RALEIGH – There’s a right way and a wrong way to justify family-friendly government policies.
One wrong way is to attempt to conscript private families into service to the state. In some European and Asian countries where childbearing rates are low, governments offer sizable cash grants and benefits to encourage couples to procreate, the intention being to fill out the future ranks of the country’s armed forces (in the less-savory cases) and young taxpayers (in the case of many countries with generous and unsustainable welfare states).
Another wrong way is to argue that traditional families with children are somehow superior and deserving of special treatment. As such families shrink as a share of the population, however, the argument loses its potency, as Ben Arnoldy reports in this interesting Christian Science Monitor piece. In 1960, about half of households consisted of families with children. They now make up less than a third of households, soon to be a quarter. If straight-up power politics explains how governments got into the family-subsidy business, it can also explain a future where singles and oldsters get theirs (though in the latter case, the lobbying heft is already readily apparent).
The real reason to have policies that look “family friendly” has to do with human-capital theory. That’s a field of economic study that considers how human beings form and use knowledge, skills, habits, and behaviors that make them productive. Because intangible “human capital” is by far the most valuable asset on the planet, it is critical to any successful economy that government refrain from hampering its formation.
Many policymakers now talk about human-capital issues in the context of adult workers and entrepreneurs. They recognize that communities can attract or repel human capital through tax, regulatory, and public-spending policies. Some of their theories about what is most important in cultivating human capital are really quite ridiculous, though that doesn’t keep them from gaining adherence among the political class. But at least there is a recognition that people are, among other things, capital assets in a market economy, assets that no one else can own (took several thousand bloody years to drive that point home in most of the world) but that can be developed and employed at various levels of efficiency.
Policymakers need to apply the same notion to issues of families and children. As it happens, having a kid – actually having many, many kids – is the oldest form of capital formation known to humankind. In primitive and agrarian societies, more mouths to feed in the short run meant more hands to help bring in the crops, herd the livestock, make simple goods for use or trade, and protect the household and community from predation. Having children was also the most common way to provide for one’s old age. It was the original Social Security. Conditions have changed, but the concept has not. Indeed, if anything human capital is even more important in industrial and information-age economies than it was in the past.
In tax policy, a basic concept about investment is that you should tax the principal or tax the return, but not both. That is, you should either reduce the long-term value of the asset by taxing the income household or firms will use to create it, or tax the future income that the asset will help to produce in the future. If you tax both, you create an artificial bias in favor of consuming now rather than investing now for consumption later, since the former has a lower effective tax rate.
You see this principle in play in such areas as retirement accounts. The money either gets taxed going in (the Roth IRA) or going out (the traditional IRA or 401-k).
Now apply the principle to households. A significant amount of everyone’s income is spent not on current consumption but on capital formation. I don’t just mean putting money in your IRA or building equity in your home. I mean studying a new field at the community college, learning a new skill to help your business, or, most importantly, investing time and resources in your children. The investment will pay off in future taxable income – both to them and to you (if you manage to stay on their good side once the kids grow up). A goodly component of childrearing expense, in other words, ought to be exempt from taxation, to avoid having government punish families with children through high long-term tax rates.
That’s the real justification for dependent exemptions, child tax credits, and similar policies. Whether families make up 50 percent or 5 percent of a population, the justification holds true – and, if heeded, benefits not just families but everyone in the economy.
Hood is president of the John Locke Foundation.