“The child tax credit has also been an engine for higher tax rates,” the Wall Street Journal recently opined. “Democrats can raise the top rate on income north of 40% while protecting suburban middle-income voters from the pain thanks to the kid discount.” They call the credit “a progressive insurance policy against pro-growth tax policy.”
Congress created the child credit in 1997. Before that, the top federal statutory income-tax rate was 39.6 percent. It is now lower, at 37 percent. The tax rate on capital gains was 28 percent. It is now 20 percent. The top estate-tax rate was 55 percent. It is now 40 percent. Dividends were taxed at 39.6 percent, but are now taxed at 20 percent. The corporate-tax rate was 35 percent, and is now 21 percent.
In some cases, the effective marginal tax rate is higher than the statutory rate because some tax breaks phase out as income rises. But it is difficult to make the case that the tax code has become more hostile to growth over time because of the child credit. It is difficult, for that matter, to make the case that it has become more hostile to growth at all.
In fact, every measure that has made the tax code more pleasing to the editors of the Journal during the last 35 years has been accompanied by an expansion of tax benefits for children.
The same 1997 legislation that created the tax credit for children cut the capital-gains tax. The Republican tax cut of 2001, which reduced income-tax rates, reduced the capital-gains tax rate, and temporarily eliminated the estate tax, doubled the credit. The Republican tax cut of 2003 cut taxes on capital gains and dividends and shortened the timetable for the expansion of the child credit. After those two tax cuts expired at the end of 2012, a bipartisan deal extended most of them, including the expansion of the child credit. Republican legislation in 2017 increased the size of the child credit again while cutting income and corporate-tax rates.
This record strongly suggests that pro-growth and pro-family tax reforms are in practice complementary. Some supply-siders love to hate the child credit. But it is what has made pro-growth tax measures politically possible.