Whether parents can claim their infants as dependents on this year’s taxes—or must wait until next year—can have long-lasting impacts for those babies, according to two recent studies.
Child-related tax credits are typically modest in size, but the studies found that for low-income families, receiving this boost sooner rather than a year later can have all sorts of benefits: persistent higher family income, fewer dealings with the child welfare system, improved academic performance and increased earnings for children turned adults. The research is part of an emerging understanding of the first few months of a child’s life as a pivotal window for boosting low-income families and possibly children’s social mobility, a period where even relatively small cash transfers might be “changing something fundamental about family structure and well-being that has long-lasting consequences,” said Katherine Rittenhouse, an economist at the University of Texas at Austin and an author of one of the studies, in a 2023 interview.
Economists have long regarded family income during a child’s early years as a kind of Magic 8 Ball, the time when economic deprivation can predict a host of disparities that threaten to endure or deepen with time. But few studies have been able to pinpoint why: Is it simply money that makes the difference? Or is it something more murky, like differences in parenting, or neighborhood environments and schools?
For families with babies, tax data offers an elegant way to isolate the impact of receiving extra cash during a child’s first year of life. That’s because infants born in, say, December of 2023 can be claimed on this year’s taxes, providing parents with extra income through tax credits this year. But for babies born just a few days or weeks later in early 2024, parents must wait a full year to receive child-related tax credits. This creates a natural experiment that allows researchers to compare the impact of extra cash on families and children who are similar in all ways except one: some received child-related tax credits when their babies were a few months old, and some waited until their children were at least 15-months-old to receive the money.
In one such study published in 2020 in the reputable The Quarterly Journal of Economics, researchers scoured federal tax data spanning four decades along with state-level education data to determine that low-income families who received the tax credit during their first babies’ first year, as opposed to later, had higher family earnings which persisted. Andrew Barr, a professor of economics at Texas A & M and an author of the study, said this suggests that something about receiving the credit during a child’s first year of life supports parental employment. (The study focused on low-income parents with first-born babies.)
The effects of extra cash during infancy were even more pronounced for the children. Children whose families received the child-related tax credits sooner went on to have higher reading and math scores, and lower suspension rates and higher graduation in school. Possibly as a result of those academic gains, the researchers speculated, their earnings were found to be 1 to 2 percent higher as young adults, and continued to increase as they aged.
The authors concluded that the tax credits not only paid for themselves through increased tax income, but delivered more bang for the buck than even the famed Perry Preschool Project of the 1960s, which was also found to boost participants’ future earnings, but cost far more per participant while serving a very small number of children.
In a different study using similar methodology, Rittenhouse of the University of Texas at Austin used California birth records to determine that for low-income families with first born children, tax credits received during a child’s first year appeared to prevent child welfare involvement, which is strongly linked to poverty. In a working paper, Rittenhouse estimated that for low-income families, receiving a one-time cash transfer of $1,000 during the first few months of a firstborn’s life as opposed to a year later led to four percent less involvement with child protective services during the first three years of life and six percent fewer days spent in foster care. The effects endured until at least age 8, which is the last year studied. “Increasing payments to families during the first year of a child’s life may pay for itself in terms of reduced long-term maltreatment costs,” Rittenhouse wrote.
In both studies, the average tax credits amounted to less than $1,500, which researchers said likely made little difference to families’ lifetime earnings. But they did make up a sizable percentage of a family’s yearly income – roughly 10 percent in one study – which economists believe is key to their effectiveness.
After all, the months following the birth of a first child comprise a uniquely vulnerable, influential time of transition for families, one when “stress is high, expenses are increasing, and working is physically difficult or impossible for new mothers,” as Barr and his co-authors explained in the study.
Because of this intensity, the first year of life is also a time when a lot can and often does go very wrong. The Survey of Household Economics and Decision-Making identified a child’s first year as a time when parents reported being financially worse off and denied credit. The first year of life is also the age when a person in the U.S. is most likely to experience homelessness and also to enter foster care.
The chronic stress stemming from adverse events like these may be especially harmful during a child’s early years, when a child’s brain grows most rapidly and consistent, positive relationships with caretakers are particularly important to healthy development.
Even a little more cash during this tenuous time of transition may go an unusually long way to protecting financially strapped families from derailing, potentially devastating events like eviction or unemployment, which can snowball. “It’s when an extra few thousand dollars can have a big effect,” said Rittenhouse.
Take reliable transportation—something many depend on to work. One study found that more than 40 percent of families who received the earned income tax credit for low-income families have a major car repair within six months of filing taxes. For some, that extra cash from the tax credit could be the difference between having a way to get to work, or not. “Having what might seem a modest financial buffer might be enough to allow [parents] to repair their car, and maintain connections to the workforce, and keep things going in a way that results in better outcomes for them as a family and then the child as well,” said Barr. “This one-time transfer kind of allows you to somehow keep your job, or get a job or do better at your job.”
Recognizing the pivotal nature of a baby’s first year, other developed countries invest in infants by providing paid family leave for parents to bond with babies and by funding child care. For decades the Finnish government has sent expectant families maternity packages filled with toys, clothes and even a mattress that transforms the cardboard box it arrives in into a crib.
Here in the United States, where we have none of this, a handful of pilot projects have been trying to make the case for no-strings-attached cash to new mothers. Since January, all mothers in Flint, Michigan can receive $1,500 while pregnant, plus $500 a month for the first year of their baby’s life. Meanwhile, researchers conducting the Bridge Project, in New York City, and Baby’s First Years are studying the impact of cash on new mothers and their children. Baby’s First Years is particularly interested in measuring child brain activity.
Projects such as these are often small and, for the time being, focused on potential short-term effects of cash transfers. By contrast, the tax studies offer compelling, large-scale, long-term evidence that investing in infants pays off big. “We now have strong evidence that providing income or welfare supports during early childhood improves the outcomes for kids throughout their life course,” said Rittenhouse.
Kendra Hurley is a journalist and researcher whose work has fueled reform and helped shape policy in education, child welfare, and homeless services. Her writing has appeared in Bloomberg's CityLab, the Washington Post, the New York Times, USA Today, and others, and her investigation into teen adoption received an award from the Casey Journalism Center. For over a decade, Kendra worked as senior editor and reporter of the families and poverty project at an applied policy institute at The New School. Before that, she launched an online journal covering the youth media field for the Open Society Institute, and worked with teenagers living in foster care for the youth media publication Represent. While coaching the young writers, she received a PASEsetter award for impactful afterschool educators.
