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22–376 2017

MOVING AMERICA FORWARD: WITH A 

FOCUS ON ECONOMIC GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JANUARY 13, 2015 

Serial No. 114–FC01 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

PAUL RYAN, Wisconsin, Chairman 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

PAT MEEHAN, Pennsylvania 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

JASON SMITH, Missouri 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

JOYCE MYER, Staff Director 

JANICE MAYS, Minority Chief Counsel 

iii 

C O N T E N T S 

Page 

Advisory of January 13, 2015 announcing the hearing ........................................ 2 

WITNESSES 

Martin Feldstein, The George F. Baker Professor of Economics, Harvard 

University and President Emeritus of the National Bureau of Economic 

Research ................................................................................................................ 21 

Douglas Holtz-Eakin, President, American Action Forum ................................... 8 

Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT 

Sloan School of Management .............................................................................. 27 

(1) 

MOVING AMERICA FORWARD: WITH A 

FOCUS ON ECONOMIC GROWTH 

TUESDAY, JANUARY 13, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:01 a.m., in Room 

HVC–210, The Capitol, the Honorable Paul Ryan [Chairman of the 

Committee] presiding. 

[The advisory announcing the hearing follows:] 

2 


22376.001

re COMAY~{ANn MEANS ~ CHAIRMA.i\1 PAUL RYAN 

Moving America Forward: With a Focus on Economic 

Growth, Ryan Announces First Committee Hearing of the 

114'" Congress 

New Chairman of the House Conunittee on Ways and Means Paul Ryan (R-WI) today 

announced that the first hearing of the 114'• Congress will be focused on the state of the 

U.S. economy and policies that can promote job creation and economic growth. The 

hearing will take place Tuesday, January 13, 2015, at 10:00 AM in HVC 210 Upon 

the announcement, Chairman Ryan made the following conunents: 

"Despite recent signs of hope, too many Americans are still falling behind. Too many are 

unemployed; wages are rising too slowly; and our federal debt continues to swell, 

threatening long-term growth. At the same time, American job creators face an 

uncompetitive tax code, rising costs, restrictions abroad on U.S. goods and services, and 

a stifling regulatory apparatus here at home. Fortunately, there are pro-growth solutions 

that can help move America forward, and those will be the focus of this hearing and this 

Committee. " 

A list of witnesses will follow. Oral testimony at this hearing will be from invited 

witnesses only. However, any individual or organization may submit a written statement 

for consideration by the Conunittee and for inclusion in the printed record of the hearing. 

Details for Submission of Written Comments: 

Please Note: Any person(s) and/or organization(s) wishing to submit written conunents 

for the hearing record must follow the appropriate link on the hearing page of the 

Conunittee website and complete the informational forms. From the Conunittee 

homepage, http://waysandmeans.house.gov, select "Hearings. " Select the hearing for 

which you would like to make a submission, and click on the link entitled, "Click here to 

provide a submission for the record." Once you have followed the online instructions, 

submit all requested information. A IT ACH your submission as a Word document, in 

compliance with the formatting requirements listed below, by the close of business on 

Tuesday, January 27, 2015. For questions, or if you encounter technical problems, 

please call (202) 225-3625 or (202) 225-2610. 

Formatting Requirements: 

The Conunittee relies on electronic submissions for printing the official hearing record. 

As always, submissions will be included in the record according to the discretion of the 
3 

f 

Chairman RYAN. The committee will come to order. 

First of all, I would like to start off by saying what an absolute 

privilege and honor it is to chair this committee. I have served with 

many of you on this committee for quite a while, 14 years for myself. 

I came into this Congress with a number of you. I see Mr. Larson 

there. I think Joe is coming. I came with Kevin. It has been an absolute pleasure serving on this committee, and I just want to tell 

you how I feel tremendously gratified and honored to be in this position. 

Second of all, announcement: We are obviously not in the Ways 

and Means room. As you know, the Ways and Means room is being 

rewired for sound reasons because it is also the alternative floor location. 

That rewiring and reworking of the room is supposed to be completed by April 16th. So, hopefully, if all goes well, we will stop 

having meetings and hearings in this room and resume it in the 

Ways and Means hearing room in mid-April. 

I have also seen this committee run very well and sometimes not 

so well. This committee deals with some of the toughest issues our 

country faces. I want to lead this committee so that we have a full 

debate on the issues, a full respectful debate on the issues. 

I also want to ensure that we treat each other with respect and 

that we conduct our debates in a civil manner, and I am going to 

work very closely with the Ranking Member, Mr. Levin, toward 

that result. 


22376.002
4 

I would also like to welcome all of our new Members and all of 

our returning Members. 

To our returning Members, I am very glad to have this opportunity to serve with you in this new Congress. 

And to our newest Members, I would like to introduce you by 

name. 

We have Pat Meehan from Pennsylvania; Kristi Noem from 

South Dakota; George Holding from North Carolina; and Jason 

Smith from Missouri. 

It is ‘‘Missouri’’ and not ‘‘Missouri’’ where you come from. Right? 

Mr. SMITH OF MISSOURI [No response]. 

Chairman RYAN. Okay. Welcome to our new Members. 

Last week we noted the hearing titled ‘‘Moving America Forward.’’ Today we will hear from three experts about the economy. 

But, as a technical matter and for the time being, we are not going 

to be calling this a hearing. 

As we have discussed with the minority staff, the House has not 

yet elected Members to the standing committees, including the 

Committee on Ways and Means. 

Committees cannot organize until members are officially elected 

by the House. So we expect this election to happen this afternoon, 

and that is why we are technically holding an informal briefing 

this morning rather than a hearing. 

However, we will run the briefing under the rules of past Congresses where Members are recognized according to the Gibbons 

rule. The Gibbons rule is somewhat unique to the Ways and Means 

Committee. 

For the benefit of our new Members, the Gibbons rule provides 

that members present in the room at the time of the gaveling in 

will be recognized by seniority. Members who arrive after the gavel 

will be recognized in order in which they arrive without regard to 

seniority. 

Once we are to organize, we will ask unanimous consent for the 

transcript from this informal briefing to be included during our 

next hearing so that it is effectively a hearing. 

The fact that Mr. Levin and his staff worked with us right out 

of the gate to overcome these technical issues to make sure that we 

could meet and talk about the economy is exactly the example of 

the kind of camaraderie that it takes to make this committee run 

very well. 

And I thank the Ranking Member for that. 

Let me start by introducing our panel. 

Dr. Holtz-Eakin is president of the American Action Forum, and 

he is the former director of CBO. 

Professor Feldstein is the former chairman of the Council of Economic Advisors under President Reagan. 

And Professor Johnson is a senior fellow at the Peterson Institute for International Economics. 

I want to thank you all for sharing your time with us, and we 

look forward to hearing your testimony. 

Now, we wanted to hold this hearing because, the way I see it, 

our mission this year is to move America forward. And this committee—this committee is going to be command central. 

5 

We are going to lead the charge in some of the biggest issues facing our economy: tax reform, trade agreements, health care. And 

our thinking is ‘‘Let’s get a lay of the land.’’ 

Before we can set things right with the economy, we have got to 

understand what is going wrong with the economy. So how are we 

doing? Well, we just got some good news. Jobs are up. 

But this bit of good news looks good only because the rest of the 

news has been so bad for so long. There is no getting around the 

fact that this is the worst economic recovery since the Great Depression. 

If our economy had grown at the pace of the average post-war 

economy, gross domestic product would be about $5,700 more per 

person. Paychecks haven’t budged, and more people have given up 

looking for work. In fact, there have never been more people out 

of the labor force than there are today, over 92 million people. 

As one person in a recent focus group told NBC News, ‘‘If you 

want to make $9 an hour, you can go get a job. But if you want 

to make a wage that can support your family, good luck.’’ In other 

words, this latest job report is simply the nicest car in the junkyard. 

This administration’s policies have pushed people off the field. 

What we need is to take people off of the sidelines and get them 

back into the economy, working, learning, building, creating, and 

we will expand opportunity for all Americans. 

And that is the second reason for this hearing. We want to start 

laying out solutions. This committee has already done a lot of work 

on that front, and this year we are going to build on those gains. 

The fact is we know what it will take to turn things around, and 

we just need to put those ideas to work. 

For instance, it is very clear that our Tax Code is broken. We 

have the highest corporate tax rate in the industrialized world. We 

are one of the few countries that taxes companies when they bring 

their money back home. And the Tax Code is so complex that 

Americans spend over 6 billion hours a year just filling out their 

tax returns. 

There is no good reason for any of this. We need to make the Tax 

Code simpler, fairer, and flatter so more people can invest and create jobs right here in America. 

We also have a good opportunity to expand markets for American 

exports. We are negotiating several big trade agreements right 

now, and the first thing we ought to do is pass Trade Promotion 

Authority. 

Trade Promotion Authority would empower Congress to set our 

negotiating objectives and hold the administration accountable. 

TPA would also help us get the best deal from our trading partners. 

As we all know, 96 percent of the world’s consumers, 96 percent 

of the world’s consumers, they don’t live here. They live in other 

countries. And U.S. manufacturers have more than a $50 billion 

surplus with trade agreement countries. 

In contrast, the U.S. trade deficit in manufacturing goods with 

the rest of the world was more than $500 billion. And I believe 

Americans can compete with any country. We just need to give 

6 

them a chance. Break down these barriers and American trade, 

along with American jobs, will take off. 

We also need to repeal and replace Obamacare with patient center reforms. It may take a new President to fully repeal the law. 

And this is something we have litigated a lot in this committee, 

and I know that good people will have different opinions on this 

subject, but this is how we feel. We need to start dismantling it 

piece by piece and replacing it with far better reforms. We have already passed three bills to do just that. 

The point is take power away from bureaucrats and give it back 

to patients. That is how we can make health care more affordable. 

We have to get spending under control, we have to get spending 

under control, so that our country will no longer live under the 

threat of a debt crisis. 

And, finally, we have got to get people out of poverty. We have 

got to restore upper mobility. We have got to restore the promise 

and the notion of the American idea that the condition of your 

birth, it doesn’t determine the outcome of your life in this country. 

That is what we were all taught. That is what we all learned. 

That is what many people have lived. But not enough are living it 

today. We need to get people from welfare to work. 

There is a lot of untapped potential in our country. And this committee, this committee, has a real opportunity to help working families get ahead, and that is what this committee is going to be 

about, moving America forward. 

So I have laid out just a few ideas to get the conversation started. Some, we will agree with one another. Some, we may not. I look 

forward to hearing from our Members and our witnesses. Everybody is going to have different ideas, and we want to hear them. 

But I think we can all agree that building a healthy economy, 

that is our mission this year. That is our focus. That is our goal. 

Because that is what the American people deserve. 

And, with that, I would like to yield to the distinguished Ranking 

Member from Michigan, Mr. Levin. 

Mr. LEVIN. Thank you very much. And congratulations on your 

chairmanship, Mr. Chairman. That wasn’t our first wish. 

Let me also say that, as I expressed to you, if the Lions had beat 

the Packers, you would be clean-shaven today. 

Chairman RYAN. And you would have a beard. 

Mr. LEVIN. That is true. 

So I want everybody to know why Paul Ryan is growing a beard. 

And if the quarterback’s health doesn’t resume, I think you will be 

clean-shaven at the next hearing. 

Chairman RYAN. We shall see. 

Mr. LEVIN. But, anyway, good luck to the Packers. 

So let me just lay out a few views for us Democrats as we proceed. 

Our economy has experienced a major bounce back. It has rebounded from the loss of 7 million jobs in a single year, beginning 

in 2008, an unemployment rate that soared to 10 percent in 2009. 

More than 11 million private-sector jobs have been created in the 

last 5 years, as shown in the chart that I hope will now appear 

here, with 58 straight months of private-sector job growth, leading 

the unemployment rate to fall to 5.6 percent. 

7 

So I think reference to a ‘‘junkyard’’ is terribly misguided. I know 

something about cars. I think the economy of this country has been 

put back on its feet and is moving ahead. 

You can see it in the stock market, if you wish to look at it, that 

has climbed to record highs. And the deficit, as a percentage of 

GDP, has been cut by two-thirds since 2009. 

The Affordable Care Act, which the chairman and others continue to say should be repealed, has helped to dramatically cut the 

percentage of Americans without insurance. Millions now have it 

who never had it before. And healthcare premiums are growing at 

the lowest rate in 50 years. 

This major reversal from deep decline out of the junkyard to economic growth occurred despite Republican opposition to the President’s proposals, repeated GOP threats to default on our debt obligations, and an incredibly harmful 16-day governmental shutdown 

fueled by an unending ideological opposition to the ACA. 

This year must see a different environment. It must, Mr. Chairman and colleagues, see bipartisan action on important issues. 

Among the deepest challenges facing our economy today remains 

one that has persisted for decades, starting in the 1980s: stagnant 

middle-class wage growth. 

And now this second chart, a striking one from EPI, shows the 

nearly flat line of wage growth that the bottom 90 percent of American workers has experienced since 1980, even as incomes have 

grown significantly, indeed, dramatically, among the very wealthiest. 

This chart is really dramatic, showing, going back to 1980, the 

bottom 90 percent has more or less had stagnant income while for 

the very wealthy it has spiraled. 

Indeed, in December, the Post chronicled the longstanding problems facing America’s middle class. They found that the average 

wage in a quarter of American counties actually is lower today 

than it was 35 years ago. 

That is real stagnation in the lives of America’s middle class. 

And, yet, even immediate and much needed steps the Democrats 

have promoted to address this problem have encountered an ideological roadblock from Republicans. 

Efforts to increase the minimum wage and to ensure that women 

earn the same as men for equal work, those have encountered 

fierce Republican resistance. 

An administration proposal to require overtime pay for millions 

of additional white-collar workers who are currently not covered 

has been met with strong criticism from some Congressional Republicans. 

And financing the long-term needs of our Nation’s infrastructure 

has taken a backseat despite the fact we know investments in infrastructure create jobs now and make us stronger in the future. 

And this committee has not held a hearing on this topic in the last 

4 years. 

I hope that, in my further discussions with the chairman, we can 

reach agreement quickly on holding hearings on the financing of 

major infrastructure legislation as you, Mr. Chairman, and I have 

discussed. 

8 

Tax reform, as you say, must be a central focus of this committee. Democrats believe that reforming the Tax Code should not 

be centered on rate cuts at the very top for the wealthiest Americans—and we have seen from the chart why that is true—but, 

rather, on creating a Tax Code that is fair for working families, 

promoting economic growth, and eliminating loopholes for special 

interests, and ensuring that both individuals and businesses pay 

their fair share of taxes. 

Under any circumstances—and I emphasize that, Mr. Chairman 

and colleagues—we learned in 1986 and we relearned more recently that tax reform to progress, it is essential that there be serious open discussions on a bipartisan basis from the very beginning, 

Mr. Chairman, and throughout. I hope we can proceed accordingly. 

On TPP, negotiations are at a vital juncture, with many of the 

key issues still unresolved, as I am going to be laying out in the 

next days. 

TPP is the most significant multilateral negotiation in over 20 

years involving 12 nations representing 40 percent of the world’s 

economy and representing many new issues for such multilateral 

negotiations. 

How these issues are resolved is central to whether we are moving effective trade policy forward. The important challenge in trade 

is not just get it done, but get it right. 

Congress must be a full partner. And, as we have discussed, Mr. 

Chairman, I strongly suggest we organize on a bipartisan basis to 

work and discuss the substance of TPP. 

Thank you. 

Chairman RYAN. Thank you, Mr. Levin. 

For our witnesses, you will each have 5 minutes to present your 

testimony, with your full written statement submitted for the 

record. 

I would ask that—if you could just summarize your testimony in 

5 minutes, because I know a lot of Members want to get on with 

questioning. 

We will start with Dr. Holtz-Eakin, then Professor Feldstein, 

then Professor Johnson. 

So, Dr. Holtz-Eakin, you are recognized. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM (WASHINGTON, D.C.) 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Ranking Member Levin, and Members of the committee. It is a privilege to be 

here today, and I look forward to your questions. You have my 

written statement. Let me make three points briefly before we turn 

to the questions. 

First, policies toward economic growth are really important right 

now. As the chairman outlined in his opening remarks, the economy is now growing at something that looks like about 21⁄2, 23⁄4

percent. Third quarter over third quarter, it was 2.7 percent. 

It generated 250,000 odd jobs in December—— 

Chairman RYAN. Doug, can you pull the microphone a little closer. 

Mr. HOLTZ-EAKIN. It generated about 250,000 jobs in December, but we continue to see very flat and sluggish real wage 

9 

growth. We continue to see median household incomes fail to rise, 

and there is an obvious need to do better than the 23⁄4. And there is some hope that, indeed, 2015 will show stronger 

economic growth, and I think we should all welcome that if it happens. 

But it is important to remember that the Congressional Budget 

Office pegs the long-term potential growth rate of the U.S. economy 

at 2.3 percent so that if you take that at face value, this is the 

boom. These are the good times. And the thought that that is the 

best we can do I find quite troubling. 

So I think the major objective for this committee, for the Congress as a whole, is to look for opportunities to change that 2.3 percent into a more rapid long-term potential growth for the U.S. 

economy so that we can get more sustained increases in the standard of living in the United States. 

Historically, since World War II, the standard of living in the 

U.S. doubled roughly every 32 years. So in a person’s working career, they could anticipate the standard of living doubling. They 

could anticipate buying a boat or taking vacations, sending someone to college, getting improvements of that type. 

Given the pace of growth in recent years, we have seen the 

standard of living on track to double roughly every 90 years. That 

is simply unacceptable. We have to do much better over the long 

term in order for Americans to feel like they have the opportunity 

for the American dream. 

That kind of growth comes from two sources. The first source is 

to actually build up and accumulate your skills, you technologies, 

the capital, the factories, the equipment, the means of production. 

And incentives to accumulate those kinds of skills, technologies, 

and capital are essential and riddled throughout the jurisdiction of 

this committee, whether it is tax or trade or other policies. And 

that is one thing to focus on. 

The second is greater productivity from the things that—especially workers in the economy. And productivity comes from strong 

incentives. It comes from a minimal interference from policies that 

distort the decisions that firms make, allow them to choose the 

means of production to the best of their ability. And focusing on 

stripping away interferences with the productivity growth I think 

should be high on the agenda for the committee. 

So what kinds of policies are they? Well, as has been mentioned, 

trade policies are a great opportunity right now, both the TransPacific Partnership, the TPP, and, also, TTIP, Transatlantic Trade 

and Investment Partnership. Estimates in my testimony suggest 

that this could increase GDP by $200 billion if fully implemented. 

This has historically been a tremendous spur to productivity 

growth. If you go back to the mid-1990s, we put zero tariffs on 

semiconductors in a very important trade agreement, and immediately thereafter we saw a tremendous boom in the technology industries and the ability of Americans to compete and be very productive in those industries. 

And I would argue we would see the same more broad benefits 

from these trade deals. But to get that done, you do have to give 

the President Trade Promotion Authority. I think that should be a 

top priority of the Congress. 

10 

Tax reform is a great opportunity. I won’t belabor—the pieces are 

in my written testimony. But the corporation income tax is very 

anti-growth. Ours is structured to be particularly anti-competitive. 

It is complicated, and it raises almost no revenue. So we are in the 

worst of all possible places with our corporate code. Individual code 

is very complex. 

And the last is I would argue that the Affordable Care Act is riddled with anti-growth features. There is a lot of very bad tax policy 

as part of that. Put the need for revenues aside. The structure of 

the device tax, the structure of the health insurance fee are all 

highly inefficient and bad tax policy and ought to be looked at carefully. 

And the basic expansion of mandatory spending goes in the 

wrong direction—from the long-term problems in our Federal budget where we are going to need to control that spending to control 

the debt and reduce the threat to long-term economic growth. 

So there is a lot of opportunities in this Congress, and there is 

a great need for better long-term growth. I congratulate the committee for taking a look at these issues. And I look forward to your 

questions. 

Chairman RYAN. Thank you. 

[The prepared statement of Mr. Holtz-Eakin follows:] 

11 


22376.003

Opportunities for Pro-Growth Policy in the 114th Congress 

United States House of Representatives 

Committee on Ways and Means 

Douglas Holtz-Eakin, President* 

American Action Forum 

january 13, 2015 

*The views expressed here are my own and not those of the American Action Forum, the 

Partnership for the Future of Medicare or the Center for Health & Economy. I thank Angela 

Boothe, Laura Collins, and Gordon Gray for their assistance. 
12 


22376.004

Chairman Ryan, Ranking Member Levin, and members of the committee, thank you for the 

opportunity to speak with you today regarding opportunities in the 114th Congress to 

promote more rapid economic growth. I believe that there are three policy areas in 

particular where much progress can be made to promote a stronger economy: 

Aggressively pursue new trade agreements and pass trade promotion authority 

legislation to facilitate trade negotiations; 

Reform America's income tax code, enhancing the nation's competitiveness abroad 

and improving incentives to work and save at home; and 

Improve the condition of the U.S. health care system by trimming away the most 

cumbersome pieces of the Affordable Care Act. 

Trade Agreements 

Trade is an important driver of economic growth in the U.S. and globally. Trade creates 

jobs, increases Gross Domestic Product (GDP), and opens markets to American producers 

and consumers. The U.S. is the world's largest participant in global trade- with almost $2.3 

trillion in exports of goods and services and imports of $2.7 trillion- and has established 

trade agreements with 20 countries.' The U.S. and our trading partners generate 25 

percent of global goods trade. 2 The U.S. is the largest exporter of services in the world 3 

Trade supports nearly 11 million jobs in the U.S.4 and U.S. exports comprise a full 13 

percent of U.S. GDP. 

These numbers are significant, and pursuing a robust trade agenda in 2015 will lead to 

increased economic growth. Two agreements the U.S. is negotiating have the potential to 

become final in 2015. Both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade 

and Investment Partnership (TTIP) are major trade deals with huge economic potential. 

Combined, these agreements have the potential to create more than 1 million new jobs in 

the U.S. and increase GDP by over $200 billion.s 

Finalizing these trade agreements depends in large part on Congress passing trade 

promotion authority (TPA) legislation. TPA allows for effective negotiations between the 

U.S. and potential trade partners. Through the TPA, the U.S. and its trade partners negotiate 

with confidence that the agreements reached will be the final version implemented once 

Congress approves. 

Since 1974, every U.S. president has had the ability to negotiate free trade agreements 

under some form ofTPA. TPA expired in 2007 and has not yet been reauthorized. This has 

contributed to slower negotiations for TPP and TTIP during the Obama Administration. 
13 


22376.005

Passing TPA will help propel these negotiations forward so we can begin to reap the many 

economic benefits of these free trade agreements. 

Tax Reform 

There are few policy areas in greater need of fundamental reform than the U.S. tax code. 

Fundamental modernization and simplification of the tax system has been an elusive dream 

for Congresses and administrations over the past 30 years. Indeed, over the 100 year 

history of the U.S. income tax system, only a handful of meaningful simplification efforts 

have been successful. This committee is to be commended for its recent contributions to 

this effort, which have included proposals for comprehensive overhaul of both the 

corporate and individual tax systems. The research literature indicates that these 

components are essential to any pro-growth overhaul; a transformation that is long 

overdue. 

Corporation In come Tax 

The U.S. corporate tax code has remained largely unchanged for decades, with the last 

major rate reduction passed by Congress in 19866 However, significant global economic 

and geopolitical changes have occurred in the intervening years, during which time the rest 

of the world has made significant changes to their corporate tax systems, both in terms of 

rates and in the taxation of overseas income. Relative to other major economies, the U.S. 

has gone from being roughly on par with major trading partners to its current position of 

imposing the highest statutory rate on corporation income. While less stark than its high 

statutory rate, the U.S. also imposes large effective rates. According to a study by 

PricewaterhouseCoopers, "companies headquartered in the United States faced an average 

effective tax rate of 27.7 percent compared to a rate of 19.5 percent for their foreignheadquartered counterparts. By country, US-headquartered companies faced a higher 

worldwide effective tax rate than their counterparts headquartered in 53 of the 58 foreign 

countries."7 

The U.S. fails another competitiveness test in the design of its international tax system. The 

U.S. corporation income tax applies to the worldwide earnings of U.S. headquartered firms. 

U.S. companies pay U.S. income taxes on income earned both domestically and abroad, 

although the U.S. allows a foreign tax credit up to the U.S. tax liability for taxes paid to 

foreign governments. Active income earned in foreign countries is generally only subject to 

U.S. income tax once it is repatriated, giving an incentive for companies to reinvest earnings 

anywhere but the U.S., owing to its high corporate tax rate. This system distorts the 

international behavior of U.S. firms and essentially traps foreign earnings that might 

otherwise be repatriated back to the U.S. 
14 


22376.006

While the U.S. has maintained an international tax system that disadvantages U.S. firms 

competing abroad, many U.S. trading partners have shifted toward a territorial system; that 

system exempts entirely, or to a large degree, foreign source income. Of the 34 economies 

in the OECD for example, 26 have adopted such systems, including recent adoption by 

japan and the United Kingdom. a 

Who Does Tax Reform Help? 

Corporations are not the only entities that bear the burden of the corporate tax structure; 

everyone is burdened by the corporate tax rate. Corporations are not walled off from the 

broader economy, and neither are the taxes imposed on corporate income. Taxes on 

corporations fall on stockholders, employees, and consumers alike. The incidence of the 

corporate tax continues to be debated, but it is clear that the burden on labor must be 

acknowledged. Indeed, one recent study found that labor bears as much as 70 percent of 

the corporation income tax rate9 Other studies have found similar implications, with a 

study by economists at the American Enterprise Institute concluding that for every 1 

percent increase in corporate tax rates, wages decrease by 1 percent1 0 

Improving the Corporate Tax Code 

The negative incentives created by the high corporate tax rate show that the high level of 

corporate tax liability effectively taxes the success of U.S. companies. In order to remove 

the drag on the economy, the corporate tax rate must be decreased and the code reformed. 

Many studies exist examining the positive impacts of reducing the corporate tax rate. Of 

note, one study found that cutting the corporate tax rate by 10 percentage points can 

increase the annual growth rate by between 1.1 percent and 1.8 percentage points. 11 The 

Tax Foundation has found similar results, estimating that the potential growth effects from 

corporate rate reduction, from 35 to 25 percent would raise GOP by 2.2 percent, increase 

the private-business capital stock by 6.2 percent, boost wages and hours of work by 1.9 

percent and 0.3 percent, respectively, and increase total federal revenues by 0.8 percent.12 

Reform of the international tax system is also an essential element of any pro-growth 

corporate tax reform. One recent estimate on the macro-economic effects of fundamental 

tax reform, authored by john Diamond and George Zodrow, examined how reform similar 

to that proposed by former Chairman Camp would affect capital flows compared to current 

law.'3 In the long-run, the authors estimated that this type of reform that lowers corporate 

rates and moves to an internationally competitive divided-exemption system 

would increase U.S. holdings of firm-specific capital by 23.5 percent, while the net change in 

domestic ordinary capital would be a 5 percent increase. It is important to note that these 

are relative measurements -they are relative to current law. If the recent spate of 

announcements of inversions is any indication, current law is inducing capital flight. 
15 


22376.007

Moreover, to the extent that the rest of the world has reduced its corporate rates and 

moved to a territorial system, a Camp-style reform may merely move the U.S. to the middle 

of the pack in terms of its tax climate. Accordingly, the 23.5 percent and 5 

percent increases in firm-specific and ordinary stock, respectively, may be interpreted in 

part as the effect of precluding future tax inversions. 

