Tax reform and the family life cycle
However, attempts to simplify the tax code routinely run headlong into a combination of good intentions and simple self-interest. Provisions like the mortgage interest deduction, charitable donation deduction, child tax and earned income credits and the tax exemption for municipal bond interest – to say nothing of the wide array of incentives for retirement, education and medical savings – all have ardent defenders, including those who benefit directly and the industries which rely on these indirect subsidies. Tax reformers struggle with the fact that many of these incentives may even serve valid purposes.
Enter Sens. Mike Lee and Marco Rubio who, in a recent Wall Street Journal op-ed, set out to synthesize the objectives of neutrality, simplicity and humanity in the tax code. In their proposal, Lee and Rubio propose a comprehensive tax reform package, including simpler rates, reductions in corporate taxes to improve American competiveness, fixing the Earned Income Tax Credit to coordinate with poverty-relief programs and introducing an expanded child tax credit that could reduce a family’s income and payroll taxes.
Lee and Rubio’s proposals, particularly that for the new child tax credit, will meet with resistance from tax-reform purists who argue such changes will not simplify the system at all, but will add complexity to an already arcane code. Americans with several children might owe less under Lee and Rubio’s plan – particularly the middle and working class, who tend to pay more in payroll taxes than in income taxes – but getting them to take advantage of these benefits would require understanding the credits and remembering to claim them, or using a tax professional who does.
In addition, the IRS will have to design new forms or worksheets and, inevitably, some taxpayers will claim refunds to which they’re not entitled or make honest mistakes which expose them to IRS audits. All of which means additional time and frustration for the intended beneficiaries of the proposal. One might even accuse Lee and Rubio of a failure of imagination: A refundable tax credit whose selling point is portability across the income and payroll tax systems, and that may actually increase Americans’ tax-filing burden? This is the great new conservative idea?
Whatever the possible issues with implementation, however, Lee and Rubio deserve credit for introducing these ideas. More importantly, they have presented a subtle but important shift in the way we should understand taxes and the burdens imposed on American workers.
We are accustomed to thinking of taxes as a charge on people as individuals: the amount I owe, the amount withheld from my paycheck and the deductions I can claim. While married Americans can file their income taxes on a single return, this is only a partial exception to the general rule. Key to Lee and Rubio’s proposal is that we begin to think of tax burdens as weighing on families, not just individuals, and that a family’s tax burden be considered across time, even across generations. Having children, they point out, is effectively an investment, one that the tax system penalizes since today’s children fund Social Security and Medicare tomorrow. This is an insight that bears even on issues which Lee and Rubio do not address, like taxes on investment through capital gains and dividend income, and the oft-disparaged estate tax.
Fundamentally, the U.S. tax system today does a poor job accounting for the life-cycle of American families. During young adulthood and middle age, when many Americans are working hard to raise children and pay the mortgage, our tax burden is often high relative to our available resources. Later in life, when the kids are grown and debts are paid, we tend to have higher disposable income and household wealth, a reality which income tax rates reflect only crudely. Failing to recognize this reality imposes costs on taxpayers precisely when their fixed costs are highest, squeezing family budgets and impeding the savings upon which long-term growth – and, of course, future tax collections – ultimately depends. Kudos to Mike Lee and Marco Rubio for pointing in a different direction.