[Joint House and Senate Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 118-340
THE FISCAL SITUATION OF
THE UNITED STATES
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
of the
CONGRESS OF THE UNITED STATES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
MARCH 12, 2024
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
55-942 WASHINGTON : 2024
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Martin Heinrich, New Mexico, David Schweikert, Arizona, Vice
Chairman Chairman
Amy Klobuchar, Minnesota Jodey C. Arrington, Texas
Margaret Wood Hassan, New Hampshire Ron Estes, Kansas
Mark Kelly, Arizona A. Drew Ferguson IV, Georgia
Peter Welch, Vermont Lloyd K. Smucker, Pennsylvania
John Fetterman, Pennsylvania Nicole Malliotakis, New York
Mike Lee, Utah Donald S. Beyer Jr., Virginia
Tom Cotton, Arkansas David Trone, Maryland
Eric Schmitt, Missouri Gwen Moore, Wisconsin
J.D. Vance, Ohio Katie Porter, California
Jessica Martinez, Executive Director
Ron Donado, Republican Staff Director
C O N T E N T S
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Opening Statements of Members
Page
Hon. David Schweikert, Vice Chairman, a Representative from the
State of Arizona............................................... 1
Hon. Martin Heinrich, Chairman, a Senator from New Mexico........ 2
Witnesses
The Honorable Michael Faulkender, Chief Economist, America First
Policy Institute, Washington, DC............................... 4
Mrs. Romina Boccia, Director of Budget and Entitlement Policy,
Cato Institute, Washington, DC................................. 6
Mr. Michael Linden, Senior Policy Fellow, Washington Center for
Equitable Growth, Washington, DC............................... 8
Dr. Kimberly Clausing, Eric M. Zolt Chair in Tax Policy at the
UCLA School of Law, Los Angeles, CA............................ 10
Submissions for the Record
Prepared Statement of Chairman Martin Heinrich, a U.S. Senator
from New Mexico................................................ 39
Prepared Statement of The Honorable Michael Faulkender, Chief
Economist, America First Policy Institute...................... 42
Prepared Statement of Mrs. Romina Boccia, Director of Budget and
Entitlement Policy, Cato Institute............................. 47
Prepared Statement of Mr. Michael Linden, Senior Policy Fellow,
Washington Center for Equitable Growth......................... 55
Prepared Statement of Dr. Kimberly Clausing, Eric M. Zolt Chair
in Tax Policy at the UCLA School of Law........................ 61
Question for the Record Submitted by Senator Klobuchar to Mr.
Linden and Response............................................ 71
Question for the Record Submbitted by Senator Klobuchar to Dr.
Clausing and Response.......................................... 72
Op-Ed titled, ``Three Ways to Treat America's Debt Pandemic'',
submitted by Representative Estes.............................. 74
THE FISCAL SITUATION OF
THE UNITED STATES
----------
TUESDAY, MARCH 12, 2024
United States Congress,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 2:28 p.m., in Room
210, Cannon House Office Building, Hon. David Schweikert [vice
chairman of the committee] presiding.
Present: Schweikert, Arrington, Trone, Beyer, Smucker,
Estes, Porter, and Ferguson.
Senators: Heinrich and Hassan.
Staff Present: Nicolas Aguelakakis, Lesley Asencio, Shauna
Burton, Christina Carr, Matthew Cernicky, Jaxson Dealy, Sebi
Devlin-Foltz, Ron Donado, Colleen Healy, Jeremy Johnson, Hunter
Lovell, Jessica Martinez, Kole Nichols, Michael Pearson,
Alfredo Romero, Jeff Schlagenhauf, Alex Schunk, Doug Simons,
and Garrett Wilbanks.
Vice Chairman Schweikert. This hearing will come to order.
I would like to welcome everyone to today's Joint Economic
hearing, titled ``The Fiscal Situation of the United States.''
Today's hearing will begin with 5-minute opening statements
from myself, Chairman Heinrich, and each of our four witnesses.
We will then proceed to questions, alternating between the
parties in order of member arrival. Members are reminded to
please keep their questions to no more than 5 minutes.
And, now, opening statement.
Before I actually read the formal opening statement, my
heresy in many of these discussions--is that volume awfully
loud, or is it just the feedback?--is, I truly, truly believe,
from today through the next 30 years, our crisis in debt and
deficit spending, economic growth is demographics.
And what saddens me is, having taken a quick look through
some of the testimony, I don't think we give enough honest
discussion of the fact of the matter is, you know, one in six
Americans now will be 65 and up, and that number moves away
from us, and in 15 years we have more deaths than births.
So my caveat is, if we are going to actually make honest
policy, maybe we need to be brutally, brutally honest with each
other in the math.
Now I would like to introduce our four distinguished
witnesses.
Dr. Michael----is it ``Funken''?
Dr. Faulkender. ``Faulkender.''
Vice Chairman Schweikert [continuing]. Faulkender--sorry, I
should have had that--is the chief economist and senior advisor
at the America First Policy Institute. Before that, he was
Assistant Secretary for Economic Policy at the United States
Department of Treasury, where he advised the Treasury Secretary
on domestic and international economic issues.
Ms. ``Roma''----
Mrs. Boccia. ``Romina Boccia.''
Vice Chairman Schweikert. Romina Boccia. And I should know
that.
Mrs. Boccia is director of budget and entitlement policy at
Cato Institute, where she specializes in the budget process,
Federal spending, and the economic impacts of rising debt.
Prior to that, she was the director of the Grover M. Hermann
Center for the Federal Budget at The Heritage Foundation.
All good?
Chairman Heinrich. Good afternoon, everyone.
And thank you, Vice Chairman Schweikert, and thank you
for--you and your staff for putting this hearing together
today.
The financial growth of our nation is critical to our
stability and growth. And, in the most basic sense, our
financial health is what allows us to invest in the people and
the places of the United States.
Last week, I was proud to vote for the long-overdue package
of six appropriations bills that included major investments in
our families and our communities. And, among many other
priorities, I fought to secure full funding for Special
Supplemental Nutrition Program for Women, Infants, and
Children, better known to the public as WIC, which serves
nearly 7 million women and children nationwide.
As I worked to make sure that families could put food on
the table and that our housing programs had enough funding to
keep roofs over their heads, there were others who opposed
these investments, pointing to our deficit.
It is true that our deficits and debt are expected to grow
in the coming years, and we do need to take this very
seriously. But that starts with being clear about where these
deficits actually come from and what will actually work to help
close them.
Much like any family's budget, when you look at our federal
budget, it is a comparison of what is coming in against what is
going out--revenue and spending. And it is clear that, with our
federal budget, we have a revenue problem. Republican tax cuts
for the wealthiest of the wealthy and biggest corporations have
driven our revenue down and our debt up.
To restore financial stability and rein in our debt, we
need tax reforms. We need to close tax loopholes for the ultra-
wealthy and maintain funding for the Internal Revenue Service
so that they can go after wealthy tax cheats, who for too long
have gotten away without paying their fair share.
That includes imposing a minimum tax on billionaires,
because no billionaire should be paying less in taxes than a
teacher or a sanitation worker or a grocery clerk. We need to
raise the corporate tax so that big companies pay their fair
share, a move that would alone raise $1.3 trillion over the
next decade. And we need to adopt the global minimum tax to
make sure that multinational companies can't get out of paying
U.S. taxes.
At the same time, we should limit costly tax expenditures
that overwhelmingly benefit the wealthy, like lower tax rates
for capital gains and stock dividends or the carried-interest
loophole that allows hedge fund executives to pay less in
taxes. These policies reward wealth over work while pushing up
our deficits.
Congress can also shore up Social Security and Medicare
without cutting benefits. And, for one, Congress should make
sure that people earning over $400,000 pay more into the Social
Security Trust Fund. Asking the highest earners to pay a small
portion of every dollar earned would go a long way towards
improving the health of the program.
Another proposal by President Biden would raise the
Medicare payroll tax by 1.2 percentage points solely on
taxpayers making over $400,000 a year. This and other small tax
changes would make Medicare solvent for the foreseeable future.
But perhaps our most important tool for reducing deficits
is continued economic growth. The Biden administration has led
some of the strongest economic growth that we have seen in
recent years. This administration is working to build an
economy from the middle out, from the bottom up.
And that has meant record-breaking job growth, with nearly
15 million jobs created since President Biden took office.
Unemployment has been below 4 percent for 2 full years, the
longest stretch in half a century. And we have seen
unprecedented investments in infrastructure and a domestic
manufacturing renaissance.
This strategy works because a booming economy boosts tax
revenues without requiring higher tax rates.
To achieve that, we need to keep investing in what helps
grow our economy, including our children. Investing in programs
for children, like WIC or SNAP, delivers a brighter future for
those kids, and it also creates a substantial long-term benefit
for our economy. Supports like early-childhood education,
healthcare, and nutrition programs lay the foundation for
healthier and more productive adults. They are then less likely
to need social support services and more likely to participate
in the labor force and earn higher incomes.
A permanent expansion of the Child Tax Credit could go a
long way towards that goal. By empowering families, we lift
kids out of poverty, stimulate the economy, and increase tax
revenues.
Investing in our economy means investing in all of America.
And I am pleased to join my colleagues to further explore these
issues in today's hearing.
Now, I would like to introduce our two distinguished
witnesses.
Mr. Michael Linden is a senior policy fellow at the
Washington Center for Equitable Growth. He has more than 15
years of experience in economic policy roles across the federal
government, think tanks, and advocacy organizations.
Prior to joining Equitable Growth, Mr. Linden served in the
Biden administration and was a senior advisor and then the
Executive Associate Director at the White House Office of
Management and Budget, where he worked on a wide array of
public policies and was integrably--integr---excuse me, I have
a cold today--integrally involved in producing the President's
budget.
Mr. Linden previously served as the senior advisor on the
Senate Budget and Senate Health, Education, Labor, and Pension
Committees. Mr. Linden was also the founding executive director
at the Groundwork Collaborative.
Dr. Kimberly Clausing is the Eric M. Zolt chair in tax law
and policy at the UCLA School of Law. Dr. Clausing most
recently was the Deputy Assistant Secretary for Tax Analysis in
the U.S. Department of the Treasury, serving as the lead
economist in the Office of Tax Policy.
Prior to joining UCLA, Dr. Clausing was the Thormund A.
Miller and Walter Mintz Professor of Economics at Reed College.
Dr. Clausing is a non-resident senior fellow at the
Peterson Institute for International Economics, a member of the
Council on Foreign Relations, and a research associate at the
National Bureau of Economic Research. Her research examines how
government decisions and corporate behavior interplay in the
global economy.
Vice Chairman Schweikert. Dr. Faulkender, 5 minutes.
STATEMENT OF THE HONORABLE MICHAEL FAULKENDER, CHIEF ECONOMIST,
AMERICA FIRST POLICY INSTITUTE, WASHINGTON, D.C.
Dr. Faulkender. Chairman Heinrich, Vice Chairman
Schweikert, members of the committee, thank you for the
opportunity to testify today on the unsustainable fiscal
situation facing the United States.
Part of my responsibility as Assistant Secretary was to
oversee the crafting of the Social Security and Medicare
Trustees Reports, so, Mr. Vice Chairman, I very much understand
the demographic challenges that you mentioned in your opening
statement.
In addition to being chief economist at the America First
Policy Institute, I am also a finance professor at the
University of Maryland, where I have served for the last 15
years.
