[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
              TREASURY DEPARTMENT FISCAL YEAR 2008 BUDGET
=======================================================================




                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 7, 2007

                               __________

                            Serial No. 110-5

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
LOIS CAPPS, California               J. GRESHAM BARRETT, South Carolina
JIM COOPER, Tennessee                JO BONNER, Alabama
THOMAS H. ALLEN, Maine               SCOTT GARRETT, New Jersey
ALLYSON Y. SCHWARTZ, Pennsylvania    THADDEUS G. McCOTTER, Michigan
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
BETTY SUTTON, Ohio                   JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                James T. Bates, Minority Chief of Staff



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 7, 2007.................     1
Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, a Representative in Congress from the State 
      of Wisconsin...............................................     6
    Hon. Henry M. Paulson, Jr., Secretary, U.S. Department of the 
      Treasury...................................................    12
        Prepared statement of....................................    14


                          TREASURY DEPARTMENT
                        FISCAL YEAR 2008 BUDGET

                              ----------                              


                      WEDNESDAY, FEBRUARY 7, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. John Spratt (Chairman 
of the committee) presiding.
    Present: Representatives Spratt, Edwards, Cooper, Allen, 
Schwartz, Kaptur, Becerra, Doggett, Blumenauer, Berry, 
McGovern, Sutton, Andrews, Scott, Etheridge, Hooley, Moore, 
Ryan, Barrett, Bonner, Garrett, Hensarling, Lungren, Simpson, 
Conaway, Campbell, Tiberi, Porter, Alexander, and Smith.
    Chairman Spratt. I call the hearing to order, and welcome 
our witness today. He happens to be an old personal friend. 
About 30 years ago, or longer than either one of us care to 
admit, I was working at the Office of the Secretary of Defense, 
for the Comptroller, when a young JG in the Navy by the name of 
Hank Paulson joined us in the office there. We worked together 
at their for the next 18 months, two years as part of the 
defense effort. And I, for all these years since had not had an 
opportunity to continue our friendship, but have enjoyed 
renewing it since he is come back to Washington. And I was 
never surprised by any of the many achievements that he has 
racked up in the course of his career. And the President could 
not have chosen better in selecting Hank Paulson to be 
Secretary of the Treasury. So we are very, very pleased to have 
you here today to talk about the President's budget.
    Mr. Paulson, you have expressed some concern, like Mr. 
Bernanke and others, having become part of the administration's 
economic team, about the entitlement obligations of this 
country into the future. And we understand those concerns and 
we share those concerns, but just as a matter of background, 
since you weren't here, what happened before you came, let me 
bring you up to where we have been over the last six years.
    Six years ago, as the economists at OMB looked out over the 
next 10 years they foresaw nothing but surpluses coming up, 
$5.6 trillion in all. We had a tentative understanding in both 
houses and both parties of Congress that as we got to this 
point, with unprecedented surpluses, we would make 
unprecedented use of the surplus we had in Social Security. We 
would forswear ever borrowing against that surplus and spending 
it.
    Instead, what we wanted to do was to take the surplus in 
Social Security and use it to buy down outstanding debt, reduce 
the debt owed by the Treasury to the public so that over time 
we would add to net national savings, lower the costs of 
capital, and by 2020 or so, when Social Security went cash-
negative, the Treasury would be in better shape than ever, with 
less debt otherwise to pay the public, would therefore be 
better situated to meet its obligations under Social Security 
and for that matter, Medicare, too. The idea that I am talking 
about had a corny name, ``black box,'' but had a serious 
substantive core to it. And that was the core idea of reducing 
the publicly-held debt.
    We implore President Bush to embrace this idea, adhere to 
this idea in the budgets he sent us, and not to continue 
borrowing and spending the Social Security surplus. I have made 
the response to the President, for example, on his Saturday 
morning address the weekend after he sent his budget up here. 
That was 2001. I said, Mr. President, it may seem like we are 
sitting on an island of surpluses, but we are surrounded by a 
sea of debt, long-term debt. And at least part of the largess 
that we find, the $5.6 trillion in surpluses ought to be used 
to retire some of that long-term debt so we can make assuredly 
solvent the obligations of Social Security and Medicare well 
into the future.
    The Bush administration took a different path, one occurred 
mainly by substantial, some would say massive tax cuts, $1.7 
trillion in all, over a period of 10 years. Well, it turned out 
that the 10-year surplus of the $5.6 trillion was overstated by 
as much as 25, 35 percent. When other factors began to take a 
toll; recession, terrorism and other things began to take their 
toll on the budget, the Bush administration did not make any 
kind of mid-course correction. They went full speed ahead. And 
as a consequence we have seen debt accumulations on a scale 
that has not been experienced since the Second World War. If I 
could have chart number eight, I think it is, Chris.


    This is just a simple back-of-the-envelope way of looking 
at the debt accumulation over the last six years. When 
President Bush came to office we had outstanding debt, subject 
to limit, total statutory debt of a $5.7 trillion. That debt 
today, six years later, is $3 trillion greater, nearly 60 
percent greater. The debt that will be incurred under this 
budget, in the remaining two years of the Bush administration, 
is indicated by the home budget deficit, which is about $450 
billion in each of the four coming years. Even if your budget 
submitted today is adopted, that means we will add about $4 
trillion in debt during the course of this administration, as 
compared to or contrasted with $5.7 trillion outstanding at the 
time the Bush administration took office.
    That is a concern to all of us and I am sure it is to you. 
And the ways to mitigate it by saying, ``Well, we have to look 
at it as it pertains to GDP''; one way to look at it is by 
looking at what it has done to debt service, because of all the 
entitlements of all the mandatory spending items in the budget, 
this one is truly obligatory. The others can be manipulated, 
with great political expense. But debt owed, the interest that 
has to be paid to service the debt, is substantial and it is 
crowding out the resources that we might otherwise use for 
reform of Medicare and Social Security.
    So that is where we are. And the budget we receive today we 
hope might be at least a first step towards a change in course, 
but we have been through this budget and you will forgive our 
skepticism, but we think the revenues are overstated, and we 
think the spending is understated, and therefore we think the 
goal, a balanced budget in 2012, is doubtful at best.
    Here are the major concerns we have: this budget assumes 
that the alternative minimum tax will remain in full force and 
effect from 2008 on, through most of the forecast period, for 
most of the time frame of this particular budget. The AMT will 
be there collecting money like a vacuum cleaner. CBO says over 
a 10-year period of time, the AMT, Alternative Minimum Tax, if 
not adjusted, if not indexed to inflation, will collect 
$1,041,000,000,000 more than the regular tax system would 
collect.
    In addition, we find as we look through the budget that 
everywhere that an assumption is made about economic 
conditions, OMB is a bit more optimistic than CBO as a 
consequence. When you accumulate all those differences, carry 
them out over time, the difference in the year 2012, the target 
year, is $608 billion in GDP and about $155 billion in 
revenues. That means that the $61 billion surplus that you are 
forecasting for that year, if it were derived by using CBO 
numbers would instead be $94 billion deficit. So these are the 
reasons we are concerned.


    Let me show you our next chart. This is where we plot the 
likely course of this budget. Assuming that something is done 
to neutralize the effect of the AMT, so that it is not paid by 
middle income taxpayers for whom it was never intended, and 
assuming that war costs continue after 2009, your budget has a 
placeholder of $50 billion after providing a supplement of $170 
billion and a supplemental of $140 billion, it drops off 
precipitously to $50 billion, without any real information as 
to why. It has been described as a placeholder, or a plug. And 
that in 2010, 2011, and 2012 there's no provision made for the 
incremental costs of deployment in Iraq, the Persian Gulf, or 
Afghanistan, or North American air defense. There is nothing 
incremental in there, and that is hard for us to believe. Would 
that it were so. I hope it happens, but I don't think it is 
realistic forecasting to drop it out.
    When we adjust your numbers for two things, an assumption 
that the AMT will be neutralized one way or another, will not 
collect that trillion dollars in additional revenues; and an 
assumption that war costs will continue at a declining, 
diminishing rate per the CBO's model which assumes that they 
will drop off, the number deployed will decline to 75,000 in 
the year 2013 in those two theaters; the divergence in curves 
is dramatic. You can see it here. Instead of moving the balance 
in 2012, the budget is in deficit by $145 billion, and over the 
next five to six years, it goes deeper into deficit such that 
at the end of the time frame it is $460 billion in debt.
    This is a matter of major concern to us because we do not 
believe the budget achieves its tagline which we heard 
repeatedly yesterday; namely, we balance the budget but don't 
raise taxes. The AMT does raise taxes by a substantial amount. 
And if you factor in the AMT and war costs, you don't achieve 
balance, it seems to us. If you disagree, we would love to hear 
your construction of what you think the likely events are going 
to be.
    We are concerned too about some of the cuts you made. Let 
me give you one for example. It is a small cut that accumulates 
to a big factor, education and job training, function 500 of 
our budget. You will be up there with the President in just a 
few weeks asking for an extension of fast-track trade 
negotiating authority. We think one complement to fast-track 
negotiating authority is to have in place a robust job 
retraining program, educational program, so that we will have a 
workforce that is proficient, sharp, well-educated, competitive 
with anywhere in the world. In other words, we believe we have 
got to make those human capital investments to achieve that 
goal if we are going to have a global free-trade economy.
    We do not see that commitment to investing in human 
capital. The function that deals with education and job 
training is cut by nearly $4 billion next year and by more in 
the out years, $4 billion. Education, the Department of 
Education is cut by $1.5 billion. You can say that is not a 
lot, but there are lots of us believe that one way to make our 
entitlements more affordable is to make our workforce, our 
people more productive. And we don't see that thrust in this 
budget, and we have a great concern that this budget is going 
to accumulate more debt and not achieve the other answer we 
think the budget should be striving for.
    So we have got a common problem in front of us. We have got 
problems like cost of entitlements well into the future that 
only we working together can settle. The difficulty of 
resolving them is such that unless we sit down at a table, put 
everything on the table, bring everything to the table, we will 
never work the problems out. we can make nickel-and-dime 
changes to Medicare, as I think you are doing here, but we will 
not really resolve the problem until we work together.
    Unfortunately I don't see this budget that is submitted 
today as kind of a common ground. We are starting at a long way 
apart, but we are still committed to working together with you 
to achieve the goal we all seek and want, that is a balanced 
budget as soon as possible, where we begin saving instead of 
dis-saving, and we begin making the investments in human 
capital that we think are necessary as a complement to our 
economic policy.
    Thank you for coming here today. We look forward to your 
answers, your testimony. But before we do that, I want to turn 
to Mr. Ryan for a statement on his part.
    Mr. Ryan. I thank the Chairman for yielding. And I want to 
welcome the Treasury Secretary. This debate we are going to 
have about the budget is a good debate, it is going to be a 
healthy debate. It is going to be about how we balance the 
budget. I think both sides are going to agree the need to 
balance the budget. Then the question then comes down to how we 
balance the budget. The administration has made a proposal to 
balance the budget without raising taxes by controlling 
spending. That means this is going to be a big dialogue about 
taxes. And I think it is important as we move forward in this 
dialogue to let us just look at what the tax cuts did, what are 
the tax cuts, where are we with respect to these tax cuts? And 
I am going to go through a few charts and talk about this, and 
how it relates to spending.


    Chart number one, which you see here, this simply shows you 
the difference in projections. And we are going to hear a lot 
about differences in projections between OMB and between CBO, 
how OMB has a slightly higher revenue projection than CBO. If 
you look at that last three years, the blue line is OMB 
projections; the red line is CBO projections; the green line is 
what actually occurred. Both CBO and OMB have underestimated 
the revenues that have come into the Federal Treasury. We will 
only know what happens in 2007 after we go through 2007, but 
the point is that both of these estimating agencies have under-
scored what revenues actually come in. Go to chart two, please.


    Now let us take a look at what these tax cuts actually 
achieve. What good are these tax cuts? Why are these tax cuts 
important?
    When the tax cuts occurred, we had high unemployment and 
when you take a look at the so-called surpluses that the 
administration inherited when they came into power in 2007, let 
us remember that there were some actualized surpluses that 
actually came in. What happened? Congress and the White House 
paid down $600 billion in debt, gave people back some of their 
money.
    The rest of the surpluses were projections. Those 
projections did not anticipate or foresee four things happening 
in the next year that actually happened. They did not foresee 
the 9/11 attack. They did not foresee the dot-com bubble 
coming. They did not foresee the recession that happened. They 
did not foresee the Enron scandals that happened, that crashed 
our markets and reduced our revenues.
    And so you had an economic perfect storm which was not 
projected and therefore those projected surpluses turned into 
actual deficits. But when those tax cuts kicked in and when 
those tax cuts happened, you can see the peak of unemployment 
at about 6.3 percent. Unemployment moved down precipitously. Go 
to the next chart, please.


    When you take a look at the tax cuts, before and after tax 
cuts, look at job creation. We were losing about 100,000 jobs a 
month before the tax cuts. After the tax cuts we had record job 
growth to the point where we have now 7.4 million jobs created 
since those tax cuts. Next chart, please.


    Take a look at business investment. Business investment in 
the prior 10 quarters before the tax cuts shrunk on average 5.9 
percent a quarter. Business investment after the tax cuts grew 
on average 6.9 percent a quarter. Next chart please.


    Revenues. Now this is the real untold story. When we cut 
these taxes--I served on the Ways and Means Committee, was one 
of the authors of these 2001, 2003 tax cuts. We really 
believed, because all of our estimators at CBO, at joint tax, 
at OMB, at Treasury were telling us: ``you cut taxes it may 
help the economy, it may produce jobs, to get us out of the 
recession, but it is going to drive us deeper into deficit. It 
is going to cost us revenues.'' That is what all the estimators 
told us.
    Well, let us take a look at what happened to federal 
revenues after we cut tax rates. We cut tax rates on incomes 
across the board. We doubled the child tax cut. We get rid of 
the marriage penalty. We repealed or put on a glad path to 
repeal the death tax. We reduced capital gains taxes. We 
reduced income taxes. We increased expensing for small business 
for three years.
    Look what happened after all those tax rate were lowered. 
Tax revenues boomed. Tax revenues did not go down. The deficit 
did not go up. Tax revenues went up. Look at the next chart.


