The most incisive guide to issues facing the American family today . . . An invaluable resource for anyone wishing to stay on the cutting edge of research on family trends.
-W. Bradford Wilcox
Associate Professor of Sociology, University of Virginia
The weeks leading up to Tax Day, April 15, have always triggered a lot of groaning about the complexity and burden of the U.S. income tax, but in recent years the criticism has taken a new tack: that increasing numbers of Americans pay no income tax. The lament is the inverse of the old misleading liberal Democratic claim, which prompted the creation of the Alternative Minimum Tax (AMT) in 1969, that the very rich pay no income tax, but this time set forth by Republicans in general and economic conservatives in particular alarmed by the growing number among the bottom half of the income distribution that are paying no income tax. Just two days before Tax Day this year, the Heritage Foundation was quick on the draw with a Backgrounder by Curtis S. Dubay citing IRS data showing that the bottom 50 percent of tax filers pay less than 3 percent of all income taxes. According to Dubay, “the rapid increase in the number of nonpaying tax filers caused by tax credits is leading the country to a dangerous tipping point.” Like other conservatives and libertarians, he fears that once the bottom half of tax filers pay no taxes whatsoever, they “could vote themselves an increasing share of government benefits at no cost to themselves.”
The Heritage Foundation is not alone in pressing this point. Scott A. Hodge, the president of the Tax Foundation, makes a similar argument in a paper published a month before Dubay’s, using data showing how the expansion of the child tax credit to $1,000 in 2003 has led to a significant increase in the income level at which a married couple with two dependent children have zero income-tax liability, reaching $55,583 in 2008. In addition, well-connected players in the GOP have joined the chorus. Ari Fleischer, former press secretary to President George W. Bush, lamented in the Wall Street Journal just before Tax Day 2009 how the 2001 tax cuts of his boss, including the doubling of the child credit, removed millions of lower-income taxpayers from the tax rolls and, citing Congressional Budget Office data, raised the share of taxes paid by the top 10 percent of American taxpayers from 68 percent in 2001 to 73 percent in 2005.
All these observers make valid points about the proliferation of numerous credits in the tax code—subsidizing such things as daycare, education, health insurance, hybrid cars, and first-time home purchases—that contribute to the phenomenon they quantify. They also offer timely warnings about how President Barack Obama’s tax policies, including his “Making Work Pay” credit, intensify the problem. But they overlook or downplay two facts: one historical, the other demographic. Throughout much of the 1950s, the median-income married couple with three or more dependent children paid little or no income taxes, and these non-taxpayers did not press for government benefits from other Americans who paid income taxes. Moreover, even with the rise of non-taxpayers in the general population in recent years, married parents with dependent children still face a significantly greater income-tax liability today, relative to other household types, than they did in the 1950s. The median income of that demographic stood at $72,743 in 2008, well above Hodge’s cited cut-off point below which a married-parent family of four incurs no income tax liability. They also pay dramatically more in payroll taxes, as the payroll tax rate has almost quadrupled since the mid-1950s.
More important, this relatively new concern about the growth in the number of Americans paying no income taxes overlooks the social roots of the problem, particularly the decline of the most economically productive segment of the population: the married-two parent family. Consequently, few economic conservatives seem willing to connect the dots between the changing demographics of the American taxpayer, which Hodge at least acknowledges, and the growth of Americans paying no taxes. They seem more eager to blame the latter on the addition and expansion of refundable credits, especially the child tax credit, not changing demographics. Yet Roberton Williams of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, estimates that married couples are far less likely to be non-taxpayers in 2009 than single filers or head-of-household filers. In this last category, his model shows 72 percent paying no income taxes, the highest percentage of all tax filing categories. Only 38 percent of married-joint filers, and 26 percent of married-separate filers, pay no taxes.
