Politicians, policy analysts, and advocates have proposed increasing the generosity of the Child Tax Credit (CTC), as a means of providing more resources to low-income families with children. Before deciding whether to expand the CTC and by how much, policymakers should be aware of existing tax and transfer policies that already provide a substantial amount of support for low-income families.
Currently, the CTC has a non-refundable portion and a refundable portion. The non-refundable CTC reduces the federal income tax liability of families by $2,000 per dependent child under the age of 17, and thus, this portion only benefits families that owe federal income tax. The refundable CTC benefits families that do not pay federal income tax, in the form of a $1,700 per child benefit check from the Internal Revenue Service. However, the refundable CTC requires families to have sufficient earnings to receive it, and so families that do not work and have no tax liability do not benefit at all from the CTC.
Proposals to increase the generosity of the CTC would generally increase the maximum amount and allow families with lower or no earnings or tax liability to receive the full benefit. Most recently, Vice President Kamala Harris proposed reinstating the 2021 version of the CTC which provided up to $3,600 per child, even for families with no earnings or tax liability, along with a $6,000 total credit for newborn babies. Senator J.D. Vance suggesting going even further by providing a $5,000 per child credit.
The figure below shows the total take-home pay—including earnings, employer provided benefits, government benefits and adjusting for taxes—for a 2-adult, 3-child family with different earnings levels: a nonworking family with no earnings, a low-wage family with $20,000 of annual earnings, and a middle-wage family with $80,000 of annual earnings. For purposes of the CTC especially, I assume that the children in the family are ages two, five, and eight. The grey segments in the figure represent earned income and employer provided benefits, the yellow segments represent existing government provided benefits, and the blue segments represent additional government benefits proposed by Vice President Harris and Senator Vance.
The nonworking family receives total existing benefits worth about $58,000 despite having no earnings of its own. The family is eligible to receive $14,000 from the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps, Medicaid coverage that costs the government $20,000 for the average family, and $24,000 in rental housing assistance. Notably, not all families that are eligible for housing assistance actually are offered it due to capped federal funding. But at the same time, the figure omits other programs for which the family is eligible and from which they may receive benefits, such as cash welfare, disability benefits, energy assistance, school meals, and other nutrition programs. By making full CTC payments even to nonworking parents, the Harris CTC proposal would provide an additional $10,000 to this family. The Vance proposal is short on details, but if it includes the same “full refundability” policy, it would provide an additional $15,000. Under the Harris proposal this family would receive about $68,000 in total government benefits, which would climb to $73,000 under the Vance proposal.
The low-wage family, after accounting for all existing taxes and government benefits, takes home an even higher $79,000, including $60,000 in existing government benefits and $18,000 from earnings net of payroll taxes (the family does not owe any federal income tax). Under current law, the low-wage family receives more in government benefits than the nonworking family, due to the fact that the combined $10,000 from the Earned Income Tax Credit and refundable CTC—each of which today require earnings—exceed the amount they lose in other benefits from the phase out of SNAP and housing assistance. The Harris CTC proposal would provide an additional $8,000 to this family, and the Vance proposal would provide an additional $12,000. Ultimately, this family with earnings from work of $20,000 would have a total income of $86,000 under the Harris proposal and $91,000 under the Vance proposal.
The middle-wage family has annual earnings of $80,000, and they receive health insurance from their employer, which contributes $15,000 per year to their premiums. In total, the family has earnings and work-related benefits that total $95,000—before counting the effect of any taxes or government benefits—which is $75,000 more than the earnings of the low-wage family. But once we account for existing taxes and benefits, the middle-wage family takes home only $11,000 more than the low-wage family, a total of $90,000. The reason is that the middle-wage family receives approximately zero government benefits, pays approximately zero federal income tax (since the CTC fully offsets their federal income tax liability), is not eligible for the Earned Income Tax Credit, and pays $6,000 in payroll taxes. The Harris CTC proposal would provide an additional $4,000, and the Vance proposal would provide an additional $9,000, for a total of $99,000 in income, modestly higher than the $95,000 they earn on their own in wages and health insurance benefits.
There are four key takeaways from this figure for policymakers who are considering CTC reforms.
First, families with little or no earnings are already eligible for tens of thousands of dollars in government benefits. The family in this example takes in $58,000 in government benefits if they do not work at all, and an even higher $60,000 in government benefits if they earn $20,000 per year, lifting their total income to almost $80,000—four times their earnings from work alone.
Second, nonworking families and low wage families are not treated unfairly by existing tax and government benefit policies. Compared to the approximately $60,000 such families receive in government benefits, middle-wage families receive no government benefits. As a result, despite earning $75,000 more in wages and health insurance benefits from their employer, the middle-wage family takes home only $11,000 more than the low-wage family.
Third, the Harris and Vance CTC proposals would increase government benefits by a substantial amount, especially for nonworking and low-wage families. The Harris and Vance proposals would grow government benefits by $10,000 and up to $15,000 respectively for nonworking families, $8,000 to $12,000 for low-wage families, and $4,000 to $9,000 for middle-wage families.
Fourth, despite sponsors’ promoting their policies as a “tax cut,” only for middle-wage families could any of the CTC changes be construed as a tax cut, and even then the taxes that would be offset are payroll taxes, for which workers earn future benefits. By contrast, the low-wage family’s payroll tax is already fully offset by the Earned Income Tax Credit, and the nonworking family owes neither federal income nor payroll taxes of any kind. Indeed, none of the families in this example owe federal income taxes, before or after the proposed CTC changes.
It is important to emphasize that existing and proposed increases in government benefits vary across families. For example, families with fewer children would receive lower benefits than the three-child family discussed here. Also, no- and low-wage families receive different sources of benefits. Many eligible families do not receive rental housing assistance, which can be large, though they may receive other important benefits like cash assistance from Temporary Assistance to Needy Families, Supplemental Security Income and General Assistance, energy assistance from the Low Income Heating and Energy Assistance Program, nutrition assistance from the Special Supplemental Nutrition Program for Women, Infants and Children and school meals, and child care assistance from the Child Care and Development Block Grant, among other sources of support. Meanwhile, middle-wage families that do not receive health insurance from their employer are eligible for Affordable Care Act tax credits to reduce the cost of purchasing health insurance.
While the figure depicting our illustrative families cannot account for all of these differences, the basic takeaways remain. Nonworking families and low-wage families receive tens of thousands of dollars in existing support, and would receive several thousand dollars more from the Harris and Vance CTC proposals. Middle-wage families receive much less, if any, government support, and would receive a smaller though still substantial amount of assistance from the CTC proposals.
Before policymakers rush to provide greater support for low-income families, they should clearly understand the scope and types of assistance already provided.