U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

81–609—PDF 2012

S. HRG. 112–784 

BOOSTING OPPORTUNITIES AND GROWTH 

THROUGH TAX REFORM: HELPING MORE 

YOUNG PEOPLE ACHIEVE THE AMERICAN DREAM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 10, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENT 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

WITNESSES 

Newman, Dr. Katherine S., James B. Knapp dean of the Zanvyl Krieger 

School of Arts and Sciences, The Johns Hopkins University, Baltimore, 

MD ......................................................................................................................... 3 

Corak, Dr. Miles, professor, Graduate School of Public and International 

Affairs, University of Ottawa, Ottawa, Ontario, Canada ................................. 6 

Lefgren, Dr. Lars J., associate professor, Department of Economics, Brigham 

Young University, Salt Lake City, UT ............................................................... 9 

Currier, Erin, project manager, Economic Mobility Project, The Pew Charitable Trusts, Washington, DC ............................................................................. 11 

Steuerle, Dr. C. Eugene, institute fellow and Richard B. Fisher chair, The 

Urban Institute, Washington, DC ....................................................................... 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 27 

Corak, Dr. Miles: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 29 

Responses to questions from committee members ......................................... 42 

Currier, Erin: 

Testimony .......................................................................................................... 11 

Prepared statement with attachment ............................................................. 60 

Responses to questions from committee members ......................................... 105 

Hatch, Hon. Orrin G.: 

Prepared statement .......................................................................................... 113 

Lefgren, Dr. Lars J.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 115 

Responses to questions from committee members ......................................... 121 

Newman, Dr. Katherine S.: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 128 

Steuerle, Dr. C. Eugene: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 139 

Responses to questions from committee members ......................................... 147 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 159 

Nellen, Annette ........................................................................................................ 162 

(1) 

BOOSTING OPPORTUNITIES AND 

GROWTH THROUGH TAX REFORM: 

HELPING MORE YOUNG PEOPLE 

ACHIEVE THE AMERICAN DREAM 

TUESDAY, JULY 10, 2012 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 2:50 p.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Wyden, Hatch, and Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; and Tiffany Smith, Tax Counsel. 

Republican Staff: Jim Lyons, Tax Counsel; and Jeff Wrase, Chief 

Economist. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

I first apologize to the witnesses and others in attendance for the 

delay. We had a somewhat unscheduled Senate vote, and I think 

we have now concluded the vote, and hopefully members of the 

committee will begin to file in. 

President Truman once said, ‘‘All of us want our children to have 

a better life than we had, and it should be the constant aim of each 

generation to make things better for the next.’’ 

As a father, I know how concerned parents can be about their 

children’s future. Americans just want their children to have a fair 

shot at earning a good living and succeeding in life. But more and 

more, American parents worry whether this dream could come 

true. These worries are well-founded, especially for parents who 

have not been able to climb the economic ladder as high as they 

would like. 

I used to say—and I believed it strongly—that America was a 

land of greatest opportunity. There was more mobility, more opportunity in America than in any other country in the world. No more. 

In the United States, a child born to a family in the top 10 percent of earners is 23 times more likely to end up financially welloff than a child born in the bottom 10 percent. 

This does not mean that a child from a low-income family will 

never make it, but it implies that they face strong headwinds, 

2 

where a child from a more fortunate background benefits from a 

strong wind behind their back. 

The American children from lower-income families face stronger 

headwinds than low-income children in other countries. In a study 

of the U.S. and nine of our competitors, the United States comes 

in dead last in mobility. A Danish child born in the bottom 20 percent of earners is almost twice as likely to make it to the top 20 

percent as an American low-income child. 

This lack of mobility means we are not capitalizing on all of our 

citizens’ talents and we are betraying the ideals on which our country was founded. Many of our foreign competitors are doing a better job advancing the American dream and opportunity than we 

are. 

So what determines opportunity? What can we do to ensure that 

all American children have a fair shot at the American dream? To 

find opportunity, children need a high-quality education. They need 

skills to be successful. 

But an American child from the top income quarter is 10 times 

as likely to go to college as a child from the bottom quarter. In 

1979, the United States led the world in the number of people who 

graduated from college. That was back in 1979. We are now number 16 out of 34 countries, just above Estonia, Poland, and Chile. 

We used to be a leader. We have slipped to 16th. 

To succeed, children also need to be healthy and cared for. They 

need mothers who are healthy during pregnancy. Lower birth 

weights result in children having lower lifetime earnings. They 

need parents who have the ability to provide for them. If their parents work, they need high-quality child care. 

Congress has tried to improve opportunities for families and children through the tax code. There are numerous tax incentives to 

encourage work, education, health care, and savings. The Earned 

Income Tax Credit and the Child Tax Credit give low-income parents an incentive to work and help them provide for their children. 

In 2010, the Earned Income Tax Credit lifted 3 million children 

out of poverty, and health reform will give more pregnant women 

access to quality health care. But many incentives in the tax system are upside-down. They give the most help to those who need 

it the least. Provisions like the exclusion for employer-provided 

child care provide more support for children with parents in highincome brackets than those with lower incomes. 

For example, the most tax savings a family making $40,000 a 

year can receive from the exclusion is $750, but a family making 

$250,000 can receive twice this amount. For children in low-income 

families, this break may provide no benefit at all. 

Today’s hearing will focus on economic mobility and how we can 

use the tax code to strengthen the American dream. It is an important issue, very important. It is such an important issue that is 

very much on people’s minds. The Washington Post and USA Today 

have stories today on the very study that one of our witnesses will 

discuss. The tax system clearly is not the only way to improve opportunities, but it is an important way. We should use all the tools 

that we have. 

So, as we work to simplify the tax code, let us ensure that every 

child has a fair shot at a richer and fuller life, and, in the words 

3 

of President Truman, let us help this generation make things better for the next. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. I do not see Senator Hatch here yet, but when 

he arrives we certainly would like to hear from him. 

But I would now like to introduce our witnesses. First is Dr. 

Katherine Newman. Dr. Newman is the James B. Knapp dean of 

the Krieger School of Arts and Sciences at Johns Hopkins University. Next is Dr. Miles Corak, professor at the Graduate School of 

Public and International Affairs at the University of Ottawa. Our 

third witness is Dr. Lars Lefgren. He is associate professor at the 

Department of Economics at Brigham Young University. Our 

fourth witness is Erin Currier. She is the project manager of the 

Economic Mobility Project at The Pew Charitable Trusts. Finally, 

we have Dr. Eugene Steuerle. Dr. Steuerle is an institute fellow 

and Richard B. Fisher chair at the Urban Institute. 

Thank you all for coming. All of you know the drill: your statements will be automatically included in the record, and I ask each 

of you to summarize in about 5 minutes. 

Dr. Newman? 

STATEMENT OF DR. KATHERINE S. NEWMAN, JAMES B. KNAPP 

DEAN OF THE ZANVYL KRIEGER SCHOOL OF ARTS AND SCIENCES, THE JOHNS HOPKINS UNIVERSITY, BALTIMORE, MD 

Dr. NEWMAN. Great. Thank you, Mr. Chairman. 

The CHAIRMAN. And, as I always say to our witnesses, let her 

rip. Just say what is on your mind, right? 

Dr. NEWMAN. I am about to do that. 

The CHAIRMAN. Good. That is what we ask. 

Dr. NEWMAN. I am very pleased to have this chance to contribute 

to your deliberations on the ways in which the tax code might facilitate upward mobility, and to do that I draw on a couple of decades’ worth of research, especially in Harlem, on the Nation’s working poor, as well as a wealth of data that has been contributed by 

other scholars, especially economists, who have studied the pathways of other countries whose mobility rates, as you pointed out, 

exceed our own. 

My aim here is to try to contribute some thoughts on what kinds 

of investments might promote mobility and how difficult it is for 

working people below the poverty line to make those investments. 

I will conclude with some thoughts about the tax code, on which 

you have asked us to deliberate. 

As you said, it is by now axiomatic that upward mobility depends 

on educational attainment. Even in the current economic downturn, unemployment is far lower among college graduates than 

high school graduates, and drop-outs are vastly over-represented 

among the Nation’s poor. 

