quickly? >> we want to have an integrated approach with a robust incentive to work at every phase of the income distribution. >> thank you very much. dr. sturly? you're recognized for five minutes. >> members of the two subcommittees, thank you again for the opportunity to appear before you once again. as i already noted, the nation's really tax system is very different than this tax system we know just by looking at direct statutory rates. such as the income tax and the social security tax. the implicit tax is derived from phasing out various benefits in both expenditure and tax programs. i tend to call expenditure taxes, because they remain largely hidden from government. and the public. and yet they actually are a major influence on behavior. these expenditures, i want to be clear, are a classic liberal conservative compromise, and mr. chairman, you commented earlier about needing to work together to solve this problem. one reason that one has to work together is because, in fact, it

is a liberal, conservative compromise that got us there in the sense that liberals have faced these types of implicit taxes as a ways of increasing progressivety, conservatives have embarked upon them as ways of saving on budget revenues, both of which are legitimate goals, but have very high tax rates. and although low and moderate income households are especially effective and the subject of this hearing, you have these implicit taxes in the amt and pell grants and dozens if not dozens of programs, including most of the subsidies in the tax system. at the urban institute, we've done a lot of work on trying to calculate these taxes. the first graph that you actually see here on the screen is the same as figure 1before of my testimony. it shows close to the maximum benefits for which a single head of household and two children may be eligible, and then how they phase out as income increases. rates are low, or even negative, up to about 10,000 to $15,000 of

income. it's thereafter they rise quickly. in the next figure that i'll be showing you, which is the same as figure three of my testimony, i show the effective tax rate for a household as income raises from 10,000 to $40,000. essentially income and social security taxes take away about 30% of earnings. and then universally available programs -- by universally, available to all of us if we have children, there's no cues, these are items like s.n.a.p., raises the rate to 55%. and for those households into welfare, programs such as tanf, the rate can rise well above 80%. what used to be called a poverty trap has now moved to what we have called the twice poverty trap. that is the high rates especially hit households who earn more than poverty level incomes. many studies have attempted to show the effect of these rates on work, and the results are actually mixed. work subsidies such as the itc generally encourage labor force

participation who may tend to discourage work at higher income levels, particularly for second jobs in a family moving to full-time work, as i note in my testimony also, for marrying someone who has a job. design matters greatly. for instance, medicaid will discourage work among the disabled more than a subsidy system, such as the health exchange subsidy that's in the health reform. another subsidy will discourage work for older people who are encouraged to retire earlier. for the same amount of cash, a major conclusion is that a program that requires work will indeed lead to more work than one that does

>> so what happened? >> well, you're asking about the forecast? >> yeah. >> okay. clearly, a different topic than marginal tax rate on safety net programs. when we -- that was the administration forecast, for unemployment. that's the same one that shows up in the administration's first budget. it's the forecast of what's called the troyca, omb, council of economic advisers, and the treasury.

that forecast was made by an incoming administration that was just forming in the fourth quarter of 2008. at that time, unbeknownst to us, the economy was cratering, gdq was falling at a rate of 9%. if you look at the statistics from that time, as we did, it looked like the economy -- that the recession was far, far more mild than that. and that's why the forecast for unemployment that you saw was actually -- the median forecast of all the professional forecasters at the time. you're absolutely right in that we missed the depth and severity. so did almost everyone else. >> okay. >> i will say that once the recovery act was implemented, it was a matter of two quarters later -- by the third quarter of 2009, gdp was rising again. i think that's a real mark of how successful it was in breaking the back of the great

recession. all be it the unemployment rate continues to rise. >> thank you. dr. graham, you testified on the additional work penalty and exchange subsidies. work penalty provided by obama care would create. i would like to highlight the fact that the subsidies also impose a marriage penalty. through the tax code. and that's because the key off the federal poverty guidelines -- under federal poverty guidelines, the poverty level let's say for a family of two is at 135% of poverty level for a single individual, rather than double. that means that, for example, two single individuals earning $22,000 a year would lose about $1,400 a year in subsidies. if they became married in one household, earning $44,000, rather than $22,000 each. can you expand on that? >> well, the major problem with

the affordable care act in terms of how it's increasing the marginal tax rates in general is that it provides a subsidy to people who are -- to go to the exchange by health insurance that they're below the poverty rate. and the phaseout is relatively -- is relatively steep in order to contain costs. so research that my boss doug holstein and alice greenel did on the subject basically laid out marginal tax rates for certain individuals will go up anywhere from 5 percentage points to 10 percentage points, based on the faphase-out of subsidies to the exchange associated with the affordable care act. >> even on the lower end. >> even on the lower end. >> so this impacts low-income individuals at the lower marginal rates. they're not just in this area of the tax code. >> that's right. thank you. i yield back. >> the chair now recognizes mr. doggette for five minutes. >> thank you, mr. chairman. do each of our witnesses agree that it is important to maintain in its current form the earned

