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74–433 2012

S. HRG. 112–484 

HOW THE TAXATION OF LABOR AND TRANSFER 

PAYMENTS AFFECT GROWTH AND EMPLOYMENT 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 16, 2012 

Printed for the use of the Joint Economic Committee 

( 
(II) 

JOINT ECONOMIC COMMITTEE 

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

SENATE 

ROBERT P. CASEY, JR., Pennsylvania, 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

JIM DEMINT, South Carolina 

DANIEL COATS, Indiana 

MIKE LEE, Utah 

PAT TOOMEY, Pennsylvania 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

MICK MULVANEY, South Carolina 

MAURICE D. HINCHEY, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

WILLIAM E. HANSEN, Executive Director 

ROBERT P. O’QUINN, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas .............. 1 

WITNESSES

Dr. Richard Rogerson, Professor of Economics and Public Affairs, Princeton 

University, Princeton, NJ .................................................................................... 3 

Dr. Andrew G. Biggs, Resident Scholar, American Enterprise Institute, Washington, DC ............................................................................................................. 5 

Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Sloan 

School of Management, Massachusetts Institute of Technology, Cambridge, 

MA ......................................................................................................................... 6 

SUBMISSIONS FOR THE RECORD

Prepared statement of Vice Chairman Kevin Brady ............................................ 30 

Chart titled ‘‘A Tale of Two Recoveries’’ submitted by Representative Brady ... 31 

Prepared statement of Dr. Richard Rogerson ....................................................... 32 

Prepared statement of Dr. Andrew G. Biggs ......................................................... 44 

Prepared statement of Dr. Simon Johnson ............................................................ 47 

(1) 

HOW THE TAXATION OF LABOR AND TRANSFER PAYMENTS AFFECT GROWTH AND EMPLOYMENT 

WEDNESDAY, MAY 16, 2012 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 2:15 p.m. in Room G– 

50 of the Dirksen Senate Office Building, the Honorable Kevin 

Brady, Vice Chairman, presiding. 

Senators present: Bingaman. 

Representatives present: Brady, Burgess, Duffy, and 

Mulvaney. 

Staff present: Conor Carroll, Gail Cohen, Colleen Healy, Patrick 

Miller, Matt Salomon, Robert O’Quinn, and Steve Robinson. 

OPENING STATEMENT OF HON. KEVIN BRADY, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS 

Vice Chairman Brady. Good morning, everyone. 

I want to welcome you to the hearing on ‘‘How the Taxation of 

Labor and Transfer Payments Affect Growth and Employment.’’ 

Today the Joint Economic Committee is holding the second of 

two hearings on how taxes affect America’s economy. This hearing 

is on the taxation of labor. The first hearing was focused on the 

taxation of capital. 

My goal, as Vice Chairman of the Joint Economic Committee, is 

to ensure that America has the strongest economy in the world 

throughout the 21st Century. To do that, we have to get our monetary policy right, our fiscal policy right, our regulatory policies 

right, and open new markets to American exports. 

A sustainable fiscal policy requires more than just closing the 

trillion dollar gap between federal spending and federal revenues. 

A sustainable fiscal policy requires economic growth. 

A growing economy improves our fiscal outlook by increasing federal revenues and reducing federal spending relative to the size of 

our economy. 

Sadly, however, economic growth and job creation is lagging 

under President Obama. To understand how poorly our economy is 

performing compared with its potential, let’s look at this chart and 

compare the big government-oriented, I think, Obama recovery to 

the free-market-oriented Reagan recovery. 

From its low point in February of 2010 following the recent recession, the Obama recovery produced private sector job growth of 
2 

4 percent. Over the comparable time frame, the Reagan recovery 

far eclipsed the Obama recovery with 10.1 percent private sector 

job growth. 

If President Obama had had the same growth rate of private sector jobs as President Reagan enjoyed, we would have over 6.5 million more jobs today. That is more than one job for every two workers currently counted as unemployed. 

From its peak in October 2009, the unemployment rate has declined by 1.9 percentage points under the President. Over the comparable time frame, the unemployment rate dropped by 3.4 percentage points under President Reagan. 

Under President Obama, the average GDP growth—real GDP 

growth rate has been 2.4 percent over the 11 quarters following the 

recession. Over the comparable time frame, President Reagan delivered an average real GDP growth rate of almost three times that 

amount, 6.1 percent. 

More than anything, hardworking American taxpayers need cohesive monetary, fiscal, and regulatory policies that encourage 

business investment—business investment in new buildings, equipment, and software. Joint Economic Committee Republicans have 

shown that such private sector business investment is the key to 

robust economic growth and private sector job creation. 

Leading economists believe that taxes affect the incentive to 

work, the incentives to save, and invest. Thus, federal tax policy 

not only determines how much the Federal Government collects, 

but also how much the U.S. economy grows and how many jobs are 

created. 

Other economists seem to believe taxes don’t really matter. In 

their view, one tax increase to reduce the federal budget deficit is 

just as good as another. 

The purpose of this hearing is to examine the empirical evidence 

offered by both sides of this thoughtful debate. 

In his written testimony, Dr. Rogerson presents evidence that 

taxes on labor substantially reduce employment and economic output. When these taxes are used to fund transfer payments and social services, the adverse effects on jobs and economic growth are 

even greater. 

Dr. Biggs presents evidence that these adverse effects depend in 

large part on the specific tax and benefit rules of each entitlement 

program. Older workers are especially sensitive to the marginal net 

tax rate. That is the additional after-tax income received in exchange for working and paying taxes an additional year. 

For his part, Dr. Johnson presents evidence that our taxes are 

lower than they have been at times in the past; and they are lower 

than many other countries’ taxes today. 

The question we face today is whether tax policy really matters. 

Can Congress allow the tax reductions of 2001 and 2003 to expire 

without any adverse effects on jobs and economic growth? 

Would this be, as many leading economists and my Republican 

colleagues have suggested, a ‘‘taxmageddon’’? Or, as President 

Obama and many of my Democrat colleagues contend, can Congress increase other federal taxes on the businesses and the 

‘‘wealthy’’ with economic impunity? 
3 

Should Congress instead focus on fundamental tax reform and 

carefully consider which tax policies will provide the greatest boost 

to long-term growth and job creation in the private sector? 

Hopefully, today’s hearing will help us answer those significant 

questions. I look forward to the testimony of our distinguished witnesses. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 30.] 

[Chart titled ‘‘A Tale of Two Recoveries’’ submitted by Representative Brady appears in the Submissions for the Record on page 31.] 

Senator, would you like to make an opening statement? 

Senator Bingaman. I did not plan to make an opening statement. I appreciate the witnesses being here. I look forward to hearing their testimony, and then I will have some questions. Thank 

you. 

Vice Chairman Brady. Thank you. And, Senator, thank you for 

being here today, as well as the witnesses joining us at the table. 

I would like you to just be aware that we are reserving five minutes for the written testimony, or for the verbal testimony. We 

want to make sure your full testimony is written into and subjected 

into the record. 

With that, Dr. Rogerson, you are recognized. 

STATEMENT OF DR. RICHARD ROGERSON, PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS, PRINCETON UNIVERSITY, 

PRINCETON, NJ 

Dr. Rogerson. Thank you. 

So I would just like to make a few verbal comments summarizing 

what was in my written testimony, consistent with just the comments we heard. 

My written testimony is concerned with the basic question of 

long-run size of government, the activities the government is involved in, how they are financed, and what the consequences of 

that are for the overall performance of the U.S. economy. 

Most importantly, the issue is the size—government needs to be 

financed. As a practical matter, most of the financing of government comes from taxation on labor. And a key question is: To what 

extent do taxes on labor provide a disincentive for individuals to 

work? 

We all know that in terms of our material wellbeing in the 

United States, that is critically related to the level of economic activity. Labor input is a key input into producing output in the U.S. 

economy. 

If we have policies which discourage people from working, that 

will reduced the amount of output produced and lead to lower material standards of living. So that is the issue. 

I want to start with—I am going to basically talk about some empirical evidence—but before i do that, I do want to make one small 

comment about the kind of underpinnings in economic theory. And 

I think this is critical, for the following reason: 

There is a tendency I think for people to talk in generalities 

about taxation on labor, as if you tell me what the tax on labor is 

and I can tell you what the effects are, and there may be controversies about that. 
4 

What I want to emphasize is that economic theory tells us very 

clearly that, if you want to think about the effect of what taxes on 

labor income do to economic activity, you have to also talk about 

what the revenues from that labor taxation are being used for. And 

in particular, I will contrast two different types—two different scenarios. 

One scenario is when the revenues are being used either as direct cash transfers—for example, things like unemployment insurance, disability, social security; or, alternatively, I’ll say something 

like defense, which is not something that individuals would necessarily go out and buy on their own if the government were not 

providing it. 

The theory tells us that the large effects we find are when the 

labor revenues are being used to fund transfer payments, either 

cash transfers to individuals, or provision of services that people 

would have purchased on their own. 

So when we look for evidence of labor taxes on economic activity, 

we have to do it with an eye towards how revenues are being used. 

Now having said that, where should we look for evidence? Economists to a large extent make their living by trying to do very detailed studies based on extensive data sets. What I want to simply 

point out here is, I think the simplest, most transparent place to 

look for data is what economists call ‘‘natural experiments.’’ We 

would like to find a situation in some country where there was a 

sizeable increase in the taxes on labor used to fund transfer payments, holding everything else constant. That would give us kind 

of clean evidence of what happens in response to those types of effects. 

In reality, it is relatively difficult to find those types of clean experiments. One of the issues which I think has clouded the inference that people make from making at the data is some people look 

at the U.S. historical record, the last 50 years. They claim that 

there are different times when there have been changes in taxes 

on labor, and they try to infer from what they saw happening in 

the U.S. data what the effect of those taxes are. 

But in fact, in the U.S. the changes in those taxes have been relatively small. There are all kinds of other things that have also 

gone on in the U.S. economy—in particular, demographic change, 

the entry of women into the labor force for I think reasons unrelated to taxes which cloud conclusions. So in my testimony, what 

I argue is the best source of evidence for people in the U.S. is to 

actually look outside the U.S. where other countries have had 

much larger changes in labor taxation to fund transfer programs. 

In my testimony I talk about looking at a study of 15 OECD 

countries between 1960 and 2000. And just as a punch line that 

comes out of that, I find that a 10 percentage point increase in 

taxes on labor used to fund transfer payments is consistent with 

a decrease in labor supply of about 12.1 percent. 

This, in terms of a simple experiment, if there was a small increase in the size of the U.S. Government funded by labor taxes, 

the magnitude of the jobs lost is similar to the jobs lost during the 

most recent Recession. 

I will stop there. 
5 

[The prepared statement of Dr. Richard Rogerson appears in the 

Submissions for the Record on page 32.] 

