[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-398

                  THE POSITIVE ECONOMIC GROWTH EFFECTS
                      OF THE TAX CUTS AND JOBS ACT

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

                                HEARING

                               BEFORE THE

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 6, 2018

                               __________

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Erik Paulsen, Minnesota, Chairman    Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona            Tom Cotton, Arkansas
Barbara Comstock, Virginia           Ben Sasse, Nebraska
Darin LaHood, Illinois               Rob Portman, Ohio
Francis Rooney, Florida              Ted Cruz, Texas
Karen Handel, Georgia                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

                   Colin Brainard, Executive Director
             Kimberly S. Corbin, Democratic Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota     1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New 
  Mexico.........................................................     3

                               Witnesses

Mr. Scott A. Hodge, President, The Tax Foundation, Washington, DC     5
Dr. William C. Dunkelberg, Chief Economist, National Federation 
  of Independent Business, Washington, DC........................     7
Mr. John H. Hinderaker, President, Center of the American 
  Experiment, Golden Valley, MN..................................     9
Dr. Benjamin H. Harris, Visiting Associate Professor, Kellogg 
  School of Management, Northwestern University, Evanston, IL....    10

                       Submissions for the Record

Prepared statement of Hon. Erik Paulsen, Chairman, a U.S. 
  Representative from Minnesota..................................    22
Prepared statement of Hon. Martin Heinrich, Ranking Member, a 
  U.S. Senator from New Mexico...................................    23
Prepared statement of Mr. Scott A. Hodge, President, The Tax 
  Foundation, Washington, DC.....................................    25
Prepared statement of Dr. William C. Dunkelberg, Chief Economist, 
  National Federation of Independent Business, Washington, DC....    39
Prepared statement of Mr. John H. Hinderaker, President, Center 
  of the American Experiment, Golden Valley, MN..................    65
Prepared statement of Dr. Benjamin H. Harris, Visiting Associate 
  Professor, Kellogg School of Management, Northwestern 
  University, Evanston, IL.......................................    80
Response from Dr. Dunkelberg to Questions for the Record 
  Submitted by Chairman Paulsen..................................    95
Response from Dr. Dunkelberg to Questions for the Record 
  Submitted by Ranking Member Heinrich...........................    95
Response from Dr. Harris to Questions for the Record Submitted by 
  Ranking Member Heinrich........................................    95
Response from Dr. Harris to Questions for the Record Submitted by 
  Representative Maloney.........................................    96

 
   THE POSITIVE ECONOMIC GROWTH EFFECTS OF THE TAX CUTS AND JOBS ACT

                              ----------                              


                       THURSDAY SEPTEMBER 6, 2018

                    United States Congress,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m., in 
Room G-50 Dirksen Senate Office Building, the Honorable Erik 
Paulsen, Chairman, presiding.
    Representatives present: Paulsen, Comstock, LaHood, 
Maloney, Adams, and Beyer.
    Senators present: Heinrich, Klobuchar, Hassan.
    Staff present: Ted Boll, Colin Brainard, Kim Corbin, Hannah 
Falvey, Connie Foster, Ricky Gandhi, Natalie George, Colleen 
Healy, Karin Hope, Paul Lapointe, Alice Lin, and Tommy Wolfe.

   OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S. 
                 REPRESENTATIVE FROM MINNESOTA

    Chairman Paulsen. I call the committee hearing to order.
    Most economists say that it is too soon to know how the Tax 
and Jobs Act will affect our economy, and I agree with them. 
That is because tax reform was not designed to give a short-
term sugar rush to the economy. It was intended to improve the 
levers that drive economic growth--more work, more capital, and 
more productivity--so that in the long run, American workers 
and families enjoy more prosperity and opportunity.
    The evidence shows that this is already beginning to 
happen. As Federal Reserve Chairman Jerome Powell put it 
recently, the economy is doing very well. The Bureau of 
Economic Analysis recently revised upward its estimate of GDP 
growth to 4.2 percent in the last quarter, and survey after 
survey shows that business optimism is surging. Individual tax 
relief has allowed people to keep more of their hard-earned 
money so that it is worth it to work hard, to find a job, and 
to keep reaching for that next opportunity.
    By investing in individuals and those who employ them, we 
are putting a downpayment on a more prosperous future for all 
Americans. After business reforms became law, companies started 
to invest in their workers and businesses in ways that lead to 
a more productive workforce. That, in turn, leads to growing 
paychecks and higher economic growth in the long run.
    This reform fought for American workers by attracting 
investment here at home, and encouraging companies to keep 
high-value intellectual property in America instead of 
overseas. It has been a game changer.
    Profits earned in international markets are returning to 
the United States where they can be invested in greater 
opportunities for our people. Though we should not base the 
success of tax reform on what is happening in the short term, 
we are already seeing positive effects from these long-term 
incentives to work and invest.
    Business investment, which paves the way for future wage 
and economic growth, is picking up. After all, an employee's 
wages can only increase following the decision by a business to 
invest more in its workers and company. We want that to be an 
easy decision.
    Since the Tax Cuts and Jobs Act became law, business 
investment has outperformed similar periods in 2017, and far 
exceeded the weak and sometimes negative growth in the final 
year of the Obama Administration.
    This chart comparing second-quarter growth rates shows how 
much business investment has increased in the last two years 
compared to the last year of the Obama Administration. In fact, 
since tax reform became law we have seen an average growth rate 
of 10 percent so far this year. That is great news.
    Yes, it will take time for tax reform to have its full 
effect on investment and wages, yet the Congressional Budget 
Office noticed rising wages in its latest report on Federal 
revenues. Economists here at the Joint Economic Committee also 
analyzed 21 different measures of wage growth and inflation, 
and 20 of the 21 showed real wages rising faster during this 
Congress and Administration than during the Obama--era 
recovery.
    Small business owners are also seeing benefits, with small 
business optimism, new hiring, worker pay increases, and 
investment plans near record highs. And for those who claim 
that tax reform only benefits the wealthy, there is great news 
for those Americans who struggle the most in a very weak 
economy, those with less education, minority workers, and 
people with disabilities.
    Unemployment is at its lowest level since the year 2000, 
but the untold story is that it is falling faster for those 
disadvantaged groups than for the groups that tend to do very 
well. It is also worth noting that the Joint Committee on 
Taxation found that during the time individual tax relief from 
the Tax Cuts and Jobs Act is in effect, the greatest percentage 
of tax cuts will go to those with incomes between $20,000 and 
$50,000, and that millionaires will actually pay a larger share 
of the Federal tax burden with tax reform than they would 
without it.
    Tax reform was just a first step. We should continue to 
improve our Tax Code to meet the challenges of an ever-changing 
global economy, but the Tax Cuts and Jobs Act put America on a 
much stronger economic footing, which will make many of our 
Nation's challenges easier to tackle.
    I look forward to a very distinguished panel of witnesses, 
including one from my home State of Minnesota. And before I 
introduce our panel of experts, I would now like to recognize 
the Ranking Member, Senator Heinrich, for a period of five 
minutes for his opening statement.
    [The prepared statement of Chairman Paulsen appears in the 
Submissions for the Record on page 22.]

 OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Heinrich. Thank you, Chairman Paulsen.
    I agree with you that it is useful to look at the 
Republican tax law's impacts on our economy, on working 
families, and our Nation's economic position. I suspect we may 
come to some different conclusions.
    At best, the Republican tax bill was a massive missed 
opportunity, squandering $1.9 trillion on tax breaks for those 
who did not need them at a time when our Nation could least 
afford it.
    The bill does little to help working families. Instead, it 
worsens inequality and burdens the next generation with 
trillions in additional debt, which could jeopardize vital 
programs and services that families count on.
    At a basic level, the law simply has not lived up to 
Republican promises. The White House and our Republican 
colleagues promised families a $4,000-a-year increase in 
income. That simply has not happened.
    In fact, hourly wages adjusted, which you can see in this 
chart here, adjusted for inflation are actually going down, not 
up. And as you can see in the chart on wage growth, the average 
hourly wage for production and nonsupervisory workers, our best 
measure of the typical workers take-home pay, was lower in July 
of 2018 than in July of 2017 after adjusting for inflation.
    In other words, wages simply are not keeping pace with the 
cost of living. That means it is harder for a typical family to 
buy groceries, to pay rent, to put gas in the tank.
    After decades of wage stagnation where the median workers' 
wages have grown by 6.1 percent over the last 38 years, people 
need a real raise, not empty promises.
    The reality is that the Republican tax bill is doing 
exactly what virtually all mainstream economists and Democrats 
said it would do. It is delivering the vast majority of its 
benefits to large corporations and wealthy individuals, while 
leaving working Americans behind. Stock buy-backs are now at 
record highs, with Goldman Sachs projecting that they will 
reach a trillion dollars by the end of the year.
    While buy-backs benefit company executives and other 
wealthy shareholders and investors, they do nothing for half of 
all Americans who own no stock. And since foreign investors own 
35 percent of U.S. stocks, much of the benefits of these buy-
backs are actually flowing overseas.
    It is important to remember that each dollar spent on buy-
backs is a dollar not spent on investing in factories, or 
plants, in training, or boosting workers' wages.
    We could have gone a different direction. My Republican 
colleagues could have joined with Democrats to craft deficit-
neutral pro-growth tax reform. But by adding $1.9 trillion to 
the national debt, the tax law gives Republicans their latest 
justification to target Social Security, Medicare, and 
Medicaid.
    Just last month, Republican Representative Steve Stivers, 
the Chair of the NRCC, expressed support for turning Medicare 
into a voucher program. Republicans are again pushing to cut 
health care coverage that families receive through Medicaid, 
and go after Medicare and Social Security which seniors and 
their families count on.
    In my State, more than half of New Mexicans depend on these 
three programs, and the Affordable Care Act, to help with 
health care and living expenses. Cuts to these programs would 
have devastating consequences for families who have seen little 
to no benefit from the tax cuts.
    Recent economic projections remind us that any growth bump 
from a Republican tax cut will be short-lived. So Republicans 
will try to take our eyes elsewhere. Republicans will point to 
the second quarter GDP growth, but will neglect to mention that 
we have hit higher levels multiple times in this recovery, or 
that long-term projections remain unchanged.
    In fact, economists at the San Francisco Fed recently 
projected that the tax cuts could have zero impact to growth, 
due to the poor timing of the law.
    They will talk about this year's job growth, but fail to 
acknowledge that 2018 and 2017 look basically the same as 2016 
and 2015. In fact, as this chart on job growth shows, the 
economy is adding fewer jobs per month since President Trump 
took over.
    Now Republicans want to make permanent the temporary 
provisions of the bill, to dole out a second helping of tax 
breaks. But doing so would deliver two-thirds of the benefits 
to the wealthiest 20 percent, and add nearly $800 billion more 
to the debt by 2028. The Republican tax law was the wrong 
medicine at the wrong time. The solution is not to take more of 
it.
    I want to thank each of our witnesses here today for your 
testimony, and I look forward to a very spirited discussion.
    [The prepared statement of Senator Heinrich appears in the 
Submissions for the Record on page 23.]
    Chairman Paulsen. Thank you, Senator Heinrich. I will now 
introduce our witnesses.
    Mr. Scott Hodge is the President of the Tax Foundation. 
During his tenure, the Tax Foundation has become one of the 
most influential organizations on tax policy in Washington and 
in State capitals. He led the development of the Tax 
Foundation's most successful programs, including the Taxes and 
Growth Dynamic Tax Modeling Project. Mr. Hodge has published 
extensive research on tax policy and government spending, and 
has edited three books on the Federal budget and streamlining 
government.
    Before joining the Tax Foundation, Mr. Hodge was the 
Director of Tax and Budget Policy at Citizens For A Sound 
Economy. In the 1990s, he helped design proposals that 
influenced major tax legislation in 1997, 2001, and 2003. He 
also analyzed policy at the Heritage Foundation, and founded 
the Heartland Institute.
    Mr. Hodge holds a B.A. in Political Science from the 
University of Illinois at Chicago.
    Also with us is Dr. William Dunkelberg, who is the Chief 
Economist of the National Federation of Independent Business, 
or NFIB, which is the largest small business association in the 
United States, and well known for its advocacy on behalf of 
small and independent business owners.
    Dr. Dunkelberg is also a Professor Emeritus of Economics at 
the School of Business and Management at Temple University, 
where he formerly served as both the Dean and Director of the 
Center for the Advancement and Study of Entrepreneurship. He is 
a contributor on economic forecasting panels for major news 
outlets, and authored numerous books and articles. Previously 
he served as an Advisor to the Secretary of Commerce, and was 
appointed to the Consumer Advisory Council of the Federal 
Reserve System. He also co-founded Wireless Energy Solutions, 
was an economic strategist in the private sector, and served as 
Chairman of Liberty Bell Bank. Dr. Dunkelberg received his 
B.A., M.A., and Ph.D. in Economics from the University of 
Michigan.
    And now I want to welcome our witness from Minnesota, Mr. 
John Hinderaker, who is the President of the Center of the 
American Experiment, a public policy organization known as 
Minnesota's think tank. The Center researches and produces 
papers on topics ranging from Minnesota's economy, State and 
local governance, to crafting and promoting creative solutions 
that emphasize free enterprise, limited government, personal 
responsibility, and government accountability.
    Before becoming President of the Center of The American 
Experiment, Mr. Hinderaker spent 41 years as a litigator with 
Faegre and Benson and its successor Faegre, Baker, Daniels, and 
received numerous awards and recognitions for his work.
    Mr. Hinderaker has appeared as a commentator on major 
television networks, and is a frequent guest and guest host on 
national radio programs. In addition, Mr. Hinderaker has 
lectured at colleges and universities ranging from Harvard Law 
School to my alma mater St. Olaf, where we both have daughters 
attending.
    Mr. Hinderaker holds an A.B. from Dartmouth College and a 
J.D. from Harvard Law School. Thanks for making the trip to be 
with us.
    And our final witness with us this afternoon is Dr. 
Benjamin Harris, who is a Visiting Associate Professor at 
Kellogg School of Management at Northwestern University, with a 
focus in tax, budget, and retirement policy. Dr. Harris also 
serves as the Chief Economist at Results For America.
    Previously Dr. Harris served as the Chief Economist and 
Economic Advisor for Former Vice President Biden. He later was 
Senior Economic Policy Advisor at Rokos Capital Management, and 
served in roles at The Hamilton Project, Brookings Institution, 
the Urban Brookings Tax Policy Center, the Council of Economic 
Advisers, and the House Budget Committee.
    He holds a Ph.D. in Economics from George Washington 
University, and other degrees from Tufts, Cornell, and Columbia 
University.
    Welcome, all of you. You will each have five minutes for 
your presentation. And with that, we will begin with Mr. Hodge 
and follow in order. Mr. Hodge, you are recognized for five 
minutes.

