Universal Child Allowance: A Simple, Effective Way to Reduce Child Poverty?
The United States has a variety of policies that are designed to help working parents with the cost of child care, but those policies tend to be particularly complex and do little to help families with little or no income. While potential tweaks and alternatives have been debated for years, many experts are starting to unite around a new vision that could lift millions of children out of poverty and cut deep poverty in half while simplifying and improving benefits for all families, regardless of income.
Read on for an overview of the tax benefits available to families, where they fall short, and how a universal child allowance could work as an alternative.
Child Poverty in the United States
The child poverty rate in the United States is consistently higher than the rate in many other industrialized countries. Similarly, most other large countries provide some sort of universal benefit for all parents to help with the costs of raising a child. While the United States does have policies to help low-income families, the benefits don’t always reach those at the bottom of the income distribution, who are also the ones who need it most.
The chart below shows how child poverty in the United States compares to other countries in the Organization for Economic Cooperation and Development (OECD), based on the latest available data for each country.
While the moral case for helping children born into poverty at no fault of their own is certainly compelling, there is also a significant economic case for using government spending to address the issue. In an article published in the Journal of Children and Poverty, four researchers–Harry Holzer, Diane Schanzenbach, Greg Duncan, and Jens Ludwig–sought to quantify the cost of child poverty on the economy. They found that child poverty has large and measurable effects on costs like crime, lost productivity, and additional health spending. In total, child poverty has an estimated societal cost of about $500 billion per year, or about 4 percent of the GDP.
While estimating the exact cost of something like poverty is an inherently challenging thing to do precisely, which Holzer, Schanzenbach, Duncan, and Ludwig readily admit, the authors highlight the range of ways in which poverty can negatively affect society as a whole.
When it comes to fighting poverty, a growing body of research shows that providing cash assistance to families, particularly low-income families, is particularly effective and tends to pay off over a beneficiary’s lifetime. Interventions that provide assistance to very young children are particularly important, which is why many proposals to address poverty include an increase in funds for children under the age of six.
Current Child Benefits
To understand why many have started to think seriously about a universal child allowance, it’s important to look at how current child-related benefits work in the United States. Where there are several policies that seek to help parents, they can be complicated and most come with restrictions. A primary criticism of these policies is several of them actually do little to help those who need the most assistance, namely people with very low or no income.
Complicated Tax Policies
The United States currently has a handful of tax-related policies that seek to help working parents; each policy tends to target parents with different income levels. The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are two that do the most to help families with low incomes. The EITC is a refundable tax credit, meaning that if it lowers a person in a couple’s tax liability to zero, it refunds the rest so recipients get the full value regardless of the amount they owe in taxes.
While the EITC offers a credit to individuals and married couples without children, only those with very low incomes can benefit and the maximum amount is relatively small. That changes significantly for parents, both in terms of income eligibility and the maximum amount available. The average amount for a family with children was $3,186 in 2015 but just $293 for a family without children. The credit is designed to encourage people to work by offering more money for additional income up to a limit and then phasing out at a certain income level. The Center on Budget and Policy Priorities has a helpful interactive that shows how EITC amounts vary at different levels of income based on marital status and number of children.
Another tax credit is the Child Tax Credit, which has an additional component that also makes it refundable. Like the Earned Income Tax Credit, the refundable Child Tax Credit is designed to both encourage work and provide assistance for low-income parents. The CTC also phases out at a much higher level of income, meaning that it benefits a much larger range of people and is not only targeted toward the working poor. However, there is a minimum income level that people need to meet to benefit–people must earn at least $3,000 to qualify for it and they need at least $9,667 in income to get the maximum value. As a result, those with very little or no income are left out.
There are other tax policies that work to offset child care costs for middle and upper-income families while doing little for those with low incomes. The Child and Dependent Care Tax Credit allows parents to reduce their income tax liability by $3,000 per child up to a total of $6,000 but is not refundable. Similarly, the employer-provided childcare exclusion allows working parents to set aside up to $5,000 of income for child expenses without having to pay taxes on it. There is also a child exemption, which allows taxpayers to lower their taxable income by about $4,000 for each qualifying child.
While the non-refundable credits don’t really help people with the lowest incomes, it’s important to note that the credits directed toward low-income parents do play an important role in fighting poverty. According to the Supplemental Poverty Measure–which tracks people’s income after tax credits and government programs–the Earned Income Tax Credit and the refundable portion of the Child Tax Credit kept nearly 9.2 million people, including 4.2 million children, out of poverty in 2015.
A Universal Child Allowance
In light of the complex nature and limitations of current benefits, a growing number of experts have started to support the idea of a universal child allowance. While the concept of a universal child allowance could take several different forms, the general idea behind it would be to consolidate some or all existing policies into one benefit that is available to all parents, regardless of income. Doing so would expand tax policy to benefit all children and would have a particularly significant impact on those living in poverty. And if set to the right amount, experts believe that a policy could be designed in a way that doesn’t leave families worse off after eliminating existing benefits like the child exemption and child tax credit.
While we don’t yet have a fully fleshed out proposal with all of the details for what a universal child allowance would look like, and the details are important, people have modeled some possible options to give a general idea of what various plans would mean for child poverty. Researchers at The Century Foundation estimated the costs and benefits of several different possible child allowance designs. For example, they project that a $2,500 per child benefit would have brought an additional 5.5 million children out of poverty in 2013. An allowance of $4,000 per child would have brought more than 8 million children out of poverty. Both policies would have decreased the child poverty rate from 18.8 percent to 11.4 percent and 7.8 percent respectively. Both would also dramatically reduce the number of children in deep poverty–children in families living at less than half of the poverty line–dropping that rate by 49 and 65 percent, respectively.
There is a wide range of proposals to develop some sort of universal benefit for children. Notable variations include a simple proposal that would give parents the same amount for every child, a tiered proposal that would give more to children under the age of six and less for children seven to 17, one that would decrease for each additional child, or some sort of combination of those. Alternatively, some argue that we should increase the value and progressiveness of the Child Tax Credit. The Century Foundation mapped several of those alternatives and found that expanding the Child Tax Credit would also reduce child poverty, but not to the same extent that certain universal benefit proposals would.
Proponents of a universal child allowance also argue that it would best be distributed regularly, rather than once a year when a family files its tax return. Ideally, the benefit could be distributed each month to help offset the costs related to raising a child as parents face them. This stability can help low-income parents budget their finances and ensure that children’s basic needs are met all year round.
While it may not be likely that the United States adopts a universal child allowance in the near future, the possibility may be more likely than one might think. Politicians on both sides of the aisle have supported efforts to expand the value of the existing tax credit, and many agree that existing child benefits could be simplified. While making existing policies more available to low-income families would amount to significant reductions in child poverty, a regular benefit available to all parents would go even further.
Child poverty in the United States has been a persistent problem for a long time. Many other advanced countries have adopted some sort of universal benefit for children and that is likely an important reason why child poverty rates in other countries are often lower than in the U.S. If politicians are serious about fighting child poverty, an emerging consensus among researchers suggests that a universal allowance may be the best way to approach the issue.