[Senate Hearing 118-347]
[From the U.S. Government Publishing Office]
S. Hrg. 118-347
MAKING WALL STREET PAY
ITS FAIR SHARE: RAISING REVENUE,
STRENGTHENING OUR ECONOMY
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
June 12, 2024
__________
Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-979 WASHINGTON : 2024
COMMITTEE ON THE BUDGET
SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia MITT ROMNEY, Utah
JEFF MERKLEY, Oregon ROGER MARSHALL, Kansas
TIM KAINE, Virginia MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico RICK SCOTT, Florida
ALEX PADILLA, California MIKE LEE, Utah
Dan Dudis, Majority Staff Director
Kolan Davis, Republican Staff Director and Chief Counsel
Mallory B. Nersesian, Chief Clerk
Alexander C. Scioscia, Hearing Clerk
C O N T E N T S
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WEDNESDAY, JUNE 12, 2024
OPENING STATEMENTS BY COMMITTEE MEMBERS
Page
Senator Sheldon Whitehouse, Chairman............................. 1
Prepared Statement........................................... 26
Senator Charles E. Grassley...................................... 3
Prepared Statement........................................... 28
STATEMENTS BY COMMITTEE MEMBERS
Senator Ben Ray Lujan............................................ 13
Senator Ron Johnson.............................................. 14
Senator Jeff Merkley............................................. 18
Senator Mitt Romney.............................................. 20
Senator Chris Van Hollen......................................... 22
WITNESSES
Dr. Joseph Stiglitz, University Professor of Economics, Columbia
University..................................................... 5
Prepared Statement........................................... 31
Ms. Sarah Anderson, Global Economy Program Director, Institute
for Policy Studies............................................. 7
Prepared Statement........................................... 39
Hon. Michael Faulkender, Ph.D., Dean's Professor of Finance,
University of Maryland......................................... 8
Prepared Statement........................................... 51
APPENDIX
Responses to post-hearing questions for the Record
Dr. Stiglitz................................................. 57
Hon. Faulkender.............................................. 60
Chart submitted by Chairman Sheldon Whitehouse.................. 64
Chart submitted by Senator Ron Johnson.......................... 65
MAKING WALL STREET PAY
ITS FAIR SHARE: RAISING REVENUE,
STRENGTHENING OUR ECONOMY
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WEDNESDAY, JUNE 12, 2024
Committee on the Budget,
U.S. Senate,
Washington, DC.
The Committee met, pursuant to notice, at 10:00 a.m., in
the Dirksen Senate Office Building, Hon. Sheldon Whitehouse,
Chairman of the Committee, presiding.
Present: Senators Whitehouse, Merkley, Van Hollen, Lujan,
Grassley, Johnson, Romney, Braun and R. Scott.
Also present: Democratic staff: Dan Dudis, Majority Staff
Director; Dan RuBoss, Senior Tax and Economic Advisor and
Member Outreach Director; Sion Bell, Tax Policy Advisor.
Republican staff: Chris Conlin, Deputy Staff Director;
Krisann Pearce, General Counsel; Nick Wyatt, Professional Staff
Director; Ryan Flynn, Budget Analyst.
Witnesses:
The Honorable Michael Faulkender, Ph.D., Dean's Professor
of Finance University of Maryland
Dr. Joseph Stiglitz, University Professor of Economics
Columbia University
Ms. Sarah Anderson, Global Economy Program Director
Institute For Policy Studies
OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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\1\ Prepared statement of Chairman Whitehouse appears in the
appendix on page 26.
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Chairman Whitehouse. Let me call this hearing of the Budget
Committee to order.
Ranking Member Grassley, members of the Committee, our
witnesses, and guests, welcome.
Next year, a number of provisions from the 2017 Trump tax
cuts will expire. Republicans have made clear their plans to
add $4.6 trillion to the deficit by extending these
provisions--$4.6 trillion, according to the latest estimate by
the nonpartisan Congressional Budget Office (CBO); $4.6
trillion to enact another budget-busting windfall for the
wealthy.
Democrats are fighting to reduce the deficit, fix our
corrupted tax code, so that big corporations and the wealthy
pay a fair share in taxes, and invest in an economy that works
for everyone--all while ensuring those making less than
$400,000 don't see their taxes go up. That's our work window,
you might call it.
Today, we'll look at one option: making Wall Street pay a
fair share of taxes. In 2008, Wall Street's reckless
speculation caused a major economic catastrophe for America.
Millions of Americans lost their jobs. More than half of
American families lost at least a quarter of their assets. That
economic shock piled on debt, and it haunts me as I hear the
warnings about climate-related economic shocks ahead of us.
From an economic fairness perspective, Wall Street riches
accrue more and more to the already extremely rich. One percent
of Americans now own 54 percent, more than half, of U.S.-owned
shares in the stock market. Foreign investors own 42 percent of
all corporate shares.
Median Chief Executive Officer (CEO) pay of companies in
the Standard and Poors (S&P) 500 hit a record $15.7 million.
This chart shows the relative growth in worker wages,
productivity, corporate profits, the pay of the top 1 percent,
and then, spiking northward CEO pay.\2\
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\2\ Chart submitted by Chairman Whitehouse appears in the appendix
on page 64.
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Worker pay since 1978 has, indeed, grown somewhat, but
economic productivity grew at four times the rate of workers'
wage growth. The increase in productivity did not flow
commensurately through in worker wages. And executive pay has
grown more than 18 times faster than the productivity growth.
So, if you do a little math and multiple 4 times the wage
growth is productivity growth, and 18 times productivity growth
is CEO pay growth, you get 72 times as the rate at which CEO
pay growth has exceeded ordinary working wage growth.
Too often, these Wall Street profits come from trickery
like stock buybacks that reward CEOs and wealthy shareholders--
trickery which surged following the Trump corporate tax cut.
And no surprise, real estate investors got particularly
favorable Trump tax treatment. At the 11th hour, real estate
investors got led into a provision Republicans had claimed was
for small businesses, providing a tax break worth tens of
billions for wealthy real estate moguls.
Corporate taxes used to pay a fifth or more of American tax
revenue. Now, it's down to 6 percent. Many huge corporations
pay zero. Billionaires pay lower tax rates than nurses and
plumbers.
Our tax code is corrupted and rotten, turned upside down
for special interests. What can we do about it? Fix the carried
interest loophole; stop rewards for offshoring jobs; lock in a
real corporate minimum tax on foreign profits, so huge
corporations can't pay zero. Raise the tax on buybacks passed
in the Inflation Reduction Act (IRA); tax companies that pay
their CEOs more than 50 times what they pay their average
worker; enact a minimum tax, so the richest can't pay lower
rates than everyone else. And what I would love to see, use de-
corrupting the tax code to make Medicare and Social Security
sound and safe as far as the actuarial eye can see.
What's clear, as Congress gears up for the 2025 tax fight
is that Trump and his Republican allies plan to blow up the
deficit with trillions more in tax cuts for the super-rich and
the largest corporations. Democrats, we know, will oppose that
giveaway. And there's a lot of conversation to be had in that
space.
I will say it is not enough just to undo the damage of the
Trump tax law. Our tax code wasn't fair before the Trump tax
law. Instead, what we must finally do is to finally de-corrupt
the tax code, so that the wealthy and corporations finally pay
a fair share of the support of this great country.
Chairman Whitehouse. With that, I turn to my friend Senator
Grassley.
OPENING STATEMENT OF SENATOR GRASSLEY \3\
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\3\ Prepared statement of Senator Grassley appears in the appendix
on page 28.
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Senator Grassley. Thank you, Mr. Chairman.
Initially, I thought that today's hearing related to
federal revenues was a nice change of pace, particularly
compared to the 19 hearings that we've had in this committee on
global warming.
