    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                          HOW WELFARE AND TAX BENEFITS
                              CAN DISCOURAGE WORK

    =======================================================================

                                 JOINT HEARING

                                   before the

                        SUBCOMMITTEE ON HUMAN RESOURCES
                                      AND
                    SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                     of the

                          COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 27, 2012

                                   __________

                           Serial No. 112-HR14/SRM08

                                   __________

             Printed for the use of the Committee on Ways and Means

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                          COMMITTEE ON WAYS AND MEANS

                         DAVE CAMP, Michigan, Chairman

    WALLY HERGER, California             SANDER M. LEVIN, Michigan
    SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
    KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
    PAUL RYAN, Wisconsin                 JIM McDERMOTT, Washington
    DEVIN NUNES, California              JOHN LEWIS, Georgia
    PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
    GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
    DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
    CHARLES W. BOUSTANY, Jr., Louisiana  MIKE THOMPSON, California
    PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
    JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
    TOM PRICE, Georgia                   RON KIND, Wisconsin
    VERN BUCHANAN, Florida               BILL PASCRELL, Jr., New Jersey
    ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
    AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
    LYNN JENKINS, Kansas
    ERIK PAULSEN, Minnesota
    KENNY MARCHANT, Texas
    RICK BERG, North Dakota
    DIANE BLACK, Tennessee
    TOM REED, New York

                       Jennifer Safavian, Staff Director

                       Janice Mays, Minority Chief Cousel

                                     ______

                        SUBCOMMITTEE ON HUMAN RESOURCES

                        GEOFF DAVIS, Kentucky, Chairman

    ERIK PAULSEN, Minnesota              LLOYD DOGGETT, Texas
    RICK BERG, North Dakota              JIM McDERMOTT, Washington
    TOM REED, New York                   JOHN LEWIS, Georgia
    TOM PRICE, Georgia                   JOSEPH CROWLEY, New York
    DIANE BLACK, Tennessee
    CHARLES W. BOUSTANY, Jr., Louisiana

                                     ______

                    SUBCOMMITTEE ON SELECT REVENUE MEASURES

                       PATRICK J. TIBERI, Ohio, Chairman

    PETER J. ROSKAM, Illinois            RICHARD E. NEAL, Massachusetts
    ERIK PAULSEN, Minnesota              MIKE THOMPSON, California
    RICK BERG, North Dakota              JOHN B. LARSON, Connecticut
    CHARLES W. BOUSTANY, Jr., Louisiana  SHELLEY BERKLEY, Nevada
    KENNY MARCHANT, Texas
    JIM GERLACH, Pennsylvania

                                C O N T E N T S

                                   __________

                                                                       Page

    Advisory of June 27, 2012, announcing the hearing................     2

                                   WITNESSES

    Panel 1:

    The Right Hon. Iain Duncan Smith, Secretary of State for Work and
      Pensions, United Kingdom, testimony............................     4

    Panel 2:

    Representative Gwen Moore (D-WI), testimony......................    28

    Panel 3:

    Dr. Clifford Thies, Ph.D., Professor of Economics and Finance,
      Shenandoah University, testimony...............................    38
    Dr. Eugene Steuerle, Ph.D., Senior Fellow, The Urban Institute,
      testimony......................................................    49
    Dr. Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and
      Policy Priorities, testimony...................................    64
    Dr. Ike Brannon, Ph.D., Director of Economic Policy and
      Congressional Relations, American Action Forum, testimony......    78

                           SUBMISSIONS FOR THE RECORD

    Anne Stevenson...................................................    95
    Center for Fiscal Equity.........................................   112
    Cherie Boeneman..................................................   115
    CLASP............................................................   118
    Recapturing the Vision...........................................   128

                          HOW WELFARE AND TAX BENEFITS
                              CAN DISCOURAGE WORK

                                  ----------

                            WEDNESDAY, JUNE 27, 2012

             U.S. House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                       Subcommittee on Select Revenue Measures,
                                                        Washington, DC.
        The subcommittees met, pursuant to call, at 12:15 p.m., in
    Room 1100, Longworth House Office Building, the Honorable Geoff
    Davis [Chairman of the Subcommittee on Human Resources]
    presiding.
        [The advisory of the hearing follows:]

    HEARING ADVISORY

     Davis and Tiberi Announce Hearing on How Welfare and Tax Benefits Can
                                Discourage Work

    *UPDATE: NEW TIME*
    Wednesday, June 27, 2012

        *UPDATE: NEW TIME*

        Congressman Geoff Davis (R-KY), Chairman of the Subcommittee on
    Human Resources of the Committee on Ways and Means, and Congressman Pat
    Tiberi (R-OH), Chairman of the Subcommittee on Select Revenue Measures
    of the Committee on Ways and Means, today announced that the
    Subcommittees will hold a joint hearing on how certain welfare and tax
    programs can discourage work as a result of the high effective marginal
    tax rates they impose on certain populations. The hearing will take
    place on Wednesday, June 27, 2012, in 1100 Longworth House Office
    Building immediately following the full committee markup that begins at
    10:00 AM.

        In view of the limited time available to hear witnesses, oral
    testimony at this hearing will be from invited witnesses only.
    Witnesses will include experts who have studied how increased earnings
    may not yield additional income for families due to the complex
    interaction between earnings and federal tax and transfer programs.
    However, any individual or organization not scheduled for an oral
    appearance may submit a written statement for consideration by the
    Committee and for inclusion in the printed record of the hearing.

    BACKGROUND:

        Low-income families often receive benefits from multiple welfare
    and tax programs, such as assistance with food, housing, and day care
    costs, help with medical costs, or cash payments to supplement earnings
    from work. While these programs often support and encourage employment,
    program ``phase-out rules''--especially when combined across multiple
    programs--mean certain households may not be significantly better off
    if they earn more from work.

        Economists have studied the interaction between earnings and
    benefits under various programs by focusing on what are called
    ``implicit marginal tax rates,'' which refers to the portion of an
    additional dollar of earnings effectively lost due to rising taxes and
    benefit reductions. Due to implicit marginal tax rates that can
    approach or even exceed 100 percent when individuals receive benefits
    from multiple programs, it is possible that some individuals will be
    little better off financially--and in some cases even worse off--if
    their earnings increase.

        This problem has been exacerbated by the addition of new programs
    and the expansion of existing programs over time. For example, the
    expansion of the Earned Income Tax Credit over time has allowed more
    households to claim this credit and has increased the benefit received
    by many households. However, these expansions also mean that more
    families face a higher implicit marginal tax rate as their earnings
    increase and the credit phases out. In addition, the Patient Protection
    and Affordable Care Act created a new subsidy to purchase health
    insurance that phases out as household income increases. As the phase-
    out of these healthcare subsidies interacts with other welfare and tax
    programs for families, the return from working will be even lower than
    before and individuals who increase their earnings may keep even less
    of their hard-earned money in the future.

        In announcing the hearing, Chairman Davis said, ``Americans should
    believe with confidence that hard work pays off. However, because of
    today's many welfare and tax programs for low-income families, it is
    not clear that work pays--and in fact additional work may not actually
    result in additional income. Federal programs must send a clear message
    that work is always better than welfare. This hearing will allow us to
    explore problems with the current system and determine how we can
    ensure these programs can be improved to encourage families to increase
    their work and self-reliance.''

        Chairman Tiberi said, ``In recent years, Congress has increasingly
    used the Tax Code to provide means-tested benefits to low- and
    moderate-income Americans. These programs, however, are often flawed,
    imposing high marginal tax rates on those in the phase-out ranges as
    well as steep marriage penalties--thus discouraging both work and
    marriage. As part of comprehensive tax reform, this hearing will help
    the Ways and Means Committee reform these tax programs to make sure
    they reward work and honor marriage.''

    FOCUS OF THE HEARING:

        This hearing will focus on the interaction of various welfare and
    tax credit programs and how concurrent receipt of benefits from those
    programs can create perverse incentives that discourage work and higher
    earnings.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

        Please Note: Any person(s) and/or organization(s) wishing to submit
    for the hearing record must follow the appropriate link on the hearing
    page of the Committee website and complete the informational forms.
    From the Committee homepage, http://waysandmeans.house.gov, select
    ``Hearings.'' Select the hearing for which you would like to submit,
    and click on the link entitled, ``Click here to provide a submission
    for the record.'' Once you have followed the online instructions,
    submit all requested information. ATTACH your submission as a Word
    document, in compliance with the formatting requirements listed below,
    by the close of business on Wednesday, July 11, 2012. Finally, please
    note that due to the change in House mail policy, the U.S. Capitol
    Police will refuse sealed-package deliveries to all House Office
    Buildings. For questions, or if you encounter technical problems,
    please call (202) 225-1721 or (202) 225-3625.

    FORMATTING REQUIREMENTS:

        The Committee relies on electronic submissions for printing the
    official hearing record. As always, submissions will be included in the
    record according to the discretion of the Committee. The Committee will
    not alter the content of your submission, but we reserve the right to
    format it according to our guidelines. Any submission provided to the
    Committee by a witness, any supplementary materials submitted for the
    printed record, and any written comments in response to a request for
    written comments must conform to the guidelines listed below. Any
    submission or supplementary item not in compliance with these
    guidelines will not be printed, but will be maintained in the Committee
    files for review and use by the Committee.

        1. All submissions and supplementary materials must be provided in
    Word format and MUST NOT exceed a total of 10 pages, including
    attachments. Witnesses and submitters are advised that the Committee
    relies on electronic submissions for printing the official hearing
    record.

        2. Copies of whole documents submitted as exhibit material will not
    be accepted for printing. Instead, exhibit material should be
    referenced and quoted or paraphrased. All exhibit materials not meeting
    these specifications will be maintained in the Committee files for
    review and use by the Committee.

        3. All submissions must include a list of all clients, persons,
    and/or organizations on whose behalf the witness appears. A
    supplemental sheet must accompany each submission listing the name,
    company, address, telephone, and fax numbers of each witness.

        The Committee seeks to make its facilities accessible to persons
    with disabilities. If you are in need of special accommodations, please
    call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
    business days notice is requested). Questions with regard to special
    accommodation needs in general (including availability of Committee
    materials in alternative formats) may be directed to the Committee as
    noted above. Note: All Committee advisories and news releases are
    available on the World Wide Web at http://www.waysandmeans.house.gov/.

        Chairman DAVIS. Good morning, everybody. Welcome to today's
    joint review of how welfare and tax benefits can discourage
    work. Before we begin our regular session today with opening
    statements, I would like to recognize a very special guest who
    is in Washington, D.C., the Right Honourable Iain Duncan Smith,
    Member of Parliament, the Secretary of State for Work and
    Pensions for the United Kingdom. We are truly appreciative that
    he has been able to adjust his schedule to join us today for a
    few minutes. The United Kingdom is currently undertaking
    significant reforms to its welfare and tax benefit programs to
    streamline their administration and reduce marginal tax rates
    so that work always pays.
        This is an issue that I have cared about for many years. We
    have been watching many of the developments in Great Britain
    closely, as these reforms have been undertaken in what appears
    to be a very bipartisan manner, and he has graciously agreed to
    share with us information about these recent reforms in the
    U.K., which will be useful as we consider the effectiveness of
    our own programs.
        Mr. Secretary, we did a little digging through our
    archives, and even with the help of the experts at the
    Congressional Research Service we are not able to find another
    example of a sitting Foreign Secretary appearing before the
    Ways and Means Committee on nontrade matters, so this is
    actually a historic occasion. We are honored to have you join
    us today. And please proceed with your statement.

