[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2002
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 1, 2001
__________
Serial No. 107-3
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
-----------
U.S. GOVERNMENT PRINTING OFFICE
70-618 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington,
CHARLES F. BASS, New Hampshire Leadership Designee
GIL GUTKNECHT, Minnesota BENNIE G. THOMPSON, Mississippi
VAN HILLEARY, Tennessee KEN BENTSEN, Texas
MAC THORNBERRY, Texas JIM DAVIS, Florida
JIM RYUN, Kansas EVA M. CLAYTON, North Carolina
MAC COLLINS, Georgia DAVID E. PRICE, North Carolina
ERNIE FLETCHER, Kentucky GERALD D. KLECZKA, Wisconsin
GARY G. MILLER, California BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio DENNIS MOORE, Kansas
RAY LaHOOD, Illinois JOSEPH M. HOEFFEL III,
KAY GRANGER, Texas Pennsylvania
EDWARD SCHROCK, Virginia RUSH D. HOLT, New Jersey
JOHN CULBERSON, Texas JIM MATHESON, Utah
HENRY E. BROWN, Jr., South Carolina
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
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, March 1, 2001.................... 1
Statement of Hon. Paul H. O'Neill, Secretary, U.S. Department of
the Treasury................................................... 1
Prepared statement of:
Secretary O'Neill............................................ 2
DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2002
----------
THURSDAY, MARCH 1, 2001
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 3:05 p.m., in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Sununu, Bass,
Gutknecht, Hilleary, Thornberry, Miller, Watkins, Culberson,
Brown, Putnam, Spratt, Bentsen, Davis, Clayton, Price, Clement,
Moran, Hooley, McCarthy, and Moore.
Chairman Nussle. I call the committee back to order. This
is the second half of hearings for today, full committee
hearings on a blueprint for now beginning the President's
budget for fiscal year 2002 through 2011. This morning, as we
know, we heard from the President's Director of Office of
Management and Budget, and this afternoon we have the
opportunity to hear from the Secretary of the Treasury, the
honorable Paul O'Neill. We welcome you, Mr. Secretary, to the
committee. Your entire testimony will be part of the record and
so you may summarize your testimony.
I have no further opening that I would like to make. I
would invite Mr. Spratt if he would like to make an opening.
Mr. Spratt. Just quickly in order to say welcome to
Secretary O'Neill and welcome to Washington as well. You come
here from a very distinguished background in business and also
from some distinguished experience in government. We are glad
to see the Bush administration attracting people of your
caliber and talents. I am sure in the next few years we will
disagree on some things, but--probably in the next few minutes
we will disagree on some things. Nevertheless, we are delighted
to have you and glad to you see at your post.
Chairman Nussle. Mr. Secretary, you may proceed.
STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, UNITED STATES
DEPARTMENT OF THE TREASURY
Secretary O'Neill. Thank you, Mr. Chairman, Mr. Ranking
Member, and distinguished Members of the Congress. It is a
great pleasure to be here. I know you had a very long session
this morning and my colleague Mr. Daniels, I am sure, told you
everything that you wanted to know and responded fully to your
questions. And I would be willing to bet you that he started
with a quick summary of what it is the President has proposed,
and rather than spend your time repeating again what I hope you
all now know well from the President's remarks the other night,
then your testimony from Mr. Daniels this morning, I am going
to, with the Chair's permission, submit my prepared statement
for the record and answer the questions that you have for me.
[The prepared statement of Paul O'Neill follows:]
PREPARED STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Good afternoon Chairman Nussle, Congressman Spratt, and members of
the Committee. It's a pleasure to be here with you today.
President Bush unveiled his budget this morning, and it is full of
good news for the American people. First, it funds America's
priorities, especially in education. Second, it walls off every dollar
of the Social Security surplus and proposes Medicare reform to
strengthen retirement security for every generation. And finally it
reduces individual income taxes, to eliminate the structural
overtaxation that has created a tax surplus today.
There's no question that the numbers in the Federal budget are
enormous. We are proposing $1.9 trillion in government spending for
next year alone. For the next 10 years, total spending will be over $22
trillion. These are changes of an entire order of magnitude since the
last time I served in Washington. In fact, this year's projected budget
surplus of $281 billion is almost as large as the total on-budget
government spending in my last year of service in Washington. That's
evidence of how much our economy has grown, and how much Washington has
grown.
The Federal budget surplus is projected to be $5.6 trillion over
the next 10 years. And this is a fairly conservative estimate, given
that we've underestimated the surplus several years in a row now. Even
after setting aside the Social Security surplus, there is plenty of
room for a $1.6 trillion tax cut. The numbers are big, but the math is
fairly simple: Start with the $5.6 trillion surplus, take away $2.6
trillion in Social Security surplus and $1.6 trillion for tax relief,
and we are left with a $1.4 trillion cushion to address our
priorities--beginning with Medicare reform, to service the debt, and to
be prepared for unexpected needs.
This is a fiscally prudent budget. Under this plan, we will pay off
a large portion of the publicly held debt over the next 6 years.
Washington ran deficits instead of surpluses for so long that no one
gave much serious thought to the prospect of retiring our debt
instruments before they mature. Only now, as we face the reality of
rapidly mounting surpluses, are we confronted with serious questions
about the potential impact of buying back the publicly held debt from a
public that may not be willing to sell it all back early.
The debt held by the public will amount to $3.2 trillion at the end
of this year. Retirement funds, state and local governments and foreign
investors all have come to rely on the security of U.S. Treasuries. It
could be very costly--if not impossible--to retire all of those
holdings prematurely. Moreover, there needs to be a replacement
opportunity for them. Experts are already thinking about alternatives
to Treasury Securities for use by the Federal Reserve and others, but
these are novel concepts that will take time to put in place.
In addition to systemic adjustment questions, there are cost
questions related to paying off the entire publicly held debt. In
testimony before the Senate Budget Committee, Fed Chairman Alan
Greenspan explained it this way: ``some holders of long-term Treasury
securities may be reluctant to give them up, especially those who
highly value the risk-free status of those issues. Inducing such
holders, including foreign holders, to willingly offer to sell their
securities prior to maturing could require paying premiums that far
exceed any realistic value of retiring the debt before maturity.''
Under the assumptions supporting the President's plan, we pay off
all but this ``non-retireable'' debt by 2008. While we are paying off
the retireable debt, the plan also increases spending on education next
year by 11 percent, increases defense spending next year by $14
billion, and provides $661 billion in overall discretionary spending
next year. Discretionary spending will increase by 4 percent, more than
enough to account for inflation and address real needs.
Some want to increase spending even further. We disagree. Instead
of simply piling on new spending, we must be better stewards of the
taxpayers' dollars. We have overlapping programs throughout the
government with little or no information on how well they deliver
services to the taxpayers. We need to find out where we are getting
results and where we aren't, and adjust Federal spending accordingly.
Once we've paid down the debt that can be retired, walled off
Social Security funds where they can't be drained for other government
spending, and increased spending for America's priorities, we face the
question of how to use any additional surplus dollars. If they aren't
returned to the taxpayers, they can only be spent in Washington,
creating new government programs or buying up private assets.
Government is big enough, and it has no business owning private
companies.
People make better decisions than government about how to spend
their money. That's why we must eliminate structural overtaxation and
let people keep more of what they earn.
Today the Federal individual income tax burden is higher than at
any other time in our nation's history. We have no business taking from
taxpayers more than it costs to pay for agreed public purposes.
The President has proposed tax relief that reinforces the values
that make America great--opportunity, entrepreneurship, strong families
and individual success.
First, the President has proposed reducing income taxes for every
American who pays income taxes. The current five rate system will be
simplified to four rates, and the tax rate on the first $6,000 of
taxable income earned by every American will fall from 15 to 10
percent.
High income tax rates block access to the middle class for working
Americans struggling to get ahead. And high income tax rates punish
success. We must have a tax code that keeps the American Dream in
everyone's reach and helps people move up the economic ladder of
success. We must have a tax code that fosters entrepreneurship and does
not penalize hard work.
Cutting income tax rates is the most effective fiscal policy action
we can take to put our economy back on the path of long-term economic
growth. The best minds in this nation contain incredible knowledge and
creativity. If we work together to unleash that potential, we can
achieve permanent high rates of growth that will make all our other
goals more achievable.
The President's tax relief plan also strengthens the ties that hold
families together.
It doubles the child tax credit to $1,000 per child.
Parents everywhere have one goal above all others: to give their
children the best possible opportunity for success and happiness in
life. The increased child tax credit will give parents more resources
to save for college tuition, pay for braces or hire a tutor.
This plan also reduces the unfair marriage penalty. We as
a society celebrate when two people decide to spend their lives
together. Why would our tax code punish them?
And this plan eliminates the unfair death tax. Government
has no business confiscating the legacy parents work their entire lives
to build for their children.
This package is a pay raise for working Americans. Four-person
families earning $35,000 a year will no longer bear any Federal income
tax burden. Four-person families earning $45,000 will see their income
taxes cut in half. And four-person families earning $75,000 will see
their income tax burden reduced by 22 percent.
The President's tax relief plan maintains the progressivity of our
tax code--and, in fact, increases the share of Federal income taxes
paid by upper-income taxpayers. In 1998, the top 10 percent of income
earners paid 65 percent of Federal income taxes, while the bottom half
of income earners paid 4.2 percent of the total Federal income tax
burden. After implementing the President's tax relief plan, the top 10
percent of income earners will pay 66 percent of all Federal income
taxes. The average family will keep $1,600 a year that they would
otherwise have sent to Washington. That's enough for 2 monthly mortgage
payments or for a year of junior college tuition.
Taxpayers in the higher tax brackets are likely to invest their tax
relief in the economy, creating jobs for all Americans. Small
businesses are the engine of growth in our economy, and a majority of
small businesses pay taxes under the individual income tax system. A
small businessman receiving tax relief will plow that back into the
firm, either to increase productivity, which results in higher wages,
or to hire more workers. A farmer will be able to use his tax savings
to trade in his old tractor and purchase the newest technology to
improve his crop yield. America's economy will grow as these
investments go forward.
This tax relief package is sound fiscal and economic policy. It
fits easily within our budget framework, leaving a $1.4 trillion
cushion over the next 10 years to service the debt, to address
priorities--beginning with Medicare reform, and to handle unexpected
needs. I like to refer to it as the Goldilocks tax relief plan--not too
big, not too small, just right.
This budget strengthens the three platforms that make success and
prosperity possible for all generations of Americans--improved
education, fiscal responsibility, and tax fairness. I look forward to
working with the members of this committee to implement these common
sense budget priorities, so that America continues to lead the world
toward greater freedom and opportunity.
Thank you.
Mr. Gutknecht [presiding]. Well, many of the taxpayers draw
the reasonable conclusion that you have additional money on
hand, or, if you have additional money on hand, you should
first pay down debt. Could you talk a little bit about debt
repayment? And all of a sudden we have a new item in our
vernacular called ``recoverable debt.'' Could you explain that
a little better for some of us?
Secretary O'Neill. Yes, I would be very happy to. And you
know, I know that we are going to have people in and out, and
so I hope you will forgive me if what I do now I will do
repeatedly to make sure that everyone understands a very
important point about the answer to these questions.
In the President's budget document, we have suggested to
you that over the next 10 years we will repurchase $2 trillion
worth of debt held by the public. And there are a set of
assumptions included behind that $2 trillion recovery. And one
of those assumptions is that there is a certain level of so-
called unrecoverable debt. And what that number is, what that
concept is, whatever the number may turn out to be, it
represents debt that is held by the public that people do not
want you to take back from them; and if you insist on retiring
it early, they will charge you a very large premium to let you
have it back. In addition to that, there is a savings bond
program which we have assumed that, because it has served us so
well as a learning device for children and many people use
savings bond programs as a way to give birthday gifts and
Christmas gifts to their children and grandchildren, that the
savings bond program will stay in place.
And the combination of those things one would not want to
buy back because of the premium necessary to pay, and the
savings program and debt held by some State and local
governments. In the foreign governments, there is a so-called
irreducible minimum of debt out there on the books.
Now, the distinction I want to make is this: that what we
do in fact at the Treasury on a day-to-day basis in managing
the outstanding maturities across a 30-year time period is a
very technically precise piece of business. And by giving you
this document and this assumption that we are going to buy, the
determination that we are going to buy back $2 trillion worth
of debt, I am not telling you and I don't want you to think
that we have therefore made a set of decisions about exactly
how we are going to manage the cash and debt balances of the
United States Government.
The reason--you may not understand why I am doing this for
you, but I learned yesterday, frankly to my surprise, that if I
don't make that distinction, the financial markets think I am
telling them something important and bond markets go into
gyrations out there in the world where they spend all their
time looking at CNBC.
So I want you to understand in everything I am saying to
you now and have said to you in the last 5 minutes, I have no
intent of changing the policy of the United States Treasury
about how we manage cash balances and lengths of maturities and
the debt structure of the United States.
Now, having said that and maybe coming to the follow-up
question, over this period of time we will buy back all of the
debt that it is possible and reasonable to do, funded by the
$2.6 trillion worth of income that is going to come from Social
Security contributions over this 10-year period.
Mr. Gutknecht. But to get to the point that we were told
early on by Mr. Greenspan, who is going to be here tomorrow,
that there is a benefit for us buying down publicly held debt
and that we should see relative--and then that is a term
economists like to use a lot, relatively lower interest rates--
do you share that view? And ultimately what is the benefit to
the average family living in my district or anybody's district
here?
Secretary O'Neill. I think it is true that as the Federal
Government reduces debt held by the public, it means there is
more money out there in the capital world that can be used by
the private sector or even by State and local governments for
investments to continue to improve productivity in the
accumulation of income and wealth in our society. So by
reducing the pressure on capital markets, by eliminating
publicly held debt, arguably one would expect to see at any
particular time, in a relative sense, a lower level of interest
than what would otherwise exist.
Mr. Gutknecht. Could you just briefly talk about what some
people have suggested that eventually we may start looking at
buying corporate instruments of one kind or another? Can you
share with us your view on that?
Secretary O'Neill. I think that it is a terrible idea. I
know I share that view with Chairman Greenspan. And I have been
asking in the few weeks that I have been here now with the
President this, and that I guarantee you without any
reservation that if any legislation ever passed that said we
were going to use public money to purchase private enterprise,
the President would veto it a hundred times.
Mr. Gutknecht. You have a reputation as being a pretty
conservative individual; and I don't mean that politically, but
career conservative in your views. You have every confidence
that there is room within the budget framework that the
President has submitted to meet the legitimate needs of the
Federal Government, to actually pay down or recover all of the
recoverable debt in the next 10 years and make more than enough
room for a $1.6 trillion worth of tax relief, do you not?
Secretary O'Neill. I have absolutely no doubt.
Mr. Gutknecht. Well, listen I will yield to Mr. Spratt.
Thank you.
Mr. Spratt. Thank you very much. Mr. Secretary, let me show
you a chart this morning that we used with Mitchell Daniels and
show you what our concern is, bona fide concern and a point of
disagreement with the administration about the budget. All of
the numbers on this chart are taken from the budget booklet
that has been sent to us by OMB, and Mr. Cohen just gave you a
copy of the chart itself. We start with the total unified
surplus which is 5 trillion 644 billion dollars. That is 34
billion more than CBO estimated a few weeks ago.
We deduct from that both the Social Security Trust Fund,
which I think you would agree with, and the Medicare HI Trust
Fund, and we do that for a particular reason. Both houses, both
parties, over the last 2 years have basically come to the
understanding that we will set these two accounts aside and
allow the surpluses building up in these accounts to be used
solely for the purchase of outstanding debt, not to buy new
Treasury specials and fund new spending, but to buy up old
debt. And that is the engine that drives the whole debt buyback
plan. I understand that down the road we have got a problem
when we run out of debt that can be bought and redeemed, but
nevertheless, our idea was to set both of these aside. And we
felt that that was the single best way to build down the debt.
And Greenspan last year heartily endorsed it, saying in the
long run if we do that we probably should get some kind of
reduction in the long bond rate. That would be one of the
rewards we would reap if we religiously pursued this. That
gives you an available surplus, if you back up those two trust
funds, of 2 trillion 52 billion dollars available for tax cuts,
available for spending increases. Your tax cut comes to a total
of 1 trillion 620 million dollars, your estimate. We are adding
to that the cost of extenders and the cost of a minimal fix to
the alternative minimum tax.
Now, this could be a proxy for any tax exchanges that might
be made in the next 10 years. I dare say this doesn't begin to
exhaust the likely realm of tax proposals that would be passed.
For example, Portman-Cardin is not included in your bill. Most
of the people in this room, most of the people in the House,
voted for it when it came up last year. If it were offered
again, that would pass again. That would be $68 billion in lost
revenues over 10 years.
In any event, we think the fix on the AMT is not only
politically very, very likely, but we have estimated it at a
very low cost. We have also given you credit for the fact that
you are extending permanently the R&D tax credit. That is about
40 percent of the expiring tax provisions, but we think there
is at least another 50 or $60 billion of likely extenders
amongst the expiring tax provision. So that is $300 billion.
