[Joint House and Senate Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 116-101
MEASURING ECONOMIC INEQUALITY IN THE UNITED STATES
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 16, 2019
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
38-198 WASHINGTON : 2020
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Mike Lee, Utah, Chairman Carolyn B. Maloney, New York, Vice
Tom Cotton, Arkansas Chair
Ben Sasse, Nebraska Donald S. Beyer, Jr., Virginia
Rob Portman, Ohio Denny Heck, Washington
Bill Cassidy, M.D., Louisiana David Trone, Maryland
Ted Cruz, Texas Joyce Beatty, Ohio
Martin Heinrich, New Mexico Lois Frankel, Florida
Amy Klobuchar, Minnesota David Schweikert, Arizona
Gary C. Peters, Michigan Darin LaHood, Illinois
Margaret Wood Hassan, New Hampshire Kenny Marchant, Texas
Jaime Herrera Beutler, Washington
Scott Winship, Ph.D., Executive Director
Harry Gural, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Carolyn B. Maloney, Vice Chair, a U.S. Representative from
New York....................................................... 1
Hon. Mike Lee, Chairman, a U.S. Senator from Utah................ 3
Witnesses
Dr. Gabriel Zucman, Associate Professor of Economics, University
of California, Berkeley, and Co-Director, World Inequality
Database, Berkeley, CA......................................... 5
Dr. Heather Boushey, President & CEO and Co-Founder, Washington
Center for Equitable Growth, Washington, DC.................... 6
Dr. Douglas Holtz-Eakin, President, American Action Forum,
Washington, DC................................................. 8
Dr. Eric Zwick, Associate Professor of Finance and Fama Fellow,
University of Chicago Booth School of Business, University of
Chicago, Chicago, IL........................................... 9
Submissions for the Record
Prepared statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S.
Representative from New York................................... 36
Prepared statement of Hon. Mike Lee, Chairman, a U.S. Senator
from Utah...................................................... 37
Prepared statement of Dr. Gabriel Zucman, Associate Professor of
Economics, University of California, Berkeley, and Co-Director,
World Inequality Database, Berkeley, CA........................ 38
Prepared statement of Dr. Heather Boushey, President & CEO and
Co-Founder, Washington Center for Equitable Growth, Washington,
DC............................................................. 42
Prepared statement of Dr. Douglas Holtz-Eakin, President,
American Action Forum, Washington, DC.......................... 54
Prepared statement of Dr. Eric Zwick, Associate Professor of
Finance and Fama Fellow, University of Chicago Booth School of
Business, University of Chicago, Chicago, IL................... 61
Response from Dr. Zucman to Question for the Record Submitted by
Senator Klobuchar.............................................. 79
Response from Dr. Boushey to Question for the Record Submitted by
Senator Klobuchar.............................................. 79
MEASURING ECONOMIC INEQUALITY IN THE UNITED STATES
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WEDNESDAY, OCTOBER 16, 2019
United States Congress,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to notice, at 2:45 p.m., in
Room 2020, Rayburn House Office Building, the Honorable Carolyn
B. Maloney, Vice Chair, presiding.
Representatives present: Maloney, Schweikert, Beyer,
Beatty, and Heck.
Senators present: Lee and Heinrich.
Staff present: Melanie Ackerman, Robert Bellafiore, Alan
Cole, Harry Gural, Owen Haaga, Amalia Halikias, Sema Hasan,
Colleen Healy, Ziyuan Huang, Christina King, Kyle Moore,
Michael Pearson, Hope Sheils, Kyle Treasure, Scott Winship, Jim
Whitney, and Randy Woods.
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Vice Chair Maloney. Thank you so much. I want to thank all
my colleagues for being here and all our distinguished
panelists. I am Congresswoman Carolyn Maloney.
Last month, the Census Bureau reported that income
inequality in the United States by one measure had reached its
highest level since they began tracking it more than 50 years
ago. For the typical worker, wages have been stagnant for
decades, for four decades. On the other hand, those at the top
are doing great. The top 1 percent of households in the United
States now take home about 20 percent of the total income.
The wealthiest 1 percent own nearly 40 percent of total
wealth. Those at the very top, the top one-tenth of 1 percent,
have seen their share of wealth double since 1990. That narrow
sliver of the population, the top tenth of 1 percent, now own
more than the bottom 80 percent of Americans.
One of our witnesses today, Dr. Zucman, has done important
work tracking these trends going back a century. His most
recent work looks at the role played by our tax system. It is
widely believed that our tax system is progressive, that the
rich pay a larger percentage of their income in taxes. However,
Dr. Zucman's recent work reveals that in 2018, the wealthiest
400 Americans paid a lower total tax rate than any other income
group. Sadly, this is not an accident. It is deliberate public
policy.
In 2017, the Republican Congress and President Trump
slashed taxes on the rich, borrowing $1.9 trillion to do it.
Inequality in America was already sky-high. The Republican tax
cut made it far worse.
Skyrocketing inequality undermines our middle-class society
in which anyone who works hard has a chance to succeed. It
means that for millions of Americans, the American dream may be
a myth.
Our second witness, economist Heather Boushey, argues that
high levels of inequality undermine economic growth, because
strong growth depends, in part, on a strong middle class.
Consumer spending accounts for 70 percent of the U.S. economy.
But as a larger and larger share of income and wealth go to
those at the top, there is less left over for everyone else.
As a result, most Americans have less money in their
pockets, less to spend on what businesses sell. Therefore, when
the bottom 50 percent, those who consume a much larger share of
income compared to those at the top, see no income growth for
40 years, that is a major problem.
Extreme inequality also undermines our communities. The
Chairman and I agree that healthy communities with strong
social capital are critical to a high quality of life. But
extreme inequality undermines that.
When wealth is highly concentrated, and in a society where
education is critical to success, families have extremely high
incentives to live in towns with other wealthy families so they
can put their children in the best school systems. So Americans
increasingly become segregated by wealth, and their quality of
life becomes dependent on their ZIP Code.
Extreme inequality also undermines our democratic
institutions. It enables the powerful to rig the rules to make
themselves even more powerful. We see the erosion of antitrust
laws, the breakdown of protections for small investors, the
rejection of overtime protections for workers. We pay a very
high price for extreme inequality.
How bad is inequality in the United States? Economists
disagree about the severity of the problem, but while they
disagree about how much inequality has worsened in recent
decades, there is little disagreement things are getting worse.
One way that we measure the strength of our economy is by
quarterly measures of gross domestic product. It is a good
aggregate number. It tells us how fast the whole economic pie
is growing. But the slices of the pie that go to the rich,
middle class, and poor are extremely unequal.
Unfortunately, we currently don't measure how economic
growth is shared. For this reason, I have introduced the
Measuring Real Income Growth Act of 2019, and I am pleased that
Senator Heinrich is introducing a companion bill in the Senate.
The bill would require the Bureau of Economic Analysis to
report GDP growth by income decile and the top 1 percent
alongside the top line number. It will help us understand not
just how fast the economy is growing, but who is benefiting
from the growth.
Academic economists, such as Dr. Zucman, have produced
estimates similar to those we are asking for from BEA, but we
need the government to do this in a regular and timely manner.
Inequality is one of the most pressing issues of our day.
It is tearing our society apart and undermining much of what we
stand for. In order to understand inequality, we must have
better ways to measure it, ways that are accepted by those on
both sides of the aisle. With that information in hand, we can
begin to restore our economy to the land of opportunity.
I would now like to call on Chairman Lee for his opening
statement, and then we will go to the panelists.
Thank you.
[The prepared statement of Vice Chair Maloney appears in
the Submissions for the Record on page 36.]
OPENING STATEMENT OF HON. MIKE LEE, CHAIRMAN, A U.S. SENATOR
FROM UTAH
Chairman Lee. Thank you, Vice Chair Maloney, for holding
this hearing. This is an interesting topic, and I look forward
to our conversation this afternoon.
Inequality has been a hinge of American politics. And
indeed, something of a hinge in all democracies for as long as
democracies have existed, and with some good reason.
Concentration of economic power can be as dangerous as the
concentration of political power.
Unfortunately, the debate about inequality, like far too
many debates these days, can easily be swept up into a partisan
exercise of talking past each other. We could spend our entire
time, and we could spend entire days for that matter, haggling
over whether inequality is best understood as something that
involves unequal opportunity or instead involves unequal
outcomes. Or indeed, if the latter, we could argue for hours
about whether and how much it is even a problem, given that
almost every facet of modern life, from air conditioning to
airplanes, can be counted among the blessings of intentionally
unequal benefits, the unequal benefits of free enterprise.
Inequality is such a large concept that it is very
difficult to tackle in a single hearing. That is why I commend
Vice Chair Maloney for organizing today's hearing on measuring
inequality and for inviting such an excellent panel of
witnesses to talk to us, people with a lot of expertise and
insight.
The subject of data measurement techniques is, at once,
narrow enough to keep our discussion focused and, hopefully,
technical enough that even Congress can set aside political
temptations and simply drill down on some very important
questions.
For instance, how exactly should we define income for
purposes of measuring inequality between rich, poor, and middle
class? How should we count government transfers, like the
earned income tax credit for lower income workers? As the
scholarship on inequality measurement has progressed, which
technical details have survived peer-reviewed scrutiny and
which remain to be worked out before we can reach some type of
academic consensus?
These are not the questions that will necessarily lead
cable news political talk shows. That is why they are exactly
the kinds of questions the Joint Economic Committee should be
taking up. Even the best policies involve tradeoffs.
Our economy is growing. And today, our economy happens to
employ more people than it ever has before. But it has, in
fact, been a long slog out of the Great Recession, much longer
for some, regrettably, than for others.
If the data really can afford us a clearer view of how the
costs and benefits of economic growth are being experienced as
we move up and down the economic scales, as we move up and down
the income spectrum, that is the type of analysis we should all
insist on getting and insist on making sure that we get it
right.
So thank you, again, Madam Vice Chair, and to the witnesses
that we are going to hear from today. I look forward to hearing
from you.
[The prepared statement of Chairman Lee appears in the
Submissions for the Record on page 37.]
Vice Chair Maloney. Thank you so much.
And I am going to introduce our witnesses, and each will
have 5 minutes, and then we will go to questions.
Dr. Gabriel Zucman is associate professor of economics at
the University of California, Berkeley. His research focuses on
distribution and taxation of global wealth. Professor Zucman is
the author of ``The Hidden Wealth of Nations,'' which found
that 8 percent of the world's wealth is held in tax havens. He
is coauthor of the just released ``The Triumph of Injustice:
How the Rich Dodge Taxes and How to Make Them Pay.'' Dr. Zucman
received his Ph.D. from the Paris School of Economics.
Dr. Boushey is the president and CEO and cofounder of the
Washington Center for Equitable Growth. Her research focuses on
the intersection between economic inequality, growth, and
public policy. Dr. Boushey is author of the just released
``Unbound: How Inequality Constricts Our Economy and What We
Can Do About It.''
Previously, she worked as an economist in several
organizations, including the Center for American Progress, the
Economic Policy Institute, and the Joint Economic Committee.
She received her Ph.D. in economics from The New School for
Social Research.
Dr. Holtz-Eakin is president of the American Action Forum,
which he founded in 2009. Previously, he served as director of
the nonpartisan Congressional Budget Office and as chief
economist at the Council of Economic Advisers.
