[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-142
THE ECONOMIC OUTLOOK WITH CEA CHAIRMAN KEVIN HASSETT
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 25, 2017
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Patrick J. Tiberi, Ohio, Chairman Mike Lee, Utah, Vice Chairman
Erik Paulsen, Minnesota Tom Cotton, Arkansas
David Schweikert, Arizona Ben Sasse, Nebraska
Barbara Comstock, Virginia Rob Portman, Ohio
Darin LaHood, Illinois Ted Cruz, Texas
Francis Rooney, Florida Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York Martin Heinrich, New Mexico,
John Delaney, Maryland Ranking
Alma S. Adams, Ph.D., North Amy Klobuchar, Minnesota
Carolina Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia Margaret Wood Hassan, New
Hampshire
Whitney K. Daffner, Executive Director
Kimberly S. Corbin, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
.................................................................
Hon. Patrick J. Tiberi, Chairman, a U.S. Representative from Ohio 1
Hon. Gary C. Peters, a U.S. Senator from Michigan................ 3
Witness
Hon. Kevin Hassett, Chairman, Council of Economic Advisers,
Washington, DC................................................. 4
Submissions for the Record
Prepared statement of Hon. Patrick J. Tiberi, Chairman, a U.S.
Representative from Ohio....................................... 28
Prepared statement of Hon. Kevin Hassett, Chairman, Council of
Economic Advisers, Washington, DC.............................. 29
Articles submitted by Representative Maloney
Washington Post article titled ``Arthur Laffer's Theory on
Tax Cuts Comes to Life Once More''......................... 33
Jared Bernstein blog ``Supply-side, trickle-down nonsense on
the NYT oped page''........................................ 36
Washington Post article titled ``Here's why we're still
arguing about trickle-down tax policy''.................... 39
Response from Hon. Kevin Hassett to Questions for the Record
Submitted by Vice Chairman Mike Lee............................ 41
Response from Hon. Kevin Hassett to Questions for the Record
Submitted by Senator Martin Heinrich........................... 42
THE ECONOMIC OUTLOOK WITH CEA CHAIRMAN KEVIN HASSETT
----------
WEDNESDAY, OCTOBER 25, 2017
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
1100, Longworth House Office Building, Honorable Pat Tiberi,
Chairman, presiding.
Representatives present: Tiberi, Paulsen, Comstock,
Maloney, Delaney, and Beyer.
Senators present: Lee, Peters, and Klobuchar.
Staff present: Breann Almos, Theodore Boll, Whitney
Daffner, Barry Dexter, Connie Foster, Colleen Healy, Matthew
Kaido, Paul Lapointe, AJ McKeown, Allie Neil, and Alexander
Schibuola.
OPENING STATEMENT OF HON. PATRICK J. TIBERI, CHAIRMAN, A U.S.
REPRESENTATIVE FROM OHIO
Chairman Tiberi. Good morning, everybody. I want to welcome
everyone to what I expect to be a most informative hearing on
how we can accelerate economic growth in the United States.
What is holding back economic growth in America has been of
central interest to this committee from the onset of my term as
chairman.
Our hearings have produced useful information and insights.
I am particularly pleased to have Chairman Hassett lend his
insights today on the forces and constraints that are holding
back private investment, labor force participation, and just as
important as anything else, wages.
We hope to get a clearer picture of how the right policies
can help the economy recover its full potential.
The economy is dealing with the aging of a population,
slowing population growth, and technological changes that are
altering the methods of production in America. But self-imposed
constraints have also altered the way the economy performs, and
not in a good way. I strongly believe we can do something about
that here in the United States Congress.
I would like to direct your attention to the graph showing
how the Congressional Budget Office lowered its assessment of
the economy's output potential every year since 2007 through
2016. These are not projections of actual GDP, mind you, but of
potential GDP, the economy's output capacity, normally a fairly
stable concept.
Back in 2007, the CBO estimated the U.S. output potential
for 2016 to be over 12 percent higher than it actually is now.
What happened? The aging of the population was predictable. Not
anticipated was the U.S. business investment would be down from
pre-recession rates, and that the rate at which Americans
participate in the labor force would be drop so markedly.
Despite the low unemployment rate, the labor's markets
health has not been fully restored. Indeed, the labor force
participation rate of people of prime working age remains
substantially below where it was prior to the recession.
I believe that economic policy, including the failure to
act when other countries were improving their business climate
is largely to blame.
I would like to show you two graphs that illustrate the
changes U.S. firms face on the international playing field. The
first chart shows how 34 countries changed their corporate tax
rate since 2000.
All of these countries, save Chile, which had the lowest
rate initially, reduced their corporate rates to make their
economy more competitive while the United States rate remained
the same.
The next chart shows how 27 countries eased product market
regulations from 1998 to 2013 based on an OECD index. All these
countries, save Chile, reduced their taxes and regulations.
This paints quite a startling picture and explains why U.S.
corporations have been moving offshore.
Other countries have purposefully improved their
international competitiveness of their business sector while
the United States has taken for granted the competitiveness of
its businesses. As a result, we now have an economy that does
not fully engage its resources, and entrepreneurial spirit.
A JEC hearing earlier this year on declining economic
opportunity revealed a dramatic decline of new business
formations in this country since the last recession. From 2008
to 2014, more businesses actually closed than opened. A JEC
hearing earlier this month showed how detrimental the tax code
can be to starting a new business, in terms of both its
provisions and its shear complexity.
As the challenges we face are more daunting as a result,
the national debt is a bigger problem with a slow-growing
economy. That is why we so urgently need both tax and
regulatory reform. We must restore a more highly functioning
market economy that offers hope and opportunity to investors,
entrepreneurs, and workers, and that removes the article
constraints on faster economic growth.
Dr. Hassett's expertise is well-grounded in economic
research. And one of his areas of specialization is taxation,
which is especially useful at this time. I can't think of a
better witness to explain to us just how taxes and regulatory
reform can lift the economy and living standards across our
country.
Chairman Hassett, we appreciate your appearance before the
committee today and I look forward to hearing your views. And I
will now yield to our ranking member, Senator Peters, for his
statement today.
[The prepared statement of Chairman Tiberi appears in the
Submissions for the Record on page 28.]
OPENING STATEMENT OF HON. GARY C. PETERS, A U.S. SENATOR FROM
MICHIGAN
Senator Peters. Thank you, Chairman. And first, I want to
thank Chairman Hassett for being with us at the committee
today. I am looking forward to having a substantive discussion
on the state of the economy and some prescriptions for the
future.
I also want to thank Chairman Tiberi for your presiding
over this hearing. And I also want to wish you well in your
future endeavors. I was sorry to hear the news. We are
certainly going to miss you here in Congress, but we also know
you are going to enjoy new challenges, and most importantly,
have a little bit more time to acquaint yourself with the
family, which is always a wonderful thing.
Chairman Tiberi. Thank you. Thank you Senator.
Senator Peters. Mr. Chairman, I also think this is a very
timely hearing, given the ongoing push by the majority and the
White House to enact tax legislation on an aggressive timeline.
But before we get into specifics of tax policy, I would like to
take a step back and take a broader look at the current state
of our economy and the economic outlook for the coming years,
as well as the coming decades.
The Administration has certainly not shied away from
highlighting some positive economic statistics. Unemployment
remains low and the stock market continues to climb. But I
think we all know that there is more to an economy than just
raw monthly job numbers or the daily Dow Jones average. For
working Michigan families, we are still seeing persistent,
frustrating stagnation on wages.
Americans are overwhelmingly still not seeing the growth in
wages that normally accompany economic recoveries. Not only do
stagnant wages have an immediate negative impact on the day-to-
day lives of American families, it is also contributing to
another troubling economic trend, and that is a growing
retirement saving crisis. Far too many Americans simply don't
have the resources for a secure retirement.
As Americans are living longer with less secure assets for
retirement, like defined benefit plans, I believe this will
have a serious consequence for our entire economy. When it
comes to middle class American families, the state of the
economy is mixed. And for policymakers, I believe there are
other trends that we must address to ensure health and
competitiveness for the American economy in the decades to
come, and see the type of growth necessary.
First, I believe it is of the utmost importance that
Congress reject the idea that deferring, or for some,
eliminating, investment in basic science and research has no
consequences. It does. It has significant negative
consequences. A lack of commitment to funding research that
will lead to the next generation great American breakthroughs
will have a devastating impact on our economy. And I can
promise you, our competitors, including China, will not simply
stand still and see the competitive advantage in innovation.
Second, we must reverse an alarming trend of declining new
business formation. New businesses are the driver of our
economy and are responsible for most new job creation in the
United States. But, alarmingly, we are not seeing the numbers
of new businesses needed to increase the shared prosperity
across the economic spectrum, and especially in the urban/rural
divide.
New business formations across presidential administrations
in both parties have fallen by half since the late 1970s. And
when new businesses are created, they are increasingly
concentrated in just a few metropolitan areas like Los Angeles
and New York.
And, finally, I believe perhaps the critical question
policymakers must be asking about the future of the economy, is
how are we going to prepare our workforce for an increasingly
autonomous world, driven by advances and artificial
intelligence and machine learning. This is why we are facing
together, I think as a Nation, some stagnant wages, massive
retirement savings gap, a retreat from investment in
innovation, decreasing business formation, except for a few
major metropolitan areas, and fundamental shift toward
automation that could dwarf the industrial revolution and
global impact.
These are problems that we can work together to solve in a
bipartisan basis, and I think we must do this on a bipartisan
basis. Unfortunately, I am concerned that we are going to be
spending the coming weeks and months debating just how big a
corporate tax cut to a multinational conglomerate should
receive, and other policies that clearly benefit the very few
and most wealthy individuals, while raising taxes for middle
class Americans.
Despite our differences, I look forward to a serious
conversation today and hope we can find common ground on how to
meaningfully support American workers and their families.
So thank you, Chairman Hassett, for being here today.
Chairman Tiberi. Thank you, Mr. Peters. Senator Peters,
thank you for your kind words as well. We are now turning to
our distinguished guest, Dr. Kevin Hassett. Dr. Hassett,
welcome.
I apologize that we have a Ways and Means Republican
meeting going on on tax reform upstairs, so a few other Members
are up there, and I will be departing before the hearing is
over, unfortunately, to join them. But we are so excited to
have you today. The Senate also has a vote, I think, at 10:30,
so sorry for that interruption as well.
Let me introduce Dr. Hassett. He is the Chairman of the
President's Council of Economic Advisers. Prior to this he
worked as a scholar with the American Enterprise Institute. He
also has served as an economic adviser to the George W. Bush,
John McCain, and Mitt Romney presidential campaigns. Dr.
Hassett was also a senior economist with the Board of Governors
of the Federal Reserve, and an associate professor at Columbia
University. He earned his doctorate in economics from the
University of Pennsylvania.
Chairman Hassett, it is an honor to have you today. You are
now recognized for your testimony.
STATEMENT OF HON. KEVIN HASSETT, CHAIRMAN, COUNCIL OF ECONOMIC
ADVISERS, WASHINGTON, DC
Chairman Hassett. Thank you, Chairman Tiberi. And what an
honor it is to be back before the committee with the word
Honorable before my name, which seems really inappropriate, but
gosh, I am so thankful for the support of Senator Lee and
Senator Peters in my confirmation in the Senate. And it is
great to be back before Mrs. Maloney and Mr. Delaney.
I think the Joint Economic Committee has a proud tradition
of focusing on the problems facing Americans and the solutions
that we can agree to on a bipartisan basis. And it is in that
spirit that I appear before you today.
In the testimony that follows, I will provide an overview
and discuss the status of a number of sectors. I will emphasize
some areas that need attention as well as recommended policy
changes that will improve our citizens' economic well-being.
If you read the 1946 Employment Act that created the
Council of Economic Advisers, it is my somber responsibility to
analyze the economy, to see what is going on, and to provide
the President and Congress with objective advice about what we
ought to do about it when we are falling short.
