[Senate Hearing 114-161]
[From the U.S. Government Publishing Office]
S. Hrg. 114-161
JOBS AND A HEALTHY ECONOMY
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JANUARY 22, 2015
__________
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
C O N T E N T S
__________
OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 4
WITNESSES
Engler, Hon. John, president, Business Roundtable, Washington, DC 6
Hall, Robert E., Ph.D., senior fellow, Hoover Institution, and
professor of economics, Stanford University, Stanford, CA...... 8
Wolfers, Justin, Ph.D., senior fellow, Peterson Institute for
International Economics; professor of public policy, Gerald R.
Ford School of Public Policy; and professor of economics,
College of Literature, Science, and the Arts, University of
Michigan, Ann Arbor, MI........................................ 10
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Engler, Hon. John:
Testimony.................................................... 6
Prepared statement with attachment........................... 43
Hall, Robert E., Ph.D.:
Testimony.................................................... 8
Prepared statement with attachment........................... 55
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 61
Wolfers, Justin, Ph.D.:
Testimony.................................................... 10
Prepared statement........................................... 63
Wyden, Hon. Ron:
Opening statement............................................ 4
Prepared statement........................................... 73
Communications
Coalition for GSP................................................ 75
Employee-owned S Corporations of America (ESCA).................. 79
Professional Beauty Association (PBA)............................ 82
Reforming America's Taxes Equitably (RATE) Coalition............. 83
(iii)
JOBS AND A HEALTHY ECONOMY
----------
THURSDAY, JANUARY 22, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:05
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Crapo, Roberts, Cornyn, Thune,
Isakson, Coats, Heller, Scott, Wyden, Schumer, Stabenow,
Cantwell, Nelson, Menendez, Carper, Cardin, Bennet, Casey, and
Warner.
Also present: Republican Staff: Chris Campbell, Staff
Director; Everett Eissenstat, Chief International Trade
Counsel; Rebecca Eubank, International Trade Analyst; Mark
Prater, Deputy Staff Director and Chief Tax Counsel; Preston
Rutledge, Tax Counsel; and Jeff Wrase, Chief Economist.
Democratic Staff: Laura Berntsen, Senior Advisor for Health and
Human Services; Adam Carasso, Senior Tax and Economic Advisor;
Michael Evans, General Counsel; Tom Klouda, Senior Domestic
Policy Advisor; Todd Metcalf, Chief Tax Counsel; Joshua
Sheinkman, Staff Director; and Jayme White, Chief Advisor for
International Competitiveness and Innovation.
Senator Wyden. The Finance Committee will come to order.
Chairman Hatch, take good care of this gavel, as I know you
will. I want you to know how much I have enjoyed working with
you, in your long history of bipartisanship.
This morning, as I hand you the gavel, I want to wish you,
Chairman Hatch, all the best. [Applause.]
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. Well, thank you very much. Thank you so much.
That comes from a very good man who knows how to use this
gavel. It has been so long since I have used one that I am not
sure I know how to do it anymore.
But we are honored to be with everybody on this committee.
This is a terrific committee, and we are going to do some very,
very important things, as we have in the past.
I want to personally pay tribute to the distinguished
Senator from Oregon for the fine way he ran this committee, and
we will try to hopefully follow his example and run it in a way
that is fair and reasonable for everybody.
I am grateful to you, and it is always a pleasure to, sir,
work with you and all of our friends on the Democrat side, and
we have a lot of really good people on the Republican side as
well.
Welcome, everyone, to the first hearing of the Senate
Finance Committee in the 114th Congress. It is appropriately
titled ``Jobs and a Healthy Economy.'' Despite the numerous
differences and disagreements that exist here in Washington, I
believe that, regardless of party affiliation, we can all agree
that job creation and a strong, vibrant economy are good
things.
The Senate Finance Committee has a long tradition of
effectiveness and bipartisanship. Given the size and scope of
our jurisdiction, that is only appropriate.
One of my main goals, as the new chairman of this
committee, is to continue that tradition, to allow the
committee to function and produce results as it has so many
times in the past. That is why we chose this topic for our
first hearing. Today I hope we can have a discussion that will
help us find consensus on these challenges rather than
highlighting our differences. I will be sorely disappointed if
it devolves into yet another back-and-forth from each side
trying to score political points rather than seeking solutions
to the problems ailing our economy.
The Finance Committee is uniquely equipped to address the
challenges related to jobs and the economy. Indeed, our
jurisdiction places us on the front lines of the most important
debates that we will have in this effort. For example, we have
jurisdiction over our Nation's tax code. There is bipartisan
agreement on the need to fix our tax system to help hardworking
taxpayers and allow businesses to grow, compete, and create
more jobs.
Our current tax code creates numerous unnecessary
roadblocks that stand between us and sustained economic
opportunity and prosperity. For these reasons, I have made tax
reform my highest legislative priority for this Congress, and I
believe Senator Wyden feels pretty much the same. Over the past
few years, I have been working to make the case for tax reform
on the Senate floor, in public appearances, in written work,
and in private conversations. I am going to continue to do so.
Recently, Senator Wyden and I set forth the first steps for
tax reform in the 114th Congress. We created five working
groups, all assigned to study different areas of tax reform and
come up with proposals that we will then use as we work on
bipartisan tax reform and bipartisan tax reform legislation. We
have a number of great Senators on the committee who are just
as committed to tax reform as we are. I look forward to seeing
the results of their work. We need to get this done.
I would like to ask each of the witnesses on our panel to
use at least some of their time during their opening statements
to give us specific ideas on how we can improve our Nation's
tax code.
Another area of the committee's jurisdiction that is
essential to job growth and a healthy economy is international
trade. The United States has a long tradition of breaking down
barriers and providing access for American goods and services
in foreign markets. This has been great for our economy, and we
must continue to do these things in the future. Ninety-five
percent of the world's population and 80 percent of its
purchasing power reside outside of the United States. For our
job creators to compete on the world stage, we must ensure that
they have greater access to this ever-growing customer base.
Toward that end, Congress needs to renew Trade Promotion
Authority, or TPA as we call it, in short order. This is also
something we need to get done. I am engaged with Senator Wyden
and others on this committee to find a path on TPA that will
provide the best opportunities for TPA to succeed. I hope we
will be able to complete our work soon. I met with our trade
ambassador yesterday for a considerable amount of time on these
particular issues.
The Obama administration is currently engaged in some of
the most ambitious trade negotiations in our Nation's history.
The only way for Congress to effectively assert its role in
these negotiations, and the only way to get trade agreements
that reflect the highest standards, is through TPA, or Trade
Promotion Authority.
I would like to ask each of the witnesses on our panel
whether they think trade is important to the expansion of
economic opportunities and the development of a healthy
economy, and to include their answer in their opening
statements.
The Finance Committee's jurisdiction expands beyond tax and
trade into other areas that impact jobs and the economy and
economic security of American households. We have growing
health care costs that continue to put strains on employers and
hardworking taxpayers, and we have a growing entitlement crisis
that threatens to swallow up our government and take our
economy down with it. And if we do not do something about that,
that is exactly what is going to happen.
All of these issues impact jobs and the economy, and all of
them are important. I hope we can have a robust conversation
today on what the committee and Congress can do to address
these important issues, as well as others.
Like I said earlier, I also hope that we can avoid having a
partisan back-and-forth that yields no productive answers or
discussion. Of course, that does not mean critiques of any
policy or proposals should be considered out of bounds, nor
does it mean that we should not have a spirited debate on the
issues. But I do hope that whatever questions we ask or
statements we make, we will stay focused on gaining a better
understanding and on the goal of creating jobs and promoting a
healthy economy for our country.
I would like to take a moment now to recognize--we have
some new members of the committee--Senators Heller, Coats, and
Scott, or should I say Coats, Heller, and Scott. I want to once
again welcome them to the Finance Committee and say that I look
forward to their participation in this hearing and others in
the future. I am also pleased that Senator Warner is still on
this committee. I expect him to be a very hardworking member of
this committee and somebody who can bring people together, and
I am counting on that and banking on it, and I am pleased that
he is with us. I have no doubt that each of their contributions
will be valuable to our efforts.
Finally, I want to note that, at any point during the
hearing when we have a quorum present, I plan to move to
executive session to formally organize the committee, which
will include some routine matters such as organizing
subcommittees and formalizing a specific change to the
committee rules.
With that, I will turn the time over to my counterpart,
Senator Wyden, for his opening statement.
[The prepared statement of Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Chairman Hatch. And on
behalf of this side of the dais, I too want to welcome our new
colleagues, Senator Coats, Senator Heller, and Senator Scott. I
have enjoyed working with each of them and will say, as Senator
Hatch appropriately mentioned, how important it is to fix this
broken, dysfunctional mess of a tax code.
I have had a chance to watch Senator Coats in action, doing
good and bipartisan work there. So I am looking forward to
working with all three of our colleagues.
I have just a couple of additional points to make about
Chairman Hatch before I turn to the matter at hand. Senator
Hatch is the second Senator from Utah to chair this committee.
The first was Senator Reed Smoot, who chaired the committee
from 1923 to 1933 and who is, perhaps unfairly, remembered best
for the tariff bill that bears his name. Fortunately, Chairman
Hatch has a very different view of economics than Senator Smoot
did.
I would also like to note that Senator Hatch is only the
third Senator to serve simultaneously as President pro tem and
chairman of this committee. He is going to be the busiest
member of the Senate. And he is only the second Senator in the
modern era to have been given the heavy responsibility of
chairing three major committees. Senator Hatch previously
chaired the Judiciary Committee and the HELP Committee, and now
the Finance Committee. In my view, he has saved the best for
last.
The last point I would mention is that, if you look at
Senator Hatch's record from a historical standpoint, he has a
long history of recognizing that the best legislation is
bipartisan legislation, where you do not proceed unilaterally
but you try to find common ground. I think that is going to
serve all of us very well. And I do look forward, as we have in
the past, Chairman Hatch, to working closely with you.
The Chairman. Thank you, Senator.
Senator Wyden. If I could just turn briefly to the matter
at hand. This is a particularly important hearing because, 7
years after the economic collapse shook our economy to the
core, our recovery still has a ways to go. Too many middle-
class Americans pounded by decades of flat wages are still
struggling to make progress. And I want everybody to understand
my bottom line for this Congress. When working families see
bigger paychecks, America's economic recovery is going to go
from a walk to a run.
Over the last few weeks, I have spent a lot of time talking
with workers and businesses in my State about the challenges
they face 7 years after the start of the Great Recession. Just
this weekend, I held town hall meetings in Klamath, Josephine,
and Lincoln Counties, and it is pretty clear that there are a
lot of Oregonians, a lot of Americans, waiting for the economic
recovery to kick in for them.
For Oregon's middle class, moving the recovery from a walk
to a run pretty much comes down to what we call the five Ts:
technology jobs, tax reform, trade done right, transportation,
and timber. And my guess is probably every Senator on this
committee, on both sides of the aisle, could come up with their
own list. And there is no question in my mind that there would
be a lot of overlap.
Now, there are a lot of lessons to be learned from our
history, as policymakers work to strengthen the foundations of
the American economy. Seventy years ago, after winning World
War II and making the long, slow climb out of the Depression,
our country took bold new steps to build a thriving middle
class. The Congress came together and expanded access to
education. It connected every corner of the Nation from
Portland, OR to Portland, ME, from Los Angeles to Miami, with
the world's best infrastructure. Over time, it reformed the tax
system to better fit modern economic challenges, and it found
opportunities in markets abroad for our companies to seize.
These policies helped power an economic boom. They grew the
paychecks of working Americans and small businesses for
decades. Year after year, people felt confident that their kids
would do better than they did.
True economic recovery, in my view, will restore that
confidence. It will mean more jobs with a strong, clear ladder
to the middle class, jobs in which workers can support their
families, build their savings, and send their kids to college;
jobs that do not leave families stretching every paycheck month
after month.
So in my view, there is a question for each of us to ask
with every bill we consider and every vote we take in the
Congress. That question is: how will this grow the American
worker's paycheck?
So, as we come together to tackle the overall tax code,
which Chairman Hatch has correctly mentioned, let us ask, ``How
is this going to grow that paycheck?'' When we take on the
enormous job of rebuilding our infrastructure, again, the
question is, ``How will this grow the paycheck?'' As we work to
get more students in the door to college, once more, ``How will
this grow the paycheck?'' And, as we try to ensure that our
companies can be competitive in a cutthroat global economy, the
issue is still, ``How will this grow the paycheck?''
We can all be proud of the fact that the Finance Committee
over the years has taken a starring role in so many of the
important policy debates. So there are going to be many
opportunities for us to come together on a bipartisan basis to
ensure that more Americans share in the recovery and are
getting bigger paychecks.
I believe I can speak for the Democrats on the committee in
saying that we all look forward to growing the middle class,
lightening their economic burden, and that we believe there is
an opportunity to pursue this in a bipartisan fashion.
Again, Chairman Hatch, congratulations, and I look forward
to our first hearing.
The Chairman. Thank you, Senator Wyden. I thank my
colleague for his kind remarks. And I look forward to working
with everybody on this committee, and, if we are going to solve
the economic problems of this country, this committee has to
play a pivotal role in that.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Our first witness today is Governor John
Engler. Since 2011, Governor Engler has served as president of
the Business Roundtable. I will call it BRT for our purposes
here. That is an association of CEOs of leading U.S.
corporations that produce $7.4 trillion in annual revenues and
employ more than 16 million people.
Prior to his time at BRT, he served for 6 years as the
president and CEO of the National Association of Manufacturers.
And, of course, he was also a 3-term Governor of the State of
Michigan.
Governor Engler serves on the board of directors for
Universal Forest Products, K12 Inc., and the Annie E. Casey
Foundation, and he is a past chairman of the National
Governors' Association.
He graduated from Michigan State University with a
bachelor's degree in agricultural economics and later earned a
law degree from Thomas M. Cooley Law School in Lansing, MI.
We welcome you, Governor Engler, to the committee. I hope
this is just the first of many appearances before this
committee to help us to do our work, and I want to thank you
for being here.
I will introduce the others as we turn to them for their
statements. So, please, give your statement, and then I will
introduce the other two witnesses.
STATEMENT OF HON. JOHN ENGLER, PRESIDENT,
BUSINESS ROUNDTABLE, WASHINGTON, DC
Governor Engler. Thank you very much, Mr. Chairman.
Congratulations on your receipt of the gavel earlier.
Ranking Member Wyden, my home State Senator Stabenow,
Senator Warner, I am pleased to be here to testify on behalf of
the Business Roundtable.
In 2015, Business Roundtable would like to see a stronger
economy, creating more jobs. The question properly before the
committee is, ``How do we get there?''
This week, we released ``Achieving America's Full
Potential: More Work, Greater Investment, Unlimited
Opportunity.'' I would ask that a copy of the Roundtable report
be included with my testimony.
The Chairman. Without objection, it will be included.
[The report appears in the appendix on p. 51.]
Governor Engler. The committee also has been provided
copies.
The Roundtable priorities include expanded trade, tax
reform, fiscal stability, fixing our broken immigration system,
infrastructure investment, and a smarter approach to
regulation.
Today I want to focus on two main topics: trade and tax
reform. Business leaders believe strongly in the benefits that
trade and high-standard trade agreements bring to the United
States. Trade is also an opportunity for Congress and the
administration to demonstrate bipartisan cooperation early on
in 2015.
Our agenda includes two recommendations relating to trade.
First, we recommend that Congress and the administration enact
updated Trade Promotion Authority as soon as possible. Second,
we recommend the administration, in consultation with Congress,
aggressively pursue and secure high-quality and fair
agreements, particularly the Trans-Pacific Partnership, the
Transatlantic Trade and Investment Partnership, and the Trade
in Services Agreement.
Trade Promotion Authority legislation is the critical tool
for achieving high-standard trade agreements that will create
strong, enforceable rules and will result in U.S. growth in
jobs. A 21st-century TPA helps ensure congressional input and
oversight of U.S. trade negotiations and ensures our
international trading partners that Washington is committed to
reaching and enacting strong trade agreements.
Business support crosses all sectors of the economy. In
2013, Business Roundtable created the Trade Benefits America
Coalition. It is a broad-based group of more than 230 U.S.
agriculture and business associations and companies, all
committed to educating the public on the benefits of trade and
strongly backing TPA. Our coalition members are eager to work
with this committee to get TPA passed as soon as possible, and
I offer their help today.
On the next topic, I think everyone agrees the U.S. tax
code is broken and desperately needs to be fixed. Mr. Chairman,
the formation of the five working groups that you referenced
earlier today on the U.S. tax code represents an excellent
start to the kind of bipartisan effort that can make a modern,
more globally competitive tax system a reality.
Just yesterday, Secretary of Treasury Jack Lew reiterated
the administration's desire to work on business tax reform, and
we urge the administration and Congress to enact tax reform
this year. Tax reform should be designed to improve the
competitiveness of all businesses; that is, non-corporate
entities and corporations alike.
Business Roundtable key tax reform recommendations for
corporations are two. First, set the corporate rate at a
competitive 25 percent. I did bring a chart. In the written
testimony, I use the OECD chart without amendment. But for
purposes of the committee, I thought I would put a green line
in asking for a 25 percent rate that would move us from the
bottom red line, where we are today, worst in the world, not up
to the middle, but we get a lot more competitive, and that is
within our reach. You would love to be where Ireland is, but
progress is important, and that is where we would be if we
could get to a 25-percent rate. It actually shows it at 29.7
percent, but that is with the local tax added in.
The second recommendation, in addition to rate, is the
adoption of a modern international tax system that ends the
double taxation of U.S. corporations' foreign earnings, thus
eliminating a policy that has resulted in more than $2 trillion
in earnings trapped offshore.
Regardless of the business structure, reform will require
hard choices. In the case of corporations, repeal of so-called
tax expenditures would offset the revenue loss from the
corporate rate reduction, but the result would be a broader,
flatter tax code.
America's business leaders have consistently maintained
that tax reform will boost wages, growth, and investment. In
2014, Rice University professors analyzed then-Chairman Camp's
tax reform proposals. Their studies showed an increase in U.S.
annual GDP of 2.2 percent after 10 years and a boost in after-
tax wages for the American workers of 3.8 percent after 10
years.
We look forward to working with you to seek even stronger
growth outcomes. This additional growth could help address our
fiscal challenges as well, as we turn to such critical issues
as our Nation's long-term debt and entitlement reforms.
CBO says that each one-tenth percentage-point sustained
increase in the growth rate of GDP--one-tenth of a percentage
point--would reduce the deficit by $300 billion over a decade.
A full percentage point then would reduce the budget deficit by
about $3 trillion over a decade--a nice, nice contribution.
Mr. Chairman, Ranking Member Wyden, members of the
committee, thank you for the opportunity to kick off the 2015
hearings and to address the many priorities of the Nation and
those that would give us a healthier economy with more jobs and
help America achieve its full potential.
Thank you.
The Chairman. Thank you, Governor. We appreciate it and
appreciate your excellent statement.
[The prepared statement of Governor Engler appears in the
appendix.]
The Chairman. Our next witness is Dr. Robert E. Hall. Dr.
Hall is the Robert and Carole McNeil and joint Hoover
Institution senior fellow and professor of economics at
Stanford University.
He served as president of the American Economic
Association, or AEA, in 2010 and is a distinguished fellow of
the AEA and a member of the National Academy of Sciences.
Professor Hall is a fellow of the American Academy of Arts
and Sciences, the Econometric Society, and the Society of Labor
Economists. He serves on the National Bureau of Economic
Research's Committee on Business Cycle Dating, which semi-
officially dates periods of recession, and has advised numerous
government agencies on national economic policy, including the
Treasury, Federal Reserve, and the Congressional Budget Office.
Dr. Hall received his Ph.D. in economics from MIT and a BA
in economics from the University of California at Berkeley.
We want to welcome you, Dr. Hall. We are very appreciative
of you being here. We welcome you to the Senate Finance
Committee, and we thank you for appearing before us today. So
please proceed with your opening statement.
STATEMENT OF ROBERT E. HALL, Ph.D., SENIOR FELLOW, HOOVER
INSTITUTION, AND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY,
STANFORD, CA
Dr. Hall. Thank you, Mr. Chairman, for this opportunity to
discuss the U.S. labor market, which is a specialty of mine. I
will also comment, as you asked, on international trade and
improvements in taxation, particularly the latter.
With respect to the labor market, the labor market is now
back to normal. It is not depressed, but it is not in a boom
state either. It is in between. For example, the unemployment
rate, at 5.6 percent, is just below its long-run average. The
key point that I think most people recognize, though, is that
employment has not grown by its normal amounts in the
expansion. That actually is the reason that family incomes have
not grown satisfactorily. Wages actually have grown, but the
problem is that employment has not grown, and the combination
of the two has left stagnation.
Just to continue, though, on this point with respect to the
availability of jobs, we are at normal now. For example, short-
term unemployment is at an all-time low. The time that it takes
employers to find a new employee is at a record high, which
means that it is hard to find workers, which means that, for
workers, it is easier to find jobs. On the other hand, there
are negatives in the labor market today. Long-term unemployment
and involuntary part-time employment are above normal levels,
but it is gratifying to see that they are declining and I think
will approach normal fairly soon.
But as I stress, employment growth is disappointing, and
the reason is declining labor force participation. The fraction
of the population, the working-age population either at work or
looking for work, has declined remarkably. A trend that began
in 2000 worsened after the crisis, but it has continued to
decline despite the restoration of normal job availability.
The decline is not the result of demographic shifts. It
reflects long-lasting changes, in particular teenagers and
young adults who account for all of the decline. Participation
has remained constant at high levels for those aged 35 to 59
and has increased from previously low levels for those 60 and
above. The decline in participation has been larger among young
people in households with above median income. So it is not
restricted, as some people, I think, mistakenly believe, to
low-income families.
I do not see then that there is a place for a policy that
attacks the labor market directly, and I think most people
agree with that. Rather, we need policies with economy-wide
favorable impacts that would bring improvements in the labor
market along with improvements in the performance of the
economy as a whole. These policies would improve educational
outcomes and stimulate productivity growth. Those would result
in higher wages across the board and close some of the gap
between wage growth for low-wage and high-wage workers.
Now, turning to trade policy, I think I just want to make
one point, and that is that earnings should be measured in
terms of purchasing power. If we allow American consumers to
pursue bargains that are available in global markets, that
raises real incomes. That is one of the major objectives of
this committee and of economic reform in general. Therefore, we
should welcome imports from countries that are providing
products at low prices.
Now, there is lots more to say about trade, but that is not
my specialty. Let me turn to tax reform, which is an area that
I have been active in. The Hall-Rabushka plan, which Alvin
Rabushka and I put together about 30 years ago, is a simple,
progressive personal tax and an airtight business tax which are
completely integrated.
Integration of the personal tax and the business tax should
be the top priority of tax reform. There is too much double
taxation of income. For example, we have a corporate income tax
and the personal income tax when individuals receive dividends
and capital gains. That is a mistake. We need to integrate the
two.
Hall-Rabushka is a very consistent approach to that, and I
recommend it to everybody. It has the right incentives for
saving and investment. It can be tailored to modern standards
of progressivity. It does not have to be a flat tax, even
though some people call it a flat tax. It is the right way to
go. It would provide the kind of stimulus that we are all
looking for.
So thank you, Mr. Chairman, again for this opportunity to
testify.
The Chairman. Thank you very much.
[The prepared statement of Dr. Hall appears in the
appendix.]
The Chairman. Last, but certainly not least, is Dr. Justin
Wolfers. Dr. Wolfers is a professor of public policy at the
Gerald R. Ford School of Public Policy at the University of
Michigan and a professor of economics. Dr. Wolfers's research
interests include labor economics, macroeconomics, political
economy, economics of the family, social policy, law and
economics, and behavioral economics.
He is a research associate with the National Bureau for
Economic Research, a research affiliate with the Center for
Economic Policy Research in London, and an international
research fellow at the Kiel Institute for the World Economy in
Germany.
Dr. Wolfers earned his Ph.D. in economics from Harvard
University and a bachelor's degree in economics from the
University of Sydney.
We welcome you, Dr. Wolfers, to the committee and want to
thank you for being here in attendance today. Please proceed
with your opening statement as well.
STATEMENT OF JUSTIN WOLFERS, Ph.D., SENIOR FELLOW, PETERSON
INSTITUTE FOR INTERNATIONAL ECONOMICS; PROFESSOR OF PUBLIC
POLICY, GERALD R. FORD SCHOOL OF PUBLIC POLICY; AND PROFESSOR
OF ECONOMICS, COLLEGE OF LITERATURE, SCIENCE, AND THE ARTS,
UNIVERSITY OF MICHIGAN, ANN ARBOR, MI
Dr. Wolfers. Thank you, Chairman Hatch, Ranking Member
Wyden, and members of the committee, particularly my home State
Senator, Senator Stabenow, and my brother in orange paisley,
Senator Cornyn. [Laughter.]
The good news is, we are very much in an improving economy
right now. Last year we created 246,000 jobs per month, on
average, which is the fastest rate of job creation since 1999.
The unemployment rate now is down to 5.6 percent, and,
importantly, through this recovery, unemployment has been
falling at a full percentage point per year. It is down from 10
percentage points. So if it is at 5.6 and it is falling by
about a point per year, that tells us that sometime this year,
depending on how optimistic or pessimistic you are about how
far we can go, the economy will finally be back to normal.
But I should urge, as much as that is the natural
projection, that we should not declare mission accomplished
prematurely. Historically, we regarded a 5.6-percent
unemployment rate as being a bad outcome, and it is certainly
the case, I think, that we can do better.
I think we learned through the mid- to late-1990s that the
U.S. economy can sustain a 4-point-something-percent
unemployment rate rather than a 5-point-something-percent
unemployment rate. And I hear a lot of talk that we might be
near capacity, but I think there is good reason to be
optimistic that the recovery could run a lot further.
That is all I want to say about the short run. I am more
concerned, I think, about the longer-run issues that come out
of the recent business cycle.
