Britain’s Tax Warning for Marco Rubio Pro-natalist credits don’t work and become new entitlements.
http://www.wsj.com/articles/britains-tax-warning-for-marco-rubio-1446075061
British politics was thrown into turmoil this week when Parliament blocked David Cameron’s plan to reform family tax credits. There’s a warning here for conservatives elsewhere, especially American Presidential candidate Marco Rubio, about the dangers of social engineering through taxation.
At issue is a convoluted tax benefit developed by Tony Blair in 2003 that was supposed to reward low-income work and childbearing. Under 2015-16 rates, low-income families can receive up to £2,780 ($4,263) in refundable credits per nondisabled child and £3,140 per disabled child, in addition to a per-family credit of £545. The per-child benefits go down as incomes rise up to £35,000 a year. Low-income workers with or without children can also earn a working tax credit on incomes below £6,420. The credits now cost some £30 billion per year in lost revenue and refunds to lower earners.
This policy hasn’t worked as intended. Rising British employment is attributable to a generally healthy economy and, since 2010, other welfare reforms Mr. Cameron has undertaken.
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The credits also haven’t raised the birth rate. The total U.K. fertility rate had risen to a little less than two children per woman in 2010 from a low of 1.63 in 2001 mainly because Britain’s many immigrants have higher-than-average fertility while native-born women are having children later in life. A 2013 Office for National Statistics study noted that the combination of economic climate and tax policy “does not have a clear impact in a particular direction.”
Instead the tax credits have become a new entitlement for the child-rearing middle class. Mr. Cameron has proposed eliminating them for all but the first two children in each family. There are currently 872,000 U.K. families receiving on average £3,670 a year for third and subsequent children, according to the Institute for Fiscal Studies. Cutting third-child credits would save Britain £1.4 billion by 2021.
In its place, Mr. Cameron offered a higher standard deduction for low-earning families, plus an increase in the minimum wage. The latter will cost jobs, but the former would be a step toward a flatter, less complex and less distorting tax code that encourages growth.
But eliminating the credits has proved to be politically difficult. The tax-credit system is so entrenched that it’s as hard to reform as any other entitlement, with both the right and the left objecting that the move is antifamily or that it will cost some households as much as £1,300 a year in additional taxes. Mr. Cameron says he’ll persevere, perhaps by phasing in reform over a longer period, although he’s already paid a steep political price for his proposal.
That’s a lesson for Americans as a debate about tax reform gathers momentum. Some Republicans are drawn to Mr. Rubio’s plan to raise the per-child tax credit to $2,500 from $1,000 on the basis that it’s pro-family, even though he admits it does nothing for economic growth.
But the most pro-family tax policies are those that do the most to boost broad-based growth and raise incomes, which means a flatter tax code with lower rates and fewer distorting credits and exemptions. As Britain shows, the danger of using the tax code for pro-natalist social planning is that you end up with an expensive new entitlement that is merely another mechanism for income redistribution and can’t be reformed.
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