Placing a value of this potential equity flight is uncertain, but based on these estimates, 

roughly 15 percent, or $988 billion in U.S. based capital is at risk of moving overseas. 

Reforming the international corporate code would preclude this capital flight and prevent 

associated job losses.14 

Individual Income Tax 

While the corporate tax is in sore need of repair, a corporate tax overhaul that does not also 

address the individual code would leave out the most significant interaction between 

federal taxation and the economy. In 2011, 145 million tax returns were filed, addressing 

over $8.3 trillion in income.'S These returns also include millions of businesses that do not 

file as (-Corporations. As of 2009, there were 31.7 million non-farm businesses filing tax 

returns: 1.7 million (-corporations, 22.7 million sole-proprietors, 4.1 millionScorporations, and 3.2 million partnerships (including LLCs). The past several decades have 

seen the relative growth of non-farm sole proprietors, S-corporations and partnerships, 

and the associated diminution of the C-corporation16 Any business tax reform must 

therefore also contemplate the individual code. The revenue raised from the individual 

code totals over 5 times the amount raised from U.S. corporations, underscoring the need 

to approach tax reform in a wholesale fashion. 

The Current Burden of the Individual Code 

As many Americans have experienced, the tax filing process is extremely time intensive and 

requires the help of outside expertise. The Taxpayer Advocate Service (TAS), the watchdog 

office within the Internal Revenue Service (IRS), stated that complexity is the single most 

serious problem with the tax code. TAS found that taxpayers spend about 6.1 billion hours 

each year complying with the filing requirements imposed by the IRS-the working 

equivalent of over 3 million fu ll-time employees. TheTAS estimates that the compliance 

costs of these requirements amounted to $168 billion in 2010. 

This complexity is also straining the administrative capacity of the IRS. As the amount of 

work required to complete tax filing increases, the ability of the agency to respond to 

inquiries declines. According to theTAS, the IRS received 115 million calls in fiscal years 

2011 and 2012, and in 2012 the IRS answered 68 percent of calls received, as compared to 

87 percent in 2004.'7 
16 


22376.008

The burden on individuals filing their taxes also translates to a large scale negative 

economic impact. Fichtner and Feldman assessed the costs that the U.S. tax code extracts 

from the economy as taxpayers through complexity and inefficiency. The study finds that, 

in addition to time and money expended in compliance, foregone economic growth, and 

lobbying expenditures amount to hidden costs are estimated to range from $215 billion to 

$987 billion1 8 

The Benefits of Comprehensive Tax Reform 

One of the largest distortions income taxes create is decreasing the effective return to work 

and saving. As people work less and investment decreases, the economy grows more 

slowly than it otherwise would. Income taxes have other secondary effects as well, such as 

incentivizing movement of compensation into tax-free benefits. Much of the academic 

literature on the effect of income taxes tends to take a broad approach that focuses on how 

income taxes affect overall economic growth and output. 

The last time the United States undertook a fundamental tax reform was with the Tax 

Reform Act of 1986 (TRA). If history is any guide, a 1986 style reform offers positive 

economic growth. This is borne out by retrospective analysis of the TRA which found that 

the 1986 tax reform produced about one percentage point higher growth over a long 

period. Further studies have shown that the negative relationship with higher marginal 

rates and taxable income, hours worked, and overall economic growth.t9 

An important step in this literature area was made by highly respected economists David 

Altig, Alan Auerbach, Laurence Kotlikoff, Kent A. Smetters, and jan Walliser, who simulated 

multiple tax reforms. They found that GDP could increase by as much as 11 percent higher 

from tax reform.zo The highest growth rate was associated with a consumption-based tax 

system that avoided double-taxing the return to saving and investment, which while 

contemplated in past reform efforts, is not currently under consideration by the Congress. 

The study also simulated a "clean," revenue-neutral income tax that would eliminate all 

deductions, loopholes, etc.; and lower the rate to a single low rate. According to their study, 

this reform raised GDP by 5.1 percent over ten years- a growth effect that roughly 

translate into about .5 percent higher trend growth, resulting in faster employment and 

income growth. 

Health Care Reform 

Health care programs continue to be the largest driver of projected federal shortfalls. The 

Congressional Budget Office (CBO) estimates that federal spending on health care will 

reach $1 trillion in 2015.21 Any serious effort to promote economic growth will have to 
17 


22376.009

address the U.S. health care system. As part of bringing sanity to federal health care 

programs, many of the changes made by the Affordable Care Act (ACA) must be reversed to 

mitigate the law's negative economic impacts. The regulatory burden, requirements forced 

upon employers and individuals, and poorly constructed revenue streams should be 

changed to reverse their downward pressure on the economy. 

Regulation 

The regulatory burden created by this massive law places a severe drag on the economy, 

and should be rolled back. According to a recent American Action Forum (AAF) study, the 

regulations in the ACA alone have imposed more than $27.2 billion in private sector costs, 

$8 billion in costs to state governments, and have created over 159 million paperwork 

hours for local governments." Over the almost five years since its enactment, the ACA has 

resulted in annual cost of $6.8 billion, as compared to an annual $2.6 billion in increased 

benefits. The following chart breaks down the paperwork hours according to the type of 

regulation: 

Most Burdensome ACA Regulations by Paperwork 

Paperwork Burden Hours 

Small Business Reporting: Form 8941 40.2 Million 

Net Investment Income Tax 24 Million 

Medicaid Eligibility Changes 21.3 Million 

Medicare, Medicaid, CHIP: Transparency 10.5 Million 

Individual Mandate Penalty 7.5 Million 

Total: 103.5 Million Burden Hours 

Impact on Businesses 

The ACA's extensive requirements are diverting time and productivity from the private 

sector, slowing economic growth. In line with the regulatory burdens addressed above, 

AAF estimates that on average, individuals who work for a company with 50-99 employees 

lose $935 annually due to ACA regulations, and employees of smaller businesses with 20-

49 employees, lose $827.50 annually. Further, the ACA's regulations are reducing small 

business wages by $22.6 billion each year and these regulations (as well as rising health 
18 


22376.010

insurance premiums) have already reduced the number of jobs by 350,000 across the 

country.23 

Employer Mandate and th e 30-hour Work Week 

The employer mandate has resulted in serious problems for employers; forcing many to 

provide coverage or pay hefty penalties and the mandate has stalled an already damaged 

economy.

24 Under the ACA's mandate, businesses that employ a worker for more than 30 

hours a week must provide health insurance for that employee. In order to avoid the cost of 

the employer mandate penalty, employee hours would have to be reduced below the 30 

hours per week threshold. According to AAF estimates, an employee earning the national 

average of$24.31 an hour would see a reduction in wages of $13,370 annually if their 

hours were cut below the 30-hour ACA standard. As illustrated in this example, defining 

full time employment as a 30-hour work week does not benefit the individual or the 

employer.25 

Along with the potential for decreases in the number of full-time employees (and therefore 

wages), the ACA not only punishes employers for not providing coverage, but also for 

offering health insurance plans that are not up to ACA standard benefit requirements. The 

House has already moved to increase the workweek provision to 40 hours per week, and a 

complete repeal of the employer mandate should be pursued, as it would lift some of the 

pressures on the economy. 

Poorly Designed Taxes 

Finally, getting rid of two poorly designed taxes within the ACA could improve economic 

growth in the health insurance sector, and the innovative medical device industry. Both the 

health insurer tax (HIT) and the medical device tax should be repealed. The concept is a 

simple one, fewer burdens on industry allows for greater economic productivity. 

The HIT, also known as the Health Insurance Annual Fee, was designed as a way to gain 

revenue from the newly generated profits for health insurance companies created by the 

employer and individual mandates. The HIT is assessed to insurers based on their share of 

total premiums paid; the total dollar amount to be collected across all insurers is set in 

statute and not actually based on profits. ACA provisions required the tax to collect $8 

billion in 2014, and will collect $11.3 billion in 2015. According to previous AAF research, 

this additional tax will be passed along to consumers, resulting in a premium increase of 

$60-$160 per person in 201426 Repealing this tax on health insurance would prevent 

premium increases for millions of consumers and decrease health insurer payments to the 

federal government. More importantly this tax is poorly designed, and an excellent example 

of how not to structure taxes. 
19 


22376.011

The medical device tax included in the ACA establishes a 2.3 percent sales tax on all 

medical devices.z7 The tax creates higher costs for innovative health care companies, many 

of whom have high initial capital investments. The tax is poorly designed because it is 

levied on each individual sale and not a company's net profit. This means companies that 

are still in the red with their investments must pay the tax on sales of their device, despite 

not having turned a profit. 

The medical device tax has already cost the industry over $900 million.za There is broad 

bipartisan support for repealing this tax, and President Obama has indicated he would sign 

legislation doing so. In order to create large benefits for this industry and to decrease costs 

for medical device consumers, Congress should repeal the medical device tax early this 

year. 

Conclusion 

As Congress looks to encourage economic growth in 2015, action should be taken in all 

three of these policy areas. Freeing industries to trade globally, creating a competitive 

environment of corporations and for consumers, as well as repairing some of the damage 

done to the health care sector will work in tandem, bolstering the U.S. economy. 

Hindrances created through delayed trade agreements, high demands on the health care 

system, and disincentives that exist in such a complicated tax code slow down economic 

activity across the country. The 114th Congress should approach the big picture of 

economic growth by taking steps to lessen the burden of the tax code, finalizing trade 

negotiations, and making changes to the health care system as it exists under the ACA. 

1 "Trade Agreements Benefit U.S. Exports," U.S. Department of Commerce, International Trade 

Administration, Washington, DC available at 

http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_ 

2 "Trade Agreements Benefit U.S. Exports," U.S. Department of Commerce, International Trade 

Administration, Washington, DC available at 

http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_OO 

3 ("World Trade Report 2012," World Trade Organization, Geneva, pp. 32-33.) 4 (Martin Johnson and Chris Rasmussen, "Jobs Supported by Exports 2013: An Update," U.S. Department of 

Commerce, International Trade Administration, Washington, DC, February 2014.), 5USTR.gov,https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/245085/TTIP_ 

and_the_SO_States_GovUK.pdf,) 

6 http:/ jamericanactionforurn.org/research/economic-and-budgetary-consequences-of-pro-growth-taxmodernization 

7 PricewaterhouseCoopers (2011). Global Effective Tax Rates. Washington, DC 8 http:/ /businessroundtable.org/uploads/studies-reports/downloads/Taxation_of_American_Companies.pdf 9William C. Randolph, "International Burdens of the Corporate Income Tax," Congressional Budget Office 

Working Paper No. 2006-09, at http:/ jwww.cbo.govjftpdocsj75xxjdoc7503/2006-09.pdf(Apri13, 2009). 

to Kevin A. Hassett and Aparna Mathur, "Taxes and Wages," American Enterprise Institute Working Paper No. 

128, june 2006. 11 Young Lee and Roger Gordon, "Tax Structure and Economic Growth,"journal of Public Economics, Vol. 89, 

Issues 5-6 (June 2005), pp. 1027-1043 
20 

f 


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12 Schuyler, Michael, "Growth Divided from a Lower Corporate Tax Rate." Tax Foundation March 2013 

Web. http:/ Jtaxfoundation.orgjarticlejgrowth-dividend-lower-corporate-tax-rate 13 http:/ /businessroundtable.org/sitesfdefault/files/reports/DiamondZodrow%20Analysis%20for%20Business%20Roundtable_Final%20for%20Release.pdf 14 http:/ jamericanactionforum.org/researchfthe-economic-risks-of-proposed-anti-inversion-policy 15 http:/ jamericanactionforum.orgjresearchjeconomic-and-budgetary-consequences-of-pro-growth-taxmodernization 

16 http:/ jamericanactionforum.org/researchjeconomic-and-budgetary-consequences-of-pro-growth-taxmodernization#_ftn26 

17 http:/ jamericanactionforum.org/researchjeconomic-and-budgetary-consequences-of-pro-growth-taxmodernization 

18 http:/ jamericanactionforum.orgjresearchjeconomic-and-budgetary-consequences-of-pro-growth-taxmodernization 

19 See: Feldstein, Martin, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax 

Reform Act." journal of Politico/ Economy, June 1995, (103:3), pp 551-72; Carroll, Robert, Douglas Holtz-Eakin, 

Mark Rider and Harvey S. Rosen, "Income taxes and entrepreneurs' use of labor." journal of Labor Economics 

18(2) (2000):324-351; Prescott, Edward C., "Why do Americans Work So Much More Than Europeans." 

Federal Reserve Bank of Minneapolis July 2004; Skinner, Jonathan, and Eric Engen. "Taxation and Economic 

Growth." National Tax Journal49.4 (1996): 617-42; Romer, Christina D., and David H. Romer, "The 

Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks." National Bureau 

of Economic Research NBER Working Paper No. 13264 July 2007 Web.http:/ fwww.nber.org/papers/wl3264 20 Altig, David, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. Smetters and Jan Walliser, "Simulating 

Fundamental Tax Reform in the United States." American Economic Review, Vol. 91, No.3 (2001), pp. 574-595 21 https:/ fwww.cbo.gov/sitesfdefault/files/45653-0utlookUpdate_2014_Aug.pdf 22 http:/ jamericanactionforum.orgjresearchjaffordable-care-act-at-four-regulatory-costs-exceed-benefitsby-twofold 

23 http:/ jamericanactionforum.orgjresearch/obamacares-impact-on-small-business-wages-and-employment 24 http:/ jamericanactionforum.orgjresearchjprimer-employer-mandate 25 http:/ jamericanactionforum.org/insights/the-problem-with-acas-30-hour-work-week 26 http:/ jamericanactionforum.org/videos/fox-news-speaks-with-douglas-holtz-eakin-on-the-impact-of-theacas-health-i 27 http:/ jamericanactionforum.orgjresearch/primer-the-medical-device-tax 28 http: J /thehill.comjpolicy /finance/21552 2-report-medical-device-tax -missing-revenue-mark 
21 

Chairman RYAN. Professor Feldstein. 

STATEMENT OF MARTIN FELDSTEIN, THE GEORGE F. BAKER 

PROFESSOR OF ECONOMICS AT HARVARD AND PRESIDENT 

EMERITUS OF THE NATIONAL BUREAU OF ECONOMICS RESEARCH (CAMBRIDGE, MASSACHUSETTS) 

Mr. FELDSTEIN. Thank you very much, Mr. Chairman. 

Chairman RYAN. You have got to turn it on, Professor, and pull 

it close to you. It is very unidirectional. Remember that word? 

Mr. FELDSTEIN. Thank you both for the invitation and for the 

advice on using this complex technology. I am pleased to appear 

again before this distinguished committee. 

Tax reform can be the major driver of faster GDP growth. Fortunately, the American Tax Code is now better in many ways than 

it was when I first appeared before this committee. We now have 

lower tax rates on personal incomes, on capital gains, and on corporate profits. That improves incentives and contributes to faster 

growth and better jobs. 

But there has also been backsliding in tax rates since the tax reform of 1986. Remedying this should be an important goal of tax 

reform. There are many high-priority tax reforms that can 

strengthen growth and reduce our fiscal deficits. 

Because my time is very limited, I will focus on a few things that 

receive less attention than they should. Let me start with tax reforms that can increase the employment of women and raise their 

after-tax incomes. 

Current tax and Social Security rules penalize married women 

more than others. The Federal Government taxes a wife’s first dollar of earnings at the same rate as her husbands’ last dollar of 

earnings. Other countries tax each individual on their own earnings, giving married women a greater incentive to work and to 

work at jobs that pay higher wages. 

Social Security now taxes a women on her full earnings, but 

often provides no extra benefits. So many women receive nothing 

for a lifetime of Social Security payroll taxes. Reforming these rules 

would increase women’s labor force participation and the Nations’s 

GDP. 

Let me turn to increasing employment among seniors. The labor 

force participation rate now declines from 64 percent among 60- 

year-olds to half that among those 65 to 69. 

As you know, Congress in 1983 raised the age for full Social Security benefits from 65 to 67 and, as a result, the labor force participation rate among 65- to 69-year-olds rose from 21 percent to 

32 percent. 

Life expectancy at age 67 has increased by 3 years since 1983. 

Raising the age for full benefits in line with that increase in life 

expectancy would expand the labor force and raise real GDP. 

Let me turn now to policies designed to raise our Nation’s rate 

of saving and, therefore, our Nation’s capital stock. 

Household saving back between 1960 and 1985 averaged 9 percent of after-tax incomes. Now it is about a third of that. A variety 

of public policies contributes to the low rate of saving and the high 

rates of dis-saving. These include the deductibility of mortgage interest and the level of unfunded Social Security benefits. 

22 

Automatic-enrollment IRA plans and a shift of Social Security to 

a mixed system with supplementary investment-based personal retirement accounts would increase national saving and would, therefore, increase business investment that would raise real incomes 

and create better paying jobs. 

Unfortunately, most of household saving is now absorbed by the 

Federal budget deficit. The resulting national debt has increased 

from less than 40 percent of GDP a decade ago to 75 percent now, 

with the prospect that it will rise to more than 100 percent unless 

Congress takes action to raise revenue and slow the growth of entitlements. 

The good news is that small reductions in the annual deficit can 

prevent the rising debt level and bring it back to lower levels. Reducing the annual deficit from today’s 3 percent of GDP to 2 percent would put us on a path to a debt ratio of less than 50 percent. 

That should be a basic goal for Congress in the next few years. 

Reducing the annual deficits requires a combination of slower 

growth of government spending and increased tax revenue because 

the annually appropriated spending for defense and nondefense 

program is already being squeezed to historically low levels. Controlling government spending requires slowing the growth of the 

middle-class programs for seniors. 

Tax revenue can be raised without increasing marginal tax rates 

by limiting the ability of taxpayers to use the tax expenditure features of the Tax Code to reduce their tax liabilities. These tax expenditures are a major form of government spending, indeed, I 

would say the major form of government domestic spending. Capping the use of these tax subsidies could also simplify the taxpaying process by inducing taxpayers to use the standard deduction 

rather than itemizing deductions. 

My written testimony provides a reference to a recent study of 

how such a cap on tax expenditures might be implemented. 

Finally, tax reform can also improve the way our Nation’s savings are used. A key element in that is the corporate tax reform, 

reducing the corporate tax rate, now the highest in the industrial 

world, and shifting to the type of international tax rule, the territorial system that is used by every other industrial nation. 

So thank you again for the opportunity to summarize my views, 

and I look forward to your questions. 

Chairman RYAN. Thank you, Professor Feldstein. 

[The prepared statement of Mr. Feldstein follows:] 

23 


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For release on delivery 

january 13, 2015, 10:00 AM 

Tax Reform for Economic Growth 

Testimony to the Committee on Ways and Means 

Martin Feldstein 

Professor of Economics 

Harvard University 

Thank you, Mr. Chairman. I am pleased to appear before this committee. I will focus 

my remarks on some of the contributions that tax reform can make to increasing 

economic growth, creating better jobs, and raising the standard of living of the 

American people. 

Higher real GDP in the future would allow not only increased personal spending but 

would also provide greater resources for public spending on national security and 

on domestic programs for education, poverty reduction, and an improved 

environment. 

Tax reform can be the major driver of faster GDP growth. Fortunately, the American 

tax code is now better in many ways than it was when I first appeared before this 

committee back in the 1970s. We now have lower tax rates on personal incomes, on 

capital gains, and on corporate profits. That improves incentives and contributes to 

faster growth and better jobs. 

But there has also been some backsliding in tax rates since the tax reform act of 

1986. Remedying this should be an important goal of tax reform. 

There are many high priority tax reforms that can strengthen growth and reduce 

our fiscal deficits. Because my time is very limited, I will focus on a few things that 

receive less attention than they should. 

I will start with tax reforms that can increase the employment of women and raise 

their after-tax incomes. 
24 


22376.014

Current tax and Social Security rules penalize married women more than other 

individuals. The federal government taxes a wife's first dollar of earnings at the 

same rate as her husband's last dollar of earnings. Other countries tax each 

individual on their own earnings, giving married women a greater incentive to work 

and to work at jobs that pay higher wages. The U.S. can achieve that improvement 

in fairness and in incentives without abandoning the system of joint filing. 

Social Security now taxes a woman on her full earnings but often provides no extra 

benefit. She receives an incremental benefit in return for her taxes only to the extent 

the benefit based on her own earnings would exceed 50 percent of her husband's 

benefit while he is alive and 100 percent after he dies. 

Reforming these tax and Social Security rules would increase women's labor force 

participation and the nation's GOP. 

Increasing emplovment among seniors 

I'll turn now to increasing employment among seniors. 

The labor force participation rate now declines from 64 percent among 60 year olds 

to only 32 percent among individuals 65 through 69. As you know, Congress in 

1983 raised the age for full Social Security benefits from 65 to 67, with a delay and 

gradual phase in. As a result, the labor force participation rate among those age 65 

to 69 rose from 21% to 32%. 

Life expectancy at age 67 has increased by three years since 1983. Raising the age 

for full benefits in line with that increase in life expectancy would expand the labor 

force and raise real GOP1 

Raising the national saving rate 

I turn now from policies designed to increase employment to policies that can raise 

our nation's rate of saving and therefore our nation's stock of capital. More capital 

investment increases productivity and output directly and by introducing new 

technology. Better policies can increase the volume of capital and the way that it is 

deployed. 

Household saving - i.e., the net personal income that is not spent on consumptionfell from 9 percent of after-tax incomes in the 25 years from 1960 to 1985 to about a 

third of that now. 2 A variety of public policies contributes to the low rate of saving 

and the high rates of dissaving. These include the deductibility of mortgage interest 

and the level of unfunded Social Security benefits. 

1 Since the increased life expectancy has been less for individuals with lower 

average earnings, the increase in the age for full benefits could be related to lifetime 

average earnings. 

? 
25 


22376.015

Automatic enrollment IRA plans and a shift of Social Security to a mixed system with 

investment based personal retirement accounts would increase national saving and 

would therefore increase business investment that would raise real incomes and 

create better paying jobs. 

Unfortunately, most of household saving is now absorbed by the federal budget 

deficit. The resulting national debt has increased from less than 40 percent of GDP a 

decade ago to 75 percent now, with the prospect that it will rise to more than 100 

percent unless Congress takes action to raise revenue and slow the growth of 

entitlements. 

The good news is that small reductions in the annual deficits can prevent the rising 

debt level and bring it back to lower levels. Reducing the annual deficit from today's 

three percent of GDP to two percent would put us on a path to a debt ratio of less 

than 50 percent. That should be a basic goal for Congress in the next few years. 

Reducing the annual deficits requires a combination of slower growth of 

government spending and increased tax revenue. Because the annually 

appropriated spending for defense and non-defense programs is already being 

squeezed to historically low levels, controlling government spending requires 

slowing the growth of the middle class programs for seniors -Social Security and 

Medicare. 

Tax revenue can be raised without increasing marginal tax rates by limiting the 

ability of taxpayers to use the tax expenditure features of the tax code to reduce 

their tax liabilities. These tax expenditures are a major form of government 

spending. Capping the use of these tax subsidies could also simplify the tax process 

by inducing taxpayers to use the standard deduction rather than itemizing 

deductions. My written testimony provides a reference to a recent study of how 

such a cap on tax expenditures might be implemented. 3 

z The current household saving rate of 4. 7 percent reflects a change in the definition 

that raised the measured level by about 1.5 percentage points relative to the old 

definition. 

3 See Martin Feldstein, "Raising Revenue by Limiting Tax Expenditures," NBER 

Working Paper 20672, forthcoming in Tax Policy and the Economy, volume 29, 

University of Chicago Press, 2014 
26 

f 


22376.016

Reforming the corporate income tax 

Tax reform can also improve the way that our nation's saving is used. A key element 

of that is corporate tax reform: reducing the corporate tax rate- now the highest in 

the industrial world - and shifting to the type of international tax rule (the 

territorial system) that is used by every other industrial nation. 

Thank you again for the opportunity to summarize my views. I look forward to your 

questions. 

4 
27 

Chairman RYAN. Professor Johnson. 

STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ (1954) 

PROFESSOR OF ENTREPRENEURSHIP AT THE MIT SLOAN 

SCHOOL OF MANAGEMENT (CAMBRIDGE, MASSACHUSETTS) 

Mr. JOHNSON. Thank you, Mr. Chairman. 

I am the former chief economist of the International Monetary 

Fund, and I would like to make three points about the recent and 

likely future U.S. experience in a comparative and global context. 

The first point is about the recovery. The second is about the 

longer term stagnation of wages. And the third is about TPP, trade. 

On the recovery—on the recovery, if we look at the U.S. experience compared with all the other countries affected by the financial 

crisis—and it was a global financial crisis; it was the most serious 

crisis that the world has faced since the 1930s—most other countries have struggled to recover from this crisis. 

The right response to such a shock includes the active use of discretionary fiscal policy where available. The difficulty with such— 

using such policy is: Can you make it timely? Can you target it appropriately? And will it be temporary? 

And we have seen problems across other countries on these dimensions. But, again, looking at the U.S., we have done remarkably well on exactly these points, including the fact that the deficit 

has now come down and the debt level, while it has increased, as 

Professor Feldstein said, is better than in other countries and is 

not yet close to any levels that would trigger a debt crisis. 

The problem, I would suggest, seen comparatively in the U.S. experience, has been the lack of consensus over the use of fiscal policy, including the repeated confrontations we have had around the 

debt ceiling and around the various issues that have triggered government shutdowns. 

These are destabilizing to financial markets. They create a high 

degree of uncertainty. They have damaged our trading partners, 

also. We have exacerbated the problems in the Euro area several 

times through exactly this mechanism. I wish that we would stop. 

I wish that we would focus more on the medium-term issues that 

you are emphasizing, Mr. Chairman. 

In that context, during the attempt to recover, I think there have 

been two important achievements. 

The first is Dodd-Frank, which took on the issue of the financial 

risks that absolutely brought about the financial crisis. And if you 

repeal Dodd-Frank, you are going open yourself up again to another destabilizing global catastrophe. 

And the second is the Affordable Care Act, which, contrary to expectations from some sides, has contributed to holding down 

healthcare costs, as Mr. Levin said. It is absolutely essential that 

we control our spending on social insurance programs, as Mr. 

Holtz-Eakin has emphasized. 

I completely agree. And the Affordable Care Act has taken some 

very concrete steps in that direction. It is still early days, I agree, 

but we need those programs to have a chance to work and to be 

evaluated. 

28 

Secondly, on the longer term issue of stagnant incomes, we really 

have to step back and look at where do these come from. It is since 

the 1980s. That is what Mr. Levin’s graph showed you. 