As I said last year at our very first hearing concerning
tax issues--so, I'm quoting myself--``Congress should regularly
examine tax incentives, just as we should review spending
programs to ensure that they're working as intended.''
Unfortunately, as is evidenced from today's politically-
oriented hearing title, an objective review of our tax laws
isn't what this hearing is all about. As a former chair and
ranking member of the Finance Committee, I assure you passing
legislation to close loopholes or shut down abusive tax
avoidance strategies isn't easy. It requires much more than
these kinds of hearings or appealing to a never-defined fair
share of taxes.
It requires building a bipartisan consensus for action and
understanding issues that often can't be boiled down to Wall
Street versus Main Street. After all, most Americans, not just
the wealthy elite, own stocks, either directly or indirectly,
as part of retirement plans. I just learned recently that just
in the last 10 years the number of people holding stock has
increased from 52 percent to 62 percent in just 10 years.
Now, I fondly recall working with my friend Senator Baucus
to identify and enact bipartisan measures to close abusive tax
loopholes, regardless of which one of us was Chairman of
Finance. We held bipartisan meetings and hearings to better
understand the law at issue and take account of both policy and
political concerns that might arise.
In contrast, I suspect that today's majority will demagogue
complex issues and deride Republicans for protecting Wall
Street. Well, I've got this news for you: for my colleagues on
the left, the reason many of the proposals we're likely to hear
about today aren't law is because of Democrat opposition, not
Republican opposition.
Take carried interest as just one example. Concerns about
carried interest became prominent in the 2000s, as private
equity and hedge funds grew in prominence. In response, Senator
Baucus and I called bipartisan hearings to study the issue.
However, our review was immediately met with resistance--and
not just from those you might expect, because I recall Senator
Baucus informing me about strong pushback he received privately
from certain Democrats, which, ultimately, led to shelving a
proposal that we were actively considering.
Despite this, Democrats publicly and continuously blast
carried interest as a loophole for the rich and blame
Republicans for its existence. Yet, when they've had full
control of the levers of power, they've repeatedly failed to
eliminate it. To date, the only legislative action taken to
limit the use of carried interest was enacted by Republicans as
part of the 2017 tax law.
At the time, Democrats roundly criticized Republicans for
not going far enough on carried interest. Yet, when they had
the opportunity to address as part of their so-called Inflation
Reduction Act, they failed.
This led to a left-wing publication, Jacobin, writing,
quote, ``Democrats pretended they were cracking down on private
equity moguls. The truth: Dems were actually protecting them,
perhaps because private equity firms are major Democratic
donors.''
Carried interest isn't the only area where the majority
says one thing, but legislates another way. The majority
regularly decries corporate handouts and large corporations
paying low or no tax, but, again, their so-called Inflation
Reduction Act proves otherwise.
Included in this partisan tax and spending bill are
hundreds of billions of dollars in new or expanded tax
incentives for favored green companies, though it also includes
novel new tax features, such as direct pay and transferability,
that actually make it easier for corporations, banks, and even
private equity firms to pay little or no tax.
Thanks to the Inflation Reduction Act and other legislation
passed under President Biden and the Democratic majority,
corporate tax benefits are now 92 percent higher than they were
under President Trump. That's based on an analysis of our own
Department of Treasury's, tax expenditure projections.
I'm all for examining perceived loopholes and looking for
ways to improve the fairness of our tax code. As past Chairman
of the Finance Committee, I actually got important reforms
passed into law. But, despite all the handwringing, that's not
a path my colleagues on the other side are taking.
Thank you. I look forward to hearing from our witnesses.
Chairman Whitehouse. Thank you, and I look forward to
working with you to see to it that the share of America's
corporate revenue contributed by corporations gets better than
6 percent, and that corporations that have various revenues are
not any longer paying zero percent.
Our first witness, appearing electronically today, is Dr.
Joseph Stiglitz, a Nobel Laureate who is currently Professor of
Economics at Columbia University. He also is Chief Economist
and Senior Fellow at the Roosevelt Institute and the founder
and Co-President of the Initiative for Policy Dialogue. He
previously served as Senior Vice President and Chief Economist
at the World Bank and as a member and Chairman of the Council
of Economic Advisors during the Clinton administration.
Next is Ms. Sarah Anderson, who is Director of the Global
Economy Project at the Institute for Policy Studies and co-
editor of the Institute's website inequality.org. She
previously served on the Meltzer Commission, which was tasked
with evaluating U.S. policy towards the International Monetary
Fund (IMF) and the World Bank.
And finally, Dr. Michael Faulkender is an Associate Dean of
Master's Programs and Professor of Finance at the University of
Maryland and the Chief Economist at the America First Policy
Institute. Mr. Faulkender served as the Assistant Secretary--
sorry--Dr. Faulkender served as the Assistant Secretary for
Economic Policy at Treasury during the Trump administration.
I welcome all of you and would turn, first, to Dr.
Stiglitz, assuming that our electronic connection can be
flipped on. There he is.
Please proceed, sir. You have 5 minutes. Your full
testimony will be made a matter of record.
STATEMENT OF DR. JOSEPH STIGLITZ, PROFESSOR OF ECONOMICS,
COLUMBIA UNIVERSITY \4\
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\4\ Prepared statement of Dr. Stiglitz appears in the appendix on
page 31.
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Dr. Stiglitz. Well, thank you, Chairman Whitehouse, Ranking
Member Grassley, and members of the Committee.
It is a real pleasure to be able to discuss future
direction of tax policy with you and how the tax code can be
more equitable and help create a more dynamic economy that
promotes the well-being of all Americans rather than just Wall
Street and other corporate giants or the wealthiest
individuals.
The tax code has explicitly contributed to inequality and
excessive financialization of the economy and distorted the
allocation of investment towards fossil fuels and real estate
and away from investments that would sustainably raise living
standards. U.S. tax policy provides considerable advantages for
unproductive activity from Wall Street firms and wealthy
investors.
In the few minutes I have, I want to emphasize four
directions for reform.
First, we need to close the loopholes and eliminate the
special provisions that result in the richest individuals and
most profitable firms not paying their fair share of taxes.
Today, billionaires have a lower effective tax rate than
working class Americans.
It makes no sense that dividends and capital gains should
be taxed at lower rates than wages. It is inequitable that
someone who is receiving dividends in his beach resort from
inherited stocks should pay a fraction of the taxes than that
of a nurse who is working long hours to take care of us during
the COVID-19 pandemic, or that a hedge fund manager uses the
carried interest loophole so she can escape much of the taxes
she would otherwise have to pay.
Special tax provisions that only serve corporations and the
wealthy have enabled and incentivized shareholder payouts,
resulting in companies having fewer resources to invest. They
reward companies for devoting their energies to tax avoidance
rather than becoming more innovative. Companies that excel in
tax avoidance grow at the expense of others.
Secondly, we need to eliminate tax provisions that are
directly distortionary. Our tax system provides large subsidies
for the fossil fuel industry, which this Committee has
previously examined.
Further, the tax code, by providing tremendous payouts for
Wall Street, encourages the excessive financialization of the
economy, making the economy less stable and increasing
inequality.
Third, we should use the tax code to actively create a
better economy by curtailing activities that create negative
externalities and encouraging those that generate positive
externalities.
The tax code should encourage research and development
(R&D) and discourage harmful economic behavior, such as
unproductive speculation and excessive emissions.
Finally, the tax code should aim more at non-distortionary
areas where elasticities are low. For instance, it was a grave
mistake not to have imposed a tax on windfall profits oil
companies and other energy companies accrued in the months
after Russia's invasion of Ukraine. The revenue from such a tax
could have helped those who were suffering from these price
surges.
