894 April28,1992 HOW To STRENGTHEN AMERICA'S CRUMBLI NG FAMILIES INTRODUCTION America's families m undex siege. Middle-income as well as blue-collar families BT~ finding it hard to buy a first home or pay for their children's college tuition, partly because a steady rise in the burden oftaxation meaus they h ave less money in their pockets. Working families also sufk because slow productivity growth in the United States economy in Iecent decades means Teal wages have stagnated. Poor families have been especially hard hkThose who fall below the poverty line en t er a dispiriting wel fm system ofperverseincentives that underrmne pcrsonalresponsibility,and family stability.What is wme, the incentives of the welfare system mean fathers be me a financial liability if they stay with their family. This eILcourages fath ers to aban don theirresponsibilities.
Growing Tax Burden. The growing tax burden has undermined the finances of mil lions offamilieswhen state and local taxes are included, government now takes over 1e-W ofthe income ofthe average twepmnt family. During t he past four de wks, the federal income tax buxden on a family of four has incnased by over3OOper mt as a shaxe of family income. Single Americans and married couples with no chil hen have escaped most of this tax incnase. Measllred by average after-tax p e r capita income, families with children now m the lowest income group in America.Theirav xage after-tax income is below that of elderly households, single persons, and couples WithoutCilildXe Families with children face a dbpnptionate tax burden because t he federal tax code has become increasingly biased against these families.The main season for this has been the steady decline in the value ofthe personal exemption applying to chil dren, which is the tax allowance for the cost of raising childnn.
Fommatel y, lawmakers in Washingtan seem at last to have come to understand that the American family is -To cut this tax burden, lawmakers from both pds have submitted legislation in Conpss. On the Republican side, bills cutting taxes on families have been introdw e d in the House by Representatives Frank Wolf of Virginia H.R. 1277) and Vin Weber of Minnesota (H.R. 3744 and in the Senate by Xndiana Senators Dan Coats (S. 710) and Bob Kasten (S. 1920 On the Democrat side, bills have been introduced in the Senate by Se n ators Albert Gore of Tennessee (S. 993 Lloyd Bentsen of Texas (S. 1921 and Bill Bradley of New Jersey (S. 1846 and in the House by Representative Tom Downey of New York (H.R. 2242 In addition, Pres ident George Bush as well as Governor Bill Clinton have p r oposed family tax relief in their campaigns for the White House Wage Stagnation. These me8suFes repsent a welcome, if belated, recognition that action is needed to reverse a tax trend that is wounding American families. But be cause mushrooming taxation i s only one factor in the financial problems facing the av erage American family, easing the tax burden is notthe complete solution. The other cause for concern is the slowdown in the growth of real wages and salaries for work ing parents. Since 1970, wages and salaries, adjusted for inflation, have grown much less rapidly than in the 1950s and 1960s. For the first 25 years following World War II, the average family could expect a continuing improvement in income, based on the steady real growth of one bread w inners earnings. But since about 1970, a growing number of families have found it necessary for both parents to enter the work farce for there to be even modest growth in real family income, both before and after taxes. And even though the Reagan tax cuts enacted in the 1980s did help, this tax relief was not sufficient to offset the policy mistakes of the 1970s. Caught between this slowdown in wage growth and the rise in taxation, most parents today thus find they must work more and mare to achieve even a modest annual improvement in family income.
Family Disintegration. The third major problem facing families and children is the decline of marriage. Studies indicate that many of the social problems of young Ameri cans-which often continue into later life-are linked to their upbringing in single par e nt households. The erosion of the institution of marriage has affected all segments of American society, but its consequences have been most devastating in low-income communities. In the black community the decline of maniage is now a crisis. In 1965 when the War on Poverty began, roughly one out of four black children were born out of wedlock. The rate today is 65 percent, and if current mnds continue the rate will rise to 75 percent by the year2OOO.
Much of the increase in single parenthood among the poo r is caused by an expaad ing welfare state which has transfarmed low-income fathers from necessary breadwin ners to financial burdens for their families. The current welfm system actively re wards households in which a father avoids his obligations, and i t penalizes marriage.
A new system is needed which promotes the foxmation of self-sufficient, two-parent families 1 All income figures in this pap are adjusted for inflation using the U.S. Bureau of Labor Statistics Consumer Price Index, model CPI-U-Xl.Ili s defla mom accurately depicts changes in consumer prices in the 19709 and early 19809, and is mm accurate for bismicd cornpisons. If the alternative CPI-U wem used, the data would show the same rates of income growth as those presented in this chapter fo r the 195Os, 1960s. and 1980s but slightly lower income growth in the 197
09. All fisures in the text depicting taxes as a percentage of income and income lost to increasedtaxes are unaffected by the inflation meesurechcsen. For adiscussion of the CPI-U-X1 and CPI-U, see US. Bureau of the Census, Money Income qfIfouseholds, Families, and Persons in the United States: 1990, Current Population Reports, Series Pa, No.174 (Wasbgton, D.C U.S. Govenunent Rinting Office, 1991 p 8-9 2 A comprehensive policy to str e ngthen American families must include four key ele ments Element #1: Family Tax Cuts. There must be tax cuts to relieve the burden on overtaxed families with children. Federal taxes on working families with children should be cut at least $l,OOO for each dependent child.
Element #2: Increased Productivity. Policies are needed to stimulate productivity growth in the economy and thmby raise the real wages and salaries of American parents as well as otherworkem. These policies quire tax cuts on savings and in vestment. Among the necessary steps: a reduction in the capital gains tax, expanded individual retirement accounts (IRAQ, and tax fairness for investment by allowing business to deduct the full value of new invest ments in plants and equipment as a busine s s expense Element #3: Spending Cuts. Increasing taxes on other Americans to finance tax relief for families with children might help those families in the short run, but it would do so only by reducing long-term economic growth and thus adding to the wage stagnation problem. Tax cuts which would cause further in creases in the federal deficit also would be folly. Thus family tax relief should be paid for by capping the growth of nondefense federal spending.
