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22–375 2017

REACHING AMERICA’S POTENTIAL: DELIVERING 

GROWTH AND OPPORTUNITY FOR ALL 

AMERICANS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 2, 2016 

Serial No. 114–FC08 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

KEVIN BRADY, Texas, Chairman 

SAM JOHNSON, 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 

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 

ROBERT J. DOLD, Illinois 

TOM RICE, South Carolina 

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 

DAVID STEWART, Staff Director 

JANICE MAYS, Minority Chief Counsel and Staff Director 

iii 

C O N T E N T S 

Page 

Advisory of February 2, 2016 announcing the hearing ........................................ 2 

WITNESSES 

Jared Bernstein, Senior Fellow, Center on Budget and Policy Priorities ........... 28 

Kevin Hassett, Director of Economic Policy Studies and the State Farm 

James Q. Wilson Chair in American Politics and Culture, American Enterprise Institute ....................................................................................................... 18 

Douglas Holtz-Eakin, President, American Action Forum ................................... 6 

Stephen Moore, Distinguished Visiting Fellow, Institute for Economic Freedom and Opportunity, The Heritage Foundation .............................................. 49 

QUESTIONS FOR THE RECORD 

Chairman Kevin Brady of Texas ............................................................................ 122 

Charles W. Boustany, Jr. of Louisiana .................................................................. 123 

SUBMISSIONS FOR THE RECORD 

ESCA, Employee-Owned S Corporations of America ............................................ 132 

The ESOP Association ............................................................................................. 137 

RATE Coalition, Reforming America’s Taxes Equitably Coalition ...................... 143 

(1) 

REACHING AMERICA’S POTENTIAL: 

DELIVERING GROWTH AND OPPORTUNITY 

FOR ALL AMERICANS 

TUESDAY, FEBRUARY 2, 2016 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The Committee met, pursuant to call, at 10:05 a.m., in Room 

1100, Longworth House Office Building, the Honorable Kevin 

Brady [Chairman of the Committee] presiding. 

[The advisory announcing the hearing follows:] 

2 


22375.001

Brady Announces First Committee Hearing of 2016 

Reaching America 's Potenlial: Delivering Growth and Opportunity for 

All Americans 

*HEARING RESCHEDULED* 

All other details remain unchanged 

Today, Ways and Means Committee Chainnan Kevin Brady (R-TX) am10unced that thl' 

Committee will hold its fii'St hearing of the year on Tuesd>ly, February 2"a at 10:00 

Al\ I, in Room 1100 Longwor·th llouse Oflice Building. ·me hearing will focus on 

reaching America's potential through pro-growth policies that deliver opp01tuoities for 

all Americans. 

Details for Subn1ission of\Vrittco Comn](mts: 

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

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

Committee website and complete the infonnational fom1s. From the Committee 

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 instnrctions, 

submit all tequested information. A TI ACH your submission as a Word document, in 

compliance with the lonnatting tequirements listed below, by the close of business 

on Tuesday, Febi'Uary 16th, 2016. For questions, or if you encounter technical problems, 

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

Formatting Requirements: 

TI1e Committee 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 

Counnittee. TI1e Committee will not alter the content of your submission, but we resetve 

the right to fonnat it according to our gu idelines. Any submission provided to the 

Committee by a witness, any materials submitted for the printed record, and any written 

comments in response to a request for written comments must confonn to the guidelines 

listed below. Any submission not in compliance with these guidelines will not be printed, 

but will be maintained in the Committee fi les for teview and use by the Committee. 
3 

f 

Chairman BRADY. The committee will come to order. 

Welcome to the Ways and Means Committee hearing on ‘‘Reaching America’s Potential: Delivering Growth and Opportunity for All 

Americans.’’ I thank you all for joining us today. 

We are holding this hearing today because we want the American people to clearly understand the members of this committee 

are focused on their number one concern, the economy. This is 

what we hear about at home, and this is what we will take action 

on in Washington. For over 7 years, Americans watched in disappointment as the Obama White House has settled for slow 

growth. Time and time again, the President has refused to support 

bipartisan, commonsense policies that can improve the lives of millions of people across the country. 

And, today, February of 2016, we remain in the middle of the 

worst recovery in the post-war era. The fact is, if the speed of this 

recovery simply matched the post-1973 average, GDP per person 

would be 7.5 percent. That is a full $4,200 per person higher than 

it is today. That is about $17,000 for a family of four. 

While the economists in the room love to hear these numbers 

and percentages, I will take a moment to talk about what this 

means to the rest of us. With growth well below historic norms, 

productivity growth is near zero, and wage growth is flat. Median 

household incomes are down. That is no surprise to most Americans. Forty-six million Americans are living in poverty, including 

millions in the prime of their life who are sitting on the sidelines 

without work. 

The American people deserve better, and Washington doesn’t 

have any more time to waste. I could spend the next hour discussing the failed policies of the past, but I won’t. The American 

people need us to focus on what we can do today to make their toVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375

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4 

morrow better. And as members of the Ways and Means Committee, we have a responsibility to deliver real leadership. 

We are committed to moving forward with a positive pro-growth 

agenda for America. And in the weeks and months ahead, we will 

take action on tax reforms to boost investment and job creation; 

welfare reforms to help more people join the workforce and achieve 

the American dream; health reforms to truly make healthcare more 

affordable and accessible; trade expansion to open more foreign 

markets to American goods and services; entitlement reforms to 

strengthen Medicare and Social Security for the long haul; and government reforms to boost efficiency and effectiveness instead of stifling jobs and higher wages. Each of these steps will go a long way 

toward delivering the growth and opportunity all Americans need 

and expect. 

Today we are going to hear from a range of respected economic 

advisors about specific actions that we can take to ensure America 

reaches its full potential. I am honored to welcome Douglas HoltzEakin of the American Action Forum, Kevin Hassett of the American Enterprise Institute, Jared Bernstein of the Center On Budget 

and Policy Priorities, and Stephen Moore of the Heritage Foundation. You are all leaders in your field, and you all understand we 

can’t accept the slow growth status quo. 

So growth matters. We have to take action to grow our economy. 

We have to take action to make it easier for the private sector, for 

Main Street, to create jobs. We have to take action to help Americans keep more of their hard-earned paychecks. Simply put, we 

have to take action. 

So thank you again for joining us, and I now yield to the distinguished Ranking Member from Michigan, Mr. Levin, for the purposes of an opening statement. 

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

And to the distinguished panel, we are glad you are here, and 

we are glad we are discussing this issue. 

The chairman talked about failed policies. I want to see if technology will work and put something on the screen there. There we 

go. 

This screen, this slide vividly illustrates failed policies. Before 

President Obama took office, that month, this country lost between 

700,000 and 800,000 jobs in a month. All of that red is because of 

the failed policies of the previous administration. What has happened since? Over 14 million jobs have been created. Seventy 

straight months of growth. The unemployment rate has been essentially cut in half. And the annual deficit has gone down substantially. And over 18 million people have been insured. 

Essentially what is being proposed here by the Republican majority is this: The President inherited a deep hole, a deep, deep hole, 

the deepest since the Great Depression. Since then, we have essentially been digging out of it, and now it is being proposed in this 

testimony and by the Republican majority, go back to the failed 

policies, trickle-down economics, essentially digging the hole deeper 

and deeper. 

We have an issue of income inequality. The Republicans have 

failed—though they have dominated in this town—to do a single 

thing to address income inequality, except to propose more tax cuts 

5 

for the very wealthy. And if there is an inversion, as taken place 

recently, where essentially a corporation is not moving anything 

except its headquarters to a different place to escape taxation, the 

answer from this Republican majority is, at best, kind of a blank 

stare. 

So the answer is not to return to the failed policies of the past, 

but to build on the progress that we have been making all of these 

months. 

So we welcome this panel, and you can expect very much that 

there will be some very important questions. I think we are going 

to hear a lot about dynamic scoring from one or more of you. And 

I finish by quoting Bruce Bartlett, and he says this about all of the 

talk about dynamic scoring, which essentially, I think, is an effort 

to kind of cover up policies that will mainly increase income inequality in this country, and he says: It is not about honest revenue estimating; it is about using smoke and mirrors to institutionalize Republican ideology into the budget process. 

That chart shows the consequences of that institutionalization. 

And the last thing we need to do is to go back to the past as we 

face the future; it is to build on the progress that we have made 

these last 7 years. 

I yield back. 

Chairman BRADY. Without objection, other members’ opening 

statements will be made part of the record. 

Today’s witness panel includes four experts on the U.S. economy 

and the importance of promoting economic growth. Douglas HoltzEakin is president of the American Action Forum. From 2001 to 

2002, he was the Chief Economist on President Bush’s Council of 

Economic Advisers. From 2003 to 2005, he served as the Director 

of the Congressional Budget Office. 

Kevin A. Hassett is the State Farm James Q. Wilson Chair in 

American Politics and Culture at the American Enterprise Institute. He is also a resident scholar and AIE’s director of economic 

policy studies. He served as a policy consultant in the U.S. Department of Treasury during the George H.W. Bush and Bill Clinton 

administrations. 

Jared Bernstein is the senior fellow at the Center of Budget and 

Policy Positions. From 2009 to 2011, he was the Chief Economist 

and Economic Advisor to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a 

member of President Obama’s economic team. 

Stephen Moore is a distinguished visiting fellow, Project for Economic Growth at the Heritage Foundation. He has written on the 

economy and public policy for The Wall Street Journal. He was also 

a member of the Journal’s editorial board. 

The committee has received your written statements. They will 

all be part of the formal hearing record. You each have 5 minutes 

to deliver your oral remarks. 

We will begin with Mr. Holtz-Eakin. Welcome back to our committee. And you can begin when you are ready, sir. Thank you. 

6 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Well, thank you Chairman Brady, and my 

congratulations to you. Ranking Member Levin and Members of the 

Committee, it is an honor to be here today. 

In my opening remarks, I will make three points. The first is 

that America has a growth problem, and the poster child for this 

is that the Congressional Budget Office has pegged the long-term 

potential for economic growth at 2 percent, which is below the average pace of the economic recovery, and so these are literally the 

good times, according to those numbers. 

The second point is that to address the growth problem, the committee needs to examine supply-side structural changes that either 

cause faster labor force growth or enhanced productivity growth. 

And my third point is there are, within the jurisdiction of this 

committee, potential reforms in trade, in taxes, and entitlements 

that can be useful in boosting the long-term rate of economic 

growth. 

Let me talk a little bit about each in turn. 

First, a way to think about the growth problem is this: In the 

post-war period up to 2007, growth averaged 3.2 percent a year, 

which when you combined with population growth meant that GDP 

per capita, roughly a measure of the standard of living income per 

person, doubled every 35 years. So in a single working career, you 

could imagine the standard of living doubling: people buying a 

home for the first time, sending kids to school, whatever that might 

be. 

If the CBO is right about its 2 percent projection and with population projections, it will take 70 years for the standard of living 

to double, and not in one working career, but in two, you might get 

back to the same kind of advances that Americans have been used 

to. Addressing that problem I think is central to the policy challenges that face the country. 

It would also help with some other things that the committee is 

quite familiar with, and that is the fiscal outlook for the Federal 

budget, right. As the CBO just pointed out in its baseline projections, we are on an unsustainable trajectory. We have been so for 

some time. Improvements in the economic growth will not solve 

this by itself. You can’t grow your way out of this problem, but 

every 10th of a percentage point translates into roughly $300 billion, $325 billion in budgetary improvement over 10 years. And 

having better growth makes addressing these other challenges 

much, much easier. It is important for that reason. 

The second key point is you need to do supply-side productivity 

and labor-force-enhancing reforms to get better growth performance. This is literally by definition not an issue of stimulus or any 

of the kinds of things we have talked so much about in recent 

years. This is about the long-term rate of economic growth independent of business cycles. And they can only be addressed by 

things that raise the growth rate of either the number of workers, 

the labor force, or the output per worker, the income that they can 

produce, productivity. And those two things should be the focus of 

the committee’s thinking: What can we do in the way of permanent 

changes to enhance labor force growth and/or productivity growth? 

7 

And because these are long-term issues, you should be thinking 

hard about structural changes, permanent changes, not temporary 

policies that might alter incentives for a short time. 

Third is that there are some obvious areas where the committee, 

I think, should focus. The first would be in social safety net entitlements and efforts to make them more pro-work in every dimension. 

This morning my institution, the American Action Forum, released 

an analysis of a proposal by Speaker Ryan to enhance the earned 

income tax credit for those who do not have children. Doubling the 

childless EITC, in our estimates, would bring about a little over 8 

million people into work in the United States. That is an enormous 

improvement. It would cost roughly $1,700 in taxpayer dollars per 

job created, which is way better than anything we have heard 

about in terms of job creation. And we know that the dividing line 

between the poor and the not poor in America is those who work, 

and any pro-work improvements of that type are things that the 

committee should be pursuing. Those are things that you could 

pursue. 

The trade agenda. Opening markets to trade is a crucial part of 

growth. Scale of market access helps our companies and our workers. The benefits of competition: enhanced productivity. It is no 

surprise that the high-productivity jobs are in the export sector, 

and that is where the high wages are. 

Tax reform I am sure we will get a chance to talk a lot about, 

but these are ways to increase the efficiency of the existing capital, 

augment capital, whether it is in innovative forms, in physical 

forms, or in the skills of workers. And most testaments indicate 

you could add as much as a half percentage point—I think that is 

the upper bound—over 10 years to the growth rate of the economy. 

And then the final one, which is I think crucial, is entitlement 

reform. Again, in the budget projections, entitlements are driving 

the large and unsustainable deficits in the future. That is not a 

pro-growth strategy. And on top of it, those entitlements are not 

serving the beneficiaries very well. So we can get a more durable 

social safety net, one that doesn’t endanger the pace of economic 

growth and serves the beneficiaries better, and that is an agenda 

that I would recommend to the committee. 

So I thank you for the chance to be here today, and I look forward to your questions. 

Chairman BRADY. All right. Thank you very much. 

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

8 


22375.003

Addressing the Growth Challenge 

United States House of Representatives 

Committee on Ways and Means 

Douglas Holtz-Eakin, President* 

American Action Forum 

February 2, 2016 

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

thank Gordon Gray, jacqueline Varas, and Chris Holt for their assistance. 
9 


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Chairman Brady, Ranking Member Levin, and members of the Committee. thank you for the 

opportunity to speak with you today regarding the essential task of reigniting long-term 

economic growth in the United States. I would like to frame discussion of this imperative in 

three parts: 

Placing the nation's current growth challenge in the context of historical experience; 

Assessing the implications of improved economic performance on the federal 

budget; and 

Suggesting areas of policy reforms with the promise of enhancing futu re economic 

growth. 

Economic Growth: Past and Present' 

The nation has experienced a disappointing recovery from the most recent recession and 

confronts a projected future defined by weak economic growth. Left unaddressed, this 

trajectory will result in faili ng to bequeath to the next generation a more secure and more 

prosperous nation. 

Figure 1: Disappointing Economic Growth 

3.5 

Post Recovery GOP Growth (2009-2015) 

3.0 

2.5 

~ 20 

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0 

<3 1.5 

>-

f. 

.. ., 1.0 0:: 

0.5 

0.0 

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0 ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; ;; N N ~ N N N ~ N N N ~ N N N ~ N N N ~ N N N ~ ~ N 

.().5 "" ... 0 "' "" ... 0 "' "" ... 0 "' "" ... 0 "' "" ... 0 "' "" ... 0 "" 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 
10 


22375.005

Figure 1 shows quarterly, year-over-year growth rates for real Gross Domestic Product 

(GOP) since the "official" end of the Great Recession in june of 2009. As displayed, real GOP 

growth has been stubbornly weak, averaging 1.8 percent (the dotted line). While it is 

generally understood that recoveries from recessions precipitated by financial crises tend 

to be weaker, the persistence of the nation's weak economic recovery should not be written 

off as inevitable, but rather as a failure of economic policy. 

Figure 2: CBO january Baseline 

Projected Growth (2016-2026) 

Even more troubling than the recent past is the outlook. The Congressional Budget Office 

(CBO) projects U.S. economic growth to average only 2.1 percent over the next decadeconsistent with the tepid recovery seen since the third quarter of 2009. This rate of growth 

is below that needed to improve the standard of living at the pace typically enjoyed in postwar America. 

During the early postwar period, from 194 7 to 1969, trend economic growth rates were 

quite rapid. GOP and GOP per capita grew at rates of 4.0 percent and 2.4 percent, 

respectively. Over the subsequent two and one-half decades, however, these fell to 2.9 

percent and 1.9 percent, respectively. 
11 


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During the years 1986 to 2007, trend growth in GDP recovered to 3.2 percent, while trend 

GDP per capita growth rose to 2.0 percent. These were rates quite close to the overall 

historic performance for the period. These distinct periods and trends should convey that 

the trend growth rate is far from a fixed, immutable economic law that dictates the pace of 

expansion, but rather subject to outside influences including public policy. 

More rapid growth is not an abstract goal; faster growth is essential to the well-being of 

American families. 

Table 1: The Importance of Trend Growth to Advancing the Standard of Living 

Trend Growth Rate Per Capita (%) Years for Income to Double 

0.50 139 

0.75 93 

1.00 70 

1.25 56 

1.50 47 

1.75 40 

2.00 35 

2.25 31 

2.50 28 

2.75 26 

3.00 23 

The trend growth rate of postwar GDP per capita (a rough measure of the standard of 

living) has been about 2.1 percent. As Table 1 indicates, at this pace of expansion an 

individual could expect the standard of living to double in 30 to 35 years. Put differently, 

during the course of one's working career, the overall ability to support a family and 

pursue retirement would become twice as large. 

In contrast, the long-term growth rate ofGDP in the most recent CBO projection is 2.0 

percent. When combined with population growth of 1.0 percent, this implies the trend 

growth in GDP per capita will average 1.0 percent. At that pace of expansion, it will take 70 

years to double income per person. The American Dream is disappearing over the horizon. 

The dramatic difference in aspirations, opportunities and achievement between a "2.1 

percent per capita economy" and a "1.0 percent per capita economy" should be cause for 

national concern. Raising the trend rate of growth is central to retaining the American 

dream and the nation's place on the globe. 

Any rapidly improving average standard of living should be shared broadly. Despite 

assertions to the contrary, that has been the historic norm in the U.S-' More recently, there 
12 


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have been numerous assertions that the labor market is "broken" and that there is a 

disconnect between labor productivity and compensation that has only grown over time. 

This purported disparity has been used to justify an ever-growing menu of policies that 

includes a higher minimum wage, increased unionization, and other similar labor policies. 

Fortunately for workers, this disconnect is a myth. Calculated correctly, compensation has 

tracked worker productivity, belying the notion that broad economic growth is not broadly 

shared3 

Economic Growth and the Federal Budget 

A second benefit of improved economic growth is budgetary. The federal government faces 

a problematic budgetary future, largely due to long-term pension, health, and other 

spending promises coupled with recent programmatic expansions. The core, long-term 

issue has been outlined in successive versions of the Congressional Budget Office's (CBO's) 

Long-Term Budget Outlook. In broad terms, the inexorable dynamics of current law will 

raise federal outlays from an historic norm of about 20 percent of Gross Domestic Product 

(GOP) to anywhere from 30 to nearly 40 percent of GOP. Any attempt to keep taxes at their 

post-war norm of about 18 percent of GOP will generate an unmanageable federal debt 

spiral. 

This depiction of the federal budgetary future and its diagnosis and prescription has all 

remained unchanged for at least a decade. Despite this, lasting action (in the right 

direction) has yet to achieve the force of law. 

In the past several years, the outlook has worsened significantly. 

Over the next ten years, according to the CBO's latest baseline projections, the deficit will 

average over $900 billion. Ten years from now, in 2026, the deficit will be $1.3 trillion. As 

a result of the nation's irresponsible spending binge, in 2026 debt held by the public will 

have more than doubled from its pre-financial crisis level in 2007 to over 80 percent of 

GOP and will continue its upward trajectory. 

High levels of indebtedness, coupled with weak projected growth, crowd out productive 

investment and further suppress economic growth. This combination eventually leads to a 

spiral of higher interest rates, debt service payments, and damaging fiscal policy. Within 

the current budget window, borrowing roughly equals interest payments, meaning the 

existing debt portfolio is already constraining policymakers and jeopardizes the budget's 

capacity to absorb another recession or geopolitical crisis. 

Despite the nation's significant budgetary challenges, even incrementally higher economic 

growth can ameliorate the fiscal outlook by increasing taxable income and suppressing 

reliance on the social safety net. According to the CBO, a persistent 0.1 percentage point 
13 


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increase in the real growth rate translates into about $300 billion in budget savings. 4 A 

robust pro-growth agenda could realize multiples of this "rule of thumb" in deficit 

reduction. 

A Pro-Growth Policy Agenda 

We should not settle for 2 percent growth as the new normal, forgoing rising wages for 

American families, but rather embark on a pro-growth policy agenda. The elements of this 

agenda should touch on every element of public policy. Within the Committee's purview, 

the Congress and the administration should further pursue sound trade policy, entitlement 

reform and a comprehensive overhaul of the nation's tax code. 

Trade Agreements 

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

Trade creates jobs, increases GOP, and opens markets to American producers and 

consumers. The U.S. is the world's largest participant in global trade-with $1.4 trillion in 

exports of goods and services and imports of over $2 trillion-and has established free 

trade agreements with 20 countries.5 The U.S. is the largest exporter of services in the 

world6 Trade supports over 11 million jobs in the U.S. 7 and U.S. exports comprise a full 13 

percent of U.S. GOP8 

These numbers are significant, and pursuing a robust trade agenda in 2016 offers the 

opportunity for improved economic growth. The Trans-Pacific Partnership (TPP), finalized 

in 2015, was promised to be a pro-growth trade agreement. I appreciate the Committee's 

and Congress' exercise of its oversight authority granted in the Trade Promotion Act to 

ensure that TPP as agreed-to remains sound trade policy. 

Two other trade agreements, the Transatlantic Trade and Investment Partnership (TTIP) 

and Trade in Services Agreement (TiSA), are currently being negotiated and offer 

opportunities for expanding global markets. TTIP would fully open EU markets, boost GOP 

by $125 billion, and create more than 740,000 U.S. jobs9 TiSA, the first trade agreement in 

services since 1995, could bind together 75 percent of the world's $44 trillion services 

market.'O If effectively negotiated, these agreements offer significant economic potential. 

Tax Reform 

The U.S. tax code is broadly viewed as broken and in need of repair, and for good reason -it 

hasn't been overhauled in 30 years. Whereas the administration would instead make the 

tax system worse- adding higher rates and new taxes, including on the middle class -the 
14 


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Committee should pursue a fundamental overhaul of the nation's tax system11 A sound 

reform of the U.S. tax code is an essential element of any pro-growth strategy, and could 

substantially increase trend economic growth, boosting the economy and tax revenue.12 

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

for Congresses and administrations over the past 30 years, and a wholesale reform of the 

code is invariably difficult during an election. This committee is to be commended, 

however, for its recent contributions to this effort, including the recent tax legislation that 

enshrines current policy as current law and grants more clarity to the nation's revenue 

outlook.'3 

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 faster 

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.14 

A more robust reform offers even greater growth benefits. Highly respected economists 

David Altig, Alan Auerbach, Laurence Kotlikoff, Kent A. Smetters, and Jan Walliser, 

simulated multiple tax reforms and found GOP could increase by as much as 11 percent 

from tax reform-'S The highest growth rate was associated with a consumption-based tax 

system that avoided double-taxing the return to saving and investment. 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 GOP by 5.1 percent over ten years- a growth effect that roughly translate into about 

0.5 percent higher trend growth, resulting in faster employment and income growth. Gains 

of this order are achievable through the types of reform efforts that could come before this 

Committee. 

Entitlement Reform 

Entitlement reform is perhaps the most important issue for the Congress. Inexorable 

increases in entitlement spending are the fundamental source of projected federal red ink. 

Those deficits and associated debt accumulation eventually threaten the U.S. economy with 

a sovereign debt crisis - hardly a pro-growth strategy - or the necessity of dramatically 

higher taxes- also not supportive of more rapid growth. Even worse, those same 

entitlement programs are failing financially and not providing the intended secure safety 

net. 

Last July, the Trustees of the nation's major safety-net programs raised the annual alarm 

that America's entitlement state is going bankrupt- driving up deficits now and leaving 
15 


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America's seniors vulnerable to severe benefit cuts in the future1 6 Controlling spending is 

more efficient than tax increases for addressing debt challenges - sensible entitlement 

reform therefore can be a part a pro-growth agenda, while assuring the financing of these 

programs for future generation. 

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 $1.1 trillion in 201617 Any serious effort to promote economic growth will have to 

address the U.S. health care system. 

In addition to the dollars, the Affordable Care Act (ACA) must be reversed to mitigate the 

law's negative economic impacts. Burdensome requirements forced upon employers and 

individuals, and poorly constructed revenue streams should be changed to reverse their 

downward pressure on economic growth. 

Impact on Businesses 

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

sector, slowing economic growth. AAF estimates that on average, individuals who work for 

a company with 50-99 employees lose $935 in wages 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 as of 

September 2014 these regulations (as well as rising health insurance premiums) had 

already reduced the number of jobs by 350,000 across the country. 18 

Employer Mandate and the 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 

economy19 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 in September of 2014, 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.'o 

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 
16 


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

pressures on the economy. 

Poorly Designed Taxes 

Finally, building on the Protecting Americans from Tax Hikes Act of 2015, and provisions in 

the Omnibus Appropriations legislation," we should finish the job of 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 fully 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 $11.3 billion in 2015 and 2016. 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 2014 and $90-$215 in 2015. 22 While the HIT has been suspended 

for 2017, permanently 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. 

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

medical devices.'3 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. It also increases insurance premiums, since the most expensive 

devices are generally covered by insurance, or used for services covered by insurance. 

The medical device tax has already cost the industry over $900 million. 24 There is broad 

bipartisan support for repealing this tax, and it has already been suspended for 2016 and 

2017. In order to create large benefits for this industry and to decrease costs for medical 

device consumers, Congress should fully repeal the medical device tax. 

Conclusion 

The United States' recent disappointing economic past threatens to become its future 

without a commitment to a pro-growth policy agenda. Within this Committee's purview are 
17 

f 


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policies that could open markets abroad, improve a broken tax code, and undo the damage 

done to the health care sector and the economy by the ACA. These policy prescriptions 

should bolster economic growth, which will strengthen the nation's precarious finances. 

More importantly, faster economic growth is essential to improving the standard of living 

for the next generation, a basic obligation that has always been fulfilled in the past 

J This section is drawn from 

https:f jlvww.uschamberfoundation.orgjsitesjdcfault/filesjThe%20Growth%201mperative.pdf 

'See Imps:/ fwww.uschamberfoundation.org/sltesjdefaultjfiles/Thc%20Growth%201mperative.pdf 1 http://americanactionfotum org/research/does~compensat on- ag:behlnd-product ity 

'https://www.cbo.gov/sites/default/files/114th-<:ongress·2015·2016/reports/49892·0utlook201S.pdf 

s • https:/ fustr.gov /trade-agreements/free-trade-agreements 

• https:/ fwww.wto.org/englishjres_cjbooksp_cjworld_trade_report15_c.pdf 

' (http:/ fwww.trade.govfmasfianfbuild/groups/public/@tg,.ian/documents/webcontent/tg,.ian_005406.pdf 

• http://data.worldbank.org/lndicator/NE.EXP.GNFS.ZS 

• 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/245085/TTIP _and_the_SO_State 

s_GovUK.pdf 10 https:/ /ustr.gov/TiSA 

'' httpJ/americanactionforum.org/insights/ooops 

u http://americanactionforum.org/research/economic·and·budgetary-consequences-of-pro-growth-taxmodernization 

u http:/ /waysandmeans.house.gov/brady-highlights-how-the-path-act-helps-american-taMpayers/ 

" Sec: Feldstein, Martin, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1966 Tax 

Reform Act." journal of Political Economy, June 1995, (103:3), pp 551·72: Carroll. Robe . Douglas Ho ~L-Eakin, 

Mark Rider and Harvey S. Rosen, "I nco me 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 journal 49.4 (1996): 617-42: Romer. Christina D .. and David H. Romer. "The 

Macroeconomic Effects ofT ax 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/pa pers/wl3264 

tS Altig, David, Alan f. Aue•·bach, Laurence f. Kotlikoff. Kent A. Smelters and jan Walliscr, "Simulating 

Fundamental Tax Reform in the United States." American Eco110mic Review, Vol. 91, No. 3 (2001), pp. 574·595 

'• http://americanactionforum.org/research/the·future-of·americas-entitlements-what-you-need·to-know-about· 

the-mel 

"https://www.cbo.gov/sites/default/files/114th-congress-2015·2016/reports/50724-BudEconOutlook-3.pdf 

•• http://americanactionforum.org/uploads/files/research/lmpact_of_ACA_on_Smaii_Business_PDF _Format.pdf 19 http //america actionforum.org/res.earch/prime -emp oye ~mandate 

20 http://americanactionforum.org/insights/the·problem-with-acas·30-hour·work·week 

"http:f/wavsandmeans.house.govfwp;:ontent/uploads/2015/12/Finai-WM-Health.-Extenders.pdf 

" http:/ famericanactionforum.org/vidcos/fox·news·speaks·with-douglas·holtz-cakin·on·the·impact·of·the· 

acas .. hcalth·i 

u httpJ/americanactionforum.org/research/ptlmer-the-medlcal-device-tax 1' http:/ fthehill.comfpolicy /fi nancc/21552 2 rcpo•~ medical evicc-tax-miss i ng-revcnue·mark 
18 

Chairman BRADY. Mr. Hassett, you are recognized. 

STATEMENT OF KEVIN HASSETT, DIRECTOR OF ECONOMIC 

POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE 

Mr. HASSETT. Thank you, Chairman Brady, Ranking Member 

Levin. It is really an honor and a pleasure to be here. Like Mr. 

Holtz-Eakin, my testimony is really divided into three parts. We 

didn’t coordinate on that ahead of time. 

The first part looks at how the economy has been doing and how 

that relates to what the administration has forecast the economy 

would be doing. And I think that the lesson of the first section of 

my presentation is that the administration has overestimated 

growth repeatedly, on average, by about a percentage point even 

though they have been able to update each year their forecasts 

based on the misses that they made before because my chart presents their forecasts a year ahead of the growth that we actually 

observe. And so, clearly, there is something going on where they 

are not using the right model or not updating the model that they 

are using because they keep making the same kind of mistake over 

and over and over again. I add—and it is an important qualification in my testimony—that I don’t think that is a partisan thing 

at all because there are a heck of a lot of economists who are doing 

the same thing, you know, from the left and from the right. 

But the third chart in my presentation suggests that there is sort 

of a reason why this has been going on, and it is that we have had 

a financial crisis, as Ranking Member Levin’s presentation suggested, that when President Obama came into office, it was a terrible, terrible time and financial markets were falling apart. And 

if you look at the Reinhart and Rogoff data that suggest, well, how 

would an economy do after a financial crisis, you can see that generally it does a lot worse than a typical recovery. And in my third 

chart, you can see that the U.S. is doing a lot worse than a typical 

recovery, but they are doing about as much worse as you typically 

see after a financial crisis. And so if you wanted a reason why we 

have not done better than we have, then you could say, well, it is 

because we have experienced exactly the same thing that for hundreds of years countries have experienced after a financial crisis. 

If you read Reinhart and Rogoff, you will see that part of the reason why you get slow growth is policy errors, and so then it opens 

up the question is, are there policies that we could pursue right 

now so that we could start to do better? And that is where the second part of my testimony begins. And there I think that there is 

a lot of hope. And, again, I don’t think of it as a partisan hope. I 

think it is a hope for everybody who believes in science and economics. 

And I focus my presentation in the second part just on papers 

that in the last 3 years have come out in the American Economic 

Review. This is not a partisan place. It is like the gold standard 

of economic journals. And in there, there is this literature that is 

starting to find that tax policy has a much bigger effect than economists used to think, and this is looking at actually hard, time series evidence of how the economy moves up and down. And my 

presentation discusses why the scientists at top universities, including the Romers—Christina Romer was President Obama’s 

19 

Chairman of the Council of Economic Advisers—that why they are 

finding this is really quite intuitive, that over time when the economy goes up and down, if the economy goes down, then members 

of the Ways and Means Committee historically have said: Gee, the 

economy went down. We have to do something about it. Maybe we 

should have a tax cut to try to get the economy out of this recession 

and/or a spending increase. 

But what that means is that if we look back at history over time, 

then in bad times, we have tended to lower taxes. And so if you 

don’t account for that, then you will find that taxes tend to be low 

when things are bad, and you could, you know, conclude that supply-side economics doesn’t work. In fact, it goes the other way. 

If you exclude those endogenous policies from your analysis, you 

tend to find really big positive effects of tax cuts, really big negative effects of tax hikes. And to put that in perspective, if President 

Obama’s team had believed this latest literature and revised their 

year-ahead forecasts to account for the negative effects of the tax 

hikes that happened when we lifted the top marginal rate, then 

their forecasts would have just about nailed the GDP growth rather 

than missing it by a lot. And so I think that, yeah, that is the scale 

of the tax effect discussed in my testimony. 

The third part of my testimony, which is less important maybe 

now for discussion, is that, you know, technical staffs will often 

say: Well, there is no economic model that can give you effects as 

big as what they are finding in the data, so the data must be 

wrong. And I talk about why there have been a lot of developments 

in the theoretical literature that suggests that we now understand 

why the economy responds as much as it does. And there, again, 

it is very, very intuitive. If you are a 35-year-old worker and we 

lift the tax rate, then if you work an hour less, then you lose the 

hour wage, but you also lose whatever increment to your human 

capital you would get from working harder. So you get some experience. You drive up your wage in the future, and if you don’t work, 

then you lose not only the wage today, but the wage in the future. 

But if you are a person like myself, 54 years old, then if I, you 

know, don’t work an hour, I am not really going to change my future wage very much. And so if you lift the top rate, what you 

ought to see is that younger people don’t respond very much because they are worried about investing in their future by working 

harder today, and older people, like myself, will respond a lot to 

taxes. If you account for that effect and build it into models, you 

end up getting out of the models effects that are just about the size 

that we are seeing in the time series data. 

And so, to conclude, what we are seeing now, I think, in the latest journals is almost a consensus emerging that taxes are having 

a much bigger effect on economies around the world than we 

thought. These results have been replicated in Canada, the U.S., 

the U.K., and Germany now. And so I think that what it suggests 

is that there is an enormous opportunity for this committee in the 

next few years to have a big positive effect on the growth of this 

economy. 

Thank you very much. 

Chairman BRADY. Thank you. 

[The prepared statement of Mr. Hassett follows:] 

20 


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~ 

~, American Enterprise Institute 

for Public Policy Research 

Statement before the House Ways and Means Committee 

Reaching America's Potential: Delivering Growth and Opportunity for All Americans 

Kevin A. Hassett 

Director of Economic Policy Sn1dies and State FMm James Q. Wilson Chair 

Ame rican Enterprise Institute 

February 2, 20 16 

Th tneM exprwed in rlti$ testimony are tho$e of rite a lllllOI' alone and do not neceSlarily represent rhose of rlte 

American Emerprise Institute. 
21 


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I. Introduction 

If any proposition generates a bipartisan consensus, perhaps it is that economic growth in 

the United States has been too low. We were reminded of this just last week when we learned 

that GOP increased at only 0.7 percent in 2015:Q4. As we review our economic experience, it is 

natural to ask whether such slow growth should be expected, and whether the disappointment 

might be related to policy actions that may have held the recovery back. 

One simple way to evaluate this is to look at how real GOP performed, and to compare 

that to the outlook presented by professional forecasters. As can be seen in Figure I, by this 

metric, the slow growth can be viewed as something of a surprise. The chart shows how real 

GOP growth has performed relative to the Obama Administration forecasts of real GOP growth 

generated during the year immediately preceding that year. (For instance, the real GOP annual 

growth rate forecast for the fiscal year 2010 was formed in February-May 2009, and was 

released with the budget for the fiscal year 2010. The value of the 2010 year-ahead forecast in 

Figure I is that forecast.) The pattern ofunderperformance is unambiguous. 

Figure I. Real GOP forecasts in historical perspective 

- Year ahead forecast (Obama) - Rea lized 

IE 

Another way of thinking about the situation is to assess how much higher real GOP per capita 

would be today, if real GOP per capita increased at the Obama Administration's year-ahead 

forecast of real GOP growth in every year since President Obama took office, adjusted for 

population growth. The first budget for which the Obama Administration provided growth 

forecasts was the fiscal year 2010 budget. If real GOP per capita, which was $46,930 in 2009, 

then increased at the year-ahead real GOP growth forecast in every year between 2010 and 2015, 

after adjusting for realized population growth, real per capita GOP would have been $53,293 in 

2015. But the realized level of real per capita in GOP in 2015 was in fact only $50,797. As 
22 


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Figure II shows, this "forecast-implied" level of real GOP per capita in 2015 is $2,496 (4.9%) 

higher than its rea lized value. To some extent, this captures well the stakes lor economic policy. 

Flcure 11. Real GOP per capita: foretast vs. reality 

...... 

I should add that such underperlbnnance is not a unique characteristic of administration 

forecasts, and there is no reason to expect that the errors are in any way attributable to 

partisanship. Many private and independent forecasters made similar mistakes. 

However, that does not mean that the slow growth should have been unexpected. 

Relative to other countries that experienced a financial crisis of their own- based on data that 

comes from Cannen Reinhart and Kenneth Rogoff, two Harvard experts on financial crises- the 

U.S. experience has been fairly typical. That is, as Figure m indicates, the U.S. growth path has 

been in line with what the history of recoveries from financial crisis would suggest it would be. 

For the most pan , economies that have undergone a financial crisis go back to the "nonnal" they 

experienced before the c risis atler an extended period of slow growth. We should be, if history 

is a !,•uide, on track to rctum to nonnal. And Figure III suggests that we are. 
23 


22375.016

2.()% 

1.0% 

0.0% 

· 1.0% 

·2.0% 

·3.0% 

·4.0% 

· 5.o% 

-6.0% 

·1.0% 

·8 .0% 

Figure Ill. Contextualizingthe post-crisis U.S. 

,. 

r-. ; ' _, ... - ; 

t+l h+2 '1:3 'M-~ 1+6 ' t+7 

I ,' .... 

t'-.. I , ,, I I 

' v I 

I ~ 

' ~ 

\ 

--us RGDParowth, depature from 1()-yearpre-aisismean 

- - Median GOP (Roaoff and Reinhart dota), departure from l~e rpre-crisis mean 

To be sure, there are many other factors influencing growth besides the financial crisis. 

Regulatory and tax policy, in particular, will likely have to be adjusted if we are to experience 

growth on par with what the other countries that have fully recovered from a financial crisis have 

enjoyed. The good news is that the latest economic literature suggests that there is ample room 

for optimism if this committe-e pursues significant tax reform. 

II. The latest evidence on taxes and growth 

For many years, the economic literanu-e has been fairly divided regarding evidence that 

marginal tax rates have a significant impact on economic growth. But some areas of the 

literature remain less divided than others. 

The literature suggesting that current corporate tax policy in the U.S. is quite hannful, 

and that lowering corporate taxes would likely increase growth, is one that is less divided. That 

is, the literature on the benefits that stand to be gained from lowering U.S. corporate taxes is less 

controversial than many comers of the literature on taxation. As I once told the Joint Economic 

Committee, for instance, there is substantial evidence that a "Laffer curve" exists for corporate 

taxation: the amount of economic activity generated by cuts to corporate taxes is so high that 

even if the rate of taxation decreased, government revenues from the corporate tax would 

increase, as economic activity carne to the U.S. and became part of the U.S. tax base (Hassen 

2012). 

For the income tax, however, the estimates have been more mixed. 111ere has, though, 

been a recent explosion in academic work that relies on a significant methodological innovation 

to better estimate tax effects. And this literature has strong implications both for understanding 

why growth in the U.S. has disappointed, and for understanding the likely growth path if 

marginal tax rates were reduced in the fut1are. 

4 
24 


22375.017

Though this literature may seem technical, the innovation that sparked the recent 

explosion of academic work is quite easy to understand. The evidence it has generated, in fact, is 

so striking that it is essential that U.S. policymakers begin to incorporate it into their thinking. 

The basic problem for economists, the problem addressed by this innovation, is that policy tends 

to be set by policymakers with an eye toward how the economy is doing. For instance, if the 

economy is weak, a bipartisan consensus might emerge to cut taxes. But when a recession is out 

of mind and the economy is booming, it might be easier for policymakers to agree to raise taxes. 

This tendency would create a world where taxes might often be lower in bad economies not 

because taxes caused harm, but because tax cuts were introduced when stimulus was most 

needed. Economists can really only estimate the impact of something as complex as a tax cut if 

it were to happen exogenously-that is, if it were to happen as if by chance, without regard to the 

current state of the economy. 

The innovation in the literature is to use narrative analysis to separate tax changes into 

those that were motivated by a weak economy, and those that were not, and then to estimate the 

impact of taxes using the latter, which are more likely to be exogenous and therefore informative 

as to the effects of tax changes. The literature is rapidly growing, and for brevity I will focus 

only on those papers in the American Economic Review, perhaps the leading economic journal. 

The first study, the "inventor" of this methodological approach in some sense, was a 2010 

study by David and Christine Romer ofUC Berkeley (Romer and Romer 2010). They analyzed 

data from the U.S. and found that an income tax increase that raises revenues by 1% of GDP 

lowers output by 3% over three years. Karl Mertens of Cornell and Morten 0. Ravn of 

University College London deployed a slightly different approach in a 2013 study also focused 

on the experience of the United States (Mertens and Ravn 2013). But, even using a different 

approach, they estimated effects similar in magnitude to those in the original Romer and Romer 

(2010) study. Specifically, Mertens and Ravn (2013) found that a change in the personal tax rate 

that lowers tax revenues by 1% ofGDP increases output by up to 2.5%. The similarity of this 

estimate to that in Romer and Romer (20 1 0) should give one confidence in the robustness of 

their estimates. This approach, rigorous and well-grounded, has since been used to analyze the 

experiences of other countries. James Cloyne of the Bank of England turned to the experience of 

the United Kingdom, which serves as a great case study because it has many clearly-identifiable 

episodes of tax reforms (Cloyne 2013). The estimate in Cloyne (2013) of the effect of tax cuts on 

output is, again, similar to the estimates in Romer and Romer (20 1 0): a 1 percent cut in taxes 

increases GDP by up to 2.5% over three years. Others have applied the approach to other 

countries, and found similarly striking results. 

A simple example can illustrate the relevance of these findings for understanding the 

recent U.S. economic experience. The year-ahead forecasts for GDP growth by the Obama 

Administration erred on the optimistic side for 2013 and 2014 by about 1 percent per year. If the 

Obama Administration had taken the results from the previous paragraph seriously, and factored 

into their forecast the negative effects of the increase in the top marginal income tax rate implied 

by the literature, then they would have reduced their forecast significantly. In other words, the 

forecast error would have been negligible if they had simply accounted for the impact of the tax 

increase using this latest evidence. 

5 
25 


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III. Theoretical underpinnings 

One argument levied against the existence of these effects, even though they are now 

well-documented, is that it is difficult to reconcile such large effects of income tax changes with 

the idea that workers that have a job tend to work about the same amount each year. If they do 

not work much harder when tax rates are cut, the argument goes, then how can we possibly get 

much GDP out of tax cuts? 

This argument falters once one factors in the results of the latest research. The key 

breakthrough came from Keane and Rogerson (2011). Fortunately, the results are once again 

quite intuitive. The idea is that the return to working is quite different depending on how old you 

are. If you are very young, then if you work an extra hour, you get paid an hour's wage, but you 

also gain experience that increases your wages for the rest of your career. For an older person 

like myself, if! work an extra hour today it probably does not influence my future wage very 

much. I personally feel comfortable putting it in the official record that my own human capital 

as I approach my mid-fifties feels like it is declining. 

Accordingly, one might expect that a tax increase would not reduce the hours worked of 

younger workers very much, since the younger workers would factor in not only the lost hourly 

wage but the lost value of the extra experience. By contrast, one might expect to observe a big 

impact on the labor supply of older workers. And the output effects for these older workers 

might be large, since they have accumulated all of that experience. The analyses that argue that 

workers don't respond much to tax rates have not accounted for this difference, and Keane and 

Rogerson (20 12) show that fairly large labor supply responses to taxes are visible once one 

accounts for this affect. 

In collaboration with the Brigham Young University Macroeconomics and 

Computational Laboratory and professors from BYU and Montana State University at the Open 

Source Policy Center (OSPC) at AEI, we have developed a model that allowed us to run a 

simulation that is consistent with the empirical findings of the last section. DeBacker et. al. 

