The Child Tax Credit: The Largest Transfer Program You’ve Never Heard Of

by Darian Woods

In the primaries we’ve heard a lot about social programs like Medicare and the Earned Income Tax Credit (EITC). Less mentioned so far is the Child Tax Credit or CTC.

The CTC offers up to $1,000 per child for up to three children. It comprises one of the largest cash transfers in America yet isn’t particularly well known. Since its introduction in 1997, the credit has grown rapidly in significance. It now costs the government $55.1 billion a year.


Source: Hoynes and Rothstein, 2016

In 1998, the annual cost of the CTC was $15.7 billion. By 2004, the program’s costs had reached $46.8 billion. For a time it surpassed even the better-known Earned Income Tax Credit (EITC). Accounting for price inflation, this was a massive 159 percent increase in less than a decade.

So why is the CTC not as well known as other parts of the tax code and social safety net? I asked Hilary Hoynes, a UC Berkeley professor whose research focuses on the American social safety net. According to Hoynes, one reason the credit may be less well known is that it is hidden among other tax deductions and refunds.

“Families may not know — it’s just built into their tax refund. But it’s significant,” Hoynes said.

Hoynes, with co-author Jesse Rothstein, released a working paper in March that revealed the extent to which the CTC had grown.

“I didn’t realize how important the Child Tax Credit had become until I sat down and wrote that paper,” she said.

The paper also highlighted how important the credit was for low-income families.

“It’s as much as a 10 percent lift in incomes for some families, and less significant the higher up the income scale you go,” she said.

A large, but flawed program

In addition to low-income families, the CTC also benefits much richer families. This is the program’s first flaw: it is not progressive. A family with an income of $120,000 can receive the same value credit as a family under the poverty line, thus the credit assists families who are not generally considered needy.

Universalism has its costs. Every dollar spent on families with stable jobs and good education is a dollar denied to parents who cannot afford to buy their children rain jackets or pay for a school camp.

One argument in favor of a less targeted program is that this builds political will to maintain and grow the program — paying money to wealthier families is, in a way, a price to pay for ensuring the government will continue to support those on lower incomes. Programs for the poor are poor programs, as the saying goes. Temporary Assistance for Needy Families (TANF) gives cash to needy families with children. The $55.1 billion CTC benefits middle-class families. In contrast to the CTC, the federal government spent only $16.6 billion on TANF in 2014.

Reform or scrap?

Several tweaks could improve the progressivity of the CTC. First, the earned income requirement could be scrapped. Currently $3,000 of earned income is required to start receiving a portion of the credit. This change could be paid for by reducing credits at upper income levels. The amount of the credit could also be increased: this would be a straightforward way to reduce the number of children living in poverty.

These reforms raise the question, though: why not just spend new money improving other, more targeted, programs? The EITC is well targeted and widely supported. The Supplemental Nutrition Assistance Program (SNAP) is an important part of the social safety net. TANF has been eroding in value for decades. Scrapping the CTC could also free up cash to introduce a pro-poor Negative Income Tax.

This transfer creeped up on policymakers and researchers. It’s time for the Child Tax Credit to be either improved or removed.

Darian Woods is a Master of Public Policy Candidate at UC Berkeley’s Goldman School of Public Policy. He is currently a graduate student researcher for Professor Hilary Hoynes and will be graduating in May 2016.