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July 20, 2021

US increases its child tax credit to fight poverty

US increases its child tax credit to fight poverty

Millions of American families have received the first of a series of monthly payments as part of an expanded child tax credit, as reported by the BBC and CNBC. 

Payments of up to $300 (£216) per child are due to be paid monthly until the end of the year as part of the American Rescue Plan Act passed by Congress in March. Anti-poverty advocates hope introducing such a program temporarily will prompt longer-lasting change.

The expanded child tax credit is more generous than the previous system and implements monthly payments for the first time. The payments include up to $300 per month per child under the age of six (maximum of $3,600 per child), and $250 per month for children aged 6–17 (maximum of $3,000 per child). Half of the credit is to be paid directly to parents in monthly instalments while the remaining can be claimed on 2021 tax returns. Families can also choose to opt out of the monthly payments and receive one lump sum later instead.

The White House says that about 90% of families will receive the benefit automatically; eligibility and the amount paid out are dependent on income.

Estimates suggest the new child tax credit and other initiatives tied to the American Rescue Plan Act will help cut child poverty in the US in half, lifting four million children out of poverty.

Most developed countries, including the UK, have paid some form of monthly child allowance to offset the costs of having children for decades. However, the US, fearing social welfare programs discourage work, has relied on an annual tax credit instead.

The revised child tax credit has been described as a defence against the US’s falling birth rate, which is at a record low, with many young adults now fearing that having and raising children is just too expensive.

Olivier Donni has explored measuring the cost of children for IZA World of Labor. He says that, among other reasons, “[m]easures of the cost of children are […] indispensable in calculating changes in poverty and inequality when the average number of children is not stable over time and for comparing poverty and inequality across countries.”

Donni tell us that “Knowing the real cost of children is important for crafting better economic policy.” He says, “[r]ecent empirical estimates of the cost of children for an average family are generally close in size to the results of traditional ad hoc equivalence scales used in official publications of the OECD. However, the empirical estimates are potentially much richer and may take into account the wide diversity of families. The cost of children may depend on a large set of explanatory variables including children’s characteristics as well as those of parents and is not necessarily proportionate to family income, as the ad hoc scales assume. Thus the empirical methods are more relevant for studying poverty and inequality.”

Congress is yet to decide whether the expanded payments will continue beyond 2021.

Explore IZA World of Labor content on the subjects of poverty and inequality.

Read Olivier Donni’s article, “Measuring the cost of children.