WASHINGTON, May 22 – The Center for American Progress released the following issue on May 21, 2021, titled "Now is the Time to Permanently Expand Your Child Tax Credit and Earned Income Tax Credit."
The thematic report was written by Areeba Haider, research assistant for the program “Poverty to Prosperity” and research assistant Galen Hendricks.
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For decades, the American economic system and other institutions designed to support economic mobility have largely failed the tens of millions of people in the country who experience poverty each year – and US tax law is no exception. Many aspects of current tax legislation perpetuate structural sexism and racism, and even provisions designed to support people and families on low incomes exclude the poorest and most vulnerable
However, the Biden administration's American Rescue Plan, a $ 1.9 trillion stimulus package focused on comprehensive emergency relief in response to the coronavirus pandemic, includes major temporary changes to the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), which are gradually resolving this issue. However, in order for these changes to have long-term effects and better support families with children and low-wage workers, they must be made permanent
The American Rescue Plan temporarily expands the CTC by fully expanding it to low- and middle-income families and paying out the loan regularly rather than as a one-off lump sum. In particular the bill:
* Credit is fully refundable for 2021, so families get the full amount even if they don't have federal income tax liability – as most low-income families and children don't
* Increases loan amount from $ 2,000 to $ 3,600 for children under 5 years of age
* Increases the loan amount from $ 2,000 to $ 3,000 for children ages 6-16, and expands the loan from $ 3,000 to 17 year olds
* Limits expansion for higher income families by phasing out the additional $ 1,000 (and $ 1,600 for young children) for incomes over $ 112,500 for heads of household such as single parents and household incomes over $ 150,000 for married couples with children. The law will not change the exit from the pre-existing $ 2,000 per child CTC, which starts above $ 200,000 for single adults and above $ 400,000 for married couples.
* Allows regular advance payment of the CTC. Families will receive half of their CTC for 2021 in monthly installments from July / 3, the rest will be paid out at tax time at the beginning of next year. Parents receive monthly payments of $ 300 per month for infants and $ 250 for older children from July through December. The remaining $ 1,800 for infants and $ 1,500 for older children will be paid out early next year.
* Allows families in Puerto Rico to apply for the fully refundable, extended CTC with the IRS, and provides funding to other US territories to pay out CTCs through their tax codes
The bill also extends the EITC to include workers without qualified children. Under previous law, these workers only received a very small EITC which expired on very low incomes, and both younger and older workers were ineligible. The American Rescue Plan adds the following to the EITC:
* Increases the maximum value of the balance from $ 543 to $ 1,502
* Increases income limit from $ 15,980 per year for single applicants and $ 21,920 per year for married applicants to $ 21,427 per year for single applicants and $ 27,367 per year for married applicants
* Extends the permitted age range for recipients so that younger employees between the ages of 19 and 24 and employees aged 65 and over can apply for the credit
The American Rescue Plan's CTC and EITC extensions are only in effect until 2021. However, this legislation lays the groundwork for Congress to make permanent, transformative changes, including permanent child support. If Congress acts later this year to renew or make the CTC permanent, monthly payments of the loan could continue beyond December 2021, providing workers and their families with the support they need.
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(See link at the end of the text for the sidebar Das Kindergeld)
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The American rescue plan is also a milestone in the administrative infrastructure for providing a monthly payment. Specifically, the new law directs the IRS to set up an online portal for families to update their information to ensure they are receiving the regular payments to which they are entitled or which they can decline. Importantly, the IRS has stated that families wishing to receive monthly payments starting July this year must file a 2020./5 tax return
These changes benefit poverty reduction advocates who have long recognized that the CTC does not work for the poorest children. The EITC structure actually taxed low-wage workers without qualifying children below the federal poverty line, forcing them further into poverty
President Joe Biden's recently published American Family Plan also recognizes this problem and calls on Congress to permanently expand the EITC and make it a permanent critical part of the CTC expansion. It also extends other parts of the temporary CTC – namely the increased loan amounts – through 2025./7
Many members of Congress, including the Chairs of the House and Senate Tax Committees, have said they want to make all CTC changes permanent into law this year
The case for persistence
Even before the outbreak of the COVID-19 pandemic, there was an urgent need for reform for the CTC and EITC to better serve people on low incomes and their families. In 2019, 34 million adults and 10.5 million children lived below the federal poverty line – an outdated measure that seriously undervalues the country's financial needs
According to the latest data, 42 percent of US households lived in difficult financial circumstances in 2018 as a result of more extensive measures to address economic disadvantage
Despite this clear need, both the EITC and CTC have excluded millions of low-income people by their design.