Taxing land has little effect on land supply. So, too, for
natural resources. Such taxes actually generate societal
benefits for investment and speculation in these areas and
divert attention away from the more productive investments. The
rents generated by such resources should be taxed at higher
rates than those imposed on other sources of income. This is
true, too, for other forms of rent, most notably, monopoly
rents.
These reforms will significantly improve equity and
increase the efficiency of our tax system. While there are
countless others, I will conclude by proposing 10 tax reforms
that would increase taxes on the ultra-rich, reduce today's
extreme levels of inequality, and tackle tax avoidance.
First, remove the tax advantage for capital gains over
other forms of income and on CEO pay in all its forms.
Secondly, implement a constructive realization policy,
taxing assets based on their current value rather than only
when the gains are realized.
Thirdly, fully tax unrealized capital gains at death.
Fourth, implement a minimum income tax along the lines of
President Biden's proposed billionaire minimum income tax or
Brazil's global minimum wealth tax.
Fifth, increase the minimum corporate tax base.
Sixth, eliminate tax subsidies for fossil fuels and
implement carbon and other environmental taxes.
Seventh, expand and make permanent subsidies that increase
productive economic activity, such as R&D tax credits.
Eighth, a financial transaction tax.
Ninth, a windfall profits tax.
And tenth, reverse preferential treatment for income from
land and other natural resources.
We can create a more equitable tax system which generates
substantially more revenue and promotes growth. The principles
are clear and in many cases their application is
straightforward. Vested interests, reflected through the power
of money in our politics, are what stand in the way.
Thank you for your time, and I look forward to your
questions.
Chairman Whitehouse. Thanks, Professor. I appreciate having
you with us.
Ms. Anderson, please proceed.
STATEMENT OF SARAH ANDERSON, GLOBAL ECONOMY PROGRAM DIRECTOR,
INSTITUTE FOR POLICY STUDIES \5\
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\5\ Prepared statement of Ms. Anderson appears in the appendix on
page 39.
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Ms. Anderson. Thank you.
I'm Sarah Anderson with the Institute for Policy Studies.
And the first time I testified before this committee, it was in
2012, at a time when our economy was still struggling to
recover from a financial meltdown that threw millions of
Americans out of their jobs and their homes 4 years earlier. I
think we can all agree that we never want to go through that
again.
And over the years, Congress and regulators have taken some
important steps, but financial institutions still extract too
much wealth out of the pockets of working families and shovel
too much wealth into massive executive bonuses that encourage
inappropriate and excessive risk.
With the regional bank failures of last year, we saw that
reckless executives can still drive their firms into the ground
and walk away with grand fortunes, while relying on taxpayer
money to contain the damage.
This hearing is focusing on tax policy as one tool to
ensure that our financial institutions contribute to a healthy
economy and encourage long-term value creation, instead of
short-term speculation to bump up CEO pay.
As you prepare for the 2025 tax debate--which will be a lot
of fun, I'm sure you'll agree--I encourage you to consider two
questions:
One, would our tax system be more fair if financial firms
and executives contributed more to the cost of vital
investments?
And two, can we use tax policy to discourage financial
activities that increase instability and inequality, and
instead, incentivize activities that create long-term value?
I think the answer to both of these questions is yes.
First, big profitable firms are not paying anywhere near
the corporate statutory tax rate. Citicorp and Bank of America
paid an effective rate of 4 percent during the first 4 years
after the 2017 tax cuts. The new 15 percent minimum will help
with that, but we need to do more to close loopholes.
Second, most Americans are used to paying sales tax when
they go out to eat at a restaurant or they buy a new car, but
Wall Street traders pay zero sales tax on millions of dollars
in stocks and derivatives. And that's encouraged the explosion
of high-frequency trading that drains profits from ordinary
investors, while adding no real value to our economy.
Third, financial executives reap huge windfalls from our
tax code's bias in favor of income from investments over income
from work. We have billionaires paying a lower tax rate than
firefighters or teachers. And investment fund managers still
get to pay the lower capital gains rate on their carried
interest compensation.
Fourth, the Tax Cuts and Jobs Act (TCJA) gave big real
estate investors yet another tax break through the 20 percent
passthrough deduction meant for small businesses.
Clearly, the financial sector can and should pay more.
Now, I'm going to share some thoughts on how to use tax
policy to both raise additional revenue and encourage long-term
value over short-term speculation and excessive CEO pay. I like
to call these ``two-fers.''
My first two-fer is a tax increase on companies that pay
their CEO more than 50 times what they pay their median worker.
A recent poll showed overwhelming support for this, including
among 77 percent of independents and 71 percent of Republicans.
It would give companies a choice. They could either narrow
their pay gaps, which would probably make them more profitable,
because extreme pay gaps tend to undermine employee morale and
productivity, or two, they could choose to pay a higher
Internal Revenue Service (IRS) bill. It would be their choice.
My second tax two-fer is a financial transaction tax to
encourage long-term investment, while generating new revenue.
The target of this would be the highflyers in the financial
casino, while the cost to pension funds and ordinary stock-and-
bond holders would be less than the typical portfolio
management fee.
My final two-fer is an increase in the stock buyback tax.
Whether you were for or against the 2017 tax cuts, I think we
should all be angry that corporations took their tax windfalls
and spent a trillion dollars of it in 2018 on stock buybacks
instead of on worker wages or innovation.
For too long, Wall Street has wielded excessive power to
shape our tax code so their firms and executives can avoid
paying their fair share of taxes, while continuing activities
and practices that benefit the few while putting the rest of us
at risk. The 2025 tax debate is an opportunity to fix these
problems as part of a broader overhaul of our tax code to make
our country stronger and more equitable.
Thank you. I look forward to your questions.
Chairman Whitehouse. Thank you. And I look forward to that
broader overhaul.
Dr. Faulkender, please proceed.
STATEMENT OF THE HONORABLE MICHAEL FAULKENDER, PH.D., DEAN'S
PROFESSOR OF FINANCE, UNIVERSITY OF MARYLAND \6\
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\6\ Prepared statement of Dr. Faulkender appears in the appendix on
page 51.
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Dr. Faulkender. Chairman Whitehouse, Ranking Member
Grassley, senators on the Committee, thank you for the
opportunity to testify today on the enormous benefits that the
American people realized from having a pro-growth tax code.
I have been a finance professor for more than 20 years and
had the privilege of serving as the Assistant Secretary for
Economic Policy at the Department of Treasury. In that role, I
worked on the economic projections included with the
administration's budget submission, including research on
historic prosperity that was generated following the enactment
of the Tax Cuts and Jobs Act, or TCJA.
Today, the American people are suffering from the harmful
effects of inflation and declining real wages. As a result of
excessive federal spending and onerous regulation, the American
people have struggled with average price increases exceeding 19
percent since President Biden took office, while average weekly
earnings have risen just 14.5 percent. For the average
household, their hard work buys $2,300 less today than it did
just 4 years ago.
Today's hearing is about finding new taxes, such as higher
personal or corporate taxes and a financial transactions tax,
that would further reduce Americans' wages, savings, and
investment income--all to fund larger government.
Let's, first, set the facts straight on taxes. In fiscal
year 2022, federal receipts were the equivalent of 19 percent
of aggregate economic output of our nation, the second highest
since World War II. Between TCJA enactment and fiscal year
2022, corporate income tax payments rose 43 percent; personal
income tax collections rose 66 percent--well faster than
inflation.
We do not have a revenue problem; we have a spending
problem. According to CBO, spending for the next 10 years will
continue to be 23 to 24 percent of national output--well above
the 20.3 percent that it averaged for the 50 years prior to the
pandemic. While a national emergency may necessitate
temporarily elevated spending, the national emergency is long
over.
