Ethics & Public Policy Center

Tax Reform for the Working Class

Published in National Review - May 15, 2017 issue on May 15, 2017


The Trump administration and congressional Republicans are champing at the bit to introduce a comprehensive tax-reform bill. All indications are that the bill will dramatically slash the marginal rate of taxation that applies to most corporations. This may be great long-term economics if supply-side theory is correct. But without more targeted tax relief that offers immediate and direct benefit to the swing voters who elected President Trump, Republicans might not be in power long enough to enjoy the economic upturn.

Trump won because he received over 5 million votes from people, largely non-college-educated whites, who had voted twice for President Obama. From an economic standpoint, these voters are likelier to be unemployed or underemployed than the typical Republican. They are also likelier to have suffered financially during the Great Recession and to have faced stagnant or declining wages for the past two decades. They crossed party lines because they saw Trump as someone who was committed to delivering what they want most: good, high-paying jobs.

Economic theory says that corporate-tax reform will deliver them to American workers, but only over time and not necessarily in any way that voters can directly perceive. The economic benefits will flow only if corporate managers believe the rate reductions are permanent, something President Trump’s continued historically low approval ratings and the likely hostility from Democrats will call into question. Even with this belief, corporations do not turn on a dime. It takes months or years to plan major investments, and longer still to actually build the new plants, factories, and businesses that would deliver new jobs and higher wages. Hurting and angry voters may not have the patience to wait to see whether the promises are kept.

A tax bill that includes provisions that are clearly intended to benefit these people directly, however, might increase their support and patience. But here traditional supply-side theory might not offer a palatable solution. Cutting these voters’ marginal income-tax rates won’t deliver much benefit. Many of these voters already pay little to no income tax because of the increases in the child tax credit and the lower marginal rates that the George W. Bush tax cuts installed in the early 2000s. Moreover, what these voters really want is a return to the prosperity they believe is their due. Cutting their tax rate from, say, 15 to 13 percent won’t give them much money now and won’t do anything to make them think the future will be noticeably brighter.

Three ideas stand out as possible provisions that could help these voters quickly. None of them fit neatly with supply-side theory, but each would deliver immediate benefits to workers and, just as important, show them that the GOP cares about people like them.

The first is a tax credit for hiring American citizens. This credit would be in addition to the current deduction for all compensation paid to a business’s workers, and it could be structured as a percentage of compensation or wages or even as a flat per capita amount. It would, in effect, be a partial subsidy for job creation. It would directly meet the need these workers have, and it would be clear and easily understandable: Hire a citizen, get paid.

This provision would also address concerns about the level of immigration. Low-skilled immigration, often illegal, exerts a downward pressure on wages for many native-born Americans. Make these credits available only for citizens, however, and on the margin it becomes cheaper to hire American than to import labor legally or to overlook the legal status of your employees. Since it would be attached to a tax bill that would go through reconciliation in the Senate, this idea would not require any Democratic support, unlike immigration legislation or appropriations for a border wall. It would also allow the Trump administration to deter illegal immigration even in sanctuary cities. A citizens-only jobs tax credit, therefore, would address two priority issues for voters — jobs and border control — with one act.

The second idea is related: a tax credit for wage increases for workers earning the national median wage or less. It should be set as a percentage of wages paid above the annual national increase (if any) in the median wage. Thus, if the national median wage rose by 1 percent in a calendar year, the tax credit would be provided for any wage increases above that percentage.

This provision would directly attack the other main economic problem that less skilled workers face: stagnant paychecks. In effect, it would provide a small but real subsidy for a business to give a marginal dollar to a low-income worker rather than pay it to a manager or to stockholders. It could be viewed as an alternative to Democratic proposals for minimum-wage hikes, and it would likely cost many fewer jobs, because it would not increase the marginal cost of all less skilled labor.

Like the first tax credit, this wage-hike credit could also be given only for U.S. citizens, further increasing a native-born American’s economic competitiveness. Moreover, by pegging the credit to the national median wage, this provision would provide additional benefits for workers in low-wage regions of the country. A firm operating in a less prosperous area, such as West Virginia, probably pays a larger percentage of its total labor bill to workers earning less than the national median wage than does a similar firm in Silicon Valley or New York. This credit would therefore provide a subtle but potentially significant subsidy to firms outside the larger metro areas, which in turn would help spread gains from economic growth more evenly throughout the country.

The third provision is to exempt a share of wages from the payroll tax. This provision would directly address the “money in the pocket” issue, giving every worker an identical tax cut regardless of income but providing a bigger proportional boost to the less well-off. If applied to the entire payroll tax, every $10,000 exempted would give a worker an additional $765 a year to spend. A two-earner family making $30,000 a year — a common situation in inner cities and in “Trump Country” — would thus get a bit over $1,500 a year more to spend. If those wages were also exempted from the employer’s share of the payroll tax, it could lower the marginal cost of hiring an additional employee.

Since the payroll tax pays for Social Security and Medicare, any such provision should include other changes that would recoup some of the lost revenue. There are plenty of ideas for doing so, such as reducing the premium subsidies that go to well-off seniors on Medicare, increasing Medicare co-pays for wealthier seniors, or increasing the share of Social Security benefits that is subject to income taxation for seniors who receive income of, say, at least $50,000 or $75,000 outside of that venerable program.

Supply-siders may resist these ideas, but they should recognize that there is more than one way to produce broadly shared economic growth. Provisions such as these could help ensure that the gains from a faster growth rate do not accrue primarily to people at the top of the income and education scales, as they did over the last 15 years. These provisions would also give less skilled workers “skin in the game” as regards tax reform. Such workers might not be terribly interested in corporate-rate reductions, but they might nonetheless care about passage of an entire tax bill if it includes these proposals as well.

The GOP leadership thinks correctly that it has a once-in-a-lifetime opportunity to pass vital tax reform. It also has a once-in-a-lifetime opportunity to create a durable political majority, a task that has eluded it in the 40 years since Ronald Reagan brought the modern Republican party into being. As Reagan told the 1977 Conservative Political Action Conference, “If we are to attract more working men and women of this country, we will do so not by simply making room for them, but by making certain they have a say in what goes on in the party.” The tax provisions I have outlined are exactly the sort that these men and women would adopt if they in fact did have a real say about what the Republican party does. GOP tax-reform advocates should use the expected tax-reform bill as a way to complete the political task Reagan bequeathed to us.

– Mr. Olsen is a senior fellow at the Ethics and Public Policy Center and the author of the forthcoming book The Working-Class Republican: Ronald Reagan and the Return of Blue-Collar Conservatism.

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