    What did it do to the economy? What did these tax cuts do 
to GDP growth and employment? Look at the GDP growth before the 
tax cuts. Look at all those quarters going from 2000 to 2003. 
GDP growth averaged 1.1 percent. From the tax cuts on, GDP 
growth has averaged 3.6 percent.
    And I want to conclude with this. You can go to the next 
chart please.


    As we have heard from nearly every witness who has come 
before this Committee in the past few weeks, our biggest 
budgetary challenge is on the spending side, our massive 
entitlements programs are simply growing too fast to be 
sustained.
    Take a look at this chart. This chart shows you that if we 
keep the tax cuts permanent, which is the black line, the 
bottom line, throughout our baseline period, that is where 
revenues ought to be as measured by CBO. If we get rid of those 
tax cuts and allow those tax cuts to expire, that is the red 
line, the red line as scored by CBO. Not a lot of daylight in 
between the two of those. But if we do nothing about spending, 
if we do nothing about entitlements, that is the green line.
    So even if we get rid of all these tax cuts, which produced 
all those excellent economic growths; 7.4 million new jobs, 
higher business investment, better international 
competitiveness in the global marketplace; if we get rid of all 
those tax cuts, we still have this spending problem. Without 
reform by the year 2040, when my kids will be exactly my age, 
Social Security, Medicare, and Medicaid will consume 20 percent 
of our economy. That is equivalent to the cost of the entire 
federal government today. In fact, even if we raise taxes to 
balance the budget in the short term, as you can see, we will 
go right back into deficits.
    So with retirement of the baby boom generation, the 
situation will just keep getting worse, even if we raise all 
these taxes. So the question is, are we going to balance the 
budget at a higher level of spending and a higher level of 
taxes today, which would we know we will have much more 
spending in the future because of these entitlements? Or do we 
want to balance the budget at a lower level of spending rather 
than a higher level of taxes and spending, so we would be in 
better positions going into the future?
    The question comes down to this. We have two fiscal 
challenges. We have got this out-of-control spending with these 
entitlements that we have to, on a bipartisan basis, come 
together to figure out how to fix these problems, how to fix 
these programs. We also have globalization. We also have 
incredible pressures, incredible economic challenges unlike any 
we have seen before, from countries like China, from countries 
like India, that we have to be prepared for. We can no longer 
take for granted that we are the leading economic power in the 
world.
    And so if we simply say we will meet the challenge of these 
entitlements by just raising taxes, we will lose our economic 
standing in the world and our children will not have the 
standards of living that we now enjoy, let alone being better 
than what we have right now.
    So it all points to spending. Do we want to balance the 
budget by controlling spending? or do we want to balance the 
budget by raising taxes? Because even if we balance the budget, 
that way or the other way, we are going to go right back into 
deficits if we don't fix these entitlement programs.
    This is the context in which this debate will occur. I want 
to welcome the Treasury Secretary for coming with us today, and 
I hope that his perspective adds a little bit to this debate. 
Thank you.
    Chairman Spratt. Mr. Secretary, welcome again, and let me 
say that your statement can be entered in the record. You can 
summarize it as you please, and you can go beyond it. The floor 
is yours, and we welcome you, and we look forward to your 
testimony.

      STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY,
                U.S. DEPARTMENT OF THE TREASURY

    Secretary Paulson. Well, thank you very much, Mr. Chairman. 
Let me begin by saying I too remember fondly those days 32 
years ago in the Pentagon. And then we both had more hair. It 
was my first job----
    Chairman Spratt. And I had less girth. [Laughter.]
    Secretary Paulson. Me too. And it was my first real job. 
And I got some great mentorship from you. And I very much look 
forward to working with you over the next couple of years.
    Let me go a bit beyond my statement, and I will shorten it 
a bit, because I did it twice yesterday and you've got a copy 
of it in the record. But I am very pleased to be here to give 
you an overview of the budget.
    We do start from a position of strength. Our economy 
appears to be transitioning from a period of above-trend growth 
to a more sustained level of about 3 percent growth, and as 
Congressman Ryan mentioned, more than 7.4 million jobs have 
been created since August of 2003. Our unemployment rate is low 
at 4.6 percent, and as something that is very important to me, 
over the last 12 months real wages have increased at 1.7 
percent. So we are seeing these gains begin to translate 
themselves into higher income for the average worker.
    Strong economic growth is also benefiting the government's 
fiscal position. In the first quarter of fiscal 2007 budget 
receipts totaled $574 billion, an increase of 8 percent over 
the same period in fiscal 2006. You know, as a result of the 
revenue, increased revenue over the last two years, we have 
brought the federal budget deficit down to 1.8 percent of GDP.
    Now, the President's budget really reflects key priorities: 
continued job growth, wage growth, economic expansion, energy 
security, the importance of healthcare, and having a strong 
economy, which is going to let us take on entitlement reform. 
As Congressman Ryan mentioned, the budget also emphasizes 
fiscal debt discipline.
    I would like to say a word or two about the healthcare 
proposal. Under the current law the tax subsidy of health 
insurance purchased through employers will average more than 
$300 billion a year for the next 10 years. That is the largest 
tax expense that we have. And for that huge expenditure, we 
have got a system in which rising costs are a burden to 
families and businesses, and which millions of people have no 
insurance at all. The President's proposal would make 
healthcare more affordable and more accessible. It will give 
all taxpayers who buy health insurance, whether on their own or 
through their employer, and no matter what the cost of the 
plan, the same standard deduction for health insurance: $15,000 
for a family, $7,500 for an individual.
    The President's proposal will help hold down healthcare 
costs by removing the current tax bias that encourages 
overspending. Costs would become clearer, giving patients more 
power to make informed choices about their healthcare spending. 
The proposal would also help jumpstart individual insurance 
markets, so consumers have more choices than are available 
today. Healthcare would be more consumer-driven, more 
affordable, and more accessible for millions of Americans.
    Energy security is another concern of the American people, 
and it is a priority that is addressed in the President's 
budget. President Bush has put forth an ambitious goal of 
reducing America's projected gasoline consumption by 20 percent 
over the next 10 years. We can achieve this goal by 
dramatically increasing the supply and use of alternative 
fuels, and improving fuel efficiency by reforming and 
increasing CAFE. The expanded fuel standard will provide 
entrepreneurs and investors a guaranteed demand for alternative 
fuels, which will accelerate private investment and 
technological development. Reforming CAFE will allow us to 
increase the fuel economy of our automobiles as fast as 
technology allows. With a more diverse fuel supply and a better 
fuel efficiency we can make our economy less vulnerable to 
supply disruptions, and confront climate change through 
technologies that reduce carbon dioxide emissions.
    Now, I will submit the rest of my statement for the record. 
And Mr. Chairman, just to respond a bit to what you said: we 
can talk about the differences in revenue projections and I 
would be perfectly happy to discuss that. We put forward what I 
believe are some reasonable estimates, you know, very similar 
to the Blue Chip consensus. CBO has got a different estimate, 
as you mention, that they--one results in 155 billion less in 
revenues. The biggest difference in those projections really 
have to do with the inflation rate. When you look at the 
numbers, that is the most of it. And we are assuming 2.2. I 
think they are at 1.8. CBO is 2.1. I have been in the business 
world and in financial markets long enough to know that no one 
has got a crystal ball. Both of these estimates are within the 
realm of reason, they are both reasonable estimates. We think 
ours is a reasonable estimate. But what they both show to me is 
the importance of keeping the economy growing, and how 
dependent, you know, what a big driver of the budget, 
resolution of the budget issue, the economy is. And growth is 
very, very important, and these assumptions are important. But 
really, what is important is to keep this economy growing and 
thriving.
    I also will welcome the discussion of AMT. I am sure we 
will get questions on that. You know, I am looking for ways to 
bridge the gaps, and you mentioned at the end, we have got 
differences on the budget, we have got the same goal. And that 
same goal is dealing with these longer-term issues that are 
going to be staring us in the face very soon, of entitlement 
reform. And I do believe we wouldn't be too concerned about the 
fiscal deficit we have right today, if it weren't for the big 
problem staring us in the face.
    A deficit of 1.8 percent GDP or, you know, I notice with 
all of your assumptions you said--you took a look at the 
administration's proposals and you thought that there would be 
a deficit of 145 billion. That would be eight tenths of a 
percent of GDP. I think we can balance the budget, and it is 
important we work toward balancing the budget, and that is a 
very important goal for both parties, and I think we can be 
successful in doing that. And we have provided a budget that 
will help us do that, but even if your forecast was right we 
still had a deficit of $145 billion. That is eight tenths of a 
percent of the GDP, and again, the major issue we have to deal 
with is a big one; entitlement reform, and I know you agree 
with that.
    And so in any event, that is my statement and I stand ready 
to take your questions. And again, thank you very much for your 
gracious introduction, Mr. Chairman.
    [The statement of Henry M. Paulson follows:]

      Prepared Statement of Hon. Henry M. Paulson, Jr., Secretary,
                    U.S. Department of the Treasury

    Chairman Spratt, Ranking Member Ryan, Members of the Committee: I 
am pleased to be here today to provide an overview of the President's 
budget for fiscal year 2008. As the Secretary of the Treasury, my top 
priority is keeping America's economy strong for our workers, our 
families, and our businesses. And the President's budget supports that 
goal.
    We start from a position of strength. Our economy appears to be 
transitioning from a period of above-trend growth to a more sustainable 
level of about three percent growth. More than 7.4 million jobs have 
been created since August 2003. Our unemployment rate is low at 4.6 
percent. And over the last 12 months, real wages have increased 1.7 
percent. Economic growth is finding its way into workers' paychecks as 
a result of low inflation. That means family budgets are going further.
    Strong economic growth also benefits the government's fiscal 
position. In the first quarter of fiscal year 2007, budget receipts 
totaled $574 billion, an increase of 8 percent over the same period in 
fiscal year 2006. As a result of increased revenue over the last two 
years, we have brought the federal budget deficit down to 1.8 percent 
of GDP.
    The President has submitted a budget that reflects our strong 
economy and our nation's priorities: continued job creation and wage 
growth, vigorous prosecution of the war on terror, increased access to 
affordable health insurance, improved energy security, and a strong 
fiscal position from which we can address long-term challenges such as 
strengthening Social Security and Medicare for future generations.
    This budget supports a strong economy by maintaining fiscal 
discipline. It maintains our current tax policy, which has helped our 
economy rebound from recession to its current robust health. With a 
steadily growing economy, tax revenues combined with fiscal discipline 
should bring the federal budget into balance in five years. In fact, we 
are submitting a budget that includes a surplus in 2012, which is 
achievable if we keep our economy growing. While no one has a crystal 
ball, our economic assumptions are close to the consensus of 
professional forecasters.
    The President's budget addresses important domestic priorities. 
Health care is high on this list. Under current law, the tax subsidy 
for health insurance purchased through employers will average more than 
$300 billion a year for the next ten years. For that huge expenditure 
we get a system in which rising costs are a burden to families and 
businesses, and in which millions of people have no insurance at all.
    The President's proposal would make health care more affordable and 
more accessible. It would give all taxpayers who buy health insurance, 
whether on their own or through their employer, and no matter the cost 
of the plan, the same standard tax deduction for health insurance--
$15,000 for a family, or $7,500 for an individual. The President's 
proposal would help hold down health care costs by removing the current 
tax bias that encourages over-spending. Costs would become clearer, 
giving patients more power to make informed choices about their health 
care spending. The proposal would also jumpstart the individual 
insurance market, so consumers have more choices than are available 
today. Health care would become more consumer-driven, more affordable, 
and more accessible for millions of Americans.
    Energy security is another concern of the American people, and it 
is a priority addressed in the President's budget. President Bush has 
put forth an ambitious goal of reducing America's projected gasoline 
consumption by 20 percent over the next 10 years. We can achieve this 
goal by dramatically increasing the supply and use of alternative 
fuels, and improving fuel-efficiency by reforming and increasing CAFE.
    The expanded fuels standard will provide entrepreneurs and 
investors a guaranteed demand for alternative fuels, which will 
accelerate private investment and technological development. Reforming 
CAFE will allow us to increase the fuel economy of our automobiles as 
fast as technology allows. With a more diverse fuel supply and better 
fuel efficiency, we can make our economy less vulnerable to supply 
disruptions and confront climate change through technologies that 
reduce carbon dioxide emissions.
    Finally, the President's budget, by emphasizing fiscal discipline 
and economic growth, lays the right foundation for dealing with 
entitlement reform--a challenge we all have a responsibility to 
address. Strengthening Social Security and Medicare is the most 
important step we can take to ensure the retirement security of our 
children and grandchildren, the long-term stability of the federal 
budget, and the continued growth of the American economy. I look 
forward to sitting down with Democrats and Republicans, without pre-
conditions, and finding common ground on these critical issues.
    Mr. Chairman, the President's budget priorities--a strong economy, 
national security, fiscal discipline, health care and energy 
innovation, and laying the groundwork for entitlement reform--are the 
right priorities for America and for the workers, businesses, and 
investors who drive our economy.
    I am confident that, working together, we will keep our economy 
strong and chart a course for maintaining our global economic 
leadership in the years ahead.
    Thank you for the opportunity to discuss this today--and I now 
welcome your questions.