Vice Chairman Brady. Thank you, Dr. Rogerson. Dr. Biggs. 

STATEMENT OF DR. ANDREW G. BIGGS, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Dr. Biggs. Vice Chairman Brady, Senator Bingaman, Members 

of the Committee: 

Thank you for the opportunity to testify today with regard to the 

effects of taxes and transfer payments on labor supply and employment. 

The 12.4 percent Social Security Payroll Tax on earned income 

is the largest tax paid by most Americans. Social Security benefits, 

which are paid in exchange for payroll taxes, are the largest source 

of income for most retirees. The potential for Social Security taxes 

and benefits to influence labor supply decisions is obvious. 

The theory of Optimal Taxation states that taxes should be highest in circumstances in which individuals are least sensitive to the 

tax, and lowest when individuals are most sensitive to tax rates. 

Following this rule will tend to minimize the harmful effects of 

taxation on work and the economy. Social Security’s treatment of 

older workers is precisely the opposite of what economic theory recommends. 

Social Security pays the lowest reward to work to older workers 

who are near to retirement. These individuals, research indicates, 

are almost the most sensitive to tax rates because they have the 

easiest option to leave the workforce and retire. 

The conjunction of high effective tax rates on particularly taxsensitive individuals leads to suboptimal outcomes for individuals 

and for the economy as a whole. 

Social Security’s benefit formula is roughly actuarially fair for individuals who choose to delay claiming benefits. However, Social 

Security is not actuarially fair with regard to the extra taxes the 

individuals pay when they delay retirement and remain in the 

workforce. 

Most near-retirees who extend their work lives receive little or 

no additional benefits for any extra taxes they pay. There are three 

reasons for this. 

First, Social Security benefits are based upon an individual’s 

highest 35 years of earnings. So an additional year of work is unlikely to boost benefits. 

Second, most female retirees receive a spousal benefit based 

upon their husband’s earnings. So any additional taxes they pay 

rarely lead to higher benefits. 

Third, once individuals reach the full retirement age, they are ineligible for Social Security Disability Benefits but must, nevertheless, continue to pay the 1.8 percent Disability Payroll Tax. 

In a 2009 research paper with David Weaver and Gail Reznick 

of the Social Security Administration, I found that for each dollar 

of additional taxes a near-retiree pays into Social Security, he or 

she receives back only around 2.5 cents in extra lifetime benefits. 

Simply put, Social Security provides almost no incentive to keep 

working. This would not be of major policy importance if near-retirees were not so sensitive to tax rates. 
6 

A middle-aged worker with a family to support may continue 

working even in the presence of high implicit tax rates. But once 

he or she reaches age 62, the option to retire becomes more attractive. 

Moreover, most retirees receive pension and Social Security benefits which can increase the marginal income tax rates they pay on 

earned income. Economic research finds that older Americans are 

significantly more sensitive to after-tax rewards to work than 

younger workers. 

I have proposed reducing or eliminating the Social Security Payroll Tax for older workers as an incentive to remain in the workforce. Doing so would lower Social Security tax revenues, but an increased labor supply from older workers would raise other revenues 

such as for federal income taxes, Medicare Payroll taxes, or state 

income taxes. 

Eliminating the Payroll Tax for workers over age 62 would reduce annual Social Security revenues by roughly 2.2 percent, or 

about $16.2 billion in terms of today’s tax collections. 

Using parameters from research by Eric French of the Federal 

Reserve, eliminating the Payroll Tax at age 62 would increase overall labor supply by around 1.4 percent. A larger workforce would 

increase federal income and Medicare taxes by around $14.7 billion, with an additional increase of state income tax revenues of 

around $3.6 billion. 

In other words, eliminating the Payroll Tax rate on older workers 

would effectively pay for itself through additional tax revenues. 

While eliminating the Payroll Tax for older workers would come at 

little cost to the budget, the gains to individuals and the economy 

could be substantial. 

Simply working one additional year would boost average private 

pension income by almost 5 percent. This would reduce poverty in 

old age and contribute to overall retirement income security. 

Social Security’s poor returns to older workers discourage delayed retirement which would strengthen the economy and it’s the 

single best option available to many individuals who reach retirement age with insufficient savings. 

Policy options such as lowering the Payroll Tax rate on older 

workers could increase labor supply, boost the economy, and raise 

retirement incomes. 

Thank you, very much. 

[The prepared statement of Dr. Andrew G. Biggs appears in the 

Submissions for the Record on page 44.] 

Vice Chairman Brady. Thank you, Dr. Biggs. Dr. Johnson? 

STATEMENT OF DR. SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, 

CAMBRIDGE, MA 

Dr. Johnson. Thank you very much. 

I would like to make three points: 

First of all, considerable damage has been doing to the balance 

sheet of the United States over the past decade and a half under 

a most unfortunate combination of circumstances. As a result, if we 
7 

are to put ourselves onto a more sustainable and less fragile fiscal 

path, we need to restore revenue. 

By the end of the 1990s, there was a relatively robust revenue 

system in the United States. Since that time, we had large tax cuts 

in the beginning of the 2000s, two foreign wars, Medicare Part D, 

and most unfortunately the financial crisis. 

The Congressional Budget Office estimates that the net impact 

of the financial crisis on our debt relative to GDP over the cycle 

is to increase it by about 50 percent of GDP. Call that $7.5 trillion 

in today’s money. 

This is the situation that we find ourselves in today. And I think 

that the parallel with the situation in the mid- to late 1980s under 

Ronald Reagan is apt. President Reagan recognized under those 

circumstances with pressure from—perceived pressure from the 

bond market, and concern about the predominance of the United 

States and the role of the U.S. dollar, he and his Administration 

agreed with Congress on the need for strengthening revenue. And 

I think that is the moment which we find ourselves in today. 

Now with regard to where you should get the revenue and the 

effects of that, I agree with Professor Rogerson that we should look 

for natural or quasi-natural experiments. And I accept his caveats 

about how difficult it is to find this in any historical experience, including across the OECD. 

I would point out—and I have written at length, both in my testimony and in a recently published book on the effects of the Bushera tax cuts—that the effects of those tax cuts, the reduction in 

higher marginal income tax rates, reduction in estate tax, and a 

number of other tax reductions, did not have major stimulative effects in terms of increasing labor supply, boosting productivity, or 

otherwise moving trend growth in the United States. 

It is not perfect evidence, to be sure. But if we are talking about 

realistic ways in which revenue might be raised in the near term, 

I think not extending the Bush-era tax cuts is absolutely going to 

be on your agenda. And I would encourage you to look at that seriously. 

That revenue is available. Going back to the revenue system of 

the late 1990s, again not a perfect system, no tax system is perfect, 

but that is an absolutely feasible and attainable political choice. 

The evidence—and we reviewed this evidence that was also compiled during the George W. Bush Administration—evidence that 

these tax cuts would pay for themselves, or stimulated, moved 

trend growth in the ways that, Mr. Brady, you outlined, we absolutely have to do in this country, that evidence is very limited. 

Now the third point I would make is with regard to the international context. I am the former—among other things—the former 

Chief Economist of the International Monetary Fund, and I would 

like to impress upon you the fragility of the European situation 

today. 

I think that it will be very dangerous for the world, including for 

our export markets, including for financial markets with which we 

are deeply interconnected, if we have any kind of fiscal crisis, or 

perceived fiscal crisis, in the United States. 

Refusing to raise revenue, or signalling that revenue is absolutely not on the table under any circumstances, can be read in a 
8 

very negative manner by financial markets. These markets can 

turn against us very quickly. 

I would remind you that the impact of the controversy and debate over the debt ceiling last year, while it did not increase yields 

in the United States for government bonds, it did absolutely put 

pressure on weaker countries around the world, including in Europe. 

The last thing the Europeans need right now is further disruption to financial markets, and a more difficult environment for 

their government bonds. 

If the United States were to take steps in a reasonable compromise—and there are a range of compromises already on the 

table, and we propose other versions in our book—with some combination of raising revenue, including through high tax rates, and 

controlling future spending, that would send an enormous signal to 

world financial markets. The U.S. would be propelled back to its, 

until recently, unquestioned predominant role in the world economy. We would again become a bastion of financial stability. 

That would be a tremendous contribution towards European financial and fiscal stability. And I urge you to take seriously—consider seriously the policy that would lead us towards a more balanced approach to restoring revenue and underpinning fiscal stability and bringing the debt to GDP under control in the United 

States. 

Thank you very much. 

[The prepared statement of Dr. Simon Johnson appears in the 

Submissions for the Record on page 47.] 

Vice Chairman Brady. Thank you, Dr. Johnson. 

Can I ask my fellow members for a point of privilege here? I was 

remiss in not keeping with me the bios of our three distinguished 

witnesses today. I would like to briefly tell you about the people we 

just heard from because I think it is important. 

Dr. Richard Rogerson is a Professor of Economics and Public Affairs at Princeton University. He also serves as co-editor of The 

American Economic Journal Macro Economics and is Associate Editor of Review of Economic Dynamics. He previously served as coeditor of the American Economic Review and Associate Editor for 

the Journal of Monetary Economics. He is a Visiting Scholar at the 

American Enterprise Institute; a Research Associate at the National Bureau of Economic Research; and a Fellow of the Econometric Society. 

Dr. Rogerson, thanks for traveling to be with us today. 

Dr. Biggs is a Resident Scholar at the American Enterprise Institute here in Washington. His work at AEI focuses on Social Security reform, as is clear from his testimony; state and local government pensions, and comparisons of public and private sector compensation. Prior to joining AEI he was a Principal Deputy Commissioner of the Social Security Administration. In 2005 he worked on 

Social Security reform at the National Economic Council. In 2001 

he was on the staff of the President’s Commission to Strengthen 

Social Security. 

Dr. Biggs, thank you. 

Dr. Johnson, I would like to welcome as well. He is the Ronald 

A. Kurtz Professor of Entrepreneurship, Professor of Global Eco-
9 

nomics, and management of MIT’s Sloan School of Management. 

He is also a Senior Fellow at the Peterson Institute for International Economics, a member of the Congressional Budget Office’s 

Panel of Economic Advisers; and a member of the FDIC’s Systemic 

Resolution Advisory Committee, among other honors. 

Dr. Johnson, thank you for being here. 

Let me get to the heart of the matter. 

[Pause.] 

Votes have been called. We will be brief. I thought all three testimonies were very interesting. 

Dr. Biggs, if more seniors read your analysis of the cost/benefit 

analysis of working late in life and Congress does not take steps 

to reform, I think we have got a bigger challenge on our hands with 

Social Security than we do today. 