The wage premium to higher education is substantial, and of 

course, accordingly then, ensuring that children of the working 

poor complete high school and attend college or seek some kind of 

advanced training is probably the best recipe for upward mobility. 

But staying on that track is very sensitive to the quality of early 

childhood education. Low-wage jobs leave families with very few reVerDate Nov 24 2008 20:19 Jul 29, 2013 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\81609.000 TIMD
4 

sources to invest in the next generation, and hence, among the 

families that I studied in Harlem, child care options were meager 

in supply, erratic, and poor in quality. 

In the 14 years that I followed working and near-poor families 

in Harlem and the outer boroughs of New York City, my observations of their child care arrangements nearly always left me concerned about the fate of the next generation. 

The most common source of child care for the working poor was 

a relative or a neighbor, often with four or five other children to 

take care of. The best of these settings would see young children 

scribbling in coloring books once in a while, but very often they 

were left to entertain themselves while grown-ups in the room 

watched television or ignored their presence. 

Rarely were these children mistreated. They were fed, they were 

warm in the winter, and they were kept out of harm’s way. Their 

mothers knew that they were safe, and that is not unimportant in 

the troubled neighborhoods in which they live. But I rarely observed attempts to engage these children, much less to introduce 

them to the kind of formal daycare or early childhood stimulation 

that more fortunate children receive. 

One example from my research may serve to illustrate the problem. Danielle Wayne—this is a pseudonym—the divorced mother of 

three children, returned to the workforce during the course of my 

8 years of following Harlem families. Her older children, ages 8 and 

10, did very well in school, having benefitted from her undivided 

attention and engagement in their schools when they were very 

young. 

But her youngest child, a 2-year-old named Safiya, had a very 

different experience. When Danielle went back to work, she took 

Safiya to her ex-mother-in-law to be looked after during the day. 

At the cost of $50 a week, which was the most she could afford— 

and she was grateful for that care—the 60-year-old grandmother 

accepted that child. I visited Safiya and her grandmother to see 

how she was doing and what she was doing during the day. 

Her daycare was in a 2-bedroom apartment in the public housing 

unit in the center of Harlem. Her grandmother had three other 

children to look after. The day I arrived, the TV set was set to the 

‘‘Jerry Springer’’ show, and the kids were glancing up to see topless 

women. 

One of the grandmother’s other children, a woman in her mid30s, was sitting on the couch in a stupor. She explained to me that 

she had four teenaged children of her own but was no longer living 

with them. The grandmother explained to me later that her daughter had a serious drug problem and had nowhere else to turn for 

shelter. 

The best we could say about this childcare situation for Safiya 

is that it is custodial. And it is taking a toll on that little girl. At 

an age where children in early childhood education are playing active games, learning to help, to be in groups, starting to recognize 

their colors, Safiya had a 2-word vocabulary: ‘‘no’’ and ‘‘shut up.’’ 

That is it. She never said another thing to me or anyone else. 

In the setting where she was spending more than 8 hours a day, 

it is not likely she is going to learn much more than that. That is 

5 

not going to put this little girl in a good position to enter kindergarten ready to learn. 

How do we avoid unproductive pathways like this? Well, in other 

countries the extension of universal or large-scale programs for preschool has become fairly common, and their experience reinforces 

the importance of this kind of opportunity. 

The studies that we have from these other countries are following children all the way from their early childhood to their 

adult years so we can see exactly what kind of impact that investment had. 

Let me just give you a few examples. In Denmark, the significant 

impact of preschool for children ages 1 through 6 on completing 

schooling and on earnings at the age of 22 to 30 is huge, and with 

larger effects for disadvantaged children. 

We see positive effects of preschool on grade retention, on test 

scores, on high school graduation, and on adult wages in France. 

Here, too, the effects are particularly large for children from disadvantaged households. 

More years in school, higher rates of college attendance, and 

greater labor market participation in Norway; again, the effects 

much larger for low-income children. Those are studies that can 

look at people all the way from zero to 30. 

We have other studies from Germany, India, Norway, Sweden, 

and Uruguay that just look at adolescents, and there too we see 

that earlier childhood education experience leads to better school 

enrollment and achievement, especially, by the way, for immigrant 

children, where exposure to the language of the host country is 

positively affected by entering school early and provides the maximum time for them to acclimate. 

What these studies are telling us is that early childhood education makes a very positive difference in the educational performance of children over the later years. What can the tax code contribute to this equation? The most important contribution it makes 

to educational outcomes for low-income families occurs, as you 

mentioned, through the Earned Income Tax Credit. 

One study that looked at the impact of receiving the EITC on the 

math and reading achievement of 5,000 children, matched to their 

mothers in the National Longitudinal Survey of Youth, found that 

a $1,000 increase in income generated by an increasingly generous 

EITC raised combined children’s math and reading test scores by 

6 percent of a standard deviation in the short run, and again the 

gains were larger for children from disadvantaged households. 

So what all of this research is telling us is that the injection of 

resources into households, either through the EITC or through income increases that mimic what the EITC provides for low-income 

households, is paying off in the educational performance of children. Those knock-on benefits of that improved track record surface 

later in the labor market and, hence, in intergenerational mobility. 

But what can you do to improve the chances that children from 

low-income households will stay that course? Specifically, what can 

the tax code do? Well, part of the answer, as you mentioned, is already with us: enlarge, or at least preserve, the Earned Income Tax 

Credit and the Child Tax Credit, both of which put resources in the 

hands of parents. 

6 

There is a lot of debate about why that works as well as it does, 

or rather what the pathway is from higher household income to 

greater educational attainment and earnings. Candidate explanations include more money to spend on children’s education, 

greater household stability, parents who are less stressed and 

hence do a better job of raising their children, and health outcomes 

which prevent the disruption to adult employment that can derail 

children or interrupt their own attachment to schooling. My guess 

is that all of these factors matter. 

When the States follow the lead of the Federal Government, the 

benefits of the EITC are amplified. 

The CHAIRMAN. I am going to have to ask you to wrap up the 

best you can, Doctor. 

Dr. NEWMAN. All right. Let me do that. 

So let me just mention a few other instruments besides the 

EITC. I do not think we should forget the other age groups that 

may be affected by the investments we make possible. Let me 

speak about teenagers and young parents. Anything we can do 

through the tax code to encourage teens to stay in school and perform at higher levels will impact intergenerational mobility. 

Millions of inner city teens are left on their own in the afterhours of school. Supposing we were to provide tax incentives for 

parents to pursue high-quality after-school, as well as early childhood education? In addition, studies of long-term benefits of college 

education among young parents, especially mothers, on the mobility of the next generation show important results. First-time college students from low-income backgrounds raise their children differently than people from the same kinds of families who do not 

attend college. It is in college that they learn about the benefits of 

museums, reading aloud, doing homework, visiting the zoo, and so 

on. 

When we follow those kids 30 years later and we look at what 

the impact of education on their mothers was for their mobility, we 

see very significant effects on their educational performance. 

Hence, the American Opportunity Tax Credit, the Lifetime Learning Credit, all of these instruments through the tax code that make 

it possible for low-income people to attend college in greater numbers, pay off not only in their intergenerational mobility, but in 

that of their children. 

Thank you. 

The CHAIRMAN. Thank you, Dr. Newman, very much. Very interesting. 

[The prepared statement of Dr. Newman appears in the appendix.] 

The CHAIRMAN. Dr. Corak? 

STATEMENT OF DR. MILES CORAK, PROFESSOR, GRADUATE 

SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, UNIVERSITY OF OTTAWA, OTTAWA, ONTARIO, CANADA 

Dr. CORAK. Thank you, Senator, for the opportunity to engage in 

this conversation. 

You summarized, I think, the facts on intergenerational mobility, 

and particularly international comparisons, quite clearly. What I 

would like to do in my 5 minutes is focus on the drivers. I think 

7 

it is very important to understand the underlying causes, for two 

reasons. 

One is, because the facts that we are talking about relate to a 

group of people born in the 1960s who went to school in the 1970s 

and 1980s and participated in the labor market of the 1990s and 

2000s. So, if we wanted to get a sense of what will happen to the 

young people of today, we need to learn from that experience, understand what drove it, and make reasonable guesses in that sense. 

The other reason we have to focus on the drivers, of course, is because, if we want to do intelligent public policymaking, we have to 

understand the underlying causes. 

