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Senate Democrats have coalesced around a big plan to expand tax credits

April 10, 2019
In The News

Senate Democrats, led by Sherrod Brown (OH), Michael Bennet (CO), Dick Durbin (IL), and Ron Wyden (OR), has introduced a new bill that would establish a child allowance for the first time in American history and substantially increase the size of the Earned Income Tax Credit for low-income people.

The Center on Budget and Policy Priorities estimates that the plan would lift 7 million people — 3 million of whom are children — out of poverty. Another 22 million poor people would be brought up closer to the poverty line, child poverty would fall by 28 percent, and deep child poverty (measured at half the poverty line) would fall by 40 percent.

The Working Families Tax Relief Act is notable less for the novelty of its ideas than for who is proposing them — 46 out of 47 Democrats in the US Senate have signed on. Both components of the bill, a child allowance and an expanded EITC, have been gaining steam gradually over the past couple of years. Brown and Bennet have had a child allowance bill since 2017, now backed by 38 of the 47 Democrats in the Senate and 176 of the 235 Democrats in the House. Brown and Rep. Ro Khanna (D-CA) proposed a massive expansion of the EITC in 2017 called the GAIN Act, and Sen. Kamala Harris (D-CA) has come out with her own variant called the LIFT Act.

The new bill is purposefully less ambitious than those proposals. Its child allowance is smaller in size, and the expansion to the EITC is less massive. But it has the support of all but one Democrat in the US Senate; as of late Wednesday, only Krysten Sinema (D-AZ) is not a cosponsor. The bill is thus well positioned to pass easily should Democrats eventually regain the Senate and presidency. It also serves as an aggressive opening bid from party leadership and the party’s more moderate wing on a key policy issue ahead of the 2020 elections.

What the Working Families Tax Relief Act would do

The Working Families Tax Relief Act will largely affect two key benefits we currently provide working-class taxpayers: the Child Tax Credit, and the Earned Income Tax Credit.

The Child Tax Credit is currently worth $2,000 — but only $1,400 of that is “refundable,” or receivable by the substantial fraction of Americans who don’t owe income taxes. And not all of that $1,400 is available to the poorest families. The share that can be refunded is limited to 15 percent of income above $2,500, a complicated restriction that effectively rules out families with little or no earnings. This is a key reason why the US child benefit system has failed to reduce child poverty, while superficially similar systems in Canada and the UK have been wildly successful.

The Working Families Tax Relief Act would both make the full $2,000 credit refundable — meaning everyone below the phaseout range (which would start at $150,000 a year in income for single parents and $200,000 for married couples for couples) would get $2,000 per kid, no matter what. The Act would also create an additional $1,000 Young Child Tax Credit for kids under 6, for a maximum benefit of $3,000 per young child.

Both the $2,000 credit and the $1,000 addition for young kids would be available as monthly payment to parents, rather than through tax returns as is currently the case (though that would remain an option for parents who want it).

This part of the bill is considerably less ambitious than the American Family Act by Bennet and Brown. That bill offers $3,000 per year for older kids and $3,600 for younger kids. But even a $2,000/older kids and $3,000/younger kids credit, available to all kids, would be a substantial expansion.

The biggest Earned Income Tax Credit change is a large expansion for childless adults. Currently the credit, which typically offers thousands of dollars to workers with children, currently has a maximum benefit of only $529 for adults without dependent kids, and no benefit at all for childless adults under 25. For years, politicians in both parties have argued for at least doubling that maximum benefit; despite claiming to support that change, Paul Ryan never passed it when he was House speaker.

The bill would quadruple the maximum credit, to $2,074, and extend the minimum age of eligibility for childless adults from 25 to 19, and the maximum age from 65 to 67.

For families with kids, WFTRA would make the EITC phase in faster, and increase its maximum value, as detailed in the below chart:

These increases are much milder than those envisioned in the earlier Brown-Khanna bill, which would raise the maximum credit for workers with two kids to $10,800. They’re also less ambitious than Kamala Harris’s LIFT Act, which would add up to $6,000 per earner to the existing EITC, for a maximum total credit for a worker with two kids of nearly $12,000. Again, the bill is meant as a consensus measure, a compromise from the more ambitious bills senators and House members introduced earlier.