STATEMENT OF MR. SCOTT A. HODGE, PRESIDENT, THE TAX FOUNDATION, 
                         WASHINGTON, DC

    Mr. Hodge. Thank you, Mr. Chairman, Mr. Heinrich, and 
members of the Committee. I appreciate the opportunity to talk 
to you today about the economic benefits that we expect to see 
from the Tax Cuts and Jobs Act.
    You know, few organizations have modeled these effects as 
much as we have at the Tax Foundation over the last few years. 
The Act contains a number of very pro-growth elements, such as 
cutting the corporate tax rate, moving to full expensing for 
capital investments, that will not only result in higher levels 
of GDP, higher wages, and more jobs, they will make the United 
States more competitive globally.
    And these provisions will improve incentives to work and 
invest, which is why, when we used our Taxes and Growth Macro 
Economic Model to score the plan, we found out our model shows 
it will have a positive long-term effect on the economy. And I 
do want to underscore ``long term.''
    And while we have seen a lot of great economic data 
recently, and it has been very encouraging, it is unrealistic 
to expect major tax policy changes like this to produce 
immediate results. And I know politics can be very impatient, 
and the media wants headlines, but tax reform and economic 
growth do not fit within a 24-hour news cycle.
    In fact, this kind of reminds me, this whole debate reminds 
me of a long car ride with your children. About an hour into 
the car ride, they're kicking the back of your seat asking, 
``Are we there yet? Are we there yet? Are we there yet?''
    But like a long car ride, economic changes, and major 
changes like this, take time and patience. And we have to tune 
out the chatter from the back seat. And over the next decade 
and beyond, our model predicts what we might call an arc of 
economic growth, rising and falling with the temporary or 
permanent nature of the various tax provisions in the bill.
    In the first few years, the economic impact will be modest 
as companies begin to invest more in plant and equipment and 
building the Nation's capital stock, but by 2025 the economy 
will be, we estimate, 3 percent larger than it otherwise would 
be.
    However, in 2026, when the individual provisions expire and 
the 100 percent bonus expensing phases out, the economy will 
begin to shrink a little bit and move back to normal baseline.
    But on average over the next decade, the level of GDP will 
be about 2 percent larger than baseline. Now it doesn't sound 
like much, but that translates into a cumulative $5.3 trillion 
worth of additional GDP over the next decade.
    Now if we look at the very long term, as our model does, we 
estimate that the new tax law will boost the level of GDP by 
1.7 percent, boost wages by 1.5 percent, and create 340,000 
additional full-time jobs.
    Now nearly all of those long-term effects are the result of 
the permanent cut in the corporate tax rate. However, our model 
predicts that if the Congress were to make the expensing 
provision permanent, and the individual rates permanent, you 
could multiply those results considerably.
    In fact, dollar-for-dollar the most pro-growth tax measure 
that Congress can enact is making that permanent--the expensing 
provision permanent. And all of those economic benefits 
translate into higher after-tax incomes for all Americans.
    The tax cuts themselves of course are great for taxpayers, 
but by 2025 we expect that the additional economic growth and 
wage growth will lead to a rise in after-tax incomes of 4.6 
percent on average for all taxpayers. And the model actually 
indicates that even, even should we face a fiscal cliff when 
the individual provisions expire, after-tax incomes for all 
taxpayers will still be higher because of the economic growth 
and wage growth than they would have otherwise been had there 
been no tax cut.
    Now nonetheless, Congress should make those individual 
provisions permanent to avoid an unfair tax increase.
    Well, Mr. Chairman, I'll conclude with just a simple 
reminder. The Tax Cuts and Jobs Act is barely nine months old. 
Most kids are not even crawling by that age. So it's really too 
soon to ask, ``Are we there yet?''
    And let's not forget that one year ago the U.S. had the 
highest corporate tax rate in the industrialized world. We had 
one of the worst cost-recovery systems anywhere for capital 
investments. And we had one of the most progressive personal 
income tax systems anywhere in the world.
    Today we have one of the most competitive corporate tax 
systems in the world. And these changes will lift wages, will 
create jobs, and will grow the economy if we give it time. But 
the prosperity will not last unless we make all of these tax 
changes permanent, and the sooner the better.
    So with that, Mr. Chairman, I am happy to answer any 
questions you may have.
    [The prepared statement of Mr. Hodge appears in the 
Submissions for the Record on page 25.]
    Chairman Paulsen. Thank you, Mr. Hodge.
    Dr. Dunkelberg, you are recognized for five minutes.

   STATEMENT OF DR. WILLIAM C. DUNKELBERG, CHIEF ECONOMIST, 
  NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC

    Dr. Dunkelberg. Chairman Paulsen and Ranking Member 
Heinrich, thank you very much for the opportunity to come and 
talk to you about the JCTA from the point of view of the small 
businesses.
    The small business sector is very important to the economy, 
estimated to be about 48 percent of private GDP. That is a lot 
of output. And roughly half of the private-sector labor force. 
So if you want to worry about productivity, then you really 
need to worry about investment in the small business sector, 
because there are a lot of workers there, and they get included 
when we calculate our average productivity growth numbers. They 
are very, very important.
    Now over the last 45 years, NFIB, National Federation of 
Independent Business, has taken a random sample of its hundreds 
of thousands of member firms and sent out a questionnaire 
asking a bunch of information about how the company is doing, 
and what people expect.
    And in that questionnaire, which by the way stays pretty 
much the same; we don't change the questions so we don't lose 
the meaning of the index, ten of those questions go into this 
index that we call the Small Business Optimism Index. And that 
has proved to be very informative over the past 45 years.
    It reached its record high level in July of 1983 of 108, 
and very recently almost hit that again at 107.9 last month. 
The average of the index over the 45 years is about 95, but 
just to give you perspective on how important it can be and the 
changes and what the changes tell us, in October of 2016 the 
average index was 95. And that is three points below the 
average.
    In the first week of November, the index was still 95. How 
do we know that? Remember we mail out 10,000 interviews. They 
come back, and we can kind of do a before-and-after analysis. 
So it was 95 before the election results were announced. Once 
announced, the index rose to 102 in the remaining months of 
November, and hit 105.8 in December, and it hasn't looked back. 
Since then, we've been averaging well over 105 for all those 
months since.
    Now small business owners had no idea really what the 
policy details were going to look like. All they knew was there 
was going to be a change. There was a new management team, and 
they thought whatever they were going to get, I guess, was 
going to be better than what they had. And that made them very 
optimistic about the future and what they can attain in the 
future.
    So if you look at how the index has done, it has really 
gone from 105 to almost 108, almost to the record high, since 
we changed the management team and we got a new set of economic 
policies.
    Now originally the index was dominated by the expectations 
component. So there are 10 components, as I pointed out, and 5 
of them are kind of ``Do you expect business conditions to be 
better in six months?'' ``Is now a good time to expand your 
business? And ``What about expected real sales?'' Those kinds 
of expectations questions. That dominated the index and drove 
it up over 105.
    Since then, the mix of this has changed. It has become a 
very muscular index, dominated by record high job openings, 
record high plans to hire, record high capital spending plans, 
record high reports of higher income, and record high plans to 
increase inventory investments.
    So that's the meat of Gross Domestic Product. And of course 
we are really happy to see that. And that means also of course 
we have had really great experience with employment gains over 
that period of time.
    So just as an example, capital spending in November of 2016 
was reported by 55 percent, now 66 percent earlier this year. 
So an 11-point increase in the percent of our owners investing 
in capital equipment and expanding their business. So that has 
worked out very well.
    We ask a question every time: What's the most important 
problem facing your business today? We have ten options. 
Outside of Volker and inflation back in the olden days, what's 
dominated is taxes and the cost of regulatory compliance, 
another tax on small businesses. So that's been averaging 
around 21 percent in the olden days, now fallen as low as 13 
percent since the TCJA had been passed.
    So it had good features, as you mentioned. The expensing, 
and the lower tax rates. Also 199A was very good, because it 
finally looked at the pass-through organizations, and we're 
happy to have that happen, as well. But what we see is that 
they have really responded to the change in policy, and they 
are putting their money where their mouth is. You look at what 
they've planned to do with the money that they hope they will 
get by the tax change, and they're going to invest and hire. 
And that's the key. And of course productivity will increase as 
long as we continue to invest in our workers in the small 
business sector.
    So we would like to see permanency, as well, so we can 
depend on it. Uncertainty is the enemy of growth. So we don't 
want uncertainty.
    So thank you very much for this opportunity, and we will 
answer questions later.
    [The prepared statement of Dr. Dunkelberg appears in the 
Submissions for the Record on page 39.]
    Chairman Paulsen. Thank you, Dr. Dunkelberg.
    Mr. Hinderaker, you are recognized for five minutes.