During my first week at Treasury, I oversaw finalizing the
2018 Financial Report of the U.S. Government. According to that
report, U.S. Government debt was projected to rise from 70
percent of national output to 530 percent by the end of the 75-
year forecast period.
The interest alone on this scale of debt would dwarf the
size of the entire Federal Government, including Social
Security, Medicare, and defense combined. For that reason, we
renamed the second section of the executive summary from,
quote, ``Where We Are Headed,'' end quote, to, quote, ``An
Unsustainable Fiscal Path,'' end quote, a title it still holds
today.
When COVID hit, Congress and the Trump administration
enacted a temporary financial lifeline that sustained
households and small businesses. Contrast that with the
beginning of this administration, when, despite the economy
being nearly fully recovered and with inflation below 2
percent, the Federal Government enacted trillions of dollars of
fiscal spending that only stimulated 40-year-high inflation.
Debt held by the public has risen from nearly $16 trillion at
the end of fiscal year 2018 to more than $26 trillion at the
end of fiscal year 2023.
According to CBO's latest Budget and Economic Outlook, over
each of the next 10 years, budget deficits are forecast to
exceed 5 percent of annual national output. And as CBO says,
quote, ``Since the Great Depression, deficits have exceeded
that level only during and shortly after World War II, the
2007-2009 financial crisis, and the coronavirus pandemic,'' end
quote. It is one thing to temporarily run a large deficit
during a time of national crisis; it is unsustainable for
deficits of this scale to be the norm.
To realize fiscal sustainability, growth is essential. As
the Laffer curve explains, higher tax rates deter economic
activity, resulting in potentially less revenue for the
government, which will not solve our budget, inflation, or
growth challenges.
The Tax Cuts and Jobs Act is not the cause of our current
fiscal challenges. After all, in fiscal year 2022, Federal
receipts were 19 percent of national output, the second-highest
since World War II, compared to an average of 17 percent for
the last 75 years.
Indeed, the problem is that spending has exploded. Federal
spending has averaged 20 percent of national output in the 50-
year timeframe of 1968 through 2019. It has averaged 25 percent
the last 3 years, with spending for the next 10 years estimated
to be in the 23-to-24-percent-of-GDP range.
Massive spending reductions should start with repealing the
cynically entitled Inflation Reduction Act. This act unleashes
an estimated $1.2 trillion in corporate welfare that makes it
more expensive to manufacture here in the United States, makes
us more reliant on energy and critical minerals from potential
adversaries, worsens our Nation's financial position, and does
not significantly improve the planet's environment.
Likewise, the student loan forgiveness of this
administration must stop. If universities offer degrees that
push radical causes instead of preparing students for high-
paying jobs, the institutions should take losses rather than
transferring them to taxpayers. Such spending distorts tuition
costs, encourages worthless degrees, and contributes to
inflation.
Much of this spending was conducted without congressional
approval. This Congress reduced long-term deficits through the
Fiscal Responsibility Act by $2.6 trillion over the next 10
years. However, technical changes increased deficits by $1.1
trillion, including $428 billion arising from how the
administration implemented energy-related tax provisions of the
IRA.
Spending through rulemaking should be approved by Congress,
rather than the executive branch usurping the powers of the
purse.
Additional deficit reductions would arise if government
benefits helped Americans realize their potential rather than
permanent dependency; from reducing the bloated government
bureaucracy; and from increased energy and mining activities on
Federal lands that would generate significant royalty income.
Finally, let me say, the impact on the American people of
higher debt is not limited to a potential economic recession or
higher future taxes. Rising 30-year mortgage rates have
resulted in the monthly payment for a $250,000 mortgage rising
from approximately $1,000 a month in January of 2021 to more
than $1,600 today. The best way for us to improve access to
home ownership for young people is to get interest rates back
down, not to provide subsidies that cause housing
unaffordability to worsen.
Thank you for including me in today's important discussion.
I look forward to answering your questions.
[The statement of Dr. Faulkender appears in the Submissions
for the Record.]
Vice Chairman Schweikert. Thank you.
Mrs. Boccia.
STATEMENT OF MRS. ROMINA BOCCIA, DIRECTOR OF BUDGET AND
ENTITLEMENT POLICY, CATO INSTITUTE, WASHINGTON, D.C.
Mrs. Boccia. Chairman Heinrich, Vice Chair Schweikert, and
members of the committee, thank you for inviting me to testify
today.
My name is Romina Boccia, and I am the director of budget
and entitlement policy at the Cato Institute.
The views I express in this testimony are my own and should
not be construed as representing the views of my employer.
I will make three main points today: First, higher spending
is driving the growth in the debt. Second, it is the growth in
Medicare and Social Security spending that is the primary
driver of the growth in public debt. And, third, slowing the
growth in spending should be coupled with pro-growth policies
to secure not only America's fiscal future but also economic
prosperity.
Our Nation's debt is growing at an alarming rate, with CBO
projecting that debt borrowed in credit markets will exceed 170
percent of GDP in the next 30 years. That is under very
optimistic assumptions.
Current fiscal projections threaten Americans with higher
taxes, reduced economic growth, higher interest rates, stifling
inflation, and the tail risk of a severe fiscal crisis that
could exacerbate all these other issues. Even under fantastic
revenue projections, spending-driven debt growth threatens U.S.
fiscal stability and Americans' economic security.
Despite CBO's highly unrealistic projections about tax
revenues rising by 50 percent over the next 10 years, spending
will continue to outpace revenues. Baked into CBO's baseline is
the assumption that the Tax Cuts and Jobs Act will expire as
scheduled under current law, when neither political party has
demonstrated an appetite for allowing that to happen.
Even taking CBO's 10-year projections at face value,
comparing them with historical spending and revenue highlights
the unsustainability of current spending growth. Spending is
projected to exceed 24 percent of GDP by 2034, compared to a
50-year average of 21 percent of GDP. Meanwhile, revenues would
also exceed their historical average of 17.3 percent of GDP,
but by much less, just shy of 18 percent of GDP.
Peacetime deficits at these levels, at 6 percent of GDP,
are too high and cannot be sustained for long.
What is driving this growth in Federal spending? Federal
healthcare programs and Social Security are the biggest
spending growth drivers, alongside increasing debt service
costs. Healthcare and Social Security are responsible for
nearly two-thirds of the growth in spending just over the next
10 years, followed by interest costs.
Over the 30-year spending window, Social Security,
healthcare, and interest continue to pose the biggest spending
pressures, threatening to drive Federal spending to an
unprecedented 30 percent of GDP, from a 50-year historical
average of 21 percent of GDP.
That would be a massive expansion in the size of government
that could only be financed by higher taxes on all Americans,
not just the wealthy. There isn't enough money at the very top
of the income distribution to make that math work.
As healthcare and Social Security spending balloon as a
percentage of the economy, every other major budget category
declines or stabilizes over that same 30-year window.
Looking out yet further to the Financial Report of the U.S.
Government, it details how Medicare and Social Security's
unfunded obligations are responsible for the entire unfunded
obligation of the Federal Government. That is right: The 75-
year gap between non-interest spending and revenues of close to
$80 trillion can be attributed to Medicare and Social Security
alone.
So the key drivers of rising U.S. deficits and debt are
obvious. Congress cannot effectively address the short-term or
long-term growth in the Federal debt without slowing the growth
in old-age benefit programs and in healthcare spending or
massively raising taxes on all Americans, bringing the U.S.
closer to European-style tax levels.
As Congress seeks to address these problems, legislators
should not lose sight of preserving the economy's capacity to
grow. Shortsighted policies that raise taxes on investing and
work could undermine debt stabilization if such policies dampen
growth. Spending-based deficit reduction historically,
especially targeted at social and entitlement programs, is most
effective at sustainably reducing deficits.
As bleak as the U.S. fiscal outlook is, there is light at
the end of the tunnel. The House Budget Committee recently
passed the Fiscal Commission Act, which seeks to stabilize the
debt over 15 years, educate the public on the Nation's
deteriorating fiscal state, and improve the Medicare and Social
Security Trust Fund's solvency over a 75-year window.
This is a positive step. It would be even more promising if
Congress designed a fiscal commission based on the successful
Base Realignment and Closure Commission, or BRAC, with
independent experts, Executive involvement, and fast-track
authority to allow for default adoption of a commission plan.
Thank you for inviting me to this hearing, and I look
forward to your questions.
[The statement of Mrs. Boccia appears in the Submissions
for the Record.]
Vice Chairman Schweikert. Thank you.
Mr. Linden.
STATEMENT OF MR. MICHAEL LINDEN, SENIOR POLICY FELLOW,
WASHINGTON CENTER FOR EQUITABLE GROWTH, WASHINGTON, D.C.
Mr. Linden. Vice Chair Schweikert, Chair Heinrich, members
of the committee, thank you so much for this opportunity to
testify here today.
I am going to make three important points.
First, I am going to agree with my colleagues that rising
debt poses real risks, but I am going to note that those risks
are inherently uncertain in both timing and magnitude, which is
why prudent fiscal policy should take a risk-management
approach.
Second, there are both good ways and bad ways to manage
fiscal risks. Policies that support broad-based economic growth
will help reduce fiscal risks without causing unnecessary harm.
And, finally, to the extent that fiscal risks have risen in
the last decade, the primary culprit is, in fact, the tax cuts
that have dramatically reduced Federal revenues.
But let's begin where everybody agrees: Debt as a percent
of our economy cannot rise forever without there eventually
being some negative consequences. Many economists reasonably
worry, for example, that an ever-increasing debt load could
result in higher interest rates or could crowd out private
investment and lead to slower economic growth, among other
plausible risks.
However, there is little to suggest that our current debt
levels are causing any of these potential harms right now, but
there is a risk that any or all of them could come to pass in
the future as debt continues to rise.
Risks are, however, by definition, uncertain, and it is
important to approach questions of fiscal sustainability with a
degree of humility. Projections may be wrong. Fiscal risks have
been overstated in the past. And there is very little agreement
or strong evidence on the magnitudes of the risks we actually
face.
For example, many economists have long believed that higher
debt would necessarily mean higher interest rates. But, in
fact, the observed relationship between publicly held debt and
interest rates is the opposite of that. Debt rates today are
still much lower than they were in the 1980s and 1990s, when
debt was significantly lower than it is today.
Similarly, a traditional concern is that more government
spending will crowd out private investment. But the evidence
for this concern is also quite mixed. Some studies have found a
significant effect, while others have found almost none. And,
in fact, recent economic evidence has suggested that there is,
in fact, a crowding-in effect that can happen, where private
investors follow the public sector's lead, and total investment
goes up, not down.
To be clear, the lesson here is not that there are no risks
from rising debt, but, rather, that the magnitude of those
risks from higher debt is really uncertain.
That is why I believe the prudent course is to take a risk-
management approach. Prudent and responsible governance means
neither ignoring risks nor making drastic changes to eliminate
them entirely. It means taking appropriate steps without
causing unnecessary harm now. After all, it would be a very
poor swap to trade the uncertainty of potential damage at some
time in the future for the certainty of major damage today.
That is why the best way to reduce risk without causing
harm is to enact policies that promote and accelerate shared,
broad-based economic growth. After all, we can reduce our debt-
to-GDP ratio by expanding GDP.
And we know, for example, that investments in early
childhood--like WIC, for example--and in scientific research
are going to pay enormous dividends, expanding our economy, and
make it easier to reduce the risks posed by increasing debt.