Dr. Holtz-Eakin spent more than a decade at Syracuse
University, where he was Trustee professor of economics at the
Maxwell School. He has a Ph.D. in economics from Princeton
University.
Dr. Eric Zwick is associate professor of finance in the
Booth School of Business at the University of Chicago. His
research focuses on the impacts of public policy on corporate
behavior, with a particular focus on the challenges facing
small and medium-sized firms. He has a Ph.D. in business
economics from Harvard University.
Thank you all for coming on this really important subject.
And, Dr. Zucman, you are recognized first, and we will go
right down.
Thank you.
STATEMENT OF DR. GABRIEL ZUCMAN, ASSOCIATE PROFESSOR OF
ECONOMICS, UNIVERSITY OF CALIFORNIA, BERKELEY AND CO-DIRECTOR,
WORLD INEQUALITY DATABASE, BERKELEY, CA
Dr. Zucman. Thank you, Chairman Lee and Vice Chair Maloney,
for inviting me to speak today. It is an honor to be here.
My name is Gabriel Zucman, and I am an associate professor
of economics at the University of California, Berkeley. My work
seeks to advance the measurement of inequality. With my
colleagues, Facundo Alvaredo, Lucas Chancel, Thomas Piketty,
and Emmanuel Saez, I am one of the co-directors of the World
Inequality Database, an extensive database on the long-run
evolution of income and wealth inequality.
One of our goals is to contribute to the creation of
comprehensive, standardized, and internationally comparable
inequality statistics that capture all forms of income
contributing to GDP. So concretely, when GDP grows 3 percent,
let's say, in a given year, we want to be able to know how
income is growing for each social group in a way that is
consistent with the official rate of GDP growth. We call these
statistics distributional national accounts.
To understand the ultimate goal and the value of this
project, the following analogy is helpful. According to the
official national accounts of the United States, real GDP grew
2.9 percent in 2018. This number involves some uncertainty. The
measurement of GDP, after all, relies on many assumptions.
There are projections based on preliminary reports that can
only be confirmed months or years down the road. There are
imputations, for example, of the rents that homeowners pay to
themselves. There are assumptions about how much income is
underreported by taxpayers to the IRS. But despite these
uncertainties, most people trust official estimates of GDP.
These estimates are based on methods that have been
improved over several decades. They are based on
internationally agreed and constantly refined concepts and
methods. They are constructed by hundreds of highly qualified
government statisticians.
My hope is that, one day, we will reach the point where
statistics of inequality are constructed and regarded like GDP
statistics.
With my colleagues, we try to contribute to this evolution.
We have created prototype distributional national accounts,
that is, statistics that distribute the national account
aggregates--such as national income, household wealth, tax
revenue, and government spending--across the population. These
prototype distributional national accounts are based on the
conceptual framework that we developed over several years. They
are based on harmonized guidelines, concepts, and estimation
techniques that we have applied and are applying to many
countries. They are constantly updated when new data becomes
available and refined estimation techniques are designed.
All the data series are made available in a user-friendly
manner on the World Inequality Database, wid.world. All
programs, computer code, and technical appendices are publicly
available. All our results can be replicated using publicly
available data. Users are free to change our methodology, and
we constantly refine our methods as we receive new feedback and
new knowledge emerges.
These prototype distributional national accounts show a
large rise in income inequality. In 1980, the top 1 percent
earned 10 percent of total pretax income. Today, it earns about
20 percent of total pretax income.
Although we have put a lot of effort in building this
prototype, it remains a prototype. The methods underpinning our
distributional national accounts are still in their infancy.
Much more work needs to be done.
Our hope is that these prototypes will eventually be taken
over by government, improved, and published as part of the
official toolkit of government statistics. This is what
happened for the national accounts in the first place.
It may take years, even decades, before this happens. But
in the meantime, it is perfectly normal to have methodological
discussions, debates, and disagreements. This does not mean
that we cannot know what is happening to inequality today.
A wide array of evidence shows high and rising inequality.
Each of these sources has limitations. All economic statistics
are constructions, whose limitations must be understood. But by
working together, we can arrive at the best possible estimates
and reach the stage where the publication of inequality
statistics will be just like the publication of GDP.
I look forward to your questions. Thank you.
[The prepared statement of Dr. Zucman appears in the
Submissions for the Record on page 38.]
Vice Chair Maloney. Thank you.
Dr. Boushey.
STATEMENT OF DR. HEATHER BOUSHEY, PRESIDENT & CEO AND CO-
FOUNDER, WASHINGTON CENTER FOR EQUITABLE GROWTH, WASHINGTON, DC
Dr. Boushey. Thank you, Vice Chair Maloney and Chairman
Lee, for inviting me to speak today. It is an honor to be here.
My name is Heather Boushey, and I am president and CEO of
the Washington Center for Equitable Growth. We seek to advance
evidence-backed ideas and policies in pursuit of growth that is
strong, stable, and broadly shared.
One of the most important things we can do to fight
inequality in the United States right now is to start keeping
track of it. Government statistics drive economic policymaking
in Congress, the Federal Reserve, and the executive agencies.
Inequality should be added to this pantheon.
And the right way to incorporate inequality is to add
measures of growth within income quantiles to the National
Income and Product Accounts. This extension to our existing
National Income Accounts updates them to better reflect the
realities of the 21st century economy.
Vice Chair Maloney has introduced a bill that would do just
that, and I want to thank her for her attention to this
important issue.
The bill is called the Measuring Real Income Growth Act,
and it will tell us what growth looks like for low-, middle-,
and high-income Americans. The one number approach to growth we
use now is no longer sufficient.
In the 1960s and 1970s, growth in our economy was broad-
based. When the economy grew, most families saw their incomes
rise in tandem. But that pattern fell apart starting sometime
around 1980. Over the past 40 years, most growth has gone to a
small group of people, those at the top of the income
distribution.
When growth is so unequally distributed, aggregate measures
are misleading. Distributional measures of growth answer an
increasingly important question: Who prospers when the economy
grows? Measuring growth for Americans up and down the income
ladder will have profound impacts on economic discourse and on
policymaking.
First, it will connect the idea of aggregate economic data
with the real-life circumstances of families in the economy.
When a worker sees politicians touting strong growth but looks
around and sees no evidence of that in their community, they
are right to feel that they are being left behind.
Second, distributional accounts will focus our attention on
the economic well-being of families, which is, after all, what
growth is supposed to deliver.
Third, distributional measures of growth will guide
policymakers in designing policies that both raise output and
do it in a way that everyone gains.
Finally, these metrics will allow citizens to hold their
elected representatives accountable to delivering an economy
that works for all.
Now is the time for the Bureau of Economic Analysis to
incorporate distributional measures into our regularly released
national accounts. The statistical science around this topic is
increasingly mature. In addition to work by academics, the OECD
has created an expert group to study a new standard for
distributional measures of income. Some member countries have
already adopted versions of these measures in their official
statistics.
Here in the United States, the Federal Reserve has started
reporting a distributional breakdown of the financial accounts.
Critically, these measurements fill in a significant gap in our
understanding of the U.S. economy. For decades, our economic
policy has been driven by the presumption that we must increase
growth at all costs.
Proponents of this view argue that, quote, ``growing the
pie is the most important metric of success.'' This presumption
is wrong. There is a large and growing body of empirical
research that shows that we cannot create strong or broadly
shared economic gains through a policy agenda that allows those
at the top to reap the bulk of the gains.
First, research shows that inequality obstructs the
development of human capital. Children from low-income families
have worse health outcomes and fewer educational opportunities,
which has long-run effects on productivity and output.
Second, research shows that inequality is subverting the
proper function of the institutions that manage the market. A
small number of citizens with immense wealth exercise outsized
influence on policy entrenching their wealth by lowering taxes
and weakening protections on labor.
Third, inequality distorts both consumption and investment.
Research confirms the intuition that the rich save more of
their income. Rising income inequality puts more money in the
hands of the rich and depresses overall economic demand, while
simultaneously encouraging a greater reliance on credit rather
than productive investment.
Because rising inequality obstructs, subverts, and distorts
our economy, we cannot be indifferent to how growth is
distributed. The new measurements proposed by Vice Chair
Maloney will help us chart a path to stable, broad-based growth
that benefits all Americans.
I look forward to your questions. Thank you.
[The prepared statement of Dr. Boushey appears in the
Submissions for the Record on page 42.]
Vice Chair Maloney. Dr. Holtz-Eakin.
STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN
ACTION FORUM, WASHINGTON, DC
Dr. Holtz-Eakin. Vice Chair Maloney, Chairman Lee, members
of the committee, thank you for the privilege of being here
today to discuss this important research area and the policy
implications of it.
We are all by now quite familiar with the characterization
of income inequality and its evolution over the past four
decades, a characterization that includes the share going to
the top 1 percent rising from roughly 10 to 20 percent and
incomes for those in the bottom half of the distribution
remaining essentially flat.
So as someone who is a consumer of this research literature
as much as anyone, it is disconcerting to read recent research
by Gerry Auten and David Splinter that reexamines these
patterns and finds, in fact, at the top, the rise was quite
modest, perhaps 2 percent, and that in the bottom 50 percent,
the income increased by about a third over that period. And
that is a very different picture of the level and evolution of
inequality in the United States.
It is clear there is no consensus. And if you dig into
this, it turns out that the results that you get are incredibly
sensitive to the kinds of things that neither you nor I would
know how to make a decision on. What is going to be the basic
unit of observation? Are we going to look at households? Are we
going to look at tax filing units? What is going to be the
definition of income? What will be in it? Will we try to scale
to get all national income or not? How do we impute the things
that we don't actually directly observe?
And it is quite striking how sensitive the results are to
different choices of the measure of inflation over that time
period. It makes a big difference for the results.
And so I think it is fair to say, at this point, there is
no real consensus about the level or evolution of income
inequality, and that this is an ongoing and active area of
research that, hopefully, some agreement will be reached by the
various researchers.
It does for me, at least, raise the question of how we want
to think about the policy implications of the research. If we
really don't know where we are, it is hard to figure out
exactly what the policy design would be. And on top of that, it
is not obvious what the goal is. What is the right level of
inequality? And how would you actually identify it and
institute policies to get to it?
Surely, we are not trying to get to zero where everyone
gets exactly the same thing. So that we have to stop somewhere
in between. And I have yet to see anyone articulate a stopping
point in a way for us to think about the objectives of this--of
this policy.
And so if you don't know where you are starting, you don't
know where you are going, it is not much of a situation where
you want to take aggressive policy action.
The final thing I would emphasize that comes out quite
clearly in this is, while there is casual talk of the top 1
percent or the middle income or the lower income, as if they
were monolithic entities, there is a huge amount of movement in
and out of those.
In research that Gerry Auten did, you find that something
between 37 and 47 percent of those people in the 1 percent are
gone a year later. So being a 1 percenter might be a one-time
lifetime event. You sell a business, you are a 1 percenter. You
weren't before, you never will be again. And how we think about
policies toward any part of that income distribution, we should
think hard about whether people are going to be there for any
sustained period of time. It makes a difference in the policy
design.
So when I look at this literature and I recognize the sort
of deep caring that has always been true in the United States
about inequality, it leads me to the modest suggestion that
perhaps the right thing to do until the research is settled is
to focus on the piece of inequality about which we all agree,
the lower tail, those people who are poor in America, have been
poor, may remain poor. There, I think, is consensus that we
ought to do something about that wherever possible and spend a
little less time fighting about policies toward the rich and
spend a lot more time thinking about strategies to reduce the
level of poverty in the United States on a permanent basis.
