[Joint House and Senate Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 117-104
``BUILDING BACK BETTER: RAISING REVENUE
TO INVEST IN SHARED PROSPERITY''
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VIRTUAL HEARING
BEFORE THE
JOINT ECONOMIC COMMITTEE
OF THE
CONGRESS OF THE UNITED STATES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 6, 2021
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-193 PDF WASHINGTON : 2022
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Donald S. Beyer Jr., Virginia, Martin Heinrich, New Mexico, Vice
Chairman Chairman
David Trone, Maryland Amy Klobuchar, Minnesota
Joyce Beatty, Ohio Margaret Wood Hassan, New
Mark Pocan, Wisconsin Hampshire
Scott Peters, California Mark Kelly, Arizona
Sharice L. Davids, Kansas Raphael G. Warnock, Georgia
David Schweikert, Arizona Mike Lee, Utah, Ranking Member
Jaime Herrera Beutler, Washington Tom Cotton, Arkansas
Jodey C. Arrington, Texas Rob Portman, Ohio
Ron Estes, Kansas Bill Cassidy, M.D., Louisiana
Ted Cruz, Texas
Tamara L. Fucile, Executive Director
Vanessa Brown Calder, Republican Staff Director
Colleen J. Healy, Financial Director
C O N T E N T S
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Opening Statements of Members
Hon. Donald Beyer Jr., Chairman, a U.S. Representative from the
Commonwealth of Virginia....................................... 1
Hon. Mike Lee, Ranking Member, a U.S. Senator from Utah.......... 4
Witnesses
Dr. Kimberly Clausing, Deputy Assistant Secretary for Tax
Analysis, U.S. Department of the Treasury, Washington, DC...... 6
Ms. Chye-Ching Huang, Executive Director of the Tax Law Center,
New York University Law, New York, NY.......................... 8
Dr. Wendy Edelberg, Director of the Hamilton Project and Senior
Fellow for Economic Studies at the Brookings Institution,
Washington, DC................................................. 9
Dr. William McBride, Vice President of Federal Tax and Economic
Policy, Tax Foundation, Washington, DC......................... 11
Submissions for the Record
Prepared statement of Hon. Donald Beyer Jr., Chairman, a U.S.
Representative from the Commonwealth of Virginia............... 28
Prepared statement of Hon. Mike Lee, Ranking Member, a U.S.
Senator from Utah.............................................. 29
Prepared statement of Dr. Kimberly Clausing, Deputy Assistant
Secretary for Tax Analysis, U.S. Department of the Treasury,
Washington, DC................................................. 31
Prepared statement of Ms. Chye-Ching Huang, Executive Director of
the Tax Law Center, New York University Law, New York, NY...... 38
Prepared statement of Dr. Wendy Edelberg, Director of the
Hamilton Project and Senior Fellow for Economic Studies at the
Brookings Institution, Washington, DC.......................... 51
Prepared statement of Dr. William McBride, Vice President of
Federal Tax and Economic Policy, Tax Foundation, Washington, DC 70
Articles for the Record Submitted by Representative Schweikert... 84
Response from Dr. Clausing to Question for the Record Submitted
by Senator Lee................................................. 84
Response from Ms. Huang to Question for the Record Submitted by
Senator Lee.................................................... 84
Response from Dr. Edelberg to Question for the Record Submitted
by Senator Lee................................................. 85
Response from Dr. McBride to Question for the Record Submitted by
Senator Lee.................................................... 86
Response from Dr. Clausing to Questions for the Record Submitted
by Senator Warnock............................................. 87
Response from Ms. Huang to Questions for the Record Submitted by
Senator Warnock................................................ 87
Response from Dr. Edelberg to Questions for the Record Submitted
by Senator Warnock............................................. 88
``BUILDING BACK BETTER: RAISING REVENUE
TO INVEST IN SHARED PROSPERITY''
----------
WEDNESDAY, OCTOBER 6, 2021
United States Congress,
Joint Economic Committee,
Washington, DC.
The WebEx virtual hearing was convened, pursuant to notice,
at 2:30 p.m., before the Joint Economic Committee, Hon. Donald
S. Beyer Jr., Chairman, presiding.
Representatives present: Schweikert, Pocan, Davids, Estes,
Beyer, Peters, and Arrington.
Senators present: Cruz, Hassan, Cassidy, and Lee.
Staff: Vanessa Brown Calder, Hugo Dante Jr., Ron Donado,
Ryan Ethington, Tamara Fucile, Devin Gould, Owen Haaga, Colleen
Healy, Jeremy Johnson, Adam Michel, Kole Nichols, Michael
Pearson, Alexander Schunk, Nita Somasundaram, Sydney Thomas,
Emily Volk, and Brian Wemple.
OPENING STATEMENT OF HON. DONALD BEYER JR., CHAIRMAN, A U.S.
REPRESENTATIVE FROM THE COMMONWEALTH OF VIRGINIA
Chairman Beyer. This hearing will come to order. And I
would like to welcome everyone to the Joint Economic
Committee's Hearing entitled ``Building Back Better: Raising
Revenue to Invest in Shared Prosperity.'' I want to thank each
of our truly distinguished witnesses for sharing their
expertise today, and now let me offer my opening statement.
The Biden Administration Build Back Better Plan will cut
taxes for working families, help small businesses, and invest
in America's long-term economic prosperity, all while asking
the wealthy and big corporations to pay their fair share.
Today, Federal revenue is just 16.4 percent of the economy, and
asking the wealthy and big corporations to contribute more
Federal revenue is consistent with supporting long-term
economic growth.
The Build Back Better Plan will help provide American small
businesses with a level playing field to compete with
multinational corporations. The Treasury Department projects
that 97 percent of small businesses will be protected from
increased taxes, and many will get a tax cut from reducing the
corporate tax rate to 18 percent for incomes under $400,000.00.
The Build Back Better Plan promotes global competitiveness
by working to end the race to the bottom on corporate taxes,
letting American businesses compete on the basis of bringing
the best products to market at the lowest price, instead of
competing on who can avoid paying taxes.
As a small businessman for almost five decades I know that
paid family leave will help small businesses retain workers.
When I had workers who got sick, or needed to care for a sick
child, we provided paid leave to our employees because we would
never want to leave our workers to choose between a paycheck or
taking care of themselves or a loved one.
At some point during their lives all workers are going to
need to take time away from work. By establishing a Federal
paid leave program, Build Back Better helps small businesses
cover those inevitabilities and reduces the cost of turnover,
which is why so many small businesses have come out in support
if it.
Small businesses will also benefit from expanding the work
opportunity tax credit, which would give businesses up to
$5,000.00 to hire qualified individuals, including eligible
veterans. Asking the wealthy and big corporation to pay their
fair share is consistent with supporting long-term economic
growth.
After the Obama-Biden Administration allowed the Bush tax
cuts for the very wealthy to expire in 2013, the economy added
8 million jobs in President Obama's second term. Job growth
slowed under President Trump as the Trump taxes delivered a
windfall for the wealthy, creating record stock buybacks, and
adding hundreds of billions to the deficit.
Although friends across the aisle will likely claim that
asking the wealthy and big corporations to pay their fair share
will hurt economic growth, the evidence just doesn't back them
up. A congressional research service report found that ``both
labor supply and savings and investment are relatively
insensitive to tax rates.'' In addition, improving IRS
enforcement will increase revenue without raising rates, while
ensuring that businesses cannot gain advantages over their
competitors by cheating on their taxes.
We know that investing in working families, communities and
innovation is the key to broadly shared economic growth, and
that's exactly what the Build Back Better Plan would do. An
analysis by the Tax Policy Center shows that the Build Back
Better Revenue provisions passed out of the House Ways and
Means Committee would abide by President Biden's pledge not to
raise taxes on those making under $400,000.00 a year.
So in 2022, households making under $500,000.00 will get
their direct taxes cut on average. Middle income parents will
get a tax cut of about $3,000.00 on average. Extending the
enhanced child tax credit, and expanded child and dependent
care tax credit that is proposed under Build Back Better, would
help families to access affordable childcare and paid family
leave.
These two supports are both critical to helping parents,
particularly mothers, remain engaged in the labor market. And
we know that increased labor force participation is key,
driving long-term and sustainable economic growth.
Under President Biden, almost four and a half million
people have returned to work, and unemployment has dropped to
5.2 percent. In the first few quarters of 2021, real GDP grew
at over 6 percent. In fact, the second quarter was just revised
upward again, and the Federal Reserve projects 5.9 percent real
GDP growth this year. Core CPI inflation grew just 0.1 percent.
That's 1 over 1,000 in August, even as real wages grew at .4
percent--four times faster.
So passage of Build Back Better and the bipartisan
infrastructure bill will cement these economic gains, improved
productivity, lower inflationary pressures and create long-term
growth. Louisiana Analytics projected that passing both bills
will increase GDP growth in 2022 to 5.3 percent.
Similarly, the Economic Policy Institute projects that the
two bills would support 4 million jobs per year, including
556,000 manufacturing jobs and 312,000 construction jobs. For
too long the wealthy and big corporations have avoided paying
their fair share. You have an opportunity now to rebalance the
scale and invest in America's future to create long-term
broadly shared economic growth.
We have been waiting for our Vice Chair, Senator Lee to
show up, but while he's not here yet let me go ahead with the
introductions of our speakers, and then we will slot Senator
Lee as soon as he shows up.
So in the order of their witness testimony our four
distinguished witnesses. Dr. Kimberly Clausing. Dr. Kimberly
Clausing is the Deputy Assistant Secretary for Tax Analysis in
the Office of Tax Policy at the U.S. Department of the
Treasury. Prior to that Dr. Clausing was the Eric M. Zolt
Professor of Tax Law and Policy at UCLA School of Law. And
before that, she joined UCLA from Reed College where she worked
as the Thormund Miller and Walter Mintz Professor of Economics.
Dr. Clausing has published numerous articles on taxation
with a particular emphasis on the taxation of multinational
companies, and she is the author of an amazing, excellent book
called Open: The Progressive Case for Free Trade Immigration
and Global Capital. She's a long-time friend of many of us and
advisor.
She received her BA in Economics from Carleton College, and
an MA and PhD in Economics from Harvard University.
Ms. Chye-Ching Huang is the Executive Director of the Tax
Law Center at NYU Law. Before joining the Tax Law Center Ms.
Huang was Senior Director of Economic Policy at the Center on
Budget and Policy Priorities where she worked on the analysis
and design of a wide range of Federal tax fiscal and economic
policy proposals in collaboration with tax academics,
practitioners, analysts and advocates.
Previously Ms. Huang was a Tax Academic at the University
of Auckland in New Zealand, where she published research in tax
law, policy and regulation, and taught graduate and under-
graduate tax law. Ms. Huang holds an LLM from Columbia Law
School where she was a Sir Wallace Rowling/Fullbright and James
Kent Scholar, and a Bachelor of Law and a Bachelor of Commerce
in Economics from the University of Auckland in New Zealand.
Dr. Wendy Edelberg is the Director of the Hamilton Project
and a Senior Fellow for Economic Studies at the Brookings
Institution. She's also a Principal at WestExec Advisors, and
prior to Brookings, Dr. Edelberg was Chief Economist at the
Congressional Budget Office, something near and dear to all of
us.
Previously Dr. Edelberg was the Executive Director of the
Financial Crisis Inquiry Commission which reported on the
causes of the 2008 Financial Crisis. Dr. Edelberg also worked
on issues related to macroeconomics, housing, and consumer
spending at the White House Council of Economic Advisers and
the Federal Reserve Board.
Dr. Edelberg received a BA in Economics from Columbia, and
MBA from the University of Chicago, and a PhD in Economics from
the University of Chicago.
Finally, Dr. William McBride is the Vice President of
Federal Tax and Economic Policy at the Tax Foundation. Dr.
McBride previously served as a Manager in the National Economic
and Statistics Group at PricewaterhouseCoopers. Dr. McBride has
experience researching and modeling the economics of taxation
and issues related to tax reform at the State, Federal and
international levels.
From 2011 to 2014 Dr. McBride served as the Chief Economist
at the Tax Foundation. Dr. McBride holds a BS in Physics from
the University of the South, a BS in Electrical Engineering
from Washington University in St. Louis, and a PhD in Economics
from George Mason University.
