Pethokoukis, Economics, Taxes and Spending

If the GOP wants to cut taxes for corporations, first cut them for families

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Why are Republicans so hot to cut taxes for companies but not for children? Reducing taxes that corporations — really their investors and workers — pay certainty makes sense. An OECD study found corporate taxes to be “the most harmful for growth,” and America’s statutory corporate tax rate is the highest among advanced economies. Slashing that rate should be central to any tax reform plan Washington cooks up. And indeed, pretty much every GOP tax plan includes a fat reduction, one supposedly financed by eliminating various tax breaks.

GOP tax cutters, however, have shown far less interest in specifically addressing the tax burden on families. Rather, just the opposite. They, along with Democrats, have potentially put the child tax credit on the chopping block as a way to pay for lowering top marginal tax rates for individuals. In a new Bloomberg commentary, Ramesh Ponnuru leads with the moral case for vastly increasing the child tax credit — fourfold or more — and making it refundable against both income and payroll taxes. (By one estimate, a middle-class married couple with two children would get a tax cut of more than $5,000 per year.)

Ponnuru’s core argument: parents make a massive financial investment by raising kids, but the economic return is captured by the rest of us. More kids mean more workers to fund Social Security and Medicare. And the more kids a tax-paying family raises, “the more others are free-riding off its investments,” Ponnuru writes. Or as Jonathan Last, author of What to Expect When No One’s Expecting, puts it, reforms such as expanding the child tax credit or reducing payroll taxes on families “don’t hand out money to parents; they simply lessen the economic disconnect created by the government in the first place.”

Then again, as President Kennedy once said, “There is always inequity in life.” But expanding the child tax credit is also pro-growth. America has stumbled into its own “one-child” policy through Social Security and Medicare programs that inadvertently undercut traditional incentives to have kids as protection against poverty in old age. These entitlement programs may be suppressing the US fertility rate by half a percentage point. But America doesn’t have 0.5% to spare given a fertility rate of 1.9%, already below replacement. Generous entitlements and overtaxed parents, as Ponnuru notes, are a toxic combo for family formation.

A fatter tax credit that allows parents to capture more of the economic return from kids probably won’t nudge them to have more kids than they desire. But it will make it easier for them to have all the kids they do want. And more kids not only mean a higher fertility rate and more tax-paying workers than otherwise, but also a younger society that is more dynamic, creative, and entrepreneurial. As the Nobel laureate economist Gary Becker writes:

Although potential difficulties in financing social security benefits are receiving the most attention, other negative effects of low birth rates may be of equal or greater importance. Low fertility reduces the rate of scientific and other innovations since innovations mainly come from younger individuals. Younger individuals are also generally more adaptable, which is why new industries, like high tech startups, generally attract younger workers who are not yet committed to older and declining industries. … A bigger population also increases the demand for new drugs, software, social networking, and other innovations that have increasing returns to the scale of demand.

So expanding the child tax credit — in essence a human capital gains tax cut — would potentially both boost long-term US labor supply and productivity, especially if it was combined with other pro-parent polices that help middle-class Americans more easily save for college and retirement. Yes, cut tax rates for US companies — but also lessen the tax burden of the parents who work for them. In fact, it will be easier to sell the first, if you also do the second.

16 thoughts on “If the GOP wants to cut taxes for corporations, first cut them for families

  1. Ponnuru’s argument is one of the dopiest and sloppiest I’ve ever seen.

    People without kids are “free riding”? Don’t people without kids pay property taxes, the vast majority of which go to support … public schools? State income taxes also provide public school funding. Federal income taxes also go to fund public schools.

    How about free or reduced price school breakfasts and lunches? Where does that money come from? Free riders?

    Subsidized school loans for college? Taxpayer funded?

    Food stamps? Welfare payments? Children’s health care?

    Starting to look like those free riders are already paying an awful lot for other people’s kids.

    You want to give a huge “bonus” to breeders? Fine then “free-riders should no longer have to support programs for children they do not have.

