[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                       DEPARTMENT OF THE TREASURY
                 BUDGET PRIORITIES FOR FISCAL YEAR 2004
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 5, 2003

                               __________

                            Serial No. 108-2

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html








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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
GIL GUTKNECHT, Minnesota             JOHN M. SPRATT, Jr., South 
MAC THORNBERRY, Texas                    Carolina,
JIM RYUN, Kansas                       Ranking Minority Member
PAT TOOMEY, Pennsylvania             JAMES P. MORAN, Virginia
DOC HASTINGS, Washington             DARLENE HOOLEY, Oregon
ROB PORTMAN, Ohio                    TAMMY BALDWIN, Wisconsin
EDWARD SCHROCK, Virginia             DENNIS MOORE, Kansas
HENRY E. BROWN, Jr., South Carolina  JOHN LEWIS, Georgia
ANDER CRENSHAW, Florida              RICHARD E. NEAL, Massachusetts
ADAM PUTNAM, Florida                 ROSA DeLAURO, Connecticut
ROGER WICKER, Mississippi            CHET EDWARDS, Texas
KENNY HULSHOF, Missouri              ROBERT C. SCOTT, Virginia
THOMAS G. TANCREDO, Colorado         HAROLD FORD, Tennessee
DAVID VITTER, Louisiana              LOIS CAPPS, California
JO BONNER, Alabama                   MIKE THOMPSON, California
TRENT FRANKS, Arizona                BRIAN BAIRD, Washington
SCOTT GARRETT, New Jersey            JIM COOPER, Tennessee
GRESHAM BARRETT, South Carolina      KENDRICK B. MEEK, Florida
THADDEUS McCOTTER, Michigan          RAHM EMMANUEL, Illinois
MARIO DIAZ-BALART, Florida           ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                DENISE MAJETTE, Georgia
[Vacant]
[Vacant]

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel





                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 5, 2003.................     1
Statement of:
    Hon. John W. Snow, Secretary, Department of the Treasury.....     7
Prepared statement and additional submissions of:
    Hon. Jim Nussle, a Representative in Congress from the State 
      of Iowa....................................................     3
    Mr. Snow:
        Prepared statement.......................................     9
        Response to Mr. Scott's question regarding OMB figures...    31
        Response to Mr. Thompson's question regarding municipal 
          bonds..................................................    42
        Response to Mr. Ford's question regarding Medicaid 
          funding................................................    57
        Response to Mr. Davis' question regarding excise taxes on 
          charitable foundations.................................    59
        Response to Mr. Davis' question regarding the President's 
          goal for charitable tax breaks.........................    59
        Response to Mr. Ford's question regarding the tax cut 
          proposal...............................................    63
    A submission for the record by Hon. Roger F. Wicker, a 
      Representative in Congress from the State of Mississippi...    39


   DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2004

                              ----------                              


                      WEDNESDAY, FEBRUARY 5, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, Toomey, 
Hastings, Schrock, Brown, Putnam, Wicker, Bonner, Franks, 
Garrett of New Jersey, Barrett of South Carolina, McCotter, 
Diaz-Balart, Hensarling, Spratt, Moran, Moore, Neal, Edwards, 
Scott, Ford, Capps, Thompson, Baird, Cooper, Meek, Davis, 
Emanuel, and Majette.
    Chairman Nussle. Members and guests will take their seats. 
I know there is a lot of interest in this hearing, and there is 
obviously, today, a lot of other interesting things happening 
around the country and the world, and I know Members, staff and 
our witness will be needed in other areas of the Capitol, so I 
want to make sure that we begin on time.
    This is the full committee hearing on the President's 
growth and jobs plan, the tax relief package in the President's 
fiscal year 2004 budget. Today's witness is the Honorable John 
W. Snow, Secretary, Department of the Treasury. And as I said 
to the Secretary prior to him taking the witness table, he has 
spent more time on Capitol Hill this week than he has spent in 
his new office. And that is part of the risks of the job, and 
part of the job description, of course, is to consult with 
Congress, and we appreciate you doing so in this manner. Today 
we have a number of issues that we would like to discuss with 
you, Mr. Secretary. I would like to welcome you.
    The Secretary, upon his confirmation, became the 73rd 
United States Secretary of the Treasury. I look forward to 
working with you, and have every faith that the President has 
picked the right person to help strengthen and stabilize the 
economy and help us create jobs for all Americans.
    Treasury Secretary Snow comes before us today with 
extensive working knowledge and expertise in economics and job 
creation. Secretary Snow has had a long and impressive career 
in both the private sector and public service to this country. 
He was the chairman and chief executive officer of CSX 
Corporation. He has served as the chairman of the Business 
Roundtable, and was a former co-chairman of the influential 
Conference Board's Blue Ribbon Commission on Public Trust and 
Private Enterprise. He also served as the co-chairman of the 
National Commission on Financial Institution Reform Recovery 
and Enforcement in 1992 that made the recommendations following 
the savings and loan crisis.
    Secretary Snow's previous public service includes serving 
at the Department of Transportation as the Administrator of the 
National Highway Transportation Administration; Under 
Secretary, Assistant Secretary for the Governmental Affairs; 
and Deputy Assistant Secretary for Policy, Plans and 
International Affairs. Secretary Snow has a Ph.D. in economics 
from the University of Virginia, a law degree from George 
Washington University, and has taught economics in the 
University of Maryland, University of Virginia, as well as law 
at the George Washington University. He also served as a 
visiting fellow at the American Enterprise Institute, and 
distinguished fellow at the Yale School of Management.
    Mr. Secretary, yesterday this committee had the opportunity 
to hear from the President's Director of the Office of 
Management and Budget, Mitch Daniels. He came presenting the 
President's overall budget. Today we look forward to your 
testimony with respect to how the President's budget proposes 
to strengthen and stabilize the economy and create jobs.
    At the beginning of the hearing on the President's budget, 
I thought it was important to point out an underlying question 
about the budget. A question that I have, a question that this 
committee will continue to have as we will review it, and a 
question that I am sure that all Americans have, and that is: 
Is it a fiscally responsible blueprint for governing America 
during some very challenging times?
    Today as we examine the Treasury Department's budget 
proposals as well as the President's proposal to strengthen the 
economy, I believe the question should be, do these proposals 
grow and strengthen the economy both now and in the long run?
    There is no question that our economic recovery needs to 
gain more traction in order to create jobs and opportunities. 
The looming question is really how to do it, how to help it. I, 
for one, think we need to look longer than just this first 
year, but many years down the road as we consider the proposals 
that we have to make.
    Last week, the Congressional Budget Office presented its 
new economic outlook numbers to this committee which showed 
that under current conditions, if we do nothing, we will return 
to surpluses somewhere around 2007, according to the 
Congressional Budget Office. However, if we can increase growth 
by only half a percent, we might be back in the black roughly a 
year earlier. And I will show you a chart that I believe 
depicts just that sentiment. Faster growth can improve or does 
improve the fiscal outlook. With just a half a percent, we can 
get back in the black, according to baseline, just in 1 year. 
Imagine if we can get a full percent or even more.
    We also learned from the Congressional Budget report that 
the largest cause for the deficits we faced in the past two 
fiscal years has been due to a weak economy. I will show you a 
chart that we believe depicts that; 68 percent in fiscal year 
2002, and 55 percent in fiscal year 2003 can be attributed to 
the economy. It seems only logical then that we must focus on 
measures that increase long-term growth and strengthen the 
economy.
    It has always seemed to me that the Washington model is 
that we should ask families to tighten their belts year-after-
year and pay higher and higher taxes to fund additional 
Washington spending, but we never seem to ask Washington to 
tighten its belt so that the American people can keep more of 
their money. So spending restraint will be a hallmark of the 
budget that we present. I think the President, though, hit the 
nail on the head last week during the State of the Union 
Address when he said, quote, ``Jobs are created when the 
economy grows. The economy grows when Americans have more money 
to spend and invest, and the best and fairest way to make sure 
Americans have that money is not to tax it away in the first 
place.'' It seems pretty basic, it seems pretty logical, and it 
seems like a good foundation for a policy that we can build on.
    So, the highest priority in crafting the budget will be 
promoting the overall strength and stability of our country; 
strength and stability in our defense, strength and stability 
in our homeland security, and that is strength and stability in 
our economy. The lesson of the last 2 years is that there is no 
substitute--no substitute for the strength and stability of 
America and our economy. And that is the subject of today's 
hearing, our economy, how to strengthen and stabilize it for 
the long term.
    And with that, I turn to my friend and colleague Mr. Spratt 
for any opening comments he would like to make.
    [The prepared statement of Mr. Nussle follows:]

  Prepared Statement of Hon. Jim Nussle, a Representative in Congress 
                         From the State of Iowa

    Good morning.
    When President Bush submitted his fiscal year 2004 budget 
yesterday, the underlying question for me was: is it a fiscally 
responsible blueprint for governing?
    From what I have read at this point, and based on the ambitious 
agenda he laid out in last week's State of the Union speech, the answer 
seems to be yes.
    The President's critics will scoff at that. They will point to the 
substantial near-term deficits in the budget deficits that the 
President and his aides have not glossed over. Those deficits are 
troubling especially coming just 2 years after we anticipated budget 
surpluses as far as the eye can see.
    But we all know what happened. Our economy, which had slowed 
dramatically in 2000, slid into recession just as President Bush took 
office. Later that year, terrorism struck here on our own soil, further 
challenging our national and economic confidence. Our necessary 
response rebuilding and shoring up here at home, and taking on 
terrorism where it breeds, overseas has required a commitment of will 
and resources.
    All these factors are still active today. At the same time, we 
continue to face increasingly urgent demands in areas such as education 
and health care. Budget deficits are among the results.
    But fiscal responsibility is not just about making numbers add up a 
certain way. It is fundamentally about governing; and governing 
requires striking a balance among competing demands, weighing desires 
against needs, and facing obligations not only to today's generation, 
but also to tomorrow's.
    Today's principal obligations are clear. We must prevail in the war 
against terrorism, committing all the resources necessary for that 
task.
    We must provide for and enhance the security of our homeland. This 
is not a one-time job; it is a permanent and ongoing task especially 
when we are trying to protect ourselves against evil minds who spend 
all their time calculating ways to terrorize and kill.
    Both of these, along with the other needs cited above will require 
government spending and will result in continued deficits for a time. 
But what matters is that we don't lose control of spending. We must not 
commit to strategies that win popular support today, only to balloon in 
costs that will be imposed on our own children.
    Last, but most important, we must help restore the strength and 
stability of our economy. According to last week's projections by the 
Congressional Budget Office, without action, this economy will continue 
to limp along with unemployment rates at about 6 percent for the next 
several years. This is not acceptable to the President; it is not 
acceptable to me; above all, it is not acceptable to all those families 
struggling to make ends meet. It takes a growing economy to provides 
jobs and opportunities which restores Americans' hope that they can 
make their lives better through their own efforts.
    When it comes to stabilizing and strengthening the economy, most of 
the ``stimulus'' plans I have heard of focus only on the short-term, 
which does not provide either the stability or the long term 
strengthening that is needed. Such proposals are the economic 
equivalent of a crash diet versus a healthy lifestyle.
    The President's plan, in contrast, recognizes that families and 
businesses need to be able to plan for the future. Whether it is a 
family planning for it child's education or a business looking at a 
capital expenditure, we need short-term and long-term solutions. People 
who are out of work don't just need a job for the rest of year; they 
need jobs that will be created to last for years to come.
    At the same time we do need to be very careful about controlling 
spending.
    Our current situation is very much like the situation many families 
throughout the country are facing. When faced with tough times, they 
still buy the family groceries and cover the cost of emergencies but 
don't remodel their kitchen.
    As we begin to construct this year's budget we must adhere to this 
same principle.
    While I support the goal of ending deficits, the highest priority 
in crafting the budget will be promoting the overall strength and 
stability of our country.
    There is no question that we face trying times but we have done so 
in the past and have always come out stronger as a nation and as a 
people.
    We must restore the stability and strength of this economy and this 
nation.
    Our budgets need to look beyond the next election and toward the 
next generation.

    Mr. Spratt. Mr. Snow, welcome to our committee. You bring 
impressive credentials and experience to the Treasury, and we 
look forward to working with you over the years to come. Among 
those welcoming your coming indirectly was an organization that 
you used to belong to named the Concord Coalition. I believe 
you were a prominent and ardent member of that organization. On 
Sunday, the Concord Coalition published a full-page ad in the 
New York Times--I didn't know they had that kind of money. It's 
a manifesto, really, about the Bush budget. And here is what 
they said, the organization of which you were once a very 
ardent and enthusiastic member:
    ``Guns and butter and tax cuts, can we have it all? To 
enact permanent new tax cuts in the face of new spending 
pressures, the prospect of war in Iraq, inevitable postwar 
costs, massive but indispensable homeland security, a major 
prescription drug add-on for Medicare is to proclaim that 
America can painlessly have it all. Unfortunately, we can't. 
Sooner or later someone has to pay the bill for guns and butter 
and tax cuts. Many worry about class warfare. Almost no one 
seems to be worried about another form of warfare, generational 
warfare. That is what we risk if we continue to live beyond our 
means and to pass the IOUs on to our children and 
grandchildren.''
    They go on to say: ``When is a tax cut not really a real 
tax cut? Many advocates of permanent tax cuts apparently 
believe that debt is a painless alternative to taxes. In fact, 
deficits merely shift the tax burden into the future. But 
haven't we shifted more than enough onto our children and 
grandchildren? According to Social Security and Medicare 
trustees, these two programs are on track to consume between a 
quarter and a third of worker payroll. This is an unthinkable 
burden. Adding more would be unconscionable. At a time when the 
young men and women of the Armed Forces are being asked to risk 
their lives, make the ultimate sacrifice, are the rest of us 
going to sacrifice by shifting even more of our tax burden onto 
future generations?''
    A pretty strong statement, and it is on our minds very 
much.
    One of the things that we are proud of, Mr. Secretary, is 
that during the 1990s we moved the budget deficit from $290 
billion in the red in 1992--fiscal year 1992, the last year of 
the Bush administration--to a surplus of $236 billion in the 
year 2000. That was a phenomenal accomplishment, and a lot of 
things converged to make it all happen. Now we are seeing the 
slow unraveling of the discipline that made it happen. This is 
one of our favorite charts because it shows what happened in 
the Clinton years. He inherited a $290 billion deficit, the 
biggest in peacetime history, and moved it over 8 years--the 
bottom line of the budget getting better every one of those 8 
years--moved it out of deficit into surplus to the tune of $236 
billion.
    Among other things, that made it possible when the Bush 
administration came to office for us to be having an earnest 
debate here about actually repaying some of the national debt 
as a prelude to saving and making solvent Social Security and 
Medicare for the long run. This would be our way to pave the 
way for the baby boomers' retirement, which begins to occur in 
2008, 77 million baby boomers marching to their retirement 
right now, the first to retire in 2008.
    Let me show you a simple linear graph that depicts--this is 
chart No. 7--the path that we were on when we began the Bush 
administration. The curve marked February 2001 shows you the 
curve that we anticipated following in order to diminish, pay 
back, buy back the Federal debt held by the public. And we had 
a realistic prospect of paying all that debt off by 2011. I 
don't think we would have ever reached that point, but 
nevertheless we had a path plotted to do that. Both sides were 
working in concert on that.
    The upper curve is where we are now, February 2003, just 2 
years, and the difference is $5 trillion. That is a stunning 
estimate of the situation we find ourselves in. We have seen a 
fiscal reversal of $7.8 trillion. We have gone from a surplus 
projected in 2001 of $5.6 trillion today, if we implement the 
policies you propose today, of a cumulative deficit of $2.2 
trillion. That is a $7.8 trillion swing, and I think you would 
agree it is a swing in the wrong direction. We are going the 
wrong way.
    The problem we have looking at this budget--could I have 
chart No. 12--is as we look across the top line and exclude the 
Social Security Trust Fund, because, after all, it is a trust 
fund, we have by law said it should be taken off budget. We 
have had motions in this committee to adopt amendments and make 
permanent law a provision that would have made it illegal to 
ever combine the two accounts. In any event, we think it is 
proper to focus on the budget deficit and the general accounts 
of the budget, the basic budget of the United States, and look 
at the top line.
    The chairman was just talking about seeing some daylight at 
the end of this forecast period. I don't see any. The deficit 
this year and the general accounts to the budget, excluding 
Social Security, is going to be $468 billion. That is before 
any cost is attributed to fighting the war in Afghanistan. By 
2008, it declines to $433 billion. Between 2004-08, 5 years, we 
accumulate $2.140 trillion in additional debt. Now, some of it 
we are able to put in the Social Security Trust Fund, but it is 
still debt of the United States, it is an obligation that has 
to be paid, and we just don't believe that that is a path we 
should be taking.
    And let me show you chart No. 6. We have had an economic 
downturn that was not forecast in January of 2001. OMB is now 
saying that of the $5.6 trillion surplus, $3.2 trillion has 
disappeared because of economic adjustments. So that is 
tantamount to saying the surplus was overstated by 60 percent 
to start with--40 percent to start with. But in any event, this 
shows the additional tax cuts that you have got right now. By 
OMB's estimation, if you did nothing further, we would have 
gone from a $5.6 trillion, to a $129 billion deficit, 
cumulative deficit, between now and 2011. From $5.6 trillion 
down to $129 billion.
    The additional $2 trillion that is showing up on the bottom 
line of the budget you are presenting us, the additional $2 
trillion in debt and deficits that we are going to be incurring 
are because of policy choices you are proposing in this budget, 
and the lion's share of those policy choices that leads us to 
bigger deficits is shown right there in the tax cuts that are 
being proposed by this administration. It will cost about $600 
billion to make permanent the 2001 tax cuts. It will cost a 
little more than $600 billion if we adopt the so-called jobs 
and growth package that you presented. We think it is an 
antigrowth package because it adds debt, and debt in turn will 
stifle growth in the economy.
    And finally, we don't think you can find a way around, nor 
we--we are both in the same box--on the alternative minimum 
tax. Between now and the end of this forecast period, we have 
got to deal with the problem and the cost of fixing the AMT so 
that 340 million taxpayers aren't affected by the alternative 
minimum tax, which is substantial. It is at least $600 billion 
itself.
    If you put those three together, that is over $1.8 trillion 
on your tax agenda. You may not have the AMT actually displayed 
in your budget this year, but there is no way around it. 
Congress and the administration will have to deal with it, and 
we want to talk to you about that in the question period. But 
if you put those three together, that is $2 trillion. If you 
add everything up and adjust it for debt service, that is $4.4 
trillion. That is why this budget is sagging. That is why we 
have got the bottom line going into the red, mired in the red 
in deficit for as far as the eye can see.
    Those are our concerns. We would like to get back to the 
path we were on when we were paying down debt and preparing for 
the retirement of the baby boomers, shoring up Social Security 
and Medicare for the long run. And frankly, as we look at your 
budget, we don't see how you get there. It is not just the fact 
that we see a dire picture of deficits as far as we can 
forecast, but that there is no plan spelled out here for the 
resolution of that problem. So we fear that we are seeing a 
cyclical deficit become a structural deficit and becoming every 
more--every year in your budget becoming more intractable.
    Respectfully, that is what we submit our concerns to be, 
and that is why we are glad to have you here today. We want to 
ask you some serious questions about this situation.
    Chairman Nussle. Without objection, all members will be 
allowed to put a statement in the record at this point.
    Mr. Secretary, welcome to the committee. This is your first 
opportunity before the House Budget Committee. We hope it is 
not your last. But we do hope in the intervening period you do 
have the opportunity to go in and set up your office and begin 
to work, and not spend your entire career on Capitol Hill; but 
we are glad that you are with us today and willing to spend 
some time with us. Welcome, and we are pleased to receive your 
testimony at this time.

