[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
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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.]