Senate Finance Committee members on July 10 considered the role of tax reform in improving future upward mobility of low-income households and heard from a panel of experts that government spending often does little to improve low-income individuals’ circumstances. Chairman Max Baucus, D-Mont., began by acknowledging that current tax policies appeared to be failing.
“Many incentives the tax system provides are upside down,” said Baucus. “They give the most help to those who need it the least.” He cited provisions like the exclusion for employer-provided child care that provides more support for children with parents in high tax brackets than those with lower incomes. “I think we can agree that a clear path toward the better seems to be fundamental tax reform, where we look carefully at what works, what doesn’t work, and how we can fix the latter,” noted ranking committee member Orrin G. Hatch, R-Utah.
Dr. Eugene Steuerle of the Urban Institute, said the current economic situation facing the country was not entirely to blame. “Even if we would bring our budget barely to a state of sustainability—a goal we are far from reaching right now—we’re still left with a badly allocated budget oriented with at least two closely related long-term threats for both growth and mobility,” he said. Steuerle maintained that there are ever-smaller shares of tax subsidies and spending devoted to children, and ever-larger shares of tax subsidies and spending devoted to consumption, rather than investment. “Each of these trends negatively affects both absolute and relative mobility,” said Steuerle.
The American Opportunity Tax Credit, which refunds up to $2,500 for undergraduate education, does show how the tax code can foster greater likelihood of college attendance among low-income women, according to Johns Hopkins University professor Dr. Katherine S. Newman. She called the credit “a very important instrument” for low-income individuals and families supporting their children in college. “This provision is scheduled to expire at the end of this year and should be renewed and expanded if we want to see more families repeat the intergenerational mobility story 20 years from now,” she said. Newman also called for an increase in the Life-Time Learning Credit, which enables students to deduct 20 percent of their tuition payments.
According to a just-released study by the Pew Charitable Trusts, Americans were united in their belief that the government has a role to play in promoting economic mobility. Erin Currier, project manager of the Economic Mobility Project, told lawmakers that an “overwhelming” 83 percent wanted the government to provide opportunities for the poor and middle class to either improve their economic situations, prevent them from falling behind or both. The belief cut across party lines with 91 percent of Democrats, 84 percent of independents, and 73 percent of Republicans agreeing, according to the study. Currier said improving upward mobility, however, goes well beyond the actions of the Senate Finance Committee. She said a good place to start would be to take a hard look at how the tax code impacts economic opportunities. “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.”
By Jeff Carlson, CCH News Staff
Testimony of Dr. Katherine S. Newman, James B. Knapp Dean of the Arts and Sciences, Johns Hopkins University
Written Testimony of Dr. Miles Corak, Graduate School of Public and International Affairs, University of Ottawa
Testimony of Dr. Lars Lefgren, Associate Professor of Economics, BYU
Written Testimony of Erin Currier, Project Manager, Economic Mobility Project, The Pew Charitable Trusts
Statement of Dr. C. Eugene Steuerle, Richard B. Fisher Chair and Institute Fellow, The Urban Institute