And with that, let me turn the floor over to the Vice Chair
of the Full Committee and the distinguished senator from Utah,
Senator Michael Lee.
[The prepared statement of Chairman Beyer appears in the
Submissions for the Record on page 28.]
OPENING STATEMENT OF HON. MIKE LEE, RANKING MEMBER, A U.S.
SENATOR FROM UTAH
Senator Lee. Thank you so much, Mr. Chairman. I really
appreciate it. Before the pandemic disrupted American's work
lives and social connections, tax cuts and deregulation
supported a thriving economy that delivered broad benefits to
families and workers.
The Tax Cuts and Jobs Act of 2017, which provided historic
relief to working and middle class American families, and led
to higher wages, better benefits, and new employment
opportunities across the country, was crucial to that
prosperity.
Our booming economy provided some of the largest benefits
to those Americans who needed it most. Unemployment for
Hispanic Americans, Black Americans, and Asian Americans fell
to the lowest rates on record. Unemployment for women dropped
to a near 65 year low, and low income workers saw their wages
rise at some of the fastest rates.
All told the wealth of the bottom 50 percent of all
Americans increased by over 70 percent in the three years prior
to the pandemic. In early 2020, more than 80 percent of working
age Americans were employed, and wages continued to rise. Pro-
growth policy reform brought the economy roaring to life in a
way that few forecasters thought might be possible.
That success demonstrates an important truth. Americans
benefit from lower taxes, less regulation, and more freedom.
Unfortunately, we've come here today because the Biden
Administration and Democrats in Congress want to squeeze the
American people with higher taxes and more regulation.
They've proposed a 3.5 trillion dollar tax and spend
blowout, one that would increase American's taxes by over 2
trillion dollars. It would be the largest tax increase in my
lifetime, and it would substantially expand the Federal
Government's footprint into our homes, our businesses, and
across our economy.
Now let's be clear the major winners from the Democrat's
plan are special interests and beltway bureaucrats. Our economy
is still recovering from the pandemic. Now is one of the worst
times to saddle our economy with higher taxes. The recovery has
stopped accelerating and American families are being hit by
higher prices for essential goods.
Things like everything from groceries to housing to
gasoline keep getting more expensive. Inflation is rising at
its fastest pace in three decades, and it's making it harder to
make ends meet. Wage increases are being swamped by higher
prices and job growth is stalling. Democrats reckless tax and
spend boondoggle will only make things worse.
Here's what we know this tax plan would do to American
families and workers and businesses. It would raise taxes on
American families despite President Biden's pledge to the
contrary. The non-partisan Joint Committee on Taxation, and the
left leaning Tax Policy Center both agree that the plan would
hike taxes on low and middle income families making less than
$400,000.00 a year.
The Democrats tax plan would also drive jobs for American
workers overseas. It would raise the Federal corporate tax rate
to 26.5 percent, making the cost of doing business in the U.S.
higher than in Canada, Mexico, Japan, the United Kingdom,
Germany, France and China.
American workers would pay the price. They'd pay for it in
lost jobs and slower wage growth and less investment in things
like domestic manufacturing and innovative research and
development. In 10 years two-thirds of the tax burden from this
corporate tax increase would be shouldered by low and middle
income workers, and perhaps worst of all the Democrats tax plan
would embolden Washington to pick winners and losers, rather
than allowing entrepreneurs to meet the needs of American
consumers.
This is about so much more than penalizing successful
Americans with even higher taxes. This is about putting more of
American's resources under the control of Washington
politicians. Democrats tax plan would cost American families
and workers and businesses. It would mean less innovation,
lower wages, and fewer jobs.
It would increase the size and scope of the Federal
Government. It would make our country less prosperous, less
fair, and less free. We know what works--keeping taxes low
helps to support a thriving economy. It benefits all Americans.
We should return to the policies that made the pre-pandemic
economy so successful for so many Americans.
Congress should keep taxes low and predictable by making
the reforms in the Tax Cuts and Jobs Act permanent. And then we
should restrain government spending. It's on a runaway path
right now, by setting clear and enforceable rules for fiscal
discipline.
Look, we simply can't, as in it simply won't work. We can't
succeed at taxing and spending our way into shared prosperity.
Instead, we need to stop spending indiscriminately and make
America the best place in the world to do business, pursue
happiness and earn success. Thank you.
[The prepared statement of Senator Lee appears in the
Submissions for the Record on page 29.]
Chairman Beyer. Senator Lee thank you very much. Now we
will recognize Dr. Clausing for your testimony.
STATEMENT OF DR. KIMBERLY CLAUSING, DEPUTY ASSISTANT SECRETARY
FOR TAX ANALYSIS, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON,
DC
Dr. Clausing. Thank you Chairman Beyer. Chairman Beyer,
Ranking Member and members of the committee. Thank you so much
for inviting me to share my views on the relationship between
tax policy and the economy.
The present moment is a very consequential one for the
future of tax policy. We have an opportunity in front of us to
create a modern, efficient, and fair tax system, capable of
funding investments that are essential to the creation of
prosperous U.S. business environment, and to the sort of
inclusive economic growth that can benefit all Americans.
First off, raising adequate government revenue is important
for funding the Nation's priorities, and for shoring up the
fundamental economic strengths that are central to job
creation. We need revenue to build roads and bridges, to fund
education, training and research, to mitigate climate change,
and to support families from tackling child poverty to
maintaining support to the elderly.
These investments are important to all of us, including
those in the business community. Right now however, the United
States raises less revenue than we need. We are in the bottom
fifth of all OECD countries in terms of revenue raised relative
to the size of our economy across all levels of government.
We raise particularly low levels of revenue taxing of
capital and corporations. The Joint Committee on Tax reports
that U.S. multinationals pay an average tax rate of only 8
percent on their income. In contrast, companies located in our
top trading partners pay 18 percent.
We collect far less corporate income tax revenue than our
trading partners, and we only collect about half what we
collected before the Tax Cut and Jobs Act, when we collected 2
percent of GDP. Our corporate tax revenues are low despite the
fact that U.S. companies show very high corporate profits, both
in historic and comparative terms.
Indeed, the United States' corporate sector is the most
profitable in the world, dominating every measure of corporate
success. Beyond revenue, tax reform is also essential to
address the offshoring and profit shifting incentives that are
embedded in current law.
Under current, law foreign income is sometimes tax exempt,
and sometimes taxed at half the rate of domestic income,
providing very strong incentives to locate both activity and
profit offshore. Although the Tax Cuts and Jobs Act included a
global minimum tax called GILTI, it did not stop profit
shifting. Indeed, the very large share of U.S. multinational
income in very low tax jurisdictions did not change after 2015.
Unfortunately, current law creates an America last tax
system. Even high- or medium-taxed foreign income is preferred
to U.S. income because it can be blended with low--tax income
and taxed at a 50 percent discount. This is why a country by
country minimum tax system is so crucial.
These reforms will also create a fairer tax system. The
past four decades can be characterized by three related
trends--large, troubling increases in income and inequality,
multiple reductions in tax rates for those at the top, and
difficulty making ends meet for many lower and middle income
families.
Under current proposals, large expansions in the child tax
credit, the earned income tax credit and the child dependent
care tax credit will help address the needs of typical
Americans. In short, asking for somewhat larger tax
contributions from the country's wealthiest households, and
from the most profitable corporations will help us raise the
revenue that is needed to support the long-term competitiveness
of the U.S. economy and the well-being of American families.
Finally, there are many ways that our tax system needs to
be modernized to suit the 21st century. The mobility of capital
means that the taxation of multinational companies is subject
to large tax competition pressures.
The existential threat posed by climate change makes it
critical to make changes in the tax code that incentivize clean
energy. In both areas, cooperation with other countries
pursuing the same goals yields double dividends, encouraging
them to take firm actions of their own in solving long-standing
collective action problems.
A crucial way to modernize our tax system is to also ensure
that we collect the tax that is due. The tax gap, which is
forecast to total about 7 trillion over the coming decade,
creates both inefficiencies and inequities. Honest businesses
who pay their tax obligations in full compete with businesses
whose owners shirk their tax responsibilities.
Workers who earn solely wage or salary income fully report
their income accurately, but face higher tax burdens than
taxpayers using evasion to hide opaque sources of income. Those
at the top of the income distribution are disproportionately
responsible for the tax gap. Providing the IRS with the
resources and information they need will give us a more
progressive tax system.
American taxpayers will benefit across many dimensions:
improved taxpayer service, better targeted audits toward those
that evade, and hundreds of billions of dollars of revenue that
allow lower taxes elsewhere, less debt, and better government.
In conclusion, the tax reforms that we will discuss today
are essential for encouraging U.S. job creation, economic
growth and inclusive prosperity. Thank you for inviting me.
[The prepared statement of Dr. Clausing appears in the
Submissions for the Record on page 31.]
Chairman Beyer. Thank you, Dr. Clausing very much. We'll
next hear from Ms. Chye-Ching Huang for your testimony.
STATEMENT OF MS. CHYE-CHING HUANG, EXECUTIVE DIRECTOR OF THE
TAX LAW CENTER, NEW YORK UNIVERSITY LAW, NEW YORK, NY
Ms. Huang. Chairman Beyer, Ranking Member Lee and members
of the committee. I am honored to testify about an opportunity
to meet the Nation's most pressing economic needs. Sound tax
policy can lift the living standards of low and moderate income
Americans, and support economic growth with shared benefits for
workers, families and businesses.
And that is because it can raise revenues to support
investments in areas like infrastructure, education, scientific
research and worker training that are known to deliver long-
term benefits. And this can also reduce the costs of challenges
like climate change.
Further, lawmakers are considering proposals, including a
stronger child tax credit, and those are also true in these
folks because they deliver longer benefits for the trajectories
of children and the broader economy.
Research shows that such credits increase the likelihood
that children grow up healthier, do better in school, attend
college, and earn more as adults. And these long-term benefits
can be large. Nobel research also suggests that financial
stability can help more children develop and apply their
talents for research, innovation, and entrepreneurship and the
country is currently losing out on so much of their potential.
Seventeen Nobel Laureate economists have explained that the
package that lawmakers are considering will ease long-term
inflationary pressures, and that's because it combines
investments that improve growth with revenues to financial
those investments without adding to long-term deficits.
Furthermore, sound tax policy can scale back on inefficient
tax breaks, and can help it slow to where it's most productive,
rather than where the tax savings are the most lucrative. It
can also reduce complex and wasteful tax planning games. And in
doing so tax policy can level the playing field for small,
domestic and honest businesses so they can fairly compete with
businesses that use tax avoidance, profit shifting to tax
havens, or even outright tax evasion is a business strategy.
The revenue raising proposals before Congress meet those
goals. They would first ensure that companies of wealthy filers
pay what they already are. Second, they would reverse some of
the 2017 tax law's corporate rate cuts that would even cover
what businesses asked for, and also address subsidies for
locating profits and investments offshore.
Third, they would scale back tax breaks that allow some of
the wealthiest people in the country to pay a little or no
income tax on very large sources of income. Such tax policies
are far more likely to strengthen the economy than tax cuts
concentrated at the top of the income distribution.
Careful research finds no evidence that the 2017 tax law
increased investment or wages above trends already in place. In
the fact of that disappointing track record, some proponents of
the tax cut strategy have instead cited predictions from paid
studies that are deeply flawed, or inaccurately described
current proposals.
Another response has been to promote a view of
competitiveness that misattributes America's economic success
very narrowly to its willingness to subsidize multinationals
tax avoidance, rather than the quality of American ideas,
people and infrastructure.
Those have already accumulated large profits and are
seeking to protect their tax preferences, can afford to push
this short-sighted view of American's competitive potential. An
investment supported by good tax policy can ensure that more
children can be part of the next generation of innovators who
may generate new breakthroughs in businesses with widely shared
benefits.
And of course successful business and individuals will
continue to benefit from American's infrastructure. Finally,
some may try to frame the tradeoffs that will make us now face,
as requiring them to choose between areas of deep need,
including reducing child poverty, broadening access to
community college and paid leave, addressing climate change,
filling homes with Medicaid and more.
