The election may be over, but the fight over tax policies is just beginning — and it’s one that Republicans and conservatives can’t afford to pull a McCain on.
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To counter Obama’s middle class tax cut rhetoric, some conservatives have argued for the idea of a $5,000 child tax credit. They would not make the credit refundable, to avoid effective new welfare checks from the government for most workers, recognizing the dramatic cuts in income taxes for the middle class and lower-income workers already adopted by Reagan and the Republicans. But they would allow the credit to be taken against the payroll taxes funding Social Security and Medicare.
But with one or two children, such a credit would quickly eliminate payroll tax liability for most workers at middle-class and lower incomes. Since Social Security and Medicare already suffer from deep long-term deficits, how will we replace the revenue lost to these credits? And why should families with children pay little or no payroll taxes for much or most of their lives, yet receive full Social Security and Medicare benefits? This would just be another redistributionist policy, only focused on favored conservative beneficiaries, which should be even easier to see in the context of the Obama tax credit policy discussed above. Indeed, focusing the redistribution solely on families with children, who already vote mostly Republican, would weaken its political benefit as an alternative to the Obama tax plan.
Moreover, this child tax credit would not promote economic growth, for the reasons discussed above. It does not promote incentives for saving, investment, business creation and expansion, job creation, etc. The $5,000 credit loses too much revenue for no pop on the economy. There are much better alternatives, both economically and politically.
For income taxes, Republicans and conservatives should focus on cutting middle-class income tax rates. If the 25% middle-class tax rate were reduced to 15%, the result would be a flat rate tax of 15% for close to 90% of workers. The lower rates would promote economic growth as discussed above. Indeed, it would likely lead to renewed middle-class income growth. It could be combined with an increase in the personal exemption, which would apply to children, to ensure that all taxpayers would get a tax cut from the package. Such a proposal would be politically competitive with the Obama tax plan right away, and could even potentially displace his tax credit scheme next year.
For payroll taxes, personal accounts should be adopted and expanded over time to eventually phase out the payroll tax entirely, and replace the programs now financed by that tax. This would produce a truly massive reduction in the size of government, with an equivalent increase in the personal resources of families. That would do more than anything to strengthen families. Advancing such accounts will be difficult in the current political and economic climate, with liberal/left Democrats vigorously opposing them currently in complete control at the federal level. But such accounts have long been overwhelmingly popular in polls and focus groups, and their strong political appeal will recover with the economy. Because of the massive, historic reduction in government potentially involved in such accounts, conservatives should greatly favor them over a simple redistributionist giveaway.
These are truly exciting middle-class tax cut opportunities, both politically and economically.