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Requiem for the Child Tax Credit


matt darling is an employment policy fellow at the Niskanen Center in Washington, where he works on labor market policy.

Published April 25, 2022


Here's a pop quiz (think-tank nerds not eligible): What’s the federal child tax credit — and why should you care? If this seems like a question of minor interest at a time when you have real things to worry about, like the price of ground beef and what comes after Omicron, join the crowd. The fact is, the low profile of the child tax credit and subsequent public indifference contribute to a tragedy in the making.

The CTC offers a rare opportunity in the partisan wasteland of American politics: renewal of the subsidy would represent a big step toward creating a better social safety net that could unite people of goodwill across the ideological spectrum. Indulge me for a few minutes to explain.

The Happy Accident

Start with some context. The child tax credit was introduced in 1997 as a modest, $500-perkid credit against the taxes a family would otherwise owe to Uncle Sam each year. However, it proved popular on both sides of the aisle — notably with politicians wishing to prove that tax cuts weren’t only for the rich. The credit was upped twice, doubling to $1,000 as part of the 2001 Bush tax cuts and a second time to $2,000 with the Trump cuts in 2017.

Indeed, the CTC was popular enough to make it to a third round under a Democratic Congress and White House. It was enlarged to $3,000 ($3,600 for children under 6) as part of the Covid-19 recession-fighting American Rescue Plan Act last March.

The bill also made two changes in structure along with sweetening the pot. First, instead of the money being credited against taxes owed in April, eligible households would now get the money every month, either as a $300 per child direct bank deposit or as a $300 check in the mail. Second, the tax credit became “refundable.” Instead of the benefit only being available as a credit against tax liability, families could collect the credit as cash in years in which they owed little or no income tax. That meant every parent (except for joint filers who made more than $400,000) would receive it. These changes transformed the CTC from an under-the-radar footnote into an ambitious reform of our social insurance system.

When people think about “welfare,” what most Americans have in mind is the Temporary Assistance for Needy Families (TANF) program, the product of the Clinton welfare reforms of the 1990s. Despite good intentions, those reforms made American antipoverty programs more complex, more complicated to access and less likely to provide straight forward cash benefits. As a result, federal assistance has become less of a welfare system in the traditional sense and (pardon my cynicism) more of a jobs program for social workers, with added subsidies to agribusiness.

The revised CTC offset this drift, moving the U.S. welfare system back toward a focus on the initial goal, helping people in financial need. Indeed, TANF and the CTC represent the starkly different directions that a social welfare program can take. Over time, TANF has become more complicated for beneficiaries to access — a virtue in the minds of some — and less effective at reaching people who need assistance. On the other hand, the CTC had become more generous, had made eligibility almost universal and was paid to people automatically if the IRS had their bank account data.

Ed Kashi/VII/Redux</div

The catch is that, unlike earlier incarnations of the child tax credit, the American Rescue Plan’s expanded CTC had an expiration date — the end of 2021. While the Biden administration hoped to make the expanded CTC permanent after the Covid emergency, negotiations on the Build Back Better followup bill floundered in the Senate. As a result, the final CTC checks (and direct deposits) went out on December 15.

Lost Ground

To understand why the reforms in the seemingly dead CTC matter so much, it is helpful to understand the mistakes baked into the 1996 reforms that created TANF. While hatched under a centrist Democrat (President Bill Clinton), the 1996 welfare reform that created TANF was actually inspired by conservative guru Charles Murray’s controversial 1984 book, Losing Ground. Murray argued that the main welfare program of that time, Aid for Families with Dependent Children (AFDC), was actually increasing poverty rates by undermining incentives to work.

Since the 1970s, AFDC benefits had become more generous. Moreover, benefits were opened to unmarried couples living together (who had previously been ineligible due to “man in the house” rules, which the Supreme Court struck down in 1968). Murray argued that the liberalized rules made “it profitable for the poor to behave in the short term in ways that were destructive in the long term.” He suggested that the architects of AFDC had forgotten a piece of popular wisdom: “People respond to incentives and disincentives. Sticks and carrots work.” Because people could live off welfare without working, he claimed that many people would stop working — either permanently or periodically.

