Mitt Romney has proposed a child allowance of $4200/year for children under age 6 and $3000/year for children age 6 to 17, which is gradually phased out for people making over $200,000 (depending on the child’s age.) It is to be paid for without boosting the budget deficit, by reducing certain other poverty programs and also eliminating certain tax deductions, such as what’s left of the SALT deduction. (This last element is one of my favorite parts of the plan.)
I don’t know enough about the plan to have a firm opinion, but from a utilitarian perspective it seems to have some positive features:
Equity: The net effect is to shift money from the affluent to the poor, which probably results in a significant gain in aggregate utility. (Yes, we can’t measure utility, but it seems likely that this factor is a net plus.)
Efficiency: It’s hard to say whether Romney’s plan improves or reduces efficiency, and that’s where I’ll focus the rest of the post. But the mere fact that “it’s hard to say” is a sort of plus for the plan, because the equity considerations seem to be pretty clearly utility improving. With most welfare proposals, greater equity comes at a cost of lower efficiency. I think it’s fair to say that either Mitt Romney is a very clever guy, or he has smart advisors, or both. At the end I’ll suggest a modification that would boost the equity of the plan, without any clear loss in efficiency.
1. Some conservatives like the fact that these child benefits would boost the birth rate, pointing to the fact that people say they want more children than they actually have. I don’t share their worry that the birth rate is too low, and I don’t trust polls. Some conservatives worry that paying poor people to have kids would cause so-called “inferior” people to reproduce. I also don’t share this worry. For me, the effect on births is a non-factor.
2. Work disincentives can come from either the income or the substitution effects. The substitution effect in Romney’s proposal is small, as parents don’t lose the child allowance until their income rises to well above $200,000. So on that basis it won’t discourage poor people from getting a working class job. There is a very mild work disincentive for upper middle class people experiencing the phase-out of the benefit. The income effect refers to the fact that poor people might no longer work because they feel they can live on the child allowance without working (perhaps combined with other programs like food stamps.) It seems to me that this disincentive would be quite modest for the size of benefits proposed by Romney. Still, in net terms there’s probably a mild work disincentive from the issues I’ve discussed thus far.
3. Many of the other provisions actually boost efficiency. Several other (inefficient) poverty programs are either reduced or eliminated. Furthermore, there’s a substantial gain from reducing the complexity of both the welfare system and the income tax system. Eliminating the SALT deduction also discourages wasteful state and local spending. So the various provisions that pay for the benefit have a significant positive impact on economic efficiency.
Combining points #2 and #3, I see no clear evidence of either an overall gain or loss of efficiency. And again, the equity benefits seem pretty clear to me.
One final comment. Why not make the child allowance fully universal, and then slightly boost the payroll tax (on wage income only) on people making over $200,000 a year to pay for it? On an equity basis, that would redistribute money from the very rich down to the upper middle class, as people with very high wage income would pay more extra tax than they’d gain from the child allowance, while the opposite is true for the upper middle class—those making modestly above $200,000.
On efficiency grounds, my proposed modification would make the income tax system much simpler, so that’s a net gain. The increase in the payroll tax rate would be smaller than the implicit marginal income tax during the phaseout range of Romney’s proposal (which mostly applies to people in the $200,000s), so extremely affluent people would face slightly higher MTRs while modestly affluent people would face significantly lower MTRs. Overall, I doubt there’d be much change in economic efficiency, maybe even an increase.
READER COMMENTS
Art K
Feb 7 2021 at 3:29pm
Canada implemented a similar child benefit a few years ago and it was the most significant program to reduce child poverty in generations. You may be able to gain some insight looking north.
Scott Sumner
Feb 8 2021 at 2:24pm
The US has a history of ignoring lessons from Canada. Look at how we ignore the success of the Canadian banking system.
robc
Feb 7 2021 at 3:40pm
On your final comment, the way to do that would be to eliminate the fica cap on the ss part.
That is much better than making fica more complicated by making it progressive.
anon
Feb 8 2021 at 1:48pm
That would be a huge, huge tax increase. 15%! Way more than would be needed to pay for this.
Alan Goldhammer
Feb 7 2021 at 4:11pm
Why not just address this through the Earned Income Tax Credit?
Scott Sumner
Feb 8 2021 at 2:23pm
You could make that argument, but many people want a child benefit for those who do not work.
