It would be a shame if, amid the latest battle over health care reform and a possible government shutdown, Senator Mike Lee’s recently announced tax reform proposal was forgotten. The Family Fairness and Opportunity Tax Reform Act, which the Utah Republican unveiled last week at the American Enterprise Institute, would give an additional $2,500 per child tax credit to all parents, eliminate the marriage penalty for high earners, and simplify the tax system by consolidating brackets and eliminating many deductions.
Lee conceives of the plan as a way to level the playing field for parents, who not only pay their own taxes but also bear the primary cost of raising the next generation of Americans…who will go on to support their parents and the childless alike through their own taxes. In other words, parents are paying double.
His proposal for relieving parents of this burden gained a surprisingly positive reception across the political divide, with conservative Reihan Salam calling it “the most promising development in Republican domestic policy in years” and liberal Matthew Yglesias sounding receptive to the idea (though he rejected the senator’s underlying rationale). It will be impossible to judge Lee’s proposal fairly until he introduces the bill with all the current gaps filled in; however, since he intends to revise and expand the plan in the future, it’s worth reflecting on now. At this point it seems to be a promising idea with a few potential shortcomings.
In his AEI talk, Sen. Lee mentioned four ways to build on his current proposal: he wants to “lower rates and simplify the code further, increase the child credit even more, reform the way we tax investments and business income, and reform the welfare system to…[promote] opportunity and upward mobility for underprivileged families.” I’ll take those items in reverse order.
Sen. Lee should try to help all American families with his tax plan—but he should prioritize those who are struggling most.
The last proposal of the four, to reform the welfare system, could either help or hurt low-income families. High marginal tax rates on poor and working-class Americans are undoubtedly a problem: the safety net is structured in such a way that earning an extra $5000 a year could mean losing $4000 a year or more in government assistance, a fact that may discourage low earners from adding to their hours. Similarly, low-income couples are sometimes better off single (and cohabiting) than married because married couples receive a smaller earned income tax credit. This may deter couples from marrying and thus deprive them (and their kids) of marriage’s many benefits. These problems are worth alleviating, to the extent possible.
On the other hand, if, to Lee, “reforming the welfare system” means attaching a strict work requirement to every component of the safety net at a moment when there are not enough jobs to go around, it is far from certain that low-income families would be helped. In his talk he specifically lamented policies that “penalize single parents for getting raises, or getting married,” so I assume and hope that he will concentrate on marginal tax rates and marriage penalties instead.
The senator doesn’t elaborate on his plan to change the tax treatment of investments and business income, but raising the rate at which capital gains are taxed would, Josh Barro points out, make the tax code more progressive (an unusual proposal from a conservative) and offset at least in part the revenue lost elsewhere in the reform.
As for Sen. Lee’s first two future aims, to “lower rates and simplify the code further” and “increase the child credit even more,” some skepticism seems warranted. Without drastically cutting federal spending, lowering tax rates (or increasing tax credits) would mean increasing federal debt beyond its current level of $16 trillion, which most agree is undesirable. Slashing federal spending would necessitate cutting into Social Security, Medicare, and Medicaid, as those programs together account for over 40% of federal spending. Despite their long-term funding problems, those programs are widely popular, and they significantly improve many Americans’ standard of living. Cutting those programs in order to offset a tax cut would mainly help the wealthy, not the low- and middle-income families who are in greater need of aid.
As he refines his proposals further, Sen. Lee should try to help all American families—but when different families’ interests are at odds, as they inevitably will be, he should prioritize those who are struggling most.