First is, we still have elevated rates of long-term
unemployment. Historically, in the U.S., we would measure
unemployment in the number of weeks that people were out. You
would lose your job, you would probably have another job in 6,
sometimes 12 weeks. Today we measure unemployment in months
and, in many cases, years. That is a new development for us,
and it appears to me that moving people back into the labor
force who have been out of work for 1, maybe 2 years, we do not
yet have the systems in place to do that. And so perhaps there
is a need for greater job search assistance. Also, perhaps we
need to think about the social insurance that may be necessary
if long-term unemployment is going to be with us for the longer
run.
During the recent recession, Congress saw fit to extend
unemployment insurance, emergency unemployment compensation,
for those who were out of work a long period of time, and it
seems to me that we want to be prepared for the next time that
something like this happens again, which is to say that, rather
than acting on the spur of the moment, it would be useful to
have a program in place that triggers longer unemployment
insurance when the next deep recession hits.
I think that is part of the second, broader thing I want to
talk about, which is, I think what we have learned from this
recession is that the Federal Reserve cannot necessarily do all
that it needs to do to offset a cyclical downturn. We are at
zero interest rates right now, and the Fed has not been able to
be as aggressive as it would otherwise be. That suggests to
many of us a greater role for automatic stabilizers. If, when
downturns hit, taxes could be lower and spending could be
higher, that, I think, would lean against the worst excesses of
the business cycle. It also has the advantage that we would
actually be spending money at a time when labor and materials
are cheap and when interest rates are particularly low.
So what I would urge the committee to do is to look for any
opportunities in any legislation under any circumstances to try
to build in triggers where we spend more and tax less during
recessions and, in turn, we tax more and we spend less during
booms. We could imagine doing this for things like Pell grants.
We could do it for TANF. We could do it for high-wage spending
and all sorts of things.
The third issue I want to talk about is, of course, rising
inequality. So, as much as the aggregates tell us the economy
is doing quite well, we are not seeing that for a lot of
families out there. We are seeing a sharp shift in the share of
the national pie that goes to capital rather than labor. This
is the issue of wage stagnation. And we are seeing that,
whereas historically economic growth went to the rich as much
as it went to the poor, over the past 30 years, most of the
gains of economic growth have actually accrued to the top 10
percent, and the bottom 90 percent of the distribution have
seen almost no rise in average income whatsoever.
I realize there is a fierce debate on Capitol Hill about
the right scope for government and the right size of aggregate
taxes, but I think there is a separate and far more useful
debate to be had, which is, what is the right distribution of
those taxes? There are groups who need greater incentives,
greater work incentives, and other groups who could use those
marginal dollars a little better.
The final point I would like to add--and it is somewhat
outside the committee's jurisdiction--is to talk about the
importance of education. One of the driving forces for
education in the United States for the last century has been
rising levels of education. This came out of the high school
movement. But that has run its course.
My generation was the first ever to not get more education
than their parents, and, at the moment, it looks like the next
generation is not getting more education than their parents.
I think the President's ideas of potentially expanding
community colleges or, also, early childhood education are
potentially ways to reverse that long-run trend and could
really be engines for growth.
Let me stop there.
The Chairman. Thank you so much.
[The prepared statement of Dr. Wolfers appears in the
appendix.]
The Chairman. We do have a quorum here now. I want to thank
my colleagues for their attendance. We will now interrupt the
hearing to conduct a few items of committee business.
[Whereupon, at 10:43 a.m., the committee proceeded into
open executive session, resuming the hearing at 10:47 a.m.]
The Chairman. Now we can resume the hearing. So we will
turn to questions now and hopefully everybody will enjoy
participating even more. Perhaps I can start off the questions.
Governor Engler, there is bipartisan interest in this
committee to continue to carefully examine options and
tradeoffs involved in tax reform and to get things done. I put
forward principles to guide tax reforms, a detailed report, and
I am working with Ranking Member Wyden and members of this
committee on both sides who have agreed to work in five
different policy groups.
Governor, what are your thoughts on how tax reform can help
grow jobs and the economy and promote a healthy economy?
Governor Engler. Mr. Chairman, thank you. As I indicated in
my testimony, I was delighted to see--and the Roundtable
strongly supports--the creation of those working groups, and I
think they are a positive step for the Senate as a whole.
We have looked at an array of issues, and we talk about the
United States in terms of maximizing its economic potential. It
is the sense of the Business Roundtable CEOs that the most
important single thing that we could do for the U.S. economy is
to modernize and restore our tax code to a competitive state.
And that, as I testified, means addressing rate, it means
addressing the international situation.
We believe that tax reform should be comprehensive in scope
and that, if this were to be done, it would have a dramatic and
direct impact. We think that there is an opportunity for the
United States today to lead, even more vigorously, a global
recovery and that bringing $2 trillion back home as part of
this would be an important contribution.
But we also look at things like mergers and acquisitions.
We actually have a deficit--if we look back in time, we would
like to see U.S. companies being acquirers, not being the
acquired. We would like to see the U.S., as it seeks to meet
one of the President's goals of doubling exports, being able to
be more competitive so it can do that.
We have a tremendous energy advantage as a Nation. We are
attractive to foreign direct investment coming here. Both of
these things would be enhanced by a tax code that is more
competitive, Mr. Chairman, and, if we bring in trade a little
bit, both of these have the opportunity to impact jobs and
wages in this country in a very positive way.
The Chairman. Thank you, Governor. I appreciate those
comments.
Dr. Hall, we just went through a devastating financial
crisis, the so-called Great Recession, and financial
deleveraging by American households. I wonder what the effects
were of all those things on labor markets in terms of how long
it has taken our labor markets to recover and whether there
will be lasting damage. I also wonder what the Federal
Government should do to support job creation.
Before you respond, let me note that some people, such as
Larry Summers, the former economic advisor to President Obama,
seem to have somewhat of a pessimistic economic outlook long-
run, or what he calls, quote, ``secular'' stagnation. That is a
future with persistent sluggishness, near-zero interest rates,
lack of an ability of monetary policy to do much, and what he
seems to see will be a need for a far greater role for the
Federal Government in the economy.
So I would like to have your viewpoints on those things as
well.
Dr. Hall. Thank you, Senator Hatch. So I was Larry
Summers's teacher at MIT, and he and I have been debating these
issues. In fact, recently we have had two very interesting
public debates on this subject.
There is a right part and there is a wrong part to the
concept of stagnation. There is a paper on my website if anyone
wants to see more about this. Stagnation is a real thing in the
U.S., but not so much in the areas that Larry Summers has
talked about. Rather, the earnings that families take from the
labor market have been stagnant in purchasing power terms since
about 2000. Prior to that, they have enjoyed substantial
growth.
Now, when you take that apart, it falls into a number of
interesting, important categories. One is--and 2000 is also
when productivity growth slowed down. The number one priority
by far for restoring growth and prosperity is to get
productivity growth up. It is a proven fact that the benefits
of productivity growth vary widely in the economy. It raises
the earnings of many different groups. The other factor is the
one I already mentioned in my previous remarks, that we have
seen this withdrawal from the labor market of certain types of
people, especially teenagers.
If you want to know what is most wrong with the U.S.
economy, here is a simple fact. In 2000, half of all teenagers
worked. Today, only one-quarter of teenagers work. The
withdrawal of teenagers from the labor market, I think, is a
symptom of what is going on.
Now I wish I could say, well, that is because they are
getting more education or they are doing other useful things,
but that is not what the data show. Instead, teenagers are
spending more time enjoying themselves. That is not, by itself,
a bad thing, but I think that it is important to understand
those are the two big factors.
Dr. Wolfers mentioned the third factor, which is that there
has been a shift of the distribution of actual income away from
labor and toward capital. We are not really sure why that is
happening, but it has been the third important source.
But that does not mean that the outlook is uniformly bad.
We could restore productivity growth, especially with tax
reform. There are certain changes, for example, in disability
programs, which clearly have a factor in declining
participation, that badly need reform and for which there are
good ideas for reform.
So I am not nearly as pessimistic as Larry Summers is. He
made a big splash with that, but I think that when you actually
look at and take apart the numbers carefully, a lot of his
pessimism is not right. With respect to the United States, one
overwhelming fact that we all need to be proud of is that the
performance of the U.S. economy has been so much better than
other advanced economies, especially those of southern Europe.
We should be very proud of how well our system works, and I
think it is going to continue to work.
The Chairman. Thank you, sir. We will get to you, Dr.
Wolfers, later. My time has expired.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Gentlemen, for years this committee has debated the merits
of supply-side economics, and often, as the consumer sees it,
trickle-down economics. My own view is that that kind of
approach is a particularly poor fit for an economy where two-
thirds of the economic activity is driven by consumer spending.
I think we all understand that the affluent can only buy so
much. What is needed for sustained economic growth is more
people buying homes and cars and other goods and services that
make life better for them and their families. So what you
really need are policies, as I was touching on, that are going
to put more money in working family's paychecks.
I think what I would like to do is just go down the row and
have each one of you give me your sense of a policy that would
do the most to increase the paychecks of the typical American
worker.
We will start with you, Governor.
Governor Engler. Thank you, Senator. I think that a 1-
percent boost in the U.S. GDP would be the thing that would
result in many more Americans coming back into the workforce.
It would raise wages for workers in the workforce. And that is
achieved in a set of policies that is not simply one thing, but
it is focused on infrastructure, it is doing many things.
It is getting the tax code right. It is having the right
trade agreements. It is investing in infrastructure. It is
delivering on the promise of our education investment, both at
the K-12 and university level. And I think immigration reform
is part of it.
We have a very complex, interrelated, integrated economy, a
global economy here in the U.S., and we have done well. I think
it has been testified to today. We have made great strides in
our recovery, but there is so much more upside potential.
Senator Wyden. Dr. Hall, the Governor is right that it is
complicated. I would just like to get your sense. If you could
do one thing, what would it be, to help raise the paychecks of
the typical worker?
Dr. Hall. I think tax reform. I think that there are a lot
of improvements in our economic performance that we could
achieve mainly by rationalizing the tax system and eliminating
double taxation so that we have closer-to-uniform tax rates.
In particular, for example, entrepreneurial income, which
is subject first to the corporate income tax, as almost all
startups are organized as C corporations, is then taxed again
as capital gains or dividends, mostly capital gains. I think
that is definitely holding things back.
I think that we could restore earlier rates of productivity
growth, in particular, which, as I have said before, would be a
huge factor in improving paychecks.
Senator Wyden. I think certainly tax reform is part of it.
Senator Coats and I--and we were pleased that former Chairman
Camp picked up on this--in our bipartisan tax reform bill, what
we do is, we triple the standard deduction for middle-class
people. We think that is the kind of thing that can help raise
paychecks.
Dr. Wolfers?
Dr. Wolfers. You have very much, Senator Wyden, emphasized
the importance of increasing the size of paychecks. But even
more important to most families is increasing the number of
paychecks, getting people back to work. You get a second
paycheck in a family, that will double their income, whereas if
we raise wage growth a little, it will increase it by maybe 3
percent. So anything that keeps the economy moving forward and
gets more people back to work will be helpful.
Governor Engler described the importance of a 1-percentage-
point rise in GDP. That was exactly the right assumption
through to about the 1970s. This used to be an economy where a
rising tide would lift all boats. That connection appears to be
broken today.
So we need to not just raise the size of the pie, but make
sure some of it gets out there, and that is where I think the
important work of the tax system is most critical.
You asked for a very specific suggestion, what would put
more money in people's paychecks. I think the childless EITC,
the Earned Income Tax Credit, is a great way of ensuring that
those who work get the rewards that they deserve.
At the moment, we mostly reserve that for parents. Why not
non-parents? And actually, to be clear, a lot of the
beneficiaries under the childless EITC would, in fact, be
parents. They would be noncustodial parents. So there are broad
swaths of the population where I think this would have a huge
effect in increasing take-home pay.
Senator Wyden. I am going to see if I can get one other
question in, Dr. Wolfers.
This is for you, Dr. Hall. Let me also note--you may not be
aware--my mother was a research associate at the Hoover
Institution when Glenn Campbell was president. People were very
nice to her. What I remember most is that they would always
tease and say they liked Mrs. Wyden so much, they have chosen
to ignore the fact she is a Democrat. There was a lot of
teasing. [Laughter.]
The Chairman. I feel the same way about him, you know.
[Laughter.]
Senator Wyden. There you are.
Here is my question. It is on infrastructure.
This is on infrastructure investment, which is something
you have been interested in. We are clearly falling behind. The
American Society of Civil Engineers gives us a D-plus. You
cannot have big-league economic growth with little league
infrastructure.
Recently, there was a forum in Chicago, a forum on global
markets. You said the United States needs user charges for
roads and bridges. When you said that, I picked up on it at the
time. What kind of user charges would you be interested in for
funding infrastructure?
Dr. Hall. Senator Wyden, in California and other parts of
the country, we have adopted rational pricing of infrastructure
of highways, and that is so-called real-time pricing.
So there are lanes in San Diego, and there is one near
where I live, where it is guaranteed that you can go 60 miles
an hour in that lane because there is a knob that gets turned
automatically that raises the price. That does two things. It
relieves congestion, which is a good thing, because congestion
is pure economic waste, and it generates government revenue,
which is a great thing.
So I would love to see better pricing of our infrastructure
of all types, but especially congestion pricing of highways. It
would give a signal about where additional infrastructure is
needed. That would be any area where the price is always high
relative to how much it would cost to expand.
It would be a huge step forward relative to where we are
today, where there is expansion of infrastructure, highways, in
particular, which often generates highways that are not very
heavily used and does not relieve serious congestion.
In the short run, we can relieve the congestion by pricing
it. In the longer run, we can use the price signal to decide
where to expand the infrastructure. It would be a whole new
ballgame, and we are seeing that all over the economy, real-
time pricing of private areas like airlines, in particular.
There has been a huge increase in airline efficiency because
all airplanes fly full now, and that, by itself, is a 10-
percent productivity improvement in the airline business, and
it is all from real-time pricing.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Thank you. Senator Cornyn?
Senator Cornyn. Thank you, Mr. Chairman. Thanks to each of
the witnesses for being here. And thanks, Mr. Chairman, for
having this hearing. I have really two items I want to touch on
briefly.
One is, since the recession in December of 2007, 1.2
million net jobs have been created in my State of Texas. Only
700,000 net jobs have been created in the other 49 states. And
it is no coincidence, I would submit, that Texas is the number-
one exporting State in the country since 2002.
We make a lot of stuff, and we grow a lot of stuff that
gets sold to markets all around the world. So I am extremely
interested, and I share the President's commitment to see trade
be high on our list of bipartisan things that we can work on,
because I think it will provide the kind of economic growth
that Governor Engler alluded to and that you have mentioned.
I know the President was celebrating a high quarter of GDP
growth last quarter, but I am wondering whether he is spiking
the football a little early. Here is my concern, and I would
appreciate your comments on this. We have accumulated $18
trillion in debt. The Federal Reserve has a huge balance sheet,
because it has been purchasing our own bonds that it is going
to have to at some point unwind, and interest rates will go up.
I worry, because of all the things that the American
taxpayer pays for via their Federal tax dollar, that we are
going to spend more and more money servicing that Federal debt
and crowding out other important priorities from national
security to safety net programs.
So I would be interested in hearing from each of you,
briefly, what you see in the future, in terms of the prospect
of this looming debt challenge and rising interest rates if the
Federal Reserve does what I think we all expect them to do and
begins to, obviously, reduce the pace at which they are buying
U.S. bonds, but also begins to unwind that program.
Governor Engler, would you care to tackle that? Maybe then
we will go down the line really quickly.
Governor Engler. Thank you, Senator Cornyn. Not an easy
question. I am not sure my crystal ball is any better than
anybody else's, and maybe not as good as some on this
committee.
Looking ahead, I guess one of the fundamental principles
that we have tried to articulate at the Roundtable comes back
to this idea of growth. I used the statistic that just a one-
tenth-percent increase in GDP is probably $300 billion to the
Treasury, and looking ahead at 1 percent, then you get $3
trillion.
We have to have a growth economy in order to generate the
kind of revenue that the government needs. Then that has to be
accompanied by prudent decisions relative to spending. And
ultimately, entitlement reform has to be addressed, because so
much of the spending is non-discretionary.
You are exactly right. I do not know that we are close to a
rapidly rising interest rate environment, given what is going
on around the world and what the E.U. is up to today. On the
other hand, the numbers are scary when you look and project if
interest rates did go up. We are a very liquid market. It is
the time to invest. And I certainly want to support the notion
that we have heard in this committee room from my fellow
panelists that infrastructure investment is also an optimal way
to be thinking about leveraging this low interest rate
environment that we are in.
We have a lot of rebuilding that needs to be done in the
country, and there are some creative ways. There are some
public-private partnerships that are out there, some of the
very transportation systems that Dr. Hall talked about. We see
it in Senator Warner's State, and I think he probably played a
role in it as the Governor. I mean, those are all priced and
built privately.
So there are mechanisms, but there are still big public
decisions that need to be made. Inland waterways of America,
the air traffic control system, the electric grid--there is
tremendous work that needs to be done. That also would be
accompanied by a tremendous demand to train the skilled workers
to do that.
Senator Cornyn. With all due respect, I hear a lot of ideas
about how we can spend money, but I do not hear a lot of great
ideas about how we can pay down our debt as opposed to pass it
on to the future generations.
Dr. Hall and Dr. Wolfers? I know that my time is limited. I
would appreciate your thoughts.
Dr. Hall. Senator, first of all, I strongly share your
concern about the balance between revenue and spending. I run a
spreadsheet that looks 100 years into the future, obviously not
accurately, but it is still worth doing. One of the
assumptions--and the CBO does the same thing on a shorter time
span--factors in a growth of interest rates, and that, of
course, feeds back into a further requirement for revenue to
pay that, and it is scary.
The trend is adverse. The trend is for revenue as a
fraction of GDP to rise substantially more slowly than
spending, and that is long-term, and it has not changed. It is
just remarkably stable.
According to this spreadsheet, say, by the end of this
century, we would be just immersed in debt. We would have way
more debt than we could possibly pay. Something has to give,
and it has to give in the sense of either more revenue or less
spending. I think our democratic system, sitting here, needs to
be very seriously concerned about that, and I share your
concern.
Senator Cornyn. If the chairman will permit--Dr. Wolfers,
my time has expired, but please go ahead, if the chairman will
allow. Go ahead.
Dr. Wolfers. Let me just make four points. First, the
budget deficit is roughly back to normal now. We are around
about the 40-year average as of last year, and set to improve
somewhat with an improved----
Senator Cornyn. Are you talking about the deficit or the
debt?
Dr. Wolfers. Deficit. So the flow of new debt, the deficit.
Second, if you look at the projections and the sorts of
spreadsheets Bob was just talking about, the debt-to-GDP ratio,
which I think is the right way of thinking about this, is
likely to be roughly stable over the next 10 to 15 years.
It is only beyond that that stuff starts to explode, and
the truth is, we do not actually know much about what is going
to happen to the economy 20, 30, 40 years out. So these point
estimates might be right, but the range of uncertainty is such
that we may find ourselves in 2 decades wondering why the debt
is too low rather than too high.
The third point is to say, should we be worried about the
sustainability of this? The very sophisticated pinstriped folks
on Wall Street who trade in government debt seem to think it is
not a problem. The 10-year government bond right now is at 1.7
percent, which suggests not only that there is perceived to be
little risk behind this, but also that it looks like interest
rates are going to stay low and low for a generation.
Finally, what is the role of infrastructure in all of this?
Your concern, which I think is an important one, is that we do
not saddle future generations with debt; it is equally
important we do not saddle future generations with crumbling
infrastructure.
So then it is not just a question of how much spending to
do, but when to do it. And I think the important issue here is
let us try to do the spending when it is cheap. It is most
important and it is going to be cheapest to do infrastructure
spending when an economy has select resources and when interest
rates are low, and that I think is the case for infrastructure
spending today.
The most interesting piece of economic research I have seen
in recent years is, the IMF has actually done some calculations
which have suggested that government infrastructure spending in
an environment like this, with low interest rates and select
resources, can actually end up lowering the debt.
It stimulates sufficient economic activity that it can
actually--I am not quite sure that I am going to go so far as
to suggest it will actually lower the debt, but the long-run
costs, when you think about how the benefits come out--the
growth benefits of infrastructure and how that then comes back
in tax revenues--can be fairly small.
The Chairman. Senator Stabenow?
Senator Stabenow. Thank you very much, Mr. Chairman.
Congratulations on holding the gavel. And I want to
congratulate you that two out of three of your first witnesses
are from Michigan. So it reaffirms my confidence in your good
judgment.
The Chairman. Well, if we can have good witnesses like this
every time, Michigan is going to be in play.
Senator Stabenow. Thank you. Let me first start by saying
that I have always thought and have been taught that, if
something works, we should do more of it, and, if it does not
work, we should do less of it.
So when we look at the economy, we can see the Clinton
years focused on education, innovation, much more focused on
middle-class income--booming times, for lots of reasons, but
booming times, with 22 million jobs added.
We go to the next administration, the Bush administration,
which focused on tax cut policy predominantly for the top, with
the theory that it will trickle down, funding wars without
paying for them, creating massive debt, lack of oversight of
financial institutions, and we ended up with what we now call
the Great Recession.
So I am concerned that we do what works--and we are not out
of it yet by any means, but we have helped save American jobs
in the auto industry, and, even though folks lost home equity
and 401(k)s and jobs and everything that happened in the Great
Recession, it is beginning to come back.
Dr. Hall, you mentioned that fewer young people are
working. I just want to say that the first thought that came to
my mind is that it is because folks in their 50s, 60s, and 70s
are taking the jobs now at fast food restaurants, because we
have way too many folks who are seniors who are having to come
back into the workforce to supplement their income or folks who
lost their job in manufacturing coming back and doing jobs that
used to be done by young people.
But we are turning things around. Jobs are up; 11 million
jobs have been created. Wall Street has doubled; the yearly
deficit is down by two-thirds; and it seems to me the challenge
really is for us to make sure now that everybody who wants and
needs a job that pays well, where they can have one job to
raise their family instead of two or three, has that.
I am pretty proud that Henry Ford had the right idea.
Despite everybody's criticism at the time--folks in the
business community thought he was crazy--he actually more than
doubled wages and paid folks top dollar, and he created the
middle class in this country. I am pretty proud that that
happened in Michigan.
So I would like to ask each of you a question. What I hear
from our manufacturers in Michigan right now is just--at a new
announcement, Mr. Chairman, with Magna, a great company
expanding in Michigan, hundreds of jobs, what they said was, we
need skilled people to match the jobs.
The number-one issue is job training, is skill development.
I know our State is focused on that. The President talked about
that. So, if we talk about how to capture this and grow middle-
income jobs, there are lots of things, but I wonder if each of
you might speak to the desperate need for skill development to
match those jobs; not that people do not have skills, they are
just not the skills for the jobs that are being created.
So job training, costs of college, the fact that folks are
coming out of 4-year schools. Maybe they should be going to 2-
year schools, but they are going to 4-year schools, coming out
with massive debt, cannot buy a house. I hear from realtors all
the time terrific concerns now about young people not being
able to get credit, buy a house, because of all the debt. It
seems to me that is a huge issue that we can be coming together
and working together on--the business community, the public-
private sector, and so on.
Governor Engler, I wonder if you might speak from your
perspective.
Governor Engler. Thank you, Senator. I would be happy to. I
think this is a really important issue. There are 4 million
jobs today unfilled in the American economy, and it is because
people do not have skills. They certainly do not have the right
skills, and I think in some cases they flat out do not have
skills.
For too long we have had a dropout rate that is too high.
We invest as a Nation $700 billion roughly on an annual basis
on our K-12 system, and we have to have a system that can send
people off to college without needing remediation when they get
there. And, if they are not going to go to college--about 40
percent in the country do not--of those who do not, maybe they
have a skill that hopefully is, I would say, measured and
certified along industry standards so that they are work-ready,
and the dropout rate has to be zero. That is the biggest
mistake that a young person can make.
The Roundtable strongly works on policies, and one area we
think is a mess is the labor market analysis. We do not
actually know where the 4 million jobs are. We do not know
enough about what the skills are that are needed to hold those
jobs. So I think industry needs to do a better job of saying,
these are the competencies that we require, but then it needs
to be aligned with the training.
I think, from the Federal job-training perspective, that we
should stop spending money when we enroll people, and reward
people when they graduate with mastery of the competencies
required to go to work. Certainly, with the innovative programs
in the country that are bringing community college training
down into the K-12 level, we can skill up young people much
earlier than waiting until they finish high school. We need to
get rid of the wasted senior year for a lot of these kids.
I think, Senator, this is an area where there is tremendous
national need and opportunity on a bipartisan basis, and I know
that Senator Alexander and members of his committee are
interested in this issue, as some of you on this very committee
are. I know Senator Wyden is focused on some of this.
We need to give young people the information they need, and
we need to do a much better job of labor market analysis in the
country. It is a dismal status.
Senator Stabenow. Briefly, Dr. Hall? Dr. Wolfers?
Dr. Hall. Thank you, Senator. I love the idea that we
should do more of what works. I would call attention to the
fact that what works on a global basis is the U.S. economy. The
U.S. economy has 20, 30, 40 percent higher paychecks than any
other country in the world of any size. In particular, it is
way ahead of Europe, especially southern Europe.
So what works is the U.S. system, and there is some
tendency to move in the direction of European institutions,
which troubles me. If you look in Europe, countries that
specifically said, let us free up the labor market, let us let
the market work and not constrain the policies of employers--
Britain and Germany--they have by far had the best experiences
after the financial crisis. So that is what works.
If you ask what does not work in the U.S. today, which
touches exactly on the themes that you were talking about, it
is the failure of secondary education. When kids get to
college, they are at a big disadvantage relative to countries,
say, especially Scandinavian countries, that have very
effective secondary education.
We need a major thrust. Of course, secondary education is
the responsibility of local government, not the Federal
Government, but still, whatever the Federal Government can do
to try to boost the quality and the appropriateness of what is
taught to kids in high school would make a huge difference in
terms of all the things that you talked about.
The Chairman. Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Senator Stabenow. Excuse me. I am sorry. Mr. Chairman, if I
could just get one--maybe 30 seconds from Dr. Wolfers. I am
sorry. He did not have an opportunity----
The Chairman. That will be fine. I would caution all of us
that we have a 5-minute rule here.
