When President Biden’s Build Back Better plan failed, the Democrats’ chance to turn the Child Tax Credit (CTC) into a permanent child allowance also faltered. A sticking point in their plan was transferring income to non-working parents — which might have decreased poverty on paper, but likely would have made it harder for families to prosper in the long run because it also discouraged employment. Combine that dynamic with marriage penalties in other safety net programs, such as the Earned Income Tax Credit (EITC), and the Democrats’ vision for poverty reduction quickly resembles the failed welfare policies of the past.
A more effective approach is to focus on work and marriage as a path out of poverty, rather than policies that undermine these crucial components. In a new report, I propose a Working Family Credit to replace the EITC and CTC as a way to achieve this goal. Decades ago, the EITC and CTC started for distinct purposes, but after numerous changes, they have become largely redundant for low-income families. Combining the EITC and CTC into one child-related credit could better support families with children, while simplifying their administration.
Congress originally passed the EITC in 1975 — initially called the earned income credit — as a temporary payroll tax offset for low-income working families, providing it to parents even when they did not earn enough to owe federal income taxes. With support from Republican and Democratic presidents, Congress increased the EITC numerous times since its adoption, making it the federal government’s largest direct cash transfer to low-income families in recent years. Separately, Congress created the Child Tax Credit in 1997, initially as tax relief for parents with federal income tax liability, but eventually as a “refundable” tax credit for working parents without income tax liability who also received the EITC.
In light of recent attempts by the Democrats to expand the CTC to non-working families, it is important to remember the original purpose of these credits — tax relief for working families — as well as the importance of employment and marriage for reducing poverty. Now that most low-income working families can receive both the EITC and the CTC, Congress should consider consolidating them and using a combined credit to reinforce the importance of work and marriage in fighting poverty. This is especially important as the lessons of welfare reform fade from memory. Twenty-five years after President Bill Clinton and a Republican Congress reinforced the importance of work and marriage in welfare reforms, the largest safety net programs still discourage work, such as with the Supplemental Nutrition Assistance Program (SNAP), or penalize marriage, such as with the EITC.
A consolidated credit also could address administration problems with the current system of child-related tax credits. The EITC is notorious for high improper payment rates, and the refundable portion of the CTC suffers from similar problems. By aligning rules across the current EITC and CTC, a consolidated credit could make it easier to enact policies that increase the integrity of these payments.
The Working Family Credit I propose is as generous — and in many cases, more generous — than the current combined EITC and CTC, providing a maximum of $6,000, $9,000 and $12,000 for low-income families with one, two and three children, respectively. Its structure encourages employment by phasing-in and -out to minimize work disincentives and supports marriage by increasing payments to more working-class married families.
Still, the costs of any new program are crucial. The Working Family Credit would cost $231 billion (2022 dollars) — $25 billion more than current. However, it would increase after-tax income for the vast majority of households with incomes below the 60th percentile, especially working-class married families. To control costs it would eliminate the head of household tax filing status, which primarily benefits high-income single parents, and reduce the amount of child-related tax credits for high-income households to between $1,000 and $3,000.
Consolidating child-related tax credits in a way that supports employment and marriage would send a strong message about the best way to reduce poverty and increase upward mobility for U.S. families — striking a sharp contrast with policies that view them as inconsequential.
Angela Rachidi is a senior fellow and the Rowe Scholar in poverty studies at the American Enterprise Institute, where she studies poverty and the effects of federal safety-net programs on low-income people in America. She served as a deputy commissioner for policy research in the New York City Department of Social Services from 2007-2015. Follow her on Twitter @AngelaRachidi.