In my previous post, I described how budget gimmicks prevent politicians from having to explain whether or not the policies they push are pushing desirable social and financial objectives. Here is a good example. Two weeks ago, I wrote about the serious problem with Congress’s attempt to expand the child tax credit. Well, new evidence suggests that opponents of the programs are correct about its short and long term consequences, which go beyond its $1.6 trillion cost over a decade. This new working paper is by Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu and was published by the University of Chicago’s Becker Friedman Institute. The authors find that the behavioral effects of the expanded CTC, such as creating incentives for some parents to work less or leave the workforce, are a much bigger issue than previously documented. The Wall Street Journal Editorial Board has since picked up on these disincentive effects as well.
AEI’s Scott Winship has a great summary. Here is a tidbit:
“[Corinth, Meyer, Stadnicki and Wu] CMSW find that the work disincentives created by the expanded CTC are larger than previous researchers have claimed — perhaps sizable enough to reverse the employment gains caused by welfare reform and the EITC in the 1990s — and primarily impact single parent families. As a result, existing studies have overstated the short-term poverty-reduction impact of the policy by a third. Notably, the NAS committee failed to model the primary behavioral response to the new CTC that would be expected to reduce employment. In contrast, the committee did include such a response in its modeling of an Earned Income Tax Credit (EITC) expansion, when the financial incentives involved would be expected to increase employment.
The CMSW paper does not model all of the potential short-term work disincentives embedded in the new CTC, nor does it model short-term incentives that would be expected to increase the share of children living with single parents, nor any long-term incentives on work, living arrangements, marriage, or fertility that might be expected to work against poverty reduction even more. It does not examine the potentially negative impact of the expanded CTC on other outcomes, such as intergenerational mobility. But by demonstrating the importance of short-term work disincentives (and the blind spot that many researchers have regarding behavioral effects), CMSW have strengthened the case that child allowances might have precisely the
unintended consequences that conservative critics fear.”
The whole thing is a must read here.
The bottom line is that the cost of the child credit expansion isn’t the only or even the biggest concern we should have. Its impact on some people’s willingness to work, marry, and ultimately on intergenerational mobility and child poverty should be front and center of anyone’s concern with this program expansion.
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.
READER COMMENTS
Phil H
Oct 10 2021 at 5:11pm
“…unintended consequences that conservative critics fear.”
Conservatives who hate the idea of parents staying home and bringing up their own children? That’s a very odd framing. I understand it when economists forget that GDP isn’t everything and start talking about how terrible it is if parents don’t work. But conservatives have been pretty consistent on liking the nuclear family and making it work.
Evan Sherman
Oct 11 2021 at 1:52pm
Suffice it to say that the word “conservative” presents a semiotic (vs. political) problem here. It’s no longer clear at all who owns that word. On this issue, for example, factions who would advocate for diametrically opposite policy each have a credible claim to the word.
Labels like that increasingly fail to add value to the political discourse. Better to just specifically say what policies one is for or against and why – as cumbersome as that can be at times.
Floccina
Oct 11 2021 at 1:02pm
But if we have a progressive family income tax, should we take family income and divide by the number of family members to get the tax rate?
Michael Byrnes
Oct 11 2021 at 1:40pm
I’d like oppoents of the CTC to address their own blind spot. Specifically their insitence on conflating “paying someone not to work” (e.g., welfare, pre-1990s reform, as recipients who started working would lose their benefits) with paying someone regardless of whether they work (e.g., the much discussed child tax credit of today).
robc
Oct 11 2021 at 3:27pm
Paying someone not to work is super bad.
Paying someone whether they work or not is bad.
They get conflated because both fall in the bad zone, even if one is worse than the other. Both discourage work. Both involve paying people not to work. The problem some have with the latter, is it is even more expensive than the former, as you are paying everybody. That one doesn’t bother me as much, as I think of it as a marginal tax cut for the working.
But its not the way to do a tax cut. If you want to cut taxes, lower the rate.
Thomas Lee Hutcheson
Oct 13 2021 at 8:22am
“Paying someone whether they work or not is bad.”
I’d say that this is good or bad depending on the income level of the persons receiving the transfer, their income elasticity of labor force participation, the income of the marginal taxpayers and their income elasticity of labor force participation. If you think the answers are Low, Low, High, Low, the transfer looks pretty good. If the answer is Low, High, High, High. the transfer looks pretty bad.
Ms de Rugy did get into this level of analysis.
Mark Z
Oct 12 2021 at 1:08pm
Can you point out where de Rugy or anyone she quotes makes this mistake? I don’t see anyone here saying that the CTC pays people not to work. Or are you suggesting that paying people regardless of whether they work doesn’t cause work disincentives? Because that’s obviously not true (due to diminishing marginal utility). If you paid me 100k a year regardless of whether I work, I wouldn’t work.
Michael Byrnes
Oct 13 2021 at 8:53am
In her previous article posted here, de Rugy analogized the CTC (“a paying people, whether or not they work” regime) to pre-reform welfare (obviously a “paying people not to work” regime).
David Henderson has made the same analogy in posts here.
Both rely on research and analysis by Scott Winship, who also makes the same analogy.
When Winship was asked directly about this obvious difference in incentives between Biden’s CTC and pre-reform welfare, he handwaves it away.
https://www.nytimes.com/2021/02/18/opinion/theres-no-natural-dignity-in-work.html
David Hernerson and many other economists have made the argument that an increase in the top marginal tax rate, even one that many people would call ‘small’ – say, 3% – will disincentivize work by those who see their tax rates go up. I agree.
But pre-1990s welfare reform was a dramatically larger incentive to work. Earn an extra dollar, see your welfare benefit reduced by the full dollar. Not a 3% disincentive but a nearly 100% disincentive.
If one wants to liken Biden’s expanded CTC to pre-1990s welfare reform, one needs to explain why this particular disincentive doesn’t matter.
I have yet to see anyone who opposes Biden’s CTC and makes this comparison even try address the difference in incentives. Even as they write about the ‘blins spots’ of CTC supporters, they neglect to address their own blind spots.
Thomas Lee Hutcheson
Oct 13 2021 at 10:50am
It depends on the job. I’ve had several that I’d do even if I were getting an extra $100,000 on the side. Grated that probably does not apply to working in fast food, but the issue is what is the income elasticity.
rsm
Oct 13 2021 at 12:09am
Can we rethink socially desirable goals? What if working disempowers through specialization in an age where we have the knowledge to self-provision, but state-capitalism coerces us into working only for neoliberal companies who would rather sell subscriptions to centralized, locked-down production than create stand-alone production that can only be sold once?
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