Finally the Bush budget itself acknowledges that if you use
1 trillion 620 billion dollars for tax reduction instead of
debt reduction, that there is an associated debt service cost
of $400 billion. When we subtract those three things, we come
down to a residual of $207 billion to be spread over 10 years.
Now, we also ask--do you agree with those numbers?
Secretary O'Neill. No, I don't, but go ahead.
Mr. Spratt. Well, let's start with where you disagree. You
don't disagree with the numbers as such, I take it.
Secretary O'Neill. I don't disagree with the numbers on the
right-hand side. But I think this is a confusion of concepts.
Because, maybe I can explain this by--let's focus on the
Medicare HI Trust Fund surplus. What that means is an amount of
money, given the way the current Medicare program is structured
into A and B with the changes that were made a few years ago to
create the illusion of a surplus, we have got an estimate that
we are going to have $526 billion, over this 10-year period of
Medicare buildup, surplus; right? Now, what is it that we are
going to do with this money?
Mr. Spratt. We are going to leave it in that trust fund.
Secretary O'Neill. No, we are not really. What we are going
to do with it is--now I am moving from program identification
to how we actually manage the country's cash. And it is to the
point that was raised earlier about how much debt are we going
to buy back in the next few years. We are going to buy back $2
trillion.
And we are going to buy back less than the 2.6 trillion of
the Social Security fund surplus by itself for the reason that
I was giving technically before. And the same is true of the
Medicare HI Trust Fund. So we are going to have all this money
flowing at us. And we are going to use it, to the degree we
can, to buy back debt held by the public. But what we are going
to do with the rest of it is, we are going to create an
obligation going forward to Medicare Trust Fund beneficiaries
and to Social Security Trust Fund beneficiaries.
So the way you have got your numbers constructed, you are
really kind of in between an income sheet, the balance sheet,
to use a private sector metaphor for how to talk about these
numbers. So the reason we have got a difference of opinion with
you and with your friends in the Senate as well--I saw this
same kind of rough chart this morning in the Senate--is because
of the mixture of concepts.
And what I would say to you is we can stipulate and we both
agree the top line budget surplus number over 10 years is 5.6
trillion, no problem with that. The amount that is going to be
spent, with no doubt, for Social Security, is going to be
reserved for Social Security, is 2.6. And of that, as much of
it as possible is going to be used to pay down the debt. 1.6
trillion, we are proposing give it back to the people or not
ever collect it from the people. And in our mathematics, that
leaves 1.4 trillion.
And out of that $1.4 trillion, I would stipulate what you
have got there for additional interest payments on the debt of
$400 billion, leaving us with a contingency reserve of $1
trillion. I think these numbers, our numbers, do not confuse
cash management and trust fund concepts. And I think they are
the appropriate way to look at what it is we propose to you.
Mr. Spratt. If you want to convert these books to the way
that Alcoa kept its books, they would look radically different.
We would have accrual accounting.
Secretary O'Neill. We would have a $10 trillion unfunded
obligation, which we are going to solve--as soon as we get done
with this, we are going to come back and work with you to get
Social Security finally fixed.
Mr. Spratt. Well, my problem is, then, if that is true,
then obviously the amount that is accumulating in the Social
Security Trust Fund is not adequate either.
Secretary O'Neill. No, we know that.
Mr. Spratt. You are a trustee of the Social Security Trust
Fund. What we are doing here is not just some convention we
have arrived at in the Congress. We have not just colloquially
given this names. This is black letter law. We call it a trust
fund. We tell people if you pay your payroll taxes it will go
into a, quote, trust fund. We have got trustees, the highest
officers of the Cabinet, who sit in trust. Do you think you are
free as a trustee to spend that money on other purposes?
Secretary O'Neill. No, we are not going to spend it on
other purposes. We are always going to have that obligation
that is associated with that. But in effect what we are doing
is we are defeasing the Federal debt so that when these
obligations come due we will either have fixed the program,
which is my preference, or we will have the debt capacity. In
the context now of how a private sector company works, it is
not unusual to have a balance sheet with 30 or 40 percent debt.
Over this period of time, what the President has
recommended is we drive the debt down to zero effectively, so
that when the bills come due, and they will come due, either we
will have fixed the program or we will have the debt capacity
to borrow the money to effectively discharge the obligations
that we promised to the American people.
Mr. Spratt. So when the trustees for the Social Security
Administration come to the window at the Treasury, you are
better able to pay them than ever before.
Secretary O'Neill. Absolutely.
Mr. Spratt. That is something that we want to do and sought
to do by this very device. That is, dedicating the trust fund
solely to that purpose. I know you hit the wall somewhere. We
can argue about how much debt you can buy back and how much
cash, somewhat judgmental. But we would like to set a target of
2008--that is the year the baby boomers first begin to retire--
and hope that we would use this money for Social Security
reform and long-term solvency, and the same with Medicare. In
that event you really wouldn't--you wouldn't have excess funds
before 2008. You probably would have enough debt that you could
buy up that would occupy these two programs.
Secretary O'Neill. We will see. I don't know. Now you are
back into cash management. I don't know. But I think the last
part of what you said, I agree with you. That is what we need
to try to do.
Mr. Spratt. What happens to the----
Secretary O'Neill. Excuse me. I am sorry. I didn't quite
finish my answer. The alternative to doing what I am saying to
you I think we should do is for the Federal Government to start
buying Alcoa and IBM and becoming, in effect, an owner of the
private sector, which we really think is a terrible idea.
Mr. Spratt. I understand your concerns about that. You know
Mr. Greenspan's pension plan at the Federal Reserve is two
thirds invested in equity. So we are already into that to some
extent, and the Thrift Savings Plan owns about $100 billion in
equities, too.
But in any event we looked at that and said, where does the
trillion dollars come from, the contingency fund? The only
providence we could find for the so-called contingency fund of
the $527 billion--the $591 billion in Social Security that
can't be used for debt reduction or the $526 billion in the
Medicare Trust Fund which is not going to be treated as a trust
fund, or, of course, the $207 billion; where do you get $1
trillion?
Secretary O'Neill. If you would like, I could go through it
again. I will stipulate to 5.6. I will stipulate that 2.6 for
Social Security. And then I will say again, $1.6 trillion for
tax relief. And if I give you the $400 billion, that is easy to
give these big numbers away, $400 billion for debt relief, I
have got a trillion left.
Mr. Spratt. You are taking out the $300 million for the AMT
fix and extenders?
Secretary O'Neill. No. No. No. I am leaving that for you,
if that is something you want. I have not provided for things
that you may want to do. And I don't deny that. You certainly
have a right to do other things than what we have recommended.
But that doesn't affect my number. I mean, you may end up
affecting the numbers we are proposing as policy, but it
doesn't affect the way we put the numbers together. So that if
you would like to spend $300 billion on extenders and fixing a
problem that has been in the Tax Code for I don't know how many
years, 20 years, in addition to what we proposed, that is
certainly something you can do. It is not what we propose to
do.
Mr. Spratt. Well, so you are not going to spot us the $300
billion, that would be our optional money to use it for that
purpose.
Secretary O'Neill. Well, if you are saying you want to
spend 300 of my trillion that way, that is your right.
Mr. Spratt. I am trying to understand how you start from
207 and get to a trillion.
Secretary O'Neill. I never get to 207. I never get to 207.
Mr. Spratt. I am stipulating the 207, that is the residual.
What else--is the Medicare Trust Fund added into the
contingency?
Secretary O'Neill. No. No.
Mr. Spratt. How do you get to $1 trillion? Would you tell
us the components again?
Secretary O'Neill. I will indeed. 5.6 is a number we both
agree with. Everyone agrees 5.6; the CBO, the blue chip
economists, everybody downtown. 2.6 for Social Security. 1.6
for tax relief or tax refund, as the President characterized it
the other night, and that leaves a residual of 1.4. And I am
willing to say to you, fine, we have included in our 1.4, in
fact we have labeled it for debt and other contingencies, so we
have got $1 trillion left out of $5.6 trillion.
Mr. Spratt. But it includes Medicare.
Secretary O'Neill. Again, we are confusing concepts and
what we are going to do. Every dollar that comes in for
Medicare and for Social Security will ultimately be spent only
for those purposes. Only for those purposes. But by the best
estimates that exist, this says that the Medicare Trust Fund, I
must say to you only because of the way it is structured, not
because of the way real life is, because real life Medicare is
A and B--this is, you know, excuse me for saying so, but this
is another fiction. You know, the SEC would have assaulted me
if I had done this in my Alcoa books.
Mr. Spratt. As these dollars come into both those trust
accounts, they are surplus to the immediate needs of the
program so they have to be invested in something.
Secretary O'Neill. They either have to be invested or they
have to be used, but with a use that doesn't endanger their
availability as an obligation of the United States Government
when the flow of funds is required.
Mr. Spratt. Right. So if they were used for something else,
we would still stand liable for the benefit.
Secretary O'Neill. We would still have the liability, there
is no doubt about that. And the limit on how far we can go in
using surplus funds is, in a theoretical sense, zero. I think
we have agreed that it is some number higher than zero. But the
obligations don't go away.
Mr. Spratt. I understand that. That is why I am concerned
about securing the obligations, why we advance-funded
particularly the Social Security fund beginning with the
Greenspan Commission's recommendations in 1983.
Let me turn to a different subject before I yield to other
witnesses, and ask you about the estimates of the revenue
consequences of your proposed tax reduction bill. In the budget
that was presented just yesterday, the estimated cost for
creating the 10 percent bracket, the new 10 percent bracket, is
$275 billion for the years--first 5 years, 2002 through 2006.
Last year when the Joint Committee on Taxation scored the
bill, the proposal, the same recut was included and they
assigned a cost, a revenue cost to it of $358 billion. What is
the difference between this estimate and the JCT estimate?
Secretary O'Neill. I have no idea. I have not seen the
reconciliation of those numbers. Although when these things
were done a year ago, we were in very different circumstances
in terms of where our economy was and the rest of it. I just
don't know.
Mr. Spratt. That is this year's estimate.
Secretary O'Neill. You know, I would happy to get you a
reconciliation. I don't have those numbers in front of me, but
we should be able to cross off the numbers so there is no
difference of opinion.
[The information referred to follows:]
RESPONSE TO TAX RATE QUESTION SUBMITTED BY MR. SPRATT CONCERNING THE
DEPARTMENT OF TREASURY ESTIMATE AND THE JOINT COMMITTEE ON TAXATION
ESTIMATE
I am not familiar with the estimates cited. However, for the FY
2002-FY 2006 period in question, the Department of the Treasury and the
JCT estimate the revenue loss associated with the proposed creation of
the new 10 percent marginal tax rate bracket at $108.7 billion and
$108.4 billion, respectively.
Mr. Spratt. The estimate for the cost of repealing the
estate tax is also smaller than the JCT. If you could also
provide us answers for the records.
[The information referred to follows:]
RESPONSE TO ESTATE TAX QUESTION SUBMITTED BY MR. SPRATT CONCERNING THE
DEPARTMENT OF TREASURY ESTIMATE AND THE JOINT COMMITTEE ON TAXATION
ESTIMATE
The Department of the Treasury and the JCT estimate the revenue
loss associated with the phase-out and repeal of the estate and gift
tax at $271.5 billion and $305.9 billion, respectively. Given the
technical complexity of preparing this estimate, and the many issues
and interactions that must be considered, the estimates are
surprisingly close. Factors that may contribute to the estimating
difference include: 1) differences in the baseline forecasts of estate
and gift tax revenue, 2) differences in estimates of taxpayer behavior
with respect to charitable giving and the realizing of capital gains
and 3) differences in estimates of possible increased tax avoidance
activity.
Secretary O'Neill. I would be glad to do that, sir.
Mr. Gutknecht. The gentleman from Tennessee, Mr. Hilleary.
Mr. Hilleary. Thank you, Mr. Chairman. Thank you, Mr.
Secretary, for coming and testifying today. I just had a quick
question. I am from Tennessee and that is one of the few,
handful of States, maybe seven or eight in the country, that
don't have a State income tax. And State income taxes, local
taxes, income taxes, are deductible off of Federal taxes. Sales
taxes are not, which is where we get most of our revenue in
Tennessee. It seems like a bit of an inequitable situation for
those folks who live in those eight States. I was just curious
if there was anything on the horizon from the Bush
administration's standpoint to correct that inequity.
Secretary O'Neill. Well, I will probably get in trouble for
telling you my answer to your question, but I will tell you
anyway. I think it is essential that we move ahead with what
the President has recommended with his first tax bill, and I
understand even today there is action going on here in the
House. As soon as we are done with that, the President has
determined that I am going to do everything I can to help him
to come back with Social Security reform that will finally fix
a problem that we have known about for 25 years and have not
solved. And then I hope we will be back here with a full-
fledged recommendation as to how we completely reform the U.S.
Tax Code so that we get rid of all the awful things that we
have cobbled together over the last 225 years, because it is a
monstrosity.
When I left, the Tax Code was maybe 4,000 pages. Today it
is 9,500 pages. It is just unbelievable what we have done to
ourselves. You know, I have to say to you, some of the things,
including some of the things that we have got recommendations
here, are more Tax Code things. I would hope we could see our
way in the not-too-distant future to work with you all to do
what every citizen I have ever met in the United States that is
interested in talking about the Tax Code, they all think it is
an abomination, you could all get reelected, 100 percent votes,
if we could really fix the U.S. Tax Code.
So I hope we are going back here not just to fix this issue
of what is deductible and what is not deductible, to really
clean it up.
Mr. Hilleary. So what you are saying is this year you are
going to concentrate on the big items the President talked
about in the campaign, that he is talking about now. There is
probably not enough room there with what you all are doing
right now to consider something like that change. But possibly
in the future it would be among other proposals to help improve
the Tax Code.
Secretary O'Neill. I sure hope so. You know, if you all
could do--if the Senate could do this tax cut, as apparently
you all are going to do this, we could get it all done real
quickly. We could do Social Security by the 4th of July and
have the rest of the year to work on other things.
Mr. Hilleary. Thank you Mr. Secretary.
Mr. Gutknecht. I think if you can guarantee 100 percent
reelection, you will get strong support from us.
Gentleman from Texas, Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Mr. Secretary, I
guess I have a few questions for you. I want to go back to your
comparison to income statements and balance sheets. Obviously
you have a distinguished career in business. But on your last
comment it does strike me as a little surprising given that I
wouldn't expect Alcoa or any other Fortune 500 company to
necessarily declare a dividend prior to finalizing their income
statement or their balance sheet or their 10K or 10Q and pay
out that dividend until they knew what their real future
expenditures were going to be.
But the House, quite frankly, is on the path to do so, and
you seem to endorse that concept. The previous speaker said it
was beyond your control, you being the administration. And you
are arguing that the House ought to do it and the Senate ought
to do it. That doesn't seem to be prudent planning in my
opinion.
I also want to talk about this concept of the trust funds.
I think first of all what you all have put forth in your budget
blueprint with respect to the Medicare Trust Fund is quite
crafty, but it does not track current law, and it would require
a substantial change in the law. Virtually every Member of the
House is on record for voting to set aside that half trillion
dollar Part A Hospital Insurance Trust Fund. And those funds
are obligated.
To take obligated funds out and spend them on other
programs, or an expansion or change of the Medicare program,
without conforming changes in benefit cuts or payroll tax
increases or more debt, would only exacerbate that unfunded
liability. I don't see how you can get around that, because
those funds are already committed under the law to future
retirees. Now, the only way to correct that is get around it.
The same is true in your budget blueprint. You talk about
using some of the projected Social Security Trust--I assume
that which is not used to pay down debt--for reform of the
system. Now, as I said before, everybody who has come before
this committee to testify on Social Security reform, from the
right to the left, has said whether you go to private accounts
or not, including Martin Feldstein who has advised the
President on his proposal to go to individual accounts, has
said it takes an outside capital infusion.
You cannot count that $600 billion or any of the projected
surplus against outside capital. Those are already encumbered
funds. But it would appear that is what the administration is
proposing; or if not, it needs to be clarified, because you
cannot double-count those funds. I would like you to comment on
that.
I would also like you to comment on your assumptions,
because what I am concerned about, in your statement you talk
about the era of deficits and how we finally got out of it. One
of the ways that we got into the era of deficits was the fact
that the Reagan administration sent a budget up that had all
its goodies up front in terms of the tax cuts and had its new
spending commitments that it wanted to make. This new
administration has its spending commitments as well, in defense
and education and some to come later. And it has assumptions
that we will have a budget that stays flat, with only an
adjustment for inflation on the discretionary side. In fact, a
real decrease on the nondefense discretionary side, and has
reductions in programs like the Export-Import bank, while I
don't know whether Alcoa ever used Ex-Im Bank for it, but
others certainly--Halliburton did down in Texas, and GE and
others--and maybe we will cut that, although I am skeptical of
that--has reductions that I am not sure Congress, Republicans
or Democrats will go along with. That is what happened back in
part in 1981.
And for the record, I would remind my colleagues, in 1981--
and I was in college at the time--but in 1981 the Republicans
controlled the Senate and they controlled the White House. So
it wasn't the Democrats in Congress who made this happen. The
Republicans had two-thirds of the lever.
But I would like you to address those two points. Where are
you not double-counting?
