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At an AEI panel discussion earlier this week, Senator Mike Lee (R-Utah) unveiled the Family Fairness and Opportunity Tax Reform Act. The centerpiece is an additional $2,500 tax credit for all children under age 17. The plan retains the $1,000 child tax credit under current law. Unlike the current credit, the new credit would not phase out at higher income levels.
Lee’s idea is straightforward—cut taxes for families with children and raise them for households with high itemized deductions.
He’d eliminate the standard deduction and personal exemption (except for dependents under 17) and replace them with a nonrefundable $2,000 per person credit. He’d also repeal the Alternative Minimum Tax and end the taxes associated with the 2010 Affordable Care Act (ACA).
He would also eliminate all but two itemized deductions, including those for state and local taxes. He’d keep the mortgage interest deduction (capped at $300,000 of debt) and the deduction for charitable giving—and make those available to all taxpayers.
The plan would have just two rates, 15 percent on the first $87,850 for single people (twice that for couples) and 35 percent—higher than the 25 percent top rate in other GOP plans. (The plan would eliminate most marriage penalties for higher-income households and provide marriage bonuses for many. High-income households with one earner and many children would get a huge tax cut.)
While Lee says he’d like to aim for even lower rates, his current design seems to recognize that you can’t slash tax rates for all without losing billions (or even trillions) of dollars in tax revenue. However, the 35 percent rate is significantly lower than the 39.6 percent top rate—plus surtaxes associated with the ACA—that applies to top incomes under current law. We don’t know yet whether the plan is revenue neutral because important details haven't been specified.
Lee would remove many households from the federal income tax rolls. But he sees no special reason why the key feature of his plan—the added $2,500 per-child tax credit—needs to be a tax credit. He’d be willing to use a direct spending program instead (something my colleague Austin Nichols might think was a better idea).
If the new child credit were instead a transfer payment, the plan wouldn’t increase the number of people who don’t pay federal income tax, but it would still provide substantial assistance to families with children, albeit with higher administrative costs. By acknowledging that such a child credit is effectively spending, Lee challenges critics to assess the merits of the plan.
We ought to be talking about whom the federal government should assist and how much aid they ought to get, without turning policy inside out by making every benefit program a tax preference when direct spending might make more sense. I agree with Senator Lee. Spending programs and tax policy can often accomplish the same thing. We should evaluate benefits for families with children and see what form of subsidy makes the most sense. Maybe in the process we could stop obsessing about who does—and does not—pay federal income tax.
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