(20 15) deploys the methodology pioneered by the OSPC and its collaborators, which 

incorporates bridges between a microsimulation and a general equilibrium over-lapping 

generations (OLG) model to generate dynamic estimates of the effect of tax policy.' Modeling 

the effects of an across-the-board I 0% statutory cut to marginal tax rates, they estimate that such 

a reform would result in a contemporaneous GDP increase of 1.64%. Though the growth rate 

effects diminish as time goes on, it remains significant. 

These estimates rely on larger labor supply responses as discussed, and also suggest that 

the recent tax hike would have caused significant economic harm. According to that framework, 

younger individuals are less responsive to changes in marginal tax rates because human capital 

accumulation increases are a larger share of the marginal benefit of working an extra hour. This 

suggests that the labor force participation of younger individuals would have dropped much less 

than the labor force participation of older individuals in response to the recent marginal tax rate 

increases. If one looks at the changes in labor force participation between December 2012, the 

last month before rate hikes took effect, and October 2015, the data reveal precisely the pattern 

1 The microsimulation is based on a rich set of realistic demographic characteristics, constmcted by matching data 

from the IRS Public Use Files to data from the Current Population Survey. 

6 
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across the age distribution that one would expect to observe under this view. Whereas labor force 

participation decreased by over 2% in the 55+ age group during this time period, it decreased by 

less than .5% in the 35 to 44 year old age group. In the 45 to 54 category, the decrease is just 

north of .5%. 

Thus, evidence of the positive potential effects of tax reform appears to be robust in the 

data. The effects are consistent with results drawn from cutting edge models of the economy 

when we account for the different responses of workers at different stages of the life cycle. 

Recent forecasts of the economy by the administration have missed by about the amount one 

would expect if they underestimated the effects of recent tax hikes, and the labor force 

participation data have precisely the age pattern our discussion predicts. 

IV. Conclusion and looking ahead 

While literatures evolve, and there are always uncertainties, the level of confidence that 

members of this committee should have about the growth possibilities of tax reform is very high 

indeed. I would like to close by mentioning collaborative work we have been engaging in at AEI 

that we hope will help the members of this committee in its deliberations. AEI's Open Source 

Policy Center has developed a fully transparent suite of economic models for studying taxes. 

You shouldn't have to wait for weeks or months or years to learn about the effects of your 

proposals; you should be able to learn about the effects of your tax reform ideas as quickly as 

you think of them. Our new application allows anyone with a web browser to analyze individual 

and payroll tax changes under a variety of different growth and behavioral assumptions and to 

then receive a score, a dynamic score, and distributional tables at your desk. A wide range of 

assumptions concerning the impact of dynamic effects can, of course, be explored. As we look 

ahead to all of the positive possibilities of tax reform, our hope is that access to real time analysis 

of the ideas of every member of this committee will help stimulate debate and progress. 

References 

Cloyne, James. "Discretionary tax changes and the macroeconomy: new narrative evidence from 

the United Kingdom." The American Economic Review 103.4 (2013): 1507-1528. 

DeBacker, Jason, Richard W. Evans, and Kerk L. Phillips. "Macroeconomic effects of a 10% cut 

in statutory marginal income tax rates on ordinary income." AEI Working Paper (2015): 2015-

15. 

Hassett, Kevin. "How the Taxation of Capital Affects Growth and Employment." Testimony 

before the Joint Economic Committee, April 17 2012. 

Keane, Michael, and Richard Rogerson. "Micro and macro labor supply elasticities: A 

reassessment of conventional wisdom." Journal of Economic Literature (2012): 464-476. 
27 

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Mertens, Karel, and Morten 0. Ravn. "The dynamic effects of personal and corporate income tax 

changes in the United States." The American Economic Review 103.4 (2013): 1212-1247. 

Romer, Christina D., and David H. Romer. "The Macroeconomic Effects of Tax Changes: 

Estimates Based on a New Measure of Fiscal Shocks." The American Economic Review (2010): 

763-801. 

8 
28 

Chairman BRADY. Mr. Bernstein, you are recognized. 

STATEMENT OF JARED BERNSTEIN, SENIOR FELLOW, CENTER 

ON BUDGET AND POLICY PRIORITIES 

Mr. BERNSTEIN. Well, thanks so much, Chairman Brady and 

Ranking Member Levin, for having the hearing today. 

From the perspective of working families, probably the most important aspect of the current economy is the state of the job market. Here, the U.S. economy is on very solid ground. Payrolls were 

up $2.7 million last year, slightly below the 2014 edition of 3.1 million jobs. The cumulative gain of 5.8 million jobs marks the strongest 2 years of payroll gains since the late 1990s. As was said, private businesses have now added 14.1 million jobs over 70—seven 

zero—straight months. That is a record consecutive streak. The unemployment rate is down by half since it peaked at 10 percent in 

late 2009. 

These developments, along with very low inflation, are helping to 

boost real earnings of middle wage workers. After falling for 3 

years, their real weekly earnings rose in both 2014 and 2015 by 1.8 

percent and 1.4 respectively. In other words, while we can certainly 

find areas of concern in today’s economy, there is too much inequality, too low productivity growth, we can and should grow faster 

than the average 2 percent real growth rate over this expansion. 

The labor market has been long improving, and if anything, job 

growth has recently accelerated. 

Turning to tax policy, I stress two important criteria: making the 

Tax Code more effective at reducing rather than exacerbating 

pretax income and wealth inequality; ensuring ample revenues 

with respect to our fiscal obligations. Based on demographic pressures alone, we are going to need more, not less revenue going forward. One way to achieve these goals simultaneously, often with 

the added bonus of improving the economic efficiency of the Tax 

Code, is to eliminate or reduce tax subsidies and loopholes that 

contribute to wealth inequality, reduce investment, and incentivize 

the overseas outsourcing of American jobs. 

In the spirit of these criteria, I would strongly urge the committee to be extremely wary of what are essentially trickle-down 

tax cut arguments. The evidence has not been friendly to such arguments. In my written testimony, I cite various nonpartisan experts. Here are some of their conclusions: Quote, ‘‘At the Federal 

level, there is virtually no evidence that broad-based corporate tax 

cuts have had a positive effect on growth. That has been amply 

demonstrated at the national level, where tax cuts have eroded revenue without discernible effect on economic activity.’’ 

Quote, ‘‘There is no evidence that links aggregate economic performance to capital gains rates.’’ 

There has been, quote, ‘‘no statistically significant correlation between capital gains rates and real growth in domestic GDP during 

the last 50 years.’’ 

Yes, there is significant room for improvement in our Tax Code, 

especially on the business side, but Congress must be wary of trickle-down tax cut fantasies. It would be nice if they were true, but 

they are not. 

29 

Turning to issues of poverty and inequality, we are going to hear 

a lot today about ideas to increase the economy’s growth rate, but 

since economic inequality began to rise in the 1970s, middle class 

prosperity in the U.S. has not been a function of growth alone. As 

a much larger share of economic output has accumulated at the top 

of the income scale, less growth has reached the middle class and 

the poor. To the extent that low and middle income families have 

gotten ahead over these decades, it has been due to more hours of 

work at slower growing or even declining real hourly pay rates, increased government transfers, especially those associated work, 

like recently expanded earned income tax credits and the unique 

period of full employment in the late 1990s. 

We cannot assume that overall GDP or productivity growth will 

yield opportunities for less advantaged families. Growth can’t help 

them if it fails to reach them. I hope we can discuss policy ideas 

to reconnect growth and more broadly shared prosperity. 

In this regard, the Affordable Care Act has been remarkably successful at reducing the economic insecurity associated with the lack 

of affordable health coverage as well as contributing to the slower 

growth of healthcare costs. Given the predominant role of 

healthcare spending in terms of our present and future fiscal outlook, the latter, slower growing healthcare costs, is essential in the 

pursuit of sustainable fiscal policy. 

Despite heated rhetoric against it, there is just no way the ACA 

has killed jobs. I noted earlier the strength of overall employment 

since health reform came online, but my testimony digs into this 

claim that rules associated with healthcare reform have led to more 

involuntary part-time work. To the contrary, such work has been 

declining since the ACA went into effect, the same way it has in 

past recoveries before it existed. 

Thank you. I look forward to your questions. And I actually yield 

back my time. 

Chairman BRADY. Thank you very much. 

[The prepared statement of Mr. Bernstein follows:] 

30 


22375.021

Testimony by Jared Bernstein, Center on Budget and Policy Priorities, 1/29/16 

Chairman Brady, ranking member Levin, I thank you for holding this important hearing on 

economic growth and opportunity. 

While the range of issues I cover, including taxes, health care, trade policy, poverty, 

preparing for the next recession, and more, may seem disparate, there .i.s, in fact, a strong 

uillfy.i.ng theme that L.nks them. In eveqr area, these are policies under this committee's 

pmview that can help or hurt working families. My testimony will highlight a positive policy 

agenda by which Congress can support growth and help families facing challenges in today's 

economy. 

Before I get to the specific policy areas, however, I begin with a brief ovetview of the 

current economic context within which these policy challenges are taking place. 

Current conditions 

TI1e current US economy is characterized by veq solid labor market trends, low 

unemployment, steady (if plodding) GDP growth, and unusually cheap energy. 

Etmgy: Oil that sold for about $1 00/ barrel two years ago is now selling for around $30. Tius 

sharp drop in energy prices has both reduced consumer prices and roiled global markets. 

From a macro-perspective, tlus price decline-a function of both increased supply of 

various energy sources and weakening global demand, particularly from China-is a 

significant problem for countries tl1at are net exporters of tlus commodity and a potential 

advantage for net importers. 

TI1ough tl1e US is still a net importer, President Obama meant it when he endorsed an "all of 

tl1e above" approach to energy. The US has doubled its domestic oil production since 2008, 

as the shale boom has added 3 million barrels per day to tl1e global energy market, while tl1e 

admiillstrati.on continues to work to develop renewables. So, while we're still a net importer, 

more jobs, families and towns are now engaged in botl1 tl1e extraction of fossil fuels and the 

development of renewable energy. Thus, while price declines help American consumers 

broadly, and, by holding down inflation, boost real wage growtl1, some communities tl1at 

have invested in energy extraction in recent years are hurt by oil's very low price. 

Jobs and Wages: Job growth has been particularly strong. Net payroll gains in 2015 amounted 

to 2.7 million, slightly below tl1e 2014 addition of 3.1 million jobs. That cumulative addition 

of 5.8 million jobs over tl1e past two year marks tl1e strongest two years of payroll gains since 

tl1e late 1990s. Private businesses have now added 14.1 million jobs over 70 straight months, 

a record consecutive streak. 

Figure 1 shows tl1e components of real weekly earnings for middle-wage workers over tl1e 

past few years: hourly wages, weekly hours, and inflation1 After falling for tl1ree years, real 

weekly earnings rose in botl1 2014 and 2015, by 1.8 percent and 1.4 percent, respectively, for 

tl1ese middle-wage earners. The figure also shows tl1at while nominal wage growtl1 has 

1 The data are for the 82 percent of the private workforce that are blue-collar workers in manufacturing and 

non-managers in services. 
31 


22375.022

slightly ~cceler<~ted, the b rgest factor driving re~l eamings g<Jins is lower inthtion. \'qlule 

hourly wage growth picked up a bit last year, growing 2.4 percent in 2015 as opposed to the 

about 2 percent of d1e prior two years, d1e big difference was the sharp energy-induced 

decline in d1e price index. 

Figure 1 

Change in Real Weekly Earnings 

2010 2011 2012 2013 2014 2015 

Wttldy Hour• • Rtal Wttldy Earnings 

[See end of document for figure sources.] 

"01ough d1e actions of the Federal Resetve are beyond d1e putview of dus comnuttee, I note 

d1at even with their recent acceleration, recent wage gains are far from intlationat]', a point 

underscored by recent infl<~tio n readings. Thus, fxom a monetal)• policy pet'Spective, it is 

important that the Fed is cautious in its rate-misirtg campaign. The job market is de-•dy 

improving, and doing so at a faster dip than in recent years. But we are not yet at fuU 

employment, and I see no sign of a nascent intlationaq threat. To the contrat')', recent 

developments in the glob<~ I economy may pose more of detlatiO!'taty risk. 

Sloll'prod11divity groll'th: There at·e rwo longex-rem1 macroeconomic problems that T would 

bring to d1e committee's attention: slow productivity growd1 and our lack of preparedness 

for d1e next recession. I return to d1e second of these at d1e end of my testimony. 

A key concern of today's hearing is d1e pace of real growth in the US economy, wluch has 

averaged about 2 percent since yeat·-over-year real GDP growth tumed positive in 2010. 

\Xfhi.le that's about twice d1e growd1 rate of d1e Eurozone, it is moderate growth, held down 

by sluggish growth in p1·oductiviry and a slower growing labor force. While pon of the 
32 


22375.023

slower labor force growth-maybe one-half to two-thirds-is an expected ti.tnction of ottr 

aging workforce, the extent to which the growd1 of output per hottr (productivity) has 

slowed desetves g•·eater attention from policy makers. 

Figure 2 shows yearly productivity growth along with a uend line d1at picks up the 

underlying movements of the series. Since 2010, trend productivity growth has been running 

at an atumal rate of arotu1d 1 percent, well below its growth in the 1990s, when d1e trend 

accelerated from about 1.5 percent in 1995 to over 3 percent in 2000. Slower productivity 

growdt is a bit like the weather: everyone complains about it but no one knows what to do 

about it. l11at said, in a recent analysis of d1e problem, I identified and reviewed d1ree 

explanations: mismeasta·ement, capital misallocation, ru1d pet-sistently weak demand? 

Figure 2 

Annual Productivity Growth 

0.07 

0 .06 

0 .05 

0.04 

0.03 

0.02 

0.01 

0 

.0.02 

.0.03 

1980Q1 198501 199001 199501 200001 

- - Trend --Actuol 

200501 201001 201501 

\XIl.Uie there's some evidence d1at increased measttrement error is biasing productivity's 

growth rate down, measurement error is not a lat-ge facto•·, a poim echoed in a recent 

~ by Federal Resetve econonlists. Instead, d1ere appears to be a significant role for 

capiro.! mis!lllocar.ioo. 1l1e opporrunity cost of devoting an increasingly significJtnt sha•·e of 

GDP to those parts of the finance sector that helped to inOat·e the housing bubble of dte 

2000s may be lower economy-wide productivity growth. "fl1at doesn't mean d1e level of 

investment is too low, d1ough business investment as a share of GDP is not quite yet back 

to pre-recession levels. It mean s too much of om investment is non-productive. 

Anod1er source of slow productivity growd1 may well be d1e absence of full employment. 

Verr tight labor t'rtarkets lead tixms (ocing higher htbor costS to find efficiencies they 

2 hnp://i:~reclbemsteittblog.com/the-productivi!)~-s owdown-misrn e-:lsurement-or-m s!llloc!\tionoc-both/ 
33 


22375.024

othe1wise didn't need to maintain profits. As economist Larry Summers recently noted: "In a 

period of zero interest rates [corresponding to periods of weak demand] ... it is ve1y easy to 

roll over loans. And tl1erefore there is veqr li.ttle pressure to restructure inefficient or even 

zombie enterprises." In this sense, it is likely not a coincidence that the last period of strong 

productivity growth roughly corresponded with the full employment period of the late 

1990s. 

You will surely hear analysis that ties the productivity slowdown to the desired policy 

outcome of one advocate or another. It will be blamed on corporate taxes, "Obamacare," 

regulations, and whatever otl1er boogiemen partisans choose to invoke. I urge members to 

be skeptical of such facile causes. Taxation, health care reform, or regulation are particularly 

implausible targets, as they would presumably raise the cost of capital and slow productivity 

through a channel of diminished investment. But capital is extremely cheap and has been for 

some time, and firms are sitting on historically high lev els of cash reserves. 

Achieving full employment and more productive capital allocation are not quick frxes 

(though greater investment in public infrastructure is an example of smart, productivityenhancing capital allocation, one I urge the committee to consider). While faster productivity 

growth is an essential goal of policy makers, beware of advocates trying to sell tax cuts and 

deregulation as the way to get there; their misguided thinking can be summed up by the old 

adage: "if your only tool is a hammer, everything looks like nail." 

I now turn to the specific policy areas under the pmv iew of this committee, with an 

emphasis on how public policy is supporting, or failing to support, growth and the wellbeing of American families. 

Health care 

TI1e Affordable Care Act has been remarbbly successful: it has reduced the number of 

Americans without health coverage and contributed to the slower growth of health care 

costs. TI1e former is a major advance in terms of reducing economic insecurity. Given tl1e 

predominant role of health care spending in terms of our present and future fiscal outlook, 

tl1e latter-slower-growing healtl1 care costs-is essential in tl1e pursuit of sustainable fiscal 

policy. 

Coverage: The number of uninsured people fell by 8.8 million and tl1e uninsured rate declined 

by 2.9 percentage points in 2014, tl1e year the Medicaid expansion and exchanges kicked in; 

as tl1e graph below shows for the uninsured rate, tl1ese changes were by far tl1e biggest 

single-year improvements on record. While coverage gains occurred in every state, the gains 

were greater in tl1e 25 states (including DC) tl1at adopted tl1e Medicaid expansion by January 

2014. The uninsured rate in expansion states is now 9.8 percent, while tl1e uninsured rate in 

otl1er states is 13.5 percent. 

Figure 3 
34 


22375.025

2014 Drop In Uninsured Rate Biggest on Record 

Change, in percentage points 

1.0 

0.5 

0. 0 -..:.-'-'-'-'-'-'--'-'-=":.....;..:.."-'-'-~-:-'-'-=--"-'-'-'-:-:-:-:-'-~.:...:...:......:...:.-:--:-:-~~ 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 I 

'88 

I 

'92 '96 

l 

'00 

l 

'04 '08 

I 

'12 '14 

Source: CBPP analysis of Census Bureau, Ct.nent PopufaUon Survey data Adjustments ore 

made uSing Census Bureau guidance to account for survoy design changes In 1999 and 2013. 

CENTER ON BUDGET AND POLICY PRIORITIES CBPP.ORG 

Some ACA critics maintain du1t these gains have come at the expense of job growdt. Tlus 

critique is l'"rd to reconcile wid1 rh e ovemll jobs numbers cited above, but what about more 

m1anced attacks? For exMnple, because employer mandates, p hased in over 2015-16, apply to 

firms with over SO full-time workers, it is argued d1at the ACA is forcing people into parttime work. If so, we would expect to see an increase, relative to trend, oi involuntaq parttime work. 

The next two figures show dtat's not happening. TI1e first figure illustrates dtat involuntaty 

part-time work l'"s follen; the decline appears to have accelerated since the ACA's exchanges 

and Medica.id expansio n went into effect in 2014. Meanwhile, voluntary part-time work is 

up, perhaps, as economist Dean Baker has suggested, due to the ACA-i.nduced rdease of 

"job-lock," where workers who would rad1er work part-time previously worked full-time in 

order to get employer-provided heald1 benefits. 

Figuce 4 
35 


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Part-time Work 

120 

100 

0 

~ 80 ,; 

.. 

.!! 

~ 60 

s 

I «< ____ _....,...llldt -

20 

0 

Jaoo-10 ...... 11 .lal>-1 4 

----•ry --V--ry 

Of cotu-se, since we expect involu11rary p<ut-time (IPT) work to decline in a recovery, 

particularly one with solid job gains, a better assessment of the question of whether the ACA 

is leading to more IPT work requires a "counterfactual," i.e., what trend we would expect 

had the ACA not been implemented. The next t-.gure shows a predicted t.rend itl JPT work 

(as a share of tota l employment) based on a simple odelus ~ the unemployment rate as a 

predictor. I ran the model using data through 2009 (pre-ACA passage) and predicted the 

trend in IPT work thereafter using actual values of the unemployment rate. 11le fact that the 

predicted trend hugs the actual trend suggests that IPT work is falling as it usually does in a 

recovery. 

Figure 5 
36 


22375.027

Involuntary Part-nme Worker Share of 

Employment 

JM-10 .laft-11 

- Actual - I'Ndlchcl 

JM.1S 

ln other words, d1exe is li11Je, if'"""· evidence to support the chim thot the ACA is o " jo bkiller." 

en/them~ co.rts: It is widely documented l'ltot heold1 c<tre costs hove been growing more 

slowly in recent years. This trend is criticoUy important, as cost pressures from the health 

secror-driven by both the ogi.ng of the popuhtion and the "excess cost burden"3

-ore a 

major contributor to our fiscal challenges. Projections of federal health spending are now 

substantially lower dton they were in 2010, before the ACA was enacted. 

Figra·e 6 provides more detaiJ of dtese different projections. Each line represen ts CBO's 

projected spending on major government herudt care programs as a share of GOP. T he top 

line shows dte 2010 projection of Medicare, Medicaid, and CHIP costs. The lower line, from 

CBO's 2015 forecMt,' includes the same programs os rhe eodier projecr~on ond •lso includes 

the ACA. Remot·bbly, totol projected fedeml health c•re costs have shrunk substanti•lly 

even rhough heolth ca re coverage hos grown subsrantiolly. By 2023, dte costs of these major 

healdt programs ru·e down by 1% of GOP relotive to the 2010 projection; by 2030 they are 

down 2% oi GOP; rutd by 2038, by 3% oi GOP. 

Figure 6 

l The excess cost burden refers to the sto ic~ I trend of health c-are spending per ~pit.'l growing f:lstec h~n 

G OP per capita, leading healtlt care spendiug to be an increasing share of GOP. 

• This analysis uses CSO's August baseline as opposed to tlteir most recent one, which 1 did uot have time to 

incorpomte. The update would yicld essentially the same picture, as the new CBO baseliJte reduces the gap 

between the rwo pfojections by just !l tiny ~mo nt. 
37 


22375.028

Cost of Major Health Programs, 2010 projection vs 2015 

projection 

8'11> 

Q. 

0 

" 

~ 6% 

~ ~ 

l. 

4% 

2% 

:!015 :!0:!0 :!025 :!030 :!015 

--Jonuory 2010 projedion 

:!040 

Heald1 reform has reduced spending direcdy by scaling back excessive payments to Medicare 

providers. It has also accelerated the shift to new Medicare pa)'ment models that seek to 

reward quality of care rather d1an die volume of setvices. l n addition, many analysts believe 

that health reform has iJtdtrecd)' encomaged structural changes i.n the health care payment 

and delivety system diat will generate furd1er savings. For example, intetventions like 

"btu1dled payments" (an overall fee covering all the care related to a procedure), 

"accountable care" models (providers have monetaq incentives to reduce spending below a 

set level while ma_intain.ing quality), and bonuses for reducing re-hospiralizations may be 

helping to slow cost growdt. Odter factors are surely behind these cost savings as well, as 

costs began to slow even befot·e die new law was in place, but die ACA is having an 

nnde•1iable impact. 

Given this committee's role in inte.rnational trade and trade agreements, I wanted to note a 

few poiHts attd concerns regarding the Trans-Pacific Partnership, or TPP, from rhe 

perspective of economic growth a.nd opportunity. 

Contrary to simple textbook trade ilieoty, d1e increase in international trade has not been an 

unequivocal good for all working fami.l.ies. In fact, more realistic theories of trade are quite 

clear on the poi.nr that wtde cn:ates winners and losers, with the latter t)'pically including 

5 This section rctlects n1y own views, and not those of CBPP, which docs not t~ke !I position on tr~de policy. 
38 


22375.029

those thrown into competition with cheaper workers abroad. Sci!!, our highly productive 

workforce can compete globally, as long as the playing field is not tilted against them. 

If the benefits of trade are to be more broadly shared, two things have to happen. First, our 

trade agreements must be more than handshakes between investors. TI1ey must provide 

workers from all signatoty countries with the rights and protections they need to capture 

some of the benefits of trade. Second, we in the US must be able to lower our large and 

persistent trade deficits through enforceable mles against currency interventions that give 

our trading partners an unfair price advantage. 

The TPP goes further than past agreements in various ways that could protect workers both 

here and in other signatory countries from unfair labor and wage practices. For example, the 

USTR worked out bilateral "consistency plans" with Vietnam, Malaysia, and Brunei that 

specify ways these countries must change their laws and practices to meet the general 

obligations in the TPP's labor chapter. Of course, such provisions underscore the need for 

stepped up enforcement, an area where the US record has not been strong enough. A 

nonpartisan Government Accountability Office survey of this issue concluded that 

"monitoring and enforcement [of labor prov isions in prior trade agreements] remain 

limited.'' 

An even greater concern is the absence of a consistency plan for Mexi.co, particularly 

because US auto production has been sharply increasing there. Mexican workers are typically 

unable to ulliollize or collectively bargain, and they make less than a fifth of what US 

autoworkers are paid. TIUs combinati.on of accelerated outsourcing of auto production to 

Mexico and suppression of workers' rights there reduces li.v i.ng standards and increases 

inequality on both sides of the border. 

Thus, in the spirit of trade that is both pro-growth and pro-worker, I urge this committee to 

carefully consider both enforcement and oversight provisions in the TPP, and the need for a 

plan to improve labor rights in Mexico. 

On currency, the existing side agreement to the TPP has some positive features but no 

enforcement mechanism. As economist Joe Gagnon points out, the "TPP partners merely 

reiterate the obligation they already have as members of the International Monetary Fund 

(IMF) to 'avoid manipulating exchange rates . . . to prevent effective balance of payments 

adjustment or to gain an unfair competitive advantage."' The side agreement may well 

provide the informacion needed to quickly identify currency mallipulators, but voluntary 

agreements only work if key actors, such as those at the US Treasury, take corrective action 

in the face of evidence. Unfortunately, our history here is lots of evidence and virtually no 

action. In the face of obvious currency management by China, for example, the US Treasury 

has been extremely hesitant to label them a currency mallipulator. 

The absence of a currency chapter in the TPP suggests the need for Congress to legislate 

enforceable currency rules outside of the trade agreement. For example, back in 2010, this 

chamber, while no less divided than it is today, overwhelmingly passed legislation that, if it 

had been enacted, would have allowed the Commerce Department to treat currency 

management as an unfair subsidy, calL.ng for counterv aiL.ng duties. Given the long history of 
39 


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voluntaq measures being inadequate to the task of pushing back on currency manipulation, 

such enforceable rules would be preferable to the voluntaq approach. 

Other aspects of the TPP also warrant close scmtiny. TI1e fact that investors are using the 

investment dispute settlement procedure under NAFTA to challenge tl1e administration's 

decision on the Keystone pipeline underscores the importance of maki.ng sure our sovereign 

rights are adequately protected. TI1e agreement also has weaker rules of origin for 

automotive products tl1an past trade agreements (e.g., NAFTA), which could hurt 

employment opportunities along our supply chains for cars and car parts. 

Tax Reform 

Both Congress and tl1e administration have argued for broad reforms in tl1e tax code. From 

tl1e perspective of economic growtl1 and broadly shared opportunity, I would urge tl1e 

committee to consider two important cr.i.ter.i.a when .i.t comes to tax policy: making the tax 

code more effective at reducing, rather than exacerbating, pretax income and wealth 

inequality, and ensuring ample revenues witl1 respect to fiscal obligations (based on 

demographic pressures alone, we will need more, not less, revenues moving fo1ward). One 

way to achieve tl1ese goals simultaneously, often with tl1e added bonus of improving tl1e 

economic efficiency of tl1e tax code, is to eliminate or reduce tax subsidies and loopholes 

that contribute to wealth inequality, reduce investment, and .i.ncenti.v.i.ze the overseas 

outsourcing of American jobs. I specify numerous examples below. 

In tl1e spirit of tl1ese two criteria, I would also urge tl1e committee to be extremely wary of 

what are essentially "trickle-down" tax cut arguments. Yes, our corporate tax code- w.i.th its 

internationally high statutoq rate, much lower effective rate, and shrinking base- needs 

serious attention. But there is no bas.i.s for arguments that sharply reducing business or 

individual tax rates or not taxing foreign earnings will return large growth, job, and wage 

effects tl1at will, in tum, lift the living standards of middle- and low-income families. 

As tax expert Bill Gale (and colleagues), recently wrote, "At tl1e federal level, tl1ere is 

virtually no evidence that broad-based [corporate] tax cuts have had a positive effect on 

growtl1 ... TI1at has been amply demonstrated at tl1e national level, where tax cuts have 

eroded revenue without d.i.scernable effect on economic activity."6 

While claims of tax cuts leading to large positive shifts in investment, productivity, and 

incomes are often heard in these hallways, in tl1e real world, Gale's obsetvations have been 

proved time and again. National expert Joel Slemrod has found tl1at "tl1ere is no evidence 

that li.nks aggregate economic performance to capital gains tax rates." TI1e non-partisan Tax 

Policy Center finds "no statistically significant correlation between capital gains rates and real 

growtl1 in gross domestic product (GDP) during tl1e last 50 years 7 Jane Gravelle, a tax 

analyst at tl1e Congressional Research Setvice who has examined research purporting to 

show large gains from corporate tax cuts, points out that claims that "behavioral responses 

could cause revenues to rise if rates were cut do not hold up on either a theoretical basis or 

an empirical basis ... Cross-country studies to provide direct evidence showing tl1at tl1e 

6 http: / /assets lc.milkeninstitute.org/assets/ Publication/MIReview / PDF /05-1 2-MR68.pdf 7 http://W\vw.cbpp.org/research/presidents-capital-ga.ins-tax-proposals-would-make-tax-code-more-efficientand-fair 
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burden of the corporate tax actually falls on labor [such that tax cuts will help workers] yield 

unreasonable results and prove to suffer from econometric flaws that also lead to a 

disappearance of the results when corrected . . . [C]laims that high U.S. tax rates will create 

problems for the United States in a global economy suffer from a misrepresentation of the 

U.S. tax rate compared to other countries . . . " 

To be veq clear, there is room for significant improvements in our tax code. Especially the 

business side of the code, as noted, is riddled with subsidies and loopholes that generate lots 

of work for tax lawyers and lobbyists figuring out new schemes for tax avoidance. In fact, 

the most recent CBO budget outlook predicts tl1at " increasing erosion of tl1e corporate tax 

base" due to "transfer pr.i.c.i.ng," tax inversions, and other avoidance techniques will lower 

corporate income tax receipts by about five percent over the next decade. 8 

It is in attacking tlus sort of problem, as opposed to tl1e pursuit of supply-side tax cuts, 

where I believe tlus committee could be most effective: cutting back or closing wasteful, 

costly subsidies and loopholes tl1at exacerbate inequality, generate inefficiencies, and increase 

budget deficits. 

--In a town where every tax break has someone to defend it, the carried interest loophole 

stands out as an exception: it is widely recognized by partisans on botl1 sides of tl1e aisle as 

providing an unfair tax break to a group tl1at doesn't need it. Investment fund managers get 

to pay the lower capital gains rate- about 24 percent as opposed to about the 40 percent 

tl1ey should pay- on a large part of tl1eir earnings generated by returns from the funds tl1ey 

manage. Note tl1at tl1ese managers are not investing tl1eir own capital; tl1e fund returns they 

get are tlms a form of compensation. As such, tl1ey should be taxed like regular earnings. 

Ten year savings: $15.6 billion over 10 years. 

--In tl1e spirit of economic growtl1, efficiency, and tax fairness, it would be extremely u seful 

for Congress to " increase the bar" against corporate tax inversions. TI1ough tl1e US Treasury 

has attempted to reduce the incentives to invert through 1ule changes, the most recent 

example- tl1e Johnson Controls/ T yco inversion- shows that more is needed. 

It .i.s well documented that these restructur.i.ngs are not .i.n the interest of uncovering 

economic efficiencies, but .i.n the interest of tax avoidance. According to news accounts, 

Johnson was already paying a relatively low effective tax rate of 19 percent, yet by merging 

witl1 T yco, headquartered in Ireland, it can lower its rate to 14 percent, a rate far below tl1ose 

seen in any plausible corporate tax reform plan floated in recent years. Instead of our 

companies figuring out ways to book more of their earnings in tax havens, we need them to 

focus on production, innovation, and job creation here in tl1e US. Congress should tlms 

make tl1e inversion bar lugher by requiring tl1at lustoric shareholders of tl1e US entity hold 

no more tl1an 50 percent of tl1e value of tl1e new ly formed company (as opposed to the 20 

percent tl1ey must hold under current rules). If a merged company is managed, controlled, 

and has significant business activities in the US, it should be considered a US corporation for 

tax purposes. Finally, an "exit tax" could be another useful "speedbump" to discourage 

inversions. 

8 https: / /www.cbo.gov I sites/ default/files/ 114th-congress-2015-2016/reports/51129-20160utlook.pdf 
41 


22375.032

--Another loophole that partisans might be able to agree to close is the "step-up basis" 

provision by which the wealthy can pass capital gains on to their heirs tax free. When the 

unrealized gai.ns of someone who d.i.es are passed on to an heir, the appreciation .i.s untaxed. 

President Obama has proposed to close this loophole, subject, as explained by tax experts 

Marr and Huang, " ... to large exemptions to ensure that middle-income and even most 

upper-income people aren't affected." There is no good economic rationale for this 

loophole. To the contraq, it creates a tax incentive- a " lock-in" effect-to hold assets until 

death, even .i.n cases in which realizing their appreciated value and .i.nvesti.ng those resources 

elsewhere might be more productive from an economic standpoint. The only score we have 

for the 1 0-year savings generated b y closing this loophole includes the President's proposal 

to raise the capital gains rate to 28 percent: $233 billion. 

--The President's FY 2016 budget proposes several other ways to reduce inefficient and 

wasteful loopholes around estate taxes. These include lowering the estate tax exemption 

threshold from $5.43 million to $3.5 million for individuals ($ 10.86 million to $7 million for 

couples), increasing the top rate from 40 percent to 45 percent, closing a loophole which 

allows an estate to put an investment in a tiust to avoid paying capital gains (the Grantor 

Retained Annuity Trust loophole), and simplifying the tax exclusion rules for gifts to heirs. 

Under these changes, the estate tax would still affect only about 0.3 percent of decedents. 

Savings: $153 billion. 

--Instead of fighting over every one of the hundreds of tax deductions and expenditures in 

the tax code, limiting them to 28 percent instead of the top income tax rate of almost 40 

percent would both improve efficiency (by ceasing to overly subsidize behaviors that would 

occur anyway, like saving for retirement or buying a home) and generate savings of $ 525 

billion over 10 years. Note that this cap on deductions does not end such deductions; it just 

reduces the disproportionate extent to which these tax benefits accrue to high income 

households. 

--The fact that our tax code allows US multinationals to indefinitely defer overseas earnings 

provides greater incentives to book profits and create jobs abroad than here at home. Surely, 

this incentive pushes the wrong way .i.n terms of creating opportunity for American workers. 

Moving to a territorial system would supercharge those .i.ncenti.ves, threatening to hasten 

profit-shifting, offshoring and outsourcing. A better approach would be a minimum tax on 

foreign earnings - provided it was set at an adequate level - after which firms could 

repatriate their earnings without further taxati.on. Also, to reduce the incentives for deferral, 

Congress should consider prohibiting US multinationals from deducting interest expenses 

on loans that support overseas investments when they are deferring taxes on the profits 

generated by those investments. 

These are but a few of the many loopholes and inefficient subsidies within our tax code. 

Addressing them would improve the code's fairness and efficiency and boost revenues. In 

that regard, doing so should be regarded as a key part as a positive growth and opportunity 

agenda. 

Poverty and inequality 
42 


22375.033

Since economic inequality began to rise in the 1970s, middle-class prosperity in the US has 

not been a function of growth alone. As a much larger share of economic output has 

accumulated at the top of the income scale, fewer pre-transfer resources have reached 

middle-class and poor families. As a result, poverty rates have become more "sti.cky"-less 

responsive to growth- and market incomes of the middle class have grown more slowly due 

to wage stagnation. To the extent that low - and middle-income families have gotten ahead 

over these years, it has been due to more hours of work at slower-growing or declini.ng real 

hourly pay rates, increased government transfers (especially those associated with work, like 

the Earned Income Tax Credit, or EITC), and the uni.que period of full employment in the 

late 1990s. 

These facts are particularly germane in the context of this hearing, as they link the two 

aspects of the themes at hand: growth and opportuni.ty. Too often, it is assumed that overall 

GDP or productivity growth will yield opportuni.cies for less advantaged families, but growth 

can't help them if it fails to reach them. H ere, then, are policy ideas I urge the committee to 

pursue to help achieve not just growth, but broadly shared growth. 

--Areas I've discussed already, including health care, trade, and tax reforms, are germane here 

as well. By providing affordable coverage with subsidies for low- and middle-income 

families, the ACA helps to offset the dis-equalizing impacts of growth. Enforcing global 

labor rights and fair currency practices helps put our factory workers on a more lev el playing 

field. And closing loopholes like step-up basis and blocking corporate inversions will prevent 

the tax code from further exacerbating pretax inequalities in the distribution of market 

outcomes. 

--This committee's pmv iew over many safety net programs underscores its essential role in 

anti-poverty policy. Moreover, House Speaker Paul Ryan's recent discussions of poverty 

policy suggest that while strong differences remain between the parties in this area, there 

may be potencial for some bipartisan actions. 

Research at CBPP has highlighted two important facts regarding the impact of the safety net. 

First, when properly measured- when tax and noncash benefits are factored in-the antipoverty effectiveness of the safety net has grown considerably over time. The figure below 

shows that in the late 1960s, anti-poverty measures lifted about 4 percent of the poor out of 

poverty. Now, they lift about 40 percent, a tenfold increase in the safety net's anti-poverty 

effectiveness. 

Figure 7 
43 


22375.034

Safety Net's Effectiveness at Reducing Poverty 

Has Grown Nearly Ten-Fold Since 1967 

Percent of otherwise poor lifted above the poverty line by the safety net 

50% 

40 

30 

20 

10 

0,~7 I I I I I I I I I I I 

'72 I 'Tl '82 

I I I I I I I I I I I I I I I I I I 

'87 '92 '97 '02 '07 '12 

Note: For each year, figures show the percent reduction In the number of people In poverty from 

when government benefits and taxes are not counted to when they are counted. Calculallons use 

Supplemental Poverty Measure (SPM) and 2012 SPM poverty line adjusted for lnflatJOn. 

Source: 1967-2012 data are from Christopher Wimer et al., 'Trends In Poverty with an Anchored 

Supplemental Poverty Measure,• Columbia Populadon Research Center, December 2013. (Plot 

points generously shared by the authors.) !=or 2013-2014, CSPP analysis of Census Bureau data 

from the March Current PopulaUon Survey and SPM public use mes. 

CENTER ON BUDGET AND POLICY PRIORITIES I CBPP.ORG 

Unfortumtely, one a.nti-poverty policy has become less effective over time at reducing 

h!trdship: Tempora£)' Assistance to Needy F!tmilies, or TANF. TANF expert Donn!l Pavetti 

has shown that when we! titre reform was passed in 1996, 68 percent of poor fami1es with 

childreu received cash beue6ts from the program, compared to 23 percent today. Pllvctti 

also points out dtat states devote only half of their T Ai'\IF fu nds to basic assistance, child 

ca.re, and work activities (only 8 percent goes to helping recipients prepare tor work). 

These shortcomiugs rel!tte to d1e decision to remo,·e TA1'\JF's individual entidemetlt to 

benefits by turni.ng the program's fu nditlg into a block gra.nt, thus undenniniug the 

program's ability to respond adequately to iucreased need. In the last recession, for example, 

many states' T ANF programs responded in•dequately or not •t all to the large rise in 

unemployment, leaving lru:ge numbers of families in severe hardship. 11 16 states, TAi\lF 

caseloads rose by less than 10 percent between December 2007 ru1d December 2009; in si.~ 

states, caseloads acntally fell. This pedonnrutce contrasts sharply with SNAP (food stamps), 

a program where ftutding still exprutds in response to rising need. L1 fact, the number of 

SNAP participants rose by 45 percem during the period noted above. 
44 


22375.035

These very different responses to increased need should be foremost in members' minds 

when considering Speaker Paul Ryan's "oppornuuty grants" idea-consolidating munerous 

programs, including SNAP, into a large block grant. Tlus idea would likely increase poverty, 

not reduce it. 

Second, willie consetvatives drum that anti-poverty measures keep people poor, longitudi .• tal 

research dtat Wtcks children into adulthood has fowtd d1at, to the contrary, d1e receipt of 

ce.nain be••dits acts more like a long-term invescrnem d1an a simple boost to immediate 

consumption. For example, as the tigure below shows, adults who received food stamps 

when they were clllldren were 18 percent more likely to complete high school and 16 

percent less likd)' to be obese th•n peers who did not bene lit from nutritional assistance. As 

explru.ned by poveny expert Arlo<· Shcrmnn, odter· studies show that EITC receipt 

" .. . incre-•ses the likelihood of children being born at a he~thhy birth weight, having highe.· 

reading and madt test scores in school, being more likely to go on to college, and having 

higher earnings in aduld1ood." 

Figu{C 8 

Food Stamps Provide Long-Lasting Benefits 

Percentage point change tor disadvantaged children by age 19 when food 

stamps became available 

20% 

15 

10 

5 

0 

-5 

-10 

-15 

18% 

-6% -5% 

-20 Stunted Growth Heart disease 

-16% 

Obesity High school 

completion Sourtc HovNS. Scn..Neno..th.ond Almoncl. "long R\o>tmpocaoi~Acc""to 

the saro:cy ,.,.._ • N<Mimber 2012 

Sherman also summarizes the mobility-enhancing benefits of"well-designed" renta l 

assistance programs: "yow1g cluldren whose families were living in public housutg and used 

rental vouchers to move to low-poverty neighborhoods fared better u1 various respects -

such as earning 3'1 percent more by oge 26 - tlta!'t simihr d1ildren whose families were 110r 

assigned vouchers under tl1e dernonstration project." These findings are particularly 

important for low-i.ncome African Ame ic<~ n and Hispanic chiJdrel't, as they are more likely 

to grow up in neighborhoods of ext.reme poverty that impinge on their economic mobility. 

Policy changes d1at would dintutish or tu1derfund these safety net functions must thus be 

avoided, particularly as economic inequality and d1e absence of full employment labor 

markers mean that growth tod•)' is less likely ro reach the poor. 
45 


22375.036

--Pro-work, anti-poverty tax credits: Because it was not paid for, the bipartisan tax deal at the 

end of last year lowered expected revenue and thus increased the budget deficit. But by 

enshrining major improvements to two major anti-poverty tax credits-the EITC and Child 

Tax Credit (CTC)-into permanent law, Congress took an important step toward increasing 

the living standards and opportunities of working poor and near-poor families. TI1ese 

improvements included reducing the earnings threshold needed to qualify for even a partial 

CTC to $3,000 (from $14,600), increasing the threshold at which the EITC phases out for 

married filers (to $5,000 above the threshold for single filers, up from $3,000), and boosting 

the EITC for families with more than two children. Altogether, making these improvements 

permanent benefited 50 million people and raised around 16 million people out of poverty 

or closer to the poverty line in 2013; roughly half of the beneficiaries are children. As one 

example of the improvements' impact, a single mother of two working full time at the 

federal minimum wage will be able to earn a $1,725 CTC; if these key provisions had been 

allowed to expire, she would have lost her entire benefit. 

One other priority I urge the committee to consider is to boost the EITC for childless 

adults. Low-income, childless workers receive no credit if they're under 25 and a very small 

credit if they're 25 or older; as a result, they are the only group of people the federal 

government taxes into or deeper into poverty. Again, boosting the EITC for childless 

workers is a bipartisan idea: both Speaker Ryan and President Obama have issued nearly 

identical proposals to help frx this problem. TI1eir plans would drop the eligibility age down 

to 21, increase the credit's phase-in rate, and raise the maximum credit to $1,000. 

--Periods of full employment have been relatively few and far between over the period when 

inequality has risen, a fact that is not at all a coincidence. Especially given the low rates of 

union membership in the US, the tautness of the job market is one of the main determinants 

of the bargaining power of middle- and low-wage workers. At veq low unemployment, 

employers must bid up compensation to get and keep the workers they need, enforcing a 

more equitable distribution of productivity growth. These dynamics are particularly 

beneficial to the poor, who benefit disproportionately from full employment. 

Public policies that would help promote full employment, outside of those of the Federal 

Resetve, include reducing the trade deficit (and thus minding the currency issues raised 

above), investment in public infrastructure, better oversight of financial markets (to prevent 

the inflation of recession-inducing bubbles) and, particularly for the poor stuck in " job 

deserts," di.rect job creation. 

Policy changes that would reduce or under fund these safety net functions must thus be 

avoided, particularly as economic inequality and the absence of full employment labor 

markets mean that growth today is less likely to reach the poor. 