Senator Stabenow. Yes. I appreciate that.
The Chairman. And it is true we have only three witnesses
and some have utilized asking each one. But if we can try to
keep it within 5 minutes, we will get through everybody.
Senator Stabenow. I appreciate that.
The Chairman. Go ahead.
Dr. Wolfers. I will try to show that a wolverine can be
brief.
Professor Hall was just talking about what works, and he
used the U.S. as an example. And of course, he is precisely
right, if you are talking about the 1970s and if you use
averages.
If instead you look at today and you look at medians, the
American middle class is not doing better than, for instance,
our neighbors north of the border. And so there has been a
long-run stagnation, and our median family earnings are not as
high as they are elsewhere.
The most important place to look at skills here is of
course education. There is a presumption, and it is widely
understood in the United States, that the government will fund
education through to the 12th grade, and we now accept that,
although at the time that that was first put forth, it was
ridiculed widely as an absurd idea that anyone would need that
much education. And I think that that history is possibly quite
useful in framing and looking at arguments for either greater
involvement in pushing post-secondary education, which should
be the new middle-class aspiration, or to try to remediate gaps
before they ever appear, which would be early childhood
education.
Senator Stabenow. Thank you.
Senator Thune. Mr. Chairman, thank you, and congratulations
on your chairmanship. I look forward to working with you and
the members on our side, as well as Senator Wyden and members
on his side, on issues that are in front of this committee that
are so important to our economy.
I want to thank our panel today. It has been mentioned, I
mean, wages are flat. They are not growing. In fact, median
household income is down $3,000 in this country from where it
was in 2009, and the labor participation rate is at a
historically low level. A lot of people have dropped out of the
labor force. Those are big issues, and we have a lot of work to
do to try to fix that.
I am a big believer that comprehensive tax reform can
unleash a lot of economic activity in this country. I know,
Governor Engler, the BRT has been a very strong advocate for
tax reform, and I know the BRT represents primarily larger
companies in this country. I am interested in knowing, with
regard to tax reform as a way to improve the tax system for all
businesses, how you think we might deal with the issue of pass-
throughs.
In my State of South Dakota, 90 percent of our businesses
are pass-through entities. Fifty percent of income in this
country, business income, is in the form of some pass-through,
subchapter S, partnership, or LLC. So, given these realities,
what do you think Congress ought to do to ensure that all
businesses benefit from a reformed and simplified tax code?
Governor Engler. We always talk about comprehensive
business tax reform, because we recognize that we have the
corporate entities and the non-corporate entities, and there
are many more numerous non-corporate entities.
We look also at which ones are facing global competition
and which ones are more domestic. But it is important, even
when looking at that, to understand that many domestic
companies are part of a supply chain which feeds into the
global economy.
So we would argue that both need to be dealt with. Dr. Hall
talked about the two different types of structures, and he has
thoughts about how that might change in the future. We are
probably not as optimistic that that kind of a fundamental
change can be achieved here in the short term.
So, in the realm of possibility, it seems to me that we
have to do something that is fiscally sustainable, given the
deficits we have just talked about. We have tried to look at
this from a standpoint of, how do you achieve benefits for
everybody without cross-subsidization or not asking individuals
to pay for corporate relief, not asking corporations to fund
individual relief?
But if you can sort through this, I think there are ways
that you can make it work. I think the corporate relief is
easier, frankly, because there are fewer variations. The
structure is a little different, but they are going to still
have double taxation.
The pass-through entities, we have those in our membership
as well. We have spent considerable time and are spending time
to try to think through how can we make similar progress there.
The rates have always been different, I guess. After the
1986 tax reform, we saw people moving from the corporate to the
unincorporated status just because they deemed that to be a
better position to be in.
I would hope that, regardless of business structure, we can
improve the competitiveness of everyone, because you have 71
million Americans who are engaged in the kind of work where
there are globally competitive companies that are impacting the
economy. And we also have seen that the increase in hiring can
be led--if I can bring trade in for a second--by those
increases in trade.
So there is a real benefit to getting the global part of
this right, but not ignoring the domestic side.
Senator Thune. Dr. Hall, Dr. Wolfers, both of you mentioned
in your testimony the decline in the labor force participation
rate and offered some theories about what causes that. Other
than demographic changes associated with baby boomers retiring,
I want to ask this question--and then I am going to ask a
follow-up, and if you would answer them both together, since we
have limitations on time.
What do you think is the single biggest factor that is
keeping more Americans from seeking work and what, if anything,
can Congress do to reverse that? And then a specific question:
Dr. Hall, in your testimony, you mentioned the rise in the
number of Americans receiving Social Security Disability
payments and the negative impact that that might be having on
the labor force. Could you elaborate on that point? So, what is
causing it, what can Congress do about it, and how does the
Social Security Disability payment issue contribute to that?
Dr. Hall. Let me start. First of all, the research that I
have done on the participation rate focuses very much on young
people, and especially the fact that they are differentially
from higher-income families, those who have withdrawn. It is
not obvious that it should be a major goal of Federal policy to
reverse that.
With respect to what has happened to participation among
older workers, I think that the Disability program does badly
call for reform. The Disability program, Social Security
Disability, essentially prohibits people within the program to
even think about working again. You would lose your benefits
instantly if you are found working.
The scholars who have looked carefully into reforming
Disability have been very clear that the right answer is to do
what has been done in some other countries, which is to turn
Disability into a transition program in which workers are
helped to re-enter the labor market and take jobs for which
they are physically capable.
The Disability program was created to deal with people
doing very physical work. Today, most work in the U.S. is not
physical. It is people sitting at desks, and yet there is no
channel by which people drawing Disability can be placed back
in the labor force working at desks, which they are physically
capable of. So there is just obvious reform that I think
everybody who has looked at this agrees should be a top
priority, and it is clearly one of the trends that is adverse
for participation in the labor market.
The Chairman. Senator Coats?
Senator Coats. Thank you, Mr. Chairman. I will try to stay
within the 5-minute limit. So I am going to quickly raise a
point and ask the three panelists to just give a very brief
answer, because I would like to get two questions in here, if I
could.
Governor Engler, you stated in your proposal that you gave
to us here that trade-related jobs grew three times faster than
average job growth over the last decade and that export-related
jobs pay about 13 percent to 18 percent higher wages than other
jobs, all of which suggest trade policy issues that we need to
deal with.
While we would agree with that and agree that that is true,
obviously that can be a dynamic aspect in terms of improving
our economy, and a lot of emphasis should be put on these trade
agreements and so forth. On the other hand, does it give you
pause when we receive reports back that China's growth was less
than anticipated, there has been a slowing down there, and
Japan is in negative growth at best, and Europe has slipped
into negative growth? The instability in the world, not just
the Middle East, but its impact on Europe and its impact on
markets, clearly is going to be a factor.
While, obviously, we should go ahead with these trade
initiatives, should we be concerned about these factors and not
achieving what we would like to achieve?
Governor Engler. Two points perhaps. On the numbers, the
written testimony that I have submitted has footnotes that
provide source documentation for the increase in wages related
to export-related jobs and in terms of the job growth in trade-
related jobs. So that information is there, and I will not go
into that.
On the pause for thought about other nations, I am moved by
the fact that where we have FTAs in place, with just 20
countries, nearly half--and that is in my BRT document--46
percent of all of our exports go to the 20 countries where we
have FTAs in place, and we have a positive trade balance there.
The TPP is a negotiation with 11 Asia-Pacific countries.
TTIP is 28 members of the EU. Those two together would be about
60 percent of world GDP and 40 percent of total world trade. We
think the opportunities are too good, and the highly relevant
experience that we have had previously argues to go forward.
So, yes, there are details to consider, and much of those
are addressed in your TPA directions to the Trade Negotiator,
Ambassador Froman, but we think the risk is outweighed by the
opportunity.
Senator Coats. I hope that is the case. Dr. Hall, do you
have any comments on that?
Dr. Hall. Just one very quickly. I wanted to reiterate that
there are two benefits of opening up trade through agreements
or by other means. One is, as the Governor has just indicated,
that it is a way to get good jobs in the U.S.
But the other thing, which is equally important, is that it
is a way to get cheap goods into the U.S. in return. The
imports--do not neglect the import side or the benefits of the
import side. There have been huge increases in real income in
the United States as a result of having very inexpensive
products available at Walmart and elsewhere that are
astonishingly cheap imports always, and that raises U.S.
standards of living. The research on standard of living shows
unambiguously that trade is great for these two reasons.
Dr. Wolfers. I would just make two observations. Are the
returns to trade as great when, say, Japan is in recession?
Japan is a huge economy. The fact is, if Japan were not in
recession, it would be a huge economy plus 3 percent. So the
returns are not that different no matter what is going on with
Japan's business cycle or any of our other trading partners.
The second observation is, I think that, to the extent you
were talking about the world becoming more chaotic and what
does this mean about the returns to trade, I think arguably
that raises the returns to trade. A more interrelated world is
one where we have greater shared interests, and it is one where
foreign trade also becomes an arm of foreign policy as well.
There are greater returns to cooperating with your
neighbors when you have deep economic linkages with them. And,
even if you want to put it even more bluntly in terms of the
foreign policy thing, we have had a huge effect in Russia
because we used to trade with Russia. And so sanctions have
been quite effective.
So there are, I think, very big foreign policy issues on
the table as well.
Senator Coats. Those are reassuring answers. Obviously, we
hope that these numbers are correct, and we hope that this can
be a very essential element of helping drive economic growth in
the United States.
I just wanted to get your thoughts relative to the
potential instabilities and sluggish trade partners' impact on
that. But thank you for that.
Mr. Chairman, my time has expired. I will withhold my
second question and try to get it in at another time.
The Chairman. Thank you, Senator Coats. We will go to
Senator Menendez at this point.
Senator Menendez. Thank you, Mr. Chairman. I want to
congratulate you on your ascendency to the chair. I look
forward to working with you. I would be more effusive, but,
since my time is limited to 5 minutes, I am going to go to my
questions.
The Chairman. I understand.
Senator Menendez. Let me say I appreciate the panel.
We have made some enormous strides in our economic recovery
since the financial meltdown and recession starting in 2008. We
have seen some robust job growth, declining unemployment,
growing GDP. But there is still work to do and, in my mind, the
measures that we should be looking at are strengthening middle-
class incomes, investing in our infrastructure, and improving
educational opportunities.
So with that in mind, most, I think, members of this
committee believe that there is a pressing need to reform and
simplify our tax code. However, opinions begin to diverge when
we are talking about what the goals for reform are, what they
should be, and how exactly we go about accomplishing those
goals.
I think the President made it pretty clear where he stands
on this question, and I strongly agree with him that we need to
be focused on measures to help middle-class families instead of
keeping in place tax loopholes geared toward special interests
with high-paid lobbyists.
So regarding this prioritization, Dr. Wolfers, very simply,
what is more beneficial to the economy and individual families,
measures targeted toward the middle class and households across
the income spectrum--such as tax credits to help working
parents afford childcare, students afford college--or further
tax breaks for those who are at the top of the bracket who do
not need, and in many cases, are not asking for them?
Dr. Wolfers. I think my answer is that tax breaks and
policies targeted toward the middle class are going to yield a
much bigger dividend. I mean that in two respects. One is,
there is an emerging body of evidence that inequality may be an
important force that is going to be a drag on our economy. So
we could ameliorate that directly if we can start to do things
like make college available to much of the middle class so it
would be an important pressure for growth.
Then there is another point. The other issue is, what is
the point of having economic growth if it actually delivers
nothing for most? And so, to the extent that these policies
could do that, I think it is worthwhile.
I also think that there is some really simple stuff we
could do. When someone first explained to me what so-called
stepped-up basis was, the trust fund loophole, the mind
boggled, and I think that that would be true for not only most
economists, but also most of your constituents--the carried
interest loophole as well. These are all loopholes which have
basically no economics behind them and no economic benefit. So
they potentially would free up a whole bunch of money for
something far more useful.
Senator Menendez. So if we, in essence, help educate a
workforce that the private sector needs in order to deal with
the human capital requirements in the global economy and, at
the same time, help more middle-class families have greater
resources to help educate that child and/or to be able to get
to work so they can have their child be taken care of without
losing so much of their disposable income, they will have more
income to spend in our society and that will help fuel our
economy, would it not?
Dr. Wolfers. Absolutely, Senator.
Senator Menendez. Now, let me ask Governor Engler and you
as well about the importance to our economy of investing in our
infrastructure, particularly at a time when interest rates are
near historic lows and there is continued slack in the
construction industry.
Today there is a report that came out in New Jersey, Mr.
Chairman, that was led by a nonprofit transportation entity,
and it said that New Jersey's bad roads and bridges are costing
individual drivers almost $2,000 and contributing to higher
numbers of fatal crashes, and it goes on to talk about a whole
host of elements.
When we are thinking about this, talking about people
getting to work, sales forces getting out there, being able to
sell the products, being able to move our products to
marketplace through ports and whatnot, can you talk about the
importance of investments in infrastructure? Because we always
look at this with a transportation trust fund that continuously
seems to be broken, and we do it in short-term extensions
instead of also looking at the investment and the ripple effect
that that generates.
Can you respond to that?
Governor Engler. I am a believer in infrastructure, and I
am a believer in investing in infrastructure, and I think you
have to sort of break it down.
I think there are elements of infrastructure investment
where the user can pay, and there is a great return on
investment to allow for that investment to be made up-front and
paid off over time. Examples of that are, you certainly have
everything from the air traffic control system to--I mentioned
the electric grid earlier. There is tremendous upgrading that
could be done to water systems, all of these kinds of things.
Roads and bridges are harder. It has gotten harder to
insist upon a user-pay approach because some vehicles do not
pay traditional fuel taxes. The efficiency of the fleet is such
today that we drive many more miles for the cents in tax paid.
So I think that is going to have to be adjusted over time. You
have been fixing the trust fund holes with general fund
borrowing. That is probably not sustainable. And we have a big
hole coming up this spring again.
One of the things that is driving all of America crazy is
the inability to plan longer-term for anything, because of tax
provisions that expire. We had a change in the code for 2
weeks, if we go back to December. Well, infrastructure is the
same thing in a State, and we have a few northerners around the
table here. You cannot build roads year-round in some parts of
the country. So you need to be ready to go in the spring. If
the trust fund is not funded and you cannot budget your money
accordingly, you underperform that way.
So I think that there is, in this low-interest-rate
environment, a tremendous opportunity to do projects. I mean,
if you borrow money, you have to pay it back, and I think many
of these projects have a value proposition to allow that to
take place. In other cases, there is public investment that is
required. And I think, if you have a hole in the roof, you
should fix it.
The Chairman. Senator, your time is up. Senator Scott?
Senator Scott. Thank you, Mr. Chairman, and congratulations
as well.
My first question will go to Governor Engler. When I think
about the impact of lowering the corporate tax rate on job
creation in our country, I think it could have a significant
impact. I think also about the recent tax inversions that have
occurred.
Could you comment on what you think the long-term impact on
perhaps research and development and other aspects of companies
that move and/or invert their companies to foreign countries
will be on job creation in our country?
Governor Engler. Secretary Lew yesterday, in his remarks
over at Brookings, referred to our backward international tax
rules and the need to root out the part of the system that
encourages companies to shift their income overseas. That is
exactly what we have in the current code.
So part of the change is to get where virtually the rest of
the world is and allow the taxes on those foreign earnings to
be paid in the country where they are earned and then be
brought back home. That has to be advantageous to the United
States to allow that. And I think once home, that money then is
available for capital spending or hiring or higher dividends.
Let us bring it home so it gets spent here for any number of
productive purposes, including research and development.
The R&D tax credit is a good example of something that has
been in the tax code since 1981. At the time it was put in, we
were the best in the world. We are not in the top 25 today. It
has devalued over time, plus it is temporary. We do not have
one as of today--the R&D tax credit has expired.
So we need permanency in the code. We need predictability,
and I think the code needs to be competitive. As I said in
response to Senator Thune's question, we think there is room
for improvement across the entire spectrum. Whether one is in a
corporate status or a non-corporate entity, we can improve. But
we particularly want to think about anybody in either status
who has to compete globally, because today we have the worst
competitive environment.
Senator Scott. Thank you, sir.
Dr. Hall, on labor force participation, I note with some
interest that if we were using about the same labor
participation rates as we had in 2009, 65 percent or 65-point-
something percent, versus where we are now, there would be 7
million more folks in the labor force to be counted.
It does not seem like all of that can be attributed to
retirement. How would you help me understand the percentage of
folks working or involved in the labor force?
Dr. Hall. Senator, there is a table in my prepared
testimony that breaks it down by age and sex. As I mentioned
earlier, the big declines in participation have been among
young people.
There is a theory, and I am not going to sponsor this
theory, but there is a theory that entertainment--I think this
is most relevant for teenagers--compelling entertainment has
become quite cheap and that makes a difference in how teenagers
decide how to allocate their time.
There are many things like that. I think you should be
encouraged to see that this is perhaps not a total disaster.
One thing is, these are not, in most cases, primary earners. We
are not talking about the middle class. If you look at people
and the peak earning and family responsibility years, there has
been no decline in their participation. I think that is a very
good thing. The decline has been in people under 35, especially
teenagers.
I think we may figure out--and of course, some of this may
reverse; there is always that possibility. To me, it does not
cry out for any policy change, at least until we understand it
better and see how permanent it is.
Senator Scott. Thank you. A final question for you as it
relates to the President's proposal. He talked about increasing
the capital gains tax. What impact would that have, especially
when you think of the backdrop of Dodd-Frank and constricting
capital leaving banks going toward entrepreneurship--what
impact would that have on more entrepreneurs, fewer
entrepreneurs, and what would that mean for our job market
long-term?
Dr. Hall. Well, it would be pushing up an already high tax
on entrepreneurial activity. So, entrepreneurs create a C
corporation. The C corporation pays the corporate income tax
at, by worldwide standards a very high rate, and it gets taxed
again before it goes into the hands of the entrepreneur.
So the tax rates on entrepreneurial activity are really
high, and I do not think that they should be elevated. I think
we need to straighten this all out and have an integrated tax
system that is careful to get the rates right for everything
instead of the hodgepodge that we have now. For example, the
topic of carried interest came up. That goes in the other
direction. That is something where what should be taxed as
ordinary income is sneaking in only as capital gains, and it is
not income that has previously been taxed under the corporate
system.
So we need to change this. We need to get the rates on
entrepreneurial activities down. We need to get the rate that
takes the form of carried interest up. We need to straighten
all those things out and kind of get reasonable, uniform tax
rates for all activity. That would just be a huge step forward.
Senator Scott. Thank you. My time is up.
The Chairman. Senator Cardin?
Senator Cardin. Well, Chairman Hatch, first of all, thank
you very much, and we all look forward to working with you as
chairman of our committee, and we wish you the best.
Senator Wyden, I think, expressed the views of all the
members on our side. So we are looking forward to a very
productive time.
I want to thank our panelists. I think this has been
extremely helpful. We are looking at ways in which America can
have a stronger economy, build on the success that we have,
create more jobs, and particularly increase real wages in this
country to keep up with productivity gains, which is a major
concern.
So there is a lot of focus on the business tax, and, when
you talk business tax, I think you have to talk about not only
the corporate rate, but you have to talk about the individual
rate, since so many businesses pay at the individual rate.
We hear frequently that the United States has some of the
highest marginal income tax rates in the industrial world. And
I find that somewhat surprising considering that, when you look
at the reliance upon the public sector among the industrial
nations of the world and revenue into the public sector, the
United States is near the bottom of the industrial countries.
Of course, the reason is that the United States relies almost
solely on income taxes, whereas the rest of the industrial
world has a heavy reliance on consumption taxes. And when the
World Trade Organization was developed, we thought it was just
fine to allow for border adjustment on the consumption taxes,
whereas the income taxes are not border-adjusted, putting the
United States at a real competitive disadvantage.
So I want to try to get to the core of the problem. I am
not sure that just rearranging the chairs on the deck is going
to make much difference if we still rely heavily on income
taxes that are not
border-adjusted when the rest of the industrial world relies on
consumption taxes.
And when I suggest that we make some changes, I usually
hear from two groups of people. One says, ``Well, we do not
want to have a revenue machine for government,'' and there are
ways to deal with that through using some form of automatic
rebate if revenues exceed what you anticipate them being. So
you can deal with that issue.
The other thing, of course, I hear is that we do not want
middle-income families to be more burdened than they already
are today. And through use of rebates based upon income, you
can deal with that issue. And both of these matters can be
dealt with in a much simpler way than our current income tax
structure, with its complexities, et cetera.
So I guess my question to you is, from a policy point of
view, from the point of view of America's competitiveness, why
would it not benefit our country to take advantage of our
natural advantage, that is, that we rely less on the
governmental sector for revenues than our competitors in
industrial nations? Why should we not be looking at a way to
take advantage of that competitively? Dr. Hall, you are shaking
your head the way I want it to be shaken.
Dr. Hall. You have just listed all the selling points of
Hall-Rabushka. In particular, a key idea that you mention is
that you could have a rebate built into it so that you can get
the right distribution of the burden; in particular, excuse
low-income families from paying the tax at all and then have
the low average tax rate in middle income as opposed to higher
incomes.
Hall-Rabushka is a consumption tax, just as you were
suggesting, which I think most economists think is a great
idea. Our proposal did not include border adjustments, but it
is easy to come up with a version of that, if you like border
adjustments. Economists are not as enthusiastic about border
adjustments because we think that it comes out in the wash in
other ways, but I know that politicians love border
adjustments, so--fine.
So all the advantages you discussed and all the advantages
I have mentioned too, all combine into making just a terrific
idea.
Senator Cardin. Thank you. I will take that. That is 90
percent of what I wanted.
Governor Engler, do you want to comment on that?
Governor Engler. Well, I will put my old manufacturer's hat
back on. We used to look at this with some envy because, what a
neat thing it would be at the border to be able to put the tax
on everything coming in and take it off on everything going
out. That had some real attractiveness.
It is a heavy lift for a Congress which cannot even make
things like the R&D tax credit permanent to be able to get
there.
Senator Cardin. Let me just challenge you. It seems like
small things are heavy lifts. Maybe big things are going to be
lighter lifts. Be visionary.
Governor Engler. Well, all I know is that the conversations
about the flat tax, your legislation on the progressive
consumption tax that you have introduced--I am kind of tax-
wonky. I like to talk about all these kinds of things. But I
also, with respect to our chair and ranking member, in some of
the work they have done, recognize that probably we have a room
full of possibilities on certain things and we should put them
on a study committee, maybe the sixth committee that gets
formed, to take a look at the long-term structure.
It is a big change, and we are willing to talk about
anything that makes the U.S. more competitive.
Senator Cardin. I appreciate it. We study things to death,
and I know that we do not have consensus yet. So there is going
to be a need for us to bring about greater consensus.
Everything we are talking about has been tried in other
countries, so nothing is new here----
Governor Engler. That is right.
Senator Cardin [continuing]. So we know what will happen,
and the United States will be much more competitive than we are
today. At one time, we did not have to worry about taxes on
competition. Today we do.
So I thank you. Again, I thank the panel for their
discussions.
Thank you, Mr. Chairman.
Senator Isakson [presiding]. Senator Heller?
Senator Heller. Mr. Chairman, thank you. I think you are
the chair of all my committees now. I look forward to working
with you on Veterans' Affairs.
I want to thank Senator Hatch and Senator Wyden. I am
looking forward to working with you. It is great to be on this
committee. And I am really pleased that the first issue that we
discuss is economic growth and creating jobs. I think for most
of the American people, that is where they come down.
I want to say hello to the Governor. It is good to see you
again. And to everybody on the panel, thank you for being here
and for your words and efforts.
The economic recession affected everyone, but in my home
State of Nevada, it was especially harmful. Nevada experienced
the Nation's highest unemployment rate, nearly 14 percent at
its peak. I would argue that real unemployment in Nevada today
is north of 9 percent, and we have the highest foreclosure rate
in the Nation and the highest personal bankruptcy rate. So it
has been a rough few years.
Though our situation has improved, Nevada's unemployment
rate, unfortunately, remains one of the highest in the Nation.
Recovery has been slow. Thousands of Nevada families are still
waiting for true economic recovery that they can see and, in
fact, feel in their pocketbooks. Americans have been told the
economy is getting better, but they are not feeling the
effects, especially in my home State. And though the national
unemployment rate has gone down, millions of Americans have
dropped out of the workforce entirely.
The fact is that this administration's policies have put up
barriers to economic growth. We already have a burdensome tax
code that has only become more complicated under Obamacare.
Businesses continue to face mountains of new Federal rules and
regulations. And we have a health care law that makes it harder
to see your doctor, makes it more difficult for employers to
grow, and raises taxes on hardworking American taxpayers.
To truly grow our economy, there are key factors that
deserve the attention of Congress. Americans deserve a cleaner,
simpler tax code; trade policies that assure America's
competitiveness in the growing international marketplace; and
health care policies that actually focus on improving access,
affordability, and quality. As a member of this committee, I
look forward to working with the chairman and the ranking
member to move these issues forward.
And with that, I have a few questions today. There is an
article today that came out in Politico. As you know, we have
not had tax reform in this country since 1986, and I think
there are pretty good reasons why that occurs.
I will just read two paragraphs out of this morning's
article. It says, ``Lawmakers and the White House are
overstating the benefits of a business code rewrite. Some of
the economists are predicting that any likely overhaul will do
little for growth and may even hurt the economy. That is
because, for all the complaints about special interest
loopholes and sky-high rates, the biggest corporate tax breaks
are generally believed by economists to promote growth.''
So I think that voice is going to get louder and louder and
louder as we work together as a committee to improve the
corporate tax code that we have. But I guess my question to
you, Governor, is, is there any truth behind these comments,
and what are the risks that you see moving forward on corporate
tax reform?
Governor Engler. Well, one of the risks of not moving
forward is that we continue to retain a patchwork, temporary
tax code that we have to come back to every few months, it
seems, to try to extend. It allows nobody to plan in advance,
nobody to rely on it, whether you are, frankly, an individual
or business taxpayer.