My first message to you is that there is no single silver bullet 

in this literature. The causes of intergenerational mobility are complex and they reflect the interaction of three broad forces: the family, the labor market, and public policy. 

Families that are stable and constructive can effectively raise 

their children and support them through all the transitions that 

they have to go through in their life, not just the early years, not 

just the primary schooling years, but also the teenaged years and 

the interface with the labor market. The stronger families are, the 

more mobility there will be. 

Second, the more inequality in labor markets there is, the less 

mobility there is; more unequal labor markets with a higher return 

to education change incentives and change opportunities for families and lead to less mobility. 

Finally, the third row is public policy. Public policy, to the extent 

that it is progressive, to the extent that it is relatively more advantageous to the relatively disadvantaged, will promote mobility. 

So, in the time that I have, I just want to talk about two stereotypical societies, if you will, in which the interaction between these 

forces is very different. The first society I will call a ‘‘2nd-chance 

society.’’ Canada and Australia might be 2nd-chance societies, if 

you will. 

The second is a society that has more tracks to it. If you get on 

the right track, you are destined to move forward, or you could 

move backward. There are not as many second chances. I will call 

this sort of a ‘‘3-strikes-you-are-out’’ society, if you will. The U.K. 

and the U.S. might sit towards that extreme. 

In a 2nd-chance society, families are able to invest, not just in 

the monetary well-being of the children, but also the non-monetary 

well-being. So money matters, but not just money. If we structured 

income support in a conditional way to young families, for example, 

and used something like the EITC, we should also recognize that 

the non-monetary resources available to children are also diminished, that we also have to provide more flexibility in work arrangements so that parents can balance the stresses of work and 

life more constructively. We also need more effective and creative 

child care to counter the kind of difficulties that Dr. Newman just 

spoke about. 

Second-chance societies keep the relative and absolute poverty 

rate of children low, and they also reduce the risk of poverty of expectations and poverty of experience. 

In the early years, 2nd-chance societies move towards fully integrating children into the schooling system. In many societies, parVerDate Nov 24 2008 20:19 Jul 29, 2013 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\81609.000 TIMD
8 

ticularly in Canada and Australia, there is talk and movement towards full participation of 4- and 5-year-olds in the schooling system on a full-time basis. 

In 3-strike societies, we begin to see in the early years a differentiation according to family resources, with more use of private sector resources on high-income families, and other families dropping 

by the wayside. 

Second-chance societies also allow children to drop in. There is 

always the risk of dropping out, but education systems are created 

more flexibly so that children can drop in later on in life. In 3- 

strike societies, it is much harder to drop back into school at a 

later stage in life, and the education system is structured very linearly. 

Quality also does not vary very much. The quality of the schooling system does not vary very much in 2nd-chance societies. The 

funding for the schooling system is more broadly based and not 

necessarily based on a narrow property tax basis, and the quality 

of schooling does not get reflected in the housing market to the 

same extent it does in 3-strike societies. So funding the schooling 

system through a narrow property base accentuates labor market 

inequalities, and they get interfaced into the family. 

Finally, I want to point to the fact that post-secondary education 

offers a lot more choices in 2nd-chance societies. There is a developed technical stream and community colleges as an alternative to 

university. While there may be high tuition fees, there are also 

strong bursaries. 

To the extent that people use loans, 2nd-chance societies make 

the repayment of those loans contingent on income so that you do 

not necessarily have to be bound by these heavy debts to the same 

extent if you experience spells of unemployment. 

Finally, I would point out that, in the interface with the labor 

market, connections matter. Families continue to play a role in 

helping their young adults transition to the labor market. In some 

societies, as many as 4 out of 10 young children have at some point 

worked for the same employer as their father. 

Also, if there are internships used, they are much more broadly 

based. One can imagine a system in which people from lower socioeconomic backgrounds have a voucher attached with them so that 

they can accept unpaid internships and get payment from the 

States so that internships are not based necessarily on just family 

background. 

Finally, in 2nd-chance societies there are wealth or estate taxes, 

or inheritance taxes, that level the playing field for the next generation and ensure a virtuous circle. 

Thank you very much. 

The CHAIRMAN. Thank you, Dr. Corak. That was very interesting. 

[The prepared statement of Dr. Corak appears in the appendix.] 

The CHAIRMAN. Dr. Lefgren, you are next. 

9 

STATEMENT OF DR. LARS J. LEFGREN, ASSOCIATE PROFESSOR, DEPARTMENT OF ECONOMICS, BRIGHAM YOUNG UNIVERSITY, SALT LAKE CITY, UT 

Dr. LEFGREN. Thank you, Chairman Baucus and members of the 

committee. 

In the United States, a 10-percent wage disadvantage in fathers’ 

long-term income translates into roughly a 6-percent wage disadvantage in a son’s long-term income. This suggests that the son 

of a poor father will have a strong tendency to have low income 

himself. Estimates from other developed countries, as you mentioned, Senator Baucus, imply much less persistence in income levels from father to son. 

These results have caused consternation because they appear to 

refute the premise of the American dream that anyone can be successful. Indeed, if a person’s economic position is determined entirely by the economic position of one’s parents, independent of the 

person’s skill or potential, there would be nearly universal condemnation of the institutions that led to such an unfair outcome. 

Furthermore, it would lead to a poorer society as the mediocre 

children of wealthy parents were promoted to jobs beyond their capabilities, while the brightest children of the poor languished in occupations that failed to harness their full potential. 

It would be equally symptomatic, however, of poor labor market 

institutions if there was no correlation between parents’ income 

and that of their children, because capable parents tend to have capable children. So, for example, the heritability of IQ is on the 

order of 0.7. A zero correlation between the incomes of children and 

parents suggests that our labor market fails to reward skill. 

Rewards for skill and hard work are essential signals for sorting 

our most talented workers to the fields and occupations in which 

they produce the most value. When we fail to allocate skill to its 

highest productivity use, we become poorer as a society. 

I will now compare the special cases of Sweden and the United 

States. These countries represent the extremes of observed intergenerational income inequality in the developed world. The comparison highlights the tension between economic efficiency and 

equality as well as the importance of efficient human capital investments. 

The degree to which paternal income difference persists to the 

next generations is about 26 percent in Sweden, compared to 61 

percent in the United States. While Sweden is a more egalitarian 

country, Swedish citizens have lower incomes on average than do 

Americans. Once one adjusts for how much goods and services cost 

in Sweden, per capita GDP is about 20 percent less in Sweden than 

it is in the United States. 

Sweden achieves this level of equality in several ways. Generous 

wages for many occupations are collectively bargained at the industry level and assume the role of the mandated minimum wage in 

other countries. A large public sector provides many individuals 

with a middle-class lifestyle. High taxes substantially reduce differences in take-home pay across workers. Aronsson and Walker 

discuss how these labor market institutions create incentives to 

limit work hours and educational investments. 

10 

These institutions also dole out incentives for individuals to enter 

demanding occupations where the value of their work product is 

high as opposed to pleasurable, but potentially less useful, occupations. High-quality public preschools, as well as primary, secondary, and college education, are provided to all citizens at little 

or no cost. 

Conversely, in the United States, levels of unionization are low 

and falling. The minimum wage is low and binds for only a small 

fraction of the population. Tax rates and the size of the public sector are both low relative to other developed countries. The financial 

return to education is quite high. 

Collectively, the tax code and labor market institutions of the 

United States do relatively little to equalize incomes at a point in 

time or across generations. They do, however, provide an efficient 

environment for individuals to undertake educational investments 

and to employ their skills in a setting in which they are most highly valued. 

In the United States, primary and secondary school is provided 

free of cost. Access to publicly provided preschools through programs such as Head Start is available to some, but not all, families. Individuals have access to low-cost community and State colleges, and also have access to loans and grants to cover remaining 

expenses. 

For well-prepared students, the United States has the best university system in the world. The United States does not, however, 

provide a strong educational foundation to the disadvantaged children. In Chicago, only 56 percent of students graduate from high 

school. Most of those who drop out and many of those who graduate have substandard numeracy and literacy skills. 

