Hearing on How Welfare and Tax Benefits Can Discourage Work
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
COMMITTEE ON WAYS AND MEANS
WALLY HERGER, California
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
JENNIFER M. SAFAVIAN, Staff Director and General Counsel
SUBCOMMITTEE ON HUMAN RESOURCES
ERIK PAULSEN, Minnesota
|LLOYD DOGGETT, Texas
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
JOSEPH CROWLEY, New York
SUBCOMMITTEE ON SELECT REVENUE MEASURES
PETER J. ROSKAM, Illinois
|RICHARD E. NEAL, Massachusetts
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
SHELLEY BERKLEY, Nevada
C O N T E N T S
The Right Honourable Iain Duncan Smith
Secretary of State for Work and Pensions, United Kingdom
Representative Gwen Moore (D-WI)
Dr. Clifford Thies, Ph.D.
Professor of Economics and Finance, Shenandoah University
Dr. Eugene Steuerle, Ph.D.
Senior Fellow, The Urban Institute
Dr. Jared Bernstein, Ph.D.
Senior Fellow, Center on Budget and Policy Priorities
Dr. Ike Brannon, Ph.D.
Director of Economic Policy and Congressional Relations, American Action Forum
Hearing on How Welfare
and Tax Benefits Can Discourage Work
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittees met, pursuant to call, at 12:15 p.m., in Room 1100, Longworth House Office Building, Hon. Geoff Davis [chairman of the Subcommittee on Human Resources] presiding.
[The advisory of the hearing follows:]
Chairman Davis. Good morning, everybody. Welcome to today’s joint review of how welfare and tax benefits can discourage work. Before we begin our regular session today with opening statements, I would like to recognize a very special guest who is in Washington, D.C., the Right Honourable Iain Duncan Smith, Member of Parliament, the Secretary of State for Work and Pensions for the United Kingdom. We are truly appreciative that he has been able to adjust his schedule to join us today for a few minutes. The United Kingdom is currently undertaking significant reforms to its welfare and tax benefit programs to streamline their administration and reduce marginal tax rates so that work always pays.
This is an issue that I have cared about for many years. We have been watching many of the developments in Great Britain closely, as these reforms have been undertaken in what appears to be a very bipartisan manner, and he has graciously agreed to share with us information about these recent reforms in the U.K., which will be useful as we consider the effectiveness of our own programs.
Mr. Secretary, we did a little digging through our archives, and even with the help of the experts at the Congressional Research Service we are not able to find another example of a sitting Foreign Secretary appearing before the Ways and Means Committee on nontrade matters, so this is actually a historic occasion. We are honored to have you join us today. And please proceed with your statement.
STATEMENT OF THE RIGHT HONOURABLE IAIN DUNCAN SMITH, SECRETARY OF STATE FOR WORK AND PENSIONS, UNITED KINGDOM
Mr. Smith. Mr. Chairman, thank you very much indeed. I must say it is a pleasure to be here. It is also rather satisfying in this surrounding. I am used to doing my answering across the dispatch box in the House of Commons, being screamed and shouted at by most of the others at the other side within almost arm’s reach. So I am anticipating that not to happen here necessarily, but if it does I hope I will be able to handle it.
Can I just say that what we are trying to do in the U.K. is much the same as anywhere else, is trying to figure out what has being going on with a system that was set out to actually try and help people to become independent but actually traps them now in a form of dependency.
We saw spending on welfare interestingly rise by 39 or 40 percent under the last government at a time prior to the recession. So, during a period of growth, the economy was growing but we were also seeing welfare grow, which does seem to be rather peculiar. And what we saw here was a growing level of people who apparently just didn’t work, a very large number who regardless of whether the economy was growing or not were out of the environment of work. That, to my mind, causes wider problems we must recognize.
It is not enough just to take people off benefits. Anybody can do that. The question you have is where do those costs then go, because they don’t disappear. By that I mean, for example, even if you don’t pay people benefits, you end up with a kind of creative underclass, and that underclass then becomes very expensive in other ways, in policing. We saw our policing bill rise by over 50 percent during the course of the last government.
Your health, this is where most of your serious health concerns exist amongst the same underclass. They are the biggest drawer on health care and they are also the biggest, the most likely group to be almost recording every kind of sickness you can possibly imagine. So health care bills are highest. And last of all, education is deeply disrupted by people from that underclass who themselves have no expectation or anticipation of proceeding. So their knock on, notwithstanding the cost in taxation, therefore is huge to all of us. And so handling and changing this is not just about reducing the welfare bill, which of course is critical, it is also about reducing those other costs that come as a result of having a group like this.
And so what we have chosen to do is to look at, first of all, one, the entrapment principle. That is to say the welfare system that you set up: does it free people or does it trap them? And what we believe is the system that we have inherited is so complex with so many different benefits, all being withdrawn from people as they go into work at different rates, some are 100 percent, some are 60 percent, some are 70 percent, as they go up the hours towards full time work, and some are gross, some are net, it is almost impossible for the benefit recipients to understand or calculate exactly how much they would have in their pocket after the withdrawal. And in some cases they are losing, in the case of some lone parents, up to 95‑96 pence in every pound. So that basically means they get about 4 or 5 pence out of every pound they work for every extra hour, not much of an incentive and often very difficult for them to understand that they are better off or worse off. And they assume hugely that they are worse off, it is not worth the effort, and so they don’t make the effort.
So the system itself doesn’t incentivize people to do the right thing, it actually does the opposite. And we will see most of the money under the last government was transferred not to people in work, although it was not intended, but mostly to people out of work, particularly large families living in larger houses, often not two couple families. So a lot of the shift of money made it worse because if you receive more money, you are less likely to go to work. So we created a thing called the universal credit, which starts next year. That merges all the back-to-work benefits into one benefit, and it takes them away at one single rate every hour. So every hour you work, you will come off, in our case it is 65 percent. Now, that is a line that can be adjusted according to the government. They make that decision. It is about investing money or withdrawing money; it is as simple as that, rather like taxation. So that simplifies your understanding of benefits.
The universal credit is critical in two regards. One, the marginal reduction rates are dealt with by that single, flat taper. The other bit, which is the participation tax rate, is the moment you enter work, to my mind that is the critical bit. So people who have been out of work generationally, you need to get them across that threshold, number one. After that, keeping them in work, and I will come back to that, is critical as well, but get them across. Keep that cliff edge very low indeed so going across is very easy. So that decision economically makes sense. The universal credit is basically about that, simplification and making work. Always pays to be in work, not on benefits. So you are better off in work always than on benefits.
Secondly, we have a work program, which is de-risking government, but actually making sure that it does what we need it to do. So we hand to the private and the voluntary sector those who are being difficult to get into work. I don’t care what they do, it is not my problem. I simply pay them only after they have got somebody into work. So it is a payment by result system. And there we actually pay them 6 months after somebody has been in work and come off the benefit register. They don’t receive their money for 6 months so they need to keep them in work, which is really critical. It is easy to get somebody into work; it is very difficult to hold them in work. You need to hold them in work because only then do they get what I call the “work habit.” Once they got the work habit they will then satisfy that thereafter. They will make sure they understand work. So 6 months, 9 months, a year, even up to 18 months in the case of the most disabled. So in other words, the rewards lie further down the chain for them, which means they need to work with people even after they have got them into work. And the lack of risk is because basically they only get paid after they do the job, not before. And we calculate that by how much money we save on benefits and therefore how much money we can pay them. It is a straight crossover in money.
The third area of our reforms, which is important, is looking at sickness benefits and disability. We had a massive problem that a huge number of people were trapped really on two benefits, particularly one, a sickness benefit, called incapacity benefit. If you are on it, you are ineligible for work. We had some people on these not seen by anybody for up to 10 years. And of course if you are on a benefit like that you are not working. It doesn’t take the brains of an incredibly intelligent individual to understand that if you had a problem you certainly have a big problem 10 years later, so you get worse not better. So what we have now done is we are reviewing all of those and moving them onto a new benefit or moving them back to work. And the assessment is around about 10,000 or 11,000 cases a week. We are doing the stock right now, and we are finding something on the order of over a third of those who are assessing that were are not fit for work are now going straight back to work and they will go to a work program. Just a bit more than that are going to the middle bit of this new benefit, which is you will be able to get to work but you have some transitory problems. You might be in cancer treatment or something like that. But the expectation is you will be available for work.
And the third group of roughly about the same, about a third, is a group that actually there is no expectation of work because you really are genuinely too sick.
And then of course we will keep assessing people once they are on that other benefit every year to make sure that if they are getting better now we can move them back to work, whereas before we never had a constant check on them. And the other one is a disability benefit, which is about your mobility and your care. We are reforming that because it got too wide, mostly through judicial review, of course where the judges have sat on the appeals and widened the case law. So we are now tightening that back up now to make sure the benefit goes to those who really need the money. And that is not work related. So in other words you can receive that in or out of work. So now we can work with people to make sure that they get back to work and the most disabled are able to work, which is after all what they really want. They don’t want to be trapped out of work.
That is it in principle. There are a lot of other things, but those are the main things that we are doing.
[The statement of Mr. Smith follows:]
Chairman Davis. Thank you very much. I appreciate you sharing some of the challenges you are dealing with and we certainly are going to be dealing with in the very near future with addressing processes, and quite a bit of it is unknown.
I mean, for me it is ironic having you here. I went to the British parachute school at RAF Brize Norton 30 years ago as a U.S. army paratrooper on an exchange. And one of the more interesting aspects was having to jump out of an old barrage balloon to find out if the parachute worked. It was the longest opening time I ever had. We are glad to watch you take the first jump so that we can learn from some of these reforms.
But as we face these challenges, unemployment rates in both our countries are elevated, fewer people are working or looking for work, there is increasing family breakdown that leads to some of the social problems and financial costs that you alluded to that you are dealing with in your own jurisdiction. And given these factors it is critical that we develop approaches to integrate our processes to more effectively serve people, an issue I have cared about having grown up in a single parent home and I was on a form of assistance as a child as well, not meeting my father until I had been in the Army for 7 years. I am very interested in how you bring people over or avoid this cliff of falling off when they want to go back to work and they find disincentives.
I was wondering if you could elaborate for us on how your reforms are meant to address each of several issues; unemployment and work, family breakdown, and the need for budgetary discipline from a governmental perspective in terms of handling this, and I also understand that wage data is playing a key role in these reforms and I was wondering if you could comment briefly on how the wage and other data are being used to design and operate this new system.
Mr. Smith. Again, the reason was family breakdown. Family breakdown was the main reason why people found themselves in what we describe as poverty. I have this big debate about how it is not relative income so much that looks at that income, it is not relative income about poverty that is the key. It is what leads you to the position of being unable to earn money for yourself as a household. And those are the things like family breakdown, failed education, debt, drug and alcohol abuse and then your dependency on the state.
So those areas need to be wound into any kind of assessment, because your lifestyle usually has a bearing on what is likely to happen to you. And here is the point about family breakdown. We therefore need to do a lot more in advance about the dysfunctional family life which exists in many of these areas. So early intervention has got to be the key to this to put particularly young dysfunctional mums and their families right so the kids are right early on. And secondly, really to look at families on the edge of breakdown, so we are now investing money into help and support from most the voluntary sector, etc. to help stabilize families before they break down rather than spend the huge sums we do picking up the pieces afterwards. It is estimated over 20 plus billion pounds a year we spend on the after effects of breakdown, whereas it is known if you put a bit of money into this you can restabilize families who are often on the edge but don’t then break down and the children will benefit.
