The Child Tax Credit: Targeting Should Be Preserved

Abstract

Should the Child Tax Credit (CTC) be overhauled to create a universal child allowance, along the lines of what many European countries have? Kathy Michelmore argues strongly in favor of this approach, as does Waldfogel (2025) in her recent book. But a number of factors suggest that we should continue to target some groups more than others, albeit with changes in the current program. The National Academy of Sciences, Engineering, and Medicine (NASEM 2026) report on tax credits and child poverty offers important evidence on a range of reforms and should play a major role in this debate. In the current program, the maximum CTC of $2000 per child (rising to $2200 in 2025 and then indexed to inflation) phases in slowly with parental earnings. Above an earnings floor of $2500, parents earn 0.15 of CTC for every additional dollar of earnings, reaching the maximum at about $15,000 (17,000 this year) of earnings. These dollars are refundable, up to a limit of $1700. The slow phase-in based on earnings generates work incentives for low-income parents, which seem to generate more employment among the poor, according to the NASEM report (see chapters 7 and 8). These funds begin to phase out for single earners with incomes above $200,000 and for married parents above $400,000. In the 2021 expansion of the CTC (part of the American Rescue Plan Act or ARPA), the maximum credit was increased to $3000 per child and $3600 for those under age 6. This higher credit was fully available to families with no earnings. The NASEM report shows that these credits reduced child poverty by at least half, even on top of reductions generated by the expansion of other income transfer programs (like SNAP and Unemployment Insurance) that year. The expansion of the CTC also cost roughly $100B (in 2021 dollars) above and beyond the cost (in lost tax revenue) of the current CTC, which is about $120B in those dollars.1 It is important to remember that the CTC is not an anti-poverty program per se. It broadly aims to offset the high costs of parenting in the United States for the vast majority of parents. Only 11% of the dollars dispersed by the CTC now go to families with the 18% of US children below the poverty line, as the NASEM report shows, and a majority goes to families with incomes more than twice the poverty line.2 At the same time, the current program helps reduce poverty and has the potential to reduce it even more. Given the economic costs to the United States associated with child poverty (Holzer et al. 2008), and the long-term income losses to the poor children themselves when they become adults (NASEM 2023), investing more resources in poverty reduction is economically sensible and socially desirable. Making the CTC more progressive could also generate relatively more income support for working- and middle-class families. Targeting the CTC to groups with greater need would be a more efficient use of limited public resources, at a time of strain on such resources, though political realities might limit the extent to which we can target these credits (as I note below). Of course, targeting and universality can come in many forms, and these two categories are not mutually exclusive. The current CTC phases out for high-income families, and the level of income at which phasing out begins could be made higher or lower. Among low-income families—on whom we mostly focus—universality can be partial or full, with not all families in all employment situations covered. When considering universality, I will primarily focus on two of the most generous policy options considered in the NASEM report, in which virtually all low-income families, even without employment, receive either half of the maximum credit or all of it. Accordingly, I support expanding the CTC with somewhat higher maximum benefits than the current $2200, and targeting the credits more on families in need, while still preserving support for most US families with children. I would provide some part of the maximum credit to families with little or no earnings, while still preserving some of the phase-in that strengthens work incentives. To limit the fiscal cost of any expansion, I would begin phasing it out at incomes well below the current $200,000 and $400,000 (for single and married households, respectively) levels where phasing out now begins, at the slow current rate (0.05 per dollar of credit). On a variety of dimensions, I believe such targeting is preferable to a universal credit or child allowance. A large literature in economics indicates that work incentives affect labor supply—or the amount of work that people supply in the labor market. Labor supply usually responds positively to higher rewards to work, which in turn depend on hourly earnings and benefits (or compensation). As compensation rises, many groups of workers choose to enter the labor force and/or work more hours, though the former response is generally larger than the latter. At the same time, providing workers with income support for not working reduces rewards to work and creates a negative income effect on labor supply. And, if the income support is means-tested, or it diminishes as earnings rise, the net returns to work will be even lower, generating a substitution effect toward nonwork. Since the current CTC phases in slowly with earnings, it strengthens the financial rewards to work for those with low compensation, just as the Earned Income Tax Credit (EITC) does. Accordingly, providing potential workers with a substantial CTC independent of earnings