Child tax credit: Potential game changer for American families
INSIGHT ARTICLE |
Authored by RSM US LLP
One aspect of the American Rescue Plan signed into law in March included an extension of the child tax credit, first enacted in 1997, to send direct aid to families.
Those aid checks, for families with children making up to $150,000 for a couple or $112,500 for a single parent who is head of household, began arriving in American family pocketbooks during the week of July 15. They will provide an additional boost to overall spending at a time of rising risks to the spending outlook linked to the spread of the delta variant.
Now that child tax credit could be made permanent if the House and Senate pass the measure.
We estimate that the expanded child tax credit already approved will result in a roughly $35 billion increase in consumer spending over the next year, bolstering both employment and business growth.
This is based on estimates by the congressional Joint Committee on Taxation and an assumption of a fiscal 1.4 multiplier, which is consistent with the 1.22 fiscal multiplier for lump-sum payments during the Great Recession.
The expanded child tax credit provides aid for the most part to the three lowest quintiles of income earners—or those who tend to spend any additional income that comes their way.
We think that the economic shock and the follow-on policy support by both the fiscal and monetary authorities create the conditions for a modestly higher fiscal multiplier given the already elevated level of savings. Conditions are ripe for the more modest increase in spending implied by our estimate.
The extension of the tax credit increases payments from $2,000 to $3,000 per child for children over the age of 6 and from $2,000 to $3,600 for children under the age of 6, and raises the age limit from 16 to 17.
Since the legislation increases payment amounts, expands eligibility and makes the credit fully refundable –previously it was only partially refundable—it will increase aid to families and boost overall economic activity.
The direct objective of the expanded child tax credit is to reduce poverty and secure a direct flow of aid to families to meet daily costs.
Perhaps more important, half of the credit is being directly disbursed to families in the current calendar year. This program provides aid for the most part to the three lowest quintiles of income earners, including the beleaguered American middle class.
The direct objective is to reduce poverty and secure a direct flow of aid to families to meet daily costs. According to the Congressional Research Service, the expansion of the child tax credit will reduce the child poverty rate from 13% to 7%. Based on that group’s scholarship, 96% of families with children will benefit from the expanded credit, up from 84% previously.
Because almost all of the direct cash payments are going to low- and middle-income households, recipients will have a higher marginal propensity to consume all the additional income and save little of it. Most of the cash payments will be spent bolstering growth in the national and local economies.
The credit then declines with families above the income limits. It is phased out for couples with two children earning $480,000 and for single-parent households above $280,000, with some variation around top income levels depending on the number of children in the household.
Costs and benefits
The Congressional Budget Office estimates that it will cost the federal government more than $100 billion once lost revenue and increased outlays are accounted for.
But research conducted by the Center on Poverty and Social Policy at Columbia University estimates that the federal government will recapture most of those costs through lower outlays on health care and crime prevention, and through increased future tax revenues linked to the child tax credit.
Why is that? Because the research shows that the long-term benefits of the child tax credit include higher future lifetime earnings and improved health-related outcomes that are roughly eight times larger than the costs of the program.
Here is how it works: A hypothetical family with $100,000 in annual income with two children under six now receives a child tax credit of $7,200. That is an increase from $4,000 previously. But unlike the previous lump-sum benefit that was taken when filing taxes, the household now receives half ($3,600) of the total benefit in six monthly installments of $600 between July 2021 and December 2021. They then receive the balance ($3,600) of the tax credit when filing their 2021 tax return in 2022.
This program is authorized only through December, with the remaining balance of the credit to be disbursed by the spring of next year. So extending the tax credit will be part of the policy narrative and budgetary debate heading into the midterm elections next year.
The cost of making the extension of the tax credit permanent will be large. Congress and the administration should consider tax and spending measures to support it if lawmakers decide to reauthorize the program. But the long-term benefits of investment in such social infrastructure should be integrated into any cost-benefit analysis. In our estimation, the fiscal authority should strongly consider making this program permanent.
Call us at (509) 663-1131 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Joe Brusuelas and originally appeared on 2021-10-05.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Homchick Smith & Associates, PLLC is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Homchick Smith & Associates can assist you, please call (509) 663-1131.