Washington, D.C.— Today, Chairman Patty Murray (D-WA) and the Senate Budget Committee held a hearing with policy experts on tackling the deficit in a balanced and fair manner, rather than solely by cutting programs that are critical to families, seniors, and communities nation-wide. Majority witnesses included Edward D. Kleinbard, Professor of Law, University of Southern California, Gould School of Law and Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and Policy Priorities. Members and witnesses discussed the impact of tax expenditures on the deficit, and the need to close loopholes and eliminate wasteful and unfair spending in the tax code.
Professor Kleinbard testified on the effects of tax expenditures and the need for tax reform, “The United States can afford to increase the total taxes it collects as a fraction of GDP. Just a decade ago, the country ran budget surpluses and enjoyed both a robust economy and job growth, while tax collections exceeded 20 percent of GDP…. this means directly tackling some of the deliberate Congressional subsidy programs baked into the tax code, which is to say, tax expenditures.”
Read Professor Kleinbard’s full testimony.
Dr. Bernstein testified that tax expenditures’ usefulness, or lack thereof, should be assessed using a three-part test. He noted, “Members will not be surprised that it is far too easy to find many tax expenditures that are ‘trifectas’: they forego significant revenue, they induce inefficiencies, and they return most of their benefits to the wealthiest households, boosting after-tax inequality and failing on the fairness criterion.”
Read Dr. Bernstein’s full testimony.
Key excerpts from Murray’s opening statement
“Now, there’s no question that we do need to look at government programs carefully, so that we can make fair, responsible cuts that put families and our economy first. But a big source of spending, and one that deserves to be just as closely examined, is expenditures in our tax code. While we don’t often think of tax expenditures as a form of spending, they require us to make the same kinds of tradeoffs that other forms of government spending would, and lots of them.
“There’s no good reason, for example, that taxpayers currently subsidize millionaires more, when they purchase a second home, or a yacht, than they do middle class families purchasing their first home. And why should a hedge fund manager pay a lower tax rate on his income than a soldier, police officer or a teacher?
“If the goal of our budget plan is to strengthen the middle class and work towards broad-based economic growth, finding savings from unfair tax provisions is an opportunity to responsibly reduce our deficit, and invest in our future.
“Just as we have got to bring down our deficits and debt, we’ve got to make sure we’re educating our workforce for the 21st century. We need to repair our roads, bridges and airways so that businesses can move their people and products efficiently. And we need to invest in research and development so we can continue growing new industries in the United States, rather than ceding those new industries, and the jobs that come with them, to China or India.
“So at a time when we absolutely must cut where we can, looking at ways we can close special tax breaks that aren’t targeted to help the middle class or our economy just makes sense. Especially when, by making these adjustments, we can stop giving an unfair advantage to those who are already doing far better than most Americans, and instead focus on making crucial investments in our future, while cutting our deficit in a fair way.”
Watch Chairman Murray give her opening statement.
Chairman Murray’s opening statement:
“This hearing will now come to order. I would like to thank our witnesses, who I will introduce in just a moment. Ranking member Senator Sessions, and all of my colleagues, thank you for joining me here today.
“Over the next few weeks, both chambers of Congress will be debating fundamental choices about our country’s direction, and what kind of nation we will leave to our next generation. We will lay out proposals that reflect very different approaches to the many challenges we face.
“One central question we’ll be looking at is how can we bring down our debt and deficits, while putting the middle class and broad-based economic growth first?
“Today’s hearing will focus on how cutting wasteful spending from our tax code can help us meet this challenge.
“As we’ve looked for ways to reduce our deficits and debt, we’ve heard a lot of outrage about waste and excess in government programs. My Republican colleagues, in particular, tend to focus on cutting programs the most vulnerable families depend on to get back on their feet. They say spending on food stamps is out of control, and we can’t afford so many education and job training programs, and unemployment benefits are driving up the deficit.
“Now, there’s no question that we do need to look at government programs carefully, so that we can make fair, responsible cuts that put families and our economy first. But a big source of spending, and one that deserves to be just as closely examined, is expenditures in our tax code. While we don’t often think of tax expenditures as a form of spending, they require us to make the same kinds of tradeoffs that other forms of government spending would, and lots of them.
“Tax expenditures have grown over the last 20 years to become one of the largest impacts on our deficits and debt. Just this year, the Treasury will lose $1.3 trillion to tax expenditures. That’s more than we’ll spend on either Social Security or Medicare.
“But unlike funding for government programs like Pell Grants or Head Start, or road repairs, which is limited and also reviewed regularly, tax expenditures have flown under the radar. Since they generally don’t need to be reauthorized, they receive much less scrutiny than programs that do need to be reauthorized. That’s why Alan Greenspan once called them ‘tax entitlements.’
“But here’s a big difference: when we think of entitlements, we typically think of Social Security and Medicare, which keep our promises to seniors, or nutrition assistance, for families who’ve fallen on hard times. These programs allow our country to fulfill its part of the bargain with those who have already done their share, and enable us to give those most in need some relief.
“However, for the vast majority of tax expenditures, about 70 percent of them, it’s the other way around. For that 70 percent of tax expenditures, the higher your income, the more you benefit. So the wealthiest households benefit the most, while middle class families receive much smaller benefits, and many of our most vulnerable don’t qualify at all. The less you need, the more you get. And we all pay for it.
“In 2012, on average, the top 1 percent of income earners saw their after-tax income increase by nearly $250,000 as a result of tax expenditures. But middle class families received an average benefit of only about $3,500.
“Which means that when we talk about big government welfare, maybe we shouldn’t always jump to cut spending for those who are most in need. Maybe we should think about what we’re spending on those who are least in need.
