James Pethokoukis

Politics and policy from inside Washington

Tax cuts for companies — but not kids?

November 8, 2010

Doug Holtz-Eakin gives a perfectly lucid explanation of why the U.S. needs to cut its corporate tax rate, allow immediate expensing of capital purchases and end worldwide taxation of  profits. But then his deficit hawkishness emerges:

Note, however, that not all components of the Bush tax laws are equally likely to foster growth. Marginal tax rates and the taxation of dividends and capital gains directly affect companies’ decisions about innovation, investment, and savings. But refundable tax credits, marriage-penalty relief, and other targeted incentives within the Bush laws make no contribution to growth. These provisions may become unaffordable luxuries.

So the GOP is going to cut taxes on companies but be perceived as raising taxes on families and children? (I know, I know — 70 percent of corporate taxes are paid by workers.) An alternative is this proposal by economist Bob Stein, who think the GOP needs an  tax agenda that is pro-family as well as pro-growth. The biggest item would be a $4000 per child tax credit (offsetting income and payroll taxes) that would grow at the same rate as wages, not inflation. In turn, high-income taxpayers would get fewer deductions:

Overall, the plan is designed to be revenue neutral — and yet most taxpayers without children will pay a little bit less in taxes, while middle- class families with children under 18 years of age will pay substantially less. So who pays more? Primarily high-income workers, but also upper-middle-class taxpayers who do not have children in the home (either because they have decided not to raise children at all, or because their children have already turned 18).

To be blunt, the plan is a tax hike on the rich and makes the tax code even more progressive than it is today. Given the loss of the state and local tax deduction, the tax hike will be particularly acute for high earners from high-tax states. And although the top income-tax rate would be capped at 35%, that rate would kick in at lower income levels than it does today. The result would be a marginal tax-rate hike — and a corresponding weakening of work incentives — for many workers who today find themselves in the 25%, 28%, and 33% brackets.

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