Comparing Tax Plans: Fairness and Families

by Ramesh Ponnuru

Derrick Morgan, my sparring partner at the Heritage Foundation (see my previous post), does not contest the core of the case for an expanded child credit: that entitlement programs constitute a kind of implicit tax on child-rearing. Instead he nibbles the edges of the case that a credit should offset this tax.

Old-age entitlements socialized the intergenerational bargain: Adults take care of children until they are old enough to work, and in return are taken care of by them when they are too old to work. Under entitlements, we do not depend on our own kids for our retirement but on everyone’s kids. This collectivization of one half of the intergenerational bargain but (thankfully!) not the other creates unequal demands on parents and non-parents — and particularly burdensome demands on large families. Entitlements make it more possible to have a secure retirement without having raised kids. If you do have them, you contribute twice to the programs, first through your taxes and second through the financial sacrifices that raising children entails.

Nobody imagines that entitlements are the only reason birthrates have fallen, or that neutralizing their effect on family size would bring us back to a pre-industrial fertility rate. But entitlements do appear to have reduced family sizes, and an expanded credit might counteract this effect. That’s not its purpose, however. Even if it has no effect on fertility at all, it will offer relief from the overtaxation of parents that is a feature of today’s entitlements.

Morgan got the impression that the point of the child credit is to restore the old dispensation in which children directly took care of their adult parents. Since it is unlikely to accomplish that goal — it is hard to think of any policy reform that would — he thinks it would be a failure. But that’s not the goal of the policy at all. The goal is rather to address the way the current system unfairly burdens families, especially large ones, which may have the side effect of enabling some growth in family size where desired.

The development of modern finance has very likely reduced birthrates, as Morgan writes (and I’ve written before): People can rely to some extent on savings rather than children to provide for their old age. Morgan asks why the tax code should counteract the effect of Social Security and Medicare but not that of 401(k)s. The answer seems pretty obvious to me: There are all kinds of reasons family sizes might change over time, but one of them should not be a government policy that puts its thumb on the scale against children.

I think the basic disagreement Morgan and I have comes toward the end of his latest post. He writes that the marriage penalty in the tax code should be eliminated. But the tax code should not address any distortions that the government creates outside of the code. We should make the tax code itself neutral and pristine. So we should not consider the tax code alongside the entitlements for which the tax code pays.

This approach makes no sense to me. The intelligible point of having a neutral tax code is that it prevents the government from distorting economic decisions. We want a neutral tax code to the extent it makes the government’s footprint smaller. An expanded child credit does that. (Morgan does not even attempt, in his latest post, to argue otherwise.) I don’t think we should refuse to do that on the ground that the tax code should be treated in isolation from the rest of the government.

Conservatives have generally favored a reduced tax rate, or no tax rate, on dividends that individuals receive. Considered purely in terms of the personal income tax, this position makes no sense. The reason we favor it is that it counteracts the fact that the dividends have already been taxed at the corporate level. Some conservatives would prefer to change the corporate code and tax dividends at normal income rates. Not very many of them would say that it is wrong in principle to alter the individual code to make the treatment of capital fairer until the corporate code changes. They wouldn’t say, that is, that we should treat the personal income tax code in isolation from the rest of what the government does.

That’s the right way to think about investment in companies, and it’s the right way to think about investment in the next generation too.