Indeed, the Tax Foundation’s own analysis of IRS data documents the decline in the proportion of married filers from 65 percent of returns in 1960 to 41 percent in the years 2000–02, and the dramatic growth of head-of-household filers, representing largely unwed mothers, from 2 percent to 15 percent during the same period. Moreover, looking at data from 2002 returns, the foundation finds that married couples, while they file less than half of all tax returns, pay nearly three-quarters of all income taxes paid by the American people. Even though the analysis does not include changes that might arise from the doubling of the child tax credit to $1,000 in 2003, the numbers nonetheless suggest that the growth in the number of Americans who pay no income taxes is driven more by the retreat from marriage than by the proliferation of credits in the tax code, as problematic as that might be. The numbers further suggest that if conservatives are serious about tax reform, they can no longer ignore the elephant in the room—the retreat from marriage and family life—that undermines the very economic growth they seek. Nor can they presume that a flatter tax system with lower rates and a wider base, favored by the libertarian wing of the GOP, will lead to smaller government, as analysis by economist Gary Becker shows that countries with flatter tax systems tend to have larger governments. They must therefore be open to tax reform proposals that recognize the natural family as the social and economic ideal as well as reinforce the recovery of marriage and the child-rich family—not economic growth for its own sake—as centerpieces of American life.
Tax reform that retains these social objectives is more critical now than ever. With all due respect to Arthur C. Brooks, the president of the American Enterprise Institute, who makes a compelling case in his latest book, The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future (Basic Books, 2010), the decisive issue facing America in the twenty-first century is not so much the battle between the private and the public sectors, but the deterioration of what economist John Mueller calls the social sector, rooted in the married-based family, without which the market and the state would not be possible. Without a thriving social sector that shares what Steven Malanga of the Manhattan Institute calls “a common set of civic virtues” and in which citizens learn “not merely hard work but also thrift, integrity, self-reliance, and modesty,” Americans can kiss both capitalism and constitutional government good-bye. But by expanding the home economy and the social sector (not just the market economy or the private sector) through the renewal of marriage and the natural family—institutions presumed by a constitutional order but feared by the modern democratic state—family-centric tax reform represents the best chance to check the power of the federal government, roll back the welfare state, broaden the appeal of the GOP, and renew the very promise of America.
Public policy that seeks to rebuild the home economy has deep roots in the GOP. Beginning in 1980, planks that have lifted up the importance of the home economy have graced the official party platform every election cycle. Ronald Reagan surely understood the importance of the American family, claiming, “When the family is strong, the Nation is strong. When the family is weak, the Nation itself is weak.” Moreover, the vehicle through which the party took control of Congress for the first time in forty years, the Contract with America, endorsed the idea of allowing marriage and family realities to inform tax policy with the creation of the child tax credit, at the time pegged at $500. After the tax credit was signed into law in 1997, the Bush tax cuts of 2001 and 2003 raised the credit to $1,000 and accelerated its implementation. As much as libertarians and economic conservatives claim the credit complicates the tax code and borders on social engineering, neither of the Bush tax cuts of 2001 or 2003 would likely have passed Congress or gained Democratic support without it.
The achievement of the child tax credit echoes the genius of the Republican-inspired Revenue Act of 1948, which introduced “income-splitting” for married couples and substantially raised the personal exemption that lowered the cost for young parents rearing children. Although largely ignored by conservative think tanks today, the 1948 legislation—perhaps the most pro-family tax reform of the post World War Two era—offers important lessons for crafting tax proposals that take the family seriously, can gain the support of both parties, and deliver impressive results both economically and socially. The legislation not only removed most married parents with three or more dependent children from the income-tax rolls for a decade, but also played a role in the unprecedented rise in marriage rates, decline in the age of first marriage, and decline in divorce rates, as well as the dramatic baby boom of the next fifteen years.
