The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion
The University of Chicago investigates the The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion emphasis mine.
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 paragraph look good if you stop reading there and miss the key phrase “initially ignoring any behavioral responses”.
Reality then surfaces.
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.
In short, people would drop out of the labor force content with $3,000 or $3,600 per child (up from $2,000 per child).
Moreover, there was no means test on this. As BBB is currently written, the money would be handed out willy-nilly.
Beware of Expansions!
Press Secretary Jen Psaki moaned “Maybe Senator Manchin can explain to the millions of children who have been lifted out of poverty, in part due to the Child Tax Credit, why he wants to end a program that is helping achieve this milestone.”
Manchin is not ending the program. He is willing to let the emergency tax credit expire and return the amount to where it was.
One of Manchin’s fears is precisely that programs never end. The second is they are not paid for. And the third is the program will add to inflation.
If Manchin OK’d BBB he would be under the same pressure a year from now, something he wants to avoid.
Meanwhile, at a time when labor shortages abound, there would be increased incentive for people to drop out of the labor force.
Add it all up and it’s impossible to not get inflation out of this mess.
Incentivizing people to not work is the last thing we need right now.
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