U.S. needs a strategy for work

By JON FORMAN
MCCLATCHY-TRIBUNE
Work. Hard work! And plenty of it. That's what has made the United States the world's foremost economic superpower. Although the United States has less than 5 percent of the world's population, our economy accounts for more than 28 percent of the world's production.
Americans also enjoy lower unemployment rates and are on the job more hours than workers in most other industrialized countries. To be sure, the United States has been blessed with magnificent and abundant resources. But ultimately, America's economic success reflects Americans' hard work and a government that has generally had the good sense to stay out of their way.
Indeed, the United States has come a long way toward developing a national strategy for work. We have outlawed employment discrimination, reduced the maximum income tax rate from 50 percent to 35 percent, and reformed the welfare system to encourage work.
But we can do much more. At the top of any agenda supporting U.S. workers should be further reductions in the tax rates on earned income.
Since 2003, the maximum tax rate on dividends and capital gains has been just 15 percent. But many workers -- especially those earning low wages or eligible for retirement -- face tax rates two or three times that high. For many Americans, cumulative tax rates on earned income can easily exceed 50 percent, and such high rates can discourage them from working or improving their skills.
Indeed, low-income workers often face confiscatory tax rates thanks to the combination of income taxes, Social Security taxes, and the phaseouts of food stamps, Temporary Assistance for Needy Families, and the earned income tax credit. To right this wrong, we should cut the phase-out rate for the earned income credit from 21 percent to 10 percent, and we should put a 40 or 50 percent cap on cumulative tax rates.
High tax rates
Many older workers also face discouragingly high tax rates. Besides forking over income and payroll taxes, workers over age 62 pay income taxes on up to 85 percent of their Social Security benefits, and the Social Security retirement earnings test can take away a dollar of benefits for each two dollars earned. No wonder more than half of the elderly retire at 62, and nearly 80 percent retire by 65. To postpone retirement, we should repeal the earnings test and change the way we tax Social Security benefits.
The tax system also imposes extraordinarily high rates on the secondary earners in two-worker couples. When both a husband and wife work, both must pay income and Social Security taxes, but the lower-earning spouse (usually the wife) must pay income taxes at her spouse's highest marginal rate. Instead of working her way through the 0, 10, 15, and 25 percent brackets, the secondary earner can lose up to 35 percent in federal income taxes, plus more if her state taxes income.
To lower the tax rates on earned income, we should repeal as many special-interest tax breaks as possible, such as those for timber, agriculture, coal and oil, and use the savings to reduce rates. We might even combine the income and Social Security tax systems into a comprehensive tax system with low rates on both workers and investors.
America works because we value and respect work. We love Horatio Alger stories -- stories in which our hero triumphs through hard work, honesty, and perseverance. We truly want to have a nation in which any child can grow up to become the president of the United States or, at least, of a Fortune 500 company. Yet, we respect all who work, whether they wear a stethoscope or hard hat. We like to see every American worker earn a fair day's pay for a fair day's work.
But America could work even better. With the right policies, we could both increase the size of our economic pie and divide that larger pie more equitably. On this Labor Day, let's resolve to lower tax rates on the income earned by the 150 million Americans who teach our children, police our neighborhoods, stock our stores, and labor on our behalf.
Jon Forman is the Alfred P. Murrah Professor of Law at the University of Oklahoma and author of the forthcoming "Making America Work" (Urban Institute Press 2006). Distributed by McClatchy-Tribune Information Services.