Child Tax Credit: Just No Respect : Idea is bashed on economic and social grounds

“It’s awful,” the prominent economist says of the Republicans’ proposed $500-per-child tax credit. “It’s really bad economics. It’s bad social policy.”

A knee-jerk reaction of a big-government, big-tax advocate? No. The words are from the conservative Arthur B. Laffer, a supporter of tax cuts and a key intellectual source for the ideas of supply-side economics that the country heard so often about during President Ronald Reagan’s first administration.

ECONOMISTS AGREE: Laffer’s dismissal of the child tax credit echoes the consensus of economists, including some who vigorously argue that Americans should be taxed less. To many of these economists, what the tax code most needs is to be made simpler, not expanded with yet another targeted tax break. At the same time, sound economic policy should encourage Americans, who have one of the lowest savings rates in the industrialized world, to save more. The child tax credit, they argue, would encourage consumption rather than savings. Moreover, it would scant the neediest taxpayers, including those with incomes so low that they pay no taxes.

The child tax credit would reduce federal revenues by $147 billion by the year 2002. It’s the centerpiece of the GOP plan to cut taxes by $245 billion over seven years, including a substantial lowering of the capital gains tax rate. But is there a real economic case to be made for the tax credit? The most passionate arguments for it virtually ignore any claims that it would provide a needed stimulus to an economy that, by and large, is doing pretty well.

The big push for the tax credit instead comes from those who see it as furthering family size, and values, by rewarding some taxpayers who have children. Most families with dependent children under 18, the credit cutoff age in the GOP plan, would of course be happy to have their taxes reduced. For that matter, so would families that have dependent children older than 18, especially families that are supporting children in college. So too would families with no dependent children, among them retirees who will almost certainly soon see their Medicare costs go up. The equity issue here is why just a minority of taxpayers--about 40% according to some estimates--should get the benefit of the child tax credit while others are required to pay for it.

HORSE TRADING: The White House and Republican congressional leaders have set a Dec. 15 deadline for breaking their budget impasse. Talks, suspended in anger last Thurs-day, are scheduled to resume today. Everyone understands that trade-offs have to be made. The child tax credit is good trading material, a big deficit booster that can be significantly cut or eliminated. That would make possible less onerous cuts in Medicaid, Medicare, education and environmental programs, which President Clinton says he insists upon. A balanced budget within seven years is achievable. But only if major compromises can be reached on the hard mechanics of getting to zero deficits.