U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

27–701 2018

S. HRG. 115–142 

THE ECONOMIC OUTLOOK WITH CEA CHAIRMAN 

KEVIN HASSETT 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 25, 2017 

Printed for the use of the Joint Economic Committee 

( 

LAP51NQ082 with DISTILLER

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

PATRICK J. TIBERI, Ohio, Chairman 

ERIK PAULSEN, Minnesota 

DAVID SCHWEIKERT, Arizona 

BARBARA COMSTOCK, Virginia 

DARIN LAHOOD, Illinois 

FRANCIS ROONEY, Florida 

CAROLYN B. MALONEY, New York 

JOHN DELANEY, Maryland 

ALMA S. ADAMS, PH.D., North Carolina 

DONALD S. BEYER, JR., Virginia 

SENATE 

MIKE LEE, Utah, Vice Chairman 

TOM COTTON, Arkansas 

BEN SASSE, Nebraska 

ROB PORTMAN, Ohio 

TED CRUZ, Texas 

BILL CASSIDY, M.D., Louisiana 

MARTIN HEINRICH, New Mexico, Ranking 

AMY KLOBUCHAR, Minnesota 

GARY C. PETERS, Michigan 

MARGARET WOOD HASSAN, New Hampshire 

WHITNEY K. DAFFNER, Executive Director 

KIMBERLY S. CORBIN, Democratic Staff Director 

LAP51NQ082 with DISTILLER

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Patrick J. Tiberi, Chairman, a U.S. Representative from Ohio .................. 1 

Hon. Gary C. Peters, a U.S. Senator from Michigan ............................................ 3 

WITNESS

Hon. Kevin Hassett, Chairman, Council of Economic Advisers, Washington, 

DC .......................................................................................................................... 4 

SUBMISSIONS FOR THE RECORD

Prepared statement of Hon. Patrick J. Tiberi, Chairman, a U.S. Representative from Ohio ....................................................................................................... 28 

Prepared statement of Hon. Kevin Hassett, Chairman, Council of Economic 

Advisers, Washington, DC ................................................................................... 29 

Articles submitted by Representative Maloney 

Washington Post article titled ‘‘Arthur Laffer’s Theory on Tax Cuts 

Comes to Life Once More’’ ............................................................................ 33 

Jared Bernstein blog ‘‘Supply-side, trickle-down nonsense on the NYT 

oped page’’ ...................................................................................................... 36 

Washington Post article titled ‘‘Here’s why we’re still arguing about trickle-down tax policy’’ ........................................................................................ 39 

Response from Hon. Kevin Hassett to Questions for the Record Submitted 

by Vice Chairman Mike Lee ................................................................................ 41 

Response from Hon. Kevin Hassett to Questions for the Record Submitted 

by Senator Martin Heinrich ................................................................................ 42 

LAP51NQ082 with DISTILLER

LAP51NQ082 with DISTILLER

(1) 

THE ECONOMIC OUTLOOK WITH CEA 

CHAIRMAN KEVIN HASSETT 

WEDNESDAY, OCTOBER 25, 2017 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

1100, Longworth House Office Building, Honorable Pat Tiberi, 

Chairman, presiding. 

Representatives present: Tiberi, Paulsen, Comstock, Maloney, 

Delaney, and Beyer. 

Senators present: Lee, Peters, and Klobuchar. 

Staff present: Breann Almos, Theodore Boll, Whitney Daffner, 

Barry Dexter, Connie Foster, Colleen Healy, Matthew Kaido, Paul 

Lapointe, AJ McKeown, Allie Neil, and Alexander Schibuola. 

OPENING STATEMENT OF HON. PATRICK J. TIBERI, 

CHAIRMAN, A U.S. REPRESENTATIVE FROM OHIO 

Chairman Tiberi. Good morning, everybody. I want to welcome 

everyone to what I expect to be a most informative hearing on how 

we can accelerate economic growth in the United States. 

What is holding back economic growth in America has been of 

central interest to this committee from the onset of my term as 

chairman. 

Our hearings have produced useful information and insights. I 

am particularly pleased to have Chairman Hassett lend his insights today on the forces and constraints that are holding back 

private investment, labor force participation, and just as important 

as anything else, wages. 

We hope to get a clearer picture of how the right policies can 

help the economy recover its full potential. 

The economy is dealing with the aging of a population, slowing 

population growth, and technological changes that are altering the 

methods of production in America. But self-imposed constraints 

have also altered the way the economy performs, and not in a good 

way. I strongly believe we can do something about that here in the 

United States Congress. 

I would like to direct your attention to the graph showing how 

the Congressional Budget Office lowered its assessment of the 

economy’s output potential every year since 2007 through 2016. 

These are not projections of actual GDP, mind you, but of potential 

GDP, the economy’s output capacity, normally a fairly stable concept. 

LAP51NQ082 with DISTILLER

2 

Back in 2007, the CBO estimated the U.S. output potential for 

2016 to be over 12 percent higher than it actually is now. What 

happened? The aging of the population was predictable. Not anticipated was the U.S. business investment would be down from prerecession rates, and that the rate at which Americans participate 

in the labor force would be drop so markedly. 

Despite the low unemployment rate, the labor’s markets health 

has not been fully restored. Indeed, the labor force participation 

rate of people of prime working age remains substantially below 

where it was prior to the recession. 

I believe that economic policy, including the failure to act when 

other countries were improving their business climate is largely to 

blame. 

I would like to show you two graphs that illustrate the changes 

U.S. firms face on the international playing field. The first chart 

shows how 34 countries changed their corporate tax rate since 

2000. 

All of these countries, save Chile, which had the lowest rate initially, reduced their corporate rates to make their economy more 

competitive while the United States rate remained the same. 

The next chart shows how 27 countries eased product market 

regulations from 1998 to 2013 based on an OECD index. All these 

countries, save Chile, reduced their taxes and regulations. This 

paints quite a startling picture and explains why U.S. corporations 

have been moving offshore. 

Other countries have purposefully improved their international 

competitiveness of their business sector while the United States 

has taken for granted the competitiveness of its businesses. As a 

result, we now have an economy that does not fully engage its resources, and entrepreneurial spirit. 

A JEC hearing earlier this year on declining economic opportunity revealed a dramatic decline of new business formations in 

this country since the last recession. From 2008 to 2014, more businesses actually closed than opened. A JEC hearing earlier this 

month showed how detrimental the tax code can be to starting a 

new business, in terms of both its provisions and its shear complexity. 

As the challenges we face are more daunting as a result, the national debt is a bigger problem with a slow-growing economy. That 

is why we so urgently need both tax and regulatory reform. We 

must restore a more highly functioning market economy that offers 

hope and opportunity to investors, entrepreneurs, and workers, and 

that removes the article constraints on faster economic growth. 

Dr. Hassett’s expertise is well-grounded in economic research. 

And one of his areas of specialization is taxation, which is especially useful at this time. I can’t think of a better witness to explain to us just how taxes and regulatory reform can lift the economy and living standards across our country. 

Chairman Hassett, we appreciate your appearance before the 

committee today and I look forward to hearing your views. And I 

will now yield to our ranking member, Senator Peters, for his 

statement today. 

[The prepared statement of Chairman Tiberi appears in the Submissions for the Record on page 28.] 

LAP51NQ082 with DISTILLER

3 

OPENING STATEMENT OF HON. GARY C. PETERS, A U.S. 

SENATOR FROM MICHIGAN 

Senator Peters. Thank you, Chairman. And first, I want to 

thank Chairman Hassett for being with us at the committee today. 

I am looking forward to having a substantive discussion on the 

state of the economy and some prescriptions for the future. 

I also want to thank Chairman Tiberi for your presiding over 

this hearing. And I also want to wish you well in your future endeavors. I was sorry to hear the news. We are certainly going to 

miss you here in Congress, but we also know you are going to enjoy 

new challenges, and most importantly, have a little bit more time 

to acquaint yourself with the family, which is always a wonderful 

thing. 

Chairman Tiberi. Thank you. Thank you Senator. 

Senator Peters. Mr. Chairman, I also think this is a very timely hearing, given the ongoing push by the majority and the White 

House to enact tax legislation on an aggressive timeline. But before 

we get into specifics of tax policy, I would like to take a step back 

and take a broader look at the current state of our economy and 

the economic outlook for the coming years, as well as the coming 

decades. 

The Administration has certainly not shied away from highlighting some positive economic statistics. Unemployment remains 

low and the stock market continues to climb. But I think we all 

know that there is more to an economy than just raw monthly job 

numbers or the daily Dow Jones average. For working Michigan 

families, we are still seeing persistent, frustrating stagnation on 

wages. 

Americans are overwhelmingly still not seeing the growth in 

wages that normally accompany economic recoveries. Not only do 

stagnant wages have an immediate negative impact on the day-today lives of American families, it is also contributing to another 

troubling economic trend, and that is a growing retirement saving 

crisis. Far too many Americans simply don’t have the resources for 

a secure retirement. 

As Americans are living longer with less secure assets for retirement, like defined benefit plans, I believe this will have a serious 

consequence for our entire economy. When it comes to middle class 

American families, the state of the economy is mixed. And for policymakers, I believe there are other trends that we must address 

to ensure health and competitiveness for the American economy in 

the decades to come, and see the type of growth necessary. 

First, I believe it is of the utmost importance that Congress reject the idea that deferring, or for some, eliminating, investment in 

basic science and research has no consequences. It does. It has significant negative consequences. A lack of commitment to funding 

research that will lead to the next generation great American 

breakthroughs will have a devastating impact on our economy. And 

I can promise you, our competitors, including China, will not simply stand still and see the competitive advantage in innovation. 

Second, we must reverse an alarming trend of declining new 

business formation. New businesses are the driver of our economy 

and are responsible for most new job creation in the United States. 

But, alarmingly, we are not seeing the numbers of new businesses 

LAP51NQ082 with DISTILLER

4 

needed to increase the shared prosperity across the economic spectrum, and especially in the urban/rural divide. 

New business formations across presidential administrations in 

both parties have fallen by half since the late 1970s. And when 

new businesses are created, they are increasingly concentrated in 

just a few metropolitan areas like Los Angeles and New York. 

And, finally, I believe perhaps the critical question policymakers 

must be asking about the future of the economy, is how are we 

going to prepare our workforce for an increasingly autonomous 

world, driven by advances and artificial intelligence and machine 

learning. This is why we are facing together, I think as a Nation, 

some stagnant wages, massive retirement savings gap, a retreat 

from investment in innovation, decreasing business formation, except for a few major metropolitan areas, and fundamental shift toward automation that could dwarf the industrial revolution and 

global impact. 

These are problems that we can work together to solve in a bipartisan basis, and I think we must do this on a bipartisan basis. 

Unfortunately, I am concerned that we are going to be spending 

the coming weeks and months debating just how big a corporate 

tax cut to a multinational conglomerate should receive, and other 

policies that clearly benefit the very few and most wealthy individuals, while raising taxes for middle class Americans. 

Despite our differences, I look forward to a serious conversation 

today and hope we can find common ground on how to meaningfully support American workers and their families. 

So thank you, Chairman Hassett, for being here today. 

Chairman Tiberi. Thank you, Mr. Peters. Senator Peters, 

thank you for your kind words as well. We are now turning to our 

distinguished guest, Dr. Kevin Hassett. Dr. Hassett, welcome. 

I apologize that we have a Ways and Means Republican meeting 

going on on tax reform upstairs, so a few other Members are up 

there, and I will be departing before the hearing is over, unfortunately, to join them. But we are so excited to have you today. The 

Senate also has a vote, I think, at 10:30, so sorry for that interruption as well. 

Let me introduce Dr. Hassett. He is the Chairman of the President’s Council of Economic Advisers. Prior to this he worked as a 

scholar with the American Enterprise Institute. He also has served 

as an economic adviser to the George W. Bush, John McCain, and 

Mitt Romney presidential campaigns. Dr. Hassett was also a senior 

economist with the Board of Governors of the Federal Reserve, and 

an associate professor at Columbia University. He earned his doctorate in economics from the University of Pennsylvania. 

Chairman Hassett, it is an honor to have you today. You are now 

recognized for your testimony. 

STATEMENT OF HON. KEVIN HASSETT, CHAIRMAN, COUNCIL 

OF ECONOMIC ADVISERS, WASHINGTON, DC 

Chairman Hassett. Thank you, Chairman Tiberi. And what an 

honor it is to be back before the committee with the word Honorable before my name, which seems really inappropriate, but gosh, 

I am so thankful for the support of Senator Lee and Senator Peters 

LAP51NQ082 with DISTILLER

5 

in my confirmation in the Senate. And it is great to be back before 

Mrs. Maloney and Mr. Delaney. 

I think the Joint Economic Committee has a proud tradition of 

focusing on the problems facing Americans and the solutions that 

we can agree to on a bipartisan basis. And it is in that spirit that 

I appear before you today. 

In the testimony that follows, I will provide an overview and discuss the status of a number of sectors. I will emphasize some areas 

that need attention as well as recommended policy changes that 

will improve our citizens’ economic well-being. 

If you read the 1946 Employment Act that created the Council 

of Economic Advisers, it is my somber responsibility to analyze the 

economy, to see what is going on, and to provide the President and 

Congress with objective advice about what we ought to do about it 

when we are falling short. 

The economy is buoyed by heightened expectations right now, 

and it is growing at a solid and sustainable pace with low unemployment and low inflation. Financial markets appear to recognize 

the likelihood of continued growth with low inflation, with the 

major stock price indices up substantially over the past year, and 

with expected inflation from the market for Treasury’s inflationprotected securities remaining pretty low. 

That said, the Trump administration is not satisfied with business as usual nor with the pace of real output and income growth 

during the past several years. As a result, we put forward a program designed to boost the rate of real GDP growth. Now, I am 

happy to report that the economy is doing well so far in 2017. Real 

GDP growth during the first two quarters of the year averaged 2.1 

percent at an annual rate. Real consumer spending grew 2.6 percent, only slightly below the 2.9 percent rate of growth during the 

preceding 2 years. 

Business investment grew at a 7 percent annual rate during the 

first half of 2017, and that is a notable acceleration from an essential flat pace during the preceding 2 years. That is very important 

because after translating this pattern of investment into the flow 

of capital services, it is apparent that capital deepening, the flow 

of capital services per hour worked, has made essentially no contribution to the growth of labor productivity in recent years, in contrast to a post-World War II average of .8 percentage points per 

year. Indeed, if you look at the contribution to productivity growth 

of capital deepening over the last 2 years, it became negative for 

the first time since the second World War. 

As I will discuss in a moment, this Administration thinks that 

tax policy could play a role in reviving the contribution of capital 

services to labor productivity growth, and most importantly, 

through that channel to the growth of real wages. But before I do 

that, let’s look at a few other sectors. 

Real residential investment grew at a slow 11⁄2 percent annual 

rate in the first half of 2017. The low and steady rate of core inflation is notable. Core CPI inflation, excluding food and energy 

prices, is only 1.7 percent for the 12 months through September. 

Looking back at the past few years, real potential GDP appears to 

be growing at about only a 2 percent annual rate, or perhaps even 

less, as Chairman Tiberi’s chart indicated. 

