THE FOLLY OF 'FAMILY FRIENDLY' TAX POLICY

April 10, 2008

Some self-styled conservatives have 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. This could be a recipe for stagnation says Stephen Entin, president of the Institute for Research on the Economics of Taxation.

Ending many deductions and fringe benefits would greatly expand taxable income, which would bump millions into higher tax brackets. Unless marginal tax rates came down a lot, marginal disincentives to work and save could rise for millions of households.

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 percent 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.

From the standpoint of today looking forward:

  • The marriage penalty and child credit provisions of the 2001 tax cut would cost more to extend than would the 15 percent tax rates on dividends and capital gains.
  • The latter were part of the 2003 tax cut, which also phased in more rapidly the delayed cuts in the top four tax rates from the 2001 tax bill, and gave a temporary boost to expensing of investment.
  • These growth provisions are what turned the economy and job creation around; they are the provisions that are critical for capital formation and wage growth.

Source: Stephen Entin, "The Folly of ‘Family Friendly' Tax Policy," Wall Street Journal, April 9, 2008.

For text:

http://online.wsj.com/article/SB120770167885700061.html 

 

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