Why does this family-focused tax credit emphasize marriage and employment?
Angela Rachidi, an American Enterprise Institute scholar who studies poverty issues, believes combining the earned income tax credit and the child tax credit would help families
Efforts to alleviate poverty and improve upward mobility should not ignore the power of marriage and employment, according to the architect of a proposal that would eliminate both the earned income tax credit and the child tax credit, while folding some of their features into a new tax credit design.
“The working family credit,” a proposal by poverty scholar Angela Rachidi, of The American Enterprise Institute, would include aspects of both of those existing tax credits, while emphasizing the need to work in order to qualify. It would also eliminate so-called marriage penalties, she told the Deseret News.
“I argue that Congress could use a working family credit to encourage employment and support marriage as a way to reduce poverty,” she said.
According to a briefing paper on her proposal, such a credit would, among other things:
- Provide tax relief for working families using a single tax credit.
- Strongly connect poverty reduction to marriage and employment.
- Simplify tax credit administration.
- Make clear how much income support low-income families receive from the government.
Rachidi’s proposal completely replaces the child tax credit and the earned income tax credit, while eliminating the “head of household” filing status. Only those who work during the year could receive the credit. The plan would give larger tax credits to married couples in order to counter what’s been called a marriage penalty, Rachidi said.
The benefits to low-income families would be at least as generous as those offered by the two existing tax credits, she said.
Moving toward middle class
Giving people money doesn’t necessarily change their overall trajectory, according to Rachidi.
She wrote in her briefing paper that recent reforms have helped families financially in the short term, but haven’t addressed poverty’s causes or driven upward mobility. “Instead, they contribute to a cycle of increasing federal expenditures coupled with more government dependence,” Rachidi wrote.
Meanwhile, “research shows that increases in housing, child care and education costs have outpaced inflation over time,” she said in her report, adding that this adds to families’ financial woes. “Renters in the bottom of the income distribution and families that must use center-based child care have likely felt the pinch of these rising costs and struggled to balance the income required to cover expenses with the time required to raise a family. As families face challenges balancing work and home life, public policies that reduce child-related costs could help.”
But Rachidi also believes simply sending money to poor families may make it harder, not easier, for them to climb out of poverty, since such payments may be “decreasing employment, reducing marriage and limiting human capital investments.”
Recent larger transfer payments have sometimes helped families get just above the poverty line without helping them reach the middle class, she added.
“If the (Working Family Credit) is enacted, AEI’s Open Source Policy Center Tax-Calculator tool estimates it would cost $231 billion in 2022 — $25 billion more than the current system. The WFC increases the average after-tax income for tax filers with children in the 0-60th income percentiles, especially among married families, and it reduces average after-tax income for the highest-income households,” Rachidi wrote. That provision would help control costs.
While she admits that her proposal would not be inexpensive, Rachidi said it would provide families with tools to leave poverty, rather than being supported in poverty.
She said it offers new advantages: giving families more flexibility in how they use the money to help their families and simplifying administration costs because it’s a single benefit, as well as incentivizing work.
Wedded and working
Why do marriage and employment matter?
For low-income families, ‘there is no path out of poverty if there’s not employment,” Rachidi said. “There’s just not. If we are going to have a serious attempt at reducing poverty, we have to increase employment among parents.“
She said two-thirds of those who are poor do not work full time.
The marriage piece is “similar, to the extent that the data just clearly show that the likelihood of being poor is much reduced when you’re in a married family. Part of that is obvious because you have the potential for two incomes and that is just much more likely to put a family above the poverty line,” she said.
But it’s not just about income, she adds. There are many other advantages to having a second adult in the household. “And it’s a more stable situation when it happens through marriage, versus cohabitation,” said Rachidi.
Not able to work
Rachidi acknowledges that not all people can work, for various reasons. But she said tax credits are designed to work within that system, which is about employment.
For those who cannot be employed, “the social services system is better equipped to serve them,” she said. “And we have a very large social service infrastructure that is still at the federal level.”