And it is about technological change, which has eliminated middle-skill, middle-income jobs. It is about globalization, which has 

done the same thing, had big effects on inequality. 

And this process, again, has affected—this is nothing unique or 

special about the United States in this regard. Other countries are 

caught up in the same process. 

The difference, though, is in the degree to which—and the way 

in which public policy responds. You can either lean against that 

wind. You can work on improving human capital. You can work on 

education. 

You can also strengthen health care and make it available to 

more of your citizens as a way to compete globally and to share 

those benefits or you can prefer some sort of trickle-down policies 

where you give advantages to people relatively high up the income 

scale—and, as you see, they have already done well before—you get 

into re-distribution—help those people and assume it is—that is 

going to share the benefits more broadly. That has been a disappointing performance for 90 percent of Americans since the 

1980s. It is a 30-year problem. 

I think Mr. Levin is right. There is plenty of scope here for 

changing and improving the tax system, keeping in mind the problems that we have, longstanding problems, with the decline of the 

middle class. 

Finally, on the trade agreements, I completely agree with Mr. 

Holtz-Eakin and Mr. Levin. These are very important issues. And 

TPP is absolutely center stage for this Congress. 

However, I would urge all Republicans and, of course, Democrats 

to take the issue of currency manipulation very seriously. There 

has in the past been cheating by some of the Governments with 

whom we trade. 

Cheating by Governments, that is something you usually don’t 

like on the Republican side. They would—have been cheating 

through manipulating their currencies. 

Now, it is not currently the number one salient problem among 

the countries entering into the TPP agreement. That is a good 

thing. Now is a good moment precisely to negotiate that and to lock 

in the current more flexible currency arrangements, expectations, 

and norms. 

But please do not think that just trade, just opening of trade, 

just more trade on the lines of TPP, is necessarily good for the middle class. It depends on the terms of the trade. If you let other Governments continue to cheat, it will go badly for our middle class. 

Thank you. 

Chairman RYAN. Thank you, Professor Johnson. 

[The prepared statement of Mr. Johnson follows:] 

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Testimony submitted to House Ways and Means Committee, hearing on the state of the U.S. 

economy and policies that can promote job creation and economic growth, at lOam on Tuesday, 

January 13 , 2015. Embargoed until the hearing starts. 

Submitted by Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan 

School of Management; Senior Fellow, Peterson Institute for International Economics; and cofounder of http://BaselineScenario.com. 

1 

A. Main Points 

I. Beginning in 2007 and reaching peak intensity in fall 2008, a global financial crisis had 

major negative impact in almost all industrial countries. The effects in the United States, 

Europe, and around the globe included a sharp contraction in asset prices, trade, output, and 

employment. The provision of credit was severely disrupted. This was the most serious 

implosion of financial sector firms and markets since the Great Depression. 

2. More than 8 million jobs were lost in the U.S. as a result of this sudden and deep recession. 

Unemployment and long-term unemployment increased dramatically. Millions of families 

were plunged into poverty; from 2007 to 2010, the poverty rate among children rose from 18 

percent to 22 percent2 

3. The pernicious effects of such crises are persistent and the process of economic recovery is 

always difficult, particularly in countries where the financial sector suffers large losses 

relative to shareholder equity. Compared with almost all industrial countries, the United 

States has experienced a sustained and robust recovery. And relative even to emerging 

markets, the short-term prospects for growth in the U.S. now look strong. 

4. Including the latest available data, nonfarm payroll employment in U.S. has increased for 58 

consecutive months and total employment rose by 2.95 million in 2014. 

5. In contrast, the European recovery has been much more problematic and other major 

industrial countries are also not doing well. The International Monetary Fund's latest 

published growth forecast for 2015, on a fourth quarter-on-fourth quarter basis, is 3.0 percent 

for the United States, 1.6 percent for the euro area, 2.2 percent for the UK, 2.4 percent for 

Canada, and 0.6 percent for Japan3 

1 Also a member of the private sector Systemic Risk Council (founded and chaired by Sheila Bair), a 

member of the Congressional Budget Office's Panel of Economic Advisers, and a member of the 

F.D.I.C. 's Systemic Resolution Advisory Committee. All views expressed here are personal. Underlined 

text indicates links to supplementary material; to see this, please access an electronic version of this 

document, e.g., at httn://BaselineScenario.com, where we also provide regular updates and detailed policy 

assessments for the global economy. For additional affiliations and disclosures, please see this page: 

httn://BaselineScenario.com/about/. 2 Sheldon Danziger, Koji Chavez, and Erin Cumberworth, Poverty and the Great Recession, October 

2012. 

3 These forecasts are from the IMF's October World Economic Outlook (Table I) and express the Fund's 

official expectation for GOP in the fourth quarter of2015 compared with the fourth quarter of2014. The 

IMF's forecasted growth in the United States will almost certainly be revised upwards, on the basis of 

recent data and also the decline in world oil prices. The outlook for Europe remains relatively gloomy, 

although lower oil prices should also be helpful. There is growing pressure on the European Centtal Bank 

to increase the scope and scale of its quantitative easing policies; at the same time as the Federal Reserve 

is scaling back on such activ ities. 
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6. Best practice for economic policy- including as advocated by the IMF around the world 

(with the support of both Republican and Democratic administrations)- involves the use of 

countercyclical macroeconomic policies to offset the effects of adverse shocks. It is the use 

of those policies that has helped to speed the U.S. recovery and to put it on a more 

sustainable basis. Other industrial countries have struggled to pursue macro policies that 

have been anywhere close to the effectiveness of what we have experienced in the U.S. 

7. In terms of monetary policy, short-term interest rates were lowered to almost zero and the 

Federal Reserve engaged in unusual measures to help lower the cost of credit. Inflation has 

also remained firmly under control, at the same time as we have avoided the risks associated 

with deflation (i.e., a fall in the level of prices). 

8. In terms of fiscal policy, the U.S. economy was helped by "automatic stabilizers"- meaning 

the fall in tax revenue and rise in spending that occurs, without policy changes, when the 

economy contracts and unemployment increases. There were also some important 

discretionary fiscal policy decisions, including measures taken in the American Recovery and 

Reinvestment Act: cutting taxes, extending the availability of unemployment insurance, 

fiscal support provided to states, and infrastructure spending4 There was a significant 

positive impact from ARRA on GDP and employment, relative to what would otherwise 

have been the case, particularly from the second half of 2009, in 2010, and in 2011 5 

9. Our economic recovery was made much more difficult by the politics of budget issues, 

including the lack of consensus regarding the need to support the economy, actual or near 

government shutdowns, and repeated confrontations over the debt ceiling. In particular, 

threatening to default on any country's national debt creates a great deal of uncertainty in that 

country. Such uncertainty discourages investment and consumption. 

10. For example, the debt ceiling impasse in summer 2011 created a degree of uncertainty that 

was not helpful to private sector job creation. The "fiscal cliff' stand-off at the end of 2012 

was another instance of policy induced uncertainty - if the same deal had been reached six 

months earlier this would have been much better for the economy than what actually 

transpired. 

II. As the economy recovered, some temporary spending declined and revenue increased - this 

is the automatic stabilizers at work. In fiscal year 2009 the federal government's budget 

deficit was 9.8 percent ofGDP. Due to the depth of the recession, this deficit was still8.5 

percent ofGDP in fiscal year 2011 and 6.8 percent in fiscal year 2012 . In fiscal year 2013, 

the deficit was down to 4.1 percent ofGDP, and by fiscal year 2014, that deficit was down to 

2.8 percent ofGDP. 

12. Revenue was about 9 percent higher in fiscal2014 than in the previous year. In nominal 

terms, revenues have "increased by 44 percent since 2009."6 As a percent ofGDP, federal 

government revenues were 17.5 percent in 2014; this was the first time since 2007 that 

4 For details on the American Recovery and Reinvestment Act of February 2009, see 

htto://www.recovery.gov/arra/Pages/default.aspx. 5 Table I in the CEO's February 2014 report on the ARRA shows a positive effect of GOP of over 2 

percent from Q3 of2009, rising to over 4 percent of GOP in Ql through Q3 of2010 and between 2 and 3 

percent of GOP in Q I through Q3 of 20 II. The unemployment rate impact was between I and 2 percent 

points during this same period. 6 The deficit, revenue, and spending figures are from the CEO's Monthly Budget Review: Summary for 

Fiscal Year 2014, https://www.cbo.gov/publication/49759. 
31 


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revenues had exceeded the 40 year average (17.3 percent ofGDP over 1975-2014). This was 

up from revenues that were 16.7 percent ofGDP in 2013 and 15.3 percent in 2012. 

13. Net spending by the government was less, in nominal terms, in 2014 than 2009, 2011 , and 

2012. In 2014, federal government spending was 20.3 percent ofGDP, which is slightly less 

than the 40 year average (20.5 percent). 

14. Countercyclical macroeconomic measures taken in response to the financial crisis did not 

damage our medium-term budget prospects. And major changes in our health care system, 

from the Affordable Care Act, have actually been associated with a slowdown in the rate of 

cost inflation in Medicare - a very important component of all longer-run budget forecasts. 7 

15. Responding to higher deficits with fiscal austerity- or with destabilizing debates about the 

degree of austerity - can have adverse and unintended consequences. In a country like the 

United States, with an ability to borrow at low interest rates, when faced with a severe 

adverse shock it is better to use short-term fiscal policy to support the economy- and then, 

when the recovery is assured, to seek medium-term fiscal sustainability8 

16. Medium-term fiscal sustainability must include a sufficiently robust base for government 

revenue that matches goals and likely outcomes for government spending. Government debt 

relative to GDP should be put on a trajectory that stabilizes over time. 

17. There is now an important potential role for comprehensive tax reform, in terms of boosting 

medium-term potential output in the United States- including through supporting education, 

infrastructure, and savings for retirement. However, it is important that such tax reform 

should not add to the budget deficit, i.e., it should be revenue neutral. 

18. The next section proposes a set of complementary measures that should, in the years ahead, 

help sustain growth and create opportunities for a broad cross-section of society. 

B. What Should Be Done? 

At the heart of the 2008 crisis was an undercapitalized financial system in which systemic risks 

materialized suddenly and with devastating impact. The 2010 Dodd-Frank financial reforms 

were put in place as an attempt to avoid repeating this experience. 

One top priority now should be attempting to strengthen the safeguards in the Dodd-Frank 

financial reform legislation. Repealing or rolling back that legislation poses a major fiscal risk9 

The fact that this is not currently scored by the Congressional Budget Office does not reduce this 

risk or make it any smaller. 

In effect, a financial system with dangerously low capital levels - hence prone to major collapses 

-creates a nontransparent contingent liability for the federal budget in the United States. 10 This 

7 See Tricia Neuman and Juliette Cubanski, The Mystery of the Missing $1 ,200 Per Person: Can 

Medicare's Spending Slowdown Continue? http://kff. org/health-costs/perspective/the-mystery-of-themissing-l 000-per -person-can-medicares-spending-slowdown-continue/ 8 See Simon Johnson and James Kwak, Wh ite House Burning: The Founding Fathers. Our National Debt. 

and Whv it Matters to You, Pantheon, 2012. 9 See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and The Next Financial 

Meltdown, Pantheon, 2010. 10 See Anal Admati, Peter DeMarzo, Martin Hellwig, and Paul Pfleiderer, "Fallacies, Irrelevant Facts, and 

Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Stanford University, 

March 2011 (revised), https://gsbapps.stanford.edu/researchpapers/library/RP2065RI&86.pdf. See also 

3 
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can only lead to further instability, deep recessions, and damage to our fiscal balance sheet, in a 

version of what one senior official at the Bank of England has referred to as a "doom loop". 

Beyond ensuring that we do not experience another serious financial crisis, there are an 

important set of issues surrounding medium-term growth- including increasing the potential rate 

of growth for the U.S. and how best to ensure that more people benefit as overall GDP rises. 

Of course, we are not completely out of the recessionary woods. Labor force participation 

remains low compared to historical levels and unemployment in some parts of the country and 

for some demographic groups remains unacceptably high. Not everyone has benefited from our 

return to growth. 

In particular, the federal structure of our government means that services provided by local and 

state governments often contract excessively when revenues fall. The decline in the number of 

K-12 teachers is a striking recent example that should be of great concern, particularly given the 

pressing need to build our human capital as a nation. 11 

More broadly, education and all forms of human capital should take a more central role in our 

national policy consideration. Many of the most important economic challenges for the US are 

long-standing (pre-dating 2008), shared across all industrial countries, and very much about 

human capital. These include: 

A process of technological change which, at least since the 1980s, has tended to displace 

middle skill and middle income workers. 12 

Globalization, in the form of increasing trade and various forms of "outsourcing" jobs, has 

also tended to displace middle income jobs, particularly in manufacturing. 13 

The ageing of the population, due to improvements in living standards and healthcare, 

alongside declining fertility rates. 

Rising health care costs, due to ageing, and also due to the cost of new technology. 

The need to manage immigration in ways are that fair for existing residents, while also 

creating opportunity for people who are newly arrived and who want to participate legally in 

the economy. 

Since the 1980s, a major theme of public policy in the United States has been to cut taxes for 

high income groups, with the motivation that this will lead to job creation and other benefits that 

Anal Admati and Martin Hellwig, The Banker's New Clothes: What 's Wrong with Banking and What to 

Do about it, Princeton University Press, 2013. 11 About 250,000 jobs were lost in public education during and after the financial crisis in the U.S. 

Teachers in the pre-school and K-12 sectors have not experienced significant economic recovery, as a 

result of budget cuts at the state and local level. 12 For an important review of the issues and policy implications, see David H. Autor, "Polanyi's Paradox 

and the Shape of Employment Growth," paper prepared for the Federal Reserve's Jackson Hole 

Conference, August 2014. There will be jobs- reports of the death of employment growth have been 

greatly exaggerated. But there will be relatively few middle-skill and middle-income jobs, compared to 

experience in the United States after World War II. Increasing job polarization- driven mostly by the 

nahrre of technological change- implies increasing income polarization, rmless public policies intervene. 13 See Daron Acemoglu, David Autor, David Dom, Gordon Hanson, and Brendan Price, Import 

Competition and the Great U.S. Employment Sag of the 2000s, Journal of Labor Economics, 

forthcoming. Technological change likely accounts for more of the pressure on middle skill jobs than 

does globalization. 

4 
33 


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will "trickle down" to lift the living standards of all Americans. These policies have not 

achieved their stated goals- income inequality has widened, with most of the gains in income 

going to people with at the top of the income distribution. 14 The increase in median wages, 

measured in real terms, has been slight and people in the bottom 90 percent of the income 

distribution have not done well. 

The pressures from technological change and globalization are present in all industrial countries. 

But countries differ substantially in the extent to which they have chosen to push back against 

the implications in terms of the distribution of income. 

To the extent that long-term interest rates for US government debt remain low and stable, this 

creates "fiscal space" for policy to address these issues in the coming years. 

Low interest rates are partly due to actions by the Fed through various forms of"quantitative 

easing", but U.S. government securities are also seen as a safe haven for international investors. 

However, this safe haven status will be jeopardized if markets perceive a significant probability 

that we will not pay our debts as contracted- or if create the perception that our economy will be 

thrown into repeated turmoil through regular showdowns over the debt ceiling. 

Over the CEO's 10-year forecast window, with the partial expiration of the Bush-era tax cuts, 

there is no insurmountable budget problem. 15 Our most important budget problems 

come after the ten-year horizon, because Medicare spending accelerates due to an aging 

population and increasing health care costs. The real issue here is containing healthcare costs -

i.e. , cutting Medicare in such a way as to shift healthcare costs onto families is not an app,ealing 

solution, particularly as this would likely raise health care spending as a percent of GOP. 6 

We should aim to find a way to control healthcare costs as soon as possible- every year of high 

healthcare cost inflation makes the problem worse. Our competitors are controlling healthcare 

costs much more effectively than we are; with the set of advanced countries, the US stands out as 

having the worst (highest) prospects for rising healthcare costs through 2030 or 2050. 17 

The United States is in the midst of a significant demographic transition, with the population 

ageing. We need to invest in education and ensure access to affordable healthcare to everyone if 

we are to increase productivity as the population ages. 18 Ultimately, this is the only way to 

14 See Thomas Piketty and Emmanuel Saez, Income Inequality in the United States 1913-1 998, Quarterly 

Journal of Economics, February 2003, Vol. CXVIII, Issue l. 15 See James Kwak, "The Weirdness of 10-Year Deficit Reduction," 

http :1 /baselinescenario.com/20 l l/07/21/the-weirdness-of-l 0-year -deficit-reduction/. 16 For more detail, see the CBO assessment of the budget proposal put forward by Congressman Paul 

Ryan in 2011: http://cbo.gov/sites/default/files/cbofiles/ftodocs/l2lxx/doc l2128/04-05-ryan letter.pdf. 17 See the IMF's Fiscal Monitor (October 2012). Statistical Table 12a, columns 3 and 4. Most of our 

main economic competitors have some form of universal health care system with a dominant or single 

payer (i.e., the government). Our fragmented system has not proved able to control costs in the past, in 

part because of constraints placed on the ability of the federal government, for example to negotiate lower 

prescription drug prices and to control reimbursement rates across all programs. 18 The Affordable Care Act helped increase access to health care and to improve the living standards of 

lower wage workers. It also reduced some payment rates and changed incentives. The rate of Medicare 

cost inflation and healthcare inflation more generally has slowed since the ACA was passed, although it 

remains to be seen how much of that slowdown in cost increase is structural and how much will prove to 

be cyclical. 
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ensure that older, retired workers can receive a sustainable level of reasonable benefits (including 

pensions and healthcare). 

Comprehensive immigration reform could also be helpful to both boost medium-term economic 

growth and to sure our fiscal accounts remain sustainable. In particular, to the extent that 

immigration helps to keep the age structure relatively young, this has significant positive impact. 

In this context and over the coming decades, the United States needs to make a longer-term fiscal 

adjustment. Part of that should include additional tax revenues. 19 The Bush-era tax cuts reduced 

revenue to an excessive degree, given the ageing of society. We are still struggling to recover 

from that flawed way of thinking about our public finances. 20 

It is striking the extent to which income inequality has increased dramatically since the last tax 

reform in 1986. 21 From 1986 to 2006, there was little change in average income for the bottom 

90 percent of wage earners while the top I percent experienced a gain of around 50 percent. The 

gains for the top one-tenth of one percent were even higher. 22 

The returns to higher education have greatly increased over this time period and there are not 

good income prospects for anyone with only a high school education (or less). If anything, the 

tax system should lean towards becoming more progressive - and investing the proceeds in 

public goods that are not sufficiently provided by the private sector, like early childhood 

education and the kind of preventive healthcare that helps prevent disruption to education (e.g., 

due to asthma). 

We should also consider shifting the emphasis of our public education system from K-12 to K14, i.e., adding an additional two years of vocational training. Such efforts should focus on 

measures that will, in aggregate, increase the supply of such training opportunities- and linking 

them more closely to actual jobs and career development. 23 

A number of other policies also merit active consideration, including: 

Raising the minimum wage. 

Expanding the earned income tax credit, to include people without children. 24 

19 For more details on the viable options, see White House Burning, Pantheon, 2012, by Simon Johnson 

and James K wak. 20 In addition, Medicare Part D was not paid for, in the sense of being supported by additional revenues. 

This is not a model to follow in the future- and efforts to cut back on the revenues raised by the 

Affordable Care Act should be resisted. 21 For more details and discussion of what accounts for the increase in inequality, see David Autor and 

Daron Acemoglu, "Skills, Tasks and Technologies: Implications for Employment and Earnings," 

http://econ-www.mit.edu/files/5571 . 22 Similarly, according to data available on the economist Emmanuel Saez 's invaluable Web site, from 

1993 to 2011 , average real income for the bottom 99% of the population (by income) rose by 5.8%, while 

the top I% experienced real income growth of 57.5%. The top I% captured 62% of all income growth 

over this period, partly owing to a sharp rise in returns to higher education in recent decades. (On average, 

those with only a high school education or less have few good income prospects.) 23 As a result of the financial crisis, almost all states cut the fimding provided to colleges. Some of the 

cuts have been dramatic. It is hard to say that this sector is currently headed in the right direction. 24 See Chuck Marr and Chye-Ching Huang, "Strengthening the EITC for Childless Workers Would 

Promote Work and Reduce Poverty," Center on Budget and Policy Priorities, July 30, 2014. 

6 
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In this context it makes sense to examine ways to improve the environment for business, 

including start-ups in the United States. However, we should also keep in mind that according to 

the best available comparative indicators, the US already ranks very highly both compared to 

other countries and in absolute terms. 

In the latest Doing Business indicators, the US is ranked #7 (out of 189 countries), with an 

overall score that is close to almost all the countries above it (other than Singapore). There are 

some apparent weaknesses, including the ease of obtaining construction permits and electricity, 

but these are hardly federal government issues. 25 Still, it could make sense for the US to 

benchmark itself more carefully against other countries - and to look at what drives differences 

in starting a business within the US. It would make particular sense to consider what will help 

support the manufacturing sector and its relatively high productivity and high paying jobs. 

In addition to these more general issues, in 2015 there will almost certainly be further discussion 

of the potential for increasing trade through signing trade agreements. The next section takes up 

some specific points that need to be addressed if such agreements are really to lead to job 

growth. 

C. Preventing Currency Manipulation 

Seeking ways to stimulate economic growth and create jobs, the Obama administration is 

seeking to push fmward in 2015 with a free trade deal known as the Trans-Pacific Partnership 

(TPP). The idea is to create a form of free-trade area across the Pacific. The initial goal was 

relatively modest, involving the US and a range of trading partners (Australia, Brunei 

Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam). 

But Japan is now on board, South Korea is watching closely, and there is the very real potential 

of engaging with China through this or a similar framework in the foreseeable future. 

The typical thinking when wanting to finalize an agreement aimed at reducing barriers to trade -

while attempting to protect labor and environmental standards - is to compromise by asking for 

less, rather than more, from the people on the other side of the table. But the TPP at this stage is 

different- the odds of success would be much greater if the U.S. now attached the additional 

requirement that participating countries not participate in currency manipulation. 

One of the major issues with our global trading system in recent decades is that there is no 

effective constraint on countries that intervene heavily in order to keep their currencies 

undervalued. A significantly undervalued currency implies a potentially big surplus of exports 

over imports. 

Ordinarily, such a surplus puts pressure on the currency of the exporting country to appreciate--

making their exports less competitive and making it easier to sell goods and services to that 

country. But if a country intervenes to buy up foreign currency, this can prevent appreciation for 

a prolonged period of time. 

25 The World Bank, which constructs these indicators, looks at local conditions; for the US this is Los 

Angeles and New York, both of which have expensive real estate and a great deal of regulation for 

construction. 
36 

f 


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Such intervention results in the build-up of what are known as foreign exchange reserves- much 

of which is held in the form of US government debt. In one way, this is helpful to the US; it 

helps keep interest rates lower than they would be otherwise. 

But currency manipulation in this way is also an unfair way to gain a trading advantage, with 

excessive negative effects on trading partners. The International Monetary Fund was founded, in 

part, to prevent this kind of economic strategy, which resulted in "competitive devaluations" 

during the 1930s. Unfortunately, the IMF in recent years has proved unable or unwilling to 

prevent precisely this kind of manipulation. 

Similarly, according to law, the US Treasury is supposed to determine if a country is intervening 

to an unfair and unreasonable extent. In practice, the Treasury reports on this topic are generally 

toothless with no real consequences. 

Fred Bergsten and Joseph Gagnon, my colleagues at the Peterson Institute, have proposed to 

include a currency clause in any TPP deal. In essence, this would amount to the signatories 

agreeing not to manipulate their currencies. 

Such a clause could come with stronger or weaker teeth. The important thing is to shift norms 

and expectations. 

Some US officials are supportive of this approach to TPP, but others are resistant. The latter 

group should think harder about what will be the dynamics on Capitol Hill when TPP comes up 

for a vote. 

Even people who are very much in favor of freer trade and even specifically some version of the 

TPP - like Messrs. Bergsten and Gagnon - feel that some Asian countries have overstepped the 

boundaries of reasonable behavior. 

At this precise moment, the level of intervention by major countries is limited (China) or even 

non-existent (Japan). This is a perfect moment for including a currency clause in the TPP, as 

most countries are less likely to become defensive. Participating countries could allow their 

currencies to float, or they could operate a fixed exchange rate- but if they do the latter, they 

must commit not to run large current account surpluses and run up big amounts of excess foreign 

exchange reserves. 

Any blatant and repeated breaking of this commitment would- and should- result in the loss of 

the special privileges granted under the TPP. This would be a reasonable and commensurate 

response. 

There is strong support on Capitol Hill, from both Democrats and Republicans, for finding some 

way to limit currency manipulation. 

Both parties are generally interested in supporting trade, along responsible lines- and 

recognizing legitimate concerns. Currency manipulation has become a little too ugly in recent 

years, including with associated significant negative impacts on some sectors and some 

communities in the United States. 

Hopefully, the other countries involved in TPP will also come to understand that this agreement 

is more likely to pass Congress and to prove sustainable- in economic and political terms- if it 

strongly discourages currency manipulation. 

8 
37 

Chairman RYAN. Dr. Holtz-Eakin, let me start with you. Your 

opening testimony was pretty staggering. Historically, we have 

doubled our standard of living among Americans every 32 years. At 

the rate we are at right now, it is 90 years. Is that right? 

Mr. HOLTZ-EAKIN. It is ballpark. We have been growing per 

capita GDP at .7 percent. Very slow. 

Chairman RYAN. And our long-term CBO forecast, which you 

are the former director, is now growth rate of 2.3 percent? 

Mr. HOLTZ-EAKIN. Yes. 

Chairman RYAN. In a nutshell, what is the explanation for that, 

that slower growth rate? 

Mr. HOLTZ-EAKIN. There are two pieces. 

One is demography and the aging of the population, the retirement at older ages leading to fewer workers. The second is lower 

productivity growth. 

And that comes from many sources. And the CBO has over the 

past 6 years steadily marked down its perception of the capacity 

of the U.S. economy to produce productive workers. 

Chairman RYAN. Okay. So in two of those areas, this committee 

has enormous impact on issues within our jurisdiction. 

Mr. HOLTZ-EAKIN. Yes. 

Chairman RYAN. Demography, getting people into the workforce, and capital stock, productivity, and—the tax treatment of 

that. 

Mr. HOLTZ-EAKIN. Yes. 

Chairman RYAN. In 1996 to 2000, you had a Republican Congress and a Democratic President. The result of that combination 

then produced welfare reform, a capital gains tax cut, a reduction 

in spending, a balanced budget, the deregulation of a telecommunications industry, and he had already previously negotiated and got 

approval of trade agreements with bipartisan support. 

We saw very robust strong economic growth across the board. We 

saw people moving from poverty into the workforce, into better 

lives. It was a good time. It seems to me that that kind of combination of reforms is what we need now. 

