The Heritage Foundation

Executive Summary #1227es on Political Thought

October 16, 1998

October 16, 1998 | Executive Summary on Political Thought

BG1227es:  How Public Policy Reform Would Unleash HispanicAmerica's Economic Potential

Congress and the President have arrived at an important juncture in public policy. Over the next six years, and before the "baby boom" generation begins to drain away the resources of Medicare and Social Security, Washington policymakers can make a number of changes in education, tax, and retirement policies that promise significant improvements in the well-being of all Americans.

To illustrate how specific policy changes can promote economic prosperity, Heritage Foundation analysts conducted a series of economic and statistical analyses to determine how potential changes would affect various socioeconomic groups. Although such reforms as making vouchers available to parents for their children's education, enacting a flat tax, and privatizing portions of Social Security would benefit all Americans, understanding how they would benefit a vibrant and growing population like Hispanic-Americans offers Congress a clear example of the promise they hold for workers and families in general.

Education Reform. According to the Census Bureau's Current Population Survey, Hispanic-American students have the lowest level of educational attainment of any major segment of the U.S. population. Only about 53 percent of Hispanic students over the age of 25 in 1993 had completed high school, and only about 9 percent held a bachelor's degree. Especially troubling is that 46.9 percent of Hispanic students did not graduate from high school at all. Lack of a high school degree significantly influences a student's overall lifetime earnings potential.

Educational reforms that put parents, teachers, and principals in charge of educating children would benefit these underachieving Hispanic-American students. Congress should devolve decision-making authority and education dollars from the federal bureaucracy back to the states, sending at least 95 percent of the funding directly into the classroom and into programs like vouchers that empower parents to find the best school setting for their children.

Tax Reform. The current income and payroll tax systems offer low- and moderate-income families little opportunity to achieve significant economic improvement. By taxing income when it is saved and again when it is invested, the tax code discourages many people from saving or investing for the future. This serves only to slow the economy, reduce job growth, and retard wage increases.

The payroll and income taxes paid by an average-income family consume a higher percentage of that family's income than do taxes paid by higher-income families. This regressivity harms Hispanic-American workers particularly. Their median annual income of $24,900 is barely high enough to create income tax liability, yet 15 percent of every wage dollar they earn is taxed to support Social Security and Medicare.

A simple and fair tax system, such as a flat tax, would go far toward correcting some of the regressive aspects of current federal tax policy. For this reason, many of the proposed flat tax plans before Congress call for family allowances that would give a family of four a deduction of between $30,000 and $36,000. Family allowances at these levels would move at least two million low-income Hispanic-Americans off the tax rolls.

Social Security Reform. One of the major challenges facing Hispanic communities is the relative absence of local capital. Capital shortfall means that Hispanic-Americans face greater difficulties in starting a business, purchasing a quality education for their children, and accessing adequate health care in their own communities. Privatizing a significant portion of the current Old-Age and Survivors Insurance program not only would save Social Security from bankruptcy, but also would permit low- and moderate-income Americans of all ethnic backgrounds, including Hispanic-Americans, to build capital in their own communities.

Conclusion. Unleashing the economic potential of all Americans, and especially Hispanic-Americans, will require many things: changing current education policy, lifting the heavy and growing tax burden from the shoulders of hardworking Americans, and permitting workers to invest a portion of their payroll taxes in bond and stock portfolios to build income for retirement and their children's future. Such changes in key federal policies can enable all Americans to use their individual talents to achieve greater economic rewards and individual well-being in the coming decades.

William W. Beach is John M. Olin Senior Fellow in Economics and Director of The Center for Data Analysis at The Heritage Foundation. Gareth G. Davis and Kirk Johnson are former Policy Analysts, and Rea S. Hederman is a Research Analyst, in The Center for Data Analysis. Nina Shokraii Rees is former Education Policy Analyst at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Kirk A. Johnson, Ph.D. Visiting Fellow
Center for Data Analysis