      STATEMENT OF JOHN W. SNOW, SECRETARY OF THE TREASURY

    Secretary Snow. Mr. Chairman, thank you very much for that 
gracious welcome to the committee, and, Ranking Member Spratt, 
distinguished members of the committee, it is an honor to be 
here before you on my second day on the job. You are going to 
have a lot more in-depth knowledge of a lot of these issues 
than I will, but I am going to struggle through and do my best, 
and in the weeks and months ahead I look forward to getting 
much, much better acquainted.
    I think the chairman and the ranking member framed the 
issues we need to deal with extremely well, and I look forward 
to engaging on those very pared set of issues in the months 
ahead.
    Let me begin by addressing some of those issues and by 
offering my views on what I take to be the essential background 
for the budget. First, the economy, the condition the economy 
is in and how we got there; and then turn to the President's 
economic growth plan, which I think promises creation of real 
jobs, acceleration of the recovery that we are on but which is 
a little wobbly; and for the longer term going to the 
Congressman Spratt's set of issues and the chairman's set of 
issues, higher growth rates, the higher growth rates that will 
enable us to meet those unfunded promises, those huge promises 
to the future that we made to future generations, and to have 
the flexibility that real output and wealth and a bigger 
economy gives us to deal with whatever issues the country may 
face.
    As every American knows by now, whether from having lost a 
job, from knowing someone who has lost a job, or from worrying 
simply about losing their own job, our economy took a turn for 
the worse beginning in the summer of 2000. I come out of the 
transportation business, and I will remember forever looking at 
the carload numbers and the containerload numbers and the 
bargeload numbers and the truckload numbers that came across my 
desk as a private citizen running a large transportation 
company in the summer of July of 2000. It was a striking 
downturn that began. It wasn't seen in the rest of the economy 
for some months to come, but the industrial sector began a long 
downturn that still isn't in a state of recovery, a 2 year--
probably the longest downturn of the industrial sector that we 
have experienced in two or three decades.
    By the time President Bush took office, that undercurrent 
was running strongly against the economy, and we were clearly 
in a period of declining growth heading into a recession. The 
unprovoked and unprecedented terrorist attacks of September 11, 
compounded those economic difficulties, compounded a recession 
that was already by that time well under way. At the same time, 
the discovery of the abuses that were apparent in some 
corporate businesses and on the part of some corporate business 
leaders slowed the recovery further and undermined confidence 
in our equity markets and in our capital markets.
    In response to this confluence of adverse events, the 
President led decisively, and acting with the Congress in a 
bipartisan fashion took the steps necessary to protect a shaken 
Nation and a fragile economy. In 2001, when relief was most 
needed, he signed a sweeping tax relief package, the most 
sweeping in a generation, and as evidence of the damage to the 
economy became clearer and clearer in 2002, March, acted again 
to further bolster the economy.
    From my point of view, this was precisely the right 
medicine administered at precisely the right time. These 
actions--and I commend the Congress for your action--these 
actions were essential to avoid a much deeper and much harsher 
downturn. And the actions made the recession the shortest and, 
I think, the shallowest in modern times--the mildest since 
World War II. I am absolutely convinced that without these 
measures--and certainly they added to those deficit numbers 
that were on the charts that you showed me--but without these 
measures, we surely would have had a much deeper and much more 
difficult recession to contend with.
    In the face of extreme adversity, our economy, like our 
Nation, remains resilient. Despite the economic slowdown, the 
attack on our homeland, the war in Afghanistan, weakened 
investor confidence, and the current uncertainty surrounding 
the economy as a result of the Iraqi situation, the economy is 
recovering, but the problem is it is not recovering on a fast 
enough pace or a sure enough pace. And as the President has 
said, we can and we must do better. Relative success isn't 
sufficient. Relative success isn't enough. Too many Americans 
are out of work today, and too many Americans are insecure 
about their tomorrows. As long as there are Americans who want 
a job and can't find one, the economy isn't growing fast 
enough.
    That is why the President's jobs and growth package is so 
important. Under that proposal, 92 million taxpayers and their 
families would receive tax relief this year. A typical family 
of four with earnings of $39,000 would receive total tax relief 
of over $1,000, I think it is $1,100-some, compared to the 
taxes they paid in 2002. And importantly, they would get that 
tax relief not just in 2003, they would get that tax relief 
year in and year out thereafter, each and every year 
thereafter. And his plan will create hundreds of thousands of 
additional jobs by the end of this year and well over a million 
by the fourth quarter of 2004.
    The package will not only help America return to its 
economic potential--and this is an important point that I am 
sure the committee will want to join with me--it will increase 
that potential. It will put us on a higher growth path. It will 
eliminate inefficiencies in the economy, distortions in equity 
markets, and, by doing so, will increase the output of the 
economy. It will create a more abundant future with more good 
jobs and greater capacity to address these problems. I think 
that is what everyone in this room, and everyone across America 
is seeking.
    Before I turn to the budget, let me offer a word on 
deficits. Congressman Spratt is correct. I have been a hawk on 
deficits in the past. I was a hawk on deficits--and you will 
want to question me on this--at a time when we were in an 
entirely different world. I was a proponent of the balanced 
budget amendment with President Bush during his--first 
President Bush--during his administration. I was active in the 
Business Roundtable in bringing about the balanced budget 
agreement between the Congress and the administration in the 
mid-1990s, and I am proud of that.
    Let me be clear: Deficits matter. Deficits are important. 
They are never welcome, but there are times, times like these, 
when they are unavoidable, particularly when we are compelled 
to address critical national needs as we are today. Are these 
deficits welcome? Absolutely not. Are they understandable? Yes, 
indeed.
    The surpluses that were talked about that we enjoyed were 
the product of a strong economy, not a weak economy. We will 
not return to economic strength by taxing the economy further 
when it is struggling any more than we would increase our 
Nation's security by failing to fund its defense when we are 
threatened. The prescription for returning to balanced budgets 
is pretty straightforward. I think the chairman talked about it 
in his opening comments. Hold the line on spending and grow the 
economy. Pick the economic growth up half a point, a quarter of 
a point, three-quarters of a point, and we get entirely 
different numbers. Hold spending a half a point or a quarter of 
a point compounded with higher growth, we get entirely 
different numbers. This is the direction the President has 
chosen of course, to create real jobs, more real jobs that 
last, and, of course, to put the Nation on a higher growth path 
for the future.
    Mr. Chairman, I look forward to responding to the questions 
of the committee and working with the committee in hopefully 
the months and weeks--the weeks and months ahead. Thank you 
very much.
    Chairman Nussle. Thank you, Mr. Secretary. And again, 
welcome to the committee, and good luck with and 
congratulations on your new position.
    [The prepared statement of Secretary Snow follows:]

 Prepared Statement of Hon. John W. Snow, Secretary, Department of the 
                                Treasury

    Chairman Nussle, Ranking Member Spratt, and distinguished members 
of the Budget Committee, I welcome the opportunity to appear before you 
today to discuss the President's budget for fiscal year 2004.
    Let me begin by offering my views on the essential background for 
this budget: the United States economy and President Bush's economic 
growth plan, which promises to create jobs, accelerate America's 
economic recovery, and increase our growth for years to come.
    As every American knows by now--whether from having lost a job, 
knowing someone who has, or worrying about losing theirs--our economy 
took a turn for the worse beginning in the summer of 2000. By the time 
President Bush took office an undercurrent was running against the 
economy. The unprovoked and unprecedented terrorist attacks of 
September 11, 2001 compounded a recession that was well underway, while 
the discovery of serious abuses of trust by some corporate business 
leaders slowed our recovery from it.
    In response to this confluence of adverse events, President Bush 
led decisively. Acting with Congress in a bipartisan fashion, he took 
the steps necessary to protect a shaken nation and a fragile economy. 
In 2001 when relief was needed, he signed the most sweeping tax relief 
in a generation. As evidence of the damage became clearer, he acted 
again in March 2002 to further bolster the economy. This was precisely 
the right medicine at precisely the right time. These actions made the 
recession shorter and shallower than it would have been. In fact, by 
most measures it was the mildest since World War II.
    In the face of extreme adversity, our economy, like our nation, 
remains resilient. Despite a sequence of economic slowdown, attack on 
our homeland, war in Afghanistan, and weakened investor confidence, the 
economy is recovering. But as the President has stated, we can and must 
do better. Relative success is not sufficient. Too many Americans are 
out of work today, and too many Americans are insecure about their 
tomorrows.
    We must build on the proven strengths of our economy. We must 
continue to move toward policies that will create more good jobs and 
raise living standards for all. As long as there are Americans who want 
a job and cannot find one, the economy is not growing fast enough. 
That's why President Bush's jobs and growth package is so important. 
Under the President's proposal, 92 million taxpayers and their families 
would receive a tax cut in 2003. A typical family of four with two 
earners making a combined $39,000 will receive a total of $1,100 in tax 
relief, compared to the taxes they paid in 2002, under the President's 
plan--and not just this year, but in each and every year after. And his 
plan will create hundreds of thousand of additional jobs by the end of 
this year and well over a million more by the end of next year.
    The package will not only help America return to its economic 
potential, it will increase it, creating a more abundant future with 
more good jobs and raising real wages. I believe that is what everyone 
in this room and across America seeks.
    Before I turn to the budget, a word about deficits. Deficits 
matter. They are never welcome. But there are times, such as these, 
when they are unavoidable, particularly when we are compelled to 
address critical national needs. It is important to remember, even 
without the President's economic growth and jobs package, homeland 
security, and the war on terrorism, we would have deficits now. Are 
these deficits welcome? No. Are they understandable? Yes.
    The surpluses we enjoyed were the product of a strong economy, not 
a weak one. We will not return to economic strength by taxing our 
economy when it is struggling, any more than we would increase our 
nation's security by failing to fund its defense when it is threatened. 
The prescription for returning to balanced budgets is straightforward: 
hold the line on spending and grow the economy. This is the direction 
the President has chosen: a course to create real jobs that last. We 
are not going to let terrorism and its effects bring either our Nation 
or our economy to its knees.
    Finally, we should remember that current deficits are small 
relative to our unique circumstances and to our economy as a whole. 
Even at their depth, they remain considerably below the typical levels 
following a recession over the last 30 years and they begin a 
pronounced improvement after next year.
    We face new threats and challenges. Job creation and economic 
growth are keys not only to our near-term but our long-term success as 
well. If we are to meet the threats of today and the challenges of 
tomorrow, we must have a strong economy. In fact, we must seek a higher 
level of prosperity for America than we have known--one which puts us 
on an even higher growth path, one which unlocks the fullest potential 
and talents of the American people. That means encouraging hard work, 
rewarding hard work, and creating the opportunities for work for all 
Americans. These are the values that brought America to where we are 
today and they are the ones that we must allow to lead us into the 
future. We must also remember that our success and our example in this 
endeavor promises not only a brighter, better future for our people and 
our children, but for the rest of the world as well.
    The Jobs and Growth Package, our new initiatives to promote 
savings, our proposal to promote health care coverage, to encourage 
charitable giving, and to promote responsible energy production, and 
improved compliance measures from the Internal Revenue Service are all 
important budget initiatives. Each of these is described in more detail 
in our request.
    The Treasury Department's portion of the 2004 budget is nearly a 
third reduced from 2003, owing mainly to the separation of homeland 
security functions from the Treasury Department this year. Adjusting 
for that change, Treasury's request is an increase of about 3.5 percent 
over last year's request.
    Treasury's budget request will allow us to build on our recent 
accomplishments and highlights our commitments to:
    1. Fight the war against terrorist financing;
    2. Ensure that the tax system is fair for all Americans through a 
comprehensive compliance effort that includes high income taxpayers;
    3. Increase Treasury's efficiency and effectiveness by streamlining 
operations; and
    4. Maintain the integrity of our nation's financial systems and 
currency.
    I look forward to discussing that plan and the rest of the 
President's budget with you today.

