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Timothy Smeeding on Proposals for a Refundable Monthly Child Tax Credit

  • Timothy Smeeding
  • March 04 2021
  • PC92-2021

Timothy Smeeding
Timothy Smeeding

In this episode, Timothy Smeeding talks about proposals from Senator Mitt Romney and from Democratic leadership for a fully refundable monthly child tax credit or child allowance and how these types of policies could reduce child poverty and help working parents in the pandemic and beyond.

Smeeding is the Lee Rainwater Distinguished Professor of Public Affairs and Economics at the La Follette School of Public Affairs at the University of Wisconsin–Madison. He was Director of the Institute for Research on Poverty from 2008–2014.

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Chancellor: Hello, and thanks for joining us for the Poverty Research and Policy podcast from the Institute for Research on Poverty at the University of Wisconsin–Madison. I’m Dave Chancellor. For this episode. We are going to be talking with Timothy Smeeding about policy proposals that have come from Senator Mitt Romney and from Democratic leadership for a fully refundable monthly child tax credit, which is sometimes referred to as a child allowance. Smeeding is a former director of the Institute for Research on Poverty. And we talked a little bit more about his background when we started the interview. So, let’s get to it.

Chancellor: Tim, thanks for joining us for the Poverty Research and Policy podcast today, so your full title is, you’re the Lee Rainwater Distinguished Professor of Public Affairs and Economics at the La Follette School at the University of Wisconsin–Madison. And you’re a former director of the Institute for Research on Poverty. Can you tell me about the kind of research that you do?

Smeeding: Well, since I came to Wisconsin, I’ve been interested in poverty and inequality. I wrote my thesis as an IRP research assistant for Bob Haveman on the anti-poverty effect of income transfers. That was in 1975. I continued that interest. I started something called the Luxenberg Income Study. It was major project, where you could compare incomes across people over time and across countries. And that’s where I learned about this idea of a child allowance.

Chancellor: We’re talking about fully refundable monthly child tax credit here, which we’ve called the child allowance, and so there’s been a version of this put forward by Senator Romney and another by Democratic leadership. But before we go into what each of these plans would entail, can you help us understand what a child allowance is? What’s going on there?

Smeeding: The generic name for a refundable child tax credit paid monthly as a child was paid to all people monthly. That’s what’s the generic name. It’s called the child benefit in Canada. It’s called by other names in other countries. Child allowance is actually the name that they use in England and in Ireland and also child benefits, another name in Australia. But what it is, it’s a refundable child tax credit payment. Now we have a child tax credit right now, two thousand dollars that’s paid annually and it’s extended to 65 percent of American families with income, roughly forty thousand dollars a year to four hundred thousand here. It doesn’t help lower income people who either don’t have enough earnings or have no earnings, and those are the people who really need it. So we hope sixty five percent we help or in some way the wrong people if we extend the child tax credit to all children under age 18, regardless of family incomes, and we figure out how to pay it monthly. We’ve got a child allowance. That’s it. The monthly child allowance is neither taxable for income tax purposes nor accountable for means tested benefits. It’s just what you get. Same way after taxes we get two thousand dollars per child off our taxes as a two thousand dollars paid directly to you. Your income isn’t high enough for whatever reason to pay taxes. OK, it’s not accountable for means tested benefit, so it doesn’t count against your eligibility for SNAP or anything else. It’s not the same as the earned income tax credit we keep, we’re keeping your income tax credit, that’s your reward for working. And you get that once a year that would stay just the way it is. But if you put EITC with the child allowance and some additional childcare support that Biden is included in his plan, that would mean consistent monthly child support, a strong incentive for added market work in addition to secure income for kids, that stability where you needed it. So that would be the right thing. And now others suddenly want to expand on that idea. Child poverty wasn’t a big presidential topic, but some of us were able to get to the Biden team, in particular Jared Bernstein and others, and convince them that we should be doing this. And Biden picked up on the plan that was proposed in twenty nineteen by Senators Bennett and Brown and by Rosa DeLauro and another person, and DelBene in the House. It’s called the American Family Act, almost every Democrat signed onto it. And that’s kind of the plan. But conservatives have come on too. Sixteen conservatives say to the child allowance benefits are best. They benefit non-working mothers, unlike subsidies for just for childcare. And they want them. And as the crisis deepened needs and expanded the country’s notions about what government can spend and what did you do for poor kids? This idea has popped up now.

Chancellor: We’re thinking about these child allowance plans or this monthly refundable child tax credit in response to the COVID-19 pandemic that we’re in, to help out families who are clearly in need right now. But you’ve been pushing for this for a long time. And I mean, you’ve talked a little bit about this here. But broadly speaking, what would a child allowance like this do that’s not happening right now?

