[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
PRESIDENT'S FISCAL YEAR 2003 BUDGET WITH TREASURY SECRETARY O'NEILL
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2002
__________
Serial No. 107-54
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
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C O N T E N T S
Page______
Advisory of January 29, 2002, announcing the hearing............. 2
WITNESS
U.S. Department of the Treasury, Hon. Paul O'Neill, Secretary.... 11
SUBMISSION FOR THE RECORD
National Society of Accountants, Alexandria, VA, statement....... 76
PRESIDENT'S FISCAL YEAR 2003 BUDGET WITH TREASURY SECRETARY O'NEILL
----------
TUESDAY, FEBRUARY 5, 2002
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:08 a.m., in
room 1100 Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 29, 2002
No. FC-10
Thomas Announces a Hearing on the President's
Fiscal Year 2003 Budget with
Treasury Secretary O'Neill
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
President Bush's fiscal year 2003 budget proposals within the
jurisdiction of the Committee. The hearing will take place on Tuesday,
February 5, 2002, in the main Committee hearing room, 1100 Longworth
House Office Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from the Honorable Paul O'Neill,
Secretary, U.S. Department of the Treasury. However, any individual or
organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the
printed record of the hearing.
BACKGROUND:
On January 29, 2002, President George W. Bush will deliver his
State of the Union address, in which he is expected to outline numerous
budget and tax proposals. The details of these proposals are expected
to be released on February 4, 2002, when the President is scheduled to
submit his fiscal year 2003 budget to the Congress. In recent weeks,
the President has reaffirmed his commitment to returning our economy to
prosperity as soon as possible by offering tax relief that will promote
economic growth. The President's proposals include accelerated
depreciation of investment, reduction of marginal tax rates, reform of
the corporate alternative minimum tax, and tax credits for individual
health insurance.
In announcing the hearing, Chairman Thomas stated, ``The President
has advanced several important proposals within the jurisdiction of the
Committee on Ways and Means such as on economic stimulus and tax
credits that expand health insurance coverage. I look forward to
receiving the President's budget and discussing his proposals with
Secretary O'Neill.''
FOCUS OF THE HEARING:
The Committee will receive testimony on the President's fiscal year
2003 budget proposals from Secretary O'Neill. The Secretary is expected
to discuss the details of the President's proposals that are within the
Committee's jurisdiction.
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noted above.
Chairman Thomas. Good morning. And welcome back, everyone.
I do want to indicate that, not with us, Clay Shaw, who is not
going to be with us for a portion of time because of a medical
reasons in the family. Paul Ryan is not with us because he and
his wife Janna had a baby girl, Elizabeth Ann, born on 02/02/
02, which that he quite properly is there instead of here. So
if any of you were concerned about Paul Ryan's priorities, I
believe he is a dedicated Member, but he is a dedicated father
more.
The President's fiscal year 2003 budget plan is, above all
else, I think on target for the times we are living in. And
because of the considerable foreign and domestic challenges
that our Nation now faces, a wealth of unanticipated
circumstances and fiscal demands has forced us to change our
thinking just since September 11th. We have been attacked as a
Nation, and I believe we must respond as a Nation. And that has
fundamentally altered the physical landscape.
The President's proposal is part of a strategy to protect
our country and citizens. I think it is quite right that for
now, it cannot be business as usual. President Bush has
presented us with a sound fiscal blueprint, its underlying
growth assumptions are measured and reasonable. Its fundamental
and concise goals, win the war, protect the homeland and revive
the economy, make sense in our current extraordinary
circumstances. Those three factors, win the war, protect the
homeland, revive the economy, I believe fundamentally define
the President's 2003 budget.
Maintaining the viability of our domestic economic life
demands action. The President's agenda, as he said in the State
of the Union, can be summed up with one word: jobs. The war
against terrorism must and will shape the fiscal agenda for the
next at least several years. Yet ensuring economic security and
job creation matter enormously to people across this country.
People need to know that they will have a paycheck if not now,
soon. The President's proposals constitute a sensible fiscal
strategy that will serve as a platform for strong and sustained
economic growth.
As we know, the economy has been in recession since March
of last year. We believe now there is more good news than bad.
Unemployment hasn't risen as much as had been feared.
Production of durable goods, at least on the short-term
measurables, is on the rise. Fourth quarter GDP or gross
domestic product came in a bit stronger than expected.
Indeed the Chairman of the Federal Reserve signaled his
growing confidence that recovery is underway based upon
statements that were made in front of Senate Committees last
week.
Those who argue that last spring's tax bill has contributed
to the recession, in my opinion, are frankly out of touch with
the facts. Most of that law hasn't yet kicked in. The laws of
economics don't get repealed when disaster strikes. Cutting
taxes still generates economic growth and raising them in a
recession still spells trouble.
Lower taxes don't just put money in people's pockets. They
help fund the business investment, innovation and expansion
that must form the backbone of a long-term economic
revitalization. They encourage further competition and the
return of venture capital to the marketplace.
Against the backdrop of a recovering economy, the need for
economic stimulus is perhaps less obvious than in the first
months after September 11th. The House acted in October to pass
a stimulus package, again in December in a slightly modified
form. The Senate has yet to act. And based upon the latest
headlines, it seems as though there may be an attempt to make
sure that the Senate cannot complete a package which reflects
the will of the Senate.
It also, I don't believe, means that a stimulus package is
no longer necessary. Part of the comments that I will direct
toward the Secretary would be his feeling about the need for a
stimulus package. Perhaps in October, we would have been a bit
bolder and stronger, but even today, perhaps there may need to
be a package.
The aftermath of September 11th has, to a degree, shaken
the people's confidence in their economic future. Markets are
not yet convinced that we have the right plan. We should not be
shy in insisting on action to ensure the durability of economic
recovery. In the face of current danger, waiting to see what
happens is rarely the right strategy.
Since we were last in session, a number of events have
occurred that I believe forces us to shape the Committee's
hearing agenda as well as it required a reshaping of the
President's budget. On February 13th I want to announce that we
will be holding a hearing focusing on health insurance tax
credits for the uninsured. And beginning on February 26th, in
consultation with the Ranking Member, I want to schedule a
series of hearings. This Committee, as well as other
committees, will have responsibilities focused on the question
of retirement security. And this Committee, as it almost always
does, should not react to a single specific circumstance but
rather look at the broad underlying fundamentals as to whether
or not they need correction.
So perhaps we could start on February 26th looking at
defined contribution pensions, the question of individual
retirement savings, 401(k)s and that sort. We would then move
to a defined benefit plan hearing focusing on what are called
in the steel industry ``legacy costs,'' as well as other
defined benefit plans and the veracity of the system that we
have constructed in the past to sustain those programs
notwithstanding the failure of companies, leading to a series
of hearings on Social Security solvency and reform for the 21st
century.
So we will have an aggressive agenda out in front of us
addressing somewhat immediate concerns, but hopefully placing
them in the context of long-term fundamental adjustments to the
system.
Mr. Secretary, it is a pleasure to have you with us. And
prior to asking you to speak to us for your assigned period of
time, the Chair would now recognize the Ranking Member, the
gentleman from New York.
[The opening statement of Chairman Thomas follows:]
Opening Statement of the Hon. Bill Thomas, Chairman, Committee on Ways
and Means, and a Representative in Congress from the State of
California
Good morning. And welcome back, everyone. The President's fiscal
year 2003 budget plan is, above all else, on target for the times we
are living in. And because of the considerable foreign and domestic
challenges that our nation now faces, a wealth of unanticipated
circumstances and fiscal demands has forced us to change our thinking
just since September 11th. We have been attacked as a nation, and I
believe we must respond as a nation. And that has fundamentally altered
the fiscal landscape.
The President's proposal is part of a strategy to protect our
country and citizens. I think it is quite right that for now, it cannot
be business as usual. President Bush has presented us with a sound
fiscal blueprint. Its underlying growth assumptions are measured and
reasonable. Its fundamental and concise goals--win the war, protect the
homeland and revive the economy--make sense in our current
extraordinary circumstances. Those three factors--win the war, protect
the homeland, revive the economy--I believe fundamentally define the
President's 2003 budget.
Maintaining the viability of our domestic economic life demands
action. The President's agenda, as he said in his State of the Union
address, can be summed up with one word: jobs. The war against
terrorism must and will shape the fiscal agenda for the next at least
several years. Yet ensuring economic security and job creation matter
enormously to people across this country. People need to know that they
will have a paycheck--if not now, soon.
The President's proposals constitute a sensible fiscal strategy
that will serve as a platform for strong and sustained economic growth.
As we know, the economy has been in recession since March of last year.
We believe now there is more good news than bad. Unemployment hasn't
risen as much as had been feared. Production of durable goods, at least
on the short-term measurables, is on the rise. Fourth quarter GDP came
in a bit stronger than expected. Indeed, the chairman of the Federal
Reserve signaled his growing confidence that recovery is underway in
his statement before a Senate committee last week.
Those who argue that last spring's tax bill has contributed to the
recession, in my opinion, are frankly out of touch with the facts. Most
of that law hasn't yet kicked in. The laws of economics don't get
repealed when disaster strikes. Cutting taxes still generates economic
growth and raising them in a recession still spells trouble.
Lower taxes don't just put money in people's pockets. They help
fund the business investment, innovation and expansion that must form
the backbone of a long-term economic revitalization. They encourage
further competition and the return of venture capital to the
marketplace.
Against the backdrop of a recovering economy, the need for economic
stimulus is perhaps less obvious than in the first months after
September 11th. This House acted in October to pass a stimulus package,
and again in December in a slightly modified form. The Senate has yet
to act. And based upon the latest headlines, it seems as though there
may be an attempt to make sure that the Senate cannot complete a
package that reflects the will of the Senate.
I don't believe that a stimulus package is no longer necessary.
Part of the comments that I will direct towards the Secretary would be
his feeling about the need for a stimulus package. Perhaps in October,
we would have been a bit bolder and stronger, but even today, perhaps
there may need to be a package.
The aftermath of September 11th has, to a degree, shaken the
people's confidence in their economic future. Markets are not yet
convinced that we have the right plan. We should not be shy in
insisting on action to ensure the durability of economic recovery. In
the face of current danger, waiting to see what happens is rarely the
right strategy.
Since we were last in session, a number of events have occurred
that I believe force us to shape the committee's hearing agenda, as
well as it required a reshaping of the President's budget. I want to
announce that on February 13th we will be holding a hearing focusing on
health insurance tax credits for the uninsured. And beginning on
February 26th, in consultation with the ranking member, I want to
schedule a series of hearings. This committee, as well as other
committees, will have responsibilities focused on the question of
retirement security. And this committee, as it almost always does,
should not react to a single specific circumstance but rather look at
the broad underlying fundamentals as to whether or not they need
correction.
So perhaps we could start on February 26th by looking at defined
contribution pensions, the question of individual retirement savings,
401(k)s. We would then move to a defined benefit plan hearing, focusing
on what are called in the steel industry ``legacy costs.'' We would
also look at other defined benefit plans and the veracity of the system
that we have constructed in the past to sustain those programs,
notwithstanding the failure of companies. This would lead to a series
of hearings on Social Security solvency and reform for the 21st
century.
So we will have an aggressive agenda out in front of us, addressing
somewhat immediate concerns but hopefully placing them in the context
of long-term fundamental adjustments to the system.
Mr. Secretary, it is a pleasure to have you with us. And prior to
asking you to speak to us for your assigned period of time, the Chair
would now recognize the ranking member, the gentleman from New York.
Mr. McDermott. Mr. Chairman, may I ask just a question. Are
your remarks written so we could all have a copy?
Chairman Thomas. Some of them are, some of them are not.
But I will get them to you since they are now done.
Mr. McDermott. I think they are very important remarks for
us to sort of hold. I would like to have a copy, if I may.
Thank you.
Mr. Rangel. Mr. Chairman, I cannot tell you how excited I
am about the consultations that we will have as relates to
anything but, more specifically, the retirement security. Am I
to read into that that Enron will also be a part of our
discussions at these hearings as relates to 401(k)?
Chairman Thomas. I tell the gentleman, obviously, that is
the specific example, but I think we need to look at the
broader consequences and, in fact, the market reflecting the
question of debt versus equity and instruments utilized in that
underlying some of the concerns about the retirement package.
Mr. Rangel. Well, we look forward to working with you on
this and other subjects.
Mr. Secretary, again, welcome to our Committee, and thank
you so much for your courteous call to me yesterday.
This Committee has the responsibility of maintaining a
sound tax policy for our Nation during times of peace and war,
and we will be very carefully following where we go in the
budget situation because the war and the popularity of the
President has dramatically changed the political tone of the
Members on both sides of the aisle.
There is no question in my mind that all Americans would
want the President and this Congress to spend whatever is
necessary in order to protect our national security. In the
President's State of the Union message, however, the question
as to the extent we are being threatened was not as clear as
the attack on the World Trade Center. That is to say, that
America recognizes when it is being attacked. America
recognized our search for Usama bin Laden, and America stands
ready to support our men and women to do what has to be done.
The President seems to have expanded the threat to the
United States by the evil axis. Most of us haven't the
slightest clue of what that means or the extent that we have to
be prepared or the extent that this will be included in our
defense budget, and we don't know whether the list will
ultimately include Somalia or Libya. But we do know one thing,
that we have to take this one step at a time when we are
talking about the budget.
Because there are some ongoing things that are going to
happen, regardless of how the threats to our national security
appear to be in the President's eye and as explained to us, I
assume, at some later date. I am talking specifically about our
Social Security system.
Some of us believe that, with the majority party, the
system is not a very popular system, nor is Medicare a popular
system. It bothers us to see that the money that we are
spending now for defense is coming out of the funds that people
are paying in order to put into the Social Security system. The
rhetoric that we have had, lockboxes and strongboxes and budget
restrictions, has now been thrown to the wind because it is
wartime.
But as we look at the numbers that are given to us by the
Congressional Budget Office (CBO), we see a large amount of the
surplus being wiped away now and in the immediate future, and
not so much because of our war expenses but a large part
because of our tax cuts.
I think that all of us share the direction that the
President is taking in terms of wanting to reduce the tax
liability on all of our citizens. We may differ as to the
income tax groups that receive the benefits at the expense of
lower income workers, but that is a political question that can
be debated. The real question, however, is that if we project
tax cuts, you know, even past 2011, and we have to rely on the
rosy scenarios that are given to us by economists with two
hands, it just seems to us that we cannot feel that secure
about getting back to the surpluses that we have recently
enjoyed and the security that we had in knowing that people
would retire and have the funds there.
Can you hear me? Anyway, I will just conclude by saying
that it looks as though--and I hope that people in the
Administration would put Social Security back on the priority
list.
The last we heard, the President appointed a bipartisan
commission that agreed with him in terms of where he would like
to see the Social Security go. But the commission reported,
don't do anything. They didn't say, don't do it because it is
an election year, but that is the way we think. 2002, don't do
anything there.
Then I think it said it would take something like a
trillion dollars to make the transition, which Mr. Clay and Mr.
Matsui agree that it would take that.
I do hope that as we talk about the war effort that we also
talk about the security of our older folks and health care and
give us some assurances that we are not just dealing with
speculations but we are dealing with taxpayers' money. No one
is more patriotic than me, but I don't know how far this thing
is going.
I listen to Ms. Condoleezza Rice and she said, listen
closely, because the President will be sharing with us what he
meant by the evil axis. Well, I got my own evil axis I would
like to slip in there, too, if the President has got a list.
But we will see where it goes. But, right now, we support the
President. We support the war effort.
We thank you so much for coming to share your views with
us.
[The opening statements of Mr. Rangel and Mr. Crane
follow:]
Opening Statement of the Hon. Charles B. Rangel a Representative in
Congress from the State of New York
This committee has the responsibility of maintaining a sound tax
policy for our nation in peace and war. And we will be very carefully
following where we go in the budget situation because the war and the
popularity of the President has dramatically changed the political tone
of members on both side of the aisle.
There is no question in my mind that all Americans would want the
President and this Congress to spend whatever is necessary to protect
our national security. Since the President's State of the Union
address, however, there is a question as to extent that we are being
threatened. It is not as clear as the attack on the World Trade Center.
That is to say that America recognizes when it is being attacked and
recognizes that Osama Bin Laden was involved and America stands ready
to support our men and women to do what has to be done.
Our President seems to have extended the threat to the United
States to the ``evil axis.'' Most of us do not have a clue as to what
that means or the extent to which we have to be prepared, or the extent
to which it would be included in the defense budget. And we do not know
if ultimately the list will include Somalia or Libya, but we do know
one thing. We have to take this one step at a time when talking about
the budget because there are some ongoing things that are going to
happen and, regardless of the threats to our national security, appear
to be in the President eye and explained to us I assume at some later
date.
I am talking specifically about our Social Security system. Some of
us believe that, with the majority party, the system is not a popular
system. Nor is the Medicare system popular. It bothers us to see that
the money that we are now spending for defense is coming out of the
funds that people are paying into the Social Security system.
The rhetoric that we have had with lockboxes and strong boxes and
budget restrictions now have been thrown to the wind because it is
wartime. But, as we look at the numbers that have been given to us by
the Congressional Budget Office, we see a large amount of the surplus
being wiped away now and in the immediate future and not so much
because of our war expenses, but in large part because of our tax cuts.
I think that all of us hear the direction that the President is taking
in terms of wanting to reduce the tax liability on all of our citizens.
We may differ on the income tax group that receives the benefits at the
expense of lower income workers, but that is a political question that
has to be debated.
The real question, however, is: if we are projecting tax cuts even
past 2011 and we have to rely on the scenario given to us by
economists, it just seems to us that we can not feel that secure about
taxes and surpluses that we have enjoyed and the security that we had
knowing that people would retire and have the funds there.
I conclude by saying that I hope that those in the administration
would put Social Security back on the priority list. The last we heard
the President appointed a bipartisan commission that concurred with him
on where he would like the Social Security to go. But the commission
reported, do not do anything. They did not say do not do it because it
is an election year, but that is the way we think: 2002, do not want to
do anything there. Then, I think it said something like it would take a
trillion dollars to make the transition, which Mr. Shaw and Mr. Matsui
agree that it would take that. And I do hope that, as we talk about the
war effort, that we talk about the security of our own approach to
health care and give us some assurances that we are not just dealing
with speculation but we are dealing with taxpayers money.
No one is more patriotic than me, but I do not know how far this
thing is going? I listened to Ms. Condoleezza Rice and she said that,
listen closely because the President will be explaining what he means
by the ``evil axis.'' Well, I have got my own evil axis and I can add
to it if the President has a list. But we will see where it goes. For
now, we support the President, we support the war effort, and we thank
you so much for coming to share your views with us.
Opening Statement of the Hon. Philip M. Crane a Representative in
Congress from the State of Illinois
Mr. Chairman, I want to thank you for holding this very important
hearing on the President's budget proposal. I also want to thank
Secretary O'Neill for appearing on behalf of the Bush Administration
today.
Today we stand at a historic intersection in the future of our
great nation. The events of September 11th have reshaped our
priorities. Our Nation is at war. We must focus on winning the war on
terrorism abroad and protecting our citizens at home. At the same time
we must continue the policies begun by the Bush Administration to make
sure our economy is on sound footing and to create jobs. I am pleased
that President Bush's budget strikes a balance in achieving both of
these goals. And while I would like to see more in the way of tax
relief for hard-working Americans, the tax relief provided in this
budget is a great start.
The President has put forward a budget that includes several items
I have championed for nearly a decade. In particular, I have championed
legislation to allow nonitemizers to deduct their charitable
contributions and to permit tax-free withdrawals from IRAs for
charitable contributions and I am glad to see President Bush included
similar provisions in his budget. The President has called for greater
involvement by citizens in charitable endeavors. While we should all
strive to give time and money to such efforts, anything we can do
through tax relief to help Americans move money to charitable
organizations is a step in the right direction.
Likewise, I have long supported the idea that Americans, who are
beneficiaries of an employer-sponsored flexible spending arrangement,
be able to rollover their unused funds for future health care needs.
Over time, this will reduce the pressures on employers by allowing
individuals to accumulate funds for future health care needs. I've also
noted that the President has proposed permanently extending Archer
Medical Savings Accounts. While other reforms are needed in the program
to encourage all insurers to offer the product, removing the time
limitation on Archer MSAs is a positive step. I am hopeful that
removing the uncertainty of the previous law, that limited Archer MSAs
to five years and thus, discouraged insurers from getting into the
market, will now pass and millions of Americans will look at this as a
viable option for obtaining health insurance.
In that vein, I believe that we must also allow individuals to
deduct all of their medical expenses not covered by private insurance
or a government program. Prior to 1986, there was no limitation on such
deductions. However, the '86 tax bill created a scheme whereby only
expenses that exceed 7.5% of adjusted gross income are deductible. I
plan to introduce legislation that will zero out the AGI limitation,
and help millions of Americans who get no tax benefit for their out-of-
pocket health care costs.
I was also happy to see that the President's budget will help more
children get a quality education by improving on the No Child Left
Behind Act. It does so by providing for a refundable credit of 50
percent of the first $5,000 of qualifying education expenses for
parents who move their kids to schools where they can get a better
education. While my enthusiasm is tempered slightly by the fact that
the definition of ``qualifying student'' is restricted to one who is
enrolled in a failing school, this provision takes a substantial step
towards giving parents the ability to decide where their children will
be best educated, a goal which I wholeheartedly support.
In short, this is a good, sound budget. It provides for our
priorities of winning the war on terrorism, Homeland defense and
stimulating the economy and creating jobs. I commend President Bush,
Secretary O'Neill and the entire Administration for their efforts and
look forward to working with them in the coming months to get this
budget signed into law.
Chairman Thomas. Thank you.
Mr. Secretary, you are the Secretary of the Treasury. We
are going to have the Secretary of Health and Human Services
and the Director of the Office of Management and the Budget. I
would simply request, perhaps in vain, that Members attempt to
focus on the issues that are predominantly under the
jurisdiction of the Department of the Treasury. We will have
ample opportunity to direct other questions to the appropriate
departments or agencies. With that, Mr.----
Mr. Kleczka. Will the Chairman yield for a question on
that?
Mr. Chairman, is not the Secretary of the Treasury a
trustee on either Social Security or Medicare?
Chairman Thomas. Yes. I will tell the gentleman that, as I
indicated, it was a request by the Chair. And, clearly, being a
trustee of those funds opens him up to a number of questions.
Mr. Kleczka. I just wanted to clarify that. I know it is
germane to his position in this government.
Chairman Thomas. I would tell the gentleman if we were to
examine Medicare, as we probably are going to in great detail
tomorrow morning, and we would venture into questions
suggesting that the President's 6.5 interest in
Medicare+Choice, while not directed toward metropolitan
statistical areas the way we would like, isn't a good policy,
that kind of a question probably is not most appropriately
directed to a trustee of the fund but to the principal
administrator of the program itself. That was the thrust of the
Chair's request.
Mr. Kleczka. But the general health of the various trust
funds would be somewhat germane.
Chairman Thomas. Absolutely.
Mr. Kleczka. Thank you very much.
Chairman Thomas. With that, Mr. Secretary.
STATEMENT OF THE HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Mr. O'Neill. Thank you, Chairman Thomas.
Chairman Thomas. You might want to check your mike. They
are very unidirectional.
Mr. O'Neill. Do we have sound now?
Chairman Thomas. There we go.
Mr. O'Neill. We have sound.
Thank you Chairman Thomas, Congressman Rangel, Members of
the Committee. Mr. Chairman, with your permission I have a
short statement I would like to read, if it is OK with you.