In terms of who pays taxes, in the latest year for which
data has been made publicly available, the top 1 percent of
households earned 26 percent of income and paid 46 percent of
total federal income taxes--well more than their share.
The United States has one of the most progressive income
tax codes in the developed world and the Tax Cuts and Jobs Act
made it more progressive.
On the corporate side, TCJA aligned the corporate tax rate
with what corporations were paying in much of the rest of the
world. Through provisions like the global intangible low-taxed
income (GILTI) and the base erosion and anti-abuse tax (BEAT),
we further incentivized economic activity to take place and be
recognized here. The result was that capital investment
accelerated; more than $1.7 trillion of foreign capital has
been repatriated, and tax inversions have, essentially, ended.
While one may think that higher tax rates would generate
higher tax receipts for the government, the Laffer curve
explains that higher rates deter economic activity. A higher
tax rate paid on less income can result in less income for the
government.
Additionally, while some of the changes in corporate tax
rates pass through to investors, higher corporate taxes also
result in higher prices for consumers and lower wages for
working families. This is consistent with the economic
prosperity our nation realized immediately following enactment
of TCJA. Inflation-adjusted incomes jumped a record $4,400 in
2019 compared to falling $2,080 since 2020.
Some are proposing a wealth tax to punish successful
entrepreneurs. Taxing unrealized capital gains would drive away
long-term venture capital investments in leading industries
like lifesaving biotechnology and low-cost, reliable energy,
where cashflows often may not be realized for 10 years.
Likewise, some are looking to enact a financial transaction
tax, which is, essentially, a fee on trading that will get
passed along to the American people. Sweden enacted a financial
transaction tax in 1984, after which trading volume declined
precipitously, and repealed it in 1991.
Higher taxes on top of the growing regulatory burden coming
from the U.S. Securities and Exchange Commission (SEC) would
just accelerate the movement of innovation offshore and further
degrade our position as the financial capital of the world.
Yet, many of the same people calling for higher corporate
and personal income tax rates are advocating that we repeal the
cap on state and local income tax deductions (SALT). According
to a 2021 study by the Tax Policy Center, 70 percent of the
benefit of repealing the $10,000 cap on SALT would go to those
making $500,000 or more. It's hard to think of a more
regressive tax policy proposal.
Our nation needs to address the staggering budget deficits
that have put us on an unsustainable fiscal path. Rather than
taking even more money out of the productive side of our
economy, the American people would benefit from repealing the
trillion dollars of green spending in the IRA; stop the Biden
administration's illegal student loan forgiveness; return non-
defense discretionary spending to pre-pandemic levels, and
reverse the regulatory burden that has caused inflation.
Thank you for including me in today's discussion, and I
look forward to your questions.
Chairman Whitehouse. Thank you, Doctor.
Dr. Stiglitz, let me begin with a few more broad and
general questions for you.
First, does economic inequality itself have economic
consequences and what happens to those economic consequences as
economic inequality worsens?
Dr. Stiglitz. That's a great question.
It used to be thought that there was a tradeoff. Arthur
Okun, who was the Chairman of the Council of Economic Advisors
under President Johnson wrote a book called The Big Tradeoff.
And the argument then was that, if you want to reduce
inequality, you would have to accept lower growth.
But that thinking has totally changed. And now, we know
that countries face a high price for inequality. The IMF
studies have shown--and IMF is not a left-wing institution--
have shown that that is the case. It was the central piece of
my book called The Price of Inequality.
One of the reasons for that is, as you get more inequality,
the adverse effects get worse and we've had an increase in
inequality. And the manner, the ways in which inequality has
increased related to monopolization/financialization also have
adverse effects on the economy.
Chairman Whitehouse. In the context of the harms that are
driven by economic inequality, could you elaborate a bit on the
extent to which our tax code actually contributes to economic
inequality, and hence, the economic evils that follow?
Dr. Stiglitz. It contributes in several different ways that
have already been highlighted. One of them is that it leads to
increased financialization of the economy. The financial
sector, in turn, has engaged in activities like predatory
lending. But, even apart from that, just increased debt leads
to greater instability, and that instability, the brunt of
that, is borne by ordinary Americans. So, it increases
inequality.
Our tax code encourages real estate speculation; provides
preferential benefits for CEOs. We've already had a discussion
of that. It taxes the very, very rich at a lower rate than it
does working Americans.
So, these are just a few of the ways in which our tax code
actually exacerbates inequalities and creates structures which
promote inequality.
Chairman Whitehouse. And if we were to look at efforts to
take advantage of those tax code failings, and perhaps consider
tax avoidance as an industry, how would you rank the size of
the tax avoidance industry and its positive or negative
contributions to society and the economy?
Dr. Stiglitz. The tax avoidance industry has become a major
global industry. It's partly a consequence of globalization.
Globalization has expanded the scope for tax avoidance
activities and given an advantage to individuals and
multinationals who operate in many countries because they can
take advantage of these tax avoidance activities. They can
afford the best tax lawyers who excel at tax avoidance.
But one of the central points of my remarks, my initial
remarks, was that those tax avoidance activities not only are
taking away directly--that is to say, those tax lawyers are
bright people. They could have been contributing to our
economy, and instead, they're trying to take money away from
the government. But they distort our economy.
We have investments in real estate; we have investments in
fossil fuel; we have investments in the financial sector that
would not be there if our tax system hadn't actually encouraged
those kinds of investment.
Chairman Whitehouse. Thanks very much, Professor.
I turn now to my distinguished ranking member, Senator
Grassley.
Senator Grassley. My conversation is going to be with Dr.
Faulkender.
My democrat colleagues talk a big game about making Wall
Street pay their fair share. Yet, many of the proposals we've
heard discussed today--from taxing carried interest the same as
ordinary income to imposing a financial transactions tax--these
have all been around for years, if not decades. Yet, Democrats
chose not to enact these proposals, even when they had a 60-
vote majority during the Obama administration, or the last
Congress when they ran through two reconciliation bills on
purely a partisan basis.
Isn't it true that many of the tax proposals that we've
heard about today haven't been enacted because of the
Democrats' own failure to enact when they had that opportunity?
Dr. Faulkender. Yes, Senator, they could have done it
through reconciliation and they did not.
Senator Grassley. Okay. Won't the policies Democrats chose
to enact as part of their misnamed Inflation Reduction Act
overwhelmingly benefit large corporations, as well as banks and
even private equity firms?
Dr. Faulkender. Yes. There are a number of tax credit
provisions and spending in the IRA that are going to go towards
large industries and private equity firms, yes.
Senator Grassley. And as we've heard today, many on the
left argue that unsustainable fiscal outlook can be solved
through tax hikes on the wealthy and large corporations and
Wall Street. As a result, the middle class has nothing to worry
about, according to them.
However, at the Budget Committee hearing last year, the
majority witness, Bruce Bartlett, let slip the truth by saying
this. Quote: ``I think we should raise taxes on the wealthy,
but we're going to have to eventually raise taxes on the middle
class.''
Isn't it true that this tax-and-spend agenda will,
ultimately, require tax hikes on the middle class?
Dr. Faulkender. At these levels of spending, there is
nowhere enough wealth amongst the top 1 percent or the wealthy
to cover all of those expenses and bring the budget into long-
term fiscal sustainability.
Senator Grassley. The majority witnesses discussed imposing
a financial transaction tax, which is, effectively, an excise
tax on every stock and bond transaction. Given that most
Americans own stock, and that more than two-thirds of the
families participate in retirement plans, wouldn't a financial
transaction tax hurt savers, regardless of their income level?
Dr. Faulkender. Yes. They will get passed on to investors
and savers, including investments through 401(k) plans.
Senator Grassley. Proponents of a financial transaction tax
argue it would promote market stability. Has that been the
experience of countries who have implemented such a tax?
