Monthly Child Tax Credit Payment Will Likely Grow the Economy
America’s 6-month experiment with what is essentially a universal basic income for kids will grow the economy, reduce unemployment, and help make the case to make it permanent, increase the amount provided, and implement a full UBI.
Economic Benefits of Direct Cash
I was asked recently if I thought there could potentially be some positive impacts on the economy of Biden’s Advance Child Tax Credit (CTC) payments that start flowing every month to parents starting on July 15, so in this blog post, I just want to answer that question in a bit more detail.
The short answer is absolutely, without a doubt in my mind, yes. How can I be so sure, and to what degree of a positive impact can we expect to see? Well, I’m so certain because Canada started a similar program about five years ago, and the economic impact of their program has already been measured by the Canadian Center For Economic Analysis as successful.
In 2016, Canada reformed and expanded its child tax benefits program, and called the new benefit the Canada Child Benefit or CCB. Since then, qualifying families have received on average about $550 ($440 USD) a month in tax-free income, with higher earning households earning a lower amount until their earned incomes are high enough to disqualify them entirely. Over half of CCB recipients have incomes between $50,000 and $150,000 with only 4% of recipients having incomes over $150,000, so the benefit does reach most Canadian families.
In July, when kids under age 6 in the United States start receiving up to $300/mo and kids age 6 to 17 start receiving up to $250/mo, kids under age 6 in Canada will be receiving up to $569/mo ($460 USD) and those age 6 to 17 will be receiving up to $480/mo ($388 USD). As you can see, the design is pretty close, with two different tiers based on age range, and amounts that reduce based on household income. Although because the CCB starts decreasing for single parents earning over $32,000 while our CTC starts decreasing for single parents earning over $112,500 as heads-of-household, America’s CTC is actually more universal than Canada’s CCB.
In 2017, Canada disbursed $24 billion to 3.7 million families with a total of 6.4 million kids. By the end of 2021, the US intends to have provided 39 million families with a total of 69 million kids with about $110 billion more than they would have received with the existing CTC. All told, it’s estimated that 93% of kids in the US will directly benefit from this poverty-reducing income boost.
So now that we’ve compared Canada’s Child Benefit to America’s new (but so far still temporary) Advance Child Tax Credit, and recognize they’re quite comparable to each other, what economic impacts have resulted in Canada that we may expect to also see here?
For every dollar of CCB distributed, Canada’s GDP has grown by $2, and 55 cents in taxes is recouped from the additional economic activity that each dollar generates. All of the economic stimulus generated from boosting the incomes of parents, and thus the spending power of consumers with kids, also contributes the equivalent of 453,000 full-time jobs. Without the CCB, it’s estimated that Canada’s labor force would be 2.5% smaller.
Looking now at the US and what we can expect, I expect a similar multiplier of around $2 per every $1. That’s about $220 billion in additional GDP which would grow our GDP of $21 trillion by one additional percentage point than would happen absent the cash payments. With a GDP growth forecast of 6.6% for 2021, forecasters could be surprised by a growth rate exceeding well over 7% if they didn’t take the economic impact of the Child Tax Credit payments into account.
In addition to the positive GDP impact, I expect the unemployment rate to also decrease as a result of the monthly Child Tax Credit, thanks to all the additional spending driving businesses to create and fill new positions, and also thanks to the additional income helping parents afford the child care they need to accept employment that they’d otherwise need to decline in order to continue providing their own unpaid child care as a parent.
An “Awareness Gap” Could Reduce Potential of the Policy Among Low-Income Families
However, there’s an asterisk next to all this, and that’s the fact that so many parents in America have no idea they qualify for the monthly CTC payments, and whereas that doesn’t really matter for those who have already filed their taxes, it does matter for those who earn so little they aren’t required to file taxes, and therefore need to get their info to the IRS. Fortunately the IRS has launched an online portal to make it easier for such parents, but it’s still expected that over two million kids might not receive the payments, despite their parents qualifying for them. So to maximize the economic impact of the Child Tax Credit payments, the amount of parents who qualify but don’t receive the payments will take a lot of reach-out efforts to reduce as much as possible.
Regardless of how many parents may end up not receiving them though, hopefully, come 2022, the results of the monthly CTC payments will be clear. They will show that just as such payments have grown Canada’s economy, the payments will have grown our economy as well. Hundreds of thousands of new jobs will have been created as a result. Child poverty will have been reduced by almost half. And all the other many impacts of basic income itself will have been observed too, in the form of things like improved physical and mental health, reduced crime rates, higher productivity and more, because we should never forget that when we’re talking about the economic impacts of reducing child poverty, we should always include the economic costs of letting child poverty continue, and that’s an annual cost of over $1 trillion where every dollar spent reducing it would save us $7.
If we spend $110 billion and as a result avoid spending $770 billion and also grow the economy by $220 billion, besides being a huge society-wide improvement that clearly pays for itself, it should also be considered as something worth making permanent, and also something worth expanding to all adults without kids too.
If it makes good economic sense to cut child poverty in half, it also makes good economic sense to end child poverty, and it also makes good economic sense to just end poverty. Period.
TL;DR: America’s 6-month experiment with what is essentially a universal basic income for kids will grow the economy, reduce unemployment, and help make the case to make it permanent, increase the amount provided, and implement a full UBI.
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