_ Robert Stein, former assistant secretary for economic policy, Treasury Department of the United States. IFS, 13. September 2023.*
For the past generation, conservative tax policy has focused on increasing incentives to work, saving, and investment. The entrepreneur and the workplace have been the focal points, with tax cuts coming in the form of lower rates on wages and salaries, capital gains, dividends, and corporate profits. The reason for this angle on tax policy is that the vast majority of conservative economists think economic growth is the measure by which almost all policies should be judged: the faster a policy makes the economy grow, the better that policy is.
But what conservatives need to recognize is that economic growth is not a pure, unadulterated good. Higher material living standards also mean a higher “opportunity cost” for raising the children upon whom the survival of our national civilization ultimately depends. Our country’s abysmal fertility rate is a crisis; whether the top marginal tax rate is 35%, 37%, or 39.6% is not.
At present, government policy is hostile toward raising children. Take Social Security and Medicare, for example. These systems require each generation to meet two obligations: first, work and pay taxes to support the previous generation; second, raise children to support today’s workers when they retire. But Social Security and Medicare let non-parents largely free ride at the expense of the people who raise the next generation. (Yes, today’s children will eventually become old, too. But they will only get benefits if they themselves raise another generation of children.)
At this point, the childless will often defend themselves by admitting they get a sweet deal from the public retirement system, but insisting they get a raw deal from schools and parks, because they pay taxes to fund these endeavours even though they have no children who use them. But that’s myth. Just like everyone else, non-parents benefitted from schools and parks when they were children; it’s only fair they pay into the system as adults, just like parents do. It’s also a myth that parents impose extra costs on others: the same children using schools and parks today will grow up to be taxpayers.
In addition, there is an important reason to give parents tax relief over and above simply fixing a loophole in the retirement system. Many cultural conservatives recognize that when we raise children we are repaying a debt to our ancestors for bringing us into the world. A fiscal policy that favours the more fertile taxpayers of the future is also a mechanism to penalize those in the future who repudiate this debt.
For some conservatives, a different policy approach doesn’t make sense; to them, society is comprised of autonomous individuals each seeking to maximize their own welfare. They think the government should be “neutral” about the decisions made by producers and consumers. The concept of government neutrality in many economic matters does have an important place. For example, absent a military reason, the government shouldn’t favor, say, the apparel or furniture industry over sugar or cruise ships. But, when it comes to matters involving family life, the concept of neutrality is absurd; a conservative government should never be neutral about whether the nation that created it exists in the future.
The next round of tax cuts should address the fertility crisis and reward parents. The tax cuts should start with an $8,000 tax credit per child, an amount which would increase every year by the same rate as the Social Security wage base, which means faster than inflation and enough to keep up with increasing worker pay.
The credit would not be welfare, nor would the credit be designed for poverty relief, which is how some others have come to view child tax credits and allowances. Paid annually as an income-tax credit when workers file their taxes, the goal would be to reduce taxes for middle-class parents (and above) relative to their less fertile peers. The credit would replace the current child credit and any credits for those using commercial day care. Parents using the earned income credit would have a choice of whether to take the new credit or stick with the EIC. The new credit could only be used to reduce income and payroll taxes (including payroll taxes sent in by employers). If a lack of earnings (or other forms of tax relief, such as the earned income credit) have already fully offset a parent’s taxes, they should be able to carry-forward the remaining child credit into future years.
Under the federal tax system for 2023, a married couple with no kids earning a total of $100,000 will pay $15,300 in payroll taxes and $8,236 in income taxes, for a total of $23,536 (assuming they use the standard deduction and including the employers’ share of payroll taxes). If they have two kids, under current law that cuts their tax bill by $4,000 to $19,536. By contrast, if the tax credit were $8,000 per child, the same couple with two children would pay $7,536.
Under current law, a married couple in 2023 earning $50,000 would pay $2,236 in income taxes and $7,650 in payroll taxes, a total of nearly $10,000. If they have two children, then under current law they get an earned income credit of about $1,200 and child credit of $4,000 total. By contrast, the new credit would fully offset every dollar of their income and payroll taxes, roughly $10,000, and also generate tax relief carryforwards they could use in future years if their income increases.
Unmarried parents with shared custody would face the same rules as the current child tax credit, with only one parent allowed to claim the credit, usually the parent with greater than half custody. However, the large size of the new child credit would be a powerful incentive for lower-income parents with custody to get or remain married to other workers with earnings.
For libertarian-style conservatives who don’t like large tax relief for parents, just think of it as a school voucher and get over it. Will people have more kids just to generate more tax relief? Doubtful. The cost of raising a child is about $17,000 per year, according to the Department of Agriculture, and that doesn’t include saving for college.
How will we pay for it given the current budget deficit? By cutting spending and limiting special favors in the tax code. This fiscal year, federal spending excluding net interest will be 22% of GDP. Budgets this big provide ample room to curb spending.
Here are a several ideas: We can reform student loans to put colleges on the hook for delinquencies and defaults, limit the charitable deduction (which largely encourages wealthy people to give money to groups hostile to conservatives), curb deductions for mortgage interest as well as state and local taxes, and reform Medicaid. Another idea is to reduce the income thresholds for the highest tax brackets, particularly singles.
Old habits die hard. Conservatives are in the habit of proposing tax cuts focused on raising the material standard of living. But our society is in desperate need of cultural revitalization as well, and recognizing the social benefits of raising children is part of that renewal.
* Republished from the original publication with the Institute for Family Studies.