So that is a huge shift to where you put your money to focus on solving breakdown rather than dealing with the after effects of it.
On the issue about how the system works in terms of employment, the reality that we have here is that right now we know what the static levels are for benefits. So what we are simply saying is that as people go in from benefits into work, the levels they achieve in work for each hour should mean that their income is higher throughout that work process and demonstrably higher than it is when they are on benefits. So the universal credit is interesting because by and large it shifts some of the money down to the bottom end, that is to say, the early hours, because we think that going into work is the biggest issue. And then moving up the hours is the secondary issue of importance, you know, your marginal deduction rates. So the participation tax rate, that bit going in, you need to get that cliff edge right down so that they are always on an upward curve in income. And that starts literally at hour number one.
Now, that will hugely benefit, for example, lone parents who we want to go to work because we think it is good for them and their children after a certain point, quite rightly, that their children realize work is a part of life and a part of your future and they see somebody from that household working. So a lone parent household it has to be them, if it is a two couple household somebody else. So the early hours are really important because they may match that with some of their caring, but that needs to pay. And to keep them in work is important.
So that is really how the economics of this works, which is as they get paid, the withdrawals are lower, particularly in the early sector. And you do that by what I call disregards. So as they enter work, each category of persons, a lone parent, will have an amount of their income disregarded before the taper, so they can earn so much. A very disabled person will have a bigger disregard than the taper. Someone who is able bodied and young will have a very small disregard for the taper. And the lone parent will have a disregard slightly bigger than that and then the taper. The taper is the same for everybody, but the disregard evaluates what your particular level of need is for you to actually make that income work for you. And that is where most of the money is therefore concentrated on the investment but then takes them up the chain. And this will allow us later on to look at in work conditionality.
Chairman Davis. Thank you very much, Mr. Secretary. I would like to recognize my friend and the ranking member of the Human Resources Subcommittee, Mr. Doggett of Texas.
Mr. Doggett. Thank you for your insightful testimony. As I understand it, this universal credit is a new approach that you are just beginning to pilot or implement?
Mr. Smith. That is true, that is correct. It goes live in October next year. We are building a new software system and everything else. And we are doing some early advance work on it starting at around about April next year in some key areas. Not trialing it, but running it out early in some key areas to see what the glitches are.
Mr. Doggett. Is the goal that once you resolve any of those glitches to have uniformity across the country, so you wouldn’t have a different policy in Wales from Greater London or in Greater London from Northern Ireland?
Mr. Smith. Not in terms of the basic structure of this, no, but how it is delivered later on it could be a very localized delivery. Right now, we will be doing it as a national delivery until it is bedded in and then we are open for discussion about whether that could actually be localized.
The key to this benefit, by the way, is that we also have to change the way we report on taxation. So alongside this is a big change to create what is called a real-time information system on our tax base. Because as someone goes to work under the present system, the tax authorities predict that they earn a certain amount of money. We know in part-time work that hours change, so it is not the same as the prediction. So you are expected as an individual to report your hours changes back to the authority so they can readjust your support through the tax credit as it exists at the moment.
The problem is you are coming from a group that really doesn’t like authority very much, doesn’t really understand it and gets confused. You forget to do this. Some might deliberately not do it, others forget. So they go on to pay you too much money over the year. The end of the year they turn around and say, oh, we have overpaid you, now we need to reclaim that money and take it back. But of course you are dealing with a group that spends every penny that you give them immediately. What the real-time information system will do with universal credit means every month we reconcile. So if your hours change, we don’t even need you to tell us because the business reports that in their immediate report and then it just adjusts automatically. So now we say, hold on, his hours were down last month, we will adjust the payments this month.
Mr. Doggett. Are your projections that overall this will cost more to your national treasury to have this universal credit or less?
Mr. Smith. We are investing money to get it in, but once it is in, you will more than save that money back because of two key features. The first is the point I was making, huge levels of fraud and huge levels of error that are costing billions in the system; they will be eradicated.
Mr. Doggett. How much more are you investing over the short term?
Mr. Smith. Over the 3 or 4‑year period we are averaging about $2 billion a year of investment. And then, as I say, once that is bedded in, after that that is where you start. Or you will be making your returns immediately, because we think we will more than offset that even as we are bringing it in through the savings we make through the error and fraud alone that exists in the present system.
Mr. Doggett. One of the obstacles that we found in this country to people moving freely from one job to another or moving from a job to setting up a small business is the lack of access to health insurance. Is it your feeling that access to health insurance in the U.K. is helpful to promoting employment?
Mr. Smith. Well, our system of course is fundamentally different from what you have over here.
Mr. Doggett. Yes, it is.
Mr. Smith. We have the National Health Service and therefore everybody gets access free at the point of delivery.
Mr. Doggett. You don’t have any barrier to employment from people being locked into an insurance policy at one job and fear of losing it if they move to another setting up a small business.
Mr. Smith. People do have private insurance, but I don’t think it plays anything like the part it would play here because of that level of basic health care that they get. I am not, by the way, entering the argument about whether you should have anything similar here.
Mr. Doggett. What we have and what has been adopted here is very dissimilar, but it does reduce that job lock. And of course when we were considering it, one of your European parliamentarians was on Fox News telling us what a horrible system there was over there. He was repudiated by Prime Minister Cameron who referred to your health service as a great national institution. Is it still a great national institution in the U.K.?
Mr. Smith. Yes. That is being reformed at the moment. There is a big, big change taking place. We have just put some reforms through to make it much more responsive to what people actually need and to make sure the money that you spend is focused, although overall we spend less money on health care than you do over here.
Mr. Doggett. Well, I agree with the concept of reform but not with repeal so that we have access to health insurance for our workers here. And thank you for your testimony.
Chairman Davis. I thank the gentleman. And the chair now recognizes Dr. Boustany from Louisiana, the chairman of the Oversight Subcommittee.
Mr. Boustany. Thank you, Chairman Davis. Welcome. It is great to see you here today, and we appreciate the tremendous work you all are doing to reform this complex system in the U.K. to really align the incentives, to make sure that work actually pays and that those who are receiving the benefits will understand that moving, crossing that threshold to get to work is where they need to go, and of course how do you keep them in employment.
I want to focus on a slightly different part of what you were doing with reforms. I think it is called the work program. And it is a system of delivering employment services to these individuals. And as you restructured the benefits, the structure of the welfare benefits and tax benefits, you are also looking at your delivery system for these benefits. And my understanding is you have ways to leverage nonprofit organizations, certain private organizations, not only to help these individuals get into the workforce but stay in the workforce. Could you elaborate on this program?
Mr. Smith. We describe the work program, which I think is unusual for two reasons. The first is that it is a payment by result system. So the risk is not taken by the taxpayer, the risk is taken by the private and the voluntary sector who actually run the program. So we don’t pay them until they have got somebody in work and kept them there for a minimum of 6 months. And then after that they get further payments the longer they are in work.
The second point about this is that we also call it a black box system. By that I mean simply it is not my job to tell them what they should do, it is their job to figure that out and do it. This is where the voluntary sector comes in. The prime contractor, there are 18 of them in different areas, and they will have underneath them different subcontractors, some private, some voluntary. There is a lot of voluntary sector. And they tend to be the organizer, they will use to deal with systemic problems that an individual has. For example, somebody who, and we know this by knowing what prisoners are. They have no ability to read or write, a reading age of 10, even age of 11. If you get somebody in front of you like that, no good trying to put them straight into work because they simply won’t stay in work because they will fall out at some point because they are incapable of doing half of the jobs. They can’t read the signs. So what they will have to do is back load them very quickly to some organization, probably a voluntary sector organization that does remedial education work, enough to get them to the point where they can actually hold a job down, and then they take them through to work. So they have to invest a bit before they start to get them into work and get them paid. And that is how the process works. For the easy ones that just need to be attached and sorted, well, they will go through quickly. But it is these more difficult, and by the way, they get rewarded at a high level for those more difficult ones, and that is how it works. So the risk is taken by the private company who is the prime. They don’t flow the risk on down to the voluntary sector, so the voluntary sector gets paid at a slightly lower level, but nonetheless it all works for them in terms of their total reward.
Mr. Boustany. This was a big departure from past practice.
Mr. Smith. Huge. It is a complete departure. In fact, I think it is the biggest anywhere in the world that I can be aware of where we are doing a payment by results program. It is now national, and we are not quite into the first year. And it is a 2‑year program, and we have targets for them. And if one of the primes fails and doesn’t achieve the results then simply we will get rid of them and somebody else will come in. So we keep the risk away from the taxpayer, very much on the provider, and in turn it is in their interest not just to get them to work, and I think I also mentioned this, holding them in work. And that is the bit that is being missed by endless government agencies, which is you churn massively after about 7 or 8 weeks, because if they are not right for work then they will not stay in work. And therefore what happens is they churn out. It is very expensive then because you are chasing them after that. Then they are less likely to go back to work later again because they got scarred. So when you get them once, you got to make it tell once. And so that means that the provider has to check on the individual who is at work constantly to see if they have any problems and deal with them and then hold them and talk to the employer if necessary to hold them in that job.
Mr. Boustany. Well, I thank you very much. That is excellent work. And hopefully we will continue to learn from the experience that you have there in the U.K.
I yield back, Mr. Chairman.
Chairman Davis. Thank you. The chair now recognizes Mr. Neal from Massachusetts.
Mr. Neal. Thank you, Mr. Chairman. Mr. Secretary, just to follow up a bit on what Mr. Doggett had to say. One of the reasons that data suggests that the Welfare Reform Act of 1996 here worked was in some measure because we added a number of mitigating issues to the overall package, including job training, childcare, and not to miss the point people were able to keep their health insurance. That had a profound impact on that flexibility that Mr. Doggett noted.
Now, I am not going to trespass into domestic politics in the U.K., but I think that just having observed from 3,000 miles away the Prime Minister during his election cycle, he actually suggested a much more radical transformation of the health care system in the U.K. than he was actually able to deliver on. And I understand that because that is just the reality of what happens. But I think as a follow up to what Mr. Doggett pointed out, I think the Prime Minister probably discovered that the health care system in the U.K. was pretty popular.
Is that a fair statement?
Mr. Smith. Yes. You’ve got to understand, seeing it from the standpoint of the U.K., which it is quite different from where you are here. There is no question the health service because of its basic principle, which is that no matter what your means you will always be able to get treatment at the point you need it without any request or requirement for money. So that is and was a big change. It is now ingrained in people’s psyche. And it is a very emotional point to lots of people. So they are very wary if you play with that because they don’t want to see that shifted so they would have to start having to fork out for treatment. So that is the big balance.
But on your point… you know, we are a coalition. I am in a coalition that is not wholly conservative, so we sometimes have to cut our cloth according to what we can do in parliamentary terms. But the reforms that we have gotten through will make a big difference to recentering where that decision making should lie much more with those who are responsible for the treatment, and also knowing how much that treatment costs and bearing down and understanding how that money is spent better.