But the actual tradeoff is much broader. It's between those
investments and to what extent policy maintains the status quo
of very wealthy taxpayers and corporations not paying taxes
that they owe, and keeping provisions of law that allow them to
pay very low tax rates. Thank you for inviting me, and I would
be glad to take your questions.
[The prepared statement of Ms. Huang appears in the
Submissions for the Record on page 38.]
Chairman Beyer. Ms. Huang, thank you very much. We'll now
hear from Dr. Edelberg. Dr. Edelberg the floor is yours.
STATEMENT OF DR. WENDY EDELBERG, DIRECTOR OF THE HAMILTON
PROJECT AND SENIOR FELLOW FOR ECONOMIC STUDIES AT THE BROOKINGS
INSTITUTION, WASHINGTON, DC
Dr. Edelberg. Chairman Beyer, Ranking Member Lee, and
members of the committee. My name is Wendy Edelberg, and I am
the Director of the Hamilton Project and the Senior Fellow at
the Brookings Institution. Before coming to Brookings I was
Chief Economist at the Congressional Budget Office.
As we discuss the tax provisions contained in the
reconciliation package, and other ambitious policy proposals,
I'd like to focus on three points. First, investments in the
social insurance system are vital for ensuring broad access to
opportunities in advancement, and for making our economy more
resilient.
There's extensive evidence demonstrating how effectively
these programs work and why they should be expanded. Second,
adopting the ambitious policies included in these packages
would not create worrying inflation risk, and those packages
effect on the long-term fiscal trajectory would be modest.
Finally, although the contemplated tax increases would have
a small negative effect on incentives to work and invest, other
policies in the package would increase incentives to work and
invest. You know everyone in the United States directly
benefits from the social insurance system at some point in
their lives.
Moreover, everyone indirectly benefits from it, either from
knowing the system would be there during some time of
unexpected hardship, or simply because it helps to support the
overall economy. During the pandemic-induced economic downturn,
some of these programs have proven particularly effective.
As a result of the enormous fiscal support provided to
households in 2020, the percentage of the U.S. population in
poverty fell from 12 percent to 9 percent. There is more to do.
Implementing new policies with regard to childcare and paid
leave would lower barriers to work among parents and those with
caregiving responsibilities, and those policies would improve
outcomes for children.
Making permanent the full refundability of the child tax
credit would lock in place reductions in child poverty. Making
permanent the recent expansion of the EITC for adults without
children would reduce poverty and income and equality, and
increase labor force participation.
Permanent expansions to health insurance premium tax
credits and cost-sharing subsidies would decrease uninsured
rates by potentially 14 percent. These are not the only
improvements to the social insurance system included in the
reconciliation package, but they are illustrated examples of
how strengthening this system would improve well-being, and
make our economy more resilient.
At the same time the ambitious policies included in the
packages being considered would not creating a worrying
inflation risk and their effect in the long-term fiscal
trajectory would be modest.
Policymakers have stated their goal is to include increases
in tax revenues and decreases in spending that would fully
offset policies that would decrease revenues and increase
spending. If something close to a full offset is achieved, the
reconciliation package would do little to the project debt
trajectory.
To be clear, policymakers still have long-term challenges
with regards to the Federal budget, however this reconciliation
package even if the estimates end up showing it would modestly
increase the cumulative deficit over the next decade would not
worsen those challenges in a notable way.
Although many of the changes being considered would
increase people's incentives to work and invest, the revenue
raising policies would have muted negative effects. For
example, the reconciliation package undoes some of the
reduction the corporate tax rate put in place in the 2017 Tax
Act.
Consensus projections were that the large reduction in 2017
only boosted the level of investment modestly. Inversely,
reversing some of that reduction would have only small,
negative effects on investment even as it raised substantial
revenue. In addition, the package increases the effect of
marginal tax rates on labor income, but only for a small
portion of the labor force comprised of the highest income
people.
Any negative effect on the aggregate labor supply would
likely be hard to identify after the fact. The policies that
would increase recipient's incentives to work, save and invest,
could have large positive effects.
For example, access to high-quality and affordable
childcare could be a game changer for labor force participation
among mothers of young children. With a larger and more
productive workforce firms would have greater incentives to
work and invest in the United States.
To wrap up, despite headwinds created by the Delta Variant,
the economy is recovering. This is the moment to strengthen the
social insurance system, and to enact an ambitious Federal
investment package. Together those policy changes would make
the U.S. economy more resilient and productive over the longer
term, and it would broaden the degree to which prosperity in
the United States is shared across workers and families, thank
you.
[The prepared statement of Dr. Edelberg appears in the
Submissions for the Record on page 51.]
Chairman Beyer. Dr. Edelberg, thank you very much. And
finally, we will hear from Dr. McBride.
STATEMENT OF DR. WILLIAM MCBRIDE, VICE PRESIDENT OF FEDERAL TAX
AND ECONOMIC POLICY, TAX FOUNDATION, WASHINGTON, DC
Dr. McBride. Thank you Chairman Beyer, Ranking Member Lee
and members of the Joint Economic Committee. I appreciate the
opportunity to speak with you. Today I'll share the key
findings of our analysis about the economic impacts, the
revenue provisions of the most recent version of the
President's Build Back Better agenda, the House Ways and Means
Committee reconciliation bill.
The House bill relies heavily on corporate tax increases,
would raise the corporate tax rate 5 percentage points to 26 1/
2 percent, which would be the largest increase in the rate in
more than 70 years.
Including the average State corporate tax, combined Federal
State corporate tax rate will be almost 31 percent, the third
highest corporate tax rate in the OECD. A similar ranking would
result in looking at effective corporate tax rates which
account for various deductions and other tax preferences.
The bill also raises or introduces several other taxes on
U.S. multinationals. Taxes that do not exist in other
countries, including the GILTI tax. The result would be to
disadvantage U.S. companies and their workers, in favor of
companies based in lower tax countries such as Canada, the UK,
or just about anywhere in Europe.
It's important to remember that corporate taxes are not
just paid by corporate shareholders. By reducing investment and
productivity growth, higher corporate taxes lead to lower wages
across the board. This is why the OECD finds that corporate
taxes are the most economically damaging way to raise revenue,
followed by individual income taxes, consumption taxes and
property taxes.
Several studies demonstrate that corporate taxes are borne
in part by workers. For example, a recent study found that
workers bear about half of the tax burden in the form of lower
wages, with low-skilled young and female employees
disproportionately harmed.
Our modeling of the House bill indicates that the corporate
tax increases alone would reduce long range GDP by about 0.6
percent, shrink the capital stock by 1.2 percent, cut wages by
0.5 percent and eliminate about 120,000 jobs.
The House bill also levies several tax increases on high
earning individuals, especially pass-through business owners,
causing the top combined tax rate on ordinary and pass-through
business income to exceed 52 percent on average. The top
combined tax rate on capital gains and qualifying dividends
would reach 37 percent on average.
These higher tax rates come with a cost. They will reduce
incentives to work, save and invest broadly reducing employment
opportunities throughout the economy. In total we estimate that
the House plan, including the corporate and individual income
tax increases would reduce the size of the economy by about 1
percent in the long run, shrink the capital stock by 1.8
percent, cut wages by 0.7 percent and cost more than 300,000
jobs.
While the plan would raise more than $2 trillion in tax
revenue over the next decade on a gross basis, it would give
away about half of it in the form of dozens of tax credits,
leaving just over $1 trillion in net revenue. After accounting
for the smaller economy, the plan raises even less revenue,
about $800 billion over the next decade on net.
In other words, the House plan would reduce long-run GDP by
more than $2 for every $1 raised, meaning the costs in terms of
GDP loss far outweigh the benefits in terms of tax revenue.
This occurs for two reasons: the revenue is raised in
economically destructive ways, and a large part of that revenue
is spent in the form of tax credits with little to no benefits
for long-term economic growth.
The tax credits are aimed at a variety of issues that
deserve attention, including childcare, clean energy, housing
and broadband development. However, cluttering up the tax code
with more tax credits comes with many downsides, including
increased complexity and compliance costs for taxpayers as well
as additional administrative burden for the IRS, which is ill-
equipped to take on so many extra duties unrelated to tax
collection.
The bulk of the tax credits are aimed at providing
temporary relief to families with children--a worthy goal, but
likely better administered by a spending agency such as the
Social Security Administration. In general, tax policy should
be focused on how to raise revenue in the least economically
harmful manner, and other goals should be handled as public
spending subject to the appropriations process.
It is important to address the escalating costs of
childcare, healthcare, housing and other concerns, but it
should be done in a sustainable way that does not greatly add
to the deficit or reduce job opportunities, wage growth, or
people's ability to succeed and attain a higher standard of
living. Thank you for your time and attention.
[The prepared statement of Dr. McBride appears in the
Submissions for the Record on page 70.]
Chairman Beyer. Dr. McBride, thank you very much. We will
now begin the round of questions. I will begin followed by
Senator Lee. So let me start. Dr. Clausing companies often
worry that tax increases will make them less competitive. In
fact, I've been on many Zooms in the last couple months with
corporations complaining about this.
In your judgment, how will reforming the international tax
system affect competitiveness?
Dr. Clausing. I've got mute button problems, but thank you
for that question. There are three really important ways to
think about competitiveness, and in my view all three of them
are much improved because of this set of proposals.
So first if we think about economic fundamentals, like what
makes the U.S. economically strong right? These are things like
our infrastructure, our workers, our institutions, our business
environment of entrepreneurship. Those fundamentals will be
strengthened if we have adequate revenue to invest in things
like climate change mitigation, like research and education and
training.
So in that definition of competitiveness this is definitely
helpful. The second definition of competitiveness thinks about
the competitiveness of the U.S. location as a place to do
things in comparison to offshore locations. Under current law
there's a tax preference for the offshore locations relative to
the U.S. locations because offshore income is either exempt
from U.S. tax, or taxed at a 50 percent discount.
Under these proposals the tilt in the playing field in
favor of foreign income, and away from U.S. income would be
dramatically reduced, and that would reduce the incentive--the
tax incentive to locate offshore. So this is a very important
way that we can improve the attractiveness of the U.S. location
for job creation and U.S. activity, as well as buttress the
U.S. tax base.
A final notion of competitiveness concerns the
competitiveness of U.S. companies when they're operating
offshore relative to their foreign counterparts right, so you
could imagine a U.S. company and a foreign company both
competing in a low tax rate country.
That type of competitiveness is also improved under the tax
policy environment that we see in front of us because there is
a historic opportunity to increase tax rates on companies based
abroad, and continue ongoing negotiations to end the race to
the bottom in corporate taxation.
So when we look at the typical tax burden faced by U.S.
companies, relative to the typical tax burden faced by foreign
companies that will be narrowing rather than widening. And I
should point out that even if we ignore changes in foreign laws
and if we assume that there are none of them, a recent Reuter's
study found that even if you adopted the full-fledged Biden
proposals on corporate and international tax, that U.S.
companies would still have a tax advantage relative to their
peers.
They looked at the 52 largest multinational companies, and
they found that our current tax advantage is about 8 percentage
points relative to their own competitors cited in financial
statements, and that that advantage would still be at least 3
percentage points. And that's ignoring all of these investments
in things like clean energy and also ignoring any possible
changes to our foreign tax laws.
So we think that this set of proposals enhances every type
of competitiveness.
Chairman Beyer. Thank you very much. Dr. Edelberg as the
former Chief Economist of the Congressional Budget Office
you're probably better equipped to understand than anyone the
impact of this legislation on our fiscal health, so do you
worry about the long-term fiscal trajectory of the Nation if we
pass any of this reconciliation in the Infrastructure Bill, and
specifically do you worry about inflation?
Dr. Edelberg. I don't think that the packages that are
currently being contemplated would have a notable effect on the
fiscal trajectory over the next decade. Policymakers have
stated that their goal is to fully offset any tax decreases or
spending increases with when you have tax increases and
spending decreases.
But even if those weren't fully offset, I don't see that
this would notably increase the fiscal trajectory in a worrying
way. Financial markets have made it very clear that they are
not perturbed by the level of fiscal debt, with the level of
Federal debt. I mean they're not perturbed by the projection of
Federal debt over the next decade under current law, and this
wouldn't do much to that projection over time.