Her proposal, she said, is not an attempt to address a family with a parent who is disabled, for instance. The Social Security Administration has benefits for someone with a disability who cannot work.
The benefit level she proposes are similar to what families are already getting through those existing tax credits. But that’s not all the help that needy families may be receiving, Rachidi adds. “I think it’s important to be transparent about how much families are actually getting because there was a lot of debate around the time they were trying to expand the child tax credit.”
Her proposed working family credit would provide a maximum of $6,000 for one child, $9,000 for two children and $12,000 for three or more children. For single parents, phase out would start at $30,000 household income; for married parents, it would start at $50,000.
She noted that low-income families potentially already get other help, such as with the cost of food through the Supplemental Nutrition Assistance Program and housing subsidies, among other public-funded programs.
“Over time, the basic structure of the (tax credit) could replace other in-kind benefits for working families, such as food and housing assistance, while maintaining social programs for nonworking households operated through the states,” she wrote.
Child allowance and other aid
Against the backdrop of the pandemic, Congress took a number of steps to help families that were struggling, including with three rounds of stimulus payments that spanned the Trump and Biden administrations.
Congress also expanded the child tax credit temporarily from $2,000 to $3,600 for young children and $3,000 for school-age children and then delivered half of it in monthly payments during the second half of 2021, rather than making families wait until they filed their taxes to claim the full amount. The child tax credit reverted to its previous form and amount this year.
Those monthly payments effectively turned the credit into a temporary child allowance, since it was also fully refundable, meaning that even people without earned income could qualify.
Rachidi said efforts to turn the child tax credit into a child allowance “undermine employment.”
Others believe the help that the child tax credit provided to families overcomes many of its critics’ concerns. And they dispute worries about reduced employment.
Earlier this year, the Deseret News reported on research by Humanity Forward, Washington University in St. Louis and Appalachian State University that found more than 90% of families didn’t plan to reduce employment and some said they would work more hours because the payments would help them cover the cost of child care they need so they can work. Columbia University also reported that the child tax credit didn’t hurt employment, but said it reduced the number of children in poverty. The Niskanen Center said the monthly payments especially helped those in rural communities.
Greg Nasif, spokesman for Humanity Forward, a bipartisan advocacy organization in Washington, D.C., that has campaigned hard for the expanded child tax credit and its monthly payments to be made permanent, said the measure has proven itself. He said it was uniquely efficient, got money directly to those who needed it and reached more than 90% of those for whom it was intended.
“While the monthly CTC proved not to be a deterrent from work, Humanity Forward is always open to proposals that make it easier and simpler for American families to have the resources to raise healthy children, in keeping with their own values. We’re looking into how monthly payments can be restored for qualifying families in a bipartisan way,” he told the Deseret News this week.
Other approaches have also gained support across the political spectrum, including a true child allowance, which would provide eligible families with a monthly allowance based on the number of children they have. Some conservatives believe it would help reverse America’s falling fertility, which has experts worried about economic, education and other ramifications for the future.
The 2021 American Family Survey found that 17% of those in what’s broadly considered prime childbearing years said they’d be more confident they could afford to have children if they received some kind of financial help, such as a child allowance. The survey was conducted by YouGov for Deseret News and the Center for the Study of Elections and Democracy at Brigham Young University.
According to that survey, most American adults favor some kind of government help with the cost of raising kids, as long as those receiving the assistance have genuine needs. But while there’s bipartisan support, there are partisan differences of opinion on what form help should take and how much should be offered.
Sen. Mitt Romney, R-Utah, proposed his own version of a child allowance. His legislation, The Family Security Act, would consolidate complicated programs to create a monthly cash payment for families. He’s called it budget neutral. Congress has not taken up the proposal.
As for her Working Family Credit, Rachidi said she hopes the proposal will get the attention of policymakers and spark some needed discussion about the form assistance to families should take and what would most help.