Monday, January 18, 2010

The Missing Ingredient in Tax Reform: Children

Good stuff. Paul Ryan ought to take a look at the essay.

What the author didn't state directly is this: "economic man" tax reform which ignores "family man" plays right into the hands of the Statists who regard children as the property of the State.

... tax reformers should understand that the workplace is not the only venue in which incentives matter — and that taxpayers are not simply workers, employers, and investors. Economic man is also a family man, and the next generation of tax reform should address the ­distortions and burdens our fiscal policy imposes on American families.

In particular, it is time to rethink how the tax code treats ­parents. Too many free-market economists still consider families an ­afterthought — ­arguing that the tax code should be "neutral" about raising children, as if parenting were merely one hobby among many. But raising children is hardly just another pastime: It is one of the most important services any American can perform for our country.

Then follows a discussion of the Reagan tax cuts, followed by this:

Today, most of the middle class finds itself in a 15% income-tax bracket that adjusts annually for inflation — and so proposals that focus on cutting marginal rates simply will not resonate as they did in 1981, when most middle-class families had been watching their marginal tax rates steadily increase for years. But federal fiscal policy still imposes a significant burden on the middle class, and especially on middle-class families. Indeed, our system of taxes and entitlements not only fails to reward parents — it actively discourages Americans from having children.

...Recent studies (especially work by Michele Boldrin, ­Mariacristina De Nardi, and Larry Jones and by Isaac Ehrlich and Jinyoung Kim) show that Social Security and Medicare actually reduce the fertility rate by about 0.5 children per woman. In European countries, where retirement systems are larger, the effect is closer to one child per woman. In other words, without government-run retirement systems, both the U.S. and Western Europe would have fertility rates of about 2.5 children per woman — safely above the ­population-replacement rate — rather than their actual rates of about 2.1 and 1.5, respectively.

Compounding the problem is the fact that even as these systems depend upon a population of productive young workers at the national level, they diminish the economic need for children at the individual level — and so undermine their own sustainability. By having the economic benefits of children accrue only to society in the aggregate — and thereby distancing those benefits from the individual mothers and fathers who make the decisions about how many (if any) children to have — ­federal policy distorts incentives in ways harmful to the country's future.

That 'society in the aggregate' is the play of Statism. Plato's tax code.

Remedy?

...the existing dependent exemption for children, the child credit, the ­child-care credit, and the adoption credit should be replaced with one new $4,000 credit per child that can be used to offset both income and payroll taxes.

To date, the US has not had a major demographic problem--like the one in Japan--because the US has had a net positive immigration status (whether 'legal' or not.) This has given the US a larger number of children--future taxpayers--than its white-population fertility rates would allow.

But at some point in the near future, that will stop, or slow significantly.

While stopping illegal immigration is a priority, in the long-term, encouraging children is far more important.

That's something else that Paul Ryan should consider.

HT: American Principles

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