Smeeding: That’s a great question, Dave, So the question is now, why now? Well, the child allowance idea is attractive to both sides. It reduces child poverty by 40 to 50 percent, provides relief for parents struggling with the increasing cost of raising children made worse by the uncertainties of the pandemic. Now, these uncertainties were there before. We have lots of evidence from before. The family incomes varied all over the place. We have lots of evidence, from IRP Brief by Anna Walther that, in fact, low income families would trade 20 percent of their income for a lesser amount in a stable and reliable and regular. So, stability is really important to overcome stress. You know something’s coming. You don’t worry so much, you’re a better parent and so forth. It stabilizes and reliably supplements incomes every month, something that low-income families relish. It might also have a positive impact on fertility and having children. Now, when we first talk about the challenges, all people would just have children to get the dollar as if that’s bad. Now people say we hope people have more children because of the child allowance, because our birth rates are really low, far below replacement and the conservatives in particular like that effect. Now, I got news for them. The best research that’s been done in Australia and in France shows that birth rates don’t really respond really well to the allowance. It produces positive long-term effects and poor children from education gains, avoiding crime, graduating and earning more money as adults. It has tremendously positive effects on kids and there’s evidence to that. And most importantly, there’s two most important things. One is that it’s highly visible evidence that government can indeed do something positive for poor families with kids. So in other words, if you’re doubting government and government’s ability to do something, all of a sudden, one about half the kids in this country, the lower and middle income kids, you start seeing poor white children in Appalachia and poor kids in rural Wisconsin, their parents are suddenly getting this every month. You see black kids living in Detroit and Gary in Cleveland and Buffalo, their parents are getting this every month and all over the rest of the country. When you see that the citizen bored children of US immigrants where US citizens have Social Security numbers and should be eligible, are getting this help every month, you suddenly realize government can do something for you. And if I’m in Congress, I want to join the president, say we did this together. I want the credit. But most importantly, last point is a monthly child allowance treats children as public goods, not just as a private responsibility for parents alone. It makes all kids deserving of unqualified public support, regardless of the work status of family and in this way, it’s just like K 12 education, which is available to all kids in our country free at public school, they may vary in quality, but it’s available and health care in almost every other country in the world where children are entitled to basic health insurance. So, this is the income component that goes with health and education to help kids get started right in life, and it doesn’t care of their gender or neighborhood or ethnicity. That’s really important in the way you administer the program to say more about that later.

Chancellor: I want to go back to looking at these two planes from Senator Romney and Democratic leadership and can you help us understand what these plans have in common and where they’re different?

Smeeding: What we know, we have the two thousand dollar a year, one hundred and seventy a month CTC. And one of the things that came out of our academy report was we recommended that you just take the current one and extend it down to everybody. 20 kids would cost thirty two billion dollars and it gets a 30, 35 percent reduction of poverty. So that’s the plan. OK, but neither Romney nor the president or the Democrats want to be cheap about it, OK? They both say they want to raise that amount of money to stabilize income. Both proposed three thousand a year two-fifty a month for all kids, six and 17, exactly the same. Now, when I met with Speaker Pelosi and her staff, she was very interested and she said young kids are more expensive, investing in young kids, it gives you better outcomes. So, I want to give them 50 dollars a month more. And so, the House bill and the American Family Act gives an extra 50 dollars a month for kids under six. So that’s three hundred a month for kids under six. Romney said, I’ll do you one better. I would add one hundred a month. The under six is three hundred and fifty per month or forty-two hundred dollars a year. Romney wants to be more generous there. Now, the big difference is Romney’s plan is going to go for five years and he’s going to fund this program by cutting other programs, including the earned income tax credit, the child care support. I’ve talked to friends at the American Enterprise Institute and elsewhere said, wait a minute, you guys are all interested in whether people go to work, here is a Republican who’s all about work and he’s just disincentivizing work. He’s taking away subsidies that help people go work. What’s wrong with it? OK. But it would be for five years. And he has other ways of covering it. But the biggest bang for the buck for his budget to pay for it is reducing your earned income credit. It’s a bad idea. Biden it wants to expand both the Child Care Development Fund, which goes to poor people through the same mechanism. And he wants to expand a child tax credit like Jim Ziliak had proposed. The same one was in our National Academy of Sciences report. So Biden wants to expand it. There’s another difference. Now, Biden hasn’t said it’s in the paper. The difference is that his plan is that we need it now. Let’s not ask questions now. Next year, we’ll have a tax bill and figure out how to pay it. And we probably will have a tax bill next year. There are a lot of provisions that the Senate Republicans like to subsidize oil and gas exploration and other special issues in the tax code that benefit certain industries in their states. When we had that bill, then at that point we should say, OK, now we have to pay for this and here’s how we’re raise money. So that’s thinking them. Also, two big differences are that Romney and me and the National Academy all want to deliver the child allowance to the Social Security Administration. Social Security Administration knows how to deliver checks to deliver pay benefits. It does it every month for the elderly. They would do it for kids. They know how to make sure to fill out forms and make sure that the right parent is getting the money in case the changes or the money split if there’s a divorce. They have eleven thousand offices around the country and you can walk in and actually talk to person. You don’t have to do it online or spend four days on hold waiting to talk to someone. On the other hand, the Democrats, for some reason, primarily because of Bennet’s staff, I think, in the Senate want to use the IRS. Now, the Internal Revenue Service has never done anything like this. The word IRS scares poor people because they do lots of audits and the earned income tax credit and somehow the IRS is going to invent a whole new structure and start paying out benefits monthly by July. Maybe, maybe not. And that’s a big sticking point right now. We really need to make sure we can deliver this. How can we make it work?

