Author: Thomas Lee

Introduction

The Child Tax Credit (CTC) is a tax benefit granted by the government to American taxpayers for each qualifying dependent child under the age of 18 at the end of the tax year. The CTC provides money to support American families by making it more affordable to raise children and by helping them save for their children’s future. To qualify for the CTC, the taxpayer’s dependent must also be an immediate relative or their descendant, have lived with the taxpayer for more than half the year, provide no more than half of their own financial support, and possess a Social Security Number that is valid for employment in the United States. In addition to the federal government, twelve states currently offer the CTC to enhance the economic security of families with children, particularly those in the lower to middle income brackets. The value of both federal and state tax credits is determined primarily by income level, marital status, and number of dependent children.

Passed by Congress, the federal government first established the CTC as part of the 1997 Taxpayer Relief Act. Under this act, the tax credit was $400 for each child under 17 and nonrefundable. When the child tax credit was initially enacted, it was primarily a nonrefundable tax credit for middle-income families with children. Through legislative changes, eligibility for the credit has expanded to both lower and higher-income families, and the amount of the credit has also generally increased for recipients. 

Refundable vs Nonrefundable Child Tax Credit

In 2001, the tax credit amount increased and was made refundable to coordinate with the Earned Income Tax Credit (EITC), a refundable earned income-based tax credit available to lower income workers. The refundable portion is called the Additional Child Tax Credit. In 2012, the American Taxpayer Relief Act increased the value of the federal child tax credit to $1,000 and increased the income threshold to correspond with the earned income tax credit. By 2017, the Tax Cuts and Jobs Act doubled the tax credit to $2,000 and made limits to the refundable amount of up to $1,400 per child. The act will expire on December 31, 2025. 

The CTC is nonrefundable and deducted from the amount of income tax a family owes. Hence, if a family owes $6,000 in taxes and is eligible for a $2,000 CTC, its remaining tax that needs to be paid would be $4,000. However, if a family owes $3,000 and its Child Tax Credit is $4,000, its tax bill would be $0. The taxpayer could receive a $1,000 refund from the remaining CTC through the Additional Child Tax Credit. The Additional CTC is a refundable credit that you may receive if your CTC is greater than the total amount of income taxes you owe. Therefore, if a family is eligible for a $2,000 CTC and its taxes are only $1,000, the remaining $1,000 credit would be refunded.

The Child Tax Credit on a State Level

In addition to the federal CTC, twelve states—California, Colorado, Connecticut, Idaho, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oklahoma, and Vermont—have enacted their own CTC. All but three of these states—Idaho, Maine, and Oklahoma—have made the CTC refundable. Eligibility requirements differ among states’ child tax credits. The COVID-19 pandemic worsened economic burdens for many families, and recent legislative trends suggest states are increasingly considering a CTC. Since 2019, Hawaii, Illinois, Iowa, Kansas, Michigan, Missouri, Oregon and West Virginia have introduced legislation to create state-level child tax credits. California and New York have both introduced legislation to expand their current state CTC.

The Child Tax Credit on a Federal Level

In 2021, President Joe Biden unveiled a $1.9 trillion legislative package, the American Rescue Plan Act (ARPA), to provide economic relief to working families, communities, and small businesses across the nation due to the COVID-19 pandemic. Under the ARPA, the CTC temporarily increased from $2,000 per child to $3,000 per child for children over the age of six and from $2,000 to $3,600 for children under the age of six, and raised the age limit from 16 to 17. Families qualified if their annual income did not exceed $150,000 for those filing a joint return and for qualified widows or widowers, $112,500 for those filing as the head of their household, or $75,000 for a single filer or one who is married and filing a separate return. Parents and guardians with higher incomes were considered eligible to claim a partial credit. 

The ARPA temporarily made the tax credit fully refundable and paid out half of the total credit in monthly payments for the first six months rather than once per year. The monthly payments ran from July to December 2021, with families receiving in cash up to half the credit’s total value. That included $300 per month for each child under age 6 and $250 per month for each child ages 6 through 17. Families received the remaining credit when they filed their tax returns in 2022. The CTC enacted in the ARPA was valid until 2021. As of 2022, the child tax credit has reverted to $2,000 per child under 17 with no advance monthly checks. According to his Build Back Better Agenda in the ARPA, President Biden states that this new Child Tax Credit should be extended for years to come. However, conservative politicians call for a revised CTC as they find weaknesses in President Biden’s CTC. 

