The child allowance will pay dividends for the entire U.S. economy far into the future
One feature of the newly enacted American Rescue Plan that got less attention in the lead up to its passage than the more headline-grabbing $1,400 economic impact payments are the reforms to the Child Tax Credit. The legislation dramatically expands and improves the CTC, making it fully refundable and increasing its value to as much as $300 per child per month. The changes, particularly if they are made permanent, will be some of the most profound changes made to the social safety net in decades, with far-reaching positive effects not only for individual families but also overall economic mobility and growth.
Not only will families benefit from this money in the short term as they navigate the coronavirus recession and recovery, but all of society will also reap the economywide benefits the child allowance will bring in the future. It will dramatically reduce childhood poverty and improve children’s chances of upward intergenerational mobility, increasing both their future earnings and the corresponding tax revenue that will be collected on it. Economists, other social scientists, and policymakers alike already know from research into other, similar income support programs, such as the Earned Income Tax Credit and the Supplemental Nutrition Assistance Program, that increasing the economic resources that families have helps them make investments in their children’s human capital development, which, in turn, improves children’s school performance and completion and boosts their future earnings.
A 2018 study finds that an extra $1,000 in the Earned Income Tax Credit increases the probabilities of children graduating high school by 1.3 percent, completing college by 4.2 percent, and being employed as a young adult by 1 percent, and grows their earnings by 2.2 percent. Other recent research finds that a $1,000 tax credit increases children’s math and reading scores by 6 percent to 9 percent of a standard deviation. These are just two examples of the extensive body of research into the positive effects of the EITC on children’s human capital, with future benefits of higher earnings accruing both to the beneficiaries, as well as the wider economy in the form of increased tax revenue on those higher earnings.
Research on the Supplemental Nutrition Assistance Program likewise shows that more money for families leads to better long-term outcomes both for children, as well as society as a whole. One study on the expansion of the food stamps program, now known as SNAP, finds the children whose families receive income support from the program grow up to lead healthier, more productive lives. And new, cutting-edge research by Martha Bailey at the University of California, Los Angeles, Hilary Hoynes at UC Berkeley, Maya Rossin-Slater at Stanford University, and Reed Walker at UC Berkeley finds that “children with access to greater economic resources before age five experience an increase of 6 percent of a standard deviation in their adult human capital, 3 percent of a standard deviation in their adult economic self-sufficiency, 8 percent of a standard deviation in the quality of their adult neighborhoods, 0.4 percentage-point increase in longevity, and a 0.5 percentage-point decrease in likelihood of being incarcerated.”
These long-term improvements in individuals’ human capital and well-being demonstrate that not only do families benefit in the immediate term from being able to afford the food they need to survive, and children personally grow up to lead healthier and more productive lives, but the entire economy also benefits from having fewer people incarcerated or receiving income support later on and having more people working for higher wages and correspondingly paying more taxes. It is because of these positive, long-term economic benefits that the Bailey and her co-authors note that public investments in income support programs such as SNAP actually could be seen as paying for themselves in the long run.
These studies also show why concerns being raised about the employment effects of a child allowance that is not conditioned on parents’ engagement with the labor market are not only misplaced but short-sighted. First, such concerns ignore research from other countries such as Canada that have child allowances and have not seen work effects as a result of the policy.
Second, the research findings noted above on the positive effects of income support programs on children’s future employment and earnings demonstrate that any concerns about work effects in the present must be weighed against positive work effects in the future. The short-sighted focus solely on the present-day effects of providing income supports to families ignores the extensive body of research that finds that when families have more money to support their children in the present, those children grow up to be healthier, more productive, and earn more money, with spillover benefits for the entire economy.
Research into positive, long-term benefits of the Earned Income Tax Credit and the Supplemental Nutrition Assistance Program is directly translatable to the benefits we can expect to see from the new child allowance. Economic research clearly demonstrates that an investment in families today is an investment in their future economic mobility, as well as in broad-based, stable economic growth. Making the newly enacted child allowance permanent will pay dividends for all Americans far into the future.