The converse is also true and worth explicitly mentioning:
Policies enacted in the name of fiscal risk reduction that slow
or impede growth, either by cutting productive investments or
by increasing inequality, are not only harmful on their own
merits but are also likely to fail at their stated goal.
As we consider risks and how to reduce them, it is valuable
to understand which policies have in the past increased our
risks and which have reduced them. Simply put, the primary, if
not sole, reason that the debt projections are currently rising
rather than falling is because of tax cuts. If not for the
series of tax reductions enacted since 2001, the debt as a
percent of GDP would be on a downward trajectory, not upward.
In fact, the CBO now projects that total Federal primary
spending as a percent of GDP will be lower, not higher, than
what it projected the last time it foresaw debt on a downward
trajectory. So, if debt is now rising instead of falling and
spending is lower than expected, then the primary culprit is
lower-than-expected revenues.
Healthcare spending, in particular, has grown much more
slowly than expected, not faster, and CBO now expects that we
will spend about $5 trillion less over the next 10 years than
it thought back in 2012, when the debt was projected to be on a
downward trajectory.
Those trillions of dollars in savings, however, will be
more than wiped out by trillions of dollars in tax cuts. CBO
now expects that revenue will be $15 trillion lower than what
it expected back in 2012.
So we may be spending $5 trillion less on healthcare, but
we are also spending $15 trillion more on tax cuts, roughly
half of which goes to the top 5 percent of households.
When I look at that debt trajectory, I do see risk. The
magnitude of the risk is uncertain, and that should make us
cautious about taking drastic actions.
But by employing a risk-management approach, we can see
that there are prudent steps we can take now without causing
unnecessary harm, like investing in ways that we know support
shared growth. And we can begin to reduce the revenue losses
that are the primary contributor to our fiscal risks by asking
the wealthy and corporations to pay more in taxes.
Thank you, and I look forward to your questions.
[The statement of Mr. Linden appears in the Submissions for
the Record.]
Vice Chairman Schweikert. Thank you.
Dr. Clausing.
STATEMENT OF DR. KIMBERLY CLAUSING, ERIC M. ZOLT CHAIR IN TAX
POLICY AT THE UCLA SCHOOL OF LAW, LOS ANGELES, CA
Dr. Clausing. Chairman Heinrich, Vice Chairman Schweikert,
members of the committee, thank you for inviting me to share my
views on the U.S. fiscal situation.
Today's situation provides important risks but also
opportunities. In my testimony today, I will make five main
points.
First, in an environment of rising deficits and debt, we
cannot afford to simply extend the many Tax Cuts and Jobs Act
provisions that are due to expire at the end of next year.
A full extension of the expiring provisions, alongside a
reversal of the business tax raisers that are built into the
Tax Cuts and Jobs Act, would cost more than $4 trillion--or $5
trillion with interest--over the 2026-to-2035 budget window.
This would add substantially to already-high estimates of
deficits.
Further, extending the Tax Cuts and Jobs Act provisions
disproportionately benefits richer households.
Second, we should view 2025 as an opportunity to make the
U.S. tax system better--not just more matched to our fiscal
needs, but also fairer, more efficient, and more suited to the
challenges we face.
For example, in recent decades, income inequality has
increased, so our tax system might reasonably ask more from
those whose incomes have soared while helping those that are
most vulnerable.
Our tax system can also better focus on efficient sources
of revenue, such as those that would reach the excess profits
of large corporations or those that would reduce carbon
emissions.
And by working together with partner countries, U.S. tax
policy can tackle important global collective-action problems,
such as climate change and tax competition.
Third, a suite of corporate and international tax reforms
can meet all of these tax policy goals, boosting revenue,
enhancing progressivity, increasing efficiency, all while
reducing the offshoring and profit-shifting incentives that
have been baked into current law. At the same time, we can work
with other countries to tackle tax competition.
A recent analysis showed that, of over 110 countries
worldwide, the United States is in the bottom 10 percent in
terms of corporate tax revenue relative to GDP, despite the
fact that the United States has the world's most profitable
corporations.
The 2017 Tax Cuts and Jobs Act reduced corporate tax
revenue substantially, and the act's international tax rules
encourage both offshoring and profit-shifting. The 2017 tax law
perversely incentivizes all sources of foreign income relative
to domestic income, and it also encourages the offshoring of
plants and equipment. I have long called the 2017 tax law an
``America last'' tax policy.
Luckily, reforming the U.S. international tax system is now
more desirable than ever. Since jurisdictions throughout the
world are adopting coordinated minimum taxation on the world's
largest multinational companies, that is reducing tax
competition pressures. This allows the United States to reform
our tax system far more easily.
Fourth, climate tax policy can help achieve both fiscal and
environmental goals in the time ahead. As a first step,
repealing existing fossil-fuel subsidies in the Tax Code, as
consistently proposed in Biden administration Green Books,
would raise more than $100 billion over the budget window and
take an important step toward a cleaner Tax Code.
But even more significant, the emissions reductions
achieved through the Inflation Reduction Act can be
turbocharged through the adoption of a modest carbon fee while
simultaneously protecting households from increases in energy
and fuel costs and reducing the deficit.
Consider a carbon fee that begins at only $15 a metric ton,
rises slowly to $65 by the end of the budget window, and carves
out retail gasoline. Layered on top of the Inflation Reduction
Act incentives, such a carbon fee would have minimal effects on
household energy costs, raising them only about $30 a year, yet
emissions reductions would be very large, and the fee would
bring in about $600 billion in revenue. Further, that score
could be hundreds of billions of dollars higher if exports are
not rebated at the border.
A domestic carbon fee would also help us work with partners
throughout the world on policies to encourage emissions
reduction worldwide. Collaboration on a nondiscriminatory
carbon border adjustment mechanism would ensure that any seller
serving markets with carbon pricing faces an incentive to
decarbonize alongside the incentives faced by domestic firms.
This could encourage countries throughout the world to reduce
emissions.
Elsewhere, I have laid out other sensible revenue raisers,
but let me close with one final point. Simply put, we can
afford to better support workers and families. Toward that end,
both the Child Tax Credit and the Earned Income Tax Credit
should be expanded.
Recent expansions in the Child Tax Credit under the
American Rescue Plan led to the most significant decrease in
children's poverty in recent decades. But the expiration of
that expansion reversed those gains. We can afford to invest in
children and to help the most vulnerable, and those goals
should be at the centerpiece of our tax policy agenda.
Thank you, and I look forward to your questions.
[The statement of Dr. Clausing appears in the Submissions
for the Record.]
Vice Chairman Schweikert. [Inaudible.]
And, yes, I will learn to hit my ``talk'' button.
Doctor, just off the top of your head, what is the most you
think we can take in in receipts--revenues? It technically
should be called receipts. Twenty percent of GDP? What--just
give me a number.
Dr. Clausing. If you look at the last time we balanced the
budget, which was at the turn of the century, we were taking in
about 20 percent of GDP, and I think that is quite attainable.
Vice Chairman Schweikert. Okay. So you think we can get up
to the 20. All right.
Dr. Faulkender, consistently, we have shown that CBO's
numbers seem to be missing what is actually going on. And it
is, as Mr. Linden said, you know, the fear of the black swan. I
will argue, right now it is the white swan. We see it coming,
but we are not adopting policy sets to deal with that.
I actually have--and you all know Brian Riedl.
Dr. Faulkender. Uh-huh.
Vice Chairman Schweikert. You know, one of the papers he
wrote, what, a couple months ago, basically doing tax
maximization of everyone over $400,000, everything from income
to estate to up and down, and then doing some economic effects,
he was only coming in with about 1\1/2\ percent of GDP.
How is it possible, then, to get to these numbers? When you
start saying, we are going to get up to 20--the President's
budget, I think, is at 20.3 percent of receipts to the size of
the economy. We have already seen the papers from other
academics saying you can only pick up another point and a half,
maybe--if you are optimistic, 2 points--from those over
$400,000. What am I not understanding?
And please understand, the run rate on this fiscal year
right now, if you do total gross borrowing, I think we are
borrowing close to 9, 9.6 percent of the entire economy.
What am I not understanding?
Dr. Faulkender. So, if we look at tax as a percentage of
GDP since World War II, as was just mentioned, the year 2000
was the highest on record. And that was because we had a
massive run-up in the equity markets that gave us some one-time
capital gains taxes that were not repeatable. The second-
highest was the year 2022, when we realized 19 percent of GDP
in the form of receipts.
So, if you were going to only put the top--those making
above $400,000 on the table as those potentially going to pay
higher taxes, and you extend the Tax Cuts and Jobs Act for
everyone below $400,000, as you said, you are coming in with
another 1 to 1\1/2\ percent of GDP. That doesn't get us to the
level that you are talking about, which, as I said, is above
the highest level we have ever seen.
In order to get to those rates that CBO was projecting 12
years ago, you have to assume massive increases in middle-class
taxes from bracket creep that Congress would not have undone.
If you are going to go after where there is significant
revenue, you are going to have to go well below $400,000 by not
inflation-adjusting many of the areas where tax rates get
modified.
Vice Chairman Schweikert. And I am going to apologize
because I always screw up. ``Boccia''?
Mrs. Boccia. Yes. Thank you.
Vice Chairman Schweikert. Is this the argument--and even
when I read the testimony from our Democrat witnesses, aren't
we--isn't the reality that, into the decade, you are heading
towards a VAT tax?
Mrs. Boccia. That is one possibility, that you raise an
entirely new level of taxes. I agree with Dr. Faulkender that
it would require higher taxes on middle-class Americans.
I think that what we concede here is that, if we believe
that, on the best prospect, the government could raise about 20
percent of GDP in revenue, and yet we know that spending is
projected to grow to 30 percent of GDP in revenue, that we need
to find spending reductions.
And there are many ways that we can slow the growth in the
main drivers of spending growth, which is Medicare and Social
Security, without cutting benefits for current beneficiaries,
including indexing initial Social Security benefits to wages,
at least for higher-income earners, if not for everyone, rather
than--I mean, to prices rather than wages. And for Medicare,
there is a lot of opportunity to introduce market forces that
would provide quality care at lower cost.
And none of these require benefit cuts to current
beneficiaries, just slowing the growth of future benefits.
Vice Chairman Schweikert. And I want to first also thank
you for your support of a debt and deficit commission.
I think we actually talk around each other often, and we
don't tell each other the truth. You know, we have had a
running discussion, and I was sort of saddened that no one
here--if diabetes is 33 percent of all healthcare spend,
wouldn't actually taking on some of the afflictions in our
society actually be one of the most moral and most effective
ways to actually take on both debt and deficits, family
formation, economic growth? But because it is not part of our
talking points, we often never look for--it becomes binary:
raise taxes, cut spending.
And the point I wanted to try to make--and tell me if my
math is wrong. So taxing folks over $400,000, you pick up,
let's say, another point and a half of GDP. For those of us on
the cut side, there is a point, point-and-a-half percent, you
know, without redesigning major entitlement programs.
And if you have a run rate--look, I know CBO said we are
going to borrow 5.6 percent of the economy this year, but so
far the current run rate is over 9 this year. Because with the
current borrowing at, what, $95,000 a second, we may borrow
2.8; there is a chance you could get close to--higher than that
this year, in a time when the economy is healthy.
And yet we will stick with our political rhetoric, because
that is what gets us reelected, because God forbid we go home
and tell people the truth. But it turns out, my revenue raisers
and my cuts still leave a huge gap.