Chairman Thomas. Without objection.
Mr. O'Neill. I can do it quickly.
Thank you for inviting me to testify today. We have had a
year to work together, and you know I am an optimist about the
future of the U.S. economy. I believe our economy has potential
to grow substantially; in fact, to lead the world in the rate
of productivity improvement as we have been for a very long
time.
Even after a difficult year, my optimism about the
fundamentals of the U.S. economy has not changed. I believe the
data show we were on the verge of recovery before the September
11th terrorist attacks and that our resilience and
determination have brought us back to the early stages of
recovery today. We see more and more signs every day indicating
that the seeds for recovery are there and only need nourishing
to speed the process of putting Americans back to work. I
believe we will return to prosperous economic growth rates of 3
to 3.5 percent as soon as the fourth quarter of this year,
especially if we are able to pass still-needed economic
security legislation to hasten and strengthen our recovery.
Strengthening our economy is a key goal of the President's
budget. A return to our normal growth rates means jobs for the
1.4 million persons who have lost jobs during this slowdown.
Just as the strengthening economy means greater prosperity
for our Nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury,
without raising taxes, giving us resources to address the
Nation's needs and the retirement of even more Federal debt--
leading to long-term economic security for our children. Even
with all that must be done to enhance our security, we expect
that a return to economic growth will bring us back to
government surplus in 2005.
The economy's slowdown began in mid-2000, when GDP and job
growth slowed sharply. Business capital spending began to
plummet in late 2000 and accelerated its decline in 2001,
dragging down the economy. In August we were beginning to see
the evidence of an economic rebound. I firmly believe that, had
it not been for the terrorist attacks of September 11th, that
we would have seen an end to the economic downturn and would
have avoided a recession.
The September 11th attack created shock waves that rippled
throughout all sectors of the economy. Financial markets were
shut down for almost a week, air transportation came to a
standstill, and, as a result, GDP fell 1.3 percent at an annual
rate in the third quarter.
By late November, the National Bureau of Economic Research
declared the United States was in a recession. They designated
the end of the previous expansion for March, 2001, but they
observed, as I have said, that the slowdown might not have met
their qualitative standard for recession without the sharp
declines in activity that followed the terrorist attacks.
In sum, the scorecard for the economy in 2001 reflected a
combination of adverse events: The private sector lost more
than 1.5 million jobs, the unemployment rate rose 1.8
percentage points, industrial production was off nearly 6
percent during the year, and industry was using less than 75
percent of its capacity at the end of the year.
As bad as these numbers are, they could have been worse.
The well-timed bipartisan tax relief package put $36 billion
directly into consumers' hands in the late summer and early
fall, providing much-needed support as the economy sagged. It
was the right thing to do, at just the right time.
It is not surprising, then, that both the Congressional
Budget Office and the Office of Management and Budget project
deficits for this year and next as a result of the economic
slowdown and the response to the September 11th attacks.
The President has presented a budget to speed our recovery.
First, the budget includes tax relief to stimulate job
creation. The President's proposals--accelerated depreciation,
speeding up the reduction in the 27 percent income tax rate,
addressing the corporate AMT or alternative minimum tax, and
checks to those who didn't benefit from last summer's tax
rebates--enjoy bipartisan support in both Houses of Congress. I
am eager to work with all of you to complete work on a package
to create jobs and assist dislocated workers with extended
unemployment insurance (UI) benefits and temporary assistance
for health care.
Second, the President's budget proposes strict fiscal
discipline, increasing spending for national security and
homeland defense and holding the line on other spending. His
management agenda calls for performance measures to be used to
determine where budget increases are allocated so that our
resources go into the projects and programs that make the
biggest difference in people's lives. As the experience of the
1990s shows, this discipline is crucial to ensuring that we do
not return to systemic deficits of the past. But fiscal
discipline alone will not guarantee budget surpluses. We must
return 3 to 3.5 percent annual growth to ensure surpluses for
years to come.
The focus must be on restoring growth. Surpluses will then
follow naturally. Raising taxes would stifle the process of
getting Americans back to work. Raising taxes is a bad idea as
our recovery is struggling to take hold. According to 1999
data, the most recent available, 33 million small business
owners and entrepreneurs pay taxes under the individual income
tax rates. They have made business plans that assume that the
tax relief enacted last summer will take place as scheduled.
Eighty percent of the benefit of cutting the top two rates goes
to small business owners and entrepreneurs. These are the
engines of job creation in our economy.
We believe tax relief should be accelerated as the
President has proposed to boost job creation. Such relief will
have minimal or no effect on long-term interest rates.
According to a recent analysis by the Council of Economic
Advisors, an expected $1 trillion change in the public debt
over 10 years would tend to raise the long-term interest rates
by 14 basis points. Since the tax cut last year, the 10 year
nominal rate has averaged 4.93 percent, which is substantially
below the 6.16 percent averaged from 1993 to the year 2000.
Restoring growth is the key to America's future. Restoring
growth will ensure we have the resources in Washington to fight
the war on terrorism, to provide for homeland defense and
provide the services the American people expect and demand. The
President's budget will help to ensure that both peace and
prosperity are restored to the American people as soon as
possible.
That is my statement, Mr. Chairman.
[The prepared statement of Secretary O'Neill follows:]
Statement of the Hon. Paul O'Neill, Secretary, U.S. Department of the
Treasury
Good morning Chairman Thomas, Congressman Rangel and members of the
committee. Thank you for inviting me to testify today. Now that we've
had a year to work together, you should know that I am an optimist
about the US economy. I believe we always have untapped potential that
can be unleashed to spread prosperity throughout the nation. Never has
that been more true than right now. Even after a difficult year, my
optimism about the fundamentals of the US economy has not changed. I
believe we were on the verge of recovery before the September 11
terrorist attacks, and that our resilience and determination have
brought us back to the early stages of recovery today. We see more and
more signs every day indicating that the seeds for a recovery are
there, and only need nourishing to speed the process of putting
Americans back to work. I believe we will return to prosperous economic
growth rates of 3 to 3.5 percent, as soon as the fourth quarter of this
year, especially if we are able to pass still-needed economic security
legislation to hasten and strengthen our recovery.
Strengthening our economy must be our primary goal. It is the focus
of the President's budget. That must be our goal, because a return to
our normal growth rates means jobs for the 1.4 million Americans who
have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our nation's people, it also means greater
strength for our government. It means greater revenues going into the
Treasury, without raising taxes, giving us resources to address the
nation's needs, and the retirement of even more federal debt--leading
to long-term economic security for our children. Even with all that
must be done to enhance our security, we expect that a return to
economic growth will bring us back to government surplus in 2005.
The economy's slowdown began in mid-2000, when GDP and job-growth
slowed sharply. Business capital spending began to plummet in late
2000, and accelerated its decline in 2001, dragging down the economy.
In August we were beginning to see the evidence of an economic rebound.
I firmly believe that had it not been for the terrorist attacks of
September 11th, that we would have seen an end to the economic downturn
and would perhaps have avoided a recession. The September 11 attacks
created shockwaves that rippled throughout all sectors of the economy.
Financial markets were shut down for almost a week. Air transportation
came to a standstill. As a result, GDP fell 1.3 percent at an annual
rate in the third quarter.
By late November, the National Bureau of Economic Research declared
that the US was in a recession. They designated the end of the previous
expansion to be March 2001, but they observed that the slowdown might
not have met their qualitative standards for recession without the
sharp declines in activity that followed the terrorist attacks.
In sum, the scorecard for the economy in 2001 reflected a
combination of adverse events:
The private sector lost more than 1.5 million jobs.
The unemployment rate rose 1.8 percentage points.
Industrial production was off nearly 6 percent
during the year.
Industry was using less than 75 percent of its
capacity.
As bad as these numbers are, they could have been worse. Our well-
timed bipartisan tax relief package put $36 billion directly into
consumers' hands in the late summer and early fall, providing much
needed support as the economy sagged. It was the right thing to do, at
just the right time.
It's not surprising then that both the Congressional Budget Office
and the Office of Management and Budget project deficits for this year
and next as a result of the economic slowdown and the response to the
September 11 attacks. Last April's budget forecast a fiscal 2002
surplus of $283 billion. The Mid-Session review figures, released in
August, took account of the impact of the President's tax relief
package and projected a $195 billion surplus in fiscal 2002. The new
budget forecasts a fiscal 2002 deficit of $9 billion, assuming no
policy action to stimulate the economy. The reduced surplus estimates
are the result of the economic downturn and the response to the
September 11 attacks. CBO's projections confirm that tax relief played
a minor role in the surplus decline in the next few years--accounting
for less than 12 percent of the decline in 2002 and less than 28
percent in 2003.
FY02
surplus
(in
billions)
April 2002 budget baseline:................................ $283
Changes from:
weaker economy/technical changes......................... -197
enacted spending......................................... -54
tax relief............................................... -40
------------
February 2003 budget baseline:............................. -9
The CBO budget projects a 10-year surplus of $1.6 trillion. Last
August, after factoring in the tax relief package, the CBO projected a
$3.4 trillion surplus for the next 10 years. The recession and the war
on terrorism depleted the 10-year projections by $1.8 trillion. The
lesson from these numbers is simple--10-year projections are a useful
discipline but they do not predict the future. None of last year's 10-
year estimates foresaw the events of September 11 or a negative $660
billion worth of ``technical changes'' that are now included in the new
10-year estimates by agreement among the technical experts. We do know
about the here and now, and we should deal with the here and now,
reigniting growth to restore long-term surpluses.
The Administration's growth projections are similar to the
consensus of private forecasts. Over 90 percent of the Blue Chip
Economic Indicators panel members say the recession will end before
April of this year. We share that assessment. Personally, I am
optimistic that the economy will do even better than our budget
assumptions suggest. For the near term, we expect the economy to grow
2.7 percent during the four quarters of 2002. That projection includes
the foreseeable effects on the economy of the President's economic
security package.
The lesson is clear. A strong economy is crucial to restoring
budget surpluses. Some would suggest that we need surpluses to improve
our economy. They have the logic backwards. Growth creates surpluses,
not the other way around.
The federal budget was in deficit every year from 1970 through
1998. From 1970 through the early 1990s, government spending growth
exceeded government revenue growth by \3/4\ of a percentage point a
year, on average. Fiscal discipline was imposed by the historic Omnibus
Budget Reconciliation Act, signed in 1990 by President Bush. With
fiscal restraint made an integral part of the budget process, once the
economy took off in the 1990s, revenue growth was double the pace of
spending growth. It was the rapid economic growth of the 1990s that
generated the burgeoning budget surpluses, which appeared even as
federal outlays grew about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut of last May helped to
keep the economic downturn shallow and it will continue to help. Energy
prices have retreated. The Federal Reserve has reduced short-term
interest rates 11 times since the beginning of 2001. Measures of
consumer confidence are bouncing back. The index of leading indicators
increased sharply in December for the third straight gain. Motor
vehicle sales have remained strong. And initial filings for
unemployment benefits are in decline. But we all know that unemployment
itself is a lagging indicator. Although the current trend is positive,
too many people will remain out of work. And given the choice, they'd
rather have a regular paycheck than an unemployment check.
The President has presented a budget to speed our recovery. First,
the budget includes tax relief to stimulate job creation as a crucial
tool to speed our recovery and put Americans back to work. The
President's proposals--accelerated depreciation, speeding up the
reduction in the 27 percent income tax rate, adjustments to the
corporate AMT so it doesn't cancel out tax relief, and checks to those
who didn't benefit from last summer's tax rebates--enjoy bipartisan
support in both houses of Congress. I'm eager to work with all of you
to complete work on a package to create jobs and assist dislocated
workers with extended unemployment benefits and temporary assistance
with health care.
Second, the President's budget proposes strict fiscal discipline--
increasing spending for national security and homeland defense, and
holding the line on other spending. His management agenda calls for
performance measures to be used to determine where budget increases are
allocated--so that our resources go into the projects and programs that
make the biggest difference in people's lives. As the experience of the
1990s shows, this discipline is crucial to ensuring we do not return to
systemic deficits of the past. But fiscal discipline alone will not
guarantee budget surpluses. We must return to 3 to 3.5 percent annual
growth to ensure surpluses for years to come.
The focus must be on restoring growth. Surpluses will then follow
naturally. Raising taxes would stifle the process of getting Americans
back to work. This is a bad idea, as our recovery is struggling to take
hold. According to 1999 data, the most recent available, 17 million
small business owners and entrepreneurs pay taxes under the individual
income tax rates. They have made business plans that assume that the
tax relief enacted last summer will take place as scheduled. Eighty
percent of the benefit of cutting the top two rates goes to small
business owners and entrepreneurs. These are the engines of job
creation in our economy.
Tax relief should be accelerated, as the President has proposed to
boost job creation. Such relief will have minimal, or no, effect on
long-term interest rates. According to a recent analysis by the CEA, an
expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by 14 basis points. Since the tax
cut last year, the 10-year nominal rate has averaged 4.93 percent,
which is substantially below the 6.16 percent averaged from 1993
through 2000.
Restoring growth is the key to America's future. Restoring growth
is the key to ensuring we have the resources in Washington to fight the
war on terrorism, provide for homeland defense and provide the services
the American people demand. The President's budget will help to ensure
that both peace and prosperity are restored to the American people as
soon as possible.
Chairman Thomas. Thank you very much, Mr. Secretary.
I do understand that the President and you believe that a
stimulus package is still desirable. The question is whether or
not the makeup of that package would be roughly the same as it
was when the House first acted in October and then followed up
in December with the second package that was passed.
One of the differences between the first and the second
package was an attempt by the House to collect the concerns on
the unemployed, both in terms of the unemployed benefits and
the health insurance protection that we knew would probably
occur if events had transpired the way they normally do. The
House passes a bill, the Senate passes a bill, we go to
conference, and we make those kinds of adjustments. So the
December bill was I think an attempt on the part of the House
to say, had we gone to conference, this is what we think the
bill would have looked like in an attempt to provide the Senate
with a structure that they could pass relatively quickly. As we
know, that didn't occur. We are now into February.
I still believe that the assistance for the unemployed
portion of the package probably, if anything, is more
underscored as we move to the date when they begin to run out
of the usual 26-week benefits.
I don't think also there is much additional concern about
maintaining consumer demand. Some of us were pleasantly
surprised and some economists were wrong that when the auto
program of 0 interest financing ended in October most people
believed that they would eat significantly into auto sales for
December and January. It appears there was only about a 5
percent drop. It wasn't nearly as much as most people thought
it would be.
In addition, the individual tax rates, especially at the
middle income level, 27 to 25, given who pay that level of
taxes, could certainly be a bit of consumer demand as well.
But what I have been concerned about is the whole business
segment of the package. More and more, the argument that
probably was largely unnecessary, and now it is completely
unnecessary, when the whole question of inventories,
liquidating inventories and then the need to rebuild was one of
the keys to economic recovery. To me, dealing with expensing,
especially on short-term depreciation, is very much the same as
consumer demand, if we could get some purchases done in the
short term.
Alan Greenspan in front of the Senate said that there were
some negative aspects to a short-term expensing. I think we
understand them. My concern is that does the Administration,
does the Treasury, do you have a concern about the way in which
the depreciation package would be structured?
The Senate seems adamant that they don't want any kind of
depreciation structure for more than 12 months. They define
that as short term. I understand ``permanent.'' That means
really long term. But I don't know that 12 months is a
significant or important or really appropriate definition for
short term; and I believe that some of the debate is going to
hinge on the way in which we view 12 months, 24 months, 36
months, probably 48 months on the outside in an area that we
think could have a relatively immediate and stimulative effect
on the economy, even today.
Comments on the structure of the expensing on depreciation,
length of it, amount, where and how it would stimulate the
economy.
Mr. O'Neill. Thank you, Mr. Chairman; and thank you for the
review of the process.
As we in the Administration have been engaged with you and
with your counterparts on the other side of the Hill, we have
been greatly appreciative of the work that has been done in
this Committee under the Chairman's leadership in both in the
October work and subsequently in the December work in order to
provide a basis for what we believed was going to be a basis
for action in the Senate so that we could have finished this
stimulus work before the Congress went home for the Christmas
recess.
We continue to believe that what you did in the Committee
and included in the bill that you sent over to the Senate in
December is the right basis for dealing with accelerated
depreciation, and we are hopeful that the Senate will see the
wisdom of what you have done and will quickly deal with this
issue so that we can get it behind us and we can assure what we
believe are the consequences of this action, which is to add
momentum and speed to the economic recovery that we all want.
I don't know anyone who would like to go slower or would
like to end up at a lower level than 3 or 3.5 percent. The
President continues to believe the stimulus proposal that you
passed in December is the right direction to go and that we
should do it now.
Chairman Thomas. Thank you very much, Mr. Secretary. The
gentleman from New York wish to inquire?
Mr. Rangel. Thank you. Yes.
Mr. Secretary, we are flattered when you talk about the
good work of this Committee and the leadership of our Chair,
but you should know that it is really not the Committee, it is
the Chair and the majority.
First of all, what this stimulus package--I have had more
discussions with you on this subject and Treasury Department
than I have been able to have with the Chairman on this subject
of the stimulus package. And so--the Members, the Democratic
Members have even less than I. So that if you want to
compliment the Chair for the way that he has handled this, that
is okay with me.
The second thing is that the Committee should get no credit
for the second stimulus package, but you should give that
credit to the Rules Committee. Because that bill never came
before the Ways and Means Committee. It went to the Leadership,
the Rules Committee and came to the floor. But we will accept
the compliments.
But you should know that the President's efforts to be
bipartisan stops when he gets to the doors of this Committee.
That is tragic, and it is unfortunate, and this is especially
so during a time of war. But, as I have indicated, I am so
pleased that war appears to have brought us together for at
least the hearing of the 26th, and let's have a good beginning
on that.
I am sorry that the Chair didn't give me a list of the
questions that he would suggest that I ask you, but, at the
risk of going off on the Social Security thing, it is just hard
for us to understand how it is, at a time where all of us,
whether Democrats or Republicans or the Administration, was
concerned about Social Security, that we find ourselves because
of the recession, because of war, because of homeland security,
that the funds that are coming in right now are basically funds
that are supposed to be earmarked--not lockboxed but earmarked
for Social Security Medicare.
We can understand how during a time of war that we do the
best we can with what we have to work with, but if indeed the
President is now protecting and asking the American people and
the Congress to consider making the tax cuts that have been put
into place permanent and if you know as a trustee that we
expect to have a real 40 million people to become eligible for
Social Security and Medicare benefits, it just defies sound
fiscal policy that we should be talking about tax cuts at a
time that we are having deficits and at a time where the Social
Security fund is not secure and at a time where the processes
of reform don't appear to be on the near horizon.
So we just hope, as the Secretary of Health and Human
Services, as the Secretary of Defense and other people come to
support their particular responsibilities, that we could hear
the same strength in your voice and testimony in terms of
protecting the Social Security trust fund. Because war is
supposed to be a time of sacrifice, and it seems as though one
of the major contributions that the Administration is proud of
is that those that make the most will be getting the largest
tax cuts, and that will be their contribution to the war
effort, while those who are depending on the Federal Government
for a lot of services, that is where fiscal responsibility
comes, because that is where we all have to make sacrifices.
So I, for one, am very concerned that--my concern about
people getting from government what they are entitled not be
confused with a lack of patriotism. If it is going to be that
we don't have money to do these things because of sound fiscal
policy, why do we say up front that we want tax cuts before we
can see how we can balance the budget and do these things?
Maybe the tax cuts should be even deeper than projected. But to
do it beyond 5 years, beyond 10 years, based on speculation
seems to be--not to be sound fiscal policy.
I look forward to your response on that, Mr. Secretary.
Mr. O'Neill. Thank you.
First, let me say--and certainly you know this as well--
that every dollar that the government collects for Social
Security and Medicaid is credited to the trust fund. No person
out there who is watching this on television should have any
concern that the Social Security funds are not being credited
to the trust fund. Every dollar of Social Security money that
is collected goes into the trust fund.
The question that you raised or the comment you raised
about the tax system is an interesting one. I have had a chart
prepared that I think bears some examination. This is a chart
that shows what the expectation is for revenue growth by the
Federal Government over the years between fiscal year 2001 and
2011. What this chart shows is that, with the tax system that
is in place as agreed, voted by the Congress, I think with lots
of shared--a sense of accomplishment last June, the revenue
taken in by the Federal Government over this 10-year period is
going to increase by 55 percent.
So, contrary to some impressions that are left, that
somehow Federal revenues are going down, this is the fact. With
the tax law as it is enacted, with the perspective of further
rate reductions and other provisions, the U.S. Federal tax
revenue will increase by 55 percent over this time period.
The little yellow parts of these bars, which you may have
trouble seeing from a distance----
Mr. McDermott. Could we, as Members of the Committee, have
a copy of that? We can't see very well. Some of us have elderly
eyes, and it would be nice if you would bring some copies for
all of us.
Mr. O'Neill. We do have some copies.
Mr. McDermott. We know the people at home can see it on the
television, but we can't see it.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512A.001
Mr. O'Neill. The yellow parts of these bars illustrate the
amount of revenue reduction from what would otherwise be
associated with the agreed tax cuts of last year, and I think
the data makes the point very well.
Now related to this set of facts is this fact: That even
with the tax enactment of last year, your Federal Government,
our Federal Government, is going to be collecting about 19
percent of the GDP in Federal taxes, which will leave us above
the trend line growth rate that has existed for a very long
time.
I didn't bring the detailed chart, but I will make that
available for the record so that you can see the agreed tax
policy effect on the Federal Government's share of the GDP.
This is the chart. As I say, I will make it available so the
whole Committee has in your own hands this data--set of facts
about what it is we are proposing to do in terms of raising
money from the people.
Mr. Rangel. Thank you.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512B.002
Chairman Thomas. The Chair would ask unanimous consent that
a series of questions submitted by Mr. Shaw be placed in the
record. Without objection.
The gentleman from Illinois wish to inquire?
[Questions submitted from Mr. Shaw to Secretary O'Neill,
and his responses follow:]
Question 1: Does the administration's proposal to expand IRS's direct
assistance to taxpayers filing online (EZ File) potentially
create a conflict with private accountants and tax return
preparers, running counter to OMB's Circular A-76?
Response: The Administration's proposal to give taxpayers the
option to file their tax return online without charge is based on two
principles: no one should be forced to pay extra just to file his or
her tax return, and the IRS should not get into the software business.
First, the ability to file electronically is an important benefit
for all taxpayers because it is simple, is less prone to errors, and
results in quicker refunds. Electronic returns also save the Government
time and money. In the 1998 IRS Restructuring and Reform Act, Congress
recognized the value of electronic returns and established a goal of
having at least 80 percent of all returns filed electronically by 2007.
The Administration's proposal will greatly enhance the IRS' ability to
meet this goal.
Second, however, Treasury does not intend for the IRS to get into
the software business. Taxpayers have, and will retain, the ability to
seek professional or other assistance in preparing a tax return.
Treasury believes that the best way to accomplish this is by forging a
new partnership with existing private sector expertise. Treasury and
IRS officials, along with members of the IRS Oversight Board and the
Electronic Tax Administration Advisory Committee, have begun a dialog
with representatives of the tax preparer industry to explore ways to
provide taxpayers with the option to e-file.
Question 2: What potential privacy issues has Treasury identified and
how are you prepared to deal with them?
Response: Treasury believes that the facilitation of electronic
filing will enhance taxpayer privacy. Some taxpayers do not file
electronically now because they don't want to send their personal tax
information to the IRS via a third party. There should be ways to
address this concern. For example, in the case of self-preparers, the
availability of direct electronic filing would eliminate the need for
taxpayers who have this concern to share their sensitive financial
information with a third party.