While existing programs such as No Child Left Behind and title 

I have had some mixed success in increasing student achievement, 

improvements in educational policies should be an ongoing congressional priority. Research by Heckman and others underscores the 

importance of early childhood education in the formation of the soft 

skills required for success in school life and the workplace. 

In conclusion, it is unclear what the right level of intergenerational income mobility ought to be. Tax and labor market 

policies designed to foster an egalitarian wage distribution and 

high levels of intergenerational mobility distort incentives for efficient educational investments, occupational choices, and effort levels. 

In this regard, Congress must thoughtfully consider the tradeoffs between economic efficiency and equality. However, the failure 

to foster the educational development and success of all of America’s children stunts the economic potential of many citizens, lowers 

our collective national wealth, and increases intergenerational inequality in a manner that most Americans, I believe, would consider unfair. 

Thank you. 

The CHAIRMAN. Thank you, Dr. Lefgren. 

[The prepared statement of Dr. Lefgren appears in the appendix.] 

The CHAIRMAN. Ms. Currier? 

11 

STATEMENT OF ERIN CURRIER, PROJECT MANAGER, ECONOMIC MOBILITY PROJECT, THE PEW CHARITABLE TRUSTS, 

WASHINGTON, DC 

Ms. CURRIER. Chairman Baucus and members of the committee, 

thank you for inviting me to testify today. I manage Pew’s Economic Mobility Project, which is a nonpartisan effort to establish 

a fact base on economic mobility. 

Today our project released the newest data available on intergenerational mobility in the United States, revealing a mixed picture of Americans’ access to opportunity. 

On the one hand, there is a glass half full, because 84 percent 

of Americans have higher family incomes than their parents did at 

the same age, and across all levels of the income distribution this 

generation is doing better than the one that came before. 

But there is also a glass half empty, because Americans raised 

at the top and bottom of the income distribution are highly likely 

to stay where their parents were, a phenomenon called ‘‘stickiness 

at the ends.’’ 

Of those whose parents were in the bottom fifth of the income 

distribution, 70 percent remain below the middle as adults. Of 

those raised at the top of the income ladder, 63 percent never fall 

to the middle as adults. This stickiness at the ends challenges the 

notion that the United States promotes equality of opportunity. It 

is further underscored, however, by international comparisons of 

economic mobility, which show that the United States has less relative mobility than Canada and many European nations. 

A recent study on economic mobility across 10 countries found 

that, in the United States, there is a stronger link between parental background and children’s outcomes than in any other country 

investigated. The research found that family background begins affecting children’s outcomes as early as they can first be measured, 

even by age 3. 

The variation in outcomes across countries suggests that policies 

and institutions can and do influence economic mobility. A person’s 

mobility outcome is not predetermined, and understanding the 

drivers of economic mobility can enhance opportunity in America. 

Our research has found that a host of factors help push Americans up the economic ladder, and some push them down. Today I 

will mention three such factors: post-secondary education; savings; 

and neighborhood poverty. 

Post-secondary education is extremely powerful. It both promotes 

upward economic mobility from the bottom and protects against 

downward mobility from the top and the middle. Having a 4-year 

degree triples the chances that someone who starts in the bottom 

income quintile will make it all the way to the top. 

Personal savings are also influential. When families are able to 

create their own safety nets, they are less likely to be derailed by 

financial emergencies and are more equipped to make mobilityenhancing investments such as college for themselves and their 

children. 

On the other hand, one of the most powerful drivers of downward 

mobility is being raised in a high-poverty neighborhood. Americans 

raised in the top three quintiles who spend their childhood in a 

12 

high-poverty neighborhood are 52 percent more likely to be downwardly mobile. 

Considering this data, it is important to assess the degree to 

which Federal policy is mobility-enhancing and who benefits from 

the investments currently made. In fact, the government spends a 

great deal to encourage movement up the economic ladder, but, because the vast majority of that spending is delivered through the 

tax code, it largely misses families at the bottom who do not owe 

income taxes. 

In 2009, a group of bipartisan advisors to the Economic Mobility 

Project drafted a set of policy recommendations to enhance economic mobility in the U.S. They called for a portfolio shift in Federal investments to better target low- and moderate-income families. Public opinion polling suggests Americans support this goal. 

An overwhelming 83 percent want the government to boost mobility for the poor and middle class, a feeling that cuts across party 

lines. 

Americans believe in the American dream, and they also believe 

that our Nation is, and should be, exceptional in its ability to promote opportunity for all citizens, regardless of family background. 

Still, Americans are increasingly concerned about their children’s 

economic chances and believe that policymakers can, and should, 

help level the playing field. 

An emerging body of research provides insight into the drivers 

that influence economic mobility and serves as a starting point for 

dialogue and action on how to promote economic mobility for all 

Americans. 

Thank you. 

The CHAIRMAN. Thank you, Ms. Currier. 

[The prepared statement of Ms. Currier appears in the appendix.] 

The CHAIRMAN. Dr. Steuerle? 

STATEMENT OF DR. C. EUGENE STEUERLE, INSTITUTE FELLOW AND RICHARD B. FISHER CHAIR, THE URBAN INSTITUTE, WASHINGTON, DC 

Dr. STEUERLE. Thank you, Mr. Chairman, Mr. Wyden, Mr. 

Thune. It is a privilege to testify before you again. Nothing exemplifies the American dream more than the possibility that each 

family can get ahead, and through hard work advance from generation to generation. No committee, I believe, in Congress has more 

influence over this issue than does the Senate Finance Committee. 

I am not claiming government can solve these problems. I think 

mobility is largely induced by the hard work and the efforts of our 

citizens, but this committee has a great deal to say about how government makes possibilities available. 

Today, I suggest that mobility across generations is threatened 

by three aspects of current Federal policy. First, we have a budget 

for a declining Nation. It is one that promotes consumption ever 

more and investment, particularly in the young, ever less. 

Second, we have relatively high disincentives to work and save, 

especially for those who move beyond about a poverty level of income. Third, we have a budget that, largely through the tax code, 

13 

favors mobility for those with higher incomes, while promoting consumption but discouraging mobility for those with lower incomes. 

So let me elaborate briefly. First, in many ways we have a budget for a declining Nation. Even if we would bring our budget into 

balance or to sustainability—and we are a long way from achieving 

that goal—we would still have a budget that allocates smaller 

shares of our tax subsidies and our spending to children and investment and ever-larger shares to consumption. 

Right now, the Federal Government is on track to spend about 

a trillion dollars more annually in a decade in spending and tax 

subsidies. The number might be slightly smaller if the Republicans 

are in power, it might be slightly larger if the Democrats are in 

power. That is a trillion dollars more annually that is scheduled to 

be spent. 

Yet, if you look at those projections, you will find that the programs that might promote mobility, such as education or job subsidies or programs for children, would get nary a dime of that trillion dollars more a year. Right now, those relative choices are reflected in both Democratic and Republican budgets. 

Second, consider that one of the many ways that the population 

rises in status relative to others is by working hard and saving a 

higher portion of their income or their wealth. Discouraging such 

efforts can reduce the extent of intergenerational mobility, which I 

will remind you is largely measured by their command over private 

income and private resources, not their command over public resources. 

One way to look at the disincentives facing lower-income households is to consider the effective tax rates that derive from combining together the direct taxes that you see in the tax system and 

the phase-outs that are prevalent in so many of the tax subsidies 

in welfare and benefit programs. 

After reaching about a poverty-level income, those moderateincome households with children often face marginal tax rates that 

are 60, 80, or even 100 percent when they earn an additional dime 

of income. 

Finally, in a study I led for The Pew Economic Mobility Project 

with Ms. Currier here, we concluded that a sizeable slice of the 

Federal budget—in fact, about $746 billion, or $7,000 per household in 2006—did go to programs that arguably tried to promote 

mobility. 

Unfortunately, almost three-quarters of the total comes mainly 

through programs such as tax subsidies for home ownership and 

other saving incentives that flow mainly to middle- and upperincome households. Moreover, some of these programs inflate key 

prices, such as the prices of homes, and thereby actually detract 

from the mobility of low- and moderate-income households. 

Finally, I would like to add a note about some current opportunities. Outside of education, and particularly early childhood education and health, if Congress wishes to promote the mobility of 

lower-income households as well as protect the past gains of 

moderate- and middle-income households that are also now threatened, almost nothing succeeds more than putting them on a path 

of increasing ownership of financial and physical assets that can 

carry forward from generation to generation. 