And the third thing I would say is, you have in your budget
$1.2 trillion in unexpended balances. Where are those monies
going or what are your plans for those monies? And, finally,
why not, if you have excess dollars and you can't retire $1
trillion worth of debt, why not decrease the debt? Rather than
sit on cash, why not buy securities and decrease the debt?
Secretary O'Neill. OK. There are a whole lot of questions
in there. Let me begin with the issue of whether or not it is
prudent to make an investment in our economy with the tax
reduction the President has proposed. I would say to you, if it
was a close call, that we should wait and deliberate and have
even less conversations. But with a prospect of a 10-year
unified surplus estimate of $5.6 trillion, it doesn't seem to
me imprudent to say that we are--take $1.6 trillion of it and,
with some comfort and assurance, say that is going to be OK.
I have been asked as I have been testifying, well, I bet
you never made a 10-year commitment when you were in the
private sector. You know, the truth of the matter is in the
business I was in before I came back here, the decisions I
made, often multibillion decisions, were for 50 years. Believe
me, when you decide you are going to build an aluminum smelter
or a refinery in the U.S. or Australia or Brazil, you don't get
to take it back after 12 months because it is somehow
inconvenient or you decide you made a bum decision. You have
got to make a decision that is based on an assessment of what
your competitive potential is and long-term capital rates and
Federal spending and all the rest of that.
So it does not seem to me a unique idea that we need to
make decisions that have long-term consequences. I would say in
some ways this is not a long-term decision, because if you
decide you hate the tax reductions in a couple of years, there
has been some demonstration in the last 20 years that it is
possible for Congress to raise taxes. I hope that is not the
case. But in any event, I don't think you should be troubled by
the idea of making an important decision that has lasting
consequences.
I don't think it is probably worth while to spend a lot of
time on history. As I think was mentioned, I was here for 15
years before I went into the private sector. And when I left, I
was a deputy director of OMB, and I cared a lot about what the
status of our fiscal affairs were, and I didn't stop paying
attention after I left; because in 1969, I helped to write the
last budget that was in balance until those of the last few
years, and then we went down the drain. We went down the drain
unbelievably. And I was watching what was going on in 1981.
As a matter of fact, I think my memory is probably right,
on page 27 of the March--I forget what date--March 1981 budget
document that was sent to the Hill, there were recommendations
for tax cuts, and there were also recommendations for $42
billion worth of unidentified spending cuts. There were no big
spending increasing in the Reagan budget.
The reason we went in the dumper is because we passed the
tax cuts and we never ever did anything about spending cuts. In
fact, during the period of the eighties, we had revenue go up
double and spending tripled. So just to make sure, I think you
will find, if you examine the history, that my version is
correct.
Mr. Bentsen. There were no defense increases in the 1981
Reagan budget?
Secretary O'Neill. I don't think so. The numbers that were
suggested that were going to be attained were not budget-
busting numbers, because there was an assumption that spending
cuts would be identified, and they were never identified. And I
don't think we are in that condition now. As a matter of fact,
the budget that we have in front of you would provide for over
the next 10-year period, over a 10-year annualization from
2001, $5.2 trillion worth of cumulative new spending. Again,
you know much to my amazement, it has been a long time since I
was here, we don't down the stuff that is associated with an
assumption of a 3 or 4 percent increase year to year. As
spending increases, we say that is inflation adjusted. I have
got to tell you, that isn't the way we do it in the private
sector or we would all be dead in the water.
And so, you know, I don't think the $5.2 trillion worth of
additional spending ought to just be blue smoke and then we
start spending on top what we are going to give ourselves a
free ride for, as though somehow inflation is an excuse to have
a lot more absolute spending.
Mr. Bentsen. The point is that you run a flat-line
discretionary budget with inflation adjustments. But at the
same time, as best I can tell from your numbers you are
proposing, at least initially, dramatic increases in education
and defense, probably very popular. Then you have other ideas
behind that, that you haven't laid out yet in your budget over
the 10-year period.
The only way you can do that within the cap that you set is
to propose decreases in other parts of the budget to stay
within that band. But the fact is, you lay out certain
decreases that I think you know and the administration knows
that Congress probably isn't going to accept. So how do you
make up for that?
Mr. Gutknecht. Mr. Bentsen, let me just interrupt. The
gentleman's time has expired. I don't know if it is fair to
sort of presume what the administration may do in next year's
budget or the subsequent budgets. I think we have to deal with
the numbers in the budget that is before us now.
We will have time if possible for another round. I would
yield to the gentleman from New Hampshire, Mr. Sununu.
Mr. Sununu. Thank you very much. Thank you for being here,
Mr. Secretary. When you were working for Alcoa, they paid
dividends to their shareholders.
Secretary O'Neill. Yes, indeed.
Mr. Sununu. Did they ever pay dividends when they had long-
term debt on the books?
Secretary O'Neill. Of course.
Mr. Sununu. No one thought it was fiscally irresponsible?
Secretary O'Neill. No, they loved it. They drove the stock
up 800 percent in the time I was there.
Mr. Sununu. Does it jeopardize the overall health of the
company?
Secretary O'Neill. No.
Mr. Sununu. I just make that point because I think it
stands to reason that, you know, within the bounds of good
fiscal management, we can make decisions not on either end of
the extreme, but that retains the appropriate level of
reserves, the appropriate level of debt even in the long term,
meets all of our commitments, even reduces the level of that
debt steadily over time, but still returns something back to
shareholders in that particular case, or taxpayers.
I would also offer for your edification comments made by
Director Daniels today which I think bear repeating. And that
is, too often we get into a situation where the taxpayers come
last, where it is every program, every spending increase that
is desired, every other opportunity to use the revenues that
are coming into the Federal Treasury, and then maybe at the end
of that process, last in line, we might think about taxpayers.
And I think this is an opportunity with this budget that has
been put together to maybe think about the taxpayers, not even
necessarily first, but certainly not put them at the end of the
line.
It was also mentioned earlier that it seemed abnormal, or
maybe to be an analogy for some of the discussion on Social
Security reform, that the Federal Reserve had a pension that
bought equities. And I would just remind everyone that the
Federal Reserve is a private organization and they are managing
a pension which is a defined contribution system, not a pay-as-
you-go system certainly, and not even a defined benefit system.
And that is very much in essence in keeping with some of the
proposals that have been put out there, some of the ideas put
forth by President Bush and others, to allow Americans to take
a portion of what they pay in Social Security taxes every week
out of their paycheck.
It was pointed out by Ms. Clayton earlier on, I think, that
there is an enormous burden for lower-income workers. Why not
allow those people to control a portion of that in something
more akin to a defined contribution system, where they control
it, they earn a higher return, it represents real wealth that
they are building and can pass it on to their family and can
draw on that wealth when they retire.
Third, let me make a point in response to some of the ideas
that were put out, and then I would like to hear your comments
about this in particular. There has been a lot of accounting
and different numbers, but at the end of the day, assuming that
Mr. Spratt doesn't advocate too forcefully for a reconciliation
figure of $1.9 trillion and is willing to agree to the
President's level of $1.6 trillion, adding to that the
additional funds that have been set aside, the reserve that the
President has created is about $1 trillion. I think we can at
least agree on that number. And it has been put forward,
advanced, that that is somehow fiscally irresponsible to be
creating that reserve, one. Two, that there is something very
problematic that we are not--the administration isn't trying to
spend that reserve, that they are claiming that it is set
aside, and most recently mentioned that you are not trying to
pay down debt or buy back Treasury securities that haven't
matured yet. Now the reason for not doing that is because the
premiums are estimated to be about $125 billion, an additional
cost to the taxpayer if we try to do that.
I think it is fiscally responsible to create a reserve. No
one tried to do it in the previous administration, no one tried
to do it in the Bush administration, no one tried to do it in
the Reagan administration. It is a wonderful opportunity to
build in a natural buffer against unforeseen events.
Could you talk a little bit about the thinking that went
into creating that buffer and also talk a little bit about the
size of this tax relief package in comparison to those that
were advanced, quite successfully, under the Kennedy
administration and under the Reagan administration in 1960 and
1981?
Secretary O'Neill. To the point of your last question, what
is recommended by President Bush is much smaller than what
either Presidents Kennedy or Reagan recommended and ultimately
got enacted in their times. And, you know, I think there is no
doubt this is prudent. And one of the things that we tried to
do, to make sure that everyone can see that it is prudent, is
to establish this so-called debt service and contingency fund,
so that it is not as though we are spending the last dollar
that is going to come into the Federal Government right up to
the wall so that we don't have an ability to deal with the down
side of an economy that is possibly weaker than what everyone
expects it to be.
In fact, one of the things, if you look back at the last
few years, it is true--and my friend Alan Greenspan said he
thinks that because we still don't fully understand the
importance and the driving force associated with productivity
growth that is taking place in our economy--that for the last 3
or 4 years we have been systematically underestimating the
amount of revenue that is going to be produced by our tax
system.
In fact in the first 4 months of this year, the Treasury
has collected a surplus of $74 billion, which is $30 billion
more than we collected last year when the economy was running
at a 5 percent growth rate. And so we are still taking up
enormous surpluses of funds. And, frankly, it does make sense
to give that money back or not take it in while we are in this
lull in the economy.
Mr. Sununu. There has been a lot of frustration expressed
about some of these time horizons we have in the budget, that
it is at 10 years. And my preference would be not for looking
out 10 or 20 years, or at least talking in the budget in those
terms because these numbers are so enormous, to focus instead,
if you will, on the next 5 years, a little bit more
predictable. In particular, talk about the debt retirement that
is projected just for the next 5 years, with a quick decision
of the budget presentation here that the total debt retirement
over the next 5 years will be between $1.2 and $1.4 trillion.
Now, that seems to me to mean that we will have to retire
every Treasury note that has a maturity between 1 and 5 years,
and it would certainly put a lot of pressure on even the
shortest term securities, the 3- and 6-month bills that you
might need for cash management purposes. Is that in fact the
case? Will all of those Treasuries come out of circulation, at
least the medium-term maturities? And if not, what are some of
the long-term issues that you are worrying about as we enter
what are truly uncharted waters?
Secretary O'Neill. If you will forgive me, I don't want to
do cash management with you in this forum, because if I told
you yes to your question, if we went back in the back room and
turned on CNBC, we would see the markets would go crazy. And so
it is frankly not appropriate for us to talk about what the
maturity structure of Federal debt looks like either now or
tomorrow or 5 years from now, because they will not forgive us
out there, believe me. We will have more trouble than any of us
want if we start doing cash management and debt maturity
restructuring here.
But your general point is right. We are going to be buying
and retiring lots of Federal debt over the next 5-year period.
And, you know, we have said an estimate of $2 trillion. It
could be we could buy back and retire more than that over the
next 10 years. But what we are going to do is we are going to
use the money that is coming in to retire debt as a first
priority--as an important priority. And we are not going to
sacrifice that debt retirement to higher spending or to the
President's proposed tax reduction. These things are in balance
with each other, starting with funding the highest priorities,
taking care of debt reduction, and only then dealing with the
prospect of tax reduction and leaving $1 trillion worth of
contingency funds. So that people out there in greater America
can look at what we are doing together and say, this is a
sensible way to proceed.
Mr. Sununu. Thank you.
Mr. Gutknecht. The gentlelady from North Carolina, Mrs.
Clayton.
Mrs. Clayton. I thank the Secretary for coming. Mr.
O'Neill, on your last comment I heard from Mr. Gary Gensler who
was formerly with the Treasury Department. You seem to suggest
that you could pay more than $2 trillion in debt, is that what
you were saying?
Secretary O'Neill. You know, what he actually said on
January the 19th, because he was----
Mrs. Clayton. This is February 27. I have a letter.
[The letter referred to follows:]
Chevy Chase, MD, February 27, 2001.
Hon. John Spratt,
House of Representatives, Washington, DC.
Dear Mr. Spratt: I am writing in response to your request for a
brief analysis of the Treasury Department debt held by the public and
in particular how much of that debt is available to be paid off over
the next 10 years.
Based upon my recent experience as a Treasury Undersecretary for
Domestic Finance responsible for Treasury's debt management, and my
prior experience as a partner of Goldman, Sachs, I believe that close
to $3.0 trillion of the currently outstanding $3.4 trillion in publicly
held debt could be paid off, leaving outstanding between $410 and $500
billion in debt at the end of 10 years. I believe that the Treasury can
achieve this in the future by: (1) allowing the vast majority of this
debt to mature as it comes due; (2) making various changes to debt
management policies over time; and (3) smoothly repurchasing over time
the majority of the Treasury's long term debt at market level prices.
This estimate of potential remaining debt is somewhat lower than
that of others, including the Congressional Budget Office at $818
billion or that of the Federal Reserve Chairman in recent testimony of
somewhat more than $750 billion. The following analysis may help to put
this lower estimate in perspective and show how there are a variety of
policy steps that may be taken to achieve potential remaining debt over
10 years of between $410 and $500 billion.
There are two main components of publicly held debt. By far the
largest component is that which is traded freely in the market place,
the marketplace debt of $3.0 trillion as of January. Of this amount,
approximately $2.5 trillion matures (or is callable) by 2010.
Therefore, nearly $2.5 trillion in marketable debt is available to be
repaid by allowing it to mature. Treasury would over time make
decisions, as it has in the past, as to the discontinuance of its
various debt offerings.
There is currently outstanding just over $500 billion in debt that
is scheduled to mature after 2010. Excluding holdings of the Federal
Reserve, the privately held portion of this long maturity debt is just
$460 billion. Treasury has available to it a number of policy
alternatives to assure that this longer maturity debt declines
significantly and smoothly over the next 10 years. First, Treasury can
determine to discontinue issuance of any new longer-term debt. A group
outside financial experts advising the Treasury, The Borrowing Advisory
Committee, voted as a majority in January to advise the Treasury to do
just that later this year.
There are also a number of ways to reduce the amount of longer
maturity debt outstanding. Over the last year, Treasury successfully
and efficiently repurchased approximately $35 billion in long maturity
debt. Debt buybacks have been used for many years as a successful
financial tool both by the private sector and the public sector.
Buybacks have been used throughout our nation's history during periods
of sustained budget surpluses, most recently 70 years ago. Treasury
Secretary Alexander Hamilton, in fact, was the first to recommend them
in his report to Congress in 1795. The financial markets anticipate the
Treasury will repurchase between $35 and $40 billion in longer-term
debt this year and continue the program into the future, even though
plans for future buybacks have not yet been incorporated into Federal
Budget estimates. I believe that Treasury can continue this program
well into the future, smoothly repurchasing substantial amounts of
long-term debt at market level prices.
Lastly, the Borrowing Advisory Committee has recommended that
Treasury consider conducting debt exchanges. Treasury last used debt
exchanges in the 1960's and could use them again to exchange short
maturity debt for long maturity debt.
Using a combination of these methods over the next 10 years, I
believe that Treasury could smoothly retire one half and possibly up to
two thirds of its current long-term marketable debt, adding between
$260 and $340 billion to debt available to be repaid.
The second main component of publicly held debt is non-marketable
debt of $426 billion. Depending upon decisions, which the Treasury has
the authority to make, approximately half of this debt is available to
be repaid over the next 10 years.
State and local governments hold approximately $148 billion in non-
marketable debt. Approximately 90 percent of this debt matures within
the next 5 years. The Treasury has the authority to discontinue
issuance of these securities just as it has in the past discontinued
issuance of other securities. Municipalities would then choose to
invest in alternative debt instruments in the market while still
abiding by anti-arbitrage rules related to the tax code.
The Thrift Savings Plan holds $33 billion in Treasury debt to back
Federal Government employees' selections of investing in the bond
market. While the TSP invests directly in private sector equity
securities, the arrangement with Treasury regarding bond investments
was set up during the mid 1980's in a period of significant and growing
fiscal deficits. In this new environment, the TSP could initiate a new
bond fund, which would actually earn a higher return for Government
employees by investing in private sector debt securities.
The remaining non-marketable debt includes $185 billion in savings
bonds and $55 billion in long maturity zero-coupon bonds issued to
foreign governments to back the Brady program and to the REF Corp. to
back the resolution of the thrift crisis. These Savings Bond programs,
while not growing in many years, still have broad public appeal and are
thought by many to be an important vehicle to promote savings among
small savers.
Lastly, Treasury will continue to have seasonal cash management
needs and will periodically wish to address those needs by issuing and
redeeming short-term cash management bills.
In summary, there is currently $3.4 trillion in Publicly Held
Treasury debt outstanding, of which close to $3.0 trillion is available
to be redeemed over the next 10 years. Letting it mature under its
terms could pay off the vast majority of this debt. No doubt, Treasury
will have many policy decisions to make over this time, but it is
within their authorities and ability to smoothly repurchase significant
long-term debt at market prices and to redeem significant non-
marketable debt. This would leave only between $410 and 500 billion in
debt over the next 10 years.
Very truly yours,
Gary Gensler.
Secretary O'Neill. Well, let me give you a reference point
for January 19 first, then maybe you would like to put the
February statement on the record. On January 19 when the
Clinton administration sent you all of their last budget
document, what it showed was that Treasury was estimating that
we would not be able to retire any more debt, then leaving us
with a residual of $1.2 trillion, actually a little bit larger
than the number we have now used. And it was only in the last
few days after President Bush's documents hit the street that
my friend Gary decided to convert and somehow figure out a way
to--what he said when he was an official of an administration
that was wrong by $700 billion.