The economy is buoyed by heightened expectations right now,
and it is growing at a solid and sustainable pace with low
unemployment and low inflation. Financial markets appear to
recognize the likelihood of continued growth with low
inflation, with the major stock price indices up substantially
over the past year, and with expected inflation from the market
for Treasury's inflation-protected securities remaining pretty
low.
That said, the Trump administration is not satisfied with
business as usual nor with the pace of real output and income
growth during the past several years. As a result, we put
forward a program designed to boost the rate of real GDP
growth. Now, I am happy to report that the economy is doing
well so far in 2017. Real GDP growth during the first two
quarters of the year averaged 2.1 percent at an annual rate.
Real consumer spending grew 2.6 percent, only slightly below
the 2.9 percent rate of growth during the preceding 2 years.
Business investment grew at a 7 percent annual rate during
the first half of 2017, and that is a notable acceleration from
an essential flat pace during the preceding 2 years. That is
very important because after translating this pattern of
investment into the flow of capital services, it is apparent
that capital deepening, the flow of capital services per hour
worked, has made essentially no contribution to the growth of
labor productivity in recent years, in contrast to a post-World
War II average of .8 percentage points per year. Indeed, if you
look at the contribution to productivity growth of capital
deepening over the last 2 years, it became negative for the
first time since the second World War.
As I will discuss in a moment, this Administration thinks
that tax policy could play a role in reviving the contribution
of capital services to labor productivity growth, and most
importantly, through that channel to the growth of real wages.
But before I do that, let's look at a few other sectors.
Real residential investment grew at a slow 1\1/2\ percent
annual rate in the first half of 2017. The low and steady rate
of core inflation is notable. Core CPI inflation, excluding
food and energy prices, is only 1.7 percent for the 12 months
through September. Looking back at the past few years, real
potential GDP appears to be growing at about only a 2 percent
annual rate, or perhaps even less, as Chairman Tiberi's chart
indicated.
Real wage growth in America has also stagnated. Over the
past 8 years, the real median household income in the United
States rose by an average of only six-tenths of a percent per
year.
The relationship between corporate profits and worker
compensation broke down really in the late 1980s, before any of
the recent policy had a chance to interrupt that. And that
deteriorating relationship between the wages of American
workers and U.S. corporate profits reflects the state of
international tax competition more than anything else, I
believe. Countries around the world, as Chairman Tiberi's chart
indicated, have responded to the international outflow of
capital by cutting their corporate tax rates to attract capital
back.
Now, a key feature of the joint proposal for taxes of this
Administration together with congressional leadership is the
proposed reduction of the statutory Federal corporate tax rate
from 35 to 20 percent. This conclusion, that the incidence of
the corporate tax falls partly but importantly on workers, is
driven by empirical patterns that are highly visible, in
addition to extensive peer-reviewed research, not to mention a
number of follow-up studies to ours that have appeared during
the past 10 days or so.
For example, the covariation between real wage growth and
statutory corporate tax rates between the most-taxed and the
least-taxed countries over recent years, visible in Figure 1,
which might go up over there, is indicative of this larger
literature. Of course, simple time series correlations don't
tell the whole story, but there is a big literature that shows
that high corporate tax countries have low wage growth and
that, low corporate tax countries have high wage growth.
Indeed, between 2012 and 2016, the 10 lowest corporate tax
countries of the OECD had corporate tax rates 13.9 percentage
points lower than the 10 highest countries, and that is about
the same scale as the reduction currently under consideration
here in the United States. The average real wage growth in the
low tax countries has been dramatically higher, as would have
been predicted by the academic literature.
Now, the U.S. economy has made great progress during the
past years in reducing the jobless rate, but the rate of
productivity growth, and therefore real wage growth, has been
slow. It is time for all of us, in a bipartisan way, to turn
our attention to building a plan for boosting the rate of
growth in the long-run, and wage growth in particular. As I
have discussed, the Administration's plan for tax reform will
have an important role in improving the rate of productivity
growth, in combination with its plan to stabilize the
regulatory environment, and we look forward to working with
you, the members of this committee, to help reach those goals.
I will be happy now to respond to any questions you may
have.
[The prepared statement of Chairman Hassett appears in the
Submissions for the Record on page 29.]
Chairman Tiberi. Thank you, Dr. Hassett. As I mentioned in
my testimony and showed in that graph, over the past decade the
CBO has continually downgraded the estimate of what the economy
is capable of producing, our output potential.
Is it possible, in your opinion, that the Obama-era
policies of higher taxes and heavier regulation actually
constrained our economic potential? And how could we change
that?
Chairman Hassett. I think on regulation it is certainly
possible. I think that your chart really captured what happened
in recent years, which is that it was our actions on tax policy
that necessarily harmed us, it was our inactions. And so what
happened is that the rest of the world cut their corporate
taxes, and that made their countries much more attractive for
the location of multinational plants than our country, and we
saw the activity move overseas in response to that. You know,
one metric, Chairman Tiberi, is how big this effect is.
There is a National Bureau of Economic Research paper that
came out in the spring that looked at just U.S. multinationals.
They transfer-priced their profits abroad to the foreign
plants, but they transfer-priced the profits abroad by paying
too much for the products that they buy, say, from the Irish
plants. And this study estimated that 52 percent of our trade
deficit right now is coming about because of this transfer-
pricing. We are paying too much for stuff from our foreign
subsidiaries. We are moving that much activity offshore: so
much activity that 52 percent of our trade deficit is
attributable to it. And so, of course, that means lower demand
for workers and lower wages as well.
Chairman Tiberi. Thank you. You have written and spoken in
recent years on the challenges of the uneven economic recovery,
a topic we have explored in this committee, a topic that
Senator Peters mentioned as well. Indeed, a wide array of
research makes clear that this recovery has been the most
graphically concentrated on record, leaving far too many
communities, like in Ohio, and Michigan, for example,
communities and the people who live in those communities--
behind.
As you know, I have introduced legislation to provide a new
market-driven way of getting private capital off the sidelines
and into our communities, certainly to foster new business and
create jobs, called the Investing in Opportunity Act, which has
garnered broad bipartisan support and bicameral support, as
Senator Tim Scott is the lead sponsor in the Senate. Two
questions for you.
First, can you briefly describe the dimensions and
consequences of this trend that is occurring within our economy
of increasingly concentrated job growth in places like Los
Angeles and New York? And, secondly, can you speak to the
Administration's commitment to ensuring tax reform ensures the
challenge head-on of incorporating ideas like the Investment
and Opportunity Act?
Chairman Hassett. Thank you, Chairman Tiberi. Geographic
inequality has been a focus of my academic work for many years,
and it is really the reason why I am an economist. I mentioned
in my confirmation hearing that I grew up in a town,
Greenfield, Massachusetts, where the Greenfield Tap and Die,
which was the main factory in town, closed. And across the way
in Turners Falls there was a big paper mill that was the main
employer there, and that closed, too. My dad and I, when I go
home (my dad still lives in Greenfield), we walk next to the
abandoned factories because they are right along the
Connecticut River. It is a beautiful walk. But the factories
are so fallen apart that the video game ``Fallout'' used it as
a location for video shooting for post-Apocalyptic America.
And so this is something that I care deeply about. And that
is why my academic career has really focused a lot on
geographic inequality, including, as you mentioned, States like
Ohio and Michigan, where there are distressed communities where
the plants closed and the jobs haven't come back.
I think that tax reform, in general, will definitely
encourage a lot of plant location back into the U.S. because,
right now, again, if you locate in Ireland you are paying
almost no tax. If you locate in the U.S., you are paying the
highest tax of the developed world. But we also should pay
close attention to where those plants are going to go. And as
you said, if the plants were all located to the places that
have very low unemployment rates right now, then they wouldn't
necessarily be helping those distressed communities.
Now, the Administration doesn't have an official position
yet, it is not something that I discussed with the President on
your specific proposal, but I can tell you that the
geographical inequality is something that everybody is paying
very close attention to.
Chairman Tiberi. Thank you. Senator Peters, you are
recognized for 5 minutes.
Senator Peters. Thank you, Mr. Chairman. Mr. Hassett, you
have certainly been engaged in a pretty high-profile debate of
sorts over the impact of the Administration's tax proposal, and
what it will have on the wages for working Americans.
And I think there is certainly an awful lot of--a lot to
dive into regarding that argument. But to be brief, I am
somewhat skeptical of the numbers that you have put out. And I
think I am in pretty good company in the fact that I think the
majority of economists also are very skeptical of some of the
numbers we have heard from the Administration.
And certainly, I believe that many working families back
home in Michigan are also very skeptical about that. For them,
I don't think many Michiganders are holding their breath to see
if their boss' boss' boss' tax cut somehow trickles down to
them to see either in increased growth or in wage increase.
Instead, they want to know how this tax proposal is going to
impact them. How it is going to impact their pocketbook. They
certainly have to worry about everyday challenges, like every
family, like buying a car and paying for daycare and providing
for a secure retirement.
So I think we need the Administration to be a little bit
more direct as to the consequences of the tax plan that is
before us. Specifically, as it is tailored to individuals, so
folks know exactly what this means for them. Certainly, some
estimates that I have seen have shown that some middle-class
families could see an $800 increase in this tax plan, because
it is focused primarily on the folks at the very top of the
income scale, and large corporations, and they will actually be
paying for it in the form of higher taxes. So I think we need
to make sure the American public and families know what that
is.
And given the fact that the median income for families in
Michigan is a little of $52,000, an $800 tax increase is a big
deal for those families, and we need to have full disclosure in
this plan going forward. So I understand you may find some
disagreement with some of these estimates that are being put
out by various economists and other types of think tanks.
But could you give this the committee today an estimate of
the tax savings that a working family will get as a result of
the tax plan that has been proposed?
Chairman Hassett. Yes. Thank you, Senator. You know, the
first part of your question relates to the tax savings
discussion, that----
Senator Lee [presiding]. So sorry to interrupt. Chairman
Hassett, could you move a little closer to the mike. Thank you.
Chairman Hassett. I am sorry. Thank you. You know, let's
talk about what we agree about. In the CEA report that we just
put out, we found that there has been a disconnect between the
welfare of corporations and the welfare of workers. That
corporate profits are soaring, but wages are not. And that is
very unusual in U.S. history. I think we agreed that that
disconnect has happened.
I think we also agree that we are the highest corporate tax
case of the developed world. That is a simple fact. So then the
other thing that I think we agree about, because it is a fact,
is that the capital deepening contribution to productivity
growth in the U.S. has gone to the lowest level it has been
since World War II.
And so I think that it behooves all of us. It is our really
somber responsibility to think, what is driving these factors?
I think that the best explanation for those patterns in the
data is that the corporate rates around the world have gone
down a lot, they have encouraged U.S. multinationals to locate
plants abroad instead of here, and that is why we see these
effects.
I know that if labor demand goes up in the U.S. that wages
will go up, and there is a dispute about how much. But I don't
think that there is anyone that thinks it is zero. Now as for
the estimate of the tax effects. As you know, the
Administration is committed to a process (that hopefully can be
bipartisan), in which the committees work out where the
brackets go. And the President has even mentioned that we are
open to a higher top rate, if that is what it takes to get
broad support for this tax plan.
And I think that this process is designed optimally to
create a bipartisan agreement about tax reform. And it is
certainly everyone's hope that we head there. So if I were to
say, well, this family is going to get this tax cut, then I
would be stepping in front of that process, because where the
brackets are located is being negotiated in the Ways and Means
Committee upstairs and in the Finance Committee right at this
moment.
Senator Peters. Well, but you are going to be a very
important part of that process. You are the principal adviser
to the Administration as to where this policy should be and how
it is going to impact growth. And so I am going to want--I want
to pursue that just a little bit. But before I say that, we do
agree on the disconnect between corporate profits and wage
levels for most workers in those companies. In fact, corporate
profits are at an all time high, so it is not that corporations
are hurting right now. But we have seen certain individuals
have benefited.
Certainly, first and foremost, we know CEOs at those
corporations have done very well. In fact, I think CEO pay has
grown about 90 times faster than the typical worker since 1978.