    Chairman Spratt. Thank you, Mr. Secretary. What struck us 
in comparing OMB's economic forecast, its baseline forecast, 
with CBO, was that with every indicia, OMB had chosen a 
slightly better number than CBO had used. Granted they were 
different, they were seemingly small differences like two and 
three tenths of a percentage point, but cumulatively, over time 
they amount to a substantial impact on the bottom line of the 
budget. That was our concern. When you put them all together, 
the impact as I said was $155 billion in the target year, 
versus a surplus of $61 billion to a deficit of $94 billion, 
which is a big swing. Maybe small changes, interest rates, job 
growth, inflation, each of these. But nevertheless, the net 
effect, cumulatively, over time, is significant and that gives 
us a little concern about the validity of the bottom-line 
number.
    The administration's tagline yesterday, which came across 
repeatedly in the testimony and in the questions put to Mr. 
Portman is that ``we are balancing the budget without raising 
taxes.'' But when we unpacked this budget that was sent to us 
two days ago to see what the underlying assumptions were, we 
found that to our surprise it was assumed that the AMT would go 
into full force and effect after 2007. The patch that we would 
put into place would not be renewed, and it would collect taxes 
to the tune of a $1,041,000,000,000 more than would otherwise 
be collected under the regular tax code.
    Isn't that an increase in taxes, moving you towards the 
goal of a balanced budget in 2112? And a big increase of $1 
trillion?
    Secretary Paulson. Let me address that, but let me--coming 
back, just one other comment on the projection.
    Chairman Spratt. Sure.
    Secretary Paulson. Because you look at the projection, 
there's two aspects to it. The biggest piece of it has to do 
with the inflation rate. And there's another piece that has to 
do with differing assumptions as to how long the baby boomers 
will work. And you know, again, our estimate is very comparable 
to many private-sector estimates. But you know, who knows? No 
one has got a crystal ball. I think the message there is to 
keep the economy growing. I would say the area that I just call 
your attention to was the rate in which the tax receipts are 
coming in. And I think people were surprised--I wasn't here a 
number of years ago, when they came in at 14.6 percent. And 
then in 2006 up 11.8. You know, the last quarter, the first 
fiscal quarter of 2007, they came in at up a little bit over 8 
percent.
    And we were assuming 5.4 percent growth over this budget 
window. In the last 20 years they have grown at 6 percent. So 
there may be some room for some optimism there, on that part of 
it.
    Now in terms of your comment about the AMT--I am sure Rob 
explained that yesterday, but let me explain what we did. I 
think we were very transparent about this. We agree, I believe 
this is the way you feel and other members of the Committee 
feel, that the AMT would be, if it went into effect, would be 
an unintended tax. It would be a cruel tax. It would hit the 
middle-class hard. It would surprise a number of people who 
wouldn't even see it coming.
    What Congress has done, what the administration has done 
over the last six years is patch it for one year. And what we 
have done is just, what we have proposed is an additional--
which is in the budget--one year of AMT tax relief, and then 
the assumption is that we are going to work together and we are 
going to work on a bipartisan basis to solve this problem. And 
I am not saying it is easy, it is a tough one.
    Chairman Spratt. We had other witnesses from your 
administration going back two, three years who said that it can 
be done within the context of the tax code in a revenue-neutral 
manner. In other words, you can go to deductions and credits 
and preferences and what have you, and change these, to raise 
enough revenues to neutralize the impact of the AMT. Could you 
give us some idea of what these deductions and credits and 
exceptions might be?
    Secretary Paulson. Well, first of all in terms of 
fundamental tax reform, maybe we will get to do that over the 
next two years. As you probably noticed, our priorities, you 
know, you can see in the budget, which is entitlement reform, 
healthcare, you know, the incremental tax changes, I think that 
the one regarding health insurance is a very important and big 
incremental change.
    So we don't have a fundamental tax reform proposal we are 
coming here with. And so all I would say to you is that this is 
something that we will need to work on together, and to solve 
the problem.
    Chairman Spratt. But in the meantime, without even having a 
solution proposed you are assuming there will be a solution, we 
will come together on some kind of a solution. It is a big one 
particularly for an administration which has an aversion to tax 
increases. You will have to increase some taxes in order to 
offset the otherwise tax impact of the AMT.
    Secretary Paulson. I am not assuming a tax increase, okay? 
When I look--and I know that we have differences with some 
people up here on that, but when I take a look at the way this 
economy is growing right now, and the way revenues are flowing 
in, I want to keep this expansion growing. I just see working 
with the budget numbers has just convinced me how sensitive all 
these numbers are to growth of the economy.
    And so I think continued fiscal discipline and keeping the 
economy growing are what is baked into our proposal. And again, 
all of it underpinning, saying if we have a strong economy and 
a fiscal position which is strengthening, this puts us in a 
good position to look at some of the bigger structural issues 
which are the entitlement programs.
    Chairman Spratt. Well, I would agree with you about the 
differences between CBO and OMB being within a band of reason. 
The only problem we had was it seemed like Treasury OMB were 
cherry-picking in each instance, each indicia, you were picking 
a somewhat higher ranking, as opposed to lower range. And I 
have great respect for your professionals over there. I think 
they do good work over there and I am glad we have got them. 
This is just an impression we had.
    But it seems to me we start off with higher growth in 
revenues based upon the economic forecasting conditions that 
you assume, and now we are adding another level to that higher 
growth in revenues based on the sort of visceral expectation 
that things are good and you expect them to be even better than 
what you projected here. And you use or dedicate those revenues 
somehow to the repeal--the revision of the AMT.
    Secretary Paulson. Yeah. I am not projecting revenues to be 
better than we have here. Our projection is a projection. It is 
an inexact science. I don't think there is cherry-picking done. 
It was very close to the Blue Chip consensus forecast. But 
again it is hard to know. We don't know with certainty what is 
going to happen next quarter, let alone four, five years from 
now. So all we can do is make the best revenue projection we 
can. And again, what they illustrate to me, when I looked at 
them, is just the importance of how sensitive this fiscal 
situation is to a growing economy where we have got revenues 
coming in at the rate they are. That is key to the whole thing.
    Now, I can't--both, as you said, are within a realm of 
reasonableness. And again, which interested me was----
    Chairman Spratt. But if it is not going to be this 
additional spurt of revenues over and above what you have 
already assumed, how do you replace the $1,041,000,000,000 in 
revenues that AMT will collect if it is unadjusted and not 
indexed? How do you replace those revenues elsewhere within the 
tax code without raising taxes?
    Secretary Paulson. I would say I even have a higher number, 
because I am looking at them relative to the policy baseline. 
So I have even got more with the----
    Chairman Spratt. What is your number?
    Secretary Paulson. It is 1.2. But looking at it over the 
period which we are looking at it, it is a tough issue, and I 
have got no answer other than that. It is one we have got to 
work on together, and I think we can do it, you know, and----
    Chairman Spratt. But it would mean repealing, trimming, 
revising some deductions, credits, exceptions, maybe raising 
rates or something like that, would it not? Otherwise how do 
you coax more revenues out of the code?
    Secretary Paulson. I have got to tell you I am not talking 
about coaxing more revenues out of the code, okay? And so we 
need to do this together. I would say to you that there are 
enough moving pieces that I would be hopeful that we could work 
together and achieve a balanced budget in 2012, and I would say 
even your projections which we don't agree with, you know, what 
I look at as a tough case, shows a strong fiscal situation in 
the short term. And again, what we really need to do, I think, 
is to focus on some of the longer-term structural issues.
    Chairman Spratt. Well, this is a common problem. The AMT is 
one of many we have got. It is a big one.
    Secretary Paulson. Yeah.
    Chairman Spratt. A trillion-two, by your calculation, over 
the next 10 years. And we have got to work together to resolve 
that. We don't have a rabbit to pull out of a hat, either, but 
we look to Treasury for its expertise to come forward with 
proposed solutions. It has got to start with you.
    Secretary Paulson. Well, I sure look forward to working 
with you on this, and I would say you are going to be strong 
partners, including, you know, my friends at the Senate Finance 
Committee, and the House Ways and Means. Because, you know, we 
will have to do this together.
    Chairman Spratt. We will be looking to you for the ideas to 
get this negotiation rolling. Thank you very much for your 
testimony, and now, Mr. Ryan.
    Mr. Ryan. Thank you, Chairman.
    We are going to have a long talk about revenues, I think 
this year, first half of this year, and projections. First of 
all, I think it is great that both CBO and OMB are basically 
showing us very low inflation in the future. That is good. That 
is good, basic fundamental.
    Secretary Paulson. A high-class problem. Would we be so 
lucky, right?
    Mr. Ryan. Yeah, exactly. I mean, it is a luxurious problem 
we have. So that is a good thing.
    A couple points, and then I want to ask you questions. 
Number one, we are going to look at different parts of this tax 
package of the 2001, 2003 tax cuts. And I think there are those 
who just believe that there is really no effect on the economy 
if we just raise taxes, there is no effect on personal 
behavior, or decision-making or on capital markets, if we just 
raise tax rates, and that at will only get more revenues with 
no other adverse consequences.
    That is the way, that is the lens that we look at these 
things through. Just take a look at capital gains taxes. 
According to the Joint Committee on Taxation, when we wrote 
this bill in 2003, they were telling us that over the following 
three areas, you know, 2003, 2004, through 2006, that we would 
lose $5.4 billion. Instead of losing $5.4 billion in capital 
gains taxes over that period, we gained $133 billion over that 
period. Similarly, the CBO forecast a loss of revenue, and 
actually their forecasts were off 68 percent on capital gains, 
because what we realized is if we taxed capital formation less, 
we got more capital formation, we got more realizations, we get 
more tax revenue. Higher revenues.
    So when we go through this debate about just raising taxes 
on this program or raising taxes on this class of assets, or 
these investors, or these workers, it is very important to note 
that reality and history has shown us over and over and over 
again that tax rates do have consequences, that we don't just 
bank the money and have no collateral damage in the economy. I 
think the underlying point that is being made here is the eye 
on the ball is to keep the economy growing. When our 
constituents are working, our constituents are paying taxes, 
they are collecting unemployment, and the fiscal situation is 
brighter.
    So with respect to taxes, I think one of the things we are 
going to have a big debate about here is the so-called tax gap. 
And this is something that all of us are interested in. We are 
going to have some hearings in Ways and Means on this, I think. 
I know you probably testified on this yesterday with Finance. 
Can you get into the challenge of closing the tax gap? Can you 
basically define the tax gap for those of us who aren't really 
into this issue as well? We obviously want Americans to pay 
their taxes. We want them to comply with the law. We want for 
everybody to pay their fair share of taxes. We have very 
complex code. Some of it is innocent noncompliance because of 
confusion; some of it is people just cheating on their taxes. 
How do we get that money, how do we get at that, and what is 
the administration's proposal to address that? What is the 
score associated with that proposal? And what else would you 
have to do with respect to the IRS compliance and what kind of 
things would you have to do to our constituents basically to 
totally close this tax gap?
    If you could discuss that I think it would be very 
enlightening because we are going to have a long talk about the 
tax gap as this year goes on.
    Secretary Paulson. Okay. Well, we had a conversation about 
that yesterday at the Senate Finance Committee. Let me just say 
first of all we need to begin by defining the tax gap. And I 
would define it as a difference between the taxes that are owed 
and the taxes that are paid, because every now and then you get 
proposals to close the tax gap which are really just changes in 
the law in terms of increasing taxes.
    The next thing I would say is that the data we have is not 
as good as we would like. The last research that was done on it 
really goes back to 2001, and we will be doing more research on 
it under my direction.
    Now we have all got to start by saying that this tax gap is 
worse than irritating to all the Americans that pay their full 
share of taxes, because those that don't pay their taxes create 
a burden, and a greater burden for the all those that do. And 
so it is something that is really worth focusing on and it is 
something that when I came here, you know, Chairman Baucus made 
such a big point to me about the importance of this that I 
spent a lot of time about it, working on it with Commissioner 
Everson at the IRS.
    Now, we have a proposal which I think is a credible 
proposal, which has got 16 legislative proposals, which if 
enacted into law would for the most part require greater 
information reporting--and I will get to that in a minute--and 
we believe that that would would raise roughly $30 billion, 29 
and a half billion dollars, over a 10-year period. We also have 
a full IRS budget with--you know, we are going to continue to 
invest in auditing and you know, the Commissioner has done a 
very good job of going after abusive tax shelters, and going 
after people that are underpaying their taxes. And we are going 
to continue to do that. There is an IT component. There is a 
service component to it, a research component, and so on.
    But the point that I made, which I think you are looking 
for me to get to, is that when we have done the research, our 
research shows that the tax gap comes from under-reporting, 
underpayment, and non-filers. But by far the biggest part of 
the tax gap, just by far the biggest part, is under-reporting 
by individuals. And when you look at this, it is under-
reporting of business income. And so, to a large extent these 
are schedule C filers. These are small businesses, farmers, and 
as you said, you don't know whether it is with malice 
aforethought, or whether they just don't understand what they 
need to do. But there is a big cash-based economy out there. 
And so when you look at closing that, you know, the 
conventional wisdom when I came down here was you simplify it. 
You simplify the tax code and you will close the tax gap. That 
I think is the best way to do it because you will get a portion 
of that. But actually what you need to do if you are going to 
go after these big dollars would be something I wouldn't 
recommend by and large, because I think it would be bad policy, 
and I don't think any of us would like it, which it be to make 
it more complicated, and would be requirements for more 
information. And so these would be the kinds of things----
    Mr. Ryan. Like what?
    Secretary Paulson. I will give you four or five examples. 
One is just reporting, 1099s. If you are paying your plumber, 
you know, filling out a 1099, having him fill out a fill out a 
1099 send it to the IRS. We could go through all kinds of 
examples that are very similar to that.
    Then, another example is just to mandate that we use 
electronic payments, whether it is credit cards or electronic 
payments, and get the electronic receipts and send that to the 
IRS. A big one which was tried when I researched it, I think 
back when Dan Rostenkowski was running Ways and Means 25 years 
ago, he got the idea of withholding. And so this was 
withholding on capital gains and interest and you could do it 
on pension payments, you could do withholding on everything. 
And I think that was in force only for a short time, because 
members of Congress got many postcards and nasty telephone 
