What have we learned about child poverty in America?

Members of a National Academy of Sciences committee share insights

From Don: The last half-decade has been an extraordinary time for poverty in America. The pandemic triggered a series of policy experiments. One of them, the expansion of the Child Tax Credit (CTC), drew directly from a 2019 National Academy of Sciences (NAS) report on child poverty. The result of this experiment was extraordinarily successful but short-lived. This end of the that experiment saw poverty rebound. The NAS recently issued a follow-up report that again addresses the question of what America can do to ensure that children in America don’t live in poverty. The committee that issued the report is made up of some of the most distinguished researchers on poverty in America. I asked some of them to share what they have learned, which you can read below. An important disclaimer is that they are writing this piece as independent scholars, not on behalf of the committee or the NAS.

The U.S has one of the highest child poverty rates of any developed nation. Within the U.S., children are the age group most likely to be living in poverty, with rates about 50% higher than both working-aged adults and the elderly. In 2019, the NAS released an expert committee report (“Roadmap to Reducing Child Poverty”) on possible federal policies that could reduce child poverty by 50% within the next ten years. One of the committee’s key findings was that by expanding the CTC, a tax credit for families with children, into a universal child allowance of $3,000 per-child child poverty would be reduced by about 40%.

A number of controversies emerged following the release of the report. Some questioned whether turning the CTC into a universal child allowance was the right tool for reducing child poverty. Indeed, the credit was never intended to serve as an anti-poverty program. It was established in 1997 as a $400 per-child credit to offset tax liability for middle-income families but it was subsequently expanded to provide benefits to low-income families as well. Others questioned the committee’s claim that turning the CTC into a $3,000 universal child allowance would truly reduce child poverty by 40%, arguing that this estimate accounted for only modest parental employment responses even though such an expansion was likely to produce sizable declines in employment. If a substantial number of parents decided to stop working as a result of such a credit, this could counteract its anti-poverty impact. Finally, others questioned whether the tax system was the right way to distribute such benefits.

Now six years later, NAS has released a follow-up report that sought to address several of the issues raised by the previous report and its critiques. In addition to ten other expert researchers with backgrounds in economics, sociology, human development, public policy, social welfare, and demography, we served on this committee and contributed to the writing of the consensus report.

The committee was asked to evaluate the impacts of a $3,000 per-child near-universal child benefit ($3,600 per child under the age of 6) on child poverty that was enacted as part of the American Rescue Plan Act (ARPA) in March of 2021 to provide economic relief to families during the COVID-19 pandemic.

Several aspects of the 2021 reforms to the CTC were noteworthy.

• First, in a stark shift away from decades of increased efforts to tie eligibility for government benefits to employment, nearly all families with children were eligible for the credit, regardless of whether the adults in the family worked.

• Second, in a marked departure from how tax refunds are typically distributed, half of this benefit was distributed to families in monthly installments between July and December of that year, with the rest distributed as part of tax refunds during tax filing season in early 2022.

• Third, these changes to the CTC were only enacted for one year, expiring after the 2021 tax year. While Congress considered legislation to make these expansions to the CTC permanent, it ultimately failed to do so. One reason was a reluctance to expand benefits to families with no working adults.

The committee’s main task was to evaluate how these temporary changes to the CTC (as well as the Earned Income Tax Credit [EITC], a tax credit for working families) affected child poverty in 2021, which groups were most impacted, and how the reforms were implemented. In addition, the committee was asked to estimate how additional reforms to the CTC, if permanently implemented, might further reduce child poverty. In its report, the committee addressed a number of the questions, or critiques, that were raised following the release of the 2019 Roadmap report, which we briefly summarize here.

Critique 1: The CTC was not designed as an anti-poverty program

When the CTC was originally introduced, families with earnings below $10,000 were not even eligible for the credit, and families with earnings above $10,000 could only claim the benefit if they had some tax liability–the credit was not refundable. This meant that the benefits largely didn’t go to children living in poverty. Over the years, the CTC has been expanded to make the credit partially refundable for families with no tax liability, increase the size of the benefit, and extend the range of income through which families could claim the benefit. By 2018, the minimum earnings threshold had been reduced to $2,500 and the credit had grown to a $2,000 per-child partially-refundable credit that all but those in the top 1-2% of the income distribution, as well as those with earnings below $2,500 could receive.