The IRS is currently in a dialog with industry to find ways to
expand e-filing opportunities and explore solutions. It should be noted
that the IRS's continuing partnership with the private sector on e-file
initiatives requires a strict adherence to the privacy rules applicable
to tax return preparers in section 7216 of the Internal Revenue Code.
Question 3: What internal agency conflicts potentially could arise by
having IRS assuming roles as both tax return preparer and its
existing role for developing regulations, collecting, and
auditing tax returns?
Response: The Administration's e-filing proposal simply stated is
``to provide taxpayers with the option to file their tax return on-line
without charge''. Treasury believes the best way to accomplish this is
by forging a partnership with existing private sector expertise in the
field. Taxpayers have the ability to seek professional or other
assistance in preparing a tax return.
This proposal should not create any conflicts with, and is
consistent with, the IRS' traditional regulatory and enforcement roles.
IRS already provides an automated tax return option via telephone,
called Tele-file, for Form 1040EZ filers. In addition, the IRS has
provided taxpayers with guidance and assistance for many years. IRS
forms, instructions, and publications, for instance, are already
available to taxpayers for free, and include comprehensive guides on
various tax issues as well as taxpayer duties and obligations. The IRS
has held a number of Taxpayer Assistance Days throughout the country
that allow taxpayers to discuss problems or issues directly with an IRS
representative. The IRS sponsors the Volunteer Income Tax Assistance
(VITA) and Tax Counseling for the Elderly (TCE) programs, which provide
free tax preparation assistance. The IRS also provides automated and
live assistance through toll-free numbers, as well as information
through its web site. All of these efforts are an important part of the
IRS' mission to explain, and guide taxpayers through, compliance with
the tax laws.
Mr. Crane. Thank you, Mr. Chairman.
Mr. Secretary, I have been a long-time supporter and active
proponent of medical savings accounts (MSA) and am pleased to
see a permanent extension of Archer MSAs in the President's
budget. The 5-year revenue loss for Archer MSAs is nearly $2
billion. However, we know in the real world that the tax
changes we make, whether they be MSAs or reducing marginal tax
rates or increasing incentives for savings, have an effect on
people's economic behavior; and you provided a fine explanation
whereby this behavior translates into reduced health care
costs. Yet in the revenue estimates we typically only pay lip
service to this behavior, and in many cases we completely
ignore it.
For example, since MSAs reduce health costs, then to the
extent that the government pays for health care in the form of
Medicaid or other programs the score should go down by some
amount.
It is my understanding that you have the authority to issue
a Treasury directive that could make the revenue estimating
process more transparent or impose dynamic scoring, the result
being potential revenue savings for proposals like Archer MSAs.
I would like to know what steps, if any, you are contemplating
in regard to this matter, and I would like to offer my
assistance in working with you.
Mr. O'Neill. Thank you very much, Congressman Crane.
Since I have been at Treasury, we have been working hard on
this the subject of estimation and looking at ways that we can
bring to the Congress and to the American people not just the
static estimates of the past but, as you characterize it,
dynamic estimates so that everyone will have an opportunity to
see the difference and as we go through time we can see which
estimates turn out to be more correct through this process.
My own view is that we should not have one system or the
other, but we should have both. We should explain the
assumptions that are incorporated in these alternative analytic
schemes, and we would all benefit from learning which models
better represent the reality as we collect experience.
Mr. Crane. Thank you, Mr. Secretary.
Chairman Thomas. The gentleman from California, Mr. Stark,
wish to inquire?
Mr. Stark. Thank you, Mr. Chairman.
Mr. Secretary, the President's inadequate budget is a
product and consequence of your failed economic policy. A year
ago, we had a record surplus of $5.6 trillion; and with those
resources we could have strengthened Social Security, secured a
prescription drug benefit that was worth anything, and
simultaneously provided homeland security and defense. Instead,
the President and his Administration pushed through a tax cut
that squanders our prosperity on those who least need it.
Now, appallingly, the President has called to make these
tax cuts permanent. Apparently, the rich aren't rich enough,
particularly Enron and his friends there. In the meanwhile, the
seniors who cannot afford prescription drugs, parents who
cannot afford child care, families who do not have health care,
and poor people in need of housing are left out in the cold and
out of the President's plan.
The President should be ashamed. This budget neither
represents sound economic policy nor the moral values the
President so fervently espouses. This budget underfunds
critical programs that Americans count on in their everyday
lives. Efforts to strengthen Social Security, provide a
prescription drug benefit, protect our environment, expand
health care coverage to the uninsured get rhetorical mention in
the budget but absolutely no significant funding.
Now, the President is right to devote resources to
improving security and national defense around the world, but
his naive devotion to tax cuts helps him dismantle Social
Security and Medicare, his avowed intention.
This budget is disappointing on a grand scale, and we will
suffer the consequences for years to come. The President
announced during his State of the Union speech that he wants to
make these tax cuts permanent. CBO just reported that making
the tax cut permanent would decrease revenues by $569 billion
and result in a debt service payments increase of $58 billion,
for a total cost of more--$627 billion more than exists in the
entire Medicare trust fund which you will spend and deplete if
you follow this budget.
This amount of money also--which $600 billion would enable
us to provide a Medicare prescription drug benefit to all
beneficiaries, not just some cockamamie discount card.
Why, why did the President give wealthy individuals in this
country absolute priority over Medicare beneficiaries?
Mr. O'Neill. If I may, Congressman Stark, go back to the
foundation of your comments. What the CBO--for those out there
in the televisionland, what the Congressional Budget Office
projections show is that for the year 2002, as we have moved
forward from a year ago when the agreed budget projection was
for a surplus of $313 billion, the following facts have
contributed to the CBO's January projection of negative $21
billion: The tax law effect on the $313 billion: $38 billion;
defense appropriations: $33 billion; nondefense appropriations
debt service and other cost: $20 billion. So the January, 2001,
projection of $313 billion surplus was reduced by $91 billion
by those events. $38 billion again for the tax law change, and
the rest for defense and nondefense appropriations.
The rest of the change in the surplus estimate was a
consequence of $148 worth of economic effect because of the
slowness in the economy, and I would observe that both the
Administration and the independent Congressional Budget Office
numbers were basically the same. And a further $94 billion was
a consequence of so-called technical changes. So the tax law
had an effect of 15 percent at most in the change on the budget
protection.
Mr. Stark. But what about for the 10 years?
Mr. O'Neill. For the 10 years it is interesting to observe
that, according to the CBO, of the $5.6 trillion estimate that
existed in January of 2001, $1 trillion, $275 billion is
related to the tax law change. And I find it really very
interesting and telling that----
Mr. Stark. I might just notice the red, Mr. Secretary----
Mr. O'Neill. Six hundred sixty----
Mr. Stark. Reduction because of the tax cut and the blue is
the reduction because of defense and the other blue is
nondefense. So about 70 percent of the reduced budget surplus
is over 10 years come from the June tax cut. So if you want to
show us your rosy scenario here of 10 years, let's look at the
results of the tax cut over 10 years so we are comparing an
apple and an apple, okay?
Mr. O'Neill. I'm sorry, Congressman, I don't understand
your concept. If you are looking at what happened----
Chairman Thomas. Excuse me. The Chair would be interested
in seeing the chart. I cannot read the bottom of it. Could I
see the chart for just a second, Mr. Stark? I appreciate it.
Mr. Secretary, these are assumptions prepared by the
Committee on Ways and Means' Democratic staff.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512C.003
Mr. O'Neill. I have not seen these numbers before. This is
certainly--I would say to you that this is not a correct--what
you have here is not even close to a correct characterization,
according to the independent Congressional Budget Office.
Mr. Stark. It is their numbers, Mr. Secretary.
Mr. O'Neill. May I give you this table from the
Congressional Budget Office? It shows, if I may use the numbers
with you of the $5.6 trillion, that the change in the tax law
that was enacted last June and acclaimed by Members on both
sides, reduced that surplus estimate by $1,275,000,000. Others
changes include $300 billion for defense.
I do not hear anyone say we should not do defense spending.
There is $249 billion for nondefense appropriations, and the
debt service is 595, an unavoidable cost of a slower economy.
Importantly, economic changes and technical changes account
for $1.589 trillion because of economic changes. And I call
attention to the fact because I think this is quite important
in looking at these 10-year numbers, there is $660 billion
worth of change in the surplus estimates related to so-called
technical adjustments by the estimators.
[The table follows:]
Summary Table 1.--Changes in CBO's Baseline Projections of the Surplus Since January 2001
(In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, Total,
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2006 2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Surplus as Projected in 313 359 397 433 505 573 635 710 796 889 2,007 5,610
January 2001.................
Changes
Legislative
Tax act a................. -38 -91 -108 -107 -135 -152 -160 -168 -187 -130 -479 -1,275
Discretionary spending.... -44 -49 -52 -54 -56 -57 -58 -59 -60 -61 -255 -550
Other..................... -4 -6 -5 -3 -4 -2 -2 -2 -2 -2 -23 -33
Debt service b............ -5 -12 -22 -32 -44 -57 -72 -88 -106 -124 -114 -562
--------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal................ -91 -158 -186 -197 -238 -268 -293 -317 -355 -317 -870 -2,420
Economic...................... -148 -131 -95 -81 -75 -75 -76 -79 -82 -88 -530 -929
Technical c................... -94 -84 -62 -51 -64 -64 -65 -64 -65 -45 -356 -660
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Changes......... -333 -373 -343 -330 -377 -406 -433 -460 -502 -450 -1,757 -4,008
Total Surplus or Deficit (-) -21 -14 54 103 128 166 202 250 294 439 250 1,602
as Projected in January 2002.
Memorandum:
Changes in the Surplus by
Type of Discretionary
Spending
Defense....................... -33 -29 -29 -29 -29 -29 -30 -30 -31 -32 -149 -301
Nondefense.................... -11 -20 -23 -25 -26 -28 -28 -29 -29 -30 -106 -249
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: For purposes of comparison, this table shows projections for 2002 through 2011 because that was the period covered by CBO's January 2001 baseline.
The current projection period extends from 2003 through 2012.
a The Economic Growth and Tax Relief Reconciliation Act of 2001, which was estimated at the time of enactment to reduce revenues by $1,186 billion and
increase outlays by $88 billion between 2002 and 2011.
b Reflects only the change in debt-service costs that results from legislative actions. Other effects on debt-service costs are included under economic
and technical changes.
c Technical changes are revisions that are not attributable to new legislation or to changes in the components of CBO's economic forecast.
Mr. Stark. If you care to put that in, Mr. Secretary, then
you get 40 percent, approximately, for the tax cut, 40 percent
for the economic changes, and less than 10 percent due to the
nondefense and defense.
Mr. O'Neill. I stipulate that characterization. I don't
think your chart shows that.
Mr. Stark. That is the same chart without the economic, and
this is the same chart with it. But the program that you have
put forth is reflected in that chart because you do not have
anything to do with the economic changes.
Mr. O'Neill. That does not look like 43 percent.
Chairman Thomas. The gentleman's time has expired.
The Chair would indicate if any other Members have charts,
we would like to duplicate them so that Members can see them. I
had not anticipated a duelling chart hearing. But if Members
could at least look at them.
The reason I made this statement earlier is that it is the
fine print in the bottom in terms of who it is coming from and
what the assumptions are associated with the very brightly
colored and large columns that is oftentimes more important
than the columns themselves.
Does the gentleman from New York wish to inquire?
Mr. Houghton. Yes, thank you, Mr. Chairman.
Glad to have you here, Mr. Secretary. I have just one
direct question. Maybe you would like to elaborate on it.
The Administration has indicated they are undertaking a
project to achieve significant simplification of the Tax Code.
Would you like to break that down a little bit?
Mr. O'Neill. Thank you very much, Congressman. As I have
had an opportunity to testify here before, I think we have a
major challenge with our Tax Code because it is so enormously
complicated. We have begun an effort to identify changes that
we can work with the Committee and with other oversight bodies
to do things that we can administratively, and to shape into
perhaps objects of legislation changes that would be helpful to
individual Americans as they try to respond to the complexity
of our Tax Code.
I think one of these areas that is very difficult is one
that Commissioner Rossotti has put in front of me, as I have
challenged him, as to how we can simplify the Tax Code. That
area is in the area of how we define ``child'' from the point
of view of the Tax Code.
It turns out that we have many different definitions of
what a ``child'' is, believe it or not, when it comes to the
use of the Tax Code. Chairman Rossotti has said to me that he
believes if he had to deal with the definition of ``child'' in
the earned income tax credit, that he would be found wanting;
which is to say, that he does not believe he could easily
understand how to apply the definition of ``child'' as we have
incorporated it in the Tax Code for this purpose.
So in this area and in many others, we are looking at ways
that we can create a simplification and better compliance and
reduced costs of administration, because with all of the good
intentions that I'm sure are reflected in the 10,000-plus pages
of the Tax Code, we obviously have room for improvement.
We are working out a way to identify those things and to
take administrative action where we can to work with you to
bring some of these things through the legislative process,
where that is required.
Chairman Thomas. Does the gentleman from California, Mr.
Matsui, wish to inquire?
Mr. Matsui. Thank you, Mr. Chairman. Thank you very much,
Mr. Secretary, for appearing before us. We appreciate it.
Mr. Stark showed you a chart that basically took into
consideration legislative changes and not changes or
reexamination and changes in the projections in the economy.
The chart that I have up there at this particular time shows
what happened to the surplus, the $5.6 trillion surplus that we
estimated January of the year 2001.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512D.004
If we look at the yellow bar, it indicates basically a
change in the economic projections. Essentially, 42 percent of
the surplus was reduced because of the reexaminations. In fact,
if one looks at this in terms of year by year, the yellow bar
actually is high this year; it is about 70 percent because of
the recession, and then it decreases over the next 9 years. But
it is still a large number in the year 2010, mainly because the
projections in 2001 were very, very optimistic and are less
optimistic now.
The red line or red bar basically is the June tax cut
accumulated over 10 years without making it permanent. That
comprises 41 percent of the total, of the total surplus. Then
you have defense, which includes the war effort, incidentally.
The defense increases by the President and also the war effort
are included, which is only 9 percent of the surplus, which is
about $560 billion, and the nondefense spending, which is
increases in housing and those other expenditures, is about 8
percent.
So the war effort is basically a very small part of the
reduction of the surplus. The large part of it in terms of what
we can do as legislators and what the President can do as the
Executive is basically the tax cut. The tax cut is 41 percent
of the reduction in the surplus.
If I may, Mr. Secretary, you answered a question that Mr.
Rangel asked, and said that the trust fund, all the money
coming in in payroll taxes is credited to the trust fund; which
is correct, it is credited to the trust fund. But you also said
at some prior time that ``it seems very unwise to think about
using the Social Security Trust Fund moneys in some other way''
besides putting it in Social Security ``because at their
current levels and with the current benefit structures, we are
not accumulating enough money.''
What is interesting, Mr. Secretary, is that the tax cut is
$1.3 trillion over 10 years. You take the loss of interest in
that and it is about $1.6 to about $1.7 trillion.
In the President's revised budget, using essentially CBO
numbers, in the President's revised budget the tax cut is the
same, but in the baseline currently, the trust funds over the
next 5 years, the Social Security Trust Fund, the range from
other expenditures plus the tax credits is $298 billion. That
is under the current baseline.
Under the President's projection over the next 5 years, it
goes up by $606 billion to a total of $904 billion. In other
words, $904 billion over the next 5 years will be used--instead
of putting it into the Social Security Trust Fund for people's
retirement, will be used for tax cuts and other expenditures. I
think that number is undisputable.
In fact, over a 10-year period, the total amount raided
from the Social Security Trust Fund, that is, individual's
payroll taxes, is $1.5 trillion, which is about the same
amount, incidentally, as the tax cut over the next 10 years, if
you do not make it permanent, just if you keep the tax cut
temporary.
I guess what my concern is, Mr. Secretary, and I think the
concern of a lot of people, and as the American public finds
out more and more about this, I'm sure it will be a concern as
well, is that because the tax cut equals the amount we are
raiding the Social Security Trust Fund, it is almost exact, it
is ironic, over the next 10 years. And because the tax cut--the
top 1 percent, which is the average income of $1.1 million on
the average tax return--the top 1 percent gets 38 percent of
that tax cut, and the elevator operator and the waitresses at
the House dining room are paying for that tax cut through their
payroll taxes.
I wonder if one can explain, Mr. Secretary, the equity in
that. It just it seems to me to be inequitable. If there were
Socrates or Aristotle, they would say perhaps there would be a
moral dimension to it, but we do not talk about moral issues in
the Congress.
It would just seem to me that it would be totally
inequitable if in fact we allow this tragedy to happen. That
is, the tax cuts are being paid for by individuals' payroll
taxes, and people who are making $15,000 and $20,000 are paying
tax cuts for people making over $1 million a year.
Could you please help me with that and perhaps alleviate my
concerns and fears about that?
Mr. O'Neill. Yes. Thank you very much, Congressman Matsui,
for your comments.
Let me start with the first data that you discussed, and
observe again that while it is true that $5.6 trillion estimate
from last January's, which was broadly agreed by both internal
and external economists, has been reduced by $1.275 trillion
over this next 10-year period, by CBO's estimates and by our
own. It does not seem to us that it is a good idea, and the
President said very directly it does not seem a good idea to
him, to raise taxes on the American people.
Now, to the point of what is happening with the Social
Security money, let me say again, all of the money collected
for Social Security is being credited to the Social Security
trust funds. If we had a surplus this year instead of the
effect of the war effort and the slowdown in the economy, the
extra cash balance represented by a surplus would be used to
pay down debt held by the public.
I think it is really important that we not frighten the
American people, and especially people that are on Social
Security, that anyone has any intent of defaulting on the
obligation that the Congress and Administrations since 1935
have warranted to individual Americans that their Social
Security will be there.
Mr. Matsui. Excuse me, but you should tell Mr. Moynihan and
Mr. Parsons on the Social Security Commission, because they are
the ones who frighten the American public that that money may
not be there, even though it is being credited. You even said
that yourself.
I am a little troubled by the inconsistency there.
Chairman Thomas. The gentleman's time has expired.
Mr. O'Neill. May I make one more point on the distribution
of the tax consequences of the tax bill? It is really this: If
you look at, under our current tax system, who is paying
individual income taxes, 85 percent of all of the tax income
from individual income taxes is coming from individuals and
families that earn more than $75,000 a year.
Mr. Stark. That is payroll taxes?
Mr. O'Neill. I am talking about the individual income tax.
That is the subject that we were talking about here.
Chairman Thomas. The Chair believes part of its
responsibility is to allow people who are perhaps watching to
understand what is happening here in terms of the dueling
charts.
The chart that was up there, this one from 02 to 10, is the
impact on the Federal budget. And frankly, whether the taxes
are permanent or not, it would have virtually no change on this
particular chart. And it shows the portion of the budget
surplus which was anticipated as to where it would go to the
various categories.
The chart held up by the Secretary of the Treasury are the
consequences of this yellow line on the economy in the larger
question of revenues coming in to pay for the Federal
Government's costs.
So to a certain extent, the charts could be perfectly
accurate but they were really showing different things. And the
gentleman from Illinois' question about static versus dynamic
scoring becomes extremely important at this point, but I will
leave that to other Members to inquire.
Does the gentleman from Louisiana wish to inquire?
Mr. McCrery. Yes, Mr. Chairman. Thank you.
Mr. Secretary, I believe this chart was distributed by
Treasury. It shows the percent of GDP that revenues constitute,
that revenues to the Federal Government constitute.
I believe everybody on the Committee was handed this chart,
so if you would refer to it, it shows that since World War II,
revenues to the Federal Government have averaged about 18
percent of GDP.
When Congress passed and the President signed the tax cut
last year, revenues to the Federal Government were at pretty
much an all-time high of around 21 percent of GDP.
So it is true that the tax cut reduced the surplus. We knew
that. Hello. We wanted to reduce the surplus. The government
was taking in too much money. We wanted to return some of that
money to the people who earned it. We wanted to let the people
who were earning that money keep more of their own money to
create jobs, to create prosperity.
Had it not been for that tax cut, the recession we are
currently in would have been much deeper, wouldn't it, Mr.
Secretary?
Mr. O'Neill. You are absolutely right.
Mr. McCrery. And revenues would have gone down even more,
wouldn't they, Mr. Secretary?
Mr. O'Neill. Absolutely.
Mr. McCrery. So those folks who are concerned about the
budget, the deficit, the debt, should know that economic growth
is the key to the surplus or to the deficit, not some marginal
tax rate for some category of income earner. It is economic
growth, that is the key.
This chart clearly shows any time we have had a recession
since World War II, revenues have dipped below the average line
except for--which one, Mr. Secretary?
Mr. O'Neill. This one.
Mr. McCrery. The one we are in right now.
Mr. O'Neill. Exactly.
Mr. McCrery. We are still taking in, even with the tax cut,
even with the recession, 19 percent of GDP, 1 percent above the
post-war average for revenues to the Federal Government. My
goodness, how much do you want the government to take, 25
percent, 30 percent? How much of the very character of our
society do you want to change by the government taking more and
more and more?
That is why we had the tax cut, to preserve the nature of
our economic system, to preserve the system that has made this
the best country in the world, which produces the most jobs,
the most exports. You name it, we do it. Why? Because of our
economic system, because we let people work and keep most of
their money.
So, Mr. Secretary, I applaud your Administration for
leading us to getting our taxes under control, which we now
have pretty much done. We would like to do a little more to
help the economy grow more quickly and more robustly as we come
out of this recession, but 19 percent of GDP for revenues to
the Federal Government it seems to me is not only adequate but
is higher than we are accustomed to taking in.
Let us talk about the debt and interest rates real quickly.
Is there any historical correlation that you are aware of, Mr.
Secretary, between deficits and long-term interest rates?
Mr. O'Neill. No. As a matter of fact, I think the economic
data very clearly shows us that long-term rates are a function
of two things: one, the necessary real rate of return to
capital; and second, inflation and inflation expectations. It
is very clear.
Mr. McCrery. And maybe a third would be the money supply.
Mr. O'Neill. I'm sorry?
Mr. McCrery. The money supply would enter into that as a
condition of interest rates, but certainly not deficits.
Mr. O'Neill. Absolutely not.
Mr. McCrery. If you look at historical charts showing
deficits and draw a line for long-term interest rates, there is
absolutely no correlation. So this phony argument about, oh,
gosh, if we run a deficit during a recession, which we have
always done, we are going to get these long-term interest rate
spikes is just nonsense.
So Mr. Secretary, please continue to fight for commonsense
economic policy and tax policy for this country, and just maybe
we will begin to grow again and the surplus will take care of
itself. Thank you.
Mr. O'Neill. Thank you very much. Mr. Chairman, we can make
this chart available in paper form to the Committee, too. What
this shows is interest rates are at 40-year lows. This chart
captures interest rate performance back to 1965 and through the
current period.
As I said in my testimony, it is simply not true that
interest rates have trended up during this recent period, as
you all have voted for tax relief for the American public. The
10-year interest rates are lower than they have been, for a
reference basis, by more than 100 basis points.
So indeed, as the Congressman suggests, we believe we are
on the right track and we should not be concerned about
interest rates and where they are going. Inflation is under
very good control at the moment.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512E.005
Chairman Thomas. I thank the gentleman. I think the
Secretary could assume that if a chart is worth holding up, it
is worth passing out. So if you have any more, we will
anticipate it and we will make copies of it and have it
available to Members.