And so you also asked about inflation. I don't see that the
packages currently being considered would have notable--would
create notable, in any kind of worrying inflation risk, and
that's for two main reasons. One, the Committee Commission on
Taxation estimates in their score that the policies would
essentially be deficit neutral over the next two years, which
is to say that all of any spending increases would be offset by
spending decreases or tax increases.
So we would see a little economic effect from those
policies over the next two years, and other policies would take
years to stand up. So inflation risk is a thing that we should
be worried about, but it has nothing to do with the policy
discussions at hand. The Chairman. Thank you Dr. Edelberg very
much. My time is up. I'll recognize my friend from Arizona, Mr.
Schweikert, with the shout out that the President appointed an
Arizonan to be the new Chair of the National Endowment of the
Humanities, and an Arizonan to be the new Chair of the National
Endowment of the Arts. Dave you were left out, but you get to
ask questions now.
Representative Schweikert. And a Native American from our
State, so it's wonderful. Mr. Chairman and just as an aside,
but an incredibly important one, as you've heard the democrat,
the left's witnesses all throw the caveat that the democrats
have a stated commitment. Majority Leader Steny Hoyer even,
after I gave a floor speech came and reaffirmed right after my
discussion that the left has made a commitment. They will pay
for every dime of the spending in this package, whether it be
the transfer payments, whether it be the subsidies to the rich,
and so we look forward to the left keeping their commitment
that this will be fully paid for.
Because without doing that much of the economic discussion
we're having here is intellectually vacuous and dishonest. So
Mr. McBride I want to first thank you, Tax Foundation, for
doing the only intellectually credible analysis of the
proposals we've seen so far, but I wanted to go a bit further.
I'm one of those that has a fixation on how you make the
working poor less poor, and we've seen some of the success of
economic expansion providing resources and ability and making
labor wages more robust. When Tax Foundation did their modeling
I know you worked through the capital stock, the actual
revenues, those things you came up with what was it 880 billion
dollars of probably true, actual increase in revenues.
Was there any attempt to model a society that moves to
almost a social welfare transfer payment model, and what that
will actually do to labor stock and labor participation
incentives?
Mr. McBride. Well we follow the empirical literature on the
well run impacts of transfer payments, and you know studies
from the IMF for instance, and other major organizations
indicate that it's very small, it's close to zero. Some studies
indicate it's actually it has a negative impact on long-term
economic growth. And so we've adopted the assumption of a zero
impact at those type of transfer payments.
Representative Schweikert. Okay. And my reason Dr. McBride
for the discussion is we have a couple articles and Chairman
Beyer we're going to submit them for the record that basically
focus on social stratification and freezing of social mobility
in the societies that do almost the identical model to the
Left's proposal that people find themselves trapped in their
quartiles.
And we were struggling, to figure out how you would even
model such a thing.
Dr. McBride. Well it's interesting. I mean the idea of
mobility and movement you know from one income quintile to the
next over one's lifetime, or you know from one generation to
the next, is a very interesting topic.
Representative Schweikert. Yes.
Dr. McBride. That's no doubt that there's actually a great
deal of movement across income quintiles within ones lifetime,
an average person's lifetime that the millionaires, or the top
1 percent are not monolithic. They are actually changing from
year-to-year. You can look at the list of the richest people in
the U.S. or any other list.
It's changing. It changes quite a lot over the course of
you know 10 or 20 years, and you know essentially that's
because wealth is episodic, and you know someone can really hit
it big with a very successful business, and that doesn't last
forever. Very often the good times lasts only a few years and
then end.
Representative Schweikert. Dr. McBride, and the tyranny of
the clock because some of this would be actually very
interesting, if our ultimate goal was we wished to deal with
child poverty, but we also want a society that closes income
inequality. There's good literature that shows transfer
payments give you a nice pop, and then freeze your society.
And I have a fixation of how do we help with child poverty,
but then also maximize economic expansion? And even some of the
details in everything--even from some of the other witnesses,
that looks like long-term capital stock economic growth
opportunity, particularly for the working poor will be actually
fairly severely damaged by the end of the decade by the
democrat proposal. And with that Mr. Beyer I yield back.
[The articles referred to by Representative Schweikert
appear in the Submissions for the Record on page 84.]
Chairman Beyer. Thank you Congressman Schweikert very much.
I now recognize the Congressman from Madison, Wisconsin Mr.
Pocan.
Representative Pocan. Thank you very much Mr. Chairman. I
appreciate it and thanks to all the witnesses. Ms. Huang, I
hope I'm saying it right, Huang.
Ms. Huang. Huang, thank you.
Representative Pocan. Thank you. Let me ask you this
question because I think there's a lot of Halloween-like
behavior going out, people trying to scare the average person
about taxes, scare small businesses. I'm a 33 year's small
business owner, over half of my lifetime.
I'm curious when you said this is about leveling the
playing field between small business and big business. And I
know there's some provisions in particular I think, you know
for example, about corporation's first five million et cetera.
Can you just talk a little bit about what you meant in a little
more detail as if you were explaining it to a local Wisconsin
chamber group?
Ms. Huang. Yeah. Well when I talk to small business people,
I really prefer not to think that much about taxes. They'd
rather be thinking about their products, their customers, their
supply chains, or the real world things that really sort of
drive business growth and productivity.
But that sort of falls down when they have to compete with
big businesses that are shifting profits offshore and using
complex tax havens to undercut them, or they have another
person that's down the street, that they know is kind of taking
in cash and not reporting it to the IRS.
So there are a range of proposals that would help these
other productive small businesses by leveling the playing field
for them, and allow really both them and other businesses to
focus more on the core things that make American productive as
opposed to playing games with taxes. And I think that's one of
the biggest things.
The other part of course is the investment part. Small
businesses, I think would also like to not have to think about
potholes in the roads that they are using to get their product
to market or other sort of relaxed infrastructure skilled
workforce that make it hard to run a business.
Representative Pocan. And I agree with you on the supply
chain issues. If you ask my husband who's spending many extra
hours every night trying to find the same stuff that he used to
be able to find, he would vote for whoever figured that issue
out. That's absolutely a huge issue in the small business side.
You know another question is you know we talk about how I
think it was referred to as you know the average person is
going to pay more in taxes. Again, I like to do it with you
know people I might run into. So the median income in Wisconsin
for a family is $81,829.00. If they have two children, let's
say one's at childcare age, and one's in elementary school.
You know I looked at what the child tax credit does for
that family, and that's going to be $3,600.00 a year for one of
their kids and $3,000.00 for another kid they're going to
benefit from. The childcare provisions, if they're paying 7
percent of their income, that's going to be $5,700.00 instead
of the median $12,597.00--again I'm only counting one child.
You know I'm already up to $13,500.00 savings, I'm not even
counting the prescription drug savings, I'm not counting the
paid leave if they need that. Can you just address that as well
a little bit about the reality is for that median family in
Wisconsin, are they paying more like it's been inferred by some
of the crypt keepers--I'm trying talk about Halloween, and
scare people, or are they actually going to be benefiting
pretty well.
Ms. Huang. Yeah. They will be benefiting. And to your point
I've seen some numbers that sort of average out the tax
increase that a hedge fund manager will pay with the tax cut
that a teacher or one of the small business people would get.
And in fact, the vast majority of working families and small
businesses will be benefiting from these costs and tax cuts,
that's really only the very top of the income scale that faces
those tax increases.
Representative Pocan. Great thank you. And then one last
one. I'm going to throw out a little wild ball here, hopefully
our Chairman doesn't care. I find it amazing that Jeff Bezos
pays virtually nothing in taxes, that between 2006 and 2018 his
wealth grew by 127 billion, and he only paid 1.1 percent of his
income, or 1.1 percent of that in Federal taxes.
That year he claimed--one year he claimed a $4,000.00 child
tax credit. In 2018 he paid no Federal income taxes. You know
for a guy who has his employees having to carry bottles with
them when they're on the road to urinate in, tell me what do I
say to that average person in my district who is saying why is
it our tax code rewards someone like him?
What can we do to go after someone with that kind of wealth
in the long-term?
Ms. Huang. There's a major hole in the tax code that is
real income and that is income that just Bezos or anyone else
that's making 100 billion dollars in gains in their stock
prices can use to fund a pretty Huxtable lifestyle, and it
doesn't make sense that they face a lower tax rate their
income, but a teacher or a professional that's earning a
salary. So I completely agree we should be addressing that, and
that is one of the things a number of the proposals would do.
Representative Pocan. Thank you. I'm out of time. I
appreciate Mr. Chairman.
Chairman Beyer. Mr. Pocan thank you very much. We'll now
turn to a professional tax collector, the former Treasurer of
Kansas Mr. Estes.
Representative Estes. Well thank you Mr. Chairman. And
thank you for all of our witnesses for being here today.
Congress should be concerned more with the economic crisis
that's unfolding before us, an unprecedented worker shortage,
coupled with rising inflation and energy prices.
But still this bill forces through trillions of new
spending and is fixated on raising taxes. So much so that
President Biden will break his promise and raise taxes on those
who make less than $400,000.00. The Joint Committee on Taxation
found that two-thirds of Biden's corporate tax hike will be
felt by middle income taxpayers, including small businesses
that file taxes as individuals.
It's not honest to say this legislation, which the New York
Times describes as touching virtually every American at every
point in life from conception to old age, won't cost a dime.
That's clearly not true.
The many new social spending programs in this plan won't
create economic growth. The Joint Committee on Taxation
estimates it will actually lower Federal revenues by around 1.2
trillion dollars over the next decade. The administration's
budget even acknowledges that growth isn't a priority for them
in an ideal world.
It only forecasts a meager 2 percent GDP growth by 2023
with it dropping even lower until 2029. Any inside Washington
seem to think that just because a bill spends lots of money
it's automatically a good investment, but Washington has a
lousy track record of spending taxpayer money.
Out in the real world spending money doesn't magically make
money. A so-called good investment gets worse when you dig into
the actual details under the hood. Much of it will go to force
Americans to do what a bureaucrat in Washington decides to do
for them, like what car to drive.
The Green New Deal provisions would make working class
families across the U.S. pay more in taxes so the millionaires
in California can write off a new electric vehicle. The bottom
line of the agenda is not based on reality. It's going to crush
small businesses, even though it's got a pull tested slogan
like Build Back Better.
I hope that we get serious about the dire financial
situation our country faces. The U.S. took in more than 3.4
trillion dollars in revenue last fiscal year. If we took time
to prioritize spending that could very well be more than enough
to support the United States Government.
Dr. McBride, as you know the evidence shows that higher tax
rates do not always yield higher increases in revenue. For
example, despite the wide variation in Federal marginal tax
rates over the years in the `60s they were even as high as 90
percent. The share of Federal revenues remained relatively
steady in the post-World War II era, ranging between 15 and 20
percent of GDP.
Indeed, scholars at your organization have pointed out that
many studies show income reported by taxpayers falls as
marginal tax rate rise. Punitively high tax rates, not only
increase the insidious to shift or underreport income, they
also have a high economic cost. How should policymakers think
about the tradeoff between high tax rates, raising revenue and
economic performance?
Dr. McBride. Thank you. That's certainly a very important
thing to remember that it's like you said it's not that simply
raising rates, it leads to more revenue in every case.
Primarily the most extreme example demonstrating that is
capital gains, and this is why they're recognized from the
history of changing tax rates on capital gains that there's a
sort of a revenue maximizing tax rate of about 28-29-30 percent
in that range, and that's what the Joint Committee on Taxation
assumes as well. And this is widely understood among revenue
estimators.
So for instance, that is well below the 37 percent average
capital gains tax rate that would apply when factoring in the
State capital gains rate under the House bill. So another
example there is corporate taxes, and so here we can look at
across the developed world, countries that have generally been
lowering their corporate tax rates quite a lot in the last 40
years roughly in half, have come down you know from around you
know 40-50 percent corporate tax rates in most countries down
to closer to 20 percent on average.
And what has been the impact on revenue? You might think
that revenues would have collapsed across all of these
countries. In fact they have been fairly stable as a share of
GDP, and actually increased moderately in many cases, and
that's over this very long period of time.
So there's something going on there along the lines of what
you're talking about. Reported income goes down, the production
of income and incentives to generate income go down as marginal
tax rates increase. And it can be a very large effect.