LAP51NQ082 with DISTILLER

6 

Real wage growth in America has also stagnated. Over the past 

8 years, the real median household income in the United States 

rose by an average of only six-tenths of a percent per year. 

The relationship between corporate profits and worker compensation broke down really in the late 1980s, before any of the recent 

policy had a chance to interrupt that. And that deteriorating relationship between the wages of American workers and U.S. corporate profits reflects the state of international tax competition 

more than anything else, I believe. Countries around the world, as 

Chairman Tiberi’s chart indicated, have responded to the international outflow of capital by cutting their corporate tax rates to 

attract capital back. 

Now, a key feature of the joint proposal for taxes of this Administration together with congressional leadership is the proposed reduction of the statutory Federal corporate tax rate from 35 to 20 

percent. This conclusion, that the incidence of the corporate tax 

falls partly but importantly on workers, is driven by empirical patterns that are highly visible, in addition to extensive peer-reviewed 

research, not to mention a number of follow-up studies to ours that 

have appeared during the past 10 days or so. 

For example, the covariation between real wage growth and statutory corporate tax rates between the most-taxed and the leasttaxed countries over recent years, visible in Figure 1, which might 

go up over there, is indicative of this larger literature. Of course, 

simple time series correlations don’t tell the whole story, but there 

is a big literature that shows that high corporate tax countries 

have low wage growth and that, low corporate tax countries have 

high wage growth. 

Indeed, between 2012 and 2016, the 10 lowest corporate tax 

countries of the OECD had corporate tax rates 13.9 percentage 

points lower than the 10 highest countries, and that is about the 

same scale as the reduction currently under consideration here in 

the United States. The average real wage growth in the low tax 

countries has been dramatically higher, as would have been predicted by the academic literature. 

Now, the U.S. economy has made great progress during the past 

years in reducing the jobless rate, but the rate of productivity 

growth, and therefore real wage growth, has been slow. It is time 

for all of us, in a bipartisan way, to turn our attention to building 

a plan for boosting the rate of growth in the long-run, and wage 

growth in particular. As I have discussed, the Administration’s 

plan for tax reform will have an important role in improving the 

rate of productivity growth, in combination with its plan to stabilize the regulatory environment, and we look forward to working 

with you, the members of this committee, to help reach those goals. 

I will be happy now to respond to any questions you may have. 

[The prepared statement of Chairman Hassett appears in the 

Submissions for the Record on page 29.] 

Chairman Tiberi. Thank you, Dr. Hassett. As I mentioned in 

my testimony and showed in that graph, over the past decade the 

CBO has continually downgraded the estimate of what the economy is capable of producing, our output potential. 

LAP51NQ082 with DISTILLER

7 

Is it possible, in your opinion, that the Obama-era policies of 

higher taxes and heavier regulation actually constrained our economic potential? And how could we change that? 

Chairman Hassett. I think on regulation it is certainly possible. 

I think that your chart really captured what happened in recent 

years, which is that it was our actions on tax policy that necessarily harmed us, it was our inactions. And so what happened is 

that the rest of the world cut their corporate taxes, and that made 

their countries much more attractive for the location of multinational plants than our country, and we saw the activity move 

overseas in response to that. You know, one metric, Chairman 

Tiberi, is how big this effect is. 

There is a National Bureau of Economic Research paper that 

came out in the spring that looked at just U.S. multinationals. 

They transfer-priced their profits abroad to the foreign plants, but 

they transfer-priced the profits abroad by paying too much for the 

products that they buy, say, from the Irish plants. And this study 

estimated that 52 percent of our trade deficit right now is coming 

about because of this transfer-pricing. We are paying too much for 

stuff from our foreign subsidiaries. We are moving that much activity offshore: so much activity that 52 percent of our trade deficit 

is attributable to it. And so, of course, that means lower demand 

for workers and lower wages as well. 

Chairman Tiberi. Thank you. You have written and spoken in 

recent years on the challenges of the uneven economic recovery, a 

topic we have explored in this committee, a topic that Senator 

Peters mentioned as well. Indeed, a wide array of research makes 

clear that this recovery has been the most graphically concentrated 

on record, leaving far too many communities, like in Ohio, and 

Michigan, for example, communities and the people who live in 

those communities—behind. 

As you know, I have introduced legislation to provide a new market-driven way of getting private capital off the sidelines and into 

our communities, certainly to foster new business and create jobs, 

called the Investing in Opportunity Act, which has garnered broad 

bipartisan support and bicameral support, as Senator Tim Scott is 

the lead sponsor in the Senate. Two questions for you. 

First, can you briefly describe the dimensions and consequences 

of this trend that is occurring within our economy of increasingly 

concentrated job growth in places like Los Angeles and New York? 

And, secondly, can you speak to the Administration’s commitment 

to ensuring tax reform ensures the challenge head-on of incorporating ideas like the Investment and Opportunity Act? 

Chairman Hassett. Thank you, Chairman Tiberi. Geographic 

inequality has been a focus of my academic work for many years, 

and it is really the reason why I am an economist. I mentioned in 

my confirmation hearing that I grew up in a town, Greenfield, 

Massachusetts, where the Greenfield Tap and Die, which was the 

main factory in town, closed. And across the way in Turners Falls 

there was a big paper mill that was the main employer there, and 

that closed, too. My dad and I, when I go home (my dad still lives 

in Greenfield), we walk next to the abandoned factories because 

they are right along the Connecticut River. It is a beautiful walk. 

But the factories are so fallen apart that the video game ‘‘Fallout’’ 

LAP51NQ082 with DISTILLER

8 

used it as a location for video shooting for post-Apocalyptic America. 

And so this is something that I care deeply about. And that is 

why my academic career has really focused a lot on geographic inequality, including, as you mentioned, States like Ohio and Michigan, where there are distressed communities where the plants 

closed and the jobs haven’t come back. 

I think that tax reform, in general, will definitely encourage a lot 

of plant location back into the U.S. because, right now, again, if 

you locate in Ireland you are paying almost no tax. If you locate 

in the U.S., you are paying the highest tax of the developed world. 

But we also should pay close attention to where those plants are 

going to go. And as you said, if the plants were all located to the 

places that have very low unemployment rates right now, then they 

wouldn’t necessarily be helping those distressed communities. 

Now, the Administration doesn’t have an official position yet, it 

is not something that I discussed with the President on your specific proposal, but I can tell you that the geographical inequality is 

something that everybody is paying very close attention to. 

Chairman Tiberi. Thank you. Senator Peters, you are recognized for 5 minutes. 

Senator Peters. Thank you, Mr. Chairman. Mr. Hassett, you 

have certainly been engaged in a pretty high-profile debate of sorts 

over the impact of the Administration’s tax proposal, and what it 

will have on the wages for working Americans. 

And I think there is certainly an awful lot of—a lot to dive into 

regarding that argument. But to be brief, I am somewhat skeptical 

of the numbers that you have put out. And I think I am in pretty 

good company in the fact that I think the majority of economists 

also are very skeptical of some of the numbers we have heard from 

the Administration. 

And certainly, I believe that many working families back home 

in Michigan are also very skeptical about that. For them, I don’t 

think many Michiganders are holding their breath to see if their 

boss’ boss’ boss’ tax cut somehow trickles down to them to see either in increased growth or in wage increase. Instead, they want 

to know how this tax proposal is going to impact them. How it is 

going to impact their pocketbook. They certainly have to worry 

about everyday challenges, like every family, like buying a car and 

paying for daycare and providing for a secure retirement. 

So I think we need the Administration to be a little bit more direct as to the consequences of the tax plan that is before us. Specifically, as it is tailored to individuals, so folks know exactly what 

this means for them. Certainly, some estimates that I have seen 

have shown that some middle-class families could see an $800 increase in this tax plan, because it is focused primarily on the folks 

at the very top of the income scale, and large corporations, and 

they will actually be paying for it in the form of higher taxes. So 

I think we need to make sure the American public and families 

know what that is. 

And given the fact that the median income for families in Michigan is a little of $52,000, an $800 tax increase is a big deal for 

those families, and we need to have full disclosure in this plan 

going forward. So I understand you may find some disagreement 

LAP51NQ082 with DISTILLER

9 

with some of these estimates that are being put out by various 

economists and other types of think tanks. 

But could you give this the committee today an estimate of the 

tax savings that a working family will get as a result of the tax 

plan that has been proposed? 

Chairman Hassett. Yes. Thank you, Senator. You know, the 

first part of your question relates to the tax savings discussion, 

that—— 

Senator Lee [presiding]. So sorry to interrupt. Chairman 

Hassett, could you move a little closer to the mike. Thank you. 

Chairman Hassett. I am sorry. Thank you. You know, let’s talk 

about what we agree about. In the CEA report that we just put 

out, we found that there has been a disconnect between the welfare 

of corporations and the welfare of workers. That corporate profits 

are soaring, but wages are not. And that is very unusual in U.S. 

history. I think we agreed that that disconnect has happened. 

I think we also agree that we are the highest corporate tax case 

of the developed world. That is a simple fact. So then the other 

thing that I think we agree about, because it is a fact, is that the 

capital deepening contribution to productivity growth in the U.S. 

has gone to the lowest level it has been since World War II. 

And so I think that it behooves all of us. It is our really somber 

responsibility to think, what is driving these factors? I think that 

the best explanation for those patterns in the data is that the corporate rates around the world have gone down a lot, they have encouraged U.S. multinationals to locate plants abroad instead of 

here, and that is why we see these effects. 

I know that if labor demand goes up in the U.S. that wages will 

go up, and there is a dispute about how much. But I don’t think 

that there is anyone that thinks it is zero. Now as for the estimate 

of the tax effects. As you know, the Administration is committed 

to a process (that hopefully can be bipartisan), in which the committees work out where the brackets go. And the President has 

even mentioned that we are open to a higher top rate, if that is 

what it takes to get broad support for this tax plan. 

And I think that this process is designed optimally to create a 

bipartisan agreement about tax reform. And it is certainly everyone’s hope that we head there. So if I were to say, well, this family 

is going to get this tax cut, then I would be stepping in front of 

that process, because where the brackets are located is being negotiated in the Ways and Means Committee upstairs and in the Finance Committee right at this moment. 

Senator Peters. Well, but you are going to be a very important 

part of that process. You are the principal adviser to the Administration as to where this policy should be and how it is going to impact growth. And so I am going to want—I want to pursue that just 

a little bit. But before I say that, we do agree on the disconnect 

between corporate profits and wage levels for most workers in 

those companies. In fact, corporate profits are at an all time high, 

so it is not that corporations are hurting right now. But we have 

seen certain individuals have benefited. 

Certainly, first and foremost, we know CEOs at those corporations have done very well. In fact, I think CEO pay has grown 

about 90 times faster than the typical worker since 1978. So the 

LAP51NQ082 with DISTILLER

10 

folks at the very top are reaping all of the rewards of that growth, 

it is not impacting everyday Americans. And we have a tax code 

now or a tax proposal that is going to say, those folks that are 

reaping all those benefits, they need to pay less taxes. I don’t think 

the average worker thinks that is the case, they think they need 

that kind of relief. 

And so as we are talking about the particulars of an individual 

family, I want to know—and we have heard President Trump say 

that middle class families will not see a tax increase. Is that the 

position of the Administration? 

Chairman Hassett. Yes. 

Senator Peters. And will you use that influence that you have 

with the President, and the President stand by those comments to 

the Ways and Means Committee here, saying that middle income 

taxpayers—all middle income taxpayers will not see a tax increase? 

Chairman Hassett. The President is adamant on that point, 

that it is the one thing that is nonnegotiable, that there is not 

going to be a middle class tax hike in this tax bill. And as for the 

corporate profit point, I know we are running a little late, but this 

is very important, and I would hope that I could respond to that, 

too, because it is a very important point. Right now, U.S. multinational profits are, as you said, at an all-time high, and executive 

compensation is skyrocketing. 

The last I checked, and I could follow-up on this, that executive 

compensation in the U.S. was higher than dividends. Go figure. 

But the disconnect from wages is not because there is fundamental 

change in market power here in the U.S. The disconnect in wages 

occurs because the profits aren’t in the U.S.: the profits are abroad. 

And so right now we have the highest tax on Earth, but those 

companies aren’t paying it because they are locating the revenue 

in places like Ireland. 

So if we make our country more attractive for location of plants, 

then it is not that we are giving a big tax cut to companies that 

are already not paying it, it is just that they are not paying the 

tax because they are locating their activity abroad, and the profits 

that are sky high in the U.S. are driving up wages in places like 

Ireland. 

Senator Peters. And, if I may, Chairman Lee, just briefly, because I want to make sure I am clear about taxes for middle income families, because some of the numbers that I have seen, particularly with the elimination, for example, of State and local deductions for State and local taxes, there have been a number of 

studies that show that that with that deduction elimination, a lot 

of middle class families are going to see an increase, about 12 or 

26 percent of families in Michigan claim that State and local deduction, and it is all over the country. And some studies have said 

the average increase for folks could be up to $1,800 a year because 

of loss of that deduction. And I think you will see a number of 

those figures. 

So, given what you said, I hope you will understand when those 

of us are pushing back on a proposal that may be put before us 

that is going to raise that, we are going to say, we can’t support 

that. And we are going to say, we can’t support that. And we are 

going to hope we will be aligned with the President that we can’t 

LAP51NQ082 with DISTILLER

11 

support these increases on middle class families, and we will push 

back pretty aggressively on the Republican proposal. 

Chairman Hassett. That is understandable. And when the complete plan is available, I look forward to working through those 

numbers with you and your staff. 

Senator Peters. All right. Thank you. 

Senator Lee. Dr. Hassett, we are grateful to have you here and 

congratulation on your confirmation. I look forward to working 

closely with you in your new role over at CEA. 

We are in the middle of a significant debate, a debate that has 

been made clear, even so far this morning in our discussion. I want 

to pick up on something that Senator Peters was discussing because I think it is an important point, having to do with our corporate tax rate. 

At 35 percent, we have the highest corporate tax rate in the developed world. And there are problems with that, problems that I 

think that are acknowledged by most Republicans and most Democrats, but sometimes I don’t think we look into it quite enough. 

Sometimes we tend to look at the corporate tax as being something 

that is paid, a burden that is borne solely by wealthy corporate fat 

cats, the likes of whom could be depicted with a Monopoly game 

piece or depicted sort of like Mr. Peanut with the monocle and a 

double-breasted suit. 

But when you take a really close look at who exactly pays corporate taxes, the picture is a little bit different. It taxes, effectively, 

both capital and labor, both the investor’s dividends and the wages 

of the workers. Economists disagree a little bit on how this breaks 

down, but it is commonly understood that lost worker wages make 

up between one-quarter and one-half of corporate tax revenue, 

some actually put the figure higher than that. And so perhaps a 

quarter to a half, maybe more, borne by workers. 

On top of that, you have got everything that people buy, every 

good, every service in the economy, is made more expensive by a 

tax like that. And there is also diminished wages, unemployment, 

and underemployment that can sometimes stem from that. So, in 

the end, I tend to view this 35 percent corporate tax as having 

some very nasty regressive effects, meaning, that its least desirable 

qualities include the fact that it is borne disproportionately by 

America’s poor and middle class. 