14 

Two opportunities largely neglected in today’s debates may be 

sitting right at our feet. First, rents have now moved above home 

ownership costs in many parts of the country. Unfortunately, we 

seem to have adopted a housing policy in this Nation that encourages low-income households to buy when the market prices are 

high, and then, when the market prices drop, we encourage them 

to sell and not to buy. This does not seem to me to be a particularly 

advantageous home ownership policy for these households. 

Second, pension reform is a natural accompaniment and add-on. 

I am not referring to the old individual account debate, but I am 

talking about pension reform. It is a natural add-on to the Social 

Security reform that I believe is around the corner that is often not 

being discussed. So, I hope you will give some consideration to 

these two opportunities. 

In conclusion, the hard future ahead for programs that help children, invest in our future, and promote mobility for low- and 

moderate-income households does not necessarily reflect the aspirations of the American people, or I believe of either political party, 

and I appreciate the efforts of this committee in moving on this 

front today. 

Thank you. 

[The prepared statement of Dr. Steuerle appears in the appendix.] 

The CHAIRMAN. Well, thank you all. I am going to start with you, 

Dr. Corak. I do not know if you suggested many specific suggestions as to what we can do in this committee to address the phenomena you are talking about, the 2nd-chance and 3-strikes-youare-out. I assume 2nd-chance is your preferred choice between the 

two. But just, what would you advise that this committee consider 

to help kids, help more mobility? That is the subject of this hearing. 

Dr. CORAK. Well, different policies at different stages of the 

child’s life cycle. Perhaps, let me focus on the very last stage of the 

transition to the labor market. What I was trying to say, for example, is that children from more privileged backgrounds have more 

opportunities and more connections available to them. 

Let us imagine how internships work in this country. My understanding is that many internships are unpaid, and this is valuable 

job experience for young people. They have to be able to afford to 

take an unpaid internship, and that involves family support. So 

these internships generally, or the more valuable ones, may go to 

people of more privileged backgrounds. 

Why not give to children of less-privileged backgrounds a voucher, if you will? If they find an unpaid internship, the State will support them for that summer and give them that kind of work experience. That is one example. 

The CHAIRMAN. Let me ask all five of you your reaction to this. 

What about universal service, with every younger person in America from the ages of, say, 18 to 22 or 23, whatever, having to serve 

in the Peace Corps, or military service, for a couple of years? My 

thought is that it would be a way for our younger people to learn 

about other people, learn about the world, learn about other people’s conditions, and have a very positive educational effect. I do 

not know what the latest studies are, how expensive it would be. 

15 

I mean, clearly I could think of some people who would say, oh, 

no, that impinges on our individual freedoms or our liberties and 

so forth. But my thought is, if it could be made to work, it would 

help bring America together again. I think about World War II and 

all of that, we were a country together and so forth. We were together in World War II. 

Now, of course we had an external threat, an existential threat 

back then. But we are being threatened now. It is a stealth threat. 

It is harder to see, but it is out there. I mean, this is just stunning 

that we are no longer the number-one country in the world in mobility, and we are sinking, I think, in that respect. 

So I would just like your candid, honest thoughts whether universal service would help or not help, whether it is something we 

should think about. Is it just not worth thinking about, and let us 

try to find other ways to deal with this issue? I will go the other 

way and go down this way this time. Dr. Steuerle? 

Dr. STEUERLE. Senator, I am not sure that I would mandate universal service, but I think we could make many of the types of programs that we provide to the public conditional upon service, such 

as, aid for college could be limited, or people could avoid having to 

pay off their loans if they participate in service. I think we should 

also perhaps require that doctors who go through medical school 

provide some sort of service in exchange for all the subsidies they 

get. I think there are a lot of ways of encouraging service. I do not 

know that you would have to go all the way to a mandate. 

The CHAIRMAN. So you would look creatively to find ways to get 

incentives to serve on a voluntary basis? 

Dr. STEUERLE. Yes. 

The CHAIRMAN. That is your suggestion. All right. 

Ms. Currier? 

Ms. CURRIER. Well, I guess I will pivot a little bit and just mention that our project has conducted two public opinion polls, one in 

2009 and one in 2011. In both cases, Americans solidly identified 

things like hard work and ambition as the key drivers of mobility. 

But they also believe that the government has a role to play in 

helping level the playing field to the degree that policies can do 

that, can expose children from all backgrounds to better educational attainment, better jobs, better labor force participation. I 

think you would see quite a bit of support from the American public. 

The CHAIRMAN. All right. 

Dr. Lefgren? 

Dr. LEFGREN. I am personally actually very sympathetic to the 

benefits of service. If service is mandated, in my opinion, then it 

loses much of the potential benefits. Mandated charity really is not 

charity at all. 

Even though I am actually very sympathetic with Dr. Steuerle’s 

view that there are potential levers to provide incentives for service, I think a key aspect of the growth aspects of service and sacrifice is the voluntary nature of it, and it is important that people 

bear some of the costs of the service that they are getting. 

The CHAIRMAN. Yes. I appreciate that. We will have two more to 

answer. For whatever it is worth, my son went to school where 

service was ‘‘required.’’ Community service was required. It is clear 

16 

to me he is a much better person as a consequence, there is no 

question about it. But that is a little bit different. 

Dr. Corak? 

Dr. CORAK. I think your call for that option sort of reflects a need 

to develop community in a spirit of the collective. My own sense 

is—I am not informed on what the long-term benefits of service at 

the later part of the age spectrum would be, but I can certainly 

imagine starting that much earlier in the schooling years, in the 

sense of universal provision of high-quality care in the early years. 

It would seem to me the community would have to start much earlier than that. 

There is also the possibility certainly of having volunteer hours 

attached to the possibility of graduating from high school, so you 

could imagine having each child spend a certain amount of time in 

some community-oriented activity, and they would have to have X 

number of hours to graduate. 

The CHAIRMAN. All right. 

Dr. Newman? 

Dr. NEWMAN. Mr. Chairman, I am very sympathetic to your point 

of view. I think universal institutions generally do pay off in mobility. That is what public schools are all about. What you suggested 

is sort of an extension, if you will, of the same idea, that all Americans would have the opportunity to serve. This is beyond the high 

school level. But what they learn when they do are new skills, new 

opportunities, new ways of doing work, new cultures, as you have 

said. 

In that sense, universal service provides the same kind of human 

capital benefit that the other universal institutions we have do. So 

I think anything that you can do through this committee to extend 

opportunities to all Americans, starting at the earliest ages and 

carrying them all the way through to that later and later transition 

to adulthood in the mid-20s, would be enormously beneficial. 

The CHAIRMAN. Thank you very much. My time has expired. 

We are honored to have the Senator from Utah, Senator Hatch, 

with us today. Senator? 

Senator HATCH. I am happy to be with you. 

The CHAIRMAN. The ranking member of this committee. 

Senator HATCH. I will put my opening statement in the record. 

[The prepared statement of Senator Hatch appears in the appendix.] 

Senator HATCH. I apologize for being late, but I was on the floor 

making some remarks that had to be made. 

We welcome all of you, especially you, Dr. Lefgren, from Brigham 

Young University. We are really happy to have you here, and all 

of you, as a matter of fact. 

Let me start with you, Dr. Corak. Figure 2 in your written testimony, which has recently been labeled the Great Gatsby Curve, 

shows the correlation between measures of inequality and mobility 

across countries. Now, there are, of course, measurement issues associated with the data. Not everyone would agree with the inequality measure, perhaps, that you use. 

In any case, your Gatsby Curve shows a positive relation between inequality and lack of mobility across countries. You suggest 

that the positive relation can give us a ‘‘rough’’ way to see outcomes 

17 

of all of the forces governing intergenerational earnings and inequality. 

You also say in your testimony that ‘‘this picture is one of association,’’ yet you have written elsewhere that ‘‘to dismiss this relationship as purely a statistical artifact or myth, with there being 

no causal impact between inequality and opportunity, would be a 

mistake.’’ 

