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



 
      PRESIDENT'S FISCAL YEAR 2005 BUDGET WITH OMB DIRECTOR BOLTEN

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 11, 2004

                               __________

                           Serial No. 108-39

                               __________

         Printed for the use of the Committee on Ways and Means






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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.





                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                                WITNESS

Office of Management and Budget, Hon. Joshua B. Bolten, Director.     8

                       SUBMISSION FOR THE RECORD

Credit Union National Association, Inc., statement...............    44


      PRESIDENT'S FISCAL YEAR 2005 BUDGET WITH OMB DIRECTOR BOLTEN

                              ----------                              


                      WEDNESDAY, FEBRUARY 11, 2004

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:15 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 25, 2004
FC-12

                      Thomas Announces Hearing on

                President's Fiscal Year 2005 Budget with

                          OMB Director Bolten

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's budget proposals for fiscal year 2005 within the 
jurisdiction of the Committee on Ways and Means. The hearing will take 
place on Wednesday, February 4, 2004, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 10:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable Josh Bolten, 
Director, Office of Management and Budget (OMB). However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On January 20, 2004, President George W. Bush delivered his State 
of the Union address in which he outlined numerous budget and tax 
proposals. The details of these proposals are expected to be released 
on February 2, 2004, when the President is scheduled to submit his 
fiscal year 2005 budget to the Congress.
      
    In announcing the hearing, Chairman Thomas stated, ``I look forward 
to Director Bolten's appearance before the Committee to hear details of 
the President's budget and policy initiatives.''
      

FOCUS OF THE HEARING:

      
    OMB Director Bolten will discuss the details of the President's 
budget proposals that are within the Committee's jurisdiction.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person or organization wishing to submit written 
comments for the record must send it electronically to 
hearingclerks.waysandmeans@ mail.house.gov, along with a fax copy to 
(202) 225-2610, by close of business, Wednesday, February 25, 2004. In 
the immediate future, the Committee website will allow for electronic 
submissions to be included in the printed record. Before submitting 
your comments, check to see if this function is available. Finally, due 
to the change in House mail policy, the U.S. Capitol Police will refuse 
sealed-packaged deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

               * * * NOTICE CHANGE IN DATE AND TIME * * *

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 03, 2004
FC-12-REV

               Change in Date and Time for Hearing on the

                President's Fiscal Year 2005 Budget with

                          OMB Director Bolten

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee hearing on the 
President's fiscal year 2005 budget with OMB Director Bolten, scheduled 
for Wednesday, February 4, 2004, at 10:30 a.m., in the main Committee 
hearing room, 1100 Longworth House Office Building, will now be held on 
Wednesday, February 11, 2004, at 2:00 p.m.
      
    All other details for the hearing remain the same. (See full 
Committee Advisory No. FC-12, dated January 26, 2004.)
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person or organization wishing to submit written 
comments for the record must send it electronically to 
hearingclerks.waysandmeans@ mail.house.gov, along with a fax copy to 
(202) 225-2610, by close of business, Wednesday, February 25, 2004. In 
the immediate future, the Committee website will allow for electronic 
submissions to be included in the printed record. Before submitting 
your comments, check to see if this function is available. Finally, due 
to the change in House mail policy, the U.S. Capitol Police will refuse 
sealed-packaged deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

                                 

    Chairman THOMAS. We will ask our guests to find a seat, 
please.
    Good afternoon. Today we continue our series of hearings to 
examine the President's fiscal year 2005 budget. In this 
session, we are honored to have the Office of Management and 
Budget (OMB) Director, Josh Bolten, I believe testifying for 
the first time in our Committee in your capacity.
    Thank you for coming. We look forward to your testimony, 
and probably Members are more interested in a more intimate and 
direct discussion of some of the particulars of the President's 
budget.
    It is always useful to talk to someone like a Secretary, 
Secretary Snow, on this occasion, but oftentimes, the 
discussion does not get to the level of some of the mechanical 
aspects of the President's budget that this Committee is going 
to have to grapple with.
    We were very pleased to hear from the Secretary in terms of 
the positive benefits of the economic policies pursued by this 
Administration in concert with Congress. We have seen the 
economy growing at a very robust rate. We have seen the 
unemployment rate drop, frankly, significantly; it is not low 
enough, but when I was in college, 6 percent was full 
employment, and it is no longer a criterion that we apparently 
use the old Humphrey-Hawkins Act (P.L. 95-523), it is something 
less than that, but certainly--it has begun a dramatic 
turnaround, but that is obviously not enough.
    We need to continue to build the economy, to make sure that 
every American who wants a job has a job and that some of the 
changes that we have made in the Tax Code continue to be 
available for Americans.
    I do commend the President's budget plan to help reduce the 
deficit through spending restraint. Everybody talks about it. 
It is a little harder to do it, but it is our responsibility to 
make sure that the tax dollars from the American people that we 
spend are spent as wisely as we possibly can.
    I do want to commend the Members of this Committee in 
comparison to other committees. Sometimes you run against the 
clock, sometimes you run in comparison with what others do. 
Frankly, our Committee has made great strides in eliminating 
waste, fraud, and abuse within programs in our jurisdiction. 
Last year, the Committee on Ways and Means eliminated over $32 
billion which--I think we can find it did not have a major 
impact on any program. I would not say it was all wasteful 
spending, but sometimes spending that isn't necessary in 
today's conditions needs to be closely examined as well.
    As a matter of fact, today on the floor there will be a 
discussion, and there will be some Members who will be with 
us--not with us as we carry out that discussion on H.R. 743, 
the Social Security Protection Act, which will be another step 
forward in reducing waste, fraud, and abuse in the Social 
Security system.
    So, Mr. Bolten, it is nice to have you with us, and we look 
forward to an informative dialogue. The gentleman from New York 
is not yet back from voting. I would recognize the gentleman 
from Michigan, if he wishes to make an opening statement for 
the Minority.
    [The opening statement of Chairman Thomas follows:]
    Opening Statement of the Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California
    Good afternoon. Today, we continue our series of hearings examining 
the President's Fiscal Year 2005 Budget. We are honored to have Office 
of Management and Budget Director Josh Bolten testifying for the first 
time before our Committee. Thank you for coming, and we look forward to 
hearing your testimony.
    As we discussed last week with Treasury Secretary Snow, the U.S. 
economy is reaping the positive results of President Bush's sound 
economic policies. We have seen signs of mounting strength: the economy 
grew at a robust rate of 4.3 percent last year, while the unemployment 
rate dropped from a recent high of 6.3 percent in June to just 5.6 
percent last month as more Americans found good jobs.
    Despite this positive news, our work is not complete. We need to 
build on the economic growth we have already achieved. I share the 
President's desire to make the tax relief enacted in 2001 and 2003 
permanent. Failure to extend this relief would not only be an unwelcome 
tax hike on working Americans, but would also shift the recovering 
economy into reverse.
    I commend the President's plan to reduce the deficit through 
spending restraint. It is crucial we take an honest look at how the 
government uses taxpayer dollars to ensure they are spent wisely.
    On a budgetary note, this Committee has made great strides in 
eliminating waste, fraud and abuse within programs in our jurisdiction. 
Last year, the Ways and Means Committee eliminated over $32 billion of 
wasteful spending in Medicare as part of the new prescription drug 
bill. And [today/later this week], the House is expected to pass H.R. 
743, the Social Security Protection Act, which also will reduce waste, 
fraud and abuse in Social Security. This Committee is dedicated to 
eliminating wasteful spending.
    I now recognize the gentleman from New York, Mr. Rangel, for any 
opening statement he may have.

                                 

    Mr. LEVIN. First of all, welcome. We are all eagerly 
looking forward to your testimony and our ability to inquire. I 
would ask that any statement that Mr. Rangel have be entered 
into the record.
    [The opening statement of Mr. Rangel follows:]
 Opening Statement of the Honorable Charles B. Rangel, Ranking Member, 
      and a Representative in Congress from the State of New York
    Mr. Chairman, I join you in welcoming Josh Bolten. This is the 
first time this Budget Director has appeared before our Committee, and 
we are most pleased you have agreed to spend some time with us.
    On NBC's Meet The Press, President Bush called himself a ``war 
president.'' In his State of the Union address, he said, ``I will send 
you a budget that funds the war, . . .''
    Instead, the budget we received did NOT include funding for the on-
going operations in Iraq and Afghanistan. Of course, there is a section 
labeled ``Winning the War on Terror,'' and it contains pictures of 
brave soldiers, airplanes and ships, and the press conference on Saddam 
Hussein's capture. But nowhere is there a mention of the costs of the 
war--fiscal and otherwise.
    When I asked Secretary O'Neill why such an important cost was left 
out, he said, ``Because the costs aren't known at this time . . . it's 
impossible to lay them out with any precision.'' and ``That we could 
give you a better number on that once we're much closer to the real 
facts there.''
    That answer is similar to one you (Josh Bolten) gave the press the 
day before: ``[I]t's not appropriate to put a number in there, because 
we don't know what it's going to be. It's going to be requested in 
supplemental funding.''
    So, the Administration clearly feels that if the costs cannot be 
determined, then we should assume they are zero and not include them in 
the budget.
    Most businesses and families would never budget that way. If a 
family has a child who will need an operation and, as is likely, the 
family's health plan does not fully cover it, that family will try to 
save every penny to pay for the surgery even if they don't know exactly 
how much it costs. They won't throw up their arms and say they don't 
know and take a vacation with their extra money.
    Instead, though, this budget denies the very existence of the war 
and creates a new way of keeping down opposition to military action. 
From this day forward, when an Administration decides it is politically 
inconvenient to show the cost of war, it simply takes them ``off-
budget'' until after the next election.
    So when the President says, ``I know that some people question if 
America is really in a war at all,'' I know he is not talking about the 
families of the 530 soldiers killed and more than 2000 injured in Iraq. 
They know we are at war no matter what the budget says.
    The Iraq war is not the only thing left out of this budget.

      The President wants to divert Social Security funds into 
individual accounts, but nowhere in the budget is the over $1 trillion 
needed for the transition alone.
      The cost of extending tax cuts is only partly counted. 
The $1 trillion 10-year cost ignore that the AMT will take back much of 
the Bush tax cuts, unless we fix it at a cost of roughly $700 billion.
      The President talks about going to Mars but again nothing 
is included in the budget for this trip, estimated by the press to cost 
another $700 million.

    When the Bush Administration took over in January 2001, the 10-year 
budget surplus for 2002-11 was projected to be over $5.6 trillion. Now, 
according to CBO's latest report (released Jan. 26th), that $5.6 
trillion surplus has deteriorated to a nearly $2.9 trillion deficit--a 
turnaround of eight and a half trillion dollars.
    We have to add to that deficit the projected shortfalls you ignore, 
including the full tax cut extensions, fixing the AMT, privatizing 
Social Security, and going to Mars. Then, we are on track to double the 
national debt in ten years.
    I know the Administration has been bragging about cutting in half 
the annual deficit within five years. But that's like catching a robber 
who tells you not to call the cops because, tomorrow, he'll steal half 
what he did today.
    The record deficit is so large today that, even if you could cut it 
in half (which you cannot if you actually carry out the policies you 
talk about), it will still be higher than the worst deficit of the 
Reagan years.
    And how do you propose to shrink the amount that you steal from 
future generations every year? Cut spending for everything except 
defense:

      You eliminate 38 programs for educating our kids, 
underfund ``No Child Left Behind,'' and cut vocational education by 
25%.
      You cut Medicaid funding and leave states even more 
strapped to provide health care for citizens.
      You provide $13\1/2\ billion less than is needed over 
five years to maintain the current level of health care for veterans.

    These cuts hit public school children, public hospitals and 
veterans hard, they barely put a dent in the deficit.
    These cuts will overwhelmingly affect middle- and low-income 
communities--the same communities that provide most of the troops in 
Iraq. Many of these soldiers have served their nation before and have 
been called back up from the National Guard or Reserve. Some of our 
volunteers have been forced to stay on much longer than the original 
tour that they volunteered for. This is taking its toll on families--
people losing their marriages, their careers, their homes.
    The lower- and middle-income citizens of this nation have been 
asked to make financial sacrifices as well. We have had 42 straight 
months of declines in manufacturing jobs for a total of more 2.6 
manufacturing jobs gone since President Bush took office. Whole towns 
and cities of working Americans are in trouble.
    Lower- and middle-income Americans received only a small fraction 
of the Bush tax cuts. Yet, they have had to pay a relatively high 
proportion of the increases in state and local taxes created by added 
homeland security and health care costs combined with Bush budget cuts.
    So, we have a budget which exacts large sacrifices from the 
millions and millions of American families who are living from day-to-
day. The same families that provide our soldiers, and the same families 
that mourn our war dead.
    This budget not only denies the war in Iraq by not including a 
single dollar for it, but it denies any need for shared sacrifice.
    This budget contains talk about going to Mars but there is no plan 
to get our brave troops home from Iraq.
    The budget contains more tax breaks for the wealthy but no mention 
whatsoever of the more fortunate sharing some of the burden of paying 
for war.
    Big companies such as Haliburton and Bechtel salivate at the 
budget's mention of ``Re-building Iraq and Afghanistan,'' but there is 
not even a mention of re-building our communities in America.
    Mr. Bolten, if the Administration insists on keeping the country at 
war and maintaining his doctrine of attacking any country that, as the 
President says ``had the capacity to make a weapon'' than it is not 
acceptable to ignore the costs. It is unfair to expect only certain 
segments of society--the lower- and middle-income families in cities 
and small towns--to send their children to war and make all the 
sacrifices while the wealthy and certain companies get a financial 
windfall.
    Instead of denying the war, we need a budget that calls for shared 
sacrifice.

                                 

    Chairman THOMAS. Without objection.
    Mr. LEVIN. Sir, let me just say briefly why we have looked 
forward to your testimony. You have been in a different hot 
seat, but it has been fairly hot in other places, and I think 
you can expect there will be some heat and, I hope, light here.
    You are coming here, presenting a budget that has a record 
deficit. We heard this morning testimony from the U.S. 
Department of the Treasury about a number of matters, including 
the alternative minimum tax (AMT).
    The response to the AMT problem is really not embedded in 
this budget of yours, and while there is a difference of 
opinion as to how much it will cost, we are talking about, 
likely, hundreds of billions of dollars.
    I was reading in the paper this morning about the testimony 
from some of our military experts and their chagrin that there 
is no, no provision in this budget for supplemental 
expenditures that are surely to happen and are likely to be $40 
to $50 billion, so you have a historically high budget deficit 
with some omissions.
    I know there has been a temptation to minimize this, and I 
was handed Mr. Greenspan's testimony earlier today, where he 
said the fiscal issues that we face pose long-term challenges, 
but Federal budget deficits could cause difficulties even in 
the relative short-term. I came across, and I mentioned it 
earlier today, some less diplomatic statements by a former 
official in the government--he was in the Reagan 
Administration--who said this about your budget, Mr. Director, 
``I despair about this budget. I do not think Bush is being 
honest with the world. I am not sure he is being honest with 
himself.'' That is the statement of William Niskanen.
    So, we look forward to your testimony, and you can expect, 
I would hope from Republicans as well as Democrats, some 
searching, if not searing, questions about your budget. So, 
with that, welcome.
    Chairman THOMAS. Thank the gentleman. Mr. Director, your 
testimony will be made a part of the record and you can address 
us in any way you see fit in the time sufficient.