Murray was right to emphasize the importance of incentives in designing welfare programs. However, the example of AFDC did not quite work the way he implied. While Murray used the language of economics, he did not apply economic analysis correctly. Economists stress the importance of how incentives change behavior at the margin. What they mean by this is that people make decisions by thinking about the incremental costs and benefits.

People who think at the margin will not decide whether to work because welfare payments are sufficient to live on. Instead, they will choose whether and how much to work based on whether the benefits of working outweigh the costs. Just because a person has enough income to live without working does not mean they will remain idle. Instead, people who have just enough to live on will evaluate what more work will get them — and few people, it is safe to say, will be satisfied with subsistence.

Murray discusses a hypothetical couple, Harold and Phyllis, jointly deciding whether to marry and whether Harold should work. If Harold works, he receives $136 (in 1980 dollars, or approximately $430 now) each week.

If Phyllis qualifies for AFDC, which she does if she and Harold are unmarried or if Harold is not working, she receives $134 in benefits each week.

Murray has a point about how AFDC changed incentives to marry. If Harold is employed, marrying would substantially reduce the couple’s income. Nevertheless, the moneymaximizing strategy is still for Harold to take a job. Consequently, Murray retreats from the incentives argument he used in the book’s opening and instead shiftily asserts that Harold will choose not to work (or at least periodically choose sloth) because he has another “basic source of income.” The assertion that his case is based on economic incentives adds the gloss of analytic rigor. But when the facts don’t fit, he looks elsewhere.

Testing, Testing

In the end, Murray justifies the claim that welfare payments will reduce work by citing a set of experiments on what we would now call a universal basic income that were conducted in Denver and Seattle in the 1960s and 1970s. The Denver Income Maintenance Experiment and the Seattle Income Maintenance Experiment (DIME and SIME) recruited 5,000 low-income households for a five-year randomized controlled trial to measure how providing cash assistance would change the work behavior of low-income households. The income provided was substantial, ranging between $24,000 and $36,000 annually in 2021 dollars.

Politicians from both parties closely watched these experiments, including Richard Nixon (no misprint) who had expressed interest in implementing a generous universal or near-universal program as an alternative to welfare-as-usual. But the initial assessments suggested a shocking failure: many recipient households reported that their earned income had drastically dropped over the course of the experiment. Husbands reported reducing their work effort by 9 percent, wives by 20 percent and young males who were not family heads by a shocking 33-43 percent.

Subsequent analyses of the SIME/DIME experiments found these conclusions were embarrassingly off. The early studies made a crucial error in looking only at self-reported income. The reanalysis showed no difference between the control and treatment groups based on payroll data of actual hours worked.

Allen J. Schaben/Los Angeles Times via Getty Images

Sadly, it was too late; the political window had closed. The initial misleading findings led Nixon to drop his plan to implement a universal basic income in the United States. And the broader narrative that providing people with cash benefits would lead them to work much less continues to haunt social policy.

Losing Ground was published after these later analyses had been released, but it made no reference to them. Murray used the initial data, concluding that any no-strings antipoverty program would create perverse incentives that would deepen poverty. Indeed, in a sweeping display of faith-based ideology, he concluded that to reduce poverty it would be necessary to eliminate anti-poverty programs entirely.

Ending Welfare as We Knew It

While inspired by Murray’s immensely popular book, the 1996 welfare reform was actually a product of political triangulation and thus did not follow his prescription to end welfare altogether. Instead, the reforms created a new program, Temporary Assistance for Needy Families to replace AFDC. The reform assigned four explicit goals to TANF:

  • Provide assistance to needy families so that children can be cared for in their own homes or the homes of relatives
  • End dependency of needy parents on government benefits through work, job preparation and marriage
  • Reduce out-of-wedlock pregnancies
  • Promote the formation and maintenance of two-parent families

To push these goals — especially encouraging people receiving welfare to move into jobs — TANF differed from AFDC in several ways.

A less rapid phaseout. A significant problem with AFDC was the rapid phaseout — the rate at which income supports decreased as recipients earned more money. The AFDC phaseout could be as high as 100 percent, meaning that getting a raise at work would not increase total household income by a penny. While TANF was still hobbled by a phaseout, it was more gradual.

