Something really good is happening next month
A celebration of the expanded Child Tax Credit and a plea to make it permanent
In one month, millions of American families will receive the first of what should be several incremental payments from the newly expanded and more generous Child Tax Credit that was included in the American Rescue Plan.
This beefed-up CTC is not a totally ideal policy for reasons I’ll get into it, but its biggest flaw by far is that it’s a one-year measure when it really ought to be a permanent policy. CTC champions like Sen. Michael Bennet have of course spent years pushing it as a permanent idea. But the ARP was the vehicle they found to get it started with, with the hopes that it would prove popular and successful enough to gain momentum and be made permanent.
I’ve also spoken to several people who have two big concerns about this rollout:
The people who do get money may not realize what money they are getting, or why, or who to thank for it.
The media leans left but also likes to be “tough,” and so will probably focus a lot of attention on the minority of eligible people who, for administrative reasons, don’t get the money.
We have covered administrative burdens in the past on Slow Boring and will do so again. But the centerpiece of a case for further expanding CTC enrollment has to be a permanent CTC. And the path to a permanent CTC runs through millions of people who benefit from this expansion recognizing that they are benefitting from it. So for now, at least, I am mostly in boost/cheerleader mode — this is a very good policy that stands to help a lot of people.
The bigger, better CTC
Children cost money, but a market economy does not magically allocate extra money to the parents of children relative to non-parents. In fact, it is somewhat more challenging to earn money when you have a kid because they impose logistical barriers to working. As a result, unless the government provides parents with extra money, the living standards of families with young children will be systematically lower than those of the childless. That’s one important reason why the poverty rate for children is so much higher than the poverty rate for adults.
Senior citizens, who normally don’t have young kids living with them, get Social Security, so the elder poverty rate is low.
To earn the $12,880 a year it takes for a single adult to be non-poor is relatively easy. But if you have two kids at home you need to earn $21,960, and you need to do it while taking care of your kids. So “single mother of two young children” families have a much higher likelihood of living in poverty, and of course, a household like that includes two children and just one adult.
Most civilized people think the idea of children growing up in impoverished conditions is sad, and one can also Google up many credible studies indicating that material deprivation has harmful long-term consequences for future adults and therefore for society writ large. This is why most developed countries provide cash benefits to parents of young kids, thus averting the kind of sky-high child poverty numbers that exist in the United States. In America, that’s been considered anathema since the 1996 welfare reform bill killed Aid to Families With Dependent Children. Instead, we had a Child Tax Credit that provided lots of useful financial help to lots of families but was deliberately designed to leave out those with the lowest earnings. Then the 2017 Tax Cuts and Jobs Act made the CTC larger, while still excluding those with the lowest earnings.
Then came ARP, which makes three critical changes:
The CTC becomes fully refundable, i.e. the poorest get all the money, though it eventually phases out for more affluent families.
The CTC becomes more generous — $3,600 for kids under six and $3,000 for older kids — before beginning to phase down if you earn over $75,000 as a single person or $150,000 as a married person.
The CTC will be paid out starting July 15 as a monthly “advance” against your eventual tax bill.
These are all changes for the better. They do have the aggregate impact, however, of making this into not much of a tax credit at all. If you’re going to try to send monthly checks to all households whether or not they have taxable income, the best way to do that would be through the Social Security Administration rather than through the IRS.
That said, one grubby practical advantage to making this a tax provision is that there is an annual exercise known as the “tax extenders.” I will allow the Tax Policy Center to explain what those are because it’s so ridiculous that unless I quote someone else, I’m afraid you won’t believe me. But because the story is there are a bunch of temporary tax breaks that Congress inevitably votes to extend at the end of each year, or else to even extend retroactively if they don’t reach an agreement by the end of the year.
Several dozen tax breaks are authorized for only a limited number of years. When these temporary provisions are scheduled to expire, they become collectively known as the “tax extenders” because lawmakers likely will consider extending most or all of them. Recently these extensions have often been retroactive, taking place well after the provisions officially expired. The temporary-but-not-temporary character of these provisions complicates tax policy and budgeting.
With that context, part of the quiet case for doing the family benefit as a tax credit is that proponents can try to jam it into the tax extenders conversation rather than finding 60 votes for a permanent program. Is that kind of dumb? Yes. Do I wish that Congress could instead act on something like Mitt Romney’s child allowance plan? Yes. But in the absence of bipartisan love for the Romney plan, the tax extender gambit is actually pretty clever. It’s all part of the slow boring of hard boards.
What happens next?
For households who already have a direct deposit/direct debit relationship with the IRS, the money will just appear in your account next month and on the 15th of every month for the rest of the year.
That’s how it ought to work, technocratically speaking, but of course on another level, it would be nice for Joe Biden to show up at everyone’s front doorstep with a giant novelty check. As a middle ground, I wish the letters the IRS sent out about this were clearer and featured more fanfare*. The way it’s currently set up, I’m concerned that a lot of people are going to think that what happened is the IRS made some error and is giving them a refund they are owed or something rather than that a new program is rolling out. The White House has announced a forthcoming Child Tax Credit Awareness Day on June 21, to promote awareness not only of the expanded CTC but also other related programs like the Child Care and Development Block Grant, the Child and Dependent Care Tax Credit, and the Paid Leave Tax Credit.
So be aware!
Realistically, though, we are going to have some administrative issues here. A healthy chunk of the low-income population doesn’t file taxes and thus isn’t going to get the benefit unless they take affirmative steps to sign up. There is going to be a scramble to try to make this happen and also plenty of criticism of the decision to give the program this structure in the first place.
