"In my view, the key to stronger economic growth starts with removing burdens we impose on work, savings, and investment.”
WASHINGTON—U.S. Sen. Jeff Sessions (R-AL), Ranking Member of the Senate Budget Committee, delivered an opening statement today at a Committee hearing on supporting broad-based economic growth and fiscal responsibility through tax reform. His remarks, as prepared, follow:
“Chairman Murray, thank you for holding this hearing today. We all agree that public policies need to support strong economic growth that benefits all Americans, and we have a growing consensus that one of the barriers to strong growth is our badly broken tax code.
However, our broken tax code is but one expression of the burden bad fiscal policy places on our economy. Excessive non-productive spending and the consequently high and growing national debt also retard the pace of economic activity.
We need to adopt sensible fiscal policies to get our budget under control and allow the economy to grow more rapidly. That’s why I’m so pleased to have Dr. Veronique de Rugy testifying today. She’s a widely recognized expert on how developed countries have attempted to stabilize their debt and bring their budget—both spending and taxes—under control. Some countries have done this well, others not; and Dr. de Rugy is here to tell us what works and what does not.
There can be no more appropriate time than now to consider the role of tax and spending policies in facilitating higher levels of economic growth. If the federal budget is to significantly improve in the near term, then the pace of economic activity must improve very soon. This improvement, however, may be hard to achieve: this economic recovery remains the slowest since the end of World War II.
The National Bureau of Economic Research dates the end of the Great Recession in June of 2009. Since then the economy has grown on average by only 2.1 percent. That’s significantly less than the rate of previous recoveries after 15 quarters. The U.S. economy is 8.3 percent bigger today than when the recession ended, which is a little less than half the average increase in the size of the US economy after 15 quarters following a recession.
This economic sluggishness comes with a great human cost. There are still fewer jobs today than when the recession started: total non-farm employment in April 2013 was 2.3 million below the level in December 2007. The overall unemployment rate is 7.5 percent, also higher than it should be this far from the end of the recession; and key unemployment rates for important demographic segments are even higher: the rate for Hispanics stands at 8.4 percent, for Blacks at 12.8 percent, and for teenagers at 24.1 percent.
These high rates of unemployment and a surprising workforce dropout rate have reduced personal income and, thus, federal revenues.
Add to this lost revenue the estimated outlays associated with unemployment being higher than it should be at this point in the recovery—about $48 billion, and the total harm of our underachieving economy to the federal budget is nearly $90 billion this year alone. Policy makers will note that this amount roughly equals the 2013 fallback sequester.
Not all of this lost income, however, is due to unemployment. Some stems from people simply dropping out because government benefits are generous that it doesn’t pay to work. I’m increasingly concerned by how well-meaning public policies are creating incentives for otherwise able-bodied workers to stay out of the labor force.
The truth is that the generosity of program benefits has grown far faster than inflation or wages since 2007. A paper published by the National Bureau of Economic Research found that between 2007 and 2009 the value of means-tested benefits available to the average non-elderly unemployed worker grew from $10,000 to $15,000—more people and higher benefits.
As more people become eligible for increasingly generous benefits, the ‘penalty’ for working—if underemployed—increases. This is especially true for workers who qualify for multiple means-tested programs. The CBO found that households with incomes just above the poverty line—or between $23,000 and $29,000 for a family of four in 2012—can experience a disincentive to work that is like a tax rate of up to 60 percent. That is, for every dollar in additional earnings through work, the households stand to lose a total of 60 cents to both taxes and lost federal benefits. With a high penalty to earning more by working, many low-income people choose either not to work or, as CBO finds, ‘put in fewer hours or be less productive.’
In my view, the key to stronger economic growth starts with removing burdens we impose on work, savings, and investment. In accomplishing that task, the tax code needs to be clearly in our sights.
The economic effect of increased taxes is one of the most widely understood effects in the economic literature. Increases in marginal tax rates discourage work, savings, and investment. Taxes are only effective and efficient if the government can better spend and allocate resources than individuals and the market. Money does not sit under someone’s mattress but is instead spent or saved, so the taxes, again, remove money from the economy.
Rather than increasing tax rates, we should take a lesson from the tax rate reductions of the 1920’s, 1960’s, and 1980’s. These rate reductions led to an increase in employment, higher returns for stocks, increased investment growth, and have generally promoted higher economic growth. The reduction in taxes on income encourages people to work more because they can keep more of their pay. Reduction in capital gains taxes increases future consumption because investors receive a higher rate of return.
Finally, I don’t want us to repeat the mistake made by some governments of increasing taxes when the real problem is excessive spending. Economists have shown that countries have been able to successfully reduce the debt while improving economic performance when the focus of the policy is on reducing government transfer spending. At the same time, tax increases can damage the chance for success. This is the critical choice we are facing and we have honestly reviewed it.
Madam Chairman, let’s be sure we adjust our leading public policies in a way that reduces the burden of and makes our government leaner and more productive while demanding less from the fragile public sector. Thank you for this hearing, and I look forward to participating.”