Thank you, and I look forward to your questions.
[The prepared statement of Dr. Holtz-Eakin appears in the
Submissions for the Record on page 54.]
Vice Chair Maloney. Dr. Zwick.
STATEMENT OF DR. ERIC ZWICK, ASSOCIATE PROFESSOR OF FINANCE AND
FAMA FELLOW, UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS,
UNIVERSITY OF CHICAGO, CHICAGO, IL
Dr. Zwick. Vice Chair Maloney, thanks to you, Chairman Lee,
members of the committee, for the opportunity to appear today
to discuss my research and lessons for measuring economic
inequality.
My name is Eric Zwick. I am an associate professor of
finance at the University of Chicago Booth School of Business.
I make three points in my testimony that I will summarize
here. First, inequality is high and has risen. A meaningful
scientific consensus supports this basic point. However, the
academic community is still debating the size of this increase
and learning about the composition of high-end inequality. For
example, relative to what we previously thought, households at
the top of the income distribution derive more of their income
from work and from entrepreneurship and less from investment
income like dividends and interest.
Most top earners are private business owners, a group that
includes lawyers, doctors, consultants, owners of mid-sized
businesses, such as auto dealers and wholesale distributors. In
both number and aggregate income, these groups far surpass that
of high-tech billionaires and public company CEOs who have been
the focus of much inequality commentary.
In an early stage paper, I have found that wealth
concentration has risen, but risen less, and depends more on
private business ownership than previously thought. I do want
to stress that our results do not imply that wealth
concentration is low or irrelevant from a policymaker's
perspective.
Second, my second point, is that measuring broad inequality
does require assumptions based on evolving data collection and
methods. Therefore, conclusions from the research frontier are
somewhat uncertain. The state-of-the-art on implementing
distributional national accounts, or DINAs, which would provide
statistics like GDP but broken out by income groups, remains a
work in progress. The core issue is that DINA methods require
many assumptions. The ultimate conclusions are sensitive to
which assumptions we make.
When data are missing on who gets what type of income,
researchers make certain assumptions to fill in the gaps. For
example, in the leading prototype of DINAs for the United
States, there is a strong link between Saez and Zucman's--and
Dr. Zucman's wealth estimates, Piketty, Saez, and Zucman's DINA
estimates, and Saez and Zucman's recent work on tax
progressivity. If we change the assumptions for estimated
wealth inequality, that will change distributional income
estimates, and changing distributional income estimates will
change estimates of average tax rates at the top and bottom.
In my view, these assumptions are, in most cases, well
justified, but they necessarily rely on incomplete data and
convenient simplification. Thus, alternative assumptions can be
equally, and in some cases better justified, with significant
implications for what stories we tell about how inequality has
evolved and what lessons we draw for tax policy.
It is also important to recall that what we observe in tax
data is influenced by reporting responses to changing tax rules
over time. So the same high-level statistics might be
consistent with very different underlying stories of what is
going on. This uncertainty is where the scholarship plays its
role.
So third, my third point is that I recommend several clear
next steps for collecting new data to help implement DINAs and
improve inequality measures.
First, task the Bureau of Economic Analysis with developing
a process to produce DINA estimates, to prepare a public
technical report, and open up findings and methodological
details to expert feedback. A recent effort by economists at
the Federal Reserve to distribute the U.S. Financial Accounts
demonstrates the value of such a process.
Second, new tax laws that require partnerships and C
corporations to trace and report their ultimate owners could
help improve our DINA estimates.
Third, expanding the IRS' random audit program could
improve our understanding of underreported income and help
improve our DINA estimates.
And last, improving data collection and retirement account
balances and the portfolio composition could improve our DINA
estimates, because that data is currently not used.
The academic literature remains somewhat divided on the
technical specifics of distributional accounts. But these
divisions largely reflect an evolving state of current
knowledge that is changing as new data becomes available. This
is not unusual in academic research; the glass is half full. I
strongly believe that we will reconcile these differences and
continue to build toward a consensus method over time.
Some final remarks. To advance our learning, I think this
committee could facilitate a substantive conversation about
several outstanding questions. For example, what roles have
population aging, changes in the pension system played in
measuring these trends; second, how important is
multigenerational wealth versus self-made wealth; third, what
are the consequences of inequality for disparities in
opportunity, especially for children.
Let me also say that I greatly admire Dr. Zucman's work and
that of his colleagues, Thomas Piketty and Emmanuel Saez,
despite our occasional friendly disagreements over accounting
methods. I have learned a lot from them, and my work would not
have been possible without theirs.
And last, I want to reiterate my reading of the evidence.
It is not that inequality in America is low or that it has not
increased at all. Rather, my reading is that the increase has
been more modest, the nature of the increase skews away from
the passive capital highlighted in Piketty's book and toward
human capital, labor, and entrepreneurial activity.
Thank you for your time. Look forward to questions.
[The prepared statement of Dr. Zwick appears in the
Submissions for the Record on page 61.]
Vice Chair Maloney. Thank you.
I am calling first on Senator Heinrich. He has got a
conflict. He has got a challenge with his time.
Senator Heinrich. Well, I will keep this short, in respect
of all of my colleagues' time.
Dr. Boushey, I just wanted to ask how important it would be
to make sure that, as we implement these new statistics, that
they actually be produced concurrently with when other
statistics are produced. So, for example, most economic
statistics come out quarterly. If we want to understand the
relationships, how important is it to be on sort of the same
calendar as everything else that we rely on when we try to
manage the economy?
Dr. Boushey. Thank you. Thank you, Senator. It is a really
important question. You know, currently we release data on--
from the National Income and Product Accounts on GDP, gross
domestic product, quarterly. And I think it would be very
important that, as the BEA puts together this methodology, that
the goal be for the distributional data to be released
alongside the GDP. It is through doing that that we will learn
how growth is distributed.
I think actually what has happened at the Federal Reserve
with their distributional accounts on the financial side shows
that that is possible. That is what they have done. They have
taken the Nation's financial accounts and they have appended
them to survey data and are able to make extrapolations that
allow that data to be released on a quarterly basis, which has
just started this fall. So I think that shows a good roadmap
for how BEA could do it.
And I think it is not just possible, but it is imperative
for the policy debate that, as we get that quarterly GDP, we
understand who in America is benefiting, where it is happening.
Ideally, I would like to be able to see that across place and
ideally across race and to some extent gender, but probably
that is a little bit more complicated. But I think that having
people understand who growth is benefiting in that timely way
is probably one of the most imperative new statistics that we
need from Federal agencies.
Vice Chair Maloney. Thank you.
Chairman Lee is recognized.
Chairman Lee. Thank you very much, Madam Vice Chair. And
thanks to all of you for being here.
Dr. Zwick, we are going to start with you, if that is all
right. You have written that the data for different types of
income are often sensitive to the types of tax regime that is
at issue. Do I understand that correctly? And if a particular
type of income receives favorable tax treatment, some income
may be relabeled to take advantage of that treatment. In other
words, you squish one end of the balloon, air is going to go
somewhere else in that balloon.
Does this suggest that we should be careful interpreting
estimates of income inequality or taxes paid in the year
immediately following a major tax reform package? For example,
a year like 1987 or like 2018. And what is the most recent year
for which you feel that we have sufficiently high quality and
reliable data?
Dr. Zwick. Yes. So thanks for the question. I think, yeah,
the basic point is that if there is a different tax rate for
types of income--I think we see this especially in
entrepreneurial situations, where you have the ability to pay
yourself either as labor or capital dependent and, you know,
subject to the tax rules, of course. We have seen responses to
tax regimes that include this relabeling response. And so the
income that is reported as capital, for example, might actually
reflect labor income sort of under the hood, if you actually
thought about the economic nature. And we use a bunch of
methods to try and estimate the extent to which capital income
as reported actually reflects labor using, say, when an owner
prematurely dies in a small business or an owner prematurely
retires, thinking about how the business reacts to that. If it
were just passive capital, the business would continue
operating. But if it were more a mix of capital and labor, the
business would change.
So those kinds of issues show up--they are always present.
And to the extent that there are different tax rates on
different kinds of income, those issues can be larger. So as we
move, you know, capital tax rates relative to labor tax rates,
those issues can be larger.
So, you know, over time we have had different tax changes.
And come right around these reforms, the specific behavior
labeling response is uncertain.
Chairman Lee. Do we have a complete and reliable dataset
yet for 2018, the first year following the----
Dr. Zwick. I don't think so.
Chairman Lee. Dr. Zucman, in your New York Times op-ed, you
have consumption taxes at 12.3 percent of income for the lowest
income group. And yet, to my knowledge, no state has sales
taxes higher than around 9 percent. And many states, of course,
have carve-outs designed to make the sales tax less regressive
by carving out things like unprepared food.
Your methods state that this is because they pay sales tax
on goods purchased with transfer income. Is that correct? Am I
stating that correctly? In other words, that the difference
between the fact that no state has sales taxes higher than 9
percent and your figure of 12.3 percent is made up for as a
result of the fact that you figure that some of these transfer
programs involve people paying for things using money that they
get through one of the programs. Is that right?
Dr. Zucman. So what we try to do in this book is very much
what we try to do in this overall project of distributional
national accounts, which is allocate the aggregate amount of
tax revenue collected by the U.S. Just like we want to allocate
total GDP. Total consumption taxes are broader than sales
taxes, they include excise taxes or other indirect taxes. So
that is a main explanation for the numbers that you mentioned.
And what I want to say is that----
Chairman Lee. Federal excise taxes aren't made up for in
that difference between 9 percent and 12.3 percent, are they?
Dr. Zucman. Yes--no----
Chairman Lee. You maintain that they are?
Dr. Zucman. State sales taxes are only a fraction of total
consumption taxes in the U.S. You have Federal excise taxes.
You have tariffs. You have other indirect taxes, such as
business licenses.
So what I want to say is, ultimately, I think it would be
helpful also for the government to publish statistics of
effective tax rates by income that are comprehensive, that take
into account 100 percent of the official amount of tax revenue
collected by the U.S. We try to provide a prototype of this. We
are the first ones to distribute 100 percent of the total
amount of tax revenue, 28 percent of national income. This is
work in progress. These are methods that can be improved and
that, hopefully, will be improved and taken over by government
statisticians in the future.
Chairman Lee. But do I have this right, though, that if
some government transfer program expanded, the program itself
expanded and poor people who benefited under that program, who
received money under that program, were able to buy more things
as a result of that expansion, that would show up in your
estimates as higher tax rates for poor people, because they
would pay more sales tax, but they would not be credited with
having more income? Am I understanding that correctly?
Dr. Zucman. This is an interesting methodological question,
Mr. Chairman. And we took that into account by restricting the
population to people who earn more than half the Federal
minimum wage in income. So, typically, these are people who
might receive some transfer income. That is not playing a big
role in the specific statistics. So we have thought hard about
this question----
Chairman Lee. But the answer is yes, right? The answer is
yes, isn't it?
Dr. Zucman. The answer is yes, but quantitatively this is
very minor.
Chairman Lee. Understood.
Dr. Zucman. Qualitatively you are correct.
Chairman Lee. My time has expired. Thank you, Madam Vice
Chair.