calls and letters. So that is another way.
    But my point is not to say this is not important and we 
shouldn't go after it. My point is that we shouldn't look at 
this as a pot of gold that we are going to use to tap into to 
fund everything anyone wants to fund. We need to keep working 
on it, and the proposals put forward are very serious proposals 
that are not without controversy. There will be people that 
will not like the amount of reporting we are suggesting in a 
number of areas, but it is a way to make a dent and it.
    So what I said to Chairman Baucus, if we can get--you know, 
he has got to hold some hearings and we are going to come 
forward with our proposals which we have, and we would like to 
get those enacted. And the other thing I would like to do is to 
demystify all of this, so that we are not looking at it as 
where we understand that we could have policies to go after all 
of these things. I think they would be bad policies in a number 
of cases, and I wouldn't recommend them. But at least we can 
have a discussion about which kinds of policies make sense, and 
how we could go after the tax gap.
    Mr. Ryan. I want to get on because I know we have a lot of 
questions. I just simply want to bring up one more chart again, 
just to try and drive home a point, chart number seven.
    And this just simply says, shows you, the black on this is 
all the percentage GDP. If we just keep tax cuts in place and 
grow revenues, we will still have revenue growth. We will still 
have more money coming in--even under these OMB or CBO. This is 
CBO, which has underestimated revenue growth lately, as has 
OMB. We will still have more money coming into the Treasury. If 
we let all the tax cuts go away, if we bring the marriage 
penalty back, cut the kids credit in half, bring the death tax 
back in full force, raise taxes on capital gains, raise taxes 
on dividends, and raise income tax rates up across the board, 
we do all that and let the AMT hit everybody unabetted; that is 
the red line.
    The Green line is the spending line. This is the CBO 
baseline. And so the green line shows that spending is the 
problem. So even if we raise all the taxes that we have out 
there, expiring provisions, and don't fix AMT, we still have 
got to deal with spending. And so I simply want to encourage 
you because as the Treasury Secretary, you know, the tax code 
runs through you, a lot of entitlement programs run through 
you. We need to have a better tax code that is going to better 
position us for the global marketplace, be efficient in its 
collection of revenues, but if we don't begin to reform these 
entitlement programs, all of that is for naught and we'll go 
right back into deficit. And with that I yield.
    Chairman Spratt. Thank you, Mr. Ryan.
    Mr. Edwards of Texas.
    Mr. Edwards. Mr. Secretary, thank you for your 
distinguished lifetime of public service to our country. I 
respect that, and thank you for that.
    My problem with this budget as well, as it has been 
presented by you and other administration officials, and 
listening to it being presented by my colleague, Mr. Ryan, is 
that with all due respect it sounds like more of the same. The 
same failed promise we have heard each year for the last six 
years; that we can have a major defense build-up--which I 
support--fight a war on terrorism, balance the budget, in spite 
of having massive tax cuts.
    The problem is those promises haven't proven to be true 
despite the best of intentions. The reality is, just like in 
the 1980s when we tried to fund massive tax cuts, under the 
Reagan administration, we saw huge deficits. And the same thing 
is happening 20 years later now.
    I think the problem is this. The administration comes in 
with a budget every year, says ``we are going to be able to 
balance the budget in five years.'' and then the administration 
puts proposed spending cuts in that budget proposal that don't 
have a chance of a snowball in Hades of passing. Even under a 
Republican-led house. So I hear Mr. Ryan saying we have got to 
balance the budget by spending cuts. Well, for 12 years, 
Republicans passed partisan budgets through this very 
Committee. And guess what, they never had the courage--I think 
that Mr. Ryan and Mr. Hensarling, and others in this room might 
have, but they couldn't muster enough courage among Republicans 
in the House to pay for their tax cuts by cutting spending. So 
after all the deficit hawk speeches are finished and concluded, 
we get a lot of deficit dove votes on the floor of the House.
    This is happening again this year. The administration's 
budget proposes an effective $1.9 billion tax increase on 
military retirees, men and women who served our country for 20-
plus years, many of them in combat, and they are going to be 
asked to pay, for example, up to $1000 more a year for their 
healthcare premiums even though the same budget doesn't ask 
members of Congress, or members of the President's Cabinet, to 
make that kind of sacrifice.
    So once again we are seeing a false promise, a well-
intentioned but false promise. And at some point, as you would 
have in business, we would have to judge an administration or a 
party in the House of Representatives by their record, not by 
their other well-intentioned promises. And all the theories of 
Mr. Ryan that we can cut spending and balance the budget and 
pay for tax cuts and fight a war in Iraq just have not proven 
to be true. The result has been my nine- and 11-year-old sons 
are going to face a $3 trillion higher national debt, that they 
will have to pay interest on till they day.
    Mr. Ryan. Will the gentleman yield for----
    Mr. Edwards. Not right now.
    So my question to you, Mr. Secretary, is what would you say 
to Republicans in the House who repeatedly vote for every 
single one of the administration's proposed tax cuts, but they 
refuse to vote for the spending cuts such as the cuts in 
military retiree healthcare the administration is proposing 
this year, to pay for those tax cuts? What would you say to 
those members of Congress?
    Secretary Paulson. Let me begin by responding to your 
overall point, which is again, I think we have all got the same 
goal, which is fiscal discipline. We have got the goal, as you 
talked about----
    Mr. Edwards. If I could interrupt just a second.
    Secretary Paulson. Yeah.
    Mr. Edwards. Since time is running short. I know we all 
have the same goal, fiscal discipline and balanced budgets. The 
problem is that if this Congress and the Republican leadership 
for the past 12 years were accused of wanting to balance the 
budget in a court of law, there wouldn't be enough evidence to 
convict them. We have had the largest deficits in American 
history. Please proceed.
    Secretary Paulson. Let me say this, because I will say I 
wasn't here two and three years ago, but I remember reading 
about the debates. And I remember reading where the President 
put forward a plan to cut the deficit in half. And I think 
there is a lot of skepticism down here, a lot of skepticism 
from Democrats. Frankly I wasn't that close to it, but I had 
skepticism from where I was sitting. And so I think one of 
the--and just take it, one of the pleasant surprises that we 
all have is what has happened to the fiscal situation--in the 
short term, granted, because we have the long-term problem of 
entitlements. But in the short term, I believe that with the 
constraint that has been shown in Congress--and there has been 
some constraint. Not as much as we would like--but with the 
constraint, coupled with the revenues coming in, there has been 
an improvement, and a marked improvement in our fiscal deficit.
    Mr. Edwards. The deficit will be 240-something billion 
dollars this year proposed, and the largest deficit in American 
history, prior to this administration, was 292 billion. But 
with time being up, could you answer the question, what would 
you say to Republican House members that vote for the tax cuts, 
but don't vote for the proposed administration's budget cuts to 
pay for the tax cuts?
    Secretary Paulson. I would say to encourage them, I would 
encourage them to vote for the budget cuts to pay for them, 
obviously.
    But I want to come back and again, I think it is--with an 
economy that is growing, growing, and growing, it is unfair to 
talk about deficits in absolute terms rather than as a 
percentage of the GDP. Just as someone who makes $100,000 can 
afford a bigger mortgage on a home than someone who makes 
$25,000 or $50,000. And I would say when you look at this 
deficit in the context of the size of this economy, it is--I 
would like it to be smaller, and the reason I really want it to 
be smaller is because of the big problem we see coming down the 
road.
    Chairman Spratt. Mr. Barrett of South Carolina.
    Mr. Barrett. Mr. Chairman, thank you, but in all due 
respect I would yield my time to some of the members that were 
here on time. So I will ask my question a little bit later. But 
it will yield 30 seconds to the Ranking Member.
    Mr. Ryan. The member from Texas just mentioned--look, I 
just make a point to clarify. The case I made and the charts I 
used used aren't theories. They are facts, actual data that 
occurred. The last chart I used--I guess you could call it a 
theory. It was a projection into the future, but it wasn't a 
Republican projection of the future. It was the Congressional 
Budget Office protection of the future that Peter Orszag, your 
nominee, produced for us.
    So these weren't theories. These are facts and data of 
information that actually occurred, as the case----
    Mr. Edwards. As is the $3 trillion national debt over the 
last six years.
    Chairman Spratt. Mr. Garrett of New Jersey.
    Mr. Garrett. Thank you. And we all can hear the phrase, 
``pay for tax cuts.'' Just remember, the flip side of that. Who 
pays for tax increases? And that is the American family. So the 
groundwork always seems to be laid on the other side so far, in 
the hearings that we have here, that we need to pay for the tax 
cuts. Just remember that at any time you talk about paying for 
tax increases it is going to be our constituents, our families, 
and our district who are going to be paying for that, every 
dollar coming out of their paycheck and sent down here to 
Washington.
    That being said, Mr. Secretary, thank you. I appreciate 
your coming here today and it is commendable the way that you 
and this administration, the President have addressed the, I 
will say, the revenue side of the fiscal picture in this 
budget. You know, many naysayers have been declaring for years 
that the tax cuts just as we have heard right now, the 2000 and 
2001, 2003 were unsustainable. And these same people have been 
saying that the only way to bring back the budget into balance 
would be to rescind them, which is a tax increase. But I 
believe and I think you would agree with me, Mr. Secretary, 
that such an action would negatively impact upon the American 
economy. And that this budget lays out a different, and in my 
opinion, better approach than that.
    I would like to just quickly address two points, though. 
One is with the AMT, the alternative minimum tax, which I 
believe the Chairman has spoken about already, the alternative 
minimum tax. I might call it the alternative maximum tax, the 
way it impacts upon families and their budget. It hurts 
American families. I come from the fifth District in the State 
of New Jersey, the Northeast, which is an affluent State. It is 
a donor State. And my district in particular, because of high 
State and local taxes, while counted as a deduction against the 
normal tax code they are not counted, as you know, with regard 
to AMT. So in 2004, one out of every four tax returns in my 
district were subject to the AMT, raising taxes for these folks 
by over $4000. So I am just curious as to your thoughts, again, 
on AMT relief and specifically related to the whole aspect of a 
State and tax deduction, that was the first question.
    And the second question, totally switching gears for you to 
something else that probably hasn't come up here so far, and 
that is GSE and GSE reform. This is an issue very important to 
me. I want to compliment yourself and the administration on a 
tougher tone that you have struck in pushing for a brighter or 
clearer distinction that is being considered in the primary 
mortgage market activities and secondary mortgage market 
activities.
    That being said on a positive note, I am disappointed in 
what appears to be a softening, however, on your position on 
portfolio limitations, and what that may mean as far as risks, 
overall, to GSEs and risk to the economy as well. In addition 
to that, I know you are in negotiations right now with House 
leaders on the other side of the aisle attempting to find a 
compromise with regard to a housing fund in GSEs. This housing 
fund would drive the market of Fannie Mae and Freddie Mac as 
well.
    We have seen this as being nothing more than a tax on 
middle-class America in the sense that they will pass these 
costs, whether it be before taxes or after taxes, to the people 
that use GSEs, use Fannie Mae and Freddie Mac. Ambassador 
Portman was here the other day and made the point that what we 
need to do is keep our taxes low, not raise any taxes, and I 
commend the administration for doing that. But in the defense 
of negotiations that are going on right now, we may be seeing 
that in one critical portion of our economy, the real estate 
and housing market, we may be seeing a tax increase looming, if 
we have these negotiations go down that road.
    So if you could address those two points for me, with AMT 
and the State and local tax aspect on it, and more specifically 
on the GSE reform and where your negotiations may be headed?
    Secretary Paulson. Okay. Well well, thank you. First of 
all, on the AMT, I see it the way you do. This was an 
unintended tax, going back to 1984. And it just wasn't indexed, 
and so we have the problem we are in right now. That is why we 
have proposed the one-year relief, and what I have said, it is 
something we really need to work on and solve.
    In terms of GSE reform, let me say you are right; we are in 
negotiations. I feel very strongly that we need a regulator 
that is independent, got more muscle, and a number of other 
changes. I also know people feel very strongly on both sides of 
this issue. I have never witnessed anything quite like this. It 
is the closest thing I have seen to a holy war. And all I can 
say to you is we will not satisfy people on both sides. I don't 
want the perfect to be the enemy of the good. And I think we 
can work something through where we get the things we need to 
protect against this--you know, there is real systemic risk, 
and I think we can get the things--I am hopeful that we can get 
the things we need, but I will just say to you there may be 
some people that think we should get more and they may just be 
disappointed.
    Mr. Garrett. Hopefully I am not disappointed, but thank you 
very much.
    Secretary Paulson. I hope you won't be, either.
    Chairman Spratt. Mr. Allen of Maine.
    Mr. Allen. Mr. Secretary, thank you very much for being 
here. Just to begin, my friend Mr. Ryan, who's left for a 
moment, and I have a long-running debate in these chambers and 
I have to respond to something he said, and then to ask you a 
question. Mr. Ryan said that reality and history have shown us 
that tax rates do have consequences, and I agree with that, but 
I would point out that from 1960 to the present, there have 
been only five years when tax revenues to the federal 
government went down. In 1971, 1983, 2001, 2002, 2003, those 
years being really the anomalies in the last 45-plus years.
    And I guess the point I would make is that in 40 years of 
tax increases and tax reductions where revenues almost always 
go up to the federal government, what some very distinguished 
economist sitting in your chair here earlier this year said. 
They said tax cuts could stimulate the economy, at least in the 
short term. They don't recover all the revenue that you lose. 
But they also said spending can stimulate the economy. And 
unfortunately, what we have been doing in the last six years, 
in my view, is we have been doing both. It is stimulation on 
steroids; vast increases in spending, and tax cuts larger than 
the economy could withstand.
    My question is about healthcare. You mentioned it in your 
comments and I wanted to come back to it, particularly because 
it seems to me that from all of the work I have done in 
healthcare and all the different people that I have talked to 
about the cost drivers of the American system, I think they 
would say the rapid growth of medical technology is a primary 
cost driver, that the over-use of some drugs and procedures and 
tests is another cost driver, and that underlying it all is a 
very complex multiple insurance plan. It is a system that is 
far more complex than other developed countries in the world.
    But in your statement you seem to say, well, it is the tax 
code again, that we are encouraging overspending and therefore 
if we simply change the tax code we will get a different 
result. What I am concerned about is this: It seems to me that 
if you push people away from employer-based healthcare plans, 
despite all the problems we have with those plans, into the 
individual market, you are basically going to push older and 
sicker people, or people who have some healthcare problem in 