This is why, in January, I penned an op-ed in the Federalist that 

proposed eliminating the corporate tax altogether, and shifting that 

particular tax burden onto investors instead of workers by taxing 

capital gains and dividends at ordinary income rates, instead of 

having the corporate tax. Under this type of strategy, workers 

could be liberated from their share of the corporate tax burden, and 

America would, without a doubt, become the most popular place in 

the world to do business. 

So, Dr. Hassett, I would love to get your comments here, any 

thoughts you might have on that idea. 

Chairman Hassett. Thank you, Vice Chairman Lee. I think 

that, again, wage growth is low, profit growth is high, the profits 

are abroad. We have got the highest rate, and we see that countries around the world that are run by governments that don’t have 

LAP51NQ082 with DISTILLER

12 

the commitment to the American system that every member of 

both parties here in Congress has, cutting their corporate rates. 

President Macron ran in France on reducing the corporate rate 

to 25 percent, and the French rate was already below ours when 

that election began. The political party governing Greece, whose 

name translates as ‘‘The Coalition of the Radical Left,’’ has a lower 

corporate tax rate than we do. This is not about right wing parties 

throwing money at rich corporations, it is about economically literate governments understanding that if we want wages to be 

higher, then we have to give workers capital to work with. 

If you look at the U.S. right now, again, the contribution to productivity growth from capital deepening is lower than it has been 

since the second World War. We have got a crisis in our country, 

and it is something that everybody on this committee needs to 

work together to solve. 

Senator Lee. And this idea of zeroing out the corporate tax altogether and replacing it with a tax on dividends and capital gains 

that would put it on par with the taxes we impose on income, what 

do you think of that idea specifically? 

Chairman Hassett. You know, I am focused like a laser right 

now as an adviser to the President on the proposals that are there. 

Your idea is something that is quite analogous to something that 

a lot of other countries have done. A few countries have eliminated 

it altogether. Many have integrated the corporate tax with the dividend and the capital gains tax so that they are basically charging 

tax once at one level, but in a progressive manner. 

If you throw it at the individual side, then if there is, for example, a retiree who is getting a dividend, and they are using that 

dividend to pay their utility bill, then maybe you don’t want to tax 

the heck out of that dividend. But if there is a really rich person 

getting a dividend, maybe you do. And those are the kind of arguments that have motivated other countries to do that, but for me 

right now I am focused on the current proposal. 

Senator Lee. There is another issue that is closely related to 

this one. It deals with the burden of overregulation. I keep two 

stacks of documents in my office here in Washington. One stack is 

a few inches tall, it is a few thousand pages long. I think for last 

year it was 3,000 pages long. The laws passed by Congress last 

year. The other stack is 13 feet tall. For last year it was about 

96,000 pages long, and it is last year’s Federal Register, the annual 

cumulative indexes of Federal regulations as they are released and 

later finalized. 

Those regulations end up costing the American economy about $2 

trillion a year. This is up from just $300 billion a year 20 years ago 

when I first started tracking this problem. So it has increased 

roughly 7-fold. It is the product really of congressional delegation 

of power. Congress not wanting to make law itself and stand accountable for the difficult line drawing decisions that go along with 

setting public policy and having someone else do it. And yet, it is 

costing the economy $2 trillion a year, and I believe those effects 

are borne disproportionately by America’s poor and middle class. 

In your opinion, do you think an idea like the regulatory budgeting idea I have proposed or the REINS Act, which would require 

LAP51NQ082 with DISTILLER

13 

congressional approval of major regulations, would have a desirable 

impact on GDP and benefits for America’s poor and middle class? 

Chairman Hassett. Thank you, Senator. In terms of the specific 

proposals, I would have to touch base with my colleagues at the 

White House. It is not something I discussed with them, and I 

wouldn’t wish to signal an official White House position that I am 

not currently informed about. But certainly the topics that you 

have mentioned are incredibly important to the White House. 

And I think that one reason why sentiment in the U.S. is so 

much higher right now is there has been a lot of palpable deregulation so far this year, but also nearly a halt of costly new regulations. And one of the things that we at CEA have been studying 

is the impact on firms of new regulations. And it is really quite 

striking because if all of a sudden you run a business and then the 

U.S. Government has a new regulation, then you have to figure out 

what to do. You have to hire lawyers. You have to decide whether 

to put new things into your plan. And it is a really urgent problem. 

The regulation from, for example, 3 years ago has costs, too, because it has distorted your previous behavior. But the new regulations are incredibly costly. And one think tank in town has estimated that just by slowing new regulations, we have reduced the 

number of man hours spent complying with new regulations this 

year by more than 6 million. And I think that gives you an idea 

of the kind of effects of prudent regulatory reform. 

But we are also very mindful of how important many regulations 

are, like clean air and clean water and so on. So we are not talking 

about wiping away all regulations, just exposing the ones that exist 

and the new ones that we might think of, to really careful cost-benefit analysis. 

Senator Lee. Thank you very much, Mr. Hassett. I see my time 

has expired. 

Mr. Delaney. 

Representative Delaney. Thank you, Mr. Chairman. Thank 

you, Dr. Hassett, and congratulations on your appointment. You 

bring tremendous expertise and very good judgment to this important job. So it is great to have you in the seat. Just staying on the 

corporate tax question for a moment. 

It seems to me that across the last decade or two, a very large 

percentage of businesses, particularly large businesses, have moved 

from an incorporated status to a pass-through status, largely because of how the private equity industry has grown, and in every 

kind of private equity-backed transaction, those companies moved 

to an LLC status where they don’t pay any corporate tax. In fact, 

many of them pay very little tax because they are leveraged and 

they can deduct the interest. 

And there is no evidence or data that I have seen to indicate that 

wages have grown any faster in those companies where there is no 

corporate tax than in incorporated businesses in this country. So 

does that to some extent mitigate this argument that the corporate 

tax rate is the reason that wages haven’t grown in this country, because in fact a growing and large percentage of the businesses in 

this country in fact don’t pay tax because of what I just discussed, 

and their wages have not grown any faster based on any analysis 

LAP51NQ082 with DISTILLER

14 

that has been done than wages in C corporations, which actually 

pay this tax? 

Chairman Hassett. Thank you for the question, Mr. Delaney. 

As always it is a very interesting one. And I am not sure there is 

literature on that question yet, but if there is, I will find it and 

send you a note about it. And it is a really great question, so I will 

have to speculate about whether that effect is there, which I won’t 

dispute or concede because I would have to study the numbers a 

little bit more, why that might be. 

Representative Delaney. Sure. 

Chairman Hassett. Don’t forget that the U.S. labor market is 

a place where firms show up and compete for workers, ideally, and 

that the wage is set by total labor demand in the country. If we 

have a big chunk of the firms in the country that are locating the 

jobs overseas, then that reduces overall demand. 

Representative Delaney. Right. 

Chairman Hassett. But in the end if, for example, Hassett, Incorporated, and Comstock, Incorporated, are competing for 

Delaney, then we are going to have to pay you about the same 

wage. 

Representative Delaney. And a quick point on corporate tax. 

The average corporate rate is fact about 23 or 24 percent. Is that 

about right? 

Chairman Hassett. Do you mean the taxes divided by total revenues—— 

Representative Delaney. Yeah. 

Chairman Hassett. The average rate, the last I checked for 

multinationals, was a good deal lower than that. 

Representative Delaney. Got it. And is that more consistent 

with our competitors as opposed to our stated rate, which is the 

highest? 

Chairman Hassett. If revenue is low with our high tax rate, because people locate activity offshore—— 

Representative Delaney. Right. 

Chairman Hassett. Then it doesn’t mean that we have a low 

tax rate. 

Representative Delaney. Right, it means they are both—— 

[Cross talk.] 

Chairman Hassett. Yeah—— 

Representative Delaney. So I loved how you talked about focusing on things that we can agree on, because we need to do more 

of that here. We tend to focus on all the things we don’t agree on. 

But two things that I think that there is broad agreement on, and 

I think you have opinions on these topics. 

The first is tying infrastructure with tax reform, which I have 

worked on extensively, as I think you know, around international 

tax reform. And it seems to me it is a missed opportunity not to 

do infrastructure as part of tax reform because it is really the only 

way to pay for infrastructure and everyone seems to agree we need 

more investment in infrastructure. 

And then the second question is a carbon tax, which would obviously generate an enormous number—amount of revenues, which 

could be used for broad-based tax reduction, individuals, small 

businesses, C corps, whatever the case may be, under the category 

LAP51NQ082 with DISTILLER

15 

of we would rather maybe tax pollution as opposed to income and 

profits. 

Can you comment on the wisdom of having infrastructure as part 

of tax reform and perhaps a carbon tax as part of tax reform? 

Chairman Hassett [joking]. Sure. You know, I am an economist, and if I look back at the times I have worked on presidential 

campaigns and advised people, then they tended to lose. So I don’t 

give political advice because it is not very—— 

Representative Delaney. More a matter of start tax policy. 

Chairman Hassett. Yeah. So infrastructure is really important. 

Tax reform is really important. Whether they go together is something that you folks are the experts in. And the second question—— 

Representative Delaney. Okay. Carbon tax. 

Chairman Hassett. Carbon tax. Yeah, I have written extensively about a carbon tax, as you know, which may motivate the 

question—— 

Representative Delaney. Yes. 

Chairman Hassett. And my job as CEA chair is to provide objective analysis of proposals. And if someone were to propose a carbon tax, then I am sure when I did that analysis I would be citing 

some of my own work—— 

Representative Delaney. And what is your directional opinion 

on a carbon tax? Whether a carbon tax whose revenues would be 

effectively dividended back to the American people either directly 

or through other tax cuts. How would that affect economic growth, 

putting aside, you know, what I view is perhaps the most important benefit, which was to reduce greenhouse gases. But how would 

you view that as an economist related to economic growth? 

Chairman Hassett. Sure. Again, not speaking on Administration policy, but—— 

Representative Delaney. Sure. I understand. 

Chairman Hassett. But as an economist who does study the literature. There is an economist at the Resources for the Future at 

the University of Maryland named Rob Williams, who has done a 

very careful modeling job of looking at carbon taxes and how they 

affect the overall economy. And depending which tax rates you reduce when you pair it with a carbon tax, you can get either really 

big negative effects on the economy or small positive effects. 

Representative Delaney. So you can get positive to negatives, 

if you—devil or God is in the details—— 

Chairman Hassett. In his model that is what it says. 

Representative Delaney. Thank you, Dr. Hassett. 

Representative Comstock [presiding]. Thank you. I now recognize myself for 5 minutes. And thank you, Mr. Hassett, good to be 

with you, Chairman, and welcome you here to this committee and 

to your new position here. 

I wanted to follow up a little bit on the growth rates, and as we 

look at growth in what we are doing in taxes, and how that relates 

to our international competition, and the potential for growth in 

economies. When you look at India and the growing middle class 

there and the potential we have to benefit from that, whether it is 

trade or other, but also in the growing competition that we are 

going to have. 

LAP51NQ082 with DISTILLER

16 

What are the best policies that you think in terms of getting our 

growth rate up, because when you go to other countries and hear 

they are having 8 percent or 9 percent. When I look at a lot of the 

potential—I am in Virginia with a lot of technology sector in my 

district, and I often hear from them about they are just sort of 

waiting whether they can invest here or invest somewhere else. 

Should I go to India? Should I go, you know, to some other country, 

or should I invest here? 

What policies can we put in place that will then sort of unleash 

it to both grow here, but then interact with the growing economy 

around the world? 

Chairman Hassett. You know, I think that there are three components to economic growth. To grow output, you need to grow inputs. And you can have more labor input either because you have 

more workers or because the workers are more talented. You can 

have more capital because we are an attractive location for, the 

capital—or both of them can get better because of technological 

change. 

Now, when you look around the world and you see countries 

growing at 9 or even 15 or 20 percent, which happens sometimes, 

very often that happens because they are starting out from a place 

where they are not at the technological frontier. Therefore, they 

can copy existing practice since the skyrocketing growth indicates 

they are just going to do it as well as, or half as well as, a major 

developed county. 

The problem for us being really the class of the world in terms 

of the technological frontier or very close to it, is that the innovation part of growth is a lot harder because we can’t just copy what 

somebody else is doing. We have to actually innovate and discover 

something that no one ever knew existed. 

There are also things that we can correct with policies, and we 

can affect labor supply and capital supply. I think that the tax reform that has been negotiated with the White House and Congress 

is designed optimally to help both on the individual side by reducing marginal tax rates, and encouraging higher labor supply, and 

on the corporate side by making the U.S. a place where plants 

want to locate again, we would increase capital formation as well. 

Representative Comstock. Now, are there ways we can, you 

know, with the workforce development, and I know that is an issue 

that we will be dealing with also subsequent to tax reform. How 

can we best invest in our workers and grow, because with the information economy, with this expanding economy and middle class 

around the world, our workers, if we are going to continue to lead, 

need to be the most talented, and we need to continually invest. 

I know we always talk about life-long education. 

What policies can we then put in place to develop and constantly 

upgrade our employees so that their wages are growing, you know, 

substantially, and we don’t have the stagnation that we have now? 

Chairman Hassett. Well, sure. One key factor is human capital 

formation and educating our workers and helping them keep up 

with the rapid technological changes in society. And there are a 

number of initiatives that are being studied and enacted now by 

Secretary DeVos and the rest of the education team to help workers keep up. 

LAP51NQ082 with DISTILLER

17 

I think that one of the things, looking back at our policy failures 

collectively as a Nation over the last few years, is that we have not 

necessarily done a good job of that. If you look at the people who 

have received training because they lost their job because of trade, 

for example, then that training doesn’t always look like it has been 

that helpful. Therefore, it is something that we need to study very 

carefully and improve upon. 

Representative Comstock. In terms of having, you know, look 

at all these training programs that we have across numerous agencies, kind of consolidating them, really having them directed towards the work shortages. And in Virginia we have lots of cyber 

jobs open, and you can—we have programs—I will give a plug for 

Capital One has done some great outreach with communities where 

kids aren’t necessarily going to college, but they will get them in 

and they have gone out and recruited kids in lower income areas, 

but with real potential, bring them in for a 6-month to a year program. And they are having huge success getting them into that 

cyber pipeline. Then if they want to go back to business school, 

they want to go to college, they now have a job where they also will 

get tuition assistance and things like that. 

So maybe as we are looking at these training programs, but also 

maybe tax policy—how we can encourage companies to invest in 

their workers like that, and match the education efforts to the jobs 

that are open and that we are deficient in filling. 

Chairman Hassett. That is certainly an important objective. 

Representative Comstock. Great. Thank you. Thank you. And 

I will now yield to my colleague, Mrs. Maloney for 5 minutes. 

Representative Maloney. Thank you. Thank you. And congratulations on your appointment. 

Chairman Hassett. Thank you, Congresswoman. 

Representative Maloney. It is wonderful to have you here 

today. Now, in the words of a famous and immortal New Yorker, 

Yogi Berra, this hearing and topic sounds a great deal like de ́ja` vu. 

