The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion
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 Earned Income Tax Credit) 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.
This paper, which has been subject to a limited Census Bureau review, is released to inform interested parties of research and to encourage discussion. Any opinions and conclusions expressed herein are those of the author(s) and do not represent the views of the U.S. Census Bureau. The Census Bureau has reviewed this data product for unauthorized disclosure of confidential information and has approved the disclosure avoidance practices applied to this release, authorization numbers: CBDRB-FY2021-CES005-024 and CBDRB-FY2021-CES005-028. We thank many employees of the U.S. Census Bureau for their assistance; Pablo Celhay, Jeffrey Grogger, Elaine Maag, Nikolas Mittag, James Sullivan, and Scott Winship for helpful discussions and comments; and Gillian Meyer, Connor Murphy, and Angela Wyse for excellent research assistance. We appreciate the financial support of the Alfred P. Sloan Foundation, the Russell Sage Foundation, the Charles Koch Foundation, the Menard Family Foundation, and the American Enterprise Institute. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.