Mr. Neal. Good point. And let me flip that argument. One of the problems that we ran into in 1996 was the suggestion I think that was fairly accurate that for many people who were receiving public benefits, they stayed with health care through the Medicaid system. The problem in some measure was that two people conceivably living next door to each you other, one who went to work every day and did not have health care benefits, came to resent the person who was receiving a public benefit and keeping the health care benefit. So those mitigating circumstances that I referenced earlier about a level of maintenance for health care in your instance seems to give you a little bit more room or flexibility in terms of experimenting.
Mr. Smith. It possibly does. The only comment I would make on that is we all as politicians make this argument that I don’t know where I am going but I know I wouldn’t start from here is always our biggest point. So dealing with our position as to where we are, we obviously don’t have that issue about health treatment in the two houses living next door to us. But we do have issues around welfare. And that resentment in welfare is a big issue right now in the U.K. where someone going to work on low and marginal income looks at the house next door with the curtains closed and realizes they are earning pretty much what they are already earning but they are not working because they have got a larger family or because they are living in a larger house. So that resentment does exist. It tends to exist for us in the welfare system. And a lot of people in work are now deeply resentful of those who are not in work. And so this is where our cultural shift is rather than on health care.
Mr. Neal. And lastly this morning in Belfast Martin McGuinnis, who is an old friend of mine, and the Queen shook hands. And it is a lot of people like me to participate over 35 years in all these it will never happen moments to witness these huge changes. But as you noted in an earlier conversation that we had, there are still very stubborn elements, smaller in number year after year, who still are rejectionists. But as one who is very knowledgeable about the Shankill and the Falls Road in Belfast, the link between poverty and high rates of unemployment and violence. It was the best, I shouldn’t say the best, but one of the best recruiting tools for the hardest men and women in those neighborhoods to organizations who sought destiny as never finding a common moment.
Mr. Smith. Yes. My comment would be this really. First of all, I was a soldier. I was in the Scots Guards many years ago. I served in Northern Ireland so I have firsthand memories of some of the violence. I lost friends who have been killed in subsequent service in Northern Ireland. No one is happier than I am to see the possibility of peace in Northern Ireland. It has been a dreadful running sore in the United Kingdom for far too long.
But you are right about the cocktail. There is a very peculiar cocktail in parts of Northern Ireland where you overlay deep deprivation also alongside peculiar religious division and a lot of residual violence. And some of those are still in place today when I visit some of those communities, and breaking those down is a very big job, but we are making strides towards that. But, yes, hugely obviously deprivation has a part to play in it.
Mr. Neal. Thank you.
Chairman Davis. I thank the gentleman. Mr. Secretary, again we thank you for taking time out of your busy schedule to come and share some of your experiences in the United Kingdom. We are going to continue to monitor your progress closely and we look forward to learning from what you are doing and to continuing this dialogue. Thank you again.
Mr. Smith. Thank you, Mr. Chairman, for the opportunity.
Chairman Davis. As the Secretary departs, I would like to thank all of my colleagues for their unanimous consent in altering our normal agenda with opening statements until afterwards to accommodate the Secretary’s time. I would like to proceed with opening statements. And now I will begin.
Today’s joint hearing is on disincentives to work built into current welfare and tax credit programs in the United States. As we have already heard from Iain Duncan Smith, the Secretary of State for Work and Pensions in the United Kingdom, other countries are wrestling with these same issues. Secretary Duncan Smith’s presentation, as well as the testimony of our witnesses today, will help us as we consider making changes on this side of the Atlantic as well.
Two weeks ago, when President Obama spoke in Cleveland, Ohio on the state of the economy, he talked about his vision for how we need to provide ladders of opportunities for folks who aren’t yet in the middle class. Today we will consider whether the multitude of current welfare programs and tax credit programs create effective ladders of opportunity or are missing important rungs by effectively discouraging work and higher earnings for millions of families.
To explain this complicated topic one of our witnesses, Dr. Clifford Thies, describes an income dead zone in which a family earning $40,000 per year is barely better off financially than a family not working at all once all welfare benefits and tax credits are taken into account. Other experts like Harvard economist Greg Mankiw call this phenomenon a poverty trap. He says the bottom line is if you are poor, the government is inadvertently ensuring that you have little incentive to try to improve your condition.
What it really boils down to is this. When government benefits for low‑income families and as their work and earnings increase, that discourages more work and earnings. The more benefits the government provides, the stronger the disincentive to work harder and earn more. Ironically many of the programs in question like TANF and childcare, in our human resources jurisdiction, are designed to alleviate poverty while promoting work. However, especially when combined with refundable tax credits that have grown rapidly in recent years, the collective weight of these programs can have an unintended side effect of discouraging harder work and higher earnings. This is not a new problem, but it is about to get a lot worse. The massive new health insurance subsidies under the Democrat’s health care reform will expand this problem and extend its reach well into the middle class affecting families earning up to $90,000 for a family of four. According to the National Center for Policy Analysis, the exchange subsidies under ObamaCare will yield marginal tax rates over a broad range of low or middle incomes that are always above 55 percent, usually above 60 percent, and sometimes above 70 percent. Those are some staggering numbers. But as we will learn, for some people, the implicit marginal tax rate can actually exceed 100 percent. That means the family is actually worse off when their work and their earnings increase.
Here is how another Harvard economist, Jeff Liebman, advisor to President Obama, describes the story of one woman who went from earning $25,000 a year to $35,000 and could not make ends meet anymore as a result. “She lost free health insurance and instead had to pay $230 a month for her employer provided health insurance. Her rent associated with her Section 8 voucher went up by 30 percent because of the income gain, which is the rule. She lost the $280 a month in a subsidized childcare voucher she had for after school care for her child. She lost around $1,600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston and she lived in a suburb so now she has $300 a month of additional gas and parking charges. She asked me if she could go back to earning $25,000.” He estimated that the government imposed a 130 percent implicit marginal tax rate on her.
We look forward to all of the witnesses’ testimonies today, including possible solutions, so Americans have more, not less incentive to work and support their families. This is an issue I have personally wrestled with for many years, first as a volunteer before coming to Congress and trying to find a way to build a bridge that would smooth this transition to work without creating a cliff, particularly for single parent families that are trying to make a go of it and improve the quality of their lives.
With that, I would like to now turn it over to the ranking member of the Human Resources Subcommittee, Representative Lloyd Doggett. Would you care to make an opening statement?
Mr. Doggett. Yes, Mr. Chairman. Thank you very much for your courtesy. Certainly if we can perfect our tax system so that it does more to reward work we should do it. And if we can ferret out any abuse of existing preferences or tax credits that are not being properly used in accordance with the law, we should do that and should take corrective steps. But I must say respectfully that it is my belief that the focus of this hearing and the focus of the overall work this year and last year of the Ways and Means Committee in this area is misdirected.
Let’s look at the facts. The richest one‑fifth of Americans are reported to own 84 percent of the wealth of this country, while the bottom 40 percent are estimated to own about 3 or 4 percent of the wealth of this country. The Congressional Budget Office reports that over the last 3 decades after tax income for the top 1 percent soared by 277 percent, while two‑thirds of the income gains from 2002 to 2007 flowed to the top 1 percent of households.
The focus of this hearing is not on the 1,500 millionaires who paid zero income tax in a recent year, it is not on those corporations who not only paid zero, such as in some years General Electric, Boeing, Wells Fargo, but in some cases actually received money back in credits from the government. It is not on the area where revenues are not flowing to our government, it is not on those at the top, it is all focused on whether those who have an ownership interest in 3 percent or less of our Nation’s wealth, whether they are getting too much.
The overall concept of this hearing seems to follow closely the report last year of the House Republican Study Committee concerning the disincentivizes of our current system. This is the same group and same set of reports that condemned as welfare and seemed to call for reductions in Pell grants, title I grants to disadvantaged schools, Head Start, the school lunch program and the school breakfast program. I believe that is a mischaracterization of those important initiatives that help those who are struggling to become part of the middle class and to share in the American dream to help them advance, and that it is wrong to continue to deny those opportunities.
When a mother with a couple of children who lives in Austin or San Marcos or San Antonio leaves the welfare program for a full time minimum wage job, the earned income tax credit and the child tax credit are available to help her and other working families. That increases the value of her work in a significant way and is an incentive to advance.
At the same period of time through the recent recession there were reports by the Pew Research Center that Hispanics particularly represented the hardest hit by the recession, a 66 percent drop in wealth from 2005 to 2009, a widening of the gap in our country that has not been seen in the last quarter of a century during the time that data was collected.
These are serious problems that need to be addressed to encourage and help people move into the middle class and to see that our Nation has the revenues that it needs in order to sustain those programs. We need more focus on those real problems rather than on the small issue that is raised by today’s hearing. And I yield back.
Chairman Davis. I thank the gentleman. I now turn to the Chairman of the Ways and Means Subcommittee on Select Revenue Measures, Mr. Pat Tiberi.
Chairman Tiberi. Thank you, Chairman Davis. Thank you for your leadership on this issue, and it is a real pleasure to have an opportunity to have a joint hearing with our subcommittees today.
Providing an adequate safety net for Americans who have fallen on hard times I believe is a nonpartisan issue in this Congress. It is something that all of us believe in. As is making sure government does not stand in the way of Americans who want to work to achieve their life and fulfill their American dream, I know firsthand for the need for a safety net. When I was in high school my father who immigrated to America with my mother with nothing lost his job of 25 years, lost his pension and our family lost our health care. At that time I was thrown into the free and reduced lunch program in high school. The good news is my dad found a job, he was rewarded and we went on being a family again.
Today what is dangerous with our Tax Code is that it appears that people or the Tax Code is saying to people, to Americans who are down on their luck, who had a job loss, that they will be penalized if they turn their luck around and are fortunate to find an opportunity of work.
Comprehensive tax reform is a chance to solve this problem. In tax reform we should ensure that low‑income Americans are not punished through extraordinarily high implicit marginal rates. We should reduce complexity as well. There is no reason that my father should have to see a tax accountant for his tax returns. Our current code is a nuisance where taxpayers, for instance, claiming the earned income tax credit in many times and many places have to use a paid tax preparer, costing them money from their own pockets.
I look forward, Mr. Chairman, to discussing how we can fix this issue to empower Americans to live the American dream. I yield back.
Chairman Davis. Thank you very much. The chair now recognizes Mr. Neal, ranking member of the Select Revenue Subcommittee.
Mr. Neal. Thank you, Mr. Chairman. Thanks to you and Mr. Tiberi for holding the hearing. I want to quote Ronald Reagan: The earned income tax credit is the best anti‑poverty program, the best pro‑family, the best job creation measure to come out of Congress. The earned income tax credit is a bipartisan idea and it was signed into law by President Ford with a Democratic Congress and expanded by every President since Ford, both Democrat and Republican.
Here is an opportunity where we might change the rhetoric in Congress when we frequently hear that 47 percent of the American people don’t pay taxes. Of course they do. They pay the most onerous taxes, payroll taxes. There would be an easy way to soften some of the harsh rhetoric here by that simple acknowledgement.
President Reagan was absolutely right, the earned income tax credit is extremely successful at increasing work and lowering welfare receipt, making our tax rules more fair for low and moderate income tax families and, most importantly, reducing poverty. In 2010 the earned income tax credit lifted about 6.3 million Americans out of poverty, almost 3.3 million children. Without the earned income tax credit the number of children living in poverty would have been one‑quarter higher. Is it perfect? Of course it is not. There is no provision in our Tax Code that is perfect. And I am open to working with my Republican friends and colleagues to strengthen the credit.