Representative Estes. Thank you. I wish I had more time
because I want to talk a little bit about the budget deficit,
and the increase there, but thank you for enlightening us on
some of that, and Mr. Chairman I yield back.
Chairman Beyer. Thank you Mr. Estes, and hang in there if
we have time. It would be great to do a second round. But now
let me recognize the gentleman from southern California
Congressman Peters.
Representative Peters. Thank you Mr. Chairman. First of all
I just want to say when I was a student at NYU Law School, I
took a couple tax classes. I thought it was so fascinating that
I actually went into tax law while in practice, and that was a
huge mistake. So I'm saying that the academics are a lot more
fun than the practice, so my free advice is don't leave.
But I had a question on this topic which is about taxing
the wealthy. One of the objections I had to the Trump tax cuts,
I didn't disagree with every part of it, because I thought the
corporate rate needed to be adjusted, and I thought we had to
fix some international tax things, but to give all that money
to wealthy people who didn't need it.
And we saw that it did not increase wealth according to the
President's projections. We saw also that the inequality has
continued to rise. And I just want to know what's your take on
the long-term economic impact on economic growth or job
creation if we were to increase taxes on capital gains for high
income earners?
It seems to be just to set that up is that wealthy people
have all the stuff that they need to buy right? They got their
fancy refrigerator, they got the cars that they need, they
might have a second house. There's no stimulative effect to
giving them money. How should we tax them, and what's wrong
with raising the capital gains rate along the lines that the
President suggested?
Ms. Huang. It's a great question because it comes up over
and over again the idea that this would damage investment which
is just simply not worn out by the reality. But the model, the
sort of trickle down idea that increasing taxes on very high
end, high wealth people would somehow sort of make it square
down to workers, that model can break down on each and every
link.
There's not that much that tax cuts are very effective at
spurring private investment. Cutting taxes can increase tax
opportunity for investment, but that can also mean that people
need to save and invest less to sort of meet their savings
goals. And also if the taxes are following on excess returns
from market power rates, and other sort of special returns,
there's not going to be a hit to the overall size of
investment.
So you see pretty small private investment changes in
response to tax changes, and that can be overwhelmed by the
effect on public saving and investment because there is a very
large fiscal cost.
Representative Peters. And I think also that the CBO does
assess that even after all the growth projections haven't been
met, the add to the deficit from that was 1.9 trillion dollars,
which has a real drag effect on the investment as you know.
Dr. Clausing, I want to just talk to you a little bit about
corporate tax revenues. I would have definitely agreed with Mr.
McBride that 35 percent was too high. I thought we were
uncompetitive. At the time the business roundtable was asking
for 25 percent, so was Dave Camp, who was then the Chairman of
the Ways and Means Committee, and President Trump took it down
to 21 percent.
Now there's talk about raising it back up to 25 say, and
business community is saying that the effective rate would be a
lot higher because there's been base broadening. Can you tell
me how we should analyze that? Is that true? And how should
that matter as we analyze what the appropriate corporate tax
treatment is?
Dr. Clausing. Well I think there's a general principle,
it's very useful to have a broad base in part because you don't
need to raise the rate as high if you're taxing all the income.
If you tax some of the income at a high rate and some of the
income at a low rate, right, then the income kind of rushes
over to the place where the rate is lower.
So in several aspects of these tax proposals we've tried to
even the tax treatment of different types of income. So whether
it's for capital or labor; for a multinational company, whether
it's foreign or domestic income; for a small business, whether
they're paying their taxes, or whether they're evading taxes.
And so I think that this is a very important feature.
It's certainly the case that if the base is broader all
things equal, at any particular tax rate that more tax will be
paid. The question is whether that is a bad thing. You know I
think that the corporate taxes----
Representative Peters. Wouldn't it be just--I'm going to
run out of time, so can you assess what the effective rate
would be if we were looking at 25 percent before, now there's
base broadening. What if we raise it up to nominally 25
percent, what are we talking about for an effective rate?
Dr. Clausing. Yes I think part of the difficulty there is
that the actual statutory rates doesn't bear a lot of
resemblance to the true tax rate paid by companies. So, for
instance, the Joint Committee on Tax is telling you right now
that U.S. companies are paying about 8 percent, the big
multinationals right.
If you ask them to pay more it will be more than 8 percent,
but 8 doesn't really reflect current law which is 21 for
domestic, and 10 and 1/2 for foreign right? So while the Biden
proposals would certainly raise effective rates, they would
still remain competitive with those of peer countries. Right
now we're way below the effective rate in peer countries.
Representative Peters. Thank you. My time has expired. I
want to just commend your testimony from 2017 about carbon
taxes, maybe we have time to do that later.
Chairman Beyer. Thank you Congressman Peters very much. If
the Senator Cruz is with us, you will be recognized next.
Senator Cruz. Thank you Mr. Chairman. Thank you to the
witnesses who are here. Dr. McBride, President Biden and the
democrats so-called Build Back Better Act, as reported by Ways
and Means is estimated to reduce long-run GDP by .98 percent,
which in today's dollars amounts to about 332 billion dollars
of lost output annually each and every year.
It's also estimated that the plan would in the long run
raise about 152 billion in new tax revenue. That being said for
every dollar of revenue raised economic output would fall by
$2.18. Your team has done extensive work analyzing these
proposals. What are your thoughts on the potential impact of
the democrat's plan on the U.S. budget deficit on America's
long-term fiscal health?
Dr. McBride. Thank you for that question. It's very
difficult to pinpoint the impact on the deficit when we don't
have estimates from the CBO or anyone else on all of the
spending programs that are being discussed in this
reconciliation bill.
What we have assumed for our purposes of estimating the
impact of the deficit is we have assumed the top line number of
3 and 1/2 trillion, and there's actually deficits over
the 10 year budget window, and in the out years no impact on
the deficit based on compliance with the Byrd Rule of the
Senate.
And but event there due to the impacts on the economy, the
reduction in wages, which is a major tax base for the Federal
Government, and other tax bases, that so-called dynamic
revenue, that accounts for all this reduction in the size of
the economy, falls to only about 800 billion over the 10 year
window.
And so you can tell that is considerably lower than the top
line spending numbers that are being discussed on the order of
2 trillion plus. And so we do find it does increase deficits in
the 10 year window, and those deficits do matter. In our
modeling the deficits, the increasing deficits means that if we
continue with a historical pattern of a lot of our national
debt is bought up by foreigners, and assuming that continues to
hold, that means foreigners own a larger and larger share of
U.S. assets, and a larger amount of income in the form of
interest payments goes to foreigners, as a result of the
increase in the debt. There's a reduction in U.S. income that's
measured by sort of gross national product.
Senator Cruz. So Dr. McBride a minute ago you just
described the cost of the Bernie Sanders socialist budget as
3.5 trillion. President Biden rather remarkably has claimed the
cost of it is zero dollars. I'm reminded of what Nobel Prize
winning economist Milton Friedman said, which is ``there's no
such thing as a free lunch.''
How can you possibly reconcile this administration's claim
that a 3.5 trillion dollar bill costs zero dollars?
Dr. McBride. Right. I think that the charitable
interpretation there is that it has no impact on the deficit,
but as I've just discussed it does have an impact on the
deficit when you account for the reduction in the size of the
economy, the reduction of the tax bases--the big tax bases.
Senator Cruz. But so you found that if I heard your number
correctly a little bit over 2 trillion dollars of impact, is
that right?
Dr. McBride. Thereabouts.
Senator Cruz. Okay. Let me ask you also President Biden has
repeatedly pledged that the democrats would not increase taxes
on anyone making less than $400,000.00 a year, and yet this
Bernie Sanders socialist budget does exactly that, and in fact
Congress's own Joint Committee on Taxation--so not a republican
organization. The Joint Committee on Taxation shows that all
these promises are unequivocally false, and that tax rates will
increase on virtually every income level--taxpayers earning
$40,000.00 a year, $50,000.00, $50,000.00 to $75,000.00,
$100,000.00.
Pretty much everyone earning $40,000.00 a year or more will
see their taxes go up. Can you explain why that is, and we're
talking about 85 percent of taxpayers that either see no
impact, or see their taxes increase. Is that right?
Dr. McBride. That's right. Right. In particular for
instance, the group earning between $100,000.00 and
$200,000.00, most of those taxpayers would see a tax increase
over the course of the next decade as a result of this, that's
according to----
Senator Cruz. But how? Please explain how.
Dr. McBride. The main reason is the corporate tax. While
it's being depicted as paid only by the wealthy or
shareholders, neither of those are completely true. First of
all let's just stick to the idea that it's paid by
shareholders. The first thing to know about that is not all
shareholders are rich. Many of them are retirees earning
considerable less than $400,000.
So as a result the Joint Committee finds that even in 2023,
very early in the budget window, although that year they assume
that all of the corporate taxes are paid by shareholders, they
find that even there in all income groups, all of those deciles
all the way down the scale, there are shareholders that own
U.S. equities, and they own them in all sorts of forms.
But the fact is they are affected by those corporate taxes
through that channel. And the second big channel is through
worker's wages. And so that effect takes longer to happen, but
it happens through reduced productivity as a result of
corporate taxes.
Reduced productivity means lower wages over time. And so
that has an effect of further increasing the tax burden
ultimately on workers all up and down the income scale.
Senator Cruz. Thank you.
Chairman Beyer. Senator, thank you very much. By the way
``there's no such thing as a free lunch'' was actually used by
Robert Heinlein in 1966, nine years before the Milton Friedman
thing.
Senator Cruz. I stand corrected Mr. Chairman.
Chairman Beyer. In the first century, so pretty cool.
And with that Senator thank you very much. Now recognize my
friend from Texas Mr. Arrington for his questions.
Representative Arrington. Thank you Chairman. Thank you
witnesses, and I'm driving through God's country out here in
West Texas, and so if I----
Chairman Beyer. I think you just got muted there
Congressman Arrington.
Representative Arrington. Can you hear me now?
Chairman Beyer. You're back.
Representative Arrington. Okay. Look this notion of
fairness in the tax code is intriguing to me, and I want to
direct this to Dr. McBride to make sure that I'm using accurate
numbers here. But I think some top 1 percent of the income
earners who earn 20 percent of the total income in the country
pay 40 percent of the taxes doesn't seem fair to me.
I think some top 10 percent of the income earners pay 75 to
85 percent of the taxes. I guess my point is the tax code is
pretty darn progressive, and in fact even though the TCJA, the
Tax Cuts and Jobs Act was disparaged for a giveaway to the
rich, we actually have a more progressive tax code post
Republican tax cuts.
Dr. McBride could you confirm and shape up some of those
numbers and percentages I was throwing out there? Do we have
one of the most progressive tax systems in the developed world?
Dr. McBride. That is correct. That was an assessment by the
OECD a few years ago. I have not seen a new assessment as to
how the U.S. compares to other countries, but safe to say the
U.S. has not changed the progressivity of the tax code a great
deal even after the Tax Cuts and Jobs Act, that's according to
David Splinter at the Joint Committee on Taxation, and found
that progressivity did not increase measurably, did not change
measurably after the Tax Cuts and Jobs Act.
Redistribution--a separate concept, did change. Taxes came
down, it was a tax cut, and so redistribution in the tax code
came down, but the actual progressivity as it is measured did
not change appreciably as a result of the Tax Cuts and Jobs
Act.
Mr. Arrington. I don't know you know what the definition of
fairness in a tax code vis-a-vis the democrat Reconciliation
Tax and Spend Bill, but to have 10 percent of Americans paying
80 percent of the freight in terms of the cost of our
government doesn't sound very fair to me, especially if you
have 40 percent roughly, or over 40 percent paying zero taxes.
And I think that's bad policy, not just on the inequity of
that ratio, but I want every American to have a stake in the
future of our country. I want ownership. I think that's
healthy, it's good, and I think you can make it so that it's
reasonable to relative to their income.
Same thing on the whole corporate tax rate. I don't know
what the tax rate--I don't have a magic number. I'm not
dogmatic about it. It's not the gospel to me. I'm not
theological about, and religious about this. I just--one place
I start is what's everybody else taxing their job creators and
their risk takers, and their businesses?
Because this is a global economy, and I don't want to
hamstring the whole team while we're competing in away games
for customers in markets around the world.
