Healthy economies need two things: capital investment and a strong workforce. In recent years, our nation has enjoyed surpluses in both low-cost capital and workers alike; however, the current economy is presenting a different scenario – capital is becoming more expensive and workers are becoming scarcer.
No longer is the challenge for average Americans a lack of jobs. With the strong economic rebound after pandemic shutdowns, unemployment rates have plummeted while job openings have soared. Nonetheless, the labor force participation rate remains subdued compared to pre-pandemic levels[6].
The problem is largely driven by demographics: lower birthrates and an aging population. The CBO projects the U.S. population (births less deaths) would begin declining in 2043 absent projected growth in net immigration levels which will further perpetuate labor shortages[7]. In addition to demographics, however, current federal tax and spending policies tend to discourage work, savings, and investment.
Under current law, federal tax rates rise with income and federal income support programs phase out benefits as income rises. While this ensures a progressive tax system and targets federal aid to low-income individuals and families, it also produces an incentive for people to remain on public assistance programs and discourages people from seeking work. The combined effect is to create an effective “marginal tax” on those who attempt to transition from relying on the government for support to getting a job and becoming self-reliant. That loss of benefits combined with an increased tax liability can lead to a marginal tax on work of more than 100%, where a recipient’s loss of government benefits combined with paying taxes exceeds the amount of their paycheck[8].
Addressing ways to both encourage work and grow the workforce is vital to ensuring our healthy economy.