Getting ready for the next recession 

Though global markets have been roiled by the sharp fall in oil prices and the slowing of 

growth in emerging economies, particularly China, the US economy continues to generate 

steady growth rates and strong job growth. TI1at said, there is another recession out there 

somewhere--economists cannot reliably predict when it will hit-and given the broad 
46 


22375.037

purview of this committee, it is worthwh.ile to examine the cond.i.tion of the nation's 

countercyclical policies. 

The first point to make here is that, contrary to oft-repeated prejudices driven more by antigovernment ideology than fact, the full spate of countercyclical interventions aimed at the 

last recession were highly effective. A recent review by economists Alan Blinder and Mark 

Zandi finds that the combined impact of these interventions, including those of the federal 

government and the Federal Reserve, cumulatively saved about 10 million jobs between 

2009 and 2012. Blinder and Zandi's analysis of the fiscal stimulus-the American Recovery 

and Reinvestment Act (ARRA) especially-is particularly germane. TI1ey estimate that 

temporary boosts in spending on SNAP (food stamps) and unemployment insurance 

benefits had the largest " bang for the buck" of any of the fiscal stimulus provisions; for 

example, they estimate that every $1 spending increase on SNAP generated a $1.74 boost to 

the economy in the first quarter of 2009. According to their model, ARRA had increased 

economic growth by 3.3 percent and added 2.6 million jobs at the height of its impact in 

2010. 

With those lessons/ findings in mind, consider that the US economy faces two related 

challenges regarding the next recession. One challenge is technical: the " zero lower bound," 

or ZLB, which is the risk that the Federal Reserve's main tool against recession-the interest 

rate it controls- could be quite low by the time the next recession hits. Tius rate will have 

little room to fall, and tlms little room to provide much in tl1e way of monetary stimulus. 

The ZLB elevates tl1e importance of a countercyclical fiscal policy response, wluch brings 

me to tl1e second challenge, a political one. Namely, policy makers must recognize tl1e 

following principles: 

--Budget deficits should expand in recessions and contract in expansions. In fact, tl1ey have 

done so since tl1e so-called Great Recession, as tl1e deficit topped out at about 10 percent of 

GDP in FY 2009 and was most recently found by CBO to be 2.5 percent of GDP in FY 

2015. It is also important to remember tl1at it is not temporary spending measures tl1at drive 

deficits over the long term. It is permanent measures (spending increases as n;e/1 as tax cuts) 

that are not paid for. "Austerity" measures-fiscal contraction in weak economies-have 

been shown to be harmful to growtl1, jobs, wages, and incomes botl1 here in tl1e US and 

even more so in Europe. 

--Countercyclical programs should trigger on in a timely manner and not trigger off too 

soon. Unemployment insurance (UI), state fiscal relief, increased nutritional benefits, 

housing vouchers, and direct job creation were all helpful in generating the Blinder/ Zandi 

results just noted. But the stimulus from many of tl1ese programs relied on legislation from 

Congress; it would be better to make these programs more automatically responsive to 

future recessions. Doing so won't obviate the need for Congress to act when hard times hit, 

but it will help to ensure that stimulus "triggers on" in a more timely fashion, that it is 

calibrated to need, and tl1at it lasts for an appropriate period of time. Ben Spielberg and I will 

shortly release an analysis of tl1ese dynamics wluch includes ideas to improve tl1e 

responsiveness of the countercycl.i.cal programs mentioned above. 
47 


22375.038

--State-level finances for the UI system should be improved. Given this committee's role in 

maintaining a strong and responsive UI system, there ru:e serious concerns about 

developments in some states in recent years. Some states have restricted UI by reducing the 

basic number of weeks available, cutting benefit levels, and introducing more restrictive 

eligibility requirements. In addition, 34 state trust funds currently fail to meet DOL's 

minimum standard for being prepared for a recession9 

Part of tl1e problem is that many states only tax a small share of worker wages and have not 

adjusted tlus level for many years. California, for example, taxes only the first $7,000 of 

wages, tl1e minimum required under federal law, and 17 other states also set tl1eir taxable 

wage base under $10,000. In tlus regard, I urge tl1e committee to consider an increase in tl1e 

federal government's $7,000 wage base, wluch serves as tl1e minimum for states and has not 

been increased in over 30 years. 

Conclusion 

The US economy has been growing steadily since tl1e second half of 2009, payrolls have 

been on a solid growtl1 patl1, and as tl1e job market edges closer to full employment, nominal 

wage growtl1 has slightly accelerated. These dynamics, along witl1 unusually low-inflation, 

have led to real earnings gains for middle-wage workers in botl1 of the past two years. 

However, in our age of high levels of economic inequality, macroeconomic growth is 

necessary but not sufficient to raise middle incomes and lower poverty. In tl1e testimony 

above, I have suggested a positive policy agenda in tl1e areas of trade, tax reform, poverty, 

inequality, health care, and countercyclical policy tl1at will help reconnect American families 

to overall growth. Taking steps to enforce rules against currency management, building on 

tl1e successes of tl1e ACA, passing a bipartisan expansion of the EITC for clllldless adults, 

closing inefficient and inequality-increasing tax loopholes, not falling prey to wasteful, 

"trickle-down" tax cuts, and ensuring our countercycL.cal policies are ready for the next 

recession are all ways this committee, w.i.th its encompassing purview, can help bring about 

tlus reconnection. I look fotward to working witl1 you to aclueve these goals. 

9 Defmed as having an "Average High Cost Multiple" below 1.0. Tills number is as of the third quarter of 

2015, the latest data is currently available. See 

http://www.ows.doleta.gov/unemploy/content/ data stats/datasum15/DataSum 2015 3.pdf. 
48 

f 


22375.039

Sources for figures 

Figure 1: BLS 

Figure 2: BLS, with HP trend 

Figure 3: CBPP 

Figure 4: BLS 

Figure 5: BLS, my calculations 

Figure 6: CBPP 

Figure 7: CBPP 

Figure 8: CBPP 
49 

Chairman BRADY. Mr. Moore, you are recognized. 

STATEMENT OF STEPHEN MOORE, DISTINGUISHED VISITING 

FELLOW, INSTITUTE FOR ECONOMIC FREEDOM AND OPPORTUNITY, THE HERITAGE FOUNDATION 

Mr. MOORE. Mr. Chairman, thank you very much for the opportunity to testify. 

Chairman BRADY. Can you grab that microphone, Mr. Moore? 

Mr. MOORE. Thank you very much for the opportunity to testify 

today. I was thinking as I was just sitting in this grand room—I 

have been in this room, as many of us have, to testify—and I was 

thinking back about the mid-1980s, and 1985 to 1986 sitting in the 

same room, and I see some of the same people—Congressman 

Johnson, I know you were here then—and we achieved something 

really remarkable, extraordinary, something that hardly has ever 

happened in the last 30 or 40 years, one of the great bipartisan 

achievements of this institution. I am talking, of course, about the 

1986 Tax Reform Act. And this was an act that, as you all know, 

was bipartisan. We reduced tax rates from 50 to 28 percent at the 

top, and we did that by broadening the base, and in a very economically efficient way. And I think almost all economists—I can’t 

speak for Jared—but I think all economists agree that what we did 

in 1986 was what increased the efficiency of the American economy 

by reducing distortions in the tax system. 

Now, the reason I mention this, Congressman, is that, many of 

you probably don’t know this, but that bill was promoted by people 

like Bill Bradley, the Senator from New Jersey, a Democrat; Dick 

Gephardt, who was the minority leader among the Democrats 

was—I mean, the majority leader for the Democrats was one of the 

House sponsors of that bill; of course, Jack Kemp and others. And 

here is the amazing thing: A bill that lowered the highest income 

tax rate in the United States to 28 percent passed 97 to 3 in the 

United States Senate. Let me say that again: 97 to 3. When is the 

last time in the last 30 years we have seen anything like that kind 

of bipartisan consensus? 

What I am suggesting is this is a plea to you, Mr. Levin, and to 

you, Mr. Brady, get together and get this done in a bipartisan way 

because the stakes are so huge. You have an opportunity, every 

single one of you on this committee has an opportunity to make 

history, and I hope you won’t lose that opportunity. It has been 30 

years. When you think about we did this in 1986, we haven’t 

cleaned out the stables of the tax system in three decades. It is 

high time we do that. 

Let me talk a little bit, then, about the economy. First, this is 

a really, really weak recovery. And you don’t have to—it sort of reminds me of the old Groucho Marx line, ‘‘Who are you going to believe, me or your own two eyes?’’ I mean, we can present as many 

statistics as you possibly need about this recession, but you know 

the people who know that this is a flimsy, anemic recovery? The 

American people. And all you have to do is look at the people who 

voted in Iowa yesterday. Exit polls showed very clearly, what is 

their single biggest concern? The economy and jobs. The American 

people just aren’t feeling love for this recovery that the President 

keeps trumpeting as some kind of grand success. People are nervVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
50 

ous. People think the American dream is gone, and that is the economic reality that every American is dealing with today. 

So what is the problem? Well, if you look—if you don’t mind 

turning to my testimony and looking at chart 1, if you have that 

in front of you, you can see the big problem is that we have had 

a recovery that is way, way, way behind trend. Now, it is absolutely true that Barack Obama inherited a terrible economy, but if 

you look at the Reagan recovery versus the Obama recovery, and 

I like to—I like this comparison because both these Presidents entered office during a period of great economic crisis. I can never understand, by the way, why people didn’t say that what Ronald 

Reagan inherited in 1980, 1981 and 1982 wasn’t a financial crisis. 

My goodness, the stock market over the previous 14 years had lost 

60 percent of its value; we had 14 percent inflation, 20 percent 

mortgage interest rates. I would submit to you folks that that is 

a financial crisis par excellence. 

And, basically, Reagan did use tax rate reductions, whatever you 

want to call it, supply-side economics, but we got $3 trillion more 

growth over this period. That is a big number. 

What I am saying is we would have $3 trillion more GDP today 

if we had a Reagan-style expansion rather than an Obama recovery. That is a huge number. 

Jared talks about income inequality. If we could just pass that 

money out, that extra $3 trillion, and pass it to every family, that 

means every family in America would have $15,000 more income. 

The average family doesn’t have $15,000 more income since Barack 

Obama came into office. The average family has about a thousand 

dollars less income. 

Now, if you will look—I am going to skip chart 2, and I just want 

to mention this issue about the recovery. This has been—if you 

look at the Economic Recovery Act that we passed in the stimulus 

bill, what is amazing about chart 3 is not only did it not work, but 

if you compare what was supposed to happen—these are the White 

House’s numbers, not my numbers—what it shows is not only did 

we have higher unemployment than we would have had if we 

would had the—in other words, what this is saying is the unemployment rate today and the unemployment rate over this 4-year 

period is higher than even the Obama people said if we had done 

nothing. We would have more jobs today if we had not done the 

economic stimulus than we did. Government spending is not a 

stimulus. What is a stimulus is tax reduction. 

What I say in my testimony—and I will end on this—is I believe 

the economy is very weak right now. I think we need an antirecession insurance policy, and the best way to do this is you 

should vote in the next weeks ahead to cut the corporate tax rate 

now as a kind of down payment on tax reform later. That will create jobs and that will bring those businesses that are leaving back 

to the United States. 

Chairman BRADY. Thank you, Mr. Moore. 

[The prepared statement of Mr. Moore follows:] 

51 


22375.040

Testimony 

Stephen Moore 

Visiting Fellow in Economics 

Heritage Foundation 

February 2, 2016 

On 

Tax Policy and Economic Growth 
52 


22375.041

Mr. Chairman. 

Thank you for the opportunity to testify before the House Ways and Means Conunittee on tax policy 

and economic growth. My name is Stephen Moore and I am an economist at the Heritage Foundation. 

Neither I nor the Heritage Foundation receive any federal funding. 

The timing could not be more propitious for this hearing. 

Last week the Conunerce Department reported that the 4th Quarter gross domestic product grew 

by a minuscule 0. 7 percent. This disappointing number is significant because now officially the growth 

gap between the Reagan recovery and the Obama recovery is just under $3 trillion. In other words, if the 

economy had grown as fast under Obama since the recovery began than it did under Reagan1s recovery, 

we would have $3 trillion more output over the last 12 months. See chart l. 
53 


22375.042

CHART 1 

Recovery's Growth Gap vs. 

Rea n 35% .--------------------------- ----------------------------

30% +-----------------------

25% +----------- 0.. 

0 

;; "' 

" a: 

.20% +--------------~~ -----------

1 

"' +--------~~~Q¥~~~UA~ e~ ~rnh~~~~~ 

" 0.. 

;; 

~ 10% +------. ------------~~~~-----

~---,J[_------~~~:_ ________ eu ~----, 

Recovery 

1 2 3 4 5 6 7 8 9 W ll U U M " H V U U W ll ll n M H 

Quarters After Recession End 

Source: Bureau of Economic Analysis 

We would also have 5 10 6 million more jobs. See chan 2. The jobs lost from anemic growth are 

roughly the size of I he entire labor force of Ohio. 
54 


22375.043

CHART2 

Nearly 6 Million Missing Jobs 20 

"'0 

~ 18 

~ u 

~ 16 .D 

~ 

0 14 t: 

" VI 

! 12 ~ 'I: 

"' b 10 ~ 

c 

~ 

~ 

Post-1960 Recoveries (other than current) Current Recovery 

Source: Bureau of Labor Statistics, based on percentage change in private sector jobs 73 

I would argue that the major reason that American workers are so angry and anxiety-ridden, and 

the reason that so many Americans are doubtful that the American dream is not going to be achievable for 

their children is that wages and salaries - or what Reagan used to call "real take home pay" - has been flat 

and even slightly negative now for a decade. Official Census Bureau figures show that since Obama took 

office seven years ago, the real median household income is DOWN by $1 ,300. For over half of 

Americans, this is no recovery at all and a recession that never ended. 

Now we are seeing that 2016 is off to a miserable start and it's hard to see much improvement in 

GDP in the first quarter. I've long argued that America is stuck in a 2 percent growth rut, but now the 

danger is we are falling below that anemic rate and there is even some chatter about a potential recession 

this year. At 2 percent growth the economy doesn't spin off enough jobs to increase wages, and tax 

revenues grow much too slowly to balance the budget. 

So the economy needs growth steroids and where should they come from? 

Let's start with what we must not do. The 2009 Keynesian economic stimulus plan that cost $830 

billion may go down in history as one of the costliest public policy mistakes of all time. The evidence is 

now nearly irrefutable that the Obama spend and borrow policy with promised Keynesian "multiplier 

effects" gave us the slowest recovery from a recession in 50 years. Given how far the economy fell in 

2008-09 when the real estate bubble popped, we should have had faster growth than normal during a rapid 

catch-up phase. That never happened and the vaunted "summer of recovery" that Vice President Joe 

Biden kept promising hasn't happened now for six summers. 

The best evidence of the complete failure of the Obama stimulus comes from comparing the Obama 

administration itself. In early 2009 the White House economics team published a report showing what 
55 


22375.044

unemploymem would be without the stimulus plan and with the stimulus spending. Not only was 

unemployme01 much higher than the White House predjcted it would be with the gusher of spending. it 

also turned out to be higher thim it would have been had we done nothing! See Chart 3. 

CHART3 

tlnt-mplO)'mt"nt Rate \\1111 and Without tilt" R«o\"t"ry Plan 

October 2009: ~ 

J 1 

.... - .... lOU: .... .... $ourt"e: ''Tiu!Job lmpa~t of the Americm1 Rt>...cot·ery and Reim•esm1eJ1t Plan," 1009, presldeJJJ's Council of £co11omic Ad,•isers; 

Burenu of Labor Slatisrics, lAbor D(!pnrlment. Gr<•phic: Tlte /leritng~ Foundation, April 2015. 

Let me repeat: this is not my analysis. bm that of the Obama administration itself. Tite White 

House's own claims when it sold Congress on the stimulus program shows the unemployment rate would 

have fallen faster and the economy more briskly bad we not borrowed S830 trillion. Now the Obama 

administration says that its own torecasts were wrong and that the economy tttrned out to be weaker than 

they thought. 

But ilt my j udgment what made the economy weaker than they thought was that almost every policy 

decision from 2008-20 l 0 on economic and fiscal policy was exactly the wrong thing to do. 

The reasons tor our worst in modern times recovery can't all be blamed on the failed stimulus bill. 

Obamacare, the tax hikes on the rich. minimum wage increases. EPA regu lations on our energy industry, 

and Dodd-Frank have slowed growth and hiring too. 

One of the lessons that we have hopefully learned or relearned over the past decade is that 

government spending on food stamps and unemployme-nt benefits. green energy subsidies for 

companies like Solyndra, and transit grants for rail projects to nowhere., is no way to improve growth in 

the short term and ccrtaittly not in the medium or long tem1. The Congressional Budget Office tells us that 

the long term effects of the stimulus plan are negative. In other words, we are a little poorer trus year and 

every year going forward becau$c of the massive borrowing. All we have to show for ourselves after the 

borrowing binge is massive debt repayments lhat will be made over decades. Tltis didn't exactly belp "the 

children." 
56 


22375.045

What is done is done and if anything good can come of this fiasco, it is to learn the lessons of what 

went wrong and to never, ever make these mistakes again. Government borrowing and spending docs not 

stimulate the economy. h never has as Chan 4. prcp:trcd by Arthur Laffer and I, shows. 

CIIART4 

Government Spending as a Percentage of GOP vs. Unemployment Rate 

40% .---------------------------------------------------. 

a. 39% 0 

~ 38% 

~ 37% 

:a 38% 

.~ 

--Fed. State & Local GoV\ Spencf1119 

asa % ofGDP 

----Unemployment Rate 

11% 

10% 

9% 

8% <:: 

'8 35% ~ 8. 

(/) 34% 7% ~ 

~ (!) 33% 

§ 32% 

.. 

S! 31% J! 

~30% 

~ 29% 

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ q ~ ~ ~ ~ ~ ~0~ ~ ~ ~ ~ 2 ~ ~ ~ g 2 g ~ 2 ~ g ~ ~ g 

6% 

5% 

4% 

Sourc:e: Bureau or Economic Anatysi$. Bureau of Labor Statistics. Laffer Associates 

~ 

~ 

I am not rcflexive1y against borrowing during a time of emergency - nor should Congress be. It 

mailers a lot what you buy with the debt. ln the 1980s we bought a feroc ious economic recovery and an 

end to the Cold War. II would be bard to argue that this borrowing didn't dramatically benefit future 

generations. In the 1990s under Bill Clinton we balanced the budget through growth of the economy and 

spending restraint. and that too was beneficial. Government spending fell from about22 percent of GOP 

to below 19 percent during Clinton's presidency even as the economy boomed. 

So since traditional Keynesian spending stimulus doesn't help, what CAN this Congress do to reignite American prosperity? I would recommend a shon temt and long temt strategy. In a forthcoming 

report that ! prepared for the Commiuee to Unleash Prosperity and Freedom Works, I recommend 12 

steps to economic recovery. Although this report is not yet publjc. I will mention one here because the 

findings arc so astonishing. We estimate that the v•lue of oil and gas under federal lands that can be 

recovered with existing technologies like horizontal drilling •nd Fracking is at today's prices roughly SSO 

trillion. This is argttably the greatest treasure chest in world history. Not only would we massively 

stimulate the economy by drilling on non-environmentally sensiti ve fcdemllands, while ensuring at least 

a half-decade of energy independence. but of special note to this commiuee, we estimate th•t over the 

next 20 years the government would raise $3 trillion in revenues for Uncle Sam - at zero cost to 

taxpayers! 

Someone please show me any other plausible plan that raises S3 trillion over the next decade 

without wrecking the economy. 
57 


22375.046

My colleagues Arthur Laffer, Larry Kudlow and I have recently recommended an immediate 

stimulus plan for the economy. We call this an insurance policy against recession. We propose a 

permanent reduction in the corporate/business tax rate from 35 percent to 15 percent. 

This should be accompanied by expensing for business capital purchases and perhaps a 5% 

voluntary repatriation tax on the $2 trillion owned by U.S. multinational firms that is parked abroad to 

avoid the high corporate tax. 

This won't cost the Treasury much in lost revenues, and who knows? It may raise money over five 

years through the money and businesses repatriated back to America. Apple and GE might bring back 

tens of billions of dollars for assembly plants and research centers on these shores. 

The current U.S. Rate of 35 percent (federal) is the highest of all the nations we compete with. The 

rest of the world is at a rate closer to 25 percent with some nations like Ireland as low as 12.5 

percent. Let's go from the highest rate in the world to one of the lowest and jobs and capital flows will 

reverse course and rush back the United States. 

We have seen companies like Burger King, Medtronics. Pfizer, and dozens more leave the U .S. in 

search of lower tax rates. In January Johnson Controls announced a merger and we could wind up with 

yet another American company leaving to reside in foreign nations. 

Liberals like to pretend that the U.S. tax rates aren't chasing out businesses and jobs, but then why 

are all the nations we compete with slashing their rates? See chart 5. The international average has come 

down from almost 40% in 1990 to 25% today. For two and a half decades the U.S. rates haven't budged, 

while the rest of the world keeps chopping. We're like a 6th grader who stops growing and then goes out 

and tries to play competitive basketball with 20 year olds over six feet tall. 
58 


22375.047

CHART S 

roQ) 

=ro 

~Q:: 

45 

(.) X 

.g ~ 40 (/)Q) 

-g~ 

~ 8. 35 <1)~ 

~8 Q)- uc 

al ~ 30 c c :o<i> 5 i) u~ 25 

20 

U.S. Corporate Tax Rate v. Average for Developed 

Countries 

U.S. Combined Federal and State Tax Rate 

Even Presidem Obama's own tax reform commission. beaded by fonner Fed chainnan Paul Volcker 

found "deep flaws'' in the corporate tax. It concluded that: 

"The high statutory corporate tax rate reduces the return to investments and there fore discourages saving 

and investment... The tax acts to reduce the productivity of American businesses and American workers, 

increase the likelihood and cost of financial distress, and drain resources away from more valuable uses." 

As for the stimulus value of our proposed business tax cut, the Tax Foundation finds that immediate 

expensing and culling the business tax rate are the best short-tern• strategy for generating more 

growth. Here is how the Foundation put it: "A cut in the corporate tax rate would have large e ffects on 

GOP. but minimal effects on federal revenue in the long nm." Nothing else bas this kind of big bang for 

the buck payoff. By the way, for those Keynesians out there sntck on the demand side. tax rebates and 

credits produc-e almost no positi,•e feedback . 

Over the longer tcnn. the ideal tax rcfom1 is some fonn of a flat tax . Make the bnse brond <tnd get 

rates down as low as possible. The Tax Foundation finds that a tax refonu that would cut tax rates to 

about 15 percent. as Senators Rand Paul and Ted Cruz have recommended, would increase economic 

growth by almost 10 percent over a decade. The growth derives from lower tax rates and the economic 

efficiency that derives from this policy chAnge and by reducing Laxcs on capital investmenl and savings. 

\Ve have found in our polling at Heritage that whtH Americans w:mt most from a revmnpcd t.'lx system 

is "fairness." Loopholes. special interest favors a.nd carve outs from the tax base are inexcusable and bad 
59 

f 


22375.048

economics. By the way, in the tax bill that passed late last year, Congress extended the solar energy 

credits so that solar power companies can make money even though their produce loses money. This 

credit was immediately capitalized into the value of companies like Solar City so in a sense, the Congress 

wrote a check to the shareholders of this company. Is there a more egregious example of corporate 

welfare in modern times? 

Tax reform requires a cut in the capital gains tax. Some economists have suggested that capital 

gains tax rates have little impact on growth and only lead to a tax cut for the rich. However, in a 

forthcoming study by myself and my Heritage colleague Joel Griffith, which may be the most definitive 

economic history of the capital gains tax, we come to a different conclusion. We find that throughout 

most of the last 50 years, lowering the capital gains tax is associated with more federal revenues and 

higher rates are associated with less revenues. This is because the capital gains tax is a voluntary tax. 

Investors can avoid paying the tax by holding on to stock or other assets, which is called the 11 lock in 

effect. u Investment in venture capital, and technology firms, and overall business investment, are all 

positively associated with lower rates of capital gains tax. The Clinton capital gains tax cut from 28 to 20 

percent had very sudden and dramatic effects on business investment and revenues grew much fast than 

expected by the Congressional Budget Office when the tax cut occurred. 

It is worth mentioning that business investment has been lagging in recent years as the capital gains 

tax has been raised by 60 percent, from 15 percent to 23.8 percent. In the latest 4th quarter GDP report, 

business investment was negative. 

In sum, Congress should get ahead of a potentially painful slowdown in the economy in 2016 by 

passing a REAL stimulus plan- and that is a corporate tax cut. This will bring money home to the U.S. 

with little if any revenue loss. Congress should never believe in the false gold of Keynesian demand side 

stimulus plans and 11 shovel ready jobs. u On net, they never materialized. 

Finally, Mr. Brady, I am very excited about your chairmanship of this committee. I know you have 

for years expressed a commitment to fundamental tax reform and I believe you can get this done in the 

next couple of years. The last time tax reform happened was 30 years ago and Ronald Reagan helped 

clean out the stables of the tax code and chop the top tax rate to 28 percent. It passed 97- 3 in the United 

States Senate. That miracle can happen again with your leadership and vision and we at Heritage wish to 

help you every step of the way. 
60 

Chairman BRADY. I think it is well-known our committee is pursuing a pro-growth Tax Code that is built for growth, built for the 

growth of families’ paychecks and for the growth of our local businesses, for the growth of the U.S. economy. 

Dr. Hassett, you explained, you know, these recent innovations 

in economic research that helps us see better about the impact of 

taxes on growth. And in the testimony, you state: When properly 

estimated, a 1-percent cut in taxes’ share of the economy increases 

the economy by up to 2.5 percent over 3 years, so in the fairly short 

term. The opposite is true as well. In laymen’s terms, can you explain a little, just a little about what this new clarity, what creates 

that? 

Mr. HASSETT. Sure. I will give it another shot, try it in a slightly different way, that one of the things economists have learned in 

the last couple of decades is that if you want to evaluate a policy, 

the best way to do it is to have a random trial, right? So we apply 

policies to these folks but not to those folks, and we see what happens. If we design the trial well, we can learn. 

The problem with tax policy and how it affects the economy is 

you don’t get random trials. What happens is that, you know, governments around the world change tax policy up and down in response to how the economy is doing, but every now and then, they 

will change tax policy because of some exogenous factor. And so 

what people have done is historians, like Christina Romer, perhaps 

the greatest economic historian alive, dug through all the tax bills 

and looked at the bills that were passed for exogenous reasons, so 

you could think of it as kind of like a random trial, or for endogenous reasons, like we are in a recession right now, so we need to 

do something. And then they looked at the effect of the exogenous 

ones, which are a true random experiment, and they tend to find 

really, really big effects of taxes. And this, again, is an experiment 

that has been repeated over and over. It is in the very, very top 

journals, the American Economic Review, the Quarterly Journal of 

Economics. It is Democrats and Republicans doing that kind of 

science and finding these big effects. 

And so to say that there is no evidence of these big effects is 

just—it is just false. There is a lot of evidence. 

And, you know, you cited Bill Gale’s paper on this. I was his discussant at a Brookings conference, and I don’t know if there are 

members of the audience who were there, but I think that they are 

probably going to have to revise that paper after the discussion. 

The fact is that there is really exciting literature going on that 

makes sense, and, again, that is the part where I start to peel it 

back. So we have got models that say that we should get an effect 

that that is big and that we should if—when we hike the tax rate 

like we just did, if the labor force participation for people late in 

their working lives goes down, which is exactly what we saw happen. And so things are really starting to add up and to line up. 

And so what that means, I think, is that people of this committee 

should recognize that they have a great responsibility because if 

you do the right things, you could really have a big positive effect 

on growth. 

Chairman BRADY. And those tax cuts were for productivity, 

incentivize productivity, the labor force. That is key. 

61 

Mr. Moore, in your testimony, you talk a lot about how more and 

more American companies are being acquired by foreign companies 

because of our so anticompetitive tax system. Just first, it seems 

like every week, we are seeing a major announcement, including a 

local company that is headquartered maybe 2 miles from my own 

home. And so can you talk about what are the consequences of so— 

to American workers and to the American economy of so many 

companies leaving, and what is the urgency for Congress to act 

now to stem that tide and actually incentivize U.S. companies to 

remain and grow and invest here in the U.S.? 

Mr. MOORE. So if you look, Mr. Chairman and Members of the 

Committee, to my chart 5 of my testimony, I think this is highly 

instructive. What this is showing you is the black dotted line is the 

U.S. corporate tax rate, Mr. Chairman, over the last 30 years. As 

you can see, we haven’t changed it. It has been flat. Look at the 

red pillars. That is the average of all of the countries that we compete with. I think this is something like the 30 major OECD countries. And look at what is happening. The rest of the world—Mr. 

Levin, you can call this trickle-down economics. You can call it 

whatever you want, but what is irrefutable is the rest of the world 

is racing to cut their corporate tax rates as fast as possible, and 

it has been happening relentlessly year after year after year. 

And so we have a Tax Code, I would argue, Mr. Chairman, that 

in the late 1980s and early 1990s was actually competitive. We 

were below where other countries were. We are in a global economy. There is no putting the genie back in that bottle. We do compete against China and Mexico and Australia and Europe. And we 

were in a situation where we could sustain a 35-percent corporate 

tax rate because—guess what?—the rest of the world was higher 

than we were. Now the rest of the world, according to the latest 

numbers from the Tax Foundation, is somewhere between 24 and 

25 percent. 

So this is a 10-percent—what I call this is a tariff that the 

United States is imposing than our own goods and services. How 

stupid is that? I mean, really. Why would we want to have a rate 

that is much higher than—we put every one of our corporations at 

a 10-percent disadvantage. That is just—look, if you cut me, I bleed 

red, white, and blue. I want a tax system that brings the jobs back 

to the United States. 

Now, your point is very well taken, Mr. Chairman. How many 

companies do we have to see week after week after week after 

week leave the United States, whether you are talking about 

Medtronic, one of our great medical manufacturing companies; 

Pfizer; just a week or two ago, it was Johnson Controls. Walgreen’s 

was talking about leaving. I don’t know if they have left, but 

they’ve been talking about it. I could go on and on. Burger King, 

another example. 

Ladies and gentlemen, how many companies have to leave before 

we take action? If you don’t take action on this, Mr. Chairman, in 

the next couple of years, I guarantee you we are going to leave— 

lose more American companies to—and by the way, where are they 

going? They are going to Ireland. They are going to Canada. They 

are going to China. Ireland is 12.5 percent. We are at 35 percent. 

Mr. Chairman, we can’t compete under that kind of tax model. 

62 

Chairman BRADY. Mr. Moore, before I turn very quickly to Mr. 

Holtz-Eakin, we are going to make significant changes in the way 

we tax to move to a pro-growth economy. So should our goal be to 

make these changes to get to the middle of the pack of our competitors or to move to the lead pack, you know, those top, most progrowth tax rates in the world? Where should we be setting our target? 

Mr. MOORE. So what I recommended in my testimony, and this 

was based on some analysis that I have done with Larry Kudlow 

and Art Laffer—I know you are familiar with them—and what we 

basically recommend is because we are very worried about the U.S. 

economy right now—I think there is a threat of a recession. I am 

not saying there is going to be a recession, but we are in a danger 

zone right now. I think you all know that. We had in the last quarter, the numbers that came out, 0.8 percent growth. If you take out 

government growth, because you guys grew spending the last quarter, the private GDP was about 0.5 percent. That is getting really 

close to recession. 

So what we recommend is a 15-percent corporate rate, which will 

bring us below the average. It will still be higher than Ireland and 

some other countries, but we will be below the average. 

And we recommend two other things, Mr. Chairman. You ought 

to allow immediate expensing for all corporate capital purchases, 

and we ought to have a repatriation policy of a tax rate of—we 

tried this in 2005. It was a big success. We raised revenue. We 

brought money back. Shareholders benefited from it, and it created 

jobs. If you would do those three things, I think you are putting 

a powerful punch into the economy. 

Chairman BRADY. All right. Thank you. And I apologize. I will 

be very brief. 

Dr. Holtz-Eakin, you have done a lot of study on the Affordable 

Care Act, the impact, not just on patient care, but the economy as 

well, and the growth of the—you spent a lot of time thinking about 

it. So I am going to—in healthcare, on the tax side of the equation, 

what are the one or two reforms we could put in place to ensure 

access to affordable high-quality healthcare as well as to improve 

the economy, your recommendations to us, because this is—will be 

part of our tax considerations as well? 

Mr. HOLTZ-EAKIN. Well, certainly I would urge the committee 

to look at all the taxes in the Affordable Care Act. It is, in my view, 

riddled with bad tax policy. Raising revenue in a fair and efficient 

fashion should be a standard that is applied to taxes in healthcare 

as well as taxes elsewhere. 

In particular, I think the committee should look at what is the 

future of the Cadillac tax, which has now been put off for a couple 

of years? It is not very good tax policy. It is very complicated and 

onerous to comply with. It is not particularly fair. Someone in the 

15 percent bracket gets some of their compensation taxed at a 40- 

percent rate. I don’t really understand that. And you ought to consider alternatives which end an open-ended tax subsidy to health 

insurance that is bigger for more wealthy people and look at ways 

to get either a cap on the exclusion or a flat tax credit, some cost 

control incentives and help for lower income Americans in getting 

private health insurance. I think those would be important. 

63 

Chairman BRADY. Great. Thank you, Mr. Holtz-Eakin. I appreciate the testimony today. 

I recognize the Ranking Member, Mr. Levin, for his questions. 

Mr. LEVIN. And, Mr. Moore, I very much agree with you that 

tax reform is going to have to be bipartisan. And we started that 

way here in this committee with working groups, and then Mr. 

Camp went in a different direction. He did come up with a proposal 

that was serious. It was essentially discarded by the Republican 

majority, but a flaw in it, and a very significant one, was the lack 

of bipartisanship in putting together the proposal itself. 

You lose so many people in this country, Mr. Moore, when you 

say the previous repatriation effort was a success. It was a miserable failure. There is no evidence it created any jobs whatsoever. 

It maybe increased dividends. And for us to repeat that experience 

would be a terrible mistake. 

I also think that you really sell short what happened during 

these last 7 years when you compare the crisis that was faced by 

this administration with the crisis that was faced by President 

Reagan. I am not saying it wasn’t an issue, a problem. It was. I 

think a lot of the responses were not correct. But in any event, to 

compare the two is, I think, a serious mistake, and you really sell 

short what was endeavored. 

I can remember hearing from the Bush Secretary of Treasury 

pleading with us to take action and saying there hadn’t been a crisis like this since the Great Depression. And the majority of the 

votes for the so-called bailout in this House came from Democrats, 

talking about bipartisanship. So—— 

Mr. MOORE. Look, there is no—oh, sorry. 

Mr. LEVIN [continuing]. You lose—you lose us. 

Also, I think in terms of your chart about the recovery gap, early 

on after the Reagan tax cuts, they increased taxes just a year before I got here. And then we continued to increase some of the 

taxes during the Reagan administration. So about half of the tax 

cuts were essentially taken away. 

But I would like, Mr. Bernstein, for you to comment on Mr. 

Hassett’s claim that there is now some kind of some magic consensus among economists as to, for example, corporate taxation and 

supply-side tax policy in general because I think that is a figment 

of the economist’s imagination. 

Mr. Bernstein. 

Mr. BERNSTEIN. Yeah. I agree with you. And I would argue 

that my friend Kevin—and I mean that, friend, not in the Washington sense; we really are friends. We write stuff together, so he 

is a colleague. But I think Kevin is misinterpreting that literature 

quite considerably, and I will explain why in a second. But I also 

wanted to clarify some of Steve’s comments about the corporate 

tax, which I think are mostly wrong, but in one sense, we agree, 

which is that, in fact, as I said in my testimony, the corporate Tax 

Code really does need reform. And I doubt there are too many people in this room who wouldn’t agree that a lower rate and a broader base would be a useful way forward, but I would also point out, 

as you suggested, that that is precisely what—part of what former 

chair of this committee, Dave Camp, proposed, and that was DOA, 

so it is a little bit more complicated. 

64 

Another complicating factor is Steve mentioned inversions and 

talked about countries leaving to avoid paying 35 percent. Johnson 

Controls was paying a 19-percent tax rate. Now, that doesn’t mean 

that they aren’t going to go try to find a lower tax rate somewhere 

else, but let’s not kid ourselves. Particularly when you are talking 

about multinationals, the 35-percent rate may be the statutory 

rate, but the effective rate, far, far lower. 

The literature that Kevin mentioned does—is by no means as 

widely accepted as he suggested, and in fact, the quotes that I gave 

you are quotes that tax experts from both sides of the aisle very 

much stand by. We disagree that anyone would retract the points 

that I made. 

Was that you? 

Chairman BRADY. Yes. 

Mr. BERNSTEIN. Oh, sorry. 

Chairman BRADY. Time has expired—— 

Mr. BERNSTEIN. Sorry. 

Chairman BRADY [continuing]. Bernstein. 

Mr. BERNSTEIN. Can I make a quick point? 

Chairman BRADY. Yes. 

Mr. BERNSTEIN. Okay. Kevin cited Christine Romer’s work 

suggesting that the administration’s estimates were wrong; if they 

would have incorporated it, they would have been different. That 

is just patently incorrect. Those effects would have lasted for a year 

or two, never 6 years. And, by the way, the tax cuts that he is referring to, that Kevin is referring to, was a tax increase on a very 

narrow slice at the top of the income scale, people above $450,000. 

That is not what that literature refers to. 

Chairman BRADY. Remind me not to give you extra time. Okay. 

Mr. BERNSTEIN. Well, thank you for—— 

Chairman BRADY. Mr. Johnson, you are recognized for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

A few weeks ago, my home town, Plano, Texas, was named 

America’s best city to find a job in in 2016. And not a day seems 

to go by that some major company isn’t moving into that area with 

new jobs, and there is a reason. It is because the Lone Star State’s 

formula for growth, low taxes and fewer regulations, make a difference. As the chairman is well aware, Texas knows how to create 

jobs. It wouldn’t hurt for folks in Washington to maybe look to see 

what is going on down there. Maybe it will work in the whole country. What do you think? 

Mr. Holtz-Eakin, welcome. Does a slower rate of future economic 

growth mean for the economy—what does it mean, and Americans’ 

living standards, how will it affect them? 

Mr. HOLTZ-EAKIN. As I mentioned in my opening remarks, I 

think it is quite telling for the projected future living standards. 

Slower economic growth comes from two things: one, a slower rate 

of population growth, but more importantly, recent and projected 

productivity growth is very low. And that is where the living standard comes from. 

If we push off into the future a doubling of the living standard 

every 70 years instead of every 35, we push the American dream 

further and further down the road, and that is simply something 

65 

that makes me very concerned about the next generation and beyond. 

Mr. JOHNSON. What are three things that we can do to change 

that, and can you list them in order of priority? 

Mr. HOLTZ-EAKIN. I picked the three that I think are most important in my testimony. I think the committee should continue to 

pursue a trade agenda. We know that the vast majority of income 

growth in the globe will be outside the U.S. Certainly the vast majority of consumers will be out there. I think it is an imperative 

that our workers and the firms they work in have access to those 

markets on terms that are fair and reasonable, and that is what 

a well-negotiated trade agreement can provide. 

I think tax reform is very important. I will align myself more 

closely with Kevin on the benefits of good tax policy. They increase 

the efficiency of the economy and can spur economic growth. 

And I think you should have to put entitlement reform on the 

table. Our entitlements are not serving the beneficiaries well. They 

need to be better. It is a disgrace to give someone a Social Security 

system that is going to go broke in 20 years. And they are feeding 

the red ink that is the problem with our budget. 

Mr. JOHNSON. We think tax reforms are important too. 

You know, at the end of last year, the total debt exceeded $18 trillion. It is now on track to reach $29 trillion in 2026. And we 

have deficits of hundreds of billions of dollars that are adding more 

and more to that debt each year. Some are suggesting that the deficit and debt are not a problem. Do you think our growing debt represents a threat to our economy? 

Mr. HOLTZ-EAKIN. Yes, I do. If you look at the CBO budget 

projections, which are what happens on autopilot, where nothing 

gets done, the deficit is about $1.3 trillion 10 years from now. $830 

billion of that is interest on previous borrowing. Interest is growing—net interest is growing at over 12 percent a year in those projections. We are borrowing today, our previous borrowing, that is 

just unwise. It is also unsustainable and dangerous to the economy. 

Mr. JOHNSON. Thank you, Mr. Chairman. I yield back. 

Chairman BRADY. Thank you. 

Mr. Rangel, you are recognized. 

Mr. RANGEL. Thank you, Mr. Chairman. 

Mr. Moore, I was choked up to tears when you brought back the 

days of 1986 bipartisanship. And you have to realize at that time, 

Members talked with each other regardless of their party. And if 

somebody was saying that they wanted to have a tax cut or tax increase, people would say, ‘‘Why,’’ not whether that is the party line. 

So I think you threw the ball in the court of the Members of Congress, but when you talk about our corporate tax cut being so high, 

it is my understanding that some 26 of the major Fortune 500 corporations pay no taxes at all, that General Electric had $27.5 billion in profit, and they got a refund in terms of it. And so the private sector, I really think, is the greatest impediment because 

those that have this extraordinarily unconscionable tax rate don’t 

pay the tax rate. So they are that not coming in here screaming 

about reform, but you are not going to find any Democrat that 

doesn’t believe that we should reduce our corporate tax rates, but 

it is hard to find Republicans willing to put their names on anyVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
66 

thing, no matter how much of a distortion of the Tax Code it is, 

if someone could say they increased someone’s taxes. And so we 

have a problem in abusing each other with rhetoric. 

And I think when we talk about whether or not we are using dynamic scoring or status current scoring, that it is a coverup for just 

saying cut taxes and not make it pain so much, but if we had people like you, Mr. Moore, that have been around the Hill and realize 

that a lot of the things that we do is because we don’t want to have 

a label, but basically a lot of us, Democrats and Republican, know 

that compromise and working things out is the only way to get 

something done. 

It is almost unlawful—if I was to ask you to prepare a case as 

a representative for this country, say, for TPP, wouldn’t you not 

say in order for that to be effective, that we would need infrastructure and that we would have to invest in it, and you could come 

up with some dynamic scoring as to how much the railroads and 

trains and planes would do, you could do it? If I was to ask you, 

what would make America great in terms of technology, couldn’t 

you come up with some dynamic scoring that by keeping people out 

of jail and unemployed and having disposable income, they could 

buy and create jobs? You could do it. So I don’t give a darn what 

economists call it. If we are not talking to each other, and dynamic 

scoring sounds like cheating to us, we don’t care how rational it is. 

And if spending is something, even for the best of things, 

healthcare, education, building roads and whatnot, if that is going 

to mean that you can’t be a good Republican, it doesn’t work. So 

why don’t the Chamber of Commerce and the Business Roundtable 

get rid of what is happening today and get back to 1986, where we 

would say, what did you mean by that, or can you change the language, or can you show what is going on, because the road that we 

are traveling is now the only people that are really not getting it 

are those people who had the hopes, the dreams that in this country, no matter what stage you are in, life can get better. And I 

don’t see why the middle class is not considered good for America 

if you are rich or poor. If you are wealthy, you need middle America to invest. 

And so I yield back the balance of my time, because you people 

who are testifying have to recognize, it is hopeless for us to talk 

with each other when you start talking about dynamic scoring because you are talking about tax cutting and you are not talking 

about paying for the tax cuts, but if you talked about education, infrastructure, and bringing closer—ending the disparity in wages 

whether you are White or Black, Republican or Democrat, you are 

talking about what we used to talk about in 1986. And I wish we 

can get just some memory, as you have, of the days we have done 

that. 

Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Mr. Nunes, you are recognized. 

Mr. NUNES. Thank you. Thank you, Mr. Chairman. 

So I remain concerned that tinkering with the Tax Code is really 

going to have much of an impact at all because the income tax is 

just completely inefficient. The Congress picks winners and losers 

all of the time, and it is tough for us to get rid of all these winners 

67 

or losers that we have picked over the years. And so I have long 

worked on a modified version of the X tax that I think most of you 

are familiar with, that does away with all of the loopholes. I think 

it is something that has bipartisan support, but because you are 

getting rid of essentially the income tax that has been in place for 

100 years, we need to properly vet a proposal of that magnitude. 

So my question—and I will start with Mr. Eakin—if this committee were to vet a modified X tax like the one I have proposed, 

what are the areas of focus that we should focus on as we review 

that proposal because if you make a change like this, you really are 

doing something that has never been tried globally before? 

I will start with you, Mr. Eakin. 

Mr. HOLTZ-EAKIN. Well, I have—I am a big fan of X tax style 

proposals, and they have some great efficiency virtues in that by 

expensing capital equipment, you equalize the tax treatment of 

capital investment, investment in skills and education because employers can subtract those. Because labor and capital are both expensed, your R&D, which is made of labor and capital, is expensed. 

