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Marriage, Kids, and Taxes, Ctd.



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In a recent post on the marriage penalty I argued, among other things, that its size can’t be gauged without considering how government overtaxes parents. This claim drew a spirited response from commenter Allesnarf:

 

It’s unfortunate that Ramesh keeps repeating the same fallacious argument, no matter how many times it’s debunked. Non-parents in no way free-ride off parents. Each individual, on average and over the course of his life, will be flat with respect to the contributions he makes to, and the benefits he receives from, the state.

In this article, Ramesh at least makes a perfunctory attempt to address this point. He writes, “The fact that children are not only future contributors to old-age programs but beneficiaries of them does not force any modification to this analysis. The childless still free-ride. Or think about it this way: Imagine a society where from time immemorial each woman has had two children. For one unusual generation, each woman has three children, and then the society reverts to the historical norm of two. The temporary increase in fertility would improve the finances of that society’s old-age programs, and this effect would never be undone. The ratio of contributors to beneficiaries, that is, would temporarily rise above what it had originally been and then fall back to its original level but not below it.”

But this doesn’t prove anything like what he thinks it does. It’s true that in those exceptional circumstances, the generation of the parents or grandparents of the first larger generation (let’s call them the “baby-boomers”) might receive a windfall. This would be the same windfall received by the first generation to receive benefits under Social Security, who never paid in. But that doesn’t say anything about whether the childless are free-riding off parents generally: no other generation receives more than it paid in under Ramesh’s hypothetical, and parents enjoy the windfall equally with non-parents.

Moreover, if we attribute the contributions of the baby-boom generation to that generation’s parents (as we must in order to make the argument that their childless peers are free-riding off of them), then we can’t attribute those contributions to the baby-boomers themselves. That means that the baby-boomers are free-riding! Unless we attribute THEIR children’s contributions to them, and not to the children themselves. In which case, THOSE children are free-riding. And so on.

This illustrates the central logical error in Ramesh’s analysis: he double-counts the contributions of children, attributing them both to the children themselves, and to their parents. By moving “income” but not “liabilities” forward a generation, he makes a zero balance sheet look like it has a positive balance.

Ramesh needs to finally come clean and accept that the argument that he’s been using for years is based on faulty reasoning. Then he can argue forthrightly on a policy basis for his beloved child tax credits.

I didn’t respond to your earlier comment, Allesnarf, because I didn’t come across it until now. But I’m not going to respond to it now, either. Instead I’ve contracted this out to Robert Stein, who writes: 

Allesnarf is viewing entitlements in the familiar terms of a “generational compact.” Each generation pays for its elders’ retirement and has its own retirement paid for by the next generation. The question he’s ignoring is: Who supplies that next generation, which comes at a cost?

The comment misses the main assumption behind our government run old-age pension system, that each generation must make two kinds of contributions to sustain the system: first, by working and paying taxes into the system; and second, in parenting, so that each generation of workers can get benefits when they retire.  If they simply pay taxes, the currently retired generation gets benefits.  But without children to grow up into future workers, current workers will end up contributing but not getting any benefits themselves.

Take a system with four couples: A, B, C, and D.  They all work and pay taxes so their own parents’ generation gets benefits.  A and B also raise four kids each, while C and D raise none.  When these four couples retire, the children of A and B will be paying into a system that benefits A through D equally.  C and D are, in part, free-riding.  (It’s important to note that it is NOT a complete free-ride, but only a partial one.  It’s not a full free ride, because C and D did contribute to their own parents’ generation through taxes.)

Allesnarf, however, says that because the children of A and B will eventually get benefits themselves, then A and B haven’t really done anything helpful for the system by having kids. Allesnarf essentially says it doesn’t matter that A, B,C, and D get benefits only because of A and B’s parenting efforts.

His basic mistake in logic is to casually assume that the children of A and B will eventually get benefits.  But who says that has to be the case?  Allesnarf needs to realize that they, the children of A and B, will only get benefits themselves if they produce little A and B grandchildren.  No kids, no benefits.

To use his terms, the children of A thru D are an asset for A thru D.  However, those same children create no liability at all unless and until they themselves generate an asset in the form of their own kids.

It would be wrong to make the opposite mistake from Allesnarf, and attribute all of the boomers’ contributions to their parents. The boomers’ contributions of working and paying taxes were real, as were their parents’ contributions of raising them (in addition to working and paying taxes). But that still leaves out the adults of the boomers’ parents’ generation who did not have kids, who got the same benefits as their peers without having taken the time and effort to make those benefits possible.

For those looking for a more thorough discussion of the reasoning, please feel free to read Working Paper #6229 from the National Bureau of Economic Research.  It’s available for free.



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