Child Tax Credit helped some parents start their own business, study finds

Parents who received advance Child Tax Credit payments last year did not leave the workforce as some feared, according to a new analysis, with lower earners increasingly seeking out entrepreneurship.

Of the 54.6 million households eligible for CTC, recipients were more likely to be employed at higher rates compared with non-recipients, according to a study led by researchers at the Washington University in St. Louis’ Social Policy Institute (SPI) and Appalachian State University. Additionally, 300,000 recipients swapped their private-sector jobs for self-employment, with the rate of self-employment increasing from 13.4% to 16.3% in families making less than $50,000 a year.

The findings come as the future of the credit’s expansion remains uncertain in Washington, D.C., with critics citing concerns about its effect on employment.

“Some policymakers and researchers worry that providing families an extra $250 to $300 a month for every child will discourage parents from working,” Stephen Roll, research assistant professor at Washington University’s Brown School and co-author of the study, told Yahoo Money. “Our research shows that over the first five months of CTC payments, employment did not decline in any notable way among parents who were eligible for the credit. This strongly indicates that parents continued to work even as they received the CTC payments.”

The study, which included Yung Chun, a data analyst at SPI, and Leah Hamilton of Appalachian State University, examined Census Household Pulse data from July to October to measure employment trends for parents and non-parents before and after the CTC payments rolled out.

‘Helping parents pursue jobs or entrepreneurial opportunities’

The American Rescue Plan passed in March of last year expanded the CTC in three key ways. It upped the maximum amount of the credit to $3,000 for each child 6 to 17 and $3,600 for those under 6. Before, it was $2,000 per child under 17.

It also made the credit fully refundable, allowing those who earn little to no income to qualify. Last, it authorized the distribution of half of the credit in monthly installments, with families receiving payments from July to December last year.

Although the majority of households with incomes below $35,000 spent their credit payments on food, utilities, shelter, clothing, and education costs,16% of households with children under the age of 5 spent some portion of the CTC on child care, according to the Center on Budget and Policy Priorities analysis of the Census Bureau Household Pulse survey.

“Families who are concerned that they may not be able to put food on the table may not feel like they can take the risks of being an entrepreneur without also putting their family at risk of hardship,” Roll said. “By helping ensure that families can afford the essentials, the CTC may also be helping parents pursue jobs or entrepreneurial opportunities that work better for them.”

Additionally, the study found that low- and moderate-income households were less likely to list child care as a reason for unemployment. In fact, 11.4% families reported using some of their CTC payments for child care expenses — that’s an average 3.9 million families — according to the report.

The rates of parents reporting they were unemployed because they had to care for children also substantially decreased after the CTC payments began from 26.0% to 19.9%, representing an estimated 3.3 million households, according to the analysis.

“Taken together, these findings may suggest the credit is helping middle-income families afford child care, which can reduce their barriers to employment,” according to the report.

Approximately 35 million households with 60 million American children received monthly payments through December 2021 as part of the temporary CTC expansion. So far, Congress has not extended the expansion — which was part of President Joe Biden’s Build Back Better plan — as concerns brewed in Washington, D.C., about the CTC’s potential effects on inflation and unemployment. Some lawmakers have even floated a work requirement for the credit.

“An extra $300 a month is not going to replace work. What it's going to do is allow you to more easily get to work, pay for transportation, child care, and give you the tools to support your family,” Joanna Ain, associate director of policy for nonprofit Prosperity Now, told Yahoo Money. “A work requirement would be a tragic thing to include.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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