income tax credit? >> yes. the positive part, yes. i would like -- if possible, to eliminate the phaseout or blend that into the tax code. >> and i would actually expand it to try to figure out ways to include single people, and by the way, i would do it as a substitute for the type of social security tax break that i believe is both on keepsian and supply side grounds, a weaker incentive for recovery than could be some expansion of earned income credit that could be cheaper. >> thank you. >> i would add, the expansions that congress supported to the eitc in the recovery act have proven to be extremely helpful in all of the ways you've heard this morning. and i would try to ensure that those expansions remain a permanent part of the program. >> dr. bernstein, we'll talk about health care just a little bit. if i have a high-tech employee

in austin, who has a great idea for a start-up, but a family of children with serious creating . similarly, if i have a poor person who can qualify and in texas it's difficult because the state under governor perry is about trying to prevent anyone from getting health care, but if they manage to qualify for benefits in the state of texas for health care with a sick family, and they choose not to seek a higher wage job in order to maintain that eligibility for medicaid, that also would appear to be not an indication of a

lack of willingness to work but of an informed decision to try to provide health care protection. we attempted to respond to both types of informed decisions. with the affordable health care act and want the expansion of access for poor people to health care remove any cliff or disincentive to work, to create a new jobs and new businesses and new economic opportunities. >> i think you're adding the kind of nuance i try to project in my testimony which must be brought to my colleagues here on the panel of the implicit tax rates in the affordable care act. there's a lot of moving parts. one of the most important is the

affordable care act expands medicaid, therefore pushing out and lowering any tax rates quite significantly. one of the studies i brought with me simulates this impact and predicts that the affordable care act accounting for the disincentives you heard here but the incentives would increase the employment of single mothers. it's a highly inefficient problem. it increasing subsidiesubsidies. it's very positive for job creation as well. look at the marginal tax rates and assume the labor supply.

we can't do that because it's not in place with one exception, massachusetts. massachusetts has a health plan much like the affordable care act. there's a very nice study that looks at the employment effects of health reform in massachusetts compared to neighboring states which face the same economic conditions but don't have that health care difference. if a tax rate bufferimps up x, must have affect x. >> thank you very much. i yield back. >> thank you. the gentleman's time is expired. mr. marchon from texas is recognized. >> economyists and researchers have noted for decades that the interaction between welfare and

tax benefits can create little incentive for low income families to work. is that still pretty much the consensus among basic economists. >> we have moved out the poverty trap to what i call the twice positive poverty trap. what the research is showing that although it's increased labor force participation and particularly for welfare mothers who didn't work, the incentive can only be positive going for welfare to welfare that requires work. it's only positive.

once you get to 10,000 or 15,000 that's when it strikes. you can decrease productivity but increase number of workers. if a second earner doesn't take a job to 40,000 but a full-time job working ten hours, you increase labor force participation yet you decrease output. the same thing with the affordable care act that we've just discussed. you've moved away from this disincentive of medicaid to hiring the income distribution. the affordable care act will help the disabled to go to work who are afraid of losing medicaid but will probably encourage elderly people to retire. it's a complicated message.

once you accept the social welfare structure better than some other design. >> that's part of the testimony of secretary smith was that they had seen some disparity in those that are disabled. as you know in our system now, we have over the last few years, we have almost 700,000 more people on our permanent, our disability roles than we did before the recession. i'd like you to make a comment about whether you think enrollment in disability has to do with obtaining the benefits of medicare/medicaid and is

there, in his case he said there was little incentive for someone in the uk to go into the ranks of the employed. do we have similar trap in our system now? >> i would say if people have a robust incentive to work then we could rely on their judgment in whether they are permanently disabled or not in applying. when we don't have that robust incentive to work, we might suspect that the person is not balancing the considerations that person faces individually, we face as a nation in terms of having a safety net in place and wanting everyone who can to work to the extent that they can. >> you're asking the toughest question of social welfare is

and that is how do we design a program for the disabled. disability insurance favors retiring disability over old age insurance. if you have moderate disability to figure out if you can file with the system. the system has huge disincentives once you get that medicaid to go back to work you're scared about losing your health insurance. you're not sure how long you're going to last on the job and afraid of having to get back into the system. i don't have an easy answer. i think there are too many disincentives in the system to go to work, but it's off the issue to handle. it's some margins where we