The Child Tax Credit is a tax benefit available to many American families for the purpose of reducing their federal income tax liability. It’s specifically designed to help offset the cost of raising children. The CTC of today, however, differs starkly from its pre-pandemic structure. Many economists, including Kevin Corinth, think that the post-pandemic changes were a step in the wrong direction.
Corinth is a senior fellow and the deputy director of the Center on Opportunity and Social Mobility here at AEI. His research interests include poverty, safety net programs, homelessness, social capital, and economic mobility. Previously, Corinth served as the staff director of the congressional Joint Economic Committee, and he was also chief economist in the White House Council of Economic Advisers.
What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
Pethokoukis: Kevin, welcome to the podcast.
Corinth: Thanks for having me on, Jim.
I want to talk about a couple of things, one of those things is a government program. It’s been in the news a lot, I thought it was a non-controversial government program, but that probably shows how little I know, of course everything is controversial: the Child Tax Credit. It’s a tax benefit. It lowers the tax burden, tax liability, for working families, working poor families.
What was this credit before the pandemic? How has it changed during the pandemic? But now kind of reverted to what it was before the pandemic, but some people want to change it again. So I wonder if, in any sort of understandable, explainable, simplistic way, you can take me through that journey.
Let me try. The child tax credit is great. It’s tax relief for families with kids. So the more kids you have, the less you should pay in taxes. That makes a lot of sense because kids cost a lot of money, and you should pay less taxes if you have them. Before the pandemic, we had a child tax credit that reduced their tax burden by $2,000 per kid. That required that you had either a federal income tax liability or at least that you had earnings in order to get it. That was fundamentally changed during the pandemic in 2021 when we went to essentially a universal basic income, or UBI, for families with kids. So instead of requiring either a tax liability or earnings, every family got the same amount per kid regardless of how much they work or if they paid any taxes.
Was there an income cap on that?
It did still phase out at $400,000 for a married parent family and $200,000 for a single parent. But the benefit amounts were increased up to $3,000 for kids aged six to 17 and $3,600 for kids under six. You probably remember that we were also getting lots of money from economic impact payments or the stimulus payments. We still had those boosted unemployment insurance checks. So this was at a time when, really, we were just sending lots of checks out. So this was one other one.
But to be clear, it’s not just the size of the Child Tax Credit that changed. It’s sort of the fundamental policy theory behind the tax credit change, where before it was about focusing on work, helping working families, especially the working poor, and that word, “work,” was a big part of it. They still called it the same thing during the pandemic, but it really wasn’t the same thing.
Yeah, the White House especially phrased this as “middle class tax relief.” That’s not really what it was. It was in the sense that it increased that maximum payment, but you’re right, the fundamental change was that you turned something from a tax credit into a child allowance, completely severing it from work or paying taxes, and so it became also sort of a welfare program, and one like we had back in the early 1990s—this is getting longer and longer ago, but it still provides an apt lesson for today—when we provided unrestricted cash assistance to low-income families, which you may think is useful because we don’t want kids to starve and live on the streets.
But we have a robust safety net in addition to that, and when we provided that unrestricted cash assistance, we had negative outcomes, especially with keeping labor supply low among single moms, discouraging marriage, encouraging more fertility—which is good, but fertility among unmarried mothers, which can have negative consequences. So the move during the pandemic sort of brought back that unrestricted cash assistance that went to people regardless of work, and, as a result, if it were made permanent, would likely discourage work.
That was a temporary program, so right now it has reverted, right? And we are in the old pre pandemic system.
We are currently in that system.
But—and this is the final part of our journey here—there’s an effort to change the program so it looks a bit more like the pandemic version?
Exactly, the so-called Wyden-Smith deal. This is a legislation that actually passed the House by a substantial margin with bipartisan support is now being taken up by the Senate where its status is much, much less certain. This would kind of go halfway there.
So one controversial provision is the, so-called “look back” provision. It would say, you can still get the child tax credit this year even if you had no earnings and pay no taxes this year, as long as you did pay taxes or had earnings last year. So it’s sort of an every-other-year work requirement.
The other controversial part is sort of phasing this in much more quickly for families with more kids. So right now you can still get the credit if you don’t pay taxes as long as you have earnings. Right now it phases in at 15 cents per dollar you earn, regardless of number of kids, this would say you get that 15 percent phase in times the number of kids. So if you have, say, three kids, it phases in at a 45 percent rate. Some people like that, but it does do some things that you might not like. For instance, it can really encourage you to say, make about 20,000 bucks a year, but it kind of reduces the incentive to move into full-time work, and it imposes some substantial marriage penalties. So once you’re at that $20,000 level of earnings going any further, you’re losing lots of other tax credits. You’re losing transfer payments such as from food stamps, you’re paying more federal income taxes, so it just sort of adds to that tax on either increasing your earnings through marriage or through full-time work
And the refundability portion, how have all of these changes affected that part? Because I think people understand the reducing tax liability, they may be less familiar with the refundability aspect. How has that changed and how would this new plan affect that, the Wyden-Smith plan?