I certainly do not dismiss your relationship as necessarily being 

an artifact or myth, but it is important not to confuse association 

with causality. Nonetheless, some people go so far as to use the 

rough correlation you present to make structural forecasts about 

how inequality today will influence mobility in the future. And 

while I do not doubt the association you present, given the data 

that you use, I think it is a stretch to treat it as structural and 

something that can be used for forecasting. 

So I have a couple of questions intended to help me understand 

what your figures are supposed to show. First, do you believe that 

your Gatsby Curve establishes statistically that lower mobility in 

a country, from whatever year your mobility data may have been 

obtained, causes the inequality measures that you say are estimates from ‘‘around the year 2000,’’ or maybe that greater inequality around the year 2000 somehow was caused by less mobility for 

children who were born and reared decades ago in far different policy and economic environments? 

Second, I wonder if you could discuss evidence that the U.S. is 

moving up your curve and how robust the evidence is across various measures of inequality. 

Finally, you have recently been quoted as saying that ‘‘the most 

important thing that the U.S. is leaving behind as it moves up the 

Great Gatsby Curve is the vision of itself.’’ 

So I wonder why you take from your curve or other research an 

impression that we in the United States are losing our vision of 

ourselves. 

Dr. CORAK. Well, thank you, Senator. 

Senator HATCH. The question was too long, I know. 

Dr. CORAK. Yes. But let me divide it up into the three that you 

suggested. First, is the relationship causal? Let me make clear, 

Senator, that I do not believe that if you simply gave people money, 

you would solve all of these problems. 

Money certainly matters. People in lower incomes certainly face 

stresses in life, but more than money matters. That is why we 

should not interpret that curve as something that we can move 

along by just tax-and-transfer policies, for example. It is not causal 

in that sense. 

It is a nice way of describing a whole series of transitions, or the 

outcome of transitions that children make through their lives. Inequalities begin to get imbedded in children’s lives in the early 

years. We know that there are inequalities in health outcomes in 

the very early years. That is one causal step that helps build that 

figure. 

We know that there are inequalities across neighborhoods and 

schooling. Those are causal. They build another step. We know that 

there are inequalities to good jobs and access to good jobs. That is 

18 

another layer that gets played onto the whole process. In the end, 

you get a picture of that sort. 

As for losing our vision of ourselves, all I am stating in that 

statement, which was in, I believe, Business Week earlier this 

week, is the concern of this committee right now, the concern that 

all children should be able to become all that they can be. 

In the United States, if you look closely at the data, there is in 

fact a good deal of mobility in the middle parts. What makes society different is the stickiness at the two ends. That is related to 

inequalities in the labor market and access to important institutions. If those continue to grow and exacerbate over time, it is hard 

to imagine the situation changing for the current generation compared to the people who were part of that graph. Does that help? 

Senator HATCH. That helps. That helps a little bit. 

I will turn to Senator Wyden. 

Senator WYDEN. Thank you very much, Mr. Chairman. I want to 

thank all of you. 

Let me begin, if I might, with you, Dr. Steuerle. You have been 

a veteran of the tax reform wars. I believe real tax reform gives 

everybody, not just those who are born on third base, the opportunity to get ahead. The current tax system primarily benefits 

those who own the ballpark. 

When you look at your numbers in particular, you come to the 

conclusion that, under the current tax code, the younger you are, 

the less income you make, the less our government does to boost 

opportunity for you to get ahead. That sure is a poster child for a 

tax system that is in the business of picking winners. 

So my first question to you is, would it not make sense, as a fundamental principle of tax reform, to clean out a lot of the special 

interest clutter, to hold down rates for everybody, and use it as a 

ladder to create more opportunity, especially for young people who 

are not getting those opportunities early on that you have described? 

Dr. STEUERLE. Senator Wyden, I certainly agree with your conclusion, but let me try to answer this in a way that I think is fairly 

bipartisan. 

Senator WYDEN. What I have described, as you know, is what 

Senator Coats and I have offered. It does not get more bipartisan 

than that. 

Dr. STEUERLE. That is what I said: I am agreeing with you on 

that. I guess where I am going along that path is, I want to distinguish between size of government and allocation. The issues you 

are raising have to do with how we allocate the budgets, which 

also, I think, reflects a little bit the previous question, the previous 

discussion. 

We actually have a social welfare budget in the United States, 

via the tax subsidies and the direct spending, of about $30,000 a 

household. That is not a trivial budget. We could argue whether it 

should be $35,000 or $25,000. A lot of it is in the tax code, a lot 

of it is in other parts of the direct spending system. 

There are ways of taking that money and reallocating it so that 

it more favors, not just lower-income households that are excluded 

from some of these tax breaks you are talking about, but also so 

that it moves more on the mobility side of the budget. 

19 

I kept emphasizing that what we have now is a budget that favors consumption, so low-income households are not left out, for instance, of the housing programs. But they are encouraged, for instance, to take rental housing where they might get rental subsidies, but not to own, whereas the subsidies for ownership, which 

are in the tax code, they are not encouraged to participate in. 

So it is not just upside-down in the tax code, it is upside-down 

across both the tax code and the social welfare system. I think 

there are ways of reallocating this money that would favor mobility 

in ways that I think that both political parties would favor. Many 

of these are in the tax code, many of them are also in the social 

welfare system. 

Senator WYDEN. Ms. Currier, let me turn to you, because I think 

you all are doing extremely important work as it relates to upward 

mobility at Pew. I am especially attracted to your ideas about personal savings. I mean, in effect this is an opportunity for a family 

to create their own safety net. 

In this regard, Senator Coats and I have proposed creating a new 

American Dream account which could be used for any purpose. 

What we would like to do is particularly address some of the judgments that you are making in terms of how young people could 

benefit from enhanced savings. 

How would you go about, at this point, setting up a new kind of 

savings opportunity? Where would you start it, and how would you 

use it in a way so as to create the best possible array of incentives 

for young people? 

Ms. CURRIER. Well, I think, as you know, our project has been 

fortunate enough since its inception to work with a bipartisan 

group of thought leaders and advocates, including Dr. Steuerle. 

They reflect views from across the political spectrum. 

A few years ago, they worked with our project to develop a set 

of policy recommendations that they unanimously agreed would enhance economic mobility. One set of those policy recommendations 

falls under the category of financial capital and includes a host of 

recommendations specifically about ways that families across the 

income distribution can develop savings. 

One of their policies includes child savings accounts and establishing accounts early in life so that children from the very beginning have opportunities to become more financially literate, build 

expectations for themselves about how that money could be used 

for human capital development, and also tap into behavioral economics, giving people an easier opportunity to invest in themselves 

and their children. 

Senator WYDEN. Mr. Chairman, if I could just ask one additional 

question. 

On education—and I think I would like to ask you this question, 

Dr. Lefgren—Senator Rubio and I have teamed up to propose a bill 

on higher education. You have been very interested in this field 

over the years. 

What Senator Rubio and I are proposing is called the Right to 

Know Before You Go Act, so as to help particularly college-bound 

students deal with this mountain of debt that so often they rack 

up. It has really become the 2nd-biggest investment, after buying 

a home, in their life. 

20 

I know that you have looked at this issue, particularly as a 

springboard to economic mobility for young people. What kinds of 

Federal policies would you suggest that could help young people 

who are getting shellacked by these enormous debts that they are 

facing for higher education? 

Dr. LEFGREN. One thing that I actually want to make clear is 

that higher education is still one of the best investments around. 

If you look at the economic literature, the returns from education 

have not been declining, they have actually been increasing over 

time. 

So I think it is important that, as we move forward, we do not 

send the message to our young people that higher education is a 

boondoggle or is a bad investment. It will, for most people, be the 

best investment that they can ever make. 

Now, there are a couple of problems. A lot of the mountains of 

debt, or the big problems, are people who go to expensive private 

colleges with a major in things that do not have a very high financial return, so there is an issue of major choice. Then there is also 

an issue where you look at some of the for-profit colleges that cater 

to disadvantaged applicants. In some ways they provide an opportunity, but many of those people who go through those programs 

have very poor outcomes. 

I think what I would like is for there to be just a lot more information. For example, if colleges sort of gave information on what 

a typical labor market outcome is for people who go through their 

institution or people who go through their program, that would 

allow people to make informed decisions, but still make efficient 

decisions. 