You have now equalized the margins by which the economy grows: 

skills, physical capital, innovation. And we need to grow, and we 

need to make sure that we take the fastest route. I think looking 

at those and making sure those kinds of incentives are put in place 

are very important. 

Second is, think carefully about the X tax’s distributional consequences because one of the things I like about X tax proposals 

is it is essentially turning the tax system into a traditional style 

IRA. You get to subtract a contribution, deduct it, expense it, and 

then it gets taxed when it comes out equally, interest, dividends, 

capital gains, no distortion on that front. That latter, I like a lot, 

but what gets unrecognized too often is when you do it that way, 

if someone gets lucky, right, so you may invest in a company and 

the rest of the global competition gets wiped out through an earthquake, stock scores, you make a ton of money, we capture the 

windfalls in that kind of a tax system, unlike one where you don’t 

get the deduction; you get to keep everything afterwards, a Roth 

style IRA. So I think that it is a better distributional system than 

is typically perceived. 

And, finally, in the end, this is going to be a progressive consumption tax, tax on the consumed income base, I think that is exactly right, and—but you are going to have to look at how it integrates with the low-income support system and the poverty network where you set thresholds to begin that consumption, can’t be 

done independently of what we are doing with the social safety net 

and the work incentives elsewhere. 

Mr. NUNES. Thank you, Mr. Eakin. 

Mr. Hassett. 

Mr. HASSETT. Thank you for being a leader on this topic, Mr. 

Nunes, too. 

You know, again, this is something—and it goes back to what 

Mr. Rangel was saying—you know, I don’t think that my testimony 

earlier, for example, was about dynamic scoring. It was about 

thinking about if we do this, what happens to the economy. And 

I exactly applaud your analysis that if we are going to that, we 

need to do it for everything. So should we build a bridge is someVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
68 

thing we can analyze, like, what is it going to do to the economy 

if we build a bridge? The consumption tax is something, again, it 

is just completely resolved in the literature. You are a science denier if you don’t recognize that—— 

VOICE. Careful, careful. 

Mr. HASSETT [continuing]. Switching to a consumption tax is 

going to have positive effects on the economy. And it is very, very 

intuitive. The members of this committee need to understand, if 

you want to have higher consumption 5 years from now, where are 

you going to get the higher consumption? Well, you are going to 

have a higher wage, or you are going to have money in the bank. 

If you have money in the bank, then you could draw some of the 

money out of the bank or the interest on the money in the bank, 

and then you could use it to have higher consumption 5 years from 

now. 

The same is true for the economy. We want our economy to have 

higher consumption 5 years from now, and this is all Americans, 

then we have to have assets that we can draw consumption from. 

And so if we have something like the X tax that Mr. Nunes has 

been working on for years now, then the way you avoid the tax is 

you save for tomorrow. And so then tomorrow, Americans across 

the board have more stuff that they can use to finance their consumption. And so it is not magic. It is not hokum. It is just simple 

arithmetic that if we encourage people to acquire assets, then they 

can have higher future consumption. 

And so I applaud you, Mr. Nunes, for pursuing this. 

Mr. NUNES. Thank you. 

I know I only have 30 seconds left, that we are not going to get 

to Mr. Bernstein or Mr. Moore. 

But maybe, quickly, Mr. Bernstein, I don’t know if you have 

looked at an X tax or not. 

Mr. BERNSTEIN. I will try to be quick. 

I think both of my colleagues made many good points. I take both 

of their points about efficiencies therein. And I think Doug’s point 

is really important about the distributional impacts of consumption 

tax on those who consume but don’t save. 

The only thing I would push back about Kevin’s point is that, in 

fact, the price of capital is very low, it is very cheap, it is very excessive. That is not a binding constraint on investment right now. 

Mr. NUNES. Thank you, Mr. Chairman. I know I am out of time, 

but, Mr. Moore, I look forward to getting your response maybe at 

a later date. 

Thank you, Mr. Chairman. I yield back. 

Chairman BRADY. Thank you. 

Mr. McDermott, you are recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

I have listened very carefully to the four of you for almost an 

hour now, and I have never heard the subject of student debt 

raised. 

Now, I would like to talk a little bit about my own experience. 

In 1970, I was a physician. I came out of the military. I moved to 

Seattle. I bought a house for $35,000. I was moving into the future, 

right? Today, you have 41 million people who are carrying $1.2 trilVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
69 

lion worth of debt, and it is putting a damper on our economy that 

none of you have even mentioned. It is surprising to me. 

The average debt of a student coming—62 percent of the stu- dents in this country come out of college $35,000 in debt. Their 

money is going to go to that debt, not to buying a house in Seattle. 

And there is no way you can have that kind of debt and consider 

investing in the society. And kids are deciding now not to go to college because they can’t see the benefit. Or I have kids in Seattle 

who are saying: I am going to Europe. I am going to Germany. I 

am going to France. I am going because college is free. 

And what is hard for me to understand is how you can avoid seeing the impact. These kids get these debts not only for them; their 

parents sign on to the debt, which changes their ability to retire 

because they have this big overhang of debt that their kid is still 

carrying. Seventy-seven percent of kids in this country say student 

loans are a major obstacle to obtaining a mortgage and buying a 

house. 

Now, if you want to talk about ObamaCare or EPA—Mr. Levin 

because he had to go to a meeting about Flint, Michigan. That is 

what you get when you get rid of regulations. If those are what you 

think will stimulate the economy, when is somebody going to talk 

about the young people in this country who are dragging debt no 

matter what they do? 

I worked on the Great Lakes every summer. I made enough 

money to pay for the whole school year. You kids work all summer 

now, you can’t pay for one quarter. You can hardly pay for one 

course. 

And so I would like to hear you talk about student debt. Do you 

think it makes any difference, what happens to the kids in this 

country? Or do you think, why should they have to pay 7 percent 

when businesses can borrow at the low rate, 1 percent, 2 percent, 

something like that? They can’t renegotiate their rates? 

We can’t even get a hearing on a bill like that. I put the bill forward. I would like to hear you say what you think about student 

debt. 

Let’s start with you, Mr. Eakin. 

Mr. HOLTZ-EAKIN. So I think you said two important things 

that are fundamental to this. The first is you used to be able to 

work during the summer and pay a whole quarter or semester. The 

fundamental problem is not the debt or the equity investment in 

higher education; it is how much higher education costs and what 

some kids are getting for it. That is a value proposition, and that 

is the fundamental issue that has to be dealt with. 

It is very similar to the kind of discussions we had back in 2006 

and 2007 about healthcare reform, where there was a bipartisan 

agreement that we are spending too much on a product of highly 

uneven quality and there was an enormous amount of Federal subsidy going into it. The same conversation has to happen on higher 

ed. 

The second is this hearing is about better economic performance. 

There is no segment of the population that has been hit harder 

than young people by the Great Recession and the poor recovery, 

and that has exacerbated the difficulties they have in these debtfinanced college educations. 

70 

So, I mean, start with the fundamentals, and then figure out how 

we can target more effectively—— 

Mr. MCDERMOTT. Why can’t we have the banks allow the rate 

to go down? Or why can’t we get kids into the Federal system and 

finance it all from the Federal Government at 1 or 2 percent rather 

than doing it the way we are doing it now, which is—— 

[Phone rings.] 

Mr. MCDERMOTT. Excuse me here a second. 

Chairman BRADY. If you are going to break into song, Mr. 

McDermott, we will need a warning on that. 

Mr. MCDERMOTT. Why can’t we have renegotiation of loans 

with banks for students? Just give me the answer to that. Why 

can’t students renegotiate? 

Mr. HOLTZ-EAKIN. Private lending has been essentially taken 

out of the Federal financing of higher education, and so there are 

no banks to negotiate with. And the rates are set in law by Members of Congress, so I would—— 

Mr. MCDERMOTT. It is up to Congress to drop the rate—— 

Mr. HOLTZ-EAKIN [continuing]. Get a mirror. 

Mr. MCDERMOTT. If we drop the rate on taxation from 35 percent, maybe we could drop the rate on student loans to prime rate. 

Chairman BRADY. All time has expired. 

Mr. Reichert, you are recognized. 

Mr. REICHERT. Thank you, Mr. Chairman. 

Six years ago, President Obama set a bold goal of doubling exports by the end of 2014. I very much support the goal of increasing U.S. growth and creating jobs through increasing exports. Exports alone support 11.7 million American jobs, and the number of 

jobs tied to trade across the country has increased by over 110 percent since 1992. In my home State alone, this number is even higher. It is 129 percent, Washington State, the most trade-dependent 

State in the Nation. 

And because of this, members—as a member, one member, along 

with Pat Tiberi, who is not here today, and Mike Kelly, members 

of the President’s Export Council, we have been pushing the administration to focus on new market access through high-standard 

trade agreements to meet this goal. Since that time, the administration has launched a series of negotiations that I hope will yield 

ambitious trade agreements resulting in more good-paying jobs in 

America. 

I chair the Trade Subcommittee, so my question obviously will 

focus on trade. I am committed to strong oversight of these negotiations, including our negotiations for a U.S.–EU trade agreement 

and working with the administration on a way forward on this 

Trans-Pacific Partnership that is winding up hopefully sometime in 

the near future. We must get this right, however. It is too important for our global leadership and economic growth not to. 

So I noticed, Professor Holtz-Eakin, in your testimony, you mentioned trade as one of your key points in growing the economy. In 

fact, I think your statements were: It is crucial to economic growth. 

It increases market access, increases productivity, of course then 

leading to additional job growth in the United States. 

Can you expand a little bit more on the importance of trade and 

how it plays that strong role in growing our economy? And then, 

71 

also, I think it might be important to mention maybe some of the 

evidence that you have to support that statement. 

Mr. HOLTZ-EAKIN. So I think broad economic engagement with 

the rest of the world is central to our future. As I mentioned before, 

we know there are large growing markets outside the United 

States, with the vast majority of consumers and income growth 

there. I think it is beholden to the U.S. to provide our workers access to selling their skills in those markets on terms that are level 

and, you know, represent the best of well-negotiated trade agreements. 

A good example of the kinds of things that go on with trade is: 

You think of in the nineties when we thought we couldn’t compete 

in semiconductors anymore, right? It was all going to go away. We 

eliminated all tariffs. There was an agreement, trade agreement, to 

eliminate tariffs on semiconductors around the world. The U.S. 

didn’t lose. It absolutely came back and has high-productivity, excellent semiconductors. 

We can compete with anyone. The productivity pressures that 

come from trade generate productivity increases and allow employers to pay their workers better. That is why you get about a 20- 

percent bump in compensation in export-related industries and 

companies. And I think we ought to be consciously trying to, you 

know, pursue engagement all around the globe to get the right 

terms. 

And as a practical matter, if you look back at the history of the 

GATT and the WTO, I would like to believe, as a Ph.D. economist, 

that the virtues of good economic policy drove that. It didn’t. The 

reality was we also faced a threat in the Soviet Union. We knit together a Western alliance on both economics and security grounds 

to face that threat. We need to think that way in the 21st century, 

as well, and knit together strategic alliances on economic and other 

grounds. And these trade agreements are great ways to do that. 

Mr. REICHERT. Very quickly. 

Mr. HASSETT. Yes. The one thing about it, though, is that the 

two issues are very connected. So we for sure should expand as 

much free trade as we can. But if we don’t fix the Tax Code too—— 

Mr. REICHERT. Oh, yeah. 

Mr. HASSETT [continuing]. What is going to happen is that they 

are going to produce the goods in Ireland that they sell to the place 

that we have the new trade deal with and that U.S. workers are 

going to be left behind, like they have been, because we are the 

high corporate tax place. 

And so if we really want to be a force multiplier with trade, then 

we have to fix the Tax Code as well. 

Mr. REICHERT. I totally agree with you. I think they are indeed 

in partnership. 

Finally, our committee considers policy ideas that will deliver 

growth and opportunity for all Americans. We focus on individual 

policies that are working, such as employee ownership. I want to 

thank Mr. Bernstein for his support of an ESOP bill that Mr. Kind 

and I are sharing together and proposing. 

And I yield back. 

Chairman BRADY. Thank you. 

And, Mr. Neal, you are recognized. 

72 

Mr. NEAL. Thank you, Mr. Chairman. 

Having served here for a long time, I have a pretty good institutional memory of some of the facts that have been thrown out here 

today. And the argument, conveniently, as we move from Reagan 

to Obama, left out Clinton and Bush. 

So I am invited to the White House within weeks of George W. 

Bush’s election with 11 others—the one I can recall that was there 

for the record was Cliff Stearns—and sat next to the President at 

the big table, and he laid out his plan for tax cuts. Paul O’Neill 

was there, and Vice President Cheney was there. 

And the President asked me what I thought. I was next up after 

he made the presentation. And I said: Mr. President, why don’t we 

stick to the position that we are currently on and offer modest tax 

cuts to middle-income Americans and continue to pay down the 

debt? Well, obviously, he didn’t accept that suggestion because 

taxes were cut by a trillion-three in 2001 and a trillion more in 

2003. 

So we take the Clinton surplus, and, with the tax cuts, we direct 

them to people at the very top and argue that that is going to trickle down to people at the very bottom. And, now, as economists, you 

must acknowledge that it was very slow in terms of growth. The 

whole notion of the Bush tax cuts were to speed up growth. It 

didn’t happen. 

The Clinton position—and Bush I, incidentally—brought us to 

unparalleled prosperity of 23 million jobs, 4 balanced budgets. 

So we continue here to argue over this notion that if you simply 

cut taxes for people at the top it is going to be great for everybody 

across the country. And there is very little evidence to support that 

conclusion, including the argument about tax cuts paying for themselves. 

So you are talking to somebody who is very interested in using 

many of the arguments that you have all offered, because I read 

your stuff pretty faithfully, in trying to figure out a path forward 

with corporate taxes and personal income taxes which might put 

the country on a trajectory of pro-growth. 

But I want to come to Mr. Bernstein for a moment, because I 

want to tell you, in western Massachusetts, the money that we 

used for rail with stimulus worked on the north-south line—New 

Haven, Hartford, Springfield, and on to Vermont. 

And as it relates to the Internet in rural western Massachusetts, 

where private companies looked at the opportunities there to extend high-speed Internet, they couldn’t do it. We used that money 

for middle mile opportunities. 

So, Mr. Bernstein, would you comment on those? 

Mr. BERNSTEIN. Yeah. This brings us to something we also 

haven’t talked about which is really critical. If we believe—and I 

am very much with you on this, Representative Neal—that part of 

dealing with our slow productivity growth problem is greater investment in public infrastructure—and you give a couple of great 

examples there—we are not going to be able to do that if we butcher our revenue base by reckless tax cuts. 

Now, that doesn’t mean that every tax cut is a reckless tax cut. 

One of the things I haven’t heard discussed here today is revenue 

neutrality. Any reform to, say, the business side of the Tax Code 

73 

should have that as the lowest bar, but, as I said in my testimony, 

that is not enough. We are going to have to do better to make these 

investments that are so critical to our public goods and to our infrastructure that is too often deteriorating. You have managed to 

take the initiative in your State, and I very strongly suspect you 

are going to have productivity gains to show for them. 

In context of some of the comments that have been made here, 

under Ronald Reagan—and you will remember Steve’s chart—the 

GDP was going up very quickly. Debt as a share of GDP increased 

15 percentage points, from 25 percent of GDP to about 40 percent 

of GDP. Okay? So you can’t make the kinds of investments you 

need if your tax cuts leave you in such an indebted situation even 

amidst relatively strong growth. 

The Clinton years, as you suggested, go precisely the other way: 

very strong growth, strong productivity growth, productivity growing a point and a half faster than it is growing now, really remarkable productivity growth, and budget surplus, not budget imbalance. What did President Clinton do? He didn’t take the advice of 

the supply-side tax-cutters. Quite to the contrary. 

So I think that the punch line of your comments is that, A, we 

have to invest in public infrastructure; B, that is going to take 

more revenues, not less; and, C, if we follow the supply-side tax 

problems, we are going to be ending up in the same Ronald 

Reagan/George W. Bush position of not having the resources to 

make those critical investments. 

Mr. NEAL. Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Dr. Boustany, you are recognized. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

I think what hasn’t been said here yet is that America is an exceptional Nation. And I think all of us believe that in our heart. 

Most Americans do. I have seen it when I have gone down to a 

shipyard in Morgan City, where workers, those who are still working, have the pride in their eyes in the craftsmanship that they 

have been able to put together to build vessels. Same in Cameron, 

where we have oil rigs that are stacked, but some are still working 

to fabricate, to hang on to those jobs. And those are good-paying 

jobs, much better paying than the average. The fact is, workers, 

American families are hurting, and they are hurting bad. 

I read the testimony last night, all of your testimony, and I can 

tell you, the charts, the graphs are depressing. Point-seven percent 

growth in the last quarter of the year? Absolutely depressing. I put 

it down. I picked up Ian Toll’s first volume on the Pacific War, our 

actions in World War II, and read the chapter on Midway. And it 

gives me hope that we are going to come out of this, because Americans always face a challenge and we always have an innovative response. That is why we are exceptional. 

We came out of the recession because we had a bump in exports 

and we had the shale revolution, and oil and gas production soared 

that helped us come out of that recession. And both are down now, 

as is consumption, manufacturing—all the indicators for our economy. We have to change it. That means understanding what is 

going on with trade and leading, as Mr. Reichert just talked about. 

It is about restoring growth, because we cannot restore American 

74 

leadership without economic growth. Trade is key. We have to retool our Tax Code. I mean, right now, American companies are 

really struggling because of the Tax Code. 

And on the international side, whether it is the BEPS coming out 

of OECD, the hostility coming out of Europe on State aid, the adverse merger and acquisition activity, if we don’t do this with a 

sense of urgency, we are going to lose. We need to understand the 

linkage between trade and energy. And we just opened up LNG exports and the potential for crude oil exports, but none of these 

things are going to solve that broad problem until we embrace this 

energy sector and understand how we retool our energy strategy to 

fit the 21st century. These things will make a major difference. 

My State of Louisiana understands this, but the Washington dysfunction here, the lack of a political will, and the lack of the understanding to sit down and have a real conversation about these 

issues and how we solve these things is what is holding us back. 

We have to take the bull by the horns here and start solving these 

problems for the sake of this country. 

I just want to focus, with the little bit of time I have left, on the 

international tax side of things. And I alluded to it with the urgency in which we need to approach this. But economic growth and 

prosperity and the well-being of American companies doing business all over the planet links directly back to the welfare of American families. 

I think you guys—would you all accept that concept? I think it 

is pretty intuitive. 

So if we don’t stop the loss of major U.S.-headquartered companies—I mean, we are hemorrhaging this. We have had several of 

them just in January, major, high-profile ones, not to mention the 

lower-profile cases, and the fact that U.S. companies can’t even 

compete in a merger and acquisition market today. We are losing 

in the global game. We have to stop it. 

Do you agree that this loss is felt all the way down into small 

communities across this country, whether it is suppliers or service 

providers that are linked to that economy, or even those that may 

not have that direct link, because of the drain on our economy, it 

is having an impact? 

Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I think this is a national tragedy. And you 

look at the Budweiser-InBev merge. Headquarters leaves St. Louis 

for tax reasons. You know, Budweiser was, the Anheuser-Busch 

brand was that town. And what happens to the Boy Scouts, the 

Girl Scouts, you know, the opera, anything like that, the suppliers 

in the local area? If you lose the headquarters, you start to lose the 

R&D. If you lose the R&D, you lose the manufacturing. 

We are losing the headquarters in every international merger 

and acquisition. We simply can’t compete. We have gone from being 

the global economic predator to the prey. And this is not going to 

stop until the Tax Code gets changed. There is just no way around 

that. 

Mr. BOUSTANY. Others? 

Mr. MOORE. You know, I just want to touch on something you 

said about energy. We just did a study that finds that the value— 

I mean, look, the shale, oil, and gas revolution—you hit it right on 

75 

the nose. Without the shale, oil, and gas revolution, we would not 

have had an economic recovery. It had nothing to do with the economic recovery. Just look at the statistics. On net, all of the new 

jobs that were created from 2008 through around 2013, 2014, all 

of the net new jobs were in the shale, oil, and gas revolution. This 

is what bailed us out. 

Now, we are in a situation today because of these technologies— 

and, by the way, the technologies are getting better and better and 

better every single day. We have a massive lead over the rest of 

the world in this industry. 

Now, here is what is amazing—— 

Mr. BOUSTANY. We don’t want to repeat the same mistakes we 

made in the seventies with that technology. 

Mr. MOORE. You have it exactly right. But let me just throw out 

one statistic, if I may, to you. The value of American oil and gas 

at current technology, the recoverable oil and gas—and that has 

more than doubled over the last 10 years because of these new 

technologies—the value of that is $50 trillion—$50 trillion to the 

U.S. economy. This is the single biggest priority we have as a country. We are sitting on a treasure chest of $50 trillion of assets. And 

this is under Federal public lands. 

Now, Mr. Chairman, this is an important point. What is the 

value to this of the taxpayer? You are talking about how we are 

going to pay for all these tax cuts. I will tell you how you are going 

to pay for it. We drill. And we have leases, and we have tax payments, and we estimate that the value of this asset to the Federal 

Government is about $3 trillion in tax payments and leases and 

royalties. 

Why don’t we do that? If we need revenues, why don’t we drill 

for this oil? I mean, we have a President—— 

Mr. BERNSTEIN. Oil is $30 a barrel. Do you want more supply? 

Mr. MOORE. We have—— 

Mr. BERNSTEIN. It makes no economic sense. 

Chairman BRADY. All time has expired. 

Mr. MOORE. It does because—— 

Mr. BOUSTANY. Thank you, Mr. Chairman. I appreciate—— 

Mr. MOORE [continuing]. The price of oil isn’t going to stay at 

$30 a barrel. 

But the point is this: that we have a President right now who 

says, keep this $50 trillion asset underground. It is one of the 

dumbest policies. It is almost unpatriotic to say we shouldn’t be 

drilling for our assets when you are talking about jobs that pay 

$80,000, $100,000, $150,000 a year. 

Chairman BRADY. All time—thank you, Mr. Moore. All time has 

expired. 

Mr. MOORE. Sorry. 

Chairman BRADY. We went over just a bit on that one. We will 

take it out of Mr. Roskam’s time. 

Mr. Doggett, you are recognized. 

Mr. DOGGETT. Well, thank you so much. 

I am all for taking the bull by the horns, but not just for more 

bull, of which we hear a lot in this committee. 

76 

I am pleased that Dr. Holtz-Eakin has been unequivocal in his 

prior testimony to the committee on one point with which I fully 

agree. 

And that is your comment, Dr. Holtz-Eakin, that, quote, ‘‘I have 

never believed that tax cuts pay for themselves.’’ That remains 

your position today, does it not? 

Mr. HOLTZ-EAKIN. Yes, it does. 

Mr. DOGGETT. And while there may be other reasons for supporting what this committee approved back in December in a massive tax cut approving so many tax expenditures that were made 

permanent, you do not disagree with the Committee for a Responsible Federal Budget, on whose board you recently served, that 

when you consider the interest cost and everything of borrowing 

the money rather than paying for those provisions, it added about 

$830 billion to the national debt over 10 years. 

Mr. HOLTZ-EAKIN. I actually haven’t seen their publication, 

but I think we know from the CBO baseline, which incorporates 

that, that that is the position we are in. 

Mr. DOGGETT. That is right. That is about what the CBO esti- mated, as well. And, indeed, about $2 trillion added to the national 

debt over the next two decades. 

And I think the problem is that, while everyone on the committee enjoys the opportunity to vote for a reduction in taxes, as 

our former chairman Dave Camp found, there are not very many 

people that want to vote to pay for those revenue reductions. And 

as a result, tax reform—and I think this will be true of the international tax changes, some of which I support, that Chairman 

Brady spoke about yesterday—tax reform is just another way of 

saying: Cut taxes, borrow more money to fund whoever has the 

strongest lobbying team here. 

Now, the stated purpose of this hearing is to provide pro-growth 

policies that deliver opportunities for all Americans. I think that 

would be something new in this committee, because, in fact, the 

way we have created so many loopholes and advantages for the advantaged in the Tax Code, it has played a major role in fostering 

inequality in this country. 

If you look back as far as 1965, the average corporate executive 

was being paid a salary that was 20 times that of the average 

worker, and today we know that is closer to 300 times the average 

worker. And yet this committee continues to support, a majority of 

it, a taxpayer subsidy for multimillion-dollar executive bonuses. 

A major factor contributing to inequality in our country, the inequality that is concerning people of differing political philosophies 

today, is the Tax Code and the way it has been altered to benefit 

the few. 

A second factor that is important to note here is that there are 

things that might be done to encourage America’s competitiveness 

other than just changes in taxes. 

And so if there is an issue about how to provide more young 

Americans an opportunity to get all the education they are willing 

to work for, how to train our workforce so that people that lose one 

job have a chance of getting a better job, every dollar that we 

would invest there, that has to be paid for under our budget rules 

by cutting something else. 

77 

But you can go on a spending spree with tax expenditures and 

never pay a dime. And that is what the Congress did in December, 

and that is what is being proposed for this year as well. 

Dr. Bernstein, specifically with regard to those corporations that 

renounce their citizenship and decide to reincorporate in name only 

abroad to avoid paying their fair share of American security, do 

you support the concept of an exit tax similar to that that applies 

to individuals who renounce their citizenship in order to dodge 

taxes? 

Mr. BERNSTEIN. Yeah, I think the exit tax would be a useful 

idea. It would build on some of the efforts of the Treasury Department, which are constrained because they can’t write legislation as 

this body can. 

And, in fact, I think you made an important point in passing 

there that often gets left behind. We talk about these inversions as 

if companies are moving everything overseas. I agree with my fellow panelists that we lose too much when headquarters are moved. 

But, in fact, oftentimes they are just moving their tax mailbox, as 

far as the IRS concern, booking profits in other countries with 

lower tax rates. 

And it will be a kind of race to the bottom if we try to do that, 

especially if this body follows a kind of CutGo, as opposed to 

PAYGO, where not just spending cuts have to be offset but tax cuts 

as well. 

Chairman BRADY. All time has expired. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Mr. Roskam, you are recognized. 

Mr. ROSKAM. Thank you, Mr. Chairman. 

Mr. Holtz-Eakin, can I ask you to give us some insight from your 

previous assignment as Director of the Congressional Budget Office? And here is our frustration. We have had a discussion about 

growth and so forth and the characterization of dynamic scoring 

and static scoring, and it is sort of a shirts-and-skins argument on 

that. But can you give some insight to a frustration that I have? 

So there is significant waste, significant fraud, significant abuse. 

The fraud numbers, for example, in Medicare blow your mind. The 

fraud numbers in EITC blow your mind. We are talking billions 

and billions and billions a week. And yet, when there are legislative proposals that CBO is asked to score, they come up with this 

catch-22 sort of thinking, and that is: Well, that is going to cost 

money, the remedy is going to cost money, and therefore you are 

not going to save money. 

Can you give us some insight into this ridiculous catch-22, onlyin-Washington-D.C. approach? And, more specifically, how can we 

fix this? Because this is just too absurd for words. 

Mr. HOLTZ-EAKIN. Well, we have certainly gone to the weeds, 

sir, and your fellow committee members will regret the hearing. 

Okay. So there are a couple different things going on. First, the 

basic act of scoring says enactment of the legislation causes something to happen. So that, in this case, involves some sort of implementation of recoveries or antifraud or something in the executive 

branch. If that linkage isn’t firm and secure, CBO cannot and will 

not score it. So that is one issue to check. 

78 

Second, in its wisdom, Congress set up rules for the budget committee and CBO that basically said you cannot simply appropriate 

a dollar to the IRS and say, ‘‘Go collect some money,’’ decide that 

they will collect a dollar and a half, and then go spend the extra 

fifty cents. This was essentially a way to rein in—and I say this 

lovingly—the appropriations committees from simply appropriating 

money that they could then spend more. 

That particular decision meant that anytime you spend money, 

which is what you are frustrated by—you are spending some 

money, but you think you are going to get something back—you 

have to demonstrate that the money in the legislation delivered to 

the agency a new tool not previously in existence that will in fact 

improve recoveries or prevent more frauds. And the new-tool test 

is the thing that is driving you crazy. If you are just giving them 

more money to do the same thing, you don’t get any credit for recoveries and the like. 

And that is a—— 

Mr. ROSKAM. What is the remedy? Is it reformation of the 

Budget Act? Is that where this—— 

Mr. HOLTZ-EAKIN. Yeah, I mean, there is a big need for a reform of the Budget Act. It is long overdue. You know, it is 50 years 

old almost, and there are lots of things about it that need to get 

fixed. And those kinds of things are incredibly frustrating because 

it does stand common sense on its head. 

Mr. ROSKAM. That is gentle, ‘‘stands common sense on its 

head.’’ I am with you. 

Mr. HOLTZ-EAKIN. Well, that was my job. I am a professional—— 

Mr. ROSKAM. It denies gravity. 

So, Dr. Hassett, there was an interesting interchange that you 

had with Mr. Bernstein a couple of questions ago about interpretations of the new tax literature. Could you just respond to that? 

Mr. HASSETT. Yeah. Jared asserted that I am making some 

kind of mistake, and I can promise that I am not. And I can, you 

know, meet with Jared, who is a close friend. We have written papers together, which means he has written at least one good thing 

in his career. 

But I am happy to run through. I mean, again, you can just— 

the staff can grab the articles that I cite in my testimony and have 

a look at what they say. 

Absolutely, the idea that if you have an incentive for something 

that you get more of it and if you have a disincentive for something 

that you get less of it, you know, should not be a contentious idea. 

The question then is, how much? 

And it sort of befuddles me why someone would say that, you 

know, you could have much higher taxes but not create any disincentives, not cause any harm. And the zero position on that is 

something that I don’t think is really defensible in the literature 

at all. And that seems to be where Jared is. 

So he is not only saying that I am incorrect when I just, you 

know, am reviewing the literature with citations, but he is making 

a point that I don’t think that there is a good citation for. In fact, 

the article that he does cite in quotes leaves out a bunch of the papers that they just don’t like the result of, apparently. 

79 

Mr. BERNSTEIN. Can I respond quickly? 

Mr. ROSKAM. Quickly. 

Mr. BERNSTEIN. Yeah. The articles that I quote are just articles from the tax literature as well, so this is a debate. 

But I will say I think Kevin is wrong both on the facts and the 

theory, because when you raise a tax, yes, you will lead someone 

to say, ‘‘Gee, I want to work less,’’ on one side, because this is 

called the substitution effect, but also they might say, ‘‘I want to 

work more because I now have a lower after-tax income. I better 

put in more hours.’’ That is called an income effect. Both of 

those—— 

Chairman BRADY. All time has expired. 

Mr. BERNSTEIN [continuing]. Are theoretically germane. 

Chairman BRADY. Thank you. 

Mr. Smith, you are recognized. 

Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman. 

And thank you to our panel. This, I believe, is a very important 

hearing. A lot of moving parts in our economy, certainly, across the 

country. I represent a constituency in Nebraska, and some of the 

States around us, we have had fairly strong economies throughout 

a lot of this time, although we are still affected by the weaker national economic recovery that we have experienced the last 7 years. 

Dr. Holtz-Eakin, you have done a lot of work on the ObamaCare, 

ACA, whatever one wishes to call it. Nebraska had the first collapse of a co-op—CoOportunity Health it was called—the first of 

the community-oriented and -operated health plans created by 

ObamaCare. That was the first to collapse. Eleven additional co-ops 

have collapsed, out of the 23 created. And, obviously, that has an 

impact, leaving a lot of folks without the coverage that they were 

promised, or perhaps they were moved over to that against their 

preferences. 

But now we also have reports of major insurers, such as 

UnitedHealth and Humana, leaving the health exchanges. And I 

would say these are major losses and certainly contribute to what 

seems to be a growing dissatisfaction of the outcomes of 

ObamaCare. 

And I was just wondering if you might comment on what we 

might expect, economically or other dynamics out there, as a result 

of these new developments, newer developments, in ObamaCare. 

Mr. HOLTZ-EAKIN. I think there is good reason to be nervous 

about the stability and future of the exchanges under the Affordable Care Act. 

The reality is that enrollments grew however quickly you might 

want to think and then have just leveled off. We know that the 

people who buy health insurance first are those that need it the 

most, and the insurers’ losses have proven that this is an expensive 

population, more expensive than anticipated. The co-ops, who had 

the dual handicaps of being highly inexperienced and using someone else’s money—bad incentives always—have gone out of business on those losses. The major insurers, the Blues and others who 

have done this for a long time, are losing money in a big way. 

And the future is sort of in doubt. One possibility is these are 

simply—they are going to try to raise premiums in the traditional 

fashion and drive people out of exchanges, and they go into a death 

80 

spiral. I doubt that Congress has the ethic to throw more money 

in and just turn these into glorified high-risk pools, where expensive people get subsidized to get their care. 

I think it is a deep concern. It is a budgetary concern. It is an 

insurance concern. And it is certainly a healthcare concern, because 

when people lose their insurance, as they did when the co-op collapsed in Nebraska and Iowa, they have to change provider networks, and this is always a bad thing for outcomes. 

So we are not in a good situation, and it is not obvious what the 

next step is going to be. 

Mr. SMITH OF NEBRASKA. So, from a consumer standpoint, 

what do you think consumers should see on the horizon? Perhaps 

any changes that they should expect or try to plan around? 

Mr. HOLTZ-EAKIN. The thing they face most imminently is 

higher premiums. I mean, these insurers are losing a lot of money. 

There is no other place to go than to raise premiums. So we have 

seen sharp premium increases already in the benchmark silver 

plans, and we have seen the kinds of disguised premium increases 

that come with narrower networks, higher copays and deductibles. 

That is the imminent threat. 

The bigger problem is insurers leaving. United has said they may 

leave. Aetna is talking about leaving. That diminishes their choice. 

There is a lot of evidence that with diminished choice comes less 

competition and higher premiums yet. 

So, in my view, whatever you thought of things when it first 

passed, it is not evolving in a very beneficial way for consumers in 

the individual market. 

Mr. SMITH OF NEBRASKA. Thank you. 

Mr. Moore, I know you have done a lot work on the national 

economy, and I certainly appreciate the graphs that you have submitted here. What kind of national impact do you think, national 

economic impact, we should see on the horizon because of the failures of ObamaCare? 

Mr. MOORE. Did you say the national impact of ObamaCare? 

Mr. SMITH OF NEBRASKA. Yes. Economic impact. 

Mr. MOORE. Look, I am not an expert on health care, but I do 

think one of the things I would recommend to you that would be 

a stimulus to the economy would be to lift the 50-worker rule. I 

can’t tell you how many times I talk to employers, probably you 

know people in your own districts, who say, ‘‘I will be dammed if 

I hire a 50th worker.’’ Because what you have created is a cliff. 

Once you hit that 50th worker, not only does the insurance mandates apply to that worker but every one of your employees. So I 

would raise that to 200, 250 workers. 

Look, we still have a lot of unemployed Americans in this country. Why in the world would we pass a law that actually encourages employers to hire fewer workers? I never really could understand the logic of that. I mean, there is a term for this now that 

is going around the country among employers. They call themselves 

‘‘49ers.’’ I am not talking about the San Francisco 49ers. These are 

companies that have capped their employment. I bet every one of 

you in your districts knows employers who have come to you with 

the same problem. We ought to fix that right away. 

Chairman BRADY. Thank you. 

81 

Mr. SMITH OF NEBRASKA. Thank you. 

Chairman BRADY. All time has expired. 

Mr. Thompson, you are recognized. 

Mr. THOMPSON. Thank you, Mr. Chairman. 

Thank you to the witnesses for being here. 

You know, I don’t have the institutional memory that my friend 

Mr. Neal has. I haven’t been here that long. But I do remember 

very precisely the night that I was in then-Speaker Nancy Pelosi’s 

office when then-Secretary Paulson came in to tell her that things 

were so bad with the economy, if we didn’t act immediately, that 

our entire economy was going to implode. 

So it just strikes me that to talk about not recovering quick 

enough, that the recovery hasn’t been as robust as it should have, 

I don’t think that that is particularly an honest assessment of what 

happened. We have not been in a situation as bad as we were on 

that point in our tenure here than the Great Depression. 

So the fact that we have been able to bring back incredible private-sector job growth, the investments that we made in infrastructure—I have had companies in my district tell me, had it not been 

for the little bit of investment that we have given these people to 

repave streets and highways, they would have closed their businesses, they would have lost their businesses. That investment, I 

believe, was very worthwhile. 

Now, fast forward to today, when we can see firsthand what a 

lack of investment in infrastructure is doing. Look at Flint, Michigan. The Ranking Member had to leave to go to a meeting on that. 

Children have been poisoned because we have not made the investments in infrastructure that we need to make. So not only did we 

lose the jobs and the economic growth that would have been 

brought about because of that investment, this is going to cost us 

dearly in the long run. 

Also, the talk today about tax cuts and the fact that we are even 

discussing going down the road of passing more tax cuts that are 

unpaid for I think is frightful. The idea that we can just run up 

the debt, we should all be concerned about that. And Mr. Doggett 

mentioned it earlier. We have just gone through this. We passed 

a massive tax expenditure package that is going to add to our debt 

and is going to become a greater drag on our economy. 

Now, like most of my colleagues here, I liked a lot of the tax policy that was in that package. As a matter of fact, a couple of the 

bills that I voted against were my bills because they—I voted 

against them because it was not paid for and the drag that would 

have on our economy. 

And the last point I want to make is on the issue of employ stock 

ownership plans. I have a number of those in my district, and I 

have a number of other people who would like to get those going. 

I am particularly interested in the idea that it would reduce wealth 

inequality, as was referenced in your article, Mr. Bernstein. And I 

think it is a great way to move forward something positive. It 

doesn’t cost us any money, doesn’t add to the debt, puts more people to work. 

And talk about looking into the eyes of your workers. The company Recology in my district, it is a municipal waste and recycling 

company. And when I go in to meet with them, they sit around 

82 

that conference table, and you have mechanics, you have truck 

drivers, you have recycle gatherers or picker-uppers, and they are 

just very, very proud of the fact that they own part of this company. And I think we could do a lot more to improve our economy. 

So, Mr. Bernstein, I would appreciate hearing from you on those 

things. 

Mr. BERNSTEIN. Well, I won’t repeat my findings because you 

very much nailed them, so thank you for that. The only thing I 

would add is that the other thing I have found is that in companies 

that have employee stock ownership programs the wage distribution tends to be considerably more narrow than in companies that 

don’t. So it is not just that they are providing their folks with some 

capital in terms of retirement security, but also paying them, typically, well also. 

I have a couple of seconds. If it is okay, I would like to reference 

this discussion that just came up on the Affordable Care Act. And 

I am particularly interested in—— 

Mr. THOMPSON. I think we are going to repeal that again 

today, appropriately since—— 

Mr. BERNSTEIN. Well, that would be a huge mistake—— 

Mr. THOMPSON [continuing]. Today is Groundhog Day. 

Mr. BERNSTEIN [continuing]. Based on the slides. First, just 

two things. I have 30 seconds. 

One is, Steve’s point that somehow there has been an increase 

in involuntary part-time work because of this 50-hours rule is directly contradicted by the data, which shows, in fact, part-time 

work—involuntary part-time work is what we would expect if people are being forced into part-time work—is falling sharply. And I 

show that in figures 4 and 5. 

In figure 6, I show projections by the CBO that show savings of 

up to 3 percent of GDP based on costs of major health programs 

that have been—— 

Chairman BRADY. Thank you, Mr. Bernstein. 

Mr. BERNSTEIN [continuing]. At least partly associated with 

the ACA. 

Chairman BRADY. Thank you. All time has expired. 

Mr. Paulsen, you are recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. You know, this hearing couldn’t come at a more critical time, a more important time. 

The testimony has actually been really sobering, but it has also 

been really, really instructive. 

And it is true, when the President came in, we were in dire financial straits, a tough situation. But the fact remains, we have 

the worst economic recovery ever in the history of our country. We 

should be doing a lot better. The worst on record ever. 

And it is no wonder, actually, 72 percent of Americans today still 

think we are in recession right now. Median household income has 

actually dropped for the first time ever, also, during an economic 

recovery. So paychecks have dropped, wages are flat. And it also 

took nearly 5 years just to get back to having the same number of 

people working again than when the recession first started in December 2007. That is the longest period of time to return to the 

starting point in any recession, actually, also in American history. 

83 

So, with that in mind, it is really critical, it is really important 

that we use every tool at our disposal—fixing a broken Tax Code, 

expanding markets overseas—to make sure that we are helping everyone achieve the American Dream and getting our economy back 

on track. 

So I want to go back to some of these international tax reform 

points and why this is so critical, from my perspective, because you 

mentioned Medtronic, Mr. Moore, for instance, a Minnesota company. It is just one of many companies that we have heard of 

changing their headquarters, moving it overseas, for instance. 

Since 1982, my understanding is we have had 51 inversions, I 

think, that have taken place, but, actually, 20 of those inversions 

have happened since 2012. We have three in January of this month 

alone. And so the trend has accelerated. 

And, actually, probably the real story is not the inversions but 

it is going to be the acquisitions of American companies by foreign 

competitors over time. And that is when you move the headquarters, you move the innovation, you move jobs overseas. So, in 

an iPod world, when you can move capital at the click of a mouse, 

we should be addressing this. 

So my question is this. I will start with you, Mr. Moore. Do you 

believe that we should also look at doing international reform as 

a downpayment to the broader reforms that are needed, that are 

tough, that are challenging to get bipartisanly done, that we need 

for this Congress, but should we move forward on that, to making 

sure that we are addressing this competitiveness issue rather than 

a tax avoidance issue? 

Mr. MOORE. You know, the thing that is remarkable about this 

issue is that, you know, when President Obama took office, he had 

a tax reform commission that was headed by Paul Volcker, who 

headed the Federal Reserve. And the Obama committee, or blue 

ribbon panel, basically said all the things that we are saying about 

the corporate tax: that it is chasing businesses and capital out of 

the country, that it is creating a competitive problem to the United 

States, and we ought to do something about this. 

And that was back in—I don’t remember the exact year, but it 

was 2009, 2010. It was certainly in President Obama’s first term. 

Here we are 5 years later, and we are still having this conversation. Why haven’t we done something about this? I mean, how 

many companies have to leave? 

Now, look, maybe we have to have—I would favor just cutting 

the corporate rate right now to 15 percent. And, look, if we have 

to borrow to do it, do it, because that is going to bring jobs back 

to the United States. 

But if you want pay-fors, I will just give you one example. I 

mean, one of the atrocious add-ons to the tax bill that you all 

passed last year was this indefensible credit for the solar industry. 

And we know what happened with that money. So you gave about 

a half a billion dollars to the solar industry, and we know what 

happened. All that money got capitalized into value of the shares 

of companies like SolarCity. So all you did was you spent $500 million of taxpayer money to the shareholders of these companies. I 

mean, my goodness, how is that good tax policy? 

84 

Let’s find those kinds of loopholes and credits, get rid of them, 

and get that rate, Mr. Chairman, down as low as we possibly can 

before more of these companies leave. 

Mr. PAULSEN. Mr. Holtz-Eakin, some critics of moving to an exemption system for foreign earnings argue that it is some sort of 

zero-sum game and that any increase in investment abroad leads 

to a decrease in domestic investment here. You know, there is 

strong evidence that when American companies expand into foreign 

markets it helps the domestic economy. 

Mr. HOLTZ-EAKIN. You are exactly right. I mean, the evidence 

is these are complementary, not zero-sum substitutes, that if you 

invest abroad, you expand your domestic employment investment 

as well. That is an important thing to remember. 

I think there are other important things to just frame this issue. 

Right now, the discussion is entirely defensive. ‘‘How do we hold 

on to our companies?’’ We really should be on offense. We should 

want every company to locate here. We have some existing inbound 

investors, fully a fifth of our manufacturing base, and these are, 

you know, high-paying, good jobs. We want people to invest here. 

They are not going to do it if we remain the highest tax country 

in the developed world and retain our system of worldwide taxation. 

The chart that Mr. Moore showed about the rate coming down 

is one thing. The second thing that has happened is, basically one 

a year, the OECD countries have moved away from worldwide taxation. We are the last ones left. So there must be some magic secret that we have hidden away in the West Wing that makes this 

a good idea when everyone else has given it up. And that is a place 

to worry. 

I would also worry not just about the corporations but about the 

entrepreneurs tax through the passthroughs. One of the striking 

features of the recent data is the firm death rate for the first time 

has gone above the birth rate. We have seen the drop in firm 

startups be so dramatic that we are losing more firms than we are 

giving birth to. 

I would worry about all the things that affect entrepreneurs. It 

is tax, it is trade, it is the regulatory burden. There is no single 

lever. But we have a problem in our business community. 