 STATEMENT OF MR. JOHN H. HINDERAKER, PRESIDENT, CENTER OF THE 
             AMERICAN EXPERIMENT, GOLDEN VALLEY, MN

    Mr. Hinderaker. Chairman Paulsen, Ranking Member Heinrich, 
members of the Joint Economic Committee:
    Thank you for your invitation to provide testimony for this 
important hearing. My name is John Hinderaker and I am 
President of Center of The American Experiment.
    The subject of my testimony is ``The Impact of The Tax Cuts 
and Jobs Act on The Economy of Minnesota'' where my 
organization is headquartered.
    While only eight months have elapsed since the Act became 
effective, already its positive effects are becoming obvious. 
We have identified at least 34 Minnesota companies, based on 
news reports, that have announced new hiring, wage increases, 
and so on, as a direct result of the Act. No doubt the 
companies on which there are news stories represent only a 
small fraction of those who have made such investments in 
Minnesota in consequence of the Act.
    Because of the Act's recent passage and the fact that 
publication of State-level data often lags behind national 
data, we are not yet able to measure the law's impact on 
Minnesota by some metrics--for example, GDP--but there is every 
reason to believe that Minnesota's GDP has risen strongly, 
along with that of the Nation as a whole.
    On the other hand, the Bureau of Labor Statistics updates 
State-level jobs and income data monthly. And here we can 
clearly see the positive effects of the Tax Cuts and Jobs Act. 
Figure one. Figure one shows the monthly net change in private 
jobs in Minnesota. The positive impact of the Act, starting in 
January 2018, pretty much jumps off the chart.
    The 2018 hiring peak is nearly 20,000 jobs above the 2017 
hiring peak. This effect on jobs is even more clear in figure 
two, also from the Bureau of Labor Statistics, but seasonally 
adjusted and from a different data set.
    Here again you can see the strong employment growth that 
began with the passage of the Tax Cuts and Jobs Act. It's the 
biggest jobs gain in at least a decade. Wages in Minnesota are 
rising, as well. You can see that in figure three, which shows 
average weekly earnings in Minnesota. Again, the upswing that 
began with the passage of the Act is unmistakable.
    Average weekly earnings in Minnesota have risen by 2.7 
percent since January 2018, more than double the 1.2 percent 
increase in the same period of 2017.
    Figure four shows seasonally adjusted hourly earnings of 
all private employees in Minnesota. You can see that wage 
growth had stagnated during the second half of 2017, but took 
off with the passage of the Act.
    The Tax Foundation estimates that the Tax Cuts and Jobs Act 
will add 6,789 full-time equivalent jobs to Minnesota's 
economy, and yield a gain of after-tax income of $722.40 for 
each of the State's middle-income families. The data indicate 
that these projections are well on the way to being realized.
    It is worth noting also that Minnesota's Office of 
Management and Budget expects the Tax Cuts and Jobs Act to 
boost Minnesota's GDP growth. In February 2017, the office's 
forecaster, IHS Markit, predicted good GDP growth driven by the 
Act. But in November 2017, it didn't look as though the Tax 
Cuts and Jobs Act was going to pass. So the Office of 
Management and Budget lowered Minnesota's fiscal forecast, 
predicting a deficit of $188 million for the current biennium. 
Then, when the Act did pass in December, the forecast was 
revised again. With the effect of the tax cuts reinstated, OMB 
now predicted, instead of a deficit, a surplus of $329 million.
    So Minnesota's Office of Management and Budget is aligned 
with other forecasters who see the Tax Cuts and Jobs Act 
producing stronger economic growth in Minnesota.
    So the evidence is clear that the Tax Cuts and Jobs Act is 
already helping Minnesota's families. With that, I thank you 
again for the opportunity to testify and look forward to your 
questions.
    [The prepared statement of Mr. Hinderaker appears in the 
Submissions for the Record on page 65.]
    Chairman Paulsen. Thank you.
    And, Dr. Harris, you are recognized for five minutes.

    STATEMENT OF DR. BENJAMIN H. HARRIS, VISITING ASSOCIATE 
     PROFESSOR, KELLOGG SCHOOL OF MANAGEMENT, NORTHWESTERN 
                    UNIVERSITY, EVANSTON, IL

