Most of the 2017 Tax Cuts and Jobs Act’s individual tax provisions, including its CTC expansion, are scheduled to sunset at the end of 2025. Beginning in 2026, the maximum CTC value will fall from $2,000 to $1,000 and be limited to a narrower set of taxpayers. This expiration may renew discussion of reform options for the CTC.
Key Takeaways
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We examine a range of CTC reform options highlighting design tradeoffs. Extending the current-policy design would cost about $800 billion over the next decade, whereas broader expansions (each with different goals for poverty alleviation, work incentives, and horizontal equity in the tax code) would cost about twice as much.
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Increasing the CTC phase-in rate strengthens work incentives, whereas eliminating it reduces the return to work. We project that the reforms would change labor force participation by between 100,000 and 200,000 workers, with negligible second-order budgetary effects.
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We estimate that by providing cash assistance during childhood, the most generous reform option would boost the future earnings of children who grow up in the bottom quintile by more than 1 percent.
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Deficit-financing a CTC expansion would boost near-term output but lead to higher interest rates and slightly lower economic growth in the longer run.