The addition of work requirements. People were only eligible for the program if they had worked or recently engaged in work-like activities (such as volunteer work or searching for a job).

Time limits. Everyone had a lifetime eligibility limit of five years, after which they would no longer be able to access cash payments through TANF. Additionally, people could only access the program for two consecutive years.

State block grants. Instead of being run as a federal program, TANF was run through the states with federal funding. States also had substantial ability to alter the design of their programs within the federal guidelines.

Nikki Kahn/The Washington Post via Getty Images
Be Careful What You Wish For

Six percent of the population had been receiving AFDC payments in 1996. After TANF was substituted, recipients fell by half. Politicians, not surprisingly, touted this steep decline in the welfare rolls as a success. However, a rigorous analysis shows that the real story is more complex.

First, it is implausible that the welfare reforms played a dominant role in the dramatic pace of transition from welfare to work in the booming 1990s economy. Other countries, which did not reform their welfare systems but did enjoy rapid growth in employment during the 1990s, also saw declines in welfare dependence. For example, Canada’s employment growth almost eerily paralleled the experience of the United States from August 1996, when the U.S. passed welfare reform, to the 2001 recession.

Second, judging the effectiveness of welfare reform by a decrease in the numbers on the welfare rolls misses the point that the program was explicitly designed to deny access. At a functional level, work requirements simply kick people off TANF who are unable to find (or unable to document) that they are working. A poorly designed work requirement program — for example, one that simply sent recipients packing if their last names began with the letter “S” whether they were working or not — would show a decrease as well. But we would be under no illusion that it was effective.

In other words, the data that were used to evaluate the effectiveness of TANF suffered from problems similar to that plagued interpretation of the SIME/DIME experiments. In both cases, the easy-to-access administrative data collected by the researchers or by unemployment agencies led to a fundamental misunderstanding of what was actually happening.

Instead of getting people into jobs, TANF mostly “succeeded” by making it harder to qualify. A Government Accountability Office analysis concluded that:

Most of the caseload decline has resulted from a decrease in the rate at which people eligible for assistance actually received benefits, rather than a decline in the population in need. For example, in 2015, 18.0 million people were eligible for TANF assistance, but 4.9 million (27 percent) received it.

While requiring someone to work to receive benefits may seem like a good idea, the way work requirements have been implemented has almost always been faulty — not to mention a paperwork nightmare. TANF requires participants to work at least 130 hours a month (this can be somewhat lower for people with younger children). As a result, TANF recipients need to track and document their hours for submission to their state’s TANF agency.

Requiring a TANF recipient to carefully document all earnings is like asking an income tax payer to document all their deductions. The difference is that keeping track of receipts for taxes is a modest annual exercise centered around April 15 and often promises a hefty return — perhaps thousands of dollars. Documentation of your work hours for TANF has to be completed on a monthly or even weekly basis, with relatively small sums as the potential reward.

For example, the maximum monthly TANF payment in Mississippi was only $170 until 2021, just $1.31 added per hour of mandated work. It’s higher now, but don’t pop the champagne corks just yet: the new monthly maximum is $260.

The paperwork can get much more complicated, ironically, because TANF offers a few safe harbors that allow some participants to collect benefits even if they’re not working. For example, you can still receive TANF if you are in vocational training.

The more fair-minded among the designers of TANF did not want people to decide against skill-building because it would strip them of benefits, but they also did not want people to stay in training indefinitely without entering the workforce. So, Congress included a lifetime limit of 12 months of compensated training to stop this from happening. A consequence of this is that TANF agencies have to track how many months of training a person has had in previous decades to ensure they do not exceed the lifetime limit.

The Inevitability of Tangled Webs

James C. Scott, a political scientist at Yale and the author of the influential book Seeing Like a State, points out that centralized bureaucratic states use administrative data to make complex phenomena “legible.” He argues that many central planning schemes fail precisely because such impositions do not account for the more complex reality of the real world.