And so that's kind of where I start. So it seemed pretty
reasonable to me to go from the highest corporate tax rate in
the free world, the developed world, to something more
competitive, not the best. So when we did that we had 4,000
inversions in the United States, the decade leading up to the
tax cuts.
We've had no inversion since then. If you talk to biotech
it's just one sample of the economy. Three out of four biotech
companies in acquisitions were being purchased by foreign
biotech companies, or venture capital companies, and today that
trend is completely reversed.
So I don't think that's an accident that we're more
competitive as a result of reducing the tax burden on our job
creators. But here's my question on the corporate tax side
because this is disconcerting to me, but it's also because of
the effects, but it's also interesting that we can't all see
this the same because the Tax Policy Center, which is more left
leaning, and the Joint Committee on Taxation, which is supposed
to be neutral arbiter of these things--tax policies, and you
all have said that the tax increases on corporations, the vast
majority--70 percent of it will be borne by working people with
higher prices of goods and services in the form of lower wages
and benefits.
I mean every think tank, and every expert analyses of the
policy left, and right is saying that same thing. Am I getting
that right Mr. McBride? And I yield back, I probably went over
my time, sorry Mr. Chairman.
Chairman Beyer. I know you don't have the clock in the car,
I understand Congressman.
Dr. McBride. That's right. And that's essentially right
that the Joint Committee on Taxation, the Treasury Department,
all major scoring groups such as ours, the Tax Policy Center,
Penn Wharton, they all assume that a significant portion of the
corporate tax is borne by workers.
And so that explains why the Joint Committee finds that so
many households, some tens of millions of households earning
less than $400,000.00 would ultimately bear the burden of
corporate taxes.
Chairman Beyer. Because we have gone so far over, let me go
to Ms. Huang for her thoughts on this.
Ms. Huang. Just to sort of effect a clarification, it is
true that all of the major estimators do assume that ultimately
some of the corporate tax is borne by non-shareholders. But
mainstream estimates are roughly 20 to 25 percent, not 75
percent. And that's what the JCT estimates.
It's also really important to note that the intuition that
sits behind the models that assumes that this happens. ASO
assumes that the cost of any corporate tax cut is fully paid
for because otherwise any private investment change that you
see in those tables would get offset by the public debt going
up, and interest rates going up, and therefore national saving
and investment going down.
So one of the things that's really important to know is
that most tables don't show the ultimate cost of the corporate
tax cuts even though they assume they'll be paid for. So when
you try and figure out where the workers actually do benefit,
you really need to check who ends up bearing the ultimate cost.
And that means taking into account things like in the 2017
tax law, the long-run costs of the permanent cuts was offset by
tax changes that increased taxes for individuals across the
board after the 10 year budget window, and that would have made
more workers worse off as opposed to better off even in those
models.
Chairman Beyer. Thank you very much. I wish we could talk
about this all afternoon, but many things are going on
including missing our seven democrats. So I want to thank each
of our witnesses for their expert contributions.
I always marvel how beautifully trained economists with
PhD's can so disagree on the same sets of statistics, but
asking the wealthy and the big corporations to pay their fair
share is an essential part of the broader package to help small
business thrive, cut taxes for working parents and invest in
education and healthcare, and policies for the workforce.
So Congress has a real opportunity to level the playing
field for American small businesses and workers while also
supporting long-term economic growth, and promoting labor force
participation. So thank you to each of our panelists for their
contributions to this timely and important debate.
This once in a generation investment in America's future
will create long-term broadly shared economic growth,
rebalancing the scale to Build Back Better. And as we do this
important work, we're going to rely on your expertise and good
faith. So thank you as well to all my colleagues for being a
part of this discussion and sharing your wisdom.
The record will remain open for 3 business days, and this
hearing is now officially adjourned.
[Whereupon, at 3:51 p.m., Wednesday, October 6, 2021, the
hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Donald Beyer Jr., Chairman,
Joint Economic Committee
recognitions
This hearing will come to order. I would like to welcome everyone
to the Joint Economic Committee's hearing entitled ``Building Back
Better: Raising Revenue to Invest in Shared Prosperity.''
I want to thank each of our truly distinguished witnesses for
sharing their expertise today. Now, I would like to turn to my opening
statement.
statement
The Biden Administration's Build Back Better plan will cut taxes
for working families, help small businesses, and invest in America's
long-term economic prosperity, while asking the wealthy and big
corporations to pay their fair share. Today, Federal revenue is just
16.8 percent of the economy, almost an all-time low, and asking the
wealthy and big corporations to contribute more to public revenue is
consistent with supporting long-term economic growth.
The Build Back Better plan will help provide American small
businesses with a level playing field to compete with multinational
corporations. The Treasury Department projects that 97 percent of small
businesses will be protected from increased taxes and many will get a
tax cut from reducing the corporate tax to 18 percent for income under
$400,000.
The Build Back Better plan promotes global competitiveness by
working to end the race to the bottom on corporate taxes, letting
American businesses compete on the basis of bringing the best products
to market at the lowest price, instead of competing on who can avoid
paying taxes.
As a small businessman for almost five decades, I know that paid
family leave will help small businesses retain workers. When I had
workers who got sick or needed to care for a sick child, we provided
paid leave to our employees because we would never leave workers to
choose between a paycheck or taking care of themselves or a loved one.
At some point during their lives, all workers will need to take
time away from work. By establishing a Federal paid leave program,
Build Back Better helps small businesses cover those inevitabilities
and reduces the cost of turnover, which is why so many small businesses
have come out in support of it. Small businesses will also benefit from
extending the Work Opportunity Tax Credit, which will give businesses
up to $5,000 to hire qualifying individuals, including eligible
veterans.
Asking the wealthy and big corporation to pay their fair share is
consistent with supporting long-term economic growth. After the Obama-
Biden Administration repealed the Bush tax cuts for the very wealthy in
2013, the economy added 8 million jobs in President Obama's second
term. Job growth slowed under President Trump, as the Trump tax cuts
delivered a windfall for the wealthy, creating record stock buybacks
and adding hundreds of billions to the deficit.
While our friends across the aisle will likely claim that asking
the wealthy and big corporations to pay their fair share will hurt
economic growth, the evidence does not back them up. A congressional
Research Service report found that ``both labor supply and savings and
investment are relatively insensitive to tax rates.'' In addition,
improving IRS enforcement will increase revenue without raising rates,
while ensuring that businesses cannot gain advantages over their
competitors by cheating on their taxes.
We know that investing in working families, communities, and
innovation is the key to broadly shared, long-term economic growth. And
this is exactly what the Build Back Better plan would do.
Analysis by the Tax Policy Center shows that the Build Back Better
revenue provisions passed out of the House Ways and Means committee
would abide by President Biden's pledge not to raise taxes on those
making under $400,000 a year. In 2022, households making under $500,000
would get their direct taxes cut, on average. Middle-income parents
will get a tax cut of about $3,000 on average.
Extending the enhanced Child Tax Credit and expanded Child and
Dependent Care Tax Credit, as proposed under Build Back Better, would
help families pay household expenses and generate long-term economic
benefits. The Joint Economic Committee estimated that advance payments
of the CTC will generate $19.3 billion in local economic activity each
month, creating jobs in local communities.
Using the revenue raised from making multinational corporations and
the wealthiest pay their fair share, Build Back Better would help
families access affordable childcare and paid family leave. These two
supports are both critical to helping parents--and particularly
mothers--remain engaged in the labor market--and we know that
increasing labor force participation is key to driving long term and
sustainable economic growth.
Under President Biden, almost 4.5 million people have returned to
work and unemployment has dropped to 5.2 percent. In the first two
quarters of 2021, real GDP grew at over 6 percent, and the Federal
Reserve projects 5.9 percent real GDP growth this year. Core CPI
inflation was just 0.1 percent in August, even as real wages grew at
0.4 percent.
Passage of Build Back Better and the bipartisan infrastructure bill
will cement these economic gains, improve productivity, lower
inflationary pressures, and create long-term growth. Moody's Analytics
projected that passing both bills will increase GDP growth in 2022 to
5.3 percent. Similarly, the Economic Policy Institute projects that the
two bills would add 4 million new jobs, including 556,000 manufacturing
jobs and 312,000 construction jobs.
For too long, the wealthy and big corporations have avoided paying
their fair share. We have an opportunity now to rebalance the scale and
invest in America's future to create long-term, broadly shared economic
growth.
__________
Prepared Statement of Hon. Mike Lee, Ranking Member,
Joint Economic Committee
Before the pandemic disrupted Americans' work lives and social
connections, tax cuts and deregulation supported a thriving economy
that delivered broad benefits to families and workers. The Tax Cuts and
Jobs Act of 2017--which provided historic relief to working and middle-
class American families and led to higher wages, better benefits, and
new employment opportunities across the country--was crucial to that
prosperity.
Our booming economy provided some of the largest benefits to those
Americans who needed it the most. Unemployment for Hispanic Americans,
Black Americans, and Asian Americans fell to the lowest rates on
record.\1\ Unemployment for women dropped to a near 65 year low. And
low-income workers saw their wages rise at some of the fastest rates.
All told, the wealth of the bottom 50 percent of Americans increased by
over 70 percent in the three-years prior to the pandemic.\2\
---------------------------------------------------------------------------
\1\ https://www.bls.gov/cps/
\2\ https://www.federalreserve.gov/releases/z1/dataviz/dfa/
distribute/chart/#range:2006.1,2021.1
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In early 2020, more than 80 percent of working age Americans were
employed and wages continued to rise.\3\ Pro-growth policy reform
brought the economy roaring to life in a way that few forecasters
thought possible. This success demonstrates an important truth--
Americans benefit from lower taxes, less regulation, and more freedom.
---------------------------------------------------------------------------
\3\ https://fred.stlouisfed.org/series/LNS12300060
---------------------------------------------------------------------------
Unfortunately, we have come here today because the Biden
Administration and Democrats in Congress want to squeeze the American
people with higher taxes and more regulation. They have proposed a $3.5
trillion tax-and-spend blowout, one that would increase Americans'
taxes by over $2 trillion. It would be the largest tax increase in my
lifetime and would substantially expand the Federal Government's
footprint into our homes, into our businesses, and across our
economy.\4\
---------------------------------------------------------------------------
\4\ https://www.heritage.org/taxes/commentary/8-things-you-need-
know-about-democrats-tax-increase-bill
---------------------------------------------------------------------------
Let's be clear--the major winners from the Democrats' plan are
special interests and beltway bureaucrats.
Our economy is still recovering from the pandemic; now is one of
the worst times to saddle our economy with higher taxes. The recovery
has stopped accelerating and American families are being hit by higher
prices for essential goods--things like groceries, housing, and
gasoline keep getting more expensive.
Inflation is rising at its fastest pace in three decades, and it is
making it harder to make ends meet. Wage increases are being swamped by
higher prices and job growth is stalling. Democrats' reckless tax-and-
spend boondoggle will only make things worse.
Here's what we know this tax plan would do to America's families,
workers, and businesses.
It would raise taxes on American families--despite President
Biden's pledge to the contrary. The nonpartisan Joint Committee on
Taxation and left-leaning Tax Policy Center both agree the plan would
hike taxes on low- and middle-income families making less than $400,000
a year.
The Democrats' tax plan would also drive jobs for American workers
overseas. It would raise the Federal corporate tax rate to 26.5
percent, making the cost of doing business in the U.S. higher than in
Canada, Mexico, Japan, the United Kingdom, Germany, France, and China.
American workers would pay the price--they would pay in lost jobs,
slower wage growth, and less investment in things like domestic
manufacturing, and innovative research and development. In 10 years,
two-thirds of the tax burden from this corporate tax increase would be
shouldered by low- and middle-income workers.\5\
---------------------------------------------------------------------------
\5\ https://www.finance.senate.gov/ranking-members-news/analysis-
biden-tax-hikes-hit-middle
---------------------------------------------------------------------------
Perhaps worst of all, the Democrats' tax plan would embolden
Washington to pick winners and losers rather than allowing
entrepreneurs to meet the needs of American consumers. This is about so
much more than penalizing successful Americans with even higher taxes;
this is about putting more of Americans' resources under the control of
Washington politicians.
Democrats' tax plan would cost American families, workers, and
businesses. It would mean less innovation, lower wages, and fewer jobs.