    Senior programs like social security and Medicare are dependent on the next generation because of program mismanagement. The seniors in question have paid into the programs throughout their working lives. They expect to get their money back, not they neighbor’s kids money back.

    • We have to face the world as it really exists, not the fantasy world where the federal government invested surplus payroll taxes from 1935 through 2008 in something other than the federal government’s own indebtedness. Joe Marinaro and his ilk are counting on my children to pay payroll taxes during his old age so that he can retire. He is also counting on someone else’s children to wipe the spittle off of his bib and wipe his bottom as he sits in a retirement home. Our collective future and Mr. Marinaro’s personal future world will be much better if middle class Americans have more children now. We can whine about how previous policy makers should have invested the surplus funds from Social Security taxes paid in prior years all we want but that won’t change the situation we have today that requires more future taxpayers. If Joe Marinaro doesn’t like having to pay taxes that indirectly benefit other people’s children, perhaps he should volunteer to commit suicide when he stops working.

      There are two strong disincentives in our current federal tax system for middle class people having children. First, the FICA taxes make no adjustment for wage earners who are supporting a family versus wage earners who are only supporting themselves. Second, the federal income tax personal exemption for 2013 is $3,900. The cost of raising a middle class child far exceeds $3,900 so parents are less able to afford paying federal taxes than non-parents. Further, the personal exemptions are completely eliminated for the purposes of the alternative minimum tax. Thus, upper middle class parents often pay the same income taxes as non-parents despite the enormous costs incurred in raising children. A well designed tax system makes adjustments for the ability of a taxpayer to pay taxes. Our tax system does not make adequate adjustments for the costs associated with raising children.

      As for state and local taxes, their income taxes have similar child unfriendly features as the federal income tax. Parents are also hit particularly hard by the real estate tax because they are the ones who are most likely to own expensive houses in good neighborhoods that are served by good public schools. This forces them to pay much higher real estate taxes on average than non-parents.

      Mr. Marinaro also seems to think that middle class parents disproportionately benefit from food stamps, welfare payments, and government provided healthcare. These are all programs for the poor. I don’t know whether children disproportionately benefit from these programs or not. In any case, these programs do not benefit middle class parents who are taxpayers.

    • There would be no need for the “breeder bonuses” Mr. Marinaro gripes about if the personal deduction became adjusted for inflation, using what it was in 1948 as the base year –about $600 per person then — which translates after inflation to close to $6,000 per person today.

      This could be done by adding less than a sentence — “adjusted for inflation based on the 1948 dollar as defined by the Consumer Price Index” — to the Income Tax law.

      A, ahem, breeding pair with four children would pay no income taxes on its first $36,000 in income and would therefore have the money needed to pay for all those school lunches and health care; have no need for food stamps; Mom would not need to work and could instead train and civilize her children instead of leaving them to the school systems, which cannot do it.

      The family would not require welfare. It probably would even be able to start saving money for the kids’ college costs.

      Further, returning the personal deduction to what it was would create an large financial incentive — in particular for those in the bottom two income quintiles — for families to remain intact. This likely would result in less youth crime and lower social welfare costs — also for the non-breeders — like food assistance, welfare, education and other national redistribution/income recycling agencies could either be eliminated or at least reduced in size by half.

      Further, the non-breeder pairs could rest assured they would be able to “free ride” on the growing pile of Social Security tax money paid by all the new happy children, instead of that program dissolving into insolvency and hence requiring these (likely higher-income) non-
      breeders to forgo ANY money from Social Security due to their enhanced net worth.

      A win-win for everyone except for the employees of Leviathan-on-the-Potomac and its enabling, tens of thousands of rent seeking lobbyists. Family friendly. Even gay friendly. What’s not to like?

  2. every time i hear the argument for the child tax credit, it seems like a much stronger argument for allowing high-skilled immigration. that would avoid taxing singledom and spending tax dollars on couples who reproduce (keep in mind, plenty of kids are burdens on the tax code, while very few high skilled workers would be).