Vice Chair Maloney. Thank you. I would like to ask each of
the witnesses, what level of confidence do you have in evidence
that inequality is rising?
We are all here today because shared prosperity matters to
the American people. GDP is the commonly used indicator to
measure the growth of the economy, but it doesn't tell us how
the growth is shared across the economy. We often have to wait
years for researchers to get the data and report on key trends.
So I would like to ask each of you, do you agree that
having more detailed data produced by the Federal Government
and shared on a regular basis on who is benefiting from
economic growth will allow us to better evaluate the impact of
policies?
And I'd like to start with you, Dr. Zucman, and let's just
have everyone's thought on it.
Thank you.
Dr. Zucman. Thank you very much for your question. As our
discussion showed, there is a great demand in society for
statistics that decompose GDP, National Income, other
macroeconomic aggregates by income groups. And there would be a
huge value in publishing those statistics.
The way that I see this process unfolding is very much like
what happens--what happened with the national accounts in the
first place. You know, the national accounts were developed by
economists such as Simon Kuznets in the 1930s in the U.S. And
then they were taken over by official government statisticians
and government agencies. And ever since, they are refined and
improved year after year. And I think that is the path forward,
and we hope to contribute to that process. That is how to build
trust in these all-important statistics.
Dr. Boushey. Thank you.
I think it is very important that we have more detailed
data on how growth is being distributed. One of the things that
we see when we look at the way that policy is discussed, the
way that the economy is talked about, we get data regularly on
the aggregate economic output through GDP and other measures.
But what we--we only get data irregularly, only once a year, on
income inequality. And I think it is very important that we put
those two conversations together.
Because we used to be a country in the sixties and
seventies where, when GDP grew, most Americans saw their
incomes grow at the same rate. Since 1980, it is only for
people in the top 10 percent of the income distribution that
see their incomes grow at least at the average of GDP, if not
above. So most people are not experiencing that average growth.
Yet we are going out--the Federal Government is going out every
quarter and saying the economy grew by 3.3 percent or the
economy grew by 2 percent, when the vast majority of families
are experiencing growth in their income, which is far below
that.
I think we have a responsibility to connect those dots, and
we have the tools and the prototype and the skills within the
inside of the Bureau of Economic Analysis to make this real.
Dr. Holtz-Eakin. I certainly think if you want to have
solid policies, you ought to measure better. I don't think that
that should be an objectionable goal.
We do get annual reports on inequality and on income
growth. And they point out, quite vividly sometimes, the
difference between the top line and what is going on.
So in 2016, families who worked full time for the full year
saw exactly zero increase in their real incomes. That is Census
data. Nevertheless, we didn't have zero macroeconomic growth.
And so we don't reconcile those in a deep way statistically. So
I think we should not object to the fact that we need to
understand this better, measure it better.
And the thing that I would just repeat from my opening
remarks is, it is important not to pretend that people are
somehow stuck in a particular place. They are moving around a
lot, and measuring that mobility would be comparably important,
in my view.
Vice Chair Maloney. Dr. Zwick.
Dr. Zwick. Yeah, I think I generally--I mean, I am an
empirical researcher, so I am always going to be supportive of
more high-quality data. So I think this is a case where not
only the empirical researchers, but I think a much broader
community would really value this product. I think what we know
about whether inequality is rising is--you know, we learn with
a considerable lag currently.
So I can say that the scientific consensus is that it has
risen, but what is going on right now is much harder to say.
Vice Chair Maloney. Thank you very much. My time is
expired.
I now call on Representative Schweikert, to be followed by
Representative Beyer.
Representative Schweikert. Mr. Chairman, Madam Vice Chair.
Okay. This is like a kid in a candy store for some of us,
which is why my staff, I think, is--has given up caffeine,
because I make them nervous.
Three of you, I have actually read a number of your things.
Can I throw out first a couple of concepts? I am going to read
something, and then let's do a couple of quick questions.
I will argue in many ways the fixation, particularly on
some of the tax reporting data from both our country and around
the world, and the--I have a fixation on income inequality. But
I believe you are missing a whole bunch of the way you would
properly model it, everything from if you actually do proper
overlays of where we are demographically. Some of the unusual
things we have seen in the data of millennial males
underperforming in the labor force participation, the fixation
on what wealthy have compared to the thing I wish--Doctor, I
know you have done some of this--velocity. What is my movement
from someone being--and can I use the language quartiles? Just
because when I was in school, that is what we called it and no
one else here on the panel did that. So I don't want to be--I
am so fearful of being offensive to anyone.
But, you know, when we would talk about the two or three
lower quartiles, we had a fixation of what was healthy in an
economy was our brothers and sisters moving up and out of some
of those lower quartiles. And a fixation by distribution
difference is actually in many ways dishonest, because if my
vast portion of my population, you know, my brothers and
sisters who didn't graduate high school, and all of a sudden I
see amazing movement, particularly in the last year, two years.
So, look, I am looking at some data right here. Real median
earnings for female households with no spouse present jumped
7.6 percent last year. We should be giddy about those sorts of
numbers. But the data you provide us, the data that are
modeling, should be talking to us as policymakers of how do we
do more of that.
I mean, if I came to you and said a 7.6 movement in a time
of almost no inflation in a quartile that had a brutal previous
decade, we should be joyful and we should be figuring out how
to do more of it.
And my fear is the partisan rage that often here, as we are
trying to make arguments on income distribution, instead of
there are things that are stunning numbers. They are
preliminary. And, you know, we have a couple authors out there
in your field that are saying the last year may be the very
first year in modern times where income inequality either was
flat or shrunk because our lower quartiles, particularly the
lower three, had such income movement. It is not done yet.
Maybe I am being pathologically hopeful.
And, Dr. Holtz-Eakin, I consider you a friend, because you
tolerate some of my eccentricities.
Dr. Holtz-Eakin. And I consider you pathologically hopeful.
Representative Schweikert. Yeah, that too. Look, I am 57
with a four year-old.
That should have been funnier for the room.
What do we do to understand the uniqueness of right now
where all my economic studies--I have been on Joint Economic
since I got here--from just a couple of years ago said the
types of numbers I have seen in the last year were impossible,
moving back well over 63 percent labor force participation was
impossible.
How do I understand--knowing the data, knowing the--it is
great. How do I understand what has worked?
Dr. Holtz-Eakin. Measure it. I mean, honestly, the--for
those of us who care about the evolution of the economy, we are
always really reading economic history. At best, we are getting
data which are last month's; usually, they are older than that.
We are guessing about what is going on right now. We never
really know.
And for me to give you--I think it is kind of a scientific
answer to what is different in 2018-2019 in terms of labor
market performance, we are going to have to measure better. We
have lots of suspicions about it, but we don't know for sure.
And that is the reality.
Representative Schweikert. Do you all consider it
statistically very significant that in a single year, a half
point drop in the poverty rate in a single year?
Dr. Holtz-Eakin. Yes.
Representative Schweikert. So, A, you know, from the
political world, we should be joyful. But, B, how do we find
out datawise what was working, what drove that?
Because I know in our modern politics, we fixate on the
wealthy and say, look, what they have you don't have. But if we
are going to be actually great for our society, we should be
fixating what our brothers and sisters in those lower quartiles
have and how we get them to have more.
Dr. Zwick. I think including, you know, the kind of
characteristics like you described, like more fixed
characteristics and seeing what happens to those people from
year to year, the data are available in the distributional
accounts.
Representative Schweikert. Well, in the last--because we
also have the problem in the Joint Economic world where we are
seeing here is Census data, here is BLS data, here is--and as
we know, tax data has stunning amounts of noise in it. And then
trying to normalize that and then trying to put all of what is
happening in our State and local and trying to normalize each
jurisdiction and their effects, it would be fascinating and you
will spend a lifetime just doing adjustments. And you know when
you do that many adjustments, your final outcome, the variance,
is unacceptable.
So, with that, I yield back, Madam Vice Chair.
Vice Chair Maloney. Mr. Beyer.
Representative Beyer. Thank you, Madam Vice Chair. And
thank y'all very much for coming and being a part of this.
First time we have ever had a panel with two people whose names
begin with Z. This is really----
Representative Schweikert. And they are bookends.
Chairman Lee. And both doctors.
Representative Beyer. Exactly. All doctors.
You know, when the Tax Cut and Jobs Acts of 2017 was
signed, I feared it would result in a significant
redistribution of wealth towards the richest among us. But I
was really struck by Dr. Zucman's figure published a lot last
week that after the law went into effect, the 400 richest
households now shoulder a lower overall tax burden, 23 percent,
than the entire bottom 50 percent, which is 24 percent. It is
the first time in a hundred years this has been true. So this
is very relevant that you are here.
Dr. Zwick, I struggled through all 800 pages of Thomas
Piketty's book. And the main takeaway I had from it was that
the return on capital is much greater than the return on labor.
And yet you talk about that in your research, you found the top
inequality is more human capital intensive. And it seems like
you basically--the cut is that you look at passthrough income
as more on the wealth side rather than the income side, whereas
as a car dealer, whom you refer to in here, I note that it is
often run very much on the labor side.
Can you talk about your differences with Piketty on his
central conclusion?
Dr. Zwick. Sure. And I will be very brief. But thank you so
much for the question, Congressman.
The difference is basically about using--the difference
between using aggregate statistics, the aggregate flows, you
can compute in the interest rate. You can get--you can compare
it to these aggregate returns on labor might tell one story.
And what we do is use sort of microdata, so it is kind of from
the bottom up trying to ask, of the top 1 percent, what share
of them is in different industries, how big are their firms?
How many firms do they own? Basic descriptive statistics that
you don't need a Ph.D. to understand.
And what we find is that--and it was surprising to us when
we looked underneath, it was not what we were expecting. There
are just a ton of doctors, there are a ton of dentists, there
are auto dealers. There is like sort of a much broader, richer
view of the economy than what you see if you read the
newspaper. You know, all the journalists live in New York.
There is a lot of finance in the newspaper. But it is a much
broader economy. And that includes at the very top of the
income distribution.
Representative Beyer. Okay, great. Thank you very much.
Dr. Zucman, one of the criticisms people are throwing back
about your research, which I very much appreciate--the
research, not the criticism--is that they leave out all the
transfer payments. You know, the earned income tax credit and
food stamps.
And how do you--is that valid? And would the--would the
income inequality not be nearly as great if you included the
things that are not part of that AGI?
Dr. Zucman. Thank you very much, Congressman, for this very
important question.
So we do look at all taxes and also all government
spending. In our prototype distributional national accounts, we
care about both, because we want to study what is the overall
distributive effect of government intervention in the economy.
So we have two sets of statistics. We have statistics on
income distribution before taxes and transfers, and we have
statistics on income distribution when you measure income after
taxes and transfers. And in both cases, adding up to 100
percent of national income or 100 percent of GDP.
And when you do that, what you see is that there is less
inequality after taxes and transfers. So, you know, the overall
tax and transfer system is redistributive, and that is very
important.
But we also find that the rise in inequality is almost the
same after taxes and transfers as compared to before taxes and
transfers. In both cases, you had a big increase in income
concentration.
Representative Beyer. Okay. Thank you very much.
Dr. Boushey, you--I have three millennial daughters, and
they are very much affected by this income inequality, at least
until they inherit the car dealer's money.
From a policy standpoint, how do we address the
millennials?
