November 10, 2022
As we close to this 12 months’s “lame duck” session of Congress, there was renewed curiosity in baby tax credit score reform as a part of a broader tax deal. One 12 months after the expanded baby tax credit score initially enacted as a part of the American Rescue Plan expired, policymakers are not any nearer to a consensus on the place the kid tax credit score ought to go shifting ahead.
Very like different areas of tax coverage, this lack of consensus is partly as a result of troublesome trade-offs surrounding income, financial development, and the distribution of the tax burden.
Take, for instance, making everlasting the American Rescue Plan (ARP) enlargement of the kid tax credit score (CTC) carried out briefly in 2021, which raises the credit score from $2,000 as much as $3,600 ($3,000 for older youngsters) and eliminates the work requirement and earnings phase-in to say the credit score (see desk under). This may enhance after-tax incomes for the underside 20 p.c of households by 10 p.c, however could be very costly, totaling over $1.6 trillion from 2022 to 2031 and costing over $207 billion yearly by 2031. The ARP credit score would additionally cut back incentives to work, resulting in 38,000 fewer full-time jobs.
Alternatively, policymakers might make the kid tax credit score established within the 2017 Tax Cuts and Jobs Act (TCJA) everlasting, as it’s at present scheduled to run out on the finish of 2025, and increase it to permit for full refundability fairly than the present most refundable worth of $1,400 annually. This may value significantly lower than the ARP credit score at $580 billion over 10 years and improve incentives to work, however it could solely improve after-tax incomes for the underside 20 p.c by 1.3 p.c.
Policymakers might additionally pursue the kid tax credit score reform proposal launched by Sen. Mitt Romney (R-UT), entitled the Household Safety Act (FSA). This may transfer the kid tax credit score outdoors of the tax code, increase the profit to $4,200 for youthful youngsters ($3,000 for older youngsters), introduce a piece requirement of $10,000 earnings earned within the prior 12 months, and part within the credit score proportionate to earnings as much as $10,000. This expanded baby tax credit score in isolation would improve after-tax incomes for the underside 20 p.c by 8 p.c and value about $1.5 trillion over 10 years.
The FSA additionally proposes a number of offsets to cowl the associated fee, together with repealing the state and native tax (SALT) deduction, head of family submitting standing, and the kid and dependent care tax credit score, in addition to reforming the earned earnings tax credit score (EITC). This pays for the kid tax credit score enlargement however ends in decrease long-term financial development and a diminished profit for the underside quintile of about 0.8 p.c.
Two different choices that will increase the kid tax credit score, although not as a lot because the ARP model, would supply a $3,000 most profit that both phases in with the primary greenback of earned earnings or is absolutely out there no matter earned earnings. Every of those choices would value near about $1 trillion over 10 years, elevating after-tax incomes for the underside quintile by greater than TCJA CTC permanency however by lower than the ARP CTC. They’d additionally keep away from the detrimental influence of eradicating the work incentive within the CTC in comparison with the ARP credit score however share a excessive income value.
A extra incremental change that could be thought-about in the course of the end-of-year session in Congress is indexing the kid tax credit score for inflation. The CTC base quantity might be listed utilizing 2022 as a base 12 months, bringing it as much as about $2,060 in 2023. Alternatively, utilizing a 2018 base 12 months for inflation indexing would carry the credit score to about $2,400 in 2023. Every of those choices would elevate after-tax incomes for the underside quintile by about 1.8 p.c by 2031 however would value between $51.7 billion and $104.6 billion over 10 years (each choices have the CTC resetting at $1,000 in 2026 as scheduled below present legislation, however the credit score rises with inflation thereafter).
As every of those examples illustrates, any change to the kid tax credit score forces policymakers to grapple with troublesome trade-offs. These are made even tougher to take care of as a result of policymakers and CTC advocates have broadly divergent visions of the credit score’s function within the tax code. The kid tax credit score at present serves as an adjustment for family dimension within the tax code, social assist for households with youngsters broadly, focused assist for working class and poor households, and a piece incentive—all on the identical time.
Till policymakers develop a constant and clearly outlined function for the kid tax credit score, there’ll proceed to be no apparent decision. These challenges are shared by different social insurance policies run by way of the tax code, which suggests {that a} larger rethink could also be required to resolve the kid tax credit score’s long-term future.
Everlasting ARP 2021 coverage | Everlasting TCJA Coverage (with refundability restrict set to $2,000) | Romney Household Safety Act CTC (No Payfors) | Romney Household Safety Act CTC (With Payfors) | $3,000 CTC with $500 absolutely out there no matter earned earnings | $3,000 CTC phasing in at first greenback earned | Index CTC for Inflation (2018 Base Yr) | Index CTC for Inflation (2022 Base Yr) | |
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GDP | Lower than -0.05% | 0.10% | 0.1% | -0.7% | Lower than +0.05% | 0.10% | Lower than -0.05% | Lower than -0.05% |
GNP | Lower than -0.05% | 0.20% | 0.1% | -0.6% | Lower than +0.05% | 0.10% | Lower than -0.05% | Lower than -0.05% |
Wages | Lower than -0.05% | Lower than +0.05% | Lower than +0.05% | -0.3% | Lower than +0.05% | Lower than +0.05% | Lower than -0.05% | Lower than -0.05% |
Hours Labored | Lower than -0.05% | 0.10% | 0.1% | -0.2% | Lower than +0.05% | Lower than +0.05% | Lower than -0.05% | Lower than -0.05% |
Full-Time Equal Employment | -38,000 | 152,000 | 57,300 | -454,000 | 7,000 | 45,000 | -7,400 | -7,400 |
Standard Income, 2023 by way of 2032* | -$1,620.6 billion | -$580 billion | -$1,538 billion | $710 billion | -$1,044 billion | -$956 billion | -$104.6 billion | -$51.7 billion |
Standard Income in 2032* | -$207.8 billion | -$102.4 billion | -$186.6 billion | $131.9 billion | -$146.4 billion | -$138.0 billion | -$9.2 billion | -$9.2 billion |
Proportion change in after-tax earnings for the underside quintile, 2032, standard | 10.0% | 1.3% | 8.0% | 0.8% | 4.1% | 2.4% | 1.9% | 1.9% |
Notice: ARP refers to American Rescue Plan, CTC refers to baby tax credit score, and TCJA refers back to the Tax Cuts and Jobs Act. Supply: Tax Basis Common Equilibrium Mannequin. |