the past, into a situation where they can't get healthcare, or 
they can't get it at an affordable rate. And in small States 
like mine, I don't believe the individual market could possibly 
provide enough choices with a very small risk pool to make any 
significant difference in cost.
    And my question is, how do you deal with that critique of 
the administration's proposal?
    Secretary Paulson. Well, let me begin by saying I think you 
are absolutely right, if you are saying to me that the 
healthcare issues we face are significant, they are complex. It 
is hard to imagine any one proposal would be a solution. Social 
Security, we may disagree on what the right policy choices are, 
but I think they are pretty well-defined and the analytics are 
pretty good, and we could come together and forge a permanent 
solution rather quickly. Healthcare, there are going to be a 
number of intermediate incremental steps we are going to need 
to take.
    So the way I look at the tax component is, just as the way 
I stated, it is the biggest preference in the tax system and so 
you've got to begin by saying this, we certainly can do better 
than. We can certainly do better than something that provides 
big benefits to those who get employer coverage, nothing to 
those who are uninsured, 17 million who are self-insured, and--
and something that has got biases and distortions in the 
system, okay, where the bias is toward the more expensive 
coverage, which in essence is just prepaid health insurance for 
whatever, everything from glasses to cosmetic surgery or 
whatever on the high end.
    So that what this is is a step, and it is a step in the 
right direction. And I just will say this. We have done a lot 
of work on this, and the idea of saying that this is going to 
lead to any kind of significant weakening of the employer-
provided health insurance, I think is wrong. What the data 
shows is that most of the bigger companies, 200 or more 
employees, provide health insurance 97, 98 percent or something 
and they need to. That is very important to their employees, 
that is a way for them to differentiate themselves. The 
research also shows that there is a trend among smaller 
companies, which is to provide--fewer of them providing 
insurance over time. In 2000, 69 percent of the employers 
provided health insurance. In 2006, it was 60 percent.
    So, what this proposal does is I think first of all, it 
removes biases, and it will give you greater access. There will 
be three to 5 million more people who will have insurance as a 
result of this. Affordability, portability--but we need to look 
at it as part of an overall plan. Secretary Leavitt will talk 
with you about his affordable choices and some of the things he 
wants to do to help build pools and make insurance more 
available at the State level.
    And when you talk to people at the State level, the one 
thing they can't deal with, you know, they can do a lot of 
things but they can't deal with our tax code. So again, think 
about the tax code. You know, I welcome your ideas, welcome--
there may be improvements, suggestions, but when you look at 
this proposal, and your people can find questions, 
imperfections--again, I said, you know, when talking about 
GSEs, let us not let the perfect be the enemy of the good. What 
we currently have in terms of the way the preference, corporate 
tax preference works, let me tell you that is not close to 
perfect. So we sure should be able to do better than that.
    Mr. Allen. My time has expired, but I would appreciate it 
if you would provide me with information on what kind of 
backstop there would be for those people who are forced into--
who can't get insurance in the individual market, at a later 
time. My time has expired. I thank you very much.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. Hensarling of Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. First, I am sorry 
that my friend from Texas who lectured us on courage has exited 
the room. I think every witness who has appeared before this 
panel has told us that the number one fiscal challenge we face 
as a nation is runaway entitlement spending. That at least 
several have said, I believe, that we may be the first 
generation in American history on the verge of leaving the next 
generation with a lower quality of life, less freedom, less 
opportunity. I do not recall the gentleman from Texas embracing 
entitlement reform spending in any of his proposals, nor do I 
recall receiving any support from the other side of the aisle 
on a Republican budget that did that, so when they gentleman 
from Texas will embrace the entitlement spending reform, I will 
be happy to sit for his lectures on courage.
    Mr. Secretary, you've heard a lot already about massive tax 
cuts, which is a current theme in this Committee. If I can have 
chart number five, please.
    When we hear the phrase ``massive tax cuts,'' and I am 
looking at this chart and I am kind of eyeballing it here, tax 
revenues have gone from roughly, oh, I don't know, one-nine, 
when President Bush took office. Apparently there was declining 
for a couple of years. He put into place the pro-growth tax 
policies, and they seem to skyrocket from there. as I 
understand it revenues are up 14.6 percent in 2005, 11.8 
percent in 2006, and 8.1 percent for the first quarter of 
fiscal year 2007. Are those figures correct, Mr. Secretary?
    Secretary Paulson. Yes, they are, sir.
    Mr. Hensarling. And I believe your forecast, which is in 
line with the Blue Chip forecast, will have revenues over the 
five-year budget window growing at approximately what was at 
five-point----
    Secretary Paulson. Four percent.
    Mr. Hensarling. Five point four percent. So I am personally 
still looking for the massive tax cuts that I have heard about. 
And still, what I think I see is massive revenue growth. In 
nominal terms, do we have the greatest amount of tax revenues 
we have had in the history of the nation?
    Secretary Paulson. Yes, we do.
    Mr. Hensarling. We also hear about massive budget cuts, and 
I do want to thank our Chairman, because 95 percent of the time 
I hear somebody used the term ``cut,'' what they really mean is 
that some budget function doesn't grow as fast as they want it 
to grow. Now, in the Chairman's case, I think he alluded to an 
education function being cut, and I think he used the term in 
its correct sense. I think it might, however, need to be put in 
a broader context. If I have done my research properly, and I 
am going to OMB numbers, since President Bush has been in 
office the education function is up 107 percent from 2001 to 
2006. And as I can eyeball all the different function 
categories, I am having a hard time seeing any other budget 
function increase as precipitously as the education function.
    Mr. Secretary, do you know how much the administration has 
increased that function? Do you have that number?
    Secretary Paulson. I don't have it in front of me, no.
    Mr. Hensarling. Okay. Mr. Secretary, although I want to 
reserve judgment until I see the final details, I very much 
want to compliment the administration on your proposal to take 
the tax code bias out of the choice of healthcare. I mean, 
empowering people, empowering taxpayers to choose the 
healthcare that is right for them and their families, as 
opposed to having a third-party employer pick it for them, I 
think is a huge reform.
    I mean, we all know in this Committee room that until you 
find the key to trying to reform healthcare costs, ultimately, 
you cannot solve the budget crisis that we face in future 
generations. So a proposal that will help healthcare become 
more affordable, accessible and give families--not Washington 
bureaucrats, but families--the choice of their control is a 
very, very important step forward. And I certainly think you 
for that.
    And contrary to my usual pattern, with eight seconds to go, 
Mr. Chairman, I will yield back the remainder of my time.
    Chairman Spratt. The gentle lady from Pennsylvania, Ms. 
Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman. And thank you, 
Secretary Paulson. I appreciate the opportunity to follow up on 
some of the questions that were asked about the healthcare 
proposals, the tax proposals. I wanted to follow up on some of 
them.
    What I am going to try to do since I only have five 
minutes, and I hope you will as well, is to ask questions 
somewhat briefly, and if you answer them somewhat briefly, 
maybe we can get through a few tight questions, if I may.
    The healthcare proposals that the President has put out on 
the tax side, to me, seems to be moving in absolutely the wrong 
direction, and I think you acknowledge them to some extent. And 
that is, to really discourage or create fewer incentives for 
employers to cover insurance. You said yourself that smaller 
companies are dropping coverage. You almost said ``anyway,'' so 
we ought to acknowledge this maybe, your implication, and 
help--just individuals the opportunity to purchase in the 
private marketplace.
    This seems to me to do two things: is to ignore the way 
insurance works, which is that it is most affordable and most 
accessible when you pool the risk with the largest group of 
people. What you are doing instead is actually saying ``We are 
going to make Americans be more on their own when it comes to 
purchasing healthcare.'' Not the way the insurance market 
works. So I want you to speak to what have you heard from the 
insurance industry or do you know about the insurance market 
that suggests that putting more people in the individual 
marketplace will in fact make it more affordable more 
accessible. there is nothing that indicates in any of our 
history that is going to happen.
    Secretary Paulson. Well, let me, even before addressing 
that, let me just tell you that I could not disagree with you 
more strongly about your first statement, because there is 
nothing in this that discourages corporations from providing 
healthcare. It is still deductible to corporations.
    What this proposal does was, it tries to put some fairness 
into the situation, and that there is 20 percent of those that 
get insurance from corporations are getting a huge tax benefit 
that is--and what this does is give everyone became same tax 
benefit regardless of whether they are getting insurance from 
their employer or what they are getting the gold-plated from 
the employer or----
    Ms. Schwartz. I don't think anyone would disagree if we 
were just simply including individuals in that fairness in the 
individual marketplace. The concern we have, that in fact it 
actually--the President is saying, what you are saying, is that 
``the employers are being too generous, we want them to stop 
providing comprehensive coverage, we want them to reduce the 
coverage,'' and I think for many of my constituents, they are 
already saying that they are seeing their co-pays go up, they 
are seeing deductibles go up. We are already seeing a shift, 
dramatically, to the individual employee, but this would 
encourage employers to reduce the benefits package they 
provide, and potentially--160 million people get coverage 
through their employer right now.
    Secretary Paulson. And it is very interesting, and a huge 
percentage of those 80 percent get coverage below the level at 
which they will get the deduction. So all this does, it doesn't 
encourage employers to not provide coverage. What this does is, 
it treats people fairly.
    Now, but your question, which has to do with the individual 
market, and access. And there is no doubt that there needs to 
be more to be done to help develop that market, and a lot will 
be done at the State level. But I would say the conversations 
that some people have had, and I have not had these 
conversations directly, but there have been conversations and 
there is going to be work that needs to be done on this, with a 
number of the insurers who are providing this insurance saying 
something like this would provide a big impetus and it would 
help jumpstart the market.
    Ms. Schwartz. I guess what I would say that just in terms 
of careful about time, I think the notion of jumpstarting the 
market is interesting, but it doesn't tell us what you mean by 
that. Given what we know certainly about the marketplace again, 
and in Philadelphia--I don't think it is that different than 
the rest of the country--is that it is very hard and very 
expensive to buy insurance individually in the private 
marketplace. there is not, there is not now an easy way to find 
affordable and accessible healthcare for individuals, and 
particularly if you are sick or if you dropped your insurance 
before and have pre-existing conditions. And so while we have 
tried to do some good work here to help make sure that the 
coverage that people can buy is meaningful, but given the 
expense I think what you are suggesting is that it will somehow 
magically be more--will work out, and I want to make sure 
people can afford it, that there is some ability in the private 
marketplace. Otherwise we should be moving in exactly the 
opposite direction, which is helping to create broader pools 
and helping people be able to purchase healthcare and share the 
risk in broader ways, rather than going one-on-one.
    Secretary Paulson. Well, I would say this is all about 
broader pools, and that a big part of this--again, this to me, 
what we are doing at the employer level with this tax benefit 
is about fairness, affordability, access. Work has to be done. 
And when Secretary Leavitt is up here, he will tell you about 
the work that he is doing at the State level to create these 
pools. And again--as you work to do that, when you are talking 
about certain people that are sick or that are in certain 
categories, that is an issue that we are going to all have to 
keep working on.
    But there is 47 million people right now who are uninsured; 
there is a waitress, there is a construction worker. They get 
no chance, they get no benefit at all from the tax system. This 
would give them----
    Ms. Schwartz. I believe my time is up but let me just one 
other question. Of the 47 million, I understand that the 
estimates that you have is at best, this whole shift to the 
individual market would actually maybe benefit 3 million people 
of the 47 million; is that correct?
    Secretary Paulson. No, we certainly did not say--I don't 
know where you got that. We have an estimate that says that 
three to five, which I believe is a conservative estimate. We 
have got people working on others.
    Ms. Schwartz. It is somewhere between three to five. It is 
about 6 percent, 7 percent of the people----
    Secretary Paulson. This is an important step in the right. 
But again, as you look at it, I don't know how I or anyone 
defends a tax code which gives--of the people that get 
insurance from the employers, 20 percent who happen to be with 
the employers that provide the most gold-plated service, the 
other 80 percent with employers are not getting the same 
benefit. You have got 47 million people uninsured, 17 million 
self-insured, no benefit.
    Ms. Schwartz. Mr. Secretary, let me say I agree there is a 
lot that we have--more we have to do about this, and a much 
longer discussion to have, but I think our time is up.
    Secretary Paulson. It is, and it will take a while to work 
this--and a way to think about this is one part of a broader 
effort.
    Chairman Spratt. Mr. Alexander--first of all, Mr. Campbell 
of California is not here. Mr. Alexander of Louisiana.
    Mr. Alexander. Thank you, Mr. Chairman.
    Mr. Paulson, the OMB Director and CBO Director both have 
been here and talked about our debt, our nation's debt. I 
mentioned the other day that we see all up and down the halls 
the plaques that the Blue Dog members have up that show 
somewhere, I think a little less than $30,000 per man, woman 
and child, that is owed.
    CBO and OMB, their numbers are hugely different. OMB 
director says it is somewhere closer to $400,000 instead of 
30,000. What is the debt of our nation?
    Secretary Paulson. What is the debt of the nation? There 
are a number of ways you can look at it, and I think the reason 
you get some confusion is, when you look at--you can look at 
the public debt that is outstanding, the treasuries which are 
outstanding, which are roughly $4.4 trillion that is 
outstanding held by the public. Then there is another big 
percentage, about 44 percent, of the total debt is in the 
Social Security and the Medicare trust funds. And that is where 
a big portion of it is.
    Mr. Alexander. So I guess it would be accurate to say we 
don't know?
    Secretary Paulson. No, it would be over $8 trillion.
    Mr. Alexander. Okay. When we see on the chart a growth of 
revenue to the Treasury Department, and we also see that we 
have a debt increase of $3 trillion during the Bush 
administration, as has been said here, how does an increase of, 
say, $1 billion in debt affect the growth of money coming into 
the Treasury? If we know that tax cuts fuel the economy, 
increase that Treasury income, then we have to assume that if 
we borrow $1 billion and put it into the system, that is to 
increase in a positive way the Treasury income, don't we? How 
do we know how much it affects it?
    Secretary Paulson. I think I see where you are going. But 
there are different ways of looking at it. Chairman Spratt has 
mentioned that obviously the debt, one way it affects 
negatively, having the debt, is the interest we pay, which I 