And, Mr. Linden, you actually hit one of my favorite
subjects, and that is, are we heading towards a time, if we
don't demonstrate certain levels of mitigation--you are heading
towards the bond market being--and this has happened, you know,
even during the Clinton administration. The bond market
hiccuped, and there was almost a sense of panic for a little
while.
You keep saying, well, a black swan doesn't have to happen.
But isn't that the point of it being a black swan, is you don't
know it is coming?
Mr. Linden. I think you want to take a prudent approach by
reducing your risks. That is the way we think about risk in a
whole host of different areas, and fiscal management should be
no different.
We don't know that that is the case. People have been
saying that is the case for a long time. If you had this
hearing 20 years ago, they would have said rising debt----
Vice Chairman Schweikert. Yeah.
Mr. Linden [continuing]. Is going to create all these----
Vice Chairman Schweikert. Of course, we also didn't think
we were going to have a decade of almost free interest rates.
It is very Taleb-ish.
Mr. Linden. Right, right. So I think it is important to be
responsible and to think, okay, there are risks, those risks
are real, we should take those seriously; how do we prudently
reduce those risks in ways that don't cause harm now?
I want to agree with my colleague, Dr. Clausing, that, you
know, raising corporate rates is probably pro-growth, it is
probably good for the economy, it is pro-efficiency, it does
raise revenue. It doesn't reduce the risk all the way to zero.
I am not sure you need to do that. What you need to do is be
prudent about this, take it seriously.
And I want to agree with you very much on the healthcare
point. You know, we have made some significant progress in the
last 10 years on reducing healthcare costs.
Vice Chairman Schweikert. And I am way over time, but it is
fascinating. We actually had a discussion with, I think it was
Goldman Sachs on even their math they were doing for the
economy and economic growth in regards to semaglutides. And you
go, this is a bizarre conversation. But yet how do we ever get
it into our lexicon that it actually becomes part of our math
set?
And, with that, I yield to the chairman.
Chairman Heinrich. Thank you.
Dr. Faulkender, one of the places where we may be in
general agreement that deviates from the conversation on
revenue and spending for just a moment is the challenges in our
Nation's demographics. And I think those are things that a lot
of people are not aware of, just how quickly--in the early
2030s--we may be shrinking our population in the United States
if we don't make changes.
Would you agree that we are not going to solve those
challenges without a larger pipeline of legal, documented
immigration?
Dr. Faulkender. Mr. Chairman, the way that I explain the
demographic challenge to people is that, for about 40 years, we
had about 3.3 workers for every senior. We are at about 2.8
right now, and we are on our way to 2.3.
The way that our major entitlement programs, major Social
Security program is structured is that it is cash-flow-neutral
at about 3. And so, if you go from 3.3 to 2.3, that is a
massive----
Chairman Heinrich. Right.
Dr. Faulkender [continuing]. Shift in demography. If you
look at the entire population increase----
Chairman Heinrich. So how do you reverse that?
Dr. Faulkender. Well, birthrates are going the wrong
direction.
Chairman Heinrich. Right.
Dr. Faulkender. And so, presuming that we continue to see
expansions in life expectancy, the only way to increase the
workforce is either to increase labor force participation among
prime-age workers----
Chairman Heinrich. Agreed.
Dr. Faulkender [continuing]. Or immigration.
Chairman Heinrich. Yeah. And presumably both of those are
laudable things to try and address the demographic challenges
with.
Dr. Clausing, would you say that we are currently taxing--
the way we are taxing individuals across the economy is
fundamentally fair? In other words, like, who is paying their
fair share? Who is not? Who maybe is paying, you know, more
than their fair share? Would you call our individual tax
structure equitable?
Dr. Clausing. There are elements of our tax structure that
are progressive, but there are other elements that are much
less fair.
One example would be the treatment of capital income
relative to labor income. As soon as you earn even $1 of labor
income, the payroll tax starts, and as you earn more and more,
you climb up the Federal income tax brackets. But there is a
lower tax bracket structure for capital gains and dividends.
And many of those sources of income aren't taxable at all. If
you hold your asset until death, in fact, you can avoid capital
gains entirely.
So our system as a whole really is favoring those who
inherit income or who have large savings, stocks already
relative to those who work for their income.
Chairman Heinrich. Mr. Linden, on a related point, our tax
code often rewards wealth over work, and it lets the wealthiest
Americans pay less taxes than teachers and firefighters.
So how do the economic impacts of the lower capital gains
rate or the carried interest loophole for hedge fund executives
compare to some of the benefits from investments that
presumably help grow our GDP--investments in families through
things like universal childcare or an expanded Child Tax
Credit? And how should you weigh those against each other?
Mr. Linden. That is a great question. Thank you for that
question.
You know, for a long time, I think there was an argument
that lower capital gains taxes would produce more investment or
more growth and more jobs, and that has not been borne out in
the economic evidence really at all. That theory persists;
people still talk about that. But there is almost no empirical
evidence for it.
On the other hand, we have a lot of empirical evidence for
what happens when you invest in early childhood, in
particular--and many other areas as well, but I will focus on
early childhood.
The returns of every single dollar invested in early
childhood and across a range of things--early-childhood
education, nutrition, healthcare--those benefits far outweigh
the costs over time, economically speaking.
I am always hesitant to--I am always hesitant to claim that
things pay for themselves, because it is very hard to know over
time. But if there is anything where the evidence is really
strong, it is early-childhood education.
Chairman Heinrich. Dr. Clausing, let me go back to the Tax
Cuts and Jobs Act again. How much of an effect would extending
the provisions of that bill have on the deficit, in your
estimation?
And, you know, do you have opinions on what portions we
should let expire and which, if any, of them we should keep?
Dr. Clausing. Yeah, so what I did to estimate was to simply
take CBO numbers and inflate them to the budget window that we
are looking at. So, assuming this negotiation happens in 2025,
we are looking at the 2026-to-2035 window.
And if you look at both the individual extensions for
everything that is set to expire, including passthrough and
individual rates and estate taxes, and you also add in business
reversals--there is a bunch of business tax increases that are
baked into the Tax Cuts and Jobs Act, and there is already, in
fact, a legislative attempt to extend some of those that has
passed the House of Representatives and is now being considered
by the Senate. So, if you add those in as well, you are at
about $4 trillion over 10 years. And if you add interest to
that, it is more like $5 trillion over 10 years.
Now, the Tax Cuts and Jobs Act did have some features that
I think are useful that one could keep. For instance, I think
having a higher standard deduction and a higher Child Tax
Credit, coupled with the loss of exemptions, is a reasonable
way to structure the system. Fewer people itemize, it is less
complicated, and it is a solid reform.
But there are a lot of parts of Tax Cuts and Jobs Act that
are simply unaffordable to extend or unwise to extend.
At the top of the list I would put the Section 199A
deduction, which is complicated, inefficient, also highly
regressive. More than 50 percent of the benefits go to those in
the top 1 percent, and the bottom half of the population only
gets 3 percent of the benefits from that 199A deduction. But,
also, I don't think we need estate tax cuts that benefit only
the richest 2 in 1,000 estates.
And I think we should seriously consider letting the rate
structure expire as it is, because it is simply an awful lot of
money that disproportionately, again, benefits those at the
top, who benefit from every step of that rate structure.
Chairman Heinrich. Great.
Thank you all.
Thank you, Mr. Vice Chairman.
Vice Chairman Schweikert. Thank you.
Mr. Estes.
Representative Estes. Well, thank you, Mr. Chairman.
And thank you to our witnesses for being here.
Our Nation is kind of at a tipping point. I mean, we are
nearly 34.5--or, actually, we are over $34.5 trillion in debt.
And I count public and intergovernmental debt, not just the
public, because nobody is going to say that they are not going
to pay Social Security recipients or not going to pay the
military retirement. So intergovernmental debt is debt that has
to be paid by the taxpayers.
We are currently, as the chairman said, borrowing $95,000 a
second, roughly. In 2023, the debt increased by $2.6 trillion
in that 365-day period. And we are on track to be over $36
billion by a year from now.
And it is irresponsible spending, really, that has impaired
the national credibility and is starting to affect the national
security now, in addition to saddling the next generations with
a huge burden of debt. We were elected to find legislative
solutions to the debt crisis in this country, and that means we
need to rein in reckless government spending and return to
regular order.
I want to just mention that, you know, we haven't passed
all 12 appropriations bills on time since 1996. It is both
Republicans and Democrats at fault. Omnibus spending and even
the minibus spending, although a step in the right direction,
continues to keep this body in a never-ending spiral of
spending more money, with these bloated spending bills.
And on our side of the aisle, my colleagues and I tend to
try to balance our budget in 10 years. We focused on that with
the Budget Committee and the work there. But since I have been
here, in the last almost 7 years, we can't--it is more and more
difficult to accomplish that in a 10-year window.
Yesterday's budget released by President Biden just pushes
us further down the wrong path. I mean, if we think our debt is
now--if we follow the plan proposed by the President, which
even includes tax increases, our national debt would be $52.7
trillion in 10 years.
Mr. Chairman, I would like to submit for the record my op-
ed entitled, ``Three Ways to Treat America's Debt Pandemic.''
In it, I outline it is not just our national debt--but that
is a problem--but that household debt has also reached a high
of $17.5 trillion this year.
Vice Chairman Schweikert. So ordered.
[The Op-Ed submitted by Representative Estes appears in the
Submissions for the Record.]
Representative Estes. Families are struggling to pay their
debt because of inflation and because of--taking on credit card
and other debt is only exacerbating that national fiscal
crisis.
Dr. Faulkender, it seems like there are correlations
between personal finances and our national fiscal situation.
The inflation from Bidenomics has created a terrible economy
for working families. They have taken on more debt and are
facing higher interest rates, while at the same time the
Federal Government is spending more than it is bringing in and
having to figure out how to pay higher interest rates on its
debt.
What are some of the public policies that have caused this?
And how do you think--or is there a relationship between
personal and national finances?
Dr. Faulkender. Sure.
So, if we think about the economy that was in place in
January of 2021, we were seeing a nice recovery from the
pandemic. We had recovered--by the middle of 2021, we had
returned to both the economic output prior to the pandemic and
the level of employment.
And yet, at the beginning of the Biden administration, an
additional $2 trillion of fiscal stimulus was thrown into an
economy that was largely already recovered.
And so, as a result, we saw inflation here in the United
States take off much faster than elsewhere around the world,
coupled with an administration who singularly focused on
reducing the ability of the United States to be energy-
independent, to take energy resources offline. We saw that the
energy sector didn't recover until 2023, despite the rest of
the economy in 2021.
So all of those things stimulated demand at a time that we
were curtailing the ability of the U.S. economy to fulfill that
demand. The natural result is inflation.
Now, the Federal Reserve then came in late to the party in
order to try to curtail some of the excess--you know, the
really low-interest-rate environment that was in place. And, in
order to catch up, they increased interest rates extremely
quickly. We saw mortgage interest rates go from about 3 to
about 7 percent.
So, not only are American households now facing 30-percent
higher energy prices, 20-percent higher food prices, but the
interest rate on a 30-year mortgage has, as I said, taken a
$250,000 mortgage from about a $1,000-a-month principal and
interest payment to over $1,600.
And the lowest-income amongst us are the ones that are hit
hardest by it, because shelter, energy, and food comprise a
much larger portion of their consumption than any other
demographic.