 STATEMENT OF THE HONORABLE JOSHUA B. BOLTEN, DIRECTOR, OFFICE 
                    OF MANAGEMENT AND BUDGET

    Mr. BOLTEN. Thank you, Mr. Chairman. Thank you, Mr. Levin, 
for that warm welcome. Distinguished Members of the Committee, 
the President's 2005 budget, which was transmitted to the 
Congress last week, continues to support and advance three 
overriding national priorities--winning the war on terror, 
protecting the homeland, and strengthening the economy.
    The President is committed to spending what is necessary to 
provide for our security and restraining spending elsewhere. 
Since September 11, 2001, more than three-quarters of the 
increase in the Federal Government's discretionary spending has 
been directly related to our response to the attacks, enhanced 
homeland security, and the war on terror. The President's 2005 
budget continues this spending trend: significant increases in 
essential funding for our security programs, combined with a 
dramatic reduction in the growth of discretionary spending 
unrelated to security.
    With your support in enacting this budget into law, we will 
be well on the path to cutting the deficit in half within 5 
years.
    Mr. Chairman, at OMB, we found it useful to divide the 
discretionary budget into three broad categories shown on the 
chart to my right, to the left of the dais. The categories are 
defense, which is basically the U.S. Department of Defense, 
homeland security, which is not congruent with the U.S. 
Department of Homeland Security. About two-thirds of the 
Department qualifies as real homeland security spending, but 
there are also other Departments' activities reflected there; 
notably, the U.S. Department of Health and Human Services 
(HHS), the U.S. Department of Justice, and the U.S. Department 
of Agriculture have significant homeland security spending 
elements to them. Then the third block on the right is 
everything else, which we refer to as non-defense, non-homeland 
discretionary spending.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] 94729A.001
    

                                 

    The President's 2005 budget is reflected in the yellow bars 
in those three categories, and what you will see is that the 
budget increases defense spending by 7 percent to support our 
men and women in uniform, by nearly 10 percent for homeland 
security spending, and it holds the rest of discretionary 
spending to half of 1-percent growth--that is significantly 
less than half the rate of inflation--while continuing to 
increase funding for key priorities, such as the President's No 
Child Left Behind (P.L. 107-110) education reforms.
    The President's budget is built on the sensible premise 
that government spending should grow no faster than the average 
increase in American family incomes, which is approximately 4 
percent. This 2005 budget proposes to hold the growth in total 
discretionary spending to 3.9 percent and again to reduce the 
growth in non-defense, non-homeland security spending to half 
of 1 percent, well below the rate of inflation.
    In the last budget year of the previous Administration, 
discretionary spending unrelated to defense or homeland 
security soared by 15 percent. That is reflected in the green 
bar in the far right column.
    With the adoption of the President's first budget, that 
growth rate was reduced to 6 percent, then 5 percent the 
following year, 4 percent for the current fiscal year, 
reflected in the appropriations that you all adopted just a 
couple of months ago, and then in the President's 2005 proposal 
down below 1 percent.
    The President's budget builds on the program of economic 
policies that have laid the foundation for the economic 
recovery now under way and for sustained economic growth and 
job creation in the years ahead.
    Mr. Chairman, the tax cuts that you were so instrumental in 
seeing to enactment have been critical to achieving the 
President's priority of strengthening the economy and creating 
jobs. Perhaps the best-timed in American history, these deserve 
much credit for today's brightening economic pictures. I will 
not go through all of the elements, but I will note that the 
last half of last year had the largest growth in gross domestic 
product (GDP) in 20 years.
    All of the indicators suggest that job growth, which 
typically lags recovery, should continue to strengthen in the 
months ahead. The President will not be satisfied, however, 
until every American who wants a job can find a job, so this 
budget supports the President's six-point plan for economic and 
jobs growth, including making permanent the tax relief that has 
fueled our economic recovery.
    The sustained growth that this budget supports will be good 
news for our budget picture, as well. As the economy improves, 
Treasury revenues will, as well.
    Like America itself, the Federal budget has faced 
extraordinary challenges in recent years: a stock market 
collapse that began in early 2000, a recession that was fully 
under way in early 2001, revelations of corporate scandals 
years in the making, and of course, the September 11th attacks 
and the ensuing war on terror.
    With Treasury receipts only beginning to reflect a 
recovering economy and major ongoing expenditures in Iraq, 
Afghanistan, and elsewhere in the war on terror, we still face 
a projected deficit of $521 billion for the 2004 fiscal year. 
That size deficit, at 4.5 percent of GDP, is not historically 
out of range. Deficits have been this large or larger in 6 of 
the last 25 years, including a peak of 6 percent in 1983.
    Under the circumstances that created it, today's deficit is 
certainly understandable, but that deficit is also undesirable 
and unwelcome, and enactment of this budget will bring it down.
    With continuation of the economic growth policies and sound 
spending restraint reflected in this budget, our projection 
shows the deficit will be cut by more than half over the next 5 
years. We will see that on the chart that is now being 
displayed. You see that in 2004 we are showing a deficit of 
about 4.5 percent of GDP. You see it coming down dramatically 
after that.
    We are projecting $364 billion of deficit in 2005, which is 
about 3 percent of GDP. The reductions build up speed 
thereafter and fall as low as 1.6 percent of GDP by 2009. That 
is not only well below its current, 4.5-percent level; it is 
also well below the 2.2 percent average deficit during the last 
40 years. That is the black line that is reflected on that 
chart. The average Federal budget deficit is 2.2 percent over 
the last 40 years, and our projections show that with 
implementation of the President's policies, we will fall well 
below that average over the next 5 years.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] 94729A.002
    

                                 

    This deficit reduction is the combined effect of economic 
growth and spending restraint. The spending restraint reflected 
in the budget is not automatic, so we are also proposing new 
statutory budget enforcement mechanisms, establishing in the 
law limits on both discretionary and mandatory spending, and 
requiring that any increase in spending be paid for by spending 
offsets.
    We plan to transmit legislation to the Congress that has 
three elements: first, the reinstatement of the caps on 
discretionary spending for 5 years, through 2009; second, the 
pay-as-you-go requirement, limited to new mandatory spending; 
and third, measuring the long-term, underfunded obligations of 
major entitlement programs and proposing a 60-vote hurdle in 
the Senate for legislation that would expand these obligations.
    I look forward to working with the Congress and 
particularly some of the Members of this Committee to gain 
enactment of these proposals to restrain spending.
    Finally, Mr. Chairman, the President is keeping his 
Administration focused on what the American people care about, 
and that is results. The measure of government's success is not 
how much we spend, but rather how much we accomplish. This 
budget includes a scorecard that measures the progress agencies 
are making in achieving results, so that the government 
continues to be accountable to the taxpayers.
    Since President Bush took office, our Nation has confronted 
a cascading set of challenges. The President and this Congress 
responded on all fronts, with tax relief to get the economy 
going, the largest reorganization of the Federal Government in 
50 years to create a new Department of Homeland Security, and 
the largest increases in the defense budget since the Reagan 
Administration to wage and win the war on terror.
    The President's 2005 budget builds on this record of 
accomplishment. With renewed economic growth and the Congress' 
cooperation in restraining spending and focusing it on our most 
critical priorities, we can accomplish the great goals the 
President has set for this country while dramatically improving 
the budget situation. I look forward to taking your questions.
    [The prepared statement of Mr. Bolten follows:]
   Statement of the Honorable Joshua B. Bolten, Director, Office of 
                         Management and Budget
    Chairman Thomas, Ranking Member Rangel, and distinguished members 
of the Committee, the President's 2005 Budget, which was transmitted to 
the Congress on February 2nd, continues to support and advance three 
overriding national priorities: winning the war on terror, protecting 
the homeland, and strengthening the economy.
    The President is committed to spending what is necessary to provide 
for our security--and restraining spending elsewhere. Since September 
11, 2001, more than three-quarters of the increase in the Federal 
Government's discretionary spending has been directly related to our 
response to the attacks, enhanced homeland security, and the War on 
Terror. The President's 2005 Budget continues this spending trend: 
significant increases in essential funding for our security programs, 
combined with a dramatic reduction in the growth of discretionary 
spending unrelated to security. With your support in enacting this 
budget into law, we will be well on the path to cutting the deficit in 
half within five years.
    The President's Budget:

      Increases defense spending by 7 percent to support our 
men and women in uniform and transform our military to ensure America 
has the best trained and best equipped armed forces in the world;
      Increases homeland security spending by nearly 10 percent 
to strengthen capabilities created to prevent future attacks; and
      Holds the rest of discretionary spending to half of one 
percent growth--less than half the rate of inflation--while continuing 
to increase funding for key priorities such as the President's No Child 
Left Behind education reforms.

    The President's Budget is built on the sensible premise that 
Government spending should grow no faster than the average increase in 
American family incomes of approximately four percent. This Budget 
proposes to hold the growth in total discretionary spending to 3.9 
percent and, again, to reduce the growth in non-defense, non-homeland 
security spending to half of one percent, below the rate of inflation. 
In the last budget year of the previous Administration (2001), 
discretionary spending unrelated to defense or homeland security soared 
by 15 percent. With the adoption of President Bush's first budget 
(2002), that growth rate was reduced to six percent; then five percent 
the following year; and four percent for the current fiscal year.
    The President's Budget builds on the pro-growth economic policies 
that have laid the foundation for the economic recovery now underway, 
and for sustained economic growth and job creation in the years ahead.
    The tax cuts you enacted and were signed into law have been 
critical to achieving the President's priority of strengthening the 
economy and creating jobs. Perhaps the best timed in American history, 
these tax cuts deserve much credit for today's brightening economic 
picture, which includes:

      Nine consecutive quarters of positive growth through the 
end of 2003;
      The highest quarterly growth in 20 years--an 8.2 percent 
annual rate in the third quarter of 2003; and the highest growth for 
any six-month period in 20 years as well;
      Extraordinary productivity growth;
      Continued strength in housing starts and retail sales; 
and
      Encouraging signs of renewed business investment.

    These indicators suggest that job growth, which typically lags 
recovery, should continue to strengthen in the months ahead.
    The President will not be satisfied however until every American 
who wants a job can find a job. So this Budget supports the President's 
six-point plan for economic and jobs growth, including making permanent 
the tax relief that has fueled our economic recovery.
    The sustained growth that this Budget supports will be good news 
for our budget picture as well: As the economy improves, Treasury 
revenues will as well.
    Like America itself, the Federal budget has faced extraordinary 
challenges in recent years: a stock market collapse that began in early 
2000; a recession that was fully underway in early 2001; revelation of 
corporate scandals years in the making; and of course, the September 
11th attacks and ensuing War on Terror.
    With Treasury receipts only beginning to reflect a recovering 
economy--and major ongoing expenditures in Iraq, Afghanistan, and 
elsewhere in the War on Terror--we still face a projected $521 billion 
deficit for the 2004 fiscal year. That size deficit, at 4.5% of GDP, is 
not historically out of range. Deficits have been this large or larger 
in six of the last 25 years, including a peak of 6 percent in 1983.
    Under the circumstances that created it, today's deficit is 
certainly understandable. But that deficit is also undesirable and 
unwelcome, and with enactment of this Budget, we will bring it down. 
With continuation of the economic growth policies and sound spending 
restraint reflected in the Budget we released last week, our 
projections show the deficit will be cut by more than half over the 
next five years.
    This dramatic reduction begins in the fiscal year of this Budget, 
2005, for which we are projecting a deficit of $364 billion, roughly 
3.0% of GDP. The rapid deficit reductions continue in subsequent years, 
with our projections showing the deficit falling to 1.6 percent of GDP 
by 2009. This is not only well below half its current 4.5 percent 
level, it is also well below the 2.2 percent average deficit during the 
last 40 years.
    This deficit reduction is the combined effect of economic growth 
and spending restraint. As the economy recovers, tax receipts as a 
percentage of GDP rise to historical levels by the end of the budget 
window, while spending restraint keeps outlays flat or slightly 
declining as a share of GDP.
    The spending restraint reflected in this Budget is not automatic. 
So we are also proposing new statutory budget enforcement mechanisms, 
establishing in law limits on both discretionary and mandatory 
spending, and requiring that any increases in spending be paid for by 
spending offsets. We plan to transmit legislation to the Congress that 
has three elements:

      Reinstate caps on discretionary spending for five years 
through 2009.
      A pay-as-you-go requirement limited to new mandatory 
spending. Any proposed increase in mandatory spending would have to be 
offset by a reduction in mandatory spending. Tax increases could not be 
used as an offset and pay-go would not apply to tax legislation.
      Measure the long-term unfunded obligations of major 
entitlement programs and propose a 60 vote hurdle in the Senate for 
legislation that would expand these obligations.

    I look forward to working with this Committee to gain enactment of 
these proposals to restrain spending.
    Finally, the President is keeping his Administration focused on 
what the American people care about--results. The measure of 
government's success is not how much we spend, but rather how much we 
accomplish. This Budget includes a scorecard that measures the progress 
agencies are making in achieving results, so that the government 
continues to be accountable to the taxpayers.
    Since President Bush took office, our Nation has confronted a 
cascading set of challenges. The President and Congress responded on 
all fronts, with tax relief to get the economy going, the largest 
reorganization of the Federal Government in 50 years to create a new 
Department of Homeland Security, and the largest increases in the 
defense budget since the Reagan Administration, to wage and win the War 
on Terror. The President's 2005 Budget builds on this record of 
accomplishment. With renewed economic growth and the Congress' 
cooperation in restraining spending and focusing it on our most 
critical priorities, we can accomplish the great goals the President 
has set for the country, while dramatically improving our budget 
situation.

