Brief: Earned Income Tax Credit and Child Tax Credit 101
Report: From Poverty to Prosperity: A National Strategy to Cut Poverty in Half
Project: Half in Ten, an Action Fund project
Both the House and Senate economic recovery bills would expand the federal Child Tax Credit, but there’s a major difference between them. Twelve million low-income children would benefit more from the House version: 2.2 million additional low-income children would qualify for the credit and 10 million more would receive a larger credit. The House approach would translate into an additional $3.9 billion total for very low-income families.
The difference between the two approaches occurs because the House bill counts all family earnings when calculating its Child Tax Credit, while the Senate bill only counts earnings exceeding $6,000 a year. Working families with earnings below $6,000 are therefore helped under the House bill, but not the Senate version, and other low-earning families get a larger credit under the House bill because all of their earnings are considered when the credit is calculated.
Here’s the background: The Child Tax Credit is a federal tax credit of up to $1,000 for children under age 17. The credit reduces the amount that higher-income families pay in taxes. The credit is partially “refundable” for families with little or no federal income tax liability, which means that if the credit amount is greater than the family’s tax liability, the family can receive the difference in a direct payment. Yet the credit provides little or no help to very low-income earners. The refundable credit was set at 15 percent of a family’s earnings above $8,500 in 2008. A family earning $12,000 therefore qualifies for a $525 credit—that is, 15 percent of $12,000 minus $8,500. If a family earns less than $8,500, the family does not qualify for the credit. The poorest working families are completely left out, as are families without earnings.
The lowest earning families receive only a small share of the Child Tax Credit’s benefits. In 2008, 17.4 percent of tax units with children earned less than $20,000, yet they received only 5.5 percent of child tax credit benefits. Working families with incomes below $10,000 received even less—only 0.1 percent of the credit’s benefits.
The House bill would eliminate the earnings threshold so that all low-earning families could qualify for at least a small credit based on 15 percent of their earnings. A family with earnings of $5,000, for example, could qualify for a $750 credit, and a full-time minimum wage earner with two children—who will earn a little more than $14,000 in 2009—would qualify for a $1,000 credit for each child. This change would allow an additional 3.7 million low-income children to newly qualify for the credit, and 10.2 million more low-income children would qualify for a larger credit.
In contrast, the Senate bill would lower the earnings threshold to $6,000, which is better than current law, but would provide only about one-third of the benefits that the House bill would accomplish. Here are examples of what the difference would mean for a family with two children:
Child Tax Credit benefits under the House, Senate, and current rules
| Earnings |
Threshold at zero (House) |
Threshold at $6,000 (Senate) |
Threshold at $8,500 (current) |
| None |
$0 |
$0 |
$0 |
| $5,000 |
$750 |
$0 |
$0 |
| $10,000 |
$1,500 |
$600 |
$225 |
| $15,000 |
$2,000 |
$1,350 |
$975 |
| $20,000 |
$2,000 |
$2,000 |
$1,725 |
Where the threshold is set doesn’t affect higher-income families, but it makes a huge difference for low-income earners. For example, a parent with two children earning $15,000—an amount above the minimum wage for full-time work in 2009—would qualify for the full $2,000 credit for two children under the House bill, but only $1,350 under the Senate bill. According to Tax Policy Center data, setting the threshold at zero instead of $6,000 would mean that 6.45 million families would receive either a new partial credit or an increased credit. Four-fifths of the benefiting families have incomes below $20,000 a year.
A zero threshold will also do more to contribute to the nation’s recovery effort. The lowest-earning families are most likely to spend the funds quickly on basic necessities, and the spending therefore has a strong “multiplier” effect as the spent funds circulate through the economy.
What’s more, there’s no good reason for having an earnings threshold for the credit at all. The Earned Income Tax Credit doesn’t have an earnings threshold; neither would the proposed, new Making Work Pay Credit. The principal effect of setting a higher threshold for the Child Tax Credit is to exclude the poorest working families from a credit intended to broadly benefit families with children.
Even with a threshold set at zero, some families with children are still left out from the benefits of the child credit—families without earnings due to age, illness, disability, caretaking, or other reasons for unemployment. Modeling from the Urban Institute for CAP’s Task Force on Poverty had estimated that if the full Child Tax Credit was made available to all low-income families with children, it could reduce child poverty in the United States by 20 percent.
Still, the change being proposed in the House would be a major improvement in the Child Tax Credit and make an important contribution to economic recovery. The Senate version would be a step forward, but the nation and its families need a much larger step right now, both to promote recovery and to help struggling families facing the worst economic conditions in decades.
Brief: Earned Income Tax Credit and Child Tax Credit 101
Report: From Poverty to Prosperity: A National Strategy to Cut Poverty in Half
Project: Half in Ten, an Action Fund project