Cash Is King in Supporting Families

Forum: Should Congress Make the Expanded Child Tax Credit Permanent?

by Matthew Yglesias

The fundamental economic dilemma of family life is that children cost money but a well-functioning market economy does not magically allocate additional funds to the parents of young children.

On the contrary, having a child tends to depress the earning potential of the primary caregiver, typically the mother, and the facts of human biology are such that a woman’s peak childbearing years occur well before the typical time for peak earnings. In traditional societies, this is a nonissue, because children serve as economic resources—they are farm hands, they are domestic servants, they are a retirement plan. But in the modern economy, children produce no income. They also heavily consume the kinds of labor-intensive services whose prices over the past couple of generations have gone up faster than the overall pace of inflation, in a pattern that shows no clear sign of abating.

Under the circumstances, the provision of flexible cash assistance to families is a vital step to strengthening American families and improving outcomes for children.

For the poor, research suggests that existing social-assistance programs, including the Earned Income Tax Credit, the Supplemental Nutrition Assistance Program (formerly called food stamps), Medicaid, and the Children’s Health Insurance Program, all improve educational outcomes.

For middle-class families, the additional financial assistance contemplated by the Biden administration through the expanded Child Tax Credit is not likely to be as big a gamechanger. But for many families, it could open the possibility of parochial school, more-enriching summer activities, tutoring, or other supplements to existing public school offerings. In other cases, as Lyman Stone of the Institute for Family Studies points out, it could mean an increase in fertility, “adding tens or hundreds of thousands of births each year.”

Indeed, the framing of the Child Tax Credit as a Democratic Party anti-poverty initiative probably obscures the extent to which cash assistance would promote conservative goals such as fewer abortions and higher enrollment in independent schools, especially religiously affiliated schools, which are usually the most affordable private option.

Conservative concerns with the tax credit largely focus on the fear that it will lessen incentives to work, particularly for less-skilled unmarried mothers, to an unacceptable extent, bringing back the bad old days of pre-reform welfare. Some progressives have tried to label such concerns categorically unreasonable by denying that the prospect of a large number of labor-force dropouts is cause for alarm, which only tends to bolster fears on the right and at the center.

But because of the difference between how the new tax credit and how older welfare programs are structured, an increase in nonwork is unlikely. Critics are in many ways misremembering the old Aid to Families with Dependent Children that, owing to its origins in Depression-era concern for widows, was structured so as to be spectacularly ill suited to modern life. Under AFDC, a parent’s labor-market earnings led to an essentially one-to-one phase-out of benefits. Under those terms, few people would choose to do the kinds of difficult and often unpleasant jobs generally available to welfare recipients. But under Biden’s plan, parents get the Child Tax Credit whether they work or not, so a nonworker’s incentive to earn more money in the labor market is the same as any working person’s incentive to score a raise, a promotion, or a new job—one gets more money, at least until the tax benefit phases out at the level of $135,000 for an individual with a child of six or older.

I’m struck that in Jason DeParle’s classic book, American Dream, he finds that it was not uncommon for AFDC recipients to do gray-market work off the books, underscoring the point that the fear of losing benefits, not the lack of motivation to earn, was the main job-killing feature of old-style welfare. What’s more, prime-age women’s labor-force participation rates are higher in Europe, where there are more generous social provisions than in the United States, and the latest research from Canada indicates that the country’s introduction of a generous child benefit had no impact on labor supply.

For those concerned about labor supply, Biden has his own set of proposed solutions, including a cap on out-of-pocket child-care costs and universal preschool for three- and four-year-olds.

These ideas have some merit, but given real-world political and fiscal constraints, cash assistance deserves to take priority. This is not the place to rehash the entire universal pre–K debate. Suffice it to say that, while the best preschool programs are excellent, it is not obvious that their success can be quickly brought to scale. It’s also inherently awkward for the federal government to become deeply involved with the direct provision of schooling, given that local governments run the K–12 schools.

