Child Allowances Make the IRS America's Number One Welfare Agency
Definitions of welfare vary but usually involve cash and cash-like government benefits provided directly to low-income individuals, whose costs are supported by taxes paid by others. That distinguishes “welfare” from “social insurance” like unemployment benefits, Medicare, and Social Security that individuals earn directly through work and the payroll taxes they and their employers pay. By that standard, the coming surge in “child allowance” payments that will flow disproportionately to low-income parents will make the IRS America’s number one welfare benefit-paying agency.
In their March 2021 $1.9 trillion American Rescue Plan, Democrats converted the former up to $2,000 child tax credit into a “child allowance” worth a flat $3,000 or $3,600 per child in 2021. Those larger payments will start being distributed in monthly allotments this July, including for the first time to parents who don’t work at all. Such monthly payments to even nonworking parents resemble America’s former welfare system. They also contrast sharply with the $2,000 tax credit, which required parents to work to claim any assistance, grew as low-income parents worked more, and was only partly “refundable.” That’s the doublespeak term for payments made by the IRS to individuals who don’t earn enough to owe federal income taxes – which makes it logically challenging to “refund” taxes they never paid in the first place.
The largest financial gains from this switch will flow to nonworking parents, who will see annual payments from the IRS rise from zero today to $3,000 or $3,600 depending on the age of the child. Close behind will be parents who work generally part time but still owe no federal income taxes. Their annual payments will rise from up to $1,400 today depending on their earnings to the same automatic $3,000 or $3,600 per child. Nonetheless, President Biden has taken to calling these expanded payments “tax cuts” or more recently a “tax break”: “We need to give ordinary families a break – a tax break – to help them with the cost of raising their kids,” Biden said at the White House on May 17.
But the vast majority of the coming expansion will not be a “tax break” as the President suggests. Official estimates from the nonpartisan Congressional Budget Office (CBO) show over 80 percent ($88.5 billion) of this year’s expansion reflects increased “refundable” payments, with less than 20 percent ($20.7 billion) comprising actual tax relief. Only for middle- and upper-income parents who owe significant federal income taxes is the expansion a tax cut. In contrast, as the CBO projections show, the bulk of the new benefits will flow to lower-income parents who now owe little or no taxes.
By repealing the child tax credit’s connection to work and making these new, larger payments entirely refundable, child allowances will also effectively turn the IRS into America’s number one welfare benefit-paying agency. As the chart below displays, the resulting $130 billion in refundable child allowances this year will dwarf recent annual food stamp payouts from the Department of Agriculture, Supplemental Security Income (SSI) payments from the Social Security Administration, and welfare checks payable under the Temporary Assistance for Needy Families (TANF) program administered by states and the Department of Health and Human Services:
Some might argue the IRS already holds this crown. For example, the chart above doesn’t include the current roughly $70 billion in refundable Earned Income Tax Credits, also paid by the IRS. But those payments promote work over welfare by flowing only to adults (mainly parents) who work, in contrast with child allowances now payable even to nonworkers. The chart also does not include the share of over $800 billion in stimulus checks the IRS paid in the past year to low-income individuals, which presumably will be limited to the pandemic. In contrast, President Biden has proposed extending the child allowance expansion through 2025, while other lawmakers would make it permanent.
The massive tide of expanded and fully “refundable” child allowances paid this year and possibly into the future fits the definition of welfare, with large increases in benefits focused on low-income households and the cost for many borne entirely by other taxpayers. That’s especially true of the millions of checks that will flow for the first time to parents who don’t work at all, recalling the worst of former welfare policies. That not only belies the “tax break” marketing President Biden and other supporters use. It also has the ironic effect of turning the IRS – the nation’s revenue collector – into its largest welfare benefit payer as well.
Matt Weidinger is the Rowe Fellow in poverty studies at the American Enterprise Institute.