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Saturday, August 17, 2024

Why the Child Tax Credit Should Not Be Expanded

I am fully aware that this is not an argument I will win. The child tax credit targets a goal that everyone agrees with--supporting children, and in a time when actual costs are so far in the future that few voters worry about them, a policy that has minor benefits, and no significant harms, the opportunity cost argument will not be enough to sway its advocates or voters.

Nevertheless, expansion of the CTC is not good policy and should not be pursued. It is not the most efficient means to achieve any of the purported goals.

Context

The Child Tax Credit is in the news because both the Republican Vice Presidential candidate and the Democratic Presidential candidate have expressed their desire to expand it should they win the 2024 election.

The Child Tax Credit was created in 1997. It was expanded in 2003, 2012, 2017, and again in 2021. In 2000, the total cost of the CTC was $20 billion. By 2005 it more than doubled to $56 billion. The 2017 TCJA doubled it again and it cost $115 billion by 2019. In 2022, the total cost, boosted by the pandemic relief bills was $226 billion.

Earlier in the year, the likelihood of extending/expanding the CTC beyond the 2017 law was high. The proposal was to increase the program by $35 billion. However, that agreement was never struck.

In the last month, however, Kamala Harris and JD Vance have both offered their own expansions. Harris's plan, would cost $1.6 trillion over ten years, so $160 billion more per year, on average. Vance's proposal hasn't been nailed down as closely, but estimates range from $1 to $3 trillion over ten years.

Arguments in Favor of CTC

The most common argument in favor of expanding the CTC is that it helps to alleviate poverty, and child poverty in particular. In 2021, when the CTC peaked because of the American Rescue Plan, the child poverty rate (at least the one that includes poverty relief programs and transfers), achieved an all-time low. The rate then increased again when the CTC reverted to its pre-pandemic size.

Proponents argue that additional resources flowing to low-income children would have significant positive effects on their lifetime well-being. Proponents further argue that these benefits will accrue to children at higher incomes as well.

Finally, some argue that the CTC will encourage American families to have more children. A country with a growing population faces fewer problems than a country that is shrinking. A younger age profile will produce more growth and provide more workers that will pay for retirees, for example.

Arguments Against

The CATO Institute already provides some good counter-arguments to expansion. Here, I'll highlight three of their arguments I find most persuasive. First, on affordability, CATO points out that the cost of raising a child has been decreasing consistently for sixty years. Second, on the fertility issue, CATO notes, correctly, in my view, that the CTC will have only a very small impact on birth rates, if any.

Lastly, and most importantly, on the poverty question, CATO points to a CBO analysis that shows only 19% of the CTC goes to families in the lowest income quintile. The lowest income 20% of families receive only 19% of the CTC allotted. The CTC is not primarily a poverty-reduction program, but proponents are using child poverty as the primary reason to expand it.

The Child Tax Credit is a markedly less-targeted transfer, to reduce poverty than the Earned Income Tax Credit. The CTC is distributed nearly evenly across all incomes. In fact, the lowest quintile gets a smaller share than any other quintile except for the richest 20% of families.

Proponents would likely argue that this is either because this is how the CTC is intended, it's for children, regardless of income. If this is the case, then they should stop using the poverty argument altogether, because if alleviating poverty is the goal, then surely the EITC (or SNAP or TANF) would be a better program to expand.

The other counter argument might be that the CTC is poorly targeted because Republicans insisted on work requirements and non-refundability (that families that didn't pay income taxes couldn't receive the credit). Again, this counter-argument presumes that the goal of the CTC should be to reduce poverty, and rather than have two programs do the same thing, where they both need to be designed just right, to achieve the desired outcomes, why not have just one, for simplicity's sake?

On top of the argument that the EITC is a much better program to reduce the child poverty rate, it should not go unmentioned that the United States already spends more than enough money to erase poverty, but it's just spent too broadly to do so.

According to CPS data, it would take $190 billion/year to wipe out poverty in the way that proponents celebrated the 2021 CTC expansion. Namely, transferring exactly $190 billion to families below the poverty line would boost their income above the poverty threshold. To alleviate child poverty, it would cost $80 billion.1

The current cost of the CTC in 2024 is $109 billion, already more than enough to erase child poverty. In 2022, $226 billion was spent, $36 billion more than necessary to erase all poverty.

In addition to the CTC, other programs to reduce poverty include the Earned Income Tax Credit, through which $67 billion is transferred, food stamps cost $90 billion in 2023, and TANF cost $31 billion in 2022, split between federal government and states.

US taxpayers spend more than $300 billion a year to solve a $200 billion problem.

Combined, US taxpayers are spending nearly $300 billion on programs that are in whole or in part targeted towards alleviating poverty. This doesn't even include the $800 billion/year spent on Medicaid. If eradicating poverty, and getting every child above the poverty threshold is the ultimate goal, that can be achieved today, by re-allocating funds that are already supposed to be accomplishing this goal.

To summarize, my two primary disputes with expanding the CTC are that we are so far in debt, that we should be maniacally disinclined to add on additional spending without carefully considering the total costs, the goals, the likelihood of meeting those goals, and how this spending rates to other spending. Expanding the CTC fails every one of these tests.

Some people say that the CTC should be expanded without limit. There is no maximum amount to be spent and no group of people to be targeted. These people aren't serious, yet they often win. There are other people who are so dedicated to eliminating child poverty, they are willing to spend untold amounts of money, without any study, to reach that goal.

If eliminating child poverty is a paramount goal, certainly, there's $100 billion somewhere in a $6 trillion budget that is less important and can be shifted.

However, if that goal rises above all others, surely, there are other programs that could be cut because they're less important. Again, an unwillingness to compare one goal to another, is a sign of unserious thinking. It's extremely easy to urge for higher spending, when other people foot the bill.

Footnotes

1I did this calculation myself using 2022 CPS data. I took the market income, subtracted any payments they make, such as payroll taxes and calculated the gap between that and the poverty threshold for that family. This probably isn't the perfect way to do it, but it should account for taxes paid (not credits) and is before other government transfers like SNAP and TANF. The American Prospect said that it would cost $175 billion in 2013. ChatGPT 4 said it would cost $82 billion in response to the prompt "how much would it cost to bring every family currently below the poverty line above the poverty line?".