Changes to the tax code in the 1960s, plus the failure of Congress to adjust the value of the personal exemption to inflation or link it to a percentage of median family income, however, diluted those family incentives. Yet the increase in the value of the personal exemption in the 1986 Tax Reform Act, according to Allan C. Carlson and Paul T. Mero, coincided with “a significant increase in overall American fertility” since its enactment. They also note that the introduction of the child tax credit in 1997 “correlates precisely” with the rise in marital fertility beginning the same year. Although Carlson and Mero do not make the point, the expanded personal exemption and the new tax credit may also have played a role in the moderation of divorce rates since the 1980s. An even stronger argument can be made that the 1997 child tax credit contributed to the moderation, and in some measures decline, of the labor-force participation rates of women and especially of married mothers since the late 1990s. As Carlson and Mero claim, “pro-family tax cuts appear to work.”
The Basics of Family Tax Reform
This may explain why increasing numbers of voices, including scholars, journalists, economists, and elected officials, are encouraging the GOP to take up the banner of family-centric tax reform—and not simply because it would redeem the party’s reputation among voters who think of the GOP as simply the party of corporate America and business interests. While it may seem a bit self-serving to highlight this initiative given his role as the founding editor and publisher of this journal, Carlson has been pushing this approach to tax reform at least since he served on the National Commission of Children, which was the impetus for the introduction of the child tax credit in 1997. His extensive proposals thoroughly informed the Parents Tax Relief Act, introduced in the Senate by Sam Brownback of Kansas and in the House by Lee Terry of Nebraska during both the 109th and 110th Congress, legislation that would:
Journalists—including Ramesh Ponnuru, Ross Douthat, and Reiham Salam—have advanced similar approaches to tax reform, including expanding the child tax credit, not simply by indexing it to inflation but also increasing its value to $5,000 and making it applicable to payroll taxes across the board, not just to low-income parents as it is now. Douthat and Salam go one step further and call for limiting this expanded credit to married couples only, an effort to help reverse the retreat from marriage and the epidemic of unwed childbearing and rearing in America, patterns that do not bode well for the future of the country from either a social or economic standpoint.
The economist David P. Goldman takes a somewhat different approach, preferring a greater use of deductions than credits, calling for an increase in the personal exemption to $8,000 to restore its real value to what it was after World War Two. Goldman also calls for a dependent exemption for payroll taxes and for an increase to the base payroll tax rate—in effect raising tax rates on the childless to confront the current actuarial imbalance between Social Security and Medicare liabilities (which are high) and the existing fertility rates (which are historically low). The advantage of all these proposals, relative to the Parents Tax Relief Act, is their attempt to buffer young parents from the impact of the payroll tax, which remains a far greater burden for the vast majority of parents than does the income tax. Although he comes to the same problem from a different angle, John Mueller, who serves on the editorial board of The Family in America, has for years called for immediate reduction in the payroll tax by 25 percent, following the recommendation of Republican actuary Robert Myers.
The most recent family-friendly tax reform proposal comes from a former George W. Bush official at the Treasury Department, Robert Stein. Writing in National Affairs, Stein addresses what he calls “the distortions and burdens our fiscal policy imposes on American families” by offering a series of tax relief measures for parents as part of a larger package of reforms of the entire tax code. Consequently, his proposal includes reforms that Republicans have pushed for years, including scrapping the AMT and removing impediments to capital investment by stepping up depreciation schedules on plant and equipment spending and allowing companies to distribute the profits, on which they have already paid income taxes, to shareholders with dividends that are tax-free to the recipient. He also calls for two income tax rates (15 percent and 35 percent), not a flat rate, and the elimination of all exemptions and deductions except for mortgage interest and charitable contributions (which would be available to all filers, not just itemizers) and all existing tax credits.
In place of all those lost deductions and credits, he calls for a $4,000 per-child tax credit (replacing the existing child credit, child-care credit, and adoption credit) applicable to both income and payroll taxes, and adjusted annually at the same rate as the taxable wage base for Social Security. Stein’s proposal also replaces the current personal exemption with a $2,000 personal tax credit, adjusted for inflation, but applicable only to the income tax. Under his scenario, a married couple with two dependent children earning $70,000 would see their income tax liability drop from $5,800 to zero and receive a $1,500 credit toward their payroll tax liability of $10,700 (representing both employee and employer share). If this couple had four dependent children, which was not uncommon a generation ago, that credit would rise to $9,500. He would also disallow “double dipping” among low-income parents: they would qualify for either the child tax credit or the EITC—but not both.