Does the gentleman from Pennsylvania, Mr. Coyne, wish to
inquire?
Mr. Coyne. Thank you, Mr. Chairman. Welcome, Mr. Secretary,
and thank you for your testimony.
In your written testimony today, you stated that the strict
fiscal discipline contained in the President's budget is
crucial to ensuring that we do not return to systemic deficits
of the past. But the administration's budget in fact proposes
systemic on-budget deficits, does it not?
Mr. O'Neill. I would not say the intent is that they be
systemic, and indeed, I suspect that--the reason I pointed out
in my comments in the exchange with Mr. Stark the $660 billion
worth of so-called technical correction in the 10-year data, it
is necessary for us to give you hard numbers that you can look
at for outyear periods.
But as I said at the very opening of my testimony, I
continue to be an optimist about the U.S. economy, and I will
not be surprised if I am here next year to say to you, well,
the estimators have changed their minds and the surpluses have
come back because our economy is growing at a faster rate than
was anticipated in January of 2002.
Mr. Coyne. I don't think one could dispute the fact that
every year from 2002 to 2007, the Administration's budget
proposes on-budget deficits, excluding--if you want to take
into consideration growth in the economy and additional
revenue, that is one thing. But the budget as proposed clearly
has on-budget deficits from 2002 to 2007.
Mr. O'Neill. We are assuming on a unified basis we are
going back into surplus in 2005.
Mr. Coyne. In my judgment, for what it is worth, that just
is not strict fiscal discipline.
Mr. Secretary, last year we talked about a lockbox to
secure the Social Security trust funds, and the
Administration's budget request now proposes using all of the
$179 billion in surplus Social Security revenues for 2003. What
good was the lockbox that we enacted last year?
Mr. O'Neill. I'm thinking about how to answer your comment
about there not being fiscal discipline. The implication of
what we have proposed not being fiscal discipline suggests one
of two courses, it seems to me: One is to raise taxes, which we
are against; and the other is to reduce spending from what the
President has proposed, which obviously we do not think is the
right thing for the country.
The President has looked at the needs in our situation for
prosecuting the war on terrorism and providing better
protection for homeland security, and following up on all of
the proposals and agreements that we have had together about
expanding significantly education and medical care spending.
And so the President's judgment is that this is the right
combination of fiscal policy for this time, as he sees his
responsibilities and as he sees all of the breadth of the
engagement of the Federal Government from the perspective of
all the people.
And so, again, if this is not fiscal discipline, there are
only two ways to get your version of fiscal discipline. One is
to raise taxes, and the other is to reduce the spending the
President has recommended. We do not favor either one of those.
Mr. Coyne. Well, the President and the Administration are
very quick to say that the Democrats want to raise taxes, but I
have heard no Democrats say that they want to raise taxes. Now,
do you categorize the possible freeze in future tax cuts as a
tax increase? Is that what is defined as a raise in----
Mr. O'Neill. I didn't make the rules, but as I understand
it, if you all want to not follow through on the tax reductions
that you all agreed to last year, that your own scoring
committees would score any change in the effective date
implementation as a tax increase. That is not my judgment, that
is my understanding of your rules.
So that if you decide that you are not going to follow
along and let people have the child credits that are
foreordained in the legislation you passed last year, or the
marriage penalty relief that you all thought was a good idea,
then it is going to show up on your account as a tax increase
for the American people.
So I would say that is a tax increase, yes.
Mr. Coyne. Thank you.
Chairman Thomas. The Chair is somewhat confused now in
terms of the charts, because I thought one of the reasons the
chart was put out was--the red bar was what is listed as the
June tax cut, and if the red bar is big and ugly, you would
assume that you would want to do something about the tax cut.
Otherwise, I don't understand the meaning of this particular
chart.
I don't know that any Democrat has said they wanted to
raise taxes, but when we show another chart in which the ugly
red bar is the same as the economic consequences to the
economy, and it is listed ``June tax cut,'' the assumption is
you want to do something with it. And there is only one thing
you can do with it, and that is to rescind it.
When you give someone something and then take it away,
whatever you want to call it, you have got to go back to the
Treasury Secretary's chart to realize that the changes that
were made will have a significant long-run positive impact on
Federal revenues.
So if no one is advocating a tax increase by virtue of
using these charts, the Chair and others would be very
interested in what the purpose of the chart was, other than to
illuminate the fact that the Congress now has very expensive
color copiers which allow us to make colorful displays.
Mr. Matsui. Will the gentleman yield?
Mr. McCrery. Another way to say it is, what is your point?
Chairman Thomas. The gentleman from Louisiana wants to
know, what is your point?
Mr. Matsui. The point is, we just wanted to show the
consequences of the actions of this Administration. Republicans
control the House, they controlled the Senate for the first 6
months of the last year, and of course the executive branch is
controlled by the Republicans. We just want to show the
consequences.
What is going to happen is that we are going to have
significant benefit cuts in Social Security as a result of this
tax cut and because of the deterioration in the economy. But
the tax cut will result in a major reduction in Social Security
benefits.
And so that is all we wanted to show. I mean, don't you
want to be responsible for your actions? You should be held
accountable for your actions.
Mr. McCrery. So the gentleman has suggested----
Mr. Matsui. If the gentleman would all of a sudden be
concerned because we wanted to expose the American people to
what they are doing----
Mr. McCrery. If the gentleman is not proposing an increase
in taxes, I would repeat, what is the gentleman's point?
Mr. Matsui. Would the gentleman listen? I just explained
it.
Mr. McCrery. The gentleman did not explain it.
Chairman Thomas. The gentleman wanted to show the
consequences of decisions that have been made, signed into law,
and the assumption is they don't like them.
Mr. Matsui. We didn't vote for them.
Chairman Thomas. The assumption is that there need to be
changes made. I believe the point has been well made. Without
saying it, the only obvious choice is to raise taxes.
Mr. Matsui. Regular order.
I just hope the other Members will be able to ask
questions. If the Chairman wants to respond every time a Member
goes through their questions, we will never let the lower-
ranking Members ask questions.
Chairman Thomas. I think the gentleman should rely on the
Chair in terms of allowing the lower-ranking Members. The Chair
has introduced procedures at these hearings that have never
been utilized in the past, and he, as well as I, having been a
lower-ranking Member, remember we never got to ask questions.
Does the gentlewoman from Washington wish to inquire?
Ms. Dunn. Thank you very much, Mr. Chairman. I think we
need to get back to the point of this budget, and I appreciate
your having helped out some of my neighbors in the Pacific
Northwest with your funds for unemployment and coverage of
medical benefits. I think that is very important.
We are in a situation where up to 30,000 Boeing employees
alone are going to be losing their jobs by the end of this
year, and we have tried very hard to help out the companies
that are going to be laying people off by some of our tax
provisions, but also by adding to the generosity of companies
like Boeing with some additional weeks of unemployment and
general coverage of medical insurance. Thank you very much for
that, Mr. Secretary.
I wanted to--could we have order, Mr. Chairman, please?
I wanted to make a point that seems to have fallen through
the cracks. That is, as I read this budget, this budget says
that for the next year or two, we will be in a deficit
situation, where we projected pre-9/11 and the recession that
accompanied that, that actually started in my part of the
country in early 2000, that after 2 years we will go back into
a surplus position.
What happened when we projected $5.6 trillion is that we
have dropped down now to a 10-year surplus of $1.6 trillion.
That is a point often forgotten in the way people cover this
whole situation that has happened to us in the United States,
most of which is beyond our control, and as we look ahead and
become involved in the very important budget process.
Mr. Secretary, I want to talk to you about one area of this
budget that is something I especially appreciate, and that is
the speeding up of the tax relief provisions that the President
signed in June.
I am particularly happy that you have included a death tax
permanency issue here, because I think that is so vitally
important. When we see how tax relief can change behavior, and
you look at the small business community alone, even though we
phase out this death tax over the next 8 years, it still comes
back to haunt us 9 months later. They are calling that the
suicide area. They are calling that 9 months the time when
somebody is going to have to die or pay some form of death tax.
And beginning in October of 2010, that tax will come back once
more to haunt us, not in its phaseout condition of the year
before, but the way it was pre-June when it was signed by the
President.
So I would like to ask your impressions of how you think
permanency is important, particularly with regard to the
phasing out of the death tax; what behavioral changes you
expect that we would see since people are still having the same
unpredictability, still having to provide for estate planning
and so forth?
Mr. O'Neill. Well, it is my expectation that if we can take
away the uncertainty that exists in the legislation the way it
was finally agreed last year, that it will have a serious
effect on how people conduct their financial affairs in
anticipation of what we all know: that inevitably we are going
to die and pass on our worldly assets to our heirs and assigns.
And the current Tax Code which the reform bill was intended to
fix last year induces all kinds of behavior to avoid taxes and
try to skip generations, and I think frankly it results in the
misallocation of capital that would otherwise pursue a normal
good growth and not be driven by tax considerations, but, more
substantially, by the expectation of accumulation for current
and future generations.
So I think in economic thought, there is no doubt that if
we can give a sense of permanency to those who are accumulating
wealth in the time between now and when these estate tax
provisions would have full effect, and then assure to them that
it will not be taken away in 9 months, that behavior will begin
to change almost immediately, and many people who now pay very
substantial amounts of money to estate planners can save that
money and use it for investment, instead of trying to figure
out how to cope with the Federal Tax Code.
Ms. Dunn. Thank you.
Mr. Secretary, I wanted to make one last comment. That is
with reference to the gentleman from California, who said that
the tax relief proposals were aimed at, to paraphrase, ``our
rich friends.''
He is talking about a single schoolteacher who makes
$30,000 a year who is not in the 28 percent tax bracket. For
him to consider that individual who cannot even afford housing
in the community where she teaches as rich, I think is over the
edge.
We have to pay attention to the details as we discuss these
things, because the rhetoric can be very hot and very flaming,
but it also can be very incorrect, and it can end up in
penalizing the people who should be helped out.
Mr. O'Neill. Thank you.
Chairman Thomas. The gentlewoman's time has expired. Does
the gentleman from Georgia wish to inquire?
Mr. Collins. Thank you, Mr. Chairman. Thank you, Mr.
Secretary, for being with us here this morning.
I have a question about the definition of ``displaced
workers'' as we move forward with the health care benefits and
the unemployment benefits in the stimulus package, and
hopefully the others on the other side of the hall will get to
this package very soon.
I am referring to displaced workers who took voluntary
leave from anywhere from 2 to 5 years so that maybe others
would not be given a pink slip, but still they are displaced.
It is all because of the economy and because of the emergency,
because of the war efforts and all, that this came about.
Has this been put on the platter at any point, that
displaced workers would include anyone who did take a voluntary
unpaid leave?
Mr. O'Neill. Help me a little bit. I am not sure I
understand the question. This is for people who are on unpaid
leave, and the question is whether or not they would be covered
by----
Mr. Collins. They would be covered under the health care
benefits, the Consolidated Omnibus Budget Reconciliation Act of
1985 or COBRA payments that we had proposed in the stimulus
package just before Christmas.
Mr. O'Neill. I think not in the version that we favor. What
we favor would provide assistance through a refundable tax
credit to people who are actually displaced; not those who, as
you say, have been in some sort of leave status. This would be
for people who actually have been actively employed and then
are unemployed subsequent to September 11.
Mr. Collins. Well, that is the same thing. These people are
unemployed, and there is no guarantee that they would be
reinstated.
Mr. O'Neill. I'm sorry?
Mr. Collins. They are permanently unemployed, and there is
no guarantee that they would be reinstated. Some just said ``I
will take leave, unpaid leave,'' betting on the fact that they
may be able to go back to work at some future point in time so
maybe some others in a less good situation than they are would
not have to be displaced.
I do think they need to be taken into consideration if we
go through with the health care benefits that we are proposing.
Mr. O'Neill. All right.
Mr. Collins. One other thing too, Mr. Secretary. It has
been said that those who are earning $15,000 to $20,000 a year,
it is unfair for them to pay for the tax relief for any other
taxpayers. Very few people who make $15,000 to $20,000 pay any
tax. In fact, under the earned income tax credit, most of the
people receive back more than their payroll tax in benefits or
through a refundable credit.
It is also interesting, the comment you made about 85
percent of the taxes collected come from families with an
income of $75,000 or more per year. The 10-year growth of
projections of 55 percent, have you used any projections that
would show what would happen with the growth of income had
there not been a tax reduction? We all know that with the
recession, with the unemployment, revenues would be down. You
show it with the----
Mr. O'Neill. We have looked at, nationally, where would we
be if you all had not enacted a tax cut, and it is fairly clear
that the depth of the recession and the speed of going into a
slow economic period would have been substantial.
As a matter of fact, I think maybe we can account it to
just good luck, if you wish, but the action that was taken by
the Congress last year that began putting money, incremental
money, back into the pockets of the people who earned it in
July was fortuitously there, because it significantly softened
what otherwise could have been a very sharp down period after
the terrorist attacks.
I think one of the reasons that I was more hopeful than
almost anybody I know about the possibility of the fourth
quarter being positive is because of the expectations I had for
the interest rate cuts that Chairman Greenspan and the Fed put
in place, and the tax action that you all took, which had begun
to infuse the economy with people's money, which they, after
all, had earned anyway, at the very beginning, on the 23rd of
July, and then flowing through the economy like a strong
current as we were recovering from the September 11 attacks.
So I think while we may not be able to specifically
quantify how many jobs we avoided losing because of the actions
that you took and the actions of the Fed, I would say the
numbers are in the hundreds of thousands, maybe more than that.
Mr. Collins. I think it would have been much worse had we
not put in place the tax relief, and I think we would have had
a much quicker recovery had the other body engaged in truthful
actions with the stimulus package.
You know, Mr. Secretary, I have found that one of the major
problems that we have here in Washington--and I am a small
business guy, have been for 39 years, and always operate on
what I refer to as cash flow. I never have called this thing
that many have called a ``surplus,'' surplus. I call it
positive cash flow, where at a point in time we were taking in
more money than we were spending. The danger part of that is
sometimes you get payday-rich and you begin to spend more than
you should.
But our problem in this town is that we focus more on the
cash flow of the Treasury than we do the cash flow of
individuals and of business. And that cash flow of individuals
and businesses is where the cash flow of the Treasury comes
from.
The old rule of thumb is that the more you leave in the
cash flow of the private sector, it has the potential of
revolving or rotating itself some seven times. That is where
you generate the revenue, the potential new revenues from the
economy, is because those dollars will be used and turned over
and over. And every time they turn, each entity of government,
not just the Federal Government, will benefit from it.
So I think if people in this body and in this Committee in
particular would focus more on the cash flow of their
constituency, the cash flow of the businesses that provide the
jobs for their constituency, then you would see a better cash
flow in Washington as a result, instead of sitting up here day
after day trying to drive wedges between people back home
because of their own political philosophy and their seeking of
political power.
Thank you, Mr. Secretary. I think you have done a very good
job this morning. We appreciate your answers.
Mr. O'Neill. Thank you.
Chairman Thomas. The gentleman's time has expired. Does the
gentleman from Michigan wish to inquire?
Mr. Levin. Welcome, Mr. Secretary. I think the public would
like some clear, simple answers, so let me ask you a few
questions.
Isn't it correct that the budget as proposed would use
Social Security funds each of the 10 years?
Mr. O'Neill. No.
Mr. Levin. Yes?
Mr. O'Neill. No.
Mr. Levin. No?
Mr. O'Neill. The Social Security funds, as I have said
repeatedly----
Mr. Levin. I didn't say about crediting.
Mr. O'Neill. The Social Security funds will be credited to
the Social Security accounts.
Mr. Levin. OK. You say ``credited,'' but let's be clear. In
terms of the surplus, the surplus in the Social Security funds
would be reduced every year, would they not?
Mr. O'Neill. No. It won't be reduced at all.
Mr. Levin. Would there be----
Mr. O'Neill. Maybe we should talk about income and balance
sheets. Maybe your point is that we have an unfunded liability.
I would stipulate that we have maybe a $10 trillion unfunded
liability for Social Security which eventually we must deal
with.
Mr. Levin. And it would be increased every year under this
budget?
Mr. O'Neill. No. It won't be increased by the budget
numbers. It will be increased as we have more people earning
more money and earning credits, but it does not have anything
to do with the revenue flow.
Mr. Levin. Let me put it this way, then. You are saying
that the unified budget goes into surplus after a number of
years, right?
Mr. O'Neill. Let me say this to you: If we kept books in a
way that made clear what our purposes are, we would have a cash
book, and it would largely be what we call the unified budget
numbers. It shows the total inflows and outflows of the Federal
Government.
To the Members, the comment of Mr. Collins, it does make a
lot of sense to pay attention to cash, because if you do not
have enough cash, it means you have to borrow some. But----
Mr. Levin. Mr. Secretary, I don't think anybody is going to
understand this. We had a unified surplus projected of $5.6
trillion, isn't that correct?
Mr. O'Neill. We had.
Mr. Levin. Now we have a unified surplus that has been
dramatically reduced, correct?
Mr. O'Neill. Right.
Mr. Levin. What that means is that we are going into the
surplus, and the Social Security fund--it is being reduced. It
has to be.
Mr. O'Neill. No. We are going into a position where we are
going to borrow some money because we are not taking enough
money in total to pay all of our debts.
Mr. Levin. I will use your words: We are borrowing Social
Security monies. We are borrowing monies that come in for
purposes of Social Security.
Mr. O'Neill. We are borrowing money from the general public
to fully service current obligations.
Mr. Levin. These are Social Security payroll taxes, are
they not?
Mr. O'Neill. And it is going into the Social Security Trust
Fund.
Mr. Levin. But we are using those monies for other
purposes.
Mr. O'Neill. Again, let me say, we have got arguably an $11
trillion contingent liability for Social Security.
Mr. Levin. No. We had a projected $5.6 trillion surplus.
That now has been diminished dramatically. Half of that surplus
was Social Security, and now we are below that amount, so we
need to tell the public straight out that under this budget,
Social Security and Medicare funds are being borrowed.
Mr. O'Neill. The alternative is to invest them, to in
effect buy back debt held by the public. We are mixing concepts
here, and I think the American people would be really well
served if we would not mix concepts. I am saying to you that
we----
Mr. Levin. I will go back to concepts. Let me just read to
you. If we lockbox Social Security, as the President said we
should do, effectively use it to pay down the public debt----
Mr. O'Neill. Correct.
Mr. Levin. And you all want to do Medicare, too; if that is
the way it comes out, that is fine. We still have got, after
implementation of the President's proposal, $1.5 trillion
available, or more than 25 percent of the total projected
surplus.
So essentially you said if we wanted to lockbox those
monies, fine. Paying them down, paying down the public debt,
that is no longer happening with those monies, isn't that
correct?
The lockbox has been unlocked. Why don't you simply admit
it? Has the lockbox been unlocked?
Mr. O'Neill. Well, I think----
Mr. Levin. Yes or no.
Mr. O'Neill. I don't think it is a simple yes or no answer.
The answer is, Social Security funds are always going to be
used for Social Security and only for Social Security. And yes,
we have cash coming in, and on balance, we are having to borrow
a little bit of money this year because of the war and because
of the slowdown in the economy.
Mr. Levin. So we are borrowing--I don't mean to interrupt
you, except the public needs a straight answer. We are
borrowing that money, and as the chart showed, a small part of
it is for defense. We are borrowing that money, so why don't
you say so? And we are borrowing it for each of the 10 years.
And then you say the deficits don't matter, and that is a
shocking change. I just read to you, and I will finish what Mr.
Greenspan had to say: ``. . . over the past year, some of the
firmness of long-term interest rates, probably as the
consequence of the fall of projected budget surpluses,
including Social Security, and the implied less rapid paydowns
of Treasury debt.''
It is astonishing that somebody comes here--and Mr. McCrery
says it is nonsense that surpluses or deficits matter, and you
come here and say that fiscal discipline, the deficits versus
surpluses, are irrelevant. Are they irrelevant? Is Mr.
Greenspan totally wrong?
Is Mr. Rubin, your predecessor, who castigates this
Administration for the loss of--he says, ``this country is ill-
served by abandoning fiscal discipline, and this budget
abandons fiscal discipline. It is the opposite of what was
accomplished in the 1990s.'' Is Mr. Rubin dead wrong?
Mr. O'Neill. The implication, Congressman, of your remarks
is that you think we should either raise taxes or reduce
spending for the things the President has recommended.
The President believes under the circumstances we have
right now, what we have put before you is the height of a
responsible proposal because it takes care of prosecuting the
war on terrorism, it takes care of heightened needs for
homeland security to protect ourselves, and it takes care of
lots of other spending to a total of over $2.1 trillion, and it
does not raise taxes, which is the----
Mr. Levin. Admit you are borrowing from Social Security to
do that.
Mr. O'Neill. We are not borrowing from Social Security, I'm
sorry.
Chairman Thomas. The gentleman's time has expired.
Fully understanding the potential wrath the Chairman's
comment may unleash, the Chair understood the gentleman from
Louisiana not to say that long-term interest rates and deficits
don't matter, but in fact there is no correlation between the
two, was what the Chair thought was the thrust of the gentleman
from Louisiana.
Does the gentleman from Ohio, Mr. Portman, wish to inquire?
Mr. Portman. I thank the Chair. There have been a lot of
confusing statements made that I think have misled people who
are trying to figure out what we are talking about here.
I think Chairman Greenspan is exactly right in the sense
that the most important single thing is economic growth, and
that is the way we are going to solve our Social Security and
our Medicare challenges.
Just to be clear, the tax relief which was passed last
spring that some are suggesting was not a good idea, and
therefore should be repealed, is about economic growth.
Mr. Secretary, you said in your testimony something about
who benefits from the tax cuts. And could you talk just a
little about those engines of economic growth who benefit from
the tax relief, particularly the two highest rate reductions?
Mr. O'Neill. Well, as I said in my testimony, and maybe I
could amplify it a little bit with a more specific example,
there are 33 million small businesses and entrepreneurs out
there who are caught by these highest tax rates because they
pay taxes on an individual basis. And last spring, after you
all passed the tax relief bill, as is my custom, we had groups
of people in to talk with us about what is going on in the
economy.
I thought it was a really dramatic example of the
importance of this point, with one person who owned a florist
shop. His comment was: ``Because of the tax changes you all
have made, and because of my position in paying high individual
rates, with your changes I am going to be able to hire one
additional person.'' Just one additional person.
I think that this is really a telling thing, that job
growth in this country occurs one at a time, and that tax rates
that we pull in here from those entrepreneurs reduce the
potential and possibility of job growth, which is, after all,
the engine of revenue accumulation here in Washington.
The thing that is really important and not to forget is
that we can have more revenue here, as my chart shows we will,
if we can give encouragement to those who create jobs and pay
taxes.
Mr. Portman. I think that is the key. You talk about 80
percent of the growth of the benefit in the top two rate
reductions go to small businessowners and entrepreneurs. You
also talk about the fact that we are now paying well above the
historic average with regard to taxes, well above the 18
percent. You also talked about distributional limits.
But what you did not say is at the end of all these tax
cuts, the wealthy will be paying a higher proportion of the
income tax. You are talking about how people making $75,000
bucks or more pay the vast majority of taxes, about 80 percent
of the income taxes. Will they be paying more or less at the
end of the Bush tax cuts?
Mr. O'Neill. The higher income people will be paying a----
Mr. Portman. They will be paying a large portion. We have
historical high tax rates, a distribution that is even more
progressive, and we are going to have economic growth that
results from it. That is the point.
