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U.S. Democratic presidential candidate Hillary Clinton holds a baby during a campaign stop at Varsity Pizza in Syracuse.
Social Mobility Memos

Clinton’s Child Tax Credit proposal: A good start on helping low- and middle-income families

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Hillary Clinton’s proposed changes to the Child Tax Credit (CTC) would help poor and middle class families, especially those with young children. Although important design challenges remain, in broad terms the plan is a positive step towards reducing income inequality.

The Child Tax Credit: What is it?

Clinton’s plan would mark another reform to the CTC, which has evolved considerably since its creation almost two decades ago:

  • At its introduction in 1997, the CTC was worth just $500. It was not refundable, and so failed to reach the large number of families with no federal income tax liability.
  • In a 2001 Brookings paper, Sawhill and Adam Thomas proposed making the credit both refundable and more generous. These proposals were adopted in the same year, with the maximum value of the credit rising to $1,000. Only parents with at least $10,000 in earnings received a credit, which phased in after the $10,000 threshold.
  • In 2009, lawmakers lowered the minimum earnings threshold from $10,0000 to $3,000. This change was made permanent in the Bipartisan Budget Act of 2015.
  • Today, the credit phases in at a rate of 15 cents on the dollar after the $3,000 threshold, reaching its maximum value of $1,000 per child under age 17 once annual earnings are just under $10,000 in earnings. The credit begins to phase out (at 5 percent of adjusted gross income) for single parents earning over $75,000 and for married parents earning over $110,000.

The Clinton plan for CTC

Clinton’s proposal has three principal elements:

  • Lower the phase in threshold from $3,000 to the first dollar of earnings;
  • Double the maximum credit amount, from $1,000 to $2,000, for parents of children under age 5; and
  • Phase in the credit more quickly for those with children under age 5 (at 45 cents per dollar of earnings rather than 15 cents).

Taken together, these changes will mean the CTC offers considerably more cash assistance to the poorest families, and to poor and middle-class families with young children:

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This focus on the early years reflects Clinton’s long-standing policy focus on families with young children, and is consistent with research, for instance, by James Heckman and Greg Duncan, which suggests that investing more when children are very young yields disproportionately large benefits to the children, their families, and society. The steeper phase-in of benefits for families with very young children is also consistent with the higher child care costs they face (or the loss of income should a parent choose to stay home in these early years).

Questions for the Clinton plan

Still, the plan raises a number of questions, which will need to be clearly answered if the proposals are to stand much chance of being enacted.

1. Why not invest in alleviating childcare costs directly, rather than expanding a cash transfer?

Clinton’s plan puts more cash in the pockets of poorer and middle-income families. But there is another way to help them: through the Child and Dependent Care Tax Credit (CDCTC), which can only be used to cover child care expenses. Of course, parents can use the extra CTC money to help with childcare costs, but also have the flexibility to use it to help with other expenses. But compared to boosting the CTC, improvements to the CDCTC could represent a more pro-work approach, as we argue in a new policy brief (specifically, we propose making it refundable and capping it at $100,000 in income).

2. Should there be a limit to the number of children triggering cash assistance?

The CTC is unusual in that it is available for an unlimited number of children. The CDCTC, by contrast, only provides support for two children; the Earned Income Tax Credit flattens out with the third child.  There is a trade-off here between supporting children, regardless of the size of the family they are born into, and promoting responsible parenting; policy also needs to account for economies of scale in larger families.

3. How high up the income scale should we be offering support?

The Clinton plan does not detail how the reformed CTC would phase out for higher-income families. If the current taper rate is kept in place, the proposed increase in the CTC for parents of young children will provide extra benefits to many well-off families—single parents making between roughly $96,000 and $115,000, and married parents earning between $130,000 and $152,000. In our paper on the CDCTC, we propose a cap of $100,000. How far up the distribution should the government’s financial support reach?

Clinton looks to post-election politics

One thing is certain: Clinton’s plan would be more progressive and help poor and working-class American families more than Donald Trump’s proposal to make making childcare costs tax-deductible. She may well be thinking ahead to possible negotiations with Congressional Republicans. Her plans have some similarities to those proposed by Senators Rubio and Lee (though hers has a more progressive design). Perhaps CTC reform will provide the opportunity for some bipartisan policymaking. If so, Clinton just opened the negotiations.

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