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The Child Tax Credit: Economic Analysis and Policy Options

General Material
Published Date
February, 2016

"The child tax credit is currently structured as a $1,000-per-child credit that is partially refundable for lower-income families with more than $3,000 in earnings. Prior to 2001, the child tax credit was a $500-per-child nonrefundable tax credit which generally benefited middle- and upper- middle-income taxpayers.

Since 2001, legislative changes, particularly those made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), have altered the structure of this tax benefit. Specifically, the amount of the credit per child has increased and the credit has been made partially refundable, expanding the availability of the credit to some low-income families. The American Taxpayer Relief Act (ATRA; P.L. 112-240) made the EGTRRA changes to the child tax credit permanent. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114- 113) made the ARRA change to the child tax credit permanent.

In light of these recent changes to the structure of the child tax credit, this report provides an economic analysis of the current credit, focusing on the credit’s impact on fairness (also referred to as “equity”). The report then explores how the credit has affected taxpayers' behavior about working and having children. Finally, this report examines the complexity of administering this tax provision in the context of other child-related tax benefits.

This report concludes with an overview of possible modifications to the child tax credit. The impact of these modifications will depend on a taxpayer’s income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policymakers may consider alongside their policy goals."