Arguments for the Child Tax Credit Expansion

With the expanded CTC from the ARPA being a temporary action, President Joe Biden and Congressional Democrats have proposed extending it through 2025, or even making it a permanent action. The Social Policy Institute’s Child Tax Credit Panel Survey studies the effect of the expanded CTC on families using a probability-based online panel, which surveys a nationally representative group of 1,782 American parents eligible for the credit and a comparison group of 2,015 ineligible households. The survey specifically compares the employment, well-being, and financial security outcomes of families before and after receiving six months of CTC payments. The results showed that families used the CTC refunds to cover routine payments without reducing their employment. The most common reported uses for the CTC were: housing and utilities (70%), clothing or other essential items for children (58%), purchasing more food for the family (56%), saving for emergencies (49%), and paying off debt (42%). Eligible families experienced improved nutrition, decreased reliance on credit cards and other high-risk financial services, and made long term educational investments for both parents and children. 

The expansion helped families recover from the COVID-19 pandemic in 2021, reducing child poverty by roughly 30%. These monthly payments had this impact on child poverty because the expansion of the ARPA lifted restrictions on the child tax credit. Under the old rules, at least 23 million children didn’t qualify to receive the full benefit because their families didn’t earn enough. The first payment in July kept 3 million children out of poverty, and the monthly child poverty rate fell from 15.8% to 11.9%. By December, the CTC was keeping 3.7 million children out of poverty. After six months the child tax credit payments have, in effect, reduced child poverty in the U.S. by about 30%. Around 70% of CTC recipients who were negatively affected by inflation said the CTC payments helped them to better manage higher prices. After the payments stopped however, the child poverty rate increased by 41% between December 2021 and January 2022.

Arguments Against the Child Tax Credit Expansion

Policymakers that oppose the CTC expansion argue that it costs taxpayers too much. According to the Tax Policy Center, the price of reverting to the CTC benefits prior to the ARPA for 2022 would be approximately $125.5 billion of total tax expenditures. In comparison, continuing the expanded CTC would cost about $100 billion more than reverting. Thus, Congressional Republicans including Senator Mitt Romney, Richard Burr, and Steve Daines suggest a CTC proposal of their own. 

In their Family Security Act 2.0 proposal, families would receive monthly cash benefits amounting to $350 per month for each child under the age of 5 and $250 per month for each child from the ages 6 to 17. The benefit would be limited to up to six children annually. In order to receive the full benefit, families would have to earn $10,000 in the previous year. Those who earn less than $10,000 would have their credits reduced proportionally to their earnings. For high income families, the proposed CTC would start to phase out at $200,000 in income for single filers and $400,000 for joint filers. For every $1,000 earned above those thresholds, the credit would be reduced by $50. The Earned Income Tax Credit  would undergo cuts to both the phase-in rate and the maximum credit available to single parents and married couples with children. In total, those changes represent an annual savings of $92.9 billion.

The EITC is a tax refund believed to be an incentive for work because it is based on taxpayers’ income. Up until the expanded CTC of the ARPA, the CTC was similar to the EITC in that a taxpayer received credit based upon how much they worked. However, President Biden eliminated that feature and provided a CTC to everyone. Hence, those who oppose the expanded CTC are concerned that it will eliminate an incentive to remain in the workforce. The incentive to work can be explained by the substitution effect in economics. In other words, if wages increase, then work becomes relatively more profitable than leisure. If someone can have enough money without working, fewer people might work. In a recent study based on data that combines information from the Current Population Survey with administrative data on earnings, retirement income, federal benefit programs and taxes, it was initially confirmed that child poverty would drop 34% with Biden’s expanded CTC. However, applying the substitution effect modeled that 1.3 million workers would drop out of the workforce because of the money provided by the CTC. Child poverty would then only decrease by 22%.

Introduction

Universal Basic Income (UBI) is a developing policy of providing a regular, guaranteed payment to all citizens regardless of financial need to replace other need-based social programs that potentially require greater government involvement. This concept of “free money with no strings attached” can be implemented by all levels of government: local, state, and federal. Interest in UBI has grown in recent years due to the fundamental changes to the economy—mainly due to the growth of automation—that threaten to leave many Americans without jobs. A 2019 report by the Brookings Institution found that one-quarter of all U.S. jobs are susceptible to automation. Researchers argue that jobs entailing more routine tasks, such as those in manufacturing, transportation, and office administration, are most vulnerable. 

With the COVID-19 pandemic and its effect on unemployment, UBI has gained more attention from the public. After the COVID-19 pandemic drove up unemployment and job insecurity in 2020, some have urged for a nationwide UBI, and pilot programs have been initiated across the country. Those who support UBI say it’s an easy way to distribute aid to vulnerable populations. Others worry that it would be costly and discourage workers from finding jobs. Opinions vary, but UBI has developed into a political debate among policymakers in the United States.

Universal Basic Income in the United States: Federal

On a federal level, Democratic presidential candidate Andrew Yang made UBI a key pillar of his 2020 campaign, which helped bring UBI into the national spotlight. Yang’s plan promised every American adult $1,000 per month from the federal government. According to the nonprofit Tax Foundation, Andrew Yang’s $1,000-a-month Freedom Dividend for every adult would cost $2.8 trillion each year. He proposed funding the program by consolidating welfare programs (food stamps, homelessness services, disability services, etc.) and implementing a Value Added Tax of 10%. Residents who receive benefits from welfare and social programs would be given a choice between their current benefits or $1,000 cash unconditionally.

