A Tax Reform for Romney

Mitt Romney speaks in Kentwood, Mich., February 15, 2012.


We have frequently noted that, for all the rancor of the primary season, Republicans are increasingly united behind a conservative program. Almost all Republican members of Congress and presidential candidates support a free-market reform of Medicare, favor the appointment of originalist judges, and wish to lower corporate tax rates. We are seeing signs of a growing consensus in one other area, too: An increasing number of Republicans have come out for pro-family tax reform. The remaining holdout from this consensus is Mitt Romney. We hope that does not stay true for long.

Rick Santorum and Newt Gingrich each have plans to triple the dependent exemption and thus lower the tax bill for parents based on the number of minor children they are raising. Former candidate Rick Perry included the same proposal in his tax reform. The Republican Study Committee, the large assembly of conservatives in the House, also backs the idea.

The current tax code features two provisions that lighten the tax burden on families: the dependent exemption and the child tax credit, currently set at $1,000 per child. There are several rationales for these provisions. One is that much of the cost of raising children, including income forgone, represents an investment in human capital. Another, related one is that parents’ economic sacrifice represents a contribution to the future of our large entitlement programs. (To put it another way, people who have no children are free-riding on that sacrifice.) The failure of the tax code to adequately recognize this contribution has almost certainly depressed family size.

The best way to address the problem — and to move toward a government policy that is neutral with respect to family size — is to expand the child credit to, say, $5,000. The credit delivers more relief to middle-class families per dollar of revenue the federal government gives up than the exemption does. Parents should be able to apply the expanded credit against their federal tax liability, including payroll taxes.

While all the available evidence suggests that most conservatives, and most voters generally, favor an expanded child credit, some of our friends in the media and in think tanks raise three reservations. They say that increasing the child credit (or raising the dependent exemption) is “social engineering,” a complaint that ignores how the status quo engineers society in an anti-family direction. They calculate that leaving the tax burden on parents unchanged makes it easier to lower taxes on investment in stocks and factories. But that is both an intellectual and a political mistake. Tax reduction should focus on the aspects of tax policy that impose the greatest distortions, regardless of whether those distortions affect the Dow; and a pro-growth tax plan is more likely to be enacted if it has some direct, tangible benefit to offer middle-class families.

Finally, these conservatives worry that wiping out people’s tax liabilities will bias them toward big government. But the Contract with America’s introduction of the child credit appears to have had no such effect. Perhaps most parents have the wit to see that the child credit can take them off the rolls only temporarily.

In 1980, 1994, and 2000, Republicans were successful in part because they offered tax cuts for the middle class. In the latter two cases, those tax cuts took the form of the creation and then expansion of the child credit. Romney appears at least dimly to grasp this point, which is why he is offering the middle class a tax cut for capital gains. But most people in the middle of the income spectrum invest more in their kids than they do in stocks. As he devises a tax-reform plan, Romney should remember that as a matter of both etymology and experience, economics begins at home.