Friday, September 22, 2023

Who Killed the Extended Children’s Discount?

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Shreya Christina
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I wrote a long piece last week about how and why I couldn’t predict how bad inflation would get. That got me thinking about some other current developments that surprised me. The biggest of these: the death of the expanded child tax credit instituted by the Biden administration as part of the US bailout plan.

Before Biden took office, the credit was up to $2,000 per child ($1,400 for children in families too poor to pay income taxes), bundled with tax refunds, and specifically excluded families with little or no income. As regards a third of the children were excluded of full credit, including more than half of black and Hispanic children, as well as 70 percent of children raised by single mothers. That is precisely the population most in need of financial assistance.

The Biden changes dramatically increased the credit to $3,000 per child 6 years and older, and $3,600 per child under 6; paid monthly; and made full credit available to all the poor children, making the previous “phasing in” rule that the credit capped at 15 percent of the household income.

The Columbia Center on Poverty and Social Policy Estimated that in July 2021, when the first monthly checks went out, the child poverty rate in the US fell to 11.9 percent, from 15.8 percent the previous month. It was the lowest recorded figure since the beginning of reliable data in the 1960s, and probably the lowest figure in US history. Some poll data suggested that: the proportion of households reporting problems with hunger dropped significantly after the credit went out.

Giving families money, it turns out, is a simple way to reduce poverty, and given that child poverty carries hundreds of billions of dollars in social costs each year“I thought it was a very worthwhile investment. But the extended credit expired at the end of December. The Columbia team estimates that: In February 2022 there were still 3.4 million children in poverty then in December, a slide into distress, almost entirely caused by the loss of credit.

So why did Congress drop one of the most important child poverty policies ever enacted?

Joe Manchin’s Failure and the Greater Failure

There is a very simple answer to why the child loan fell through: There were no 50 senators willing to support its extension. And most of the public coverage suggests that Senator Joe Manchin was the most important.

Hans Nichols of Axios, the premier Manchin whisperer of the DC Press Corps, reported last October that the West Virginia Democrat demanding that the credit includes a “firm work requirement” and does not go to families earning more than $60,000 a year.

That’s a huge departure from the Biden CTC, whose main attraction was that it not done step in with income and went to all poor households. The credit also went to many families with six-figure incomesand if Manchin were to change that, it would force a de facto tax hike on higher-income earners.

Some reports have also suggested that Manchin thought the money would go until buy drugs — a perennial concern about money programs for the poor (Manchin’s office declined to confirm or deny that he expressed these concerns personally). This presumption is unfounded; the best evidence rating on the question I have come to the conclusion that there is little reason to believe that money transfers increase drug or alcohol abuse.

Manchin’s fear that the credit would discourage work is more credible and the subject of some scholarly disagreement. The old child credit was “phased in” with income, with beneficiaries receiving 15 cents for every additional dollar of income. In theory, that stimulated people to work, and economists from the University of Chicago Kevin Corinth and Bruce Meyer argued that abolishing phasing-in would lead to many people leaving the labor market. Other economists disagreed† But even if you think the credit is somewhat discouraging work, it is still significantly reduces poverty. I would say that even if Corinth and Meyer are right, the policy was still worth it.

So why is Manchin opposing it anyway? I suspect it has a lot to do with being a Democratic state senator who won Donald Trump by about 40 points in 2016 and 2020. Manchin barely stayed put in 2018 during a tough democratic year, and understandably he doesn’t want to go too far from a major government spending program. Millions of West Virginia residents benefited from the policy, but it is ultimately a very conservative state that is skeptical of liberal policy initiatives. (Not to mention voting against your immediate economic interests is pretty common—lots of wealthy people in blue states like California and Connecticut vote for candidates who will raise their taxes.)

The structural challenge

At some point, however, focusing too much on one man can mislead more than it informs.

The bigger questions, I think, are a) why beneficiaries couldn’t fight to keep the benefit, as Obamacare beneficiaries successfully did in 2017, and b) whether doing this kind of legislation on straight party lines is viable.

The 2017 Obamacare bailout was a great illustration of a classic political science theory by Paul Pierson of Berkeley. Pierson noted that even conservative leaders like Margaret Thatcher and Ronald Reagan hadn’t been able (or even really tried) to roll back basic welfare state programs like the National Health Service and Social Security. He argued that beneficiaries were invested in these programs and would rebel against politicians who threatened them.

That’s basically what happened in 2017: Republicans should have gotten the votes to repeal Obamacare after Trump took over the White House, but the prospect of throwing millions off Medicaid was beginning to look so politically toxic that several GOP senators abandoned the effort and killed.

I thought this would happen in 2021: The expiration of the child tax cut would infuriate the parents who benefit from it so much that Congress would be forced to extend it.

It wasn’t.

Perhaps the three rounds of stimulus checks prompted voters to view child loan payments as temporary, which, as with pandemic aid, would naturally hold up the money. Perhaps the people for whom the credit was most important? too poor to have the time or resources to organize† Perhaps the pandemic has slowed down the organization. Perhaps it’s a matter of status quo bias: The credit would run out, and it’s always easier for Congress to do nothing than pass new legislation to expand a program.

Whatever the reason, beneficiaries couldn’t and couldn’t save the credit. And this kind of policy strengthening is the main reason why Democrats have historically been able to expand the welfare state along party lines (see again, Obamacare or Bill Clinton’s expansion of income tax credits in 1993† Normally, Republicans could just repeal these kinds of policies the next time they come to power, just like they rolled back Obama’s higher income taxes of 2012; but because the policy creates their own constituencies, the Republicans can’t really do that.

But if that kind of constituency not developing, this means that this kind of policy is inherently fragile and can be cut off the next time there is a change in party control.

That suggests to me that the only way forward is some sort of bipartisan deal on the child tax credit. Samuel Hammond and Robert Orr of the Niskanen Center have a great piece on what this would look like† It would probably mean phasing in income and excluding households with absolutely no income. Hammond and Orr propose keeping a very young child credit that is fully available to those with no income, but admit that even this might fall by the wayside to earn Republican votes.

I find that tragic, because it excludes people who are in urgent need of help. But it may be the only way to make such a policy work in America.

A version of this story was originally published in the Future perfect newsletter. Sign up here to subscribe!


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