Child Tax Credit debate: Should it have a work requirement?

The expanded Child Tax Credit (CTC) has already had an impact since it began delivering monthly checks to families with children 17 and under in July, with an immediate reduction in hardship. But a debate is arising over President Joe Biden’s plan to extend it through 2025, with some experts questioning whether the payments could convince some parents to drop out of the workforce.

Among them is University of Chicago economist Bruce Meyer, an expert on poverty and social safety net programs. His new analysis of the program estimates that as many as 1.5 million parents could drop out of the workforce due to the payments, or about 2.6% of all working parents. 

Meyer’s research comes on the heels of a suggestion from Senator Joe Manchin, a Democrat from West Virginia, that the expanded tax credit should include a work requirement. Under the American Rescue Plan, the CTC was expanded from $2,000 per child to as much as $3,600 per child, with half of the credit arriving in the form of monthly checks from July through December 2021. Parents don’t need to work to receive the tax credit and its monthly payments. 

But questions about the structure of the CTC are arising as lawmakers debate Mr. Biden’s wide-ranging American Families Plan, which would extend the expanded tax credit through 2025. Because the earlier version of the CTC required families to have a tax liability — in other words, to earn money and owe taxes on it — to receive the full credit, that provided a form of work incentive, University of Chicago’s Bruce Meyer said.

“The proposed expansion would get rid of the strong work incentives under the prior CTC; it would essentially eliminate a tax credit that encouraged work and replace it with something that discourages work,” Meyer told CBS MoneyWatch. “In the end, those at the bottom may not be better off.”

Because the prior CTC required that parents earn money to receive the full credit, it mainly helped families earning more than $50,000, rather than families with kids living in poverty, according to the Tax Foundation.

“Strong work incentive”

Anti-poverty advocates say the old CTC structure meant that the tax credit missed the children who most needed the help — kids whose parents had very low or no income. 

But Meyer and his co-authors forecast that some parents may opt out of the workforce if given ongoing payments without any strings attached, especially lower-income parents.

The expanded CTC would “give every person with kids a fairly substantial amount of money regardless of whether they work at all,” Meyer said. In that situation, some parents might opt against working due to the payments and if they can cobble together money from family, friends and other government aid programs like food stamps, he added.

He supports Manchin’s idea of a work requirement because “the old CTC had a strong work incentive, that you can think of as a work requirement, because to think of getting the full credit, you had to work a substantial amount,” he added. A work requirement “is a good idea,” he added.

Meyer’s research makes him somewhat of an outlier on the issue, given that more than 400 economists last month signed a letter in support of the expanded Child Tax Credit. 

About 95% of families who would receive the expanded CTC have a parent or caretaker who is working, between jobs, ill, disabled or has a child under 2, according to the left-leaning Center on Budget and Policy Priorities. In its view, a work or earnings requirement would “needlessly leave in poverty — or push deeper into poverty — the children who need help the most.”

Biden and Harris on Child Tax Credit payments… 15:55

Question of human behavior

But the question of whether parents would drop out of the workforce if they had the reassurance that the expanded CTC would continue through 2025 is one of human behavior. For instance, would a parent with a job earning $30,000 a year give it up for a tax credit valued at a maximum of $3,600? Some experts say it’s hard to believe they would.

“The key assumption of what the employment effect will be is really not credible,” said Jacob Goldin, an associate professor of law at Stanford University and an expert on taxes and low-income households. “Do we really believe that millions of parents will quit their jobs to live on an extra $2,000 to $3,000 in child tax credit payments?’

Goldin is estimating the difference between the prior CTC, at $2,000 per child, versus its expanded version of up to $3,600 — which means that on a per-child basis, parents at most would receive an extra $1,600 per child from the expanded CTC compared with the prior version. 

“Some people who are in part-time work, horrible jobs, maybe they would give it up, but not people for the income ranges that they are assuming,” Goldin said. 

Meyer’s analysis estimates the biggest impact would be on parents earning less than $50,000, but also forecasts that some parents earning more than $50,000 would also leave the workforce due to the payments. But other countries with child payments similar to the CTC, such as Germany, have higher labor force participation rates than the U.S., which suggests that the payments don’t drive people out of the workforce, Goldin noted. 

The U.S. has never had a form of basic income like the Child Tax Payments, which makes all of this somewhat unknowable. But even if parents were to leave the workforce at the rate that Meyer projects, the CTC would still have a major impact on reducing child poverty. 

By Meyer’s estimate, child poverty would fall by 22% even if 1.5 million parents stopped working as a result of the payments — not bad, but far from the 34% reduction in child poverty if the payments don’t have an impact on workforce participation.