Whose Child Is This? Improving Child-Claiming Rules in Safety-Net Programs.

• Author: Goldin, Jacob

ARTICLE CONTENTS INTRODUCTION 1722 1. SAFETY-NET BENEFITS AND CHILD-CLAIMING RULES 1728 A. Child-Benefit Programs in the United States and Abroad 1729 1. The Earned Income Tax Credit and Child Tax Credit 1729 2. Other U.S. Programs 1731 3. Programs Outside the United States 1733 B. Categories of Child-Eligibility Rules 1733 C. Current Child-Claiming Rules 1735 1. Rules for Tax-Administered Benefits 1736 2. Rules in U.S. Non-Tax Programs 1737 3. Rules in Non-U. S. Programs 1740 II. CENTRALITY OF CHILD-CLAIMING RULES TO PROGRAM OUTCOMES 1742 A. Excluded Children 1742 B. Limited Flexibility 1745 C. Compliance Costs for Taxpayers 1745 D. Administrative Costs for the IRS 1748 III. DEFINING PROGRAM GOALS 1752 A. Primary Goal: Promoting Children's Well-Being 1752 1. Children's Weil-Being as a Primary Goal 1753 2. Instrumental Goals for Promoting Children's Well-Being 1755 B. Tradeoffs in Program Design 1757 1. Channeling Versus Complexity 1758 2. Channeling Versus Inclusiviry 1760 3. Inclusivity Versus Complexity 1761 C. Other Policy Goals 1762 IV. PROPOSED CHILD-CLAIMING RULES 1764 A. Policy 1: Universal Child Allowance 1765 B. Policy 2: Benefit with Income Phase-Out 1771 C. Policy 3: Benefit with Income Phase-In 1776 D. Policy 4: Benefit with Phase-In and Phase-Out 1779 E. Summary of Proposed Rules 1780 V. TRANSLATING INTO REAL-WORLD POLICY 1782 A. Specific Legislative Reforms 1782 B. Further Administrative Considerations 1785 1. Conflict-Resolution Rules 1785 2. Annual Benefits Versus Shorter Claim Periods 1787 3. Unifying Rules Across Programs 1790 CONCLUSION 1792 INTRODUCTION

Child poverty is a staggering problem in the United States. Roughly 11 million children are growing up in families that live below the poverty line, comprising nearly one-third of all Americans living in poverty. (1) Research finds that, compared to nonpoor children, children living in poverty suffer worse physical and mental health, lower educational attainment, higher stress levels, and other negative outcomes that persist into adulthood. (2) These findings should surprise no one. And yet, for the past several decades social safety-net programs in the United States have often failed to reach the poorest children. By design, they operate via a patchwork, decentralized system that fails to capture all families in need. (3) By execution, they are administered in ways that burden the poorest households with complex rules and aggressive enforcement tactics. (4)

For the first time in decades, dramatic reform of child-benefit programs may be imminent. In March 2021, Congress passed the American Rescue Plan Act, which temporarily expanded one of the largest child benefits, the Child Tax Credit (CTC), to reach virtually all U.S. families with children. (5) Child welfare advocates and sympathetic lawmakers seek to capitalize on current momentum by making these expansions permanent. (6) Although the proposed expansion of the CTC appeals most to Democrats, there is bipartisan recognition of the need to better support children through the U.S. social safety net, evidenced by Senator Mitt Romney's alternative child-benefit proposal. (7) These proposals and others take diverse tactics ranging from modifying existing child tax credits, to adopting a universal basic income program that accounts for children, to partly replacing existing safety-net programs with a universal child allowance. (8)

Despite their differences, all of these programs rely on some set of rules to distribute resources intended to benefit a child to some responsible person other than the child, such as a parent or caregiver. Such "child-claiming" rules are necessary because children cannot directly receive or spend cash payments on their own behalf. Although largely neglected by both scholars and policymakers, these rules are vitally important. They determine who's in and who's out--that is, which children can benefit from a program and which cannot. They affect how costly a program is to administer and how burdensome it is for beneficiaries to comply with the rules. And they shape whether the benefits of a program are channeled to those most in need or reinforce existing patterns of inequality.

