The Stimulus Bill Is a Step Toward Aggressively Fighting Poverty

The House just passed a stimulus bill that breaks the 25-year bipartisan consensus that the very poor shouldn’t be eligible for cash benefits. It’s a watershed moment — and we should build on it by turning the US welfare state into a poverty-fighting machine.

Democratic members of the Georgia congressional delegation hold a press conference on the $1.9 trillion COVID-19 stimulus package, on Wednesday, March 10, 2021. (Bill Clark / CQ-Roll Call, Inc via Getty Images)

The third big round of coronavirus legislation passed the House this afternoon and is headed for Joe Biden’s desk. Like the two prior rounds, this legislation provided much-needed cash payments to households, primarily through per-person payments administered by the IRS and a bonus payment for individuals receiving unemployment insurance. The bill also put more money into the Coronavirus Relief Fund established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides fiscal support to state and local governments.

In addition to re-upping these measures, the newest bill made one-year modifications to the nation’s tax credit programs, most prominently the child tax credit (CTC) and the earned income tax credit (EITC). As a fraction of total spending in the bill, the changes to these programs were relatively small, but insofar as they point toward where the US welfare state might be headed, they are arguably the most significant.

The Reforms

The EITC was reformed as follows:

  • The maximum benefit for the childless EITC was increased from $543 to $1,500.
  • Eligibility for the EITC was expanded from ages twenty-five to sixty-four to ages nineteen and above.

The CTC was reformed as follows:

  • The maximum benefit was increased from $2,000 per child to $3,600 for children below the age of six and $3,000 for children ages six and above.
  • The CTC benefit phase-in, which excluded the poorest children from the benefit, was eliminated.

These reforms contain a major ideological watershed. In eliminating the CTC benefit phase-in, we finally overcame the twenty-five-year bipartisan consensus that held that very poor people should not be eligible for cash benefits.

Arguably, we overcame that consensus last year when the first two rounds of stimulus checks were available for the first time to the poorest Americans. But those checks did not get scanned in the political discourse as being a revolution in welfare state thinking, while the CTC reform — even though it is also just for one year — did get scanned that way.

The Ideological Fight

Because it was scanned that way, we finally got to have the ideological debate that had mostly gone unspoken for the last quarter-century. In that debate, folks like Oren Cass, Scott Winship, Mickey Kaus, Marco Rubio, and Mike Lee denounced the elimination of the CTC phase-in as the welfare boogeyman of the 1990s. But the denouncements had no effect.

The major liberal publications — like the Washington Post, the New York Times, and the New Republic — that egged on the brutal welfare cuts of the 1990s took the opposite position this time around.

Even one Republican, Mitt Romney, shrugged off the concerns and offered his own alternative child benefit that would have provided even more money to the poorest children than the CTC reform that ultimately passed.

Senator Ron Wyden summed up the general Democratic response to the anti-welfare critiques this time around, even among the most conservative Democratic legislators:

“It’s unfortunate that Senate Republicans are using the same tired old tropes from the 1980s to argue against helping children whose parents are among the poorest Americans,” said Senate Finance Chair Ron Wyden (D-Ore.).

“This is about lifting children out of deep poverty — no parent would be able to live high on the hog because they get a few thousand dollars per year to help feed, house and clothe their child.”

The fact that we had this debate and the pro-welfare side won is something to be happy about. I’ve only been in the policy game for around ten years, but even I know that, until recently, non-phased-in cash benefits were seen as so ridiculous and pointless that it’s a waste of time to even talk about them.

Messy First Steps

Although the ideological reversal is something to celebrate, it’s also important to not lose sight of the fact that even the new tax credit regime is an indefensible mess.

All of the critiques I made in 2017 against the precise design of the new CTC are still true. If we are going to eliminate the CTC phase-in, then we should take the benefit out of the tax system altogether and create a universal benefit administered by the Social Security Administration (SSA), something Mitt Romney proposed in response to the Biden bill, which was later endorsed by Vox and the New York Times.

The new CTC operates as a monthly advanced payment of an annual benefit based on annual characteristics that cannot be known in advance. Needless to say, this design generates insane levels of complexity that were resolved in the final bill by creating an even more insanely complex safe harbor that only partially protects people who make errors trying to navigate the complexity created by the design in the first place.

The IRS is not set up to pay out monthly benefits, has relatively few customer-facing offices, and is detached from a large share of poor kids because those kids’ families do not file taxes.

Characterizing a non-phased-in monthly child allowance as a mere tweak of the existing CTC program was cute and perhaps even somewhat useful initially to get people’s heads wrapped around the idea. But at some point that framing device should have given away to good policy design. Sadly, it did not.

As bad as the new CTC is, the new EITC is even worse. Many Democrats spoke eloquently about the injustices of phasing in the CTC, but then decided to go ahead and continue phasing in the EITC, despite the fact that EITC and CTC are basically the exact same benefit. As a result of this decision, the new tax credit regime continues to exclude the poorest kids from the majority of the nation’s tax credit benefits. As we can see in the graph below, the poorest kids will only receive $3,000 from the tax credit system, while kids with incomes right around the poverty line will receive more than twice that amount, $6,618.

If you think it is wrong to phase in the child tax credit, then why isn’t it also wrong to phase in the identically constructed earned income tax credit? If $6,618 is an appropriate level of benefit for a child right around the poverty line, then why isn’t it also an appropriate level of benefit for the poorest children in the country? With racial justice all the rage, why are we keeping in place an EITC benefit that disproportionately excludes black and Latino children because their parents are too poor to claim the full benefit amount?

Many liberals reacted in moral horror at Scott Winship and Oren Cass saying that we should continue to phase in the tax credit benefits. And yet Democrats actually half-followed this morally horrific advice.

Beyond the child aspects of the new EITC, the other weird thing about it was expanding EITC coverage to people ages sixty-five and older. This is not a huge thing in the grand scheme of things, but, whereas the CTC represented an ideological watershed in the right direction, this represents an ideological watershed in the wrong direction. In prior periods, when faced with the reality that some elderly people lacked sufficient income, we produced and then beefed up the Social Security and Supplemental Security Income programs. Today, when faced with that same reality, we passed a wage subsidy for the elderly to encourage them to work more.

Finishing the Debate

The good news is that these tax credit reforms are all set to expire at the end of the year. There is a major appetite among Democrats to make them permanent. One hopes that this appetite is not literally constrained to making these exact credits in these exact forms permanent, but is rather an appetite for achieving the broad aims of these new credits in the best way possible.

This means that everyone in the policy game, and especially the Left, should start working now to stake out what they think the permanent version of these benefits should ideally look like. Rather than continuing on with these messy kludges, we have an opportunity to do it right. The ideological barriers have been overcome.