Democrats’ rhetoric about their expansions of the child tax credit increasingly insists that these new benefits amount to “tax cuts” for middle-class families. As one article recently put it: “In speeches, internal memos, and campaign-style videos, President Joe Biden and the Democrats are increasingly promoting the payments as a ‘tax cut’ for the middle class, rather than a spending program that benefits only lower-income families.” But that characterization is sharply at odds with the proposal’s actual effects, which Democrats would extend for four years as part of their $3.5 trillion budget reconciliation package.
The expanded child tax credit would continue to ship out tens of millions of new monthly government checks, mostly to families who work so little they don’t owe federal income taxes in the first place. Only a small fraction would be devoted to actual tax relief.
The reality behind the proposed extension, and specifically the cost devoted to benefit expansions as opposed to tax cuts, is illustrated below using data from the nonpartisan Joint Committee on Taxation:
The left side of the chart shows that over the next five years, 75% of the cost of the proposed policy, over $400 billion, would be devoted to benefit expansions for parents who don’t owe federal income taxes, compared with just 25% for tax cuts for those who do. The right side shows that the lingering costs of the proposed extension will become entirely about benefit expansions — there are literally no tax cuts for working families at all. In both cases, the largest individual benefit expansions would flow to parents who don’t work.
In budget terms, the issue boils down to the difference between “refundable credits” and tax relief for those who owe income taxes. Refundable credits allow policymakers to provide benefits through the tax code — even to those with incomes so low they don’t owe federal income taxes to start with. Most of the earned income tax credit and a significant share of the former child tax credit programs were devoted to paying refundable credits. But the refundable credit expansion in Democrats’ new policy is so enormous that it has already converted the latter program into one that provides more benefits than tax relief, despite the program’s “child tax credit” moniker and Democrats’ “tax cut” marketing. Along the way, it has made the IRS America’s No. 1 welfare-paying agency, too.
Before this year, the child tax credit was primarily devoted to providing tax relief to working parents. Former program rules also required recipients to work in order to qualify and offered rising benefits when low-income parents worked and earned more. No longer. The policy Democrats enacted on a partisan basis for 2021 swept aside those popular conditions and replaced them with a flat monthly government check payable to all parents regardless of whether they are working or not. Even those “unwilling to work,” as Rep. Alexandria Ocasio-Cortez once put it in promoting her Green New Deal, are on the benefit rolls. That the expanded child tax credit also overturned bipartisan, successful, and pro-work welfare reforms was an added advantage to liberals who long rejected that approach.
Democrats have proposed extending the bulk of this policy for four years in their mammoth spending plan. They would make the expansions permanent if they could only identify the massive tax hikes needed to cover the hidden $1 trillion cost of doing so, just over the balance of the coming decade.
Polling indicates that the public is already wise to what is really going on. For example, the same article describing Democrats’ increasing “tax cut” rhetoric notes that 52% of voters “say they don’t think the policy should be made permanent.” Another poll adding the important detail that these payments flow to all families, regardless of whether they work to earn money or not, found that only 28% of voters supported making the policy permanent. It remains to be seen how that proposal will be pared back and whether it can even pass, but that abysmal support suggests people rightly recognize this proposal is really about benefit expansions and not tax cuts, Democratic rhetoric notwithstanding.
Matt Weidinger is the Rowe fellow in poverty studies at the American Enterprise Institute.