                                 

    Chairman THOMAS. Thank you very much. I do think it is 
important to send us a budget that clearly outlines the 
President's priorities, and I believe the President's 
priorities are in line with the general thrust and direction 
that this Congress should take, especially over this fiscal 
year.
    I do want to compliment you and the Administration you 
represent. When you understand that the product you create and 
present here is a top-down hierarchical agreement and what we 
produce is legislation, is a broad-based, as-little-as-possible 
additive process to reach quantitative majorities or we do not 
make law; you need to stick to your guns on what you think 
needs to be done, and we will, when you are right, be with you. 
When we face the fact of not passing needed legislation or 
adhering to some a priori position, we do want folks to 
appreciate and understand this particular institution, and the 
way it works.
    I guess that is the long way of saying I think we 
understand where we need to go, and we probably have a better 
chance of getting there if we do not start drawing lines in the 
sand right away. I want to compliment you and your 
Administration for not doing that, and if you have 
occasionally, the tide comes in, washes the line away and we 
get to draw another one, but that is the only way we can get 
through this very difficult period.
    There are a number of people who want to make statements 
for eternity. I would just like to get us through the 
responding economy, make sound policy where it is appropriate, 
and continue to help the American people carve a better life 
for themselves, so I am not going to bombard you with a lot of 
thick questions. I think some of my colleagues might. I just 
want to compliment you for taking on a job which, if anybody in 
the know would identify, those that you probably do not want in 
the Federal Government, yours would be high on the list.
    That does not mean I do not think you do not know. That is 
where I want to compliment you for taking on the job that you 
have, Josh. With that, I recognize the gentleman from New York, 
the Ranking Member, for any questions he may have.
    Mr. RANGEL. Thank you Mr. Chairman. Once again, I welcome 
you, Director Bolten, to this Committee.
    Last Sunday, I saw and heard the President say that he 
wanted to be known as the ``War President,'' and earlier, he 
said at the State of the Union that he would send us a budget 
that included the funding for the war. Yet we do not see any 
provisions in the budget for Iraq and Afghanistan.
    When we ask members of the Administration, they would say 
that they do not know what the costs would be and they do not 
want to just guess it, so we have to give an estimate that it 
will not cost anything.
    I have a deep concern that this war that we are engaged in 
is really not a question of shared sacrifice, because the 
priority is not given to those who are fighting the war and 
losing their lives, but those who are making the money and 
enjoying the tax cuts. So, it really surprises me where, at a 
time of crisis and a time of war, instead of advocating raising 
the funds to pay for the war, we are actually talking about 
giving tax cuts and further tax cuts that go beyond 2010.
    I am also concerned that there are no provisions for the 
AMT, because unless the Congress provides some type of relief 
or remedy for these people who got caught in this legislation, 
we will be giving them a $700 billion tax increase. The 
Administration said this should not happen, but they have not 
shared with us how we can fulfill their mandate to make this 
revenue neutral.
    I assume that the President has had second thoughts on 
financing a trip to Mars, but--it was mentioned in the State of 
the Union, but there was no provision made to fund for such an 
expedition.
    There is a lot of talk about fixing privatized and Social 
Security. I think the advocates for that will estimate it will 
take a trillion dollars for the transition, so maybe these are 
post-election issues that will be taken up later, but when the 
President states it in the State of the Union and stresses it 
in the budget and does not provide how you spend for it, some 
of us are very skeptical.
    What we are not skeptical about is the spending cuts for 
everything except defense; and it just seems to me that if you 
take credit for leaving no child behind, you should take credit 
for raising the funds to fund these programs, and this is 
especially so when you talk about our veterans.
    I cannot think of any citizens that we should want to go 
out of our way, whether we are talking about the agent, whether 
we are talking about kids or people with disabilities, but it 
is veterans that are putting their life on the line in order to 
preserve the security of this Nation. Yet the budget provides 
for cuts in their programs, especially in the veterans health 
programs, and there is nobody, Republican or Democrat, that 
does not have problems in their area in providing the services 
that are needed. So, we find ourselves with citizen-soldiers 
being pulled out of the National Guard, the reservists, for a 
war which we do not know when it is going to end. We do not 
know how much it is going to cost. It is not even included in 
the budget. We have lost over 530 men and women, over 2,000 
people are in hospitals; there is no end in sight. What hurts 
the most is that the budget does not ask anybody to make 
sacrifices financially.
    Indeed, the moneys that we are spending for non-military 
activities, the number of private corporations that are getting 
hundreds of billions of dollars, to them, if you just look at 
the balance sheet, the war makes a heck of a lot of sense in 
terms of profits. So, I would hope that the Administration 
could dispel this selective sacrifice to the men and women 
fighting the war and share with us this morning what is it 
going to cost, because this omission is just a screaming 
indication that it was not important enough to give us some 
figures to know what it is going to cost us.
    I would be less than honest if I did not tell you that many 
of us in the Congress believe that it was omitted because this 
was an election year and that those numbers, at least what are 
known--and we will know better after the election what the cost 
of the war is and not be able to consider that--as you advocate 
further tax cuts.
    So, I wish I could congratulate you for having the courage 
to assume this great responsibility, but I sympathize with the 
problems you are going to have to wrestle with in the future, 
and I thank you for coming before this Committee.
    Mr. BOLTEN. Mr. Chairman may I take one moment in response?
    Chairman THOMAS. Just one moment. The gentleman's time has 
expired in expounding the question if there was one.
    Mr. RANGEL. Mr. Chairman----
    Chairman THOMAS. You obviously can respond.
    Mr. RANGEL. Thank you so much. You are so kind. You really 
are.
    Chairman THOMAS. I appreciate your growing awareness.
    Mr. BOLTEN. I appreciate, Mr. Rangel, your sympathy. I will 
not try to respond to everything you raised, although I hope I 
will have a chance during the course of the rest of the 
questioning. The one point I do want to respond on is about the 
defense spending in the budget. It says right here in this 
budget document that the costs for the war in Iraq and 
Afghanistan have not been given a specific figure in this 
budget.
    Mr. RANGEL. Right.
    Mr. BOLTEN. Because we do not know what they are going to 
be, and we are going to request them as a matter of 
supplemental funds.
    Mr. RANGEL. Could I hear that again? It is not in the 
budget because you do not know what it is going to be?
    Mr. BOLTEN. We do not know what the costs in 2005 will be 
for the incremental costs of conducting----
    Mr. RANGEL. So, for purposes of our work, there is no cost?
    Mr. BOLTEN. No, I did not say that. I said, we do not know 
today what they will be and the Administration will request 
them as a matter of supplemental funds.
    Mr. RANGEL. I am saying you have no idea what number to 
give us, and so we have to deal with zero. We cannot provide 
for it. You cannot give me a number.
    Mr. BOLTEN. That is not what I said.
    Mr. RANGEL. I thought it was.
    Mr. BOLTEN. No. What I said was, we do not know today the 
amount of the costs. Let me tell you this about the costs: that 
is, we do know today the spend-out rate for the war in Iraq and 
Afghanistan is below $50 billion a year, probably well below 
$50 billion for 2004.
    If you choose to believe that the level of our commitment 
in Iraq and Afghanistan is going to need to be sustained at the 
same level it is today, what you should expect in the way of a 
supplemental request from the Administration is roughly the 
same number, somewhere between $40 and $50 billion a year. I do 
not happen to believe that. I think our costs will be 
substantially lower, but if you choose to believe our costs 
will be as high as they are today, you should anticipate a 
supplemental request as high as that.
    When the Administration does have a better idea of exactly 
what the situation is, when we know what the security situation 
in Iraq is, when we know what the election situation is in 
Afghanistan, all of these things are yet to come, we will come 
forward with a proposal, but as a supplemental spending 
proposal, which I think is the right way, as a budgetary 
matter, to handle these expenditures.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Ohio, Mr. Portman, wish to inquire? This is based upon the 
fact that on the previous panel we did not get through all the 
Members and those Members who were here at the time of the 
gavel and remained, but did not get recognized, will now be 
recognized first. That happens to be the gentleman from Ohio 
and the gentlewoman from Ohio, and then we will proceed in 
regular order.
    Mr. PORTMAN. Thank you, Mr. Chairman, for your generosity 
letting an all-Buckeye inquiry here for a while.
    Mr. Bolten, thank you for sending us a budget that does 
reduce the deficit. I appreciate your testimony today, where 
you talked about the deficit being undesirable and unwelcomed, 
and I applaud the fact that your level of domestic 
discretionary spending, taking out the needed expenses for our 
country, our homeland defense, is practically zero, practically 
a freeze.
    I read it as a 0.5-percent increase which does not keep up 
with inflation. That is an austere budget, and I think where we 
are in our economy--given where we are with our economy and our 
spending over the last decade, not just in the last few years, 
that that is appropriate, and I commend you for it.
    I am also very pleased to see that your budget acknowledges 
the economic recovery that is under way and does not do things 
which would keep us from continuing that recovery.
    We are beginning to see incredible uptake in our economy. 
As you said, in the last half of 2003 we had the best growth 
since 1984. As I look at the numbers, it is incredible that 
investment has accelerated at triple the rate for the first 
half of the year, and this Committee would agree with you and 
your budget that it is the tax relief that we got through this 
Committee in 2001-2002, and also more recently in 2003.
    My question would be, when you look back at the deficit--so 
we can learn from it, how much of the deficit that we have 
built up in the last couple of years is due to the economic 
downturn that began before this President was sworn in? How 
much of it is due to the revenue not coming in because of the 
economy being off?
    Mr. BOLTEN. Congressman, that is the essential question, 
and what our economists say is that at least half of the 
deficit situation that we find ourselves in, the change in 
situation from the projections of surpluses that existed just a 
few years ago, is the result of a downturn in the economy.
    The tax cuts that you all constructed and enacted are a 
principal reason why the economy is turning around now; going 
forward into 2005 and beyond, we are able to project for the 
first time in 3 years firming revenues in the Treasury and the 
prospects of actually heading that deficit back down toward 
zero.
    Mr. PORTMAN. When you look at the deficit, you mention tax 
relief. More than half of it, you say, is due to the economy 
and the lack of revenue coming in because the economy, again 
prior to this President being sworn in, started to have a 
downturn, which is now having the opposite effect; we are 
beginning to see an uptake in the economy.
    How much of that deficit over the last few years is 
attributable to increased spending on things like defense 
related to our war against terrorism or homeland security or 
just responding to 9/11? If it is over 50 percent due to the 
economy, how much is due to increased spending?
    Mr. BOLTEN. About a quarter in our economists' estimation.
    Mr. PORTMAN. So, about 25 percent due to spending. How much 
is due to the tax relief that this Committee again has passed 
three times in the last few years?
    Mr. BOLTEN. Again, about one-quarter, but one thing I would 
say about that quarter is that it is a static score, and the 
Members of this Committee are well familiar with the 
difficulties involved with static scoring. That static score--
in accounting for the deficit and for the change into a deficit 
position, that static score does not take account of what the 
tax cuts have done to restore growth to the economy, which is 
the essential feature in restoring our budget picture.
    So, you can say that a quarter of the deficit can be laid 
at the feet of the tax cuts, but that is not including what the 
tax cuts have done to bring the economy back, which is actually 
bringing our budget situation back.
    Mr. PORTMAN. Thank you, Mr. Chairman--or, Mr. Director. I 
appreciate the testimony; I think it puts it in perspective. 
Having the best growth we have seen since 1984 and having the 
increased receipts that come with that economic growth makes 
that 25 percent of the deficit over the last few years an 
investment; does it not?
    Mr. BOLTEN. I believe it does.
    Mr. PORTMAN. Yes. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. The gentlewoman 
from Ohio.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. To my colleague 
from Ohio, we are looking from different perspectives in Ohio. 
I guess our perspective on what is going on is clearly going to 
be a little different.
    Let me point to some statistics for Mr. Bolten. Welcome. I 
hope you enjoy your new position. I am glad you have an 
opportunity to testify before our Committee.
    The facts: unemployment, it is down to 5.6 percent in 
January from 5.7 in December, but unemployment among blacks and 
Hispanics rose. Blacks was 10.3 percent in December, 10.5 
percent in January; Hispanics, 6.6 percent in December, 7.3 
percent in January.
    Manufacturing and employment are continuing to thaw, by 
11,000 jobs just this past month. In my Congressional District, 
the city of Cleveland, the unemployment rate is 13.1 percent. 
Ohio lost 160,100 manufacturing jobs since this Administration 
took office, 200 jobs lost just in December of last year.
    Reflecting on the Administration's dedication to the 
creation of new jobs, are you familiar with a gentleman by the 
name of Gregory Mankiw--is that how you pronounce his name--who 
is the Chairman of the President's Council on Economic 
Advisers? Are you familiar with him, sir?
    Mr. BOLTEN. Dr. Mankiw is Chairman of the Council.
    Ms. TUBBS JONES. He recently stated in reference to jobs, 
``Outsourcing is just a new way of doing international trade. 
More things are tradable than were tradable in the past, and 
that is a good thing.'' The people in Ohio, at least from my 
Congressional District, are not real happy about jobs being 
traded.
    I would like to ask you, sir, what in this budget do you 
foresee, predict, that we are going to have more job growth--
not just economic statistics and economics, job growth. That is 
what I want to know about.
    Mr. BOLTEN. We are projecting economic growth in this 
budget of roughly 4.4 percent, which is on the conservative 
side of estimates; and that is the most important thing for job 
growth, getting economic growth back into this economy.
    Now, we have had lagging job growth in this recovery----
    Ms. TUBBS JONES. Hold up just there for a moment. We have 
had lagging job growth. What is the lagging job growth related 
to? What do you connect that to, sir?
    Mr. BOLTEN. I am inclined to believe Chairman Greenspan's 
analysis, when he testified about that this morning.
    Ms. TUBBS JONES. No, I want to know what you say. I do not 
want to know what Chairman Greenspan says. You are the OMB guy. 
Tell me what you think.
