Tax Policy and The Family

May 3, 2012

Tax

Recently we came across this article by Robert Stein, former deputy assistant secretary for macroeconomic analysis at the U.S. Treasury Department, on “Taxes and the Family.” The whole article is worth a read, albeit slow-going at times, because he makes a compelling argument that the federal tax code should be more friendly to families with children.

Why? Put simply, these households are engaged in production–creating human capital in their children. Arguably, this human capital is the most important form of capital in the entire economy. While the tax code recognizes capital investment by businesses, it is failing to do so for human capital. Robert Stein states the problem as such:

In particular, it is time to rethink how the tax code treats ­parents. Too many free-market economists still consider families an ­afterthought — ­arguing that the tax code should be “neutral” about raising children, as if parenting were merely one hobby among many. But raising children is hardly just another pastime: It is one of the most important services any American can perform for our country.

Even if we ignore the societal and cultural implications of parenting and consider economic factors alone, no government — especially not a government committed to an entitlement system like ours — can be neutral toward the very existence of future generations of taxpayers. Our nation’s long-term economic prospects are threatened by a declining fertility rate that, if it remains constant, will only barely manage to replace our current population. And even as Social Security and Medicare depend on large numbers of future workers, they have created an enormous fiscal bias against procreation, undermining an important motive for raising children: to safeguard against poverty in old age.

By targeting tax reforms to address these problems, policymakers would both offer meaningful relief to American families and create political opportunities to enact other pro-growth policies. Such reforms could eventually yield a much simpler tax code with lower top marginal rates on work and investment, as well as more favorable treatment for families with children. The result would be a tax-reform agenda with the right attitude toward families — and one with a chance to break the political logjam that has prevented serious change for a generation . . .

And in the end, it is right and proper to show some favor to parents. Our country is not comprised of individuals who simply fall out of the sky as fully grown citizens — and our civilization’s continued existence hinges on the willingness and desire of adults to raise children. Our public policy can no longer fail to reward those who do.