I also think you’ll hear people on the right say that given the inflationary macroeconomic context, this is a poorly chosen time to roll out what is in effect another round of demand-side stimulus. All those critics sort of have a point. In particular, if I could swiftly rewrite ARP, I would have the one-year expanded CTC be in effect for next year and spread the overall stimulus out more.
That being said, the policy as written is really good!
The expanded CTC is excellent policy
To recall, the expanded Child Tax Credit puts extra cash in the hands of virtually all American parents, leaving out only the richest.
This is important because all parents have suffered from the rising relative price of things like education, child care, and healthcare relative to electronics and durable goods. The result of those relative price shifts is that while people living in 2021 have much higher overall living standards than people living in 1981, people these days face much stronger financial incentives to avoid having children. Today, American women have fewer children than they say they’d ideally like (i.e, one to two on average rather than two to three), and the main obstacles they cite are financial. Giving middle-income parents more money is an excellent way to address these issues.
But because the lowest-income families receive the least help from the current CTC, they get the biggest dollar boost from the CTC expansion. In percentage-wise terms, the impact is even bigger. For parents in the bottom fifth of the income distribution (i.e., below about $25,000 a year) the Biden proposal will be transformative in terms of its impact on living standards.
One thing that’s particularly exciting about this is that there is no trade-off here between focusing on short-term and long-term issues. An expanded CTC helps people in need right away. But it also delivers substantial sustained benefits in terms of kids who benefit from growing up healthier, smarter, and better able to reach their full potential and contribute to society. Here are a few key conclusions from a recent National Academies consensus report on child poverty.
Periodic increases in the generosity of the Earned Income Tax Credit Program have improved children’s educational and health outcomes (direct quotes from Box S-1 in the report).
The Supplemental Nutrition Assistance Program has been shown to improve birth outcomes as well as many important child and adult health outcomes.
Evidence on the effects of housing assistance is mixed. Children who were young when their families received housing benefits that enabled them to move to low-poverty neighborhoods had improved educational attainment and better adult outcomes.
Expansions of public health insurance for pregnant women, infants, and children have generated large improvements in child and adult health and in educational attainment, employment, and earnings.
The weight of the causal evidence indicates that income poverty itself causes negative child outcomes, especially when it begins in early childhood and/or persists throughout a large share of a child’s life. Many programs that alleviate poverty either directly by providing income transfers, or indirectly by providing food, housing, or medical care have been shown to improve child well-being.
The conventional wisdom on the Biden administration has veered hard from “this guy won’t get anything done with these small majorities” to “holy shit that’s a big stimulus, he’s the next FDR” to “wait a minute this guy won’t get anything done with these small majorities.”
To me, that shows in part that the press is overly excitable. But it also shows how much hinges on this one specific provision of the American Rescue Plan. If the expanded CTC is extended and improved over time, then that alone ensures Biden has a major legacy. If not, then it’s difficult to see where such a legacy would come from. ARP deserved the plaudits it got at the time, but America’s children and struggling parents deserve renewed focus on making good on its promises.
A worthy legacy
I think the best version of Larry Summers’ critique of the American Rescue Plan is that by spending so much so quickly, Biden jeopardized the opportunity to get more spending in on longer-term projects like an infrastructure bill. My basic view of that is that Summers has been overrating the merits of increased transportation spending for years, largely through excessive abstraction away from poor project design in transit and the reality that America’s roads and bridges are fine in a comparative context.
The two best parts of Biden’s infrastructure proposal were the R&D that is maybe going to happen on a bipartisan basis through the Endless Frontier Act, and his housing ideas which were a little half-baked in the ARP proposal but have some bipartisan support. Progressives are currently rending their clothes over frustrations with bipartisan infrastructure talks, but if Biden winds up settling for a small bill while the R&D stuff is hived off into separate legislation, then I think that’s a fine outcome. Honestly, even if the infrastructure plan totally collapses, we still have the genuinely bipartisan surface transportation reauthorization bill which is, you know, an infrastructure plan. ARP also pumped a ton of money into state and local governments. And do you know what infrastructure bills do? They give state and local governments grant money. Some infrastructure will be built in the Biden years. How much exactly? We’ll see. How much does it matter? I’m not so sure.
By contrast, cutting child poverty by 40-50% through the CTC and by more than that by unleashing a full employment boom generates a real flywheel of social improvement. If five million children are lifted out of poverty and that nudges the whole curve of what they’re able to achieve in life to the right, that’s not just a short-term boost to welfare — it’s a massive increase in the odds that a handful of those kids will grow up to be the kind of people who do extraordinary things that benefit all of humanity.
It also tackles a problem where, unlike road quality, the United States really is an extreme global outlier. And it’s designed to do all that in a way that also provides meaningful help to middle-class families. It’s a policy you can plausibly tout in Jared Golden’s Trumpy House district in rural Maine, but that also answers the question of what Raphael Warnock is doing to advance racial equity and how Jacky Rosen is delivering for the suburbs of Las Vegas. It helps a broad swathe of the population in a really concrete way, and opposition to it is driven by the mean-spirited and inaccurate view that the only way to keep people interested in earning money through work is to threaten to starve their children if they don’t.
Beyond that, it is well-designed for the budget reconciliation process without any changes to the filibuster or breakage of norms, and it has a plausible bipartisan path to extension through the “tax extenders” charade. But for all this to be possible, people need to talk about it and get excited about it. I don’t necessarily get the sense that the White House or congressional leadership sees this as a make-or-break issue for the legacy of the 117th Congress, but it genuinely is and deserves to be seen that way. Congress is doing something amazing and important by creating the checks that are going out next month, but to make it really count, they need to focus on entrenching this policy.
Correction: I originally expressed suprise that the Biden administration hadn’t sent out letters touting the arrival of this cash; it turns out they actually did sent letters they just weren’t very tout-y or clearly worded.