    Dr. Harris. Thank you. I would like to begin this testimony 
by thanking Chairman Paulsen, Ranking Member Heinrich, and all 
members of the Committee for inviting me to testify at this 
important hearing. It is truly an honor to receive this 
invitation.
    I will start by noting that independent organizations have 
generally reached the consensus around the impact of the TCJA. 
A collection of independent entities have found that the 
initial boost provided by the bill will eventually wear off, 
slowing the growth rate in later years as rising interest rates 
due to growing deficits and expiration of the tax cuts drag 
down the economy.
    Projections also find that the legislation drives up both 
public debt and borrowing from abroad, giving foreign investors 
a larger claim on domestic income, leaving income earned by 
Americans little changed. For example, CBO projects that the 
bill will grow real GNP by just one-tenth of one percent by 
2028.
    These projections aside, I would like to raise three main 
concerns with the legislation.
    My first concern is that the bill is poorly designed to 
spur new investment in a cost-effective way. One of the most 
significant shortcomings of the bill is the large windfall gain 
provided to investors. In this context, windfall gains tax cuts 
awarded to individuals and businesses for something they have 
already done. The corporate tax cut and the deemed repatriation 
on foreign earnings are classic examples of windfall gains.
    Since the tax cuts impact on growth is largely determined 
by whether it raises investment or labor supply, windfall gains 
represent a wasted opportunity to boost the economy, and are 
one of the primary reasons why so many project the Act to have 
a tepid impact on long-run growth.
    A related concern with the bill is that it will actually 
reduce certain types of investment. According to CBO, the bill 
will lower combined investment in residential real estate and 
intellectual property by over $200 billion.
    My second concern is that the bill's steep increase in debt 
will hurt middle class families. As members of this Committee 
are well aware, our Nation faces serious long-term fiscal 
challenges, with dire projections of a public debt explosion 
even before the bill became law. But the bill has greatly 
exacerbated concerns over soaring debt, raising deficits by 
roughly $2 trillion over the next decade. And these costs will 
rise substantially if the legislation is made permanent.
    There are plenty of concerns with exploding debt, but one 
particular worry is if policymakers respond by cutting major 
public programs such as Social Security and Medicare. Social 
Security is the bedrock of the U.S. retirement system, with 
roughly half of elderly households relying on these benefits 
for all or nearly all of their retirement income. While another 
quarter of elderly households depend on Social Security for a 
substantial portion. Cutting it would be a major blow to older 
Americans.
    Widespread cuts to Medicare and Medicaid would also be 
exceptionally harmful to American retirees, especially those 
with limited income or assets who cannot plausibly return to 
the labor market.
    An additional concern is the impact of higher interest 
rates on middle class families. The higher debt levels in the 
bill will raise interest rates, making everything from home 
ownership, to student loans, to credit card payments, more 
expensive for American households, even before they're asked to 
begin repaying the massive debt incurred under this tax law.
    My third concern is that the bill is poorly designed to 
benefit workers. In broad terms, there are two primary ways the 
tax cut can increase wages. One is by increasing worker 
productivity through higher business investment. Under this 
scenario, tax reform can eventually raise wages by first 
increasing the level of investment, which can then boost worker 
productivity, which can then in theory boost wages.
    There are plenty of caveats to this situation, but the key 
point is that without higher investment there is no plausible 
argument for a tax cut raising wages. Legislation can also 
increase after-tax wages by directly cutting taxes on labor. 
This can effectively be done through a payroll tax cut, a 
refundable credit based on earnings, or an EITC expansion, but 
cuts in income tax rates are generally ineffective ways to 
boost middle class wages because so many families pay little to 
no income taxes.
    Unfortunately, in my opinion, the bill receives poor marks 
on these various criteria. Future academic studies will shed 
light on the bill's investment impact, but initial evidence 
suggests that it has primarily booster share repurchases rather 
than investment.
    Distributional analysis shows the tax cuts are of limited 
value to working families. Indeed, families will begin paying 
more in 2026, with higher tax bills indefinitely thereafter.
    Lastly, the bill's relatively favorable treatment of 
businesses compared to workers may exacerbate the enduring fall 
of labor's share of national income, meaning an even smaller 
piece of the pie for workers across the country.
    In sum, the combination of limited new investment, 
substantially higher debt, and potential cuts to critical 
programs to offset that debt, and little positive impact on 
wages, means that the bill is unlikely to achieve its purported 
economic effects.
    Thank you, and I look forward to your questions.
    [The prepared statement of Dr. Harris appears in the 
Submissions for the Record on page 80.]
    Chairman Paulsen. Thank you, Dr. Harris.
    And with that, during our question and answer period, I 
would remind Members to keep their questions to five minutes, 
and I will begin.
    Mr. Hodge, you had outlined how our corporate rate now has 
made us much more competitive. And the long-term effect is very 
positive, obviously, for our economy. So two questions.
    One, debt and deficits are obviously very important, and 
they are a problem. But--are they a problem of not having 
enough revenue or growing--mandatory spending? And two, is our 
long-term debt problem--easier to tackle in a growing economy, 
or in a weak economy?
    Mr. Hodge. Thank you, Mr. Chairman. In fact, actually the 
CBO addressed some of that recently in a report. They were 
looking at projecting out both revenues and spending over the 
next decade, and they found that revenues--they estimate that 
revenues will be about 17.2 percent of GDP over the next 
decade, which is about at the national average over the last 50 
years.
    Meanwhile, spending will be about 22 percent of GDP over 
the next decade, which is a couple of percentage points higher 
than where they've been over the last 50 years.
    So, really, spending is the problem. Entitlement spending 
is out of control. And it seems as though, according to CBO, 
revenue will pretty well stabilize at around 17 percent of GDP.
    What is important, though, if you are looking at deficit 
reduction, is enacting policies that do not do harm to the 
economy while you are trying to reduce the deficit. And it is 
interesting that you mention that, because there was a new 
report recently out of the IMF. They looked across the globe at 
all of the different countries that have cut their deficits at 
one time or another through tax of spending policies, and which 
ones did the most harm and which ones did the most good.
    And they found that cutting spending was the most 
beneficial for both reducing the deficit and for economic 
growth. Whereas, raising taxes did the most harm for economic 
growth, which ended up being counterproductive for trying to 
reduce the deficit.
    And that is based on an IMF survey of countries across the 
globe over the last few decades. So really we need to address 
the spending problem, and leave the economic growth to come 
from the Tax Cuts and Jobs Act.
    Chairman Paulsen. Dr. Dunkelberg, you had mentioned 45 
years of surveys with your membership currently almost at a 
record high showing overwhelmingly positive news from the small 
business community since tax reform.
    Because small business owners need to make long-term and 
long-range plans for their companies, are there plans to hire 
and give more pay raises and make more investments a signal 
that they expect long-term growth at their companies and their 
businesses?
    Dr. Dunkelberg. I certainly would interpret it that way. 
All the decisions that small business owners make are always 
about the future. It's all about the future, and not about the 
past.
    So decisions they are making now to spend and to hire are 
commitments to the future, not just six months or a year, but 
much longer than that, especially when you look at the fact 
that we have a record high number now saying it is a good time 
to expand their business. That is heavy-duty stuff, not just a 
small investment in a new piece of equipment.
    All of that is very important. So we think they are very 
optimistic about the future, not just the immediate future but 
long term. They see a different set of policies that are 
conducive to growth in the economy, and that are encouraging 
them to do the kinds of things that will raise worker 
productivity.
    And to go along with that we have a record high percentage 
who are now already reporting that are raising worker 
compensation. So as our workers become more productive, we do 
pay them more.
    Chairman Paulsen. Mr. Hinderaker, thank you first of all 
for providing so much information on the economic conditions in 
Minnesota. I am sure that other states are seeing some similar 
results, based on my conversations with colleagues regarding 
Federal tax reform.
    What do you expect would happen in Minnesota, for our 
economy, if our State followed suit and actually lowered some 
of the tax burdens on its residents or businesses and had a 
focus along that front?
    Mr. Hinderaker. Well, two things. In the short term, I 
think we would see a boost like we have been seeing from the 
Federal legislation. I think in the long term, it would be even 
more important because those tax cuts would make Minnesota 
competitive. So not only is it a good thing in the way that the 
Federal tax cuts are a good thing, but it is an especially good 
thing because you get the benefits of the tax cuts but then you 
get the secondary benefit that we are no longer one of these 
blue states with the highest taxes--I think currently the sixth 
highest tax burden. And those cuts would make Minnesota more 
competitive.
    So they would have tremendous long-range benefit for the 
State.
    Chairman Paulsen. Senator Heinrich, you are recognized for 
five minutes.
    Senator Heinrich. We are alone up here.
    [Laughter.]
    Mr. Hodge, I appreciated your analogy about the kids in the 
backseat asking, ``Are we there yet?'' but I would like to 
point out that hourly workers have been asking, ``Are we there 
yet?'' for 38 years, while their wages have stagnated, despite 
the fact that we have seen immense increases in productivity 
over that time.
    One of the reasons I think there is some frustration, or 
impatience, as you put it, with this tax law is that there was 
a fairly explicit promise made by the President, and some 
Members of Congress, that this would result in $4,000 worth of 
additional wages.
    Talk to me about that prediction. How does the data match 
up to a $4,000 increase in wages as a prediction?
    Mr. Hodge. Well there is a lot at work here in the wage 
data. So I think we have to be a little bit careful with it.
    First and foremost, if you read a recent op-ed by Robert 
Samuelson in The Washington Post, he talked about a study that 
I think was very important and how over the last few decades 
the growth in health care costs has really put a damper on wage 
growth----
    Senator Heinrich. We are talking about--are we seeing an 
increase in wages that you can even count as $1,000, in four 
digits?
    Mr. Hodge. We have done this analysis, and our results were 
different from what the Council of Economic Advisers came up 
with, but ours was long-term results as well. Their analysis 
was a long-term estimate. And I think we have to be patient and 
stop asking, ``Are we there yet?''
    Senator Heinrich. How long should workers be patient, given 
what they have gone through in the last four decades?
    Mr. Hodge. This could take just a few years. And I think 
we're going to see this as soon as the expensing provisions 
begin to kick in and a lot of that new equipment comes on line, 
which makes workers much more competitive.
    And I think Dr. Harris is right. You know, cutting the 
corporate tax rate does help old investment as well as new 
investment. But what you really get the bang for your buck is 
that expensing provision where companies are allowed to go out 
and expense that new equipment, which makes their workers more 
productive----
    Senator Heinrich. Dr. Harris, what have you seen in the 
wage data in terms of the impact of this?
    Dr. Harris. Just to take that $4,000 calculation by Kevin 
Hassett, who is Chairman of the CEA, we have a $1.3 trillion 
corporate tax cut over 10 years. So that is about $130 billion 
per year. In order to grant each worker a $4,000 on average 
wage, just multiplying out the number of workers in the 
economy, you are talking about $600 billion per year.
    So what Dr. Hassett suggested was that a $130 billion tax 
cut on the corporate side would lead to $600 billion on the 
wage side? It is just implausible. I have not seen----
    Senator Heinrich. I am still looking for the worker. I have 
been asking people at home, you know, who got that $4,000 wage 
increase, and I am still looking.
    Dr. Harris. Well wages on average have not grown since the 
passage of the tax cut.
    Senator Heinrich. Let me ask another question. And we can 
just go down the line here. I will start with you, Dr. Harris, 
and then we will just go the other direction.
    This bill was not free: $1.9 trillion by one estimate. 
There are a number of different estimates, but we all recognize 
it came with a price tag. Now a number of people, including the 
Speaker of the House, are saying that to pay for our current 
fiscal situation that we need to cut Social Security. We need 
to cut Medicare. We need to cut Medicaid. Would each of you 
support cutting benefits for those three programs?
    Dr. Harris. And then we will just go the other way.
    Dr. Harris. So in addition to being a scholar who studies 
taxes, I have also spent much of my career studying retirement. 
Social Security, in my opinion, is undoubtedly the bedrock of 
the U.S. retirement system. About half of retirees, as I 
mentioned in my earlier testimony, depend almost entirely on 
Social Security. If you cut Social Security by 10 percent, you 
are making those workers 10 percent worse off. If we cut Social 
Security, we are asking older workers, or older retirees who 
cannot plausibly----
    Senator Heinrich. I hate to cut you off--I was just asking, 
could we go a little long on this question, and I will let him 
finish?
    Dr. Harris. I will just be direct. No, I would not. I would 
worry that cutting Social Security, Medicare, and even Medicaid 
which supports long-term care, would have disastrous 
consequences for retirees.
    Senator Heinrich. You, sir?
    Mr. Hinderaker. Well first of all, I think the best thing 
to do about our deficit--and I am glad to see that people are 
concerned about the deficit. There has been too little concern 
about it, especially from the Democrats, for a long time. So I 
am glad to see it.
    I think the best thing to do about the deficit is to grow 
the economy at something like a 4 percent rate. That does an 
enormous amount to protect on the spending side.
    Senator Heinrich. Growing the economy is absolutely 
fantastic for the deficit. Would you support cuts to those 
three programs?
    Mr. Hinderaker. I would not support cuts to Social 
Security. I would support cuts to Medicare, which is really the 
one that is breaking the bank. We have got to find a way to 
restrain the growth in that program.
    Senator Heinrich. And Medicaid?
    Mr. Hinderaker. Medicaid I think is in the same category 
with Medicare, but I would be open to study that.
    Senator Heinrich. Dr. Dunkelberg.
    Dr. Dunkelberg. Well Medicaid is the real threat. And I 
think if you look at Social Security, it might not be 
unreasonable to consider a change in the retirement age, or 
looking at means' testing Social Security. I think Bill Gates 
might be happy to give his up.
    Senator Heinrich. Mr. Hodge.
    Mr. Hodge. These programs are promising benefits that are 
unaffordable. And unless they are reformed, this country faces 
a tax increase----
    Senator Heinrich. So you would actually cut off all three?
    Mr. Hodge. We have to reform all of them. And there are 
different ways that you can go about making them actuarially 
sound and fiscally sound. But otherwise, we face a tax increase 
that this country has never faced before, and that will be 
detrimental--devastating to the economic growth of this 
country.
    Chairman Paulsen. Thank you. I know Senator Klobuchar is on 
her way, so let me just ask one more question until she gets 
here.
    First of all, one piece of good news is obviously with the 
growing competitive economy, I know Social Security is on 
firmer footing with more revenues coming in, with a stronger 
economy and more payroll tax dollars coming in for the Federal 
Government.
    But, Mr. Hodge, what are your major areas of disagreement 
with Dr. Harris' testimony? Because you are kind of on opposite 
ends here. I mean, why are you right--and Dr. Dunkelberg and 
Mr. Hinderaker you can add something--but just outline some of 
the perspectives you might have, Mr. Hodge, versus Dr. Harris, 
because you are at opposite ends on the testimony.
    Mr. Hodge. I guess I am on his right today, all kidding 
aside.
    Chairman Paulsen. But why are you right?
    Mr. Hodge. No, I think the major disagreement here is on 
the effects of deficits and crowding out in the economy. 
Actually, if you look at a lot of the models that the Tax 
Policy Center, the Wharton, CBO, and the Joint Committee on 
Taxation, if you line them up to the way that we have estimated 
or looked at the Tax Cuts and Jobs Act, it is fairly similar.
    They show that it is pro-growth. Where we differ is on the 
effects of the deficit in this, quote, ``crowding out'' that 
happens in rising interest rates. We do not see that happening. 
There is $20 trillion a year worth of savings globally every 
year, and a little bit of deficit in the United States is not 
going to crowd out and raise interest rates on a global basis.
    So we do not believe that that is actually a proper way to 
look at this. And so, while they see economic growth from this 
plan, it gets, quote, ``crowded out'' by this deficit effect, 
we don't think that that is a correct way to look at it. And 
that is why we show much more growth than they do.
    Chairman Paulsen. Dr. Dunkelberg and Mr. Hinderaker, you 
can add something as Senator Klobuchar gets ready.
    Dr. Dunkelberg. Sure. I would point out two things, or 
three things maybe. But obviously it was noted that one of the 
things that is growing really quickly is the cost of benefits. 
And so when you go to measure wages, we should really be paying 
attention to that.
    We should also note that employment is growing 
substantially. Millions of new jobs are created. What was their 
income before they got the job? So we include them in the wage 
growth calculation, and we take total wages and divide by the 
total number of people working, and we get an average wage. 
Well, gee, it did not go up as much as we hoped. But how about 
all the people that are in there that were not in there before? 
We really have to acknowledge that.
    And finally, we do know that the government revenues do 
grow when the economy grows. And so we have got more people to 
tax. We have got higher incomes to tax. Government revenue, we 
have never been able to estimate that very well going forward. 
It is going to certainly mitigate the deficit issue.
    Chairman Paulsen. Mr. Hinderaker, a brief comment?
    Mr. Hinderaker. Yes, on this issue of the missing $4,000 in 
wage increases, in Minnesota, in only six months we have seen 
significant wage increases, which if you annualize it adds up 
to $1,200 per year. That is a big chunk of the $4,000 in just 
six months.
    So I would push back on this theory that we are not seeing 
wage increases. We certainly are in Minnesota.
    Senator Paulsen. Senator Klobuchar, you are recognized for 
five minutes.
    Senator Heinrich. I have spent a lot of time talking to a 
lot of hourly workers. I have yet to find one that even felt 
like they got a thousand or a twelve hundred dollar raise. I 
think that flies in the face of real experience out with real 
working people.
    Senator Klobuchar. Okay. Well I can only be here briefly 
because we have another hearing going on that you might have 
heard of. So I feel like I am going to start asking you guys 
about, you know, the Times v. Sullivan, or precedent versus 
settled law, but I will try to focus on our topic at hand.
    I had one specific thing that I was figuring out during the 
debate on the tax bill. I will start with you, because I think 
you know about this, Dr. Harris. It is something I had spoken 
with Gene Sperling about, who is the former Director of the 
National Economic Council. And he warned before the tax law was 
passed that its allowance of a global minimum tax, rather than 
a country-by-country minimum, will incentivize companies to 
shift more of their operations overseas. And I think it is 
probably too soon to know if that has happened, but the idea 
was that if you do it country-by-country minimum it would not 
have that kind of incentive. But if you do this global minimum 
tax, there would be some incentive because you would want to 
get at the average. And so some of the jobs would move to 
basically no-tax countries. And I just wondered if you could 
respond to that.
    Dr. Harris. So I agree that it is too early to evaluate the 
impact of the changes in our system of foreign taxation.
    But there is I think legitimate concern that some of the 
provisions in the TCJA perhaps inadvertently will push domestic 
activity overseas.
    So for the GILTI and for the FDII provisions, those are 
both based on tangible assets. And so if you are a company and 
you move your factory overseas with those two particular 
provisions, you will get a higher tax benefit, all else equal.
    Before what we saw in our tax code was that there were 
incentives to move intangible activity overseas--Apple, tech 
companies that had IP, and they were basically trading in 
ideas. The problem with the current system now is that there 
are provisions that will incent the movement of factories and 
actual real production.
    So I agree that it is too early to tell, but if you just 
look at the incentive, companies do have an incentive to pick 
up that factory out of places like Minnesota, and every State 
in the country, and move it overseas because they get a tax 
benefit if they do so.
    We will be watching that carefully, but right now I think 
it is a real concern.
    Senator Klobuchar. Does anyone else want to comment? No? 
Okay.
    Mr. Hodge, each year Congress' Joint Committee on Taxation 
releases a list of tax expenditures. Those are deductions, 
exclusions, you know. And Congress has long talked about 
broadening the base by reforming these tax expenditures, 
thereby reducing the complexity of the Tax Code, boosting 
fairness, reducing the deficit, and that was the over-reaching 
goal that drove that bipartisan tax reform way back in 1986.
    To what extent did the Tax Cuts and Jobs Act broaden the 
base by eliminating tax expenditures to offset rate reductions?
    Mr. Hodge. It did some, but not enough. We would recommend 
that Congress go much further in eliminating tax expenditures.
    We would trade those off for lower rates. We do think that 
that's the key to economic growth, is broadening the base and 
lowering rates.
    There was a little bit of work done on that, but not 
enough. There is still far too much junk in the Tax Code, far 
too much complexity, and it is costing the economy. The more we 
can rid the Code of those sorts of things, the better.
    Senator Klobuchar. Okay. Maybe I will end here with our 
home State guest, Mr. Hinderaker, welcome. And I had wanted to 
bring the corporate rate down. I made that clear many times, 
including during the debate. But I was concerned that it just 
went too far where it ended up, and you and I will have 
reasonable disagreement on this. And one of the reasons I was 
concerned was at every point we went down with $100 billion, 
and one of the ways that we could have spent maybe one percent, 
one point of that money was on infrastructure.
    And we had a bipartisan bill that was good, that passed a 
few years ago, that Senator McConnell actually led in the 
Senate. I was one of the first Democrats to sign on, called the 
FAS Act, which is a scary name to name any bill in Congress, 
but it passed and we were able to add some money into 
infrastructure.
    But I think we still are so behind, when we have got the 
American Society of Civil Engineers' 2013 report card U.S. 
still at a D+ on overall condition of the Nation's 
infrastructure. We obviously had issues in Minnesota with the 
bridge collapse. We put more State money into a number of our 
projects there. But what are your ideas for funding 
infrastructure? What do you think we should do? Because now we 
have gone down to this rate where it is going to be harder to 
get that kind of funding that I think we need, not just your 
traditional congestion issues, or jobs from infrastructure, 
it's just getting goods to market in this colossally 
intertwined global economy, whether it's locks and dams, or 
rail, or highways and bridges.
    Mr. Hinderaker. Well, Senator, I disagree with the idea 
that these cuts have created a revenue problem. I think the 
Federal Government has gotten more than enough revenue.
    I think the question is what should the government be doing 
with that revenue? You mentioned the corporate income tax. We 
didn't cut it way down. We cut it down to about average. So at 
least it is not totally noncompetitive. But it still is at 
about the average range.
    I agree with you that infrastructure is something that 
should be prioritized. And I think in the vast dollars that are 
being spent by the Federal Government, adequate infrastructure 
should be a high priority.
    So I don't know that we are disagreeing too fundamentally 
there.
    Senator Klobuchar. Okay. Thank you very much. And thank 
you, Representative Paulsen, and Senator Heinrich.
    Chairman Paulsen. Thank you. I want to thank all of our 
witnesses for being here today. We had a House vote that was 
called, which is why we lost a few Members during our 
discussion. But I will remind Members that if they wish to 
submit questions for the record, the hearing record will remain 
open for three business days.
    And with that, I will adjourn the hearing.
    [Whereupon, at 3:23 p.m., Thursday, September 6, 2018, the 
hearing was adjourned.]

