A big question for lawmakers and presidents is: What will happen if we do this new thing? It is hard to understand economics and taxes. A change in the economy should raise the incomes of Americans, but if it is not put properly into effect, it can have bad effects.
Policymakers rely on economists to make models of the effects of proposals. But now, there is a big fight among them about whether President Obama’s child tax credit would reduce poverty as much as advocates say it would. At stake is how much the president’s proposal will help us (and how).
The economists are very intelligent. They care about poverty issues. Tensions have risen, even to the point of sparking a formal letter asking for a correction in an influential report on reducing childhood poverty issued by the National Academy of Sciences.
The Fact Checker cannot help with an economic dispute of this size. I have researched the literature and talked to the economists involved to explain the situation without getting too technical.
Joe Biden expanded an existing child tax credit so it would be monthly. This is a good idea because 108 other countries have monthly allowances for families.
Biden changed the tax law so that parents under a certain income limit receive $3,600 per child ages five and younger and $3,000 per child ages 6 to 17. Previously, in most cases, they only received the credit if they had paid their taxes. Now families can get the credit even if they work less than full time or don’t pay taxes at all.
Biden planned to give people with children more money. Under the old plan, a single mom with two kids working full time and earning $14,500 per year would receive $1,800 per child. Biden plans to give them $6,000 for that same family, and they would get 500 dollars every month.
This expansion is only in effect through the end of this year, but Biden’s Build Back Better plan would make it last longer and make it permanent. Economic elasticity is the change in demand or supply with a price change. It can be applied to labor economics, or how much people want to work at different wages.
For example, the earned income tax credit is a very good law. It helps poor people. If you work, you will get money for every hour that you work. You can even get back the money if your income is low!
The EITC (Earned Income Tax Credit) is an incentive for people to work. If people don’t work, they won’t get money. Up until this year, the Child Tax Credit was like the EITC in that you only got it if you worked. Joe Biden’s new proposal would give the credit (money) to everyone who has children regardless of whether or not they work. The question is whether giving this money out to everyone will encourage people not to work anymore and stop working to collect lots of money from their government?
People work more if their wages go up. But people might not work if they make enough money without working. And people will want to buy things with more money, like food and clothes.
A report by an Academy wrote about a child allowance policy of $250. They said its effect on employment is negligible (about 150,000 fewer workers). It would reduce poverty by 36% and deep poverty even more. Four hundred sixty-two economists agreed with this report.
Experts who review this issue for the National Academy of Sciences say that a child allowance would have a small effect on jobs. They wrote an open letter to Congress about it on September 15.
But a new paper from Bruce, Kevin, and two of their friends at the University of Chicago says that child poverty would go down 34% with Biden’s expanded child tax credit even if no one changed their behavior because of the policy.
The substitution effect means that about 1.5 million people will stop working because of the money they are getting from the child tax credit. About ten times more people will quit their jobs than the Academy predicted. That is 1.3 million workers who are quitting and 140,000 who are quitting because of the income effect.
Meyer and Corinth said, “Child poverty would only fall 22 percent — and deep poverty not at all. Moreover, they said, the policy would erase most if not all of the gain in employment by single mothers since the 1990s.”
The calculations are based on the input. The input is how many workers will have enough money to work. But if they are not working, it depends on the number of hours they can work. This number is called the elasticity of employment participation. Some numbers show what this number should be for people who receive the EITC, but these numbers are different from children’s tax credit, so economists need to choose which one to use.
That is part of the dispute, which we will talk about in detail below.
Meyer and Corinth said the Academy panel made an error. The Academy panel never applied the substitution effect to its calculations on the child tax credit. But it did concern a proposed expansion of the Earned Income Tax Credit (EITC). This means that they calculated that working is good for people, but not that having children would be bad for them.
For example, the Academy Report assumes that $1,000 of extra EITC will generate a 7% (5.6 percentage point) increase in employment for women with some college or less. Therefore, converting the child tax credit to an allowance should be like taking away $2,000 (or more for multiple children) of work incentive.
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Meyer and Corinth sent a letter to the National Academies of Sciences, Engineering, and Medicine. They want them to correct what they said.
The people on the panel said that they didn’t model how much it would cost to have a child tax credit. They explained that the new law was passed during their report, and before then, there was only a credit of $1,000. This amount isn’t big enough for them to calculate how much it would cost people.
Most thoughts were about families who didn’t have money or who would stop work. But there weren’t any estimates for when people make $25K-$40K. So we ignored them.
The people who do the modeling, Hilary Hoynes and Robert Moffitt, sent a message. They said that it was wrong for me to say that they did the modeling.
“When we were coming up with our policy, we thought that people would notice a $2,000 increase in income more than they would notice a small reduction in the working gain. It is easier to notice a large increase in income than it is to notice a very small reduction. That is why we chose our policy.”
Academy panel members are not happy with Meyer-Corinth’s numbers because the report said people making more than $50,000 would drop out of the workforce if given child tax credits, but Academy panel members say that is not believable.
Meyer says that if you took people who make more than $50,000 out of the calculation, his research would still show a decrease of 1.1 million people. That’s higher than the Academy panel estimates.
“We think that we were right in our assessment, but the employment effects might be bigger than we thought. As good scientists, we are willing to change our opinion if shown hard evidence that we were wrong. But it would be very hard for us to accept an analysis like this one (referencing Corinth-Meyer) because they are wrong.
Ultimately, the result will depend on how much an economist believes workers are affected by the incentives and disincentives in tax policy. That is their elasticity. If you find a different number, then you get a different result.
Economists have been overestimating the impact of the EITC on work. Women are becoming more like men, and as a result, they are less influenced by changes in wages.
Meyer and Corinth only chose the elasticity for single mothers who receive the EITC. It’s about 10 million people. They chose a different elasticity for everyone else.
In a new research paper, about 500,920 to 578,197 parents will stop working if the child tax credit expands. This is much higher than the panel from the Academy but not as high as Meyer-Corinth’s result.
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An earlier version of this paper seemed to support the elasticity that Meyer-Corinth used for single women receiving the EITC. But a new version says that sentence has been removed, and there is a footnote criticizing Meyer-Corinth’s methodology. The authors did a more rigorous review of the literature as part of their update, which resulted in a smaller elasticity.
Meyer and Corinth think Hoynes made a mistake in a paper before. Because of this, they don’t think she is right about the numbers in her letter to Congress.
I am really surprised that Hilary, who I have known for 30 years, made a mistake about the elasticity. This is not difficult to figure out. Hilary is not doing the most simple calculation right. I am very surprised and sad. She would need to use a more accurate calculation, so she gets the number she wants.
Putting aside what other people say, the answer is yes. I reject his idea that I calculated something wrong.
There is a big question about which numbers are correct. If parents work less, this could be good. They can spend more time teaching their children, and this could make them smarter in the future. Economists think it is good to give people choices because they may do something better than what they would have done before.
In our college course, the professor told us a joke. A scientist, an engineer, and an economist are stuck on an island with one food tin. They need to open it. The scientist says they can use the sun’s rays, and the engineer wants to use a coconut shell. The economist says that we should assume that they have a can opener before deciding next.
The things that make the difference in if the expanded child tax credit is a disincentive to work are what you think. All agree that it would be some disincentive, but where it is meaningful is in dispute. You can choose an elasticity number and then look at different types of workers to see what happens.
The range of the policy has political stakes. The actual number will never be known unless the policy is implemented. Assumptions can take you so far but not always.
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