Give me your general sense of what could we best do to pull from 

the 92 million people who are not at work, what could we do to pull 

them into the workforce to help deal with that productivity issue, 

to help deal with that demographic issue that is giving us these 

lower trend growth rates, which is giving us these lower standards 

of living? And what could we do on the tax front to help increase 

our productivity? 

Mr. HOLTZ-EAKIN. Let me start with the latter. I think, number one, you have to deal with the corporate Tax Code, which the 

OECD research has identified as the single most potent antigrowth tax. And we have the highest tax rates in the developed 

world. That is an invitation to—for bad growth performance and it 

also hurts our international competitiveness. I think you start with 

that. 

More generally, I think you have to be especially focused on the 

growth impacts of the tax treatment of the return to capital, dividends, interest, capital gains, the tax treatment of corporations in 

that regard. 

38 

Economic growth is, in the end, quite simple. You give up something now in order to save and invest and make the economy bigger in the future. And at every margin, whether it is in Social Security rules, whether it is in tax rules, you want to provide people 

with incentives to do that and interfere with those incentives as little as possible in your Tax Code. 

On the work front, I think, you know, in the United States, the 

difference between being poor and not poor is work and the difference between being successful when working and less successful 

when working is education and skills. 

So at every juncture you want to have the social safety nets support work, as welfare reform did. And there is a lot of opportunities 

to do that. You want to take Social Security and make sure it 

doesn’t discourage work at older ages where we are going to have 

more highly skilled older Americans in years to come. 

Every—every time you take up an issue in this committee, you 

ought to ask ‘‘What are the work incentives and how can we do better?’’ And I think that is the recipe. 

A lot people think growth is a bill. Growth—you pass a recovery 

act and you get growth and you check that box and go do other 

things. The truth is growth is a philosophy. 

At every juncture, when you have to make tough policy decisions, 

when there are environmental considerations versus growth considerations, labor considerations versus growth considerations, you 

have to err on the side of growth and give it a chance at the—in 

the policy discussion. And that is the job of this committee. 

Chairman RYAN. Professor Feldstein, you were around in the 

Reagan Administration during two rounds of tax reform. We had 

1981, Kemp-Roth; 1986, where the top rate was brought down to 

28 percent. Capital gains, I think, went up to 28, if I am not mistaken. 

Are there some lessons we should derive from that, positive, negative? That is Question 1. 

Question 2: That was a different era where the global economy 

was far less integrated than it is today. Our rates are the highest 

in the industrialized world on corporations. 

We are sort of unlike other countries in the industrialized world 

in that we tax most of our businesses as individuals through what 

we call pass-throughs, and the top effective rate there is, I believe, 

44.6 percent effectively. So we are taxing our businesses at much 

higher rates than our foreign competitors are taxing theirs. 

In this global economy in the 21st century, how much of a difference is that making with respect to global competitiveness and 

capital flows? And what are the lessons what we ought to derive 

from your past experiences in broadening bases and lowering 

rates? And what mistakes did you make then that you think we 

should avoid, if there are any, in a couple of minutes? 

Mr. FELDSTEIN. Well, I think the tax reform experience in the 

1980s during the Reagan years was a very positive one. We saw 

rates come down. We saw a significant increase in tax revenue as 

individuals shifted from tax shelters, shifted into reporting more 

income. 

39 

And so the revenue cost of that was less than a pure static analysis would suggest and, yet, it also, of course, provided strong incentives for saving and for job growth. 

The corporate tax has become a bigger and bigger problem. We 

used to have a much higher corporate tax rate. We brought it 

down. The rest of the world brought it down more rapidly. So we 

now see ourselves with a higher corporate tax rate than every 

other country in the world. 

And that, of course, puts our companies at a disadvantage. It 

raises the cost of capital. It makes it more attractive to invest 

abroad than to invest in the United States. And it raises the cost 

and, therefore, the prices of American products. And that makes it 

harder for us to compete with imports and harder to compete as 

we export to the rest of the world. 

So I think that is why there is broad agreement that bringing 

down the corporate tax rate and moving to an integrated system, 

a so-called territorial system, for taxing corporate profits would 

make a lot of sense. 

Chairman RYAN. I want to be respectful of other’s time and, 

therefore, cognizant of mine. 

So I will yield to Mr. Levin. 

Mr. LEVIN. Thank you. 

First, I would like there to be distributed two charts, if you 

would do that right now. 

And, also, to our three witnesses—it is a little clumsy here because of the way we are seated. Who is going to distribute them 

on this side, too? Who is doing that? 

Chairman RYAN. You are not going to do it on the screen? 

Mr. LEVIN. No. Just the old-fashioned way. 

Come on. Just take some and distribute them over here, too. Will 

you? 

Let me start—let me discuss it just quickly because I don’t want 

to dwell on it, except I do think it is a mistake to minimize the 

progress that we have made in the last years. We need to look to 

the future, but trying to degrade or, I think, misdescribe what has 

happened in these last years is a serious mistake. 

These two charts show—to pick up what you have said, Dr. Johnson, the first chart shows the net employment gain in the U.S. 

compared to the U.K., Germany, Canada, Japan, Korea, and all 

others, and you will see that more than half of the employment 

gain from 2010 to 2014 was in the United States. 

The second chart, to pick up your point, Dr. Johnson, relates to 

GDP and selected economies. 

And now our three witnesses also have it. 

And it is very striking what has happened in other countries 

compared to the United States. And so, if we are going to move 

ahead, I think it is important not to misdescribe the past and I 

think it is also important for us to look at the policies that were 

undertaken. 

And I hope, if I might say so, that the Republicans will take another look at their opposition to stimulus policies that have really 

worked. 

Let me also say about the corporate rate, Dr. Feldstein and the 

other witnesses, I think we need to look at it. We need to also look 

40 

at the effective tax rate because it varies dramatically according to 

sectors. 

In some sectors, they are paying the full mid-30s, but in other 

sectors, the effective tax rate is much lower, and in some cases, the 

effective tax rate is zero. So I think we need to take a good look 

at it. 

Going back to the first chart that I put on—actually, it was the 

second chart—I would like Dr. Johnson to—if we could put that 

back, the second chart that I referred to, which talks about essentially the stagnant income for the bottom 90 percent in contrast to 

the top 10 percent and the top 1 percent. 

Dr. Johnson, you referred to this a bit. But describe, if you 

would, a bit more—this goes back to the 1980s. And you mentioned 

a few of the factors. 

But as we try to turn our attention, as we must, to income stagnation for the middle class, just review what you think are the 

major factors that have caused this, going back now 35 years. 

And maybe you can put on the screen, if we can do that technically, that second chart. If not, go ahead. Proceed. 

Mr. JOHNSON. Yes, Congressman. 

I think it is a very important chart, and I think it is important, 

also, that it doesn’t matter too much which way you break it down. 

If you did this for the medium wage, if you do it for the lower 

70 percent or the lower 20 percent, it is a very similar story, that 

people who used to be in the middle of the income distribution and 

people who were middle class, people who had a high school education or 1 year or 2 years after high school, have done relatively 

badly in terms of income growth. 

And that—the research on this, which has been done by many 

people, Mr. Levin, including David Autor and his colleagues at 

MIT, emphasizes the importance of technological change. So computers and information technologies automated away a lot of what 

were administrative clerical jobs before. 

Secondly, globalization, the pattern of trade that has developed, 

probably not as important as the technological change, but something that has reinforced that. 

And, in addition—— 

Mr. LEVIN. Let me just break in. 

I think, as we talk about the importance of exports—and I want 

to do that—relating to globalization, you have to talk about the impact of imports. And there is often a tendency to look at just one 

side of the equation when clearly you have to look at both. I think 

that is your point. 

Mr. JOHNSON. That is a central point. 

So David Autor and colleagues have some recent research on the 

effect of China’s surge in exports to the United States, so our imports from China in the 2000s. 

And they have mapped out in compelling detail the destruction 

of jobs in American manufacturing that came directly and specifically from that trade shock, which, by the way, was facilitated by 

an episode of currency manipulation in which the Chinese 

Renminbi was kept below its market value through deliberate government policy. 

41 

So imports are absolutely very important, Mr. Levin. They destroy jobs. And then those people go down—if they can get a job, 

again, they go down in terms of the income that they can earn, and 

that is a big part of what lies behind the picture that you showed 

earlier. 

Mr. LEVIN. Thank you. My time is up. 

Chairman RYAN. Because we are having some technical difficulties with the technology here, for the record, it is, ‘‘When it comes 

to the pace of annual pay increases, the top 1 percent wage growth 

grew 138 percent.’’ That is the slide that the gentleman from 

Michigan was referring to. 

Mr. LEVIN. It was the second slide that we showed. Thank you. 

Chairman RYAN. Okay. 

Mr. Johnson. 

Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman. And, 

again, congratulations on being the new chairman. And I thank 

you for this hearing as well. 

Mr. Holtz-Eakin, I want to begin by asking you some questions 

regarding the Social Security disability. 

As you may know, the program is projected to become insolvent 

in 2016. And I will just say the last thing that should happen is 

Congress raiding the retirement program to bail out the disability 

program. This is worse than kicking the can down the road and actually makes the Social Security retirement program worse without 

doing anything to fix it. 

Do you believe that reforming disability insurance, DI, would improve economic growth at all? 

Mr. HOLTZ-EAKIN. Yes, in a couple of ways. 

First, on the merits of the program itself, we have a clear issue 

with people going onto disability insurance. And I think it is useful 

for this committee to review the definition of disability. 

We now basically divide people in these concrete groups: can 

work, disabled. And, in fact, there is a much more fluid reality out 

there about people with physical and mental disabilities being able 

to continue to work. 

And the DI program provides a bad incentive to have them not 

work at all. And there is a lot of fraud in the entry process on top 

of that. 

The second thing is DI is a black hole. People go into DI, they 

never come out. 

Mr. JOHNSON OF TEXAS. Tell me. 

Mr. HOLTZ-EAKIN. And I ought to—and I think the committee 

ought to think hard about especially young people who are on the 

DI program, who, if they got continuous monitoring, would actually 

find ways to exit and move into the labor force at a relatively 

young age, and we would benefit from that. 

So I think the structure of the program itself deserves serious review. And it is a great opportunity for the Congress to look at a 

mandatory spending program and, instead of just stealing money 

from another part and financing it or just cutting it, reforming it 

so that it meets its social safety net objectives and costs less. That 

is what we are going to have to do with the Federal budget. 

We have a mandatory spending problem in the years going forward. We have tried things like cutting Medicare physicians with 

42 

the SGR. It doesn’t work. We need reforms, not cuts, and DI is a 

good place to start. 

Mr. JOHNSON OF TEXAS. Thank you. I agree with you, and I 

am sure most of my colleagues do, too. 

As you know, it can take a long time for a person to receive a 

decision on an application for disability. 

For those that don’t qualify for benefits, how does this time out 

of the labor force, in your opinion, affect their earnings? 

Mr. HOLTZ-EAKIN. In general, long spells of unemployment are 

bad for people’s future earnings ability. And we learned that in this 

downturn. We have learned it—the same lesson again and again. 

To have a policy induce people to undertake such a spell is a bad 

incentive. 

Mr. JOHNSON OF TEXAS. You know, sometimes workers take 

Social Security before they stop working. In other cases, they need 

to keep working to supplement their retirement income. 

However, if they claim benefits before their full retirement age, 

their benefits are reduced based on how much they earn due to the 

retirement earnings test. 

How can we better encourage work, especially later in a worker’s 

career? 

Mr. HOLTZ-EAKIN. There is a long list of things one can do by, 

as Dr. Feldstein mentioned, looking at the normal retirement age 

and moving it to match the current life expectancies, the taxation 

of Social Security earnings. When people are working and have 

earnings is something that is worth looking at. 

The program itself needs to be reformed. I mean, again, as the 

committee knows, this is a pension program that is kept actually 

set on the books by the promise to cut benefits 25 percent across 

the board in 20 years. Not a very good way to run a pension program. 

So it ought to be reformed so that it will be sustainable for the 

future, people know what the deal will be. They will then be able 

to make their labor force decisions and know how much they have 

to earn and how long they have to work. All of that would be beneficial. 

Mr. JOHNSON OF TEXAS. Okay. Tell me why you think we 

ought to tax those earnings, because they have already been taxed 

once. 

Mr. HOLTZ-EAKIN. I didn’t say I wanted to. I said I think you 

ought to re-examine that. 

Mr. JOHNSON OF TEXAS. Okay. 

Thank you, Mr. Chairman. Yield back. 

Chairman RYAN. Thank you. 

Mr. Lewis. 

Mr. LEWIS. Thank you, Mr. Chairman. 

Mr. Chairman, I want to take an opportunity to congratulate you 

on becoming the chairman of this committee. And, like Mr. Levin, 

I look forward to working with you, sir. Thank you. 

Welcome, members of the panel. 

Dr. Johnson, would you like to comment on the question raised 

by Mr. Johnson. 

Mr. JOHNSON. Yes, Mr. Lewis. 

43 

This is an issue—a problem that we encounter in many severe 

crises. This is the—why preventing severe financial crises is so important, Mr. Johnson, because when so many people are dumped 

into the labor market—when so many people are dumped out of the 

labor market, lose their jobs—more than 7 million people—as Mr. 

Levin said, you overwhelm everybody’s capacity to cope and more 

people do end up on disability. A lot of them end up with stress 

on disability because of what has happened. 

So that is why the Dodd-Frank reforms are so important, and I 

urge you not to lose track of that part of the big picture. And this 

is why the fiscal stimulus was so important, also, getting people 

back to work, making sure that they stayed engaged with the labor 

force and kept those skills. 

As you said, it is about long term being thrown out of work, and 

then people couldn’t find a job, Mr. Johnson. Those are the circumstances in which we found ourselves at the end of 2008 and in 

2009. 

Mr. LEWIS. Thank you very much, Dr. Johnson. 

The budget passed by the House Republicans last year would 

have unfairly targeted low- and moderate-income Americans for 

significant cuts in assistance with at least 69 percent of its non-defense cuts coming from programs that served people of limited 

means. 

Now, I want you to tell us: Do you worry that cutting medical, 

food, and education assistance to struggling Americans might be 

counterproductive to long-term economic growth? 

Mr. JOHNSON. Yes, Mr. Lewis. I think the human capital, people’s ability to learn, children’s ability to go to school and to concentrate, this is absolutely affected by their access to nutrition, by 

their access to health care. 

Medicaid for children is a very sensible investment in the longterm future growth of the country and in its fiscal sustainability 

because those are the people who pay taxes when they are grown 

up. 

If they can’t concentrate, if they are—if they are sick, if they are 

absent from school for those reasons, or if their family has medical 

emergencies that mean they can’t keep the children in school, all 

of this impacts negatively, obviously, the individuals and the family, but, also, the rest of us as a society and—and as people responsible for the fiscal accounts. 

Mr. LEWIS. Are you further concerned that huge cuts for lowincome Americans might increase inequality, which is already a 

growing concern all across our country? 

Mr. JOHNSON. Yes, Congressman. I think inequality is an important issue, and that is what you saw in Mr. Levin’s chart. 

But what I would stress, it is not just about inequality. It is not 

just about redistribution, at this point in our history, it is about 

growth. It is about human capital. It is about people. It is about 

who are you helping when they are young and they are poor and 

their families can’t help them. What kind of opportunities are you 

providing? 

I think it is, also, Mr. Lewis, about immigration reform. We 

should be encouraging more people to enter the country legally and 

join the labor force, including families with young children. 

44 

That is a huge advantage we have relative to other industrial 

countries, our potential growth in our labor force through legal immigration. No other major developed industrial country has that 

kind of opportunity looking forward. 

Mr. LEWIS. Thank you very much, Dr. Johnson. 

Chairman RYAN. Thank you. 

Mr. Nunes is recognized. 

Mr. NUNES. Thank you, Mr. Chairman. 

Dr. Holtz-Eakin, I have been working for several years on a proposal to kind of get us out of the sandbox that we have been in for 

the last 100 years with a progressive Tax Code and get us to a system that allows us to really let investment flow where it needs to 

flow and let capital come off the sidelines that is sitting on the 

sidelines not only in banks here in the United States, but, also, offshore and let that money go to where it is best used in the economy 

where entrepreneurs and investors want to invest. 

You are familiar. It is based off of the Bradford X Tax. What I 

did is I converted it into taking that tax and just looking at it as 

a—on all business activity and created a cash flow tax. Been working under Chairmen Camp and now Chairman Ryan with joint tax 

to try to get this to a revenue-neutral score because it is a theory 

now. 

But I am trying to vet it and get it out there in the public so 

that all Republicans, Democrats, the American people, have a 

chance to look at what it would look like under a completely different tax structure. I know you are familiar with it. 

And I would like for you just on the—if you could, on the record 

kind of talk about the positives and possibly the negatives with 

transitioning to a tax like this. 

Mr. HOLTZ-EAKIN. As you know, I am a student of the late 

David Bradford, who was one of the greatest tax policy minds this 

country has ever seen, and I am a big fan of your tax system as 

a result. I think it has a lot of virtues from the point of view of 

equalizing effective tax rates on investments across sectors of the 

economy—something that is an important consideration. 

It can be paired with the kind of territorial systems that Dr. 

Feldstein has mentioned that will allow us to stop the practice of 

locking offshore the overseas earnings of our most successful global 

companies and bringing those back, invest them in the United 

States. Again, that is having investment flow to its highest rate of 

return and reaping the reward of doing that. 

It, effectively, taxes people on what they take out of the economy, 

what they consume, as opposed to what they contribute to the economy—their efforts, their skills, their savings in the capital pool. 

And I think, as a basis for taxation, that is a very fair principle, 

to tax people on what they take out. 

And it distinguishes, as a result, between a high-income individual who lives a lavish lifestyle and takes a lot out and a highincome individual who plows it back into the economy and helps 

the Nation as a whole. And I think that is something we ought to 

think about when we think about fairness; not all high-income people are created equal. 

The downside, in many people’s eyes, is the inability to, sort of, 

have high effective tax rates on the affluent—I think that can be 

45 

addressed with a progressive tax structure—and how you treat the 

return to capital for people who are extremely successful. 

And this system, I think, is especially desirable because it basically turns the whole world into a big traditional IRA. You deduct 

any saving investment when you make it, and you tax everything 

that comes out, the original plus the earnings when it is realized. 

That means that if you, you know, hit a windfall, if you end up 

being Microsoft or you end up being an enormously successful 

startup, all of that success gets taxed. In other systems that try to 

attempt to give good investment incentives, they look like Rothstyle things, where you pay the tax and then whatever happens 

after that goes untaxed. That allows much more in the way of 

windfalls to be untaxed. 

So if you have to pick at this point in time a pro-growth policy— 

and that would be a very pro-growth policy—that has better fairness considerations, I think it is really a very good candidate. 

Mr. NUNES. Well, it is fairer to the entrepreneur, right? Because now we have—— 

Mr. HOLTZ-EAKIN. Yep. 

Mr. NUNES [continuing]. Entrepreneurs make their startup decisions based off of the Tax Code, which is exactly what we don’t 

want them to do. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. NUNES. We only have a minute left, Dr. Feldstein. I don’t 

know if you are familiar with the X tax, but I would like to get 

your thoughts, if you could. 

Mr. FELDSTEIN. I am also a fan of the X tax. I think the idea 

as Douglas Holtz-Eakin described it, as a kind of generalized IRA 

in which individuals can save and pay tax only when they take it 

out, is a way of improving the fairness and also contributing to savings incentives and growth. 

Mr. NUNES. Well, I look forward to sharing the proposal with 

you. It is just a draft for now, but I would like to get your comments when you can. 

And I would also like to get your comments also, Mr. Johnson, 

at a later date. 

Thank you, Mr. Chairman. I yield back. 

Chairman RYAN. Thank you. 

Mr. Neal is recognized. 

Mr. NEAL. Thank you, Mr. Chairman. And congratulations 

again. 

The panelists that we all have are all well-regarded, so I want 

to talk a little bit about dynamic scoring. Recently, Mr. Larson and 

myself, we had a chance to see an almost completed project along 

the rail line from New Haven to Hartford and on to Springfield and 

on to eventually Saint Albans, Vermont. It will mean 12 to 16 more 

trains a day between New Haven and Springfield. There are two 

union stations that are under reconstruction because of it, involving substantial Federal expenditure, in one case up to $82 million. 

Now, I supported stimulus, got up on the floor and spoke in support of the stimulus package offered by President Obama. And I believe Dr. Feldstein supported the stimulus package. 

And you will have a moment, Doctor, to reject that if it is not 

true. 

46 

But how, according to Mr. Ryan’s dynamic scoring undertaking, 

would you measure the effect of stimulus in terms of investment, 

which I happen to believe is a pro-growth economic undertaking? 

And I am comfortable enough asking all three panelists to tell me 

what you think of it. 

Mr. FELDSTEIN. Let me go back to the stimulus bill in 2009. 

At that time, interest rates were down at about zero, and I thought 

we did need a fiscal stimulus. I thought the design of that particular bill was not good. I thought, in the end, it provided some 

stimulus but probably added more to the national debt than it did 

to GDP. 

I think, in the end, we have had a very significant recovery because the Federal Reserve took over, introduced so-called quantitative easing, drove down long-term interest rates. That ultimately led to, as Ben Bernanke predicted it would, led to big increases in both home values and stock market equity values, so 

household net worth rose $10 trillion in 2013. And that led to increased consumer spending. And that, in turn, led to more hiring 

by firms, more inventory accumulation. And that gave us the recovery that started in the second half of—the serious recovery that 

started in the second half of 2013. 

So I think that, as a more general proposition, when you do tax 

changes or you do spending, it is worth trying to calculate what 

that is going to do to GDP. And, historically, on the tax side, that 

has not been done, so Congress gets—— 

Mr. NEAL. Could—— 

Mr. FELDSTEIN [continuing]. An incorrect view of what the 

costs are of tax reductions and what the benefits are of tax increases. 

Mr. NEAL. Thank you, Doctor. 

Could we hear from the other two quickly? We only have about 

2 minutes. 

Mr. HOLTZ-EAKIN. This is a big issue, but I would just point 

out a couple of obvious things. 

First, very few bills are substantial enough in their impact to 

merit looking for the growth impacts of those bills, which is what 

dynamic scoring does. It expands the boundary to check does the 

economy as a whole get larger or smaller as a result of the legislation. So, you know, a couple of bills in each Congress will probably 

merit this consideration. I don’t think it is going to change most 

of the work of the Congress very much at all. 

The second thing I would say is this is not a new thing or a particularly exotic thing. Every President’s budget is dynamically 

scored. If you read it, it says, these estimates are contingent on enacting all the policies of the President. So we have been doing it. 

The CBO has been doing it since 2003. The Joint Committee has 

done it. 

The third thing I will say—and I know we are running out of 

time: It is no more uncertain or no more difficult to do than conventional scoring. I had to score terrorism risk insurance, the financial consequences of an unknown attack at an unknown time 

with an unknown weapon. That is hard. I mean, so there are going 

to be judgments and difficulties in conventional and dynamic scoring. I don’t think any of that should stop the members of this comVerDate Sep 11 2014 01:10 Jun 10, 2017 Jkt 022376 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22376.XXX 22376
47 

mittee from knowing those things which are better for growth as 

opposed to those which are not. 

Mr. NEAL. Could we—— 

Mr. JOHNSON. Well, Mr. Neal, I agree that we should consider 

the full growth implications, but dynamic scoring is very complicated. 

And some of these models that they are using for dynamic scoring have got some strange features, including full employment, for 

example. Now, assuming full employment in the modern American 

context is a little bit of a stretch, for example. 

So I think it needs to be used extremely carefully. And I worry 

that it can be and sometimes is used to justify whatever outcome 

people are seeking. 

Mr. NEAL. Mr. Chairman, I hope you will—— 

Chairman RYAN. Thank you. 

Mr. NEAL [continuing]. Examine at the time the opportunity to 

apply dynamic scoring, if that is the embrace of the rules package 

passed by the House, that you will consider the idea of spending 

as it relates to the dynamic scoring. 

Chairman RYAN. It is in the House Rules. I think the gentleman 

should review, but—— 

Mr. NEAL. We looked at it, Mr. Chairman. A bunch of the emphasis was on—— 

Chairman RYAN. It is CBO and Joint Tax, and—— 

Mr. NEAL [continuing]. Tax cuts. 

Chairman RYAN [continuing]. It is spending as well. 

Mr. NEAL. All right. Thank you. 

Chairman RYAN. So the gentleman’s concerns have been addressed. 

Mr. LEVIN. No, but the language is different as to spending as 

to revenue. 

And I suggest—there is an article in The New York Times about 

Medicaid and children—— 

Chairman RYAN. The gentleman’s—— 

Mr. LEVIN [continuing]. That you ought to look at. 

Chairman RYAN. The gentleman’s time has expired. We can revisit this another time. 

Mr. Tiberi is recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Dr. Holtz-Eakin, you mentioned in your testimony that trade creates jobs, in fact, supports nearly 11 million jobs in the United 

States. 

In my home State of Ohio, home of the national champion Buckeyes, by the way, there are—— 

Mr. HOLTZ-EAKIN. But no beard, sir? 

Mr. TIBERI. Because we are winning. Well, never mind. 

A lot of misconceptions, a lot of rhetoric thrown around, particularly during Presidential campaigns. In fact, we have had Presidential candidates talk about trade being bad but exports being 

good. 

Can you do trade without exports or exports without trade? 

Mr. HOLTZ-EAKIN. No. 

Mr. TIBERI. Okay. 

It has been pretty surreal to watch. 

48 

In Ohio, international trade supports 1.4 million jobs. We in 

Ohio, since 2002, goods exported to our trading partners account 

for about a 48 percent increase over the last 12 years to our trading partners. Our trading partners purchased 19 times more goods 

per capita from Ohio than nontrading countries in 2012. Canada is 

our biggest exporter, but NAFTA is bad, many people in Ohio 

think—again, campaign rhetoric. 

So my dad was a steelworker, and, like many jobs that people 

in that industry have had, those jobs didn’t go overseas; technology 

changed those jobs. 

Oftentimes, Dr. Holtz-Eakin, we never hear about the advancement of technology and what that has done to our economy. The 

scapegoat tends to always be, ‘‘These jobs went elsewhere.’’ I have 

toured manufacturing plants where there used to be 20 people on 

an assembly line and now there is 1—19 jobs gone because of technology. There are a lot of efficiencies, by the way, but those cost 

jobs. 

So, as we move forward, with respect to your testimony, I think 

there is a huge opportunity for America, whether you look at trade, 

exporting, the Tax Code. We in the United States are doing well 

despite the fact that we have one arm tied behind our back, whether it is the high corporate tax rate that we have talked about, 

whether it is the fact that we have fewer trading partners than 

many of our allies do around the world. 

Can you tell us why, particularly on trade, opening up additional 

markets and giving the President TPA is important sooner rather 

than later, why that is important to our economy and jobs in Ohio 

and other States? 

