A Progressive Tax Plan For Kids

The Weekly Standard: Tax Reform Should Be Advantageous To Those With Children

(Weekly Standard)  This column was written by Cesar Conda and Robert Stein.

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Tax reform has been the Holy Grail of conservative economists since the early 1990s. But after years of conservative ascendance in Washington, the tax code remains a mess.

Two major problems plague the flat tax, the retail sales tax, and other "big bang" tax reforms. First, utopianism. Ending the mortgage interest deduction might make perfect sense on a blackboard. But putting at risk the most valuable asset many taxpayers have is the equivalent of policy-making suicide.

Second, many free market economists treat families as an after-thought. As far as they are concerned, the tax code should be "neutral" about raising children. In effect, they say the U.S. government should be indifferent to whether the people that created it exist in the future. What these experts fail to recognize is that Social Security and Medicare have created a huge fiscal bias against raising children, "crowding out" the traditional motive to raise children to protect against old-age poverty, a bias that would exist even in a mandatory saving program.

We suggest a different approach to tax reform, one that achieves the major conservative policy goals of a simple, flatter, and fairer tax-and can be enacted with broad bipartisan support. The proposal would simplify the tax code-no more itemizing, no more alternative minimum tax-cut marginal tax rates on capital investment and high-income labor (the activities most sensitive to marginal rates), reduce the tax burden on the middle class and below, treat married couples as equal partners, and offset the anti-parent bias in Social Security and Medicare.

Rather than re-creating the tax code from scratch or imposing new taxes, we would make the following changes to the existing code.

First, remove impediments to capital investment. Cut the corporate tax rate to 32 percent and make cash dividends fully deductible at the corporate level (taxable as regular income for individuals). Reduce the corporate tax rate-currently the second highest in the industrialized world-to encourage equity financing of new investment, raising worker wages, and improving the competitiveness of U.S. firms.

Additionally, let firms expense 25 percent of plant and equipment in the year of purchase. Replace the separate tax structure for capital gains with a 100 percent exclusion for gains up to $5,000 and a 50 percent exclusion for long-term gains above that level. Eliminate the tax on inheritances.

Next, scrap the individual alternative minimum tax and every itemized deduction except two: mortgage interest and charitable donations. Make these two deductions available to all taxpayers, not just itemizers. Reduce the limit on the principal amount on which interest is to be deducted, but only to keep the total amount of mortgage interest deductions the same as under current law. Similarly, for the charitable deduction, adjust minimums, maximums, and verification standards to keep the amount the same as under current law.

After deductions, individuals face only two income tax brackets: 15 percent and 32 percent. Make the 15 percent bracket twice as wide for married couples as singles to acknowledge that husbands and wives share their incomes. Then apply credits based on family size to reduce taxes owed.

Replace the standard deduction and personal exemption for each filer with a nonrefundable credit of $2,000. (Married couples get up to $4,000; singles up to $2,000.) Replace the personal exemption for children, child credit, child care credit, and adoption credit by a new $4,000 credit per child that offsets both income taxes and payroll taxes. (Citizenship requirements would apply, and those taking the earned income credit could not take the child credit too.) Dependents not covered by the $4,000 credit get $500 instead. Given the generosity in the child credit, eliminate the "head-of-household" filing status and treat them as singles. Index the 15 percent brackets and filer credit for inflation; index the child credit for wages, like the Social Security tax base.

These changes would make a huge difference. The typical married couple with two children would get a tax cut of more than $5,000 per year.

Additionally, the plan promotes better health care by converting the employer deduction into a worker deduction with a cap, empowering consumers to purchase affordable health insurance.

The common arguments against a $4,000 child credit do not withstand scrutiny:

The child credit is a large transfer payment. Although it's called a "credit," it is not a lump-sum payment. It works like a deduction applicable against both income and payroll taxes. Taxpayers only get the full credit if they have enough earnings and taxes to offset.

Nonparents already pay for schools. When nonparents complain about having to pay school-related taxes, they are saying, in effect, that they were entitled to a free K-12 education without ever having to pay for one.

The proposal takes too many people off the tax rolls each year, increasing the public's appetite for more government spending. Workers move across income classes over time, which is why static tax distribution tables are often misleading. Given this dynamism, we should not be concerned with some workers falling off the tax rolls in a particular year, based on where they are in their life cycle. Parents will pay higher taxes when their kids grow up and parents with more after-tax income are less likely to demand government services.