Dr. Rogerson, your point goes to the heart of does taxation on 

labor matter. Your point is that over the last 40 years, that labor 

taxes in America—or frankly, labor taxes among our OECD competitors, have risen at three times the rate of the United States. 

As a consequence, worker hours worked among those same competing countries, while ours have increased, on average our OECD 

competitors’ hours have decreased. And it has a direct economic 

consequence as a result. 

You make the point that if the tax rate on labor is increased by 

10 percentage points, hours of work will decrease by 12.1 percent. 

Another way to look at tax rates is to calculate the after-tax return. My question is: If the tax rate is 25 percent, and the aftertax return is 75 percent, I asked my staff to recalculate your data 

on that basis. They concluded that a 10 percent change in the 

after-tax return to labor would result in 12.1 percent change in 

hours worked. Would that be consistent with your results? 

Dr. Rogerson. Yes, definitely. Those are two different ways to 

summarize the patterns that are in the data. So those two estimates are in fact consistent with each other. 

Vice Chairman Brady. And the net result is if you raise taxes 

on labor you get less of it and fewer jobs as a consequence? 

Dr. Rogerson. Yes. With the caveat that the—it depends what 

the revenues are being used for—— 

Vice Chairman Brady. Sure. 

Dr. Rogerson [continuing]. And across countries the revenues 

are being used either for transfer payments, or provision of services 

in kind. So that is implicit in those estimates. 

Vice Chairman Brady. Sure. Right. Thank you. I wanted to be 

brief because of the vote. 

Senator Bingaman. 

Senator Bingaman. Since there is a vote on the House side, 

maybe you would want some of the House Members to go ahead 

with their questions, because we do not have a vote and I can stay 

when you folks have to go vote. 

Vice Chairman Brady. Great. Thank you, Senator. 

Dr. Burgess. 

Representative Burgess. Yes, we have noticed they do not vote 

often in the Senate. 

[Laughter.] 

Sorry. I couldn’t resist. 
10 

Let me just ask a question because it is the point of some discussion. The Speaker gave a speech yesterday at the Peterson Foundation and talked about the fact that we all knew December of this 

year was likely to be a pretty dreadful month, and it is his opinion 

that we ought to move things out of the so-called lame duck session 

and tackle those problems during the time that we have left, between now and the election. And I agree with him. 

I may not agree with everything that he outlined, and I rather 

suspect our panelists do not agree with everything that he outlined, but fundamentally do you think that is a more coherent approach to the problems that face this country? What with the expiration of existing tax policy, the Bush-Obama tax cuts, the possibility of facing yet another debt-limit crisis toward the end of the 

year, should we move this forward and get it done during the summer, or during the early fall? And I would appreciate an answer 

from each of you. 

Yes, Dr. Rogerson, we will start with you and then move down. 

Dr. Rogerson. Okay. I mean, my view on that issue is I believe 

uncertainty is bad for the economy. And so when there are important decisions to be made, rather than let them sit and people be 

worried about what may happen, I think it is important to take action. So from that perspective, taking action sooner so that individuals and businesses can understand what they’re going to be working with moving forward, I think that makes good sense. 

Representative Burgess. Right. It is not like these things are 

not going to happen. 

Dr. Biggs. 

Dr. Biggs. I agree with Professor Rogerson regarding uncertainty. I think I would just add that I am not an expert on the political process, but it strikes me that the longer people from both 

parties have time to consider the sorts of choices and the sorts of 

compromises they might have to make, the more likely it is an 

agreement can be come upon. 

So beginning today, and talking as much as you can today, I 

think is more likely to produce a good outcome than pushing it all 

to December and then trying to rush it through at the end. 

Representative Burgess. Well that is typically what we have 

done. 

Dr. Johnson. 

Dr. Johnson. I think it depends on what sort of deal you think 

you could come up with in the interim, Dr. Burgess. If revenue is 

on the table. If you have a balanced approach to bringing the debt 

under control, this would amazingly shock and impress world financial markets. And you would substantially remove the risk of 

a fiscal crisis in this country for the foreseeable future. 

But if revenue is completely off the table, if this kind of debate 

would just reaffirm that, that one part of the political spectrum 

will not compromise or change its view with regard to tax rates 

and bolstering revenue, then I fear that the financial markets may 

take that adversely. So you would resolve the uncertainty, to be 

sure, but resolve it in a negative direction with regard to mediumterm fiscal sustainability. 
11 

Representative Burgess. Let me just ask you a question, Dr. 

Johnson. In your testimony you said that the expiration of existing 

tax policy would be desirable. 

Now when the President talks about it, he talks about preserving existing tax policy for people who earn under $250,000 a year for 

a couple. Is it your view that the entire existing tax policy from 

2001 d 2003 needs to go away? 

Dr. Johnson. Yes. What exactly our view is is that the so-called 

Bush-era tax cuts—perhaps we should call them the Bush-Obama 

tax cuts now—should not be extended. And if you feel that the effect, short-term effect on the economy would be too dramatic, I 

would propose that you replace that with a temporary payroll tax 

linked to employment relative to total population. 

So as employment recovers, the payroll tax would fade away. 

That is a way to offset the anti—if you want to be Keynesian about 

it, and I do not particularly urge a Keynesian perspective here, but 

if you want to take a Keynesian perspective then you could replace 

the effects of those expiring tax cuts with the temporary payroll tax 

cut linked to a rule. 

Representative Burgess. Well suffice it to say we are not going 

to come to a conclusion today, but I appreciate all of your views on 

that. And this is something that again I am glad the Speaker 

brought it up because we do need to face it. Although it may be 

politically unpalatable to do so before election day, it needs to happen. 

I will yield back, Mr. Chairman. 

Vice Chairman Brady. Thank you, Dr. Burgess. 

Mr. Mulvaney. 

[No response.] 

Mr. Duffy. 

Representative Duffy. Thank you. I want to be clear, Mr. 

Johnson, as well. When we—we talk about allowing the Bush tax 

cuts to expire, how much revenue would that bring in in the first 

or second year of that expiration? 

Dr. Johnson. Well the usual time frame for the numbers used 

are $4 trillion over 10 years. And roughly speaking, you would expect that to be evenly spread over the 10-year period. So that is 

a substantial amount of revenue. 

But the key thing, and the contrast that I would emphasize between our situation and let’s say the European situation, is that we 

do not need to make a precipate, immediate fiscal adjustment. We 

have time to get our debt onto a more sustainable path. 

I recommend bringing debt down to 40, 50 percent of GDP. And 

as a result, taking that revenue more gradually through some sort 

of offsetting temporary tax cut could also be considered to be entirely reasonable fiscal policy. The point is to change the mediumterm forecasted future. 

Representative Duffy. So roughly, you’re saying, about $400 

billion a year, is that right, would come in in revenue for these increased tax rates? 

Dr. Johnson. That is the standard CBO calculation. 

Representative Duffy. And the rest would come from tax cuts? 

I’m sorry, spending cuts? You’re proposing spending cuts as well, 

right? 
12 

Dr. Johnson. We are proposing to limit future increases in 

spending and, at least in our framework you do that over a twodecade horizon. So you can phase in some of those spending cuts. 

You can also begin to limit tax expenditures. 

Representative Duffy. Is that Medicare reform? Social Security 

reform? Is it the military? What do you guys look at? 

Dr. Johnson. All of the above. 

Representative Duffy. Okay. And in your analysis, when we 

allow tax rates to increase there is an offsetting impact on the 

economy? Isn’t that right? The economy does not grow more with 

tax increases? It would probably grow less? Is that right? 

Dr. Johnson. Presumably—look, nobody likes high taxes, and 

higher taxes must have some distortive effect. But the question is: 

How much effect do they have? 

This is not a high-tax country. These are not—we are not—our 

experience with these tax rates is not consistent with the view that 

they have caused a major slowdown. 

Representative Duffy. But you would agree that if you raise 

taxes, that that will have a slowing effect on the economy? It does 

not grow the economy more? It would grow it less? Increased taxes, 

yes? 

Dr. Johnson. Well actually in the standard CBO framework, the 

question is: What is the medium-term picture for the deficit? 

So if you are cutting taxes and have a larger deficit as a result, 

that in the CBO framework will actually slow growth because you 

are crowding out private investment as you issue more government 

debt. 

Representative Duffy. Is your testimony, then, that if we raise 

taxes we will increase American growth? 

Dr. Johnson. My testimony is that what you need—as the 

Chairman said at the beginning—is a sustainable fiscal future consistent with economic growth. And in order to do that, you should 

constrain, for sure, future spending; and strengthen revenue in 

part by increasing tax rates. 

Representative Duffy. And isn’t the best way to strengthen 

revenue to the federal coffers a growing economy? I mean, doesn’t 

a growing economy have a far better impact on revenues to the federal coffers, as opposed to tax increases? 

I mean, if you look at correlations in American history with regard to growing economies and tax increases, don’t you have a better correlation with growing economies which mean more people 

are working, more people are making more money, which means 

more people are paying taxes? As opposed to raising tax rates? 

There is not that correlation, is there? 

Dr. Johnson. Of course we want to have economic growth. But 

as the Europeans have discovered, if you run persistent deficits 

and you refuse to fund the government on a responsible basis, you 

get a fiscal crisis. Bond yields go up. Private credit contracts. That 

is the worst possible thing to do for economic growth. 

Representative Duffy. And I would say that we are in a global 

economy. I think it has changed over the course of the last 10 or 

12 years. There is far more competition from India, China, Mexico, 

Vietnam, Brazil, Canada. And I guess I would look at it like this: 
13 

You know big box retailers, right? Wal-Mart, Target, Kmart? If 

you were to advise Kmart today, you say: Kmart has to bring a little more revenue to keep their stores open. Your advice to Kmart 

would be to bring in more revenue, you would have to raise the 

price of the goods that you are selling by 2 percent, 5 percent. And 

if you raise your prices of the goods sold, that will bring in more 

revenue. 

But everyone here knows that if Kmart raises its prices, right, 

you will see shoppers go to Wal-Mart and Target. If we raise the 

price of doing business in America, doesn’t that also drive business 

elsewhere in the world from American shores to China, India, Mexico, other parts of the world that are more competitive? 

Dr. Johnson. Congressman, we certainly have to worry about 

competitors. You are absolutely right. It is a globalized world, and 

globalized financial markets. If the financial markets decide that 

you do not have a responsible fiscal policy, if they are concerned 

about the sustainability of your debt, that is the worst shock of all. 

That is where the Europeans are. 

These are rich, proud countries. These are our competitors in Europe who have inflicted upon themselves an awful fiscal disaster 

that absolutely is going to undermine growth for the foreseeable future. We do not want to go there, and we do not need to. 

Representative Duffy. And I would agree with that. But I do 

not think we get there by raising—I mean, I think we have done 

a study here where you could raise your top tax rates on the two 

top brackets to 100 percent and you still could not balance your 

budget. 