Holding the spending growth at roughly five perce nt per annum would allow a reasonable level of tax relief. In this way, each dollar of family tax relief would be matched by one dollar in reduced domestic spending Element #4: Welfare Reform. The mnt welfaxe system discourages work, marriage and family r e sponsibility, and encourages welfare dependency. To rebuild Americas shattered poor families, the welfare system must be overhauled to promote responsible behavior, marriage, and self-sufficiency In welfare, you get what you pay for. Since the 1960s the g o vernment has been pay ing for single parenthood and non-working households and it has been getting dra matic increases in both. The welfm incentive system must be revised to promote rather than penalize mamiage and self-sufficiency. This can be accomplish e d by in creasing support to low-income two-parent and single-parent families who m pre pared to work. Conversely, the high welfare benefits that go to non-working single mothers on welfare must be reduced, and some welfm mothers should be required to work in exchange for the benefits they receive.
The family is the cofe of American society. It is the principal mechanism through which values, knowledge, discipline, and motivation are passed from one generation to the next. The family almost alone molds the character of future generations, and thus it serves as the foundation of civilized life. If the family is weakened, govemment pro grams cannot repair the damage. But rather than bolstering families, many government policies actually undermine them. These a nti-family government policies must be re versed if American society is to regain its health and vitality 3 HOW WASHINGTON HAS HIKED TAXES ON CHILDREN Federal taxation of families with children has increased dramatically over the past four decades In 1948 , a family of four at the median fTily income level paid just two percent of its income to the federal government in taxes. In 1989 e equivalent fam ily paid nearly 24 percent of its income to the federal govemment?When state and local yes are included, th e tax burden on that family exceeds one-third of its in come.
As Table 1 shows, the rise in federal income taxes on families with children in the last four decades has been much faster than for other groups of Americans. From 1954 to 1989, the average fede ral income tax rates for single persons and mded couples with no children did not inmase? But for a married couple with two children, the av erage income tax rate more than doubled. And for a family with four children, the aver age income tax rate rose fr om zero in 1954 to 2.6 percent in 1960, and to 6.3 percent in 1989.
The Toot cause of this growing anti-family bias in the federal income tax code has been the eroding value of the personal exemption. The personal exemption far children was intended to off set part of the annual costs of raising a child by allowing families to deduct an amount of money from their taxable income. In 1948, the personal exemp tion was $6
00. This was ual to roughly 20 pexcent of the median income of two-par ent families, then $3,2
72. Far a family of four, the $600 personal exemption shielded nearly 80 pent of family income from federal income tax. Families could xeduce their tax bill further by itemizing deductions or taking the standard deduction, and this protected most of the xemaining 20 percent of income from income tax. The result: in the late 1940s and early 1950s the avenge family with children paid little or no in come tax far behind the rise in incomes and inflation. Although the Tax Reform Act of 1986 raised the va l ue of the personal exemption from $1,000 to $2,000, this only partially offset the erosion in the value of the exemption since the 1940s. Chart 1 shows the de clining value of personal exemptions relative to the median income of twepmnt fami 7 In the past four decades, however, increases in the personal exemption have lagged 2 The value of the personal exemption also declined between the imposition of the fedeEal income tax in 1913 and Word War II. But 1948 is chosen as a benchmark because it is neither a depression year nor a war year, and because it mtllks the beginning of a long period of high infiation and rising taxes.
These fi- represent the tax rates for a family of four at the median family income level for two-parent Eamilies.
Estimate based on da ta supplied by U.S. Bureau of the Census Ihe avenge ot effective income tax rate is a measure of total taxes campared with income. By contrast, the marghaltax rate, or "taxbracket isameasureonly of the tax paid on the lastdollareamed.Thusmany families hav e expeziaced a cut in their marginal tax rstes, yet their average tax rates have climbed.
Mary E Henson, Trends in Income, by Selected C harcrcteristics: 1947 to 1988, US. Bureau of the census Current population Reports, Series P-60, No. 167 (Washington, D.C U.S. Government Printing OfFiCe, 1990 p. 19 3 4 5 6 4 5 lies. As the value of the per sonal exemption has declined the income tax pai d by families with children has increased For the personal exemption today to have the same value relative to family income that it did in 1948, it would have to be about $8,000 in 1992 and an estimated $9,000 in 19
96. At least a partial restoration of the value of the personal exemp tion is a necessary step in im proving the financial well being of American families.
The second tax blow to fam ily finances has been the in crease in security Social taxes technically known as "payroll taxes In 1948, worker s paid a two percent Social Security tax on annual wages of up to 3,000: one percent was paid directly by the employee and Chart 1 Share of Income Protected from Federal Income lax by Personal Exemptions Forcent of Family lnoomr 7o hi 1 cy 00 A 60 %6 '60 '66 '70 '76 '60 '66 '60 Year 8ouro.: Herltage Tax Model. Income Oeta from US.
Bureau of Cenrrur. Horltogo OotrChart one percent paid indirectly by the employer through the so-called employer share?
By 1989, combined Social Security taxes had risen to 15 percent of wages on in comes up to $48,0
00. While all workers have suffered from skyrocketing Social Secu rity taxes, the bite has been most severe on warking families with children. The reason for this is that Social Security taxes, unlike regular income taxes, are not adjusted far the number of dependents in a family, so a working parent trying to support a family of four feels the sting of this tax far more sharply than a single person at the same wage level. The effect of Social Security taxation is p a rticularly severe on lower-in come parents; a family with an income of $25,000 per year, for instance, pays $3,750 in Social Security taxes. Moreover, Social Security taxes on today's young parents grealy exceed the real value of any retirement benefits t hey will receive from the sys tem.
