We should replace the Child Tax Credit with a universal child benefit

The Child Tax Credit (CTC) is one of the largest assistance programs for children in the US. With a newly expanded budgetary impact of $120 billion, it will reach 40 million households this year — 88 percent of all households with children.¹ ² For families that receive it, the CTC is highly effective, having lifted 1.5 million children out of poverty in 2016. This success has brought it bipartisan support, with both Hillary Clinton and Marco Rubio having proposed expansions in the past couple years. However, like most tax credits, it provides little if any assistance to the poorest households who need it most.

There’s an easy fix: replace the CTC with a universal child benefit, a payment given monthly to parents for each of their children. I modeled this in a new paper using the open-source Tax-Calculator software,³ showing that such a reform would be highly progressive.

A revenue-neutral plan would give $1,500 per child per year,⁴ increasing by 7 percent the after-tax incomes of the bottom quartile of households with children, at a small expense to higher earning households. Or for a cost of $42 billion — a 36 percent increase to the CTC budgetary impact — we could match the CTC’s maximum of $2,000 per child per year (currently unavailable to many families), boosting incomes of the bottom quartile by 13 percent while either benefiting or not affecting other groups. Both options reduce poverty and inequality, and provide parents with a steady, dependable income to care for their children, instead of an uncertain amount every April.

Who currently benefits from the Child Tax Credit?

For each child under age 17, the CTC can reduce tax bills by up to $2,000. Among other restrictions, the core credit phases out for very high incomes, and does not reduce tax liability below zero, effectively excluding filers with very low incomes. However, it has a refund mechanism called the Additional Child Tax Credit which can reduce liability below zero. The rules and formulas around the Additional Child Tax Credit are complicated and changed in 2018, but it results in a credit that’s considerably less generous than the nonrefundable component higher earners receive.

The December 2017 tax bill changed the CTC in a few ways, most importantly: (a) doubling the maximum amount to $2,000, and (b) raising the income threshold before it phases out. This increased the program’s annual budgetary impact by 130 percent, from $52 billion to $120 billion.

Given the complexities of the two credits, distribution of actual outcomes are useful for understanding the credit’s benefit. This chart shows the average credit value per CTC-eligible child (essentially being age 16 or younger) based on the household’s percentile of after-tax after-transfer income (that is, including programs like food stamps; called “income” from here on) without the credit. The analysis is limited to households with at least one child eligible for the CTC, and “child” is defined as children eligible for the CTC.

The average credit per child exceeds $1,500 for most percentiles outside the bottom third, up until the top 1 to 2 percent — those with pre-tax incomes above $270,000 or so — who are ineligible. But for the very poor, it provides little benefit. Further, the Republican tax bill disproportionately helped upper-middle income families, without addressing the disparity for very low earners.

What if it were shared with every child?

The simplest way to avoid the regressiveness of partially-refundable tax credits is to transform them into universal transfers. If we were to share the CTC’s current $120 billion budgetary impact with our 80 million children, each would get $1,500.⁵ This would raise by 7 percent the after-tax after-transfer income of the bottom quartile of tax units with children, while reducing it by under half a percent for the upper 75 percent. Infusing $42 billion to make it $2,000 per child would raise the bottom quartile’s incomes by 11 percent, and also raise the upper 75 percent by 0.6 percent. While the revenue-neutral plan has a relatively constant effect across the upper three quartiles, the $2,000 benefit would be progressive at each quartile.

Even this understates the benefits to the poorest families. Zooming in on the bottom quartile shows that the bottom 5 percent increase their incomes by 120 percent in the revenue-neutral plan and 160 percent in the $2,000 plan. This group’s current average income is $3.30 per person per day, including transfer programs like food stamps and Medicaid (with the caveat that measuring extremes of the income distribution has its challenges).

While the Republican tax bill extended the CTC to most high-income households, it still phases out for filers with incomes above $200,000, or $400,000 if filing jointly. That means that universal child benefits would benefit this top roughly 2 percent of tax filers with children, increasing their incomes by 0.2 percent (0.4 percent in the $2,000 plan). The benefit could be paired with a higher top-bracket marginal rate — which was reduced from 39.6 percent to 37 percent as part of the tax bill — to avoid this result.

Even with the benefit to the top 1 percent, both plans reduce inequality, as measured by the popular Gini coefficient. This measure lies between 0 (perfect equality) and 1 (perfect inequality), and is currently 0.451 among US households with children. The revenue-neutral plan would reduce it to 0.446, while the $2,000 plan would reduce it to 0.441.

A child benefit would put us on par with other countries

Many countries have child benefits of some sort. While most are means-tested or change depending on the number of children, the US would not be alone in enacting a flat benefit for all children. Ireland and Sweden are two such countries, giving families the equivalent of $2,070 and $1,540 per child under 16 per year, respectively.⁶ Canada’s child benefit was also universal (though taxable) until it became means-tested in 2016.