Chancellor: OK, so you’ve talked a little bit about this National Academy report, and for folks that want to look this up, this is called the Roadmap to Reducing Child Poverty. And you looked at a number of programs that could potentially move the number on child poverty. And but with the goal of reducing it by half, what it seemed that you found is you can do a lot of different things, but without something that’s pretty universal like this, you’re not really going to get the numbers that you want to use that. Is that about right?

Smeeding: Let me give you a little background about the academy report. What’s important? First thing in Chapter two, for the first time, the National Academy of Sciences said unequivocally that poverty hurts children. There is a causal evidence that regardless of your race, ethnicity, your locality, your neighborhood, your family structure, poverty independently reduces life chances. That was a huge thing to say. So, we know that income matters. The second thing was that we also established we worked with a couple of psychologists, especially Elder Shafir, who looked a lot at the way that stress affects low-income families. And we found that the stresses of daily life among the poor have created lots of pressure on. Parents are worried about food, shelter and more, and these affected kids negatively, including their brain development early on in life. So, they made parents unbearable. A lot of stress in their kids. There, as you said, we looked at 20 different policies and variance of each and the challenge to the best of about. It slightly reduced work effort. We’ll talk more about that later, but then we thought about policy packages, the way of taking a child allowance and combining it with other programs like the EITC, a higher minimum wage, more childcare support, which had a huge and positive effect on work so that we are both more work and basic income support. OK, and in the end, it seemed to me we didn’t recommend anyone. We couldn’t get consensus about what to do. But the simplicity of delivering systems and overcoming complexity and benefit take ups and so forth. You know, we had lots of policy recommendations, but the one that came through, I think, and that people apparently like the best place in the world for sure. Lots of white writers is the child allowance. I’m glad that it rose. It rose out of our responsibility towards what people really look for the report is as the right thing to do.

Chancellor: So, in the weeks since we’ve begun to hear about these plans, a lot of the questions have sort of centered around overall cost of this, which you’ve talked about a little bit here, and then concerns over whether it might just incentivize parents, some working. And finally, just questions about who should be eligible, maybe how far up the income ladder that should go. What’s your take on those issues?

Smeeding: Those are really important issues. The Biden plan costs one hundred and ten billion a year. This is the cost the child allowance part. Look, it’s not small, but there’s an eight to one benefit cost ratio for doing it. It’s large in terms of a long-term outlay, but it’s nothing when you put it in as part of a tax bill. Tax bills talk about trillions and half a trillion.

We decide we want to support it, we’re giving these benefits to all sorts of other kids all the way up to three and four hundred thousand, at least for the Romney plan. Now, that’s something else I should have commented on. The Biden plan cuts off earlier. We’ll talk about that in a minute. When you talk about the cutoffs, but it seems like it’s a good investment and particularly a good investment right now. And when we’re in the midst of the pandemic, in the recession, it’s turned out it’s been a great move for Canada. Canada is very happy with theirs, which is much bigger than ours. OK, Canada’s four hundred bucks a month again, and they’re spending more money on housing and school enrichment. People are working more because they can find time to work more and find jobs that may not pay as much, but which offer them regular day work so they can spend time with their kids and all that. So, the Canadians love it. And there’s a lot of evidence why the Canadian plan works now. How about working? Offering what the right says is offering parents a cash subsidy would discourage work. Well. Not it. Let’s think about it that way. This is a standard welfare banana that gets thrown up. The classic way that welfare discourages work is by reducing benefits as earnings grow. OK, so in other words, the benefits are clawed back if you make an extra dollar. And you’re living in public housing and you’re getting SNAP, you lose more than half of that in terms of paying more for your rent and in terms of getting less in the way of food stamps. The child allowance doesn’t work that way. You don’t lose any of it if you work more. OK, this is a key point that conservatives don’t understand. Gives families a full amount until they’re solidly middle class. Every dollar earned would be a dollar gained. It doesn’t go away. It’s a platform. Now, we estimated a challenge to reduce earnings by under two thirds, one percent.

