Tax Refund

A key subtext to the debate over whether to restore the expanded 2021 version of the Child Tax Credit (CTC) is this: Does the credit help reduce child poverty by giving low-income families much needed money, or does it increase poverty by discouraging work? The debate is especially intense around the 2021 provision that made the credit fully refundable. That is, should parents get the full credit only if they work and earn a certain amount of income, or not?  

The 2021 CTC provided up to $3,600 for each child under age 6 and up to $3,000 for children ages 6 through 17. And even very low-income families received the full credit, thanks to full refundability.

The current version of the credit, as with previous versions, is only partially refundable so non-working parents receive no credit and many working parents receive only limited credits because they don’t earn enough to access the full credit. That means almost 19 million of the poorest children will receive less than the full benefit. While congressional Democrats tried to restore full refundability, their efforts failed, largely because some lawmakers objected to the credit’s lack of a work requirement.

This is a familiar debate among folks who study poverty. It has both a moral and an economic component. The moral argument says some people are deserving of help and some are not. Generally, workers are considered worthy and nonworkers are not. This claim gets complicated, though, when you consider people with disabilities, grandparents caring for grandchildren, adult children caring for frail parents, or even parents raising very young children.

The economic argument is that if you give people money without requiring them to work, they won’t. Or they’ll work fewer hours. And ultimately, their families will be worse off.  

Most economists agree that some parents who receive the full credit will reduce their hours. It’s long been recognized, for example, that secondary earners (most often mothers), work a bit less when their families receive the earned income tax credit (EITC). Essentially, the credit subsidizes one parent to spend more time at home. Conservatives, who otherwise oppose refundable credits, might argue in a different context that a stay-at-home parent is good for children.

But controversy exists over how many people leave the labor force entirely if they receive the full CTC. The answer is unclear. I, along with colleagues at Urban, used survey data from 2020 and 2021 to see if people who received the monthly payments of the CTC were any less likely to work while receiving the payments than those that did not. We  found no evidence that CTC recipients worked less.

Another survey I worked on found that about one quarter of parents used the expanded CTC to pay for child care – something that often makes work possible. Researchers at Columbia University also found no significant drops in employment by CTC recipients, as did other academics looking at low-income families.

But some economists insist that in the long-run, over 1.5 million adults would stop working if they receive the full credit without having to work. Careful analysis suggests this claim is likely exaggerated.

A study by Rutgers University economist Jacob Bastian predicts only about 300,000 people will quit their jobs. He arrives at this much lower number by focusing on working parents earning below $80,000 (the group other research suggests is most sensitive to a transfer) and allowing each partner in a married couple to decide individually whether to stop working. The larger number of 1.5 million assumed, among other things, that a quarter of people who would leave the workforce earned over $80,000 and that both or neither married parent would quit working – claims Bastian finds to be suspect.

Bastian also notes that the larger estimates rely on earlier responses to welfare reform which combine the effect of three things – the strong economy of the late 1990s, an expanded EITC, and reduced transfer benefits. Later work showed that each of these factors accounted for about one-third the change. Thus, estimates based on those early studies should attribute about one-third of the projected decline in labor supply to the more generous CTC – a number that would be much closer to Bastian’s own estimate.

While we can continue to debate the magnitude of people leaving their jobs, we know with more certainty that while monthly payments for the CTC were being delivered between July and December, 2021, immediate measures of hardship among families with children declined. Food insecurity dropped and families reported they were better able to pay their household expenses. We often lose sight of the fact that investments in children can reap big rewards – not just for children themselves, but for society. As my colleagues at The Brookings Institution summarized, the expanded CTC is a bargain.

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