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New Evidence: The Expanded Child Tax Credit’s Disincentives

Summary:
In my previous post, I described how budget gimmicks prevent politicians from having to explain whether or not the policies they push are pushing desirable social and financial objectives. Here is a good example. Two weeks ago, I wrote about the serious problem with Congress’s attempt to expand the child tax credit. Well, new evidence suggests that opponents of the programs are correct about its short and long term consequences, which go beyond its .6 trillion cost over a decade. This new working paper is by Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu and was published by the University of Chicago’s Becker Friedman Institute. The authors find that the behavioral effects of the expanded CTC, such as creating incentives for some parents to work less

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In my previous post, I described how budget gimmicks prevent politicians from having to explain whether or not the policies they push are pushing desirable social and financial objectives. Here is a good example. Two weeks ago, I wrote about the serious problem with Congress’s attempt to expand the child tax credit. Well, new evidence suggests that opponents of the programs are correct about its short and long term consequences, which go beyond its $1.6 trillion cost over a decade. This new working paper is by Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu and was published by the University of Chicago’s Becker Friedman Institute. The authors find that the behavioral effects of the expanded CTC, such as creating incentives for some parents to work less or leave the workforce, are a much bigger issue than previously documented. The Wall Street Journal Editorial Board has since picked up on these disincentive effects as well.

AEI’s Scott Winship has a great summary. Here is a tidbit:

“[Corinth, Meyer, Stadnicki and Wu] CMSW find that the work disincentives created by the expanded CTC are larger than previous researchers have claimed — perhaps sizable enough to reverse the employment gains caused by welfare reform and the EITC in the 1990s — and primarily impact single parent families. As a result, existing studies have overstated the short-term poverty-reduction impact of the policy by a third. Notably, the NAS committee failed to model the primary behavioral response to the new CTC that would be expected to reduce employment. In contrast, the committee did include such a response in its modeling of an Earned Income Tax Credit (EITC) expansion, when the financial incentives involved would be expected to increase employment.

The CMSW paper does not model all of the potential short-term work disincentives embedded in the new CTC, nor does it model short-term incentives that would be expected to increase the share of children living with single parents, nor any long-term incentives on work, living arrangements, marriage, or fertility that might be expected to work against poverty reduction even more. It does not examine the potentially negative impact of the expanded CTC on other outcomes, such as intergenerational mobility. But by demonstrating the importance of short-term work disincentives (and the blind spot that many researchers have regarding behavioral effects), CMSW have strengthened the case that child allowances might have precisely the unintended consequences that conservative critics fear.”

The whole thing is a must read here.

The bottom line is that the cost of the child credit expansion isn’t the only or even the biggest concern we should have. Its impact on some people’s willingness to work, marry, and ultimately on intergenerational mobility and child poverty should be front and center of anyone’s concern with this program expansion.


Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.

Veronique De Rugy
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her popular weekly charts, published by the Mercatus Center, address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies. She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.

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