Magazine | August 11, 2014, Issue

Tax Fairness for Families

That’s what a hike in the child tax credit would accomplish

Pro-family tax reform is the rare conservative cause that is more popular with the public at large than it is with conservative elites. An expanded child tax credit, such as the one Senator Mike Lee (R., Utah) has proposed, has the support in polls of most people, especially those in the middle of the income spectrum. But oh how the Wall Street Journal’s editors hate it. It “does more for political redistribution than economic growth.” It’s a “mistake.” It’s “just the sort of flim-flam that economists loathe.”

Opposition to the credit is a longstanding cause of the Journal: Those quotes are from 1995, 1996, and 2003, respectively, when the Journal was chastising Newt Gingrich, George W. Bush, and other Republicans who wanted tax relief for parents. During the mid 1990s, the Journal was convinced that the child credit would backfire politically because “the middle class will resent being treated as pawns in a political game that will only produce a tax code that is more complex and less rational.” It was no kinder to other attempts to offer tax relief to families. When Iowa raised the dependent exemption from $15 to $40 per child, the Journal wrote that such proposals “sound nice, but aren’t going to do much for growth.”

The Journal and like-minded conservatives have renewed their campaign against tax relief for children in recent years, and particularly since Senator Lee made his proposal. So it’s worth reviewing the case for the child tax credit to see why past Republicans were right to set aside the criticisms — and why today’s Republicans should set them aside again.

The best argument for a large child credit is that raising children is an investment in the future, and not just in a sentimental sense. Parents have always raised children in part to have caretakers in old age. In the modern world, old-age entitlements socialize part of the intergenerational bargain. Adults raise children, who grow up and take care of their aged parents collectively. The modern arrangement has some advantages, but it imposes an implicit tax on raising children. Parents still make financial sacrifices to do it, but some of the return is given to non-parents. Have no children, and you will get the same Social Security and Medicare benefits as someone who raised three.

Social scientists have found that the creation and expansion of old-age entitlements has contributed significantly to reduced family sizes throughout the developed world (and had other related effects, such as increasing the age of marriage and reducing marriage rates). A large child credit would offset the large bias against children that federal policies inadvertently create.

There’s no better and realistic way to counteract this effect of entitlements. Effectively nobody wants to get rid of the entitlements. Replacing part of Social Security with private saving accounts might be a good idea but would do nothing to reduce the state’s bias against raising children. Cutting benefit levels would reduce the bias but still leave it in place. Giving extra benefits to people who raised more kids could end the bias: But why have the government take money from families and give it back to them decades later when it could just leave it with them? Making people’s payroll-tax rates vary inversely with how many children they have would be more complicated than expanding the existing credit, and would create a politically troublesome accounting problem for Social Security and Medicare.

There is also, of course, a political argument for a higher child credit. Republicans have for decades promised that tax cuts would yield indirect benefits for most people: They would improve incentives to work, save, and invest, the economy would grow, and you would benefit from that growth. But when tax-cutting has been politically successful it has also offered direct savings to large numbers of people. In 1980, 1984, 1988, 1994, and 2000, Republicans were able to say that if middle-class voters chose them they would be able to keep more of their money.

Republicans could make that promise to many middle-class voters once more if they ran on Lee’s proposal. There aren’t many other ways to deliver middle-class tax relief. Cutting income-tax rates across the board, as Mitt Romney promised in 2012, runs into limits because the payroll tax is a larger burden for most people nowadays than the income tax. (They also offer little economic bang for the buck. Cutting the 15 percent tax rate to 10 would increase the returns to work, saving, and investment a tiny amount for middle-class people. Richer people would get a windfall as they passed through that bracket — that’s where most of the revenue hit would come — but would not see their incentives change at all.) Cutting payroll-tax rates would be attacked as endangering the popular entitlement programs. Lee’s approach — giving parents a credit that applies against both income and payroll taxes — offers real relief while avoiding that charge.

Because of his concern about the looming federal debt crisis, Senator Lee aims to advance a plan that expands the child credit while also raising roughly the same amount of revenue as does today’s tax code. He would not balance the expansion with a higher top tax rate; he would even bring that rate slightly down. He recoups the lost revenue by scaling back tax breaks and applying the top rate to a larger share of income. The result should be a tax code that resembles the one we had after the 1986 tax reform, but with somewhat higher rates and better treatment for investments — including investments in children.

Liberals have made three arguments against an expanded credit. All are weak. The first is that the numbers do not work: An early score of Senator Lee’s proposal showed it reducing revenue significantly. He is, however, working with Senator Marco Rubio to modify the plan accordingly without changing the basic concept. The second is that it is insufficiently progressive, failing to offer many benefits to those too poor to pay much in the way of income or payroll taxes. That’s an argument that simply ignores the rationale for the credit. And third is the argument, made most fatuously by Paul Krugman, that the argument for a large credit treats children as “organic 401(k)s.” No, it just treats the costs associated with raising children as in part an investment.

