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The CTC Work Incentive Works


August 9, 2023

The expiration of the American Rescue Plan Act at the end of 2021 brought with it the end of the fully refundable Child Tax Credit (CTC). The CTC has since returned to its pre-pandemic form, phasing-in at 15 percent of earnings beyond $2,500, up to a maximum of $1,600 in a refundable CTC per child and a non-refundable $2,000 per child for families with tax liability. The refundable portion is available to families with income too low to owe federal income taxes, while the non-refundable portion offsets taxes owed. But for six months during the pandemic, the full CTC amount was available to parents regardless of their income tax liability or work status, removing its phase-in and essentially eliminating the CTC’s work incentive.

Research from our AEI colleagues Kevin Corinth and Bruce Meyer found that removing the credit’s phase in permanently could have caused up to 1.5 million workers to leave the workforce. Despite the likely employment reductions, some policymakers have lamented the end of the pandemic-era CTC, arguing that the current CTC unfairly withholds the full amount from the poorest Americans. They also suggest that concerns over negative employment effects are misplaced because the overwhelming majority of CTC recipients already work. At a recent Senate Finance Committee Hearing (at which one of us testified), a proponent of the CTC Sen. Michael Bennet cited statistics claiming that nearly 80 percent of those affected by the expiration of the expanded CTC were already working. He went on to claim that many of the parents no longer receiving the full benefit “work two and three jobs in many cases.”

After crunching the numbers ourselves, we found these claims to be misleading. Firstly, there are large employment differences between those who are ineligible for the full CTC because they do not have enough income tax liability (typically households with income below $30,000-35,000) and those who receive the full credit because they do. Figure 1 shows the employment rates of potentially-eligible parents whose income is below the full CTC income threshold for their household size and tax filing status.

Nearly all parents with household income high enough to give them the full CTC were employed (red bars), while just over half of those ineligible for the full CTC worked (blue bars). The red bars are below 100 percent because it includes all adults whose household incomes are above the income threshold – including non-working spouses. Additionally, some full-CTC recipients may not be currently working, but worked in the past, resulting in high enough income to qualify for the full CTC.

More importantly, however, parents with incomes below the full CTC income threshold had much lower employment levels. Although over half worked, there remained a nearly 30 percentage-point employment gap between parents whose incomes were high enough for the full CTC and those with incomes too low to receive the full amount, suggesting an opportunity to increase employment rates.

Parents in households with incomes below the full-CTC threshold were also much less likely to work full-time (Figure 2). For example, less than 40 percent of head of household tax filers with income below the full CTC threshold had a full-time worker in the household, compared to over 80 percent of households with enough income to receive the full credit. This suggests that increasing work hours also offers an opportunity for families to receive the full CTC.  

We also checked the claim that many parents ineligible for the full CTC worked multiple jobs. As shown in Figure 3, parents working multiple jobs is extremely rare no matter the family income, but especially uncommon among families with income below the full-CTC income threshold. The belief that many families work two or three jobs but still do not have enough income to qualify for the full CTC is not supported by the data.

Rather than the current CTC denying the full amount to working families unfairly, our analysis suggests that many families below the full-CTC income threshold could work more. This raises questions about the work disincentives at play in other safety net programs. Many low-income families receive other government benefits, such as SNAP and housing assistance, which counteract the work incentives of the CTC. The question remains how much the employment disincentives of these other safety net programs discourage families from working more and therefore receiving the full CTC.  

Contrary to Sen. Bennet’s claim that “no matter how hard [these low-income families] work, they cannot lift their children out of poverty,” these data show that there is opportunity for families who do not receive the full CTC to work more and experience the full benefit.