Chairman BRADY. Thank you all. Time has expired. 

Mr. Marchant, you are recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

When I go back to my district and have townhall meetings, the 

subject that comes up most frequently is the national debt. Whether it is young people, older people, people on Social Security, it is 

the inevitable subject that always comes up. 

I would like all of your opinions, each of you to make a comment. 

What effect does the size of our national debt and the lack of a plan 

to reduce it have on our current economy? And what effect will it 

have on the ability of us to have a future growth economy? And 

let’s just start with each panelist. 

Mr. HOLTZ-EAKIN. So the current trajectory for the debt is 

unsustainable; it is explosive. That is bad for the economy right 

now, because if you are any rational investor from anywhere 

around the globe and you look at the U.S. and you say, okay, withVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
85 

in a decade we are going to get to the point where basically all borrowing is to pay interest on previous borrowing, that is a very dangerous place to put my money or hire my people. 

Because only a couple things can happen: You can raise a lot of 

taxes. The terms on that are going to be low. You could not do 

something and end up in a big financial crisis, a sovereign debt crisis. That is a terrible growth strategy. Or you could get the budget 

under control with some sensible spending reforms, but that is only 

one of three things that is a good thing. 

So it really damages the image of the United States as a place 

to start and to expand businesses. And that, I think, should be 

troubling to everyone right now. 

We may stabilize the debt, but we are at a very high level. And 

if you do that, you are baking in a lack of flexibility in the budget, 

because you are paying a lot of interest costs every year that could 

be devoted to the annual appropriations or some other pressing national need. There is an inflexibility as a Nation; you are exposed 

to interest rate shocks, and you are going to have to manage that 

in a global economy. 

So you give up a lot of the flexibility you would like to have, both 

as a budget entity and as a nation, by locking in at a high level. 

The best thing to do is to have a trajectory that stabilizes and then 

goes down, and that would be something that the committee should 

be looking for. 

Mr. MARCHANT. Mr. Hassett. 

Mr. HASSETT. I can be quick. 

There is a big literature that suggests that when debt relative to 

GDP—this is just gross debt—gets above about 90 percent, then 

you get pretty slow growth. If you look at the forecast for the debt 

in the U.S., then it is easy to see about 1 percent lower growth 

every year because of the high debt that we have over the next 30, 

40 years. And that is something that we need to get out in front 

of or we are going to have that low growth. 

It is one of the reasons why, you know, 2 percent might actually 

be better than we can achieve. Because I don’t think that those 

forecasts that we are looking at now that we are depressed about 

are fully incorporating the negative effects of the high debt. 

Mr. BERNSTEIN. So I don’t think the negative effects of the 

high debt are nearly as visible as Kevin’s comments would suggest. 

For example, debt is high right now, and interest rates are very 

low, have been very low, and probably will be very low for a long 

time coming. So it is more complicated than that. 

That said, I think Doug’s point about the future is very well 

taken. And I don’t think we are going to achieve a sustainable path 

unless we, and I guess I would argue you, accept that there is 

going to have to be spending cuts, which we have done a lot of already, but also revenue increases, which I think is just anathema 

to Members of this body. And we will never be able to achieve a 

sustainable path if people are unwilling to yield on that point. 

Mr. MOORE. So I guess I am the outlier here. Look, the debt is 

a result of low growth. Low growth is not caused by the debt. If 

we get this economy growing at 31⁄2 to 4 percent, where we should 

be, we are really not going to have to worry so much about the debt 

because the debt is going to fall both in terms of getting to a balVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
86 

anced budget and also, what we care about, the debt as a share of 

GDP. 

So I would urge you all to concentrate about what do we do to 

get growth up, because growth up will reduce the burden of the 

debt. I mean, Jared is right; we have the lowest interest rates in 

50 years. 

My problem with what we did in 2009 is not that we borrowed; 

it is just that we didn’t get anything for the money. I mean, yeah, 

we borrowed a lot in the 1980s, but look what we got. We got tax 

rates down that caused one of the strongest expansions in the history of our country, and we defeated the Soviet Union, we won the 

cold war. That is a pretty good investment of $2 trillion to do those 

two things. 

I look at the economy now, and I look—we borrowed $8 trillion 

in 7 years. What have we got to show for it? Solyndra? People on 

food stamps? People on unemployment benefits? I mean, there is 

just no lasting benefit to what happened when we did this. 

And I just want to go back to this one quick point, that, look, 

people keep asking, ‘‘Gee, what if we hadn’t done what we did? 

What if we didn’t have the massive $8 billion bill?’’ And we know 

what would have happened if we didn’t, because this was a chart 

that was prepared. These were Jared Bernstein’s own numbers. We 

have a higher unemployment rate than we would have had, according to Jared, if we hadn’t borrowed all this money. 

Chairman BRADY. Thank you. All time has expired. 

Mr. Blumenauer, you are recognized. 

Mr. BLUMENAUER. It has been so long, I forgot where the button is. 

Thank you, Mr. Chairman. And I appreciate the diversity of 

opinions and the attitude that is being taken here this morning. I 

think this is important, and it has been useful. 

I appreciate Mr. Bernstein’s work on ESOPs. I am going to defer, 

I think, to my friend Mr. Kind, who might want to talk about it, 

but I think those are such a powerful tool to stimulate economic 

growth and to align the interests of workers and the corporation 

in a very powerful way. 

I appreciated what we heard from Mr. Moore, talking about the 

1986 spirit of cooperation and what happened in this committee 

with some disparate attitudes from people who—Reagan and Tip 

O’Neill. I would note that out of that compromise there was a significant increase in corporate tax rates, an increase in capital 

gains. There are some lessons there about the package that can be 

put together, and I hope we have a similar flexibility moving forward. 

In particular, I would go back 4 years earlier, when Ronald 

Reagan and Tip O’Neill raised the gas tax a nickel a gallon, and 

we got some things for it. And that was done on a cooperative, bipartisan basis, raising a user fee, not raising the deficit. 

I am hopeful that we might be able to exercise that same spirit 

of cooperation and bold thinking that isn’t actually so bold—it is 

Eisenhower, it is Reagan, it didn’t used to be controversial—in 

terms of the use of user fees rather than the gimmicks that we 

used this last year for—I am glad we have a 5-year reauthorizaVerDate Sep 11 2014 01:27 Jun 09, 2017 Jkt 022375 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\22375.XXX 22375
87 

tion. We have a little bit of money; we have 5 years of certainty. 

But it is not on a sustainable basis going forward. 

I have shared with this committee before and I hope the committee, Mr. Chairman, might be able to at least spend a day looking at revisiting how we used to do it and listen to the broad consensus across interest groups—the U.S. Chamber of Commerce, the 

AFL–CIO, truckers and AAA, environmentalists, the people who 

are involved with road construction and other infrastructure—to 

look at something that is broadly agreed upon that would make a 

difference going forward. 

And, frankly, I think we raise the gas tax to abolish the gas tax, 

because it is not sustainable, going forward, to base on gallons of 

fuel consumed to finance the underpinnings of our infrastructure. 

And there is a better way. This committee has had legislation before it, which luckily got included in the reauthorization, to allow 

the pilot project that we have in Oregon to deal with road user 

charges that would be fairer, more sustainable, and would enable 

us to fine-tune the charge to be able to deal with things like congestion and maybe the lower costs in rural and small-town America. So it would be fairer, raise more money on a sustainable basis, 

and get rid of the gas tax, which is increasingly unrelated to road 

user benefit. 

But my question—and, Jared, maybe you would like to comment. 

What impact would it have over the next decade if we took that 

spirit of Ronald Reagan and Tip O’Neill and raised the user fee in 

a sustainable fashion in terms of putting Americans to work at 

family-wage jobs across the country and having something to show 

for it 

Mr. BERNSTEIN. Well, I will just reflect back to my comments 

to Mr. Marchant a second ago. I don’t think there is a way forward 

that doesn’t involve some compromise on this point. We can’t 

achieve a sustainable budget simply by spending cuts. And, in fact, 

if you look at the nondefense discretionary side of the budget, 

where so much important spending goes on in issues like law enforcement, homeland security, education, research, public health, 

veterans medical care, that is slated to fall to its lowest share on 

record as a share of GDP by next year. 

Mr. BLUMENAUER. Help me, Mr. Bernstein, on infrastructure. 

Mr. BERNSTEIN. And so on—yes. So the tax on gas, on a gallon 

of gas, has been stuck at 18.4 cents in nominal terms since 1993. 

Now, in what kind of fantastical thinking can we pay for our roads, 

can we upgrade our roads on a tax that hasn’t been updated in 20- 

plus years? 

Chairman BRADY. Thank you. All time has expired. 

Mr. Reed, you are recognized. 

Mr. REED. Thank you, Mr. Chairman, and thank you to the witnesses. 

Opening comment here, it has been interesting listening to the 

comments of my colleagues on the other side as well as the responses from the witnesses. And it is just ironic that I hear often 

about the glory days of the Clinton administration. The Clinton administration policies enacted a glorious budget surplus and economic growth, and that is all due to the Clinton administration. 

But yet when we talk about the Obama administration in this 

88 

present economy, of course, it can’t be the Obama administration’s 

policies that are causing this slow-growth economy. It has got to be 

all Bush No. 43, and we all blame it on prior—on Bush. So I think 

what we are hearing here is a lot of rhetoric, a lot of politics. You 

know what? I am sick and tired of that. 

What I am interested in is some real solutions from this panel 

as we go forward with some reforms that we all know need to be 

done. Obviously, we have a broken Tax Code. The Tax Code has 

to be fixed. I see that there is potentially a road ahead for us to 

do that, but is there something to be done in 2016 in regards to 

comprehensive tax reform? I am always the eternal optimist, but 

let’s be realistic and maybe we downsize our expectations here a 

little bit and focus on something maybe we can do, and that is 

international tax reform. As we deal with international tax reform, 

we have had some conversations with the White House. We have 

had some conversations with folks on the other side of the aisle 

and other side of the Chamber in the Senate about a real need to 

fix this issue. And I think we all agree that that problem is in need 

of fixing, and I think there is a bipartisan, bicameral effort to potentially tackle this, but one of my concerns—and I am a strong 

voice for U.S. manufacturing. I am a strong voice for U.S. manufacturing. I do believe we can make it here to sell it around the world 

again. That is something I have adopted in my office, and I firmly 

believe that opportunity is before us. And so as we go through, we 

look at U.S. manufacturing, what two-thirds of our U.S. manufacturers on a pass-through status, being taxed on the individual side 

of the coin. I am interested, a sincere interest, from the panelists, 

as we do international tax reform and as we look at potential reforms on that front with our international corporate entities in particular, what can we be doing at the same time in a 2016 horizon 

that you guys could potentially offer us in regards to those passthrough entities, the two-thirds of the U.S. manufacturers that are 

in need of tax reform just as much as the international tax component of the Tax Code that is in need of fixing? 

Is there anything, Mr. Moore, that you could offer? And then we 

will just go right down—— 

Mr. MOORE. Well, it is a great question. I mean, look, you are 

right. Most of our companies are small businesses, and they pass 

this through—and medium-sized businesses. So there is some 

thought about, you know, if we are going to cut the corporate tax, 

we should cut the tax on small businesses at the same rate. I am 

in agreement with that. I just think the emergency is so great on 

our corporate system, that I just want to get it done right now. 

That is my—and let’s deal with that issue later. And that is sort 

of the way I feel about tax reform generally. I mean, there is nobody—I have devoted 30 years to this issue of tax reform, so there 

is no one who wants it more with more urgency than I do, but I 

think we have got an emergency right now—we have talked about 

this all morning—about getting that corporate tax—and, look, to 

the Democrats in this room, yes, we as Republicans are going to 

have to give up some of the things that we want to get this done. 

I mean, we are not saying it has to be our way, but this was 

done, Mr. Rangel. You know it. You were here in this room when 

it got done. And I loved what you said, by the way, in your opening 

89 

statement. I mean, I think you and the chairman should get together for lunch and figure this stuff out. Maybe you do need to 

talk more because I agree with almost everything that you said. 

Mr. REED. Well, Steve, reclaiming my time, but I am really looking at, how can we take care of potentially an immediate concern 

that the pass-throughs, the U.S. manufacturers, the small businesses? Because one of the things I am concerned about is I come 

from rural western New York, and we have got a lot of people. And 

I go back to my home district. I am here on behalf of them. And 

I understand the concern on the international side, and we need to 

fix it. I join in that effort, but I want to do something for them, 

and I want to do something for them right now. 

So what can we do, Mr. Bernstein—— 

Mr. BERNSTEIN. So I won’t talk about this, but the strong dollar is making life very hard for our manufacturers, and—— 

Mr. REED. I agree with you. 

Mr. BERNSTEIN [continuing]. I take your point about the inherent competitiveness. Instead of fighting over every one of the hundred tax deductions and expenditures in the Tax Code, I am all 

about closing the loopholes. We should limit those deductions and 

expenditures to 28 percent instead of the top rate of 40 percent. I 

think that would both improve efficiency, again, shut down subsidies and loopholes, and raise half a trillion dollars over 10 years. 

Mr. REED. Mr. Hassett. 

Mr. HASSETT. You know, I think that something that you guys 

could do this year would be just to—you know, Mr. Rangel, you 

said that we have got this high corporate tax, but none of the guys 

are paying it. You should experiment. If you cut the rate by 2 or 

3 percentage points, you are not going to lose revenue. It is going 

to help American business. It is going to help American manufacturing. And the pass-through entities would see the rate reduction 

and change corporate form. It costs a couple of hundred bucks—— 

Mr. REED. Do it across the board, rate reduction for everybody. 

Mr. HASSETT. Yeah. 

Mr. REED. My time has expired. Thank you. 

Chairman BRADY. Thank you. 

Mr. Pascrell, you are recognized. 

Mr. PASCRELL. Mr. Chairman, I listened very carefully to your 

introductory remarks, and you touched upon what we would be 

doing in terms of tax reform and welfare reform and health reform 

and trade expansion. And then I heard a lot of numbers go this 

way and then a lot of numbers come this way, and I said to myself, 

well, we have had smart people there like yourself before who said 

pretty much the similar, same kinds of stuff: How come we can’t 

get this done? And my contention is that it has very little to do 

with the numbers because we all can make a case. We are all good 

lawyers when it comes to it, even though we are not lawyers all 

of us. You know, we need fact checks upon ourselves. We need fact 

checks. All of these scholars, I think they are good people. I have 

heard them testify, most of them, before. They have got a lot to 

say, a lot of good things to say. But you take the case of the threshold—since you are talking about the future and the economy—the 

threshold of the Affordable Care Act of 50 employees, you know, 

let’s take that as an example. In 2014, 2014 alone, the number of 

90 

workers employed part-time for economic reasons declined by more 

than 1 million. The greatest increase in involuntary part-time work 

came in 2008, and Obama was not the President, was not the 

President. 

So you painted—my good friend, Mr. Holtz-Eakin, you have 

painted a beautiful picture of the apocalypse; apocalypse II, it is all 

going to come down on us. I mean, maybe you are preparing us for 

the next recession, which you should be doing, part of your job, I 

think, but I think you need fact checks. You need them, and we 

need them. And then we could come to a conclusion together. 

We are not going to do—we have so many redos since we passed 

plan D and prescription drugs. Talk about the economy. It is not 

a major part of this big picture that we are dealing with—what is 

the future budget going to look like?—but it is a good thing to go 

back to. Democrats lost on that issue, if you remember. We lost at 

3 o’clock in the morning, 4 o’clock in the morning. We lost on the 

issue. We campaigned against it. I went to senior citizens to tell 

them to—I had to tell senior citizens why I am going to vote 

against this thing, even though it is going to maybe help them with 

their prescription drugs, pay for them. And then we found out what 

had happened in that 3:30, 4 o’clock in the morning and what it 

meant. Now, I didn’t go back to my constituents, I didn’t go back 

to my constituents and tell them: We lost, but we are going to fight 

this now. 

No. I went back to my constituents and said: I fought the good 

fight, and we lost. Now we are going to have to make this situation 

work. 

When has that happened in the past 8 years? When have you 

come forward with anything good to say about the economy? You 

would think—you know, we got—we have employed more people 

than all of the European countries put together since this great recession, depression, call it whatever the heck you want to call it. 

When have you ever come forward and said, ‘‘Housing is better now 

than it was in 2007, building new housing’’? When have you ever— 

I have never heard it from the other side, and a lot of these guys 

and gals are my friends. I have never heard it from them, ever. 

Why? He did some good. We have done some good. And we have 

done the best when we work together. 

So you can have all the numbers you want. You can have all the 

numbers to present, et cetera, et cetera. And I—you know, on page 

11 in your report to us—Jared, you said something about the carried interest, and I think it is like a little mirror to this whole 

mess, carried interest, about how unfair that is when you are trying to deal with the economy, when you are trying to have fairness 

woven into the process, how important that would be, what the results of that would—that is, what, $16 billion over 10 years, and 

it is not going to change the history of mankind, but it is just one 

example. Why can’t we even get to that, when I know there are 

people on the other side that want the same thing we want? So 

when we are talking about budgets and future budgets, we are 

talking about not only numbers; we are talking about attitudes and 

altitudes. 

Chairman BRADY. Thank you, Mr. Pascrell. 

Mr. PASCRELL. You are welcome. 

91 

Chairman BRADY. Your time has expired. 

Mr. Kind, you are recognized. 

Mr. KIND. I thank the chair’s courtesy. The dais kind of bends 

over here, and I get tucked away a little bit, but I want to thank 

the witnesses for your testimony here today. 

And, Mr. Bernstein, let me start with you and just pick up on 

a line that Mr. Thompson was questioning you about. And I want 

to commend you for the recent article that you wrote on ESOPs, 

entitled ‘‘Employee Ownership, ESOPs, Wealth, and Wages.’’ I believe for a long time that can be a tool when it comes to addressing 

income inequality. 

Representative Reichert and I have had this ESOP modernization bill pending before this committee. 

Mr. Chairman, I think that would be a very nice vehicle for us 

as a committee to move forward on. It doesn’t cost anything. It 

makes it easier to convert to the ESOP model. I have visited a lot 

of the ESOP shops in my congressional district and throughout the 

State. And, you know, the pride of ownership, the productivity, the 

loyalty, all these factors coming into play, so I commend you for the 

article. 

And I would ask unanimous consent, Mr. Chairman, at this time 

to have that article included in the record. 

Chairman BRADY. Without objection. 

[The information follows:] 

92 


22375.049

January 2016 

This rtparo was commissioned by t~ £mplor«·Owntd S Corporations of America. The author •• •olely 

rnpon11ble f\>r the wntenl. Any v1ews exprwed h(rt rfPrtKnt onty the views of the author. 

The •uthor thanks Joseph Blasi and Doug~a.< Kru$< for d••• ilrtd txten$ive utput. Lor.n Rodgers abo provtded 

helpful information. The author assumt$ rcspOil.)ibihty (or any mis-takes. 
93 


22375.050

introduction 

The growing problem of economic inequality has many <li ffereot dimensions. The dispersion of econom.ic outcon1es 

has increased in the distributio,ls of wage.~. incomes, and 

wealth. tn earlier work, I've li.n.k:ed these developments to 

the potcntiaJ for greater skewing of political power find influence, steeper barriers 10 opportunily tOr the. tl)3ny on 

the wrong side of 1he inequaHty divide. and even macroeconontic disruptions.• In this paper1 l begin by examining 

one bnponant development in the increase of inequality: 

section reviews the literature on ESOPs, including recent 

work on F.SOPs' impacL on jobs and firm-level productivity. An impormtlt finding of this rt"view, one present in numerous studic..;;, is that finns with ESOP.s appear uniquely 

resilient in recessions relative to non-ESOP firms. perbaps 

due to cnhttnced coopcratiOrl by employee-owners. A sui> 

section then examines BSOPs' utility as a policy tool to 

push back against inequality. with an emphasis on wealth 

inequality. 

che shift in national income from compensation to profits. The next section uses the National Bute3u of Econom· 

T highHght thls aspect of inequality's growth because t am ic Rescarc.h (NBER) duta$Ct on cmployce-ownersbip for 

interested in the extent to whic!h a particular poHcy might analysis of ESOPs' impact on wage inequality. Though 

help tC) rebalance this recent shift in income rypcs. That pol· this ata.~t is very rich, it is not nationally representative. 

icy is employee ownets.hip programs in " I ~how that shared O\\U~rshlp However, I show that among tirm!li with 

general and employee stock ownership w_nd ESOP~ ~ppcllr to have a 5:miilll, employee-owners a) wages te-nd to be 

plans .. or ESOPs, i.n particular. more narrowly distributed (i.e., there is equxti:tine fmp)lct on "dlllh 1eod less wage inequality), b) that effect is 

wagt distrlbudons ... 1 ~bo bypotb- positively correlated with shtued owneslz~ that '"ere such emplo)et own- ership (as ownership intensity goes 

('Nhip plans to proliferate. tbeir up, wage inequality goes down), and 

imp1c1 on ineituali~ reductie'n c) these fimlS have tig.hter wage districould welt be dgntflcant. •• butions than what cxisls in lhc overall 

Using a number of datasets and refer· 

encing a growing literarure on this ques--

tion, I show that shared ownership and 

ESOPs appear to have 11 small, equalizing impact on wealth and wage distributions. Since ESOPs tran .. ~fer capital 

owner.; hip to workers Less lilc.ely tO own capital, lhi.s t-qu:.•lizin.g impact is expected. But there is no obvious reason 

why wage di~trihu nn~ in finn.s with employee ownership 

should be l..s va~·ied (more equal) lhan in other fiml.S. Ye~ 

while the data arc only suggestive on this point. T show that 

as the extent of employee ownershjp rises, wage inequality 

an-u:.mg \\'<Jrl:.er-owners tledincs. 

Based on these findings, 1 also hypothesize that were such 

employee ownership plans to proliferate, their impact on 

in~Xt al ty reduction could weU be significant. [n patt, 

l argue d1ac this is a result of transferring wealth in the 

form of stock in their companies to workers who1 because 

they o"'·n little such. wealth, reside.: in lhe lower reaches of 

the wealth distribution. But the result also flows from research. which I both cite and contribute to herein, :;:howing 

workers do not appear to trade off one fom1 ofincowe, Hke 

wages. for ownership shares. 

The fimmli oftlte paper: Section one oithe paper cxphliiLS 

the theory of "t'il.ctor incomes"- the dlvision of national 

income noted above-and tracks recent trends. Measurement issues loom l3lge here as various data series show 

som<.owhat difTcr<.'11l results. That said, chcy all show a significaot shift from wages to profits in recent years .. The ne.'<t 

economy (though lhis finding depends 

on a rough comparison between t11c NBSR dataset and a 

nationally representative dataset). 

following this empirical work, I coosider the policy implications of the findings. First, J place E:SOPs in context with 

various other policies that are intended to reduce incquali(y, like minimum wages or job creation policies. I argue 

that ESOJl>s can reduce both wealth and wage inequality. 

Given lhc importance of amplifying those eneers through 

wider use of employee ownership, some may conclude that 

further tax inceoti\'eS to promote ownersWp are warranted. 

I generally do not think so. but t suggest a few other policy 

ideas that could help ESOPs prolifenue. 

Ooe imporumt part of the ESOP rese31cll d!at I do nor 

explore in lhis paper is their positive impael on a serious 

American economic problem that also relales to the growth 

of incqualicy: retirement insecurity. Because of the shift 

away from defined benefit pension, along whh wage and 

income stagna lion, a growing share of workers nca.ring rc· 

tirement do nor have enough saved to maintain their living 

standards in retirement) Phillip Swagcl and Robert Carroll 

point out that nearly 60 percent of American workers have 

no a-SSClS in u work·rclatcd n:tirernem plan. ESOPs are an 

import.anr pan of the solution to this prob1cm. and firms 
94 


22375.051

\'tith ESOPs ltave be~n found co contribute not just to 

the ESOP but to 401(k) plans .. ,well, an imponant 

diversification point co which I return later. But my 

tbcus for this plper i$ on the impact of ESOPs and 

other employee ownership plans on various dimen· 

sions of economic inequality. 

The Logic of ESOPs aod inequality reduction 

Before proc~eding. let me explicitly dmw out the: 

logic behind this work Broadly speaking, there are 

tlt ICDSt two ways middle· and low-wage worki1lg 

people who have been losing ground co inequality 

c.an dampen or reverse that trend. One, chcy can increase their earnings relative to higher earners, and 

two, they crut accumubte a larger share of their 

firms' profits. The Iauer mechanism ''works" (reduces inequality) because profit holdings are coo~iderably more ooncencrated than lhac of earnings. Note. 

tor example, that \vh.ile about 20 ptr(:ent of income 

is held by lhe top I percent of households, about 40 

pe-rcent of wealth is held by the top 1 percent.3 

So, when a lower-income person claims a larger 

share of a type ofincorne that's more unC<JuaUy dis· 

tributed, inequalny is "mechanically'' reduced. The 

findings througbouc this paper suggest lhaL ESOPs 

and other employee ownership programs have this 

effe.:~ though data suggest the ma!,'l!itudc of the cf· 

feet is still small in part beeause ESOP ownership is 

still small, perh~l.~ accruing to lc:ss than 10 percent 

of the workforce. Still, these findings suggest tbat 

growing employee ownership is a step in an equalizing dirtctiOn1 aod thus more widespread employee 

ownetShip will incre-ase the anti-inequality impacts 

documented below. 

While I believe this logic is entirely sound, it is un· 

fonunatcly the case tbat data limitations abound in 

lhis work such that neither I nor any other researc.ller (as fnr as I know) has been able lo establish the 

magnintde of this eftCct (i.e. 10 quantify the equaJ· 

izing irnj>aCt of much n'lorc widespread employee 

ownership). TI1ere is, t()r example, oo nationally 

representative dataset with information on Lbese di· 

mensions of inequality along with infonnation on 

fim1s with ESOPs, for example. As noted above, J 

do use the very rich (though not nntionaJiy representative) NBER dahtSCL with cx e~:~sivc information on 

employee ownership and ESOPs. Scholars, mos• notably 

Rlasi, Freeman. and Kruse (BfK, hereafter), have deeply 

tapped this dataset in their work on "shared capitalism," 

work I' cite throughout. 

Factor incomes: the shift from Ia bur to capital and how 

ESOPs tan Increase the share of workers with capital 

ownership. 

In national income accounting, there are cwo ways to decompose aggregate income. The most common i~ to look 

at Gross Domes1ic Product (GOP) from its production 

sources: consumption, invC$tment! government spending, 

and net ex pons. Rut equivalently, GOP can be attributed 

to the different income-generating sectors: workers' com~ 

pcnsation. profits to capital ho ngs~ government income 

(through taxes and other fees), and proprietors incorne.' 

National accountants think of these sectors as different fae. 

tors of income ptOducrio.n. Workers generate value which 

returns compensation to them. assets spin off incomes lo 

their 0\"·ners, and so on (proprietors get d1eir own line in 

the accounts because it's hard to know how to divide, for 

example. a l3wyer•s private practice into her compensation 

versus her t>rofits). 

To bring lhc analysis closer to a level that's relevant for 

thi!: paper. F.xhil,it I s hows :l consrntct that's roughly private faccor inc:onu:s, including compcnsalion, profits, and 

proprietors• income in 20l5q3. AboUt rwo·thirds of the to~ 

tal S 14 trillion is oompen!:ation, with proliL'f al 22 percent. 

ExbJbit 1: Prtvatt factor shares ofnnrional 

income, 2015 Q3 

Compc:nsaclon 

Pro filS 

Proprietors 

Total 

$9.736 

$3.230 

$1,403 

514,36~ 

68% 

22% 

10'/o 

100'1. 

Note: Profits include rental income and net interest 

paynJents. 

Souroe: NIP A AOOOWUs 
95 


22375.052

What matters more for our inequality analysis is hO\\.' these 

incomes are distributed throughout the income scale. Most 

workers depend on their paychecks (oompens.ation), and 

the ownership of corporate profiiS tends to be concentrated 

among the wealth}', a.s shown below. In t3c~ this simple ~ 

sight ntOiivates much of what is to follow: ESOI's can bt 

thought of" as a way to distribute pro;. tability to those "'ho 

largely depend on compensation. Given tha1 profitability 

bas grown faster in recent yeru'S than ooany worters' pay~ 

checks, the potentially cqualiz;ing impact of E.SOPs moti~ 

vates this research. 

nte di$tributr'on of {at:IOr illcOmes: ln Order tO furtbCl' 

motivate the resean::h question herein, it is useful to try to 

learn more about the djstribution of factor incomes. spe-. 

ci6cully wages and profits. While it is difficuh to show 

the precise distribution of factor incomes, we can approximate their distribution in a variety of ways. TI1e two imponant observations from the perspecr:ive of this repon is 

that un.surprising_ly, profits arc more concentrated among 

the wealthy than compensation, and that concentration bas 

inctease<J. 

• ::t The first look at the evolution of factor incomes 

is simply a plot of compensation and pro<,ts as a 

sh:l.te of national income (Exhibil 2). EconomistS 

Exhibit 2: Shar<' of national incon1e to compensation 

vs. profits 

70.0 15.0 

'$. 12.5 

e 67.5 

1! 10.0 a V> "' Q 

0 65.0 7.5 g; ·:: 

~ -~ & s.o '$. E 62.5 8 2.5 

~ ~ ~ 0 0 2 0 0 

~ ~ ~ ~ ~ ~ ~ ~ 

- Compell.Satioo 

- I'TOfil 

are typically taught that compensation generally 

varies narrowly around abo\u t\vo-thirds of national income. That's a plausible estimate from around 

1970: in (act. the average o(the seties since 1959 

is 64 percent. But since the Great Recession that 

began in laic 2007, th~ compensation share fell to 

historically low levels an_d "ice versu tOr that of 

profit._;;, As.'>uming that profits arc dispropon n~ 

otely held by wealthy households, by this metric, 

factor incomes have bt.-comc significantly more unoquolly distributed in re<:ent years. 

• C" Next. ln Exhibit 31 economists Larry Mishcl and 

Josh Bivens ~ a useful de<:Omp<)SiliOn of anOther n:lc:vn_nt mellSure of rising i_nequ.aliry: the gap 

betwr.l'.n medltm compensation and net prtJducti'V--

ity growdr (productivity growth net of depred 3-

tion). BetWeen 1973 and 2014, producHviLy is "P 

72 pcrc:ent while rc:al median compeo.so.tion is only 

up about 9 percent, a differe1lce of 63 percentage 

poi L~. The modal factor implicated in d1is gap is 

the lncquaUty of compensation, or in the tcnninology of this section, the growth of inequality within 

the labor income factor share. A smaller shart.- 9 

percemage points--is due to the loss of Labor's 

share of national income (i.e .. a shift from labor to 

capital, or profit·bascd, iocome).s 

~xhibit 3: Percent Change in productivity and 

compe:nution from 1948 

* f 

.1: 

90 

60 

30 

Loss in laW$ $hare 

"Tetmscrttade"' 

J Inequality of p-; compensation 

1970 1980 1990 2000 2010 

-30 J 

Real median hourly compensation 

Real conS\Imer aver-tgC hourly compensation 

- Real producer ave1'11gc hourly compensation 

- Nel J>roductivity 

Som~e: G<:onomie Policy TnstiMe 
96 


22375.053

An unpos·taJlt lesson here relative hl lotcr analysis 

in this paJ:>cr is tluu while E-SOP$ can mcreasc the 

we~lth of those who dep<od mostly on paychccks, 

cquali7..atjon within the labor share remasns a 

dommant SOIU'C< of inequalil)' and a dti>~n$ force 

behind the pp bctw<:cn wage and produ<tmty 

gn>Mh ThiS should nO< at all dctru:t &om Ulppllll! 

employee ow•xn.hip to hdp n:balancc the abo fib<· 

tween (actor shares. To lb.e contrary, wage r~sults I 

show later su~c.1it that ESOP firms have narrower 

(less·unequal) wage distributions th•n non·ESOP 

fimti, and wugc inequality tend~ co fall wilh the 

increAsed modes of employee ownership. But it 

will to.kc: botl1 ~h ifls between and within labor and 

c:apital factor &hares to signific:andy t<V<rse the 

many-decades long trend low'-rd '-'l"'eater economic: 

incquahty. 

I noted above that dooa oo the dlSinbunon of <or· 

ponlle profit! throughout the household income 

distribution IS scnrce. One source, however, IS the: 

Congressional Budget Office's incom-e series. In 

order to detennine bow they should allocate COI)JO· 

rote mx liability to households. the CBO culculalcs 

what share of corporate (and labor) income goes 

to each income class. As Exhibit 4 show$, for example, the &hare of corpora1e income (anAiogout to 

t:xhlbil-4: Oistribulion ofcCH"pOnlc income 

50 

40 

"$. 30 

c 

~ 

~ 20 

10 

0 

'" 0 ,... 00 

~ ~ 

llouom Fofth 

'" 0 "' 0 "' 0 00 "" "' 0 0 

"' ~ ~ 0 0 0 

"' "' N 

\hddlc Fifth - Top I Pcn:o:nt 

the profit share sn UxbJblC 2) is skewed to the top 

I percent of huU><holds •ortcd by income. More:· 

over, their ~ht\rc of such holdings h3S mereased. 

from about 30 p<rc:ent m 1979 to SO p<:runt in 

20 II. Meanwhile, lbc mtddl<>elus share bas de· 

<hned &om about I 0 peroenl to 5.5 pcrccn~ ond 

low-irK.'QfnC: ramlllQ h&\"C nc'\·c:r held much It all 

or du$ meome sourct. 

• .J FinaJJ'y, economist Ed Wolff has calculated sto<'k 

market holdinas by income class. While we hcnr 

more about the: "dcmocrutitution of the stock mttr· 

kef' these days, duu nocion is driven by the ract 

that more people hold ruty stock now than in the 

past But if we look at thcvalueofstockowners.hap, 

we .sec n remain~ highly concencrared. far more so 

than income, for example. Ahou180 pete:ent of the 

\.'aluc$ of the stock martcd is held by dlC wc:alth10 p<rc:cnt or boo$dlolds, while middle and 1.,... 

wealth fomthcs hold &mO<Lntl that are bolrel)' 'i•i· 

ble in lhe F.:thlbit. 

Exhibir S: Share or fora I stock value by wealth ~roul' 

Top 1.0 Percent • Next 20 Percent 

Next 9 Pcn:en1 • Moddle 20 Percent 

• Next 10 Percent • Bouom 40 Pcrccnt 

Soorc.c: Wolfl"(2012) 

4 
97 


22375.054

Tht di_rect cffctt of rcdlst·r-ibuling w~alth: a simplt simulation 

G-iven tbcsc findings, r can now assert a point that i-S at 

the core of the rese.arcb that fOllows: t11e direct etrecc of 

redistributing wealth to wage camcN: should be expected 

to lower mcome inequality. The connection to ESOPs is 

straightforward, and stems from lhc e\•idence just presented. To the extent the ESOPs pro\'ide stock mArket wealth 

to wage c(tmCi('$~, inequality iS likely lode<: line. Or COlii'SC, 

··by bow much•r' is a televant question to wbich 1 can only 

shed a liule light, as signith:ant data limitations exi.st..:;. 

What is the meaning of '"direct effect" in the above assertion? Suppose there arc indi_re<:t effects of ESOPp vi~ion. 

most notably, tt dQIIar from an F.SOP get..; tro~.dcd off with 

a dollar from wage,s. 1lten inequality is less Hkely ro be 

reduced, and equally importantly, workers are not better 

off. and given the '·time value of money" (a dollar loday is 

worth more than a. dollar tomorrow). arguably worse off. In 

this rtgard,lhe question of substitution, discussed a l some 

length below, looms large in this analysis (importantly, an· 

alysts do not find such • trndeoff in the data on F.SOPs). 

To break this idea down in{() a simple, albeit unrealistic, 

presentation, conside.r the following simulation, the rc· 

sult.li uf which arc shown in Exhibil 6. ( took lhe Census 

Bureau's :Lvcrage income by fifth in 2014, and broke me 

ineome value.'\ into two sourcei: earnings and wealtll.6 For 

the ootlom 60 percent (first three quintiles), income is .... 

sumed to be all earnings, tbr the fourth quintile, income-is 

80 perc-tnt earnings and for the top fifth, 40 percent earnings (and thus 60 pe1·eem wealth). Agaio, these :ue oot at 

all the true income compositions, but just a simplification 

to make the following point. 1 did desil!Jl the shares to 

roughly replicate th:: 2/3, I f3 comp,·nsaliQn/profits in the 

natiooal factor shares. 

Exhibit 6: Simularing how n..'distribu1ic1g wc:.ltb 

towers inequalicy 

WMM \&b. ii! .. iil@p 

3.6% 4J$% 

9.2•to 10.3% 

IS.l% 16.~~ 

Z3.2% 21.S% 

4S.~. 47.2% 

No-te: S-ee text fol' simuhnjoo explanation 

Source: Census 

4.9o/o 

lOA% 

16.3~' 

21.3% 

47.0',4 

I then redistributed LO percent or wealth a.nd 10 perc.ent 

of eamings frol'n the top two quintilc.s lO the boHom three. 

111e resulting incomes shares arc in ~b bit 6. By design, 

sh.iucs go up in !he boltom three fifih relative tv the top 

two-there's no i.ncollJe. growth in th.issimple exercise, just 

redistribution. But even while the earnings share is about 

twice that of the wealth share (213 to 1/3), the equalizing 

impact of the rodistributjons is similar, because wealth is 

more concentrated lban earnings. rn fact, as suggested in 

the figures above, it i~ a lot more concentrated than in my 

simulation. 

So, absent substitution effects, we should expect ESOPs 

to be c.-qu.aJizing. Aficr a brief review ofESOPs in general, 

the following few sections examine this expectation. 

A brief review of shared capitalism ttod ESOPs 

Before rumin_g to the liter3ture on ESOP!~> and inequality, it 

is useful for contextual purposes to briefly describe ESOPs 

and t11eirprcvalence. ESOPs are defined contribution plans 

where the contributions are typically shares of stock in the 

employee's company. They are thus both a tax-favored 

savings vehicle (l'U explain the tax advantages below) and 

a ronn or employee ownership. 

According to the lat<'St dato from tho National Center tor 

Employee Ownership (an advocacy organization for em .. 

l>loyec ownership), about 6,800 oompanies had ESOPs 

covering 15 million workers, about lO percent or201 S employment. According to NCEO. "In an ESOP. a company 

sets up :t trust 1\Jnd, into which it contributes new shares 

of its own StO<:k or cash to buy existing shares. Altema· 

tivcly, the ESOI' can borTow money to buy new or existing 

shares, with the company making eti.Sb contributions to the 

plan to <.:nablc it to r(..-pay 1hc loan. Rcgardlt.-ss or how th..: 

plan acquires stockt comp<:~;ny conttibutions to the m.tst are 

Lax-deductible. within certain lim t~ ... 1 

Shares in the trust arc allocatc.-d to ~mploy<,..-cs based on 

measures such as relative pay or sen_iority. a fact that beC(Hne.:; gemt.ane in inequality discus:sions that follow. lJn· 

like R\OSt other taX·favored employee savings plans, com· 

panics can add to their ESOPs by borrowing cash to buy 

company shares from the market (if the company is public) or from existing ownc.:S in privatdy helcJ linus. The 

company can then make rax deductible contriburions to the 

ESOP to repay the loan. In other words, companies finance 

their ESQ(Js with pretax contributions! 

5 
98 


22375.055

Tll<t< •~ nuny cxhcr '''"Y' !he laX c:odc fav"" ESOP•. thou,Jh thc:f'C art aome distinctioos based on lhe struc:tu.rc of 

thecompany (o.e., wbetloer it is "C" or an -s· corporation). 

For example. onoo !he ESOP owns 30'-' of all the stw-<s on 

a"(;_,.· a S<ll<r of the stock can def<r<Oj>ital gainsta•· 

es by rulling 0\'<r the gains into other securities.. 11u.s md· 

vantage is notavaoL!ble to ·-s corps." However, NCEO,..,. 

poru that "the percentage uf ownership held by tbe ESOP 

is not ~ubjecc co 1ncome tax at the fc<!erallevel (and usually 

the s:tate level as we: II): That means. for instance. that there 

is no income tax on 30% of the profits or an S COJPQn&tion 

with an ESOP holding 30% of the stock1 and no mcome mx 

nt all on I he profios of an S corporation wholly owned by 

its ESOP." Towards the end ofrhis report. I further explore 

F.SOP uox from the p<rspocoiv< of incentives designed w generate mon: widespread employee owt'lership. 

t\s with other employ..,. contribution plans, employee 

owncn of FSOP slwes do cOl pay bl< on ESOP contribo· 

llOOS mode by the company as thc:y accumulate and opp<e· 

eiate clurinQ the tmployecstmure with the comp3ny Upon 

cash on& out in retircmo:m, former employ«< pay utcome taxes ol ~t;ular rates. agam, like a tr.lditional IRA. More· 

over, ~:mpl~es can ro11 over Lhc-ir distnbutions in an IRA 

<>< other rttiranont plan, ohougb any distribouon would 

Lnvok:e eapual cains raxation. When employees leave the 

compMy. their stock hoJdings must be bought by che com .. 

pany :u eather eurrcnt market price, or, for privately held 

finn~. fa ir market value detennined by outside valuallon. 

or CO\II"SC, ESOPs arc just one option within a. growi_ng 

menu of shared capitnlism vehicles.. 

What does the lfttrarure show about ESOPs' imt)acl on 

work? 

Th<"te now c:ci>ll a body of ~ oo the imp>ct of 

"sha~ ownmhip" prognuns. meaning pohcie> that provide C"'!'IO)ecs willo some shan: of the profits or ownenlup 

m the COOipany that employs them. Those inelode ESOPs 

(and variouoll$, hke KSOPs and S ESOPs'), profitsharin~. 

gaon shanng (e.g.. a bonus w a group of omployc:es that hit 

or •urpa."""' a production rarget), or stock opoions. Accord· 

m.g to data from n3tionally repn...~ntativc: Gc."'eral Social 

Survey, ftlmost half of fuU·time, pnvate sector employees 

(47 percent) particiJ>atc in some kind of shared ownership 

1>ro~ram 10 Mnny of those workers p:uticipate in more than 

one or these types orprogrums; 40 pcrc.:cnt arc profilor gain 

shurina plan~. 21 percent participate in stock ownership u1 

thcu com~te:s. and lO percent rccci"e sux.:k opoons; 12 

pc-rcC'nt p:articip;tte in all three ronm o( ownet'Ship 

t:SOPs os a solution to the principaVot;mt problem: 

Whole the mon: n:c:cnt reseatcll os branefwl& OUt onto new 

quesuons, as I'll show in a moment, historically, the ma1n 

quc"tion asked by researchers is. ··What 1mpx1 have S\lth 

progro1ms had oo company poofonnancc. including profits 

and productivily?"lntuirively, one might expect employee 

ownel'$hip tO cre.ate a new UJcentivc _ to wort harder since 

the cmploycclowner now has some skin in tbe game. In 

tenns of the microeconomics of the finn, own1.'t8hip pro· 

s pi'\!SCnl a solution to the well·known .. principcLI/ 

agent" problem the idea that in a typic:ul bu•i•"'-' with 

no employee ownership. the incentives of the workfOrce 

do not align with that of the owners. A))s(.-nt some way to 

realitp'l inct..'11ti\'cs, the concern is lhat aaents (noo-owncn) 

woll nOI always ac1 in the best inkn:>t of ohc princ:ipaiJ 

(o.,n<n.). 

Soudics that have asked the qu<$1ion posed above ha\"e 

s.,....lly answeted, '"yes, but .•. • where the "but" i• some 

Olher condition thai interacts with ownership proa:nms in 

wa}'s that improve the ou~c variable, such u finn·IC'\'CI 

productivity. TypicaUy. Lhat condition is $0IDC process by 

which employ~e-owners can have an unpo.ct on the way 

the firm caiTics out its miss-ion. The!i>e 1ttud1es 1.allc t'bom 

the imponance of ghing workers 01greater uuwnomy in 

decision making." a •·suppOrtive corporate culture;• or a 

'')lanicipaoory company eulrure." 

Such findings make good common sense for two r'--u.sons. 

First, having "skin in the game" is unlikely, by IIS<If, 10 

""lve ohe pri~pal/ag<11t problem. In O<der oo lllp the full 

potentiol b<ncfits in temlS of outcome rnc:a'l\lrts for the 

firm, o:mployee-ownm need some way of providong inpuonto the production proccs$ that goes beyond theor own 

penon>! efT0<1. Second.~·· the "fn»nd<r." ot sbir'<· 

rna. problem. 