The task of designing child-claiming rules would be simple in a society with largely uniform child-care arrangements, but modern U.S. society is not homogenous in this way. Family structures and child-rearing arrangements in the United States are complex and diverse, and becoming more so. (9) Marriage rates have declined significantly in recent decades, and a large proportion of children live with single parents or cohabitating unmarried couples. (10) Children often split their time between different households, and a growing number of children live with and are supported by nonparent relatives. (11) These complex living arrangements often make it difficult to determine which person is best situated to receive resources intended to improve a child's well-being. Rules that assume a traditional two-parent family structure are a poor match for reality and can end up excluding many of the children who would benefit most from assistance. (12)

This Article makes three contributions to the literature on the design of safety-net programs. First, we show how child-claiming rules are pivotal to the functioning of such programs, both theoretically and practically. Drawing on the current requirements for claiming the Earned Income Tax Credit (EITC)--the largest antipoverty cash-transfer program in the United States today (13)--and the CTC, we explore how the child-claiming rules explicitly and implicitly draw boundaries around which children can benefit and which cannot, and how these restrictions shape the efficacy of the programs. (14) The framework we develop highlights the characteristics of child-claiming rules that give rise to these effects, providing a theoretical lens for considering policy reforms in this area.

Second, having established the centrality of child-claiming rules for program outcomes, we consider how best to design them to achieve specific program goals. We start with a brief theoretical discussion to demonstrate that pursuing even a single, uncontroversial objective, such as promoting children's well-being, entails significant policy tradeoffs. (15) Then, informed by the framework developed at the outset, we consider how best to navigate the difficult yet inevitable policy choices that arise and propose concrete reforms to the existing child-claiming rules for safety-net programs, focusing primarily on those programs administered through the tax code. (16) By highlighting how different child-claiming rules provide a better or worse fit for alternative program designs, our analysis illustrates that no single rule regime dominates across the program objectives we identify.

Third, we offer legislative and administrative considerations with the goal of assisting policymakers to translate our proposed rules into law. (17) In particular, the current child-claiming rules for the EITC and CTC operate by reference to the rules governing which children can be claimed by a taxpayer as a "dependent." (18) The dependent-child rules at least in part seek to define a family unit and account for families' ability to pay, rather than seeking to distribute cash benefits to support children's well-being. We argue for delinking the child-claiming rules for the EITC and CTC from the dependent-child rules. To assist with this goal, we offer sample statutory language for a proposed rule regime that would largely stand apart from dependent-child rules. In addition to legislative considerations, we discuss important administrative details, including conflict-resolution rules, annual versus monthly claim periods, and unification of child-claiming rules across safety-net programs.

To demonstrate the centrality of child-claiming rules, we focus on the CTC and EITC, two of the largest cash-based benefit programs for U.S. families. (19) We detail how the current child-claiming rules lead to the exclusion of millions of poor children from these programs--as well as limited flexibility for families, high compliance costs for claimants, and high administrative costs for the government. As we explain below, the current rules primarily rely on what we refer to as "connection tests," (20) which limit who can claim a particular child based on the relationship between the claimant and the child. For instance, a taxpayer must be closely related to the child and reside with her for more than half the year in order to claim her for the EITC. (21) Although imposed on potential claimants rather than children, these connection tests have the effect of excluding certain children from a program's benefits entirely. In the case of the EITC, for example, children who do not live with a close relative for enough of the year cannot benefit from the credit.

The most vulnerable households are hit hardest by the exclusions and complexity that the current child-claiming rules create. Children living in poverty are more likely to live in families with complex care arrangements that do not fit neatly into the current connection tests. (22) Additionally, because of the overlap between race and poverty as well as demographic differences in marital patterns and family structures, these rules are more likely to exclude children in Black and Hispanic families. (23) There is also evidence that enforcement activity is higher against such households, perhaps as a result of suspected violations of the childclaiming rules. (24) These outmoded rules are thus most likely to exclude and overburden vulnerable and historically marginalized families.

If child-claiming rules are central to program outcomes, then policymakers must design the rules for any particular program with that program's goals in mind. This Article provides a framework for doing so. We start with the goal of promoting children's well-being. As we show, furthering...