The Child Tax Credit and Intergenerational Mobility: Evidence from Administrative Tax Records

• In Event: Money Matters Early: How Income Policies Shape Child Health, Safety, and Long-Run Opportunity

Abstract

Background. The Child Tax Credit (CTC) is designed to reduce tax liability for taxpayers with children. The 2017 Tax Cuts and Jobs Act significantly expanded the CTC and the One Big Beautiful Bill made these changes permanent. Despite CTC’s broad reach and a growing literature on its influence, little is known about its long-run effects.
Research Question. What is the effect of childhood exposure to the CTC on intergenerational mobility?  
Methods. A major obstacle to studying the CTC is statistical power. Leveraging administrative tax records, we overcome this barrier and investigate whether CTC eligibility during childhood affects later-life economic opportunity. Our design exploits the sharp loss of CTC eligibility when a child turns 17, a discontinuity absent in other major tax credits. Using a regression discontinuity framework, we compare children in the same school-year cohort who enter the school year at age 16 between 1998 and 2015: parents whose children born in September – December are no longer eligible for the CTC in that tax year, while parents whose children are born in January – April remain eligible. Because the CTC was enacted in 1997, the affected birth cohorts (1981 – 1999) also experienced greater cumulative exposure to the credit over childhood, with $0 for children born in 1981 and $15,200 for children born in 1999. 
Preliminary Results. In a preliminary sample of around 80,000 parent-child pairs, we find suggestive evidence that CTC eligibility improves later-life economic opportunity. This preliminary analysis is based on reported wages from Form W-2. Next, we plan to expand our sample, use income reported on Form 1040, examine effects on future tax revenue due to changing opportunity structures, and investigate spatial and gender heterogeneity. 
Implications. This study provides new evidence on whether the CTC shapes intergenerational mobility and will better inform policymakers of the lasting implications of the changes in child-directed tax policies.

Author

• Katie M Jajtner, Internal Revenue Servcie
  Presenting Author