So the folks at the very top are reaping all of the rewards of
that growth, it is not impacting everyday Americans. And we
have a tax code now or a tax proposal that is going to say,
those folks that are reaping all those benefits, they need to
pay less taxes. I don't think the average worker thinks that is
the case, they think they need that kind of relief.
And so as we are talking about the particulars of an
individual family, I want to know--and we have heard President
Trump say that middle class families will not see a tax
increase. Is that the position of the Administration?
Chairman Hassett. Yes.
Senator Peters. And will you use that influence that you
have with the President, and the President stand by those
comments to the Ways and Means Committee here, saying that
middle income taxpayers--all middle income taxpayers will not
see a tax increase?
Chairman Hassett. The President is adamant on that point,
that it is the one thing that is nonnegotiable, that there is
not going to be a middle class tax hike in this tax bill. And
as for the corporate profit point, I know we are running a
little late, but this is very important, and I would hope that
I could respond to that, too, because it is a very important
point. Right now, U.S. multinational profits are, as you said,
at an all-time high, and executive compensation is
skyrocketing.
The last I checked, and I could follow-up on this, that
executive compensation in the U.S. was higher than dividends.
Go figure. But the disconnect from wages is not because there
is fundamental change in market power here in the U.S. The
disconnect in wages occurs because the profits aren't in the
U.S.: the profits are abroad.
And so right now we have the highest tax on Earth, but
those companies aren't paying it because they are locating the
revenue in places like Ireland.
So if we make our country more attractive for location of
plants, then it is not that we are giving a big tax cut to
companies that are already not paying it, it is just that they
are not paying the tax because they are locating their activity
abroad, and the profits that are sky high in the U.S. are
driving up wages in places like Ireland.
Senator Peters. And, if I may, Chairman Lee, just briefly,
because I want to make sure I am clear about taxes for middle
income families, because some of the numbers that I have seen,
particularly with the elimination, for example, of State and
local deductions for State and local taxes, there have been a
number of studies that show that that with that deduction
elimination, a lot of middle class families are going to see an
increase, about 12 or 26 percent of families in Michigan claim
that State and local deduction, and it is all over the country.
And some studies have said the average increase for folks could
be up to $1,800 a year because of loss of that deduction. And I
think you will see a number of those figures.
So, given what you said, I hope you will understand when
those of us are pushing back on a proposal that may be put
before us that is going to raise that, we are going to say, we
can't support that. And we are going to say, we can't support
that. And we are going to hope we will be aligned with the
President that we can't support these increases on middle class
families, and we will push back pretty aggressively on the
Republican proposal.
Chairman Hassett. That is understandable. And when the
complete plan is available, I look forward to working through
those numbers with you and your staff.
Senator Peters. All right. Thank you.
Senator Lee. Dr. Hassett, we are grateful to have you here
and congratulation on your confirmation. I look forward to
working closely with you in your new role over at CEA.
We are in the middle of a significant debate, a debate that
has been made clear, even so far this morning in our
discussion. I want to pick up on something that Senator Peters
was discussing because I think it is an important point, having
to do with our corporate tax rate.
At 35 percent, we have the highest corporate tax rate in
the developed world. And there are problems with that, problems
that I think that are acknowledged by most Republicans and most
Democrats, but sometimes I don't think we look into it quite
enough. Sometimes we tend to look at the corporate tax as being
something that is paid, a burden that is borne solely by
wealthy corporate fat cats, the likes of whom could be depicted
with a Monopoly game piece or depicted sort of like Mr. Peanut
with the monocle and a double-breasted suit.
But when you take a really close look at who exactly pays
corporate taxes, the picture is a little bit different. It
taxes, effectively, both capital and labor, both the investor's
dividends and the wages of the workers. Economists disagree a
little bit on how this breaks down, but it is commonly
understood that lost worker wages make up between one-quarter
and one-half of corporate tax revenue, some actually put the
figure higher than that. And so perhaps a quarter to a half,
maybe more, borne by workers.
On top of that, you have got everything that people buy,
every good, every service in the economy, is made more
expensive by a tax like that. And there is also diminished
wages, unemployment, and underemployment that can sometimes
stem from that. So, in the end, I tend to view this 35 percent
corporate tax as having some very nasty regressive effects,
meaning, that its least desirable qualities include the fact
that it is borne disproportionately by America's poor and
middle class.
This is why, in January, I penned an op-ed in the
Federalist that proposed eliminating the corporate tax
altogether, and shifting that particular tax burden onto
investors instead of workers by taxing capital gains and
dividends at ordinary income rates, instead of having the
corporate tax. Under this type of strategy, workers could be
liberated from their share of the corporate tax burden, and
America would, without a doubt, become the most popular place
in the world to do business.
So, Dr. Hassett, I would love to get your comments here,
any thoughts you might have on that idea.
Chairman Hassett. Thank you, Vice Chairman Lee. I think
that, again, wage growth is low, profit growth is high, the
profits are abroad. We have got the highest rate, and we see
that countries around the world that are run by governments
that don't have the commitment to the American system that
every member of both parties here in Congress has, cutting
their corporate rates.
President Macron ran in France on reducing the corporate
rate to 25 percent, and the French rate was already below ours
when that election began. The political party governing Greece,
whose name translates as ``The Coalition of the Radical Left,''
has a lower corporate tax rate than we do. This is not about
right wing parties throwing money at rich corporations, it is
about economically literate governments understanding that if
we want wages to be higher, then we have to give workers
capital to work with.
If you look at the U.S. right now, again, the contribution
to productivity growth from capital deepening is lower than it
has been since the second World War. We have got a crisis in
our country, and it is something that everybody on this
committee needs to work together to solve.
Senator Lee. And this idea of zeroing out the corporate tax
altogether and replacing it with a tax on dividends and capital
gains that would put it on par with the taxes we impose on
income, what do you think of that idea specifically?
Chairman Hassett. You know, I am focused like a laser right
now as an adviser to the President on the proposals that are
there. Your idea is something that is quite analogous to
something that a lot of other countries have done. A few
countries have eliminated it altogether. Many have integrated
the corporate tax with the dividend and the capital gains tax
so that they are basically charging tax once at one level, but
in a progressive manner.
If you throw it at the individual side, then if there is,
for example, a retiree who is getting a dividend, and they are
using that dividend to pay their utility bill, then maybe you
don't want to tax the heck out of that dividend. But if there
is a really rich person getting a dividend, maybe you do. And
those are the kind of arguments that have motivated other
countries to do that, but for me right now I am focused on the
current proposal.
Senator Lee. There is another issue that is closely related
to this one. It deals with the burden of overregulation. I keep
two stacks of documents in my office here in Washington. One
stack is a few inches tall, it is a few thousand pages long. I
think for last year it was 3,000 pages long. The laws passed by
Congress last year. The other stack is 13 feet tall. For last
year it was about 96,000 pages long, and it is last year's
Federal Register, the annual cumulative indexes of Federal
regulations as they are released and later finalized.
Those regulations end up costing the American economy about
$2 trillion a year. This is up from just $300 billion a year 20
years ago when I first started tracking this problem. So it has
increased roughly 7-fold. It is the product really of
congressional delegation of power. Congress not wanting to make
law itself and stand accountable for the difficult line drawing
decisions that go along with setting public policy and having
someone else do it. And yet, it is costing the economy $2
trillion a year, and I believe those effects are borne
disproportionately by America's poor and middle class.
In your opinion, do you think an idea like the regulatory
budgeting idea I have proposed or the REINS Act, which would
require congressional approval of major regulations, would have
a desirable impact on GDP and benefits for America's poor and
middle class?
Chairman Hassett. Thank you, Senator. In terms of the
specific proposals, I would have to touch base with my
colleagues at the White House. It is not something I discussed
with them, and I wouldn't wish to signal an official White
House position that I am not currently informed about. But
certainly the topics that you have mentioned are incredibly
important to the White House.
And I think that one reason why sentiment in the U.S. is so
much higher right now is there has been a lot of palpable
deregulation so far this year, but also nearly a halt of costly
new regulations. And one of the things that we at CEA have been
studying is the impact on firms of new regulations. And it is
really quite striking because if all of a sudden you run a
business and then the U.S. Government has a new regulation,
then you have to figure out what to do. You have to hire
lawyers. You have to decide whether to put new things into your
plan. And it is a really urgent problem.
The regulation from, for example, 3 years ago has costs,
too, because it has distorted your previous behavior. But the
new regulations are incredibly costly. And one think tank in
town has estimated that just by slowing new regulations, we
have reduced the number of man hours spent complying with new
regulations this year by more than 6 million. And I think that
gives you an idea of the kind of effects of prudent regulatory
reform.
But we are also very mindful of how important many
regulations are, like clean air and clean water and so on. So
we are not talking about wiping away all regulations, just
exposing the ones that exist and the new ones that we might
think of, to really careful cost-benefit analysis.
Senator Lee. Thank you very much, Mr. Hassett. I see my
time has expired.
Mr. Delaney.
Representative Delaney. Thank you, Mr. Chairman. Thank you,
Dr. Hassett, and congratulations on your appointment. You bring
tremendous expertise and very good judgment to this important
job. So it is great to have you in the seat. Just staying on
the corporate tax question for a moment.
It seems to me that across the last decade or two, a very
large percentage of businesses, particularly large businesses,
have moved from an incorporated status to a pass-through
status, largely because of how the private equity industry has
grown, and in every kind of private equity-backed transaction,
those companies moved to an LLC status where they don't pay any
corporate tax. In fact, many of them pay very little tax
because they are leveraged and they can deduct the interest.
And there is no evidence or data that I have seen to
indicate that wages have grown any faster in those companies
where there is no corporate tax than in incorporated businesses
in this country. So does that to some extent mitigate this
argument that the corporate tax rate is the reason that wages
haven't grown in this country, because in fact a growing and
large percentage of the businesses in this country in fact
don't pay tax because of what I just discussed, and their wages
have not grown any faster based on any analysis that has been
done than wages in C corporations, which actually pay this tax?
Chairman Hassett. Thank you for the question, Mr. Delaney.
As always it is a very interesting one. And I am not sure there
is literature on that question yet, but if there is, I will
find it and send you a note about it. And it is a really great
question, so I will have to speculate about whether that effect
is there, which I won't dispute or concede because I would have
to study the numbers a little bit more, why that might be.
Representative Delaney. Sure.
Chairman Hassett. Don't forget that the U.S. labor market
is a place where firms show up and compete for workers,
ideally, and that the wage is set by total labor demand in the
country. If we have a big chunk of the firms in the country
that are locating the jobs overseas, then that reduces overall
demand.
Representative Delaney. Right.
Chairman Hassett. But in the end if, for example, Hassett,
Incorporated, and Comstock, Incorporated, are competing for
Delaney, then we are going to have to pay you about the same
wage.
Representative Delaney. And a quick point on corporate tax.
The average corporate rate is fact about 23 or 24 percent. Is
that about right?
Chairman Hassett. Do you mean the taxes divided by total
revenues----
Representative Delaney. Yeah.
Chairman Hassett. The average rate, the last I checked for
multinationals, was a good deal lower than that.
Representative Delaney. Got it. And is that more consistent
with our competitors as opposed to our stated rate, which is
the highest?
Chairman Hassett. If revenue is low with our high tax rate,
because people locate activity offshore----
Representative Delaney. Right.
Chairman Hassett. Then it doesn't mean that we have a low
tax rate.
Representative Delaney. Right, it means they are both----
[Cross talk.]
Chairman Hassett. Yeah----
Representative Delaney. So I loved how you talked about
focusing on things that we can agree on, because we need to do
more of that here. We tend to focus on all the things we don't
agree on. But two things that I think that there is broad
agreement on, and I think you have opinions on these topics.
The first is tying infrastructure with tax reform, which I
have worked on extensively, as I think you know, around
international tax reform. And it seems to me it is a missed
opportunity not to do infrastructure as part of tax reform
because it is really the only way to pay for infrastructure and
everyone seems to agree we need more investment in
infrastructure.