ESOPs and lloe free-rider problem: While omployeeown· 

ership prov1des skin-in-the-game that helps to solve the 

principaVag_ent pf<>b1em. it may all)() be: lhe c.1Se that C\'t'fl 

when chey·re pan owners, some em,ployecs may be con· 

ocnted to kick back and let others do the !Lud work. llsp<· 

cially when ownership shares 3.re small, their prercroncc'l 

could be such that the benc6os of any c>tra effort they'd 

need co contribute to boost produccjvity and profilii iiN 

not worth the cosL~ w them, csp,-clally if thc.y see others 

6 
99 


22375.056

around <hem alrClldy uying bard<r. Such $hirkers would be 

content h) "free ride" on lheir more diligent co-workers. 

However, the research reveals that when the "partieip:t· 

tory company culrure'' extends to co-workers monitoring 

each od1er, such shirking is much diminished. According 

to BFK, .. he,ng pan of a team. having a high participation in decisions, being treated with respect by superviwrs, h.avi.ng formal training and job security, and being 

paid relatively well," were all positively correlated with 

worker co--monitoring. interestingly, the.~ effects were 

negatively correlated with firm size, meaning workers in 

$mallcr finns were more likely to confront rrcc ridcrs.11 

This may reflect the fact that in larger finns, shirting is 

diluted- a few shirkers are not a.') damaging to lhe bottom 

line as wbe11 those few represent a significant share of the 

finn's workforce. 

RFK provide an interesting example ot hc~'lt: dynan1ics at 

work 3$ the result of a n:lrural experiment that they were 

able to observe. A finn they were working with was about 

to introduce new profit sharing pia~ so the researchers 

were abJc to administer before and after surveys. l11ey 

found tbac a tier <he (generous) plan was inmxluced, .. <he 

percent of wol'kers who s.a.id they were vety likely to talk 

to a worker wbo was not performing his or her job properly 

increased from 42 percent to 55 percent" Moreover, survey evidence suggested that this bcllavior W:.JS moti\•atcd 

by the concern that the shirkers' behaviOI' wouJd diminish 

the profit share or s1ock price. 

Is there 11 rradeoffbeth-vum ESOP:t• nnd base pay?: While 

lbcse research results regarding shared owncrsbip ore intcrcl}ting and 111 leHSI t.a.ng.cntially related to the questions 

of interest in th.is sntdy regarding such programs' impact 

on inequality. this next question is directly relevant; when 

employees pan:icipate in sbared ov..-ners.hip, do they rake 

an otfsctting cut in their base pay'! Regarding inequality 

and the teehokal discussion above. this possibility is of 

obviou.~ importance because if employees are simply trnd· 

ing off one type of pay for anolhcr, lbc likelihood of any 

imJXact at all on inequality is surely diminished. Mor<-over. 

ba.10ed on the economic theory of risk aversion. many such 

employce.s: would in fact be made worse off by chis ex· 

change: substituting a ccnain fonn of compensation for a 

variable fom1 is generally viewed a.s undesirable, even if 

on a.verage, the paycheck is th.c same. That is. most workers find that greater variance around a stable mean gener· 

atcs greater econornic insecurity. 

Some earlier work on this question S\lggestcd a tr.tdc:off 

might he in play. Robert Budtcle ct al (2010) point out 

chat union members in induslrics Lhat deregulated in the 

1970s nnd 80s ·m~de large wage concessions in return for 

ownership shares to save their companies and their jobs." 

They also note that it is not uncommon for high4 tech smnups and even more c.:stablis.hcd ventures to lure talent with 

srOC:k options versus above4 market pay rates. 

But according to research that looks at a larger and more 

contemporary sample of firms. such cases are ex.ceplions. 

The more representntive work finds what I would describe 

as the ugOt')d employer package" lit worSe: fimlS tluu offer 

shared ownership also pay higher compelt53tion, including 

other retirement plans, such as defined benefit or defined 

contribution (note that the latter implies pOrtfolio diversificution &.way rrom jusl company stock). Usiog the rich 

NBER data sec develeped to analyze a broad spcctmm of 

iltsues ai'()UJld Clnj)loyee ownc~hip, Buehele et al run arevealing ser ofrcgressions on this question or offsets. Al<mg 

with a: variety of controls in an equati011 with base and total 

pay as tbe dependent variables. their key regressor is the 

value of the em,ployee's accrued stock per year of tenure 

relative to their base pay (note that this is simply the annu3l chau.ge in the value of their stock relative (Q their pay). 

While the oflSet hypetbesis would predict a negative coefficient C)n thi:;; variable, the rc$Carchcrs instead found positive coefficients across multiple specifications. ln J 2 of 

14 equations. that coefficient was positive, in six it was 

positive and st3tisticaUy significant, and in the two ca~s 

wbcrc the coefficient wu negative, it was far from signif· 

icant. \Jsefully,lhe researchers undertake a similar regression with a different data set (the General Social Survey. 

or GSS) and set similar results. Bast.:d on these:: findings. it 

seems considerably more Likely that employers that offer 

shared ownership aJso offer bcucr pay and benefits than a 

tradeoff berween ownership a11d base p3y. This is an im· 

ponant finding for my work in that it undcrscon..~ the pOS· 

sibility tb:tt ESOPs reduce income inequality. 

Do ESOPs outperfOrm orhe.r (.tms in recessions?: An· 

other relevant strain or new research on lhe impacLS of employee ownership is work that 3sks how these finns perform relative to others in recessions. An: fi.n·ns wilh shared 

ownership more scnble vessels when the ocean gets rough. 

pcrflaps hc:cause lhe sailOr.$ have a great sense of ownership of the boat. or are they indistinguishable from the other ships in the fleet? Kurrulus and Kruse (forthcoming), 

7 
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22375.057

for example:, l:)k if ownc:n;hip film$ b~vc: more sQblc: em· 

ploym<nt an downrums. In the f~c of demand shock>. an: 

IIIey 1 ... bitely lh>n ..,.,..,...nmhip firms 10 lay \\ori<ers 

oil" Through these authors' eorlicr wori< cbd no< anclude 

the \'«)' sev<re dtmand $bock that b<:gilll in lote 2007, orlen n:rcm:d to u the: Grea1 Reoe$$ion, thc1r more re«:nl 

update, cited below, includes data through 2010. 

In faet, they find that employee ownership finns had hijih· 

c.:r ~urviva l races during 1999-2010.and S\IC:h firms were 80 

percent liS likely ns non-EO firms to disappear. and 70 pcrC.:4:nta.s likely to experience lxlnkruptey or liqtndotion. As 

Uxh.abit 7 re\'eols, these fim1s had more stable cuaploynu:nt 

durina the downturn, and Kurtutus and Kruse no(e that 

these ruulu held even when the negati>c slu>ekl< hit the 

firn'b' ~ales and s,hare prices. Another convincing asp«t or this rcl3taonship between employee own(.-n;hip and lJ()Rte 

d<lf\:t or insulation from recession (relati\·e to nor~-own· 

ers.hip firms) was aJong the: ""intensi\-e1"" ma.rain: fim\5 wuh 

deeper employee ownc,.hip wm: man: s<ahle lh>n finns 

w1lhleu. 

E•hlblt 7: Cbangt in employment for ESOPs vs. othtr 

firm ~ (nacurtiiO: of tmployment tba.a.ge) 

- Non-ESOPs ESOPs 

0.10 

0.08 

~ 0.06 

a 

~ 00-1 

i- 0.02 

.e 

~ 

a 

0.00 

While the ... tbors have DO( yet bc.n able 10 nail do"'n the 

~ific ways in whieh 0\\llCfShtp finns weather s1onns 

better lh>n those wtthout. one intngwng h}po<ha~> i• that 

ohm: may be something about the more c:oopcnhvc culrurc an these firms that helps in tlus regard. Perh19• WMgcs 

an f1lOf't' ftexiblt, such that employ« ovoncnhip finns c:an 

odjUSl to • negative sales shock, for o.u.rnplo. along the 

wage versus lhe employment margin. In add1uon, finns 

with owners.hi·p programs may provide "'greater employment ~ecuri y as part of an overall efT on to b\lild a more 

coopera(ive workplace culture," n culture which "can in· 

crc;:.sc worker effort and general will i~ncss on t.hc port 

or workers (0 make adjus(ments during times or c<:onomic 

di$trcss, which can increa.~ fim1 productivity and lower 

the finn ·s need to lay off wo.rkersdunng ti.nancial i~ttetS." 

A numba of papers have e.x.aroined this quatjon or lhc 

rtlat.ivc perfonnance of ESOP firms with • specific fa<:w 

on S F.SOI's. Analyzing data on 49 finns wach S ESOPs 

during the severe downturn in 2008. s..-.,el and Carroll 

find tbllt "'hi!< ovcnU payroll employmtnt contzK1cd 

by about 3 percent llut year. crnploym<nl in these firms 

rose by 2 percent. Remarlcably, oonsid<n.oa the nwsive 

collapse of tbe housing bubble in dat period, the authors 

find this S3me pattern existed in ooostruclion ean,ploymcn~ 

where S liSOP consoru<:tion finns actually addod jobs that 

yeu white overall construction rayrolls cmtc.red by lO 

percent. Research on S ESOPs by Alex Brill underscore$ 

the:,e findings, showing significantly faster thno 1\Vtrogc 

job growth by CSOPs in the 2000s, particularly in m.:mu· 

(ac:turing. ttnotJ•er induslry that struggled in those ye:lrs. u 

Again, little research has been conducted on why ESOP 

comp3ni~ appear to be so much more rcsili\.-nt. c.:v~o:n in 

p.artieularly harsh n:<:essions. but along with more coopcranvc cui~. another fattor could be llut these oompanacs are financially more secure O.t.t complied by 1\.Ct:O 

shows that tmpiOy«!-owncd buson<$$<$ havt fcv.-.r 101111 

defaultS than other businesses. wath an average default ~t• 

on bank loons to ESOP companies of only 0 2 pcrcent between 2009 ond 2013. By contrast. mid-mao1«t companau 

in the U.S. typically default on oomparahlclwns at an an· 

nual nile of 2 to 3.75 pcrcx:nt. NCEO argues that the dafferenee is related to incentives of employee--owners much 

like those cited by Kurrulus <1 al. Tb.1t m•y well be so. 

btu nly point here is that given the dtl:ttnJctivc.: role played 

by excessive leverage in lhe last downturn. their low lonn 

dcft1ult rotcs suggests ESOP eompanic." w<:rc lcsi likely w 

8 
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22375.058

catch the unsustainable borrowia.g tev~r that plagued other 

businesses (and households). 

Employee ownersbjp, ESOPs, and tbc distribution of 

we.alth 

As per infonnation discussed so far in this study, we know 

two releYanl facts regarding lhe distribution of wealtb. or 

net worth, in the U.S. First, it is highly concentrated, a..~C 

shown in exhibits above rcgardi_ng corpomte income or the 

value of the stock market. Second, certain employee own~ 

e-rship programs, ESOPs in p::ttticul:lt, distribute shares of 

stocks to those in income classes that are less likely to hold 

stock. Thus, also as suggested above (recall the redistribucive simulation). we should expect that ESOPs are at lea'it 

somewhat equalizing. 

There Me, however, two reasons why ··somev.•h.at'' might 

not amount to very much, i.e .• why we shouldn't ex.peet 

ESOPs as they stand today to significantly eqt1alize the 

highly skewed wealth distribution. First, the distributjoo 

of ESOPs tends to reflect the distribution of earnings., as 

shares of company stock tend to be granted proponionally 

to salaries, a practice whieb mechanically links eamings 

inequality with wealth inequ::tJity. StiiJ, since earnings is 

less concenmued than weallh, we should at least expect 

ESOPs to be equalizing in sign if not of great magnitudes. 

Second, ESOPs remain a relativety small part of wealth, either in the aggregale or even among those who hold them. 

Abour I 0 peteeot of the wodd'orce panicipates in ESOPs, 

and their holdings tend to be relatively small-. though accumulation matters: those wbo·ve been in ownership plans 

Cor years have a lot more 10 show for it than newcomers.'' NCEO reportS that ESOP company filings for 2008 

~howed that the average participant received above $4,400 

per year in company contributions and ~d an ac,count 

balance of $55,836. It's also the case that ESOP holders 

tend to hold other forms of wealth, typically through other 

tax-favored rt:tircment vehicles like 401 ('k:)'s, though com .. 

parisons show I!SOP balances to be more than twice as 

large as 401 (k) plans." From the importam perspective of 

diversification. lhe fact tha1 company stock tends not to be 

an ESOP participants' sole bolding is of course • feature. 

not a bug. 

Des-pite these constraintS. it is not hard to show the equal· 

i~ g intp3ct of ESOPs on the wealth distrib<Jtioo. The exhibir below. from Buchclc et al. uses data on wealth boldings and employee ownership to model the dislribution or 

workers by wealth closs with and without dte benefils of 

ownership shares. If ownership had no impacL on the distribution of wealth1 we'd expect the bars to be of equal 

height, i.e., workers would be distributed similarly through 

the wealth classes. However, the acha..al distribution (the 

darker bhac bars) is more skewed to the right- toward 

higher wealth holdings- than the green bars. Clearly, by 

this metric, employee ownership shins ils beneficiaries 

into higher wealth classes. 

Exhibit 8: Dlsrrlbutlon of workers by wealth class 

• l'redictcd w/o employee ownCf!<bip • Act\181 

20 

?f!, IS 

fi 10 e 

~ 

~ 

~ 

'1 "' ~ 

"' SOW'Ce: Bucbtft et al 

~ ;:; "T '7 0 0 N 31 "' 

~ ~ ~ ~ 

~ s; 8 + 

~ "' ":' ~ 8 :7\ 0 0 

a s; .... ;;; ;;; "" "' 

The next figure, also from Buchclc et al. compur<.'S the 

percent of employee wcalth by wealth class for those in 

ESOPs with all s-tock holdings for a ttationatly represent3tive data set (lhe Federal Reserve's Survey of Consumer J'inonces). Clearly, all srock holdings are much more 

skewed than those of ESOP participants. ln fact, with 

the exc<:plion of relatively llll'gc share or wealth held by 

ESOP panicipanrs in the highest wealth class ($500,000 

and up)-35 percenl- dtc djstribution is fairly uniform. 

r his stands in stark contrasl to the diStribution of all Slt.ck 

holdings, where low wealth employees have very linle in 

stoeks-less tba.n I 0 percent of their holdings for those 

with l<$s than S20,000 in wealth- compared to •bout 20-

2S pettcnt for ESOP panicipanLS. 

9 
102 


22375.059

F.xhihit 9: Pe-cent of employee'swESith in ESOPs 

and a U stocks 

• ESOI's • All Stocks 

40 

* 30 

ii 20 e 

" ~ 10 

0 

" "' ~ "' "' ;:; ~ g + "' 0 ~ d ";> "' ~ "' ,. d :Q 0 0 

~ 0 0 "' :q ~ .. ... "' ~ .. ;;;; ;;;; .... ... Soun:e: Bucbete ct aJ 

Buchele et al present a rough estimare of lhe cxteol to 

which ESOPs reduce wealth concentration. They show 

tbat the sbare of wealth (netting out any liabilities, so this 

is ··net worth") of employees with ESOPs is 58.5 percent 

for those in tJte top 10 percem of the wealth distribution 

end 4 percent for those in the bonom 40 perc-tnt. When 

they reealculatc those sha.res taking om the value of employer stock, those shares go to 61 perceot for <be wealthiest 10 percent ""d 3 perc:ent for the bouom 40 1x:rccnt. The 

differences in these shares can be attributed to equalizing 

impact of ESOPs. Thus, ESOPs reduced the concentration 

or high-end wealth by 2.S percentage points1 ilt.ld 1ow-ead 

wealth by one pen:<ntage point. 

Fi.naiJy, diversific3tion concerns arc obviously relevant and 

history is replete wilh example of employees hurt by Olh11· 

in.g tOO muc::h company stock relalive to other holdings. 

Empirically, however, research suggests that ESOP companies are more likeJy to also set up 40 I (k) acc::ounts, and that 

these accounts tend to be diversified, often bocau.se companics provide investment advice to achieve that outcome. 

Rose-n points out that ;'ESOP companies are slightly more 

likeJy to have a secondary retirement plat~ ( even a defined 

benefit plan) than non-ESOP eompalllcs arc to have JUst 

one plan ... ., He also poims out that "mature" ESOP plans 

engage in their own diversification. ESOP participants SS 

and up with at least 10 yeatS in the plan •·can divcr,iry up 

to 25 ~· of their company stock. Five years aller they 

sto.rt doing tttis, they can diversify up to 50 percent u 

More on ESOPs and wage inequality 

While I had hoped in this paper to be able to map ESOP 

ownership onto a nationally representative data set and 

thus be able to evaluate its impacr on distribulional out· 

comes, d.ata limitations have thus rar prolubited such a 

matching exercise. 

However, I can explore another important dimension of 

intquatity, that of wages. Increased dispersion of wages 

has been a fundamental characteristic of growing lnequal· 

ity since lhe mid-1970s. One of the most compelling pictures of that development is in the. next exhibit, showing 

the growing wedge between the real compensation of middle-wage worlcer.; and productivity (real output-per-hour) 

grQ\\11>. Betwoen 1948 and 1913, both productivity aod 

middle earnings almost doubled; both gtew more than 90 

percent. Since dleo, productivity is up 72 percent and COOl· 

pcnsation for middJe.wage work.ers is up only 9 percent, 

u. buge difference in trend Clearly, middle and low·wage 

workers are benefitting much less from the growth in out· 

put, growth tO wbicb 1hcy thel11S<:Ivcs arc contributing. 

Exhibit 10: Percent Cl••nge iu productivicy aod 

compensation rrom 1948 

240 - - Hourly Co.npeusotion 

210 --Net Productivity 

180 

$. 150 

il 120 !! 

., 

c.. 90 

60 

30 

0 

1940 1960 1980 2000 2020 

Sourer: Economic Polky r!)Stimtc 

10 
103 


22375.060

The reasons for this split are beyond my scope in this p.<tI)C'r. As I've written extensively elsewhere, they re.late to the absence of full employment, persistent rrade deficiLo;, 

growing educational differe.ntials (the growing wage adVll.ntagc ofthose with more education relative to those \Vith 

tess), the rise of finance, the erosion of labor standards and 

W)ions, a.nd gcnt:.r-.tlly speaking, the weak bargaining clout 

of many in the workforce.'' Here-, much like in prior sec· 

tions that reflected on the role of shared ownership oppor· 

tuniries, especially ESOPs, in wealth inequaliry,l'd like tO 

reReet on that role in the context of wagc-lnequ.aHty. 

l 've already cited re-search showing there does not appear 

to be a wage tradeoff in exchan.ge for benefits of ESOP>, 

profit sharing. etc. But to what extent do finns tb3t ofl"er 

shared ownership also push back on wage inequality'! One 

might hypOthesize that shar~d ownership finns operate a 

bit more from the "we're-itHhis-togethcr" playbook and 

thus SUPt>On pay scales with less dispersion than odter 

firms. ln this section, I examine that hypothesis as be,;;t I 

can glveo data limhations. 

Here again, the lack of a natjonally representative dataset wilh iofonnation on benefits sucb tiS ESOPs ct a1 is a 

eonstrnint. However, the NDER d~taset used to great effect by rna11y authm:s c-ited alwvc (and at the c.ofe of the 

work by llfK) ofl'ers n potentially 11seful way to look at 

the question. This data set, designed to invcstiga l'~ many 

dimemions offums lbat offer the full spate of shared ownership programs, has data 011 over 40,000 woricers at such 

firms. For my purposes, the key variable is their base pay. 

controlliug for a wide variety of ftu::tors. including ' "orker characteristics and cx.posure to what BFK call "shared 

capitalism." In this regard, thc::ir .. shated capitalism index'' 

(SCI), which measures the extent of such offerings ai the 

finulevel. is a key control in what follows. 

The downside of the NBER dataset is that while it is incredibly rich in infonnation on finns that practice shared 

ownership, these are the onJy firms in the dataset. Thus~ 

it is far from representative of the universe of tlnns, and 

offers little by way of opportunity to c-Ompare employee 

ownership fmn$ Y..rilh finns that do not offer sucb benefits. 

I lowever. we can make a few reve-aling comparisons. For 

example. we can look at lhe difference in waee ineQu:ality 

between firms based on their different degree$ of intensity 

on l.hcSCI.Aiso, while it is a very rough comparisoo1 oce I 

would not put a lot of emphasis on, I can also compare the 

wage distribution ln the NBER daUlSet to that of a nation· 

ally n;p~"ntativc dataset (the Cc11SUS Bureau's 1\nnual 

Social Md Economic Supplement). 

Exhibit II features the metric "log variance .. (lv) co mea· 

sure wugc inequulity. As its oame suggestS, this sc-.alar is 

simply the variance of the natural log of earnings, such that 

higherlv's imply more wage dispersion or inequality. E.."lch 

entry in the table presents the lv for a different .'iamplc, 

with the lxlsic S3mplc comprised of nU observarions where 

the worker is based in the US (since firms in the NBER 

dataset ca•l be multinational, workers can reside outside 

the US), at least 18 years old, and works full-timo (more 

than 35 hours per week). The other columns add ooher 

sample restrictions. '"SCI>O," for example, means a val· 

ue on the shared capitalism index of 1· 1 0; "ESOi>"' means 

the worker's finn has an ESOP (typically, as emphasized 

in the Ulerarure. such fimts offer other programs as well). 

.. Prof share .. indicates a finn with (al lcJ.~.St) profit sharing, 

and so on. "llosie sample. ASEC" is the lv from lhe na· 

tional representative Cen.s·us d.ata set noted above, with the 

same controls of the basic S3mple for the l\'BER dalasct. '' 

Exhibit 11: Loe variances for different samples 

SaiU ~ I oz \arb neeBa,oc 

SCI>O 0.300 

SCI>S 0.190 

SCI• I 0.206 

SCI• IO 0.118 

ESOP 0.256 

Protil Shanng 0.314 

401(k) 0.314 

Stock Option.' 0.315 

Bosic,AS£C 0.4S6 

11te results generally, though not always. follow the exp<..-ctcd pattern. lncn.---ascd intensity of sbarcd c.apitnJism 

low~ the lv, though SCl=l has an unexpectedly low v21. 

uc. implying l.:ss wage d.ispersion than I hypothesized (J 

take a closer look at this finding in a moment). Firms with 

extensive shared bencfics have extremely right wage-dist.ributjons in the NOER dataset. \vith an tv orO. l iS, cs~ than 

11 
104 


22375.061

half lllar of llle basic sampl<. lhe presence of on ESOP 

lowers the lv relative to tl1c base .sample; 31 0.256, firms 

wilh ESOPs have less wage inequality than those with the 

otbcr types fe.aturcd ln the table. The represemtujvc distribution rrom the Census ASEC is considerably higher than 

the basic sample from the NBER data, but unfortunately. 

these are apple and orange comp..1ri:~ons, as the-sampling 

frameworks are so ditltrent. However, the difference is 

suggestiYe and motlvatcs funhcr work in this area, as 1 

discuss in the conclusion. 

One shortcont_in,g of Exhibit 11 is a lack of controls. Exhibit 12 shows coefficientS on the SCl from various specifications with tJle log of yearly t:amings os the dependent 

variable. The hypothesis again is thal as SCI goes up, pay 

does as weU. in chis case, with an exte-nsive set ofcoEttrols, 

inc:Juding fixed eff1..'tls for companies and year, education,. 

gender, age (and age squared), and '''!lure. Using OLS, 

the SCI coefficient is about 0.05, implying that a !-notch 

move up on the index of owne.rship intensity corre-sponds 

co a 5 percent increase in pay, equivalent to about SJ,OOO 

in these data. Again, this confirms a point made throughout 

the literature regarding the complemcnlarity (versus S\tb· 

stirutability of base pay of employee owners!Up prog,.nms). 

Exhibit 12: Cneffic;.ie.nls oo SC iodex (dependent 

variable: log earnings) 

OLS 0.0516 

QuaotiJe "Regressions 

10" 0.0580 

30" 0.0540 

50" 0.0501 

70" 0.0474 

90"' 0.0460 

N~fe• AI! *IT~ s signil'ktutt IU lhc: < 0.001 !\:vel. 

S.:c rexcfor-cSet:~il.s 

But to get at the distributional questjon. I run •·quaruile 

regressions" (also in Exhibit 12) which, broadly speAking, 

return the SCI coefficient tOr differem classes of earn.:rs. 

lntcrcscingly. lhc tocfficicnts on SCl decline as the perc~nti e on which the regression is centered goes up, implying larger e,arnings gains from shared capitalism intensity 

as for lower rel3.tive to higher e:amers. While the gradient is consistent, the differences are relatively small; still, 

lbe pattern su.ggcslS an cqutlJiz:ing impact rrom employcc-o,vncrship. 

As ESOP scholar Josepb Blasi points out, these results 

finding tighter wage distributions in ownership finn.s may 

be related to tl1e f'inding, quite col'nmon in this literan1re 

(as discussed above}, thai ESOP finms tend to be tn<>rc producr.ivc, all else equal. Blasi sugg.csts that it may be the 

case that in non· ESOP fimts, the primary way to get ahead 

is cOtllJ)Ciiog intcrna11y lc> "climb the ladder" in ways that 

may or may not improve the firm's output :lnd efficiency. 

ESOP tinns, which tend to be tc.'-S hierarchical witb more 

shared rewards. can benefit from ··promotions" from their 

shurcs, gains, profit shares, ctt. By dampening .. wasteful'' 

(in efficiency terms) internal competition- ''managing up" 

a.~ it is called in the bu~i css litcrnturc, meaning pleasing 

managers rather than boosting the bottom linc--ESOPs' 

tighter wage distributions may in themselve..o; be produc· 

tivity enhancing. 

More broadly, this 1heme suggests a negative rela1ionship 

between inequality, particularly intemal w::~gc distributions, and productivity. Exploring this connection is be· 

yond my scope. but there is a burg<."<>ning literature on linkages between inequality and ~croeconomi c variables, 

notably productivity growth, which has slowed somewhat 

t~nniog y in recent years. Tbe conneetion Bla&i suggests 

is '"'orthy of further study, in no small part because lhc op· 

positc could be true as well. That is, if lbe gt~ins to climb· 

ing the hierarchy are outsized due to high inlcma1 c:amings 

inequality, and the fmn accurately promotes. i.e., promotions are for marginal increases io productjvity, not wa.\tc:· 

ful competition. this effect could go the other way, towards 

higher finn-level productivity. 

\Vhere do £SOPs 6t in an anti·inequ1llity poUcy framework? 

As discussed in the introduction. since there are many 

different types of incomes~ each with its own unique dlsttibunon. tl1ere are many different types of economic in· 

equality. In this section I brieHy note the various types of 

inequality through the prism of pol ci~ designed to push 

back on the extent of inequality. I then place ESOPs within 

that framework. 

Inequality analysts generally focus on three dimensions or inequality: that of wealth, income, and wages. Of -course, 

these are relaled, but lhey ate also u.sefu11y disaru,rrcgalcd. 

\Vcalth tends to be more of a stock variable, one that both 

12 
105 


22375.062

generates income flows, through interest payments or asset 

realization, for example, while income is a Oow variable, 

dri\'en higher or lower by Jabor earnings (w~gcs). transfers, 

taxes, Oow;t fr<,m wealth, and so em. Wages thc·rnsclves are 

a ftmction of hourly JXlY along with labor supply, incl'uding 

hours worked per week and weeks woric:ed per year. 

While this disaggrcgatcd typology may scent overv.rrought, 

there are at lease two rta:$0nS why it is useJul. First, though 

inequality is U(> i11 all three variables-wealth. wages, and 

incomes- there are markedly different trends and levels in 

all of these variables. As noted earlier, the wealth share of 

t.he top I percent is about twice that of the income share 

(obout 40 coonpart<l to 20 percent). While low and ntiddle w.tge men•s wages have generally been stagnam in 

real temu for decades. family income has gone up more 

quickly due in pan to greater labor supply, particularly by 

women, whose wage trends hnve been more favorable lhan 

men's. at least up until around 2000 (income for poor ram· 

ilies has also been boos1ed by increased government trans· 

fcrs).111 Second. because of sucl1 differences. a broad sc...1. 

of policies arc needed to address the increase in economic 

inequality, as different policies target di«crC11l 3$j>OCL~ of 

growing ineqMii<y. 

The minimum wage, for e.xa_mple, has been shown 10 be 

a useful policy to n."duce the gnp be-tw·een low and middle 

wages, particularly for women." Bm "high·cnd incqua i~ 

ty," that among the top l percent of inoome or weaJtb, is 

fa r bt.-yond the reach of the minimum wage. (n my own 

work. l have docwueoted the ine uaHty~redue ng U.ttpac.t 

throughout the wage distribution Qr full employment. pro· 

viding support for macroeconomic policies that achieve 

that goo I. 1 have al'io stressed the impact of lrudc policy 

(and persistent trode deficitS) on production worker/blue 

collar jobs and camings.2o 

Based on lhe literature and findings above, ESOPs fit 

into tills mix iu two ways. Uniquely, t_hey appear tO push 

back on two diffcn:nt ty!X"S of inequality, and <bey do so 

di.tectl)• and indirectly. First, recall the income simulation 

above, showillg that since wealth holdings are panicular· 

ly concentrated among higb·wealth families, and profits 

such as r<::lum on capital ownership, Like equities, ilJC part 

of w~lth, :1. polity th't i_r2nS:fer1 \-.·e2.lth tO w;age e:~. eh: 

will tend 10 reduce wealth inequality. In fact. the rese-arch 

cited above by Duchele ct al found a reduction ln wealth 

concentration among the top l 0 percent of employees with 

ESOP;-; by 2.5 percentage poin~. This is the direct impacl 

of wealth redistribution through employee ownership of 

th-eir companies. BF'K, arguably the nation's top expertS on 

the economic impactS of employee ownership, underscore 

thi..~ J)Qint in arguing that l11e "best way ... to break the trend 

toward greater inequality and to direcl our society away 

from the road to c..-conomic feud31ism is to increase the cit· 

i7.ens' share of the business capital in this country." 

ln assessing Duchete et aJ's findings and BFK's strongly 

positive assertion, it is important to remember thnt many 

workers bold a variety of different fonns of employoc: 

ownership (this was the source of the variatjon in the SCI 

(rom the previous sec• ion). BFK report tl\at about a third of 

all workers hold some combination of ownership vehicles: 

12 percent or all workers arc cmploycc..,wncrs and protil 

sharers; 4 percent share of profits and get stock options; 

5 pcrcc11t are t..'1Ilploycc owners and get stock options; J 2 

percent hold all three (ow ers ip~ profit ha ng~ stock options). Rased on the fact that Lhese ronns of wealth are 

among the most concentrated, I would score these some· 

what diverse owncrshjp shares as further evidcoce of the 

more direct form of direct, equalizing redistribUtion. 

Another direct, equalizing force in play is that by dint of 

ERISA rules, ESOPs may not grant stock to wage e.amers 

above a cap. a. pOlicy in plttce ro ensures l1tat the finn's 

ownei'ShiJ) distributions meet the .E.RJSA condition that the 

most highly compcn.~a cd employees do not receive such 

a large share of the benefits that lower paid wodc.ers would 

becgrcgiou.sly lcfl lx:hind.ln 2016, eligible l'•Y for ESOP 

allocalions goes up to $265,000 per year, to be indexed for 

inflation in SS.OOO increments in subsequent )'cars.11 Titis 

cap not only restricts employee ownership for those with 

compensation levels O\'Cr the cap. h may c.reatt: sonle ptes· 

sure to tighten the wage distribution relative to non-ESOP 

tinns, leading to the findings in Exhibits I I and 12 above~ 

i.e., the indirect equalizing effect I discuss next. 

The indirect way CSOPs and employee ownership in 

geoeral appear to reduce inequality is shown in the wage 

analysis i.n the previous section_, suggesting that the wage 

inequality is lower in ownership firms, and that the dis~ 

tribution becomes less unc<tual :;.s the extent or owner· 

sbip witb.in firms rises. This finding also holds based on 

2 rough compatit:on wich a n:.11ion~lly representative data 

sel of all workers' eamings. Moreover, this gradient (less 

wage im:quality with more owncnihip) persists even when 

I add extensive controls to the so.mple. This is an indireet 

outcc,mc and $imply s:uggeslS llmt for unkJlc)wn reasons, 

t3 
106 


22375.063

finns that offer employee ownership tend to have rjgbt~r 

wage distributions as employee ownership rises (or, to be 

more accurate. firm~ in 1he NBER da~scl). h is not. like 

the wealth impact, a .. mechanical'' outcome oftrtmsferring 

weallh to a group with less of it. 

How filf could the:se relationships be.: pushed? Tf we were 

somehow able to significantly increase ESOP participa· 

tion, would wealt11 and wage: inequality be significantly 

red\lced? As we often say in answel' to this sort of question 

in economics when our data and knowledge arc just not 

''there yet," we c-:an be certain of the sign, but not the mag4 

nitude. I particulurly have liUie doubt lhat a more widely 

shared distribution of finn ownetShip and busino$S capitol 

tlu·ougb ESOPs would fun.her reduce wealth inequaliry. 

As Kruse points out, the only way d1at would not happen 

would be ifESOPs substituted for wages, and this is some· 

thing we clearly do nOt see in the data. 

There is, however, a limiting facror ln play here that current 

data do reveal. While T suspect, based on analysis above, 

that there is less pay inequality within ESOP firms, there is 

srm an unequal distributjoo of wages therein. Since ESOP 

contributions are usually made as a percent of earnings, the 

reduction in wealth inequality within ESOP f'inns will be 

limited by the amount of pay inequality. As noted, wealth 

is considerably less equitably distributed than wages. so 

if ESOPs helped push weallb ioequality to look more like 

wage inequality, lhat would be a solid step towards less 

overall inequality. And, if earnings distributions are. as my 

findings suggest, less w1equal in ESOP/ownership fimis 

Lhan non·ownership firms, this too would pusb in a more 

equitable ditec1ion. But quantifYing these impacts is at this 

point well beyond available data. 

ESOPs and tu policy 

Given Lhc above findings and speculations regarding. in. 

equality, some will argue that progressive policy should 

include tax incentives, such as chose disc-ussed earlier in 

the paper, to increase ESOPs. A-:, noted above, like most 

retirement savings vehicles. ESOrs already receive fhvor· 

able tax treatment. Tn thi~ section, I brieny l'etum to the 

ta.'( lx:ncfits of ESOPs and argue that they are sufficient 

t:::specially given the importance of maintaining {and in· 

creasing) government revenue in order to suppo11 other 

equalizin.g poli..:ics. like in1proved learning opportunities 

for those facing edueacional aceess b3niers. adding even 

more Ca.x incentives aroWld ESOP.s or other type or employee ownership mey yield negative net bencfiL~. 

Unique among retirement savings vehicles, companies 

with ESOPs can borrow lo buy ncwly·issucd co p:~.ny 

stock. Those shares then b«ome tax-deductible contl'ibu· 

tions to the ESOP. As bankcno: at Wells Fargo point out, 

"(b]y borrowing money through an ESOP, the company 

can mise cash and deduct both the principal and interest 

payments on lhe ESOP loan." Moreover, as noted earljer, 

when an owner of a C corp sells at least 30 percent of1heir 

finn co their workforee, they can avoid capital gains taxes 

on the sale ifd1cy rollover Lhc proceeds into other securities (this deferral ends upon a subsequent sale of the gains). 

Advocates for ESOPs correctly note that this tax defei'T31 

provides owners with a strong incentive to set up ESOPs. 

and thus arguclhatthc copital gains deferral should apply 

to S corp llSOI's as well. 

However, S corps have some of their own special tnx. priv· 

ileges associated wit11 ESOPs. S corp earnings are p3$iSCd 

Lhrough 10 individual shareholders. and wben the sole 

shoreholder of un S COI]J is an ESOP (i.e .. the ESOP own 

lOO percent of the company) taxes on company earnings 

are deferred until discribution, helping to build up n.:tirc· 

mt."Ot assets consider.tbly faster than would other"Ni.se «:· cur. Once ret'ir('es <:.ash out of the ESOP, they must pay 

federal taxes at their income rax rate..:;. While this i.s ~ valu· 

able tax break for employee owners, it does not <.-reate an 

incentive to set up an S·ESOP. as does the gains deferral 

break for C corp owners. 

Given ESOPs' equotizing effeCts, from a social welfare 

perspective, these ta.x incentives are arguably worthwhile. 

Moreover, this vlew gets fun.her some support by oompar· 

ing ESOPs' impact on inequality to that of401(k)'s, where 

lhe benefits fiow largely to those at the top of the income 

scale. Ma.rr et a1 show. for example, thal most of the bene· 

fits of 40 I )'s abouttwO·~tirds-acct1lc to ~"'"e in the 

top fifth of Lhe income sc.ale. while those in the bonom 

fifth are the least prepared tOr retiremeot.12 ShouJd tax pol· 

icy tilt further toward ESOPs and other more direct forms 

of employee ownership, like profit sharing? Should policies like tbc one proposed by presidential candidate Hilary 

C.:Jintoo- a tax credit equal to IS percent of profitJ that 

businesses .share with employees-get a closer look? 

This is not an obvious conclusion. As tax expen Martin 

SuUivan reasonably poi11 ~ out, given their current spalc 

of bencf1lS, it's nor clear why more employers need c:ven 

14 
107 


22375.064

more im:entivcs co take up shared ov.rnership progr:uns.U 

He writes. "Given the generally positive crrccts or profit 

sharing, (the Clinton credit] would not be tbe worst thing 

in our ta;tt <:ode. But so far. the Clinto-n campaign has not 

explained why smart employers taking into account all 

cost~ and bencfiLS are not already providing profit-sJ1aring 

plans in simations where they make sense:~ 

A beuer idea to promote ESOP ownership 

My suspicion, based not on research but on infonnal discussions with variou.c:; businesses wid1out ESOPs. is tbat 

the answer to the question Sullivan JXl.SC:S (if employee 

ownership is so g.reac. why do we have to oOCr even more 

generous cax benefits than those that already exist?) has 

more to do with acrual or pei'Ceived starrup costs: manag· 

crs perceive the process of setting up an ESOP as complex 

and costly. 111ere is also some concern that their employees could become undcr..('(iversifiod. 

In this regard, t agree with BFK. who have suggested a 

govenunem function. housed perhaps in the SmaU Business Administration or the Commerce Department. lhal 

provides direct assistance-, a.r no cost. to small businesses 

that waru to set up ESOPs or other shared ownership plans. 

Turning back to the w code. another intcrc~n ng idea is 

that bllsinesses might be more likel;• lO introduce profit 

sharing if other tax benefits that dtey currently enjoy, like 

bonus depredation, deduction of the interest costs from 

debt financing. deferral of taxes of overseas earnings, or 

the ability to pass through business earning.-; to the individual side of the oode, were c-onditional on setting up ESOPs, 

gain/profit s:haring, and so on (the tax dcfci'T3) on gains 

realized by C corp owners after selling their shares to an 

ESOP is an example of this idea in practice; extc-ndiog h to 

S eorp owners would be consistent with this suggesrion). 

lnsteJtd of making ttu .. -se benefits automatic, why 10~ in the 

interest of botlt greater revenue collection and lncenriviz_-

ing more employee owncrshipt make them contingent on 

offering o·wnership shares to worktrs-? Given the inequali~y findings ubovc. this seems like 11 us~fu l ince-ntive to 

build into tbe t:vc code that has the polential m raise more 

revenue than under cum:m Jaw. 

Conclusion 

Inequality has g.rowra among various dimensions in the 

American economy. Wealth. for example. is a lot more 

concentrated, as shown in various exhibits above. and this 

a.~ resulted in shifts in ·ffactor incomes•· from oompensarjon to profics. Since ESOPs transrer wealth to workersfrom owners to employees- a naru.ral question is whether 

rhey can help push back on this trend in inequality. 

Much of the Literature reviewed above, including extensive work by BFK, >11ggestS £::SOPs ean play thai role. 

ESOPK have been shown to reduce wealth inequality, and 

my 0\\'11 analysis of the NBER dataset 6nds chat 6nns with 

employee ownership programs tend to have le.')S unequal 

wage distributions. Would a lor more ESOPs mean a lot 

less inequality? Based on the empirical pauerns I and olh· 

er-s identify, ESOPs' equalizing effeccs are limited by the 

fact thatle.<;S than 10 percent of Lhe ,.,.,orkJorce participatt 

in them. Though the existing data do not allow researchers 

to quantify lhc impacc of grCal(.T ESOP participation, wy 

analysis suggests that more ESOPs would mean less in· 

<.'((uality, probably of both wealth Md wages. 

( do not. however, believe that this finding should le-ad 

PQiic:y makers tO further ineeutivi2:e ESOI"s through the 

uax code. at least not by offering new tax breaks, as the 

current spate of tax advantages inccntivizin_g (..'11lployoc 

ownership goes far enough, especially considering furure 

revenue needs. I do. howcvc..T, sugge.•n lWCJ ide-as fol' expanding E.SOPs: a small government agency or bureau to 

help finns manage the process of starting an ESOP. and 

''reversing the polarity" of current business tnx: breaks to 

make them conditional on the flrrn having some rorm of 

employee ownership. 

Future research in this area of ESOI's and incqtlality oould 

be advanced by adding questions nbout the vnrious fOrms 

of employee ownership on nationally repre.~ntat ivc eco· 

oonUc surveys tbat collect infonnation about income and 

wealth. Obviously, this would take resources. as these 

questions can quickly get complex. However, experts 

such as Doug Krus~ who was insLrUrncnt.al in creating the 

NBER datase~ have some field experience in asking ques· 

Lions about employee ownership. E\'cn a onc·timc. pointin-time set of questions oa a survey like the FederaJ Reserve's Survey of Consumer Finances would be weful in 

that lt might allow a deeper look into the impact of ESOPs 

c-.n inequaliry in America. 

t5 
108 

f 


22375.065

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11. SA< pgo. 185-6. 

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13. Fb::ent to.KB)daareport 15millionpcw9lpancsin ~employment in2015 wasabout 150minion,erg:>the10pen::entdt«J in the 

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109 

Mr. KIND. Thank you. 

And another point that some of my colleagues have raised too, 

and that is the eagerness—and it is a concern I share—it is the eagerness for this Congress to support tax cuts that aren’t paid for 

and that are not offset and the potential damage it can do for our 

fiscal solvency as a Nation at a time when we have got 10,000 

boomers retiring every day in this country and joining Social Security and Medicare. And I know politically it is one of the easiest 

votes to cast is a tax cut that is not paid for, but there are consequences to it. 

We heard testimony earlier today from this panel talking about 

the beneficial effect of the Reagan tax cuts, but what was failed to 

be mentioned was the eight subsequent tax increases that followed 

that initial tax cut in order to deal with the exploding budget deficit that resulted from that decision. 

There was also talk about the idyllic 1986 tax reform moment 

where there was bipartisan support for reducing individual rates, 

but what was failed to be mentioned was it also entailed one of the 

largest business tax increases in our Nation’s history at the time 

to help pay for a lowering of those individual rates in that 1986 reform bill. 

There has been testimony about what other nations are doing to 

lower their corporate rate, but what was failed to be mentioned is 

those same countries are dialing up their VAT in order to replace 

the lost revenue that they are experiencing from a reduction of the 

corporate rates. We don’t have that luxury in this country, other 

than going after loopholes and expenditures within the Tax Code 

that we should be willing to go after and deal with that inefficiency 

in the Tax Code. 

And yet last December, this Congress again passed an $800 billion permanent tax change to the Code without a nickel of it being 

offset, and as Mr. Doggett pointed out, that is $2 trillion over 20. 

And a few years ago, we had permanency of the Bush tax cuts, 95 

percent of what was made permanent in the Tax Code. It is a 

multitrillion dollar expense that our country will be suffering because, again, that was not offset. And this administration shares 

some of that blame. They have given up more baseline revenue 

funding in their 8 years in office than any previous administration 

has to this date. Even the Bush administration sunset his tax cuts 

to 10 years in order to make the budget scenario look better, even 

though at the time, everyone kind of knew that once you do it, it 

is going to be permanent at some point in the future. 

There is a cost, especially with the aging demographics of this 

Nation, that we are not addressing. And I just caution this committee to stop going down this road of delivering more tax goodies 

without any offsets, without any pay-fors. We have got to be more 

fiscally responsible for future generations than that. 

And I am also—and I think someone else mentioned it, but also, 

we need to have more testimony, more hearing about the type of 

investments we have to be making in the human capital of this Nation, not just corporations, not just businesses, but human beings. 

And, again, Mr. Bernstein, let me end it with you, and I want 

to thank you for the recent article you just published in the Washington Post about the missed opportunity of—— 

110 

Mr. BERNSTEIN. You are reading all my stuff. I—— 

Mr. KIND. I am sorry, but it is jumping out at me for some reason, but—— 

Mr. BERNSTEIN. That is great. 