The Washington, D.C., universal-preschool program is often cited as an inspiration for Biden’s preschool initiative in the American Families Plan. But while I view the D.C. experiment as highly successful (my son is a veteran of two years of D.C. Public Schools’ pre-K), the program also involved a number of circumstances that may not apply nationally. Before embarking on universal preschool in 2008, D.C. had access to many underused school buildings because of its under-enrolled public school system. The city also has an unusually large charter school sector that enjoys widespread political support and has fully participated in the preschool rollout. Last but by no means least, the dense urban environment makes it easier to match parents with available slots than it might be elsewhere. Even with these favorable conditions, it took years of capacity building to achieve the goal of universality in D.C.

Universal preschool remains a promising approach to providing childcare, at least when children are three and four, but it’s fundamentally one where state and local governments need to be the leaders and operate in a way that’s suited to local circumstances.

The federal government’s competency in cutting checks to various entities lends itself much better to the cash-assistance idea. The expanded Child Tax Credit concept is strictly superior to the parallel Biden plan for a kind of childcare voucher system. That proposal would cap childcare costs at 7 percent of household income for all families earning less than 150 percent of state median income—with childcare completely free to the poorest families.

This is a fine idea, but if you had to pick one, the money option holds more merit. Families can spend the cash on daycare if they are so inclined, but they can also use it to cut back on work hours and do more traditional home care. This does raise the conservative fear of labor force dropouts, but realistically, “use the money to work less” is going to be most attractive to financially stable married couples who face higher tax rates and a lower marginal utility of money. Or they could choose to pay a family member for caregiving. You don’t need to be a wild-eyed libertarian to see that it’s inherently difficult for the government to assess the full range of situations that face young children and their parents. Individual families left to their own devices may not always make perfect choices about care arrangements, but it’s still very difficult to beat freedom of choice, given the sheer range of family and work situations that arise.

The American Rescue Plan’s cash benefit, set for extension in the proposed American Families Plan, should be the core of any congressional effort to expand the welfare state and improve child wellbeing. That’s not to say this path is perfect. Many experts I’ve spoken to have doubts as to the IRS’s actual capacity to pay out benefits on a monthly basis. And most refundable tax credits have lower uptake rates than a direct-spending program like Social Security. For that reason, Mitt Romney’s version of a child-benefit program paid out by the Social Security Administration might be preferable to Biden’s idea.

Beyond administration, there are various differences between the Biden and Romney visions. Romney’s benefit is a bit more generous than Biden’s, but it sunsets certain earned-income tax-credit provisions that Biden retains. Accordingly, which program gives you more money hinges on what your earnings are.

Romney also provides money further up the income chain (the Romney credit begins to phase out at $400,000 in annual income for a married couple, compared to $150,000 for the Biden plan as implemented) in exchange for totally eliminating the state and local tax deduction, which makes his program more strictly a transfer from nonparents to parents than from affluent to poor.

The differences between the two proposals, though, strike me as less important than the fundamental similarities.

Since 1995, the United States has greatly increased its provision of means-tested in-kind benefits to the poor. We have also bolstered work-linked tax-credit programs that are partially refundable. Both kinds of programs have proven benefits. But, because of its inflexibility, in-kind assistance offers less than one dollar of benefit for every dollar spent. And tax credits that are only partially refundable exclude the neediest families. Bringing these families into the fold of a program that also benefits the middle class is one of the best things we can do to strengthen American families as we emerge from the pandemic. And while such a policy is no substitute for getting the school system back up and running, it could be a critical supplement to everything the education system does and a politically appealing alternative to pushing more money through existing formulas and institutions.

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This is part of the forum, “Should Congress Make the Expanded Child Tax Credit Permanent?” For an alternate take on this topic, please see “Deprivation Is Not Simply a Material Matter,” by Scott Winship.

Matthew Yglesias is a journalist who writes about economics and politics.

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