As noted above, the expansions to the CTC in 2021 turned the credit into a near-universal child benefit, eliminating the minimum earnings requirement and greatly increasing the size of the benefit. The committee estimated that, along with the EITC, the temporary expansion of the CTC in 2021 lifted 2.9 million children out of poverty, reducing child poverty by 51% (see Figure 1). These results turned out to be quite similar to projections made in the 2019 Roadmap report, adding support to the claim that an expanded CTC that was available to nearly all children could achieve the goal of reducing child poverty by 50%. Poverty reductions were sizable for all demographic groups, with larger effects typically for groups with higher poverty rates, including single-parent headed households, those with low parental education, and non-Hispanic Black and Hispanic households.

Figure 1. Effect of the EITC and CTC on child poverty, 2021

The committee also examined the role of other pandemic policies that were in place in 2021 (e.g. extended unemployment benefits, economic impact payments, etc.), which rendered child poverty much lower than in typical years. Were these other policies not in place at the time, the committee estimated that the EITC and CTC would have reduced child poverty even further, by 58%, collectively lifting more than 7 million children out of poverty.

It is important to note that under current policy the CTC reaches children in families (tax filing units) with earnings up to approximately $400,000, which was also the case in 2021. Furthermore, the committee found that much of the total spending on the CTC and EITC in 2021 did not go to children living in poverty (see Figure 2). In fact, just 6% of total federal spending on these programs went to children living below the poverty line. About one-fifth of spending went to families with income between 100-150% of poverty, and 23% went to families with income between 150 and 200% of poverty. This means that over half of federal spending on these credits went to families with income above 200% of the poverty line, which is roughly $64,000 for a family of four in 2024.

In sum, while the credits did substantially reduce child poverty in 2021, the vast majority of the dollars spent on the CTC and EITC did not go to children living in poverty.

Figure 2. Share of EITC and CTC outlays going to children in different income brackets (2021 policy)

Critique 2: Declines in parental employment will mitigate anti-poverty effects of the CTC

The anti-poverty impact of any program depends, in part, on whether people react to the program in ways that offset its impacts. For instance, if the $3,000 per-child CTC led parents to stop working or reduce how much they work because of the generous cash benefit, its anti-poverty impacts might be substantially reduced. This question of how much parents would reduce their employment in response to a $3,000 per-child cash benefit became a contentious issue in the years following the release of the 2019 Roadmap report.

In its report, the committee addressed this concern by taking stock of the literature and compiling estimates of how individuals typically respond to changes in incentives to work created by policy changes, such as expansions of the EITC. Because of substantial variation in the size of these estimates across studies, our committee decided to use a range of three estimates (low, medium, and high) to examine how changes in employment would impact our predictions of the poverty-reducing impacts of the EITC and CTC (see Figure 3).

The committee also noted that the EITC and expanded CTC were likely to have different impacts of parental employment, as the EITC benefit structure encourages work while making the CTC available to non-working parents discourages work. The committee found that the net impact of these two credits in 2021 ended up having very minimal impacts of employment on poverty. In fact, accounting for employment responses actually increased the poverty-reducing effects of these programs, largely because the work-encouraging effects of the EITC outweighed the work-discouraging effects of the expanded CTC.

Figure 3. Effects of the EITC and CTC on child poverty, accounting for employment effects

Critique 3: Is the tax system an effective way to reduce child poverty?

The main goal of the IRS is to collect tax revenue, yet in recent years it has served other functions: it has become an important venue for distributing benefits like the EITC and the CTC, and other benefits such as tax breaks for those pursuing higher education. Additionally, following the passage of the Affordable Care Act, the tax system also became the place to verify health insurance coverage and pay penalties for not holding health insurance.

Concerns have arisen in recent years about potential fraud associated with claiming credits through the tax code. Congress has introduced more stringent requirements for claiming the EITC with the goal of reducing errors, and audit rates are highest for low-income taxpayers who claim the EITC. Some argue that benefits of this sort should be administered through agencies that require claimants to talk to caseworkers so that they can be connected to other important benefits. Opponents of this proposition argue that such a system would only deter potential beneficiaries from claiming benefits because of the inconvenience and hassle costs associated with going to welfare offices and interviewing for benefits.

Despite these concerns, the committee found that the implementation of the 2021 expansion of the CTC was carried out with high fidelity, with estimates suggesting that 98% of monthly payments were sent accurately. The IRS reported that approximately 62 million children received at least one of the monthly benefits in 2021, at a cost of $94 billion dollars (another $116 billion in benefits were sent out as part of tax refunds in early 2022). This means that monthly payments went out to more than 80% of all children living in the U.S. in 2021, a take-up rate on par with some of the programs with the highest participation in the U.S.. Still, the committee also found that some groups struggled to receive the monthly credits, including Hispanic families, families with lower income, and those who had not recently filed taxes. In the case of Hispanic families, lower take-up rates might be due to lower eligibility compared to other demographic groups, since children must have Social Security Numbers in order to claim the CTC.