Mr. KIND. If you want to, you know, pick that up just a little 

bit about that missed opportunity to—— 

Mr. BERNSTEIN. Absolutely. First of all, on the ESOPs, let me 

just make one point about employee stock ownership programs. I 

think the Tax Code actually incentivizes ESOPs plenty as it is. 

What I would actually do, and I have talked to numerous employers, you probably have too, who are interested in starting ESOPs, 

but don’t see the way forward, don’t understand how to do it, think 

it is complicated, think it is expensive. I have recommended an 

agency, a small agency within Commerce that helps people who 

want to do that, just give them advice, and I write about that in 

my piece. 

Look, on investment in human capital, the piece I wrote yesterday that you are referring to talks about the return on investment 

in early childhood education. We can talk about early childhood, or 

we can talk about pre-K, quality pre-K. According to a really pretty 

careful analysis, Kevin talked about controlled studies, ideas where 

you look at the intervention on one group first that got the intervention, another group that didn’t, we are talking about returns on 

investment that are as high as $8.50 for every dollar invested when 

these kids grow up. We are leaving large amounts of benefits on 

the table here and a lot of kids behind. 

Mr. KIND. Thank you, Mr. Chairman. 

Chairman BRADY. Ms. Black, you are recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. 

And I want to ask my question to Mr. Holtz-Eakin. Some say 

that the deficit and the debt are not a problem. And I hear that 

from people, and it just drives me crazy because if you were in your 

own household building up the kind of debt that you had in the 

deficit and looking, by the end of—at the end of the last year, our 

total debt passed that $18 trillion mark. When I say this to my 

constituents, it is really hard to even fathom what that is because 

when I talk about trillions, it sounds almost like it is fictitious. The 

CBO now tells us that it is on track to reach $29 trillion by 2026. 

We should all be concerned about this when we talk about the 

economy. 

Do you think our growing debt is a threat to our economy? 

Mr. HOLTZ-EAKIN. I do. That trajectory turned level and forward is unsustainable. Something has to change. And how it gets 

changed is the central question. The first question is sort of, what 

you do? Do you get the debt to go down, or do you just, you know, 

get it stabilized somehow? I would argue against stabilizing it because even now we are spending over $200 billion a year on net 

interest with interest rates relatively low. Everyone on this committee can think of a good use of $200 billion to meet national 

needs. So locking in high levels of debt locks in high commitments 

for interest and crowds out other budgetary activities and/or returning the money to the private sector. 

The second issue is suppose you don’t stabilize it, and then, you 

know, you have got even higher taxes. You know, you don’t have 

111 

to be a raving supply-sider to recognize how dangerous that is. 

Again, deficit out there at the end of 10 years, $1.3 trillion. Suppose you wanted to just close the deficit. Do we really want a trillion dollar tax increase to do that? So you are going to have to take 

on some combination of activities, or if you don’t, you know, private 

enterprise, either domestically originated or looking in from outside, is going to say: This is an unappetizing place to do business; 

we are going to go elsewhere. 

Mrs. BLACK. So if you had your way today, where would you say 

the first reform would be that we should start looking at to help 

to at least begin to solve this problem? 

Mr. HOLTZ-EAKIN. So the sad reality is that it is going to have 

to be in the area of the entitlement programs because all the budgetary work that has been done to date in recent years has focused 

on the discretionary side. That has never been the problem, and I 

think recent history has suggested the caps that were written into 

the Budget Control Act were unrealistic. On two occasions already, 

the Congress has undone them. 

So let us go to the real problem. The problem is mandatory 

spending programs: Social Security, Medicare and Medicaid, Affordable Care Act, go down the list. Many of those have a big demographic component so they are going to rise inexorably with the 

baby boom, so speed is of the essence. And, you know, all of them 

are going to require a lot of careful consideration on both sides of 

the aisle to get it done. I mean, so I hate to say it, you know, you 

got to go do entitlement reform, but you do, and it is going to be 

difficult, and doing it fast is important. 

Mr. MOORE. Let me make a quick point on this. 

Mrs. BLACK. Mr. Moore. 

Mr. MOORE. I am, obviously, for the kinds of reforms that Doug 

is talking about, but the focus of this hearing was on, what can we 

do to improve the economic growth of the country? And Doug probably knows these numbers by heart better than I do, but let me 

put it simply. If we keep having 2 percent growth, you can’t get 

from here to a balanced budget. You just can’t. The numbers, it 

doesn’t matter how much you cut; you are not going to get it to a 

balanced budget with 2 percent growth rate. We have to get to 3 

to 4. And I think we actually, given that we have been in such a 

growth rut for such a long time, I don’t see why we couldn’t strive 

for 5 percent growth. If you do that—now, you probably know these 

numbers better than do I, Doug—every percentage point increase 

in growth over a decade is, what, another $2 trillion or something? 

Mr. HOLTZ-EAKIN. Every tenth of a percent is about $300 billion. 

Mr. MOORE. How much? 

Mr. HOLTZ-EAKIN. If you get a whole percentage point, you 

could get $3 trillion. 

Mr. MOORE. So that is why this is such an important hearing. 

You know, we need to concentrate obviously on spending control, 

but we also have to get that growth rate up to at least 3.5 percent. 

Mrs. BLACK. So that would be the second part of my question, 

actually, that you picked up on. In the growth, we can’t just grow 

our way out of it. We do have to look on the spending side and—— 

Mr. MOORE. What I am saying is it is a precondition. 

112 

Mrs. BLACK. Absolutely. 

Mr. MOORE. It is a necessary, but not sufficient. 

Mrs. BLACK. And so the question on that, with my 35 seconds 

left, which we are not going to have an opportunity to discuss, is 

the whole issue of taxes. And as I tell people at my town hall meetings at home, if I can give you more money back in your pocket, 

what are you going to do with it? And, without exception, everybody in the room—mostly females, but the males also—say, I am 

going to spend it. And if you spend it, that increases the opportunity for another job. And if somebody has another job producing 

a product, that means that we are going to actually spend more 

money and bring in more revenue. So this whole thing about, well, 

reducing taxes really doesn’t help, yes, it does because if I put a 

dollar back in your pocket, most people are going to say, ‘‘I am 

going to spend a dollar,’’ which means production of another product. 

So thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Mr. Davis, you are recognized. 

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

Mr. Bernstein, you testified that our economy demonstrates solid 

labor market trends and that our entire poverty policies have 

helped reduce poverty over the past few decades. However, there 

remain groups of Americans who are not yet experiencing this economic recovery. For example, the University of Illinois, Chicago’s 

Great Cities Institute, recently found that almost half of AfricanAmerican men ages 20 to 24 in Chicago are neither in school or 

working. Alarmingly, this rate is higher than other racial and ethnic groups in Chicago and also is much higher than their peers in 

other large cities, such as Los Angeles and New York City. 

Let me ask you, what policies would you think are needed to help 

strengthen the economic well-being of these Americans who are not 

yet benefiting from the economic recovery that we talk about? 

Mr. BERNSTEIN. Well, thank you for asking that question and 

bringing it into this hearing, I think for the first time, a significant 

group of people who have been very much left behind. And these 

kinds of problems, deep disconnection from the overall economy, 

occur in neighborhoods across the country. 

I think what would help them most directly would be a job saturation program where direct job creation combined with a human 

capital program to help these folks improve their skills would really deal with a fundamental problem in these areas, which is they 

are job deserts. Even when we are competing—even when we are 

increasing employment throughout the country, there are areas of 

the country that remain essentially deserts in terms of job creation, 

and there we have a market failure. And when the market fails, 

the public sector has to step in and make up the difference. And 

when I say ‘‘job saturation,’’ I am not just talking about a job or 

two; I am thinking about a deep investment in direct employment 

opportunity coupled, again, with a human skills investment program as well. 

Mr. DAVIS. Well, let me thank you for that. And I also believe 

that we can look at improving TANF in a way that might add another opportunity in terms of subsidizing some of the jobs that are 

113 

indeed created and also providing benefits to individuals who are 

childless, who don’t necessarily have children, in terms of earned 

income tax credit and making use of that as a way of stimulating 

work for this group. 

Mr. BERNSTEIN. Yeah. I very much agree with you. And by the 

way, no less than my colleague Doug Holtz-Eakin down there, who 

is on the other side of the aisle, who mentioned the importance of 

expanding the earned income tax credit to childless adults, something that I think there is some bipartisan support for. 

In terms of TANF, you raise a really important point. Here is a 

program that was block granted back in 1996 and where welfare 

reform arguably had some positive results. What happened there 

was a real disinvestment in this program vis-a`-vis helping some of 

the most disadvantaged families with children. Back in 1996, right 

at the point where welfare reform was passed, 68 percent of poor 

families with kids received some benefits from the program. Now 

that is just around 20 percent. Only 8 percent of TANF funding 

goes to the basic assistance with childcare and work activities of 

the type we have talked about. So we have to be very careful and 

not go down this block granting, or what Congressman Ryan calls 

opportunity grant program, where we really disinvest in precisely 

the kind of investments that the neighborhoods that we are talking 

about so desperately need. 

Mr. DAVIS. And let me ask you quickly, there are still individuals suggesting that the Affordable Care Act is going to decrease 

jobs and work opportunity and eliminate jobs. Do you see any possible way that that happens as a result of the Affordable Care Act? 

Mr. BERNSTEIN. Well, I can only speak about the data record 

on this, the empirical evidence, and the empirical evidence shows 

that anyone who is claiming the ACA is a, quote, ‘‘job killer’’—you 

unfortunately hear those two words all too often—really has nothing to stand on. We have already talked about the job—the overall 

labor market improvement, which I think has been very strong, but 

I also pointed out that there has been no increase in involuntary 

part-time unemployment, as Steve’s model would predict. In fact, 

quite the opposite, and at the same time, there has been a clear 

increase in healthcare employment. 

Mr. DAVIS. Thank you very much. 

I yield back, Mr. Chairman. 

Chairman BRADY. Thank you. 

Mr. Kelly, you are recognized. 

Mr. KELLY. Thank you, Mr. Chairman. 

I thank the panel for being here. 

I heard one of my colleagues talk about being here when Mr. 

Paulsen came into the Leader’s office and talked about the economic crisis. I remember that. I wasn’t here. I was actually back 

in my dealership trying to figure out what the economic crisis 

meant to me because I had payroll to make. And there are many 

times—and most of us in the private sector have made sure that 

the people that work with us got paid, and we didn’t get paid. 

But today’s panel and the discussion was about economic growth. 

And I know we get too political in these things, and we don’t talk 

enough about policy. You all study that, and you know what is 

going to make a difference. And, Steve, I have listened to you, and 

114 

Mr. Bernstein, Mr. Hassett, Mr. Holtz-Eakin, I mean, I really 

wanted to hear from you today. I don’t need any more stump 

speeches, quite frankly. I have lived it. And I spent more time on 

the blacktop than a laptop, so nobody has to tell me about theoretically how things happen. 

When you put more money into the pockets of consumers, they 

spend it. That is what gets the economy going. People are not leaving this country because they hate it. They are leaving because it 

doesn’t favor them anymore or offer them opportunity. That is ridiculous in America. And I am constantly concerned about it. And 

there was a cartoon I remember when I first came out of college 

that we had posted in the back office, and it said: The beatings will 

continue until morale improves. 

And I think just put that into the private sector and then constantly be beat up every single day because of your greediness, the 

fact that you want to do something with your money that the government doesn’t agree with. 

So, Doug, between all of you, other than tax reform, and I am 

talking about complete tax reform, how are we going to grow our 

way out of this? There are opportunities all around the world. I 

would love to see us keep our base and then grow our opportunities. In a country that is awash in so many assets, the only thing 

missing right now is leadership to get us back to there. So if you 

can. There are only 3 minutes left, and I really appreciate you 

being here, but this is so basic. We should—this is like figuring out 

how many angels you can fit on the head of a pin. It is right in 

front of us how to fix it. We talked about energy. We talked about 

all the things we have going. Doug, and, please, and if you all can 

just go down through it. We have to get this fixed. 

Mr. HOLTZ-EAKIN. Yes. And you have heard my list before. The 

one thing that hasn’t been discussed that I would emphasize is 

genuinely taking on the regulatory burden imposed by the Federal 

Government. At the American Action Forum, we read and follow 

every regulation issued by the Federal Government. We take at 

face value the cost the agencies themselves generate for what it 

will take for a private businessman to comply with them. In the 

past, a little over 7 years, the agencies have issued a final regulation at the rate of over one per day, and the cumulative regulatory 

burden is over $800 billion, as reported by the agencies themselves. 

That is basically $100 billion a year in disguised taxes. 

Mr. KELLY. Just real quickly, would you please, for people who 

don’t understand this, where do all those costs get transferred to? 

Mr. HOLTZ-EAKIN. They are going to show up as lower wages, 

higher prices, or people going out of business. 

Mr. KELLY. Amen. It is the price on the shelf when you are all 

done. I don’t care if it is taxes or regulation; it gets added on to 

the finished product or service, which makes it harder for people 

to consume it, which makes it harder for us to compete in the global economy. This is a Forrest Gump moment. There ain’t no fixing 

stupid. 

Mr. HOLTZ-EAKIN. So I would encourage everyone to take a 

look at that. You have a lot of oversight in this committee on places 

that issue some very expensive regs. 

115 

Mr. HASSETT. Mr. Kelly, here is one way to think about your 

question. Would you like to go to Greece right now and start a 

business? Well, you can think: Well, you know, there probably 

aren’t a lot of people starting businesses in Greece, and so if I 

brought some capital there, maybe I could make some money. But 

if you look at how busted the government is, then you can more 

or less be sure that if you started to have a successful business, 

then at some point a few years from now, they are going to take 

it out of your hide with higher taxes, and so you don’t go. You don’t 

think—like none of us in this room are thinking: Hey, let’s all go 

to Greece and start businesses. Their business formation is low, so 

it is a great opportunity for us. It is because you are looking at a 

country that is fundamentally broke. If you look at the CBO longrun outlook for the U.S., we look like Greece not that far from now. 

And so if you want to—— 

Mr. KELLY. A lot more zeroes. 

Mr. HASSETT. So other than tax reform, what can we do to create growth? We need to make ourselves a place where people, you 

know, basically want to go there and start a business—— 

Mr. KELLY. Kind of like selling cars. 

Mr. HASSETT [continuing]. Because they are optimistic about 

the future. 

Mr. KELLY. Yeah. Yeah. It is kind of like selling cars. Right 

product, right—— 

Mr. BERNSTEIN. I am on the other side, but I have an issue— 

an argument you might like here, which is, what about a minimum 

tax on foreign earnings? If that was set at an adequate level, firms 

could repatriate their earnings without further U.S. taxation. That 

is an idea the administration has put forth. I think Dave Camp 

had that idea as well. So a minimum tax on foreign earnings, I 

think would help get around a lot of this nonsense. 

Now I will argue with you very quickly, which is if you give a 

dollar to a very rich person, they won’t spend it. So that has been 

shown time and again. They will save it. Now, that is not a bad 

thing, but I just want to correct the record on that point. 

Mr. KELLY. Steve. 

Mr. MOORE. Boy, you know, when I was at the Wall Street 

Journal, we used to talk to CEOs of the major American companies, you know, the great men and women who lead our companies, 

and, you know, the story of this half-baked recovery is this: businesses are making money. The stock market has done great over 

the last 5 or 6 years. It hasn’t done so well recently, but it has been 

a huge—and that is because companies are profitable. And we 

would always ask these men and women, why—where the things 

have broken down in the economy is they are not reinvesting that 

money into the economy the way that they used to, at the rate that 

they used to. And we would always ask them—now this is just, you 

know, anecdotal—but almost every man and woman we talked to 

when we asked them, ‘‘why aren’t you reinvesting,’’ they said they 

are afraid. And then we would ask them, what are you afraid of? 

And think of what they have lived through: ObamaCare, tax increases on the rich, you know, massive increases in debt. All of 

these things have just pounded businesses down, so they are in a 

kind of state of hibernation right now. They are not spending. We 

116 

need to get them to start spending and hiring again. And part of 

this is just attitudinal. Let’s start treating businesses like they are 

good things rather than villains. 

Chairman BRADY. Thank you. All time has expired. 

Ms. Sa ́nchez. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman, and thank you to our 

witnesses for joining us today. This hearing feels like it is becoming 

a perennial favorite, which I think is very fitting for Groundhog 

Day. The committee now gathers at the beginning of each calendar 

year for the Republicans to decry the terrible economic decisions 

made by President Obama that have supposedly sent this country 

spiraling into a bottomless pit, while the Democrats on the committee point out some hard facts, such as the following: 70 consecutive months of private sector job growth; 14.1 million jobs created; 

the longest consecutive private sector job growth in our Nation’s 

history; 18 million people who now have health insurance after 

ACA implementation, many of them my constituents, by the way. 

So here we are again for our annual meeting of what I like to 

call fact versus fiction. And I will at least give the majority credit 

for not inviting a witness here to testify today who submits overly 

sexist testimony like last year. At least that is a tiny step in the 

right direction. 

But more to the topic at hand, do I think that our economy is 

perfect today? Absolutely not, but we are far from barreling off a 

mountain into oblivion. And I know that that is not popular with 

the panic merchants on our panel today who are peddling the narrative that ‘‘oh, my God, the sky is falling, the sky is falling.’’ 

I want to echo some of the sentiments made by many of my 

Democratic colleagues on the issue of wage stagnation in this country. Hard-working families are overdue for a well-earned raise, but 

I would note, again, just as I did at this same hearing last year, 

that there continues to be a whopping zero Republican cosponsors 

on the bill to raise our Federal minimum wage. And if Mrs. Black 

were here, I would like to ask her: How’s that for putting a dollar 

in the pocket of a working person who would spend it? Let’s think 

about raising the Federal minimum wage. What a novel concept. 

We have a tremendous opportunity to improve the economic conditions for working people all across the country. And the eternal 

optimist in me, despite everything that I have heard today, isn’t 

ready to throw in the towel yet on fighting to ensure that the improvements that we make to our economy are felt by everyone, not 

just those at the very, very, very, very, very top of the food chain. 

Mr. Chairman, I know you have spoken a lot about your desire 

to focus much of this year on overdue international tax reform, but 

I hope that those efforts are not going to be done in a vacuum that 

forgets and disadvantages our domestic manufacturing sector because we need a level playing field in tax reform, and tackling this 

effort piecemeal is not the way to go, or we will harm our own 

manufacturers. 

Finally, with the rest of my time, which is short, I would like to 

turn to one of the biggest potential economic benefits to this country, and that is the economic benefit of comprehensive immigration 

reform. And just for a refresher, immigrants in this country are 

people who invest back into our communities by purchasing things 

117 

like homes and school supplies, and starting businesses in many 

blighted areas. Half of the people who are living here in an undocumented status have been here for at least 10 years waiting patiently for a pathway to citizenship so that they can pay their fair 

share of taxes and contribute even more to our economy. 

Our failure to act on comprehensive immigration reform means 

that we are effectively walking away from economic growth that 

could also help improve the long-term financial standing of our Social Security trust fund. 

So in the last minute that I have left, Mr. Bernstein, given your 

policy expertise and your work, could you provide me with your 

thoughts on the issue of comprehensive immigration reform and 

why that isn’t seriously being talked about today as a potential economic growth factor? 

Mr. BERNSTEIN. I will not only do that, but I will tie in some 

of the other issues you raised, in your what I thought were just a 

great set of commonsense comments there. 

By the way, I think you will find a lot of friends on this panel 

on the question of comprehensive immigration reform. 

The idea that the economy—I mean, the fact that the economy 

is growing more slowly than we like—we all share that view—is 

partly constrained by labor supply. Labor supply is growing more 

slowly than it used to, and that is a very direct factor into economic 

growth. This is well-known. And, in fact, if you look at projections 

as to what is slowing the economy down, it is diminished labor supply is, even more so than slower productivity growth, the main culprit. So CIR, comprehensive reform, in that spirit would very much 

attenuate that constraint. 

Now, if we are going to have more folks here, some of them are 

going to be low-income workers, disproportionately women, by the 

way, and therefore we need to raise the minimum wage as well 

awesome of the good EITC ideas we have heard even from colleagues on the other side. I think—— 

Ms. SA ́ NCHEZ. And perhaps even closing the wage gap, but that 

is just my personal opinion. Continue. 

Mr. BERNSTEIN. Absolutely. Comprehensive immigration reform in tandem with an enhanced EITC and a higher minimum 

wage makes a lot of sense to me. 

Chairman BRADY. Thank you. 

All time has expired. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. 

Chairman BRADY. You bet. 

Mr. Renacci, you are recognized. 

Mr. RENACCI. Thank you, Mr. Chairman. 

I want to thank the witnesses. I apologize. I was away for a little 

bit of this listening to some budget issues, which I think are very 

important. Gives you a real good setup to come back here. 

At the end of last year, our debt rose over $18 trillion, and I 

know my colleague, Diane Black, talked about that, but that 

doesn’t account for the $42 trillion liability that is not on the books 

and something we never talk about. 

When I was in the business world for almost three decades and 

I did a lot of turnarounds, first thing I did is I went into a troubled 

entity, and I determined what their balance sheet looks like. And 

118 

I am very frustrated that here in Washington, we like to talk about 

$18 trillion. We never like to talk about the $42 trillion additional 

dollars that really are unfounded liabilities, and, again, it will be 

part of the balance sheet. 

So I would ask, maybe I will start with you, Mr. Holtz-Eakin, 

why is it important to take a look at the total picture, including 

those unfunded liabilities? Because I do believe—and I want to get 

back to later with Mr. Moore—there are two sides to this. We are 

talking about economic growth, the importance of economic growth. 

Well, the one thing you have to do is you have to look at your expenditures. The other thing you have to do is you look at how you 

can increase payroll and employment, but if we don’t—and somebody talked about Greece, which I think is so important. People 

look at this country and say we are still the greatest country in the 

world, but as this debt continues to grow, are we a place to really 

come and build a business? And we have got to make sure that we 

are always competitive, but don’t we have to look at all of the liabilities and really make our decisions based on that? 

Mr. HOLTZ-EAKIN. Yes, you do and with the caveat that I don’t 

like to refer to them as liabilities because they aren’t the same as 

contracts that have to be honored. These are policy decisions that 

have been made in the past, should be rethought in the present, 

and have to look different in the future. But the reality is if you 

are sensible about looking at the commitments that are out there, 

add them up in a balance sheet style fashion, you know then one 

of two things. These are going to be the draws on the taxpayer to 

fulfill all those commitments, and that number is unthinkable; or 

these are going to be the kinds of commitments that are going to 

compete with national security and all the sort of basic functions 

of government that our Founders envisioned, basic research, infrastructure, education, those things. So, you know, take a look at 

those liabilities. Those are the entitlement programs, and make 

sure you see the scales of what they are going to impose on the rest 

of the economy. 

Mr. RENACCI. And, in turn, we could also look at the decisions 

we make and how they affect all those liabilities. 

Mr. HOLTZ-EAKIN. Of course. You should know the long-run 

implications of things you do right now. 

Mr. RENACCI. Mr. Moore, do you have any comments in regards 

to a total balance sheet picture here as something to look at? 

Mr. MOORE. It has always struck me, being any sort of budget 

expert in this town, that, as you just said, we don’t do a balance 

sheet like a business does. I mean, it is sort of crazy that, you 

know, if we accounted like a business did, you know, we wouldn’t 

pass any basic audit. So I like this idea of taking into account these 

long-term liabilities, but it is also important to remember that 

these liabilities are not baked in the cake. You know, nobody has 

a legal right to Social Security benefits. Nobody has a legal right 

to Medicare or these other things. You can change the benefits, and 

we ought to start looking at ways to change the benefits in ways 

that will reduce these long-time liabilities because they are not— 

you know, these $50 trillion of liabilities you are talking about, 

that is fixable. That is fixable, but we should start right now before 

all 80 million baby boomers have retired. 

119 

Mr. RENACCI. Sure. If we have the political will—— 

Mr. MOORE. Right. 

Mr. RENACCI [continuing]. They are fixable. 

On the growth side, I just have a question for—and this, Mr. 

Bernstein, you even talked about this. If we took some of the dollars that were overseas and brought them back and were able to 

put them at a lower rate, even zero tax—and I am just using an 

extreme—and put those and required those to be put right back 

into employment and adding employees to these companies that 

would have to be structured so that it was an employee based—I 

mean, isn’t that going to boost the growth here in the country? And 

I would ask any of you. 

Mr. BERNSTEIN. Well, I mean, I think the idea of a repatriation, what you are talking about, some kind of repatriation of foreign earnings, has been found—and this is the Joint Tax Committee; this isn’t a partisan thing—has been found to just 

incentivize more overseas deferral because they think they are 

going to get another repatriation somewhere down the road. If you 

have to do it, the way you described is a better way to do it, but 

it is a big revenue loser. 

Mr. RENACCI. Well, it is a revenue loser if we are expecting to 

get it back. We are never getting it back. 

Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. The quick thing I would say is think long 

term. The tax reform should be designed to be a good Tax Code in 

any set of circumstances, whether we happen to be in a boom or 

a recession. You know, you don’t want to tailor a permanent reform 

designed to enhance the supply side to the conditions of the moment. 

Mr. RENACCI. Mr. Hassett. 

Mr. HASSETT. And the last thought on this is just that the folks 

who have a lot of unrepatriated money are folks who by definition 

have a lot of money. And so the point is that the domestic firm— 

for sure I am for, you know, allowing people to repatriate money 

permanently, you know, for free, but to do it for 1 year, you are 

basically taking folks who have a lot of money and letting them 

bring it home. And it is not really plausible that Apple would employ more people in the U.S. right now if we didn’t cut the corporate rate and just let them bring some money home because they 

have all the money they need at home already. 

Mr. RENACCI. I would agree with you. It is not a 1-year program. I am just using that as an example because the only way to 

spur economic growth in this country is payroll. We have to increase payroll. 

Thank you all for your time. I yield back. 

Chairman BRADY. Thank you. 

Mr. Rice, for the final question. 

Mr. RICE. Thank you, Mr. Chairman. 

I think everybody here agrees that more growth solves a lot of 

our problems, if not most of our problems, right? And I agree that 

post-recession growth has been muted, and it is disappointing. And 

I believe the reason for that is we are not competitive around the 

world. 

120 

Mr. Hassett, I am going to pick on you for a minute. If you have 

a company that—two companies, one is paying 35 percent tax, and 

the other is paying 15 percent tax, which one—and they are both 

selling to the same customers and they are both buying their products from the same suppliers, tell me the fate of those two companies. 

Mr. HASSETT. Yeah. So what is going to happen is the 15-percent company is going to win, and the 35-percent company is going 

to go out of business; or the 15-percent company might buy the 35- 

percent company—— 

Mr. RICE. So—— 

Mr. HASSETT [continuing]. And after that purchase, they can 

move that—— 

Mr. RICE. So when an American company paying 35 percent tax 

moves to Ireland to pay 13 percent tax, it is not a matter of patriotism. Is it? It is a matter—— 

Mr. HASSETT. No. 

Mr. RICE. It is a matter of pure economic survival. 

Mr. HASSETT. That is the only way to survive. 

Mr. RICE. Now, I want you to—whoever believes that we are 

competitive in our Tax Code, please raise your hand, in the world. 

Okay. We agree on that. 

Whoever believes that our regulatory framework that costs $10,000 per employee in the United States is competitive in the 

world, please raise your hand. We all agree on that. 

Who agrees that our trade policy, our United States trade policy 

makes American companies, companies located here, more competitive in the world? Okay. We all agree on that. We are not competitive in any of those things. 

Who agrees that our current unsustainable debt path makes us 

more competitive in the world? We agree with that. 

Who agrees that our current policy on infrastructure and the failure to invest in infrastructure makes our companies more competitive in the world? We agree on that. 

So we recognize that in all these major areas, this country is not 

acting competitively. This is not a Republican or Democrat issue. 

This is an America, the country, versus the rest of the world issue. 

And what we have to recognize, what the American people have to 

recognize and what the Republicans, Democrats, and the President 

have to recognize is that there are people around the world who get 

up every day and go to work in all these countries, and their job 

is to try to figure out how to beat America economically. And there 

is nothing wrong with that. And the only problem is that we refuse 

to compete. They are winning because we won’t do it, and the 

American people know it. Two-thirds, two-thirds of Americans believe that their children will not have the same opportunities that 

they have had. If that is not a good economic indication, I don’t 

know what is. Two-thirds. 

We all agree. Everybody here agrees on this panel that we are 

not competitive, and we refuse to react. The President goes on TV. 

He complains about Congress. We sit here and fuss at each other. 

And nothing happens. All the while, more American jobs leave our 

shores. Our children can’t find good-paying jobs. And the American 

people are sick of it. Hence, Donald Trump. I am sick of it too. 

121 

Let’s show some leadership. We have got to get together and fix 

this. If we ever decide that we want to be competitive, we will 

make America great again. 

Thank you very much. I yield back my time. 

Chairman BRADY. Thank you. I would like to thank all of our 

witnesses for appearing before us today. 

And please be advised, as you know, members may submit written questions to be answered later in writing, and the questions 

and your answers will be made part of the formal hearing record. 

Again, the discussion is growth, the changes in competitiveness 

Mr. Rice referenced. We have a lot of work to do, and I am confident actually we can do this. In fact, we don’t have a choice. We 

have to do it. 

So, with that, the committee stands adjourned. 

[Whereupon, at 12:52 p.m., the committee was adjourned.] 

122 

Questions for the Record 


22375.067

HEARING ON REACHING AMERICA'S POTENTIAL: 

DELIVERING GROWTH AND OPPORTUNITY FOR ALL 

AMERICANS 

Questions for the Record 

Question fl'om Chail'man Bt·adv 

Question: 

Dr. Hassett, in your written testimony you specify a number of studies published in the American 

Economic Review which demonstrate a strong relationship between taxes and economic growth. 

Would you please expand upon thM list by citing other sin1ilar high-quality research? In addition 

to an expanded bibliography, we would welcome any connncnts or analysis you would like to 

include that may highlight the findings of that research. 

Beyond the articles in the American Economic Review mentioned in the testimony, other studies 

pointing to the same conclusion come ji"Oin other economics joumals. Turning to the Get·man 

experience in the Oxford Economic Review, Hayo and Uhl (20 14) use this "narrative approach" 

to examine German data spanning 1974 to 2010. They estimate that a ta~· increase of1% ofGDP 

cumulati•·ely lowers output by as 11111ch as 2.4% over eight quarters. In aggregate, therefore, the 

estimated output effects from "narrative approach" analyses of the U.S., U.K., and German 

contexts evince a remarkable le••el of stability, ranging only from 2.4% over eight quarters in the 

case of Germany to 3% over1en quarters in the case of the U.S. comext. Lopes (2016) replicates 

the approach and the results with data for Canada. 

Other studies of the economic effects of tax refonns pivot away fi·om the standard version of the 

"narrative approach" and instead emphasize the distinction between average and marginal tax 

rates, the Iafier of which tend to be rite most relevant for policy discussions. Constructing a timeseries of overage marginal U.S. federal income tax rates fi"om /912 to 2006, Berro and Redlick 

(2010) repwpose a variation of the Rome1· and Rome1· (2010) identification strategy to constmct 

an instmmemfor changes in average marginal tax rates (A.MTRs). They find that a decrease in 

the AMTR of!% increases per capita GDP by .5% after a period of one year. Deploying a 

vector autoregression, Mertens (20 15) estimates a peak output effect fi"om a 1% decrease in the 

AMTR on real GDP of/.5%, though the sample includes only changes to persona/tax rates and, 

in the interest of avoiding amicipation effects, excludes tax reforms with an implementation gap 

between time of legislation and time of implementation of one year or more. In conclusion, then, 

this diverse and variegated body of evidence fi"om rite economics profession points to a common 

and shared conclusion: lower taxes increase growth. Anyone who asserts that there is no 

evidence supporting a large impact of tax policy onlhe economy is either misinfonned about1he 

literal/Ire, or dishonesl. 

A fit!/ bibliography for both these studies and those in the American Economic Review is below. 
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22375.068

Bibliography 

Barro, Robert J. and Charles Redlick. "Macroeconomic effects fi·om government purchases and 

taxes." The QuarrerlyJonrna/ of Economics. 126 (20 11 ): 51 -102. 

Cloyne, James. "Discretionary tax changes and the macroeconomy: new narrative evidence from 

the United Kingdom." 71?e American Economic Ret·iew 103 (20 13): 1507-1528. 

Favero, Carlo, and Francesco Giavazzi. 2009. "How Large Are The Effects of Tax Changes?" 

Cambridge: Nationa l Bureau of Economic Research Working Paper 15303. 

Hayo, Bemd, and Matthias Uhl. "The macroeconomic effects of legislated tax changes in 

Getmany." Oxford Economic Pape1~· 66.2 (2014): 397-418. 

Hebous, Shafik. "TI1e effects of discretionary fiscal policy on macroeconomic aggregates: a 

reappraisal. " Jonmal of Economic Snn•eys 25.4 (2011): 674-707. 

Questions f•·om Rep. Boustany 

Q uestion 1: 

Lead in: 

Last year, I led a movement by this committee to t·eauthorize the Temporary Assistance for Needy 

Families (TANF) program. Throughout hearings and discussion drafts we focused on the need for 

welfare refonns to increase labor force participation, work and upward mobility. 

The need to see this work move forward, seems nothing short of timely and extremely critical. Just 

last week Louisiana's Association of United Ways announced that more than 40 percent of 

individuals in Louisiana can't aflord the basic necessities of life. That statistic titrther cements the 

fltct that our nation's economy and anti-poverty programs an:n't working as well as they should to 

help people move up the economic ladder. 

Q uestion: 

Dr. Holtz Eakin, as you know, last year we held numerous bearings highlighting the fact that 

welfare recipients can sometimes lind themselves in a situation where working more doesn't 

necessarily pay more. In your opinion, has the economic recovery been diflerent for low wage 

workers? 

l11e recove1y has been subpm; with especially slow job and }>YJge growth among the low-wage 

workers. This is in parr due to a previously legislaTed increase in the minimum wage early in rhe 

recaveiJ', and as well due to the sTrucTure of rhe social safety net. There are cerTain elements of 

the social safety net That discourage work, in parr due ro short-Term benefirrradeolfs. l11is is visible 
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22375.069

among several programs such as Disability Insurance and TANF, where on a dollar for dollar 

basis, benefit receipts may equal entry-level wages, or at least offer equal value for a recipient's 

time. But this short-term calculus leaves out fillure benefits that accme to work over time. Social 

safety-net programs that recognize these benefits by incenting work ultimately do a greater service 

to beneficiaries. Moreover, despite some rhetoric, even entry-level employees find less need for 

social safety net programs according to recent research completed by AAF. 1 

Follow up: 

Specifically, we released a discussion draft of a TANF reform bill that would revitalize the work 

requirement for people collecting welfare benefits. The discussion draft proposal ends the credits 

and loopholes, so states would be required to engage at least 50 percent of welfare recipients in 

work-related activities, as intended by the originall996law. Do you think this kind of reform can 

actually solve the problem or is it just one necessary piece of the puzzle to get people back to 

believing the American dream is possible? How would you contrast this approach be for 

constructive and self-sustaining as compared to the ongoing and aggressive calls by the President 

and democrats to raise the minimum wage? 

The entire social safety net needs to be reformed to better support work. A good start is to return 

to the original intent of the TANF work requirements. 

In contrast, a minimum wage increase is exactly the wrong approach to addressing the need to 

enhance upward mobility. In effect, raising the minimum wage transfers wage earnings from the 

low-wage workers who are unfortunate enough to become jobless to the low-wage workers who 

remain employed. 2 Indeed, AAF has found that raising the minimum wage would cost 3.8 million 

low-wage jobs. In total, income among low-wage workers would rise by, at most, $14.2 billion, of 

which only 5. 8 percent would go to low-wage workers who are actually in poverty. 3 Instead the 

U.S. should pursue some specific pro-work policies targeted at this population, such as expansion 

of the childless EITC, paired with a robust growth agenda to grow the U.S. economy more rapidly. 

Question 2: 

Lead in: 

It is no secret that the oil and gas industry are critical to the state of Louisiana's economic stability. 

In fact, Louisiana loses about $12 million every time the price of oil drops$!. This has been felt 

more so in recent months as the price for a barrel of oil fell below $27 a barrel for the first time 

since December 2003. In fact, in my hometown of Lafayette we have suffered the greatest number 

of job losses in the country over the past 12 months -losing 5,100 jobs in total. If those statistics 

don't highlight just how much the American economy is struggling right now, I'm not sure what 

does. 

1 http://americanactionforum.org/research/employment-the-retail-sector-and-usage-of-the-social-safety-net 

2 http://americanactionforum.org/research/higher-pay-fewer-jobs 

3 http:ljamericanactionforum.org/research/counterproductive-the-employment-and-income-effects-of-raisingamericas-min 
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22375.070

Dr. Holtz-Eakin, in December you highlighted that "The best energy policy is letting markets work. 

A great testimony to this is the recent revolution in oil and gas production. It was due to marketdriven technological advances that built on some government basic research andfiirther industry 

development. It would be beneficial for consumers and producers alike if even more market forces 

were put in to play- namely to permit domestic producers to export cmde oil (and accelerate the 

granting of permits to export liquified natural gas). Unfortunately, the U.S. approach to energy 

policy has often been to use tax and other policies to tilt the playing field. Wind power and solar 

power receive tax subsidies, while coal is penalized by the Environmental Protection Agency's 

regulatory agenda .. The past 40 years of U.S. energy policy has consisted too much of federal 

intervention and micromanagement. The better route forward is to simply rely on the market forces 

that have delivered so much success in other parts of the economy, and recently in energy as well." 

Question: 

Knowing that you and I share concerns about the negative impact regulations placed on industry 

by the Administration are having to the overall economy, and that not all tax policy is helpful to 

the domestic business community, what do you think are the policy decisions we can and should 

be making right now, from the federal and local level, to implement an energy strategy for our 

country and to ensure Louisiana and the rest of the US is prepared to meet these challenges? 

A starting point would be to control the ever-increasing regulatory burden, which has grown by 

roughly $100 billion annually for the past seven years. These regulations, as well as tax policy, 

distort the energy sector to the detriment of the American consumer and the economy as a whole. 

At present, the United States has a patchwork of subsidies and financing mechanisms layered onto 

federal and sub-national mandates and regulations, which rarely act in harmony to advance a 

coherent energy policy. Instead, the U.S. should get out of the energy "business, " and allow 

market forces to take greater hold on the energy sector. Allowing U.S. producers to export cmde 

oil is a positive step, but the administration 's subsequent oil tax proposal reflects an approach to 

energy policy that appears rooted in the 1970s. 

Question 3: 

Lead in: 

With more than 95 percent of the world's population and 80 percent of the world's purchasing 

power outside the United States, future economic growth and jobs for Louisiana and America 

increasingly depend on expanding U.S. trade and investment opportunities in the global 

marketplace. 

Export growth increases jobs by generating new business for Louisiana's manufacturers, service 

providers and farmers. It is well known that imports support jobs and keep costs low, helping 

Louisiana businesses compete and saving Louisiana families real dollars at the cash register. We 

know this well in Louisiana where more than one in five jobs depend upon international trade. In 

fact, according to labor statistics Louisiana's trade-related employment grew 2.5 times faster than 

total employment from 2004 to 2013. 

Question: 
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22375.071

Economists generally agree that trade liberalization, such as through the TPP, benefits Americans. 

How will the TPP benefit American families? In particular, will it lower costs on basic 

necessities such as clothes and shoes, which also happen to face high tariffs? 

A key goal of TPP is to eliminates or reduce tariffs on goods traded between partner countries, 

which should benefit families through more affordable consumer staples. TPP should also reduce 

foreign tariffs on American exports, which can encounter tariffs as high as 100 percent. Reducing 

both barriers should benefit American workers through enhanced opportunity for trade, and a 

reduction in costs for certain inputs and household goods. TPP also aims to increase trade in 

services, an essential element of U.S. trade, accounting for $711 billion of exports in 2014. 4 

Follow up: 

In Louisiana the TPP is as much about what is under barges and ships in Gulf Coast rivers as it is 

about the goods they carry. This is because Louisiana's rivers are in dire need of dredging and the 

Army Corps of Engineers must continue to invest in maintaining locks and dams if the state is to 

reap the full benefit of the so-called Trans-Pacific Partnership. How critical do you all believe 

reliable infrastructure is for the U.S. to recognize the full benefits of TPP or any future trade 

agreement? 

Properly targeted, federal expenditures on infrastmcture can enhance U.S. productivity and 

broadly benefit the American economy. To meet a productivity test, transportation investments 

should have a greater impact in terms of raisingfillure standards of living than other uses of fimds 

as measured by the return on other market investments. Thus, to ensure the best use of taxpayer 

dollars, government must channel fimding to the projects that offer the highest returns to society. 

That means choosing programs that do the most to enhance long-term productivity. 5 Infrastmcture 

projects that ensure access to international markets and trade routes can offer important 

opportunity for these productivity gains 

Question 4: 

Lead in: 

The long-term exponential growth in America's entitlement state has had far reaching 

consequences that we may not fully grasp for years to come, but there is no question for any of my 

colleagues on this committee, that the financial impact has trickled down to our respective states. 

Perhaps most directly irnpactful on state's financial burdens is the Medicaid program; as everyone 

likely knows, Medicaid is jointly administered and financed at the federal and state levels, which 

is not the case for most other entitlement programs, and leaves states at higher financial risk. In 

fact, like many other states, my home state of Louisiana currently faces a budget gap of roughly 

$1.9 billion, a figure that would only be further strained by any additional increases in spending. 

Question: 

4 http:ljamericanactionforum.org/insights/pri mer-the-trans-pacific-partnership 

5 See: https:/Jmed ia.mhfi.com/documents/201507-M HFJGI-Dynamic-Scoring-AAF-PPJ-Final.pdf 
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Dr. Holtz-Eakin, in your testimony submitted for the record, you highlighted the point that 

increased entitlement program spending has a depressive ellect on our nation's economic growth 

overall, and ultimately leads to the need for increased revenue through tax increases elsewhere. 

For states like Louisiana, who may be contemplating expansion of their Medicaid programs 

following on the rccoounendations made in the President's health care law, how would you advise 

Louisiana's new governor and others on the question of whether or not to follow through on 

expanding their Medicaid programs? 

Medicaid has impacrs on healrh policy, budger policy, and economic policy. Beginning wirh rhe 

la11e1; Medicaid is poor economic policy. A recem eslimate by AAF found that a nationwide 

Medicaid expansion would result in a direct net loss of up to $174 billion in economic growth 

nationwide over ten years and the loss of over 206,000 jit/1-year-equivalent jobs for I he years 2014 

to 2017. 

Medicaid is questionable budget policy. The ACA 's Medicaid e>.pansion layered $824 billion in 

entillement spending onto an already unsustainable federal budget, that left unchecked will harm 

jillure economic growth. 6 States have to be cognizanrthatrhe Medicaid expansion is not "ji-ee" 

and that the tenns may worsen in the nearjitture. 

Finally, states are much beller situated ro derermine their low-income healrh policies r!tan is rhe 

federal government. 

Follow up: 

If you would advise against expansion, can you elaborate as to why Medicaid program expansion 

is not ultimately cost-efficient or successful at achieving the President's purported goals of 

expanding coverage to ensure timely access to high-quality heallhcare services? 

Perhaps more imporTant rhan its budget01y implicaTions, is rhe failure of Medicaid Ia deliver 

qualiry care to rhe neediesr Americans. There is evidence rhat Medicaid coverage does nor increase 

overall health or reduce emergency room use. 7 Indeed, Medicaid coverage arguably leads ro the 

worsr healrh ourcomes because reimbursemenT rates for providers are so low thor ir makes nonemergency room care virtually inaccessible. 8 As no red above, srares may have much belle•· 

solutions on their own. 

Lastly, can you describe for me what you think the long-term fmancial impact would he on a state 

like Louisiana, with its $ 1.9 Billion budget gap, if the decision was made to expand Medicaid? 

