The Anti-Poverty and Labor Supply 

Effects of Replacing a Child Tax Credit 

with a Child Allowance

Kevin Corinth| University of Chicago, IZA

Bruce Meyer | University of Chicago, NBER, AEI

Matthew Stadnicki | University of Chicago

Derek Wu | University of Chicago

Federal Committee on Statistical Methodology

October 25, 2022

Disclaimer: This paper, which has been subject to a limited Census Bureau review, is released to inform interested 

parties of research and to encourage discussion. Any opinions and conclusions expressed herein are those of the 

authors and do not represent the views of the U.S. Census Bureau. The Census Bureau has reviewed this data 

product for unauthorized disclosure of confidential information and has approved the disclosure avoidance practices 

applied to this release, authorization numbers CBDRB-FY2021-CES005-024 and CBDRB-FY2021-CES005-028.
Preview of results

• BBB Act would have replaced the current CTC that 

encourages work with a somewhat larger child allowance 

that discourages work by not requiring earnings or a tax 

liability

• We estimate that the change to a child allowance would 

lead approximately 1.5 million working parents to exit 

employment

• Others have assumed no employment effect

• The reduction in employment would eliminate a third of 

the poverty reduction and all of the deep poverty 

reduction.

2
Two major innovations of our paper

• Unlike previous research, we recognize the decrease in 

the return to work from eliminating the CTC

• Some previous authors recognized the change in marginal 

incentives, not the inframarginal one

• Previous poverty simulations assumed no change in employment

• Use Comprehensive Income Dataset (CID)

• Links CPS ASEC to large set of tax records and administrative 

government program data

• First time CID has been used to simulate the effects of proposed 

policies

3
Outline

• A frequently cited CNSTAT/NAS report “A Roadmap to 

Reducing Child Poverty” blundered but hasn’t been 

corrected

• The report found negligible employment effect due to 

omission of the substitution effect in modelling the CTC

• They incorporated the substitution effect when modeling changes 

to the EITC (which affects the same population in the same way; 

furthermore the changes to the EITC they considered were smaller 

than the CTC changes)

• Their modeling approach consistently applied to all tax credits for 

low-income families leads to larger estimates than ours

• Our approach

• Our results on employment and poverty 

• Other results, caveats, some big picture issues

4
Consistently Applying 

CNSTAT/NAS Methods

5
NAS finding influenced policy debate 

on the change to a child allowance

• NAS simulated the labor supply and anti-poverty effects 

of a policy similar to the BBB child allowance

• Replaced pre-existing CTC with child allowance of $3,000 per 

child

• Did not recognize that eliminating the pre-existing CTC 

decreases the return to work

• NAS report has heavily influenced policy debate

• Letter to Congressional leaders signed by 462 economists 

stated child allowance would have “minimal” or “negligible” 

employment effects citing the report

• Other simulations cited by White House ignore employment 

effects relying on NAS report (Collyer et al. 2021)

6
NAS found substantial employment 

effects from 40% increase in EITC

7

Credit Amounts and Work Incentives of CTC, EITC, and 40% of EITC, 

Single Parent with Two Children, 2020

NAS found that 

40% increase in 

EITC would bring 

771,000 new 

single mothers 

into employment

Source: Internal Revenue Service, Congressional Research Service, Authors’ calculations

Notes: CTC and EITC parameters are based on 2020 tax law (all dollar values expressed in 2020 nominal terms). All adjusted gross income 

is assumed to come from earned income, and the family is assumed to take the standard deduction and claim no other non-refundable tax 

credits.
NAS would have found large employment 

effects if it had modelled CTC consistently

8

0.056 Percentage point increase in employment per 

$1,000 increase in return to work

NAS 2019

p. 413

×

$2.048 Mean decrease in return to work among single 

mothers due to child allowance, in thousands $

Our 

estimate

×

10.14 Millions of single mothers who are non-disabled, 

not enrolled in school and have child under 18

NAS 2019

p. 488

+

0.15 Millions of parents exiting workforce due to income 

effect

NAS 2019

p. 550

1.31* Millions of parents exiting workforce

*Does not include substitution effect for single fathers and married couples
Our approach

