Testimony on Drivers of Intergenerational Mobility and the Tax Code

On July 10, 2012, I testified before the Senate Finance Committee on “Mobility, the Tax System, and Budget for a Declining Nation,” available online here. Below is a shorter summary of my testimony.

Nothing so exemplifies the American Dream more than the possibility for each family to get ahead and, through hard work, advance from generation to generation.

Today mobility across generations is threatened by three aspect of current federal policy:

  • a budget for a declining nation that promotes consumption ever more and investment, particularly in the young, ever less;
  • relatively high disincentives to work and saving for those who try to move beyond poverty level income; and
  • a budget that generally favors mobility for those with higher incomes, while promoting consumption but discouraging mobility for those with lower incomes.

Let me elaborate briefly.

First, in many ways, we have a budget for a declining nation.

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 budget that allocates smaller shares of our tax subsidies and spending to children, and ever-larger shares to consumption rather than investment.

Right now the federal government is on track to spend about $1 trillion more annually in about a decade.  Yet federal government programs that might promote mobility, such as education and job subsidies or programs for children, would get nary a dime.  Right now, these relative choices are reflected in both Democratic and Republican budgets.

Second, consider that one of the main ways that part of the population rises in status relative to others is by working harder and saving a higher portion of the returns on its wealth. Discouraging such efforts can reduce the extent of intergenerational mobility.

One way to look at the disincentives facing lower-income households is to consider the effective tax rates they face, both from the direct tax system and from phasing out benefits from social welfare programs. After reaching about a poverty level income, these low- to moderate-income households often face marginal tax rates of about 50 or 60 percent or even 80 percent when they earn an additional dollar of income.

Third, in a study I led for the Pew Economic Mobility Project, we concluded that a sizable slice of federal funds—about $746 billion or $7,000 per household in 2006—did go to programs that arguably try to promote mobility. Unfortunately 72 percent of this total comes mainly through programs such as tax subsidies for homeownership and other saving incentives that flow mainly to middle- and higher-income households.  Moreover, some of these programs inflate key asset prices such as home prices. That puts these assets further out of reach for poor or lower-middle-income households, or young people who are just starting their careers. Thus, programs not only neglect the less well-off, they undermine their mobility.

Finally, a note about some current opportunities. Outside education and early childhood health, if Congress wishes to promote mobility of lower-income households, as well as protect the past gains of moderate- and middle-income households that are now threatened, almost nothing succeeds more than putting them onto a path of increasing ownership of financial and physical capital that can carry forward from generation to generation.

Two opportunities, largely neglected in today’s policy debates, may be sitting at our feet.

First, rents have now moved above homeownership costs in many parts of the country. Unfortunately, we seem to have adopted a buy high, sell (or don’t buy) low homeownership policy for low- and moderate-income households.

Second, pension reform is a natural accompaniment and add-on to the inevitable Social Security reform that is around the corner.

I hope you will give some consideration to these two opportunities.

In conclusion, 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.

2 Comments on “Testimony on Drivers of Intergenerational Mobility and the Tax Code”

  1. Carla Rollandini says:

    This is a great new layout & clearer to read. VERY Cool!

    The last sentence where you say…
    “does not reflect the aspirations of the people”
    Did this refer to your ideas of people not saving with more interest in spending/consumption ? Answer at next DG is fine! Have FUN in Italy–Hi to Marge.

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