Prior to the American Rescue Plan CTC Temporary Extension, the loan was not fully refundable. no more than $ 1,400 of the $ 2,000 designated for each child could actually be paid to a family if it exceeded their tax liability
In addition, the value of the loan was linked to income, gradually as the annual household income exceeded $ 2,500. If a family's income weren't high enough, they would receive less than $ 1,400 per child, with some receiving a far lower payment or even nothing ./12
These restrictions purposely prevent the poorest children from receiving the benefits of full credit and result in families with the lowest incomes not receiving credit at all. The majority of children in families in the bottom 10 percent of the income distribution were not eligible for the loan at all, and the majority of children in the bottom 30 percent were only eligible for a partial loan ./13
Because of these limitations, 70 percent of children in families led by a single parent, female parent, or guardian were not eligible for the full credit. This is due in part to structural sexism, which promotes the gender pay gap and, in particular, lowers the income of women and mothers, women and mothers of color ./14
This program design also creates dramatic differences for children in terms of racial demographics. Black and Hispanic children who are already more vulnerable to poverty due to the way racism, sexism and other forms of structural marginalization manifest themselves in economic and social policies are less likely to receive the full loan amount compared to white children ./fifteen
More than half of black, non-Hispanic, and Hispanic children are not eligible for full credit because their household income is too low, compared to 23 percent of white children ./16
The Biden administration's American Families Plan fixes this fundamental flaw and makes the CTC's full refundability permanent ./17
Similarly, the combination of the EITC's age restrictions, the phase-in structure designed to create incentives for work, the phase-out structure that begins even when income is below the federal poverty line, and low benefit amounts can be used for workers without qualified children, exclude millions of people below or near the poverty line./18
In fact, the EITC's low maximum loan amount for workers without qualified children – just $ 543 for the full year – rarely offsets the combined income and wage taxes paid by low-wage workers. So the limited EITC is actually helping push millions of workers into poverty
And while EITC benefits for those without qualified children are sometimes referred to as "childless EITC" for short, it affects an estimated 780,000 parents whose children do not live with them enough time to qualify for larger amounts of EITC, even if they bid continue to give them financial support
The expansion will help workers and children for whom the pandemic has exacerbated financial hardship
The expansion of the EITC and CTC specifically targets populations most affected by the pandemic, including children, low-wage workers, young adults and people of color.
It is well known that low-wage workers – who are disproportionately women and people of color – have experienced the brunt of the pain of the pandemic economy
This is partly due to the way systemic racism, sexism and other forms of marginalization have focused workers with the least economic and political power in sectors where jobs are underpaid and undervalued. However, a study by the Bureau of Labor Statistics finds that the concentration of low-wage workers in "low-wage" sectors does not fully explain the differences: in a wider variety of industries, the worst-paid workers have suffered disproportionately. 22nd
The same study found that low-wage workers who remained employed during the pandemic were more likely to work part-time for economic reasons, which further constrained their income.
The temporarily expanded EITC includes new workers ages 19-24 and workers 65 and over to ensure that millions more low-wage workers can benefit from the tax credit. Younger workers – defined as people between the ages of 16 and 24 – tend to have a persistently higher level of unemployment and underemployment than workers aged 25 and over, even in tight labor markets
At the height of US job losses in April 2020, workers ages 20 to 24 had an unemployment rate of 24 percent
And even among younger workers, the population suffering from demographic numbers disproportionately shows an all-too-familiar pattern – young colored workers and especially black women face serious setbacks when looking for work, even when the economy begins to recover. / 25
For these workers, the EITC is just one of the many forms of income support required for equitable economic recovery, especially given that the economic consequences of recessions follow young adults throughout their lives, depressing overall incomes and worsening economic outcomes . 26th
Similarly, extending the new CTC measures to include permanent child benefit would support families and children who were disproportionately exposed to economic damage during the pandemic. During the height of the recession in April 2020, the proportion of children with at least one unemployed parent reached its highest level in 50 years
Between 5 and 9 million children lived in households where they did not eat enough because their families could not afford to eat, and one in three adults in households with children reported difficulties in meeting common expenses such as rent, food and medical expenses ./28
Due to systemic racism and marginalization, black and Latin American children were most likely to be affected by this harm ./29
The economic devastation of the pandemic was not inevitable. The fragile U.S. safety net, tied to difficult work demands, difficult to navigate, and entangled in racist and sexist narratives that instilled stigma against recipients, was ill-prepared to handle the influx of millions of people in need. / 30
Now, the COVID-19 pandemic and the resulting recession have already exacerbated painful inequalities for low-income people and others from historically marginalized communities. The impact on these families is likely to last much longer than the temporary expansion of the tax credit.
