Per-Child Social Security Payroll Tax Cuts

Tim Carney makes the case for libertarian populism as a strategy for reaching out to minority voters. Artur Davis and I are working on a related but somewhat different argument, so I was pleased to see Tim’s  intervention, which included the following observation:

It’s hard for Republicans to appeal to minorities, as minorities, because Democrats are always better at identity politics among non-whites. But this is where libertarian populism comes in. Republicans can reach out to minorities in their roles as parents, taxpayers and small businessmen.

Start with payroll taxes. Payroll taxes disproportionately hit minority families, because they are regressive, and minorities tend to earn less. Republicans ought to slash payroll taxes. One sensible policy: a per-child exemption from the Social Security tax. After all, since parents who have and raise children are preserving Social Security’s future, shouldn’t they get some credit for it?

Hispanic families are 50 percent more likely than non-Hispanic white families to be married couples with children at home, according to Census figures from 2010. “Other race” and Asian families were even more likely to have kids. Anything that makes life easier for parents can work as Hispanic outreach. [Emphasis added]

Family-friendly tax reform is one area where reform conservatives and libertarian populists are closely aligned, and it has at least some intellectual momentum. Robert Stein’s call for family-friendly tax reform has been embraced by a growing number of policy thinkers, my guess is that it will soon by embraced by forward-thinking GOP lawmakers. Charles Blahous and Jason Fichtner of the Mercatus Center explored the idea of a “fertility-neutral payroll tax” last year:

We take as a fundamental philosophical starting point for this inquiry that the objective is not to replicate the vagaries of other federal economic policies in compensating for child bearing via arbitrarily negotiated subsidies. The purpose is instead to determine whether a simple policy adjustment could recognize the quantifiable financing responsibilities that families with children assume on behalf of Social Security—burdens that have been shown to put downward pressure on fertility rates internationally.

With this in mind, Blahous and Fichtner offer the following modified payroll tax structure:

In this simplified system, a worker with two children would pay a 14.4 percent payroll tax rate in years with no dependent children in the household, 11.9 percent during years that one is at home, and 9.4 percent during years when both are present. This system would lead us back roughly to an average rate equal to the current- law 12.4 percent tax rate for parents of two children. More precise rate schedules could be determined by rigorous actuarial analysis, but this schedule reasonably approximates how such a policy might operate.

One of the virtues of the fertility-neutral payroll tax is that if fertility remains consistent with current projections (2.0), the average payroll tax will be the same as it is now and the program’s finances will be unaffected. If fertility levels fall to 1.5, the average payroll tax will increase, thus mitigating the damage to the program’s finances. And if fertility levels increase to 3.0, the average payroll tax will decrease, yet Social Security’s long-term finances will actually improve. I would favor an approach that is more generous to parents, but Blahous and Fichtner offer an intellectually rigorous way forward. 

It is worth noting that Stein’s approach is far more generous to parents than that of Blahous and Fichtner, both because it has a very different structure and because it is not primarily a Social Security reform. While the Stein plan has great political potential — one can imagine it appealing to middle-income Latino and Asian voters with children who are unmoved by GOP calls for tax cuts on high-earners, as Tim suggests — the Blahous and Fichtner proposal is probably best understood as part of a larger Social Security overhaul. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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