    STATEMENT OF THE RIGHT HONOURABLE IAIN DUNCAN SMITH, SECRETARY
             OF STATE FOR WORK AND PENSIONS, UNITED KINGDOM

        Mr. SMITH. Mr. Chairman, thank you very much indeed. I must
    say it is a pleasure to be here. It is also rather satisfying
    in this surrounding. I am used to doing my answering across the
    dispatch box in the House of Commons, being screamed and
    shouted at by most of the others at the other side within
    almost arm's reach. So I am anticipating that not to happen
    here necessarily, but if it does I hope I will be able to
    handle it.
        Can I just say that what we are trying to do in the U.K. is
    much the same as anywhere else, is trying to figure out what
    has been going on with a system that was set out to actually
    try and help people to become independent but actually traps
    them now in a form of dependency.
        We saw spending on welfare increasingly rise by 39 or 40
    percent under the last government at a time prior to the
    recession. So, during a period of growth, the economy was
    growing but we were also seeing welfare grow, which does seem
    to be rather peculiar. And what we saw here was a growing level
    of people who apparently just didn't work, a very large number
    who regardless of whether the economy was growing or not were
    out of the environment of work. That, to my mind, causes wider
    problems we must recognize.
        It is not enough just to take people off benefits. Anybody
    can do that. The question you have is where do those costs then
    go, because they don't disappear. By that I mean, for example,
    even if you don't pay people benefits, you end up with a kind
    of creative underclass, and that underclass then becomes very
    expensive in other ways, in policing. We saw our policing bill
    rise by over 50 percent during the course of the last
    government.
        Your health, this is where most of your serious health
    concerns exist amongst the same underclass. They are the
    biggest drawer on health care and they are also the biggest,
    the most likely group to be almost recording every kind of
    sickness you can possibly imagine. So health care bills are
    highest. And last of all, education is deeply disrupted by
    people from that underclass who themselves have no expectation
    or anticipation of proceeding. So their knock on,
    notwithstanding the cost in taxation, therefore is huge to all
    of us. And so handling and changing this is not just about
    reducing the welfare bill, which of course is critical, it is
    also about reducing those other costs that come as a result of
    having a group like this.
        And so what we have chosen to do is to look at, first of
    all, one, the entrapment principle. That is to say the welfare
    system that you set up: does it free people or does it trap
    them? And what we believe is the system that we have inherited
    is so complex with so many different benefits, all being
    withdrawn from people as they go into work at different rates,
    some are 100 percent, some are 60 percent, some are 70 percent,
    as they go up the hours towards full time work, and some are
    gross, some are net, it is almost impossible for the benefit
    recipients to understand or calculate exactly how much they
    would have in their pocket after the withdrawal. And in some
    cases they are losing, in the case of some lone parents, up to
    95-96 pence in every pound. So that basically means they get
    about 4 or 5 pence out of every pound they work for every extra
    hour, not much of an incentive and often very difficult for
    them to understand that they are better off or worse off. And
    they assume hugely that they are worse off, it is not worth the
    effort, and so they don't make the effort.
        So the system itself doesn't incentivize people to do the
    right thing, it actually does the opposite. And we will see
    most of the money under the last government was transferred not
    to people in work, although it was not intended, but mostly to
    people out of work, particularly large families living in
    larger houses, often not two couple families. So a lot of the
    shift of money made it worse because if you receive more money,
    you are less likely to go to work. So we created a thing called
    the universal credit, which starts next year. That merges all
    the back-to-work benefits into one benefit, and it takes them
    away at one single rate every hour. So every hour you work, you
    will come off, in our case it is 65 percent. Now, that is a
    line that can be adjusted according to the government. They
    make that decision. It is about investing money or withdrawing
    money; it is as simple as that, rather like taxation. So that
    simplifies your understanding of benefits.
        The universal credit is critical in two regards. One, the
    marginal reduction rates are dealt with by that single, flat
    taper. The other bit, which is the participation tax rate, is
    the moment you enter work, to my mind that is the critical bit.
    So people who have been out of work generationally, you need to
    get them across that threshold, number one. After that, keeping
    them in work, and I will come back to that, is critical as
    well, but get them across. Keep that cliff edge very low indeed
    so going across is very easy. So that decision economically
    makes sense. The universal credit is basically about that,
    simplification and making work. Always pays to be in work, not
    on benefits. So you are better off in work always than on
    benefits.
        Secondly, we have a work program, which is de-risking
    government, but actually making sure that it does what we need
    it to do. So we hand to the private and the voluntary sector
    those who are being difficult to get into work. I don't care
    what they do, it is not my problem. I simply pay them only
    after they have got somebody into work. So it is a payment by
    result system. And there we actually pay them 6 months after
    somebody has been in work and come off the benefit register.
    They don't receive their money for 6 months so they need to
    keep them in work, which is really critical. It is easy to get
    somebody into work; it is very difficult to hold them in work.
    You need to hold them in work because only then do they get
    what I call the ``work habit.'' Once they got the work habit
    they will then satisfy that thereafter. They will make sure
    they understand work. So 6 months, 9 months, a year, even up to
    18 months in the case of the most disabled. So in other words,
    the rewards lie further down the chain for them, which means
    they need to work with people even after they have got them
    into work. And the lack of risk is because basically they only
    get paid after they do the job, not before. And we calculate
    that by how much money we save on benefits and therefore how
    much money we can pay them. It is a straight crossover in
    money.
        The third area of our reforms, which is important, is
    looking at sickness benefits and disability. We had a massive
    problem that a huge number of people were trapped really on two
    benefits, particularly one, a sickness benefit, called
    incapacity benefit. If you are on it, you are ineligible for
    work. We had some people on these not seen by anybody for up to
    10 years. And of course if you are on a benefit like that you
    are not working. It doesn't take the brains of an incredibly
    intelligent individual to understand that if you had a problem
    you certainly have a big problem 10 years later, so you get
    worse not better. So what we have now done is we are reviewing
    all of those and moving them onto a new benefit or moving them
    back to work. And the assessment is around about 10,000 or
    11,000 cases a week. We are doing the stock right now, and we
    are finding something on the order of over a third of those who
    are assessing that were are not fit for work are now going
    straight back to work and they will go to a work program. Just
    a bit more than that are going to the middle bit of this new
    benefit, which is you will be able to get to work but you have
    some transitory problems. You might be in cancer treatment or
    something like that. But the expectation is you will be
    available for work.
        And the third group of roughly about the same, about a
    third, is a group that actually there is no expectation of work
    because you really are genuinely too sick.
        And then of course we will keep assessing people once they
    are on that other benefit every year to make sure that if they
    are getting better now so we can move them back to work,
    whereas before we never had a constant check on them. And the
    other one is a disability benefit, which is about your mobility
    and your care. We are reforming that because it got too wide,
    mostly through judicial review, of course where the judges have
    sat on the appeals and widened the case law. So we are now
    tightening that back up now to make sure the benefit goes to
    those who really need the money. And that is not work related.
    So in other words you can receive that in or out of work. So
    now we can work with people to make sure that they get back to
    work and the most disabled are able to work, which is after all
    what they really want. They don't want to be trapped out of
    work.
        That is it in principle. There are a lot of other things,
    but those are the main things that we are doing.
        [The prepared statement of Mr. Smith follows:]