And then the second question is a carbon tax, which would
obviously generate an enormous number--amount of revenues,
which could be used for broad-based tax reduction, individuals,
small businesses, C corps, whatever the case may be, under the
category of we would rather maybe tax pollution as opposed to
income and profits.
Can you comment on the wisdom of having infrastructure as
part of tax reform and perhaps a carbon tax as part of tax
reform?
Chairman Hassett [joking]. Sure. You know, I am an
economist, and if I look back at the times I have worked on
presidential campaigns and advised people, then they tended to
lose. So I don't give political advice because it is not very--
--
Representative Delaney. More a matter of start tax policy.
Chairman Hassett. Yeah. So infrastructure is really
important. Tax reform is really important. Whether they go
together is something that you folks are the experts in. And
the second question----
Representative Delaney. Okay. Carbon tax.
Chairman Hassett. Carbon tax. Yeah, I have written
extensively about a carbon tax, as you know, which may motivate
the question----
Representative Delaney. Yes.
Chairman Hassett. And my job as CEA chair is to provide
objective analysis of proposals. And if someone were to propose
a carbon tax, then I am sure when I did that analysis I would
be citing some of my own work----
Representative Delaney. And what is your directional
opinion on a carbon tax? Whether a carbon tax whose revenues
would be effectively dividended back to the American people
either directly or through other tax cuts. How would that
affect economic growth, putting aside, you know, what I view is
perhaps the most important benefit, which was to reduce
greenhouse gases. But how would you view that as an economist
related to economic growth?
Chairman Hassett. Sure. Again, not speaking on
Administration policy, but----
Representative Delaney. Sure. I understand.
Chairman Hassett. But as an economist who does study the
literature. There is an economist at the Resources for the
Future at the University of Maryland named Rob Williams, who
has done a very careful modeling job of looking at carbon taxes
and how they affect the overall economy. And depending which
tax rates you reduce when you pair it with a carbon tax, you
can get either really big negative effects on the economy or
small positive effects.
Representative Delaney. So you can get positive to
negatives, if you--devil or God is in the details----
Chairman Hassett. In his model that is what it says.
Representative Delaney. Thank you, Dr. Hassett.
Representative Comstock [presiding]. Thank you. I now
recognize myself for 5 minutes. And thank you, Mr. Hassett,
good to be with you, Chairman, and welcome you here to this
committee and to your new position here.
I wanted to follow up a little bit on the growth rates, and
as we look at growth in what we are doing in taxes, and how
that relates to our international competition, and the
potential for growth in economies. When you look at India and
the growing middle class there and the potential we have to
benefit from that, whether it is trade or other, but also in
the growing competition that we are going to have.
What are the best policies that you think in terms of
getting our growth rate up, because when you go to other
countries and hear they are having 8 percent or 9 percent. When
I look at a lot of the potential--I am in Virginia with a lot
of technology sector in my district, and I often hear from them
about they are just sort of waiting whether they can invest
here or invest somewhere else. Should I go to India? Should I
go, you know, to some other country, or should I invest here?
What policies can we put in place that will then sort of
unleash it to both grow here, but then interact with the
growing economy around the world?
Chairman Hassett. You know, I think that there are three
components to economic growth. To grow output, you need to grow
inputs. And you can have more labor input either because you
have more workers or because the workers are more talented. You
can have more capital because we are an attractive location
for, the capital--or both of them can get better because of
technological change.
Now, when you look around the world and you see countries
growing at 9 or even 15 or 20 percent, which happens sometimes,
very often that happens because they are starting out from a
place where they are not at the technological frontier.
Therefore, they can copy existing practice since the
skyrocketing growth indicates they are just going to do it as
well as, or half as well as, a major developed county.
The problem for us being really the class of the world in
terms of the technological frontier or very close to it, is
that the innovation part of growth is a lot harder because we
can't just copy what somebody else is doing. We have to
actually innovate and discover something that no one ever knew
existed.
There are also things that we can correct with policies,
and we can affect labor supply and capital supply. I think that
the tax reform that has been negotiated with the White House
and Congress is designed optimally to help both on the
individual side by reducing marginal tax rates, and encouraging
higher labor supply, and on the corporate side by making the
U.S. a place where plants want to locate again, we would
increase capital formation as well.
Representative Comstock. Now, are there ways we can, you
know, with the workforce development, and I know that is an
issue that we will be dealing with also subsequent to tax
reform. How can we best invest in our workers and grow, because
with the information economy, with this expanding economy and
middle class around the world, our workers, if we are going to
continue to lead, need to be the most talented, and we need to
continually invest. I know we always talk about life-long
education.
What policies can we then put in place to develop and
constantly upgrade our employees so that their wages are
growing, you know, substantially, and we don't have the
stagnation that we have now?
Chairman Hassett. Well, sure. One key factor is human
capital formation and educating our workers and helping them
keep up with the rapid technological changes in society. And
there are a number of initiatives that are being studied and
enacted now by Secretary DeVos and the rest of the education
team to help workers keep up.
I think that one of the things, looking back at our policy
failures collectively as a Nation over the last few years, is
that we have not necessarily done a good job of that. If you
look at the people who have received training because they lost
their job because of trade, for example, then that training
doesn't always look like it has been that helpful. Therefore,
it is something that we need to study very carefully and
improve upon.
Representative Comstock. In terms of having, you know, look
at all these training programs that we have across numerous
agencies, kind of consolidating them, really having them
directed towards the work shortages. And in Virginia we have
lots of cyber jobs open, and you can--we have programs--I will
give a plug for Capital One has done some great outreach with
communities where kids aren't necessarily going to college, but
they will get them in and they have gone out and recruited kids
in lower income areas, but with real potential, bring them in
for a 6-month to a year program. And they are having huge
success getting them into that cyber pipeline. Then if they
want to go back to business school, they want to go to college,
they now have a job where they also will get tuition assistance
and things like that.
So maybe as we are looking at these training programs, but
also maybe tax policy--how we can encourage companies to invest
in their workers like that, and match the education efforts to
the jobs that are open and that we are deficient in filling.
Chairman Hassett. That is certainly an important objective.
Representative Comstock. Great. Thank you. Thank you. And I
will now yield to my colleague, Mrs. Maloney for 5 minutes.
Representative Maloney. Thank you. Thank you. And
congratulations on your appointment.
Chairman Hassett. Thank you, Congresswoman.
Representative Maloney. It is wonderful to have you here
today. Now, in the words of a famous and immortal New Yorker,
Yogi Berra, this hearing and topic sounds a great deal like
deja vu.
This country has heard again and again about how huge tax
cuts for the most fortunate will pay for themselves, and that
the benefits will somehow trickle down to benefit working
families. And again and again that has not been the case. Just
last April this committee had a hearing where we debated the
virtues of trickle down economics and featured the inventor of
the Laffer Curve, Arthur Laffer, and Dr. Jared Bernstein, who
was the chief economist to former Vice President Joe Biden.
Mr. Laffer made a number of the same claims being made here
today about the benefits of giant tax cuts. And after the
hearing he published a number of articles that pointed out that
that is not what happened. And I would like--and it is not
likely to happen again, I would say, based on the past
performance. So, without objection, I would like to submit
copies of these articles into the record.
Representative Comstock. No objection.
[The articles appear in the Submissions for the Record on
page 33.]
Representative Maloney. Now, according to your prepared
testimony, you estimate that the Administration's proposed tax
cut to the corporate tax rate would increase the level of
average household income in the United States by at least
$4,000 annually, after the effects have taken place. That is on
page four of your testimony.
Chairman Hassett. Correct.
Representative Maloney. Well, I must say that that sounds
absolutely wonderful, but it sounds a little bit to me like you
can lose all this weight, but you don't have to exercise and
you don't have to go on a diet. And past performance doesn't
show that.
Now, the New York times pointed out in one of their
articles that a 2012 Treasury Department study found that less
than a fifth of the corporate tax falls on workers. So it does
not trickle down to them. And a Congressional Research report
last month concluded that the effects of corporate taxes fell
largely on high-income Americans, not average workers.
So I would like to, without objection, to place into the
record these two reports also. Without objection.
Representative Comstock. Without objection.
[The information was not received by the printing
deadline.]
Representative Maloney. Thank you. Now, FactCheck.org, you
might have seen the report that they did on your numbers. They
also took a look at the underlying math and found that there
were roughly 125 million households in the U.S. last year, and
an average increase of 4,000 for each of these households would
equal more than 503 billion annually. But according to the U.S.
Treasury, the total amount that U.S. collected in corporate
taxes in fiscal year 2017 was just $297 billion.
So even if you somehow transferred all the money previously
collected in corporate taxes directly to American households,
you would still be about 200 billion short. And that doesn't
add up to me. So to support the Administration's proposal, you
further testified today, and you give the example in your
testimony, that between 2012 and 2016, the ten lowest corporate
tax countries of the OECD had a corporate tax rate 13.9
percentage points lower than the 10 highest corporate tax
countries, about the same scale as the reduction currently
under consideration in the United States. But you don't list
those countries. But I assume that they must include low-tax
countries like Switzerland and Latvia. And I would like, for
the record, for you to submit who these countries are.
Chairman Hassett. Right.
Representative Maloney. I looked at Latvia and it is a
great country. They have emerged in a noble fashion from
communism and Soviet oppression. But last year the GDP of
Latvia was $27.68 billion, and that is not quite as good as
Vermont. And Vermont, they came in at number 50 in GDP among
our States.
So are you seriously suggesting that the U.S., a country
with huge complex dynamic economy, and a GDP last year of over
$18 trillion, can and should model its tax policy after that of
an eastern European country still emerging from the yoke of
communism. Actually, Switzerland also has a very low tax rate,
with a GDP that is less than that of one of our great States,
Vermont?
And if I can use Latvia as a model, then we should also use
the tragic example, I would say, of Kansas, as a cautionary
tale--a tale about the economic chaos that happened if your
brand of trickle down economics is put into place. Kansas is
not a pretty picture.
So your comment really on the 10 compared to the 10
highest--and to me it doesn't make a normal or accurate
comparison, and the numbers that were really refuted by
FactCheck.com on the 4,000 benefits.
One of the items that Senator Peters mentioned is the
concern that many of us have that outside organizations and
analysis are saying that 80 percent of the tax cut goes to the
most fortunate, which is not the stated claim or purpose or
goal of the Administration. But in its current form, numbers
don't lie. And the numbers are coming in in a way that does not
benefit the working man and woman in our country.
Chairman Hassett. Thank you very much. It is always a
pleasure to appear before you, Mrs. Maloney.
Representative Maloney. Always a pleasure to see you.
Congratulations.
Chairman Hassett. I will respond to two points directly.
The point about Latvia: there is a very large literature that
looks at corporate tax rates and how wages respond. And in
order to estimate that effect, you need variation in the tax
rates. There is variation over time within countries, and there
are studies that look at that. There is variation across
countries. There is variation within----
Representative Maloney. Excuse me a second. But when you
make a presentation, if you could give us the 10 countries that
you are looking at.
Chairman Hassett. I will do that. I will follow up and send
them. I can't think of them off the top of my head, in part,
because it changes each year because countries are cutting
their taxes. But this evidence has been found and people who
look across U.S. States, for example, you mentioned Vermont.
There is--a Federal Reserve paper that looks at when states
change their corporate taxes, what happens to wages. There are
papers that look at Canada, across Canadian provinces, and
papers that look at Germany.
And so the chart was meant to summarize what is basically a
result that appears over and over in the literature in an easy
to digest forum, and I think it serves that purpose. I think
that the FactCheck.org point, which has been emphasized also
publicly by a few economists, is really something of a classic
economic blunder.
The fact is that, if--right now we have a corporate tax
system that encourages firms to locate their activity in
Ireland in order to avoid U.S. tax, and they do that by
creating jobs in Ireland instead of here, then we are barely
getting any revenue at all from the corporate tax here because
they moved the money to Ireland. I think we agreed that U.S.
multinationals aren't paying that tax.