Enlargements make the economy more resilient to downturns and shocks
A permanent expansion of the EITC and child benefits would make households more resilient to economic shocks and create a more resilient economy overall. In the near future, the temporary expansions to the American rescue plan will provide a much-needed cash feed for families struggling to get through due to the coronavirus pandemic and the ensuing recession, which will result in a much faster recovery. Estimates show that expanding the CTC and EITC are two of the most powerful forms of incentive, generating up to $ 1.50 in economic activity for every $ 1 spent
However, providing cash support to families, especially at regular rates throughout the year, would also help smooth out volatile incomes, simplify financial planning, and make families more economically stable overall, even after the economy has recovered ./32
This, in turn, would dampen the impact of future economic downturns, empower communities that will feel the effects of the recession long after the topline numbers return to normal, and lift millions out of poverty.
Permanent CTC and EITC extensions are important public investments
Changes to the CTC and EITC are not just an emergency response to the acute withdrawal caused by the COVID-19 pandemic and the associated recession. Rather, they are an important and overdue public investment in children and low-wage workers.
Investing in children – especially toddlers under the age of 6 – produces incredibly positive benefits for child health and well-being, future income, and long-term economic mobility. According to some estimates, increasing the family income of a child under the age of 5 by just $ 3,000 can increase adult income by nearly 20 percent
Income support programs such as CTC and EITC have also been shown to significantly improve infant and maternal health and child performance in school and improve future levels of education
Despite this, total federal spending on children – including mandatory and discretionary programs – fell by 8.6 percent between 2016 and 2020
An investment in the CTC in its currently expanded form – fully refundable with larger loan amounts included in the temporary extension and distributed monthly – would bring society around $ 800 billion in overall benefits./36
While the Biden government's plan extends the increased loan amount to $ 3,600 for children under 6 and to $ 3,000 for children 6-17 years old by 2025, it is important that these larger amounts be permanent. Otherwise, with no action by Congress, the loan amount will decrease to $ 1,000 after 2025, significantly reducing its usefulness as a public investment and poverty reduction tool
For low-wage workers, poverty is associated with adverse health consequences, including shorter life expectancy and higher sickness rates, a problem that is often exacerbated by the lack of stable health insurance and access to care
In addition, the psychological stress of experiencing poverty – the fear and stress of having basic needs met, the physical and emotional stress of food insecurity and housing instability, the struggle from paycheck to paycheck – associated with increased levels of mental health problems are strong and quality of life affect. / 39
Expanding poverty reduction programs such as the EITC that target these workers is an important investment in their wellbeing.
Keys to Designing and Implementing Effective Child Allowance
The design of permanent child benefit and the expansion of the EITC will determine whether the reforms can live up to their promises. Policy makers need to ensure that legislation and implementation take into account the following principles:
Focus on simplicity and reduce the administrative burden
The American social safety net is known to be difficult to navigate, but any permanent child allowance and EITC extension must be easily accessible to recipients and free from the administrative burdens that limit the effectiveness of reforms. According to the current iteration of the program, a household must apply for tax in order to claim the CTC and EITC benefits for which they are entitled. This poses serious challenges.
Very low or no income families who are new to the CTC are generally not required to file federal taxes. However, they are expected to understand how to obtain their benefits and go through complicated, time-consuming formalities in order to access their funds. Even with aggressive contact, some of these families are likely to miss out. Research shows that the populations most likely to be excluded due to this administrative burden reflect the children who were previously excluded from the tax credit phase-in structure. In 2019, an estimated 5.5 million children were living in households that were not taxed that year. 1 in 3 children in households with incomes below the poverty line were also in no-tax households, as was 1 in 2 children in "deep" poverty, defined as 50 percent of this threshold. Fifteen percent of black children, 9.2 percent of Latino children and 4.7 percent of white children lived in households without filters
To truly advance racial and economic justice, barriers to access to benefits for those who have not filed a tax return need to be addressed and, as much as possible, the burden of managing the benefit shifted to the federal government rather than the recipients.
Likewise, extended authorization for the EITC does not guarantee extended access. In the 2017 tax year, the IRS estimated that only 78 percent of eligible households participated in the EITC./41
Even for individuals who've managed to maintain their performance, some face an additional hurdle: EITC applicants are being over-exploited by paid tax advisors who promise to file their complicated tax returns at an average of $ 400, which is a substantial Part of the refund / 42
As explained below, Congress needs to greatly expand the practical ways people can file taxes for free and contact unscrupulous or incompetent tax advisors. A permanent version of these guidelines must be easy to obtain for all eligible households, without exorbitant fees and complex, time-consuming documentation to access money that is rightfully theirs.
