Last month, I wrote a piece about how the second version of Mitt Romney’s child benefit plan was designed to exclude the poorest children from benefits. Unlike the first version of the plan, which extended benefits to all families with incomes below $200k/$400k, the second version creates a new carve-out for families with incomes below $10k and specifically targets them for benefit denial.
Explicitly excluding poor families from benefits is ghoulish for obvious reasons. But less obvious is the way that Romney’s new exclusion completely changes how his benefit will have to be administered, changes that will end up excluding even more poor people than Romney intends to exclude.
The First Administrative Design
The administration of Romney’s first child benefit proposal worked as follows:
- The Social Security Administration (SSA) would send every single family a monthly check based on the number and ages of their kids. The benefits would not vary based on income, marital status, or anything else.
- At tax time, the SSA would send each family a tax form detailing the amount of benefit they received. Families with incomes above $200k (singles) and $400k (marrieds) would have to pay a special income tax to the IRS equal to 5 cents for every dollar of income they earned beyond those thresholds or the amount they received from the child benefit, whichever was less.
This slightly goofy structure was described as a means test, but it is importantly different from the way means-testing usually works. With a typical means-tested benefit, the benefit administrator collects income information first and then varies each family’s benefit payment based on the income information.
In Romney’s first proposal, the SSA never collects any income information and never varies benefit payments based on income. Instead, the SSA provides a universal payment and then the IRS separately applies a “phaseout” that is administratively indistinguishable from an income tax.
This design was not perfect, but it had one key advantage over every other proposal at the time: it did not require people to file income taxes or report their income in order to receive benefits. Low-income families do not have to file taxes and millions of them don’t. As a result, benefit designs, like Biden’s CTC, that use tax-filing information to administer a means-tested benefit end up excluding a large chunk of the poorest children in society.
By having the SSA pay benefits out to all families regardless of their income tax situation, Romney’s first plan avoided the non-filer participation problem. And since non-filers don’t have incomes above the $200k/$400k thresholds, the special IRS-administered “phaseout” tax would never apply to them, making their non-filing status truly irrelevant to every piece of the child benefit program.
The New Administrative Design
When Romney released his second proposal last month, it initially included language that suggested it would be administered the same way as the first proposal, meaning that the SSA would pay out the benefit universally and then the IRS would “reconcile” overpayments at tax time.
At the time, I criticized this as obviously unworkable due to the second proposal’s new exclusion of families with incomes below $10k. Unlike families with incomes over $200k/$400k, families with incomes below $10k would not have any money on hand to pay back their benefit at tax time. Trying to clawback their child benefit “overpayments” in this way would thus create unmanageable tax debts for the poorest families in the country.
I have since been informed that Romney does not intend to administer the benefit in his second proposal the same way as the benefit in his first proposal. The language saying as much was apparently a clerical mistake and has since been removed from the document.
Instead, Romney’s second child benefit proposal will be administered as follows:
- Every year, families will file taxes with the IRS.
- The IRS will supply the SSA with the income information contained in the tax filings.
- The SSA will then pay each family a monthly check based on the number and ages of their children and on their income from their last tax return.
So in this new design, the SSA will have to collect income information from the IRS and will have to vary payments using that information, meaning that the key administrative advantages of Romney’s first proposal have been completely eliminated.
No longer will the SSA simply provide a universal payment to every family with the IRS separately collecting a special “phaseout” tax. Instead, the SSA now has to provide a means-tested payment using tax-filing information.
Since the SSA has to use tax-filing information to administer this new benefit, the non-filer participation problem that Romney solved in his first proposal has now been reintroduced as a problem in his second proposal. The millions of low-income families with non-zero earnings that don’t file taxes will wind up not receiving child benefits that they are eligible for. This exact non-filer participation problem has plagued Canada’s child benefit regime, which similarly administers monthly means-tested benefits based on prior-year tax returns. And, as mentioned already, it plagued the Biden CTC regime last year.
Another problem with this new administrative design is that income information for prior-year tax returns is out of date. A family with a high income last year may have a low income this year. And so at exactly the moment that they could most use a child benefit — a big market income decline — they will instead be locked out of child benefit payments until the subsequent year. Romney’s first proposal did not have this problem either.
So, at this point, Romney’s child benefit not only mirrors the poor-excluding eligibility rules of the current Child Tax Credit (CTC) and every CTC that came before 2021, but it also incorporates the same participation-sapping administrative design of the CTC. It’s the same garbage we have been dealing with but just with higher benefit amounts.
In fairness to Romney, as soon as he decided that he was going to change the program to kick out the very poor, he really had no choice but to make administrative changes that would make the program much more dysfunctional and, in so doing, kick out and otherwise harm people who are actually eligible for benefits. You can’t carve out the poor without applying a means test upfront, and you can’t apply a means test upfront without creating serious administrative problems.
For Romney, administrative dysfunction is simply the price worth paying for the greater good of keeping benefits out of the hands of the poorest families.