Mrs. Clayton. My understanding is that that might have been
an OMB estimate rather than a Treasury estimate.
Secretary O'Neill. He signed up for it. Please believe me,
when you get a document, when I am the Treasury Secretary, that
reflects a Treasury number, I will own it. Maybe he is now
disavowing ownership. I will not do that to you in or outside
the government.
Mrs. Clayton. Mr. Secretary, let me raise the issue I
raised with your colleague, Mr. Daniels. The issue is the whole
fairness of the tax bill. He kind of said that his expertise
was in the amount. Now, the President in his State of the Union
did raise questions about the amount, whether it was too big or
too little. He asserted that it was just right. He did not
raise questions about fairness.
I wish to raise that question. But I will give him credit
and I think he probably assumes that it is fair because he
makes statements to the effect that this plan will move low-
income people to middle income. He makes that claim.
I want to answer that question from my perspective, and
give you the basis on which I made the answer and get your
response to it. When I reviewed the President's plan, I see it
being skewed to the upper income level. In fact, 1 percent will
receive from 36 to 43 percent. When I look at 80 percent of the
taxpayers, I see they receive something roughly around 29
percent by one analysis. However, the 1 percent pays less than
they are receiving in tax cuts, and the 80 percent of people
who get less of a cut in the package actually have a greater
liability in that.
In fact, the Treasurer last year, reported that the top 1
percent paid 20 percent of all Federal taxes under the current
law.
Now, the President has made the claim that those in effect
working families, lower income and moderate income, will
receive a larger percentage of a cut. That claim can be made if
you only focus on--and I am glad Mr. Sununu recognized it--the
limited liability burden that low- and moderate-income people
have, and that is the income tax. Their greater Federal tax
liability is the payroll tax. They pay far more money in
payroll taxes than they will ever pay in income taxes.
So if you took a family of four making around $27,000 and
had two children, their income tax liability would indeed under
this plan be completely eliminated, 100 percent. But their
cost, their liability in actual dollars, would be something
like $25 or $30, if that much.
So you could do that, but if you actually looked at their
payroll taxes and deducted the income tax income credit, they
still will owe over $2,000. So when I make the claim that I
don't see this tax being a fair tax to the working poor and
low-income people, that is the basis on which I make it.
Further, if I also make an analysis of the current census
population, one-third of the families with children under 18
will not receive any help. Now, the standard rationale is,
well, they are not paying taxes, but they receive no assistance
on that. If I look at that one-third carefully, I again find
minorities represent more than one-half of that one-third,
receiving no help from this tax plan, 55 percent for African
Americans, 55 percent for Hispanics. I cannot understand how I
can look at that and be objective and think that this tax plan
is being fair to all taxpayers, working families, who are lower
income as well as moderate.
Would you respond to that?
Secretary O'Neill. Yes, indeed. Let me first say everywhere
I go, I run into my old friend Bob Greenstein's numbers. Bob is
obviously a very bright guy, and he is really good at creating
advocacy statistics.
I am sure you all recognize what he has done with the 1
percent. You know, that is a constant thing. Then he does,
well, they pay 20. What do they pay 20 percent of? They pay 20
percent of all the taxes. What is the 43 percent? That is not
related to the 20 percent, that is related to a different issue
of what is going to happen with this income tax restructuring
that is being proposed.
So you did not do it to me here, but this morning I got
treated to a bar chart that showed 20 percent of one number and
43 percent of another number, and you get the visual impact and
say, oh, my God, that can't possibly be fair.
Well, let me tell you what the facts are. With what the
President has proposed, the higher-income taxpayers are going
to pay a larger relative share of total Federal income taxes
than they do now. Why is that so? Because we are taking a lot
of people off the tax rolls completely, and for lower-income
taxpayers, say, for a four-person family with $35,000 worth of
income, their tax bill under the President's proposal is going
to be zero. They are going to get a 100 percent reduction in
their taxes. You can't go lower than zero unless you want to go
negative, which is in effect what we have done with the earned
income tax credit.
But, again, I would say to you, you know, if you want to
look at the world in this way of combining all of the taxes,
then we should look at the same side of what we are doing with
the money that comes in here. So if you want to look at what
are the total individual impacts of taxes and spending, which
we are not proposing to do, we are proposing to fix the income
tax right now, but if you were to take this broader approach,
first of all, you would put down earned income tax credit, and
then you would put down food stamps, and then you would put
down housing subsidies, and then you would put down Medicaid,
and then you would put down----
Mrs. Clayton. Mr. Secretary, with all respect, I would put
down corporate deductions.
Secretary O'Neill. I am not disputing that. What I am
saying is what you are trying to do----
Mrs. Clayton. Sir, what you are doing to me is you are
suggesting that I am playing the income tax card. I am simply
trying to show you that--and we can disagree, but the tax
system gives as many breaks to those with income as it ever
considered, giving the low-income. The earned income tax credit
does not eliminate fully all the tax burdens on those who are
poor, because they still have to pay an excise tax, they pay
other taxes, and they pay payroll taxes. When you eliminate
that, they still come out with tax liability.
You are correct, perhaps that $35,000 would be eliminated,
but I don't know what that liability would be. You have a
limited liability.
Chairman Nussle. The gentlewoman's time has expired.
Mrs. Clayton. Thank you, I will honor that. Can I have
another round?
Chairman Nussle. I will be glad to let him answer your
question. Why don't we let the Secretary do that.
Secretary O'Neill. Let my give you a few more numbers. Let
me give the numbers for a four-person family with $45,000. They
are going to get a 50 percent reduction in their taxes, which
means $2,000. They are going to get reduced from $4,000 to
$2,000. For a four-person family with around $70,000, $75,000,
they are going to have a 25 percent reduction in their taxes.
As I said to you, the President's proposals make the
Federal income tax system more progressive than it is today. I
want to be sure my intent is clear. I am not gainsaying for a
moment. All the things that we do to help low-income people,
disadvantaged people, people with disabilities, people who
can't make it on their own, I am just calling attention to the
idea that if we are going to sweep all the taxes together, then
we need to sweep all the benefits together, because, as I am
sure you know, if you look at Social Security, for example, if
you look only at the tax side, you would say this is very
regressive. If you look at taxes and benefits together, it is
really quite a progressive system. And I am just making a plea,
you know, maybe it is the plea of an outlander who has been
away from here too long, that as we talk about these things,
how important it is to think about them in a way that doesn't
divide us, but hopefully unites us around ideas that are truly
related to each other.
Chairman Nussle. Mr. Secretary, I apologize for having to
be away for a little bit. I have got some good news to deliver
to you, however. The reason that I was absent is I was over at
the Ways and Means Committee, and the President in his speech
said he wanted tax relief in an urgent manner, he wanted us to
pass it quickly, and just moments ago the Ways and Means
Committee passed the first tranche of the tax bill. So I wanted
to deliver that news to you. That was the reason for my
absence. I apologize for that. I thought it would be some news
you would be interested in.
Secretary O'Neill. Thank you, Mr. Chairman. If it wasn't
unseemly for a Treasury Secretary to do it, I would jump up on
top of the table and shout hooray.
Chairman Nussle. The cameras are all now very disappointed
they weren't here for that.
Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman.
Mr. Secretary, I want to go back to one of the issues that
you stipulated really with Mr. Spratt and is in the President's
budget submission, and that is the additional interest payments
because of not putting the money that is used for the taxes
onto the debt. It seems to me that is dependent upon a couple
of assumptions. One of them is, of course, as we have been
talking, is you could use that money to pay down debt, and you
have been talking about the fact that you have to start paying
a premium, and it doesn't make sense to do so after a certain
point. So that raises questions in my mind whether that is
really an expenditure. If you can't pay the debt anyway, are
you really saving the interest?
The second one assumes that all of that money would
actually be used to pay down debt and not spent on bigger
government. I have been here long enough to have some doubt
about that.
Now, I am not quite sure why it is that the budget--and
today in your discussions you are stipulating that, because it
seems to me there are two very iffy propositions that cause
that to be there at all in that chart.
Secretary O'Neill. Well, you know, if I could rewrite the
way we do business, I would sure take it out in a minute,
because I don't think it makes very much sense, but it is a
convention that you among yourselves have agreed to as the way
we must do these things, so we have done what you require. I do
believe, as Dr. Martin Felstein, one of the most preeminent
economists in the world, says, that in all likelihood, the
President's tax proposal when it is all said and done is going
to cost $600 billion less than what we have attributed to it
because the impact as it flows through the economy is going to
be to generate higher levels of revenue and business activity,
and therefore higher levels of tax take for the Federal
Government. But we don't permit ourselves to do what is called
dynamic scoring. So in effect what we do is we have scissors
with one blade, and it is the blade that says if you do
something like a reduction in taxes, then you have got to
charge yourself interest for it, and you can't pay attention to
or anticipate what the next set of effects are in the economy.
So I don't like it a whole lot, but it is a convention you all
agreed to, and we have to play by your rules.
Mr. Thornberry. Let me ask you one other thing. You have
heard reference a few moments ago to the fact that various
government retirement funds have investments in securities and
various places.
Coming from where you have recently come from, can you
discuss with us a little bit what we have to be mindful of if
we get to the point that we have significant cash in the
government that we start to put into private markets in some
way? How does that affect private markets? Tell us what we need
to be thinking about if that were to come to pass.
Secretary O'Neill. You know, I have been thinking about
this, because there has been so much in the news, and people
have talked about it a lot.
One of the things that creates the spirit of enterprise and
productivity growth is, frankly, a fear of failure, and if you
can endlessly fail and there is somebody still there pumping
money into you--I don't think there is a single place in the
world where you can find entrepreneurial spirit and
fantastically good productivity where the fear of failure is
not present.
I give to you as an example from my experience in going to
Russia in the last 10 years and spending a lot of time looking
at their facilities and looking at how they operate. It is just
unbelievable how awful an enterprise can be and how awful it
can be for the human beings in it if there is an underlying
assumption that there is no way of failure. I take you in your
mind to Siberia, to a Russian aluminum plant which is one of
the biggest aluminum plants in the world. The life expectancy
in this town called Krasnoyarsk, 1 million people, is 47 years.
The reason it is 47 years is because they have contaminated
their own water supply with nuclear poisoning, and so they are
killing off the people.
If you go into this plant, you would not believe the
interior environment of this plant. You can't see. I would not
be able to see the Chairman if I was this far away from a
person in this plant because of the unbelievable pollution that
exists in the building. And they have been going on like this
for decades. Why did they do this, how did they get away with
this? Because there were no fear of failure, no standards that
human beings are important.
I think when you see--if you travel around the world and
see the conditions that people live in, where capitalism and
the fear of failure doesn't exist, you rush back to the United
States with a happiness that you have been permitted to live
your life in these circumstances. And I think we don't even
want to approach the outskirts of governmental ownership of
enterprise in this country of the kind that would be involved
in our beginning to buy enterprises where we effectively take
away their fear of failure, because if they fail, we pump in
more money. It is a route to doom.
Mr. Thornberry. What would our other alternatives be if we
had these cash money surpluses and we don't let people keep
more of their money; what is the alternative?
Secretary O'Neill. Well, you all could certainly spend it.
There is not too much doubt about that. That is not, frankly,
an appealing option for me as well. It is better, though, than
having you own the private enterprise.
Chairman Nussle. Thank you.
Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
Mr. Secretary, I thank you for being with us here today.
Let me, apropos of Mrs. Clayton's line of questioning, ask you
for the record to respond to some distribution figures that
come from William Gail at the Brookings Institution. You made a
disparaging remark about advocacy statistics, and, of course,
we are in a climate where anyone who dares refer to a
distribution table is accused of class warfare. But I think we
need to look at the distribution tables. The figures I have,
this is from Mr. Gail, the top 1 percent income group in this
country pays 21 percent of Federal taxes, gets 36 percent of
the Bush tax cut; the top 5 percent, 37 percent of Federal
taxes, 49 percent share of the Bush tax cut.
I would just appreciate your deconstructing those numbers
for me. If those are faulty advocacy statistics, I would like
to know it.
Let me move into some other questions for our oral exchange
here, if you don't mind, because we have limited time. We have
the chart back up here. There seems to be an ongoing question
today about whether we are putting the taxpayers first or last
or somewhere in between. I would like to reassure you that I
think virtually every Member of Congress is ready to vote for
tax relief and believes that tax relief ought to be part of
this budget, but we do have some honest questions about whether
we ought to be shoving through a tax cut in advance of a
budget, how large that tax cut can responsibly be, and also
what a fair distribution of the tax benefits would be. Those
are legitimate issues which we must debate.
How much is available for a tax cut? Now, we had an earlier
discussion here about the treatment of these trust funds, and
you seem to be suggesting that somehow the Social Security
Trust Fund and the Medicare Trust Fund ought to be treated
differently, but I am not sure I understand the basis for that.
You yourself have argued for reserving the proceeds from
the Social Security surplus, and you have treated that as a
principle of some importance. You have then said that it really
is not important to do that with Medicare. In fact, it is
somewhat misleading to suggest it even with respect to the
Medicare Trust Fund.
Why would the arguments you have made against reserving
funds borrowed from Medicare Trust Fund, why wouldn't they also
apply to the Social Security Trust Fund; and vice versa, why
wouldn't the arguments you have made for reserving the Social
Security Trust Fund not then argue for the same treatment of
the Medicare Trust Fund? I don't understand the basis on which
you are differentiating between the two.
Then, secondly, as Mr. Spratt was asking, this $1 trillion
in reserve funds, I think the way we get there from these
figures to yours is by not reserving the Medicare surplus, and,
of course, by picking up the $207 billion that we have on this
chart, and then as you have said, not accounting for extenders
and fixing the AMT. So that is how we get to the $1 trillion
contingency fund.
You said one possible claim against that fund would, in
fact, be the extenders and the AMT, and I am not sure if you
think that would be a good idea or not, but you are
acknowledging that that may be something that there is a lot of
support for.
This spending program, we have beyond-inflationary
increases proposed for defense, for education, for medical
research, presumably for adding prescription drugs to Medicare.
If the overall increase is around 4 percent, then that surely
implies below-baseline decreases for a number of other items.
One estimate has said about 7 percent decrease in everything
else. Is that really sustainable? Presumably that might be a
claim against this contingency fund. Of course, calling it a
contingency fund suggests that you are acknowledging that these
surplus projections may be a little shaky. After all, two-
thirds of the surplus projections are more than 5 years out. So
the whole idea of a contingency fund is to have some cushion in
case the surpluses don't materialize. So what is the range of
claims on this contingency fund, and is it going to, in fact,
reliably function as a cushion?
Secretary O'Neill. Well, let me start back with your
reference to Mr. Gail. Let me say apparently I am not that
clear in what I say, so let me try again.
Mr. Price. If you don't mind, I did ask you to respond for
the record to that, because I am much more eager to have an
exchange on these other items.
Secretary O'Neill. If I may, let me make sure I understand
the question, and then I will respond for the record. As I
understand the question, Mr. Gail asserts that right now the
top 1 percent pay 21 percent, I want to make sure I wrote these
down right, and I didn't get what he said they are going to be
paying after the President's tax reduction. What percent will
they pay afterwards?
Mr. Price. I will be happy to give you his full
distribution chart. I was just taking those two numbers from
it. He is saying 21 percent share of Federal taxes, 36 percent
share of the Bush tax cut.
Secretary O'Neill. He doesn't give you how much the top
payers are going to be paying after the tax relief is put in
place. I think you will find it is 22 percent.
Mr. Price. This is the share of the tax cut which they are
receiving.
Secretary O'Neill. I am trying to get at how progressive
the tax is going to be. It seems to me that is the appropriate
comparison. The President's tax proposal would make the Tax
Code more progressive. What I am suggesting to you is what I
suggested to your earlier line of questioning on this, that the
way these statistics are put together, both by Mr. Greenstein
and by Mr. Gail, is to confuse on the one hand what is
happening with the flow of funds, and, on the other, what is
ending up to be the responsibility of a particular group of
people to pay for public goods and services. The President's
proposal would shift the incidence of tax burden to higher-
income people in a relative sense compared to where it is
today.
Mr. Price. I must say that if these figures are correct as
to where the preponderance of the breaks from the Bush
proposals go, then that would be an incompatible outcome. I
would appreciate, as I said, your deconstructing these figures
for us. If there is something wrong with these figures, letting
us know what the problem is.
Secretary O'Neill. I would be very happy to do that.
[The information referred to follows:]
RESPONSE TO QUESTION SUBMITTED BY MR. PRICE CONCERNING DISTRUBITIONAL
FIGURES
The distributional figures cited by Mr. Price were prepared by
William Gale of the Brookings Institution. It is not possible to
deconstruct the figures without a detailed explanation of how the
figures were derived, and the assumptions made in their derivation.
However, the basic issue is how large a share of the tax burden will be
borne by upper-income taxpayers once the President's tax proposal is
enacted. The figures cited by Mr. Price do not include this basic
information. However, the Treasury Department has prepared a
distributional analysis of the major individual income tax provisions
in the President's tax proposal that does include this information.