Steven Roth
Feb 8 2021 at 5:54pm
Well using the same idea through the EITC encourages work and improves economic efficiency whereas the Romney plan will have less economic utility as you mention by allowing some who are ok being poor to stay unemployed and rely on this and other government programs. Getting them off of government programs when their kids are young will allow them to continue building their human capital. This will allow their net productivity to be higher over their lifetime.
Thrawn997
Feb 7 2021 at 5:00pm
Why treat state and local less favorably than charitable giving? Or are you also for removing that deduction?
As an aside, I am in favor of removing this deduction as it incentives us to enact social policies at the federal level instead of leaving it to the states.
robc
Feb 8 2021 at 8:52am
Because they aren’t charity?
I am in favor of no deductions (and, well, no income tax for that matter), but I would put charity well above SALT or mortgage interest deduction if we were going to have any deductions.
Thomas Hutcheson
Feb 8 2021 at 10:09am
Why not partial tax credits if we want to incentivize certain uses of income?
Personally I’d incentivize state and local taxes and charity (to decentralize some social expenditures), and retirement savings (people are myopic), but not mortgage interest (which distorts the own/rent decision)
Thrawn997
Feb 8 2021 at 10:44am
State and local governments are certainly more worthy of deductions than churches are.
anon
Feb 8 2021 at 1:44pm
Why? Churches do lots of charitable work both locally and internationally. They build community and give people the personal connections that are so important to public health and welfare. They rely on voluntary contributions. Do churches waste a lot of money? I will admit to not being an expert but they seem fairly frugal for hte most part.
Scott Sumner
Feb 8 2021 at 2:20pm
I’d probably remove it for charity as well. But there’s a stronger argument for a charitable deduction, due to the “external benefits” factor.
Michael
Feb 7 2021 at 5:46pm
As a liberal, I like the potential impact on childbirth because it makes having children easier for those who want more while allowing those who don’t want more children to go on as before.
Romney proposes that this tax credit replaces other government assistance programs, such as TANF, that have stronger work disincentive effects. So I think there may be more of a net benefit there in terms of incentive to work.
Your proposal seems like it would be improvement.
Thomas Hutcheson
Feb 7 2021 at 9:09pm
Why not just pay for it by making the personal income tax more progressive? I’m all for looking at how it would fit with other transfers, but reaching zero increase is transfers would not be a benefit in my view. I want to make the tax and transfer system MORE progressive subject to not increasing deadweight losses from taxes “too much.”
I’ve still to understand what deadweight loss is removed by taxing income paid to states of local governments.
robc
Feb 8 2021 at 8:53am
If you really care about deadweight loss, welcome to the Single Land Tax club!!!!
Thomas Hutcheson
Feb 8 2021 at 10:11am
I have not figured out how to administer the Single Land Tax and make it progressive,
robc
Feb 9 2021 at 6:41am
Simple: Wealthier people tend to own more land – and more valuable land – hence pay more in tax.
It is an easy tax to dodge by not owning land.
anon
Feb 8 2021 at 1:52pm
We already have the most progressive federal income tax in the entire world.
Why would you get a deduction for S&L taxes? That’s a subsidy to S&L governments and encourages them to increase tax revenue beyond what is efficient, no?
Nyshlon
Feb 8 2021 at 5:29pm
I’ve long questioned the opposition to SALT deductions, simply because I see the stereotypical high tax states (NY, NJ, Mass, CA, etc.) sending more money to the feds than they get back, despite some of them receiving major federal spending (e.g. CA’s military presence). Intuitively (which means it could be totally wrong!), I can see higher state/local taxes in net-federal-contributor states as being a needed response to lower relative federal spending in those places. I.e. if money is not coming from the feds, it has to come from somewhere.
I would also be curious about how SALT deduction accounts for different types of tax varying by state, e.g. as TX has no income tax, poorer residents face a higher tax burden than in CA, while rich residents (note: not middle class residents) face a much lower tax burden. With that in mind, IF the SALT deduction includes all those taxes hitting the poorer residents, then it would seem to work as a sort of corrective for a low income TX resident otherwise burdened by a highly regressive local tax system. If it doesn’t include those taxes, then maybe it’s mostly helping the middle class (and less so the rich, as it’s now capped).
robc
Feb 9 2021 at 6:44am
While the SALT deduction does include sales tax and etc (Sales *or* income tax, but not both), since the new tax law I doubt many low income people are itemizing so arent benefiting anyway.
Scott Sumner
Feb 8 2021 at 2:21pm
I’d prefer to abolish the income tax.