Evidence from around the world shows that these child benefits work. As Vox’s Dylan Matthews summarizes, child benefits and other cash benefits to families not only reduce child poverty, but lead families to spend more time with children, increase rates of prenatal care, improve children’s physical and mental health, and ultimately boost kids’ learning outcomes and earnings later in life.

Flat amounts can also avoid macro-level disadvantages of means-testing: administrative overhead, abuse by politicians, tensions between recipients and nonrecipients, welfare cliffs (implicit marginal tax rates exceeding 100 percent), and difficulty in distributing more frequently than annually.

These virtues have motivated other scholars to advocate child benefit plans, including Hammond and Orr (2016), Shaefer et al (2018), and Bitler, Hines, and Page (2018).

The beginning of the end of child poverty

A child benefit in the US would significantly cut child poverty. There’s no single measure of child poverty, but these four are commonly used:

• Extreme poverty is defined internationally by the World Bank as consumption⁷ below $1.90 per day per person, in 2011 dollars adjusted for purchasing power. That’s about $780 in 2018 dollars per person per year in the US.
  Estimate: Under 0.1 percent (Brookings Institution analysis of 2011 data). No child-specific data available.
• The US poverty threshold is defined by the US Census Bureau. It is based on the number and age of household members, and only includes earnings and cash transfers (not taxes, tax credits, or in-kind transfers), so will be unaffected by changes to the CTC. The 2017 threshold for a household with one person under age 65 and one child was $16,895.
  Estimate: 21 percent of children (National Center for Children on Poverty report, no year specified).
• The US poverty guideline (often called the federal poverty line, or FPL) is defined by the department of Health and Human Services to determine eligibility for programs like Medicaid. Like the poverty threshold, it is based on pre-tax cash alone, but it does not depend on age. For the contiguous states, HHS defines the FPL as $12,140 for a household with one person, plus $4,320 for each additional person.
  Estimate: None available.
• The US Supplemental Poverty Measure (SPM) is defined by the Census Bureau. It includes taxes and transfers — cash and in-kind — and is adjusted based on local cost of living.
  Estimate: 15.6 percent of children (Center on Budget and Policy Priorities analysis of 2016 data).

None of these is ideal for estimating the poverty reduction resulting from replacing the CTC with a child benefit. Extreme poverty measures consumption, not income; neither the poverty threshold nor guideline include tax credits like the CTC; and Tax-Calculator data lacks geographic granularity needed for the SPM.

Instead, I use these measures:

1. Extreme poverty by income, at the same $780 defined by the World Bank, using income rather than consumption. Estimates of the poorest Americans are unreliable, but this provides a rough relative picture.
2. Federal poverty line (FPL) including taxes and transfers, using levels defined for the contiguous states.
3. $10,000 per person per year, a simple threshold.

By all three measures, both the revenue-neutral and $2,000 child benefit significantly reduce the share of children living in impoverished households. The impact is most significant for the extreme poverty measure, which falls from 1.8 percent to 0.4 percent and 0.2 percent for the two respective plans. Using the FPL, the child poverty rate falls by 15 percent and 22 percent, respectively, and it falls by 6 percent and 13 percent using the $10,000 threshold. The existing CTC also cuts child poverty using the FPL and $10,000 thresholds, but has virtually no effect on extreme child poverty.

Throughout its twenty-year history, the Child Tax Credit has helped middle-income families care for the future of our country. The nominal value of the credit has grown over time, and it has slowly become more available to low-income families through partial refundability.

It should culminate in a universal child benefit, completing its path toward inclusivity and fulfilling its mission to help the poorest families. Doing so would not only alleviate poverty and stem inequality, it would provide a common baseline footing for every child in America. A universal child benefit in our policy arsenal would provide a tool that could be expanded over time, and which could ultimately eliminate the scourge of child poverty.

[1] “Households” in this analysis refer to tax units, as this is the core unit in the Tax-Calculator software. Households can contain multiple tax units (e.g. in households where spouses file separately), and the US has 20 percent more tax units than households. Tax-Calculator also imputes tax units that might not have filed using CPS data.

[2] Children here are defined as children eligible to receive the Child Tax Credit, the primary criterion of which is being age 16 or younger.

[3] This notebook contains my code and calculations using Tax-Calculator 0.19.0, CPS data, and projections for 2018.

[4] Rounded from an exactly revenue-neutral amount of $1,470; this rounding would cost $2.4 billion.

[5] Tax-Calculator’s CPS data estimates a $117 billion budgetary impact and 80 million CTC-eligible children. Other estimates are ~$114–120 billion, and the Census estimates 70 million children under age 17. To produce consistent distributional estimates, I use Tax-Calculator’s CPS data, but the full paper includes other estimates.

[6] Ireland also gives their child benefit to some 16- and 17-year-olds.

[7] Consumption is estimated via surveys. See Our World In Data (2017) for more information.

Thanks to the Open Source Policy Center’s Cody Kallen, Matt Jensen, Sean Wang, Martin Holmer, Anderson Frailey, and Amy Xu.