Senator WYDEN. That is exactly what Senator Rubio and I are 

proposing. We want young people to have that kind of information 

in front of them. The fact of the matter is, today, in many respects, 

you can get more information about buying a used car than you can 

about the point you are making in terms of what your economic 

prospects are when you get a degree from a particular school. So, 

we are going to be following up with you, because I think your 

point is spot-on. Thank you, Senator Hatch. 

Senator HATCH. Thank you. 

Senator Thune, we will turn to you. 

Senator THUNE. Thank you, Mr. Chairman. I want to thank our 

witnesses for sharing their insights today. We have had some discussion from our witnesses about a range of tax provisions and 

other programs that affect economic mobility, but I would also suggest that the greatest driver of upward economic mobility is not a 

government program, but the ability to find a good-paying job. Unfortunately, right now the policies that we have in place have failed 

to create enough jobs to lift incomes and raise living standards. 

The lack of a robust economic recovery has fallen particularly 

hard on younger Americans. If you look at the statistics, there is 

a recent Brookings Institute study that found that the percentage 

of Americans aged 20 to 24 who were employed fell nearly 8 percent between 2007 and 2010. This compares to a decline of less 

than 1 percent for Americans over the age of 55. 

There is another study that estimated that a young person graduating from college today will earn roughly 17.5 percent less than 

21 

they would if they had graduated during a stronger labor market. 

That translates into about $70,000 in lost income over a decade in 

time. 

So we can discuss specific government incentives at the margin, 

but I think we really need policies that promote job creation and 

keep taxes low and that provide, really, the economic certainty that 

I think our business owners and investors need. It seems to me, at 

least, that now would be a really bad time to implement large tax 

increases on the people who create jobs and our entrepreneurs out 

there. 

I want to just get your reaction to an issue that bears pretty 

heavily in the part of the country where I am from, and that has 

to do with the death tax, the estate tax. There is a lot of discussion 

about that and how much revenue it raises relative to the cost of 

compliance and other things. 

But one of the things that we do know affects economic mobility 

is the ability to save money over time. For many families, their 

small business is their savings. For these families, the Federal estate tax, or as I referred to it, the death tax, makes it more difficult 

for savings and wealth to pass from one generation to the next. It 

is especially true in rural areas of the country. 

According to the Department of Agriculture, farm real estate accounted for 84 percent of U.S. farm assets in 2009. For these farmers, who are land-rich and cash-poor and who have seen land valuations rise dramatically in many parts of the country, the death tax 

reverting to a top rate of 55 percent next year, coupled with an exemption amount of only $1 million, would be devastating. 

If we want to help Americans save for the future, and if we want 

to improve economic mobility, we need to make sure that the Federal death tax does not result in the liquidation of businesses that 

have been built up over a lifetime through many years of hard 

work. 

I guess I am just interested in your perspective on how that issue 

bears on this ability to transfer intergenerationally small businesses that would allow that next generation to achieve a higher 

standard of living. And particularly—I do not know if any of you 

can speak to this—from a rural perspective, farm and ranch families that I know of—in fact, I had someone mention to me just the 

other day, with the land values that we are seeing in many parts 

of the country today, you really can be land-rich and cash-poor and, 

when that time comes, end up having to liquidate a lot of your assets just to pay the IRS. That seems like a fairly counterproductive 

thing to do if you are interested in sustaining some of these businesses and creating economic opportunity for future generations. 

Does anybody want to comment on that? 

Dr. LEFGREN. I will comment for a moment. It is my recollection 

that the estate tax, even when the tax rates are higher, actually 

does not generate very much revenue because there are so many 

mechanisms that families have to estate plan prior to the passing. 

So in some ways, it is likely the case that the incentive effects of 

the estate tax, in terms of tax avoidance and that, are likely high 

relative to the financial benefits of increasing the tax. 

In countries like Sweden, they actually have high tax rates on 

labor income and actually relatively low tax rates on capital, beVerDate Nov 24 2008 20:19 Jul 29, 2013 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 R:\DOCS\81609.000 TIMD
22 

cause of the incentive effects. However, it is not obviously clear to 

me why there is something special about farmers relative to other 

people, for example, people who own expensive homes that have 

been in the family for a generation. It is not clear to me that that 

is sort of solving the problem or that the inheritance tax is something that is an obstacle to mobility. But I think the revenue effects, however, are pretty small, so it is probably a 2nd-order issue 

in terms of—— 

Dr. STEUERLE. Senator Thune, can I suggest that most of the 

data that we examine here is for the broad swath of the population, 

and I do not know if we could find the estate tax to say that the 

top 1 percent of wealth holders—I do not know how much that 

would actually show up even in our statistics. 

I mean, a lot of what we are talking about on intergenerational 

mobility particularly, is people near the bottom being able to rise 

up to the middle and even, say, top quartile, but not even necessarily the top 1 or 2 percent. I would suggest you might want to 

think about, if there is going to be a continuation of an estate tax 

at whatever rate, that it be divided into a capital gains at death 

and an estate tax. 

So instead of, say, a 30-percent cap death estate tax, you might 

think of a 15-percent capital gains tax and a 15-percent estate tax, 

which I think actually ameliorates a number of problems, although 

it may not solve the problem for the farmer who has had huge 

amounts of capital gains. 

Senator THUNE. Right. Good. All right. It is probably somewhat 

unique to more the middle of the country. I mean, it is not unique 

in the sense that you have a lot of small businesses that deal with 

this, but I think in terms of farm and ranch families who do work 

very, very hard, and in many cases because of the value of their 

operations—which at one time with land values were not what they 

are relative to today, but we have seen these land values increase 

dramatically. 

So now you have what would probably be characterized by many 

as a relatively small farm that has a pretty high value, and you 

would experience a significant amount of tax liability when one 

family member dies and passes that on to the next generation, 

which is what we try to encourage where I am from. You want people to continue to stay in farming, ranching, and agriculture. This 

has become a real detriment to that and a real obstacle to that, but 

that may be, again, a factor that is somewhat unique to where I 

am from. 

Dr. STEUERLE. And I think it is somewhat easy to exempt most 

of the farmers in that situation. I mean, depending on how we design it as well. 

Senator THUNE. You could, if you designed it the right way. But 

as of January 1st of next year, the exemption level goes down to 

a million dollars and the top rate goes up to 55 percent. If you have 

a 1,000-acre farm at $5,000 an acre on that farm, you are at $5 

million right there, and that does not include equipment or anything else. 

Dr. STEUERLE. I think $1 million is very low. My calculations on 

the lifetime value of Social Security and Medicare benefits is they 

are close to $1 million for a couple, too. 

23 

Senator THUNE. Right. 

Dr. STEUERLE. So we are getting up pretty close to middle-class 

assets, at least at some level. 

Senator THUNE. All right. Thank you. 

Thank you, Mr. Chairman. My time has expired. 

The CHAIRMAN. Thank you, Senator. 

I might chime in with the remarks of the Senator from South 

Dakota. In my part of the country, that is a real issue, for the reasons that he indicated. 

I wonder, what do we do about crime in cities, inner cities? There 

have been reports in the last several days about the murder rate 

going up in Chicago. The new mayor, Rahm Emanuel, is trying to 

address it, and doing a very good job. Chicago is a great city. But 

my sense is that, in a lot of these cases, if you are born into a part 

of a city where all you see is gang warfare, that is probably what 

you are going to end up doing, being a gang member. 

I do not know how you break that cycle. What do you do in these 

neighborhoods? It is a crazy thing to say, but I have been home in 

my State of Montana for 10 days, and I came back yesterday, and 

all I heard was a bunch of sirens, cops chasing after people, and 

they got hold of somebody, about eight squad cars just a block from 

where I live. My gosh, we do not have this in Montana. But it is 

here, and it is in other cities around the country. 

So, it is tough. How do you address mobility when you are born 

in the inner city and all you see is crime, a single parent, if you 

are lucky? How do you deal with that? Anybody? 

Dr. LEFGREN. Can I? 

The CHAIRMAN. Yes. 

Dr. LEFGREN. This is something that I have done some research 

on. There is good work by Lance Lochner and others that looks at 

the impact of educational investments on subsequent criminal activity. So in the long run, encouraging the same investments that 

promote upward mobility actually leads to reductions in criminal 

behavior. There is also literature by Steven Raphael and David 

Mustard, who look at the impact of labor market opportunities on 

criminal behavior. 

