Urban Wire Permanently Expanding the Child Tax Credit Would Increase Kids’ Lifetime Earnings and Education
Nikhita Airi
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Today, Congress will vote on the Wyden-Smith proposal—a tax deal that would modify certain business tax deductions and temporarily expand the child tax credit (CTC) through the following:

  • increasing benefits from 2023 (retroactively) to 2025
  • leaving in place the income phase-in for determining CTC benefits but phasing in the refundable portion of the credit faster for families with multiple children (thus boosting the benefits available to families with low incomes who have low or no tax liability)
  • adjusting the credit for inflation
  • giving families the alternative to use last year’s income to qualify for the credit in 2024 and 2025

In the past, much of the debate around the benefits of the child tax credit, and its temporary expansion in 2021, has focused on its short-term benefits: reducing child poverty, food insecurity, and material hardship.

Today, new Urban Institute research on a larger expansion of the CTC finds significant long-term benefits as well: a permanently expanded credit would also boost high school and college graduation among childhood CTC recipients and their adulthood earnings by as much as 10 to 17 percent across racial and ethnic groups. This analysis does not model the smaller expansion under consideration now, though it would likely have a proportional, smaller effect on these outcomes.

The effects of permanently expanding the CTC

During 2021, the CTC was fully refundable, so taxpayers with children and little or no income could still qualify for full benefits. The maximum annual credit amount was also increased from $2,000 per child to $3,600 (for children younger than 6; $3,000 for other children up to 17), part of which families could receive as advanced payments throughout the year.

Our new analysis finds that, if those provisions had been permanent, children of all racial and ethnic groups from families with low incomes who had received the CTC growing up would earn between 7 and 12 percent more annually by the time they are 30 years old (an additional $2,000 to $3,400).

Among Black children from families with low incomes, earnings at age 30 would increase by 10 to 17 percent. In absolute dollars, Latine CTC recipients’ earnings would increase by 8 to 13 percent. By removing the credit phase-in, the 2021 expansion lifted a requirement that otherwise excludes about 19 million children, a disproportionate share of whom are Black and Latine, from receiving the full CTC. Because of structural racism and discrimination in the labor market, these children’s families experience barriers to opportunities for high-quality, high-paying jobs.

For the full population, by race, ethnicity, and sex
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High school graduation rates would increase modestly, by around 1 to 3 percentage points, while college graduation would increase around 2 to 6 percentage points. The analysis uses the Social Genome Model, which accounts for the long-term links between childhood income, test scores, behavior, and adult outcomes. The ranges of estimates reflect that the benefits of additional income could diminish over a child’s lifetime.

Importantly, this analysis does not model the current CTC proposal. Instead, it models the effects of the larger 2021 American Rescue Plan Act expansion. However, the current proposal would likely have proportionately smaller benefits for every dollar in additional benefits that families receive. The Urban-Brookings Tax Policy Center estimates that families with kids who would see a tax cut would receive an average benefit increase of about $680 from the Wyden-Smith proposal on their 2023 taxes, relative to current law. For families with low incomes, the average change in tax benefits would increase from $730 in 2023 to $840 in 2025.

Beyond the Wyden-Smith agreement

The proposal would raise the CTC through 2025, but the credit is still scheduled to decrease in 2026, alongside many expiring provisions of the Tax Cuts and Jobs Act.

At that time, lawmakers will be debating what tax policy looks like for the foreseeable future. These new findings underscore that long-term investments in kids during childhood have enduring returns that go beyond the many short-term benefits.

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Research Areas Taxes and budgets
Tags Child support Child welfare Children's budget Child Tax Credit
Policy Centers Income and Benefits Policy Center
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