A Tax Policy Trojan Horse for Welfare Expansion and Inflationary Deficits
Richard Stern / Preston Brashers /
If you think congressional deadlocks are concerning, just wait until you see what Congress does when it’s in a blinding rush. The House Ways and Means Committee is ready to go from introducing its latest tax bill to House passage in under a week and a half.
Though branded as full of middle-class tax cuts and pro-growth reforms, checking inside this Trojan horse known as The Tax Relief for American Families and Workers Act instead reveals a mixed bag that includes welfare expansions, corporate windfalls, and inflationary deficits.
The only individual tax cut in the bill is a slight cost-of-living adjustment to the child tax credit—likely from $2,000 to $2,100—that would apply to taxpayers’ 2025 and 2026 tax filings before expiring.
The bulk—91.5% to be exact—of what is being described as “middle-class tax relief” is, in fact, an expansion of welfare benefits. The legislation does not fix existing work requirements for individuals to receive the “additional child tax credit,” which, unlike the ordinary child tax credit, exclusively goes to individuals and couples who pay no income tax. Sadly, this feature was begun in the Tax Cuts and Jobs Act in 2017.
This provision would amount to a whopping 32% expansion of this welfare credit by 2026—at which point, in typical Washington fashion, these handouts would expire and create a political crisis where tens of millions of people would lose their brand-new welfare benefits—creating a perfect storm for yet more expansion and permanence.
Currently, households with more than $2,500 of annual earned income can qualify for the additional child tax credit. The credit phases in at a rate of $15 for every $100 of earned income after $2,500.
The new tax and welfare bill would accelerate the phase-in so that, for example, a taxpayer with $10,000 of annual income claiming three children could receive a $3,375 benefit instead of $1,125, despite paying $0 in income tax. This additional benefit would be on top of $4,500 in earned income tax credit benefits and any other welfare benefits he may receive.
This would also likely exacerbate existing fraud issues with both programs. The improper payment rate for the earned income tax credit was at 31.6% for fiscal year 2022 while the improper payment rate stood at 15.8% for the additional child tax credit.
To make matters worse, a tax filer would be able to claim this new enlarged additional child tax credit with an individual taxpayer identification number instead of a Social Security number, meaning that many of these new payments would go to illegal immigrants. This was another shortcoming of the 2017 Tax Cuts and Jobs Act that is not fixed in this bill.
The bill would also add a lookback provision for the work requirement, so that if a household doesn’t work enough in 2024 to qualify for the credit, but it did in 2023, it would be allowed to receive the benefits based on the prior year of work.
In other words, to qualify for the benefits, it would be enough to work part time, part of the year, even if you only work every other year.
Conservatives have long fought for stronger work requirements for welfare recipients. This legislation fails to enact any and actually takes a step backward in that respect.
The business tax provisions in the bill are better than the welfare provisions, but they’re also deeply flawed.
For example, the bill would temporarily extend for 2024 and 2025 some expiring provisions of the 2017 Tax Cuts and Jobs Act that allow companies to deduct research and development expenses and short-lived capital investments in the same year that they bear those costs instead of having to depreciate or amortize those costs over multiple years. That’s good tax policy and also leads to more growth by encouraging investment.
However, the pro-growth benefits of those changes are done alongside retroactive relief for the 2022 and 2023 tax years. Such a windfall does nothing to improve companies’ incentives to invest, since they can’t go back in time to change past investment decisions.
The bill does include a modest win by slightly increasing the expenditure threshold where small businesses may qualify for full expensing, and this change is permanent.
The combination of these handouts and the temporary nature of most of the expensing provisions culminates in a staggering long-run growth estimate of precisely zero new jobs created. Yes, you read that right: A Tax Foundation modeling analysis showed that the contrived and odd construction of these provisions would have no impact on long-run economic growth. Maybe it creates momentum for pro-growth policy in 2025, but the bill itself doesn’t move the dial much.
The Joint Committee on Taxation—the official congressional scorekeepers—agree that the business provisions would have no significant impact on economic growth. Tens of billions of dollars of corporate windfall handouts buy a grand total of no long-run economic growth.
To compound these issues, even ignoring the gimmicky way the bill intends to “pay for” these handouts, the formal cost estimate shows $155 billion in new deficits through this year and next from this bill. This would only add to inflationary pressures and spike interest rates—including on mortgages and on loans to small businesses looking to expand.
As with much “bipartisan” legislation, this one falls short on conservative principles. The bill has some small wins but unfortunately will redistribute wealth from hardworking, middle-class families to large, established corporations and to individuals who are barely engaged in work at all.
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