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+ - DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2004
+
+[House Hearing, 108 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+ DEPARTMENT OF THE TREASURY
+ BUDGET PRIORITIES FOR FISCAL YEAR 2004
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON THE BUDGET
+ HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED EIGHTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ HEARING HELD IN WASHINGTON, DC, FEBRUARY 5, 2003
+
+ __________
+
+ Serial No. 108-2
+
+ __________
+
+ Printed for the use of the Committee on the Budget
+
+
+ Available on the Internet: http://www.access.gpo.gov/congress/house/
+ house04.html
+
+
+
+
+
+
+
+
+ U. S. GOVERNMENT PRINTING OFFICE
+84-884 WASHINGTON : 2003
+____________________________________________________________________________
+For Sale by the Superintendent of Documents, U.S. Government Printing Office
+Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
+Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
+
+
+
+
+
+
+ COMMITTEE ON THE BUDGET
+
+ JIM NUSSLE, Iowa, Chairman
+GIL GUTKNECHT, Minnesota JOHN M. SPRATT, Jr., South
+MAC THORNBERRY, Texas Carolina,
+JIM RYUN, Kansas Ranking Minority Member
+PAT TOOMEY, Pennsylvania JAMES P. MORAN, Virginia
+DOC HASTINGS, Washington DARLENE HOOLEY, Oregon
+ROB PORTMAN, Ohio TAMMY BALDWIN, Wisconsin
+EDWARD SCHROCK, Virginia DENNIS MOORE, Kansas
+HENRY E. BROWN, Jr., South Carolina JOHN LEWIS, Georgia
+ANDER CRENSHAW, Florida RICHARD E. NEAL, Massachusetts
+ADAM PUTNAM, Florida ROSA DeLAURO, Connecticut
+ROGER WICKER, Mississippi CHET EDWARDS, Texas
+KENNY HULSHOF, Missouri ROBERT C. SCOTT, Virginia
+THOMAS G. TANCREDO, Colorado HAROLD FORD, Tennessee
+DAVID VITTER, Louisiana LOIS CAPPS, California
+JO BONNER, Alabama MIKE THOMPSON, California
+TRENT FRANKS, Arizona BRIAN BAIRD, Washington
+SCOTT GARRETT, New Jersey JIM COOPER, Tennessee
+GRESHAM BARRETT, South Carolina KENDRICK B. MEEK, Florida
+THADDEUS McCOTTER, Michigan RAHM EMMANUEL, Illinois
+MARIO DIAZ-BALART, Florida ARTUR DAVIS, Alabama
+JEB HENSARLING, Texas DENISE MAJETTE, Georgia
+[Vacant]
+[Vacant]
+
+ Professional Staff
+
+ Rich Meade, Chief of Staff
+ Thomas S. Kahn, Minority Staff Director and Chief Counsel
+
+
+
+
+
+ C O N T E N T S
+
+ Page
+Hearing held in Washington, DC, February 5, 2003................. 1
+Statement of:
+ Hon. John W. Snow, Secretary, Department of the Treasury..... 7
+Prepared statement and additional submissions of:
+ Hon. Jim Nussle, a Representative in Congress from the State
+ of Iowa.................................................... 3
+ Mr. Snow:
+ Prepared statement....................................... 9
+ Response to Mr. Scott's question regarding OMB figures... 31
+ Response to Mr. Thompson's question regarding municipal
+ bonds.................................................. 42
+ Response to Mr. Ford's question regarding Medicaid
+ funding................................................ 57
+ Response to Mr. Davis' question regarding excise taxes on
+ charitable foundations................................. 59
+ Response to Mr. Davis' question regarding the President's
+ goal for charitable tax breaks......................... 59
+ Response to Mr. Ford's question regarding the tax cut
+ proposal............................................... 63
+ A submission for the record by Hon. Roger F. Wicker, a
+ Representative in Congress from the State of Mississippi... 39
+
+
+ DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2004
+
+ ----------
+
+
+ WEDNESDAY, FEBRUARY 5, 2003
+
+ House of Representatives,
+ Committee on the Budget,
+ Washington, DC.
+ The committee met, pursuant to call, at 10:10 a.m. in room
+210, Cannon House Office Building, Hon. Jim Nussle (chairman of
+the committee) presiding.
+ Members present: Representatives Nussle, Gutknecht, Toomey,
+Hastings, Schrock, Brown, Putnam, Wicker, Bonner, Franks,
+Garrett of New Jersey, Barrett of South Carolina, McCotter,
+Diaz-Balart, Hensarling, Spratt, Moran, Moore, Neal, Edwards,
+Scott, Ford, Capps, Thompson, Baird, Cooper, Meek, Davis,
+Emanuel, and Majette.
+ Chairman Nussle. Members and guests will take their seats.
+I know there is a lot of interest in this hearing, and there is
+obviously, today, a lot of other interesting things happening
+around the country and the world, and I know Members, staff and
+our witness will be needed in other areas of the Capitol, so I
+want to make sure that we begin on time.
+ This is the full committee hearing on the President's
+growth and jobs plan, the tax relief package in the President's
+fiscal year 2004 budget. Today's witness is the Honorable John
+W. Snow, Secretary, Department of the Treasury. And as I said
+to the Secretary prior to him taking the witness table, he has
+spent more time on Capitol Hill this week than he has spent in
+his new office. And that is part of the risks of the job, and
+part of the job description, of course, is to consult with
+Congress, and we appreciate you doing so in this manner. Today
+we have a number of issues that we would like to discuss with
+you, Mr. Secretary. I would like to welcome you.
+ The Secretary, upon his confirmation, became the 73rd
+United States Secretary of the Treasury. I look forward to
+working with you, and have every faith that the President has
+picked the right person to help strengthen and stabilize the
+economy and help us create jobs for all Americans.
+ Treasury Secretary Snow comes before us today with
+extensive working knowledge and expertise in economics and job
+creation. Secretary Snow has had a long and impressive career
+in both the private sector and public service to this country.
+He was the chairman and chief executive officer of CSX
+Corporation. He has served as the chairman of the Business
+Roundtable, and was a former co-chairman of the influential
+Conference Board's Blue Ribbon Commission on Public Trust and
+Private Enterprise. He also served as the co-chairman of the
+National Commission on Financial Institution Reform Recovery
+and Enforcement in 1992 that made the recommendations following
+the savings and loan crisis.
+ Secretary Snow's previous public service includes serving
+at the Department of Transportation as the Administrator of the
+National Highway Transportation Administration; Under
+Secretary, Assistant Secretary for the Governmental Affairs;
+and Deputy Assistant Secretary for Policy, Plans and
+International Affairs. Secretary Snow has a Ph.D. in economics
+from the University of Virginia, a law degree from George
+Washington University, and has taught economics in the
+University of Maryland, University of Virginia, as well as law
+at the George Washington University. He also served as a
+visiting fellow at the American Enterprise Institute, and
+distinguished fellow at the Yale School of Management.
+ Mr. Secretary, yesterday this committee had the opportunity
+to hear from the President's Director of the Office of
+Management and Budget, Mitch Daniels. He came presenting the
+President's overall budget. Today we look forward to your
+testimony with respect to how the President's budget proposes
+to strengthen and stabilize the economy and create jobs.
+ At the beginning of the hearing on the President's budget,
+I thought it was important to point out an underlying question
+about the budget. A question that I have, a question that this
+committee will continue to have as we will review it, and a
+question that I am sure that all Americans have, and that is:
+Is it a fiscally responsible blueprint for governing America
+during some very challenging times?
+ Today as we examine the Treasury Department's budget
+proposals as well as the President's proposal to strengthen the
+economy, I believe the question should be, do these proposals
+grow and strengthen the economy both now and in the long run?
+ There is no question that our economic recovery needs to
+gain more traction in order to create jobs and opportunities.
+The looming question is really how to do it, how to help it. I,
+for one, think we need to look longer than just this first
+year, but many years down the road as we consider the proposals
+that we have to make.
+ Last week, the Congressional Budget Office presented its
+new economic outlook numbers to this committee which showed
+that under current conditions, if we do nothing, we will return
+to surpluses somewhere around 2007, according to the
+Congressional Budget Office. However, if we can increase growth
+by only half a percent, we might be back in the black roughly a
+year earlier. And I will show you a chart that I believe
+depicts just that sentiment. Faster growth can improve or does
+improve the fiscal outlook. With just a half a percent, we can
+get back in the black, according to baseline, just in 1 year.
+Imagine if we can get a full percent or even more.
+ We also learned from the Congressional Budget report that
+the largest cause for the deficits we faced in the past two
+fiscal years has been due to a weak economy. I will show you a
+chart that we believe depicts that; 68 percent in fiscal year
+2002, and 55 percent in fiscal year 2003 can be attributed to
+the economy. It seems only logical then that we must focus on
+measures that increase long-term growth and strengthen the
+economy.
+ It has always seemed to me that the Washington model is
+that we should ask families to tighten their belts year-after-
+year and pay higher and higher taxes to fund additional
+Washington spending, but we never seem to ask Washington to
+tighten its belt so that the American people can keep more of
+their money. So spending restraint will be a hallmark of the
+budget that we present. I think the President, though, hit the
+nail on the head last week during the State of the Union
+Address when he said, quote, ``Jobs are created when the
+economy grows. The economy grows when Americans have more money
+to spend and invest, and the best and fairest way to make sure
+Americans have that money is not to tax it away in the first
+place.'' It seems pretty basic, it seems pretty logical, and it
+seems like a good foundation for a policy that we can build on.
+ So, the highest priority in crafting the budget will be
+promoting the overall strength and stability of our country;
+strength and stability in our defense, strength and stability
+in our homeland security, and that is strength and stability in
+our economy. The lesson of the last 2 years is that there is no
+substitute--no substitute for the strength and stability of
+America and our economy. And that is the subject of today's
+hearing, our economy, how to strengthen and stabilize it for
+the long term.
+ And with that, I turn to my friend and colleague Mr. Spratt
+for any opening comments he would like to make.
+ [The prepared statement of Mr. Nussle follows:]
+
+ Prepared Statement of Hon. Jim Nussle, a Representative in Congress
+ From the State of Iowa
+
+ Good morning.
+ When President Bush submitted his fiscal year 2004 budget
+yesterday, the underlying question for me was: is it a fiscally
+responsible blueprint for governing?
+ From what I have read at this point, and based on the ambitious
+agenda he laid out in last week's State of the Union speech, the answer
+seems to be yes.
+ The President's critics will scoff at that. They will point to the
+substantial near-term deficits in the budget deficits that the
+President and his aides have not glossed over. Those deficits are
+troubling especially coming just 2 years after we anticipated budget
+surpluses as far as the eye can see.
+ But we all know what happened. Our economy, which had slowed
+dramatically in 2000, slid into recession just as President Bush took
+office. Later that year, terrorism struck here on our own soil, further
+challenging our national and economic confidence. Our necessary
+response rebuilding and shoring up here at home, and taking on
+terrorism where it breeds, overseas has required a commitment of will
+and resources.
+ All these factors are still active today. At the same time, we
+continue to face increasingly urgent demands in areas such as education
+and health care. Budget deficits are among the results.
+ But fiscal responsibility is not just about making numbers add up a
+certain way. It is fundamentally about governing; and governing
+requires striking a balance among competing demands, weighing desires
+against needs, and facing obligations not only to today's generation,
+but also to tomorrow's.
+ Today's principal obligations are clear. We must prevail in the war
+against terrorism, committing all the resources necessary for that
+task.
+ We must provide for and enhance the security of our homeland. This
+is not a one-time job; it is a permanent and ongoing task especially
+when we are trying to protect ourselves against evil minds who spend
+all their time calculating ways to terrorize and kill.
+ Both of these, along with the other needs cited above will require
+government spending and will result in continued deficits for a time.
+But what matters is that we don't lose control of spending. We must not
+commit to strategies that win popular support today, only to balloon in
+costs that will be imposed on our own children.
+ Last, but most important, we must help restore the strength and
+stability of our economy. According to last week's projections by the
+Congressional Budget Office, without action, this economy will continue
+to limp along with unemployment rates at about 6 percent for the next
+several years. This is not acceptable to the President; it is not
+acceptable to me; above all, it is not acceptable to all those families
+struggling to make ends meet. It takes a growing economy to provides
+jobs and opportunities which restores Americans' hope that they can
+make their lives better through their own efforts.
+ When it comes to stabilizing and strengthening the economy, most of
+the ``stimulus'' plans I have heard of focus only on the short-term,
+which does not provide either the stability or the long term
+strengthening that is needed. Such proposals are the economic
+equivalent of a crash diet versus a healthy lifestyle.
+ The President's plan, in contrast, recognizes that families and
+businesses need to be able to plan for the future. Whether it is a
+family planning for it child's education or a business looking at a
+capital expenditure, we need short-term and long-term solutions. People
+who are out of work don't just need a job for the rest of year; they
+need jobs that will be created to last for years to come.
+ At the same time we do need to be very careful about controlling
+spending.
+ Our current situation is very much like the situation many families
+throughout the country are facing. When faced with tough times, they
+still buy the family groceries and cover the cost of emergencies but
+don't remodel their kitchen.
+ As we begin to construct this year's budget we must adhere to this
+same principle.
+ While I support the goal of ending deficits, the highest priority
+in crafting the budget will be promoting the overall strength and
+stability of our country.
+ There is no question that we face trying times but we have done so
+in the past and have always come out stronger as a nation and as a
+people.
+ We must restore the stability and strength of this economy and this
+nation.
+ Our budgets need to look beyond the next election and toward the
+next generation.
+
+ Mr. Spratt. Mr. Snow, welcome to our committee. You bring
+impressive credentials and experience to the Treasury, and we
+look forward to working with you over the years to come. Among
+those welcoming your coming indirectly was an organization that
+you used to belong to named the Concord Coalition. I believe
+you were a prominent and ardent member of that organization. On
+Sunday, the Concord Coalition published a full-page ad in the
+New York Times--I didn't know they had that kind of money. It's
+a manifesto, really, about the Bush budget. And here is what
+they said, the organization of which you were once a very
+ardent and enthusiastic member:
+ ``Guns and butter and tax cuts, can we have it all? To
+enact permanent new tax cuts in the face of new spending
+pressures, the prospect of war in Iraq, inevitable postwar
+costs, massive but indispensable homeland security, a major
+prescription drug add-on for Medicare is to proclaim that
+America can painlessly have it all. Unfortunately, we can't.
+Sooner or later someone has to pay the bill for guns and butter
+and tax cuts. Many worry about class warfare. Almost no one
+seems to be worried about another form of warfare, generational
+warfare. That is what we risk if we continue to live beyond our
+means and to pass the IOUs on to our children and
+grandchildren.''
+ They go on to say: ``When is a tax cut not really a real
+tax cut? Many advocates of permanent tax cuts apparently
+believe that debt is a painless alternative to taxes. In fact,
+deficits merely shift the tax burden into the future. But
+haven't we shifted more than enough onto our children and
+grandchildren? According to Social Security and Medicare
+trustees, these two programs are on track to consume between a
+quarter and a third of worker payroll. This is an unthinkable
+burden. Adding more would be unconscionable. At a time when the
+young men and women of the Armed Forces are being asked to risk
+their lives, make the ultimate sacrifice, are the rest of us
+going to sacrifice by shifting even more of our tax burden onto
+future generations?''
+ A pretty strong statement, and it is on our minds very
+much.
+ One of the things that we are proud of, Mr. Secretary, is
+that during the 1990s we moved the budget deficit from $290
+billion in the red in 1992--fiscal year 1992, the last year of
+the Bush administration--to a surplus of $236 billion in the
+year 2000. That was a phenomenal accomplishment, and a lot of
+things converged to make it all happen. Now we are seeing the
+slow unraveling of the discipline that made it happen. This is
+one of our favorite charts because it shows what happened in
+the Clinton years. He inherited a $290 billion deficit, the
+biggest in peacetime history, and moved it over 8 years--the
+bottom line of the budget getting better every one of those 8
+years--moved it out of deficit into surplus to the tune of $236
+billion.
+ Among other things, that made it possible when the Bush
+administration came to office for us to be having an earnest
+debate here about actually repaying some of the national debt
+as a prelude to saving and making solvent Social Security and
+Medicare for the long run. This would be our way to pave the
+way for the baby boomers' retirement, which begins to occur in
+2008, 77 million baby boomers marching to their retirement
+right now, the first to retire in 2008.
+ Let me show you a simple linear graph that depicts--this is
+chart No. 7--the path that we were on when we began the Bush
+administration. The curve marked February 2001 shows you the
+curve that we anticipated following in order to diminish, pay
+back, buy back the Federal debt held by the public. And we had
+a realistic prospect of paying all that debt off by 2011. I
+don't think we would have ever reached that point, but
+nevertheless we had a path plotted to do that. Both sides were
+working in concert on that.
+ The upper curve is where we are now, February 2003, just 2
+years, and the difference is $5 trillion. That is a stunning
+estimate of the situation we find ourselves in. We have seen a
+fiscal reversal of $7.8 trillion. We have gone from a surplus
+projected in 2001 of $5.6 trillion today, if we implement the
+policies you propose today, of a cumulative deficit of $2.2
+trillion. That is a $7.8 trillion swing, and I think you would
+agree it is a swing in the wrong direction. We are going the
+wrong way.
+ The problem we have looking at this budget--could I have
+chart No. 12--is as we look across the top line and exclude the
+Social Security Trust Fund, because, after all, it is a trust
+fund, we have by law said it should be taken off budget. We
+have had motions in this committee to adopt amendments and make
+permanent law a provision that would have made it illegal to
+ever combine the two accounts. In any event, we think it is
+proper to focus on the budget deficit and the general accounts
+of the budget, the basic budget of the United States, and look
+at the top line.
+ The chairman was just talking about seeing some daylight at
+the end of this forecast period. I don't see any. The deficit
+this year and the general accounts to the budget, excluding
+Social Security, is going to be $468 billion. That is before
+any cost is attributed to fighting the war in Afghanistan. By
+2008, it declines to $433 billion. Between 2004-08, 5 years, we
+accumulate $2.140 trillion in additional debt. Now, some of it
+we are able to put in the Social Security Trust Fund, but it is
+still debt of the United States, it is an obligation that has
+to be paid, and we just don't believe that that is a path we
+should be taking.
+ And let me show you chart No. 6. We have had an economic
+downturn that was not forecast in January of 2001. OMB is now
+saying that of the $5.6 trillion surplus, $3.2 trillion has
+disappeared because of economic adjustments. So that is
+tantamount to saying the surplus was overstated by 60 percent
+to start with--40 percent to start with. But in any event, this
+shows the additional tax cuts that you have got right now. By
+OMB's estimation, if you did nothing further, we would have
+gone from a $5.6 trillion, to a $129 billion deficit,
+cumulative deficit, between now and 2011. From $5.6 trillion
+down to $129 billion.
+ The additional $2 trillion that is showing up on the bottom
+line of the budget you are presenting us, the additional $2
+trillion in debt and deficits that we are going to be incurring
+are because of policy choices you are proposing in this budget,
+and the lion's share of those policy choices that leads us to
+bigger deficits is shown right there in the tax cuts that are
+being proposed by this administration. It will cost about $600
+billion to make permanent the 2001 tax cuts. It will cost a
+little more than $600 billion if we adopt the so-called jobs
+and growth package that you presented. We think it is an
+antigrowth package because it adds debt, and debt in turn will
+stifle growth in the economy.
+ And finally, we don't think you can find a way around, nor
+we--we are both in the same box--on the alternative minimum
+tax. Between now and the end of this forecast period, we have
+got to deal with the problem and the cost of fixing the AMT so
+that 340 million taxpayers aren't affected by the alternative
+minimum tax, which is substantial. It is at least $600 billion
+itself.
+ If you put those three together, that is over $1.8 trillion
+on your tax agenda. You may not have the AMT actually displayed
+in your budget this year, but there is no way around it.
+Congress and the administration will have to deal with it, and
+we want to talk to you about that in the question period. But
+if you put those three together, that is $2 trillion. If you
+add everything up and adjust it for debt service, that is $4.4
+trillion. That is why this budget is sagging. That is why we
+have got the bottom line going into the red, mired in the red
+in deficit for as far as the eye can see.
+ Those are our concerns. We would like to get back to the
+path we were on when we were paying down debt and preparing for
+the retirement of the baby boomers, shoring up Social Security
+and Medicare for the long run. And frankly, as we look at your
+budget, we don't see how you get there. It is not just the fact
+that we see a dire picture of deficits as far as we can
+forecast, but that there is no plan spelled out here for the
+resolution of that problem. So we fear that we are seeing a
+cyclical deficit become a structural deficit and becoming every
+more--every year in your budget becoming more intractable.
+ Respectfully, that is what we submit our concerns to be,
+and that is why we are glad to have you here today. We want to
+ask you some serious questions about this situation.
+ Chairman Nussle. Without objection, all members will be
+allowed to put a statement in the record at this point.
+ Mr. Secretary, welcome to the committee. This is your first
+opportunity before the House Budget Committee. We hope it is
+not your last. But we do hope in the intervening period you do
+have the opportunity to go in and set up your office and begin
+to work, and not spend your entire career on Capitol Hill; but
+we are glad that you are with us today and willing to spend
+some time with us. Welcome, and we are pleased to receive your
+testimony at this time.
+
+ STATEMENT OF JOHN W. SNOW, SECRETARY OF THE TREASURY
+
+ Secretary Snow. Mr. Chairman, thank you very much for that
+gracious welcome to the committee, and, Ranking Member Spratt,
+distinguished members of the committee, it is an honor to be
+here before you on my second day on the job. You are going to
+have a lot more in-depth knowledge of a lot of these issues
+than I will, but I am going to struggle through and do my best,
+and in the weeks and months ahead I look forward to getting
+much, much better acquainted.
+ I think the chairman and the ranking member framed the
+issues we need to deal with extremely well, and I look forward
+to engaging on those very pared set of issues in the months
+ahead.
+ Let me begin by addressing some of those issues and by
+offering my views on what I take to be the essential background
+for the budget. First, the economy, the condition the economy
+is in and how we got there; and then turn to the President's
+economic growth plan, which I think promises creation of real
+jobs, acceleration of the recovery that we are on but which is
+a little wobbly; and for the longer term going to the
+Congressman Spratt's set of issues and the chairman's set of
+issues, higher growth rates, the higher growth rates that will
+enable us to meet those unfunded promises, those huge promises
+to the future that we made to future generations, and to have
+the flexibility that real output and wealth and a bigger
+economy gives us to deal with whatever issues the country may
+face.
