By Reihan Salam
On Tuesday afternoon, a small but influential slice of the inside-the-Beltway conservative intelligentsia gathered at the American Enterprise Institute, a D.C.-based conservative think tank, to hear Utah Sen. Mike Lee present his new tax reform plan, the "Family Fairness and Opportunity Tax Reform Act." Though it is unlikely that the bill will become law, it represents genuinely new thinking about how Republicans ought to approach domestic policy. And as such, it has the potential to break the GOP out of its defensive crouch.
It is worth noting that Mike Lee isn't exactly the most likely messenger for family-friendly tax reform. He first emerged on the national scene when he challenged three-term incumbent Sen. Bob Bennett, a Republican widely lauded for his willingness to work across the aisle, in a hard-fought primary race. Lee, a constitutional lawyer with a distinguished resume, ran as a Tea Party stalwart. As a senator, he has led the fight for a balanced budget amendment and against new gun control laws. Most recently, he has rallied Senate conservatives around the idea of defunding the Affordable Care Act, an effort that has been condemned by the Wall Street Journal editorial page and key members of the congressional Republican leadership as reckless and irresponsible. No one questions Lee's conservative bona fides. What is new is Lee's willingness to venture outside of his comfort zone. While many leading Republicans have insisted that conservatives do more to better the lives of middle-income voters — the bedrock of the GOP coalition — Lee is actually putting his money where his mouth is with his new tax plan.
Conservatives will find much to like in Lee's plan. Though it is not a flat tax, an idea Lee has championed in the past, it does reduce the tax code from seven individual income tax rates to two, set at 15 percent and 35 percent. The first rate applies to income up to $87,850 for single filers and $175,700 for joint filers, and the second applies to all income above those thresholds. As of 2010, a single filer earning $87,850 would find herself in the 95th percentile of individual earners, while a married couple earning $175,700 would find themselves in the 87th percentile of married households. The plan also eliminates the taxes included in the Affordable Care Act and the Alternative Minimum Tax, the goal being to improve incentives to work and save.
If Lee left it at that, his plan would closely resemble every other Republican tax reform of the last decade. But the heart of the proposal is a new $2,500 per-child tax credit, which can be used to offset payroll taxes as well as income taxes. This is on top of the existing $1,000 child tax credit, which Lee leaves in place, along with a number of other tax benefits for low-income parents. In one stroke, large numbers of middle-income households with children will be removed from the federal income tax rolls altogether.
Lee argues that the current tax code unfairly punishes parents. The solvency of pay-as-you-go entitlement programs like Social Security depends on a steady stream of well-educated new workers. Alas, these new workers do not materialize from thin air. Parents invest considerable time and effort in educating their children and making them workforce-ready. Yet those of us who choose not to raise children are entitled to the same Social Security benefits as those of us who do choose to raise children, and who make enormous sacrifices in the process. Lee's new per-child tax credit is designed to reduce this bias against parenting, which he describes as an investment in human capital at least as important as the investments savers make in their 401(k)s.
To finance his new $2,500 credit, Lee stipulates that a wide range of tax breaks that primarily benefit high-income households be swept away, including the state and local tax deduction. One important exception is the mortgage interest deduction, which will be made available to all filers as an above-the-line deduction, but which will be limited to $300,000 worth of principal. Another is the charitable deduction, which will also become an above-the-line deduction.
As of yet, we don't have a detailed analysis of how Lee's tax reform will impact the federal government's fiscal position. Lee anticipates that it will raise somewhat less revenue than the current tax code, though we don't know how much. It is a safe bet that while it will represent a substantial tax cut for middle-income families with children, it will also represent a substantial tax increase for many moderately affluent workers without children, particularly those who live in high-tax states like New York, New Jersey and California.
It is worth noting that Lee's proposal leaves many questions unanswered. It has relatively little to say about the tax treatment of health insurance, or whether we should make the earned-income tax credit more generous for childless low-income workers. His bill is best understood as an effort to change the tax reform conversation in conservative circles — to emphasize the interests of middle-income parents, not just high-earners and investors and entrepreneurs. It is a good start, but it is still just a start.
What remains to be seen is whether other Republicans will follow Lee's lead. In 2014, the GOP has a decent shot at winning a Senate majority, not least because the president and his Democratic allies have been struggling amidst a weak recovery. Winning, however, will require convincing middle-income voters that Republicans are looking out for their interests. Getting behind an expanded child tax credit would be a great way to deliver that message.
(Reihan Salam is a Reuters columnist. Opinions are his own.)