Tax cuts for the kids

A number of reform-minded conservatives gathered at the American Enterprise Institute last week to celebrate the publication of a new book, “Room to Grow.” The book is a collection of policy proposals from economists, policy analysts, and writers that attempt to alleviate many middle-class problems such as rising college costs, high unemployment, and healthcare costs while aligning with conservative priorities. One particularly interesting proposal is a call for “family friendly” tax reform from economist Robert Stein of the investment advisory firm First Trust Portfolios.

Stein’s proposals flows from the conservative desire to reduce tax rates, but with the recognition that groups outside of the top 1 percent might be a better target for tax cuts. The plan would give each family with a child a tax refund for each child. The idea already has credibility among conservatives with an earlier version of the plan adapted into legislation by Senator Mike Lee of Utah with the child rebate set at $2,500 per child.

Stein and Lee support the tax cut as a way to counteract the supposed disincentive to have children created by the payroll tax and retirement programs. But policy analysts and policy makers might want to get behind this idea broadly even if they don’t agree with this motivation. By focusing the tax cut on families that have children, the plan would help the development of future human capital.

A variety of factors, of course, determine how and how much parents invest in their children, but simply enabling them to spend more on them would help. Parents can spend a significant amount of money on what are called “enrichment expenditures” that include spending on books, high-quality child care, and summer camps. But the amount spent on these expenditures varies quite a bit by income position.

The average amount of expenditures on children by families in the bottom 20 percent grew by 12 percent from 1994-1995 to 2005-2006. Over that same time period, expenditures by those in the top 20 percent grew by 27 percent. A child tax credit could help boost expenditures on kids by families at the bottom.

Still, the Stein-Lee plan does have some serious problems. The tax refund is not refundable, meaning that families without tax liability, mostly low-income families, wouldn’t be able to receive the credit. The families that need the credit the most would be locked out. And in an effort to make the plan revenue neutral, Lee would reduce tax credits for those at the bottom of the income ladder, as Chuck Marr at the Center for Budget and Policy Priorities has pointed out, making the issue of access even worse for low-income families.

This conservative version of family friendly tax reform won’t become law anytime soon. Nor should it. But the recognition that increasing the disposable income of families is key to growth and mobility is certainly a welcome policy position from the right.