Babies and Economics

At least since Gary Becker won the Nobel Memorial Prize in economics almost twenty years ago, I don’t think that we really have the option of treating “social policy” and “economic policy” as hermetically separate categories.

Since I assume that the Wall Street Journal cheered the much-deserved award to Becker, I’ve been confused at the characterization in the WSJ editorial criticized by R.R. Reno in his Monday On the Square that writing children into the tax policy somehow imports improper “social policy,” as opposed to a proper economic purpose, into the income tax code: “This is social policy masquerading as economics. Unlike a cut in marginal tax rates, a larger tax credit does little for growth because it doesn’t change incentives to save, work or invest. It merely rewards taxpayers who have children over those who don’t.”

While I wouldn’t reduce child rearing to an exclusively economic category, I certainly hope that policy makers (and those commenting on policy) recognize an irreducibly economic dimension to child-bearing and child-raising decisions. Labor has long been recognized as a key factor of production, after all. And I don’t know from where else additional labor derives other than from babies and, therefore, from parents.

Indeed, in the not-too-distant past, children often were the only form of “social security” that parents might have. While a lot of things have changed in the relations between the young and the aged, the modern age hasn’t eliminated the dependence of the aged on the young. Rather, modern policies have only diffused that dependence and attenuated natural linkages between young and old (albeit, for the purpose of assisting aged folk who had no children, or who raised ungrateful children).

Instead of helping one’s parents directly as they age, younger folk now pay taxes that support the aged whether they had children or not.

Parents generate positive externalities in the bearing and raising children. That is, parents do not recoup the full economic value that their children will produce. The difference now is that parents recoup even less of the economic value generated by their children than they did in the past. This reduces the marginal incentive that parents have to bear and raise more, rather than fewer, children.

According to standard microeconomic theory, subsidizing the behavior that generates a positive externality is one way to continue that beneficial behavior.

To be sure, a tax deduction distorts efficient economic behavior relative to a non-distortionary tax. That said, I seem to recall from many years ago that the only non-distortionary tax is a head tax (because it’s a constant, the tax drops out when one differentiates an equation that includes the term, and so the tax doesn’t affect economic behavior at the margin). But no one that I know seriously proposes a head tax. And even the so-called flat tax distorts efficient economic behavior. (The flat tax taxes a constant proportion of income, so it does not disappear when differentiated, and distorts optimal economic behavior.)

So I don’t have a clear intuition of just how bad the effect would be of an increase in the child tax deduction in our second-best world.

But there’s no reason to stand on a formalism if that’s what upsets our friends: Let’s eliminate the child tax credit. In its place let me propose the Old Age Assistance Act. This would provide a subsidy – not a tax deduction – of $3,000 to the parents of each child. For convenience, I’d propose that parents file for the subsidy concurrent with their income taxes. To save paper, we can put the subsidy application at the end of the income tax return. Albeit the application for the subsidy should come after the signatures for the tax form. That way we can insure that it’s the subsidy is not taken to be a tax deduction, but rather is understood as an efficiency-enhancing subsidy for the positive-externality producing behavior of parents.

James R. Rogers is associate professor and department head in the Department of Political Science at Texas A&M University.