Undermining Family pcomei Chart 2 shows the growth in federal taxes as a share of median family income. At two percent of income in 1948, effective tax rates have risen each decade. By 1979, the median family of four paid 24 percent of its income to 7 Liberal and consenative eumomists agree drat both shares of the Social Security tax are in fact direct taxes on warkers' wages. See Joseqh A. pechman and Benjamin A. Okmr, Who Bears the Tux Bwdcn Washhgton D.C The Broakings Institution. 1974 pp. 2543.
Peter J. Femua, Social Security: The Inherent Conacrdiction (Washington, D.C The cat0 Institute. 1980 8 6 the federal government. Because of Ronald Reagans policies, the rise in federal tax rates on the average family was halted . If Reagan had persevered in his original tax re duction plans, taxes as a share of average family income actually would have declined But the Reagan income tax cuts enacted in 1981 were offset partly by tax increases in 19
82. And fol lowing the recomme ndations pro posed by the 1982 National Com mission on Social Security Re form, Reagan unwisely agreed to accelerate the introduction of fu Ne social security tax hikes scheduled under legislation en acted by Resident Carter in 1977.
But despite the parti al rollback of Reagans early steps to cut taxes on middle-class families Reagan did stem what had been a relentless growth in taxes as a share of family income. The 1980s were the first decade since World War II when effective tax rates on the average fam i ly with children did not rise. Average taxes in 1989 were 24 percent of family in come, roughly what they were in 1979 Chart 2 Federal Taxes as a Share of Median Family Income: 1948-1990 30s 26 201 z l i f e 60 66 -60 06 70 76 00 06 00 Year Note: Flgurea are lor a medlan Income fclmlly of lour.
Owrom: Herltage Tax Model; Income Oaf0 from U.S. Bureau of Censua. Horltaom DatrCkrrt The effect of federal taxes on family income is shown in Chart 3 (next page Two facts stand out. One is that in each decade up to 1980 the rate of increase in pre-tax family income declined. The other is that the tax bite, or the share of family income collected by the IRS, increased Thus taxes rose as income growth slowed. This trend peaked during the 1970s. In that decade median pre-tax family income, adjusted for in flation, increased by about $6,0
00. But of that $6,000, exploding federal taxes swal lowed up $4,OOO.Thus of evcry dollar in income gained by the average family in the 1970s the federal government took 66 cents.
Tax ing Families Out of House and Home. The income loss due to increased taxa tion has seriously strained American family finances and profoundly affected Ameri can family life. Chart 4 (next page) shows the effects of increases in federal income and Social S ecurity taxes since World War 11 on the finances of the average fwily.
Total pre-tax income for the median two-parent family in 1989 was $41,4
42. After 9 Social Security and income taxesasashareof the median income for a famil y of four in each year. Hemn,op tit p. 21 and other data provided by the Bureau of the Census.Tax calculations fmm Hexitage model, assuming thatfamiliesclaimitemizeddeductionsequalto23percentofgnwsincomethraugh1986and18percent theafm 7 taxes this family's in come fell to eral taxes as a percentage of family income were restored to 1948 levels the family's come would have been 40,6
18. For the median in come American family, the loss of income in 32,4
08. If fed post-tax in chart 3 Income Lost to Federal Taxes for a Family of Four: 1948-1990 Thouundr of le00 Dollui 850 I 1 rl 60 '66 '60 W 70 76 %O '06 '80 bar Noh Flgureo are for a malm Income farnlly of four.
Ooum Herltage Tax Model. Incoma data from U.S. Bureau of Cenoue.
Hnl(.ge DatrCharl 1989 because of the increase in federal taxes as a share of family income, due to the falling value of the personal exemption and the rise in Social Security taxes since the late 19409, was $8,210.
This income loss severely afects the ability of families to support themselves. The median price of a single family home purchased in 1989, for instance, was $93,100.
The aveiage an nual mortgage payment on such a home (includ ing principal and interest was 7,9
20. Thus the annual fam ily income loss duetoincreased federal tax rates for the average family in the last four decades ac tually exceeds the annual cost of an average family home maage 1 860,000 840.000 8so.000 820.000 8 10,000 Chart 4 Effects of Increased Federal Taxes on Family Finances 841.442 I $8,2 10 I Median Family Income for 1989 Hrltmgo D.t.Dk.rl Samm Harltage Tax Model. Inooma anti from U.S.
Bureau of Cenrur 10 Data hm the U.S. Bureau of the Census. Total pfax family income includes the employer share of Social Security tax deducted fkom the pamu' waga 11 NationalAssoclaM n of Realtms, Horn Solcs, January 1991, p. 12.
Family Time Famine. The loss of income due to rising taxes also helps explain why so many mothers have felt compelled to join the work farce to make ends meet Chart 5 Rising Federal Taxes: No w Both Parents Must Work Th0W.H 80 For the average family in which both the husband and wife are em ployed the wife's earnings equal about 32 percent of total family income."
The average em ployed mother, juggling her job mands, knows only too well that d espite her efforts the pay checks she brings home do and family de 1948 lax Rates Ig0S Tax Rater S50.267 I Husband Only Employed I Both Spouses Employed 40 sa0 820 10 en 1 Pro-Tax Pool-Tax Pm-Tax Port-Tax Income Incomo Income Income Hurhand'r Ewnlngr Wlh' r E.rnlng. Poat -Tu lnoolm Noh krereoe 1989 Income. Pre-tex income incluaee OmOloyBr enere of SocIeI Securlly.
Swron HerlIege Tax Moaml. Income ante from U.S. Burreu of tne Census.
0. Datahart not seem to be raising her family's living standard very much. The reason: only about one-third of her earnings actually are taken home for the family's budget. The remain ing two-thirds of today's mother's earnings pay the higher federal taxe s on family in come levied since World War II. In fact, if federal tax rates as a peantage of family income were re stored to 1948 lev els, and if the av erage employed mother in a two parent family were to leave the labor farce en tirely, the family would see only a moderatedip in real post-tax in come.
