The Fiscal Cliff's Effect on Children

High earners aren't the only ones who will be affected by the tax increases of the fiscal cliff; unemployment benefits will suffer as well, and children living in poverty are the ones who will be affected.

On Jan. 1, 2013, the unemployment benefit, currently at 99 weeks, will revert back to 26. This will touch not only adults that are caught in this economy’s joblessness quagmire, but also their children. New research indicates that the effect could be wider than previously thought.

Poverty Rate of Children Under 18: 2000-2011

Graph courtesy Assistant Secretary for Planning and Evaluation; data from census bureau.

Alexander M. Gelber and Matthew C. Weinzierl used a model* of ideal income taxation to study the outcome of boosting families’ disposable income on their children’s national standardized scores. Their paper is posted on NBER (see at the end of this column).

An extra $1,000 per year per child made no difference on the test scores for children in families that already have some extra income, for example those that make $100,000 or above. But, it did for those in families below the poverty level. In 2012, the income threshold for poverty for a family of four was $23,050.

This is forward-looking research. At a time when the poverty rate of children under 18 is increasing, their investigation brings this problem to people’s attention in a new way.

Though everyone knows poverty is not a good thing, most people don’t recognize how devastating it is for affected children. Ultimately, this brutal truth could have a secondary effect on all Americans in the future: children who can’t reach their potential due to poverty perpetuate joblessness as adults. This creates a burden on the entire American system.

*The authors used a model of ideal income taxation called a standard dynamic Mirrleesian optimal tax model. It is based on work by James Mirrless executed in 1971. This model is considered the theoretical benchmark for any normative model of redistributive taxation.

Read more:

Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children’s abilities depend on Parents’ Resources