Biden Should Sunset the EITC Not the CTC


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In the American Rescue Plan that was passed earlier this year, the Child Tax Credit (CTC) was temporarily expanded from $2,000 per kid to $3,600 per kid below the age of 6 and $3,000 per kid between the ages of 6 and 17. The CTC’s phase-in, which excluded the poor from the program, was also eliminated.

In the recently-announced American Family Plan, the Biden administration has said that it will maintain this temporary expansion through 2025. After that point, the credit will be cut to $1,000 per kid.

Shaky Rationale for Cuts

When you talk to people in the know about these CTC cuts, they tell you that they do not intend to actually make the cuts, but are instead scheduling them to make the American Family Plan appear cheaper than it really is.

On its face, this rationale is very confusing. Presumably the reason you want the bill to be cheaper is because there are moderate members of congress who don’t want to spend beyond a certain amount. But it is hard to see how those members of congress are reassured by a bill that schedules spending cuts that they know you do not intend to follow through on.

Another reason to do it might be to lower the dollar amount that shows up in newspaper headlines, but, even granting that there are some people in the public who are reflexively spooked by big numbers, it is hard to imagine a person who is spooked by a headline that says $2.2 trillion but not one that says $1.8 trillion. These numbers are already meaningless standing alone, and people are not cognitively able to distinguish between numbers at that scale. (To make some sense of them, you’d present them as 0.7 percent and 0.6 percent of projected GDP).

Scheduling steep benefit cuts for 2026, which is two congressional elections and one presidential election from now, based on these rationales is just incredibly ridiculous.

Cut the EITC Instead

With that all said, if the Democrats are going to schedule these kinds of cuts to play budget games, they should schedule EITC cuts, not CTC cuts. The primary reason for doing this is that the CTC is available to the poorest people while the EITC is not.

The below graph shows what the current situation is with the EITC and CTC. This is what the situation will continue to be through 2025 under the American Family Plan.

The next graph is what will happen in 2026 if the CTC cut contained in the American Family Plan is enacted.

This final graph shows what would happen if you instead cut the EITC benefit of each tax unit with children by $2,000 per child.

Since tax units that receive the maximum EITC also receive the CTC, it makes no difference to their bottom line whether you cut their CTC by $2,000 or cut their EITC by $2,000. They lose $2,000 in both cases.

For everyone else, the EITC cut is preferable to the CTC cut. This is especially true for the poorest tax units who receive the CTC but not the EITC.

In addition to shielding the poorest from this game of benefit cut chicken, putting the EITC on the chopping block actually makes more strategic sense as the GOP is more likely to protect the EITC from a cut than they are to protect the recent expansion of the CTC to the poorest Americans.

Of course, this EITC cut does not save as much money as the CTC cut, but it nonetheless saves somewhere in excess of $200 billion over the the ten-year scoring window. That could be enough to hit whatever arbitrary budget pretension the administration is aiming for by scheduling these cuts.