As far as the unnamed economists who say that certain
provisions have benefits, of course. Many of those benefits
were put in to offset some of the negative effects of the code
we have. That was the whole goal.
Since 1986, we have seen changes made, but what has really
changed since 1986 is what the rest of the world has done in
reaction to our code. And so then we react to that, and some of
those provisions are designed exactly to try to make us more
competitive against some other region of the world or some
other practice out there.
I think that a simpler, flatter, fairer tax--I mean, I
certainly enjoyed the conversation with Senator Cardin, but it
is a long way to get where he would like to go. But we can
clearly see a simpler tax code in our future if we act now on
some of the things that I think are doable in this committee.
Senator Heller. We have talked a little bit about
education, and I know BRT has a solid position, so I would like
to get your view on this. But in Nevada, about 30 percent of
the high school graduates go on to a post-high school
education. Unfortunately, by 2020, 65 percent of the jobs in
this country will need post-high school education.
How do you feel about the President's proposal on Tuesday
for free community colleges?
Governor Engler. Well, the free community colleges are
spending a lot of their time doing what the high school did not
do in the first place. So I am frustrated by that proposal a
little bit, and I am certainly frustrated by what is offered as
a way of trying to pay for it.
Nobody has seen the details on what he is actually,
specifically proposing. But I would say that--take Clark
County, NV. We really need to have for each student, kind of,
their individual plan. If it is going to college, they need to
get there and be able to do college work when they arrive. If
they are not going to go directly to college, maybe they will
go into the gaming industry, maybe into the resource industry.
Then what kind of jobs are those and what skills are needed in
those jobs? Can we not start earlier than post-12th grade? Let
us start at the 10th grade and help people.
What we are seeing in the real world is that people who get
skilled will often then also gain confidence with that and
conclude that they want even more education, then go back to
school to gain that. And oftentimes they are able to pay for
it, because they are now employed. It is a much more virtuous
circle.
The other thing is to end the dropouts, because, if you
drop out, you are really dropping out of the whole economy.
Senator Heller. Governor, thank you. My time has run out,
Mr. Chairman.
Senator Isakson. Which triggers my time. And I am going to
be very brief, but I wanted to note that each one of the three
of you has raised one of the $64,000 questions of tax reform.
So I want to assign you with a little bit of a homework
assignment to get us back an answer to the questions that you
raised.
Governor, I appreciate all the many great things you have
done for the country and for your State, and I appreciate your
being here. I am a big fan of the BRT. And somewhere at the
BRT, in the bowels of the BRT, there is a list of sacred cows
that cannot be used as offsets for lowering the tax rate from
35 percent to 25 percent. I am sure it must be there.
Can you tell us, if we go through a comprehensive report of
C corps using tax treatments to offset the reduction in
revenues from the percentage rate, is there a sacred cow list
or could we possibly come up with a consensus for this
committee and the BRT as to what could be used to drive the
rates down?
Governor Engler. Yes, there is absolutely a list that I
think works. There is a reluctance--Chairman Camp, maybe
against somebody's advice, certainly ours, floated a little
excise tax. He brought in a new tax on banks. The next thing we
find out is, now it is a proposal to pay for new spending. So
there is a reluctance sometimes to put all the cards face up on
the table until it is that magic moment when we are ready to do
a deal.
But we have done the math. There is no question that, in a
fiscally responsible way, we can put together a plan that
works. We are still certainly looking hard at the pass-through
entities and how that works there and how much can be done, and
we are optimistic some great progress can be made on all types
of business entities. So we are eager to work with you.
Senator Isakson. I would love to see that list. Thank you
very much.
Dr. Wolfers, you made a statement--and I could not find it
in your printed testimony, although I am sure it is there--but
you made a statement in your verbal testimony that you
recommended triggers for automatic stabilizers, those things
that would lower tax rates when times were tough and raise tax
rates when times were good, and with spending correspondingly
going up and down.
Can you supply us with what those triggers are, what
triggers you would use, as a professor of economics and one
knowledgeable in that area, and where you would have those
triggers come in and how you would have them come in?
Dr. Wolfers. If you wanted a very simple formula right now,
whenever the unemployment rate is above 7.5 percent, trigger on
a bunch of stuff, and whenever it is back below 7.5, trigger it
off.
Senator Isakson. So you would use the unemployment rate
versus some other index.
Dr. Wolfers. It strikes me as the single best index of the
business cycle.
Senator Isakson. I have a second question on that. There
are many types of taxes, as we all know: payroll tax, income
tax, capital gains tax, et cetera. What taxes would you trigger
with that stabilization mode, all taxes or the income tax, the
payroll tax?
Dr. Wolfers. I would need to think harder about the
question. For sure, income taxes. Beyond that, I would need to
think harder.
Senator Isakson. It would be helpful to know, if you would
think about that, because it is an interesting concept, and I
appreciate it. And it does beg the $64,000 question; that is,
tax policy drives economic outlook, and if you have automatic
stabilizers, index-based on the health of the economy in terms
of raising or lowering taxes, it tells us that anytime we raise
or lower taxes, there are economic consequences, so we had
better do it correctly.
Which brings me to Dr. Hall. You are an advocate of the
flat tax, if I am not mistaken. And in one of the answers that
you gave, you talked about the tax code we have right now. The
name you give an income determines the tax rate it has: 28
percent on the proposed capital gains, or 20 percent or 23.4,
whatever it might be, taking a carried interest assignment at a
capital gains-type rate, or a dividend rate rather than the
earned income rate.
That was a testimony for a flat tax or a fair tax for
certain; is that correct?
Dr. Hall. Right.
Senator Isakson. Let me ask you this question then, if I am
correct in my assumption. The biggest stumbling block to
simplicity of the tax code is transition from the code we are
in to the code we would have that is simpler. For example, you
have longitudinal tax treatments: depreciation, investment tax
credits, low- and
moderate-income housing tax credits, and I could go on and on.
Have you ever designed a model for if you one day woke up
and there was all of a sudden an 18-percent flat tax, just
pulling something out of the air, what you would grandfather in
from the previous tax code where people had invested their
money and what you would not?
Dr. Hall. So a while ago, 20 years ago, I went through that
whole topic in detail. Depreciation, in the Hall-Rabushka
proposal, there is first-year write-off. So that is forward-
looking, and that is easy.
The question then is how you treat the hangover of the
previously promised depreciation deductions. It would cost a
lot of money, but we could just honor them. That is probably
what I would recommend.
There are some other issues having to do with personal
saving vehicles, but those can all be worked out and have been
worked out. So it does get into some detail that I cannot go
into this morning, but certainly it is something I have thought
about, and it is doable.
But you are right. You have to do it right, and there is a
fairly long list of fair, correct transition rules that would
have to be applied, but it is doable.
Senator Isakson. I appreciate your answer, and I would
love, if you did that paper a number of years ago, if you would
give it to me so I can read it. I like to learn, and I get
bored at night watching TV. So I would love to read it and see
what happens.
But the reason I raise the point is, when Reagan reformed
taxes in 1986, the one thing we made a mistake on was, we took
passive loss and passive gain and changed the treatment of
those things midstream in investments, which took a large
segment of the economy, primarily commercial and investment
real estate--it caused the savings and loan collapse, to be
honest with you.
So you have to be very careful when you change the
treatment of taxation mid-investment, when it is already made.
You have to make sure you are not creating the unintended
consequence of causing a recession. That is the reason I asked
that question.
With that said, I am going to turn over everything to the
ranking member, Senator Wyden.
Senator Wyden. Thank you, Senator Isakson. I share a lot of
your concerns as well, and I look forward to working with you.
Let me, if I might, go back, Governor Engler, to what you
and Senator Thune talked about, because you have been kind to
take the time over the years to talk with me about it. I think
you know how strongly I feel about bipartisan, comprehensive
tax reform.
I think a big part of this debate is really going to come
down to Pete's Auto Supply and Fran's Hardware Store, because,
if they walk away thinking that all the discussion in
Washington, DC is about the big guys--the big guys are going to
get the breaks, the multinationals are going to get the breaks,
and Pete and Fran are not going to get anything--when they
start looking at the numbers, they may think they are going to
have to pick up some of the costs in order to have the break
for the big guys. I think that is a show-stopper, both
substantively and politically. And you, to your credit, have
indicated that you are interested in talking about this.
I understand that there is some discussion going on in the
business community in an effort to try to think this through,
and you have to find a pay-for and the like. But given the fact
that these small businesses, well over 80 percent, pay taxes as
individuals rather than businesses, I understand there is some
discussion about the concept of perhaps coming up with a
general small business credit, something that would allow the
small business people on day 1 to see that there was an effort
to try to ensure that, as we do tax reform, we want everybody
in America to get ahead and we are recognizing those small
businesses.
I know that this is not the time to talk in specifics or
how everything is going to be paid for, but what is your sense
of that discussion and where it might go?
Governor Engler. Well, I think that, first of all, it is an
unavoidable discussion. It has to be part of the whole
conversation. And I think as long as we are working with the
constraint of what is I think described generally as fiscally
responsible tax reform, that sort of means that if you are
going to try to bring rates down, which costs revenue, as was
just mentioned by Senator Isakson, what then offsets that
revenue loss?
I personally would think that there is a fairly dynamic
effect that is there. There is certainly some effect if you cut
tax rates. I happen to think it is a beneficial effect and that
it will be seen in higher revenues. But I understand the
scoring rules that we use.
So if we say, what is fiscally responsible, how do we want
to do it? Those that are corporate ratepayers, what do they
pay? Those that are non-corporate entities that pay at the
individual rate--nobody should subsidize the other. I mean,
they should not be subsidizing corporate relief, and I would
argue vice versa, that corporate should not be subsidizing
their relief.
So how do you get them a better tax code? How do you get
that corporate taxpayer a better tax code? I think we have
figured out kind of where we would like to be on the corporate
side. The other is a little more complex because--you just
astutely, in your question, pointed out the diversity.
There are many, many of them clustered at the bottom, and
then they kind of go up, and some are pretty big. I think some
pass-through entities, more than 200, are bigger than $2
billion in revenue. So those are big guys up there.
So as we look at this, your question about a small business
credit or something, all of those ideas are intriguing. And we
are very open to working with the committee to see what could
be done, because we certainly always speak of comprehensive tax
reform, and, if it is comprehensive, that means that they are
not left out.
Senator Wyden. Let me ask one other quick question, if I
might, and then I am going to recognize Senator Carper.
One of the most troubling aspects of where this country is
economically is the huge gap between economic recovery in urban
areas and economic recovery in rural areas. The National
Association of Counties recently released a report noting that,
of the 3,000 rural counties, only 65 are in economic recovery.
No county in my State has seen a full economic recovery.
Twenty-three rural counties in my State have lagged well behind
the State's more urban and populous counties.
Clearly, in my State--and I just came from town hall
meetings in rural Oregon--I am not going to accept turning
those rural communities into sacrifice zones where we just
write them off and say, that's the way it goes and ``the end.''
I would just like to go down the row, before I go to
Senator Carper. Maybe if you would like to start, Dr. Wolfers.
But again, if you have an idea, just one, because time is
short, to try to deal with this huge gap between recovery in
urban areas and recovery in rural areas, I would be interested
in an idea from each of you.
Dr. Wolfers?
Dr. Wolfers. I am going to try the professor's usual
gambit, which is to reject the question rather than answer it.
Senator Wyden. Fair enough.
Dr. Wolfers. There is enormous variation in unemployment
across the country. There is variation between blacks and
whites, between men and women, between States, and between
urban and rural areas.
I think we should weight each of these as real people with
dignity, and that does not mean favoring one group over the
other. I think the important part of your question is,
implicitly, the claim that the economic recovery has a lot
further to run.
On that I completely agree, and we can push down to a 4-
point-something-percent unemployment rate rather than a 5-
point-something unemployment rate. It is not going to do
anything particularly for rural versus urban differences, but
it is going to help both groups.
Senator Wyden. Dr. Hall?
Dr. Hall. The trend toward urbanization has been going on
throughout the history of the U.S. And exactly what comforts
should be given to the people who are still in rural areas is
an open question. But it is very important to understand that,
especially certain big urban areas that are at the other
extreme--for example, in the urban area that I live in, the
unemployment rate today is 4 percent. Well, it is a huge magnet
for people from rural areas, and rural populations are
declining as urban populations rise.
We have a progressive tax system which helps a lot in that
respect, and we have a social safety net. I am not sure that it
would be appropriate to go beyond that to have something
specifically aimed at rural areas. Certainly Europe--one of the
huge problems in Europe is very consistent attempts to prevent
people from migrating to big cities, and that has been one of
the many drags on the growth of productivity in Europe.
So again, I am against the Europeanization of the U.S., and
we would not want to move in that direction. But I do want to
say we have a pretty robust social safety net. The numbers on
that are quite impressive at the bottom end of the income
distribution, how much help we do give, and, in particular,
excuse people in that area completely from paying taxes.
So I think we do a reasonable job, but I still recognize--
--
Senator Wyden. I want to go to Governor Carper. I can tell
you, in rural Oregon, people are first and foremost interested
in family-wage jobs. They want those opportunities in trade.
They want an improved infrastructure. They want a balanced
approach on natural resources. Nobody this weekend said the
answer was just safety net programs.
Governor Engler, is there anything else you want to add?
Then I want to go to Governor Carper.
Governor Engler. Really quickly, as somebody who grew up in
Beal City, MI, kind of one of those communities, I do think
that technology has a huge role to play in bridging that gap,
and I really feel that if everybody had high-speed access, we
could take the work to where the people are today in many
cases, and I think we should be doubling down on those
strategies.
The one thing, though, that is simply not negotiable is,
even in rural schools today, with technology you can have the
very best education that is available in the world, but you
have to get that technology. You have to insist upon it, and
you have to build it.
If I was leading one of those communities today, I would
really put my emphasis on the education of the workforce. The
skills are delineators in terms of opportunity and incomes
going forward, and it is just going to get more acute.
Senator Wyden. Well said. Governor Carper?
Senator Carper. Thanks very much. He knows how to warm me
up when he calls me ``Governor.'' This is what I tell people
around the country, when they ask, ``What do you do?'' I say,
``I am a recovering Governor,'' and I am.
Governor Engler. Please do not recover.
Senator Carper. I will never fully recover. Johnny and I
used to work together when we were Governors at the same time.
We worked together on a lot of stuff, like welfare reform. We
had married sort of later in life to these wonderful women and
had young families. And so we had our kids at the National
Governors Association and spent a lot of time together.
And we share a passion for a particular baseball team that
has now traded away two of the best pitchers in baseball, Doug
Fister and Max Scherzer, to the Washington Nationals. The
Nationals should be pretty good this year. But we will see how
good our Tigers are. I am hopeful, though, that we still have
plenty of punch.
Having said all of that, we also are always interested in
how to foster greater economic growth. And whether you are
Governors or Senators or Presidents, we do not create jobs, we
help create that nurturing environment. I was pleased with the
President's speech, very pleased actually, and he focused on
some things that I think could help create an even more
nurturing environment for job creation and job preservation.
One of those is trade. Trade policy and trade agreements
actually make it easier for us to sell our goods and products
into foreign markets. He talked a bit about tax reform, and I
have had a long-time interest in broadening the base, lowering
the rates, and moving toward a territorial tax system on the
corporate side.
He spent some time on cyber-security. We have a lot of
folks trying to steal our intellectual seed corn, from places
like DuPont Company and AstraZeneca in my State and from
universities, whether it is Michigan, Ohio State, Delaware, you
name it. And we are, I think, doing a better job, but it is a
big job.
He spoke about immigration reform. Someone mentioned it. I
do not know who it was who mentioned it here today. Immigration
reform actually will, over the long term, reduce budget
deficits and foster greater economic growth.
And the last one is--this is where I am going--
transportation, and investments in transportation and
infrastructure.
Governor Engler, before his current job and after being
Governor, one of the things that he did is he led the National
Association of Manufacturers. They put out a work study done by
some very smart people looking at what kind of GDP growth we
get if we fully fund the transportation system--a
transportation plan for the next 6 years.
And it said we would get a fair amount of GDP growth and
economic boost from putting 600,000 or 700,000 people to work
building roads, highways, and bridges across the country, a lot
of whom are long-term unemployed. But the real growth, the real
growth in terms of GDP from a fully funded transportation
program comes in a just-in-time economy, to be able to move
goods and products across the country, out of the country, and
into foreign markets, and that is where we get the real GDP
growth.
The big question around here has always been, how do you
pay for this stuff? In the last 5 years, we have seen 12 times
that we have kicked the can down the road and really not done
much of anything. We end up borrowing money from the general
fund, which is broke. So we borrow money from China and other
places around the world. I do not think that is a very smart
policy--reduced pension smoothing and stuff that has nothing to
do with transportation.
One of you, I think it was you, Dr. Hall, may have
mentioned something like user fees. I know in Michigan, the
Governor up there--is Governor Snyder still your Governor? I
know he tried to double the gas tax from $0.19 to $0.39. I
think it passed the Senate up there last year but not the
House, and now they are going to go to a referendum and see if
they can pass it that way.
Lastly, I chaired, until 10 days ago, the Senate
Subcommittee on Transportation Infrastructure. I serve on
Environment and Public Works, and I have a great interest in
that and in funding it through this committee.
Here is my question. Our ranking member, your former
chairman, he is from Oregon. They have been working for 10
years on something called a road user charge. It is another way
of saying vehicle miles traveled.
In Delaware, if you go through my State on I-95, you pay a
toll. We have a highway speed E-ZPass so people can move
through rather expeditiously. If you go south in my State from
I-95 down to the beaches, Rehoboth and all those places you go
through, it is a user fee on State Route 1, in the form of a
toll. So we have a combination of tolls. We have road user
charges. Dr. Hall, I think you were talking about congestion
funding and charging, and I think that makes a whole lot of
sense.
Two questions. One, given this advice, we are going to run
out of money in the transportation trust fund yet again, for
the 12th time in 5 years. We run out of money at the end of
May. What advice would you have for us? My sense is it needs to
be a combination of things, but we have not raised the gas tax
or diesel tax for 21 years.
A $0.19 diesel gas tax today is worth a dime. A $0.24
diesel tax today is worth about $0.15. And we all know what is
going on in the price of gas and diesel; you feel it across the
country.
What are your recommendations for each of us when we take
up these issues in about a month or so? What should we do?
Do you want to lead it off, Governor Engler?
Governor Engler. I am happy to start. I do think that, as
part of a comprehensive business tax reform proposal, there are
some opportunities to do some things--I do not think they are
permanent fixes, but I think they are multiple-year fixes in
the transportation fund. They would not be as good, though, as
if you were to address overall revenues from the fund from
dedicated user fee sources.
But I do think that there are some creative ideas. Chairman
Camp got at some of them, and the President sort of endorsed
that. So I look at that as a possibility.
There have been also in the press comments that just do not
add up, where they say, let us just repatriate one time and use
that money from a scoring standpoint. That does not work.
But there is a way to do it, and, as I said, Chairman Camp
got at some of that in the proposals made in the House in the
last Congress.
There have been also--and I will not discuss them at
length, because I do not want to use up my colleagues' time
here--but some of the other proposals about how you might even
change how the highway trust fund is administered, at what
level--you are completely right that we could make a
contribution that could be very helpful, buy some time, but we
really need to step it up dramatically from where we are. The
needs that are unmet are pretty staggering.
Senator Carper. Thank you.
Dr. Hall, please.
Dr. Hall. I am not equipped to deal with these day-to-day
problems, especially from 2,600 miles away.
Senator Carper. Where do you live?
Dr. Hall. In California.
Senator Carper. Where?
Dr. Hall. In Menlo Park.
Senator Carper. Our road was right where the--very close to
the Stanford Golf Course. The road came right by the Stanford
Golf Course, right by my house. I went back there a couple of
years ago. I was a naval flight officer out there. They had a
sign in the front of the house that said, ``Tom Carper may have
slept here.'' [Laughter.]
Dr. Hall. But taking a somewhat longer perspective on
infrastructure in general, especially roads, the roads should
make a profit for the owners of the roads. So if the owners
are, in some cases, the Federal Government, then the government
ought to make a profit, because they sit on a lot of land that
is worth a lot, and, if they are not making a profit, they are
not making good use of the land.
So that shows how different infrastructure policy is today
from the way it should be, because we know we are pouring a lot
of money into it.
Now, on the gas tax, there is a case that we should have a
gas tax as part of a carbon tax, since gasoline has a lot of
carbon. Otherwise, as has been pointed out earlier, the gas tax
is an extremely inefficient and now ineffective way to deal
with recovering fees. We need to recover fees from a
transponder, E-ZPass, or whatever it is called in different
parts of the country.
Senator Carper. We do a lot of that in Delaware.
Dr. Hall. Yes. Yes. Exactly, and that is great. That is the
way we should do it.
Senator Carper. We also have a gas tax.
Dr. Hall. Sure. We should have a gas tax because of the
carbon content. But that does not mean we should keep raising
it all the time.
Senator Carper. We have not raised it in 21 years.
Dr. Hall. Then it is probably too low. But in any case,
intelligent policy, I think, should be very focused on getting
the right level of real-time pricing of the users of
infrastructure.
And air travel--the same thing. It is scandalous that,
since most people who fly are at least middle-income, it is
scandalous that we subsidize airports through infrastructure
funds. So we need to get that straightened out too. There
should not be any Federal subsidy to air travel.
Senator Carper. Thank you. Dr. Wolfers?
Dr. Wolfers. I would say three things.
Senator Carper. Are you from Australia?
Dr. Wolfers. I am, mate.
Senator Carper. Are you still an Australian citizen?
Dr. Wolfers. I am a dual citizen.
So first, raise the gas tax, and I think you will find----
Senator Carper. Would you say that again?
Dr. Wolfers. Raise the gas tax.
Senator Carper. I thought that is what you said.
Dr. Wolfers. And I think you could ask almost any economist
in the United States and they would say exactly the same thing,
and I can think of two reasons. One, at the moment, we are
effectively subsidizing the dirtiest forms of transport rather
than the cleaner ones, with enormous environmental
consequences. Professor Hall is right, there are even better
things we could do. But in the world we live in, this is the
simplest instrument we could use.
Second, I was struck--I actually like to run to work. Well,
when I run to work, I have to join a gym just to shower. On the
days I drive to work, I can use tax-exempt money to pay for a
parking spot. So we are actually subsidizing one form of
transportation rather than another, and I would argue probably
not the right form, although my fellow Michiganders might
disagree.
The second thing is how to get more bang for your buck from
the transportation fund. One way is to think about spending
more when stuff is cheapest. So we have a lot of construction
workers out of work right now, and we have low interest rates.
Now is a great time to spend. If the boom keeps going, 5 years
from now will probably be a terrible time to spend. We can get
more bang for our buck by countercyclical spending.
Third, you began by saying that you had asked some
economists what the economic growth payoff for better
transportation policy would be. I think that is actually the
wrong question.
The real payoff from good transportation policy is moms and
dads who get home to see their kids 15 minutes earlier every
day. That is not economic growth, but it is an improvement in
living standards, and one we should take seriously.
Senator Carper. That is a good point. Texas A&M does a
study every year, and they figure out how much time we just sit
in traffic--just sit in traffic, not move 5 miles, just sit
there. It is about 2 full days per year. So that is a point
well-taken.
Mr. Chairman, thanks. You are very generous with your time.
Senator Wyden. Governor Carper has been our leader on
infrastructure.
Thank you all, and, on behalf of Chairman Hatch, we are
adjourned at this time.
[Whereupon, at 12:24 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of John Engler, President, Business Roundtable
Good morning, Chairman Hatch, Ranking Member Wyden and members of
the committee.
My name is John Engler and I serve as President of Business
Roundtable, an association of CEOs of major U.S. companies operating in
every sector of the economy.
Business Roundtable CEO members lead companies with $7.2 trillion
in annual revenues and nearly 16 million employees. Business Roundtable
member companies comprise more than a quarter of the total market
capitalization of U.S. stock markets and invest $190 billion annually
in research and development (R&D)--equal to 70 percent of U.S. private
R&D spending. Our companies pay more than $230 billion in dividends to
shareholders and generate more than $470 billion in sales for small and
medium-sized businesses annually. Business Roundtable companies also
give more than $3 billion a year in charitable contributions.
Thank you for the opportunity to appear before you today to address
the policies necessary for creating jobs and sustaining a healthy
economy. Business Roundtable members are committed to promoting
policies that will help America reach its full potential. Indeed, just
this week we released, Achieving America's Full Potential: More Work,
Greater Investment, Unlimited Opportunity, which outlines the
priorities we believe are necessary to drive economic and job growth.
This report drew on extensive input from our more than 200 CEO members,
and its policy recommendations include many areas that fall within this
committee's jurisdiction.
To sustain strong and consistent U.S. economic performance, we
believe that Congress and the Administration must work together to
adopt pro-growth policies. As communicated in Achieving America's Full
Potential, these policies include maintaining fiscal stability,
enacting pro-growth tax reform, expanding U.S. trade, investing in
physical and digital infrastructure, fixing our broken immigration
system and adopting a smarter approach to regulation.
Fiscal stability means completing budgets on time and avoiding
showdowns and shutdowns that threaten the economy. We ask that you keep
in mind that, despite near-term projections of a declining federal
budget deficit, deficits are projected to begin expanding further
within the next 10 years, placing the United States on an unsustainable
fiscal path. To avoid this fate, America needs long-term fiscal
stability that creates the right conditions for sustained business
investment, economic and wage growth and job creation.
With more than one in five American jobs supported by trade and 95
percent of the world's consumers living outside of the United States,
expanding U.S. trade opportunities is critical to supporting U.S.
growth, well-paying American jobs and U.S. business investment.
Business tax reform that results in a modern tax system with
competitive rates and competitive international tax rules may be the
single most effective means of accelerating business investment,
boosting job creation and wages, and providing greater opportunity for
America's working families.
On this topic, Mr. Chairman and Ranking Member Wyden, we thank you
for recently launching five working groups to examine areas of the tax
code. This initiative represents the kind of serious, bipartisan work
Congress will have to undertake to enact tax reform.
