Why the New Monthly Child Tax Credit Is More Likely to Be Spent on Children


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Hundreds of dollars began arriving in parents’ bank accounts Thursday, as the first installment of the Biden administration’s monthly child tax credit. Compared with programs that require a lot of paperwork or happen only at tax time, it was hard to deny the power of government assistance in the form of a direct deposit.

It offers a psychology lesson that could inform public policy. Sending people money on a regular basis — no paperwork to file, no strings attached — achieves policy goals, and perhaps political ones, too. It’s a powerful way to make people aware of exactly what the government is doing for them.

President Biden emphasized that aspect in a speech Thursday: “We’re proving that democracy can deliver for people, and deliver in a timely way.”

The simplicity of direct deposit — the new credit is $300 per child under 6, and $250 per child from 6 through 17 — is a major reversal from most safety net programs, which have work requirements and other hurdles and oblige recipients to navigate a complicated bureaucracy. (People who don’t use direct deposit for their taxes are receiving checks; those who don’t file taxes can sign up for the credit online.)

Also, money labeled for children — the deposit that arrived in parents’ bank accounts Thursday was called CHILD CTC — is more likely to be spent on children, research shows. The previous child tax credit was one of many payments and credits folded into a final tax number each April, so it was easy for taxpayers to lose track of a credit meant for children.

One reason is that spending on children is often considered a mother’s domain. A significant amount of research in developing countries has found that when money is given directly to mothers, it is much more likely to be spent on food and other necessities for children than it is when fathers control the money.

This is also true in rich countries. A study of fragile families in the United States found that children are much less likely to have food insecurity when mothers control the family’s money. An influential study on a child allowance sent to mothers in Britain in the 1970s found that unlike previous benefits not designated for children, it was more likely to be spent on things like clothing and toys for children.

Also, labeling the purpose of the money guides people on how to spend it. The behavioral economist Richard Thaler described in 1985 the ways in which people keep mental accounts, allocating money for different purposes, even though this “violates the economic principle of fungibility” — the idea that money is interchangeable. People tend to use monthly payments for daily expenses and lump sums for long-term investments, like education or a car, said H. Luke Shaefer, a professor of social work studying antipoverty policy at the University of Michigan.

Although the new tax credit is a large increase for low earners, higher earners end up receiving the same amount annually that they would…

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