Representative Estes. Yeah. I am just so concerned about--
as you mentioned, inflation is such a burden for so many
individuals, and we have to get that under control. We have to
have good fiscal policy and not excessively spending over our
revenue that brings that in.
And speaking about revenue, I just want to say one quick
comment, Mr. Chairman, is that I do want to correct the record
on the Tax Cuts and Jobs Act. We have consistently brought in
more tax revenue than what the Congressional Budget Office
estimated after the Tax Cuts and Jobs Act was passed. In 2023,
we saw almost $300 billion more in tax revenue than what had
been estimated by the CBO. In 2022, it was over $900 billion.
And, in 2020, it was over 200--roughly $280 billion.
So the revenue is coming in because the economy is moving.
And that is one of the things that we have to keep in mind as
we look at having good pro-growth policies.
Thank you, and I yield back.
Vice Chairman Schweikert. Thank you, sir.
Ms. Porter.
Representative Porter. Dr. Clausing, I wanted to ask you
about what you referred to as ``America last'' tax policy. And
so, specifically, I wanted to probe two points of this.
One is, related to footnote 6, if you want to get really
technical. You say, early evidence suggests that the Tax Cuts
and Jobs Act's incentives created increased foreign investment,
which I think would be the opposite of making America great
again. It would actually be helping our foreign competitors.
Can you tell me more about that evidence?
Dr. Clausing. Yes, absolutely.
So there are two features of the international provisions
in the Tax Cuts and Jobs Act that encourage offshoring and
profit-shifting. One is a 50-percent discount for foreign
income relative to U.S. income. And the second is an exemption,
completely free of U.S. tax, for the first 10-percent return on
foreign assets.
If you think about those two in concert, they lead to
incentives to both move plants and equipment offshore, because
then the first 10-percent return will be completely free of
tax--which isn't true, you know, here in the United States--and
to book as much as profit as possible offshore, where it will
get a 50-percent discount.
And it is actually a little more perverse than that,
because even if you have income in a high-tax country offshore,
or at least a medium-tax country offshore, you can use the
foreign tax credits from that income, combine it with your
income in haven jurisdictions, and still get to half the U.S.
rate. So you would rather have income in France or Japan; then
you would have it in the United States too, because it will
generate those foreign tax credits to offset tax due on lower-
tax jurisdictions like Switzerland.
Representative Porter. So I represent about 700,000
Americans. How do they benefit from increased foreign
investment?
Dr. Clausing. There are benefits to international capital
and international trade, and I have written a whole book about
that. But I don't think we want a tax system that puts a thumb
on the scale in favor of the foreign, relative to the domestic,
right? We also benefit from having these investments here at
home and from jobs and the other things that go with plants and
equipment, right?
So, when you are looking at, kind of, like, the bang for
the buck of what we got from all those corporate tax cuts, I
think that money would have been much better spent on some of
the investments that Mr. Linden referred to, like the early-
childhood education.
Representative Porter. My second question is about
competition policy, which has been a big focus of the Biden
administration.
My colleagues on both sides of the aisle love to talk about
small business and how they are pro- small and medium business.
How does the Tax Cuts and Jobs Act affect competition
policy? In other words, the corporate tax base is very
concentrated, so when we reduce corporate taxes, who gets
helped among businesses, and who gets hurt?
Dr. Clausing. Yeah. That is a really interesting point, and
I am glad you asked that question.
Because one unappreciated fact is just how concentrated
that corporate tax base is. There are about a half-million C-
corp payers in the United States, and less than one-half of 1
percent of them, fewer than 2,000, account for 90 percent of
the tax base, approximately.
So, if you look at where all of that tax revenue went, it
mostly went to just a small handful of companies. About 300 of
them account for 70 percent of the tax base. And those are
companies that disproportionately have very high profits, have
market power, and have multinational operations. So they can
even self-help themselves to a much lower rate than the U.S.
domestic rate by moving profit offshore.
Representative Porter. So our current corporate tax policy
favors the very largest corporations, and they get about--the
top 300 corporations are about 70 percent----
Dr. Clausing. Right.
Representative Porter [continuing]. Of the tax base.
So I guess my question is, again, why would we have that
tax policy? How would an ordinary American who might want to
start a business be helped by this?
Dr. Clausing. I think there is a strong argument for
treating the largest companies differently than the smaller
companies, in part because I think they are less likely to be
incentivized by things like investment incentives, because they
already have all the money they need to do all of these
investments.
I think we have it backwards right now, in that we are
giving the biggest companies a lighter tax burden than the
smallest companies in a lot of ways. And I think that shoring
up the international tax system is the first step to fixing
that. Because if you try to just do it all through the domestic
system, the big guys can still move the income offshore.
Representative Porter. Uh-huh.
Dr. Clausing. So the first step, fix the international, and
then you can fix the corporate rate structure after that.
Representative Porter. I will just close by observing that
the first time I came across the phrase ``GILTI''--which is G-
I-L-T-I in tax world--I was sort of struck by the fact that it
is called ``GILTI,'' which is what the Tax Cuts and Jobs Act
is. It is guilty of creating a tax system that benefits the
largest corporations over the smallest ones and benefiting
corporations over American workers.
I yield back.
Vice Chairman Schweikert. Mr. Arrington.
And thank you, Mr. Smucker, for helping with his schedule.
Mr. Arrington. I owe you one, classmate.
So I didn't plan on delving into tax policy, although I
think it is important when we are looking at the prospects of
staving off a debt crisis and growing the economy--which,
reducing spending and growing the economy, tax policy is
inevitably and should be a conversation. But I think we have to
get the facts right here. And I am not sure I am--I am not sure
the facts, as I have heard them, line up.
As a Ways and Means Committee member, we brought in record
revenue to the Treasury after the Tax Cuts and Jobs Act.
Dr. Faulkender, is that correct?
Dr. Faulkender. Yes.
Mr. Arrington. We saw record--record--R&D investment and
capital, trillions, flowing from overseas to this country. And
do you know why? Because we had the highest corporate tax rates
in the free world and the not-so-free world. Like, Communist
China had lower corporate tax rates than the United States of
America.
Listen, it is not the gospel of Jesus for me to suggest
that a tax rate is at one point or another. But I can tell you
this, just from west Texas common sense: We cannot grow this
economy and we cannot have our job creators in the United
States be competitive if we have the highest tax rates in the
world. Now, I would hope we could all agree on that, regardless
of where we negotiate the right place.
We are not even in--I don't even know that we are in the
top quartile. Maybe we are. I think we are more in the middle
now and not dead-last.
And it is amazing, what TCJA did. Was it perfect? No. Like
I said, I am not dogmatic about it. But the lower rates for
individuals benefited the lowest-income families and
individuals. That is a proven fact. The people who benefited on
the individual tax rate side were those at the lower end.
Representative Arrington. And here is another fact: The Tax
Code is more progressive after TCJA than it was before. It is
more progressive. We have more people at the higher income
paying more taxes than at the lower income and more people
paying no taxes than there were before.
That is just the fact. It may be inconvenient. But it is
also probably inconvenient that after TCJA and we reduced the
tax burden on American families and job creators that we had
the lowest poverty rates in recorded history.
Do you know that, Dr. Clausing, that we had the lowest
poverty rates after we reduced taxes in this country on our
working families and on businesses? Yes or no, do you agree
that we achieved the lowest poverty rates?
Dr. Clausing. Poverty rates were going down in part because
of the macro economy. But I think even the American Enterprise
Institute analysis of the Tax Cuts and Jobs Act would disagree
with you on several of the points you just raised.
Representative Arrington. Okay. I am not asking about
several points. But the poverty rate was at record low after
TCJA. We had record corporate revenue to the Treasury. We had
the lowest unemployment rate for women and minorities.
These are all facts that happened I think in large part
because of pro-growth policies from the previous
administration, not all related to tax cut but America First
trade, deregulation, and the combination of those things--
including, by the way, incentivizing people who are able to
work to work, not people who are not, not people who can't, but
those who can work should work.
Because one of the big constraints for growth is a labor
shortage, which is a whole nother conversation. But we are
certainly not going to solve that when we are paying people
more to stay home than to go back to work. And that is
certainly what happened during ARPA and some of my Democrat
colleagues and their policies whether they intended that or
not.
Listen, I don't know a single person in this country that I
have talked to, who is well-informed, who believes that the
level of indebtedness record for this country, that the fiscal
path in terms of deficits and the projections from CBO of $120
trillion on top of the 34 believe this is sustainable and are
not terrified at the prospect of a debt-related crisis.
Not any objective or serious person believes that,
including our Democrat witness from our Fiscal State of the
Union in this very room, Mark Zandi from Moody's Analytics, and
other nonpartisans, like our Comptroller General, who worked
under both Democrat and Republican.
Every one of them said--and, granted, Democrats have a
different set of solutions and strategies. There is probably
some middle ground. And then we have ours.
But no one--and I am sorry, Mr. Chairman, I will end with
this--no one thought that we were okay, that we could sustain
the level of deficits and debt, and that there wouldn't be a
payday some day and one that would be irreparable and even
catastrophic.
I haven't met anybody in this hearing room, at that dais,
that witness table, saying anything to the contrary.
With that, I yield back. I apologize.
Vice Chairman Schweikert. Mr. Beyer.
Representative Beyer. Thank you, Chairman Schweikert. Thank
you for calling this meeting. And a very important topic.
Vice Chairman Schweikert. Thank you for showing up.
Representative Beyer. Yeah.
I would like to first agree with my friend, Mr. Arrington,
that this is an enormous concern. And I don't know that all of
us share it, but I have been worried about the deficit for a
long time. And it has only gotten worse and worse and worse.
I do want to point out that the lowest poverty rate
happened after COVID when we spent $800 billion on unemployment
insurance, we did economic impact payments, we did PPP loans
where businesses throughout the world were held harmless and
often made millions and millions of dollars, and we got child
poverty down to 5.2, 5.3. And then most of those went away, and
it went back up to 12.7.
But government funding was a huge part of that. It was also
a pretty huge part of all the money that corporations were
paid, again, because they had unprecedented profits as the
profit margins were tripling and quadrupling.
As a car dealer, I can tell you ours tripled and quadrupled
here, too. But that is neither here nor there. I didn't come to
beat up on the TCJA.
But I do want to thank Dr. Clausing for always being so
good to us, for your service in the administration, in and out.
But we do have, because the TCJA is expiring, we have the
opportunity to fix a bunch of things, including a corporate tax
rate which could easily have been 26.5 and gotten almost all of
the gains that we had before.
Specifically, though, we had a great Ways and Means dinner
last night with the Dems side on Pillar Two and trying to
understand that. And we regularly hear from corporations that
they want to preserve a Tax Code that is competitive relative
to the rest of world.
Dr. Clausing, wouldn't complying with an international
agreement that creates a floor on global corporate tax rates
everywhere, including the Caymans and Cypress--I won't--I am
not going to pick on wonderful countries like Switzerland--stop
the race to the bottom and give the U.S. greater freedom to
design tax policy, not to compete with Zug, but actually to
reflect our priorities?
Dr. Clausing. Absolutely. I really appreciate that
question.
For a long time when we were trying to address the profit
shifting and offshoring features of current law, people would
argue, well, you can't do that because some other country will
obviously undercut us and our U.S. firms will lose out to
others in merger and acquisition bids.
But lo and behold, we now have this international agreement
coming into effect throughout the world that already covers
more than 90 percent of the in-scope multinational companies
that raises the bottom from zero to 15 percent.