One hundred and ten thousand fewer people would go to work, it was one hundred ten thousand fifty jobs. OK, the policy involves tradeoffs, maintaining ninety-nine-point four percent of work effort while cutting child poverty. More than forty five percent is a good trade off, a trade-off that we should be able to do, and that’s all it does. You know, as I said before, in our packages, Greg Duncan and I, I’ve written about this in the Proceedings of the National Academy of Sciences and elsewhere, if you had a little bit of more child care, a higher minimum wage and better EITC, they’ll do more to incentivize what those would push three times or four times as many people to work. So, the combination of the two is important, and that’s where Romney is cutting back on childcare support and the earned income credit is wrong, that why he might end up discouraging work. But the Democrat plan, where you’re going to have support for childcare, get paid more when you do work. And have at least the current EITC. That means more work, not less for now. Where do you cut it off? Is it important that the current two thousand dollar a year child tax credit only cuts off the top two percent of families with kids? You have to have one of the few hundred thousand dollars a year in taxable income and more than one hundred two hundred thousand dollars a year for a single person. That’s rare and very few people. And so under the Romney plan, which would just go down, would subsidize it all the way down to cover everybody. You really got it. Almost universal child allowance. Now the Democrats are thinking people will make four hundred thousand dollars a year, don’t need an extra two or three thousand bucks a year to raise their kids, which they probably don’t.

So, they won’t be out. To save money, it makes it cheaper if you place it out around seventy five thousand for a single head of household and about one hundred and twenty five to one hundred and fifty thousand for a couple so they want to phase out their paycheck. Now does it hurt you? Most people at these levels aren’t going to get it monthly anyway. And it just means you’re withholding changes as your income goes up there and you pay a little more in taxes. And that’s all in Washington with everything else. So I personally, I’m somewhere I could live with the Biden thing to save money. But I also understand the conservative side that subsidizing everybody’s kid is more universalistic. It either way, it works out OK. It will be more expensive if we give it to the rich as well as the poor. But I can live with either one.

Chancellor: If a policy like this was adopted, I mean, this would represent a change in the way that we fight child poverty in the US. Right. What do you think are the keys to getting this right? And you’ve talked a lot about implementation, but what else?

Smeeding: The key is we have to get this out there and we have to deliver it without hassle, relatively visibly. The nice thing about a child allowance, OK, unlike SNAP programs or public housing programs where you might not find a partner if you’re of the wrong race or where in some parts of the country, it’s really hard to qualify and maintain eligibility and a lot of administrative burden. That’s not there. That’s not what you were the parent. This is your child. This is your child’s Social Security number. When you start getting paid and you continue to get paid every month regularly until you’re no longer the legal guardian of that child or that child turns 18, that’s simplicity. That’s straightforward. That’s no hassle. That’s not complex. You don’t have to requalify every month and so forth. So, the big thing is the monthly bonus. We have to get that out there for sure. And if we’re getting it to the right people on a regular basis, it will reduce instability and allow parents to plan the budget better on a regular basis. And it’s without a doubt the single best plan we have to reduce child poverty permanently. There is no good substitute for it, and I think agreement is growing and I surely hope that something will be passed in the next month and that I will have a big smile on my face for a long time after that, knowing that we’re kids and have a better chance of success after this policy than before.

Chancellor: Thanks so much to Tim Smeeding for taking the time to talk to us. If you’d like to learn more about the National Academies report on reducing child poverty, you can find that on the National Academies website or for a shorter version, check out IRP’s September 2019 Focus issue on the report. This podcast was supported as part of a grant from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation. But its contents don’t necessarily represent the opinions or policies of that office or any other agency of the federal government or the Institute for Research on Poverty. Our theme music for this episode is Staring Straight by Maarten De Boer. Thanks for listening.


Child Development & Well-Being, Child Poverty, Children, Economic Support, Employment, Family & Partnering, Family & Partnering General, Inequality & Mobility, Inequality & Mobility General, Labor Market, Low-Wage Work, Social Insurance Programs