Charts 5 and 6 show why this is so. Average total pk-tax income in 1989 in families Chart 6 Working Wives Uncle Sam Not Family Gains Most Thouundo of lWG Ddlaro i 12 U.S. Bureau of the Census, Earnings of M curicd-couple Fdies, Cumnt Population Repow, Series P-60, No 165 (Washington, D.C.: U.S. Government Printing Office, 1989 pp. 8,9 9 where both spouses were employed was $50,2
67. Of this, the husb ds average earn ings we 33,948 and the wifes average earnings were $16,319.lYMter federal taxes, post-tax income for this family fell to $39,0
46. If federal tax rates as a percent age of family income we stared to 1948 levels, the familys post-tax income would be 32,591 if only the husband worked, or just $6,45 5 less than the familys current 1 post-tax income today with both spouses working. Thus nearly two-thirds of the em ployed wifes average eamings go to pay for increased taxation; only one-third to sup port the family.
This does not mean that dl employed m others would want to or should leave the labor farce if taxes we= lowered to earlier levels. But it does show strongly that rising federal taxation is a key factor in the financial and personal strains that farce many mothers reluctantly into the work for c e. It also helps to explain why parents today typi cally spend 40 percent less time interacting with their children than did parents in ear lier generations. While parents in 1965 spent 30 hours per week in direct contact with their children, by 1985 such time spent with children had dropped to just 17 h0urs.14 Surveys indicate that the pressure on parents to work harder and longer to keep the family financially afloat is eroding the quality of family life. A 1988 USA Today sur vey found that 73 percent of tweparent families would choose to have one p main at home full time to caxe for their children if money were not an issue 1989 survey by the New YorkTimes found that 72 percent of employed fathers and 83 percent of employed mothers feel tom between the d e mands of their jobs and their de sire as parents to spend more time with their families. A 1989 Cornell Univmity study discovered that two-thirds of mothers employed full time would prefer to work fewer hours in order to devote more time to family life. A n d over half of the fathers and mothers surveyed in a similar Los Angeles Times poll conducted 1990 stated that they feel guilty about spending too little time with their children qn The conclusion from these data is clear: The best way for the federal gov e rnment to HOW TO PROVIDE FAMILY TAX RELIEF THE FAMILY TAX FREEDOM PLAN The simplest way to reduce the tax pinch on middle class families with children would be to restore the income tax personal exemption for children, generally known as the &pendent exem p tion, to its 1948 level. In 1948 the dependent exemption was equal to roughly 20 percent of the median income for two-parent families. For the ex emption to have the same value in terms of family income, it would have to be set at 13 -tax income figures i n clude the employers share of Social Security tax. Data from the U.S. Bureau of the census 14 William R. Mamx Jr The Parent Trap, Poky Review, Winter 1991, p. 6 15 Ibid 16 Ibid 17 Ibid 10 approximately $S,OOO in 1992 and raised to about $9,OOO by the mid- 1990s. Doing this would put roughly $1,000 in the pocket of the average family in new tax relief for each child.
Raising the exemption, however, would not in fact be the best way to provide relief.
Most families with incomes below 27,000 per year do not p ay enough income tax to get the full value of raising the personal exemption for dependent children to $9,OOO Yet they are still heavily taxed This is because income liable to Social Security taxes is not reduced by exemptions and other deductions. Famili e s with modest incomes thus need relief fromSoCial Security taxes as well as from hicome taxes. A practical way to give reasonable tax relief to these families would be to enact a non-refundable child credit. Parents would use such a credit to reduce both t heir income tax and the employer and employee Social Security tax liability The following example illusmtes the difference between an income tax exemption and a tax credit. With an income tax exemption, income equal to the amount of the ex emption is exem pted from income tax. Thus far a family in the 15 percent income tax bracket, a $1,000 exemption decreases taxes owed by $1
50. By contrast, under a tax credit the amount of the credit is deducted from the taxes paid. It directly reduces tax li ability.Thu s for the same family in the 15 percent income tax bracket, a $l,OOO tax credit decreases net taxes by $l,oOO. And because a tax credit can be applied to both income and Social Security taxes, it is the better way to reduce the tax burden on mod est incom e families As Chart 4 above showed, increases in federal tax rates as a pentagek family in come since the early 1950s have raised the tax burden on the average family by over 8,OOO per annum. While it would be impossible to eliminate this excessive taxatio n in one step, it is possible to begin to roll back the familys tax burden. The most effective way to begin to roll back the tax burden would be to provide a $l,OOO tax credit for each child under age eighteen in working families. The tax credit could be u s ed to re duce a familys income tax liability employee Social Security tax liability, and em ployer Social Security tax liability!8 The credit would be available to working, taxpay ing families only. And the credit would not be refundable, meaning the valu e of the credit could not exceed a familys financial liability from income and social security taxes. For the average family in the 15 pent federal income tax bracket, a $l,OOO per child credit would give roughly the same level of tax relief as raising the depen dent exemption in the income tax code back to 1950 levels The credit would substantially reduce the tax burden of lower income working fami lies. Federal taxes would be eliminated on working families with incomes below roughly 120 pent of the federa l poverty thteshold Example: Under the proposal, a family of four earning around $16,000 in 1992 would pay no federal taxes. Families 18 The maximum value of the proposed credits thus would not exceed a familys total tax liability, represented by federal i n come tax and social securily taxes paid by the employee and employer. For familia receiving the eamedincome tax credit 0, the value dthe new credits proposed in this study would not exceed the familys net tax liability after receipt of the earned incame t a x credit.Thus if the cunent EITC already reduced afamilys tax liabilify to zero, that family would not be eligible to receive the propad new credits because it has 110 tax liabW 11 with earned incomes above $16,000 generally would have their taxes cut by t he full 1,OOO per child but would continue to pay some reduced federal taxes Young Child Credit. The families facing the most severe financial pressures of all are those with young chilhn. The mason is that families with one or more pre-school chilbn eith e r must bear the cost of day caxe for their children or must fmgo the sal ary of one parent while she or he remains at home to care for the chilhn. Thus a tax policy designed to help families with chilhn should give greater tax relief to families facing th e higher costs of raising young children. Such a family policy, moreover should not disciiminate agaiinst families making the economic sacrifice of keeping one parent at home to care for young chilhn. An extra $500 credit for each child under age six in th e family would help to offset the extra costs faced by these families. This credit would be available to all taxpaying families with young children and would re place the current dependent are tax credit, which is available only to parents using paid non-p arental day care. 28 The family tax freedom plan thus would provide two levels of tax credit:21 level I: a $1,000 tax credlt for each child aged six to eighteen level II: a $1,500 tax credit for each chlld under age six.
