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.