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        Chairman DAVIS. Thank you very much. I appreciate you
    sharing some of the challenges you are dealing with and we
    certainly are going to be dealing with in the very near future
    with addressing processes, and quite a bit of it is unknown.
        I mean, for me it is ironic having you here. I went to the
    British parachute school at RAF Brize Norton 30 years ago as a
    U.S. army paratrooper on an exchange. And one of the more
    interesting aspects was having to jump out of an old barrage
    balloon to find out if the parachute worked. It was the longest
    opening time I ever had. We are glad to watch you take the
    first jump so that we can learn from some of these reforms.
        But as we face these challenges, unemployment rates in both
    our countries are elevated, fewer people are working or looking
    for work, there is increasing family breakdown that leads to
    some of the social problems and financial costs that you
    alluded to that you are dealing with in your own jurisdiction.
    And given these factors it is critical that we develop
    approaches to integrate our processes to more effectively serve
    people, an issue I have cared about having grown up in a single
    parent home and I was on a form of assistance as a child as
    well, not meeting my father until I had been in the Army for 7
    years. I am very interested in how you bring people over or
    avoid this cliff of falling off when they want to go back to
    work and they find disincentives.
        I was wondering if you could elaborate for us on how your
    reforms are meant to address each of several issues;
    unemployment and work, family breakdown, and the need for
    budgetary discipline from a governmental perspective in terms
    of handling this, and I also understand that wage data is
    playing a key role in these reforms and I was wondering if you
    could comment briefly on how the wage and other data are being
    used to design and operate this new system.
        Mr. SMITH. Again, the reason was family breakdown. Family
    breakdown was the main reason why people found themselves in
    what we describe as poverty. I have this big debate about how
    it is not relative income so much that looks at that income, it
    is not relative income about poverty that is the key. It is
    what leads you to the position of being unable to earn money
    for yourself as a household. And those are the things like
    family breakdown, failed education, debt, drug and alcohol
    abuse and then your dependency on the state.
        So those areas need to be wound into any kind of
    assessment, because your lifestyle usually has a bearing on
    what is likely to happen to you. And here is the point about
    family breakdown. We therefore need to do a lot more in advance
    about the dysfunctional family life which exists in many of
    these areas. So early intervention has got to be the key to
    this to put particularly young dysfunctional mums and their
    families right so the kids are right early on. And secondly,
    really to look at families on the edge of breakdown, so we are
    now investing money into help and support from most the
    voluntary sector, etc. to help stabilize families before they
    break down rather than spend the huge sums we do picking up the
    pieces afterwards. It is estimated over 20 plus billion pounds
    a year we spend on the after effects of breakdown, whereas it
    is known if you put a bit of money into this you can
    restabilize families who are often on the edge but don't then
    break down and the children will benefit.
        So that is a huge shift to where you put your money to
    focus on solving breakdown rather than dealing with the after
    effects of it.
        On the issue about how the system works in terms of
    employment, the reality that we have here is that right now we
    know what the static levels are for benefits. So what we are
    simply saying is that as people go in from benefits into work,
    the levels they achieve in work for each hour should mean that
    their income is higher throughout that work process and
    demonstrably higher than it is when they are on benefits. So
    the universal credit is interesting because by and large it
    shifts some of the money down to the bottom end, that is to
    say, the early hours, because we think that going into work is
    the biggest issue. And then moving up the hours is the
    secondary issue of importance, you know, your marginal
    deduction rates. So the participation tax rate, that bit going
    in, you need to get that cliff edge right down so that they are
    always on an upward curve in income. And that starts literally
    at hour number one.
        Now, that will hugely benefit, for example, lone parents
    who we want to go to work because we think it is good for them
    and their children after a certain point, quite rightly, that
    their children realize work is a part of life and a part of
    your future and they see somebody from that household working.
    So a lone parent household it has to be them, if it is a two
    couple household somebody else. So the early hours are really
    important because they may match that with some of their
    caring, but that needs to pay. And to keep them in work is
    important.
        So that is really how the economics of this works, which is
    as they get paid, the withdrawals are lower, particularly in
    the early sector. And you do that by what I call disregards. So
    as they enter work, each category of persons, a lone parent,
    will have an amount of their income disregarded before the
    taper, so they can earn so much. A very disabled person will
    have a bigger disregard than the taper. Someone who is able
    bodied and young will have a very small disregard for the
    taper. And the lone parent will have a disregard slightly
    bigger than that and then the taper. The taper is the same for
    everybody, but the disregard evaluates what your particular
    level of need is for you to actually make that income work for
    you. And that is where most of the money is therefore
    concentrated on the investment but then takes them up the
    chain. And this will allow us later on to look at in work
    conditionality.
        Chairman DAVIS. Thank you very much, Mr. Secretary. I would
    like to recognize my friend and the ranking member of the Human
    Resources Subcommittee, Mr. Doggett of Texas.
        Mr. DOGGETT. Thank you for your insightful testimony. As I
    understand it, this universal credit is a new approach that you
    are just beginning to pilot or implement?
        Mr. SMITH. That is true, that is correct. It goes live in
    October next year. We are building a new software system and
    everything else. And we are doing some early advance work on it
    starting at around about April next year in some key areas. Not
    trialing it, but running it out early in some key areas to see
    what the glitches are.
        Mr. DOGGETT. Is the goal that once you resolve any of those
    glitches to have uniformity across the country, so you wouldn't
    have a different policy in Wales from Greater London or in
    Greater London from Northern Ireland?
        Mr. SMITH. Not in terms of the basic structure of this, no,
    but how it is delivered later on it could be a very localized
    delivery. Right now, we will be doing it as a national delivery
    until it is bedded in and then we are open for discussion about
    whether that could actually be localized.
        The key to this benefit, by the way, is that we also have
    to change the way we report on taxation. So alongside this is a
    big change to create what is called a real-time information
    system on our tax base. Because as someone goes to work under
    the present system, the tax authorities predict that they earn
    a certain amount of money. We know in part-time work that hours
    change, so it is not the same as the prediction. So you are
    expected as an individual to report your hours changes back to
    the authority so they can readjust your support through the tax
    credit as it exists at the moment.
        The problem is you are coming from a group that really
    doesn't like authority very much, doesn't really understand it
    and gets confused. You forget to do this. Some might
    deliberately not do it, others forget. So they go on to pay you
    too much money over the year. The end of the year they turn
    around and say, oh, we have overpaid you, now we need to
    reclaim that money and take it back. But of course you are
    dealing with a group that spends every penny that you give them
    immediately. What the real-time information system will do with
    universal credit means every month we reconcile. So if your
    hours change, we don't even need you to tell us because the
    business reports that in their immediate report and then it
    just adjusts automatically. So now we say, hold on, his hours
    were down last month, we will adjust the payments this month.
        Mr. DOGGETT. Are your projections that overall this will
    cost more to your national treasury to have this universal
    credit or less?
        Mr. SMITH. We are investing money to get it in, but once it
    is in, you will more than save that money back because of two
    key features. The first is the point I was making, huge levels
    of fraud and huge levels of error that are costing billions in
    the system; they will be eradicated.
        Mr. DOGGETT. How much more are you investing over the short
    term?
        Mr. SMITH. Over the 3- or 4-year period we are averaging
    about $2 billion a year of investment. And then, as I say, once
    that is bedded in, after that that is where you start. Or you
    will be making your returns immediately, because we think we
    will more than offset that even as we are bringing it in
    through the savings we make through the error and fraud alone
    that exists in the present system.
        Mr. DOGGETT. One of the obstacles that we found in this
    country to people moving freely from one job to another or
    moving from a job to setting up a small business is the lack of
    access to health insurance. Is it your feeling that access to
    health insurance in the U.K. is helpful to promoting
    employment?
        Mr. SMITH. Well, our system of course is fundamentally
    different from what you have over here.
        Mr. DOGGETT. Yes, it is.
        Mr. SMITH. We have the National Health Service and
    therefore everybody gets access free at the point of delivery.
        Mr. DOGGETT. You don't have any barrier to employment from
    people being locked into an insurance policy at one job and
    fear of losing it if they move to another setting up a small
    business.
        Mr. SMITH. People do have private insurance, but I don't
    think it plays anything like the part it would play here
    because of that level of basic health care that they get. I am
    not, by the way, entering the argument about whether you should
    have anything similar here.
        Mr. DOGGETT. What we have and what has been adopted here is
    very dissimilar, but it does reduce that job lock. And of
    course when we were considering it, one of your European
    parliamentarians was on Fox News telling us what a horrible
    system there was over there. He was repudiated by Prime
    Minister Cameron who referred to your health service as a great
    national institution. Is it still a great national institution
    in the U.K.?
        Mr. SMITH. Yes. That is being reformed at the moment. There
    is a big, big change taking place. We have just put some
    reforms through to make it much more responsive to what people
    actually need and to make sure the money that you spend is
    focused, although overall we spend less money on health care
    than you do over here.
        Mr. DOGGETT. Well, I agree with the concept of reform but
    not with repeal so that we have access to health insurance for
    our workers here. And thank you for your testimony.
        Chairman DAVIS. I thank the gentleman. And the chair now
    recognizes Mr. Boustany from Louisiana, the chairman of the
    Oversight Subcommittee.
        Mr. BOUSTANY. Thank you, Chairman Davis. Welcome. It is
    great to see you here today, and we appreciate the tremendous
    work you all are doing to reform this complex system in the
    U.K. to really align the incentives, to make sure that work
    actually pays and that those who are receiving the benefits
    will understand that moving, crossing that threshold to get to
    work is where they need to go, and of course how do you keep
    them in employment.
        I want to focus on a slightly different part of what you
    were doing with reforms. I think it is called the work program.
    And it is a system of delivering employment services to these
    individuals. And as you restructured the benefits, the
    structure of the welfare benefits and tax benefits, you are
    also looking at your delivery system for these benefits. And my
    understanding is you have ways to leverage nonprofit
    organizations, certain private organizations, not only to help
    these individuals get into the workforce but stay in the
    workforce. Could you elaborate on this program?
        Mr. SMITH. We describe the work program, which I think is
    unusual for two reasons. The first is that it is a payment by
    result system. So the risk is not taken by the taxpayer, the
    risk is taken by the private and the voluntary sector who
    actually run the program. So we don't pay them until they have
    got somebody in work and kept them there for a minimum of 6
    months. And then after that they get further payments the
    longer they are in work.
        The second point about this is that we also call it a black
    box system. By that I mean simply it is not my job to tell them
    what they should do, it is their job to figure that out and do
    it. This is where the voluntary sector comes in. The prime
    contractor, there are 18 of them in different areas, and they
    will have underneath them different subcontractors, some
    private, some voluntary. There is a lot of voluntary sector.
    And they tend to be the organizer, they will use to deal with
    systemic problems that an individual has. For example, somebody
    who, and we know this by knowing what prisoners are. They have
    no ability to read or write, a reading age of 10, even age of
    11. If you get somebody in front of you like that, no good
    trying to put them straight into work because they simply won't
    stay in work because they will fall out at some point because
    they are incapable of doing half of the jobs. They can't read
    the signs. So what they will have to do is back load them very
    quickly to some organization, probably a voluntary sector
    organization that does remedial education work, enough to get
    them to the point where they can actually hold a job down, and
    then they take them through to work. So they have to invest a
    bit before they start to get them into work and get them paid.
    And that is how the process works. For the easy ones that just
    need to be attached and sorted, well, they will go through
    quickly. But it is these more difficult, and by the way, they
    get rewarded at a high level for those more difficult ones, and
    that is how it works. So the risk is taken by the private
    company who is the prime. They don't flow the risk on down to
    the voluntary sector, so the voluntary sector gets paid at a
    slightly lower level, but nonetheless it all works for them in
    terms of their total reward.
        Mr. BOUSTANY. This was a big departure from past practice.
        Mr. SMITH. Huge. It is a complete departure. In fact, I
    think it is the biggest anywhere in the world that I can be
    aware of where we are doing a payment by results program. It is
    now national, and we are not quite into the first year. And it
    is a 2-year program, and we have targets for them. And if one
    of the primes fails and doesn't achieve the results then simply
    we will get rid of them and somebody else will come in. So we
    keep the risk away from the taxpayer, very much on the
    provider, and in turn it is in their interest not just to get
    them to work, and I think I also mentioned this, holding them
    in work. And that is the bit that is being missed by endless
    government agencies, which is you churn massively after about 7
    or 8 weeks, because if they are not right for work then they
    will not stay in work. And therefore what happens is they churn
    out. It is very expensive then because you are chasing them
    after that. Then they are less likely to go back to work later
    again because they got scarred. So when you get them once, you
    got to make it tell once. And so that means that the provider
    has to check on the individual who is at work constantly to see
    if they have any problems and deal with them and then hold them
    and talk to the employer if necessary to hold them in that job.
        Mr. BOUSTANY. Well, I thank you very much. That is
    excellent work. And hopefully we will continue to learn from
    the experience that you have there in the U.K.
        I yield back, Mr. Chairman.
        Chairman DAVIS. Thank you. The chair now recognizes Mr.
    Neal from Massachusetts.
        Mr. NEAL. Thank you, Mr. Chairman. Mr. Secretary, just to
    follow up a bit on what Mr. Doggett had to say. One of the
    reasons that data suggests that the Welfare Reform Act of 1996
    here worked was in some measure because we added a number of
    mitigating issues to the overall package, including job
    training, childcare, and not to miss the point people were able
    to keep their health insurance. That had a profound impact on
    that flexibility that Mr. Doggett noted.
        Now, I am not going to trespass into domestic politics in
    the U.K., but I think that just having observed from 3,000
    miles away the Prime Minister during his election cycle, he
    actually suggested a much more radical transformation of the
    health care system in the U.K. than he was actually able to
    deliver on. And I understand that because that is just the
    reality of what happens. But I think as a follow up to what Mr.
    Doggett pointed out, I think the Prime Minister probably
    discovered that the health care system in the U.K. was pretty
    popular.
        Is that a fair statement?
        Mr. SMITH. Yes. You've got to understand, seeing it from
    the standpoint of the U.K., which it is quite different from
    where you are here. There is no question the health service
    because of its basic principle, which is that no matter what
    your means you will always be able to get treatment at the
    point you need it without any request or requirement for money.
    So that is and was a big change. It is now ingrained in
    people's psyche. And it is a very emotional point to lots of
    people. So they are very wary if you play with that because
    they don't want to see that shifted so they would have to start
    having to fork out for treatment. So that is the big balance.
        But on your point . . . you know, we are a coalition. I am
    in a coalition that is not wholly conservative, so we sometimes
    have to cut our cloth according to what we can do in
    parliamentary terms. But the reforms that we have gotten
    through will make a big difference to recentering where that
    decision making should lie much more with those who are
    responsible for the treatment, and also knowing how much that
    treatment costs and bearing down and understanding how that
    money is spent better.
        Mr. NEAL. Good point. And let me flip that argument. One of
    the problems that we ran into in 1996 was the suggestion I
    think that was fairly accurate that for many people who were
    receiving public benefits, they stayed with health care through
    the Medicaid system. The problem in some measure was that two
    people conceivably living next door to each other, one, who
    went to work every day and did not have health care benefits,
    came to resent the person who was receiving a public benefit
    and keeping the health care benefit. So those mitigating
    circumstances that I referenced earlier about a level of
    maintenance for health care in your instance seems to give you
    a little bit more room or flexibility in terms of
    experimenting.
        Mr. SMITH. It possibly does. The only comment I would make
    on that is we all as politicians make this argument that I
    don't know where I am going but I know I wouldn't start from
    here is always our biggest point. So dealing with our position
    as to where we are, we obviously don't have that issue about
    health treatment in the two houses living next door to us. But
    we do have issues around welfare. And that resentment in
    welfare is a big issue right now in the U.K. where someone
    going to work on low and marginal income looks at the house
    next door with the curtains closed and realizes they are
    earning pretty much what they are already earning but they are
    not working because they have got a larger family or because
    they are living in a larger house. So that resentment does
    exist. It tends to exist for us in the welfare system. And a
    lot of people in work are now deeply resentful of those who are
    not in work. And so this is where our cultural shift is rather
    than on health care.
        Mr. NEAL. And lastly this morning in Belfast Martin
    McGuinnis, who is an old friend of mine, and the Queen shook
    hands. And it is a lot of people like me to participate over 35
    years in all these it will never happen moments to witness
    these huge changes. But as you noted in an earlier conversation
    that we had, there are still very stubborn elements, smaller in
    number year after year, who still are rejectionists. But as one
    who is very knowledgeable about the Shankill and the Falls Road
    in Belfast, the link between poverty and high rates of
    unemployment and violence. It was the best, I shouldn't say the
    best, but one of the best recruiting tools for the hardest men
    and women in those neighborhoods to organizations who sought
    destiny as never finding a common moment.
        Mr. SMITH. Yes. My comment would be this really. First of
    all, I was a soldier. I was in the Scots Guards many years ago.
    I served in Northern Ireland so I have firsthand memories of
    some of the violence. I lost friends who have been killed in
    subsequent service in Northern Ireland. No one is happier than
    I am to see the possibility of peace in Northern Ireland. It
    has been a dreadful running sore in the United Kingdom for far
    too long.
        But you are right about the cocktail. There is a very
    peculiar cocktail in parts of Northern Ireland where you
    overlay deep deprivation also alongside peculiar religious
    division and a lot of residual violence. And some of those are
    still in place today when I visit some of those communities,
    and breaking those down is a very big job, but we are making
    strides towards that. But, yes, hugely obviously deprivation
    has a part to play in it.
        Mr. NEAL. Thank you.
        Chairman DAVIS. I thank the gentleman. Mr. Secretary, again
    we thank you for taking time out of your busy schedule to come
    and share some of your experiences in the United Kingdom. We
    are going to continue to monitor your progress closely and we
    look forward to learning from what you are doing and to
    continuing this dialogue. Thank you again.
        Mr. SMITH. Thank you, Mr. Chairman, for the opportunity.
        Chairman DAVIS. As the Secretary departs, I would like to
    thank all of my colleagues for their unanimous consent in
    altering our normal agenda with opening statements until
    afterwards to accommodate the Secretary's time. I would like to
    proceed with opening statements. And now I will begin.
        Today's joint hearing is on disincentives to work built
    into current welfare and tax credit programs in the United
    States. As we have already heard from Iain Duncan Smith, the
    Secretary of State for Work and Pensions in the United Kingdom,
    other countries are wrestling with these same issues. Secretary
    Duncan Smith's presentation, as well as the testimony of our
    witnesses today, will help us as we consider making changes on
    this side of the Atlantic as well.
        Two weeks ago, when President Obama spoke in Cleveland,
    Ohio on the state of the economy, he talked about his vision
    for how we need to provide ladders of opportunities for folks
    who aren't yet in the middle class. Today we will consider
    whether the multitude of current welfare programs and tax
    credit programs create effective ladders of opportunity or are
    missing important rungs by effectively discouraging work and
    higher earnings for millions of families.
        To explain this complicated topic one of our witnesses, Mr.
    Clifford Thies, describes an income dead zone in which a family
    earning $40,000 per year is barely better off financially than
    a family not working at all once all welfare benefits and tax
    credits are taken into account. Other experts like Harvard
    economist Greg Mankiw call this phenomenon a poverty trap. He
    says the bottom line is if you are poor, the government is
    inadvertently ensuring that you have little incentive to try to
    improve your condition.
        What it really boils down to is this. When government
    benefits for low-income families and as their work and earnings
    increase, that discourages more work and earnings. The more
    benefits the government provides, the stronger the disincentive
    to work harder and earn more. Ironically many of the programs
    in question like TANF and childcare, in our human resources
    jurisdiction, are designed to alleviate poverty while promoting
    work. However, especially when combined with refundable tax
    credits that have grown rapidly in recent years, the collective
    weight of these programs can have an unintended side effect of
    discouraging harder work and higher earnings. This is not a new
    problem, but it is about to get a lot worse. The massive new
    health insurance subsidies under the Democrat's health care
    reform will expand this problem and extend its reach well into
    the middle class affecting families earning up to $90,000 for a
    family of four. According to the National Center for Policy
    Analysis, the exchange subsidies under ObamaCare will yield
    marginal tax rates over a broad range of low or middle incomes
    that are always above 55 percent, usually above 60 percent, and
    sometimes above 70 percent. Those are some staggering numbers.
    But as we will learn, for some people, the implicit marginal
    tax rate can actually exceed 100 percent. That means the family
    is actually worse off when their work and their earnings
    increase.
        Here is how another Harvard economist, Jeff Liebman,
    advisor to President Obama, describes the story of one woman
    who went from earning $25,000 a year to $35,000 and could not
    make ends meet anymore as a result. ``She lost free health
    insurance and instead had to pay $230 a month for her employer
    provided health insurance. Her rent associated with her Section
    8 voucher went up by 30 percent because of the income gain,
    which is the rule. She lost the $280 a month in a subsidized
    childcare voucher she had for after school care for her child.
    She lost around $1,600 a year of the EITC. She paid payroll tax
    on the additional income. Finally, the new job was in Boston
    and she lived in a suburb so now she has $300 a month of
    additional gas and parking charges. She asked me if she could
    go back to earning $25,000.'' He estimated that the government
    imposed a 130 percent implicit marginal tax rate on her.
        We look forward to all of the witnesses' testimonies today,
    including possible solutions, so Americans have more, not less
    incentive to work and support their families. This is an issue
    I have personally wrestled with for many years, first as a
    volunteer before coming to Congress and trying to find a way to
    build a bridge that would smooth this transition to work
    without creating a cliff, particularly for single parent
    families that are trying to make a go of it and improve the
    quality of their lives.
        With that, I would like to now turn it over to the ranking
    member of the Human Resources Subcommittee, Representative
    Lloyd Doggett. Would you care to make an opening statement?
        Mr. DOGGETT. Yes, Mr. Chairman. Thank you very much for
    your courtesy. Certainly if we can perfect our tax system so
    that it does more to reward work we should do it. And if we can
    ferret out any abuse of existing preferences or tax credits
    that are not being properly used in accordance with the law, we
    should do that and should take corrective steps. But I must say
    respectfully that it is my belief that the focus of this
    hearing and the focus of the overall work this year and last
    year of the Ways and Means Committee in this area is
    misdirected.
        Let's look at the facts. The richest one-fifth of Americans
    are reported to own 84 percent of the wealth of this country,
    while the bottom 40 percent are estimated to own about 3 or 4
    percent of the wealth of this country. The Congressional Budget
    Office reports that over the last 3 decades after tax income
    for the top 1 percent soared by 277 percent, while two-thirds
    of the income gains from 2002 to 2007 flowed to the top 1
    percent of households.
        The focus of this hearing is not on the 1,500 millionaires
    who paid zero income tax in a recent year, it is not on those
    corporations who not only paid zero, such as in some years
    General Electric, Boeing, Wells Fargo, but in some cases
    actually received money back in credits from the government. It
    is not on the area where revenues are not flowing to our
    government, it is not on those at the top, it is all focused on
    whether those who have an ownership interest in 3 percent or
    less of our Nation's wealth, whether they are getting too much.
        The overall concept of this hearing seems to follow closely
    the report last year of the House Republican Study Committee
    concerning the disincentivizes of our current system. This is
    the same group and same set of reports that condemned as
    welfare and seemed to call for reductions in Pell grants, Title
    I grants to disadvantaged schools, Head Start, the school lunch
    program and the school breakfast program. I believe that is a
    mischaracterization of those important initiatives that help
    those who are struggling to become part of the middle class and
    to share in the American dream to help them advance, and that
    it is wrong to continue to deny those opportunities.
        When a mother with a couple of children who lives in Austin
    or San Marcos or San Antonio leaves the welfare program for a
    full time minimum wage job, the earned income tax credit and
    the child tax credit are available to help her and other
    working families. That increases the value of her work in a
    significant way and is an incentive to advance.
        At the same period of time through the recent recession
    there were reports by the Pew Research Center that Hispanics
    particularly represented the hardest hit by the recession, a 66
    percent drop in wealth from 2005 to 2009, a widening of the gap
    in our country that has not been seen in the last quarter of a
    century during the time that data was collected.
        These are serious problems that need to be addressed to
    encourage and help people move into the middle class and to see
    that our Nation has the revenues that it needs in order to
    sustain those programs. We need more focus on those real
    problems rather than on the small issue that is raised by
    today's hearing. And I yield back.
        Chairman DAVIS. I thank the gentleman. I now turn to the
    Chairman of the Ways and Means Subcommittee on Select Revenue
    Measures, Mr. Pat Tiberi.
        Chairman TIBERI. Thank you, Chairman Davis. Thank you for
    your leadership on this issue, and it is a real pleasure to
    have an opportunity to have a joint hearing with our
    subcommittees today.
        Providing an adequate safety net for Americans who have
    fallen on hard times I believe is a nonpartisan issue in this
    Congress. It is something that all of us believe in. As is
    making sure government does not stand in the way of Americans
    who want to work to achieve their life and fulfill their
    American dream, I know firsthand for the need for a safety net.
    When I was in high school my father who immigrated to America
    with my mother with nothing lost his job of 25 years, lost his
    pension and our family lost our health care. At that time I was
    thrown into the free and reduced lunch program in high school.
    The good news is my dad found a job, he was rewarded and we
    went on being a family again.
        Today what is dangerous with our Tax Code is that it
    appears that people or the Tax Code is saying to people, to
    Americans who are down on their luck, who had a job loss, that
    they will be penalized if they turn their luck around and are
    fortunate to find an opportunity of work.
        Comprehensive tax reform is a chance to solve this problem.
    In tax reform we should ensure that low-income Americans are
    not punished through extraordinarily high implicit marginal
    rates. We should reduce complexity as well. There is no reason
    that my father should have to see a tax accountant for his tax
    returns. Our current code is a nuisance where taxpayers, for
    instance, claiming the earned income tax credit in many times
    and many places have to use a paid tax preparer, costing them
    money from their own pockets.
        I look forward, Mr. Chairman, to discussing how we can fix
    this issue to empower Americans to live the American dream. I
    yield back.
        Chairman DAVIS. Thank you very much. The chair now
    recognizes Mr. Neal, ranking member of the Select Revenue
    Subcommittee.
        Mr. NEAL. Thank you, Mr. Chairman. Thanks to you and Mr.
    Tiberi for holding the hearing. I want to quote Ronald Reagan:
    The earned income tax credit is the best anti-poverty program,
    the best pro-family, the best job creation measure to come out
    of Congress. The earned income tax credit is a bipartisan idea
    and it was signed into law by President Ford with a Democratic
    Congress and expanded by every President since Ford, both
    Democrat and Republican.
        Here is an opportunity where we might change the rhetoric
    in Congress when we frequently hear that 47 percent of the
    American people don't pay taxes. Of course they do. They pay
    the most onerous taxes, payroll taxes. There would be an easy
    way to soften some of the harsh rhetoric here by that simple
    acknowledgement.
        President Reagan was absolutely right, the earned income
    tax credit is extremely successful at increasing work and
    lowering welfare receipt, making our tax rules more fair for
    low and moderate income tax families and, most importantly,
    reducing poverty. In 2010 the earned income tax credit lifted
    about 6.3 million Americans out of poverty, almost 3.3 million
    children. Without the earned income tax credit the number of
    children living in poverty would have been one-quarter higher.
    Is it perfect? Of course it is not. There is no provision in
    our Tax Code that is perfect. And I am open to working with my
    Republican friends and colleagues to strengthen the credit.
        I do get a bit antsy, however, with recent comments that I
    have heard from some who would suggest or imply that we should
    increase taxes on low and moderate income families. Majority
    Leader Cantor recently stated, quote, we also know that over 45
    percent of the people in this country don't pay income taxes at
    all and we have to question whether that is fair.
        Mr. NEAL. Again, an opportunity to reshape language.
    Majority leader Cantor and I clearly have different definitions
    of the word ``fair.'' Some are calling for increasing taxes on
    the poor and moderate-income Americans at the same time they
    are calling for lowering taxes on the wealthy. That is hardly
    fair.
        Republicans tell us that we can't increase taxes on the
    wealthy because of the negative impact on jobs. But ironically,
    they link increasing taxes on poor people, because they say it
    will encourage them to work. We have come a long way since
    those days when President Reagan proudly proclaimed at the
    signing of the Tax Reform Act of 1986, quote, ``Millions of the
    working poor will be dropped from the tax rolls altogether and
    the wealthy will pay their fair share.'' That is Ronald
    Reagan's quote.
        But as I conclude, let me highlight that I am open to
    working on this legislation. I hope that the 1-year
    enhancements that we are attempting to offer EITC and the child
    tax credit would make their way to the end of the year and I
    hope that members of this subcommittee and the full committee
    can find a common path forward on these issues.
        Yield back.
        Chairman DAVIS. I thank the gentleman.
        I will now turn to our member panel on which Representative
    Gwen Moore will be testifying. Representative Moore and I have
    worked on legislation in the Financial Services Committee
    affecting affordable housing, dealing with child homelessness
    and domestic abuse.
        I would like to remind Representative Moore to limit her
    oral statement to 5 minutes, however. Without objection, all of
    your written statement testimony will be made part of the
    permanent record. Please proceed with your testimony.