Both credits could be used to reduc e income tax liability and Social Security taxes owed through the employee and employer share. And the credits would not be refund able-meaning they could not exceed the value of a family's combined income tax and Social Security tax liability.
This system of tax credits would constitute an important but only modest step to ward alleviating the crushing tax burden that has been imposed on families with chil dren since 19
48. With the proposed new credits, a two-parent family at the median fam ily income w ith one pre-school and one school age child would pay $2,500 less in taxes.Total federal taxes on this family would fall to around 19 percent of income, or roughly the same level as existed in 19
73. Thus, while the credits would be a small first step in the right direction, they still would not go very far toward eliminating the excessive taxation since World War II 19 As with the current earned income tax credit, low-income families would continue to eam credit toward future Social Security retirement b e nefits based on the amount of labar perfonned-even if no actual Social Security taXeSWf3,epaid 20 The pmposed credits also would replace the current tax exclusion far employer provided dependent cam for children 21 For a full discussion of the family tax h zdorn plan, see Robert -tar Reducing theFinancial Burden on the Embattled American Family in Scott A. Hodge, ed A Rmp'cy Prcul for America-Fiscd 1993 Washington, D.C The Heritage Foundation, 1992 12 GRAPPLING WITH WAGE STAGNATION The most pressing fmancia l problem facing families with children today is overtaxa tion, and this can be addressed by tax relief measures such as those outlined above.
But families with childm face another financial problem which requires a mare indi rect and long-term solution. That problem is the slowdown in wage and salary growth due to low productivity improvements in the U.S. economy. The heavy tax burden on saving s and investment is a principal cause of this slow growth As Chart 3 showed, median family income in constant dolh grew less rapidly in the 1970s and 1980s than in pior decades. Momver, most of the increase in family in come in the 1970s and 1980s was due t o wives entering the labor farce. We in ear lier periods a husband's salary alone normally could provide a steady increase in real family income, after I~O it became necessary in many families for both spouses to enter the labor farce just to achieve even a modest in crease in the family's stan dard of living dollar growth of income in married couple families in which only the husband is em ployed (These data are a rea sonable proxy for the salary growth of husbands in general since World Warn Between 1950 and 1970, the real in come of husbands nearly dou bled. Between 1970 and 1990, however, real pre-tax in com grew by only 8 per cent. What is worse, grow ing federal taxation swal lowed up what little income gain there was; post-tax in Chart 7 shows the co n stant 22 Chart 7 Income Lost to Federal Taxes for Single-Earner Families: 1949-1990 Thourandr of 1000 bollarr 98 30 16 8'o'60 '66 '60 '06 70 76 10 -0 '90 Year Notm Figurer are ior a median income marrled couple Oourom Heritage lax Model; Income Uata lrum family wlth wife not in Iha labor lorca U.
8. Deparlmrnl 01 Cenaua. norit.~r Datachart lhese data slightly underestimate the growth in real incomes since 1970 because they do not include increases in non-wage beqefb such as medid coverege. Nevertheless cve n if inuwse in benefits rue taken into Bccount the ht remains that then was a significant slowdown in the inaease of husbands' toml income (including salaries and benefits) after 19
70. Data fmm Hemon, op. cit. See also U.S. Bureau of the Census, Money In come ofHouscholrlr, Fbmilics, and Persons in the United Stares: 1987, Current popllation Reports, Series Pa, No. 162 (Washingmn, D.C U.S. Govenunent Printbig o&ce, 1989 p. 107.This gives historical dam on the incomes of males employed full time year round . Mare Iccent data an? available in later issues. All data series show nearly identical trends in male earnings over be 13 :ome for these single-earner families has not inmased at all over the past twenty years The stagnation in post-tax income of working h usbands played a large role in induc ing large numbers of wives to enter the labor force in the 1970s and 1980s. While this zxm labor did raise family incomes somewhat, at least half of the family income added in this manner was swallowed by escalating fe d eral taxes. Todays families thus are being crushed by the dual problem of high taxation and slow wage growth Lawmakers interested in relieving the financial pressures on the modem family thus cannot m-ly-reduce taxes on families. They.also.must enact poli c ies that will restore wage growth to the levels that prevailed in the 1950s and 1960s. This means tax re oms that will spur the savings and investment needed to make the U.S. economy more productiv so that American workers can enjoy higher incomes. Among t he nec essary reforms 1) Cut the capital gains tax rate to 15 percent and Index this tax rate to the rate of Inflation In contrast with Americas leading industrial competitors, investors in U.S. compa nies face high taxes on the nominal value of gains the y make in the value of their in vestments In the U.S. the top rate of capital gains is 28 percent. By contrast, the top rate in Japan is 5 percent and in Gennany there is no such tax on assets held for longer than six months. The heavy tax on U.S. capital g ains discourages Americans from mak ing the investments in industry necessary to improve productivity, and thus the in comes of American workers B 2) Extend and expand indhrldual Retirement Accounts (IRAs Like capital gains, the earnings Americans receive on their savings is more heavily taxed than in most other industrialized countries. This high taxation encourages Ameri cans to consume their income rather than to save.This in turn reduces the available pool of money for new investment.
