Mike Lee Introduces Pro-Growth, Pro-Middle-Class Tax Reform

by Patrick Brennan

Today at AEI, Senator Mike Lee of Utah introduced an idea that’s been missing in Congress for a long time: A conservative tax-reform plan that aims to improve opportunity and reduce the bias against families inherent in the U.S. tax code.

It would significantly simplify how individual income taxes work, and result in a large tax cut on families with children, especially married ones: The system would be reduced to just two brackets — 15 percent on all income below $87,850 (at which the rate currently jumps from 25 percent to 28 percent) and 35 percent on all income above that. Most interestingly, though, it would provide much more compensation in the tax code for raising children: “The centerpiece” of the plan, as Lee put it, is a $2,500 tax credit per child under the age of 16, which would reduce what parents owe in income taxes dollar-for-dollar, and if that’s reduced to zero, what they owe in payroll taxes, too. (The tax code currently provides a combination of a tax deduction for children, which only reduces the amount of one’s income that’s subject to the income tax and isn’t, for most couples, nearly as valuable per dollar, and a smaller tax credit.)

That represents a significant tax cut on a lot of middle-income earners, but a number of tax expenditures (deductions and credits) would be eliminated, and some would be smartly restricted — the mortgage-interest deduction, for instance, would be capped at $300,000 in principal, as Lee says, “focusing the deduction on the families and communities who need it the most.” He highlights a “new charitable deduction that would be available to all taxpayers,” which would be available to people who don’t currently itemize their deductions (lower-income Americans, for one). The “marriage penalty” would be eliminated, because the bracket sizes would now just be doubled for married couples (preserving a “marriage bonus” for many couples).

The senator couched his argument for the new tax code by preempting the argument that making tax policy much more generous to parents means some kind of favoritism toward them — joking that it might look self-interested for a middle-aged Mormon to propose the idea (one can expect some actual serious criticism from the left on this front). Lee’s plan, he explains, corrects a distortion in the tax code, its undercompensation for the costs of raising children that will someday pay taxes and fund the government, rather than introducing one. He explained that federal entitlement programs, including Social Security and Medicare, “operate as generational transfer payments, not individual insurance policies,” meaning that at any point, younger people are, in reality, paying for their elders’ benefits rather than contributing money toward their own future benefits. Lee explains:

Parents are required to contribute to this system not once, but twice. First, when they pay their taxes, just like everyone else. And then again, by bearing the enormous economic costs of raising their children, who in time, of course, grow up to become the next generation of taxpayers. . . .

This hidden, double tax on parents – in and of itself – violates conservatism’s core principle of equal opportunity. Another way to think about it is that current policy imposes an enormous tax on the economic, human, and social capital that all parents invest in their children, and in our country. . . .

We know better than that. We can do better than that. And a new Republican opportunity agenda should. 

(Ramesh Ponnuru laid out the argument for the necessity of such a correction at length in a May 2012 article for NR, “The Empty Playground and the Welfare State.”)

The senator responded to a number of possible conservative objections to the proposal — why not a flat tax, for instance, and why is the top rate so high? — by suggesting that his plan is inherently a limited one, and doesn’t go as far as he’d like. But it is, he argues, an attempt to apply American conservatism’s oldest principles – equality of opportunity and the pursuit of happiness — to new problems,” namely, the struggle of middle-income American families. Under the plan, he explained, “a married couple with two children making the median national income of $53,000 would see a tax cut of approximately $5,000 per year.” Who would end up paying more? Single, childless, relatively affluent people, especially those who live in high-tax jurisdictions (the deduction for state and local income taxes would be eliminated).

The plan hasn’t been scored for its revenue effects, but it seems likely, overall, to reduce the receipts of the federal income tax slightly. Over the long term, though, while this isn’t the main intent, a rise in fertility and increased investment in raising children should go a ways to reducing America’s long-term fiscal gap (AEI’s Jim Pethokoukis likes to refer to such an idea as a “human-capital tax cut” — while, again, it’s about fixing a distortion in the tax code and not adding one, at the margins it’s a big tax cut for having children).

These ideas have been floating around conservative circles for a long time — something like it was recommended in Ross Douthat and Reihan Salam’s manifesto The Grand New Party, and Robert Stein made the case for such a policy in the Winter 2010 issue of National Affairs.

“For a political party too often seen as out of touch, aligned with the rich, indifferent to the less fortunate, and uninterested in solving the problems of working families, Republicans could not ask for a more worthy cause around which to build a new conservative reform agenda,” Lee said today. He’s right, and it’s heartening to see a concrete proposal for it introduced in Congress, especially by Lee — a key proponent of the conservative defund-Obamacare effort who was elected in the 2010 tea-party wave.

That might esuggest, to the most optimistic among us, that we can expect plenty more conservative, pro-growth, middle-class-friendly innovations to come.

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