Mr. HOLTZ-EAKIN. So it is important now because we are not 

fully employed. We don’t have everybody who wants to work at 

work. And additional opportunities to access markets and sell our 

products, bring people into the labor force to make those products 

are especially important right now. And moving quickly is beneficial. 

The second thing is we will be in at the ground floor of setting 

the rules for those trading arrangements. And if you are on the 

sidelines, the rules are written in ways that are probably undesirable, and waiting is not a good idea. Be at the table. 

Third thing that is important is that ultimately we would expect 

us to get back to full employment, but this is an opportunity to sell 

to the parts of the world where we are going to see the greatest 

income growth in the years to come. And that is better income. 

That means better jobs, not just more, but people’s jobs will be better as a result. 

And then the third is you get the opportunity to take advantage 

of the technologies, as you said. If you have the ability to do something better, you can take advantage of that through trade. 

The biggest example of change in trade recently has been driven 

by technological advances in natural gas and oil exploration. It has 

changed the global lay of the land for the United States permanently. You could not imagine the level of geopolitical risk that we 

have in the Middle East right now and oil prices at $50 a barrel 

5 years or 10 years ago. It just wouldn’t happen. It has also 

49 

changed our imports of those products, and that has been a big 

change in trade. 

So, you know, it is hard when people get displaced by trade. It 

happens. It is not all exports; there are imports. But it is an opportunity. And if the economy as a whole takes advantage of that opportunity, we have more people working and they are making more 

money. 

Mr. TIBERI. But the displacement is not—— 

Mr. HOLTZ-EAKIN. No, it—— 

Mr. TIBERI. It is also technology. Technology enters into it as 

well. 

Mr. HOLTZ-EAKIN. It is not all international trade. 

Mr. TIBERI. Right. 

Mr. HOLTZ-EAKIN. It is interregional trade. Textile jobs that 

used to be in the Northeast went to the South. I mean, this is part 

of an economy adjusting—— 

Mr. TIBERI. Thank you. 

Mr. HOLTZ-EAKIN [continuing]. And it is not unique to trade. 

Chairman RYAN. Thank you. 

Mr. Doggett is recognized. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

I suppose in a hearing on this topic of this import that it is merely an oversight that, I guess, the leader of Republican thinking on 

this, in the Senate at least, Senator McConnell, began this session 

by noting that what he called the uptick in our economy resulted 

from the mere expectation of a Republican Congress. 

And it is good to know that, after so many apocalyptic predictions about the Economic Recovery Act, the Affordable Care Act, 

and almost everything else that over the last 6 or 7 years this administration either has done or has not done, that we have enough 

progress that some Republican leadership is claiming credit for all 

the things they said would hurt or hinder the economy that have, 

in fact, in most cases, helped it significantly. I guess that it does 

give new meaning to the old reference to the memory of an elephant. 

One of the areas that, of course, we have not seen the progress 

that we need to see that Mr. Johnson has referred to is the fact 

that not all Americans have shared. And this is not by accident. 

But the data is rather remarkable, that, according to the Pew Research Center, we have the widest wealth gap in 3 decades, that 

the compensation for the chief executive officers at American corporations was about 20 times that of the typical worker back in the 

1960s but in more recent years it has become about 300 times a 

typical worker’s pay. Since 1979, worker productivity increased by 

about 65 percent, but worker wages remained essentially flat, but 

CEO pay grew by almost 1,000 percent. 

I think that this income inequality has some of the same pernicious effects on economic growth in our country as just discrimination against various groups, gender discrimination, for example, 

claiming that we are not going to permit, as some societies continue to do, women to participate fully in our economy. Well, in this 

case, we have treated one group of Americans as really not having 

the potential to achieve their—or not being able to fully achieve 

their God-given potential. 

50 

Mr. Johnson, I just wanted to ask you about that further, what 

the impact is of decisions here in Congress, either through action 

or inaction, to not have all Americans participate in this and adopt 

policies like the American Opportunity Tax Credit and increases in 

Pell grants to assure that more Americans can share and can contribute to the economy. Does that have a direct impact on our future economic productivity and growth as a country? 

Mr. JOHNSON. Mr. Doggett, it has a huge impact. 

Look, the process of technology and globalization we have been 

discussing. Nobody is asking you to be like King Cnut trying to 

turn back the tide. You can’t do that. But there are many sensible 

policies absolutely under the jurisdiction of this committee, including the Pell grants, for example, including other ways that will encourage people, give them an incentive, give them resources or enable them to become educated. 

We know what kind of skills you need in order to be productive, 

in order for our country to compete globally. We know you need to 

be much better at using information technology. We know that you 

need to have quantitative skills and analytical reasoning skills. We 

also know it is very hard for people for many parts of the income 

distribution to get those skills. And it is very hard for them to get 

any kind of post-high-school education. 

I think we should shift away from talking about K through 12 

as our expectation for education to K through 14, because you need 

those 2 years post-high-school to have any chance of decent, high 

lifetime earnings and being able to pay taxes. 

Mr. DOGGETT. As far as corporate taxes are concerned, Mr. 

Johnson, it is difficult to see how you can lower the rate much 

more for a company like General Electric unless you begin to pay 

them for operating, which we, in fact, have done in some years, 

where corporation after corporation pays its lobbyists more than it 

pays the Federal Treasury. 

As you look at corporate tax reform, is it important to close loopholes at the same time that we make any changes to the statutory 

rate? 

Mr. JOHNSON. Yes. I think you—if you are going to consider 

just corporate taxes, you should consider a revenue-neutral approach. Of course, quite a few of the proposals that we hear would 

do away with some form of accelerated depreciation. I am not sure 

that is going to help in terms of capital formation. 

But the other point is, compare around the world, compare with 

other countries. The World Bank does this, asks entrepreneurs how 

do they assess the business environment. We are number seven in 

the world, and we are very close to five of the countries that are 

above us in those rankings. 

Chairman RYAN. Thank you. 

Mr. Reichert. 

Mr. REICHERT. Thank you, Mr. Chairman. And congratulations 

again. 

Like my colleagues, I support a robust trade agenda. I come from 

Washington State, and I think most everyone knows that Washington State, with Boeing and Microsoft and other large corporations, 40 percent of the jobs created in Washington are a direct result of our strong trade agenda. 

51 

Not only, I think, do most of the colleagues on this panel agree 

with the strong trade agenda, but, in fact, the President of the 

United States and our Ambassador, Mr. Froman, both agree that 

TPP and TPA are critical to doubling our exports and creating jobs 

in America. 

I happen to be a member of the President’s Export Council and 

have been for the past 6 years and have been at almost every one 

of those meetings. And, of course, the President’s wish and the Ambassador’s wish is that the Democrats recognize the importance as 

much as the President and the Ambassador do and help him get 

both TPP and TPA passed through this Congress. 

As I said, 40 percent of the jobs in Washington State—now, Mr. 

Tiberi talked a little bit about technology. My focus is more on 

small business and how technology has helped small businesses. 

We all think of exports and larger corporations across this country 

exporting their goods like airplanes, et cetera, but I have a son-inlaw who is currently in China, a small software producer, and I 

have a son who is a—it is a machine shop, who sends his product— 

they have 10 or 12 employees. He sends his products all over the 

world. 

How important is trade, Mr. Holtz-Eakin, to these small businesses and the future and the expansion of their businesses? How 

important is trade to creating jobs in those small businesses and 

opportunities for people who migrate to those small businesses for 

their employment? 

Mr. HOLTZ-EAKIN. So, as a ballpark number, 70 percent of our 

exporters would be conventionally classified as small businesses. 

And because they are small, the value of what they export isn’t 

that large, and those value numbers get dominated by the Boeings 

and Microsofts of the world. But in terms of being engaged in international commerce, small businesses do this. And it is an important part of their customer markets, to be able to get to other countries and sell there. 

We also know that it is those small and growing businesses that 

create the majority of jobs on an ongoing basis in the United 

States. So their access to those markets and their ability to trade 

is intimately linked to our success in creating new jobs at higher 

pay and getting rid of the old less high-paying jobs as a part of the 

national economic growth. 

So I think it is important to keep an eye on good ability to trade, 

trade agreements that level the playing field and allow us comparable access to other markets. 

Mr. REICHERT. And we are talking about 80 percent or more 

of the jobs created across this country are really created by small 

businesses, correct? 

Mr. HOLTZ-EAKIN. Yeah. The small growing businesses, that is 

the place where you see the majority of the job creation. 

Mr. REICHERT. And that really creates—trade really creates an 

opportunity to sell their product not only here, of course, in the 

United States but in what everybody has described, I think, on this 

panel—95 percent of our market is outside of this country. 

Mr. HOLTZ-EAKIN. And the advantages come in very subtle 

ways that are hard to document, but, you know, you sell in another 

market, you see the kinds of competitive pressures you face there, 

52 

the kinds of technologies your competitors are using, the kinds of 

marketing business models they use. And those things get acquired 

and diffused into American firms and make them more effective, 

whether it is in physical technologies or the way they run their 

business. So there is a lot of advantage of being engaged in these 

activities. 

Mr. REICHERT. Thank you. 

Mr. Feldstein, I would like to address my last question to you 

quickly. In another area where we have the ability to boost our 

economy, it is through tax reform. As was mentioned many times, 

businesses large and small will benefit from finally, since 1986, 

looking at our Tax Code and creating some certainty and stability 

in our Tax Code and the opportunity to grow and invest, of course 

then creating jobs. 

What about passthrough businesses—sole proprietorships, partnerships, S corporations? They face a high marginal tax rate in addition to high compliance costs. How do you see the change in the 

Tax Code specifically helping those small passthrough businesses? 

Mr. FELDSTEIN. I think that is a major challenge that you face 

as a committee and as a Congress in dealing with tax reform, that 

lowering the corporate tax rate, where both the President and the 

Republicans have said we have to get down into the 20s, will still 

leave passthrough businesses, who file through their personal tax 

return, facing much higher tax rates. 

So somehow that has to be dealt with, and by treating the business income of passthrough individuals differently from other 

things so that, in effect, they get the advantages of the lower tax 

rates that come with corporate tax reform. 

Mr. REICHERT. I yield back. 

Chairman RYAN. Thank you. 

Mr. Larson. 

Mr. LARSON. Thank you, Mr. Chairman. And echoing the sentiments of the committee, congratulations on two fronts: becoming 

chairman and you and Mr. Kind’s great success with the Green 

Bay Packers. 

Condolences to Kenny, Kevin, and Sam. You guys was robbed. It 

was a catch. But I don’t want to create further controversy. 

I would also note that—— 

Mr. LEVIN. How about the Detroit Lions? 

Mr. KIND. That is dynamic scoring, Mr. Chairman. I object. 

Chairman RYAN. It is called completing the process of the catch. 

Mr. LARSON. That is really dynamic scoring. 

But it does get to the point—first, I also want to acknowledge 

Aetna today, which in my district is announcing a floor of $16 per 

hour for its employees, in large part due to the success of the Affordable Care Act and coordinated care and all the innovation technology and coming and merging together of a pro-growth industry. 

So I wanted to acknowledge that and also return to the point of 

dynamic scoring, not as it related to the game, Ron, but as it relates to the rules that are before us and with respect to infrastructure in general, something that this committee desperately needs 

to address, in terms of our highway infrastructure but roads, 

bridges, sewage system, broadband for our schools. 

53 

Quick answer from the members, a ‘‘yes’’ or ‘‘no’’: Should dynamic 

scoring be included in major national infrastructure programs? 

And we will start from left to right with Mr. Feldstein. 

‘‘Yes’’ or ‘‘no’’? 

Mr. FELDSTEIN. If it is really major, I can see the case for it. 

But as has been commented on—— 

Mr. LARSON. Well, with 70 percent of the roads and bridges in 

deterioration and that has long been neglected by the Congress, it 

seems like this is a pent-up need that certainly would require that. 

Mr. FELDSTEIN. It would be good to know what impact on GDP 

that kind of infrastructure program would have. 

Mr. LARSON. Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. If it is large-scale or mandatory spending, 

it will, under the House rule, be—it will be scored. I mean, that 

is the rule. 

If it is extremely large-scale and plausibly going to have macro 

impacts, the committee chairs can designate legislation to be major 

legislation and have it be dynamically scored. 

So, you know, there is nothing about these rules that tilts the 

field in one direction or the other. 

Mr. JOHNSON. Yes, Congressman, but can we also please include Medicaid for children, the Affordable Care Act, and the DoddFrank financial reforms, which are absolutely scored backwards, 

according to the CBO? 

If you repeal some parts of Dodd-Frank, you are supposedly 

going to save the budget. You are not going to save the budget anything; you are going to open yourselves up to massive financial risk 

and another debt catastrophe like the one we just had. 

So if you are going to fix scoring on all these dimensions, please 

do it comprehensively. 

Mr. LARSON. Now let me yield to my colleague from Massachusetts, who I think was making the point of differentiating on those 

rules as they exist. If I can, I would yield to Mr. Neal. 

Mr. NEAL. I think what we are trying to get to here is the idea 

that there are economic outcomes that come from significant infrastructure investments that are not only long overdue but have been 

resisted by the majority in the House. 

And the path forward seems to me to be one that would include, 

for example, an investment in two huge union stations from Hartford to Springfield, putting a lot of construction workers on the job; 

the rail being improved; broadband having been extended to the 

hill towns of western Massachusetts so that children—who, by the 

way, live in communities that have first-class colleges have to go 

to the parking lot at the local library during the evening hours to 

connect to the Internet. 

And I think that those are the sorts of measurements that we 

want to be assured of as we go forward. If we are only going to 

apply this to tax cuts, then it seems to me as though it is ill-considered. And if we decide that we are going to talk about long-term 

investments, what better way to do it that improving rail transportation? 

And just for our colleagues here that are dubious about highspeed rail, that first train when we got to western Massachusetts 

on the way to Vermont and to a couple of small towns, that train 

54 

got up to 79 miles an hour. And how do we measure that accurately, consistent with the point that Mr. Larson has made, if we 

resist the idea that that doesn’t count in terms of a long-term forecast of economic—and, Mr. Johnson, will you take a shot at that? 

Mr. JOHNSON. I think we should be considering these broader 

economic impacts, Mr. Neal. I worry about the uncertainty of the 

dynamic scoring model on the tax proposals. And I think that 

looms very large over this Congress. So that is why I think you 

have to be careful with exactly the details of the models that are 

being used and exactly the implications. 

But, of course, you are right; there are growth implications, positive growth implications, for renewing and expanding the infrastructure of this country. 

Chairman RYAN. Thank you. 

Time for the gentleman has expired. 

Mr. Boustany is recognized. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

Here we are in year 6 of the recovery, and I think we have all 

established that growth is absolutely essential. 

And I think, Mr. Holtz-Eakin, you really laid out the task of this 

committee very, very clearly. And our task is to accelerate longterm growth in this country beyond the paltry 2.3 percent that we 

are seeing. 

And as I have looked and read many, many things during the 

course of these past few years, trade and energy have been the two 

accelerants that have worked against the drag that we have seen 

in this economy as we have tried to climb out of the recession. 

And I want to point out, in my State, in Louisiana, we are now 

seeing $86 billion in new investment in my district alone related 

to trade and energy. Exports now account for 25 percent of the 

State’s GDP. We have doubled exports in 4 years. And this is all 

within the trade and energy space, from LNG exports to chemical 

and petrochemical exports. We have seen a resurgence in manufacturing as a result. These are bright spots. 

What really worries me in all of this are the macroeconomic 

threats to this, and we haven’t talked about that today. From the 

slowing in Asia, slowing of growth in Asia, clearly the problems in 

Europe, where they can’t get policy straight as to what direction 

they are going to go—and we are seeing, you know, many of these 

countries in recession—and, of course, insecurity in the Middle 

East and elsewhere, what do we do about those things? 

There are many things we have talked about here that we can 

do with regard to domestic policy, from tax reform, education, and 

so forth, much in the jurisdiction of this committee. But what can 

the United States do to mitigate these threats and lead? Because 

without U.S. leadership we will not see the type of growth needed 

in this country nor globally. 

I believe that America’s opportunity to lead, the catalyst for leadership is trade promotion authority, which then opens a door and 

gives our negotiators the best leverage to move forward on TPP, on 

TTIP, on TISA, and all these trade agreements. This is the opportunity, and this is our opportunity for growth. We have to focus on 

what we can do to lead in the global economy. 

55 

Now, with energy and trade and the success story we are seeing 

in Louisiana—and I am afraid a lot of that is threatened—there 

are two things I want to point out. 

One, it is my sense of it that these jobs related to exports and 

manufacturing exports as well as energy jobs pay significantly better than jobs unrelated to that. For instance, many, many folks 

back home with a high school education, not even an extra 2 years, 

are making pretty good money, significantly better than jobs unrelated to energy. And we know of stats that deal with trade- or export-related jobs. I think the figure is roughly around 18 percent 

higher than non-export-related jobs. 

Would you all agree that these types of jobs pay better, on average? 

Mr. FELDSTEIN. I think that is a fact. 

Mr. BOUSTANY. So, as we deal with income inequality, this is 

also one of the potential solutions, by embracing trade policy, opening markets, and also embracing this remarkable energy revolution 

which we are seeing today, not penalizing it with taxes or other 

things, but embracing it as a truly revolutionary development that 

will put the United States in a leadership role. 

Yes, Mr. Johnson. 

Mr. JOHNSON. So, Mr. Boustany, I agree with you completely 

on the strategic role of trade. I think that is the right framework. 

But the question, particularly for this committee, is, do you want 

to give the—do you need the give the TPA, the so-called fast track, 

to the administration right now? These negotiations are, as you 

know, quite well along, and you could instead focus your attention 

on the TPP and, if you want, on the TTIP, on the European—— 

Mr. BOUSTANY. Look, reclaiming my time, I will say that our 

negotiators need to maximize their leverage in these negotiations. 

And I have had conversations with the Japanese, and they will 

admit that. They are going to put their best deal on the table when 

we have TPA. 

But I want to raise another issue. One of the biggest issues we 

are going to face in Louisiana is the lack of workforce to handle all 

these jobs with the new investment related to trade and energy. 

And I am very concerned about the rigidity in the labor market 

that we have in the United States. We are going to be robbing 

Peter to pay Paul within our State and along the immediate Gulf 

Coast. And we have high unemployment up in the Midwest and 

other areas. 

What can we do, what can this committee do to deal with this 

rigidity in the labor market? 

Mr. HOLTZ-EAKIN. I think you really have a limited number of 

tools in terms of geographic mobility, something which has diminished in the United States. There are certainly a lot of State-level 

policies, not in your jurisdiction, that I would urge the State-level 

Governors to look at. I mean, there is a lot of licensing and the 

like, certification, that just absolutely interferes with labor market 

mobility. I think it is quite excessive in the U.S. 

Those are some things. And then you have the social safety net. 

You want people to work, you don’t want people tied out of the 

labor force because of the social safety net. So, as I said, everything 

work-related in that regard would help. 

56 

Mr. BOUSTANY. Thank you. 

Chairman RYAN. Thank you. 

Time for the gentleman has expired. 

Mr. Blumenauer is recognized. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

And I welcome your words and the spirit with which they were 

offered. And this hearing, I think, was an interesting and thoughtprovoking panel to get us going. The issues that we have referenced, in terms of tax, trade, and health care, are somewhat complex and controversial, but I think they absolutely need to be on 

the agenda. 

But I would argue that there may be something that the panel 

did not address that is tied to this that actually can have an opportunity to bring people together. I am thinking the next hearing 

might well have the president of the AFL–CIO, the president of the 

U.S. Chamber of Commerce, the president of the American Trucking Association, the president of civil engineers, environmentalists, 

truckers, who will unite and say, after 22 years, it might be time 

for us to raise the gas tax and fund our infrastructure. 

President Ronald Reagan, 22 years ago, 23 years ago, in his address for Thanksgiving, made an appeal that when Congress came 

back he wanted them to more than double the gas tax, because 

roads were falling apart, because there were hundreds of thousands 

of people who could be put to work, because it was a user fee that 

conferred benefits on people who paid it. And, in fact, there were 

costs that were being incurred at that time because of deteriorating 

roads. He said it would probably cost the average motorist less 

than a pair of shock absorbers. 

Well, today, we are in a situation, when we talk about productivity, 42 percent of our major urban highways are congested. And 

the estimates, I think, are not controversial across the political 

spectrum. It costs us about $100 billion a year. A third of our roads 

are in poor or mediocre condition, and it is costing the average motorist over $300 a year in damage to their vehicles. 

The S&P economic report—we talk about dynamic scoring. Well, 

I think there is—regardless of how you are going to use dynamic 

scoring or not, the evidence is strong that a $1.2 billion investment 

in infrastructure is going to put close to 30,000 people to work. And 

my friend, Mr. Boustany, wouldn’t have to worry about whether it 

is in regions of high unemployment or not. These are jobs that 

would be available, family-wage jobs, for people across the country—across the country. 

Now, I would respectfully suggest that our committee has a 

unique responsibility. This title for transportation is Ways and 

Means. It is not the T&I Committee. This is our jurisdiction. We 

have not yet had a hearing on this in over two Congresses. We 

were going to have one. Chairman Camp offered it on the floor, you 

will remember, but circumstances didn’t permit. 

I would respectfully suggest that this is an area that there is 

broad consensus, where we can get local governments, State governments, the private sector, the professions, environmentalists, 

and, as I say, truckers and AAA to come together and say, ‘‘Congress, get off the dime.’’ 

57 

When I came to the airport yesterday, the corner gas station was selling gasoline $1.60 a gallon less than the peak this spring. The 

average motorist, if we raised the gas tax 15 cents over 3 years, 

would be paying less than a tenth of what they are already benefiting in terms of reduced gasoline prices. And remember, they are 

paying over $300 a year, damage to their cars. 

I would think we could have a very healthy discussion with experts across the political spectrum on what we could do. If somebody has a better approach than raising the gas tax, supported by 

two commissions from the Bush administration, let’s hear from 

them. 

Chairman RYAN. Unfortunately, the time for the gentleman has 

expired to ask his question. 

Mr. BLUMENAUER. Okay. 

Don’t you think? 

Thank you, Mr. Chairman—— 

Chairman RYAN. You got it. 

Mr. BLUMENAUER [continuing]. For your courtesy. 

Chairman RYAN. All right. All right. 

Dr. Price is recognized. 

Mr. PRICE. Thank you, Mr. Chairman. And I want to join my 

colleagues who have congratulated you. I congratulate you on ascending to the chairmanship of the committee, and I look forward 

to working with you and assisting your efforts. 

I want to first talk a little bit about macroeconomic analysis or 

what my friends call dynamic scoring, which I call ‘‘realistic inaccurate scoring.’’ 

And I would just note with some amusement that all, except for 

Mr. Blumenauer, who used his entire time, all of my friends on the 

other side who asked questions of the panelists, Mr. Johnson and 

others, all of the questions that they asked were an effort to try 

to get an assessment of what a policy change would have on the 

economy. That is called macroeconomic analysis, dynamic scoring. 

It is what economists do every single day. They provide an assessment of the consequences of the policy decisions that we would 

make. So I want to welcome my colleagues to embracing the importance of macroeconomic analysis. 

I want to just state for the record that we are all very pleased 

that the economy has begun to become a little more robust. It is 

also important to remember that this is the slowest recovery of any 

economic downturn in this country ever—ever. There is a reason 

for that, and we as policymakers ought to be asking the question, 

why is that? 

I want to ask Dr. Holtz-Eakin—and I want to highlight your 

quote. I think it is important that we as policymakers ask the 

question, what are the work incentives to any policy endeavor that 

we undertake? What are the work incentives? 

And, to that end, we last week learned that the December jobs 

numbers resulted in a decrease in the unemployment rate to 5.6 

percent. That is a good thing, but it doesn’t tell the whole story. 

The more troubling number was the labor participation rate. At 

62.7 percent, the rate is the lowest that it has been in 37 years. 

You have to go back to the Carter administration to get rates this 

low. 

58 

We also discovered within those job numbers that only 56.6 percent of women are participating in the job market. That number is 

the lowest it has been in 26 years. 

So, Dr. Holtz-Eakin, I wonder if you wouldn’t mind opining as to 

why the labor force participation rates are so slow and maybe provide us with two or three items that we might consider to increase 

participation in the labor market. 

Mr. HOLTZ-EAKIN. So, if you look at the decline, some of it is 

just demographics. We know that the baby boomers are aging and 

there are retirement possibilities out there, and so some of the decline in labor force participation comes from that. 

Mr. PRICE. How much would that account for? 

Mr. HOLTZ-EAKIN. It is about half of the decline, roughly, of 

what we have seen. 

Of the remainder—there was about a 2-percentage-point decline, 

ballpark. About half a percentage point appears to have been sort 

of traditional, cyclical stuff where people got discouraged, left the 

labor force, and may return. And then there is another quarter of 

the phenomenon which is just open to dispute. And will they come 

back is an important question from the perspectives of monetary 

policy, because, you know, how tight is the labor market, and when 

will wage inflation start to push into consumer inflation. It is also 

important from the point of view of productivity, and, you know, 

what are we going to have in the way of worker ability going forward. 

There, I tend to be in the camp that says they are not coming 

back. It has only been in the latter half of 2014 that, if you looked 

at an unemployed person, that the probability they would get a job 

exceeded the probability they would leave the labor force. And now 

it is just barely winning the race getting back to the job. If you look 

at someone who is out of the labor force, they are just not coming 

back. It is over 90 percent for both men and women. They just stay 

out. 

So I think we have discouraged a chunk of workers in a very big 

and substantial way. And we ought to reexamine, from start to finish, the kinds of anti-work incentives that are in all of our social 

safety net programs. Because they have to be relying on the social 

safety net, to some extent, and we ought to just scrub them. 

Mr. PRICE. Do you want to highlight two or three of those? 

Mr. HOLTZ-EAKIN. Well, I mean, we know that a big chunk of 

this is going to come from single men whose labor force participation has gone down a lot. And the EITC is not particularly beneficial toward that. That is something that ought to be looked at. 

Another big decline has been in teens. One of the reasons I am 

deeply skeptical of the virtues of a minimum-wage increase is that 

we were raising the minimum wage through the great recession 

from previous legislation and teen departure from the labor force 

has been enormous. And that is the starting-out jobs that people 

rely on to get into the career ladder. 

And so, you know, I think we ought to look at, you know, what 

is going on with the teens, what is going on with the single men. 

And then, for the workers we have, don’t let them leave. Look at 

the old-age issues. 

Chairman RYAN. Thank you. 

59 

Mr. PRICE. Thank you, Chairman. 

Chairman RYAN. The time for the gentleman has expired. 

Mr. Kind is recognized. 

Mr. KIND. Thank you, Mr. Chairman. And I, too, want to congratulate my friend and colleague from Wisconsin for his chairmanship and look forward to working with you and see if we can, as 

a committee, at least find some common ground on some crucial 

issues facing our Nation. 

Mr. Johnson, you can comment on my preface to the question I 

am going to give to you, or not. But we are having a hearing today 

on the state of the economy, where we need to go as a Nation, the 

type of policies that make sense. But it is difficult in the current 

environment because it seems as if the parties are on two different 

planets. We keep talking past each other. 