And so to look at the change in revenue and the change in
wages, and to say that that is a meaningful ratio is something
that has been disproven by careful analysis by John Cochrane at
the University of Chicago, Casey Mulligan at the University of
Chicago, and Greg Mankiw at Harvard University. So the
FactCheck.org numbers are just not correct. Thank you.
Representative Maloney. Well, if you would send me the
reports that you mentioned.
Chairman Hassett. Sure will.
Representative Maloney. And I will send you the Treasury
Department report and the Congressional Research Service.
Chairman Hassett. I have read both of those.
Representative Maloney. That refute that. So as we go
forward in this debate, it is important that we get our numbers
straight. And I would like to see the numbers that you rejected
with the foreign countries. And this is important. I would like
to see money brought back to America and invested in our
economy and in our infrastructure. I agree with you on that.
And this is a work in progress.
We do need to simplify our tax code, but we certainly need
to do it in a way that is fair to working men and women. And I
do not believe that the current forum that is before us--of
course, it is going to be debated and changed as we go forward,
as you pointed out, does that.
Thank you so much for your service.
Chairman Hassett. Thank you.
Representative Maloney. And I guess I yield to Senator Lee,
right?
Senator Lee [presiding]. Thank you. Senator Klobuchar.
Senator Klobuchar. Thank you very much. And thank you so
much for being here, and I would share the Representative's
concern about the current proposal. But I want to start out
with something I know that you have done some work in the rural
economic area, and I am still seeing a lot of challenges. I was
just up on the Canadian border with Representative Peterson. We
obviously talked about the current estate tax proposal, and it
only helps I think two people in his district.
But last year we saw large layoffs in the iron range due to
steel dumping. People are now just getting back to work. We
have a shortage of workforce housing. So while we have that
going on in a lot of our rural areas, we actually have housing
issues because we have some successful companies. And we have
job openings, but not enough trained workers, and I know you
have been asked about this.
You have written about the challenges facing our rural
communities. What policies or programs do you think we should
implement to help?
Chairman Hassett. Thank you, Senator. And thank you for
your support in my nomination to my confirmation. I am very
grateful for that and humbled by it.
I think that the geographic inequality around our country
right now is very palpable in many different ways, and that
there are places that are booming at the State level. For
example, right now, Colorado has about half an unemployed
worker per job listing. And if you survey firms, then the
biggest, number one, problem they have is that they can't find
the workers for the job openings that they have. And then, as
you know, that there are many parts of your State and every
State that have the exact opposite circumstance, where the
unemployment rate is way north of 10 percent and it has been
for more than a decade and doesn't seem like it is budging,
even though the economy is doing great.
I, as an economist, am hopeful that the corporate tax
reform that is currently being considered could do quite a bit
to help that, because with a tight labor market in lots of
parts of the country, then, if you are a firm and you want to
locate a plant here instead of Ireland, then you have got to
find a place where there are a lot of workers, because if you
locate there, then you will actually be able to fill up the
plant. And so I think that that big picture effect is probably
the biggest thing that we can do.
Earlier, we talked with Chairman Tiberi about a proposal
that he has put forward, which the White House has no current
position on, about how to address geographic inequality, more
specifically with a bipartisan proposal that Mr. Tiberi is a
co-sponsor of. But I think that ideas like that--or a cosponsor
of, excuse me--ideas like that are things that we need to
explore as well.
Senator Klobuchar. You mentioned the tax and other
countries, locating overseas. Certainly, one of the biggest
goals here we have is to have jobs in America. And I was just
talking before I came over here with some tax experts about the
difference of someone that would like to bring money back from
overseas that is over there, between a global minimum tax idea,
where you have the average among countries, versus the previous
administration had proposed a territorial tax idea, where you
would have a minimum tax per country as opposed to having this
average, and what would the average do. Could you talk about
the difference between those two proposals? I am not talking
about specific rates. I am talking about the mechanics of how
that would work and the effect that could have on companies'
incentives to keep jobs in America.
Chairman Hassett. I know that this issue is something that
is currently being studied carefully by the committees. I think
that everybody involved who has studied it, including President
Obama, thinks that we should move towards a territorial system.
The frustrating part for people who do taxes is that there
really isn't just a territorial system and a worldwide system,
but there are degrees of territoriality and worldwide. And I
look forward to seeing what the committee has come up with
specifically on this issue. And I think it is a very important
one for understanding the international tax implications of the
corporate tax. But I think we have to let the committees decide
where they are going to go on that.
Senator Klobuchar. Okay. Last question I have is just on
the economic opportunities that we could have with immigration
reform. And Grover Norquist, when I was the ranking on this
committee, came in and gave his full-throated support for
immigration comprehensive reform with the basis that we could
bring the debt. And there have been many studies, CBO studies,
on that, and also that we could actually bring in more talent
and create more jobs, and I think the 2013 figure back then, it
would reduce the deficit by $158 billion over 10 years, $685
billion over the following--include the following decade.
Twenty-five percent of our U.S. Nobel laureates were born in
other countries. Seventy of our Fortune 500 companies are
headed up by immigrants. Could you tell me where you are on
this?
Chairman Hassett. Sure. You know, I think that, as an
economist, we talked earlier in the hearing about how, if you
want more output, you need more input, and one of the inputs is
labor. And so, for sure, in any economy, immigration is an
important source of labor. And also we have borders, and they
need to be protected. I am not an expert on border security.
But I think it is also that there is bipartisan agreement that
we----
Senator Klobuchar. We had a bill like this out of the
Senate that did both things.
Chairman Hassett. Excuse me?
Senator Klobuchar. We had a bill that passed the Senate
that had significant funding for order at the border but also
allowed this kind of legal immigration that I am talking about.
Chairman Hassett. I would be happy to discuss that specific
bill with you----
Senator Klobuchar. Okay. Very good.
Chairman Hassett [continuing]. And that specific study.
Senator Klobuchar. Time is of the essence here. We have
been waiting a decade.
Chairman Hassett. And I could add that I am very grateful
that my Irish ancestors came here, and I am pretty sure they
weren't allowed here because they had computer degrees.
Senator Klobuchar. Exactly. Good point. Same with mine,
came as a chef or a chef's assistant, not a chef. Thank you.
Chairman Hassett. Thank you.
Senator Lee. Congressman Beyer.
Representative Beyer. Thank you, Senator.
Mr. Chairman, reports out of the recent fourth round of the
NAFTA renegotiations have not been positive, particularly
regarding the reactions in Ottawa and in Mexico City to certain
U.S. proposals. And the successful conclusion of the
negotiations was always going to be difficult, and now we seem
to be further away from that goal than ever before. If those
renegotiations don't produce an outcome that is acceptable to
the Administration or to Congress, would the economy be better
off if the U.S. pulled out of NAFTA rather than the status quo?
Chairman Hassett. Thank you for the question. I am not
involved in the negotiations, and I think that the President's
position on trade is that our trade deals could be made better.
And I think that, as an economist, I can say that, if an
economist wrote a free trade deal, then it would be one
sentence. We would say: We got free trade. If you look at the
free trade deals, then they take months and months to
negotiate, and they have got thousands and thousands of pages.
And so I don't think that one could dispute the observation
that we could make those deals better. I am also hopeful to see
where the negotiations lead and hope that the trade deals could
be made better.
Representative Beyer. I am glad to hear it. Implicit in
your remarks is that you are very much a free trader.
Chairman Hassett. I am an economist----
Representative Beyer [continuing]. Put those together.
You have written in the past about the stock market. And
based on public statements by senior administration, including
our Treasury Secretary, who described government, quote, as a
mark-to-market business. Many market participants believe that
this Administration views higher stock prices as a validation
of its economic policies. But, as you know, stock prices go up
and down. What are the risks, in your view, of guiding policy
based on the whims of the equity markets?
Chairman Hassett. You know, I don't think that there is
anyone, that I know of, in the White House that is guiding
policy based on what happened yesterday in the stock market. I
think that our economic proposals are based on sound economic
reasoning and objective analysis. I think that you are right,
that the market goes up and down. And the market has gone up a
lot lately, and I think that if I were going to write down an
economic model that predicted a couple of reasons why, the most
important would be that there is an anticipated tax reform. And
if the statutory corporate tax rate were to drop as
significantly as is proposed, then that would certainly have a
positive impact on the market. And so exactly how big that
effect is and what the probability is that the markets factored
in of the tax reform is unclear to me. There is not really a
good estimate of that. But I think that one could be quite
confident that, if the tax reform were to fail, that that would
be a big negative for the market.
Representative Beyer. Okay. You know, Mr. Chairman, several
Fed presidents have recently noted that cutting taxes at this
point in the business cycle would be highly procyclical.
Robert Kaplan of Dallas Fed said, quote: My concern is you
would create a bump in gross domestic product that would be
short term. It would then decline back down to trend growth,
except that when you decline back down, you would be more
leveraged than when you started.
And San Francisco Fed President John Williams said: Unless
targeted to raise productivity and underlying potential, the
tax cut could feed unsustainable growth that could ultimately
be undone by asset price bubbles, inflation, and possible
recession.
So why is now the time for added stimulus? I know you have
been concerned in the past about inflation risks and fiscal
risks in the past. Were those concerns unfounded in the past?
Why are we being so procyclical right now?
Chairman Hassett. I would share those concerns if the tax
proposal right now were a demand stimulus, but the tax proposal
is to stimulate supply. And so, if we stimulate supply, then
there is more capital, there is higher labor productivity, and
you are actually making even the workers that are already
employed more productive because they have better machines to
work with. And so that doesn't create a kind of Keynesian
demand inflation spiral at all, but rather the increase in
capital supply puts downward pressure at the margin given the
positive GDP growth because you are increasing supply.
Representative Beyer. But we already have--corporate
profits are at an all-time high right now. There is more
capital sitting on the sidelines than there has ever been. Why
do we think that changing the corporate tax structure is going
to put more of that money to work?
Chairman Hassett. The money is on the sidelines, and it is
on the sidelines, across the ocean. And the fact is that the
corporate money isn't turning into factories here in the U.S.
because we have the highest corporate taxes on Earth. It is not
rocket science. And if we were to reduce the corporate tax
rate, then companies would come back, and the money would come
off the sidelines because the U.S., again, would be an
attractive location for investment.
Representative Beyer. If 25 percent of those corporations
pay no taxes, and the 35 percent is the statutory rate, and the
actual rate is closer to 14, wouldn't we be better off finding
a way to get it much lower, 20, 22, 25, whatever the target
rate is, by eliminating the preferences and the exceptions that
allow 25 percent to pay nothing?
Chairman Hassett. They paid nothing mostly because they
have located the money in Ireland or some other country
offshore, and, therefore, avoid the U.S. tax. And so that is
precisely the offshoring model that we are trying to sever with
this proposal.
Representative Beyer. Mr. Chairman, thank you. I yield
back.
Senator Lee. Mr. Hassett, I wanted to ask you, generally
speaking, what you believe the bright spots are in our economy.
We talk a lot, understandably and with good necessity, about
some of the things that scare us, that worry us. But I am
curious to know, as an economist, not only what you think are
the bright spots but also what has surprised you about our
economy over the last few years.
Chairman Hassett. Sure. I think that there are a number of
bright spots, and we are really starting to see it in the data,
that with GDP growth going up north of 3 percent, we will get
another release this week. It will probably be hurricane-
affected, but be a little bit below 2 percent would be my
guess. But the expectation of the professional staff at the CEA
is that we are currently looking at a second half of the year
that, on average, will be north of 3 percent growth. So that
would be, on average, three-quarters in a row. And I think that
going from the new normal of 1.9 to 3 percent, that that bright
spot, which is really a nice headline for America's workers, is
mostly attributable to a surge in capital formation that I
think is there because of increased optimism about deregulation
and lower taxes. And so I think that right now it is incumbent
on us to see that bright spot and to make sure that it stays
bright by delivering on the policies that we promised but,
especially on taxes, haven't been delivered yet. But I think
that firms are optimistic because they expect that we are going
to succeed.
Senator Lee. Thank you. That is good insight.
