Corinth, Kevin and Meyer, Bruce and Stadnicki, Matthew and Wu, Derek, The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion (October 7, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-115. SSRN: http://dx.doi.org/10.2139/ssrn.3938983
Abstract: The proposed change under the American Families Plan (AFP) to the Tax Cuts and Jobs Act (TCJA) Child Tax Credit (CTC) would increase maximum benefit amounts to $3,000 or $3,600 per child (up from $2,000 per child) and make the full credit available to all low and middle-income families regardless of earnings or income. We estimate the anti-poverty, targeting, and labor supply effects of the expansion by linking survey data with administrative tax and government program data which form part of the Comprehensive Income Dataset (CID). Initially ignoring any behavioral responses, we estimate that the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. The expansion of the CTC would have a larger anti-poverty effect on children than any existing government program, though at a higher cost per child raised above the poverty line than any other means-tested program. Relatedly, the CTC expansion would allocate a smaller share of its total dollars to families at the bottom of the income distribution—as well as families with the lowest levels of long-term income, education, or health—than any existing means-tested program with the exception of housing assistance. We then simulate anti-poverty effects accounting for labor supply responses. By replacing the TCJA CTC (which contained substantial work incentives akin to the EITC) with a universal basic income-type benefit, the CTC expansion reduces the return to working at all by at least $2,000 per child for most workers with children. Relying on elasticity estimates consistent with mainstream simulation models and the academic literature, we estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force. The decline in employment and the consequent earnings loss would mean that child poverty would only fall by 22% and deep child poverty would not fall at all with the CTC expansion.
Caveats
A few caveats are in order. While our baseline estimate is that employment will decline by
1.5 million adults based on the midpoint of ranges used in past simulations and the central tendency
of literature surveys, both lower and higher changes are predicted by other elasticities in the
literature. Since we rely on elasticities from the literature rather than estimate a full structural
model, we would need other information to allocate the average tendencies implied by elasticities
to particular individuals. For example, we do not know whether a one percent decline in average
hours implies a ten percent decline for one in ten people or a one percent decline for every worker.
Similarly, we would need a more sophisticated model than the one we employ to consider
the separate incentives of both spouses in a couple. These complications are avoided in our
modeling of the work/nonwork decisions for single worker families since average tendencies
imply probabilistic choices that are easily modeled. As a result, we focus only on the
work/nonwork decision, not incorporating the reduction in hours that would be expected for those
who remain in the workforce due to the increase in marginal tax rates along the previous phase-in
and over the new phase-out of the CTC. This understatement of the work response is likely offset
to some extent by our simplified work decision of couples, taking them both to stop working or
neither to stop working. In fact, the employment response for couples should be spread across a
larger number of families, some of whom would have only one spouse leave the labor market.
Since the loss of one out of two low-income earners from a family is likely to lead a family to be
below the poverty line but not the deep poverty line, the implication of our simplification is that
the child poverty reduction of the AFP CTC has likely been overstated, but the deep child poverty
reduction understated. As the large majority of our response comes from single worker families,
even assuming no response of dual-earner couples as an extreme would leave intact the large
majority of the behavioral response we estimate. At least 83 percent of the families that experience
a drop in earnings in our simulations have only one worker and are unaffected by this issue.39F
40
Long-Run Effects
Potential long-run effects of the CTC expansion are important to consider alongside shortrun effects. Increased support for low-income children could improve their long-run outcomes.
Children’s access to food stamps in the 1960s and 1970s led to improved outcomes when they
became adults, including higher earnings (though not increased employment), better health, less
incarceration and less dependence on welfare programs (Hoynes, Schanzenbach, and Almond
2016; Bitler and Figinski 2019; Bailey et al. 2020). Much of this evidence comes from a period
when other safety net programs were much less generous than current aid, so the marginal effects
might be lower today. Larger EITC payments for children have increased their educational
attainment and their employment and earnings as adults (Bastian and Michelmore 2018). In that
case, the policy being examined is a combination of more income and higher employment. The
incremental CTC could also affect behavior in less favorable ways, for example by changing rates
of marriage or divorce. Some of the most methodologically sound research on this topic has found
large effects of unconditional aid on single parenthood (Grogger and Bronars 2001). Consistent
with this microdata evidence, the share of children with a single parent stabilized and then reversed
after welfare reform, reversing a more than thirty-year trend.40F
41 Single parenthood has been found
to lead, for example, to lower levels of educational attainment and higher incarceration rates of
children in the long run (Hoffman and Maynard 2008).