    Mr. BOLTEN. I believe what Chairman Greenspan was talking 
about this morning, which is that lagging job growth is, in 
large part a product of extraordinary productivity growth in 
this economy. That is a two-edged sword.
    Productivity growth is actually a very good thing. It means 
we are more competitive; it means we are more efficient.
    Ms. TUBBS JONES. Stay with me for a minute. I only have 5 
minutes. I need short answers, not the answer that you were 
going to give if you were giving a professorial speech at a 
college, okay? Are you done?
    Okay, let me ask you something else. I noticed in a 
statement that you released that we all do op-ed pieces in 
newspapers. Your op-ed piece in the Wall Street Journal 
commentary, dated December 10, 2003, and your statement before 
this Congress, dated today, February 11, 2004, are 
substantially similar. I am wondering if anything happened 
between December and February that might have caused you to 
make--to improve upon your projections in your statement today, 
sir.
    Mr. BOLTEN. No. I am not sure what you are referring to.
    Ms. TUBBS JONES. Are those economic indicators you have 
been talking about?
    Mr. BOLTEN. Yes.
    Ms. TUBBS JONES. Might they have improved what was going on 
in the job or economy since December and January?
    Mr. BOLTEN. I think the economic indicators are continuing 
to show pretty good strength in the economy.
    Ms. TUBBS JONES. Let me ask you one more question. The 
budget stops at 2005, right? Your projections stop at 2005. 
Excuse me.
    Mr. BOLTEN. In 2009.
    Ms. TUBBS JONES. A 5-year budget, 2004-2009. What happens 
from 2009 to 2014, which is the usual length of time, a 10-year 
period, to deficits? What happens then?
    Mr. BOLTEN. Well, for budgeting purposes the usual length 
of time is 5 years; there was a brief period when it was done 
for 10 years.
    Ms. TUBBS JONES. The Congressional Budget Office (CBO) does 
10 years, right?
    Mr. BOLTEN. They do 10 years.
    Ms. TUBBS JONES. They are the official office for budgets, 
and so forth, for Congress in the Senate and the House, 
correct?
    Mr. BOLTEN. Correct.
    Ms. TUBBS JONES. The CBO says that at 10 years out, what is 
the deficit going to be? It is not going to be equal, not even. 
We are not going to be at a surplus, are we, sir?
    Mr. BOLTEN. We do not do 10-year projections on deficits or 
surpluses, but I would expect on the chart that I had up there 
just a moment ago, showing the deficit declining to 1.6 percent 
of GDP by 2009----
    Ms. TUBBS JONES. Do me a favor, Mr. Bolten. When you get 
back to your office, read what the CBO says is going to happen 
in 10 years, and send me a note, based on what they sent you, 
okay?
    Mr. BOLTEN. I would be glad to correspond with you, but if 
I----
    Ms. TUBBS JONES. I thank you very much. I yield the balance 
of my time, Mr. Chairman.
    Mr. BOLTEN. Mr. Chairman, if I might finish my sentence? 
The succeeding 5-year period, I do not have any reason to 
believe that that trend will not continue; and I think the CBO 
numbers to which you were referring probably confirm that, 
although their set of assumptions is different.
    Ms. TUBBS JONES. Thank you for your response, sir, but the 
10-year out, there is a deficit of $1.3 trillion; is it not?
    Mr. BOLTEN. If you are referring to the CBO numbers, they 
may be, although----
    Ms. TUBBS JONES. That is all I have to refer to, sir. You 
do not have any for me.
    Mr. BOLTEN. They actually show the budget returning to 
balance, although their set of assumptions is very different 
from ours.
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentlewoman. Gentleman from 
Illinois wish to inquire?
    Mr. CRANE. Thank you, Mr. Chairman, and I appreciate your 
appearance here today, Mr. Bolten. I used to teach history, and 
I used to remind kids that if Adam had never bitten the apple, 
we would never have needed government in the first place. It is 
the fall from grace. That was reflected when the Founding 
Fathers created this government, in creation of a Department of 
Defense, first and foremost; State Department, because it is 
better to talk than fight; Justice Department, because we might 
pass laws that spilled over to people in all 13 States; and 
finally Treasury, because you might have to borrow in time of 
war.
    Now, if we just go back to basics, that is only 18 percent 
of the total budget for next year. Boy, we could have a huge 
surplus without raising taxes, we could cut taxes even more 
than we have. I appreciate the Administration's proposal to 
rein in non-defense and non-homeland security spending by 
increasing it just 1 percent this year.
    I am worried though by the fact that Congress suffers the 
affliction of our entire Nation, obesity--biggest health 
problem we are experiencing today--and the appetite for 
spending in this town grows every year. One way the 
Administration can help in this regard is to state 
unequivocally that it will reject spending bills that go over 
and beyond the allotted increases. Can you speak to that point?
    Mr. BOLTEN. Mr. Crane, I anticipate that, as occurred last 
year, we will have a good, cooperative process with the 
leadership, with the Budget Committee Chairmen, with the 
Appropriations Committee Chairmen, and that, as with last year, 
when the President reached an agreement with the leadership on 
what the total discretionary increase would be, that increase 
will stick.
    It stuck last year. Total discretionary spending increases 
last year in the regular budgeting process were held below 4 
percent. The President is proposing below 4 percent this year. 
I anticipate the President will hold firm on this this year.
    Mr. CRANE. That means he will not have any reticence about 
utilization of the veto, if need be?
    Mr. BOLTEN. I do not anticipate the President would be at 
all reticent about using a veto if need be, but the record here 
is that the veto has not been necessary because this House has 
done its job, and the other body has typically done its job, 
and there have not been spending bills sent to the President 
that exceeded his expectations.
    Mr. CRANE. Well, we hope and pray it does not happen. It is 
of paramount importance that we must spend in deficit, and that 
we should do it with an eye toward investing in economic 
growth. As regards long-term growth of the economy, can you 
comment on how critically important it is that Congress makes 
permanent the tax cuts that otherwise will expire over the next 
several years?
    Mr. BOLTEN. Congressman, we think it is absolutely critical 
that Congress make permanent the tax cuts that you all enacted 
over the last 3 years. Especially those that are expiring this 
year that are of great importance to those in low- and middle-
income areas--the child credit, the marriage penalty reduction, 
and the 10-percent bracket. Those are all critically important, 
both for the working families of America and for ensuring that 
the recovery is sustained.
    If you are interested in jobs, it is very important that 
there be some certainty in the Tax Code. The wrong thing to do 
with this economic recovery right now would be to raise taxes 
in this environment.
    Mr. CRANE. I could not agree more. Thank you.
    Chairman THOMAS. Thank the gentleman. I will remind my 
colleague that one of those departments started out as the War 
Department. We did pretty well over the years as the War 
Department. When it got switched to the Department of Defense, 
we have not done nearly as well. The gentleman from California 
wish to inquire?
    Mr. STARK. I do, Mr. Chairman. I would just like to take a 
moment to remind my distinguished friend and colleague from 
Illinois that I think I am the only one in the room that was 
here when he ran for President, and how much more conservative 
your party has gotten since you gave up that quest. I really 
enjoyed your comment.
    Mr. Bolten, I am concerned. We talked about a veto just a 
minute ago. In a book that I suspect summarizes the budget, you 
suggest that in your tax credit, which you think will help 
reduce the number of people without health insurance, your 
budget includes an offset for that $70 billion credit, but you 
do not define it. You just suggest that, if we follow your 
wishes and provide for the health care credit, we are expected 
to offset it, so that really it is not in your budget.
    So, my first question is, if we did not have an offset, 
would you recommend that the President veto the offset, the 
credit?
    Mr. BOLTEN. Well, Mr. Stark, our intention would be to work 
with you and come forward with specific offsets.
    Mr. STARK. If we did not, would the President veto it?
    Mr. BOLTEN. I cannot say for certain what the President 
would do.
    Mr. STARK. I know there is nothing in the health care area. 
Is there anything else in your budget that requires an offset?
    Mr. BOLTEN. Mr. Stark, what we are proposing is that 
mandatory spending increases be offset with mandatory spending 
cuts, so there are mandatory spending increases. We do have, I 
believe it is $35 billion worth of mandatory spending cuts, 
which could be applied to the health credit, and we would work 
with you on the balance.
    Mr. STARK. Well, I guess I am wondering why it has only 
this tax credit for health, for which you require an offset and 
nothing else, but----
    Mr. BOLTEN. I think, Mr. Stark, we would seek an offset for 
all mandatory spending.
    Mr. STARK. So, if we corrected the AMT, we would run an 
offset?
    Mr. BOLTEN. We would not regard that as a mandatory 
spending increase.
    Mr. STARK. Oh. Oh----
    Mr. BOLTEN. Our proposal for the budget process reform 
proposal----
    Mr. STARK. This is a tax credit for health care, I got you.
    Mr. BOLTEN. Which is scored as a spending proposal.
    Mr. STARK. You also suggest in your testimony that the 
measure of your Administration's success is not how much we 
spend but how much we accomplish.
    Now, as I read it, you are going to spend $110 billion in 
health savings accounts (HSAs) and tax credits, and Secretary 
Olson suggested to us that there might be 4 million people who 
would become insured out of the 40 million who are uninsured. 
Other independent economists suggest it is more like 2 million 
people who would pick up health insurance for the expenditure 
of this $110 billion. Do you think that that is an 
accomplishment of which you should be proud?
    Mr. BOLTEN. I think any reduction in the number of 
uninsured is----
    Mr. STARK. Even if you spend $110 billion to get 2 to 4 
million people?
    Mr. BOLTEN. I do not think we would agree with those 
numbers, Mr. Stark, but----
    Mr. STARK. Well, Secretary Olson of the Treasury happens to 
think it is 4 million, and economists who have some credibility 
in this field think it might be 2 million. How many do you 
think it will be?
    Mr. BOLTEN. I do not know exactly what number of uninsured 
might be reduced by the tax credit proposal, but there are a 
number of proposals in the President's----
    Mr. STARK. The HSAs and the credit, which totals $110 
billion, and it does not seem to me that that is much of an 
accomplishment. I suggest that my kids could do that with their 
third grade math and have a lot of money left over to go to 
McDonald's.
    Let me ask you this, further. The cornerstone of the 
President's effort to contain health care costs is malpractice 
reform, and I do not see anything in your budget. If this is 
such a hotshot area in which to save money, why did you not--
CBO tells us it may be 2 percent of all health care spending, 
which isn't very much, but why did you not include the savings 
in your budget? Or did I miss it somewhere?
    Mr. BOLTEN. Mr. Stark, there is a proposal pending that I 
believe has passed this House, is pending before the Senate.
    Mr. STARK. It is not in your budget, though. I would think 
the great savings you would want. Why did you not use it in 
your budget?
    Mr. BOLTEN. You mean why did we not claim it in that 
provision?
    Mr. STARK. Yes. Yes.
    Mr. BOLTEN. We would be glad to go back and take a look.
    Mr. STARK. Or take the credit, sure.
    Mr. BOLTEN. It may be difficult to----
    Mr. STARK. Probably find it there with those weapons of 
mass destruction. It helps you close the credibility gap is 
what it really does. Thank you.
    Mrs. JOHNSON. [Presiding.] Thank you Mr. Stark. Just as a 
matter of information before the Committee, because we will be 
delving into the issue of the uninsured, since the tax credit 
for the uninsured is targeted to the low-income and it is most 
advanceable and refundable, 80 percent of the money is seen as 
spending.
    Mr. STARK. Excuse me, am I still recognized, Madam Chair?
    Mrs. JOHNSON. No, you consumed your time.
    Mr. STARK. I see, and I was wondering, if the Chair would 
yield, if you heard the discussion with the Ranking Member and 
the Chair about the Chair question, about the Chair commenting 
and----
    Mrs. JOHNSON. Mr. Stark, I did not have any time, so I have 
a right to use a little time myself.
    Mr. STARK. Great.
    Mrs. JOHNSON. I did want the record to note and the Members 
of the Committee to understand that the uninsured are a very 
varied population. A small sliver of them can actually afford 
insurance.
    What is beautiful about the tax credit proposed by the 
Administration is that this just reaches the portion, if I am 
not mistaken, of the uninsured that are the poorest, and so, 
since it is both refundable and advanceable, it is under the 
budget spending. That is the point I wanted to make, spending 
versus taxing.
    Mr. STARK. Would the gentlelady yield? How would you pay 
for it?
    Mrs. JOHNSON. Mr. McCrery.
    Mr. MCCRERY. Thank you, Madam Chair. Mr. Bolten, I would 
like to switch to a different subject here, which is welfare. 
In your budget, you accommodate, I believe, the increase in--
that is reflected in the House-passed welfare bill, but do not 
substantially increase spending for welfare. Can you give us 
some background on why you think the current funding of the 
Temporary Assistance for Needy Families program is sufficient?
    Mr. BOLTEN. Well, Congressman, I know, as one of the 
leaders in welfare reform, you yourself are probably well aware 
that that program has been spectacularly successful in reducing 
the number of families on welfare, I think by about half, so 
that in keeping the funding levels basically flat for the 
welfare program, we are actually making substantially more 
money available to deal with those families who do remain on 
welfare.
    Now, those families who remain are in large part, as you 
know better than anyone, some of the tougher cases and may 
require a broader range of attention from the State than some 
of those that have been able to work their way off of welfare. 
We think that the $16.9 billion funding level that we have 
included in our proposed budget is more than adequate to meet 
the current needs.
    Mr. MCCRERY. If you break that funding down to a per-family 
basis, is it true that in 1996 the funding that we set aside 
was approximately $7,000 per family and under your budget for 
next year it would be about $16,000 per family?
    Mr. BOLTEN. I do not have those exact figures off the top 
of my head, Mr. McCrery, but I am guessing that you are right.
    Mr. MCCRERY. I am pretty close, I think. Now, switching 
gears again, I want to go to income taxes, because we are 
talking now about extending some of the tax cuts that have been 
passed. Others are advocating that some of those tax cuts be 
repealed or let expire; and in that debate, we have heard a lot 
of charges from some that if these income tax cuts were to take 
place, then the vast benefit would go to the wealthy, and the 
wealthy would be paying less in taxes.
    Can you give us any idea of what has happened since the tax 
cuts were enacted, in terms of the share, the total income tax 
pot that is paid by the wealthy, compared to the rest of the 
population?
    Mr. BOLTEN. I can, Mr. McCrery. We have a chart, I believe, 
that shows the share of the income tax. Yes, that is the one.
    Congressman, I am glad you have given me an opportunity to 
address this, because the tax cuts that this Committee was so 
instrumental in enacting have, in fact, made our income Tax 
Code more, rather than less, progressive.
    There is a lot of talk about a tax cut for the rich. I 
repeat, the effect of the tax cuts has been to make the Tax 
Code more, rather than less, progressive. The wealthier income 
tax payers in our economy today pay a larger share of the 
income tax today than they would have without the tax cuts. So, 
for example, if you look at the graph, the bars that say ``top 
5 percent,'' Mr. McCrery, those are people making, I think, 
roughly more than $135,000 a year.
    [The chart follows:]