Floccina
Feb 8 2021 at 1:53pm
Some Democrats contend that children in “under-resourced” families are at a huge disadvantage when it comes to future success, so maybe it is not inferior people but people unlikely to be able to provide what it takes.
anon
Feb 8 2021 at 1:55pm
At first I was thinking this might contribute to the existing problem of single mothers who stay at home with children and boyfriends who flit around. But if it starts to phase out at $200k and replaces other programs, maybe it would help? Because they wouldn’t lose it if they got married and maybe it replaces programs that they would? That would be the key thing I would look at. If it encourages intact families I’m for it but if it subsidizes adding children to broken families then I’m not.
Scott Sumner
Feb 8 2021 at 2:22pm
Based in what I’ve read it does reduce the marriage penalty, which is a plus in my view.
Joe
Feb 8 2021 at 4:09pm
Scott.
Why do you not care about collapsing fertility rates? Its happening in all developed societies and seems to be a major issue for such nations.
Scott Sumner
Feb 8 2021 at 5:07pm
I don’t see any reason to worry. The world has 7.8 billion people. I have no idea what the optimal number is.
I do favor more immigration to the US, for utilitarian reasons.
Michael Sandifer
Feb 8 2021 at 8:23pm
You don’t favor higher fertility rates in the US to help boost economic growth and increase US influence in the world versus what it will otherwise be?
Evidence seems to indicate that boosting immigration is the easier way to go, which I also favor, being an open borders advocate, but why not boost US fertility rates to the degree that it makes economic sense?
Scott Sumner
Feb 8 2021 at 9:13pm
I just don’t see any good public policy reasons for doing so. Sure you can mention “more US influence” and I can respond “more burden on the planet’s resources”, but how persuasive are either of those arguments? Not very persuasive, in my view.
John Brennan
Feb 8 2021 at 6:21pm
I am surprised that commenters here are not pointing out the pure politics of this with respect to Romney himself and the State of Utah who he represents and would like to gain re-election (which is tougher for him now than say one month ago). It is one of the few times over the course of the year here that I find those of the economics discipline more obtuse than those of political science. But this is one.
See:
https://www.deseret.com/utah/2021/1/24/22242586/mitt-romney-poll-disapproval-mike-lee-republican-donald-trump-election-fraud-joe-biden-democrat
and see:
https://worldpopulationreview.com/state-rankings/average-household-size-by-state
and see:
https://gardner.utah.edu/wp-content/uploads/UtahAtAGlance_20180207.pdf
and see:
https://econweb.ucsd.edu/~gdahl/papers/tithing-and-definition-of-income.pdf
My overall point is that this policy proposed by Romney is geared toward his re-election, not the greater good of the nation.
John Brennan
Feb 8 2021 at 7:13pm
Romney understands that his core voter lives mostly by the work of Joseph Smith, not Milton Friedman, not Jeremy Bentham, and not Adam Smith.
Scott Sumner
Feb 8 2021 at 9:15pm
I really don’t care what motivates Romney, I’m interested in the merits of the proposal.
Scott Sumner
Feb 8 2021 at 9:16pm
And if Romney was motivated by hopes for re-election, why is he the only senator in US history to vote to impeach a president of his own party?
Jose Pablo
Feb 8 2021 at 7:13pm
“Why not make the child allowance fully universal …?”
That’s a great idea, but why financing it thru a boosting of the payroll taxes? (which is a terrible idea).
It would be much better financing this “universal allowance” thru the disappearance of all the other “poverty reduction” programs and thru the introduction of a VAT (even better: use also this two to get rid of all the income taxes … at every level of income).
This universal income could also be used to eliminate all the existing (and incoming) minimum wage legislation.
Scott Sumner
Feb 8 2021 at 9:19pm
I’m strongly in favor of abolishing the income tax. A payroll tax is similar to a VAT in that they are both consumption taxes.
robc
Feb 9 2021 at 9:05am
I realize it depends on the details, but a payroll tax looks a helluva lot more similar to an income tax than to a VAT, especially for those of us who the vast majority of our income is on our W-2.
In many ways, it is less of a consumption tax than the income tax, as it is applied before certain deductions (401k, IRA, etc) unlike the income tax.
Now the Hendersonian flat tax with unlimited deduction for retirement accounts is more similar to a consumption tax. But neither FICA nor the local payroll taxes I used to pay in KY fit that.