      STATEMENT OF THE HONORABLE GWEN MOORE, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF WISCONSIN

        Ms. MOORE. Thank you so much, Chairman Davis and Chairman
    Tiberi and Ranking Members Neal and Doggett. It is certainly a
    privilege to be here as an expert witness on being poor.
        I am indeed an expert. As many of you may know, I had my
    first child at age 18. She is now 42 years old and talks back
    very regularly. But let me say that times were not always so
    easy. The very first welfare benefit that I received, sir, was
    Medicaid, because I gave birth to my daughter on Medicaid.
        The subject of this, and I can tell you that if in fact
    welfare reform would live up to its promises and its rhetoric
    of making work pay, of helping to lift people out of poverty,
    to give people a hand up instead of a hand out, I can guarantee
    you that the 4 million people who are now receiving TANF would
    storm the Capitol and demand welfare reform. But of course that
    is more rhetoric than it is reality.
        I was able to listen to some of the testimony of our
    distinguished guests, the Honorable Duncan Smith, catch a bit
    of his testimony before I walked over here today. And I must
    say that as a Britainer, he must appreciate the fact that
    Britain is the country with probably the least social mobility
    among the OECD states, which means that you can predict
    people's social mobility more by what their father's station,
    whether they were a duke or an earl or what their income was,
    than you can with anything that welfare would have done.
        And I say that with all due respect, Mr. Chairman, and I
    mean it with all due respect, that the title of this hearing,
    ``How Welfare and Tax Benefits Can Discourage Work,'' is at
    best a misnomer, and at worst is just fallacious non-sequitur
    because it assumes--I heard the testimony--it assumes a lot
    about the lack of character on the part of welfare recipients,
    and it doesn't talk at all about the structural intent of these
    welfare programs.
        I just want to--I want to quote, since I see my time is
    expiring against my will here, I would like to just quote from
    Charles Dickens--I think that is appropriate, given our first
    panel--SparkNotes quote on Dickens. The theme of David
    Copperfield focuses on orphans, women, and the mentally
    disabled to show that exploitation, not pity or compassion, is
    the rule of an industrial society. So that when we look at the
    tax benefits, the marginal tax rates that people experience, it
    is because our benefits are not high enough to make work pay.
        I would submit and I look forward to the question-and-
    answer period, I would submit that people don't work just for
    their self-esteem or for their dignity. They need to make
    enough money to be able to pay the rent and put a Barbie doll
    under the Christmas tree at Christmas.
        In my case--and I am happy to share details of that with
    you--my daughter had her first asthma attack at age 4 days old.
    I could not afford to have a job that would have separated me
    from the Medicaid benefit that we had. And I once had a job and
    begged my supervisor not to give me a 50 cents an hour raise
    lest I lose Title 20 day care. I worked 80 miles away from my
    children. And as a person who survived childhood rape, I know
    how important it was to have reliable daycare.
        And so I would say that if we really want to encourage
    work, things like the Earned Income Tax Credit, things like
    providing child care, things like providing food supplements,
    encourage work, not to simply take the position that we are
    going to take the Keynesian approach and just say, Well, the
    thing to do is to snatch food stamps, snatch housing benefits,
    snatch Medicare so that we can literally deliver this poor
    group of people, primarily women, to the workforce so they will
    be forced to work because, in fact, they will not have any
    other choice.
        And with that I would be happy to answer questions Mr.
    Chairman.
        [The prepared statement of Ms. Moore follows:]

