Politics

The True Cost of Expanding the Child Tax Credit

As the current session of Congress winds down, with the stage set for a divided government over the next two years, prospects are fading for Democrats seeking to pass an income guarantee for families with children. This is good news.

This policy — an unconditional child allowance — is well intended and supported by some important data. But the overall evidence suggests that for too many struggling families, the short-term benefits wouldn’t outweigh its long-term costs.

Legislators and researchers have fiercely debated the merits of the policy for nearly two years, since the American Rescue Plan temporarily enacted it in March 2021, a year into the Covid-19 pandemic. (Technically an expansion of the child tax credit, it is now back to being available only to families with earnings.)

When the American Rescue Plan passed, proponents argued, based on a 2019 National Academies of Sciences report, that the child allowance would reduce poverty without meaningfully discouraging parental employment. Opponents, including me, argued that the allowance’s short-term effects on poverty would be at least partly reversed in the long run because the allowance would lead some parents to stop working and would discourage marriage. We cited evidence from two divergent approaches: the poverty-reducing welfare reforms of the 1990s, which increased work, and an income-guarantee experiment in the 1970s, which had the opposite effect.

Nearly two years later, there is much better evidence about the likely costs and benefits of the policy. In the short run, the child allowance really did help to reduce poverty by a sizable amount (a point that many critics of the program are loath to concede). But new research suggests that the long-term effects will be much smaller.

Based on the evidence we have now, a permanent child allowance would indeed reduce poverty among those who fall temporarily on hard times. (That is the initial effect, after all, of giving people money.) But among those families with the weakest attachment to stable work and family life, it would be likely to consign them to more entrenched multigenerational poverty by further disconnecting them from those institutions.

Let’s start with the short-term data. Federal statistics indicate that in 2021, when child allowance checks were sent out for the last six months of the year, child poverty fell from the previous year’s 9.7 percent to just 5.2 percent — the lowest rate on record. Census Bureau researchers have estimated that more than a third of that reduction was a result of the expanded child tax credit.

This evidence is consistent with results from the Center on Poverty and Social Policy at Columbia University, which found that child poverty rose from 12.1 percent in December of that year to 17 percent when the child allowance went away just a month later. That implies that the child allowance lowered poverty rates by roughly 29 percent. In the short-term, that’s a significant impact.

Why is that not the end of the debate? Because in the medium to long run, giving the same amount to parents regardless of whether they work will cause some parents to stop working. That will negate some of the poverty-reducing impact of the child allowance. And new research after the arrival of those monthly child allowance checks suggests the countervailing effects would be worrisomely large.

A University of Chicago study from October 2021, led by the economists Kevin Corinth and Bruce Meyer, concluded that if the child allowance was made permanent, 1.5 million parents would stop working. As a result, rather than child poverty falling by one-third, the decline would be 22 percent.

In a second study, from December 2021, that focused only on single mothers, the Chicago team found that 1.3 million would stop working if a permanent child allowance was enacted. Debate continues about the size of the employment effect in question. But it would be as striking as that short-term poverty decline.

A 22 percent decline in child poverty would still be an impressive figure — but that’s not the end of the story either. There would probably be unintended consequences to a child allowance apart from creating an incentive for parents to stop working: Some parents would continue to work but work fewer hours; some parents would choose to divorce or never marry in the first place; some would have a child they would not have had absent the additional benefits. All of those behaviors, however warranted they might be in individual cases, lead to greater poverty in general. That would further dampen the effect of a child allowance.

And there’s more bad news. To the extent that low-income families that become less attached to work and marriage are stuck in multigenerational poverty, the policy might damage children’s prospects for upward mobility, even as it lowers childhood poverty. Tellingly, the otherwise welcome drop in child poverty over the past several decades has not been accompanied by a rise in intergenerational mobility.

Some analysts have responded to the University of Chicago results by pointing to research indicating that the 2021 child allowance did not reduce employment. But the research on behavioral effects is about medium- to long-term effects. Few people would be expected to leave work or have a child out of wedlock in response to receiving a new benefit that is set to expire after six months. These kinds of behavioral effects take time to set in, and the affected people are responding to permanent policy changes.

Acknowledging that a child allowance would reduce poverty substantially in the short term but by less in the long term leaves plenty of room for debate about the extent to which behavioral effects would negate the poverty reduction from a child allowance and the net impact on intergenerational mobility. But Republicans are right to worry about unintended consequences.

Legislators should start over in the next Congress. Republicans should energetically commit to policies that would meaningfully reduce child poverty and increase upward mobility, and Democrats should take seriously the substantial risk that unconditional cash benefits will pervert their good intentions.

Scott Winship (@swinshi) is the director of poverty studies and a senior fellow at the American Enterprise Institute.

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