Tuesday, April 15, 2008
Incentives Count--For Congress Too!
"Some self-styled conservatives have lately 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. Authors such as Ramesh Ponnuru, Ross Douthat and Reihan Salam emphasize the encouragement of 'human capital formation,' as opposed to investment in physical capital. ... This could be a recipe for stagnation. Ending many deductions and fringe benefits would greatly expand taxable income. ... If the tax change is revenue neutral, and much of the revenue is devoted to large tax credits for families with children, then other taxpayers must pay a higher tax bill. ... We know from decades of economic modeling, and observing the revenue feedback when taxes are changed, that each added dollar Washington collects, then spends or gives away (for goods and services, entitlements or tax-transfers), costs the public about $2.50. ... The new 10% bracket is not 'at the margin' for most taxpayers, and so it has little supply-side incentive effect on work or saving. ... 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% tax rates on dividends and capital gains. ... If the argument is that many people are no longer interested in tax rate reductions, that's because past increases in tax credits took millions of households off the income tax rolls. The bottom half of the income distribution pays barely 3% of the income tax. ... For people who pay no income tax, general government is practically a free good. ... A large expansion of family-friendly credits would make matters much worse and could tilt the political balance irrevocably toward runaway government. To be sure, it is fair to ask if a large tax credit for children constitutes an investment in human capital. ... The real problem is that government is too big. ... The true pro-family solution is less government, not more. And the likely outcome of taking millions more people off the tax rolls is more government, not less", Stephen Entin (SE) at the WSJ, 9 April 2008.
I agree with SE. Our current tax system of rates, credits, phaseouts and AMT has 90+% of the population pay virtually no tax. Further, it encourages resource misallocations in my opinion, in encouraging our least capable to go to college and have more children than they can otherwise afford. Contrast our policy with China's "one-child" policy. A contrasting opinion is: a 2 April 2008 post and related comments at http://www.economiclogic.blogspot.com/. Tax increases will never balance the budget. They will only lead to new spending programs like No Child Left Behind.