Child Allowance: How the COVID Stimulus Bill can Cut Child Poverty in Half

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The COVID-19 stimulus bill, or the American Rescue Plan Act (ARPA), arguably the most significant issue that has been pushed by the Biden Administration so far, has finally been passed. The bill is large and complex, but there are sections that could provide substantial social policy change compared to the past. This post will look at a specific stipulation in the bill that will increase the monetary benefit for those families with children under 18.

How the child allowance will work: Essentially, what this section entails is an increase to an existing tax credit that benefits those with children under 18; however, it has several key differences and a simple increase in funding which renders it the superior policy option. Previously, the child tax credit allowed qualifying families to reduce their income tax bills by up to $2,000 for each child through age 16; the new law signed by President Biden on Thursday increases the credit to $3,000 a child and makes parents of 17-year-olds newly eligible. The credit rises to $3,600 for children under the age of 6 as of the end of 2021. According to estimates by the Tax Policy Center, more than 90% of families with children under 18 will get some benefit from the new law. The expanded portion of the credit begins to scale down for individuals at $75,000 in adjusted gross income, single heads of household at $112,500, and couples filing jointly at $150,000. It phases out at $50 for every $1,000 in additional revenue, meaning for a couple filing jointly with one child; the credit would entirely phase out at $170,000 and $182,000 if the couple had a child under the age of 6.

Furthermore, the new tax credit is fully refundable and will be distributed periodically; a congressional research report details the plan “would direct the Treasury to issue half of the expected 2021 credit in periodic payments beginning July 1, 2021 (these periodic payments would generally be equal in amount). Taxpayers would claim the remaining half of the total 2021 credit when filing their 2021 income tax return in early 2022.” These direct payments are projected to be around $300 a month per child under five and $250 for older children. Under the prior law, parents earning $2,500 or less couldn’t claim the credit; families that earned more but not enough to pay income taxes could receive no more than $1,400 as a refundable credit. In linking the credit to a parent’s earnings, the law was intended in part to encourage people to work. According to the Center on Budget and Policy Priorities, this led to approximately 27 million children in low-income families not receiving the full $2,000 benefit available to higher-earning families. Under the new law, the credit is fully refundable, and so parents with little or no income will get the full credit. Elaine Maag, a principal research associate at the Tax Policy Center, said that this change, along with other new law elements, will cut the number of children living in poverty in half to about five million children.

Benefits of the plan: Several studies have examined the long-term effects of the earned income tax credit (EITC) on children’s adult outcomes. Teenagers with higher EITC exposure are more likely to graduate high school and college, be employed as young adults, and have higher earnings. Looking at both the EITC and child tax credit, another study finds that tax credits increase test scores, especially for middle school children. By making some assumptions about the relationship between test scores and adult earnings, the authors calculate that each dollar in tax credits yields more than a dollar in adult earnings. Several other studies find similar impacts of the EITC on children’s test scores and educational attainment. Further, a recent study found that the EITC increases intergenerational mobility, especially for kids with married parents. These studies clearly show that conditional cash (rather than in-kind benefits) can be an investment in children’s long-run success.

Additionally, a fact sheet by the Center on Poverty and Social Policy at Columbia University articulates that the plan would cut child poverty by 45 percent and by more than 50 percent among Black families. A Business Insider article writes, “even when generating results for the most restrictive assumptions to show any possible negative impact from the child allowance, the report still found that societal benefits would yield $431.3 billion per year,” demonstrating the scope of benefit the plan has. Some argue that the program will disincentivise work resulting in an increase in unemployment; however, the studies mentioned above illustrate that the plan’s net gain is projected to be exponentially higher than any potential loss of workforce.

From an ethical point of view, children who are born in disadvantaged families or communities often receive a lesser share of services due to things outside of their control or unchosen circumstances. This bill could be a revolutionary step in leveling the playing field for all Americans by redirecting some of the resources towards families with younger children.

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