With regard to Social Security, there have been a lot of
misleading statements. To make something very clear, people
have been saying we are dipping into the Social Security trust
funds to pay for the cost of the war, to pay for this tax
relief that is so important to economic growth. We know that is
not true.
Let's just be very specific here. Can you explain the
difference between the Social Security surplus and the Social
Security trust funds?
Mr. O'Neill. Well, the Social Security Trust Fund is a
trust that you all have established, and most significantly, it
is a warrant to the American people that the word of the U.S.
Government is good, and that as people mature into Social
Security recipient status, that they will get what they
expected to get.
The President has said over and over again that this is a
trust that will never be breached, and I think you all agree
with that; that we are going to make good on the commitment
that has been made to American citizens that when they get to
retirement age, Social Security will be there for them in the
form they expect it.
Mr. Portman. The only way to change that is for Congress to
take action to either reduce the benefit or change the revenue
in some ways. Is anybody considering that? Is that in your
budget?
Mr. O'Neill. I cannot believe anyone would seriously
consider----
Mr. Portman. Before we scare those seniors and near seniors
that may be watching us today, we are not talking about the
trust fund. It is not touched by this. If there had been more
surplus built up because the economy continued to do as well as
it would have been doing, how would that surplus have been
used?
Mr. O'Neill. Would have been used to reduce debt held by
the public.
Mr. Portman. To pay down debt. That is the difference. I
think it needs to be made clear. Income to Social Security
trust funds can only be used for the purposes designated by
law, which is Social Security benefits and funding the Social
Security Administration. Isn't that the way the law currently
reads?
Mr. O'Neill. Yes, sir.
Mr. Portman. I think it is very important, Mr. Chairman,
that we not talk about dipping into the Social Security trust
funds, because we are not doing that. We have made that very
clear. I also would make the point again that it is incredibly
important that we grow this economy. That is the single most
important thing. That is what the tax relief is about. We would
be deeper into recession if we didn't have it. I appreciate
your testimony, Mr. Secretary.
Mr. O'Neill. Thank you.
Chairman Thomas. Does the gentleman from Maryland wish to
inquire?
Mr. Cardin. Thank you, Mr. Chairman. Mr. Secretary,
welcome.
I want to do something that is rarely done here. Rather
than put up a chart to start off with, Mr. Chairman, I am going
to go through the actual book, the Congressional Budget Office
book, page 161, which gives the backup information to a chart
that was used to indicate that we are still very high on the
total number or total revenues we receive as a percentage of
the gross domestic product.
[The table follows:]
APPENDIX F HISTORICAL BUDGET DATA 161
Table F-4
Revenues by Major Source, 1962-2001 (As a percentage of GDP)
Estate
Individual Corporate Social Excise and Customs Miscellaneous Total
Income Income Insurance Taxes Gift Duties Receipts Revenues
Taxes Taxes Taxes Taxes
1962........................................................... 8.0 3.6 3.0 2.2 0.4 0.2 0.1 17.5
1963........................................................... 7.9 3.6 3.3 2.2 0.4 0.2 0.2 17.8
1964........................................................... 7.6 3.7 3.4 2.1 0.4 0.2 0.2 17.5
1965........................................................... 7.1 3.7 3.2 2.1 0.4 0.2 0.2 17.0
1966........................................................... 7.3 4.0 3.4 1.7 0.4 0.2 0.2 17.3
1967........................................................... 7.6 4.2 4.0 1.7 0.4 0.2 0.3 18.3
1968........................................................... 7.9 3.3 3.9 1.6 0.4 0.2 0.3 17.6
1969........................................................... 9.2 3.9 4.1 1.6 0.4 0.2 0.3 19.7
1970........................................................... 8.9 3.2 4.4 1.5 0.4 0.2 0.3 19.0
1971........................................................... 8.0 2.5 4.4 1.5 0.3 0.2 0.4 17.3
1972........................................................... 8.0 2.7 4.5 1.3 0.5 0.3 0.3 17.6
1973........................................................... 7.9 2.8 4.8 1.2 0.4 0.2 0.3 17.6
1974........................................................... 8.3 2.7 5.2 1.2 0.3 0.2 0.4 18.3
1975........................................................... 7.8 2.6 5.4 1.1 0.3 0.2 0.4 17.9
1976........................................................... 7.6 2.4 5.2 1.0 0.3 0.2 0.5 17.2
1977........................................................... 8.0 2.8 5.4 0.9 0.4 0.3 0.3 18.0
1978........................................................... 8.2 2.7 5.5 0.8 0.2 0.3 0.3 18.0
1979........................................................... 8.7 2.6 5.5 0.7 0.2 0.3 0.4 18.5
1980........................................................... 8.9 2.4 5.8 0.9 0.2 0.3 0.5 18.9
1981........................................................... 9.3 2.0 6.0 1.3 0.2 0.3 0.5 19.6
1982........................................................... 9.2 1.5 6.2 1.1 0.2 0.3 0.5 19.1
1983........................................................... 8.4 1.1 6.1 1.0 0.2 0.3 0.5 17.4
1984........................................................... 7.8 1.5 6.2 1.0 0.2 0.3 0.4 17.3
1985........................................................... 8.1 1.5 6.4 0.9 0.2 0.3 0.4 17.7
1986........................................................... 7.9 1.4 6.5 0.7 0.2 0.3 0.5 17.5
1987........................................................... 8.4 1.8 6.5 0.7 0.2 0.3 0.4 18.4
1988........................................................... 8.0 1.9 6.7 0.7 0.2 0.3 0.4 18.1
1989........................................................... 8.2 1.9 6.6 0.6 0.2 0.3 0.4 18.3
1990........................................................... 8.1 1.6 6.6 0.6 0.2 0.3 0.5 18.0
1991........................................................... 7.9 1.7 6.7 0.7 0.2 0.3 0.4 17.8
1992........................................................... 7.7 1.6 6.6 0.7 0.2 0.3 0.4 17.5
1993........................................................... 7.8 1.8 6.5 0.7 0.2 0.3 0.3 17.6
1994........................................................... 7.8 2.0 6.6 0.8 0.2 0.3 0.3 18.1
1995........................................................... 8.1 2.1 6.6 0.8 0.2 0.3 0.4 18.5
1996........................................................... 8.5 2.2 6.6 0.7 0.2 0.2 0.3 18.9
1997........................................................... 9.0 2.2 6.6 0.7 0.2 0.2 0.3 19.3
1998........................................................... 9.6 2.2 6.6 0.7 0.3 0.2 0.4 19.9
1999........................................................... 9.6 2.0 6.7 0.8 0.3 0.2 0.4 20.0
2000........................................................... 10.3 2.1 6.7 0.7 0.3 0.2 0.4 20.8
2001........................................................... 9.8 1.5 6.8 0.7 0.3 0.2 0.4 19.6
SOURCE: Congressional Budget Office
Mr. Cardin. My reason for going to actually the source
document is to sort of walk through this for a moment to show
that it is true that income taxes over the last 40 years have
remained somewhat constant as a percentage of our GDP.
Corporate taxes have actually been reduced by about 50 percent
during that period of time. And the big loser--or the big
increase--has been on the social insurance taxes, which have
doubled in that same period of time.
I mention that because if you want to look at why we are
having a high percentage of revenue, it has mostly been the
growth in the social insurance programs, Social Security and
Medicare; and I think that is why many of us are very concerned
that, when we start looking now at the projections, we see that
the surpluses that are generated, as Mr. Levin pointed out, by
Social Security, that many of us last year thought would be
used for a solution to the Social Security problem is now off
the table. Because we don't have those dollars available to
invest in Social Security.
Mr. Secretary, I understand the one chart that we put up
that talks about congressional action, what we did last year.
We put that up just to point out that what Congress did last
year, in regards to the projected surplus, about 80 percent was
the tax cut; and that is why we lost the projected surpluses
and we are now in deficit. Twenty percent was basically the war
effort, increased spending. But 80 percent of what we did last
year, what Congress did last year, was the tax cut.
Now, Mr. McCrery said, why did we bring that up? I think it
is at least instructive as to what we should do this year. What
are we going to do this year? Now, first off has been the
stimulus package. Are we going to reduce corporate taxes more?
Is that what we plan to do? Or are we going to look at
additional spending as part of the unemployment insurance? Or,
as you point out in your statement, you support extending
uninsurance--UI benefits and providing temporary relief for
workers who have lost their insurance. I commend you for that.
But why haven't we brought up a bill by total agreement now
just on UI? In every recession we have brought forward a bill
to increase UI benefits. You know and I know that that money
will be put right back into the economy. It is the right thing
to do, it stimulates the economy, and yet it is being held
hostage for a larger stimulus package. Make no mistake about
it. It is being used to try to get additional corporate tax
reductions.
I think we should work on all these issues. But in the
meantime we passed a bill for the airlines, we are in the
process of passing a bill for the insurance industry, we passed
a lot of money to help New York, and we still haven't done
anything for displaced workers.
I implore you, as we go through this process, talk about
what Congress can do. Try to at least spin out the people who
have really been left out here, the displaced workers. Don't
get that tied up in the politics of additional tax cuts.
Because that is controversial. Many of us were told last year
that everything was going to be all right as long as we passed
this tax bill. Many of us said we thought the projections were
wrong. Well, you made 6 or $700 billion of technical
adjustments since last year. That means we made some mistakes
last year in projecting the surplus. So we know we have a
problem with displaced workers.
Why can't we get along with and get that done now by
agreement? I can assure you the Democrats are willing to work
with the Republicans and move out a separate bill on UI. Why
can't we do that at least? Isn't that the right thing to do?
Mr. O'Neill. Congressman, I would remind that on October
the 5th the President said he thought we should have a stimulus
bill, and he spelled out the components that he thought were
important to deal with: Include those people who were directly
affected by the events of September the 11th, including those
who were displaced workers, and to deal with those who had
reduced incomes and to provide some basis for additional job
creation. So I think the President has been very clear and we
have worked very hard with this Committee, with the Chairman of
this Committee through the month of October and November and
December with the belief that it was necessary to take action
on a stimulus bill and what we call an economic security
package.
The House passed versions of this twice, and we simply
could not get the Senate to agree to determine----
Mr. Cardin. I would suggest the Senate would be willing to
take up a UI package by itself.
Let me also suggest there is a $35 billion surplus in the
tax. The money is sitting out there. It is available. It is
temporary. It is immediate. And we have people now that have
exhausted their regular benefits that are no longer getting
unemployment insurance because Congress has not acted on this
subject. We need your help. We need your leadership. Divide
that out as we did for the airline industry. Divide that out as
we are doing for the insurance industry. It was right when we
did it for the airline industry. It was right what we are doing
for the insurance industry. But the displaced workers, it is
wrong that we haven't taken action and have separated out their
issues.
Thank you, Mr. Chairman.
Mr. O'Neill. In December, I truly believe that if Senator
Baucus had been free to bring our work to a conclusion we would
have passed stimulus before the Congress went home at the end
of December. And if we had been able to do what at least some
important Members of the Senate had wanted to do, we would have
passed terrorist risk insurance, too, which we failed to do. So
there is no doubt we need action in these areas.
I must tell you I think we worked with every good faith and
every good intention with the direction from the President that
he wanted these things done. We simply couldn't get them done
in the Senate.
Chairman Thomas. Thank the gentleman.
Just for purposes of clarification, the gentleman used two
phrases in regard to the stimulus: to ``reduce corporate taxes
more,'' and then you said ``additional corporate tax
reductions.'' The gentleman didn't mean to imply, did he, that
last year's tax reduction package affected corporations?
Mr. Cardin. No. If the Chairman would yield, I was
referring to the historic reductions over the last 40 years of
corporate taxes, which have been reduced by about 50 percent.
Chairman Thomas. Thank the gentleman. There was some
confusion on the Chair's part because, as everyone knows, there
were no corporate tax reductions in last year's package.
The gentleman from Pennsylvania, Mr. English, wish to
inquire?
Mr. English. Yes.
First of all, Mr. Secretary, I would like to thank you for
your demeanor at this hearing. In the face of some difficult
questions and sometimes rather partisan lines of questioning, I
think you have offered the American public some simple but
intellectually honest answers. I think you have added a great
deal to the debate by doing so.
I would like to start my questioning by seeking a little
further clarification. You are, I know, a student of economic
history. Has this country ever run a surplus in wartime?
Mr. O'Neill. No.
Mr. English. Has this country ever run a surplus during a
recession?
Mr. O'Neill. No.
Mr. English. I wonder, did this country not try to run a
surplus in the early part of the Great Depression and at that
point we saw the negative effect going into a surplus of trying
to--of going into a serious recession of trying to run a
surplus? The lessons of history suggest that maybe we should be
running a modest deficit now. I am very comfortable with what
the President has proposed.
Now, I am delighted that your budget continues to
accommodate--Mr. Chairman, I am not sure the Committee is in
order right now.
Chairman Thomas. The Committee will come to order.
Mr. English. Regular order. Thank you.
Getting back to my line of questioning, Mr. Secretary, I am
delighted to see that in the President's budget you have
continued to accommodate a stimulus package. Now we have heard
some statements made here today, but the fact is the House has
passed a stimulus package that was intended to provide direct
assistance to workers, improve their unemployment benefits and
I think at a very difficult time provide some assistance to
working families.
We have heard it suggested that the Administration should
drop its support for stimulus in order to maintain those parts
of the package that only provide assistance to workers. But I
represent a district which being--having spent time in Western
Pennsylvania you know is heavily manufacturing, is going
through a much deeper recession right now than the rest of the
country. Looking at the stimulus package, could you comment on
the importance of some of the corporate provisions that are
being dismissed on the other side? Specifically, does not the
expensing provision help manufacturing firms like we have in
Northwestern Pennsylvania, many of which are export oriented?
Mr. O'Neill. Absolutely. In fact, you know, I think the
point is--I prefer not to say these are corporate related--
these are business related. As I observed earlier, the real
engine of economic growth in this country is small firms. All
firms would benefit by being able to accelerate depreciation.
As the comment was made earlier for those of you who have been
in business or understand how business works, this would
produce free cash flow, right now, either to protect jobs that
are already out there or to add jobs for those firms that are
seeing increased demand.
There is no doubt that we should give this burst of
assistance to business organizations so that they can attend to
keeping and increasing job availability so our revenue can go
up at the Federal level, not down. As you observed, we do not
believe that it makes sense to raise taxes in a slow economic
period and for the sake of an accountant's surplus.
Mr. English. Specifically on that point, having been the
Chief Executive Officer of a large manufacturing concern, is it
not true that the companies that benefit from an expensing
provision are precisely those companies which in a recession
are making a heroic effort to invest back in their
productionline, improve their productivity, and work their way
back to profitability?
Mr. O'Neill. Exactly right.
Mr. English. By utilizing those provisions aren't they
actually reducing their bottom line? They are not actually
seeing a direct benefit. What we are seeing here, is it not
true, that the Tax Code gets out of their way when they make
critical capital investments that create jobs. So is this not a
tax incentive for job creation in the purest sense?
Mr. O'Neill. It preserves and creates jobs going forward.
Mr. English. My time has expired but, again, Mr. Secretary,
I thank you for taking the time to come here and offer I think
a little bit of clarity in the fog.
Mr. O'Neill. Thank you.
Chairman Thomas. Thank the gentleman for having his
questions and the answers remain within the 5-minute window.
The gentleman from Washington wish to inquire?
Mr. McDermott. Yes. Thank you, Mr. Chairman. I really
appreciate your having such a fine hearing because we don't
usually get much out of these hearings. They are kind of PR
events.
What I want to thank Mr. O'Neill for is admitting to Ms.
Dunn that the real point of the $600 billion tax cut is to
slide the estate tax out the door for the future, that it will
change all the planning that is done by all the people on the
top of the society. It is very good that you would admit that
to us.
The second thing that is good is that you admitted to Mr.
Levin that we are going to borrow from Social Security. At
least we got that out of you. Oh, now you are taking that back.
So you are not even going to tell us that you are borrowing the
money that is coming in for Social Security in this unified
budget.
But I want to go a little bit further and tell you why we
keep hammering on this issue. This chart shows what happened in
the Reagan years. That first blob of red is when they made a
cut and had a military buildup at the same time, and it went
down for the whole period of the 12 years. The green is what
happened during the Clinton Administration, and we just barely
got out of it, and now you are taking us back to the same
place.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512F.006
Mr. McDermott. We heard--when I came to Congress in 1988, I
heard, take Social Security off budget, stop stealing from
Social Security, the Democrats are stealing from Social
Security; and now you are doing exactly that. Now, why is that
important? Let me tell you why it is important. The Enron
Corporation went belly up and left thousands of people out
there with nothing but their Social Security. And you said that
you are an optimist. We said we would count how many times you
said optimist. You said nine times you are an optimist.
The fact is that it is hard to be optimistic if you really
look at what is happening to, say, United Airlines. We gave
them $15 billion to save the airlines, and here they are
talking about going into Chapter 11.
Now, what comes out--you know why they are going to have
trouble doing that of course is that it is an Employee Stock
Ownership Plan. Because all the pilots and all the mechanics
have got their money tied up in that company, all their future.
The only thing they know they will have is their Social
Security. Because if it goes into Chapter 11 they could lose it
all. They could lose it all.
You can say, well, yeah, companies go into Chapter 11, and
they come out. Yeah, like Eastern Airlines and Braniff and Pan
Am. You can go right down the list of companies that went into
Chapter 11 and didn't come out. So for these people out there
who have been working all their lives in good-paying jobs, they
are going to wind up with their Social Security or nothing.
So when you say that you are going to do this, it is very
hard for me to understand how do you explain to the American
people that in 2008, when we will have a new President, one way
or another, we are going to have the bulk of the 40 million
baby boomers starting onto Social Security. We all know that.
And if you were running a major company like an aluminum
company or something you couldn't get away with taking the
pension funds and giving them as stock dividends to your board
and your executives. You would--well, we will see what happens
to Enron. That is what they did. They gave stock dividends,
they gave options, they gave it all away to the guys on the
top, and the guys on the bottom got stuck.
If you were running a company you would be up here in one
of these four hearings that are going on on the Hill today
about what Enron did. But as a government official you can come
up here and say, well, we are going to ignore what is
happening. We can see it in 2008 coming. The average retirement
age today is 62, and that is when the baby boomers start
coming. How can you say that this borrowing from Social
Security somehow isn't going to have to be paid for right at
the time when this thing gets the worst and you are giving out
$600 billion more in taxes? You have got people showing up for
the only check they are going to have for their senior years.
How can you do that? Where is your planning for how you are
going to pay off those moneys that you have taken out of the
Social Security fund and put in?
Mr. O'Neill. Well, let me say again we haven't taken any
money out of the Social Security trust fund.
But let me ask you a question, if it is appropriate for me
to do that, Mr. Chairman. If I suggest that I infer from what
you are saying is that we should put the contingent liability
of the Social Security and all of their funds on the budget, I
would buy that. Is that what the Member is recommending, that
we begin running a balance sheet that shows the long-term
obligation? I would agree with that.
Mr. McDermott. You can't have it both ways.
Mr. O'Neill. I am happy to have it that way.
Mr. McDermott. Oh, sure. But that would show your
irresponsibility pretty quickly.
Mr. O'Neill. It would show that we have run a convention
since 1935 of using current payroll taxes to pay those who are
already retired. I don't think there is any dispute about that.
I think people who are students of this subject know that
we together, not just the Administration but the Federal
Government, as represented by Administrations and Members of
Congress, are going to have to make reforms in Social Security.
And I think not just to deliver what we promise, because I have
no doubt you all will never, ever renege on the commitments
that you have made collectively to the American people about
their Social Security benefits, but there is no doubt we are
going to have to have reform.
The President has said he believes that reform should move
us toward a system of wealth accumulation; and he appointed a
very wise, I think, and well-experienced bipartisan commission
that worked on the subject last year and made some proposals.
And the President has said we need to have an engagement and a
conversation with you all about specifically how to move
forward on this subject. So you know, again----
Mr. McDermott. Mr. O'Neill, that commission suggested
cutting benefits.
Mr. O'Neill. I don't think that is--I think they looked at
a number of different alternatives.
Mr. McDermott. What other alternatives?
Chairman Thomas. The time of the gentleman has expired. We
can't get into that question. We will get into the question as
we have hearings on Social Security directly.
I do have a question to the gentleman from Washington on
his chart. There is no indication of where it came from. My
question has to do with the comparisons between years on money.
Are these dollar amounts adjusted for inflation?
Mr. McDermott. It came out of the CBO figures. We took--the
whole thing was done by the Budget Committee using CBO figures.
So if there is some problem the gentleman can talk to CBO about
it.
Chairman Thomas. The gentleman assumes they are adjusted
for inflation or does not?
Mr. McDermott. You wouldn't think the CBO would put things
out that weren't adjusted for inflation, would you?
Chairman Thomas. I understand the gentleman is now
shoveling this chart off to the CBO once I asked a question
about it. Because the Chair could also indicate that, if the
gentleman would look prior to 1994, that the Democrats
controlled Congress for the entire time that Social Security
was going into the yellow and the red. It is only when the
Republicans gained the majority in the House that it was turned
around. That chart would show exactly the same results.
So the Chair is trying to understand what it is that the
gentleman is producing. If he now says he has no responsibility
for this chart and it is CBO, the Chair has a hard time
believing that it was structured quite this way by CBO.
Mr. McDermott. Mr. Reagan had no impact. That is what you
are telling us. That the Congress sat here and did it all by
themselves, and Mr. Reagan just sat down there and twiddled his
thumbs?
Chairman Thomas. No. The Chair is simply saying that, under
the Constitution, all revenue originates in the House. The
gentleman just dismissed the control of the House by the
Democrats. I believe it needs to be looked at in a more
sophisticated way than this chart indicates. We hope we will do
that during the hearing on Social Security, because, frankly,
we are running out of time, and we need to quit approaching
this from a partisan point of view and begin to look at
societal solutions.
The gentleman from Arizona wish to inquire.
Mr. Hayworth. I thank the Chairman for the time.
Mr. Secretary, thank you for coming. Though we may have had
our distinctions somewhat publicly in the past, I would like to
publicly commend you for your grasp of issues and for this
morning again coming through a somewhat cantankerous if not
hostile form of questioning from some of my colleagues.
Indeed, Mr. Secretary, as I look at the plethora of charts,
before I ask you a question, there is one question I just need
to ask my colleagues with a show of hands. Does anyone on this
Committee dias, anyone here at all, want to raise taxes? If you
do, just raise your hand. It is a philosophical question.
When all the charts are brought out to talk about how the
world would be if we had a tax increase or we left taxes there,
the clear implication to this Committee and the American people
is that some folks in this room want to raise taxes. Now,
either you do or you don't. You are telling us now here on the
public record, no hands go up, so apparently you don't want to
raise taxes. Thank you for that.
Mr. Secretary----
Mr. Rangel. Mr. Chairman, if we are----
Mr. Hayworth. Regular order, Mr. Chairman.
Chairman Thomas. The gentleman from New York is complaining
that we are now doing equal demagoging, and he is concerned
about that. If the gentleman would inquire about that.
Mr. Rangel. If you agreed with the Chair, put up your hand.
No hands go up. Let the record indicate that no one agrees with
the Chair.
Mr. Hayworth. Delightful. Mr. Secretary, seeing the actions
of my friend remind me of the actions or inactions of the
Senate Majority Leader, Mr. Daschle, who complained that the
tax relief was the source of all this problem but when push
came to shove said oh, no, we don't want to raise taxes.
Although I note also he is going to resort to, apparently, some
floor maneuvers to yet again do nothing on the economic
security package.
Mr. Secretary, in your opinion, if we had passed this
economic security package in December as it looked like we
could have done, where would the American economy be today?