Immigration reform will help keep America secure and is essential
for a healthier economy--accelerating growth, encouraging hiring and
creating American jobs.
America relies on digital and physical infrastructure that
facilitates the movement of people, information, physical goods and
financial assets that drives economic activity. Congress and the
Administration should come together to enact policies that strengthen
these vital national assets.
Business Roundtable supports smart regulatory policies that will
ensure American businesses retain the capacity to operate and innovate,
while promoting the health and welfare of employees, customers and
communities.
Clearly, there is a lot of work to be done to get the right pro-
growth policies fully developed and enacted. The members of the
Roundtable look forward to working closely with you to achieve these
important goals.
expanded trade
I'd like to first discuss the importance of international trade and
investment policies to promoting U.S. economic growth and American
jobs.
A. Trade and U.S. Trade Agreements Help Support U.S. Growth and Jobs
More than 95 percent of the world's population and 80 percent of
its purchasing power currently lies outside the United States. U.S.
trade policy has traditionally recognized the growing importance of
international markets and, as a result, U.S. Administrations--both
Democratic and Republican--have long pursued market-opening trade
agreements to create opportunities for U.S. companies, farmers and
workers in the global marketplace.
These bipartisan efforts have been successful. To highlight just a
few examples:
Today, more than one in five American jobs are supported by
international trade; \1\
---------------------------------------------------------------------------
\1\ Baughman and Francois, ``Trade and American Jobs, The Impact of
Trade on U.S. and State-Level Employment: 2014 Update'' (2014),
available at:
http://businessroundtable.org/resources/trade-and-american-jobs-
2014-update.
U.S. job growth from 2004-2013 was three times higher for trade-
related jobs compared to average job growth; \2\
---------------------------------------------------------------------------
\2\ Ibid.
Export-related jobs pay 13 to 18 percent more than the average U.S.
wage; \3\
---------------------------------------------------------------------------
\3\ Riker, ``Do Jobs in Export Industries Still Pay More? And
Why?'' (2010), available at:
http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/
webcontent/tg_ian_
003208.pdf.
More than 300,000 U.S. companies are exporters. Of this total,
297,995, or 98 percent, are small and medium-sized enterprises
(SMEs) with fewer than 500 workers; \4\
---------------------------------------------------------------------------
\4\ Census, ``A Profile of U.S. Importing and Exporting Companies,
2011-2012'' (2012), available at: http://www.census.gov/foreign-trade/
Press-Release/edb/2012/index.html.
In 2013, U.S. free trade agreement (FTA) partner countries
purchased 12 times more goods per capita from the United States
than non-FTA countries did; \5\ and
---------------------------------------------------------------------------
\5\ Business Roundtable, ``How the U.S. Economy Benefits from
International Trade & Investment'' (2015), available at:
http://tradepartnership.com/wp-content/uploads/2015/01/
US_State_Study.pdf.
Nearly half of all U.S. manufactured goods exported go to the 20
countries that have FTAs with the United States.\6\
---------------------------------------------------------------------------
\6\ Derived from U.S. Census Bureau data.
Business Roundtable members believe strongly in the benefits that
trade and high-standard trade agreements bring to the United States.
That is why our 2015 policy agenda, Achieving America's Full Potential:
More Work, Greater Investment, Unlimited Opportunity, includes two key
---------------------------------------------------------------------------
recommendations relating to trade.
First, we recommend that Congress and the Administration work
together to enact updated Trade Promotion Authority (TPA) as
soon as possible.
Second, we recommend that the Administration, in consultation with
Congress, aggressively pursue and secure high-quality and fair
agreements, particularly the Trans-Pacific Partnership (TPP),
Transatlantic Trade and Investment Partnership (TTIP), and
Trade in Services Agreement (TISA).
Business Roundtable's 2015 trade priorities also include support
for:
A multiyear reauthorization of the U.S. Export-Import Bank as soon
as possible before its nine-month extension expires at the end
of June;
Negotiations on an expanded World Trade Organization (WTO)
Information Technology Agreement;
Implementation of the WTO Trade Facilitation Agreement;
U.S. Bilateral Investment Treaty negotiations with China and India;
and
Accession of China to the WTO Government Procurement Agreement.
B. TPA is a Critical Tool for Negotiating and Implementing High-
Standard Trade Agreements that Support U.S. Growth and Jobs
Trade Promotion Authority is a critical tool for negotiating and
implementing high-standard trade agreements that create strong,
enforceable trade rules and support U.S. growth and jobs. In fact, all
U.S. FTAs since 1974 (except for the U.S.-Jordan FTA in 2000), or 14
agreements, were concluded pursuant to TPA. The GATT Tokyo Round and
World Trade Organization Uruguay Round agreements were also concluded
pursuant to TPA. When TPA was not in effect from 1994 to 2002, the
United States fell behind our foreign competitors who continued
negotiating trade and investment agreements that advantaged their
companies, farmers and workers over ours in international markets. We
cannot let that happen again.
TPA creates a constitutional partnership between Congress and the
President. It helps ensure congressional input and oversight of U.S.
trade negotiations and allows the executive branch to negotiate and
conclude strong trade agreements that are in the United States' best
interests and reflect Congressional priorities for trade.
Congress uses TPA to tell the President and his Administration what
the key U.S. negotiating objectives are in trade negotiations.
This strengthens Congress's role in helping to shape their
outcomes and helps U.S. negotiators get the best possible deal.
Congress keeps oversight of trade negotiations through
comprehensive and strong consultation procedures in TPA, which
require the President and U.S. negotiators to keep Congress and
the public informed during all stages of negotiations. This
helps ensure that Congress and the public are consulted in a
transparent way and can provide input on issues in the
negotiations.
TPA also establishes procedures to help Congress consider each
completed trade agreement, decide whether to approve it, and,
if it is approved, implement the agreement in a timely way so
that American companies, farmers and workers can take advantage
of the benefits that U.S. negotiators obtained.
TPA and its negotiating objectives and procedural requirements also
reassure our trading partners that Congress and the
Administration are committed to reaching and implementing
strong trade agreements.
TPA was last enacted in 2002, and it expired in 2007. Since then,
new trade issues and barriers have emerged for American businesses,
workers and farmers in today's global marketplace. For example, state-
owned enterprises that benefit from subsidies and differences in
regulatory treatment are increasingly competing with U.S. companies in
global markets. Foreign countries whose companies are unable to compete
with innovative U.S. companies are using localization policies and
restrictions on cross-border data flows to tilt the playing field in
their favor. Cyber theft and piracy are serious problems in certain
markets. U.S. trade negotiators are doing good work in pushing back
against these types of challenges in an ad hoc way as they arise, but
their hands would be strengthened if they could negotiate and enforce
new rules. By working together to modernize and pass a 21st Century
TPA, Congress and the Administration can give our negotiators the tools
they need to do just that.
To make the already persuasive case for TPA through education and
advocacy, Business Roundtable in 2013 led the creation of the Trade
Benefits America Coalition, a broad-based group of more than 230 U.S.
business and agricultural associations and companies. In the coming
months, the coalition will continue to promote the benefits of trade,
help pass TPA and advance ongoing U.S. trade negotiations.
C. The Administration Should Aggressively Pursue and Secure High-
Quality Results in Trade and Investment Negotiations
As important as TPA is as an exercise of Congress's constitutional
authority over trade, TPA is also a means to an end. It is a critical
tool for Congress and the President to work together to ensure the
negotiation of high-quality trade agreements and ultimately their
consideration and approval by Congress. The United States currently has
one of its most ambitious trade agendas in a long time, including the
TPP, TTIP and TISA.
The TPP is a negotiation with 11 other Asia-Pacific countries.
The TTIP is a negotiation with the 28 members of the European Union
(EU).
The TISA is a negotiation with 50 countries (including the EU
members) that are committed to creating new opportunities for
trade in services.
The TPP and TTIP agreements would cover about 60 percent of world
GDP and 40 percent of world trade.\7\ TISA would cover about 65 percent
of world GDP \8\ and over 70 percent of world services trade.\9\
---------------------------------------------------------------------------
\7\ Derived from United Nations and World Trade Organization data.
\8\ Derived from United Nations data.
\9\ Coalition of Services Industries, ``Why America Needs a New
Trade in Services Agreement,'' (2013) available at: https://
servicescoalition.org/images/TiSA_Background.pdf.
By passing TPA early this year, Congress will help get the
strongest possible outcomes in and conclude the TPP negotiations,
setting the stage for possibly implementing the final agreement in
2015. It will also provide clear guidance to U.S. negotiators in the
TTIP and TISA negotiations to help ensure strong outcomes in them, too.
These are just the types of high-quality trade agreements that are
essential to opening new markets for U.S. companies, farmers and
---------------------------------------------------------------------------
workers and helping them compete with our foreign competitors.
They are also an effective means to ensure that trade and
investment is free and fair. The record of our past trade agreements
demonstrates that FTAs are a force to level the playing field by
developing new rules to deal with new issues and also by improving
existing rules, often raising the standards in other countries. For
example, our most recent FTAs with South Korea, Colombia and Panama
swept away foreign barriers, and they created even stronger rules in
such areas as labor and the environment. Each of these agreements
eliminated the majority of tariffs on U.S. exports as soon as they
entered into force, and many American exporters have benefited from
this new market access. That said, FTAs like these take years to be
completely implemented and fully realize their benefits.
Finally, as the committee and Congress as a whole moves forward on
bipartisan TPA legislation and continues to work with the
Administration on the TPP, TTIP, TISA and other trade agreements,
Business Roundtable hopes you will keep in mind: (1) that we are in a
different global economy than we were 20 years ago; and (2) that the
global economy will move forward with us or without us.
If the United States does not stay engaged in pursuing new trade
agreements that address the new challenges that U.S. companies face in
international markets, we risk falling behind other countries that are
pursuing agreements of their own. We also surrender the opportunity to
be the ones setting the global rules of the road. If we don't take the
initiative ourselves, others will do it for us, but the rules they
negotiate will serve their interests, not ours.
That is why, if the United States wants to achieve its full
potential to have a healthy economy with greater opportunities for all
Americans, Congress and the President need to work quickly to enact
updated TPA and to bring high-quality trade agreements like the TPP,
TTIP and TISA to fruition.
pro-growth tax reform
Next, I'd like to discuss the importance of enacting tax reform
that provides a modernized, competitive and permanent tax system to
boost job creation, wages and long-term economic growth. Business
Roundtable urges Congress and the Administration to move forward in
2015 to enact tax reform.
A. Tax Policy Recommendations to Increase Investment, Jobs, Wages and
Growth
Tax reform is fundamental to ensuring that American workers and
businesses are competitive in global markets. Tax reform should improve
the competitiveness of all businesses, whether taxed as corporations or
taxed directly to business owners under the individual income tax
system.
Business Roundtable's key tax reform recommendations for
corporations include:
Setting the corporate tax rate at a competitive 25 percent; and
Adopting a modern international tax system (a ``territorial-type''
tax system) that ends the double taxation of U.S. corporations'
foreign earnings and aligns the United States with the tax
systems of our major trading partners.
Business Roundtable supports these reforms being undertaken in a
fiscally responsible manner, understanding that domestic reform will
require broad repeal of the so-called ``tax expenditures'' to offset
the revenue loss of the corporate rate reduction. As for the U.S.
international tax system, reform should be accompanied by appropriate
safeguards to protect America's tax base, consistent with the rules of
our major trading partners.
Other important principles for pro-growth tax reform include:
Making the important decisions on the structure of tax reform so as
to maximize its growth effects;
Measuring the impact of tax reform on revenues relative to a
baseline that acknowledges that longstanding tax provisions
extended repeatedly on a short-term basis are in reality a
permanent feature of current law;
Not unfairly targeting or favoring any industry. Rather, tax reform
should recognize that a streamlined tax system stripped of
preferences would better allow the engine of the economy to
operate without the distortions created by the current tax
code; and
Reforming the corporate tax code should not be paid for by tax
increases on individuals or non-corporate businesses. Likewise,
individual and non-corporate reforms should not be paid for
with tax increases on the workers, customers, and shareholders
of corporations.
B. America's Antiquated Corporate Tax System
Reform of the U.S. corporate tax system and its treatment of
international income are of significant importance to the growth of the
U.S. economy. U.S.-headquartered companies with operations both in the
United States and abroad supported 71.2 million jobs in 2011.\10\ These
American companies directly employ 23 million American workers in well-
paying jobs, with an average compensation of $76,500 in 2012.\11\ In
addition, these U.S.-headquartered companies support more than 48
million additional American jobs through their supply chains and
spending by their suppliers and employees. The ability of American
companies to compete in both domestic and foreign markets is essential
to improving economic growth in the United States, adding jobs and
increasing wages and providing for rising American living standards.
---------------------------------------------------------------------------
\10\ PwC, ``Economic Impacts of Globally Engaged U.S. Companies,''
(July 2013) available at: http://businessroundtable.org/sites/default/
files/BRT_Final_Report_Economic_Impacts_of_Glo
bally_Engaged_US_Companies_July_2013.pdf.
\11\ Bureau of Economic Analysis, ``Activities of U.S.
Multinational Enterprises in 2012,'' Survey of Current Business, August
2014.
Corporate tax reform can directly boost wages by increasing
investment in the United States. Increased investment enhances worker
productivity and leads to higher wages. The Joint Committee on Taxation
(JCT), the Congressional Budget Office (CBO) and the U.S. Treasury
Department all recognize that a significant portion of the corporate
income tax is borne by workers in their official distributional
estimates.\12\ A number of academic studies conclude that workers bear
50 percent or more of the burden of the corporate income tax, with one
study by the CBO finding that workers bear slightly more that 70
percent of the corporate tax burden.\13\
---------------------------------------------------------------------------
\12\ See Joint Committee on Taxation, ``Modeling the Distribution
of Taxes on Business Income'' (JCX-14-13), (October 2013);
Congressional Budget Office, ``The Distribution of Household Income and
Federal Taxes, 2008 and 2009'' (July 2012); Julie Anne Cronin et al.
``Distributing the Corporate Income Tax: Revised U.S. Treasury
Methodology,'' Office of Tax Analysis Technical Working Paper (May
2012).
\13\ William C. Randolph, ``International Burdens of the Corporate
Income Tax,'' CBO Working Paper (2006).
The U.S. corporate income tax system today is an outlier relative
to the tax systems of our trading partners at a time when we can least
afford to be out of step with the rest of the world--when capital is
more mobile and the world's economies are more interconnected than at
---------------------------------------------------------------------------
any time in history.
The combined U.S. federal and state statutory corporate tax rate is
now the highest in the Organization for Economic Cooperation and
Development (OECD), 14 percentage points above the average of other
industrialized countries (Figure 1).\14\ A competitive 25 percent
corporate tax rate is an essential element of meaningful corporate tax
reform.
---------------------------------------------------------------------------
\14\ OECD Tax Database, Table II-1, available at: http://
www.oecd.org/tax/tax-policy/tax-database.htm. As noted in the footnote
to Table II-1, Japan lowered its combined rate to 34.6 percent in 2014.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The United States is also the only G-7 country that taxes the
worldwide income of its corporations. Within the 34 countries of the
OECD, 28 countries use territorial systems for the taxation of foreign
earnings, whereby little or no additional home country tax is imposed
on active trade or business profits earned abroad when those earnings
are reinvested at home.\15\ Since 2000, 15 OECD countries have adopted
territorial systems. In 2009, Japan and the United Kingdom reformed
their tax codes to increase the competitiveness of their locally
headquartered multinationals and boosted their economies by adopting
territorial tax systems.\16\ The U.S. worldwide system of taxation
significantly magnifies the damage done by the high U.S. corporate tax,
and significantly impairs American businesses competing in world
markets.
---------------------------------------------------------------------------
\15\ Business Roundtable, ``Comprehensive Tax Reform: The Time is
Now,'' (July 2013).
\16\ PwC, ``Evolution of Territorial Tax Systems in the OECD,''
(April 2013), available at: http://www.techceocouncil.org/
clientuploads/reports/Report%20on%20Territorial%20Tax%20Sy
stems_20130402b.pdf.
Wherever American companies compete abroad, they are now virtually
certain to be competing against foreign companies that have more
favorable tax rules. Within the OECD, 93 percent of the non-U.S.
companies in the Global Fortune 500 are headquartered in countries that
use more favorable territorial tax systems--up from 27 percent in
1995--and all of these countries have a lower home country corporate
tax rate.\17\
---------------------------------------------------------------------------
\17\ Business Roundtable, ``Comprehensive Tax Reform: The Time is
Now,'' (July 2013).
Since the last major reform of the U.S. corporate tax system in
1986, the world's economies have become increasingly integrated. The
importance of cross-border trade and investment has grown
significantly, with worldwide cross-border investment rising seven-
times faster than world output since 1980. At the same time, U.S.
companies account for a smaller share of worldwide cross-border
investment today than in 1980, down nearly 40 percent.\18\
---------------------------------------------------------------------------
\18\ United Nations Conference on Trade and Development database.
Today, the U.S. corporate tax system hinders the ability of U.S.
companies to grow and compete in the world economy with the consequence
of less investment in the United States, a reduced ability to compete
overseas, and a weaker economy with fewer job opportunities and lower
wages for American workers. The ability of American companies to
compete and invest abroad is vital for opening foreign markets to U.S.-
produced goods and expanding the scope of investments in R&D and other
---------------------------------------------------------------------------
activities in the United States.
A thorough modernization of the tax system through tax reform also
has the potential to help provide solutions to address America's
infrastructure needs. Business Roundtable is examining funding
proposals for infrastructure in the context of the deliberations of
permanent tax reform.
C. The Significant Economic Growth Effects from Tax Reform
As Congress undertakes tax reform, critical decisions will be made
that affect the ability of American workers and the companies that
employ them to compete in the global economy. Tax reform should be
designed to increase investment, jobs, wages and growth and take into
account the significant gains that can be achieved through a more
efficient and competitive tax system.
America's business leaders have consistently maintained that tax
reform will boost wages, growth and investment. Accordingly, Business
Roundtable commissioned Rice University Professors Diamond and Zodrow
to independently analyze Chairman Camp's 2014 tax reform proposals.\19\
The Diamond-Zodrow findings were consistent with this long-term view
showing that the Camp plan would:
---------------------------------------------------------------------------
\19\ John W. Diamond and George R. Zodrow, Tax Policy Advisers LLC,
``Dynamic Macroeconomic Estimates of the Effects of Chairman Camp's
2014 Tax Reform Discussion Draft,'' (March 2014).
Boost after-tax wages for American workers by 2.3 percent two years
---------------------------------------------------------------------------
after enactment and by 3.8 percent after 10 years;
Increase U.S. annual GDP by 0.9 percent two years after enactment
and by 2.2 percent after 10 years; and
Expand U.S. annual domestic investment by 1.8 percent two years
after enactment and by 6.5 percent after 10 years.
Business Roundtable fully supports and encourages your vigorous
pursuit of tax reform.
fiscal stability
A key aspect of fiscal stability in the near term is managing the
federal budget in a timely, responsible and predictable manner. Recent
showdowns over the federal budget and national debt have contributed to
spikes in policy uncertainty and dips in consumer confidence.
Major fiscal deadlines are quickly approaching for which immediate
action will be needed to maintain fiscal stability. In the months
ahead, Congress will need to take action to increase the debt ceiling
and promptly address other key fiscal deadlines, including expirations
impacting Medicare health care providers and the Highway Trust Fund.
The U.S. economy and American workers and their families cannot afford
the negative consequences of another debt ceiling showdown or stalled
budget negotiations that threaten jobs, slow investment and halt the
economic recovery.
A. Deficit Reduction Remains a National Imperative
Despite declining deficits in the near term, deficit reduction
remains a national imperative. Except for World War II, the federal
debt of this country has never been larger as a share of income than it
is today. Simply put, the United States is on an unsustainable path of
continuing increases in debt burdens relative to our country's ability
to service that debt.
The Congressional Budget Office's August projections estimated
federal budget deficits of $7.2 trillion through 2024 under its
official baseline. Under an alternative fiscal scenario, comprising a
set of policy assumptions with less fiscal restraint, the cumulative
deficit over this period rises to $9.5 trillion under CBO's
projections.\20\
---------------------------------------------------------------------------
\20\ Congressional Budget Office, ``An Update to the Budget and
Economic Outlook: 2014 to 2024,'' (August 2014).
CBO's long-term budget projections show that under current law the
federal debt will increase from 74 percent of GDP in 2014 to 80 percent
of GDP by 2025--and will reach 100 percent in 2036. Under the
alternative fiscal scenario, deficits grow even more rapidly. These
projections also ignore any harmful impacts of the growing debt on the
economy, including higher interest rates and a contracting economy,
consequences that cannot be ignored and which would result in an even
more rapidly increasing debt burden. CBO concludes that with debt
rising faster than GDP, the United States is on an unsustainable fiscal
---------------------------------------------------------------------------
path.
Rapid increases in America's debt burdens will drive up the cost of
borrowing, as lenders demand a greater risk premium and the government
competes to borrow funds. Higher interest rates mean greater debt
service costs for the federal government and even larger deficits. More
importantly, higher interest rates crowd out productive private
investment in the economy, meaning slower economic growth and lower
wages for American workers.
Policies focused on growth can help reduce these debt burdens and
put the country back on a sustainable path. CBO estimates that adding a
sustained one-tenth of one percent to GDP growth would reduce budget
deficits by over $300 billion over a decade. A sustained increase in
the growth rate of GDP of a full percentage point annually would reduce
the budget deficit by $3.1 trillion over a decade.\21\
---------------------------------------------------------------------------
\21\ Congressional Budget Office, ``The Budget and Economic
Outlook: 2014 to 2024,'' p. 131 (February 2014).
While government policy should do everything possible to encourage
private sector growth, spending restraint is also a necessary component
---------------------------------------------------------------------------
of ensuring that government finances are on a sustainable path.
CBO's budget projections show annual government outlays increase by
$2.3 trillion between 2014 and 2024. Spending on interest, Social
Security and government health care programs account for 85 percent of
this increase. By 2024, two-thirds of total federal spending will be
devoted to interest, Social Security and government health care
programs. Since interest costs are tied directly to the growing debt,
reducing spending will require controlling the explosive growth of
spending on Social Security and government health care programs and
putting them on a sustainable path.
B. Strengthen Medicare and Social Security
Modernizing Medicare and Social Security modernization is a
critical element for ensuring fiscal stability and our country's
prosperity.
To ensure that future generations of American retirees can rely on
the assurance of basic retirement security, changes are needed to
strengthen the Medicare and Social Security programs.\22\ Our proposals
would gradually bring changes into alignment with America's fiscal and
demographic realities while fully protecting current retirees and those
near retirement. Our goal is to preserve the safety net for future
generations.
---------------------------------------------------------------------------
\22\ Business Roundtable, ``Social Security Reform and Medicare
Modernization Proposals'' (January 2013), available at: http://
businessroundtable.org/resources/social-security-reform-and-medicare-
modernization-proposals.
Specifically, Business Roundtable supports gradually increasing the
eligibility age for full benefits, updating the method of computing
cost-of-living adjustments, implementing means testing for higher-
income recipients and expanding competitive models of care within
---------------------------------------------------------------------------
Medicare.
Acting sooner rather than later means the changes can be gradual,
current retirees and those near retirement would be fully protected and
the programs can be strengthened, which preserves the programs for
future generations.
investment in infrastructure
America relies on infrastructure that facilitates the movement of
people, information, physical goods and financial assets that drives
economic activity. Business Roundtable supports prudent public
investments in infrastructure and policies that facilitate increased
private investment.
Despite its importance to virtually every aspect of economic
activity, our public infrastructure is not up to the challenge. A
recent survey of U.S. manufacturing leaders found that 65 percent
believe our nation's infrastructure cannot meet the demands of a
growing economy over the next 10 to 15 years.\23\
---------------------------------------------------------------------------
\23\ Hart Research Associates/McLaughlin & Associates. Online
survey conducted 05/29/13-06/28/13, and one-on-one interviews conducted
in 05/13; as cited in National Association of Manufacturers & Building
America's Future (March 2013). ``Infrastructure: Essential to
Manufacturing Competitiveness'' (2013), available at: http://
www.nam.org/Data-and-Reports/NAM-BAF-Infrastructure-Survey/NAM-BAF-
Infrastructure-Survey.pdf.
U.S. roads and bridges, for example, are in disrepair and suffering
from chronic underinvestment. Of particular concern is the Federal
Highway Trust Fund, the balance of which is expected to turn negative
this year. In the absence of additional funding, rising expenditures
and falling income will drive increasingly large Federal Highway Trust
Fund deficits over the next 10 years. Public investment in the nation's
infrastructure is steadily declining, falling from 3 percent of GDP in
the mid-1960's to just under 1 percent of GDP today. Indeed, between
2003 and 2012, the level of real public investment in infrastructure
decreased by 11 percent.\24\
---------------------------------------------------------------------------
\24\ Jeffrey Werling & Ronald Horst, ``Catching Up: Greater Focus
Needed to Achieve a More Competitive Infrastructure'' (September 2014),
Inforum Report to the National Association of Manufacturers, available
at:
http://www.nam.org/Issues/Infrastructure/Surface-Infrastructure/
Infrastructure-Full-Report-2014.pdf.
That is why Business Roundtable believes Congress and the
Administration should adopt policies that develop and maintain a world-
---------------------------------------------------------------------------
class infrastructure for the United States. That means:
Providing consistent and reliable funding streams to support
infrastructure projects that are key to economic growth and job
creation;
Enacting policies that better enable the private sector to invest
in infrastructure projects that lead to long-term economic
growth; and
Streamlining the federal permitting process for all major
infrastructure projects.
conclusion
Mr. Chairman, thank you again for the opportunity to discuss the
challenges we face--and the solutions we support--to get our economy
firing on all cylinders. Business Roundtable CEOs stand with you as you
begin to take steps to put these policies in place. Like you, we
believe that America's best days are ahead of it and that by acting
today, we can help our nation achieve its full potential.
I am happy to answer any questions you may have.
______
ACHIEVING AMERICA'S FULL POTENTIAL
More Work, Greater Investment, Unlimited Opportunity
January 2015
Business Roundtable SM
More Than Leaders. Leadership.
