Back in October, Bruce Meyer and friends released a report that claimed that the Child Tax Credit (CTC) expansion contained in the American Rescue Plan Act (ARPA) would cause 1.46 million workers to drop out of the labor force. According to Meyer, these drop outs would be concentrated among lower earners and thus the initial anti-poverty effect of the CTC would be greatly reduced.
ARPA contained two changes to the CTC that are relevant to Meyer’s analysis:
- It increased the benefit amount from $2,000 to $3,600 for children between the ages of 0 and 5 and increased the benefit amount from $2,000 to $3,000 for children above the age of 5.
- It eliminated the CTC phase-in. Previously, the CTC provided families with children 15 cents of benefits for every dollar they earned over $2,500 up to the maximum CTC amount. Under the new CTC, families received the maximum CTC amount at $0 of earnings.
In Meyer’s analysis, the first change has virtually no effect on labor force participation. Increasing the benefit size by $1,000-$1,600 only causes 140,000 people to drop out of the labor force. This is less than 0.1 percent of all workers and includes many people who have comfortable income levels but just need a little extra cushion to enable them to become stay-at-home parents. I suspect this number is too high, especially as applied to low-earning single mothers, but it’s also not a big deal and does not drive the eye-popping conclusions in the Meyer paper.
It is the second change where all the action is. Because the pre-ARPA CTC matched every dollar of earnings beyond $2,500 with 15 cents of benefit but the post-ARPA CTC did not having this earnings-matching (aka phase-in) structure, the incentive to work was reduced. According to Meyer, this reduction in the return to work causes 1.32 million people to drop out of the labor force. These dropouts are overwhelmingly low-wage workers and single mothers.
On its face, this second claim sounds preposterous. In the below graph, I have illustrated the difference between the all-in marginal federal tax rate of a single mother with two kids before and after the Biden CTC. This all-in marginal federal tax rate includes the CTC, Earned Income Tax Credit (EITC), federal income tax, and employee-side Medicare and Social Security Taxes.
As we see in the graph, for the first $2,500 of earnings, there is no difference before and after the ARPA CTC. For those earnings, the single mother has a marginal federal tax rate of -32.35 percent (-40 percent from EITC plus 7.65 percent from Medicare and Social Security Tax). This means that, for every dollar earned between $1 and $2,500, the federal government kicks in an additional 32.35 cents, on net.
Between $2,500 and $15,410 of earnings, the effective marginal tax rate is -47.35 percent in the baseline, and -32.25 percent with the Biden CTC. So during this chunk of earnings, instead of the federal government kicking in 47.35 cents for every dollar earned, it kicks in 32.25 cents for every dollar earned. This 15-point difference from the baseline continues up through $22,500 of earnings, at which point it ceases because the refundable portion of the CTC is fully phased in.
What the Meyer report is saying in a nutshell is that when you move the tax policy from the black line to the red line in the graph above, 1.32 million people choose to give up all of their wages and all of their EITC benefits and drop out of the labor force. To understand what he means in practical terms, consider the following table which shows the income situation of a single mother with two kids who earns $20,000.
|Baseline||With Biden CTC|
|Income Tax||– $60||– $60|
|Medicare Tax||– $290||– $290|
|Social Security Tax||– $1,240||– $1,240|
|Earned Income Tax Credit||+ $6,164||+ $6,164|
|Child Tax Credit||+ $2,685||+ $6,000|
|Final Income||= $27,229||= $30,544|
When the Biden CTC is introduced, this single mother’s final income increases from $27,229 to $30,544. But remember from above that this income increase has almost no effect on her behavior. Instead, what matters here is that, whereas she previously had to earn $20,000 in order to receive her CTC benefits, she now receives a CTC benefit that she would be able to keep even if she didn’t work at all.
So, naturally in these circumstances, rather than continuing to work while enjoying an extra $3,315 of annual income, this single mom quits her job and lives in deep poverty on $6,000 per year. To be more precise, according to Meyer, about 10 percent of single moms so described will quit their job and live in deep poverty.
The Amusing Debate
This finding sounds crazy because it is crazy. But Meyer’s paper and the subsequent debate about it is amusing because Meyer builds his findings on totally implausible estimates about how many single mothers are brought into the workforce by the EITC phase-in. And these estimates have heretofore been majorly touted by liberal policy organizations and professionals who liked to promote the EITC.
The debate about the Meyer paper was fixated almost entirely on the question of how sensitive workers really are to the “return to work” defined as how much total income they receive for a given unit of work. In the technical jargon, the debaters began to fight about the elasticity of employment with respect to the return on work.
Meyer put the elasticity for single mothers who receive the EITC at 0.75, meaning that every 1 percent reduction in the return to work results in 0.75 percent of this population dropping out of the labor force entirely.
Hilary Hoynes said the elasticity chosen by Meyer was way too high, but she has older EITC papers with even higher elasticities. Robert Moffit also said the Meyer elasticity was too high, but he has older EITC papers with even higher elasticities.
Jacob Goldin, Elaine Maag, and Katherine Michelmore published a paper about the new CTC that contained a similar analysis as Meyer. In their paper, they cited to the literature on the question and ultimately concluded that an appropriate elasticity for single mothers on EITC (and all mothers) would be 0.3, less than half of Meyer’s 0.75. But in a prior draft of that paper, published before the Meyer paper, their literature review included a sentence that said “the extensive margin elasticities found in this literature … approach 0.70 to 1.00 for single mothers.” This sentence was stripped out of the later version, which does not look great, but in neither version of the paper did they use this single-mother elasticity. It just was mentioned in the literature review in one draft but not the other.
So in the confines of the debate, it’s fair to say Meyer caught many prominent policy analysts in contradictions. Decades of touting the supposedly huge employment effects of phased-in benefits like the CTC and EITC — all done in a conservative political climate where that kind of touting was potentially advantageous — came back to haunt advocates as soon as that climate gave way to the possibility of a serious child benefit regime not predicated upon keeping the benefits away from the nation’s poorest children.
The idea that moving from the black line to the red line above would cause mass labor force dropouts is obviously ridiculous and all the literature saying so is old and not high-quality (see Kleven). You could imagine someone reducing their hours somewhat, perhaps by going part-time or declining a shift here and there. But amusingly that possibility is not even entertained because the same literature that says the EITC massively promotes employment also implausibly finds that it only affects whether people work, not how much they work. This nonsensical finding is why every person in Meyer’s study responds to the new CTC by quitting their job entirely: he’s dutifully applying the goofiest tax literature we have.
An off ramp to this kind of stuff is available. Read our Myths of the EITC paper to see how.