FACING FACTS The Truth about Entitlements and the Budget A Fax Alert from The Concord Coalition FAX ALERT ( Number 10, November 6, 1995) IF WE MUST HAVE A CHILD TAX CREDIT, MAKE IT "KIDSAVE" The reasoning behind the new "KidSave" tax credit proposal goes like this. The last thing we need right now is a tax cut, but if we're going to get one, why not ensure that it advances the ultimate goal of deficit reduction: boosting national savings? Indeed, why not? Getting Outside the Box The KidSave proposal, formulated by Senators Bob Kerrey and Joe Lieberman, would allow a $500 tax credit for each child -- provided that parents invest it in a qualified retirement account in the child's name. This would raise national savings -- and future incomes -- relative to what they would be if parents were free to spend the child tax credit on current consumption. True, parents might offset some of the new child credit savings by reducing other household savings. On the other hand, the existence of new savings accounts in which people can see personal assets grow might constitute a psychological accelerator that encourages them to save more -- and this would work the other way. Some will object to KidSave's mandated savings as unwarranted interference in families' private choices. If the child credit -- like the other GOP tax cuts -- will be paid for through cuts in federal spending, why attach strings? The tax cut, after all, is "deficit neutral." But is it? Within the political framework of the budget debate -- which presupposes that Congress would make an equal reduction in its proposed spending cuts if it were to cancel the child tax credit -- the answer is yes. But if we step outside the conventional box of "budget process," the answer is no. Considered as a separable polcy initiative, each dollar of the credit adds a dollar to the federal deficit. In this perspective, a no-strings child credit is a cruel hoax on children, its ostensible beneficiaries. Even if the entire credit were efficiently invested in children, it would merely offset an equal amount of extra public debt which children will eventually have to pay back. But all of the credit wouldn't go to children. Suppose that 50 cents on the dollar does -- a generous assumption. Then suppose that of that 50 cents, half will be allocated to financial or human capital investments (like child health and education) that yield future returns. Against that 25 cents, the federal government will have incurred a dollar of debt. For kids to break even, money invested by parents on their behalf would have to generate returns four times greater than the interest cost on the public debt -- an outlandish assumption. The More Savings the Better Viewed in these terms, KidSave would at best cancel out public dissavings -- and hold children harmless. To reject this plain arithmetic is to retreat unreflectively into the budget process box and claim that our path toward a perfectly balanced budget -- and an optimal rate of national savings -- is already set in stone. This is not so. Even under the House plan, deficits will add $739 billion to the national debt over the next seven years. In 2002, the plan projects a razor-thin surplus of $1 billion, even if all the spending cuts are enacted and all the savings occur. A blip in the economy -- or a blink by Congress -- and the surplus evaporates. Tax cuts are forever, a Hill saying goes, but spending cuts are only good until the next budget season. All of this, moreover, ignores what everyone knows: Beyond Congress's seven-year time horizon, deficits are once again scheduled to surge. "The Baby Boom generation hitting Medicare is like a tsunami," notes Martin Corry, AARP's candid director of federal affairs. "All we're doing this year is buying some time." Former Colorado Governor Dick Lamm likes to say that Christmas is a time when kids ask Santa Claus what they want and parents pay for it. Deficits are a time when parents tell government what they want and kids pay for it. Given the foreseeable impact of America's age wave on the federal budget and national savings, the best policy would be to forego all tax cuts and aim for a substantial budget surplus. If not now, with the Baby Boom swelling the workforce and a small generation retiring, when? But if we must have a tax cut, rather than a child credit which borrows from kids to finance a new tax entitlement for their parents, let's enact a credit that helps them -- or at least doesn't hurt them.
FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips