Congressman Geoff Davis (R-KY), Chairman of the Subcommittee on Human Resources of the Committee on Ways and Means, and Congressman Pat Tiberi (R-OH), Chairman of the Subcommittee on Select Revenue Measures of the Committee on Ways and Means, today announced that the Subcommittees will hold a joint hearing on how certain welfare and tax programs can discourage work as a result of the high effective marginal tax rates they impose on certain populations. The hearing will take place on Wednesday, June 27, 2012, in 1100 Longworth House Office Building, beginning imediately following the full committee markup.
In view of the limited time available to hear witnesses, oral testimony at this hearing will be from invited witnesses only. Witnesses will include experts who have studied how increased earnings may not yield additional income for families due to the complex interaction between earnings and federal tax and transfer programs. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
In announcing the hearing, Chairman Davis said, "Americans should believe with confidence that hard work pays off. However, because of today's many welfare and tax programs for low-income families, it is not clear that work pays--and in fact additional work may not actually result in additional income. Federal programs must send a clear message that work is always better than welfare. This hearing will allow us to explore problems with the current system and determine how we can ensure these programs can be improved to encourage families to increase their work and self-reliance."
Chairman Tiberi said, "In recent years, Congress has increasingly used the tax code to provide means-tested benefits to low- and moderate-income Americans. These programs, however, are often flawed, imposing high marginal tax rates on those in the phase-out ranges as well as steep marriage penalties -- thus discouraging both work and marriage. As part of comprehensive tax reform, this hearing will help the Ways and Means Committee reform these tax programs to make sure they reward work and honor marriage."
Low-income families often receive benefits from multiple welfare and tax programs, such as assistance with food, housing, and day care costs, help with medical costs, or cash payments to supplement earnings from work. While these programs often support and encourage employment, program "phase-out rules" -- especially when combined across multiple programs --mean certain households may not be significantly better off if they earn more from work.
Economists have studied the interaction between earnings and benefits under various programs by focusing on what are called "implicit marginal tax rates," which refers to the portion of an additional dollar of earnings effectively lost due to rising taxes and benefit reductions. Due to implicit marginal tax rates that can approach or even exceed 100 percent when individuals receive benefits from multiple programs, it is possible that some individuals will be little better off financially--and in some cases even worse off--if their earnings increase.
This problem has been exacerbated by the addition of new programs and the expansion of existing programs over time. For example, the expansion of the Earned Income Tax Credit over time has allowed more households to claim this credit and has increased the benefit received by many households. However, these expansions also mean that more families face a higher implicit marginal tax rate as their earnings increase and the credit phases out. In addition, the Patient Protection and Affordable Care Act created a new subsidy to purchase health insurance that phases out as household income increases. As the phase-out of these healthcare subsidies interacts with other welfare and tax programs for families, the return from working will be even lower than before and individuals who increase their earnings may keep even less of their hard-earned money in the future.