The (Employment) Depressing Child Tax Credit

For those who didn’t know, as part of the American Rescue Plan, there were some changes made to the Child Tax Credit (CTC) for the tax year 2021.

  • First, the credit was expanded from $2k to $3,600 per child for children under 6 years of age (to $3k otherwise). It’s also fully refundable.
  • Second, half of the credit is being disbursed to tax-filers early: over the latter 6 months of 2021.

What does this mean?

For context, I have 3 children all under that age of 6. My total 2021 CTC is $10,800. Half of that is being distributed as monthly checks from July through December. For me, that’s a check for $900 per month that I had not anticipated. While it is true that I will see less of a remaining credit when I file my taxes by April of 2022, I strongly suspect that most similar households are somewhat short-sighted about these funds.

Depending on the number of children in a household, the monthly check from the IRS can be quite significant. From the parent point of view, there has been a lump-sum transfer. There is no endogenous response to obtain more children – there’s no time for that. The transfer also occurs regardless of any activities, economic or otherwise. In essence, tax-filers with children have experienced a positive income shock.

The big question is: What is the effect on employment?  

In one sense, the effect is ambiguous and depends on preferences: People can now afford more leisure and more consumption. How they engage in more of each is a matter of preference. But, given that both are goods, both will increase by some amount.

That’s my simple model. I hereby make multiple predictions:

  1. Parents with children will have consumed more in the 3rd and 4th quarters of 2021.  
  2. Parents with children will have lower employment growth for those quarters.
  3. The effects will be stronger for parents with children under 6 years of age.
  4. The employment rebound in the 1st quarter of 2022 will be stronger for these groups (and stronger than forecasted overall).
  5. Finally, while I’m feeling silly enough to make predictions publicly, I predict slower growth in consumer durable expenditures in 2022 Q1.

I looked at the BLS for data to corroborate my predictions. Excitingly, the Current Population Survey (CPS) does slice the data by sex, age, and age of own children (conveniently by younger than 6 and 6-17 years of age). This is where I post the great visual to demonstrate the veracity of my claims, right?

WOMP WOMP.

The relevant data is currently only available annually as recent as 2020

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