The Case of the Missing Child Tax Credit Reduction
In December 2018, the Congressional Budget Office published a 316-page report titled Options for Reducing the Deficit: 2019 to 2028. Those reports are often useful because they can tell you the implications for the deficit of various changes in government spending and in tax law. This report is relatively comprehensive. It examines dozens of ways in which the U.S. government could cut spending and dozens of ways in which it could increase taxes. Its main strength is coming up with estimates of the effects of each of these ways.
But there’s one big problem: By listing all these ways and leaving out other ways, the CBO is consciously or unconsciously becoming an agenda setter. “You have a suggestion for changing the tax code that would raise revenue? Well the CBO didn’t think it was worth mentioning.”
And actually, I do have a suggestion for changing the tax code that would raise revenue: reduce the child tax credit to the level it was at before the 2017 tax bill.
That bill increased the tax credit from $1,000 per child to $2,000.
A tax credit, recall, is not a tax deduction. It’s a reduction in your taxes by the amount of the credit. And some of it is even “refundable,” the euphemism used to refer to a tax credit doesn’t just reduce your taxes but also has the government give you money when the amount of the credit exceeds what would otherwise be your tax liability.
Why did the Republicans do this? I think for two main reasons. First, they wanted to be able to say that people at all income levels would get a tax cut. Since the vast majority of federal income taxes are paid by the top 50% of income earners, one of the few ways to give people, especially people in the bottom 30%, a substantial tax cut was to increase the child tax credit.
The second reason is that Utah Senator Mike Lee pushed hard for this change. He has been advocating such a change for years, seeing it as pro-family and, probably not coincidentally, pro-large family, of which Utah has more than its share.
The revenue reduction from this increase in the child tax credit is huge. In 2013, the Committee for a Responsible Federal Budget estimated that the lost revenue to the federal government from the $1,000 tax credit was approximately $56 billion per year. (I’m estimating this by eyeballing their graph at this link.) So a reasonable estimate of the annual revenue loss from the $1,000 increase in the tax credit for the years 2019 to 2028 is $60 billion. (I’m assuming some growth in the number of children.) $60 billion a year is almost half of the reduced revenue from the 2017 tax cut, assuming the tax cut causes zero growth. It’s over half of the reduced revenue from the tax cut, given a more reasonable estimate of the growth due to the tax cut.
But unfortunately, the CBO didn’t estimate the revenue gain from returning to the level of the tax credit that existed just 13 months ago.
By the way, ask yourself how successful Republicans were at communicating that this tax cut really did cut taxes substantially for lower-income people.
READER COMMENTS
B Barnhorst
Jan 28 2019 at 7:39pm
“Why did the Republicans do this?” The exemption for children was also eliminated, which was $4,050 per qualifying child. For those in the 24% bracket, the increase in the child tax credit was just a wash for the loss of the exemption. The tax credit phases out at incomes over $400k, so the new system (credit instead of exemption) is better for those in the lower brackets, a wash for those in the 24% bracket, and worse for those in the higher brackets.
David Henderson
Jan 29 2019 at 10:39am
Thanks for that important correction.
The numbers you cite are substantially less bad than I had thought.
The one other big difference between a tax credit and a tax deduction is that the tax deduction can lower someone’s marginal tax rate; the tax credit can’t. There’s no supply-side boost from an increased tax credit. So to the extent the tax credit increase is compensated for by a reduction (in this case, elimination) of the deduction, the net effect for the economy is slightly less output.
Matthias Goergens
Jan 29 2019 at 1:05am
Politically, it’s almost impossible to reduce something called a child tax credit, no matter how bad it actually might.
Same as abolishing something named an ethics committee.
First rename it to something anodyne and perhaps merge it with something else that boring and wonkish. Then you can quietly abolish it.
Alan Goldhammer
Jan 29 2019 at 8:07am
I’m still waiting for the rest of the financial institution data to come in but it looks like my “tax cut” is pretty much nil. My major gripe is that IRS did a poor job in getting information out about how much withholding tax to pay last year. I double checked all my numbers last April and still ended up owing money even with increased quarterly payments to Uncle Sam. From my experience, the increased personal exemptions ($12K apiece for us) eliminated the need for Schedule A itemized deductions. The cap on SALT deductions had a marginal impact.
robc
Jan 29 2019 at 9:29am
I don’t think “refundable” needs to be in quotes. In most cases, I think the refunded amount would be covered by payroll taxes, so it is still a refund and not a transfer payment – it is just refunding from a different tax than the income tax.
I am an example, due to business losses in 2016, I am “exempt” in 2018 from income taxes. But I paid far more in FICA tax in 2018 than I will get refunded due to the child tax credit.
National Jester
Jan 29 2019 at 3:22pm
We ended up being losers in the new tax law. We have moderate income, a majority of which comes from an account managed by an investment advisor. Those fees are no longer deductible so we are stuck with having to take the standard deduction. Our CPA predicted it will cost us $1600 more in fed taxes. Doesn’t seem fair but that isn’t unusual when speaking about our tax code.
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