The two of us are among the conservatives who have proposed a tax reform that permanently reduces tax rates on capital gains, dividends, and estates, cuts the top income-tax rate and the corporate-tax rate, and abolishes the alternative minimum tax on individuals. We are not surprised to see this plan attacked. But when the attacker is a supply-side tax-cutter writing for the op-ed pages of the Wall Street Journal, may we suggest that he is being a trifle short-sighted?
Stephen Entin goes so far as to say that our tax-reform plan “could be a recipe for stagnation,” not to mention “runaway government.” He is wrong on both counts.
Entin makes two objections to the plan. The first is that it raises marginal tax rates for some people. But almost every tax-reform plan raises tax rates for some people. Many supply-siders have long sought a flat tax of 17 percent. That proposal has many excellent features, but it would raise marginal tax rates on most taxpayers.
We don’t recall Entin ever raising his voice against the flat tax for that reason.
The question to ask about a proposed tax reform is not whether it raises tax rates for anyone, but what its net effect is. Our plan reduces the most damaging marginal tax rates. As under the flat tax, some people will see their rates rise, but the plan as a whole is both pro-growth and pro-family.
CREDIT WHERE DUE
Entin’s second objection is to the plan’s centerpiece: a large expansion of the child tax credit. We believe the credit should be bigger, should be applied against payroll taxes as well as income taxes, and should be available to all taxpayers (with no high-income phase-outs). We argue that Social Security and Medicare create a large implicit tax on child-rearing: Parents make the financial sacrifices necessary to raise the children who will fund those programs tomorrow, while also paying taxes to fund them today. The tax credits would offset this bias by recognizing that parents are, in effect, making two layers of contributions.
Entin’s counter-argument is hard to take seriously. He says that “most people have children because they want them, not because the state needs future taxpayers to fund social programs.” Thanks for clearing that up! But the point is irrelevant. He argues, further, that instead of expanding the child credit we should shrink the entitlements. Fine. At some point, we will have to rein in their growth at the very least. But it could take us a while to get there. And once we did, we would still be right to finance the slimmed-down programs in a way that avoids double-billing parents.
The child credit, it turns out, is also responsible for the “runaway government” that Entin fears. The fewer people pay income taxes, he argues, the more they will consider big government a free good and vote for it. Entin provides no evidence for this theory.
It is a strange theory to adopt if you believe in a dynamic, fluid economy. When we conservatives propose cutting the top tax rate and liberals say that we are helping only the rich, we typically point out (among other things) that the composition of this class changes over time. So does the class of parents of children. As a group, they tend to have longer time horizons than non-parents. They would know they would be back on the tax rolls once their kids grow up. It’s also not a voting bloc that tends to favor big government, and giving them more control over resources is likely to lessen their demands for government services.
THE POLITICS OF POINTLESSNESS
Entin presumably would prefer an alternative tax reform. Based on his postulates it seems likely that he would like to get rid of the child credit altogether rather than expand it, and instead cut the top income-tax rate even more than our proposal. He probably would take capital taxes down more too, perhaps to zero. But in the current political environment, and the environment that is likely to prevail for the foreseeable future, zero percent is also a decent estimate of the likelihood that this type of orthodox supply-side reform has of becoming law.
Entin is attacking what would probably be the most popular element of our plan, the large tax credit for children, because of its supposed inefficiency. But if conservatives adopt Entin’s outlook, they will surrender much of the tax-policy field to liberals. How efficient are the results likely to be?
The vast majority of the benefits of our expanded child credit would go to married couples with children. Increasing our popularity among these voters, who often feel beset by harmful social trends and the costs of child-raising, will improve the political playing field for those seeking orthodox supply-side tax cuts.
– Mr. Ponnuru is a senior editor at National Review. Mr. Stein is a senior economist at First Trust Advisors. The views expressed in this article are Mr. Stein’s, not those of First Trust Advisors.