That gives countries like the United States a lot more
freedom to address these longstanding problems without worrying
about these competitiveness concerns, and it is exactly what
the business community has been asking for a long time to help
level that playing field.
Representative Beyer. Thank you very much.
Mr. Linden, you talk a lot about risk management, which is
a wonderful way to think about this.
I believe we should move towards fixing this budget
deficit. But when you figure that 80 percent of it is things
that every American wants, that even people like Donald Trump
say you can't touch, and we don't want to touch the military.
So we are looking at 8 to 10 percent of the budget to try
to fix a problem that is much larger than that, especially
because all that is sort of investment in our kids and things
like that.
So we turn to revenues. And that, of course, is my problem
with my dear Republican friends, is they won't look at it. The
President had it in his billionaires minimum income tax, which
Steve Cohen and I have been co-leading. And he talks about
other things, step-up in basis, moving gift tax rates to where
they were before, moving estate tax rates to where they were
before.
But my Republican friends will say, no, no, the wealthy job
creators won't be able to create jobs anymore.
How do you see that from a risk management framework?
Mr. Linden. Yeah, I appreciate that question.
I want to make two points.
One is that it is true that, as some of my colleagues said,
that spending on things like Social Security and Medicare have
gone up over time as the population has aged. We have talked
about that a little bit in this hearing.
And those are commitments that we have made to America's
seniors that are, A, popular. As you said, every--broad
bipartisan support for those policies. They work. They reduce
poverty. They reduce senior precarity. They are popular for a
reason.
And, critically, we used to have a Tax Code that was able
to finance the increase in costs. And instead of maintaining
that Tax Code or building on it, we cut taxes repeatedly. And
that is why now, even though those costs are rising, the debt
is now rising with it.
It didn't have to be this way. We could have chosen to
simply finance those commitments the way we were before.
Now we are in a bigger hole, and we have to dig our way out
of it. But the first thing you do when you are in a hole is
stop digging. So stop cutting taxes for people at the top.
And that leads me to my second point, which is, look, at
the end of the day, where does economic growth come from? Does
it come from the titans of industry sitting in boardrooms
deciding how many jobs they are going to create in a day? No,
it doesn't. It comes from customers. It comes from workers. It
comes from families doing their best from day to day. And that
is where you want to invest.
That is why we see the evidence that we do that investing
in middle-class families and low-income families produces
broad-based economic growth. It doesn't come from giving tax
cuts to people at the very top.
Representative Beyer. Yeah.
And, Mr. Chairman, just for 10 seconds, Dr. Faulkender was
nodding his head no on the tax increase. So I just want to say
that, as somebody who has kept the dealership books since 1975,
I remember figuring tax rates out at 75 percent until we got to
1986. Somehow we kept growing and surviving. So they have gone
way, way, way down from where they used to be.
I yield.
Vice Chairman Schweikert. Okay. We won't do a whole
discussion of effective rates, which is another thing.
Mr. Smucker, thank you for your patience.
Representative Smucker. Thank you, Mr. Chairman.
A fascinating discussion. And, in fact, the chairman
mentioned a fiscal commission. I think this would be exactly
what a fiscal commission should be doing, is trying to come up
with a shared set of facts and beliefs that we all can agree
upon, because there are things mentioned here today that I
think probably most of us agree.
Our birthrate and our demographics will not work for a
growing economy going forward. We are going to have to increase
the workforce participation rate and/or increase immigration
because we are going to need the workers to pay into the
system. So I completely agree with that.
Mr. Linden, you mentioned that one of the important
components of changing the debt-to-equity ratio is growing the
economy. And so, I completely agree, we have got to figure out
the right policies to grow the economy. So this is exactly the
kind of discussion that we should be having.
I was surprised, Mr. Linden, that your perception of the
debt is different than many that we hear, and I would like to
just explore that a little, because this is sort of a
fundamental fact base, if you will, or a problem that we have
to agree on.
My perception is the debt is projected to grow--the debt to
GDP is going to grow according to CBO to almost 200 percent in
the next 30, 50 years, 172 percent, I think, in the next 30
years.
Your quote, and I have read your testimony as well, but you
said here you think the evidence of high debt being a problem
is mixed. So are you not concerned?
I mean, as far as we can see, revenues are on a certain
line and even if we make changes to revenue. And then spending
is another one. So the gap is going to continue to increase.
You don't think that is a legitimate concern?
Mr. Linden. Oh, I do think it is a legitimate concern.
Representative Smucker. Yeah. Okay.
Mr. Linden. I think risks--
Representative Smucker. At what level?
Mr. Linden. Well, that is the question, right? Risks are
different than certainties. And if you had asked people 10
years ago, they would have said 90 percent of GDP, that is
going to be--that is the threshold. If we are there, then
things fall apart. And that turned out to not be true. And if
you had asked people before that, they would have given you a
different number.
And I think the point that I really want to make is we
should, instead of saying we are definitely headed for a
calamity and, therefore, willing to do anything we can to avoid
that calamity, we should take the risks seriously, look at what
the evidence actually says.
Does higher debt inevitably lead to higher interest rates?
The answer to that question is no by our historical experience.
Could it lead to higher interest rates? Yes. And that is
why we need to be thoughtful about these.
Representative Smucker. Are you concerned about a possible
sovereign debt crisis at some point? And what I am talking
about is where people no longer--people buying treasuries no
longer believe that the U.S. has the ability to repay, and so
they stop buying treasuries.
I mean, that would be--first of all, you agree that would
be a calamity?
Mr. Linden. That would be very bad.
Representative Smucker. Yeah. Are you concerned about that?
Mr. Linden. I think the way that we want to reduce the risk
of something like that happen to be clear. No evidence we are
on the cusp of that or anything like that.
Representative Smucker. Yeah.
Mr. Linden. But it is a risk, and we should take risks
seriously. And like we do in any other area of our life, we
should measure those risks based on how likely they, how big
they are.
Representative Smucker. I wish we had more time, and I
would love to give the two of you a chance.
And what I am looking for--and I don't know if either of
you can point me in the right direction--I don't know if you
all have read Ray Dalio's book. I don't know.
But, like, there are plenty of examples of countries and
empires that have risen and fallen. And my perception at least
is often it is because of their fiscal policies. You had the
British empire for centuries. You had the Dutch empire. And
they are gone. And I am concerned this could happen to America.
Have any of you looked at history and tried to extrapolate,
like, where we are and where we are headed if we don't change
course?
I mean, Mr. Linden, you obviously aren't as concerned.
But I would be interested in hearing from the two of you,
as well.
Dr. Faulkender. So, Congressman, my read of the literature
on the 90 percent figure is that countries have not had
financial crises, debt crises below 90 percent of GDP, debt-to-
GDP ratios, that they have all occurred above 90.
Now, it does not mean that once you hit 90 you hit a debt
crisis. It just says that is where that happens. Japan has been
above 200 percent for a while, but Japan has a much higher
savings rate.
Now, the U.S. has the world's reserve currency which means
that our threshold is going to be higher. The challenge that we
have that is we don't know where the threshold is and it will
be a moment--it will be a crisis of confidence moment and you
don't know what is going to spark that.
I testified a couple of months ago with a former Treasury
colleague who now runs the Penn Wharton Budget Model, and his
testimony was that we don't know when, but 20 years from now
there will be no interest rate that will clear the Treasury
bond market--at the best 20 years from now.
I don't want to find out what that looks like, and that
means we need to get our fiscal house in order today.
Mrs. Boccia. If I can just add one point.
One of the risks is that we might end up in a scenario
where we have what is so-called fiscal dominance where the
Federal Reserve no longer makes policy based on containing
inflation but on the basis of supporting the Treasury in
continuing to finance government spending, should it become
difficult to borrow from bond markets.
And there what you are looking at is we had a fairly recent
experience with that, very high rates of inflation, recurring
bouts of inflation, which create uncertainty in the market and
cause a lot of harm and pain for exactly the types of
populations that can bear that risk the least, which is why I
think that it is very encouraging that Congress is advancing
the idea of a fiscal commission to have those discussions
before a fiscal crisis or another unexpected calamity forces
legislators' hands.
Representative Smucker. I am apparently out of time. But
thank you. Maybe we aren't as far apart as initially we would--
it sounded.
Vice Chairman Schweikert. You are out of time.
Representative Smucker. Yeah, I know. I am out of time.
Thank you.
Vice Chairman Schweikert. Have at it.
Representative Trone. Mr. Smucker, you are out of time.
Thank you, Vice Chairman Schweikert, staff. Thank you,
everybody, for being here today.
The latest CBO budget forecast held debt for the public to
increase from 99 percent GDP in 2024; 116 percent is the
groundwork by 2034.
What is important to acknowledge, that these trends are not
set in stone. What can we do? The American people are
dependent, each and all of us, to come together, find
solutions. We have to increase revenue, and we have to extend
the solvency of social supports. Of course, we have to yield
good returns.
So we can by, one, I think, reforming our immigration
system. Mr. Smucker touched on it. Two, making the ultra
wealthy and corporations pay their fair share. And, three,
increasing workers' ability, as was mentioned, to join our
labor force, boost revenue, balance the budget for the long
term.
This leads me to my first question.
Mr. Linden, the Penn Wharton Budget Model, which I am
pretty familiar with having been involved in it from the
beginning, states that exempting applicants with advanced STEM
degrees from employment-based green card caps, exempting them
from those caps would reduce the Federal budget deficit by $129
billion over 10 years.
The CBO then projects 5 million more immigrants--I love
immigration--5 million more immigrants would add an additional
$1 trillion to our tax revenue over 10 years. That is real
money.
Can you speak to the impact that would--this reform would
have on our labor force and revenue and how this could drive
our local and national economies, protect Social Security,
Medicare, Medicaid for generations?
Mr. Linden.
Mr. Linden. That is a great question.
Look, I think we should ground ourselves in some basic
facts, which is that right now we have the highest labor force
participation rate in the United States for prime age workers
that we have seen in 20 years.
And we have talked about some of our demographic
challenges. We know that those are real. And they don't have to
be challenges. They just are what they are. The American people
as a whole are getting older.
And we can help expand our economy with more workers. That
can come through, as we talked about, higher birth rates, but
also through legal immigration.
And so that is why the CBO says what it says about
immigration being really good for our fiscal future.
I do want to make the point, I want to double-click on the
point you said, which is, look, what creates growth in this
country? Growth does not come from the top. It comes from
entrepreneurs. It comes from workers. It comes from families.
And when we attract the highest talent, highest skilled
people from all over the world to the United States, that is
good for everybody. That is going to raise wages. It creates
jobs. It creates more growth. And it does create more revenue
into the Treasury to help us with our fiscal risks.
Representative Trone. How many immigrants do we take in a
year on average? Is it about a million, a million a year?
Mr. Linden. Sorry. Repeat the question.
Representative Trone. How many immigrants are we bringing
in for the last 20-some years, legal immigrants?
Mr. Linden. I would have to go back and check the question.
Representative Trone. It is about a million a year.
Mr. Linden. I am going to trust you.
Representative Trone. What would happen if we took that
number to 5 million immigrants and we did that every year?
Maybe that would reduce pressure on the border if we processed
those folks at their country of origin, so that would, like,
originally they could go in their own country, consulate, an
embassy, et cetera, 1 million to 5 million.
Any thoughts?
Mr. Linden. I would want to defer that question to true
immigration experts. I do not consider myself that.
