President Donald Trump’s response this summer to the violence in Charlottesville, Va., and his pardon of former sheriff Joe Arpaio added to the image of Republicans as the party of white grievance, and not as the political vehicle for conservative thought and ideas. Conservatives and Republicans, especially those in Congress, have an opportunity to challenge that image this fall.
As they turn their attention to tax reform, Republicans can legislate better public policy. But conservatives can also seize this chance to advance and illustrate their principles and priorities.
Conservatism (properly understood) believes public policy should build ladders of opportunity for low-income Americans, offering them a hand up out of poverty and into the workforce. One of the most successful programs we have to advance this goal operates through the tax code. The Earned-Income Tax Credit is a subsidy available only to households with jobs, and the amount of the subsidy rises with every additional dollar of earnings over an initial range.
These incentives to encourage employment are successful. Previous expansions of the EITC have significantly increased workforce participation among targeted groups. And each year the credit lifts millions of people, including several million children, out of poverty.
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The credit is insufficiently generous for workers who are not raising children in their homes. The maximum subsidy for a household with no children is about $500 per year. A childless adult working full time at the minimum wage receives less than $40 per year. To increase employment among childless adults – many of whom are prime-age men, a group with troubling workforce participation rates – the EITC for childless adults should be expanded.
House Speaker Paul Ryan has a plan to do exactly that. It should be included in this year’s tax legislation.
Other policies should be considered, too. One is a tax credit to encourage people to relocate to start a new job. This credit should be aimed at individuals who have been out of work for some time, who live in places with especially bad local labor markets, and who lack the resources to move. It would empower individuals to earn their own success, reflecting conservative values.
Conservatives can also use tax reform to focus public spending on those who need it. We spend more money through the tax code than we spend on national defense. The top 20 percent of households by income receive over half of the benefits from the largest tax expenditures. More than $4 of every $5 from the deduction for mortgage interest goes to households earning more than $100,000 a year. And more than $9 of $10 in deductions for state and local taxes goes to six-figure households.
Congress ought to reduce spending through the tax code on policies like these, and use the resulting revenue to lower tax rates. But a secondary goal should be that less of the remaining spending benefits upper-income households. For example, using a portion of the savings to enhance the EITC would better target spending toward those who need it.
Tax reform can encourage dynamism and energy in the commercial sector by cutting the corporate tax rate. The current system is a mess, giving companies incentives to avoid taxes at home by earning and booking profits abroad, and to invest in countries other than the U.S. This reduces productivity and drives down wages. Permanently reducing the corporate tax rate from its current 35 percent – the highest statutory rate among advanced economies – to the low 20s would substantially mitigate these counterproductive distortions.
To benefit the economy, the revenue lost from the lower corporate rate needs to be replaced by broadening the tax base, and not financed through larger budget deficits. Republicans in Congress should champion fiscal responsibility to strengthen economic growth, and adding to the already troublesome long-term national debt is imprudent.
All this is not a comprehensive list of what ought to be included in tax reform. But no matter the final package, conservatives should welcome tax reform as a chance to design policies that champion and illustrate core values of opportunity, empowerment, earned success, prudence, responsibility and dynamism. All these will be on display in a tax reform done right. In today’s political climate, this will be very hard to achieve.
Given how the last eight months have gone, that’s all the more reason for conservatives to welcome the challenge.