Relief would come on one of the less controversial lines on your Form 1040: the personal exemption. Next winter, when you figure your taxes for 1991, current law lets you slice $2,150 from your income for each person in your household (and even more for the aged and the blind). This is Uncle Sam’s big break for parents, but it’s not what it used to be. Urban Institute economist Eugene Steuerle figures that the exemption would have to jump to $7,800 to shelter the same share of income it did back in 1948. As a result, contends Sen. Dan Coats, an Indiana Republican, “the basic taxpayer, spouse and family are getting the short end of the tax code.”
The arithmetic isn’t quite so simple: that family also gets a lot more in services from the Feds than it did back in 1948, from environmental protection to college loans. Nonetheless, both parties are pushing hard enough that a “pro-family” tax bill is likely to pass before next year’s presidential campaign gets hot. “Parents spend less time with their children than they did 40 years ago, because they’re forced to be out working to support their families, " says Republican Rep. Frank Wolf of Virginia. Wolf and 213 cosponsors would boost each child’s exemption to $3,500. Coats advocates a $4,000 exemption for kids and grown-ups alike. A Democratic alternative, pushed by Rep. Thomas Downey of New York and Sen. Al Gore, would convert each child’s exemption into a tax credit of $800.
Those numbers don’t add up the same way. The Gore-Downey credit gives the same amount of money to every taxpayer with children. Poor families that pay no federal income tax would receive only $400 per child, but they could get more if they work-plus an increase in the existing tax credit for low-paid workers (chart). The Wolf and Coats bills favor those higher on the income scale: Coats’s $4,000 exemption is worth $1,240 to Donald Trump, but it might save only $600 for his maid.
Should any of the bills pass, taxpayers would find out that what’s friendly to someone else’s family might be less friendly to theirs. The price tag for these tax-code changes ranges from $11 billion to $20 billion a year–and under Washington’s new budget rules, a tax bill that increases the federal deficit is out. That leaves two ways to finance tax cuts for kids: slicing social programs or hiking other taxes. Coats and Wolf offer no specifics, but they talk of new limits on spending–including spending on programs that benefit children.
The more likely outcome is an old idea: soaking the rich. Downey and Gore would boost the top rate and slap a surtax on income over $250,000 a year, leaving high-income taxpayers with a maximum 38 percent rate. Only yesterday, Washington gospel held that high taxes on the last dollar of earnings discourage investment and work effort. That’s why Congress slashed the top rate from 50 percent to 31 percent during the 1980s. In fact, lower rates weren’t the miracle tonic supply-siders promised, but they did allow Congress to wipe out many shelters and tax-avoidance schemes. Now, however, even some conservatives may accept higher rates at the top of the scale in trade for lower taxes on groups like welfare recipients who are entering the work force.
There is an alternative. “You can raise taxes on high-income groups without raising marginal rates or a surtax,” points out University of Virginia professor Don Fullerton, a Reagan administration tax official. One way: tax the fringe benefits of highly paid employees. Another: kill the deduction for home-equity loans. A third: take other steps to broaden the tax base, such as limiting charitable deductions. But those steps would involve sacrificing provisions that many legislators–and their constituents–hold dear. “Giving preference for at least some activities that would be in the national interest makes sense,” says Gore. “If you eliminate them all, you’re going to tie your hands when it comes to implementing national policy.”
Pro-family tax tinkerings won’t change the fact that poor and working-class families receive about 2 percent less of the nation’s income than they did in 1980. That trend has little to do with the tax code; the major cause is that the pay of less-educated workers is falling relative to the pay of college graduates. Economists agree almost unanimously that the only way to solve that problem is to develop a more educated and productive work force. “You’re talking about decisions going on in thousands of factories and schools,” says the University of Maryland’s Frank Levy. “How you seize that from a federal perspective is not clear. " Cutting taxes for families with children is a modest attempt by the politicians to grab hold of the issue. It might even help–if the breaks go to the families that need them most.