Stein concedes that his tax plan won’t please economic conservatives and “anti-tax” purists. For starters, he doesn’t believe that the Reagan tax-cut model—which delivered greater tax relief to the highest-earning workers—can work its magic today because the same kind of cuts today would reduce income tax rates to zero. Consequently, his proposal is more progressive than the current tax code; his revenue-neutral proposal essentially raises taxes on “the rich,” by which he means upper-income taxpayers who do not have children at home. Indeed, he calls for income-splitting only in the first income bracket, perhaps the only shortcoming of his proposal. Stein also won’t please the conservative think tanks or even his former boss in the White House, as he pooh-poohs the mandatory retirement savings programs that President George W. Bush tried to sell in 2005. Private accounts, he claims, share the same problems as the current Social Security system: they represent “an enormous fiscal bias against procreation” and harm the country’s future by “crowd[ing] out the traditional motive to raise kids.”
Even with his one shortcoming, Stein’s proposal would nonetheless please President Theodore Roosevelt, the progressive who believed taxes should be “immensely heavier on the childless and on families with only one or two children, while there should be an equally heavy discrimination in reverse, in favor of families with over three children.” His plan also reflects some debt to Carlson, who in the wake of the tax reform of 1986, cautioned against the trend to flatten income tax rates and to leave questions of social policy off the table in crafting tax policy. To Carlson, “a somewhat progressive income-tax structure that recognizes and supports marriage” and gives “strong preference to children as a national treasure” is ideal.
More Promising than Welfare Reform
Whether fashioned by Carlson, Stein, Goldman, Ponnuru, or Douthat and Salam, these family-centric tax proposals—by encouraging marriage and family stability with financial incentives—have the potential to dismantle the welfare state, a major driver of government spending for which economic conservatives have no antidote. They also hold greater promise for a recovery of the American family than GOP attempts to overhaul welfare, like the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF). That was a remarkable achievement, in that Congress acknowledged for the first time the moral, social, and economic consequences of the failed War on Poverty by highlighting statistical findings that revealed how the near-tripling of AFDC caseloads since the 1960s correlated with the decline in marriage rates and the dramatic rise in unwed childbearing. The legislation declared: “Marriage is an essential institution of a successful society which promotes the interests of children.” It set the “promotion” of a marriage (and work) ethic as key goals of welfare reform.
Yet the actual outworking of “welfare reform” demonstrates its limited capacity to reverse the retreat from marriage and restore the married, two-parent family as the social ideal. Changes to one single welfare program—even graced with components pushed by President George W. Bush that promoted sexual restraint before marriage and healthy relationships in marriage—represent mere window dressing when measured against the massive welfare-state social-services complex that has undermined marriage, fatherhood, and the American family for decades. With its origins in the never-ending War on Poverty, the means-tested welfare state remains in 2010 every bit the parasitic complex that is was in 1996. According to Heritage Foundation estimates, it will consume and spend $953 billion in the fiscal year beginning this October through seventy different “means-tested” assistance programs, including TANF, food stamps, energy assistance, birth-control promotion, daycare, public housing, the Earned Income Tax Credit (EITC), Medicaid, and State Children’s Health Insurance Program (SCHIP).
