NCPA - National Center for Policy Analysis

Could Lower Taxes Replace the Child Tax Credit?

May 12, 2015

First introduced in 1997, the Child Tax Credit (CTC) has grown in size and eligibility to become one of the single largest tax credits available to middle-class families. It provides qualifying taxpayers with a tax credit of up to $1,000 per eligible child under the age of 17.

The credit currently provides over $57 billion in benefits to taxpayers. This $57 billion figure is comparable to the deduction for state and local taxes ($56.5 billion) and the Earned Income Tax Credit (EITC), which provides a benefit of over $69 billion to taxpayers.

How is the credit calculated?

  • For taxpayers with annual incomes of $3,000 or less, no credit is available.
  • Above $3,000 of income, the CTC is phased in at a rate of 15 percent. The basic credit is limited by the amount of the taxpayer's tax liability, but there is also a refundable portion of the credit, limited to 15 percent of the taxpayer's income above $3,000.

The CTC provides a significant subsidy to almost all taxpaying families with children, and the U.S. federal and local tax codes contain many other provisions that subsidize child rearing. Taken together, the CTC subsidy to families with children has grown to nearly $60 billion, placing it among the list of the largest "tax expenditures" as defined by Congress's Joint Committee on Taxation.

This topic requires much more scrutiny, primarily to determine if, given other policies subsidizing child rearing, there is a social need for $1,000 more per child. One alternative is to remove the subsidy and lower tax rates by an offsetting amount. This tax cut would benefit all taxpayers, not just parents. It would also provide social benefits in terms of increased productivity and economic growth, and this is the most relevant comparison to any social benefits from additional children.

Source: Jeremy Horpedahl, "The Child Tax Credit." Mercatus Center, May 2015. 

 

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