Pro-family tax reform addresses the long view

Maggie Gallagher
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Posted: Jan 10, 2003 12:00 AM
President Bush's bold plan to eliminate dividend taxes has monopolized public attention, and why not? That roar behind you is the investor class cheering -- the half or more of all Americans whose long-term economic futures are directly linked to stock market performance. The other half's economic futures are indirectly linked to the ability and willingness of the investor class (here and around the world) to provide the capital necessary to sustain economic growth.

Once again, the president proved that this Bush has the vision thing in spades. Agree or disagree, it is remarkably evident that President Bush believes in using the power of the bully pulpit to advance real reforms and dramatic new ideas. In particular, he rejects the Democratic assertion that tax cuts are government subsidies by another name. The No. 1 goal of tax policy should be to create the right incentives for productive activity. Before wealth can be redistributed or spent, it has to be made.

Just as remarkably, this president does not define productivity in narrow economic terms. Public response has focused on the dividend tax cuts, but the president's plan also contains a powerful move toward a fairer, pro-family tax code. President Bush wants to increase the child tax credit to $1,000 per child (from the current $600) and accelerate changes designed to reduce marriage penalties on middle-class families. Together, these changes will cost close to $90 billion over 10 years.

Do pro-family tax cuts matter, and if so how? For those of us who are concerned about the well-being of the family as an institution, the news is good: Research clearly demonstrates that tax measures such as the child tax credit have a real, measurable effect on the birth rate of married couples. This is a remarkable fact, worth pausing over. According to government estimates, each middle-class child costs a married couple tens of thousands of dollars in direct extra expenditures. Babies cost a bundle, and even generous pro-family tax reform can cushion the hit only slightly. But even quite modest shifts in the tax codes affect millions of married couples' fertility choices (most single mothers don't have much income after the birth of their child, and so are less affected). Millions of Americans are having fewer children than they would like because the government consumes too great a share of family income.

Pro-family tax reform is not popular among many economic conservatives for two reasons: First, some imagine this is the equivalent of government paying people to have babies, an idea few of us would support. These critics have forgotten the origins of our pro-child tax policies. The dependent exemption and the child tax credit are best understood as ways to adjust the tax code for family size. It is not fair to tax a family of five with an income of $80,000 the same tax as an individual making $80,000.

Second, pro-family tax cuts are uniquely expensive in terms of government revenue. Unlike cuts in capital gains or income taxes or dividend taxes, family tax cuts do not generate any increase in government revenue over the short run. Instead they tend to increase the proportion of the next generation that is being raised by married couples. Which makes pro-family tax cuts a supply-side issue, but only in the long run.

The great supply-side insight is that the most important form of capital is human capital: the ability of motivated, disciplined workers to produce goods and services, and to create innovative new ways to produce goods and services.

More well-raised babies in married homes become, on average, more effective students, family members, neighbors, citizens, and yes, workers, inventors and entrepreneurs down the road. That is the great long-run dividend we can expect from President Bush's pro-family tax reform.