think the Chairman's numbers were $280 billion a year. And so 
that is part of the cost. And so there is no doubt that that 
the reason we would like to be operating with a balanced budget 
is because we are concerned if debt levels get to be too high. 
And I guess the way I would put it, if you are looking at a 
family, if you are looking at a business, or if you are looking 
at a government, there is an appropriate debt level, where it 
is a healthy, appropriate debt level. And our outstanding 
public debt, which is one thing I look at, which had averaged 
46 percent of GDP in the 1990s, right now is 37 percent, and it 
is headed down. If we were just looking at that, that would be 
something that with an economy this size would seem to be 
prudent.
    But the reason I think there is so much angst around the 
fiscal situation doesn't have to do with, you know, the current 
fiscal situation. It has to do with the growth of entitlement 
spending and the rate at which this--the rate at which these 
benefits are growing, and the debt will be piling up, we will 
be in a situation in a number of years, where there are some 
very tough choices we will have to make if we don't solve the 
problem. And there it will be either taxes that are a lot 
higher higher, discretionary spending that is a lot lower, or 
benefits that are much, much lower. And so that is what I think 
all the discussion is about.
    Mr. Alexander. Thank you. Thank you Mr. Chairman.
    Chairman Spratt. Mr. Doggett of Texas.
    Mr. Doggett. Thank you, Mr. Chairman. I see that Mr. 
Edwards has returned from the briefing that he organized for 
our Texas delegation with the Adjutant General to talk about 
our National Guard meetings. But I do think Mr. Hensarling, in 
referring to him, raises an important matter. And that is the 
tendency to look at the mess that has been created over the 
last six years, the $3 trillion of debt. And then the first 
issue that is always up is how can we cut Medicare or Social 
Security to deal with it?
    I don't think it took courage and frankly, I think it would 
have been foolhardy for Mr. Edwards or any other member on the 
side of the aisle to have embraced the Republican plan to 
privatize Medicare and Social Security. The Social Security 
privatization plan is unfortunately still in this budget. This 
President will not give up on privatizing Social Security, and 
there are millions of seniors who I think are mighty pleased 
that neither Mr. Edwards nor anyone else has embraced that. And 
as long as that is on the table, it is very difficult to sit 
down and discuss, as we have said repeatedly to Secretary 
Paulson and others, the notion of entitlement reform, because 
this President is determined to make Social Security ever 
weaker with private accounts.
    I wanted to address the second aspect of the mythology that 
Mr. Hensarling and other members have raised today, and that is 
that we can solve all of our country's problems with no tax 
revenue increases, because I know, Mr. Paulson, from the 
proposals you are defending this morning you certainly don't 
agree with that position. You have embraced a proposal under 
which President Bush would raise taxes on 30 to 38 million 
Americans who have comprehensive health insurance; have you 
not?
    Secretary Paulson. Sir, you must have come in late to the 
hearing.
    Mr. Doggett. I just looked at your proposal calling for 
affordable choice. It raises taxes on 30 to 38 million people.
    Secretary Paulson. Either you came in late, or I have put 
you to sleep. Because the point we made was we proposed a one-
year patch, relief for one year----
    Mr. Doggett. No, sir. I am not talking about the AMT. I am 
talking about the affordable choice program that you endorsed 
this morning, that the President talked about what it was going 
to do to provide relief to folks, but didn't bother telling 
them he was going to raise taxes on 30 to 38 million people. 
And you had endorsed a proposal.
    Secretary Paulson. I don't believe--I don't see where we 
are going to be raising taxes----
    Mr. Doggett. Well, you are going to be raising taxes on 
anyone who has comprehensive health insurance. That is part of 
your proposal. You provide in your budget documents for 
significant increase in revenues in order to pay for your 
affordable choice program. In fact, one estimate I have seen is 
that the year after next you are going to raise taxes by a 
total of $236 billion on those people, on their comprehensive 
health insurance program with the new Bush health insurance 
tax.
    Mr. Ryan. Will the gentleman yield for clarification?
    Mr. Doggett. I would like for the Secretary to answer, 
first. This is a program you said is so important.
    Secretary Paulson. Well, I don't know anything about the 
new Bush health insurance tax.
    Mr. Doggett. Well, it is in your budget documents, Mr. 
Secretary.
    Secretary Paulson. You are going to have a very interesting 
discussion with Secretary Leavitt, I guess, when he is here, 
because----
    Mr. Doggett. Well, I do plan to ask about it this 
afternoon, but you are the Secretary of the Treasury, and you 
had endorsed, you would have a much bigger hole in your budget 
than you do if you didn't raise revenue. And you are raising 
revenue. I understand if you just listen to the President's 
State of the Union address, you would never know that was part 
of the proposal, but he has got a proposal to raise taxes on 30 
to 38 million Americans who have comprehensive health 
insurance. He says that is going to encourage--it is going to 
redesign the marketplace. But nevertheless, if you are out 
there and if you got a good insurance program, you are going to 
be paying higher taxes on it----
    Secretary Paulson. Okay, so you are talking about the tax 
preference on health insurance----
    Mr. Doggett. I have been talking about a $238 million 
increase in taxes that the Bush administration is proposing the 
year after next on people who have comprehensive health 
insurance, that tax.
    Secretary Paulson. I got to tell you I don't know what you 
are talking about. But if----
    Mr. Doggett. Look at your budget documents, and I welcome a 
follow-up, and I will ask Secretary Leavitt, and I will move on 
to something else.
    Secretary Paulson. Now let me ask you--are you talking 
about the standard deduction for health insurance?
    Mr. Doggett. I am talking about the fact that people who 
have comprehensive health insurance are going to be taxed on it 
under the Bush plan, and they are not today. And for every one 
of those 30 to 38 million Americans, that is a tax increase. It 
is a Bush tax increase.
    Secretary Paulson. Let me say to you, what this does, this 
health insurance is a standard deduction. It gives the same 
standard deduction to everyone, no matter what their health 
insurance plan is, and it treats----
    Mr. Doggett. Well, thank you, Mr. Secretary. I don't think 
that is a really responsive to my question. But let me ask you 
about the other tax increase that the Chairman asked you about.
    Secretary Paulson. What is the tax increase that you are 
talking about? What----
    Mr. Doggett. I am talking about the tax increase that the 
Bush administration has proposed on people with comprehensive 
health insurance, that you have included in your budget 
documents as an attempt to offset a portion of what you call 
your affordable choice program. And it is a tax increase as 
real as any that anyone has ever talked about here.
    But me ask you about the AMT since you talked about that 
with the Chairman----
    Chairman Spratt. Is there something you want to say to 
that?
    Secretary Paulson. Yes. I guess I am confused as to what 
the Congressman is talking about.
    Chairman Spratt. I think what he is talking about the 
exclusion from ordinary income, from employee-provided 
premiums, which will be repealed and replaced with a standard 
deduction.
    Secretary Paulson. Yes, absolutely.
    Mr. Doggett. The Bush health tax.
    Secretary Paulson. Okay, now, the health tax----
    Chairman Spratt. The 20 percent of the population, the 
health coverage population, by your estimates, who will be 
disadvantaged by that.
    Secretary Paulson. Okay, now, in terms of the----
    Chairman Spratt. I don't accept that characterization, but 
I understand----
    Secretary Paulson. I don't either, so let me just again 
look at it, and say what this does, and address his question 
about the tax. What this is is a standard deduction that 
everyone who has health insurance gets, whether they get it 
through the employer, whether they get it themselves in the 
individual market. What this does is, there will be--it is a 
$15,000. So those, 20 percent of those in the employer-provided 
health market, 20 percent of those people, who get a plan that 
is a gold-plated plan, where the premiums are greater than 
15,000, will pay more taxes unless they restructure their 
health insurance. Eighty percent will end up better from a tax 
standpoint.
    Mr. Doggett. Let me just say, your own revenue estimates 
show this Bush tax increase, and if you are out there and you 
call it ``gold-plated'' but it is a comprehensive plan to cover 
your child with disabilities, you are going to be paying more 
taxes. And you said you can't institute this plan to cover what 
I think Ms. Schwartz appropriately identified as a 7 percent 
solution, to cover 7 percent of the uninsured, unless you add 
this kind of additional revenue.
    Secretary Paulson. Congressman, we need to spend some time 
off-line, because what this will do is, from a--the vast 
majority of people will be better off. And this is revenue-
neutral.
    Mr. Doggett. I understand full well your claims, and the 
very fact that you just told me it is revenue neutral makes the 
point. It costs something to provide this additional coverage, 
and 30 to 38 million people are going to pay higher Bush 
insurance taxes as a result, to make it revenue-neutral.
    Secretary Paulson. Well, there will be 20 people at the 
high end that get gold-plated insurance plans will have--they 
will either have the opportunity to restructure their 
insurance, or they will pay more taxes, but there will be 80 
percent that will be much better off.
    Mr. Doggett. Thank you. Thank you for acknowledging that. 
Thank you, Mr. Chairman.
    Chairman Spratt. Okay. Mr. Porter of Nevada.
    Mr. Porter. Thank you, Mr. Chairman.
    Chairman Spratt. Excuse me. Mr. Barrett is not here, Mr. 
Smith is not here, Mr. Bonner is not here, so you come next.
    Mr. Porter. Thank you.
    Mr. Ryan. Mr. Porter, would you just yield for a minute?
    Mr. Porter. Happy to.
    Mr. Ryan. Thank you.
    There is a lot of confusion on our side and on the other 
side as to what this is, this healthcare thing. Employers can 
deduct the cost of providing healthcare benefits to their 
employees now, and they always will be able to under this plan. 
That is not the issue. And I know that is not what the 
gentleman from Texas said, so I don't want to be putting words 
in your mouth.
    The question then is, to the individual on their taxes, 
right now they get healthcare benefits from the employer and it 
is not taxed. It is given to them in a tax-free way. This 
proposal changes this to make that taxable, and it transfers 
that tax benefit from the employer benefit to the individual so 
that the individual, whether it is an individual with their 
own, a single person or a family, they get a tax benefit on 
their income tax, $15,000 for family plan, $7,500 for the 
individual plan. And the numbers that I have to call into 
question is, 100 million people get health insurance from their 
jobs and that is the plans. It is mathematically impossible 
that 38 million people are going to have their taxes increased. 
It is their estimate that 20 percent----
    Secretary Paulson. 20 percent at most.
    Mr. Ryan. 20 percent of those plans cost more than 15 
grand. that means 80 percent of those plans cost less than 15 
grand and these individuals will see their taxes go down. What 
happens to the 20 percent above 15 grand? Well, they will 
probably restructure, maybe they will get a tax cut, I don't 
know, but we know that that is not 38 million people. So I just 
want it clarified. For our guys too, this is not talking about 
taking away the tax expenditure on the business side; it is 
transferring the tax expenditure on the individual's side to 
the actual individual, rather than attaching it to the benefit. 
That is----
    Mr. Doggett. Will the gentleman yield?
    Mr. Ryan. Sure.
    Mr. Doggett. Well, there is a study that the Lewin group 
has done, since the Treasury has not provided these numbers 
themselves, that shows it is 30 to 38 million people. And 
whether it was 30 to 38 million or three to 5 million people, 
they are going to have a tax increase and it is a very clear 
tax increase and the estimate of the Lewin group is that it is 
hundreds of millions of dollars the year after next.
    Mr. Ryan. Reclaiming--and I haven't seen the study that--
and I have a hard time buying that, but--Mr. Porter, thank you 
very much for your time.
    Chairman Spratt. Mr. Porter.
    Mr. Porter. Thank you, Mr. Chairman.
    Mr. Secretary, it is good to see you again, yesterday at 
ways and means, and now here again this morning.
    Two points. One, to follow up on a conversation that we had 
yesterday. We were talking about how we got to where we are 
today, and there is no question that we have substantial 
deficit and a debt. But if we look back through the early part 
of 2000, as the recession was starting to have a major impact 
on our country, we had 2001, we had 9/11 and billions of 
dollars in our economy that were impacted by the attack on our 
homeland, to New York and here in D.C. We also had to rebuild 
the military that was drastically cut for a decade, or eight to 
10 years. Our military was underfunded, under-built to protect 
our homeland. So as we talk about where we are today, I think 
it is important to keep in history, that a lot of this has to 
do with some things, from a natural disaster to an attack on 
our homeland. And we are doing everything we can to address it.
    But I would like to visit one more time some of the 
successes of this proposal of reducing impact on families and 
taxes. Now we look at Nevada as an example. Currently we are 
building 40,000 new rooms for visitors. Our unemployment rate 
is as low as it has been in four decades. We are drawing 70,000 
people a month. Our room occupancy is around 97, 98 percent.
    All of those are a bellwether for the economy. And we 
talked, in Ways and Means and in this Committee, about the 
attitudes of Americans. I would like to cite, and if we could 
add it to the record, New York Times, they did some research in 
March. They asked people how they felt about the economy, how 
they felt about the direction of the country.
    ``And more than ever, Americans cherish the belief that it 
is possible to become rich. Three quarters think their chances 
of moving up to a higher class are the same or greater than the 
last 30 years. Compared with their social class when growing 
up, people said their current class was 48 percent higher, 
compared to 30 years ago when the likelihood of moving up from 
one's social class to another is about 40 percent greater.''
    And I enter this into the record because I think we are all 
in all we are hearing is how miserable people feel. I think 
that the policies of returning hard-earned dollars to Americans 
is making a difference. I think that needs to be taken into 
consideration, that people appreciate the fact that we are 
reducing our expenses.
    On another issue, very specific, something that has not 
been brought up, and that is Yucca Mountain. And I know there 
are those that think it is out of sight and out of mind, but if 
you look at the history of Yucca Mountain in Nevada, It is been 
a $9 billion hole, and even those proponents should look 
closely at the waste, the gross waste of dollars. It is close 
to five or $600 million a year. Hoping to reduce debt in this 
budget to something substantially less than that. But I think 
as a Committee, as we are looking at ways to save money, and 
the budget hawks that may support burial of nuclear waste in 
Nevada need to look at the fact that it is a colossal waste of 
taxpayers' dollars, close to $9 billion, and we need to find 
alternatives.
    So I guess it is not really a question regarding the 
economy, regarding Yucca Mountain, but could you address the 
impacts that these things have had on the growth of our 
economy, from 9/11 to our catastrophic national disasters?
    Secretary Paulson. I just want to say one thing real 
briefly on mobility. When people talk--and I have spent a lot 
of time looking at the growing divergence of income. But the 
one bit of good news is the mobility you've talked about, that 
dynamism. Because what the numbers show is that of those in the 
bottom quintile, half of them will have moved out of that, in a 
10 year period. And those in the top quintile, half of them 
were not there 10 years earlier. And so there is great 
mobility.
    And in terms of the tax cuts, I saw it firsthand, in terms 
of what they did, and in terms of inspiring investor 
confidence, and corporate confidence to invest in the economy, 
changing behavior. I think one way we probably all can see it 
is when you look at small businesses. And you know, the top 
individual rate is often the small-business rate with the 
