Counting All the Children

Because the federal government wants to help families with children, it created something called the Child Tax Credit (CTC). Families with children file for the CTC on their income tax statement. The CTC provides a maximum benefit of $1,000 per child—but not all families get it. Those with incomes below $11,750 can’t qualify. Below $11,750, the family doesn’t have enough taxable income. They get nothing—$0 whether they have one child, two children or many more children.

Recently, I blogged about the Earned Income Tax Credit (EITC), the program Ronald Reagan called the best pro-family, pro-work, anti-poverty program ever created. Let’s be equally blunt about the CTC—this may be the worst anti-poor, anti-family program ever created. "Hey, mom and dad, those kids of yours may mean the world to you, but as far as the taxman is concerned, let’s just say they're pets. Forget about the diapers that need changing, the shoes and other clothes, the visits to the pediatrician, the food those kids eat—mere technicalities. Mom and dad, the taxman wants to ignore all that because you don’t make enough money." 

Six million children in low-income families get $0 of help from the CTC. Another 10 million live in families that don’t qualify for the entire credit.  Starting at $11,751, families become eligible for $1. The credit rises till the family’s taxable income is equal to the CTC’s $1,000 cap. A single parent with two kids needs to be earning more than $22,630 before she can qualify for the full $1,000 credit.

How can the EITC be so good and the CTC so bad? One word: refundability. They are both tax credits, yes, but they are not both refundable tax credits. The EITC is refundable; the CTC isn’t. With a refundable tax credit, it doesn’t matter where your tax liability starts. For every dollar of income, you get a percentage of that money back. If the credit were 100 percent, a family would receive one dollar of credit per one dollar of income. With a 50 percent credit, the family receives 50 cents per one dollar in taxable income.

A refundable CTC would cost the federal government more in tax expenditures, but given all the tax breaks wealthy families are eligible to receive, a refundable CTC would be an important step in correcting the inequalities of the tax code. Then there is that fundamental moral question: can anyone justify defining what counts as a child based on a family’s taxable income? Maybe we shouldn’t go there. Let’s stick with being practical. Arguably, the families who don’t qualify for the CTC are the ones that need it the most. So how do you rationalize not including them? I can’t. Maybe someone can, but I haven’t heard it explained yet in a way that makes any sense.