[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
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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
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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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