So we think we have to grow our economy, number one, and reduce our spending. And my time is up and I yield back. 

Vice Chairman Brady. Thank you, sir. 

The House Members will be going back to the Chamber to vote, 

and I will yield to Senator Bingaman for questioning. 

Thanks. 

Senator Bingaman [presiding]. Thank you very much. 

I am advised that I should ask my questions, and then we will 

put the hearing in recess until the Vice Chairman Brady can return. And he will be back in just a few minutes, as soon as they 

vote in the House. 

Let me ask a couple of questions that have occurred to me, just 

hearing the discussion here. If the concern is to have a robust, 

growing economy, raising taxes can interfere with that; cutting 

spending can, as well. The proposed spending cuts would also drag 

down our economic growth, as I understand it. 

Are those two roughly comparable in the effect? In other words, 

do policies that raise additional revenue through tax increases and 

policies that cut spending have a comparable effect on the growth 

rate of the economy? 

Dr. Johnson, I would ask you first. 

Dr. Johnson. Yes, Senator, in the short term they are roughly 

comparable. If you consider what the European discussion is right 

now about austerity, in some European cases they are cutting 

spending. In other European cases, they are raising taxes. 
14 

If you do either one of those in a forced, precipitant manner, that 

will, generally speaking, have a contraction effect on the economy, 

depending on what else is going on. 

Over the medium term, the task of the United States is to control spending, control it as a percent of GDP; not to cut it dramatically in a way that would damage the economy. Control spending 

and make sure that it is funded more completely with revenue. 

We have relied a lot on issuing debt in the past decade-and-ahalf. Half of our national debt is now owned by foreigners. That is 

not a sustainable situation. Sooner or later the Asian economies 

and oil-producing economies will save less and/or there will be competing currencies in which people can put these investments when 

they want to invest internationally. 

We should have a more sustainable funding basis for the activities of the Federal Government, including the social insurance programs—Social Security, Medicare, other forms of health care funded through the government in the form of insurance for people who 

cannot afford health care otherwise. That has to be funded on a 

sustainable, realistic, and reasonable basis. 

Senator Bingaman. Let me ask about payroll tax cuts. The conventional wisdom here in Washington is we are not going to extend 

the payroll tax cut at the end of this year, when it is due to expire. 

The President’s budget does not propose to extend this tax cut beyond 2012, and Members of Congress have given speeches saying 

the payroll tax should go back to where it was, 6.2 percent on the 

employee, 6.2 percent on the employer. It still is 6.2 percent on the 

employer right now. But they are saying at the end of this year, 

we should go back to that level of taxation on employees. 

The debate is now about what do we do about the income tax 

cuts—the so-called Bush tax cuts or as some have called them 

today the Bush-Obama tax cuts since they were extended a couple 

of years under President Obama. 

My impression is that if you want to maximize employment in 

a society, you would try to find a way to keep the payroll tax as 

low as possible, and you would get your revenue from somewhere 

else on an ongoing basis. 

I know that the argument is made now that we’ve got to go back 

to the previous level of the payroll tax in order to fund the Social 

Security Trust Fund, but there are bound to be alternative ways 

to put funds into the Social Security Trust Fund if the economy 

would benefit substantially from keeping the payroll tax low on the 

workers themselves. 

Dr. Rogerson, do you have some thoughts about whether it 

makes sense for us to contemplate some way to keep the payroll 

tax from going back to where it was? 

Dr. Rogerson. The main comment I would make is that in a— 

there are issues about what happens in the immediate aftermath 

of the change in terms of how long it takes various prices and such 

to adjust from a long-run perspective, conditioned upon talking 

about raising money from taxing labor whether it is labor income 

tax, the establishment part of the payroll tax, or the worker side 

of the payroll tax, to first approximation I view all of those as the 

same. 
15 

Senator Bingaman. So with regard to the long-run effect on the 

economy, it does not matter whether we get the revenue from letting the payroll tax go back to where it was, or get the revenue 

from increasing the income tax? 

Dr. Rogerson. Yes. As I say, the first approximation there are— 

if we go into additional level of details, there are some distributional consequences because of the structure. So there are issues 

about if you are just increasing the payroll tax in its current form, 

of course it is capped at a certain income. 

If you are talking about changing the income tax on labor, there 

is the question about how you do that across the income spectrum. 

But assuming you are sharing the burden of that taxation equally 

in the two systems, whether it comes from payroll or taxing income 

from labor I say is neutral. 

Senator Bingaman. Yes, Dr. Johnson. 

Dr. Johnson. Well, Senator, as you know, the original presentation of Social Security under President Roosevelt was very much 

as a social insurance program; that you are paying in and you are 

getting it out. We are insuring you against outliving your other assets and your family’s ability to survive you. 

And I think that that motivation and explanation for Social Security is very important to keep in place. Social Security is mildly regressive on the taxation side because we do not tax all of your income, or even all of your labor income. I should think the cap 

should be lifted, or indexed more appropriately, but not removed 

completely. 

And it is a somewhat progressive policy on the receipt of Social 

Security. So it is a mildly progressive, but not massively progressive, or redistributive policy. And I do not think you should shift 

the burden of financing that away from the payroll tax onto income 

tax, where income taxes, as you know, are paid more by middle income and higher income Americans. 

I think people value the fact that they are paying into the system, and they get out a form of social insurance both for Social Security and for Medicare. Medicare is the same motivation. We are 

insuring you against ill health when you are in your 70s, 80s, and 

90s, because there has never been private insurance that will cover 

you for those risks, and there never will be, irrespective of what 

you try and do to the health care system. Those are uninsurable 

risks from a private perspective. Therefore, you have a social insurance program which you fund appropriately. 

Senator Bingaman. Let me ask both Dr. Rogerson and Dr. 

Johnson to give me their reaction to the proposal that Dr. Biggs 

has made. As I understand it here, it is essentially saying that the 

payroll tax should not apply to a person when they reach the age 

of 62 and are then eligible for Social Security. He sees benefits in 

keeping people in the workforce, allowing them to build up additional pension, value if we provide that incentive. He says the current system of payroll tax, as I understand it—and correct me if 

I am misstating your position, Dr. Biggs—but as I understand 

what your point is, that the current payroll tax is a disincentive 

for folks who stay in the workforce once they are 62 years old? Is 

that accurate? 
16 

Dr. Biggs. That’s correct. For younger individuals, the payroll 

tax shouldn’t be a significant disincentive because they’re aware 

that they are earning benefits that compensate for the taxes they 

are paying. 

For people who are near retirement, on average they earn almost 

no additional benefits. So the Social Security Payroll Tax would be 

what you would call a ‘‘pure tax.’’ It is money they pay that they 

are never going to get back. When you have the option of retiring, 

that makes retiring seem more attractive relative to working. 

Senator Bingaman. And your proposal is that at age 62 they 

would no longer be required to pay the worker’s portion of the payroll tax? Is that what you are suggesting? 

Dr. Biggs. To make the system actuarially fair for individuals 

in that age range, you would have to eliminate both the employee 

and the employer side of the tax, the full 12.4 percent. 

Senator Bingaman. I see. So what is your reaction to that kind 

of proposal, Dr. Rogerson? 

Dr. Rogerson. I guess the most general comment I would make 

is that, as Dr. Biggs has testified, the details of benefit programs 

such as he is talking about I think are very important. They can 

have very large incentive effects. 

Just to draw on some cross-country evidence, the U.S. system of 

paying out is quite different than what exists in some other countries. In some countries, for an individual to receive their social security they actually have to stop working at their existing job. 

A system such as that creates a huge incentive for individuals to 

stop working at a point where the benefits that are eligible to them 

have been maxed out and may well be as large as the income they 

get from their job. There is simply no benefit to working. 

So I think those types of institutional details exist in other countries. What Dr. Biggs has talked about is that type of detail. It is 

a little bit of a smaller scale in the context of the U.S. system, but 

I agree with the idea that we need to be very careful about the incentives for work as they apply to workers in those situations. 

Senator Bingaman. Dr. Johnson, did you have a point of view 

on Dr. Biggs’s proposal? 

Dr. Johnson. Well I agree that we should encourage people to 

work longer. And one of our proposals is, in the context of strengthening Social Security and raising revenue to support it, we should 

also index the age at which you can receive a full pension to life 

expectancy. 

Americans who are 65 today should expect to live 3 years 

longer—this is on average—3 years longer than Americans who 

were 65 in 1970. So, roughly speaking, Americans could retire one 

year—under our proposal, retire one year later every generation, 

one year later than your parents retired. 

Senator Bingaman. So you are saying that that indexing 

should occur with regard to Social Security benefits? 

Dr. Johnson. With regard to the age at which you could receive 

a full pension, not the age at which you can begin to receive a pension which would remain at 62. 

Now on Dr. Biggs’s proposal, which I think is interesting, I need 

to study it further. I think I would have some questions about the 
17 

behavioral basis on which people make this decision of whether to 

continue working when they are older. 

Certainly some older Americans take the view that they are, 

through the additional income they are earning from their job, that 

they are helping to protect themselves against let’s say a tail outcome of living a very long time. And there are many Americans 

who want to continue to work until the age at which they can absolutely get the maximum benefit. 

So I think there is one issue of what is actuarially fair. There’s 

another issue of the basis on which Americans, older Americans, 

make those decisions. And I think we should look at that. 

We have had great success in extending life expectancy. We need 

to avoid becoming a society in which people retire younger and 

younger. That is one of the mistakes that has been made in Europe. We have not gone that route. I think we need to push gently 

in the other direction at the same time as raising the payroll tax 

over the medium term in order to help rebalance the Social Security Trust Fund. 

Senator Bingaman. Let me ask Dr. Johnson, just so I clearly 

understand what you suggest in your testimony. Your suggestion 

is: Allow the Bush tax cuts to expire at the end of the year, as they 

are scheduled to, and in order to be sure that you do not have too 

adverse an effect on the economy, we should have some kind of a 

reduction in the payroll tax that would be linked to employment, 

and the total population? Maybe you could just explain how that, 

how the two would interact, and what the trigger would be for getting the payroll tax back to where it is today, or where it is scheduled to be? 

Dr. Johnson. Certainly, Senator. And this proposal, I should 

say, has also been made by Peter Orszag, who was the former 

Budget Director in the Obama Administration and a former head 

of the Congressional Budget Office. The idea is that the payroll tax 

would be—you would cut the payroll tax, and you would phase it 

back in based on employment relative to total population. 

You don’t want to do it—— 

Senator Bingaman. Cut it from what it is today? Or from what 

it will become on the first of January if we do not change the law? 