As you are aware, some of the tax reform proposals that we
have been looking at have included a discussion of a separate
rate for pass-through entities. The idea is that there would be
separate rules that would go along with the separate pass-
through rate that would be there to thwart opportunistic,
manipulative tax avoidance. What, in your opinion, would those
rules look like? And how would this work?
Chairman Hassett. Yeah. We absolutely believe that the
corporate rate reduction to 20 percent requires some kind of
commensurate rate reduction for pass-through businesses,
America's small businesses, but we also recognize that the
guardrails around that 25 percent rate need to be very good
because, otherwise, for example, if LeBron James is going to be
getting the 25 percent because he is a small business. And, you
know, I love him. He may be the greatest basketball player of
all time, but I think he should pay the top marginal tax rate
because it is labor income. You see how hard he works on the
court.
I am not a lawyer. I hear the lawyers talk about
guardrails, and I know that there is a lot of optimism that
this can be constructed in a prudent way. But I have to wait
and see what the final outcome is before I can do an economic
analysis of it.
Senator Lee. Thank you.
Representative Comstock.
Representative Comstock. Thank you.
You know, I think this morning we did hear a lot of the
same critiques that we have heard in the past from 1980s, you
know, really for the past 30 years. You know, all the
disparaging remarks that you heard today. But we are really in
a different economy now, this information economy and the
international economy that we have. And as you pointed out
numerous times, you know, if people can leave and go to Ireland
and find a talent pool there that allows them, you know,
Microsoft, or a lot of our tech companies to go there, that is
what we are competing with. So what kind of new thinking maybe
gets past some of the same partisan language that you have--
that, you know, has kind of been renewed. I thought we had all
sort of agreed our corporate rate was too high, but now we are
kind of--we are seeing that reversion on the partisan front to
the same old tired critiques. What kind of new thinking can we
do with this new economy so that we can get past some of those
partisan divides? And if you can just--kind of following up on
some of the bright spots but also that we can't really thrive
and have 3, 4 percent growth if we stick with those old models.
Chairman Hassett. I think that there is so much that the
members of this committee agree about: the fact that there is a
disconnect between profits and wages; the fact that we have got
the highest statutory rate on Earth, but there is a whole bunch
of companies that don't pay it; the fact that wage growth has
been completely unacceptable. And it is really the
responsibility of the Members of Congress to think about why
those patterns exist in the data and then to come up with
something that we are going to do about it.
And I understand that partisanship is part of what we do
here in Washington. It is inevitable. But I have not seen an
alternative theory for this set of facts that is in any way
moving for me. And I just honestly hope that the responsibility
that we all have for America's workers, for the people that are
working harder every day and not getting more money, can help
us work together on this bipartisan tax reform. I think it is
designed to be the same kind of process we had in 1986 where a
great tax reform passed that was a big positive for the
economy, and I am still hopeful that that can be achieved if
people will start to focus on the actual analysis. For example,
why have wages been growing so slowly even though profits have
not? What is your story for that if it is not the one that we
are talking about? I don't think that there is a good
alternative.
Representative Comstock. And Larry Lindsey had an article
where he was talking about the difference between the 3.1 or
3.2 percent growth and the 2.1 that we have had from 2011 to
2016, that average of 2.1. What is the difference between a 2.1
and a 3.1 to the economy and to long-term things like Social
Security and our entitlements?
Chairman Hassett. Sure. You know, these are going to be
slightly incorrect, but they are useful rules of thumb because
they are round numbers and they are easy to remember: If we get
an extra percent of GDP growth, then that is about a million
jobs. That is about a thousand dollars per household.
And so, if we can come up with a tax plan that adds--you
know, pick your favorite number--3 or 4 percent over 10 years,
then multiply those out. It is a lot of money. It is a lot of
jobs. And so that is how I think about it.
Representative Comstock. And then, as we were talking
earlier, if we also have that skill upgrade, you are really
talking about wage growth of a lot more than a thousand. If you
go from being somebody who maybe loses your coal job--although,
those very high income, $80,000, $90,000, $100,000 in coal
country--but if you move into some of these technology jobs,
engineering, construction, a lot of these things also have very
high pay, we need to be supporting, you know, through the tax
structures, through the business process, supporting that
relocation and that reassignment of jobs and labor, too, also.
So you would be talking about a lot more than $1,000 increase
when you get them into that higher information economy, right?
Chairman Hassett. Sure. You are exactly right. It is
something that we have talked a lot about in the White House.
The President even tweeted about people needing to move if they
are having a hard time finding a job to the labor markets that
are hot.
Representative Comstock. Great. Well, thank you.
Chairman Hassett. Thank you.
Representative Comstock. Thank you. I really appreciate the
opportunity to visit this morning.
Chairman Hassett. Thank you.
Senator Lee. Mr. Hassett, we thank you for coming.
Chairman Hassett. Thank you for having me.
Senator Lee. And your insight today has been very helpful.
We are grateful, also, for the service you provide for the
country and the Administration.
Should members wish to submit questions for the record, the
hearing record will remain open for 5 business days.
And, with that, we will be adjourned.
Chairman Hassett. Thank you.
[Whereupon, at 11:18 a.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Patrick J. Tiberi, Chairman, Joint Economic
Committee
Good morning and welcome. I want to welcome Senator Peters and Vice
Chairman Senator Lee as well as the other Members of the Committee to
what I expect will be a most informative hearing on how we can
accelerate economic growth in the United States.
What is holding back economic growth in America has been of central
interest to this Committee from the onset of my term as chairman. Our
hearings have produced useful information and insights. I am
particularly pleased to have Chairman Hassett lend his insights today
on the forces and constraints that are holding back private investment,
labor force participation, and wages. We hope to get a clearer picture
of how the right policies can help the economy recover its full
potential.
The economy is dealing with the aging of the population, slowing
population growth, and technological changes that are altering the
methods of production. But self-imposed constraints also have altered
the way the economy performs and not in a good way. I strongly believe
we can do something about that.
I would like to direct your attention to the graph showing how the
Congressional Budget Office (CBO) lowered its assessment of the
economy's output potential every year since 2007 until 2016. These are
not projections of actual GDP, mind you, but of potential GDP--the
economy's output capacity--normally, a fairly stable concept. Back in
2007, CBO estimated the U.S. output potential for 2016 to be over 12
percent higher than it is now.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
What happened? The aging of the population was predictable. Not
anticipated was that U.S. business investment would be down from
prerecession rates and that the rate at which Americans participate in
the labor force would drop so markedly. Despite the low unemployment
rate, the labor market's health has not been fully restored. Indeed,
the labor force participation rate of people of prime working age
remains substantially below where it was prior to the recession.
I believe that economic policy, including the failure to act when
other countries were improving their business climate, is largely to
blame.
I would like to show you two graphs that illustrate the changes
U.S. firms face on the international playing field. The first chart
shows how 34 countries changed their corporate tax rates since 2000.
All these countries, save Chile, which had the lowest rate initially,
reduced their corporate tax rates to make their economies more
competitive while the U.S. rate remained the same.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The next chart shows how 27 countries eased product market
regulations from 1998 to 2013, based on an OECD index. All these
countries save Chile reduced taxation and regulation.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
This paints quite a startling picture. It explains why U.S.
corporations have been moving offshore.
Other countries have purposefully improved the international
competitiveness of their business sector while the United States has
taken the competitiveness of its businesses for granted. As a result,
we now have an economy that does not fully engage its resources and
entrepreneurial spirit.
A JEC hearing earlier this year on declining economic opportunity
revealed a dramatic decline of new business formation in this country
since the last recession. From 2008 to 2014, more businesses actually
closed than opened. A JEC hearing earlier this month showed how
detrimental the tax code can be to starting a new business--in terms of
both its provisions and its sheer complexity.
All the challenges we face are more daunting as a result. The
national debt is a bigger problem with a slow-growing economy. This is
why we so urgently need both tax and regulatory reform. We must restore
a more highly functioning market economy that offers hope and
opportunity for entrepreneurs, investors, and workers and that removes
the artificial constraints on faster economic growth.
Dr. Hassett's expertise is well grounded in economic research, and
one of his areas of specialization is taxation, which is especially
useful at the present time. I cannot think of a better witness to
explain just how tax and regulatory reform can lift the economy and
living standards. Chairman Hassett, we appreciate your appearance
before the Committee and look forward to hearing your views today.
I will now yield to Senator Peters for his statement.
__________
Prepared Statement of Chairman Kevin Hassett, Council of Economic
Advisers
Chairman Tiberi, Ranking Member Heinrich, Vice Chairman Lee, and
Members of the Committee, thank you for inviting me to discuss the
state of the economy with you today. In the testimony that follows, I
will provide an overview and discuss the status of a number of sectors.
I will emphasize some areas that need attention, as well as recommend
policy changes that will improve our citizens' economic well-being.
Overview: the economy, which is buoyed by heightened expectations,
is now growing at a solid and sustainable pace with low unemployment
and low inflation. Financial markets appear to recognize the likelihood
of continued growth with low inflation, with the major stock price
indexes up substantially over the past year, and with expected
inflation (from the market for Treasury's inflation-protected
securities) remaining low.
That said, the Trump Administration is not satisfied with business
as usual nor with the pace of real output and income growth during the
past several years. As a result, we have put forward a program designed
to boost the rate of real GDP growth. That program includes tax cuts
designed to boost the rate of investment, raise productivity, and boost
real wages. The Administration also plans to improve the regulatory
landscape, and thereby to keep the flow of new regulations from further
reducing the pace of economic growth. We recently put out a report that
looked specifically at the burden of regulation on our economy, and
there is no doubt that overly burdensome regulation hurts GDP growth.
I am happy to report that the economy is doing well so far in 2017.
Real GDP growth during the first two quarters of the year averaged 2.1
percent at an annual rate, and the range currently being estimated for
third-quarter growth (2-to-3\1/2\ percent) despite the negative effects
of Hurricanes Harvey and Irma. As a result, some snap-back can be
expected in the fourth quarter, especially in the petroleum-producing
sectors whose Texas operations were shut down by Hurricane Harvey.
Since January, the unemployment rate fell 0.6 percentage points to 4.2
percent in September, the lowest rate since 2001, and overall growth is
poised to average about 3 percent over the second half of the year.
Financial Markets: Since the election, stock market values have
climbed steeply, with a value of large companies in the Standard and
Poor's 500 index increasing [20] percent and the values of the small
companies in the Russell 2000 climbing even more, [26] percent. The
joint Administration-Congressional tax proposal, the ``Unified
Framework for Fixing our Broken Tax Code,'' likely boosted the overall
stock market, which has priced in an increased chance of a major tax
cut. Also, the President's program to stabilize the regulatory
environment may be partly responsible for the relatively strong
performance of small company stocks because regulation is an
approximately fixed cost and is therefore more of an impediment for
small firms than for large firms. The rise in the stock market--
together with the increase in home prices--has generally positive
implications for the rest of the economy, such as its role in
supporting consumer spending.
Real consumer spending grew 2.6 percent at an annual rate during
the first two quarters of 2017, only slightly below the 2.9 percent
rate of growth during the preceding two years. Consumer spending has
outpaced disposable income growth during the past four quarters (1.2
percent). As a result the saving rate fell to 3.8 percent in the second
quarter from a 2016 average of 4.9 percent. High levels of consumer
sentiment and the recent gains in housing values and stock-market
wealth have supported growth in consumer spending and the accompanying
decline in the saving rate.
Business investment grew at a 7 percent annual rate during the
first half of 2017, a notable acceleration from an essentially flat
pace during the preceding two years. The acceleration was in the
equipment and structures components while the intellectual property
component continued to grow at a healthy (5 percent annual) rate.
Looking back over the whole of this past business-cycle, business
investment fell more during 2008-09 than during any previous recession,
but then recovered in line with a normal recovery--at least through
about 2014. During the past two years (2015-16), however, it plateaued.
Because of the deep dive during the recession, however, the level of
investment did not rebound to the level of the previous (2007) peak
until four years into the recovery.
