Mike Lee's Tax Plan: Poor People Should Pay the Parent Tax Penalty

I wrote a piece at Salon detailing the way in which the reform conservative's tax plan sells out poor parents. The short of it is that Mike Lee's child tax credits and personal exemptions operate so as to provide far more child benefits to richer parents than to poorer parents. I've made this point before. Patrick Brennan has a response to my piece at the National Review, claiming that I have gotten Mike Lee's plan very wrong. This is not true.

Brennan's Argument

The best way to understand the dispute is to separate the three child benefit programs contained in Mike Lee's plan.

The first program is the personal exemption (PE) for children. Because this program acts as a taxable income deduction, it provides far more benefits to richer parents than poorer parents, up until incomes are high enough to hit the phaseout. Brennan concedes this.

The second program is the $1,000 child tax credit (CTC1). Because this tax credit is only semi-refundable (by which I mean those with tax liabilities too low to claim the full amount can sometimes get some of the surplus amount refunded, provided their market income is high enough), it too provides more benefits to richer parents than poorer parents, up until incomes hit the phaseout. Brennan also concedes this.

The third program is the $2,500 child tax credit (CTC2.5). This tax credit is not refundable at all, though it counts payroll taxes towards your liability as well. Even with counting payroll taxes, lower income parents will not have adequate tax liability to claim the full amount.

Brennan takes issue with my analysis of CTC2.5, saying that it helps fix the problems with PE and CTC1 because it also includes payroll tax liability. But this does not help fix anything. It is still the case that the more money parents have, the more money the CTC2.5 provides them. If the CTC2.5 didn't include the payroll tax liabilities towards the amount, it would be worse than it is. But it still looks just like the PE and CTC1 in total: more market income = more child benefits (up to some point). On twitter, Brennan also concedes this to be the case.

It is precisely because these child benefits are matched to tax liability that the Tax Policy Center's scoring of the plan renders this rather telling distributive breakdown of the entire tax proposal as a whole (which includes things other than the child benefits stuff I have been discussing):

Everything I have said about the way in which these benefits are patterned so as to provide more money to the middle and rich than the poor is very correct.

Rationale Supports Flat Benefits

I was hoping Brennan would go into the theory behind why the reform conservatives want to expand the welfare state in this way. That is a big part of my Salon piece. But he punts mainly, saying only this:

As an aside, it’s important not really to think about a more generous child tax credit as “a massive expansion in child-related welfare spending” — Stein explains well in Room to Grow why it’s actually removing distortions created by the old-age welfare system we have (and are more or less stuck with).

I find it fascinating that if you dress up a welfare program enough with the right words coming out of the right mouth, you can get people to buy an argument as silly as this. But I don't want to push too hard on this because Stein's argument, as silly as it is, shows that crafting our child benefit policy this way makes absolutely no sense.
The argument that this is not simply a welfare state expansion is that people with children pay a "parent tax penalty." They are said to pay into Social Security and Medicare twice, once themselves and a second time when their kid pays. As I said above, this doesn't make any sense, but just roll with it.
Stein says that the average child will pay around $160,000 (in present value terms) into the Social Security and Medicare programs. The purpose of the CTCs and PE is to compensate parents for these future tax contributions of their children. Let that sink in for a second and ask yourself this question: if the point of these cash transfers is to compensate parents for the future tax payments of their children, then why do rich parents get more money than poor parents?

Consider the following dialogue between Mike Lee, Rich Parents (or middle class parents if you want), and Poor Parents.

Mike Lee: Good evening Rich Parents and Poor Parents. I've noticed a serious flaw in our tax system. You pay a parent tax penalty insofar as your children will pay $160,000 into the old-age retirement programs. People who don't have children don't raise people who pay into those systems. This is unfair. So you should be compensated for those $160,000 in future tax contributions that your children will pay when they are adults. Or at minimum, we should offset some of that $160,000.

Rich Parents: Awesome, sounds good.

Poor Parents: Yeah, good idea. Raising kids is expensive.

Mike Lee: Excellent. So here is what we will do. Rich Parents, I see you just had two kids last year, twins. Congratulations. So this year, you are going to start getting your parent tax penalty compensation. You will get $8,000 or so from the CTC1, CTC2.5, PE.

Rich Parents: That is some good money. I think I will spend it on the private school I send my kids to, as Robert Stein suggested in his chapter of the book "Room To Grow."

Mike Lee: And for you, Poor Parents, I also see you just had two kids last year. So this year, you are also going to get your tax relief to avoid the parent tax penalty. You will get $1,000 (or maybe $1500 let's say depending on how poor you actually are) from the CTC1, CTC2.5, PE.

Poor Parents: Wait a minute! Why do I only get $1,000 when the Rich Parents get $8,000!?

Mike Lee: Well, the PE pays out more for people with higher incomes. And your income was too low to have enough tax liability to allow you to get the full value of the credits.

Poor Parents: But you said the point of these payments is to compensate us for the $160,000 our children will contribute in payroll taxes when they are adults. What does my income have to do with that? My kids will grow up to contribute $160,000 in payroll taxes and Rich Parents' kids will grow up to contribute $160,000 in payroll taxes. If that's what the payments are meant to offset, then surely we should get the same payments as Rich Parents get!

Mike Lee: Well, I don't know what to tell you. It seems my view is that the parent tax penalty is really bad, but the poor should still pay it.

A Solution To End All Debate

The way to solve this conundrum is super-easy. If you want to give parents money to compensate them for the future payroll taxes of their children, then do it. Eliminate the CTC1, CTC2.5, and PE. Pick a specific dollar amount and give it out to all of the parents, ideally in a monthly check called a child allowance. Then every parent will be equally relieved of the parent tax penalty.

I am genuinely curious (not trolling here) as to what conservatives have to say about this alternative proposal. It actually solves the thing they say they are trying to solve (the "parent tax penalty"), while their plan doesn't remotely do so. Why not just do this instead of use the CTC1, CTC2.5, and PE if that's what you are really trying to do? Why pattern child benefits according to the incomes of their parents when your justification for them is about how much children will pay in payroll taxes when they are adults? It makes no sense, unless you impute a different and more sinister motive to these proposals (which I suspect is what is actually going on and why I wrote the Salon piece the way I did).