Referring to Tanzania’s failed attempts to relocate farmers into well-defined communal villages, he argues:

It seems incredible, in retrospect, that any state could proceed with so much hubris and so little information and planning to the dislocation of so many million lives. It seems, again in retrospect, a wild and irrational scheme which was bound to fail both the expectations of its planners and the material and social needs of its hapless victims.

The impact of U.S. welfare reform may not be in the same league of top-down disfunction as the destruction of Tanzanian village society, but it does provide some uncomfortable points of comparison. TANF was designed as if it were costless for both the individual and the government to process information. It’s one thing to demand that a person receiving TANF be ready to work or that they do not receive more than 12 months of vocational training while receiving TANF. It’s something else to create the administrative systems that can accurately track and process this information.

Contrast the administrative-state approach of TANF to the institutions buttressing the recently expired child tax credit. TANF is a tangled web of surveillance and administration — hardly the system wanted by the self-styled small-government conservatives who pushed for it. The CTC simply provided families with a no-strings $300 a month per child — which actually proved enough to halve child poverty. While the CTC is unable to completely eliminate the need for data collection (the government still has to verify how many children are part of households and where to send the money), the process of obtaining the benefits is straightforward.

Build Back Broken?

The pandemic led to an increase in government spending (unprecedented short of world war) to offset the partial unraveling of the productive economy. It dwarfed previous anti-recessionary stimulus — Congress feared the worst would happen with the passage of President Obama’s stimulus package in 2009, which only amounted to $787 billion.

Q-Image/Alamy Stock Photos

Covid-19 relief has included the Families First Act ($225 billion), the Cares Act ($1.9 trillion), the Paycheck Protection Program and Health Care Enhancement Act ($355 billion), and the Response and Relief Act ($915 billion). And, of course, President Biden’s American Rescue Plan added $1.9 trillion in 2021, for a total of $5.3 trillion in spending.

In today’s rush to find a scapegoat for the current spike of inflation, some prominent politicians seem to have forgotten that we did get something valuable in return for the flood of deficit spending. Indeed, even though Covid-19 continues to disrupt production and trade, the U.S. economy is the only major economy to have already surpassed its prepandemic GDP.

Even with the success of pandemic relief — perhaps because of its success — the old rules seem to have made a comeback. The Build Back Better bill, which included extension of the fabulously successful CTC, was passed in the House but has languished in a Senate consumed by nostalgia for a time when a billion dollars was real money.

Note the similarities in revisionist history in the two great macroeconomic crises of the 21st century. In the wake of Wall Street’s meltdown in 2008, government programs designed to increase homeownership for the near-poor were widely blamed for the failure of the mortgage market. Research later showed that the blame was, in fact, misplaced: middle- and high-income households owed most of the loans in default.

Again, a false economic narrative is holding policy back. Through the Covid-19 crisis, conservatives warned that generous unemployment relief explained the labor shortages. When the supplemental payments ceased last September and millions still refused to go back to work, conservatives zeroed in on the CTC incentives as the culprit. Indeed, negotiations over extending the CTC have specifically focused on whether the program should include a work requirement, thereby imposing the same barriers that left gaping holes in the safety net ruled over by TANF.

* * *

The great irony here (yes, I do use the word a lot) is that the no-strings CTC fits a conservative ideological agenda better than a liberal vision of a European-style welfare state. The CTC is a potent anti-poverty tool, yet it demands no specific behavioral changes from recipients and requires virtually no administrative bureaucracy.

The sad truth here is that conservatives are at war with themselves. For libertarian-leaning conservatives, the CTC seems a marvelous means of sustaining a civilized society that depends less on government and minimizes restrictions on freedom. For familyfocused conservatives, it increases the resources being provided to children, making it easier for people to start or have large families. But for a more familiar kind of American conservative, the CTC appears as a temptation to laziness, another excuse for the poor to live off the hard-won earnings of the working majority — never mind the evidence that cash supplements don’t decrease work.

The even sadder truth is that the latter sort of conservative is winning. And their Dickensian view of humanity is costing us a chance to unite conservatives and liberals on a common path toward decency without the constraints of an administrative state. Dare we hope for better?

main topic: Tax Policy