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How to End Child Poverty: The Case for a Universal Child Allowance

Among developed nations, the United States suffers from one of the highest rates of child poverty. In 2020, 1 in 6 American children, approximately 11 million, lived below the poverty line. In this regard, the United States is an outlier, as many other countries have nearly eliminated child poverty. The child poverty rate in Finland, for example, is estimated to be between 3 and 4%, just a quarter of the rate in the United States. Unlike the U.S., Finland recognizes the collective need and moral imperative to eliminate child poverty, which it does  through the provision of a universal child allowance. If the United States is to drastically decrease child poverty, it should follow the lead of Finland and provide all Americans with a monthly child allowance.

The economic logic behind a child allowance is simple: children consume resources from their household, but cannot work and therefore cannot provide additional market income to the household to offset their consumption. If two households earn the same income but have different numbers of children, the household with more children will need to spend more, so it will be worse off. This process drives a significant proportion of American poverty. According to one estimate, over half of American adults currently in poverty would not be if they did not have children. It is also clear that markets cannot alleviate this problem. Regardless of how much or how hard a parent works, or even how high their wage rises, having additional children will reduce their incomes. The only way to counteract this effect is through government action to provide income directly to parents.

Most developed countries have realized this fact and thus provide some form of welfare benefit to families with children. As previously mentioned, Finland offers all families a universal child benefit based on the number of children in the household and the ages of the children. The United States, in contrast, distributes most of its child benefits through a group of tax credits, most notably the Child Tax Credit and the Earned Income Tax Credit. While these programs have admirable aims and do a great deal to reduce child poverty, they are consistently inferior to a universal child allowance in achieving the goal of eliminating child poverty.

  The structure of the Child Tax Credit provides an example of the flaws of the tax credit system. Eligible parents receive a $2000 tax credit for each dependent child under the age of 17. However, this tax credit is only partially refundable. If a parent or family has paid less than $2000 in taxes, they can only receive up to $1400 in the form of a tax refund. This refund, known as the Additional Child Tax Credit, is calculated by multiplying all taxable income over $2500 by 15%. Effectively, poorer families will receive less than wealthier ones up to a certain income level, creating a system of “trapezoidal” benefits, in which the poorest families are excluded from receiving full benefits along with the most affluent families. The Earned Income Tax Credit follows a similar trapezoidal structure, with drastic consequences. By one estimate, the poorest fifth of American children receive either no benefits or partial benefits from the tax credit system.  

The tax credit system also suffers from other problems. Most estimates of the impact of tax credits assume that nearly 100% of eligible filers claim them, but a Census study on the Earned Income Tax Credit suggests that many filers do not claim the credits they are eligible for. This nonparticipation is most prevalent among low-income filers, possibly due to lack of knowledge about the credit and how to claim it. The credit is also provided in a lump payment at the end of the year, so families cannot use it to pay expenses throughout the year. 

A universal child allowance does not have these issues. By providing a fixed monthly payment to every family based solely on the number of children in the household, it avoids the complicated structure of phase-ins and phase-outs that dominate the current U.S. tax credit system. Under a universal child allowance, children in the poorest households would not be prevented from receiving benefits, which would rectify the most glaring flaw in the tax credit system. In addition, a child allowance disbursed in the form of a monthly check sent by the Social Security Administration would eliminate the problem of poor households not claiming their benefits. 

In Finland, 99.1% of children receive benefits through the universal child allowance, meaning almost all impoverished children receive the benefits they are eligible for. This massive uptake is one of the primary benefits of providing a universal benefit, as opposed to one that phases out for families with high income levels – though it may seem theoretically more optimal to not “waste” money by excluding high earners. U.S. policymakers often view universal benefits as giveaways to the rich, arguing that means-tested benefits can better reach those in the most need. In practice, however, each additional income test added to the receipt of benefits increases the administrative burden on recipients and risks that benefits are withheld from people who need them. The “paradox of redistribution” describes this occurrence, stating that universal programs are actually more effective at redistribution than narrowly targeted programs because they ensure that no potential recipients fall through the cracks; a recent study confirms its premise. 

Similarly, a highly visible universal child allowance would go to a large segment of the population and would therefore be more likely to remain politically popular.  One paper argues citizens are more likely to support cuts in mean-tested benefits than universal ones in response to immigration, suggesting that universal programs can remain popular in the face of welfare backlash. This phenomenon is clear in the United States, where universal programs like Social Security and Medicare remain extremely popular. A theoretical universal child benefit could reap all the political advantages of universality while also drastically decreasing child poverty.

Many policymakers have recognized the flaws of the current tax credit regime and have moved to improve the system by which we provide child benefits. As part of the COVID-19 relief bill, senior Democrats plan to include a proposal that would raise the child tax credit to $3000, pay it out monthly, and make the tax credit fully refundable, removing the phase-in for benefits.  Senator Mitt Romney (R-UT) has proposed his own child allowance plan, which would replace the current tax credit system with a cash benefit that phases out for the highest earners. His proposal suggests there is a recognition of the need for reform from both parties. Indeed, these policy makers recognize that the current tax credit system is broken. A universal child allowance would be the first step towards fixing it. 

Photo: Adobe Stock (david19771)