Scott Sumner
Feb 9 2021 at 12:54pm
It may not look that way, but in a long run a flat payroll tax and a flat VAT are identical in effect and incidence. Do a two period thought experiment with labor income in period one, and consumption spread over two periods. The payroll tax and the VAT are identical, while the income tax taxes period two consumption at a higher rate than period one consumption.
robc
Feb 9 2021 at 2:10pm
Wouldn’t the result depend on the size of the standard deduction for the income tax and the existence or non-existence of any form of negative income tax, such as EITC or refundable tax credits?
I see your point, the flat payroll tax is the same as the consumption tax, ignoring savings. The income tax will be different, but whether period two is taxed higher or lower depends upon the details.
Of course, ignoring savings is the big point. A consumption tax allows for avoiding or delaying of paying the tax by saving instead of consuming. Which is why I mentioned Hendersons* idea of the flat tax with the unlimited 401k/IRA.
*I dont know if it is original with him or not. Actually, I don’t think that is his idea, now that I write it. His was keeping the progressive tax with the unlimited 401k to make it a progressive consumption tax. And I should be clear that I dont think that is his preferred option either.
Jose Pablo
Feb 10 2021 at 9:45am
Maybe Scott, and also, if transaction costs are small enough, the institutional system you start with is irrelevant (following Coase) and yet I would prefer to start with a market system rather that with a communist government one.
VAT does not allow, for example, to fool you believing that your employer share of the payroll taxes is actually reducing your employer consumption and not yours.
Tax Incidence is an extremely difficult exercise. Keeping the system simple and clear in the mind of the taxpayer (and not only on the “blackboard”) helps. I think.
JP
Feb 9 2021 at 8:55am
It’s always uncomfortable to read lines like “Some conservatives like….Some conservatives worry…I also don’t share this worry.” Either name them or don’t make broad generalizations. This first point about conservatives has many defenders (e.g. Ross Douthat) while the second point doesn’t and seems to be there to make the author feel good (e.g. I’m not one of those people). In an otherwise good post, this paragraph subtracts rather than add.
Scott Sumner
Feb 9 2021 at 12:56pm
It’s an argument I’ve heard from some conservatives. But perhaps I should have just said “some people.”
robc
Feb 9 2021 at 2:11pm
I think the one thing that can be agreed upon (mostly) is that the current tax system is far from the best option. There are a dozen easy to implement options that are better than the current one, even if 11 of them aren’t optimal.
Jose Pablo
Feb 10 2021 at 9:35am
The tax code has 2.4 million words, and it is not the only document taxpayer has to deal with when filling their income tax.
The Tax Foundation estimates that there are ” 7.7 million words of tax regulations from the IRS and 60,000 pages of case law that is tax related. These are not law, but are also important pieces of understanding taxes”.
It is extremely difficult that you required 7.7 million words for constructing an “optimal system” (Occam would be puzzled).
And it should not be optimal since its size keep increasing (I would expect an “optimal solution” being more “stable”): the tax code has gone from 409,000 words in 1955 to 1.2 million words in 1985 to 2.4 million words in 2017.
You can even say that it is worse every year since it required about 26,000 pages of amendments per year in the 1955-1985 period and 37,500 pages of amendment per year in the 1985-2015 period.
You need to read 100 pages of new tax code every single day (Saturdays, Sundays and Thanksgiving included) just to keep you updated on your tax obligations.
To say that this system is “not optimal” is a serious candidate to “the biggest understatement in the history of humankind” contest.
robc
Feb 10 2021 at 11:19am
Did you misunderstand me?
I was implying the current system is far from optimal. Almost any change would be an improvement. What I was saying is that of the dozen or so suggestions that would be better than the current system, only 1 is optimal*, but the other suggestions would still be better than the current system.
*It is the single land tax, but that isn’t the point.
Jose Pablo
Feb 10 2021 at 1:06pm
Not at all … actually I was trying to support your point (as amost always) …
Sorry for the irony overdose …
Yaakov
Feb 10 2021 at 4:15am
Israel has a universal child allowance of about $560 a year per child, with about an extra $150 a year for children 2-4 of the family. The rates used to be much higher for large families, until in 2003 there was a big political backlash and the rates were cut. Following the cut, the participation in the workforce increased dramatically, Fertility rates decreased among communities who used to have large families and poverty rates slowly decreased.
Scott Sumner
Feb 10 2021 at 1:15pm
Good point. It is important that the benefit not be made so large that it discourages people from working.
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