At a Senate Finance Committee hearing on July 10, the topic was the "Impact of Tax Reform on Economic Opportunities for Young People." The purpose of the hearing was to examine ways that future tax reform might enable more young people from lower-income families to achieve success in pursuing the American dream.

Chairman Max Baucus (D-MT) opened with a quote from President Truman who stated, "All of us want our children to have a better life than we had and it should be the constant aim of each generation to make things better for the next."

Baucus noted that children of lower-income families have many challenges in America. He stated that a child of a family in the top 10% of earners is "23 times more likely to end up financially well-off than a child born in the bottom 10%." Baucus observed the U.S. is "dead last in mobility" among the nine other first world economies for children of lower-income families. Finally, the child in that higher-income family is 10 times more likely to complete college.

Sen. Orin Hatch (R-UT) is the Ranking Member of the Senate Finance Committee. He followed the comments of Sen. Baucus and suggested "The most important way to provide those opportunities is for parents to invest in early childhood development and education and to provide a stable family structure." Hatch noted that the nation is continuing "to run up our federal debt and burdening our children and theirs with mountains of bills to pay off." In his view, this debt is likely to lead to declining opportunities. He agreed with Baucus that "a clear path towards the better [solution] seems to be fundamental tax reform."

Erin Currier of the Pew Trusts highlighted the importance of using tax incentives to encourage mobility. She pointed out that most of the current tax benefits go to higher income individuals. Approximately 70% of the various tax incentives benefit upper-income Americans. Because lower income Americans pay little or no income tax, they receive minimal benefits from tax incentives.

Witness Eugene Steuerle is an Institute Fellow at the Urban Institute. He focused on three specific challenges that face the government. First, he observed that the current budget promotes consumption rather than investment in young people. There are "ever-smaller shares of our tax subsidies and spending devoted to children" and larger expenditures each year for retirement and health programs.

Second, for lower-income persons, there are relatively high disincentives to work and save. Steuerle pointed to analyses by his organization that suggest fairly high tax rates on individuals who increase income from $15,000 per year to $35,000 per year. Because of the phase-outs of various tax benefits, the actual tax rate on the increased income in that range is approximately 50% to 60%. This high effective tax rate makes it difficult for individuals in very low income jobs to move through that range into higher-paying positions.

His third observation is that government spending and tax provisions are frequently focused on housing and pensions. While both are good concepts, the vast majority of the tax benefits for homeownership and retirement plans is enjoyed by those with higher incomes.

Editor's Note: The continued series of hearings by the Senate Finance Committee is preparing the way for major tax reform in 2013. It is very helpful and positive for both parties to focus on practical ways the federal government can facilitate advancement of young people with lower incomes into the middle and upper income ranges.