    [GRAPHIC] [TIFF OMITTED] 94729A.003
    

                                 

    Without the tax cuts, that income group was paying about 50 
percent of the total income tax revenue of the United States; 
after the tax cut, that group pays 53 percent.
    Mr. MCCRERY. So, in fact, the effect of the tax cut has 
been the top 5 percent of wage earners in the country are 
actually paying a bigger share of the total income tax, 
personal income taxes, than they were before the tax cut?
    Mr. BOLTEN. That is correct. Everybody got a tax cut, but 
as you said, as a result of the cuts that were focused 
especially on the lower- and middle-income earners in this 
country as a result of those cuts, of those making in the 
upper-income brackets, they are paying a larger share of our 
income tax than they were before the cuts.
    Mr. MCCRERY. Well, for the general population, what has 
happened to after-tax income the last few years? Has it gone up 
or down?
    Mr. BOLTEN. It has gone up. Again, I would be happy to 
provide some figures for you for the record, but that has gone 
up. If you take your average family income, they have in 
percentage terms a very substantial tax cut. A family of four 
making in the $40,000-a-year range have had a tax cut in the 
range of $2,000. Many of them have been taken off the rolls 
entirely.
    Mr. MCCRERY. Thank you very much.
    Mr. BOLTEN. Thank you, sir.
    Mrs. JOHNSON. Mr. Levin.
    Mr. LEVIN. Well, there will be plenty of time, Mr. Bolten, 
to debate this in the Presidential campaign. I know this 
question was a spontaneous one. You just happened to have a 
chart here.
    Mr. BOLTEN. Mr. Levin, actually, it was, but I do carry 
that chart with me wherever I go; it always comes up.
    Mr. LEVIN. I hope you bring a chart showing what has 
happened to income in this country the last few years, and the 
reason the share of income tax has gone up is because the share 
of income of the very wealthy has gone up.
    You talk about income tax. Sometimes others and even the 
President forget the word ``income'' before ``tax,'' and that 
omit the Federal Insurance Contributions Act (Social Security 
Act, 1935, 49 Stat. 620) tax. So, we will have a lot of chance 
to debate this in the days ahead. By the way, the Secretary of 
HHS yesterday said 50 percent cut in the uninsured; I haven't 
found anybody who knows where that figure ever came from. The 
testimony we have had today talks about 4 or 5 million, when 
there are some 40 million uninsured.
    Let me just ask you quickly, this reference in the budget, 
the contingent offset for refundable portion of health care 
portion Mr. Stark referred to, you don't have any idea where 
that offset would come from?
    Mr. BOLTEN. We have proposed about $35 billion in offsets 
in the budget, including a program called Medicaid 
Intergovernmental Transfers.
    Mr. LEVIN. In Medicaid cuts?
    Mr. BOLTEN. Not in cuts. In actual Medicaid reimbursements. 
The intergovernmental transfer is going after a practice by 
which the States----
    Mr. LEVIN. You don't put that in your budget?
    Mr. BOLTEN. That is proposed in the budget.
    Mr. LEVIN. Where is the $65 billion from?
    Mr. BOLTEN. The $65 billion is the actual cost.
    Mr. LEVIN. You have contingent offset. Where does the $65 
billion come from?
    Mr. BOLTEN. To offset the $65 billion.
    Mr. LEVIN. And $35 billion is in your budget?
    Mr. BOLTEN. We are carrying $35 billion in mandatory spendin
g.
    Mr. LEVIN. Part of the $65 billion is the $35 billion----
    Mr. BOLTEN. We could use that $35 billion to pay for the 
mandatory spending.
    Mr. LEVIN. Then it comes out of someplace else in the 
budget. Can't use it twice.
    Mr. BOLTEN. We would not propose using it twice.
    Mr. LEVIN. So, $65 billion short. You used that $35 billion 
for something else. So, we would have to come up with $65 
billion in addition to the $35 billion or replace that $35 
billion, right?
    Mr. BOLTEN. If the Congress chooses to move on the 
President's proposals for these mandatory spending increases, 
we would come to you with our suggestions of which mandatory 
spending decreases be proposed as offsets.
    Mr. LEVIN. I have never seen this reference to contingent 
offset before. It is plugging a huge hole, and it indicates 
that if we can't find it, the deficit even gets worse. In your 
testimony it gets interesting. On page 3 is it, or page 2, you 
say that the 5.5 percent of GDP is not historically out of 
range. Then you say a few paragraphs down, this is not only 
well below half its current 4.5 percent level, it is also well 
below the 2.2-percent average deficit during the last 40 years. 
So, the deficit for this year is twice of what it has been on 
the average the last 40 years.
    Mr. BOLTEN. Correct.
    Mr. LEVIN. Unemployment comp, 375,000 people exhausted 
their benefits in January. The Administration has not proposed 
extension of Federal benefits. Why not?
    Mr. BOLTEN. We have been monitoring the situation, and we 
would be glad to work with you on it.
    Mr. LEVIN. Are you for it or against it?
    Mr. BOLTEN. We are glad to work with the Congress.
    Mr. LEVIN. Look, 375,000 unemployed, exhausted their 
benefits. It is estimated 2 million more, and you are 
monitoring it. So, you want my colleagues and me to go back and 
say the position of the Administration is you are monitoring 
it?
    Mr. BOLTEN. We have worked with the Congress on three 
different occasions now to extend the temporary unemployment 
benefits.
    Mr. LEVIN. Are you for it or against it?
    Mr. BOLTEN. As I said, Mr. Levin, we are prepared to work 
with the Congress.
    Mr. LEVIN. You have not proposed it.
    Mr. BOLTEN. We have not carried a proposal in the budget.
    Mr. LEVIN. Why not?
    Mr. BOLTEN. We are prepared to work with the Congress on 
extending, if that is the direction in which the Congress wants 
to go.
    Mr. LEVIN. How about the Administration wanting to go? I am 
pressing you because people don't need vagueness, they want an 
answer from the Administration. What is the answer, yes or no 
or maybe? What is your answer?
    Mr. BOLTEN. I have given you the best answer I can, Mr. 
Levin. We are prepared to work with you on it. I would point 
out that in previous cycles that the extended unemployment 
benefits have been cut off at much higher levels of 
unemployment.
    Mrs. JOHNSON. Mr. Lewis.
    Mr. LEVIN. Much lower levels of exhaustion, and you know 
that.
    Mrs. JOHNSON. Mr. Levin, your time has expired. Mr. Lewis.
    Mr. LEWIS OF KENTUCKY. Mr. Bolten, thanks for being here 
today. We appreciate you appearing before our Committee. By the 
way, I don't think people want extended unemployment checks. 
They want jobs. That is what the Administration is 
concentrating on, and that is what we are seeing starting to 
happen. So, I appreciate the job the Administration is doing in 
bringing that about.
    You mentioned a little while ago, I think when Mr. Portman 
was questioning you about dynamic scoring, and the 
Administration released the Economic Report of the President on 
Monday, which contains an entire chapter on dynamic scoring. 
Could you comment on how these more advanced microeconomic 
models could be used to improve the accuracy of budget scoring, 
and tell us what steps the Administration is taking to 
implement dynamic scoring?
    Let me say this. I remember in 1997 when we passed the 
Balanced Budget Act (P.L. 105-33), it was projected to balance 
in 5 years. I know the projection in the President's budget is 
to cut the deficit in half in 5 years, but there has got to be 
a better way of projecting out and get a more accurate scoring 
on some of these things. I think the problem with budget 
balance with a little over a year--and CBO did not see that 
coming, none of us saw that coming. I think the problem is that 
we don't have the accurate vehicle to do the scoring to see 
what the future is like.
    Sometimes I think maybe I should call a psychic and see if 
there would be a better way of coming up with some of these 
answers. Anyway, what is the Administration doing with dynamic 
scoring?
    Mr. BOLTEN. The vagaries of scoring are one of the huge 
frustrations of this whole area of budgeting, and we have seen 
it time and again in what turned out to be good faith but 
unrealistic estimates of surpluses several years back. One of 
the key sources of frustration, though by no means the only 
source, are the economists' inability to correctly take into 
account the dynamic effects of tax cuts, which have profound 
effects on the economy that feed back into the budget.
    In our budgeting, we basically take a static model, and 
that model does not give, in my judgment, anywhere near full 
credit to tax cuts that they deserve in looking forward to how 
much they can improve our budget picture. The economists have 
been working very hard on this. I understand they are refining 
the art, if not the science, and are coming closer to being 
able to come to some consensus on dynamic scoring, but in the 
absence of that consensus or something close to it, we have not 
attempted in our budgeting to take credit for dynamic scoring. 
I would emphasize for all the Members that we really should, at 
least in some general sense, be aware of the important effects 
the tax cuts do have on the economy, because as they work their 
way through the system, they substantially improve our budget 
picture.
    Mr. LEWIS OF KENTUCKY. I think history proves that with 
several tax cuts through different Administrations. We have 
seen that to be the case and in some of the States, too.
    One quick last question. The Economic Report of the 
President also released on Monday predicted that the economy 
will create 2.6 million new jobs in 2004. Can you explain what 
recent economic indicators lend support to the Administration's 
estimate of job creation?
    Mr. BOLTEN. That is from tables that were included in the 
Economic Report. I don't think it should be regarded as a 
prediction. It is what the economic models themselves produce. 
Other economists, including the blue chip economists, are 
somewhere in that range. I believe this morning Chairman 
Greenspan said he thought these were realistic projections if 
productivity returns to a more normal level. That is important 
because the large job growth that we should be seeing in the 
economy is somewhat dampened by the otherwise excellent news of 
strong productivity growth. What the economists' modeling does 
is take note of historical patterns, and historical patterns 
would tell us that we should have that many jobs going forward 
if the economy reverts back to normal productivity growth. 
However, if we continue to have the extraordinary productivity 
growth which we have had in this economy, which I would repeat 
is otherwise excellent news, we may not see job growth nearly 
that high. I hope we will see job growth that high or even 
higher.
    Mrs. JOHNSON. Thank you, Mr. Bolten. Mr. McDermott.
    Mr. MCDERMOTT. Thank you, Madam Chair. I am pleased that we 
could have another reading of a chapter from George Bush's 
``Alice in Wonderland'' here today. We have had four of them 
now, and I notice by the fact that there is practically no 
press here, it is obvious they don't believe they are going to 
find anything worth believing. My favorite headline recently 
was, ``We Were Almost All Wrong.'' That was about the war.
    The budget stuff is even more disastrous if you look at it. 
I remember a guy named Shinseki. He was the head of the chiefs 
of staff, and he said we need more people. Mr. Lindsey got 
fired because he said we are going to need $200 billion in 
Iraq. Anybody who tells the truth in that seat is on the way 
out. I wonder if you could tell us when Mr. Principi is going 
to have to go. He testified yesterday that we need $1.2 billion 
for veterans.
    What is your answer? Do you think the Administration is 
going to let him hang around talking like that?
    Mr. BOLTEN. I think Secretary Principi does a fabulous job 
in a very tough position, and I have no expectation or hope 
that he is going anywhere.
    Mr. MCDERMOTT. You agree with him that he needs $1.2 
billion more, and he is perfectly within the Administration's 
rules and regulations on how they talk in public?
    Mr. BOLTEN. I think what Secretary Principi said was that 
his agency requested more from OMB than he actually got in the 
budget, which happens to be true of every single agency. Every 
agency comes in and asks for more than they have any reason to 
expect that they can get in a budget. If during the budget 
process I actually granted the wishes of every Cabinet 
secretary who is an ardent advocate for his or her Department 
and agency's spending priorities----
    Mr. MCDERMOTT. I understand. You have to cut people off. 
Your job is to be the hatchet man. This morning the Joint 
Chiefs of Staff say they are going to need more money before 
the end of the year. Are we going to deal with that, or is that 
going to be another one of those things like Principi; that 
they say it, and we ignore it and pick it up in a supplemental 
down the road, I think is what you are telling us.
    Mr. BOLTEN. We have said that, in black and white, here in 
the budget that there will be supplemental requests. I think 
what the chiefs were expressing is that they get that money 
rapidly enough. The Comptroller of the Defense Department has 
as recently as today said--and he is the person who hands out 
the money and is responsible for it--is that he is confident, 
with a supplemental request made during fiscal 2005, that there 
will be no difficulty meeting the spending needs of the Defense 
Department.
    Mr. MCDERMOTT. Does that mean after October 1st? Do you 
think we are going to be in session between October 1st and 
January 1st?
    Mr. BOLTEN. I have no idea when you will be in session, but 
what I do know----
    Mr. MCDERMOTT. Do you know there is an election this year? 
Has that been brought to your attention?
    Mr. BOLTEN. I have been awfully busy.
    Mr. MCDERMOTT. I have always thought of the International 
Monetary Fund (IMF) as being a bunch of fuddy-duddies over 
there who just have their head buried in the sand, and they go 
around the world messing up countries and making analyses and 
telling them how to run their economy. Here these guys are 
saying, with the budget projections showing large Federal 
fiscal deficits over the next decade, not that 5-year chart you 
showed us, but the next decade--they are doing 10-year 
projections--they said the recent emphasis on cutting taxes may 
come at the eventual cost of upward pressure on interest rates, 
a crowding out of private investment, and erosion of long-term 
U.S. productivity.
    Now, do you agree with them or do you think they are just 
kind of off the wall or alarmists or what? What do you think of 
the IMF?
    Mr. BOLTEN. The IMF performs an important function. What we 
have presented in the budget is an entirely credible path if 
the President's policies are adopted, and that is continued 
pro-growth economic policies, sound fiscal restraint. Those two 
things combined in both the 5-year window--and I would expect 
continuing in a 10-year window if we did 10-year projections.
    Mr. MCDERMOTT. Reexamine IMF then. You are borrowing this 
year half of the 4,500 billion you are offered from foreign 
investors. The Congressional Research Service tells us $264 
billion you are borrowing abroad. If the world reads what the 
IMF says, you think they are going to keep putting money in our 
economy, wondering if we are going to tank?
    Mr. BOLTEN. The record shows that foreign investors are 
finding this a very attractive place to invest, and we have to 
make sure that is still true, which is why we need to pursue 
pro-growth economic policies.
    Mr. MCDERMOTT. So, my granddaughter is going to pay back 
the Chinese $90 billion and the Saudis $20 billion and all that 
money when she is working 40 years from now; she is going to be 
paying this debt back, and that is okay with you? You think 
cutting taxes is really the answer?
    Mr. BOLTEN. I think it is essential to sustain the growth 
in this economy. If you look at our revenue projections, even 
assuming continuation of the tax cuts, you will see the revenue 
that dropped off so dramatically over the last 3 years before 
we had any tax cuts returning strongly to the economy. I think 
it is exactly the right way to go.
    Mr. MCDERMOTT. You are no more credible than the weapons of 
mass destruction. It is really appalling that the budget 
director would come in here and not tell us what the impact is 
going to be of the war. We will tell you later. You can't 
certify this is a decent budget. It doesn't answer the 
questions that you know you are going to face.
    Mrs. JOHNSON. Thank you, Mr. McDermott. Mr. Brady.
    Mr. BRADY. Thank you, Mr. Bolten, for being here. I think 
the criticism you are hearing is from those whose philosophy is 
that this is Washington's money and not the taxpayers' dollars, 
and we will decide what is best for working families. 
Thankfully we have got a President and a Congress that believes 
that it is the people's money, and that is working.
    Let us talk about spending for a minute. I think one of the 
frustrations that I share, Congress shares, and you share is 
that our Federal budget is like a big leaky bucket, and we pour 
resources in trying to accomplish something, but there are so 
many ways it gets spattered that by the time it gets to where 
we really want it, not enough is being applied. Some here, many 
of our Democratic friends, measure by how much water we can 
pour in that bucket. Republicans are trying to close those 
leaks, trying to get the money and the resources to defense, 
education, and health care where it really applies. I 
appreciate you and OMB working with us in Congress, trying to 
fill the holes in that bucket so we can do more with less.
    On spending, you studied the numbers from January 2001 to 
today where we had a projected surplus at the time to the 
deficit we have today. A lot of people are saying that is all 
due to tax cuts. My hunch is that spending and the economy has 
played an overwhelming role in creating the steps. Can you tell 
us what the numbers show?
    Mr. BOLTEN. Our economists' estimate is that through 2003 
the principal reason why we moved from what appeared to be a 
substantial surplus position to a deficit position is the 
economy. About half of that move was directly related to 
flagging economic activity, which means lower revenues. About a 
quarter of the move was additional spending, much of that 
related to September 11th and the war on terror, and about a 
quarter related to the tax cuts. Although as I had discussed 
with Mr. Lewis just a moment ago, that quarter number for the 
tax cuts does not take into account the dynamic effects that 
those tax cuts have had on the economy, and therefore have had 
on restoring our budget situation, not to mention saving a lot 
of jobs in the process.
    Mr. BRADY. The projections, I think it would be difficult 
to look out 10 years. Is it safe or accurate to say that we 
have control, some say, over that 10-year reality, that as we 
get the economy going, if Congress will work, the President, to 
cut spending--that deficit isn't set in stone? In fact, it can 
be turned around into a surplus, and we can get back into the 
black, is that correct?
    Mr. BOLTEN. Absolutely. I think our 10-year horizon, if we 
follow the kinds of policies that are laid out in this budget, 
is very promising. I should add that looking beyond that, we 
face an enormous challenge, which is the retirement of the baby 
boomers. We face a serious structural unfunded liability with 
respect to our Medicare and Social Security programs. Those 
need to be addressed on their own merits, but within that 10-
year window you are talking about, I am very optimistic the 
policies reflected in this budget can get us well back toward 
balance.
    Mrs. JOHNSON. Excuse me, Mr. Becerra.
    Mr. BECERRA. Thank you Madam Chair. Mr. Bolten, thank you 
for being with us. I just wanted to return to something 
quickly. You made a comment about this chart that talked about 
the share of individual taxes, income taxes paid by the various 
sectors of the American public, the top 1 percent, 5 percent, 
the bottom 50 percent. It is fascinating because when you talk 
in terms of percentages, I can see how you shift the numbers, 
but I would be interested to see what the actual dollar amounts 
are that are paid.
    What I would be more interested to see is if you would be 
willing to provide us with charts that show the distribution of 
the tax cuts in the capital gains category. Would you be 
willing to provide us with a chart that talks about the 
distribution of tax cuts for the capital gains tax cut?
    Mr. BOLTEN. Sure. If we have that data, we will be glad to 
provide it.
    Mr. BECERRA. Perhaps for the dividend tax cuts as well. I 
would like to see the distribution, if you could provide us a 
chart for the tax cut that went in the area of the estate tax 
repeal and provide us that as well. Any idea when you could 
probably get that to us?
    Mr. BOLTEN. I don't know. It would depend on what data is 
available. With respect to the death tax, those tax cuts have 
not been implemented.
    Mr. BECERRA. Actually, I think we can do it pretty quickly, 
because if we are going to talk about the distribution of that 
tax cut, all we have to do is worry about the 2 percent of 
wealthiest Americans, because 98 percent of the rest of 
Americans aren't getting a tax cut. It would be pretty easy to 
make the chart that all the tax cuts go to the 2 percent 
wealthiest, 98 percent of the rest of America doesn't get 
anything?
    Mr. BOLTEN. That may be possible to produce a chart looking 
at the future. The charts we have presented to you have been 
what we see the situation as of today.
    Mr. BECERRA. I would be more interested if you could give 
us the charts that show us the distribution for the different 
sectors of the American public.
    Mr. BOLTEN. We will provide you the data we have.
    [The information follows:]