    Chairman Nussle. I guess I want to start with what you said 
we ought to question you on, and that is you are a deficit 
hawk. And like so many people around here, the words of the 
last 10 years have been put to music about balancing the 
budget, keeping it balanced, you know, never going back to 
those days when we were running deficits, some would say, as 
far as the eye can see.
    How did we get here? How did we get to this point? You say 
deficits matter. We all think deficits matter, I would say, and 
I believe that is now joined in a bipartisan way. So if 
deficits matter, A, how did we get here, and B, what are we 
going to do about it?
    Secretary Snow. One of the charts that was put up suggested 
where the biggest part of the problem lay: The economic 
slowdown, which has cost us over $3 trillion from those 
forecasted surpluses of just a few years ago. We didn't 
squander that surplus. We never had it. It was a forecast. It 
wasn't real dollars in hand.
    And I think the thing to keep in mind here is just how 
humble people who make forecasts should be; that the economic 
slowdown was not foreseen. The slowdown in the growth of 
Government revenues, which was greater than the slowdown in the 
economy, wasn't foreseen any more than at the end of the 
1990s--1996, 1997, 1998, the vast increase in governmental 
revenues was foreseen. That vast surge in governmental revenues 
was the product of what? It seems to me it was clear. It was 
the product of a very buoyant and unsustainable stock market 
that created a lot of capital gains taxes for the Federal 
Government that had not been in the budget before and which are 
not there today. It created an awful lot of revenue for the 
Federal Government growing out of the exercise of options at a 
time when options were buoyed up by this very effervescent 
stock market, by incentive compensation that was a primary part 
of corporate world that ballooned during this period and 
created lots of additional and unforeseen revenues at the 
Federal Government.
    That is over now. It disappeared. And the economic slowdown 
and the consequence of the stock market decline, I think, are 
the single most important factors in explaining the difference 
between where we were several years ago and where we are today, 
to say nothing of the cost of the war on terrorism and the 
economic uncertainty that goes with the Iraqi situation.
    Chairman Nussle. Well, let me hone in then on revenues, 
since that is the reason why the bottom line has changed so 
dramatically is the revenues have not come in. We can talk 
about the fact that there was additional emergency spending, 
there was certainly new homeland security spending, there was 
spending certainly over and above what was anticipated that 
certainly contributed to it. But the economic downturn had 
quite a bit to do with the lack of revenues coming into the 
Treasury. As you said, it was not predicted, it was not 
forecasted. I am dying to ask, why? I mean, we missed--and when 
I say we, I mean CBO, OMB, and Treasury, missed these forecasts 
by $50 billion at a chunk. Why? How can this be within 6 
months--and this is your second day, so I guess the passion 
behind the question is that hopefully this has got to be one of 
the first issues that is tackled.
    And let me put out a suggestion as to what might be going 
on. Our tax system that we have right now, we cannot predict 
the revenue that it will generate. The current tax system has 
gotten so complicated, so convoluted, so based on things that 
are outside of anybody's control that no human being now is 
able to predict what it will generate, because for the first 
time, as I understand it, since 1929, regardless of where the 
economy was going and heading, this is the first 2-year period 
that revenues actually dropped in actual dollars from the 
previous year. And to me that is a signal of the Tax Code and 
our inability to manage revenues more than probably any other 
issue that is out there. And I'd ask your comment or 
observations on that.
    Secretary Snow. I think you are putting your finger on a 
very important issue here. Predicting the economy is one thing, 
and predicting the revenues that go to the Federal Government 
as a consequence of changes in the economy is another. The 
latter seems to have greater margins of error in it than the 
margins of error associated with predicting the economy. So the 
revenue stream is even more uncertain than the economy itself, 
which has always got a measure of uncertainty about it. So 
clearly, there is a disconnect. It is a disconnect I don't 
think we understand. And the best people in the world of 
understanding these things are beside me here and over at the 
Treasury Department and up here in the Congress. We all missed 
it. We all missed it big. As I said, I think, earlier, it ought 
to make us humble, and it ought to make us go back and think 
harder about these interconnections between the economy, the 
Tax Code, and the Government's revenue streams.
    Chairman Nussle. All right. But then if that is the case, 
if we can't forecast tomorrow and can't forecast next year, let 
us just not do anything. Let us just freeze where we are. Let 
us freeze spending; let us not change the Tax Code. According 
to CBO, we grow out of it. According to OMB, we will grow out 
of it in 2 or 3 years. Let us not do anything.
    Why is the President suggesting at this moment in time that 
we do something? And I am asking you this, to some extent, 
tongue in cheek. I mean, we are supposed to freeze at this 
moment in time and do nothing as a government? We are not 
supposed to change the tax policy of this country? That is what 
I hear so many people saying: Don't do anything. Well, in 2 or 
3 years we will be out of it. I mean, is that true, that all of 
a sudden we are going to grow out of it in 2 or 3 years by 
doing nothing over those next 2 or 3 years?
    Secretary Snow. No. I think the President's program is 
animated by the answer to your question, which is, no, we can't 
leave it the way it is. We need to take the steps to assure 
that the recovery, which will generate additional revenues--
that the recovery stays in place and accelerates; that those 
additional jobs are created; that the economy grows in the 
short term. But more importantly, because this package is--the 
President's growth program--has got a long-term component as 
well as a short-term component that I hope we will be able to 
get into later, it assists the economy now. It creates some 
500,000 additional jobs by year end, the fourth quarter of this 
year, a million and 3 or 4 by the fourth quarter of next year. 
That is a lot of jobs.
    Now, that helps a lot of people who are out looking for 
work. I want to see as many ``Help Wanted'' signs going up all 
over America as possible. But what we need to do is get this 
economy on a higher growth path long term. The way to do that, 
I think, is to take actions like those the President proposes 
on the dividend, because clearly, the double taxation of 
dividends weakens the economy. It distorts the economy. If you 
tax equity capital more, you get less of it. If you tax 
anything, you get less of it. And so we have less equity 
capital. As a consequence, we have more debt in the system than 
we otherwise would have. And I am--we will get into this later, 
but the important thing about the package is that it serves 
both short-term and critically important long-term goals of 
speeding up the economy in the short term, assuring more jobs, 
and putting us on that more abundant growth path in the future, 
which allows us to address these questions that are on your 
mind.
    Chairman Nussle. I have had a chance to talk to a few Iowa 
business folks, big employers within my district and State, and 
who were similarly situated to yourself not too long ago, and I 
asked them what we need to do to create jobs. And I will tell 
you, what they tell me is that there is money out there--a lot 
of people sitting on money right now. A lot of people are 
sitting, waiting. They are waiting because of lack of 
confidence, on one hand. They tell me they are waiting because 
of the uncertainty over the war that is looming. And they tell 
me they are just uncertain about the future.
    And so, I guess, my last question would be, having sat in 
that situation not too long ago around the boardroom table 
making decisions about product lines and job creation and 
actually creating a job, unlike the Government which hasn't 
created a job except a government job in its entire existence, 
tell us what is the trigger. What is the trigger? With low 
interest rates right now and the cost of capital as low as it 
has ever been, what is the trigger to get someone like yourself 
who sits around that table, whether it is a big boardroom table 
or it is a small business kitchen table at home, that triggers 
them to create that next one or two jobs? What is the trigger? 
What is the way that we can get this thing going?
    Secretary Snow. I think the main trigger is confidence, and 
confidence comes from people seeing their disposable income 
rise, and seeing it rise not just in a one-time event, but the 
prospect for a permanent increase in what they can take home, 
what they can spend, what they really have, their after-tax 
income in their pocket going up.
    That is what this first and foremost does. It puts lots of 
additional money in the hands of 92 million Americans. That 
will stimulate the economy because it will give people 
confidence in their future. And it is the multiple-year aspect 
of this. Making these future tax cuts permanent will telescope 
to the future and cause people to say, wow, I am going to have 
another $1,000 a year, I am going to have another $2,000 a year 
to spend. It makes them feel more confident about their future.
    Business will respond as consumers--as they see the 
prospects for their business improving, as they see their 
returns improving. An important feature of this legislation is 
that small businesses, which are the biggest job generator in 
America, will find themselves with more net income and more 
cash flow. They will have more cash flow and net income because 
of the expensing provision, which is an attractive and 
important feature of the bill, but also because of the 
reduction in the marginal tax rates. And of course, so many 
small businesses use the flow-through method of paying taxes, 
they will find their marginal tax rates being reduced. As their 
marginal tax rates are reduced, what does that mean? It means 
their business is more profitable. As their business becomes 
more profitable, has more free cash flow, they are more 
inclined to go out and expand to take on additional customers, 
to make some capital investments, and to put up those help 
wanted signs that I said earlier I would like to see more of 
going up all over America.
    Chairman Nussle. Thank you, Mr. Secretary.
    Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman.
    Mr. Secretary, I was here during the 1980s and here during 
the 1990s, and you were a close observer of the process then, I 
think you would agree. The way we got to where we were in 2000, 
with a surplus of $236 billion and the bottom line of the 
budget that it improved every year that the Clinton 
administration was in office is that we had a plan and we had a 
process. The process grew out of the Budget Enforcement Act of 
1990, which we adopted as part of the budget summit agreement 
made with Mr. Bush, laying the foundation for what happened in 
the 1990s.
    Those rules are now all gone. The PAYGO rule is gone, 
discretionary spending ceilings are gone, sequestration is 
gone. All of the disciplines are gone. And the last vestige of 
any kind of budget plan expired last year. We have no plan; we 
have no process. So how do we get rid of these enormous 
deficits and back to a balanced budget without a plan and 
without a process?
    Now, I know that you are proposing the renewal of some of 
these budget process provisions such as the PAYGO rule. There 
is an old adage around here that it is pay as you go, and that 
you pay, and I will get a free ride. That is a typical attitude 
on both sides of the aisle among all Members of Congress.
    As I understand it, you want to renew that rule, but you 
don't want it applied your proposals; it won't apply to your 
tax cuts, and it won't apply to your entitlement increases; is 
that correct?
    Secretary Snow. Congressman, the PAYGO rules and the other 
sequestration rules and those things that came about in the 
1990s were good policies. I supported those at that time. We 
got to those good numbers you are looking at because of those 
rules in part where spending was under much tighter control in 
that period of the mid-1990s on than it had been heretofore. 
And I forget precisely what it was, but over about a 5- or 6-
year period there, spending rose at less than the rate of 
inflation, I think.
    Mr. Spratt. But we had a plan, and we had to limit it 
someplace at least. We didn't always adhere to it, we fudged on 
it, but nevertheless it constrained spending significantly and 
achieved results. Alan Greenspan sat there and said, I will 
admit, I was a cynic. I was a skeptic. I didn't think it would 
work. But I have to say--he said--I think that this contributed 
successfully to the successes of the 1990s.
    Secretary Snow. I take some pride in having been associated 
with groups that were in the forefront of urging Congress to 
adopt those rules. I don't think it was the Concord Coalition 
that I was a member of, though.
    Mr. Spratt. I beg your pardon?
    Secretary Snow. But, you know, I know Pete Peterson and the 
Concord Coalition and Warren Rudman, and I think they had done 
a lot of good work as well. But those PAYGO rules and 
sequestration rules and so on were clearly part of the game 
plan that restrained spending that helped us get to that 
promised land of balanced budgets, but aided greatly, I think 
you would agree with me, by that surge of governmental revenues 
that came about because of the buoyant stock market and the 
high productivity and rising real wage rates. We had an awful 
lot of good things going on.
    Mr. Spratt. It was a convergence of all of those things. 
But if we hadn't had the budget disciplines in place, we 
wouldn't have taken maximum advantage. You wouldn't have seen 
the effect on the bottom line. But my question to you is the 
here and now, right now. If you want to see the renewal of 
those, shouldn't they apply to your tax cut proposal this year, 
your increase in Medicare benefits?
    Secretary Snow. No, I wouldn't. If you are asking me 
whether we should have offsets----
    Mr. Spratt. That is what the PAYGO rule means. If you don't 
have offsets----
    Secretary Snow. If you are asking me whether there ought to 
be offsets to the tax reductions, I would candidly say no, 
because if you do that, then you don't get the benefits of the 
tax reductions. And we need those tax reductions to put so many 
people back to work. I mean, it is 2 million people over the 
course of the next 3 years that get back to work because of 
this. And I think that is awfully important, too, to have--as 
we deal with international security, we deal with economic 
security at home.
    Mr. Spratt. Why propose it then, the renewal of the PAYGO 
rule, if it is not going to be applicable?
    Secretary Snow. The PAYGO rule should apply to spending.
    Mr. Spratt. Well, it does. That is what we are talking 
about.
    Secretary Snow. Well, I don't view a tax reduction as 
spending.
    Mr. Spratt. Well, it always applied to tax reduction and 
spending from the very beginning. So you are just talking about 
a PAYGO rule that has limited application. And would you apply 
it to your proposal, to, let us say, Medicare prescription 
drugs?
    Secretary Snow. No, I don't think we would.
    Mr. Spratt. That is spending, isn't it?
    Secretary Snow. It is a spending, but it is part of a 
larger program to reform a system that is badly in need of 
reform.
    Mr. Spratt. Well, I would agree with you about the need for 
prescription drug coverage, but you just proposed a rule, but 
then dispensed with all the applications of the rule.
    Secretary Snow. I am suggesting that we would defeat the 
very purpose of the tax reductions if we tried to offset the 
effect of the tax reductions.
    Mr. Spratt. I understand the point, but if you are going to 
make that point and make it in the manner you made it, then we 
shouldn't even be proposing in your budget that we have a PAYGO 
rule or--a renewal of the PAYGO rule.
    Secretary Snow. Well, I am talking about the PAYGO rules 
applying primarily to spending. I think we have to deal with 
the discretionary spending is where it applies.
    Mr. Spratt. The chairman touched on a very sensitive 
subject for anybody who operates in the realm of the budget, 
and that is the lateness and the reliability of early Treasury 
forecasts of revenues and the composition of revenues. And this 
is not a new topic; it has been around for a long time. We keep 
prodding and pushing the Treasury to come up with better 
estimating techniques so we can know far sooner than 18 months 
or 2 years what is the composition of income taxes, corporate 
taxes, whatever, in a particular fiscal year or calendar year. 
Do you have any plan for doing that--I know you have only been 
on the job for 2 days--improving those techniques?
    Secretary Snow. If I had a better way do it right now, I 
would tell you, but I don't.
    Mr. Spratt. Well, let me suggest to you the reason everyone 
bought into that fantastic forecast, $5.6 trillion in 
surpluses, was that it facilitated your tax cut proposal. We 
were warning that this was a blue sky estimate. You said you 
saw estimates of the economy slumping in August of 2000.
    Secretary Snow. Industrial sector.
    Mr. Spratt. Industrial sector. Transportation sector. The 
MBER says the recession started in March of 2001. The tax cuts 
weren't passed until June of 2001. So what happened is those 
who were pushing the tax cuts ignored the storm clouds that 
were gathering over the economy that people like John Snow at 
CSX were seeing; others were seeing them. They ignored those 
storm clouds and didn't want to acknowledge that that $5.6 
trillion was probably an overestimate. Treasury and OMB now say 
it is an overestimate to the tune of $3.2 trillion due to 
economic adjustments alone. They didn't want to acknowledge 
that likelihood.
    And here is what their budget looked like: If you designed 
a surplus, which excluded the Medicare surplus and the Social 
Security surplus; and those were the terms we were talking 
about on both sides of the aisle then, that we should stay out 
of both of those trust accounts. We were forswearing ever again 
borrowing and spending those surpluses. This is what the 
surplus would have looked like, and this is how it was applied 
in the budget that was adopted in the first year of the Bush 
administration.
    And you see that top green sliver of a line, that layer at 
the very top? After the blue spending proposals and the green 
tax cuts, that was all that was left in the near term between 
2002 and 2005, 2006 as a margin for error. And having made a 
very extravagant project--well, what turns out to be a blue sky 
projection of the economy and the surplus, they then came up 
with a budget that left no margin for error even though, as I 
said, storm clouds were gathering and people were questioning 
whether or not this surplus could indeed be obtained. That is 
what happened. And the reason you bought into it was because it 
made possible these tax cuts.
    Now, at this point in time, if I could get the bridge 
chart--there we go. This is a little complicated for the 
screen, but this comes straight out of OMB numbers. This shows 
where the April 2001 surplus projection lay, $5.637 trillion. 
These are economic adjustments that OMB now says should be made 
to that. Those include technical as well as just economic 
growth adjustments. They don't break them down, unfortunately. 
That means the adjusted surplus that can really be expected to 
obtain in that period of time, 2002-11, the cumulative surplus 
is $2.463 trillion, and all of that virtually is Social 
Security. There is no on-budget surplus after that.
    Then here are the enacted policies: tax cuts, the stimulus 
tax cuts, and then other enacted legislation, a large part of 
which goes to homeland defense and national security. The total 
of those enacted policies comes to $2.592 trillion. That means 
of the available surplus, adjusted available surplus, is 
already spent to the tune of $129 billion. That is the next 
item there. That shows you how much already has been spent. So, 
anything you do now goes dollar for dollar to the bottom line, 
adds dollar for dollar to the deficit, and, as the Concord 
Coalition said, that is a way of charging it up to our 
children. That is what it amounts to, shifting forward the 
burden of it. And the total amount of deficits that you are 
incurring is $2.122 trillion, and all of that--almost all of 
that results from policy decision making right now. You are 
saying it is OK to proceed from now because this is what OMB 
tells us. This is going to be the price tag of adopting this 
budget unless something falls out of the sky and gives us a 
higher rate than 3 percent, which is what they are assuming 
already, a pretty robust rate of growth for a 10-year period of 
time. Doesn't that give you concern?
    Secretary Snow. The--sure.
    Mr. Spratt. As a self-described deficit hawk, you are about 
to pursue policies that will increase the deficit by $2.122 
trillion.
    Secretary Snow. Let us go back and talk about how we got 
there.
    Mr. Spratt. OK.
    Secretary Snow. The 2001 tax reduction was good policy. Who 
doesn't think that?
    Mr. Spratt. But that is over now. I am talking about----
    Secretary Snow. But it builds into these numbers.
    Mr. Spratt. I have got that in enacted policy. I am telling 
you, you are standing at the point with a cumulative deficit 
between 2002 and 2011 is $129 billion, and you are proposing to 
add $1.993 trillion to it, OMB numbers.
    Secretary Snow. OMB numbers that they will acknowledge, 
Congressman, understate the revenues for the future and build 
in all of the costs of the President's growth package. So they 
are worst-case sorts of numbers. I think the economy can grow 
faster, and it certainly will have more revenues in it than the 
numbers that OMB presented to you as they acknowledged, I 
think, that it was a pessimistic case on governmental revenues. 
So the picture is better than that.
    Now, am I happy to have deficits of any amount? No. But as 
I said, deficits sometimes, regrettable as they are, are an 
essential part of carrying on the essential business of the 
country, the critical business of the country, homeland 
security now, and domestic security. And I think it is 
important to bear in mind the size of these deficits. These 
deficits are relatively small compared to the size of the 
economy and historic deficits coming out of recession, as is 
the debt level of the country. They are manageable, and they 
will be receding after a couple years. I think the OMB 
administrator had them going down, as was shown in one of these 
charts. They are deficits that we can work our way out of if we 
can grow this economy faster. And I would make the bet on 
growing the economy faster to work our way out while 
maintaining tight spending controls.
    Mr. Spratt. But you will admit you have got fairly robust 
growth built into this budget already. It is better than 3-
percent real growth for the next 10 years, averaging out over 
10 years better than 3-percent robust growth, real growth.
    Secretary Snow. I will have to check that to confirm that 
you are right. If you are, I will certainly acknowledge it. I 
had thought that OMB had explicitly not taken into account the 
growth effects, or had discounted some of the growth effects of 
the President's package, but had scored the entire cost of that 
package.
    Mr. Spratt. Let me just ask you a final question. I don't 
want to monopolize this, but this is a very important part of 
the decisions that lie ahead of us. This is our back of the 
envelope tab of what is on the agenda, the Bush 
administration's tax cut agenda.
    The first couple of items are done deals. They are enacted 
law. The tax cut of June 2001, the cost of it a $1.349 trillion 
without including any additional debt service. The stimulus 
package in March of 2002, $42 billion. And now you've got on 
the table a growth package, a small portion of which has been 
passed, a so-called growth package. It will be implemented over 
a period of time. The cost between now and 2013 is $615 
trillion. That is an OMB number. You are also proposing making 
permanent the 2001 tax cuts, which cost about $692 billion.
    As I said, I think you have to include the alternative 
minimum tax. The Treasury was the first to blow the whistle on 
the alternative minimum tax. They put out a report a couple of 
years ago and said, given current trends the number of tax 
filers who will be confronting the AMT will grow from 2 million 
to 39 million over the next 10 to 12 years. I have forgotten 
the time frame. The numbers are roughly correct. You know and I 
know politically we will have to deal with it, and equitably we 
should deal with it, because when we pay off the alternative 
minimum tax it was a way of saying to upper bracket taxpayers 
you are not going to be able to wipe out all your income tax 
liability with reductions and credits and preferences and so 
forth. You got to pay at least the minimum tax. We never meant 
for that to apply to middle income taxpayers, but it soon will. 
But the number who have to confront the AMT every year grows 
from 2 million to 10 million. Politically, the pressure for 
doing something about it has to be dealt with. You said that 
for several years, your Treasury Department has, both 
administrations. The AMT has to be confronted, the committee 
deals with it. Don't you agree it has to be included? If you 
talk about this time frame, we are talking 2004-13, and you 
don't include the AMT, you are fooling yourselves and you are 
fooling the American people.
    Secretary Snow. I think it will be addressed but it should 
be addressed by the Congress and the administration as part of 
an overall tax reform package rather than as a one-off item.
    Mr. Spratt. What you are saying though it has to be offset, 
is that what you are saying? That would mean revenue increases 
somewhere.
    Secretary Snow. It is an issue that needs to be addressed. 
I am granting you that. How and when is something I really 
don't have an opinion on at this time.
    Mr. Spratt. Between now and 2013, the taxpayers affected by 
it will grow from 2 million to 24 million. Don't you think 
before 2013 within the time frame we are talking about, well, 
within it, you have to deal with this issue; therefore it has 
to be included in the tally of the tax cuts likely?
    Secretary Snow. But I think it should be addressed in the 
larger context of real, broad tax reform.
    Mr. Spratt. Let me ask you one final question. It is time 
to clean the closet out. We need to scrub the code down as we 
did in 1986. It is long past due. And one of the anomalies in 
the code we could deal with in a tax reform package would be 
the taxation of dividends. Why not put it in a revenue neutral 
tax reform package? And indeed why not make it for the 
corporate Tax Code the big chip just as the ITC and accelerated 
depreciation was. It was a trade-off to get lower rates. Why 
not play this chip and say to corporate America we will give 
you this if you will agree to get rid of these loopholes and 
the exclusions that lower the effective rate of corporate taxes 
from 35 percent to 15 percent? Aren't you passing up a real 
opportunity there to induce real change and a good cleaning out 
of the corporate Tax Code?
    Secretary Snow. There are a variety of ways to do things. 
However you look at this proposal, it is just good economics.
    Mr. Spratt. But it is not good bargaining. Put it on the 
table and corporate Americans say this is what we will give you 
if you will agree to get rid of these loopholes and these 
things that let you expatriate and locate in Bermuda and avoid 
taxes. This is the incentive to you. We are going to handle the 
double taxation dividends problem in return for your concession 
on these issues.
    Secretary Snow. There are a number of advantages from the 
exclusion on the dividends, one of which is it reduces the 
incentive to do the very thing that you find objectionable and 
I find objectionable, inversions and tax shelters, abuse of tax 
shelters and things, because if you are not paying income tax 
on it there is nothing to shelter.
    Mr. Spratt. You have to have something to show.
    Secretary Snow. There is a byplay here between the dividend 
exclusion and encouraging good taxpayer behavior.
    Mr. Spratt. I agree, and put them in the same package and 
you got something you can pass. Thank you, sir.
    Secretary Snow. Let me close though. I think you and I 
maybe didn't agree on everything there, but I think we can 
agree on the need for better estimates and I will go to work on 
that.
    Mr. Spratt. I would hope we found broader common ground 
than that.
    Chairman Nussle. Just to complete the record, I was 
curious, is the proposal offered by the Democrats compliant 
with PAYGO and offset and revenue neutral?
    Mr. Spratt. If you are not going to play by the rule, we 
are not going to play by the rule.
    Chairman Nussle. Just wanted to make sure the record was 
complete.
    Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman. Mr. Snow, we 
welcome you to the committee and to Washington again. The first 
question I have for you, are you a volunteer or a conscript? I 
suspect you are somewhere in between. You don't have to answer 
that question. You know it bothers me sometimes when they take 
words that I used back in 1995 and throw back at me today. 
Things have changed. And clearly the economy is different today 
than it was in 1995 and the circumstance we find ourselves in 
is different than it was in 1995.
    I do want to agree with you on everything that has been 
said. As we look at projecting what the economy is going to do, 
what revenues we are going to produce, we can agree now that 
this is a very humbling business. But I do want to come back to 
some things because I didn't hear the kind of answers that I 
think ultimately the American people want to hear. The chairman 
asked a pretty interesting question. Why don't we just freeze 
everything? I mean most Americans would be happy if the Federal 
Government would just freeze an awful lot of the spending and 
allow the economy to catch up.
    Let me give you an example. And we sort of have this debate 
sometimes between CBO and OMB and what Alan Greenspan says and 
other people say about where the economy is and where it is 
going, but according to our official bean counters at the 
Congressional Budget Office this year the Federal Government 
will increase revenues to the tune of 3.7 percent. Now 
yesterday Mr. Daniels was here and I await a little better 
explanation because in many respects I was proud of the fact 
that he stole a line from me that the Federal budget shouldn't 
grow any faster than the average family budget. But the average 
family budget is not growing at 4.5 percent, at least by my 
estimate. And I want to come back to this point. If revenues 
are going to increase by 3.7 percent this year and the Bureau 
of Labor Statistics tells us that the CPI is going to increase 
at 1.8 percent, that is about half, I guess on behalf of an 
awful lot of Americans, why isn't 3.7 percent enough for the 
Federal Government?
    Secretary Snow. Well, Congressman, I am fairly new in this 
job and didn't have too much to do with preparing the budget 
for the United States, but I think the short answer--and it is 
a question better addressed to Mitch Daniels than to me, but I 
think the short answer is that there are pressing national 
priorities. There is the priority of homeland security, which 
takes a very significant part of that increase in the budget 
expenditures for next year. There are also initiatives in a 
number of other areas, the prescription drug proposal that I 
think enjoys widespread support, is part of a broad Medicare 
reform program that makes sense.
    There is a cost to not doing things as well as a cost to 
doing things. If we don't do a growth package like this, what 
do we tell the 2 million people who don't have jobs who 
otherwise would have had jobs because of the growth package? 
How do we explain that we failed to take the action that makes 
the economy stronger? The action you all took in and the 
Congress took in 2001 was an essential action. It cost. It 
certainly had--scoring it, it produced more deficit than it 
produced revenues, but it was good policy. And I think if we 
keep focused on doing good policy, and then asking ourselves 
what is the opportunity cost, what do we give up because we 
don't do it and then look at what shouldn't we do. Should we 
not maintain the homeland security? Should we not wage the war 
on terrorism? Should we not try to put 2 million people back to 
work? Should we not take the growth up a percentage point over 
where it is otherwise? I think the foregone alternatives of not 
doing these thing are actually greater than the costs of 
incurring the budgetary impact of doing them.
    Mr. Gutknecht. I agree with you generally that allowing 
people to keep more what they earn during times when the 
economy is soft is really a good thing to do. My concern is on 
the spending side. You said there is broad based support for 
this program. You will find here in Washington there is broad 
based support for virtually every spending program. It is the 
responsibility of this committee to try and restrain that 
spending so we can actually have a balanced budget and 
ultimately create room for additional tax relief.
    The problem I have with the budget that the White House 
sent up is they say ``yes'' to almost every one of these 
priorities and you come back to the basic number. To a lot of 
Americans allowing the Federal Government to have a growth in 
their revenue of 3.7 percent ought to be enough to fund the 
legitimate needs of the American people. And at some point I 
think we all have to come to grips with the tough decisions we 
have to make, and we need some help from folks like you to get 
that done.
    Thank you.
    Chairman Nussle. Mr. Moran?
    Mr. Moran. Thank you, Mr. Chairman. You know, this is 
exactly what President Bush the first called ``voodoo 
economics.'' It is Reagan redux. Some of us remember in 1980 
when David Stockman spun us the same kind of pitch. Deep tax 
cuts for the wealthiest taxpayers, dramatic increases in 
defense spending, which the Democrats didn't oppose, and then 
of course what the Democrats label as Draconian cuts in social 
programs, which they felt was part of the long-term agenda. 
When President Bush the first came into office and there was 
some resonance of his description of it as ``voodoo economics'' 
because it didn't pan out, and it quadrupled the Federal debt 
in just 8 years. In 1990 he put together a bipartisan budget 
summit, raised taxes marginally on the top rates and balanced 
the budget. President Clinton followed up with a balanced 
budget and raised taxes on the highest taxpayers, who, 
incidentally, including yourself, over the last 8 years have 
taken back more after tax income than at any time in American 
history, so it obviously didn't hurt, but it balanced the 
budget. And so it left us with a $5.6 trillion surplus at the 
beginning of 2001. And that was the justification that we were 
given for the deep tax cuts of 2001. And we were even told and 
I remember, in fact the chairman suggested it, that the growth 
could well be more than this, that--the suggestion was we 
really didn't need to worry about surpluses and what the loss 
of revenue would do because the economy was going to keep 
growing. And so we left very little margin for error. And now 
you are telling us, as we have been told five times now, that 
this budget is going to grow the economy. In February of 2001, 
we were told that this budget will grow the economy. We were 
told again in the mid-session review in July of 2001. Again in 
February of 2002. Again in July of 2002. The same spin. And yet 
we have had the worst job growth in 58 years. We have had the 
worst economic growth in 50 years. It is the worst first 2 
years of any presidency from an economic perspective. And yet 
you are telling us, well, we really shouldn't worry much about 
the fact that we have got deficits as far as the eye can see 
because economic growth is going to be better than what you 
suggest.
    And yet we look at the analysis that OMB has given us, your 
economic growth figures are more favorable than CBO's or the 
Blue Chip forecast. Your unemployment rate is less than CBO or 
the Blue Chip forecast. The interest rates that you say you 
would pay are lower than CBO or the Blue Chip forecast, and yet 
you think you can tell us these numbers, give us this 
Pollyannish projection and, you know, everything is going to be 
OK.
    The worst aspect of this whole economic plan is that you 
are cutting taxes in every way possible on unearned income at 
the expense of earned income. In other words, the people who 
are paying for the $4.4 trillion of tax cuts, including 
interest costs over the next 10 years, the people who are 
paying for that are the ones who are payroll taxes into Social 
Security, FICA taxes, because you are taking $2.2 trillion out 
of that Social Security money and using that to offset the cost 
of the tax cuts. So you take it from those who can most afford 
it and take it--and eliminate tax on those who can most afford 
paying them and then sticking those who can least afford it. 
That is our biggest problem with it.
    And you know, in fact, Mr. Nussle used the expression our 
problem is a lack of confidence that people are not investing, 
they are waiting because of the uncertainty. You said it 
triggers their confidence. I agree with you, the stock market 
has lost $5 trillion since your President took office and it is 
primarily a lack of confidence. So if you have any response, I 
would be interested in hearing it, Mr. Snow.
    Secretary Snow. Congressman, I hardly know where to begin, 
but let me take on a few of your points. You are right, the 
economy--the Nation has been subject to a deep and far reaching 
set of shocks that help explain the situation we are in today, 
not the least of which is the extraordinary meltdown of the 
Nasdaq and the equity markets generally. I think it is actually 
$7 trillion that has evaporated with gigantic wealth effects.
    Mr. Moran. I didn't want to exaggerate.
    Secretary Snow. That is probably over the whole period. 
Then the recession, then 9/11, then the corporate scandals, 
crisis of confidence in corporate leadership, on and on. We 
have had a set of shocks, a series of shocks to the economy 
that are of far reaching proportions, and yet the economy 
remains resilient. It is really a credit to the strength of 
this economy and to past policies that the economy could 
respond as well as it did. I will come see you some time and 
talk about the numbers.
    The Blue Chip estimates actually are for more robust growth 
rates than the growth rates that the administration has and for 
lower unemployment. Well, I won't read it to you, but I have it 
here. For instance, in 2003 the administration unemployment 
rate is--well, I won't read all these to you because it will 
take up too much time. On the issue of fairness, because we 
always come back to this issue of fairness, I think it is 
important to come back to the fact that the burden of the 
Government, the burden of the revenues is higher on the top 
taxpayers after this proposal than it is before that proposal; 
that is, if you enact, if the Congress enacts this proposal, 
the highest income taxpayers will be paying a larger share of 
the total obligations of the Federal Government than they do 
before, and the lowest income taxpayers will be paying a lower 
share of the total obligations of the Federal Government.
    Mr. Moran. Is that after estate taxes?
    Chairman Nussle. The gentleman's time has expired. Mr. 
Toomey.
    Mr. Toomey. Thank you very much, Mr. Chairman, and, Mr. 
Snow, welcome to the committee. I can't quite see you there but 
I know you are there. I want to comment briefly and follow up 
on a comment one of my colleagues just made that we are looking 
at Reagan redux, and all I can say is I just vigorously hope he 
is right. It is amazing to me. When Ronald Reagan came to 
office and dramatically slashed taxes, especially marginal 
income, including taxes on the highest wage earners in our 
country and because he dramatically increased the incentives to 
work and save and invest, he ushered in a 17 year long economic 
boom that has created more wealth, prosperity and opportunity 
than this country or any country on the face of the Earth has 
ever seen. How anybody can look at that and say that was a bad 
thing is fascinating to me. It is baffling to me. It was a 
wonderful thing, and it was driven primarily by dramatic 
reductions in taxes.
    There is another aspect of this debate which is almost a 
little overwhelming to me, and that is that the same folks who 
are so concerned about the size of the deficits are the very 
same folks who want to spend even more money. We have had huge 
increases in spending in recent years. And my good friends on 
the other side--and I don't doubt their sincerity about their 
concerns with the deficits, but the fact is they are only going 
to get worse if we keep the spending going.
    The President proposed a budget which is a refreshing 
change from the previous administration in that he is trying to 
hold the line on spending. I hope we can do more. I am going to 
work to try to reduce spending below the level the President 
has proposed. But I understand in Congress that is going to be 
really tough to do. So if we end up right where the President 
is, we need to take that as the given, that level of spending, 
high in my judgment but maybe that is where we end up, the 
question then I think becomes which is better for the economy, 
to finance that as the President has proposed, almost entirely 
with taxes, but with a little bit, about 2.7 percent of our 
economy with debt, or should we instead raise taxes and finance 
the rest of it also by taking money away from the wage earners 
of America and doing it all with taxes instead of this 
combination? I think that is the question before us.
    We will wrestle with the spending level. We will probably 
end up somewhere around where the President is. And I would 
just ask you to comment on which is better for the prosperity 
of America, for the economy of our country, for job prospects 
to just raise taxes and finance it all with taxes or to have 
this modest component of debt?
    Secretary Snow. You framed the essential issue here, 
Congressman, better than I did. It is that notion of 
opportunity cost. What do we give up if we don't give the 
taxpayers more of their own money? And on the other hand, what 
does it cost us in real terms if we try to finance it through 
tax increases. I think framed that way there is only one answer 
you can come to; it is clearly better to go down the path the 
President is taking us. Sure, we have a little higher debt, 
still debt that is in the really modest range by comparison 
with the past, 2.5 percent, 2.7, coming down well below that in 
the years ahead.
    The other side of this is who would propose a tax increase 
to accomplish that objective. I don't think you would, and I 
don't think you would get the objective. You would have lower 
employment and lower growth and ultimately less Federal 
Government revenues.
    Mr. Toomey. I agree. As to the question of the total amount 
of public debt--and I would love to see us have a balanced 
budget this year. I think you have been quite right in framing 
this as plausible alternatives right now, but could you just 
comment on--we are running about low 30s as a percentage--our 
debt as a percentage of GDP in America. Of course that is not 
including the unfunded commitments of the major entitlement 
programs, which obviously require profound reform, but where do 
we rank amongst major industrialized nations? What statistics 
could you share with us to put that in context?
    Secretary Snow. Maybe we could put up a chart that would be 
helpful on the overall question of the Federal debt held by the 
public. I don't have offhand, maybe somebody here does, our 
debt versus other countries. I think our debt is significantly 
lower than the debt as a percent of GDP by most OECD countries. 
But what this chart shows, of course, is that the debt that is 
projected out for the years ahead is lower than the debt we 
have experienced in most of the period since the 1980s. It is a 
manageable level of debt. Would it be better if we could have 
it lower? Absolutely yes. But could we accomplish the national 
objectives without this level of debt? I don't think we could 
either.
    Mr. Toomey. Thank you, and a last quick question. I think 
the President's proposal for a new round of tax relief is 
vitally important for both the short-term and even more 
importantly for the long-term sustainable growth. It seems to 
me capital formation is a critical component in maximizing--
long-term maximizing sustainable growth. Do you believe that is 
correct and the double taxation on dividend--eliminating that 
double taxation on dividend absolutely has to have a strong 
positive effect on capital formation?
    Secretary Snow. I think there are a few who would dispute 
that. Even those who wouldn't favor the proposal would 
acknowledge that the double taxation of dividends hurts our 
national capital formation. As I said earlier, anything you tax 
more of, you get less of. And we are taxing capital formation, 
equity capital formation and encouraging overuse of debt as a 
consequence. The marketplace left to itself would use more 
debt--less debt and more equity. Because of the Tax Code we 
have higher debt to equity ratios than we otherwise would have. 
And that is not a good thing for the economy. What sense does 
it make to penalize equity capital formation? What sense does 
it make to discourage corporations paying out dividends to 
their shareholders. I have sat in on any number of meetings 
where senior management and the board thinks about how to 
reward shareholders. They say what can we do here. Well, you 
can buy somebody because you can use debt to buy somebody. You 
can buy in your shares. You can use debt to buy in your shares. 
That is tax deductible. You can make some internal investments 
or you can pay out dividends. What is the conclusion most 
companies come to? That is a tax inefficient way to reward our 
shareholders, so we do less of it. By leveling the playing 
field on dividends, we are going to do something that is 
important for corporate governance. One of the charges today, 
one of the concerns today in the capital markets is how 
accurate are these numbers. Are the numbers being managed? You 
can't manage cash. Once we are paying out more cash dividends, 
the best possible way to show shareholders what your real 
earning power is and I think by eliminating the double 
taxation, we are going to see many companies, like Microsoft 
announced recently, will begin paying dividends.
    Mr. Toomey. Thank you.
    Chairman Nussle. Mr. Neal.
    Mr. Neal. Thank you very much, Mr. Chairman. Mr. Secretary, 
for the last two sessions of Congress, I have filed legislation 
on corporate inversions. I think in the last session there were 
187 signatures on a discharge petition, and it deals primarily 
with the issue of those companies who move to Bermuda for the 
purpose of avoiding U.S. Corporate taxes. Do you think that in 
a time of potential war and deficits that it is patriotic for 
these companies to move to Bermuda for the purpose only and 
solely for avoiding American corporate taxes?
    Secretary Snow. Well, if you are asking me whether I am a 
fan of inversions, the answer is no.
    Mr. Neal. Do you think we should do something about it?
    Secretary Snow. I understand the department has a number of 
studies underway on that subject. I think it is a subject that 
needs to be looked at. The Tax Code certainly shouldn't be 
inducing abusive tax avoidance behavior. And I don't know 
enough about the subject, as you do.
    Mr. Neal. Let me help you. Mr. Secretary, I have been on 
the Ways and Means Committee for more than a decade and I have 
heard the chairman of the Ways and Means Committee--and since 
some of us here suffer from amnesia, let me use a reminder--I 
have heard prominent members of the Ways and Means Committee 
say that upon their watch they were going to pull the Tax Code 
up by its roots. And then I heard we were going to dismantle 
the tax system. And I heard the former majority leader talk all 
the time about moving toward a new tax system. And I heard 
candidates for President say we are going to a long funeral 
procession for the Tax Code.
    Do you really believe in the next couple of years you are 
going to change the Tax Code here, Mr. Secretary?
    Secretary Snow. I hope we improve it some.
    Mr. Neal. Do you think we are going to move to a flat tax 
or a consumption tax in the next couple of years?
    Secretary Snow. I don't know. You and the Members of the 
Congress would probably have a better sense of that than I. But 
I think the proposal, the President's tax proposal certainly 
produces a better tax system, a simpler tax system. If you tax 
something only once, it is a lot simpler than if you tax it 
twice.
    Mr. Neal. Well, for these guys in Bermuda, there is no tax 
at all.
    Secretary Snow. But they move there because they are trying 
to avoid taxes, and if you don't tax the dividends, you remove 
the reason for them to go abroad. If people don't have to pay 
taxes, then they don't seek shelters.
    Mr. Neal. What do you think the IRS would do to individual 
taxpayers if they moved to Bermuda for the purpose of avoiding 
taxes?
    Secretary Snow. I don't know.
    Mr. Neal. We could save $4 billion, Mr. Secretary, by just 
asking these folks to pay their share. Business people 
applauded me at a Chamber of Commerce luncheon last week with 
1,200 people in the audience when I said when these folks don't 
pay, you pay more. Not a bad applause line for business people. 
They understand it. The American people understand fairness in 
the tax system. You answered earlier saying we should always 
come back to fairness. Not a bad position to start from, never 
mind to come back to.
    Finally Mr. Secretary, what kind of job do you think 
Secretary Rubin did during his years in the Clinton 
administration?
    Secretary Snow. I am an admirer.
    Mr. Neal. Do you think he was more right than wrong in the 
suggestions he made?
    Secretary Snow. Tell me which particular suggestion you 
have in mind.
    Mr. Neal. Suggesting that we pay down deficits.
    Secretary Snow. I wish Bob Rubin had become more a champion 
of tax reductions. I talked to him about that and I never could 
persuade him of the benefits of some lower marginal tax rates.
    Mr. Neal. The problem I hear is the former majority leader 
said when we passed those three budgets, which I voted for with 
Bush Sr. and Clinton twice, I remember the former majority 
leader saying that we were headed to fiscal Armageddon. And 
then I heard the former chairman of the Budget Committee say 
that we were headed toward the greatest depression in the 
history of the country. Now I hear Rubinomics is dead after we 
proceeded on a course of success that is unparalleled in 
American history. Would you agree with that in terms of 
economic prosperity during those 6 years?
    Secretary Snow. I take my hat off to everybody who had a 
hand in bringing about the balanced budget in that period. My 
preference, though, would have been to see it done with a 
little different mix of tax increases and spending reductions; 
in other words, less on the tax increase side and more on the 
spending restraint side.
    Mr. Neal. I think my time is up, Mr. Chairman.
    Chairman Nussle. Mr. Hastings.
    Mr. Hastings. Again, if I could ask my friend from Alabama 
to lean back and my friend from Arizona. Mr. Secretary, I want 
to congratulate you for being here and having been on the Hill. 
The chairman alluded to that when you have only been on the job 
for a couple of days. You have been inundated with a lot of 
things. I know that you haven't had an opportunity to really 
look at very closely and I congratulate you coming up here and 
really taking the heat.
    Couple of comments on the data that you have been thrown 
at, and you did respond to Mr. Spratt that there is probably 
agreement between the two of you on the one issue that you try 
and do. Projecting ahead is a very inexact science and you are 
being inundated to comment on things that will happen 11 years 
from now. And we know we will probably be way off--pick a 
factor. I am sure that will happen. But let me pick up on a 
very basic issue as to where the policies that are being 
suggested by this administration and past policies by prior 
administrations. If the idea of having--in fact for many years, 
the idea of trying to get the economy going is to have some 
sort of Government stimulus, infrastructure and so forth. If 
that were the case and the fact that the Government is 
spending, we should never be in a recession if that were a very 
accurate model, it seems to me. What you are doing is--and the 
President is doing is--let us trust the people more by giving 
them more of their money.
    So my very basic question to you is, does the economy tend 
to perform better when there is more government intervention or 
less government intervention? And based on whatever your answer 
is--and I hope it is B--tell me why that is the case and why we 
should be looking at that long term.
    Secretary Snow. Well, I think there is clearly a role for 
government in a lot of spheres. But there is also no doubt 
about the fact that the reduction in the role of government 
over the last 30 years or so--less transportation regulation is 
one example and deregulation in many, many spheres--has been a 
big boost to the economy. And I am a big believer in 
minimizing--maximizing the role of the private sector. I think 
the strength of this country of ours and the strength of this 
economy is that we really give a large role to the private 
sector. We let the private sector work. We let markets work and 
we contrast the performance in the United States with the 
performance, say, in Europe. And the defining difference is the 
fact that we believe in markets. We let labor markets work. We 
let capital markets work. And we have embraced market 
principles here, whether in the international trade arena with 
trade liberalization or in domestic markets, in banking and 
finance with Gramm-Leach-Bliley, on and on and on. We have made 
this economy much more responsive, much more competitive and 
much more efficient. As we do that, we grow more. We create 
more good jobs--not just more jobs, but more good jobs, more 
jobs with rising real wage rates.
    So I am a very strong believer in the competitive 
marketplace and letting the competitive marketplace operate. 
Clearly there has to be rules, but letting the competitive 
marketplace be the driver of economic performance and making 
that bet on peoples' initiative and spending their own money 
and making their own decisions and responding to the forces of 
the competitive marketplace, which disciplines all of us, I 
think is the surest and safest course for rising outputs and 
higher standards of living. I agree with you 100 percent.
    Mr. Hastings. Mr. Secretary, thank you very much for that 
response. I was fascinated when Milton Friedman essentially 
wrote a book or a thesis on how a pencil is made. I mean the 
dynamics in the marketplace is absolutely incredible. And where 
we are trying to go is to make that obviously more of a long-
term phenomenon than a short-term phenomenon. So I give you a 
great deal of credit for taking that initiative. But more than 
that, once again, I think you do a wonderful service coming up 
here with only 2 days on the job and taking what you are 
taking.
    Secretary Snow. Mr. Chairman, if I could expand on the 
Congressman's point for just a minute. In the 1970s, I had the 
privilege of serving in the Ford administration in a role where 
my responsibility was to develop the transportation policy 
initiatives heading the policy shop over at DOT under Secretary 
Bill Coleman, and we worked with the best economists in the 
world, best at quantifying market impacts and so on, and we 
developed these proposals. We didn't get them through. They 
were enacted when President Carter and his administration 
picked them up and moved them forward and ran with them and got 
a congressional blessing on them.
    None of us, none of us who were doing the forecasts on the 
economic gains from eliminating truck and rail regulation had 
any idea how much the wealth effects would be, how gigantic and 
huge the savings for the economy as a whole would be. None of 
us forecasted the fact that in the railroad transportation 
business, transportation rates today in real terms are 40-
percent lower than they were back then. In the trucking 
industry it is also 40-percent lower in real terms, and with 
better service and with greater profitability. What happened 
there, we unleashed the marketplace, and when we unleash the 
marketplace all sort of wonderful and unforeseen things happen.
    I think that is going to happen with the President's 
dividend proposal. That is why I so strongly support it.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Chairman. I would like to 
address two reasonable questions raised by a Republican 
colleague in this committee. One is, does the economy perform 
better or worse with more or less government intervention? And 
I would suggest Enron is an example where the company would 
have fared a heck of a lot better and millions more might be 
employed today if we had more government intervention rather 
than less. I don't believe the sound bite that the least 
government is always the best government. And I say that as 
someone who is a great defender of our private market system.
    Second question raised by our colleague from Pennsylvania, 
and I think this gets to the root of the difference here about 
this year's debate between Republicans and Democrats. He said 
how can anyone disagree with the Reagan fiscal policies of the 
1980s. I am one person who does disagree with those policies 
because they led to the tripling of our national debt in less 
than a decade, and perhaps that is not a concern to some 
members of this committee. It should be a great concern because 
it will be a huge burden to our children and grandchildren, and 
there is nothing economically sound, there is nothing fair 
about paying for today's tax cuts by charging the cost of those 
to our children and grandchildren.
    Now, Mr. Secretary, what I am hearing this administration 
saying is several things regarding the budget. First, when the 
economy is good and we have surpluses, let us cut taxes and 
give that money back, thus ignoring the fact, the reality we 
already have a $6 trillion national debt. Well, then when the 
economy turns around and is bad, let us have tax cuts to 
stimulate the economy. Tax cuts under any situation may be good 
politics, but I think it is irresponsible policy. And if I were 
an American businessman listening to this debate today, I think 
what would concern me more than the fact that we are having to 
face the largest deficit in the history of America is that 
former Republican budget hawks are now rationalizing and 
explaining away the significance of having the largest deficit 
in the history of America.
    And the next thing I hear this administration saying is 
this budget deficit is moderate and manageable. It may be 
moderate compared to the next worst case in the history of the 
United States, 1992, but I don't consider a $300 billion 
deficit this year and, even more importantly, deficits as far 
as the eye can see to be moderate or manageable. The impact 
upon our children will be devastating when they have to pay the 
debt tax, the interest on the national debt. The impact on 
businesses when this economy starts back up again and we have 
higher interest rates because of huge deficits will inhibit 
growth, not help growth.
    Third thing, this administration says this budget is a 
growth budget. I would challenge this administration to show me 
in the history of the world any nation that took the philosophy 
that long-term deficit spending is a growth stimulator. There 
is no evidence of that throughout the history of the country. 
And I believe this is a growth inhibiting budget because it 
endorses massive national deficits for years to come.
    Next, I am hearing we are not responsible for the largest 
deficit in the history of the United States. Obviously, you are 
not responsible for the war against terrorism or the attacks on 
this country. We all understand that. But you are responsible 
for proposing $2.8 trillion in tax cuts while we face these 
problems and know we have to pay for these problems. The fact 
is we would not have the largest deficit in the history of the 
United States today had it not been for the $1.3 trillion tax 
cut that some of us did predict 2 years ago would lead to 
deficit spending.
    Finally, I hear you talk about cutting spending. Yet the 
six largest programs of the Federal Government that represents 
74 percent of spending are Social Security, defense, Medicare/
Medicaid and health, interest on the debt, education and 
training. This administration and this budget is proposing 
increases in three of the six largest programs. The fourth we 
have no choice. We must pay the interest on the debt. That 
leaves Social Security and Medicaid.
    Mr. Secretary are you proposing cuts in those two programs?
    Secretary Snow. Congressman, thank you for those good 
questions. First of all, on the issue of the manageability of 
the debt load, clearly as Mitch Daniels said to you, we are in 
a deficit position and we will be for some years to come. But 
the green line there shows that those deficits are relatively 
moderate compared with past periods as a percent of GDP and 
that they are shrinking as a percent of GDP and are well within 
what is manageable. I think the important thing about a 
deficit--and you raise a good question. We have to keep that 
question in mind always. But the important thing about a 
deficit is does it influence the way financial markets react 
and respond, because if it influences the way financial markets 
react and respond then we will get higher interest rates. And 
financial markets react and respond if they think the deficit 
is large and growing relative to GDP or the debt is large and 
growing relative to GDP and if they think it is going to be 
sustained. I think financial markets are accepting these 
deficits that are projected. I think they are bigger than they 
are going to be, frankly, for the reasons I went through 
earlier. But the important thing is to make sure that they 
shrink over time and stay modest, shrink both in absolute and 
in relative terms.
    And of course we are now living in a period where financial 
markets reacts instantaneously to the information they have 
available to them. They have this information. They have seen 
this coming. And interest rates I think are the lowest in 40 
years. So while I very much share your concern about deficits, 
I will come back to the point that the level that we are at 
today is manageable and is not an undue burden.
    Chairman Nussle. Gentleman's time has expired. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Thank you for coming. 
You have only been on the job a couple of days but you are not 
short of advice, and we appreciate you coming today and letting 
us kind of pick you a little bit. But we debated the tax cuts 
and we recognized that the economy was in a downturn and the 
highest tax level was over 39 percent we felt it was too much 
and lowered those rates down to 35 percent. We felt like the 
death tax was unfair and we eliminated that and now propose 
eliminating the double taxation on dividends and the unfair 
tax, the marriage penalty. All of those were issues we felt 
were relative issues that needed to be adjusted. And yet we 
find in the economy, we look at the long range plan of over 5-
percent unemployment over the next several years. Those issues 
must be addressed. The economy has got to be put back on the 
right track. We appreciate your efforts to help us mend that.
    Are there any viable alternatives you see--suggestions from 
the other side--other than to cut the tax at the lowest level? 
And you know with this tax rate, you have already expanded 
that. Balancing the budget using the Social Security proceeds, 
there has been a lot of debate about how to do that and whether 
they are going to have a locked box exactly--how we intend to 
do it. But under the code itself, the only investments we can 
have in the Social Security proceeds are in Federal 
instruments. So how do we separate that? I don't think we can 
take the Social Security proceeds and just put it in a locked 
box and not gain any kind of a return.
    Would you explain on how that might work?
    Secretary Snow. I am trying to understand how a locked box 
would work and what the concept of a locked box really is. 
Social Security is a pay-as-you-go system, and it is a system 
with intergenerational obligations. It is currently running a 
surplus. We know that that surplus will run out at some point 
in the future. Every dollar--every penny of that surplus is 
credited to the trust fund and is backed by the full faith and 
credit of the United States. So there is no taking away, there 
is no--I hear this term from time-to-time, raiding the trust 
fund. That is a misuse of the language. There is no raiding of 
the trust fund. To create a locked box without a return, as 
long as it is cash you put into it, seems to me that would be 
sort of a far-fetched notion. That wouldn't make any sense. The 
only reason why it would make any sense out of the notion of a 
locked, box and you can help me understand this better, is that 
you take the money and pay down the debt. But the reason that 
deficits are going up is that we have these urgent national 
needs like putting people back to work, as you alluded to, and 
getting the economy growing. So going that way wouldn't seem to 
make much sense. And I am puzzled by just what the locked box 
concept means in this context where the only way I can make any 
economic sense out of the idea of a locked box is that you use 
it to pay down the debt. And if you do that, then we aren't 
accomplishing these important objectives.
    I hope that is responsive.
    Chairman Nussle. Mr. Scott.
    Mr. Scott. Thank you. Mr. Snow, welcome. It is a pleasure 
to see you here and I hope you bring some Virginia fiscal 
responsibility to this administration. Now I know this budget 
isn't your fault, but it is the President's budget that you are 
having to defend. One of the things you mentioned was growing 
our way out of it. And I just wanted to get the record 
straight. Is it not true that the OMB figures for real growth, 
inflation, unemployment and interest rates for the future are 
more favorable than CBO and the Blue Chip consensus? And if you 
don't know----
    Secretary Snow. I don't know, but I will check the record 
for you. I had thought that there were a number of private 
forecasters that had more robust growth and lower unemployment.
    [The information referred to follows:]