Dr. Boushey. Oh, what a great question. You know, I mean,
so what we are here to talk about today is how we measure
economic progress. We know that the younger generations, from a
lot of different datasets, are struggling in this economy.
There are a lot of different ways that the concentration of
wealth and income is making it harder for them to get their
footing, to move their way up, if they are not lucky enough to
have a parent that is, you know, bequeathing them a small
business or the like.
So I think starting by figuring out how we can increase
opportunity, remove the obstructions to opportunity, especially
for kids, those millennials that are at the lower end of the
income distribution. Personally, some of my favorites include
things like thinking about how we are going to deal with
education, especially early childhood education? How we are
going to ensure that there are good jobs for them? Will they
have the right to join a union? Will they have the right to
have a job that has access to benefits like healthcare or paid
family medical leave? Those are some of the places I would
focus. But those really hinge on making sure that we address
the concentration of wealth and particularly market
concentration.
Many of those millennials are looking at labor markets that
what--economists are so great with our words--but are
monopsony--monopsony labor markets, meaning that they don't
have a lot of options where to work. And I think thinking about
that side of the economy, we haven't done enough of. So I would
start by focusing there.
Representative Beyer. Okay, great. Thank you very much.
Madam Vice Chair, I yield back.
Vice Chair Maloney. Thank you.
Representative Joyce Beatty.
Representative Beatty. Thank you, Madam Vice Chair. And
thank you to all of our scholarly witnesses here.
Let me start by saying I am overwhelmed. I am just simply
overwhelmed. And here is where I want to go with this. You
know, this is like the new thing. You know, and for me coming
to Congress when President Barack Obama was in office, he made
statements that he observed that inequality was the defining
issue of our time. Well, that has continued. Whether I am
talking about the Congressional Black Caucus forums, when we do
our scholarly work, it is the same titles that we have here. It
is wealth creation, it is inequality, it is the gap, it is how
we bring it through.
Now, I am not going to say that I have read, but I have
muddled through all of your scholarly work here. And I am
having a hard time separating inequality and poverty, because I
think they have an effect on each other directly and indirectly
through their link with economic growth.
But when I read this, and then I get resolved from you,
making statements like there is no consensus in the research or
the literature, bottom line, that will give us an answer. So I
am here for some answers.
I have read the theories. I read again--you will say, given
these challenges to the policies, there is no scientific
research that tells us.
When I go home to the 3rd Congressional District, where I
represent the wealthiest and the poorest, the number one thing
that I get beaten up on is this topic here today, Madam Vice
Chair. And they want answers.
So when I think of the question of I want to pose to you--
and I will start with you, the female, Ms. Boushey--Dr.
Boushey. This past July, you authored an article entitled,
``Neither history nor research supports the supply-side of
economics.'' In it you stated that the Reagan tax cuts did not
pay for themselves and they ushered in a period of broad
economic inequality. I am with you. A substantially similar
phenomenon occurred with the Bush tax cuts.
Well, we already know that the Republican tax cuts passed
in Congress will not pay for themselves. I think mostly
everyone agrees that it was a myth.
But how do you think this will affect the income equality?
Is the Tax Code the primary driver of this income inequality or
what?
Because I have to go back and tell people. They will say,
how do you fix me? You know, we have got the Census data. And I
agree with my colleague over there. I remember the quartiles
and how growth----
But is there a real bottom line answer that I go back--when
people say, you serve on this powerful committee. What did the
experts tell you of how we resolve this?
Dr. Boushey. Well, let me--a couple of answers. First, I
think that the people in your community, I would bet, would be
really gratified to know that what their experience is in the
economy was reflected in how we talked about economic progress.
And that is the kind of data that we have been talking about,
that we want the Bureau of Economic Analysis to do.
So no longer would we just say the economy grew at 3.3
percent, but we would be able to say, in the average it grew by
3.3 percent, but for most people in the bottom quartile, growth
was only 1 percent or growth was 5 percent, whatever that
number is.
Representative Beatty. How do we get to increase this
growth?
Dr. Boushey. So yes. So the first thing, though, is I think
giving people the power of the data, really important. But
then----
Representative Beatty. I don't think the poor people--poor
people don't--this is inside baseball. No offense to you. This
is inside baseball.
When you go out--it is not people like us that are asking
the question. You go into a room with a thousand people, and
what they are saying to me, how do we--they are the factors on
the other end of that. So this works for us, because this is
intellectual dialogue.
But are there any answers--do we need higher paid jobs? You
know, we have got disparities and discrimination. We have got
women who don't make the same amount as their male
counterparts. We have got--where is all of that in this for
resolve? And anyone can answer that.
One of the guys, jump in, somebody, because I only have 30
seconds.
Dr. Holtz-Eakin. As I said in the outset, I think it is
appropriate, given all the uncertainty about what is going on
at the upper end of distribution, to focus on the bottom end.
Focus on poor people.
Representative Beatty. Okay.
Dr. Holtz-Eakin. And we know that there are things that
really need to be done there. Education is a big problem,
including early childhood education, where the evidence is
there are very high returns.
Representative Beatty. Okay.
Dr. Holtz-Eakin. So, you know, start with getting Americans
prepared to enter the labor force and compete effectively. Do
that and the rest of their future will be brighter.
And, you know, there is a big difference between inequality
rising because people got poor and inequality rising because
everyone stayed the same and the rich got richer. Let's worry
about when people are poor. That should be a focus.
Representative Beatty. Okay. Thank you. And my time is up.
But thank you very much.
Vice Chair Maloney. And Denny Heck, Representative Heck.
Representative Heck. Thank you, Madam Vice Chair. And thank
you for holding a hearing on such an incredibly important
subject.
In addition to the other factors that my colleague
mentioned, we have also got the Federal Reserve. And it is
pretty--Heather knows exactly where I am going on this.
It is pretty clear that over the last 25 years, the Fed, in
a well-intended effort to anticipate an overheating of the
economy, has tapped the brakes before we reached full
employment. We know this to be the case, because they rarely
reach their inflation target. They are almost always below it.
And as a consequence, inarguably, especially low-skilled or
low-income workers, are having a harder time receiving wage
growth. And that is not an insignificant part of the overall
suppression of the wage growth over the last 30 years.
So I guess my first question is, have any of you studied,
in particular, the impact on wage growth for--as a consequence
of the Fed's policy? No, not their policy, I would suggest,
because they are not achieving their policy. Their practice.
Have any of you studied the impact on wage growth of Federal
policy?
Dr. Boushey first, if you don't mind, sir, because she is
from Washington State.
Dr. Boushey. I have got the home court advantage here. I am
not from Olympia, though.
I mean, I think that--I am so glad you asked about the Fed.
And I think it is connected with the Congresswoman's question
about what we can do to help families all across the United
States.
You know, the Fed has a mandate to keep employment high and
inflation low. And, of course, we think there is a tradeoff
there. What we are seeing right now is that we have very low
unemployment, and yet that hasn't led to the kinds of wage
increases that we would have expected. If you would have told
us a decade ago, oh, you would have seen unemployment this low
for----
Representative Heck. Let me stop you.
Dr. Boushey. Yeah.
Representative Heck. Are you going to argue that the
Phillips curve is broken? Because we don't have enough--we
don't have enough time for that argument. Because the truth is,
Dr. Boushey, we are still adding jobs into the labor market at
a rate in excess or at a number in excess of replacement. So we
are clearly not at full employment yet.
Dr. Boushey. Right, exactly. And so the Fed needs to keep
doing its job. But here's the thing: I think what this moment
shows us is that we need other policies around the Fed to
ensure that communities, that people in those communities see
the wage increases that they should be seeing with low
unemployment.
So last time that we saw unemployment this low, we had
communities where more people were members of unions. So they
had an institution where they could bargain for higher pay
without having to threaten to quit their job, right? You had
less market concentration, because the--because we were
enforcing--you know, especially in the sixties, we were
enforcing antitrust differently, which gave workers more
opportunities to be able to switch jobs and to raise their pay.
So my point is that the Fed is incredibly important. But I
am not letting you off the hook, because there are other parts
of the policy that we need to--the policy environment that we
need to do to make sure that we----
Representative Heck. Heather, I have never tried to wriggle
off the hook. Let's be real clear about that.
But it seems to me the great unspoken part of this
discussion is the Fed is not actually doing what their
statutory charge is. And we don't know what it would look like
over the last 25 years, as they have continued to fight the
last war, hyperinflation of the seventies, in order to squeeze
out that incredibly destructive impact on the economy.
Dr. Boushey. But you are in a pickle--you are in a pickle
now, Congressman, because we have interest rates that are very
low, and the Fed does have all of these new tools that they
have been using.
Representative Heck. They raised them four times last year.
Dr. Boushey. That they did, but they----
Representative Heck. And we were not at full employment and
we are still not at full employment. Can we at least allow an
experiment in realizing what their statutory mandates are?
Dr. Boushey. I a hundred percent agree with you.
Representative Heck. Okay. I am not wiggling off the hook.
I want to go to Dr.----
Dr. Boushey. I am 100 percent with you, but I just want to
make sure that we take into account that they can't----
Representative Heck. You have always made that abundantly
clear, and it is gratefully received again today.
Dr. Holtz-Eakin, I actually have a follow-up question.
Is there a better way to measure full employment?
Dr. Holtz-Eakin. No.
Representative Heck. Well, that is depressing.
Dr. Holtz-Eakin. Yeah, it is. But here is what I would say.
I agree with Heather on using lots of policies, not relying so
much on the Fed. I mean, I think Europe is a testament to
overreliance on monetary policy, a big problem. Right now, I
think the Fed is actually quite cognizant of the sort of
dilemma they face in achieving their mandate.
Representative Heck. Let me stop you there.
Dr. Holtz-Eakin. If I could just finish.
Representative Heck. No, let me stop you there, because I
have got 18 seconds.
Former Federal Reserve Chairs acknowledge this problem.
Dr. Holtz-Eakin. But the current----
Representative Heck. Ben did it; Janet did it, after they
left.
Dr. Holtz-Eakin. Sure, sure. I think to Chairman Powell's
credit, I spent a day at the San Francisco Fed talking about
the benefits and costs of running a hot economy. They are
thinking hard about when it is that they say stop. They know
that the benefits of continuing the expansion
disproportionately benefit those who are marginally taxed labor
force, have the weakest skills, lowest education.
Representative Heck. Let me--because I am over time.
Because I do want to acknowledge that Chairman Powell has been
more explicit in his acknowledgment of this need. And Chair
Yellen was implicitly, while she was chair, more willing to
acknowledge it and explicitly since she's been--I think the
trend line is good. But the fact is, under the current
statutory construct, they didn't do what they were asked to do
for 25 years, and they could do that again.
And with that, I yield back. Thank you, Madam Vice Chair.
Vice Chair Maloney. Thank you so much.
And the Chair has requested a second round of questions. So
we are going to do that for those who would like to.
And I would like to ask Dr. Zucman, you have written
extensively on how the wealthy hold trillions in assets in
offshore accounts. As much as 8 percent of the global wealth is
held in offshore havens. You estimate about $200 billion in
global tax revenue is lost each year. And how do these offshore
havens affect estimates of inequality, and are we getting a
complete picture?
And also, any of the panelists, how does the U.S.
experience compare to that of other advanced economies over the
last 30 to 40 years? What is the trend internationally? What
should we learn from other high-income countries on their
efforts to track and report on inequality?
Starting with Dr. Zucman and anyone who wants to weigh in.