After translating this pattern of investment into the flow of
capital services, it is apparent that capital deepening--the flow of
capital services per hour worked--has made essentially no contribution
to the growth of labor productivity in contrast to a post-WWII average
of 0.8 percentage point per year. As I will discuss in a moment, this
Administration thinks that tax policy could play a role in reviving the
contribution of capital services to labor productivity growth, and
through that channel to the growth of real wages.
Real residential investment grew at a slow (1.5 percent) annual
rate in the first half of 2017. Growth was also slow during the four
quarters of 2016, after five years of rapid growth. We have reason to
expect somewhat faster growth during the next year in view of tight
housing-market conditions, rising home prices, and a shortage of
existing homes for sale. Building permits have exceeded housing starts
for the past [7] months and the level of permits authorized but not yet
started is near its business-cycle high, suggesting solid near-term
prospects for an increase in housing starts.
Consistent with tight supply, nominal national home prices
increased 6.3 percent during the 12-months ended in July (according to
the FHFA Purchase-Only Index). Nominal national home prices were 10
percent above their 2007 peak. However, after adjusting for inflation
with the Consumer Price Index, real home prices in July were still 8
percent below their peak. The changes in home prices varied
considerably across states. Over the four quarters that ended in
2017:Q2, home prices rose in 48 states and the District of Columbia.
West Virginia experienced the largest decrease (-1.2 percent), while
Washington State experienced the largest increase (12.4 percent). A
consensus of housing-price experts expects that home prices will
continue to increase, albeit at a moderating rate over time. The median
forecast from Zillow's survey of house price experts is for home prices
to increase 5.0 percent in 2017 and 4.0 percent in 2018.
The low-and-steady rate of core inflation is notable. Core CPI
inflation (that is, excluding food and energy prices) was only 1.7
percent for the 12 months through September, down from 2.2 percent
during the year-earlier period. Low prices on goods imported from our
trading partners have been one force holding down domestic inflation.
The low and roughly stable rate of core inflation suggests that the
U.S. economy has not yet bumped up against a capacity constraint and
that it still has room to grow.
Looking back at the past few years, it appears that real potential
GDP appears to be growing at about only a 2 percent annual rate, or
perhaps less. After all, the unemployment rate has fallen 0.5
percentage points per year during the past two second-quarter to
second-quarter intervals with only 1.7 percent per year real GDP
growth. Looking back at this recent history, I can understand why the
Congressional Budget Office projects growth of potential GDP of 1.8
percent during the next 10 years in their current-law forecast,
although I am not endorsing that CBO forecast. If economic policy can
do anything to elevate this growth rate, it should . . . because of the
importance of potential growth for the soundness of our Budget and the
welfare of our Nation. This recent disappointing growth is the key
motivation behind this Administration's growth agenda.
Real wage growth in America has stagnated. Over the past eight
years, the real median household income in the United States rose by an
average of six-tenths of a percent per year. But even as Americans'
real wages stagnated, real corporate profits soared, increasing by an
average of 11 percent per year. The relationship between corporate
profits and worker compensation broke down in the late 1980s. Prior to
1990, labor compensation rose by more than 1 percent for every 1
percent increase in corporate profits. From 1990-2016, the pass-through
from corporate profits to labor compensation was only 0.6 percent, and
looking most recently, from 2008-2016, only 0.3 percent.\1\ The profits
of U.S. multinationals are still American profits, but, increasingly,
the benefits of those profits do not accrue to U.S. workers.
---------------------------------------------------------------------------
\1\ Results from a regression of total labor compensation in the
U.S. on corporate profits from BEA data covering 1966-2016. A Wald test
supremum trend break occurs in Q4 1989.
---------------------------------------------------------------------------
The deteriorating relationship between the wages of American
workers and U.S. corporate profits reflects the state of international
tax competition. Countries around the world have responded to the
international outflow of capital by cutting their corporate tax rates
to attract capital back. They have doubled down on such policies as
they have seen business-friendly policies benefit workers.
A key feature of the joint proposal for taxes of this
Administration together with Congressional leadership is the proposed
reduction of the statutory Federal corporate tax rate from 35 to 20
percent. An analysis by the Council of Economic Advisers suggests that
this tax rate cut would increase the level of average household income
(relative to a no-tax-cut baseline) in the United States by,
conservatively, $4,000 annually after the effects have taken hold.
It may sound counter-intuitive to some that a cut in the tax on
profits might boost wages, but the chain of causality is
straightforward. Real wages reflect output per hour (labor
productivity) of American workers. The productivity of workers in an
economy depends, in part, on tools and machinery in the hands of the
workers. The services of these tools, known technically as the flow of
capital services--in the right hands--enables production. Even in an
economy without international capital flows, reductions in the
corporate tax rates and the associated capital deepening may imply a
higher marginal product of labor and higher wages. The issue becomes
more dramatic when the international dimensions are considered. The
ability of domestic U.S. firms to invest foreign profits overseas
magnifies the implications of corporate tax policy for domestic workers
because an uncompetitive domestic corporate tax rate reduces the demand
for U.S. workers by encouraging capital formation abroad. Indeed, when
viewed in this way, the incidence of the corporate tax could
theoretically fall entirely on U.S. workers, so long as workers are
immobile and capital moves freely across borders. And wage changes of
the scale we have modeled happen in just a few years simply if capital
deepening returns to normal.
This conclusion--that the incidence of the corporate tax falls
partly but importantly on workers--is driven by empirical patterns that
are highly visible, in addition to extensive peer-reviewed research,
not to mention a number of follow-up studies to ours that have appeared
during the past 10 days or so. For example, the covariation between
real wage growth and statutory corporate tax rates between the most-
taxed and least-taxed developed countries (OECD) over recent years,
visible in Figure 1 (attached), is indicative of this larger
literature. Between 2012 and 2016, the 10 lowest corporate tax
countries of the OECD had corporate tax rates 13.9 percentage points
lower than the 10 highest corporate tax countries, about the same scale
as the reduction currently under consideration in the United States.
The average real wage growth in the low-tax countries has been
dramatically higher, as would have been predicted by a consumer of the
recent academic literature, which looks at much longer time periods and
explores the relationship with modern econometric techniques.
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The U.S. economy has made great progress during the past years in
reducing the jobless rate, but the rate of productivity growth and
therefore real wage growth has been slow. It is time to turn our
attention to building a plan for boosting the rate of growth in the
long-run. As I have discussed, the Administration's plan for tax reform
will have an important role in improving the rate of productivity
growth, in combination with its plan to stabilize the regulatory
environment, and we look forward to working with you to reach these
goals.
I will be happy to respond to any questions the committee may have.
Thank you.
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Response from Hon. Kevin Hassett to Questions for the Record Submitted
by Vice Chairman Mike Lee
During the hearing, you identified geographic inequality as not
only an important issue, but also one that is central to the reason you
chose to become an economist. My Joint Economic Committee staff, who
have spearheaded the ``Social Capital Project,'' are exploring a number
of topics including how the decline in marriage, participation in
community institutions, and religious adherence might be connected with
the economic challenges faced in some of these struggling areas. What
role do you see these social and cultural shifts playing, at the local
level, in driving or exacerbating declines in economic outcomes in some
communities?
Thank you for this thought-provoking question.
As you note, I have had an interest in geographic inequality
starting from watching my hometown of Greenfield, Massachusetts,
decline once our mill closed. It is an interest that I was proud to
pursue through the nonprofit Economic Innovation Group, EIG, even aside
from any research that I performed as an economist at AEI, up until I
became the Chairman of the Council of Economic Advisers (CEA). And it
is a privilege to answer this question for you and your Committee as
the Chairman of the CEA.
The economics profession has yet to converge toward any kind of
consensus about how economic activity and social and cultural shifts
relate to one another. The philosopher of science Karl Popper once
characterized science as a process of ``conjecture'' of hypothesis and
``refutation'' by evidence. I will outline three main sets of
conjectures about your question.
I should advise as I begin that the citations below do not purport
to be anything close to exhaustive: the research in this field is
enormous and continues to expand.
The first set of conjectures attempts to estimate the causal
effects of economic challenges on variables that proxy for social or
cultural outcomes. One approach looks at what happens to mortality
after an individual loses a job when a firm-level layoff that an
individual could not plausibly have caused--an ``exogenous'' job loss--
causes an individual to lose a job. The results are disheartening to
say the least: mortality increases by up to 50 to 100 percent (Sullivan
and von Wachter 2009), including the risk of death from suicide
(Classen and Dunn 2012). Another approach looks at the experience of a
community rather than an individual after it loses its sources of jobs
and income, finding similar results. As a local government loses its
economic tax base, property values decline, crimping the community's
capacity to invest in local public services like public schools; in
addition, property crime rises (Feler and Senses 2017). Rates of
marriage decrease even rates of out of wedlock births increase (Autor,
Dorn, and Hanson 2017). And deaths from suicide and drug overdoses rise
(Pierce and Schott 2017).
In spite of the rigor their methodology, however, these estimates
are far from the last word on how economic challenges may interact with
social and cultural outcomes. Even the most ironclad evidence of an
effect that runs from the economic to the social and cultural does not
rule out the possibility that other causal channels affect this same
set of outcomes. And nothing in this evidence explains why some
individuals or some communities may respond better to economic
challenges than others. In principle, the effect of any economic shock
on mortality estimated in any study could, say, double if some set of
social and cultural factors that helps individuals or communities adapt
to economic challenges were to cease to exist. Yet such an effect could
virtually never be detected by any of the standard statistical
techniques economists use to estimate the causal effect of economic
challenges on social and cultural factors.
A second school of thought posits, citing the apparent explanatory
failure of economic variables alone to explain variation in social and
cultural outcomes, that variation in social ``norms'' of some variety
must themselves be exerting a distinct causal influence on the outcomes
in question. Kearney and Riley (2017), for instance, find that the
Appalachian coal boom of the 1970s and 1980s induced increases in
family formation and marital births--but that the fracking boom post-
2005 induced an increase in marital and non-marital births, but no
increase in marriage. Kearney and Riley (2017) interpret this evidence
as consistent with the idea that economic forces influence social and
cultural outcomes through their interaction with social norms rather
than through a causal mechanism constituted by economic forces alone.
Other analyses, however, interpret evidence of a similar nature to
suggest that variation in social norms alone do not need to have any
interaction with economic factors to explain the social and cultural
outcomes of interest. An example of analysis that marshals quantitative
data to make an argument to this effect is Murray (2013).
However, from the perspective of insisting that all conjectures in
science be vulnerable to refutations by evidence, many explanations
that rely on variation in norms to explain social and cultural outcomes
seem to leave something to be desired. An explanation of how social
norms explain social and cultural trends would seem to require, to be
fully useful to policy makers, a theory of how the norm arose in the
first place. Lacking such an explanation, it would seem difficult to
refute any specific conjecture about how the rise and fall of a social
norm explained a social or cultural trend.
A third set of explanations, however, does make reference to deep-
seated historical factors that can plausibly explain both geographic
variation in social norms and economic outcomes. Inspired in their
hypothesis by Frederick Jackson Turner's 1893 essay The Significance of
the Frontier in American History, a new strand of research integrates
historic data from the U.S. Census and GIS data from additional
historical sources on the frontier experience. In spite of the time
elapsed since the closing of the frontier, constructing a variable for
plausibly exogenous ``frontier experience'' within a local area, the
authors find that the legacy of the frontier indeed persists into the
present. They find, for instance, that the greater the ``frontier
exposure'' of a community, the less its current residents favor
redistribution. The authors attribute this attitude to the greater
reward of effort in the historical frontier environment.
To be sure, this research program of attempting to identify deep-
seated historical factors that explain both social norms and economic
variables--at least as applied to the United States--remains in its
infancy.
references
Autor, D., David Dorn, and Gordon Hanson. 2017. When Work
disappears: Manufacturing Decline and the Falling Marriage-Market Value
of Men. National Bureau of Economic Research, Working Paper No. w23173.