Individual Retire ment Accounts IRAs) reduce the tax bias against savings by defer ring income taxes on income.placed into the special accounts. Unfortunately, the 1986 Tax Reform Act sharply restricted the amount of income that families could place in such accounts. Exten d ing and expanding these accounts, and revising the tax treatment of the accounts, would boost#vings and so increase the pool of funds available far productive new investments 3) Reduce taxes on buslness Investment by Indexing depreclatlon schedules In mos t industrialized countries, fms effectively are allowed to deduct the full cost of new plant and equipment fiom their taxable profits, much like any other business ex penses In the U.S however, arcane depreciation schedules farce firms to wait many years f o r tax relief on major investments of new plant and equipment. Indexing depre for Inflation 23 For a complete discussion of measures needed to boost savings and investment in the U.S. economy, see Daniel J. Mitchell, A Tax Reduction Strategy to Spur Econom i c Growth, in Hodge, op. cit 24 For an ehboration of the IRAproposal, seeibid 14 ciation schedules for inflation, which would give fms more up front tax relief for investments, would be an impartant first step toward achieving a fairer tax treatment of inv estments, and thereby boosting new investment.
Because these tax changes would improve productivity and thereby raise the wages of parents and other workers, they are profoundly pro-family. If, by making such re forms, the U.S. can restore productivity inc reases and wage growth to the rates en joyed in the 1950s and 196Os, the average parent could expect real hourly wages to grow by nearly 50 percent in the next deza This is crucial to relieving the financial pressures on todays beleaguered families HOW TO PAY FOR FAMILY TAX RELIEF Several proposals on Capitol Hill to relieve taxes on families with children, such as those spond by Senator Gore, Representative Downey, and Senator Bentsen would cut taxes modestly for middle-class families but would couple the s e tax cuts with increases on higher-income families. The muble is that these tax increases would slow investment, which in turn would slow the growth of economic productivity and hence slow real wage growth far the average American. The result: What famil ies would gain by tax relief they would lose in the slower growth of real wages. Thus tax proposals like the Gore-Downey plan and the Bentsen plan actually would hurt Ameri can families.
The proper way to provide for family tax reduction is not to increase taxes on other Americans. Raising taxes on one group to cut the tax burden on another would do noth ing to improve productivity in the economy and likely would reduce it. The way to pay for tax cuts for families is to restrain the growth of federal nonde f ense spending which has grown faster than the rest of the economy for the last three decades. Ifa cap of five percent per annum wexe placed on the growth of total federal domestic spend ing, the resultant waste dividend woqbe sufficient to finance most of the family and growth tax package outlined above. Under such a plan the family tax credits out lined above could be phased in over a four-year perid In each year during the phase in the tax revenue loss from the proposed mdits would be matched, dollar for dollar by spending reductions under the five percent spending growth cap. The value of the family tax credits would be increased each year and would reach their full value of l,OOO for a school-age child and $1,500 for a pre-school child in 19
96. In that year the revenue loss from the praposed new tax dts for children would be around $55 billion per annum. A five percent spending cap first instituted in fiscal 1993 would result in a corresponding domestic spending reduction in 1996 of some $46 billion. U p to an additional $10 billion per annum could be obtained through extra cuts in the de 25 Many experts believe that reducing the tax rates on savings and investment would so stimulate economic growth that they would c8use an increase in overall federal ta x revenues. Thus, acceding to these analysts, tax cuts on investmentll and savings would help reduce the f- deficit. However, for purposes of this study, it is assumed that tax cuts on savings and investment would incseaSe economic growth but would neither increase nor deQease fedeaal tax revenue, thus they would have no impact on the federal deficit. See ibid p. 32 26 For a detailed analysis of how a five percent cap would fund the pmposed tax relief, see Hodge. op. cir. fense budget. Under the existing bu d get agreement, defense spending already is sched uled to be cut some 20 percent in real terms over the next five years. Thus under the spending cap plan, each dollar of family tax relief would be matched by one dollar of reduced non-defense and defense sp e nding. The proposed family tax credits hence would not cause any inmase in the fe&ral deficit; the deficit would continue to shrink, and at current projected rates would be cut in half by 1996 PRO-FAMILY WELFARE REFORM The current welfare system is anti-f a mily. In fact, the system has made marriage eco nomically irrational for most low-income parents. Welfare has transformed marriage from a legal and social institution designed to protect and nurture children into an insti tution which imposes financial pe nalties on nearly all married low-income parents. The current welfare system, in fact, has all but destroyed family structure in the inner city.
The problem is that welfare mates strong financial disincentives that effectively block the formation of intact, two-parent families.
Example: Suppose a young man in the inner city has fathered a child out of wedlock with his girlfriend. If this father abandons his responsibilities to the mother and child various levels of government will step in and support the m other and child with wel fare. If the mother has a second child out of wedlock, as is common, average combined benefits in a typical state will reach around $13,000 per year." If, on the other hand the young man does what society believes is marally cat-t h at is, marries the mother and takes a job to support the family-government policy takes the opposite course. Welfare benefits will almost be completely eliminated. If the young father makes mm than $4.50 per hour, the fdral government actually begins taki ng away his income through taxes.
