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
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 improvement would be temporary—structured to last for the next two years. But, at a time when millions of families are struggling due to job losses, reduced hours, and low wages, the improved credit would both help provide needed stimulus to the economy and aid to low-income working families make ends meet.
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. That is because the refundable credit is set at 15 percent of the amount by which a family’s earnings exceed a “threshold”—$8,500 in 2008. So, for example, if a family has earnings of $8,600, the family qualifies for a $15 credit (15 percent of $8,600 minus $8,500). But, if the family has earnings of less than $8,500, the family qualifies for no credit at all. The poorest working families are completely left out, as are families without earnings.
As a result, the current child tax credit actually increases inequalities among families with children. In 2008, families with incomes below $20,000 made up 17.4 percent of tax units with children, but received only 5.5 percent of the benefits of the child tax credit. Working families with incomes below $10,000 received 0.1 percent of the benefits of the credit.
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 $5000 could qualify for a $750 credit, and a full-time minimum wage earner with two children would qualify for a $1000 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 Center on Budget and Policy Priorities estimates that in addition, approximately 9.6 million additional children would be in families receiving larger credits due to the change.
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. In contrast, higher-income families will be more likely to save funds they receive, which may make a great deal of sense for the family, but will do less to stimulate the economy.
The expanded child credit, even on a temporary basis, is also good policy, because it ends exclusion of the poorest working families from a credit intended to broadly benefit families with children.
Even with this change, 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 would make an important contribution to the recovery. 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.
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