   Mr. Snow's Response to Mr. Scott's Question Regarding OMB Figures

    Of course, there are some slight differences among the different 
forecasts. The administration's budget forecast is finalized in late 
November to early December, in order to have time to develop budget 
numbers that correspond to the economic figures. CBO and Blue Chip 
figures were assembled a month or two later and therefore are based on 
somewhat more information. Even so, there is really remarkable 
similarity in the results.
    Over the 6 years of the forecast period, the administration 
estimated real GDP growth to average 3.3 percent, only a shade higher 
than the 3.2 percent contained in the CBO and Blue Chip forecasts.
    The 5.3 percent average unemployment rate forecast by the 
administration for the 6 years matches the Blue Chip. CBO estimates 5.5 
percent.
    The administration's view of inflation does show slower growth--an 
average of 1.6 percent over the 6-year forecast horizon for the GDP 
price index, compared to 2.0 percent in the other two forecasts. CPI 
growth is estimated at 2.2 percent by the administration and 2.4 
percent by the CBO and Blue Chip.
    Slower inflation means that the administration projects slower 
growth of nominal GDP than in the other two forecasts--a rate of 4.9 
percent compared to 5.2 percent (the sum of real GDP growth and growth 
of the GDP price index). This would work against the administration's 
budget forecasts since lower nominal GDP would result in lower tax 
receipts.
    Even after accounting for slower growth of indexed programs, which 
are based on the CPI, the budget impact narrows but the Blue Chip and 
CBO figures would still be slightly more favorable for budget 
estimates.
    Overall, while we can point to modest differences among the 
forecasts, it seems that all are very much within a narrow range.