+ As every American knows by now, whether from having lost a
+job, from knowing someone who has lost a job, or from worrying
+simply about losing their own job, our economy took a turn for
+the worse beginning in the summer of 2000. I come out of the
+transportation business, and I will remember forever looking at
+the carload numbers and the containerload numbers and the
+bargeload numbers and the truckload numbers that came across my
+desk as a private citizen running a large transportation
+company in the summer of July of 2000. It was a striking
+downturn that began. It wasn't seen in the rest of the economy
+for some months to come, but the industrial sector began a long
+downturn that still isn't in a state of recovery, a 2 year--
+probably the longest downturn of the industrial sector that we
+have experienced in two or three decades.
+ By the time President Bush took office, that undercurrent
+was running strongly against the economy, and we were clearly
+in a period of declining growth heading into a recession. The
+unprovoked and unprecedented terrorist attacks of September 11,
+compounded those economic difficulties, compounded a recession
+that was already by that time well under way. At the same time,
+the discovery of the abuses that were apparent in some
+corporate businesses and on the part of some corporate business
+leaders slowed the recovery further and undermined confidence
+in our equity markets and in our capital markets.
+ In response to this confluence of adverse events, the
+President led decisively, and acting with the Congress in a
+bipartisan fashion took the steps necessary to protect a shaken
+Nation and a fragile economy. In 2001, when relief was most
+needed, he signed a sweeping tax relief package, the most
+sweeping in a generation, and as evidence of the damage to the
+economy became clearer and clearer in 2002, March, acted again
+to further bolster the economy.
+ From my point of view, this was precisely the right
+medicine administered at precisely the right time. These
+actions--and I commend the Congress for your action--these
+actions were essential to avoid a much deeper and much harsher
+downturn. And the actions made the recession the shortest and,
+I think, the shallowest in modern times--the mildest since
+World War II. I am absolutely convinced that without these
+measures--and certainly they added to those deficit numbers
+that were on the charts that you showed me--but without these
+measures, we surely would have had a much deeper and much more
+difficult recession to contend with.
+ In the face of extreme adversity, our economy, like our
+Nation, remains resilient. Despite the economic slowdown, the
+attack on our homeland, the war in Afghanistan, weakened
+investor confidence, and the current uncertainty surrounding
+the economy as a result of the Iraqi situation, the economy is
+recovering, but the problem is it is not recovering on a fast
+enough pace or a sure enough pace. And as the President has
+said, we can and we must do better. Relative success isn't
+sufficient. Relative success isn't enough. Too many Americans
+are out of work today, and too many Americans are insecure
+about their tomorrows. As long as there are Americans who want
+a job and can't find one, the economy isn't growing fast
+enough.
+ That is why the President's jobs and growth package is so
+important. Under that proposal, 92 million taxpayers and their
+families would receive tax relief this year. A typical family
+of four with earnings of $39,000 would receive total tax relief
+of over $1,000, I think it is $1,100-some, compared to the
+taxes they paid in 2002. And importantly, they would get that
+tax relief not just in 2003, they would get that tax relief
+year in and year out thereafter, each and every year
+thereafter. And his plan will create hundreds of thousands of
+additional jobs by the end of this year and well over a million
+by the fourth quarter of 2004.
+ The package will not only help America return to its
+economic potential--and this is an important point that I am
+sure the committee will want to join with me--it will increase
+that potential. It will put us on a higher growth path. It will
+eliminate inefficiencies in the economy, distortions in equity
+markets, and, by doing so, will increase the output of the
+economy. It will create a more abundant future with more good
+jobs and greater capacity to address these problems. I think
+that is what everyone in this room, and everyone across America
+is seeking.
+ Before I turn to the budget, let me offer a word on
+deficits. Congressman Spratt is correct. I have been a hawk on
+deficits in the past. I was a hawk on deficits--and you will
+want to question me on this--at a time when we were in an
+entirely different world. I was a proponent of the balanced
+budget amendment with President Bush during his--first
+President Bush--during his administration. I was active in the
+Business Roundtable in bringing about the balanced budget
+agreement between the Congress and the administration in the
+mid-1990s, and I am proud of that.
+ Let me be clear: Deficits matter. Deficits are important.
+They are never welcome, but there are times, times like these,
+when they are unavoidable, particularly when we are compelled
+to address critical national needs as we are today. Are these
+deficits welcome? Absolutely not. Are they understandable? Yes,
+indeed.
+ The surpluses that were talked about that we enjoyed were
+the product of a strong economy, not a weak economy. We will
+not return to economic strength by taxing the economy further
+when it is struggling any more than we would increase our
+Nation's security by failing to fund its defense when we are
+threatened. The prescription for returning to balanced budgets
+is pretty straightforward. I think the chairman talked about it
+in his opening comments. Hold the line on spending and grow the
+economy. Pick the economic growth up half a point, a quarter of
+a point, three-quarters of a point, and we get entirely
+different numbers. Hold spending a half a point or a quarter of
+a point compounded with higher growth, we get entirely
+different numbers. This is the direction the President has
+chosen of course, to create real jobs, more real jobs that
+last, and, of course, to put the Nation on a higher growth path
+for the future.
+ Mr. Chairman, I look forward to responding to the questions
+of the committee and working with the committee in hopefully
+the months and weeks--the weeks and months ahead. Thank you
+very much.
+ Chairman Nussle. Thank you, Mr. Secretary. And again,
+welcome to the committee, and good luck with and
+congratulations on your new position.
+ [The prepared statement of Secretary Snow follows:]
+
+ Prepared Statement of Hon. John W. Snow, Secretary, Department of the
+ Treasury
+
+ Chairman Nussle, Ranking Member Spratt, and distinguished members
+of the Budget Committee, I welcome the opportunity to appear before you
+today to discuss the President's budget for fiscal year 2004.
+ Let me begin by offering my views on the essential background for
+this budget: the United States economy and President Bush's economic
+growth plan, which promises to create jobs, accelerate America's
+economic recovery, and increase our growth for years to come.
+ As every American knows by now--whether from having lost a job,
+knowing someone who has, or worrying about losing theirs--our economy
+took a turn for the worse beginning in the summer of 2000. By the time
+President Bush took office an undercurrent was running against the
+economy. The unprovoked and unprecedented terrorist attacks of
+September 11, 2001 compounded a recession that was well underway, while
+the discovery of serious abuses of trust by some corporate business
+leaders slowed our recovery from it.
+ In response to this confluence of adverse events, President Bush
+led decisively. Acting with Congress in a bipartisan fashion, he took
+the steps necessary to protect a shaken nation and a fragile economy.
+In 2001 when relief was needed, he signed the most sweeping tax relief
+in a generation. As evidence of the damage became clearer, he acted
+again in March 2002 to further bolster the economy. This was precisely
+the right medicine at precisely the right time. These actions made the
+recession shorter and shallower than it would have been. In fact, by
+most measures it was the mildest since World War II.
+ In the face of extreme adversity, our economy, like our nation,
+remains resilient. Despite a sequence of economic slowdown, attack on
+our homeland, war in Afghanistan, and weakened investor confidence, the
+economy is recovering. But as the President has stated, we can and must
+do better. Relative success is not sufficient. Too many Americans are
+out of work today, and too many Americans are insecure about their
+tomorrows.
+ We must build on the proven strengths of our economy. We must
+continue to move toward policies that will create more good jobs and
+raise living standards for all. As long as there are Americans who want
+a job and cannot find one, the economy is not growing fast enough.
+That's why President Bush's jobs and growth package is so important.
+Under the President's proposal, 92 million taxpayers and their families
+would receive a tax cut in 2003. A typical family of four with two
+earners making a combined $39,000 will receive a total of $1,100 in tax
+relief, compared to the taxes they paid in 2002, under the President's
+plan--and not just this year, but in each and every year after. And his
+plan will create hundreds of thousand of additional jobs by the end of
+this year and well over a million more by the end of next year.
+ The package will not only help America return to its economic
+potential, it will increase it, creating a more abundant future with
+more good jobs and raising real wages. I believe that is what everyone
+in this room and across America seeks.
+ Before I turn to the budget, a word about deficits. Deficits
+matter. They are never welcome. But there are times, such as these,
+when they are unavoidable, particularly when we are compelled to
+address critical national needs. It is important to remember, even
+without the President's economic growth and jobs package, homeland
+security, and the war on terrorism, we would have deficits now. Are
+these deficits welcome? No. Are they understandable? Yes.
+ The surpluses we enjoyed were the product of a strong economy, not
+a weak one. We will not return to economic strength by taxing our
+economy when it is struggling, any more than we would increase our
+nation's security by failing to fund its defense when it is threatened.
+The prescription for returning to balanced budgets is straightforward:
+hold the line on spending and grow the economy. This is the direction
+the President has chosen: a course to create real jobs that last. We
+are not going to let terrorism and its effects bring either our Nation
+or our economy to its knees.
+ Finally, we should remember that current deficits are small
+relative to our unique circumstances and to our economy as a whole.
+Even at their depth, they remain considerably below the typical levels
+following a recession over the last 30 years and they begin a
+pronounced improvement after next year.
+ We face new threats and challenges. Job creation and economic
+growth are keys not only to our near-term but our long-term success as
+well. If we are to meet the threats of today and the challenges of
+tomorrow, we must have a strong economy. In fact, we must seek a higher
+level of prosperity for America than we have known--one which puts us
+on an even higher growth path, one which unlocks the fullest potential
+and talents of the American people. That means encouraging hard work,
+rewarding hard work, and creating the opportunities for work for all
+Americans. These are the values that brought America to where we are
+today and they are the ones that we must allow to lead us into the
+future. We must also remember that our success and our example in this
+endeavor promises not only a brighter, better future for our people and
+our children, but for the rest of the world as well.
+ The Jobs and Growth Package, our new initiatives to promote
+savings, our proposal to promote health care coverage, to encourage
+charitable giving, and to promote responsible energy production, and
+improved compliance measures from the Internal Revenue Service are all
+important budget initiatives. Each of these is described in more detail
+in our request.
+ The Treasury Department's portion of the 2004 budget is nearly a
+third reduced from 2003, owing mainly to the separation of homeland
+security functions from the Treasury Department this year. Adjusting
+for that change, Treasury's request is an increase of about 3.5 percent
+over last year's request.
+ Treasury's budget request will allow us to build on our recent
+accomplishments and highlights our commitments to:
+ 1. Fight the war against terrorist financing;
+ 2. Ensure that the tax system is fair for all Americans through a
+comprehensive compliance effort that includes high income taxpayers;
+ 3. Increase Treasury's efficiency and effectiveness by streamlining
+operations; and
+ 4. Maintain the integrity of our nation's financial systems and
+currency.
+ I look forward to discussing that plan and the rest of the
+President's budget with you today.
+
+ Chairman Nussle. I guess I want to start with what you said
+we ought to question you on, and that is you are a deficit
+hawk. And like so many people around here, the words of the
+last 10 years have been put to music about balancing the
+budget, keeping it balanced, you know, never going back to
+those days when we were running deficits, some would say, as
+far as the eye can see.
+ How did we get here? How did we get to this point? You say
+deficits matter. We all think deficits matter, I would say, and
+I believe that is now joined in a bipartisan way. So if
+deficits matter, A, how did we get here, and B, what are we
+going to do about it?
+ Secretary Snow. One of the charts that was put up suggested
+where the biggest part of the problem lay: The economic
+slowdown, which has cost us over $3 trillion from those
+forecasted surpluses of just a few years ago. We didn't
+squander that surplus. We never had it. It was a forecast. It
+wasn't real dollars in hand.
+ And I think the thing to keep in mind here is just how
+humble people who make forecasts should be; that the economic
+slowdown was not foreseen. The slowdown in the growth of
+Government revenues, which was greater than the slowdown in the
+economy, wasn't foreseen any more than at the end of the
+1990s--1996, 1997, 1998, the vast increase in governmental
+revenues was foreseen. That vast surge in governmental revenues
+was the product of what? It seems to me it was clear. It was
+the product of a very buoyant and unsustainable stock market
+that created a lot of capital gains taxes for the Federal
+Government that had not been in the budget before and which are
+not there today. It created an awful lot of revenue for the
+Federal Government growing out of the exercise of options at a
+time when options were buoyed up by this very effervescent
+stock market, by incentive compensation that was a primary part
+of corporate world that ballooned during this period and
+created lots of additional and unforeseen revenues at the
+Federal Government.
+ That is over now. It disappeared. And the economic slowdown
+and the consequence of the stock market decline, I think, are
+the single most important factors in explaining the difference
+between where we were several years ago and where we are today,
+to say nothing of the cost of the war on terrorism and the
+economic uncertainty that goes with the Iraqi situation.
+ Chairman Nussle. Well, let me hone in then on revenues,
+since that is the reason why the bottom line has changed so
+dramatically is the revenues have not come in. We can talk
+about the fact that there was additional emergency spending,
+there was certainly new homeland security spending, there was
+spending certainly over and above what was anticipated that
+certainly contributed to it. But the economic downturn had
+quite a bit to do with the lack of revenues coming into the
+Treasury. As you said, it was not predicted, it was not
+forecasted. I am dying to ask, why? I mean, we missed--and when
+I say we, I mean CBO, OMB, and Treasury, missed these forecasts
+by $50 billion at a chunk. Why? How can this be within 6
+months--and this is your second day, so I guess the passion
+behind the question is that hopefully this has got to be one of
+the first issues that is tackled.
+ And let me put out a suggestion as to what might be going
+on. Our tax system that we have right now, we cannot predict
+the revenue that it will generate. The current tax system has
+gotten so complicated, so convoluted, so based on things that
+are outside of anybody's control that no human being now is
+able to predict what it will generate, because for the first
+time, as I understand it, since 1929, regardless of where the
+economy was going and heading, this is the first 2-year period
+that revenues actually dropped in actual dollars from the
+previous year. And to me that is a signal of the Tax Code and
+our inability to manage revenues more than probably any other
+issue that is out there. And I'd ask your comment or
+observations on that.
+ Secretary Snow. I think you are putting your finger on a
+very important issue here. Predicting the economy is one thing,
+and predicting the revenues that go to the Federal Government
+as a consequence of changes in the economy is another. The
+latter seems to have greater margins of error in it than the
+margins of error associated with predicting the economy. So the
+revenue stream is even more uncertain than the economy itself,
+which has always got a measure of uncertainty about it. So
+clearly, there is a disconnect. It is a disconnect I don't
+think we understand. And the best people in the world of
+understanding these things are beside me here and over at the
+Treasury Department and up here in the Congress. We all missed
+it. We all missed it big. As I said, I think, earlier, it ought
+to make us humble, and it ought to make us go back and think
+harder about these interconnections between the economy, the
+Tax Code, and the Government's revenue streams.
+ Chairman Nussle. All right. But then if that is the case,
+if we can't forecast tomorrow and can't forecast next year, let
+us just not do anything. Let us just freeze where we are. Let
+us freeze spending; let us not change the Tax Code. According
+to CBO, we grow out of it. According to OMB, we will grow out
+of it in 2 or 3 years. Let us not do anything.
+ Why is the President suggesting at this moment in time that
+we do something? And I am asking you this, to some extent,
+tongue in cheek. I mean, we are supposed to freeze at this
+moment in time and do nothing as a government? We are not
+supposed to change the tax policy of this country? That is what
+I hear so many people saying: Don't do anything. Well, in 2 or
+3 years we will be out of it. I mean, is that true, that all of
+a sudden we are going to grow out of it in 2 or 3 years by
+doing nothing over those next 2 or 3 years?
+ Secretary Snow. No. I think the President's program is
+animated by the answer to your question, which is, no, we can't
+leave it the way it is. We need to take the steps to assure
+that the recovery, which will generate additional revenues--
+that the recovery stays in place and accelerates; that those
+additional jobs are created; that the economy grows in the
+short term. But more importantly, because this package is--the
+President's growth program--has got a long-term component as
+well as a short-term component that I hope we will be able to
+get into later, it assists the economy now. It creates some
+500,000 additional jobs by year end, the fourth quarter of this
+year, a million and 3 or 4 by the fourth quarter of next year.
+That is a lot of jobs.
+ Now, that helps a lot of people who are out looking for
+work. I want to see as many ``Help Wanted'' signs going up all
+over America as possible. But what we need to do is get this
+economy on a higher growth path long term. The way to do that,
+I think, is to take actions like those the President proposes
+on the dividend, because clearly, the double taxation of
+dividends weakens the economy. It distorts the economy. If you
+tax equity capital more, you get less of it. If you tax
+anything, you get less of it. And so we have less equity
+capital. As a consequence, we have more debt in the system than
+we otherwise would have. And I am--we will get into this later,
+but the important thing about the package is that it serves
+both short-term and critically important long-term goals of
+speeding up the economy in the short term, assuring more jobs,
+and putting us on that more abundant growth path in the future,
+which allows us to address these questions that are on your
+mind.
+ Chairman Nussle. I have had a chance to talk to a few Iowa
+business folks, big employers within my district and State, and
+who were similarly situated to yourself not too long ago, and I
+asked them what we need to do to create jobs. And I will tell
+you, what they tell me is that there is money out there--a lot
+of people sitting on money right now. A lot of people are
+sitting, waiting. They are waiting because of lack of
+confidence, on one hand. They tell me they are waiting because
+of the uncertainty over the war that is looming. And they tell
+me they are just uncertain about the future.
+ And so, I guess, my last question would be, having sat in
+that situation not too long ago around the boardroom table
+making decisions about product lines and job creation and
+actually creating a job, unlike the Government which hasn't
+created a job except a government job in its entire existence,
+tell us what is the trigger. What is the trigger? With low
+interest rates right now and the cost of capital as low as it
+has ever been, what is the trigger to get someone like yourself
+who sits around that table, whether it is a big boardroom table
+or it is a small business kitchen table at home, that triggers
+them to create that next one or two jobs? What is the trigger?
+What is the way that we can get this thing going?
+ Secretary Snow. I think the main trigger is confidence, and
+confidence comes from people seeing their disposable income
+rise, and seeing it rise not just in a one-time event, but the
+prospect for a permanent increase in what they can take home,
+what they can spend, what they really have, their after-tax
+income in their pocket going up.
+ That is what this first and foremost does. It puts lots of
+additional money in the hands of 92 million Americans. That
+will stimulate the economy because it will give people
+confidence in their future. And it is the multiple-year aspect
+of this. Making these future tax cuts permanent will telescope
+to the future and cause people to say, wow, I am going to have
+another $1,000 a year, I am going to have another $2,000 a year
+to spend. It makes them feel more confident about their future.
+ Business will respond as consumers--as they see the
+prospects for their business improving, as they see their
+returns improving. An important feature of this legislation is
+that small businesses, which are the biggest job generator in
+America, will find themselves with more net income and more
+cash flow. They will have more cash flow and net income because
+of the expensing provision, which is an attractive and
+important feature of the bill, but also because of the
+reduction in the marginal tax rates. And of course, so many
+small businesses use the flow-through method of paying taxes,
+they will find their marginal tax rates being reduced. As their
+marginal tax rates are reduced, what does that mean? It means
+their business is more profitable. As their business becomes
+more profitable, has more free cash flow, they are more
+inclined to go out and expand to take on additional customers,
+to make some capital investments, and to put up those help
+wanted signs that I said earlier I would like to see more of
+going up all over America.
+ Chairman Nussle. Thank you, Mr. Secretary.
+ Mr. Spratt.
+ Mr. Spratt. Thank you, Mr. Chairman.
+ Mr. Secretary, I was here during the 1980s and here during
+the 1990s, and you were a close observer of the process then, I
+think you would agree. The way we got to where we were in 2000,
+with a surplus of $236 billion and the bottom line of the
+budget that it improved every year that the Clinton
+administration was in office is that we had a plan and we had a
+process. The process grew out of the Budget Enforcement Act of
+1990, which we adopted as part of the budget summit agreement
+made with Mr. Bush, laying the foundation for what happened in
+the 1990s.
+ Those rules are now all gone. The PAYGO rule is gone,
+discretionary spending ceilings are gone, sequestration is
+gone. All of the disciplines are gone. And the last vestige of
+any kind of budget plan expired last year. We have no plan; we
+have no process. So how do we get rid of these enormous
+deficits and back to a balanced budget without a plan and
+without a process?
+ Now, I know that you are proposing the renewal of some of
+these budget process provisions such as the PAYGO rule. There
+is an old adage around here that it is pay as you go, and that
+you pay, and I will get a free ride. That is a typical attitude
+on both sides of the aisle among all Members of Congress.
+ As I understand it, you want to renew that rule, but you
+don't want it applied your proposals; it won't apply to your
+tax cuts, and it won't apply to your entitlement increases; is
+that correct?
+ Secretary Snow. Congressman, the PAYGO rules and the other
+sequestration rules and those things that came about in the
+1990s were good policies. I supported those at that time. We
+got to those good numbers you are looking at because of those
+rules in part where spending was under much tighter control in
+that period of the mid-1990s on than it had been heretofore.
+And I forget precisely what it was, but over about a 5- or 6-
+year period there, spending rose at less than the rate of
+inflation, I think.
+ Mr. Spratt. But we had a plan, and we had to limit it
+someplace at least. We didn't always adhere to it, we fudged on
+it, but nevertheless it constrained spending significantly and
+achieved results. Alan Greenspan sat there and said, I will
+admit, I was a cynic. I was a skeptic. I didn't think it would
+work. But I have to say--he said--I think that this contributed
+successfully to the successes of the 1990s.
+ Secretary Snow. I take some pride in having been associated
+with groups that were in the forefront of urging Congress to
+adopt those rules. I don't think it was the Concord Coalition
+that I was a member of, though.
+ Mr. Spratt. I beg your pardon?
+ Secretary Snow. But, you know, I know Pete Peterson and the
+Concord Coalition and Warren Rudman, and I think they had done
+a lot of good work as well. But those PAYGO rules and
+sequestration rules and so on were clearly part of the game
+plan that restrained spending that helped us get to that
+promised land of balanced budgets, but aided greatly, I think
+you would agree with me, by that surge of governmental revenues
+that came about because of the buoyant stock market and the
+high productivity and rising real wage rates. We had an awful
+lot of good things going on.
+ Mr. Spratt. It was a convergence of all of those things.
+But if we hadn't had the budget disciplines in place, we
+wouldn't have taken maximum advantage. You wouldn't have seen
+the effect on the bottom line. But my question to you is the
+here and now, right now. If you want to see the renewal of
+those, shouldn't they apply to your tax cut proposal this year,
+your increase in Medicare benefits?
+ Secretary Snow. No, I wouldn't. If you are asking me
+whether we should have offsets----
+ Mr. Spratt. That is what the PAYGO rule means. If you don't
+have offsets----
+ Secretary Snow. If you are asking me whether there ought to
+be offsets to the tax reductions, I would candidly say no,
+because if you do that, then you don't get the benefits of the
+tax reductions. And we need those tax reductions to put so many
+people back to work. I mean, it is 2 million people over the
+course of the next 3 years that get back to work because of
+this. And I think that is awfully important, too, to have--as
+we deal with international security, we deal with economic
+security at home.
