Evidence-based policy – Policy Crossroads

(Estimated 5 minute read)

Early on in the Biden administration, Vice President Kamala Harris tweeted the message below. In her tweet, she claimed that the Child Tax Credit (CTC) would cut child poverty in America in half. The question is now if this assessment is correct or if this policy assessment is based on a skewed image presented in the measurements for poverty reduction. Arguably, the latest CTC appears to have some merit, as a few studies have suggested. In this article, some of these points will be addressed and a conclusion on the effectiveness and possible impacts of the policy will be considered.

A brief background on the US Child Tax Credit

Generally, the American taxpayer can utilize a number of tax credits, including the CTC. The first common credit was provided by the Taxpayer Relief Act in 1997. By the end of 1998, the original tax credit was $500 per child under the age of 17. Following the Taxpayer Relief Act in 2012, the amount doubled for the first time. By 2017, Congress had agreed to changes to the CTC under the Tax Cuts and Jobs Act (TCJA), which once again doubled the amount per child from $1,000 to $2,000 and made approximately $1,400 refundable. Ultimately, the TCJA set a limit of 15% earnings above $2,500, meaning low-income filers would not have access to the much needed credit. Furthermore, the Tax Policy Center stated that the TCJA is also set to expire in 2025 and thus the CTC will revert to tax credit estimates prior to 2017. This is indeed a notable aspect to keep in mind when following possible impacts of the American Rescue Plan (ARP)!

CTC under the American Rescue Plan: Cutting poverty in half?

Having a base understanding on the origins of the CTC, the ARP comes at a critical time following the COVID-19 pandemic in order to enhance the previous endeavors. As the American Rescue Plan’s CTC outlines, tax filers could claim $3,600 per child under the age of 6 and up to $3,000 per child ages 6 to 17. However, compared to previous CTC measures, the ARP added a unique angle to this tax issue. Rather than receiving one lump sum when taxpayers file their returns, the IRS was directed to disburse monthly advanced payments as of July 2021. With the current disbursements, the CTC is set at $300 per month for each child under 6 and $250 for each child between 6 to 17 for the next six months. As a result of the legislation and the actions taken, the total annual poverty rate is estimated to decrease from 13.7% to 8.7% (directly impacting the child poverty rate as well). This estimate was found in combination with extended pandemic related unemployment benefits, the Supplemental Nutrition Assistance Program benefits (SNAP), the $1,400 recovery rebate, and lastly the advanced pay of the CTC.

According to the same study by the Urban Institute, these measures have the potential to reduce the projected number of people in poverty in the US from 44 million to 28 million. Moreover, apart from the decrease in annual poverty, this estimate indicates the projected poverty rate for children would be cut by half. As pointed out in a previous Policy Crossroads’ article, the measurement of poverty heavily depends upon a number of questions. As is the case in many studies, we must not only consider who compiled the data but which metrics are being used in the analysis. To illustrate, the 2019 US census has shown an official poverty rate of 10.5%, with 34 million people in poverty compared to the different estimates from the Urban Institute in the same year.

Bearing these details in mind, it is perhaps most useful to take a step back and look at the historical trends on children in poverty. The graph below shows the child poverty rate in the US from 1990 to 2020 based on data from the Current Population Survey (CPS). As the graph indicates, the child poverty rate was the lowest in 2019.

Effectively, the graph also shows a steady decrease in the child poverty rate from 2014. What is interesting there is the rise in rate of child poverty throughout the 2000s and the fall again from 2014 onwards. It thus begs the question how effective the previous CTC measures were.

Now to return to the fundamental question raised here, will the ARP CTC cut child poverty in half? A typical answer in the academic community might sound something like, “it depends”. However, the central point it depends on here is relatively straightforward. It primarily depends on whether Congress will approve the CTC measures to keep up this current commitment. In a recent letter to Congress, more than 400 economists urged them to continue the CTC on a permanent basis. In their arguments, the economists detailed how the CTC can drastically improve the lives of millions of children and promote long-term economic prosperity by reducing child poverty. Moreover, the Russell Sage Foundation published a research article in 2018 calling for a universal child allowance, which would steadily reduce the child poverty rate. As evidence that such a policy would indeed have such an intended impact, one recent study found the monthly installments have already shown a significant decrease in child poverty.

Towards universal child benefits

Apart from some of the diverging estimates on poverty in the US, there is ample evidence that the trends, whether increasing or decreasing, are usually similar. So, will the new CTC measures cut poverty in half? Considering the available evidence, it is highly possible this might be the case. Besides other factors, such as the economic impacts and recovery following the COVID-19 pandemic, and state legislation on wages, the tax credit plays some role in child poverty. Throughout the previous fluctuations in the child poverty rate, a CTC was offered, even as the effects of the 2008 financial crisis took hold. Where the difference effectively begins to matter ultimately rests upon future commitments which turn the tax credit into a stable universal child benefit. On that note, there is reason for optimism that this policy will continue throughout the Biden administration. If not, it will be difficult to unravel whether six months of a child allowance will create long-term impacts on the child poverty rate.

