Bryan Caplan  

Are Natalist Tax Incentives a Free Lunch?

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Almost all economists ridicule the notion that - at its current margin - the U.S. government can raise revenue by cutting taxes. Well, let me put forward a promising new candidate for a free lunch tax cut: Much lower taxes for families who have additional children.

According to Arthur Brooks (of Gross National Happiness fame), Ronald Lee and Tim Miller estimate that from the point of view of the IRS, the net present discounted value of the average American child is $100,000. If $99,999 in tax incentives produce one more child, it's a good deal. In fact, it's a no-brainer.

What fraction of couples of child-bearing age would accept such an offer? It's got to be at least 25%, doesn't it? Of course, you'll dilute the incentive if e.g. pre-existing large families headed by parents in their 40s qualify, too. But even if natalist incentives were quite bluntly targeted, they could easily be the kind of free lunch that Laffer dreamed of.

Admittedly, unlike the usual Laffer curve story, you have to wait decades for natalist tax cuts to pay off. But since Lee and Miller's estimate is a present value, that's already accounted for. And as long as bond markets work reasonably well, the time pattern of payments makes little difference.

Of course, if you're really looking for a free lunch, you'd give extra-big natalist tax incentives to the rich, because their kids are especially likely to pay a lot more taxes than they consume in services. But hey, we should probably stick to one outrageous proposal at a time.


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CATEGORIES: Tax Reform
Twitter: Bryan Caplan @bryan_caplan



COMMENTS (14 to date)
Psychohistorian writes:

This is ignoring the basic problem that adding such an incentive would itself alter the average present discounted value of a child for two reasons: (probably) diminishing marginal returns and (almost definitely) changes in the demographic of who has kids.

It is likely that people most willing to start making kids for large amounts of cash may also not parent them well, and may already have been producing sub-average-productivity kids to begin with. Of course, the incentive might help some people improve their parenting, but others will simply see the kid as a cost to pay to get their hundred grand.

Brandon Berg writes:

As long as it's non-refundable, a $100,000 per child income tax credit actually would target the rich, or at least the upper middle class, because no one else pays that much in income taxes.

MouseJunior writes:

Seems like an excellent way to convince people like me to leave the country.

Taxes pay for services generally accepted as necessary. In order to make up for the deficit created by obliterating the share of public money added by parents (which is what you're talking about), you'd need to jack marginal rates on the childless up to about 100%, which is a pretty blunt message that we're not wanted and should take our assets elsewhere. See how far you get with only parents, none of whom pay for anything.

Anthony writes:

"Ronald Lee and Tim Miller estimate that from the point of view of the IRS, the net present discounted value of the average American child is $100,000."

Does "the point of view of the IRS" fail to factor in the additional expenditures of the government for these children? If not, this number seems ridiculously wrong. Don't we have enough people in this country already?

On that note, I wonder what Ronald Lee and Tim Miller would estimate, from the point of view of the IRS, the net present discounted value of the average Mexican legal immigrant.

Brandon Berg writes:

It's also worth noting that a big chunk--probably a large majority--of the subsidies would be wasted on inframarginal children. Sure, you could limit it to children born after the tax code is changed, but that doesn't do anything to change the fact that most of the children born after the subsidy is in place would have been born anyway.

So if a subsidy with an NPV of $100,000 increases the birth rate by 25%, the government is actually giving up $500,000 in revenue per extra child born. To get the free lunch you suggest, you'd have to increase the birth rate by 25% with only a $20,000 subsidy.

FC writes:
Taxes pay for services generally accepted as necessary.

Ever heard of public choice theory?

Eli writes:

Brandon, you could get around most of the inframarginal issues by targeting only third and subsequent children.

Bryan, capital markets would have to work really well. After all, the children born under this system would also be likely to have lots of children and therefore avoid paying taxes. The government would have to deficit-finance in perpetuity. What we really have is a g>r situation. I'm sure you've talked to Tyler about this.

SheetWise writes:
Almost all economists ridicule the notion that - at its current margin - the U.S. government can raise revenue by cutting taxes.

I'm not sure what you mean. As we all know, Reagan raised taxes, he cut rates. If you meant "Economists ridicule the notion the US can raise revenue by cutting tax rates", that surprises me.

I would expect economists to have a little more humility. Every tax bracket is at an optimal level? Come on. Do economists ever study the underground economy? People move in and out all the time -- often motivated by the stupid things governments do, thinking taxpayers will blindly follow ...

And the tax code actually does offer several ways for wealthier parents to get a larger write-off for children.

Anthony writes:

"To get the free lunch you suggest, you'd have to increase the birth rate by 25% with only a $20,000 subsidy."

Then the current subsidy of $1000/year for 17 years isn't too far off, except for the phase-out.

"Bryan, capital markets would have to work really well. After all, the children born under this system would also be likely to have lots of children and therefore avoid paying taxes. The government would have to deficit-finance in perpetuity."

Hyperinflation would probably kick in until the $100,000 wasn't so significant any more.

I guess that's one way to raise revenue by cutting taxes - cause hyperinflation.

Loki on the run writes:
Of course, if you're really looking for a free lunch, you'd give extra-big natalist tax incentives to the rich, because their kids are especially likely to pay a lot more taxes than they consume in services. But hey, we should probably stick to one outrageous proposal at a time.

I'm sure that can't be true! Isn't it the case the the rich consume many times more than their fair share of services and good will than the poor, which is why we have a progressive taxation system.

MouseJunior writes:

Ever heard of public choice theory?

Yes. It's a complicated theory about a very simple problem: everybody makes political decisions that are in their personal rational best interest but that turn out to be pathological for the group as a whole.

Bryan's proposal is an excellent example of this kind of short term rational-stupid decision: decrease taxes on a group of people who use the most services, increase taxes on the group of people who use the fewest to cover the deficit, and don't bother to consider that those people, who have the fewest reasons not to vote with their feet, might just decide to do so.

Les writes:

It seems to me that the argument is not complex. All transactions in the private sector that are not made under duress are Pareto-efficient, otherwise they would not be consummated. But transactions involving government cannot be shown to be Pareto-efficient because they are made under duress.

Therefore economic efficiency requires that transactions involving government should be avoided in all situations - except where there are no private sector substitutes for public goods, namely national defense against hostile external enemies and a criminal justice system to protect us from domestic crime.

It follows that taxes should be limited to necessary government expenditures to provide national defense against hostile external enemies and a criminal justice system to protect us from domestic crime. And not a penny more.

David writes:

What if instead of a huge tax credit up front, the federal government instead reinstated one of the traditional reasons for having children?
By that I mean, suppose that the federal government kicked back 10% of the net federal taxation (that is, taxes paid minus transfer payments received) from your children each year after you reached 60 years of age.
This approach should avoid a lot of the drawbacks of the tax credit approach, and creates a strong incentive to raise productive children.

Taimyoboi writes:

Ramesh Ponnuru has been making this, and similar, points for at least two years over at National Review regarding pro-family, pro-natalist tax policies.

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