The Treasury table is attached. It shows that the share of income
tax relief provided to families with incomes under $100,000 is larger
than their share of current income taxes paid (compare the first and
second columns). As a result, these families will pay a smaller share
of the total income tax burden under the President's proposal than they
do under current law. Conversely, the share of the income tax relief
provided to families with incomes of $100,000 or more is smaller than
their share of current income taxes paid. As a result, these families
will pay a larger share of the total income tax burden under the
President's proposal than they do under current law.
MAJOR INDIVIDUAL INCOME TAX PROVISIONS OF THE PRESIDENT'S TAX PROPOSAL\1\
[2000 Income Levels]
----------------------------------------------------------------------------------------------------------------
Distribution of total individual Average
Distribution of income taxes\3\ individual
Cash income proposed changes -------------------------------------- income taxes Percent change
class\2\ in individual With proposed with proposed in individual
income taxes Current law changes\4\ changes income taxes
(percentage) (percentage) (percentage) (dollars)
----------------------------------------------------------------------------------------------------------------
0-30 9.3 -1.0 -2.8 -457 -136.2
30-40 6.5 2.5 1.8 993 -38.3
40-50 7.8 4.1 3.4 2,210 -28.0
50-75 17.2 12.2 11.3 4,279 -20.8
75-100 13.6 12.2 12.0 7,848 -16.3
100-200 19.8 27.1 28.3 16,625 -10.7
200 and over 25.4 42.9 45.9 103,931 -8.7
---------------------------------------------------------------------------------------------
Total \5\ 100.0 100.0 100.0 6,322 -14.6
----------------------------------------------------------------------------------------------------------------
Source: Department of the Treasury, Office of Tax Analysis, March 8, 2001.
\1\ The major individual income tax provisions are: i) lower individual income tax rates (lower 39.6 and 36
percent rates to 33 percent, lower 31 and 28 percent rates to 25 percent, and introduce a new 10-percent rate
bracket for taxable income (in 2006) under $6,000 for single filers, $10,000 for head of household filers, and
$12,000 for joint filers); ii) increase the child credit to $1,000, raise the income level at which it phases
out, and allow the child credit against the AMT; iii) allow a 10 percent deduction for the earnings of the
lower earning spouse (up to $30,000) in two-earner families; iv) allow taxpayers who do not itemize to deduct
charitable contributions up to the amount of the taxpayer's standard deduction; and v) provide a refundable
tax credit for individually-purchased health insurance.
\2\ Cash income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt
interest, dividends, rental income, realized capital gains, cash transfers from the government, and retirement
benefits. Employer contributions for payroll taxes and the federal corporate income tax are added to place
cash on a pre-tax basis. Cash income is shown on a family rather than on a tax return basis. The cash incomes
of all members of a family are added to arrive at a family's cash income used in the distributions.
\3\ The refundable portions of the earned income tax credit (EITC) and the child credit are included in the
individual income tax. Individual income taxes are estimated at 2000 income levels but assuming fully phased
in law and, therefore, exclude provisions that expire prior to the end of the budget period and are adjusted
for the effects of unindexed parameters.
\4\ The change in individual income taxes is estimated at 2000 income levels assuming fully phased in law.
\5\ Families with negative incomes are excluded from the lowest income class but included in the total line.
Secretary O'Neill. If I can remember the thread of the
other pieces, one that occurred to me, and I wrote down a
number of $3 trillion, was a question of what are the other
things that are competing for the $1 trillion contingency that
the President has identified?
Mr. Price. I asked you why the differential treatment of
the two trust funds, and I asked you what is the range of
claims on the $1 trillion.
Secretary O'Neill. OK. Let me deal with the range of claims
first. As I have been testifying and talking with Members over
the last 5 weeks, I don't say this in a facetious way, I would
say to you the range of claims are $3 trillion or $4 trillion.
There seems to be no end to the individual appetite which add
up to numbers that would not only eat all of the increases
proposed by the President for priority things, but in truth the
whole $5.6 trillion, I think, could be consumed by the appetite
of Congress if it was on the table. I honestly believe that to
be the case, as I have wandered around and listened to people
and what they think we should be doing.
Mr. Price. Mr. Secretary, with due respect, you yourself
portrayed a few moments ago the $300 billion for the tax
extenders and the AMT as a legitimate possible claim against
the $1 trillion contingency fund, did you not?
Secretary O'Neill. I meant by that there are people who
would like to do that. There are people who would----
Mr. Price. I would daresay 99 percent of the Congress would
like to do that. These extenders passed unanimously. Who is
going to let 26 million taxpayers bump up against the AMT?
Secretary O'Neill. I don't know how long the AMT has been
in the Code, but it is a heck of a lot longer than 1 year. It
has been a burgeoning problem for 20 years or so, and now you
are saying that we should accept the burden for fixing the
whole thing immediately on the first year of our watch? What we
have said is we have got this position, so in combination with
the child credit, as a generalization almost no family with
income under $100,000 is going to get hit in the near term by
the AMT, and, in fact, everyone--no one will be worse off
because of the AMT after the tax reduction. But if some of you
believe that you want to take money away from the contingency
fund or away from the phase-in schedule of the President's tax
proposal in order to fix AMT, that is certainly a discussable
item if that is what your preference is.
Mr. Price. Thank you.
I think the estimate on the AMT fix is actually a very
conservative estimate as to what it would take to fix it over a
10-year period. It doesn't anticipate doing it all at once. May
I ask, Mr. Chairman, since our time has expired, I would
appreciate for the record your indicating to me exactly on what
principled basis you are distinguishing between the Social
Security Trust Fund and the Medicare Trust Fund in terms of
their treatment in this budget.
[The information referred to follows:]
RESPONSE TO QUESTION SUBMITTED BY MR. PRICE CONCERNING THE SOCIAL
SECURITY TRUST FUND AND THE MEDICARE TRUST FUND
The Administration has the same policy toward Social Security and
Medicare. All funds collected for each program should be dedicated to
that program. In the case of Social Security, more funds are collected
than are needed to pay current benefits--thus, the Administration has
pledged to wall off and reserve this surplus for Social Security. In
contrast, all Medicare funds are used for current expenditures--thus,
there are no excess taxes/premiums to wall off.
Medicare has two trust funds--the HI, or Part A, trust fund and the
Supplementary Medical Insurance (SMI), or part B, trust fund. The SMI
trust fund receives substantial transfers from the general fund since
premiums collected cover only 25 percent of program costs--thus, from
the perspective of the overall Federal budget, it is running a large
deficit. The SMI deficit is far larger than the HI ``surplus'', meaning
that Medicare as a whole faces an overall shortfall of $50 billion in
2002 and $643 billion from 2002-2011. Thus, there is no Medicare
``surplus.''
It is also important to note that roughly one-third of the HI
``surplus'' is the result of an accounting gimmick from the 1997 Budget
Agreement. The prior Administration and Congress opted to improve the
apparent solvency of the HI Trust Fund by moving a large portion of one
of its fastest-growing programs at the time--home health care--out of
the HI Trust Fund and into the SMI trust fund. This had no effect on
Medicare's total spending, but gave the illusion that HI solvency was
extended and its ``surplus'' increased. Accounting gimmicks, such as
this one, increase complacency over Medicare's future and undermine the
prospects for needed reform. This shows the risk with focusing on just
one part of Medicare instead of viewing it as a whole.
Chairman Nussle. Actually at this point, Mr. Price, what I
would suggest it is that I ask unanimous consent that all
Members have 7 legislative days in which to submit written
questions, and that for the record, so that all Members that
may have a question, whether it is similar to that or
otherwise, may do so. Is there objection to that?
Without objection, so ordered. Thank you.
Responses to Additional Questions Submitted By Mr. Price
1. The Administration has the same policy toward Social Security
and Medicare. All funds collected for each program should be dedicated
to that program. In the case of Social Security, more funds are
collected than are needed to pay current benefits--thus, the
Administration has pledged to wall off and reserve this surplus for
Social Security. In contrast, all Medicare funds are used for current
expenditures--thus, there are no excess taxes/premiums to wall off.
Medicare has two trust funds--the HI, or Part A, trust fund and the
Supplementary Medical Insurance (SMI), or part B, trust fund. The SMI
trust fund receives substantial transfers from the general fund since
premiums collected cover only 25 percent of program costs--thus, from
the perspective of the overall Federal budget, it is running a large
deficit. The SMI deficit is far larger than the HI ``surplus'', meaning
that Medicare as a whole faces an overall shortfall of $50 billion in
2002 and $643 billion from 2002-2011. Thus, there is no Medicare
``surplus.''
It is also important to note that roughly one-third of the HI
``surplus'' is the result of an accounting gimmick from the 1997 Budget
Agreement. The prior Administration and Congress opted to improve the
apparent solvency of the HI Trust Fund by moving a large portion of one
of its fastest-growing programs at the time--home health care--out of
the HI Trust Fund and into the SMI trust fund. This had no effect on
Medicare's total spending, but gave the illusion that HI solvency was
extended and its ``surplus'' increased. Accounting gimmicks, such as
this one, increase complacency over Medicare's future and undermine the
prospects for needed reform. This shows the risk with focusing on just
one part of Medicare instead of viewing it as a whole.
2. It is not possible to evaluate the accuracy of the figures
without a detailed explanation of how the figures were derived, and the
assumptions made in their derivation. However, the basic issue is how
large a share of the tax burden will be borne by upper-income taxpayers
once the President's tax proposal are enacted. The figures cited by Mr.
Price do not include this basic information. However, the Treasury
Department has prepared a distributional analysis of the major
individual income tax provisions in the President's tax proposal that
does include this information.
The Treasury table is attached. It shows that the share of income
tax relief provided to families with incomes under $100,000 is larger
than their share of current income taxes paid (compare the first and
second columns). As a result, these families will pay a smaller share
of the total income tax burden under the President's proposal than they
do under current law. Conversely, the share of the income tax relief
provided to families with incomes of $100,000 or more is smaller than
their share of current income taxes paid. As a result, these families
will pay a larger share of the total income tax burden under the
President's proposal than they do under current law.
3. The $1,600 figure is the income tax cut a middle-income family
of four would receive from two provisions of the President's proposal
when the income tax provisions are fully phased (in 2006): the new 10
percent bracket and the $500 increase in the child tax credit. The tax
cut from the new 10 percent tax bracket for this family would be the
reduction in the tax rate (5 percent, from 15 percent to 10 percent)
times the size of the bracket ($12,000 for joint filers), a tax cut of
$600. This family would receive a tax cut of $1,000 ($500 per child)
from the increase in the child tax credit. The family's total tax cut
is therefore $1,600.
For all joint filers with dependents who receive an income tax cut,
the median tax cut in 2006 will be $1,856. This is more than the $1,600
figure because the President's proposal includes other income tax
provisions that will benefit many of these families. In particular,
many of these families will benefit from marriage penalty relief
provided by the two-earner deduction, and from the new deduction for
charitable contributions for non-itemizers. Approximately 60 percent of
all joint filers with dependents who receive an income tax cut will
receive a tax cut of $1,600 or more in 2006.
For all taxpayers, with or without dependents, who receive an
income tax cut, the median tax cut in 2006 will be $692. Approximately
25 percent of all taxpayers who receive an income tax cut will receive
a tax cut of $1,600 or more in 2006.
Mr. Culberson.
Mr. Culberson. Thank you, Mr. Chairman.
Mr. Secretary, thank you so much for being with us today
and for your concise and very clear explanation of what
President Bush has laid out. It has been my experience in 14
years of serving in the Texas House under Governor Bush that he
and you are both correct, that if we do not refund this tax
surplus to the people that pay it, that the government will
consume it and spend it, and you will have a bureaucracy that
will continue to grow ad infinitum into the future.
I wanted to ask you about the tax cuts that President
Kennedy and President Reagan proposed. I am succeeding Chairman
Bill Archer, and Chairman Archer calculates that the Reagan tax
cut, if placed in today's dollars, would be approximately $5.5
trillion. Have you heard that number?
Secretary O'Neill. Yes, indeed, that is correct.
Mr. Culberson. And the Kennedy tax cuts, I have not heard
that number in today's dollars.
Secretary O'Neill. It would be even larger. It is an even
larger number.
Mr. Culberson. That may be one that I will submit in
writing, because it would be interesting to know that in terms
of comparison. Those who oppose President Bush's tax cuts are
attempting to make that comparison, and I think that quickly
exposes to the American public that comparison is not valid.
[The information referred to follows:]
RESPONSE TO REQUEST SUBMITTED BY MR. CULBERSON CONCERNING THE KENNEDY
AND REAGAN TAX CUTS
Mr. Culberson stated that he will submit a question in writing
regarding the relative sizes of the Kennedy and Reagan tax cuts. We are
not aware of any question that has been submitted.
Mr. Culberson. One other point that I think also
illustrates the fact that you cannot compare the very modest
tax cut that President Bush is proposing with the Reagan tax
cut, I wanted to confirm with you, is that there is, from my
understanding--that after the Reagan tax cuts of 1981, that
Federal revenues increased, doubled essentially, but that the
Congress increased spending by a factor of three times.
Secretary O'Neill. Precisely right.
Mr. Culberson. Which anyone out there listening can
immediately understand that if the tax cut doubled revenues,
but Congress tripled spending, that is where the deficit came
from.
Secretary O'Neill. Exactly right.
Mr. Culberson. So that illustrates very clearly why that
argument does not hold water.
One final point that was a surprise to me as a new Member
of Congress and sitting in on the Budget Committee discussions
of the President's budget and the unchartered waters, as Mr.
Sununu says we have now entered, is the fact we can only pay
down so much of the debt so quickly without incurring
significant penalties. I was surprised to learn that, as were
my constituents when I returned to Houston this past week and
meeting with large numbers of constituents who were really
quite surprised to learn that information. That is something
none of us really thought about before.
I wanted to ask you if you could please for the record,
reiterate for the listening public and everyone, the
President's budget proposal proposes to pay down as much of the
public debt as can be paid down without incurring penalty.
Secretary O'Neill. That is exactly right. Exactly right.
Mr. Culberson. Finally, if I could, I wanted to ask you
about the earned income tax credit that was enacted long before
my time here. It is my understanding the purpose of the earned
income tax credit was to offset the cost of Social Security or
payroll taxes for those individuals who were not paying taxes,
and that earned income tax credit has increased over the years.
Secretary O'Neill. It is running right now about $32
billion at an annual rate.
Mr. Culberson. Thank you, Secretary O'Neill, for your
testimony and for the approach you are taking. I can testify
from personal experience in Texas to the benefits of the tax
cuts that Governor Bush enacted in Texas. They had a dramatic
impact on our economy. It kept the size and cost of the State
government in line. I am looking forward to seeing that same
benefit occur at the national level and supporting the
President in any way I can. Thank you, sir.
Chairman Nussle. Mr. Clement.
Mr. Clement. Thank you, Mr. Chairman.
Mr. Secretary, congratulations to you on your new position.
Secretary O'Neill. Thank you.
Mr. Clement. I know you were with a very fine company as
Chairman and CEO of Alcoa. You have a major presence in the
State of Tennessee.
I also want you to know that myself, as well as Congressman
Brian Baird from the State of Washington, introduced
legislation on the Sales Tax Deduction Act of 2001. The reason
we did it, we have States such as Florida, Texas, Tennessee,
Nevada, South Dakota, Washington and Wyoming, that do not have
a State income tax, and we don't feel like our people should be
forced to move to a State income tax if they don't want to, but
we cannot deduct our State sales tax from our Federal income
tax return. But if you live in a State that has a State income
tax, you can deduct that from your Federal income tax return.
As you know, that was taken away from us in 1986, in the 1986
tax reform. That is why it is critically important that we must
correct this problem, because we really are serious about tax
fairness and tax simplicity. I know you mentioned a while ago
about the Tax Code and about how much it has grown over the
years, and I sure agree with you there. But we feel like, you
know, if we want to bring about some tax fairness and tax
simplicity, and if we do want a tax cut, there are a lot of
people that want to help and support and move in that
direction, but we want an overall package that makes common
sense and is fair to the American people and to all States, and
not just some States.
I also want to ask you about the trigger. I know the Bush
administration seems to be on record opposing the trigger. What
I mean by the trigger simply, for all concerned, is what if
these forecasts are not correct? What about something that
happens overseas, an international incident? What about if the
economy deteriorates much more than it is deteriorating now?
Because we do have some softness, and even Chairman Greenspan
said even yesterday he doesn't really know the state of the
economy today.
Why shouldn't we have a trigger just to protect ourselves
if we really had a downturn and these surpluses really don't
materialize after all?
Secretary O'Neill. All right, good. There is kind of a
siren song with the idea of a trigger, because it sounds so
logical, and as I spent a lot of time thinking about it, how
would one actually construct a trigger? Let me use the idea of
marginal rate reductions as a way to think this through with
you.
With what is moving through the House today, the Ways and
Means Committee today, is marginal rate reductions, and they
are phased in over time. They don't become fully effective, and
I am not sure, because I have been busy all day testifying, but
I think they are phased in over a 4- or 5-year period. So it
all sounds pretty slick.