                       SUBMISSIONS FOR THE RECORD
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    I call this hearing to order.
    Most economists say that it's too soon to know how the Tax Cuts and 
Jobs Act will affect our economy. I agree with them.
    That's because tax reform wasn't designed to give a short-term 
``sugar rush'' to the economy. It was intended to improve the levers 
that drive economic growth--more work, more capital, and more 
productivity--so that in the long run, American workers and families 
enjoy more prosperity and opportunity.
    The evidence shows that this is already beginning to happen.
    As Federal Reserve Chairman Jerome Powell put it, ``The economy is 
doing very well.''
    The Bureau of Economic Analysis recently revised upward its 
estimate of GDP growth to 4.2% in the last quarter.
    Survey after survey shows business optimism is surging.
    Individual tax relief has allowed people to keep more of their 
hard-earned money so that it's worth it to work hard, find a job, and 
keep reaching for that next opportunity.
    By investing in individuals and those who employ them, we're 
putting a downpayment on a more prosperous future for all Americans.
    After business reforms became law, companies started to invest in 
their workers and businesses in ways that lead to a more productive 
workforce. That, in turn, leads to growing paychecks and higher 
economic growth in the long run.
    This reform fought for American workers by attracting investment 
here at home and encouraging companies to keep high-value intellectual 
property in America instead of overseas.
    Profits earned in international markets are returning to the U.S. 
where it can be invested in greater opportunities for our people.
    Though we shouldn't base the success of tax reform on what's 
happening in the short term, we're already seeing positive effects from 
these long-term incentives to work and invest.
    Business investment--which paves the way for future wage and 
economic growth--is picking up. After all, an employee's wages can only 
increase following the decision by a business to invest more in its 
workers and company. We want that to be an easy decision.
    Since the Tax Cuts and Jobs Act became law, business investment has 
outperformed similar periods in 2017 and far exceeded the weak and 
sometimes negative growth in the final year of the Obama 
Administration.
    This chart comparing second-quarter growth rates shows how much 
business investment has increased in the last two years compared to the 
last year of the Obama Administration.

