A centerpiece of Vice President Harris’ recently released economic plan is a revised child tax credit that would give families $6,000 for each newborn and up to $3,600 for older children, up from the existing tax credit of $2,000 per child. Her proposal follows vice presidential candidate JD Vance’s recent call to increase the tax credit to $5,000 for all children.
While the increased amounts have attracted most of the attention, a key motive for these proposals is to ensure that low-income working families receive the maximum credit. Working families who pay little or no income tax currently receive only a partial credit, a practice Senator Wyden, Democrat of Oregon, calls “economic discrimination.” Along the same lines, Mr. Vance laments the “massive cut” to the current credit for low-income families, while Ms. Harris aims to provide more assistance to the “most hard-pressed working families.”
There is just one problem. When you look at the total amount of government assistance, low-income families are treated far more favorably than middle-class families, receiving tens of thousands of dollars more each year.
Consider a mother and father with three children. One parent works full time and earns $10 an hour, while the other stays home with the kids. Without government assistance, this family would survive on just $20,000 a year, making it nearly impossible for a family of five to make ends meet.
But in reality, the family is receiving tens of thousands of dollars in government assistance. They receive $2,600 from the existing child tax credit – but that is $3,400 less than the maximum amount available to middle-income families. But that shortfall is more than made up by the $7,400 they receive from the earned income tax credit.
They also receive over $12,000 in food stamps. The family earning $20,000 alone actually earns more than $42,000 when you include the guaranteed government subsidies from these three programs alone. It may still be hard to make ends meet, but their means are more than doubled by the government assistance.
But that’s not all. The family is generally eligible for free health insurance through Medicaid, which costs the government about $20,000 annually for the average family. Some families receive housing certificates or other rental subsidies worth more than $10,000. Others receive additional assistance in the form of welfare, energy subsidies and other nutrition programs. The total government subsidies could increase the family’s income from $20,000 to more than $75,000.
That hardly seems unfair.
These facts have not stopped calls to spend even more on these families. The Harris plan provides an additional $10,000 for young families. The Vance proposal provides more than $12,000. This means that the entire federal aid package would more than quadruple a family’s income. An income of $20,000 would become almost $90,000 for some families when the entire aid package is taken into account.
And what about the middle-class families who are supposedly better treated under the status quo? Take a family with two parents and three children making $80,000 a year. They get the full $6,000 child tax credit, but that only offsets the nearly $6,000 they pay in federal income tax.
In contrast, the low-income family will receive a check for $2,400 despite paying no federal income tax at all. The middle-class family will also get nothing from the Earned Income Tax Credit, nothing from food stamps, and nothing from most of the other programs available to the low-income family. They may get a tax credit to help offset the cost of health insurance, but it will not be free.
To be clear, there is nothing wrong with government assistance programs helping low-income families. But let’s not pretend it’s an economic injustice when one part of the tax code modestly benefits middle-class families by offsetting their taxes, while our other tax and transfer policies send tens of thousands of dollars more to low-income families.
Instead, we should focus on helping low-income families earn more on their own so they don’t need as much assistance. Our current programs prevent upward mobility by phasing out assistance as incomes rise. This discourages taking steps to move up the career ladder and, worse, penalizes single parents when they marry a working partner. Reducing marriage penalties and building skills should be the top priority when it comes to helping low-income families.
Politicians who focus on the perceived injustice of the child tax credit are missing the bigger picture. We already provide a lot of resources to low-income families. What we need now is to help them move up through strong families and improved skills.