I do get a bit antsy, however, with recent comments that I have heard from some who would suggest or imply that we should increase taxes on low and moderate income families. Majority Leader Cantor recently stated, quote, we also know that over 45 percent of the people in this country don’t pay income taxes at all and we have to question whether that is fair.
Mr. Neal. Again, an opportunity to reshape language. Majority leader Cantor and I clearly have different definitions of the word “fair.” Some are calling for increasing taxes on the poor and moderate‑income Americans at the same time they are calling for lowering taxes on the wealthy. That is hardly fair.
Republicans tell us that we can’t increase taxes on the wealthy because of the negative impact on jobs. But ironically, they link increasing taxes on poor people, because they say it will encourage them to work. We have come a long way since those days when President Reagan proudly proclaimed at the signing of the Tax Reform Act of 1986, quote, “Millions of the working poor will be dropped from the tax rolls altogether and the wealthy will pay their fair share.” That is Ronald Reagan’s quote.
But as I conclude, let me highlight that I am open to working on this legislation. I hope that the 1‑year enhancements that we are attempting to offer EITC and the child tax credit would make their way to the end of the year and I hope that members of this subcommittee and the full committee can find a common path forward on these issues.
Chairman Davis. I thank the gentleman.
I will now turn to our member panel on which Representative Gwen Moore will be testifying. Representative Moore and I have worked on legislation in the Financial Services Committee affecting affordable housing, dealing with child homelessness and domestic abuse.
I would like to remind Representative Moore to limit her oral statement to 5 minutes, however. Without objection, all of your written statement testimony will be made part of the permanent record. Please proceed with your testimony.
STATEMENT OF THE HON. GWEN MOORE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
Ms. Moore. Thank you so much, Chairman Davis and Chairman Tiberi and Ranking Members Neal and Doggett. It is certainly a privilege to be here as an expert witness on being poor.
I am indeed an expert. As many of you may know, I had my first child at age 18. She is now 42 years old and talks back very regularly. But let me say that times were not always so easy. The very first welfare benefit that I received, sir, was Medicaid, because I gave birth to my daughter on Medicaid.
The subject of this, and I can tell you that if in fact welfare reform would live up to its promises and its rhetoric of making work pay, of helping to lift people out of poverty, to give people a hand up instead of a hand out, I can guarantee you that the 4 million people who are now receiving TANF would storm the Capitol and demand welfare reform. But of course that is more rhetoric than it is reality.
I was able to listen to some of the testimony of our distinguished guests, the Honorable Duncan Smith, catch a bit of his testimony before I walked over here today. And I must say that as a Britainer, he must appreciate the fact that Britain is the country with probably the least social mobility among the OECD states, which means that you can predict people’s social mobility more by what their father’s station, whether they were a duke or an earl or what their income was, than you can with anything that welfare would have done.
And I say that with all due respect, Mr. Chairman, and I mean it with all due respect, that the title of this hearing, “How Welfare and Tax Benefits Can Discourage Work,” is at best a misnomer, and at worst is just fallacious non‑sequitur because it assumes ‑‑ I heard the testimony ‑‑ it assumes a lot about the lack of character on the part of welfare recipients, and it doesn’t talk at all about the structural intent of these welfare programs.
I just want to ‑‑ I want to quote, since I see my time is expiring against my will here, I would like to just quote from Charles Dickens ‑‑ I think that is appropriate, given our first panel ‑‑ SparkNotes quote on Dickens. The theme of David Copperfield focuses on orphans, women, and the mentally disabled to show that exploitation, not pity or compassion, is the rule of an industrial society. So that when we look at the tax benefits, the marginal tax rates that people experience, it is because our benefits are not high enough to make work pay.
I would submit and I look forward to the question‑and‑answer period, I would submit that people don’t work just for their self‑esteem or for their dignity. They need to make enough money to be able to pay the rent and put a Barbie doll under the Christmas tree at Christmas.
In my case ‑‑ and I am happy to share details of that with you ‑‑ my daughter had her first asthma attack at age 4 days old. I could not afford to have a job that would have separated me from the Medicaid benefit that we had. And I once had a job and begged my supervisor not to give me a 50 cents an hour raise lest I lose Title 20 day care. I worked 80 miles away from my children. And as a person who survived childhood rape, I know how important it was to have reliable daycare.
And so I would say that if we really want to encourage work, things like the Earned Income Tax Credit, things like providing child care, things like providing food supplements, encourage work, not to simply take the position that we are going to take the Keynesian approach and just say, Well, the thing to do is to snatch food stamps, snatch housing benefits, snatch Medicare so that we can literally deliver this poor group of people, primarily women, to the workforce so they will be forced to work because, in fact, they will not have any other choice.
And with that I would be happy to answer questions Mr. Chairman.
[The statement of Ms. Moore follows:]
Chairman Davis. Do any members have a question?
Mr. Doggett. Thank you very much for your expert testimony Ms. Moore.
Do you think that Americans that are out there looking for work are more focused on the issues of child care, job training , job availability than they are on calculating their potential marginal tax rate if they work a certain number of hours?
Ms. Moore. No, sir, I can tell you that they are not. But I want to stipulate, Mr. Doggett, that welfare recipients are not stupid. They have common sense, even though they may not have the ability to calculate implicit tax marginal rates. I can tell you that it is just common sense. Like what I learned as a parent of a 4‑day‑old child is that I had to have health care so that I think I would have been very successful as a waitress, you know, because I love people, I love engaging them, but I would not have been able to afford to, as a 4‑day‑old parent, go work in a restaurant that didn’t provide health care, and risk at that time losing Medicaid. I couldn’t afford to lose Medicaid. My daughter is 42 now and still has asthma. And I couldn’t afford to lose Medicaid. It is a benefit, and if the government wants to help people, they should. I would want to work if in fact I didn’t risk losing Medicaid.
Same thing with daycare. Just like I begged my employer, it is not something that I calculated. My daycare provider told me if that I was ‑‑ that earning $17,000 a year with three kids ‑‑ I was still poor ‑‑ that I had, in fact, hit that marginal tax rate; and that if I earned any more ‑‑ I was still poor ‑‑ so that when January came around and the automatic increases in Title 20 occurred, the inflationary increases, then I could take, I could take the 50 cents an hour raise.
So I want to stipulate to the fact that there are implicit marginal tax rates that people hit. But the conclusion that poor people are then gaming the system or you should just take the benefit away is fallacious. What it means is that the cost of daycare in 2012 terms, $1,000 a month, $1,500 a month, depending on the age of your child, is so great that work does not pay. Women cannot afford to work without governmental assistance.
Mr. Doggett. Thank you.
Chairman Davis. And one thing I would like to point out to the gentlewoman, the purpose of the hearing in fact is in fact to address these questions. You said yourself that you begged not to get a raise, and I called this hearing ‑‑
Ms. Moore. Yes, sir. And I want to stipulate that ‑‑
Chairman Davis. Reclaiming my time. I would just like to make the point that what we are trying to address are broken processes that we have worked on, a bipartisan process over the course of this Congress, to address this very cliff.
And I think what I am hearing from your commentary is actually agreeing with the premise of our hearing, to look at best practices, ways to better integrate information, and avoid people getting into the very situation that you yourself were in as a young mother.
With that I would like to recognize Mr. Neal.
Ms. Moore. Mr. Chairman, can I respond to that because that was not your time. I think that was someone else’s time, and so you reclaimed someone else’s time. There is still 2 minutes remaining on the clock.
Chairman Davis. Actually that was my time, Ms. Moore. We will go ahead to Mr. Neal and then we can come back.
Mr. Neal. Thank you. I think you hit some very important points, job training ‑‑
Ms. Moore. Yes.
Mr. Neal. Health care.
Ms. Moore. Yes.
Mr. Neal. Transportation.
Ms. Moore. Yes.
Mr. Neal. Daycare.
Ms. Moore. Yes.
Mr. Neal. The other agreement that we had in 1996 that was really far reaching and all encompassing ‑‑ and maybe you could speak to it because you invited a question when you said you wanted to be as candid as possible ‑‑ what about the role of child support? We do a pretty good job with trying to enforce child support here. Maybe you could give us a practical assessment of that?
Ms. Moore. Well, thank you for asking that, because I am a huge fan of child support. And as a matter of fact, for several years the only bipartisan amendment that has passed out of the Budget Committee has been me and Mr. Ryan’s amendment to try to do 100 percent passthrough of child support to a custodial parents. I am a huge fan of child support, particularly since all of the other source of supports are wanting. TANF is not a very reliable source of income, it is no longer a mandatory expenditure. So I think child support is very important.
I want to respond to something that Chairman Davis said with my tacit agreement about hitting these marginal tax rates. I come to a different conclusion about it. You know, instead of saying, Let’s take away the work supports, I am saying that perhaps you ought to expand it. Because right now for an infant, for example, if you want a woman who is on welfare to go work to get decent daycare ‑‑ and I mean very modest daycare for an infant ‑‑ this would cost $1,000 a month in the Midwest. I am not talking about New York City or Washington, D.C. How can a woman earn $1,000 a month and still pay the rent, buy food? She can’t. And so if she hits that cliff in terms of eligibility for daycare at $7.52 an hour, your premise is, or Honorable Duncan Smith’s premise is that she is some sort of lazy person who is lacking in character and so therefore she would quit work. And I am saying that she is someone like me who very much wants to continue work but needs ‑‑ honestly needs more support in order to be able to continue to work. And so that is a clarification I would make with regard to our agreement on that.
Chairman Davis. Mr. Larson is recognized for 5 minutes.
Mr. Larson. Thank you, Mr. Chairman, and thank you, Mr. Tiberi, as well. I appreciate the spirit of which this hearing is being conducted and especially appreciated the value added that my colleague from Wisconsin brings.
And you underscore a point. I wasn’t going to speak, but to look at the magnitude of this situation, it goes beyond anecdotes. And I am speaking, I think, with a great deal of knowledge just in my own staff here at the Capitol. When we talk about daycare, I think Ed Ziegler, the sterling professor of psychology, the father of the Head Start program for the Nation under the Nixon program, said it best: Daycare is nothing short of a cosmic crapshoot for people who are seeking to have their children be developed in a manner that, if they could stay at home themselves, which of course they would all prefer, but for the fact that they have to be out and employed.
So it underscores I think what you are saying, Representative Moore, the need for us to continue to augment; and as the chairman has said, when we get to these cliffs what is it at that cliff that we have to decide? Ziegler used to say, Why is it that we don’t utilize public schools that are already on bus routes that are safe, where we can put people there and provide the kind of affordable daycare that is safe, that is fundamentally sound and would be helpful?
Take a look around, and especially if you are a young and expectant mother and you are in the workforce currently, you are pursuing a professional career. Take a look around at what kind of daycare there is for you, and then consider where you may have the means, the situation of so many fellow Americans that don’t. I hope that underscores some of what you have to say, Representative.
Ms. Moore. Well thank you for that commentary, Representative Larson, because it is. I can tell you what the alternatives are to having $1,000 a month to pay for decent daycare. You can have a loving mother or mother‑in‑law who will take care of your kids the 2 days of the week that she is not on dialysis. You can have a next‑door neighbor take care of your kids, and maybe this will be a good family and that Chester the molester will not be a resident of that household. It is a crapshoot, as you said.