Dr. Johnson. Well from what it is today. If you want to have 

a stimulative effect relative to what it—that should be taken as the 

appropriate baseline. But you want to restore it, eventually, to the 

rate at which it was before, or we are actually suggesting that the 

payroll tax rates should gradually over a period of decades actually 

increase as a way to rebalance the Social Security Trust Fund. 

And the key point is, Senator, not to link this to unemployment 

because the number of people who are unemployed depends on how 

the labor market is. People get discouraged. They drop out of the 

labor force. And that reduces unemployment. What you really want 

is to get people back to work. You want to restore employment back 

to where it was preferably before the financial crisis of 2008. 

So the temporary payroll tax cut would be phased out as employment rises relative to the total population. There would be a formula, a rule that you would set in law, and then you would hope 

that subsequent Congresses did not overturn that rule. And if people believe you are not going to overturn it, then you have a cred-
18 

ible path towards medium-term fiscal sustainability at the same 

time as you preserve what people may feel is a stimulative effect 

of the tax cuts. 

Senator Bingaman. Dr. Rogerson, did you have a point of view 

as to what the Congress ought to do at the end of the year on the 

Bush tax cuts, on the payroll tax change? Or any of the other crises 

that we are expected to confront here at the end of the year? 

Dr. Rogerson. I have a very boring answer to that. I do not 

have a strong view on those particular things, piecemeal. I think 

what is critical is to have a long-range, coherent view of what programs are going to be supported and how they are going to be financed. 

And to talk piece by piece about each one individually I think is 

actually counterproductive, and in some ways it is hard—ultimately, we need to talk about the package of things that the government is going to do and how they are going to be financed. And 

you can’t parcel out the effects of things one by one without knowing what is going to be adjusted to compensate. 

So that is my boring answer. 

Senator Bingaman. Dr. Biggs, did you have a point of view? 

Dr. Biggs. Well I agree with Professor Rogerson’s view that you 

want to think in terms of package deals, in the sense that we have 

to think of what we want government to do for us and what we are 

willing to pay for it. 

With regard to the Bush tax cuts, though, I think it is worth 

pointing out, there is a perception that the Bush tax cuts have 

starved the Federal Government of revenue. And if you look historically, if you look at CBO’s projections going forward, I think 

that is just really not the case. 

I mean, historically the Federal Government has collected total 

revenues equal to somewhere around 18 percent of GDP. I don’t 

have the precise figures in my head, but that is about right. 

If you look at CBO’s projections of federal revenues going forward relative to GDP, if you retain the Bush tax cuts they rise to 

record levels relative to GDP. They are around 20 percent of GDP 

on average. 

So certainly retaining the Bush tax cuts means less tax revenues 

than getting rid of the Bush tax cuts. Does it mean less revenues 

than we have lived with in the past? The answer to that is: Clearly, no. We will have as much revenue relative to the size of the 

economy as we have in the past. 

And so the question we have to say is: Is that enough? Or do we 

need more? But my main point is the idea that we are being 

starved of revenue, pushed below historical levels by the Bush tax 

cuts, I think is not correct. 

Senator Bingaman. Dr. Johnson. 

Dr. Johnson. Well the—just to Dr. Biggs’s point, the nature of 

society has changed fundamentally. It is an aging society, and the 

major activities of the Federal Government, if we are looking out 

over a period of decades, is maintaining and running the social insurance programs, which as we discussed involve individuals paying in when they are young and receiving benefits, both pension 

and health care, when they are older. 
19 

So if you cap artificially spending levels at 18 percent, or some 

other number, then you are squeezing the ability of the people 

themselves to participate in the social insurance programs run by 

the government. And I am not sure why you would want to do that. 

We should be ensuring that older Americans can have a reasonable retirement with decent health. This is a great achievement, 

one of the greatest achievements of this country. I do not see why 

we want to undermine that. 

Senator Bingaman. Well I have heard people refer to the Federal Government as a big insurance policy with an army. And 

maybe that is what we are headed toward here. 

I think it has been useful. Thank you all for being here and testifying. As I indicated before, Mr. Brady had asked that you please 

stay around for a few minutes, if you would, until he can return 

and ask a few more questions. 

Thank you. We will go into recess here for a few minutes. 

[A brief recess is taken.] 

Vice Chair Brady [presiding]. Good afternoon, everyone. 

Thanks for understanding the delay as we finished our House 

votes. And we will have I think some of our Members returning for 

questioning, as well. 

I have a question for each of you. 

Dr. Rogerson, I believe you are familiar with the 2010 CRS Report that referred to the study you co-authored in 2006 published 

by the Federal Reserve Bank of Kansas City. Do you think the CRS 

Report correctly stated the findings of your study? 

Dr. Rogerson. Absolutely not. The quote that I read in it was 

basically the complete opposite of what we claimed our findings 

were. 

Vice Chairman Brady. Yes, that was my understanding. In 

fact, when we asked CRS about this at our last hearing, they admitted their report was in error. They then proceeded to give us 

another description of your study. You may be familiar with it. Do 

you agree with their latest description? 

Dr. Rogerson. I do not. I have read their report and personally 

find it quite puzzling to try and make sense of the arguments being 

made in relation to what we have done. In particular, our study 

and the testimony I presented today are very clear about the important role of how tax revenues are used. To return to the language of kind of intermediate micro, there’s income and substitution effects. If you tax somebody, there’s an income and a substitution effect. When you give it back as a transfer, that undoes the 

income effect. You are left with a substitution effect. That is critical 

to the results, and they do not seem to appreciate that. 

Vice Chairman Brady. Well be aware, I think CRS ought to be 

accurate, especially in describing other studies. So we are going to 

be asking for a correction, or at least an acknowledgement that in 

future papers that your study is described accurately. 

People read these. They count on them. It matters. So thank you, 

Doctor. 

Dr. Rogerson. Thank you. 

Vice Chairman Brady. Dr. Biggs, in your testimony you said 

Social Security payroll taxes cannot be viewed in isolation. A key 

point. Benefits also have to be considered. On a lifetime basis, you 
20 

say benefits are equal to 78 percent of the taxes paid by a typical 

couple. But for those nearest retirement, additional benefits are 

equal to only about 2.5 percent of the additional taxes paid. 

Do you think there is any evidence that workers are aware of 

that significant disparity? 

Dr. Biggs. Well, there’s been some work done looking at how 

well individuals understand the Social Security rules. And they understand them a little bit better than my gut would tell me would 

be the case, because the Social Security Benefit formula was extremely complicated. And so no one can understand that in full. 

The general incentives though, I think they do understand. And 

when I was at Social Security, I would occasionally talk to people. 

And they would ask you: What am I going to get if I continue working? And the answer I would have to give them is: Well, pretty 

much nothing. I mean, your benefit will be increased to account for 

the fact that you are delaying claiming, but the taxes you pay between today and the eventual date of retirement, very few people 

are going to get very much of that back. 

Vice Chairman Brady. You think overall they understand it in 

a general sense? 

Dr. Biggs. I think they do, yes. And their behavior reflects that. 

Vice Chairman Brady. As opposed to—explain that a little further, ‘‘and their behavior reflects that’’? 

Dr. Biggs. Well, I mean if you go back to the 1950s, the typical 

person claimed Social Security benefits around 68. Today they 

claim them earlier. And there’s been changes in the benefit rules, 

which I think would help push that. But I think there’s just kind 

of a gut feeling of, you know, what am I getting out of this? 

And when people are younger, younger folks in particular don’t 

think they’re getting very much out of Social Security but they 

don’t have much choice. You know, if you want to eat, you have to 

work. And so they are going to try to work regardless. 

When somebody is in a situation where they can retire, though, 

if they do not feel the system is paying them back in exchange for 

what they are paying into it, they are going to take that option to 

retire. 

One point I would make, in thinking about our budget solutions 

going forward, is that raising the Social Security payroll tax rate 

could exacerbate this in the sense that if you raise Social Security 

taxes people’s after-tax earnings are going to be lower. And for 

near-retirees, the Social Security benefit they could get is going to 

look more attractive relative to what they could get by working. 

So by doing that, we could push more people into retirement. So 

there are going to be difficult choices involved with Social Security 

reform, but we have an aging population. If there are things we 

can do to keep people on the job and keep them working, that is 

good for the economy. It is good for the federal budget. And most 

of all, it is good for the people who do it. 

Vice Chairman Brady. Well can I, to follow up on that, in your 

testimony you suggest one way to increase employment would be 

to eliminate the payroll tax for older workers. The obvious objection, which you identified as well, is a potential loss of revenue. 
21 

Other people have suggested that we raise the retirement age. 

The obvious objection there is most people want to retire sooner 

rather than later, even though they are living longer. 

So what about both? In your view, what would be the offset of 

linking your payroll tax elimination to an increase in the age of eligibility? 

Dr. Biggs. Well you could do transfers from the rest of the budget back to Social Security. In my testimony, I point out that the 

increases in federal income taxes, federal medicare taxes, and state 

income taxes, would roughly compensate for the reduction in Social 

Security revenues. 

So you could simply make transfers from the rest of the budget 

back to Social Security. Alternately, you could—— 

Vice Chairman Brady. So the offset is obviously not within the 

mandatory side of it, but it’s in the general revenue? 

Dr. Biggs. That’s correct. 

Vice Chairman Brady. From the economic growth. 

Dr. Biggs. So Social Security, by cutting the payroll tax rate, 

will lose revenue. The question is how much other revenue do you 

gain? Do you want to compensate Social Security back for it? I 

would tend to think you would. 

Things like raising the retirement age, those will also encourage 

people to work longer. There is evidence that as the retirement age 

has shifted from 65 to 66, more people have targeted that age 66 

retirement age. 

So I believe in sending a whole range of signals to people that 

says, you know, you need to work longer but we want you to work 

longer. Raising the retirement age is sort of the stick of saying if 

you do not work longer you are going to get a lower benefit. Cutting the payroll tax rate is the carrot. It says to individuals, and 

it also says to employers, you know, we want you to work. we want 

to make it worthwhile for you to do this. 

Vice Chairman Brady. Do you think—I serve on the Social Security Panel over in the Ways and Means Committee—you know, 

the number of people choosing to retire at 62 is pretty striking. 

When you talk with them, the first answer that comes out is that, 

I don’t know about the finances of Social Security in the future; I’m 

frankly going to access my benefits now while I can. 

Do you think that is a part of the thinking, rational expectations 

of a worker at that age? 

Dr. Biggs. I think it’s actually irrational expectations. I think 

that many people are thinking that. They say, I’m going to get it 

while I can get it. 

Vice Chairman Brady. Yes. 

Dr. Biggs. The political reality is, the chance of cutting benefits 

significantly for current retirees, or near-retirees, is pretty small. 

The only way you could really do that is by cutting cost-of-living 

adjustments, and retiring earlier is not going to fix that. 

