Additional Child Tax Credits

Economists refer to economic problems that result from government action as government failure.  These failures are analogous to market failures that justify government interventions that Mankiw summarizes as principle 7; government can sometimes improve market outcomes.  These failures generally span several administrations both Republican and Democratic.  According to the Treasury Inspector General for Tax Administration, (“Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits”) through a series of unfortunate events spanning fifteen years and three administration, the federal government has created conditions that allow undocumented workers to fraudulently claim $4.2 billion in 2010 on refundable tax credits most coming from the additional child tax credits (ACTC). 

All people who earn income in the United States are required to pay taxes even if they earn that income through illegal activities or are in the country illegally.  Refundable tax credits are earned when refunds to individuals exceed taxes paid.        

In 1996 Congress passed and President Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act, fulfilling a Clinton campaign promise to “end welfare as we know it” and a plank on the Republican’s Contract with America.  A minor section of the new law attempted to discourage illegal immigration with provisions authorizing denial of public welfare benefits to illegal aliens.  Guidance on implementing these provisions was not provided and the importance of that lack grew with subsequent legislation.     

A year later, the Taxpayer Relief Act of 1997 was enacted with main provisions that lowered capital gains taxes, exempted from taxation homes sold for less than $500,000 that had been lived in for at least two of the last five years, and increased the child deduction.  The Economic Growth and Tax Relief Reconciliation Act of 2001 made it possible for filers to receive a return that exceeded taxes paid by removing the requirements that the Child Tax Credit be refundable only if the taxpayer had three or more qualifying children and Social Security taxes exceeded earned income credits.  The new law also increased the Child Tax Credit from $500 to $1,000 per child, making more families eligible for the refundable portion known as the Additional Child Tax Credit (ACTC).  The American Recovery and Reinvestment Act of 2009, the Obama stimulus legislation, similarly increased potential refunds by raising the income threshold for calculating the ACTC. 

The graph shows that the number of ITIN has increased from 796 thousand in 2005 to 1,526 thousand in 2010 as laws increased the benefits of filing.  During the same period, the ACTC increased from $924 million to $4,000 million.  The greater slope of the ACTC one compared to the ITIN line implies that the benefits per filing increased.  By 2010 the average filing claimed $1,325 of ACTC.