Tax Reform, the Family, and the Pursuit of Happiness

Remarks delivered to the American Enterprise Institute, September 17, 2013.

Thank you very much, Arthur”both for that kind introduction and for everything you do to advance the cause of human freedom.

And a Happy Constitution Day to you all.

Now, you might think there are few demographic groups more easily stereotyped than middle aged, Mormon, constitutional lawyers.

But let me tell you, every year on September 17th, after you get a few 7-Ups into us, all bets are off. Or would be, if any of us gambled.

For on Constitution Day, from the J. Reuben Clark Law School at BYU, to the Utah Supreme Court, to the Provo Chapter of the Federalist Society, we will be partying like it’s 1787.

It is a privilege to be here at the American Enterprise Institute. A.E.I. has been the home of so many distinguished scholars who have influenced my own thinking over the years.

And far more importantly, A.E.I. scholars have for decades influenced everyone’s thinking, really”by challenging and transforming public policy debates in Washington and around the country. I am here today because I believe the public policy status quo in Washington”and in particular, within the Republican Party”must once again be challenged and transformed.

As Arthur mentioned, the focus of my remarks will be the new tax reform proposal I will soon be introducing in the Senate.

But before I get into the specifics of the legislation, I think it’s important to explain the problem it has been designed to solve.

On this Constitution Day, allow me to begin with thoughts from perhaps the two most important constitutionalists in American history.

The first, from James Madison, is that the “object of government,” is “the happiness of the people.”

The second, from Abraham Lincoln, is that the role of government is:

“ . . . .to lift artificial weights from all shoulders, to clear the paths of laudable pursuit for all, to afford all an unfettered start and a fair chance in the race of life.”

Taken together, these two insights offer an almost perfect distillation of what America”and the Republican Party, at its best ”stand for: equal opportunity, for all, to pursue happiness.

Today, this fundamental American ideal is hanging by a thread.

Up and down American society”which used to be defined and driven by what Tocqueville called our “yearning desire to rise””we find a new and unnatural stagnancy.

We find the underprivileged trapped in poverty, sometimes for generations.

We find the middle class caught on a treadmill, running harder every year just to maintain the economic security and social cohesion that were once taken for granted.

Meanwhile, at the top of our society, we find a political and economic elite that”having reached the highest rungs”has pulled up the ladder behind itself, denying others the chance even to climb.

From Wall Street to K Street to Pennsylvania Avenue, we find special interests increasingly exempted and insulated” by law” from the rigors of competition and the consequences of their own mistakes.

All of this points to what really is an inequality crisis in America today”a crisis not of unequal wealth of income . . . but unequal opportunity .

Progressives, from the president on down, say that inequality in America today is a failure of the free market, resulting from insufficient government intervention.

But if you look closely, you start to notice, the opposite is true.

Today, many of Lincoln’s “artificial weights” and obstacles blocking his “paths of laudable pursuit” are themselves dysfunctional government policies.

It is government policies, after all, that trap poor children in rotten schools; poor families in broken neighborhoods; that penalize single parents for getting raises, or getting married.

It is government policies that inflate costs and limit access to quality schools and health care; that hamstring badly needed innovation in higher education; and penalize parents’ investment in their children.

Much more on that in a moment.

And of course it is government policy that gives preferential treatment and subsidies to well-connected corporations and special interests at the expense of everyone else.

Seen in this light, there is a very good reason why Americans across the political spectrum”from the Tea Party to the Occupy movement”believe our system has become rigged.

Rigged for big government, big business, and big special interests. And rigged against the ordinary citizens and forgotten families who work hard, play by the rules, and live within their means.

More and more every day, the system is rigged. The market can’t do that. Only government can. And it does.

Government at all levels”but especially in Washington, not coincidentally now home to six of America’s ten wealthiest counties”is in effect redistributing opportunity from the poor and middle class . . . to government itself and its clients and cronies.

This inequality crisis”including government’s role in it and the millions of struggling families it is leaving behind”is the great social and economic challenge facing the United States today.

It is also the great challenge facing the Republican Party.

For it is our own deepest convictions about the pursuit of happiness and the very meaning of America that this opportunity crisis subverts.

Without equal opportunity, our free enterprise economy and voluntary civil society”the twin pillars of American exceptionalism”break down.

When government twists the law to benefit the well-connected at the expense of the disconnected, America ceases to be exceptional.

And the Land of Opportunity . . . isn’t.

This is not merely a case of sub-optimal policymaking”especially when Republicans go along with it.

For the Party of Lincoln to indulge in the politics of privilege is a corruption of everything we are supposed stand for.

To rescue the nation”and ourselves”from this crisis of unequal opportunity, the Republican Party must return to its own truest self.

Not simply on behalf of those Americans who have fairly worked their way up the ladder of success”but for those still climbing . . . and especially those clinging to the lowest rungs.

For a political party too often seen as out of touch, aligned with the rich, indifferent to the less fortunate, and uninterested in solving the problems of working families, Republicans could not ask for a more worthy cause around which to build a new conservative reform agenda.