    The analysis available is for the effects of all the provisions of 
the 2003 tax cut combined, not the individual elements. The analysis 
recognizes the importance of obtaining the full picture to show where 
possible how much tax liability is paid by each income group, as well 
as the amount of tax relief that group would get. This is problematic, 
however, for the dividend tax because it represents the second level of 
tax such that it applies to corporate distributions from income that 
has already been subjected to the corporate income tax, and so to 
calculate the total amount of tax paid by dividend recipients requires 
some knowledge about the incidence of the corporate income tax, and 
unfortunately there is little consensus on the incidence of the 
corporate income tax. A similar problem arises with respect to the 
capital gains tax to the extent the asset giving rise to the tax 
reflects ownership of corporate equity.
    What we can say with confidence is that lowering the tax rates on 
dividends and capital gains will cut taxes an average of $798 for 26 
million taxpayers, including seven million seniors who will save an 
average of $1,098. This is too broad a swath of the taxpayer public to 
characterize as 2 percent.
    We can also say with confidence that reducing these taxes reduced 
the cost of capital in the United States, reducing the tax disincentive 
to invest in new plant and equipment so that America's corporations can 
grow faster, increase employment faster, raise productivity faster, 
raise wages and other forms of labor compensation faster, and compete 
more effectively in international markets.

                                 