schedule C filers. You know, you probably know a lot of small 
businessmen who every extra penny they have they plow back into 
their business, and they are a big driver of growth. And so I 
would say you are right, that has changed behavior, and it is 
an important part of this economic growth.
    Mr. Porter. Now, Mr. Secretary, it may seem parochial to 
mention the Nevada experience, but people who do not travel do 
not enjoy tourism and travel, and we would not be at a 97 
percent occupancy if the American people didn't feel 
comfortable, and believe in the future of our country. Thank 
you.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman. Just a general 
comment. I find it somewhat optimistic on the part of the 
administration bringing us this budget predicated on a one 
percent limitation to non-security and domestic spending, 
something that my Republican friends have been unable to 
achieve even once in the 12 years that they have been in power. 
And somehow the administration thinks that with Democrats in 
charge we will do that in the next four years. Somewhat ironic.
    The second irony is that the Treasury Department and the 
President do not place a higher long-term priority on extending 
the tax codes than dealing with the alternative minimum tax, 
which is rapidly morphing from a tax on lawyers, doctors, and 
lobbyists. It doesn't get the hedge fund managers, and the 
typical CEO, but it does get the lobbyists, the lawyers, the 
doctors, the accountants. But this is rapidly morphing into a 
tax on two-income teacher, firefighter, plumber--the plumber 
that you referenced, that 89 percent of married families with 
children will pay the ATM by 2010, under the priorities that 
have been advanced by the Bush administration's budget. I find 
that ironic, that concern about tax reduction and 
prioritization, and I think it is a sadly mismanaged set of 
priorities, which I hope our Budget Committee will address.
    Mr. Secretary, I was pleased to see that the Global 
Environmental Facility, GEF, received not only the 8 million 
that was pledged, but it appears in this budget as I read it 
that there will be a commitment towards paying off our past 
shortfall. I know you are a noted person who is concerned about 
the environment as part of your resume, which is something I 
was pleased to see, and I really commend you and the 
administration for meeting this commitment, and I hope we can 
continue to do so in the future.
    My question to you deals with issues surrounding debt 
cancellation. Impoverished countries have benefitted from the 
2005 debt agreement reached recently in the UK. Your sort-of 
counterpart, Gordon Brown, has named 67 countries as requiring 
full debt cancellation. I am wondering what your thoughts might 
be about our being able to go forward under the confines of 
this budget, or work that we can do within the budget Committee 
or the Ways and Means Committee, where we need to revisit it to 
be able to move in this direction, as a way to help put the 
underpinnings under these poor countries.
    We appreciate what the President has done in this budget 
with HIV-AIDS. I personally hope we are able to do a better job 
keeping our commitments for water and sanitation, but I wonder 
if you have some observations also----
    Secretary Paulson. First of all, I thank you for the 
question and I talk with Gordon Brown fairly often, and this is 
a topic that he is very passionate about. And it is one that 
the administration worked very closely with him a year or two 
ago, fashioning that very important agreement.
    The poor developing countries is a very important issue, 
and it is important when we do it, we do it in a way in which 
we think has got a reasonable chance of being sustainable, and 
so we come together as a group. And one of the things we have 
been spending a lot of time talking about is the importance of 
keeping nations from coming in afterwards, and then 
individually loaning, or unilaterally loaning money to increase 
their problem again.
    So this is something that we will continue to focus on. And 
I think right there, it has got to be part and parcel of some 
credible economic program. And I would also just put in a plug 
for trade and for Doha, because if we don't get a Doha 
agreement, the poorest countries are going to be the ones that 
are going to be paying the biggest price for that.
    Mr. Blumenauer. I appreciate your comments, and I 
appreciate your courtesy, Mr. Chairman. I would hope that as 
you move forward, that there is--I appreciate that we need some 
standards and for these countries themselves, I hope there is 
some sensitivity, particularly as we deal with their water and 
sanitation.
    Secretary Paulson. Very very much so.
    Mr. Blumenauer. Thank you.
    Chairman Spratt. Mr. Simpson of Nevada.
    Mr. Simpson. Thank you, Mr. Chairman. Thank you for being 
here, Secretary Paulson, we appreciate it, in this fun give-
and-take that we have.
    I want to take you back if I could to something you said 
when you were talking, when you answered Mr. Edwards' 
questions, relative to the deficit and the debt. You said, 
speaking of Congress, the need to maintain the economic 
policies to stimulate growth and so forth, and the spending 
restraint. And you said, referring to Congress, ``there has 
been some restraint down here. Not as much restraint as we 
would like to see.''
    Given that in the six years that I think the President has 
been President, this Committee and Congress has adopted the 
discretionary budget cap put fourth in the President's budget 
proposals, our 302 cap is always reflective of the President's 
cap on discretionary spending. What additional spending 
restraint are you talking?
    Secretary Paulson. Well, it was a general statement in the 
sense that I think we all recognize a need for greater 
discipline. The President has talked a fair amount about 
earmarks, and so I think there is a number of things that we 
could do better. But I take the comment that the previous 
speaker made, which is we, holding nonsecurity discretionary 
spending to one percent a year would be better than we have 
done in the past. And it is not easy, and I don't mean to imply 
that it is easy.
    Mr. Simpson. Well, what bothers me, I guess is that I 
continue to hear the administration and the officials talking 
about spending restraint, we need to make sure that Congress 
exercises exercises spending restraint. As a member of the 
Appropriations Committee, we have had some tough times trying 
to live under the budget caps, but we have done so. And I get 
this feeling that the administration is trying to shift the 
blame to Congress for not being fiscally constrained enough to 
hold it down, and we have done a good job.
    And as far as mentioning earmarks, hey, you know I was at 
an event yesterday with the President when he held up this big 
stack of earmarks and all this kind of stuff. Then the CR that 
we just passed the House, you will notice that we eliminated 
almost all the earmarks out of that. There were some that were 
left in, particular from the Senate side, but most of the CRs 
were left out, or most of the earmarks were left out. Guess how 
many dollars we saved.
    Secretary Paulson. Not a lot.
    Mr. Simpson. Zero. Because that money went into the 
agencies and now guess what. Now, we go to the agencies and ask 
them to fund the projects. The only thing that changed with 
that was the discretion of which projects are going to be 
funded, whether it is going to be that by the administrative 
branch of government, or whether members of Congress are going 
to have some control over a very small portion of that budget. 
Earmark reform is not going to save a dollar. Should it be more 
transparent? Yes. Should we look over it better and make sure 
they earmarks are justified? Yes. But in terms of saving 
dollars in fiscal constraint, all I want is the administration 
to acknowledge that it is a joint problem between the 
administration and Congress. And certainly he is going to 
propose spending programs to be eliminated. Some of them we 
have done. Some of them we disagree with the administration. 
And that is the way it is. He is going to propose, as an 
example, on the public schools, the county payments for those 
counties that have lost forest timber revenue, he is going to 
propose, as he did in his budget, the way to pay for that for 
the next five years is to sell public lands. He proposed it 
last year.
    So we are going to have to find another way to do it. And 
we will work within that budget. But the acknowledgment that we 
have actually had fiscal constraint and fiscal spending 
discipline on the discretionary part of this budget, I think, 
by the administration, would be a good thing. And what we 
really have two do, in a bipartisan fashion is work on the 
mandatory spending of Social Security, and Medicare, and 
Medicaid, and no matter what anybody says, everybody that looks 
at it knows that we have got to address it because you can't 
continue the growth that it is on.
    Secretary Paulson. I would say amen. And so I clearly see 
that both Congress and the administration deserve a lot of 
credit for the fiscal situation we have right now in the short 
term, which is a stronger fiscal situation. And so we have a 
strong economy, revenues coming in, and there has been 
restraint when you look at, you know all of this after the 
natural disasters and hurricanes, and 9/11, the war, and 
funding all of that. And so you are very right to focus on the 
big problem.
    Mr. Simpson. I appreciate that. And I would say to my 
friend from Texas, Mr. Doggett, that it is difficult to meet 
and talk about saving Social Security, the Treasury Department 
Social Security, because the President would have to propose 
private accounts.
    Put everything on the table. I don't care what the 
proposals are. Let us sit and talk about it, and have a 
bipartisan solution to this. It may include private accounts, 
it may not, I don't know. But let us work it out, and quit the 
politics of blaming each other for it and try to find a 
solution.
    Thank you Mr. Chairman.
    Chairman Spratt. Mr. Berry.
    Mr. Berry. Thank you Mr. Chairman.
    Mr. Paulson, thank you for being here. We don't run 
across--I am looking at your resume here. Dartmouth, MBA from 
Harvard, we don't have too many of those at the Rice Paddy 
Motel coffee shop in Gillett, Arkansas. And we don't have 
access to this kind of expertise very often.
    So I would like to--I have been around here since 1993. 
Most of the discussions I have ever heard about the economy or 
public policy or whoever, certainly from your side of the 
aisle, would indicate that the only thing that matters is the 
tax rate, that if you just cut taxes the economy just bubbles 
up out of the ground. And if you raise them, that horrible 
things happen. Now, to the best of my memory in that short 
period of time, we have raised taxes and had a successful 
economy, and we have cut taxes and incurred huge debt. So my 
first question is, is there anything that impacts the economy 
besides taxes?
    Secretary Paulson. Obviously, many things. We have a very 
diverse, very, very strong economy, great entrepreneurial 
spirit. There are many things that impact the economy. Taxes 
happen to be an important one.
    Mr. Berry. I asked this question of Director Portman 
yesterday. Do you all ever recognize the value to the economy 
that the American people get because they spend less than half 
as much of their money for food as any other nation in the 
world? Does that ever occur to anybody at the Department of 
Treasury? Can you get a report on that and the value of it, and 
what would happen if we doubled the price of food? Not now, but 
at some future date?
    Secretary Paulson. Sure.
    Mr. Berry. I would love to see that information. I would 
associate myself with the remarks of the gentleman from Idaho 
about earmarks. I think we know more how to spend money than 
the administration, whether it is this administration or 
another. And I think it ought to be transparent, and I think it 
is a good thing.
    I think you have been given the most difficult task of 
making chicken salad out of chicken litter, and I don't think 
it is going to be an easy thing for you to do. I appreciate 
your willingness to come up here and tell us how good things 
are going to be, and how wonderful the world is going to turn 
out to be in spite of the fact that we have completely 
ignored--if we came forward today and proposed just borrowing 
over the next two years $1 trillion, let us just float a $1 
trillion bond issue. And let us take it and divide it up among 
the people according to how much money they make, whoever makes 
the most money gets the most. Would your former--the company 
that you headed before you came here, would you all be 
interested in buying those bonds, and doing that?
    Because essentially that is what we have done. We have sold 
$3 trillion worth of bonds and given the money to the people 
according to how much money they make. Doesn't borrowing money 
and giving it away, doesn't that stimulate the economy too? You 
know, like I said, I am just a poor dirt farmer from eastern 
Arkansas, but I can add and subtract. And I am curious, am I 
right about that? If you borrow money and give it away to the 
people, doesn't that stimulate the economy?
    Secretary Paulson. There will be a short-term stimulus, 
sure. I would just say, Congressman Berry, a couple things. 
First of all, if you think I am sitting here saying everything 
is going to be bright and rosy in the future, you've 
misunderstood me. The one thing I will say is we all can be 
pleased that we have a strong economy today. We have a strong 
economy today, and that puts us in a stronger position to solve 
some of the problems we need to solve.
    But frankly, since coming to Washington, although I have 
had a pleasant surprise on the short term, that frankly, in 
January, if you had asked me last January whether the economy 
would be as strong as it is this January, I wouldn't have 
guessed it. And it looks like we have made a transition to a 
sustainable rate of growth, and that this expansion--I would 
say the problem--I see a huge problem, which is the longer-term 
problem of entitlements.
    Mr. Berry. I understand all that.
    Secretary Paulson. And that is bigger than I thought it was 
before coming here.
    Mr. Berry. Let me ask you this. What would our economy look 
like today if we hadn't borrowed $3 trillion?
    Secretary Paulson. I have got to tell you that is an 
unknown, what the economy would look like. I would do you this: 
I know that the tax relief played a very big part in getting 
this economy back up and going, where we needed to get it.
    Chairman Spratt. On the Republican side, Mr. Conaway.
    Mr. Conaway. Thank you, Chairman. Last week we had Mr. 
Orszag here, and I challenged him to begin parsing his 
adjectives better. You used the word ``huge'' earlier in 
connection with something. We always use the word 
``massive.''you all use the word ``massive.'' We do that I 
think in order to try to augment the strength of our arguments, 
as opposed to just letting the argument lie where it is. 
Numbers go up, numbers go down, and we ought to be able to 
understand it.
    But in that vein, my brother colleague from Texas augmented 
one of his positions by saying that he was offended--is 
challenging the change in VA benefits, the co-pays or whatever 
it is we may be asking this budget to do, and I certainly agree 
we ought to talk about those. But he seemed to want that, then, 
by saying that members of Congress aren't sharing 
proportionally some sort of a burden.
    So, I am not in the least embarrassed by how much I make or 
we make, the benefits. I defend it all the time in my district, 
I voted for the pay raises. But if my good colleague from Texas 
is in fact wanting to augment his argument that Congress, and 
the staff, and the Secretary of the Treasury, others, ought to 
share in this by taking pay cuts or a reduction to benefits, 
then let the bidding begin.
    But it ought to begin on his side. If he is not serious 
about that line of logic, which is very emotional one, and one 
I don't agree with, but it is very emotional, and it appeals to 
an awful lot of folks. If in fact he wants to continue using 
that line of logic, which he has used in the past, used again 
today, then I would encourage him, I guess, as part of next 
week's unveiling of the new agenda, to include I guess the 
opening bid, which would allow us on this side to begin, you 
know, raising that bid.
    A comment was made about earmarks. I would argue that there 
were--there was, or is, member-directed spending in the 
Continuing Resolution. I would argue that our good colleague, 
the chairman of the Appropriations Committee singlehandedly 
directed an awful lot of spending, moving monies around within 
that CR. It took 137 pages to do what normally takes two to 
four pages to do, and so there was member-directed spending in 
the Continued Resolution.
    Looking forward to more conversations like this. I don't 
have anything to add other than just to say we have got some 
tough decisions to make, and whether you raise taxes and this 
economy goes to the tank, or you spend more money or whatever 
we do, I am continually impressed by the resiliency of this 
American people, this American economy. It thrives in the face 
of things we do here in an attempt to make it better. And most 