There’s a pretty large standard deduction. So if you don’t have earnings of, say, $25,000, then you don’t pay any federal income tax. Therefore a tax credit that was only non-refundable wouldn’t help you at all. But the Child Tax Credit has this refundable portion that says, even if you owe no taxes to the federal government, you can still get a benefit. And the way they calculate it is to say, okay, take all of your earnings that you have, they disregard the first $2,500, but after that I earn, say, $10,000 a year, take 15 percent of that, and that’s your refundable child tax credit. So that’s going to be a check from the government that you get at tax time that you get, even though you paid no federal income tax during the year.
How would the Wyden-Smith change the current refundability rules, if at all?
It would increase the refundability if you have more than one kid. If you have one kid, there’s only some small changes. It would increase the maximum refundable credit by a couple hundred dollars. But the much bigger change is that if you have say two, or three, or more kids, you’re going to phase that in much more quickly. So you could get, if you have three kids, your refundable credit could be three times as large, which is a big deal. It could be an extra couple thousand dollars or $3,000 for a family with three kids.
To the extent that I understand sort of the dispute here, sort of the policy dispute, is there’s a benefit to giving people money, whether it’s paying less taxes or making parts of it refundable, people have more cash than they would otherwise. Versus the negative trade-offs that you’ve identified. Maybe it’s a marriage penalty, maybe there’s less incentive to work or less incentive to work in a given year. But, of course, all the trade-offs aren’t exactly equal, and I guess that’s why there is a dispute here. So as you see it, how important are the downsides to this new expansion effort and are they so significant that we should just keep the status quo?
So I don’t like the status quo, and I think in 2025 we’ll have this fuller debate about tax reform and whether the individual tax provisions from the Trump tax cuts will be kept in place or not. I don’t think that the Wyden-Smith bill is nearly as big of a deal as the 2021 CTC that we had. The 2021 bill went much further and really converting a child tax credit into a child allowance you get no matter what. So the Wyden-Smith bill does not go there, but it goes part of the way there and I think it sets up a negotiating position. If you’re someone who favors this child allowance, it gets you part of the way there so you have a much stronger position in the negotiations next year.
It’s an awkward thing to say we’re going to have a one year look back for the Child Tax Credit that says, oh, it’s either based on this year or last year’s earnings. And the per-child benefit could make sense, but we already have the earned income tax credit, which does exactly that. And so it’s replicating other programs and the more you make this more of a transfer to low income households, it disconnects it from what should be a tax relief. And that’s the way it’s always sold is tax relief, so it’s ironic that it’s now being sold as tax relief in a way to not provide the tax benefits for middle class families, but provide more assistance for low-income families. And again, we want to support low-income kids, it’s not their fault that their families are poor, but we do a lot. And if you want to make changes to the safety net, you should change the safety net, you shouldn’t change a tax credit program that works well.
As perhaps is often the case, there’s sort of like this bigger policy debate in the background, and so we’re only seeing part of the iceberg, and is the bigger policy debate is that some people want there to be a no-strings-attached, child-allowance, checks-to-parents program—and you had even mentioned calling it kind of a UBI earlier—that’s what they want, and this is a vehicle, and they want to turn this child tax credit into that thing, whereas other people want to say, “No, here’s what it is: It is tax relief for working families of various income levels.” Limit it, let it do its job, and if you want to do something else, then let’s have that debate, not try to slowly transform this into this other thing. Am I close?
Yeah, that’s accurate. I think it’s no secret that I think every Democrat in the Senate, with the exception of Senator Manchin, wants to bring back the 2021 child allowance. I think pretty much zero Republicans want to bring that back. So it’s a very close fights and I think that’s what the left wants. And even in the Wyden-Smith deal, it was largely the Democrats, they were the ones that sort of planned out and decided the parameters of the child tax credit piece. Then it was the Republican side, led by Representative Smith, who were focused on the business tax side. And I think ceding the game on the CTC, even in this partial effort does make it more likely that we’ll end up with the 2021 version of the child tax credit next year. It probably hinges a lot on who wins the presidency and how the House and Senate turn out, but I think that’s a legitimate risk that’ll happen next year.
The notion of what you call a child allowance, which is just giving parents checks for their kids because… they’re parents, and there’s kids, and we want kids to have higher living standards and give parents more resources. That’s a child allowance. We don’t have that right now, right? There’s lots of checks and programs, but we don’t have that particular… And there are people who want that. Do you want that? And if you don’t want that, why don’t you want that? Because I know there’s people on the left and right who want that.
Yeah, there are some who want that. And I don’t want that because we already have. If we had no other safety net and we only had this child tax credit, I would favor making it a child allowance because I think low-income families and kids should have some benefits. I guess the issue is that we already have other programs, especially the SNAP or Food Stamp program, which would, for a family of four, you’re talking about $15,000. We have Medicaid coverage for all these low-income families. You have housing assistance. We have cash welfare in terms of the TANF program, which is connected, at least in part, to work.