It would increase the size and scope of the Federal Government. It
would make our country less prosperous, less fair, and less free.
We know what works. Keeping taxes low helps to support a thriving
economy that benefits all Americans. We should return to the policies
that made the pre-pandemic economy so successful for so many Americans.
Congress should keep taxes low and predictable by making the reforms in
the Tax Cuts and Jobs Act permanent, and restrain runaway spending by
setting clear and enforceable rules for fiscal discipline.
We cannot tax and spend our way to shared prosperity. Instead, we
need to stop spending indiscriminately and make America the best place
in the world to do business, pursue happiness, and earn success.
Thank you.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Articles for the Record Submitted by Representative Schweikert
1. Should the U.S. Copy Denmark's Social Welfare Policies?
https://taxfoundation.org/denmark-social-welfare-policies/.
2. The Anti-Poverty, Targeting, and Labor Supply Effects of the
Proposed Child Tax Credit Expansion
https://bfi.uchicago.edu/wp-content/uploads/2021/10/BFI--WP--2021-
115-1.pdf.
__________
Response from Dr. Clausing to Question for the Record Submitted by
Senator Lee
Dr. Clausing:
In your testimony, and in past work, you have each emphasized the
importance of addressing income and wealth inequality. Yet, there is a
contingent of lawmakers who are openly advocating for either lifting or
repealing the $10,000 cap on the SALT deduction. Ironically, the
success of the Build Back Better Act may hinge on whether changes to
the cap are included.
According to the Brookings institution, ``the SALT tax deduction is
a handout to the rich.''\1\ Eliminating or raising the cap on this
deduction is a policy change that would not meaningfully benefit
middle-class households--or even upper-middle class households.
Repealing the SALT cap would cost hundreds of billions of dollars in
tax revenues and the top 5 percent of households would receive over 80
percent of the benefit.\2\
---------------------------------------------------------------------------
\1\ https://www.brookings.edu/blog/up-front/2020/09/04/the-salt-
tax-deduction-is-a-handout-to-the-rich-it-should-be-eliminated-not-
expanded/.
\2\ https://www.cbpp.org/research/Federal-tax/repealing-salt-cap-
would-be-regressive-and-proposed-offset-would-use-up-needed.
What is your perspective on lifting or repealing the SALT
deduction cap? Would including this change improve inequality or make
---------------------------------------------------------------------------
it worse?
The Administration did not propose changes to the SALT deduction
cap. However, any tax law changes should be evaluated on a holistic
basis that considers the aggregate effects of all of the component
parts. Although repealing the SALT deduction cap in insolation would
reduce the progressiveness of the tax code between now and 2025 (the
cap expires after 2025), any such repeal could be coupled with other
reforms that make the tax system as a whole more progressive. As one
exam pie, the SALT cap was implemented in the context of a tax law
change (the Tax Cuts and Jobs Act of 2017) that made our overall tax
system less progressive. Likewise, a repeal of the cap could easily
occur in the context of a tax law change that makes our overall tax
system more progressive.
__________
Response from Ms. Huang to Question for the Record Submitted by Senator
Lee
Ms. Huang:
In your testimony, and in past work, you have each emphasized the
importance of addressing income and wealth inequality. Yet, there is a
contingent of lawmakers who are openly advocating for either lifting or
repealing the $10,000 cap on the SALT deduction. Ironically, the
success of the Build Back Better Act may hinge on whether changes to
the cap are included.
According to the Brookings institution, ``the SALT tax deduction is
a handout to the rich.'' \1\ Eliminating or raising the cap on this
deduction is a policy change that would not meaningfully benefit
middle-class households--or even upper-middle class households.
Repealing the SALT cap would cost hundreds of billions of dollars in
tax revenues and the top 5 percent of households would receive over 80
percent of the benefit. \2\
---------------------------------------------------------------------------
\1\ Christopher Pulliam and Richard Reeves, ``The SALT deduction is
a handout to the rich. It should be eliminated not expanded,''
Brookings Institution, September 4, 2020, https://www.brookings.edu/
blog/up-front/2020/09/04/the-salt-tax-deduction-is-a-handout-to-the-
rich-it-should-be-eliminated-not-expanded/.
\2\ Chuck Marr, Kathleen Bryant, and Michael Leachman, ``Repealing
`SALT ' Cap Would Be Regressive and Proposed Offset Would Use up Needed
Progressive Revenues,'' CBPP, December 10, 2019, https://www.cbpp.org/
research/Federal-tax/repealing-salt-cap-would-be-regressive-and-
proposed-offset-would-use-up-needed.
What is your perspective on lifting or repealing the SALT
deduction cap? Would including this change improve inequality or make
---------------------------------------------------------------------------
it worse?
Thank you for your question, Senator Lee.
The Brookings estimate and Center on Budget analysis of the direct
distribution and revenue impact of repealing the SALT cap are sound.
In the 2017 tax law, however, capping the SALT deduction was used
to help offset the cost of tax cuts that were, overall, even more
tilted to the wealthiest filers than the benefits of the SALT
deduction, so this was not a sound trade.
However, repealing the SALT cap now in the context of a package
with a limited size is likely to mean less robust investments in other
policies like the Child Tax Credit that directly benefit low- and
moderate-income families, so that, too would be an unsound trade. \3\
---------------------------------------------------------------------------
\3\ Ibid.
---------------------------------------------------------------------------
Some proponents of repealing the SALT cap are concerned that the
cap constrains the ability of states to raise progressive revenues and
fund State investments with widely shared benefits. That is a
reasonable concern, especially because in 2017, some supporters of
capping the SALT deduction explicitly hoped that it would limit State
revenue collection and investments.
However, the evidence on the SALT deduction's impact on State
budgets is inconclusive.\4\ For example, since the 2017 tax law went
into effect, New Jersey has raised income taxes for households with
incomes over $1 million, New York has extended and increased an
existing millionaires' tax, and three states (Connecticut, New York,
and Washington state) have increased real estate transfer taxes on
high-value homes.\5\ While it impossible to know precisely what states
would have done without the cap in place, this does at least show that
states can continue to raise progressive revenues and invest with the
cap in effect.
---------------------------------------------------------------------------
\4\ Congressional Research Service, ``Tax Expenditures: Compendium
of Background Material on Individual Provisions,'' Senate Committee
Print #116-53, December 2020, https://www.govinfo.gov/content/pkg/CPRT-
116SPRT42597/pdf/CPRT-116SPRT42597.pdf.
\5\ Wesley Tharpe, ``New Jersey Budget Deal Advances Equity With
Millionaires' Tax and More,'' CBPP, October 7, 2020, https://
www.cbpp.org/blog/new-jersey-budget-deal-advances-equity-with-
millionaires-tax-and-more; Ashlea Ebeling, ``New York's ` Temporary'
Millionaire Tax Extended 5 More Years,'' Forbes, April 9, 2019, https:/
/www.forbes.com/sites/ashleaebeling/2019/04/09/new-yorks-temporary-
millionaire-tax-extended-5-more-years/?sh=53926abe59bd; Carmen
Reinicke, ``New York is raising taxes for millionaires. Will other
states follow?'', CNBC, April 8, 2021, https://www.cnbc.com/2021/04/08/
new-york-is-raising-taxes-for-millionaires-will-other-states-
follow.html; Michael Leachman and Samantha Waxman, ``State `Mansion
Taxes' on Very Expensive Homes,'' CBPP, October 1, 2019, https://
www.cbpp.org/research/state-budget-and-tax/state-mansion-taxes-on-very-
expensive-homes.
---------------------------------------------------------------------------
Further, even if repealing or weakening the SALT cap were to make
it somewhat easier to raise revenues for investments at the State
level, that is likely to be a far less effective and cost-efficient way
of delivering economic and budgetary benefits to states than
alternatives proposed in President Biden's Build Back Better agenda.
For example, the proposed package makes critical investments in
infrastructure, green jobs, community colleges and other areas of deep
need.\6\ These investments would likely be far more effective, per
dollar spent, at boosting strong and inclusive economic growth in
states. Along with investments in areas like the CTC and child and
elder care, these would be a far better use of the revenues raised by
progressive tax changes.
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\6\ Adam S. Hersch, `` `Build Back Better' agenda will ensure
strong, stable recovery in coming years,'' Economic Policy Institute,
September 16, 2021, Elizabeth McNichol, ``It's Time for States to
Invest in Infrastructure,'' CBPP, updated March 19, 2019, https://
www.cbpp.org/research/state-budget-and-tax/its-time-for-states-to-
invest-in-infrastructure.
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__________
Response from Dr. Edelberg to Question for the Record Submitted by
Senator Lee
Dr. Edelberg:
In your testimony, and in past work, you have each emphasized the
importance of addressing income and wealth inequality. Yet, there is a
contingent of lawmakers who are openly advocating for either lifting or
repealing the $10,000 cap on the SALT deduction. Ironically, the
success of the Build Back Better Act may hinge on whether changes to
the cap are included.
According to the Brookings institution, ``the SALT tax deduction is
a handout to the rich.'' Eliminating or raising the cap on this
deduction is a policy change that would not meaningfully benefit
middle-class households--or even upper-middle class households.
Repealing the SALT cap would cost hundreds of billions of dollars in
tax revenues and the top 5 percent of households would receive over 80
percent of the benefit.
What is your perspective on lifting or repealing the SALT
deduction cap? Would including this change improve inequality or make
it worse?
My colleagues at the Brookings Institution, Christopher Pullam and
Richard Reeves,\1\ have examined the state and local tax (SALT)
deduction cap and find that under the current SALT cap, over \3/4\ of
the tax benefit goes to the top quintile of households by income.\2\
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\1\ Pulliam, Christopher and Richard Reeves. 2020. ``The SALT tax
deduction is a handout to the rich. It should be eliminated not
expanded.'' Up Front (blog), Brookings Institution, Washington, DC,
September 4, 2020.
\2\ Urban-Brookings Tax Policy Center. 2018. ``Table T18-0143:
Repeal $10,000 Limit on Deductible State and Local Taxes; Baseline:
Current Law; Impact on Tax Revenue, Number of Itemizers, and Individual
Alternative Minimum Tax (AMT), 2018-28.'' Urban-Brookings Tax Policy
Center, Washington, DC.
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Those authors point out that the main argument for the SALT
deduction ``is that it encourages states to spend more by making it
easier for them to tax more.'' Many of the State and local policies
that are implicitly subsidized through the SALT deduction are
progressively structured and aim to support disadvantaged households,
despite the benefits of SALT tax relief disproportionately accruing to
those with the highest incomes. However, repealing the SALT deduction
cap is not the optimal policy approach if the goal is to provide fiscal
support to fiscally active State and local governments. If the cap were
raised or fully eliminated, the tax benefit would flow overwhelmingly
to households at the top of the income distribution while providing
little benefit to the after-tax incomes of middle-class households.
Moreover, proposals to repeal the SALT cap that also include revenue
raising offsets, such as increasing the top marginal income tax rate,
risk exhausting a finite source of potential revenue while failing to
address any of our Nation's critical priorities. A better approach
would provide additional Federal aid directly to states and localities
in the form of grants to better target funding toward key priorities
like K-12 education, infrastructure, and health care.
__________
Response from Dr. McBride to Question for the Record Submitted by
Senator Lee
Dr. McBride:
We know that pro-growth policies, like tax cuts and deregulation
benefit low-income and otherwise disadvantaged Americans by creating
strong labor markets and a healthy economy. Americans experienced these
benefits following the 2017 tax cuts. Unemployment was historically
low, including for women, Black Americans, and Hispanics. In my home
state of Utah, per capita income grew 17 percent in the 3-years before
the pandemic and some of the largest wage gains benefited the lowest
income Americans. This strong pre-COVID economy is a testament to the
power of getting the government out of the way and unleashing American
ingenuity.
Key pieces of the Democrats' plan are targeted at
reversing the very policy changes that helped support our strong
economy. Can you speak briefly to the successes of the 2017 Tax Cuts
and Jobs Act and then describe how these new tax increases might
undermine some of the gains that Americans experienced?