    Mr. Scott. My reading of the President's budget shows it is 
more favorable in each of those categories. One of the things 
we mentioned as a recovery--unfortunately this budget doesn't 
have much help for the recovery. The things that will help the 
recovery are the short-term expenditures, especially the cheap 
ones like accelerated depreciation which, long term, don't 
adversely affect the budget very much but have a stimulative 
effect now or temporary increase in unemployment benefits that 
don't lock in payments but give you the benefit right now. The 
backloaded tax cuts will have nothing to do with stimulating 
the economy now.
    Can I get chart No. 5? You have seen this chart several 
times. It reflects the tough choices that were made in 1993. 
They were unpopular, but they were responsible. And as a direct 
result of the votes that Democrats cast in 1993 that put us on 
that trajectory, the Republicans campaigned against us and took 
50 seats. Now that green line right there is not an accident. 
It is in stark contrast to the projections in chart No. 3, 
which show that we are just spending Medicare, Medicaid--excuse 
me, Medicare, Social Security and then some as far as you can 
see. You are from Virginia, Mr. Snow, and you have seen the 
kind of work that Mark Warner has done and the responsible 
decisions he has made, and that is in stark contrast to what we 
heard yesterday when Mr. Daniels came and suggested that there 
is virtually no problem and he intends to make none of the 
tough choices.
    Could we have No. 14? Now, you indicated that this thing 
the deficit is manageable. I would like to ask you how we can 
manage--this stops at 2008. That is when the baby boomers start 
retiring in Social Security. With the substantial new taxes 
that have to be paid--not to pay down the debt but just to 
carry the debt. There is nothing in there for the war on Iraq. 
How are we going to be able to manage the Social Security and 
Medicare challenges of the baby boomers?
    Secretary Snow. Congressman, thank you. Again, you are 
raising the right questions and the important questions. The 
way we manage those obligations to the future is to have a well 
performing economy and to have a bigger economy and to get the 
growth rates in the economy that will give us the flexibility 
to respond to those needs. I am troubled, as you are, by the 
long-term financial status and sustainability of Social 
Security and Medicare. The issues are a little bit different, 
but demographics drive both and of course rising health care 
costs particularly drives----
    Mr. Scott. Do you acknowledge that as the thing gets worse, 
in terms of this budget it gets worse at a time when we need to 
be in a fiscal position to meet the biggest fiscal challenge 
America has ever seen, baby boomers retiring?
    Secretary Snow. We need to be benefited by the strongest 
possible economy as well.
    Mr. Scott. So do I understand you to say that we are going 
to hope we grow out of it without any contingency plan?
    Secretary Snow. No. I wouldn't hope; I would pass this 
legislation so we do.
    Mr. Scott. Well, we see which direction we are going in, as 
far as I can see.
    Let me ask you another question. Do you believe the AMT 
needs to be fixed if we go from 2 million to 39 million 
Americans paying the AMT?
    Secretary Snow. As I commented earlier in response to that 
question, it is an issue that clearly has to be addressed. I am 
not close enough to the facts yet to know how best to address 
it or what the time frame is.
    Mr. Scott. There are only a number of ways to fix it; that 
is, you can increase taxes, spending cuts, or increase debt.
    Secretary Snow. Or you can make it part of a broad-based 
tax reform proposal.
    Mr. Scott. Which would increase taxes or reduce spending or 
increase debt.
    Secretary Snow. Or grow the economy significantly faster 
than it would otherwise grow. I mean, I still think this code 
is a burden on the economy. I don't want to shrink from coming 
forward on this, on that proposition, and I think lower 
marginal tax rates make good economic sense.
    Mr. Scott. Thank you, Mr. Chairman. And I would just like 
to point out that this budget has very favorable growth already 
in it, and in spite of that we are seeing, the numbers go south 
at a rate that we haven't ever seen in the history of the 
United States.
    Secretary Snow. Congressman, the very able chief economist 
for the Department of the Treasury, Butch Clarida, the 
Assistant Secretary for Economic Policy, tells me that I was 
basically right in saying that the Blue Chip is more favorable 
than the Treasury's own estimates. And I will share that with 
you later.
    Chairman Nussle. Mr. Putnam.
    Mr. Putnam. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. We are delighted to have you here. 
In business, you never want to get in a fight with the 
railroad, but it must be quite a rude awakening on your second 
day on the job to be in this new position, because it is a 
little bit different than running a railroad, I am sure.
    Two years ago, as a freshman member of the committee, we 
opened up with the Treasury Secretary and had some really 
fascinating academic discussions about what to do with the 
surplus, all kinds of pontification over eliminating entire 
classes of debt instruments, and how the Government would 
actually deal with the cash that would be coming in. And 
certainly things have changed since then.
    As Mitch Daniels pointed out yesterday, even if we had 
never been attacked and incurred no costs of war or recovery 
from September 11, and no tax relief had become law, we still 
would be in deficit today as a consequence of the recession and 
the popped revenue bubble, as he put it.
    So I want to talk just a little bit about the dependence of 
the Federal Government on that revenue pyramid and where that 
revenue comes from. You have a high percentage of Americans who 
pay little or nothing in terms of Federal income taxes. For 
many of them, April 15 is a day when they become eligible to 
receive money rather than money is due. And for a fairly small 
percentage of Americans, the Federal Government depends a great 
deal on the revenues that they contribute to pay the bills.
    There are consequences to the structure, to that 
architecture of revenue. In the President's State of the Union 
speech, he mentioned that, as an example, that a family of four 
making $40,000, if his plan were passed, would go from paying 
somewhere around just under $1,200 a year to $45 a year.
    So my first question would be, what is the social 
consequence of having a large percentage of your population 
that pays nothing for the national defense, for an interstate 
highway system, for the level of health care, for the benefits 
of national parks, what is the social consequence of having a 
huge percentage of your population believe that those things 
don't cost anything or that they cost $45 a year?
    Secretary Snow. Again, a good question, probably one that 
is more philosophical than my practical nature allows me to 
give a good answer to. But I think there is something 
inherently troubling about the idea that people aren't 
connected to the larger purposes of the country through the tax 
system and don't take an interest, therefore, in a number of 
the issues that as citizens we would want to encourage people 
to take an interest in. For instance, the efficiency of their 
government, the tax policy itself, the fairness of the code.
    If you are not in the system, I think you are absolutely 
right, you take much less interest in the things that the 
system impacts and affects, and I think that is regrettable. If 
you asked me to design a code that was perfect, and I could do 
it and had all of you to vote for it, I would have a code that 
had fewer deductions, and more people part of it, and lower 
marginal tax rates.
    Now you will tell me how to get there, and I can't tell you 
that. But in principle, I agree with you 100 percent.
    Mr. Putnam. Well, the flip side of that, of course, is that 
a small percentage of Americans are responsible for a high 
percentage of the revenue that comes into the Government. That 
is the source of great debate, and rightfully so. It is a fair 
thing to argue about in this committee and in the Congress at 
large. The President has taken the position that for tax relief 
to be meaningful, those who pay taxes ought to receive it. But 
the larger issue is that a percentage of that volatility in 
Government revenue is based on the dependence on the revenue 
generated from a strong stock market which is inherently 
volatile.
    So if you would, please, comment--and I don't have the 
specific percentage of revenue that comes in as a result of 
capital gains and the dividends and things like that--but if 
you could share with us your thoughts on that and a better 
approach to make the revenue sources less volatile.
    Secretary Snow. You know, I don't have those numbers 
offhand, but I do remember a discussion with Mitch Daniels, 
saying that he was absolutely astonished by the importance of 
that top income tax category to fund the total Federal debt. 
And I forget the number, but the top 1 percent is something 
like 27 or 28 percent, and the top 5 percent is something like 
47 or 50 percent. I mean, it is a small--a relatively small 
number of the taxpayers are paying a large portion of the total 
Federal Government revenue bill. I think everybody who follows 
the Federal budget was astonished to see those revenues grow as 
they did with the ebullient stock market we had in 1997 on, and 
was equally astonished by the collapse in capital gains and 
high-end options and performance shares and those things that 
created so much revenue.
    Which brings us back to the point we began with, with the 
chairman, about volatility of the Federal revenue depended on 
things like the stock market and bonuses.
    But in talking about an ideal tax system, I don't think I 
am going to get a chance to identify or produce an ideal tax 
system. I think we have got to work with the tax system we have 
got for now, and make the marginal improvements we can. And the 
elements that the President has proposed I think are clearly 
not just minor adjustments, but very fundamental improvements 
in the code itself.
    Mr. Putnam. Well, I hope you do have that opportunity. 
Thank you for being here.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Thank you, Mr. Chairman.
    And welcome, Mr. Secretary. I want to start with some 
comments that were made by my colleague, Mr. Baird, yesterday--
they were provocative--when he was speaking with Mr. Daniels. 
He brought to our attention the size of the real budget deficit 
is actually $480 billion in fiscal year 2004, if we exclude the 
Social Security surplus from our calculations. And that is the 
real deficit that we should be talking about. Social Security 
surplus as we describe it, that so-called lockbox, ought to be 
off limits. There are claims on that money that we all agree 
are going to need to be met in the near future.
    Second, Mr. Baird noted that we could not eliminate this 
$480 billion deficit even if we eliminate every nondefense 
discretionary spending item in the budget. Not cut, but 
actually eliminate.
    Let us set aside that we have been discussing the need for 
short-term deficits in the current situation which are 
unavoidable because of the downturns in the revenues to the 
Government from both the sluggish economy and the President's 
tax cuts, which I actually voted for, combined with the needs 
in the war on terrorism both here and abroad. They have put a 
terrific strain on our budget. And these deficits, which Mr. 
Daniels has described as nothing to hyperventilate about, are 
probably that, if we consider just the short term.
    But I believe we should all be very worried about running 
these kinds of deficits year-after-year. And I would like you 
to address this. But I want you to do so, if you would, keeping 
in mind that the growth projections from the President already 
assume that the economy is going to grow 3.4 percent for the 
next four quarters, and then more than 3 percent annually for 
the next year. How can we reduce the deficits, already assuming 
this kind of growth?
    Secretary Snow. Well, let me start by addressing the 
initial question; and that is, how best to look at the deficit. 
Is it the unified deficit, or is it the off-balance budget, the 
debt owed the public budget?
    I think it is better in terms of gauging the economic 
impacts of the economy to look at it on a unified basis, 
because it is the unified basis that creates the true picture 
of what is happening in financial markets, how much money needs 
to be actually borrowed, or how much of a surplus you actually 
have. So the financial markets will look at it in a unified 
basis, taking into account the funds from the entitlement 
programs as well.
    But I agree with your basic point. We can't be content to 
have deficits as far as the eye can see, and particularly 
deficits that rise in future years. So I always come back to 
the point that deficits are unwelcome. They are not a happy 
thing. In this case, they happen to be a necessary thing for 
some period of time. But there is, I think, OMB Director 
Daniels probably yesterday emphasized his commitment to keeping 
us on a course of fiscal responsibility. The President 
certainly is committed to a course of fiscal responsibility. 
The deficits are on a unified basis, as I said, and showed in 
one of those charts we put up, relatively modest in terms of 
the past experiences and the debt is--this is the deficit 
itself--relatively modest, relative to, and manageable. When I 
talk about manageable, I mean in this level.
    Mrs. Capps. But could I follow up by saying, then, because 
I want to ask you another topic real briefly--I am assuming 
then from your answer that unless we include the Social 
Security Trust Fund and unless we grow the economy by more than 
3 percent, that we are not going to be able to do this.
    But I actually would like to ask you a question that I 
asked Mr. Daniels yesterday; because now, as Treasury 
Secretary, you are also going to be or are a Medicare trustee. 
And I am concerned about the question that most of our 
constituents are asking about, which is how to reform Medicare 
in a way that will allow include coverage for their high-cost 
medications.
    The President's proposal, putting at the core 
Medicare+Choice or a privatized insurance model, which I 
haven't seen the insurance companies really jumping up and down 
about, but would also be paid for with $400 billion over the 
next 10 years. And I am wondering how you think we can manage 
doing this since these companies in my rural district have been 
raising their premiums and lowering their benefits, and then 
leaving because they have made the case that they can't afford 
to be there. They are going to be coming to ask us for more 
money if they are in fact going to be the centerpiece of this 
Medicare program.
    Secretary Snow. Medicare needs to be reformed.
    Mrs. Capps. Yes.
    Secretary Snow. But it needs to be reformed with a 
prescription drug component. And it seems to me every Medicare 
enrollee should have outpatient prescription drugs. There would 
probably be broad-based agreement on that. The President's 
program would use the marketplace, competitive providers under 
a structured system, so that there would be broad coverage, and 
avoid this adverse selection sort of set of issues that runs 
through insurance.
    And Tommy Thompson could give you a lot more detail on 
this, but I understand there is a low-income assistance 
component to the President's package where they would receive 
additional assistance to acquire prescription drugs.
    But the larger issue, though, is how to make the system 
more efficient, how to create the right incentives inside the 
system. My predecessor, Paul O'Neill, spoke eloquently and at 
length about his efforts in Pittsburgh to go in and apply 
metrics to health care, to identify--to bring business 
practices in the Pittsburgh community to the health care 
providers, and the astonishing reduction in costs in health 
care delivery systems that came about over the course of a 
fairly brief period as these management practices, re-
engineering metrics, and so on were applied.
    I think we can get a much more efficient health care system 
in America. And, if we don't, we are going to have health care 
rising from what is it today, 14 percent, in a few years to be 
17 percent, and if we don't do it, thereafter 20 percent, an 
unsustainable growth in this component of the economy.
    So I guess I am agreeing with you. This is a subject that 
needs a lot of work.
    Mrs. Capps. Thank you.
    Chairman Nussle. Mr. Wicker.
    Mr. Wicker. Thank you, Mr. Chairman.
    Mr. Secretary, thank you so much for your testimony today. 
And I think all members of the committee will agree that the 
President made the right choice, and we think the Treasury is 
in good hands. And thank you for the give-and-take that we have 
had today. Certainly there are differences in philosophy 
between the two sides of this room. I think it is certainly 
fair to say we like tax cuts a little more over on this side 
than maybe my friends on the other side of the aisle. And it is 
fine for us to have that debate.
    I do think it is important, however, for us to make sure 
that the facts that are stated in this room and on the floor of 
the House of Representatives are correct, and so I am concerned 
at some of the disparaging remarks that I hear about the Reagan 
administration, and also some of the perhaps revisionist 
history that I hear regarding the early days of President 
Clinton's administration with regard to budgetary policies and 
recommendations. And I will agree with my friend from 
Pennsylvania, Mr. Toomey. I will take 17 years of sustained 
economic growth any time, the greatest standard of living that 
any country in the world has ever seen. I applaud the Reagan 
administration for ushering that in. And I was here as a staff 
member, Mr. Secretary, when Democrats came across the aisle in 
a Democrat-controlled House of Representatives and helped 
Republicans enact those Reagan tax cuts of 1981.
    But the thing that concerns me is when I hear that those 
tax cuts led to record deficits and the run-up in the national 
debt. So I asked someone to go get me the historical tables, 
and I had a staff member bring that over for me. And I see on 
page 29 of the historical tables provided by this committee, 
that in 1982, revenues increased to the Federal Government. 
Now, I will tell the truth, they decreased in 1983. But then 
after that, in spite of these draconian tax cuts, they went up 
in 1984, in 1985, 1986, 1987, 1988, and 1989 to the point, Mr. 
Secretary, where revenues to the Federal Government increased 
during the Reagan administration by some 60 percent in the face 
of these tax cuts.
    I would suggest to you, and I will ask you to comment in a 
moment after I make my second point, that maybe there was 
another reason for the deficits rather than lack of revenue.
    And then some of my friends from the other side of the 
aisle, Mr. Secretary, mentioned the Clinton surpluses. Of 
course, we on this side of the aisle like to think that the 
Republican majority that was elected in 1994 had a little 
something to do with the surpluses, but I think the truth 
probably is that the economy had a lot more to do with it than 
anything that we did. But the statement was made that President 
Clinton in the early 1990s had a plan and a process for getting 
us to a balanced budget, so I sent out for a copy of President 
Clinton's February 1995 budget proposal. And I see that during 
my second month in office here as a member of the new 
Republican majority, President Clinton came before Congress and 
proposed annual deficits of $192 billion, $196 billion, $213 
billion, $196 billion, $197 billion; and in 2000, $194 billion 
in deficits were proposed by President Clinton in 1995 before 
this very committee.
    [The information referred to follows:]
    
    
    Now, we felt that we could take a different approach and a 
different process when we brought in the majority, and so we 
asked for a tax cut. And it took us a couple years to get it, 
but in 1997, with the help of some Democrats, we enacted a tax 
cut. And, you know, a couple of years after that we had 
achieved a balanced budget in spite of the fact that we had let 
the American people have a little more of their money back in 
the form of tax reductions.
    So I would ask you this two-pronged question, Mr. 
Secretary: In light of the fact that revenues increased some 60 
percent during the Reagan administration and we still ran up 
this huge debt, don't you think it was possibly excess 
Government spending and particularly entitlement spending that 
caused that deficit? And don't you think that perhaps the 
economic growth caused us to be able to do a little better than 
President Clinton proposed to this very Congress during the 
first months of my time here on the Hill?
    Secretary Snow. Congressman, I--what do they say in the 
courtroom--I associate myself with your comments. I think the 
obvious answer to your question is that expenditures rose at a 
rate that exceeded that 60-percent increase in revenues, and 
that was a mighty large increase in the revenues.
    Now, there was a peace dividend that came out of that 
eventually that affected the budgets of the 1990s in a very 
important way, and I don't think we should forget that the 
investment in the defense under President Reagan and Bush 
produced a much different world and a much better world, and 
ended the Soviet Union as we knew it and gave us this large 
peace dividend.
    But the numbers are clear on that. If expenditures had been 
under tighter control, we would have had huge surpluses. And 
the numbers you cite from the Clinton budgets of the early 
1990s was a reason that a number of us got concerned about the 
need for the balanced budget approach that certainly became 
very much part of the Contract With America, as I recall.
    Mr. Wicker. Well, I know that my time has largely expired, 
but I would just encourage the Secretary----
    Chairman Nussle. It has.
    Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman.
    Mr. Secretary, thank you very much for being here. Could I 
get chart No. 14, please? And while that is coming up, I just 
want to say I was glad to hear you, in your response to Mrs. 
Capps, say that it was unacceptable to have debts as far as the 
eye can see. Because when you were making your presentation, 
you were asked are deficits--is debt understandable, and you 
said yes. My note was, but is it understandable to run them for 
as far into the future as these deficits are running? And as a 
deficit hawk, I believe that is totally unacceptable. So I am 
glad that you clarified that.
    Secretary Snow. What I really said is that as long as they 
are a declining share, they don't trouble me. I mean, I hope 
they recede just as soon as possible, and I share that with 
you. But, you know, in running, in serving on boards of major 
companies and so on, debt isn't inherently a bad thing. We take 
on debt at CSX because we use the debt to then get high returns 
on investments. So debt isn't inherently bad as long as the 
debt is used to accomplish something worthwhile.
    Mr. Thompson. Well, at this point I believe it is really 
out of control, and we are paying for that and we are going to 
pay for that into the future years.
    On the first page of your statement, you talked about the 
typical family of four with two wage earners making $39,000 who 
would enjoy an $1,100 tax break. And on chart No. 14, the debt 
tax chart, it shows the tax that these average family of four 
folks are having to pay. Is there any way that we can calculate 
into that the offset? Because it seems to me if you juxtapose 
your example with this chart, there is actually more money 
being paid, at least by some taxpayers, than they are actually 
getting back. And you can either answer that now or get that 
information back to me.
    Secretary Snow. I would like to think about that. The 
notion of a debt tax is one I am still trying to get my mind 
around.
    Mr. Thompson. Well, that is what we are paying as a result 
of the interest we pay on our national debt. I think it is $1 
billion a day that our taxpayers are paying that go to this 
interest.
    Secretary Snow. But fortunately, it is--I think it is only 
8 percent now of the total expense to the Government because--
--
    Mr. Thompson. What goes down goes up as well.
    Secretary Snow [continuing]. Interest rates are at historic 
lows.
    Mr. Thompson. The other issue that I wanted to touch on was 
the idea of the dividend tax repeal. And you explained I think 
at length why you thought that was good. But I have to go back 
to California this weekend, as everyone here has to go back to 
their home State. And California is going to experience about a 
$1.5 billion hit if in fact the dividend tax is repealed. If 
you add to that what the State treasurer predicts the cost to 
the State will be in regard to multiple bond funding over the 
next 10 years, it is about $18 billion and change. And this is 
going to be not only a direct hit to the State of California, 
but this is going to make it more difficult to fund some of the 
exact programs that you were talking about that will help bring 
us out of these bad economical times. It is going to hurt in 
both State and local government funding, everything from 
schools to firehouses to low-income housing.
    And that is a rough one to square, I don't care which State 
you come from. But when you come from one as big as California, 
it is real tough. And when you come from a State that if you 
look at our GNP, our ranking amongst the industrial States, we 
are the fifth largest State. So if the United States is going 
to recover from this economic downturn, California is going to 
be a big part of that, and this really puts them back.
    And the other thing I want to say about dividend tax is, I 
understand that there is about 36 percent of the seniors that 
receive income from dividends, 64 percent don't. So it also 
becomes a hard one to square when you are talking to that 64 
percent who don't get a dividend income, and try to explain to 
them why we should risk their economic security, especially in 
regard to Social Security and Medicare, to provide a tax cut to 
those 36 percent that do derive their income that way.
    And it just seems to me that we are--and it is usually us 
on this side of the aisle that we are accused by our friends on 
the other side of the aisle for setting up these debates 
regarding class warfare. But I think these are two examples of 
class warfare, one in regard to the underfunding or the 
disparity that is going to be created for funding for low-
income housing, schools, and things of that nature, and the 
other in regard to people who derive their money from dividends 
vis-a-vis those who derive their money from an hourly job or a 
salaried job.
    Secretary Snow. Let me respond briefly, and then maybe at 
some point come back and talk to you at some length on this.
    Again, Dr. Clarida has done some studies on this question. 
I don't know that he has done California explicitly, but he may 
well have, or his people may well have. But the conclusion of 
the analysis of the net effects of the dividend proposal and 
the rest of the tax plan on the State budgets was that it had a 
positive influence on State budgets, not a negative influence. 
And you ask, well, how can that----
    Mr. Thompson. Well, if you would, though. You are assuming 
that the States would pick that up somewhere else, and it 
becomes an administrative nightmare that is unaffordable if 
they try and create bureaucracies to track that income.
    Secretary Snow. Well, I am told that there is a relatively 
simple adjustment that Treasury can do for the States to put 
that line on the State forms that can be accommodated if the 
States choose to decouple, I think is the phrase.
    But on your question of the municipal bonds and other such 
instruments that States and municipalities use, I don't think 
the dividend proposal will have any major detrimental effect, 
because, as I think about those instruments, they are in 
different markets. I mean, people go into those municipal bonds 
because they want tax-free results, because they want 
stability, they want fixed incomes. There is a profile of the 
investor in those that is different than the profile of the 
investor in equities. And think of it this way. If you are 
looking for a cautious and safe haven, 1 day's loss of market 
equity values will wipe out all the gains of the dividend 
exclusions.
    So I mean, I hear you, and there is maybe some byplay 
there, but I don't think it would be dramatic. And then in 
terms of seniors, I think it is something like half of all the 
seniors who file tax returns get dividends of some kind. And I 
think that is an important fact to keep in mind as well.
    Mr. Thompson. Thank you. And I would like to see your 
information on the municipal bonds, because it is contrary to 
every economic analysis that I have had.
    Secretary Snow. I will follow up with you on that.
    [The information referred to follows:]

