Hearing Recap – Tackling the Tax Code: Evaluating Fairness, Efficiency and Potential to Spur Inclusive Economic Growth

Jun 22, 2022
Press Release

Watch the Full RecordingRead the Written Event Recap

Read Panelist RecommendationsRead the Policy Memo and Testimony

 

WASHINGTON – On Wednesday June 22, 2022, at 12pm ET, the U.S. House Select Committee on Economic Disparity and Fairness in Growth – Chaired by Rep. Jim Himes (CT-04) – hosted a hearing titled “Tackling the Tax Code: Evaluating Fairness, Efficiency and Potential to Spur Inclusive Economic Growth.” Members and bipartisan experts discussed how tax policy affects economic disparity, focusing on how federal tax policy influences household and business decisions, macroeconomic performance, and the ability to raise revenue to pay for federal investments. Members also evaluated the progressivity and efficiency of the current tax code and discussed proposals to make the code fairer.

Opening Statements from Chairman Jim Himes (CT-04) and Ranking Member Bryan Steil (WI-01)

“Today’s hearing will focus on the efficiency and fairness of the U.S. tax code,” said Chairman Himes. “In general, our progressive tax regime means if you make more money, you generally pay more taxes. In practice, the tax code ceases to be progressive at the very top of the income distribution.”

“One of the reasons we lack progressivity in the tax code is that it includes preferential tax rates for yields on capital, dividends, interest, and capital gains,” continued Chairman Himes. “Proponents for these preferential rates argue they may lead to more economic growth, but the problem with this theory is that it is just not clear that this is true. I hope we take a hard look at those tax expenditures, and I believe it is a bipartisan belief that government subsidies and benefits should go towards those who need them and whose marginal dollars are much more valuable.”


The Select Committee presented recorded video testimonials of individuals communicating the impact the Child Tax Credit had on their lives:


Ana Betancourt – Resident of Los Angeles  

“[The Child Tax Credit] sincerely means so much, because being left without a job, the CTC helped us pay back past-due bills for gas and electricity, with the little left used for food.”

Talia Robollar – Resident of Los Angeles

"I make $600 every two weeks so that money was a blessing for me. I bought [my daughter] some shoes because her feet are growing.” Talia continued, “I bought her clothes. [I am] buying her food. So for me, that [the CTC] was a big help."


The following witnesses testified before the Select Committee on ways the federal government can reform tax policy:


Dr. William Gale, Senior Fellow, Brookings Institution and Co-Director of the Urban-Brookings Tax Policy Center, discussed the overall economic effects of the tax code on individual and business economic decisions. “Decades of research show that tax cuts, especially for high-income households, have little to no impact on economic growth,” stated Dr. William Gale, adding there are “several policies that could raise revenue, would not hurt – and could boost – economic growth, and could be used to finance programs to boost the economic prospects for less affluent households and reduce economic disparities.”

Professor Dorothy Brown, Professor of Law, Georgetown University Law School, explained the structural and racial biases in the U.S tax system. “Once we understand how the joint return became law and which couples it was designed to benefit, we will understand why Black married couples have been left behind,” said Professor Dorothy Brown, adding, “by ignoring race during tax policy discussions, we are working to maintain the status quo of economic inequality.”

Mr. Seth Hanlon, Senior Fellow, Center for American Progress, evaluated provisions in the federal tax system that perpetuate economic disparity and affect the overall fairness of the system. “One important factor enabling inequality has been how the tax code provides special, favorable tax treatment for income derived from wealth, and utterly failing to tax some of the largest fortunes,” stated Mr. Seth  Hanlon.

Ms. Amy Matsui, Director of Income Security and Senior Counsel, National Women’s Law Center, highlighted specific tax policies that benefit lower-and middle-income families and their economic effects on the country.  “Given the historical discrimination and ongoing structural barriers that have locked women and people of color out of economic opportunity, tax provisions can amplify gender and racial disparities,” testified Ms. Amy Matsui.

Ms. Angela Rachidi, Senior Fellow, American Enterprise Institute, advocated for replacing refundable tax credits like the CTC and the Earned Income Tax Credit (EITC) with a Working Family Credit (WFC) that would encourage employment. “The WFC would merge the three primary deferral tax-benefits for families with children – the EITC, the CTC, and head of household tax preference – into one child-related benefit administered through the tax system,” stated Ms. Angela Rachidi.


The subsequent Q&A portion of the hearing produced the notable points of exchange between the Select Committee Members and witnesses:


Chairman Jim Himes (CT-04) asked Dr. William Gale to explain the public purpose of preferential rates and the effect these rates have on investment, growth, and the tax code. Dr. William Gale responded by providing numerous examples of tax reforms and concluded there is “an enormous amount of ideology here and very little evidence that these capital income tax cuts are generating the growth that people want them to.”

Congressman Jodey Arrington (TX-19) asked Mr. Seth Hanlon if he supported the SALT cap deduction being raised, to which Mr. Seth Hanlon responded he does not believe that “raising the SALT cap entirely should be a priority in this reconciliation bill.”