Dr. Faulkender. It is not, Senator. So, when Sweden
implemented one, they saw reduction in trading volume, which is
generally bad for market stability. You want to maintain
liquidity through trading.
Senator Grassley. Okay. As you discussed in your testimony,
Americans have been ravaged by high inflation, and the other
side continues to propose tax increase after tax increase.
Since the 2020 campaign, President Biden has pledged not to
raise taxes on Americans earning less than $400,000. However,
because of inflation, according to the Bureau of Labor
Statistics, it takes $480,000 today to have the same buying
power of $400,000 in the summer of 2020. Yet, President Biden
hasn't updated his $400,000 pledge.
Isn't this another example of how President Biden's tax-
and-spending agenda is a broken promise?
Dr. Faulkender. It is because a lot of these tax provisions
are not adjusted for inflation. Some in the tax code are, but
this $400,000 has not, which means that over time it will hit
the upper middle class.
Senator Grassley. Yes. And in my few minutes, I'm going to
make this comment about people talking about raising the
marginal tax rate.
I used to have a chart--and I don't suppose I've shown it
for 10 or 15 years--but you can go back to World War II, when
we had 93 percent marginal tax rates, and you can go all the
way through the 1960s, or even up until the 1980s, when it was
still 70 percent, I believe, or it became 70 percent.
But if you looked at the income coming into the public, it
was pretty steady for that whole 30 or 40 years, which tells me
that you can raise the marginal tax rate as high as you want
to, but people that have the ability to make decisions that
they're going to work for the government or not work for the
government are deciding they're only going to pay ``X'' number
of dollars, and you're not going to get another penny out of
me, regardless of how high the marginal tax rate is, because
they've got the ability to hire the people to make tax
advantage. So, they get their taxes down to where they're
willing to work maybe for 40 percent, like today, 42 percent
that they pay in.
It's just ridiculous to think you can raise marginal tax
rates to 93 percent and you're going to get people stupid
enough to pay 93 percent of their income in taxes, so they're
working for nothing.
I give up. [Laughter.]
Chairman Whitehouse. No, you don't. You're going to be
always fighting. You just yield.
Senator Lujan, followed by Senator Johnson.
STATEMENT OF SENATOR LUJAN
Senator Lujan. Thank you, Mr. Chairman.
Dr. Stiglitz, I have some questions for you today.
I've been hearing a lot about buy, borrow, and die. Can you
explain what ``buy, borrow, and die'' is, Dr. Stiglitz?
Dr. Stiglitz. What that refers to is the way so many of the
share buybacks work. What you do is you borrow money from the
market to finance your buybacks. You get deductions for your
interest on your borrowing. The share buybacks are taxed at
favorable rates, only the increment over what you purchased.
And meanwhile--and this is probably the worst part--because
you reduce the number of shares of the company, the value, the
price per share goes up, and the CEO gets a big bonus for doing
nothing other than financial wizardry. It's nothing real. It
doesn't help create jobs. It doesn't help the economy. In fact,
it makes the economy worse because the company is now suffering
from an additional liability from the borrowing.
Senator Lujan. And, Dr. Stiglitz, in preparing for this
hearing, of several studies that I found, the one I'm going to
point to is some of the experts at Georgetown found that the
wealthy avoid taxes for 75 percent of their investment income.
Why is it that the wealthy engage in this tax avoidance
strategy?
Dr. Stiglitz. Well, it's because our tax code gives them
the opportunity to do it. You know, over the years, I've seen
the very rich engage, particularly through hedge funds, in
amazing strategies to avoid and in some cases evade taxes. The
worst get caught and have to pay back. But our tax code is just
rife with these provisions that provide for advantageous
treatment--if you have smart tax lawyers.
Senator Lujan. And so, Dr. Stiglitz, I'm trying to better
understand tax policies that have been adopted in recent
memory; namely, under the previous President. There are
estimates that have come out associated with what is a benefit
to the wealthy from a stepped-up basis perspective. And the
Joint Commission on Taxation (JCT) estimated that the stepped-
up basis at death will cost the United States $299.3 billion
from 2022 to 2026, or about $60 billion a year. And so, I just
want to take a moment to put that into perspective.
I'm one of, I think, two senators right now that went to
pre-K. I thought everyone went to Head Start. I didn't know
that I had to qualify for the program. That's a joke.
What I understand about universal pre-K is that it costs
about $14 billion a year. So again, $299 billion is the number
I referred to earlier. The Affordable Connectivity Program that
provides affordable broadband to over 23 million low-income
Americans costs $11 billion a year.
The United States recently passed the bipartisan Radiation
Exposure Compensation Reauthorization Act (RECA) to deliver
long-overdue justice to those left out of the original RECA
program, passed in 1990 and amended in 2000. And the New
Mexicans who had the first nuclear bomb dropped in their
backyards were left out. The program is supposed to provide
compensation to downwinders and uranium workers, but it expired
on Monday. This just goes to show another area where investment
from America could make a positive difference in the lives of
so many that injustice has been the only thing that they have
experienced.
Now, Dr. Stiglitz, how does stepped-up basis and buy/borrow
impact the ability of the government to fund critical programs,
such as education, health care, housing, and infrastructure
development?
Dr. Stiglitz. The purpose of stepped-up basis, it's a
mechanism by which rich people totally avoid paying taxes on
the income that they've accrued, the capital gains that they've
accrued for years, in some cases decades. So, while ordinary
people are paying taxes year after year, if you get your income
in the form of capital gains, you can postpone it, and then,
with the stepped-up basis, you never pay for it.
One of the things that I argued in my introductory remarks
was that constructive utilization, where you force individuals
to pay year by year on their capital gains as they accrue would
be an important step forward. But if you don't do that, it's
absolutely imperative that you have the stepped-up basis--and
as you pointed out, the revenues lost are very large and could
be used in so many constructive ways.
You gave a couple of examples; there are more we could talk
about--enabling more students to go to college. Tuition has
gone up enormously. So, there are a very large number of very
productive investments yielding very high returns that would be
able to be financed by the revenue you could generate from
those two proposals that you talked about.
Senator Lujan. Thank you. Thank you, Mr. Chairman.
Chairman Whitehouse. Senator Johnson, followed by Senator
Merkley.
STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Mr. Chairman.
We're trying to scramble to get the chart, my own version
of the chart that Senator Grassley was talking about.
Hopefully, we can get it up here before I am done.
I'll just ask all the witnesses, anybody want to defend the
current tax code? Anybody think it's a great code?
[No response.]
Senator Johnson. Okay. Silence. It's way too complex,
right? So, when you have something really complex, that's
something that can be taken advantage of, correct? So,
shouldn't our efforts be, rather than reforming the tax code
and trying to continue to socially and economically engineer
through the tax code, wouldn't it make a lot more sense to
simplify and rationalize the tax code? Dr. Faulkender.
Dr. Faulkender. It would, indeed. And that's one of the
things we tried to do in the Tax Cuts and Jobs Act was, by
doubling the standard deduction and removing some of the
deductions for other items, it was to encourage more people--to
encourage fewer people to itemize and more people to take the
standard deduction, thereby, making it less complex. But,
unfortunately, people, then, still calculated both ways, and we
didn't succeed in doing that.
Senator Johnson. Right, it's complex because you have all
these special interests from all over, from all ends of the
spectrum, coming in here and carving out a little special deal
for themselves. So, it ends up being incredibly complex.
So, we just put this chart up here.\7\ This is what Senator
Grassley was talking about. I mean, this is the futility of
trying to punish individuals, you know, trying to punish their
success. It just doesn't work. People aren't that stupid.
They're willing to hand over so much to the government and no
more.
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\7\ Chart submitted by Senator Johnson appears in the appendix on
page 65.