9
Using the CID to address income 

misreporting in survey data

• Use 2017 CPS ASEC (2016 income year), updated to 2022

• Our measure of income is after taxes and transfers including nonmedical in-kind transfers

• Link administrative data to correct for survey misreporting

• Market income: 1040s, W-2s, DER; 1099-R

• Social insurance and means tested transfers: OASDI (PHUS & MBR); 

HUD rental housing assistance (PIC/TRACS); SSI (SSR)

• Other: Numident (to capture birthdates of children)

• All filers get the CTC, and assume 75 percent of non-filers in base 

results. 

• Account for complex families

• Individuals outside of family may claim survey children

10
Simulate extensive margin labor supply 

response

• Focus on work/nonwork decision; we don’t account for hours 

changes so we understate the labor supply response 

• Substitution effect is product of percent change in return to 

work and work participation elasticity for each worker

• Change in return to work typically equal to pre-existing CTC benefit

• Elasticity of 0.75 for single mother EITC recipients

• See McClelland and Mok (2012); Gelber and Mitchell (2012); Nichols 

and Rothstein (2016); Goldin et al. (September 2021)

• Elasticity of 0.25 for all other workers

• See Chetty et al. (2012); CBO (2012); Penn Wharton Model

• Income effect is product of percent change in income and 

participation elasticity for each worker

• We follow NAS, using elasticity of -0.085 for single mothers and -

0.05 for all other workers; on low end, especially in long run

11
Details of anti-poverty effect simulations

• We use an after-tax income plus non-cash benefit 

definition of income and account for survey error in 

income, transfers and taxes

• Since accounting for income underreporting as well as 

taxes and in-kind transfers means many incomes are 

much higher we raise the thresholds (by 40 percent) to 

set the initial poverty rate at the 2018 SPM rate

• Simulate income after replacing CTC with child allowance 

and recalculate poverty

• Replace pre-existing CTC with child allowance

• Reduce earnings to zero for parents exiting employment

• Recalculate tax liability, child allowance benefits, and transfer 

benefits due to elimination of earnings

12
Results

13
Child allowance would lead approximately 

1.46 million parents to exit employment

14

Millions of parents exiting employment due to change to child allowance, 

income effect and substitution effect, our estimate and NAS estimate, 2022

0.14

1.32

1.46

0.15 0.15

Income effect Substitution effect Total effect

Our estimate

NAS

NAS did 

not model

Source: 2017 CPS ASEC (adjusted to 2022 levels using changes in prices and benefits) linked to administrative IRS and program

records, TAXSIM, NAS (2019) 

Notes: Estimates are based on simulations of the American Families Plan CTC for 2022. Our sample consists of all individuals in PIKed

and non-whole imputed families, with survey weights adjusted for non-PIKing and whole imputes using inverse probability weighting. The 

Census Bureau has reviewed this data product for unauthorized disclosure of confidential information and has approved the disclosure 

avoidance practices applied to this release, authorization number: CBDRB-FY2021-CES005-028.
Decrease in employment mutes child 

allowance’s child poverty effect

15

Child poverty rate and deep child poverty rate, baseline, static simulation of change to child 

allowance, and dynamic simulation of change to child allowance, 2022

13.7%

2.3%

10.8%

2.3%

9.1%

1.4%

Poverty Deep poverty

Baseline Dynamic Static

22% decrease

34% decrease

0% decrease

39% decrease

Source: 2017 CPS ASEC (adjusted to 2022 levels using changes in prices and benefits) linked to administrative IRS and program records, 

TAXSIM

Notes: Dynamic and static estimates are based on simulations of the American Families Plan CTC for 2022 We adjust tax liabilities and 

SNAP benefits for workers exiting the labor force in dynamic simulation. Our sample consists of all individuals in PIKed and non-whole 

imputed families, with survey weights adjusted for non-PIKing and whole imputes using inverse probability weighting. The Census Bureau 

has reviewed this data product for unauthorized disclosure of confidential information and has approved the disclosure avoidance practices 

applied to this release, authorization number: CBDRB-FY2021-CES005-028.
Further Results

16
Change to child allowance would be less targeted 

to bottom than most means tested programs

17

Share of program dollars received by families in bottom decile of annual 

income distribution, by program, 2022 (static simulation)

Source: 2017 CPS ASEC (adjusted to 2022 levels using changes in prices and benefits) linked to administrative IRS and program

records, TAXSIM. 