2015 POLICY PRIORITIES
A Plan to Move America Forward
TO REACH AMERICA'S FULL POTENTIAL AND CREATE GREATER
OPPORTUNITY FOR ALL AMERICANS, THE U.S. ECONOMY NEEDS TO FIRE
ON ALL CYLINDERS. THAT LEVEL OF PERFORMANCE REQUIRES PRO-GROWTH
POLICIES THAT FACILITATE BUSINESS INVESTMENT, WHICH DRIVES
PRODUCTIVITY GAINS, ACCELERATES ECONOMIC GROWTH AND PROMOTES
JOB CREATION.
AMERICA'S BUSINESS LEADERS SUPPORT POLICIES THAT ENSURE THE
UNITED STATES IS THE BEST PLACE IN THE WORLD FOR PRIVATE SECTOR
INVESTMENT, EXPANSION AND HIRING--POLICIES THAT WORK FOR THE
ECONOMY AND THE AMERICAN PEOPLE.
THE CEO MEMBERS OF BUSINESS ROUNDTABLE HAVE IDENTIFIED THE
FOLLOWING PRIORITIES AS THE BEST WAY TO ACHIEVE AMERICA'S FULL
POTENTIAL, AND WE URGE CONGRESS AND THE ADMINISTRATION TO WORK
TOGETHER TO ENACT THEM IN 2015:
FISCAL STABILITY
PRO-GROWTH TAX REFORM
EXPANDED TRADE
IMMIGRATION REFORM
INVESTMENT IN PHYSICAL AND DIGITAL INFRASTRUCTURE
SMART REGULATION
fiscal stability
While America's annual federal deficit has declined in recent years,
the U.S. federal debt as compared to the nation's gross domestic
product (GDP) remains at levels not seen since the end of World War II.
Social Security, Medicare and interest on the debt will account for an
increasing share of federal spending, crowding out other priorities and
squeezing public investment. America needs long-term fiscal stability
solutions that create the right conditions for sustained business
investment, economic growth and job creation.
_______________________________________________________________________
87% $3.11T 2x
Share of American Reduction in the federal Ratio of publicly held
voters who think deficit over a 10-year federal debt to GDP
the current level period attainable with a doubled between 2007 and
of the national P1 percent increase in 2014.
debt is Pstifling GDP growth..
the economy.
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should:
Address the debt limit in a timely manner to allow for required
borrowing and to protect the full faith and credit of the
United States.
Pass annual budgets on time and appropriate funds early enough in
the legislative session to allow for proper planning and avoid
disruptions to government operations.
Constrain federal spending in a manner that reduces long-term
spending growth rather than imposing abrupt and arbitrary
reductions in near-term outlays, regardless of effectiveness or
priority.
Strengthen Medicare and Social Security by gradually increasing the
eligibility age for full benefits, updating the method of
computing cost-of-living adjustments, implementing means
testing for higher-income recipients and expanding competitive
models of care within Medicare.
pro-growth tax reform
With the highest corporate tax rate in the developed world, America's
outdated, anti-competitive business tax system frustrates business
investment and limits both the potential of the U.S. economy and
opportunities for American working families. Business tax reform that
results in a modern tax system with competitive rates and competitive
international tax rules may be the single most effective means of
accelerating business investment, jumpstarting U.S. economic growth and
boosting job creation.
America needs a simplified tax system that is permanent in law,
minimizes the burden of compliance costs on individuals and businesses
and enhances the competitiveness of all our enterprises, regardless of
whether they are global or domestic.
_______________________________________________________________________
39.1% +2.2% 71M
U.S. combined Boost to U.S. GDP after Number of American jobs
corporate tax 10 years if former supported by U.S.
rate, the highest Representative Camp's globally engaged
in the developed plan for comprehensive companies.
world. tax reform were
Penacted..
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should enact pro-growth tax reform
that:
Sets the corporate tax at a competitive 25 percent rate;
- Domestic reform will require broad repeal of many of the so-called
``tax expenditures'' to offset the revenue loss of the
corporate rate reduction.
Adopts a modern international tax system (``territorial-type'' tax
system) that ends the double taxation of U.S. corporations'
foreign earnings and is consistent with the practices of
America's major trading partners;
- Reform of the U.S. international tax system should be accompanied
by appropriate safeguards to protect America's tax base,
consistent with the rules of our major trading partners.
expanded trade
With more than one in five American jobs supported by trade and 95
percent of the world's consumers living outside of the United States,
expanding U.S. trade opportunities is critical to support U.S. growth,
well-paying American jobs and U.S. business investment.
_______________________________________________________________________
1 in 5 3x 46%
More than one in Trade-dependent jobs grew Nearly half of all U.S.
five U.S. jobs-- more than three times goods exports go to the
nearly 40 faster than the rate of 20 countries that have a
million--are tied overall U.S. job growth free trade agreement
to trade. between 2004 and 2013.. with the United States.
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should work together to enact
updated Trade Promotion Authority legislation as soon as
possible.
The Administration should aggressively pursue and secure high-
quality results in trade and investment negotiations, including
the Trans-Pacific Partnership, Transatlantic Trade and
Investment Partnership, Trade in Services Agreement, expanded
World Trade Organization Information Technology Agreement and
U.S. Bilateral Investment Treaty talks with China and India.
Congress and the Administration should enact a multi-year
reauthorization of the U.S. Export-Import Bank to help U.S.
companies compete for sales abroad and support the U.S. jobs
that depend on those sales.
The Administration should continue to implement reforms to outdated
U.S. export controls.
immigration reform
As business leaders representing every sector of the economy, Business
Roundtable members understand the importance of fixing America's broken
immigration system. Immigration reform, done right, will help keep
America secure and is essential for a healthier economy--accelerating
growth, encouraging hiring and creating American jobs.
_______________________________________________________________________
$1.2T +4.8% 40%
Reduction in the Boost to U.S. GDP over 20 Percentage of Fortune 500
federal deficit years from enacting companies that were
over 20 years immigration reform.. founded by immigrants or
from enacting their children.
immigration
reform.
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should:
Enact reforms that welcome legal immigrant workers, including
increasing visas for higher-skilled workers and establishing a
new system for lower-skilled workers.
Find a solution for undocumented immigrants that integrates them
into our society, including allowing those already residing in
the United States to earn a legal status.
Improve the technological capability to enforce U.S. immigration
laws, ranging from increased resources for border security to
an E-Verify system for all U.S. employers.
investment in physical and digital infrastructure
America relies on a platform of digital and physical infrastructure
that facilitates the movement of people, information, physical goods
and financial assets that drives economic activity.
Business Roundtable supports prudent investments in public
infrastructure, policies that encourage increased private investment
and a smarter, more agile approach to cybersecurity that protects the
freedom to innovate and more effectively counters rapidly evolving
threats.
_______________________________________________________________________
65% -11% 100%
Share of U.S. Decline in public Share of multinational
manufacturing infrastructure corporations that have
leaders who investments between 2003 malicious traffic on
believe U.S. and 2012.. their networks,
infrastructure according to a Cisco
cannot meet the Systems, Inc.
demands of a examination of threat
growing economy intelligence trends.
over the next 10-
15 years.
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should:
Adopt policies that develop and maintain a world-class
infrastructure for the United States, including by:
- Providing consistent and reliable funding streams to support
infrastructure projects that are key to economic growth and
job creation; and
- Enacting policies that better enable the private sector to invest
in infrastructure projects that lead to long-term economic
growth.
Adopt policies to more effectively counter escalating cybersecurity
threats, including by:
- Providing tools to combat growing risks, including information
about potential threats and strong legal and privacy
protections for private sector information sharing
participants;
- Avoiding overly prescriptive regulatory solutions that are poorly
matched to a rapidly evolving threat environment and the
reality of privately owned and operated information assets;
and
- Integrating smart and agile cybersecurity policy into U.S.
relations with other countries, including trade
negotiations. Addressing cybersecurity and privacy concerns
need not and should not result in restrictions on the flow
of data across national borders that could fragment
information systems and slow global innovation.
smart regulation
Business Roundtable CEOs have consistently identified the cumulative
burden of federal regulations as a major barrier to increased
investment, growth and job creation. At the same time, well-conceived,
science-based regulations are essential to protect human health and
safety.
Business Roundtable supports smart regulatory policies that will ensure
American businesses retain the capacity to operate and innovate, while
promoting the health and welfare of employees, customers and
communities.
_______________________________________________________________________
6% 41st 48%
Share of major U.S. rank out of 189 Percentage of Americans
regulations countries in terms of who think there is ``too
issued by ease of construction much regulation,'' up
independent permitting.. from 28 percent in 2002.
regulatory
agencies that
received full
cost-benefit
analysis Pbetween
2002 and 2013.
_______________________________________________________________________
POLICY RECOMMENDATIONS
Congress and the Administration should:
Enact the Regulatory Accountability Act (RAA), which would modernize
the 70-year-old Administrative Procedure Act. The RAA would
require objective cost-benefit analyses for every major rule,
including those issued by independent agencies.
Provide greater certainty for business planning by requiring public
transparency about all future regulations. The Administration's
Regulatory Agenda should be updated in real time to provide
this information.
Require each agency to issue a notice of initiation for every new
regulation and put this information online. This will ensure
that regulatory agencies engage with stakeholders early,
allowing greater public input before regulators draft a
proposed rule.
Streamline the federal permitting process for all major
infrastructure projects, in accordance with the recommendations
of the President's Council on Jobs and Competitiveness.
Currently, delays in federal approvals keep many worthwhile
projects in limbo, impairing business investment and risking
job creation.
_______________________________________________________________________
Business Roundtable SM
300 New Jersey Avenue, NW, Suite 800
Washington, D.C. 20001
202.872.1260
brt.org
______
Prepared Statement of Robert E. Hall, Ph.D., McNeil Joint Senior Fellow
and Professor, Hoover Institution and Department of Economics, Stanford
University
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
I am pleased to appear before you today to discuss the state of the
U.S. labor market. I am an economist with a long-standing research
program on the labor market and the overall performance of the U.S.
economy. I am a past president of the American Economic Association and
a member of the National Academy of Sciences.
1. low employment growth despite falling unemployment
At 5.6 percent in December 2014, the U.S. unemployment rate is back
to normal. But the number of people at work is well below its
historical growth path. Between 2011 and 2014, unemployed fell by a
heartening 2.7 percentage points. This three-year decline was the
second largest in the history of the unemployment survey, exceeded only
by a decline in 1951 during the Korean War. But employment rose by only
4.6 percent over those three years. Normal three-year employment growth
during expansions with large declines in unemployment has been 7.1
percent. The U.S. has suffered a severe employment shortfall despite
the excellent progress in bringing unemployment back to normal since
the depths of the Great Recession.
Though the labor market is, overall, in normal conditions today,
some imbalances remain from the financial crisis and deep recession. On
the one hand, short-term unemployment--the fraction of the labor force
who became unemployed within the past 6 weeks--is remarkably low. At
1.6 percent, it is lower than ever before recorded. This measure of
unemployment was 1.7 percent in the strong labor market of 2007, just
before the crisis, when the overall unemployment rate was a robust 4.6
percent, and was 1.8 percent in the even stronger labor market of 2000,
when the unemployment rate was 4.0 percent. Another measure showing an
exceptionally strong market is the average time taken by employers to
fill jobs. Longer recruiting times indicate that the condition of the
labor market is favorable to jobseekers and correspondingly more
difficult for employers to match with those jobseekers. At 28 days,
average duration is the same as in the strong market of 2007 and above
the 26 days recorded in 2001, a year of low (4.8 percent) unemployment.
On the other hand, long-term unemployment, a legacy of the wave of
deep job loss from the crisis, remains above normal. In 2014, workers
still searching after 6 months of unemployment accounted for 2.1
percent of the labor force, down from a peak of double that level in
2010, but above the normal level of about one percent of the labor
force. Fortunately, long-term unemployment is on a fairly steep
downward path and should reach normal soon. Another indicator showing
remaining slack in the labor market is the fraction of workers who
would choose full-time work if available, but are now on part-time
schedules. At 3.0 percent, it is above its normal level of about two
percent. It too is declining and should reach normal soon.
Another indicator of that some economists bring into the diagnosis
of labor-market conditions is the rate of increase of workers' pay. The
Employment Cost Index of the Bureau of Labor Statistics is a
comprehensive measure of pay, including fringe benefits, and
incorporating adjustments for the changing composition of the
workforce. Its recent rate of growth, in 2012 and 2013, has been just
under two percent per year, below its average level from 2000 through
2011 of 3.1 percent. Because the rate of growth of the cost of living
fell by about one percent per year over the same period, growth in
real, inflation-adjusted wages has been close to constant. Declining
rates of productivity improvement have also been a drag on wage growth.
The role of labor-market conditions in determining wage growth appears
to be fairly small--over the period of stable, low inflation starting
in 1985, the ECI grew by 3.6 percent per year in years of below-average
unemployment and by 3.1 percent per year in years of above-average
unemployment. Most of the fluctuations in wage growth arise from other
factors, including productivity growth.
My conclusion is that the U.S. labor market is back to normal in
terms of unemployment, job-finding, and recruiting. The success of the
our economy in repairing the damage in the labor market from the
financial crisis is a tribute to the functioning of our market-based
economy. U.S. success in restoring normal unemployment stands in sharp
contrast to some major European economies, where unemployment remains
high--in some cases, much higher than it ever reached here.
2. disappointing employment growth
Many observers take the low rates of employment growth during the
recovery from the Great Recession as a conclusive indicator of poor
labor-market performance. My investigation suggests that the forces
governing employment growth are more complicated. The starting point
for the analysis is the simple observation that employment is the
number of people desiring to work multiplied by the fraction of them
who are working. Those desiring to work are called labor-force
participants. They comprise the employed plus the unemployed. Thus
unemployment is a central determinant of employment--if the number of
participants is constant, employment fluctuates in the opposite
direction from unemployment. On the other hand, if unemployment is
constant, fluctuations in employment arise from fluctuations in the
number of participants. With growth in the working-age population, it
is customary to state these relationships in terms of the employment/
population ratio, the labor-force participation rate (participants/
population), and the unemployment rate (unemployment/participants).
Thus the key to understanding the puzzlingly low growth of
employment during the recovery from the Great Recession is the decline
in the labor-force participation rate. Figure 1 shows the history of
the rate for years since 1990. The working-or-searching fraction of the
working-age population rose gradually during the 1990s, began to
decline in 2000, flattened for a few years, then began falling
dramatically starting in 2009.
In the years immediately after 2009, the decline was generally
interpreted as a response to the high unemployment of the Great
Recession. In early recessions, small declines in participation
occurred. But that interpretation is not tenable today, because the
recovery of unemployment resulted in no recovery in participation.
Rather participation fell by about the same amount per year while
unemployment was rising, in 2009 and 2010, as when it was falling, in
2011 through 2014. The evidence points unambiguously toward other
forces, in addition to poor availability of jobs prior to 2014.
The changing composition of the working-age population is one
candidate to explain the decline in participation--the entry of the
baby-boom generation to years of possible retirement decreased the
participation rate. But another demographic trend, toward higher
education, had the opposite composition effect, and the net effect of
demographic change is essentially zero, according to research by Robert
Shimer at the University of Chicago.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Economists have pointed to the increasing role of the social safety
net in the labor market over the years since the crisis as a source of
declining participation. A bulge in the number of individuals receiving
disability benefits is one aspect of this trend. The social security
disability program discontinues support for claimants who start
working, so those receiving benefits face a strong disincentive to join
the labor force. A much larger bulge in the fraction of families
receiving food-stamp benefits is a similar source of disincentive. Both
bulges have failed to dissipate despite the recovery of normal job
availability.
Professor Nicolas Petrosky-Nadeau of Carnegie-Mellon University
(currently on leave at the Federal Reserve Bank of San Francisco) and I
have launched a research project aimed at understanding the forces
leading to the decline in overall labor-force participation rate and
variations around that rate in segments of the labor force. This
testimony and the attached brief report are early results of the
project.
Table 1 shows the change in participation from the years of high
participation, 1998-1999, to recent years, 2011-2013, broken down by
age, sex, and two categories of household income (above or below the
median). Income includes all cash earnings plus all cash benefit
receipts. Teenagers had huge declines in participation in all four
groups: men in lower and higher income households and women in those
households. In most cases, the teenagers are not the major contributor
to income. The most telling finding for teenagers is that for both men
and women, the decline in participation was greater in the more
prosperous families.
Table 1: Changes in Labor-Force Participation Rates by Age, Sex, and
Family Income, From 1998-2000 to 2011-2013
------------------------------------------------------------------------
Men Women
-------------------------------------------------------
Lower half Upper half Lower half Upper half
------------------------------------------------------------------------
Teenagers -7.1 -15.6 -8.8 -15.9
20 to 34 -4.4 -4.7 -1.9 -3.8
35 to 59 1.4 -1.7 0.4 -0.9
60+ 4.7 2.8 3.9 8.9
------------------------------------------------------------------------
Young adults, those aged 20 through 34, also had declines in all
four groups, with about equal declines in the two income groups for men
and larger declines for women in the more prosperous families. In the
group containing the highest earners, those aged 35 through 59,
participation remained about the same, with small increases in lower-
income families and slight decreases in higher-income ones. Among
people of retirement age, 60 and above, men had moderate increases in
participation, larger in lower-income families, while women had quite a
large increase in participation in higher-income families and a
moderate increase in lower-income families.
The table makes it clear that a single force, such as low
availability of work, is an unlikely candidate to explain the changes
that occurred in participation. Rather, the changes seem likely to be
different for people in different situations. Most of the decline in
participation occurred among teenagers and young adults. The finding
that these effects tend to be larger in more prosperous families points
strongly away from much of a role for rising influence of benefit
programs, because these programs, especially food stamps, are only
available to families with incomes well below the median.
Some indication about the changing balance between work and other
uses of time comes from the American Time Use Survey, which began in
2003. Table 2 shows the change in weekly hours between 2003 and 2013 in
a variety of activities. For men, the biggest change by far is the
decline of 2.5 hours per week at work, a big drop relative to a normal
40-hour work week. A small part of the decline is attributable to
higher unemployment--the unemployment rate was 6.0 percent in 2003 and
7.4 percent in 2013. The decline for women is much smaller, at 0.8
hours per week. For both sexes, the big increases were in personal care
(including sleep) and leisure (mainly video-related activities).
Essentially no change occurred in time spent in education. Women cut
time spent on housework.
Table 2: Changes in Weekly Hours of Time Use, 2003 to 2013, People 15 and Older
----------------------------------------------------------------------------------------------------------------
Personal Household
care work Market work Education Leisure Other
----------------------------------------------------------------------------------------------------------------
Men 1.3 0.1 -2.5 0.2 1.3 -0.4
Women 1.6 -0.7 -0.8 -0.1 0.8 -0.8
----------------------------------------------------------------------------------------------------------------
3. conclusions
The return to essentially normal unemployment conditions is an
important milestone for the U.S. labor market. The period of abnormal
difficulty for new job-seekers is over, and the legacy of long-duration
unemployment appears likely to work itself out soon. In that respect,
the labor market is performing well, especially in comparison to the
markets of many other countries. No special policies related to
unemployment and job-finding are indicated at present.
The decline in labor-force participation is one of the factors
contributing to the stagnation of the earnings of American families,
especially those not enjoying the rising wages of the highly educated.
But a study of the data on the decline does not suggest the
desirability of policy changes focusing on reversing the decline. In
particular, the data do not seem to support the view that the social
safety net is discouraging participation--participation by those in
low-income families has generally risen, not fallen. That said, the
case for structural reform of some parts of the safety net, notably
disability programs, remains strong, because reform promises payoffs
apart from stimulating participation.
______
Changes in US Household Labor-Force Participation by Household Income *
---------------------------------------------------------------------------
* This note is an early report on a research project on labor-force
participation. Visit the authors' websites for updates. Opinions here
are those of the authors and not the Federal Reserve Bank of San
Francisco. We thank Canyon Bosler of the bank for excellent research
assistance.
---------------------------------------------------------------------------
Robert E. Hall
Hoover Institution and Department of Economics
Stanford University
National Bureau of Economic Research
[email protected]; http://stanford.edu/rehall
Nicolas Petrosky-Nadeau
Federal Reserve Bank of San Francisco
and Carnegie Mellon University
[email protected]; https://sites.google.com/site/
npetroskynadeau/
January 19, 2015
The fraction of the working age population in the U.S. working or
looking for work--the participation rate--decreased steadily from a
high of 67 percent in the late 1990s to 64 percent in 2013. But the
overall trend masks important differences in labor supply behavior
across households of varying levels of income. The Survey of Income and
Program Participation (SIPP) reveals that individuals living in the
poorest households have bucked the trend--their participation in the
labor market rose over the same period.
Administered by the Census Bureau since 1983, the SIPP is a panel
survey intended to provide comprehensive information on the income and
program participation dynamics of individuals and households in the
United States. The sample is selected to be representative of the
civilian non-institutional population age 15 and over, and the survey
collects detailed information on respondents' labor force activities,
cash and in-kind income, wealth, and participation in government
programs, as well as a wide range of demographic data.
The federal government created the SIPP to remedy shortcomings in
the existing survey data on household incomes and benefit-program
dependence. Prior to the SIPP, the primary source of such data was the
March Income Supplement to the Current Population Survey (CPS),
administered by the Bureau of Labor Statistics. Among the major
limitations of the March Supplement data was its reliance on
respondents' ability to recall their income accurately over the prior
year and its reliance on a single observation for each household, which
prevented most analysis of the evolution of individuals' and
households' income and program participation over time. The SIPP's
design addressed these shortcomings by interviewing respondents every
four months over the course of several years. The SIPP User's Guide
(2001) provides additional information on the history and method of the
survey.
Figure 1 shows the participation rates of individuals 16 and older
broken down by the total income of the household in which they live.
Incomes are stated as ranges of percentiles, starting with the bottom
10 percent of the income distribution and ending with the top 10
percent. The data run from February 1996 through April 2013. In the
latter period, the 10th-percentile group has incomes less then $935 per
month. The next cut off, $1,740 per month, encompasses the lower
quarter of U.S. household in terms of total income. The median
household income is $ 3,360 per month, while the cut offs for the 75th
and 90th percentiles are, respectively, $5,920 and $9,215 per month.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The period we call 1998-1999 runs from December 1997 through
November 1999 and the one we call 2011-2013 runs from May 2011 through
April 2013. We chose these periods to avoid the times when one cohort
of respondents is leaving the SIPP and another joining. In the bottom
10 percent of households by household income, 33 percent of individuals
participated in the labor market in 1998-1999. By 2011-2013 this
proportion was 44 percent. At the other end of the household income
distribution, the rate of labor market participation fell from 81 to 76
percent. The largest decline was for individuals living in households
in the third quartile of the household income distribution, where the
participation rate fell from 74 percent to 68 percent. The total
decline in participation between the two periods was quite similar in
the SIPP and the CPS. The CPS does not collect data on household income
comparable to the data collected in the SIPP.
There is variation by age and sex in these trends. Table 1 reports
the percentage point change in labor market participation rates for
women and men of different age groups, and living in households in
different quartiles of the household income distribution. Several
striking feature appear in the table. First, the overall pronounced
decline in participation of teenagers, from 46 to 33 percent, is
concentrated in households in the upper half of the income
distribution. Teenagers living in the 25 percent of households with the
highest incomes had a 16 percentage-point decline in participation,
compared to a 5 percentage-point decline for teenagers in the lowest
quartile. Second, men and women aged 35 to 65 in the lowest income
quartile increased participation substantially, by 8 percentage points
for men between the ages of 35 and 50 and 11 percent for men in between
the ages of 50 to 65. Third, the decline in labor market participation
of prime aged workers is concentrated in household in the upper half of
the income distribution. Finally, the overall increase in participation
of individuals 65 years of age and over, from 13.7 percent to 18.2
percent, is mostly attributable to the increased participation of
individuals in the highest household income quartile.
Table 1: Change in Labor Market Participation Rates: Age, Sex, and Household Income
----------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quartile -----------------------------------------------------------------------------------------------
men women men women men women men women
----------------------------------------------------------------------------------------------------------------
Teenagers -3.3 -7.1 -9.6 -10.4 -13.5 -15.6 -16.9 -16.2
20 to 35 -2.0 1.5 -5.3 -4.1 -5.6 -5.9 -3.9 -2.0
35 to 50 8.1 1.2 -0.2 -2.3 -1.5 -1.7 -1.0 -2.1
50 to 65 11.3 6.9 4.7 3.6 -0.4 3.3 -2.5 1.8
65 and over 3.0 1.4 -0.8 1.9 -0.2 4.4 6.2 8.7
----------------------------------------------------------------------------------------------------------------
Notes: Authors' calculations based on the SIPP. Each entry reports the difference in labor market participation
rates between the average from December 1997 to November 1999, and the average from May 2011 to April 2013.
The average cutoff for the ``2011-2013'' period for the first quartile is $1,740 per month, for the second $
3,360 per month, and third $5,920 per month.
References
Bureau, C. (2001). Survey of Income and Program Participation User's
Guide (Third ed.). Rockville: Census Bureau.
Data
Household total income
The SIPP collects a total household income variable and eleven
variables tracking different types of income at the household level.
The eleven variables cover social security (thsocsec), supplemental
security (thssi), unemployment compensation (thunemp), veterans'
payments (thvets), food stamps (thfdstp), earned income (thearn),
means-tested cash transfers (thtrninc), property income (thprpinc),
public assistance (thafdc), noncash/in-kind income (thnoncsh), and
``other'' income (thothinc). Total household income is the sum of the
household-level earned, property, means-tested transfers, and ``other''
income variables.
Labor market status
Unlike the CPS, the SIPP constructs a comprehensive, week-by-week labor
force history for all respondents, recorded on a weekly basis in the
five variables rwkesr1-rwkesr5, with five different classifications:
(1) with job--working,
(2) with job--not on layoff, absent without pay,
(3) with job--on layoff, absent without pay,
(4) no job--looking for work or on layoff,
(5) no job--not looking for work and not on layoff.