Let's say you put a trigger on and say you don't actually
let the next phase go in in 2003 if for some reason you don't
like what the circumstances are.
Let me tell you what I think the world looks like from a
regular family person out there in America. If you all pass a
tax bill with marginal rate reductions in it that, say, to a
low-income family gives them, let's say, $500 worth of money
that they get to keep that they thought they were going to send
to Washington, and they are thinking about buying a house. That
$500 gives them the ability to buy a house if the interest rate
is 10 percent. That is $5,000 more house than they could buy
before you gave them a $500 tax deduction on an annual rate
basis. So the leveraging effects of giving people back money
for buying homes or buying cars is very substantial.
Now, if you say to them, well, we are going to give it to
you, but we are not sure we are going to give it to you, then
they are not going to be able to make that kind of a long-run
decision about housing purchases and automotive purchases and
longer-run decisions that families need to make, or about
decisions about how much money they should be putting away for
college education.
So if your intent is to help people, then you are going to
have to vote to help people. If your intent is to suggest to
them that maybe sometime in the future, if the sun keeps coming
up, you are going to help them somehow, you are not going to
get much of a value from an economic point of view by dribbling
out the amounts and leaving huge uncertainty in people's minds
about when they are ever going to get it.
If you wanted to argue, on the other hand, you wanted to
put a trigger into estate taxes or death taxes, I suppose you
could do that, but I can't imagine the wrestling match you
would have with your constituents when you got home and said to
them, well, you know, we decided we are going to eliminate
death taxes, but you better make sure you hold out until the
trigger lets you do it.
I just don't know how to make sense out of what is an
appealing idea of a trigger except in this way. I told you a
trigger I would like. I would like a trigger that said after we
do the structural changes to the Tax Code, from now on,
whenever we run a tax surplus at the end of a fiscal year, at
the end of September 30th, of more than $25 billion, that we
have a proposition which says we will send 65 or 75 percent of
all the extra money we collected back to the people who sent it
in, no ifs, no ands, and no buts.
Secretary O'Neill. Not but, but here comes your money, and
you get it, wouldn't it be great if they got it on December
1st? I would love that kind of a trigger.
Mr. Clement. Thank you, Mr. Secretary.
Chairman Nussle. We actually had a vote on trigger locks
not too long ago. Maybe that is what we should do.
Mr. Hastings.
Mr. Hastings. Thank you, Mr. Chairman, and congratulations,
Mr. Secretary.
I think your last remark regarding the triggers is a very
sound idea. I find it interesting that when people talk about
triggers on anything, it is generally on the revenue stream,
and never on the appropriations stream. It seems to me if you
want to be fair and honest and approach it in that way, you
ought to be at least consistent on both sides.
Mr. Secretary, I come from a rural district, a farm
district, very diversified district, in central Washington. We
grow a variety of crops, and virtually none of them are doing
very well right now. Some of the prospects for the future with
a low water year, which is critical in eastern Washington from
a hydropower standpoint, and rising energy costs, and, of
course, the prospect, at least today, of farm prices not
increasing, I would like to know how the President's plan could
potentially help farmers.
One idea, as I understand it, he is contemplating is an
idea of what we call farm income management accounts or
something to that extent, where a farmer can put money aside
from the good years for the bad years. Would you elaborate on
that, please, for me?
Secretary O'Neill. Well, you know, I don't think I can help
very much, because I don't know a lot more about it than what
you have said. It is not an area that I, frankly, have had time
in the last 5 weeks to really specialize in. But my impression
and understanding of what it is the President is thinking about
is exactly that, in effect a device that would allow farmers to
create what you might characterize as a rainy day fund to get
them over the ups and downs of the notorious cycles agriculture
people have to deal with.
Mr. Hastings. That is correct. I would be willing to
certainly work with you on that, because that has a great deal
of interest, and I know my constituents would, too.
One final comment I would like to make after listening to
the testimony here and remarks from members of this committee
and then outside this committee about focusing on how we deal
with the surplus, whether we should have a tax relief or not, I
think it is just worth reminding you and my colleagues here
that when we passed the Balanced Budget Act in 1997, we
contemplated balancing the budget next year. So when we look at
it, I recognize how tough it is to anticipate revenues way off
into the future. There is no question it is an inexact science,
because we missed this one here by 3 years out of the 5-year
projection. So I think that is the best evidence. You are
dealing with the best evidence that we have today, but, more
importantly, and I mentioned this to Mr. Daniels when he was
here earlier today, it is very refreshing to me to have the
opportunity to debate in this committee and this Congress what
we are going to do with surpluses, and also to debate in this
committee and this Congress, and it has already passed the Ways
and Means Committee, that we are going to have tax relief. I
suspect your time in the private sector and your time here, 30
or 40 years ago, whenever it was, that that has got to be
refreshing for you, too.
Secretary O'Neill. I don't remember ever having an
experience like this. It is a much better one than the other.
Mr. Hastings. Let's enjoy it together. Thank you very much.
Chairman Nussle. Mr. Moran.
Mr. Moran. Thank you. I have a series of questions.
Chairman Nussle. You have to turn your microphone on, right
at the bottom there.
Mr. Moran. Thank you very much, Mr. Chairman. That is very
helpful. Boy, this technology.
Chairman Nussle. The bipartisanship we are trying to show.
Mr. Moran. You have to think twice.
Are you a supply-sider, Mr. Secretary? Do you consider
yourself a supply-sider?
Secretary O'Neill. No, I don't.
Mr. Moran. You don't?
Secretary O'Neill. I don't consider myself much of anything
that people can put a label on. I am one who believes--I forgot
who it was that said, I believe, and therefore I think;
therefore I am. That is what I am.
Mr. Moran. I am not sure I want to get into the
etymological theory, but metaphysics, this is a little more
pragmatic, the questioning I want to ask of you.
You buy into the theory that we need a tax cut in order to
stimulate the economy as it exists today?
Secretary O'Neill. I buy into the idea that we are in a
very slow period in our economy, and if we can reflow some of
the taxpayer money to them, it will be helpful to avoid a
deeper downturn and perhaps make the downturn more shallow and
speed us into the next upside improvement.
Mr. Moran. What I would like to get into, Mr. Secretary, is
the specifics of what you mean and some of the timing.
It has been suggested that the Congress would have to act
at warp speed to get a tax cut to the President's desk by the
August recess, for example. Are you planning on us getting it
to the President's desk and enacted before the August recess?
Secretary O'Neill. I would hope before the April recess.
Mr. Moran. Before the April recess. All right. Well, boy.
OK.
Secretary O'Neill. But you have to----
Mr. Moran. Are you thinking we are going to get this before
the April recess? Holy smokes.
Secretary O'Neill. If I may say one more thing on this, you
know, again, I have only been here for a little while, and I
just got out of the private sector. If I had decided that I was
going to give my employees a raise, believe me, it wouldn't
take me 9 months to get it done.
Mr. Moran. This could be a very disillusioning experience
for you, Mr. Treasury Secretary, I am afraid. Anyway, you want
to get it done.
Let's just say the experts in the budget and appropriation
and legislative process are right, and it takes us until August
to get a bill. Do you think there would be as compelling a need
to stimulate the economy if it took, for example, 6 months,
maybe even 9 months, before it could get enacted? Would it then
be as needed?
Secretary O'Neill. I don't know, and I don't mean to be
presumptuous, but I sure wouldn't want to go home and explain
to my constituencies, if the need looks like it did now, why it
took me 9 months and I didn't do anything.
Mr. Moran. I think it is probably going to get through the
House. The Senate may be another story. What I am trying to
figure out is how much of the rationale behind this tax cut is
due to the need for economic stimulus.
Secretary O'Neill. I would say none.
Mr. Moran. None?
Secretary O'Neill. The President articulated these
principles and ideas beginning 2 years ago. The principles and
ideas you have in front of you are exactly what he talked about
when he announced his candidacy in Iowa over 2 years ago. So
this is not a bill of convenience, but the idea of taking
especially the rate reductions and the child credit and using
them to flow money back to people right now, I think, is
strongly suggested by the economic circumstances we have, and
in addition to that, the structural ideas are timelessly
important and valuable.
Mr. Moran. So from the standpoint of trying to get this tax
bill enacted, it is actually fortuitous that we have an
economic downturn. But I am putting those words in your mouth.
Those are not your words.
Secretary O'Neill. I would tell you when I look at what we
can do more for us to be a better society, not just here, but
around the world, believe me, I don't welcome a downturn ever.
Mr. Moran. I understand.
Mr. Secretary, do you think that this could make the
difference between a slow landing and a recession perhaps? On a
scale of 1 to 10, what do you think are the chances that this
country could go into a recessionary period?
Secretary O'Neill. I don't know. Mr. Greenspan and I are
good friends, and we talk to each other all the time. I talked
to him a couple times this morning. I think I see the data as
he does. We are running in a bandwidth now, someplace between
minus .5 and plus .5 in real growth, which is to say kind of
bouncing along at zero. Most of the bettors think we are not
going to go into a recession. I don't know. I haven't seen
enough data to draw a conclusion yet. Alan will probably draw
it before I do, but I think, when you get into this kind of
stage in the economic cycle, the thing that he has called a lot
of attention to, and I agree it is very, very important, and
those are the expectations people have and the confidence
people have going forward which causes them to make that
decision to buy a new house or a new car or new washing machine
or to take a vacation or the rest.
So economics is very important, especially in these levels
of expectations and the confidence business.
Mr. Moran. Let me ask you, Mr. Secretary, in a period like
we have today, do you think that monetary policy is more
effective than fiscal policy, particularly given the time frame
for fiscal policy to be implemented? And if that is the
concern, the ability to buy durable household goods, for
example, and homes and so on, reducing interest rates would be
more effective than fiscal policy or tax policy; would it not?
Secretary O'Neill. I don't know. You know, it is not clear
to me that it is really smart to do this on an either/or basis
since there is general agreement. At least I have not found yet
in all the testimony I have done a single Member who says to me
we should have a zero tax cut, which suggests to me everyone
agrees we should have a tax cut.
Then the question is if we are going to do it, why don't we
do it quickly, because it can be useful to a degree, and it is
what I call the belts-and-suspenders approach; if you can have
both, why not wear them both?
Mr. Moran. Well, I appreciate your responses to these
questions. I am also cognizant of David Stockman's book. I
suspect you read it. So much of selling the tax cut was spin,
and much of it was expedient type of spin, you know, all of a
sudden they found the supply side theory, and at one point he
says that supply side was really trickle down theory under a
different cloak.
I want to ask you specifically a couple other questions
quickly. First of all, if we passed it, how long is it going to
take for your IRS to change the Tax Code and to get it in shape
so it will be reflected immediately in tax returns?
Secretary O'Neill. Probably 5 or 6 weeks. We began--we have
looked at the history. I have had a meeting with Charles
Rossotti and his technical people at the IRS to look at not
only the question of how quickly can we change the withholding
tax, but I asked him to entertain a question, is it at all
feasible to think about sending people refund checks? I think
the answer to that is no. But I do think that in a 5- or 6-week
period we can get the withholding tables fixed so that they
will not come back to bite us.
This is an important technical question of how we do this
correctly so that we don't create a situation where people have
more withholding. That then makes them feel like they got a tax
increase next year. So we are working on these things.
If I may say one more thing, you know, Stockman found it
necessary to write a confession book after he left here. I must
tell you, I don't ever expect to write a confession book,
because what I am going to say to you all every day when I say
here is exactly what I believe, and not with some duplicitous
purpose and intent to mislead.
Mr. Moore. We are confident that is the case, Mr.
Secretary, but that is important to get down. You figure that
even if we went at warp speed and got this bill enacted, it
would be about 5 or 6 weeks before it could possibly be
reflected in withholding, and you also said that----
Secretary O'Neill. Maybe May 1st.
Mr. Moran. The idea of it really affecting calendar year
2000 tax returns is somewhat remote. Is that a fair statement?
Secretary O'Neill. You know, no one I know has suggested
that we should try to do a calculation based on the year 2000
tax year. No.
Mr. Moran. 2001.
Secretary O'Neill. Oh, yes, we could have a big effect on
2001. If you would give us the luxury of passing a tax bill,
let's say by the first of April, I will figure out some way
that we can--I don't know exactly how, but I will figure out a
way that by May 1st the withholding tables are fixed, and your
constituents will begin seeing a difference in their
withholding.
Mr. Moran. Wow, that is a pretty strong promise, Mr.
Treasury Secretary. Good luck. I think it is probably a moot
scenario, to be honest with you.
Secretary O'Neill. I would love to have the challenge.
Chairman Nussle. The gentleman's time has expired.
There is one rule of thumb around here: You don't pass
anything on April 1st.
Secretary O'Neill. I would say March the 31st would be
terrific.
Chairman Nussle. The gentleman from New Hampshire Mr. Bass.
Mr. Bass. Thank you very much, Mr. Chairman.
I would admonish my colleagues not to dampen the
Secretary's enthusiasm so early in his career. We sound like a
bunch of hardened cynics.
I must admit, having been on this committee now for 6
years, it amazes me how the debate has changed since we arrived
here. The talk of deficit elimination was stuff of cocktail
party jokes. As recently as 2 years ago, we never even
considered the concept of making a commitment to take the
entire Social Security surplus off budget. In fact, I sat in
this room and was lectured about why it didn't really matter.
But we moved forward substantially. I would point out to my
dear friend from Virginia that this conference tried to cut
taxes twice, once in 1999, $745 billion tax relief package,
which was ridiculed, and secondly, last year, with the marriage
tax penalty elimination, which was vetoed, and perhaps if those
tax relief packages had passed, maybe the economy wouldn't be
in as threatening a situation as it is today.
The other observation I have to make, Mr. Chairman, is it
is extraordinary to me how the debate has changed, and it
should be a delightful debate, but only in Washington and in
Congress can you turn a subject as good as discussing the
disposition of the surplus into a disagreeable debate.
I would also like to extend, if I could, for a second, the
President's Goldilocks quote, as I think it is going to come to
be known, to a rather somewhat broader range. You come from a
business background, and so do I, and when you have what can
only be called a workout situation with the U.S. Government,
which we have experienced here, what do you do when you
suddenly develop or discover that you have unanticipated
revenues and profits? You do three things: You might make some
investments in new equipment, which is what we are talking
about with defense spending and education and so forth; you
also might give the owners a little dividend so that they
continue to invest and have faith in your endeavors; and you
pay down some debt, because the banks force you to do so.
The President's budget is not only correct on the tax cuts
area, but it is also just right in seeking to achieve the
balance in reducing debt, making investments as they are now
known, or increased spending, and also cutting taxes.
I would only say, Mr. Secretary, that I hope that although
we won't talk about money management at this point, that we can
pay down as much debt as we possibly can, and that we endeavor
not to become overly invested in the long-term securities,
because that would further limit our ability to pay down the
debt 8, 10, 12, 15 years from now.
I yield back to the Chairman.
Chairman Nussle. Thank you, Mr. Bass.
Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
Welcome, Secretary O'Neill. I am new to the Congress, just
2 years here at least, so I am learning along with you. But I
appreciate your testimony.
I wanted to just ask you a few questions, make some
observations, I guess. You have indicated that Chairman
Greenspan is a good friend of yours, and you know from talking
to him, I am sure on a daily basis, and hearing his testimony
before the Senate Budget Committee and the Financial Services
Committee more recently that his first priority still is paying
down national debt before tax cuts even. You understand that?
Secretary O'Neill. Right.
Mr. Moore. Do you agree with him on that?
Secretary O'Neill. Yes, and I think we are doing that.
Mr. Moore. OK. Well, I heard, and I am talking about just
weeks ago, Democrats and Republicans saying in unison, we
should take Social Security and Medicare off the table before
we do anything else. So when you look up at the chart up here,
you see $5.6 trillion. I am rounding it off to the tenth, $5.6
trillion. If you took Social Security and Medicare off, you
would have about $3.1 trillion off, which would leave about
$2.5 trillion. We can have a discussion about how you take it
off the table and how you, in fact, lock it up or where you put
it to be sure, but if my math is right, we end up with about
$2.5 trillion if you take Social Security and the Medicare
figure off.
My feeling is, and I think a lot of the people, I feel,
there--I am not going to speak for the Democrats--I feel we
should do that before we start talking about how we allocate up
the surplus that is left, and that would be about $2.5
trillion. And what I would like to see, frankly, is that we use
some of that for the initiatives the President has identified,
and I agree with him on several of those, such as education,
such as strengthening national defense, and such as the
prescription drug benefit. Then I would like to see us also
commit a significant portion to debt reduction beyond the money
that we have taken off the table for Social Security and
Medicare.
That is where I think we differ from my friends across the
aisle here, because as I at least understand what is happening
here, the President basically is taking $2 trillion out of
Social Security and using that to pay down debt and says,
there, we have paid down debt.
Well, in fact, we may have, and we have put ourselves and
the country in a better position in the future because of that
debt reduction, but what I am talking about is taking all that
off the table before we pay down the debt, and the President is
using parts of that money of Social Security to pay down the
debt. Do I misunderstand?
Secretary O'Neill. Yes.
Mr. Moore. Please correct me.