Invest in the implementation
Shifting the administrative burden to the federal government means investing appropriately in the agencies that are expected to do the job. While there has been some debate about whether the IRS or the Social Security Agency (SSA) is the federal agency best suited to administering a child benefit, there is an obvious similarity between the two options: they have been systematically underfunded, and this divestment has been serious Consequences for the administrative capacity of each agency./43
The IRS is currently handling the monthly payout of the CTC temporary extension provided for in the American Rescue Plan. Although the agency was hired to undertake these major new tasks, its budget was slashed and its workforce was reduced significantly. Measured as a percentage of total tax revenue, the IRS budget has declined nearly 50 percent since its peak in 1993 and has declined 40 percent since 2010. As a result, the agency has cut 16 percent of its workforce over the past decade. 44
The budget cuts have not only hampered enforcement of the country's tax laws – which has benefited wealthy tax evaders and corporate tax evaders – but also hampered the IRS's ability to provide quality services to taxpayers
For example, the agency currently only answers 1 in 50 calls from taxpayers asking for assistance./46
The SSA has also faced significant funding cuts in recent years. Since 2010, the operating budget has decreased by more than 10 percent and the number of national employees has decreased by 12 percent./47
The budget cuts have already contributed to longer waits for the Social Security toll-free phone line, the closure of more than 500 cell phone offices and 60 branch offices, and other administrative issues that directly impact people's experience of contacting the agency to maintain their services. / 48
Regardless of which agency is tasked with administering the child benefit, providing the benefit amount in regular payments will create a number of additional administrative problems, including ensuring that payments reach all eligible households, reducing the compliance burden and the Fixed technical issues such as overpayments. To ensure the agency is able to cope with these new challenges, Congress must provide a significant multiannual flow of funding to allow the agency to hire and train staff, update legacy technology, and improve customer service. Efficient implementation also requires investment in coordinating administrative data between government agencies and federal benefit programs such as the Supplemental Nutrition Assistance Program (SNAP) to support automatic enrollment where possible.
In addition, permanent expansion of the CTC and EITC needs to be accompanied by a solid public relations investment to ensure that people are aware of and are actually receiving the benefits. These efforts include providing funding to volunteer income tax support sites and low-income local tax advisors, community and grassroots tax filing support organizations, and coordinating between federal and state agencies to reach as many eligible families as possible.
Given the failures of the IRS free files program, the agency should develop its own free online filing option./49
A simple, accessible, government-run program would help reduce the need for low-income people to rely on the often expensive private tax preparation that many currently do to maintain their EITC. President Biden's American Family Plan includes a proposal that clarifies that the IRS has the power to regulate paid tax accountants. This proposal was supported by both parties and even approved by the Trump administration
A simplified filing tool would also help the millions of families who are new to the CTC but otherwise not required to file federal taxes when applying for their credit.
Center hard-to-reach communities
While there are many steps that congressional and federal agencies can take to make filing easier for EITC and CTC recipients, it is equally important that the loan design itself focuses on communities that are considered "difficult to reach" .
For example, all families who otherwise qualify should be able to receive the benefit, regardless of their immigration status or that of their children. Currently, the EITC is not available to people without a social security number. In the case of married couples, the entire family is excluded if one spouse does not have a social security number. In addition, the Trump-era Tax Cuts and Jobs Act amended the CTC to exclude children without a Social Security number, eliminating critical support for nearly 1 million children in low-income households / 51
Any permanent expansion must include these children and remove barriers for migrant families.
Continuing child support and the EITC must also consider rules that maximize flexibility for changing conditions, including minimizing the registration burden, automatically managing benefit when possible, and ensuring a strong safe haven for families where families change – or life circumstances could put them at risk overpayment.
For recipients of homelessness, those without stable housing, and those without a bank account, Congress and the US Treasury Department should consider expanding the use of Direct Express or other easy-to-use debit card payments. The establishment of an inexpensive banking system through the US Postal Service would also ensure that the loans are paid out to eligible persons who may not be or are insufficiently banked
These alternative payment methods can have the added benefit of helping recipients not to turn to predatory financial services to access their loans.
While the federal government has made some changes to improve accessibility – for example, the IRS is building a portal for families to keep information like address, bank account, and family circumstances updated – it's important that Congress keep it up is working to design a permanent loan that is available to everyone, including those who live in rural communities without a nearby IRS or SSA office, or in areas with no broadband internet access. By expanding resources for first-time tax advisors and young people who previously worked in foster care, it will ensure, among other things, that the benefits reach the people who need them most.
Guaranteed income for families with children from birth to 17 years of age and improved credit for childless workers, which include young workers 19 to 24 years of age and workers 65 and over, are major public investments in communities that were often excluded from reforms of the social safety net. This federal investment is also a commitment to the moral truth that the government has a responsibility to support the economic security of its residents and to ensure that all children thrive. Sustained child support and an expanded EITC would have the potential to increase the resilience of the economy to negative shocks, vastly improve the social safety net, ensure the next generation inherits a fairer economy, and dramatically reduce poverty in the United States .
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You can find endnotes at https://www.americanprogress.org/issues/poverty/reports/2021/05/21/499777/now-time-permanently-expand-child-tax-credit-earned-income-tax-credit/