would reduce the rewards to work and reduce employment among low-income workers employment.3 The magnitudes of these effects are determined by what economists call the elasticity of labor supply, which appear largest for low-income single mothers. Because these magnitudes remain uncertain, the report (as noted in chapter 7 of the NASEM 2026 report) uses a range of elasticities to account for employment effects. As Michelmore notes, the report (chapter 9) presents simulated estimates of 16 different proposals to increase the generosity of the CTC, and their estimated impacts on child poverty. Some proposals keep maximum credits at $2000 and mostly maintain current rates of phase-in and phase-out; others raise the generosity of the benefit to where it stood in 2021—up to $3000 (and $3600 for children under age 6) or even higher; the credits would be partially or fully available to all parents, regardless of their earnings, in some but not all of these proposals.4 Most proposals in the report also assume that phase-outs begin at lower income levels than the current program, beginning at $75,000 for single parents and $110,000 for married couples. The simulation show that all 16 proposals would reduce child poverty, to different degrees—by anywhere from 1 to 7 percentage points from its current level (or below 10% to over 60% of child poverty); they also show that parental employment would decline in most cases, somewhat offsetting the declines in poverty by modest amounts (below 1 percentage point in all cases.) The simulations (not actually reported in the NASEM study) suggest that Option 11 in the report, which would raise CTC benefits to $3000/3600 but only allow nonworking parents to receive half that amount, would likely reduce total employment in the United States by 275,000–400,000. Option 12, which allows nonworking parents to receive the full credit, and most closely resembles a universal child allowance, would reduce employment by 400,000–700,000.5 In a labor force of 170 million US workers, these represent quite small percentage reductions in employment. Both proposals would reduce child poverty to just over 7%. On the other hand, the estimates suggest that about 60%–80% of these work reductions would occur among relatively low-income single mothers (defined as those with earnings under the median US household income of $80,000). And since the base employment level for this group is estimated to be 5.8 million, the reductions in labor supply estimated for Option 12 could be as high as 10% of this group's base employment, and 7% for the medium elasticity estimate. If we were to implement a version of Option 11 or 12 with somewhat lower increases in maximum benefits, the magnitude of employment loss would be reduced, as would the reduction in poverty. It is not an exaggeration to say that the United States is now running federal budget deficits and accumulating public debt at levels which make a financial crisis quite likely in the coming years or decades if actions are not taken to mitigate them. And, under such circumstances, we should be very cautious about adding new or expanded federal entitlements that could significantly worsen federal deficits and debt. Both federal tax cuts and higher spending are contributing to our deficits and debt at an increasing rate. Even at full employment, the US federal budget deficits are now running at about 6% of GDP, while the public debt is projected to reach nearly 120% of GDP by 2035 (Congressional Budget Office 2025)—and both are unprecedented in US history. And, as deficit and debt levels continue to grow, foreign investors will begin demanding higher interest payments on US public bonds to finance these deficits, which will in turn create more fiscal strain. Avoiding a financial crisis, in which investor confidence in the ability of the United States to finance its debt rapidly declines, will require steps to rein in federal deficits with lower spending and/or higher taxes, but neither Republicans nor Democrats show much interest currently in taking these painful steps, which will only become more costly over time. How much does the CTC currently cost the federal government, in lost tax revenue, and how much would the various CTC proposals add to federal deficits over time? Annual revenue expenditures (in 2021 dollars) for the entire current CTC are over $100B.6 All of the proposals in the NASEM report that raise the generosity of the CTC would add to these costs, though by highly varying amounts. Proposals that expand the eligibility of families to obtain the CTC without raising the maximum credit have fairly modest marginal costs; whereas raising the credit to $3000/3600 is more expensive, especially if the credit is more fully shared with nonearners. Sharing half or all of these credits with nonworkers (Options 11 and 12 in the report) would cost an additional $100B (in 2021 dollars) in the former case and a bit more in the latter.7 In addition, the faster phase-outs assumed in the NASEM reduce expenditures by about $25B at the lower credit levels, and likely by $40B at the higher credit levels. If the faster phaseouts are not implemented, total federal expenditures on the CTC under Option 12 would rise to about $240B in 2021 dollars (or about $290B in current dollars). Perhaps the benefits of poverty reduction justify these higher expenditures but most CTC expenditures under Option 12 would still go to families well above the poverty line.8 A case can certainly be made that even many middle-class families deserve help with the high costs of raising children, especially