This country has heard again and again about how huge tax cuts 

for the most fortunate will pay for themselves, and that the benefits will somehow trickle down to benefit working families. And 

again and again that has not been the case. Just last April this 

committee had a hearing where we debated the virtues of trickle 

down economics and featured the inventor of the Laffer Curve, Arthur Laffer, and Dr. Jared Bernstein, who was the chief economist 

to former Vice President Joe Biden. 

Mr. Laffer made a number of the same claims being made here 

today about the benefits of giant tax cuts. And after the hearing 

he published a number of articles that pointed out that that is not 

what happened. And I would like—and it is not likely to happen 

again, I would say, based on the past performance. So, without objection, I would like to submit copies of these articles into the 

record. 

Representative Comstock. No objection. 

[The articles appear in the Submissions for the Record on page 

33.] 

Representative Maloney. Now, according to your prepared testimony, you estimate that the Administration’s proposed tax cut to 

the corporate tax rate would increase the level of average houseLAP51NQ082 with DISTILLER

18 

hold income in the United States by at least $4,000 annually, after 

the effects have taken place. That is on page four of your testimony. 

Chairman Hassett. Correct. 

Representative Maloney. Well, I must say that that sounds 

absolutely wonderful, but it sounds a little bit to me like you can 

lose all this weight, but you don’t have to exercise and you don’t 

have to go on a diet. And past performance doesn’t show that. 

Now, the New York times pointed out in one of their articles that 

a 2012 Treasury Department study found that less than a fifth of 

the corporate tax falls on workers. So it does not trickle down to 

them. And a Congressional Research report last month concluded 

that the effects of corporate taxes fell largely on high-income Americans, not average workers. 

So I would like to, without objection, to place into the record 

these two reports also. Without objection. 

Representative Comstock. Without objection. 

[The information was not received by the printing deadline.] 

Representative Maloney. Thank you. Now, FactCheck.org, you 

might have seen the report that they did on your numbers. They 

also took a look at the underlying math and found that there were 

roughly 125 million households in the U.S. last year, and an average increase of 4,000 for each of these households would equal 

more than 503 billion annually. But according to the U.S. Treasury, the total amount that U.S. collected in corporate taxes in fiscal 

year 2017 was just $297 billion. 

So even if you somehow transferred all the money previously collected in corporate taxes directly to American households, you 

would still be about 200 billion short. And that doesn’t add up to 

me. So to support the Administration’s proposal, you further testified today, and you give the example in your testimony, that between 2012 and 2016, the ten lowest corporate tax countries of the 

OECD had a corporate tax rate 13.9 percentage points lower than 

the 10 highest corporate tax countries, about the same scale as the 

reduction currently under consideration in the United States. But 

you don’t list those countries. But I assume that they must include 

low-tax countries like Switzerland and Latvia. And I would like, for 

the record, for you to submit who these countries are. 

Chairman Hassett. Right. 

Representative Maloney. I looked at Latvia and it is a great 

country. They have emerged in a noble fashion from communism 

and Soviet oppression. But last year the GDP of Latvia was $27.68 

billion, and that is not quite as good as Vermont. And Vermont, 

they came in at number 50 in GDP among our States. 

So are you seriously suggesting that the U.S., a country with 

huge complex dynamic economy, and a GDP last year of over $18 

trillion, can and should model its tax policy after that of an eastern 

European country still emerging from the yoke of communism. Actually, Switzerland also has a very low tax rate, with a GDP that 

is less than that of one of our great States, Vermont? 

And if I can use Latvia as a model, then we should also use the 

tragic example, I would say, of Kansas, as a cautionary tale—a tale 

about the economic chaos that happened if your brand of trickle 

down economics is put into place. Kansas is not a pretty picture. 

LAP51NQ082 with DISTILLER

19 

So your comment really on the 10 compared to the 10 highest— 

and to me it doesn’t make a normal or accurate comparison, and 

the numbers that were really refuted by FactCheck.com on the 

4,000 benefits. 

One of the items that Senator Peters mentioned is the concern 

that many of us have that outside organizations and analysis are 

saying that 80 percent of the tax cut goes to the most fortunate, 

which is not the stated claim or purpose or goal of the Administration. But in its current form, numbers don’t lie. And the numbers 

are coming in in a way that does not benefit the working man and 

woman in our country. 

Chairman Hassett. Thank you very much. It is always a pleasure to appear before you, Mrs. Maloney. 

Representative Maloney. Always a pleasure to see you. Congratulations. 

Chairman Hassett. I will respond to two points directly. The 

point about Latvia: there is a very large literature that looks at 

corporate tax rates and how wages respond. And in order to estimate that effect, you need variation in the tax rates. There is variation over time within countries, and there are studies that look 

at that. There is variation across countries. There is variation within—— 

Representative Maloney. Excuse me a second. But when you 

make a presentation, if you could give us the 10 countries that you 

are looking at. 

Chairman Hassett. I will do that. I will follow up and send 

them. I can’t think of them off the top of my head, in part, because 

it changes each year because countries are cutting their taxes. But 

this evidence has been found and people who look across U.S. 

States, for example, you mentioned Vermont. There is—a Federal 

Reserve paper that looks at when states change their corporate 

taxes, what happens to wages. There are papers that look at Canada, across Canadian provinces, and papers that look at Germany. 

And so the chart was meant to summarize what is basically a result that appears over and over in the literature in an easy to digest forum, and I think it serves that purpose. I think that the 

FactCheck.org point, which has been emphasized also publicly by 

a few economists, is really something of a classic economic blunder. 

The fact is that, if—right now we have a corporate tax system 

that encourages firms to locate their activity in Ireland in order to 

avoid U.S. tax, and they do that by creating jobs in Ireland instead 

of here, then we are barely getting any revenue at all from the corporate tax here because they moved the money to Ireland. I think 

we agreed that U.S. multinationals aren’t paying that tax. 

And so to look at the change in revenue and the change in 

wages, and to say that that is a meaningful ratio is something that 

has been disproven by careful analysis by John Cochrane at the 

University of Chicago, Casey Mulligan at the University of Chicago, and Greg Mankiw at Harvard University. So the 

FactCheck.org numbers are just not correct. Thank you. 

Representative Maloney. Well, if you would send me the reports that you mentioned. 

Chairman Hassett. Sure will. 

LAP51NQ082 with DISTILLER

20 

Representative Maloney. And I will send you the Treasury Department report and the Congressional Research Service. 

Chairman Hassett. I have read both of those. 

Representative Maloney. That refute that. So as we go forward in this debate, it is important that we get our numbers 

straight. And I would like to see the numbers that you rejected 

with the foreign countries. And this is important. I would like to 

see money brought back to America and invested in our economy 

and in our infrastructure. I agree with you on that. And this is a 

work in progress. 

We do need to simplify our tax code, but we certainly need to do 

it in a way that is fair to working men and women. And I do not 

believe that the current forum that is before us—of course, it is 

going to be debated and changed as we go forward, as you pointed 

out, does that. 

Thank you so much for your service. 

Chairman Hassett. Thank you. 

Representative Maloney. And I guess I yield to Senator Lee, 

right? 

Senator Lee [presiding]. Thank you. Senator Klobuchar. 

Senator Klobuchar. Thank you very much. And thank you so 

much for being here, and I would share the Representative’s concern about the current proposal. But I want to start out with something I know that you have done some work in the rural economic 

area, and I am still seeing a lot of challenges. I was just up on the 

Canadian border with Representative Peterson. We obviously 

talked about the current estate tax proposal, and it only helps I 

think two people in his district. 

But last year we saw large layoffs in the iron range due to steel 

dumping. People are now just getting back to work. We have a 

shortage of workforce housing. So while we have that going on in 

a lot of our rural areas, we actually have housing issues because 

we have some successful companies. And we have job openings, but 

not enough trained workers, and I know you have been asked 

about this. 

You have written about the challenges facing our rural communities. What policies or programs do you think we should implement to help? 

Chairman Hassett. Thank you, Senator. And thank you for 

your support in my nomination to my confirmation. I am very 

grateful for that and humbled by it. 

I think that the geographic inequality around our country right 

now is very palpable in many different ways, and that there are 

places that are booming at the State level. For example, right now, 

Colorado has about half an unemployed worker per job listing. And 

if you survey firms, then the biggest, number one, problem they 

have is that they can’t find the workers for the job openings that 

they have. And then, as you know, that there are many parts of 

your State and every State that have the exact opposite circumstance, where the unemployment rate is way north of 10 percent and it has been for more than a decade and doesn’t seem like 

it is budging, even though the economy is doing great. 

I, as an economist, am hopeful that the corporate tax reform that 

is currently being considered could do quite a bit to help that, beLAP51NQ082 with DISTILLER

21 

cause with a tight labor market in lots of parts of the country, 

then, if you are a firm and you want to locate a plant here instead 

of Ireland, then you have got to find a place where there are a lot 

of workers, because if you locate there, then you will actually be 

able to fill up the plant. And so I think that that big picture effect 

is probably the biggest thing that we can do. 

Earlier, we talked with Chairman Tiberi about a proposal that 

he has put forward, which the White House has no current position 

on, about how to address geographic inequality, more specifically 

with a bipartisan proposal that Mr. Tiberi is a co-sponsor of. But 

I think that ideas like that—or a cosponsor of, excuse me—ideas 

like that are things that we need to explore as well. 

Senator Klobuchar. You mentioned the tax and other countries, locating overseas. Certainly, one of the biggest goals here we 

have is to have jobs in America. And I was just talking before I 

came over here with some tax experts about the difference of someone that would like to bring money back from overseas that is over 

there, between a global minimum tax idea, where you have the average among countries, versus the previous administration had proposed a territorial tax idea, where you would have a minimum tax 

per country as opposed to having this average, and what would the 

average do. Could you talk about the difference between those two 

proposals? I am not talking about specific rates. I am talking about 

the mechanics of how that would work and the effect that could 

have on companies’ incentives to keep jobs in America. 

Chairman Hassett. I know that this issue is something that is 

currently being studied carefully by the committees. I think that 

everybody involved who has studied it, including President Obama, 

thinks that we should move towards a territorial system. The frustrating part for people who do taxes is that there really isn’t just 

a territorial system and a worldwide system, but there are degrees 

of territoriality and worldwide. And I look forward to seeing what 

the committee has come up with specifically on this issue. And I 

think it is a very important one for understanding the international tax implications of the corporate tax. But I think we have 

to let the committees decide where they are going to go on that. 

Senator Klobuchar. Okay. Last question I have is just on the 

economic opportunities that we could have with immigration reform. And Grover Norquist, when I was the ranking on this committee, came in and gave his full-throated support for immigration 

comprehensive reform with the basis that we could bring the debt. 

And there have been many studies, CBO studies, on that, and also 

that we could actually bring in more talent and create more jobs, 

and I think the 2013 figure back then, it would reduce the deficit 

by $158 billion over 10 years, $685 billion over the following—include the following decade. Twenty-five percent of our U.S. Nobel 

laureates were born in other countries. Seventy of our Fortune 500 

companies are headed up by immigrants. Could you tell me where 

you are on this? 

Chairman Hassett. Sure. You know, I think that, as an economist, we talked earlier in the hearing about how, if you want more 

output, you need more input, and one of the inputs is labor. And 

so, for sure, in any economy, immigration is an important source 

of labor. And also we have borders, and they need to be protected. 

LAP51NQ082 with DISTILLER

22 

I am not an expert on border security. But I think it is also that 

there is bipartisan agreement that we—— 

Senator Klobuchar. We had a bill like this out of the Senate 

that did both things. 

Chairman Hassett. Excuse me? 

Senator Klobuchar. We had a bill that passed the Senate that 

had significant funding for order at the border but also allowed this 

kind of legal immigration that I am talking about. 

Chairman Hassett. I would be happy to discuss that specific 

bill with you—— 

Senator Klobuchar. Okay. Very good. 

Chairman Hassett [continuing]. And that specific study. 

Senator Klobuchar. Time is of the essence here. We have been 

waiting a decade. 

Chairman Hassett. And I could add that I am very grateful 

that my Irish ancestors came here, and I am pretty sure they 

weren’t allowed here because they had computer degrees. 

Senator Klobuchar. Exactly. Good point. Same with mine, 

came as a chef or a chef’s assistant, not a chef. Thank you. 

Chairman Hassett. Thank you. 

Senator Lee. Congressman Beyer. 

Representative Beyer. Thank you, Senator. 

Mr. Chairman, reports out of the recent fourth round of the 

NAFTA renegotiations have not been positive, particularly regarding the reactions in Ottawa and in Mexico City to certain U.S. proposals. And the successful conclusion of the negotiations was always going to be difficult, and now we seem to be further away 

from that goal than ever before. If those renegotiations don’t 

produce an outcome that is acceptable to the Administration or to 

Congress, would the economy be better off if the U.S. pulled out of 

NAFTA rather than the status quo? 

Chairman Hassett. Thank you for the question. I am not involved in the negotiations, and I think that the President’s position 

on trade is that our trade deals could be made better. And I think 

that, as an economist, I can say that, if an economist wrote a free 

trade deal, then it would be one sentence. We would say: We got 

free trade. If you look at the free trade deals, then they take 

months and months to negotiate, and they have got thousands and 

thousands of pages. And so I don’t think that one could dispute the 

observation that we could make those deals better. I am also hopeful to see where the negotiations lead and hope that the trade deals 

could be made better. 

Representative Beyer. I am glad to hear it. Implicit in your remarks is that you are very much a free trader. 

Chairman Hassett. I am an economist—— 

Representative Beyer [continuing]. Put those together. 

You have written in the past about the stock market. And based 

on public statements by senior administration, including our Treasury Secretary, who described government, quote, as a mark-to-market business. Many market participants believe that this Administration views higher stock prices as a validation of its economic 

policies. But, as you know, stock prices go up and down. What are 

the risks, in your view, of guiding policy based on the whims of the 

equity markets? 

LAP51NQ082 with DISTILLER

23 

Chairman Hassett. You know, I don’t think that there is anyone, that I know of, in the White House that is guiding policy 

based on what happened yesterday in the stock market. I think 

that our economic proposals are based on sound economic reasoning and objective analysis. I think that you are right, that the 

market goes up and down. And the market has gone up a lot lately, 

and I think that if I were going to write down an economic model 

that predicted a couple of reasons why, the most important would 

be that there is an anticipated tax reform. And if the statutory corporate tax rate were to drop as significantly as is proposed, then 

that would certainly have a positive impact on the market. And so 

exactly how big that effect is and what the probability is that the 

markets factored in of the tax reform is unclear to me. There is not 

really a good estimate of that. But I think that one could be quite 

confident that, if the tax reform were to fail, that that would be a 

big negative for the market. 

Representative Beyer. Okay. You know, Mr. Chairman, several Fed presidents have recently noted that cutting taxes at this 

point in the business cycle would be highly procyclical. 

Robert Kaplan of Dallas Fed said, quote: My concern is you 

would create a bump in gross domestic product that would be short 

term. It would then decline back down to trend growth, except that 

when you decline back down, you would be more leveraged than 

when you started. 

And San Francisco Fed President John Williams said: Unless 

targeted to raise productivity and underlying potential, the tax cut 

could feed unsustainable growth that could ultimately be undone 

by asset price bubbles, inflation, and possible recession. 

So why is now the time for added stimulus? I know you have 

been concerned in the past about inflation risks and fiscal risks in 

the past. Were those concerns unfounded in the past? Why are we 

being so procyclical right now? 

Chairman Hassett. I would share those concerns if the tax proposal right now were a demand stimulus, but the tax proposal is 

to stimulate supply. And so, if we stimulate supply, then there is 

more capital, there is higher labor productivity, and you are actually making even the workers that are already employed more productive because they have better machines to work with. And so 

that doesn’t create a kind of Keynesian demand inflation spiral at 

all, but rather the increase in capital supply puts downward pressure at the margin given the positive GDP growth because you are 

increasing supply. 

Representative Beyer. But we already have—corporate profits 

are at an all-time high right now. There is more capital sitting on 

the sidelines than there has ever been. Why do we think that 

changing the corporate tax structure is going to put more of that 

money to work? 

Chairman Hassett. The money is on the sidelines, and it is on 

the sidelines, across the ocean. And the fact is that the corporate 

money isn’t turning into factories here in the U.S. because we have 

the highest corporate taxes on Earth. It is not rocket science. And 

if we were to reduce the corporate tax rate, then companies would 

come back, and the money would come off the sidelines because the 

U.S., again, would be an attractive location for investment. 

LAP51NQ082 with DISTILLER

24 

Representative Beyer. If 25 percent of those corporations pay 

no taxes, and the 35 percent is the statutory rate, and the actual 

rate is closer to 14, wouldn’t we be better off finding a way to get 

it much lower, 20, 22, 25, whatever the target rate is, by eliminating the preferences and the exceptions that allow 25 percent to 

pay nothing? 

Chairman Hassett. They paid nothing mostly because they 

have located the money in Ireland or some other country offshore, 

and, therefore, avoid the U.S. tax. And so that is precisely the 

offshoring model that we are trying to sever with this proposal. 

Representative Beyer. Mr. Chairman, thank you. I yield back. 

Senator Lee. Mr. Hassett, I wanted to ask you, generally speaking, what you believe the bright spots are in our economy. We talk 

a lot, understandably and with good necessity, about some of the 

things that scare us, that worry us. But I am curious to know, as 

an economist, not only what you think are the bright spots but also 

what has surprised you about our economy over the last few years. 

Chairman Hassett. Sure. I think that there are a number of 

bright spots, and we are really starting to see it in the data, that 

with GDP growth going up north of 3 percent, we will get another 

release this week. It will probably be hurricane-affected, but be a 

little bit below 2 percent would be my guess. But the expectation 

of the professional staff at the CEA is that we are currently looking 

at a second half of the year that, on average, will be north of 3 percent growth. So that would be, on average, three-quarters in a row. 

And I think that going from the new normal of 1.9 to 3 percent, 

that that bright spot, which is really a nice headline for America’s 

workers, is mostly attributable to a surge in capital formation that 

I think is there because of increased optimism about deregulation 

and lower taxes. And so I think that right now it is incumbent on 

us to see that bright spot and to make sure that it stays bright by 

delivering on the policies that we promised but, especially on taxes, 

haven’t been delivered yet. But I think that firms are optimistic because they expect that we are going to succeed. 

Senator Lee. Thank you. That is good insight. 

As you are aware, some of the tax reform proposals that we have 

been looking at have included a discussion of a separate rate for 

pass-through entities. The idea is that there would be separate 

rules that would go along with the separate pass-through rate that 

would be there to thwart opportunistic, manipulative tax avoidance. What, in your opinion, would those rules look like? And how 

would this work? 

Chairman Hassett. Yeah. We absolutely believe that the corporate rate reduction to 20 percent requires some kind of commensurate rate reduction for pass-through businesses, America’s small 

businesses, but we also recognize that the guardrails around that 

25 percent rate need to be very good because, otherwise, for example, if LeBron James is going to be getting the 25 percent because 

he is a small business. And, you know, I love him. He may be the 

greatest basketball player of all time, but I think he should pay the 

top marginal tax rate because it is labor income. You see how hard 

he works on the court. 

I am not a lawyer. I hear the lawyers talk about guardrails, and 

I know that there is a lot of optimism that this can be constructed 

LAP51NQ082 with DISTILLER

25 

in a prudent way. But I have to wait and see what the final outcome is before I can do an economic analysis of it. 

Senator Lee. Thank you. 

Representative Comstock. 

Representative Comstock. Thank you. 

You know, I think this morning we did hear a lot of the same 

critiques that we have heard in the past from 1980s, you know, 

really for the past 30 years. You know, all the disparaging remarks 

that you heard today. But we are really in a different economy 

now, this information economy and the international economy that 

we have. And as you pointed out numerous times, you know, if people can leave and go to Ireland and find a talent pool there that 

allows them, you know, Microsoft, or a lot of our tech companies 

to go there, that is what we are competing with. So what kind of 

new thinking maybe gets past some of the same partisan language 

that you have—that, you know, has kind of been renewed. I 

thought we had all sort of agreed our corporate rate was too high, 

but now we are kind of—we are seeing that reversion on the partisan front to the same old tired critiques. What kind of new thinking can we do with this new economy so that we can get past some 

of those partisan divides? And if you can just—kind of following up 

on some of the bright spots but also that we can’t really thrive and 

have 3, 4 percent growth if we stick with those old models. 

Chairman Hassett. I think that there is so much that the members of this committee agree about: the fact that there is a disconnect between profits and wages; the fact that we have got the 

highest statutory rate on Earth, but there is a whole bunch of companies that don’t pay it; the fact that wage growth has been completely unacceptable. And it is really the responsibility of the Members of Congress to think about why those patterns exist in the 

data and then to come up with something that we are going to do 

about it. 

And I understand that partisanship is part of what we do here 

in Washington. It is inevitable. But I have not seen an alternative 

theory for this set of facts that is in any way moving for me. And 

I just honestly hope that the responsibility that we all have for 

America’s workers, for the people that are working harder every 

day and not getting more money, can help us work together on this 

bipartisan tax reform. I think it is designed to be the same kind 

of process we had in 1986 where a great tax reform passed that 

was a big positive for the economy, and I am still hopeful that that 

can be achieved if people will start to focus on the actual analysis. 

For example, why have wages been growing so slowly even though 

profits have not? What is your story for that if it is not the one that 

we are talking about? I don’t think that there is a good alternative. 

Representative Comstock. And Larry Lindsey had an article 

where he was talking about the difference between the 3.1 or 3.2 

percent growth and the 2.1 that we have had from 2011 to 2016, 

that average of 2.1. What is the difference between a 2.1 and a 3.1 

to the economy and to long-term things like Social Security and our 

entitlements? 

Chairman Hassett. Sure. You know, these are going to be 

slightly incorrect, but they are useful rules of thumb because they 

are round numbers and they are easy to remember: If we get an 

LAP51NQ082 with DISTILLER

26 

extra percent of GDP growth, then that is about a million jobs. 

That is about a thousand dollars per household. 

And so, if we can come up with a tax plan that adds—you know, 

pick your favorite number—3 or 4 percent over 10 years, then multiply those out. It is a lot of money. It is a lot of jobs. And so that 

is how I think about it. 

Representative Comstock. And then, as we were talking earlier, if we also have that skill upgrade, you are really talking about 

wage growth of a lot more than a thousand. If you go from being 

somebody who maybe loses your coal job—although, those very 

high income, $80,000, $90,000, $100,000 in coal country—but if you 

move into some of these technology jobs, engineering, construction, 

a lot of these things also have very high pay, we need to be supporting, you know, through the tax structures, through the business process, supporting that relocation and that reassignment of 

jobs and labor, too, also. So you would be talking about a lot more 

than $1,000 increase when you get them into that higher information economy, right? 

Chairman Hassett. Sure. You are exactly right. It is something 

that we have talked a lot about in the White House. The President 

even tweeted about people needing to move if they are having a 

hard time finding a job to the labor markets that are hot. 

Representative Comstock. Great. Well, thank you. 

Chairman Hassett. Thank you. 

Representative Comstock. Thank you. I really appreciate the 

opportunity to visit this morning. 

Chairman Hassett. Thank you. 

Senator Lee. Mr. Hassett, we thank you for coming. 

Chairman Hassett. Thank you for having me. 

Senator Lee. And your insight today has been very helpful. We 

are grateful, also, for the service you provide for the country and 

the Administration. 

Should members wish to submit questions for the record, the 

hearing record will remain open for 5 business days. 

And, with that, we will be adjourned. 

Chairman Hassett. Thank you. 

[Whereupon, at 11:18 a.m., the committee was adjourned.] 

LAP51NQ082 with DISTILLER

(27) 

SUBMISSIONS FOR THE RECORD 

LAP51NQ082 with DISTILLER

28 

PREPARED STATEMENT OF HON. PATRICK J. TIBERI, CHAIRMAN, JOINT ECONOMIC

COMMITTEE

Good morning and welcome. I want to welcome Senator Peters and Vice Chairman 

Senator Lee as well as the other Members of the Committee to what I expect will 

be a most informative hearing on how we can accelerate economic growth in the 

United States. 

What is holding back economic growth in America has been of central interest to 

this Committee from the onset of my term as chairman. Our hearings have produced useful information and insights. I am particularly pleased to have Chairman 

Hassett lend his insights today on the forces and constraints that are holding back 

private investment, labor force participation, and wages. We hope to get a clearer 

picture of how the right policies can help the economy recover its full potential. 

The economy is dealing with the aging of the population, slowing population 

growth, and technological changes that are altering the methods of production. But 

self-imposed constraints also have altered the way the economy performs and not 

in a good way. I strongly believe we can do something about that. 

I would like to direct your attention to the graph showing how the Congressional 

Budget Office (CBO) lowered its assessment of the economy’s output potential every 

year since 2007 until 2016. These are not projections of actual GDP, mind you, but 

of potential GDP—the economy’s output capacity—normally, a fairly stable concept. 

Back in 2007, CBO estimated the U.S. output potential for 2016 to be over 12 percent higher than it is now. 

What happened? The aging of the population was predictable. Not anticipated was 

that U.S. business investment would be down from prerecession rates and that the 

rate at which Americans participate in the labor force would drop so markedly. Despite the low unemployment rate, the labor market’s health has not been fully restored. Indeed, the labor force participation rate of people of prime working age remains substantially below where it was prior to the recession. 

I believe that economic policy, including the failure to act when other countries 

were improving their business climate, is largely to blame. 

I would like to show you two graphs that illustrate the changes U.S. firms face 

on the international playing field. The first chart shows how 34 countries changed 

their corporate tax rates since 2000. All these countries, save Chile, which had the 

lowest rate initially, reduced their corporate tax rates to make their economies more 

competitive while the U.S. rate remained the same. 

The next chart shows how 27 countries eased product market regulations from 

1998 to 2013, based on an OECD index. All these countries save Chile reduced taxation and regulation. 

LAP51NQ082 with DISTILLER


Insert offset folio 1 here 27701.001 Insert offset folio 2 here 27701.002
29 

This paints quite a startling picture. It explains why U.S. corporations have been 

moving offshore. 

Other countries have purposefully improved the international competitiveness of 

their business sector while the United States has taken the competitiveness of its 

businesses for granted. As a result, we now have an economy that does not fully 

engage its resources and entrepreneurial spirit. 

A JEC hearing earlier this year on declining economic opportunity revealed a dramatic decline of new business formation in this country since the last recession. 

From 2008 to 2014, more businesses actually closed than opened. A JEC hearing 

earlier this month showed how detrimental the tax code can be to starting a new 

business—in terms of both its provisions and its sheer complexity. 

All the challenges we face are more daunting as a result. The national debt is 

a bigger problem with a slow-growing economy. This is why we so urgently need 

both tax and regulatory reform. We must restore a more highly functioning market 

economy that offers hope and opportunity for entrepreneurs, investors, and workers 

and that removes the artificial constraints on faster economic growth. 

Dr. Hassett’s expertise is well grounded in economic research, and one of his 

areas of specialization is taxation, which is especially useful at the present time. I 

cannot think of a better witness to explain just how tax and regulatory reform can 

lift the economy and living standards. Chairman Hassett, we appreciate your appearance before the Committee and look forward to hearing your views today. 

I will now yield to Senator Peters for his statement. 

PREPARED STATEMENT OF CHAIRMAN KEVIN HASSETT, COUNCIL OF ECONOMIC

ADVISERS

Chairman Tiberi, Ranking Member Heinrich, Vice Chairman Lee, and Members 

of the Committee, thank you for inviting me to discuss the state of the economy 

with you today. In the testimony that follows, I will provide an overview and discuss 

the status of a number of sectors. I will emphasize some areas that need attention, 

as well as recommend policy changes that will improve our citizens’ economic wellbeing. 

Overview: the economy, which is buoyed by heightened expectations, is now growing at a solid and sustainable pace with low unemployment and low inflation. Financial markets appear to recognize the likelihood of continued growth with low inflation, with the major stock price indexes up substantially over the past year, and 

with expected inflation (from the market for Treasury’s inflation-protected securities) remaining low. 

That said, the Trump Administration is not satisfied with business as usual nor 

with the pace of real output and income growth during the past several years. As 

a result, we have put forward a program designed to boost the rate of real GDP 

growth. That program includes tax cuts designed to boost the rate of investment, 

raise productivity, and boost real wages. The Administration also plans to improve 

the regulatory landscape, and thereby to keep the flow of new regulations from further reducing the pace of economic growth. We recently put out a report that looked 

specifically at the burden of regulation on our economy, and there is no doubt that 

overly burdensome regulation hurts GDP growth. 

I am happy to report that the economy is doing well so far in 2017. Real GDP 

growth during the first two quarters of the year averaged 2.1 percent at an annual 

rate, and the range currently being estimated for third-quarter growth (2-to-31⁄2 percent) despite the negative effects of Hurricanes Harvey and Irma. As a result, some 

snap-back can be expected in the fourth quarter, especially in the petroleum-producing sectors whose Texas operations were shut down by Hurricane Harvey. Since 

LAP51NQ082 with DISTILLER


Insert offset folio 3 here 27701.003
30 

January, the unemployment rate fell 0.6 percentage points to 4.2 percent in September, the lowest rate since 2001, and overall growth is poised to average about 

3 percent over the second half of the year. 

Financial Markets: Since the election, stock market values have climbed steeply, 

with a value of large companies in the Standard and Poor’s 500 index increasing 

[20] percent and the values of the small companies in the Russell 2000 climbing 

even more, [26] percent. The joint Administration-Congressional tax proposal, the 

‘‘Unified Framework for Fixing our Broken Tax Code,’’ likely boosted the overall 

stock market, which has priced in an increased chance of a major tax cut. Also, the 

President’s program to stabilize the regulatory environment may be partly responsible for the relatively strong performance of small company stocks because regulation is an approximately fixed cost and is therefore more of an impediment for small 

firms than for large firms. The rise in the stock market—together with the increase 

in home prices—has generally positive implications for the rest of the economy, such 

as its role in supporting consumer spending. 

