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Policy Considerations for Child Allowances

By enacting a temporary expansion of the Child Tax Credit (CTC) as part of the American Rescue Plan (ARP), lawmakers took a major step towards introducing a permanent child allowance. Indeed, just last month, the IRS began issuing monthly payments to most households with children. Those regular payments, however, will stop at the end of 2021, when the ARP provision expires. With bipartisan interest growing around the concept of a child allowance, lawmakers should adopt a durable and permanent child allowance plan while addressing the implications for workers and federal fiscal policy.

Background 

First, the basics. A child allowance provides a flat, periodic per-child cash benefit, with the goal of helping families offset the costs of raising children throughout the year. In its simplest form, a child allowance would go to all families regardless of income so that those with no earnings receive the same monthly per-child check as those with the highest earnings. In practice, however, policymakers in countries that have adopted child allowances tend to provide the full benefit for families with no income while phasing it out for families further up the income distribution. Many iterations of a child allowance in other countries provide a larger benefit for young children, recognizing that parents of young children often face significant child-related costs while earning less income than parents of older children.

This year, legislative momentum toward adopting a child allowance progressed as Democrats passed the ARP along party lines, effectively transforming the CTC into a child allowance for 2021. In particular, the ARP made the CTC fully refundable so that families without federal income tax liability can receive the full credit, eliminated the credit phase-in so families without any earnings can receive the maximum benefit, and directed the IRS to pay benefits periodically. The ARP also increased the maximum CTC from $2,000 to $3,600 for children under age 6 and to $3,000 for children ages 6 through 17.1

On the Republican side, the Family Security Act, proposed by Sen. Mitt Romney (R-UT), would transform the CTC altogether with a monthly child allowance administered by the Social Security Administration. Romney’s plan would provide $4,200 per year ($350 per month) for children under 6 and $3,000 per year ($250 per month) for those between ages 6 and 17. If families have multiple children, the total household child allowance benefits would be capped at $15,000 per year ($1,250 per month). This effectively caps a family’s benefit to four or five children, depending on age. Romney’s plan would fund the new child allowance, in part, by scaling back other portions of the social safety net. Specifically, it would reduce the Earned Income Tax Credit (EITC) and eliminate the Child and Dependent Care Tax Credit (CDCTC) and the Temporary Assistance for Needy Families program, among other changes.

Both the ARP and Romney’s proposal would phase out the child allowance for higher-income families.

Policy Considerations

The permanent adoption of a child allowance would have significant implications for poverty, work, and the federal budget.

Child Poverty

According to a study by the National Academy of Sciences (NAS), a child allowance is among the most effective policy options for reducing child poverty. In particular, the NAS study found that introducing a $250 per month child allowance would reduce child poverty by 5.3 percentage points (from 14.4% in 2019), the most of any policy examined—the reason being it would support the neediest families that work-based benefits, like the EITC, are unable to reach.

A child allowance would also help smooth income volatility, enabling families to better meet financial needs throughout the year. Low-income adults often have tenuous job security and volatile incomes. When these families lose earnings, they also lose federal and state safety-net benefits that are tied to earned income. Even short spells in poverty can do lasting harm to a child’s development—a worry that is especially great for children of color, whose parents’ unemployment rates are higher and more cyclical than white workers’. By delivering monthly direct cash payments that don’t depend on earnings, a child allowance would provide vulnerable families with a steady stream of income to help afford necessities and stabilize finances when household earnings fall.

Lastly, raising the incomes of low-income families has been shown to have long-term benefits for children. Giving low-income families cash or benefit equivalents causes their children to grow into adults who have higher educational attainment, are more likely to be employed, earn more, are less likely to live in poverty, are healthier, rely on fewer government benefits, live in better neighborhoods, and commit fewer crimes. In other words, a child allowance could not only alleviate poverty in the near term, but—like education or children’s healthcare—reduce the lifelong consequences of child poverty.2

Work

Since a child allowance goes to low-income families regardless of earnings and does not require recipients to work, it would reduce poverty exclusively through direct cash assistance rather than motivating increases in earned income. As a result, a child allowance does not share the major advantages of other safety-net programs that combine cash transfers with work incentives.

By contrast, the EITC—a combined transfer and work incentive—both increases the immediate income of low-income families and encourages adults to participate in the labor force. Indeed, only about half of the poverty reduction generated by the EITC is a result of the credit’s cash transfer—the other half comes from the increase in earned income caused by the credit. Programs that incentivize work may also increase a recipient’s skills, experience, and attachment to the labor force, thereby improving their employment and earnings outcomes. Child care support also helps improve the long-term outcomes of children.

Moreover, because the child allowance would be available regardless of earnings, it may reduce work among certain populations. For instance, the NAS study estimated that a $2,000 annual child allowance would result in 60,000 fewer workers among families with incomes below 200% of the poverty line, while a $3,000 child allowance would lead to 120,000 fewer such workers. While the reduction in work is likely to be small, it could be mitigated by pairing it with reforms to further support workforce attachment, such as a stronger EITC or greater support for child care.

Advantages of Simplicity

By virtue of its simple design, a child allowance would have several administrative advantages. For example, if it did not vary with earnings except for high-income households, payments would be predictable and straightforward for most families. This makes it easier for federal authorities to deliver benefits in monthly installments. Additionally, a child allowance would likely have far fewer improper payments than a program like the EITC, which has a more complicated design.

Fiscal Implications

While a child allowance could provide substantial social and economic benefits to families, it would also come with a significant price tag. In particular, the Congressional Budget Office projects that the CTC expansion enacted by the ARP will cost the federal government $109 billion in 2021. Making the expansion permanent would cost $1.3 trillion over 10 years.

Meanwhile, Romney’s proposal to convert the CTC into a child allowance would increase spending by roughly $1.1 trillion over 10 years but fund that spending by scaling back other portions of the safety net. It may be unrealistic to fund a child allowance largely by reducing other safety-net spending targeted to children and families. Romney’s package, however, provides an important reminder for any reform effort to consider the overlapping objectives of the existing patchwork of government programs for this population.

One option to curb the overall cost of a child allowance is to cap the benefit at a certain number of children. This would acknowledge the economies of scale in raising children, as the marginal cost of raising a fourth or fifth child is less than that of raising a first or second. Another would be to phase out the allowance so that it is targeted away from higher-income households, acknowledging that they already have the means to cover the cost of raising children.

Conclusion

As lawmakers consider continued expansions to the CTC or the adoption of a child allowance, it is important to weigh the associated tradeoffs and fiscal implications. The best way to do so is to examine the introduction of a targeted child allowance—unavailable to those with the highest incomes—in the context of the broader social safety net and to enact reforms adequately balancing financial support with rewarding work. A hybrid approach would best meet these goals—BPC proposes creating a minimum allowance for families no matter how low their earnings and phasing in an additional benefit as families earn more. To further encourage work, BPC’s solution would also increase the EITC. These elements combined would ensure that child benefits reach the neediest families and still incentivize work.

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End Notes:

1 Under prior law, the maximum age of children who could be claimed for the CTC was 16. This will be reinstated when temporary ARP provisions expire on December 31, 2021.
2 There are quibbles to pick with whether each paper we cite here generalizes to a child allowance—one program also increased parents’ cash on hand when their child was about to enter college, another simultaneously raised the returns to education; one paper studied a near-cash transfer, another a program that raised parental employment along with income. But the overwhelming amount of evidence across several programs—and the evidence that cash transfers produce effects, like higher test scores and more positive socioemotional development, that should improve adult outcomes—persuades us that a child allowance is likely to produce similar effects for low-income children.

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