  Mr. Snow's Response to Mr. Thompson's Question Regarding Municipal 
                                 Bonds

    Two concerns have been expressed about the possible effects on the 
market for tax-exempt bonds of the President's proposal for eliminating 
the double tax on corporate earnings. Both relate to the demand on the 
part of investors to hold and acquire those obligations. The first 
relates to demand on the part of individuals, the second to demand by 
corporations. The concerns are that reduction in demand will translate 
into higher interest rates having to be paid by State and local 
governments.
    The Federal Reserve System's Flow-of-Funds data for the end of 2002 
show that individuals, either directly or indirectly through mutual 
funds and bank trust departments, held about 77 percent of the $1.8 
trillion of outstanding tax-exempt bonds. Over the last two decades the 
portion held by individuals has risen while the volume outstanding has 
increased substantially. Individuals have increased their holdings 
because yields have been relatively high in comparison to the after-tax 
yields on taxable Federal and corporate bonds and defaults rare. They 
have done so even in years when the stock market was booming. Ending 
the double tax on corporate earnings will make ownership of corporate 
stock more attractive and corporate issuance of debt less attractive. 
In response we expect individuals to increase their holdings of 
equities and reduce their holdings of corporate debt. Because the 
dividend yield on equities will continue to be well below tax-exempt 
bond yields we expect individuals to continue to be attracted to the 
yield and safety provided by holding tax-exempt bonds. Any diminution 
in individual demand is likely to be so minor that it would be 
extremely difficult to detect given the normal fluctuation in interest 
rates generally.
    Three types of corporations hold significant amounts of tax-exempt 
bonds. At the end of 2002, property and casualty companies held about 
10 percent of the total, commercial banks held about 7 percent and 
other corporations about 6 percent. Corporations find investment in 
tax-exempt bonds attractive in part because the spread between tax-
exempt yields and yields on comparable taxable bonds has in recent 
years been significantly less than the maximum corporate tax rate. Some 
corporations, such as banks holding qualified small issuer bonds or 
corporations having less than 2 percent of their assets invested in 
tax-exempt bonds, additionally benefit from using interest payments 
associated with carrying tax-exempt bonds to shelter other income from 
tax. Moreover, banks are attracted to tax-exempt bonds to meet their 
obligations under the Community Reinvestment Act. Under current law 
relatively small spreads between taxable and tax-exempt rates and, in 
applicable cases, the ability to deduct cost-of-carry against other 
income raises the after-tax capital gains to shareholders from 
corporate investments in tax-exempt bonds well above returns on 
comparable taxable investments. Under the President's proposal after-
tax gains to shareholders will still be higher for corporate 
investments in tax-exempts, given reasonable assumptions about the 
spread between taxable and tax-exempt yields, corporate dividend payout 
rates and effective capital gains tax rates. As a result, Treasury 
analysts conclude that no significant reduction in corporate demand for 
tax-exempt bonds is likely to occur with the enactment of the 
President's proposal.

    [The following was prepared by staff in Treasury's Office 
of Economic Policy:]

     The Bush Proposal and Municipal Bond Yields (January 27, 2003)

    Some analysts suggest the proposal to eliminate the double taxation 
of corporate profits will increase municipal bond yields as investors 
shift their portfolios toward dividend-yielding stocks. However, 
research papers from several financial institutions suggest a number 
factors will prevent a significant effect on the municipal market.
     Municipal investors have a low risk tolerance and want to 
preserve capital. According to Lehman Brothers, municipals have had an 
annual default rate of 0.004 percent and since 1970 there has never 
been a default on a general obligation water, sewer, or public 
university bond rated by Moody's. Eliminating the double taxation of 
corporate profits will not significantly reduce the difference in risk 
between stocks and municipals.
     The gain in the after-tax dividend yield on stocks due to 
the Bush proposal could be wiped out in 1 day due to a change in the 
price of stocks. The standard deviation of monthly returns is 1.1 
percent for municipals versus 5.4 percent for equities, according to 
Lehman Brothers.
     Even if tax free, the dividend yield on most stocks is 
unimpressive versus long-term municipals. At present, the yield on the 
S&P 500 is about 1.75 percent versus almost 5 percent on municipals.
     Municipals are already relatively cheap. Long-term 
municipals are offering yields very close to long-term Treasury bonds. 
Given the very low default rate on municipals, it is hard to envision 
municipals yielding more than Treasury bonds, given that the municipal 
yield is tax free at the Federal level.
     Municipals offer investors a pre-determined dependable 
schedule of payments and a final maturity date. These cash flows allow 
investors (such as financial institutions) to match the timing and 
amount of cash flows on assets with the negative cash flows on 
liabilities. Stocks offer no guarantees as to dividend payments or the 
return of principal.
     Investors purchase municipals for diversification 
purposes.
     Investors are much more likely to shift out of corporate 
bonds than municipals. Compared to municipals, corporate bonds are much 
closer substitutes with equities and have similar underlying credit 
risk. Municipals are about ten times less likely to default than 
similarly rated corporates, according to UBS Paine Webber.
     If investors want to shift out of municipals preferred 
securities are a slightly better substitute than common stock. However, 
according to Merrill Lynch, 72 percent of preferred securities pay 
interest, not dividends. Another 13 percent of preferred is issued by 
REITs and foreign issuers. So only 15 percent of preferred securities 
would get the benefit of the Bush proposal. That 15 percent consists of 
about $24 billion in shares outstanding versus a $1.8 trillion 
municipal market.

