The Next Step for Democrats: Curb Their Ambitions
(Bloomberg Opinion) -- The Joe Biden administration has finally accepted that it needs to scale back its ambitious economic agenda. This provides an opportunity for a much-needed overhaul, say Bloomberg Opinion columnists Karl Smith and Michael R. Strain. Here are their recommendations, even if it remains to be seen whether Democrats are willing to listen.
Karl Smith: From a political perspective, the core problem all along has been the lack of clear vision. The reconciliation bill the House assembled was a hodge-podge of interest-group demands without a core guiding principle. From a policy perspective, however, the bill’s deeper problem is that those demands reflect the concerns of a pre-Covid economy, when working-class jobs were scarce and raw materials were cheap.
For example, both the proposed $400 billion expansion in home health services and $485 billion in spending on manufacturing are designed to increase job opportunities and boost pay for blue-collar workers. The U.S., however, is now facing a titanic labor shortage, and wages at the bottom of the scale are rising rapidly.
Given these new realities, I would alter the focus of the agenda entirely and make expansion of the child tax credit the central and perhaps sole element of the proposal. In doing so the Biden administration could continue a program that has the promise of making a significant dent in child poverty, without resorting to more extreme means testing that could bring back some of the old work disincentives of the Aid to Families With Dependent Children program.
Michael R. Strain: I completely agree that a major problem has been a lack of clear vision. But focusing the smaller bill on the proposed expansion of the tax credit for children would also be muddled. While the expanded credit has been touted as a measure to fight child poverty, the majority of the money — this year, $36 billion of the total $101 billion cost of the program — would flow to households above the poverty line.
A good way to have a clear vision would be to actually focus the credit on fighting poverty. The 2017 tax law pushed eligibility for the credit up the income ladder. Before it, families with two children with incomes of $150,000 weren’t eligible. In 2017, that amount was changed to $480,000.
Returning the eligibility threshold to its pre-2017 value would substantially reduce the cost while also providing a clear vision for the law.
Smith: You’re right that the $480,000 threshold is probably too high. However, I’d be hesitant about dropping the phase-out all the way to $150,000. First, it increases the effective marginal tax rate on middle-class families. As you know, that means they keep less of every dollar they earn and is a disincentive to their efforts to get ahead, whether by working extra hours or taking a higher paying job in different city.
Second, even solidly middle-class families struggle with child-care costs. Democrats have suggested subsidizing government managed child care but it would be fairer and more efficient to cut out the middleman and provide funding for families to choose the arrangement that works best for them.
Fighting generational poverty means not only providing relief to the poorest families but making sure they have the tools and incentives to get a firm footing in the middle class. The tightening labor market is helping to provide that chance for an ever-greater number of families. Tax policy shouldn’t stand in the way.
Strain: There is an inescapable tradeoff between subsidies that focus on lower-income households and tax policy inadvertently discouraging them from earning extra income. In my view, eliminating the subsidy for households earning a comfortable six-figure income would have very little effect on their employment.
It’s also reasonable to argue that tax credits should help middle-class parents to afford investments in their children. But then we’re back to the problem of a muddled message! Is the proposed law about fighting poverty through a larger child credit? Or about helping middle-class parents? Of course, it can be about both. Apart from that, it’s hard to justify subsidies for households earning, say, a quarter of a million dollars per year.
Smith: All good points. What I think we can agree on, however, is that much of the programmatic spending in the reconciliation bill — spending that is not direct cash to families — should go. For my part, I think it’s far from clear that the economy has room for the type of industrial policy that Biden envisioned as a candidate.
The economy is poised to grow, and the best thing the administration can do is step out of the way. I know that’s not in line with the transformative agenda some progressives have imagined but, as we discussed, there is plenty of good to be done on poverty alleviation and help for struggling middle-class families. That was once the core of the Democrats’ message. I wonder if it still is?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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