Hillary Clinton has proposed two important changes to the child tax credit (CTC). The first would phase in the credit starting with the first dollar of earnings, a change that would make very low-income workers eligible and increase assistance for workers with earnings too low to receive their full CTC. The second would double the credit for children under age 5 to $2,000 and accelerate the phase-in, insuring that even low-income families could benefit from the increase. These changes would reduce revenues by $209 billion from 2016-2026.
Today’s CTC provides a credit of up to $1,000 for each child under age 17. The credit phases out at a rate of 5 percent of income over $75,000 for single parents or $110,000 for married couples. Workers who qualify for a credit that exceeds the tax they owe can receive part of the credit as a refund (known technically as the additional child tax credit—ACTC—or the refundable CTC). Workers can receive a credit of 15 cents for every dollar they earn until they reach the $1,000 maximum. But that only starts after they’ve made $3,000. As a result, about 10 million children in the poorest families receive a credit of less than $1,000 because their parents earn too little to get the full CTC.
By removing the $3,000 refundability threshold, Clinton’s plan would direct about $15 billion towards the poorest workers—something I have suggested in the past and that Rep. Rose DeLauro (D-CT) and Senator Bennet (D-CO) have proposed in recent legislation. About 85 percent of the additional benefits would go to families in the lowest fifth of the income distribution and almost all of the rest would go to workers in the next fifth. The change would also simplify taxes by making the CTC consistent with other tax benefits that phase in with earnings, including the earned income tax credit (EITC).
The second piece of Clinton’s plan would also increase benefits for many low- and middle-income families with young children. Each child under age 5 would qualify for a $2,000 credit, double what they can receive now. The refundable credit would phase in at 45 cents per dollar of earnings, up from today’s 15 cents. Thus even very low-income families could receive their full credit. For example, a family with one child (under age 5) currently has to earn $9,667 to get the full $1,000 credit. Under the proposal, that family would get a $2,000 credit once their earnings exceeds $4,445. Research shows that the most effective and efficient investments in children are those made when they are very young, so even relatively small boosts in income during these critical early years matter.
Members of both major political parties (including former Presidential contender Marco Rubio) have proposed increases to the CTC. And there are lots of options out there for improving the program. Perhaps one of them will find its way into bipartisan legislation next year.
This article first appeared in TaxVox.