+ Mr. Spratt. Why propose it then, the renewal of the PAYGO
+rule, if it is not going to be applicable?
+ Secretary Snow. The PAYGO rule should apply to spending.
+ Mr. Spratt. Well, it does. That is what we are talking
+about.
+ Secretary Snow. Well, I don't view a tax reduction as
+spending.
+ Mr. Spratt. Well, it always applied to tax reduction and
+spending from the very beginning. So you are just talking about
+a PAYGO rule that has limited application. And would you apply
+it to your proposal, to, let us say, Medicare prescription
+drugs?
+ Secretary Snow. No, I don't think we would.
+ Mr. Spratt. That is spending, isn't it?
+ Secretary Snow. It is a spending, but it is part of a
+larger program to reform a system that is badly in need of
+reform.
+ Mr. Spratt. Well, I would agree with you about the need for
+prescription drug coverage, but you just proposed a rule, but
+then dispensed with all the applications of the rule.
+ Secretary Snow. I am suggesting that we would defeat the
+very purpose of the tax reductions if we tried to offset the
+effect of the tax reductions.
+ Mr. Spratt. I understand the point, but if you are going to
+make that point and make it in the manner you made it, then we
+shouldn't even be proposing in your budget that we have a PAYGO
+rule or--a renewal of the PAYGO rule.
+ Secretary Snow. Well, I am talking about the PAYGO rules
+applying primarily to spending. I think we have to deal with
+the discretionary spending is where it applies.
+ Mr. Spratt. The chairman touched on a very sensitive
+subject for anybody who operates in the realm of the budget,
+and that is the lateness and the reliability of early Treasury
+forecasts of revenues and the composition of revenues. And this
+is not a new topic; it has been around for a long time. We keep
+prodding and pushing the Treasury to come up with better
+estimating techniques so we can know far sooner than 18 months
+or 2 years what is the composition of income taxes, corporate
+taxes, whatever, in a particular fiscal year or calendar year.
+Do you have any plan for doing that--I know you have only been
+on the job for 2 days--improving those techniques?
+ Secretary Snow. If I had a better way do it right now, I
+would tell you, but I don't.
+ Mr. Spratt. Well, let me suggest to you the reason everyone
+bought into that fantastic forecast, $5.6 trillion in
+surpluses, was that it facilitated your tax cut proposal. We
+were warning that this was a blue sky estimate. You said you
+saw estimates of the economy slumping in August of 2000.
+ Secretary Snow. Industrial sector.
+ Mr. Spratt. Industrial sector. Transportation sector. The
+MBER says the recession started in March of 2001. The tax cuts
+weren't passed until June of 2001. So what happened is those
+who were pushing the tax cuts ignored the storm clouds that
+were gathering over the economy that people like John Snow at
+CSX were seeing; others were seeing them. They ignored those
+storm clouds and didn't want to acknowledge that that $5.6
+trillion was probably an overestimate. Treasury and OMB now say
+it is an overestimate to the tune of $3.2 trillion due to
+economic adjustments alone. They didn't want to acknowledge
+that likelihood.
+ And here is what their budget looked like: If you designed
+a surplus, which excluded the Medicare surplus and the Social
+Security surplus; and those were the terms we were talking
+about on both sides of the aisle then, that we should stay out
+of both of those trust accounts. We were forswearing ever again
+borrowing and spending those surpluses. This is what the
+surplus would have looked like, and this is how it was applied
+in the budget that was adopted in the first year of the Bush
+administration.
+ And you see that top green sliver of a line, that layer at
+the very top? After the blue spending proposals and the green
+tax cuts, that was all that was left in the near term between
+2002 and 2005, 2006 as a margin for error. And having made a
+very extravagant project--well, what turns out to be a blue sky
+projection of the economy and the surplus, they then came up
+with a budget that left no margin for error even though, as I
+said, storm clouds were gathering and people were questioning
+whether or not this surplus could indeed be obtained. That is
+what happened. And the reason you bought into it was because it
+made possible these tax cuts.
+ Now, at this point in time, if I could get the bridge
+chart--there we go. This is a little complicated for the
+screen, but this comes straight out of OMB numbers. This shows
+where the April 2001 surplus projection lay, $5.637 trillion.
+These are economic adjustments that OMB now says should be made
+to that. Those include technical as well as just economic
+growth adjustments. They don't break them down, unfortunately.
+That means the adjusted surplus that can really be expected to
+obtain in that period of time, 2002-11, the cumulative surplus
+is $2.463 trillion, and all of that virtually is Social
+Security. There is no on-budget surplus after that.
+ Then here are the enacted policies: tax cuts, the stimulus
+tax cuts, and then other enacted legislation, a large part of
+which goes to homeland defense and national security. The total
+of those enacted policies comes to $2.592 trillion. That means
+of the available surplus, adjusted available surplus, is
+already spent to the tune of $129 billion. That is the next
+item there. That shows you how much already has been spent. So,
+anything you do now goes dollar for dollar to the bottom line,
+adds dollar for dollar to the deficit, and, as the Concord
+Coalition said, that is a way of charging it up to our
+children. That is what it amounts to, shifting forward the
+burden of it. And the total amount of deficits that you are
+incurring is $2.122 trillion, and all of that--almost all of
+that results from policy decision making right now. You are
+saying it is OK to proceed from now because this is what OMB
+tells us. This is going to be the price tag of adopting this
+budget unless something falls out of the sky and gives us a
+higher rate than 3 percent, which is what they are assuming
+already, a pretty robust rate of growth for a 10-year period of
+time. Doesn't that give you concern?
+ Secretary Snow. The--sure.
+ Mr. Spratt. As a self-described deficit hawk, you are about
+to pursue policies that will increase the deficit by $2.122
+trillion.
+ Secretary Snow. Let us go back and talk about how we got
+there.
+ Mr. Spratt. OK.
+ Secretary Snow. The 2001 tax reduction was good policy. Who
+doesn't think that?
+ Mr. Spratt. But that is over now. I am talking about----
+ Secretary Snow. But it builds into these numbers.
+ Mr. Spratt. I have got that in enacted policy. I am telling
+you, you are standing at the point with a cumulative deficit
+between 2002 and 2011 is $129 billion, and you are proposing to
+add $1.993 trillion to it, OMB numbers.
+ Secretary Snow. OMB numbers that they will acknowledge,
+Congressman, understate the revenues for the future and build
+in all of the costs of the President's growth package. So they
+are worst-case sorts of numbers. I think the economy can grow
+faster, and it certainly will have more revenues in it than the
+numbers that OMB presented to you as they acknowledged, I
+think, that it was a pessimistic case on governmental revenues.
+So the picture is better than that.
+ Now, am I happy to have deficits of any amount? No. But as
+I said, deficits sometimes, regrettable as they are, are an
+essential part of carrying on the essential business of the
+country, the critical business of the country, homeland
+security now, and domestic security. And I think it is
+important to bear in mind the size of these deficits. These
+deficits are relatively small compared to the size of the
+economy and historic deficits coming out of recession, as is
+the debt level of the country. They are manageable, and they
+will be receding after a couple years. I think the OMB
+administrator had them going down, as was shown in one of these
+charts. They are deficits that we can work our way out of if we
+can grow this economy faster. And I would make the bet on
+growing the economy faster to work our way out while
+maintaining tight spending controls.
+ Mr. Spratt. But you will admit you have got fairly robust
+growth built into this budget already. It is better than 3-
+percent real growth for the next 10 years, averaging out over
+10 years better than 3-percent robust growth, real growth.
+ Secretary Snow. I will have to check that to confirm that
+you are right. If you are, I will certainly acknowledge it. I
+had thought that OMB had explicitly not taken into account the
+growth effects, or had discounted some of the growth effects of
+the President's package, but had scored the entire cost of that
+package.
+ Mr. Spratt. Let me just ask you a final question. I don't
+want to monopolize this, but this is a very important part of
+the decisions that lie ahead of us. This is our back of the
+envelope tab of what is on the agenda, the Bush
+administration's tax cut agenda.
+ The first couple of items are done deals. They are enacted
+law. The tax cut of June 2001, the cost of it a $1.349 trillion
+without including any additional debt service. The stimulus
+package in March of 2002, $42 billion. And now you've got on
+the table a growth package, a small portion of which has been
+passed, a so-called growth package. It will be implemented over
+a period of time. The cost between now and 2013 is $615
+trillion. That is an OMB number. You are also proposing making
+permanent the 2001 tax cuts, which cost about $692 billion.
+ As I said, I think you have to include the alternative
+minimum tax. The Treasury was the first to blow the whistle on
+the alternative minimum tax. They put out a report a couple of
+years ago and said, given current trends the number of tax
+filers who will be confronting the AMT will grow from 2 million
+to 39 million over the next 10 to 12 years. I have forgotten
+the time frame. The numbers are roughly correct. You know and I
+know politically we will have to deal with it, and equitably we
+should deal with it, because when we pay off the alternative
+minimum tax it was a way of saying to upper bracket taxpayers
+you are not going to be able to wipe out all your income tax
+liability with reductions and credits and preferences and so
+forth. You got to pay at least the minimum tax. We never meant
+for that to apply to middle income taxpayers, but it soon will.
+But the number who have to confront the AMT every year grows
+from 2 million to 10 million. Politically, the pressure for
+doing something about it has to be dealt with. You said that
+for several years, your Treasury Department has, both
+administrations. The AMT has to be confronted, the committee
+deals with it. Don't you agree it has to be included? If you
+talk about this time frame, we are talking 2004-13, and you
+don't include the AMT, you are fooling yourselves and you are
+fooling the American people.
+ Secretary Snow. I think it will be addressed but it should
+be addressed by the Congress and the administration as part of
+an overall tax reform package rather than as a one-off item.
+ Mr. Spratt. What you are saying though it has to be offset,
+is that what you are saying? That would mean revenue increases
+somewhere.
+ Secretary Snow. It is an issue that needs to be addressed.
+I am granting you that. How and when is something I really
+don't have an opinion on at this time.
+ Mr. Spratt. Between now and 2013, the taxpayers affected by
+it will grow from 2 million to 24 million. Don't you think
+before 2013 within the time frame we are talking about, well,
+within it, you have to deal with this issue; therefore it has
+to be included in the tally of the tax cuts likely?
+ Secretary Snow. But I think it should be addressed in the
+larger context of real, broad tax reform.
+ Mr. Spratt. Let me ask you one final question. It is time
+to clean the closet out. We need to scrub the code down as we
+did in 1986. It is long past due. And one of the anomalies in
+the code we could deal with in a tax reform package would be
+the taxation of dividends. Why not put it in a revenue neutral
+tax reform package? And indeed why not make it for the
+corporate Tax Code the big chip just as the ITC and accelerated
+depreciation was. It was a trade-off to get lower rates. Why
+not play this chip and say to corporate America we will give
+you this if you will agree to get rid of these loopholes and
+the exclusions that lower the effective rate of corporate taxes
+from 35 percent to 15 percent? Aren't you passing up a real
+opportunity there to induce real change and a good cleaning out
+of the corporate Tax Code?
+ Secretary Snow. There are a variety of ways to do things.
+However you look at this proposal, it is just good economics.
+ Mr. Spratt. But it is not good bargaining. Put it on the
+table and corporate Americans say this is what we will give you
+if you will agree to get rid of these loopholes and these
+things that let you expatriate and locate in Bermuda and avoid
+taxes. This is the incentive to you. We are going to handle the
+double taxation dividends problem in return for your concession
+on these issues.
+ Secretary Snow. There are a number of advantages from the
+exclusion on the dividends, one of which is it reduces the
+incentive to do the very thing that you find objectionable and
+I find objectionable, inversions and tax shelters, abuse of tax
+shelters and things, because if you are not paying income tax
+on it there is nothing to shelter.
+ Mr. Spratt. You have to have something to show.
+ Secretary Snow. There is a byplay here between the dividend
+exclusion and encouraging good taxpayer behavior.
+ Mr. Spratt. I agree, and put them in the same package and
+you got something you can pass. Thank you, sir.
+ Secretary Snow. Let me close though. I think you and I
+maybe didn't agree on everything there, but I think we can
+agree on the need for better estimates and I will go to work on
+that.
+ Mr. Spratt. I would hope we found broader common ground
+than that.
+ Chairman Nussle. Just to complete the record, I was
+curious, is the proposal offered by the Democrats compliant
+with PAYGO and offset and revenue neutral?
+ Mr. Spratt. If you are not going to play by the rule, we
+are not going to play by the rule.
+ Chairman Nussle. Just wanted to make sure the record was
+complete.
+ Mr. Gutknecht.
+ Mr. Gutknecht. Thank you, Mr. Chairman. Mr. Snow, we
+welcome you to the committee and to Washington again. The first
+question I have for you, are you a volunteer or a conscript? I
+suspect you are somewhere in between. You don't have to answer
+that question. You know it bothers me sometimes when they take
+words that I used back in 1995 and throw back at me today.
+Things have changed. And clearly the economy is different today
+than it was in 1995 and the circumstance we find ourselves in
+is different than it was in 1995.
+ I do want to agree with you on everything that has been
+said. As we look at projecting what the economy is going to do,
+what revenues we are going to produce, we can agree now that
+this is a very humbling business. But I do want to come back to
+some things because I didn't hear the kind of answers that I
+think ultimately the American people want to hear. The chairman
+asked a pretty interesting question. Why don't we just freeze
+everything? I mean most Americans would be happy if the Federal
+Government would just freeze an awful lot of the spending and
+allow the economy to catch up.
+ Let me give you an example. And we sort of have this debate
+sometimes between CBO and OMB and what Alan Greenspan says and
+other people say about where the economy is and where it is
+going, but according to our official bean counters at the
+Congressional Budget Office this year the Federal Government
+will increase revenues to the tune of 3.7 percent. Now
+yesterday Mr. Daniels was here and I await a little better
+explanation because in many respects I was proud of the fact
+that he stole a line from me that the Federal budget shouldn't
+grow any faster than the average family budget. But the average
+family budget is not growing at 4.5 percent, at least by my
+estimate. And I want to come back to this point. If revenues
+are going to increase by 3.7 percent this year and the Bureau
+of Labor Statistics tells us that the CPI is going to increase
+at 1.8 percent, that is about half, I guess on behalf of an
+awful lot of Americans, why isn't 3.7 percent enough for the
+Federal Government?
+ Secretary Snow. Well, Congressman, I am fairly new in this
+job and didn't have too much to do with preparing the budget
+for the United States, but I think the short answer--and it is
+a question better addressed to Mitch Daniels than to me, but I
+think the short answer is that there are pressing national
+priorities. There is the priority of homeland security, which
+takes a very significant part of that increase in the budget
+expenditures for next year. There are also initiatives in a
+number of other areas, the prescription drug proposal that I
+think enjoys widespread support, is part of a broad Medicare
+reform program that makes sense.
+ There is a cost to not doing things as well as a cost to
+doing things. If we don't do a growth package like this, what
+do we tell the 2 million people who don't have jobs who
+otherwise would have had jobs because of the growth package?
+How do we explain that we failed to take the action that makes
+the economy stronger? The action you all took in and the
+Congress took in 2001 was an essential action. It cost. It
+certainly had--scoring it, it produced more deficit than it
+produced revenues, but it was good policy. And I think if we
+keep focused on doing good policy, and then asking ourselves
+what is the opportunity cost, what do we give up because we
+don't do it and then look at what shouldn't we do. Should we
+not maintain the homeland security? Should we not wage the war
+on terrorism? Should we not try to put 2 million people back to
+work? Should we not take the growth up a percentage point over
+where it is otherwise? I think the foregone alternatives of not
+doing these thing are actually greater than the costs of
+incurring the budgetary impact of doing them.
+ Mr. Gutknecht. I agree with you generally that allowing
+people to keep more what they earn during times when the
+economy is soft is really a good thing to do. My concern is on
+the spending side. You said there is broad based support for
+this program. You will find here in Washington there is broad
+based support for virtually every spending program. It is the
+responsibility of this committee to try and restrain that
+spending so we can actually have a balanced budget and
+ultimately create room for additional tax relief.
+ The problem I have with the budget that the White House
+sent up is they say ``yes'' to almost every one of these
+priorities and you come back to the basic number. To a lot of
+Americans allowing the Federal Government to have a growth in
+their revenue of 3.7 percent ought to be enough to fund the
+legitimate needs of the American people. And at some point I
+think we all have to come to grips with the tough decisions we
+have to make, and we need some help from folks like you to get
+that done.
+ Thank you.
+ Chairman Nussle. Mr. Moran?
+ Mr. Moran. Thank you, Mr. Chairman. You know, this is
+exactly what President Bush the first called ``voodoo
+economics.'' It is Reagan redux. Some of us remember in 1980
+when David Stockman spun us the same kind of pitch. Deep tax
+cuts for the wealthiest taxpayers, dramatic increases in
+defense spending, which the Democrats didn't oppose, and then
+of course what the Democrats label as Draconian cuts in social
+programs, which they felt was part of the long-term agenda.
+When President Bush the first came into office and there was
+some resonance of his description of it as ``voodoo economics''
+because it didn't pan out, and it quadrupled the Federal debt
+in just 8 years. In 1990 he put together a bipartisan budget
+summit, raised taxes marginally on the top rates and balanced
+the budget. President Clinton followed up with a balanced
+budget and raised taxes on the highest taxpayers, who,
+incidentally, including yourself, over the last 8 years have
+taken back more after tax income than at any time in American
+history, so it obviously didn't hurt, but it balanced the
+budget. And so it left us with a $5.6 trillion surplus at the
+beginning of 2001. And that was the justification that we were
+given for the deep tax cuts of 2001. And we were even told and
+I remember, in fact the chairman suggested it, that the growth
+could well be more than this, that--the suggestion was we
+really didn't need to worry about surpluses and what the loss
+of revenue would do because the economy was going to keep
+growing. And so we left very little margin for error. And now
+you are telling us, as we have been told five times now, that
+this budget is going to grow the economy. In February of 2001,
+we were told that this budget will grow the economy. We were
+told again in the mid-session review in July of 2001. Again in
+February of 2002. Again in July of 2002. The same spin. And yet
+we have had the worst job growth in 58 years. We have had the
+worst economic growth in 50 years. It is the worst first 2
+years of any presidency from an economic perspective. And yet
+you are telling us, well, we really shouldn't worry much about
+the fact that we have got deficits as far as the eye can see
+because economic growth is going to be better than what you
+suggest.
+ And yet we look at the analysis that OMB has given us, your
+economic growth figures are more favorable than CBO's or the
+Blue Chip forecast. Your unemployment rate is less than CBO or
+the Blue Chip forecast. The interest rates that you say you
+would pay are lower than CBO or the Blue Chip forecast, and yet
+you think you can tell us these numbers, give us this
+Pollyannish projection and, you know, everything is going to be
+OK.
+ The worst aspect of this whole economic plan is that you
+are cutting taxes in every way possible on unearned income at
+the expense of earned income. In other words, the people who
+are paying for the $4.4 trillion of tax cuts, including
+interest costs over the next 10 years, the people who are
+paying for that are the ones who are payroll taxes into Social
+Security, FICA taxes, because you are taking $2.2 trillion out
+of that Social Security money and using that to offset the cost
+of the tax cuts. So you take it from those who can most afford
+it and take it--and eliminate tax on those who can most afford
+paying them and then sticking those who can least afford it.
+That is our biggest problem with it.
+ And you know, in fact, Mr. Nussle used the expression our
+problem is a lack of confidence that people are not investing,
+they are waiting because of the uncertainty. You said it
+triggers their confidence. I agree with you, the stock market
+has lost $5 trillion since your President took office and it is
+primarily a lack of confidence. So if you have any response, I
+would be interested in hearing it, Mr. Snow.
+ Secretary Snow. Congressman, I hardly know where to begin,
+but let me take on a few of your points. You are right, the
+economy--the Nation has been subject to a deep and far reaching
+set of shocks that help explain the situation we are in today,
+not the least of which is the extraordinary meltdown of the
+Nasdaq and the equity markets generally. I think it is actually
+$7 trillion that has evaporated with gigantic wealth effects.
+ Mr. Moran. I didn't want to exaggerate.
+ Secretary Snow. That is probably over the whole period.
+Then the recession, then 9/11, then the corporate scandals,
+crisis of confidence in corporate leadership, on and on. We
+have had a set of shocks, a series of shocks to the economy
+that are of far reaching proportions, and yet the economy
+remains resilient. It is really a credit to the strength of
+this economy and to past policies that the economy could
+respond as well as it did. I will come see you some time and
+talk about the numbers.
+ The Blue Chip estimates actually are for more robust growth
+rates than the growth rates that the administration has and for
+lower unemployment. Well, I won't read it to you, but I have it
+here. For instance, in 2003 the administration unemployment
+rate is--well, I won't read all these to you because it will
+take up too much time. On the issue of fairness, because we
+always come back to this issue of fairness, I think it is
+important to come back to the fact that the burden of the
+Government, the burden of the revenues is higher on the top
+taxpayers after this proposal than it is before that proposal;
+that is, if you enact, if the Congress enacts this proposal,
+the highest income taxpayers will be paying a larger share of
+the total obligations of the Federal Government than they do
+before, and the lowest income taxpayers will be paying a lower
+share of the total obligations of the Federal Government.
+ Mr. Moran. Is that after estate taxes?
+ Chairman Nussle. The gentleman's time has expired. Mr.
+Toomey.
+ Mr. Toomey. Thank you very much, Mr. Chairman, and, Mr.
+Snow, welcome to the committee. I can't quite see you there but
+I know you are there. I want to comment briefly and follow up
+on a comment one of my colleagues just made that we are looking
+at Reagan redux, and all I can say is I just vigorously hope he
+is right. It is amazing to me. When Ronald Reagan came to
+office and dramatically slashed taxes, especially marginal
+income, including taxes on the highest wage earners in our
+country and because he dramatically increased the incentives to
+work and save and invest, he ushered in a 17 year long economic
+boom that has created more wealth, prosperity and opportunity
+than this country or any country on the face of the Earth has
+ever seen. How anybody can look at that and say that was a bad
+thing is fascinating to me. It is baffling to me. It was a
+wonderful thing, and it was driven primarily by dramatic
+reductions in taxes.
+ There is another aspect of this debate which is almost a
+little overwhelming to me, and that is that the same folks who
+are so concerned about the size of the deficits are the very
+same folks who want to spend even more money. We have had huge
+increases in spending in recent years. And my good friends on
+the other side--and I don't doubt their sincerity about their
+concerns with the deficits, but the fact is they are only going
+to get worse if we keep the spending going.
