[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




                  U.S. GOVERNMENT PRINTING OFFICE
78-761                    WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                      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:]

    [GRAPHIC] [TIFF OMITTED] T8761.001
    
    [GRAPHIC] [TIFF OMITTED] T8761.002
    
    [GRAPHIC] [TIFF OMITTED] T8761.003
    
    [GRAPHIC] [TIFF OMITTED] T8761.004
    
    [GRAPHIC] [TIFF OMITTED] T8761.005
    
    [GRAPHIC] [TIFF OMITTED] T8761.006
    
    [GRAPHIC] [TIFF OMITTED] T8761.007
    
    [GRAPHIC] [TIFF OMITTED] T8761.008
    
    [GRAPHIC] [TIFF OMITTED] T8761.009
    
    [GRAPHIC] [TIFF OMITTED] T8761.010
    

                                 

    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:]

    [GRAPHIC] [TIFF OMITTED] T8761.011
    
    [GRAPHIC] [TIFF OMITTED] T8761.012
    
    [GRAPHIC] [TIFF OMITTED] T8761.013
    
    [GRAPHIC] [TIFF OMITTED] T8761.014
    
    [GRAPHIC] [TIFF OMITTED] T8761.015
    
    [GRAPHIC] [TIFF OMITTED] T8761.016
    
                                 
    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:]

    [GRAPHIC] [TIFF OMITTED] T8761.017
    
    [GRAPHIC] [TIFF OMITTED] T8761.018
    
    [GRAPHIC] [TIFF OMITTED] T8761.019
    
    [GRAPHIC] [TIFF OMITTED] T8761.020
    
    [GRAPHIC] [TIFF OMITTED] T8761.021
    
    [GRAPHIC] [TIFF OMITTED] T8761.022
    
    [GRAPHIC] [TIFF OMITTED] T8761.023
    
    [GRAPHIC] [TIFF OMITTED] T8761.024
    
    [GRAPHIC] [TIFF OMITTED] T8761.025
    
    [GRAPHIC] [TIFF OMITTED] T8761.026
    

                                 

    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:]

    [GRAPHIC] [TIFF OMITTED] T8761.027
    
    [GRAPHIC] [TIFF OMITTED] T8761.028
    
    [GRAPHIC] [TIFF OMITTED] T8761.029
    
    [GRAPHIC] [TIFF OMITTED] T8761.030
    
    [GRAPHIC] [TIFF OMITTED] T8761.031
    
    [GRAPHIC] [TIFF OMITTED] T8761.032
    
    [GRAPHIC] [TIFF OMITTED] T8761.033
    
    [GRAPHIC] [TIFF OMITTED] T8761.034
    
    [GRAPHIC] [TIFF OMITTED] T8761.035
    
    [GRAPHIC] [TIFF OMITTED] T8761.036
    
    [GRAPHIC] [TIFF OMITTED] T8761.037
    
    [GRAPHIC] [TIFF OMITTED] T8761.038
    
    [GRAPHIC] [TIFF OMITTED] T8761.039
    

                                 

    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:]

    [GRAPHIC] [TIFF OMITTED] T8761.040
    
    [GRAPHIC] [TIFF OMITTED] T8761.041
    
    [GRAPHIC] [TIFF OMITTED] T8761.042
    
    [GRAPHIC] [TIFF OMITTED] T8761.043
    
    [GRAPHIC] [TIFF OMITTED] T8761.044
    
    [GRAPHIC] [TIFF OMITTED] T8761.045
    
    [GRAPHIC] [TIFF OMITTED] T8761.046
    
    [GRAPHIC] [TIFF OMITTED] T8761.047
    
    [GRAPHIC] [TIFF OMITTED] T8761.048
    
    [GRAPHIC] [TIFF OMITTED] T8761.049
    
    [GRAPHIC] [TIFF OMITTED] T8761.050
    
    [GRAPHIC] [TIFF OMITTED] T8761.051
    

                                 

    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:]

    [GRAPHIC] [TIFF OMITTED] T8761.052
    
    [GRAPHIC] [TIFF OMITTED] T8761.053
    
    [GRAPHIC] [TIFF OMITTED] T8761.054
    
    [GRAPHIC] [TIFF OMITTED] T8761.055
    

                                 

    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

[GRAPHIC] [TIFF OMITTED] T8761.056

[GRAPHIC] [TIFF OMITTED] T8761.057

[GRAPHIC] [TIFF OMITTED] T8761.058

[GRAPHIC] [TIFF OMITTED] T8761.059

[GRAPHIC] [TIFF OMITTED] T8761.060

[GRAPHIC] [TIFF OMITTED] T8761.061

[GRAPHIC] [TIFF OMITTED] T8761.062

[GRAPHIC] [TIFF OMITTED] T8761.063

[GRAPHIC] [TIFF OMITTED] T8761.064

[GRAPHIC] [TIFF OMITTED] T8761.065

[GRAPHIC] [TIFF OMITTED] T8761.066

[GRAPHIC] [TIFF OMITTED] T8761.067

[GRAPHIC] [TIFF OMITTED] T8761.068

[GRAPHIC] [TIFF OMITTED] T8761.069

[GRAPHIC] [TIFF OMITTED] T8761.070

[GRAPHIC] [TIFF OMITTED] T8761.071

[GRAPHIC] [TIFF OMITTED] T8761.072


                                 
                        Center for Fiscal Equity

[GRAPHIC] [TIFF OMITTED] T8761.073

[GRAPHIC] [TIFF OMITTED] T8761.074

[GRAPHIC] [TIFF OMITTED] T8761.075

[GRAPHIC] [TIFF OMITTED] T8761.076


                                 
                            Cherie Boeneman

[GRAPHIC] [TIFF OMITTED] T8761.077

[GRAPHIC] [TIFF OMITTED] T8761.078

[GRAPHIC] [TIFF OMITTED] T8761.079


                                 
                                 CLASP

[GRAPHIC] [TIFF OMITTED] T8761.080

[GRAPHIC] [TIFF OMITTED] T8761.081

[GRAPHIC] [TIFF OMITTED] T8761.082

[GRAPHIC] [TIFF OMITTED] T8761.083

[GRAPHIC] [TIFF OMITTED] T8761.084

[GRAPHIC] [TIFF OMITTED] T8761.085

[GRAPHIC] [TIFF OMITTED] T8761.086

[GRAPHIC] [TIFF OMITTED] T8761.087

[GRAPHIC] [TIFF OMITTED] T8761.088

[GRAPHIC] [TIFF OMITTED] T8761.089


                                 
                         Recapturing the Vision

[GRAPHIC] [TIFF OMITTED] T8761.090

                                 
