How We Can Use Tax Policy To Get What We Want – and Stop What We Don’t

By Clay Grubb
tax policy

I am a huge advocate for children, their rights and protection, having spent more than 20 years engaged in the Children’s Defense Fund’s Freedom Schools, among other initiatives benefiting children. So why am I opposed to something so appealing-sounding as a tax credit for children? I believe a child tax credit should incentivize a parent to nurture and care for a child, to reward the parent for taking the child to things like regular health checkups, pre-school, and other health and education initiatives. With any tax policy, we need to ask ourselves what behaviors we want to encourage as well as those we want to discourage.  Our tax policy is an opportunity to try to nudge societal change – but the challenge is ensuring that the policy matches our ultimate goals.

To start with an obvious example – the long-term capital gains tax – we should first ask whether we want to encourage folks to save their hard-earned money and invest in the future of our country. Naturally, we do. However, the current definition of “long-term” for this tax is only one year.  What person saving for retirement or running a business would agree that a long-term investment is one year? I would argue that the current administration would generate more tax income by changing the definition of long-term to 10 years rather than raising the rate they charge. Just think how much stronger our economy could be if we incentivized investors to put their money in companies focused on resilient 10-year business plans versus the hot investment du jour, like a new cryptocurrency.

Another policy worth a second look is the earned income tax credit. We should enhance this credit so that those hard-earned dollars of income are not initially taxed. Instead, the government should match those earnings – say 20 percent of the first $10,000 a person earned, and 10 percent of the second $10,000 they earned. This would likely motivate more people to earn income – thus leading to additional corporate taxes generated by the additional productivity created by companies as a result of having access to a significantly larger pool of job applicants.

We can also use tax policy to discourage harmful behavior. For example, one of the most prominent sin taxes, our heavy tax on cigarettes, achieved one of its main objectives: a drastic reduction in smoking by Americans. Many argue this sin tax isn’t a permanent source of tax income, but that is short-sighted. Not only has it been a predictable source of tax revenue for states that have instituted their own state tobacco taxes, it also drives down tobacco usage, which benefits public health and worker productivity, and reduces state health care costs.

How many Americans believe we should promote more pollution? How many Americans think we should encourage other countries to create more pollution? Despite anyone’s views on climate change, I cannot imagine any rational human believing that more carbon spewing into the atmosphere is a good thing. So why not put a carbon tax on the table? I do not think it should be a tax specifically on goods produced in America but instead should hit every good shipped to America equally, including the impact of shipping. Producing goods locally—whether it is honey from bees or metal silkscreens—is a more resilient strategy than relying on someone on the other side of the world to support our consumer habits.

To see how tax policy can both encourage and discourage behavior, look at the current U.S. Census results, which showed that the populations of Florida and Texas grew while California’s and New York’s shrunk. I do not think this migration was a result of folks deciding they preferred the heat of living in Miami and Houston to the temperate climates found in Los Angeles and San Francisco. Rather, it was most directly tied to whether people wanted to pay 50 percent more in income taxes for the benefits of living in these states.

While the adjustments to tax incentives and changes to tax policy are limitless, it is time for us to focus our energies on a more sustainable approach to how we run America, just as any company would approach its business. Let’s create incentives for people to work, produce goods, and strengthen America, and let’s apply taxes to those behaviors we want to discourage.