Idea of the Day: Eliminate the Earnings Threshold on the Child Tax Credit

January 22, 2009

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The economic recovery bill introduced in the House of Representatives would make a major improvement in the federal Child Tax Credit. The bill would diminish an inequity that has made the current credit unavailable to the poorest working families with children.

The Child Tax Credit is a federal tax credit of up to $1,000 for children under age 17. For higher-income families, the credit reduces the amount they pay in taxes. For families with little or no tax liability, the current credit is partially “refundable,” that is, if the credit amount is greater than the family’s tax liability, the family can receive the difference in a direct payment. However, under current rules, the credit provides little or no help to very low-income earners.

The bill now being considered by the House would—for the next two years—eliminate the earnings threshold, so that low-earning families could qualify for at least a small credit based on 15 percent of all earnings. For example, a family with earnings of $5,000 could qualify for a $750 credit, and a full-time minimum wage earner with two children would qualify for a $1,000 credit for each child. The Urban-Brookings Tax Policy Center estimates that these changes would result in 3.7 million children newly benefiting from the credit.

The improved credit will be a valuable contribution to the nation’s recovery effort. Providing additional help to low-earning families helps the economy because they are likely to spend the funds quickly on basic necessities, so the spending has a strong “multiplier” effect as the spent funds circulate through the economy. What's more, it would give low-income children in working families greater access to food, clothing, school supplies, and other essential resources that can help prepare them to become America’s next generation of wage earners.

For more on this topic, please see:

• The Child Tax Credit and the Economic Recovery Bill
• The Earned Income Tax Credit and Child Tax Credit 101