+ The President proposed a budget which is a refreshing
+change from the previous administration in that he is trying to
+hold the line on spending. I hope we can do more. I am going to
+work to try to reduce spending below the level the President
+has proposed. But I understand in Congress that is going to be
+really tough to do. So if we end up right where the President
+is, we need to take that as the given, that level of spending,
+high in my judgment but maybe that is where we end up, the
+question then I think becomes which is better for the economy,
+to finance that as the President has proposed, almost entirely
+with taxes, but with a little bit, about 2.7 percent of our
+economy with debt, or should we instead raise taxes and finance
+the rest of it also by taking money away from the wage earners
+of America and doing it all with taxes instead of this
+combination? I think that is the question before us.
+ We will wrestle with the spending level. We will probably
+end up somewhere around where the President is. And I would
+just ask you to comment on which is better for the prosperity
+of America, for the economy of our country, for job prospects
+to just raise taxes and finance it all with taxes or to have
+this modest component of debt?
+ Secretary Snow. You framed the essential issue here,
+Congressman, better than I did. It is that notion of
+opportunity cost. What do we give up if we don't give the
+taxpayers more of their own money? And on the other hand, what
+does it cost us in real terms if we try to finance it through
+tax increases. I think framed that way there is only one answer
+you can come to; it is clearly better to go down the path the
+President is taking us. Sure, we have a little higher debt,
+still debt that is in the really modest range by comparison
+with the past, 2.5 percent, 2.7, coming down well below that in
+the years ahead.
+ The other side of this is who would propose a tax increase
+to accomplish that objective. I don't think you would, and I
+don't think you would get the objective. You would have lower
+employment and lower growth and ultimately less Federal
+Government revenues.
+ Mr. Toomey. I agree. As to the question of the total amount
+of public debt--and I would love to see us have a balanced
+budget this year. I think you have been quite right in framing
+this as plausible alternatives right now, but could you just
+comment on--we are running about low 30s as a percentage--our
+debt as a percentage of GDP in America. Of course that is not
+including the unfunded commitments of the major entitlement
+programs, which obviously require profound reform, but where do
+we rank amongst major industrialized nations? What statistics
+could you share with us to put that in context?
+ Secretary Snow. Maybe we could put up a chart that would be
+helpful on the overall question of the Federal debt held by the
+public. I don't have offhand, maybe somebody here does, our
+debt versus other countries. I think our debt is significantly
+lower than the debt as a percent of GDP by most OECD countries.
+But what this chart shows, of course, is that the debt that is
+projected out for the years ahead is lower than the debt we
+have experienced in most of the period since the 1980s. It is a
+manageable level of debt. Would it be better if we could have
+it lower? Absolutely yes. But could we accomplish the national
+objectives without this level of debt? I don't think we could
+either.
+ Mr. Toomey. Thank you, and a last quick question. I think
+the President's proposal for a new round of tax relief is
+vitally important for both the short-term and even more
+importantly for the long-term sustainable growth. It seems to
+me capital formation is a critical component in maximizing--
+long-term maximizing sustainable growth. Do you believe that is
+correct and the double taxation on dividend--eliminating that
+double taxation on dividend absolutely has to have a strong
+positive effect on capital formation?
+ Secretary Snow. I think there are a few who would dispute
+that. Even those who wouldn't favor the proposal would
+acknowledge that the double taxation of dividends hurts our
+national capital formation. As I said earlier, anything you tax
+more of, you get less of. And we are taxing capital formation,
+equity capital formation and encouraging overuse of debt as a
+consequence. The marketplace left to itself would use more
+debt--less debt and more equity. Because of the Tax Code we
+have higher debt to equity ratios than we otherwise would have.
+And that is not a good thing for the economy. What sense does
+it make to penalize equity capital formation? What sense does
+it make to discourage corporations paying out dividends to
+their shareholders. I have sat in on any number of meetings
+where senior management and the board thinks about how to
+reward shareholders. They say what can we do here. Well, you
+can buy somebody because you can use debt to buy somebody. You
+can buy in your shares. You can use debt to buy in your shares.
+That is tax deductible. You can make some internal investments
+or you can pay out dividends. What is the conclusion most
+companies come to? That is a tax inefficient way to reward our
+shareholders, so we do less of it. By leveling the playing
+field on dividends, we are going to do something that is
+important for corporate governance. One of the charges today,
+one of the concerns today in the capital markets is how
+accurate are these numbers. Are the numbers being managed? You
+can't manage cash. Once we are paying out more cash dividends,
+the best possible way to show shareholders what your real
+earning power is and I think by eliminating the double
+taxation, we are going to see many companies, like Microsoft
+announced recently, will begin paying dividends.
+ Mr. Toomey. Thank you.
+ Chairman Nussle. Mr. Neal.
+ Mr. Neal. Thank you very much, Mr. Chairman. Mr. Secretary,
+for the last two sessions of Congress, I have filed legislation
+on corporate inversions. I think in the last session there were
+187 signatures on a discharge petition, and it deals primarily
+with the issue of those companies who move to Bermuda for the
+purpose of avoiding U.S. Corporate taxes. Do you think that in
+a time of potential war and deficits that it is patriotic for
+these companies to move to Bermuda for the purpose only and
+solely for avoiding American corporate taxes?
+ Secretary Snow. Well, if you are asking me whether I am a
+fan of inversions, the answer is no.
+ Mr. Neal. Do you think we should do something about it?
+ Secretary Snow. I understand the department has a number of
+studies underway on that subject. I think it is a subject that
+needs to be looked at. The Tax Code certainly shouldn't be
+inducing abusive tax avoidance behavior. And I don't know
+enough about the subject, as you do.
+ Mr. Neal. Let me help you. Mr. Secretary, I have been on
+the Ways and Means Committee for more than a decade and I have
+heard the chairman of the Ways and Means Committee--and since
+some of us here suffer from amnesia, let me use a reminder--I
+have heard prominent members of the Ways and Means Committee
+say that upon their watch they were going to pull the Tax Code
+up by its roots. And then I heard we were going to dismantle
+the tax system. And I heard the former majority leader talk all
+the time about moving toward a new tax system. And I heard
+candidates for President say we are going to a long funeral
+procession for the Tax Code.
+ Do you really believe in the next couple of years you are
+going to change the Tax Code here, Mr. Secretary?
+ Secretary Snow. I hope we improve it some.
+ Mr. Neal. Do you think we are going to move to a flat tax
+or a consumption tax in the next couple of years?
+ Secretary Snow. I don't know. You and the Members of the
+Congress would probably have a better sense of that than I. But
+I think the proposal, the President's tax proposal certainly
+produces a better tax system, a simpler tax system. If you tax
+something only once, it is a lot simpler than if you tax it
+twice.
+ Mr. Neal. Well, for these guys in Bermuda, there is no tax
+at all.
+ Secretary Snow. But they move there because they are trying
+to avoid taxes, and if you don't tax the dividends, you remove
+the reason for them to go abroad. If people don't have to pay
+taxes, then they don't seek shelters.
+ Mr. Neal. What do you think the IRS would do to individual
+taxpayers if they moved to Bermuda for the purpose of avoiding
+taxes?
+ Secretary Snow. I don't know.
+ Mr. Neal. We could save $4 billion, Mr. Secretary, by just
+asking these folks to pay their share. Business people
+applauded me at a Chamber of Commerce luncheon last week with
+1,200 people in the audience when I said when these folks don't
+pay, you pay more. Not a bad applause line for business people.
+They understand it. The American people understand fairness in
+the tax system. You answered earlier saying we should always
+come back to fairness. Not a bad position to start from, never
+mind to come back to.
+ Finally Mr. Secretary, what kind of job do you think
+Secretary Rubin did during his years in the Clinton
+administration?
+ Secretary Snow. I am an admirer.
+ Mr. Neal. Do you think he was more right than wrong in the
+suggestions he made?
+ Secretary Snow. Tell me which particular suggestion you
+have in mind.
+ Mr. Neal. Suggesting that we pay down deficits.
+ Secretary Snow. I wish Bob Rubin had become more a champion
+of tax reductions. I talked to him about that and I never could
+persuade him of the benefits of some lower marginal tax rates.
+ Mr. Neal. The problem I hear is the former majority leader
+said when we passed those three budgets, which I voted for with
+Bush Sr. and Clinton twice, I remember the former majority
+leader saying that we were headed to fiscal Armageddon. And
+then I heard the former chairman of the Budget Committee say
+that we were headed toward the greatest depression in the
+history of the country. Now I hear Rubinomics is dead after we
+proceeded on a course of success that is unparalleled in
+American history. Would you agree with that in terms of
+economic prosperity during those 6 years?
+ Secretary Snow. I take my hat off to everybody who had a
+hand in bringing about the balanced budget in that period. My
+preference, though, would have been to see it done with a
+little different mix of tax increases and spending reductions;
+in other words, less on the tax increase side and more on the
+spending restraint side.
+ Mr. Neal. I think my time is up, Mr. Chairman.
+ Chairman Nussle. Mr. Hastings.
+ Mr. Hastings. Again, if I could ask my friend from Alabama
+to lean back and my friend from Arizona. Mr. Secretary, I want
+to congratulate you for being here and having been on the Hill.
+The chairman alluded to that when you have only been on the job
+for a couple of days. You have been inundated with a lot of
+things. I know that you haven't had an opportunity to really
+look at very closely and I congratulate you coming up here and
+really taking the heat.
+ Couple of comments on the data that you have been thrown
+at, and you did respond to Mr. Spratt that there is probably
+agreement between the two of you on the one issue that you try
+and do. Projecting ahead is a very inexact science and you are
+being inundated to comment on things that will happen 11 years
+from now. And we know we will probably be way off--pick a
+factor. I am sure that will happen. But let me pick up on a
+very basic issue as to where the policies that are being
+suggested by this administration and past policies by prior
+administrations. If the idea of having--in fact for many years,
+the idea of trying to get the economy going is to have some
+sort of Government stimulus, infrastructure and so forth. If
+that were the case and the fact that the Government is
+spending, we should never be in a recession if that were a very
+accurate model, it seems to me. What you are doing is--and the
+President is doing is--let us trust the people more by giving
+them more of their money.
+ So my very basic question to you is, does the economy tend
+to perform better when there is more government intervention or
+less government intervention? And based on whatever your answer
+is--and I hope it is B--tell me why that is the case and why we
+should be looking at that long term.
+ Secretary Snow. Well, I think there is clearly a role for
+government in a lot of spheres. But there is also no doubt
+about the fact that the reduction in the role of government
+over the last 30 years or so--less transportation regulation is
+one example and deregulation in many, many spheres--has been a
+big boost to the economy. And I am a big believer in
+minimizing--maximizing the role of the private sector. I think
+the strength of this country of ours and the strength of this
+economy is that we really give a large role to the private
+sector. We let the private sector work. We let markets work and
+we contrast the performance in the United States with the
+performance, say, in Europe. And the defining difference is the
+fact that we believe in markets. We let labor markets work. We
+let capital markets work. And we have embraced market
+principles here, whether in the international trade arena with
+trade liberalization or in domestic markets, in banking and
+finance with Gramm-Leach-Bliley, on and on and on. We have made
+this economy much more responsive, much more competitive and
+much more efficient. As we do that, we grow more. We create
+more good jobs--not just more jobs, but more good jobs, more
+jobs with rising real wage rates.
+ So I am a very strong believer in the competitive
+marketplace and letting the competitive marketplace operate.
+Clearly there has to be rules, but letting the competitive
+marketplace be the driver of economic performance and making
+that bet on peoples' initiative and spending their own money
+and making their own decisions and responding to the forces of
+the competitive marketplace, which disciplines all of us, I
+think is the surest and safest course for rising outputs and
+higher standards of living. I agree with you 100 percent.
+ Mr. Hastings. Mr. Secretary, thank you very much for that
+response. I was fascinated when Milton Friedman essentially
+wrote a book or a thesis on how a pencil is made. I mean the
+dynamics in the marketplace is absolutely incredible. And where
+we are trying to go is to make that obviously more of a long-
+term phenomenon than a short-term phenomenon. So I give you a
+great deal of credit for taking that initiative. But more than
+that, once again, I think you do a wonderful service coming up
+here with only 2 days on the job and taking what you are
+taking.
+ Secretary Snow. Mr. Chairman, if I could expand on the
+Congressman's point for just a minute. In the 1970s, I had the
+privilege of serving in the Ford administration in a role where
+my responsibility was to develop the transportation policy
+initiatives heading the policy shop over at DOT under Secretary
+Bill Coleman, and we worked with the best economists in the
+world, best at quantifying market impacts and so on, and we
+developed these proposals. We didn't get them through. They
+were enacted when President Carter and his administration
+picked them up and moved them forward and ran with them and got
+a congressional blessing on them.
+ None of us, none of us who were doing the forecasts on the
+economic gains from eliminating truck and rail regulation had
+any idea how much the wealth effects would be, how gigantic and
+huge the savings for the economy as a whole would be. None of
+us forecasted the fact that in the railroad transportation
+business, transportation rates today in real terms are 40-
+percent lower than they were back then. In the trucking
+industry it is also 40-percent lower in real terms, and with
+better service and with greater profitability. What happened
+there, we unleashed the marketplace, and when we unleash the
+marketplace all sort of wonderful and unforeseen things happen.
+ I think that is going to happen with the President's
+dividend proposal. That is why I so strongly support it.
+ Chairman Nussle. Mr. Edwards.
+ Mr. Edwards. Thank you, Mr. Chairman. I would like to
+address two reasonable questions raised by a Republican
+colleague in this committee. One is, does the economy perform
+better or worse with more or less government intervention? And
+I would suggest Enron is an example where the company would
+have fared a heck of a lot better and millions more might be
+employed today if we had more government intervention rather
+than less. I don't believe the sound bite that the least
+government is always the best government. And I say that as
+someone who is a great defender of our private market system.
+ Second question raised by our colleague from Pennsylvania,
+and I think this gets to the root of the difference here about
+this year's debate between Republicans and Democrats. He said
+how can anyone disagree with the Reagan fiscal policies of the
+1980s. I am one person who does disagree with those policies
+because they led to the tripling of our national debt in less
+than a decade, and perhaps that is not a concern to some
+members of this committee. It should be a great concern because
+it will be a huge burden to our children and grandchildren, and
+there is nothing economically sound, there is nothing fair
+about paying for today's tax cuts by charging the cost of those
+to our children and grandchildren.
+ Now, Mr. Secretary, what I am hearing this administration
+saying is several things regarding the budget. First, when the
+economy is good and we have surpluses, let us cut taxes and
+give that money back, thus ignoring the fact, the reality we
+already have a $6 trillion national debt. Well, then when the
+economy turns around and is bad, let us have tax cuts to
+stimulate the economy. Tax cuts under any situation may be good
+politics, but I think it is irresponsible policy. And if I were
+an American businessman listening to this debate today, I think
+what would concern me more than the fact that we are having to
+face the largest deficit in the history of America is that
+former Republican budget hawks are now rationalizing and
+explaining away the significance of having the largest deficit
+in the history of America.
+ And the next thing I hear this administration saying is
+this budget deficit is moderate and manageable. It may be
+moderate compared to the next worst case in the history of the
+United States, 1992, but I don't consider a $300 billion
+deficit this year and, even more importantly, deficits as far
+as the eye can see to be moderate or manageable. The impact
+upon our children will be devastating when they have to pay the
+debt tax, the interest on the national debt. The impact on
+businesses when this economy starts back up again and we have
+higher interest rates because of huge deficits will inhibit
+growth, not help growth.
+ Third thing, this administration says this budget is a
+growth budget. I would challenge this administration to show me
+in the history of the world any nation that took the philosophy
+that long-term deficit spending is a growth stimulator. There
+is no evidence of that throughout the history of the country.
+And I believe this is a growth inhibiting budget because it
+endorses massive national deficits for years to come.
+ Next, I am hearing we are not responsible for the largest
+deficit in the history of the United States. Obviously, you are
+not responsible for the war against terrorism or the attacks on
+this country. We all understand that. But you are responsible
+for proposing $2.8 trillion in tax cuts while we face these
+problems and know we have to pay for these problems. The fact
+is we would not have the largest deficit in the history of the
+United States today had it not been for the $1.3 trillion tax
+cut that some of us did predict 2 years ago would lead to
+deficit spending.
+ Finally, I hear you talk about cutting spending. Yet the
+six largest programs of the Federal Government that represents
+74 percent of spending are Social Security, defense, Medicare/
+Medicaid and health, interest on the debt, education and
+training. This administration and this budget is proposing
+increases in three of the six largest programs. The fourth we
+have no choice. We must pay the interest on the debt. That
+leaves Social Security and Medicaid.
+ Mr. Secretary are you proposing cuts in those two programs?
+ Secretary Snow. Congressman, thank you for those good
+questions. First of all, on the issue of the manageability of
+the debt load, clearly as Mitch Daniels said to you, we are in
+a deficit position and we will be for some years to come. But
+the green line there shows that those deficits are relatively
+moderate compared with past periods as a percent of GDP and
+that they are shrinking as a percent of GDP and are well within
+what is manageable. I think the important thing about a
+deficit--and you raise a good question. We have to keep that
+question in mind always. But the important thing about a
+deficit is does it influence the way financial markets react
+and respond, because if it influences the way financial markets
+react and respond then we will get higher interest rates. And
+financial markets react and respond if they think the deficit
+is large and growing relative to GDP or the debt is large and
+growing relative to GDP and if they think it is going to be
+sustained. I think financial markets are accepting these
+deficits that are projected. I think they are bigger than they
+are going to be, frankly, for the reasons I went through
+earlier. But the important thing is to make sure that they
+shrink over time and stay modest, shrink both in absolute and
+in relative terms.
+ And of course we are now living in a period where financial
+markets reacts instantaneously to the information they have
+available to them. They have this information. They have seen
+this coming. And interest rates I think are the lowest in 40
+years. So while I very much share your concern about deficits,
+I will come back to the point that the level that we are at
+today is manageable and is not an undue burden.
+ Chairman Nussle. Gentleman's time has expired. Mr. Brown.
+ Mr. Brown. Thank you, Mr. Chairman. Thank you for coming.
+You have only been on the job a couple of days but you are not
+short of advice, and we appreciate you coming today and letting
+us kind of pick you a little bit. But we debated the tax cuts
+and we recognized that the economy was in a downturn and the
+highest tax level was over 39 percent we felt it was too much
+and lowered those rates down to 35 percent. We felt like the
+death tax was unfair and we eliminated that and now propose
+eliminating the double taxation on dividends and the unfair
+tax, the marriage penalty. All of those were issues we felt
+were relative issues that needed to be adjusted. And yet we
+find in the economy, we look at the long range plan of over 5-
+percent unemployment over the next several years. Those issues
+must be addressed. The economy has got to be put back on the
+right track. We appreciate your efforts to help us mend that.
+ Are there any viable alternatives you see--suggestions from
+the other side--other than to cut the tax at the lowest level?
+And you know with this tax rate, you have already expanded
+that. Balancing the budget using the Social Security proceeds,
+there has been a lot of debate about how to do that and whether
+they are going to have a locked box exactly--how we intend to
+do it. But under the code itself, the only investments we can
+have in the Social Security proceeds are in Federal
+instruments. So how do we separate that? I don't think we can
+take the Social Security proceeds and just put it in a locked
+box and not gain any kind of a return.
+ Would you explain on how that might work?
+ Secretary Snow. I am trying to understand how a locked box
+would work and what the concept of a locked box really is.
+Social Security is a pay-as-you-go system, and it is a system
+with intergenerational obligations. It is currently running a
+surplus. We know that that surplus will run out at some point
+in the future. Every dollar--every penny of that surplus is
+credited to the trust fund and is backed by the full faith and
+credit of the United States. So there is no taking away, there
+is no--I hear this term from time-to-time, raiding the trust
+fund. That is a misuse of the language. There is no raiding of
+the trust fund. To create a locked box without a return, as
+long as it is cash you put into it, seems to me that would be
+sort of a far-fetched notion. That wouldn't make any sense. The
+only reason why it would make any sense out of the notion of a
+locked, box and you can help me understand this better, is that
+you take the money and pay down the debt. But the reason that
+deficits are going up is that we have these urgent national
+needs like putting people back to work, as you alluded to, and
+getting the economy growing. So going that way wouldn't seem to
+make much sense. And I am puzzled by just what the locked box
+concept means in this context where the only way I can make any
+economic sense out of the idea of a locked box is that you use
+it to pay down the debt. And if you do that, then we aren't
+accomplishing these important objectives.
+ I hope that is responsive.
+ Chairman Nussle. Mr. Scott.
+ Mr. Scott. Thank you. Mr. Snow, welcome. It is a pleasure
+to see you here and I hope you bring some Virginia fiscal
+responsibility to this administration. Now I know this budget
+isn't your fault, but it is the President's budget that you are
+having to defend. One of the things you mentioned was growing
+our way out of it. And I just wanted to get the record
+straight. Is it not true that the OMB figures for real growth,
+inflation, unemployment and interest rates for the future are
+more favorable than CBO and the Blue Chip consensus? And if you
+don't know----
+ Secretary Snow. I don't know, but I will check the record
+for you. I had thought that there were a number of private
+forecasters that had more robust growth and lower unemployment.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Scott's Question Regarding OMB Figures
+
+ Of course, there are some slight differences among the different
+forecasts. The administration's budget forecast is finalized in late
+November to early December, in order to have time to develop budget
+numbers that correspond to the economic figures. CBO and Blue Chip
+figures were assembled a month or two later and therefore are based on
+somewhat more information. Even so, there is really remarkable
+similarity in the results.
+ Over the 6 years of the forecast period, the administration
+estimated real GDP growth to average 3.3 percent, only a shade higher
+than the 3.2 percent contained in the CBO and Blue Chip forecasts.
+ The 5.3 percent average unemployment rate forecast by the
+administration for the 6 years matches the Blue Chip. CBO estimates 5.5
+percent.
+ The administration's view of inflation does show slower growth--an
+average of 1.6 percent over the 6-year forecast horizon for the GDP
+price index, compared to 2.0 percent in the other two forecasts. CPI
+growth is estimated at 2.2 percent by the administration and 2.4
+percent by the CBO and Blue Chip.
+ Slower inflation means that the administration projects slower
+growth of nominal GDP than in the other two forecasts--a rate of 4.9
+percent compared to 5.2 percent (the sum of real GDP growth and growth
+of the GDP price index). This would work against the administration's
+budget forecasts since lower nominal GDP would result in lower tax
+receipts.