Even apart from President Obama’s $787 billion stimulus legislation passed by Congress in February 2009, which dramatically increased social spending and reversed the reforms of 1996, TANF could not by itself undo the extent to which the entire means-tested welfare system creates what economists call a moral hazard, insulating adults and young people from the plethora of economic, health, educational, and social disadvantages that stem from being raised in a broken home, living outside the protective bonds of marriage, or bearing children out of wedlock. Even as it slashed cash-assistance roles, the welfare reform of 1996 neither reduced welfare spending nor weaned the dependent class off of other forms of government dependency. Most important, it failed to achieve its key objective: reversing the nation’s high rates of out-of-wedlock childbearing. While illegitimacy rates appeared to have moderated during the late 1990s, data from the National Center for Health Statistics reveal that all measures of childbearing outside of marriage have been on the rise among almost all population groups since 2002. While the percentage of all U.S. births that were to unwed mothers was 32.2 percent in 1995, that measure increased to 40.6 percent among the general population, and to 72.3 percent among African-Americans, in 2008. These numbers confirm that even under much publicized and praised reform measures, incentives that displace marriage and fathers from families, a tragic legacy of modern welfare systems wherever they have been implemented, remain heavily embedded in U.S. social welfare policy.
The Pernicious Assault on the Family
Keep in mind as well that those perverse incentives, which George Gilder claims erode “the sexual constitution of society,” represent only one front of the war against the social sector that the government has aggressively waged since the 1960s, at times in collusion with big business. That entire assault on the family at all levels of society—not just the problems of the welfare state that are limited to the portion of population that the Census Bureau considers poor—needs to be fully assessed and rolled back. The courts, no doubt, have been the key ringleaders of that pernicious assault, changing or gutting state laws that have either privileged the marriage-based family as a social institution or stigmatized behaviors that weakened the marital bond. The most blatant example, but surely not the only example, of the legal assault on the family, the discovery of a constitutional right to elective abortion in Roe v. Wade (1973), directly contributed to the retreat from marriage by eroding the custom of the shotgun wedding, a widely accepted response to so-called “unintended pregnancies” among generations of Americans prior to the 1970s. John Mueller points out that once the Supreme Court elevated abortion as a legally protected “choice” for the unmarried woman who finds herself pregnant, not only did abortion rates experience their most rapid increase and birth rates their most rapid decline, but also U.S. marriage rates dropped precipitously.
State legislatures also delivered a huge blow to the family with their adoption of unilateral no-fault divorce during the 1970s. The impact of this one change in state law went beyond just the dramatic rise in divorce rates. It represented the legal and social deconstruction of marriage, putting the power of the state on the side of family breakup, not family preservation. The adoption of no-fault divorce also undermined the idea of marital permanency and forced couples—out of fear of divorce—to pull back from the kind of full commitment that makes lifelong marriage a real bargain for both sexes. Furthermore, when no-fault divorce was combined with the federal take-over in the 1970s of what was formerly a state function—child-support enforcement—the two policies created powerful incentives for divorce that continue to wreak their havoc in the lives of parents and children. With the explicit support of the powerful federal child-support enforcement machinery, the family court system in most states guarantees divorcing mothers and their children support from fathers without requiring those mothers, who initiate two-thirds of all divorces in America, to prove fault on the part of the father.
If these disincentives were not enough, Congress built additional roadblocks against the development of marriage as a lifelong partnership by creating an affirmative-action regime that favors women over men in the workplace. This arrangement has not only resulted in patterns of employment that neither American men nor women consider ideal, but also serves the interests of big business by supporting the movement of mothers out of the social sector (the home economy) and into the market economy, because it increases the labor supply and lowers its relative cost. Congress also continues its war against fertility by funding, through Titles X and XX of the Public Health Service Act and Title XIX of the Social Security Act (Medicare), the widespread distribution of contraception devices, a distribution that extends to minor and dependent teenagers without parental consent. Even though U.S. fertility rates have been relatively flat since the early 1970s and low-cost birth-control devices are available at every corner grocery store, Congress thinks, against all the evidence to the contrary, that a continued government-funded birth-control or so-called “family planning” campaign, estimated by the Heritage Foundation to cost the taxpayers $1.73 billion in 2002, helps to alleviate poverty.
