Distributional Effects of the Child Tax Credit in Poland and Its Potential Reforms

The Child Tax Credit (CTC) in Poland now differs substantially in its generosity and distributional implications from the original policy proposals. While initially designed as an instrument addressed to low income working families, the tax credit was implemented without any upper earnings limit, and its generosity was substantially extended in 2007 implying an annual budgetary cost of about 0.5% of the GDP. The current design of the credit grants largest income gains in absolute terms to families in the upper half of the income distribution, while proportional gains are most significant for those in the middle of the income distribution. Households with children in the bottom 10% of the income distribution gain on average about 7.60 PLN per month, and those in the top 40% gain over a 100 PLN per month on average. The paper also analyses the possible effects of potential reforms of the CTC aimed at reducing its cost. The recently proposed eligibility limitation to families with three or more children would reduce the fiscal cost of the tax credit by 80-90%, while a simulated reduction of generosity of the credit by 50% would save in the state budget about 2.2 bn PLN per year. The latter policy would leave the incomes of families with children in the lowest deciles largely unchanged, and it would reduce the benefits from the credit to households in the upper half of the income distribution by about 50% on average.