How Expanding the Child Credit Can Help Conservatives Achieve Their Goals

by Reihan Salam

What might the ongoing intra-conservative tax policy debate prompted by the release of Room to Grow tell us about the future of the conservative coalition? One thing it tells us is that conservatives are fixated on tax policy despite the fact that as Michael R. Strain of the American Enterprise Institute, a contributor to Room to Grow, reminds us, taxes aren’t the biggest policy challenge facing the right. The modest gains we might yield from even the most well-designed tax reform proposal are outweighed by, among other things, the benefits of labor market policies that get the long-term unemployed back to work and health entitlement reforms that put the federal government on the road to fiscal health. But like it or not, we’re in the middle of a serious tax policy debate that could have a huge impact on where the right goes next. The discussion so far has been very abstract. I’d like to focus on how an expanded child credit might shape the political terrain as the baby boomers continue to retire in large numbers, entitlement programs come under heavy strain, and liberals and conservatives jockey for position. 

It is actually a non-conservative, Matt Yglesias of Vox who sees the political potential of an expanded child credit most clearly. Shifting the tax policy debate between Democrats and Republicans from a debate over the merits of cutting the top marginal tax rate to the merits of expanding the child credit would, according to Yglesias, have a big impact on the partisan landscape:

Right now when Democrats propose a big new program for the poor and the middle class — whether it’s Obamacare or future universal preschool benefit or what have you — Republicans counter by complaining about excessive spending and government waste. But the GOP alternate to spending money is tax cuts for a small number of very rich people. That in many ways sets the bar for a liberal proposal very low. Democrats don’t need to convince voters that their programs are cost-effective, just that they are in some sense useful.

A reorientation of the tax cut debate around bigger tax credits for middle class parents rather than lower tax rates for hedge fund managers would change that. Republicans would be able to offer people more money in their pockets as the alternative to more public services — a potentially much more compelling offer.

I’ve made something like this case myself, so I’m inclined to agree with him. There are, to be sure, aspects of Yglesias’s analysis that I reject. Yglesias says that Robert Stein and Sen. Mike Lee (R-UT) want to “abandon supply-side tax policy.” That’s incorrect. He is right, however, to underline the fact that Stein and Lee aren’t putting all of their eggs in the basket of improving work incentives for the highest earners. Stein recognizes the importance of seeing to it that work incentives for the highest earners remain strong. Yet in light of the steady deterioration of the fiscal position of the federal government, he believes that tax relief should be focused elsewhere. While the political costs associated with a substantial cut to the top marginal tax rate are considerable, the economic benefits would be relatively modest, particularly when compared to Reagan’s 1981 tax cut, which cut the top rate from 70 percent to 50 percent. Thomas Piketty and François Hollande might welcome a return to pre-Reagan-era top tax rate in the U.S. Mainstream Democrats, who need to manage an economically diverse coalition, recognize that such stratospheric marginal tax rates are both economically destructive and politically unthinkable. This is a debate that conservatives have essentially won. The key supply-side issues now surround the tax treatment of capital income, where conservatives are more inclined to favor measures like progressive consumption taxes and sweeping corporate tax reform. These efforts are, for obvious reasons, less politically salient. Even if we accept that the corporate tax burden is borne not just by the owners of capital assets but also by wage-earners, its impact is largely invisible, and so calls for a consumption tax or for corporate tax reform aren’t likely to prove compelling on the campaign trail. Family-friendly tax reform is best understood as a complement to pro-growth tax reform focused on the encouraging savings and investment, as Pethokoukis has argued

Yglesias does recognize that family-friendly tax reform represents a departure from earlier conservative approaches that have failed to resonate, including the Romney campaign’s call for a revenue-neutral tax reform that would eliminate various tax expenditures to finance a reduction in marginal tax rates. There is a danger that such an approach would lead to higher tax on middle-income households, a charge that the Romney campaign had a difficult time fending off. What better way to address this danger than to expand the child credit for middle-income households? 

Moreover, an expanded child credit that concentrates its benefits on middle-income households offers another potential benefit to conservatives that Yglesias misses: as Ramesh Ponnuru ventured in the Weekly Standard in January of 2013, middle-class tax cuts are the most effective way to constrain the growth of federal spending, or “starve the beast.” The Bush-era tax cuts did little to restrain the growth of government, in part because (a) the highest earners are not as tax-sensitive as middle earners, at least when it comes to the difference between Bush-era and Clinton-era top tax rates (this is particularly true of those who choose to live in high-tax jurisdictions); (b) the highest earners aren’t a large electoral constituency, and they tend not to be swing voters; and (c) Clinton-era top tax rates were a non-scary counterfactual for the electorate as a whole. The result is that raising revenue by raising taxes on the highest earners has been fairly politically popular, as the left has demonstrated on more than one occasion. 

Of course, there are limits to hiking taxes on the rich as the sum total of your fiscal policy: the revenue that can be gained from sharply increasing taxes on affluent households won’t be enough to contain rising deficits, even if we assume that higher tax rates have no impact on work incentives, which seems unlikely. To finance future spending levels on a business-as-usual course, taxes on middle-income households would have to rise. The trouble for those who oppose large-scale entitlement reform, and indeed for those who favor expanding federal social programs, is that raising taxes on middle-income households is extremely unpopular, as middle earners are more tax-sensitive than the rich, they constitute a large swing constituency, and there are no recent precedents for a huge, painless middle-income tax hike. The threat of substantial tax increases on middle-income households would greatly improve the political prospects of reforms designed to contain the rising cost of (in particular) health entitlements. 

The politics of an expanded child credit look even more attractive when we consider how big an impact it would have an after-tax incomes for middle-income households in swing states and districts, and it might create an opportunity for conservatives to appeal to Latino and Asian households, which are far more likely to consist of married couples with children under the age of 18 than is the case among other U.S. households. The YG Network, where I serve as an advisor, recently conducted a survey of American women, which found overwhelming (78 percent) support for “expanding the child tax credit to allow parents to keep more of their own money.” I realize that many conservatives find the idea of an expanded child credit discomfiting. But its political potential is undeniable. If you want to ease the way for tax reforms that would encourage savings and investment, restrain the future growth of government, and broaden the conservative coalition, the child credit appears to be what you’ve been looking for.

The Agenda

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