Reform the Earned Income Tax Credit and Child Tax Credit

This option reforms the earned income tax credit (EITC) and child tax credit (CTC) by removing the EITC’s variation for number of dependents and expanding the CTC.

Under this option, the EITC phases in at 10 percent up to $1,000 for single filers and $2,000 for joint filers (inflation-adjusted) and phases out at 10 percent beginning at $20,000 single and $40,000 joint. This option makes the CTC fully refundable, with a maximum credit of $3,750 and an additional $750 credit for children under 6. The increases in the credit amounts above the baseline child tax credit ($2,200 in 2026) phase out at 5 percent when income exceeds $85,000 single or $170,000 joint.

These changes would increase average CTC size for lower-income taxpayers but would increase marginal tax rates by eliminating the phase-in and extending the phase-out ranges. Combined with changes in the EITC, marginal tax rates on income would rise slightly overall, while benefits from the refundable credits would also rise overall.

On a conventional basis, this option would increase the primary deficit by $631.8 billion over the budget window. Long-run output would decline slightly, and long-run GNP would decline by 0.1 percent as the larger budget deficit would increase federal government borrowing, and more interest payments would flow to foreigners. On a dynamic basis, the primary deficit would increase by $689.3 billion from 2027 through 2036, $57.5 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 179.2 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.3 percent, with the bottom three quintiles experiencing the largest benefit. On a long-run dynamic basis, taxpayers would see a 0.3 percent increase on average.