    Chairman Nussle. Mr. Bonner.
    Mr. Bonner. Mr. Chairman, thank you very much. I am sorry 
that my colleague from Alexandria, VA left because I would have 
liked to have said this in his presence. But since he did, I am 
going to put it on the record regardless.
    Yesterday with Mr. Daniels and again today with the 
Secretary, it is troubling to hear comments made about ``your'' 
President. You know, I didn't vote for President Clinton. My 
colleague from Illinois served with President Clinton. But he 
was my President. And President Bush is my President. And I 
think it is important, we are in this time of war where the war 
may expand, and in this time of national tragedy following the 
Columbia tragedy, that this is not ``your'' President and 
``your'' President's budget. This is ``our'' President. And we 
can have a friendly debate about how the budget progresses, but 
I personally would like and hope that as future guests come 
before this committee, that we can refrain from making these 
characterizations that are derogatory toward the President of 
the United States.
    Mr. Spratt. Would the gentleman yield so that I can 
respond?
    Mr. Bonner. Yes, sir.
    Mr. Spratt. I think the gentleman makes a point. And I want 
to say that for a long time we have made it clear that 
President Bush is our President. And in particular, with 
respect to the war, we have said if a war comes, then we will 
be unstinting about the cost of it, because we want to see our 
forces prevail. I had an op-ed piece in the Washington Post 
yesterday which came down on this budget and the President, but 
it ended in the last paragraph by asking him for a bipartisan 
summit. And so I think that indicates a real spirit between us 
and them. He is our President. We want to see him succeed 
economically, geopolitically, and in every other way.
    Mr. Bonner. Mr. Secretary, you have only had a day on the 
job, and some of us on this end of the table have had about 
2\1/2\ weeks so we have got a jump start on you.
    I would like to make sure that I understand from your 
perspective--none of us have a crystal ball and none of us can 
predict with certainty what is going to happen in the 
outyears--but what would the effect be if we did nothing?
    Secretary Snow. Well, if we did nothing in terms of 
boosting the economy, I think we would have a much less certain 
recovery. There is the Iraq war hanging over us, there is the 
threat of higher oil prices. There is this lack of confidence I 
think that permeates the world we live in today, and is seen 
most dramatically in the performance of equity markets and in 
investment in the industrial sector, which is waiting to see 
some reason why they should begin investing. For all those 
reasons, I think to fail to act would be a mistake. And the 
cost of failing to act is those additional jobs, those 2 
million additional jobs that would be created, that percent 
plus of additional GDP that we would have, the better lives, 
the better lives that people would have in a more prosperous 
economy. That is a high price to be paid for not embracing the 
better economic policies that take us to more prosperous 
country.
    Mr. Bonner. Prior to your coming to this job, you certainly 
had a distinguished career in the private sector. One of my 
concerns is if we don't do something to make permanent the tax 
cuts of 2001, that we can't give working families or corporate 
America any certainty about what the future holds. What would 
the effect be of doing nothing to make permanent the tax cuts 
of 2001? Putting yourself back in your former job, how can you 
plan past 2010 if there are some set provisions on many of 
these important tax reductions?
    Secretary Snow. Well, one thing it would do would be to be 
approximately a 50-percent tax increase on the lowest taxpaying 
Americans. I think that is unacceptable.
    Mr. Bonner. Fifty-percent tax increase on the lowest----
    Secretary Snow. Taxpaying Americans.
    Mr. Bonner [continuing]. Taxpaying Americans.
    Finally, I would like to just associate myself with the 
point that the gentleman from Mississippi was making. The Wall 
Street Journal yesterday had an interesting and excellent op-ed 
piece that I would commend to all of the members of this 
committee. And if you have not had a chance, Mr. Secretary, to 
read it, I would suggest that you do as well: Growth in 
discretionary spending over the last 5 years, 45 percent; in 
the last year alone, 9 percent. And we can blame tax cuts, we 
can blame a number of different factors. And I wasn't a Member 
of Congress during the previous 5 years, but does not that 
increase shock the conscience?
    Secretary Snow. I saw Mitch Daniels' numbers that I think 
he maybe displayed here yesterday that lay out that scenario. 
We have abundantly funded a lot of discretionary programs over 
the last 5 or 6 years. I think that is absolutely true. And I 
don't think we can afford to continue to do that.
    Mr. Bonner. Finally as I thank you again for coming, let me 
share with you a number. I spoke to a group of Federal 
employees on Friday in my district. And of course, they have 
different interests than some of the interests we might have. 
But I found it interesting in doing some research, during the 
first year of our Federal Government, your department, the 
Department of Treasury, had 39 employees in 1789. I would hope 
that we could, as we move forward, find ways to move back 
toward a smaller government that is less obtrusive to the 
American people. Thank you again for your time.
    Secretary Snow. You are suggesting that Alexander Hamilton 
had higher productivity than I do.
    Mr. Emanuel. Don't take it personally.
    Chairman Nussle. Mr. Baird.
    Mr. Baird. Thank you, Mr. Chairman.
    I wonder if I could have minority staff put slide No. 16 
up, and the majority staff post the slide reflecting deficits 
percent of GDP.
    Mr. Secretary, in--could you post that slide reflecting 
deficits and percent of GDP?
    Secretary Snow. Our slide?
    Mr. Baird. Your poster. You have referred to it throughout 
the day.
    You have made the point repeatedly, Mr. Secretary, that we 
must consider deficits as a percentage of GDP; yet in 1995, 
when you were talking about the benefits of a reduction in 
deficit, at that point the percentage of GDP--or the deficit as 
a percentage of GDP is approximately where it is now, according 
to the chart that I have seen.
    Now, if in 1995 you projected that a 2-percent--or that a 
reduction in deficits could lead to as much as a 2-percent--and 
that is slide No. 16--could lead to as much as a 2-percent 
reduction in interest rates, if I am a family with a $200,000 
home and my interest rates are reduced by 2 percent, I save 
about $4,000.
    You have talked today about the benefits of a $1,000 tax 
return for a family of four. It seems to me if my interest 
rates, if I could cut interest rates, I would be better off.
    So deficits are real and they do have consequences. And 
while it may be important to interpret deficits in the light of 
percent of GDP, your comments in 1995 suggesting deficits 
needed to be reduced are almost precisely where the deficit was 
today.
    Could you comment on that, please?
    Secretary Snow. Sure, I would be delighted to.
    In 1995, the budget of the United States was projected to 
be in a sizeable deficit in the years going forward. That was 
the $200 billion-plus projections that were in the budget of 
the United States.
    Mr. Baird. Is that not where we are today, sir?
    Secretary Snow. Yes, but with an economy that is 40 
percent, 50-percent bigger.
    Mr. Baird. But the fact that we are talking relative as a 
percent of GDP standardizes that out, Does it not?
    Secretary Snow. Well, you are looking here at a set of 
numbers toward the end of the 1990s that reflected the totally 
unexpected growth of Government revenues from the buoyant stock 
market. In 1995, when I got as concerned as I did--and it 
actually preceded that, Congressman. It preceded it in the 
early 1990s--in the late 1980s, late 1980s, early 1990s. When I 
got concerned about this, I was looking at projections of the 
United States Government for annualized deficits that were up 
in the 4 and 5 percent range, not the 2 percent range. So I was 
talking about projections that we were all talking about at 
that time, and that were alarming not just to me but to many on 
both sides of the aisle.
    Mr. Baird. So you were referring at the time to 
projections?
    Secretary Snow. Sure.
    Mr. Baird. And yet you didn't say that in the comment. I am 
not trying to hold you. But the fact was, you were saying if we 
could lower it by 2 percent from where it is now. Your 
statement in 1995, sir, didn't say if we could lower it from 
the projected rate; it referred to where we were at in 1995. 
And I would assert that we are about there now. And so deficits 
do have a cost.
    Let me ask you a second question, if I may. The gentleman 
here suggested you should lower the size of your agency. I have 
met with some of your agents recently, and they tell me that 
your agency is a toothless tiger; that when they go on 
enforcement efforts, people laugh at them and assert that if 
you try to make me pay my taxes, I will file complaints against 
you.
    Now, we all respect the fundamental rights of the American 
people to be treated fairly by the Department of Treasury, the 
IRS, et cetera. But what do you think we might be able to do in 
terms of generating additional revenue if those people who are 
laughing at your inspectors right now had some respect for them 
and there were some teeth in that?
    Secretary Snow. Well, I think there is a significant 
augmentation of the Treasury budget to strengthen the 
enforcement hand of the Treasury. I think it is $100 million, 
focused on the higher-end income people, and other enforcement 
augmentations as well.
    Mr. Baird. I would applaud that. I have some concerns, 
however, that apparently, at least as I read the budget 
proposal, part of that will be privatized. And I have some 
concerns about the American people having what may well be 
hired guns trying to collect their taxes. I can tell you that 
in the realm of Medicare fraud enforcement, this has been an 
unabashed disaster, and you have got hired guns out treating 
people very shabbily. And we can say all we want, people love 
to criticize Federal employees, but I have seen no great 
evidence that a hired gun is going to treat a private citizen 
with greater respect than a Federal employee who at least is 
answerable to an elected Representative who they elected. So I 
just want to voice my concern. Thank you for your comments.
    Chairman Nussle. Mr. Franks. Mr. Garrett.
    Mr. Garrett. Thank you. And I appreciate your being here 
with us and suffering through all this endless questioning.
    Secretary Snow. Well, it is a good education for a new 
Secretary.
    Mr. Garrett. And it is a good education for a new Member as 
well. And my only regret is I was not here when Mr. Putnam was 
here 2 years as a freshman, when the debate was how do we pay 
off some of these instruments.
    I am inclined to take the view that you held more back in 
1995 than perhaps you hold today as far as the importance of 
attacking the deficit problem. I agree with my chairman, I 
guess his rhetorical question that he made at the outset. He 
said, well, if we do nothing, we know where we are going to 
need to go; so, should we do nothing?
    And the answer, I agree with him is, no, we have to take 
this action. And I agree with the line of reasoning that you 
and the President have with regard to the tax cut, and I am 
completely behind the notion that the way to do this is to grow 
the economy and to grow revenue, and that will be the long-term 
solution to the problem.
    But getting to the issue of the deficit today, you made the 
comment that we have to be concerned about deficit spending. 
But one of the phrases you used was ``except when there are 
critical needs to be addressed,'' and I think everyone on both 
sides of the aisle will agree that we are in a period of time 
when there are certainly critical needs to be addressed. But as 
you said that, I was thinking that when is there a time in this 
Nation when we would not be sitting at these tables and say 
that there are not critical needs to be addressed? We had 40 
years of the cold war, and I am sure the people that testified 
then would say there was a rationale for deficit spending, and 
there was a Great Society and there was certainly a need for 
moving in deficit spending in those times. I would hazard a 
guess that any one of us could come up with a program and say 
that this program that we sponsor for our district or the 
Nation is a critical need, and we could get over that hurdle of 
saying, well, this is the one that we have to address.
    The critical need that we are dealing with right now is the 
terrorism aspect, and I think our President is right when he 
came out right after 9/11 and said, this is not something that 
is going away in a month or 6 months from now; this is a long-
term problem.
    So how do we--can you just for a moment address that issue 
of saying when we don't have that?
    Secretary Snow. What--the juxtaposition of critical needs 
in my opening comment was homeland security, the war or 
terrorism, and creating good jobs for Americans who are 
struggling. Those were the critical needs I referenced.
    Mr. Garrett. And I agree with them. But I just think that 
going forward we are always going to have those critical needs. 
And how do we put them aside to say we want to move toward what 
Mr. Baird and others were saying, and along the line more in 
keeping with a balanced budget? I think, I hope, in the future 
that this committee is going to be grappling with the bigger 
rules that we are going to be discussing, that you were 
mentioning at the outset with regard to the framework and the 
rules, that Mr. Spratt and others were talking about as far as 
the framework that we deal with in budgets in the future. And 
you have mentioned the PAYGO rule and how that worked.
    And I guess my questions go along the line of this. I think 
I agree with, although I have to think about this a little bit 
more, your comment with regard to the PAYGO rule not applying 
to tax cuts. And I think that is right, but I have to give that 
more consideration. But you also made the comment that it 
should not apply to mandatory expenditures. And I will let you 
respond to this. My thought there is that if we are clever 
enough, any one of our absolutely critical needs we have in our 
districts, I think we are probably clever enough that if that 
was the rule that we had to live with, we could try to turn it 
into a mandatory expenditure so we could get beyond the rule.
    And I think your second comment along that line was if 
there are certain sorts of programs such as the Medicare 
program--if there are certain sorts of programs such as the 
Medicare reform, which we all agree on that we can save 
spending, then perhaps they should be able to get around rules 
such as that PAYGO rule. I would hazard the guess also that 
just about any spending initiatives that we have here on either 
side of the aisle, that we will always say that if we just 
spend more money on education or transportation or 
infrastructure, that we will posit the truth that it is going 
to actually save spending in the long term.
    So if we move all those things off the page, what is left 
even in discretionary spending that is still within the rules?
    Secretary Snow. Well, if you are suggesting that the game 
can get rigged, in which everything is off the table, I would 
agree with you. All games can get rigged in ways that are 
destructive of the fundamental game. But on the larger set of 
questions you are raising here, how to frame this whole set of 
issues, I would have to defer I think to Mitch Daniels and 
people who know a lot more about this subject than I do.
    Mr. Garrett. OK. Thank you very much.
    Chairman Nussle. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Mr. Secretary, I have two questions, one macro, one micro. 
You are new on the job; you have to sell a budget that you 
didn't prepare. But I would urge you to read page 315 or 318 of 
this very thick book called Analytical Perspectives, because I 
am deeply worried that you have been saddled with an 
unconstitutional recommendation. And I know that you took the 
oath of office seriously to support and defend the 
Constitution. But when I read the bottom of that page, quote, 
``Under the President's proposal, if an appropriations bill is 
not signed by October 1 of the new fiscal year, funding would 
automatically be provided at the lower of the President's 
budget or the prior year's level,'' that could give 40 U.S. 
Senators the ability to terminate or radically reduce and 
cripple almost any spending program in the country.
    The Constitution gives Congress the power to appropriate 
the dollars for spending. So I would urge you to look at this 
proposal very closely, one that you did not formulate. And 
overall, I would like to urge the American people to get on-
line and read some of these documents, because for all of your 
smooth skill and calm demeanor, there is a lot in here such as 
this proposal that is indeed radical, perhaps unconstitutional, 
and perhaps irresponsible. And it is important that all 
Americans tune in to these important although arcane issues.
    So, could I have your pledge to take a serious look at this 
proposal?
    Secretary Snow. You can. I accept both the compliment and 
the challenge that you have given me.
    Mr. Cooper. Thank you. At the micro level, you have a very 
able staff. I am not like my colleague from Alabama who wants 
to deplete your staff. One of your ablest people is Pam Olson. 
She is now looking at an issue that has to do with municipal 
power company prepayment for electricity. A bond issue is 
currently being held up right now because she will allow 
prepayment for gas but not for electricity. We would like a 
fuel-neutral policy so that municipal power companies can help 
their people with electricity and gas, and be able to prepay 
for both. So I would just like to urge you and her to take a 
look at that micro issue, because it could help a lot of 
consumers all over America having a municipal power company. 
Thank you.
    Secretary Snow. I will agree to do that.
    Mr. Cooper. Thank you.
    Chairman Nussle. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Secretary, let me echo the sentiments of one of my 
other colleagues, that it is indeed, as a freshman Congressman, 
great to meet somebody who has less seniority than me.
    This is my second hearing of the Budget Committee and 
obviously your first, but we have both had the benefit of 
seeing a dizzying array of charts put on the screen here for 
us. I would like to know if the assumptions underlying--if you 
have the same understanding that I do. No. 1, I believe that I 
am being asked to believe that with some amount of clarity and 
exactitude, that we can figure out 10 years in the future 
exactly what the economy is going to be doing. And, at the same 
time, I believe these charts that have a large amount of red 
ink on them are based on the so-called static scoring of the 
President's economic plan, and that I am being asked to believe 
that changes in tax rates have no impact on job creation or the 
economy.
    You saw the same charts that I did, Mr. Secretary. Is that 
your understanding as well?
    Secretary Snow. Yes, broadly. I would not put enormous 
confidence in 10-year estimates of budget numbers. This may be 
the best that can be done, but I would look at them with a 
great deal of caution, as you are suggesting.
    I do agree with you that I think they do not reflect, and I 
think Mr. Daniels was clear in saying this, that they do not 
reflect the full growth component that would be expected from 
the tax package, but they do reflect the full cost component. 
So I would certainly agree with all three of your points, 
actually.
    Mr. Hensarling. Mr. Secretary, even though the budget does 
not include the dynamic impact of the economic program, 
obviously you have seen a number of opinions expressed. What do 
you perceive is the consensus opinion of the economic impact of 
the President's economic program?
    Secretary Snow. Talking to colleagues in the business 
community, and the Business Roundtable put out an estimate. I 
have seen some others. I would say the official numbers of OMB 
probably are on the low side of the growth that will actually 
be achieved. And I think that is true of a variety of the 
private sector estimators.
    Mr. Hensarling. Mr. Secretary, of all the charts that I 
have seen posted today, I notice that there are two that are 
fairly noticeable by their absence. Today, I have not seen one 
chart that plots the growth of Government over the last 10 
years or projecting 10 years forward, even though we did hear 
earlier today that as recently as last year we had a 9-percent 
increase in discretionary spending.
    I am under the impression that over the last 10 years 
Government spending has grown at approximately 6 percent. 
Obviously, the economy has not kept pace with that. There has 
been some criticism from my colleagues on the other side of 
aisle that your economic projections are too rosy; that 3 
percent or 3.3 percent economic growth in the future is too 
rosy.
    So say, for example, hypothetically, if economic growth 
over the next 10 years was, say, 2\1/2\ percent, and say the 
Government continued to grow at the rate of 6 percent, given 
that today the tax burden on the average American family is 40 
percent--local, State, and Federal taxes--if these trends 
continue, do you have an opinion of what would happen to the 
tax burden on the American family?
    Secretary Snow. Well, I can't do all the math in my head, 
but I think the direction is pretty obvious. It would be a 
heavier burden. A heavier burden.
    Mr. Hensarling. Thank you.
    Chairman Nussle. Mr. Emanuel.
    Mr. Emanuel. Thank you, Mr. Chairman.
    This is our second hearing for some of our freshmen, and 
the second time that we have gone through lunch. And I wanted 
you to know I started this six-two and 250 pounds, and that is 
all I have got left. And that you kind of look around, and you 
begin to feel like you are in an Agatha Christy novel: And then 
there were none.
    Thank you very much, Mr. Secretary. Also I would like to 
repeat and echo my colleague: It is good to find somebody with 
less seniority than yourself.
    You know, I am going to take a faint attempt at 
bipartisanship and quote Ronald Reagan. ``Facts are stubborn 
things.'' The fact is, although a lot of people want to review 
the 1980s versus the 1990s and what led to economic growth, the 
fact is that in the 1990s we had a record period of job growth. 
Fact: We had a record reduction in the welfare roles.
    Fact is that we have also in the 1990s extended the trust 
fund for Medicare by 20 years. Fact, we had a drop in those who 
worked full-time and didn't have health insurance, down to 38 
million. And fact is we also had a drop in violent crime in 
this country and we did all that without tripling the Nation's 
debt. So although people can take rightful pride comparing the 
1980s and the 1990s as a period of economic growth and what 
happened, just a simple fact, and I would like to quote Ronald 
Reagan on that, ``facts are stubborn things and those are just 
facts.'' And that may be hard for some people to swallow, and I 
appreciate that, but that is what happened.
    And with that, I think it is worth noting since some people 
like to compare 17 years of Ronald Reagan's economic growth, we 
do think something happened in the 1990s that was certainly 
magical. There is no doubt that it started with the 
entrepreneurs and the middle class families around the country, 
and also with the decisions, whether people like it or not, 
because I don't want to just do nothing about welfare reform. 
We did something about welfare reform. And doing something in 
Washington does have an impact.
    The arguments to the 2001 tax bill was that the President 
inherited the recession and he needed a $1.3 trillion tax cut 
to get the economy moving. Since that time the economy has lost 
2\1/2\ million jobs. Four more million Americans are without 
health insurance that had health insurance before. And I think 
you will appreciate this, is that also nearly $1 trillion of 
corporate assets have been foreclosed on in chapter 11. And one 
of the facts I am most impressed with between the 1990s was the 
fact that we decreased the amount of people living in poverty 
but in fact in the last 2 years two more million people have 
been added to the poverty rolls in this country, just facts.
    And I do think the decisions we make here rather than just 
static and not doing anything have an impact on the economy and 
on what happens, and I do agree that we all want to see job 
growth and economic growth. We want to see deficits lower. But 
one of the things we want to see is every American participate 
in that and that hasn't happened to date. The unemployment, the 
uninsured are not equally shared across every income group. And 
I agree with what you said, deficits can be manageable if they 
are seen as cyclical. But once the markets sees the perception 
go from cyclical to permanent, interest rates rise and that has 
an effect on mortgages, college loans, paying for health care 
bills and it becomes a tax on the families. And we are very 
close--and you may be right and I think you are right, right 
now they are seeing them cyclical. But that moment that 
perception changes in the market that they are permanent and 
fixed and structured, nothing we are talking about the tax cuts 
here will pale in comparison to the rising costs of managing to 
pay for a home, paying for college or paying for health care.
    With that, I do want to talk a second about savings. Fewer 
than 5 percent of the American people participate in the IRAs 
as they exist, the Roth IRAs. And why do you think that 
increasing that limit is going to increase the participation 
that only 5 percent of the top bracket participate today? To my 
view since $3,000 a year is out of reach for a lot of Americans 
to put away, making it $7,000 is only going to be putting more 
money away for those who want to participate and try to save. 
You are just going to go to the same people who today 
participate in the IRA and we are not going to extend it.
    Now I think if you look at all that money that is going to 
go toward that savings, some people see critical investments in 
agriculture. Folks like me see critical investments in 
education. Right now we can't even pay for the President's 
initiative of Leave No Child Behind. This budget, the amount of 
deficits we leave, the amount of debt we add and the ability 
not to invest it, Pell Grants or in education, do have 
consequences because American lives aren't static. Washington 
may want to be static, but their lives are not.
    Secretary Snow. I agree with much of what you had to say.
    Mr. Emanuel. There is an act of bipartisanship right there.
    Secretary Snow. One of the important proposals coming out 
of the Treasury deals with the issue you are raising, the low 
savings rates among the lower income, below the median people. 
The failure to use the IRAs and the Roths and 401s and so on--
and I would urge you to take a look at this proposal. Pam Olson 
was mentioned earlier as somebody that the committee works with 
closely, which really she is the rowing oar on these LSAs and 
RSAs which would create a new savings vehicle. The current tax 
favored vehicles are just too complex on the one hand and too 
restrictive on the other. They limit the purpose so that that 
mother who wants to educate her child, she puts her money into 
the fund and the child gets sick, she can't use it to help deal 
with the medical problems of that child, so they don't use it. 
And I commend Pam and the Treasury Department for coming up 
with these proposals to make--create new savings vehicles to 
encourage more savings among middle income and lower income 
people. Wealthy people have lots of ways to save. It is the 
lower income people that need to have savings facilitated. So I 
urge you to take a look at these proposals.
    Chairman Nussle. Mr. McCotter.
    Mr. McCotter. Thank you, Mr. Chairman, and I would like to 
thank the good member from Illinois for his bipartisan praise 
of the 1990s-led GOP House of Representatives. You mentioned 
something about the debt tax and that is something I heard a 
lot about. It is a new term, although I am fully expectant that 
I will be hearing that term over and over again at least for 
the next year and 11 months. I think I might have an idea of 
what it is and I just want to see if I can be correct, and then 
I have a quick question. It seems to me that the debt tax is 
caused by politicians' need to immediately spend money in the 
hopes that it will lead to long-term structural improvements in 
the economy when in the end it is basically a mortgage and a 
hope that Government spending will help improve the economy and 
the quality of peoples' lives. This naturally will limit the 
amount of discretionary spending that will be available later. 
So in my mind it becomes basically a debt penalty.
    It gets confusing because we heard the overall accumulation 
of Government debt in relation to individual budgets, and there 
was never a proration for how the immediate spending influenced 
those future budgets. And I think that that was kind of apples 
to orangutans or something. I think under that kind of logic 
there are really five things that can be done. You can 
individually--you can raise taxes. You can individually cut 
prorated reductions in the programs that were benefited by the 
immediate spending at the expense of future spending. You can 
have larger cuts in all other programs whether affected or not. 
You can obviously go across the board spending freeze because 
we heard that will lead to a balanced budget or you can hope 
through some type of budgetary policies you can grow the 
economy and restrain spending and arrive back into a surplus 
situation.
    I didn't study economics. I was a liberal arts guy so I may 
be wrong about some of that. But my question is in investing 
the 1990s--I was a state legislator. I was a county 
commissioner prior to that--at the end of the 1990s, we saw, I 
think it was historically the largest increase in Government 
revenues and we also saw one of the largest increases in 
Government spending and that was followed by a recession. We 
have heard a lot about deficits having consequences on markets, 
a debt--the cost of having a debt at the national level. I was 
wondering if anyone had looked into the prospect of a national 
surplus also constituting negative consequences to our economy 
when the Government takes too much from entrepreneurs and the 
people who make this country great, the working men and women 
and then spends it inefficiently.
    Secretary Snow. Congressman, you may not have studied 
economics formally but you have obviously learned it some other 
way, because you are framing the issues the way the economist 
would frame them. I saw a speech that Larry Summers gave 
recently in which he said no one can be well educated today if 
they don't have a fundamental understanding of economics. And 
economics is basically the study of trade-offs and choices and 
the costs of alternative choices and framing the choices 
intelligently. You just did, and I agree with the way you 
framed them. It is important to always ask what is the cost of 
not doing what we are proposing as well as what is the cost of 
doing it. And where the cost of not doing, what you give up is 
greater than the cost of doing it, you should give it up.
    So I think the President's program is the course that takes 
us and puts us on the best course in terms of those trade-offs 
that you have enumerated.
    Mr. McCotter. I just want to thank you very much. In the 
final analysis, though, I do believe a historical precedent is 
important, and I do believe that had we perhaps at the State 
and local level, because I can't address the national level, 
saved some of the money that the taxpayers put here into 
reserve accounts, into rainy day funds, perhaps we might not 
have offset the entire cost of this proposed budget but would 
have laid a foundation for a rainy day fund much like families 
have to do. And my concern is that we do not attempt to bolt 
the Federal budget on the backs of family budgets no matter 
what direction we take.
    Secretary Snow. I agree with your large point there.
    Chairman Nussle. Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman, and I would like to 
have displayed slide No. 3. Can you display slide No. 3? And 
good afternoon, Mr. Secretary. I appreciate your patience and 
your fortitude. In my previous life I was a trial court judge 
and I certainly wouldn't have had a witness on the witness 
stand as long as you have been without a break.
    Secretary Snow. Cruel and unusual.
    Ms. Majette. But I certainly appreciate your being here 
this morning and this afternoon, and we have talked a lot about 
the cost of doing or not doing things and trade-offs. And 
before I ask my question I would just like to preface it with 
some reading that I did this morning, and this is from a book 
written by Richard Kriegbaum on leadership and particularly on 
the aspect of creating a budget. And he says that, ``The core 
values of an organization are the promises its members make to 
each other. The budget is the most comprehensive and detailed 
description of what the organization has promised to do in 
expressing those values. What makes budgeting so difficult for 
a future oriented leader is that the budget is mostly about 
history, about keeping promises that have already been made. If 
the promises were made wisely, they will have created a good 
set of present opportunities, attract great people, secured a 
strong position in the market with a positive image and allowed 
for increasing net revenues. The need for growth is a product 
of the fundamental paradox in each budget. Driven mostly by the 
promises of history, the budget must also make promises to 
secure a future. The budget, mundane and arcane, is the 
ultimate leadership forum.''
    Now my question is given the fact that we have the baby 
boomers, the baby boom generation will begin to collect Social 
Security benefits starting in 2008 and also having the Medicare 
coverage and that those are promises that we have made, made by 
past and current Presidents and by past and current Congresses, 
how are we going to be able to honor those past and current 
promises in light of the deficit we already have and the 
proposed budget that will increase those deficits as we move 
forward to 2008?
    Secretary Snow. I begin by saying that our commitments to 
Social Security and Medicare are sacrosanct. It is unthinkable 
that those commitments won't be made. At the same time, it is 
important to recognize that, as you are suggesting, that the 
demographics of the country are putting us on an unsustainable 
basis in terms of the current course. So some fundamental 
reforms need to be thought about in both areas.
    The President has made clear his commitment to Social 
Security, but also is engendering a national dialogue on how to 
put it on a sustainable basis. The commission he appointed came 
up with three options. All included investment retirement 
accounts--I guess two of the three--all three had investment 
retirement accounts as part of the approach. The Social 
Security system needs savings. It needs an infusion of real 
savings. And we need to find a way to make that happen. It can 
only happen, though, I think, and we can only put Social 
Security on a sustainable basis if, one, we grow the economy, 
because that gives us the wherewithal to deal with the 
problems, and, secondly, if there is a bipartisan consensus to 
move forward on that issue.
    On Medicare, health care, the commitment is the same. The 
problem is a little different. It is driven by demographics, 
but also by this extraordinary increase in health care costs, 
which we have to rein in. We have to bring greater discipline 
and efficiency to the health care delivery system. We talk 
about that a lot. We talk about that a lot. But it is an issue 
that has to get joined.
    So I applaud you very deeply for putting that issue before 
the committee and before the Congress because it is one that we 
simply have to address.
    Ms. Majette. Thank you.
    Chairman Nussle. Mr. Ford.
    Mr. Ford. Thank you. We are here, as you know, Mr. 
Secretary, talking about this budget stuff after or during the 
time in which Secretary Powell has made quite a compelling 
statement about the world taking steps against Iraq and even an 
invasion of Iraq. I know that you have a tough gig, made 
tougher by the fact that you didn't really have a job in 
writing this budget, but you have to defend it and perhaps you 
do fully agree with it. But some of the things you said in the 
past which I think we tried to point out here are in conflict 
with the direction that this budget will take us. I want to ask 
specifically just a couple of questions.
    I am reading this morning in the CQR, one of the local 
newspapers here on the Hill, where your friend and colleague 
Glenn Hubbard makes the point that because of dynamic scoring 
that the costs of this tax cut, the $695 billion tax cut, would 
actually be less some $280-billion less, $278 billion to be 
exact, and that it would actually cost only $417 billion over 
11 years. I was curious, one, if you are familiar with his 
talking about this and, two, if you agree with this dynamic 
scoring.
    Sounds a little like fuzzy math to me. I know a lot of 
people here have talked about what counties have to do and what 
families have to do. I would love to be able to go into a 
grocery store and fill up my grocery cart and say it looks like 
it is 250 but by the time I get to the counter maybe it will 
only be 185. I am curious to know if you agree with Glenn 
Hubbard's estimation about this.
    Secretary Snow. Actually I have not discussed that with the 
CEA chairman.
    Mr. Ford. If you could get back to me on that and maybe the 
chairman. I know he is a fan of dynamic scoring as well. 
Perhaps he can get back to those of us on the committee if he 
too agrees with Glenn Hubbard's estimations here.
    Chairman Nussle. Will the gentleman yield?
    Mr. Ford. As long as you don't take my time.
    Chairman Nussle. I will be glad to not take it from your 
time. I am just curious. So your point is that you see 
absolutely no impact at all from our fiscal policies on the 
overall economy and that it should not be taken into 
consideration?
    Mr. Ford. No, sir. I am just asking the question. Evidently 
you are giving me a partial yes. I would love----
    Chairman Nussle. It is not a partial guess or a yes. I just 
wondered if you saw no impact at all from fiscal policy on the 
economy.
    Mr. Ford. Mr. Snow has run a railroad that runs through my 
city of Memphis, and has done very well in business. You, Mr. 
Nussle, have been head of the committee. I am just curious. I 
asked the question for this reason. I was not on the committee 
2 years ago, but I understand having voted against the budget 
that came out of this committee, there were a lot of estimates 
about how well the economy would perform after the tax cuts 
that Congress passed 2 years ago. Well, in fact, that has not 
happened. We heard a variety of reasons why. It is ridiculous 
some of the things that everybody said, particularly--I have a 
lot of friends on that side of aisle. But to suggest that 
Clinton had something to do with this or that Reagan had 
something to do with this or that one person deserves more 
credit than the other is ridiculous. Let us face the facts we 
face right now. If that is the case and if it does not happen, 
what is our fallback here, because we estimated over the next 2 
years all these things would happen with this tax cut and it is 
not happening.
    And I will be happy to yield to the chairman if he wants. 
The second question I would have for Mr. Snow with regard to 
the stimulus package, and I would love to get a copy of your 
memo you sent to Mr. Thompson on municipal bonds and other tax 
free instruments, including the low income housing tax credit 
that Ms. Johnson raised yesterday, I think, before the Ways and 
Means Committee. But I am curious about States. My State, like 
many others, is faced with these crushing burdens. Is there not 
an argument--and I am not an economist. I went to a school 
where they teach it up at Penn and Wharton, but I didn't take 
any of those classes. I was a liberal arts major like the 
former commissioner and State representative over there was. I 
am curious--it would seem to me though, what little I know, 
that the best thing we probably could do would be to help 
Governors avoid either raising taxes or cutting vital services. 
And if we don't provide some direct aid to the States, is it 
your belief that that may offset what we may do here at the 
Federal level whether it is dividend taxes or payroll tax 
rebates or whatever we eventually settle on?
    Secretary Snow. The best thing we can do for the States is 
to create a strong national economy that grows and as that 
strong national economy grows and the States have more jobs, 
more revenues will flow to the States. And the analysis I have 
done--I introduced Dr. Clarida earlier who has done these 
analyses. The States actually pick up in the aggregate more 
revenues as a consequence of this growth package than they 
would have otherwise.
    Mr. Ford. So it is your belief that providing direct aid to 
the States for health and education and other needs, and this 
is not to suggest that we don't have other priorities but I am 
just curious, modifying the Medicaid formula so that my State--
and Tennessee is faced with a $400 million shortfall this year 
and an expected larger one next year. That is small compared to 
some of the other States represented here. But you don't 
believe that providing some direct aid in addition to the 
stimulus jobs and growth package that the President talked 
before Congress a week or two ago, you don't believe direct aid 
could also help alleviate some of this burden and actually help 
create jobs and grow their economies at the State level as 
well?
    Secretary Snow. I forget the numbers. You would know them 
because you were here yesterday when Mitch Daniels testified, 
but as I recall there was a--here is the chart--these are OMB 
numbers. You can see there has been a fairly sizeable increase 
in grants, Federal grants to State and local governments, and 
that is continuing in this budget.
    Mr. Ford. How much of that is Medicaid? I must have missed 
that part of Mr. Daniels' testimony. It is my understanding a 
little over three-quarters of that was Medicaid funding if I am 
not mistaken.
    Secretary Snow. The numbers escape me right now, but I will 
get back to you on that for sure. I know Medicaid is now, I 
think, the largest source of the grants to the States and I 
think the second largest item in most State budgets.
    [The information referred to follows:]

 Mr. Snow's Response to Mr. Ford's Question Regarding Medicaid Funding

    Total Federal grant-in-aid money to state and local governments was 
$351.6 billion in fiscal year 2002. It will rise 9 percent to an 
estimated $384.2 billion in 2003 and an additional 4 percent to $398.8 
billion in 2004 under our budget proposal.
    A huge 20 percent rise in Medicaid grants is slated for this year, 
boosting them from $147.6 billion in fiscal year 2002 to $176.8-billion 
under current law for fiscal year 2003. These grants are expected to 
rise 3 percent further to $182.5 billion in 2004 (amount takes account 
of proposed legislation).
    The rise in Medicaid costs in fiscal year 2003 is expected to 
account for 89.6 percent of the increase in total grant-in-aid in that 
year, but the rise in fiscal year 2004 would make up only about 39 
percent of the increase in grant monies.
    Medicaid expenditures accounted for 42.0 percent of total Federal 
grant-in-aid to states in fiscal year 2002; the share is expected to 
rise to 46.0 percent in fiscal year 2003 and account for 45.8 percent 
of grants in fiscal year 2004.