Something else to be seen through the looking glass? (Estimated 5 minute read)

If you were to ask someone on the street how they would define poverty, you would likely hear the concept defined in different terms, yet more or less the same. In this hypothetical narrative, most people might say something along the following lines:

Being in poverty means you do not have enough money to meet very basic needs, such as having enough food or perhaps access to health services.

Granted this is a condensed narrative, it captures the bare essence of how people might define poverty. Beyond the short definition there would be people who could extensively elaborate on the issue and separate absolute and relative poverty. However, the point of the exercise is simply to imagine how people define the term in this concise manner.

Now try and envision a world full of academics and researchers, international organizations and non-governmental organizations, all working in the same field, yet with their own dissimilar definitions. Then of course, we cannot forget about the fieldworkerswho are physically present and involved in campaigns against poverty. Surely each group or individual is driven by the way they see the world and perceive existing poverty. Therefore, the way they approach the concept is also driven by their own understanding and experiences and how it should best be managed.

Having imagined how average people and researchers define poverty, it is time to move forward and consider how poverty is measured. Be forewarned, as this singular post will not do justice to the numerous approaches which are widely utilized by different groups!

You might already be familiar with the “dollar-a-day” proclamations in the news or advertisements. To illustrate, the World Bank has worked extensively on the money-metric endeavor for decades now, leading to the current rate of $1.90 a day based on a purchasing power parity (World Bank, 2021). If you’re below this threshold, you are considered to be in absolute poverty. The WB adjusts this rating every few years and state’s strive to examine their own relative indicator around monetary measurements. Imagine then that a state has managed to lift enough citizens above this threshold, much as was stated with the Millennium Development Goal by 2015 (Qui, 2016). Suddenly, millions of people across the globe are out of poverty because they’re above the threshold. The obvious problems with this type of measurement have been drawing more attention for years (Hickel, 2019). First, the measurements began in the 1980s and account for most of the downward trend from that point forward. This fails to account for longer periods before this time when subsistence economies, for example, were still relatively more commonplace. Second, as you may have thought to yourself, the standard is already quite low. So what if absolute poverty was measured at $3 or $5 a day? That would suddenly catapult millions back into poverty on a technicality, while still showing relatively little about their actual living conditions.

Considering this arbitrary threshold is often contested, it is perhaps no wonder others have sought to introduce different measures of poverty that extend beyond the notion of one’s purchasing power. On the other end of the measurement spectrum, others have worked on a concept of capabilities and capability deprivation (Robeyns & Fibieger Byskov, 2020). At least this is considered as an extension of being impoverished in the sense that one lacks social opportunities, a life of dignity, and political freedoms, alongside standard economic elements. Furthermore, there are scholars that have shifted the debate to a more participatory approach whereby practitioners listen to the voices of the poor within their communities (Kapoor, 2002). In comparison, this is perhaps more straightforward than the capabilities literature in the sense that “participation” is relatively clearer than what “capabilities” in terms of poverty entails. Beyond these two concepts, another one of the most popular measurements are the multidimensional approaches (OPHI, 2021). The multidimensional approaches generally include at least three dimensions of poverty: health, education, and living standards. Under the three dimensions are also relevant indicators, such as nutrition, child mortality rates, levels of schooling, and access to sanitation, water, and electricity. This is perhaps one of the most widely utilized tools since it appears to capture different layers of poverty that could be experienced, though the approach also has its fair share of critics.

It should be stated that the purpose here is not to show that there is necessarily one method which is better than the other but that the very conceptualization of poverty leads to the next step: how to measure it or at least critically consider how it is being measured (cf. Fischer, 2018). This is at least one area where the academics, researchers, and fieldworkers might find some mutual agreement. At least discussing how existing measures could continuously be improved upon is a step forward. After all, the familiar saying along the lines that you cannot manage what cannot be measured, speaks volumes. If we’re to overcome an issue, we first need to address what we define as the issue and from there take the steps to alleviate it.

In the subsequent posts on poverty, the main focus will be to look at national policy areas and how certain state’s operationalize their own campaigns against poverty.

***Please note: some of the cited material is not from the original authors, such as Amartya Sen or Robert Chambers. Instead, they’re taken from introductory materials or other authors reviewing their concepts. This is not meant to be indicative of my professional views on these approaches.