Thank you.
Dr. Zucman. Thank you. Thank you very much, Madam
Chairwoman, for this question.
Yes, in my work, I have estimated that about 8 percent of
the world's household financial wealth is held in tax havens
globally. And this has implications for inequality, you know,
that wealth and the income it generates, because it is not
captured by GDP statistics or national income statistics. So
they are not even in the aggregates and so they are not in our
distributional national accounts. So it is possible and perhaps
likely that we are actually underestimating the rise of income
and wealth concentration for that reason.
Now, I am working with colleagues, including colleagues at
the IRS, to improve statistics, drawing on data that has become
available in recent years, about Americans with offshore bank
accounts and better measuring high-end tax evasion, in
particular, its implication for inequality. So that is a very
important field of research. And again, that is an area where
the series will be improved, will be revised, will have--we
will always have better estimates in the future.
Vice Chair Maloney. Thank you.
And does anyone want to comment on the U.S. experience
compared to other advanced economies over the past 30 to 40
years?
Dr. Zwick. I will just say a couple of quick things. I
think Dr. Zucman and his colleagues have done a lot of work
studying other countries. And the issues I raised--back to
Chairman Lee's original question about the rules being quite
important for what we measure in those series, in Europe where
we have seen relatively low increases in inequality, in their
reported series, there is also a lot of important closely held
private business, retained earnings are not distributed
necessarily. And so I think there is additional new research,
looking at Scandinavia in Europe, that has raised again this
issue that like measurement, a fully distributional account
would be quite helpful. So that is one point I just wanted to
raise.
Dr. Holtz-Eakin. I think there are two interesting things
that we are thinking about. One is that the rising inequality
over the past four decades is a global phenomenon. It is not
unique to the United States. Labor markets have higher returns
to skill across the globe. And, you know, it is important to
think about that and think about the common factors.
The second is--and this is particularly important now in
the aftermath of the 2017 Act, that reform moved the taxation
of business from global to territorial and changed the
incentives to invest, innovate, and do it in the United States.
Our developed country competitors have all done that,
basically one a year for decades. And so in the data will be
the implications for that reform on the way things get
reported, including the more than half of business income that
shows up on individual returns. And that is an important part
of this debate.
Vice Chair Maloney. And, Dr. Boushey, could you--what is
going to happen--what is the risk to our economy and our
society if we as a Nation continue down the path we are on now
with economic inequality continuing to worsen?
I will start with you and anyone else who would like to
comment.
Dr. Boushey. Well, if we----
Vice Chair Maloney. Not a good trend.
Dr. Boushey. No, it is not a good trend.
You know, if we believe Thomas Piketty's book, if we allow
income inequality to continue unabated, it leads to greater
wealth concentration. And, you know, it will only--it will take
a seemingly heroic political effort to change that.
I think that the evidence is also that that kind of wealth
concentration is constricting of our economy more generally. It
obstructs people's ability to move up. It is making it harder
for people to start new businesses and to have the kind of
innovation economy that we want in many sectors because of the
concentration. And it is having real distortionary effects on
both consumption and investment.
There is new research out that talks about the ways that,
because of the rise in the concentration of savings, one would
expect that that leads to investment. But, in fact, it has been
leading to an expansion in household credit, which as we all
learned during the Great Recession, can be destabilizing.
I want to add on the international comparisons that our
level of income inequality and wealth inequality here in the
United States, when you look across countries, appears to be
very much a choice that we have made. Other countries,
according to the data we have, have not experienced the same
kind of inequality that we have, but they have been subject to
the same trends in terms of globalization and technology. And
so I think really looking deep inside the kinds of institutions
that we are putting in place to constrain inequality is
important.
Vice Chair Maloney. Thank you. And my time has expired.
Chairman, Chairman Lee.
Chairman Lee. Thank you, Madam Vice Chair.
Dr. Zucman, I would like to get back with you for a minute.
For purposes of determining tax rates, you group people, as I
understand it, by the income that they receive. And my
understanding is also that you include Social Security benefits
and unemployment insurance income when you create those
groupings. Is that right?
So someone receiving unemployment benefits would end up
looking a lot poorer and does have a higher tax rate if you
didn't count those benefits as income. Is that correct?
Dr. Zucman. That is correct, but we do count these benefits
as income.
Chairman Lee. Got it. And yet you don't count other
government transfers as income when you group people. So
doesn't that make them look a lot poorer and thus have higher
tax rates than if you counted those benefits in that category?
Dr. Zucman. Yes. Thank you, Mr. Chairman. We have thought a
lot about these methodological questions, which are extremely
important. There are many ways to compute income, many ways.
And government agencies use a variety of ways and research
papers use different definitions.
Chairman Lee. No, I get it. And I don't want to
oversimplify the task. I don't want to describe it as overly
simple. I just want to make sure I am understanding correctly.
You do make this classification?
Dr. Zucman. What we do--specifically what we do is we
distribute 100 percent of national income, you know, which is
GDP minus capital depreciation, plus net income received from
abroad, 100 percent. If you want to include transfers in your
measure of income to compute tax rates, then you are allocating
more than 100 percent of national income.
And so by construction, if you give people more income than
the total amount of income that there is in the economy, you
are going to underestimate the tax rates of certain groups of
the population. So that is the reason why we do things the way
we do.
But what I want to emphasize, which is very important, is,
again, what we are doing is a prototype to be improved and to
be better done by government statisticians than by researchers.
We hope the work we put out will be taken over, will be
improved, will be refined, and will be published by government
statistical agencies, including, you know, covering the entire
distribution from the bottom to the very, very top.
Chairman Lee. I totally get that, and I respect the effort.
And that is one of the reasons we are having this conversation
today, is because we have got to figure out effective, agreed-
upon ways of measuring these things.
I guess my question to you is, why is your treatment of
Social Security income and unemployment insurance income
different than the other categories of government transfers?
How is that--how is it consistent ideologically?
Dr. Zucman. We have two measures of income. One measure is
pretax income after the operation of the pension system, so
including Social Security benefits and unemployment insurance
benefits. And another measure of income that we have is post-
tax income, subtracting all taxes and adding all other forms of
government spending.
These are the two consistent measures of income that you
can compute in the sense that they distribute 100 percent of
national income. You can construct other measures--and we do
both. And you can compute tax rates as a fraction of pretax
income or post-tax income, and we do both. You can construct
other measures of income, but they won't add up to 100 percent
of national income. So they won't make it possible to decompose
economic growth by social group. They will capture either less
or more than 100 percent of national income, which then raises
lots of technical problems when computing tax rates and so on.
Chairman Lee. Yeah, I get it. I get it.
I still--as long as we are having the conversation about,
you know, making sure that we have effective measures, I don't
think that really responds to the underlying concern about how
you differentiate that. I understand that if you plus certain
things up, if you leave them out, you are going to have less
than 100 percent. If you count other things twice, that would
be bad too. But that doesn't answer this central concern.
I got one more question in the small amount of time I have
got remaining. In--your peer-reviewed 2018 paper indicated that
the top 1 percent of the top 1 percent saw its tax rate fall
between 1964 and 2014 by 1 percentage point. Your book, if I
understand it correctly, now shows a drop of 20 points.
Am I reading those wrong or is there an inconsistency? If
there is, which one is right?
Dr. Zucman. So we constantly refine and improve our methods
to incorporate new data and better techniques. So for that
particular question, we changed the way that we allocate the
corporate tax, because now we have a better understanding of
how to do that conceptually.
Chairman Lee. Thank you.
Vice Chair Maloney. Congressman Beyer.
Representative Beyer. Thank you very much.
One of the--when we talk about income inequality, I
occasionally get the question ``so what?'' You know, Jeff Bezos
makes $110 billion, and my daughter makes $48,000, but she is
not hungry and she is maybe happier than he is.
Dr. Boushey, you talked about why income inequality is bad
for the economy. I would love for you to expand on the first
point, which is that it obstructs the supply of talent, ideas,
and capital. I had an economics professor who spent the last 10
years of his career trying to figure out why kids in the lowest
quartile never applied to my alma mater, even though they are
obviously--IQ is fairly randomly distributed. And you would
point out that far more important than a child's aptitude score
is their parental income.
Dr. Boushey. Yeah. There is a lot of great--there are a lot
of great pieces of research that answer that ``so what''
question. One of the ones that I keep coming back to is work by
Raj Chetty and a long list of coauthors that looks at the
distribution of patents. There is fascinating data on who gets
a patent, who applies for a patent and who gets one, and the
person's income as an adult. And they also have data on that
person's third grade math test scores and their parents' income
when they were in third grade.
So they find--you know, on the first cut, they find the
obvious, kids that do really good on those third grade math
tests are much more likely to grow up and get a patent, become
an inventor. But they also find that children from the top
quartile who are the children who get the top math scores, who
are in the top income quartile are four times as likely to grow
up and get a patent than other children.
So income inequality has this really important effect on
whether or not smart kids who, you know--who otherwise could be
innovators in our economy, or contributing in a variety of
ways, are moving their way up.
Now, there are a lot of different hypotheses and research
on why those kids aren't moving up. Is it because they are
living in different communities and they don't see opportunity?
Is it because they can't get a student loan? Is it because they
don't graduate from high school, again, because of a bad
neighborhood?
So there are a lot of different policy interventions. But
what is important to note is that there is something peculiar
about a society where you have, you know, the rungs of the
income ladder further and further apart that makes it really
difficult for people to move up.
And so where the research keeps coming back to is that that
indicator of inequality is something in and of itself that we
need to address above and beyond all of the kinds of
micropolicy interventions that we might take to help that one
child succeed.
Representative Beyer. I want to keep building on your
second point. Because one of the things that we struggle with
all the time is how incredibly polarized the American public
is, especially over politics. And as a Democrat, I am always
trying to understand the core 40 percent that is very, very
loyal to our President. And there are some interesting essays
in the last couple of weeks about people who have felt so left
out of the economy, they just want to burn the house down, the
notion of the chaos theory.
And your second point is, you talked about the fundamental
institutions being distorted by this; you know, that economic
inequality gives people disproportionate political influence;
laws, regulations, things like that.
Dr. Boushey. Yeah. I mean, I think that this is--this
question is actually why I am so passionate about this data
that we are talking about here today. Because we have not
connected the dots that so many communities have been left
behind. And because we aren't faced with that information every
quarter, we are not searching for solutions to get at it.
I fear that it has been 40 years where--you know, we know
that it has been 40 years where income inequality has been
rising, but we haven't focused on making sure that we are
bringing all those people forward.
And so now, in 2019, you have got communities where people
are like, yeah, we haven't seen economic growth, we haven't
seen vitality, people are ignoring us. And I think--and being
in this town for 20 years, it is because we haven't seen it.
So, I mean, just to sort of bring it back to today's
hearing, seeing that I think can help us open up the doors to
all of the different solutions that we need to take to make
sure that we are including people in our economy. Because the
reality is, is that the data available shows that we aren't.
And it is everything from the lack of jobs available to
what we are doing in terms of investments in education, and,
you know, everything in between. But that reality that some
communities are being left behind and policymakers haven't
taken the steps to forge that comprehensive agenda seems to be
at the core of a lot of this polarization. But I am an
economist, so I am always going to read economics into
politics.
Representative Beyer. But I, too, I sometimes wonder if I
lived in a very disadvantaged rural community that had seen no
growth whatsoever, that I might be drawn to a ``Make America
Great'' message also.