    Mr. Ford. If you could have drafted this budget, Mr. 
Secretary, and you were trying to craft a stimulus package in 
light of the challenges we face and with the vast experience 
you have had in the private sector, public sector, is this the 
budget you would have drafted and presented to this Congress 
and suggested to this Nation to help create a rebound and a 
growth period, including job creation?
    I know I am going over my time. I think I know what you may 
say, but I am just curious if this is the budget you would have 
presented to this Congress had you been on from the very 
beginning with this administration.
    Secretary Snow. I am very pleased to be in a position to 
advocate the policies reflected in this budget. I shy away from 
using the term ``stimulus'' because I think it mischaracterizes 
what this package is all about.
    Mr. Ford. I would agree.
    Secretary Snow. It really is a growth package.
    Chairman Nussle. Mr. Secretary, let me just--excuse me--let 
me yield to Mr. Davis and then I will take some time at the 
end. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Mr. Snow, I apologize 
to you that I missed a lot of your testimony. I have some 
pressing constituency issues in my office, but I did see a lot 
of you on television this morning. Let me ask a question that 
is totally different from what you have been asked about during 
most of the day. I want to go to the larger point of incentives 
that this budget creates and I want to talk about incentives in 
one particular area. I want to preface that by saying that two 
things are apparent to me as I look at the political context 
around this budget.
    First of all, it is evident that whether we agree or 
disagree with the whole range of cutbacks that are made in this 
budget that there are a range of objective cuts or reductions 
in the rate of growth for a number of social programs that I 
consider important, from education, health care, Head Start, 
you name it. Because of that, it strikes me that there is going 
to be a much greater reliance on the private sector, a much 
greater reliance on the private sector to step up to the plate 
when it comes to charitable giving. The President has spoken 
very eloquently of compassionate conservatism. He has spoken 
very eloquently of the private sector and the private community 
in this country assuming some of the burden that the Government 
may be advocating.
    Given that set of premises, I want to ask you about this 
budget's failure to provide more incentives for charitable 
giving. Pull out just a few facts that I have seen in the 
budget. The President is proposing a $500 charitable deduction 
for nonitemizers. Now based on numbers that I have seen, the 
average charitable gift for most taxpayers is $348. The range 
between $348 and $500 is significant at that level, so as a 
practical matter most people who were giving charitably will 
not receive a tax incentive.
    Give you some more numbers. Two years ago when the 
President sent his first tax cut plan up to Congress, he 
proposed a $90 billion--what would have amounted to a $90 
billion charitable tax break over a 10-year period, about $9 
billion a year. That plan was not successful. In this go-
around, the President comes back with a $20 billion plan for 
reductions in charitable giving over 10 years. That seems to be 
a significant retreat on the part of the President.
    Two other aspects I will point out to you. A lot of 
charitable foundations--in fact, my understanding is that all 
private charitable foundations, while they are not taxed in the 
normal fashion, pay an excise tax that totals up to $1.4 
billion a year. This budget provides no relief from that excise 
tax.
    Finally, as I understand it right now, if people withdraw 
money from an IRA and attempt to give it to charities, that is 
still taxed. Now that is a classic case of double taxation. The 
budget the President proposes does nothing about that.
    So my question to you is this: Given the extraordinary 
shift from public sector to private sector the President seems 
to contemplate, how can you justify to us and, more 
importantly, to our constituents why the President doesn't do 
more in this budget to encourage charitable giving?
    Secretary Snow. I am not as conversant with this subject as 
you obviously are, but I will give you two broad answers. One, 
the best way to stimulate charitable giving is to have a 
stronger economy so people have more money in their pockets, 
more disposable income. This proposal does that. I am confident 
of that. The IRA proposal that we talked about earlier, 
Congressman, when you weren't here, the Treasury proposals 
there, does permit transfers to charities. It creates a more 
flexible use of these savings accounts and I think will 
encourage savings generally and, by creating more flexible 
uses, will be helpful to charity generally. And I understand 
that in the budget there is some several $100 million in effect 
directed to charitable causes.
    Mr. Davis. Let me ask two follow-up questions, Mr. 
Secretary. Would you support the legislation that has been 
introduced in the Senate, as I understand it and that some of 
us will cosponsor in the House, that would lift the excise tax 
on the charitable foundations?
    Secretary Snow. I have to study that. I am not up enough--I 
wouldn't want to give an off the top of my head answer.
    [The information referred to follows:]

 Mr. Snow's Response to Mr. Davis' Question Regarding Excise Taxes on 
                         Charitable Foundations

    The administration's fiscal year 2003 and fiscal year 2004 budgets 
include a proposal to simplify the excise tax on private foundation 
investment income. The administration has not proposed repeal of the 
excise tax. Under current law, the excise tax rate is 2 percent, but 
the tax rate may be reduced to 1 percent if the foundation's charitable 
distributions exceed its average level of charitable distributions over 
the five preceding years. The administration proposal is intended to 
provide simplification and some amount of tax relief for foundations by 
replacing the current two-tier rate structure with a single 1-percent 
tax rate. The current formula, in addition to imposing recordkeeping 
burdens, can discourage foundations from increasing charitable 
distributions in a particular year, because it would be more difficult 
for the foundation to qualify for the reduced rate in subsequent years.

    Mr. Davis. One more question. Can you give me some 
explanation of why the President has by his own terms retreated 
from his $90 billion goal of 2 years ago as far as charitable 
tax breaks to a considerably less ambitious goal of $20 
million?
    Secretary Snow. This is an area that I am beyond my ken. I 
wasn't here when the President made whatever the original 
proposals are and I am not really familiar with what the 
proposals are in this budget, but I will be happy to look into 
that.
    [The information referred to follows:]

 Mr. Snow's Response to Mr. Davis' Question Regarding the President's 
                     Goal on Charitable Tax Breaks

    The administration's fiscal year 2004 budget proposals reflect 
legislative developments. The charity bills considered in the House and 
the Senate in the 107th Congress were both much more modest bills than 
earlier proposals. In addition, there were bi-partisan meetings between 
Congressional leaders and the White House last year that produced a 
consensus package. The current budget proposals reflect those 
considerations and would provide significant new support and incentive 
for taxpayers to increase their charitable contributions.

    Mr. Davis. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Chairman Nussle. Let me just take a little bit of time here 
because Mr. Ford brought this up and I have enormous respect 
for my good friend from Tennessee. Just to make it clear, I am 
not a fan of either static nor dynamic scoring. I am a big fan, 
though, of accurate scoring, and we haven't had that under any 
model that I have seen as of now and that frustrates me and I 
know it frustrates the gentleman from Tennessee. So just to 
correct the record.
    Mr. Ford. I didn't mean to cast any aspersions. I know I 
heard a lot of people talking about dynamic this and dynamic 
that yesterday and I thought I heard you saying you support 
dynamic scoring.
    Chairman Nussle. And that gets me to the second part. I am 
not sure what to call it, but--well, let me just ask the 
Secretary. Does the President in the budget that has been 
presented before Congress score his growth package in a dynamic 
scoring model or methodology?
    Secretary Snow. The budget builds in some of the growth 
that would come as a result of the tax incentives in the plan, 
but it is not fully built in; that is, it doesn't play through 
all the consequences of enhanced incentives for savings, 
investment and consumption, nor does it, to my knowledge, fully 
take into account the removal of the inefficiencies that are 
associated with the current Tax Code, in the area, for 
instance, of the dividends. So the way I look at it, it 
certainly scores all the costs of it, but probably doesn't 
reflect all the benefits.
    Chairman Nussle. And I guess it is puzzling because I asked 
the same question of Mr. Daniels yesterday and he said no, it 
is not dynamically scored. In fact, the way I understood it was 
that if, in fact, OMB's growth figures are less than CBO's and 
Blue Chip and both Blue Chip and CBO assume nothing basically 
is changing, I don't know how anyone could assume that that 
scores dynamically, or assumes any growth or assistance from 
the growth package that the President has put forward. And I 
guess that is what I am getting at. I am wondering why you 
don't in the budget assume growth larger than status quo from 
this growth package.
    Secretary Snow. I think it is--the decision to err on the 
side of conservatism basically lies at the base of that 
decision and build in conservative numbers rather than 
otherwise. That is the only explanation that I can see for it.
    Chairman Nussle. Let me ask you one other thing because the 
gentleman from Tennessee said this. He said obviously there was 
no changes or there was no growth, there was no economic 
benefit from the package--the growth package from 2001, the tax 
cuts from 2001. And unless I am missing something, that not 
only was not your testimony but I am not aware of any economist 
that suggests that this was a recession that is typical based 
on the dynamics that were out there at the time, that there is 
nobody with any kind of economic credentials that is suggesting 
that there was no impact in a positive way from the 2001 tax 
cuts that were passed. Now somebody may think it didn't go far 
enough or it could have had more economic impact, but to 
suggest that there was no dynamic impact, just, I am surprised 
at because I am not familiar with any school of thought that 
suggests that there was absolutely no impact from the 2001 tax 
cuts. What is your belief on that?
    Secretary Snow. Well, my belief is that the 2001 package 
was essential to avoid a deep recession and was the right 
medicine at the right time. And if it hadn't been done, if 
Congress hadn't stepped up to the plate with the 2001 tax 
package where I was sitting in the private sector, I was 
looking at the prospect of a very deep and serious recession. 
We ended up with--I think it is the shallowest and shortest 
recession since the Second World War. So I think it was the 
right medicine at the right time and the consequences were 
obvious. The Congress, by taking the steps you did, put us on a 
much faster recovery than would have been the case otherwise. 
That means lots of additional jobs and lots less misery for a 
lot of people.
    Mr. Ford. Mr. Chairman, I didn't actually suggest that 
there has been no impact, if I can indulge for one moment. I 
was only making the point--two points. One, there is an 
estimated $278-billion less that--$278-billion less of an 
impact on the bottom line, and there was a lot of impact on 
what the package that was passed in 2001 would accomplish. Now 
if I am hearing correctly, instead of losing by five 
touchdowns, we lost by three. Might have covered the spread, 
but we still lost. And the only point I was trying to make, I 
still want an answer from you, Mr. Chairman, and maybe you have 
answered it already, but from the Secretary, is there a belief 
in the White House about what Mr. Hubbard said, that the cost 
of this tax cut, that the economic surge could offset 40 
percent of the plan's cost? I think that is a pretty 
significant offset.
    Chairman Nussle. Did he say ``could''? What is the quote?
    Mr. Ford. ``White House official says economic surge could 
offset----''
    Chairman Nussle. Could?
    Mr. Ford. Clearly----
    Chairman Nussle. Not definite, not ``I am betting my house 
on it,'' but ``could?'' Why isn't that fair to say that could 
be the case? Using your analogy, using the analogy of the 
gentleman walking through the grocery store buying food and 
that it has no impact at the end of the counter, doesn't 
recognize, but it does have an impact because at the end of the 
day hopefully he has had dinner and hopefully his stomach is 
full. So there was an impact.
    Mr. Ford. Walking through the grocery store and hoping that 
things go on sale before you arrive at the counter is my point. 
I am only telling you what the man said. Now if you agree--I am 
asking the Secretary. If you agree with Mr. Hubbard in his 
characterization that it could be offset by 40 percent, there 
is no need to be defensive with me. You and I represent people 
we have to go home and explain this to.
    Chairman Nussle. Let me reclaim my time and answer your 
question. Yes, it could.
    Mr. Ford. Fair enough.
    Chairman Nussle. And let me continue to reclaim my time and 
suggest to you that I don't believe that dynamic scoring which, 
A, nobody can yet define and, B, there aren't any models that 
anyone that I am aware of is yet ready to roll out and suggest 
this is the be all and end all economic model. But to suggest 
what we currently suggest, that fiscal Government policy has no 
impact--no impact on today, tomorrow, the next year, 10 years 
from now--is living in an unbelievable vacuum that I don't 
think is realistic either. But to be able to predict it, no, I 
think you are correct and that is why we share, whether it is 
bipartisan or whatever, is that we need better, more accurate 
scorekeeping and more accurate estimates as we look at today, 
tomorrow and the future.
    Mr. Ford. Do you think Mr. Hubbard, who holds a fairly 
significant position at the White House, him making this 
comment that it could cost $278-billion less, but could that 
influence some of you and our colleagues here in the Congress? 
Could it have us believe that this thing won't cost as much and 
somehow or another----
    Chairman Nussle. Why is it unfair for us to consider--let 
me just ask it back. Why is it unfair for us to consider 
whether this could affect us in a positive way when I have been 
hearing all day for the last 2 days how it could not from your 
side; that it may not; that it may be the worst medicine? If 
you could look at the positive, you can look at it from the 
negative.
    Mr. Ford. I am holding fast to the notion that could not. 
But I wanted to get Secretary Snow on record as saying that he 
believed that he could.
    Chairman Nussle. Reclaiming my time, that is why we have 
budgets. That is why we have plans. That is why we have 
parties. That is why we have votes. And that is why we need to 
have this discussion and we need to put our plans on the table. 
We hope to see a plan from your side. We have seen the plan 
from the President. We hope to see a plan from your side and 
then we will be able to make a decision.
    Mr. Spratt.
    Mr. Spratt. Three quick points. If I could, Mr. Secretary, 
give you a handwritten request for some additional information. 
I just had no other method other than to hand write it out. We 
would like some backup data about the assumptions about the 
revenues that will be gained or realized from your new savings 
proposals and then the revenue losses that will ensue as these 
tax shelters build up and accumulate. I think your 5-year 
summary is that it will generate $14 billion in revenues over 
10 years. We would like the assumptions you are making about 
who will transfer out of traditional vehicles into new 
vehicles.
    Second point, I could offer as a witness, but ask the 
former chief economist of OMB who is sitting right behind me, 
Joe Minarik, who has been in this budget process for 20-odd 
years, and he will tell you that OMB does consider the 
behavioral effects of various economic policies in putting 
their documents together. They don't get into alchemy. They 
don't get into magic elixirs and things like that. They take 
very basic views, which is what we want them to do. There is a 
passage from David Stockman about how the first cut on the 1981 
tax cuts was treated, where the bottom line came out and he 
gave it to Mary Wheatenbaum and said what can we do about this, 
we can never sell that, and Mary Wheatenbaum says I can take 
care of it right here. That is where the assumptions will come 
from. Very gut judgments. We don't want that, OMB, Treasury or 
CBO or anywhere else. We want very, very basic assumptions that 
have been demonstrable in the past from other fiscal policies.
    And finally, Mr. Chairman, as we spoke, the Treasury issued 
a bulletin indicating that the Government is about to run out 
of borrowing authority by February 20, according to the 
Treasury's forecast. They will hit the ceiling and will have to 
engage in some stopgap practices in order to keep going. I 
doubt that we will get anything about that around here by 
February 20, but I am concerned that this is a sign of things 
to come. It may not be the last time we will have to raise the 
debt ceiling.
    Mr. Ford. I would still be curious. I know Mr. Nussle has 
answered, but I would be curious to know at some point after 
you have had an opportunity to review Mr. Hubbard's estimation 
about what could happen, I would be curious to know your 
thoughts, if you share his belief that an economic surge could 
offset 40 percent of the $695 billion tax cut proposals. I know 
you said you hadn't had a chance to look at it. I would 
appreciate if you would be able to respond to that.
    [The information referred to follows:]

   Mr. Snow's Response to Mr. Ford's Question Regarding the Tax Cut 
                                Proposal

    I believe the extra economic growth produced by the 
administration's Economic Growth Package will offset a significant 
portion of the official budget estimate of its cost. A study released 
by the Business Roundtable shows the tax cut will offset one-third of 
the official cost estimate, with most of the offset generated by the 
dividend proposal. A simulation run by the Council of Economic Advisers 
suggests revenue from extra economic growth could offset about half of 
the official cost of the proposal during the 2003-07 period.
    The tax cut will reduce the cost of capital for corporate equity 
investments, leading to an increase in the stock of corporate capital. 
By reducing tax distortions, it will also enhance the efficiency with 
which capital is allocated. Other potential gains from the tax cut 
include those from lower debt ratios, more appropriate corporate payout 
ratios, higher labor supply, and greater investment by small 
businesses.

                                       COMPARISON OF ECONOMIC ASSUMPTIONS
                                                [Calendar years]
----------------------------------------------------------------------------------------------------------------
                                                                  Projections                           Average
                                         -----------------------------------------------------------------------
                                            2003      2004      2005      2006      2007      2008      2003-08
----------------------------------------------------------------------------------------------------------------
Real GDP (billions of 1996 dollars):
    CBO January.........................    9,673    10,018    10,358    10,697    11,037    11,380   ..........
    Blue Chip Consensus January \2\.....    9,704    10,050    10,383    10,709    11,041    11,384   ..........
    2004 Budget.........................    9,710    10,061    10,414    10,760    11,102    11,446   ..........
Real GDP (chain-weighted):\1\
    CBO January.........................      2.5       3.6       3.4       3.3       3.2       3.1         3.2
    Blue Chip Consensus January \2\.....      2.8       3.6       3.3       3.1       3.1       3.1         3.2
    2004 Budget.........................      2.9       3.6       3.5       3.3       3.2       3.1         3.3
Chain-weighted GDP Price Index:\1\
    CBO January.........................      1.6       1.7       2.0       2.1       2.1       2.2         2.0
    Blue Chip Consensus January \2\.....      1.6       1.9       2.1       2.1       2.1       2.1         2.0
    2004 Budget.........................      1.3       1.5       1.5       1.7       1.7       1.8         1.6
Consumer Price Index (all urban):\1\
    CBO January.........................      2.1       2.2       2.5       2.5       2.5       2.5         2.4
    Blue Chip Consensus January \2\.....      2.2       2.2       2.5       2.6       2.5       2.5         2.4
    2004 Budget.........................      2.2       2.1       2.1       2.2       2.2       2.3         2.2
Unemployment rate:\3\
    CBO January.........................      5.9       5.8       5.4       5.3       5.3       5.2         5.5
    Blue Chip Consensus January \2\.....      5.9       5.5       5.1       5.1       5.1       5.1         5.3
    2004 Budget.........................      5.7       5.5       5.2       5.1       5.1       5.1         5.3
Interest rates:\3\
91-day Treasury bills:
    CBO January.........................      1.4       3.5       4.8       4.9       4.9       4.9         4.1
    Blue Chip Consensus January \2\.....      1.6       2.9       4.2       4.4       4.6       4.4         3.7
    2004 Budget.........................      1.6       3.3       4.0       4.2       4.2       4.3         3.6
10-year Treasury notes:
    CBO January.........................      4.4       5.2       5.6       5.8       5.8       5.8         5.4
    Blue Chip Consensus January \2\.....      4.4       5.2       5.6       5.8       5.7       5.7         5.4
    2004 Budget.........................      4.2       5.0       5.3       5.4       5.5       5.6         5.2
----------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; Aspen Publishers, Inc., Blue Chip Economic Indicators.
 
\1\ Year over year percent change.
 
\2\ January 2003 Blue Chip Consensus forecast for 2003 and 2004; Blue Chip October 2002 long run for 2005-08.
 
 \3\ Annual averages, percent.

    Chairman Nussle. Mr. Davis.
    Mr. Davis. I don't want to weigh into this debate, but I 
want to take advantage of your expertise to clarify something 
for myself here. When we talk about or when I have read a lot 
about these notions of dynamic scoring, for some reason it 
seems that the debate seeks to estimate the economic impact of 
fiscal policy, of tax cuts, things of that nature. Can you shed 
some light for me, Mr. Secretary, about why these theories of 
dynamic scoring don't estimate the impact of, say, more 
spending on things such as education and health care, because 
it is my uninformed theory since I am not an economist, it is 
my theory that those things have some effect on the health of 
our economy as well, but it seems that people who engage the 
dynamic scoring issue don't focus on the potential economic 
impact from those things?
    Secretary Snow. I think, and I don't pretend to be an 
authority on this subject, I agree with the chairman that what 
we ought to do is do accurate scoring. But accurate scoring 
ought to take into account the way people respond, and people 
do respond to tax incentives.
    Just a little story, I was in Beaufort, SC just last 
weekend and the historian was showing my wife and me and some 
friends around Beaufort. Beaufort is a unique city because it 
was occupied all during the war and the people left early in 
the Civil War and the antebellum homes are maintained. It was 
never destroyed. And on this tour, the historian pointed out 
the various houses and noted that a number of these houses 
didn't have any doors and that was curious. We asked him why. 
He said it was the first tax shelter. He said Beaufort in those 
days taxed houses by the number of doors, so people put in 
windows.
    Mr. Chairman, just an illustration of the point, Tax Code 
is noted by people and they adjust their behaviors in 
accordance with it.
    Mr. Davis. I do want to make one point before I yield the 
floor, Mr. Secretary. I have no doubt that that is true at some 
level, but the point I will leave you with is this. As we look 
at the priorities facing our country that it seems to me if we 
make the adequate investments in health care, if we make the 
adequate investments in education, that too will have an impact 
on people's behavior, because it will do one very fundamental 
thing. It will move people who have been at the margins of our 
economy into a more secure position, the middle class. It will 
ratchet up people's economic power, and I will leave you with 
the observation that that is something we should take into 
account.
    Chairman Nussle. Mr. McCotter.
    Mr. McCotter. Quickly, I agree with that, but I think that 
the best way for people to come off the margins is to make more 
money and keep it and make the decisions on how to invest that 
money in their own lives through their family budgets. And the 
good news for the good Representative from Memphis, I was at 
the grocery store last night, and I am living a bachelor's life 
with my wife 500 miles away and I decided that ice cream was 
two for five bucks. I have a sweet tooth, what can I say? I go 
up to the counter and it dawns on me it is two for $5 if you 
have a bonus card for the grocery store. I immediately altered 
my behavior given the economic conditions to save myself about 
$2.50, and I am now a member of that grocery store's bonus 
club. So I think that economic decisions even down to the 
micro, micro----
    Mr. Ford. You maybe ought to get Mr. Hubbard and Mr. Snow 
one of those bonus cards, too.
    Mr. McCotter [continuing]. And everyone's decisions are 
affected economically by the conditions in which they find 
themselves. The trouble we are having is not really an argument 
or a debate between you and Chairman Nussle. I think in many 
ways the reason we get economic forecasts that we find to be 
suspect or debatable is the same reason that every economic 
forecaster is not a very, very wealthy person. No one is right 
100 percent of the time, and we have to make our best, most 
educated guess, whether it is dynamic, static or whatever, but 
primarily the needs of our constituents.
    Chairman Nussle. Mr. Secretary, we always save the best 
discussion for last and I think that you have seen a little bit 
of our interests here today on the Budget Committee, and we 
very much appreciate you spending the time that you have with 
us when you certainly could be getting settled at your office. 
So we wish you Godspeed in your new position. I would commend 
to you that estimations--certainly I think you have heard here 
today--are an important priority and you work for the 
President, not necessarily the Congress, but if we could put it 
on your ``to do'' list, that would greatly assist us and, 
secondly, just to give you encouragement as a fellow tax 
reformer, be bold, don't shy away. Even though you may not see 
the light at the end of the tunnel just yet, there are many of 
us who are looking to you and others for leadership in this 
regard, so be bold with regard to tax reform. I think it is 
important at this juncture in our Nation's history.
    I appreciate your time, and we look forward to the time we 
will spend together in the future.
    Secretary Snow. Thank you very much. I look forward to 
being invited back.
    Chairman Nussle. With that, the hearing is adjourned.
    [Whereupon, at 1:50 p.m., the committee was adjourned.]

                                
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