So I think that is something where workers are scared, and they 

are retiring early when they really should not do that. So I think 

by getting Social Security reform on the table, and really discussing it, yes, it raises some tough choices that people do not want 

to think about, but it can also reassure people who are near retire-
22 

ment that we are not going to pull the rug out from underneath 

you. 

Vice Chairman Brady. Thank you, Dr. Biggs. Before I turn the 

questioning over to Mr. Mulvaney, Dr. Johnson, this is a little bit 

off-topic but since we have got you here I would like to ask you a 

question about a topic you have written a great deal about: Too big 

to fail. 

Do you believe that Dodd-Frank has helped protect our economy 

from systemic risk? Or simply made the problem perhaps even bigger and potentially more problematic? 

Dr. Johnson. Some parts of the Dodd-Frank Financial Reform 

legislation are steps in the right direction. I would point particularly to Title II, the resolution authority which is being designed 

by the FDIC. 

I have worked with them on this, and I have helped with some 

of their outreach efforts. It is a tough technical problem, particularly dealing with cross-border issues for the global megabanks as 

currently structured, and there are a lot of political issues that 

would need to be overcome if you were actually to manage the orderly liquidation of one of these colossal banks like a JPMorgan 

Chase or a Bank or America-Citigroup, and so on. 

I do think we need to support the FDIC in this effort. I think 

it is very helpful to have Congress reaffirm the need for an orderly 

resolution mechanism. Relying purely on bankruptcy to handle 

these kinds of failures is not a good idea. That was the big lesson 

from the collapse of Lehman in the fall of 2008. 

I would also urge you to consider proposals that are now resurfacing with regard to reintroducing some version of Glass-Steagall. 

For example, Tom Hoenig, who as you know is now the number 

two person at the FDIC, is absolutely I think on target when he 

says large commercial banks of the kind that are essential to the 

functioning of this economy should not be allowed to have trading 

desks. They should not be allowed in any way to engage in speculative, high-risk activities. 

That part of banking should become boring. I think Mr. Hoenig 

is exactly on target. I work in part with Sheila Bair on some of 

these issues. I think she is exactly on target with regard to having 

much more equity capital throughout the financial system, particularly in these global megabanks. 

So all of this suggests we should move further. I hope we can 

move further on a bipartisan basis. I certainly hear plenty of Republicans as well as Democrats saying they are very worried about 

our existing financial structures. You should be worried. We should 

all be worried, particularly given the situation in Europe, the 

weakness of their big banks, and the connections through these 

black box of derivatives in particular to our very big banks that can 

absolutely damage our economy again. 

Making the banks small enough and simple enough to fail, so 

that we can then use bankruptcy for them, is absolutely the right 

goal to have as you consider future legislation on this issue. 

Vice Chairman Brady. All right. Thank you, Dr. Johnson. 

Mr. Mulvaney. 

Representative Mulvaney. Thank you, Mr. Chairman. 
23 

Mr. Johnson, just a couple of things. There are obviously a lot 

of different topics we could go over today, but I want to go over a 

couple of small pieces of your testimony. And specifically you advocate for strengthening the revenue base of the Federal Government, returning closer to the tax rates of the late ’90s. This is in 

conjunction with the writing you have done regarding the expiration of the Bush-Obama tax cuts. 

I think you are right, by the way, to call them the Bush-Obama 

tax cuts. Not a lot of folks in this town do that, but you are absolutely right in that they were approved by this President in a Congress controlled by his Party at the end of 2010. So I applaud at 

least the candor on that front. 

But the testimony you’ve got has a sentence that struck me, 

which is that: ‘‘We need to strengthen the revenue base of the Federal Government’’ and then—‘‘returning closer to the tax rates from 

the 1990s.’’ 

Now it strikes me those two things are not exactly the same 

things are they? The base is the size of the economy, or the number 

of people who are paying into the system. And the rates are what 

those people pay, or what you charge against that side of the economy? Is that right? The base and the tax rate are really not the 

same thing, are they? 

Dr. Johnson. You are absolutely right. The base is the taxable 

base, that part of the economy which you feel you can tax. And the 

rates are what you are applying against that base. 

Representative Mulvaney. And you put that together and that 

is where you get your revenue. So let’s talk about the base. Because one of the things we have talked about in this committee in 

the past is the size of the base. And you are advocating for a return 

of the Bush-era, the Bush-Obama tax cuts. Do you believe that will 

broaden the base? 

Dr. Johnson. Well just increasing the rates in any tax system 

doesn’t address the base issue. We also propose to eliminate or 

phase out a lot of so-called tax expenditures which, as you know, 

are both on the individual tax side and on the corporate tax side, 

are part of what narrows the base. 

And when people talk about tax reform, they talk about doing 

both. We are in favor of tax reform, but we would rather have tax 

reform that raised revenue rather than being revenue neutral or in 

the context of revenue cutting. So that is the difference, pure and 

simple. 

Representative Mulvaney. And that is something we all agree 

on, in terms of ending the tax expenditures in an effort to broaden 

the base. One of the things we hear regularly, gentlemen, is that 

roughly half the folks do not pay the income tax. And that as a result, they do not pay for the operation of government. They may 

pay the payroll tax, which pays for their specific benefits, most notably Social Security and Medicare, but they do not actually pay for 

the running of the government. 

So I will ask you, Dr. Johnson, a question I have asked a couple 

of other people. Which is: Do you think that everybody should help 

pay for defense? 

Dr. Johnson. Absolutely, Congressman. And I believe that everybody does. Now you are right, of course, that payroll tax is no-
24 

tionally marked as going to Social Security and going to Medicare. 

Those are of course very big government programs. Twenty percent 

of government spending is on Social Security, 15 percent and rising 

is on Medicare. But people across the income spectrum pay lots of 

other taxes at the state, local, and federal level, including property 

tax and sales tax. 

This all contributes to the funding of the government. 

Representative Mulvaney. Agreed. But let’s—because it’s come 

up in previous hearings, and you have not been party to those so 

I understand that you want to focus on a broader issue, but the 

issue we have talked about on this committee before is specifically 

defense. 

Which is, if I pay my local property taxes, I am paying for 

schools. I’m paying for my local roads. If I pay my gasoline tax, I’m 

paying for roads. If I pay my state sales tax, I’m paying for everything that the state provides me. But defense is somewhat unique, 

isn’t it? Tell me how everybody is paying for defense? Because it 

may be and I just don’t see it. 

Dr. Johnson. Well money is fungible, Congressman. And to the 

extent you are contributing to government and you are supporting 

all the activities of government across the different levels of government—state, local, and federal—I think anybody who is paying 

into that system, anybody who is paying any kind of tax, anybody 

who is participating in the modern taxed economy, is helping to 

support government. 

So that we don’t pay—none of us pay a particular tax marked for 

defense, but even if we did it would be somewhat meaningless. 

Money is coming in and money is going out of the budget, and that 

is the overall balance which we need to take care of. 

Representative Mulvaney. Sure. And obviously I agree with 

the concept that money is fungible, but I can assure you that the 

money that we pay to the state is not fungible for the money that 

the Federal Government uses to provide defense. Would you agree 

with me on that? 

Dr. Johnson. Well a lot of the Federal Government spending is 

shared with, or passed down to state level. So I think that the— 

while it’s absolutely true that if the state decides to go off and 

spend an extra marginal one dollar, the Federal Government does 

not necessarily back that; a lot of funding, a lot of projects are actually joint. It is a great thing about the fiscal federal system that 

we’ve established and run for 200 years, and something the Europeans do not have and desperately need to have, exactly this kind 

of balance between the different levels of government and a shared 

funding and a shared burden of funding across all citizens, all taxpaying citizens. 

I think the American system has much to commend it around the 

world. Particularly, I commend it all the time to the Europeans. 

Representative Mulvaney. Got ’cha, and I don’t mean to belabor the point, but there’s been other folks—you are the first person to actually claim that everybody is paying for defense by virtue 

of the fact that they’re paying the payroll tax, they’re paying their 

property taxes, they’re paying the gasoline tax, and they’re actually 

in effect paying for defense. So I apologize for drawing that out. 

Maybe we can visit that another time. 
25 

With the Chairman’s indulgence? Can I continue for a few minutes? 

Vice Chairman Brady. Sure. 

Representative Mulvaney. Thank you. You have got a statement also in your testimony, Dr. Johnson, number four, that says: 

‘‘The idea that the recent increase in public debt is due primarily 

to ’runaway spending’ since 2008 is completely at odds with the 

historical record—although it is true that spending was not under 

control in the period 2000–08 . . . . The worsening deficits since 

2008 have been primarily due to a big drop in tax revenue and the 

sharp fall in GDP due to the finance-induced recession.’’ 

Let me deal with a very quick credibility issue. So I’m hoping I 

don’t get the answer that I think I just read, which is: Are you saying that spending wasn’t a problem in 2008 until now? But it was 

a problem from 2000 to 2008? Not a driver of our deficits, maybe 

a synonym for problem? 

Dr. Johnson. Part of the problem from 2000 to 2008 was, part 

of what happened, was two foreign wars. Obviously that is spending. Medicare Part D. That is in addition to social insurance. That 

is spending, no matter how you look at it. 

The big hit since 2008 was the Recession. Again—well probably 

I am quoting the Congressional Budget Office there, and partly I’m 

quoting the IMF. The details are in the book chapter to which I 

refer there. I would be happy to send that to you. The point is, 

when you have an enormous recession caused by any financial sector blowing itself on the scale we experienced, that blows a big hole 

in the tax revenue. 

Also, you get some additional spending from unemployment insurance, which is a completely sensible social safety net you have 

in the event, for examples, your banks blow themselves up because 

they were reckless and took crazy risks. 

So that is a consequence of the financial crisis. And the fall in 

GDP, of course, means that even if you were—even if you kept 

spending at the same level, it would look bigger relative to the 

GDP, again because the banks have blown such a big hole in your 

economy. So that is the specific sense in which I mean it, Congressman. 

Representative Mulvaney. And I understand. You go on later 

in your testimony to—I think you quantify the Bush tax cuts’ impact on the deficit in 2010 as being roughly $270 billion. You may 

not be aware that Mr. Van Hollen, the Ranking Member on Budget, asked the CBO to quantify the effects of the Recession on the 

2010 deficit as well, and they placed it at roughly $370 billion, 

which gets us somewhere in the realm of $600 billion, which was 

half of the deficit. 

So can we at least agree that maybe half of the deficit is driven 

by a spending problem and not necessarily by GDP or the Bush tax 

cuts? 

Dr. Johnson. I’m afraid not, Congressman. I’ll have to look at 

the details of what the CBO said—I haven’t had a chance to review 

that—but if you’re saying the effect of the Recession, a large part 

of the effect of ‘‘the Recession’’ is precisely the loss of tax revenue. 
26 

In fact—and this is not specific to the United States. Across all 

developed countries with any kind of modern, sensibly functioning 

government, when you have a big recession you lose revenues. 