Mr. O'Neill. I think if we had acted in October I suspect
we would have avoided tens of thousands of job losses that
occurred because we didn't act. And I have no doubt that, with
the components that were in the House-passed bills, people that
you had to face when you went home in December who had
exhausted their 26 weeks worth of unemployment insurance would
have had a continuation of benefits. It must have been really
difficult to explain to them why we couldn't do it here in
Washington.
So I have no doubt we would have been better off, and it
would have been measured in macroeconomic terms but, more
importantly, it would have been measured in the lives of
individual people out there who were laid off or unable to find
work because we couldn't get our act together here in
Washington. Most particularly, the other side of the Capitol
couldn't act.
Mr. Hayworth. Mr. Secretary, I appreciate you coming down.
It is interesting to hear some folks talk about holding certain
portions of this hostage. I just find the irony that the Senate
majority leader, who apparently champions the causes of the
downtrodden, continues to delay action on this, thereby hurting
the very people he purports to help.
Mr. Chairman, thank you for the time. Mr. Secretary, thank
you for your answer.
Chairman Thomas. Thank the gentleman for his brevity. The
gentleman from Wisconsin, Mr. Kleczka, wish to inquire?
Mr. Kleczka. Thank you, Mr. Chairman.
The question that was just asked is why wasn't the
unemployment compensation extension granted by now? And the
reason, as you know, Mr. Secretary, is that the Administration
and Republicans insisted on tying in with that unemployment
extension massive tax breaks for the business community under
the guise of stimulus.
One of the original bills that we passed out of this House,
and I don't know if it came before the Committee, was a repeal
of the alternative minimum tax for corporations, one which was
retroactive back to 1986. So the effect of that policy was to
give corporations like Ford and IBM a check from the Federal
Government of $1.4 billion; General Motors, $800 million;
Enron, $250 million. That is why unemployment compensation
extension did not pass, because it was tied in with these tax
breaks which are not justified. And as the Washington Post
said, the only stimulus provided for in that bill was to
stimulate campaign contributions to the supporters of that tax
cut.
You know, we have talked a lot about Social Security this
morning. I find it just totally amazing that when my Republican
colleagues were talking about a lockbox, locking away the
balance of Social Security, locking away the balance in
Medicare, that we were told by the Republicans that you
Democrats spent the money, you spent the money, and you put
worthless IOUs into the trust fund.
Well, my Lord, how things have changed. Now the Republicans
have taken over. The Republicans have the Administration. Now
those things aren't happening anymore. Now we are borrowing and
not spending it, and--as evidenced by the Secretary's own
words--and these aren't worthless IOUs anymore, they are
credits to the trust fund. My Lord, how things have changed in
2 years--or a little over 1 year, I should say.
Mr. Chairman, I would ask unanimous consent to put in the
record two articles that appeared in the Los Angeles Times.
Both are dated Tuesday, February 5th.
Chairman Thomas. Without objection.
Mr. Kleczka. The first one is entitled, Budget Sells Social
Security Down Red Ink River; and the first paragraph indicates,
in the budgets he delivered Monday President Bush relies on one
source of new money more than any other to pay for his
proposals: the trillions of dollars in Social Security funds
being set aside for the start of the baby boom retirement. That
is the one article.
The article also has contained in it a chart which is
almost identical to the one my colleague, Mr. McDermott, put up
which was not agreed to by some of my Republican colleagues.
But this one--it is the same kind of a chart--it indicates the
source is the Office of Management and Budget.
[The article follows:]
Los Angeles Times.
BUSH BUDGET PLAN
Budget Sells Social Security Down Red Ink River, Critics Say
By PETER G. GOSSELIN
TIMES STAFF WRITER
February 5 2002
WASHINGTON--In the budget he delivered Monday, President Bush
relies on one source of new money more than any other to pay for his
proposals: the trillions of dollars in Social Security funds being set
aside for the start of the baby boom retirement.
Although Bush and his aides warned in advance that the war on
terror and the need for homeland defense would require dipping into the
Social Security surplus and running deficits for a few years, the
dimensions of what the administration had in mind were not apparent
until the unveiling of the $2.13-trillion spending plan for fiscal
2003. The measure took the breath away from some Democrats and
independent analysts.
``The president is requiring the use of Social Security to pay for
the normal operations of government,'' said Robert D. Reischauer,
president of the nonpartisan Urban Institute and a Washington budget
veteran. ``That's the most significant, and largely unrecognized,
change he's making.''
Declared Citigroup vice chairman and former Clinton administration
Treasury Secretary Robert E. Rubin: ``This country is ill-served by
abandoning fiscal discipline and this [budget] abandons fiscal
discipline. It's the opposite of what was accomplished in the 1990s.''
To be sure, that opinion was not universally shared, and no one
claimed there was any danger to current retirees' benefits. Former
Democratic Sen. Daniel P. Moynihan, who cochaired a recent commission
on Social Security for Bush, said: ``My own view is that this is a war
budget. This is a national emergency and the president is responding.''
Still, many analysts expressed surprise, both at the extent of
deficits in the new Bush budget and its extensive use of Social
Security money to cover them. What most surprised them:
Far from running only a few years of deficits, the
new budget assumes that the government's so-called ``on-
budget'' spending, which covers everything from maintaining a
military to subsidizing Amtrak, will run $150 billion or more
in the red each year for the next decade, according to
documents and White House officials.
Instead of covering the bulk of the costs with
expanding income tax revenue that can be expected with the
resumption of economic growth, the plan relies heavily on
Social Security money to nudge the overall budget--which
includes on- and off-budget spending, such as payments to
retirees--into the black by 2005.
Although the president argues that the chief reason
the nation must run in the red is to pursue the war on terror,
his budget calls for new tax cuts--over and above the 10-year,
$1.3-trillion package approved last year--equal to or greater
than the new defense spending he seeks. The plan includes $590
billion in additional tax cuts over 10 years, but only $550
billion in new defense spending.
``Everybody concedes that deficit spending, if it is in response to
an emergency like Sept. 11, is not a bad thing,'' said Robert Bixby,
executive director of the anti-deficit Concord Coalition. ``But what's
astounding is that this goes way beyond what was [once] a strong
political consensus to save the Social Security surpluses.''
In fact, before the September attacks, the president was at the
center of that consensus. In addressing a joint session of Congress
only one year ago, he declared that ``to make sure the retirement
savings of America's seniors are not diverted in any other program, my
budget protects all . . . of the Social Security surplus for Social
Security, and for Social Security alone.'' His pledge was considered
critical to winning congressional passage of his $1.3-trillion tax cut.
But Bush and his aides appear to have decided that they cannot
pursue their new military and homeland defense goals, protect the
president's already approved tax cuts and maintain the Social Security
surplus. And they apparently think there is little political cost to
giving up on the surplus pledge.
In part, that's because there is no immediate danger to retirees'
checks. The system expects to collect more than $700 billion in revenue
this fiscal year and pay out only about $470 billion in benefits. But
analysts warn that failure to keep running surpluses and paying off
Federal debt will leave the country in a painful bind as baby boomers
retire in growing numbers, and will burden the smaller generation of
workers that follows with rising Social Security tax costs.
``By paying down the debt, we were increasing national savings,
reducing the upward pressure on mortgages and corporate debt, and
cutting the government's own interest bill,'' Rubin said.
Analysts drew the analogy to a couple paying off their home
mortgage before retiring in order to cut monthly costs and save. They
said that Washington was making the payoff in the nick of time because
boomers are expected to begin leaving the work force in substantial
numbers around the end of the decade.
Rubin and other analysts said that the administration's sudden
lurch into deficits demonstrates that last year's tax cuts were more
than the country could afford, and that any further cuts would compound
the problem. ``They're unwise and unjustified,'' said Reischauer.
But it was unclear Monday whether congressional Democrats will find
the political spine to oppose a president with sky-high public approval
ratings in the midst of a war on terror.
Capitol Hill Democrats criticized Bush for submitting a budget that
goes into deficit, but they offered no suggestions about how to bring
it back into the black.
In fact, the lawmakers suggested they would support policies that
would make the deficit even bigger: While supporting Bush's increases
in defense and homeland security, Democrats opposed offsetting cuts in
highway, environmental and other domestic programs. At the same time,
Democrats insisted they would not seek a tax increase or rollback of
last year's tax cut.
About all that congressional Democrats would offer were ideas for
curbing future tax cuts. Senate Budget Committee Chairman Kent Conrad
(D-N.D.) said that the Democrats' budget proposal may include a
``trigger'' that would turn off future cuts or spending increases if
the tax revenue to pay for them do not materialize.
______
[GRAPHIC] [TIFF OMITTED] T9512G.007
Mr. Kleczka. Mr. Chairman, the other article I would like
to put in the record is the L.A. article entitled, Don't Tap
Into Social Security. And in this particular article they have
a poll. There is an L.A. poll, and here is what the poll
indicates: that in a Times survey fully four-fifths of
Americans, including more than two-thirds of the Republicans--
let me repeat that. The Times survey indicates fully four-
fifths of Americans, including more than two-thirds of
Republicans, say they would rather defer future tax cuts than
use Social Security money that way. Thank you, Mr. Chairman.
[The article follows:]
Los Angeles Times.
TIMES POLL
Don't Tap Into Social Security
Nation: Four-fifths favor tax cut deferment over using the fund's
revenue to pay for other programs.
By RONALD BROWNSTEIN
Times Staff Writer
February 5 2002
WASHINGTON--Although Americans express resounding approval of
President Bush's performance at home and abroad, an overwhelming
majority would rather cancel later stages of his signature tax cut than
tap Social Security revenue to pay for other government programs, a Los
Angeles Times Poll has found.
With war, the recession and the tax cut's cost straining the
government's bottom line, the White House on Monday released a budget
that projects Washington will need to divert $1.73 trillion in Social
Security money to fund other programs through 2012. But in the Times
survey, fully four-fifths of Americans--including more than two-thirds
of Republicans--say they would rather defer tax cuts than use Social
Security money that way.
Those findings may be the most ominous clouds for Bush in a
political environment defined mostly by his extraordinarily broad
support.
Congressional Democrats charge that Bush's tax cut, more than any
other factor, obliterated the anticipated Federal budget surpluses and
forced the government to dip deeply into Social Security revenue--
barely more than a year after a 2000 campaign in which both parties
pledged to set aside that money in a ``lockbox'' to reduce the national
debt.
So far, the poll suggests, Democrats have not pinned the blame on
Bush for the reversal: Substantially more Americans blame the terrorist
attacks of Sept. 11 than the tax cut and Bush's policies for the return
of federal deficits. And more Americans express faith in Bush than
congressional Democrats to revive the economy.
But on a series of questions, a majority of Americans indicated an
openness to reconsidering the tax cut--something Bush has pledged will
happen only ``over my dead body.'' Said Doris Walls, a secretary in
Denton, Md., who responded to the survey: ``Absolutely do not use
Social Security for anything other than Social Security. If they can't
figure out some other way... don't go ahead [with the tax cut].''
The Times Poll, supervised by Polling Director Susan Pinkus,
surveyed 1,545 adults from Jan. 31 to Feb. 3. It has a margin of
sampling error of plus or minus 3 percentage points.
The survey, taken after Bush's State of the Union address Jan. 29,
finds the president in a commanding position. Fully 80% of Americans
say they approve of his job performance--down only slightly from his
stratospheric 86% rating in November. (Even nearly two-thirds of
Democrats give him positive marks.) Three-fourths say they approve of
his handling of foreign policy; 83% endorse his performance on the war
in Afghanistan.
Jan Kendall, a small-businessowner in Slidell, La., offered a
typical assessment. ``I don't think anyone could have done anything
better on the war,'' she said. ``He held his cool when initially it
would have been so easy to just start sending fliers over there.''
Another measure of the confidence in Bush as commander in chief:
More than three-fourths of Americans said they would support military
action against Iraq, which he named as part of an ``axis of evil'' that
threatens other countries.
The backing Bush has generated through his performance in the
crucible of war has spilled over to other issues, the survey found. By
42% to 30%, Americans expressed more confidence in Republicans than
Democrats to handle the major problems facing the country. That
advantage may reflect the sense that terrorism has become the nation's
top priority. Asked directly which party they trust to fight terrorism,
Americans picked the GOP by more than 3 to 1.
With his recent signing of landmark legislation reforming federal
education programs, Bush has also erased the historic Democratic
advantage on that critical domestic issue: More Americans express
confidence in Bush (38%) than Democrats (30%) to improve the public
schools. On health care--another issue that has long favored
Democrats--Bush and congressional Republicans have fought the Democrats
to a draw, the poll found.
The survey found substantial support for several other priorities
Bush laid out in his State of the Union address. For instance, more
than eight in 10 respondents said they support his call for spending
$38 billion on homeland security next year; a thin majority said it
would support the request even if it means cuts in other domestic
programs.
Likewise, three-fourths of respondents endorsed his proposed $48-
billion increase in defense spending, and just over half said they
would still support that added money even if it requires cuts in
domestic programs. ``That has to be our top priority because we have to
build up our armed forces; we have to get our country safe,'' said
Sharon McCann, a homemaker in Bird City, Kan.
On other fronts, two-thirds embraced Bush's proposal to build a
national missile defense. And, though considerably more Americans
expressed confidence in congressional Democrats than Bush to protect
the environment, a narrow plurality sided with the president on the
central environmental issue dividing the two parties: By 48% to 43%,
Americans said they supported the administration's proposal to open
part of the Arctic National Wildlife Refuge to energy exploration.
But on the economy, Social Security and the Federal budget, the
poll finds more hesitance about Bush--and a few outright chinks in his
formidable political armor. The country appears torn between its
general confidence in Bush, its attraction to walling off Social
Security money and its uncertainty about the economic value of the tax
cut at the heart of the president's domestic agenda.
Approved last year, the tax cut totals $1.3 trillion and is set to
be phased in over 10 years.
The confidence in Bush is evident in the striking finding that two-
thirds of Americans support his handling of the economy, even though
four-fifths say the country is in recession. A third of Americans say
they trust Bush most to revive the economy, compared with 29% who look
toward congressional Democrats and 19% for congressional Republicans.
Even if that's a much smaller advantage than Bush enjoys on security-
related issues, rarely do voters express so much backing for a
president's economic management when the economy is sputtering.
Yet these questions divide the country along partisan lines unlike
anything relating to the war on terrorism. For instance, nearly three-
fifths of Democrats picked congressional Democrats as best able to
revive the economy, whereas over half of the Republicans picked Bush.
Independents divided almost evenly between the two sides.
These partisan divisions resurface in other economic questions.
Overall, the country appears ambivalent about whether Bush's policies
will strengthen the economy: 38% said yes, 41% said they will make no
difference and 16% said they will weaken it. The country also is
divided about his tax cut, with 43% saying it's been good for the
economy and 47% saying it's either been bad (29%) or had no effect
(18%).
On both questions, Americans divided sharply along partisan and
ideological lines. Conservatives such as McCann remain enthusiastic
about keeping the tax cut law in place. ``If you have tax cuts, the
economy does better; when you raise taxes, the economy doesn't do
well,'' she said.
But Gene Meyers, a retired architect and self-identified liberal in
New York City, believes the tax cut has been a mistake. ``I think it's
insane,'' he said. ``The president campaigned on a fiscally responsible
[platform]. I cannot understand how you can be fiscally responsible and
create deficits wantonly.''
In the survey, many Americans shared Meyers' fear about deficits.
Looking backward, Americans were not inclined to indict Bush for the
return of the red ink: Just 11% blamed the tax cut and 13% Bush's
policies, compared with 42% who blamed the terrorist attacks and 15%
the recession.
But looking forward, the poll found enormous resistance across
party lines to tapping Social Security money, or raising the national
debt, to pay for other government programs, as the budget Bush released
Monday proposes to do.
Asked whether future installments of the Bush tax cut scheduled for
2004 and 2006 should go through if that meant the government would have
to use Social Security revenue to fund other programs, Americans said
no by 81% to 13%. Even roughly seven in 10 Republicans and
conservatives said they would shelve the tax cut under those
circumstances.
Asked if the tax cut should go through if it meant tapping Social
Security and increasing the national debt--as Bush's budget proposes
for the next 3 years--84% said no. Looking toward the 2004 presidential
election, 48% of registered voters said they are inclined to give Bush
another term, whereas 30% said they would prefer a Democrat. But when
asked which party they intend to support in this fall's congressional
elections--47% picked the Democrats, 41% the GOP.
Chairman Thomas. Thank the gentleman. The gentleman from
Illinois wish to inquire?
Mr. Weller. Thank you, Mr. Chairman. Mr. Secretary, now it
is good afternoon; and thank you for coming before the
Committee today.
I also want to commend you on your frankness and direct
response to the questions being asked today.
The Bush Administration has got a big challenge. You are
fighting a war against terrorism. You are working to make our
homeland more secure here at home. You are also working to get
the economy moving again. And President Bush's speech last week
was right to the point. It is all about jobs. We want to win
the war against terrorism. We have to get this economy moving
again.
If you look at the history here, it is an established fact
President Bush inherited a weakening economy when he came in.
In January, his White House housewarming present was a weaker
economy. He proposed the tax cut using 20 percent, 20 cents on
the dollar, the surplus at that time, put some extra money in
the pocketbooks of folks back home. And economists tell us it
was working. In August, the economy was beginning to grow
again. Unfortunately, the tragedy of the terrorist attack not
only cost thousands of lives, but it has hurt our economy.
Since September 11th over a million Americans have lost their
jobs as a result of the terrorist attack and the psychological
blow to the confidence of investors and consumers. Of course,
we have been working now to try and get it going again.
The President's budget that he has outlined this week works
toward that goal, getting this economy moving again. Clearly,
we have to win this war on terrorism. It is not going to begin
and end in Afghanistan. It is going to take years. It is going
to cost billions to make our local communities more secure. But
we need to get this economy going again.
One of the concerns I have got is there are some on the
other side of the aisle, Senator Kennedy, Senator Jeffords and
others, and perhaps some in this room, who have advocated
raising taxes. You say, and you made it very clear this
morning, that delaying the President's tax cut as it is going
to be phased in, lowering the rates for small businesses and
entrepreneurs, eliminating the marriage tax penalty,
eliminating the death tax, giving greater opportunity to save
for retirement, to increase the child tax deduction, you stated
that killing that phase-in is a tax increase. And from your
standpoint, as someone who was in business for years, what--you
know, this type of tax increase as proposed by Senator Kennedy
and Senator Jeffords and others, how would that impact their
economic recovery?
Mr. O'Neill. It would slow down the track that we would
otherwise follow. It would reduce the number of jobs in the
economy, compared to where we would otherwise be, and it would
be a substantial negative.
I think there really is a telling point, which I said
earlier, that by the rules of the Congress, if--I can't believe
this is possible, but if you were to decide to change the
benefits that were flowing for child credits and marriage
penalty and the other things that seemed so wise last year,
your own rules would show it as a tax increase.
So I think there is no doubt, both in substance and in fact
and by scoring procedures, if you don't follow through on what
you have already voted you are really voting for a tax
increase. I think there is no doubt in the economic observation
that as government takes more it reduces the economic potential
of a society.
Mr. Weller. You know, Mr. Secretary, I have heard not one
word from a real-world economist saying we should increase
taxes during a recession. Many economists also told me that
small business people, investors and consumers, their
confidence is based on continuity, and they are already making
decisions today based on those changes in tax law. And if we
were to change that tax law as they are basing their decisions
upon it, it could jeopardize economic growth.
So I appreciate--like you used to say, if it walks like a
duck, quacks like a duck, it is a duck. In this case, if it is
a tax increase, it is a tax increase; and that is what Senator
Kennedy and Senator Jeffords and others have proposed.
Chairman Thomas. The gentleman from Georgia wish to
inquire?
Mr. Lewis OF GEORGIA. Thank you, Mr. Chairman. Thank you,
Mr. Secretary, for being here.
Mr. Secretary, I want you to tell us what does this budget
do to preserve Social Security and what does the budget do to
strengthen Medicare?
In addition, I want you to tell us how much does the budget
take from Social Security, how much does the budget take from
Medicare?
Mr. O'Neill. Well, this budget fully funds the obligations
that the Federal Government has to--under current law to Social
Security and Medicare beneficiaries. It takes nothing away. In
fact, the President has proposed that we make some
modifications in benefits going forward for the Medicaid--for
the Medicare population in the form of assistance with drug
costs. So I think it is a very fulsome budget in meeting our
responsibilities.
Mr. Lewis OF GEORGIA. Mr. Secretary, could you tell me how
much you will be borrowing from future retirees? It is my
understanding over a period of 10 years we would be taking $1.4
trillion from Social Security, $550 billion from Medicare. Am I
right?
Mr. O'Neill. No, you are wrong.
Mr. Lewis OF GEORGIA. Tell me.
Mr. O'Neill. We are going to take all the Social Security
and Medicare money, and we are going to credit it to the Social
Security trust fund. Now, from a cash flow point of view, once
it is credited to those accounts where it belongs, from a
financial accounting point of view--if you are saying to me,
let's take that money then and use it to buy down the debt, we
could do that. And then we will go out to the public, and we
will borrow money to meet all of the cash flow obligations.
It seems to me, you know, if this is really a serious
conversation that we have been hearing this morning, we would
solve all of this illusion that we are borrowing money from
Social Security or Medicare by simply using all of that money
to go ahead and buy down debt held by the public, and the next
day we could borrow the money that is necessary to meet the
cash obligations of the Federal Government, which we only do in
response to laws passed by the Congress.
We are just doing--we are executing the laws passed by the
Congress. It really doesn't seem particularly enlightening to
me for people out there in America to believe from this
conversation that we in the Administration or you in the
Congress would really seek to damage them by not having the
money to meet our obligations to Social Security recipients and
Medicare recipients going forward. I think nothing could be
further from the truth.
Mr. Lewis OF GEORGIA. When you do propose paying the
credits back, would the funds be there when the baby boomers
come of age?
Mr. O'Neill. Well, again, I would say, as I did before, if
implicit in this question is is it a good idea to put the
unfunded liability of all of our trust funds on a balance sheet
and begin using that as a discipline for how we do business
here in Washington, I would sign up in a moment. I don't find
many Members who want to do that.
Mr. Lewis OF GEORGIA. Mr. Secretary, let me move to another
area. I am deeply concerned about the Enron situation, not just
for the thousand Enron employees, but in my home State of
Georgia, the Georgia State employees and teacher retirement
system lost more than $125 million. Is there anything in the
budget--are you proposing anything to help these people?
Mr. O'Neill. Help me a little bit. These are people who are
employed by Enron?
Mr. Lewis OF GEORGIA. No, these are people that invested
their retirement fund in Enron stock, and they lost more than
$125 million.
Mr. O'Neill. The American people should pay for that?
Mr. Lewis OF GEORGIA. No, I am asking.
Mr. O'Neill. We have not proposed that the American people
should pay off those people who lose money in any stock.
Mr. Lewis OF GEORGIA. This is their pension. This is their
retirement. We bail out the airlines. We help the major
airlines. Can we help the people who lost hundreds, thousands
and millions of dollars--in the case of Georgia, $125 million?
Mr. O'Neill. The Congress passed--for the airlines, the
Congress passed an emergency--a $5 billion cash flow assistance
bill--it was agreed among all the Members and the
Administration--and a $10 billion provisional loan guaranty
program. I think that is true.
But I don't see the parallel between that where, in effect,
the Federal Government shut down, appropriately so, all of the
air travel for a period of time and because of the terrorist
attacks, which was an attack on all the American people, I
think you acted in a wise way to make sure that the airline
industry did not go into complete liquidation. I think that was
a wise thing.
