April 9, 2008
The Folly of 'Family Friendly' Tax Policy
Op-ed by Stephen J. Entin, president of the Institute for Research on the Economics of Taxation
Some self-styled conservatives have lately been suggesting that Republicans not overemphasize renewing the pro-growth Bush tax rate cuts. Instead, they argue, conservatives should focus on family-oriented tax credits for rearing children, education and health care. Authors such as Ramesh Ponnuru, Ross Douthat and Reihan Salam emphasize the encouragement of "human capital formation," as opposed to investment in physical capital.
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It is worth reviewing the Bush tax cuts and what they accomplished. The 2001 tax cut included some provisions that were more social than economic policy. The new 10% bracket is not "at the margin" for most taxpayers, and so it has little supply-side incentive effect on work or saving. The marriage penalty relief was partly social, partly economic. The child credit was raised to $1,000 from $500 and made more refundable. These provisions—which seem to be the only ones the current Congress wants to extend—ate up a fair amount of the revenue available, and limited the scope of the growth elements.
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If the argument is that many people are no longer interested in tax rate reductions, that's partly because past increases in tax credits took millions of households off the income tax rolls. The bottom half of the income distribution pays barely 3% of the income tax. According to the Tax Foundation, over 40% of the population owes no federal income tax, and about half who owe nothing actually get net refunds. For many, the refundable parts of the Earned Income Credit (EIC) and the child credits offset much of the payroll tax too. [Read the full article.]