/ US, CHILD ALLOWANCE

The effect of child allowances across US states

Poverty has a lasting impact on children. Growing up in poverty increases stress and incarceration rates and decreases educational and health outcomes. These negative consequences not only impact the nation’s poor, but the entire economy as well–child poverty shrinks GDP by more than $1 trillion annually.

Research has shown that giving money to families with children, as most developed countries do, can reduce each of these issues. Programs that provide cash to families with children are called a child allowance, and are typically paid out on a monthly basis.

Here you can explore the impact of a potential child allowance of various amounts in each state. We show impacts across three funding mechanisms:

  • Federal tax as a flat rate on taxable income. For each child allowance amount the total cost is calculated by multiplying the annual child allowance by the total number of children. To calculate the revenue neutral tax rate, the total cost is divided by the nation’s total taxable income. For example, a child allowance of $100 per month would cost about $88 billion annually and require a new flat tax of 1.1 percent.
  • State tax as a flat rate on taxable income. The state tax is calculated in the same manner as the federal tax, but at the state level. This shows how states can fund their own child allowances. Because states vary in child population and income, different states have different tax rates. A $100 monthly child allowance in DC is offset by a 0.5 percent tax on taxable income while the same amount requires a 1.3 percent tax in Alabama.
  • No funding does not impose any new taxes.

These static analyses (they do not consider labor supply effects) are based on data from the Current Population Survey March Supplement representing income from 2017 to 2019, and preserve existing benefits such as the Child Tax Credit.

Distributional effects

While the new tax would hit most Americans, save the very poorest who earn less than the standard deduction, the overall distributional consequences would be positive. For instance, the bottom decile would see their average annual resources rise by about $3,700 per person with a federal $300 per month child allowance, while the top 10 percent would see their average resources per person fall by about double, $6,400.

This $300-per-month child allowance would raise the bottom decile’s income by 33 percent, while lowering the top decile’s income by 4 percent.

Inequality

The progressive benefits by decile demonstrate that child allowances would reduce inequality. Measures of inequality can formalize this result. For example, the Gini index lies between 0 and 1, with 0 indicating that everyone has the exact same income, and 1 indicating that one person possesses all the income.

Across funding strategies, child allowances reduce inequality as measured by the Gini index, with larger child allowances producing larger inequality reductions. Nationally, a $500 monthly child allowance shrinks the Gini index nine percent, from 0.446 to 0.406. While states vary in their levels of current inequality, a $200 monthly child allowance cuts the measure of inequality consistently between 4 and 5 percent across them.

Poverty

A child allowance can also substantially cut poverty. In this example, a person is said to be in poverty if their household’s total post tax and transfer income is less than their poverty threshold. Poverty thresholds are determined by the Census Bureau’s Supplemental Poverty Measure (SPM), which considers a medley of factors including household size, housing status, and local housing costs.

A child allowance of $300 per month, funded by a federal income tax, would cut US child poverty by 52 percent, and also cut adult poverty by 13 percent. Overall poverty would fall 22 percent.

That same $300-per-month federally-funded child allowance would cut child poverty fairly consistently across races: 51 percent among White children and 54 percent among Black children. But because Black children are currently about twice as likely to be in poverty, it also cuts the percentage-point racial gaps in half.

Beyond reducing child poverty, child allowances would decrease adult poverty and abate inequality. These effects are consistent across states, races, and the funding mechanisms.

Read on to our Empirical studies page for more research on the (often causal) links between child poverty and outcomes like health, education, and income. For more information on how a child allowance would compare to existing policies like the Child Tax Credit, visit our Policies page.