The Promise of the Refundable Child Tax Credit

Abstract

From 2017 to 2019, my job was helping people identify their career goals and land well-paid jobs in growing industries. Unemployment in the Twin Cities was at record lows and recruiters consistently reached out to me looking for qualified candidates and seeking input on how to retain their workers. A critical part of the job and the was not career development at all. Everyone I worked with was receiving cash assistance, and I lost count of the number of times someone would be ready to start their new job before realizing they lost access to childcare or had a financial emergency, putting them back to square one. Observing frustration brought on by excessive paperwork and ill-defined rules, I was immediately optimistic when I learned about guaranteed minimum income. I was certainly not alone, as many researchers have devoted their careers to understanding the impacts of administrative burden and the implications of giving people unrestricted cash. Momentum for these programs has grown significantly in the last year, following the "Freedom Dividend" proposed by 2020 Presidential Candidate Andrew Yang, as well as high profile investments from tech-leaders and the development of "Mayors for a Guaranteed Income." The potential of a Guaranteed Minimum Income (GMI) sounds promising. Everyone receives a certain amount of cash that provides the bare minimum required for all people to live, regardless of their meeting of certain program conditions and criteria. As frustrations with growing inequality and systematic racism have come to the forefront of American politics, could a GMI be the answer? The United States has taken major steps towards implemented GMI in the last year, as a temporary response to the COVID-19 pandemic. Many Americans received a "stimulus" check directly from the government, intended to provide some consumption smoothing in the short term. Another significant step towards GMI is the 2021 Improvements to the Child Tax Credit (CTC), included in the American Rescue Plan Act (ARPA). Considered highly popular, both Democrats and Republicans have proposed permanent expansions to the CTC. These proposals overlap in their pursuit of additional refundability; however, they different greatly in their calculations of credits and eligibility, funding mechanisms, and administrative authority. Under the proposed CTC expansions, the families I used to work with would all be eligible for a cash transfer as high as $360 a month for a child under six years old. For the average family receiving less than $500 each month from cash assistance, that money could be the difference between starting or missing out on a life changing career opportunity. While advocates and policymakers have good intentions, they must understand the differences between the proposed programs and the impact they could have on Americans struggling to make ends meet. This paper uses static microsimulation with data from the Survey of Income and Panel Participation (SIPP), to calculate the distributional effects of each proposal.