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Ms. Anderson, I want to ask you, what percent of an
American's income, of a dollar of income, should the Federal
Government be able to extract? What's the maximum tax rate? You
know, I'm just talking about the Federal Government now. What
do you think?
Ms. Anderson. I'd be happy to give you my preferred top
marginal tax rate----
Senator Johnson. What is it?
Ms. Anderson [continuing]. Once you close the loopholes
that make up our current top tax rate.
Senator Johnson. Okay. Okay, let's call it ``the effective
tax rate.''
Ms. Anderson. No----
Senator Johnson. What is the maximum amount anybody ought
to pay after all the deductions and that type of thing?
Ms. Anderson. Since people are not paying that at the top
level, we have billionaires paying an effective income 2
percent rate----
Senator Johnson. I need to know; what is the maximum--just
give me, what do you think is the most anybody should pay out
of a dollar of income?
Ms. Anderson. Yes. It's not about, that chart is not about
futility.
Senator Johnson. Yes, okay, I'm not getting----
Ms. Anderson. That chart is about loopholes----
Senator Johnson. Dr. Stiglitz----
Ms. Anderson [continuing]. That Members of Congress have
allowed in the tax code.
Senator Johnson. I've got limited time. Dr. Stiglitz, what
do you think the maximum amount anybody ought to pay out of a
dollar of income?
Dr. Stiglitz. I think you begin by asking the question, how
do you close the loopholes and how do you make sure----
Senator Johnson. Guys, this is, it's a very simple
question. What is the maximum amount any American ought to pay
out of a dollar of income? It's a very simple question. Again,
eliminate all the loopholes, but, I mean, the effective rate,
what is the maximum amount somebody ought to pay?
Dr. Stiglitz. Well, again, one of the things I said is, if
you derive your money from land speculation, you should pay a
very, very high tax rate.
Senator Johnson. So, first of all, income----
Dr. Stiglitz. And it's appropriate----
Senator Johnson. First of all, let me say, to simplify the
tax code, income should be income. There is a rationale for a
lower tax on capital gains because you're taxing inflation
there, the inflationary gain. So, you could index the
inflationary gain, and then, tax it at the individual rate.
Here was my proposal in 2017-2018. I call it a true Warren
Buffett tax. Tax all business income at the ownership level.
Okay? Ninety-five percent of American businesses are pass-
throughs. It's entirely possible. I talked to Warren Buffett
about this, talked to his shareholder services people. You
allocate income and you tax income every year, allocate it and
tax it at the ownership level. You could have corporations do a
backup withholding.
All kinds of advantages to that. That plan right now, parts
of it are being scored by JCT. Hopefully, the Chairman of both
this Committee and the Finance Committee--I know Chairman Wyden
is interested in it.
So again, that would be a simple system. And by the way, it
would be able to--you wouldn't have that locking up of
unrealized profit in C corps. This is, again--what's going to
happen in 2026 is a gross distortion, and puts small companies,
95 percent of American businesses, at a huge disadvantage with
the big C corps. So, we need to address that.
But, Dr. Faulkender, comment on what I'm talking about
there. And I don't think you've ever seen that plan.
Dr. Faulkender. No. I have heard you talk about it,
But I haven't yet seen the details, and I look forward to
seeind the score come out. But, yes, if we could do everything
as a pass-through, you would eliminate some of the distortions
that are created by changing your tax structure--all to have a
lower rate, either as a C corp or an S corp.
What we ought to do is tax all income uniformly and stop
saying, if government--if you spend money the way government
wants you to, you have a lower tax rate than if you don't do it
the way--than if you spend your money the way you want to.
Senator Johnson. Well, you would agree we do a terrible job
social and economically engineering through the tax code. So,
stop doing it.
Dr. Faulkender. That's right.
Senator Johnson. Use the tax code to collect the revenue
the government needs as simply and fairly as possible. That
ought to be our effort. Rather than talk about these complex
things about a billionaire tax, let's simplify this thing.
Let's rationalize this. That's what I'm going to try to push
for in the next couple of years.
Dr. Faulkender. Yes. Lower the rates; broaden the base.
Stop picking and choosing winners and losers through the tax
code.
Senator Johnson. By the way, one principle that we should
abide by is wherewithal to pay. So, trying to tax unrealizable
capital gains would be disastrous. Okay?
But again, I hope the Chairman takes a look at my tax plan
because it makes a lot of sense.
Chairman Whitehouse. I'm sympathetic to the Senator's
concerns and I appreciate the enthusiasm with which he pursues
them.
I do think that, when it comes to the question of what the
tax rate should be on the dollar of income, it matters whether
it's the first dollar or the last dollar, and it matters
whether it's the 10 thousandth dollar or the 10 millionth
dollar of income for that individual.
Senator Johnson. But you're complicating the question.
Again, it's just like overall----
Chairman Whitehouse. Yes, but it matters.
Senator Johnson [continuing]. The effective tax rate. You
know, what should be the maximum? Do you want to tell me what
you think your maximum should be?
Chairman Whitehouse. I don't, because you've got to know
what the dollar is. If it's the last dollar and it's the----
Senator Romney. Well, say it's a person who has earned a
billion dollars. Say someone earned a billion dollars. The last
dollar, how much should we tax?
Chairman Whitehouse. We don't even know what exists. I
think the tax----
Senator Romney. How much should we--what's the percent?
What percent? The last dollar of a billion. So now, we're
giving you----
Chairman Whitehouse. I would say way, way above 50 percent.
Senator Romney. But what?
Chairman Whitehouse. Because your billionaire doesn't even
know that dollar exists.
Senator Romney. So, what? So, what's your----
Chairman Whitehouse. It would be very different of
somebody's making $30,000 a year.
Senator Romney. You asked a question: which dollar is it?
It's a billion. Someone earned $1 billion one year.
Chairman Whitehouse. Well over half.
Senator Romney. Bill Gates earned $1 billion. What should
we tax in the last dollar?
Chairman Whitehouse. Well over half.
Senator Johnson. How about $1 million then, as long as
you're----
[Laughter.]
Senator Romney. Like about 70 percent? Seventy percent?
Chairman Whitehouse. We're into Senator Merkley's time.
[Laughter.]
Chairman Whitehouse. Senator Merkley.
STATEMENT OF SENATOR MERKLEY
Senator Merkley. Thank you, Mr. Chairman.
And this issue of our tax code is fundamental because we do
so many different things with it. But one of the things that it
certainly does is accentuate the wealth of the wealthiest
individuals.
My father, the mechanic, would ask the question, why is it
that working people who earn their income by the sweat of their
brow pay a higher marginal rate than do millionaires getting a
return on their already existing investments? And I think it's
an important question to continue to ask.
But I wanted to turn, Mr. Stiglitz--and good to have you
here--to the comment that President Trump made recently when he
told some of the country's wealthiest political donors they
should increase their donations from $2 to $3 million to $25 or
to $50 million in support of his election, because his tax
policies would benefit them far more than would Biden's tax
policies.
And so, I want to know, to what degree, Mr. Stiglitz, would
retaining some of the cuts for the wealthiest individuals and
the corporations from the previous Trump tax cuts, or
increasing those cuts, how would that benefit ordinary
Americans?
Dr. Stiglitz. It wouldn't and it actually would harm the
economy. You know, I was asked in the beginning about the
relationship between economic performance and inequality. And I
said the evidence now is in. It's very strong that a more
unequal society performs better, grows more poorly--a more
unequal society performs more poorly, grows more slowly, and
greater financialization is bad for economic stability and our
tax code encourages that. Our tax code encourages more
speculation and that's bad for the ordinary citizen.
So, the extension of the kinds of policies that President
Trump enacted would, I believe, be not only bad for the typical
American, but be bad for our overall economy. Remember the tax
cuts that were enacted in 2017 went overwhelmingly to those at
the very, very top.
