Return to main report card

INCREASE ELIGIBILITY FOR THE REFUNDABLE PORTION

OF THE CHILD TAX CREDIT

Key Points

·        This proposal would reduce the income threshold at which the Child Tax Credit (CTC) begins to phase in from $12,550 in 2009 and an estimated $12,600 in 2010 to $0 and, therefore, would extend the credit to the poorest working families.

·        This is the most highly targeted of the tax provisions, helping low-income working families with children, who would tend to spend most or all of the additional funds.

·        The stimulus would be delayed because the credit would generally only come after recipients file their tax returns the following year.

·        JCT estimates that the proposal will cost $18.3 billion over 10 years.

Current Law

Families with children under age 17 can claim a Child Tax Credit (CTC) of up to $1,000 per child. The credit is reduced by 5 percent of adjusted gross income over $110,000 for married couples ($75,000 for single parents). If the credit exceeds taxes owed, families can receive some or all of the balance as a refund, known as the Additional Child Tax Credit (ACTC). The ACTC is limited to 15 percent of earnings above a threshold—$12,550 in 2009—that is indexed to inflation. The point at which the ACTC begins to phase-in coincides with the end of the phase-in range of the earned income tax credit (EITC) for families with two or more children, providing a smooth transition between the two credits for these families. For families with one child, however, there is a $3,600 gap between the $8,950 end of the EITC phase-in and the $12,550 start of the ACTC phase-in.

Stimulus Proposal

The proposal would reduce the start of the phase-in for the ACTC to $0 through 2010 so that families would start getting at least a partial credit as soon as they enter the labor force.

Discussion

The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. As currently structured, higher-income families are much more likely to benefit than lower-income families. In 2007, when the ACTC threshold was $11,750, only 8.2 percent of families with eligible children in the lowest quintile—or fifth—of the income distribution received any benefit from the credit, compared to nearly all families in the middle income quintile (see TPC table T07-0296). On top of that, many low-income families who receive the credit get less than its full $1,000 value because their income falls in the phase-in range.

The Tax Policy Center estimates that if the earnings threshold were reduced to $0, the families of 10.4 million children would see higher benefits from the child credit; of those, families of 6.3 million children would become newly eligible for the credit (see TPC table T08-0278).

This proposal is the most targeted part of the stimulus package, providing assistance to the poorest families, who are most likely to spend additional income. Research based on credit card data showed that low-income households spent about 75 percent of their rebates from the 2001 tax stimulus (Johnson, Parker, and Souleles 2006). Beneficiaries of this proposal have even lower incomes than the low-income recipients of the earlier tax rebate and would likely spend an even larger share of any additional credit this proposal would provide. On the other hand, survey data contradict that research, suggesting instead that low-income families spent much less than three-fourths of their 2001 rebates and not much more than higher-income families (Shapiro and Slemrod 2003). However, low-income survey respondents were also generally better off than most of the people who will benefit from this proposal so how they reacted to the 2001 rebates may not be relevant; the very low income households newly eligible for the CTC could well spend most of their additional credits and thus help to stimulate the economy.

The lower phase-in threshold would increase the benefits of working and could thus induce some very low income people to look for jobs. In an ordinary time, that would help boost the economy. In today’s weak economy with its high unemployment rate, however, new job seekers are unlikely to find work so the economy would get little stimulus through this mechanism.

The proposal gets marked down because most families would receive no benefit until they file their tax returns in 2010. The stimulus could be made timelier (and thus more effective) if the first installment were paid out as rebate checks based on 2008 incomes.

The proposal represents a modest simplification in the sense that a threshold of $0 is easy to comprehend and the refundable portion of the credit would be easy to calculate. The threshold would also not change from year to year as the current threshold does. The main benefit, though, is that it would make the refundability provision more transparent.

There would be strong pressure to extend the credit beyond two years. That would significantly increase the long-term revenue cost, but it would make the tax system fairer and slightly simpler. If the $0 threshold were made permanent, it would have mixed effects on economic efficiency. Most lower-income households in the phase-in range would have a greater incentive to work, but many households in the phase-out range for the EITC could face strong disincentives to work more.

Grade: B+

This provision is the most highly targeted in the stimulus package, going to the poorest households who are most likely to spend additional income. The proposal would receive an A grade if the first installment were distributed based on 2008 tax returns.

 Return to main report card