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Reassessing the Child Tax Credit: A Response to the Becker-Friedman Institute

By on October 8, 2021 0

A recent research paper published by the Becker-Friedman Institute challenged the consensus view that the new Child Tax Credit (CTC) program would have limited effects on employment. The authors – Kevin Corinth, Bruce D. Meyer, Matthew Stadnicki, and Derek Wu – use data from the Comprehensive Income Dataset. They find that the CTC expansion proposed by the Biden administration (and currently being debated for permanent renewal by Congress) would reduce total employment by 1.5 million and reduce poverty rates by 22%. This differs significantly from previous estimates, which generally found limited effects on employment as well as larger effects on poverty reduction (generally around 40 percent).

This is a new working document that has not been peer reviewed. We expect other economists to question the validity of some of the articles’ assumptions (some have already started doing it). The paper is complex and necessarily makes some assumptions about how to model different decisions and what parameter estimates to use. While we would expect most of these decisions to be reasonable, equally reasonable modeling choices would likely result in very different estimates.

This is particularly important because the significant effects suggested by the document are difficult to reconcile with the observations of other countries that have created similar programs. In our previous white paper, we noted that there had not been such a decline in labor market participation after the introduction of a similar program in Canada.

Nevertheless, it is worth taking seriously the conclusions of the document as given.

A refundable CTC does not lead to an entitlement corporation

It should first be noted that this article agrees with the previous literature on a crucial point. The paper estimates that relatively few parents (0.14 million) will leave the workforce because of the extra money provided to parents by the expanded CLC (what economists call the “income effect”). Parents will not decide to stop working because the money provided by the CLC allows one or more parents to get by without a job. This shouldn’t be surprising: $ 300 per month per child is not enough to replace income from work.

If, like Senator Manchin, you are concerned that the expansion of the CTC will create a “rights society”, this document should alleviate those concerns.

Refundable CTC takes the government’s thumb off the scales

Instead, the results are driven by the “substitution effect”. The previous version of the child tax credit “was phased in” (so only parents who earned at least $ 24,000 per year would receive the full credit). This meant that the CTC previously functioned as an employment subsidy, effectively increasing the salary of someone earning $ 24,000 to $ 26,000. Indeed, the government chooses to supplement the wages of parents who decide to work rather than stay at home.

It is worth considering whether this is the right role for government. While the government (or society in general) arguably has an interest in helping people find work (and may choose to limit assistance to people who can work and choose not to), claim that the government should specifically push parents to enter the workforce goes against many conservative principles. Some social conservatives, including Reihan Salam, candidate for the Senate Blake Masters, and Pierre de Lyman, have gone so far as to suggest that lower parental participation in the labor market should be a policy objective. The Niskanen Center has previously argued that the government should be largely neutral in this decision, without pushing parents into or out of the workforce. A fully refundable CTC achieves this goal, unlike the previous phased introduction.

A refundable CLC allows employers to proceed gradually

Finally, it should be noted that while the end of the phased introduction of the CTC decreases the incentive to work provided by the federal government, there is one group that might be better placed to increase this incentive: the employers themselves. .

The Becker-Friedman paper assumes that offered wages will not change in the presence of the fully reimbursable CTC. But if 1.5 million people are considering leaving the workforce, as the document suggests, companies will of course be thinking about how to attract more applicants. This can take the form of an increase in wages, effectively replacing funding previously provided by the government. One consequence of these salary increases would be that many parents decide to continue working.

And certainly, employers may be able to find better ways to attract parents than money alone. If parents are considering leaving the workforce, companies will be looking for new ways to attract them. Obviously, this could include options like more regular hours or limited hours that make it easier for parents to be home before and after school. It is a pro-family policy that we should all support.

Photo by Sue Zeng on Unsplash

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