Given a legal and policy environment that remains hostile to marriage and the natural family, it is no wonder—paraphrasing Gilder—that promiscuity, illegitimacy, divorce, separation, cohabitation, daycare, contraception, and abortion find fuller favor in the laws of the land today than do monogamy, marital permanency, full-time motherhood, fertility, and strong family bonds. The government is so heavily invested in family breakdown, it is difficult to know which front to tackle first. But given the central role that tax-and-spending decisions play in a representative democracy and the fact that the tax code is the main place where the vast majority of families interact with the federal government, family-centric tax reform—more than any other single policy initiative—would deliver immediate financial protection against all the forces, on the part of the state and the market, that are lined up against the American family.
Broadening the Appeal of the GOP
If strongly adopted and pushed by the Republican leadership, family-centric tax reform also represents an opportunity for redemption of a political party that has lost its way. If the seesaw pattern of elections of the past twenty years demonstrates anything, the GOP cannot presume that another “reversal of fortunes” this fall will guarantee effectiveness in governing should they regain control of Congress. The party desperately needs new ideas and a new vision. As Peter Berkowitz of the Hoover Institution laments, “the promise” of the Reagan era and the 1994 Contract with America “was not fulfilled” by congressional Republicans when they were in the majority or by the George W. Bush administration. Nor has the GOP minority, since Barack Obama moved into the White House, been offering policy ideas that resonate with the voters. According to a recent Washington Post/ABC poll, six out of ten respondents said they have a negative view of the policies set forth by the Republicans in Congress; only a third say they trust the GOP over the Democrats. That trust level, according to Angelo Codevilla in the American Spectator, is even lower among self-identified Republicans, as only a fourth of them claim that GOP officeholders represent them well.
But family-centric tax reform and a focus on renewing the social sector could very well represent the core of that new vision. This is not the time to call, as Indiana Governor Mitch Daniels has suggested, for a “truce” on social issues until economic issues are resolved. Indeed, Berkowitz encourages the development of policy solutions that “recognize that a federal system favorable to local self-government, respectful of religion and supportive of the family is a time-tested way of cultivating individuals capable of conserving free institutions and taking advantage of the opportunities freedom affords.” Seen in this light, family tax reform offers a welcome change from the party’s reliance on economics alone—particularly the power of free markets, unleashed by the lower taxes and regulation—to deliver the promise of America. As Ronald Reagan told the Conservative Political Action Conference during the Jimmy Carter years, the party needs “a program of action based on political principle that can attract those interested in the so-called ‘social’ issues and those interested in ‘economic’ issues.” He also said, “We must combine the two major segments of contemporary American conservatism into one politically effective whole,” and “the New Republican Party must be committed to working always in the interest of the American family.” That’s as true today as it was in 1977, as it resonates not only with the Republican rank-and-file but also with moderate Democrats and the sizeable block of voters that are not quite ready, even in the wake of the Democratic excesses of the past eighteen months, to fully trust the Party of Lincoln.
In the final analysis, the appeal of tax reform that is intentionally pro-marriage, pro-family, and pro-fertility has less to do with the policy itself but everything to do with the universal promise of the natural, married-based and child-centered family. Neither society nor the economy could exist without marriage, without the union of husband and wife who bear and raise children, and children who follow their parents’ example and also marry and create new families. As a natural institution that predates the state, the family is the only social entity that can actually create, grow, and renew both society and the economy. As Wendell Berry observes, marriage is “the fundamental connection without which nothing holds.” Family-centric tax reform simply recognizes and protects these critical social relations in the same way the U.S. Constitution recognizes and defends the “unalienable rights” of the Declaration of Independence that also predate the state. From this perspective, it is not the family that needs the state, but it is American society and her economy that need—now more than ever—what marriage and the natural family do. For this reason alone, family-centric tax reform offers the most promising agenda through which the Grand Old Party can regain its footing and project a new and compelling vision that resonates all across America.
Mr. Patterson, editor of The Family in America, is an adjunct professor of government at Patrick Henry College in Purcellville, Virginia. He served in the George W. Bush administration as a senior speechwriter at the Small Business Administration and at the Department of Health and Human Services.