“For every $1 we spend on lifting kids out of poverty & cutting taxes for the middle class w/ the #ChildTaxCredit, we save $8.”
— Rep. Suzan DelBene (D-Wash.), in a tweet, Oct. 5
President Biden wants to ramp up tax credits for families with children, one of the key planks in his economic agenda.
DelBene, the vice chair of the House Ways and Means Committee, which handles taxation, says the proposal is a no-brainer because every dollar spent would generate $8 in savings.
She is referring to a study from the Center on Poverty and Social Policy at Columbia University, according to her staff. However, when we ran the study by other fiscal experts, they said its assumptions were so optimistic as to be suspect.
The Facts
The Democrats’ $3.5 trillion spending proposal would among other things beef up the Child Tax Credit (CTC). The age limit for eligible children would be raised from 16 to 17, and the value of the tax credit would increase from a flat rate of $2,000 per child to $3,600 for children 5 and younger, and $3,000 for those ages 6 to 17.
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Biden and Congress already implemented these higher tax credits for 2021 as part of a coronavirus relief package in March. Democrats now propose extending the bigger tax break into future years.
“Initial fiscal costs of the American Family Act’s expansion of the Child Tax Credit equal roughly $100 billion per year,” the Columbia University study, led by researcher Irwin Garfinkel, says. “The present discounted value of current and future benefits for society equals roughly $794 billion, or approximately eight times initial costs. Recipients of the transfer gain $810 billion per year. Each year, taxpayers recoup $84 billion of the $100 billion investment.”
The researchers estimated that 81 percent of the $794 billion in economic benefits would come from improvements in health and longer life expectancy for children and their parents. The baseline assumption is that each healthy life has a value of $10 million, and the study concedes that lowering that estimate would change the numbers significantly.
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“I think it’s pretty silly, to be honest,” said Marc Goldwein, senior policy director for the nonpartisan Committee for a Responsible Federal Budget. “The study is not saying that there’s $800 billion going to the federal government for every $100 billion spent on the Child Tax Credit. It’s suggesting a very high return to society — and reducing child poverty does have a high rate of return for society, but the idea that it’s 8-to-1 is highly suspect.”
Goldwein said the study appears to estimate that $58 billion in reduced health-care costs would be taxpayer savings, “as if lower health premiums is higher federal revenue.” The study assumes that a $1,000 monthly increase in household income would raise life expectancy by one month, Goldwein said, which would mean that over 11 years of the proposed CTC expansion, the average child’s life expectancy would increase by four-and-a-half years.
At the same time, the study does not appear to factor in the borrowing costs and higher taxes required to pay for the bigger credits, or the added burden on Social Security or Medicare from longer life spans, he added.
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The Columbia study uses published research on various types of transfer payments to estimate the potential benefits to society of a CTC expansion, such as reduced child-protection or criminal-justice costs, but the bulk would come from healthier, longer lifespans.
“Even a tiny increase in life expectancy has a huge return, because you’re assuming $10 million per life,” Goldwein said. “When you dig through how they’re calculating it, I’m just not buying it. They’re looking at studies that are totally different types of things: World War I pensions and food stamps.”
Erica York, an economist at the right-leaning Tax Foundation, pointed out that the Columbia study includes caveats that acknowledge the uncertainty in estimating future costs. The Tax Foundation estimates that making the bigger CTC permanent would lead to a 10 percent increase in after-tax income for the bottom 20 percent of taxpayers, decrease jobs by 38,000 and cost $1.6 trillion over the next decade.
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“Most of the estimated savings to taxpayers in the study is the result of health care savings due to estimated reductions in out-of-pocket costs to beneficiaries and in public and private costs for insurance,” York wrote in an email. “The study itself notes that the estimates of anticipated benefits to society are highly uncertain, but asserts there is reason to believe the effects would be very good to extraordinary. Often though, as is the case with the literature on labor supply effects of the expanded CTC, there is more uncertainty or ambiguity than typically conveyed by proponents.”
The Columbia study includes different estimates when assumptions are broadened or narrowed. It says “there is a fair range of uncertainty about precisely how good an investment AFA represents. But in the current context, the most plausible estimates range from AFA being a very good to extraordinarily good investment in our Nation’s future.”
We asked Garfinkel how confident he was in the 1-to-8 ratio. He wrote in an email about two sets of results his team produced this year: “The August results indicated that every dollar invested generates a little less than $8 in social benefits. The earlier results indicated a bit more than $8. The earlier results indicated taxpayers save nearly 1/2 of the initial expenditure of $100 billion per year. The later results indicated taxpayers saved 84% of initial expenditures. The biggest gains in social benefits go to recipient children in the form of higher earnings as adults and better health and longer lives.”
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A different study, from the National Bureau of Economic Research in September, found that the expanded CTC effectively would cost $70 billion a year, after accounting for a $109 billion annual expense and $40 billion generated in “long-term earning effects.”
The lead author of that report, Jacob Goldin, said in an email: “We’re only focused on fiscal costs and really only looking at additional tax revenue from higher earnings by children as adults. They are looking at a broader range of things.”
“But the bottom line is similar to what the Garfinkel et al. study found: there would be small changes in labor supply today that would not meaningfully affect the fiscal cost of the expansion, whereas the long-term benefits to children would yield important gains for society in the form of higher tax revenue and lower medical costs,” Goldin said.
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A spokesman for DelBene, Nick Martin, said in an email: “The congresswoman has been a leader on CTC for many years and we’ve worked with Columbia during that time and find their research to be thorough and credible. While other researchers might come to different conclusions, Columbia has significant long-term experience studying the CTC and other child allowances.”
The Pinocchio Test
DelBene is relying on a study that says an expansion of the Child Tax Credit proposed by Democrats would generate $8 in economic benefits for society for every $1 spent.
But lawmakers should look under the hood. The Columbia study acknowledges that its estimates are subject to “a fair range of uncertainty,” other budget experts found its conclusions to be implausibly rosy, and other research suggests significant but more modest benefits to society.
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We debated whether to award Two or Three Pinocchios for her tweet, and landed on Three. What tipped us over is that DelBene is not citing the Columbia study correctly in our view, as it doesn’t say the same taxpayers spending $1 would be saving $8. In fact, the researchers broke down their cost estimate (a net $16 billion a year for taxpayers) and said most of the economic benefits would accrue in a different, theoretical way to society as a whole.
Three Pinocchios
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