Senator Mike Lee of Utah is offering fellow Republicans a possible path out of the political and policy wilderness. In an American Enterprise Institute speech Tuesday, Lee introduced a tax-reform plan that would reduce the current code’s bias against, as he put it, “the ultimate entrepreneurial and investor class: America’s moms and dads.” Call it the “And a Child Tax Credit Shall Lead Them” plan, though Lee calls it “Family Fairness and Opportunity Tax Reform Act.”
At its core: a new $2500 per child tax credit — in addition to the existing $1000 credit — available to all parents of dependent children and applicable to both payroll and income taxes. The expanded tax break would help reduce the “parent tax penalty.” Parents contribute twice to senior social insurance programs; first when they pay payroll taxes, then again when they incur the cost of raising the next generation of taxpayers, their kiddies. Lee:
This is money – their own money, right away – for a family to get out of debt, or to move into a better neighborhood with better schools. It could allow a single mother to afford child care so she could go back to school or take a better job. It could allow a mom or dad working full time to scale back to part-time or go from part-time to staying at home with young children. It could mean tuition for a private school, or start-up capital for a small or home business. … It would, in short, restore opportunities to working parents and their children to pursue happiness that right now federal policy unfairly denies them.
In a way, Lee is proposing a “human capital” gains tax cut. But the proposal has the other kind too, eliminating the Obamacare investment taxes. In addition, Lee would reduce the current seven individual income tax brackets to two with 15% and 35%. To help pay for those reductions and reduce more economic distortions — as a whole the plan might be a modest revenue loser when scored statically — Lee creates a new mortgage interest deduction capped at $300,000, and eliminates other tax breaks such as the state and local deduction. (Sorry upper-income, childless taxpayers in big-spending blue states.)
On the policy side, some economists would justify this sort of pro-family tax cut by saying it would allow parents to recapture more of their economic investment in children, only fair since they are providing a massive benefit to society by birthing, raising, and training its future.
And perhaps it would also boost birth rates, although Lee emphasizes that is not a goal of the plan. But it would be a great side benefit. While an expanded child credit probably won’t nudge many parents to have more kids than they desire, it might make it easier for them to have all the kids they do want. That means more tax-paying workers and, perhaps more importantly, a younger society that is more dynamic, creative, and entrepreneurial, as Nobel laureate economist Gary Becker has written. In addition to middle-class tax relief, expanding the child tax credit would potentially boost both long-term labor supply and productivity. Make no mistake, this is supply-side tax reform that reduces economic distortion.
Politically, the Lee plan adds balance to a Republican policy agenda that has lots to say about entrepreneurs and debt-cutting, far less so about everyday problems of middle and low-income Americans. This was a gaping hole in the Romney campaign and message, one Republicans have struggled to fill since that election. So far, the Washington GOP has focused again on corporate tax reform and balanced budget amendments, as if 2012 never happened. The Lee plan also allows Republicans to modernize their message for the problems of 2013, not 1981 when top tax rates were 70% and tax brackets unindexed for out-of-control inflation. Just today, the Census Bureau said real median household income in 2012 was 8.3% lower than the 2007. A pro-growth, pro-family middle-class economic agenda is entirely appropriate.
Now the Lee plan is hardly the final word on the subject. It has nothing to say on corporate taxes or radically changing capital taxation to move the code toward a progressive consumption tax model. It could also be a bit simpler. The Lee plan is rooted in a more comprehensive plan from economist Robert Stein, and there is room to grow. But it is a useful start in pushing forward a more relevant center-right economic thesis and solution set.