• July 31, 2021

Exclusive: Why the New Monthly Child Tax Credit Is More Likely to Be Spent on Children

 Exclusive: Why the New Monthly Child Tax Credit Is More Likely to Be Spent on Children


Hundreds of dollars began arriving in parents’ bank accounts Thursday, as the first installment of the Biden administration’s monthly child tax credit. Compared with programs that require a lot of paperwork or happen only at tax time, it was hard to deny the power of government assistance in the form of a direct deposit.

It offers a psychology lesson that could inform public policy. Sending people money on a regular basis — no paperwork to file, no strings attached — achieves policy goals, and perhaps political ones, too. It’s a powerful way to make people aware of exactly what the government is doing for them.

President Biden emphasized that aspect in a speech Thursday: “We’re proving that democracy can deliver for people, and deliver in a timely way.”

The simplicity of direct deposit — the new credit is $300 per child under 6, and $250 per child from 6 through 17 — is a major reversal from most safety net programs, which have work requirements and other hurdles and oblige recipients to navigate a complicated bureaucracy. (People who don’t use direct deposit for their taxes are receiving checks; those who don’t file taxes can sign up for the credit online.)

Also, money labeled for children — the deposit that arrived in parents’ bank accounts Thursday was called CHILD CTC — is more likely to be spent on children, research shows. The previous child tax credit was one of many payments and credits folded into a final tax number each April, so it was easy for taxpayers to lose track of a credit meant for children.

One reason is that spending on children is often considered a mother’s domain. A significant amount of research in developing countries has found that when money is given directly to mothers, it is much more likely to be spent on food and other necessities for children than it is when fathers control the money.

This is also true in rich countries. A study of fragile families in the United States found that children are much less likely to have food insecurity when mothers control the family’s money. An influential study on a child allowance sent to mothers in Britain in the 1970s found that unlike previous benefits not designated for children, it was more likely to be spent on things like clothing and toys for children.

Also, labeling the purpose of the money guides people on how to spend it. The behavioral economist Richard Thaler described in 1985 the ways in which people keep mental accounts, allocating money for different purposes, even though this “violates the economic principle of fungibility” — the idea that money is interchangeable. People tend to use monthly payments for daily expenses and lump sums for long-term investments, like education or a car, said H. Luke Shaefer, a professor of social work studying antipoverty policy at the University of Michigan.

Although the new tax credit is a large increase for low earners, higher earners end up receiving the same amount annually that they would have in previous years — with half of it coming earlier in monthly installments. Still, it’s likely to make a difference in what they do with it, researchers said.

“I’m an economist, so I would say money is fungible and aren’t people funny being tricked by this?” said Diane Whitmore Schanzenbach, who studies child poverty and policy at Northwestern. “But that’s how people work. You sort of have your mental accounts — this is money I spend on food, this is money for the kids.”

A policy goal of the tax credit is to slash child poverty, and direct monthly payments have the biggest effect on the poorest families. The poorest third of children were excluded from the previous child tax credit because their parents didn’t pay income taxes, and even for those who received it, a once-a-year tax refund did not help in an efficient way with daily expenses like food, child care and rent.

Since the last major changes to family welfare policy in the 1990s, and especially during the pandemic, there has been a much greater realization that families’ income is rarely stable over time. People across income levels go in and out of financial stability and employment.

“When we load up so much of our aid in an annual big refund, it means so many of our families are going into the red by the end of the year,” Professor Shaefer said. “We used to think about poverty in the United States as static — your income is below the poverty line — but people’s lives are very volatile.”

Politically, the more universal a program is, the more buy-in it has, because the money isn’t benefiting just some people, and there is no stigma attached. Nearly nine in 10 American families qualify — all but the richest.

Also, automatic monthly payments are a recurring reminder of government support. Both parties became more willing to send unconditional checks during the pandemic, and to seek credit for it. President Trump made sure his name was on stimulus checks, and President Biden sent letters to each family receiving the child benefit.

It’s a sharp contrast with President Obama’s 2009 tax cut, in which he decreased the taxes withheld from people’s paychecks so they took home more money — but they didn’t necessarily realize it or give him political credit.

“I think Democrats learned their lesson under Obama,” said Samuel Hammond, director of poverty and welfare policy at the Niskanen Center. “Quietly reducing people’s taxes may be based in theory, but doesn’t win you any political favors. Democrats are very aware that the saliency of this policy will help remind voters that Democratic governments help ordinary people.”

Republican voters, generally proponents of small government, seemed as excited as anyone else to have the credit hit their bank accounts, he said. And Republican lawmakers, with a few exceptions, were mostly quiet about the policy. It reflects a growing split between social conservatives, who are increasingly open to the government financially supporting families, and economic conservatives, who prioritize limiting government spending.

Many of today’s working-class, socially conservative and religious Republican voters aren’t as concerned about free-market economics, Mr. Hammond said. They want strong families and are likelier to favor direct payments that people can spend as they wish, rather than to support policies with more governmental involvement, like universal child care. Widespread support may also make the child credit, which is only for 2021, harder to reverse from a political perspective.

Helping families is an uncontroversial policy goal, researchers said, but there’s less agreement on how to do it. In this case, the government is betting that the simplest answer — appealing to people’s satisfaction at money appearing in their bank accounts — may be the most effective.



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