Dr. Boushey. Yeah.
Representative Beyer. I yield back.
Vice Chair Maloney. Congressman Schweikert.
Representative Schweikert. Thank you. And I will try to
stay off the hook this time.
Dr. Zwick, a question I have had in--and I have actually
hunted for credible information on it. What is the size of the
underground economy?
Dr. Zwick. In the United States?
Representative Schweikert. Just the United States.
Dr. Zwick. So it is a little bit outside my lanes. My
understanding is it is smaller than it is in other developing
countries, but----
Representative Schweikert. Understood. And where I go with
that is, many years ago when I was a much younger man, one of
the projects we were assigned is try to take individuals in our
community and model, not their income, but their consumption,
what they had.
And, look, this was undergraduate, so it wasn't
particularly brilliant math. But we had consumption double what
we believed the very households we looked at's income. And that
was just really hard to say were they just brilliant in their
consumption? Were there things we didn't understand? Were
there--because just--if that is--in two or three of the lowest
quartiles, that sort of distortion, it lets you start to
understand what is wrong in our sample data, what are we not
understanding.
And I had some--many years later, some experiences when I
was the treasurer for a very, very large county and doing the
taxes, collections, and all those things, and realizing some of
the things didn't seem to line up where, you know, the value of
the home, this and that, didn't match what we thought we knew
about the household.
Dr. Zwick. If I may, Congressman, briefly. One of the open
questions in this measuring inequality literature is how we
distribute the underreported or unreported income. So one of my
suggestions on expanding an audit program that would help us
measure the underground economy and think about its
distribution, how it is distributed relative to the income we
do observe, actually, I think could be quite helpful and speak
directly to your question.
Representative Schweikert. Wouldn't a more elegant, at
least, test from your income inequality would be a consumption
model, just to sort of--because that would let you know that
there is something distortive, and see if that same distortion
from 30 years ago still exists, because--and also--and help you
understand, because it would really give you some great
targeting information of why are some communities--and this is
where I was heading, and it would be for Doug Holtz-Eakin--we
see entrepreneurial--you know, some of our ethnic population,
some of our communities, some of the education and those
things, have clusters of entrepreneurship, that seems to be
what creates tremendous amount of that velocity. And I have
always wondered how I could sort of identify why and where. It
is--I mean, we often see that the fastest movement for really
moving out of lower quartiles is actually some type of
entrepreneurship.
Dr. Holtz-Eakin. So before we leave the observation on
consumption, there has been lots of very good work. And I would
point to Bruce Meyer and his various coauthors, looking at
consumption-based measures of poverty. And they do, in fact,
paint a different picture than the conventional income-based
measures of poverty; the level of poverty is lower, there has
been diminished poverty. But it doesn't change the fact that we
still have some pressing poverty problems. But I would suggest
that to you.
On the entrepreneurship, this is fascinating. So one of
the--one of the best test cases and interesting phenomenons is
immigrants. Immigrants to the United States are
disproportionately entrepreneurial. They start businesses at a
higher rate than the native-born population. And in some cases,
they have sort of pooled finance as an immigrant community.
They will sort of develop the financing mechanisms. And you can
take countries in Asia, in particular, Southeast Asia, and look
at their performance in the U.S., and there are dramatically
different rates of native entrepreneurship when they arrive in
the U.S. Very small differences in culture. So it is not just
the economic circumstances that determine this.
Representative Schweikert. But does that make an argument,
if we desperately wanted to help a community that has suffered,
that some of what is in there is better education, better this,
but also an entrepreneurship of starting the plumbing or the
food truck or whatever, you know, even if it is a level of
microfinance?
Dr. Holtz-Eakin. It is Professor Zwick's job to grow new
entrepreneurs. I would argue we should just have as few
barriers to them as possible.
Representative Schweikert. Well, in many ways, that is one
of the discussions we have a lot, particularly in Arizona, is
can you make it not scary. A single stop to get a permit, to
get a license, to get this, to get that. So--because in many
ways, it is a knowledge barrier that keeps these things from
actually happening.
So, Madam Vice Chair, thank you.
Vice Chair Maloney. Congressman Heck.
Representative Heck. Thank you.
Maybe next to Fed policy that revs my motor is housing
policy. So I want to begin by asking if any of you have either
studied the issue of the relationship between homeownership and
wealth inequality or have a working knowledge of other people's
work in this regard?
Dr. Holtz-Eakin. I have studied homeownership over a number
of years, especially tax policy toward homeownership.
Representative Heck. So--good. Thank you.
Let me lay out my construct and then just have you react to
it. Homeownership is falling, especially among millennials. It
is fully 15 percent lower than the generation of 30 and 60
years ago, even when excluding those who are still living
upstairs or downstairs.
And what we know about homeownership is that while consumer
preferences are changing, it is still a commonly held
aspiration of this country. We know that it is, on average, the
number one net worth building tool for Americans, and we know
that to defer homeownership is to squeeze down the value at the
end of that journey.
My favorite expression, when I am not citing another
favorite expression, is the two most powerful forces on the
face of the Earth are the status quo and compound interest. And
with long term--the longer term homeownership you have, the
more compounded interest you have, as it were, which obviously
affects people's retirement security. It affects what it is
they are able to bequeath to their--to their offspring.
Obviously, it also disproportionately affects those who are
unable to capture that first rung on the ladder.
So like everything else, low-income people are
disproportionately impacted by deferred homeownership or lack
of access to homeownership.
So, I guess, there is my construct. There are a lot of
reasons to explain what is happening. That is not our purpose
here today. But I would appreciate some reflection on just this
general construct.
Dr. Holtz-Eakin. I think it is a complicated area. It is a
really good question. The first thing I would just politely
disagree with a little bit is I was----
Representative Heck. Careful.
Dr. Holtz-Eakin. I am aware, sir.
You know, I was in the White House in 2001, 2002, and there
was a heavy emphasis on getting minority homeownership up,
pushing, pushing, pushing. The instruments by which we
typically push are subsidies to the debt portion of the
homeownership acquisition. That continued on a relatively
bipartisan basis right into the Great Recession, and we wiped
out the wealth of a lot of minority America.
So I am more skeptical than some about the automatic
wealth-building aspects of homeownership. We have some history
that suggests people might want to be cautious about,
especially people who are young who just looked at that. They
are concerned about it. So that is sort of number one.
Number two, there are----
Representative Heck. Stop. That is an argument about how
you go--what is the best way to go about solving the problem
statement.
Dr. Holtz-Eakin. I also agree with that, yes.
Representative Heck. It is not an argument about any of the
things I laid out in my construct, because I didn't offer a
solution. In fact, if I would offer a solution, I would go back
to the last discussion we had, which is the best way to
increase homeownership overall is get people's incomes up so
they can afford it. But there are a lot of----
Dr. Holtz-Eakin. That is what I was going to say next. So I
agree with that.
Representative Heck. Okay. But is it a material factor in
wealth inequality or is it becoming one?
Dr. Holtz-Eakin. It was a very material factor in the rise
in wealth inequality in the Great Recession, because the bottom
disappeared. They lost their wealth. There is no question about
it.
It has consequences--knock-on consequences. So, for
example, lots of entrepreneurs use the equity in their home as
the way to finance things. So, you know, how--how big is that
right now? I don't know, but it is a phenomenon.
In terms of things that can be done, probably most of the
important levers are at the State and local level where land
use restrictions, zoning and things like that, are making some
things just too expensive, and the restrictions on the supply
are a big concern. And that is something that could be dealt
with by States and localities.
Representative Heck. And you say that as somebody who has
actually studied the relationship between tax policy and
homeownership.
I--our purpose here today is not to argue--well, maybe it
is--the specific solutions to the problem statement I laid out.
But I would push back very considerably on your notion that the
Federal Government does not have a significant role to play in
this, be it tax policy or how--you said the major----
Dr. Holtz-Eakin. To be clear, it has a major role. I just
don't like the way it has executed that. I would rather see,
for example----
Representative Heck. Okay. Come up with something better.
Dr. Holtz-Eakin [continuing]. Have a new--a new homeowner
tax credit instead of, hey, get a big mortgage. That is not a
good message.
Representative Heck. Something that enables more people.
All right. We are good. I yield back. Thank you, Madam Vice
Chair.
Vice Chair Maloney. Thank you. This has been a very
spirited conversation.
And I want to go back to how you were measuring wealth. I
am a former teacher and a former social worker. And I worked in
incredibly poor neighborhoods in New York. And I have worked
with families that had significant social transfers from the
State, living on welfare, subsidized housing and public
housing. We have 700,000 families in public housing, subsidized
housing in New York. The WIC program, which is food for
children. Fuel, they had--we have these programs where the fuel
is subsidized, and many, many food programs. And even before
ObamaCare, in New York City, the healthcare of the poor is
taken care of. Anybody who is sick is taken care of in our
public hospitals.
So that is a significant amount of support that is going to
a family. Are you measuring that in your--in your numbers?
Dr. Zucman. Yes. Thank you very much, Madam Chairwoman.
Yes, we do, in our work, distributional national accounts,
we do allocate all government spending, including monetary
transfers, in-kind transfers, such as health spending,
Medicare, Medicaid, and also spending on public goods like
education, like police, like defense, everything. We take all
forms of government spending that we distribute to the--that we
allocate to the entire population. Just like we do for taxes,
we do the same--the exact same thing, comprehensively for
government transfers.
And when you do that, what you see is that U.S. Government
does redistribute resources. It is overall, you know,
redistributive, of course.
And what I want to stress, again, is that, you know, it is
hard to allocate many forms of government spending. Who
benefits from defense spending?
Vice Chair Maloney. Everyone.
Dr. Zucman. Some people believe that wealthy benefit more
from defense spending. That is arguable. It is hard. It is not
for us to say.
Vice Chair Maloney. 9/11 attacked everyone in the vicinity.
It didn't benefit anyone.
Dr. Zucman. I totally agree that--and that is the way we do
it. You know, the way we allocate it is we allocate it to
everyone. But what I want to say is that these are difficult
questions--or difficult choices to make, and these choices are
better made by government statisticians----
Vice Chair Maloney. I need to read your book. Then we can
have another hearing.
Dr. Zucman [continuing]. By government agencies than by
academics. We hope that our little prototype is going to be
taken over, is going to be done by government statisticians and
improved. It can be improved in many ways.
Vice Chair Maloney. I would now like to yield to--call on
Mr. Lee and----
Chairman Lee. I didn't want to end this hearing without
giving you a chance to talk to us about the concept of tax
competition and whether or not you think we are in a vulnerable
position as a result of it. What worries you about tax
competition?
Dr. Holtz-Eakin. Tax competition is very real. And it drove
the structure of the corporate reforms in the Tax Cuts and Jobs
Act, because those mimic what has happened across the OECD and
the movement away from worldwide systems.
The reality is that it is impossible to identify where and
when a dollar is earned around the globe. And to try to tax it
in the U.S. at that moment is a virtually impossible job.
So we have moved toward, I think, a realistic positioning
of ourselves in the competitive world for the moment. The rates
in the middle of the developed country world, 21 percent. The
base is more like one we would have. And it better positions
our companies to compete internationally, and that is good for
the workers. And that ultimately is the objective.
