The Child Tax Credit is the second-largest provision in the U.S. tax code (after the Earned Income Tax Credit) benefiting families with children. The CTC was enacted in 1997 and has been expanded with bipartisan support since 2001. The tax credit helps working families offset the cost of raising children. In 2016, the Urban-Brookings Tax Policy Center estimated the credit would deliver $57 billion to 35 million families with children. 1 (See Figure 1.)
The Child Tax Credit provides up to $1,000 per eligible child (under the age of 18 at the end of the tax year and only for a U.S. citizen). Taxpayers can deduct the amount of the credit from the total amount of federal income taxes they otherwise owe (the amount of the credit is constant per child). For taxpayers who do not owe enough tax to receive their full tax credit, they can qualify for a refundable CTC (technically called the Additional Child Tax Credit, or ACTC). This credit provides a refund of 15 cents for every dollar earned in excess of $3,000. (This brief considers the CTC benefit as the amount of the CTC used to offset federal income taxes, plus the refundable ACTC portion.)
The Child Tax Credit is a powerful tool in fighting poverty. According to the Center on Budget and Policy Priorities, in 2013 the credit lifted approximately 3.1 million people out of poverty, including about 1.7 million children.2
The design of the Child Tax Credit has three key characteristics that affect who benefits from the credit. First, by design, low-income families with earnings from work below the $3,000 minimum threshold are not eligible, even if income received from other sources is higher.
Second, only a portion of the Child Tax Credit is refundable for low-income families whose incomes are so low that they do not owe any federal income tax. (They do pay full payroll taxes for Social Security and Medicare.) This component, known as the ACTC, is limited to 15 percent of earnings above the $3,000 threshold. If the value of the tax credit that a family would be able to receive exceeds the amount due in federal income tax, then a family may receive this refundable portion up to the limit directly. For instance, a single mother with two children who earns $14,000 in 2016 could receive 15 percent of $11,000 ($14,000 minus the $3,000 threshold), or $1,650, as a refund even if she owed no federal income tax. If she earns double that, or $28,000 in 2016, she could receive the entire value for each child, or a credit of $2,000. In contrast, if she earned only $7,000 in 2016, she would be limited to 15 percent of $4,000, or a maximum $600 refund.
Third, in order to contain the cost of the program, the Child Tax Credit begins to phase out once income reaches $110,000 for married couples ($75,000 for single filers). The credit phases out completely for a family with two children once income reaches $150,000 ($115,000 for single filers).
Taken together these three features mean that the Child Tax Credit provides a smaller absolute transfer to the poorest families and more to almost all better-off families, except for those in the top 10 percent. (See Figure 2.)
A closer look at how the Child Tax Credit is distributed across families at different income levels is possible by using the most recent publicly available micro data (2009) from the Statistics of Income provided by the Internal Revenue Service. The structure of the credit has not changed since 2009, so the depiction of outlays will look similar in 2016.
In Figure 3 below, families are divided into 20 groups (ventiles) of equal size ordered along the horizontal axis from lowest to highest adjusted gross income. The vertical axis of the figure displays the average amount of Child Tax Credit benefits received by claimants with eligible children in each income group. The share of tax filers who have at least one exemption for a child ages zero to 17 that end up claiming the credit was 72.7 percent in 2009, suggesting strong uptake of the tax credit. (See Figure 3.)
To get a better idea of the spread of household incomes, compare the income ranges of families in the bottom, middle, and top ventiles. Families in the second ventile have incomes that range from $2,340 to $5,480, while those in the top ventile have incomes that range from $153,500 to $75,600,000. Families in the middle ventile have incomes that range from $27,600 to $31,700.
Figure 4 below shows the average share of income received in Child Tax Credit benefits for each income group—expressed as the average Child Tax Credit in Figure 3—but now as a share of the corresponding income in each income group. Unlike lower-income families with children, middle- and high-income families are able to reap the benefits of the entire $1,000 per child value of the tax credit. Those between the 4th and 6th ventiles receive benefits equal to about 8.0 percent of their incomes, but those who make less (in the 2nd and 3rd ventiles) also receive less in benefits relative to what they earn. (The first income ventile is excluded from this analysis because it has an average adjusted gross income of less than zero.) (See Figure 4.)
The four figures in this issue brief demonstrate that the Child Tax Credit is progressive across the income distribution except for one large hole—the tax credit does not provide any benefits to the poorest families with children and provides less than the full benefit to many low-income families. As previously noted, families with incomes below the $3,000 earnings threshold receive nothing, and even those with two children and low earnings of less than $16,330 are eligible to receive only a partial refund because they do not pay federal income tax.
A growing body of research finds that boosting the income of families with children improves a host of long-term outcomes, including higher rates of high school graduation, better health, more hours worked and greater adulthood earnings, expanded economic opportunity, and increasing economic mobility in adulthood. Research suggests that reducing or eliminating the minimum-earnings threshold for eligibility and making the credit fully refundable would allow low-income families to fully benefit from the child tax credit as middle-income families do.3
These kinds of measures would help to provide the poorest families in the United States with much-needed assistance and greater economic opportunities in the future. These two suggested reforms would have a greater impact on the next generation’s long-term outcomes and the future health and productivity of the U.S. economy.
—Nisha Chikhale is a research assistant at the Washington Center for Equitable Growth
(Equitable Growth would like to thank Elaine Maag at the Urban Institute for helpful comments.)
- Elaine Maag, “Reforming the Child Tax Credit How Different Proposals Change Who Benefits,” (Washington, DC: Tax Policy Center, 2015), http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000540-Reforming-the-Child-Tax-Credit-How-Different-Proposals-Change-Who-Benefits.pdf. ↩
- “Policy Basics: The Child Tax Credit” (Washington, DC: Center for Budget and Policy Priorities), http://www.cbpp.org/research/policy-basics-the-child-tax-credit. ↩
- Michelle Maxfield, “The Effects of the Earned Income Tax Credit on Child Achievement and Long-Term Educational Attainment,” November 14, 2013. Accessed October 2016. https://msu.edu/~maxfiel7/20131114 Maxfield EITC Child Education.pdf., Hilary Hoynes, Douglas Miller, and David Simon. “Linking EITC Income to Real Health Outcomes.” Accessed October 2016. doi:10.15141/S5SG6Q., Raj Chetty, John Friedman, and Jonah Rockoff. “The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood.” NBER Working Paper Series, December 2011. Accessed October 2016. http://www.rajchetty.com/chettyfiles/value_added.pdf” target=”_blank”. ↩