Daily Tax Update - July 10, 2012: Finance Committee Discusses Economic Opportunity and Tax Reform

FINANCE COMMITTEE DISCUSSES ECONOMIC OPPORTUNITY AND TAX REFORM:  Today, the Senate Finance Committee held a hearing entitled "Boosting Opportunities and Growth Through Tax Reform:  Helping More Young People Achieve The American Dream."  The hearing examined the role the tax code can play in promoting economic opportunity for young Americans.

  • In his opening remarks, Chairman Max Baucus said, "Congress has tried to improve opportunities for families and children through the tax code.  There are numerous tax incentives to encourage work, education, healthcare 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 three million children out of poverty.  And health reform will give more pregnant women access to quality health care.  But many incentives the tax system provides 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 high tax brackets than those with lower incomes."  Baucus added, "The tax system isn’t the only way to improve opportunities, but it’s an important way.  We should use all the tools that we have.  So as we work to simplify the tax code, let us ensure every child has a fair shot at a richer and fuller life."
  • The witnesses were:
    • Dr. Katherine S. Newman, James B. Knapp Dean of The Zanvyl Krieger School of Arts and Sciences, The Johns Hopkins University
    • Dr. Lars J. Lefgren, Associate Professor, Department of Economics, Brigham Young University
    • Ms. Erin Currier, Project Manager, Economic Mobility Project, The Pew Charitable Trusts
    • Dr. C. Eugene Steuerle, Institute Fellow and Richard B. Fisher Chair, The Urban Institute
    • Dr. Newman stated, "The most important contribution it makes to educational outcomes for low income families occurs via the Earned Income Tax Credit. . . . Specifically, what can the tax code provide that improves the odds?  Part of the answer 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."
    • Dr. Lefgren testified, "[I]t 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 inequality.  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."
    • Ms. Currier said, "Our shared goal is to improve upward mobility for everyone, with a particular emphasis on lower-income Americans, those who face the most difficulty in moving up the income ladder.  We are calling for nothing less than a fundamental shift toward government policies that are mobility-enhancing, and a more targeted allocation of existing mobility expenditures towards low- and moderate-income families."
    • Dr. Steuerle stated, "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 our people or of either political party.  Instead, the automatic features of our budget increasingly favor
      • end-of-life support over beginning-of-life support — that is, more support to help each person retire early and consume than to help the next generation build productive lives;
      • consumption over investment, including social consumption (Social Security, Medicare, and food assistance) over social investment (children’s health and education); and
      • for poor and moderate-income households, adequate consumption, especially for those who do not work, but exclusion from mobility-enhancing programs."
    • Dr. Steuerle added, "There are limits to how much government generally, or the Senate Finance Committee more specifically, can do to increase intergenerational mobility.  However, a good place to start would be to do just as you are doing today:  consider how well the automatic growth in many types of tax subsidies, as well as other programs under its jurisdiction, promote or hinder such mobility."
    • Testimony can be accessed here.
    • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

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