I don't think that will--that will stay still. Like when we
did the 1986 reforms, we had the lowest corporate rate in the
developed world, and we were way behind by the time 2017 rolled
around. I expect the rest of the world to keep moving. We will
have to just see where we are competitively.
Vice Chair Maloney. I thank everybody. It really has been
incredibly interesting. Economic inequality is a major
challenge facing this country. It is not good for the rich. It
is not good for the poor. It is not good for the country
overall. And we need to do a better job measuring inequality,
tracking it, and most importantly, addressing it.
So I am really very grateful to all of you for your
research and for what you shared with us today. You gave us a
lot of good insights on a very critical issue. Thank you so
much.
We are adjourned.
[Whereupon, at 4:25 p.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Carolyn B. Maloney, Vice Chair, Joint
Economic Committee
Last month, the Census Bureau reported that income inequality in
the United States, by one measure, had reached its highest level since
they began tracking it more than 50 years ago.
For the typical worker, wages have been stagnant for four decades.
On the other hand, those at the top are doing great.
The top 1 percent of households in the United States now take home
about 20 percent of the total income.
The wealthiest 1 percent own nearly 40 percent of total wealth.
Those at the very top--the top one-tenth of 1 percent--have seen
their share of wealth double since 1990.
That narrow sliver of the population--the top tenth of 1 percent--
now own more than the bottom 80 percent of Americans.
One of our witnesses today, Dr. Gabriel Zucman, has done important
work tracking these trends going back a century.
His most recent work looks at the role played by our tax system.
It is widely believed that our tax system is progressive--that the
rich pay a larger percentage of their income in taxes.
However, Dr. Zucman's recent work reveals that in 2018 the
wealthiest 400 Americans paid a lower tax rate than any other income
group.
Sadly, this is not an accident--it is deliberate public policy.
In 2017, the Republican Congress and President Trump slashed taxes
on the rich . . . Borrowing $1.9 trillion to do it.
Inequality in America was already sky high.
The Republican tax cuts made it far worse.
Skyrocketing inequality undermines our middle-class society, in
which anyone who works hard has a chance to succeed.
It means that for millions of Americans, the American dream may be
a myth.
Our second witness, economist Heather Boushey, argues that high
levels of inequality undermine economic growth . . .
. . . because strong growth depends in part on a strong middle
class.
Consumer spending accounts for 70 percent of the U.S. economy.
But as a larger and larger share of income and wealth go to those
at the top, there is less left over for everyone else.
As a result, most Americans have less money in their pockets, less
to spend on what businesses sell.
Therefore, when the bottom 50 percent--those who consume a much
larger share of income compared to those at the top--see no income
growth for 40 years, that's a major problem.
Extreme inequality also undermines our communities.
The Chairman and I agree that healthy communities with strong
``social capital'' are critical to a high quality of life.
But extreme inequality undermines that.
When wealth is highly concentrated and in a society where education
is critical to success, families have extremely high incentives to live
in towns with other wealthy families, so they can put their children in
the best school systems.
So, Americans increasingly become segregated by wealth and their
quality of life becomes dependent on their zip code.
Extreme inequality also undermines our democratic institutions.
It enables the powerful to rig the rules--to make themselves even
more powerful.
We see the erosion of antitrust laws, the breakdown of protections
for small investors, the rejection of overtime protections for workers.
We pay a very high price for extreme inequality.
How bad is inequality in the United States?
Economists disagree about the severity of the problem.
But while they disagree about how much inequality has worsened in
recent decades, there is little disagreement . . .
. . . things are getting worse.
One way that we measure the strength of our economy is by quarterly
measures of gross domestic product. It is a good, aggregate number--it
tells us how fast the whole economic ``pie'' is growing.
But the ``slices'' of the pie that go to the rich, middle class and
poor are extremely unequal.
Unfortunately, we currently don't measure how economic growth is
shared.
For this reason, I have introduced the Measuring Real Income Growth
Act. And I'm pleased that Senator Heinrich is again introducing a
companion bill in the Senate.
The bill would require the Bureau of Economic Analysis to report
GDP growth by income decile and the top 1 percent alongside the top
line number.
It will help us understand not just how fast the economy is growing
but who is benefiting from that growth.
Academic economists, such as Dr. Zucman, have produced estimates
similar to those we are asking for from BEA. But we need the government
to do this is in a regular and timely manner.
Inequality is one of the most pressing issues of our day. It is
tearing our society apart and undermining much of what we stand for.
In order to understand inequality, we must have better ways to
measure it--ways that are accepted by those on both sides of the aisle.
With that information in hand, we can begin to restore our country
to the land of opportunity.
__________
Prepared Statement of Hon. Mike Lee, Chairman, Joint Economic Committee
Thank you, Vice Chair Maloney, for calling this hearing.
Inequality has been a hinge of American politics, and indeed in all
democracies, for as long as there have been democracies. And with good
reason. The concentration of economic power can be as dangerous as the
concentration of political power.
Unfortunately, the debate about inequality--like many debates these
days--can be easily swept up into a partisan exercise of talking past
each other.
We could spend our entire time today haggling over whether
``inequality'' is best understood as unequal opportunity, or unequal
outcomes.
Or indeed, if the latter, we could argue for hours about whether
and how much it is even a problem, given that almost every facet of
modern life--from air conditioning to airplanes--can be counted among
the blessings of the intentionally unequal benefits of free enterprise.
Inequality is such a large concept that it is impossible to tackle
in a single hearing. That is why I commend the Vice Chair for
organizing today's hearing on ``measuring'' inequality. And for
inviting an excellent panel of witnesses who can help us navigate the
issue.
The subject of data measurement techniques is at once narrow enough
to keep our discussion focused, and--hopefully--technical enough that
even Congress can set aside political temptations and simply drill down
on some important questions.
For instance:
How should we define ``income'' for purposes of measuring
inequality between rich, poor, and middle class?
How should we count government transfers--like the Earned
Income Tax Credit--for lower-income workers?
As the scholarship on inequality measurement has
progressed, which technical details have survived peer-review scrutiny,
and which remain to be worked out before we can reach academic
consensus?
These are not the questions that will lead cable news political
talk shows. That's why they are exactly the kind the Joint Economic
Committee should be taking up. Even the best policies involve
tradeoffs.
Our economy is growing, and today employs more people than ever
before. But it has been a long slog out of the Great Recession, much
longer for some than others.
If the data really can afford us a clearer view of how the costs
and benefits of economic growth are being experienced up and down the
income scale, that is analysis we should all insist on getting . . .
and insist on getting right.
Thank you again Madam Vice Chair, and to the witnesses for being
here today. I look forward to your testimony and our discussion.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response from Dr. Zucman to Question for the Record Submitted by
Senator Klobuchar
You have extensively researched how wealthy taxpayers and
corporations take advantage of offshore tax havens to evade payment of
U.S. taxes.
In your opinion, how has the 2017 Tax Cuts and Jobs Act
affected the amount of wealth stored in these offshore tax havens, and
what impact has this had on economic inequality?
Thank you for your question, Senator. The Tax Cuts and Jobs Act
reduced the Federal corporate income tax rate from 35% to 21% and moved
the U.S. towards a so-called ``territorial'' tax system, whereby
profits booked outside of the United States are not taxable in the U.S.
Such a system gives corporations incentive to book profits in foreign
tax havens. Although the Act contains a number of anti-abuse
provisions, it is thus possible that the amount of profits booked by
U.S. companies in offshore havens will grow as a consequence of the Tax
Cuts and Jobs Act. It is too soon, however, to make precise
quantitative statements about this phenomenon at this stage. In my
opinion the main effect of the Tax Cuts and Jobs Act was to
dramatically reduce Federal corporate income tax revenue, increasing
income for shareholders. Because equity ownership is highly
concentrated in the United States, this is likely to increase
inequality.
__________
Response from Dr. Boushey to Question for the Record Submitted by
Senator Klobuchar
Our antitrust enforcement agencies need adequate tools and
resources to address the threat of economic concentration, promote
competition, and protect consumers. In recent decades we have seen
weakened antitrust enforcement coupled with rising economic inequality.
I have introduced legislation to modernize antitrust enforcement--
including by updating merger filing fees to reflect the 21st century
economy.
What role does vigorous antitrust enforcement play in
promoting innovation and reducing economic inequality?
Vigorous antitrust enforcement protects competition and helps
address inequality. Modern studies show that growing monopoly power is
a problem for consumers and innovators. A recently released antitrust
literature review summarizes modern antitrust and competition research,
much of which shows us that more competition is good for innovation.\1\
Over the last decade, we have seen the role rising monopoly power has
on stifling innovation, especially in the drug manufacturing and tech
industries.\2\ Monopoly power also exacerbates inequality because those
who benefit from higher monopoly rents (stockholders and senior
executives) are wealthier than the consumers, who pay higher prices,
and the workers, who earn lower wages, harmed by market power.\3\
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\1\ Fiona Scott Morton, ``Modern U.S. antitrust theory and evidence
amid rising concerns of market power and its effects'' (Washington:
Washington Center for Equitable Growth, 2019), available at https://
equitablegrowth.org/research-paper/modern-u-s-antitrust-theory-and-
evidence-amid-rising-concerns-of-market-power-and-its-effects/.
\2\ Colleen Cunningham, Florian Ederer, and Song Ma, ``Killer
Acquisitions'' Working Paper (Washington Center for Equitable Growth,
2019), available at https://equitablegrowth.org/working-papers/killer-
acquisitions; Ryan A. Decker and others, ``Declining Dynamism,
Allocative Efficiency, and the Productivity Slowdown,'' The American
Economic Review 107 (5) (2017).; Gauti B. Eggertsson, Jacob A. Robbins,
and Ella Getz Wold, ``Kaldor and Piketty's Facts: The Rise of Monopoly
Power in the United States.'' Working Paper No. 24287 (National Bureau
of Economic Research, 2018).
\3\ Joshua Gans, Andrew Leigh, Martin Schmalz and Adam Trigs,
``Inequality and Market Concentration, When Shareholding is More Skewed
than Consumption.'' Working Paper No. w25395 (National Bureau of
Economic Research, 2018), available at https://ssrn.com/
abstract=3306105. Mordecau Kruz, ``ON the Formation of Capital and
Wealth: IT, Monopoly Power and Rising Inequality''), available at
https://ssrn.com/abstract=3014361. Einer Elhauge, ``Horizontal
Shareholding,'' Harvard Law Review 129 (2016): 1267-1317. See
generally, Bonnie Kavoussi, ``How market power has increased U.S.
Inequality,'' https://equitablegrowth.org/how-market-power-has-
increased-u-s-inequality/.
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However, the agencies charged with enforcing these laws need
adequate resources to take appropriate action. Today, the Federal Trade
Commission (FTC) and the Department of Justice's (DOJ) Antitrust
Division are under-resourced, with annual appropriations on a steady
decline since 2010 and now 18 percent lower in real terms than in
2010.\4\ Enforcement has fallen to historic lows as funding has
dropped. Merger enforcement actions have stagnated as merger filings
have risen over the past decade and fewer corporations are being fined
for antitrust violations since 2012-2014, and especially since the
1990s. As our economy grows, the need for resources to regulate it
grows in unison.
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\4\ Michael Kades, ``The state of U.S. federal antitrust
enforcement'' (Washington: Washington Center for Equitable Growth,
2019), available at https://equitablegrowth.org/research-paper/the-
state-of-u-s-federal-antitrust-enforcement/?longform=true.
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