Senator Merkley. Mr. Stiglitz, I want to shift to--I just
had a series of townhalls this weekend. I have a townhall in
every county every year. I was in towns that, basically, I lost
these counties by 30 to 50 percent. So, they are not what you
would call my base electorate.
And the issue that came up most over anything else was the
high cost of housing. So, this is very much a factor in urban
America; it's a factor in rural America. People are watching
the dream of homeownership disappear before their eyes, for
their children.
And we have a number of programs for more affordable
rentals, more affordable first-time homeownership. But one of
the things that I've been directing some attention to is the
growing role of hedge funds in buying up American single-family
housing.
What we saw in 2009, after the foreclosure crisis, is the
government sold houses in groups of a thousand or more. And no
ordinary American buys a thousand houses. Hedge funds, where
the investment of millionaires and billionaires exists, buys
those houses. They were being sold at 50 percent discounts.
I suggested they make them available to ordinary families.
I took this up with the Treasury Secretary. As a brand-new
Senator, I took it up with the President to say, ``Make them
available for 3 to 6 months to ordinary families.'' And
basically, the response was too complicated, too many homes to
dispose of, too worried about vandalism, frozen pipes, so on
and so forth.
But the hedge funds from 2009 forward have now recognized
that there's this enormous slice of the American pie that was
the major wealth-builder for middle class Americans, and the
hedge funds want to take that off the plate of middle-class
Americans and put it on their plate.
It's estimated that, by the end of this decade, the hedge
funds will own some 40 percent of the single-family rental
houses in America. And right now, we see in some markets the
hedge funds buying some 40 percent of the single-family houses
available.
In Oregon, we hear the vignettes of people saying, ``my
realtor told me I was outbid by an all-cash, no-inspection
offer.'' Who makes all-cash, no-inspection offers?
Is there any logic to saying that we should keep
homeownership, single-family homeownership, on the plate of
middle class Americans? And I've specifically proposed that
hedge funds cannot buy any more single-family housing; that
they have to sell what they have over a 10-year period, 10
percent of it, their housing stock, each year.
Is there a reasonable argument to say that, in terms of
equity, under how we approach the opportunity and the stake in
our society for ordinary working Americans, hedge funds
shouldn't be in the single-family housing market?
Dr. Stiglitz. Well, first, let me say that I do think
homeownership is very important. It's important for community
stability. It's important for engagement in all kinds of
education, local schools, and so forth.
Secondly, let me say that the tax code has given benefits
to the hedge funds, and the tax code has broadly in the real
estate sector contributed to real estate speculation, land
speculation, which increases the price of land. It makes
housing, more generally, less affordable.
The third thing is, in some communities there is real
concern that they own a sufficient fraction of the housing,
that you no longer have a competitive housing market. And that
allows them to raise prices, to take advantages of the tax code
and of market power. They're in there not to make people
happier. They're in there to make more money.
And it's become an attractive venue of money. And when you
think they're making money, who is the money coming from? It's
coming from ordinary Americans. It's just a transfer.
And so, you're actually right, Senator, that it's a
transfer which not only increases inequality, but I think
undermines the American dream, undermines our communities, and
undermines the opportunity for the typical American to make his
way up in the world.
Senator Merkley. And I'll just close--I know I'm over
time--so, I'll just close with this comment: that the tax code
very much plays on why this is such a profitable enterprise.
Untaxed appreciation and artifice of depreciation, which is
just a tax shelter, and untaxed interest is for the funds to
actually leverage their funds to borrow more and not pay taxes
on that interest. So, there's several features that really help
drive the profitability for hedge funds.
Chairman Whitehouse. Senator Romney.
Dr. Stiglitz. You're absolutely right.
Chairman Whitehouse. Senator Romney.
STATEMENT OF SENATOR ROMNEY
Senator Romney. Astonishing. I'm delighted that we're
talking about things related to our deficit. We should have
been doing this for a long time and I appreciate the fact that
we are.
Recognize, of course, that this is not about gathering
information and making decisions. We've never met as a
Committee on these things privately. You're seeing our full
discussion of the tax code right now. We're here to perform for
an audience, but the joke is on us--because, basically, no
one's watching, right? This is not something the American
people are tuned into. That doesn't mean it's not important.
I will note that ``things''--it's not my quote, but it
comes from another famous economist--``things that can't go on
forever won't.'' And continuing to spend massively more than we
take in, and adding every year massively to the national debt,
will not go on forever. And unless we deal with it in a
constructive way, we will have a financial catastrophe at some
point. I can't tell you when it is. Hopefully, we'll deal with
this issue and don't have the catastrophe, but that's going to
be a challenge for us.
I would note it's not just spending. It is both spending
and taxing. You have to do both in order to reach balance. If
somehow we were able to magically stop all spending other than
military that we vote on every year, if we eliminated all of
government, and kept in place, of course, the entitlements that
are mandatory, but all the rest of the government we got rid
of, we would still have a deficit. So, we're going to have to
look both at spending and taxing.
I keep hearing this idea that there are corporations that
are very profitable that pay no tax. Now, I can't figure out
how that is. Because if they're following the government tax
law that we've written, and that Congress has approved and the
President signed, and they have a profit, they have to pay a
tax on that profit. Is that right, Ms. Anderson?
Ms. Anderson. There are many tax avoidance strategies from
tax havens----
Senator Romney. No, no, no, no, no, no. No, no, no, no.
Answer the question. If a company follows government tax
accounting policies passed by Congress and the President, and
shows at the end of the year, let's say, a million-dollar
profit, they have to pay a tax on that profit of 21 percent, is
that right?
Ms. Anderson. Unless they're getting other tax credits that
balance that out. But----
Senator Romney. Well, but if they have other tax credits,
that means that's following the government accounting--the
things we passed in Congress.
Ms. Anderson. Yes.
Senator Romney. My point is this, which is, companies that
are profitable under the law that we've passed are paying full
taxes. So, if you think there are companies out there that are
massively profitable that aren't paying taxes, that's just not
true. What it says is----
Ms. Anderson. I wish there was more transparency on how
they're getting away with that.
Senator Romney. No, excuse me. I'm speaking now. It's not
your--it's not your turn.
So, what that says is, what that says is, if we don't like
the taxes companies are paying, then let's be honest about it
and change the federal law. But companies are paying taxes as
we have passed them.
What's being said is dishonest when people say, ``oh, all
these companies are earning all this money.'' What they're
referring to--I've tried to ask, ``what are you talking
about?'' They say, ``oh, we're talking about Wall Street
accounting, not government accounting.''
You see, companies are paying full taxes under government
accounting, but, then, the politicians look at Wall Street
accounting and say, ``oh, they're making a profit there. They
should pay a tax on that.'' That's a different matter. So,
let's be honest on how we deal with that issue.
CEO pay, as a ratio, the idea, you indicated we should pay
or charge CEOs based upon the ratio of their pay to their lower
employee wages. Do you know what companies would do in that
circumstance? Think about unintended consequences. That is,
companies would separate their employees between two different
companies, and low-income people would be part of one company
and higher-income people would be part of the other. All right?
You have to recognize that the kinds of things you're
suggesting have massive unintended consequences. The idea of
taxing people based upon their assets, which Dr. Stiglitz
suggested we ought to do, based on their net worth--not their
income, but their net worth--do you know what that would do?
France found out. They tried that. They had 60,000
multimillionaires leave the country over the course of about a
decade. They stopped doing it.
There's no other country in the world that taxes people
based on their assets because they realize people flee when
that happens, move assets other places. Unintended
consequences.
Look, we're going to have to do things that do raise
additional revenue and we're going to have to do things that
cut spending. We've got to do both, but we've got to be honest
with each other if we're going to do that in a reasonable and
fair way.