In fact, in many countries this is referred to as the automatic 

stabilizers and regarded as not a bad thing; it’s a good thing. From 

a point of view of thinking about the tax burden on the economy, 

it automatically falls when you go into a recession; therefore, it 

helps to buffer the losses. 

Representative Mulvaney. But now you’re being Keynesian. 

You said you wouldn’t do that. 

Dr. Johnson. Well I know that people feel strongly about 

Keynesian, and I’m not particularly a Keynesian on much of this 

analysis, I have to tell you, but the view that there is an automatic 

stabilizer in the sense that you tax less in a recess and tax more 

relatively speaking in a boom, that is actually a reasonable notion. 

The Keynesian issue is: Can you stimulate the economy? Can you 

micro manage the economy, particularly using fiscal policy? On 

that, I have deep reservations. Fiscal policy, as the Chairman said 

at the beginning, is for the medium run. Fiscal sustainability to 

support growth. That’s the right approach to fiscal policy. 

Representative Mulvaney. Dr. Johnson, I respect your position. I just look at the numbers, and I look at the growth in spending, the top-line spending—and I recognize that a recession will 

have an impact on the receipts of the government and thus an impact on the deficits on the government, but if you look at spending 

in nominal terms—I have not had a chance to do the math and convert it—but you are talking about a government that’s grown on 

a nominal basis by 100 percent in the last decade. In fact, it grew 

20 percent in just the 2009 fiscal year by itself. The expenditures 

of the government in 2000 were $1.78 trillion, and they are going 

to be roughly $3.8 trillion this year. So more than 100 percent over 

the course of the last 12 years. 

So I hear what you’re saying. And I cannot but agree that part 

of the problem would be coming from the GDP, and certainly if you 

lower taxes and bring in less money that may contribute in a short 

term to the deficit. But to say it is not a spending problem I think 

undermines the overall argument. 

But let me get the last issue to everybody. Because the one thing 

we have not heard about today is productivity. And I think one of 

the lessons that we can learn from Europe is that they have been 

fairly locked into low productivity rates for a long time. They may 

be contributing to their structural deficits and the issues they are 

dealing with. They are probably not solving their productivity problem even if their countries are making steps to solve their fiscal 

problem, productivity is still not particularly healthy in Europe. 

We had a little boost here during the early stages of the 2008 Recession. But in the long term, I do not think we are seeing any dramatic increases in productivity. In fact, the Chairman mentioned 

more folks leaving the workforce at 62, which generally speaking 

would be a time of their lives when they would be productive members of society; now they are turning into retirement ages. 

So tell me, gentlemen, am I right to be focusing on this, number 

one? And then if I am, tell me. And I am specifically looking at Dr. 
27 

Johnson, now, tell me—and I will go last to him—tell me how raising taxes is going to increase our productivity? 

Dr. Rogerson. 

Dr. Rogerson. Well I will say for starters, I think you are right 

on base to say that productivity growth is absolutely essential to 

the long-term health of the economy. I think there is widespread 

agreement that productivity growth lies behind the sustained improvements in living standards. So absolutely we need to be focused on policies that influence productivity growth in thinking 

about what policies are good for productivity growth. 

Having said that, I certainly do not think that raising taxes are 

good for productivity growth. I would—— 

Representative Mulvaney. Is that a gut feeling, Dr. Rogerson? 

Can you back that up? 

Dr. Rogerson. I know of no evidence to have supported that. I 

mean, I will temper it on the other side that I do not think that 

all taxes need be bad for productivity growth. I think some taxes 

might be relatively neutral in terms of productivity growth. 

If you think that a major source of productivity growth is the incentives to innovate, many tax policies may not be a first-order importance in terms of the incentives for innovation, for example. 

But taxes on—progressive taxes on labor income, for example, 

the more productive you become the higher tax rate you pay, that 

obviously can provide a disincentive for people to accumulate skills 

which would be a negative factor for productivity. 

So I think productivity is absolutely important. Taxes certainly— 

some taxes I believe can have important negative effects on productivity, but I would not go so far as to say all taxes are negative for 

productivity. 

Representative Mulvaney. Dr. Biggs. 

Dr. Biggs. When I think about the EU, I mean it is not—it’s not 

that a French or a German worker is necessarily less productive 

than an American workers for each hour that they work. They are 

skilled people and they are good at what they do. The issue is that 

they are simply not working the same sorts of hours that American 

workers are doing. And the question is: Why? 

I think Professor Rogerson’s research provides compelling evidence that one reason why they work so many fewer hours is the 

tax rates are a lot higher today than they had been in the past. 

And that obviously does, it leads to issues in terms of skills’ accumulation. 

Because if you know you are going to be working more hours 

over the course of a year, or having a longer career, building up 

human capital provides a larger payoff to you. 

In addition, when you have individuals who are shut out of the 

labor market for a long period, as you had in Europe for quite some 

time, and unfortunately as increasingly we’re having here, their 

skills deteriorate. Their connection to the workforce becomes more 

tenuous. And so even when they do get back to work, that is when 

their productivity suffers, when their output-per-hour actually will 

fall. 

So I think there is a connection, and I think the fact that Americans work 100 hours or so more a year than many Europeans, I 

think that is not disconnected from tax rates. I’ll say that. 
28 

Representative Mulvaney. And finally, Dr. Johnson. 

Dr. Johnson. I have three responses, Congressman. 

First of all, I am not proposing anything close to European tax 

rates. No one has been a more outspoken critic of the European fiscal system. And to your other interests, Mr. Brady, the monetary 

system, than I have. I have written extensively about this. It is a 

disaster. 

And we don’t want to go there, and I don’t think we are going 

to go there, and I don’t think that is what we’re talking about. 

Secondly, on labor market participation, Dr. Biggs has already 

given you exactly the right answer. Which is: If people start to fear 

that Social Security will not be there, then they will retire earlier. 

That was his point about retiring at 62, because you don’t think 

the pension is going to be there. 

People have to believe that the system is going to continue in 

order for older Americans to remain working. We should be increasing labor force participation, including through people working the hours they work, including these older Americans who have 

very valuable skills that we need to stay engaged with the labor 

force. 

The third answer is, to Professor Rogerson’s point, we should be 

taxing consumption more and income less. I have testified, I think 

not before this committee but before a number of other Congressional committees, on the advantages of a Value Added Tax of 

some form. 

That, to your point about productivity, is a very good way to address your concerns. If you think we’re taxing your income too 

high, if we can agree on the role of government and how to fund 

it, we should be funding it more with taxes on consumption and 

less with taxes on income. It would address exactly your concerns. 

But I understand there is bipartisan hesitancy to move towards a 

VAT, despite the fact there are only two G–20 countries that don’t 

have a VAT: Us, and Saudi Arabia. And Saudi Arabia doesn’t have 

a shortage of revenue. 

Representative Mulvaney. Gentlemen, thank you very much. 

And I especially appreciate the indulgence by my Chairman for the 

extra time. 

Vice Chairman Brady. Thank you, Mr. Mulvaney. I went over 

on my time, as well. 

I want to thank our witnesses today. This is a very interesting 

conversation and the testimony really was very insightful, and I 

appreciate that as well. I appreciate Senator Bingaman and the 

Members, Mr. Mulvaney, who were able to attend. But for those 

who were not, as a courtesy I would like to leave the record open 

for five days for questions to be submitted in writing. We will pass 

them on to our witnesses, and I would ask you to respond in a 

timely manner. 

With that, thank you all very much for being here. The hearing 

is adjourned. 

[Whereupon, at 3:47 p.m., Wednesday, May 16, 2012, the hearing 

was adjourned.] 
(29) 

SUBMISSIONS FOR THE RECORD 
30 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY, VICE CHAIRMAN, JOINT ECONOMIC COMMITTEE

Today the Joint Economic Committee is holding the second of two hearings on 

how taxes affect America’s economy. This hearing focuses on the taxation of labor. 

The first hearing on April 17th focused on the taxation of capital. 

My goal, as Vice Chairman of this Committee, is to ensure that America has the 

strongest economy in the world throughout the 21st Century. To do that, we must 

get our monetary policy right, get our fiscal policy right, get our regulatory policies 

right, and open new markets to U.S. exports. 

A sustainable fiscal policy requires more than just closing the trillion dollar gap 

between federal spending and federal revenues. A sustainable fiscal policy requires 

economic growth. 

A growing economy improves our fiscal outlook by increasing federal revenues and 

reducing federal spending relative to the size of our economy. 

Sadly, however, economic growth and job creation are lagging under President 

Obama. To understand how poorly our economy is performing compared with its potential, let’s look at this chart and compare the big government-oriented Obama recovery to the free market-oriented Reagan recovery: 

• From its low point in February 2010 following the recent recession, the Obama 

recovery produced private sector job growth of 4.0%. Over the comparable timeframe, the Reagan recovery far eclipsed the Obama recovery with 10.1% private 

sector job growth. 

• If President Obama had the same growth rate of private sector jobs as President Reagan enjoyed, we would have over 61⁄2 million more jobs today—that is 

more than one job for every two workers currently counted as unemployed. 

• From its peak in October 2009, the unemployment rate has declined by a meager 1.9 percentage points under President Obama. Over the comparable timeframe, the unemployment rate dropped by 3.4 percentage points under President Reagan. 

• Under President Obama, the average real GDP growth rate has been 2.4% over 

the 11 quarters following the recession. Over the comparable time-frame, President Reagan delivered an average real GDP growth rate of 6.1%. 

More than anything, hardworking American taxpayers need cohesive monetary, 

fiscal, and regulatory policies that encourage business investment—business investment in new buildings, equipment, and software. Joint Economic Committee Republicans have shown that such private sector business investment is the key to robust 

economic growth and private sector job creation. 

Leading economists believe that taxes affect the incentive to work, save, and invest. Thus, federal tax policy not only determines how much the federal government 

collects, but also how much the U.S. economy grows and how many jobs are created. 

Other economists seem to believe taxes don’t really matter. In their view, one tax 

increase to reduce the federal budget deficit is just as good as another. 

The purpose of this hearing is to examine the empirical evidence offered by both 

sides of the debate. 

In his written testimony, Dr. Rogerson presents evidence that taxes on labor substantially reduce employment and economic output. When these taxes are used to 

fund transfer payments and social services, the adverse effects on jobs and economic 

growth are even greater. 

Dr. Biggs presents evidence that these adverse effects depend in large part on the 

specific tax and benefit rules of each entitlement program. Older workers are especially sensitive to the marginal net tax rate. That is the additional after-tax income 

received in exchange for working and paying taxes an additional year. 

