Taxes

Babies or Board Rooms? Tax Bill Tests Republican Loyalties

The public disagreement is a refreshing change from chanting that tax cuts -- any tax cuts -- will be wonderful for all.

Kissing babies is good politics. But historically so are corporate tax cuts....

Photographer: Chip Somodevilla/Getty Images

Friday, Dec. 1, 2017, will undoubtedly go down in history as one of the most exciting news cycles of the Trump administration. As many of you are undoubtedly already aware, this was the day when Mitch McConnell announced that the Senate had enough votes to pass tax reform.

Oh, you were thinking of something else? What’s more exciting than a tax bill? That’s right: absolutely nothing.

This tax bill has been more exciting than most, because it’s touched off some internecine warfare between the natalist and the growth wings of the Republican Party. The natalists don’t care all that much about corporate taxes or marginal income tax rates on high earners; what they want is a tax bill that offers stronger financial support to families. The growth wing, on the other hand, wants those good old-fashioned Republican tax cuts, focused on lower corporate income taxes, lower marginal rates, and slashing, or better-yet ending, the estate tax.

This is a private conversation that has been going on for a long time, and it often gets quite heated. But this week, the volume knob got dialed up to 11.

The first draft of the Republican plan was basically all growth, no natalism: a huge corporate income tax cut, a modest reduction in personal income taxes (though not for everyone, as high earners in blue states got slammed by the loss of valuable itemized deductions), and a fond farewell to the estate tax. But the natalist reformicons were not content to sit by without a fight. A few days ago, Senators Mike Lee and Marco Rubio introduced an amendment that would trim the corporate tax cut in order to offer families a bigger, refundable tax credit.

This touched off bitter recriminations between the two wings of the party, with the growth side complaining that Rubio and Lee were splitting the caucus at the worst possible moment, while the natalists retorted that if asking for a quite modest change really risked splitting the caucus, then the problem was not with them, but with the supply-siders who weren’t willing to compromise.

Ross Douthat of the New York Times launched into an epic rant on Twitter, aimed at Trump supporters, in which he pointed out that the president had come out against “a conservative policy that's actually mildly responsive to the trends all these folks freaking about the Twilight of the West (TM) claim to care about” because “he doesn't want to take any $ away from his yuge tax cut for the very globalist types that all these guys claim to be against.”

When tempers had cooled a bit, he offered some caveats, including the observation that “it's possible to believe that growth drives birthrates and corporate tax cuts drive growth and so they're more pro-natalist than overt family-friendly policy.” This was big of him to say, but with all due respect to Ross, I’m not sure that’s right.

That is, it is possible to believe that, in the sense that it is possible to believe that somewhere in this vast universe of ours, there is a planet composed entirely of marshmallow, where chocolate rivers run through beautiful lollipop forests. But there isn’t really any reason to believe it. And so with the theory that the original GOP tax bill will make more babies.

You can think of the GOP tax bill as doing basically four things: cutting marginal income tax rates for many taxpayers; cutting corporate income taxes; eliminating many deductions; getting rid of the estate tax. There’s more, of course, but these are the main provisions. Which of these is supposed to be natalist?

The income tax rates? Well, we can tell a story where being richer lets more people choose to have kids. But this is at best scattershot compared to giving people a tax credit when they have kids. More importantly, by the logic of the supply-sider growth promises, it’s probably backward.

How, after all, do cuts to the marginal income tax rate promote growth? Well, it’s effectively an hourly wage increase, since you can take home more of your pay. And how do people respond to a wage increase? We assume that when wages go up they want to work more. 1 Labor supply increases, and so does GDP.

But people who have children will notice that it is very hard to increase your hours with a kid at home. Unless you make multiple-nanny money, at least one partner has to be there a lot of the time -- putting Kraft dinner on the table, nagging the kids about their homework, making sure that they have two clean socks and some jeans to wear to school. Effectively, raising the available hourly wage increases the cost of having a kid: you now have to sacrifice more consumption in order to have another child. We’d expect to see fewer births, not more.

What about the corporate tax cut? Well, how do we think this works? Are we incentivizing entrepreneurs? It’s darned hard to start a firm while parenting your children. Are we incentivizing corporate investment? You can tell a shaggy-dog story where after a lot of rounds of this, we’ve made the economy so darn productive that people hardly need to work at all. But “let’s reform our way to mass unemployment” is not really a story that supply-siders like to tell, and it’s certainly not one likely to appeal to the MAGA folks that Douthat was trying to reach with his original tweetstorm.

Nor does it seem to be that likely an outcome. Much more likely is that the corporate tax cut shows up as a combination of 1) higher wages, which will put downward pressure on births and 2) dividends to shareholders, many of whom are institutions that don’t have kids, and most of the rest of whom are either a) too rich to care about the financial cost of children or b) not making their childbearing decisions based on what they expect to get out of their 401(k) four decades hence.

That leaves us the variously lowered deductions, which seem tremendously unlikely to affect childbearing (except possibly, in the case of the deduction for home mortgage interest, to lower it). And the estate tax. You can tell a story where people who have $20 million dollars in the bank become more interested in having children when they can leave more of it tax free to the kids. But I do not find this story plausible, and frankly, I doubt anyone else does either. People in their prime childbearing years simply do not spend this much time thinking about their own deaths. And people with assets find plenty of ways to use them to benefit their children.

So no, I don’t think that you can believe that the original design of the tax bill was better designed to promote childbearing than the proposed amendment -- at least, not in good faith. The arguments within the Republican coalition involve real tradeoffs that cannot be finessed by declaring that “It’s a floor wax, and also a dessert topping!”

Republicans have too long tried to make those sorts of claims for tax policy -- that cuts would lower bills and raise more money, that a change in the tax code could be all things to all people, and make it Christmas every day. It’s a healthy sign that Republicans are starting to have heated public arguments, rather than unanimously chanting that tax cuts -- any tax cuts -- will be wonderful for all. Real policies involve tradeoffs and priorities, choices and values. And good policy debates start by admitting that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
  1. Actually, this strong supply-sider theory is not very sound, because there’s a countervailing effect: as effective wages go up, people may decide that they’d rather maintain the lifestyle they had and enjoy more leisure, so that a tax cut could actually result in people working less. But we’re trying to engage with supply-siders on their own terms, and they think that labor supply goes up. 

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net

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