You can do as I did for so many years before I found this daycare that finally told me that I was going to hit the cliff, and I sent my kids down to the corner to a babysitter who sat my kids in front of a television with a stick, and if they moved she would hit them and beat them, so much and so that my daughter who is now 42 refused to take her brothers down there again.
Or you can just hang a key around your kid’s neck and your 8‑year‑old and 6‑year‑old kid and tell them to stay in the house, don’t open the door, fix a peanut butter and jelly sandwich, and hope that you are lucky enough that nothing will happen to them while you are gone.
Those are the options that I know plenty of people who have resorted to those options. That is what happens. It is not that you are sitting there calculating the implicit marginal tax rate. You are just trying to figure out if you have to work and it is not ‑‑ and if you don’t work it is not because you have poor character, it is because you cannot figure that out. You are not lucky enough to be able to figure that out.
Mr. Larson. I yield back.
Chairman Davis. I thank the gentleman. And as one of those kids with the key around his neck from when he was 7 years old, I care very deeply about this issue. And in no way has there been any attempt to prejudice any individuals who are caught in these situations. Again, though, it is absolutely critical as a nation, like Great Britain is doing, that we address all of the process issues to integrate agencies effectively and be willing to ask the hard questions. And with that, I thank the gentlewoman for her testimony and would ask for the next panel to come up.
Thank you very much.
Ms. Moore. And just thank you, Mr. Chairman, and thank all of you for listening to my testimony.
Chairman Davis. Moving on to our third panel joining us today, several distinguished gentlemen who are going to share their thoughts on the issues of reforms and addressing the issues of taxation and benefits. Dr. Clifford Thies, Ph.D., professor of economics and finance at Shenandoah University; Dr. Eugene Steuerle, Ph.D. and senior fellow, the Urban Institute; Dr. Jared Bernstein, Ph.D. and senior fellow, Center on Budget and Policy Priorities; and Dr. Ike Brannon, Ph.D., director of economic policy and congressional relations, American Action Forum.
I would like to remind all of our witnesses the testimony is limited to 5 minutes. However, without objection, all of your written testimony will be made part of your permanent record.
Dr. Thies, please proceed with your opening statement.
STATEMENT OF CLIFFORD THIES, PH.D., PROFESSOR OF ECONOMICS AND FINANCE, SHENANDOAH UNIVERSITY
Mr. Thies. Good morning. I appreciate very much the emotion with which certain people have addressed the loss of health insurance upon passing over certain thresholds. In the article I wrote on the Dead Zone 3 years ago, I myself got a little emotional at those points. It seemed so unfair as well as socially inefficient to have these cliffs over which people would fall, and there is an opportunity with health reform to address this.
We have grown a series of supports to provide an economic safety net. One of these supports, the EITC, has a positive incentive for working. It stands out in that regard. The impact it had in terms of increasing labor force participation was noticeable upon its enactment and upon its expansions. It does testify to the importance of these programs. Also, although they are anecdotal, there are lots and lots of anecdotes. Almost everybody knows anecdotes of people who were making the calculations about whether working more is worthwhile. And these people maybe sometimes are called gamers of the system; in truth, they are heroic.
Often my own mother, she would complain about not having health insurance and working. She said, Prisoners get health care when they need it. I said, Mom, if you need, you can go rob a bank.
Now, in Europe they have health insurance and it is paid for primarily by payroll taxes and sales taxes, and it has a much bigger apparent cost than our system does. Our system has a larger real cost in terms of the disincentive effect in terms of keeping people in a certain status in society. Instead of moving from addressing security, to moving to self‑actualization in their work, instead of being engaged as a fully human person in terms of working with diligence and with judgment and with a degree of creativity in their work, they are trapped in a different strata, and not participating fully with the rest of us in a free society. We should want a seamless transition from the place where we have the economic safety net to the place where we ‑‑ most of us at least in our lifetime, certainly our children will be in their lifetime, in terms of acting as a free person, self‑actualizing, associating with other people on the basis of free association.
Now, I was interested in the other calculations of the numbers; the actual implicit tax rate is somewhat problematic because of the cliffs that are involved. The EITC phases in and phases out, that is pretty easy to calculate the implicit tax rate.
Well, how do you handle something where you have a cliff where you lose eligibility entirely, or the adults lose health insurance and then the children are still covered for a while and then they lose eligibility? So there is some art to making those calculations.
I wondered whether I should update the calculations I had in my 2009 article for this presentation but I, like everybody else, am waiting for the Supreme Court to speak on the issue of health‑care reform. And then also we have the problem of the payroll tax going up, of the Federal income tax rate for the first bracket going up, and of the child tax credit going down. So I thought let me just have the same calculations I had several years ago.
The point is pretty clear, when you consider income after taxes, and plus benefits that you receive, that there isn’t much incentive for a lot of our fellow Americans to work. Taking into account the net effect, the tax rate may be 50 percent for some, may be as much as 100 percent for others. We should have a big, robust, positive tangible effect for everybody in our system. This speaks to tax simplification and tax reform, so that all pay their fair share, the focus today being that the poor not pay more than that fair share on the marginal dollar of productivity.
And the payroll tax is a very big tax and it is paid twice, by the worker and by their employer. It is a very large tax. Why do we have that tax when we are trying to help people?
If you look at an alternative measure of income for the purpose of calculating poverty, based not on the official income that we currently base our poverty rate on, but based on income after taxes, plus benefits, at least for the State of Minnesota, the Urban Institute shows that you have about the same poverty rate. We push about as many people into poverty as we pull out, we pull the same people in and out yo‑yoing them in the process.
Chairman Davis. Dr. Thies, could you sum up quickly so we could move on?
Mr. Thies. We want to have an integrated approach with a robust incentive to work at every phase of the income distribution.
Chairman Davis. Thank you very much.
[The statement of Mr. Thies follows:]
Chairman Davis. Dr. Steuerle, you are recognized for 5 minutes.
STATEMENT OF EUGENE STEUERLE, PH.D., SENIOR FELLOW, THE URBAN INSTITUTE
Mr. Steuerle. Chairman Davis and members of the two subcommittees, thank you again for the opportunity to appear before you once again. As already noted, the Nation’s real tax system is very different than the tax system we know just by looking at direct statutory rates such as the income tax and the Social Security tax. The implicit taxes that derive from phasing out various benefits in both expenditure and tax programs—I tend to call expenditure taxes because, like tax expenditures, they remain largely hidden from government and the public—and yet they actually are a major influence on behavior.
These expenditures, I want to be clear, are a classic liberal conservative compromise. Mr. Chairman, you commented earlier about needing to work together to solve this problem. One reason that one has to work together is because, in fact, it is a liberal‑conservative compromise that got us there in the sense that liberals have favored these types of implicit taxes as a way of increasing progressivity, while conservatives have embarked upon them as ways of saving on budget revenues. Both of them are legitimate goals but have resulted in very, very high tax rates. And although low‑ and moderate‑income households are especially affected and seem to be the subject mainly of this hearing, I remind you that you have these implicit taxes in the AMT and Pell grants and in dozens, if not hundreds, of programs, including most of the subsidies that are in the tax system.
At the Urban Institute we have done a lot of work on trying to calculate these taxes. The first graph that you see here on the screen is the same as in figure 1b of my testimony. It shows close to the maximum benefits for which a single head of household and two children may be eligible, and then how they phase out as income increases.
Rates are low or even negative up to about 10,000 to $15,000 of income. It is thereafter that they rise quickly.
In the next figure, which is the same as figure 3 of my testimony, I show the effect of tax rate for a household whose income rises from 10,000 to $40,000. Essentially income and Social Security taxes take away about 30 percent of earnings, and then universally available programs—by “universally” I mean they are available to all of us if we have children, there are no queues, and include items like EITC or SNAP—raise the rate to about 55 percent. And for those households who happen to be into welfare programs such as TANF or get housing benefits, the rate can rise well above 80 percent.
What used to be called a poverty trap has now moved to what Linda Giannarelli and I have called the twice poverty trap; that is, the high rates especially hit households who earn more than poverty‑level incomes.
Many studies have attempted to show the effect of these rates on work and the results are actually mixed. Work subsidies such as the EITC generally encourage labor‑force participation and may tend to discourage work at higher income levels, particularly for second jobs in a family, moving to full time work, or, as I note in my testimony, also for marrying someone who has a job.
Design matters greatly. For instance, Medicaid will discourage work among the disabled more than a subsidy system such as the health exchange subsidy that is in the health reform; on the other hand, that health exchange subsidy will discourage work for older people who are encouraged to retire earlier.
For the same amount of cash, a major conclusion is that a program that requires work will indeed lead to more work than one that does not. In that regard, the earned income credit and welfare reform have done better on the work front than did AFDC.
Other consequences need examining. Means testing and joint filing have resulted in hundreds of billions of dollars of marriage penalties for low‑ and middle‑income households, and indeed not marrying is the tax shelter for the poor. Many programs do help those with special needs, although they vary widely in their efficiency and effectiveness. So, for instance, there is some evidence that a well‑developed program can improve behavior such as school attendance and maternal health. At the same time, as an economist I have to question our ability to judge the long‑term consequences of these programs merely from the empirical studies that we perform.
So just as a classic liberal‑conservative compromise got us into this situation, so might it require a liberal‑conservative compromise to get us out of it. And among the many approaches to reform that I think are worthy of consideration are:
One, seeking broad‑based social welfare reform, far beyond even what we are discussing today, rather than adopting programs one‑by‑one with multiple phaseouts.
Two, starting to emphasize opportunity and education over adequacy and consumption. We can start moving the budget in the former direction rather than the latter. It doesn’t necessarily require cutting back on programs. It means that the growth on government which continues would get redirected in a different way.
Three, we can put tax rates directly in the Tax Code so they are not so hidden.
Four, we can make work an even stronger requirement for receipt of various benefits.
Five, we could think about trying to adopt a maximum marginal tax rate for at least some programs combined.
And, six, I believe we can let child benefits go with the child, and wage subsidies go with low‑income workers rather than combining the two. And the goal there is not just to favor work but also to try to start including in the social welfare structure many of these low‑income, working, single people who basically are excluded altogether and have access to this system mainly by going to prison. Thank you.
Chairman Davis. Thank you very much Dr. Steuerle.
[The statement of Mr. Steuerle follows:]
Chairman Davis. Dr. Bernstein.
STATEMENT OF JARED BERNSEIN, PH.D., SENIOR FELLOW, CENTER ON BUDGET AND POLICY PRIORITIES
Mr. Bernstein. Chairman Davis, Ranking Member, Representative Doggett, I thank you for inviting me to testify today. My first point, however, is that I believe that it is essential to broaden the question at the heart of this hearing. For policymakers to best understand the impacts of the policies under review, we must investigate not just any work disincentives they may engender, but also work incentives. For example, as has been heard numerous times today, the Earned Income Tax Credit, an important wage subsidy for low‑income workers, has been found to have large work‑incentive effects. It lifts millions of families out of poverty, working families. Surely this is why it was one of Ronald Reagan’s favorite anti‑poverty programs.