+ Even after accounting for slower growth of indexed programs, which
+are based on the CPI, the budget impact narrows but the Blue Chip and
+CBO figures would still be slightly more favorable for budget
+estimates.
+ Overall, while we can point to modest differences among the
+forecasts, it seems that all are very much within a narrow range.
+
+ Mr. Scott. My reading of the President's budget shows it is
+more favorable in each of those categories. One of the things
+we mentioned as a recovery--unfortunately this budget doesn't
+have much help for the recovery. The things that will help the
+recovery are the short-term expenditures, especially the cheap
+ones like accelerated depreciation which, long term, don't
+adversely affect the budget very much but have a stimulative
+effect now or temporary increase in unemployment benefits that
+don't lock in payments but give you the benefit right now. The
+backloaded tax cuts will have nothing to do with stimulating
+the economy now.
+ Can I get chart No. 5? You have seen this chart several
+times. It reflects the tough choices that were made in 1993.
+They were unpopular, but they were responsible. And as a direct
+result of the votes that Democrats cast in 1993 that put us on
+that trajectory, the Republicans campaigned against us and took
+50 seats. Now that green line right there is not an accident.
+It is in stark contrast to the projections in chart No. 3,
+which show that we are just spending Medicare, Medicaid--excuse
+me, Medicare, Social Security and then some as far as you can
+see. You are from Virginia, Mr. Snow, and you have seen the
+kind of work that Mark Warner has done and the responsible
+decisions he has made, and that is in stark contrast to what we
+heard yesterday when Mr. Daniels came and suggested that there
+is virtually no problem and he intends to make none of the
+tough choices.
+ Could we have No. 14? Now, you indicated that this thing
+the deficit is manageable. I would like to ask you how we can
+manage--this stops at 2008. That is when the baby boomers start
+retiring in Social Security. With the substantial new taxes
+that have to be paid--not to pay down the debt but just to
+carry the debt. There is nothing in there for the war on Iraq.
+How are we going to be able to manage the Social Security and
+Medicare challenges of the baby boomers?
+ Secretary Snow. Congressman, thank you. Again, you are
+raising the right questions and the important questions. The
+way we manage those obligations to the future is to have a well
+performing economy and to have a bigger economy and to get the
+growth rates in the economy that will give us the flexibility
+to respond to those needs. I am troubled, as you are, by the
+long-term financial status and sustainability of Social
+Security and Medicare. The issues are a little bit different,
+but demographics drive both and of course rising health care
+costs particularly drives----
+ Mr. Scott. Do you acknowledge that as the thing gets worse,
+in terms of this budget it gets worse at a time when we need to
+be in a fiscal position to meet the biggest fiscal challenge
+America has ever seen, baby boomers retiring?
+ Secretary Snow. We need to be benefited by the strongest
+possible economy as well.
+ Mr. Scott. So do I understand you to say that we are going
+to hope we grow out of it without any contingency plan?
+ Secretary Snow. No. I wouldn't hope; I would pass this
+legislation so we do.
+ Mr. Scott. Well, we see which direction we are going in, as
+far as I can see.
+ Let me ask you another question. Do you believe the AMT
+needs to be fixed if we go from 2 million to 39 million
+Americans paying the AMT?
+ Secretary Snow. As I commented earlier in response to that
+question, it is an issue that clearly has to be addressed. I am
+not close enough to the facts yet to know how best to address
+it or what the time frame is.
+ Mr. Scott. There are only a number of ways to fix it; that
+is, you can increase taxes, spending cuts, or increase debt.
+ Secretary Snow. Or you can make it part of a broad-based
+tax reform proposal.
+ Mr. Scott. Which would increase taxes or reduce spending or
+increase debt.
+ Secretary Snow. Or grow the economy significantly faster
+than it would otherwise grow. I mean, I still think this code
+is a burden on the economy. I don't want to shrink from coming
+forward on this, on that proposition, and I think lower
+marginal tax rates make good economic sense.
+ Mr. Scott. Thank you, Mr. Chairman. And I would just like
+to point out that this budget has very favorable growth already
+in it, and in spite of that we are seeing, the numbers go south
+at a rate that we haven't ever seen in the history of the
+United States.
+ Secretary Snow. Congressman, the very able chief economist
+for the Department of the Treasury, Butch Clarida, the
+Assistant Secretary for Economic Policy, tells me that I was
+basically right in saying that the Blue Chip is more favorable
+than the Treasury's own estimates. And I will share that with
+you later.
+ Chairman Nussle. Mr. Putnam.
+ Mr. Putnam. Thank you, Mr. Chairman.
+ Welcome, Mr. Secretary. We are delighted to have you here.
+In business, you never want to get in a fight with the
+railroad, but it must be quite a rude awakening on your second
+day on the job to be in this new position, because it is a
+little bit different than running a railroad, I am sure.
+ Two years ago, as a freshman member of the committee, we
+opened up with the Treasury Secretary and had some really
+fascinating academic discussions about what to do with the
+surplus, all kinds of pontification over eliminating entire
+classes of debt instruments, and how the Government would
+actually deal with the cash that would be coming in. And
+certainly things have changed since then.
+ As Mitch Daniels pointed out yesterday, even if we had
+never been attacked and incurred no costs of war or recovery
+from September 11, and no tax relief had become law, we still
+would be in deficit today as a consequence of the recession and
+the popped revenue bubble, as he put it.
+ So I want to talk just a little bit about the dependence of
+the Federal Government on that revenue pyramid and where that
+revenue comes from. You have a high percentage of Americans who
+pay little or nothing in terms of Federal income taxes. For
+many of them, April 15 is a day when they become eligible to
+receive money rather than money is due. And for a fairly small
+percentage of Americans, the Federal Government depends a great
+deal on the revenues that they contribute to pay the bills.
+ There are consequences to the structure, to that
+architecture of revenue. In the President's State of the Union
+speech, he mentioned that, as an example, that a family of four
+making $40,000, if his plan were passed, would go from paying
+somewhere around just under $1,200 a year to $45 a year.
+ So my first question would be, what is the social
+consequence of having a large percentage of your population
+that pays nothing for the national defense, for an interstate
+highway system, for the level of health care, for the benefits
+of national parks, what is the social consequence of having a
+huge percentage of your population believe that those things
+don't cost anything or that they cost $45 a year?
+ Secretary Snow. Again, a good question, probably one that
+is more philosophical than my practical nature allows me to
+give a good answer to. But I think there is something
+inherently troubling about the idea that people aren't
+connected to the larger purposes of the country through the tax
+system and don't take an interest, therefore, in a number of
+the issues that as citizens we would want to encourage people
+to take an interest in. For instance, the efficiency of their
+government, the tax policy itself, the fairness of the code.
+ If you are not in the system, I think you are absolutely
+right, you take much less interest in the things that the
+system impacts and affects, and I think that is regrettable. If
+you asked me to design a code that was perfect, and I could do
+it and had all of you to vote for it, I would have a code that
+had fewer deductions, and more people part of it, and lower
+marginal tax rates.
+ Now you will tell me how to get there, and I can't tell you
+that. But in principle, I agree with you 100 percent.
+ Mr. Putnam. Well, the flip side of that, of course, is that
+a small percentage of Americans are responsible for a high
+percentage of the revenue that comes into the Government. That
+is the source of great debate, and rightfully so. It is a fair
+thing to argue about in this committee and in the Congress at
+large. The President has taken the position that for tax relief
+to be meaningful, those who pay taxes ought to receive it. But
+the larger issue is that a percentage of that volatility in
+Government revenue is based on the dependence on the revenue
+generated from a strong stock market which is inherently
+volatile.
+ So if you would, please, comment--and I don't have the
+specific percentage of revenue that comes in as a result of
+capital gains and the dividends and things like that--but if
+you could share with us your thoughts on that and a better
+approach to make the revenue sources less volatile.
+ Secretary Snow. You know, I don't have those numbers
+offhand, but I do remember a discussion with Mitch Daniels,
+saying that he was absolutely astonished by the importance of
+that top income tax category to fund the total Federal debt.
+And I forget the number, but the top 1 percent is something
+like 27 or 28 percent, and the top 5 percent is something like
+47 or 50 percent. I mean, it is a small--a relatively small
+number of the taxpayers are paying a large portion of the total
+Federal Government revenue bill. I think everybody who follows
+the Federal budget was astonished to see those revenues grow as
+they did with the ebullient stock market we had in 1997 on, and
+was equally astonished by the collapse in capital gains and
+high-end options and performance shares and those things that
+created so much revenue.
+ Which brings us back to the point we began with, with the
+chairman, about volatility of the Federal revenue depended on
+things like the stock market and bonuses.
+ But in talking about an ideal tax system, I don't think I
+am going to get a chance to identify or produce an ideal tax
+system. I think we have got to work with the tax system we have
+got for now, and make the marginal improvements we can. And the
+elements that the President has proposed I think are clearly
+not just minor adjustments, but very fundamental improvements
+in the code itself.
+ Mr. Putnam. Well, I hope you do have that opportunity.
+Thank you for being here.
+ Chairman Nussle. Mrs. Capps.
+ Mrs. Capps. Thank you, Mr. Chairman.
+ And welcome, Mr. Secretary. I want to start with some
+comments that were made by my colleague, Mr. Baird, yesterday--
+they were provocative--when he was speaking with Mr. Daniels.
+He brought to our attention the size of the real budget deficit
+is actually $480 billion in fiscal year 2004, if we exclude the
+Social Security surplus from our calculations. And that is the
+real deficit that we should be talking about. Social Security
+surplus as we describe it, that so-called lockbox, ought to be
+off limits. There are claims on that money that we all agree
+are going to need to be met in the near future.
+ Second, Mr. Baird noted that we could not eliminate this
+$480 billion deficit even if we eliminate every nondefense
+discretionary spending item in the budget. Not cut, but
+actually eliminate.
+ Let us set aside that we have been discussing the need for
+short-term deficits in the current situation which are
+unavoidable because of the downturns in the revenues to the
+Government from both the sluggish economy and the President's
+tax cuts, which I actually voted for, combined with the needs
+in the war on terrorism both here and abroad. They have put a
+terrific strain on our budget. And these deficits, which Mr.
+Daniels has described as nothing to hyperventilate about, are
+probably that, if we consider just the short term.
+ But I believe we should all be very worried about running
+these kinds of deficits year-after-year. And I would like you
+to address this. But I want you to do so, if you would, keeping
+in mind that the growth projections from the President already
+assume that the economy is going to grow 3.4 percent for the
+next four quarters, and then more than 3 percent annually for
+the next year. How can we reduce the deficits, already assuming
+this kind of growth?
+ Secretary Snow. Well, let me start by addressing the
+initial question; and that is, how best to look at the deficit.
+Is it the unified deficit, or is it the off-balance budget, the
+debt owed the public budget?
+ I think it is better in terms of gauging the economic
+impacts of the economy to look at it on a unified basis,
+because it is the unified basis that creates the true picture
+of what is happening in financial markets, how much money needs
+to be actually borrowed, or how much of a surplus you actually
+have. So the financial markets will look at it in a unified
+basis, taking into account the funds from the entitlement
+programs as well.
+ But I agree with your basic point. We can't be content to
+have deficits as far as the eye can see, and particularly
+deficits that rise in future years. So I always come back to
+the point that deficits are unwelcome. They are not a happy
+thing. In this case, they happen to be a necessary thing for
+some period of time. But there is, I think, OMB Director
+Daniels probably yesterday emphasized his commitment to keeping
+us on a course of fiscal responsibility. The President
+certainly is committed to a course of fiscal responsibility.
+The deficits are on a unified basis, as I said, and showed in
+one of those charts we put up, relatively modest in terms of
+the past experiences and the debt is--this is the deficit
+itself--relatively modest, relative to, and manageable. When I
+talk about manageable, I mean in this level.
+ Mrs. Capps. But could I follow up by saying, then, because
+I want to ask you another topic real briefly--I am assuming
+then from your answer that unless we include the Social
+Security Trust Fund and unless we grow the economy by more than
+3 percent, that we are not going to be able to do this.
+ But I actually would like to ask you a question that I
+asked Mr. Daniels yesterday; because now, as Treasury
+Secretary, you are also going to be or are a Medicare trustee.
+And I am concerned about the question that most of our
+constituents are asking about, which is how to reform Medicare
+in a way that will allow include coverage for their high-cost
+medications.
+ The President's proposal, putting at the core
+Medicare+Choice or a privatized insurance model, which I
+haven't seen the insurance companies really jumping up and down
+about, but would also be paid for with $400 billion over the
+next 10 years. And I am wondering how you think we can manage
+doing this since these companies in my rural district have been
+raising their premiums and lowering their benefits, and then
+leaving because they have made the case that they can't afford
+to be there. They are going to be coming to ask us for more
+money if they are in fact going to be the centerpiece of this
+Medicare program.
+ Secretary Snow. Medicare needs to be reformed.
+ Mrs. Capps. Yes.
+ Secretary Snow. But it needs to be reformed with a
+prescription drug component. And it seems to me every Medicare
+enrollee should have outpatient prescription drugs. There would
+probably be broad-based agreement on that. The President's
+program would use the marketplace, competitive providers under
+a structured system, so that there would be broad coverage, and
+avoid this adverse selection sort of set of issues that runs
+through insurance.
+ And Tommy Thompson could give you a lot more detail on
+this, but I understand there is a low-income assistance
+component to the President's package where they would receive
+additional assistance to acquire prescription drugs.
+ But the larger issue, though, is how to make the system
+more efficient, how to create the right incentives inside the
+system. My predecessor, Paul O'Neill, spoke eloquently and at
+length about his efforts in Pittsburgh to go in and apply
+metrics to health care, to identify--to bring business
+practices in the Pittsburgh community to the health care
+providers, and the astonishing reduction in costs in health
+care delivery systems that came about over the course of a
+fairly brief period as these management practices, re-
+engineering metrics, and so on were applied.
+ I think we can get a much more efficient health care system
+in America. And, if we don't, we are going to have health care
+rising from what is it today, 14 percent, in a few years to be
+17 percent, and if we don't do it, thereafter 20 percent, an
+unsustainable growth in this component of the economy.
+ So I guess I am agreeing with you. This is a subject that
+needs a lot of work.
+ Mrs. Capps. Thank you.
+ Chairman Nussle. Mr. Wicker.
+ Mr. Wicker. Thank you, Mr. Chairman.
+ Mr. Secretary, thank you so much for your testimony today.
+And I think all members of the committee will agree that the
+President made the right choice, and we think the Treasury is
+in good hands. And thank you for the give-and-take that we have
+had today. Certainly there are differences in philosophy
+between the two sides of this room. I think it is certainly
+fair to say we like tax cuts a little more over on this side
+than maybe my friends on the other side of the aisle. And it is
+fine for us to have that debate.
+ I do think it is important, however, for us to make sure
+that the facts that are stated in this room and on the floor of
+the House of Representatives are correct, and so I am concerned
+at some of the disparaging remarks that I hear about the Reagan
+administration, and also some of the perhaps revisionist
+history that I hear regarding the early days of President
+Clinton's administration with regard to budgetary policies and
+recommendations. And I will agree with my friend from
+Pennsylvania, Mr. Toomey. I will take 17 years of sustained
+economic growth any time, the greatest standard of living that
+any country in the world has ever seen. I applaud the Reagan
+administration for ushering that in. And I was here as a staff
+member, Mr. Secretary, when Democrats came across the aisle in
+a Democrat-controlled House of Representatives and helped
+Republicans enact those Reagan tax cuts of 1981.
+ But the thing that concerns me is when I hear that those
+tax cuts led to record deficits and the run-up in the national
+debt. So I asked someone to go get me the historical tables,
+and I had a staff member bring that over for me. And I see on
+page 29 of the historical tables provided by this committee,
+that in 1982, revenues increased to the Federal Government.
+Now, I will tell the truth, they decreased in 1983. But then
+after that, in spite of these draconian tax cuts, they went up
+in 1984, in 1985, 1986, 1987, 1988, and 1989 to the point, Mr.
+Secretary, where revenues to the Federal Government increased
+during the Reagan administration by some 60 percent in the face
+of these tax cuts.
+ I would suggest to you, and I will ask you to comment in a
+moment after I make my second point, that maybe there was
+another reason for the deficits rather than lack of revenue.
+ And then some of my friends from the other side of the
+aisle, Mr. Secretary, mentioned the Clinton surpluses. Of
+course, we on this side of the aisle like to think that the
+Republican majority that was elected in 1994 had a little
+something to do with the surpluses, but I think the truth
+probably is that the economy had a lot more to do with it than
+anything that we did. But the statement was made that President
+Clinton in the early 1990s had a plan and a process for getting
+us to a balanced budget, so I sent out for a copy of President
+Clinton's February 1995 budget proposal. And I see that during
+my second month in office here as a member of the new
+Republican majority, President Clinton came before Congress and
+proposed annual deficits of $192 billion, $196 billion, $213
+billion, $196 billion, $197 billion; and in 2000, $194 billion
+in deficits were proposed by President Clinton in 1995 before
+this very committee.
+ [The information referred to follows:]
+
+
+ Now, we felt that we could take a different approach and a
+different process when we brought in the majority, and so we
+asked for a tax cut. And it took us a couple years to get it,
+but in 1997, with the help of some Democrats, we enacted a tax
+cut. And, you know, a couple of years after that we had
+achieved a balanced budget in spite of the fact that we had let
+the American people have a little more of their money back in
+the form of tax reductions.
+ So I would ask you this two-pronged question, Mr.
+Secretary: In light of the fact that revenues increased some 60
+percent during the Reagan administration and we still ran up
+this huge debt, don't you think it was possibly excess
+Government spending and particularly entitlement spending that
+caused that deficit? And don't you think that perhaps the
+economic growth caused us to be able to do a little better than
+President Clinton proposed to this very Congress during the
+first months of my time here on the Hill?
+ Secretary Snow. Congressman, I--what do they say in the
+courtroom--I associate myself with your comments. I think the
+obvious answer to your question is that expenditures rose at a
+rate that exceeded that 60-percent increase in revenues, and
+that was a mighty large increase in the revenues.
+ Now, there was a peace dividend that came out of that
+eventually that affected the budgets of the 1990s in a very
+important way, and I don't think we should forget that the
+investment in the defense under President Reagan and Bush
+produced a much different world and a much better world, and
+ended the Soviet Union as we knew it and gave us this large
+peace dividend.
+ But the numbers are clear on that. If expenditures had been
+under tighter control, we would have had huge surpluses. And
+the numbers you cite from the Clinton budgets of the early
+1990s was a reason that a number of us got concerned about the
+need for the balanced budget approach that certainly became
+very much part of the Contract With America, as I recall.
+ Mr. Wicker. Well, I know that my time has largely expired,
+but I would just encourage the Secretary----
+ Chairman Nussle. It has.
+ Mr. Thompson.
+ Mr. Thompson. Thank you, Mr. Chairman.
+ Mr. Secretary, thank you very much for being here. Could I
+get chart No. 14, please? And while that is coming up, I just
+want to say I was glad to hear you, in your response to Mrs.
+Capps, say that it was unacceptable to have debts as far as the
+eye can see. Because when you were making your presentation,
+you were asked are deficits--is debt understandable, and you
+said yes. My note was, but is it understandable to run them for
+as far into the future as these deficits are running? And as a
+deficit hawk, I believe that is totally unacceptable. So I am
+glad that you clarified that.
+ Secretary Snow. What I really said is that as long as they
+are a declining share, they don't trouble me. I mean, I hope
+they recede just as soon as possible, and I share that with
+you. But, you know, in running, in serving on boards of major
+companies and so on, debt isn't inherently a bad thing. We take
+on debt at CSX because we use the debt to then get high returns
+on investments. So debt isn't inherently bad as long as the
+debt is used to accomplish something worthwhile.
+ Mr. Thompson. Well, at this point I believe it is really
+out of control, and we are paying for that and we are going to
+pay for that into the future years.
+ On the first page of your statement, you talked about the
+typical family of four with two wage earners making $39,000 who
+would enjoy an $1,100 tax break. And on chart No. 14, the debt
+tax chart, it shows the tax that these average family of four
+folks are having to pay. Is there any way that we can calculate
+into that the offset? Because it seems to me if you juxtapose
+your example with this chart, there is actually more money
+being paid, at least by some taxpayers, than they are actually
+getting back. And you can either answer that now or get that
+information back to me.
+ Secretary Snow. I would like to think about that. The
+notion of a debt tax is one I am still trying to get my mind
+around.
+ Mr. Thompson. Well, that is what we are paying as a result
+of the interest we pay on our national debt. I think it is $1
+billion a day that our taxpayers are paying that go to this
+interest.
+ Secretary Snow. But fortunately, it is--I think it is only
+8 percent now of the total expense to the Government because--
+--
+ Mr. Thompson. What goes down goes up as well.
+ Secretary Snow [continuing]. Interest rates are at historic
+lows.
+ Mr. Thompson. The other issue that I wanted to touch on was
+the idea of the dividend tax repeal. And you explained I think
+at length why you thought that was good. But I have to go back
+to California this weekend, as everyone here has to go back to
+their home State. And California is going to experience about a
+$1.5 billion hit if in fact the dividend tax is repealed. If
+you add to that what the State treasurer predicts the cost to
+the State will be in regard to multiple bond funding over the
+next 10 years, it is about $18 billion and change. And this is
+going to be not only a direct hit to the State of California,
+but this is going to make it more difficult to fund some of the
+exact programs that you were talking about that will help bring
+us out of these bad economical times. It is going to hurt in
+both State and local government funding, everything from
+schools to firehouses to low-income housing.
+ And that is a rough one to square, I don't care which State
+you come from. But when you come from one as big as California,
+it is real tough. And when you come from a State that if you
+look at our GNP, our ranking amongst the industrial States, we
+are the fifth largest State. So if the United States is going
+to recover from this economic downturn, California is going to
+be a big part of that, and this really puts them back.
+ And the other thing I want to say about dividend tax is, I
+understand that there is about 36 percent of the seniors that
+receive income from dividends, 64 percent don't. So it also
+becomes a hard one to square when you are talking to that 64
+percent who don't get a dividend income, and try to explain to
+them why we should risk their economic security, especially in
+regard to Social Security and Medicare, to provide a tax cut to
+those 36 percent that do derive their income that way.
+ And it just seems to me that we are--and it is usually us
+on this side of the aisle that we are accused by our friends on
+the other side of the aisle for setting up these debates
+regarding class warfare. But I think these are two examples of
+class warfare, one in regard to the underfunding or the
+disparity that is going to be created for funding for low-
+income housing, schools, and things of that nature, and the
+other in regard to people who derive their money from dividends
+vis-a-vis those who derive their money from an hourly job or a
+salaried job.
