There is a debate going on about the disincentive to work lurking in the child tax-credit changes proposed in new tax legislation by Ron Wyden (D., Ore.) and Jason Smith (R., Mo.). On one side are those who say that no one will stop working for a $2,000 annual credit per child; on the other side are those who say that workforce participation will indeed dip as a result.
In that context, I find these two items interesting — one produced by Scott Winship and Kevin Corinth at AEI, and one produced by the Wall Street Journal. They correctly remind us that accurately assessing the CTC’s impact on incentives to work requires careful consideration of the incentives created by other existing transfers to parents.
First, Corinth and Winship:
Figure 1 below shows, for a single parent with three children, the family’s total income after adjusting for taxes and transfers for any given level of earnings. It accounts for federal income tax, the employee portion of the federal payroll tax, the Supplemental Nutrition Assistance Program (SNAP), the Earned Income Tax Credit (EITC), and the CTC. It breaks the CTC up into the existing amount (assuming a $1,800 cap on the refundable portion is applied in tax year 2023, as set forth by the Wyden-Smith bill), and the additional amount if the refundable portion was provided on a per-child basis. Since the parent has three dependent children, the refundable credit would phase in at a 45 percent rate in this case. Note that the sudden cliff around $39,000 of earnings is a result of lost SNAP eligibility.
One striking aspect of Figure 1 is that a single parent with three children who earns between $15,000 and $20,000 per year would have a total income of $37,200 to $41,300, of which around $3,000 (or more) is a result of the CTC expansion.
Then there is the WSJ piece that explains this with simple words:
Messrs. Corinth and Winship take the example of a parent of three earning $20,000 a year — about $20 an hour working 20 hours a week. Under the bill, if this parent switches to full-time work and earns $40,000, her total household income increases by only $3,400.
That’s because the bill would hand out larger child-credit checks at lower incomes — and because the child credit is merely part of a constellation of benefits that include the earned-income tax credit and food stamps, which phase out as income rises. The bill thus imposes a “14 percentage point increase in the effective tax” of moving from part-time to full-time work for some parents.
Worse is the provision that would let parents rely on the prior year’s income to claim the credit — even if they don’t work at all the next year. This is a Democratic down payment on eliminating the $2,500 earnings requirement in the credit that functions as a work requirement, and even temporary changes will inevitably drive some parents out of the labor force.
While I find the discussion about this child tax-credit proposal interesting, I think the real value of the Corinth–Winship paper, and their chart posted above, is that it draws attention to the way the CTC interacts with other transfers.
As we see in the example they use, a single parent with three children earning $15,000 annually will get $11,244 from SNAP, $6,750 from the EITC, and an additional $5,400 in CTC (existing law and additional per child refundable credit). Corinth told me that these numbers omit benefits such as Medicaid/CHIP, child-care assistance, school meals, WIC, LIHEAP (energy assistance), TANF, housing assistance, SSI for disabled children, and state’s EITC and CTC, and more.
It is difficult to argue that our system isn’t already generous toward low-earning families with children. It isn’t hard to see how this system, while creating some incentives to work at first, also creates disincentives to work. A single mom of three kids would gain roughly $10k when earnings grow from $15k to $45k (rough numbers, eyeing the chart).
We can spend a lot of time arguing over the impact of this child tax-credit proposal in isolation or over the scale of the disincentive to work. It seems to me, however, that the debate should really be about whether we believe people are better off receiving most of their income through work or through government transfers. If you believe there is some value to being mostly self-sufficiency, this system we have — not just whether or not to add to the child tax credit — should worry you.