What I will say is that, look, when we want to think about
reducing our fiscal risk we need to expand the economy. We need
to invest in things that grow the economy. We know that having
more workers, more businesses, higher wages----
Representative Trone. So you are saying the best way to do
that, the best single way to do that would be more immigration,
legal immigration?
Mr. Linden. I wouldn't want to say that that is----
Representative Trone. We are not going to move the birth
rate. The birth rate is not moving. You can't get that done.
Mr. Linden. I think the----
Representative Trone. What else you got? I got nothing
else.
Mr. Linden. I mean, you could invest in early childhood
education, too. But those things aren't--we shouldn't pit those
things against each other. We can do both of those things.
Representative Trone. Okay. Thank you.
Baseline tax cuts, loopholes, corporations, wealthy, ultra
wealthy, definitely damaging our Nation's fiscal health,
devastating families. A public school teacher might pay a
higher tax rate than someone that makes a significant amount of
money. That is wrong.
Dr. Clausing, could you talk about quickly Bush tax cuts,
the Trump tax scam, and their extensions, how their extensions
have impacted the economy?
Dr. Clausing. Yes, absolutely.
We haven't seen either of those lead to a big boost in
growth or really any discernible booth in growth or investment.
And certainly it has reduced corporate tax revenues in the case
of the Trump tax cuts and revenues writ large in both
instances. So there is no evidence that that has really been a
wise investment of fiscal dollars.
And just on the immigration front, too, I will agree with
you that I think this is an incredibly important thing to do
and that if you look at the share of new businesses and Fortune
500 companies that are founded by immigrants, you are going to
get not just labor force participation, but you are going to
get entrepreneurship, innovation, and growth.
Representative Trone. Forty percent founded by----
Dr. Clausing. Yeah.
Representative Trone [continuing]. Immigrants or the next
generation. Apple, Google, eBay.
Dr. Clausing. Yeah.
Representative Trone. The list never ends. Immigrants
create tens of millions of jobs.
Thank you. I yield back.
Vice Chairman Schweikert. Thank you.
Doctor.
Representative Ferguson. Thank you, Mr. Chairman.
I thank each of you for being here.
I am going to start with a very simple question.
How many of you sitting at this table have opened a small
business and operated it for more than a decade?
I got you down there, Don.
How many of you have worked back in rural districts in a
small business?
Dr. Clausing. I have worked in one, but I haven't founded
one.
Representative Ferguson. You haven't founded one. So all
right.
So the reason I am asking that question is we are talking
about some really big stuff here. And there is a lot of room
for debate on that. But I am going to go back to what works and
what is not working in our small business community right now.
Inflationary pressures are incredible. Regulatory burdens
and how they are enforced in a very prescriptive manner are
crushing to the small business community.
These are businesses that are innovating. These are
businesses that are creating jobs. And this is where the next
great idea always comes from, is somebody's small business in a
garage.
And what we keep doing with a lot of these policies is
making our economy bigger in terms of the participants in the
economy versus making it work for smaller businesses, and
particularly those in rural areas.
So I want to really emphasize how important it is right now
that we form this debt commission and where we work in a
bipartisan manner to really get to a really good set of facts
that we can then begin to make really good decisions on.
We argue all the time about this policy is better, that
policy is better. I am going to give you one example.
How many of you think that we should be making decisions on
the CBO score? The Congressional Budget Office scoring of when
we do policy, how many of you think that we should actually be
using that number as the basis for our decision?
Okay. It is wildly wrong. If you take a CBO score and go
out 10 years, it is wrong every time in their 10-year estimate,
almost every single time. They use static scoring instead of
dynamic scoring.
Let me give you a perfect example. On paper, if you look at
the Affordable Care Act, it said that we would have better
access, better utilization, better outcomes, and lower costs.
Well, let's look at where we are based off of CBO scoring.
The first question is, is America healthier now than it was
a decade ago? By every metric, the answer is no.
Are costs up or down? Costs are up.
We may have better access, but do we have better
utilization of the system? The answer is no.
If you look at the CBO scoring as it relates to the Tax
Cuts and Jobs Act, we had greater than expected revenues coming
in from that.
Does anybody argue with that?
Mr. Linden. I think that is not right.
Representative Ferguson. You don't think it is right.
Mr. Linden. No, it is not.
Representative Ferguson. So we have record revenues coming
in.
Mr. Linden. No.
Representative Ferguson. Okay.
Mr. Linden. Last year's revenues were 16.5 percent of GDP.
It is worth noting, yes, of course, in the year before that,
there was a record year, but that was, as my colleague noted,
kind of an aberration, 16.5 percent of GDP was the revenue.
That is one of the lowest in recent history.
In 2000, before the Bush tax cuts and the Trump tax cuts,
it was 20 percent.
Representative Ferguson. How do you factor in inflation
into the GDP? Does that skew it at all?
Mr. Linden. No, it doesn't, because it is the nominal
amount of revenue raised divided by the nominal GDP. It is 16.5
percent.
Representative Ferguson. All right.
Dr. Faulkender, do you think we should be doing things from
a business standpoint that encourage investment here
domestically, that encourage research and development here
domestically? And do you think we should make every effort to
transfer wealth from around the world to the U.S.?
Dr. Faulkender. I think we should be creating a business
environment that is competitive globally. And so this where I
am going to just greatly disagree with some of the other
panelists, because if you look at the pre-TCJA world, if you
operated a business here in the United States, you
contemporaneously paid a 35 percent corporate income tax rate.
In TCJA, we brought that down to 21 percent.
If you operate a multinational, you were able to
essentially, especially if you are a significant intellectual
property firm, you are able to move the royalties from
intellectual property over to a tax haven country and
essentially evade corporate income tax--avoid corporate income
tax on it.
And so by implementing GILTI, we took the tax rate on
foreign IP profits from essentially zero up to 11 percent.
So it seems to me that, prior to TCJA, it was 35 for a
small company located here in the United States, or a domestic
company doing something here, versus essentially zero. Instead
of 35 versus zero, it went to 21 versus 11. That encouraged
domestic activity, not discourage.
Representative Ferguson. Mr. Chairman, may I make one--I
know my time is expired. May I make one more--ask one more
question?
We are in this battle right now. If you are running a
business, particularly a small business, there is limited
revenue stream. You can do elastic pricing models, you can
raise prices to a certain point, but then consumers cannot
afford that.
You have got to create headroom in there for a business to
operate, to be creative, to take risks, to make investments.
Would anybody on this panel, if the answer is raising
taxes, would you simultaneously be willing to greatly reduce
the regulatory burden, not necessarily the goals of what you
want the regulation to be but the prescriptive nature in which
those regulations are applied to multinationals, as well as
small businesses?
Dr. Clausing. I think there is room for streamlining some
regulations. But I wouldn't take them to zero. I think they
serve a very useful purpose in some. But there is room to
streamline, yeah.
Representative Ferguson. Thank you. Thank you for your
indulgence, Mr. Chairman.
I yield back.
Vice Chairman Schweikert. Well, that was interesting.
Do I have anyone with a particular passion for another
question before I do?
Representative Trone. Thanks for the warning.
Vice Chairman Schweikert. Mr. Beyer, something quick.
Representative Beyer. Just a quick thing, to pull on Dr.
Ferguson.
Yes, if we could get the 16.5 percent back up to the 20
that it was back 20 years ago when George W. Bush was
President. We have to be open to spending cuts and to
regulatory reform, absolutely.
Vice Chairman Schweikert. I really wish we would use the
language ``smart regulation.'' The reality is the world of
technology we live in today, the way we do much of our
regulation is absurd. It is a 1938 design model when you could
crowdsource much of what we do.
But, then again, no one has ever watched the YouTube video
I did on--I did this great cartoon on how to use technology.
I do want to--the prerogative of getting to sit in the
bigger chair, I have a handful of things I just want to touch
on.
Mr. Linden, I want you to provide the committee the paper
that says debt levels do not affect long-term interest rates,
because I have the Peterson Foundation article that says just
the opposite in their study.
And I am going to submit that to the record.
[This article can be found at: www.pgpf.org/blog/2022/12/
the-rising-national-debt-drives-up-interest-rates]
Vice Chairman Schweikert. I think it is only fair to let
you submit your article or your dataset that contradicts the
Peterson Foundation's.
Mr. Linden. Yeah, I appreciate that, Vice Chairman.
And just to be very clear, my point is simply that if you
look at the observed relationship, if you look at a graph of
interest rates paid on 10-year treasuries----
Vice Chairman Schweikert. Because you have to look at
liquidity provided by the Fed and then the rolling up the
balance sheet. So from a monetarist standpoint, you got some
real noise in the data.
Mr. Linden. The data is noisy. But if you look for the past
40 years, if you had told anybody in 1985, when the interest
rates were, what, four times what they are today, that the debt
was going go from 30 percent of GDP to 90 percent of GDP----
Vice Chairman Schweikert. No, no, I----
Mr. Linden. Would interest rates go up or down?
Vice Chairman Schweikert. But what I am just simply asking
for is provide me the paper. I would love to read it.
For anyone on the panel, is it rational--how many other
countries, particularly in the industrialized world, OECD, do
not actually give a score for internal borrowing?
If someone were to grab their phone right now and look up
OECD's calculation for U.S. debt to GDP, they have us at 144
percent. Do we intend not to pay back the money? Of course we
intend to pay back the money.
But we have actually had a couple months, I believe, where
we actually borrowed money to be able to make the payments on
our borrowed money.
And the fact of the matter is we pay interest to the funds,
as is only appropriate, but it--I just--and this is--this goes
back actually to my finance classes back in the Dark Ages. We
had this debate. Is it appropriate how the United States says,
oh, it is only publicly held, yet you have several trillion
over here that you are paying interest on, that you do owe, and
you at this current rate are going to have to either tax or
borrow to actually pay back those trust funds?
I mean, give me an opinion. Do we play actually a shell
game with ourselves?
Dr. Faulkender. It, to me, depends on the question that you
are asking. So if you are asking where market interest rates
are going to find their equilibrium, then it is publicly held
debt that is relevant.
But if you want to understand what are the long-term
obligations, as again somebody who oversaw the Trustees process
for Social Security and Medicare, we very much want to make
sure that the revenue stream that comes from the trust fund's
assets are incorporated into the expectations of being able to
finance Social Security and Medicare.
So depending on the question you are asking, it is going to
vary which measure of that you look at.
Vice Chairman Schweikert. Okay. So it's [crosstalk]
liability.
And, Mr. Linden, you sort of----
Mr. Linden. This is a really great point.
Vice Chairman Schweikert. Almost touched on this----
Mr. Linden. Yeah.
Vice Chairman Schweikert. When you were talking----
Mr. Linden. To be very, very clear, so we are all clear,
CBO's long-term projections essentially do that. They assume
that all obligations in Social Security and Medicare will be
fully paid regardless of the status of the trust fund.
The publicly held debt projections in CBO's projections are
an accurate reflection of our obligations, and that is why
publicly held debt is the right way to think about it.
It is not that the gross--the intergovernmental debt is not
real. It absolutely is. I completely agree with you. Those are
real obligations that the government will have to pay. But it
is fully captured in the CBO projections of publicly held debt.
Vice Chairman Schweikert. Yeah, but in realizing that every
month we have been functionally, it is an effect of our current
borrow, because we--I don't think we have, other than
employee--government employees--really any major trust funds
that are actually growing. All of them are bleeding. And so now
each are a negative draw.
And I don't think there is a complete understanding here
that we are going to bleed out the Social Security trust fund
over the next 8, 9 years.