Over rhe long-Term, it is basic marh that increasing rhe Medicaid-eligible populaTion will increase 

jillure liabilities. While rhe ACA promises ro cover rhe bulk of rhis expansion, ji1ture Congress are 

• https://www.cbo.gov/sites/default/files/l14th-congress-2015·2016/reports/S0252·Effects of ACA Reoeal.pdf 7 http://americanactionforum.org/insights/more·insurance·shouldnt·lead-to·more-emergency-room-visits-but-itml&!.!l * http://americanactionforum.org/testimony/the-affordable-care-act-after-five-years-wasted-money-and-brokenP.!.Q.mj 
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not bound to any current financing structure. We have even seen States experience cost increases 

in the short term, being held hostage by maintenance-of-effort provisions that force state Medicaid 

agencies to continue paying for temporary programs that have long since expired. 9 

Question 5: 

Lead in: 

As many of my colleagues on this committee can attest, the constituents in each of our respective 

states have been "white-knuckling" the wheel of a stagnant economy, trying to hang on until things 

"get better". In fact, my home state of Louisiana closed 2015 ranking 481

h in the U.S. for positive 

economic growth, alongside a 6.3% unemployment rate well above the national average of5.0%, 

and 0.0% wage growth 

Louisiana, alongside every one of the 50 U.S. states, serves as a major hub for international 

business across many industries. There has been an exponential growth in inversions, and mergers 

and acquisitions activities, most recently the sale of Johnson Controls to Ireland-based Tyco, as 

well as the sale of U.S.-based Baxalta to Ireland-based Shire. Following the loss of these two 

major U.S. companies alongside the many others that preceded them, this is only further evidence 

to support the critical need for tax reform. 

Dr. Holtz-Eakin, in your submitted testimony you made the accurate and astute observation that 

economic growth is positively correlated with a very tangible result for American families: "The 

Congressional Budget Office projects the U.S. economic growth to average only 2.1 percent over 

the next decade ... This rate of growth is below that needed to improve the standard of living at the 

pace typically enjoyed in post-war America ... More rapid growth is not an abstract goal; (aster 

growth is essential to the well-being of American families. " 

Question: 

Dr. Holtz-Eakin, given the concrete connection between our nation's economic growth, and 

therefore the well-being of American families, do you believe international tax reform to address 

the increasing inversions and mergers-and-acquisitions activities will have a positive economic 

effect that trickles down to small business and American families? 

Well-designed tax reform does offer the promise of stronger economic growth and better 

international competitiveness, and as noted in the testimony, can boost wages and employment. 

Tax reform proposals offering these gains should be favorably by the Committee. In the current 

environment, the Committee would also do well to avoid considering tax policies that may harm 

an already weak economic recovery. Some proposals in Congress would hasten the departure of 

some U.S. firms, eroding the U.S. tax base and taking high-wage jobs along the way. 

Follow-up: 

Can you explain how America 's loss or retention of these large U.S.-based companies going 

forward stands to impact availability of jobs across the 50 United States and D.C.? 

9 http:ljamericanactionforum.org/testimony/the-affordable-ca re-act-after-five-yea rs-wasted-money-and-brokenQLQ!!J_[ 
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The combination of growing markets abroad and the maintenance of a highly uncompetitive tax 

code has resulted in, and is projected to continue to induce equity flight abroad. Estimates suggest 

that roughly 15 percent in U.S. based capital is at risk of moving overseas. Anti-inversion laws 

that include management and control tests such as some before this Congress would push the 

capital overseas and headquarters jobs would follow suit. According to a recent estimate by AAF, 

the largest American firms have nearly 299,000 headquarters employees, many of which would be 

at risk for having their positions relocated abroad. If roughly 15 percent of U.S. based market 

capital is at risk, it suggests a proportional overseas relocation of 42,000 U.S. jobs. 10 

Furthermore, how does the loss of major U.S. headquartered companies to our foreign counterparts 

ultimately impact everyday American families like those in my home state of Louisiana? 

According to research from the Harvard business school, "corporate headquarters in the United 

States are about twice the size of European counterparts yet appear to be more effective. "11 Losing 

these corporate entities means losing thousands of jobs, often high-paying managerial jobs that 

offer a sizeable tax base to a community and relatively higher standards of living. Moreover, major 

corporate headquarters play an outsized role in their local communities - one need not look 

beyond donors to local civic, educational, and health institutions to appreciate the impact that 

losing a corporate resident can have on a local community. 

Question 6: 

Lead in: 

As many of my colleagues on this committee can attest, the constituents in each of our respective 

states have been "white-knuckling" the wheel of a stagnant economy, trying to hang on until things 

"get better". In fact, my home state of Louisiana closed 2015 ranking 481

h in the U.S. for positive 

economic growth, alongside a 6.3% unemployment rate well above the national average of5.0%, 

and 0.0% wage growth 

Louisiana, alongside every one of the 50 U.S. states, serves as a major hub for international 

business across many industries. There has been an exponential growth in inversions, and mergers 

and acquisitions activities, most recently the sale of Johnson Controls to Ireland-based Tyco, as 

well as the sale of U.S.-based Baxalta to Ireland-based Shire. Following the loss of these two 

major U.S. companies alongside the many others that preceded them, this is only further evidence 

to support the critical need for tax reform. 

Question: 

Dr. Hassett, given the concrete connection between our nation's economic growth, and therefore 

the well-being of American families, do you believe international tax reform to address the 

10 http://americanactionforum .org/research/the-economic-risks-of-proposed-anti-inversion-policy 

11 http://hbswk.hbs.ed u/ item/international-differences-in-the-size-and-roles-of-corporate-headquarters-anempirica l-examination 
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increasing inversions and mergers-and-acquisitions activities will have a positive economic effect 

tbat trickl~s down to small business and Am~r can families? 

Answer: When if comes to COipOrate taxation, the evidence for the existence of this "fi'ee lunch" 

fi'om internotionaltax reform that would benefit American workers and small businesses is strong. 

The United States has the highest official or "stat11101y" c01porate tax rate of any cowwy in the 

OECD. 8111 many who dispute the need for broad pro-growth tax reform would point out that the 

"effective" tax rate paid by COipOrations is lower than this official legislated rate, due to tax 

credits etc. Still, even if one accounts for the many loopholes in the tax code that c01porations 

exploit and examines the "effective" rate that U.S. c01porations pay rather than the statwo•y rate 

legislated by Congress, U.S. c01porate tax rates remain elevated relative to those in other OECD 

countries. lntemationa/tax reform to address inversions would entail lowering the U.S. corporate 

tax relative to the tax rate in other countries, in order to make the U.S. a relatively more allractive 

tax jurisdiction. To be sure, other countries might wei/follow suit, and the disadvantage of having 

relatively high rates might reemerge. But the competition between counrries for capital is a force 

that drives rates toward their optimal/eve/. We should play the game by reducing rates, and we 

should celebrate its existence. Right now we are on the sidelines, and ourfinns and workers are 

suffering because of it. 

However, if there were successfiil international tax refonns that rendered the U.S. a relatively 

"less expensive" place to do business relative to its OECD peers, American workers and American 

small businesses would benefit. Such reform would n111te the incentive that now motivates firms to 

undenake inversions and mergers-and-acquisitions activity that effectively results in an inversion. 

This would save the jobs that firms take with them abroad when they engage in these activities and 

shift their taxjurisdictionto, say, Ireland. Small businesses, too, would benefit. One channel would 

be through the reinvigoration of local economies that would result fiwn the presence of the 

additional jobs in a local economy; rhe local tailor would do better when there are more men 

wearing suits to cotporate jobs than when those jobs are offshored to Ireland for rax pwposes. A 

second channel would be through effects thor may be mediated by business-to-business economic 

activity thor occurs along the supply chain; as COI]JOrate offices remain in rhe U.S. rather than 

im·err to Ireland, they would be buying, say, office supplies and food fi'om local producers in the 

U.S. rather than local producers in Ireland. And the employees of the big multinational would 

learn valuable business skills, and then starr new firms 011 their own. 

FoUow-up: 

Can you explain bow America's loss or retention of these large U.S.-based companies going 

forward stands to impact availability of jobs across the 50 United States and D.C.? 

Furthermore, bow docs the loss of major U.S. headquartered companies to our foreign counterparts 

ultimately impact everyday American families like those in my bome state of Louisiana? 

Answer: 
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Going forward, the loss or retention of large U.S.-based companies stands to have a significant 

impact on the availability afjobs in the 50 states and D. C. In today 's globalized economy, 

America must compete as a tax j urisdiction to attract mobile businesses and the jobs they bring 

with them. And, U.>' many members of this Committee ure likely U~'Htre, bwiine.sses and 

c01porations cast a "vote with theirfeet" as they choose to locate in a given jurisdiction. Today, 

businesses are voting against the stallls quo of American tax policy when they "inven " and move 

to a new jurisdiction, takingjobs with them. Unfortunately, then, it is the American worker- the 

American voleJ that suffers when co1porations vote against America's co1porate lax policy. 

Whether this trend continues or abates depends on whether the U.S. undertakes the tax reforms 

that are necessmy to ameliorate the powe1jitl economic incentives that are today driving 

co1porations and the jobs they create away from the 50 states and D. C. There is no natural 

limit to this process. It might well be that, in the f ullness of time, eve1y U.S. multinational will 

invert. The economic incentives to do so are that powe1jitl. 

The loss of major U.S. headquartered companies ultimately has a devastating impact on 

everyday American families like those in Louisiana. 11Ie absence of these jobs at co1porations 

prevents families from enjoying the income and economic stability that families in America have 

traditionally had the opportunify to enjoy. There is a voluminous literall/re that relates 

unemployment to maladies as wide-ranging and profound as the fiuure earnings of children and 

the incidence of suicide. The retention of co1porations and the jobs they provide is a mal/er of 

dire importance and grave stakes forfamilies in eve1y state in the U.S., including Louisiana. 
132 

Public Submissions for the Record 


22375.077

ESCA 

THE AMERICAN DREAM AT WORK 

Statement for the Record 

House Committee on Ways and Means 

Hearing on "Reaching America's Potential: Delivering Growth and Opportunity for All Americans" 

February 2, 2016 

Stephanie Silverman 

President & Executive Director 

Employee-owned S Corporations of America 

1341 G Street, NW, 6'~ Floor 

Washington, DC 20005 

On behalf of the Employee-Owned S Corporations of America (ESCA), thank you for the opportunity to 

submit comments to the House Committee on Ways and Means. We commend the Committee for its 

continued focus on policies to drive economic growth, which are essential in addressing the difficulties 

that continue to vex the U.S. economy, w orking Americans, and their families. 

ESCA represents private employee-owned companies operating in every state across the nation, in 

industries ranging from heavy manufacturing to construction to school photography to grocery stores. 

The expansion of S corporation ESOPs (employee stock ownership plans) in recent years is testimony to 

the fact that these companies are a dynamic and growing part of our economy. Currently, about 3,000 

companies areS corporation ESOPs, and they employ 470,000 workers across the country and support 

nearly a million jobs in all. We would respectfully suggest to the Committee that a vital means of 

promoting economic opportunity for working Americans is to expand the availability of S corporation 

ESOPs for more companies and their workers. 

On January 26'", economist Jared Bernstein, former chief economist for Vice President Biden, w ho 

testified at this hearing, released new research that reflects the benefits of expanding private 

employee ownership of U.S. businesses. In remarks during the hearing, Congressman Kind requested 

that Bernstein's report be entered into the hearing record. By increasing ownership of business capital, 

the study shows, ESOPs reduce wealth and wage inequality among workers. The fact that they only do 

this on a small scale, Bernstein asserts, is due to the fact that there are limited numbers of ESOPs in the 

United States. More ESOP companies would, he made clear, have an even greater and more beneficial 

impact on closing the growing wage and inequality gap in the American workforce. 

Other key findings from Bernstein's new study include: 

1341 G Street NW • 6"' Floor• Washington, DC 20005 

T: 202·466·8700 F: 202·466·9666 

www.esca.us 
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That ESOPs help to address growing wage gaps between top management and other workers 

because they generally pay their workers better (and that the ESOP benefits companies offer 

aren't generally a substitute for other compensation); 

That ESOP-owned companies provide more stable employment than other businesses, and 

private, employee-owned companies are better able to weather economic downturns (like the 

Great Recession); 

That there isn't much behind assertions that employees who are part of ESOPs are in danger of 

being 'over exposed' to company stock. Bernstein notes that the great majority of ESOP-owned 

companies provide employees with an additional 401(k) or other similar plan, making their 

ownership stake in the company additive and highly beneficial. 

Bernstein's report expands on what we already know: S corporation ESOPs are doing exactly what 

Congress intended when it created them in the late 1990s- generating economic activity, creating jobs, 

and promoting retirement savings. By any mea sure, these companies have been a remarkable success 

story, and a bright spot in an economy characterized over the course of the last decade or more by 

sluggish growth, anemic job creation, worker insecurity and wea lth inequality. 

It stands to reason that companies with ESOPs have displayed a dynamism and vitality lacking in other 

sectors of our economy. An ownership stake in one's place of work is not only a reason to help drive to 

greater productivity, but it also inspires greater loyalty as workers consider themselves aligned with 

the fortunes of the business, and avoid adversarial dynamics that can emerge when employees are 

convinced that the interests of stockholders and corporate board members are at odds with their own. 

For workers inS corporation ESOP firms, what is good for ownership is good for them by definition. 

The evidence is compelling that expanding the availability of S corporation ESOPs for more companies 

and their workers would not only boost the retirement savings of countless Americans, but would also 

create more jobs, generate more economic activity, and encourage the formation of bu sinesses that 

are more stable and successful because they provide their employees with the kind of built-in 

incentives conducive to loyalty and productivity. 

As the Ways and Means Committee contemplates pro-growth measures, we urge members to support 

tax policies that expand the availability of S corporation ESOPs, allowing more workers to own their 

businesses and benefit from the advantages that employee-ownership holds. 

Towa rd that end, H.R. 2096 --introduced by Committee members Dave Reichert and Ron Kind along 

with Reps. Pat Tiberi, Richard Neal, Erik Paulsen, Earl Blumenauer, Charles Boustany and Bill Pascrell --

would help to grow the number of private ESOP bu sinesses in the United States, giving more workers 

the opportunity to build savings, reduce wea lth and wage inequality, and retire with dignity. The 

measure includes provisions to extend the gain-deferral provisions of Code section 1042 to sales of 

employer stock to SESOPs, encourage the flow of bank capital to ESOP-owned S corporations, provide 

resources to small businesses contemplating making the transition to an ESOP, and ensure that SBAcertified small bu sinesses do not lose their status by becoming employee owned. H.R. 2096 currently 

has 63 bipartisa n cosponsors (including 21 members of the Ways and Means Committee) 

We look forward to working with Committee members to advance H.R. 2096 toward this year. We 

thank the Committee for its continued championship of employee ownership through the S ESOP 

model, and more broadly for its work on pro-growth policies for working Americans. 
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Additional Background on 5 Corporation E50Ps 

A Subchapter S corporation is a business entity that provides flow-through tax treatment to its 

shareholders. An employee stock ownership plan ("ESOP") is a qualified defined contribution plan that 

provides a company's workers with retirement savings through their investments in their employer's 

stock, at no cost to the worker. ESOPs are regulated by the Employee Retirement Income Security Act 

("ERISA") just like pension funds, 401(k) plans, and other qualified retirement plans. 

In 1996, in the Small Business Jobs Protection Act, Congress authorized the S corporation ESOP 

structure, effective January 1, 1998, with the goal of encouraging and expanding retirement savings by 

giving American workers a greater opportunity to have equity in the companies where they work. 

In the Taxpayer Relief Act of 1997, Congress repealed the unrelated business income tax (UBIT) 

originally imposed on the ESOP for its share of S corporation income, enabling S corporation ESOPs to 

become a viable new business structure to benefit American workers. Seventeen years later, there are 

more than 2,600 S ESOP companies operating in every state of the nation, in industries ranging from 

heavy manufacturing to retail grocery stores, from construction to consulting. Because of the structure 

of S ESOP tax policy, S ESOPs are achieving exactly what Congress intended: generating unparalleled 

retirement savings for workers, providing good and resilient jobs in high-performing businesses, and 

creating important macroeconomic benefits in their communities. 

Over the years, ESCA has worked closely with federal policymakers to ensure that S ESOPs hold true to 

their original purpose of encouraging broad employee ownership. We collaborated with members of 

your committee in 2000-2001 to craft anti-abuse rules that became section 409(p) of the Internal 

Revenue Code. These rules, enacted in the Economic Growth and Tax Relief Reconciliation Act 

(EGTRRA), now mandate that S ESOPs provide for broad-based employee ownership and establish 

strict repercussions for violations. 

As the report language for EGGTRA (H.R. Rep. No. 107-51, part 1, at 100 (2001) states: The 

Committee continues to believe that S corporations should be able to encourage employee 

ownership through an ESOP. The Committee does not believe, however, that ESOPs should be 

used by S corporation owners to obtain inappropriate tax deferral or avoidance. 

Specifically, the Committee believes that the tax deferral opportunities provided by an S 

corporation ESOP should be limited to those situations in which there is broad-based employee 

coverage under the ESOP and the ESOP benefits rank-and-file employees as well as highly 

compensated employees and historical owners. 

Since enactment, Section 409(p) has been highly effective in ensuring that S ESOPs serve their purpose. 

As a result, S ESOPs have become perhaps the most effective retirement savings plan under federal 

law, and today the averageS ESOP plan participant has significantly more money saved in their ESOP 

account than they do in their 401(k) account. 

The Unparalleled Performance of S ESOPs 

Many studies over the years have documented why and how S ESOPs have proven to be so powerful 

for both workers as a retirement savings and economic security tool, and how they have contributed 

substantially to communities and the broader national economy. 

last year, Ernst and Young's Quantitative Economics and Statistics (QUEST) practice issued a study 

showing that 5 corporation E50Ps outperformed the 5&P Total Returns Index in terms of total return 
135 


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per participant by an impressively large margin (62%), net assets of S ESOP accounts in the aggregate 

increased over three-fold, and retirement distributions to workers inS ESOPs totaled nearly $30 billion 

from 2002 to 2012. 

In a study released in 2014, data compiled by the National Center for Employee Ownership (NCEO) 

shows that private employee-owned businesses have strikingly fewer loan defaults than other 

businesses. NCEO finds that the default rate on bank loans to ESOP companies during the period 

2009-2013 was, on average, an unusually low 0.2 percent annually. By contrast, mid-market 

companies in the U.S. typically default on comparable loans at an annual rate of 2 to 3.75 percent. The 

tenfold difference between the economic strength of employee-owned companies and other 

businesses highlights the fact that private businesses which are owned by their employees have the 

incentives and vision that makes them more stable, more successful, and better for employees as 

well as the larger economy. 

A 2012 study by Alex Brill, a former chief economist and policy director to the Ways and Means 

Committee and tax advisor to the Simpson-Bowles deficit reduction commission, found that: 

Employment among surveyed S ESOP firms increased more than 60% from 2001-2011, while 

the private sector as a whole had flat or negative growth in the same period. 

In the struggling manufacturing industry in particular, the S ESOP structure has buffered against 

economic adversity and job loss. 

• S ESOPs have significantly expanded the pool of US workers who are saving for retirement, 

while also boosting company productivity- something that has greatly benefited their 

employee-owners. 

In his study, Brill notes that "in the context of the current tax reform debate that seeks to curtail 

existing tax expenditures in favor of lower statutory rates, policymakers should recognize the evidence 

in support of S ESOPs and their positive economic contribution." 

In 2013, Brill produced a follow-on study entitled "Macroeconomic Impact of S ESOPs on the U.S. 

Economy." Key findings of that broader assessment revealed that: 

• the number of S ESOPs and the level of active participation (number of employee-owners) 

have more than doubled since 2002. 

• total output from 5 ESOPs and the industries they support is nearly 2 percent of GOP. 

• S ESOPs directly employ 470,000 workers and support nearly a million jobs in all. 

• S ESOPs paid $29 billion in labor income to their employees, with $48 billion in additional 

income for supported jobs. 

Brill's study on the macroeconomic impact of S ESOPs built upon findings issued in 2008, in a 2008 

University of Pennsylvania report, whose authors found that S ESOPs contribute $14 billion in new 

savings for their workers each year beyond the income those workers otherwise would have earned, 

and that S corporation ESOPs offer workers greater job stability and increased job satisfaction. The 

study also found that S corporation ESOPs' higher productivity, profitability, job stability and job 

growth generate a collective $19 billion in economic value that otherwise would not exist. 

The Brill and University of Pennsylvania studies reinforce other important evidence about S ESOPs that 

show how powerful they can be. 

4 
136 

f 


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In a 2010 Georgetown University/McDonough School of Business study, two leading t ax economists, 

former Treasury Department officials Phillip Swage I and Robert Carroll, reviewed the performance of a 

cross-section of S corporation ESOP companies during the early part of the prior recession and found 

that these companies performed better than other equivalent companies in terms of job creation, 

revenue growth, and worker retirement security. Specifically, Swagel and Carroll found that: 

• Companies that areS corporation ESOPs are proven job-creators, even during tough times. 

While overall U.S. private employment in 2008 fell by 2.8%, employment in surveyed 5 

corporation ESOP companies rose by 2%. Meanwhile, 2008 wages per worker in surveyed S 

corporation ESOP companies rose by 6%, whi le overall U.S. earnings per worker grew only half 

that much. 

• S corporation ESOP companies provided substantial and diversified retirement savings for 

their employee-owners at a time when most comparable companies did not. Despite the 

difficult economic climate, surveyed S corporation ESOP companies increased contributions to 

retirement benefits for employees by 19%, whi le other U.S. companies increased their 

contributions to employee retirement accounts by less than 3%. 

As the Ways and Means Committee continues to work on comprehensive t ax reform, ESCA wou ld be 

pleased to serve as a resource and we look forward to continuing this important dialogue about a 

corporate structure and retirement savings plan that is enabling hundreds of thousands of Americans 

to achieve the American dream at work. 

The Employee-Owned 5 Corporations of America ("E5CA") is the Washington, DC voice for employee-owned 5 

corporations. ESCA's exclusive mission is to advance and protect 5 corporation ESOPs and the benefits they 

provide to the employees who own them. These companies have an important story to tell policymakers about 

the tremendous success of the 5 ESOP structure in generating long-term retirement savings for working 

Americans and their families. ESCA provides the vehicle and the voice for these efforts. E5CA represents 

employee-owners in every state in the nation. 
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Statement for the Record for 

Fnll Committee Hearing 

"Reaching America's Potential: Delivering Growth and Opportunity for All Americans" 

February 2, 2016 

The following statement is submitted by The ESOP Association, located at 1200 lS'h Street, NW, 

#1125, Washington, D.C. 20036, phone 202-293-2971. The person who drafted the following 

statement is J. Michael Keeling, President, email michael@esopassociation.org 

"Before setting forth the evidence why employee stock ownership plans, referred to as 

ESOPs, should be promoted and encouraged as a means of expanding our nation's growth for 

providing more opportunity for all citizens to share in our free enterprise system, it is appropriate 

to set forth what an ESOP is, and its history, for the past 41 years of laws promoting the creation 

and operation of employee stock ownership via the ESOP model. 

What Is an ESOP? 

Unique among ERISA plans, an ESOP, by law, must~ primarily invested in the highest 

class of stock of the plan sponsor and the stock may be acquired with borrowed funds. In 

practical terms, the plan sponsor may take on ' debt' to acquire shares of the sponsor, and not be 

engaged in a prohibited transaction if the shares are acquired by the ESOP trust at a price no 

greater than the fair market value. 

Brief History of ESOPs 

The ESOP model of employee ownership actually has its roots in a compensation 

practice from the 191

h Century. (A recent book, The Citizen's Share, Blasi, Freeman, and Kruse, 

Yale Press, wrote a very convincing case, pages 1 - 56, that our founding fathers, such as 

Washington, Jefferson, Adams, Hamilton, et al, believed in broad ownership of productive assets 

as being essential to the survival of a democracy. President Lincoln's views, as evidenced by the 

Homestead Act, were also in sync with our founding fathers' views.) 

As the U.S. economy moved into the industrial age, corporations with nationwide reach, 

and large numbers of employees emerged- Procter & Gamble, Montgomery Ward, and others. 

Leaders of these companies realized that some employees would work for many years, reach an 

age requiring retirement, and retire with no income. There was no 191

h Century safety net for 

retirees, and leaders of a number of national firms decided to set aside company stock for the 

employees to have when they retired, and to "cash in." 

After World War I, and the ratification of the 161

h Amendment to the Constitution 

authorizing a national income tax, Congress recognized that taxing income was not so simple, 

and that many issues had arisen because the basic definition that income is anything of value 

received by an individual, and the general rule that an income tax should tax anything of value. 
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In response to questions of what income should be taxed, Congress developed the very 

first true income tax code, the Code of 192!. 

In developing the Code, those firms that were setting aside stock for their retiring 

employees came to the House Committee on Ways and Means and asked - "Is the stock set 

aside for an employee's retirement taxable when set aside, and is the value of the stock an 

employer's compensation cost?" 

The Ways and Means Committee decided no, it was not current income to the employee, 

but would be taxed when the employee realized the previously deferred income; and yes, the set 

aside was compensation, and thus a cost of business for the employer and thus deductible for 

income tax purposes. 

Thus, the first deferred compensation plan recognized by Congress was the "stock bonus 

plan," the forerunner oftoday's ESOP. 

Fast forward to post War World II and owners of privately-held businesses began to 

consider how to "exit" their businesses and "cash" in their non-tradable stock in the company 

they started and which had become successful because of the hard work of the company 

employees. While somewhat lost in history due to the fact that until the mid-l970s private letter 

rulings were not public documents, an owner in Alaska, followed by others, obtained permission 

from the IRS, in a non-public letter ruling, that the company could "buy" his stock with 

borrowed money, have the stock placed in the company's stock bonus plan, and have the stock 

allocated to the employees as the debt was paid off. 

A true visionary in San Francisco, California, Dr. Louis 0. Kelso, developed a 

comprehensive economic philosophy in using such a method for funding stock bonus plans to 

expand ownership in a capitalistic society and to facilitate capitalization of for-profit businesses. 

He and his law firm colleagues led the way in expanding the use of this method blessed by the 

letter rulings, and many correctly note that the first "ESOP" was the sale by exiting shareholders 

of the Monterrey Press north of San Francisco in 1957 to an ESOP. 

By the mid-l950s, many, both conservative and liberals, were seeing abuses in the area 

of pensions, or tax qualified deferred compensation plans, which the tax laws sanctioned and 

encouraged. Evidence was overwhelming that some pension funds were investing in organized 

crime activities. Then there was the collapse of major U.S. employers, leaving employees with 

no retirement income as promised. As a result, a drive in Congress to "reform" the tax and labor 

laws governing tax qualified deferred compensation plans, or "retirement savings plans," led to 

the enactment of ERISA in 1974. 

During Congressional work on these "tax qualified deferred compensation plans," a 

major influence on tax policy of that era, Senator Russell B. Long, long time chair of the Senate 

Committee on Finance, became a champion of the economic philosophy ofDr. Kelso, and made 

sure the new ERISA law sanctioned ESOPs. 

2 
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His support for the ESOP model grew stronger with each passing year, and his leadership 

led to major enactment of tax laws promoting the creation and operation ofESOPs. The bulk of 

these laws passed in 1984, in legislation referred to as DEFRA, and the perfection of those laws 

were in the Tax Reform Act of 1986. 

In 1984 and 1986, Ways and Means members on the Conference Committee with 

members of the Senate Finance Committee, accepted nearly all provisions in the Senate bill 

promoting ESOPs. 

In 1997, it was the Ways and Means Committee, by unanimous vote, accepted an 

amendment to the 1997 tax bill permitting S corporations to sponsor ESOPs. Former 

Congresswoman Nancy Johnson authorized the amendment. 

Many of these laws of the 1980s, and the "Johnson" amendment remain in the Code. 

While casual observes mistakenly think only the Senate Finance Committee reviewed the 

impact ofESOPs on employees, their companies, and our economy, the Ways and Means 

Committee had four oversight hearings on ESOPs in the period of 1987-1990. And in 2014-

2015, the Committee's work on laying a foundation for comprehensive tax reform, led to former 

Chair Camp's tax reform proposal maintaining all current tax laws that encourage the creation 

and operation ofESOPs. 

To be noted, a major partner with Senator Long promoting ESOPs in the 80s through 

1988, was former President Ronald Reagan, who often spoke of his view that widespread 

ownership of productive assets was the core of maintaining equitable wealth ratios in a 

capitalistic society. 

In sum, the Ways and Means Committee has a long, and a recent history, of supporting 

more employee stock ownership via the ESOP model. 

ESOPs, Ways and Means, and the 1141° Congress 

It is important to note support for employee stock ownership by members of Ways and 

Means. 

While the national media and, men and women running to be their parties' nominees for 

President in 2016, love, and the word love is used on purpose, to refer to members of Congresswhich of course includes all members of Ways and Means, as "stupid", corrupt, lackeys of 

special interest groups, who do not "get along" for the good, the fact is ESOPs enjoys support 

from both Democrats and Republicans, liberal, moderate, and conservative members of Ways 

and Means. 

For example, on April29, 2015, eight members of Ways and Means, four Republicans 

and four Democrats, introduced H.R. 2096- Representatives Reichert, Kind, Tiberi, Neal, 

Paulsen, Blumenauer, Boustany, and Pascrell. (Summary ofH.R. 2096, Attachment I) Since 

then, eleven more members ofH.R. 2096 have joined their colleagues. Five other Ways and 

Means Committee members co-sponsored the same bill (H.R. 4837) in the ll31

h Congress. 

3 
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The question is WHY? Why has a bi-partisan group of women and men serving in the 

House renewed evidence of a mainstream view set forth by the Congress since 1975 that the 

expansion of employee stock ownership via the ESOP model would be good public policy? 

Just to include in this statement for the record some of the evidence why employees, their 

companies, and our economy all benefit from being owners through an ESOP, below are quick 

summaries of respected findings over the past two decades. 

1. Since the 2002 prestigious General Social Survey up to the recently released 2014 

GSS, evidences clearly that companies with employee stock ownership are much 

more likely to have layoff rates that are significantly less than conventionally owned 

companies-3% in 2002 for companies with employee ownership, 9.2% 

conventionally owned; 2006, 2.3% versus 8.5%; 2010, 2.6% versus 12.3%; and 2014, 

1.3% versus 9.5%. Most impressive are the 2010 numbers, reflecting layoffs during 

the Great Recession. (N ole that further data crunching by the National Center for 

Employee Ownership indicated that the fact these companies with employee stock 

ownership had fewer layoffs generated $14 billion dollars due to employees paying 

income, Social Security, and Medicare taxes, and not taking Unemployment 

Compensation or Food Stamps, seven times more than the general revenue estimates 

for the "tax expenditures" of special ESOP tax rules.) 

2. A study of 1100 ESOP companies in the late 90's, compared to counterparts in the 

same industry, by Rutgers Professors Dr. Blasi, and Kruse, evidenced the ESOP 

companies had better sales, more employment, and were by a rate of 16% greater than 

their competitors over an 11-year period to remain independent. 

3. Highly valued as a one source of history and data about employee stock ownership, 

and the ESOP model in particular, is the book "The Citizen's Share", by Dr. 's Blasi, 

Kruse of Rutgers, and Dr. Freeman of Harvard. The easy to read volume contains 

reference to nearly all of the research over the past 3 0 years with regard to the 

per.formance of ESOPs, both as a wealth creation, retirement savings, and as a jobs 

policy. 

Attachment 2 is a fuller summary of research and its data of the track record of ESOP 

companies, and their reward of average pay employees. 

In sum, Chair Brady and members of the Committee on Ways and Means, there is ample 

data, and real world experience to continue the push by the Committee to increase employee 

stock ownership. Bottom line, ESOPs are more productive, more sustainable, with jobs 

controlled by U.S. interests." 

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H.R. 2096 will: 

Attachment 1 

Summary of H.R. 2096 

"Promotion and Expansion of Private 

Employee Ownership Act of 2015" 

(Same as Last Congress H.R. 4837) 

1. Pennit owners of S stock to sell the stock to an ESOP and defer the capital gains tax on his/her gain if 

the proceeds are reinvested in the equities ofU.S. operating corporations as owners ofC cmporations 

stock have done under IRC 1042 since 1984; 

2. Pennit lenders to S cmporations w ith 50% or more ownership through an ESOP to exclude 50% of the 

interest from the loan, if used to acquire stock for the ESOP; 

3. Establish an office in the Department of Treasury to provide technical assistance to S cmporations with 

ESOPs; 

4. Provide that a small business, S or C, eligible for one of the many programs provided by the Small 

Business Administration to remain eligible for SBA programs if the company becomes owned 50% or 

more by and ESOP, and the workforce remains the same or nearly the same as before the establishment 

of the 50% ownership by employees through the ESOP. 

General Explanation 

1. As evidenced in [name of your company] employee stock ownership plans are benefiting [name of 

company], om employees, and [name of your city or town.] 

2. There is ample macro-data evidencing that the benefits our ESOP provides to [name of company] is also 

the case in the vast majority of privately-held ESOP companies in America. 

3. H.R.2096 is a modest proposal that will not cost any significant tax revenues, and will build even larger 

account balances for retired employee owners, who will pay more taxes on their ESOP distributions than 

the targeted tax expenditure for ESOPs in H.R. 2096. For example, more ESOPs will be created, ce11ain 

existing ESOP small businesses will qualify for SBA loans, and all S ESOP private companies can 

access Treasmy experts on the complex rules governing S ESOPs. 

4. In shm1 H.R. 2096 will address the growing concerns of individual access to ownership, equitable 

distribution of our nation's capitalism, in companies that are more productive, more profitable, and more 

sustainable providing locally controlled jobs. 
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Attachment 2 

e Employee Omtet· Impact Col'pot·ate Pet·fol'rnance Positively 

Ovel'whelrning Evidence ESOP Companies Mol'e Pl'oductive, Mol'e 

Pt·ofitablc, and MOI'C Sustainable, Pt·oviding Locally Controlled J obs .. During the Gre-at Recession, employee stock owned companies laid off employees at a rate of less tl.mn 3%, 

whereas conventionally owned companies laid offal a rale greater than I 2%. (Dala sow·cc: 2010 General Social 

Survey.) 

Because employees of ESOP companies were four limes more likely to retain jobs during the Gr~t Recession., 

Federal govcrwueul recognized savings o f over $ 14 billion in 20 I 0 compared 10 lax payments foregone by laid 

off employees of couvcutioually owned companies: in other words for every Sl in tax expeuditlu·cs to promote 

employee stock ownership, the Federal govemmenr collected $13 in taxes. (Data Source: 2010 General Social 

Survey analyzed by National Center for Employee Ownership.) 

A sm·vey of I .400 ESOP companies in 20 I 0 evidenced lhe average age of lhe companies• ESOPs were I 5 years, 

and the average account balances for employees were nearly $200,000, much higher Lhau da1a reported for 

average 401(k) account balances. (The ESOP Company Smvcy, 2010, of The ESOP Associatiou's Corporate 

members.) 

Accordiug 10 20 I 2 General Social Survey. I 3% of employees of emp loyee stock-owned companies were thinking 

of seeking cwployment clscwbcrc. whereas 24% of the employees of couvciUiouaUy-owncd companies were 

considering leaving their ctuTent job. 

ln the suuuner of2014, the Employee Ownership foundation released results from the 23rd Annual Economic 

Performance Sur,•cy (EPS) of ESOP companies. Since the Employee Ownership Fotmdation's awmal ccououlic 

survey began 23 ye.1rs ago. a very high percentage, 93% of survey respondents. have consistenlly agreed that 

cre-ating emp1oyee ownership tluougb an ESOP was "a good business decision that has helped the company." 1.1 

sbot d he noted 1ha11his figure bas been over 85% for the Jasl 14 years the stuvey has been conducted. In 

addilio ~ 76% of respondents indicated the ESOP posilivcly affected the overall productivity of the employee 

owners. ln tenus of revenue and profitability --- 70% of respondents noted that revenue increased aud 64% of 

respondents reported that profitabiJity increased. lo renns of stock value. the majority of respondents. 800/o, stated 

the company's stock value increased as detennined by outside independent valuations; 18% of the respondents 

reported a decline in share value; 2% reponed no change. TIIC survey also asked respondents wb.11 year the ESOP 

was established. Among those responding 10 Ibis survey, the average age oflhc ESOP was 16 years wilh the 

average year for establishment being 1998. 

More than half oft he ESOP companies have rwo retirement savings plan (primarily a 401(k)). whereas more tb.an 

half of all cOu)patlics have !!Q retirement income savings plan. (Analysis of fonns 5500. and Bureau of Labor 

S1a1islics by I be National Center for Employee Ownership, funded by I he Employee Ownership Foundation.) 

The average ESOP company (less than 200 employees) has sales $9 million more per year than its non-employee 

owned c.omparable competition. (Jtme 2008 Dissenation. Or. Brent Kramer, CUNY.) 

A Sludy of I I 00 ESOP companies over e leven years oowparcd 10 II 00 comparable conven1ioual owned 

companies evidenced the 1100 E.SOP companies had better sales. more employmem. and were more likely over 

the period 10 remain independent businesses by 16%. (Mosl detailed sh•dy of ESOP companies by Or. Joseph 

Blasi. and Dr. Douglas Kruse, 1eumed professors, Rutgers University School of labor and Manageweul, 1999.) 
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RATE COALITION 

P .O. BOX33871 

Washington , DC 20033 

Reforming America's Taxes Equitably (RATE) Coalition 

Statement for th e Record 

Ways & Means Com mittee Hearing on 

Reaching America's Potential: Delivering Growth and 

Opportunity for All Americans 

February 2, 20 16 

If Members of Congress wish to take true and meaningful action on policies to promote job 

creation and economic growth, they should act on bipartisan momentum for comprehensive tax 

reform. That means setting the corporate rate at 25 percent or less and closing the loopholes. 

American job creators face an uncompetitive tax code. That's why America desperately needs 

an overhaul of that code. Without reform to our uncompetitive code, we can expect continued 

corporate inversions and the loss of jobs and investment to other countries with fairer tax codes. 

Our foreign competitors are continuing to lower their rates leaving the U.S. at an increasing 

competitive disadvantage. And so the notorious phenomenon of "corporate tax inversions," for 

example, continues. 

The answer to the question posed by the committee in today's hearing is clear if we look back to 

the Tax Reform Act of 1986. By lowering the rates and broadening the base, that piece of 

bipartisan legislation brought about two full decades of steady economic growth. 

It really happened, not only in the 80s, but also in the 60s, and with the enthusiastic support of 

both parties. Indeed, we can look back at that era, from roughly 1962 to 1986, and see a time 

when both parties were on board. If we are willing to learn the lessons of that era, including the 

way that each party chose to view tax-rate reduction s, then there's hope, even in this era of 

rancorous partisanship for achieving something great for the American people. 

Yet if we really do want to return to those good old days, we need first to remember the ideas 

that brought the two parties into agreement. It wasn't that they saw eye-to-eye-not at all. 

Then as now, they had divergent visions, and yet back then, they were nevertheless able to 

align their differences into a single legislative package. That was the art, one might say, of that 

era. 

So what were these two visions? In a nutshell, Republicans saw tax-rate reductions as a boon 

to the private economy. That is, workers, savers, and investors would see more money; they 

would enjoy, in the parlance, a higher after-tax return. 

By contrast, Democrats saw tax-rate reductions as a boon to the public economy. To be sure, 

Democrats agreed that tax cuts could stimulate the private economy, but that wasn't their main 

goal. Their main goal was for the government to have more money to spend. 

The champion of this sort of thinking was John F. Kennedy. In 1960, Kennedy had campaigned 

for the White House on a pledge to "Get the country moving again." And by that he meant that 

Uncle Sam should do more-more to fight communism abroad, more to fight poverty at home. 
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In other words, JFK's vision was primarily a pubic vision: He wanted the government to have 

more money to do more things. So on December 14, 1962, when he said , in a speech to the 

New York Economic Club, "It is a paradoxical truth that tax rates are too high today and tax 

revenues are too low," he meant exactly what he said-rates too high, revenues too low. Yet 

Kennedy was shrewd enough to see that lobbying for a simple tax increase would be counterproductive, and probably not politically feasible. He took a more complex route to his goals; he 

embraced the "paradox," as he called it, that lowering tax rates would yield higher tax revenue. 

Yes, in Kennedy's mind, the government needed more money. As he spoke at the Waldorf 

Hotel in Manhattan in 1962, the 35th President wasn't worried that savvy New York City 

investors would fail to see the advantage to them in lower tax rates. Instead, his message was 

bigger and broader, aimed at the larger national audience that might not have been as alert to 

the variables of marginal taxation and after-tax return. 

Indeed, to get a better sense of Kennedy's argument in that era, we might consider what is 

probably his best-known quote about the economy: "A rising tide lifts all boats." We can note 

that those words were said in a speech delivered in late 1963, as he lobbied once more for the 

tax-rate reduction. (Those tax cuts would not, in fact, occur in Kennedy's lifetime; they were not 

enacted until 1964-then, as now, Congress moved slowly.) Yet because JFK's words about a 

"rising tide" were uttered during his tax-cut campaign, it is often assumed that this rising tide had 

something to do with tax cuts. And in a way, they did-but only in a paradoxical way, only 

indirectly. As we shall see, Kennedy was referring, specifically, not to the positive impact of tax 

cuts, but to the positive impact of spending increases-yet gained, to be sure, by those very 

same cuts. 

On October 3, 1963, JFK traveled to Heber Springs, Arkansas, to dedicate the Greers Ferry 

Dam. In his remarks that day, he was at pains to delineate the public benefits of public-works 

projects: "A rising tide lifts all the boats, and as Arkansas becomes more prosperous so does 

the United States." 

That is, Americans didn't have to calculate their after-tax return, nor did they need to trust, in 

any way, the "magic of the marketplace" to see the benefit of his policies. Instead, thanks to 

greater prosperity and greater revenues, all they had to do was look out their window and enjoy 

the many benefits of their new dam. 

And that was Kennedy's bold idea. He himself was fully aware of the stimulatory effect of tax 

cuts, but what he wanted to sell , especially to his fellow Democrats, was the benefit of that 

stimulus-higher tax revenues that could be spent on public works, such as the Greers Ferry 

dam. 

One Republican who agreed with Kennedy was another JFK: Jack F. Kemp. Kemp, born in 

1935, was very much a member of Kennedy's New Frontier generation. And so, in the 70s and 

80s, it was easy for Kemp, a "supply side" Republican, to say that the purpose of tax-rate 

reductions was to give more to workers, savers, and investors. That was the Republican 

message. And yet at the same time, Kemp could say, echoing JFK, that the goal was also to 

generate more tax revenue for social programs. That was a message that spoke to Democrats 

and made Kemp such an important "crossover figure" and bipartisan bridge-builder. And so 

such staunch Republicans as Ronald Reagan, and such staunch Democrats as Lloyd Bentsen, 

both became persuaded by Kemp's way of thinking, which, as we have seen, was tried-andtrue, even as it was fresh. 
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Many Republicans came to regard Kemp as a "big government" conservative, and in the minds 

of some, that jibe was justified. However, he was the intellectual champion of the two great taxrate reductions of the 80s, in 1981 and 1986. 

Thus we can see, at the risk of overusing the word, a further "paradox": Tax-rate reductions, as 

Kennedy and Kemp foresaw in their different eras, would so stimulate the economy that 

revenues would increase as well. And that was good news for Democrats, even those who 

mistrusted the private sector. Meanwhile, Republicans, who mistrusted the public sector-and 

thus wouldn't want the government to have more money-would have to make a cal culation: 

Did their affection for private economic growth exceed their hostility toward an enlarged public 

sector? 

During the Reagan years, every1hing came together-for both parties. Federal revenues 

soared, from $617 billion in fiscal1982 to $991 billion in fi scal1989, and yes, this revenue-surge 

happened even as the top personal tax rate was cut from 70 percent to 28 percent and the 

corporate tax rate from 46 percent to 34 percent. So was this a victory, or a defeat, for 

Republicans? To Reagan and Kemp, it was undeniably a victory, because real GDP rose by 

more than a third in that era. But many Democrats had voted for the '81 and '86 tax reforms as 

well, and for them , too, it was a victory: After all, federal spending rose by more than half during 

the Reagan years. 

As we have seen, in that golden quarter-century, 1962 to 1986, both parties preferred to go with 

their hopes, not their fears. They voted , together, for growth. 

We hope that this Congress agrees that we need that same spirit of bipartisan problem-solving 

today. 

RATE Coa litio n Me mb e r Comp anies 

Altria , AT&T, Assoc ia tio n o f Am e rican Ra ilroa d s , Bab coc k & Wilcox, Boe in g , BrownFo rma n , CVS Hea lth , Cap ita l On e , Cox Ente rp rises, Edison Elec tric Ins titute , Fe dEx, Fo rd , 

Ge n e r a l Dyn amics , Inte l, Kimb e rly-Cla rk, KRAFT Foo d s , Lib e rty Me d ia , Lockh eed Ma rtin , 

Macy's, McGraw Hill Fin an c ia l, Na tio n a l Re ta il Fe d e ra tio n , Nike , No rthrup Grumman , 

Rayth eon , Reyn o lds Ame rican , South e rn , T-Mo bile , 

Tim e Warn e r Cable , UP S , Ve rizo n , Viacom , Wa lma rt, Wa lt Dis n ey