And one of the concerns I have with many of my friends on the 

other side is—and most of the Republican economists, quite frankly, that come before us and their testimony or hearings or suggestions is there seems to be a three-note song that they love and repeat over and over again regardless of economic conditions. It is always about tax cuts, especially for the most well-off in our Nation. 

It is always about spending cuts, including important investments 

we should be making in the human capital of our Nation. It is always about deregulation, including deregulating the Wall Street 

banks under Dodd-Frank right now. And it doesn’t matter what the 

economic circumstances are that we face at the time; it is the same 

three notes over and over and over again. 

Now, I am a former quarterback. I had a chance to play at Harvard for a few years in that. But I knew that if a play isn’t working 

you have to change it in the huddle or on the line of scrimmage 

and call an audible. And it is an inability in order to call an audible, given the economic circumstances that we face, that leads to 

the gridlock and the head-butting. And it seems to me that it is 

less data- and fact-driven and more just ideological and philosophically driven. 

And that is where there is a problem. Because there is going to 

be an appropriate time to cut taxes and to increase spending or to 

raise taxes and reduce spending or to deregulate or to call for more 

regulations. And it is the ability to distinguish between the two 

that would turn us into a real partner with the private sector when 

it comes to economic growth and job creation. And it is that inability that has us tied up into knots. 

And you can comment on that, but what I want to ask you 

about—and having had a chance to read your testimony here, on 

page 2, item 9—and to get back to an original point you made in 

your opening statement—you said, and I quote, ‘‘Our economic recovery was made much more difficult by the policies of budget 

issues, including the lack of consensus regarding the need to support the economy, actual or near government shutdowns and repeated confrontations over the debt ceiling. In particular, threatening to default on our country’s national debt creates a great deal 

of uncertainty in that country. Such uncertainty discourages investment and consumption.’’ You cite the debt-ceiling standoff, the 

fiscal-cliff standoff, all the uncertainty that it created. 

60 

Would you care to expand on that with some recommendations 

on how we can overcome that in the future to really be a partner 

with the growth that we need right now? 

Mr. JOHNSON. Well, Congressman, my recommendation is, 

‘‘Don’t do it.’’ 

I testified to this committee, I think it was 2 years ago, under 

Chairman Camp, exactly about these points. And I beseeched all 

the Members not to engage in this kind of destabilizing confrontation politics where you threaten to default on the debt. That really 

is crazy, to use a technical term. 

To threaten government shutdowns and generate this uncertainty for everyone in and around government contracting, including the workers, again, that is not helpful. You can see—and this 

has been measured, and this was in my previous testimony to this 

committee—the wave of uncertainty spikes for everyone. And we 

know that kind of uncertainty discourages investment, discourages 

consumption, discourages hiring—all the parts of the recovery that 

Dr. Price was talking about. 

That is what we—absolutely all Americans must want everyone 

to get back to work, and then we can sort out how we improve opportunities and improve growth. But if you generate that kind of 

uncertainty, you will slow down the economy for sure. 

Mr. KIND. Now, there has been a lot of focus on tax reform and 

the impact it is going to have, but, again, if you look at the past 

data, the facts, you talk to businessowners themselves, I think the 

impact of tax policy is way overstated and way overplayed because 

of the multiple factors that businesses and owners have to make 

every day in regards to hiring decisions, sales, marketing, you 

name it. There are just many multiple factors in that. 

Can you speak upon that in regards to the whole dynamic-scoring issue that we are talking about and how hard it really is to predict the macroeconomic impacts of virtually any of the policies that 

we have coming out of this place? 

Mr. JOHNSON. Well, first of all, Congressman, I think you are 

absolutely right, it is multidimensional, the environment for business. And you should look at the available measures, including the 

one I cited before, these doing-business indicators. We are number 

seven in those measures. But they look at two cities for the U.S., 

New York and L.A., and the problems they identify are more about 

real estate and local regulatory issues, not about the Federal Government. 

So I think benchmarking what business absolutely and actually 

needs makes sense. And I think you are going to see a range of 

things, including the availability of skilled labor. That is very important. 

Mr. KIND. It is also interesting, the last major tax reform in 

1986 resulted in one of the largest corporate tax increases in our 

Nation’s history at the time. And that was under President Reagan’s administration. 

Chairman RYAN. Thank you. 

Time for the gentleman has expired. 

Mr. Buchanan is recognized. 

61 

Mr. BUCHANAN. Thank you, Mr. Chairman. And I agree that 

this committee has got a real opportunity to work together and get 

some big things done right now. 

I want to touch quickly on the discussion earlier one of my colleagues brought up about corporate rates, the highest in the world. 

I happened to have the opportunity in the late 1980s to be in Hong 

Kong—flat rate, no deductions, or minimal deductions, was 20 percent. I was back there a couple, 3 years ago. They lowered it to 16. 

I asked them why. I said, 20 is more than fair, it seems to me. And 

he said, we need to be competitive in the world. 

So I think we agree that we need to do something with corporate 

rates. My concern is passthrough entities. You have touched on it 

a little bit. The effective rate in the country, when you add everything, is 44. If you add in State income tax for a lot of these States, 

the average is, what I read, is 49.6. So if you look to move corporate rates from 35 to 28 to 25, whatever they are thinking about 

doing there, I don’t know how you can be competitive, a lot of businesses with C corps, in terms of passthroughs. 

One statistic I got is 99 percent of the companies registered, 

Florida and other places, are—take 95, 99—are small businesses. 

A lot of them are, obviously, passthrough. Sixty percent of the job 

creation comes through these businesses and many of these 

startups. 

And I would also say, in terms of reducing the rate, if you are 

a passthrough entity and you happen to have 70 employees and 

you are giving half of your money back to the various governments, 

it is pretty hard to be able to grow your business, add equipment, 

grow jobs when you are giving of it half away. 

My point, I guess, to the professors here today is your thoughts 

in terms of, if we lowered the rates in terms of passthroughs as 

well as C corps, what difference would that make in terms of growing the economy and creating jobs? 

And, Professor Holtz-Eakin, would you expand on that? 

Mr. HOLTZ-EAKIN. I think Dr. Feldstein mentioned earlier, you 

know, it is a bad tax policy that treats the same business activity 

differently depending on whether it is a passthrough or a C corporation. And that would drive you to organize your business on 

the basis of tax considerations, not on the basis of business decisions. That is the hallmark of the tax interfering with the efficiency 

in the economy. 

In the work I have done on sole proprietorships, partnerships, 

entrepreneurial kinds of ventures, relatively small, they are disproportionately sensitive to tax considerations. They are heavily reliant on their cash flow, in many cases, and so lowering taxes gives 

them greater cash flow. They can, as a result, invest more, hire 

more. And so you see strong linkages between tax policy toward 

those entities and their capacity to grow, expand payrolls, invest. 

I would be happy to get the research and citations to you, but 

they look much more sensitive on that front than do the larger C 

corps in terms of just pure rate sensitivity. 

Mr. BUCHANAN. Yeah. My sense, as someone who has been in 

business 30 years, you just see a lot of people moving from 

passthroughs, S corps, and partnerships and moving back to C 

corps. 

62 

Mr. Feldstein, what are your thoughts? I know you touched on 

it, but could you add anything more to that conversation? 

Mr. FELDSTEIN. Well, but as you said, it is an option that companies have. So they can always go back to the C corp if that offers 

lower overall effective tax rates. And the reason that most corporations, small corporations prefer to be an S corp or some other form 

of passthrough is they avoid the second round of taxation on distribution of their corporate profits. 

So I think it is a complicated issue. There isn’t any simple solution to how you integrate the two. But I think the basic principle 

ought to be to take taxes out of the choice between whether you 

are an S corp or a C corp. 

Mr. BUCHANAN. Thank you. 

I just would add that I remember, in the late 1970s, early 1980s, 

we were all C corps. Then we went to S corps. Then we went to 

LLCs. And now we could come full circle and go back to C corps. 

But I think it would really hurt businesses, especially small businesses and startups, if we don’t address C corps as well as all the 

passthroughs as well. 

Thank you. I yield back. 

Chairman RYAN. Thank you. 

Mr. Pascrell. 

Mr. PASCRELL. Thank you, Mr. Chairman. And good luck. 

Mr. Chairman, what I have noticed—— 

Chairman RYAN. That means a lot coming from you. Thank you. 

Mr. PASCRELL. You are welcome. 

Mr. Chairman, I have noticed that we have lowered the decibels 

but we are still in ironclad position here and there. It is going to 

take a lot more than talk to get us out of the logjam. 

And just one example. I hear from your side all the time about 

discussing and debating the business tax extenders. I hear nothing 

about personal tax extenders. And I think that it has become quite 

obvious, if we are going to come to any agreements, that there need 

to be both in consideration. And I ask that you do that. 

And I sincerely wish you the best of luck. You are going to need 

it. 

The questions at hand, I think—and one I would like to ask Mr. 

Johnson on trade. 

You wrote an article in 2013 about what we needed to avoid in 

trade deals which look lovely from the outside. You talked about 

trade expanding unfairly at times, without a level playing field 

that protects our workers who benefit from free trade. 

Is it the workers in the factories or is it the shareholders and executives at the top that you are talking about? 

Mr. JOHNSON. Well, Congressman, as you know and as we have 

been discussing all morning, most of the gains in terms of income 

have been realized at the top of the income distribution over the 

past 30 years. And much of that is for management and for CEOs, 

although, obviously, highly skilled labor has also done well. 

And I think this is the important point about TPP, which is really, as I understand it, an issue before this committee, which is: Do 

you want to engage with the details? 

For example, on the auto industry, a point Mr. Levin has made, 

Japan has had a very closed market for cars and for auto parts for 

63 

a long time. Are they really offering to open that up to U.S. exports? That would seem like an appealing opportunity. To what extent are they going to be held responsible for that? 

This is a link you can draw to jobs but only if you get into the 

details. If you grant TPA, you get the fast track, you are not going 

to be engaged in that discussion. 

I think I have heard committee members say they want to think 

about all of these pieces and how they can be helpful. Engage with 

TPP, not with the TPA, not at this stage. You don’t need the TPA. 

Engage with the TPP. That is the way to have the conversation. 

Mr. PASCRELL. Mr. Feldstein, back in April 2009, you wrote a 

column for the Financial Times with the headline, ‘‘Inflation Is 

Looming on America’s Horizon.’’ I think maybe you can recall that. 

In the almost 6 years since you wrote that piece, inflation has been 

consistently below the Federal Reserve’s 2 percent target while the 

unemployment rate continued to be elevated, causing real-world 

pain and hardship for a lot of Americans. 

Recently, with the economy improving, thanks largely to some 

specific policies that were passed between 2006 and 2010, the unemployment rate has been dropping, but we are still a long way 

away from a healthy economy. We all agree on that. 

Yet, despite your previous predictions of inflation, you have continued to call for the Federal Reserve to act aggressively—your 

word—despite the fact that our recovery is nowhere near complete 

and there are few signs that inflation will soon hit or even exceed 

the Federal Reserve’s target. 

Why do you think your prediction in April of 2009 did not materialize? 

Mr. FELDSTEIN. Thank you for that question. 

I think, basically, Federal Reserve policy changed after that. We 

got the so-called unconventional monetary policy where the Fed, 

because they were authorized to pay interest on excess reserves, induced the commercial banks to deposit the extra funds that they 

got from the quantitative easing policy to deposit that back at the 

Federal Reserve. So we never saw the increase in the money supply 

that looked like it was going to happen back in 2009. 

So I think the Fed handled this very well. And, ultimately, as I 

said earlier in my comment, I think it was the Fed policy that gave 

us the strong recovery rather than fiscal policies in 2009 and 2010. 

Mr. PASCRELL. Thank you. 

Yield back. 

Chairman RYAN. Time for the gentleman has expired. 

Mr. Paulsen is recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. And thanks for calling this hearing. I think it is aptly titled, Moving America Forward, with a new Congress, in particular. 

And the recent improvements we have seen in the economy is 

certainly welcome news, but it is certainly also drowned out by 

knowing, as has been stated by several Members already, the worst 

economic recovery since the Great Depression. The slowest economic recovery ever. 

We can’t even get to an average. I mean, an average is a C 

grade. We should be able to at least get a C grade. And when 

64 

wages are flat and household incomes are flat, people are taking 

notice. 

And I think the numbers that were—began with Mr. HoltzEakin. You started out with saying the standard of living that 

Americans have enjoyed and appreciated, normally that is doubling 

every 32 years or so, and now it is going to double every 90 years. 

So you have added 60 years onto the standard of living for an 

American family. And it is probably no surprise, then, that a lot 

of folks in our country think this is the new normal. I think the 

public is accepting it. Unfortunately, many elected officials are accepting it. And we can do a lot better. 

And when you see that 72 percent of Americans just a few weeks 

ago think the economy is still in recession when we have been out 

of recession for 51⁄2 years, actually, is pretty alarming. 

But I think what is most troubling is that two-thirds of Americans, if you ask them, you know, ‘‘Are your children going to better 

off than you are?’’—two-thirds of Americans say, ‘‘No.’’ I mean, they 

don’t see a bright horizon. 

And we know that the policies we have an opportunity to have 

an impact on in a new Congress now can make a difference in tax 

policy, fixing a broken Tax Code—we talked about that—trade policy, knowing 750,000 jobs in my state of Minnesota are tied to 

trade. 

We have got huge opportunities with the transportation partnership, with the European Trade Agreement. Obviously, getting 

Trade Promotional Authority is key to that, though, if we are going 

to get the best deal on the table. I mean, there is no doubt about 

that. 

But, also, I want to talk about regulation. Maybe, Mr. HoltzEakin, you can just mention real quick: Is it possible to measure 

how much expansion of regulations in recent years are costing our 

workers, is costing the economy in slower growth? And, if so, how 

much, if you can measure that? 

Mr. HOLTZ-EAKIN. Well, thank you for the question. 

As I hope you know, at the American Action Forum, we have an 

ongoing attempt to measure the regulatory burden in the United 

States where what is called the Regulation Rodeo Database tracks 

all regulations coming out of every agency in the Federal Government and looks at a couple different measures of their burden, all 

of which are incomplete, but it gives you some sense. 

First is the self-reported compliance cost. Agencies say, ‘‘How 

long—how much will this cost to comply with?,’’ and we can total 

up those compliance costs. 

There is the paperwork burden, you know, how many hours. And 

in my written testimony, there is some measure of the paperwork 

burden hours from different regulations in the Affordable Care Act, 

for example. You can look at that comprehensively. 

And I would be happy to get you the totals. But if you look at 

2014, for example, you know, final regulation added just in terms 

of compliance costs about $20 billion in 2014 alone. If you think 

about doing that every year, that is a $200 billion tax increase. 

And if this committee was debating a $200 billion tax increase, 

we would have a strong discussion about whether it was economiVerDate Sep 11 2014 01:10 Jun 10, 2017 Jkt 022376 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22376.XXX 22376
65 

cally desirable, what would be the growth impacts, you know, how 

did we want to think about that. 

That debate doesn’t go on in the regulatory front. And I think, 

if you look back over the past 6 years, it has been an extraordinary 

period for regulation, and these costs display that. 

The only comparable period in my recent memory was post-September 11th, 2001, when the Bush Administration did a lot of national security anti-terrorism regulation, which was comparably 

costly. These are—these are big impacts on the economy, and I 

think they merit consideration. I would be happy to get you the 

numbers. 

Mr. PAULSEN. Yeah. 

And, Mr. Chairman, I know we will be looking at that in the 

coming months. 

Let me ask one other question. Because I know—in the 1990s, 

I understand that we were successful as a country in boosting the 

labor force participation rate, increasing take-home pay and reducing poverty, all which has gone the opposite direction right now in 

these last 6 years currently through welfare reforms. 

Could another round of welfare reform do the same? Could it improve those numbers? Can we do more on welfare reform? Should 

we be looking at that? And what are some ideas? Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. As I said, I think we need to look at the 

work incentives. The 1990s have lessons for the U.S. and, also, 

some things that are different. 

The economy grew and—and there is no substitute for rapid economic growth. And improving the long-term growth rate of this 

economy is, I think, the number one priority that makes the welfare reform of the 1990s easier to both enact and for those participants to be successful. So you want it in that kind of environment, 

and I think we should try to do that again. 

I don’t think you want to replicate the dot-com bubble, which led 

to an enormous inflow of revenues, making it easier to balance the 

budget. You want to do it the old-fashioned way and not rely on 

a bubble that then breaks in 2001. 

And the kinds of spending restraints that were successful in the 

1990s are no longer available. That was an era where discretionary 

spending and a peace dividend got us to a balanced budget. 

The spending problem now is in the mandatory programs. The 

discretionary part has been done. And so now the hard work remains. This is a different world. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Chairman RYAN. Thank you. 

Mr. Davis is recognized. 

Mr. DAVIS. Thank you very much, Mr. Chairman. And I thank 

you for calling this hearing. 

And I certainly thank our witnesses for participating. 

I also want to add my congratulations to you, my friend from the 

Midwest, for your ascendancy to the chairmanship of this tremendous committee. 

You know, I was having dinner with two of my grandsons the 

other day, and I asked them if they would pass me the glass of 

water. 

66 

One said, ‘‘Granddad, do you mean the water that—the glass 

that is half empty?’’ The other one said, ‘‘Or do you mean the one 

that is half full?’’ And, of course, there was only one glass. They 

both saw the same glass, but they saw it differently. 

And like all of the Members of this committee, I am indeed 

pleased that our economy has made tremendous progress in the 

last several years. More people are working. Unemployment numbers are down. The economy is moving forward. And so there is 

reason for what I call joy, but not jubilation. 

Not jubilation because there are still too many people being left 

behind, too many people being unemployed or underemployed. People who even during this frigid climate throughout many areas of 

the country do not have heat in their homes, and others do not 

have homes to heat nor jobs for which to apply. 

Dr. Johnson, could you share what you would recommend in 

terms of policies that could keep our economy moving forward and 

could reach back and include in it some of those millions of people 

who are being left behind. 

Mr. JOHNSON. So, Congressman, I think that is the right way 

to think about the issue. And in section—second section of my testimony, I did try to lay out a range of ideas there. 

I think there are some very specific measures this committee 

could take up. Extending, expanding, the earned income tax credit, 

for example. Raising the minimum wage, which is not entirely 

within your jurisdiction, but certainly highly relevant to it. Support 

for education. Support for education that is available—early childhood education and post-high school education for low-income people, the Pell Grants, for example. 

I think there is a long list of specifics. And I think, if you are 

looking at the Tax Code and you are considering tax reform, it is 

very important to do that in a way that is revenue neutral so you 

keep the revenue in the budget. We have an aging population. We 

have continuing pressures from technology, from globalization. 

The Affordable Care Act has so far done a remarkable job in 

terms of slowing down healthcare inflation. But this is an aging 

population. We need to have the revenue there. We need to have 

the revenue base. And all of the proposals I have heard so far are 

cutting taxes and giving away revenue. Nobody likes taxes. But 

who has the responsibility here? 

Mr. DAVIS. Thank you. 

And let me just ask if each one of the witnesses would reply to 

this comment: The United States has the highest share of income 

going to the top 1 percent of earners compared to the other G7 

countries. 

Does this policy—and the trend seems to be continuing to go. 

Does this seemingly help expand our economy? Does it have any 

impact on it? Is it intended to? Or what would your response just 

simply be? 

Mr. HOLTZ-EAKIN. It is a reflection of the global trends and the 

return to skills, and it is not unique to our economy. It has been 

going on since the 1980s. We have seen the top rising continually. 

We saw the bottom fall. It stopped. 

And I would point out that all of the evidence done at a big Harvard study on the mobility, the ability to get from the bottom to 

67 

the middle and the middle to the top and top to the middle—that 

is part of mobility, too—says that mobility is unchanged over the 

past 50 years. 

So, for me, in reading that evidence, that says people still have 

a chance to get ahead in America. The rich can be rich in America. 

But we are not growing fast enough that we are happy with what 

is going on at the bottom. 

So I would focus on anti-poverty, on the ability to have the low 

levels of income be better in the future than they are at the 

present, that that gives people hope. That is the focus, the bottom 

and the poverty, not the top end. 

Mr. JOHNSON OF TEXAS [presiding]. Thank you. The time of 

the gentleman has expired. 

Mr. Marchant, you are recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

I would like to ask the panel some questions about the recent 

phenomena that has taken place in Texas and North Dakota in the 

oil patch. 

I think it is arguable that, over the last 5 years at least, the exploration, discovery, transmission of oil and gas in the United 

States has been a major factor in the economy picking up and probably the most robust part of the economy. 

And now that we have seen a significant price decrease in oil and 

we are seeing in my—I drive every week to the ranch on the weekend, and I gauge how—what prices are by a certain gas station on 

the highway. And it was 1.64 for regular gas this weekend. 

And my question is: Do the gains to the consumers and the lower 

cost to all businesses across the spectrum and their fuel costs offset 

the loss of economy that has been created by the boom in the oil 

patch over the last 5 years? And if we reach some stabilized level 

of oil prices at a significant lower amount, is this going to have any 

kind of long-term effect on the economy? 

And I would like each of your opinion. 

Mr. FELDSTEIN. Well, I think the decline in oil prices that we 

have experienced recently has been a very big plus for the U.S. 

economy. I think that is a view shared by the Federal Reserve and 

others, that we are going to see stronger growth because consumers’ real incomes have gone up. 

Now, in part, we benefit at the cost of other countries that—from 

which we import oil. Most of it is internal. And, therefore, oil companies—U.S. oil companies are taking a hit at the same time that 

consumers are directly better off. 

But there is no question that the combination leads to stronger 

growth, higher real incomes, more consumer spending, better job 

creation in the near term. 

Mr. HOLTZ-EAKIN. The energy explosion the U.S. has had a 

dramatic impact on the economy over the past 5, 6 years. And I 

have never seen anyone do a full accounting of sort of what the 

stimulus was from the decline in that imports was important. 

The ability of chemical manufacturers to move back to the 

United States because of the cost of natural gas and other feedstocks, very important impacts. The direct employment effects in 

the oil patch, things like the income generated. 

68 

But certainly it changed what used to be a world in which oil 

prices up, unambiguously bad for the United States, oil prices 

down, unambiguously good for the United States, to a more 

nuanced position. 

I still think that the bottom line is what Dr. Feldstein said. On 

a balance, we benefit from having these lower oil prices. But I 

think, if you look forward, some of the weakness right now is just 

global weakness. And as other economies grow more rapidly, we 

will see world oil prices go back up. 

They appear to be headed to stabilize in a range that will allow 

for profitable exploration and extraction in the United States. So 

I don’t see any real long-term problem at the moment. 

I would not be surprised if we saw a downturn a bit in the oil 

patch because of the transitorily low world oil prices. 

But I think, on balance, this is a good thing for the United States 

and it has made this a very different world for—from the perspective energy policies. 

Mr. MARCHANT. Thank you. 

Mr. JOHNSON. Congressman, on balance, I agree it is good. But 

I would stress two things. 

First of all, oil prices go up and they go down. You need an economy with a flexibility on the investment side. And there is a remarkable amount of technological innovation that we have seen 

through these investments in the past few years. 

And, secondly, on job mobility. So one thing the Affordable Care 

Act did that you may or may not like is it reduced job lock. It reduced the previous tendency of people to stick with a certain job 

or to stick with an employer even if there were good opportunities 

elsewhere because they didn’t want to give up on the health care. 

Whatever you do, please do not return us to a situation where 

we have greater job lock because we need to be able to move people 

and capital to these new opportunities. And right now we are pretty good at it, better than we were. 

Mr. HOLTZ-EAKIN. Just add one thing. 

Oil and natural gas aren’t identical in that most of the production out of a gas well is in the first year. And so, if you see gas 

prices go down, you will see a bigger drop-off in exploration. They 

can ramp it up quickly as well. 

It is the oil producers who sort of have to drill a well and count 

on getting sustained relatively high prices to make it worthwhile. 

They are the tougher call in this environment. 

Mr. MARCHANT. Yield back. 

Mr. JOHNSON OF TEXAS. Thank you. The time of the gentleman has expired. 

Ms. Black, you are recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. 

And just in the absence of our chairman, I want to congratulate 

him as well. So everybody can tell him that I did so, since all the 

Members have up to this point. 

I want to go to the issue of capital. There was a very interesting 

talk that the chairman and the founder of FedEx gave to the U.S. 

Chamber a couple years ago. 

69 

And I was really struck by what he said there, and it was so simple. And maybe because I am such a simple-minded person and not 

an economist, as you all are, it made so much sense to me. 

And we have talked about how do we have sustained economic 

growth, how do we have good-paying jobs. And he said in his talk 

it is about capital and, if you don’t have an influx in capital, you 

are not going to create a job, you are not going to create a business 

which creates a job and, by that, there are taxes that are paid only 

to the product or the service that is produced as well as the income 

of those workers. 

And so, as we look at capital and how we are seeing that the influx of capital is not occurring, I want you, Mr. Holtz-Eakin, to 

start us out with just the thoughts on what is it that keeps someone who would essentially be putting capital into the market because they would see a return—what is it that keeps us from seeing that influx of capital right now? Is it taxes? Is it regulation? 

Is it the issue of trade? Or is it all of those things combined? 

Mr. HOLTZ-EAKIN. I think you get impacts from all those 

things, quite frankly. If you look at the things that the Government 

can do to affect the incentives to save and invest, at the very highest level, the Federal budget is very anti-growth. 

Basically, it taxes both consumption and the return to capital 

and uses it largely to subsidize consumption. Right? We give people 

health care. We give people subsidies because we want them to live 

better. That is consumption. 

So, as a Nation, it is anti-saving, anti-investment, anti-accumulation of capital. It runs deficits and competes with the private sector 

for that capital. 

Within the budgetary framework, the large spending programs, 

which are all about consumption and largely old-age consumption, 

are crowding out any genuine investments in research, infrastructure, and education that the Federal Government makes. So we 

have a budget that is very anti-accumulation of capital and antisaving investment. 

The Tax Code can be the very same way. One of the reasons I 

am a big fan of the kind of Tax Code that Mr. Nunes is pushing 

is it allows for rapid capital recovery. It is essentially expensing of 

all capital investments. It is a powerful incentive and something 

that we need to get into the Tax Code as much as possible, and 

it treats all capital the same. 

You hire a worker and you educate him, you get to expense it. 

You buy a piece of machinery, you expense it. You put a worker 

in a lab for R&D, you are expensing it. You treat all the capital 

the same. That is a good thing to do. 

And then, at this household saving, we don’t save very much. I 

think Dr. Feldstein has done more research on this than almost 

anybody. 

It is tax rules. It is the rules for higher education finance and 

why would you save for college education when the rules say we 

are not going to give any scholarships to you if you do. What about 

saving for retirement? What happens with Social Security and 

Medicare and the incentives to save? 

70 

All of those things are important, but all of it comes back to are 

we going to save and are we going to invest. And we have got to 

look at those things. 