Congresswoman Pramila Jayapal (WA-7) asked Professor Dorothy Brown, “What does it mean for groups that are left out of paying their fair share in taxes if the Tax Code focuses on income?” Professor Dorothy Brown replied, “it means that highest-income white Americans are the ones most likely to own and get income from stock that’s subject at most to the 20% tax rate whereas wage earners, which are disproportionately Black and Hispanic, are being taxed on every dollar of their income.”

Ranking Member Bryan Steil (WI-01) asked Dr. Angela Rachidi about real-world implications of removing work requirements for accessing the Child Tax Credit and the Earned Income Tax Credit. Dr. Angela Rachidi answered, “I think the main concern with making the CTC fully refundable, meaning that it went to non-working families, as that it would disincentivize employment over the long-term,” adding “the concern in moving back to an Aid to Families with Dependent Children-type approach in how to reduce poverty I think raises a lot of concerns, mainly because it does disconnect our government programs from employment.”


Summary of Memorandum Prepared by Select Committee Majority Staff


Tax Policy and Economic Outcomes

Tax policy serves several economic purposes, the most fundamental of which is to raise revenue to pay for government spending on public goods, services, and benefit programs. Tax policy also forms part of the tax and transfer system designed to redistribute income— from (on net) tax higher-income households to (on net) assist lower-income households. Further, tax policy is also used to support or promote certain types of economic activities (forms of income, types of consumption) with tax-preferred treatment via exemptions, deductions, credits, or preferential/reduced tax rates.

Whether taxes are levied on households or businesses, tax policy has very direct influences on both economic growth and economic disparity. By taxing income, taxes can discourage productive economic activity such as working and saving by reducing the net-of-tax wage rate or net-of-tax return received, if the incentive effect of the tax rate outweighs the income effect on those behaviors. But tax rates that rise with income are necessary to achieve distributional goals (a “progressive” tax system)—so there is often an efficiency-equity tradeoff where lowering taxes at the top of the income distribution could increase overall economic growth yet exacerbate economic inequality (disparity).


Tax Policy and Inequality

The overall federal tax system accounting for all the major tax bases (individual income, corporate income, payroll, and excise) is a progressive system, in general imposing higher average tax rates on high-income households than on lower-income households, largely because the largest tax in revenue terms is the individual income tax which is intentionally designed to be progressive via both the exemption level and increasing marginal tax rates (tax liability on next dollar earned) as taxable income rises.

Because the tax system does not tax all forms of income at the same marginal or average rates, there are distributional consequences reflecting the fact that highest-income households tend to have more sources of income than only labor income. Capital income also faces lower marginal tax rates as well as benefits from explicit tax expenditures (“subsidies”) like preferential tax rates, exclusions, or deductions. 


Tax Policy and the Macroeconomy

Collecting revenue through an income tax where both marginal (statutory) and average (effective) tax rates tend to rise with income can in theory present a tradeoff between the distributional and macroeconomic goals of taxation. Taxing higher-income households at higher rates might discourage people from earning higher income, if the tax share taken out of their marginal dollars earned is too high. Taxing corporations via the corporate income tax does not absolve us from this tradeoff, as the economic burden of taxes remitted by a corporation ultimately falls on real people, in their roles as workers, consumers, executives or investors. The theoretical concern about higher tax rates on the rich or on corporations is that they might discourage work, saving, investment, or innovation—in a way that reduces overall macroeconomic growth (GDP) and economic activity for everyone. 

Recent research focused on the performance of broad-based tax cuts in terms of creating jobs and boosting wages shows mixed results, suggesting that tax policies more specifically targeted toward businesses that demonstrably create new jobs or retain workers or increase wages would be more effective. Another recent analysis of the effect of the influence of (broad-based) corporate tax cuts on employee wages finds that the workers most likely to see tax cuts passed along to them in higher wages are the most highly compensated employees, not the rank and file.


Recent and Pending Tax Reforms

The Tax Cuts and Jobs Act of 2017: In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) into law which made several temporary and permanent tax policy changes. TCJA increased the pre-2017 Child Tax Credit from $1000 per qualifying child to $2000 and increased the refundable Additional CTC to “15% of household earnings above $2,500, and up to $1,400 per child in 2018. 

Shortly after the passage of TCJA, the Joint Committee on Taxation (which uses after-tax income as a proxy for taxpayers well-being) found “the groups predicted to have the largest increases [in after-tax income] being those who earn between $500,000 and $1 million.” Further, low- to moderate-income taxpayers ($40,000 or less) would see after-tax incomes fall in years 2023 and after.34 One reason for this disparity is that the deduction for pass-through business income tends to benefit higher-income households. Together with the corporate tax rate cuts, these TCJA tax policy changes disproportionately benefit highest-income households.  


The American Rescue Plan and pandemic-era tax policy: The COVID-19 Pandemic-induced recession incurred severe costs on Americans’ economic well-being. The federal government responded with major stimulus programs to mitigate the economic downturn, which included the most significant tax policy changes since TCJA. The American Rescue Plan Act (ARPA) of 2021 made expansions to key tax provisions primarily benefiting low-income families 

As a result of ARPA, the expanded and refundable CTC reached nearly 40 million families and 65 million children, driving child poverty to record lows in 2021 with 67 percent of households benefiting from the expansion making less than $99,000 a year.38 The EITC expansion helped millions of front-line workers – many of which are people of color – and benefited over 25 million working families and individuals who received around $2,400.
 

117th Congress