For years, supply-siders and progressives have talked past each other. Our proposal lets both sides get their way. By using generous family-related credits and a reduced top marginal rate that kicks in at lower income levels, the tax code would become substantially more progressive. The rich would pay more but, with a lower top marginal tax rate, have better incentives to work harder and invest more. The middle class and those below would pay less and have their tax burden shifted away from the years when they need it the most, when they are raising children.

[glb1969]

What a lunatic proposal. In a day and age when the planet is already overpopulated and barely able to meet the food needs of the humans already here, the government must take action to penalize all who seek to reproduce beyond replacing themselves. This author completely ignores this very important maxim, with the goal of simplifying the tax code to meet his dubious and morally ambiguous goals. Of course, what could you expect from a kill them all who don't see it my way conservative republican? Their ilk will soon be gone the way of the Federalist Party.

[delfmast]

Franklin D. Lomax www.editorialstaff.net: Those nations adopting a flat tax are routinely called economic miracle nations. When our criminal political class stops robbing our soverign citizens, at gun point, (try not paying), we will enjoy the American Economic Miracle. No millionaire will ever be less tax wise, nor hire a tax lawyer less taxwise, than the political hacks who write the hundreds of pounds of drivel that comprise our tax code. Abolish the IRS, extabilish a flat tax, exempting those in the bottom 5% to 15% of our people who are unemployable, or marginally employable. The rich will actually pay more, not because our tax writers are clever, but because the nuisance value associated with perfectly legal tax avoidance, including for instance, not doing business, or not working, to avoid high taxes, will outweigh the cost of paying the flat tax. Everybody knows this, world wide, it is not rocket science. The reason the criminal politicians refuse to enact a flat tax, is they are largely lawyers, and most lawyers would have to get an honest job, if we ditched the hundreds of pounds of tax laws that guide the lobbyists who pay off the criminal politicians of all parties, to keep the tax code thicker than the Encyclopedia, and thus enriching lawyers, and politicians, at the expense of good government, health care, national defense, and human decency.

[cofmanaaron]

Good article, but I don't think we need to give the upper class such a break in corporate tax. If the tax is based on employee average salary, that can be a boon. (more money for middle-class to help the economy)But stop inheritance tax? Stinks of Aristocracy. Anyways, there is one govt. service that is sorely in need of both money and reform. Education. This is how to fix the Social Security problem:
1. Let Bush's tax cuts expire and implement some of the incentives as described above, the rich do need to pay more because we need the revenue.
2. Eliminate pork spending
3. Increase the child credit and such incentives.
4. Use substantial money to a.Pay off the national debt so interest payments get lower and b. increase education funds.
5. Massive education reform
6. As part of #5, implement job placement programs for high school and college grads.
So as a long-term result you have the budget less weighed down by interest payments and pork (and Iraq war too!) and also you increase the earning power of more graduates, more kids graduate, and child tax credits increase the number of kids to graduate, to pay into social security and balance the budget. There you go!

[sjc_1]

If you can not afford to have kids, do NOT have them! The same people that are all for tax breaks for this are the same ones that say less government and lower taxes are the way. NOW they want single people to subsidize and bail out the people that are in over their heads.

People, use your heads in the first place. If you do not have the education and financial security to raise a family on your own then do NOT.

That is the responsible thing to do and do NOT be looking for a handout and then harp about individual responsibility and "family values"...what a bunch of hypocrites...but every one knows that these people are hypocrites except them.

[ressigmann]

I'm liberal, single, no kids. I don't think I should have to pay higher taxes so people choosing to have kids get a break. But if you gotta pump out some kids, do raise 'em liberal and not hateful and selfish.
Posted by peacethinker at 03:26 PM : Jul 08, 2007

"not hateful and selfish." yeah whatever, like I would raise my three wonderful boys to be selfish ego-maniacs like you. There are fewer more hateful and selfish people in the world than liberals.

[toadyouso21]

I'll vote for that...because without conservative breeders, we wouldn't have any g.a.y. kids...

[peacethinker-2009]

I'm liberal, single, no kids. I don't think I should have to pay higher taxes so people choosing to have kids get a break. But if you gotta pump out some kids, do raise 'em liberal and not hateful and selfish.

[rmsdm4]

Thats great. Encourage more bas$t^ard children. Hey keep pumping out more liberals and we will pay you.