This labor force history allow us to construct a CPS-style labor force
classification for individuals in the SIPP. To do so, we classify
someone as employed in a given month if their SIPP labor force status
was 1 or 2 in the CPS reference week. For those whose SIPP status in
the reference week was not 1 or 2 in the CPS reference week, we look at
their status in the CPS reference week and the preceding three weeks.
If during any of those weeks their SIPP labor force status was 3 or 4,
they are classified as unemployed. If their SIPP labor force status was
5 for all four weeks, they are classified as not in the labor force.
______
Prepared Statement of Hon. Orrin G. Hatch, a U.S. Senator From Utah,
Chairman, Committee on Finance
WASHINGTON--U.S. Senator Orrin Hatch (R-Utah), Chairman of the Senate
Finance Committee, today delivered the following opening statement at a
committee hearing on jobs and a healthy economy:
Welcome everyone to the first hearing of the Senate Finance
Committee in the 114th Congress. It is appropriately titled ``Jobs and
a Healthy Economy.''
Despite the numerous differences and disagreements that exist here
in Washington, I believe that--regardless of our party affiliation--we
can all agree that job creation and a strong, vibrant economy are good
things.
The Senate Finance Committee has a long tradition of effectiveness
and bipartisanship. Given the size and scope of our jurisdiction,
that's only appropriate.
One of my main goals, as the new chairman of the committee, is to
continue that tradition, to allow the committee to function and produce
results as it has so many times in the past.
That is why I chose this topic for our first hearing.
Today, I hope we can have a discussion that will help us find
consensus on these challenges, rather than highlighting our
differences. I will be sorely disappointed if it devolves into yet
another back and forth with each side trying to score political points
rather than seeking solutions to the problems ailing our economy.
The Finance Committee is uniquely equipped to address the
challenges related to jobs and the economy. Indeed, our jurisdiction
places us on the front lines of the most important debates we'll have
in this effort.
For example, we have jurisdiction over our nation's tax code.
There is bipartisan agreement on the need to fix our tax system to
help hardworking taxpayers and allow businesses to grow, compete, and
create more jobs. Our current tax code creates numerous unnecessary
roadblocks that stand between us and sustained economic prosperity.
For these reasons, I have made tax reform my highest legislative
priority for this Congress.
Over the past few years, I have been working to make the case for
tax reform on the Senate floor, in public appearances, in written work,
and in private conversations. I'm going to continue to do so.
Recently, Ranking Member Wyden and I set forth the first steps for
tax reform in the 114th Congress. We created five working groups, all
assigned to study different areas of tax reform and come up with
proposals that we will then use as we work on bipartisan tax reform
legislation.
We have a number of great Senators on this committee who are just
as committed to tax reform. I look forward to seeing the results of
their work. We need to get this done. I'd like to ask each of the
witnesses on our panel to use at least some of their time during their
opening statements to give us specific ideas on how we can improve our
nation's tax code.
Another area of the committee's jurisdiction that is essential to
job growth and a healthy economy is international trade.
The United States has a long tradition of breaking down barriers
and providing access for American goods and services in foreign
markets. This has been great for our economy and must continue into the
future.
Ninety-five percent of the world's population and 80 percent of its
purchasing power reside outside of the U.S. For our job creators to
compete on the world stage, we must ensure that they have greater
access to this ever-growing customer base.
Toward that end, Congress needs to renew Trade Promotion Authority
(TPA) in short order. This is also something that we need to get done.
I am engaged with Senator Wyden to find a path on TPA that will provide
the best opportunities for TPA to succeed. I hope we will be able to
complete our work soon.
The Obama Administration is currently engaged in some of the most
ambitious trade negotiations in our nation's history. The ONLY way for
Congress to effectively assert its role in these negotiations and the
ONLY way to get trade agreements that reflect the highest standards is
through TPA.
I'd like to ask each of the witnesses on our panel whether they
think trade is important to the expansion of economic opportunities and
the development of a healthy economy and to include their answer in
their opening statements.
The Finance Committee's jurisdiction expands beyond tax and trade
into other areas that impact jobs and the economy and economic security
of American households.
We have growing health care costs that continue to put strains on
employers and hardworking taxpayers.
And, we have a growing entitlement crisis that threatens to swallow
up our government and take our economy down with it.
All of these issues impact jobs and the economy. And all of them
are important.
I hope we can have a robust conversation today on what the
committee and Congress can do to address these important issues. Like I
said earlier, I also hope that we can avoid having a partisan back and
forth that yields no productive answers or discussion.
Of course, that doesn't mean critiques of any policy or proposal
should be considered out of bounds. Nor does it mean that we shouldn't
have a spirited debate on the issues. But, I do hope that, whatever
questions we ask or statements we make, we will stay focused on gaining
a better understanding and on the goal of creating jobs and promoting a
healthy economy.
I'd like to take a moment now to recognize that we have some new
members of the committee: Senators Heller, Coats, and Scott. I want to
once again welcome them to the Finance Committee and say that I look
forward to their participation in this hearing and others in the
future. I have no doubt that each of their contributions will be
valuable to our efforts.
Finally, I also want to note that, at any point during the hearing
that we have a quorum present, I plan to move to Executive Session to
formally organize the committee, which will include some routine
matters, such as organizing subcommittees and formalizing a specific
change to the committee rules.
With that, I'll turn it over to Ranking Member Wyden for his
opening statement.
______
Prepared Statement of Justin Wolfers, Ph.D., Fellow, Peterson Institute
for International Economics, and Professor of Economics and Public
Policy, University of Michigan
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you for inviting me to speak with you today on the important
issues of job creation and a healthy economy. Before continuing, let me
add the obvious disclaimer that I am only speaking for myself.
an improving economy
From a macroeconomic perspective, the labor market recovery is
robust. In 2014, non-farm payrolls grew by an average of 246,000 jobs
per month, the fastest rate not only through this recovery, but also
the fastest rate since 1999.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It finally appears that the recovery has developed reliable
momentum. Aggregate GDP statistics also bear this out, although they
suggest that rates of economic growth through the recovery are better
described as moderate--typically in the 2-2\1/2\ percent range. The
juxtaposition of moderate GDP growth and robust employment growth
reflects the fact that productivity growth has been a bit slow through
the recovery.
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Even so, robust job growth has led the unemployment rate to fall
from nearly 10 percent through most of 2010, to 5.6 percent at the end
of 2014. This means that over the past four years, the unemployment
rate has fallen by about one percentage points per year, a rate far
faster than most economists had envisioned and faster than has
historically been typical for an economic recovery.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
If unemployment continues on its current trajectory, unemployment
will have fallen to around 5 percent by the middle of this year, which
is a rate that many economists consider to be ``normal.''
unfinished business
As much as there is good news about the direction and rate of
change of our broad macroeconomic aggregates, we should not confuse
this with the fact that the level of activity remains below potential.
The economy is improving, but it is not yet doing well.
For instance, the level of output remains substantially below the
economy's long-run potential.
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And while the current level of unemployment at 5.6 percent is far
better than it was a few years ago, this is not the sort of outcome
that has historically been regarded as cause for celebration. Indeed,
today's 5.6 percent unemployment rate is roughly the same as its
average throughout the post-war period (5.8 percent).
Even as unemployment has fallen toward the sorts of levels that
many economists regard as effectively being ``full employment,'' I
would caution against declaring ``Mission Accomplished'' too early.
While unemployment has fallen sharply, the proportion of the population
with a job--which is sometimes called the employment-to-population
ratio--has not risen much at all.
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Should we feel buoyed by the almost-complete recovery in the
unemployment rate, or depressed by the minimal recovery in the
employment-to-population ratio? Mechanically, the different patterns
shown by these two indicators reflect a decline in the labor force
participation. In turn, this suggests that the extent to which you
consider the recovery unfinished business depends on the extent to
which those who left the labor force in recent years would be willing
to work if sufficient opportunities for meaningful work were available.
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The decline in labor force participation since 2000--and its
steepening decline since 2008--is rather remarkable, coming as it does
after decades of a rising participation. That rising participation had
reflected the entry of women into the workforce, a phenomena which
slowed in the 2000s and will likely require policy action such as
adopting paid parental leave and other family-friendly policies in
order to see further large gains.
The more recent decline in participation reflects both cyclical and
structural factors. Most economists agree that at least half of the
decline in labor force participation since 2007 is due to population
aging, and this has become a particularly important force as the
leading edge of the Baby Boom cohort hit age 62 in 2008. This is just
the beginning of a longer-run demographic shift that will continue to
push the participation rate down over the next fifteen years as the
rest of the Baby Boomers enter prime retirement age.
While demographics explains half of the decline in participation,
the factors responsible for the other half remains unclear, as this
remains a contested issue, and there is no shortage of economists with
their own preferred explanations.
It remains possible that much of this may reflect the ongoing
effects of the recent recession which led many discouraged workers to
simply stop looking for a job. If this interpretation is correct, then
today's depressed labor force participation rate disguises a ``reserve
army'' of unemployed, who will return to the workforce when jobs become
plentiful. By this view, the recovery still has a long way to run, and
policy should be focused on ensuring that the recovery is long and
strong enough to get these folks back to work.
The view that today's low participation rates partly reflect hidden
unemployment is consistent with my own preferred interpretation, which
is based on the evidence that that cyclical downturns continue to
depress labor force participation for several years after the ensuing
recovery. By this view, today's weak participation partly reflects the
weak economy two, three, four or even five years ago. If this view is
correct--and there is evidence from state business cycles to support
it--then we are still some distance from full employment, and an
ongoing economic recovery will lead participation rates to rise
moderately over the next year or two.
Beyond this specific view, the more important point is that the
understanding of economists about what constitutes full employment
remains quite imprecise, and there is substantial uncertainty about how
much farther this recovery can continue without igniting inflationary
pressures. If the recovery continues, we may end up learning that the
economy can sustain not only higher labor force participation, but also
an unemployment rate of four-point-something percent, rather than five-
point-something. Certainly, the 1990s suggests that this may be
achievable. If there is uncertainty about what the economy can achieve,
policy should err on the side of exploring whether better outcomes are
possible.
Let me now shift my focus from the relative short run, and move to
raising some longer-run issues.
long-term unemployment
Historically, the United States had a highly fluid labor market, in
which millions of people were hired and fired each month. The result
was that losing your job was not a catastrophe, as there were plenty of
new opportunities. Accordingly, so a typical spell of unemployment
would only last a matter of weeks, before a motivated worker could find
another job. In turn, this meant that the burden of unemployment on any
individual was not too great, as even a five percent unemployment rate
meant that many people were each spending just a few weeks or months
unemployed.
Yet following the Great Recession, the burden of unemployment
became a lot more concentrated, as the average duration of unemployment
rose sharply. Today we measure unemployment spells in months or years,
rather than in weeks. Instead of many people sharing the burden of
short unemployment spells, today's unemployment is due to far fewer
people each bearing the burden of many months or years of unemployment.
Beyond the strains on their own lives, this may also have long-term
macroeconomic consequences, as a long spell of unemployment leads
people to lose skills, connections and hope, leading to the possibility
that there will be a group that may never work again--at least without
intensive assistance. This raises the likelihood that a complete
recovery from this recession will require much more intensive job
assistance in order to help the very long-term unemployed return to
work.
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The good news is that much of the rise in long-term unemployment
(defined as having been jobless for at least six months) has declined
as the recovery has progressed. But beyond the business cycle ups and
downs, there has been a slow-moving trend over many decades toward
rising levels of long-term unemployment. Even if current rates of long-
term unemployment return to their pre-recession trend, it will still
comprise 1.2 percent of the labor force.
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Given that widespread long-term unemployment is so new, it is
little surprise that our labor market and training programs are not
well-adapted to dealing with this issue.
Following the financial crisis, Congress passed Emergency
Unemployment Compensation, extending the number of weeks for which
jobless workers could claim unemployment insurance. Subsequent research
has shown that this actually helped the long-term unemployed remain in
the labor force and supported their job search.
Congress should consider making this process of extending benefits
automatic for future downturns of sufficient severity. Such a move
would both remove the need for specific congressional action (which
often comes with a lag), and a well-crafted formula would also offer
Congress the assurance that such extensions would disappear when
business cycle conditions returned to normal.
Indeed, let me expand on this theme a bit, by raising the
possibility of using such automatic stabilizers more aggressively.
preventing future recessions and an increasing
role for automatic stabilizers
The most recent recession has highlighted an important shortcoming
in relying on the Federal Reserve to manage the business cycle: When
interest rates hit zero, there is limited scope for further monetary
action to stimulate the economy. Indeed, we now understand that in a
low inflation environment, it is very difficult for the Fed to engineer
the sorts of sufficiently low real interest rates that may be required
to offset adverse economic shocks.
This suggests that it may be important to build more automatic
stabilizers into our economy. We already have some automatic
stabilizers built in, such as a progressive tax system, which means
that when income falls, so too will tax rates. Likewise, some federal
programs, like the Unemployment Insurance Extended Benefits provide
needed income that lead to increased spending during periods of high
unemployment.
This idea of building in a counter-cyclical spending pattern is one
which Congress could expand substantially, building formulae into an
array of federal programs that would raise spending during periods of
slow economic activity, and lower spending during periods of stronger
activity. I have already raised the idea that the Emergency
Unemployment Compensation program could be put in place so that it is
automatically triggered whenever long-term unemployment rises again in
the future. But the idea is far more broadly applicable, and similar
triggers could be built into programs ranging from federal highway and
infrastructure spending, to Pell grants, to making block grants to
states for TANF responsive to economic conditions.
Not only would the automaticity of these mechanisms minimize the
legislative lags that often undermine fiscal stimulus, but they would
increase spending precisely when the value of that spending was highest
and curtail spending as the value falls. And the use of formulae would
allow the debate about how best to respond to cyclical changes to be
divorced from the very different debate about how much should be spent
on each of these programs.
Automatic stabilizers also have important benefits beyond the role
they play in taming the business cycle. By concentrating federal
spending during periods when the economy is weak, the federal
government will be hiring precisely when there is the greatest amount
most slack resources, meaning that it competes less with the private
sector for scarce resources. The result is that federal spending would
be targeted for those times when the cost of hiring workers is lowest.
rising inequality and the role of the tax system
For much of U.S. history, the presumption was that economic growth
would deliver rising well-being for a broad swathe of the population.
Yet two important trends have undermined that view.
First, real wages have not risen by much, even as productivity
continues to grow. The result is that labor's share of national
income--the proportion of our economic pie that goes to workers in the
form of wages--has declined sharply over recent decades, suggesting
that firm owners, rather than workers, are enjoying the fruits of
economic growth.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
And second, beyond the shift in the functional distribution of
income between labor and capital, there has been a sharp rise in
overall income inequality, even within labor or capital earnings. As
the following chart shows, economic growth raised incomes in roughly
equal measure for both rich and non-rich from 1947 through to 1979. But
since 1980, economic growth has delivered large average rises in income
for the top 10 percent (and much of that was concentrated in the top 1
percent), but it has yielded very little for the remaining 90 percent.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
If these are the outcomes that our current market system is
delivering, it suggests a potential role for the tax system in ensuring
that the fruits of economic growth are more broadly shared. While the
two major political parties are locked in a debate about the optimal
size of government, and how large aggregate tax collections should be,
this raises a conceptually distinct question, which is how best to
distribute that tax burden. This is a debate that can occur even
without shifting the overall tax burden. Higher taxes on the few who
have enjoyed unusually strong returns, if it leads to lower taxes on
many other workers, may even enhance overall incentives for productive
activity, while also reducing inequality.
investing in education
For much of the past century, economic growth and opportunity in
the United States have been supported by rising levels of education.
Typically, each generation of Americans got around two more years of
education than their parents. Yet in the past few decades, this trend
has slowed dramatically, and virtually halted for men. Indeed, the
current crop of 30-year old men are barely more educated than their
parents were.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The ``high school movement'' in the early twentieth century led to
a substantial expansion of secondary education. And while I recognize
that these issues lie largely outside the committee's jurisdiction, I
think it nonetheless important to make the case that now is the time
for a broader ``college movement,'' which makes both two-year and four-
year colleges more widely available.
The President's proposal to expand access to community college
seems like a natural first step in this agenda. But this is an agenda
that would also benefit from four complementary reforms. First, college
readiness remains an important barrier for many students, and an
emerging body of evidence suggests that the roots of these gaps arise
in early childhood. This suggests that investments in pre-K education
may help also yield better long-run outcomes. Second, while there are
some excellent tertiary institutions, far too many of them--and far too
many in the community college sector--yield low-quality education, and
result only in students dropping out from colleges. The sector needs to
be reformed, with an emphasis on raising the quality of community
college education, providing more support for struggling students, and
the federal government should stop funding under-performing tertiary
institutions. Third, a variety of innovative education programs have
shown that even very small low-cost nudges--such as help in navigating
FASFA, a text message to remind you of your deadlines, a personalized
letter letting you know that a high-quality college education may
actually be affordable given the array of funding opportunities
available--can have very large effects. Successful programs should be
scaled up, and federal grants should be made for ongoing innovation in
simplifying the college application process, and making the relatively
low cost of college substantially more transparent. And fourth, the
expensive big-ticket items, like the Hope Tax Credit, the Credit for
Lifelong Learning, and the American Opportunity Tax Credit, are
potentially useful, but should be tightly tailored to families most in
need, both because that is where the college attendance gap is the
largest, and also because this is where extra federal dollars are most
likely to have their largest affect. Moreover, these credits are most
likely to be effective if coupled with the sorts of information
campaigns and nudges I just mentioned.
Labor markets and a healthy economy are of paramount importance to
the health, happiness and well-being of all Americans, and I appreciate
the opportunity to share my assessment with you today.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Thank you, Mr. Chairman. On behalf of all of us on this side of the
dais, I want to join in welcoming the new members of our committee,
Senators Coats, Heller, and Scott. In particular, I have spent a lot of
time working on tax reform with Senator Coats, and I hope to build on
that work.
Senator Hatch knows that the best legislation is bipartisan
legislation, and his record of accomplishment reflects that
understanding. We are grateful for his extraordinary service to the
Senate and the people he represents, and we look forward to working
under Chairman Hatch's leadership and with all of our Republican
colleagues.
Now on to the matter at hand.
Seven years after the economic collapse shook the American economy
to its core, our recovery has improved from a crawl to a walk. Too many
middle-class Americans--pounded by decades of flat wages--are still
struggling to make progress. Here's my bottom line: When working
families see bigger paychecks, America's economic recovery will go from
a walk to a run.
Over the last few weeks, I've spent a lot of time talking with
workers and businesses in Oregon about the challenges they're facing
seven years after the start of the Great Recession. Just this weekend,
I held town halls in Klamath, Josephine and Lincoln counties. And to
me, it's clear as day that there are still a lot of Oregonians waiting
for the economic recovery to kick in for them.
For Oregon's middle class, moving the recovery from a walk to a run
comes down to the five T's. Tech jobs, tax reform, trade done right,
transportation and timber. Every senator on this committee could tick
through a similar list for his or her own state, and without question,
there would be a lot of overlap.
There are lessons to learn from our own history as policymakers
work to strengthen the foundations of the American economy. Seventy
years ago, after winning World War Two and making the long, slow climb
out of the Great Depression, the United States took bold, new steps to
build a thriving middle class.
Congress came together and expanded access to education. It
connected every corner of the nation--from Portland, Oregon to
Portland, Maine, from Los Angeles to Miami--with the world's best
infrastructure. Over time, it reformed the tax system to better fit the
day's economy, and it found opportunities in markets abroad for
American manufacturers to seize.
Those policies helped power an economic boom that grew working
Americans' paychecks for decades. Year after year, people felt
confident that their children's generations would do better than their
own.
True economic recovery today will restore that confidence. It will
mean more jobs with a clear ladder to the middle class--jobs in which
workers can support their families, build their savings, and send their
children to college--jobs that don't leave families stretching every
paycheck, month after month.
So in my view, there's one question for us to ask ourselves with
every bill we introduce and every vote we take in Congress: ``How will
this grow the American worker's paycheck?''
As this committee comes together to overhaul the tax code, we have
to ask, ``How will this grow the paycheck?''
As this committee takes on America's infrastructure crisis, we have
to ask, ``How will this grow the paycheck?''
As this committee works on getting more students in the door to
college, we have to ask, ``How will this grow the paycheck?''
And as this committee finds ways to make American businesses more
competitive and successful in a cutthroat global economy, we have to
ask, ``How will this grow the paycheck?''
The Finance Committee will have a starring role in many of the
policy debates Congress is expected to tackle over the coming months
and years--perhaps more than any other committee on Capitol Hill. So
there will be many opportunities for us to come together on a
bipartisan basis to ensure that working Americans are sharing in the
recovery and getting bigger paychecks.
I know I speak for the Democrats on the committee in saying that we
look forward to working together to accomplish this goal.
______
Communications
----------
Statement for the record on behalf of:
Coalition for GSP
1001 Connecticut Ave., NW Suite 1110
Washington, DC 20036
202-347-1085
The Coalition for GSP welcomes the opportunity to submit the following
statement for the ``Jobs and a Healthy Economy'' hearing record.
The Coalition for GSP is a group of American companies and trade
associations organized to educate policy makers and others about the
important benefits to American companies, workers, and consumers of the
Generalized System of Preferences (GSP) program. Its members range from
small, family-owned businesses to Fortune 500 corporations and operate
in all 50 states, the District of Columbia, and Puerto Rico.
Implemented in 1976, the Generalized System of Preferences (GSP) is a
special trade program that eliminates U.S. import duties on certain
products from about 125 developing countries. Over time, American
companies have come to rely on the GSP program to lower costs for
inputs needed to produce goods in the United States and finished
products for American families. Lower costs spur demand and allow
companies to create good-paying American jobs.
However, GSP expired on July 31, 2013 and Congress has not yet passed
legislation to renew it. As a result, American companies have paid
nearly $2 million a day--and more than $1 billion to date--in higher
taxes while awaiting congressional reauthorization of the GSP program.
The mounting costs and uncertainty surrounding when GSP might be
renewed have had a chilling effect on companies' ability to grow, or
even maintain, their workforce. Of course, workers--both existing and
potential--feel the effects of this negative business environment.
The Coalition for GSP surveyed hundreds of U.S. GSP program users in
2014 and found that:
44% of companies have delayed planned hires. For example, Kana
Bicycle in Washington has been unable to hire new R&D and
product development personnel, while Varaluz in Nevada and
McGuire Manufacturing in Connecticut cannot afford to replace
workers that have left voluntarily because of higher costs
resulting from GSP expiration.
40% of companies have delayed or canceled job-creating investments.
B&C Technologies bought a facility to begin manufacturing in
Florida by April 2015, but it cannot afford the necessary
building upgrades to create those American manufacturing jobs
as planned because of higher costs imposed by GSP expiration.
22% of companies have cut employee wages and benefits. The cost of
import duties has cut into the monies available to Stackhouse
Athletic in Oregon to pay for health care, forcing the company
to cut health care benefits for its nine workers.
13% of companies have laid off workers. Matrix Metals laid off 75
workers at facilities in Iowa and Texas, while Vispak LLC in
Minnesota is going out of business completely because higher
production costs resulting from GSP expiration have made the
companies uncompetitive.
The full report, which includes many other company-specific examples,
can be downloaded at http://bit.ly/GSP1Year. As those examples show,
higher costs resulting rom GSP expiration affect both the quantity and
quality of jobs in the U.S. economy. Some workers are laid off, while
others never get an opportunity to work in the first place. Those with
jobs often face benefits or salary cuts.
In a complex global economy, the best means for supporting American
jobs and fostering a healthy economy may not be clear. Even when
Members of Congress agree about the best path forward, they may not
have the ability to implement the desired policies. That is not the
case for GSP: Congress has the ability to eliminate the import taxes
and mitigate past damages by passing an immediate, retroactive GSP
reauthorization. Renewal has bipartisan support in both the House and
the Senate. In this sense, renewing the GSP program should be ``low-
hanging fruit'' for Congress as it seeks ways to improve the US job
environment.
More than 660 American companies and associations have joined the
Coalition for GSP's call for Congress to do just that. The ever-growing
list of organizations can be viewed at http://bit.ly/GSPsupporters.
About 30 of them have provided brief statements (below, grouped by
state) for this submission on the negative job impacts of GSP
expiration and/or the potential jobs benefits of a retroactive renewal.
If you have further questions about the impacts of GSP expiration on
American companies, or would like to follow up with any of the
companies that provided statements below, please contact Daniel Anthony
at the Coalition for GSP at [email protected] or 202-347-
1085.
The Coalition for GSP looks forward to working with the Finance
Committee leadership on a bipartisan basis to pass an immediate,
retroactive GSP renewal.
Zack Stenger, Owner of Blackbeam LLC in San Francisco, California: The
GSP renewal would allow us to hire three sales and office-related
employees for our growing small business.
Bruce Marlin, Purchasing Manager at Circa Corporation in San Francisco,
California: As a rare, surviving U.S. manufacturer of leather goods, it
is essential to us that GSP be renewed. Our competitors manufacture
primarily in China and India, and we need as level a playing field as
possible to remain viable as a U.S. domestic manufacturer.
Shaun Shroff, Vice President of DuraBrake Co. in Santa Clara,
California: We would be able to reduce dependence on production in
China and would be able to increase business on the East Coast. We
would be able to hire two sales people on the East Coast as pricing
would be competitive.
Peggy Altfater, Owner of Peggy V Designs in Petaluma, California: My
business is a sole proprietorship. My sales have declined because I
have needed to raise my prices on my product that no longer has GSP
status. My job is in dire straits at this time because of price
increases so I am asking you to please renew the GSP.
Jeffrey Tunstall, Vice President at Port Plastics in Chino Hills,
California: Our company imports a substantial amount of materials from
qualified GSP countries. Our total sales were down 7 percent in 2014
while the economy grew an estimated 2.4 percent. We believe the
downturn in our business is solely due to the higher costs of our
products as a result of the GSP program not being renewed. This
downturn in our business has resulted in our being forced to reduce a
number of employees.
Fred Cohen, Owner of Omicron Granite & Supplies in Pompano Beach,
Florida: The failure to renew the GSP has cost my company over $100,000
per year in additional taxes, which has kept me from hiring at least
two more workers. Please renew the GSP and make it retroactive.