“The skewed nature of tax breaks like these has helped drive the amount the wealthiest Americans pay in taxes to historically low levels, as a share of their income. IRS data show that the effective tax rate for the 400 wealthiest taxpayers has fallen from almost 30 percent in 1995, to only 19.9 percent in 2009. This is less than the rate paid by many middle-class families. And meanwhile, over the same time period, the average income for the 400 wealthiest taxpayers rose five-fold. That’s probably why some tax expenditures are often called back door spending, or special interest earmarks for the largest corporations and wealthiest Americans.
“Of course, not all expenditures in the tax code are wasteful. Many help hardworking families reach goals like sending a child to college, which helps them, their child, and our economy. But many, too many, are inefficient and unfair.
“There’s no good reason, for example, that taxpayers currently subsidize millionaires more, when they purchase a second home, or a yacht, than they do middle class families purchasing their first home. And why should a hedge fund manager pay a lower tax rate on his income than a soldier, police officer or a teacher?
“We’ve got some clear opportunities to cut wasteful spending and make our tax system work better for middle class families.
“And at a time when there is far too much we disagree on in Washington, there does seem to be acknowledgement by leaders on both sides of the aisle that we should seize these opportunities.
“Senator Tom Coburn said, ‘Masquerading as tax cuts, many of these programs are no different from any other federal program that spends taxpayer money.’ Speaker Boehner recently proposed to raise $800 billion in new revenue by closing what he termed, ‘special-interest loopholes and deductions.’ Even House Budget Committee Chairman Paul Ryan has noted that many preferences in our tax system are, ‘patently unfair’ and ‘mainly used by a relatively small group of mostly higher-income individuals.’
“I appreciate Senator Coburn, the Speaker, and Chairman Ryan for making these arguments, and pointing out that these loopholes help special interests succeed, but do very little to help middle class families succeed. I, like many of my Democratic colleagues, would like to know when Republicans will be willing to sit down with us and start looking strategically at which wasteful provisions we can eliminate.
“Experts across the political spectrum have also proposed eliminating wasteful spending in our tax code as a way to reduce our deficit. Discussing options for major deficit reduction, Ronald Reagan’s chief economist Martin Feldstein recently said, ‘The distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.’ And today, we’ll hear from experts who have studied this issue at length.
“Professor Edward Kleinbard has noted that we spend twice as much on tax expenditures as we do through discretionary investments, like education, infrastructure and research. But many of these subsidies are both poorly targeted, and skewed to unfairly benefit high-income Americans more than low-income Americans.
“Economist Jared Bernstein recently explained that by reducing unfair tax expenditures, we can essentially raise revenue by cutting spending. That sounds like a form of deficit reduction Democrats and Republicans should be able to agree on.
“I look forward to hearing their testimony, as well as testimony from Mr. Roberts of the Hoover Institution, who Senator Sessions will introduce.
“If we agree that there is wasteful spending in the tax code, and I think it’s clear that there is, the next question is, how should those savings be used?
“Many of my Republican colleagues would prefer to use every dollar of new revenue to dramatically lower tax rates, rather than making critical investments in our competiveness, or paying down the debt. But that approach is more of the same.
“It would very likely make it easier for the wealthy to get even further ahead of middle class families, while making paths to opportunity for the middle class, through student loans, workforce training, and job-creating research and innovation, more narrow.
“If the goal of our budget plan is to strengthen the middle class and work towards broad-based economic growth, finding savings from unfair tax provisions is an opportunity to responsibly reduce our deficit, and invest in our future.
“And let’s remember that all of the bipartisan groups, like Simpson-Bowles and the Senate Gang of Six, agreed. They all recommended using a significant portion of the revenue from eliminating tax breaks to reduce the deficit.
“As Democrats and Republicans both know, responsible deficit reduction is essential to our long-term prosperity. But that’s not all we have to do.
“Just as we have got to bring down our deficits and debt, we’ve got to make sure we’re educating our workforce for the 21st century. We need to repair our roads, bridges and airways so that businesses can move their people and products efficiently. And we need to invest in research and development so we can continue growing new industries in the United States, rather than ceding those new industries, and the jobs that come with them, to China or India.
“That’s why proposals from nonpartisan experts include new revenue for deficit reduction, and point out the need to continue making investments in our long-term economic well-being. The Simpson-Bowles plan, for example, described infrastructure, higher education and research and development as, ‘high-priority investments America will need to stay competitive.’
“And we’ve seen time and time again that the American people agree. The American people also think we should get rid of inefficient, unfair tax breaks skewed towards the wealthiest Americans and corporations. A recent poll showed that 57 percent of respondents strongly agreed we should eliminate the loophole that allows hedge fund managers to pay lower tax rates than the middle class. 58 percent strongly agreed with closing loopholes that allow wealthy Americans and corporations to shift income overseas. And Americans want to see that new revenue used to lower the deficit, and make crucial investments in our future, rather than lowering tax rates for those who are already doing just fine.
“I’m looking forward to today’s conversation, because it seems that cutting wasteful spending in our tax code would help us move forward on a number of challenges.
“We know there is wasteful spending in our tax code. And Chairman Ryan was absolutely correct; much of it is skewed towards the wealthiest Americans.
“So at a time when we absolutely must cut where we can, looking at ways we can close special tax breaks that aren’t targeted to help the middle class or our economy just makes sense. Especially when, by making these adjustments, we can stop giving an unfair advantage to those who are already doing far better than most Americans, and instead focus on making crucial investments in our future, while cutting our deficit in a fair way.
“I would like to thank all our witnesses again for joining us today. I hope that this hearing can be a productive discussion.
“And now I’ll turn it over to ranking member Senator Jeff Sessions.”
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