The new bill would allow an advance of up to $500 on the Earned Income Tax Credit to families. Because the credit is currently paid out through tax refunds, it sometimes leads to a perverse situation in which families use it to pay down debt (some of it from predatory payday lenders) they never would’ve had to incur if they’d gotten the money earlier.

The option for a $500 advance — first proposed in a 2014 paper for the Center for American Progress by Rebecca Vallas, Melissa Boteach, and Rachel West — is meant to spread out the credit’s benefits more and prevent risky debt. As those authors explained, “Since the value of the typical payday loan is about $375, this amount would be sufficient to prevent many instances of predatory lending — and thus preclude the high costs and cycles of debt associated with such lending practices.”

The benefits of the bill — especially the child allowance

The evidence base for a universal child allowance, as created in the Working Families Tax Relief Act, is considerable.

A child allowance or similar policy exists in almost every EU country, as well as in Canada and Australia. In many countries, the payments are truly universal; you get the money no matter how much you earn. In others, like Canada, the payments phase out for top earners, but almost everyone else benefits.

But the core principle is the same in every system: Low- and middle-income families are entitled to substantial cash benefits to help them raise their children.

This helps explain why European countries are so much better at fighting child poverty than the US is. While about 11.8 percent of US children live in absolute poverty (as indicated by the US poverty line), only 6.2 percent of German children and 3.6 percent of Swedish children do (note, though, that this absolute poverty data isn’t updated regularly and is a bit out of date).

The numbers get even worse when you define poverty like most European countries do, as living under half the median income. By that standard, 20 percent of children in the US live in poverty, compared to only about 10.3 percent in Germany and 4.9 percent in the Netherlands.

This isn’t exclusively due to child benefits, but they play a crucial role.

What’s more, a growing body of evidence suggests that investments in early childhood development can pay off in lower crime, higher earnings, and greater educational attainment later on.

Programs that give families cash, according to UC Irvine economist Greg Duncan, result in better learning outcomes and higher earnings for their kids. One study found a $3,000 annual income increase for poor parents is associated with 19 percent higher earnings for their child once he or she grows up. That implies that a child allowance of that size could dramatically improve the lives of children decades later.

There’s plenty of other research where that came from:

When the Eastern Band of Cherokee Indians’ casino began paying dividends to its members, psychological problems among children decreased, crime rates dropped, and on-time high school graduation rates increased, according to Duke’s Jane Costello.
Canada’s child benefit expansions boosted test scores and health outcomes, the University of British Columbia’s Kevin Milligan and University of Toronto’s Mark Stabile found.
A short-lived universal child benefit program in Spain increased the time mothers spent with children in the first year of life, according to a study by Libertad González at Pompeu Fabra University in Barcelona, and reduced the risk of couples with newborn babies breaking up.

Cash subsidies can even extend lives. Brown’s Anna Aizer, University of Toronto’s Shari Eli, Northwestern’s Joseph Ferrie, and UCLA’s Adriana Lleras-Muney looked at the Mothers’ Pension program, the first federal welfare program in American history, which ran from 1911 to 1935. They found that male children of mothers who were accepted for the program lived one year longer, got more schooling, and had incomes 14 percent greater than children of mothers who were rejected.

Like a child allowance, an expanded EITC would substantially reduce poverty. A recent randomized trial conducted in New York City found that increasing the EITC to $2,000 for single people substantially reduced deep poverty and encouraged employment.

That last point — increased employment — is one reason even Republicans have sometimes supported the EITC, and why some lefties are critical of the program. The phase-in to the EITC and CTC functions as the opposite of a tax: It directly incentivizes people to work more. If you support work for its own sake, that’s great! That said, it runs a risk of depressing wages by pushing more people into the labor market.

That’s less of a problem, though, when every worker — whether or not they have kids — is getting a subsidy. Even if some of that subsidy is captured by employers, the workers themselves come out ahead.

But it’s still a reason why we need programs like a fully refundable child tax credit that can help people regardless of employment status.

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