Another good sign about Utah Sen. Mike Lee’s Family Fairness and Opportunity Tax Reform Act (FFOTRA) is that Josh Barro of Business Insider, a scathing critic of the congressional GOP, is tentatively positive about it. He does, however, object one of the central arguments for family-friendly tax reform:
I should note, I don’t actually buy the human capital argument that Lee and other proponents of “family-friendly” tax plans advance. They argue that people help keep the country solvent by raising children who will pay Social Security taxes while we’re all old and retired; therefore, not giving big tax credits to families with children is a “family penalty.”
It seems to me that every generation is, by definition, fiscally neutral: Your kid who will be paying Social Security taxes in 40 years will be attending public school in 10 years and collecting Social Security in 70 years. I don’t really owe you anything, fiscally, for the fact you chose to raise a child.
That said, I favor higher child tax credits for a different and simpler reason: A family of four with an income of $100,000 has a significantly lower standard of living than a family of two with an income of $100,000 and therefore should not be expected to pay as much in tax. I’m with Lee on the policy end even if we don’t agree on the exact rationale.
Dylan Matthews of Wonkblog describes the plan’s basic features. Some critics are prematurely suggesting that FFOTRA is a giveaway to the rich. What we do know is that FFOTRA makes the mortgage interest deduction more progresive by making it available to non-itemizers and capping its value, and that it retains the existing child tax credit, the child and dependent care credit, and the earned-income tax credit while eliminating the payroll tax burden on large numbers of working families. I am intrigued by the idea that this proposal does more for the rich than for middle-income households. If anything, it looks as though FFOTRA returns taxation for high-earners to something like the pre-ACA, pre-cliff status quo. It might be a terrible thing to return to the Bush-era tax treatment of high-earners, but this isn’t where the action is.
What FFOTRA does do, however, is change the tax treatment of childless HENRYs (high-earners, not rich yet) living in high-tax, high-cost jurisdictions, like the New York metropolitan area, the Bay Area, and southern California. This is a group that has outsized influence in both major political parties, but particularly in the Democratic party. Hostile responses to FFOTRA are likely to come not from middle-income Democrats, most of whom stand to gain from it, but rather from more affluent coastal liberals who might resent its pro-family bias. It should go without saying that affluent coastal liberals are anchored to the Democratic coalition. If Republicans want to woo Democratic voters, and they should, particularly in “purple” states, they need to focus on middle-income, culturally moderate or conservative, family-oriented Democrats, many of whom are Latino, black, or Asian.
FFOTRA represents a significant departure from traditional GOP tax policy. But I can see it taking off among Republican candidates in 2014. To understand why, consider the subjective experience of middle-income voters in politically important states. The estimated U.S. median income for four-person families is $74,964. Then consider the estimated U.S. median income for four-person families in the states where the GOP hopes to make gains in U.S. Senate races next year: South Dakota ($69,221), West Virginia ($60,825), Montana ($69,221), Arkansas ($56,975), Alaska ($86,658), Louisiana ($66,896), Kentucky ($64,119), North Carolina ($66,978), Georgia ($67,276), and Iowa ($73,972). These numbers don’t tell us much in themselves, but in 2010, the U.S. Department of Commerce constructed stylized household budgets for three married-couple two-parent two-child families a the 25th, 50th, and 75th percentiles of the income distribution respectively. It should go without saying that these families represent a minority of all household types, but they represent roughly a fifth of all U.S. households and a larger share of all voters.
The budget for the 50th percentile household ($80,600) was divided into housing ($17,600), food, clothing, utilities, and other “non-aspirational” expenditures ($23,200), and car ownership ($12,400), and taxes on income ($12,400), among other categories. The new child credit in FFOTRA would have a significant impact on this household budget, even if we assume that some tax decreases would be offset by other tax increases.
Ultimately, middle-income tax cuts aren’t the best way to improve the economic position of low- and middle-income households. Rather, we need policies that are designed to increase long-term growth and achieve full employment. But measures like FFOTRA can make a positive long-term difference, and they promise palpable benefits for a large number of Americans. FFOTRA will give GOP candidates a meaningful way to talk about the anxieties plaguing middle-income families, and it offers a solid foundation for other proposals designed to attack worklessness. This is a big deal.