And that raises another necessary dimension along which these programs must be evaluated: To what extent do they achieve their poverty‑reduction targets; in other words, to examine only the marginal tax rates and work disincentives associated with our anti‑poverty programs, risks and incomplete understanding of the impact of the programs on work, on poverty and on well‑being?
So research on these questions finds the following. While benefits of means‑tested programs are, by definition, reduced as incomes rise beyond a certain point, their work disincentives differ. And a number of significant programs, including the EITC and SNAP, formerly food stamps, are found to have either positive or neutral effects on labor supply.
The EITC extensively studied in this regard has yielded the following finding from a recent comprehensive review. The overwhelming finding, the empirical literature, is that the EITC has been especially successful at encouraging the employment of single parents, especially mothers. A recent exhaustive review of the poverty reduction effectiveness of the full scope of our safety net and social insurance programs found “the combination of the means tested and social insurance transfers in the system have a major impact on poverty, reducing deep poverty, poverty and near‑poverty rates by about 14 percentage points in the U.S. population as a whole.
The next finding from that study is particularly germane to today’s hearing. Quote, “This poverty reduction impact is only negligibly affected by work incentives, which, in the aggregate, have almost no effect on the pretransfer rates of poverty in the population as a whole.”
In other words, what is notable about this research is that it finds these significant and quantitatively large poverty‑reduction effects after accounting for any work disincentives implicit in the programs.
Other recent research has found positive generational effects of safety net programs on later education and earnings outcomes of children from families that receive such benefits. For example, one study finds that raising a poor family’s income by 3,000 a year ‑‑ and that is a fairly typical amount for a poor family to receive from the child tax credit or the EITC before age 5 ‑‑ is associated with a 17 percent increase in earnings and an average of 135 hours of additional work per year compared to similarly low‑income children whose families do not receive the benefits of these safety net programs.
One poverty expert summarized the findings as, quote, a remarkably strong body of research, much of it based on large‑scale, well‑implemented, experimental research designs showing that supplementing the earnings of parents helps raise families out of poverty and improves the school performance of young children.
This research clearly suggests that reducing those benefits would, net of any work disincentive effects, lower income, raise poverty, and harm future generations in terms of their educational and earnings outcome.
Finally, to the extent that work disincentives exist, policymakers should consider ways to reduce or eliminate them. In the final section of my testimony I offer three ways to do so. First, lower marginal tax rates by extending phaseout ranges, though of course this increases costs. Provide work supports such as child care and transportation assistance. And third, increase number of jobs available to low‑income workers through demand‑side policies.
Given the persistent weakness in the low‑wage labor market in recent years, I want to be sure to stress the importance of this last point. Research over the last few decades has shown that the most effective work incentives for working‑age members of low‑income families are tight labor markets with rising pretax wages. In this regard, policies such as the job creation measures in President Obama’s American Jobs Act will prove far more effective in incentivizing work than lowering marginal tax rates on safety net benefits.
Conversely, it would be a significant policy mistake to require recipients of benefits to work without first ensuring adequate job availability. Even in a climate of strong work incentives, without adequate job availability, this is a policy recipe for rising poverty and the accompanying strain on families and children. Thank you.
Chairman Davis. Thank you Dr. Bernstein.
[The statement of Mr. Bernstein follows:]
Chairman Davis. Dr. Brannon.
STATEMENT OF IKE BRANNON, PH.D, DIRECTOR OF ECONOMIC POLICY AND CONGRESSIONAL RELATIONS, AMERICAN ACTION FORUM
Mr. Brannon. Thank you very much, and I want to thank the committee for the invitation to speak here.
As a tax economist, the one thing I have realized through the years looking at the research is that tax rates matter. And very high tax rates, no matter where you are at in the income ladder, tend to deter employment and how much people want or are willing to work. And one of the things we have seen from a plethora of research in the welfare rolls is that because of all these various programs Dr. Steuerle has pointed out, you have marginal tax rates that regularly reach 40 percent for low‑income people and can in certain situations go up as high as 80 percent or even 100 percent if you take into account the various State and local programs. No one really designed the programs to be this way.
To quote a former Treasury Secretary, just like the tax system, we should have a welfare system that “looks like it was designed on purpose.” Every program was designed well and was put in by well‑meaning people, but when you have 12 or 13 different programs at the Federal level, the State level, and sometimes at the local and regional level, these things act to create tremendous disincentives.
I think this is something that appeals to a number of people on the committee, and I suspect that is why you had the Honorable Duncan Smith here to talk about what they are doing in the United Kingdom. To me that makes a lot of sense. Instead of having several different programs that might be at odds and, combined, create tremendous disincentives to work, it makes a lot more sense to have one overarching program.
It is very difficult to implement, I understand that, especially when you consider my hometown of Mossville, Illinois. People who are low income there get benefits at the Federal level, they get certain benefits at the State level, and they also get benefits from the township itself. Having a Federal Government design one overarching welfare reform program can be very, very difficult, and it might be impossible to tell the States and the townships to butt out.
But nevertheless, we need to do something so that people aren’t facing 70 or 80 percent tax rates. Both this Congress and previous Congresses have looked at this program and there have been bipartisan efforts to do this.
One thing I would just like to recommend that this committee look at again, in 2002 and 2003 there was discussion about reforming the unemployment insurance system. One of the things we see with the unemployment insurance system is that if the unemployment benefits go on for 26 weeks, what happens is that when 100 people get laid off, about 30 or 40 percent find new jobs the first month, another 5 or 10 find jobs the second month, and then hardly anyone finds jobs until month 7, and then the majority of people who are still unemployed find employment that seventh month. If you extend it to 9 months, the magic month is 10 months. If you extend it to 12 months, the magic number is 13 months.
One of the suggestions ‑‑ a bipartisan effort was put forth in the Senate Finance Committee in 2002 and 2003 ‑‑ was to change that to something they called personal reemployment accounts, where, when people were laid off, instead of being given a monthly benefit as long as they didn’t have a job, they were simply given an account, money that they could use to support their family or to get additional training or education or something like that. It totally eliminates the marginal disincentive that unemployment insurance provides to recipients against work.
Doing such a thing might be difficult and impossible for other welfare programs, but it is a model that people need to recognize.
People respond to incentives, and as Congresswoman Moore pointed out, they might not have college degrees but the typical welfare recipient is able to figure out whether or not it is worth their while to work. What we don’t want to do is make sure people get just enough to get by and then provide disincentives for them to work.
Chairman Davis. Thank you very much.
[The statement of Mr. Brannon follows:]
Chairman Davis. We will move on to questions now. I would like to recognize Mr. Tiberi, the chairman of the Select Revenue Subcommittee, for 5 minutes.
Chairman Tiberi. Thank you. Dr. Bernstein, I have a chart that you will see on the TV monitor. In your testimony you note that, “for each percentage point lower unemployment, the increase in real hourly wages for low‑wage workers is at least twice that of high‑wage workers.” That is in your testimony.
In January of 2009 you were the coauthor of an administration report titled, “The Job Impact of the American
Recovery and Reinvestment Plan.” In that report, you may remember, you forecast the unemployment rate today would be 5.7 percent with the administration’s stimulus plan passing. As we know, today’s unemployment rate is at 8.2 percent and has been above 8 percent for a post‑Depression record of 40 straight months.
Is it your testimony that low‑wage workers have disproportionately lost out on higher wages due to the elevated unemployment rates we have seen, especially compared with the unemployment rates you forecast in the administration’s trillion dollar stimulus plan as it became law?
Mr. Bernstein. Yes, I think the research is very clear on this, as I cited in my testimony. The wages of low‑wage workers are, in economics terms, more elastic to the unemployment rate than wages of higher‑income workers. And in fact, their unemployment rates are higher as well.
Chairman Tiberi. So what happened?
Mr. Bernstein. Well, you are asking about the forecast?
Chairman Tiberi. Yeah.
Mr. Bernstein. Clearly a different topic than marginal tax rates on safety net programs. When we ‑‑ that was the administration forecast for unemployment. That is the same one that shows up in the administration’s first budget. It is the forecast by what is called the troika: OMB, Council of Economic Advisers, and the Treasury.
That forecast was made by an incoming administration that was just forming in the fourth quarter of 2008. At that time, unbeknownst to us, the economy was cratering, GDP was falling at a rate of almost 9 percent. Now, if you look at the statistics from that time, as we did, it looked like the economy ‑‑ that the recession was far, far more mild than that. And that is why the forecast for unemployment that you saw was actually the median forecast of all the professional forecasters at the time. You are absolutely right in that we missed the depth and severity, but so did almost everyone else.
I will say that once the Recovery Act was implemented, it was a matter of two quarters later, by the third quarter of 2009, GDP was rising again. And I think that is a real mark of how successful it was in breaking the back of the “great recession”, albeit the unemployment rate continues to rise.
Chairman Tiberi. Thank you. Dr. Brannon, you testified on the additional work penalty that the new exchange subsidies ‑‑ work penalty that the new exchange subsidies provided by ObamaCare would create.
I would like to highlight the fact that these subsidies also impose a marriage penalty through the Tax Code, and that is because they key off the Federal poverty guidelines; and under the Federal poverty guidelines, the poverty level, let’s say, for a family of two, is at 135 percent of the poverty level for a single individual rather than double. That means that, for example, two single individuals earning $22,000 a year would lose about $1,400 dollars a year in subsidies if they became married in one household earning 44,000 rather than 22,000 each.
Can you expand on that?
Mr. Brannon. Well, the major problem with the Affordable Care Act in terms of how it is increasing the marginal tax rates in general is that it provides a subsidy to people who go to the exchange and buy health insurance if they are below the poverty rate, and then the phaseout is relatively steep in order to contain costs.
And so research that my boss, Doug Holtz‑Eakin, and Alex Brill did on the subject basically indicated the marginal tax rates for certain individuals will go up anywhere from 5 percentage points to 10 percentage points based on the phaseout of the subsidies to the exchange associated with the Affordable Care Act.
Chairman Tiberi. Even on the lower end?
Mr. Brannon. Even on the lower end.
Chairman Tiberi. So this impacts low‑income individuals at the lower marginal rates and not just in this area of the Tax Code.
Mr. Brannon. That is right.
Chairman Tiberi. Thank you. I yield back.
Chairman Davis. Thank you. The chair now recognizes Mr. Doggett for 5 minutes.
Mr. Doggett. Thank you Mr. Chairman. Do each of our witnesses agree that it is important to maintain in its current form the Earned Income Tax Credit?
Mr. Thies. Yes, the positive part yes. I would like, if it is possible, to eliminate the phaseout or blend that into the Tax Code.
Mr. Steuerle. I would actually expand it to try to figure out ways to include single people. And by the way, I would do it as a substitute for the type of Social Security tax break that I believe is both on Keynesian and supply‑side grounds, a weaker incentive for recovery than could be some expansion of the earned income credit that could be cheaper.
Mr. Bernstein. I would add that the expansions that Congress supported to the EITC in the Recovery Act have proven to be extremely helpful in all of the ways you have heard this morning, and I would try to ensure that those expansions remain a permanent part of the program.
Mr. Doggett. Dr. Bernstein, let’s talk about health care just a little bit.
If I have a high‑tech employee in Austin who has a great idea for a start‑up, but a family of children with serious illnesses, it is an informed decision for that person to stay with their group health insurance rather than go out and benefit society perhaps by creating a tech start‑up.