given the high expenses associated with child care (Holzer and Sawhill 2022) and postsecondary education. But increasing tax expenditures on the CTC to over $300B is not trivial, relative to total federal tax revenue collections of about $4T in 2021 (and $5T today). And it would continue a practice of significantly adding to federal deficits, even at full employment and with a future fiscal crisis looming. Implementing a smaller increase in the maximum benefit, with part or full eligibility among nonworkers, would reduce the degree of poverty reduction but also the fiscal cost of the increase. Given the current high degree of political polarization at the federal level, what kinds of CTC expansions might garner bipartisan support and have lasting appeal? The answers to this question are not obvious. On the one hand, many voters dislike heavily redistributive tax and spending policies, preferring programs with broader eligibility that benefit the working and middle classes as well as the poor (Mettler 2018). This was why the Biden Administration often preferred broad tax credit expansions or increased spending (for instance, on federal student loans) to targeted ones, despite their much higher fiscal costs. On the other hand, the high inflation rates of 2022–2023, driven at least partly by very high federal deficit spending (as well as monetary expansions and a range of “supply shocks,” according to Bernanke and Blanchard (2024) were also very unpopular. Deficits can be avoided if new benefits are paid for with higher taxes, but raising taxes is politically unpopular as well, especially among Republicans.9 Furthermore, there is currently a strong aversion among many moderate as well as conservative voters to expanding federal benefits to the nonworking poor.10 The United States has developed what many policy analysts call a “work-based safety net,” with benefits flowing mostly to poor families with at least one employed family member. The current CTC and EITC share these characteristics, as do SNAP and Medicaid to some extent (especially since work rules for these programs were expanded in the legislation passed in 2025 known as the “One Big Beautiful Bill”). Some voters might consider the nonworking parents of some poor families deserving of federal aid, if they believe that the parents in these families really cannot obtain employment—due to personal employment barriers or weak labor markets, and especially during recessions. But it is usually hard to conclusively demonstrate a lack of job availability for workers, or to separate the deserving from nondeserving nonworkers.11 Employment declines caused by a rising CTC will reinforce voter skepticism, especially among those who strongly believe in a work ethic for all when jobs are available. Of course, progressive and moderate Democrats could try to implement a more generous CTC on their own, at a time when they control both the House of Representatives and Senate as well as the White House, using “reconciliation” budget actions that require just 50 votes in the Senate.12 Indeed, this was how the Democrats implemented the very large ARPA package (costing nearly $2T) in 2021 that contained the temporary CTC expansion. On the other hand, when the Republicans gain such uniform control in Washington, as they did in 2025, the benefits for poor nonworking families would likely be cut or disappear entirely in a new tax and spending budget. Turning CTC policy into such a partisan “ping-pong” ball is not a very desirable state of affairs for the United States. In light of the many tradeoffs indicated above regarding CTC expansion—on matters involving employment, fiscal, and political challenges—what reforms should we make? I support the goal of further using the CTC to reduce child poverty. According to the NASEM report, even a set of fairly modest changes to the CTC, which would keep maximum benefit levels at their current levels, could reduce the child poverty rate from about 11% to 9% (or a reduction in child poverty of about 18%). Both Options 11 and 12 in the report—which would increase the maximum credits to $3000/3600 while allowing either half or all of such benefits to go to the families of nonearners—would further reduce child poverty to something just above 7%, though Option 11 is a bit less costly and reduces employment by considerably less. I favor a moderate increase in the value of the credits and making them more available to nonworking poor families, though by somewhat less than their full value—thereby maintaining some phase-in with earnings that would preserve at least part of the work incentive that exists in the current program. I also support the idea of beginning to phase out the credits at somewhat lower income levels, which can save federal revenues—especially in the presence of higher credits. If maximum credit levels are raised—whether as high as $3000/3600 or somewhat less—we could make sure that most middle-class families enjoy somewhat higher benefits than now, even with earlier phaseouts. To begin phasing out the CTC at $75,000 or $110,000 of annual income for single and two-parent families, respectively, as was assumed in the NASEM report, means that phase-out would begin for families well above the median household income level; under these conditions, most families would still enjoy a higher credit value, even those at the lower ends of the phase-out range. So, while we can appreciate the potential appeal of a universal credit, the costs it would entail remain too high, and more moderate increases are more prudent in light of these costs.