Tax reform is in the air and in an effort to make it more family-friendly, Senator Lee has introduced a bill, the Family Fairness and Opportunity Tax Reform Act. Senator Rubio is a supporter as well. The bill broadens the tax base by eliminating many itemized deductions; but instead of using the revenue savings to lower marginal tax rates as Republicans have done in the past, the Senator invests them instead in more than tripling the child tax credit from $1,000 to $3,500. Because of the generosity of this family-friendly provision and the fact that his bill also eliminates the Alternative Minimum Tax, the ACA surtaxes, and most existing tax brackets (replacing them with just two, 15 and 35 percent), it ends up costing $2.4 trillion over 10 years, according to the Tax Policy Center. Adding this much to the deficit is both irresponsible and likely to lower long-term growth. But to make the plan revenue neutral would require that some of these provisions be modified or that spending reductions be adopted as a way to pay for the bill.
At first blush, it appears that the increase in the child tax credit might help lower income families. It would be refundable against income and payroll tax liabilities (both employer and employee portions). So far, so good. But this refundability only kicks in if one’s tax liabilities exceed the value of the existing EITC and the existing partially refundable child tax credit. As a result very few if any low income families with children would benefit from the plan. Moreover, because the bill eliminates the phase out of the existing child tax credit at higher income levels it targets its benefits to those who need them least.
Proponents of the bill could argue that refundable credits are just a new form of “welfare” and that the pan is aimed squarely at the tax-burdened middle class. But as Senators Lee and Rubio explained in a Wall Street Journal oped (Sept. 22, 2014) about the child tax credit, the rationale for their proposal is much more convoluted than that. It goes something like this: parents are double taxed. They pay tax once to cover their own retirement costs. But they are “taxed” a second time to raise the next generation. That second tax is needed, they argue, so we will have enough children to finance a future generation’s retirement costs.
In addition to being convoluted, this line of argument does not stand up to closer reasoning.
First, and most obviously, childless adults help to pay for schools, health care, and other child-oriented services so it is arguably those without children rather than parents who are over-taxed.
Second, payroll taxes do not cover the full costs of an individual’s retirement, especially the full costs of Medicare; and it is general revenues that make up the difference between what each of us pays in and what we take out.
Third, although it is true that a falling fertility rate will make financing the older generation’s retirement more difficult, this is only because retirement programs have been structured as giant Ponzi schemes with each generation relying on the next one to finance its social security paychecks and a portion of its Medicare. But that means today’s working-age parents are paying not for their own retirement but for today’s retirees. Their children, in turn, will pay for their parents’ retirement once the children reach working-age. If fertility is declining, that can pose problems. But there is another solution: we could reform our immigration system to achieve whatever level of population growth we want and stop worrying about who is going to support us in our old age.
Finally, unless you believe that providing a more generous child tax credit to middle class families will cause them to have more children, the Lee-Rubio argument doesn’t solve the problem. And the evidence from other countries that have experimented with pro-natalist policies suggests that fertility rates will be little affected. Take the case of Singapore. A middle-income couple with two children can receive the equivalent of about $142,000 more from the government than a childless couple in the preschool years. Yet fertility in that country continues to fall.
Senator Lee may be well-meaning and I commend him for his efforts to simplify the system, to eliminate many deductions, and to reach out to the struggling middle class. But without modifications this legislation is regressive, balloons the deficit, and is oddly motivated to boot.