Mr. Linden. So one way to think about this, Vice Chairman,
is if you snapped your fingers today and said instead of
financing Social Security through a trust fund we were just
going to finance everything through the general fund--I am not
saying we should do that or shouldn't do that but just as an
exercise to think about this--you said no more trust fund, we
are going to get rid of the intergovernmental debt, but we are
not going change a single benefit, and we are not going change
a single tax policy, would that change the projections, the
budget projections at all?
Vice Chairman Schweikert. No, no, it won't, it would stay
exactly the same.
Mr. Linden. It is exactly the same.
Vice Chairman Schweikert. But it stays exactly the same
because those trust funds are basically gone.
Mr. Linden. Right, because we already assumed that we
will--those projections assume that we will pay those
obligations.
So that is why it is very important to--I don't focus on
the intergovernmental debt for economic reasons because the
obligations are fully captured in the debt projections.
Vice Chairman Schweikert. Okay.
Mr. Beyer.
Representative Beyer. When you are done.
Vice Chairman Schweikert. No, no, no, do this. I actually
like the conversation model. It drives the poor witnesses
insane, but it makes me happy.
Representative Beyer. Well, as long as I--I just want to--I
read a number of interesting articles over the weekend about
how we have gone from a global savings glut to a global savings
drought, that it is drying up almost everywhere.
I would be really interested--I don't know who to ask the
question to--but what you think that is going end up doing to
interest rates.
Vice Chairman Schweikert. That is actually a really good
question.
Dr. Faulkender. So there has been an interesting hypothesis
that one of the things the pandemic did is it changed people's
willingness to delay consumption.
So if you think about the savings rate--sorry to get really
finance professor nerdy on you--savings is essentially the
compensation for deferring consumption. And so to the extent
that people equate consuming now versus consuming later, that
is going to drive your interest rate and equilibrium.
Now, if what the pandemic did is it made people think more
about today because tomorrow may not be here, not so much
because of death but because you may all of a sudden be locked
down for 2 years, we are seeing this much greater desire to--
there seems to be less sensitivity to things like spending on
vacations. People are willing to do it because you never know
when you are going to get locked down.
That means that there is going to be a savings reduction or
you are going to have a higher interest rate in order to induce
the same amount of savings to finance the outstanding debt.
And so that is the hypothesized relationship as to why it
may--we may see that this reduction in savings, to the extent
that it is explained by this change in behavior, could lead to
a higher equilibrium interest rate in order to compensate
people for the savings that necessarily funds debt.
Did that make sense?
Representative Beyer. Yeah, and not limited to the United
States.
Dr. Faulkender. Not at all. That change in preferences is
probably global because the whole world experienced that kind
of outcome, but it is more acute in the United States because
we already had low savings rates to begin with.
Mrs. Boccia. I would add a further point, and that is that,
as the Vice Chair mentioned earlier, this is also a demographic
reality, because one thing that also happened during the
pandemic is that more older individuals that could still work
decided to retire early. And so you have a large population
moving into the consumption phase of their life, of their later
years, rather than continuing to produce, invest, and save.
So we must not lose sight of the fact that this is also--
the pandemic pulled forward the effects of the aging society on
our macro economy and this is reflected in lower savings.
And what that will result in is that there will be less
capital available for investment. So we should be extra careful
when we think about raising taxes on capital that will affect
investment because we no longer have the benefit of the savings
glut we had previously which offset some of the pressures from
higher government borrowing on interest rates.
We benefited from this for a very long time, but that
period is likely over now.
Vice Chairman Schweikert. All right. My last comments. And
I really appreciate you being here. I appreciate members that
have shown up.
I am disappointed in all of us because we did what we
normally do. ``You guys cut taxes.'' ``You guys spent too much
money.''
And one of the these days there will be a discussion like
this where we are not going to mention what happened yesterday.
We are going to talk about tomorrow and the day after that and
the day after that, where we are demographically, where we are
technology adoption, where we are in potential immigration
models.
And that is actually why I--one of the things I truly
appreciate you, you are one of my few voices out there that has
been saying the debt and deficit commission is an opportunity
for us to at least have some commonality where we so bathed in
our partisan rage often--look, let's be honest.
There was a number of things said that--some of you have
Ph.D.s--that I am here looking at the math facts and I have
another Ph.D. saying just the opposite.
I don't know how we deal with the reality. We have an
issue. Our burn rate, our borrowing rate, and even the
President's budget yesterday--think about what was in the
President's budget yesterday.
Last July, the borrow--the debt was going to be, what, 1.4,
1.5, maybe 1.6? And yesterday they admitted it is going to now
be 2.1. But if you actually do the tracking on the daily debt
right off the Treasury, it is 2.8.
How in several months you have that types of variance, when
variance--when CBO, our brothers and sisters across the street,
come in and they miss the number by a trillion dollars. Is that
because of something in the tax policy? Is it something
demographically? Is it parts of the Inflation Reduction Act?
There is something going on.
And it is my fixation, is how do we ever sit with Democrats
and Republicans, like cats and dogs cuddling, and have a common
understanding of saying here is where we are demographically,
here is where we are health-wise, and start part of the
intellectual part of the argument?
One of the things I am so proud, at least the Joint
Economic Republicans, what was it, last May, they were willing
to write a chapter on obesity. And I thought, being the person
that authorized it and asked them to spend months looking at
the numbers, I thought I was going to get my head kicked in for
talking about something we are not allowed to talk about.
And it turns out I had Democrats saying that is neat,
because it was, what, 5-some trillion dollars. And we didn't
even really have the ability to ultimately work out all the
secondary and third-degree effects of society, family
formation, other things.
There are some things here that would be moral, some
fascinating data of just health being the most powerful--we
always thought it was education. Maybe health is the most
powerful thing in income inequality for urban, my Tribal, rural
poor.
How many of us have ever sat at a hearing and had anyone
actually go off-script and say we often are fighting over the
wrong stuff?
So, look, my respect, because of my friendship with Mr.
Beyer, you had one more thing you wanted to share. And then I
will do the script and I will ask everyone to give us our
documents over the next couple weeks and then we will go home.
Representative Beyer. Well, I think, Mr. Chairman, as long
as you are nerding out, that I would jump in.
First of all, I think it is discouraging on the fiscal
commission right now that, at least according to the political
rags, it is Grover Norquist and Newt Gingrich that are opposing
it.
Vice Chairman Schweikert. It breaks my heart.
Representative Beyer. Yeah, which is really--I still think
one of the biggest mistakes we made was not adopting Simpson-
Bowles. I mean, here we are all these years later buried in it.
But looking forward, not looking back at TCJA or Simpson-
Bowles or anything else, one of the things in the President's
budget was getting rid of the step-up in basis. And, obviously,
there is one reason for doing that, which is it would generate
a lot more money. The second reason is it is a huge part of why
our wealth inequality is the largest it has been in a hundred
years.
But I would be fascinated from the economist perspective
about one of the things that we know that it does is it locks
up an awful lot of assets. We can't sell that real estate
because we are going to pass it on to our children. And the
basis was a million, and it is going to be $10 million. And we
pass it on to the children. That is $9 million that never gets
taxed, ever, ever, ever.
It would be interesting to know what you think the debt
churn rate in the economy and how much new--not just taxes--but
how much new economic activity would be created by getting rid
of the step-up in basis.
Dr. Clausing. I think that would be a very important
reform, both for fairness reasons, because if you think about
all these people getting locked into their assets and then
passing on intergenerational wealth when they could have used
that money to reinvest in the economy, I think there are
enormous benefits there.
And I do agree that we should have more bipartisan
conversations. And I appreciate Vice Chairman Schweikert's plea
for that.
I think JCT and the CBO are national treasures that try to
bring nonpartisan analysis to things. And, of course, they get
some scores wrong at times and, of course, forecasting is
difficult, and they should ceaselessly try to do that better.
But I do think it behooves us to at least have some factual
organizations that we are all looking at and we are, like,
okay, this is what the nonpartisan group is saying about the
truth of what revenue came in. And there we will be
fluctuations. But, I think that is--it is a very important
thing to build on.
Representative Beyer. We also think that the Joint Economic
Committee is a national treasure.
Dr. Clausing. Yes.
Vice Chairman Schweikert. And, look, one of the reasons
that I am doing this is because we almost never have this
discussion. And I would prefer us doing roundtables over
sitting, with the barriers here.
To Mr. Beyer's step-up in basis, I have an economic paper
somewhere in one of my binders--I have a bad habit of being a
pack rat--that was talking about one of the reasons you might
have less churn in the economy, even though basis has the
adjustments and the 1031s and some of the other things in
there, is because so much of your growth in your basis is
actually inflation.
So do you sell an asset and pay taxes on something that
your reinvestment is also now at a new higher basis, because
how much is true appreciation and how much is just inflation?
And so you almost need an inflation shock absorber as somewhat
part of the math so you get that economic velocity.
I mean, is it wrong to actually think about saying, okay,
if he wants to affect basis, we should at least have an
inflation calculator in there?
Dr. Clausing. Inflation is definitely part of the
situation.
But one thing to bear in mind is that investors also
benefit from deferral. When you earn income year after year,
somebody takes out the money every single time you earn it.
Whereas if you have something invested, in that whole time that
it is growing free of tax it is going to grow to a much larger
number than it would otherwise. And that deferral advantage is
much larger than the inflation disadvantage. You are exactly
right that the inflation----
Vice Chairman Schweikert. The need to adjust it.
Being someone who actually managed some resources, what we
would often do is just borrow off of it.
Dr. Clausing. Yeah, I mean, you can borrow against it.
Vice Chairman Schweikert. Dr. Faulkender.
Dr. Faulkender. Yeah. So to the Congressman's earlier
question, I have never really particularly understood why we--I
think the basis step-up existed because if you go back decades,
it was very difficult for heirs to figure out what was the
original basis of the asset when my forebears originally
purchased it.
If you look at the electronification of financial
recordkeeping, I think that that is a much less salient
argument today. And to be honest, I would much rather see the
sale of the asset be the taxable event than the death of the
owner be the taxable event.
And so if you were to ask me, I would prefer a basis step-
up over an estate tax. I think that is a much more economically
efficient way to go after accumulated capital gains.
If we are really going after stuff right now, I would also
say that I don't think that people should be able to borrow--
and I am speaking entirely for myself now.
I thought that when Elon Musk purchased Twitter, the idea
that he could borrow against his Twitter stock and not pay
capital gains taxes on that, rather than liquidate the Twitter
holdings in order to come up with the money and then I think
count on a basis step-up at the end of his estate in order to
essentially permanently avoid that run-up, I think that that is
a problem in the Tax Code that we should be able to find
bipartisan consensus on fixing.
Mr. Linden. Bipartisan consensus, my former colleague at
OMB, Zach Liscow, has a proposal to tax the borrowing against
unrealized gains for exactly that reason. So there is
bipartisan. That would raise a hundred billion dollars over the
next----
Vice Chairman Schweikert. Okay. My only point, and then I
am going to gavel us down so we can go back and do something
useful.
For staff who is watching this, think about it. In the last
6 minutes you had actually more intellectually robust
conversation than we did in the previous hour. Help us figure
out a way to do more of this.
All right. And with that, I would like to thank everyone
for being here.
I am going--let's make it 7 days to get the articles in.
And with that, we are adjourned.
[Whereupon, at 4:14 p.m., the committee was adjourned.]
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