The Child Tax Credit is a rare example of social policy aimed at American families that has enjoyed bipartisan support in recent decades. In 1994, it was included in congressional Republicans’ “Contract with America.” President Bill Clinton endorsed a credit the following year, and the Child Tax Credit became law in 1997. President George W. Bush’s tax cuts included expansions of the Child Tax Credit, doubling its maximum from $500 to $1,000 per child. President Barack Obama’s administration extended the increases and made the credit more generous for families without income-tax liability. Donald Trump’s major tax bill doubled the Child Tax Credit to $2,000 per child and again made it more substantial for low-income families.
President Joe Biden, within his first two months in office, expanded the Child Tax Credit yet again, this time with sweeping—but temporary—reforms. The American Rescue Plan boosts the Child Tax Credit for most families, to $3,600 for young children and $3,000 for older children; makes it fully refundable (that is, families get the full amount even if they have no tax liability); allows families to receive the credit on a monthly basis; and extends eligibility to 17-year-olds. These provisions apply only to 2021, but the recently proposed American Families Plan would continue them through 2025 (while permanently extending the full refundability).
The Child Tax Credit has become an important element of both family policy and antipoverty policy. Social conservatives, in particular, appreciate the support it provides for parenting and childrearing. The American Rescue Plan expansion of the Child Tax Credit will reduce child poverty by a third, according to my American Enterprise Institute colleagues Alex Brill, Kyle Pomerleau, and Grant Seiter. So, what’s not to like about more money for kids?
Well, to begin with, there is the considerable risk that, in focusing too much on reducing immediate short-term poverty, the new Child Tax Credit might make it more difficult to reduce entrenched poverty—poverty over long durations of childhood, intergenerational poverty, concentrated poverty, and social poverty, that is, inadequate social capital from family and other relationships.
By giving $3,000 to $3,600 per child to families regardless of whether parents work, the Biden Child Tax Credit expansion makes it easier to get by without any earnings by combining the credit with other safety-net benefits. This trade will appeal more to lower-income families, since the credit would replace a larger share of their income than would be the case for higher-income workers. And since single parents, on average, have lower incomes and must balance work and childrearing on their own, the trade will be most appealing to them. That situation could lead to more single-parent households, either because custodial parents find it easier to go it alone with the help of the tax credit, or because noncustodial parents decide it is easier to make custodial parents go it alone. Fewer and fewer children and adults get to enjoy the benefits of stable two-parent families, and our antipoverty policies, by encouraging single-parent families, only exacerbate this unfortunate trend.
If these incentives were strong enough, we could end up moving closer to the situation that existed before the landmark welfare reforms of the 1990s. Prior to those reforms, the typical family participating in the Aid to Families with Dependent Children program received benefits for an average of six years. Many families received benefits only briefly, relying on the safety net for temporary support, but a core group of recipients depended on benefits for a much longer time. Those families made up a disproportionate share of beneficiaries in any given month, because they remained on the rolls over time as other families moved on and off. In a typical month, the average duration of welfare receipt among recipients was 13 years. Some people argue that the tax credit is different from welfare because, unlike welfare, the benefit doesn’t phase out until a fairly high income level, so tax-credit beneficiaries who work will end up with more money. But while the expanded credit does not penalize people for entering the workforce (or for increasing their hours), it makes it easier for those who don’t want to work to forgo employment or work less.
Indeed, while the nation has achieved more success in reducing child poverty than is commonly recognized, low-income children are just as likely to become low-income adults today as in past decades. Child poverty was at an all-time low even before the American Rescue Plan passed. Poverty among the children of single mothers has fallen steadily since the early 1980s. Safety-net expansions have contributed to the decline in child poverty. But by disincentivizing behaviors that promote upward mobility—work, marriage, savings, and human-capital investment—the safety net has also likely contributed to stagnant multigenerational poverty. And since welfare reform, the increase in work has reduced child poverty all by itself. Child poverty is lower today, even if one omits means-tested benefits and refundable tax credits from the equation, than it was in the mid-1990s after including cash welfare benefits.
