Elaine Maag (Tax Policy Center) presents Boosting Wages or Helping Children? Understanding How New Earnings and Child Tax Credit Proposals Impact Income Inequality and Vulnerable Children (with C. Eugene Steuerle & Robert McClelland) at UCLA today as part of its Colloquium on Tax Policy and Public Finance hosted by Kirk Stark and Jason Oh:
The earned income tax credit (EITC) and child tax credit (CTC) provide substantial benefits to working families with children. The EITC also provides modest benefits to workers without custodial children, often called “childless workers” for tax purposes. Because the amount of credit childless workers can qualify for is modest, almost all benefits from both credits flow to families with children. Together, the credits lift almost 9 million people out of poverty each year (Fox 2019).
Policymakers are looking to build on the success of these credits and further address the joint issues of income inequality between very high-income people and everyone else (Congressional Budget Office 2019) - fueled in part by wage stagnation (Mishel et al 2018) and relatively poor outcomes for low-income children (Duncan, Ziol-Guest, and Kalil 2010; Ratcliffe 2015). Coupled with the CTC increase that was enacted in 2017 being set to expire after 2025, legislators are considering the next phase of work and child subsidies.
We analyze four expansions to the credits:
The Working Families Tax Relief Act (WFTRA) — introduced by Senators Bennet (D-CO), Brown (D-OH), Durbin (D-IL), and Wyden (D-OR); The LIFT (Livable Incomes for Families Today) the Middle Class Act (LIFT) — introduced by Senator Harris (D-CA); The American Families Act (AFA) — introduced by Senators Bennet (DCA) and Brown (D-OH) and Representatives DelBene (D-WA) and DeLauro (D-CT); and The Cost-of-Living Refund (CLR) — introduced by Senator Brown and Representatives Khanna (D-CA), Watson-Coleman (D-NJ), and Tlaib (D-MI).
All the proposals analyzed in this paper (as is this case with the EITC and CTC) would provide benefits to both families with children and those with very low-incomes, illustrating that a proposal can focus primarily on one goal but still accomplish others, something we discuss in detail. However, the starting point has implications for how broad the policy will be and likewise, how much the proposal will cost. For instance, a policy focused on low-income children could simultaneously reduce income inequality and improve outcomes for children, but not affect income inequality among people without children.
As choices are made, policymakers must keep in mind that any effort to increase the relative benefits for one group inevitably means a decrease in the relative, though not necessarily the absolute benefits, for other groups. Along with analyzing the proposals, we modify important parameters of each proposal to illustrate how different choices would alter inherent trade-offs.