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        Chairman DAVIS. Do any members have a question?
        Mr. DOGGETT. Thank you very much for your expert testimony
    Ms. Moore.
        Do you think that Americans that are out there looking for
    work are more focused on the issues of child care, job
    training, job availability than they are on calculating their
    potential marginal tax rate if they work a certain number of
    hours?
        Ms. MOORE. No, sir, I can tell you that they are not. But I
    want to stipulate, Mr. Doggett, that welfare recipients are not
    stupid. They have common sense, even though they may not have
    the ability to calculate implicit tax marginal rates. I can
    tell you that it is just common sense. Like what I learned as a
    parent of a 4-day-old child is that I had to have health care
    so that I think I would have been very successful as a
    waitress, you know, because I love people, I love engaging
    them, but I would not have been able to afford to, as a 4-day-
    old parent, go work in a restaurant that didn't provide health
    care, and risk at that time losing Medicaid. I couldn't afford
    to lose Medicaid. My daughter is 42 now and still has asthma.
    And I couldn't afford to lose Medicaid. It is a benefit, and if
    the government wants to help people, they should. I would want
    to work if in fact I didn't risk losing Medicaid.
        Same thing with daycare. Just like I begged my employer, it
    is not something that I calculated. My daycare provider told me
    if that I was--that earning $17,000 a year with three kids--I
    was still poor--that I had, in fact, hit that marginal tax
    rate; and that if I earned any more--I was still poor--so that
    when January came around and the automatic increases in Title
    20 occurred, the inflationary increases, then I could take, I
    could take the 50 cents an hour raise.
        So I want to stipulate to the fact that there are implicit
    marginal tax rates that people hit. But the conclusion that
    poor people are then gaming the system or you should just take
    the benefit away is fallacious. What it means is that the cost
    of daycare in 2012 terms, $1,000 a month, $1,500 a month,
    depending on the age of your child, is so great that work does
    not pay. Women cannot afford to work without governmental
    assistance.
        Mr. DOGGETT. Thank you.
        Chairman DAVIS. And one thing I would like to point out to
    the gentlewoman, the purpose of the hearing in fact is in fact
    to address these questions. You said yourself that you begged
    not to get a raise, and I called this hearing----
        Ms. MOORE. Yes, sir. And I want to stipulate that----
        Chairman DAVIS. Reclaiming my time. I would just like to
    make the point that what we are trying to address are broken
    processes that we have worked on, a bipartisan process over the
    course of this Congress, to address this very cliff.
        And I think what I am hearing from your commentary is
    actually agreeing with the premise of our hearing, to look at
    best practices, ways to better integrate information, and avoid
    people getting into the very situation that you yourself were
    in as a young mother.
        With that I would like to recognize Mr. Neal.
        Ms. MOORE. Mr. Chairman, can I respond to that because that
    was not your time. I think that was someone else's time, and so
    you reclaimed someone else's time. There is still 2 minutes
    remaining on the clock.
        Chairman DAVIS. Actually that was my time, Ms. Moore. We
    will go ahead to Mr. Neal and then we can come back.
        Mr. NEAL. Thank you. I think you hit some very important
    points, job training----
        Ms. MOORE. Yes.
        Mr. NEAL. Health care.
        Ms. MOORE. Yes.
        Mr. NEAL. Transportation.
        Ms. MOORE. Yes.
        Mr. NEAL. Daycare.
        Ms. MOORE. Yes.
        Mr. NEAL. The other agreement that we had in 1996 that was
    really far reaching and all encompassing--and maybe you could
    speak to it because you invited a question when you said you
    wanted to be as candid as possible--what about the role of
    child support? We do a pretty good job with trying to enforce
    child support here. Maybe you could give us a practical
    assessment of that?
        Ms. MOORE. Well, thank you for asking that, because I am a
    huge fan of child support. And as a matter of fact, for several
    years the only bipartisan amendment that has passed out of the
    Budget Committee has been me and Mr. Ryan's amendment to try to
    do 100 percent passthrough of child support to a custodial
    parents. I am a huge fan of child support, particularly since
    all of the other source of supports are wanting. TANF is not a
    very reliable source of income, it is no longer a mandatory
    expenditure. So I think child support is very important.
        I want to respond to something that Chairman Davis said
    with my tacit agreement about hitting these marginal tax rates.
    I come to a different conclusion about it. You know, instead of
    saying, Let's take away the work supports, I am saying that
    perhaps you ought to expand it. Because right now for an
    infant, for example, if you want a woman who is on welfare to
    go work to get decent daycare--and I mean very modest daycare
    for an infant--this would cost $1,000 a month in the Midwest. I
    am not talking about New York City or Washington, D.C. How can
    a woman earn $1,000 a month and still pay the rent, buy food?
    She can't. And so if she hits that cliff in terms of
    eligibility for daycare at $7.52 an hour, your premise is, or
    Honorable Duncan Smith's premise is that she is some sort of
    lazy person who is lacking in character and so therefore she
    would quit work. And I am saying that she is someone like me
    who very much wants to continue work but needs--honestly needs
    more support in order to be able to continue to work. And so
    that is a clarification I would make with regard to our
    agreement on that.
        Chairman DAVIS. Mr. Larson is recognized for 5 minutes.
        Mr. LARSON. Thank you, Mr. Chairman, and thank you, Mr.
    Tiberi, as well. I appreciate the spirit of which this hearing
    is being conducted and especially appreciated the value added
    that my colleague from Wisconsin brings.
        And you underscore a point. I wasn't going to speak, but to
    look at the magnitude of this situation, it goes beyond
    anecdotes. And I am speaking, I think, with a great deal of
    knowledge just in my own staff here at the Capitol. When we
    talk about daycare, I think Ed Ziegler, the sterling professor
    of psychology, the father of the Head Start program for the
    Nation under the Nixon program, said it best: Daycare is
    nothing short of a cosmic crapshoot for people who are seeking
    to have their children be developed in a manner that, if they
    could stay at home themselves, which of course they would all
    prefer, but for the fact that they have to be out and employed.
        So it underscores I think what you are saying,
    Representative Moore, the need for us to continue to augment;
    and as the chairman has said, when we get to these cliffs what
    is it at that cliff that we have to decide? Ziegler used to
    say, Why is it that we don't utilize public schools that are
    already on bus routes that are safe, where we can put people
    there and provide the kind of affordable daycare that is safe,
    that is fundamentally sound and would be helpful?
        Take a look around, and especially if you are a young and
    expectant mother and you are in the workforce currently, you
    are pursuing a professional career. Take a look around at what
    kind of daycare there is for you, and then consider where you
    may have the means, the situation of so many fellow Americans
    that don't. I hope that underscores some of what you have to
    say, Representative.
        Ms. MOORE. Well thank you for that commentary,
    Representative Larson, because it is. I can tell you what the
    alternatives are to having $1,000 a month to pay for decent
    daycare. You can have a loving mother or mother-in-law who will
    take care of your kids the 2 days of the week that she is not
    on dialysis. You can have a next-door neighbor take care of
    your kids, and maybe this will be a good family and that
    Chester the molester will not be a resident of that household.
    It is a crapshoot, as you said.
        You can do as I did for so many years before I found this
    daycare that finally told me that I was going to hit the cliff,
    and I sent my kids down to the corner to a babysitter who sat
    my kids in front of a television with a stick, and if they
    moved she would hit them and beat them, so much and so often
    that my daughter who is now 42 refused to take her brothers
    down there again.
        Or you can just hang a key around your kid's neck and your
    8-year-old and 6-year-old kid and tell them to stay in the
    house, don't open the door, fix a peanut butter and jelly
    sandwich, and hope that you are lucky enough that nothing will
    happen to them while you are gone.
        Those are the options that I know plenty of people who have
    resorted to those options. That is what happens. It is not that
    you are sitting there calculating the implicit marginal tax
    rate. You are just trying to figure out if you have to work and
    it is not--and if you don't work it is not because you have
    poor character, it is because you cannot figure that out. You
    are not lucky enough to be able to figure that out.
        Mr. LARSON. I yield back.
        Chairman DAVIS. I thank the gentleman. And as one of those
    kids with the key around his neck from when he was 7 years old,
    I care very deeply about this issue. And in no way has there
    been any attempt to prejudice any individuals who are caught in
    these situations. Again, though, it is absolutely critical as a
    nation, like Great Britain is doing, that we address all of the
    process issues to integrate agencies effectively and be willing
    to ask the hard questions. And with that, I thank the
    gentlewoman for her testimony and would ask for the next panel
    to come up.
        Thank you very much.
        Ms. MOORE. And just thank you, Mr. Chairman, and thank all
    of you for listening to my testimony.
        Chairman DAVIS. Moving on to our third panel joining us
    today, several distinguished gentlemen who are going to share
    their thoughts on the issues of reforms and addressing the
    issues of taxation and benefits. Dr. Clifford Thies, Ph.D.,
    professor of economics and finance at Shenandoah University;
    Dr. Eugene Steuerle, Ph.D. and senior fellow, the Urban
    Institute; Dr. Jared Bernstein, Ph.D. and senior fellow, Center
    on Budget and Policy Priorities; and Dr. Ike Brannon, Ph.D.,
    director of economic policy and congressional relations,
    American Action Forum.
        I would like to remind all of our witnesses the testimony
    is limited to 5 minutes. However, without objection, all of
    your written testimony will be made part of your permanent
    record.
        Mr. Thies, please proceed with your opening statement.

    STATEMENT OF CLIFFORD THIES, PH.D., PROFESSOR OF ECONOMICS AND
                     FINANCE, SHENANDOAH UNIVERSITY

        Mr. THIES. Good morning. I appreciate very much the emotion
    with which certain people have addressed the loss of health
    insurance upon passing over certain thresholds. In the Article
    I wrote on the Dead Zone 3 years ago, I myself got a little
    emotional at those points. It seemed so unfair as well as
    socially inefficient to have these cliffs over which people
    would fall, and there is an opportunity with health reform to
    address this.
        We have grown a series of supports to provide an economic
    safety net. One of these supports, the EITC, has a positive
    incentive for working. It stands out in that regard. The impact
    it had in terms of increasing labor force participation was
    noticeable upon its enactment and upon its expansions. It does
    testify to the importance of these programs. Also, although
    they are anecdotal, there are lots and lots of anecdotes.
    Almost everybody knows anecdotes of people who were making the
    calculations about whether working more is worthwhile. And
    these people maybe sometimes are called gamers of the system;
    in truth, they are heroic.
        Often my own mother, she would complain about not having
    health insurance and working. She said, Prisoners get health
    care when they need it. I said, Mom, if you need, you can go
    rob a bank.
        Now, in Europe they have health insurance and it is paid
    for primarily by payroll taxes and sales taxes, and it has a
    much bigger apparent cost than our system does. Our system has
    a larger real cost in terms of the disincentive effect in terms
    of keeping people in a certain status in society. Instead of
    moving from addressing security, to moving to self-
    actualization in their work, instead of being engaged as a
    fully human person in terms of working with diligence and with
    judgment and with a degree of creativity in their work, they
    are trapped in a different strata, and not participating fully
    with the rest of us in a free society. We should want a
    seamless transition from the place where we have the economic
    safety net to the place where we--most of us at least in our
    lifetime, certainly our children will be in their lifetime, in
    terms of acting as a free person, self-actualizing, associating
    with other people on the basis of free association.
        Now, I was interested in the other calculations of the
    numbers; the actual implicit tax rate is somewhat problematic
    because of the cliffs that are involved. The EITC phases in and
    phases out, that is pretty easy to calculate the implicit tax
    rate.
        Well, how do you handle something where you have a cliff
    where you lose eligibility entirely, or the adults lose health
    insurance and then the children are still covered for a while
    and then they lose eligibility? So there is some art to making
    those calculations.
        I wondered whether I should update the calculations I had
    in my 2009 article for this presentation but I, like everybody
    else, am waiting for the Supreme Court to speak on the issue of
    health-care reform. And then also we have the problem of the
    payroll tax going up, of the Federal income tax rate for the
    first bracket going up, and of the child tax credit going down.
    So I thought let me just have the same calculations I had
    several years ago.
        The point is pretty clear, when you consider income after
    taxes, and plus benefits that you receive, that there isn't
    much incentive for a lot of our fellow Americans to work.
    Taking into account the net effect, the tax rate may be 50
    percent for some, may be as much as 100 percent for others. We
    should have a big, robust, positive tangible effect for
    everybody in our system. This speaks to tax simplification and
    tax reform, so that all pay their fair share, the focus today
    being that the poor not pay more than that fair share on the
    marginal dollar of productivity.
        And the payroll tax is a very big tax and it is paid twice,
    by the worker and by their employer. It is a very large tax.
    Why do we have that tax when we are trying to help people?
        If you look at an alternative measure of income for the
    purpose of calculating poverty, based not on the official
    income that we currently base our poverty rate on, but based on
    income after taxes, plus benefits, at least for the State of
    Minnesota, the Urban Institute shows that you have about the
    same poverty rate. We push about as many people into poverty as
    we pull out, we pull the same people in and out yo-yoing them
    in the process.
        Chairman DAVIS. Mr. Thies, could you sum up quickly so we
    could move on?
        Mr. THIES. We want to have an integrated approach with a
    robust incentive to work at every phase of the income
    distribution.
        Chairman DAVIS. Thank you very much.
        [The prepared statement of Mr. Thies follows:]

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        Chairman DAVIS. Mr. Steuerle, you are recognized for 5
    minutes.

     STATEMENT OF EUGENE STEUERLE, PH.D., SENIOR FELLOW, THE URBAN
                               INSTITUTE

        Mr. STEUERLE. Chairman Davis and members of the two
    subcommittees, thank you again for the opportunity to appear
    before you once again. As already noted, the Nation's real tax
    system is very different than the tax system we know just by
    looking at direct statutory rates such as the income tax and
    the Social Security tax. The implicit taxes that derive from
    phasing out various benefits in both expenditure and tax
    programs--I tend to call expenditure taxes because, like tax
    expenditures, they remain largely hidden from government and
    the public--and yet they actually are a major influence on
    behavior.
        These expenditures, I want to be clear, are a classic
    liberal conservative compromise. Mr. Chairman, you commented
    earlier about needing to work together to solve this problem.
    One reason that one has to work together is because, in fact,
    it is a liberal-conservative compromise that got us there in
    the sense that liberals have favored these types of implicit
    taxes as a way of increasing progressivity, while conservatives
    have embarked upon them as ways of saving on budget revenues.
    Both of them are legitimate goals but have resulted in very,
    very high tax rates. And although low- and moderate-income
    households are especially affected and seem to be the subject
    mainly of this hearing, I remind you that you have these
    implicit taxes in the AMT and Pell grants and in dozens, if not
    hundreds, of programs, including most of the subsidies that are
    in the tax system.
        At the Urban Institute we have done a lot of work on trying
    to calculate these taxes. The first graph that you see here on
    the screen is the same as in figure 1b of my testimony. It
    shows close to the maximum benefits for which a single head of
    household and two children may be eligible, and then how they
    phase out as income increases.
        Rates are low or even negative up to about 10,000 to
    $15,000 of income. It is thereafter that they rise quickly.
        In the next figure, which is the same as figure 3 of my
    testimony, I show the effect of tax rate for a household whose
    income rises from 10,000 to $40,000. Essentially income and
    Social Security taxes take away about 30 percent of earnings,
    and then universally available programs--by ``universally'' I
    mean they are available to all of us if we have children, there
    are no queues, and include items like EITC or SNAP--raise the
    rate to about 55 percent. And for those households who happen
    to be into welfare programs such as TANF or get housing
    benefits, the rate can rise well above 80 percent.
        What used to be called a poverty trap has now moved to what
    Linda Giannarelli and I have called the twice poverty trap;
    that is, the high rates especially hit households who earn more
    than poverty-level incomes.
        Many studies have attempted to show the effect of these
    rates on work and the results are actually mixed. Work
    subsidies such as the EITC generally encourage labor-force
    participation and may tend to discourage work at higher income
    levels, particularly for second jobs in a family, moving to
    full time work, or, as I note in my testimony, also for
    marrying someone who has a job.
        Design matters greatly. For instance, Medicaid will
    discourage work among the disabled more than a subsidy system
    such as the health exchange subsidy that is in the health
    reform; on the other hand, that health exchange subsidy will
    discourage work for older people who are encouraged to retire
    earlier.
        For the same amount of cash, a major conclusion is that a
    program that requires work will indeed lead to more work than
    one that does not. In that regard, the earned income credit and
    welfare reform have done better on the work front than did
    AFDC.
        Other consequences need examining. Means testing and joint
    filing have resulted in hundreds of billions of dollars of
    marriage penalties for low- and middle-income households, and
    indeed not marrying is the tax shelter for the poor. Many
    programs do help those with special needs, although they vary
    widely in their efficiency and effectiveness. So, for instance,
    there is some evidence that a well-developed program can
    improve behavior such as school attendance and maternal health.
    At the same time, as an economist I have to question our
    ability to judge the long-term consequences of these programs
    merely from the empirical studies that we perform.
        So just as a classic liberal-conservative compromise got us
    into this situation, so might it require a liberal-conservative
    compromise to get us out of it. And among the many approaches
    to reform that I think are worthy of consideration are:
        One, seeking broad-based social welfare reform, far beyond
    even what we are discussing today, rather than adopting
    programs one-by-one with multiple phaseouts.
        Two, starting to emphasize opportunity and education over
    adequacy and consumption. We can start moving the budget in the
    former direction rather than the latter. It doesn't necessarily
    require cutting back on programs. It means that the growth on
    government which continues would get redirected in a different
    way.
        Three, we can put tax rates directly in the Tax Code so
    they are not so hidden.
        Four, we can make work an even stronger requirement for
    receipt of various benefits.
        Five, we could think about trying to adopt a maximum
    marginal tax rate for at least some programs combined.
        And, six, I believe we can let child benefits go with the
    child, and wage subsidies go with low-income workers rather
    than combining the two. And the goal there is not just to favor
    work but also to try to start including in the social welfare
    structure many of these low-income, working, single people who
    basically are excluded altogether and have access to this
    system mainly by going to prison. Thank you.
        Chairman DAVIS. Thank you very much Mr. Steuerle.
        [The prepared statement of Mr. Steuerle follows:]

