The effects of EITC and children's allowances on the economic well-being of children

Abstract

This article introduces the concept of children's allowances as a strategy for the redistribution of income to children and reports the findings of an empirical study on the distributive effects of a children's allowance program and an improved earned income tax credit (EITC), separately and in combination. The source of data for the study was the 1999 Current Population Survey. The study found that these programs would greatly increase the income statuses and reduce the poverty rates of all children in this country, but especially of EITC-recipient children and children in large families, among whom black and Hispanic children are overrepresented. Implications for policy are discussed. Key words: children of color; children's allowances; earned income tax credit; economic well-being; large families ********** The United States is at a crossroad with its social policy on income support for children. The demographics are changing rapidly in two dimensions. First, the U.S. population is aging, with the proportion of children shrinking; second, the proportion of children from racial and ethnic minority backgrounds is increasing, with considerable differences in birth rates and net immigration rates between the white and racial and ethnic minority populations (Day, 1996; Ozawa, 1997). If the United States is to develop effectively into a multiracial and multicultural society with a viable growing economy, public policy should focus on children from racial and ethnic minority groups, who are concentrated among large low-income families. How political leaders deal with the interplay between the wage structure in a free economy and the needs of families determined by family size will determine whether the United States can maintain its vitality as a nation. Policymakers in many countries addressed this problem long ago (Beveridge, 1942; Douglas, 1927; Vadakin, 1958). They realized that employers in capitalistic societies cannot and are not obligated to provide differential wages according to the number of dependents in a family. On the other hand, a society cannot survive unless it finds the means to meet the financial needs of families with different numbers of dependents. These policymakers found the solution in children's allowances (Beveridge; Douglas; Vadakin). Through the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (P. L. 107-16), the federal government signaled its commitment to channel financial resources to families with children, using a tax credit approach. Section 2 of the law established a child credit of $600 per child, which will gradually increase to $1,000 in 2010, and made the tax credit refundable. Close scrutiny of this law indicates, however, that children whose parents have no earnings do not receive tax credits. Furthermore, for children of taxpayers who have earnings but not enough to pay income taxes, the law places a cap on the amount of refundable tax credits. For example, a family with two children that earned $15,000 in 2001, and hence would pay no income tax, would receive a total child tax credit of $500, not $1,200, because the law provides that the tax credit in this case must be the lesser of $1,200 or 10 percent of the difference between $15,000 (the family's earnings) and $10,000 (a statutory provision). It is important to note that the equation ($15,000-$10,000) x 0.1 applies to taxpayers with $15,000 in earnings, no matter how many children they have. Taxpayers with income tax liabilities that are smaller than the full child tax credit can claim the tax credit in the amount equal to the income tax amount, but the balance (the refundable component) is subject to the same cap as described here. In contrast, taxpayers with large income tax liabilities can claim a $600 tax credit for each child and can claim the tax credit for all the children. If, for example, a taxpayer with such a liability has eight children, he or she receives $4,800 in the form of a tax credit in 2001, as long as the adjusted gross income does not exceed the stipulated amount. …