The first payments of the Biden administration’s expanded child tax credit went out last week — marking what could be the start of a truly radical change.
The new system is in place only for the rest of this year, though Democrats are hoping first to extend it as part of their budget proposal, and then to make it permanent.
Their ambition is nothing less than to transform the provision of income support, especially for the poorest families.
That’s a worthy goal, to be sure, and one that’s capable of commanding bipartisan support. But the new policy is both administratively demanding and very expensive. It was a mistake to dodge these questions before the six-month experiment began. Good answers are essential if this policy, or something similar, is to be adopted for the longer term.
Under the previous rules, most taxpayers could claim a credit of up to $2,000 a year for each child under age 17. Thanks to the new scheme, introduced as part of the American Rescue Plan Act, they can claim a credit of $3,600 for each child under 6 and $3,000 for children aged 6 to 17. These amounts don’t start phasing out until income exceeds $112,500 for single people and $150,000 for married couples.
Crucially, ARPA also makes the credit “fully refundable” — meaning that the support is paid in full even if the recipient has no income and owes no taxes against which to set the credit. Under the previous rules, the poorest households got little and in many cases nothing. Under the new rules, they’ll receive the full amount. In addition, payments will go out from the Internal Revenue Service each month, starting now, so that by the end of the year (unless they opt out), households will have received half of the year’s total credit; the balance will be paid when taxes for 2021 are processed next year.
The more generous credit, combined with monthly payments and full refundability, will make an enormous difference for the poorest families. It’s estimated that nearly 30 million children in low-income households that received less than the standard $2,000 per child will now receive the new maximum of $3,000 or $3,600 (depending on the child’s age). Roughly 4 million children will be lifted out of poverty, cutting the child poverty rate by more than 40 percent.
The effect will be especially dramatic for children in so-called “deep poverty,” who live in households with incomes at half of the poverty line or less.
A key benefit of the system is that the value of the benefit stays constant as incomes rise up to a relatively high threshold. This means that the great majority of households face no disincentive to increase their earnings. Under alternative approaches to more generous income support, the credits start to be clawed back at lower incomes — imposing a high marginal tax rate on affected families and discouraging work.
In short, the new scheme has enormous advantages. As you’d expect, they come at a correspondingly high price.
The estimated full-year cost of the expanded child tax credit is $100 billion at the outset. It could amount to roughly $1.6 trillion over a 10-year budget period if made permanent, tax experts say.
How will it be paid for?
Remarkably, there’s no clear answer. The administration and its allies in Congress are intent on pressing forward even though the revenue side of the equation is entirely unresolved.
The other main hazard is administrative. The simple version of how the scheme works (see above) might seem complicated enough. In practice, the convolutions are far, far worse.
Managing eligibility in real time as family circumstances shift, and dealing with issues such as clawing back overpayments, will severely test the already-stretched capacity of the IRS. Indeed, administering an anti-poverty scheme of this kind really shouldn’t be the IRS’s job. Casting it this way has political advantages: It presents child tax credit payments as tax cuts. Yet for the poorest families, the payments aren’t tax cuts at all; they’re benefits, and it would be better to manage and explain them to the public accordingly.
This might seem like nitpicking, but it goes to a broader point. An eminently desirable reform is being framed and implemented as one more layer of expensive complexity on top of a tax code that’s already insanely complicated. Radical reform to cut poverty, especially with virtues as striking as this one, is welcome. But its prospects of long-term success would be greater if the proposal also moved the government toward greater simplicity, transparency and administrative efficiency. Sadly, at the moment, this might be too much to ask of U.S. politics.
Biden and his allies were right to propose the experiment. But they should have addressed the questions about costs and administration before embarking on it. The country certainly deserves answers before taking the scheme any further.
— Bloomberg Opinion