A central goal of the Tax Cuts and Jobs Act (TCJA) was to reduce
the tax burden on business investment, which it did primarily by
reducing the corporate tax rate as well as tax rates on pass-through
business income among other measures. Basic economic theory and much
empirical evidence predicts investment increases when the after-tax
return on investment increases, leading to a larger capital stock, more
productivity, higher wages, more jobs, and faster economic growth.
Indeed, the Congressional Budget Office (CBO) projected that the
effects of the TCJA would ``include higher levels of investment,
employment, and gross domestic product (GDP).'' By most measures, the
actual performance of the economy post-TCJA exceeded CBO's forecasts,
until the pandemic hit two years later. CBO forecasted in June 2017,
prior to enactment of the TCJA in December 2017, that business
investment (i.e., real nonresidential fixed investment) would grow by
4.8 percent from the fourth quarter of 2017 to the fourth quarter of
2019, but it actually grew 9.4 percent--even exceeding the CBO's post-
TCJA forecast from April 2018 of a 9.2 percent increase. Employment
grew about 3 percent over the two years following TCJA, roughly
tripling CBO's pre-TCJA forecast and matching CBO's post-TCJA forecast.
Growth in wages and GDP also exceeded CBO's pre-TCJA forecast, although
not to the extent forecast post-TCJA.
While there were certainly other non-tax factors in play--e.g.,
deregulation may have added to investment and the trade war may have
subtracted from investment--tax reform should not be dismissed as a
major factor driving the higher performance of the economy after TCJA.
Proposals to unwind major pro-growth elements of TCJA, by raising tax
rates on corporate and individual income, would push the economy in the
other direction, reducing incentives to work, save, and invest, and
leading to fewer jobs, lower wages, and a smaller economy than would
otherwise exist.
__________
Response from Dr. Clausing to Questions for the Record Submitted by
Senator Warnock
Small Businesses (Dr. Kimberly Clausing)
According to polling done by the Small Business Majority, nearly
three-quarters of small businesses say the current tax system favors
big businesses over small businesses and that their business is harmed
when big corporations use loopholes to avoid taxes. If you're a small
business, such as those structured as a pass-through business, I am
sure it can sometimes feel like you are swimming upstream.
1. What will it mean for the economy to enact policy that
effectively raises the necessary revenue without raising taxes on small
businesses?
For pass-through businesses, no tax increases will occur if the
owners are below the $400,000 threshold. Indeed, According to Treasury
Department analysis, the President's Agenda will protect 97 percent of
small business owners from income tax rate increases, while delivering
tax cuts to more than 3.9 million entrepreneurs.
2. What benefits will small businesses have through the enacted of
programs such as providing affordable childcare to working families,
funding for workforce training programs, and lower higher education
costs?
The revenue raised from these tax proposals will help pay for
investments that will grow our economy and create jobs, including
investments in small business. These include investments in clean
energy, research, technology, childcare, education, and workforce
training. The Build Back Better Agenda will also increase access to
contracting opportunities and provide financing and technical
assistance programs for small businesses, including small
manufacturers.
__________
Response from Ms. Huang to Questions for the Record Submitted by
Senator Warnock
Child Tax Credit (Ms. Chye-Ching Huang)
In the past, there has been discussions about the economic impact
of corporations, but I think more about hard working Georgians, like
the mother I met in Columbus, Georgia. She was laid off recently, but
was able to use the money from the Child Tax Credit to pay for books
for her little girl. I also think of the constituent who just last week
sent me a note about how they've been able to use the credit to pay
down debt incurred during the pandemic, afford teaching materials for
their children participating in online learning, and told me that this
money kept her family in their home and off the streets.
1. What kind of long term benefits to the economy will we see from
reducing child poverty by implementing tax cuts, like the Child Tax
Credit, that supports working families?
2. What benefits have we seen by having the Child Tax Credit paid
monthly in advance to eligible taxpayers, instead of requiring
Americans to file their taxes to receive the benefit?
Thank you for your question, Senator Reverend Warnock.
The experiences of these Georgian families are not unusual, which
is why the CTC is so important for families and communities across the
country.
Monthly distribution of the Child Tax Credit has made it easier for
families to pay for recurring expenses throughout the year.\1\ Research
shows that parents with low incomes have, like your constituents, spent
their monthly CTC on basic needs like food, rent, utilities, clothing,
or school supplies--and shortly after the first monthly check was
distributed, food insecurity and financial hardship fell dramatically
among households with children.\2\
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\1\ Chuck Marr, ``The Expanded Child Tax Credit Must Be Permanent
and Monthly,'' CBPP, April 15, 2021, https://www.cbpp.org/blog/the-
expanded-child-tax-credit-must-be-permanent-and-monthly.
\2\ Claire Zippel, ``After Child Tax Credit Payments Begin, Many
More Families Have Enough to Eat,'' CBPP, August 30, 2021, https://
www.cbpp.org/blog/after-child-tax-credit-payments-begin-many-more-
families-have-enough-to-eat; Daniel J. Perez-Lopez, ``Economic Hardship
Declined in Households With Children as Child Tax Credit Payments
Arrived,'' U.S. Census Bureau, August 11, 2021, https://
www.census.gov/library/stories/2021/08/economic-hardship-declined-in-
households-with-children-as-child-tax-credit-payments-arrived.html.
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The monthly CTC has not only helped families make ends meet in the
short-term, but a large body of research suggests that it is a true
investment: it will also have positive effects on the life trajectories
of children in the long run, and for the economy as a whole.
Investments in families with low incomes have been shown to improve
infant and child health, improve children's academic performance in
schools, increase the likelihood that children attend college, and
boost earnings once children ultimately reach adulthood.\3\
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\3\ Arloc Sherman and Tazra Mitchell, ``Economic Security Programs
Help Low-Income Children Succeed Over Long Term, Many Studies Find,''
CBPP, July 17, 2017, https://www.cbpp.org/research/poverty-and-
inequality/economic-security-programs-help-low-income-children-succeed-
over.
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These long-term benefits for children and families can also mean
broadly shared benefits for communities and the larger economy. They
mean that children are more likely to be healthier as adults, attend
college and have higher adult earnings. Boosting the health and
earnings of the next generation also in turn reduces spending on health
care costs and other macroeconomic costs associated with high child
poverty rates over time.\4\
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\4\ Arloc Sherman, Ali Safawi, Zoe Neuberger, and Will Fischer,
``Recovery Proposals Adopt Proven Approaches to Reducing Poverty,
Increasing Social Mobility,'' CBPP, August 5, 2021, https://
www.cbpp.org/research/poverty-and-inequality/recovery-proposals-adopt-
proven-approaches-to-reducing-poverty.
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Further, novel research suggests that investments in children from
low- and moderate-income families can help more children develop and
apply their talents for innovation. If equally talented girls, children
of color, and children from low- and middle-income families grew up to
be inventors at the same rate as white boys from rich families, there
would be four times as many inventors in America as there are today.\5\
The research suggests that a key reason why this potential is being
lost is simply because many families lack basic financial resources.
Sound investments in these families can ensure more children are able
to be a part of the next generation of innovators who may generate new
breakthroughs and businesses with widely shared benefits.
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\5\ Alex Bell et al., ``Who Becomes an Inventor in America? The
Importance of Exposure to Innovation,'' Quarterly Journal of Economics,
Vol. 134, Iss. 2, May 2019, https://opportunityinsights.org/paper/
losteinsteins/. Also see: Wesley Tharpe, Michael Leachman, and Matt
Saenz, ``Tapping More People's Capacity to Innovate Can Help States
Thrive,'' CBPP, December 9, 2020, https://www.cbpp.org/research/state-
budget-and-tax/tapping-more-peoples-capacity-to-innovate-can-help-
states-thrive.
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__________
Response from Dr. Edelberg to Questions for the Record Submitted by
Senator Warnock
racial wealth gap
In 2019, the median net worth for all American families was about
$121,000 while the median net worth of Black families was about
$24,000.
1. What can a strong social insurance system, like those in the
Build Back Better plan, do to address historical inequities in our
economy?
2. What do you believe their long-term effect will have on our
economy?
Improvements in the social insurance system can help to address
historical inequities in household resources, including wealth, which
act to cushion families against financial setbacks, enable individuals
to take risks, and provide people with access to better neighborhoods.
The racial wealth gap is the product of exclusionary and discriminatory
practices dating back to the foundation of this country. As a result,
the median Black household was left far more vulnerable to the
devastating economic effects of the COVID-19 pandemic.
Piling onto an already precarious situation for Black Americans,
Black workers and Black owned businesses were disproportionately likely
to be in the industries hardest hit by the pandemic [1]. As the economy
recovers, a hot labor market will begin to close the racial and ethnic
unemployment gap, but will not be enough to eliminate it [2]. Moreover,
closing the unemployment gap does not close the racial wealth gap [1].
In fact, the racial wealth gap is observable even among households with
similar incomes and at all levels of income, except for the bottom
quintile in which median net worth is universally zero [3].
A stronger social insurance system can alleviate the harsh impact
of recessions by bolstering household savings, reducing poverty and
food insecurity, and guaranteeing access to preschool programs. Black
households have less in emergency savings than white households, with
$1,500 in liquid assets in 2019 as compared to $8,100 among white
households [4]. Such disparities in financial resources would be
mitigated by making the full refundability of the Child Tax Credit
(CTC) permanent [5]. Notably, the expansions to the CTC in 2021 will
help cut child poverty by more 45 percent among all households, and
more than 52 percent among Black households [6]. In addition, an
improvement in access to childcare would lower the cost of working for
parents of young children and, particularly, increase labor force
participation among women [7]. An improved social insurance system
would do more to curb the severity of economic crises and hasten
recoveries, though it does not fundamentally address the racial wealth
gap.
As articulated in The Hamilton Project blog on this subject, as
published in December 2020:
``Indeed, closing the Black-white wealth gap will require that
the deep and systemic economic disparities brought about by
centuries of discriminatory policies are addressed through
significant structural changes across a range of policy areas.
As discussed in a previous Hamilton Project analysis, these
policies range from redlining and the denial of financial
services to minority communities, to the Jim Crow Era's ``Black
Codes'' strictly limiting opportunities in many southern
states--all of which contributed to the disproportionate
accumulation of wealth held by white households while
exacerbating the economic fragility of many Black households.
Overcoming the effects of these policies will necessitate
substantive and systemic changes in education, small business,
healthcare, broadband access, tax reform, and broader place-
based policies.
The COVID-19 pandemic underscores the importance of the Black-
White wealth gap and its impact on the ability of households to
weather the economic shocks caused by recessions. By expanding
policymakers' focus not only on strengthening the safety net
and income supports, but also on the inclusion of systemic and
structural public policy changes across a range of areas to
close the Black-White wealth gap, disparities in the ability of
Black and White households to weather the next economic storm
will be greatly reduced'' [2].
References
1. McIntosh, Kriston, Emily Moss, Wendy Edelberg, Kristen E.
Broady. 2020. ``The Black-White Wealth Gap Left Black
Households More Vulnerable.'' The Hamilton Project, Washington,
DC.
2. Aaronson, Stephanie, Mitchell Barnes, Wendy Edelberg. 2021.
``A Hot Labor Market Won't Eliminate Racial and Ethnic
Unemployment Gaps.'' The Hamilton Project, Washington, DC.
3. McIntosh, Kriston, Emily Moss, Ryan Nunn, Jay Shambaugh.
2020. ``Examining the Black-White Wealth Gap.'' The Hamilton
Project, Washington, DC.
4. Bhutta, Neil, Andrew C. Chang, Lisa J. Dettling, and Joanne
W. Hsu. 2020. ``Disparities in Wealth by Race and Ethnicity in
the 2019 Survey of Consumer Finances''. Board of Governors of
the Federal Reserve System, Washington, DC.
5. Jabbari, Jason, Leah Hamilton, Stephen Roll, Michal
Grinstein-Weiss. 2021. ``The New Child Tax Credit Does More
Than Just Cut Poverty''.'' The Brookings Institution,
Washington, DC.
6. Center on Poverty and Social Policy at Columbia University.
2021. ``A Poverty Reduction Analysis of the American Family
Act.'' Center on Poverty and Social Policy at Columbia
University, New York, New York.
7. Betsey Stephenson. 2021. ``Women, Work and Families:
Recovering from the Pandemic-Induced Recession.'' The Hamilton
Project, Washington, DC.
[all]