Ever since the Reagan era, conservatives have been captivated by the power of cutting marginal tax rates. The problem is that while cutting the income tax rate from 70 percent to 50 percent meant the highest earners could keep 50 cents instead of 30 cents on every dollar of extra earnings, today’s middle-income households already keep most of what they earn. Cutting the 15 percent federal income-tax rate faced by much of the middle class to 10 percent means letting a worker keep 90 cents on the dollar instead of 85 cents. Such a cut would do relatively little to improve work incentives, not least because two-thirds of the tax relief would go to households who earn only some of their income in the 15 percent bracket on their way to higher brackets.
Robert Stein argues that instead of focusing on marginal tax rates, conservative tax reformers ought to focus on the ways the federal government punishes middle-income families. Because Social Security and Medicare disincentivize raising children, conservatives should offer tax cuts to reduce the cost of raising children, making it easier for parents (and potential parents) to pursue the family size they would desire in the absence of federal interference. While some conservatives fear that reducing the tax burden on parents could make them more likely to support government spending, it could make them less likely to do so, as a lack of cash during their parenting years is one reason they might favor more government activism in the first place. By supporting tax relief for parents when they need it most, conservatives could do more than correct a distortion in the tax code. They could win back the political trust and the support of the middle class.
Robert Stein is a former deputy assistant secretary for macroeconomic analysis at the U.S. Treasury Department.