Mrs. BLACK. And, Mr. Holtz-Eakin, you keep talking about incentives, as all of you have. I think that is one of the things that 

we ought to be thinking about in this committee, is every time we 

think about a policy, we have to think about is it incentivizing 

what we want. 

And, unfortunately, I think, as you have already indicated, 

that—there are many policies that we have that are not 

incentivizing what we want. And that is what I hope that we will 

continue to do as we talk about policies in this committee, is to be 

able to tie that—— 

Mr. Feldstein, would you like to weigh in on this issue of capital? 

Mr. FELDSTEIN. Well, the key is saving. If we don’t save, we 

don’t have capital. So the household saving rate is half—or closer 

to a third of what it was from 1960 to 1985. We did very well during those years. 

And, yet, now our saving rate is very low. And why? Partly because of the incentives to dis-save through mortgage deductions, 

partly because of other policies which substitute for saving. 

So we really should be examining what kind of policies we have 

that drive savings down for American households. 

Mrs. BLACK. Mr. Johnson, I have 30 seconds left, if you would 

like to weigh in from your perspective. 

Mr. JOHNSON. Ms. Black, I would say, when we discuss capital, 

please don’t forget human capital, because one thing we have 

learned from 200 years of experience is that the prosperity of any 

country depends, first and foremost, on the education, on the skills, 

on the health of its citizens, its inhabitants, everyone. 

And please, when you are considering what the Federal Government does and doesn’t do, remember social insurance was introduced to protect people, to encourage them to take risks, to encourage them to build the country, particularly after World War II, and 

it was great success. Please do not give that up. 

Mrs. BLACK. I know—reclaiming my time—I know I am out of 

time—but remembering that it is the private sector that really 

helps to grow the economy that makes all these great things possible. 

Yield back. 

Mr. JOHNSON OF TEXAS. Thank you, Ms. Black. 

Mr. Reed, you are recognized. 

Mr. REED. Thank you, Mr. Johnson. 

And thank you, Mr. Chairman, for holding this hearing today. 

Fascinating conversation. And we have covered a lot of territory. 

And I am not going to rehash that area, but also just say there is 

huge opportunities I see not only in the energy field, but in U.S. 

manufacturing in particular. 

But I do want to focus on one thing that the chairman said in 

his introductory remarks about the country’s debt crisis and the 

debt crisis that potentially is that dark cloud that hangs over us. 

Now, Mr. Johnson, I read your testimony and you referenced the 

fact that we should not threaten the ability of the U.S. to pay its 

debt or the threat of not paying its debt causes some real destaVerDate Sep 11 2014 01:10 Jun 10, 2017 Jkt 022376 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22376.XXX 22376
71 

bilizing impacts, and I think you were referring to the debt ceiling 

debacles and fights that we have had here in Congress. 

But would you all agree, as economists, that there is a point in 

time with our debt load in America when it is just not going to be 

sustainable if we continue on the path that we are on? 

I mean, we are championing the fact that we have lowered the 

deficit per year. Great. I am all in. I appreciate that. But it is not 

getting to the root problem. Our national debt continues to grow. 

At what point in time—because you have got two pieces of debt, 

principal and interest. So at what point in time does the principal 

become unsustainable? Eighteen trillion is where we are at today. 

At what point in time can you continue policy from the Federal Reserve that keeps an interest rate at zero? 

As an economist, I can’t imagine any of you would agree that is 

possible. I mean, as a non-economist, I would say that is impossible. So we are going to have an interest rate issue. At some point 

in time, inflation will come back. 

Does anyone on this panel think that we have tamed inflation 

and it will never be an issue to face America in the future, as 

economists? Correct? 

Everybody agrees that it is out there. 

So if you raise interest rates, at what interest rate does it become unsustainable? Can anybody give me any numbers? Maybe 

Mr. Feldstein. 

Mr. FELDSTEIN. Well, the Congressional Budget Office reminds 

us that interest rates, if we don’t have an increase in inflation, will 

rise to 4, 41⁄2 percent. 

And given the size of our debt, that is going to be a very substantial increase in our annual deficits and, therefore, in the growth of 

the debt. 

So that is why the CBO tells us that, if there aren’t changes in 

entitlement programs or in revenue or some combination of the 

two, we are heading from a debt-to-GDP ratio of 75 percent, we are 

heading to 100 plus, and that gets us into serious trouble. 

And we have to remember that about more than half of that debt 

is held by people outside the United States. At some point, they 

may say, ‘‘Gee. This isn’t such a good idea.’’ And if that happens, 

interest rates rise even further. 

So I think it is really important for this committee and this Congress to find ways to slow the growth of spending and to use tax 

reform, limiting tax expenditures, to raise revenue. 

Mr. REED. Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I would just add to that, if—this is not 

years and years and years and years in the future. This is relatively imminent. Over the next 10 years, the CBO baseline, autopilot, says that the debt-to-GDP ratio starts to rise and that, when 

you get 10 years from now, we are running a trillion-dollar deficit, 

roughly 800 billion of which will be interest on previous borrowing. 

So we are perilously close to borrowing simply to pay previous 

interest. That is a debt spiral, and that is not a good thing. 

Mr. REED. And that is where I wholeheartedly agree with you. 

Because doesn’t that put the whole thing at risk, all of our concern 

that we share? Mr. Johnson. 

Mr. JOHNSON. Yes. 

72 

Mr. REED. And my colleagues on the other side of the aisle, I 

don’t question that they care for American lives. I care for American lives. 

And if we get into the death spiral, don’t you jeopardize it all? 

And shouldn’t we, as responsible legislators, do the right thing, 

have the vision to deal with it now rather than later? 

Mr. JOHNSON. Yes, Mr. Reed. And there are three implications 

that I hope we can also agree on. 

First, don’t give up on Dodd-Frank. The big hit to our debt came 

from the financial crisis. It came from the deep recession. Do not 

allow the financial sector to do that again. That is Job No. 1, absolutely. 

Second, be revenue neutral. Do not give up on the revenue. We 

need to keep a robust revenue base as the population ages. 

And, third, you have got to control healthcare costs. It is mandatory. That is—what Mr. Holtz-Eakin said is right. It is health care. 

It is health care, not just Medicare. It is health care. The Affordable Care Act has tilted the curve on that. We will see if they can 

keep at it. Please don’t give up on that either. 

Mr. REED. But the costs keep going up in health care. It just 

the growth rate has gone—— 

Mr. JOHNSON. Yes. It is demographics and it is technology we 

have to take into account. 

Mr. REED. Reclaiming my time, reclaiming my time, I think we 

all can agree that we have to do something on the debt issue. 

And, with that, I yield back. 

Mr. JOHNSON OF TEXAS. The gentleman’s time has expired. 

Mr. Thompson, you are—— 

Mr. THOMPSON. Thank you, Mr. Johnson. 

And my congratulations to Chairman Ryan as well. 

A number of the witnesses talked about tax expenditures, and 

there were some questions about that already today. 

Just yes or no. Should tax expenditures be revenue neutral? And 

we will start with Mr. Feldstein. 

Mr. FELDSTEIN. I think tax expenditure reform changes limits 

on tax expenditures. 

Mr. THOMPSON. Should they be revenue neutral? 

Mr. FELDSTEIN. No. 

Mr. THOMPSON. No? Okay. 

Mr. FELDSTEIN. I think they should both raise revenue and be 

used to lower tax rates. 

Mr. THOMPSON. Thank you. 

Mr. HOLTZ-EAKIN. I would have them be revenue neutral. 

Mr. THOMPSON. Mr. Johnson. 

Mr. JOHNSON. Well, I think the entire package of tax reform 

should be revenue neutral. But if you are considering—but I think 

you have to also recognize this point about the trajectory of 

healthcare costs going forward. 

You need a revenue base that is going to grow to support whatever forms of health care you think the government should and will 

be buying. 

Mr. THOMPSON. Thank you. 

A number of folks mentioned the fact that our recovery, notwithstanding the fact that it is pretty remarkable, has taken too long. 

73 

I just think it is important to point out that, under the last administration, our economy wasn’t just run into the ditch, it was run 

over the cliff. We had a long way to go to climb out. 

And I think it has been mentioned a couple of times—and I just 

want to reiterate it—that there was some impediments in us getting out of that—getting up from out of that cliff. Government 

shutdowns certainly didn’t help. Near defaults certainly didn’t 

help. And a repeated debt ceiling crisis certainly didn’t help. 

So given where we were and where we are today, it has been a 

pretty remarkable recovery. I don’t think anybody thinks this is 

where we need to stay. We need to keep going. But we have done 

quite a bit, and it is fairly impressive. 

And, Mr. Johnson, I would like to hear from you. To what do you 

attribute our growth in the economy and the progress that we have 

made? 

Mr. JOHNSON. Well, Congressman, the recovery is due, in part, 

to the fact that it is a strong, vibrant Nation. More than 300 million people took an enormous punch in the face from what happened in the financial sector and managed to get themselves back 

off the floor. So I think the resiliency of the American people is 

really important. 

They needed assistance. The Central Bank absolutely assisted, 

and I think they should get kudos for what they did. And they 

needed help from fiscal policy. This is standard. It is out of the 

textbook. 

And my colleagues here have in other circumstances spoken in 

favor or said positive things about stimulus of some kind when the 

economy goes down in the face of that shot. 

So the disappointment, to me, Mr. Thompson, is that we didn’t 

all work together. It is, I think, rather sad and unfortunate and 

had a negative consequence that slowed the recovery that we had 

so much confrontation over fiscal policy when, in fact, there was 

just massive grounds for agreement under those circumstances. 

Mr. THOMPSON. Thank you. 

I also want to pick up where Mr. Blumenauer left off. He made 

quite a statement on infrastructure and the need for infrastructure. 

He didn’t get to his question. 

But I agree that it is the most direct and the most immediate 

way to help our economy. There is not one of us on this dais or any 

of our colleagues in Congress whose districts wouldn’t benefit 

greatly by an adequate level of investment in infrastructure. 

And I know, Mr. Johnson, you started to say something about 

the infrastructure, and I would like to hear your thoughts on how 

that would benefit our economy. 

Mr. JOHNSON. Yes. Well, I think it was Mr. Blumenauer who 

was making the point about the gas tax and the need for investment in roads. 

I was going to suggest you should consider investment in transportation more broadly. So it is not just necessarily about the 

roads. It is about how people move to and from work and around 

the country. 

And that is not just in the car—— 

Mr. THOMPSON. And infrastructure is not, nor should it be, 

limited to just roads. It is roads. 

74 

Mr. JOHNSON. Yes. 

Mr. THOMPSON. It is bridges. It is transportation. It is 

broadband—— 

Mr. JOHNSON. And it is addressing—it is absolutely broadband. 

It is addressing congestion, Mr. Thompson. So if sometimes—in 

some situations, if you just add capacity to the roads, more people 

drive. 

In those parts of the country, it makes sense to add alternatives 

to cars and to invest in that and to use revenue sources, such as 

gasoline tax, if you were going to consider increasing it, to invest 

in transportation infrastructure. 

Mr. THOMPSON. And then, while we are on that, what—Mr. 

Johnson, what impact do cuts and our inadequate investments in 

infrastructure, education, energy have on job creation in our economy? 

Mr. JOHNSON. I think, if you look in comparative perspective, 

look to—look relative to the countries with which we compete in 

Europe or in Asia, including people who are already prosperous, 

and countries that are up and coming where we—our companies, 

our private sector, absolutely needs a supportive environment from 

the United States. 

One of the things that I hear a lot from entrepreneurs when I 

talk with them is the weakness of our infrastructure. Airports, for 

example. The lack of investment in some of our major airports is 

a big issue for our business people who are traveling back and 

forth competing in these international markets. 

Mr. THOMPSON. Thank you very much. My time has expired. 

Mr. JOHNSON OF TEXAS. Thank you. The time of the gentleman has expired. 

Mr. Young, you are recognized. 

Mr. YOUNG. Well, thank you, Mr. Chairman. 

I, too, want to join my colleagues in offering my congratulations 

to Chairman Ryan for his ascension to this position. 

I want to thank all of you, our panelists, for being here today for 

this freewheeling conversation. 

I would like to talk about tax reform, something that has been 

brought up a number of times today, but specifically focusing on 

tax reform for our smaller businesses, our younger firms. 

Last Congress we put together a draft, a so-called Camp draft, 

under former Chairman Camp’s leadership, and analysis indicated 

that, were that draft implemented, albeit imperfect and requiring 

further iteration and elaboration, hopefully this Congress, we 

would increase the rate of GDP in this country, increasing GDP by 

up to $3.4 trillion and increasing employment by 1.8 million jobs. 

I do have concerns, however, back to the small and the younger 

firms, about some intimation by the President and by others in this 

town that we may only consider corporate reform as opposed to reforming the individual code so that those pass-through entities 

likes S corporations and LLCs get the benefit of simplification, on 

one hand, and on marginal rate reduction, knowing that many of 

them pay over half of their profits in taxes when you combine the 

taxes at different levels of government. 

It bears reminding perhaps not you, but many of our constituents, that over the last decade more than six out of ten new jobs 

75 

created in this country have been through these smaller firms and 

this is where over half of jobs currently exist in this country. 

So, really, my question for all of you is: Do you agree, and I will 

start with Dr. Holtz-Eakin—do you agree that we should be focusing on reforming not just the corporate code, but also taking a look 

at the individual code? And what would be the broader economic 

implications of only focusing on corporate as opposed to focusing on 

the entire Internal Revenue code? 

Mr. HOLTZ-EAKIN. Well, if you focus on corporate only, you 

limit your ability to improve the taxation of business income and 

incentives for hiring, investment, expansion. There is no doubt 

about that. 

I think everyone who wants to broaden bases, lower rates, and 

improve the quality of the tax policy in the United States would 

do both individual and corporate simultaneously for the reasons we 

discussed earlier, that you want to make sure the pass-throughs 

are treated in a sensible fashion. 

There are some particularly vexing issues in the—in the tax 

treatment of business income and investment income in the individual code right now, not the least of which is we now have three 

different Tax Codes: the ordinary income tax, the alternative minimum tax, and the new net investment surtax with a different definition of net investment that doesn’t exist anywhere. 

And so, as a top priority, simplification of the Tax Code so that 

there is one set of tax rules that is permanent would help especially the smaller guys trying to deal with the business as a passthrough in a big way. 

And then we have back—done a lot of backsliding from the 1980s 

when we got marginal rates down much lower. And the biggest obstacle to doing comprehensive reform, individual plus corporate, is 

the unwillingness of some to contemplate lower top marginal tax 

rates. It was done in the 1986 reform. It was very successful. And 

it has been unwound in the years since. 

Mr. YOUNG. Mr. Feldstein, if you could offer me, say, 30 to 45 

seconds of your perspective. 

Mr. FELDSTEIN. 28 percent. That was the rate that we had 

after the 1986 tax reform. It is now up in the 40s. So that is a very 

big difference for anybody who is contemplating a small business 

or expanding a small business. 

Mr. YOUNG. Mr. Johnson. 

Mr. JOHNSON. Mr. Young, don’t forget, in 1986, there was an 

equalization of tax rates on labor income and capital income. 

And that is a principle that I think we should go back to because 

what you get is—if you are considering the distortions and the disincentives and if you are considering comprehensive tax reform— 

and I think you should think comprehensively and you should 

think comprehensively on a revenue neutral—I would say revenuebuilding basis, given the challenges that the country faces—the differential taxation between labor income and capital income introduces a lot a of distortions. And I think you should go back to it— 

on that point to the principles of 1986. 

Mr. YOUNG. And in my remaining time, Dr. Feldstein, should 

we coordinate reform between—as we reform the tax system, 

76 

should we also consider coordinating those reforms with reform of 

the welfare system in this country? 

Mr. FELDSTEIN. Well, the welfare system, as previous comments have brought out, have become a disincentive for working 

for lower-income people, and we really ought to be looking at what 

food stamps, for example, has done to the incentive, particularly for 

second earners. 

Mr. YOUNG. Are there provisions of the code, however, that we 

ought to consider taking a look at with respect to this matter 

that—— 

Mr. FELDSTEIN. Yes. 

Mr. YOUNG [continuing]. Would help individual persons? 

And what might they might be? 

Mr. FELDSTEIN. Well, I wouldn’t draw the distinction between 

the Tax Code and the safety net provisions. 

But almost 50 million individuals are now receiving food stamps, 

and that creates very serious incentives for second earners. It creates a very high effective marginal tax rate for that group. 

Mr. YOUNG. Right. You pull away the benefits. Thank you. 

I yield back. 

Mr. JOHNSON OF TEXAS. The gentleman’s time has expired. 

Mr. Kelly, you are recognized. 

Mr. KELLY. Thank you, chairman. 

And thank you all for being here. 

One of the things that has bothered me since I got here—I am 

from the private sector, and I have never understood how you can 

continually spend more than you take in and somehow look to the 

future and say ‘‘We are going to be okay.’’ 

And the numbers may not be exact, but I think it is somewhere 

around 3.2 to $3.4 trillion a year we spend and we take in somewhere around 2.5 to 2.6 in tax revenues. 

And that is like telling somebody who makes 25- or $26,000 a 

year ‘‘It is okay to go out and spend 32,000 or 34,000 a year. And 

don’t worry about it because you are always going to be able to borrow whatever you need. And if that doesn’t work, you can down 

and start printing it in the basement.’’ 

We have talked about and we are bragging about the fact that 

we have reduced our deficit spending, but we don’t talk about the 

effect it has on our long-term debt. It is the long-term debt that is 

going to really affect our ability to recover. 

The numbers that I understand is that last year tax preparation 

took about $167 billion, tax preparation, and it took about 31⁄2 billion hours to do it. I would think that most Americans would feel 

that that money and that time could have been used more effectively. 

Dr. Holtz-Eakin, I have listened to you many times. 

And, Dr. Feldstein, you, also. 

Mr. Johnson, I have never been with you before. 

My concern, quite frankly, is that we are not addressing the real 

problem here. Anybody that has a charge account, the worst thing 

you can do is to continually ask the bank or the lender to give you 

greater spending limits without being able to address the fundamental problem, that is, you are spending too much. 

77 

So what we look at right now with tax reform, we have an excellent opportunity to get this country back on track. 

Dr. Holtz-Eakin, you talked about annual growth of 2.3 to 2.4. 

I think that is absolutely pathetic in a country that is so blessed 

with so many assets. And to think ‘‘Well, that is the new normal 

and that is what we should shoot for,’’ that doesn’t make sense to 

me. 

If there is a global market that we cannot only compete in, but 

dominate in, we have an excellent opportunity. And most of it, I 

would think, comes from energy. 

If you could just for a minute, the effects of lower costs of energy 

and our ability then to compete in the global market, where that 

would take us and how that would strengthen our position in the 

world. 

I think the geopolitical consequences of not being in the strongest 

position create the greatest danger for us not only abroad, but here 

at home. 

So just a little bit talk about—my goodness. 2.3, 2.4, that is the 

new normal? I would—I would think that is almost laughable. 

And if we are going to allow a political agenda to outpace policy, 

then we are in deep trouble. But energy and our ability to export 

energy and capitalize on it. 

Mr. HOLTZ-EAKIN. Well, as I said, I don’t think anyone has 

done a comprehensive accounting of the benefits to the U.S. economy of the rapid expansion in the oil and natural gas industries 

in the United States. 

But we know from the post-war history of U.S. economic growth 

that a standard problem has been sharp spike in global oil prices, 

Federal Reserve’s concern over inflation getting pushed into the 

system as a result, tightening of monetary policy, some combination of that leading to a recession, worsening budgetary outcomes 

in the process, having to fight anti-recession measures. 

We have seen that movie again and again and again. And I think 

the biggest difference now, given the distribution of production in 

North America and the rest of the world, is that is very different. 

And we won’t see that to the extent that we have in the past, and 

that is the biggest benefit. 

We should continue to let the private sector pursue energy developments based on market incentives, and I think we should interfere less with incentives. I see no reason why we don’t export our 

oil, for example. That ban is an anachronism and should be lifted 

as quickly as possible. It would allow U.S. gasoline prices to fall 

even farther because they are benchmarked with global prices and 

we could get them down. 

So we should pursue the energy. We have gotten a lot of benefits 

from it. We can get more. But I don’t think we need to single out 

the energy sector as something—the only thing we are going to do. 

That would be bad economic policy. Let markets drive it. It will be 

successful. 

Mr. KELLY. And the effect—Dr. Feldstein, if you want to weigh 

in on this, also, the effect on businesses, the private sector especially, when one of your main worries is not your competition, but 

the way you are regulated and the way you are taxed by the country that you live and work in, and, by the way, the same country 

78 

that you fund every single penny of either what they spend or what 

they borrow, I think we need to be looking at that as to how do 

we make those people stronger. 

I can tell you from being in the automobile business—people get 

confused about this—in the early 1970s, when prime rate was at 

21 percent—not 2.1 percent, but 21 percent—I understand it because, at that time, my floor plan at the dealership was 1 percent 

over prime. 

When you start paying 22 percent interest on inventory, what 

you do is you quit ordering cars, which means the guys that make 

tires don’t make tires, the guys that build cars don’t build cars. It 

has an effect that is overwhelming. 

If you could, we have an excellent opportunity right now to really 

lift this country to a level that it hasn’t seen in quite some time 

if we look at this tax opportunity and pro-growth. 

Mr. FELDSTEIN. I see you have about 1 second left. So I will 

simply say yes. 

Mr. KELLY. Okay. Well, you know what you said earlier about 

savings. I am 66 and you talked about the 67 years old. So I am 

hoping I have more than 1 second left. But thank you for coming 

here today. Thank you for your testimony. 

Mr. JOHNSON OF TEXAS. Your time has expired. 

Are you going to sell them all three a car? 

Mr. KELLY. You know what. I—you know, it is—there is a great 

market out there. Right now my question is always, ‘‘What can you 

afford?’’ ‘‘Up to, but not more than’’—and then we will get you 

there. And I don’t know how many months or how much money 

down, but we will get you to where you need to be. 

Mr. JOHNSON OF TEXAS. Thank you. 

Mr. Renacci, you are recognized. 

Mr. RENACCI. Thank you, Mr. Chairman. 

And thank the witnesses for being here today. 

I want to follow up a little bit on what my colleague Mr. Reed 

was talking about and a little bit what Mr. Kelly was talking 

about, too. 

You know, we are talking about national debt and growth of the 

national debt. I always get concerned—you know, I was a businessman, also—because I am a big believer you have to look at the full 

picture. 

Before you can move forward, you have to know where you are 

at, before you can make decisions, policy decisions, any decision, 

moving forward. And I am always somewhat concerned that we always just zero in on the national debt without also zeroing in on 

all the unfunded liabilities that this country actually has. 

When you start to add those unfunded liabilities to the national 

debt, I believe you make different policy decisions than you may 

just zeroing in on the national debt. But I would like to hear what 

your thoughts are. 

And I will start with you, Mr. Feldstein. Why don’t we look at 

the total picture? And do you think we should? 

Mr. FELDSTEIN. Well, I think a number of economists, a number of studies, and the CBO all do look at these unfunded liabilities. The danger when you do it is the numbers turn out to be so 

79 

big that people just throw up their hands and say, ‘‘This is hopeless.’’ 

But it isn’t hopeless. The real point is, if we slow the growth of 

some of these entitlement programs not by a lot, but by a little bit, 

then we can bend the curve and avoid this explosion of unfunded 

liability. 

So I think that is—that is the challenge. And—and I spoke about 

increasing the retirement age in line with the increase in life expectancy. That would make a big difference to these unfunded liabilities. 

Mr. RENACCI. You see, I am a big believer, if you know what 

all your liabilities are and you are making a policy decision and 

you see the liability curve has changed, you made a good decision. 

We don’t do enough of that. 

Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. Well, I would say two things that I think 

got left out of this discussion. We all know the numbers are big and 

terrifying, and that is exactly right. 

Number one, I personally dislike the term ‘‘unfunded liability’’ in 

this context because they are not liabilities. They are policy decisions and promises made. They are not like contractual obligations 

in the private sector. They can and should be modified. 

Number two, to call them ‘‘unfunded’’ begs to fund them. Please 

don’t. We can’t afford that kind of a tax increase without killing the 

economy. It is just unreasonable. So I don’t like the term. 

Second is this discussion is often posed by the green eyeshade 

types, me. CBO directors say, ‘‘Oh, my God. These numbers are big, 

huge.’’ These programs are important parts of the social safety net 

and they are falling apart. 

Social Security: 25 percent benefit cut across the board in 20 

years. Terrible way to run a pension system. Fix it. 

Medicare right now: Payroll taxes come in. Premiums come in. 

Spending goes out. Gap? $300 billion every year. 10,000 new beneficiaries every day. That is a program that will fall apart in its own 

financial weight. Terrible for seniors. Please fix it. 

Medicaid: A program where people go to the hospital for ordinary 

care at higher rates than the uninsured. Please fix it. 

So it is not just they are unfunded liabilities and that they 

threaten the economy. They are not doing their job either. 

Mr. RENACCI. But they are a liability. And I think, if we looked 

at them, we would make those decisions. 

Mr. Johnson. 

Mr. JOHNSON. I agree. 

We should look forward and we should understand what drives 

those costs. And it is health care costs across the economy paid by 

the Government and paid by the private sector. 

And we should be considering and trying to apply policies that 

shift—bend that curve, that slow down the rate of increase. The Affordable Care Act did that. 

Now, that is the data. Now, we will see—we will see—we will see 

if it lasts. I understand. We will see if it lasts. There is plenty of 

discussion there. I mentioned that in my testimony. All right. 

80 

But that is what we should be looking for, policies that reduce— 

that forward trajectory of all healthcare costs, not just those very 

important ones paid by the Government. 

Mr. RENACCI. Thank you. 

Also, a big issue for me always in the private sector was certainty and predictability. We make decisions here that eliminate 

that certainty and predictability. Government is good at doing that 

for the business owner. 

I would like to hear your thoughts on—you know, we have these 

expiring tax provisions that were talked about. Talk about uncertainty and unpredictability. How does a business operate when 

they never know what their tax policy is? 

I want to know—and I know I have got 50-some seconds. So I 

will give you all an opportunity of what your thoughts are. Should 

these be permanent? They have been around for 20-plus years. 

What is your thoughts? 

Mr. FELDSTEIN. Certainly many of them get renewed every 

time, but there is an uncertainty about it. So why not make them 

permanent. That, seems to be, would be sensible. 

Mr. HOLTZ-EAKIN. There is no virtue to an annual tax extender’s package. The practice should end. Make the good ones permanent. Get rid of the rest. 

Mr. JOHNSON. Uncertainty discourages investment, discourages 

hiring. Please do not—in addition to what you are proposing, do 

not have a confrontation over the debt ceiling or threaten more 

government shutdowns. Those generate a lot more uncertainty 

than the annual tax extenders. 

Mr. RENACCI. Thank you, gentlemen. 

I yield back. 

Mr. JOHNSON OF TEXAS. Thank you, sir. 