To be sure, the Family Support Act of 1988 permits a family to continue receiving welfare if the father marries the mother and stays with the family-but only as long as he does not work Once he takes a full-time job to sup port his family, the welfare bene fits quickly are eliminated and the father's earnings become subject to taxation 27 This figure repnsents the average value of combined welfare benefits for a single mother with two children enrolled in the Aid to Familie s with Dependent Children program in the average state. Benefits which the family could receive under the following programs m included in the calculation: Food Stamps, Medicaid,the Women, Infants, and Children food program, Low-Income Energy Assistance, P u blic Housing, Section 8 Housing, School Lunch Program, School Breakfast Program, Summer Food Prognun, and the Tempomy Emergency Food Assistance Program. The calculation does not assume that the average AFDC family receives benefits from all these programs , but is based on the actual probability of AFDC families also participating in these extra programs. For example, if the cost of public housing subsidies is $5,000 per unit and 25 percent of AFDC families receive public housing subsidies, then the average value of public housing subsidies for AFDC families in general would be $1,2
50. This procedm provides an accurate calculation of the average value of welfm benefits from different programs received by AFDC families of a given size within each state. Of c ourse, many AFDC families within a given state will have web benefits above or below the average in that state, depending on the number of extra welfare programs they participate in 16 Current welfare thus may best be conceptualized as a system which offe r s each sin gle mother an annual "paycheck" worth an average of between $8,500 and $15,000, de pending on the state. The mother has a contract with the government; she will continue to Eceive her "paycheck" as long as she fulfills two conditions Condition # 1: She must not work and Condition #2: She must not many an employed male.28 Low-income. parents have :responded quite logically to these destructive incentives of the welfare system. Single mothers on welfare in the inner city typically drift through a s e ries of "common law marriages" with Want males. While allowing the household to comply with the letter of the welfare law, these relationships lack the so cial, legal, and financial incentives which help to cement middle-class families and so strong, perm a nent tweparent families seldom emerge stability, educational achievements, and life prospects of low-income children. Chil dren raised in single-parent families, when compared to those in intact families, are one-third more likely to exhibit behavioral pr o blems such as hyperactivity, anti sence of a father so increases the probability that a child will use drugs and engage in criminal activity!' seventy percent of the juveniles ow in state =form institutions grew up in single-pmnt homes or no-parent homes.
And children in single-parent families are three times as likely to fail and repeat a year in grade school than are children in tweparent families. In all ~spects, the Mer ences between chilhn raised in single-parent homes and those raised in intact homes are profound, and such differences persist even if single-parent households are com pared with two-parent households of exactly the same income level and educational at tainmen But the greatest tragedy is that cWn from fragmented homes, when grown to adu l thood, tend to pass problems on to their own childten. Weakened in their own de velopment, children from single-parent homes are markedly less likely to be able to es tablish a stable married life when they become adults. Studies show, for instance, that y oung white women raised in single-parent families are 164 percent mm likely to bear children out of wedlock themselves, and 11 1 pemnt more likely to have children The collapse of family structure in turn has crippling effects on the health, emotional beh a vior, and anxiety, and they are moxe likely to commit suicide as teenagers fb A 28 Technically the mother may be married to a husband who works part-time at very low wages and still be eligible for some aid under the AFDC-UP program. Howvex, if the husban d works a Significant number of hours per month even at a low hourly rate, his earnings will be sufficient to eliminate the family's eligibility to AFDC-UP and most 0th- welfare 29 Dr. Deborah A. Dawson Family Structure and children's Health and Well-being : Data From the 1998 National Health Interview Survey on Child Health paper presented at the annual meeting of thePopulation Association of America,Tonnrto, May 1990,Table 5 30 Nicholas Davidson The Daddy Dearth Poky Review, Winter 1990, p. 43 31 Cited by K arl Zmsmeister in Lcft and Right: The Emergence cfa New Politics in the 199091 (Washington, D.C Ihe Heritage Foundation and the prosresSive Foundation, 1992 p. 27 32 Dawm, op. cit. Davidson, op. ut 17 While many social and political changes are needed to = verse this instability, one of the most urgent is a major change in the perverse incentives of the welfare system. In particular, incentives from existing programs which promote single parenthood and I prolonged dependency must be eliminated or at least r e duced. Conversely, new poli cies must be devised which will promote self-suffciency and encourage the fonnation of two-parent families What is not needed is policies along the line of those recommended by the National Commissi n on Children chaired by Sen a tor John D. Rockefeller, the West Virginia 35 Democrat. Although the Rockefeller Commission, which released its repart in 1991 trumpeted a strong rhetorical commitment to the principle that two-parent families are best and should be encouraged by governme n t policy, its policy recommendations con tradict its own rhetoric. By inneasing the economic rewards provided to non-working single mothers relative to working two-parent families, the Commission proposals, like the similar proposals introduced as legisla t ion by New York Democrat Representative Tom Downey H.R. 3603 would repeat and intensify every mistake of the existing welfare system WELFARE REFORMS TO PROMOTE STRONG FAMILIES AND SELF-SUFFICIENCY There is, fortunately, an emerging consensus among America n s that the welfare sys tem has undermined the family and harmed those it was intended to benefit. Lawmak ers at the federal and state level should build on this consensus and work together to develop a pro-family welfare strategy which would reform the we l fare incentive sys tem by inneasing the rewards for work and marriage while decreasing the current re wards to non-work and single parenthood. Among the necessary components of this new strategy Ghre tax relief to low-Income working famllles Few Americans realize that a father warking to support a wife and two children and earning as little as $16,000 per year actually pays around $2,000 to the federal govern ment in taxes. The simplest way to innease the rewards to marriage and work relative to welfare is to reduce the tax burden on low-income working families. The family tax 33 Irwin Gamnlrel and Sara S. McLanahan, Single Mothers and Their Children: A New Anzerican Dilemma Washington, D.C The Urban Instituw Press, 1988) p. 31 34 Ibid 35 National Commissio n on children, Beyond Rhetoric: A New American Agenda for Children and Families Washington, D.C U.S. Government Printing office, 1991 18 plan outlined earlier in this study would do this by providing families with a non-re undable tax credit of $1,0o0 for each school age child and $1,500 for each pre-school child. This would eliminate federal taxes on families earning less than 120 percent of the federal poverty income threshold, which was $12,675 for a family of four in 1991.