The general import of your other question is that somehow
we should save the American taxpayers--if individuals make
investments in individual companies and it doesn't turn out
well that the American taxpayer should make up that difference.
I don't find that is a very good idea.
Mr. Lewis OF GEORGIA. Maybe not on your watch. But some
time ago, Mr. Secretary, we bailed out the S&Ls and why not
bail out the retirees? They only depend on Social Security. I
guess that would be the only thing left. But if we steal from
Social Security and leave all of this red ink, there won't be
much of anything left for anyone.
Chairman Thomas. The gentleman's time has expired. The
gentleman from Tennessee wish to inquire?
Mr. Tanner. Thank you very much, Mr. Chairman. Thank you,
Mr. Secretary.
I do not have a chart. I think the conversation this
morning has been enlightening in that probably charts should
be--that are 10 years in nature should be taken with a grain of
salt. Both of us know that the charts we had last year showing
what was going to happen over the next 10 years are totally in
error. I would suggest that most of the charts we have seen
this morning about what is going to happen in the next 10 years
are probably in error.
Let me tell you what bothers me about the budget. It is the
obligation on the next generation. We have had a lot of talk
about what is Social Security borrowing and so forth. I agree.
It really doesn't matter if one begins to talk about the debt
of the country and the debt of the individual citizens who live
here.
As you know, the Blue Dogs talked about that last year. We
said, wait a minute. We ought not to go into a 10-year
projection and use up most, if not all of it, based on what we
think is going to happen. We couldn't foresee the war. We
couldn't foresee a natural disaster. We couldn't foresee a lot
of things. We can't this year, over the next 10.
We are not reducing the Nation's debt like we thought we
were going to. I think you will agree with that statement. Our
financial condition as a nation has deteriorated from the time
you were here last year till today in a rather major way, given
10-year projections as the measure of that financial condition.
Would you not agree that we have deteriorated in that regard?
Mr. O'Neill. We have had some change, but it is very
interesting to see where we are going. I showed you earlier the
chart that I think represents a real truth that we are going to
have a huge increase in revenue at the Federal level over the
next 10 years without fail. I think there is no doubt about
that. And it is also true that government debt burden is going
to fall as interest costs are a smaller and smaller fraction of
Federal spending in total. So I think we are going back--by our
light, we are going back on a track of debt reduction as we go
through this 10-year period.
So while there is some delay in how fast we are going to
buy back the debt, it is still our intent with our program and
the tax regime to reduce the outstanding debt held by the
public.
Mr. Tanner. Well, Mr. Secretary, that is nice to know. But
I know this: Common sense tells me that we are borrowing money
and paying interest on that money every year, that we are not
retiring the debt like we thought we were, and just from that
standpoint common sense tells me our condition is worse, not
better than it was last year.
Now you can talk about how you parse that out, but I also
know that you are right when you say restoring growth in the
economy is a key to getting out of this. I know that as the
government borrows money it puts upward pressure on interest
rates. And as interest rates rise, then the money available in
the private sector to create jobs may not be as fluid as
thought.
So all I am saying is I don't think this budget that you
have presented has enough correlation between income, outgo and
debt retirement. Because over the next 10 years you do not
foresee in this budget an on-budget surplus, that is, monies
available to pay down debt for the future generations that
don't come from the social insurance tax or some other. I think
that is a shortcoming of this budget, and I hope you will look
at it.
I would say this: When people say that if one suggests that
any part of the tax cut that is to be phased in over the next
10 years by deferring it is raising taxes, then it seems to me
that we raise taxes in 2011 when we passed it, in a way
probably the most major increase in American history.
All I am saying is, as Mr. Greenspan said, when we look at
the next 9 years--and you will be back next year, I hope, and I
hope we are all here--I hope you will figure out a way to
present a budget that gets us into a surplus situation in the
on-budget area before another 9 years goes by. I don't think
that is the best we can do. Thank you.
Chairman Thomas. Thank the gentleman. The gentleman from
Missouri, Mr. Hulshof, wish to inquire?
Mr. Hulshof. I do. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
I think some of the questioning, not of the last
questioner, my friend from Tennessee, but I think some of the
questioning of you this morning has been a bit unfair. They
have taken statements that you made before September the 11th
and previous appearances here and then comparing where we are
today as a nation with our economy and saying with righteous
indignation which I think has been misplaced, in the words of
one of my colleagues, what a shocking change.
Well, our Nation has experienced a shocking change. None of
us could have anticipated the terrorist attacks or the
recession or homeland security, the round-the-clock rebuilding
and recovery effort. So I think comparing statements that you
may have made to us a year ago to today I think is a little bit
unfair to you. I do want to thank you for your strong support
of what this Committee has put forward in the short-term
economic stimulus bill.
I think it is interesting to point out that in December
1999, speaking of statements, some time ago, in a speech that
then Governor Bush made to the greater Des Moines Iowa Chamber
of Commerce, he said this: I also believe in tax cuts for
another practical reason, because they provide insurance
against economic recession. Sometimes the economists are wrong,
then Governor Bush said. I can remember recoveries that were
supposed to end but didn't and recessions that weren't supposed
to happen but did. I hope for continued growth, but it is not
guaranteed. A recession would doom our balanced budget. But if
delayed until a downturn begins, tax cuts would come too late
to prevent a recession. Putting more wealth in the hands of the
earners and creators of wealth now before trouble comes would
give our current expansion a timely second wind. End quote.
Again, this was in December 1999. So I applaud your
endorsement of what we have tried to do in the short term as
far as economic stimulus. I agree that a stimulus is still
necessary, as you have stated in your testimony, to hasten and
to strengthen our recovery.
What I want to do, though, in the last minute or so that I
have, is move away from the short-term stimulus to long-term
certainty. As you pointed out and as my colleague in the State
of Washington questioned you earlier, the President last
Tuesday in the State of the Union stated, for the sake of long-
term growth and to help Americans plan for the future, let's
make those tax cuts permanent, end quote.
Now, my colleague, Paul Ryan, who is where he needs to be
right now with his wife and newborn daughter, he and I have
cosponsored H.R. 2316 that would sunset the sunset, that is, to
make the tax cuts permanent. I think probably most Americans
may not realize as they are perusing their 1040s now that the
increased child tax credit or the phaseout of the marriage
penalty or certainly the phaseout of the Federal death tax,
that those are temporary in nature because of that arcane
technical budget rule that put the sunset on an agriculture tax
cut.
I would say, to make the record complete, that when Mr.
Stark was inquiring and talked about a CBO budget estimate, the
joint tax told us last November if we had made the tax cuts
permanent in the last fiscal year it would have been a cost to
the government of $112 billion.
Now we are now in a new fiscal year. I know that for those
that live or die by these estimates--I acknowledge what Mr.
Tanner said--these estimates we know are going to be wrong, but
that is not the sum of money that--I think there is some fault
and assumptions that the Congressional Budget Office has made
as far as their claim that this would be a $627 billion hit.
But putting the numbers aside, I think from a public policy
point of view that this is the right thing to do.
You talked about the positive economic implications of
making the tax cut permanent. What I hope we don't get into is
kicking along these extenders as we do with research and
development or work opportunity tax credit or welfare to work
tax credit. Can you envision a situation where we were to
continue to phase out the death tax maybe in 2-year increments
or 4-year increments? Would that satisfy the certainty, Mr.
Secretary?
Mr. O'Neill. No, I think permanent is really permanent. And
I suppose it is--maybe it is too much to hope for, but it would
be great if we could get to a position where--maybe we could
create another device to show that people care by voting, that
they care about these things, instead of actually leaving the
cliff-hanging uncertainty of whether or not the Congress is
going to come through with things that everyone seems to agree
with are necessary and desirable to do.
Mr. Hulshof. As my final comment I would echo what Mr.
Tanner said, again, my friend from Tennessee, on December 31st
of 2010: We will have lower tax rates. And if Congress does
nothing, the lower 10 percent tax bracket will go up to 15
percent, the lower 35--the 35 percent tax rate will go up,
again, close to 40 percent.
Putting aside whether a suspension of the current tax cuts
is a tax increase or not, certainly if Congress fails to act
would you agree with me that on January 1, 2011 we are going to
see significant tax increases if Congress fails to act?
Mr. O'Neill. Absolutely.
Mr. Hulshof. Thank you. No further questions, Mr. Chairman.
Chairman Thomas. Thank the gentleman. The gentleman from
California, Mr. Becerra, wish to inquire?
Mr. Becerra. Thank you, Mr. Chairman.
Mr. Secretary, thank you very much for being here and your
patience as we go through all these questions.
I think over the next year we are all trying to figure out
how we get through this debacle that we see economically. No
one could have expected the recession to hit as quickly as it
did last year. Certainly no one expected 9/11. But now that we
confront it, we have to deal with it.
I appreciate the remarks that you have made and the
President's State of the Union address. Clearly, it is going to
be a choice of a balance of priorities, where we choose. I
don't think there is any question that the President outlined
the need for more homeland security, the need to be able to
defend against terrorism. So as we weigh the balance--weigh the
competing interests and engage in that balancing act, I think a
lot of us are asking ourselves, what are the President's real
priorities?
We understand that he has indicated an interest in
increasing homeland security, and I don't think anyone will
question the need for that. Whether you weigh that against
Social Security or education or tax cuts, I think all of us are
prepared to do what is necessary when it comes to homeland
security.
When it comes to the war on terrorism, I believe the
President himself said it probably is costing us a billion
dollars a month. So that is about $12 billion a year. If you
were to extend that for 10 years, and God forbid that for the
next 10 years we are under the same scenario, that would be
$120 billion over the next 10 years to deal with terrorism.
When I look at the President's budget on education, I start
to have some concerns. Because while I agree that we need to do
what we can on homeland security and while I agree that we have
to deal with terrorism, if you assume it is $120 billion over
the next 10 years, and, as I said, God forbid it is, none of
those priorities will eat up the Social Security trust fund or
the Medicare trust fund. But, yet, the President's budget takes
at the end of 10 years close to $2 trillion out of those trust
funds that are meant for retirement and medical services to the
elderly.
Then when you look at the President's budget, while he
increases spending on defense, which in some cases I believe is
very necessary, he cuts programs like summer job programs. He
eliminates them. He eliminates the program to reduce class size
throughout the Nation, completely eliminates the funding for
it. He eliminates all funding for school construction.
I must tell you in Los Angeles, where I live, in my
district we are having to build more than 60 schools in the
next 5 years just to meet the rate of growth. We are not
talking about even reducing the size of the classroom.
So it concerns me greatly when we see so much money going
out and we see that the tax cut that we passed last year--I did
not vote for it but that passed last year and that the
President is proposing would now eat into it even worse.
To me, for us to have a year ago voted and for the
Administration to have talked about a lockbox for Social
Security, to say we are going to keep that money locked away,
none of us will touch it, we will keep our greedy fingers off
of it, all of a sudden we find that vote was--I remember going
back home. Many people said it would be it was worthless. That
lockbox has been blown apart by this budget.
I don't see how we can justify to the American people doing
differently than what they themselves must do. We all go into
deficit spending. I think we all understand that. When we buy a
home, we don't pay the money up front for that home. We take
out a mortgage. That is deficit spending. But we know it is for
a good reason, so over the next 20 or 30 years that we are
going into deficit spending on that mortgage. When we provide
for our kids' college education, we go into deficit spending
because we know there is a good at the end of that when our
child receives that degree.
I don't see how we believe that in providing tax cuts that
will benefit megacorporations or the wealthiest of Americans--
because the estate tax cut repeal, for example, which would
benefit only the 2 percent richest Americans, American
families, certainly does nothing to help the 98 percent of
other Americans--that we can justify that balancing act and
talking about tax cuts versus Social Security or tax cuts
versus education or tax cuts versus homeland security.
Mr. Becerra. If I am going to spend money and save some
money, and certainly I hope we will, I would hope that the
President would come back to us and say, ``These are my
priorities.''
What I see right now as the President's priority is tax
cuts above Social Security, tax cuts above prescription drugs
for seniors, tax cuts above some review programs for low-income
children who otherwise spend their days on the street corners,
and tax cuts above even something as important as special
education, which for years the Federal Government has refused
to fund at the level it had committed to more than 15 years
ago. We committed as a government to fund 40 percent of all the
costs of special education. We only do about 10 to 12 percent.
So I hope, Mr. Secretary, that you will go back and talk to
the President about what our priorities are and we will come
back in a bipartisan fashion and do something for the American
people.
Thank you, Mr. Chairman.
Mr. O'Neill. Mr. Chairman, may I just say a couple of
things on these comments?
First of all, I hope I made it really clear that we do not
think we should raise taxes in this slow economic period. And
then your question about priorities, maybe you don't join me,
maybe you think we should raise taxes----
Mr. Becerra. Mr. Secretary, I never said we should raise
taxes.
Mr. O'Neill. You join us in not wanting to raise taxes.
Then I would ask how would you rearrange, given what the
President has said--and we have to prosecute the war on
terrorism, we have to deal with homeland security, and then you
mentioned education several times.
Let me tell you the numbers for education. In 1996,
discretionary spending for the Department of Education was $23
billion. The President's proposal for 2003 is $50,310,000,000.
If that is not an expression of priority--and maybe you are
saying, well, it was all done before, the number in 2000 or
fiscal year 2001 was $40 billion, I think it speaks to the
issue of whether or not the President cares about education; he
cares about it, he puts his money where his mouth is, and he
has not reduced it. He has increased hugely education-proposed
spending. He led the charge that gave us the hope of
fulfillment of ``no child left behind.''
So I don't think it is true. No one should believe that
this President has chosen prosecuting the war on terrorism over
the importance of educating children. That is simply not true.
Mr. Becerra. Mr. Secretary, he has proposed to eliminate
rural education programs, drug prevention programs, reduce
drug-free school programs. We can use those programs in our
districts, Mr. Secretary.
Chairman Thomas. The gentleman's time has expired.
Mr. O'Neill. Just one more comment. This President has made
deliberate decisions about programs that either have not worked
or which can be funded under these broader education
authorities that give more discretion to the local recipients
instead of earmarks from here in Washington.
Mr. Becerra. Dropout prevention programs should be
eliminated?
Chairman Thomas. The gentleman's time has expired. The
gentlewoman from Florida?
Mrs. Thurman. Mr. Secretary, I, like everybody else, thank
you for being here today, but I do kind of want to answer what
you just said about priorities.
Remembering in 1996, and when you recognized the $24
billion that was suggested for education as to now, that was a
Republican Congress. There were a lot of us fighting for
additional dollars for education, but we at that time were also
concerned about deficits and deficit spending, and we were
trying to put ourselves on an economic track.
In fact, in 1997, this Committee voted for a balanced
budget amendment or a balanced budget, and in fact where we did
tax cuts, where we did what we thought was proper for getting
this economy going. So I don't think you can just say, you
know, all of a sudden accept the fact that now all of a sudden
everybody believes we can just jump it up to $40 billion and
not worry about what is happening with the deficit.
I would also say to some that have left now, let me just
say, when we talk about Kennedy, when we talk about Jeb Bush in
Florida, he is under a constitutional amendment on a balanced
budget. Does he not have the same concerns as homeland
security? Are we not asking our law enforcement at the State
and local levels to worry about that as well? Do you not
believe that his educational priorities are not the same?
We all believe in these priorities. We believe in the
Medicaid system at our State level. But they are in a different
situation because they have a balanced budget. They had to
delay their tax cut. They are now in session having to overhaul
their whole tax system, about which, by the way, there is a lot
of concern of what is going on.
So I think when you start listing people and who raises
taxes and who does this, isn't it more important that the
debate should be about the balance of what we are doing for
this country; that we are looking at all of the issues that are
of a concern, not pointing fingers, where if you say this you
are raising taxes, if you say that you are balancing the
budget? I just think that is hogwash.
I will tell you, Mr. Secretary, and the rest of the folks
here, I was in the drugstore the other day talking to my
pharmacist, picking up my medicine for my husband, who has a
kidney transplant, as many of you know, and it was $1,500.
Thank God we have health insurance. And the pharmacist said to
me, well, Karen, what is going to happen with the prescription
drug plan? I said, I think we might have a card, it might give
10 percent. He said, you know, Karen, quite frankly, we already
have that. We have the People's Plan, we have this plan. It
might save a little here, might save a little there.
He said, ``Well, what else?'' I said, well, I think that
all of us stood very strongly with the President on the idea of
what was going on with the war. All of us came in here with the
idea that we needed to stand shoulder to shoulder with him. We
looked at the $40 billion, we looked at the bailout, we did
those kinds of things.
But I said, ``You know, Billy, I am really kind of
concerned where we are going now with the deficit.'' He said,
``Let me tell you about this conversation that was taking
place.'' And if you can imagine walking in to the pharmacist,
and what happens when you go into the drugstore, especially
when you live in a small town, everybody knows everybody.
This guy looked at him and he said ``You know, I listened
to the President the other day. If I had wanted a loan for
myself, I would have gone to the bank and gotten it.'' That is
what they feel like is happening, we are taking a loan out,
that we are taking a loan out that some people did not
necessarily want; you know, that they think that now they can
pass that on to their children or their grandchildren to pay
that loan back.
Quite frankly, these were the same people that came to me
when I ran in 1993 and said, Mrs. Thurman, please do something
about the deficit. Please do not put us in that situation. They
talked about Social Security and they talked about those
things.
So let me just say that I think that one of the other
things that we have to say when we talk about not scaring the
American people, and I agree, but one of the things that we do
not talk about is what will go on when we have not asked the
question: How far out do we see Medicare now? How far out do we
see Social Security? We know those dates were extended the last
couple of years to '36 or '37. At 2025 they start to fall back
in. We can say that.
But I think what people are feeling, and I would agree with
Mr. Becerra on what is happening at home, you know, what are we
doing? We take a credit and put it in there. If I do that and
then I write a check, I get an overdraft. The overdraft I get I
have to pay a penalty on. That is kind of what we are doing
with this now.
So I do not want to get into all of this, but please, let
us forget all of this stuff about who is raising taxes, who is
not raising taxes. That is not what this debate is about. There
is a fundamental philosophical difference in what we believe
should be a balanced approach and one that keeps us on the
right track for financial security for this country.
Chairman Thomas. I thank the gentlewoman. Does the
gentleman from Kentucky, Mr. Lewis, wish to inquire?
Mr. Lewis OF KENTUCKY. Thank you, Mr. Chairman. Mr.
Secretary, thank you for being here today.
One of my concerns about this hearing today is that I have
parents that are 85 years old, and if they are watching today,
I think there would be a certain amount of concern for them,
because my friends on the other side of the aisle seem to want
to put fear in their hearts that Social Security is not safe;
that sometime in the future it is not going to be there because
of tax relief for other people in this country. And they also
got some tax relief.
My son and my daughter-in-law, they work in a factory. Both
of them together make about $60,000 a year. They need tax
relief. Forty percent of their income is in local, State, and
Federal taxes, so they have a major tax burden. And if you add
in regulatory costs, it is probably about 50 percent of their
income. They need help. They work weekends to try to make ends
meet, and overtime.
To try to bring into the debate in this country about how
we should use our national resources, to try to instill
generational envy, and to put fear in the hearts of senior
citizens I think is a sad thing, but that is what we keep
hearing.
I do not think there is anyone who is probably here today,
Republican or Democrat or whatever, that does not have family
members that are on Social Security, that does not have family
members that could use some tax relief. So I think it is a sad
state of affairs when the once-proud Democrat Party now is
relegated to the point of where the only thing they have to
offer is fear and class envy, and they have no solutions.
If you ask them, well, are you for tax increases? No, we
cannot do that. Are you for cutting spending? Well, we need
more spending in this, we need more spending in that. What
answers do they have? I would have hoped that today, when we
have hearings like this and hearings in the future, that they
could bring something to the table besides fear and envy. That
is not what this country is all about.
When that is all they have to offer, you know--my mom and
dad basically have been Democrats all their lives until just
here recently, and I think they feel pretty sad about where
that party has come to.
Mr. Hulshof. Would the gentleman yield?
Mr. Lewis OF KENTUCKY. Yes, I will be happy to yield.
Mr. Hulshof. I appreciate the gentleman from Kentucky. I
know my friend from Florida is still here in the room. But a
comment that I would like to make as far as she was talking
about real life examples about where we are, I would share this
with her and Members of the Committee.
My wife and I make our home in Columbia, Missouri. Back in
1999, the foundation of our house caved in. This was an
emergency, it was unforeseen, so we had some choices to make
around our kitchen table and the family budget. The choice we
made was that we should go into debt for a short period of
time. So we obtained a home equity loan because, again, this
was an emergency, an unforeseen event.
I think that is where we are right now with our national
economy. The gentlewoman talked about priorities, and I agree
with her general statements. But for what happened on September
11, I believe we would still be in a surplus. I think that the
President's budget would be in balance but for the increased
requirements of the war on terrorism and homeland defense.
I see my friend from Dakota shaking his head. But in
reasonable lines of disagreement, I would say this is a
singular unforeseen situation that now confronts us. I bring
our family example just to illustrate that fact. I appreciate
the gentleman yielding.
Mr. Lewis OF KENTUCKY. I just want this question answered
directly, and I think you have done a good job of it. The
Social Security Trust Fund is going to pay the Social Security
benefits to my mom and my dad and to all the millions of senior
citizens out there. They do not have to worry about it. They do
not have to be fearful. If they were able to come to that
fearful conclusion today that that might be the case, tell them
right now, straighten the record, that is not the case; their
benefits are solid, they are going to be paid for.
Mr. O'Neill. Nothing could be clearer. The Congress of the
United States and the President are never going to fail the
obligation they have to the people to pay Social Security
benefits as and when they are due.
Mr. Lewis OF KENTUCKY. Thank you.
Chairman Thomas. Does the gentleman from Texas wish to
inquire?
Mr. Doggett. Mr. Chairman, thank you. Mr. Secretary, though
we have very different perspectives on public policy, I
sincerely thank you for your service to our country in these
very troubling times.
Mr. O'Neill. Thank you.
Mr. Doggett. Mr. Secretary, the year 2001 will certainly go
down as an historically bad year for Enron in Houston, but here
in Washington, on tax policy, it seems to me it was a rather
good year. Enron successfully sought favorable treatment in
that collection of subsidies and preferences that was called an
energy bill; Enron successfully supported efforts to block an
international crackdown on offshore tax havens; Enron's
accounting firm Arthur Andersen was successful in opposing any
legislation on abusive corporate tax shelters; Enron
successfully led the AMT coalition, as we discussed, in
obtaining House approval of repeal of the AMT; and instead of
contributing something to the cost of the war on terrorism, to
actually asking for a check for $254 million back.
Can you tell the American people today of any tax break
that Enron requested in the last year that this Administration
did not embrace?
Mr. O'Neill. I am stunned by the question, because I have
no idea of what Enron was for with regard to taxes. I have no
idea what they were for.
I think what was passed last year was the tax proposal
recommended by the President, which the Congress responded to
in quite a complete way, which was for the benefit of
individual taxpayers.
Mr. Doggett. Let me ask you, then, about comments that you
made last year. Last May, you indicated that you absolutely
supported the abolition of all corporate income taxes and
capital gains taxes on business in your interview in London.
You called the present corporate tax system an abomination.
Mr. O'Neill. I did.
Mr. Doggett. And you said, ``Not only am I committed to
working on this issue, but the President is also intrigued
about the possibility of fixing this mess,'' and it was
reported that you said that even though ``abolishing corporate
taxation would lead to higher personal income taxes,'' you
thought repeal would be good for the country.
