Room to Grow, Parenting, and Human Capital Investment

by Reihan Salam

Room to Grow has sparked a constructive intra-conservative debate on a number of questions, but the most controversial essay in the collection has proven to be Robert Stein’s call for family-friendly tax reform, which has been the object of sustained criticism from Kim Strassel in the Wall Street Journal, Stephen Moore, also of the Wall Street Journal, here at National Review (see Ramesh Ponnuru’s reply to Moore), and Scott Lincicome and Ben Domenech of The Federalist. As an advisor to the YG Network, the group responsible for Room to Grow, it should come as no surprise that I’m on Stein’s side in the dispute, though I believe that some of his critics, particularly Domenech, have raised coherent, thoughtful objections that deserve to be taken seriously. So I’d like to think through the proposal one more time. 

Debating taxes is catnip for conservatives. Speaking for myself, there are few things I find more engaging, and more important, than debating the contours of the tax code, as it is the chief instrument through which we shape the economy. It serves as a synecdoche for the larger debate over the role of government in society. Those of us on the right favor tax policy that is less prescriptive and less discriminatory across different economic decisions made by individuals, households, and firms than the tax policy favored by champions of a more interventionist state. Departures from this ideal of a neutral code must pass a high bar to be deemed acceptable on the right. When Stein calls for an expanded child credit, he emphasizes the “parent tax penalty” that unfairly discriminates against the human capital investment parents make in their children. This notion that parenting represents an investment in the human capital of the next generation and that this investment ought to be reflected in the tax treatment of parents is not, suffice it to say, universally embraced. Many others believe that, from the perspective of the tax code, at least, the decision to have and to raise a child ought to be treated as akin to the decision to purchase and maintain any other consumer durable, as the late Gary Becker famously put it in his groundbreaking 1960 essay on fertility:

For most parents, children are a source of psychic income and satisfaction, and,in the economist’s terminology, children would be considered a consumption good. Children may sometimes provide money income and are then a production good as well. Moreover,neither the outlays on children or the income yielded by them are fixed but vary in amount with the child’s age, making children a durable consumption and production good. It may seem strained, artificial, and perhaps even immoral to classify children with cars, houses, and machinery. This classification does not imply, however, that the satisfactions or costs associated with children are morally the same as those associated with other durables. The satisfaction provided by housing, a “necessity,” is often distinguished from that provided by cars, a “luxury,” yet both are treated as consumer durables in demand analysis. Abstracting from the kind of satisfaction provided by children makes it possible to relate the “demand” for children to a well-developed body of economic theory.

Becker’s treatment of children as a consumption and production good was useful in many respects. Yet Becker was also keenly interested in the relationship between human capital investment and what we tend to understand as labor income, an idea that he explored in “The Upside of Income Inequality,” a 2007 essay for The American that he co-authored with Kevin Murphy. Becker and Murphy argue that just as higher rates of return on capital reflect greater productivity in the economy, the initial impact of higher returns to human capital is wider earnings inequality. The best way to redress this wider earnings inequality is, in their view, to foster greater investment in human capital across all families with children. The chief barrier to greater investment along these lines, in their view, is the breakdown of the American family: 

The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—particularly individuals from broken households. Cognitive skills tend to get developed at very early ages while, as our colleague James Heckman has shown, noncognitive skills—such as study hab­its, getting to appointments on time, and attitudes toward work—get fixed at later, although still rel­atively young, ages. Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital.

So instead of lamenting the increased earnings gap caused by education, policymakers and the pub­lic should focus attention on how to raise the fraction of American youth who complete high school and then go on for a college education. Solutions are not cheap or easy. But it will be a disaster if the focus remains so much on the earnings inequality itself that Congress tries to interfere directly with this inequality rather than trying to raise the education levels of those who are now being left behind. [Emphasis added]

Becker and Murphy conclude their essay by calling for policymakers not to raise taxes on high-earners, but rather to encourage more human capital investment, as attempts to raise taxes on the higher earnings that flow from greater skills could dampen productivity growth in the U.S. “by dis­couraging investments in its most productive and precious form of capital—human capital.”

Suffice it to say, I doubt that Becker and Murphy would embrace Stein’s specific proposal. It is clear, however, that Stein’s logic adheres closely to that of Becker and Murphy. Stein’s proposal lowers, albeit slightly, the top marginal tax rate while also recognizing that the most important human capital investments are those that take place early in life, when parents are imparting noncognitive skills to their progeny. If you embrace the skills beget skills idea, i.e., that the skills we master as small children enable us to acquire greater skills as we reach maturity, it becomes clear that the incentives that matter are not just those we face as individuals entering the labor market, but also those facing parents as they make decisions about the early education of their children.

One strategy for fostering human capital investment in the young is to socialize early childhood education. That is, if parents aren’t doing an adequate job of providing their children with noncognitive skills, the public sector ought to take on this role. This is the premise behind calls for universal preschool. An alternative view is that while children raised in the poorest, most chaotic households might require state intervention of this kind, many other households would benefit more from a reduction in the payroll tax burden, which would allow them to either increase spending on their children (to purchase a higher-equality education, for example), to purchase or rent a home that entails a shorter commute (to increase the time spent with a child), or to reduce work hours (also to increase the time spent with a child). There is a suite of in-kind transfer programs that reduce the burdens of raising children for low-income parents, but these programs are ill-suited to the needs of lower-middle-income and middle-income households. In-kind transfers, like SNAP, Medicaid, and housing vouchers, reflect a belief that while adults with very low incomes deserve some measure of assistance, they should not receive no-strings-attached cash in lieu of these transfers, as a widespread conviction is that these adults might not purchase medical care and other essential services for themselves. There are, of course, many people who find this approach needlessly paternalistic. But when it comes to wage-earners earning somewhat higher incomes, the case for paternalism is weaker still, particularly in the case of two-parent families. These are households that earn enough and that have the human capital they need to provide their children with noncognitive skills, yet a relatively modest increase in after-tax income would make it somewhat easier for them to do so.

This argument obviously won’t satisfy those who believe that private property rights merit little respect, or who believe that middle-income two-parent families and low-income single-parent families are identical in every relevant sense, and that the same policy solutions apply to both. To those who agree with Becker and Murphy that the main challenge we as a society face is not income inequality but rather underinvestment in the human capital of the next generation, however, an expanded child credit holds considerable appeal. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.