Mr. Rangel, you are recognized. 

Mr. RANGEL. Thank you, Mr. Chairman. 

And let me thank the panel. 

Professor Holtz-Eakin, you have been around so long that I almost consider you a part of—an extension of the Congress. 

But having said that, I am very optimistic as to what we can accomplish in the next 2 years. The President has 2 years left. We 

have a new chairman of this committee. And we have a lot of 

things that we have a priority: tax reform, infrastructure, education, disparity in incomes. But the one opportunity that I will 

just confine my inquiries today is going to be on trade. 

We have a new chairman. And I look forward to working with 

Chairman Tiberi on trade. And certainly Ranking Member Sandy 

Levin has dedicated a large part of his adult life to improving trade 

and creating jobs. 

A lot of things that you said could go unchallenged. But I hope 

that even after this hearing you and I can get together to see just 

what parts, in your professional opinion, we all agree on so that we 

can just keep out the rhetoric and start concentrating on those 

things that we can cooperate because the TPP and the Trans-Atlantic opportunities should not just fail because we are not talking 

to each other. 

Now, there is a lot of thought that the President should have 

trade authority because 435 people cannot negotiate a trade agreeVerDate Sep 11 2014 01:10 Jun 10, 2017 Jkt 022376 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22376.XXX 22376
81 

ment and the fact that a lot of our foreign partners want to make 

certain that the Congress is not going to tear it apart and the 

President has the authority. 

And, of course, the Congress is caught in a position that—we just 

don’t want to be caught in the position that we have to vote yes 

or no when there is so much time and opportunity for us really to 

discuss what is in the bill, what are the winners and losers, and 

how are we prepared to deal with it. 

There are just some people, when you say trade, they say loss of 

jobs. Of course, other people say, ‘‘We are talking about millions of 

jobs that are going to be created.’’ 

It would seem to me, Professor, that—why is it so difficult to determine where these jobs are going to be lost and where they are 

going to be gained? 

Because the fact remains that, if you are having a progressive 

trade agreement, whether it is because of cheap labor, whether it 

is loss of productivity, whether it is technology, there are a lot of 

Americans who totally are just out of it for whatever reason as a 

result of trade. 

Now comes an opportunity for new jobs to be created. And if we 

had any idea that included in these agreements were protection for 

the American people, the intellectual property, the standards are 

going to be there for health that—that these people—Communist 

countries especially are going to respect their workers. Environment is going to be protected. 

How do you expect that we should give the President the authority when we have not the transparency to educate a Congress, Republican and Democrats, when, say, TPP comes to the floor? 

Now, you know the politics of it so that you can get directly to 

the core and giving the answers to questions that some of us may 

not want to hear because it is easier politically to kick down the 

barn than to build it. 

But you have to admit that—if a person has lost their job for any 

reason and you tell them about great opportunities in TPP and 

that Congress doesn’t know what it is and won’t know what it is 

until the President gives the trade authority, what do you do? 

Mr. HOLTZ-EAKIN. I don’t run for office, but you have already 

made that mistake. 

So I think, on the negotiating issue, it is not an either-or choice. 

I think the President—every President should have Trade Promotional Authority. I believe that deeply for the reasons you actually described quite eloquently: their ability to seal the deal, make 

a firm commitment. 

At the same time, the Congress has its oversight capabilities 

and, you know, the trade ambassador should be at this table. And 

you should be weighing in on, ‘‘What is the state of the negotiations? What are the provisions that I care about? Are you doing a 

good job?’’ 

There is no reason why they get to negotiate with no oversight 

from the Congress in a vacuum without any feedback—— 

Mr. RANGEL. And the oversight—— 

Mr. HOLTZ-EAKIN. I mean, that is an important—— 

Mr. RANGEL. When we vote—— 

Mr. JOHNSON OF TEXAS. Gentleman’s time has expired. 

82 

Mr. RANGEL [continuing]. We don’t have oversight for 435 members. It is either yes or it is no. And I am going to follow through 

with you. 

Mr. HOLTZ-EAKIN. Before the vote. During the negotiations. 

That is when it is important to have them at the table. That is 

what I would say is the right combination. 

Mr. RANGEL. I would like to follow up with you because—— 

Mr. JOHNSON OF TEXAS. The gentleman’s time has expired. 

Mr. Smith, you are recognized. 

Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman. 

Thank you to our panel for your participation here today. 

Obviously, America is a big place. The world is even bigger. And 

I think the discussions about trade and various—and the economy, 

in general, are very important. 

You know, it has been interesting, as a representative from Nebraska, one of a number of plains and mountain west States, others being South Dakota, Wyoming, Utah—other notable States 

have fallen far below average unemployment and lower costs of living throughout a lot of the economic downturn. 

And what has been interesting, obviously, is that—these States 

that don’t experience these substantial economic highs nor those 

lows that perhaps some other States have. 

And so I was wondering if you could reflect a little bit on the observations you may have made throughout the last few years about 

the differences between, you know, regions of the country, more 

specifically even States, because, obviously, we had our share of 

challenges in Nebraska amidst the economic downturn, but certainly we did not see that high unemployment rate that other 

States saw. 

Could any of you reflect on that a bit, perhaps starting with Dr. 

Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I think the number one thing that differs 

going into the crisis is the state of housing markets. Housing markets were an integral part of the—of the Great Recession. 

We had two different kinds of bad housing markets. We had the 

one everyone hears about, which is the California, Nevada, Arizona, Florida style big housing bubble collapse and the roller coaster ride that that visited on everything related to housing. 

The Midwest had a very different housing problem. They never 

saw the housing bubble and collapse, but those were bad economies 

and they weren’t growing rapidly and people turned their houses 

into—into second mortgages and third mortgages to get cash out of 

them because they were really struggling. And when the recession 

hit, they couldn’t keep it up. 

And that was a very different style of housing problem. And the 

States’ experiences I think start with those differences. 

They then differed greatly, depending on their oil and natural 

gas opportunities. The energy States did much better than did the 

rest quickly for reasons we have discussed already. 

And then I think the third thing is, you know, State government 

matters. I mean, in terms of the quality of the policymaking, you 

know, some States went in in terrible financial shape and were unable to help and assist the private sector. Others, like Indiana, 

went in in great shape. I don’t know the details of every State. 

83 

But I would look at those factors as well. 

Mr. SMITH OF NEBRASKA. Thank you. 

Mr. Feldstein. 

Mr. FELDSTEIN. Housing was very important, and there is a 

danger we are going to create some of those same problems again. 

As I understand the new rules, Fannie and Freddie will take 

mortgages with 3 percent down payments, 97 percent loan-to-value 

ratio. That doesn’t sound like a good idea. 

The notion was that mortgage originators should have an incentive to be careful by keeping some skin in the game, 5 percent. 

That has been scrubbed. That is not part of the new rules. 

So I think we are creating a possibility that we are going to see 

in different parts of the country serious problems if house prices 

don’t continue to rise at a uniform rate. 

Mr. SMITH OF NEBRASKA. Right. 

But looking back, were there any observations you made in terms 

of States that had relatively low unemployment in comparison to 

States’ high unemployment? 

Mr. FELDSTEIN. Well, I think what Dr. Holtz-Eakin said is 

quite right, that there were big differences in what had preceded 

in the housing area. And, therefore, the downturn was much more 

serious in some areas where house prices had gotten way out of 

line. 

But if I can buy a house with only 3 percent down, there is going 

to be a temptation to start running up house prices again in those 

markets. 

Mr. SMITH OF NEBRASKA. Thank you. 

Mr. Johnson. 

Mr. JOHNSON. Just to pick up on one point made by Mr. HoltzEakin, which is many States do not have fiscal capacity to deal 

with crises, they either don’t have the resources, they are not able 

to borrow, or maybe they run in a way that is a little too close to 

the edge, or they have balanced budget legislation. And that is why 

what the Federal Government does in terms of fiscal policy is particularly important. 

And that is why, you know, I think we should on a forward-looking basis before it gets to a situation where there is a lot of rhetoric 

and confrontation think about what is the right way for fiscal policy to be involved in any future difficulties that occur at a State 

level, a regional level, or the national level. 

As I recall, at the end of 2007, early 2008, when you had a Republican President, there was a lot of Republican voices who were 

in favor of a fiscal stimulus at that point. I think Mr. Feldstein testified in some of those hearings and had a big impact. We should 

think about that before it gets partisan again. 

Mr. SMITH OF NEBRASKA. Thank you. 

And one additional question, Professor Holtz-Eakin: Do you believe that trade promotion authority would actually help American 

agriculture? 

Mr. HOLTZ-EAKIN. Yes. We have the most productive and efficient agricultural sector on the planet. And opening up, for example, the Japanese agriculture markets is a big opportunity, if it can 

be done. 

Mr. SMITH OF NEBRASKA. I agree. Thank you. 

84 

I yield back. 

Mr. JOHNSON OF TEXAS. Thank you. Your time has expired. 

I now recognize Mr. Schock. 

Mr. SCHOCK. Thank you, Mr. Chairman. 

And I, too, wish to congratulate our new chairman of the committee. 

You know, I have been fascinated by all the questions from both 

sides about economic growth, static scoring or accurate scoring, as 

Chairman Price calls it. And it is particularly because I think the 

debate oftentimes, at least on this committee and even in the 

broader context in the political realm, between left and right on 

economic growth, on the disparity between haves and have-nots, 

the middle class, the wealthy, the poor, is really a question of 

whether or not you believe our economy is dynamic, whether or not 

you believe that the best way to create wealth, the best way for 

those without to have is whether to take from those who have and 

redistribute or whether to incentivize those who do not have to 

work, to innovate, to create, and, for those that have, to invest. 

And so, specifically, there has been a lot written about this over 

the last couple years, and I know one book that has been getting 

a lot of play right now, particularly on the left, is a book written 

by a French economist, Thomas Piketty, ‘‘Capital in the 21st Century.’’ 

And some of the most interesting assumptions he makes is basically that, throughout the last 100 years—he looks at the bottom 

5 percent, the bottom 10 percent, all the way up to the top 1 percent—he is basically making the assumption that those in those 

percentiles pretty much remain the same and that there hasn’t 

been the type of mobility and the type of upward mobility up the 

economic ladder that I think many of us on the right side of the 

aisle, at least, believe is what America is all about. 

Specifically, Mr. Feldstein, I know that you have taken Mr. 

Piketty on in these assumptions. And I wish you would just maybe 

speak a little bit about what you think this committee ought to be 

focused on in terms of the income disparities that are present in 

our economy and the best way to raise those who have without and 

those that are struggling to be in the middle class and those that 

are in the middle class to go even higher. 

Mr. FELDSTEIN. So Professor Piketty was really not concerned 

with that problem. He was concerned with high incomes. So I think 

that is the wrong place to focus. 

I think the right place to focus, if we are concerned about income 

distribution, is to focus on the question of poverty and what we are 

dealing with there. Part of that is a question of education. Part of 

it is labor force participation. Part of it is a measurement problem; 

it is not as bad as it looks. 

So I think all of those are things that this committee might 

spend some time focusing on, drilling down, and trying to understand what the actual nature is of, say, the bottom 10 percent of 

the measured income distribution. 

Mr. SCHOCK. Mr. Holtz-Eakin, would you like to comment? 

Mr. HOLTZ-EAKIN. I think there are a couple responses to this 

whole discussion. 

85 

One is, Mr. Piketty’s research has been questioned on a number 

of fronts, and I think it is worth looking at just sort of the geeky, 

nerdy statistical fight about whether he is measuring something 

real or not. For example, tax reform caused a lot of people to report 

income after 1986 that they didn’t previously. The world hadn’t 

changed, but the reported world looks very difficult. And I would 

be nervous about that, that I think that is one of the things that 

is going on. 

Second is sometimes the wealth of the upper class went up relative to the middle class because we destroyed the wealth of the 

middle class. That is what the housing bubble did. Don’t do it 

again. Right? That is the lesson of that. It is nothing about the top; 

it is about our housing policies. 

And then the third is, I will just echo the mobility evidence that 

says that, on the whole, mobility in the United States is the same 

as it was 50 years ago. People have a chance to get ahead. We just 

don’t like how good getting ahead is. We don’t like how good being 

at the bottom is. That is focusing on economic growth and antipoverty programs. And that is where the focus should be. 

Mr. SCHOCK. Mr. Johnson, I have 30 more seconds. Do you believe in mobility? 

Mr. JOHNSON. Of course. We all believe in mobility. I am an 

immigrant, Mr. Schock. I came here for exactly the mobility. But 

I think that the—and I think, by the way, the way you framed the 

discussion at the beginning is sensible and appropriate. I think you 

summed it up nicely. 

And I think if you go back to the chart Mr. Levin put up at the 

beginning showing what has happened since the 1980s, the big 

theme we have had in our public policies has been—not 100 percent, but a big theme has been towards some form of trickle-down 

and saying this will benefit other people, and it hasn’t happened. 

And I think we should, in the basis of thinking about comprehensive tax reform, consider that. 

You know what we got out of the 1980s and out of the 1990s, 

and it was not more for the middle. It was more for the top. And 

it is a global competition for talent, as Mr. Holtz-Eakin said. That 

is absolutely right. And you have to think about how you handle 

that going forward. 

Mr. SCHOCK. Thank you. 

Chairman RYAN [presiding]. Time for the gentleman has expired. 

Dr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I want to congratulate you. I think I will wait until after next Sunday in Seattle 

before I congratulate you totally. 

I listened—I mean, we have been here 3 hours, and you guys 

have been through the rack on about everything under the sun. 

But one of the interesting things I see, having sat through all of 

this, is very little is talking about the middle class and those people struggling to get on those ladders. 

One of them is students. There has been almost no discussion of 

the $1.2 trillion in student debt which is hanging over our students. And I look at that—I mean, I am a doctor, so I know what 

goes on in medicine, where you come out $300,000, $400,000 in 

86 

debt, but even if you are going to be a schoolteacher, you are 

$60,000 in debt—what that does to your view of the economy and 

the society and how much you are going to invest. 

And when you are basically trying to succeed in survival and pay 

your debt service, there is nothing left to save. We hear there are 

no savings in America. Of course there isn’t. Every middle-lass 

family in this country has put all their savings into their students’ 

loans. They have signed their house notes, they have signed all 

kinds of stuff to do this. 

Now, one of the fascinating things about listening to this also has 

been—sometimes we get very centric about what happens in the 

United States, but, Mr. Johnson, I would like to hear your comments about the European attitude toward student debt and what 

that investment by those societies is making in terms of their future. 

Because I sit at—I have had a university in my district for a 

long, long time, ever since I came into politics. And I watch the National Institutes of Health dropping their investment on higherlevel students. They used to do 19 percent; now they are doing 6 

percent of the grants. And there are people deciding, do they want 

to go into that kind of a thing? 

And what is the long-term effect of our heaping the debt on the 

students? That is really what I want to hear you talk about. And 

how do the Europeans do otherwise? 

Mr. JOHNSON. Well, Congressman, it is not just the Europeans. 

It is our other competitors around the world, including in Asia—— 

Mr. MCDERMOTT. Yes. 

Mr. JOHNSON [continuing]. Where the attitude is exactly what 

you said, which is that you want a strong and expanding highereducation sector. You want more people with post-high-school education. You want more people with vocational skills. And you don’t 

want to load them—overburden them with debt. I think that there 

is a particular problem around the for-profit sector in the United 

States in higher education, and our competitors have, to some degree, avoided that. 

Higher education in this country has been a strength, and I 

think it will be a strength going forward. I think we need to expand that post-high-school vocational education, but expand the 

supply of it. Don’t just subsidize people and encourage them to take 

on more debt to get various kinds of degrees. Expand the supply, 

increase the skills that are out there, have them come out with 

manageable, lower debt levels, to your point. That is going to 

be—— 

Mr. MCDERMOTT. Let me interrupt you, then, to give you a 

suggestion to comment on. 

Why should a student in this country pay more than 1 percent 

above prime on their student loans? Why don’t we have our loans 

down at that level rather than these kids who have these 13.6 percent loans from private banks and all the other craziness? 

If we brought it so that every student could borrow for school to 

1 percent above prime, how would that change the future? 

Mr. JOHNSON. Well, I think we want to be careful not to encourage overborrowing. But you are absolutely right that the level 

of interest rate on some of these loans is too high. And these people 

87 

are a good credit risk, particularly depending on the exact conditions of the loan and the contract you are signing. You get paid. 

The default rate is relatively low. And it is hard to discharge, in 

many jurisdictions, as you know, discharge these debts in bankruptcy. 

Mr. MCDERMOTT. It is impossible in most. 

Mr. JOHNSON. If they are Federally guaranteed loans, certainly. 

So I think that we should look at this market and we should understand the competitive practices and we should understand some 

of the companies that are inappropriately gouging students. That 

is absolutely part of the picture. 

But, most of all, expand the opportunity, expand the supply of 

post-high-school vocational training. 

Mr. MCDERMOTT. Now I want a short answer on one more 

question. 

If the oil patch goes in the tank, as it looks like it is going to 

because of all this, of the cost of oil coming down so low and it is 

no longer—they are making it in banks all over the Southwest, 

they are starting again like they did in the housing and loan— 

should we bail them out? 

Mr. JOHNSON. No. 

Mr. MCDERMOTT. Thank you. 

Chairman RYAN. Okay. We will leave it at that. 

Ms. Noem is recognized. 

Mrs. NOEM. Thank you, Mr. Chairman. And congratulations. I 

am looking forward to being a part of the work that this committee 

is going to be doing. 

And I appreciate all of you being here and being here for so long 

and lending us your expertise. 

I wanted to talk a little bit about trade and the process for getting trade agreements accomplished. But I wanted to reference a 

comment that was made earlier by a member of the committee that 

was interesting to me, because he talked about Republicans and 

people on our side of the aisle continuously running the same playbook—lower taxes, less regulation, not spending dollars, cutting 

spending—and how that isn’t working and we need to change the 

play. 

Well, I come from the State of South Dakota. In fact, I represent 

the entire State of South Dakota. And so we have made some tough 

decisions in that State. I served in the legislator from 2006 to 2010, 

so I was there during the crisis when we had such difficult times. 

We have become the number-one State in the Nation to do business 

in. And we have done it by keeping our tax burdens low. 

We have a regulatory burden that is minimal and allows businesses to come into the State and to thrive and survive and keep 

our people to work. We have a low unemployment rate. In fact, we 

even have a constitutional requirement to have a balanced budget 

every single year, which I believe Mr. Johnson earlier was indicating might be a problem for a State to have something like that 

when it comes to tough times. For us, it works. We make tough decisions, and, literally, within a year or 2, we can see our economy 

turn around and do very well. 

88 

Our number-one industry is agriculture. And I have spent my life 

being a farmer and rancher and working very hard to increase not 

only my own businesses’ opportunities but also agriculture in South 

Dakota and across the Nation, overseas. And so I am excited about 

the trade agreements that we have coming and the opportunities 

that that creates. But I also am kind of concerned about how the 

process goes down. 

Last year, the United States reached a record high at $152 billion worth of exports that happened when it came to that. But, 

also, I see we have more opportunities, especially when it comes to 

agriculture products. And, in history, they have given us some 

sticky points with countries when we have negotiated. Sometimes 

the hang-up to getting agreements done has been ag products. We 

have faced barriers when it comes to sanitary and phytosanitary 

issues and discussions that have gone on. 

I would like to ask you: TPA, when it comes to getting that, historically, when we look at previous trade agreements, has it been 

bipartisan? 

I will reference Mr. Holtz-Eakin. 

Has it been a bipartisan agreement, traditionally, between Republicans and Democrats to give that type of authority to the President? 

Mr. HOLTZ-EAKIN. Yes. And, honestly, it has also been, in 

many cases, tough, because there is skepticism not just on the left 

but on the right, and Members have to work out their concerns in 

granting trade promotion authority. But it has been a bipartisan 

power given to both Republican and Democratic Presidents by Republicans and Democrats. 

Mrs. NOEM. Uh-huh. And then, in that role, when TPA is being 

sought after from Congress, what is the role of the President? Do 

they become a proponent of getting that type of negotiation power 

so they can complete these trade agreements? 

Mr. HOLTZ-EAKIN. Yes. I mean, White House involvement in 

this process is essential. White House leadership is essential. On 

any large bipartisan initiative, you have to have White House leadership to be successful. And that has been a recipe in the Bush administration, the Clinton administration. 

Mrs. NOEM. So tell me what the near-term effects we could have 

if some of these trade agreements are wrapped up—TPP, the agreement that we have in negotiation now with the European countries. What are some short-term, immediate effects we could see in 

the first 5 years of completing an agreement for that for our country? And then perhaps down the road 10 years from now, what 

would the benefits see that we would have in this country? 

Mr. HOLTZ-EAKIN. Well, as with almost any beneficial economic policy, at a time when you are operating, you know, below 

your potential, when we still have some people unemployed, we 

still have so many factories and acreage lying idle, you put those 

to use. And that is a good thing, and it happens quickly. 

But there are finite benefits to that, though. Eventually, that impact goes away. And the larger impact, I think, is the ability to set 

standards, make sure that the standards, for example, in manufacturing in the U.S. and the codes used to identify compliance with 

89 

standards are accepted internationally and you are not missing 

from that negotiation. 

They are very durable then. You move the mix of your workforce 

into the attractive international opportunities, and you can pay 

them better. And that is why you have these sort of bonuses in export-related sectors in terms of pay. 

These are all very durable advantages to being engaged in trade 

and on negotiating good trade agreements. 

Mrs. NOEM. One of the comments or facts that I saw circulating 

around trade agreements and what they mean for our economy is 

that, traditionally, trade-related jobs pay more than non-trade-related jobs. 

Dr. Feldstein, would you care to comment on that and if that is 

true? 

Mr. FELDSTEIN. I believe it is true. I think it is very important, 

as you move towards TPA—and you can’t do a trade agreement 

without it—that you understand exactly what the other side is 

thinking about putting on the table, what we are hoping they are 

doing. My sense is that we are not looking at as robust a set of 

agreements in agriculture with the Japanese as you and I might 

like. 

Chairman RYAN. Thank you. 

The gentlelady from California, Ms. Sa ́nchez, is recognized. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. 

And thank you to our witnesses who have been here patiently 

answering our questions. I appreciate your willingness to join us. 

And I am a little bit confused about the purpose of this hearing, 

or, I should say, the information that has come out of this hearing. 

Because, on the one hand, I hear that, you know, our terrible President is sending our country down the drain with his un-American 

economic policies, but, on the other hand, we are hearing that our 

country has seen 58 consecutive months of job growth thanks to 

the leadership of President Obama. So I guess it just depends on 

whether you like the President or not. 

The Ways and Means Committee has a long history of holding 

substantive hearings in an effort to find solutions, actual solutions, 

to try to move the country forward. And I feel like today has just 

been a messaging piece, and there has not really been a lot of serious discussion. 

Is our economy a perfect economy? No, of course it is not. Should 

take-home pay for workers be higher? Absolutely. But, ironically, 

I don’t see the Republican-led Congress stepping up to fight for 

workers anytime soon, because a whopping zero Members of that 

aisle could bring themselves to cosponsor a bill to raise our Federal 

minimum wage to $10.10 in the last Congress. 

In fact, most of our recent economic recovery in this country has 

come despite strong Republican opposition and brinkmanship. You 

know, this is a party that threatened to default on our financial obligations and that actually shut our government down, all at great 

cost to taxpayers. 

And while they continue to advocate for more tax cuts for the 

very rich, you know, they seem to live in this bubble where they 

think that history will somehow stop repeating itself and that their 

so-called strategies of trickle-down economics is going to magically 

90 

work this time and benefit everybody, including minimum-wage 

workers. 

And let’s talk about another piece, which is, you know, health 

care, which is probably one of the most important issues for many 

American families. And the Republican leadership on health care 

has been nonexistent, as well. Health care shouldn’t be just a privilege that an entitled few get to have and can afford. 

Before the ACA was enacted, being a woman was considered a 

preexisting condition, and most women’s health issues, including 

pregnancy, were routinely treated as preexisting conditions. But 

now, thanks to the ACA, women can’t be denied coverage or 

charged more simply because of our gender, and we can now receive preventive services without out-of-pocket costs, and health 

plans must cover maternity services, all of which help many working women. Many women now must work to help support their 

families. 

Yet, despite the progress we have seen on women’s health, we 

have seen 54 different votes to try to repeal the healthcare law but 

no coherent draft of a Republican alternative plan. If we repeal the 

ACA, what do they propose to replace it with? 

There have been, in real dollars and cents, many economic benefits from the healthcare law. And let’s talk about the productivity 

gains that we have as a country from more women staying in the 

workforce, thanks to the preventive services and family-planning 

counseling that they receive because of the ACA. 

I am particularly sensitive to women’s issues as they relate to 

the labor force and the workforce, and I want to talk about their 

participation in the workforce because I think it is critical for 

where our country goes in the future. 

I want to address some testimony by Mr. Feldstein and his 

claims that Social Security discriminates against women by taxing 

their income but not paying them the Social Security benefits that 

they have earned. Coming to that particular conclusion, I think, requires three sexist and completely incorrect assumptions, and I am 

going to talk about them because I think they are important. 

The first assumption is that, you know, it assumes that all 

women are married. Well, that is not the reality in my district. 

Second, it assumes that married women depend primarily on 

their husbands to support them and would therefore get the same 

benefit from Social Security if they didn’t work as if they did. And, 

again, that is not necessarily the case for many of the constituents 

that I represent. 

And the third assumption that is built in to that statement is 

that only women and never men, mind you, only women would ever 

make a choice to earn less or work less, for example, by raising 

children while being supported by a spouse. And yet we know the 

reality is there are many stay-at-home dads now that work parttime or choose not to work to stay at home and raise kids. 

In fact, the truth is that the vast majority of men and women 

get Social Security benefits based on their earnings alone, whether 

or not they are married. A smaller number get the full benefit that 

they are entitled to from their own work—if I could just finish my 

sentence, Mr. Chairman. I am going to beg your indulgence. 

Chairman RYAN. You are doing great. 

91 

Ms. SA ́ NCHEZ [continuing]. And then an additional benefit because a much higher-earning spouse has earned a higher family 

benefit. 

And I am just going to close by saying: And some married women 

and men do not work at all but still qualify for Social Security benefits via a spouse’s work. 

So I just felt the need to point that out, because I don’t know 

what reality you live in, but the reality that I live in is that most 

women now must work to help support a family and that, economically, it is no longer the case that women depend on men for their 

support. 

And I will yield back and thank the chairman for his indulgence. 

Chairman RYAN. Yep. I am happy to indulge the gentlelady 

from California. 

All time has expired. I believe no other Members are requesting 

time. 

Gentlemen, you have been here since 10:00 a.m. this morning. 

This is our first hearing in the new 114th Congress, and I very 

much thank you for taking time out of your busy schedules to indulge us today. Thank you very much for enlightening us in this 

hearing. 

The committee stands adjourned. 

[Whereupon, at 1:23 p.m., the committee was adjourned.] 

Æ