Secretary O'Neill. I am trying to think about how I can
explain the difference between program flows and cash flows in
a way that gets to what I think is a very sincere question on
your part.
Mr. Moore. It is.
Secretary O'Neill. The Social Security money and the
Medicare money that is coming in in a definitional sense that
goes into a trust fund, everyone has agreed these dollars will
only be spent for these purposes. But if you can think about
when the cash is coming in, those represent funds in excess of
current needs to pay benefits to people who are entitled. So
now, look at me, I am your friendly banker, and I have got all
this money coming in. What do I do with this money? If I don't
invest it, then it is losing value. So what am I going to do
with it? I am going to invest it, and in a Federal context that
means I am going to reduce debt held by the public down to the
point that I can't go any further.
Mr. Moore. I do understand that; and I have only been here
2 years, but I do understand that. Let me stop you 1 minute. I
appreciate your straightening me out, but I do understand that.
I guess what I am saying is we are--and most people in the
country might not agree with this, but we in Congress, both
sides of the aisle, are intelligent people who want to do the
right thing by our country. I would think that you and the
Congress working together could figure out some way to actually
take that money figuratively off the table and put it in a
lockbox, and I don't mean in a mattress, I am not talking about
that; and we can have a debate whether it should be in an index
fund or whatever, because a lot of States and municipalities do
that without any dire consequences, I think. You are shaking
your head, and I understand you don't agree with that, but I am
saying, that is one option. I am certain we could come up with
other options. No? Well,----
Secretary O'Neill. Well, you know, I suppose certainly
there are people who have your views who don't think it is
corrosive of our society for the Federal Government to begin
controlling private assets. As I have already said to you, I
think it is the most corrosive of ideas, because I have a
really great fear that it will erode the entrepreneurial spirit
with what it means to be at risk of failure. If you are not at
risk of failure, it makes an enormous difference in how well
you are able to concentrate your mind to produce value for the
society.
Mr. Moore. OK. I do, and I voted last time, to support
relief in estate tax and marriage penalty tax, and I still
believe those ideals. But I have a very great fear that we have
placed a $5.7 trillion mortgage on our kids and grand kids'
future, and that is absolutely not fair.
I think if Alan Greenspan were sitting right here, he would
say, there are several benefits of debt reduction, first. One
is eliminating, or at least getting rid of a substantial
portion of that $200 billion plus interest figure we pay each
year; secondly, is keeping interest rates lower; and thirdly,
is just equity and fairness to future generations in this
country.
Secretary O'Neill. We are going to do every one of the
things you just said. With what the President has proposed, we
are going to do every single one of the things you said.
Mr. Moore. I understand, but it seems to me, and I say this
with total respect and I mean this, it seems to me like when
you are taking the $2 trillion out of Social Security, you are
really kind of double-counting the money.
Secretary O'Neill. No, we are not. Not at all. Not at all.
Mr. Moore. It seems to me that, but I respect your opinion.
Thank you.
Chairman Nussle. Mr. Brown.
Ms. Brown. Thank you, Mr. Chairman.
Mr. Secretary, you gave a figure earlier about the amount
of money that is being refunded to the lower income tax--lower
income earners, I guess. What was that amount?
Secretary O'Neill. My recollection is $32 billion on the
earned income tax credit this year.
Ms. Brown. So this is people that don't pay any taxes, but
get a check back?
Secretary O'Neill. That is right.
Ms. Brown. I was reading your remarks and I notice that you
said in 1988 that 10 percent of the income earners pay 65
percent of the tax.
Secretary O'Neill. That is right.
Ms. Brown. And the bottom half paid 4.2 percent. That was
in 1998. And after, in effect, the President's tax plan, then
10 percent of the income earners would pay 66 percent----
Secretary O'Neill. That is right.
Ms. Brown [continuing]. Of the tax. What percent would the
bottom half pay?
Secretary O'Neill. It is fractionally lower. It is 3\1/2\
or something like that, but it is lower. It is the point I have
been trying to make all afternoon, that the President's tax
proposal is more progressive than the tax system as it exists
today.
Ms. Brown. That is where I am leading, and I hope I can ask
the proper questions in order to clarify my point.
If we are, in effect, getting $32 billion worth of tax
credits back, what of what percent then would the wage earner
be credited to the limit of what he pays in for Social Security
and Medicare; primarily Social Security, because Medicare--
well, both Social Security and Medicare are both special
reserve funds for a special purpose.
Secretary O'Neill. Well, let me do the numbers in my head.
I am not sure it is quite right, but let us say this year we
are going to take in--I am rounding out $2 trillion, and 4
percent of that is $80 billion, and if $32 billion is
subtracted from that $80 billion, then you have reduced the
amount to $50 billion coming from that low income group. So in
relative terms, you are reducing the burden on the lowest part
of the population by something like 50 percent.
Ms. Brown. OK. So what we--I guess in reference to Mrs.
Clayton's question then, we have made concessions to that low
income group.
Secretary O'Neill. Absolutely.
Ms. Brown. OK. Thank you very much.
Chairman Nussle. Thank you.
Mr. Davis.
Mr. Davis. Thanks, Mr. Chairman.
Mr. Secretary, I really appreciate your plain speaking
style here.
Could you briefly tell me why you all decided to set up
what you are referring to as this contingency fund?
Secretary O'Neill. Well, it just seemed to be a way to
communicate to the American people that we are not going to the
limit of what one might consider in spending the whole surplus
or giving back in tax relief all of the surplus, and
recognizing the reality of what I have heard even here today,
that there are lots of members, and I think lots of committees,
and probably each House of the Congress will have things that
they are going to want to continue doing where they don't agree
with us about things that should be stopped, or new initiatives
that they would like to add in. I heard it this morning.
Mr. Davis. Mr. Secretary, I am very distressed that at the
time we are beginning our discussions as to this blueprint, we
have already passed a tax cut in the House Ways and Means
Committee that may approximate $950 billion.
My question to you is, if you would accept my assumption
that we may deplete this entire contingency fund through these
spending proposals up here, does that not distress you about
the impact the tax cut might ultimately have on our ability to
pay down the debt in this session of Congress?
Secretary O'Neill. I tell you what, I would be--forget
about whether I am Secretary of the Treasury or not. I would be
horrified if I thought that the prospect was that we were going
to continue to grow Federal spending at 2 or 3 times the real
productivity increase in our society. It seems to me that the
way to kill our society is to have the rate of increase in the
public sector growing at 2 or 3 times what the private sector
is able to produce, because what the private sector is able to
produce as a residual fraction will go down and down and down.
If you think about an 8 percent rate of growth, which is what
we had last year in Federal spending, at that level, it takes 9
years for the Federal budget to double, which means we go from
$2 trillion to $4 trillion a year in 9 years is a frightening
prospect.
Mr. Davis. But Mr. Secretary, would you also agree that if
we are going to be responsible in our spending habits, we ought
to take into account population growth as relates to those
programs that are based on population?
Secretary O'Neill. Our population growth, believe me, is
not growing at anything like an 8 percent rate. The incremental
growth in our population for the last 25 years or so has been
between 3\1/2\ and 4 million people a year. So there is no way
too justify 8 percent growth rates on the back of a population
growth.
Mr. Davis. Can you give us any numbers that we can
associate with the various proposals, many of which are
supported by Democrats and Republicans that the President has
advocated, starting with defense?
Secretary O'Neill. Well, we don't have a proposal to
increase defense any more than the $14 billion, which is still
a staggering sum to me; $14 billion year-to-year increase for
defense. The President has asked the Secretary of Defense to do
a complete strategic review, and to come back with
recommendations as to how we can create the international
military force and capability that we need for the future,
without an assumption that we must maintain everything that we
have had in the past because it doesn't seem to wash very well
that, in fact, the way we are organized and the deployment of
weapons we have makes any sense when you look at the future
instead of at the past.
So I think it is very likely that the Secretary of Defense
will come back with a convincing case that we do need to spend
some more money, but I am also very optimistic he will come
back, because I know him well and I know his intellectual
capability and experience in being Secretary of Defense before,
he will not come back with an add-so program, he will come back
with a program that is a combination of new money and the
redirection of monies that are currently being spent.
So I think what you will see for defense will be
responsible, but it will not be adding on to what we have
already done.
Mr. Davis. Mr. Secretary, as we get closer to dealing
seriously with this tax cut, if it appears there is a risk that
defense spending will increase substantially, wouldn't it be
wise for us to determine what those figures are before we had a
full debate on the magnitude of the tax cut?
Secretary O'Neill. Well, you know, I can't imagine it
impinging on this issue. Right now, if I understood you, the
bill that is moving through the House process right now is $900
billion, still an amazing amount of money to me; $900 billion,
nevertheless is less than a fifth of what I think we have all
agreed is a likely surplus of $5.6 trillion. So if I were you,
I would not be too fearful of $900 billion being given back to
the American people in a way that creates a more progressive
tax system with emphasis on low- and moderate-income taxpayers
that leaves a higher portion of the population paying more.
Yes, you may want to do a whole lot more for subsequent tax
bills, but I would certainly not have any fear for doing the
right thing about the most important priority and doing it in a
timely way right now. I would have no fear at all.
Mr. Davis. Mr. Secretary, what should be our top priority,
tax cuts or paying down the debt, if you had to choose between
the two?
Secretary O'Neill. I don't think we have to make a choice
at all. I think we can do both, and I think we have
demonstrated how to do it and we are ready to do it.
Mr. Davis. But if the surplus projections should change; if
Congress should not do an appropriate job in its spending
habits which, by the way, it has failed to do in the last 3
years, even when the Republicans control the House and Senate,
and they generally tend to do a better job than Democrats, if
those do occur and we do have to choose, what should be our top
priority, paying down the debt or a large tax cut?
Secretary O'Neill. Well, again, let me say, if you take the
tax number that you have given me of $900 and you add to it the
amount of debt that we are rationally going to be able to defer
over the next 10 years, it is about 50 percent of what everyone
would stipulate is a likely flow of surpluses, I don't think
you have to make a choice when you have a 50 percent free ride
or free board to take care of contingencies and appetite for
spending and all the rest of that, so I don't think there is a
choice to make.
Mr. Davis. Thank you.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman, and members of the
committee.
Mr. Secretary, it is good to see you again.
Secretary O'Neill. Thank you.
Mr. Watkins. Mr. Secretary, I come to Congress from the
private sector, having met payrolls and trying to invest back
into the community and trying to create private sector jobs. So
I come to this Congress with a mission. I don't look at
politics as being the end of itself, I look at politics as
being the vehicle of trying to do some things, and my overall
purpose is to try to build private sector jobs in the economic
depressed rural areas of this Nation. I think our answer is the
private sector.
I was listening to some questions a while ago, and one of
the things we can be thankful for, I think in relationship to
the overall growth in our GDP, the growth of government, is a
little less, and I think that has put it in the perspective of
what we need to keep our eye on compared to what the overall
growth of our GDP may be.
Mr. Secretary, I think you are a policymaker, a problem-
solver in seeking as a policymaker to solve a lot of problems
we might have. And I agree we have some uncharted courses out
there and some of them I think are really great and others of
them I am kind of wondering where that uncharted direction may
be going.
First, uncharted surpluses, that is a wonderful problem to
have. That is a great one. We can buy down our debt all we can
without having to pay a penalty, and I understand that it is
just like trying to pay off a home. You don't want to pay off a
home if you have to pay too huge a debt or a penalty to pay the
last part of that mortgage off. So I think we can handle that
one. We should be able to not screw that one up, hopefully.
Then too I have a concern, and I noticed that Mr. Greenspan
didn't know exactly also the uncharted waters of the huge trade
deficits we have. I know when I became very interested in trade
20 years ago, we had about a 65- to $70 billion trade
imbalance, and today it is a $375 billion trade imbalance, and
the way that money is being utilized in those areas with the
trading balances can definitely affect the future of this area.
Another area, though, I think of great concern I have, is
we are in a recession in rural America, in the small town,
rural America, and it seems like we have no one who is willing
to champion the cause of saying that it would be best for
America for us to sustain and maintain a strong economic base
in that area. When I talk about rural America, rural America is
agriculture, but it is more than agriculture. I have two
degrees in agriculture. I have a love for agriculture. I am an
old former State president of the Future Farmers of America and
president in agriculture school, so I don't back up to anyone
about agriculture.
But we cannot save rural America with just agriculture
jobs. We have to have off-farm jobs because things have
changed, and we have not only a recession, but we have a
revolution that is taking place out there and the sustaining or
being able to have a strong common rural America is in
question, whether we can pull that together.
Now, where am I going with that? In my area, I had to leave
it as a youngster 3 times before I was 10 years of age with my
parents to go to large cities to find a job. It made a burning
imprint on my life. That is why I am devoted totally in my
public life to try to change those economic conditions.
In my district, most of my district is less than 40 percent
of the national average, per capita income; not from the top,
the national average, and when you get into the native
Americans and others, it is even worse. But it seems like
nowhere are we willing to address that. Nowhere. I keep
sounding, it seems like a lonely voice that doesn't ever get
heard, and I feel like it is totally ignored.
That is why I am kind of--I believe in you. I believe you
are a policymaker that can solve problems and we need too
concentrate on how we can let some of this great economic
growth over the years, the high-tech industry, be directed
toward the rural areas of this country. I have talked to a lot
of those companies. I don't have a fortune 500 headquarters in
my district. I have 22 counties throughout over one-third of
the State of Oklahoma, and I don't have a Fortune 500
headquartered there. I have some warehouses that have some
timber in my area, but it is way out in Oregon, as you know. I
don't have an Alcoa Aluminum, but I would love to have one in
my area.
I heard all of these companies that talk about layoffs. I
don't have any major companies that can lay off. Because our
out-migration over the last 20 to 40 years has been tremendous.
When I was State FFA President back a number of years ago,
about 35 years ago, 16 percent of us were in the production of
agriculture. Today there is only 1\1/2\ percent of us in the
production of agriculture, and that has not been addressed. In
fact, I want to ask you to look at that with me, because we
have to try to say, how do we resolve that problem in small
town rural America and also, how do we solve the trade problem,
which is a major problem also.
Farmers who 70 years of age, 65, 70 years, they find
themselves with their backs to the wall, they are locked in
because they have had to farm with the inflationary value of
their land they owe there. At the same time they cannot sell
because they have capital gains and they cannot pay off their
note, so they are locked, and many of them are having some real
stressful situations develop because of that, and many of the
situations are with native Americans.
I guess what I want to ask you is what are you willing to
do about trying to help us solve these and not leave that a
void in that overall budget for the economic growth of the
small towns and rural areas, and also the trade situation on
how we are going to be able to--I know those are two broad kind
of statements, but I think I might as well pitch it out to you
and let you worry about it with me. I need somebody to worry
about it with me.
Secretary O'Neill. I look forward to working with you on
this development problem. In the time I have spent wandering
around the world, including where my family came from and where
my wife's family came from, I know about rural America and
about what it is like to be a farmer. There is a saying that
you know well: farmers live poor and die rich, and it is not a
bad characterization of what it is really like out there.
It is amazing to me what is going on. I was out not too
long ago and spent a morning riding on the newest of modern
combines and watched the computer up in the corner of the cab
telling my relative, the owner, what the moisture content was
and making a computer map so that when the mapping happened in
the spring, the computer would know where to put down extra
fertilizer in order to get a higher yield. It is just
staggering on the one hand to see that, and then to see people
in the part of the rural world you are talking about and living
there who just are--just scratching out an existence in little
towns.
I would give you a piece of advice. You mentioned you don't
have any Fortune 500 headquarters. You don't really want one of
those. The troublemakers are all in headquarters and they get
fired all the time. What you really want is a plant that makes
things for people that other people want to buy.
Mr. Watkins. If you will just send me one of those, I will
gladly make sure that--let me share with you, and I think my
Chairman here agrees with this statement, 100 percent because
he has a rural background. You know, we know how to produce. I
spoke the other day and gave a talk, they wanted me to name a
topic and I called it American agriculture, changing from the
PTO to the WTO. PTO, being a pilot takeoff on a tractor, is
likely to get bigger and bigger and all the modern things. The
WTO--we have to be able to sell it.
Secretary O'Neill. I agree with you.
Mr. Watkins. That is what we have to talk about, because
our trade people have sold us down the drain. I talked to Bob
Zellick about this for an hour and a half. We locked in with a
peace clause in the Uruguay Rounds, $7 billion of export trade
assistance for the European Union. We have less than $200
million and what we don't use, they will. We sold our farmers
out. We did. You know? And we have to try to be stronger about
that along the way.
Secretary O'Neill. We are going to work with you on these
trade issues.
Chairman Nussle. The gentleman's time has expired. I
hesitate to interrupt you when you are making the kind of
passioned plea for farmers that you are making, but I need to
interrupt you because we need to move.
Mr. Watkins. I appreciate you letting me get it off my
chest. Thank you.
Chairman Nussle. Thank you. Mrs. McCarthy.
Mrs. McCarthy. Thank you, Mr. Chairman.
Now, Secretary O'Neill, you know why this will not be done
by the end of May.
Secretary O'Neill. I believe in working into the night. You
are very patient, by the way.