Similarly, if I have a poor person who can qualify ‑‑ and in Texas it is very difficult because the State under Governor Perry is mainly about trying to prevent anyone from getting getting health care ‑‑ but if they manage to qualify for benefits in the State of Texas for health care, with a sick family, and they choose not to seek a higher‑wage job in order to maintain that eligibility for Medicaid, that also would appear to be not an indication of a lack of willingness to work but of an informed decision to try to provide health‑care protection.
We attempted to respond to both types of informed decisions with the Affordable Care Act, and, over time, want the availability, particularly the expansion of access for poorer people to health care, remove any cliff or disincentive to work, to create new jobs and new businesses, and new economic opportunities.
Mr. Bernstein. Yes, Congressman, I think you are adding precisely the kind of nuance that I tried to reflect in my testimony which must be brought to these criticisms by my colleagues here on the panel of the implicit tax rates in the Affordable Care Act. There are a lot of moving parts. You just mentioned a number of them. One of the most important is that the Affordable Care Act expands Medicaid, therefore pushing out and lowering any marginal tax rates or work disincentives associated with that program, quite significantly.
And one of the studies that I brought with me today simulates this impact and predicts that the Affordable Care Act, accounting for the disincentives you heard here but the incentives that I just mentioned, would actually increase the employment of single mothers. The Affordable Care Act also reduces job lock which is what you mentioned. It is a highly inefficient problem for people stuck in the wrong job because they will lose coverage if they leave. It increases subsidies for small business. And by the way, if it successfully lowers health costs as expected, that will of course be very positive for job creation as well.
I think what I tried to express in my testimony is that you simply can’t do what some of my colleagues have done today, which is look at the marginal tax rates and assume that they reduce labor supply. You have to get into the actual functioning of these programs and look at the empirical outcomes. Now, we can’t do that with the ACA yet, because it is not in place, with one exception ‑‑ Massachusetts. Massachusetts has a health plan much like the Affordable Care Act, and there is a very nice study that looks at the employment effects of health reform in Massachusetts compared to neighboring States which face the same economic conditions but don’t have that health‑care difference, and it finds no employment effects at all.
So I would be very wary of the simple prediction that says if a tax rate bumps up X it must have Y effect, without considering the kinds of nuances that I think occur in the real world.
Mr. Doggett. Thank you very much I yield back.
Chairman Davis. Thank you. The gentleman’s time is expired. Mr. Marchant from Texas is recognized for 5 minutes.
Mr. Marchant. Thank you, Mr. Chairman.
Mr. Steuerle, Dr. Steuerle, economists and researchers have noted for decades that the interaction between welfare and tax benefits can create little incentive for low‑income families to work. Is that still pretty much the consensus among economists?
Mr. Steuerle. Well, I tried to point this out in my testimony. What has happened over the last 2 or 3 decades is we have moved out what used to be called a “poverty trap” to what I now call the “twice poverty trap.”
So Dr. Bernstein is right that if you ask about what those reforms have done, they have probably increased labor‑force participation. What the research is showing is that although it has increased labor‑force participation and particularly for, say, welfare mothers who didn’t work, the incentive can only be clearly positive in going from welfare to an earned income credit, or going from welfare to a welfare where you require work. The incentive is only positive towards participating in the labor force.
What has happened, however, is that once you earn a little bit of money, once you get to about 10,000 or 15,000, that is when the disincentives largely strike. And so that is also one reason why we get mixed effects dependent on how you are measuring work.
There is also something we haven’t even discussed. You can actually decrease productivity but increase number of workers. So if a second earner doesn’t take a job at $40,000 (a full‑time job), but a couple of low‑income workers work for 10 hours, you can increase labor‑force participation, yet decrease output.
I realize I am giving you a more complicated message. But the disincentives have basically moved up the income distribution.
The same thing occurs with the Affordable Care Act that we were just discussing. You have moved away from this disincentive in Medicaid and now you have moved the disincentive higher in the income distribution. So I pointed out in my testimony, for instance, that the Affordable Care Act probably will very much help the disabled to go work who are afraid of losing their Medicaid, but it will probably encourage more elderly people near to retirement to retire because now they can get health care without having to retire. So it is a complicated story in how tax rates discourage work. But the question is how much and for whom. And is this particular design, once you accept a social welfare structure, better than some other design?
Mr. Marchant. Another part of the testimony of Secretary Smith was that they had seen some disparity in those that are disabled. And as you know in our system now, we have over the last few years we have almost 700,000 more people on our permanent ‑‑ our disability rolls than we did before the recession.
So I would like each of you to make a comment about whether you think this disability, this enrollment in disability has to do with obtaining the benefits of Medicare or, slash, Medicaid, and is there a ‑‑ in his case he said there was very little incentive for someone that was disabled in the U.K. to go into the ranks of the employed ‑‑ and do we have a similar trap in our system now?
Mr. Thies. I would say if people have a robust incentive to work, then we could rely on their good judgment about whether they are permanently disabled or not in applying, and that when we don’t have that robust incentive to work, we might suspect that the person is not balancing the considerations that person faces individually, and we face as a Nation in terms of having a safety net in place, and nevertheless wanting everyone who can to work to the extent that they can.
Mr. Marchant. Dr. Steuerle.
Mr. Steuerle. Mr. Marchant, you are asking what I think is the toughest question in all social welfare policy: how do we design a program for the disabled? As I mentioned, among those near to retirement, disability insurance, for instance, favors retiring on disability rather than old‑age insurance. If you retire on disability at 62, you get 30 percent higher benefits than if you retire on old‑age insurance. So it creates an incentive, if you have moderate disabilities, to try to figure out if you can qualify for the system.
Among those who really are disabled and have huge medical needs, the system has huge disincentives, once you get that Medicaid, to go back to work. You are really scared not just about losing your health insurance. But even if you take a job that has health insurance, you are not sure how long you are going to last on the job. And then you are afraid of having to get back in the system.
So I don’t have an easy answer for you. Disability, reforming disability I think is absolutely required. I think there are too many disincentives in the system to go to work, but it is a tough issue to handle. I think there are some margins where we clearly can make the system better.
Mr. Bernstein. Two very brief points, Congressman.
First of all, and this is just repeating something that I think Gene said a minute ago, the Affordable Care Act, by pushing out, extending, expanding Medicaid eligibility, including to the disabled, actually reduces a work disincentive; and it is pro‑work inducing for folks with mild disabilities such that they can go to work. So it kind of reduces a cliff there, which is helpful.
My second point is I think implicit in your question was the idea ‑‑ and numerous folks have looked at this ‑‑ the extent to which disability rolls are rising faster than we might expect them to, faster than they have in prior years. And there is a question, are some long‑term unemployed people simply using disability as a replacement for unemployment insurance? I am sure that ‑‑ research suggests there is some of that going on, but one of my colleagues has looked at those numbers. Adjusting for age in the population, as the population ages there is going to be more disability, and that has created significant upward pressure on the rolls as well. So at some level, it pushes back on that idea that folks are illegitimately getting on the rolls.
Chairman Davis. Thank you. The gentleman’s time has expired. The chair recognizes Mr. Neal for 5 minutes.
Mr. Neal. Thank you, Mr. Chairman.
Just a point that Dr. Bernstein mentioned earlier. One of the things that is significant about that Massachusetts plan is the consumer satisfaction rate. It remains pretty popular across the board. Small business, large business, it was carefully negotiated, and I think that bears noting in the discussion that we are currently having. Once it was implemented and people had a chance to see the fruit of the investment, it has been fairly well met. And I don’t know anybody in the State, Republican or Democrat, who are talking about going back to the previous system, including the Massachusetts Hospital Association. They have all made sure that it would work, and regardless of what the Court does tomorrow, the people in Massachusetts, again ‑‑ left, right, and center ‑‑ they are committed to making this plan work and nobody talks about breaking it out.
Let me just, Dr. Bernstein, before I go back to Mr. Brannon, because I raised an issue with you, I spoke earlier of one of the things that we did in 1996 with the welfare reform bill, which, in the end, was a series of artful compromises. We did talk about job training, transportation incentives, child care, daycare; but also one of the things that was very, very important, and it was done on a bipartisan basis, was the whole notion of child support. Would you speak about that experience, because I think it bears noting as we go forward.
Mr. Neal. You may.
Mr. Bernstein. The Council of Economic Advisors did a study when I was back at the White House and they looked at the impact of the Affordable Care Act on businesses small and large and they wrote as follows, creating a well functioning insurance market also prevents an inefficient allocation of labor away from small firms by leveling the playing field among firms of all sizes in competing for talented workers in the labor market, which is a complicated way of saying what you said very plainly, which is that since large firms are much more likely to offer comprehensive health insurance for their workers a system like the one we have today outside of Massachusetts gives them an advantage and a disadvantage from the worker’s perspective in terms of job lock. If you have a more comprehensive system as the Affordable Care Act would present, small firms then lose that competitive disadvantage to large firms in competing for talented workers.
Yes, child support is one of the many work supports that I would argue go far further in incentivizing work than tweaking marginal tax rates, whether it is quality childcare, transportation assistance, job training and education, subsidized employment, which by the way was a program that worked very well in the Recovery Act in incentivizing employment. These kinds of work supports have been shown to be much more consequential in helping people move from welfare to work than changes in marginal tax rates.
Mr. Neal. And Dr. Brannon, in New England where we saw the textile industry leave and then we saw the old line manufacturers begin to depart over the last 50 years, I must tell you based upon that solid old manufacturing history I never met anybody, the families that I have known all of those years, that were inclined to extend unemployment benefits if they thought they could get another job in a similar industry.
Mr. Brannon. Well, I also come from a major manufacturing center. Mossville, Illinois is the home of Caterpillar Tractor Company. In the early 1980s Caterpillar went through the recession with the rest of the country, and basically over 50 percent of the blue collar employees from Caterpillar’s factories in Mossville and East Peoria and Morton were laid off. We had a great example of that just in our hometown. What happened was that anyone who had any home building done, any work on the side, basically hired someone who did it for cash, presumably with no taxes paid. And who were these people? These were blue collar Caterpillar workers. So people might indeed be working but they are not necessarily reporting their income. I think you see a lot of that.
Mr. Neal. But you weren’t suggesting then that people with that strong history of work and a good solid work ethic didn’t want to go back to work if they could find a good job or similar to the one that they lost?
Mr. Brannon. No. I think if you have a blue collar job and you get laid off for 2 or 3 or 4 months, it becomes a rational decision. I think if you realize you are getting exactly half your salary it might make sense for you to take a few months off. When I was a professor in Wisconsin I knew people who worked at Oshkosh Truck. And what they would do when they knew they were going to have to lay off workers is they would ask for volunteers. And there are all kinds of people who would volunteer to be laid off for a month or two because they had various other things they wanted to do. Some of it was they had jobs that they wanted to do on the side in winter.
Mr. Neal. Thank you. Thank you, Mr. Chairman.
Chairman Davis. Thank you. The chair now recognizes Mr. Berg from North Dakota for 5 minutes.