Because poverty is geographically concentrated, if the expanded Child Tax Credit increases the number of single-parent families with no worker, it will do so in a similarly concentrated way. In one out of five American neighborhoods, single-parent families outnumber two-parent families.
And cash benefits are unlikely to reduce social poverty. Deprivation is not simply a material matter. It means having less power over one’s life circumstances and options. It involves reduced opportunities to fill meaningful societal roles and make contributions. And it manifests in a dearth of supportive social connections. Making joblessness and single parenthood more common would further isolate low-income families from sources of social capital, even as we paper over the problem by pointing to lower poverty rates.
Beyond the risk of unintended consequences, there is also the cold, hard fact that it is an inauspicious time to expand spending on families dramatically. The American Rescue Plan will increase spending on the Child Tax Credit in 2021 by $110 billion. The expansion of the tax credit through the American Families Plan would cost $450 billion over 10 years but would only prolong most provisions through 2025. A permanent extension would cost in the neighborhood of $1.6 trillion over a decade, according to the Tax Foundation.
These are enormous sums. In 2020, the Child Tax Credit cost $125 billion. That is more than twice what the federal government spends per year on public elementary and secondary education, which is predominantly funded with state and local tax dollars. The Tax Policy Center projected the tax credit would cost $1.2 trillion over 10 years.
This spending picture raises again the distinction between poverty alleviation and mobility promotion. Public policy in the United States has been biased in favor of the former at the expense of the latter, since it’s easy to transfer money to families (and often thought to promote mobility). If reducing point-in-time poverty were an effective way to increase child opportunity, we would expect to see increasing upward mobility rates over the same decades that poverty has fallen. The fact that mobility has remained stagnant suggests that expanding child opportunity will require a different set of policies.
The bias in favor of poverty reduction meant that we spent over a trillion dollars in 2020 in payments to households above and beyond what we would have spent in a normal year, even as we failed to prevent already yawning learning gaps from widening amid the pandemic. When Opportunity Insights tracked progress in an online math platform called Zearn, it found that students in the top fourth of ZIP codes by income initially saw a drop of nearly 25 percent in completed lessons. But by the end of the school year, they had recovered to pre-Covid levels. Other students were not so lucky. Those in the middle half of ZIP codes ended the school year down 32 percent, while students in the poorest fourth of ZIP codes were completing 41 percent fewer lessons than at the beginning of 2020. As of the beginning of May 2021, the lesson-completion rates for students in these poorest neighborhoods were still down more than 22 percent. We held poverty at bay, but opportunity withered.
The Biden administration then prioritized cash payments again in the American Rescue Plan, which transferred another $800 billion directly to households while providing $125 billion for K–12 education to help schools reopen.
It would be one thing if we were failing badly at the important goal of reducing child poverty. That might call for something like a child allowance despite the risk of unintended consequences. But by combining a humane safety net with work incentives and economic growth, the nation has reduced child poverty by something like 80 percent since the early 1980s, most of that since the early 1990s. As far as researchers can tell, child poverty in America is only modestly higher than in Canada, Ireland, and Australia, which have child allowances and less single parenthood than the United States. It is lower here than in the United Kingdom.
What we are failing badly at is increasing opportunity for poor children. Imagine if we had prioritized figuring out how to reopen schools fully this spring and then directed some of the funds spent on cash transfers toward remedial summer-learning opportunities. Imagine if we had provided funds for home visiting to ensure that poor children had the technology they needed for online learning and that parents had the supports they needed to keep their children on track. Imagine if we offered funds for online tutoring over the 2021–22 academic year.
But transferring dollars from the U.S. Treasury to families is what the federal government does best. Many progressives seem to think that handing out cash will solve all our social and economic ills, and many conservatives seem to believe that the federal government can’t get anything else right. We are in dire need of a pro-opportunity agenda that rejects both views.
This article appeared in the Fall 2021 issue of Education Next. Suggested citation format:
Winship, S. and Yglesias, M. (2021). Should Congress Make the Expanded Child Tax Credit Permanent? Education Next, 21(4), 66-73.