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        Chairman DAVIS. Mr. Bernstein.

     STATEMENT OF JARED BERNSEIN, PH.D., SENIOR FELLOW, CENTER ON
                      BUDGET AND POLICY PRIORITIES

        Mr. BERNSTEIN. Chairman Davis, Ranking Member,
    Representative Doggett, I thank you for inviting me to testify
    today. My first point, however, is that I believe that it is
    essential to broaden the question at the heart of this hearing.
    For policymakers to best understand the impacts of the policies
    under review, we must investigate not just any work
    disincentives they may engender, but also work incentives. For
    example, as has been heard numerous times today, the Earned
    Income Tax Credit, an important wage subsidy for low-income
    workers, has been found to have large work-incentive effects.
    It lifts millions of families out of poverty, working families.
    Surely this is why it was one of Ronald Reagan's favorite anti-
    poverty programs.
        And that raises another necessary dimension along which
    these programs must be evaluated: To what extent do they
    achieve their poverty-reduction targets; in other words, to
    examine only the marginal tax rates and work disincentives
    associated with our anti-poverty programs, risks and incomplete
    understanding of the impact of the programs on work, on poverty
    and on well-being?
        So research on these questions finds the following. While
    benefits of means-tested programs are, by definition, reduced
    as incomes rise beyond a certain point, their work
    disincentives differ. And a number of significant programs,
    including the EITC and SNAP, formerly food stamps, are found to
    have either positive or neutral effects on labor supply.
        The EITC extensively studied in this regard has yielded the
    following finding from a recent comprehensive review. The
    overwhelming finding, the empirical literature, is that the
    EITC has been especially successful at encouraging the
    employment of single parents, especially mothers. A recent
    exhaustive review of the poverty reduction effectiveness of the
    full scope of our safety net and social insurance programs
    found ``the combination of the means tested and social
    insurance transfers in the system have a major impact on
    poverty, reducing deep poverty, poverty and near-poverty rates
    by about 14 percentage points in the U.S. population as a
    whole.
        The next finding from that study is particularly germane to
    today's hearing. Quote, ``This poverty reduction impact is only
    negligibly affected by work incentives, which, in the
    aggregate, have almost no effect on the pretransfer rates of
    poverty in the population as a whole.''
        In other words, what is notable about this research is that
    it finds these significant and quantitatively large poverty-
    reduction effects after accounting for any work disincentives
    implicit in the programs.
        Other recent research has found positive generational
    effects of safety net programs on later education and earnings
    outcomes of children from families that receive such benefits.
    For example, one study finds that raising a poor family's
    income by 3,000 a year--and that is a fairly typical amount for
    a poor family to receive from the child tax credit or the EITC
    before age 5--is associated with a 17 percent increase in
    earnings and an average of 135 hours of additional work per
    year compared to similarly low-income children whose families
    do not receive the benefits of these safety net programs.
        One poverty expert summarized the findings as, quote, a
    remarkably strong body of research, much of it based on large-
    scale, well-implemented, experimental research designs showing
    that supplementing the earnings of parents helps raise families
    out of poverty and improves the school performance of young
    children.
        This research clearly suggests that reducing those benefits
    would, net of any work disincentive effects, lower income,
    raise poverty, and harm future generations in terms of their
    educational and earnings outcome.
        Finally, to the extent that work disincentives exist,
    policymakers should consider ways to reduce or eliminate them.
    In the final section of my testimony I offer three ways to do
    so. First, lower marginal tax rates by extending phaseout
    ranges, though of course this increases costs. Provide work
    supports such as child care and transportation assistance. And
    third, increase number of jobs available to low-income workers
    through demand-side policies.
        Given the persistent weakness in the low-wage labor market
    in recent years, I want to be sure to stress the importance of
    this last point. Research over the last few decades has shown
    that the most effective work incentives for working-age members
    of low-income families are tight labor markets with rising
    pretax wages. In this regard, policies such as the job creation
    measures in President Obama's American Jobs Act will prove far
    more effective in incentivizing work than lowering marginal tax
    rates on safety net benefits.
        Conversely, it would be a significant policy mistake to
    require recipients of benefits to work without first ensuring
    adequate job availability. Even in a climate of strong work
    incentives, without adequate job availability, this is a policy
    recipe for rising poverty and the accompanying strain on
    families and children. Thank you.
        Chairman DAVIS. Thank you Mr. Bernstein.
        [The prepared statement of Mr. Bernstein follows:]

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        Chairman DAVIS. Mr. Brannon.

    STATEMENT OF IKE BRANNON, PH.D, DIRECTOR OF ECONOMIC POLICY AND
             CONGRESSIONAL RELATIONS, AMERICAN ACTION FORUM

        Mr. BRANNON. Thank you very much, and I want to thank the
    committee for the invitation to speak here.
        As a tax economist, the one thing I have realized through
    the years looking at the research is that tax rates matter. And
    very high tax rates, no matter where you are at in the income
    ladder, tend to deter employment and how much people want or
    are willing to work. And one of the things we have seen from a
    plethora of research in the welfare rolls is that because of
    all these various programs Mr. Steuerle has pointed out, you
    have marginal tax rates that regularly reach 40 percent for
    low-income people and can in certain situations go up as high
    as 80 percent or even 100 percent if you take into account the
    various State and local programs. No one really designed the
    programs to be this way.
        To quote a former Treasury Secretary, just like the tax
    system, we should have a welfare system that ``looks like it
    was designed on purpose.'' Every program was designed well and
    was put in by well-meaning people, but when you have 12 or 13
    different programs at the Federal level, the State level, and
    sometimes at the local and regional level, these things act to
    create tremendous disincentives.
        I think this is something that appeals to a number of
    people on the committee, and I suspect that is why you had the
    Honorable Duncan Smith here to talk about what they are doing
    in the United Kingdom. To me that makes a lot of sense. Instead
    of having several different programs that might be at odds and,
    combined, create tremendous disincentives to work, it makes a
    lot more sense to have one overarching program.
        It is very difficult to implement, I understand that,
    especially when you consider my hometown of Mossville,
    Illinois. People who are low income there get benefits at the
    Federal level, they get certain benefits at the State level,
    and they also get benefits from the township itself. Having a
    Federal Government design one overarching welfare reform
    program can be very, very difficult, and it might be impossible
    to tell the States and the townships to butt out.
        But nevertheless, we need to do something so that people
    aren't facing 70 or 80 percent tax rates. Both this Congress
    and previous Congresses have looked at this program and there
    have been bipartisan efforts to do this.
        One thing I would just like to recommend that this
    committee look at again, in 2002 and 2003 there was discussion
    about reforming the unemployment insurance system. One of the
    things we see with the unemployment insurance system is that if
    the unemployment benefits go on for 26 weeks, what happens is
    that when 100 people get laid off, about 30 or 40 percent find
    new jobs the first month, another 5 or 10 find jobs the second
    month, and then hardly anyone finds jobs until month 7, and
    then the majority of people who are still unemployed find
    employment that seventh month. If you extend it to 9 months,
    the magic month is 10 months. If you extend it to 12 months,
    the magic number is 13 months.
        One of the suggestions--a bipartisan effort was put forth
    in the Senate Finance Committee in 2002 and 2003--was to change
    that to something they called personal reemployment accounts,
    where, when people were laid off, instead of being given a
    monthly benefit as long as they didn't have a job, they were
    simply given an account, money that they could use to support
    their family or to get additional training or education or
    something like that. It totally eliminates the marginal
    disincentive that unemployment insurance provides to recipients
    against work.
        Doing such a thing might be difficult and impossible for
    other welfare programs, but it is a model that people need to
    recognize.
        People respond to incentives, and as Congresswoman Moore
    pointed out, they might not have college degrees but the
    typical welfare recipient is able to figure out whether or not
    it is worth their while to work. What we don't want to do is
    make sure people get just enough to get by and then provide
    disincentives for them to work.
        Chairman DAVIS. Thank you very much.
        [The prepared statement of Mr. Brannon follows:]

