[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION




                            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/


70-618                     WASHINGTON : 2001

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                        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
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

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



                        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.


    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:]

                            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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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:]


    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:]


    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 

    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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:]


    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.

                                              [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:]


    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 
    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 
    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:]

                          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 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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.]