Bazzi, S. Martin Fiszbein, and Mesay Gebresilasse. 2017. Frontier
Culture: The Roots and Persistence of ``Rugged Individualism'' in the
United States. National Bureau of Economic Research, Working Paper No.
w23997.
Classen, T. and Richard A. Dunn. 2012. The Effect of Job Loss and
Unemployment Duration on Suicide Risk in the United States: A New Look
Using Mass Layoffs and Unemployment Duration. Health Economics 21(3):
338-350.
Feler, L. and Mine Z. Senses. 2017. Trade Shocks and the Provision
of Local Public Goods. American Economic Journal: Economic Policy,
9(4): 101-43.
Kearney, M.S. and Riley Wilson. 2017. Male Earnings, Marriageable
Men, and Nonmarital Fertility: Evidence from the Fracking Boom.
National Bureau of Economic Research, Working Paper No. w23408.
Murray, Charles. 2013. Coming Apart. Three Rivers Press.
Pierce, J., and Peter Schott. 2017. Trade Liberalization and
Mortality: Evidence from U.S. Counties
Sullivan, D., and Till von Wachter. 2009. Job Displacement and
Mortality: An Analysis Using Administrative Data. The Quarterly Journal
of Economics, 124(3), 1265-1306.
__________
Response from Hon. Kevin Hassett to Questions for the Record Submitted
by Senator Martin Heinrich
1.) The Joint Committee on Taxation, Congressional Research
Service, Congressional Budget Office and the Treasury Department have
all recently reviewed the literature regarding how the corporate tax is
split between capital and labor. Each reached different conclusions
from the CEA's recent report that finds that average household income
would increase by at least $4,000 following a cut in the corporate tax
rate from 35 to 20 percent. For example, the 2012 Treasury Paper,
``Distributing the Corporate Income Tax: Revised U.S. Treasury
Methodology,'' which recently was removed from the Treasury website,
finds that less than one-fifth of the corporate tax is borne by labor.
As policymakers try to understand the impacts of
different tax cut proposals, do you intend to encourage Treasury to
repost the study?
Assessing how the Treasury Department should manage the research
produced by its previous staff is not within the purview of my role as
Chairman of the Council of Economic Advisers.
I would recommend that individuals who want to read analyses of the
share of the corporate tax burden that falls on labor read more-recent
estimates of this parameter in recent peer-reviewed literature. That
literature estimates that the labor share is significantly higher than
20 percent. Our most recent paper on the impact of corporate tax reform
on both growth and wages did an exhaustive literature review of this
topic. It was common for models used in the 1960s and 1970s to assume
that international capital mobility is not an important factor to
consider when model ling the U.S. but such an assumption is
inconsistent with the modern world.
Why did CEA choose to ignore the experience of the United
Kingdom, which cut the corporate tax rate from 30 to 19 percent and saw
wages fall? What can we learn from the U.K. experience?
The CEA did not ignore the experience of the United Kingdom. The
United Kingdom, in fact, is within the sample of OECD countries that
CEA analyzed. But, like any one country included in a statistical
analysis of many countries, the United Kingdom alone does not alone
determine the conclusions of the analysis.
As a historical example, however, the United Kingdom does offer
some suggestions for how U.S. policymakers can design corporate tax
reform in such a way as to ensure that America's workers get as much of
the benefit from corporate tax reform as possible. And I am pleased to
report that the tax legislation now under consideration does take these
suggestions from the United Kingdom's historical experience into
account.
As the U.K. lowered its headline corporate tax rate over the
period, as a recent Tax Foundation analysis pointed out, it also
concurrently changed other provisions in the tax code that had the
effect of increasing the marginal tax rate on new investment. According
to economic theory, then, one should not have expected any wage
increase from capital deepening from the U.K. corporate tax changes--
the U.K. changed other provisions in the business tax code that had the
effects of offsetting the reduction in the statutory rate. The
corporate tax changes now under consideration in the U.S., however,
reduce the headline corporate tax rate and include additional reforms
(e.g., changes to the tax treatment of new investment expenditures)
that serve to decrease rather than to increase the effective marginal
tax rate on new investment.
An examination of the other changes to the U.K.'s corporate tax
code that accompanied its reduction of its statutory rate suggests that
one would be mistaken to expect the effect of the U.K.'s corporate tax
changes on wages to necessarily speak to the anticipated effects of the
corporate tax reforms now under consideration in the United States.
2.) Recently we've seen a disturbing trend of attacking nonpartisan
scorekeepers when analysis comes out that disproves administration and
GOP leadership talking points.
In your opinion, do the Congressional Budget Office and
Joint Committee on Taxation undergo rigorous processes in developing
their models and releasing legislative analysis?
The staffs of the Congressional Budget Office (CBO) and the Joint
Committee on Taxation (JCT) have a level of technical expertise that is
difficult for any institution to match. At the same time, however, as a
tax economist I am aware of how many judgment calls must be made in
order to perform analysis at the complexity and level of detail that
the CBO and JCT are required to perform. And reasonable people can
disagree about the judgment calls that must inevitably be made when
conducting tasks involving the magnitude of the complexity of those
performed by CBO and JCT.
So, yes, I think CBO and JCT have processes that meet standards of
rigor. But I would note that the existence of processes that meet
standards of rigor does not mean a reasonable person cannot disagree
with the conclusions derived from assumptions made in those analyses.
For example, we cite in our CEA report on the growth effects of tax
reform empirical papers that are published in top journals that find
that exogenous tax changes, like this one, have large growth effects.
Should the JCT or CBO provide an analysis that suggests that the tax
bill will not have large growth effects, then one would be correct to
inquire whether the position of the staff is that this literature
should be ignored, and to follow up and ask why that is their position.
The IMF, for example, has a talented staff as well, and a recent paper
that we cite in our report explicitly discusses, as is scientifically
appropriate, the modeling assumptions required to generate results from
their equilibrium models that are consistent with the broader
macroeconometric results emerging in the latest literature.
Do you believe that they have become partisan?
As before, I would emphasize that the depth and breadth of
expertise at CBO and JCT are virtually unmatched. They are important
institutions. At the same time, I think that reasonable people can
disagree even with expert judgments that meet high standards of rigor
without having disagreements be viewed as ``partisan.'' This is what
professional tax economists spend most of their time doing: engaging in
debates in which they disagree about calculations and the
interpretation of them, even though they believe the person who
performed the calculation is an expert acting in good faith whose
calculation possessed no shortage of rigor.
When JCT and CBO release their analysis of the tax reform
plan, would you recommend that Congress use it to inform their actions?
I believe that members of Congress and citizens more generally
should base their views on a wide variety of rigorous analyses,
including those produced by the JCT and CBO. But the value of that
analysis of a tax policy or any other policy provides to the consumer
of that information depends at least in part on the transparency of the
assumptions used to generate that analysis, and the ability of the
models being relied upon to reproduce accepted patterns in the data.
3.) The International Trade Commission just recommended that the
Administration levy tariffs on imported solar cells. While tariffs may
help a few domestic manufacturers, they could lead to tens of thousands
losing their jobs distributing, selling, and installing solar panels.
How would you advise the President about the
effectiveness of protective tariffs?
As you know, through Section 201 of the Trade Act of 1974, Congress
created a technocratic process for providing domestic industry relief
in the event that a large amount of increased imports is causing or
threatens to cause serious injury to firms producing in the United
States. On October 31, the International Trade Commission (ITC) issued
a series of recommendations to the President after determining that
crystalline silicon photovoltaic cells are being imported at such
quantitates as to cause serious injury to the domestic industry.
On November 13, the ITC forwarded its report and recommendations to
the President. As this is a matter currently subject to an
administrative proceeding, it would be inappropriate for me to comment
further at this time. However, I can assure you that the Office of the
United States Trade Representative, which is tasked with developing
recommendations for the President, will adequately consult with the
various agencies that have equities in this matter, including the
Council of Economic Advisers.
Based on your knowledge of the economic research on
tariffs, do protective tariffs like the one proposed for solar panels
help American workers and consumers in the long run?
Given that this is subject to an ongoing administrative proceeding
and a matter before the President, it would be inappropriate for me to
elaborate on my conversations with the President at this time. As you
know, the ITC forwarded its report and recommendations to the President
on November 13th. I can assure you that the Administration is carefully
considering the pros and cons of these recommendations and in the
process of determining the most appropriate path forward.
4.) The President has said many times in the past that he will not
support cuts to Medicare or Medicaid. But the budget Congress just
passed cuts nearly half a trillion dollars from Medicare and $1
trillion from Medicaid in order to partially pay for tax cuts. This is
the budget the President has lauded on twitter.
Would you advise the President that cuts to Medicare and
Medicaid are acceptable if they are necessary to pass tax reform?
The Employment Act of 1946 created the Council of Economic
Advisers, and it reads that ``It shall be the duty and function of the
Council . . . to gather timely and authoritative information concerning
economic developments and economic trends, both current and
prospective.'' Consistent with that mandate, I view providing the
President economic analysis of the costs and benefits of the policies
under consideration as part of my role as Chairman of the Council of
Economic Advisers.
But I do not necessarily think that the ``timely and authoritative
information concerning economic developments and trends'' would
necessarily be the only set of information relevant to a decision about
the specific tradeoffs involved in a specific legislative decision. Nor
can I, as Chairman of the Council of Economic Advisers, commit to
providing anything but objective economic analysis to the President.
5.) You've spoken, written, and testified in the past about the
economic benefits of immigration. In the hearing, you mentioned that
immigrants help grow the economy, but that immigration policy must also
factor in border security concerns. In regards to Americans protected
under the Deferred Action for Childhood Arrivals (DACA) program, border
security is unlikely to be a main concern.
What would the economic impact be of deporting these
800,000 young, hardworking Americans?
As I have mentioned, the Employment Act of 1946, which created the
Council of Economic Advisers, declares that ``It shall be the duty and
function of the Council . . . to gather timely and authoritative
information concerning economic developments and economic trends, both
current and prospective.'' Consistent with that mandate, I provide the
President with objective economic analysis of the costs and benefits of
the policies under consideration.
The complexities involved in the economic analysis of immigration
are, to say the least, significant: there are few subjects that
generate as much debate between economists as immigration. But CEA has
not yet evaluated any specific policies involving DACA. The enormity of
the effort that would be required to complete an analysis on this
subject is, as an economist, hard to overstate. As Chairman of the CEA,
I would not regard myself as in a position to comment about a specific
proposal involving DACA.
How will you make the case to the President that keeping
protections in place for these young Americans is important for the
economy?
I view a key task of the CEA that I chair as the provision of
``timely and authoritative information concerning economic developments
and economic trends, both current and prospective.'' Rather than
recommending a specific course of action, as Chairman of the Council of
Economic Advisers, I commit only to providing the President with
objective economic analysis.
6.) The Republican tax plan proposes eliminating ``special
interest'' deductions such as the Medical Expense deduction, a
deduction that reduced tax burdens for 8.7 million households in 2015,
and the student interest deduction, which was taken by more than 12
million households in 2015.
a. What would be the impact on families facing tens of
thousands of dollars in medical expenses be if they are forced
to trade this deduction for the CEA's theoretical future wage
gains?
The impact of any tax legislation on a specific subset of families
depends on the interaction of many provisions of the final legislation.
However, many of the specifics that will determine how this bill
affects the millions of American households affected by our tax code
have not yet been determined. Thus, it would be premature to comment
about the effect of the tax legislation on the well being of a subset
of households as specific as the subsets of families you describe.
However, while I would demur from speculating about the impact of a
still-in-progress bill on specific sets of households, I disagree with
a characterization as ``theoretical'' for CEA's estimate of the wage
effects. Indeed, the estimate is based on a very large and successfully
peer-reviewed empirical literature, and a wide range of estimates has
been provided.
b. What would the impact of this tradeoff be on families if
they are also paying down tens of thousands in students loans?
As I noted earlier, the impact of any tax legislation on a specific
subset of families depends on the interaction of many provisions of the
final legislation--and many of the specifics that will determine how
this bill affects the millions of American households affected by our
tax code have not yet been determined.