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    In fact, since tax reform became law, we've seen an average growth 
rate of 10 percent so far this year. This is great news.
    Yes, it will take time for tax reform to have its full effect on 
investment and wages.
    Yet the Congressional Budget Office noticed rising wages in its 
latest report on Federal revenues. JEC economists also analyzed 21 
different measures of wage growth and inflation and 20 of 21 showed 
real wages rising faster during this Congress and Administration than 
during the Obama-era recovery.
    Small business owners are also seeing benefits, with small business 
optimism, new hiring, worker pay increases, and investment plans near 
record highs.
    And for those who claim that tax reform only benefits the wealthy, 
there is great news for the Americans who struggle the most in a weak 
economy--those with less education, minority workers, and people with 
disabilities.
    Unemployment is at the lowest level since the year 2000, but the 
untold story is that it is falling faster for these disadvantaged 
groups than for other groups that tend to do well.
    It's also worth noting that the Joint Committee on Taxation found 
that, during the time individual tax relief from the Tax Cuts and Jobs 
Act is in effect, the greatest percentage tax cuts will go to those 
with incomes between $20,000-$50,000 and that millionaires will pay a 
larger share of the Federal tax burden with tax reform than they would 
without it.
    Tax reform was just a first step. We should continue to improve our 
tax code to meet the challenges of an ever-changing global economy. But 
the Tax Cuts and Jobs Act put America on a much stronger economic 
footing, which will make many of our Nation's challenges easier to 
tackle.
    I look forward to our distinguished panel of witnesses, including 
one from my home State of Minnesota.
    Before I introduce our panel of experts, I now recognize the 
Ranking Member, Senator Heinrich, for a period of 5 minutes for his 
opening statement.
                               __________
                               
   Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint 
                           Economic Committee
    Thank you Chairman Paulsen. I agree with you that it's useful to 
look at the Republican tax law's impacts on the economy, working 
families, and our Nation's future economic position.
    I suspect we will come to very different conclusions.
    At best, the Republican tax bill was a massive missed opportunity, 
squandering $1.9 trillion on tax breaks for those who don't need them 
at a time our Nation can least afford it.
    The bill does little to help working families. Instead, it worsens 
inequality and burdens the next generation with trillions in additional 
debt, which could jeopardize vital programs and services families count 
on.
    At a basic level, the law hasn't lived up to Republican promises. 
The White House and my Republican colleagues promised families a $4,000 
a year increase in income.
    But that hasn't happened.
    In fact, wages adjusted for inflation are actually going down, not 
up.
    As you can see in this chart on wage growth, the average hourly 
wage for production and nonsupervisory workers--our best measure of the 
typical worker's take-home pay--was lower in July 2018 than July 2017, 
after adjusting for inflation.
    In other words, wages aren't keeping pace with the cost of living.
    That means it's harder for the typical family to buy groceries, pay 
rent and put gas in the tank.
    After decades of wage stagnation--where the median worker's wages 
have grown by 6.1 percent over the last 38 years--people need a real 
raise, not empty promises.
    The reality is that the Republican tax bill is doing exactly what 
virtually all mainstream economists and Democrats said it would do. It 
is delivering the vast majority of its benefits to large corporations 
and wealthy individuals, while leaving working Americans behind.
    Stock buybacks are now at record highs, with Goldman Sachs 
projecting they will reach $1 trillion by the end of the year.
    While buybacks benefit company executives and other wealthy 
shareholders and investors, they do nothing for half of all Americans 
who own no stock. And, since foreign investors own 35 percent of U.S. 
stocks, much of the benefits of the buybacks are flowing overseas.
    It's important to remember that each dollar spent on buybacks is a 
dollar not spent on investing in factories or plants, training, or 
boosting workers' wages.
    We could have gone a different direction.
    My Republican colleagues could have joined with Democrats to craft 
deficit-neutral, pro-growth tax reform.
    But, by adding $1.9 trillion to the national debt, the tax law 
gives Republicans their latest justification to target Social Security, 
Medicare, and Medicaid.
    Just last month, Republican Representative Steve Stivers, the chair 
of the NRCC, expressed support for turning Medicare into a voucher 
program.
    Republicans are again pushing to cut health care coverage that 
families receive through Medicaid and go after Medicare and Social 
Security, which seniors and their families count on.
    In my State, more than half of New Mexicans depend on these three 
programs and the Affordable Care Act to help with health care and 
living expenses.
    Cuts to these programs would have devastating consequences for 
families who have seen little to no benefit from the tax cuts.
    Recent economic projections remind us that any growth bump from the 
Republican tax cut will be short lived.
    So, Republicans will try to take your eyes elsewhere.
    Republicans will point to second quarter GDP growth, but will 
neglect to mention that we have hit higher levels multiple times in 
this recovery, or that long-term projections are unchanged.
    In fact, economists at the San Francisco Fed recently projected 
that the tax cuts could have zero impact to growth, due to the poor 
timing of the law.
    They'll talk about this years' job growth, but fail to acknowledge 
that 2018 and 2017 look basically the same as 2016 and 2015. In fact, 
as this chart on job growth shows, the economy is adding fewer jobs per 
month since President Trump took over.
    Now, Republicans want to make permanent the temporary provisions of 
the bill--to dole out a second helping of tax breaks.
    But doing so would deliver two-thirds of the benefits to the 
wealthiest 20 percent and add nearly $800 billion more to the debt by 
2028.
    The Republican tax law was the wrong medicine at the wrong time. 
The solution is not to take more of it.
    I want to thank each of the witnesses for your testimony today and 
I look forward to a spirited discussion.
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 Response from Dr. Dunkelberg to Questions for the Record Submitted by 
                            Chairman Paulsen
    A Council of Economic Advisers report, released September 5, 2018, 
found that properly measured, Q2-2018 inflation-adjusted hourly 
compensation of workers was 1.4 percent higher than a year ago. This 
compares with a 0.1 percent increase TCJA critics frequently tout. In 
your capacity as an economist, could you comment on this report's 
findings? Which indicators would be best to look at to determine what's 
really happening to workers' inflation-adjusted wages?
    There are many measures of inflation and of wage and compensation 
gains over different time periods to analyze these numbers, producing 
different results. The Atlanta Federal Reserve has a good series that 
monitors wage changes for people who are in the same job from period to 
period. In this tight labor market, more people change jobs to earn 
more or get a preferable position. This signals gains for those 
switching. NFIB members have reported record-high percentages raising 
``compensation,'' which includes benefits and wages. The CEA analysis 
is certainly supported by the broader evidence such as NFIB findings, 
JOLTS reports (lots of turnover), and the Atlanta Federal Reserve. And, 
as I pointed out in testimony, such criticism ignores the fact that 
millions of new workers went from ``zero'' income to a positive income, 
a rather significant increase. But, for example, the 200,000 new job 
holders last month are added to the denominator to calculate ``average 
wages.'' What they add to the numerator, total new wages, depends on 
what types of jobs they take. If they take exactly the same jobs that 
the existing workforce has, there is no change in ``average wages,'' 
which explains the claim of ``no gain'' even though 200,000 more people 
are working and have an income.
    Thank you for the opportunity to present the NFIB results at your 
hearing.
                               __________
 Response from Dr. Dunkelberg to Questions for the Record Submitted by 
                        Ranking Member Heinrich
    Gross Domestic Product is the most commonly used indicator to 
measure the health of the overall economy. But it doesn't tell us how 
growth is shared across the economy--in other words, who is benefiting 
and who is not. To get a more complete and timely picture, we need to 
measure how economic growth is distributed across households. That's 
why I'm introducing legislation that instructs the Bureau of Economic 
Analysis to start reporting on new Income Growth Indicators (IGI), 
which would show how incomes are growing at different levels of income.
    Do you believe that having more detailed and timely data on who is 
benefiting from growth would allow policymakers to better evaluate the 
long-term impact of the recent tax cuts as well as other policies?
    The distribution is a very important dimension of our ``economic 
performance,'' and I think that policymakers have access to those data 
at their discretion from Census and the Treasury Department. 
Organizations such as Brookings and Heritage pay attention to the 
distribution of income (and the distribution of spending by consumers) 
in their policy research. Perhaps the information could be more widely 
publicized. Reports of income shares by income decile are regularly 
produced and are available on the websites of the various agencies 
(HHS, Treasury, and Census).
    Thank you for the opportunity to present the NFIB results at your 
hearing.
                               __________
   Response from Dr. Harris to Questions for the Record Submitted by 
                        Ranking Member Heinrich
    Gross Domestic Product is the most commonly used indicator to 
measure the health of the overall economy. But, it doesn't tell us how 
growth is shared across the economy--in other words, who is benefiting 
and who is not. To get a more complete and timely picture, we need to 
measure how economic growth is distributed across households. That's 
why I'm introducing legislation that instructs the Bureau of Economic 
Analysis to start reporting on new Income Growth Indicators (IGI), 
which would show how incomes are growing at different levels of income.
    Do you believe that having more detailed and timely data on who is 
benefiting from growth would allow policymakers to better evaluate the 
long-term impact of the recent tax cuts as well as other policies?
    Gross Domestic Product (GDP) is an economic measure of the value of 
the goods and services produced in an economy. As such, it is 
fundamentally designed to measure the size of a country or region's 
economy, but can produce misleading inferences about the well-being of 
American households.
    GDP is especially poorly designed to measure the impacts of a tax 
change for a few reasons. One, changes in GDP mask changes in income 
and resources for households. As evidenced by analysis produced by the 
Congressional Budget Office, the Tax Cuts and Jobs Act boosted GDP by 
roughly 0.5 percent after a decade, but led to tax increases for 
millions of households in the outyears of the tax cut. Extrapolating 
the value of the tax cut based on GDP alone would suggest that all 
households would be somewhat better off, while many households would 
instead face a tax increase--especially following the expiration of the 
individual provisions in 2025.
    More broadly, better and timelier data is critical to better 
evaluation of government policies and programs. This issue has gained 
increased attention with the 2017 report of the Commission on Evidence-
Based Policymaking and subsequent bipartisan legislation to implement 
several recommendations contained in the report. Increased government 
resources for more and better data will help policymakers better 
understand the true economic impact of various reforms, which will 
ultimately lead to improved lives for American families.
                               __________
   Response from Dr. Harris to Questions for the Record Submitted by 
                         Representative Maloney
    I'd like to consider the topic of inequality and our shrinking 
middle class. According to a study by the Economic Policy Institute, 
between 1978 and 2017, inflation-adjusted CEO pay rose more than 1,000 
percent. The median American worker's income grew only 11 percent. Most 
of the gains made by those workers occurred between 1978 and 2000.
    Since 2000, the wages of the median worker have flatlined. For many 
Americans, the situation is even worse. A report by the Hamilton 
Project of the Brookings Institution finds that wages for the bottom 20 
percent of earners fell between 1979 and 2016.
    Nevertheless, the new tax law seems to exacerbate those trends. A 
report by Center on Budget and Policy Priorities estimates that when 
the new tax law is fully phased-in, the average tax cut for the top 1 
percent will be more than $61,000 per year. Those with incomes in the 
bottom 60 percent will receive on average about $400. Households in the 
top 1 percent will receive an after-tax gain that is three times that 
of the bottom 60 percent of households.
    Could you please explain the various mechanisms by which the tax 
law could deepen inequality? Please touch on the likely effect of the 
increased debt burden and of proposed cuts to Social Security and 
Medicare.
    Analysis from a host of independent organizations has confirmed 
that the Tax Cuts and Jobs Act (TCJA) will deepen inequality. However, 
for a host of reasons, this analysis has generally understated the 
severity of the impact.
    At first glance, the TCJA is worth substantially more to upper-
income families than to those in the bottom part of the income 
distribution. This is undoubtedly true when examining the absolute size 
of the tax cut, but also true when looking at the impact relative to 
family income. For example, the Urban-Brookings Tax Policy Center (TPC) 
found that in 2018 the bill would raise income for the bottom quintile 
by just 0.3 percent, but by 2.2 percent for the top quintile.
    These calculations, while helpful, understate the true impact on 
equality for a few reasons. One, they do not identify which households 
will be asked to repay the tax cut. Subsequent analysis by TPC found 
that if households are asked to repay the tax cut in proportion to 
their income, 90 percent of households in the bottom quintile would get 
a tax increase with nearly 80 percent of households in the bottom 
quintile seeing a drop in their income of over 1 percent. In contrast, 
roughly 60 percent of households in the top 1 percent would receive a 
tax cut. Similarly, if seniors are effectively asked to pay for the tax 
cut through substantial cuts in Social Security and Medicare, the 
decline in progressivity would be targeted towards low- and middle-
income households who depend on these programs. While it is impossible 
to precisely measure the impact in the absence of a specific budget 
change, it is true that even small changes in these programs will have 
severe impacts on many seniors as millions depend almost exclusively on 
these programs for their income and benefits.
    A second reason these understate the severity of the inequity is 
that analysis of the tax cuts often focuses on the near-term. As you 
know, the permanent aspect of the tax cut can be summarized as a 
dramatically lower corporate tax rate in return for lower rates of 
indexing the tax code. The decline in the corporate rate is highly 
concentrated among owners of capital, who tend to be those at the 
highest end of the income distribution, while taxpayers of all stripes 
are impacted by the change to inflation--including those who do not pay 
income tax. Thus, the magnitude of the tax cut's impact on inequality 
is exacerbated over time.
    The major selling point of the tax cuts was that they would create 
jobs and increase wages. So far, we have seen little evidence of wage 
growth, particularly real wage growth.
    There are wildly different estimates of the future effects of the 
tax cuts on wages. The graph below by the Washington Center for 
Equitable Growth helps put this in perspective.
    Could you comment on the wide disparity between these estimates? 
What would happen if the most optimistic estimates are wrong? How would 
this affect the gap between the very wealthy and the rest of American 
families?

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    As the chart above shows, entities that are described as ``non-
partisan'' and ``independent'' typically have more similar estimates of 
the economic impact of the tax cut, including in particular the impact 
on wages. Much of the discrepancy comes from the assumption about how a 
corporate tax cut--by far the most costly and consequential aspect of 
the TCJA--eventually filters through to wage-earners. There is actually 
a relatively solid consensus on this point, with CBO, JCT, Treasury's 
OTA, and TPC making the assumption that roughly 20 to 25 percent of a 
corporate tax cut will raise wages through higher productivity. It 
should be noted, too, that this assumption is largely based on several 
theoretical studies of the corporate tax incidence--economists have 
limited ``real world'' estimates of how a corporate tax cut impacts 
wages. Moreover, there is even less evidence on how a corporate tax 
impacts wages differently across the distribution of wage levels.
    Under a situation where the consensus is confirmed--that is, the 
outlier estimates produced by the Tax Foundation and CEA are wrong--the 
TJCA would likely exacerbate income inequality. The magnitude of this 
impact would depend critically on the eventual response by Congress, 
and whether deficits were eventually closed through tax cuts or reduced 
funding for programs, but it is difficult to imagine a scenario under 
which wage growth remained stagnant and the tax cuts decreased 
inequality.
  

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