By Tax Credits (CC BY 2.0)
The Federalist website offers yet another critique of expanding the child tax credit vs. sharply lowering top tax rates. A few things:
1.) As a supporter of CTC expansion, I feel at a bit of a disadvantage since critics such as Cato’s Dan Mitchell aren’t offering constructive alternatives. If they desire a tax reform plan that only generates, say, 15% federal revenue as a share of GDP — while also proposing a legit way to reduce government spending to that level — more power to them. Love to hear about it. But as the recent Dave Camp tax-reform plan — as well as the 2012 Mitt Romney tax proposal — show, it is extraordinarily difficult to combine large, across-the-board tax cuts that don’t increase the deficit or increase the middle-class tax burden.
2.) Frankly, doing anything significant on personal income taxes when (a) half the country pays no income tax and (b) we are future facing large, entitlement-driven deficits is really, really hard. See, where you are going to really get the most supply-side bang for your tax-cut buck (at least by cutting tax rates) is on the corporate side. That’s one reason conservative reformers are so adamant about corporate tax reform that will enhance US competitiveness, reduce cronyism, and raise living standards for workers.
3.) Let me again point out two flaws in the “crank up GDP and all will be well” argument. First, modest cuts in top rates aren’t going to produce a dramatic acceleration economic growth. And deep cuts, as I point out above, are problematic. Second, recent economic trends suggest that income gains from higher growth may flow mostly, if not almost entirely, to a sliver at the top thanks to macrotrends in globalization and automation. Average incomes may rise, but median income might not. Mitchell, in his Federalist piece, seems to acknowledge this possibility but wonders, “Isn’t it better to get come extra growth rather than know extra growth?”
It is. So reform the corporate tax code, while also immediately boosting middle-class family incomes with needed tax relief and offsetting the unfair double-tax on parents. Here is Senator Mike Lee on that last point:
As you know, the federal senior entitlement programs – Social Security and Medicare – operate as generational transfer payments, not individual insurance policies. Taxes that workers pay today fund today’s seniors’ benefits. In the same way, when you retire, your benefits thenwill be paid by the taxes of workers in the future.
In the simplest terms, any one generation pays for the Social Security and Medicare benefits of its parents… and then, in turn, has its own benefits paid by its children. Therein lies the familiar bargain of the system, but also an unintended consequence: the parent tax penalty.
Under the current system, all seniors are entitled to the same benefits, based on their total lifetime contributions. But parents are required to contribute to this system not once, but twice. First, when they pay their taxes, just like everyone else. And then again, by bearing the enormous economic costs of raising their children, who in time, of course, grow up to become the next generation of taxpayers.
Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids. This is the inequity my bill is designed to highlight and address. … Another way to think about it is that current policy imposes an enormous “capital gains” tax on the economic, human, and social capital that all parents invest in their children, and in our country
Let’s help the job creators and the worker creators.
Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.