+ Secretary Snow. Let me respond briefly, and then maybe at
+some point come back and talk to you at some length on this.
+ Again, Dr. Clarida has done some studies on this question.
+I don't know that he has done California explicitly, but he may
+well have, or his people may well have. But the conclusion of
+the analysis of the net effects of the dividend proposal and
+the rest of the tax plan on the State budgets was that it had a
+positive influence on State budgets, not a negative influence.
+And you ask, well, how can that----
+ Mr. Thompson. Well, if you would, though. You are assuming
+that the States would pick that up somewhere else, and it
+becomes an administrative nightmare that is unaffordable if
+they try and create bureaucracies to track that income.
+ Secretary Snow. Well, I am told that there is a relatively
+simple adjustment that Treasury can do for the States to put
+that line on the State forms that can be accommodated if the
+States choose to decouple, I think is the phrase.
+ But on your question of the municipal bonds and other such
+instruments that States and municipalities use, I don't think
+the dividend proposal will have any major detrimental effect,
+because, as I think about those instruments, they are in
+different markets. I mean, people go into those municipal bonds
+because they want tax-free results, because they want
+stability, they want fixed incomes. There is a profile of the
+investor in those that is different than the profile of the
+investor in equities. And think of it this way. If you are
+looking for a cautious and safe haven, 1 day's loss of market
+equity values will wipe out all the gains of the dividend
+exclusions.
+ So I mean, I hear you, and there is maybe some byplay
+there, but I don't think it would be dramatic. And then in
+terms of seniors, I think it is something like half of all the
+seniors who file tax returns get dividends of some kind. And I
+think that is an important fact to keep in mind as well.
+ Mr. Thompson. Thank you. And I would like to see your
+information on the municipal bonds, because it is contrary to
+every economic analysis that I have had.
+ Secretary Snow. I will follow up with you on that.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Thompson's Question Regarding Municipal
+ Bonds
+
+ Two concerns have been expressed about the possible effects on the
+market for tax-exempt bonds of the President's proposal for eliminating
+the double tax on corporate earnings. Both relate to the demand on the
+part of investors to hold and acquire those obligations. The first
+relates to demand on the part of individuals, the second to demand by
+corporations. The concerns are that reduction in demand will translate
+into higher interest rates having to be paid by State and local
+governments.
+ The Federal Reserve System's Flow-of-Funds data for the end of 2002
+show that individuals, either directly or indirectly through mutual
+funds and bank trust departments, held about 77 percent of the $1.8
+trillion of outstanding tax-exempt bonds. Over the last two decades the
+portion held by individuals has risen while the volume outstanding has
+increased substantially. Individuals have increased their holdings
+because yields have been relatively high in comparison to the after-tax
+yields on taxable Federal and corporate bonds and defaults rare. They
+have done so even in years when the stock market was booming. Ending
+the double tax on corporate earnings will make ownership of corporate
+stock more attractive and corporate issuance of debt less attractive.
+In response we expect individuals to increase their holdings of
+equities and reduce their holdings of corporate debt. Because the
+dividend yield on equities will continue to be well below tax-exempt
+bond yields we expect individuals to continue to be attracted to the
+yield and safety provided by holding tax-exempt bonds. Any diminution
+in individual demand is likely to be so minor that it would be
+extremely difficult to detect given the normal fluctuation in interest
+rates generally.
+ Three types of corporations hold significant amounts of tax-exempt
+bonds. At the end of 2002, property and casualty companies held about
+10 percent of the total, commercial banks held about 7 percent and
+other corporations about 6 percent. Corporations find investment in
+tax-exempt bonds attractive in part because the spread between tax-
+exempt yields and yields on comparable taxable bonds has in recent
+years been significantly less than the maximum corporate tax rate. Some
+corporations, such as banks holding qualified small issuer bonds or
+corporations having less than 2 percent of their assets invested in
+tax-exempt bonds, additionally benefit from using interest payments
+associated with carrying tax-exempt bonds to shelter other income from
+tax. Moreover, banks are attracted to tax-exempt bonds to meet their
+obligations under the Community Reinvestment Act. Under current law
+relatively small spreads between taxable and tax-exempt rates and, in
+applicable cases, the ability to deduct cost-of-carry against other
+income raises the after-tax capital gains to shareholders from
+corporate investments in tax-exempt bonds well above returns on
+comparable taxable investments. Under the President's proposal after-
+tax gains to shareholders will still be higher for corporate
+investments in tax-exempts, given reasonable assumptions about the
+spread between taxable and tax-exempt yields, corporate dividend payout
+rates and effective capital gains tax rates. As a result, Treasury
+analysts conclude that no significant reduction in corporate demand for
+tax-exempt bonds is likely to occur with the enactment of the
+President's proposal.
+
+ [The following was prepared by staff in Treasury's Office
+of Economic Policy:]
+
+ The Bush Proposal and Municipal Bond Yields (January 27, 2003)
+
+ Some analysts suggest the proposal to eliminate the double taxation
+of corporate profits will increase municipal bond yields as investors
+shift their portfolios toward dividend-yielding stocks. However,
+research papers from several financial institutions suggest a number
+factors will prevent a significant effect on the municipal market.
+ Municipal investors have a low risk tolerance and want to
+preserve capital. According to Lehman Brothers, municipals have had an
+annual default rate of 0.004 percent and since 1970 there has never
+been a default on a general obligation water, sewer, or public
+university bond rated by Moody's. Eliminating the double taxation of
+corporate profits will not significantly reduce the difference in risk
+between stocks and municipals.
+ The gain in the after-tax dividend yield on stocks due to
+the Bush proposal could be wiped out in 1 day due to a change in the
+price of stocks. The standard deviation of monthly returns is 1.1
+percent for municipals versus 5.4 percent for equities, according to
+Lehman Brothers.
+ Even if tax free, the dividend yield on most stocks is
+unimpressive versus long-term municipals. At present, the yield on the
+S&P 500 is about 1.75 percent versus almost 5 percent on municipals.
+ Municipals are already relatively cheap. Long-term
+municipals are offering yields very close to long-term Treasury bonds.
+Given the very low default rate on municipals, it is hard to envision
+municipals yielding more than Treasury bonds, given that the municipal
+yield is tax free at the Federal level.
+ Municipals offer investors a pre-determined dependable
+schedule of payments and a final maturity date. These cash flows allow
+investors (such as financial institutions) to match the timing and
+amount of cash flows on assets with the negative cash flows on
+liabilities. Stocks offer no guarantees as to dividend payments or the
+return of principal.
+ Investors purchase municipals for diversification
+purposes.
+ Investors are much more likely to shift out of corporate
+bonds than municipals. Compared to municipals, corporate bonds are much
+closer substitutes with equities and have similar underlying credit
+risk. Municipals are about ten times less likely to default than
+similarly rated corporates, according to UBS Paine Webber.
+ If investors want to shift out of municipals preferred
+securities are a slightly better substitute than common stock. However,
+according to Merrill Lynch, 72 percent of preferred securities pay
+interest, not dividends. Another 13 percent of preferred is issued by
+REITs and foreign issuers. So only 15 percent of preferred securities
+would get the benefit of the Bush proposal. That 15 percent consists of
+about $24 billion in shares outstanding versus a $1.8 trillion
+municipal market.
+
+ Chairman Nussle. Mr. Bonner.
+ Mr. Bonner. Mr. Chairman, thank you very much. I am sorry
+that my colleague from Alexandria, VA left because I would have
+liked to have said this in his presence. But since he did, I am
+going to put it on the record regardless.
+ Yesterday with Mr. Daniels and again today with the
+Secretary, it is troubling to hear comments made about ``your''
+President. You know, I didn't vote for President Clinton. My
+colleague from Illinois served with President Clinton. But he
+was my President. And President Bush is my President. And I
+think it is important, we are in this time of war where the war
+may expand, and in this time of national tragedy following the
+Columbia tragedy, that this is not ``your'' President and
+``your'' President's budget. This is ``our'' President. And we
+can have a friendly debate about how the budget progresses, but
+I personally would like and hope that as future guests come
+before this committee, that we can refrain from making these
+characterizations that are derogatory toward the President of
+the United States.
+ Mr. Spratt. Would the gentleman yield so that I can
+respond?
+ Mr. Bonner. Yes, sir.
+ Mr. Spratt. I think the gentleman makes a point. And I want
+to say that for a long time we have made it clear that
+President Bush is our President. And in particular, with
+respect to the war, we have said if a war comes, then we will
+be unstinting about the cost of it, because we want to see our
+forces prevail. I had an op-ed piece in the Washington Post
+yesterday which came down on this budget and the President, but
+it ended in the last paragraph by asking him for a bipartisan
+summit. And so I think that indicates a real spirit between us
+and them. He is our President. We want to see him succeed
+economically, geopolitically, and in every other way.
+ Mr. Bonner. Mr. Secretary, you have only had a day on the
+job, and some of us on this end of the table have had about
+2\1/2\ weeks so we have got a jump start on you.
+ I would like to make sure that I understand from your
+perspective--none of us have a crystal ball and none of us can
+predict with certainty what is going to happen in the
+outyears--but what would the effect be if we did nothing?
+ Secretary Snow. Well, if we did nothing in terms of
+boosting the economy, I think we would have a much less certain
+recovery. There is the Iraq war hanging over us, there is the
+threat of higher oil prices. There is this lack of confidence I
+think that permeates the world we live in today, and is seen
+most dramatically in the performance of equity markets and in
+investment in the industrial sector, which is waiting to see
+some reason why they should begin investing. For all those
+reasons, I think to fail to act would be a mistake. And the
+cost of failing to act is those additional jobs, those 2
+million additional jobs that would be created, that percent
+plus of additional GDP that we would have, the better lives,
+the better lives that people would have in a more prosperous
+economy. That is a high price to be paid for not embracing the
+better economic policies that take us to more prosperous
+country.
+ Mr. Bonner. Prior to your coming to this job, you certainly
+had a distinguished career in the private sector. One of my
+concerns is if we don't do something to make permanent the tax
+cuts of 2001, that we can't give working families or corporate
+America any certainty about what the future holds. What would
+the effect be of doing nothing to make permanent the tax cuts
+of 2001? Putting yourself back in your former job, how can you
+plan past 2010 if there are some set provisions on many of
+these important tax reductions?
+ Secretary Snow. Well, one thing it would do would be to be
+approximately a 50-percent tax increase on the lowest taxpaying
+Americans. I think that is unacceptable.
+ Mr. Bonner. Fifty-percent tax increase on the lowest----
+ Secretary Snow. Taxpaying Americans.
+ Mr. Bonner [continuing]. Taxpaying Americans.
+ Finally, I would like to just associate myself with the
+point that the gentleman from Mississippi was making. The Wall
+Street Journal yesterday had an interesting and excellent op-ed
+piece that I would commend to all of the members of this
+committee. And if you have not had a chance, Mr. Secretary, to
+read it, I would suggest that you do as well: Growth in
+discretionary spending over the last 5 years, 45 percent; in
+the last year alone, 9 percent. And we can blame tax cuts, we
+can blame a number of different factors. And I wasn't a Member
+of Congress during the previous 5 years, but does not that
+increase shock the conscience?
+ Secretary Snow. I saw Mitch Daniels' numbers that I think
+he maybe displayed here yesterday that lay out that scenario.
+We have abundantly funded a lot of discretionary programs over
+the last 5 or 6 years. I think that is absolutely true. And I
+don't think we can afford to continue to do that.
+ Mr. Bonner. Finally as I thank you again for coming, let me
+share with you a number. I spoke to a group of Federal
+employees on Friday in my district. And of course, they have
+different interests than some of the interests we might have.
+But I found it interesting in doing some research, during the
+first year of our Federal Government, your department, the
+Department of Treasury, had 39 employees in 1789. I would hope
+that we could, as we move forward, find ways to move back
+toward a smaller government that is less obtrusive to the
+American people. Thank you again for your time.
+ Secretary Snow. You are suggesting that Alexander Hamilton
+had higher productivity than I do.
+ Mr. Emanuel. Don't take it personally.
+ Chairman Nussle. Mr. Baird.
+ Mr. Baird. Thank you, Mr. Chairman.
+ I wonder if I could have minority staff put slide No. 16
+up, and the majority staff post the slide reflecting deficits
+percent of GDP.
+ Mr. Secretary, in--could you post that slide reflecting
+deficits and percent of GDP?
+ Secretary Snow. Our slide?
+ Mr. Baird. Your poster. You have referred to it throughout
+the day.
+ You have made the point repeatedly, Mr. Secretary, that we
+must consider deficits as a percentage of GDP; yet in 1995,
+when you were talking about the benefits of a reduction in
+deficit, at that point the percentage of GDP--or the deficit as
+a percentage of GDP is approximately where it is now, according
+to the chart that I have seen.
+ Now, if in 1995 you projected that a 2-percent--or that a
+reduction in deficits could lead to as much as a 2-percent--and
+that is slide No. 16--could lead to as much as a 2-percent
+reduction in interest rates, if I am a family with a $200,000
+home and my interest rates are reduced by 2 percent, I save
+about $4,000.
+ You have talked today about the benefits of a $1,000 tax
+return for a family of four. It seems to me if my interest
+rates, if I could cut interest rates, I would be better off.
+ So deficits are real and they do have consequences. And
+while it may be important to interpret deficits in the light of
+percent of GDP, your comments in 1995 suggesting deficits
+needed to be reduced are almost precisely where the deficit was
+today.
+ Could you comment on that, please?
+ Secretary Snow. Sure, I would be delighted to.
+ In 1995, the budget of the United States was projected to
+be in a sizeable deficit in the years going forward. That was
+the $200 billion-plus projections that were in the budget of
+the United States.
+ Mr. Baird. Is that not where we are today, sir?
+ Secretary Snow. Yes, but with an economy that is 40
+percent, 50-percent bigger.
+ Mr. Baird. But the fact that we are talking relative as a
+percent of GDP standardizes that out, Does it not?
+ Secretary Snow. Well, you are looking here at a set of
+numbers toward the end of the 1990s that reflected the totally
+unexpected growth of Government revenues from the buoyant stock
+market. In 1995, when I got as concerned as I did--and it
+actually preceded that, Congressman. It preceded it in the
+early 1990s--in the late 1980s, late 1980s, early 1990s. When I
+got concerned about this, I was looking at projections of the
+United States Government for annualized deficits that were up
+in the 4 and 5 percent range, not the 2 percent range. So I was
+talking about projections that we were all talking about at
+that time, and that were alarming not just to me but to many on
+both sides of the aisle.
+ Mr. Baird. So you were referring at the time to
+projections?
+ Secretary Snow. Sure.
+ Mr. Baird. And yet you didn't say that in the comment. I am
+not trying to hold you. But the fact was, you were saying if we
+could lower it by 2 percent from where it is now. Your
+statement in 1995, sir, didn't say if we could lower it from
+the projected rate; it referred to where we were at in 1995.
+And I would assert that we are about there now. And so deficits
+do have a cost.
+ Let me ask you a second question, if I may. The gentleman
+here suggested you should lower the size of your agency. I have
+met with some of your agents recently, and they tell me that
+your agency is a toothless tiger; that when they go on
+enforcement efforts, people laugh at them and assert that if
+you try to make me pay my taxes, I will file complaints against
+you.
+ Now, we all respect the fundamental rights of the American
+people to be treated fairly by the Department of Treasury, the
+IRS, et cetera. But what do you think we might be able to do in
+terms of generating additional revenue if those people who are
+laughing at your inspectors right now had some respect for them
+and there were some teeth in that?
+ Secretary Snow. Well, I think there is a significant
+augmentation of the Treasury budget to strengthen the
+enforcement hand of the Treasury. I think it is $100 million,
+focused on the higher-end income people, and other enforcement
+augmentations as well.
+ Mr. Baird. I would applaud that. I have some concerns,
+however, that apparently, at least as I read the budget
+proposal, part of that will be privatized. And I have some
+concerns about the American people having what may well be
+hired guns trying to collect their taxes. I can tell you that
+in the realm of Medicare fraud enforcement, this has been an
+unabashed disaster, and you have got hired guns out treating
+people very shabbily. And we can say all we want, people love
+to criticize Federal employees, but I have seen no great
+evidence that a hired gun is going to treat a private citizen
+with greater respect than a Federal employee who at least is
+answerable to an elected Representative who they elected. So I
+just want to voice my concern. Thank you for your comments.
+ Chairman Nussle. Mr. Franks. Mr. Garrett.
+ Mr. Garrett. Thank you. And I appreciate your being here
+with us and suffering through all this endless questioning.
+ Secretary Snow. Well, it is a good education for a new
+Secretary.
+ Mr. Garrett. And it is a good education for a new Member as
+well. And my only regret is I was not here when Mr. Putnam was
+here 2 years as a freshman, when the debate was how do we pay
+off some of these instruments.
+ I am inclined to take the view that you held more back in
+1995 than perhaps you hold today as far as the importance of
+attacking the deficit problem. I agree with my chairman, I
+guess his rhetorical question that he made at the outset. He
+said, well, if we do nothing, we know where we are going to
+need to go; so, should we do nothing?
+ And the answer, I agree with him is, no, we have to take
+this action. And I agree with the line of reasoning that you
+and the President have with regard to the tax cut, and I am
+completely behind the notion that the way to do this is to grow
+the economy and to grow revenue, and that will be the long-term
+solution to the problem.
+ But getting to the issue of the deficit today, you made the
+comment that we have to be concerned about deficit spending.
+But one of the phrases you used was ``except when there are
+critical needs to be addressed,'' and I think everyone on both
+sides of the aisle will agree that we are in a period of time
+when there are certainly critical needs to be addressed. But as
+you said that, I was thinking that when is there a time in this
+Nation when we would not be sitting at these tables and say
+that there are not critical needs to be addressed? We had 40
+years of the cold war, and I am sure the people that testified
+then would say there was a rationale for deficit spending, and
+there was a Great Society and there was certainly a need for
+moving in deficit spending in those times. I would hazard a
+guess that any one of us could come up with a program and say
+that this program that we sponsor for our district or the
+Nation is a critical need, and we could get over that hurdle of
+saying, well, this is the one that we have to address.
+ The critical need that we are dealing with right now is the
+terrorism aspect, and I think our President is right when he
+came out right after 9/11 and said, this is not something that
+is going away in a month or 6 months from now; this is a long-
+term problem.
+ So how do we--can you just for a moment address that issue
+of saying when we don't have that?
+ Secretary Snow. What--the juxtaposition of critical needs
+in my opening comment was homeland security, the war or
+terrorism, and creating good jobs for Americans who are
+struggling. Those were the critical needs I referenced.
+ Mr. Garrett. And I agree with them. But I just think that
+going forward we are always going to have those critical needs.
+And how do we put them aside to say we want to move toward what
+Mr. Baird and others were saying, and along the line more in
+keeping with a balanced budget? I think, I hope, in the future
+that this committee is going to be grappling with the bigger
+rules that we are going to be discussing, that you were
+mentioning at the outset with regard to the framework and the
+rules, that Mr. Spratt and others were talking about as far as
+the framework that we deal with in budgets in the future. And
+you have mentioned the PAYGO rule and how that worked.
+ And I guess my questions go along the line of this. I think
+I agree with, although I have to think about this a little bit
+more, your comment with regard to the PAYGO rule not applying
+to tax cuts. And I think that is right, but I have to give that
+more consideration. But you also made the comment that it
+should not apply to mandatory expenditures. And I will let you
+respond to this. My thought there is that if we are clever
+enough, any one of our absolutely critical needs we have in our
+districts, I think we are probably clever enough that if that
+was the rule that we had to live with, we could try to turn it
+into a mandatory expenditure so we could get beyond the rule.
+ And I think your second comment along that line was if
+there are certain sorts of programs such as the Medicare
+program--if there are certain sorts of programs such as the
+Medicare reform, which we all agree on that we can save
+spending, then perhaps they should be able to get around rules
+such as that PAYGO rule. I would hazard the guess also that
+just about any spending initiatives that we have here on either
+side of the aisle, that we will always say that if we just
+spend more money on education or transportation or
+infrastructure, that we will posit the truth that it is going
+to actually save spending in the long term.
+ So if we move all those things off the page, what is left
+even in discretionary spending that is still within the rules?
+ Secretary Snow. Well, if you are suggesting that the game
+can get rigged, in which everything is off the table, I would
+agree with you. All games can get rigged in ways that are
+destructive of the fundamental game. But on the larger set of
+questions you are raising here, how to frame this whole set of
+issues, I would have to defer I think to Mitch Daniels and
+people who know a lot more about this subject than I do.
+ Mr. Garrett. OK. Thank you very much.
+ Chairman Nussle. Mr. Cooper.
+ Mr. Cooper. Thank you, Mr. Chairman.
+ Mr. Secretary, I have two questions, one macro, one micro.
+You are new on the job; you have to sell a budget that you
+didn't prepare. But I would urge you to read page 315 or 318 of
+this very thick book called Analytical Perspectives, because I
+am deeply worried that you have been saddled with an
+unconstitutional recommendation. And I know that you took the
+oath of office seriously to support and defend the
+Constitution. But when I read the bottom of that page, quote,
+``Under the President's proposal, if an appropriations bill is
+not signed by October 1 of the new fiscal year, funding would
+automatically be provided at the lower of the President's
+budget or the prior year's level,'' that could give 40 U.S.
+Senators the ability to terminate or radically reduce and
+cripple almost any spending program in the country.
+ The Constitution gives Congress the power to appropriate
+the dollars for spending. So I would urge you to look at this
+proposal very closely, one that you did not formulate. And
+overall, I would like to urge the American people to get on-
+line and read some of these documents, because for all of your
+smooth skill and calm demeanor, there is a lot in here such as
+this proposal that is indeed radical, perhaps unconstitutional,
+and perhaps irresponsible. And it is important that all
+Americans tune in to these important although arcane issues.
+ So, could I have your pledge to take a serious look at this
+proposal?
+ Secretary Snow. You can. I accept both the compliment and
+the challenge that you have given me.
+ Mr. Cooper. Thank you. At the micro level, you have a very
+able staff. I am not like my colleague from Alabama who wants
+to deplete your staff. One of your ablest people is Pam Olson.
+She is now looking at an issue that has to do with municipal
+power company prepayment for electricity. A bond issue is
+currently being held up right now because she will allow
+prepayment for gas but not for electricity. We would like a
+fuel-neutral policy so that municipal power companies can help
+their people with electricity and gas, and be able to prepay
+for both. So I would just like to urge you and her to take a
+look at that micro issue, because it could help a lot of
+consumers all over America having a municipal power company.
+Thank you.
+ Secretary Snow. I will agree to do that.
+ Mr. Cooper. Thank you.
+ Chairman Nussle. Mr. Hensarling.