We now know that Enron used 881 subsidiaries, at last
count, located in tax havens, and other devices that led it to
pay modest or no Federal income taxation for the last several
years. A number of other Fortune 500 corporations have also
paid little or nothing toward our national security in recent
years.
Is this a sign of healthy progress toward the goal that you
advocated of ``no corporate taxation,'' or is it an indication
that the Treasury Department does not share former Secretary
Summers' view that abusive corporate tax shelters are the
leading tax compliance problem in the country today?
Mr. O'Neill. Well, you have mentioned a whole lot of
attributed things to me.
Let me make the record clear, because I have said this over
and over again: I think the Federal Government's tax system is
an abomination, and when I go out and talk to people around
this country I do not find anyone who disagrees with me. If you
can find someone who thinks what has been crafted here in
Washington is a wonderful tax system that should be a model for
the rest of the world, I wish you would send them to me so they
could convince me that I do not know what I am talking about.
But as one who has lived under this tax system, with its
increasing complexity, and paid taxes every year myself in
substantial amounts since 1950, I can tell you it is an
abomination. Maybe some are proud of it, but I do not think we
should be too proud of it. It needs to be fixed.
And then, more directly to your question, am I in favor of
an inequitable, unfair tax treatment for people in this
country, absolutely not. Am I for people with higher incomes
paying higher taxes? You bet. I don't know what other
principles you would like for me to say. Have no doubt, I think
I am on the right side of the angels in understanding what is
wrong with this tax system and the need for us to work together
to make it something Americans can be proud of.
I think one of the great dangers we have in this country is
that this tax system has become so complicated that even fair-
minded Americans can make the case that it is too complicated
for them to understand and respond to, and that is dangerous to
our democracy.
Mr. Doggett. Finally, Mr. Secretary, last year at the
Senate Finance Committee you said, ``I believe that our tax
system should be structured so that growth rates of zero or 1
percent . . . we are in balance.''
Mr. O'Neill. I agree with that.
Mr. Doggett. ``That is to say that the tax system produces
enough revenue under conditions of low or no growth that we are
not borrowing from our children, that we are paying on a
current basis for the things we have said are an appropriate
object of public spending.''
And you told this Committee, Mr. Levin in specific, that
the deficits of the Reagan-Bush years ``put ourselves in a
ditch that was horrendous.'' What you said then I believe
applies today, to show the folly of this borrow and spend
budget proposal that will wreck Social Security and cut Social
Security benefits in the future.
Thank you so much.
Mr. O'Neill. I think with a combination of a war and a
recessionary period, if there was ever a reason why we should
be very marginally a negative, those are the reasons why we
should do it. The President has said over and over again if not
for the war, if not for the effect of terrorism, if not for the
slow economy, we would be in balance and we would be in
substantial surplus in fact.
I think, again, at zero rates of growth, which is about
where we are, we have a very small negative number. And if
someone believes we should raise taxes, they ought to say so,
instead of having this deficit. If somebody believes we should
not spend money to provide funds for our troops in Afghanistan,
they should say so. If someone wants to cut education funding,
they ought to say so.
The President has weighed all these things, and his
judgment is in the books that we have sent to you.
Mr. Doggett. I am just saying the same thing you said last
year. Thank you.
Chairman Thomas. The gentleman's time has expired. The
gentleman from By Gosh, North Dakota.
Mr. Pomeroy. North By Gosh, Dakota.
Chairman Thomas. Excuse me, North By Gosh, Dakota.
Mr. Pomeroy. Mr. Secretary, thank you for being with us
today. During your long distinguished private sector career,
you have made reports to many boards of directors regarding the
financial condition of the company. I doubt you have ever
reported a reversal in financial position as dramatic as what
you are reporting to us today.
Mr. O'Neill. I never ever had an occasion to restate
earnings, ever.
Mr. Pomeroy. That is wonderful, although what you are
stating to us today is a $4 trillion picture to the negative
different than what it was 1 year ago with very troubling
conditions.
I would like a chart to reflect what it means in terms of
our ability to retire national debt. Based on your numbers, Mr.
Secretary, 1 year ago we were projecting a virtual elimination
of the national debt by the year 2008. This year's numbers,
shown in red, show virtually no elimination of national debt.
It continues at the existing high levels for the foreseeable
future. The reason for failure to pay down debt is because when
the cash comes in on Social Security, we give Social Security
an IOU and we spend the cash on running the government.
Mr. Secretary, do you believe that it will be easier for
the Federal Government of the United States to meet its
commitment to Social Security if the Federal debt held by the
public is at a lower level rather than a higher level?
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512H.008
Mr. O'Neill. I don't think the two are tied together in the
way that you have suggested. I have said over and over again
that I think that without a doubt none of you and none of your
successors are ever going to fail the obligation made to Social
Security recipients to deliver the benefits you promised. You
are not ever going to do that.
Mr. Pomeroy. I would like to pursue that. I do not mean to
interrupt, but our time is short.
Next decade, we will run into a situation where in order to
continue to meet the full obligations of Social Security we
will have to be redeeming some of the bonds held by the Federal
Treasury. It will not be funded just on cashflow coming in from
the payroll taxes. Is that correct?
Mr. O'Neill. We are going to have to have the funds to pay
our obligations. I'm sure we will have.
Mr. Pomeroy. Basically, Social Security moves into deficit
next decade, is that correct?
Mr. O'Neill. The annual income from the then-working work
force will be lower than the obligation requirements.
Therefore----
Mr. Pomeroy. Therefore, Mr. Secretary, in order to keep
those obligations absolutely current, as you have committed to
again today, we are going to have to take funds from the
General Fund budget in order to make up for us not coming in
with Social Security?
Mr. O'Neill. That is not necessarily so. It depends on what
action the Congress and the Administration might take going
forward to amend and reform Social Security so that----
Mr. Pomeroy. Are you suggesting that in order to bring
these payments into line we might actually need to reduce
benefits because the cash will not be sufficient?
Mr. O'Neill. I would not suggest that. I am not ready to
believe that----
Mr. Pomeroy. Mr. Secretary, what other changes could we
make that would, by the middle of next decade, bring this into
balance, what is coming in on the payroll tax and what is----
Mr. O'Neill. I think, as you observed, and we have had
endless conversations about this this morning, in 1 year's time
there has been a substantial change. That does not mean that
the facts are going to be different, it just means that the
estimates are going to be different.
I would submit to you that there is a $660 billion so-
called technical change in the estimates. I do not know that it
is not possible that next year we will have a $660 billion
technical correction to go the other way. I mean----
Mr. Pomeroy. Mr. Secretary, I have another chart for you
that shows that while we are already running in deficit
position, passing the $600 billion making the tax cuts
permanent also proposed by the President takes us from a bad
situation into a worse situation.
If you want to get out of a hole, it seems to me the first
thing you stop doing is you stop digging. It appears to me the
Administration would take us into even deeper deficit
positions, taking us even deeper into debt and making it even
more unlikely we will be able to meet the Social Security
responsibilities.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T9512I.009
Mr. O'Neill. I think it is just--I just have to tell you, I
think it is really bad public policy to put up there starting
with ``raids,'' when I think you would stipulate in private
there is no such thing as a raid because the trust funds are
intact; they are crafted with all the money that is collected
from all the people, no matter what. No one is raiding the
trust funds.
I would associate with the comment that said we should stop
using language that incorrectly describes our fiscal situation
because it is misleading the people who do not understand
enough about public policy to know that certain assertions are
wrong. It only scares them.
Mr. Pomeroy. Mr. Secretary, I will conclude. Thank you for
responding to my questions.
I would observe in conclusion, to the extent that Social
Security proceeds, cash coming in on Social Security taxes, are
used to fund the functions of government, used for the
operating costs of government, you have made meeting the Social
Security obligation you have spoken so forcefully of much more
difficult going forward.
Mr. O'Neill. If you don't mind me saying so, the important
public policy question is, as we have maturing Social Security
obligations, do we have the balance sheet at the Federal level
to support them, and I would say to you without any fear of
contradiction our balance sheet will support the obligations we
have made to the American people, without a doubt.
Mr. Pomeroy. It seems to me we have viewed the surplus as
people's money, but the debt as our children's obligation. I
think that is unfortunate.
Thank you, Mr. Chairman.
Chairman Thomas. Could I ask the gentleman, once again in
terms of his charts, are the dollar projections adjusted for
inflation or are they nominal dollars?
Mr. Pomeroy. Let me ask----
Chairman Thomas. I believe, in looking at the chart, that
they are not justified for inflation, they are nominal dollars.
And at some point the Chair may put some basic ground rules in,
because this is, I believe, the third chart in a row that has
used nominal dollars and not adjusted dollars.
It is fine if you want to do it, but I believe for purposes
of clarity we really ought to have a common yardstick.
Mr. Rangel. Mr. Chairman, I would ask if the Secretary's
figures are adjusted for inflation, because I was under the
impression that we were using the same standards as the
Administration was using. And if that is so, then tell them,
too.
Chairman Thomas. They did not present the chart that the
gentleman from North Dakota is presenting.
Mr. Rangel. They have been presenting a lot of charts this
morning.
Chairman Thomas. I understand that. That was six charts
ago.
Mr. Rangel. That was a small chart. He can answer it. Are
you adjusted----
Chairman Thomas. The gentleman from Louisiana? The
gentleman still has not inquired. The gentleman from Louisiana.
Mr. Rangel. Mr. Chairman, just as a matter of courtesy, you
have made the point half a dozen times as to whether or not our
charts are adjusted for inflation, which I thought was a very
good question. I now ask, could you ask the same question for
the Administration?
Chairman Thomas. Sure.
Mr. O'Neill. For the chart where it is appropriate to use
constant dollars, we have done so. We have used nominal dollars
where--for ease of explanation, we have done that.
Mr. Rangel. We would like to adopt that answer as our own.
Chairman Thomas. The gentleman from Louisiana.
Mr. McCrery. Mr. Chairman, the import of your question with
respect to Mr. Pomeroy's first chart is that the nominal
dollars, which is what Mr. Pomeroy's chart shows, nominal
dollars, the nominal dollars are not nearly as important as the
percentage of our national income that those nominal dollars
represent.
And if he had put up another chart showing the rise, the
estimated rise in economic growth in the country, then he would
have reflected the lowest percentage of our national income
represented by that national debt, that publicly held debt,
since 1984 for this coming year.
And if he had followed on out as many years as he did on
his chart, it would have shown the lowest percentage of
national debt as a percent of our national income since 1940,
except for 1 year, 1974.
So to be honest with everybody from describing the impact
of that debt, he should have put up another chart showing that
juxtaposed with our national income.
Chairman Thomas. The gentleman from Texas deserves to be
heard. But prior to that, the Chair will exercise the
prerogative of indicating that the elimination of the debt
suddenly changed the Chairman of the Federal Reserve's
testimony last year and we began to worry about it, just
exactly what we would do.
I think the point of the gentleman from Louisiana is the
relationship, it is the percentage of the debt to income that
is most significant; and in that regard, in a bipartisan way
over the last decade we have begun to move in the right
direction.
Does the gentleman from Texas wish to inquire?
Mr. Brady. I do, finally, Mr. Chairman.
Mr. Secretary, thank you for being here. I am a Houston
area Congressman. Our community, our region, has been hurt very
seriously by the collapse of Enron. I have neighbors who are
now out of work and have lost their retirement. Politicians who
try to score political points off the misery of the Enron
workers cannot go any lower than they are going. They ought to
be ashamed of themselves. That means you, Lloyd, and the
Democratic colleagues who join in.
Mr. Doggett. That is really uncalled for.
Mr. Brady. No, it is not. You are going to sit there and
listen to a different message.
The message is especially important since we need to be
working together to help those folks. One of the silver linings
of September 11 was watching Congress pull together and unite
as a country to help those who had really been hurt. The other
night the President asked us to do the same thing, to help
people who have been laid off from Enron, Boeing, General
Motors, or any other even small business, even, in America.
The fact of the matter is since September 11, through the
rest of that year, we lost almost 8,000 jobs a day. Eight
thousand people had to go home every day and tell their family
they are out of work, their whole lives were changed, dreams
had been destroyed, everything was going bad. Things have
gotten a little better, but it is still very serious.
The fact of the matter is we do agree that we need
unemployment benefits for those folks who have been laid off.
We agree. Unfortunately, it is still stalled in the Senate. We
agree people ought to have help with health care, help with
health care in the short term. Unfortunately, that is still
stalled in the Senate due to politics. We agreed that families
need help, we agreed that States need unemployment insurance,
we agreed that people need to go back to work. Unfortunately,
all of that is still stalled in the Senate due to politics.
The fact of the matter is if we do not agree on anything
else, we ought to agree that if we get this economy moving, we
can help those people. If we pass that stimulus plan we can
help them in the short term get through things, but most
importantly to get a job, which is what they really want to get
their lives back in order today.
The fact of the matter is the President's tax relief I
think has helped the economy. The reason we do not have a
surplus today and we are off track is Congressional spending.
Some of it we need for homeland security, a good amount of it,
but other of it is just needless pork barrel projects.
We have to discipline ourselves. But the biggest culprit is
the economy. The only way we are going to balance the budget
and start paying down the debt again, preserve Social Security
and Medicare, and get people back to work is to get this
economy moving now. There is no way to escape it. That is what
we ought to be agreeing upon as Republicans and Democrats.
My question to you is, I know the President has more than
met our leaders in the Senate halfway. I know he continues to
do that. Don't we need the economic stimulus bill to pass the
Senate today, just as importantly as it was back this fall?
Mr. O'Neill. We do, and for exactly the reasons that you
have given. I couldn't add anything to improve on what you have
said. That is exactly right.
Mr. Brady. Thank you, Mr. Chairman.
Chairman Thomas. I thank the gentleman. Mr. Secretary,
thank you very much. You are kind to allow all of the Members
to inquire. Just let the Chair say we appreciate your efforts
to help us chart a course through a year that no one
anticipated.
Thank you very much. Good luck.
The hearing stands adjourned.
[Whereupon, at 1:33 p.m., the hearing was adjourned.]
[Questions submitted from Mr. Neal to Secretary O'Neill,
and his responses follow:]
Question 1: The Department of Treasury's explanation of the
President's revenue proposals states a concern that, ``The individual
alternative minimum tax (AMT) may impose financial and compliance
burdens upon taxpayers who were not originally intended targets of the
AMT.'' I share your concerns. Would you explain why the Administration
chose to extend only until 2004 the exemption of nonrefundable personal
credits from the application of the AMT, as opposed to making this
exemption permanent as were some other expiring provisions?
Question 2: Last year's enacted tax changes increased the
individual AMT exemption amount by $2000 for single filers, and $4000
for married couples filing jointly. While your proposed budget
permanently extends provisions which expire in 2010, this provision
unfortunately expires at the end of 2004. If this provision is not
extended, more than twice as many taxpayers will be subject to the AMT
in 2005 over the prior year. Do you agree that, for millions of
unsuspecting taxpayers, their taxes in 2005 will increase?
Response: The Administration's 2003 Budget proposal to extend the
Tax Code provision permitting nonrefundable personal credits to be
offset against the AMT for 2 years (through taxable years 2002 and
2003) is only an initial step in dealing with the AMT problem. The
Administration intends to work with Congress to develop a more
comprehensive approach to the AMT.
[A submission for the record follows:]
Statement of the National Society of Accountants, Alexandria, Virginia
Mr. Chairman, the National Society of Accountants (NSA) is pleased
to submit testimony for the hearing record on President Bush's fiscal
year 2003 budget proposals. The NSA and its affiliated state
organizations represent 30,000 accountants, tax practitioners, business
advisors and financial planners providing services to over 19 million
individuals and small business. Most of our members are sole
practitioners or partners in small to medium sized firms. NSA
represents the accountants for Main Street, not the accountants for
Wall Street.
IMPROVE TAX ADMINISTRATION
The Administration proposes a six-part modification to the IRS
Restructuring Act of 1998 (RRA98). We concur with the provision to
allow taxpayers to enter into less than full pay installment agreements
with the IRS. This is a common sense provision whose implementation is
long overdue. The proposal to modify IRS employee infractions subject
to mandatory termination is a positive change to the RRA98.
Another proposal would curb frivolous submissions and filings by
raising penalties for filing frivolous tax returns from $500 to $5,000
and impose a $5,000 penalty for repeatedly filing or failure to
withdraw after notice certain other submissions. While generally
supportive, we caution that if improperly crafted these new measures
could dampen legitimate resubmissions and filings, such as a
resubmission of an Offer-In-Compromise (OIC) based on new or updated
taxpayer information. In a similar vein, the proposal to terminate an
installment agreement for failure to make timely tax deposits and file
tax returns should contain allowances for circumstances beyond the
control of the taxpayer.
We support the change that would eliminate the requirement that the
IRS Chief Counsel provide an opinion for any accepted OIC equal to or
exceeding $50,000. In our view, the Chief Counsel has not added any
value to the program to begin with and in fact has been a detriment to
the process by withholding approval of offers on policy grounds rather
than on legal sufficiency.
On the issue of the OIC program in general, NSA maintains that the
program remains fundamentally flawed and ultimately no amount of
``process'' improvement will help. Until the program is moved from
compliance oriented personnel and reassigned to settlement oriented
personnel who are allowed to design and administer a settlement
oriented program, the goal of achieving what is potentially collectible
at the earliest possible time and at the least cost to the government
while providing taxpayers a fresh start toward future voluntary
compliance will remain unfulfilled.
IRS NATIONAL RESEARCH PROGRAM
Recently, the IRS unveiled a new compliance study, known as the
National Research Program, to revamp its audit selection process. As we
understand the program, the tax returns of up to 50,000 individuals and
small business' would be subject to review at various levels of
intensity. The program would select 2000 taxpayers for detailed line-
by-line examination for ``calibration'' purposes.
First and foremost, we do not question the right of the IRS to
perform audits to ensure compliance with tax laws. Nor do we object to
the need for the Service to gather statistics for use in improving the
process. We do object to the perceived need to subject even 2000
taxpayers to the burden and hardship of intrusive line-by-line audits
whose sole reason for selection is to satisfy a debatable statistical
need for ``calibration.'' We believe that the IRS has other tools and
techniques at its disposal to gather the information needed to improve
the audit process, such as data from closed cases. The IRS can and
should find another way.
An audit of a tax return is by definition an adversarial process. A
notice of audit from the IRS even to a compliant taxpayer is a cause
for concern and anguish and many will seek, at substantial cost,
professional representation to protect their interests. Adding to the
mix is the fact that much of the tax code is subject to interpretation
and judgment calls based on facts and circumstances. Reasonable people
can and do differ on how the tax law applies to a given situation.
To defuse the adversarial aspects and to enhance taxpayer
cooperation and faster resolution of issues, the IRS should grant the
taxpayer limited immunity for problems discovered during the audit
(barring any criminal behavior on the part of the taxpayer). If the
goal of the NRP is to gather better data and truly improve the audit
process then IRS should provide these taxpayers something in return for
compelled cooperation as compensation for the intrusion and expense
caused by these audits.
Mr. Chairman, the scars from the overly intrusive Taxpayer
Compliance Measurement Program (TCMP) of the past are still fresh. We
are deeply concerned, even after assurances from senior IRS management
to the contrary, that this program will morph itself into an updated
version of the TCMP. At the very minimum, we recommend that the Ways
and Means Committee rigorously exercise its oversight authority to
prevent this program from reincarnating into another TCMP nightmare.
FREE ON-LINE TAX FILING
The President's budget contains a proposal to allow taxpayers to
file their taxes ``free'' through an IRS web site as part of the E-
Government initiative. The NSA is committed to electronic filing of tax
returns and in the wake of the September 11 terrorist attack issued a
``Call to Arms'' for its members to file returns electronically and use
EFTPS for tax deposits as a means of reducing mail to the IRS service
campuses. Unfortunately we must oppose the President's e-file
initiative.
First, the government should not compete with the private sector.
Even if the IRS starts off with a ``bare bones'' service, pressure will
be brought to bear each year to add new features and enhancements and
permit the filing of more complex returns. It also raises conflict of
interest issues by having the IRS serve as tax preparer, tax collector
and tax prosecutor.
Second, the initial development and on-going maintenance of an on-
line filing service is expensive. This ``free'' service will cost
taxpayers plenty. The resources of the IRS are better spent improving
its woefully inadequate taxpayer service and assistance systems. It has
no business in the tax return preparation industry. Even a system
designed and built in ``partnership'' with the IRS raises cost,
perception and privacy concerns.
Third, we see no market failure that requires government
intervention. The private sector already provides excellent tax
preparation and filing service at reasonable cost. The private sector,
volunteer groups and the IRS provide a variety of free services to low-
income taxpayers. The cost issue is merely a smoke screen.
Why should we spend additional money to fund a new program when it
is painfully obvious that the IRS has significant difficulties even
with its current programs as evidenced by a less than 75% correct
response rate to taxpayer questions. In most schools, 75% is a grade of
``D'' and does not inspire confidence that free e-filing as envisioned
in the President's budget will be successful or fair.
EXTENSION OF TIME FOR E-FILED RETURNS
The Administration proposes to extend the April filing date from
April 15 to April 30 for individuals filing returns electronically to
help encourage the growth of electronic filing. We sincerely doubt that
this change will have any effect on getting more electronic returns
filed. The early filers do so to get their refunds sooner. The
procrastinators file later because they have balance due returns. Why
reward them with an extra 15 days to file and pay?
To truly promote electronic filing, IRS should devote more funds to
advertising of benefits to taxpayers and tax practitioners. Removing
barriers that limit or discourage the practitioner community from
participating as electronic return originators would also be a major
step forward.
TAX CREDITS AND THE AMT TRAP
The President's budget contains a number of initiatives using tax
credits, including refundable credits, to provide incentives and
promote certain behavior and activities. We choose not to argue the
merits of the proposals, but rather, focus on the mechanics.
Based on our reading of the description of these proposals we
cannot determine how they interrelate with the alternative minimum tax.
Our concern is simple: if there is no ability for a taxpayer to offset
alternative minimum tax (AMT) by the ``regular'' tax credit the credit
becomes meaningless for many taxpayers. The expansion of the AMT into
the lives of middle-class Americans makes it imperative for Congress to
consider the AMT implications on any new deduction and tax credit
offered under the ``regular'' tax system and grant similar treatment
under the AMT.
TAX SIMPLIFICATION
We applaud the Administration for beginning a ``thorough review of
means of simplifying the tax code'' and developing both short term and
longer-term tax simplification proposals. NSA is ready to work with the
Administration, Congress and other groups to produce meaningful reform.
The Administration stated its ``Highest priority will be given to
simplification proposals that will yield the largest benefits, i.e.
that will affect the most people and have the largest effects in
reducing compliance burdens and administrative costs.'' We are
encouraged that the Administration leads off the list with the
individual AMT.
Much has been written on the adverse effect of the individual AMT
and need not be restated here. We believe the individual AMT is a
predator on the middle-class and the time has come for Congress to slay
this monster. For every year that Congress delays action on AMT the
price tag for repeal increases. In the not-to distant future the AMT
will be the defacto tax system for many taxpayers undoing the many of
the benefits targeted under the regular tax for the middle class. This
was never the intent of Congress.
Much of the groundwork for simplification has occurred. The
recently released National Taxpayer Advocate Office 2001 report to
Congress contains many important recommendations supported by NSA.
Likewise, the Joint Committee on Taxation's 2001 simplification study
(JCS 3-01) is a useful starting point. The Nation's taxpayers deserve a
better tax system. The time has come for the political system to
deliver.