Real consumer spending grew 2.6 percent at an annual rate during the first two 

quarters of 2017, only slightly below the 2.9 percent rate of growth during the preceding two years. Consumer spending has outpaced disposable income growth during the past four quarters (1.2 percent). As a result the saving rate fell to 3.8 percent in the second quarter from a 2016 average of 4.9 percent. High levels of consumer sentiment and the recent gains in housing values and stock-market wealth 

have supported growth in consumer spending and the accompanying decline in the 

saving rate. 

Business investment grew at a 7 percent annual rate during the first half of 2017, 

a notable acceleration from an essentially flat pace during the preceding two years. 

The acceleration was in the equipment and structures components while the intellectual property component continued to grow at a healthy (5 percent annual) rate. 

Looking back over the whole of this past business-cycle, business investment fell 

more during 2008–09 than during any previous recession, but then recovered in line 

with a normal recovery—at least through about 2014. During the past two years 

(2015–16), however, it plateaued. Because of the deep dive during the recession, 

however, the level of investment did not rebound to the level of the previous (2007) 

peak until four years into the recovery. 

After translating this pattern of investment into the flow of capital services, it is 

apparent that capital deepening—the flow of capital services per hour worked—has 

made essentially no contribution to the growth of labor productivity in contrast to 

a post-WWII average of 0.8 percentage point per year. As I will discuss in a moment, this Administration thinks that tax policy could play a role in reviving the 

contribution of capital services to labor productivity growth, and through that channel to the growth of real wages. 

Real residential investment grew at a slow (1.5 percent) annual rate in the first 

half of 2017. Growth was also slow during the four quarters of 2016, after five years 

of rapid growth. We have reason to expect somewhat faster growth during the next 

year in view of tight housing-market conditions, rising home prices, and a shortage 

of existing homes for sale. Building permits have exceeded housing starts for the 

past [7] months and the level of permits authorized but not yet started is near its 

business-cycle high, suggesting solid near-term prospects for an increase in housing 

starts. 

Consistent with tight supply, nominal national home prices increased 6.3 percent 

during the 12-months ended in July (according to the FHFA Purchase-Only Index). 

Nominal national home prices were 10 percent above their 2007 peak. However, 

after adjusting for inflation with the Consumer Price Index, real home prices in July 

were still 8 percent below their peak. The changes in home prices varied considerably across states. Over the four quarters that ended in 2017:Q2, home prices rose 

in 48 states and the District of Columbia. West Virginia experienced the largest decrease (¥1.2 percent), while Washington State experienced the largest increase 

(12.4 percent). A consensus of housing-price experts expects that home prices will 

continue to increase, albeit at a moderating rate over time. The median forecast 

from Zillow’s survey of house price experts is for home prices to increase 5.0 percent 

in 2017 and 4.0 percent in 2018. 

The low-and-steady rate of core inflation is notable. Core CPI inflation (that is, 

excluding food and energy prices) was only 1.7 percent for the 12 months through 

September, down from 2.2 percent during the year-earlier period. Low prices on 

goods imported from our trading partners have been one force holding down domestic inflation. The low and roughly stable rate of core inflation suggests that the U.S. 

economy has not yet bumped up against a capacity constraint and that it still has 

room to grow. 

LAP51NQ082 with DISTILLER

31 

1 Results from a regression of total labor compensation in the U.S. on corporate profits from 

BEA data covering 1966–2016. A Wald test supremum trend break occurs in Q4 1989. 

Looking back at the past few years, it appears that real potential GDP appears 

to be growing at about only a 2 percent annual rate, or perhaps less. After all, the 

unemployment rate has fallen 0.5 percentage points per year during the past two 

second-quarter to second-quarter intervals with only 1.7 percent per year real GDP 

growth. Looking back at this recent history, I can understand why the Congressional Budget Office projects growth of potential GDP of 1.8 percent during the next 

10 years in their current-law forecast, although I am not endorsing that CBO forecast. If economic policy can do anything to elevate this growth rate, it should . . . 

because of the importance of potential growth for the soundness of our Budget and 

the welfare of our Nation. This recent disappointing growth is the key motivation 

behind this Administration’s growth agenda. 

Real wage growth in America has stagnated. Over the past eight years, the real 

median household income in the United States rose by an average of six-tenths of 

a percent per year. But even as Americans’ real wages stagnated, real corporate 

profits soared, increasing by an average of 11 percent per year. The relationship between corporate profits and worker compensation broke down in the late 1980s. 

Prior to 1990, labor compensation rose by more than 1 percent for every 1 percent 

increase in corporate profits. From 1990–2016, the pass-through from corporate 

profits to labor compensation was only 0.6 percent, and looking most recently, from 

2008–2016, only 0.3 percent.1 The profits of U.S. multinationals are still American 

profits, but, increasingly, the benefits of those profits do not accrue to U.S. workers. 

The deteriorating relationship between the wages of American workers and U.S. 

corporate profits reflects the state of international tax competition. Countries 

around the world have responded to the international outflow of capital by cutting 

their corporate tax rates to attract capital back. They have doubled down on such 

policies as they have seen business-friendly policies benefit workers. 

A key feature of the joint proposal for taxes of this Administration together with 

Congressional leadership is the proposed reduction of the statutory Federal corporate tax rate from 35 to 20 percent. An analysis by the Council of Economic Advisers suggests that this tax rate cut would increase the level of average household 

income (relative to a no-tax-cut baseline) in the United States by, conservatively, 

$4,000 annually after the effects have taken hold. 

It may sound counter-intuitive to some that a cut in the tax on profits might boost 

wages, but the chain of causality is straightforward. Real wages reflect output per 

hour (labor productivity) of American workers. The productivity of workers in an 

economy depends, in part, on tools and machinery in the hands of the workers. The 

services of these tools, known technically as the flow of capital services—in the right 

hands—enables production. Even in an economy without international capital flows, 

reductions in the corporate tax rates and the associated capital deepening may 

imply a higher marginal product of labor and higher wages. The issue becomes more 

dramatic when the international dimensions are considered. The ability of domestic 

U.S. firms to invest foreign profits overseas magnifies the implications of corporate 

tax policy for domestic workers because an uncompetitive domestic corporate tax 

rate reduces the demand for U.S. workers by encouraging capital formation abroad. 

Indeed, when viewed in this way, the incidence of the corporate tax could theoretically fall entirely on U.S. workers, so long as workers are immobile and capital 

moves freely across borders. And wage changes of the scale we have modeled happen in just a few years simply if capital deepening returns to normal. 

This conclusion—that the incidence of the corporate tax falls partly but importantly on workers—is driven by empirical patterns that are highly visible, in addition to extensive peer-reviewed research, not to mention a number of follow-up studies to ours that have appeared during the past 10 days or so. For example, the covariation between real wage growth and statutory corporate tax rates between the 

most-taxed and least-taxed developed countries (OECD) over recent years, visible in 

Figure 1 (attached), is indicative of this larger literature. Between 2012 and 2016, 

the 10 lowest corporate tax countries of the OECD had corporate tax rates 13.9 percentage points lower than the 10 highest corporate tax countries, about the same 

scale as the reduction currently under consideration in the United States. The average real wage growth in the low-tax countries has been dramatically higher, as 

would have been predicted by a consumer of the recent academic literature, which 

looks at much longer time periods and explores the relationship with modern econometric techniques. 

LAP51NQ082 with DISTILLER

32 

The U.S. economy has made great progress during the past years in reducing the 

jobless rate, but the rate of productivity growth and therefore real wage growth has 

been slow. It is time to turn our attention to building a plan for boosting the rate 

of growth in the long-run. As I have discussed, the Administration’s plan for tax reform will have an important role in improving the rate of productivity growth, in 

combination with its plan to stabilize the regulatory environment, and we look forward to working with you to reach these goals. 

I will be happy to respond to any questions the committee may have. Thank you. 

LAP51NQ082 with DISTILLER


Insert offset folio 4 here 27701.004
33 

LAP51NQ082 with DISTILLER


Insert offset folio 5 here 27701.005

Submitted by Representative Carolyn B. Maloney 

Washington Post- April25, 2017 

Arthur Laffer's Theory on Tax Cuts Comes to Life Once More- By Peter Baker 

WASHINGTON -A white cloth napkin, now displayed in the National Museum of American 

History, helped change the course of modern economics. On it, the economist Arthur Laffer in 1974 

sketclted a curve meant to illustrate his theory that cutting taxes would spur enough economic 

growth to generate new tax revenue. 

More than 40 years after those scribblings, President Trump is reviving the so-called Laffer curve as 

he announces the broad outlines of a tax overhaul on Wednesday. What the first President George 

Bush once called "voodoo economics" is back, as Mr. Trump's advisers argue that deep cuts in 

corporate taxes will ultimately pay for themselves with an explosion of new business and job 

creation. 

The exact contours of the plan remained murky and Mr. Trump will not produce a fully realized 

proposal ou Wednesday. But what the president has called a tax reform plan is looking more like a 

tax cut plan, showering taxpayers with rate reductions without offsetting the full cost by closing 

loopholes or raising taxes elsewhere. In the short run, such a plan would add many billions of dollars 

to the national deficit. Mr. Trump contends that it will be worth it in the long run. 

"The tax plan will pay for itself with economic growth," Steven Mnuchin, the Treasury secretary and 

main architect of the plan, told reporters this week. 

The scope of the president's plan, as it has leaked out in recent days, has excited the markets even as 

it has worried fiscal hawks. If this feels like a familiar debate, it is because it has played out 

repeatedly in the past four decades as the dominant Republican orthodoxy shifted from deficit 

reduction to tax cuts. 

Presidents Ronald Reagan and George W. Bush both cut taxes deeply on the promise of economic 

payoffs, putting aside concerns about deficits, which grew during their tenures. Mr. Trump at points 

during the campaign talked tough about deficits, promising not only to eliminate them but also to 

wipe out in just eight years the entire $19 trillion in national debt that has accumulated over the 

history of the United States- a pledge so wildly unrealistic that even he has since dropped it. 

Indeed, since taking office, Mr. Trump has made no sustained effort to rein in deficit spending. In his 

first partial spending plan, called a skinny budget, he proposed $54 billion in cuts to domestic and 

foreign spending programs, some of them quite deep, to pay for $54 billion in additional military 

spending. That would leave the bottom line unchanged. In the current fiscal year, which started 

under former President Barack Obama, the government is spending $559 billion more than it is 

taking in through taxes, according to the Congressional Budget Office. 

Mr. Trump's plan reportedly will cut corporate tax rates to 15 percent from 35 percent, and cut taxes 

for small businesses and other firms that pay through personal income taxes as well. The 

administration has also promised tax breaks for middle-income Americans. And the plan may be 

paired with an expansive spending proposal to build new roads, bridges and other infrastructure. 

Mr. Mnuchin argues that an ambitious tax cut would unleash businesses that now feel constrained by 

one of the highest corporate tax rates in the world. Corporations would be freed to build plants and 
34 

LAP51NQ082 with DISTILLER


Insert offset folio 6 here 27701.006

create jobs in the United States instead of in foreign countries, and would bring home money that 

currently is sheltered overseas. 

While a corporate tax rate cut of the dimension Mr. Trump envisions would reduce tax revenues by 

more than $2 trillion over the next 10 years, Mr. Mnuchin noted that an increase in economic growth 

of a little more than one percentage point would generate close to the same amount. The goal, he 

said, was to produce a sustained national growth rate of 3 percent, instead of the 1.8 percent now 

projected over the next decade. That would not include the cost of personal income tax cuts. 

The question comes down to how the effect of a tax cut is measured. Under what is called static 

scoring, changes are judged without assuming any difference in growth. Under what is called 

dynamic scoring, assumptions are made about how much growth will change. "Under dynamic 

scoring, this will pay for itself," Mr. Mnuchin said at a public forum last weekend. "Under static 

scoring, there will be short-term issues." 

Critics scoffed at the math. "There is not a shred of evidence to support the secretary's pay-for-itself 

claim," said Jared Bernstein, a top White House economics adviser under Mr. Obama. "Sure, 

significantly faster growth would spin off more revenues. But there's simply no empirical linkage 

between tax cuts and growth that's both a lot faster and sustained." 

Douglas Holtz-Eakin, a former Congressional Budget Office director who advised Senator John 

McCain's Republican presidential campaign in 2008, was equally skeptical. "I can imagine cutting 

the rate to 15 percent," he said. "I can imagine growing a percentage point faster. I can imagine 

raising $2 trillion in revenue. I can't imagine them being one and the same policy." 

N. Gregory Mankiw, a Harvard University economist who was chairman of the President's Council of 

Economic Advisers under the younger Mr. Bush, said tax cut supporters exaggerate the possible 

growth benefits while opponents overemphasize the budgetary cost. "A reasonable rule of thumb, in 

my judgment, is that about one-third of the cost of tax cuts is recouped via faster economic growth," 

he said. 

One-third, of course, is not the same as fully paid for, which is one reason some Republicans on 

Capitol Hill are concerned. "I certainly want to see corporate taxes decreased," Representative 

Leonard Lance, Republican of New Jersey, said on CNN. ''I'm not sure we can go down to 15 

percent." 

The Committee for a Responsible Federal Budget, an advocacy group focused on reducing deficits, 

said that Mr. Trump's tax plan was more likely to increase growth by 0.2 percentage points than by 

the higher estimates Mr. Mnuchin forecast. "These tax cuts, of course, would not pay for themselves," 

the group said in a statement. "As we've explained before, there is little evidence to suggest any 

major tax cut could pay for itself with economic growth alone." 

But one fan of Mr. Trump's approach is Mr. Laffer, now 76 and still every bit the believer in the 

virtues oflower taxes as he was the night he went to a restaurant in 1974 with three fellow 

conservatives named Dick Cheney, Donald H. Rumsfeld and Jude Wanniski and outlined his 

thinking on that famous napkin. 

He said that he would urge Mr. Trump to close loopholes and eliminate tax shelters as he slashed 

rates, but that even without doing so, a corporate tax rate cut would generate cascades of tax 

revenue. The businesses themselves would no longer look for ways to avoid paying, and so report 

more of their income. 
35 

LAP51NQ082 with DISTILLER


Insert offset folio 7 here 27701.007

"We would bring people back and we would create jobs without tariffs and without protectionism," 

Mr. Laffer said by telephone. "''m a big believer in using honey rather than vinegar, and incentives 

are much better. I think it would be a flood of businesses coming back in short order, and it would 

stop inversions" - when companies move overseas for tax reasons. 

He also said greater economic activity would increase revenues from other taxes, including those on 

personal income and sales. Moreover, he said, with more jobs would come lower expenses for 

welfare. 

"It's a slam dunk," Mr. Laffer said. "It's a no-brainer." 

Politically, at least. He noted that both Mr. Reagan and the second Mr. Bush won re-election. 

Correction: April25, 2017 

Because of an editing error, an earlier version of this article misattributed the passage beginning 

with the quotation, "We would bring people back and we would create jobs without tariffs and 

without protectionism," and concluding with the quotation, "It's a no-brainer." The remarks were 

made by Arthur Laffer, not Jude Wanniski. 
36 

LAP51NQ082 with DISTILLER


Insert offset folio 8 here 27701.008

Submitted by Representative Carolyn B. Maloney 

April 19th, 2017 at 10:38 am 

OnT/u!, 

i&ONDNY 

JARED BERNSTEIN BLO& 

Supply-side, trickle-down nonsense on the 

NYf oped page 

There's a robust debate to be had as to why the NYT published this op-ed on the alleged economic 

benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the 

opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why 

it's there. But it does require debunking, so thanks NYT,for some make work. 

