How JD Vance could help working families in the US

Republican vice presidential candidate JD Vance is making more and more public appearances and sharing his position on key policy issues as the election approaches. One issue he has been vocal about is increasing the child tax credit, which is currently $2,000 per child for qualifying families.

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“I would like to see a child tax credit of $5,000 per child. But of course you have to work with Congress to see how possible and feasible that is,” Vance said on “Face the Nation with Margaret Brennan.”

A higher tax credit would help working families. Case in point: In 2021, the American Rescue Plan Act temporarily increased the child tax credit from “$2,000 per child to $3,000 per child ($3,600 for a child under 6)” to support parents during the pandemic. The program helped reduce child poverty. But according to experts GOBankingRates spoke with, a higher tax credit could also come at a price that would weigh on the economy.

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Financial relief

Although being a parent brings many joys, raising a child is a huge financial responsibility. According to Credit Karma, the average cost of raising a child is $16,227 to $18,262 per year, including room, board, and child care. To help offset the financial pressure, parents have the child tax credit.

“It puts downward pressure on child poverty rates, which over time leads to gains in human capital,” said Peter C. Earle, senior economist at the American Institute for Economic Research.

Increasing the tax credit to $5,000 could have a significant impact and benefit families in many ways.

“For a family with three children under 17, this could mean an extra $9,000 per year to make ends meet or take a special family vacation,” explained Davis McFarlane CFP®, CPA, Family Office Advisor at Greenleaf Trust.

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Boost economic growth

Another benefit of increasing the child tax allowance is higher spending, which leads to economic growth.

“Increasing the child tax credit provides direct financial relief to families, which can stimulate consumer spending by increasing disposable income,” Earle told GOBankingRates.

He added: “Since consumption accounts for about 70 percent of U.S. GDP, the child tax credit contributes directly to economic growth.”

Tax policy would have to be changed

In the interview with Face the Nation, Vance suggested expanding the child tax credit to “all American families” and seeing a “family-friendly” program. The Republican vice presidential candidate said he does not want “massive cuts to low-income families like we have right now,” adding, “You don't want a different policy for higher-income families.”

The story continues

Expanding the child tax credit is a great campaign topic. However, to balance the benefits for all families and avoid increasing debt, complicated tax policies would have to be changed.

“Since 1997, the CTC has been developed and further adapted to help low- to moderate-income families,” McFarlane said. “However, due to the increased income thresholds (the current phase-outs were implemented under the 2017 TCJA) and the limitations on the refundable portion of the current CTC, one could argue that middle- and upper-middle-class taxpayers receive more benefits than lower-income taxpayers due to the current design of the CTC.”

McFarlane added: “Due to current limitations on the refundable portion of the CTC, many low-income taxpayers are already unable to receive the full benefit, currently $2,000 per child.”

He noted that “Vance's proposal to increase the CTC to $5,000 per child may not provide any additional benefit to low-income taxpayers, who are already limited by the refundable portion of the CTC, which is based on the taxpayer's income. It remains to be seen how Vance's proposal would address the limits on the refundable portion of the CTC.”

Financial challenges

A larger tax credit would benefit families and have several advantages, but would also bring fiscal challenges.

“This could lead to an increase in government spending and a widening of budget deficits if this is not offset by higher revenues in other areas,” Earle said.

Another problem that experts have in connection with the increase in the child tax allowance is inflation.

Earlier this year, the Congressional Research Service summarized estimates from the Joint Committee on Taxation that the COVID-related expansion of the child tax credit from $2,000 to $3,600 would cost $105 billion annually. Burns noted that an even higher tax credit would have even greater costs and potential economic consequences.

“In general, we would expect that an increase in the child tax credit would have a stimulatory effect and, absent other changes, would lead to an increase in debt and deficits,” said Christopher D. Burns, CFA®, CPA, CFP® Vice President and Deputy Director of Research at the Greenleaf Trust.

“Expanding it to $5,000 per child could cost about $250 billion a year, depending on the final design of the program,” Burns said. “The spending generated by these loans would likely boost growth and possibly inflation.”

An increased child allowance could deter some from working

There are also concerns that providing higher tax credits could discourage some people from working.

“It has also been argued that such credits may cause some families to not want to work, depending on how the credit is structured,” Earle said. “As with any other policy decision, changes to the child tax credit involve trade-offs.”

Further details are required

Vance has not provided a detailed plan for increasing the child tax credit and has only spoken in general terms. Burns said the following information is needed to determine the impact.

• At what income level will the credits be phased in or phased out?

• Are there any limits on the refund of credits?

• Will the credits be adjusted for inflation in the future or not?

• Will monthly prepayments be part of the proposal or not (as was the case during COVID)

• Whether the cost of the loans would be covered by higher tax revenues elsewhere in the budget or whether they would be financed entirely through a deficit.

Editor's note on election coverage: GOBankingRates is nonpartisan and strives to objectively cover all aspects of the economy and present balanced reporting on politically focused financial topics. For more coverage on this topic, visit GOBankingRates.com.

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This article originally appeared on GOBankingRates.com: I'm an Economist: How JD Vance Could Benefit Working Families in the U.S.