Critique 4. How would permanent changes to the CTC affect child poverty and what changes to these tax credits could further reduce child poverty?

As noted, the committee found that the expansion of the CTC to families with little or no earnings, in combination with the EITC, substantially reduced child poverty in 2021, even after adjusting for the effects of these credits on parents’ employment and for effects of other pandemic programs on child poverty.

But what impacts might further changes to the CTC, beyond those implemented under ARPA, have on child poverty? And, what impacts would these changes, including extending the CTC to zero- and low-income families, have on child poverty if these changes were permanent, rather than temporary? The committee examined both of these questions.

In the report, the committee considered 16 different modifications to the CTC that might further reduce child poverty and generated estimates of the immediate fiscal costs of these modifications. The modifications included changing the amount of the credit, modifying terms that affect eligibility, and creating work exemptions for specific populations with high care responsibilities, such as those with young children.

In general, the committee found that while more generous policies would have the largest impact on child poverty, they also came with the highest fiscal costs, with the most generous modification lifting nearly 5 million children out of poverty relative to current policy, at a cost of roughly double the cost of the current CTC. While the committee was not able to conduct a formal cost benefit analysis of each reform, projections based on the 2021 expansions of the CTC suggest that the long-term benefits of a universal child benefit are likely to be sizable–perhaps as high as 10:1 relative to the costs–through improved health, reductions in crime and dependence on other programs, and improved economic mobility.

The committee also evaluated how permanent implementation of these changes would affect child poverty by examining how these changes would likely impact parental employment, especially those policies that extended the CTC to zero- and low-income families. As noted above, the EITC and CTC are likely to have different effects on the employment for those with little or no income. But the literature the committee examined also indicated that the magnitudes of these effects were likely to differ depending on whether the changes were permanent versus temporary ones. In particular, this literature strongly suggested that making the CTC permanently available to zero- and low-income families and/or expanding the generosity of these credits would likely reduce their employment more than if these changes were temporary.

Based on its simulations, the committee found that indeed all of the policy options that permanently expanded the generosity of CTC or its availability of zero- and low-income families, alongside the existing provisions of the EITC, would have the net effect of reducing parental employment and, as a result, dampening the child poverty reduction impacts of these policies. At the same time, the committee found that child poverty would still be lower, both on average and for all subgroups, compared to the incidence of child poverty under the current implementation of the CTC that does not extend benefits to families with no or low incomes.

Concluding Observations

The NAS report reveals tax credits, especially the child tax credit, as one effective policy tool for reducing child poverty.

It also reveals the challenges of obtaining these estimates given limitations related to availability of, and access to, data and the importance of future work toward understanding a full range of costs and benefits to families and children in the short and long-term. We encourage interested readers to read the committee’s full report for more details.

Marianne Bitler is professor and Chair at the Department of Economics at UC Davis, she was a professor of economics at UC Irvine. She has also worked at the Public Policy Institute of California, the RAND Corporation, the Board of Governors of the Federal Reserve, and the Federal Trade Commission. She is a research associate with the National Bureau of Economic Research and a research fellow at IZA. She is currently a co-editor of the Journal of Human Resources.

Maria Cancian is a professor and former Dean at the McCourt School of Public Policy at Georgetown University. Her research considers the dynamic between public policies and family wellbeing—both how policies shape choices and outcomes for families, and how family change creates new challenges and opportunities for public policy. She was elected a Galbraith Fellow of the American Academy of Political and Social Science, and is a fellow of the American Academy of Social Work

Lisa Gennetian is the Pritzker Professor of Early Learning Policy Studies at the Sanford School of Public Policy, Duke University. She is an applied economist whose research straddles a variety of areas concerning child poverty from income security and stability to early care and education with a particular lens toward identifying causal mechanisms underlying how child poverty shapes children’s development.

V. Joseph Hotz is a Research Professor in the Harris School of Public Policy at the University of Chicago. Hotz currently serves as principal investigator of the Add Health Parent Study; the Great Smoky Mountains Study of Rural Aging and the Mid-Life Health Inequalities in the Rural South; and the Collaborative for Innovation in Data & Measurement in Aging.

Katherine Michelmore is an associate professor of public policy at the University of Michigan’s Gerald R. Ford School of Public Policy. Michelmore is a leading scholar and educator on the social safety net, education policy, labor economics, and economic demography. A research associate at NBER, she is a recognized expert on the efficacy of the Earned Income Tax Credit and Child Ta Credit and their impact on children.