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        Chairman DAVIS. We will move on to questions now. I would
    like to recognize Mr. Tiberi, the chairman of the Select
    Revenue Subcommittee, for 5 minutes.
        Chairman TIBERI. Thank you. Mr. Bernstein, I have a chart
    that you will see on the TV monitor. In your testimony you note
    that, ``for each percentage point lower unemployment, the
    increase in real hourly wages for low-wage workers is at least
    twice that of high-wage workers.'' That is in your testimony.
        In January of 2009 you were the coauthor of an
    administration report titled, ``The Job Impact of the American
    Recovery and Reinvestment Plan.'' In that report, you may
    remember, you forecast the unemployment rate today would be 5.7
    percent with the administration's stimulus plan passing. As we
    know, today's unemployment rate is at 8.2 percent and has been
    above 8 percent for a post-Depression record of 40 straight
    months.
        Is it your testimony that low-wage workers have
    disproportionately lost out on higher wages due to the elevated
    unemployment rates we have seen, especially compared with the
    unemployment rates you forecast in the administration's
    trillion dollar stimulus plan as it became law?
        Mr. BERNSTEIN. Yes, I think the research is very clear on
    this, as I cited in my testimony. The wages of low-wage workers
    are, in economics terms, more elastic to the unemployment rate
    than wages of higher-income workers. And in fact, their
    unemployment rates are higher as well.
        Chairman TIBERI. So what happened?
        Mr. BERNSTEIN. Well, you are asking about the forecast?
        Chairman TIBERI. Yeah.
        Mr. BERNSTEIN. Clearly a different topic than marginal tax
    rates on safety net programs. When we--that was the
    administration forecast for unemployment. That is the same one
    that shows up in the administration's first budget. It is the
    forecast by what is called the troika: OMB, Council of Economic
    Advisers, and the Treasury.
        That forecast was made by an incoming administration that
    was just forming in the fourth quarter of 2008. At that time,
    unbeknownst to us, the economy was cratering, GDP was falling
    at a rate of almost 9 percent. Now, if you look at the
    statistics from that time, as we did, it looked like the
    economy--that the recession was far, far more mild than that.
    And that is why the forecast for unemployment that you saw was
    actually the median forecast of all the professional
    forecasters at the time. You are absolutely right in that we
    missed the depth and severity, but so did almost everyone else.
        I will say that once the Recovery Act was implemented, it
    was a matter of two quarters later, by the third quarter of
    2009, GDP was rising again. And I think that is a real mark of
    how successful it was in breaking the back of the ``great
    recession,'' albeit the unemployment rate continues to rise.
        Chairman TIBERI. Thank you. Mr. Brannon, you testified on
    the additional work penalty that the new exchange subsidies--
    work penalty that the new exchange subsidies provided by
    ObamaCare would create.
        I would like to highlight the fact that these subsidies
    also impose a marriage penalty through the Tax Code, and that
    is because they key off the Federal poverty guidelines; and
    under the Federal poverty guidelines, the poverty level, let's
    say, for a family of two, is at 135 percent of the poverty
    level for a single individual rather than double. That means
    that, for example, two single individuals earning $22,000 a
    year would lose about $1,400 dollars a year in subsidies if
    they became married in one household earning 44,000 rather than
    22,000 each.
        Can you expand on that?
        Mr. BRANNON. Well, the major problem with the Affordable
    Care Act in terms of how it is increasing the marginal tax
    rates in general is that it provides a subsidy to people who go
    to the exchange and buy health insurance if they are below the
    poverty rate, and then the phaseout is relatively steep in
    order to contain costs.
        And so research that my boss, Doug Holtz-Eakin, and Alex
    Brill did on the subject basically indicated the marginal tax
    rates for certain individuals will go up anywhere from 5
    percentage points to 10 percentage points based on the phaseout
    of the subsidies to the exchange associated with the Affordable
    Care Act.
        Chairman TIBERI. Even on the lower end?
        Mr. BRANNON. Even on the lower end.
        Chairman TIBERI. So this impacts low-income individuals at
    the lower marginal rates and not just in this area of the Tax
    Code.
        Mr. BRANNON. That is right.
        Chairman TIBERI. Thank you. I yield back.
        Chairman DAVIS. Thank you. The chair now recognizes Mr.
    Doggett for 5 minutes.
        Mr. DOGGETT. Thank you Mr. Chairman. Do each of our
    witnesses agree that it is important to maintain in its current
    form the Earned Income Tax Credit?
        Mr. THIES. Yes, the positive part yes. I would like, if it
    is possible, to eliminate the phaseout or blend that into the
    Tax Code.
        Mr. STEUERLE. I would actually expand it to try to figure
    out ways to include single people. And by the way, I would do
    it as a substitute for the type of Social Security tax break
    that I believe is both on Keynesian and supply-side grounds, a
    weaker incentive for recovery than could be some expansion of
    the earned income credit that could be cheaper.
        Mr. BERNSTEIN. I would add that the expansions that
    Congress supported to the EITC in the Recovery Act have proven
    to be extremely helpful in all of the ways you have heard this
    morning, and I would try to ensure that those expansions remain
    a permanent part of the program.
        Mr. DOGGETT. Mr. Bernstein, let's talk about health care
    just a little bit.
        If I have a high-tech employee in Austin who has a great
    idea for a start-up, but a family of children with serious
    illnesses, it is an informed decision for that person to stay
    with their group health insurance rather than go out and
    benefit society perhaps by creating a tech start-up.
        Similarly, if I have a poor person who can qualify--and in
    Texas it is very difficult because the State under Governor
    Perry is mainly about trying to prevent anyone from getting
    health care--but if they manage to qualify for benefits in the
    State of Texas for health care, with a sick family, and they
    choose not to seek a higher-wage job in order to maintain that
    eligibility for Medicaid, that also would appear to be not an
    indication of a lack of willingness to work but of an informed
    decision to try to provide health-care protection.
        We attempted to respond to both types of informed decisions
    with the Affordable Care Act, and, over time, want the
    availability, particularly the expansion of access for poorer
    people to health care, remove any cliff or disincentive to
    work, to create new jobs and new businesses, and new economic
    opportunities.
        Mr. BERNSTEIN. Yes, Congressman, I think you are adding
    precisely the kind of nuance that I tried to reflect in my
    testimony which must be brought to these criticisms by my
    colleagues here on the panel of the implicit tax rates in the
    Affordable Care Act. There are a lot of moving parts. You just
    mentioned a number of them. One of the most important is that
    the Affordable Care Act expands Medicaid, therefore pushing out
    and lowering any marginal tax rates or work disincentives
    associated with that program, quite significantly.
        And one of the studies that I brought with me today
    simulates this impact and predicts that the Affordable Care
    Act, accounting for the disincentives you heard here but the
    incentives that I just mentioned, would actually increase the
    employment of single mothers. The Affordable Care Act also
    reduces job lock which is what you mentioned. It is a highly
    inefficient problem for people stuck in the wrong job because
    they will lose coverage if they leave. It increases subsidies
    for small business. And by the way, if it successfully lowers
    health costs as expected, that will of course be very positive
    for job creation as well.
        I think what I tried to express in my testimony is that you
    simply can't do what some of my colleagues have done today,
    which is look at the marginal tax rates and assume that they
    reduce labor supply. You have to get into the actual
    functioning of these programs and look at the empirical
    outcomes. Now, we can't do that with the ACA yet, because it is
    not in place, with one exception--Massachusetts. Massachusetts
    has a health plan much like the Affordable Care Act, and there
    is a very nice study that looks at the employment effects of
    health reform in Massachusetts compared to neighboring States
    which face the same economic conditions but don't have that
    health-care difference, and it finds no employment effects at
    all.
        So I would be very wary of the simple prediction that says
    if a tax rate bumps up X it must have Y effect, without
    considering the kinds of nuances that I think occur in the real
    world.
        Mr. DOGGETT. Thank you very much I yield back.
        Chairman DAVIS. Thank you. The gentleman's time is expired.
    Mr. Marchant from Texas is recognized for 5 minutes.
        Mr. MARCHANT. Thank you, Mr. Chairman.
        Mr. Steuerle, Mr. Steuerle, economists and researchers have
    noted for decades that the interaction between welfare and tax
    benefits can create little incentive for low-income families to
    work. Is that still pretty much the consensus among economists?
        Mr. STEUERLE. Well, I tried to point this out in my
    testimony. What has happened over the last 2 or 3 decades is we
    have moved out what used to be called a ``poverty trap'' to
    what I now call the ``twice poverty trap.''
        So Mr. Bernstein is right that if you ask about what those
    reforms have done, they have probably increased labor-force
    participation. What the research is showing is that although it
    has increased labor-force participation and particularly for,
    say, welfare mothers who didn't work, the incentive can only be
    clearly positive in going from welfare to an earned income
    credit, or going from welfare to a welfare where you require
    work. The incentive is only positive towards participating in
    the labor force.
        What has happened, however, is that once you earn a little
    bit of money, once you get to about 10,000 or 15,000, that is
    when the disincentives largely strike. And so that is also one
    reason why we get mixed effects dependent on how you are
    measuring work.
        There is also something we haven't even discussed. You can
    actually decrease productivity but increase number of workers.
    So if a second earner doesn't take a job at $40,000 (a full-
    time job), but a couple of low-income workers work for 10
    hours, you can increase labor-force participation, yet decrease
    output.
        I realize I am giving you a more complicated message. But
    the disincentives have basically moved up the income
    distribution.
        The same thing occurs with the Affordable Care Act that we
    were just discussing. You have moved away from this
    disincentive in Medicaid and now you have moved the
    disincentive higher in the income distribution. So I pointed
    out in my testimony, for instance, that the Affordable Care Act
    probably will very much help the disabled to go work who are
    afraid of losing their Medicaid, but it will probably encourage
    more elderly people near to retirement to retire because now
    they can get health care without having to retire. So it is a
    complicated story in how tax rates discourage work. But the
    question is how much and for whom. And is this particular
    design, once you accept a social welfare structure, better than
    some other design?
        Mr. MARCHANT. Another part of the testimony of Secretary
    Smith was that they had seen some disparity in those that are
    disabled. And as you know in our system now, we have over the
    last few years we have almost 700,000 more people on our
    permanent--our disability rolls than we did before the
    recession.
        So I would like each of you to make a comment about whether
    you think this disability, this enrollment in disability has to
    do with obtaining the benefits of Medicare or, slash, Medicaid,
    and is there a--in his case he said there was very little
    incentive for someone that was disabled in the U.K. to go into
    the ranks of the employed--and do we have a similar trap in our
    system now?
        Mr. Thies.
        Mr. THIES. I would say if people have a robust incentive to
    work, then we could rely on their good judgment about whether
    they are permanently disabled or not in applying, and that when
    we don't have that robust incentive to work, we might suspect
    that the person is not balancing the considerations that person
    faces individually, and we face as a Nation in terms of having
    a safety net in place, and nevertheless wanting everyone who
    can to work to the extent that they can.
        Mr. MARCHANT. Mr. Steuerle.
        Mr. STEUERLE. Mr. Marchant, you are asking what I think is
    the toughest question in all social welfare policy: how do we
    design a program for the disabled? As I mentioned, among those
    near to retirement, disability insurance, for instance, favors
    retiring on disability rather than old-age insurance. If you
    retire on disability at 62, you get 30 percent higher benefits
    than if you retire on old-age insurance. So it creates an
    incentive, if you have moderate disabilities, to try to figure
    out if you can qualify for the system.
        Among those who really are disabled and have huge medical
    needs, the system has huge disincentives, once you get that
    Medicaid, to go back to work. You are really scared not just
    about losing your health insurance. But even if you take a job
    that has health insurance, you are not sure how long you are
    going to last on the job. And then you are afraid of having to
    get back in the system.
        So I don't have an easy answer for you. Disability,
    reforming disability I think is absolutely required. I think
    there are too many disincentives in the system to go to work,
    but it is a tough issue to handle. I think there are some
    margins where we clearly can make the system better.
        Mr. BERNSTEIN. Two very brief points, Congressman.
        First of all, and this is just repeating something that I
    think Gene said a minute ago, the Affordable Care Act, by
    pushing out, extending, expanding Medicaid eligibility,
    including to the disabled, actually reduces a work
    disincentive; and it is pro-work inducing for folks with mild
    disabilities such that they can go to work. So it kind of
    reduces a cliff there, which is helpful.
        My second point is I think implicit in your question was
    the idea--and numerous folks have looked at this--the extent to
    which disability rolls are rising faster than we might expect
    them to, faster than they have in prior years. And there is a
    question, are some long-term unemployed people simply using
    disability as a replacement for unemployment insurance? I am
    sure that--research suggests there is some of that going on,
    but one of my colleagues has looked at those numbers. Adjusting
    for age in the population, as the population ages there is
    going to be more disability, and that has created significant
    upward pressure on the rolls as well. So at some level, it
    pushes back on that idea that folks are illegitimately getting
    on the rolls.
        Chairman DAVIS. Thank you. The gentleman's time has
    expired. The chair recognizes Mr. Neal for 5 minutes.
        Mr. NEAL. Thank you, Mr. Chairman.
        Just a point that Mr. Bernstein mentioned earlier. One of
    the things that is significant about that Massachusetts plan is
    the consumer satisfaction rate. It remains pretty popular
    across the board. Small business, large business, it was
    carefully negotiated, and I think that bears noting in the
    discussion that we are currently having. Once it was
    implemented and people had a chance to see the fruit of the
    investment, it has been fairly well met. And I don't know
    anybody in the State, Republican or Democrat, who are talking
    about going back to the previous system, including the
    Massachusetts Hospital Association. They have all made sure
    that it would work, and regardless of what the Court does
    tomorrow, the people in Massachusetts, again--left, right, and
    center--they are committed to making this plan work and nobody
    talks about breaking it out.
        Let me just, Mr. Bernstein, before I go back to Mr.
    Brannon, because I raised an issue with you, I spoke earlier of
    one of the things that we did in 1996 with the welfare reform
    bill, which, in the end, was a series of artful compromises. We
    did talk about job training, transportation incentives, child
    care, daycare; but also one of the things that was very, very
    important, and it was done on a bipartisan basis, was the whole
    notion of child support. Would you speak about that experience,
    because I think it bears noting as we go forward.
        Mr. NEAL. You may.
        Mr. BERNSTEIN. The Council of Economic Advisors did a study
    when I was back at the White House and they looked at the
    impact of the Affordable Care Act on businesses small and large
    and they wrote as follows, creating a well functioning
    insurance market also prevents an inefficient allocation of
    labor away from small firms by leveling the playing field among
    firms of all sizes in competing for talented workers in the
    labor market, which is a complicated way of saying what you
    said very plainly, which is that since large firms are much
    more likely to offer comprehensive health insurance for their
    workers a system like the one we have today outside of
    Massachusetts gives them an advantage and a disadvantage from
    the worker's perspective in terms of job lock. If you have a
    more comprehensive system as the Affordable Care Act would
    present, small firms then lose that competitive disadvantage to
    large firms in competing for talented workers.
        Yes, child support is one of the many work supports that I
    would argue go far further in incentivizing work than tweaking
    marginal tax rates, whether it is quality childcare,
    transportation assistance, job training and education,
    subsidized employment, which by the way was a program that
    worked very well in the Recovery Act in incentivizing
    employment. These kinds of work supports have been shown to be
