Baby Steps in the War on Child Poverty

The 2021 expansion of the Child Tax Credit (CTC) led to the most significant reduction in child poverty in modern U.S. history. By extending full eligibility to all low income households, the credit raised nearly four million kids out of poverty, and helped stabilize the family finances of millions more.

Unfortunately, the expansion expired at the end of the year, and the chances of Congress renewing it have only grown slimmer by the day. With the demise of President Biden’s Build Back Better Act, a bipartisan expansion is now likely the best, if not only, path forward.

Reaching a consensus won’t be easy, but we owe it to America’s children to try. After all, child poverty is expensive. From reduced productivity to increased healthcare costs, researchers have quantified the social cost of childhood poverty in the United States at over $1 trillion annually. Policies that reduce child poverty thus have the potential to both enhance the wellbeing of children and enrich society as a whole.

A new study in the Quarterly Journal of Economics backs this up by exploiting a quirk of the U.S. tax code. For better or worse, two of America’s largest and most successful anti-poverty programs — the Earned Income Tax Credit (EITC) and CTC — are administered as annual tax refunds based on the calendar year. This makes a family whose child is born in December eligible for an extra year’s worth of child-related tax benefits relative to an identical family whose child is born in January. By comparing the universe of EITC recipients on either side of the January 1st cut-off, the study’s authors were able to isolate the effects of cash benefits on child outcomes, and the results are astounding.

Families in the study with babies born late in the year received an extra $1,300 on average. Despite a seemingly small sum, children in those families went on to have improved test scores, a higher likelihood of graduating high school, and 1 to 2 percent higher earnings in adulthood. Those higher earnings, in turn, generated tax revenues that more than offset the initial expenditure.

The study is particularly useful for helping cut through the debate over child benefits and work incentives. While the EITC is designed to incentivize work, the larger refunds were retrospective, and thus reflected the impact of cash benefits per se. As the authors note, “The observed effects on shorter-run parental outcomes suggest that additional liquidity during the critical window following the birth of a first child leads to persistent increases in family income that likely contribute to the downstream effects on children’s outcomes.”

Results like these illustrate why a smart CTC compromise should prioritize preserving a monthly benefit for young children and infants. The key word is “liquidity.” While policymakers often treat the income distribution as if it were static, household incomes actually vary significantly from year to year and in response to financial shocks — shocks that include the costs associated with childbirth. Indeed, surveys suggest that the birth of a child pushes nearly three in ten otherwise middle-income American families onto public assistance programs, at least temporarily.

The CTC expansion in 2021 aimed to dampen family income volatility by advancing payments on a monthly basis. While critics latched onto monthly payments as reminiscent of traditional welfare, ensuring resources arrive when households need them most is a policy innovation worth defending — if only in a more circumscribed form.

Enacting a monthly child benefit for kids of all ages remains a worthy goal, but to get from here to there will require accepting creative compromises along the way. That means focusing on a fully refundable CTC for infants where the per-dollar impact on poverty is greatest and the concerns over work incentives are least.

The expansion that came and went in 2021 proved America has the means to win the war on child poverty. Whether or not a compromise manifests, that at least gives me confidence we will get there eventually. Baby steps.

Samuel Hammond is the Director of Poverty and Welfare Policy at the Niskanen Center.