Why Congress Let Biden’s Child Benefits Lapse

And what it can learn from the Dutch.

Washington DC
Skyline of Washington DC with the United States Capitol in the distance, September 28, 2017 (Ted Eytan)

A year ago, I wrote that the child benefits Joe Biden snuck into his $1.9 trillion coronavirus recovery program might outlive the pandemic. Once American parents had accustomed to receiving monthly cheques of $250 or $300 per child, I figured it would be hard for Congress to let the program lapse.

But that’s what they did.

Before Biden

Before Biden’s reforms, American parents could deduct up to $2,000 per child from their taxes. $1,400 of this tax credit was “refundable”, meaning parents could get the money from the government if they paid no income tax. (Europeans would call this a “benefit”.)

The credit was capped at 15 percent of a family’s income, so lower-income parents received a lower credit.

What Biden changed

Biden raised the maximum credit from $2,000 to $3,000 for children aged 6 and over, and $3,600 for children under the age of 6.

He eliminated the $1,400 maximum, making the full credit refundable, and he eliminated the 15-percent cap.

Instead, he phased out the credit above a single-parent income of $112,500. So rather than the poorest families benefiting the least, they now benefited the most.

Finally, Biden paid out the credits in monthly cheques of the aforementioned $250 to $300.

16 percent of American children lived in poverty before the pandemic. The Columbia Center on Poverty and Social Policy estimates that the rate fell to 12 percent last year, the lowest on record and putting the United States in the league of France and Korea instead of Greece and Mexico.

Manchin says no

So why didn’t Congress continue the program?

The short answer is Joe Manchin, the most conservative Democrat in the Senate. With a majority of one, and Republicans unwilling to support anything, Democrats need all fifty senators on board, and Manchin isn’t.

I don’t want to pile on the villainization of Manchin. He’s a Democrat in a state that voted 69 percent for Donald Trump. His opposition to $2 or $3 trillion in spending to “build back better,” coming after almost $5 trillion in COVID recovery spending and a $1 trillion infrastructure plan (out of which $550 billion is new spending), doesn’t look so unreasonable now that inflation has reached 8.5 percent.

In the case of child benefits, though, I think his austerity is penny-wise but pound-foolish.

Economists at the National Bureau of Economic Research have calculated that Biden’s child benefits cost taxpayers almost $100 billion in a year, but, if continued, would generate $1 trillion in societal benefits every year. Spending on child services would fall. Children’s educational achievements and health would improve, leading to higher tax revenues and lower spending on Medicaid, public housing and unemployment insurance over time.

Manchin’s demands

Manchin wants child benefits to come with a work requirement, so parents would have to be either in work or looking for work. He also wants to limit them to families making under $60,000 per year, which is less than the average household income of $67,500.

The attraction of Biden’s reforms was that they disconnected child support from the economic situation of parents.

Economists are divided on whether and to what extent work requirements work, but in this case it’s irrelevant. The point of child benefits is not to raise employment but to reduce child poverty, and all the negative long-term consequences of it.

Limiting benefits to low incomes (also called “means testing”) reduces the overall cost, but it also lowers public support. Medicare is popular, because it’s for all seniors. Medicaid is not, because it’s for poor people.

Another advantage of universal benefits is that they require less bureaucracy, which saves administrative costs and avoids the risk of recipients being wrongfully denied benefits.

Learn from the Dutch

Manchin could learn from the Netherlands, where the government is moving in the opposite direction: replacing means-tested with universal child-care benefits.

The reason is that some 20,000 families were wrongly flagged for fraud under the outgoing system for often simple administrative errors, such as incorrectly filling out a form or forgetting to report monthly changes in their income. Many of the falsely accused parents were of migrant descent, because the algorithm that was designed to surface potential cheats took non-white ethnicity into account as a risk factor.

Thousands of Dutch parents were bankrupted when they had to pay back tens of thousands of euros in child support. The last government resigned over the scandal. The current government is paying out €5.5 billion in compensation. Whatever money the Netherlands saved over the years by withholding benefits from parents it believed were cheating wasn’t worth it.