“Basic economics teaches us that incentives matter and the CTC is not incentive compatible.”
Any child living in poverty is a tragedy and government policies aimed at ending child poverty are noble and worth pursuing. But the Child Tax Credit (CTC) plans proposed by President Biden and Senator Mitt Romney (R-UT) will not help strengthen the social net but will instead generate perverse incentives for families.
What is the Child Tax Credit?
CTC plans like Romney’s are cash payments to low-income families with young children. Romney proposes giving families between $250 and $350 a month. Democrats have proposed a similar plan. These benefits are like those of the Temporary Assistance for Needly Families (TANF) program, which is the main government support initiative for families. The key difference between CTC and TANF is that the benefits under CTC would be available whether or not a parent is working or married. These plans additionally aim to minimize the Earned Income Tax Credit (EITC) to fund the CTC.
How Do Advocates Say It Will Help?
Advocates for the proposal argue that it would reduce child poverty through increased transfer payments to impoverished families with children and through a major simplification of the tax code. Some advocates argue that this spends welfare money in a more effective manner, by encouraging parental choice and avoiding bureaucracy of the US regulatory state – avoiding regulatory capture.
The Reality: More Poverty
But basic economics teaches us that incentives matter and the CTC is not incentive compatible. These plans increase the income of low-income families but do not change the marginal returns of an extra dollar of earnings. Robust empirical analysis demonstrates that without changing the marginal returns of a dollar, the incentive to work falls.
By disincentivizing work, these proposals fail to accomplish their end of reducing childhood poverty. A study by the National Academies of Sciences found that child allowance plans like the ones Romney and the Democrats are proposing would lead to 277.4 million hours in aggregate employment loss. Further, the authors of the NAS study find that those at the very bottom of the CTC plan would become even poorer.
The Solution: Work
Proponents of the plan seem to have misconstrued what it means to reduce childhood poverty. Lifting people out of poverty does not just mean raising them marginally above the poverty line, but instead providing ways for upward mobility. For the majority of those in poverty, finding work is the only real means of entering the middle class. After all, in 2014 the official poverty rate for adults who worked full-time was only 3.0 percent, compared to 33.7 percent of adults who did not work at all. Replacing policies like the EITC reduces government incentives to work and therefore eliminates the path out of poverty for low-income families.
Ending poverty, especially for children, is a worthy goal but policies that reduce the incentive to work will never provide upward mobility. The relationship between work and mobility is clear and government policies that aim to end poverty should focus on encouraging people to work, not cutting their hours, or stopping them from working completely.
Susannah Barnes is a senior economics major from Midland, Michigan. Susannah has loved politics and policy since she began speech and debate in eighth grade. Since then, her passion for economic and political freedom has only grown. On campus, Susannah is the co-captain of the Debate Society and serves as the Executive Administrative Editor for the Grove City College Journal of Law and Public Policy. Additionally, she works in the Admissions Office and as a Public Relations manager and Teacher’s Assistant for the Economics Department.
Susannah interned at the Mercatus Center at George Mason University as a Media Relations Intern first through the Koch Internship Program in 2019 and again in 2020. Before that, she interned as a Communications Intern at the Mackinac Center for Public Policy. After graduation, Susannah hopes to work in communications for a think tank and get a graduate degree in economics.