Universal Basic Income in the United States: State

A form of UBI on a state level is Alaska’s distribution of $1,000-$2,000 checks to its residents each year since 1982 from a fund created with oil revenues, also known as the Alaska Permanent Fund. In 2017, the government distributed a dividend of $1,100 per person including children. For example, a household of six would have received $6,600 in that year. The National Bureau of Economic Research conducted a study to observe the effects of the permanent fund on the state. The study was based on data from the Current Population Survey and a synthetic control. The study focused on tracking two outcomes: the full-time employment to population ratio and the population share working part-time. The results showed that the dividend had no negative effect on full-time employment. For part-time employment, a 1.8 percentage point (17%) increase since the beginning of the program was observed. Overall, the test results suggested that UBI does not significantly decrease aggregate employment.

Universal Basic Income in the United States: Local

A local-level experiment on UBI is the Stockton Economic Empowerment Demonstration (SEED). SEED was the nation’s first mayor-led guaranteed income demonstration launched in February 2019 by former mayor Michael D. Tubbs of Stockon, California. For comparative purposes, Stockton’s median household income of $46,033 is about 40% below that of California as a whole. SEED distributed $500 a month to 125 randomly selected residents for 24 months. From a preliminary analysis of the first year of the program, those who received the monthly dividend were surveyed as healthier, happier, and less anxious than those in a control group not receiving the monthly dividend. At the start of the study period in February 2019, 28% of recipients had full-time employment. A year later, it increased to 40%. By comparison, full-time employment in the control group rose from 32% to 37% after a year. Additionally, the experiment suggested that recipients experienced less income volatility than those who did not receive the guaranteed income, which allowed them to plan for the future with fewer financial burdens.

Arguments for Universal Basic Income

Those who support UBI argue that it is the most efficient method of distributing aid to vulnerable populations. Its simplicity provides immediate aid to income poverty as it eliminates eligibility restrictions that make it difficult for some households to access other need-based services. For the government, UBI systems eliminate the need to spend resources reviewing applications and monitoring benefits. Programs like the Supplemental Nutrition Assistance Program (SNAP) and housing vouchers require 10% of their funding for benefits and services to be spent on state administrative costs. In other words, only 90% of the program expenditures are allocated to distribution. Also, these programs require recipients to invest their time in applying. UBI would likely cost less than 1% in administrative costs and involve little to no burden on recipients. 

Some conservatives argue that UBI provides a possible replacement for current social safety nets at a lower cost for those in need. According to political scientist Charles Murray, a guaranteed universal income of $10,000 a year could potentially eliminate need-based programs such as Social Security, Medicare, Medicaid, agricultural subsidies, and corporate welfare. It can remove both the social stigma that accompanies public assistance and the risk of anyone in need falling through the cracks. Furthermore, UBI can provide a boost in entrepreneurship as people would feel more comfortable starting a business. The stipend provides a financial cushion needed for workers who are considering changing jobs, retiring earlier, or quitting the workforce to care for children or other loved ones.

Arguments Against Universal Basic Income

According to the Center for Budget and Policy Priorities, the federal government providing all Americans with a basic $10,000 a year would cost $3 trillion annually. That would be three-quarters of the federal budget and the influx of cash into the economy could also drive up inflation. Paying for it, along with Social Security, Medicare, defense, and infrastructure, would require higher tax rates. Moreover, even substituting these social programs with UBI is not so simple as studies show that the current programs—Social Security, Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), housing assistance, food stamps (SNAP), and the Earned Income Tax Credit (EITC)—have cut the poverty rate across family types. Comparing administrative data from these programs and the 2008-2013 Survey of Income and Programs Participation data, the study found that Social Security cut the poverty rate by a third within the 5 years. All programs except the EITC reduced poverty below 50% of the poverty line. For the elderly, Social Security decreased poverty levels by 75%. If the UBI program was to acquire funding through new taxes, it would most likely leave some people worse off from the reduced income after taxes and transfers. Furthermore, there is a vast difference in the cost of living across the country. Depending on the size of payments, UBI could allow people in some parts of the country to live comfortably without working. The benefit might be more than sufficient in low-cost states such as South Dakota, but it might not be enough in high-cost states such as California and New York. 
Outside the United States, Finland carried out a nationwide, randomized control experiment on UBI. The results of the 2017 UBI Program in the country did not meet the expectations set from the beginning. The experiment consisted of giving 2,000 unemployed people a basic income of €560 (approximately $630) per month for two years with the hope that it would motivate them to work. The findings from the first year suggested that individuals who received a basic income were no more likely to find work than those who didn’t. On average, both groups worked nearly 50 days a year and earned around €4,250.