Here's much of the article's text,followed by my comments in italics: 

In the aftermath of the health care blowup, President Trnmp and the Republicans need a legislative 

victory. Tax reform probably should have gone first, but now is the time to move it forward with 

urgency. 

By tax reform, as they admit below, the authors mean tax cuts. This is no such urgency at all. If 

anything, based on simple demographics alone, we're going to need more, not less, revenue. This is 

a typical ploy in this space: create an emergency that can only be solved by tax cuts on the wealthy. If you listen carefully, you hear their fear that their tactics aren't working, and the tax debate has 

gotten gummed up. That's music to my ears, but cacophony to theirs. 

Unfortunately, the White House seems all over the map on the subject. One day there is a trial 

balloon for a value-added tax. The next, the idea of a carbon tax or a reciprocal tax. And now we are 

hearing the curve ball of a payroll tax cut. Steve Mnuchin, the Treasury secretary, has thrown cold 

water on the idea of any tax bill meeting the August deadline. 

One sure lesson from the health care setback is the old admonition "Keep it simple, stupid." The 

Republicans tried to fix the trillion-dollar health insurance market instead of keeping the focus on 

repealing Obamacare. 

I take their point re the lurching of the White House on taxes, which really is remarkable and 

reveals the lack of not just any planning or coalition building, but even a clear sense of what they 

want to do on taxes. The idea that "keeping the focus on repealing Obamacare" would work, 

however, makes no sense, and reveals that the authors' magical thinking extends beyond tax cuts to 
37 

LAP51NQ082 with DISTILLER


Insert offset folio 9 here 27701.009

health care. Republican voters don't want Obamacare to be replaced with nothing. They want 

more health care at less cost, which was what Trump promised them . 

.. .Instead, the primary goal of Mr. Trump's first tax bill should be to fix the federal corporate and 

small-business tax system, which has made America increasingly uncompetitive in global markets 

and has reduced jobs and wages here at home. The White House and the Treasury already have a tax 

plan that we were involved with last year. The three most important planks of that plan are: 

First, cut the federal corporate and small-business highest tax rate to 15 percent from 35 percent, 

which is now one of the highest corporate tax rates in the world. 

Our statutory business rate is a globally high 35 percent. What companies actually pay-their 

effective rate-is about 10 points lower, because of all the loopholes. Also, because so many 

businesses are now pass-throughs (where you claim your business income as personal income), 

you can't talk about corporate taxes without noting a new loophole these guys are including in the 

plan they wrote for Trump: take the pass-through rate down to 15 percent as well. This creates 

a huge incentivefor every high earner to become a pass-through. 

Second, allow businesses to immediately deduct the full cost of their capital purchases. Full 

expensing of new factories, equipment and machinery will jump-start business investment, which 

since 2000 has grown at only one-third the rate recorded from 1950 to 2000. 

Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of 

business and the wealthy, they invest more, that raises profits and productivity, and the benefits 

trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment 

income, do not correlate with greater investment, and they certainly are uncorrelated with faster 

productivity growth. Businesses already receive very favorable tax treatment on their investments; 

in fact, their tax burden on debt :financed investments can be negative. No question, tax cuts raise 

after-tax profitability, but absent much more worker bargaining power, those profits !ili!JJ. in the 

pockets of those at the top of the income scale. 

Third, impose a low tax on the repatriation of foreign profits brought back to the United States. This 

could attract more than $2 trillion to these shores, raising billions for the Treasury while creating 

new jobs and adding to the United States' gross domestic product. 

To help win over Democratic votes in the House and Senate, we would also suggest another 

component: What many workers across the country want most from President Trump is 

infrastructure funding. As part of this bill, we should create a fund dedicated to rebuilding America's 

roads, highways, airports and pipelines, and modernizing the electric grid and broadband access -

financed through the tax money raised from repatriation of foreign profits. 

We at CBPP have done a lot of work on this question of "tax holidays," where multinationals are 

offered a much-reduced tax rate if they "repatriate"-bring back to the US-their foreign earnings, 

which they've long held abroad to avoid US taxes. When the program is voluntary with no strings 

attached, it's a big revenue loser, and you can't pay for something (infrastructure) with less than 

nothing. That said, required (vs. voluntary) repatriation as part of a transition to broader reform 

of how we tax our MNCs would constitute real tax reform. 

As much as possible, this bill should include private financing for projects like toll roads and energy 

drilling. We also favor "user pays" financing, such as toll roads, and we would oppose any Fannie 

Mae-type financing structure for projects that would put taxpayers on the hook for hundreds of 

billions in potential losses. 
38 

LAP51NQ082 with DISTILLER


Insert offset folio 10 here 27701.010

This user-fee stuff is a terrible idea for infrastructure. The whole point of"public goods" is that they 

are projects that don't generate the return on investment that would motivate private firms to 

make such investments. In other words, this is a thinly disguised Privatization ulan . 

... We should emphasize that business tax relief is not a sellout to corporations but a boon for middleclass workers. A study by the Tax Foundation and Kevin A Hassett, then at the American Enterprise 

Institute and now the chairman of President Trump's Council of Economic Advisers, found that 

middle-class wages rise when business taxes fall. 

The additional increase in real wages could be nearly 10 percent over the next decade, which would 

reverse 15 years of income stagnation for the working class in America. And, if we are right that tax 

cuts will spur the economy, then the faster economic growth as a result of the bill will bring down the 

deficit. 

Here we have the "money" 'graf: the straight-up claim that trickle down tax cuts will boost the 

earnings of the working class, which will help offset their cost-the Laffer curve in action. I guess I 

should give the authors credit for adding "if we are right," though I'll give you very long odds that 

the editors insisted on this addition. Because there's no reason to ask if they're right. They're not, 

with the latest exhibit being the state of Kansas, an "experiment" derived by some of these very 

authors. 

B1W, I've endorsed my .friend Kevin Hassett for his new job as a voice of economic reason in this 

administration. But I've been carefol to note thisfiaw in his work and his thinking. In fact, the 

study they reference here has been thoroughly debunked in various places . 

... As for fixing the maddeningly complex individual income tax system - lowering tax rates and 

ending needless deductions- we are all for it, but that should wait until2018. Jobs and the economy 

are the top priority to voters. 

Republicans need to act with some degree of urgency. The financial markets and American 

businesses are starting to get jittery over the prospect that a tax cut won't get done this year. A failure 

here would be negative for the economy and the stock market and could stall out the "Trump 

bounce" we have seen since the president's election. 

Again with the urgency, and "trust us ,folks, it's not the zillionaires for whom our hearts bleed-it's 

jobs and the economy.'" Not to mention the stock market, which is getting 'jittery" over the 

possibility that Trump won't deliver a tax plan like the one these guys wrote, which delivers folly 

half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once folly phased 

in, delivers 99 percent of its cuts to the top 1 percent). 

Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple schemeTrump wins, the rich get big tax cut-has turned out to be harder to pull off than they'd hoped. 

That's a feature, not a bug, of our current political moment, even if it means we have to read a WSJ 

oped in the NIT. 
39 

LAP51NQ082 with DISTILLER


Insert offset folio 11 here 27701.011

Submitted by Representative Carolyn B. Maloney 

The Washington Post 

August 15, 2016 

Here's why we're still arguing about trickledown tax policy 

For all his anti-establishment posturing, Donald Trump's tax plans are standard Republican fare: big 

tax cuts that favor the wealthy by lowering top marginal rates (on individual, corporate, and passthrough income) and eliminating the estate tax. 

While it hardly seems newsworthy to point out that a Republican presidential candidate introduced 

yet another supply-side, trickle-down tax plan, in this unique election-cycle, it raises a few questions. 

First, why are we still arguing about the viability of this failed approach to tax policy, and second, 

why is Trump, a candidate who's trying to appeal to working-class voters hurt by a "rigged" system 

and surely not helped by eliminating the estate tax, going there, too? (Note: the estate tax hits 0.2 

percent of estates; for couples, estates worth less than $11 million are exempt; the average 

beneficiary from this cut gets $3 million.) Finally, is there an alternative conservative vision on taxes 

that's less untethered from reality? 

If facts could kill the trickle-down myth, I'd be giving its eulogy at its gravesite. Instead, part of 

what's going on here is that these candidates are doing the bidding of their wealthy donors, if not 

themselves. Trump's new version of his plan hasn't been fully evaluated yet, but 35 percent of the 

benefits of his first plan went to the richest 1 percent, and one analysis suggests that his proposal to 

repeal the estate tax would save his family billions. 

20 things Trump says he11 do for the U.S. economy 

At a rally in Detroit, Republican presidential candidate Donald Trump outlines what he would do as 

president to take the U.S. economy to "amazing new heights" (Sarah Pamass/The Washington Post) 

But the real target of these plans is the size of government itself. Since large tax cuts don't come close 

to paying for themselves and Republicans won't countenance any tax increases, the only way to truly 

offset the cuts is to reduce spending (or to dramatically increase the budget deficit, something 

Republicans typically say they oppose). 

Consider the distributional outcomes from this scenario: the tax cuts benefit the wealthy while the 

spending cuts invariably whack the poor. Paul Ryan's trickle-down tax plans, for example, have 

consistently offset part of their costs - most recently, 6o percent - by cutting spending on Medicaid, 

food stamps, education and housing programs. 

What's so misguided about all of this is that, based on just demographics alone - not to mention 

climate change, geopolitics, and inequality- meeting our future challenges will demand more, not 

less, tax revenue. 

But today's conservatives won't go there. Their view was efficiently summarized by columnist Robert 

Novak years ago: "God put the Republican Party on earth to cut taxes. If they don't do that, they have 
40 

LAP51NQ082 with DISTILLER


Insert offset folio 12 here 27701.012

no useful function." And ifthere's a theory, like supply-side growth effects, that gives these tax cuts a 

patina of academic credibility, they'll tightly embrace it. Regardless of the evidence, they11 build it 

into their models, as did the conservative Tax Foundation in a recent analysis that found growth 

effects to offset 92 percent of $24 trillion in lost revenue from the latest House GOP tax plan. 

Importantly, some conservative thinkers are urging their party to get outside this old box. James 

Pethokoukis agrees with the needed revenues point, noting that it will be "exceedingly difficult for 

the U.S. to maintain the average post-World War II tax burden given the aging of American society." 

A recent Times piece featured ideas by "reformocon" policy types rejecting tax cuts on the wealthy in 

favor of tax credits to boost the incomes of low- and middle-class working families. Oren Cass, a 

former Mitt Romney adviser, went so far as to predict that future conservatives would be more open 

"to raising taxes when justified." 

Unfortunately, these "reformers" have been at this for years and have gotten nowhere. They pack 

intellectual heft, but the coin of this realm is actual coin. 

One also might suspect that the trickle-down-touting establishment wing of the party would 

recognize that the voters they need to attract aren't moved by estate and corporate tax cuts. President 

Reagan may have made the supply-side sale, but it didn't work for Mitt Romney, and recently, in 

what I consider a promising development, a bunch of state elected officials in Kansas lost their 

m for supporting supply-side tax cuts that are starving their budget and stressing government 

services, most notably education. There's a lot of money at the top of the wealth scale, but not a ton 

of votes. But such electoral math hasn't broken through the supply-side tax orthodoxy. 

I thus conclude that as long as big money remains in politics and de-Nile isn't just a river, the GOP, 

including alleged renegades like Trump, will continue to insist that evidence be damned: tax cuts pay 

for themselves, the rich will create jobs for the rest of us if we just let them pass on their estates tax 

free, and multinational corporations will come back home if we just halve their tax rates. 

I wish I had a happy ending to this story. I wish I could stop wasting time arguing against the junk 

economics that claims trickle-down works. But this dark fantasy goes deep, and it's blocking needed 

changes in tax policy, fomenting gridlock, and promoting fact-free policy analysis in a crucial area of 

political economy. 
41 

RESPONSE FROM HON. KEVIN HASSETT TO QUESTIONS FOR THE RECORD SUBMITTED

BY VICE CHAIRMAN MIKE LEE

During the hearing, you identified geographic inequality as not only an important 

issue, but also one that is central to the reason you chose to become an economist. 

My Joint Economic Committee staff, who have spearheaded the ‘‘Social Capital 

Project,’’ are exploring a number of topics including how the decline in marriage, 

participation in community institutions, and religious adherence might be connected 

with the economic challenges faced in some of these struggling areas. What role do 

you see these social and cultural shifts playing, at the local level, in driving or exacerbating declines in economic outcomes in some communities? 

Thank you for this thought-provoking question. 

As you note, I have had an interest in geographic inequality starting from watching my hometown of Greenfield, Massachusetts, decline once our mill closed. It is 

an interest that I was proud to pursue through the nonprofit Economic Innovation 

Group, EIG, even aside from any research that I performed as an economist at AEI, 

up until I became the Chairman of the Council of Economic Advisers (CEA). And 

it is a privilege to answer this question for you and your Committee as the Chairman of the CEA. 

The economics profession has yet to converge toward any kind of consensus about 

how economic activity and social and cultural shifts relate to one another. The philosopher of science Karl Popper once characterized science as a process of ‘‘conjecture’’ of hypothesis and ‘‘refutation’’ by evidence. I will outline three main sets of 

conjectures about your question. 

I should advise as I begin that the citations below do not purport to be anything 

close to exhaustive: the research in this field is enormous and continues to expand. 

The first set of conjectures attempts to estimate the causal effects of economic 

challenges on variables that proxy for social or cultural outcomes. One approach 

looks at what happens to mortality after an individual loses a job when a firm-level 

layoff that an individual could not plausibly have caused—an ‘‘exogenous’’ job loss— 

causes an individual to lose a job. The results are disheartening to say the least: 

mortality increases by up to 50 to 100 percent (Sullivan and von Wachter 2009), including the risk of death from suicide (Classen and Dunn 2012). Another approach 

looks at the experience of a community rather than an individual after it loses its 

sources of jobs and income, finding similar results. As a local government loses its 

economic tax base, property values decline, crimping the community’s capacity to invest in local public services like public schools; in addition, property crime rises 

(Feler and Senses 2017). Rates of marriage decrease even rates of out of wedlock 

births increase (Autor, Dorn, and Hanson 2017). And deaths from suicide and drug 

overdoses rise (Pierce and Schott 2017). 

In spite of the rigor their methodology, however, these estimates are far from the 

last word on how economic challenges may interact with social and cultural outcomes. Even the most ironclad evidence of an effect that runs from the economic 

to the social and cultural does not rule out the possibility that other causal channels 

affect this same set of outcomes. And nothing in this evidence explains why some 

individuals or some communities may respond better to economic challenges than 

others. In principle, the effect of any economic shock on mortality estimated in any 

study could, say, double if some set of social and cultural factors that helps individuals or communities adapt to economic challenges were to cease to exist. Yet such 

an effect could virtually never be detected by any of the standard statistical techniques economists use to estimate the causal effect of economic challenges on social 

and cultural factors. 