And I would note, just as a small subpoint, the idea of
eliminating the tax-free stepped-up basis in death is one thing
we ought to look at, and it probably makes sense. All right?
I do think that, when we look at taxes, we have to say
which things can we adjust that won't hurt the growth of the
economy. Because most of what's been described today is, in my
opinion, going to be highly detrimental to the growth of the
economy and the capacity of America to create jobs and lead the
world.
Don't forget, our economy is leading the world. Don't broke
what ain't--or don't try and fix and break what's actually
working pretty well. And let's fix things that we can to
finally rein in the excessive spending and deficits that we're
seeing.
Mr. Chairman.
Chairman Whitehouse. Thank you, Senator Romney.
Senator Van Hollen.
STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you, Mr. Chairman.
Always good to listen to our colleagues like Senator
Romney. I would just make a distinction between those
individuals and corporations that are not paying their taxes
that are due and owing versus those that are making payments
compliant with the law. And in those areas, as you said,
Senator Romney, some of us think that the current law does need
to be changed to create a more sort of productive economy and
not reward excessive risk-taking by CEOs, for example.
But, just to be clear, the funding that was requested for
the IRS, which House Republicans, anyway, have tried to zero-
out over time, is designed to make sure that people pay the
taxes that are already due and owing, and it amounts to huge
sums of money every year, according to many economists.
So, thank you, Mr. Chairman, for holding this hearing and
all of the witnesses for covering some of these issues.
I know the carried interest loophole has been covered.
I think if you look at our current tax system, it's riddled
with provisions that need to be revised and reformed, both to
sort of encourage more productive investment, but also to raise
funds that are important to invest in things like education,
health care, and our people.
Ms. Anderson, you mentioned in your testimony the effort
some of us have been pursuing with regard to Section 956 of
what was back in the day the Wall Street Reform Act. One of the
things we saw during the 2008 financial crisis was how big
firms paid out tens of millions in bonuses to CEOs, in many
cases that were from the same firms that U.S. taxpayers ended
up bailing out, which is why many of us have been working to
try to ensure that federal agencies implement Section 956. The
Federal Reserve has been a laggard here.
Could you just speak to the importance of doing that and
how many of these bonus systems simply reward short-term risk-
taking at the expense of other investments on behalf of firms
and their stockholders?
Ms. Anderson. Yes. And I want to thank you, Senator Van
Hollen, for your efforts to finally get this part of the 2010
Dodd-Frank bill implemented. This is the part that bans Wall
Street firms from providing incentive compensation that
encourages inappropriate risk.
And six different agencies have to agree to it. And so, it
has gotten dragged out far too long. We're hoping to see action
in ways that would incentivize Wall Street executives to think
more about the long-term value creation instead of complicated
schemes that can blow up and put the rest of us at risk.
For one thing, they could require them to put a share of
their incentive compensation into a joint fund that could be
used to pay any potential penalties against the company for
fraudulent behavior, but there are a lot of important ways that
are on the table and being discussed to finally get that
regulation over the line in a way that I think will mean that
we're all safer from the kind of risks we saw in 2008.
Senator Van Hollen. Well, thank you for that. And we are
continuing to push all the federal agencies to move forward on
those rules.
Dr. Stiglitz, thank you for raising the issue of tax
treatment of capital gains at death. As you know, current law,
including very large exemptions to the estate tax, entrenches
and accelerates wealth inequality. In fact, it's one of the
larger sources of just wealth being passed on from generation
to generation in huge amounts, essentially, avoiding any taxes,
any commitment to the public good in the process.
Could you just talk about why we need to address this issue
and how failure to address it contributes to increasing wealth
inequality in the United States and reducing investments in
productive areas?
Dr. Stiglitz. Well, first, let me say that it also
contributes to a sense that the tax system is unfair. Because
what it means is that the income of individuals that is earned
in the form of capital gains of these rich individuals is
never, never taxed.
So, while ordinary people may be taxed at 25-30 percent,
those who can take advantage of stepped-up basis and receive
their income or convert their income into capital gains totally
escape that taxation. And because they escape that taxation,
the wealth, they are able to pass on so much more wealth to the
next generation, who, then, can engage in the same activity
over their lifetime. And so, you have the creation of a
plutocratic country.
Senator Van Hollen. Well, thank you for summing that up
quickly, and it's one of the areas that I and others have been
focused on, and look forward to continue to work with you and
appreciate all the work that you've done in this area over
many, many years.
Thank you, Mr. Chairman.
Chairman Whitehouse. Thank you, Senator.
I'm going to wrap up the hearing here. One of the things we
do in the hearing is ask witnesses to answer questions for the
record.
And, Dr. Stiglitz, in particular, I would like to ask you a
question for you to get back to us that relates to climate-
related risk and the extent to which it appears now to be
adequately or inadequately accounted for in the corporate
sector.
We've heard again today my Republican friends trying to
insist that there is a difference between climate risk and
economic risk; that the two are unrelated. We've had abundant
testimony from very expert and highly regarded people who are
bound by fiduciary responsibility who point out the exact
opposite.
I happen to believe that climate risk is the biggest
looming risk over our economy. The climate risk is economic
risk and that economic risk is budgetary risk. Indeed, a third
of our debt has come from economic shocks, not just from the
erosion of spending over taxation and income.
We've talked about the 2008 shock and its role today. And
the Chief Economist for Freddie Mac warned that we've got
another one coming just from coastal property values being hit,
by the insurance failure that follows, by mortgage failure that
follows, by values failure. And we've had other witnesses
confirm that testimony.
So, I just flat-out reject the notion that climate risk is
not economic risk, and that that economic risk is not a huge
budgetary risk. I think all of the evidence runs to the
contrary.
And in that regard, Dr. Stiglitz, you watch all of this
very carefully. You've provided excellent economic testimony
about climate risk. And I'd love you to answer in a written
question for the record (QFR) how well you think at the moment
the market is assessing climate risk and how well you think
corporate reporting accounts for climate risk. Would you be
willing to do that?
Dr. Stiglitz. Very much so. And you're absolutely right,
climate risk is an economic risk. It is a budgetary risk. And
some people think, because climate change is out there in the
distant future, it's not something that we have to pay
attention to today. But that's not true. We're already getting
some of the direct effects, as you mentioned, in terms of
extreme weather events and in terms of coastal properties being
adversely affected.
But there's another effect that I would want to emphasize,
which is at some time in the not-too-distant future markets are
going to wake up and realize that we can't go on with fossil
fuels. And when that happens, there will be a re-evaluation of
the price of fossil-fuel-related corporations/activities. And
if you thought that there was a big shock from mispricing of
residential real estate mortgages, this is an order of
magnitude larger.
And hopefully, it won't happen; the market will realize
this more gradually. But where we are right now, the market has
not taken these risks onboard, and it could come as a very big
shock to our entire economic system.
Chairman Whitehouse. Well, I would ask you to write that
out for me as a response to a question for the record; and
also, to touch on how effective you think the new SEC proposal
will be in improving the climate risk reporting.
Chairman Whitehouse. And with that, let me thank the
witnesses for appearing before the committee today.
Questions for the record, other than the one I just asked,
will be due by noon tomorrow, either to the Committee clerk or
by email.
We will ask the witnesses--Dr. Stiglitz, this would be
you--if you wouldn't mind responding within 7 days of noon
tomorrow. That would be very helpful to us, as a Committee, to
have your response in by then.
And ditto to any other questions for the record that come
in by noon tomorrow.
Chairman Whitehouse. With no further business before the
committee, our hearing is adjourned.
[Whereupon, at 11:22 a.m., Wednesday, June 12, the hearing
was adjourned.]
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