Expanded Child Tax Credit Would Pay Huge Dividends: Report

Expanded Child Tax Credit Would Pay Huge Dividends: Report


Federally funded child benefit programs that provide cash transfers to families provide long-term benefits that significantly exceed their costs, according to a new study published by the National Bureau of Economic Research.

Relying on existing studies of the effects of cash and near-cash transfer programs such as food stamps and the Earned Income Tax Credit, a team of seven researchers from Columbia University and the Open Sky Policy Institute looked at the long-term benefits produced by such programs for children and parents. Those benefits include future earnings and taxes paid, educational attainment and multiple positive health outcomes for children, and greater health and longevity for parents.

The researchers then compared the cost of providing those benefits to the associated decline in costs of providing things like health care, child protective services, criminal justice and other social welfare programs.

Overall, the researchers concluded that the benefits of virtually all cash-transfer programs outweigh their costs, by a factor of between five and 10, depending on the program and the need of the households involved.

Yes, but: The study comes with some important limitations. For one thing, the researchers had little data on the variation of effects by income. It’s likely that a very low-income household will receive far more benefits from $1,000 in cash aid than a household closer to the middle class, but the researchers had little insight into different effects for different income groups. And researchers could not determine how rapidly the positive effects decline as cash transfers increase. It’s likely that the first $1,000 in aid produces more powerful effects than the second or third thousand, but researchers do not have a good way of determining by exactly how much.

A look at Democrats’ child tax credit: The researchers applied their results to the costs and benefits of the proposal backed by the Biden White House to provide a permanent refundable child tax credit, similar to the temporary program included in the American Rescue Plan in 2021 that expired in December. In their analysis, the program, which provides cash benefits of $3,600 per child under the age of 6 and $3,000 per child between ages 6 and 17 for qualifying households, would cost about $97 billion per year, while providing about $982 billion a year in overall benefits — “very high net returns for the U.S. population,” the authors write.

The largest single component of that benefit comes in terms of the health and longevity of children, which the researchers calculated to be worth $424 billion. But even in the more concrete terms of income, the program still produces a net positive, with children’s future earnings rising by an estimated $270 billion. Public health expenditures are projected to decline by $16 billion, while the decline in the overall cost of crime is a substantial $208 billion.

Once all of the savings and increased expenditures are factored in (including, for example, higher Social Security spending for beneficiaries who lead longer lives), the net savings for taxpayers in terms of direct expenditures comes to $135 billion, the researchers said.

“While this benefit-cost ratio is quite high, it is in the same ballpark as other investments in children such as high-quality pre-k programs, public education, and Medicaid,” the researchers said.

Better child care would provide big benefits, too: A separate report released by The Century Foundation, a liberal think tank, finds that the proposal to subsidize child care services and universal pre-kindergarten included in Democrats’ Build Back Better bill would also provide significant individual and social benefits. The proposed program would pay money to both service providers and directly to parents to expand child care options and make it more affordable for families. Although the analysis doesn’t dig into the cost-benefit tradeoff, it does conclude that improved child care would provide billions in benefits to families, businesses and communities.

According to the analysis, the proposed child care plan would increase overall economic output by about $48 billion as more parents are freed up to return to work; boost business and government tax revenue by $60 billion as disruptions caused by child care problems decrease; and provide a roughly $30 billion increase in the economy as child care services and employment expand.

“The child care and [universal pre-kindergarten] policies being considered in Congress will support children’s healthy development, family economic security, and gender and racial equity,” say authors Julie Kashen, Julie Cai, Hayley Brown and Shawn Fremstad. “This report shows that they are also essential to helping state economies grow and prosper.”