UPDATE (July 10, 2014): Sen. Lee’s office disputes the characterization of his plan as paying people to have more kids. Instead, according to a spokesman, the credit compensates parents for a penalty the senator believes the tax code currently imposes on them. That point might sound like a quibble, but it is the subject of an intense debate among conservatives. We’ll return to it in a future post.
As often happens in civil wars, it's getting hard to distinguish between the factions in the battle for the Republican Party's future. Besides the old feud between the tea party and the G.O.P. establishment, a new fissure has opened between traditional Republicans and a group of conservative intellectuals who think the party needs new ideas.
This group of reformers has been agitating for several years, publishing detailed policy proposals in the quarterly National Affairs and elsewhere. Recently, though, it's become obvious just how deep their disagreements are with their party's mainstream. In May, the reformicons (as they are sometimes called) published a 121-page manifesto summarizing the ideas they'd been been working on. The document has since received scathing critiques in National Review and The Wall Street Journal.
The criticism has focused on the reformers' proposal to back away from reducing tax rates for the wealthy, which they feel will be both politically unpopular and economically ineffective. Instead, they want to offer parents a larger tax credit per child. The idea, which economist Bob Stein first laid out in 2010, is crucial to the latest tax proposal from Sen. Mike Lee (R-Utah). Basically, Lee wants to pay people more to have kids, but the ultimate goal is expanding the workforce to strengthen the economy in the long term. Traditional conservatives see the plan as a betrayal of President Reagan's legacy.
There are problems with Lee's tax plan. First, it would cost money. An analysis from the Tax Policy Center predicted that Lee's plan would add $2.4 trillion to the deficit over 10 years -- whatever its long-term effects might be. Moreover, the way the plan is written, wealthier people benefit from it more on average. Their taxes will be reduced by a larger amount both in dollars and relative to their income.
Tax bills for many poor people would not change at all. Low-income households often pay nothing in federal income tax, and they can't pay the government any less. That will remain the case under Lee's tax plan. It is true that the plan could have allowed them, instead, to receive the credit in the form a check in the mail. Such tax credits are known as fully refundable credits in the argot of tax policy. In Lee's plan, though, the credit is only partially refundable. It has a complicated formula that would prevent most low-income parents from receiving the credit this way.
It's very hard to think up any justification in terms of policy for effectively excluding the poor. All babies will contribute something to the economy when they grow up and enter the workforce, including those who grow up in poverty (See Stein's comments to Ryan Cooper for more on this issue.) The chart below, from the Tax Policy Center's report, shows how many people at different levels of income would pay more, less, or the same amount in taxes.
Lee's legislative aides probably have a few long nights ahead of them. A spokesman for Lee said that the bill was intended as a draft to encourage discussion and that Lee welcomes the criticism it has received, which the senator plans to incorporate in a revised version of the bill.
But some of the plan's conservative opponents have gone pretty far with their objections. The Heritage Foundation's Stephen Moore wrote, "We are moving rapidly toward the Marxist dream where all the taxes are paid by a smaller and smaller share of wealthy taxpayers and government benefits are free to everyone else." Moore made his remarks despite the fact that Lee's plan on the whole is a tax cut weighted toward the rich. In that respect, it is similar to previous Republican proposals.
The proposal still represents a major change in G.O.P. thinking on taxes of the past 30 years. If Reagan's strategy of reducing marginal tax rates helped the economy, the evidence is mixed at best. In any case, as Stein argues, any benefits from further reductions would be small, since there isn't much left to cut. A child tax credit, by contrast, is a novel idea, at least in the abstract. It could help ordinary Americans immediately and in the future avert the kind of demographic decline that is now afflicting Japan and Europe, all while appealing to a conservative principle -- the importance of the family.
The fact that a Republican senator has demonstrated that he is willing to think about new ideas and to challenge his party on one of its most basic tenets is very encouraging for everyone who cares about good policy. At the same time, the vitriol Lee and his fellow travelers have received shows how difficult their task will be. It isn't just marginal tax rates: whether it's limiting the mortgage-interest deduction, breaking up the banks, or responding to climate change in a sensible way, the reformicons are mispronouncing all the Republican shibboleths.
Wonkblog will be discussing Lee's tax plan and the future of Republican politics and policy at greater length in subsequent posts, so come back here soon.