+ Mr. Hensarling. Thank you, Mr. Chairman.
+ Mr. Secretary, let me echo the sentiments of one of my
+other colleagues, that it is indeed, as a freshman Congressman,
+great to meet somebody who has less seniority than me.
+ This is my second hearing of the Budget Committee and
+obviously your first, but we have both had the benefit of
+seeing a dizzying array of charts put on the screen here for
+us. I would like to know if the assumptions underlying--if you
+have the same understanding that I do. No. 1, I believe that I
+am being asked to believe that with some amount of clarity and
+exactitude, that we can figure out 10 years in the future
+exactly what the economy is going to be doing. And, at the same
+time, I believe these charts that have a large amount of red
+ink on them are based on the so-called static scoring of the
+President's economic plan, and that I am being asked to believe
+that changes in tax rates have no impact on job creation or the
+economy.
+ You saw the same charts that I did, Mr. Secretary. Is that
+your understanding as well?
+ Secretary Snow. Yes, broadly. I would not put enormous
+confidence in 10-year estimates of budget numbers. This may be
+the best that can be done, but I would look at them with a
+great deal of caution, as you are suggesting.
+ I do agree with you that I think they do not reflect, and I
+think Mr. Daniels was clear in saying this, that they do not
+reflect the full growth component that would be expected from
+the tax package, but they do reflect the full cost component.
+So I would certainly agree with all three of your points,
+actually.
+ Mr. Hensarling. Mr. Secretary, even though the budget does
+not include the dynamic impact of the economic program,
+obviously you have seen a number of opinions expressed. What do
+you perceive is the consensus opinion of the economic impact of
+the President's economic program?
+ Secretary Snow. Talking to colleagues in the business
+community, and the Business Roundtable put out an estimate. I
+have seen some others. I would say the official numbers of OMB
+probably are on the low side of the growth that will actually
+be achieved. And I think that is true of a variety of the
+private sector estimators.
+ Mr. Hensarling. Mr. Secretary, of all the charts that I
+have seen posted today, I notice that there are two that are
+fairly noticeable by their absence. Today, I have not seen one
+chart that plots the growth of Government over the last 10
+years or projecting 10 years forward, even though we did hear
+earlier today that as recently as last year we had a 9-percent
+increase in discretionary spending.
+ I am under the impression that over the last 10 years
+Government spending has grown at approximately 6 percent.
+Obviously, the economy has not kept pace with that. There has
+been some criticism from my colleagues on the other side of
+aisle that your economic projections are too rosy; that 3
+percent or 3.3 percent economic growth in the future is too
+rosy.
+ So say, for example, hypothetically, if economic growth
+over the next 10 years was, say, 2\1/2\ percent, and say the
+Government continued to grow at the rate of 6 percent, given
+that today the tax burden on the average American family is 40
+percent--local, State, and Federal taxes--if these trends
+continue, do you have an opinion of what would happen to the
+tax burden on the American family?
+ Secretary Snow. Well, I can't do all the math in my head,
+but I think the direction is pretty obvious. It would be a
+heavier burden. A heavier burden.
+ Mr. Hensarling. Thank you.
+ Chairman Nussle. Mr. Emanuel.
+ Mr. Emanuel. Thank you, Mr. Chairman.
+ This is our second hearing for some of our freshmen, and
+the second time that we have gone through lunch. And I wanted
+you to know I started this six-two and 250 pounds, and that is
+all I have got left. And that you kind of look around, and you
+begin to feel like you are in an Agatha Christy novel: And then
+there were none.
+ Thank you very much, Mr. Secretary. Also I would like to
+repeat and echo my colleague: It is good to find somebody with
+less seniority than yourself.
+ You know, I am going to take a faint attempt at
+bipartisanship and quote Ronald Reagan. ``Facts are stubborn
+things.'' The fact is, although a lot of people want to review
+the 1980s versus the 1990s and what led to economic growth, the
+fact is that in the 1990s we had a record period of job growth.
+Fact: We had a record reduction in the welfare roles.
+ Fact is that we have also in the 1990s extended the trust
+fund for Medicare by 20 years. Fact, we had a drop in those who
+worked full-time and didn't have health insurance, down to 38
+million. And fact is we also had a drop in violent crime in
+this country and we did all that without tripling the Nation's
+debt. So although people can take rightful pride comparing the
+1980s and the 1990s as a period of economic growth and what
+happened, just a simple fact, and I would like to quote Ronald
+Reagan on that, ``facts are stubborn things and those are just
+facts.'' And that may be hard for some people to swallow, and I
+appreciate that, but that is what happened.
+ And with that, I think it is worth noting since some people
+like to compare 17 years of Ronald Reagan's economic growth, we
+do think something happened in the 1990s that was certainly
+magical. There is no doubt that it started with the
+entrepreneurs and the middle class families around the country,
+and also with the decisions, whether people like it or not,
+because I don't want to just do nothing about welfare reform.
+We did something about welfare reform. And doing something in
+Washington does have an impact.
+ The arguments to the 2001 tax bill was that the President
+inherited the recession and he needed a $1.3 trillion tax cut
+to get the economy moving. Since that time the economy has lost
+2\1/2\ million jobs. Four more million Americans are without
+health insurance that had health insurance before. And I think
+you will appreciate this, is that also nearly $1 trillion of
+corporate assets have been foreclosed on in chapter 11. And one
+of the facts I am most impressed with between the 1990s was the
+fact that we decreased the amount of people living in poverty
+but in fact in the last 2 years two more million people have
+been added to the poverty rolls in this country, just facts.
+ And I do think the decisions we make here rather than just
+static and not doing anything have an impact on the economy and
+on what happens, and I do agree that we all want to see job
+growth and economic growth. We want to see deficits lower. But
+one of the things we want to see is every American participate
+in that and that hasn't happened to date. The unemployment, the
+uninsured are not equally shared across every income group. And
+I agree with what you said, deficits can be manageable if they
+are seen as cyclical. But once the markets sees the perception
+go from cyclical to permanent, interest rates rise and that has
+an effect on mortgages, college loans, paying for health care
+bills and it becomes a tax on the families. And we are very
+close--and you may be right and I think you are right, right
+now they are seeing them cyclical. But that moment that
+perception changes in the market that they are permanent and
+fixed and structured, nothing we are talking about the tax cuts
+here will pale in comparison to the rising costs of managing to
+pay for a home, paying for college or paying for health care.
+ With that, I do want to talk a second about savings. Fewer
+than 5 percent of the American people participate in the IRAs
+as they exist, the Roth IRAs. And why do you think that
+increasing that limit is going to increase the participation
+that only 5 percent of the top bracket participate today? To my
+view since $3,000 a year is out of reach for a lot of Americans
+to put away, making it $7,000 is only going to be putting more
+money away for those who want to participate and try to save.
+You are just going to go to the same people who today
+participate in the IRA and we are not going to extend it.
+ Now I think if you look at all that money that is going to
+go toward that savings, some people see critical investments in
+agriculture. Folks like me see critical investments in
+education. Right now we can't even pay for the President's
+initiative of Leave No Child Behind. This budget, the amount of
+deficits we leave, the amount of debt we add and the ability
+not to invest it, Pell Grants or in education, do have
+consequences because American lives aren't static. Washington
+may want to be static, but their lives are not.
+ Secretary Snow. I agree with much of what you had to say.
+ Mr. Emanuel. There is an act of bipartisanship right there.
+ Secretary Snow. One of the important proposals coming out
+of the Treasury deals with the issue you are raising, the low
+savings rates among the lower income, below the median people.
+The failure to use the IRAs and the Roths and 401s and so on--
+and I would urge you to take a look at this proposal. Pam Olson
+was mentioned earlier as somebody that the committee works with
+closely, which really she is the rowing oar on these LSAs and
+RSAs which would create a new savings vehicle. The current tax
+favored vehicles are just too complex on the one hand and too
+restrictive on the other. They limit the purpose so that that
+mother who wants to educate her child, she puts her money into
+the fund and the child gets sick, she can't use it to help deal
+with the medical problems of that child, so they don't use it.
+And I commend Pam and the Treasury Department for coming up
+with these proposals to make--create new savings vehicles to
+encourage more savings among middle income and lower income
+people. Wealthy people have lots of ways to save. It is the
+lower income people that need to have savings facilitated. So I
+urge you to take a look at these proposals.
+ Chairman Nussle. Mr. McCotter.
+ Mr. McCotter. Thank you, Mr. Chairman, and I would like to
+thank the good member from Illinois for his bipartisan praise
+of the 1990s-led GOP House of Representatives. You mentioned
+something about the debt tax and that is something I heard a
+lot about. It is a new term, although I am fully expectant that
+I will be hearing that term over and over again at least for
+the next year and 11 months. I think I might have an idea of
+what it is and I just want to see if I can be correct, and then
+I have a quick question. It seems to me that the debt tax is
+caused by politicians' need to immediately spend money in the
+hopes that it will lead to long-term structural improvements in
+the economy when in the end it is basically a mortgage and a
+hope that Government spending will help improve the economy and
+the quality of peoples' lives. This naturally will limit the
+amount of discretionary spending that will be available later.
+So in my mind it becomes basically a debt penalty.
+ It gets confusing because we heard the overall accumulation
+of Government debt in relation to individual budgets, and there
+was never a proration for how the immediate spending influenced
+those future budgets. And I think that that was kind of apples
+to orangutans or something. I think under that kind of logic
+there are really five things that can be done. You can
+individually--you can raise taxes. You can individually cut
+prorated reductions in the programs that were benefited by the
+immediate spending at the expense of future spending. You can
+have larger cuts in all other programs whether affected or not.
+You can obviously go across the board spending freeze because
+we heard that will lead to a balanced budget or you can hope
+through some type of budgetary policies you can grow the
+economy and restrain spending and arrive back into a surplus
+situation.
+ I didn't study economics. I was a liberal arts guy so I may
+be wrong about some of that. But my question is in investing
+the 1990s--I was a state legislator. I was a county
+commissioner prior to that--at the end of the 1990s, we saw, I
+think it was historically the largest increase in Government
+revenues and we also saw one of the largest increases in
+Government spending and that was followed by a recession. We
+have heard a lot about deficits having consequences on markets,
+a debt--the cost of having a debt at the national level. I was
+wondering if anyone had looked into the prospect of a national
+surplus also constituting negative consequences to our economy
+when the Government takes too much from entrepreneurs and the
+people who make this country great, the working men and women
+and then spends it inefficiently.
+ Secretary Snow. Congressman, you may not have studied
+economics formally but you have obviously learned it some other
+way, because you are framing the issues the way the economist
+would frame them. I saw a speech that Larry Summers gave
+recently in which he said no one can be well educated today if
+they don't have a fundamental understanding of economics. And
+economics is basically the study of trade-offs and choices and
+the costs of alternative choices and framing the choices
+intelligently. You just did, and I agree with the way you
+framed them. It is important to always ask what is the cost of
+not doing what we are proposing as well as what is the cost of
+doing it. And where the cost of not doing, what you give up is
+greater than the cost of doing it, you should give it up.
+ So I think the President's program is the course that takes
+us and puts us on the best course in terms of those trade-offs
+that you have enumerated.
+ Mr. McCotter. I just want to thank you very much. In the
+final analysis, though, I do believe a historical precedent is
+important, and I do believe that had we perhaps at the State
+and local level, because I can't address the national level,
+saved some of the money that the taxpayers put here into
+reserve accounts, into rainy day funds, perhaps we might not
+have offset the entire cost of this proposed budget but would
+have laid a foundation for a rainy day fund much like families
+have to do. And my concern is that we do not attempt to bolt
+the Federal budget on the backs of family budgets no matter
+what direction we take.
+ Secretary Snow. I agree with your large point there.
+ Chairman Nussle. Ms. Majette.
+ Ms. Majette. Thank you, Mr. Chairman, and I would like to
+have displayed slide No. 3. Can you display slide No. 3? And
+good afternoon, Mr. Secretary. I appreciate your patience and
+your fortitude. In my previous life I was a trial court judge
+and I certainly wouldn't have had a witness on the witness
+stand as long as you have been without a break.
+ Secretary Snow. Cruel and unusual.
+ Ms. Majette. But I certainly appreciate your being here
+this morning and this afternoon, and we have talked a lot about
+the cost of doing or not doing things and trade-offs. And
+before I ask my question I would just like to preface it with
+some reading that I did this morning, and this is from a book
+written by Richard Kriegbaum on leadership and particularly on
+the aspect of creating a budget. And he says that, ``The core
+values of an organization are the promises its members make to
+each other. The budget is the most comprehensive and detailed
+description of what the organization has promised to do in
+expressing those values. What makes budgeting so difficult for
+a future oriented leader is that the budget is mostly about
+history, about keeping promises that have already been made. If
+the promises were made wisely, they will have created a good
+set of present opportunities, attract great people, secured a
+strong position in the market with a positive image and allowed
+for increasing net revenues. The need for growth is a product
+of the fundamental paradox in each budget. Driven mostly by the
+promises of history, the budget must also make promises to
+secure a future. The budget, mundane and arcane, is the
+ultimate leadership forum.''
+ Now my question is given the fact that we have the baby
+boomers, the baby boom generation will begin to collect Social
+Security benefits starting in 2008 and also having the Medicare
+coverage and that those are promises that we have made, made by
+past and current Presidents and by past and current Congresses,
+how are we going to be able to honor those past and current
+promises in light of the deficit we already have and the
+proposed budget that will increase those deficits as we move
+forward to 2008?
+ Secretary Snow. I begin by saying that our commitments to
+Social Security and Medicare are sacrosanct. It is unthinkable
+that those commitments won't be made. At the same time, it is
+important to recognize that, as you are suggesting, that the
+demographics of the country are putting us on an unsustainable
+basis in terms of the current course. So some fundamental
+reforms need to be thought about in both areas.
+ The President has made clear his commitment to Social
+Security, but also is engendering a national dialogue on how to
+put it on a sustainable basis. The commission he appointed came
+up with three options. All included investment retirement
+accounts--I guess two of the three--all three had investment
+retirement accounts as part of the approach. The Social
+Security system needs savings. It needs an infusion of real
+savings. And we need to find a way to make that happen. It can
+only happen, though, I think, and we can only put Social
+Security on a sustainable basis if, one, we grow the economy,
+because that gives us the wherewithal to deal with the
+problems, and, secondly, if there is a bipartisan consensus to
+move forward on that issue.
+ On Medicare, health care, the commitment is the same. The
+problem is a little different. It is driven by demographics,
+but also by this extraordinary increase in health care costs,
+which we have to rein in. We have to bring greater discipline
+and efficiency to the health care delivery system. We talk
+about that a lot. We talk about that a lot. But it is an issue
+that has to get joined.
+ So I applaud you very deeply for putting that issue before
+the committee and before the Congress because it is one that we
+simply have to address.
+ Ms. Majette. Thank you.
+ Chairman Nussle. Mr. Ford.
+ Mr. Ford. Thank you. We are here, as you know, Mr.
+Secretary, talking about this budget stuff after or during the
+time in which Secretary Powell has made quite a compelling
+statement about the world taking steps against Iraq and even an
+invasion of Iraq. I know that you have a tough gig, made
+tougher by the fact that you didn't really have a job in
+writing this budget, but you have to defend it and perhaps you
+do fully agree with it. But some of the things you said in the
+past which I think we tried to point out here are in conflict
+with the direction that this budget will take us. I want to ask
+specifically just a couple of questions.
+ I am reading this morning in the CQR, one of the local
+newspapers here on the Hill, where your friend and colleague
+Glenn Hubbard makes the point that because of dynamic scoring
+that the costs of this tax cut, the $695 billion tax cut, would
+actually be less some $280-billion less, $278 billion to be
+exact, and that it would actually cost only $417 billion over
+11 years. I was curious, one, if you are familiar with his
+talking about this and, two, if you agree with this dynamic
+scoring.
+ Sounds a little like fuzzy math to me. I know a lot of
+people here have talked about what counties have to do and what
+families have to do. I would love to be able to go into a
+grocery store and fill up my grocery cart and say it looks like
+it is 250 but by the time I get to the counter maybe it will
+only be 185. I am curious to know if you agree with Glenn
+Hubbard's estimation about this.
+ Secretary Snow. Actually I have not discussed that with the
+CEA chairman.
+ Mr. Ford. If you could get back to me on that and maybe the
+chairman. I know he is a fan of dynamic scoring as well.
+Perhaps he can get back to those of us on the committee if he
+too agrees with Glenn Hubbard's estimations here.
+ Chairman Nussle. Will the gentleman yield?
+ Mr. Ford. As long as you don't take my time.
+ Chairman Nussle. I will be glad to not take it from your
+time. I am just curious. So your point is that you see
+absolutely no impact at all from our fiscal policies on the
+overall economy and that it should not be taken into
+consideration?
+ Mr. Ford. No, sir. I am just asking the question. Evidently
+you are giving me a partial yes. I would love----
+ Chairman Nussle. It is not a partial guess or a yes. I just
+wondered if you saw no impact at all from fiscal policy on the
+economy.
+ Mr. Ford. Mr. Snow has run a railroad that runs through my
+city of Memphis, and has done very well in business. You, Mr.
+Nussle, have been head of the committee. I am just curious. I
+asked the question for this reason. I was not on the committee
+2 years ago, but I understand having voted against the budget
+that came out of this committee, there were a lot of estimates
+about how well the economy would perform after the tax cuts
+that Congress passed 2 years ago. Well, in fact, that has not
+happened. We heard a variety of reasons why. It is ridiculous
+some of the things that everybody said, particularly--I have a
+lot of friends on that side of aisle. But to suggest that
+Clinton had something to do with this or that Reagan had
+something to do with this or that one person deserves more
+credit than the other is ridiculous. Let us face the facts we
+face right now. If that is the case and if it does not happen,
+what is our fallback here, because we estimated over the next 2
+years all these things would happen with this tax cut and it is
+not happening.
+ And I will be happy to yield to the chairman if he wants.
+The second question I would have for Mr. Snow with regard to
+the stimulus package, and I would love to get a copy of your
+memo you sent to Mr. Thompson on municipal bonds and other tax
+free instruments, including the low income housing tax credit
+that Ms. Johnson raised yesterday, I think, before the Ways and
+Means Committee. But I am curious about States. My State, like
+many others, is faced with these crushing burdens. Is there not
+an argument--and I am not an economist. I went to a school
+where they teach it up at Penn and Wharton, but I didn't take
+any of those classes. I was a liberal arts major like the
+former commissioner and State representative over there was. I
+am curious--it would seem to me though, what little I know,
+that the best thing we probably could do would be to help
+Governors avoid either raising taxes or cutting vital services.
+And if we don't provide some direct aid to the States, is it
+your belief that that may offset what we may do here at the
+Federal level whether it is dividend taxes or payroll tax
+rebates or whatever we eventually settle on?
+ Secretary Snow. The best thing we can do for the States is
+to create a strong national economy that grows and as that
+strong national economy grows and the States have more jobs,
+more revenues will flow to the States. And the analysis I have
+done--I introduced Dr. Clarida earlier who has done these
+analyses. The States actually pick up in the aggregate more
+revenues as a consequence of this growth package than they
+would have otherwise.
+ Mr. Ford. So it is your belief that providing direct aid to
+the States for health and education and other needs, and this
+is not to suggest that we don't have other priorities but I am
+just curious, modifying the Medicaid formula so that my State--
+and Tennessee is faced with a $400 million shortfall this year
+and an expected larger one next year. That is small compared to
+some of the other States represented here. But you don't
+believe that providing some direct aid in addition to the
+stimulus jobs and growth package that the President talked
+before Congress a week or two ago, you don't believe direct aid
+could also help alleviate some of this burden and actually help
+create jobs and grow their economies at the State level as
+well?
+ Secretary Snow. I forget the numbers. You would know them
+because you were here yesterday when Mitch Daniels testified,
+but as I recall there was a--here is the chart--these are OMB
+numbers. You can see there has been a fairly sizeable increase
+in grants, Federal grants to State and local governments, and
+that is continuing in this budget.
+ Mr. Ford. How much of that is Medicaid? I must have missed
+that part of Mr. Daniels' testimony. It is my understanding a
+little over three-quarters of that was Medicaid funding if I am
+not mistaken.
+ Secretary Snow. The numbers escape me right now, but I will
+get back to you on that for sure. I know Medicaid is now, I
+think, the largest source of the grants to the States and I
+think the second largest item in most State budgets.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Ford's Question Regarding Medicaid Funding
+
+ Total Federal grant-in-aid money to state and local governments was
+$351.6 billion in fiscal year 2002. It will rise 9 percent to an
+estimated $384.2 billion in 2003 and an additional 4 percent to $398.8
+billion in 2004 under our budget proposal.
+ A huge 20 percent rise in Medicaid grants is slated for this year,
+boosting them from $147.6 billion in fiscal year 2002 to $176.8-billion
+under current law for fiscal year 2003. These grants are expected to
+rise 3 percent further to $182.5 billion in 2004 (amount takes account
+of proposed legislation).
+ The rise in Medicaid costs in fiscal year 2003 is expected to
+account for 89.6 percent of the increase in total grant-in-aid in that
+year, but the rise in fiscal year 2004 would make up only about 39
+percent of the increase in grant monies.
+ Medicaid expenditures accounted for 42.0 percent of total Federal
+grant-in-aid to states in fiscal year 2002; the share is expected to
+rise to 46.0 percent in fiscal year 2003 and account for 45.8 percent
+of grants in fiscal year 2004.
+
+ Mr. Ford. If you could have drafted this budget, Mr.
+Secretary, and you were trying to craft a stimulus package in
+light of the challenges we face and with the vast experience
+you have had in the private sector, public sector, is this the
+budget you would have drafted and presented to this Congress
+and suggested to this Nation to help create a rebound and a
+growth period, including job creation?
+ I know I am going over my time. I think I know what you may
+say, but I am just curious if this is the budget you would have
+presented to this Congress had you been on from the very
+beginning with this administration.
+ Secretary Snow. I am very pleased to be in a position to
+advocate the policies reflected in this budget. I shy away from
+using the term ``stimulus'' because I think it mischaracterizes
+what this package is all about.
+ Mr. Ford. I would agree.
+ Secretary Snow. It really is a growth package.
+ Chairman Nussle. Mr. Secretary, let me just--excuse me--let
+me yield to Mr. Davis and then I will take some time at the
+end. Mr. Davis.
+ Mr. Davis. Thank you, Mr. Chairman. Mr. Snow, I apologize
+to you that I missed a lot of your testimony. I have some
+pressing constituency issues in my office, but I did see a lot
+of you on television this morning. Let me ask a question that
+is totally different from what you have been asked about during
+most of the day. I want to go to the larger point of incentives
+that this budget creates and I want to talk about incentives in
+one particular area. I want to preface that by saying that two
+things are apparent to me as I look at the political context
+around this budget.
