Effects of the 2021 Expanded Child Tax Credit

We analyze the impact of the 2021 Child Tax Credit (CTC) expansion using detailed transaction data from nearly two million individuals and difference-in-difference analyses around monthly CTC payments. We find that recipients significantly increase their consumption in the week following the payment versus the prior week, with more pronounced effects for lower-income recipients and those with more children. We also find a significant reduction in liquidity constraints for lower-income recipients, with reductions in overdrafts, use of high-interest payday loans, and use of gig work for supplemental income. Building on these initial findings, our analysis further delves into more nuanced, policy-targeted aspects: We observe a greater alleviation of liquidity constraints from monthly CTC payments compared with annual tax refunds. In addition, monthly payments decrease consumption volatility and increase stability in consumption levels. These results inform considerations for payment frequency. Furthermore, we provide insights into the income thresholds for the policy’s phase-in and phase-out ranges by identifying the most pronounced consumption effects among the lowest-income recipients—who benefit from full refundability under the plan—and noting an absence of significant consumption changes among higher-income recipients. Our results present the first large-scale, transaction-based, empirical archival evidence of the effects stemming from the 2021 CTC amendments and provide insights for policy-related discussions. This paper was accepted by Eric So, accounting. Funding: We acknowledge funding from the Think Forward Initiative and the University of California, Irvine, and the U See I Write initiative at the University of California, Irvine, for focused writing retreats which facilitated the writing of this manuscript. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.02254 .