By raising the real eamhg powe r of lower-skilled men, this tax reduction would en courage marriage and foster the formation of two-parent families, as well as helping single mothers to work their way off welfan Y Give vouchers to all low=lncome families not on welfare for the purchase of medical insurance The current welfare system provides free medical coverage through the Medicaid program to single parents and non-working two-parent families on AFDC, but the gov ernment provides little or no assistance to low-income working families t o help buy coverage. This discourages work because a welfaxe mother considering a low-income job in a small firm-which typically will not include a health benefits plan-faces the loss of thousands of dollars worth of medical benefits. It also discourages m arriage be cause a welfare mother marrying a man in a low-wage job in a firm without family medical benefits will again lose medical coverage. The federal government could re duce the anti-work and anti-marriage effects of welfare by enacting the comprehe n sive medical refv proposed by The Heritage Foundation, known as the Consumer Choice Health Plan. Among other xefanns, this plan would provide federal tax dts and vouchers for the purchase of medical insurance to low-income working families not eli gible f o r Medicaid. A proposal with some similarities to the Heritage plan mently has been introduced by hsident Bush. Under the Bush plan, poor families would meive a voucher worth as much as $3,750 each year for the purchase of medical coverage Y Reduce the wel fare benefits for slngle mothers enrolled In the AFDC program The higher welfare benefits are, the greater the disincentives to work and marriage.
Recipients of Aid to Families with Dependent Children (AFDC) are eligible for bene fits from nearly a dozen major welfare program.These include Food Stamps, Medic aid, Public Housing, Low-Income Energy Assistance, and the Women, Infants, and Children food program. In all but five states, the combined value of benefits meived by the average AFDC family actually exceeds the federal poverty income threshold.
Welfare benefits for families on AFDC should be duced, particularly in states in which the average val ue of benefits is well above the poverty level. This would dis courage households from staying on welfare because it is comparatively attractive, and yet would not impose actual hardship 36 For adescription of the plan, see Stuart Butler APolicy Maker's G u ide to the Health CareCrisis,PartIkThe Heritage Consumer Choice Health Plan Heritage Foundation Talking Poinrs, March 5,1991 19 Require mothers who do not have children under age five, or who have re ceived AFDC for over five years, to perform fuli=tlme c o mmunity service in ex change for benefits The work requirement should not be temporary. Recipients subject to it should be re quired to perform a community seMce as long as they receive welfare benefits. Requir ing a welfare recipient to work in exchange f or benefits greatly reduces the attractive ness of welfare relative to private sector employment. Work requirements thus discour age dependence and encourage efforts toward self-support. A work requirement also eliminates many of welfare's anti-marriage i n centives. Example: Under the current welfare system, if a welfare mother marries a fully employed man she will lose some 10,000 to $13,000 in welfare benefits. Under a welfare system with a work require ment, the welfare mother still loses benefits upon m a rrying, but she will be losing ben efits for which she must work rather than losing a free income. Hence, the practical loss will be far less significant. Indeed, as long as the welfare mother can obtain a pri vate sector job which pays roughly as much as her previous welfare benefits, then the financial penalty on marriage would be eliminated entirely.
Most mothers with pre-school children would be exempt from this work require ment. Because of the high costs of providing day care, work requirements for mothers with pre-school children almost cert8inly would increase rather than cut welfare costs.
Moreover, great caution should be exercised toward any policy which separates young children from their mothers as this will often have a significant detrimenta l effect on the child's development. Thus a well-designed work program generally would not in clude mothers with young children. However, a second rule requiring work by all mothers who have received AFDC payments for over five years, either continuously or in separate periods, is needed to discourage mothers from intentionally having mm children to avoid an obligation to work.
If a work requirement of this kind wm established, roughly 50 percent of AFDC mothers would be required to wark as a condition of receiving benefits. This would be an enormous improvement fnnn the present situation; in the average state only 6 per cent of AFDC mothers currently participate in job search, work, or training programs Eqmiment with "wedfare" programs Several states, inc l uding Wisconsin, are considering so-called Wedfare programs which would give cash bonuses to AFDC mothers who marry, leave AFDC, and k main off the welfare rolls. Example: A welfare mother might be given a payment of 2,000 if she married and remained off t he welfare rolls for at least two years. How ever, since the real effects of wedfare programs are uncertain, state governments should introduce such programs n an experimental basis and rigmusly evaluate them through controlled experiments. 28 37 New Jers e y has also enacted a variant of wedfa. A wedfare program would probably be most effective if restricted to mothen who are likely to be long-term welfare depenaents such as never ded mothers who have been on AFDC over two years 20 CONCLUSION Americas often disparaged traditional two-parent family is the principal social insti tution by which the work ethic, self discipline, intellectual motivation, and moral char mer are passed on to the next generation. The American family is the foundation of American soc i ety. When the family is weakened, the nation is weakened But the American family is in deep trouble. A crushing tax burden is making it in creasingly difficult for middle class families to support themselves. Excessive taxes on savings and investment have eroded the American Dream, reducing the real growth of parents wages to a fraction of what could be expected in earlier generations. And the ever-growing welfare system has replaced the husband as the principal breadwinner for a growing number of low-inco me mothers and childxen.
What families need from government is not new spending and new social programs.
Those have done little or nothing to help families, and paying for them has added to the tax burden on us all. What families really need is threefold. First, for government to allow them to keep a greater share of their own hard-earned money. Second, for gov ernment to cut taxes on investment and savings in order to stimulak productivity growth and to raise real wages hughout the economy. Third, a refo rm of the welfare system to promote rather than penalize the formation of self-sufficient, two-pmnt fam ilies. These policies are needed urgently if America is to msm its bedrock social insti tution.
RobeltRector Policy Analyst 21