A second school of thought posits, citing the apparent explanatory failure of economic variables alone to explain variation in social and cultural outcomes, that variation in social ‘‘norms’’ of some variety must themselves be exerting a distinct causal influence on the outcomes in question. Kearney and Riley (2017), for instance, 

find that the Appalachian coal boom of the 1970s and 1980s induced increases in 

family formation and marital births—but that the fracking boom post-2005 induced 

an increase in marital and non-marital births, but no increase in marriage. Kearney 

and Riley (2017) interpret this evidence as consistent with the idea that economic 

forces influence social and cultural outcomes through their interaction with social 

norms rather than through a causal mechanism constituted by economic forces 

alone. Other analyses, however, interpret evidence of a similar nature to suggest 

that variation in social norms alone do not need to have any interaction with economic factors to explain the social and cultural outcomes of interest. An example 

of analysis that marshals quantitative data to make an argument to this effect is 

Murray (2013). 

LAP51NQ082 with DISTILLER

42 

However, from the perspective of insisting that all conjectures in science be vulnerable to refutations by evidence, many explanations that rely on variation in 

norms to explain social and cultural outcomes seem to leave something to be desired. An explanation of how social norms explain social and cultural trends would 

seem to require, to be fully useful to policy makers, a theory of how the norm arose 

in the first place. Lacking such an explanation, it would seem difficult to refute any 

specific conjecture about how the rise and fall of a social norm explained a social 

or cultural trend. 

A third set of explanations, however, does make reference to deep-seated historical factors that can plausibly explain both geographic variation in social norms and 

economic outcomes. Inspired in their hypothesis by Frederick Jackson Turner’s 1893 

essay The Significance of the Frontier in American History, a new strand of research integrates historic data from the U.S. Census and GIS data from additional 

historical sources on the frontier experience. In spite of the time elapsed since the 

closing of the frontier, constructing a variable for plausibly exogenous ‘‘frontier experience’’ within a local area, the authors find that the legacy of the frontier indeed 

persists into the present. They find, for instance, that the greater the ‘‘frontier exposure’’ of a community, the less its current residents favor redistribution. The authors attribute this attitude to the greater reward of effort in the historical frontier 

environment. 

To be sure, this research program of attempting to identify deep-seated historical 

factors that explain both social norms and economic variables—at least as applied 

to the United States—remains in its infancy. 

REFERENCES

Autor, D., David Dorn, and Gordon Hanson. 2017. When Work disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men. National Bureau 

of Economic Research, Working Paper No. w23173. Bazzi, S. Martin Fiszbein, and Mesay Gebresilasse. 2017. Frontier Culture: The 

Roots and Persistence of ‘‘Rugged Individualism’’ in the United States. National Bureau of Economic Research, Working Paper No. w23997. Classen, T. and Richard A. Dunn. 2012. The Effect of Job Loss and Unemployment Duration on Suicide Risk in the United States: A New Look Using Mass Layoffs and Unemployment Duration. Health Economics 21(3): 338–350. 

Feler, L. and Mine Z. Senses. 2017. Trade Shocks and the Provision of Local Public Goods. American Economic Journal: Economic Policy, 9(4): 101–43. 

Kearney, M.S. and Riley Wilson. 2017. Male Earnings, Marriageable Men, and 

Nonmarital Fertility: Evidence from the Fracking Boom. National Bureau of Economic Research, Working Paper No. w23408. 

Murray, Charles. 2013. Coming Apart. Three Rivers Press. 

Pierce, J., and Peter Schott. 2017. Trade Liberalization and Mortality: Evidence 

from U.S. Counties 

Sullivan, D., and Till von Wachter. 2009. Job Displacement and Mortality: An 

Analysis Using Administrative Data. The Quarterly Journal of Economics, 124(3), 

1265–1306. 

RESPONSE FROM HON. KEVIN HASSETT TO QUESTIONS FOR THE RECORD SUBMITTED

BY SENATOR MARTIN HEINRICH

1.) The Joint Committee on Taxation, Congressional Research Service, Congressional Budget Office and the Treasury Department have all recently reviewed the literature regarding how the corporate tax is split between capital and labor. Each 

reached different conclusions from the CEA’s recent report that finds that average 

household income would increase by at least $4,000 following a cut in the corporate 

tax rate from 35 to 20 percent. For example, the 2012 Treasury Paper, ‘‘Distributing 

the Corporate Income Tax: Revised U.S. Treasury Methodology,’’ which recently was 

removed from the Treasury website, finds that less than one-fifth of the corporate tax 

is borne by labor. 

• As policymakers try to understand the impacts of different tax cut proposals, do 

you intend to encourage Treasury to repost the study? 

Assessing how the Treasury Department should manage the research produced by 

its previous staff is not within the purview of my role as Chairman of the Council 

of Economic Advisers. 

I would recommend that individuals who want to read analyses of the share of 

the corporate tax burden that falls on labor read more-recent estimates of this parameter in recent peer-reviewed literature. That literature estimates that the labor 

LAP51NQ082 with DISTILLER

43 

share is significantly higher than 20 percent. Our most recent paper on the impact 

of corporate tax reform on both growth and wages did an exhaustive literature review of this topic. It was common for models used in the 1960s and 1970s to assume 

that international capital mobility is not an important factor to consider when 

model ling the U.S. but such an assumption is inconsistent with the modern world. 

• Why did CEA choose to ignore the experience of the United Kingdom, which cut 

the corporate tax rate from 30 to 19 percent and saw wages fall? What can we 

learn from the U.K. experience? 

The CEA did not ignore the experience of the United Kingdom. The United Kingdom, in fact, is within the sample of OECD countries that CEA analyzed. But, like 

any one country included in a statistical analysis of many countries, the United 

Kingdom alone does not alone determine the conclusions of the analysis. 

As a historical example, however, the United Kingdom does offer some suggestions for how U.S. policymakers can design corporate tax reform in such a way as 

to ensure that America’s workers get as much of the benefit from corporate tax reform as possible. And I am pleased to report that the tax legislation now under consideration does take these suggestions from the United Kingdom’s historical experience into account. 

As the U.K. lowered its headline corporate tax rate over the period, as a recent 

Tax Foundation analysis pointed out, it also concurrently changed other provisions 

in the tax code that had the effect of increasing the marginal tax rate on new investment. According to economic theory, then, one should not have expected any wage 

increase from capital deepening from the U.K. corporate tax changes—the U.K. 

changed other provisions in the business tax code that had the effects of offsetting 

the reduction in the statutory rate. The corporate tax changes now under consideration in the U.S., however, reduce the headline corporate tax rate and include additional reforms (e.g., changes to the tax treatment of new investment expenditures) 

that serve to decrease rather than to increase the effective marginal tax rate on new 

investment. 

An examination of the other changes to the U.K.’s corporate tax code that accompanied its reduction of its statutory rate suggests that one would be mistaken to 

expect the effect of the U.K.’s corporate tax changes on wages to necessarily speak 

to the anticipated effects of the corporate tax reforms now under consideration in 

the United States. 

2.) Recently we’ve seen a disturbing trend of attacking nonpartisan scorekeepers 

when analysis comes out that disproves administration and GOP leadership talking 

points. 

• In your opinion, do the Congressional Budget Office and Joint Committee on 

Taxation undergo rigorous processes in developing their models and releasing 

legislative analysis? 

The staffs of the Congressional Budget Office (CBO) and the Joint Committee on 

Taxation (JCT) have a level of technical expertise that is difficult for any institution 

to match. At the same time, however, as a tax economist I am aware of how many 

judgment calls must be made in order to perform analysis at the complexity and 

level of detail that the CBO and JCT are required to perform. And reasonable people can disagree about the judgment calls that must inevitably be made when conducting tasks involving the magnitude of the complexity of those performed by CBO 

and JCT. 

So, yes, I think CBO and JCT have processes that meet standards of rigor. But 

I would note that the existence of processes that meet standards of rigor does not 

mean a reasonable person cannot disagree with the conclusions derived from assumptions made in those analyses. For example, we cite in our CEA report on the 

growth effects of tax reform empirical papers that are published in top journals that 

find that exogenous tax changes, like this one, have large growth effects. Should the 

JCT or CBO provide an analysis that suggests that the tax bill will not have large 

growth effects, then one would be correct to inquire whether the position of the staff 

is that this literature should be ignored, and to follow up and ask why that is their 

position. The IMF, for example, has a talented staff as well, and a recent paper that 

we cite in our report explicitly discusses, as is scientifically appropriate, the modeling assumptions required to generate results from their equilibrium models that 

are consistent with the broader macroeconometric results emerging in the latest literature. 

• Do you believe that they have become partisan? 

As before, I would emphasize that the depth and breadth of expertise at CBO and 

JCT are virtually unmatched. They are important institutions. At the same time, 

LAP51NQ082 with DISTILLER

44 

I think that reasonable people can disagree even with expert judgments that meet 

high standards of rigor without having disagreements be viewed as ‘‘partisan.’’ This 

is what professional tax economists spend most of their time doing: engaging in debates in which they disagree about calculations and the interpretation of them, even 

though they believe the person who performed the calculation is an expert acting 

in good faith whose calculation possessed no shortage of rigor. 

• When JCT and CBO release their analysis of the tax reform plan, would you recommend that Congress use it to inform their actions? 

I believe that members of Congress and citizens more generally should base their 

views on a wide variety of rigorous analyses, including those produced by the JCT 

and CBO. But the value of that analysis of a tax policy or any other policy provides 

to the consumer of that information depends at least in part on the transparency 

of the assumptions used to generate that analysis, and the ability of the models 

being relied upon to reproduce accepted patterns in the data. 

3.) The International Trade Commission just recommended that the Administration levy tariffs on imported solar cells. While tariffs may help a few domestic manufacturers, they could lead to tens of thousands losing their jobs distributing, selling, 

and installing solar panels. 

• How would you advise the President about the effectiveness of protective tariffs? 

As you know, through Section 201 of the Trade Act of 1974, Congress created a 

technocratic process for providing domestic industry relief in the event that a large 

amount of increased imports is causing or threatens to cause serious injury to firms 

producing in the United States. On October 31, the International Trade Commission 

(ITC) issued a series of recommendations to the President after determining that 

crystalline silicon photovoltaic cells are being imported at such quantitates as to 

cause serious injury to the domestic industry. 

On November 13, the ITC forwarded its report and recommendations to the President. As this is a matter currently subject to an administrative proceeding, it would 

be inappropriate for me to comment further at this time. However, I can assure you 

that the Office of the United States Trade Representative, which is tasked with developing recommendations for the President, will adequately consult with the various agencies that have equities in this matter, including the Council of Economic 

Advisers. 

• Based on your knowledge of the economic research on tariffs, do protective tariffs 

like the one proposed for solar panels help American workers and consumers in 

the long run? 

Given that this is subject to an ongoing administrative proceeding and a matter 

before the President, it would be inappropriate for me to elaborate on my conversations with the President at this time. As you know, the ITC forwarded its report 

and recommendations to the President on November 13th. I can assure you that the 

Administration is carefully considering the pros and cons of these recommendations 

and in the process of determining the most appropriate path forward. 

4.) The President has said many times in the past that he will not support cuts 

to Medicare or Medicaid. But the budget Congress just passed cuts nearly half a trillion dollars from Medicare and $1 trillion from Medicaid in order to partially pay 

for tax cuts. This is the budget the President has lauded on twitter. 

• Would you advise the President that cuts to Medicare and Medicaid are acceptable if they are necessary to pass tax reform? 

The Employment Act of 1946 created the Council of Economic Advisers, and it 

reads that ‘‘It shall be the duty and function of the Council . . . to gather timely and 

authoritative information concerning economic developments and economic trends, 

both current and prospective.’’ Consistent with that mandate, I view providing the 

President economic analysis of the costs and benefits of the policies under consideration as part of my role as Chairman of the Council of Economic Advisers. 

But I do not necessarily think that the ‘‘timely and authoritative information concerning economic developments and trends’’ would necessarily be the only set of information relevant to a decision about the specific tradeoffs involved in a specific 

legislative decision. Nor can I, as Chairman of the Council of Economic Advisers, 

commit to providing anything but objective economic analysis to the President. 

5.) You’ve spoken, written, and testified in the past about the economic benefits of 

immigration. In the hearing, you mentioned that immigrants help grow the economy, 

but that immigration policy must also factor in border security concerns. In regards 

to Americans protected under the Deferred Action for Childhood Arrivals (DACA) 

program, border security is unlikely to be a main concern. 

LAP51NQ082 with DISTILLER

45 

• What would the economic impact be of deporting these 800,000 young, hardworking Americans? 

As I have mentioned, the Employment Act of 1946, which created the Council of 

Economic Advisers, declares that ‘‘It shall be the duty and function of the Council 

. . . to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective.’’ Consistent with that 

mandate, I provide the President with objective economic analysis of the costs and 

benefits of the policies under consideration. 

The complexities involved in the economic analysis of immigration are, to say the 

least, significant: there are few subjects that generate as much debate between 

economists as immigration. But CEA has not yet evaluated any specific policies involving DACA. The enormity of the effort that would be required to complete an 

analysis on this subject is, as an economist, hard to overstate. As Chairman of the 

CEA, I would not regard myself as in a position to comment about a specific proposal involving DACA. 

• How will you make the case to the President that keeping protections in place 

for these young Americans is important for the economy? 

I view a key task of the CEA that I chair as the provision of ‘‘timely and authoritative information concerning economic developments and economic trends, both 

current and prospective.’’ Rather than recommending a specific course of action, as 

Chairman of the Council of Economic Advisers, I commit only to providing the President with objective economic analysis. 

6.) The Republican tax plan proposes eliminating ‘‘special interest’’ deductions such 

as the Medical Expense deduction, a deduction that reduced tax burdens for 8.7 million households in 2015, and the student interest deduction, which was taken by 

more than 12 million households in 2015. 

a. What would be the impact on families facing tens of thousands of dollars in 

medical expenses be if they are forced to trade this deduction for the CEA’s theoretical future wage gains? 

The impact of any tax legislation on a specific subset of families depends on the 

interaction of many provisions of the final legislation. However, many of the specifics that will determine how this bill affects the millions of American households 

affected by our tax code have not yet been determined. Thus, it would be premature 

to comment about the effect of the tax legislation on the well being of a subset of 

households as specific as the subsets of families you describe. However, while I 

would demur from speculating about the impact of a still-in-progress bill on specific 

sets of households, I disagree with a characterization as ‘‘theoretical’’ for CEA’s estimate of the wage effects. Indeed, the estimate is based on a very large and successfully peer-reviewed empirical literature, and a wide range of estimates has been provided. 

b. What would the impact of this tradeoff be on families if they are also paying 

down tens of thousands in students loans? 

As I noted earlier, the impact of any tax legislation on a specific subset of families 

depends on the interaction of many provisions of the final legislation—and many of 

the specifics that will determine how this bill affects the millions of American 

households affected by our tax code have not yet been determined. 

Æ 

LAP51NQ082 with DISTILLER