3 questions to ask about the child allowance plans
After endorsements from President Joe Biden and a high-profile Republican senator, the country seems on the verge of adopting a society-transforming idea: giving a “child allowance” to the poorest families.
Done well, this would lift 4 million children out of poverty, a monumental achievement. It could narrow disparities in living standards and opportunities between lower- and higher-income kids. The design of the policy matters, though, so I’m outlining three broad questions for evaluating the rival proposals now on offer.
In general, the proposals involve expanding the child tax credit; paying it out monthly (rather than annually); and making it “fully refundable,” so that families get the full value of the benefit even if they have little or even zero tax liability. Under the House framework expected to be included in Biden’s economic relief package, for instance, low- and moderate-income families would receive $3,600 a year for each child under 6, and $3,000 for children ages 6 to 17.
Here’s my cheat sheet:
1. DOES THE PLAN ACTUALLY HELP POOR AND
LOWER-INCOME FAMILIES?
Full refundability of the child tax credit is key to helping the ultra-poor. But other elements of these proposals could blunt the impact.
For example, the child-allowance plan from Sen. Mitt Romney, R-Utah, would also shrink or eliminate other programs for lower-income families, such as the earned-income tax credit and traditional cash welfare. Collapsing and combining some overlapping anti-poverty programs into a more transparent and streamlined plan is not necessarily a bad idea. But the net effect of this consolidation matters.
Under Romney’s plan, many low- income families are likely to end up not much better off than they are now, since a large chunk of their new benefits would be offset by losses of old benefits. Some back-of-the-envelope estimates suggest that a lot of low-income single parents might be left substantially worse off. (Romney has released limited details, complicating more precise calculations.) 2. HOW MUCH DOES THIS NEW PROGRAM
COST, AND WHO PAYS FOR IT?
The bigger and more universal the child allowance is — that is, the more households that qualify for it , the more it will cost. This raises the question of who (if anyone) foots the bill.
The latest House Democratic proposal would begin phasing out the newly expanded payments at $75,000 for single filers and $150,000 for joint filers, with others above those thresholds eligible for partial payments. It’s a one-year plan that isn’t paid for. Already, though, Democrats have made clear that they want to make child allowances permanent — which would likely require fiscal offsets down the line.
My view is that the poor should not be responsible for bankrolling programs for the poor. Other groups are better able to absorb the costs - particularly the wealthy. Alternatives for funding these child allowances include repealing parts of the 2017 GOP tax overhaul, such as its expanded estate tax exemption or corporate tax cuts. Or, hey, its provisions expanding the child tax credit for wealthier households.
3. ARE THERE DESIGN ELEMENTS THAT COULD BACKFIRE, UNINTENTIONALLY HURTING POOR FAMILIES?
One concern involves whether poor families might be hit with surprise end-of-year tax bills if their circumstances change (e.g., a parent loses custody) and the government’s monthly checks had been too high. Othercountries’ experiences have shown this can be a real problem. House Democrats’ one-year proposal reportedly has some “safe harbor” provisions intended to safeguard against this.
A broader, and perhaps harder, question involves incentives.
Some conservatives have expressed concern that giving people money, regardless of whether they have any earnings, could reduce incentives to work. I have not seen evidence that labor-supply effects would be large enough to impact the policy’s goals to reduce child poverty. And besides, if getting an extra $250 per month allows a single mom greater choice about whether to work the night shift or spend more time with her second-grader, that’s not obviously a bad thing.
There are other considerations for these plans, but these questions are a good place to start.