The American Spectator

Political Hay

The Conservative Welfare State

By Peter Ferrara on 7.2.08 @ 12:08AM

Ross Douthat and Reihan Salam argue for restoring the Republican Party through a new activist government agenda focused on addressing the problems and concerns of the working class. The failure to decisively win over the working class is what has prevented Republicans from winning a true governing majority, they argue. The new agenda, they say, should include subsidies and policies to strengthen marriage and the family, and promote having children.

Douthat and Salam have written yet another book advocating the complete revision of conservatism based on embracing rather than rejecting Big Government: Grand New Party: How Republicans Can Win the Working Class and Save the American Dream. But as editors at the Atlantic magazine, they are really part of the newly emerging neoliberalism in various new institutions and projects in Washington. They draw on the ideas and thinking of this neoliberal crowd, the future heart of the Democrat party, rather than the conservative and free market think tanks and institutions that form the intellectual base of the Republican Party.

Yet, as a libertarian and supply-sider, I still accept their basic premise that conservatives and Republicans should focus on policies that would win over the working class (though we have a style problem among the upper classes that needs to be addressed as well). I even accept that we need to adopt policies that strengthen marriage, the family and child bearing. America has barely avoided so far the collapsing demographics of Europe that has already begun phasing out the social culture and heritage of the old continent. We still have the chance to avoid that fate in America.

But, as I will show below, these goals would be promoted far better by reducing Big Government and its burdens, rather than by the bigger than ever conservative welfare state proposed by Douthat and Salam.

The authors propose winning the support of the working class the old-fashioned way: buying it, with taxpayer money, of course. They endorse a proposal by Ramesh Ponnuru of National Review to raise the current $1,000 child tax credit to $5,000 per child. That credit could be taken up to the full amount of each parent's income tax and payroll tax liability. They also support subsidies for child care provided in the home (which would inevitably be extended to child care outside the home). They also advocate pension credits similar to Veterans' Benefits for stay-at-home moms.

They endorse as well a program of Federal wage subsidies for lower-income workers even though, "There's no question that a serious wage subsidy would be expensive...up to $85 billion a year." They also propose increasing the Earned Income Tax Credit (EITC), which does the same thing as a wage subsidy. And the proposals for government subsidies for this and that go on and on.

EVER SINCE THE SOCIAL CONSERVATIVES arose as a powerful force in the Reagan coalition, various intellectuals have come along trying to win their support as another interest group that could be served with welfare state subsidies for their social goals. But the social conservatives I meet at Paul Weyrich's Coalitions for America are as fiercely free market, pro-taxpayer, and anti-Big Government as the taxpayer activists at Grover Norquist's Americans for Tax Reform, and the libertarians at the Cato Institute. All of them meet every Wednesday morning at Grover's weekly coalition meeting, where they are card-carrying members of Grover's "Leave Us Alone" coalition. They don't want government handouts for the family. They want the government to stop trying to restrict their religious liberty, promote family breakup, denigrate and downgrade the family, raise their taxes, spend the nation into ruin, and take their guns.

Since those in the working class pay little or no income taxes (the result of three decades of Republican tax policy), the $5,000 child tax credit would be taken mostly against payroll taxes. One child would just about eliminate the employee's share of payroll taxes for most working class taxpayers, and two children would just about eliminate the tax for most workers overall

As former Treasury Department official Steve Entin pointed out in the Wall Street Journal, for the same amount of revenue loss as would result from this $5,000 tax credit, more could be produced over the long run in higher wages and better jobs by reducing or eliminating the excessive, overwhelming, multiple taxation of capital. Capital income is taxed at least four times through the individual income tax, the corporate income tax, the capital gains tax, and the death tax. Capital investment expense, moreover, can only be deducted over several years under long depreciation schedules rather than immediately as for all other business expenses. Since the child tax credit does not reduce any of these marginal tax burdens, it does nothing to promote economic growth.

A far better alternative for the payroll tax is for those funds to be saved and invested by each worker in personal accounts that finance benefits ultimately replacing all of the benefits financed by payroll taxes now. Those accounts could start at any size and eventually replace the payroll tax entirely. Investing the employee share of the Social Security tax plus the entire 2.9% Medicare payroll tax over their entire careers at standard long-term market returns, average income families would retire with accumulated funds approaching a million dollars. Even career low income workers would reach close to half a million. The rest of the payroll tax could then be phased out altogether.

WHAT A DRAMATIC, revolutionary change for the working class, and the rest of America! The personal accounts would transform the payroll tax from a tax into an engine of family wealth. Working class voters in particular support this because they recognize the idea as their only real chance to accumulate substantial wealth. Every worker, in the working class and otherwise, would own a substantial ownership stake in America's business and industry. Wealth would be owned far more equally throughout society.

The account funds would pay far higher benefits than Social Security even promises, let alone what it can pay. Indeed, in scoring the most comprehensive personal account proposal before Congress, the Chief Actuary of Social Security concluded that the accounts would be such a good deal that all workers would choose them over Social Security. This would be far better than any system of pension credits for stay-at-home moms. Workers would directly own these funds just like in their own IRAs. They could choose to leave some or all of the funds to their families and children. Building this wealth within each family unit would greatly strengthen families, and provide a foundation for future prosperity, financing higher education, or small business startups, or professional practices.

The accounts would eventually take over so much of the financial burdens of Social Security that the program's long term deficits would eventually be eliminated entirely, achieving full solvency. Workers would be supporting themselves in retirement, rather than living in dependency on taxpayers and the government. Self-reliance would consequently be greatly expanded, a key value in the new order envisioned by Douthat and Salam.

The personal accounts would pour hundreds of billions into the capital markets for real savings and investment in the private sector. This would create millions of new jobs for the working class, and increase their wages today. All of the rapidly advancing science and technology of today's modern era requires massive amounts of new capital to be developed and brought to market. The personal accounts and their massive new capital investment would greatly accelerate this process, bringing the wonders and joys of this new science and technology to working people, and everyone else, today.

Such personal accounts are nothing less than a 21st century breakthrough in the personal prosperity of working people. They are the foundation of any political strategy to appeal to the working class. Indeed, polls have consistently shown now for 15 years that such personal accounts are supported by two-thirds of the public, particularly strongly by the working class.

Letter to the Editor

topics:
Taxes, Education, Health Care, Business, Social Security, Medicaid, Conservatism, Medicare