The Problem with the American Families Plan

5/6/21

Among the most consequential accomplishments of the Biden administration thus far has been the expansion of Child Tax Credits under the American Rescue Plan Act of 2021, which pays qualifying families $3,600 for each child under 6 years old and $3,000 for each child between 6 and 17. Eligibility is restricted, however, to married taxpayers filing jointly and widows and widowers with incomes below $150,000, heads of households making less than $112,500, and an upper bound of $75,000 for everyone else. According to the White House, this program will impact 66 million kids and cut child poverty in half.

Given the broad coverage of the bill, Democrats are counting on popular support for the program; and under the American Families Plan, the administration is hoping to continue with these provisions through 2025 — i.e., the first step toward making them permanent. I support this initiative, but I do so with considerable reservation. It’s a good start, but it could be much improved.

The family with two adults and two children under 6 years old gets $7,200 a year — whether they make nothing or as much as $149,999. The transparent Democratic strategy — readily admitted to by Senate Leader Schumer — is to buy the favor of most Americans by assuring that the benefits of this and other programs accrue broadly, so that most Americans can tangibly feel like government is delivering for them; but the design of this provision simply gives too much to higher income households at the expense of lower income households.

Seventy-two hundred dollars isn’t nothing to households making in the range of $150,000, but the impact of those same number of dollars to households at the lowest level of the wealth spectrum is so much more consequential. I’d much rather see (a) a lower income cutoff and a larger grant going to the recipients remaining, and (b) some measure of progressivity instituted, whereby larger benefits would go to less well-off households. This wish list applies not only in this case, but to a variety of the “one-size-fits-all” benefits proposed by the Biden administration in a range of initiatives in the American Families Plan. A greater use of means testing would improve the package.

My concerns about progressivity would be mitigated somewhat if these benefits were appropriately re-named taxable income supplements, as opposed to “refundable” tax credits. (Refundable tax credits aren’t tax credits in the traditional sense. Rather, they are outright grants that are independent of any associated tax liability.) By considering these benefits to be taxable income, the full amount of the benefit would be given to the lowest income earners who pay no income taxes, but for higher income earners facing a marginal tax rate above 0 percent, some portion of the benefit would be clawed back. Thus, at least some measure of progressivity would be instituted. For example, the married filing jointly household at the poverty line would get to keep the whole benefit; but the household making just under $150,000 would have to return 22 percent of the benefit. (I’d actually prefer to see more progressivity, but I’ll take what I can get.)

In my judgment, the concern I’m highlighting should be a seminal debate within the Democratic party, but I’m not hearing it. Republicans aren’t going to support anything in the American Families Plan, so they’re not worth wasting any time on. If any form of this plan passes, it’ll require holding the Democratic Caucus together. While there may be a consensus to “go big,” there seems to be little consideration of how benefits might be structured to be graduated and means tested. If this discussion is happening, it must be going on behind closed doors. It’ll be a tricky balancing act, but I, for one, favor an allocation of benefits that addresses income and wealth disparities more aggressively than that shown in the pending legislative initiative.

Kawaller holds a Ph.D. in economics from Purdue University.