    Mr. BECERRA. The issue of jobs. I was listening to the 
give-and-take with Congressman Levin, and I wasn't sure exactly 
what we should tell the American public, our constituents when 
we go back home, when it comes to over 2 million Americans who 
have lost their jobs, something around 9 to 10 million 
Americans who have been without a job in some cases over a 
year. What is the message we should say is emanating from the 
White House with regard to those working Americans who lost 
their job in the last year, 2 or 3 years, and are still 
looking? What do we tell them with respect to the insurance 
benefits if they have exhausted them?
    Mr. BOLTEN. What you can say is the President wants 
everyone who is looking for a job to find a job.
    Mr. BECERRA. These folks who have now exhausted their 
unemployment insurance benefits, in other words they have been 
out of work for several months now, what is the word--what do 
we say that the Administration is saying to them? These are 
working Americans, because of the faltering economy or other 
reasons have lost their job, are ready and willing to work and 
have exhausted their unemployment benefits, and now are trying 
to make ends meet for the family. What do we tell them?
    Mr. BOLTEN. I think what you ought to tell them is that the 
Administration is doing everything possible to make sure they 
can get back to work, because I assume you will agree that is 
what they really want to do.
    Mr. BECERRA. I would also like to tell them that we are 
actually going to extend their benefits while they are looking, 
and we have the leadership in the White House saying that the 
White House would like to extend them. I don't hear that yet, 
but we will work with you on that.
    With regard to Iraq, am I correct in saying that this 
budget provided by the President provides $0 for Iraq 
reconstruction or security of our troops in Iraq?
    Mr. BOLTEN. This budget says that we will request 
supplemental funding for that during the fiscal year 2005 
season when the needs become clear. We have in the past 
requested supplemental funding.
    Mr. BECERRA. This budget doesn't request any moneys to 
date. You are not going to request any supplemental funding for 
Iraq?
    Mr. BOLTEN. We will.
    Mr. BECERRA. Before November 2004?
    Mr. BOLTEN. We don't know the exact date, but what we were 
advised by the Defense Department is that they don't expect to 
need to request that money during 2004.
    Mr. BECERRA. My last question has to do with the deficits. 
Listening that you are going to cut the deficits in half from 
$521 billion to something in the order of $250 billion, I don't 
know how many people should feel comforted that we are still 
going to have deficits in the range of $250 billion, but I did 
some quick math, as I did when Secretary Snow was here. The 
$521 billion deficit for this fiscal year translates into 
$15,200 debt tax, because that debt tax will have to be paid by 
somebody, by each tax filer in America. If you talk about the 
American public, in all there are some 292 million people in 
America. That, still, for every man, woman and child, totals 
about $6,800 per every man, woman, and child that this year's 
alone fiscal deficit of $521 billion will cost Americans. I 
don't know of many Americans, average families that got 
anywhere near even a $1,000 in a tax cut, but to see that we 
are going to put that type of burden on our children--and that 
is just this fiscal year. Over the 10-year period, we are 
increasing the size of our debt from $4.5 trillion to about 
$6.4 trillion. I am talking about $521 billion, not $6.4 
trillion. I think most families are asking, how are we going to 
budget? It really is our money, not the government's money. It 
is not going to be the government's debt, but the people's 
debt. When the government runs a deficit of $521 billion, that 
is not the government's deficit, that is the people's deficit. 
When the government runs a $6.4 trillion debt by 2014, that is 
not the government's debt to the world financiers and bankers, 
that is every man, woman and child's debt. I think what worries 
so much of us is that we haven't put our fiscal house in order. 
The President is talking about making permanent tax cuts that 
took us, to some degree, to where we are.
    Mr. BOLTEN. There is no disagreement about the problem. I 
think the disagreement is about what the remedy is, and a very 
important part of the remedy is a strong economy. A very 
important part of a strong economy is making those tax cuts 
permanent.
    Mr. BECERRA. I would agree with you on most of that except 
the very end.
    Mrs. JOHNSON. Thank you Mr. Becerra. Mr. Ryan.
    Mr. RYAN. Thank you, Madam Chair. Mr. Bolten, I want to 
commend you for bringing a lean budget to Congress. It is my 
belief and hope that you can see your lean budget and make it 
leaner as it moves through the House and Senate. It is my hope 
we can actually make good on the fiscal restraint that you 
provided and actually go a little farther.
    In doing so, every time we pass the budget, inevitably what 
seems to happen in this institution, in Congress, is we break 
the budget. If you take a look at the baseline spending that 
occurred in discretionary spending for the 2000 spending bill, 
where we had 15.3-percent increase in discretionary spending, I 
recall coming back early from my honeymoon to vote against that 
omnibus bill; but if you recall, we put in a 15.3-percent 
baseline increase in discretionary spending. Then I believe 
your first budget came after that.
    Mr. BOLTEN. Non-defense discretionary.
    Mr. RYAN. What were your discretionary spending numbers 
after that, your non-defense discretionary numbers after that 
15.3 percent?
    Mr. BOLTEN. In 2002, it was 6 percent; next year, down to 5 
percent; and for the current fiscal year, down to 4 percent. 
That is non-defense discretionary. For 2005, we are proposing 
below 1-percent growth in that category.
    Mr. RYAN. One of the problems that occurred, that I 
witnessed from that huge spending spree when we did 15.3-
percent domestic discretionary in the 2001 budget, was that 
that was out of conformity with the budget resolution. One of 
the things we noticed is that every time we write a budget 
resolution, we have a budget process that produces this 
springsmanship that at the end of the process, at the end of 
the year, we end up breaking our budget caps, breaking our 
budget agreement, to spend money to get out of town. So, many 
of us have been concerned that the budget process we have 
before us is broken.
    So, in that vein, a lot of us have gotten together, and a 
group of us from the moderate to the conservative camp of the 
Republicans in the House released 12 principles for budget 
process reform. In that vein, I along with Congressmen 
Hensarling, Chocola, and Cox are introducing a bill tomorrow to 
rewrite our Federal budget process. We sent you an advanced 
copy of that bill. What is your take on some of the provisions 
we have put in there?
    Mr. BOLTEN. It is a big bill, and I don't want to comment 
on all of it, but in general, we are very enthusiastic about 
what you are doing. In this budget we sent up last week, we 
proposed several elements that I understand are part of your 
bill. Your bill does a number of other things, but in my 
judgment, if we could accomplish what the Administration sent 
up and even some of the things that you are proposing, to go 
farther in the way of budget process reform, we have done an 
enormous service to the budgeting process, in this country and 
enormous service to all of those, like Mr. Becerra, who are 
concerned about the debt burden that may be loaded on future 
generations. I think that is the best hope for constraining 
spending in an environment where it is otherwise difficult to 
do so.
    Mr. RYAN. We are not going to cut the deficit in the next 5 
years if we don't enforce our budget. I hope that we can 
continue to work together to get budget enforcement rules that 
stick.
    I have one more quick question, since I see I have some 
time. That is, last week Secretary Snow and Mineta sent us a 
letter with respect to the transportation bill. In that letter 
they said they would recommend a veto threat to the President 
if it used any increase in gas taxes, any kind of bond 
financing other than private activity bonds, or any new deficit 
spending, or any deficit spending at all. They also alluded to 
the fact that they would recommend a veto threat if the overall 
spending level in that transportation bill exceeded $256 
billion. Could you clarify as to whether or not that is a 
number that the Administration plans to stick by?
    Mr. BOLTEN. That is the number that was contained in our 
budget, Mr. Ryan. The three principles that the Secretary has 
enunciated are no gas tax or other Federal excise tax 
increases, no mechanisms like bonding that conceal the true 
cost to the taxpayers--I am reading from their letter right 
now--and that highway spending should be financed from the 
highway trust fund, not the general fund. The number that came 
to--that meets those principles is $256 billion.
    Mr. RYAN. If you read that letter, it looks like if the 
principles are violated, they are going to recommend a veto. 
They don't really necessarily say if the number is violated, 
they will or will not recommend a veto. I wanted to clear that 
up. Is the number part of that veto threshold?
    Mr. BOLTEN. The way it is stated in their letter is that if 
a bill that breached these principles were presented to the 
President, his advisers would recommend a veto. What I can say 
in addition to that, though, it is hard to imagine there are 
provisions, other than those that have been contained in our 
budget, which comes to $256 billion, that would not violate 
these principles.
    Mr. HERGER. [Presiding.] I thank the gentleman from 
Wisconsin. Now the gentleman from North Dakota to inquire.
    Mr. POMEROY. Thank you, Mr. Chairman. Mr. Director, you 
will go down in history. You have advanced the budget with more 
red ink than any OMB director in our Nation's history. I would 
think that under these circumstances that you would be under 
tremendous pressure to try and show credibility at this hearing 
today. Frankly I don't see it, in light of specific points of 
testimony that I will now walk you through.
    You said in your first response to Congressman Portman, and 
you repeated it later to Congressman Lewis, that about half of 
the budget shortfall was due to economic circumstances. Anyone 
reading the Wall Street Journal today is going to have access 
to a chart that adds a little more specificity to the actual 
figure. Just looking in the Wall Street here, they have got a 
breakout: legislative tax cuts, far and away the largest 
contributor to widening the deficit; technicals, including 
unanticipated revenue shortfalls, that is revenue coming in 
below what was projected is the next leading indicator; 
spending increases is the next leading indicator; and, last but 
not least, a weaker-than-projected economy. Again, I cite you 
to the chart in the Wall Street Journal.
    I have never before heard anyone talk about clumping the 
technical readjustments in budget scoring other than a flat-out 
relationship to the economy. I don't think it lies, and I think 
that was a misrepresentation by you in your testimony today, 
but that is not the end. You stated that----
    Mr. BOLTEN. May I respond on that one?
    Mr. POMEROY. Let me go through the itinerary first and then 
you can go back and rehabilitate yours. You stated not putting 
the cost of the war in the budget because you don't know how 
much it is going to be is established accounting principles, 
and that certainly is not the case. Can you imagine a 
corporation displaying their financials, a publicly traded 
corporation displaying their financials but leaving blank 
liabilities, known but uncertain, leaving it blank because it 
didn't know how much it was going to be? I used to be an 
insurance regulator. There is no way in the world I would have 
let insurance companies file financials like you file your 
budget. They had to estimate what future claims were going to 
be and figure it into your financials.
    You say the budget, you are going to cut the budget deficit 
in half, but you don't count a penny to the war which you 
indicated could be $50 billion this year, could be $50 billion 
next year. I certainly hope not, but you consistently low-
balled the cost of the war. That right there will keep you from 
meeting your cut-the-deficit-in-half target. We know the war is 
going to cost something. You sit here today and say not a penny 
is provided for in the budget, and that comports with budget 
principles. It does not comport with budget principles. I think 
it is fairly staggering that you make that suggestion.
    You go on to say, and have a chart prepared, that shows the 
Tax Code has become more progressive. This is really a game of 
semantics at that point. Without question, the largest share of 
the tax cut went to the most affluent few households in the 
demographic spreads there are clearly well known.
    Additionally, you state that we are going to cut this 
deficit in half and maybe we go into surplus in the second 5 
years of this decade. I cite to you the ``Analytical 
Perspectives, Fiscal Year 2005,'' prepared by the 
Administration, I believe prepared by your department. Pages 
192 through 196 have a variety of scenarios charted in terms of 
what happens to the deficit if your policies are enacted. In 
each case, you see revenues tailing down, reflecting spiraling 
deficits. The only--there is only one scenario that has any 
possibility of hitting budget--a budget balance in the second 
decade. That doesn't count any money whatsoever for fixing the 
AMT, a price tag estimated that could be as much as $600 
billion, and you indicated that the Administration is inclined 
to support the AMT, although you have not provided for it in 
this budget. So, quite frankly, you not only have the record 
for advancing more red ink than any other OMB director, you 
have also offered the most disingenuous, consistently 
misleading testimony of any Administration official that I have 
heard since I have been on the Committee on Ways and Means. 
Very unimpressive performance. I invite you to respond if the 
Chair will allow.
    Mr. BOLTEN. Mr. Chairman, may I take a moment?
    Mr. HERGER. Yes, please.
    Mr. BOLTEN. First of all, despite the difficult situation, 
I am proud of this budget. I think it is a strong budget and 
sets us on the right path, and I think it reflects forthrightly 
what our situation is.
    First, you raised the issue of how do we get where we are. 
Our economists have done the analysis, which has been confirmed 
by other economists, and they have shown clearly that our 
change in budget position from surpluses to deficits, which is 
what I was addressing with Mr. Portman, is about half the 
result of the economy. When the budgeteers say technical 
factors, they usually mean change in economic performance. I 
stand by those numbers, and I think most economists would 
support the proposition that overwhelmingly the largest cause 
of the deficit situation in which we now find ourselves is not 
the tax cuts that you all enacted, which have done a lot to 
bring this economy back, but rather the impact of recession 
that was well underway by the time this Administration took 
office.
    Second, on defense spending, it is in fact typical in the 
case of war for an Administration to seek additional money for 
supplemental spending for emergencies and war separately, not 
to carry them in the regular budget, especially when we don't 
know what the costs are. We said in this budget that we intend 
to ask for supplemental funding. I don't anticipate that that 
need for supplemental funding will affect our ability to meet 
the goal of cutting the deficit in half within 5 years. It will 
affect our numbers in the immediate years, our ability to cut 
the deficit as rapidly as that chart showed, because the chart 
I had did not in fact reflect Iraq and Afghanistan spending. I 
would anticipate that by the time we got toward the end of that 
chart, 2008 or 2009, that we would not need supplemental 
funding for the ongoing war effort.
    Third, I stand by the chart that we presented on the 
progressivity of the income tax cuts. While it is certainly 
true that wealthy people, if you add up total dollars, got 
larger dollar cuts than most middle- or low-income people, it 
is also true that they are paying a substantially larger share 
of the income tax. As a result of the tax cuts that this 
Congress enacted, they are paying an even larger share than 
they otherwise would have. That is not to minimize the cuts 
that have been included for both the working families of 
America, the $40,000 income family of four that has a $2,000 
tax cut embedded in this bill, and the small businesses of 
America.
    Finally, looking out and beyond our budget window, the 
optimism I expressed with Mr. Brady, I think, and with Mr. 
Lewis was for the coming 5-year period. I think we are showing 
in this 5-year period a very solid and sustainable path toward 
bringing the budget deficit well below half of where it is 
today, and I have optimism that the succeeding 5-year period 
has good prospects of bringing that deficit down toward zero. 
The difficulty comes about a decade from now, when the baby 
boomers begin to retire and we face a tidal wave of unfunded 
liabilities in our entitlement programs. I think those need to 
be addressed separately in the context of the entitlement 
programs.
    I think the budget that is reflected here is entirely 
responsible and forthright in dealing with a 5-year and even 
10-year situation. We need to address the longer term situation 
in the entitlements separately, and I look forward to the 
debate and conversation on that.
    Mr. HERGER. The gentleman from Michigan, Mr. Camp, is 
recognized.
    Mr. CAMP. Thank you, Mr. Bolten, for your excellent 
testimony and for the great job you are doing here today. My 
question really involves small businesses and smaller 
manufacturers. As you know, the Jobs and Growth Act (P.L. 108-
27) did some great things in terms of small business expensing. 
My question to you is, what do we have in the President's 
budget that might help in terms of bonus depreciation last time 
and the expensing issues that could help our small businesses 
and small manufacturers, which really are the job creators in 
many of our districts and really need the assistance--is there 
anything in the President's budget that might help with small 
business?
    Mr. BOLTEN. There is continuing strong funding for the 
Small Business Administration. I think just as important for 
the small businesses of America is the extension of the tax 
cuts that I was just discussing with Mr. Pomeroy. A lot of our 
small businesses pay their business tax through the top rate in 
the individual income tax. So, when there is referring to cuts 
for the wealthiest Americans, a lot of the people paying at 
that top rate are, in fact, the small businesses of America. If 
they are going to be in a position to plan for investment to 
add jobs, to add plant and equipment, they need to know those 
tax cuts will remain in place, which is why the Administration 
is strongly urging this Congress to make those tax cuts 
permanent.
    Mr. CAMP. I know you have mentioned today, and on other 
occasions, that about 50 percent of the deficit is revenue 
loss, revenue not coming to the Federal Government. Could you 
elaborate on that a little bit for me; and particularly which 
kinds of revenue we are not seeing, and what might be the cause 
of that?
    Mr. BOLTEN. Sure, and that 50 percent is revenue loss 
associated with flagging economic activity. The economists 
disagree somewhat on what the causes are for the radical 
dropoff in revenues that this country experienced over the last 
3 years, I think the only 3 years in modern history where the 
United States has had actually declining revenue for 3 straight 
years. I believe that one of the principal causes of that is, 
in fact, the stock market bubble, the tech bubble, that this 
country experienced in the 1990s. There was a great increase at 
that time in capital gains earnings and in options earnings. 
Then when the stock market collapsed, that collapse rippled 
through, surprised the actuaries and the estimators, and 
produced a decline in revenue much deeper than anyone had 
projected or even had seen before in the history of this 
country.
    The tax cuts that you all enacted in response to that have 
been extraordinarily well-timed to help bring the economy back 
from a trough like that. Our projections show the revenues of 
the United States firming substantially over the next few 
years, even assuming permanent enactment of all of the tax cuts 
you have enacted so far, because economic growth is really the 
key to a healthy budget.
    Mr. CAMP. Thank you very much. Thank you, Mr. Chairman.
    Mr. HERGER. Thank you. The gentleman from Tennessee, Mr. 
Tanner, you are recognized to inquire.
    Mr. TANNER. Thank you, Mr. Bolten, for your patience. I was 
reviewing your budget, and it shows that under your projections 
that the gross Federal debt would increase by approximately 
$4.8 trillion in the years 2001 to 2009; is that correct?
    Mr. BOLTEN. I don't have the tables in front of me. Let me 
ask my folks.
    Mr. TANNER. I assume that that is your opinion and best 
estimate of where we are and where the country is going; that 
is your best guess of where we are going.
    Mr. BOLTEN. That is basically a projection out of current 
trajectories with policies proposed in the budget.
    Mr. TANNER. How do you categorize interest on the debt?
    Mr. BOLTEN. In what sense?
    Mr. TANNER. As a tax or as an obligation, as a payment on 
revenues coming in? How would you categorize interest on the 
debt as an obligation of the Federal Treasury?
    Mr. BOLTEN. I think it is reflected in the charts.
    Mr. TANNER. Would you further agree that that obligation 
has to be paid, as we say, off the top before anything else is 
paid?
    Mr. BOLTEN. Yes.
    Mr. TANNER. So, one could argue, then, by policies that 
result in $4.8 trillion of additional debt, were we to pay 
interest at 4 percent on that debt at the end of that time, we 
would have effectively put $192 billion deficit or tax, if you 
will, on the American people because of the policies that we 
pursued from 2001 to 2009. Somebody has got to pay it.
    Mr. BOLTEN. I have been doing a little bit of arithmetic in 
my head, and I am coming up with $3.8 trillion, but for the 
general direction that your point is making, yes, with that 
additional debt.
    Mr. TANNER. The point I am making is we only tell half the 
story when we say we are going to continue to cut revenue and 
cut taxes with borrowed money, which is going to result in 
additional taxes in the future, just not right now, but 
additional taxes in the future as to whoever is around in those 
days to pay it.
    Mr. BOLTEN. Well, what I would say is that the important 
element about our budget is that what is going to make it 
possible for the Treasury to get revenues in and keep that debt 
as low as possible is a strong economy.
    Mr. TANNER. I understand that and I agree with that, but 
what I am saying, when you come with a budget document that I 
have from 2001 to 2009, $5.7 to $10.5 trillion debt, which is 
$4.8 trillion--regardless of whether it was $3.8 trillion to 
$4.8 trillion, whatever it is, when you come with policies that 
result in this much additional debt--I know that and I agree 
that the economy is what we want to do--but when you say this 
is the kind of policy we want to follow, you are in effect 
putting a tax on the American people at 4 percent, 5 percent, 
whatever it is, that must be paid--and that is page 2--of 
cutting taxes with borrowed money, in my judgment, because 
somebody has to pay the interest on the debt and it has to come 
off the top.
    Mr. BOLTEN. There is no disagreement, those obligations 
have to be paid, and we want to keep them as low as possible. 
What we disagree about is how do we keep them as low as 
possible.
    Mr. TANNER. The White House, the Senate, and the House--and 
when you show me a document that says that the best you can do 
is to accumulate this kind of red ink between now and 2009, 
that is in many ways we could do much better--I can't do 
anything about it, but it seems to me we can do much better as 
a country.
    Let me go to one other factor here when you say, no 
evidence of anybody having a problem with the policies we are 
pursuing that results in this kind of red ink. I know you know 
that the G-7 has expressed concern about it. Every day in the 
London Financial Times there are alarm bells ringing all over 
Europe about our financial situation. It seems like everybody 
in the world is concerned about what we are doing but us.
    The Wall Street Journal said that a number of Asian central 
banks, among the biggest investors in the Federal Government, 
they are looking at alternative targets for their vast dollar 
holdings. It goes on to talk about the treasuries of Japan and 
China. The Japanese Prime Minister said in response to a 
question, we are looking at diversifying.
    For you to say that there is nothing going on that we ought 
to be concerned about with respect to the rest of the world 
buying debt, I think you are not reading something, or else I 
am reading different things than you are, because I see alarm 
bells going off all over Asia and Europe. We sit here as the 
only ones on Earth that are not concerned about it. It just is 
incredible to me.
    Mr. BOLTEN. I certainly don't want to leave the impression 
that it is not a matter of concern. We haven't seen evidence of 
foreigners being reluctant to invest in the United States, 
which is a good thing, but I do agree with you, we do need to 
be concerned about it. The right way to address it is with the 
right kinds of policies as reflected in this budget. The most 
important thing we can do to ensure foreign confidence in our 
market and to keep foreigners investing in our market--
including buying our Treasury bills--is to keep the economy 
growing strongly. Where we have the disagreement is whether the 
tax cuts are part of that. I happen to believe, and the 
Administration believes, that the worst thing we can do for 
this economy is raise taxes at this time.
    Mr. HERGER. The gentleman's time has expired. The gentleman 
from Pennsylvania, Mr. English.
    Mr. ENGLISH. Thank you. Mr. Bolten, I have been listening 
with a great deal of interest, and I think a couple of things 
have to be put into context. I appreciate your budget 
submission because you put into place, really the first time in 
my memory that I have seen this coming in a Presidential 
budget, a significant new set of budget enforcement rules 
building on the pay-go rules that had expired. I wonder if you 
could explain how the new budget enforcement rules proposed in 
the budget are designed to control spending.
    Mr. BOLTEN. I am happy to, Mr. English, and thank you for 
the opportunity. We have proposed three measures:
    One is to put into statute caps on discretionary spending 
similar to those that arise in budget resolutions each year, 
but require a fight over the budget resolution each year. We 
would like to make that statutory over a 5-year period.
    The second is to restore what is called pay-go caps on 
mandatory spending. The requirement would be that if any 
proposal comes before the Congress that would increase 
mandatory spending, then there would be a corresponding offset, 
a decrease in mandatory spending coupled with the increase. I 
think that may be the most important thing we can do, because a 
lot of the spending that has been difficult to control in the 
legislative process has been the mandatory spending that isn't 
subject to the normal authorization and appropriations process, 
but rather tends to go out the back door in a way.
    The third element of our proposal is a point of order in 
the other body to make it difficult to increase the long-term 
unfunded liability of some of our big entitlement programs. I 
think the real concern ought to be focused beyond the 10-year 
window. We need desperately to take a look at the unfunded 
liabilities in our big entitlement programs.
    Mr. ENGLISH. Why is it important that these rules not apply 
to tax changes?
    Mr. BOLTEN. Thank you for reminding me of that. We have not 
proposed that tax cuts be subject to the same sort of 
limitations. The principal reason is that the real problem we 
see in the budget is the increases in mandatory spending, not 
the tax cuts, which have a tendency to actually help economic 
growth, which helps our budget situation.
    Spending increases and tax cuts are not equal as far as the 
budget is concerned. A spending increase will increase the 
deficit by at least the amount of spending increase plus 
interest, as I was discussing just a moment ago with Mr. 
Tanner. Whereas a tax cut will actually have important feedback 
effects in the economy, making the economy stronger and able to 
bear a larger debt burden than it otherwise would. That is why 
we have done that. That is true both in the short run and the 
long run.
    I note that Chairman Greenspan, when he was testifying this 
morning, if I understood his testimony, also emphasized that 
our longer term problem is on the expenditure side.
    Mr. ENGLISH. On a rather different front, Mr. Tanner, and 
others have expressed concern about the long-term impact of 
deficits and increases in the national debt, but I think the 
real target and what affects economic behavior and conditions 
more than anything is the size of the debt relative to the 
economy. Would you not agree?
    It seems to me that there is a point we discovered a few 
years ago at which, even when you are still running a deficit 
but headed toward a balanced budget, the deficit begins to--I 
am sorry, the national debt begins to shrink relative to the 
economy. The economy grows faster than the national debt does.
    Under your budget projection, under your proposal, how soon 
does the national debt start to shrink relative to the economy, 
assuming the economy continues to grow based on your 
assumptions?
    Mr. BOLTEN. Mr. Chairman, if I may take 60 seconds to 
respond, because Mr. English I think has raised the absolutely 
crucial point here that I didn't have a chance to address.
    Mr. ENGLISH. We wait until the end of the hearing.
    Mr. BOLTEN. I appreciate you raising it, because the 
economists will tell us the reason to worry about deficits is 
because they raise the national debt. The reason to worry about 
the debt is that at some level it begins to crowd out private 
investment in the capital markets. So, I think you are focusing 
on exactly the right question.
    In our projections, the debt-to-GDP ratio peaks in 2007 and 
then begins to decline after that, and that is assuming the 
permanent enactment of all of the President's tax cuts. The 
average, postwar debt-to-GDP ratio is about 44 percent. We are 
today, in 2004, at about 38.6 percent. We expect the peak to be 
around 40 percent in 2007 and then the rate is expected to 
decline thereafter. So, we are not in a historically out-of-
range situation. We do need to keep an eye on that debt-to-GDP 
ratio. That is what the capital markets will be looking at.
    With the policies proposed in this budget, which include 
pro-growth economics and spending restraint, we see the debt-
to-GDP ratio peaking well below the postwar average in 2007, 
and coming down thereafter.
    Mr. ENGLISH. Thank you for the brilliance of your analysis 
and a very excellent presentation.
    Mr. HERGER. The gentleman's time has expired. The gentleman 
from Texas.
    Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Bolten, we are 
pressed for time, so I am going to give you a whole bunch at 
once and see if you can come up with some answers. I would like 
to know the difference between private activity bond under 
consideration and elsewhere in reference to the highway bill 
reauthorization. Are the bonds a cost-effective way to get 
roads built? In your view, what benefits would private activity 
bonds provide for transportation? You know they are different 
from what we are talking about.
    Mr. BOLTEN. In the interest of time, Mr. Johnson, I will 
ask to give you a long answer for the record, but basically 
they are a good thing, because they make it possible for the 
States--sometimes in cooperation with the private sector--to 
finance important infrastructure projects without substantially 
burdening the Federal budget. There is some burden in these 
bonds because the interest is not taxable, and so we do need to 
take account of that cost, but they don't actually impose a 
direct cost on the Federal budget. From where I sit today, that 
is extremely important.
    [The information follows:]

