A little credit, please - Republican Party backs child tax-credit proposal - On the Scene

National Review, Oct 24, 1994 by Lawrence A. Kudlow

The $500-per-child tax credit, long favored by social conservatives such as Marshall Wittmann and Ralph Reed of the Christian Coalition and Gary Bauer of the Family Research Council, has just become Republican Party policy. A key plank in Newt Gingrich's Contract with America, the child credit shows the new political muscle of the Christian Right. It also shows the GOP's explicit commitment to promoting traditional families. And while the family tax credit by itself will not enhance long-term economic growth, it could well represent a significant step in the GOP effort to reclaim middle-class voters who deserted George Bush in 1992.

The supply-side growth wing of the party strongly opposed the tax credit, arguing that the absence of marginal-tax-rate reduction means no new rewards for the extra hour worked, dollar invested, or risk taken. Many supply-siders regard tax credits as the equivalent of dropping money from helicopters. "It wont change economic behavior, and it won't stimulate the economy," argues former Reagan advisor Steve Entin. Furthermore, in the plan adopted by Gingrich, childless couples, single taxpayers, and older couples whose children are over 18 would get no tax cut at all.

And the credit comes with a $200,000 means test, put in by Representative Chris Shays (R., Conn.) and others as the price of their support for the whole Gingrich package. This provision creates a nasty penalty for successful working families. According to supply-sider Cesar Conda of the De Tocqueville Institution, an entrepreneur with four kids, making just under $200,000, will face a marginal tax rate of nearly 80 per cent if he increases his income by $5,000. (Insisting on an income cap may seem out of character for Mr. Shays, who favored across-the-board tax-rate relief instead of the family credit; but he was concerned about another class-warfare debate on the House floor.)

Cultural conservatives actually preferred a universal child credit and opposed the means test. But for them, economic growth is not the immediate point. "We are trying to marry the economic issues with the social issues," says the Christian Coalition's Marshall Wittmann. He argues that more budget resources must be transferred from the Federal Government to the family in order to defund Clinton social experimentation, especially the sex education and condom distribution favored by Joycelyn Elders and the new Goals 2000 education programs.

Similar views were expressed by Heritage Foundation economist Scott Hodge, who became the cultural Right's chief number-cruncher during the debate. "It's pure social policy, but it does have economic content," he told me. Hodge believes that family tax credits will build a constituency against pork-barrel spending by showing congressmen that budget cuts will go directly to middle-income families. In direct contrast to the Clinton Administration, which tried to buy middle-class votes with expanded entitlements for health, welfare, and income security, social conservatives want to use the child credit to attract pro-family Reagan and Perot Democrats with the promise of less government and fatter private wallets.

Hodge calculates that the $500-per-child tax credit would benefit 52 million children, or 36 million families. "With a price tag of $107 billion, we can gain the loyalty of 36 million families and force a major reduction in government spending," he says.

What's more, Hodge and other social conservatives believe the child credit - along with elimination of the marriage penalty and a rollback of the recent tax hike on Social Security benefits - will lay the coalition groundwork for future tax cuts. Indeed, what is so striking about the current tax debate among social and supply-side conservatives is the agreement on the need for lower taxes, smaller government, and more growth. The sometimes heated debate in the run-up to Gingrich's September 27 rally on the Capitol steps was really an argument over tactics, not goals.

All the social conservatives I spoke to favored a long-run program of across-the-board tax-rate reduction, including repeal of the Bush-Clinton tax hikes. They also strongly supported proposals indexing and cutting the capital-gains tax, and neutral cost-expensing of business-equipment purchases (to speed depreciation write-offs), both of which are pro-growth and are included in the Gingrich package. Tactically, many people believe that capital-gains relief - always portrayed by Beltway insiders as "tax cuts for the rich" - could be successful only if linked to middle-class tax reduction.

Looking beyond the hoped-for first hundred days of a Republican Congress, Gingrich has already commissioned Representative Jim Saxton (R., N.J.) to come up with an across-the-board tax cut, one that might move income-tax rates back to the 15 and 28 per cent brackets of the 1986 tax reform bill, or perhaps toward the single-rate flat tax advocated by Representative Dick Armey (R., Tex.). (Many free-market types like Armey's proposal, but eliminating deductions for home-mortgage interest, charity, pension contributions, and state and local taxes is a bad idea. It would wreck the housing market, and, over the long term, rates would creep back up, leaving taxpayers worse off.)