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Congress Shouldn’t Expand Welfare in Return for Corporate Tax Cuts

National Review

January 12, 2024

Bipartisan negotiations to revive the Democrat-favored 2021 Child Tax Credit in return for Republican-favored business-tax cuts are heating up. The business-tax cuts could be helpful in principle — if they focus on encouraging future investment and don’t add to the deficit. But under no circumstance should Republicans agree to turn the Child Tax Credit into a welfare program. Fully maintaining the credit’s work requirement should be a red line.

For their part, Democrats seek to turn back the clock to the final six months in 2021 — when the Biden administration’s American Rescue Plan fundamentally changed how the government supports families. It turned a Child Tax Credit that encouraged work and reduced the tax burden of working families into a guaranteed income provided regardless of work effort. Non-working parents received the same bulked-up $3,000 per child credit — $3,600 in the case of children under age six — that working parents received.

Democrats have not been dissuaded by evidence that providing a guaranteed income in lieu of a work-promoting tax credit may have led up to half a million parents to stop working during the second half of 2021. And despite the approximately $100 billion annual cost of the expansion, a recent study relying on the most accurate available data shows that child poverty didn’t deviate much from its trend. The 2021 Child Tax Credit was a very expensive and largely ineffective policy.

A permanent version would be worse.

The study that most carefully modelled the policy’s work incentives and relied on the most accurate data estimated it would cause well over a million parents to exit the workforce in the long run. It would also threaten children’s long-run prospects. Research consistently shows when tax credits require parents to work, their children are more likely to thrive when they become adults. They earn more, and they become less dependent on the government. Disconnecting tax credits from work could end up doing long-run damage to the very children policy-makers are trying to help.

The closed-doors discussion to bring back elements of the 2021 Child Tax Credit is alarming in light of the evidence of its harmful effects. A framework reportedly agreed upon by a small bipartisan group in Congress would boost spending on the Child Tax Credit by up to $50 billion and could partly restore benefits to non-working parents. Apparently, Democrats want to send out beefed-up checks this April when families file their taxes — just several months before voters go to the ballot box later this year. From their perspective, the clock is ticking to get a bill passed quickly.

Whatever bill the bipartisan group comes up with, Republicans should draw a red line. The Child Tax Credit’s work requirement must be fully maintained. If you don’t work, then you don’t receive the credit that year.

Opening the door even slightly to a guaranteed income for non-workers would be risky. Once a benefit is put in place, it becomes much easier to expand in the future. That should rule out proposals requiring work only in some previous year to receive the credit this year. The fact that more than two years removed from the expiration of the 2021 Child Tax Credit — an extremely expensive policy that contributed to the worst inflation experienced in 40 years — approximately half of Congress continues to adamantly seek its full restoration is a testament to the risk of ceding any ground on work requirements.

This doesn’t rule out other sensible reforms to the Child Tax Credit. For example, since 2018, when Congress doubled the maximum per Child Tax Credit to $2,000 under the Tax Cuts and Jobs Act, inflation has cut its real value by almost $500. Moving forward, Congress could automatically increase the maximum benefit with inflation each year to ensure its real value stays constant over time, though Congress should avoid jacking up the current maximum benefit. Adopting the 2021 maximum credit amounts of up to $3,600 would cost upwards of $80 billion per year.

Modest reforms to the Child Tax Credit that support working families could sensibly be paired with Republican-favored business-tax reforms, but only if they focus on encouraging future investment rather than retroactively subsidizing investment that already occurred. Most importantly, any increased spending on the Child Tax Credit and reduced revenue from the business-tax provisions must be fully offset by reduced spending elsewhere.

The national debt recently surpassed $34 trillion. Now is not the time to spend an additional $100 billion on individual and corporate tax reforms — the reported agreement between Democrat and Republican negotiators — unless it is fully paid for through spending cuts elsewhere.

Policy-makers should heed the evidence on what works to help families. They should also start acting like the country’s accelerating fiscal problems are real. That means a red line on the Child Tax Credit that protects its work requirement, and it means fully paying for pro-growth business-tax reforms.