    A private activity bond is a municipal bond that is either used 
entirely or partially for private purposes and is given Federal tax-
exempt status. The bonds would be issued by local governments 
(localities, states, other bond issuing authorities), but the proceeds 
may be provided to a private firm to develop or operate a facility like 
a toll road. The firm would repay the local government from revenue 
generated by the facility. Currently, tax-exempt private activity bonds 
are issued for a wide range of privately developed and operated 
facilities, including: airport facilities, docks and wharves, water, 
sewage and solid waste disposal facilities, mass commuting facilities, 
qualified residential rental and other capital projects.
    Unlike private activity bonds, other financing proposals that have 
been considered in the context of highway reauthorization involve 
creating new Federal bonding programs to supplement spending on Federal 
transportation programs. These options were developed to take advantage 
of Federal scoring rules and are not the most efficient means for the 
Federal Government to raise money to pay for roads and transit systems. 
These options also could potentially disrupt the established 
marketplace for Treasury bonds, increasing the government's cost of 
borrowing. Moreover, creating a transportation bonding program would 
set a dangerous precedent for using special bonding to pay for other 
government programs.
    In many instances, yes. The private activity bond proposal is 
intended to encourage private participation in surface transportation 
infrastructure projects. This has the potential to reduce the costs 
since the private sector can apply its management expertise to the 
development and operation of transportation facilities. In addition, 
unlike other bonding proposals for highways and transit, private 
activity bonds minimize the risk and liability to the Federal 
Government.
    The primary benefit is to permit state and local governments to 
leverage their funding and permit more construction. The bonds also 
foster greater flexibility for state and local governments for use in 
funding transportation projects, which should facilitate greater 
private investment. Another benefit is that the investment and risk is 
shared between the government and the private sector.

                                 

    Mr. JOHNSON. I asked the question before, if we are not 
getting that tax right now, why is it a loss? That is our 
scoring system. Thank you so much for your testimony. I 
appreciate it, and I appreciate you supplying a long answer for 
us for the record.
    [The information follows:]

    It is not possible to predict with certainty the extent to which 
private sector capital invested in these tax exempt bonds would have 
otherwise been invested in taxable investments, other tax exempt 
investments, or some other taxable use. That being said, when creating 
a new tax exempt investment opportunity, it is prudent to make 
conservative assumptions about the impact of such a policy change on 
Federal revenues, which is why both the Executive Branch and 
Legislative Branch have traditionally scored such proposals as a loss 
to the Treasury.

                                 

    Mr. HERGER. I thank the gentleman from Texas. I would like 
to conclude, Director Bolten, with just a couple of comments, 
if I could. Number one, I want to thank you and the Bush 
Administration for the leadership that you have shown during 
this incredibly challenging time on the war on terrorism and 
with--and at the same time, having inherited this recession 
that we have been in, and for hanging in there. We so often 
hear from our good friends on the other side of the aisle the 
fact that these tax cuts are going to the rich. It is 
interesting, I have some statistics here from the Internal 
Revenue Service which indicate--and I guess my question is just 
how much should we have the rich pay?
    My question would be, if we had the top 1 percent of those 
paying Federal income tax pay 33.9 percent of the total Federal 
income tax paid, would that be enough? Well, that is at least 
what they were paying just a couple of years ago. It is 
probably greater than that now. The top 5 percent pay 53.3 
percent. Again, these are 2001 stats and you may have some that 
are more current than that, but over half of the tax paid by 
the top 5 percent. The top 10 percent are paying 64.9 percent, 
almost two-thirds. The top 25 percent, 82.9 percent. The top 50 
percent are paying 96 percent, which leaves the bottom 50 
percent paying only about 4 percent.
    It is interesting with the chart that you gave us, even 
with the tax reduction, those that are in these highest 
brackets, taxpayers are still paying more than they were 
before. So, clearly I think it could be argued that the rich 
are more than paying their fair share.
    Again I want to thank you for the courage and of the 
Administration for spurring the economy at this time that we so 
much need it, and we do see the economy improving. I thank you 
for appearing before us today. With that, this hearing stands 
adjourned.
    [Whereupon, at 3:15 p.m., the hearing was adjourned.]
    [Submission for the record follows:]
          Statement of Credit Union National Association, Inc.
    The President's 2005 Budget, which was transmitted to the Congress 
on February 2, 2004, contains a number of proposals that the Credit 
Union National Association (CUNA) supports. CUNA represents over 90 
percent of the nation's approximately 10,000 state and federally 
chartered credit unions and their 84 million members. We are pleased to 
provide comments for the record in connection with the February 11, 
2004, hearing of the House Committee on Ways and Means on the 
``President's Fiscal Year 2005 Budget.''
    The Administration's FY 2005 budget plan would, among other things, 
create an Individual Development Account (IDA) tax credit and simplify 
personal saving by replacing existing tax-preferred saving options with 
Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) 
and Employer Retirement Savings Accounts (ERSAs).
    IDAs are matched savings accounts that may be opened by persons who 
meet a net worth test and are eligible for the Earned Income Tax Credit 
or Temporary Assistance for Needy Families. The accounts are restricted 
to three uses: 1) buying a first home; 2) funding post-secondary 
education or training; or 3) starting or improving a small business. 
They were first authorized by the Personal Work and Responsibility Act 
of 1996 (P.L. 104-193). In 1998, the Assets for Independence Act (P.L. 
105-285) established a five-year $125 million demonstration program 
administered by the Department of Health and Human Services to evaluate 
the effects of savings incentives on persons of limited means.
    Currently, contributions are not deductible but are matched by 
contributions from a program run by a state or a participating 
nonprofit organization. Matching contributions and their earnings are 
not taxed to the individual. The Administration's IDA proposal would 
provide dollar-for-dollar matching contributions of up to $500 
supported by a 100 percent transferable tax credit to sponsoring 
financial institutions. An additional $50 per account per year would be 
available to offset administrative costs and expenses associated with 
providing financial literacy training.
    In this connection, CUNA notes that H.R. 7, the ``Charitable Giving 
Act,'' passed by the House on September 17, 2003, by a vote of 408-13 
and S. 476, The Charity, Aid, Recovery and Empowerment (CARE) Act of 
2003, passed by the Senate on April 9, 2003, by a vote of 95-5 both 
contain IDA expansion provisions and await further congressional action 
in conference. We urge you to include the transferable tax credit 
provision included in the Senate bill in the final agreement reached on 
this most important legislation.
    Under the Administration's Lifetime Savings Accounts proposal, 
individuals of any age or income could contribute up to $5,000 annually 
(nondeductible) to a LSA, regardless of whether they had any earnings 
that year. Investment earnings and distributions from the account would 
be tax-free. There would be no required distributions from LSAs during 
the account owner's lifetime. Coverdell Education Savings Accounts 
(ESAs) and Section 529 Qualified State Tuition Plans (QSTPs) could be 
converted to LSAs up to December 31, 2005.
    We agree that these more relaxed rules could encourage individuals 
to save who might otherwise not do so in targeted savings plans because 
of restrictions on and penalties for withdrawals.
    The Administration's Retirement Savings Account proposal would 
allow individuals of any age or income to contribute up to $5,000 per 
year \1\ (nondeductible) from earned income to a RSA. Qualified 
distributions \2\ would be tax-free. All other distributions would be 
subject to tax on amounts exceeding contributions. Current ``Roth 
IRAs'' would be renamed RSAs and would be subject to the rules for 
RSAs. Owners of traditional IRAs could convert them to RSAs.
---------------------------------------------------------------------------
    \1\ For a married couple, the maximum contribution would be the 
lesser of annual earned income or $10,000.
    \2\ Qualified distributions would be those made after age 58 or if 
the account owner died or became disabled.
---------------------------------------------------------------------------
    We agree that RSAs would simplify the range of choices for 
taxpayers saving for retirement by making the Roth IRA concept 
available to all taxpayers. Any taxpayer could contribute up to the 
lesser of $5,000 or their earned income. Unlike current law, however, 
withdrawals could only be made for retirement, beginning at age 58. 
RSAs would address a key component of retirement--personal savings.
    By eliminating income restrictions, the RSA could become a strong 
vehicle for retirement savings, particularly for those who are within a 
decade of beginning to retire.
    The Employer Retirement Savings Accounts proposal would make many 
of the employer plans easier to understand. Beginning in 2005, 
Sec. 401(k), Sec. 403(b), Savings Incentive Match Plans for Employees 
(SIMPLE plans), Simplified Employee Pension (SEP) plans and 
governmental Sec. 457 plans would be consolidated into ERSAs, which 
would be available to all employers. Qualification rules under the 
Internal Revenue Code would be simplified.
    LSAs, RSAs and ERSAs could provide additional encouragement for all 
taxpayers to save. However, we urge you to also include and expand the 
current law SAVER's tax credit in the provision.
    American's private savings rate remains low and many low- and 
middle-income individuals continue to have inadequate savings or no 
savings at all. Lower income families remain more likely to be more 
budget constrained with competing needs such as food, clothing, 
shelter, and medical care taking a larger portion of their income. 
Applying the SAVER's credit to RSA and ERSA contributions would provide 
a needed additional tax incentive that would enhance their ability to 
save adequately for retirement. We believe the credit should also be 
made refundable to be available to individuals who might not have to 
pay tax in any particular year.
    CUNA urges Congress to pass tax legislation that would encourage 
all Americans to increase personal savings. We understand that Congress 
may address other tax matters, either as a part of this package or 
later in this session. Should such an opportunity arise, we request 
that you consider legislation that would:

      Simplify the Earned Income Tax Credit;
      Create Farm, Fish, and Ranch Risk Management Accounts 
(``FFARRM'' accounts);
      Permanently extend the retirement and savings provisions 
of the Economic Growth and Tax Relief Reconciliation Act of 2001 
EGTRRA;
      Permit tax free withdrawals from IRAs for charitable 
contributions;
      Provide a tax credit for developers of affordable single-
family housing;
      Permanently extend the disclosure of tax return 
information for administration of student loans; and
      Extend the protections of section 7508 of the Code to all 
Armed Forces reservists and National Guardsmen called to active duty.
CONCLUSION
    CUNA appreciates having this opportunity to present our views on 
the revenue provisions contained in the President's fiscal year 2005 
budget proposal. We look forward to working with you in the future on 
these most important matters.

                                 
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