For his part, Dr. Johnson presents evidence that our taxes are lower than they 

have been at times in the past; and they are lower than many other countries’ taxes 

today. 

The question we face today is whether tax policy really matters. Can Congress 

allow the tax reductions of 2001 and 2003 to expire without any adverse effects on 

jobs and economic growth? Would this be, as many leading economists and my Republican colleagues have suggested, ‘‘taxmageddon’’? Or, as President Obama and 

many of my Democratic colleagues contend, can Congress increase other federal 

taxes on the businesses and the ‘‘wealthy’’ with economic impunity? 

Should Congress instead focus on fundamental tax reform and carefully consider 

which tax policies will provide the greatest boost to long-term growth and job creation in the private sector? 

Hopefully, today’s hearing will help us answer these questions. I look forward to 

the testimony of our distinguished witnesses. 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 

*The views expressed in this testimony are those of the author alone and do not necessarily 

represent those of the American Enterprise Institute. 1This figure is based upon current law scheduled benefits. Reform could alter these figures 

and, to close the program’s financing gap, must necessarily reduce the ratio of total benefits received to taxes paid. 

STATEMENT OF ANDREW G. BIGGS, PH.D., RESIDENT SCHOLAR, AMERICAN

ENTERPRISE INSTITUTE*

Vice Chairman Brady and Members of the Committee: Thank you for the opportunity to testify with regard to the effects of taxes and transfer payments on labor 

supply and the employment. 

While taxes are designed to raise revenue for the government, tax policy can also 

have important effects on individuals’ decisions to work. The behavioral impact of 

tax policy has been studied by economists for decades with an aim to minimizing 

the economic costs of raising a given level of revenues. However, relatively little attention has been given to how Social Security’s taxes and benefits affect labor supply. While the program’s effects are not large for individuals in their prime working 

years, Social Security tax and benefit rules present significant work disincentives 

for individuals considering delaying retirement. Altering these rules could increase 

labor supply and improve retirement security at little cost to the federal budget. 

Social Security is the largest single domestic spending program of the federal government. Unlike most federal programs, it levies a dedicated tax on earnings and 

pays retirement, survivors and disability benefits in return. The 12.4 percent Social 

Security payroll tax on earned income is the largest tax paid by most Americans, 

and thus it has significant potential to affect their labor supply decisions. In exchange for their payroll taxes, individuals can become entitled to future benefit payments for themselves and eligible family members. The effect of Social Security 

taxes on labor supply cannot be analyzed in isolation from the benefits those taxes 

‘‘purchase.’’ 

Social Security analysts think of these issues in terms of the ‘‘net tax rate,’’ which 

is equal to the statutory 12.4 percent payroll tax rate net of the present value of 

any future benefits those taxes purchase. The present value of benefits is a function 

of the time until benefits will be paid, the expected duration of benefit receipt, the 

riskless rate of interest at which individuals might invest, and any risk premium 

individuals apply to Social Security benefits due to solvency or political risk. 

If the benefits an individual becomes entitled to are equal to the taxes he pays, 

his net tax rate is zero. In such cases, the Social Security program should have relatively little effect on an individual’s labor supply decisions. If an individual’s net 

tax rate is negative, which can be the case for lower-earning individuals, then Social 

Security might encourage work. And if his net tax rate is positive, then labor supply 

is discouraged. 

According to Social Security’s actuaries, a middle income two-earner couple retiring in 2014 can expect to receive lifetime Social Security benefits equal to around 

78 percent of the taxes they pay.1 This implies that on a lifetime basis, around 78 

percent of the Social Security payroll tax (or 9.7 percentage points) can be viewed 

as a ‘‘contribution’’ which will be repaid at retirement or disability, while the remaining 2.7 percentage points can be viewed as a ‘‘pure tax’’ for which no benefits 

will be received. 

However, labor supply decisions are not generally made on a lifetime basis. Rather, at any given point in time an individual may decide whether and how much to 

participate in the labor force. Thus, what matters in terms of Social Security’s impact on labor supply is what might be called the marginal net tax rate, that is, the 

benefits an individual receives in return for working and paying taxes over a given 

period of time, such as a year. 

In general, the theory of optimal taxation states that taxes should be highest in 

circumstances in which individuals are least sensitive to the tax and lowest when 

individuals are most sensitive to tax rates. Following this rule will tend to minimize 

the harmful effects of taxation on work and the economy. 

However, Social Security’s treatment of older workers is precisely the opposite of 

what economic theory recommends. Social Security pays the lowest reward to work 

to older workers who are near to retirement. These individuals, research indicates, 

are among the most sensitive to tax rates, because they have the easiest option to 

leave the workforce and retire. 

Social Security’s benefit formula is roughly actuarially fair for individuals who 

choose to delay claiming benefits. For instance, imagine a person who leaves the 

labor force at age 62. He can claim retirement benefits at any age from 62 through 

70. For each year he delays claiming benefits, his eventual monthly benefit rises by 
45 

2 Reznik, Gayle, Weaver, David A. and Biggs, Andrew G. ‘‘Social Security and Marginal Returns to Work Near Retirement.’’ Social Security Administration. Issue Paper No. 2009–02. 

April 15, 2009. 3Lucie Schmidt and Purvi Sevak. ‘‘Taxes, Wages, and the Labor Supply of Older Americans.’’ 

Research on Aging, March 2009; vol. 31, 2: pp. 207-232. http://roa.sagepub.com/content/31/2/ 

207.abstract 4 Congressional Budget Office. ‘‘Labor Supply and Taxes.’’ January 1996. 

5 Journal of Public Economics, forthcoming. 

6 Eric French. ‘‘The Effects of Health, Wealth, and Wages on Labor Supply and Retirement 

Behavior.’’ Review of Economic Studies, April 2005, 72(2), 395–427. 7 Eliminating the payroll tax would raise wages by around 13.3 percent (106.2/93.8), times a 

labor supply elasticity of 0.1067 = 1.41%. 8Source: American Community Survey. 

9See http://www.nber.org/taxsim/state-marginal/avrate.html 

around 7 percent. Over the course of an average lifetime, total benefits are about 

the same if you claim at age 62, 70 or any age in between. 

However, Social Security is not actuarially fair with regard to individuals who 

delay claiming and remain in the workforce. Most near-retirees who extend their 

work lives receive little or no additional benefits for any extra taxes they pay. Thus, 

their net tax rate is very close to the statutory rate of 12.4 percent and therefore 

discourages labor supply at older ages. 

There are three reasons for this. First, Social Security benefits are based upon 

an individual’s highest 35 years of earnings. An additional year of work, particularly 

if it is part-time, is unlikely to boost benefits. Second, most female retirees receive 

a spousal benefit based upon their husbands’ earnings. Any additional taxes they 

pay are unlikely to lead to higher benefits. Third, once individuals reach the full 

retirement age they are ineligible for Social Security disability benefits, but must 

nevertheless continue to pay the 1.8 percent disability payroll tax. 

In a 2009 research paper with David Weaver and Gayle Reznik of the Social Security Administration, I found that for each dollar of additional taxes a near-retiree 

pays into Social Security, he or she receives only around 2.5 cents in extra lifetime 

benefits.2 Simply put, Social Security provides almost no incentive to keep working. 

This would not be of major policy importance if near-retirees were not so sensitive 

to tax rates. A middle-aged worker with a family to support will likely continue 

working even in the presence of high implicit tax rates, but once he or she reaches 

age 62 the option to retire becomes more attractive. Moreover, most retirees receive 

pension and Social Security benefits, which can increase the marginal income tax 

rates they pay on earned income. Economic research finds that older Americans are 

significantly more sensitive to after-tax rewards to work than younger workers. 

In a 2009 study that relied on differences in state income tax tax rates, Lucie 

Schmidt of Williams College and Purvi Sevak of Hunter College found that a 10 percent increase in after-tax earnings would increase labor force participation by 7.5 

percent among men and 11.4 percent among women.3 These estimated labor supply 

elasticities are 2 to 5 times higher than the Congressional Budget Office assumes 

for the working-age population.4 In forthcoming research, John Laitner and Dan Silverman of the University of Michigan find that eliminating the payroll tax at age 

59 would cause individuals to delay retirement by an average of 1.1 years.5 And in 

a 2005 study, Eric French of the Federal Reserve Bank of Chicago found that a 10 

percent increase in wages as of age 62 would dramatically increase work by seniors, 

sufficient to boost overall labor supply by 1.1 percent.6

I have proposed reducing or even eliminating the Social Security payroll tax for 

older workers as an incentive to remain in the workforce. Doing so would lower Social Security tax revenues, but increased labor supply from older workers would increase other revenues, such as for federal income taxes, Medicare payroll taxes, or 

state income taxes. 

Using the Policy Simulation Group’s Social Security models, I estimate that eliminating the payroll tax for workers over age 62 would reduce annual Social Security 

revenues by roughly 2.2 percent, or about $16.2 billion in terms of 2012 tax collections. Using French’s parameters, eliminating the payroll tax at age 62 would increase overall labor supply by around 1.4 percent.7 The offsetting increases in nonSocial Security revenues depend upon tax rates paid by older workers. The average 

62-year old working full time in 2010 earned around $58,800,8 implying a federal 

income tax rate of about 15 percent. Adding the 2.9 percent Medicare payroll tax 

and a 4.4 percent average state income tax rate,9 total non-Social Security revenues 

would rise by around $18.3 billion, of which the federal government would collect 

about $14.7 billion. 

These figures are approximate, but higher non-Social Security revenues could at 

a minimum compensate for much of Social Security’s revenues lost to a payroll tax 
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10 Author’s calculations using Policy Simulation Group models. 

cut. As part of a Social Security reform package, transfers of general tax revenue 

could compensate Social Security for losses in payroll tax revenue, thereby making 

the payroll tax cut neutral with regard to Social Security’s solvency. 

While eliminating the payroll tax for older workers would come at little cost to 

the budget, the gains to individuals and the economy could be substantial. Simply 

working one additional year would boost average private pension income by almost 

5 percent.10 This would reduce poverty in old age and contribute to overall retirement income security. 

Labor force participation among older Americans has ticked upward as near-retirees seek to rebuild their 401(k)s. This demonstrates that, even in a very challenging 

employment environment, highly motivated individuals can often find positions. But 

overall, Americans today still retire several years earlier than in prior decades, despite less strenuous jobs and significantly longer life spans. The typical American 

will spend one-third of his adult life in retirement, financed by entitlement programs that cannot bear the strain. Social Security’s poor returns to older workers 

discourage delayed retirement, which would strengthen the economy and is the single option available to many individuals who reach retirement age with insufficient 

resources. Policy options such as lowering the payroll tax rate on older workers 

could increase labor supply, boost the economy and raise retirement incomes. 
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