And then we also want to provide benefits and sort of rewards for those who have lower wages, say, a single mom who earns 15 bucks an hour, who works most of the year. We want to have work rewards for her to make sure that one, to encourage work, but also, we understand that not everyone’s going to have a higher wage at the start, and they have kids to feed. So there should be support. And we do, we have an earned income tax credit, which is, say, $7,000 a year, and when you add up all these benefits, we are doing a lot.
I worry about a sort of check from the IRS that deals with the material need, but doesn’t cater it to the specific needs of the families who need help. And so maybe they do need some more material assistance, but when you can deliver it in a way that kind of speaks to their specific needs and helps them overcome the barriers to get into work, to make sure their kids are going to school, to make sure all their relationships are healthy, that is not going to be done with an IRS check. And when you provide those checks, it just sort of has a tendency to get increased over time and to expand to larger populations. And then you get into this world where you disconnected work and opportunity from earning it yourself.
The issue isn’t, “One side wants to help people and one side doesn’t.” That’s not the issue. You just named a lot of programs and you did not advocate destroying all those programs, you did not advocate canceling… So that’s not the issue. So is the issue a paternalism issue, where people who want the allowance think like you’re putting just too many strings, that it’s better just to give people money and they can do with it as they will? So what would the Mirror Universe version of you say to you? Like, “Kevin, here’s what you are missing…” Is it a paternalism or is it something else?
Yeah, so I definitely want to help people. I think… Is there paternalism? I don’t know if I would use the “P” word…
Why are you wrong? I know you think you’re right, maybe I think you’re right, so what is the argument on the other side that says, “This is the key thing that folks like Kevin Corinth are missing?”
They would say that the safety net is complex, hard to navigate, not everyone who’s eligible for benefits can get them. They would especially emphasize the importance of cash. While we might provide food stamps or housing assistance, people have other needs beyond that. If I have to now answer to them, I would say, “Sure, yes, people do need other assistance, but we do provide things for those who work. And if you don’t, we do have even a cash welfare program, so if you think that that’s needed, then maybe cater that to those needs.”
But I think it’s just important to maintain a safety net that sort of is cognizant of all the things that we already do so that when we layer something else on top of it that we’re not doing something we didn’t intend. And I guess, the paternalism thing, there’s certain overall values that I think many of us share—not everybody—but that work is extremely important, and family, and marriage, that there’s some underlying values that are important not only for families today, but then for kids as they grow up, like if they have a parent in the household who works, and if they’re lucky enough to have parents who are married, those things are going to help them in the long run. And I think there’s focus among some of us on those values today and those long-run outcomes for kids that we’re especially concerned about. And even if that means we’re going to have some risk of increased hardship today, that those values and long-term goals are important enough to outweigh those short-term costs.
I want to finish up with something I like to call my airplane question, which is, “If you were on an airplane and you’re sitting next to someone and you started the chat—now keep in mind, I do not want to talk to people at airplane, but you’re a chatty person, you might like it and you seem very friendly—and he started chatting, and the person found out you were an economist and maybe he said, “What are the kinds of things you focus on?” And you mentioned, “Well, I’ve done some work on this, that, and I’ve done some work on homelessness.” And they said, “Oh, well, I see on the news there seems to be a terrible homelessness problem. I see in San Francisco and some other cities, it seems out of control! What do we do about that?” Let’s even say that you’re getting close to landing, so you don’t have much time to give them an answer. What would you tell your seatmate?
Well, first of all, I am friendly, but I’m not a chatter, so I would not do this in real life. But in your hypothetical, I’ll play along.
So on homelessness, I guess there’s two main things you need to do, and it just focuses on the two parts of the population. You basically have an unsheltered homeless population struggling with substance abuse and mental health problems, and then you have sort of a sheltered homeless population, largely single-parent families who have very low incomes who can’t afford housing in the area, or might’ve had sort of lost a job. So you need to, first of all, say, “Those are two different problems,” and deal with them mostly separately.
For those on the streets: One, you need to provide mental health treatment. You need to find them and tell them they need to come into shelter or supportive housing, but you have to also enforce the law. There are regulations and laws around whether or not you can sleep in city parks or in school playgrounds, whether you can have tents on sidewalks. And some of what we’ve seen, especially in California, is those ordinances were not being enforced, people got the message, and you had this buildup of people on the streets. We should be very compassionate about those individuals, but they’re not better off sleeping on the streets. They are better off in shelters, in supportive environments. And you have to have the services together with the enforcement.
When it comes to the other population, largely families in shelters: One, I think we should have sort of a shelter safety net. So, have the shelters available, provide short-term rental subsidies, have prevention when they’re about to fall into homelessness, give them a couple thousand dollars in cash assistance to help them stay in an apartment. That’s been shown to work quite well.
But the bigger solution that we really need is just to build a lot more housing. It’s way too expensive to afford an apartment. $4,000 in San Francisco for a couple-bedroom apartment for a family, that’s completely unrealistic. And so if we want to have families able to actually, first of all, afford to live in a city, and then stay there in some of these high-opportunity places where we want them to be, you’re going to need to build a lot, lot, lot, lot more housing, and that just means relaxing the restrictions on building in the first place.
So many problems and at the end of the day, we end up talking about housing. Kevin, thank you so much. Great stuff.
Thank you.