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Brooks Wilson's Economics Blog: Additional Child Tax Credits

Monday, September 5, 2011

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. 


  1. WildAngels6/9/11 9:03 PM

    This is one of the areas of the government that is very frustrating to average families that are paying a lot of money out in income taxes. I don't understand how things like this can get out of control so quickly, hence the reason I am not the President of the U.S..

  2. Dena Derby7/9/11 4:17 AM

    To say that the government is doing everything it can to control illegal immigration is an understatement. When I read information that is valid that states that laws have been created that go against Federal Law and policies that have been implemented to protect the legal citizens of the United States infuriates me. I am what society would consider a lower-middle class citizen and I have to pay taxes every year, and have to submit to paying for and education, or taking loans out to further enhance "The American Dream" do not receive tax credits, or incentives. So why is it that individuals who are legally not suppose to be here are provided with avenues to stay? I am not against immigration...I am from a family who immigrated here long ago when America became America, BUT I am an American!!! I believe that everyone should have the opportunity to become a citizen, but what about those who became a citizen and followed the process. Individuals who continue to enter our borders without the proper protocol are creating havoc for everyone!!! Our economy continues to slide into a recession, so why are we not providing relief for our country??? If we (the people) would take control and get involved our country would not be displaying a credit score of a A- ( if we still hold that to date)!!! Create policies that wil aid future restoration to America, before we have to complete Reconstruction of America all over again!!!!

  3. Laura Ledford10/9/11 1:05 PM

    I do not understand how individuals that are illegal and claim six dependents on there exemptions that the government gives them back more money than I recieve back being legal and paying taxes. They use social security numbers for working and others for claiming end of year taxes. I know that the government people are smart enough to know who the cheaters are by looking at thier names as well as how they are working and not paying and getting back. I myself aas well as others lnow what goes on and we are not in the hot seat to see the figures. It is nice to have but it should not be for the illegals.