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Child Allowances: A Simple and Inexpensive Way to Help Families With Children 

by Steven Pressman

Jul 5, 2021 | Economy

David Davies. A young girl in McAllen, Texas, lines up at a Salvation Army feeding truck.

Raising children is expensive. A typical middle-class, two-child family spends $13,000 annually on each child, or nearly a quarter-million dollars per child in total through age 17. This tally includes neither college costs nor the cost to a family of putting money aside to help the children attend college, which itself can easily run another quarter of a million dollars or more for each child. The challenge is even greater for poor families that have little income and need to spend a large fraction of it supporting their children. Most families with children in the United States today are struggling financially. 

Fortunately, there is a remedy—child allowances. These are regular payments from the government to families for the sake of their children. Think of it as universal basic income, but for children only. The aim is to help families support their children and keep families from being penalized because they have children and more mouths to feed. This pro-child policy is necessary because firms won’t pay workers more money if they have children. Any firm that did this would find itself at a competitive disadvantage. For this reason, virtually every country in the world has a child allowance program. (For more on child allowances in France, see my piece in the August 2018 Washington Spectator.)

Nations benefit from helping low-income families with children. Children growing up in poverty get less education, earn less income, and pay less in taxes. They are a bigger burden on society throughout their life. They experience more health problems, raising insurance costs for everyone, and receive more social insurance benefits. Finally, there is considerable evidence that poverty has noneconomic costs—it creates anxiety and behavioral problems in children and leads to greater instances of depression compared with non-poor children. 

Support for child allowances comes from across the political spectrum. Conservatives like that they encourage parents to stay at home and care for their kids and that they don’t require the government to make decisions about people’s lives. As the Niskanen Center, a conservative think tank, put it, child allowances “leave paternalism to the parents.” Liberals like the fact that child allowances don’t stigmatize the poor by providing means-tested benefits (such as SNAP or Food Stamps) and because they are an effective way to reduce child poverty.  

Nobel laureate economist Robert Solow estimated the annual cost to the nation due to child poverty at 3 percent of U.S. gross domestic product, or approximately $630 billion today. The Center for American Progress estimated the annual cost at 4 percent of GDP, or $840 billion. The cost comes from reduced employment and taxes plus higher crime rates and health care expenditures. 

Providing child allowances is a highly effective way to reduce child poverty and decrease these societal costs. According to the U.S. Census Bureau, 14.4 percent of U.S. children (one in seven) were poor in 2019. The Luxembourg Income Study, a cross-national database with comparable information on household income, estimates that in the mid-2010s the child poverty rate in the United States for two-parent families was 13 percent. By comparison, the child poverty rate for two-parent families was 7.9 percent in Germany, 7.7 percent in the U.K., and 1.6 percent in Finland. My research traces these international differences directly to government policies aiding families with children, particularly child allowances. 

Given the benefits of reducing child poverty, why has the United States failed to adopt a child allowance program? Partly, the reason is that the United States has used other policies to help families with children. 

The main source of support for families with children has been a tax exemption for each child. In 2017, the last year that this tax benefit was available, each dependent child provided an exemption that reduced taxable income by around $4,000. The tax saving for a family then would depend on its tax bracket. Those in the top tax bracket (40 percent) got back $1,600 per child; a family in the 10 percent bracket gained only $400 from a $4,000 child exemption. Those in the 0 percent bracket, owing no taxes, got no help. This was an upside-down subsidy. It helped the affluent raise their children, but it did nothing to help poor families and little to help middle-class families.  

A push for change began in the 1990s. The National Commission on Children recommended a universal $1,000 child tax credit (the equivalent of $2,000 today) in a 1991 report. With a tax credit, every household receives the same monetary benefit. It is very nearly a child allowance. The United States first instituted a $400 child tax credit in the 1997 Taxpayer Relief Act. But the credit was not refundable. Families owing no taxes got nothing; and families owing less than the full amount of the credit only got back the taxes they owed to the Federal government. Low-income families, needing the most help to raise their children, were helped the least. 

When George W. Bush increased the tax credit to $1,000, as part of his 2001 tax cut, Democrats pushed to have it be partially refundable. The credit has been increased several times since then. In 2020, the credit was $2,000; $1,400 was refundable to those with at least $2,500 of earned income. Still, families with children in the greatest need received no aid or very little. The Brookings Institution has calculated that 40 percent of the $118 billion spent on this program in 2020 went to households with incomes above $100,000. In contrast, most children living in households in the bottom 10 percent of the income distribution got nothing.  

Child poverty experts in Congress, including Democratic Senators Michael Bennet of Colorado, Sherrod Brown of Ohio, and Representative Rosa DeLauro of Connecticut, have pushed long and hard to make the tax credit fully refundable. They succeeded when President Biden signed the American Rescue Plan on March 11. This $1.9 trillion Covid-19 relief bill increased the child tax credit from $2,000 to $3,000, with an extra $600 for children under age 6, and made the credit fully refundable. 

Finally, the American Rescue Plan stipulated that payments be made monthly to families with children, rather than annually through a tax refund. Beginning July 2021 and continuing through June 2022, most families will get monthly payments from the IRS of $300 for each young child and $250 for children over the age of 5. Providing money sooner helps the many families with variable income. Monthly payments will also reduce child hunger and homelessness, as well as the high-interest debt that families incur (e.g., payday loans) to put food on the table and pay utility bills. As a full child allowance policy, these payments will make a huge difference in the lives of children whose families live paycheck to paycheck. 

The Center on Budget and Policy Priorities estimates that the changes in the child tax credit will lift 4.1 million children above the poverty line. The Center on Poverty and Social Policy at Columbia University estimates that nearly five million children will escape poverty due to these changes, reducing the U.S. child poverty rate to 7.9 percent. It will cost $109 billion, according to the Congressional Joint Committee on Taxation. 

Given the costs of child poverty, as estimated by Solow and the Center for American Progress, the American Rescue Plan should pay for itself quickly by cutting the U.S. child poverty rate nearly in half. Virtually no private investment has such a large rate of return. Furthermore, the government can borrow money for this investment at the rate of around 1.5 percent (the interest rate on 10-year government bonds). 

Like Cinderella at midnight, after June 2022, the fully refundable child tax credit will return to what it was during 2020. A number of Democrats hope to make the refundable tax credit permanent. If they succeed, it would be a major step forward in reducing child poverty in the United States.  

A permanent child tax credit, or child allowance program, would be of significant help to low- and middle-income families with children. The reduction in child poverty will benefit the entire nation in demonstrable ways. It is time to follow the rest of the world and make this a permanent feature of the U.S. tax code.   

Steven Pressman is professor of economics at Colorado State University, author of Fifty Major Economists, 3rd edition (Routledge, 2013), and president of the Association for Social Economics.

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