Why Congress is really fighting for the refundable child tax credit


Often tax policy debates can be settled by splitting the difference. You like a 28% tax rate. I prefer 20%. Let’s focus on 24% and call it a day.

But a key disagreement over the future of the Child Tax Credit (CTC) is much more than a number. This is the very nature of credit: is its primary purpose to reduce child poverty? Or is it largely to support middle-income (and even some high-income) families, as most conservatives say?

The depth of this dispute is one of the main reasons why it has been so difficult for lawmakers to reach a consensus on the future of the CLC and a big reason why the Build Back Better (BBB) ​​program of the President Biden is at a standstill.

The evolving CTC

To overhaul the bidding, in the Tax Cuts and Jobs Act of 2017 (TCJA), Republicans increased the credit from $1,000 to $2,000 per child for couples earning up to at $400,000. Those who did not pay income tax could get up to a maximum of just $1,400, but had to earn at least $2,500 to qualify for any benefits.

The 2020 US Bailout Plan (ARP) increased the credit to $3,000 ($3,600 for each child under 6) and, importantly, made it fully refundable. Therefore, the maximum credit was available to non-working parents, a significant change from previous refundable credits. These increased benefits were only allowed for 2021 and the law has now reverted to the 2017 version.

Almost all Democrats want to restore the design of the ARP. And their reason is explicit: to significantly reduce child poverty. Here’s what five Democratic senators said in a January 26 letter: “The expanded CTC payments, which are expected to reduce child poverty by more than 40%, have helped keep an estimated 3.7 million children out of poverty. In December 2021 alone… Nationally, the payments reduced hunger for families with children by 24%. CTC payments have helped millions of parents and guardians enter or stay in the workforce. »

A hindrance to work?

But not all Democrats agree. Sen. Joe Manchin believes only working parents should receive the credit. And many Republicans insist that a fully refundable credit discourages work.

Here is a typical conservative criticism, from the wall street journal editorial page (paywall): “The effect of the larger allowance on poverty has been overstated because the allowance as structured crushes the incentive to work. Traditionally, someone needed $2,500 of income to claim the Child Credit, which became more generous as a person earned more to encourage advancement. This is an extremely modest income, and the Democrats have torpedoed this threshold for the sole purpose of sending large checks to people who are not working.

In 2017, Rep. Kevin Brady (R-TX), then chairman of the House Ways & Means Committee, said the TCJA’s expanded CLC was primarily aimed at helping middle-class families with the costs of parenthood, and not to have children. out of poverty: “We are increasing family-oriented tax benefits, such as the Child Tax Credit, to help families cope with the rising costs of child care, higher education and caring for their loved ones. »

Middle ground?

In theory, at least, there can be common ground between the two parties. Just as not all Democrats believe in the poverty-alleviating benefits of the CTC, not all Republicans reject them. For example, Sen. Mitt Romney (R-UT) says his Family Security Act explicitly aims to support families with children and reduce child poverty, sharing the goal of the refundable CTC. Romney’s plan would replace rather than supplement other safety net benefits for low-income households, something Democrats don’t like. Yet it includes a core of compromise.

The problem is that Romney seems to have little support among his fellow Republicans, just as Manchin has little or no support among Democrats.

The other issues in the current CTC dispute—should the credit be $2,000 per child or $3,000, for example—are relatively easy to resolve. The old reliable trick of dividing the difference can be applied.

Profound differences

But that won’t work when it comes to redeemability. Congress is deadlocked on a deep philosophical question: Is the primary purpose of refundable tax credits to support the children of low-income parents or to encourage those parents to work? Is it to supplement wages or reduce poverty?

Conservative icon Milton Friedman proposed an early version of a refundable tax credit as a negative income tax available to everyone, whether they worked or not. Romney’s plan, although limited to only families with children, is built on the same idea. But the current earned income tax credit does have a work requirement.

The choice Congress makes on the future of the CTC will have profound implications for families and for how the government views its support for low- and middle-income households. But getting there won’t be easy. It does not lend itself to splitting the difference.

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