Obama's Awful Tax Plan

The tax proposals in President Obama’s new economic plan are significantly worse than we expected, combining several tax increases on investment with an especially destructive form of social engineering.

Republicans are likely to concentrate on the plan’s attacks on investment -- including a hike in the capital-gain tax and new restrictions on 529 education plans and IRAs -- because they know that case by heart. The president and his aides believe that saving and investment are given tax “advantages,” and that, for the rich, these should be scaled back. In truth, the tax code is heavily biased against saving and investment; most tax breaks for saving merely reduce this bias. Rich people naturally do a disproportionate amount of the country’s saving; they should not be encouraged to consume their incomes instead.

These portions of the plan concern familiar divisions between the parties. More gratuitous are the plan’s slaps at mothers outside the paid labor force. Obama would triple the tax credit for child care and create a new tax credit for second earners. Take two families making $50,000 a year, one in which a mother does paid work and one in which she does not. Under Obama’s plan, the first couple receives a large child-care credit and a new second-earner credit. The second couple does not -- and so pays higher taxes than the first one.

#ad#Most mothers, especially of small children, prefer to work part-time or drop out of the labor force for a time. Commercial child care is the least favored option for most parents. The president’s plan encourages families to do what they do not wish to do and penalizes them for refusing.

An alternative would be to provide tax relief to all parents who pay taxes, however they structure their lives, by expanding the tax credit for children. Parents would then be able to spend the extra money on commercial day care, or use it to finance a shift to part-time work for one parent, or save it for future educational expenses -- or do whatever they chose with it. That alternative would have the additional advantage of offsetting the large implicit tax on parents contained in our entitlement system. We suspect that letting families keep more of their money to spend as they wish would be more popular than the president’s notion that mothers should work and send their kids to day care to get their money back.

A less prescriptive plan would not, it is true, induce mothers to increase their hours of paid employment, which the White House, in its promotional material for its plan, treats as crucial to economic growth. But there are better ways to encourage economic growth, and a good beginning would be to go in the reverse of the direction the president favors for the taxation of saving and investment.