The Magazine

THE SOLUTION TO EVERYTHING

The Case for a Family-Friendly Tax Cut

Dec 14, 1998, Vol. 4, No. 13 • By ALLAN CARLSON and DAVID BLANKENHORN
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Almost everyone in Congress wants to "save" Social Security. And return some of the current budget surplus to the people in the form of tax cuts. And get rid of the much-discussed marriage penalty in which, perversely, some married couples pay more in federal taxes than the two of them together would have paid if they had remained single. And, let's not forget, improve child care and strengthen the American family. And, finally, get something (anything!) passed and signed into law in 1999 that would be substantive, bipartisan, and politically popular.

Fortunately, much of this good work can be accomplished in one lick, by mixing supply-side economic theory with a dose of promarriage sentiment, topped off with a profound insight from Gunnar Myrdal, the Swedish socialist and intellectual father of the modern welfare state. Call it The Solution to Everything. Or, more modestly, call it family-supportive tax reform.

Consider Social Security. In our pay-as-you-go system, the most important thing that working adults contribute is not money, but children. Current predictions of disastrous shortfalls in the Social Security trust fund after the year 2020, as the baby boomers become expensive retirees, assume that our currently low birth rate is an immutable social fact. Accordingly, most ideas to save the trust fund involve some combination of higher taxes, reduced benefits, and later ages of retirement. But all of the currently proposed solutions ignore the possibility and desirability of bringing more children -- more twenty-first-century contributors to the trust fund -- into the world now.

We estimate that each additional child born in the next ten years will contribute (using 1998 figures) an average of $ 242,000 to the trust fund during his or her working life. An additional 100,000 children born in any one year would contribute an additional $ 24.3 billion to the system. If U.S. marital fertility were to return to where it was in 1970 -- about 2.5 children per married couple, as opposed to 1.6 children per couple today -- the additional births in just one year would eventually add $ 274 billion to the trust fund. You get the idea. Additional children born into responsible homes would go some distance toward solving the Social Security problem.

This was the great insight of Gunnar Myrdal. He realized that the modern welfare state's program of old-age retirement benefits, which he strongly supported, largely socialized the long-term economic benefits of having children, thereby sharply reducing the individual couple's economic incentive to have and raise children. But you can't run a benefits system forever based on a constantly shrinking pool of contributors. For this reason, Myrdal pushed hard for an explicitly pro-child family policy -- a system of family-supportive tax measures and other benefits aimed at countering the anti-child incentives inadvertently created by many features of the modern welfare state.

Okay, so Myrdal was a socialist. But for conservatives, he could have easily and properly called his idea "supply-side" family policy. The essential notion is that we do have the power to grow our way out of a budget deficit, by doing something that is fun and that would also, by the way, produce enormous and multiple social benefits. Of course, demography does not determine culture. At the same time, for those who fret about our cultural condition, on issues ranging from vulgarity on television to "me-first" moral values, could any demographic shift imaginable bode better for us than more married couples having more children?

Can new economic incentives produce new children? Experience in Europe suggests that direct government grants, or "child allowances," have little long-term impact on fertility. However, the well-established U.S. alternative -- tax benefits keyed to marriage and family size -- does have a record of success in promoting more births. U.S. research by the demographer Leslie Whittington shows a strong, positive relationship between fertility and the real value of tax exemptions for children. Using her model, a team of researchers predicted that the 1986 tax reform, which increased the personal exemption for children, would raise fertility by 7.5 births per 1,000 women by 1990. The actual increase turned out to be 5.5. Other U.S. research shows that family-supportive tax benefits directly encourage more parental time spent in child-rearing, thus increasing what economists call human capital.