Navigating the Child Benefit Sweet Spot


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Yesterday, we released a new paper titled “Now Is the Time for an American Child Benefit.” The paper proposes to eliminate the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Additional Child Tax Credit (ACTC) and replace them with a $374 per month check paid to every child in the country.

Near the end of the paper (p. 21), I spend some time discussing what I call the four edge cases. These are scenarios where non-rich people might actually wind up cut back some from the current system. I thought this might be of passing interest to readers, but it apparently is of a lot of interest to certain people, so I am writing this post to basically reiterate what’s in the paper with some extra detail.

Three of the four edge cases are tiny populations of people that have been strangely bolted on to the EITC program over the years. The populations are:

  1. Childless tax units with earnings below $15,570. They are eligible for a maximum credit of $529, but only units with earnings between $6,920 and $8,650 can actually claim the full credit.

  2. Full-time students between the ages of 19 and 23. This EITC benefit is not paid to the students themselves but rather to their parents, provided that the students were enrolled in school for 5 or more months in the year and lived with their parents for most of the year.

  3. Permanently and totally disabled adult children. As with students, this EITC benefit is not paid to the disabled person but rather to their parents provided the disabled person lives with them for most of the year.

Populations (2) and (3) are just bad policy. We have benefits for low-income students called Pell Grants and benefits for disabled adult children called Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). If you want to increase benefits for those populations, you should allocate more money to Pell Grants and SSDI and SSI, not send their parents a check once a year that is conditional upon the parents having a low income (but not too low) and upon the kid living in the same house with their parents.

Nonetheless, as I note in the paper, these three bolted-on populations are easy to protect from an income decline. All you do is say that the EITC will still be available for them even though the rest of the EITC is being eliminated.

The more serious edge case is the the fourth edge case, which relates to one-child families with earnings right at the sweet spot where they are eligible for the full EITC, the full ACTC, and some of the CTC. The best way to spot this sweet spot is to look at the next series of the graphs.

This first graph, which is contained in the paper, is how much money each family receives per child from these three tax credit programs, based on their earnings level.

You can see in this overall graph where the benefit runs way up and peaks at around $15,000 of earnings. In the next graph, I zoom in on this area of the graph so it can be seen even more clearly.

Finally in this last graph, I have added the universal child benefit (UCB) proposed in the paper. It is the pink dashed line that runs near the top.

The UCB line is higher than every line at every point except the one-child line between around $10k of earnings and $25k of earnings. At the peak, the one-child line hits $4,926 while the the UCB line is at $4,480.

In the paper, I spend some time specifically arguing that this edge case is insignificant. Eighty percent of women who have one child go on to have more and almost no family that has only one child sits at this sweet spot year after year. Also 22 percent of people who are eligible for the EITC fail to claim it due to the paperwork burden. Also monthly payments are better than annual lump sums. Also monthly payments actually get the money in the year that it is needed, not in the subsequent year at tax time. I could go on.

In the proposal, I wanted to make a point of arguing that we should not let stupid design decisions made by bad policymakers of the past force us into bad policy designs in the future. It was always a crazy idea to say people in this narrow income band should have really high benefits while, for instance, people who are much poorer than them get less or nothing. This spike should never have existed and we should not have to make future policy suck just because past policy sucked.

Nevertheless, in the paper, I do outline two ways of topping off the less than 1 percent of kids who sit at this sweet spot in any given year.

  1. Make the child benefit $411 per month for the first child and $374 per month for every subsequent child. This adds some extra complexity to the program but it would get the job done.

  2. Create a special 1-child EITC that only tops people off at this sweet spot. This is “cheaper” than option (1) but also relies upon the EITC program, which is badly designed and hard to apply for. Nonetheless, it gets the job done.

In addition to these two options, Nisakenen has proposed a third option, which is to create a $600 per-adult tax credit. A one-child family at the sweet spot would therefore get $4,480 from the child benefit each year and $600 from the adult tax credit each year, bringing them to $5,080 (for tax year 2019).

Any of these options are fine and I am glad there are many of them. The introduction of the EITC was one of the dumbest policy moves ever made in this country but there are ways to eliminate it that do not require any net distributive cutbacks for the non-rich if you really want to do that.