Conservative criticism of an expanded credit has been more scattershot. Some of the criticisms seem to concern different plans altogether. One article complains that the existing credit cuts off above a certain income level; Lee’s plan has no such cut-off. Others object that the credit will not be helpful because parents will get it only once a year instead of in each paycheck. That is not the case with the existing credit — people just have to write how many kids they have on their W-4s to have their withholding adjusted for it — and would not be the case with an expanded one either.

#page#Other arguments attempt to cut deeper, challenging the rationale for the credit. “What about education?” is a common refrain: The childless have to pay for it but derive no benefit from it. The answers are that education is a small part of the cost of raising children, and that the childless have already received educations for which they did not pay.

The next argument is that conservatives should not layer one government “intervention” on top of another, supporting a child credit as a way of undoing some of the effects of entitlements. It is a strange principle that conservatives never consider applying in any other context. State right-to-work laws are far less defensible than the child credit: They prohibit a class of voluntary contracts. They make it illegal, that is, for an employer to require union membership as a condition of hiring. Conservatives and libertarians have fought for them anyway, because within the constraints of federal labor law they represent a step in the right direction. And federal labor law would be far easier to scrap than entitlements.

Other arguments misunderstand the purpose of the credit. They assume that the goal is to encourage people to have additional children that they do not want, and conclude that achieving this goal would be impossible or undesirable or both. In our country, though, desired family size is on average larger than actual family size. A large credit might make it possible for some people to have one more child, or to start having kids earlier in their lives. Even if it had no such effect, however, it would rectify the federal bias against parents. Almost all conservatives support ending the marriage penalty. Nobody criticizes that policy as an attempt to interfere with private decisions — they understand it’s the reverse of that — and nobody thinks the policy would be a failure if it did not raise marriage rates appreciably. The child credit should be judged the same way.

Some of the critics rely on the lazy invocation of labels and slogans. The credit is thus held to be “redistribution” even though its actual effect is to reduce the amount of redistribution from large families to small ones that the federal government does. Or the claim is made that the legitimate purpose of a tax code is solely to raise a given level of revenue at the lowest economic cost, which means there should be no child credit. Nobody, however, really takes this view. Not even a flat tax would be consistent with it. We would have to demand a tax code in which rates are lower the more income someone makes. And why not seek a tax code that minimizes the distortion of society by government, whether or not those distortions show up in this year’s economic statistics? Government policy puts a weight on the scales against both the choice to work and the choice to have kids. Why not lower that weight in both cases?

In practice these are not competing goals. We are more likely to achieve pro-growth changes in tax policy if they are tied to popular pro-family changes. Senators Lee and Rubio intend for their bill to both expand the child credit and cut taxes on business investment. Whatever they devise will be open to the objection that it raises taxes on some people: an objection that would apply to any attempt at revenue-neutral tax reform, from the abolition of tax breaks for clean energy to the imposition of a flat tax. High-earning childless couples who have expensive homes in high-tax states will probably pay a higher tax bill under the plan. But even they should face a lower marginal tax rate and thus have slightly greater incentives to work, save, and invest.

Some conservatives fear that an expanded child tax credit, by taking millions of parents off the tax rolls entirely, will make them look more favorably on big government. There is, however, no evidence that the existing child credit has had any such effect. The credit takes a group of people off the rolls temporarily, and this group is likely to be relatively future-oriented. For a similar reason, there is little to fear from the idea that a large credit will encourage parents to consider themselves an interest group. They are probably too large and heterogeneous a group to organize effectively for political purposes. Such group interests as they have are relatively benign, being roughly identical to the future health of our society.

One final objection holds that favoring the child credit will muddy the message that conservatives favor simplifying the tax code. Expanding the credit, however, does not complicate the code (since the credit already exists), and is compatible with simplification (as in Lee’s plan). It is true that the flat tax is simpler. But a revenue-neutral flat tax would raise taxes on many more middle-class families than would a pro-family tax code, and that would have a much worse effect on conservatives’ ability to convey our basic hostility to overtaxation.

These, then, are the arguments against providing tax relief for parents. They are not very good arguments. Politicians, of course, do not have the luxury of looking at arguments based solely on their merits. They must also consider whether large numbers of their supporters or potential supporters believe those arguments. In this case, however, they have no reason to worry. Both polling and history suggest that it is safe to ignore the conservative critics of pro-family tax reform. The Journal’s opposition to the child credit was not even a speed bump for Gingrich or Bush. On this issue, it does not seem to speak for very many people.

Ramesh Ponnuru — Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg View, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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