+ First of all, it is evident that whether we agree or
+disagree with the whole range of cutbacks that are made in this
+budget that there are a range of objective cuts or reductions
+in the rate of growth for a number of social programs that I
+consider important, from education, health care, Head Start,
+you name it. Because of that, it strikes me that there is going
+to be a much greater reliance on the private sector, a much
+greater reliance on the private sector to step up to the plate
+when it comes to charitable giving. The President has spoken
+very eloquently of compassionate conservatism. He has spoken
+very eloquently of the private sector and the private community
+in this country assuming some of the burden that the Government
+may be advocating.
+ Given that set of premises, I want to ask you about this
+budget's failure to provide more incentives for charitable
+giving. Pull out just a few facts that I have seen in the
+budget. The President is proposing a $500 charitable deduction
+for nonitemizers. Now based on numbers that I have seen, the
+average charitable gift for most taxpayers is $348. The range
+between $348 and $500 is significant at that level, so as a
+practical matter most people who were giving charitably will
+not receive a tax incentive.
+ Give you some more numbers. Two years ago when the
+President sent his first tax cut plan up to Congress, he
+proposed a $90 billion--what would have amounted to a $90
+billion charitable tax break over a 10-year period, about $9
+billion a year. That plan was not successful. In this go-
+around, the President comes back with a $20 billion plan for
+reductions in charitable giving over 10 years. That seems to be
+a significant retreat on the part of the President.
+ Two other aspects I will point out to you. A lot of
+charitable foundations--in fact, my understanding is that all
+private charitable foundations, while they are not taxed in the
+normal fashion, pay an excise tax that totals up to $1.4
+billion a year. This budget provides no relief from that excise
+tax.
+ Finally, as I understand it right now, if people withdraw
+money from an IRA and attempt to give it to charities, that is
+still taxed. Now that is a classic case of double taxation. The
+budget the President proposes does nothing about that.
+ So my question to you is this: Given the extraordinary
+shift from public sector to private sector the President seems
+to contemplate, how can you justify to us and, more
+importantly, to our constituents why the President doesn't do
+more in this budget to encourage charitable giving?
+ Secretary Snow. I am not as conversant with this subject as
+you obviously are, but I will give you two broad answers. One,
+the best way to stimulate charitable giving is to have a
+stronger economy so people have more money in their pockets,
+more disposable income. This proposal does that. I am confident
+of that. The IRA proposal that we talked about earlier,
+Congressman, when you weren't here, the Treasury proposals
+there, does permit transfers to charities. It creates a more
+flexible use of these savings accounts and I think will
+encourage savings generally and, by creating more flexible
+uses, will be helpful to charity generally. And I understand
+that in the budget there is some several $100 million in effect
+directed to charitable causes.
+ Mr. Davis. Let me ask two follow-up questions, Mr.
+Secretary. Would you support the legislation that has been
+introduced in the Senate, as I understand it and that some of
+us will cosponsor in the House, that would lift the excise tax
+on the charitable foundations?
+ Secretary Snow. I have to study that. I am not up enough--I
+wouldn't want to give an off the top of my head answer.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Davis' Question Regarding Excise Taxes on
+ Charitable Foundations
+
+ The administration's fiscal year 2003 and fiscal year 2004 budgets
+include a proposal to simplify the excise tax on private foundation
+investment income. The administration has not proposed repeal of the
+excise tax. Under current law, the excise tax rate is 2 percent, but
+the tax rate may be reduced to 1 percent if the foundation's charitable
+distributions exceed its average level of charitable distributions over
+the five preceding years. The administration proposal is intended to
+provide simplification and some amount of tax relief for foundations by
+replacing the current two-tier rate structure with a single 1-percent
+tax rate. The current formula, in addition to imposing recordkeeping
+burdens, can discourage foundations from increasing charitable
+distributions in a particular year, because it would be more difficult
+for the foundation to qualify for the reduced rate in subsequent years.
+
+ Mr. Davis. One more question. Can you give me some
+explanation of why the President has by his own terms retreated
+from his $90 billion goal of 2 years ago as far as charitable
+tax breaks to a considerably less ambitious goal of $20
+million?
+ Secretary Snow. This is an area that I am beyond my ken. I
+wasn't here when the President made whatever the original
+proposals are and I am not really familiar with what the
+proposals are in this budget, but I will be happy to look into
+that.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Davis' Question Regarding the President's
+ Goal on Charitable Tax Breaks
+
+ The administration's fiscal year 2004 budget proposals reflect
+legislative developments. The charity bills considered in the House and
+the Senate in the 107th Congress were both much more modest bills than
+earlier proposals. In addition, there were bi-partisan meetings between
+Congressional leaders and the White House last year that produced a
+consensus package. The current budget proposals reflect those
+considerations and would provide significant new support and incentive
+for taxpayers to increase their charitable contributions.
+
+ Mr. Davis. Thank you, Mr. Secretary. Thank you, Mr.
+Chairman.
+ Chairman Nussle. Let me just take a little bit of time here
+because Mr. Ford brought this up and I have enormous respect
+for my good friend from Tennessee. Just to make it clear, I am
+not a fan of either static nor dynamic scoring. I am a big fan,
+though, of accurate scoring, and we haven't had that under any
+model that I have seen as of now and that frustrates me and I
+know it frustrates the gentleman from Tennessee. So just to
+correct the record.
+ Mr. Ford. I didn't mean to cast any aspersions. I know I
+heard a lot of people talking about dynamic this and dynamic
+that yesterday and I thought I heard you saying you support
+dynamic scoring.
+ Chairman Nussle. And that gets me to the second part. I am
+not sure what to call it, but--well, let me just ask the
+Secretary. Does the President in the budget that has been
+presented before Congress score his growth package in a dynamic
+scoring model or methodology?
+ Secretary Snow. The budget builds in some of the growth
+that would come as a result of the tax incentives in the plan,
+but it is not fully built in; that is, it doesn't play through
+all the consequences of enhanced incentives for savings,
+investment and consumption, nor does it, to my knowledge, fully
+take into account the removal of the inefficiencies that are
+associated with the current Tax Code, in the area, for
+instance, of the dividends. So the way I look at it, it
+certainly scores all the costs of it, but probably doesn't
+reflect all the benefits.
+ Chairman Nussle. And I guess it is puzzling because I asked
+the same question of Mr. Daniels yesterday and he said no, it
+is not dynamically scored. In fact, the way I understood it was
+that if, in fact, OMB's growth figures are less than CBO's and
+Blue Chip and both Blue Chip and CBO assume nothing basically
+is changing, I don't know how anyone could assume that that
+scores dynamically, or assumes any growth or assistance from
+the growth package that the President has put forward. And I
+guess that is what I am getting at. I am wondering why you
+don't in the budget assume growth larger than status quo from
+this growth package.
+ Secretary Snow. I think it is--the decision to err on the
+side of conservatism basically lies at the base of that
+decision and build in conservative numbers rather than
+otherwise. That is the only explanation that I can see for it.
+ Chairman Nussle. Let me ask you one other thing because the
+gentleman from Tennessee said this. He said obviously there was
+no changes or there was no growth, there was no economic
+benefit from the package--the growth package from 2001, the tax
+cuts from 2001. And unless I am missing something, that not
+only was not your testimony but I am not aware of any economist
+that suggests that this was a recession that is typical based
+on the dynamics that were out there at the time, that there is
+nobody with any kind of economic credentials that is suggesting
+that there was no impact in a positive way from the 2001 tax
+cuts that were passed. Now somebody may think it didn't go far
+enough or it could have had more economic impact, but to
+suggest that there was no dynamic impact, just, I am surprised
+at because I am not familiar with any school of thought that
+suggests that there was absolutely no impact from the 2001 tax
+cuts. What is your belief on that?
+ Secretary Snow. Well, my belief is that the 2001 package
+was essential to avoid a deep recession and was the right
+medicine at the right time. And if it hadn't been done, if
+Congress hadn't stepped up to the plate with the 2001 tax
+package where I was sitting in the private sector, I was
+looking at the prospect of a very deep and serious recession.
+We ended up with--I think it is the shallowest and shortest
+recession since the Second World War. So I think it was the
+right medicine at the right time and the consequences were
+obvious. The Congress, by taking the steps you did, put us on a
+much faster recovery than would have been the case otherwise.
+That means lots of additional jobs and lots less misery for a
+lot of people.
+ Mr. Ford. Mr. Chairman, I didn't actually suggest that
+there has been no impact, if I can indulge for one moment. I
+was only making the point--two points. One, there is an
+estimated $278-billion less that--$278-billion less of an
+impact on the bottom line, and there was a lot of impact on
+what the package that was passed in 2001 would accomplish. Now
+if I am hearing correctly, instead of losing by five
+touchdowns, we lost by three. Might have covered the spread,
+but we still lost. And the only point I was trying to make, I
+still want an answer from you, Mr. Chairman, and maybe you have
+answered it already, but from the Secretary, is there a belief
+in the White House about what Mr. Hubbard said, that the cost
+of this tax cut, that the economic surge could offset 40
+percent of the plan's cost? I think that is a pretty
+significant offset.
+ Chairman Nussle. Did he say ``could''? What is the quote?
+ Mr. Ford. ``White House official says economic surge could
+offset----''
+ Chairman Nussle. Could?
+ Mr. Ford. Clearly----
+ Chairman Nussle. Not definite, not ``I am betting my house
+on it,'' but ``could?'' Why isn't that fair to say that could
+be the case? Using your analogy, using the analogy of the
+gentleman walking through the grocery store buying food and
+that it has no impact at the end of the counter, doesn't
+recognize, but it does have an impact because at the end of the
+day hopefully he has had dinner and hopefully his stomach is
+full. So there was an impact.
+ Mr. Ford. Walking through the grocery store and hoping that
+things go on sale before you arrive at the counter is my point.
+I am only telling you what the man said. Now if you agree--I am
+asking the Secretary. If you agree with Mr. Hubbard in his
+characterization that it could be offset by 40 percent, there
+is no need to be defensive with me. You and I represent people
+we have to go home and explain this to.
+ Chairman Nussle. Let me reclaim my time and answer your
+question. Yes, it could.
+ Mr. Ford. Fair enough.
+ Chairman Nussle. And let me continue to reclaim my time and
+suggest to you that I don't believe that dynamic scoring which,
+A, nobody can yet define and, B, there aren't any models that
+anyone that I am aware of is yet ready to roll out and suggest
+this is the be all and end all economic model. But to suggest
+what we currently suggest, that fiscal Government policy has no
+impact--no impact on today, tomorrow, the next year, 10 years
+from now--is living in an unbelievable vacuum that I don't
+think is realistic either. But to be able to predict it, no, I
+think you are correct and that is why we share, whether it is
+bipartisan or whatever, is that we need better, more accurate
+scorekeeping and more accurate estimates as we look at today,
+tomorrow and the future.
+ Mr. Ford. Do you think Mr. Hubbard, who holds a fairly
+significant position at the White House, him making this
+comment that it could cost $278-billion less, but could that
+influence some of you and our colleagues here in the Congress?
+Could it have us believe that this thing won't cost as much and
+somehow or another----
+ Chairman Nussle. Why is it unfair for us to consider--let
+me just ask it back. Why is it unfair for us to consider
+whether this could affect us in a positive way when I have been
+hearing all day for the last 2 days how it could not from your
+side; that it may not; that it may be the worst medicine? If
+you could look at the positive, you can look at it from the
+negative.
+ Mr. Ford. I am holding fast to the notion that could not.
+But I wanted to get Secretary Snow on record as saying that he
+believed that he could.
+ Chairman Nussle. Reclaiming my time, that is why we have
+budgets. That is why we have plans. That is why we have
+parties. That is why we have votes. And that is why we need to
+have this discussion and we need to put our plans on the table.
+We hope to see a plan from your side. We have seen the plan
+from the President. We hope to see a plan from your side and
+then we will be able to make a decision.
+ Mr. Spratt.
+ Mr. Spratt. Three quick points. If I could, Mr. Secretary,
+give you a handwritten request for some additional information.
+I just had no other method other than to hand write it out. We
+would like some backup data about the assumptions about the
+revenues that will be gained or realized from your new savings
+proposals and then the revenue losses that will ensue as these
+tax shelters build up and accumulate. I think your 5-year
+summary is that it will generate $14 billion in revenues over
+10 years. We would like the assumptions you are making about
+who will transfer out of traditional vehicles into new
+vehicles.
+ Second point, I could offer as a witness, but ask the
+former chief economist of OMB who is sitting right behind me,
+Joe Minarik, who has been in this budget process for 20-odd
+years, and he will tell you that OMB does consider the
+behavioral effects of various economic policies in putting
+their documents together. They don't get into alchemy. They
+don't get into magic elixirs and things like that. They take
+very basic views, which is what we want them to do. There is a
+passage from David Stockman about how the first cut on the 1981
+tax cuts was treated, where the bottom line came out and he
+gave it to Mary Wheatenbaum and said what can we do about this,
+we can never sell that, and Mary Wheatenbaum says I can take
+care of it right here. That is where the assumptions will come
+from. Very gut judgments. We don't want that, OMB, Treasury or
+CBO or anywhere else. We want very, very basic assumptions that
+have been demonstrable in the past from other fiscal policies.
+ And finally, Mr. Chairman, as we spoke, the Treasury issued
+a bulletin indicating that the Government is about to run out
+of borrowing authority by February 20, according to the
+Treasury's forecast. They will hit the ceiling and will have to
+engage in some stopgap practices in order to keep going. I
+doubt that we will get anything about that around here by
+February 20, but I am concerned that this is a sign of things
+to come. It may not be the last time we will have to raise the
+debt ceiling.
+ Mr. Ford. I would still be curious. I know Mr. Nussle has
+answered, but I would be curious to know at some point after
+you have had an opportunity to review Mr. Hubbard's estimation
+about what could happen, I would be curious to know your
+thoughts, if you share his belief that an economic surge could
+offset 40 percent of the $695 billion tax cut proposals. I know
+you said you hadn't had a chance to look at it. I would
+appreciate if you would be able to respond to that.
+ [The information referred to follows:]
+
+ Mr. Snow's Response to Mr. Ford's Question Regarding the Tax Cut
+ Proposal
+
+ I believe the extra economic growth produced by the
+administration's Economic Growth Package will offset a significant
+portion of the official budget estimate of its cost. A study released
+by the Business Roundtable shows the tax cut will offset one-third of
+the official cost estimate, with most of the offset generated by the
+dividend proposal. A simulation run by the Council of Economic Advisers
+suggests revenue from extra economic growth could offset about half of
+the official cost of the proposal during the 2003-07 period.
+ The tax cut will reduce the cost of capital for corporate equity
+investments, leading to an increase in the stock of corporate capital.
+By reducing tax distortions, it will also enhance the efficiency with
+which capital is allocated. Other potential gains from the tax cut
+include those from lower debt ratios, more appropriate corporate payout
+ratios, higher labor supply, and greater investment by small
+businesses.
+
+ COMPARISON OF ECONOMIC ASSUMPTIONS
+ [Calendar years]
+----------------------------------------------------------------------------------------------------------------
+ Projections Average
+ -----------------------------------------------------------------------
+ 2003 2004 2005 2006 2007 2008 2003-08
+----------------------------------------------------------------------------------------------------------------
+Real GDP (billions of 1996 dollars):
+ CBO January......................... 9,673 10,018 10,358 10,697 11,037 11,380 ..........
+ Blue Chip Consensus January \2\..... 9,704 10,050 10,383 10,709 11,041 11,384 ..........
+ 2004 Budget......................... 9,710 10,061 10,414 10,760 11,102 11,446 ..........
+Real GDP (chain-weighted):\1\
+ CBO January......................... 2.5 3.6 3.4 3.3 3.2 3.1 3.2
+ Blue Chip Consensus January \2\..... 2.8 3.6 3.3 3.1 3.1 3.1 3.2
+ 2004 Budget......................... 2.9 3.6 3.5 3.3 3.2 3.1 3.3
+Chain-weighted GDP Price Index:\1\
+ CBO January......................... 1.6 1.7 2.0 2.1 2.1 2.2 2.0
+ Blue Chip Consensus January \2\..... 1.6 1.9 2.1 2.1 2.1 2.1 2.0
+ 2004 Budget......................... 1.3 1.5 1.5 1.7 1.7 1.8 1.6
+Consumer Price Index (all urban):\1\
+ CBO January......................... 2.1 2.2 2.5 2.5 2.5 2.5 2.4
+ Blue Chip Consensus January \2\..... 2.2 2.2 2.5 2.6 2.5 2.5 2.4
+ 2004 Budget......................... 2.2 2.1 2.1 2.2 2.2 2.3 2.2
+Unemployment rate:\3\
+ CBO January......................... 5.9 5.8 5.4 5.3 5.3 5.2 5.5
+ Blue Chip Consensus January \2\..... 5.9 5.5 5.1 5.1 5.1 5.1 5.3
+ 2004 Budget......................... 5.7 5.5 5.2 5.1 5.1 5.1 5.3
+Interest rates:\3\
+91-day Treasury bills:
+ CBO January......................... 1.4 3.5 4.8 4.9 4.9 4.9 4.1
+ Blue Chip Consensus January \2\..... 1.6 2.9 4.2 4.4 4.6 4.4 3.7
+ 2004 Budget......................... 1.6 3.3 4.0 4.2 4.2 4.3 3.6
+10-year Treasury notes:
+ CBO January......................... 4.4 5.2 5.6 5.8 5.8 5.8 5.4
+ Blue Chip Consensus January \2\..... 4.4 5.2 5.6 5.8 5.7 5.7 5.4
+ 2004 Budget......................... 4.2 5.0 5.3 5.4 5.5 5.6 5.2
+----------------------------------------------------------------------------------------------------------------
+Sources: Congressional Budget Office; Aspen Publishers, Inc., Blue Chip Economic Indicators.
+
+\1\ Year over year percent change.
+
+\2\ January 2003 Blue Chip Consensus forecast for 2003 and 2004; Blue Chip October 2002 long run for 2005-08.
+
+ \3\ Annual averages, percent.
+
+ Chairman Nussle. Mr. Davis.
+ Mr. Davis. I don't want to weigh into this debate, but I
+want to take advantage of your expertise to clarify something
+for myself here. When we talk about or when I have read a lot
+about these notions of dynamic scoring, for some reason it
+seems that the debate seeks to estimate the economic impact of
+fiscal policy, of tax cuts, things of that nature. Can you shed
+some light for me, Mr. Secretary, about why these theories of
+dynamic scoring don't estimate the impact of, say, more
+spending on things such as education and health care, because
+it is my uninformed theory since I am not an economist, it is
+my theory that those things have some effect on the health of
+our economy as well, but it seems that people who engage the
+dynamic scoring issue don't focus on the potential economic
+impact from those things?
+ Secretary Snow. I think, and I don't pretend to be an
+authority on this subject, I agree with the chairman that what
+we ought to do is do accurate scoring. But accurate scoring
+ought to take into account the way people respond, and people
+do respond to tax incentives.
+ Just a little story, I was in Beaufort, SC just last
+weekend and the historian was showing my wife and me and some
+friends around Beaufort. Beaufort is a unique city because it
+was occupied all during the war and the people left early in
+the Civil War and the antebellum homes are maintained. It was
+never destroyed. And on this tour, the historian pointed out
+the various houses and noted that a number of these houses
+didn't have any doors and that was curious. We asked him why.
+He said it was the first tax shelter. He said Beaufort in those
+days taxed houses by the number of doors, so people put in
+windows.
+ Mr. Chairman, just an illustration of the point, Tax Code
+is noted by people and they adjust their behaviors in
+accordance with it.
+ Mr. Davis. I do want to make one point before I yield the
+floor, Mr. Secretary. I have no doubt that that is true at some
+level, but the point I will leave you with is this. As we look
+at the priorities facing our country that it seems to me if we
+make the adequate investments in health care, if we make the
+adequate investments in education, that too will have an impact
+on people's behavior, because it will do one very fundamental
+thing. It will move people who have been at the margins of our
+economy into a more secure position, the middle class. It will
+ratchet up people's economic power, and I will leave you with
+the observation that that is something we should take into
+account.
+ Chairman Nussle. Mr. McCotter.
+ Mr. McCotter. Quickly, I agree with that, but I think that
+the best way for people to come off the margins is to make more
+money and keep it and make the decisions on how to invest that
+money in their own lives through their family budgets. And the
+good news for the good Representative from Memphis, I was at
+the grocery store last night, and I am living a bachelor's life
+with my wife 500 miles away and I decided that ice cream was
+two for five bucks. I have a sweet tooth, what can I say? I go
+up to the counter and it dawns on me it is two for $5 if you
+have a bonus card for the grocery store. I immediately altered
+my behavior given the economic conditions to save myself about
+$2.50, and I am now a member of that grocery store's bonus
+club. So I think that economic decisions even down to the
+micro, micro----
+ Mr. Ford. You maybe ought to get Mr. Hubbard and Mr. Snow
+one of those bonus cards, too.
+ Mr. McCotter [continuing]. And everyone's decisions are
+affected economically by the conditions in which they find
+themselves. The trouble we are having is not really an argument
+or a debate between you and Chairman Nussle. I think in many
+ways the reason we get economic forecasts that we find to be
+suspect or debatable is the same reason that every economic
+forecaster is not a very, very wealthy person. No one is right
+100 percent of the time, and we have to make our best, most
+educated guess, whether it is dynamic, static or whatever, but
+primarily the needs of our constituents.
+ Chairman Nussle. Mr. Secretary, we always save the best
+discussion for last and I think that you have seen a little bit
+of our interests here today on the Budget Committee, and we
+very much appreciate you spending the time that you have with
+us when you certainly could be getting settled at your office.
+So we wish you Godspeed in your new position. I would commend
+to you that estimations--certainly I think you have heard here
+today--are an important priority and you work for the
+President, not necessarily the Congress, but if we could put it
+on your ``to do'' list, that would greatly assist us and,
+secondly, just to give you encouragement as a fellow tax
+reformer, be bold, don't shy away. Even though you may not see
+the light at the end of the tunnel just yet, there are many of
+us who are looking to you and others for leadership in this
+regard, so be bold with regard to tax reform. I think it is
+important at this juncture in our Nation's history.
+ I appreciate your time, and we look forward to the time we
+will spend together in the future.
+ Secretary Snow. Thank you very much. I look forward to
+being invited back.
+ Chairman Nussle. With that, the hearing is adjourned.
+ [Whereupon, at 1:50 p.m., the committee was adjourned.]
+
+
+
+