And so, the great challenge to the Republican Party is to craft such an agenda that is at once more responsive to the inequality crisis plaguing American society today, and more consistent with our true, conservative principles.

The core of that agenda should be restoring equal opportunity”the natural, God-given right to pursue happiness”to the individuals, communities, and institutions from whom it has been unfairly taken.

This new agenda should ultimately address the ongoing problems of immobility at the bottom of our economy, insecurity within the middle class, and cronyist privilege at the top.

But the first and most important piece of this “pursuit of happiness” agenda should restore equal opportunity to the first and most important institution of them all . . . .

The institution that unites all Americans regardless of race, class, creed, or politics: the institution of the family.

Here, I am not speaking about the family as a moral or cultural institution”strictly as a social and economic one.

Conservatives sometimes get criticized for putting too much emphasis on the family in policy debates. But a growing body of evidence”much of it developed here at A.E.I.”suggests the critics have it backwards. The real problem may be that we don’t think about family enough .

For family is not just one of the major institutions through which people pursue happiness. It is the one upon which all the others depend.

More than that, in recent years, the family has emerged as perhaps the most important institution in our economy .

The family is an incubator of economic opportunity, and an indicator of economic success.

It is every individual’s primary source of human and social capital: habits and skills like empathy, self-discipline, trust, and cooperation that grow more economically important every day.

The family is where we learn the skills to access and succeed in America’s market economy and civil society . . . and thereby create new opportunities for others to do the same.

The primacy of family should inform conservative policies about everything from welfare to education to transportation to criminal justice.

If there is any single group of people in the entire country whose equal opportunity to pursue happiness we should make sure to protect, it is our ultimate entrepreneurial and investor class: America’s moms and dads.

Yet sure enough, the federal government actually singles out parents of young children for unfair and extremely expensive discrimination.

Which brings me to the tax reform plan I will be introducing in the Senate in coming days.

The “Family Fairness and Opportunity Tax Reform Act” is based on the traditional conservative tax reform principles of simplicity, efficiency, and fairness.

It lowers rates, consolidates brackets, and eliminates deductions and loopholes.

Economic conservatives have for decades supported fundamental tax reform that accomplishes these goals. And so have I.

But the problem is, there’s another problem. It’s a hidden problem that even thoughtful, conservative proposals might accidentally make worse.

That problem is what I call the Parent Tax Penalty.

Here’s how it works.

As you know, the federal senior entitlement programs”Social Security and Medicare”operate as generational transfer payments, not individual insurance policies.

Taxes that workers pay today fund today’s seniors’ benefits . In the same way, when you retire, your benefits then will be paid by the taxes of workers in the future.

In the simplest terms, any one generation pays for the Social Security and Medicare benefits of its parents . . . and then, in turn, has its own benefits paid by its children.

Therein lies the familiar bargain of the system, but also an unintended consequence: the parent tax penalty.

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.

This is the inequity my bill is designed to highlight and address.

Like any policy mistake, the parent tax penalty can be connected to various distorted incentives and unintended consequences. But for our purposes today, they are mostly beside the point.

This hidden, double tax on parents”in and of itself”violates conservatism’s core principle of equal opportunity.

Another way to think about it is that current policy imposes an enormous “capital gains” tax on the economic, human, and social capital that all parents invest in their children, and in our country.

The current system”including its one-thousand-dollar per child credit”does not begin to offset this unfair tax. It doesn’t really treat children as an investment at all.

We know better than that. We can do better than that. And a new Republican opportunity agenda should.

And so, in coming days I will introduce a bill to reform the tax code”which our sluggish economy already needs”to make it at once more pro-growth, pro-opportunity, and pro-family.

The “Family Fairness and Opportunity Tax Reform Act” would establish two individual income tax rates: 15% on all income up to $87,850”and twice that amount for married couples”and 35% on all income above that.

It would eliminate most existing deductions and credits not related to children, and create in their place the following:

• a $2,000 personal credit to replace the personal exemption and standard deduction;
• a new charitable deduction that would be available to all taxpayers;
• a new mortgage interest deduction, also available to all home-owners, but capped at $300,000 worth of principal, focusing the deduction on the families and communities who need it the most.

And the centerpiece of the plan is an additional $2,500-per child tax credit, available to all parents of younger children. Coupled with existing child tax provisions, this new credit will begin to equalize the tax code’s treatment of parents and children.

To that same end, this new credit would apply not only to income taxes, but parents’ payroll tax liability as well”the employee and employer sides. And it would not phase out.

In sum, this plan consolidates tax brackets, simplifies the code, repeals the AMT and Obamacare tax hikes, lowers rates, and finally begins to address the parent tax penalty.

Now, this plan is not comprehensive. It deals only with individual income, not the corporate side of the code.

