Designing a Better Child Tax Credit: Accounting for Effects on Poverty, Parental Employment and Government Budgets

In the ongoing debate about optimal strategies to reduce child poverty, policymakers have assessed cost-effective ways to reduce poverty that do not discourage parental employment. The policy at the center of this debate is the child tax credit (CTC), and a key question is whether CTC benefits should be available only to workers or also to the poorest nonworking or low-earning families.

The design of the CTC affects parental work incentives, which in turn affects the CTC’s net effect on child poverty. While giving money to low-income families is sure to pull many out of poverty, if these payments have the unintended effect of discouraging parents from working, the net poverty decrease may end up being small. There is strong disagreement about how a permanent CTC change might affect poverty and parental employment.

This paper presents three distinct ways to adjust the CTC and analyzes the following for each: poverty, parental employment, total cost and cost per child pulled out of poverty. Each proposal increases maximum CTC benefits to $3,000 per child and phases out benefits in an identical way. The key difference among the three proposals is whether benefits are restricted to working families.

CTC proposal #1 increases the existing 2022 CTC and restricts benefits to workers; proposal #2 resembles the temporary 2021 CTC that was available to both working and nonworking families; and proposal #3 is a combination that provides some benefits to both workers and nonworkers, as well as additional benefits to working families.

Most political debate has focused on versions of proposals #1 or #2. Those on the political right tend to be more in favor of giving benefits only to those who work, such as the approach examined in proposal #1; those on the political left tend to favor benefits for both workers and nonworkers like the approach shown in proposal #2. Proposal #3 has the potential to be a bipartisan compromise—a policy that both reduces child poverty and has a small (potentially even positive) impact on parental employment.

By analyzing these CTC proposal options through these lenses, this paper provides policymakers with the tools needed to design a new CTC that pulls millions of children out of poverty in a cost-effective way while minimizing work disincentives for parents.