Peter Allen, President of Royal Tropics, Inc. in McCall, Idaho: The GSP
expiration and the uncertain return has caused my small company a
hardship in the sense that the extra funds we have paid in duties has
caused us to hold back on some planned expansion of our business. With
the needed expansion we would be able to hire additional employees as
well as fund some additional equipment. The GSP program is very
important for small business in the U.S.
Brendan Naulty, Senior Vice President at Ajinomoto North America Inc.
in Itasca, Illinois: The impact of non-renewal of GSP impact for 2014
on Ajinomoto North America has been $690,678. This has put this
business segment into a red figure for 2014. Therefore we could not
expand our workforce or reinvest profits into other businesses. We
would greatly welcome retroactive renewal, which would enable us to
initiate capital projects that have been postponed due to availability
of funds and uncertainty about the stability of this business segment.
Kelly Weinberger, Owner at WorldFinds Fair Trade in Westmont, Illinois:
Our fair trade organization has been badly hurt by the non-renewal of
GSP. A retroactive renewal would help create jobs in our US office, as
well as to provide more work to our low-income women artisan groups in
the developing world.
Jim Angers, Partner at K2 Coolers LLC in New Iberia, Louisiana: We paid
$79,000 in duties in 2014. We need to hire an additional warehouse
worker and the duties are impacting our margins to the point of causing
us to delay hiring.
Damian Jones, Designer & Founder at Aid Through Trade in Annapolis,
Maryland: Our 22 year old fair trade company has depended on GSP since
our inception. The current lapse and uncertainty makes it hard for me
to have the confidence I need to invest and hire. Retroactive GSP
renewal would give me cash and confidence to hire and invest.
Lisa Johnson, Vice President at COLE-TUVE, Inc. in White Marsh,
Maryland: We sorely need renewal of the GSP so that our company has the
chance to get back on track. Among other penalizing set-backs (such as
limiting labor), we have not been able to raise our prices to account
for this increase as we could not do that and stay competitive. Our
capital is just about gone, and getting the GSP retroactively approved
will allow us to reinvest resources back in to the business, to get
beyond playing catch up and grow along with the prospects of a growing
manufacturing sector.
Richard Harris, President of Accessories Unlimited in North Harwich,
Massachusetts: Since the cancellation of GSP we have had our fixed
margins reduced between 5 and 6 percent. We cannot raise our prices as
they are set by our suppliers. We can cut corners where we can. We need
employees on a full time basis, but have had to hire them on a part
time basis and not hire the type of personnel we need to improve our
business.
Steve Hill, Vice President at Polysource in Pleasant Hill, Missouri:
The most damaging result of nonrenewal is the impact it has on U.S.
manufacturers of global consumer goods. GSP allows U.S. manufacturers
to take advantage of certain raw materials throughout the world that
allows them to sell worldwide resulting in jobs and tax revenue. The
impact on Polysource has limited our ability to compete and hire. We
could easily justify the inability to hire for two new professional
positions with full benefits if we had not experienced a loss of over
$500k in the last 18 months.
Robert J. Murray, Operations Manager at General Carbon Corporation in
Paterson, New Jersey: The lack of renewal of the GSP has caused General
Carbon to limit its search for new hires. If the GSP was renewed and
the duties refunded we would be in a much better position concerning
new hires and improving the overall future of General Carbon. It may
also lead us to make capital improvements to our facilities that we
have been delaying to make pending the GSP renewal.
Gert van Manen, President of iTi Tropicals Inc. in Lawrenceville, New
Jersey: We have paid $800,000 in duties since GSP expired and we are
not charging our customers for this for various reasons, mainly we
believe that it will be reinstated retroactively as it always has been.
If this is not the case it will have serious consequences for our
company. We are a small business with 25 people on payroll in business
for 26 years.
Benny Nabavian, President of EORC in Farmingdale, New York: We are a
very small company and the GSP expiration is really hurting our cash
flow and income. Every penny counts in our business, especially in the
current economic conditions. It is a question of survival for us.
Gabriel Khezrie, President of Fremada Gold Inc. in New York, New York:
Due to the softness of the jewelry business in general, there has been
tremendous pushback by our customers. They will not accept the
additional price increases to accommodate the 5.71 percent tariffs that
were never part of our pricing equation. This has led to less billings
at our company. Accordingly we have had to let some staff go.
Benjamin Justman, Royal Chain in New York, New York: Restoration of GSP
will have a huge positive effect on our company. We will be able to
reinstate some of the business lost to competition. Some customers have
stuck with us based on our promise that we will refund the duty paid if
GSP is renewed retroactively. Going forward, we will be able to rehire
personnel that were laid off, as well as expand our business.
Nenad Milinkovic, Vice President at Vail International Corp. in New
York, New York: Lack of GSP Renewal has precluded our company from
hiring additional personnel, and we are now at a point facing layoffs
for some of our workforce. We have been trying to hang in there in
anticipation of the renewal, but this prolonged expiration has now
placed a very serious financial strain on our business.
Scott Ferguson, President of CCS USA, Inc. in Hickory, North Carolina:
To date, the expiration of GSP has cost my company over $125,000. It
has cost jobs, investment and has crippled us competitively with lost
business. Please retroactively renew this critical trade program!
Fred Starr, President of Thompson Traders in Greensboro, North
Carolina: Thompson Traders is a start-up company, and after seven years
of trial and tribulation, made it to a break-even in 2013. Then the GSP
was allowed to expire, and due to our financial position and our
inability to pass this charge onto our customers, we had to slow down
growth, including hiring. We would be a different company today without
this totally unanticipated tariff.
We've reduced our payroll by eight people, a 40 percent reduction and
will not be adding people, until we have a better government
environment, including the renewing of GSP. The renewal of GSP will
allow us to grow, creating new job opportunities. Moreover, since we
share profits with our employees, each job will become a better paying
job whether salaried or hourly.
Most important, the return of our tariff payments, paid out since
August 2013, will help Thompson Traders enter new domestic and foreign
markets and build a much larger company, including domestic
manufacturing investment--more jobs and better-paying jobs.
Greg H. Kirkland, President of Kirkland Associates, Ltd. in
McMinnville, Oregon: In 2014 our small import company paid over $50,000
in import duty charges on products imported from India. We currently
desperately need to hire two additional employees. However, we simply
can't afford to do that as the company profits will not support two new
employees and continued import duty charges. If we were to see GSP
passed, especially retroactively, we would immediately move toward the
new employee additions. I know we are not a big deal to Washington,
D.C. but this move would really help our company now and in the future.
Burak Cezik, Account Manager at Kervan USA LLC in Bethlehem,
Pennsylvania: We ended up with a net loss in fiscal year 2014 due to
GSP expiration. Accordingly, we are working on ways to cut jobs and
holding off on our strategy of hiring regional sales managers. We would
definitely hire new positions in the case of retroactive GSP renewal.
Amy Campbell, Founder of Brilliant Imports in Austin, Texas: Brilliant
Imports has experienced, what is significant to a budding business,
cash outflow due to GSP expiration . . . for a company that is less
than three years old, this has been a hard blow to handle. In addition,
there is extreme uncertainty on GSP renewal going forward therefore I'm
keeping `predictable' cash outflows as tight as possible. As the
Founder and Owner, I've let go of my PR firm, my Virtual Assistant (VA)
as well as cut back on advertising (these are a few examples). There is
no projection to hire any help going forward. Retroactive GSP renewal
would be a nice boost to keep a relatively new business like Brilliant
Imports afloat as well as lead to a hire of a VA and placement of
Brilliant Imports in a fulfillment center . . . both of these are
detrimental to my company's success.
Cathy Korndorffer, Chief Operating Officer at Chantal Cookware Corp in
Houston, Texas: We are a small, privately owned company in the
housewares industry. We struggle every year to compete on a global
scale with huge conglomerates and every penny that our product cost
increases counts. We have not laid anyone off because of GSP non-
renewal, but we cannot pass this along to our retailers. What happens?
Our employees do not get raises. There is no money going into their
401K plan. There is no Christmas bonus. There is a reduction in our
medical insurance contribution from Chantal. Is it painful? YES!
Wajih Rekik, President of CHO America in Baytown, Texas: Importing
olive oil from Tunisia and bringing a Tunisian olive oil to the U.S.
consumer is a big challenge that was supported by the GSP advantage.
Since GSP expiration, we froze hiring, gave up a plan to expand into a
new warehouse. A retroactive renewal will be vital to us and will be
translated into expansion of warehouse and at least three new hires.
Allan Zadik, Owner of FAZ Marketing in Houston, Texas: I had to close
the import business as my selling price became uncompetitive. I did
have to let go of two people as there was no way to keep sales up. I'm
currently not importing products where GSP has affected my business.
Abe Shaheen, Owner of Shaheen Import Export Co. in Virginia Beach,
Virginia: The GSP expiration and uncertainty about renewal has resulted
in laying off three of workers at our company, and not being able to
hire new employees. Retroactive GSP renewal would lead to more jobs at
our company, and will enable us to expand our business.
______
ESCA
THE AMERICAN DREAM AT WORK
Statement for the Record
Stephanie Silverman
President & Executive Director
Employee-owned S Corporations of America
805 15th Street, Suite 650
Washington, DC 20005
On behalf of the Employee-Owned S Corporations of America (ESCA), thank
you for the opportunity to submit comments to the Senate Finance
Committee. We commend the Committee for its continued focus on economic
growth, as we firmly believe that pro-growth policies are essential in
addressing the difficulties that continue to vex the U.S. economy,
working Americans, and their families.
ESCA represents private, employee-owned companies operating in every
state across the nation, in industries ranging from heavy manufacturing
to school photography. The rapid expansion of S corporation ESOPs in
recent years is testimony to the fact that these companies are a
dynamic and growing part of our economy. We would respectfully suggest
to the committee that a vital means of promoting both economic growth
and retirement security for working Americans is to expand the
availability of S corporation ESOPs for more companies and their
workers.
Today, S corporation ESOPs are doing exactly what Congress intended
when it created them in the late 1990s: creating jobs, generating
economic activity, creating jobs, and promoting retirement savings. By
any measure, these companies have been a remarkable success story in
recent years: truly a bright spot in an economy characterized by
sluggish growth, anemic job creation, and worker insecurity.
It stands to reason that companies with employee stock ownership plans
have displayed a dynamism and vitality lacking in other sectors of our
economy. An ownership stake in one's place of work is not only a spur
to greater productivity, but inspires greater loyalty and
identification with the fortunes of the business. And
employee-owned companies aren't subject to the frequently destructive
adversarial dynamic of suspicion and resentment that takes hold when
employees are convinced that the interests of stockholders and
corporate board members are at odds with their own interests. For
workers in S corporation ESOP firms, what is good for ownership is good
for them by definition.
The evidence is compelling that expanding the availability of S
corporation ESOPs for more companies and their workers would not only
boost the retirement savings of countless Americans, but would also
create more jobs, generate more economic activity, and encourage the
formation of businesses that are more stable and successful because
they provide their employees with the kind of built-in incentives
conducive to loyalty and productivity.
As the Finance Committee contemplates measures to reform the Tax Code
and increase access to retirement savings, we urge Senators to support
tax policies that expand the availability of long-term retirement
savings opportunities and economic growth through S corporation ESOPs.
Background on S Corporation ESOPs
A Subchapter S corporation is a business entity that provides flow-
through tax treatment to its shareholders. An employee stock ownership
plan (``ESOP'') is a qualified defined contribution plan that provides
a company's workers with retirement savings through their investments
in their employer's stock, at no cost to the worker. ESOPs are
regulated by the Employee Retirement Income Security Act (``ERISA'')
just like pension funds, 401(k) plans, and other qualified retirement
plans.
In 1996, in the Small Business Jobs Protection Act, Congress authorized
the S corporation ESOP structure, effective January 1, 1998, with the
goal of encouraging and expanding retirement savings by giving American
workers a greater opportunity to have equity in the companies where
they work.
In the Taxpayer Relief Act of 1997, Congress repealed the unrelated
business income tax (UBIT) originally imposed on the ESOP for its share
of S corporation income, enabling S corporation ESOPs to become a
viable new business structure to benefit American workers. Seventeen
years later, there are more than 2,600 S ESOP companies operating in
every state of the nation, in industries ranging from heavy
manufacturing to retail grocery stores, from construction to
consulting. Because of the structure of S ESOP tax policy, S ESOPs are
achieving exactly what Congress intended: generating unparalleled
retirement savings for workers, providing good and resilient jobs in
high-performing businesses, and creating important macroeconomic
benefits in their communities.
Over the years, ESCA has worked closely with federal policymakers to
ensure that S ESOPs hold true to their original purpose of encouraging
broad employee ownership. We collaborated with members of your
committee in 2000-2001 to craft anti-abuse rules that became section
409(p) of the Internal Revenue Code. These rules, enacted in the
Economic Growth and Tax Relief Reconciliation Act (EGTRRA), now mandate
that S ESOPs provide for broad-based employee ownership and establish
strict repercussions for violations.
As the report language for EGGTRA (H.R. Rep. No. 107-51, part 1, at
100 (2001) states: The Committee continues to believe that S
corporations should be able to encourage employee ownership
through an ESOP. The Committee does not believe, however, that
ESOPs should be used by S corporation owners to obtain
inappropriate tax deferral or avoidance.
Specifically, the Committee believes that the tax deferral
opportunities provided by an S corporation ESOP should be
limited to those situations in which there is broad-based
employee coverage under the ESOP and the ESOP benefits rank-
and-file employees as well as highly compensated employees and
historical owners.
Since enactment, Section 409(p) has been highly effective in ensuring
that S ESOPs serve their purpose. As a result, S ESOPs have become
perhaps the most effective retirement savings plan under federal law,
and today the average S ESOP plan participant has significantly more
money saved in their ESOP account than they do in their 401(k) account.
The Unparalleled Performance of S ESOPs
Many studies over the years have documented why and how S ESOPs have
proven to be so powerful for both workers as a retirement savings and
economic security tool, and how they have contributed substantially to
communities and the broader national economy:
In a study released in June last year, data compiled by the National
Center for Employee Ownership (NCEO) shows that private employee-owned
businesses have strikingly fewer loan defaults than other businesses.
NCEO finds that the default rate on bank loans to ESOP companies during
the period 2009-2013 was, on average, an unusually low 0.2 percent
annually. By contrast, mid-market companies in the U.S. typically
default on comparable loans at an annual rate of 2 to 3.75 percent. The
tenfold difference between the economic strength of employee-owned
companies and other businesses highlights the fact that private
businesses which are owned by their employees have the incentives and
vision that makes them more stable, more successful, and better for
employees as well as the larger economy.
A 2012 study by Alex Brill, tax advisor to the Simpson-Bowles deficit
reduction commission and a former chief economist and policy director
to the Ways and Means Committee, found that:
Employment among surveyed S ESOP firms increased more than 60
percent from 2001-2011, while the private sector as a whole had
flat or negative growth in the same period.
In the struggling manufacturing industry in particular, the S ESOP
structure has buffered against economic adversity and job loss.
S ESOPs have significantly expanded the pool of US workers who are
saving for retirement, while also boosting company
productivity--something that has greatly benefited their
employee-owners.
In his study, Brill notes that ``in the context of the current tax
reform debate that seeks to curtail existing tax expenditures in favor
of lower statutory rates, policymakers should recognize the evidence in
support of S ESOPs and their positive economic contribution.''
In 2013, Brill produced a follow-on study entitled ``Macroeconomic
Impact of S ESOPs on the U.S. Economy.'' Key findings of that broader
assessment revealed that:
the number of S ESOPs and the level of active participation (number
of employee-owners) have more than doubled since 2002.
total output from S ESOPs and the industries they support is nearly
2 percent of GDP.
S ESOPs directly employ 470,000 workers and support nearly a
million jobs in all.
S ESOPs paid $29 billion in labor income to their employees, with
$48 billion in additional income for supported jobs.
Brill's study on the macroeconomic impact of S ESOPs built upon
findings issued in 2008, in a 2008 University of Pennsylvania report,
whose authors found that S ESOPs contribute $14 billion in new savings
for their workers each year beyond the income those workers otherwise
would have earned, and that S corporation ESOPs offer workers greater
job stability and increased job satisfaction. The study also found that
S corporation ESOPs' higher productivity, profitability, job stability
and job growth generate a collective $19 billion in economic value that
otherwise would not exist.
The Brill and University of Pennsylvania studies reinforce other
important evidence about S ESOPs that show how powerful they can be.
In a 2010 Georgetown University/McDonough School of Business study, two
leading tax economists, former Treasury Department officials Phillip
Swagel and Robert Carroll, reviewed the performance of a cross-section
of S corporation ESOP companies during the early part of the prior
recession and found that these companies performed better than other
equivalent companies in terms of job creation, revenue growth, and
worker retirement security. Specifically, Swagel and Carroll found
that:
Companies that are S corporation ESOPs are proven job-creators,
even during tough times. While overall U.S. private employment
in 2008 fell by 2.8 percent, employment in surveyed S
corporation ESOP companies rose by 2 percent. Meanwhile, 2008
wages per worker in surveyed S corporation ESOP companies rose
by 6 percent, while overall U.S. earnings per worker grew only
half that much.
S corporation ESOP companies provided substantial and diversified
retirement savings for their employee-owners at a time when
most comparable companies did not. Despite the difficult
economic climate, surveyed S corporation ESOP companies
increased contributions to retirement benefits for employees by
19 percent, while other U.S. companies increased their
contributions to employee retirement accounts by less than 3
percent.
We will have new data to share with Committee members later this year
about the meaningful distributions paid out to employee owners for
retirement.
In the last Congress, Senators Ben Cardin and Pat Roberts reintroduced
bipartisan legislation, S. 742, the Promotion and Expansion of Private
Employee Ownership Act of 2013, that will:
Encourage owners of S corporations to sell their stock to an ESOP.
Provide additional technical assistance for companies that may be
interested informing an S corporation ESOP.
Ensure small businesses that become ESOPs retain their SBA
certification.
Acknowledge the importance of preserving the S corporation ESOP
structure in the Internal Revenue Code.
We look forward to working with Committee members on introduction of
the bill this Congress and appreciate your consideration for moving
these provisions as part of a tax package that promotes economic growth
and retirement savings for working Americans. As the Finance Committee
continues to work on comprehensive tax reform, ESCA would be pleased to
serve as a resource and we look forward to continuing this important
dialogue about a retirement savings plan that is enabling hundreds of
thousands of Americans to achieve the American dream at work.
The Employee-Owned 5 Corporations of America (``ESCA'') is the
Washington, DC voice for employee-owned 5 corporations. ESCA's
exclusive mission is to advance and protect 5 corporation ESOPs and the
benefits they provide to the employees who own them. These companies
have an important story to tell policymakers about the tremendous
success of the S ESOP structure in generating long-term retirement
savings for working Americans and their families. ESCA provides the
vehicle and the voice for these efforts. ESCA represents employee-
owners in every state in the nation.
______
Statement for the Record--Submitted by:
The Professional Beauty Association (PBA)
Steve Sleeper, Executive Director
Chairman Hatch, Ranking Member Wyden, and other Members of the
Committee, we thank you for holding this important hearing and we
appreciate the opportunity to submit a statement for the record. As the
Committee contemplates measures to ensure job creation and a strong,
vibrant economy, the Professional Beauty Association (PBA) urges the
Committee to prioritize policy measures that would promote tax fairness
within the small business community, thereby enabling salon business
owners to reinvest in their businesses and employees, granting new
economic and employment opportunities in their local communities.
More specifically, the Small Business Tax Equalization and Compliance
Act is an opportunity for the professional beauty industry--comprised
of salon owners, employees, manufacturers, and distributors of salon
products throughout the country--to gain tax fairness and ensure a
strong, continued presence to better the economic health of our nation.
Current law permits the restaurant industry a dollar-for-dollar tax
credit, known as the 45(B) tax credit, on the employer's share of FICA
taxes paid on tip income above the minimum wage. The Small Business Tax
Equalization and Compliance Act, which we hope will be reintroduced
later this year, would apply the Section 45(B) FICA tax credit that is
currently available only to restaurant owners to the salon industry.
In recent years there has been a significant shift from traditional
employment-based salons, where cosmetologists function as regular
payroll employees and are required to report tip information to their
employers, to non-employer salons, where cosmetologists simply rent a
booth from a salon owner and function as a self-employed contractor,
responsible for reporting their own tips. This shift has led to an
increased amount of underreported income. The Small Business Tax
Equalization and Compliance Act would also help address the tax gap by
bolstering the reporting of taxable tip income among self-employed
cosmetologists.
As you well know, small businesses are the backbone of America's
economy, and the salon industry is an industry of small businesses.
While job growth has outpaced the overall economy in eleven out of the
past fifteen years our industry has not been immune to economic
uncertainty . Extending the 45(B) tax credit to the salon industry
would serve to support and provide stability to a growing sector of
America's economy, and one that is vitally important to the success of
many other industries: according to the U.S. Department of Commerce,
every dollar spent in the salon industry generates an additional $1.77
of sales for other industries in the economy.
As Congress looks to encourage economic growth and job creation in
2015, we hope you will consider including this provision in any pro-
growth measures considered by the Committee. We appreciate your
interest and the opportunity to provide feedback, and look forward to
continuing our work with the Committee in the 114th Congress.
______
Written Testimony of Dr. Elaine C. Kamarck and
James P. Pinkerton, Co-Chairs,
Reforming America's Taxes Equitably (RATE) Coalition
Thank you, Chairman Hatch and Ranking Member Wyden, for convening this
hearing to address a pressing challenge facing our country today--
safeguarding a legacy of secure, well-paying jobs for U.S. workers.
This Committee has done great work leading the charge toward restoring
our nation to the land of job opportunity it once was.
We are Elaine Kamarck and James P. Pinkerton, the bipartisan co-chairs
of the Reforming America's Taxes Equitably (RATE) Coalition. Our
collective membership, comprised of thirty-three diverse businesses and
trade associations aims foremost to achieve tax reform that secures a
lower, internationally competitive tax rate for all businesses. We
believe strongly that such a competitive tax rate will allow family-
owned companies, firms, and large corporations to continue to invest,
grow and hire here in the U.S.
With the economy serving as the primary focus of this hearing, we
readily cite data from an Ernst & Young study commissioned by RATE
Coalition last year which quantified the alarming impact of our high
corporate tax rate on U.S. fiscal health. The study found GDP was an
estimated 1.2% to 2.0% lower--translating into a loss of roughly $235-
$345 billion each year. Similarly, workers' wages were found to be
diminished by 1.0 to 1.2% due to our uncompetitive business tax code.
Each year we allow our outdated corporate tax code to run rampant,
added financial pressure mounts on companies and business owners--most
who must find ways to cut corners elsewhere--whether that's laying off
workers, delaying investment or expansion, or spending less on research
and development.
RATE Coalition's membership represents a diverse array of industry
sectors--including retail, telecommunications, and defense, among
others. Collectively, our members employ over thirty million Americans
and operate in all fifty states. Our expansive company footprint also
gives us a first-hand look into the international business marketplace
where U.S. companies must operate and compete.
For example, Boeing, a leader in the aerospace industry, is a RATE
member company that employs 165,000 workers across the U.S. Boeing's
Chief Financial Officer Greg Smith attests to this Committee that the
increasingly competitive global market, as well as burgeoning new
technologies and the industries that bring these products to consumers
all over the world, reinforce the need for the U.S. to lower its
corporate rate to an internationally competitive level.
His statement for the record can be found below:
``The aerospace industry is facing increasing competition from
established and emerging players across the globe as nations see
the transformative power of innovation in delivering highly-skilled
and high-paying jobs. With a significant portion of our 165,000
employees, research and development activities and manufacturing
operations located across the United States, we support continuing
efforts to improve the country's competitiveness. That is critical
for the United States to build on its leadership in aerospace and
other sectors. We believe that reforming the tax code, which
includes a globally-competitive corporate tax rate, will make the
U.S. a more attractive place to do business and provide a strong
boost for continued innovation and growth.''
We are optimistic the 114th Congress will build on existing momentum
for pro-growth policies to make great progress in the areas of tax
reform that will strengthen our economy--especially the widely
supported goal of business tax reform. And we note this momentum is
bipartisan: Treasury Secretary Jack Lew recently highlighted areas of
potential common ground during his speech on business tax reform to the
Brookings Institution; indeed, he has made the pro-reform argument on
many different occasions.
Specifically, we were encouraged to hear the Administration's
acknowledgement of an existing bipartisan pathway to achieve
comprehensive business tax reform that makes the tax code more
competitive. Truly, the consensus for tax reform has resonated in
Washington and sits high on a list of legislative priorities most ripe
for action in the coming months.
In addition, we believe that the most effective tax reform should
concentrate on the goals of simplifying the code and lowering rates.
Efforts to direct revenues raised by tax reform to other purposes risk
reducing the important economic effects of reform on growth.
Repatriation that is not part of comprehensive tax reform is only a
band-aid solution to an ailing illness.
This point--that repatriation standing on its own is the opposite of
true tax reform--cannot be reiterated enough. Comprehensive tax reform
that applies to all businesses, simplifies the code, and lowers the
rate will relieve American businesses of a stifling tax burden that has
driven many in the business community to seek haven outside the U.S. in
recent years, through corporate inversions and similar tax avoidance
maneuvers.
Moreover, these short-term fixes will only give a false sense of
accomplishment that some degree of tax reform has been achieved when--
in reality--no true progress has been made to update our wildly
outdated and burdensome tax code. This can only lead to more economic
harm than good in the long run--and will only be kicking the can down
the road.
Toward this end, we believe the time for real reform has come, however,
there is still work to be done to refine the most advantageous
components of tax reform that will benefit all businesses. Most
imperative will be a lower corporate tax rate that allows the U.S. to
compete globally.
We are optimistic the Administration and Congress will come together to
work alongside this Committee to bring forth favorable tax reform
legislation that broadens the base, simplifies the code and makes the
U.S. a better place for businesses to thrive. We appreciate this
opportunity to present our Coalition's case for business tax reform to
this esteemed Committee.
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