Mrs. McCarthy. But, I mean, here is where we all come
together on this. Number one, I think everybody should know,
there is going to be a tax cut and there will be a tax cut,
because I think both sides of the aisle agree there should be a
tax cut given back. The problem is as we go through all of our
appropriations, what Mr. Watkins was saying for his farmers is
absolutely true. We also know that we are going to have many
laborers laid off in the garment industry, that will even go
down more, so retraining has to come, and of course, money is
well spent when we can put people to work, even though it is
probably going to be in a different field, so we have to think
about that.
But I am going somewhere else. I have spent my life as a
nurse, so what I am concerned about, when you see all of this
surplus and paying down the debt, I am looking 10 years down
when my baby boomers are going to retire. I am looking at my
senior citizens that live in the New York area, it would look
like they have a good income. Unfortunately, because of State
taxes, local taxes and everything else, they are hurting a
little bit. They can't pay for their prescription drugs. And I
guess if we go into different parts of this country, we are
going to see that people would rather have those services given
to them than having their amount of taxes returned to them.
I have to think that here on the Federal level, especially
the last several years, they have done a good job on cutting
back waste and fraud. Can we do better? Absolutely, and we can.
But when we talk about saving, which I am saving rapidly now
for my retirement, because I always worked as a nurse part-
time, we never got a great salary, so now I am working like
crazy and trying to put away as much money as possible, so
whatever I have as a pension will also supplement my Social
Security, and I encourage my staff to do that.
Here we have, paying down the debt, where are we going to
go when our baby boomers retire? Our veterans are getting
older, and we know the last 3 months of their life is the most
expensive of their care, and we have promised to take care of
them, and that is why when we talk about encouraging our young
people to save, that is why I think here in the government, we
should be taking a pretty good part of that surplus and saving
it, because we are going to have a rainy day. Seven months ago
we would not have even been talking about a slowdown. We don't
know.
I would be more comfortable giving a heck of a lot of tax
cuts now and having them come out in the first 5 years and then
say hey, if we are doing a great job here, the next 5 years,
let us give another tax cut, but we have to prepare for the
future. We tell our kids, everyone here tells us, we have to
save, we have to save for that rainy day, and that is what we
are doing here. But really, Medicare is in trouble now, and it
is. Our hospitals are on bare bones, and when our hospitals on
our bare bones, are nurses are laid off. When our nurses are
laid off, everyone down the whole line is, and no one even
wants to go into the health care field any more.
So here we have our farmers that are hurting across this
country, and they are; here we have elderly people that can't
afford to take their drugs, and they can't; and we have to
prepare for the future, baby boomers, our veterans; we have a
lot to do here.
So the monies that we do spend here--and like I said, I am
all for cutting back as much as we can, but we as a Nation work
together. You know, I live on Long Island and people say to me,
what do I care about agriculture? Well, you know why? I got
some farmers out on the east end and I got farmers up in
upstate New York that are hurting really bad, and we have to
take care of our farmers.
Mr. Watkins. If the gentlewoman will yield, every one of us
eats about 3 meals a day, so we are involved in agriculture. We
are eating, you know?
Mrs. McCarthy. I know, but we have to prepare for the
future too. So this is where we are saying, we are going to
have a tax cut, and we will, before this Congress is over, we
are going to have a tax cut. Now, whether it is $1.6 billion,
or Democrats are saying what, $900 billion? I know if you had
asked me to say this 4\1/2\ years ago, I would go, we are not
talking a heck of a lot in-between here for the programs that
we want to help for the rest of the people. It is going to get
done. It will. This is the beginning. This is a blueprint. It
is a blueprint, and I am hoping that by the time we finish up,
we will all be on the same page. Thank you, Mr. Secretary.
If you have any comments on that, I would love to hear it.
Secretary O'Neill. I would just make one comment to you,
and I look forward to working with you on your specialty area
of health and medical care.
This is an area that I have spent 30 years working on, and
in the last 5 years of leading a group in Southwestern
Pennsylvania to demonstrate what I believe to be true, which is
this: that if we properly organize the way we deliver health
and medical care in our society, that we can reduce the cost by
50 percent, and I don't mean by cost-cutting, I don't mean by
cost-cutting, I mean by doing things correctly the first time,
which necessitates using some technology that is widely used in
other businesses.
I will give you an example. I don't want to take too much
time, but if I go to Rome and I get this card out of my wallet
and I stick it into the ATM machine, you know what? They know
who I am. They know how much money I have. They give me what I
want and they make a deduction in my U.S. bank account with
American dollars.
If you have a card like this and you go into a medical
provider, a card that is supposed to be your medical access,
almost inevitably, there may be some exceptions, but almost
inevitably, after you give them your card, they give you a
clipboard with 3 pages on it for you to fill out like they
never saw you before, even if your sister works there, all
right? I mean, at the very front end of medical care, we are
still working as though we were in the 17th century.
I think I can demonstrate to you that we can improve the
value equation for medical care 50 percent, and we need to get
on with it, because if we would only do that, we would stop
destroying the morale of the people in the medical sector who
believe, because of what goes on here in Washington, that they
are the targeted enemy of the people, because of what is going
on and the way that they are thought about here in Washington,
as a bunch of ne'er-do-wells. You don't think this about your
own doctor or nurse, but the general impression that comes from
Washington down to the provider community is, you think we are
all out to gouge you, that we don't like people, we don't like
patients, and we are going to do every trick we can to get more
money out of the Federal Government.
I am sure you know this. Go talk to your doctors and nurses
about what they feel about what the attitude is of the American
government toward them as a professional class. It is a
disaster. And it is part of the reason we are not getting the
productivity improvements that we should.
Mrs. McCarthy. Well, I mean everything is on a computer. I
mean any of us that have gone in for a checkup or an emergency
treatment, everything is by computer.
Secretary O'Neill. Do you own the records
Mrs. McCarthy. Do I own the records? I can get the records,
yes.
Secretary O'Neill. I know, but that is not the same as
ownership. In a system that is designed around human beings
with rights and responsibilities, you would own the record and
you would have on that little card I showed you information
that would hook you up to the Internet so that if you went to
London for a conference and you got sick, you could put it into
the machine and you could download for the provider in London
all of your medical history, including drug allergies and a
combination of things that you shouldn't have. You know, all of
this stuff is available out there in the technological world,
and none of it exists for the benefit of today of human beings
as we live our lives. It is just an illustration of how much we
can do.
I am sure you all must have seen the Institute of Medicine
report. Accidentally, we are killing 100,000 people a year
because of medication errors, and nosocomial infections, just
to name a couple of obvious ones. This is all about how we can
improve productivity in our society at a rate that we haven't
even dreamed about in this important area of our life.
Mrs. McCarthy. I am sure everybody here would agree then,
let us take the difference in our tax cut and just do it.
Secretary O'Neill. Listen to me. Today we are spending $1.3
trillion on this important subject in our society. If we
implemented what we know how to do, we could reduce the cost
$650 billion a year, and if you look at the 10-year run-out of
numbers for Medicare and Medicaid, a huge portion of the money
that is going to come into Washington, with the assumption that
we don't have any productivity improvements in health and
medical care, it is going to go right there. We should not let
that happen.
Mrs. McCarthy. Could we have a hearing on this in the
future?
Chairman Nussle. It sounds like a good suggestion.
Mrs. McCarthy. Thank you, Mr. Chairman.
Chairman Nussle. I appreciate your time too.
Mr. Putnam.
Mr. Putnam. Thank you, Mr. Chairman.
I appreciate my colleague from the Ways and Means
Committee's remarks about the FFA. I think I am still eligible
to be a member.
Mr. Secretary, I appreciate you being here and I appreciate
your endurance. I was fascinated by my colleague from Florida's
remarks about the contingency funds, and coming from a State
that does have rainy day funds that work very effectively, but
it is a State that allows some of those funds to be deposited
in private securities, and that is a different issue because it
is a State and it is a drop in the bucket.
What vehicle would you anticipate the Federal Government
using to hold the $1 trillion in rainy day reserve funds that
the budget blueprint anticipates?
Secretary O'Neill. Well, this is, in fact, an accumulation
of funds over this 10-year period and, you know, with the debt
buy-downs that we are doing, it really represents additional
debt capacity that we have rather than funds that are in a
mattress some place. So, you know, of the $5.6 trillion, when
you look at the breakdowns of the pieces, you need to
distinguish between debt capacity availability and money
available. It is a complicated intersection, because these
funds are going to flow in over the next 10-year period. But in
effect, it represents buying capacity for things that we decide
we want to do, including--you know, if we got to the other end
of this tunnel in 10 years and we haven't spent any of those
funds, it becomes the subject of another tax reduction, or more
program spending if that is what you want to do with it.
Mr. Putnam. So you are saying that at no point will the
revenues outpace our ability to buy back debt?
Secretary O'Neill. Absolutely.
Mr. Putnam. OK. That clears a lot of it up.
What percent of Americans pay no Federal income tax?
Secretary O'Neill. You mean legally or illegally?
Mr. Putnam. I just left the Marc Rich pardon hearing. Let
us stick with the legal ones.
Secretary O'Neill. Let me see. Do I have a number in my
head? I honestly don't have a number in my head, but I would
guess, let us see, 8 million to 10 million who are attached to
the work force.
Mr. Putnam. And then what would that be assuming that there
is this restructuring of the Tax Code?
Secretary O'Neill. It is going to go up another 3 million
or 4 million people with the restructuring that is proposed.
Mr. Putnam. What are the social implications of having a
population of Americans that large who do not have a direct
nexus to their civic responsibility as Americans? The
assumption being that roads, bridges, tanks, schools are free,
or that they come from something--some nebulous body called
government, from a social perspective.
Secretary O'Neill. You know, I am glad you followed this
line of questioning, because it lets me now be on the other
side and say, I think it is really imperative that people that
are attached to the work force pay something, and that is what
Social Security taxes are all about. It is an obligation as an
adult member of the community to provide something for your own
future, and I think it would be a disaster for us to turn
Social Security into a ``welfare program'' and, in effect,
relieve people of the responsibility as adults not to at least
in part provide for their own future well-being with retirement
funds.
Frankly, I would like to see us do it for medical insurance
as well and insist that, you know, if you are an adult, able-
bodied citizen of the United States, it seems to me if you have
a job, this is important, if you have a job, you have an
obligation not to become a ward of other people because you
have decided to consume monies that legitimately should be put
aside for your own future responsibility. It seems to me a
fundamental notion of a successful democracy that people have
responsibilities for themselves and to others.
So I think it makes perfectly good sense to expect people
to pay Social Security taxes. It is quite OK with me if, on the
other hand, we say, until you get to a certain level of income,
you shouldn't have to pay income tax. And, to the degree we
want to and can afford it to say to people, we are even going
to give you a negative--earned income tax credit in a way is a
negative income tax, and we are prepared to give you some
additional resources because it costs hard money to live in our
society.
That is all OK with me, but I don't think we should get
confused about what are the responsibilities of adult
citizenship in the United States. So I would maintain we must
keep Social Security as a requirement that all adults pay into
it, and to the degree that we want to counterbalance it with
other social policies, that is OK.
Mr. Putnam. Thank you. I would just follow that up by
saying that we all know that there is this perception out there
that everybody has their own Social Security account already,
that what they have paid in has their name on it, it is waiting
on them when they retire. So I think that, you know, just to
add to what you said, the impact of paying income taxes above
and beyond Social Security is that it imposes that civic
obligation that there is a greater need out there beyond
yourself for national defense, for the common good, for the
general welfare. And it is a little bit--I understand, of
course, we have a progressive tax, and those people who are
least able to afford it should pay the least, but I think that
there is a potential destabilizing effect on society to have a
burgeoning class of people who lose that nexus.
I see the yellow light and I will just stop right there.
But thank you, Mr. Secretary, for coming.
Secretary O'Neill. Thank you very much.
Chairman Nussle. Mr. Collins, you are going to get the last
word here today, I think, or at least the last session of
questioning.
Mr. Collins. Mr. Chairman, that is no different than it is
at home.
Chairman Nussle. I doubt that.
Mr. Collins. I have the last word at my house, too. It is
``yes, ma'am.''
Mr. Secretary, you don't know how refreshing it is as a
member who has been here 8 years, now into the 9th year, to
hear someone say very candidly, I don't have the answer to that
today, but I will get it. And also to say, you know, people
have responsibilities. Very straightforward. I like that, and
it is well needed.
It reminds me of what a friend of mine said to me about 3
weeks ago on one of my trips to Columbus, Georgia, and he is
kind of in the circle of some of the movers and shakers in
Columbus. He said, Mac, you know what people around here are
saying about President Bush and his appointments to the
cabinet? I said, well, I don't suppose I do. And he says, they
are telling me that it is good to see the adults back in
charge. I agree, it is, sir.
I like your answer on the trigger mechanism. I think it
would be great to have a mechanism that would automatically
give tax relief when you have a positive cash flow. I think our
constituents would do more of what I saw in 1993 and that is to
encourage the Congress not to spend. I know when I was speaking
to a Rotary Club in Columbus as we were debating the 1993 tax
bill, a gentleman walked up and he had a postcard, he walked up
to the podium and handed it to me and three simple words on it,
because I had been speaking about the tax bill. Those three
simple words were: cut spending first.
We haven't been able to do that. We have had some success
of slowing the growth down, but not much. We haven't had in the
last 8 years a President who says, this is the number, this is
the top number. Now, we can work the numbers below there, but
this is the top number. If we would pass a number here, it
would always come back and they would say, you are going to
raise your number, that is not enough. So it is good to hear
that the adults are back in charge.
But one of the reasons that you hear so much talk about a
trigger, a trigger that would cease the tax relief some time in
the future, depending on the cash flow, is that they are
concerned about the cash flow of the government, the Treasury.
Today it is positive. Even taking the entitlement, the trust
funds and setting them aside, we have a positive cash flow.
Sir, I don't like to use the word ``surplus.'' It is a positive
cash flow.
Secretary O'Neill. Right.
Mr. Collins. Mr. Secretary, I am worried about the cash
flow of the individual.
A report we were looking at earlier this morning in Ways
and Means, for the month of January, we saw a 300,000 increase
in the unemployed. What happened to their cash flow when they
became unemployed? I would think it was probably disrupted
considerably. They still have their obligations out there. I
wonder what they are thinking? I would imagine that many of
them are hoping that even though this first year, it will be
minute tax relief, but it is that much. Someone broke it down
today that for a single it would be a dollar a day. Well, in
the economy, a dollar a day times 100 million is $100 million,
and if you carry that out for 365 days, better than $30 some
billion. That will be a stimulant to this economy.
When it comes to Social Security and Medicare, when I talk
to the seniors in my district, and I tell them that--you know,
Mr. Greenspan says the arithmetic won't work for these
programs, and he is right, because when they were established,
there were a number of workers for every beneficiary, and today
it is 3.3 to every beneficiary. In thirty years it will be 2 to
1. Those numbers won't work.
We need to be very cognizant of the economy and the cash
flow of people, particularly those people that say that we need
a fair tax relief bill. You know, it is only fair if it helps
those on the bottom end of the ladder. But those who are in the
middle to upper middle and higher incomes, they are the ones
that create the jobs that provide the cash flow of the economy.
So it is fair to make sure that we treat all our taxpayers with
fairness and with tax relief.
Sir, it is good to have you. It is refreshing to hear you
answer questions and make comments and go beyond even the
question with some of your own ideas. Keep it up, sir. It is
welcomed.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Spratt.
Mr. Spratt. Mr. Secretary, I am not going to try your
patience, but I just need to get a few things clear for the
Record.
Secretary O'Neill. All right.
Mr. Spratt. First there is an item in the budget blueprint,
additional tax incentives, $123,000, and there is no
description--$123 billion, but there is no description of what
that is for. Could you identify that line?
Secretary O'Neill. It is a long list of things which I
would be happy to submit for the record.
Mr. Spratt. I would appreciate that, sir.
Secretary O'Neill. I am sorry, I am getting a little foggy.
Mr. Spratt. I don't doubt it. I looked in the book and I
don't find it.
Secretary O'Neill. I will give you a list. It is a
specific, discrete list of things.
Mr. Spratt. Secondly, if you could get us the differences
in the estimates between Treasury and Joint Tax Commission,
that would be appreciated. And thirdly, it is my understanding
that the revenue losses assigned to what the Ways and Means
Committee passed today was $958 billion, and your estimate, or
at least your revenue cost for that same--those same tax
reductions was about $115 billion less than that, I am told.
Secretary O'Neill. My--you know, I was in the Senate all
morning and I have spent all afternoon here, as you know. My
sense is what they have done in Ways and Means is that they
provided for retroactivity and some acceleration, and I will
get those numbers reconciled for you.
Mr. Spratt. All right, thank you, for the record, if you
would. Thank you very much.
Chairman Nussle. Mr. Secretary, thank you so much for being
here today. We appreciate your answers, your candor, and we
would love to have you back some time possibly to talk about
health care or other subjects in the future.
One other thing. I would ask unanimous consent that all
members have the opportunity to submit statements for the
record for both of the hearings today and, without objection,
so ordered.
With that, we are adjourned.
Secretary O'Neill. Thank you all very much.
[Whereupon, at 5:45 p.m., the committee was adjourned.]