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A child and her mother wait in their car at an Orlando, Florida–area food distribution site, before Thanksgiving last year. The new Child Tax Credit will cut the rate of child poverty in half.
For several decades, child advocates have tried to bring more public indignation to the scandal of extreme child poverty, and have pushed for the expansion of the Child Tax Credit. In recent years, some progressives have called for something that seemed even more utopian, a universal basic income.
Well, gentle reader, we just got both. And the brilliance is in the details.
The credit, which is really a family allowance run through the IRS, provides $3,000 a year for each child under 18, topped up to $3,600 for kids under six. So a family with three kids gets almost $10,000. As a point of reference, the average income of the bottom 20 percent of American households is about $14,000.
The new Child Tax Credit will cut the rate of child poverty in half, and will raise the total incomes of the bottom fifth of American families by 33 percent. I never expected to see something like this in my lifetime.
It’s not enough, but it’s one hell of a leap forward—that will create momentum for more leaps. And a special shout-out to Rep. Rosa DeLauro (D-CT), who has been this idea’s champion for decades.
If you compare the new tax credit with the Earned Income Tax Credit and the existing Child Tax Credit, there is one key difference beyond the expanded benefits. The existing tax credits leave out the poorest of the poor, because you have to have some taxable income in order to get them.
The new credit is for everyone, except the very richest. If you have some existing contact with the IRS, checks will come automatically. If you don’t, all you need to do in order to apply is to state your income, the Social Security numbers of you and your kids, and that’s it.
There is no hassle establishing income eligibility, because eligibility is automatic. There will be no abusive audits of the kind that the IRS has imposed on so many EITC recipients for technical mistakes.
Even better, the legislation authorizes the Treasury to send checks monthly. Under the current system, EITC and CTC recipients get their refunds at tax time.
People in poverty often borrow against their anticipated annual tax refund, paying usurious interest rates to tax preparation companies, for whom these refund loans are a major profit center. When the check comes, it’s experienced as coming from H&R Block rather than from Uncle Sam.
This new policy eliminates the middleman. The recipient gets either a check, a direct deposit, or a debit card from the Treasury, and gets 100 cents on the dollar with no rake-off by the tax preparer.
Experts estimate that 92 percent of potential recipients will either qualify automatically or have computers and will have an easy time of applying online. For the remaining 8 percent, who typically have neither bank accounts nor computers, the government plans a massive outreach program.
And if you think about it, this should not be difficult. This is free money, and word will spread.
We can expect local churches, public libraries, post offices, community organizations, and of course congressional offices, as well as those of mayors, city councilors, and state reps, to sign people up. All of which will be a salutary reminder of government helping people.
Some have suggested that the program be run through Social Security rather than the IRS, on the premise that Social Security has more local offices than the IRS. Social Security also has a trusted brand, as well as experience delivering monthly checks to some kids as well as retired people.
I’ve looked into this variant in some detail. I conclude that while the proposal is well intentioned, it’s not a good idea.
Among its other virtues, one great and not well understood advantage of structuring a universal child allowance as a “refundable” tax credit is that it doesn’t reduce other benefits. Let me explain.
It you get an entitlement benefit through Social Security, your taxable income goes up, and so other income-tested benefits such as food stamps or TANF go down. Depending on the state, you might also lose your eligibility for Medicaid. These so-called “cliff effects” also create disincentives to work.
But unlike Social Security, the Child Tax Credit doesn’t count as household income, and thus doesn’t undercut your TANF, food stamps, or Medicaid (which are all too meager and need to be retained).
If you take a better job and your household income goes up, you still get the same child allowances. (And if we really want Social Security to be part of the outreach, there’s nothing to prevent Treasury from contracting with local Social Security offices to be part of the outreach and sign people up for the tax credits.)
We’ve gone back to the simple, radical, Rooseveltian idea of giving people money.
These dynamics are why some conservatives, from Milton Friedman to Mitt Romney, like universal child allowances. But Romney, like Friedman, makes the mistake of wanting them to replace rather than complement other anti-poverty programs.
The new program costs only about one-tenth of 1 percent of its benefits to administer. The late economist Arthur Okun liked to lament that “the welfare state redistributes in a leaky bucket.” Well, this is one tight bucket.
One nuance is that the new Child Tax Credit phases out above incomes of $200,000 for individuals and $400,000 for couples. That means 99 percent of the population with kids will get some benefit.
We should just disconnect it from income entirely, and make it fully universal. That would make it even simpler to administer and apply for. We can tax back the small amounts that go to the wealthy with a more progressive income tax.
We have come full circle from an era when moderate liberals, who were nervous about the conservative charge of coddling the undeserving poor, encumbered the welfare state with bureaucratic monstrosities like TANF, which were assaults on both efficiency and dignity—as well as playing the conservative game of intimidating eligible and needy people into not applying.
We’ve gone back to the simple, radical, Rooseveltian idea of giving people money, which might just begin to restore their faith in government.
But hold on, should government just be giving people money? Well, what do you think the 2017 Trump tax cut did? It just gave the money to the wrong end of the income scale. What do patents, trademarks, copyrights, oil subsidies, and military contracts do?
This brings me to the politics of making the Child Tax Credit permanent. If the credit expires after one year, on schedule, the result would be to give 99 percent of Americans a tax increase. Grover Norquist, take notice.
The child benefits cost about $113 billion a year. When you realize you can cut child poverty in half for that relatively modest sum, you appreciate just how poor tens of millions of Americans are.
Under the “PAYGO” rule, to make the children’s allowance permanent, it’s necessary to find revenue offsets totaling the same $113 billion a year. Conveniently, that’s about half the annual cost of the 2017 Trump tax cut, almost all of which went to millionaires and billionaires.
Let’s see: Continue universal child allowances that benefit poor and middle-class families? Or protect tax breaks for the top 1 percent?
No wonder Team Biden is relishing the fight to make this benefit permanent. Over to you, Mitch McConnell.