    • JC doesn’t care what happens to the country after his short lifespan within it. Our forefathers didn’t build this country so their progeny could fail to reproduce and give the country away to foreigners. I am constantly amazed at Americans who enjoy the fruits of prior generations’ work and feel no obligation to pass on a better country to the next generation.

      • i don’t quite get this response. how do you know how long my lifespan will be? should i be concerned that there’s something Christopher Scott knows that i do not?
        if i recall, many of the founding fathers were immigrants or children of recent immigrants themselves (or as you ungraciously term them, “foreigners”, although once someone becomes american, they’re no longer a foreigner, right? so i take it you support a path to citizenship for immigrants) why do you think moar high skilled immigrants won’t pass on a better country to the next generation?

  3. Does the GOP wish to become a majority again? This can only happen IF AND ONLY IF they listen to Main Street first before listening to Wall Street or K Street.

  4. I will try to ignore the patently offensive term “breeders” used by a previous commenter. I prefer the traditional term: “parents.”

    The gigantic underfunded liabilities are Social Security and Medicare. People receive much more in benefits than they pay into these systems, so they are supported by those who are still working. Thus, people who raise children are raising the people who will be paying for the retirements of all of the members of the parents’ generation, including those who did not have children. As a baby-boomer, I have noticed that about half of my college classmates have not had children, and their level of benefits in retirement will be as high or higher than the level of those who have raised families and as a direct result have lower levels of personal financial assets going into retirement.

    Moreover, Ponnuru is specifically discussing middle-class taxpayers as parents, not those who are recipients of TANF, food stamps, and Medicaid. They are also paying the school taxes! And some of them do not use the government schools and so are in exactly the same position as those who are not raising children in regard to the return on their tax money.

    High-skilled immigration is not a permanent solution, since these immigrants themselves will retire in due time.

    The enmity to the family of our present system becomes more apparent every day.

    • “High-skilled immigration is not a permanent solution, since these immigrants themselves will retire in due time.”

      lol. so will native born kids. so will we all, insh allah.

  5. Let’s eliminate all personal deductions and credits. Any argument for the child tax credit can be applied equally to any other. They all have to be on the chopping block or none will be.

  6. First apologies to those I offended by the term “breeders”. Meant no offense and was trying to draw a distinction between “parents” (who may have children who are “of age” and no longer would be receiving a tax credit for those children) and those “parents” still raising younger children.

    My points though stand and:

    If anyone seriously think that a tax credit would be limited to only the middle class (however that is defined), you are not paying attention. There is no way the government is giving a check (credit) to a family making $60,000 a year for having 2 kids and not giving the same check to the family making $25,000 a year. The tax credit (not a deduction) would no doubt be extended downward out of middle class and probably should be extended upward as long as we decide to give money to , “parents”, it should be all parents.

    New York Times had an article some time ago (no citation, sorry) that stated “high earners” get less from Social Security than they pay into it. “Low Earners” (BTW – those designations were the Times, not mine and they did not post an income definition) get more than they contribute. We can probably position high earners as those earning $65k – $100k (taxable income capped) we can see a lot of people who would consider themselves “middle class” would be getting less from SS than they paid into it.

    Finally, if the tax credit were law then how would the lost revenue be replaced? The old, raise taxes on someone else plan? Raise rates on everyone?

    Again, apologize if my choice of word offended anyone.

    • > Finally, if the tax credit were law then how would the lost revenue be replaced? The old, raise taxes on someone else plan? Raise rates on everyone? <

      Simple. Reduce spending at the national level. Entire Departments and those who seek (primarily) money from them — Agriculture, Energy, Education, and HUD would top my initial list — can be eliminated. A few of their necessary activities should be be returned to the states, where the rent-seeking overhead will be reduced significantly.

      Zero-based budgeting, as opposed to today's "baseline" budgeting, ought also to eliminate useless/wasteful government spending.

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