Notes: This figure shows shares of total program dollars received by each decile of annual family income (after taxes/non-medical in-kind 

transfers and including the American Families Plan (AFP) CTC). SNAP estimates are calculated using the subset of states for which 

administrative SNAP data are available. We drop non-PIKed and whole imputed families in the CPS, adjusting survey weights using 

inverse probability weighting. The Census Bureau has reviewed this data product for unauthorized disclosure of confidential information 

and has approved the disclosure avoidance practices applied to this release, authorization number: CBDRB-FY2021-CES005-028.
Change to child allowance would cost 

more to lift children out of poverty

18

Thousands of dollars spent on families with children per child lifted out of 

poverty, by program, 2022 (static simulation)

Source: 2017 CPS ASEC (adjusted to 2022 levels using changes in prices and benefits) linked to administrative IRS and program

records, TAXSIM 

Notes: Our sample consists of all individuals in PIKed and non-whole imputed families, with survey weights adjusted for non-PIKing and 

whole imputes using inverse probability weighting. To estimate the cost per individual lifted out of poverty, we divide program spending on 

families with children by the number of children added to poverty if the program were removed. The Census Bureau has reviewed this 

data product for unauthorized disclosure of confidential information and has approved the disclosure avoidance practices applied to this 

release, authorization number: CBDRB-FY2021-CES005-024 and CBDRBFY2021-CES005-028.
Comparison of CID-based Results to Results Using 

Survey Data Only (No Behavioral Responses)

• Correction for underreporting of survey income and 

broadening of income measure leads to CID poverty 

thresholds being 40% higher than official thresholds 

• Despite doing so, baseline level of deep child poverty is 2.3% 

using CID

• In contrast to static survey-only results, static CID-based 

results find:

• Smaller differences between the change to a child allowance and 

existing programs in preventing poverty 

• Greater targeting of existing tax credits to families at the bottom 

of the income distribution 

• Results reflect the ability of the CID to more accurately 

measure all sources of income, including tax credits 

19
Caveats

• Hours not accounted for; would be reduction in hours 

due to elimination of marginal phase-in incentives

• Simplified decisions of married couples; both not work or 

both work

• Only a small share of the overall number of families that see 

their earnings fall are married couples

• Would more plausibly have more families see a smaller fall as 

one worker dropped out and fewer see family earnings fall to 

zero

20
Robustness

• Different elasticities

• Using substitution elasticity of 0.5 (rather than 0.75) for single 

mothers leads to labor supply reduction of 1.25 million parents, 

ceteris paribus

• Using substitution elasticity of 0.05 (rather than 0.25) for all 

other workers leads to labor supply reduction of 0.92 million 

parents, ceteris paribus

• Ignoring any effects on higher income parents

• 89% (1.30 million) of parents leaving labor force have taxable 

earnings below $100k

• 72% (1.05 million) of parents leaving labor force have taxable 

earnings below $50k

21
Discussion

22
Big picture and related work

• A child allowance would roughly reverse welfare reform

• Cash assistance much more widely available than under AFDC

• Eliminates work incentive comparable to 90s EITC increase

• Series of papers by Meyer and Sullivan (most recently Han, 

Meyer and Sullivan 2021) say that welfare reform increased 

resources of single mothers

• Single mothers’ consumption increased in absolute terms, 

especially at the very bottom

• Single mothers’ consumption increased relative to sensible 

comparison groups like single childless women and married 

mothers

• Housing characteristics show a similar pattern of improvement

• Decline in poverty confirmed using linked survey and admin 

income data from 1995-2016 (Corinth et al. 2022)

• Decline in share of children with one parent

23