    much more consequential in helping people move from welfare to
    work than changes in marginal tax rates.
        Mr. NEAL. And Mr. Brannon, in New England where we saw the
    textile industry leave and then we saw the old line
    manufacturers begin to depart over the last 50 years, I must
    tell you based upon that solid old manufacturing history I
    never met anybody, the families that I have known all of those
    years, that were inclined to extend unemployment benefits if
    they thought they could get another job in a similar industry.
        Mr. BRANNON. Well, I also come from a major manufacturing
    center. Mossville, Illinois is the home of Caterpillar Tractor
    Company. In the early 1980s Caterpillar went through the
    recession with the rest of the country, and basically over 50
    percent of the blue collar employees from Caterpillar's
    factories in Mossville and East Peoria and Morton were laid
    off. We had a great example of that just in our hometown. What
    happened was that anyone who had any home building done, any
    work on the side, basically hired someone who did it for cash,
    presumably with no taxes paid. And who were these people? These
    were blue collar Caterpillar workers. So people might indeed be
    working but they are not necessarily reporting their income. I
    think you see a lot of that.
        Mr. NEAL. But you weren't suggesting then that people with
    that strong history of work and a good solid work ethic didn't
    want to go back to work if they could find a good job or
    similar to the one that they lost?
        Mr. BRANNON. No. I think if you have a blue collar job and
    you get laid off for 2 or 3 or 4 months, it becomes a rational
    decision. I think if you realize you are getting exactly half
    your salary it might make sense for you to take a few months
    off. When I was a professor in Wisconsin I knew people who
    worked at Oshkosh Truck. And what they would do when they knew
    they were going to have to lay off workers is they would ask
    for volunteers. And there are all kinds of people who would
    volunteer to be laid off for a month or two because they had
    various other things they wanted to do. Some of it was they had
    jobs that they wanted to do on the side in winter.
        Mr. NEAL. Thank you. Thank you, Mr. Chairman.
        Chairman DAVIS. Thank you. The chair now recognizes Mr.
    Berg from North Dakota for 5 minutes.
        Mr. BERG. Thank you, Mr. Chairman. And I thank the panel
    for being here. This is obviously a critical debate and issue
    and probably won't be totally solved today. But obviously our
    goal is to lift people out of poverty and try and create a
    system that encourages the end result where people are self-
    sufficient. So I guess the thing that obviously is clear today
    is the programs and the tax, if these are combined, really
    create an unintentional barrier to help lift people out. And so
    I guess we talked about the dead zones and the poverty traps.
    And I guess my question is real simple, is how do we fix this
    to encourage people to work? So if we could just--Mr. Thies, do
    you want to start?
        Mr. THIES. Well, I think if we could address the payroll
    tax it comes in at dollar one of earnings. And so while the
    Federal income tax is highly progressive, has a very generous
    zero bracket, the working people of low income and moderate
    income today are paying much higher taxes than did people
    during the 1960s when the payroll tax was 3 to 4 percent and
    the employer matched that.
        Mr. STEUERLE. Mr. Berg, actually my first comment reflects
    the previous discussion on unemployment compensation and on
    disability. There is some evidence, and I think all the members
    on this panel agree, that if you design a program so that you
    have quicker, earlier, intervention it seems to make a lot of
    difference. In some cases for the unemployed and the disabled
    it is the habits that are developed in these periods of
    unemployment and disability that will continue. And so there
    are some proposals that are trying to figure out ways to give
    more incentives to employers, for instance, to try to intervene
    early so as to affect those habits. So that is one area we can
    work. I mentioned a lot of other relative shifts I think we can
    make. I think once we agree we are going to have a social
    welfare structure we are going to have to struggle with this
    work disincentive issue. The issue is not going to go away. And
    so the question is what are some relative shifts we can make?
    One of them is that I think we could make work a greater
    requirement for some other benefits.
        Another one that I think of, along the lines of a much
    broader thesis I have been examining, is that our social
    welfare budget keeps expanding every year. It doesn't matter
    whether the Republicans are winning or Democrats are winning.
    If the economy doubles in 50 years or 30 years, typically we
    will devote more to that budget. Maybe we will devote 90
    percent more if the Republicans win and 110 percent more if the
    Democrats win. It is still growing. We can orient that growth
    not so much towards consumption and adequacy, and, quite
    honestly, not so much toward paying very high cost health care
    and retirement benefits, but shift it more towards incentives
    for work.
        I have a variety of other proposals at the end of my
    testimony. I don't want to take too much time here, but I would
    be glad to discuss them more with you.
        Mr. BERNSTEIN. Congressman, if we are going to have means
    tested programs that phase out as incomes rise, which is very
    much a function of our safety net, we are going to have these
    marginal tax rates. So my answer to your question is the best
    that we can do is to have that phaseout be as long and gradual
    as possible, but of course there is a tradeoff there with cost.
    I think the evidence is quite clear that that helps in the case
    of the EITC or in certain States with food stamps where that
    marginal tax rate is kept low.
        Second, work supports are critically important, as we have
    mentioned earlier, such as transportation and childcare
    assistance. I would argue that these are more important than
    the marginal tax rates in terms of work. And third, and this is
    key, the adequate availability of jobs. And that takes you more
    to the demand side. I certainly wouldn't think of adding work
    requirements to other programs that don't currently have them
    in a climate where there is simply inadequate job availability.
        Mr. BRANNON. I just want to pick up on something Mr.
    Steuerle said about the importance of people entering the
    workaday world and learning how that works right away before
    they get trapped. To that I just want to add one other thing,
    that the minimum wage can often be a disincentive for young
    people, especially teenagers, to enter that workaday world. I
    just want to encourage the Congress to think long and hard
    before they increase the minimum wage again.
        Mr. BERG. Thank you very much. I yield back, Mr. Chairman.
        Chairman DAVIS. I thank the gentleman. The chair now
    recognizes Mr. Larson from Connecticut for 5 minutes.
        Mr. LARSON. Thank you, Chairman Davis. And again I want to
    commend you and Mr. Tiberi for the spirit and bipartisanship in
    which this is held. I had the recent opportunity, well, about a
    year ago, to travel to China, and got in a heated debate, and
    one this committee is familiar with, about China currency and
    also the trade disparity that exists between our countries. And
    former Ambassador Zhen made this point. He said, do you know,
    how many people do you think we have lifted out of poverty in
    China. And I did not know, to be honest. And it was around 320
    million, which is the entire population of the United States.
    They were able to do so by investing in their infrastructure.
    And to prove that point we drove from Beijing to lower Mongolia
    and witnessed all the investment in infrastructure.
        I raise this point because, Mr. Bernstein, you pointed out
    the adequacy of jobs. And after all the discussion about
    marginal tax rates and incentives versus disincentives
    fundamentally people aren't going to be able to work if jobs
    aren't available to them. And so while there has been much
    ballyhoo about how we are going to create jobs here we sit in a
    Congress where we have yet to take up after more than 100 days
    a transportation bill as the season eclipses, and fundamentally
    the President's request of last September to have his bill
    taken up in terms of jobs is not.
        Mr. Bernstein, I will ask you, and then I have a question
    for Mr. Steuerle also. What would the effect of passing the
    President's jobs plan be on incentives for millions of
    Americans that currently can't find a job. And then, Mr.
    Steuerle, the German system where they incentivize people
    staying in work by instead of paying unemployment they provide
    the company with direct subsidy to retain the person in that
    job instead of having them go outside to work.
        Mr. Bernstein.
        Mr. BERNSTEIN. Right. If I may poach for a second on Gene's
    question. We actually now have a work sharing program here, and
    I think it is exemplary, and I commend the Congress for passing
    it. There is--and some of my colleagues up here may well agree
    with what I am about to say, even though I know they are more
    focused on the tax rate side of this. There is no better social
    welfare program, no stronger social welfare program for
    reducing poverty than an adequate availability of good jobs for
    low wage people, than a tight labor market, a full employment
    labor market, where instead of an excess supply of lower wage
    workers there is an excess demand for them. And I think we saw
    that most clearly in the second half of the 1990s where there
    were a lot of moving parts, welfare reform, the EITC, a higher
    minimum wage, lots going on, but even in the midst of all the
    disincentives that we have been talking about today we saw the
    employment rates of less skilled, disadvantaged workers, of
    poor workers, of single moms, go to the highest rates on record
    and poverty rates drop to some of their lowest rates on record.
    So simply put, no better program.
        Mr. LARSON. Mr. Steuerle.
        Mr. STEUERLE. Mr. Larson, I think you make a very good
    point. I think we can learn a lot from the German system,
    although it extends far beyond just the part that you
    mentioned. The German system is especially good at sponsoring
    apprenticeships and favoring education of people who don't go
    to college, not just those who do go to college--something I
    don't think we do a very good job of in this country. My
    colleague, Mr. Lerman, works a lot on this issue and perhaps
    has talked to you about that already. I mentioned earlier that
    I think you can change the incentives in unemployment and
    disability and engage the employer in the sense that maybe you
    can experience rate these programs a little more so there is
    some greater consequence for the employer. It is not so much
    that the employer has to pay the full burden, but it would be
    nice to have somebody who would help with this early
    intervention, which sometimes is harder for the government to
    do.
        So I think there are ways in which we really could learn
    from the German system.
        Mr. LARSON. George Will used to express frequently that
    government works best when it is a collective enterprise. And
    by using the term ``collective'' I think what he meant is, know
    what he meant was that by embracing our academic private
    sectors, labor sector and government pulling together we do
    have this engine of growth in opportunity.
        What models would you suggest or do you have any that we
    should follow to achieve those goals and address some of the
    concerns that our chair has raised about coming to the
    precipice of this cliff and making sure that we are doing the
    right things?
        Mr. STEUERLE. Well, this actually fits in a bit with what
    Jared Bernstein was just saying. The long term engine for all
    of this is economic growth. And I keep mentioning that we think
    the economy is going to expand over time. So I really encourage
    you to think about how we restructure our social welfare system
    in a very broad sense as we move forward 5, 10, 15, 20 years
    from now. If you look, for instance, at the government budget
    put forward by President Obama. I would say the same thing if
    there was a Republican budget. We are planning on spending
    about $1 trillion more per year in another 10 years. Yes, about
    $1 trillion more. Now, it turns out almost all of it right now
    is going for interest on the debt and Social Security and
    Medicare and Medicaid, but not the children, in ways that for
    the most part don't favor employment at all. If we think about
    how government shifts its resources more towards favoring
    employment, we can go a long way. Then the other advantage we
    get is that if we get it (economic growth) then the relative
    wage from working starts growing and growing relative to simply
    living off a subsidy from the government. So you can affect
    partly through marginal tax rates the relative hurdle or point
    at which going to work and engaging in the market makes one
    better off.
        Mr. LARSON. Would you agree with Mr. Stiglitz that the war
    cost of some $3 trillion and having the two wars and the tax
    cuts paid for----
        Chairman DAVIS. The gentleman's time has expired. Thank
    you.
        Mr. Bernstein, on page 9 of your testimony you say it would
    be a, quote, significant policy mistake to require recipients
    of benefits to work without first ensuring adequate job
    availability. This is exactly the same argument that some made
    against welfare reform in the 1990s, that it was wrong to
    require work without guaranteeing, quote, adequate job
    availability, closed quote, for everyone, which makes me
    wonder, how do you define adequate job availability?
        Mr. BERNSTEIN. That is a fair question. And I was there at
    the time thinking, writing about welfare reform. I didn't mean
    to imply that there should be a guaranteed job for everyone.
    What my statement in my testimony was meant to stress, that
    absent stronger labor demand, right now if you look at the low
    wage labor market, for example, you will find that there are
    far more job seekers than there is job availability. Obviously
    that is partly a function of the recession. But even in a
    stronger economy when the business cycle is expanding the low
    wage labor market is often characterized by excess supply and
    not enough jobs. If you look at welfare reform, which I would
    argue was quite successful in moving people from welfare to
    work through this period of full employment in the latter 1990s
    that I mentioned, it has actually been quite unsuccessful ever
    since, even with relatively low overall unemployment rates into
    2000. So while welfare reform is largely regarded as a success
    in this regard it really hasn't been over the last decade or so
    as the job market has weakened.
        So my point is simply kind of, as Gene and I were just
    reflecting, that you have to have a very strong demand side
    functioning on the low wage labor market if you are going to
    require work and expect it to reduce poverty.
        Chairman DAVIS. Would any of the other panelists like to
    comment? Mr. Thies.
        Mr. THIES. Yes. It is understandable during a period of
    depressed economic conditions that through statutory means and
    administrative discretion the public and the private charity
    system also will relax eligibility standards, extend
    unemployment benefits and so forth because of the objectively
    more difficult circumstances facing people who are vulnerable.
    Having said that, it is understandable that when we do have a
    robust recovery we are going to revisit some of those things.
        Chairman DAVIS. Mr. Steuerle.
        Mr. STEUERLE. Just very quickly to repeat something I said
    earlier, is if we had taken more of the stimulus money and put
    it into job subsidies, particularly for lower income people,
    that that could have cost less and it would be a better change
    in stimulus because these people are more likely to consume. It
    would have been a better supply side incentive because you
    would have a better set of work incentives than some of the
    just across the board way we spent some of the other money.
        Chairman DAVIS. Thank you. Mr. Brannon, would you like to
    have the last word?
        Mr. BRANNON. Yeah. Casey Mulligan, the University of
    Chicago economist who testified in front of the House Budget
    Committee a couple of months ago, pointed out that if you look
    at what happened to the array of welfare programs in 2008 and
    2009 we dramatically increased spending on a wide variety of
    them, and again we did each one of those individually. I come
    back to Mr. Duncan Smith's point that we really have a
    haphazard welfare system that creates terrible disincentives to
    work in all kinds of places. And as Mr. Steuerle has pointed
    out, not only at relatively low incomes, but it also has
    disincentive effects at higher incomes. And it seems to me it
    is beyond time for us to redesign a system and think about it
    more holistically rather than program by program and come up
    with something that removes these disincentives.
        Chairman DAVIS. Great. I want to thank all of our witnesses
    for coming today, for your patience through the early changes
    in the schedule. It has been very helpful, the insights that
    you have provided how tax policy and welfare policy can create
    disincentives as well as incentives to work. And hopefully we
    will continue to work together in the time ahead to address the
    broken processes that we have between the various agencies to
    harmonize this and to get to the point that Mr. Brannon talked
    about at the end in a hopefully bipartisan way.
        If members have additional questions they will submit them
    to you in writing. We would appreciate it if you would reply to
    the committee so we can have those inserted into the record.
    Thank you again. And with that I conclude the hearing.
        [Whereupon, at 12:20 p.m., the subcommittees were
    adjourned.]
        [Submissions for the Record follow:]

                                 Anne Stevenson

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                                Cherie Boeneman

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                             Recapturing the Vision

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