At the American Enterprise Institute today, Senator Mike Lee (R-UT) unveiled the broad outlines for his tax plan, which he will introduce into the Senate in the upcoming days. The plan focuses on broadening the base, lowering rates, consolidating tax brackets and simplifying the tax code. However, the emphasis of Lee’s plan is to eliminate the parent tax penalty. Here’s how Lee described the penalty today:
Under the current system, all seniors are entitled to the same benefits, based on their total lifetime contributions.
But parents are required to contribute to this system not once, but twice. First, when they pay their taxes, just like everyone else. And then again, by bearing the enormous economic costs of raising their children, who in time, of course, grow up to become the next generation of taxpayers.
Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids.
Lee’s plan, appropriately titled the Family, Fairness and Opportunity Tax Reform Act, creates a $2,500 per-child tax credit applicable to both payroll and income taxes. This last part is particularly important. Many poor Americans don’t pay income taxes, but they do pay payroll taxes. Making the credit applicable to payroll taxes allows those low-income parents to benefit from it as well. This corrects the parent tax penalty for all parents.
The freshman senator emphasized later that the purpose of this credit was to correct an unfairness in the tax code, not to influence the childbearing decisions of Americans.
“My plan would simply level the playing field to treat all taxpayers more equally,” he said. “It’s not social engineering.”
The Family, Fairness and Opportunity Tax Reform Act would create two tax brackets. The first would be at 15% for individuals with incomes less than $87,850 (and double that for married couples). All income above those thresholds would be taxed at 35%. In addition, Lee would create a new mortgage interest deduction capped at $300,000 worth of principal and a new charitable deduction available to all taxpayers, not just those who file itemized deductions. Both of these are alterations to current popular deductions intended to distribute the benefits of them more evenly across the income spectrum. At the moment, high-income homeowners reap most of the benefits of the home interest deduction as they pay a large proportion of mortgage payments. Low-income individuals are also less likely to itemize their deductions so they are unable to take advantage of the charitable deduction in the current system.
Lee’s plan also eliminates special interest loopholes, the state and local deduction and repeals Obamacare taxes and the AMT. You can read the rest of it here. He estimates that it will raise revenue equal to approximately 18-20% of GDP, which is right in line with the historical average. The Joint Committee on Taxation will take it up in the near future after Lee officially files the bill and will score it. Hopefully others will look at the distributional impact of the plan as well. It’s a promising piece of legislation that deserves an honest debate and conversation. I’m looking forward to having it.