The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion

79 Pages Posted: 11 Oct 2021

See all articles by Kevin Corinth

Kevin Corinth

University of Chicago - Harris School of Public Policy

Bruce Meyer

University of Chicago

Matthew Stadnicki

University of Chicago

Derek Wu

University of Chicago - Harris School of Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2021

Abstract

The proposed change under the American Families Plan (AFP) to the Tax Cuts and Jobs Act (TCJA) Child Tax Credit (CTC) would increase maximum benefit amounts to $3,000 or $3,600 per child (up from $2,000 per child) and make the full credit available to all low and middle-income families regardless of earnings or income. We estimate the anti-poverty, targeting, and labor supply effects of the expansion by linking survey data with administrative tax and government program data which form part of the Comprehensive Income Dataset (CID). Initially ignoring any behavioral responses, we estimate that the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. The expansion of the CTC would have a larger anti-poverty effect on children than any existing government program, though at a higher cost per child raised above the poverty line than any other means-tested program. Relatedly, the CTC expansion would allocate a smaller share of its total dollars to families at the bottom of the income distribution—as well as families with the lowest levels of long-term income, education, or health—than any existing means-tested program with the exception of housing assistance. We then simulate anti-poverty effects accounting for labor supply responses. By replacing the TCJA CTC (which contained substantial work incentives akin to the EITC) with a universal basic income-type benefit, the CTC expansion reduces the return to working at all by at least $2,000 per child for most workers with children. Relying on elasticity estimates consistent with mainstream simulation models and the academic literature, we estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force. The decline in employment and the consequent earnings loss would mean that child poverty would only fall by 22% and deep child poverty would not fall at all with the CTC expansion.

Keywords: Child Tax Credit; Poverty; Administrative data; Survey misreporting; Simulation; Employment

Suggested Citation

Corinth, Kevin and Meyer, Bruce and Stadnicki, Matthew and Wu, Derek, The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion (October 7, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-115, Available at SSRN: https://ssrn.com/abstract=3938983 or http://dx.doi.org/10.2139/ssrn.3938983

Kevin Corinth

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Bruce Meyer (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Matthew Stadnicki

University of Chicago

Derek Wu

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

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