Nor is it meant to be the final word on tax reform. It won’t even be my final word on tax reform. Going forward, I would like to:

• lower rates and simplify the code further,
• increase the child credit even more,
• reform the way we tax investments and business income, and
• reform the welfare system to harmonize with this new tax code so that federal policy seamlessly promotes opportunity and upward mobility for underprivileged families as they work their way into the middle class.

It should be noted that the parent tax penalty could be dealt with through entitlement reform rather than tax reform, or a combination of the two.

Each of these goals is essential to economic growth and opportunity. And in my opinion we should pursue them all” but not at the expense of ignoring or exacerbating the parent tax penalty.

For now, this plan is an attempt to apply American conservatism’s oldest principles”equality of opportunity and the pursuit of happiness”to new problems . . . to immediately improve the lives of American families.

Under this plan, a married couple with two children making the median national income of $51,000 would see a tax cut of approximately $5,000 per year.

The expansion of the 15% bracket essentially creates a low, flat tax for about 90% of all individuals and families.

From the perspective of policymakers, this should be a matter of common sense.

Right now, the tax code penalizes parents. It shouldn’t.

Many other loopholes unfairly reallocate wealth from the middle class to the wealthy. That’s wrong.

The state-and-local tax deduction unfairly transfers wealth from low-tax states to high-tax states. That’s wrong, too.

In each case, my plan would simply level the playing field to treat all taxpayers more equally.

But from the perspective of a middle class family, this is an immediate, potentially life-changing reform.

This is money” their own money, right away”for a family to get out of debt, or to move into a better neighborhood with better schools.

It could allow a single mother to afford child care so she could go back to school or take a better job.

It could allow a mom or dad working full time to scale back to part-time . . . or go from part-time to staying at home with young children.

It could mean tuition for a private school, or start-up capital for a small or home business.

It could mean affording health insurance, or community college . . . or cutting back hours at work to coach little league for a season . . . or just making it home in time for family dinner.

It would, in short, restore opportunities to working parents and their children to pursue happiness that right now federal policy unfairly denies them.

Rather than promising struggling individuals, families, and communities a small, unequal share of someone else’s opportunity”as the Left does”this plan seeks to restore to them a full, equal share of their own.

Now, if you are like me”a conservative with a libertarian streak”you might at first raise an eyebrow at all this.

My plan, you might say, may share some features of traditional conservative tax reform . . . but it’s no Flat tax. It’s no consumption tax.

That’s right. It’s better.

Because both of those approaches, though they might be improvements on the status quo, still don’t fix the parent tax penalty. And they might make it worse.

Some skeptics might suggest this plan is just a different kind of tax loophole for a group conservatives like.

Not so.

Like everyone in this room, I hope , I oppose rigging policy to unfairly favor any group”even middle-aged, Mormon, constitutional lawyers.

And that’s why my bill does not tilt the playing field for parents. That would be wrong. Instead, it takes a playing field that is right now tilted against parents, and levels it. That’s only fair.

Others might argue that a top rate of 35 percent is still too high.

I agree.

My plan does cut the top rate, but only to its level before the recent tax hikes. I put off further cuts in this proposal in order to focus attention on the parent tax penalty.

Last year I proposed a complete federal budget that balanced in five years. I am more than happy to lower taxes further as we reduce the size and scope of the federal government.

And, finally, some might worry that increasing the child credit would take more people off the income tax rolls altogether.

And it would.

But then again, people who pay no income tax do pay federal taxes”payroll taxes, gas taxes, and various others.

Working families are not free riders.

And taxpayers’ circumstances change over time. Under my plan”any parents with so many kids that they pay no taxes one year will know that the situation is temporary. When their kids grow up, their taxes will rise.

There is no reason to believe the people my plan temporarily takes off the rolls would support permanent expansions of government. And what we know about the way parents innately focus on the future suggests otherwise.

As with any other plan, there are legitimate questions.

But I submit that with this plan, the tougher the questions, the better the answers.

This plan eliminates an unfair and dysfunctional double standard in the tax code.

It provides substantial, immediate tax relief to middle class parents who today bear a disproportionate share of the tax burden.

It equalizes various other biases in the tax code, and lowers tax rates to encourage new jobs and investment.

It restores to the American people opportunities not only to form new businesses and non-profits, but new families as well.

And it challenges the Republican Party to recognize that most Americans’ most important investments mature much more slowly than bonds. Especially the boys.

This plan is a new idea. But I think it’s one that deserves a seat at the table, as Congress considers tax reform, and the Republican Party considers its future.

In closing, the great challenge that is America’s opportunity crisis ought to be the Republican Party’s opportunity , to remember and once again become what it has always been at its best.

To move beyond what we are against . . . to what we are for . . . to what we are:

The party of Lincoln and Reagan. The party of equal opportunity, social mobility, and economic growth. The party of individual freedom, and the heroic communities free individuals form. The party of the common man, and of America’s uncommon experiment in the pursuit of happiness.

Thank you very much.

Mike Lee is U.S. Senator from Utah and a member of the Senate Judiciary Committee. Image via Wikimedia Commons.

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