So a lot of providing labor market opportunities to these young 

people is also another medium- to long-run solution to—these are 

what you are going to want to do dynamically. In the short run, 

you have the options of increasing incentives and incapacitation 

through incarceration, except I think that, relative to other developed countries, we already have excessive levels of incarceration for 

many offenses. 

The CHAIRMAN. Obviously this is a hearing of the Finance Committee on the tax code, but one thing that impressed me is 8, 9, 

10 years ago I saw a local news program about how a principal in 

a garden-variety school on the East Coast—it was mixed races, 

nothing really to distinguish it from any other school, except it had 

very high drop-out rates and very low test scores. They were in a 

world of hurt at this school. 

So the principal did something that took them 3 years to accomplish. It looked like a very good idea. Essentially, he figured out a 

way to have a parent or guardian of each student spend a couple 

of hours a week at that school. Maybe somebody was a playground 

24 

monitor, maybe somebody knew a little bit about English or math, 

maybe somebody knew a little bit about shop or making something. 

But anyway, after 3 years he was able to get a parent or guardian of every single student to spend a couple of hours a week at 

that school. Grades shot up, drop-out rates plummeted. My sense 

is it is because the school and the parents took ownership of the 

school and what was going on, knew other kids—kind of a family, 

if you will. 

My sense is, the more schools do things like this, maybe earlier— 

I know it is easier at the mid-school age, but even at an earlier age, 

perhaps, you can address some of this needed sense of community 

at schools so kids have confidence, they know they have friends, 

they know somebody cares about them, and so forth. 

Dr. NEWMAN. Mr. Chairman, I think one of the things we can actually justly be proud of in the United States over the last couple 

of decades is that crime rates have actually gone down very significantly in most of our cities. 

The CHAIRMAN. I have seen that. Right. That is right. 

Dr. NEWMAN. That does not mean that that will necessarily last 

forever. I think the wave of foreclosures that is leading to abandoned properties in cities like the one where I live now, Baltimore, 

or cities like Detroit, may well create a turn-around on that that 

we will not be happy to see. 

But I think that we need to recognize a very small number of 

people can make a neighborhood dangerous for everyone else who 

lives there. It is very rarely the case that you have massive numbers of people involved in gang activity. You have a few, and they 

make life pretty miserable for everyone else. 

But we do know that strong neighborhoods that have good, 

strong social backbones to them generally tend to police their own 

and become neighborhoods in which crime rates do not spread. So 

we need to look at what makes for stable neighborhoods, and all 

the institutions we have been talking about today—strong schools, 

strong families—contribute to neighborhoods that have strong social organization, and that is where you tend to see crime rates 

down, even if they are poor. 

So I think it is important for us to recognize all of these things 

are interconnected. All these institutions and their stability are 

interconnected, and you do not see crime spread where you have 

families that have opportunity for strength, schools that are functioning, opportunities for young people other than crime. 

Dr. STEUERLE. Senator? 

The CHAIRMAN. Yes? 

Dr. STEUERLE. Can I mention one tax provision I think that 

would affect the discussion here? 

The CHAIRMAN. Yes, good. We have to get to tax here. 

Dr. STEUERLE. By the way, I reconfirm what you said. The example you gave is one—if we could figure out ways—and it would vary 

widely from a community in Montana to a community in New 

York—to have an adult presence around most kids most of the 

time, most of the year—there are a lot of different ways to think 

about that—it makes a huge difference in what happens in their 

life. This actually starts at a very early age. 

25 

But the tax code provision I would refer to is wage subsidies. 

There is one group that is largely left out of our social welfare system. Our social welfare budget is largely oriented towards you and 

me as we get older. That is where all the money is going, we know 

that, on the entitlement side. But on the welfare side, it is for families with children, largely single parents with children. We tend to 

exclude the married families with children because their income 

starts rising just enough that they get excluded. 

The low-wage male, the young male and female who is just starting out in life, typically is excluded from this system, with the one 

exception: if they go to prison, they will get a lot of government 

money, but not necessarily to help them. 

I think there are ways to redesign our wage subsidies so we try 

to subsidize a little more, or reorient it so we subsidize a little 

more of the low-wage worker without requiring they be the one 

who raises the children, or they be the one who, on the side, helps 

raise the children as long as they do not marry. 

The CHAIRMAN. Thank you. My time has really expired some 

time ago. 

Senator Hatch, anything? 

Senator HATCH. Well, thank you. I just want to thank all of our 

witnesses for being here. I am sorry I missed part of this, because 

I was on the floor. But this is an extremely interesting area. 

I have some questions for you, Dr. Lefgren, but I think I will 

withhold them and submit them in writing so you can answer them 

for us, and for the rest of you as well. There are a number of questions that I would have liked to have had everybody on the panel 

give their answers to. 

But I appreciate you holding this hearing, Mr. Chairman. I think 

it is an important one, and I will do what I can to help. 

The CHAIRMAN. Thank you. Thank you, Senator. 

This really is critical. First, thank you. Second, I urge you to 

keep thinking. When you are walking out of here and you are going 

home, gee, here is something else that we could be doing, something else I want that committee to know about and push them on. 

So, please stay involved, because this is really critical. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 4:07 p.m., the hearing was concluded.] 

(27) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


81609001.eps
28 


81609.002
29 


81609.003
30 


81609.004
31 


81609.005
32 


81609.006
33 


81609.007
34 


81609.008
35 


81609.009
36 


81609.010
37 


81609.011
38 


81609.012
39 


81609.013
40 


81609.014
41 


81609.015
42 


81609.016
43 


81609.017
44 


81609.018
45 


81609.019
46 


81609.020
47 


81609.021
48 


81609.022
49 


81609.023
50 


81609.024
51 


81609.025
52 


81609.026
53 


81609.027
54 


81609.028
55 


81609.029
56 


81609.030
57 


81609.031
58 


81609.032
59 


81609.033
60 


81609.034
61 


81609.035
62 


81609.036
63 


81609.037
64 


81609.038
65 


81609.039
66 


81609.040
67 


81609.041
68 


81609.042
69 


81609.043
70 


81609.044
71 


81609.045
72 


81609.046
73 


81609047.eps
74 


81609.048
75 


81609.049
76 


81609.050
77 


81609.051
78 


81609.052
79 


81609.053
80 


81609.054
81 


81609.055
82 


81609.056
83 


81609.057
84 


81609.058
85 


81609.059
86 


81609.060
87 


81609.061
88 


81609.062
89 


81609.063
90 


81609.064
91 


81609.065
92 


81609.066
93 


81609.067
94 


81609.068
95 


81609.069
96 


81609.070
97 


81609.071
98 


81609.072
99 


81609.073
100 


81609.074
101 


81609.075
102 


81609.076
103 


81609.077
104 


81609.078
105 


81609.079
106 


81609.080
107 


81609.081
108 


81609.082
109 


81609.083
110 


81609.084
111 


81609.085
112 


81609.086
113 


81609.087
114 


81609.088
115 


81609.089
116 


81609.090
117 


81609.091
118 


81609.092
119 


81609.093
120 


81609.094
121 


81609.095
122 


81609.096
123 


81609.097
124 


81609.098
125 


81609.099
126 


81609.100
127 


81609.101
128 


81609.102
129 


81609.103
130 


81609.104
131 


81609.105
132 


81609.106
133 


81609.107
134 


81609.108
135 


81609.109
136 


81609.110
137 


81609.111
138 


81609.112
139 


81609.113
140 


81609.114
141 


81609.115
142 


81609.116
143 


81609.117
144 


81609.118
145 


81609.119
146 


81609.120
147 


81609.121
148 


81609.122
149 


81609.123
150 


81609.124
151 


81609.125
152 


81609.126
153 


81609.127
154 


81609.128
155 


81609.129
156 


81609.130
157 


81609.131
(159) 

COMMUNICATIONS


81609132.eps
160 


81609.133
161 


81609.134
162 


81609.135
163 


81609.136
164 


81609.137
165 


81609.138
166 


81609.139
167 


81609.140
168 


81609.141
169 


81609.142
170 


81609.143
171 

Æ 


81609144.eps