Conservatives, wake up: The tax code is not your biggest problem

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Article Highlights

  • Long-term unemployment is a national emergency that belongs at the front of the line — addressing it is good economics, and the right thing to do.

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  • The average labor force participation rate of prime-aged men in 1980 was 94.3 percent. The rate last month? Just 88 percent.

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  • I would make progress with conservative health-care reforms before worrying about tax reform. It’s a bigger economic problem today — and it’s a problem that will only grow in importance over the coming years.

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Yes, conservatives support lower tax rates. But should this really be a top priority for conservatives today?

Many think so. Last week, for instance, Kimberley A. Strassel offered an explanation for her support of tax reform: It would grow the economy.

But by how much? Strassel highlighted the tax reform plan put forward recently by Rep. Dave Camp, which would likely increase the size of the economy by less than one percent over the next 10 years. That’s a modest increase, but it’s not nothing — one percent of a big number is still a big number. Still, there are several problems facing the country today that are more urgent than the tax code and that, if improved, would offer greater social and economic benefit than a modestly larger economy. Herewith, three such problems.

The long-term unemployed are workers who have been out of work and looking for a job for six months or longer. There are over 3 millionlong-term unemployed workers today, representing over 2 percent of the labor force. And there are millions more workers who have left the labor force but would like a job. These workers can be thought of as idle economic resources — the economic equivalent of factories shut down or new technology ignored. The longer we leave this problem unaddressed, the greater the likelihood that this cyclical problem will become structural, leaving us with a smaller labor force and a smaller economy over the long-term. More importantly, long-term unemployment is a human tragedy, shattering lives on a mass scale.

I would employ a suite of policies to help get the long-term unemployed back to work before reforming the tax code. Long-term unemployment is a national emergency that belongs at the front of the line — addressing it is good economics, and the right thing to do.

Men of prime working age — too old to be in school and too young to be retired — are in flight from the labor force. The average labor force participation rate of prime-aged men in 1980 was 94.3 percent. The rate last month? Just 88 percent. Only 83 prime-aged men out of every 100 have a job today.

Relative to 1980, this represents a staggering decline. It is related to several serious problems: Wages are stagnant or falling for low-skilled men, and schools are failing to equip many American children and teenagers with the skills they need to command higher wages and success in the labor market.

Public policy can help. It must start with conservative solutions to reform our schools. We should also increase the generosity of the earned income tax credit (EITC) for childless workers as a way to increase labor force participation by increasing the financial rewards from work and to ensure that no one who works full time and heads a household lives in poverty. Conservatism champions earned success, which the EITC and conservative solutions to education promote. Such policies are well targeted, and are more important to society and the economy today than tax reform.

Our health-care system is in need of serious reforms. The Affordable Care Act is an ugly package filled with unintended consequences. One of those consequences is a significantly smaller labor force. It should be repealed and replaced with a conservative alternative. And health-care costs are projected to put Medicare and Medicaid spending on an unsustainable and destructive path, and are putting downward pressure on wages and salaries.

I would make progress with conservative health-care reforms before worrying about tax reform. It’s a bigger economic problem today — and it’s a problem that will only grow in importance over the coming years.

To be clear, we should reform our tax code along the lines these conservatives suggest. (Much better would be to replace the current system with a progressive consumption tax, as my AEI colleague Alan Viard has suggested.) In particular, we should broaden the tax base by phasing out the tax exclusion for employer-provided healthcare, the mortgage interest deduction, and the state and local tax deduction. But conservatives must prioritize their policy goals, and the rather modest economic gains from tax reform do not merit it being addressed before (at least) the three issues I discussed above.

In her column, Strassel offered criticism of “Room to Grow,” a book of policy essays published by the YG Network, to which I contributed a chapter. “Room to Grow” is not above critique, but Strassel is significantly off base. She writes that the central premise of the book is “that conservatives need to embrace government,” driven by political considerations, “to better endear themselves to the ‘middle class.’” That’s absurd. The central premise is instead that the problems and challenges of 2014 are not the same as the problems and challenges of 1980 — when, for example, the top marginal income tax rate was 70 percent — and that conservatism needs to address today’s challenges if it wants to help the economy and the nation.

With that premise I hope we all can agree.

Michael R. Strain is a resident scholar at AEI.

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