Mr. Berg. Thank you, Mr. Chairman. And I thank the panel for being here. This is obviously a critical debate and issue and probably won’t be totally solved today. But obviously our goal is to lift people out of poverty and try and create a system that encourages the end result where people are self‑sufficient. So I guess the thing that obviously is clear today is the programs and the tax, if these are combined, really create an unintentional barrier to help lift people out. And so I guess we talked about the dead zones and the poverty traps. And I guess my question is real simple, is how do we fix this to encourage people to work? So if we could just ‑‑ Mr. Thies, do you want to start?
Mr. Thies. Well, I think if we could address the payroll tax it comes in at dollar one of earnings. And so while the Federal income tax is highly progressive, has a very generous zero bracket, the working people of low income and moderate income today are paying much higher taxes than did people during the 1960s when the payroll tax was 3 to 4 percent and the employer matched that.
Mr. Steuerle. Mr. Berg, actually my first comment reflects the previous discussion on unemployment compensation and on disability. There is some evidence, and I think all the members on this panel agree, that if you design a program so that you have quicker, earlier, intervention it seems to make a lot of difference. In some cases for the unemployed and the disabled it is the habits that are developed in these periods of unemployment and disability that will continue. And so there are some proposals that are trying to figure out ways to give more incentives to employers, for instance, to try to intervene early so as to affect those habits. So that is one area we can work. I mentioned a lot of other relative shifts I think we can make. I think once we agree we are going to have a social welfare structure we are going to have to struggle with this work disincentive issue. The issue is not going to go away. And so the question is what are some relative shifts we can make? One of them is that I think we could make work a greater requirement for some other benefits.
Another one that I think of, along the lines of a much broader thesis I have been examining, is that our social welfare budget keeps expanding every year. It doesn’t matter whether the Republicans are winning or Democrats are winning. If the economy doubles in 50 years or 30 years, typically we will devote more to that budget. Maybe we will devote 90 percent more if the Republicans win and 110 percent more if the Democrats win. It is still growing. We can orient that growth not so much towards consumption and adequacy, and, quite honestly, not so much toward paying very high cost health care and retirement benefits, but shift it more towards incentives for work.
I have a variety of other proposals at the end of my testimony. I don’t want to take too much time here, but I would be glad to discuss them more with you.
Mr. Bernstein. Congressman, if we are going to have means tested programs that phase out as incomes rise, which is very much a function of our safety net, we are going to have these marginal tax rates. So my answer to your question is the best that we can do is to have that phaseout be as long and gradual as possible, but of course there is a tradeoff there with cost. I think the evidence is quite clear that that helps in the case of the EITC or in certain States with food stamps where that marginal tax rate is kept low.
Second, work supports are critically important, as we have mentioned earlier, such as transportation and childcare assistance. I would argue that these are more important than the marginal tax rates in terms of work. And third, and this is key, the adequate availability of jobs. And that takes you more to the demand side. I certainly wouldn’t think of adding work requirements to other programs that don’t currently have them in a climate where there is simply inadequate job availability.
Mr. Brannon. I just want to pick up on something Dr. Steuerle said about the importance of people entering the workaday world and learning how that works right away before they get trapped. To that I just want to add one other thing, that the minimum wage can often be a disincentive for young people, especially teenagers, to enter that workaday world. I just want to encourage the Congress to think long and hard before they increase the minimum wage again.
Mr. Berg. Thank you very much. I yield back, Mr. Chairman.
Chairman Davis. I thank the gentleman. The chair now recognizes Mr. Larson from Connecticut for 5 minutes.
Mr. Larson. Thank you, Chairman Davis. And again I want to commend you and Mr. Tiberi for the spirit and bipartisanship in which this is held. I had the recent opportunity, well, about a year ago, to travel to China, and got in a heated debate, and one this committee is familiar with, about China currency and also the trade disparity that exists between our countries. And former Ambassador Zhen made this point. He said, do you know, how many people do you think we have lifted out of poverty in China. And I did not know, to be honest. And it was around 320 million, which is the entire population of the United States. They were able to do so by investing in their infrastructure. And to prove that point we drove from Beijing to lower Mongolia and witnessed all the investment in infrastructure.
I raise this point because, Dr. Bernstein, you pointed out the adequacy of jobs. And after all the discussion about marginal tax rates and incentives versus disincentives fundamentally people aren’t going to be able to work if jobs aren’t available to them. And so while there has been much ballyhoo about how we are going to create jobs here we sit in a Congress where we have yet to take up after more than 100 days a transportation bill as the season eclipses, and fundamentally the President’s request of last September to have his bill taken up in terms of jobs is not.
Mr. Bernstein, I will ask you, and then I have a question for Dr. Steuerle also. What would the effect of passing the President’s jobs plan be on incentives for millions of Americans that currently can’t find a job. And then, Dr. Steuerle, the German system where they incentivize people staying in work by instead of paying unemployment they provide the company with direct subsidy to retain the person in that job instead of having them go outside to work.
Mr. Bernstein. Right. If I may poach for a second on Gene’s question. We actually now have a work sharing program here, and I think it is exemplary, and I commend the Congress for passing it. There is ‑‑ and some of my colleagues up here may well agree with what I am about to say, even though I know they are more focused on the tax rate side of this. There is no better social welfare program, no stronger social welfare program for reducing poverty than an adequate availability of good jobs for low wage people, than a tight labor market, a full employment labor market, where instead of an excess supply of lower wage workers there is an excess demand for them. And I think we saw that most clearly in the second half of the 1990s where there were a lot of moving parts, welfare reform, the EITC, a higher minimum wage, lots going on, but even in the midst of all the disincentives that we have been talking about today we saw the employment rates of less skilled, disadvantaged workers, of poor workers, of single moms, go to the highest rates on record and poverty rates drop to some of their lowest rates on record. So simply put, no better program.
Mr. Larson. Dr. Steuerle.
Mr. Steuerle. Mr. Larson, I think you make a very good point. I think we can learn a lot from the German system, although it extends far beyond just the part that you mentioned. The German system is especially good at sponsoring apprenticeships and favoring education of people who don’t go to college, not just those who do go to college—something I don’t think we do a very good job of in this country. My colleague, Mr. Lerman, works a lot on this issue and perhaps has talked to you about that already. I mentioned earlier that I think you can change the incentives in unemployment and disability and engage the employer in the sense that maybe you can experience rate these programs a little more so there is some greater consequence for the employer. It is not so much that the employer has to pay the full burden, but it would be nice to have somebody who would help with this early intervention, which sometimes is harder for the government to do.
So I think there are ways in which we really could learn from the German system.
Mr. Larson. George Will used to express frequently that government works best when it is a collective enterprise. And by using the term “collective” I think what he meant is, know what he meant was that by embracing our academic private sectors, labor sector and government pulling together we do have this engine of growth in opportunity.
What models would you suggest or do you have any that we should follow to achieve those goals and address some of the concerns that our chair has raised about coming to the precipice of this cliff and making sure that we are doing the right things?
Mr. Steuerle. Well, this actually fits in a bit with what Jared Bernstein was just saying. The long term engine for all of this is economic growth. And I keep mentioning that we think the economy is going to expand over time. So I really encourage you to think about how we restructure our social welfare system in a very broad sense as we move forward 5, 10, 15, 20 years from now. If you look, for instance, at the government budget put forward by President Obama. I would say the same thing if there was a Republican budget. We are planning on spending about $1 trillion more per year in another 10 years. Yes, about $1 trillion more. Now, it turns out almost all of it right now is going for interest on the debt and Social Security and Medicare and Medicaid, but not the children, in ways that for the most part don’t favor employment at all. If we think about how government shifts its resources more towards favoring employment, we can go a long way. Then the other advantage we get is that if we get it (economic growth) then the relative wage from working starts growing and growing relative to simply living off a subsidy from the government. So you can affect partly through marginal tax rates the relative hurdle or point at which going to work and engaging in the market makes one better off.
Mr. Larson. Would you agree with Dr. Stiglitz that the war cost of some $3 trillion and having the two wars and the tax cuts paid for ‑‑
Chairman Davis. The gentleman’s time has expired. Thank you.
Dr. Bernstein, on page 9 of your testimony you say it would be a, quote, significant policy mistake to require recipients of benefits to work without first ensuring adequate job availability. This is exactly the same argument that some made against welfare reform in the 1990s, that it was wrong to require work without guaranteeing, quote, adequate job availability, closed quote, for everyone, which makes me wonder, how do you define adequate job availability?
Mr. Bernstein. That is a fair question. And I was there at the time thinking, writing about welfare reform. I didn’t mean to imply that there should be a guaranteed job for everyone. What my statement in my testimony was meant to stress, that absent stronger labor demand, right now if you look at the low wage labor market, for example, you will find that there are far more job seekers than there is job availability. Obviously that is partly a function of the recession. But even in a stronger economy when the business cycle is expanding the low wage labor market is often characterized by excess supply and not enough jobs. If you look at welfare reform, which I would argue was quite successful in moving people from welfare to work through this period of full employment in the latter 1990s that I mentioned, it has actually been quite unsuccessful ever since, even with relatively low overall unemployment rates into 2000. So while welfare reform is largely regarded as a success in this regard it really hasn’t been over the last decade or so as the job market has weakened.
So my point is simply kind of, as Gene and I were just reflecting, that you have to have a very strong demand side functioning on the low wage labor market if you are going to require work and expect it to reduce poverty.
Chairman Davis. Would any of the other panelists like to comment? Dr. Thies.
Mr. Thies. Yes. It is understandable during a period of depressed economic conditions that through statutory means and administrative discretion the public and the private charity system also will relax eligibility standards, extend unemployment benefits and so forth because of the objectively more difficult circumstances facing people who are vulnerable. Having said that, it is understandable that when we do have a robust recovery we are going to revisit some of those things.
Chairman Davis. Dr. Steuerle.
Mr. Steuerle. Just very quickly to repeat something I said earlier, is if we had taken more of the stimulus money and put it into job subsidies, particularly for lower income people, that that could have cost less and it would be a better change in stimulus because these people are more likely to consume. It would have been a better supply side incentive because you would have a better set of work incentives than some of the just across the board way we spent some of the other money.
Chairman Davis. Thank you. Dr. Brannon, would you like to have the last word?
Mr. Brannon. Yeah. Casey Mulligan, the University of Chicago economist who testified in front of the House Budget Committee a couple of months ago, pointed out that if you look at what happened to the array of welfare programs in 2008 and 2009 we dramatically increased spending on a wide variety of them, and again we did each one of those individually. I come back to Mr. Duncan Smith’s point that we really have a haphazard welfare system that creates terrible disincentives to work in all kinds of places. And as Dr. Steuerle has pointed out, not only at relatively low incomes, but it also has disincentive effects at higher incomes. And it seems to me it is beyond time for us to redesign a system and think about it more holistically rather than program by program and come up with something that removes these disincentives.
Chairman Davis. Great. I want to thank all of our witnesses for coming today, for your patience through the early changes in the schedule. It has been very helpful, the insights that you have provided how tax policy and welfare policy can create disincentives as well as incentives to work. And hopefully we will continue to work together in the time ahead to address the broken processes that we have between the various agencies to harmonize this and to get to the point that Mr. Brannon talked about at the end in a hopefully bipartisan way.
If members have additional questions they will submit them to you in writing. We would appreciate it if you would reply to the committee so we can have those inserted into the record. Thank you again. And with that I conclude the hearing.
[Whereupon, at 12:20 p.m., the subcommittees were adjourned.]
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