CBO As Agenda Setter on Tax Policy
By David Henderson
The Case of the Missing Child Tax Credit Reduction
In December 2018, the Congressional Budget Office published a 316-page report titled Options for Reducing the Deficit: 2019 to 2028. Those reports are often useful because they can tell you the implications for the deficit of various changes in government spending and in tax law. This report is relatively comprehensive. It examines dozens of ways in which the U.S. government could cut spending and dozens of ways in which it could increase taxes. Its main strength is coming up with estimates of the effects of each of these ways.
But there’s one big problem: By listing all these ways and leaving out other ways, the CBO is consciously or unconsciously becoming an agenda setter. “You have a suggestion for changing the tax code that would raise revenue? Well the CBO didn’t think it was worth mentioning.”
And actually, I do have a suggestion for changing the tax code that would raise revenue: reduce the child tax credit to the level it was at before the 2017 tax bill.
That bill increased the tax credit from $1,000 per child to $2,000.
A tax credit, recall, is not a tax deduction. It’s a reduction in your taxes by the amount of the credit. And some of it is even “refundable,” the euphemism used to refer to a tax credit doesn’t just reduce your taxes but also has the government give you money when the amount of the credit exceeds what would otherwise be your tax liability.
Why did the Republicans do this? I think for two main reasons. First, they wanted to be able to say that people at all income levels would get a tax cut. Since the vast majority of federal income taxes are paid by the top 50% of income earners, one of the few ways to give people, especially people in the bottom 30%, a substantial tax cut was to increase the child tax credit.
The second reason is that Utah Senator Mike Lee pushed hard for this change. He has been advocating such a change for years, seeing it as pro-family and, probably not coincidentally, pro-large family, of which Utah has more than its share.
The revenue reduction from this increase in the child tax credit is huge. In 2013, the Committee for a Responsible Federal Budget estimated that the lost revenue to the federal government from the $1,000 tax credit was approximately $56 billion per year. (I’m estimating this by eyeballing their graph at this link.) So a reasonable estimate of the annual revenue loss from the $1,000 increase in the tax credit for the years 2019 to 2028 is $60 billion. (I’m assuming some growth in the number of children.) $60 billion a year is almost half of the reduced revenue from the 2017 tax cut, assuming the tax cut causes zero growth. It’s over half of the reduced revenue from the tax cut, given a more reasonable estimate of the growth due to the tax cut.
But unfortunately, the CBO didn’t estimate the revenue gain from returning to the level of the tax credit that existed just 13 months ago.
By the way, ask yourself how successful Republicans were at communicating that this tax cut really did cut taxes substantially for lower-income people.