the time it just continues to trudge along, and overcomes them 
amidst the challenges that we put in the face of it, whether it 
is a complicated tax code scheme that is criminal on its face, 
or other over-regulations, or other losses, all the kinds of 
things that we have got out there, that this economy can 
continue to thrive, and goodhearted Americans get out there and 
work every single day, in spite of what we do here in these 
chambers.
    So Mr. Paulson, thank you very much for your service. You 
do have a tough job. Chicken litter, I guess that is a phrase I 
am not real--I know what it is, but I just haven't heard the 
more genteel phrase. But I look forward to working with you.
    And with that Mr. Chairman, I yield back.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. McGovern of Massachusetts.
    Mr. McGovern. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for being here. I appreciate your testimony. I am a 
new member of this Committee and one of the things I have come 
to appreciate from your testimony and listening to others is 
that there is no simple quick-fix solution to the mess that we 
are kind of confronted with. We are going to have to talk about 
entitlement reform, we are going to have to deal with issues of 
not only tax cuts, but tax increases. I think there is a lot of 
controversial issues down the road that if we are honest we are 
going to have to deal with them.
    I am also a bit concerned however, that we all talk about 
numbers. Sometimes we forget that there are people behind these 
numbers. So when we talk about cuts in programs or we talk 
about ``we are not going to raise the amounts in some of these 
programs to deal with inflation,'' to deal with increased 
participation, that there are people that fall through the 
cracks, and I think we need to keep that in mind.
    I have limited time so I just wanted to ask, I have a 
couple of sets of questions. The first is, Mr. Secretary, when 
are we going to have to raise the debt ceiling? That is, when 
is the administration going to make a formal request to us to 
raise the debt ceiling?
    Secretary Paulson. The best estimate of that would be 
sometime this fall.
    Mr. McGovern. Will the administration make a formal request 
to Congress asking it to be increased?
    Secretary Paulson. Yes.
    Mr. McGovern. The other area I just wanted to focus on a 
little bit is the issue of the war cost. We have spent over 
$300 billion already on Iraq. If I add all the numbers up, if 
we do everything in your budget, which is I think kind of 
lowballing it, looking at some of these out years, that will be 
over $600 billion, and almost all that is not paid for. And I 
guess my question is, is the administered ever going to 
actually consider paying for the war? In the form of a war tax, 
or maybe a user fee, to make it more comfortable for some of my 
friends on the other side of the aisle?
    I ask the question for a couple of reasons, not just 
because of the budgetary impact, and when you are talking about 
several hundred billion dollars, that is a lot of money. And we 
have no idea how much it is ultimately going to cost. Surely it 
is costing much more than was advertised when the war began. 
But I also ask it because right now the only people that are 
really paying the price of this war are the troops and their 
families. They are the only ones being forced to sacrifice 
here. And I am not sure the American people would object to 
stepping up to the plate and doing their part, which is to make 
sure that this war is paid for, and not put on the backs of our 
kids and our grandkids, and our great grandkids.
    And I ask that question because I think it is the right 
thing to do, I think we should be paying for this thing. All of 
us need to be sacrificing. And it is a little bit disconcerting 
that in a time of war, we are giving people tax cuts. And we 
can argue about whether the war stimulates the economy, we can 
go back and forth on that. But I think at a minimum I think 
that it wouldn't be too much to ask that all of us sacrifice, 
and that we actually pay for this war also.
    Secretary Paulson. Okay, all of us owe a great debt to the 
men and women who are in the war in Iraq, and it is--I would 
say one thing I know will be very important to them is when 
they come home, they come home to a strong economy, which is 
growing and providing opportunity.
    Mr. McGovern. Well, how does paying for the war undercut a 
strong economy?
    Secretary Paulson. I didn't say it did. I would also just 
remark that when Congressman Conaway talked about just what a 
remarkable thing our economy is, which is pretty amazing when 
we look at, as you said, the cost of the war and all the other 
things we have funded, and again look at how strong our fiscal 
situation is right now. No, I appreciate your--I hear the 
spirit in which you made it.
    Mr. McGovern. Again I appreciate your response. And again, 
I think it is the right thing to do, and I don't think it would 
be terribly controversial for the President to say, look, you 
know, as part of our national sacrifice we are all going to pay 
for this war. And you know, you can repeal the user fee or the 
war tax when the war is over with, or you know, have it sunset. 
But it just seems to me--I mean, to a lot of people, and I have 
talked to a lot of soldiers who are fighting this war. It is a 
little bit disconcerting, when I think a lot of people in the 
military think they are fighting this war and it is all on 
their backs and we are not doing our part.
    Secretary Paulson. I understand the feeling.
    Mr. McGovern. Thank you.
    Chairman Spratt. Mr. Conway--no, you have already gone, I 
beg your pardon. Mr. Lungren.
    Mr. Lungren. Thank you, Mr. Chairman, and thank you very 
much for being here, Mr. Secretary. I apologize for missing 
most of your testimony, as I was at another Committee.
    Let me just be one to say that I share the concern that 
you've expressed, the administration has expressed about 
earmarks. I was absent from this place for a number of years 
and surprised--alarmed, frankly, I came back to see the 
proliferation of earmarks here. And just so that the record at 
least reflects this member's views: while the earmarks 
themselves may not be that large in terms of the dollars in the 
budget you deal with, frankly there is a psychological impact 
of earmarks here, which is if members get their earmarks in 
they are far less likely to vote against a bill that spends 
more money than they believe ought to be spent. And that I 
believe is one of the dynamics that we refuse to admit around 
here. We need our own discipline, and that is why I hope that 
you and the administration will continue to fight for the 
legislative line-item veto, or enhanced rescission, whatever 
you want to call it, because we use the word ``transparency,'' 
but transparency only is a means to help us do what we need to 
do, which is to get this budget under control. So I hope you 
don't believe that all of us here disregard the importance of 
earmarks.
    As I understand your testimony and the testimony that we 
had from Rob Portman yesterday, with the administration's 
budget and the projected budget for the next five years we will 
be at about 18.5 percent of GDP for the tax revenues; is that 
correct?
    Secretary Paulson. Yes.
    Mr. Lungren. And that is slightly above the average for the 
last 40 years, including those years going back to the Vietnam 
War through the present time; correct?
    Secretary Paulson. Yes, correct.
    Mr. Lungren. So essentially, we are asking the same 
sacrifice of the American people that we have asked for the 
last 40 years in wartime and in peace; is that not correct?
    Secretary Paulson. Yes, it is.
    Mr. Lungren. The other thing I would wonder is, what are 
our overall tax rates on the American people in comparison to 
the tax rates that we see in Germany, France and Japan?
    Secretary Paulson. They would be--Germany, France and Japan 
have much higher tax rates.
    Mr. Lungren. And as I understand it, even with the deficits 
that we have been running, the U.S. Federal debt as a shared 
GNP is falling, and is at 37 percent. And that compares to 
Germany at 52 percent----
    Secretary Paulson. The public debt outstanding, yeah, 37 
percent.
    Mr. Lungren. Right. With Germany, in comparison, at 52 
percent, France at 43 percent, and Japan at 79 percent, is that 
pretty accurate?
    Secretary Paulson. I don't know those numbers off the top 
of my head, but that is directionally right.
    Mr. Lungren. So systems that have significantly higher tax 
rates than we have are suffering under far greater public debt 
burden?
    Secretary Paulson. In the case of those countries that is 
absolutely true.
    Mr. Lungren. Do you have an idea what the unemployment 
rates of those countries are at the present time?
    Secretary Paulson. They are clearly, in Germany and in 
France, much higher than in the U.S. and in Japan, higher.
    Mr. Lungren. I don't have the folk wisdom that some other 
members have expressed here, but I do remember a statement 
years ago. I think it was Pete Wilson, when he was first 
running for statewide office in California, said that the 
greatest social welfare program is a job, and to the extent we 
can establish an economy that generated jobs, primarily in the 
private sector, we would be doing the best thing that we could 
for the average American.
    Do you have a recollection of what the sustained 
unemployment rate was in the 1970s?
    Secretary Paulson. I don't, but it was well above where it 
is here. This is--maybe the Chairman does. We were both--the 
1970s were not a great time for our economy. We had 
``stagflation'' and so it was----
    Mr. Lungren. The reason I bring that up is we like in this 
Committee to compare what is happening now with what has 
happened in the Clinton years, which I happen to think the 
Clinton years in some ways benefitted from the legacy of the 
Reagan tax cuts, which when they came into effect came into the 
context of an economy that had a much higher sustained rate of 
unemployment, economists saying that you couldn't have--well, 
full employment they were defining as no more than 94 percent. 
That is, we would run this economy into a tailspin if we had 
less than 6 percent sustained unemployment rates. We had higher 
inflation rates. We had higher tax rates.
    And as we look at the difficulties--and there are 
difficulties. I am one of those who believes we ought to be 
concerned about the debt. But as we look at that, we should 
also ought to look at the alternatives of what we had before, 
when we had higher tax rates, which higher rate of inflation, 
which higher rates of an appointment, with economists agreeing 
that we could never have the kind of vigorous economy that we 
have had, that is the sustained literally with few recessions, 
compared to what we were seeing through the 1960s and 1970s.
    Chairman Spratt. Mr. Lundgren, we got to move on.
    Mr. Lungren. I appreciate that.
    Chairman Spratt. To answer your question there were 22.7 
million jobs created during the years of the Clinton 
administration, which vastly outdistances what has happened in 
this----
    Mr. Lungren. All after the Reagan sustained tax cuts that 
we basically have followed, then, along with the Bush----
    Chairman Spratt. That is the subject of another hearing. 
Mr. Andrews of New Jersey.
    Mr. Andrews. Thank you, Mr. Chairman.
    Mr. Secretary, in answer to Mr. McGovern's question a 
moment ago, you indicated the administration will be submitting 
a request for increase to the debt ceiling. When do we expect 
that request, and how much of an increase to the debt ceiling 
will you be asking for?
    Secretary Paulson. I don't know the answer to either of 
those, because it is going to be very dependent on the way 
which revenues come in. But it would be sometime in the fall.
    Mr. Andrews. Thank you. In your testimony you indicate that 
the projected surplus under the administration's budget 
proposal will lay the foundation for dealing with entitlement 
reform. I am a little skeptical that it is really a surplus by 
2012, and here is why. I am correct, aren't I, in that every 
dollar of the projected Social Security surplus during this 
five-year window is applied to the deficit; is that correct?
    Secretary Paulson. That is the way it works under the law.
    Mr. Andrews. And if we were to express the operating budget 
of the federal government, net of Social Security, my reading 
of the budget tells us that we would be $187 billion in deficit 
by 2012; is that correct?
    Secretary Paulson. I can't confirm that number.
    Mr. Andrews. In addition to that, there are some other 
costs which are not built into the five-year plan. One is the 
alternative minimum tax. There is a plug, but it doesn't extend 
to 2012. If Congress takes action that would shelter 39 million 
people from paying the alternative minimum tax, which I think 
is likely, that increases the deficit in 2012, doesn't it?
    Secretary Paulson. You know, I have to answer this question 
a number of times, but clearly, what I have said is we are 
going to need to work together on solving the alternative 
minimum tax.
    Mr. Andrews. I mean, as a logical proposition, unless we 
raise taxes on someone else, or cut spending to offset the tax 
relief for people under AMT, it is would increase the deficit, 
right? Okay. If I read the budget document correctly there are 
no war costs built into fiscal year 2012 at all. Now, I hope 
there are none. I hope that we are successful in resolving the 
conflict, and we are not spending any money in Iraq or 
Afghanistan. I strongly doubt that. But am I correct in my 
assumption that there is zero war costs built into 2012?
    Secretary Paulson. Yes, because what we have done is we 
have a placeholder for 2009. It is difficult to estimate.
    Mr. Andrews. It certainly is, I understand that. And here 
is the calculation I have done. If you take the net budget 
deficit, net of Social Security, is 187 billion. If you add in 
the AMT, the CBO tells us that would cost us $93 billion. If 
the war is costing us about what it is costing us today--I hope 
it isn't but if it is that is $87 billion, and then if you add 
interest on further debt we would have accumulated in the first 
four years, that takes us to $393 billion deficit.
    Now, we further compound the problem. Those numbers are 
built on the administration's revenue assumptions, which I hope 
are correct, that revenue will grow at the rate that you 
project. If you use the CBO's revenue numbers, though, you 
would have a falloff of $155 billion in revenue, which means 
that the deficit would be $548 million before you get into the 
Social Security surplus. Even applying the Social Security 
surplus you would have a deficit after that.
    Now, here is my concern. David Walker was here 10 days ago, 
and testified that if no policy changes by the middle of the 
next decade, we will have a deficit that is 5 percent of GDP, 
because of the onrush of the baby boom retirees. This budget 
really doesn't change policy. It continues the existing policy.
    Are you confident that this existing policy is going to 
avoid the problem I just talked about, given the fact that 
there is no war cost, there is no AMT built in here, that we 
are spending every dollar of Social Security surplus? Can you 
approach 2017 with a high degree of confidence that are going 
to be ready to deal with entitlement reform?
    Secretary Paulson. I can't unless we start dealing with 
entitlements now. In other words, I would have different 
numbers. Your chairman had different numbers. Under his 
assumption that there was a deficit of eight tenths of a 
percent GDP. We think we can balance the budget. But the forest 
through the trees is the problem you have pointed at, and I 
would say of all the things most frustrating to me coming down 
here is to be able to look at this big structural issue we see 
ahead of us, and it is like we are flying into the side of a 
mountain, and we have got time. We can avoid it but we can't--
we need to come together.
    Mr. Andrews. I see my time is up. I would agree. I am just 
concerned that we are not really changing the direction of the 
plane. I think that proposed in the next five years takes us 
right to the mountain again.
    Secretary Paulson. Let us deal with the big issues then, 
because I would say the fiscal deficit today of 1.8 percent of 
GDP is not our problem. The problem is the structural issue 
coming up with the entitlements.
    Mr. Andrews. Thank you very much, Mr. Secretary.
    Chairman Spratt. Mr. Secretary, we have three members who 
have waited patiently. Do you have the time to entertain us?
    Secretary Paulson. I am certainly not going to tell them if 
they waited they cannot go. I will try to--I realize part of 
the reason we have gone over is I have been too loquacious 
myself. So let us go on and I will try to be very, very brief.
    Chairman Spratt. Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman.
    And Mr. Secretary, thank you, and thank you for being here 
today, I will be try to have my stuff as tight as I can, too, 
so you can get in. I appreciate you taking the time. Let me 
just ask you a couple of quick questions.
    Yesterday, the Federal Reserve Board chairman, Mr. Bernanke 
said spreading economic opportunity as widely as possible is 
important, and here is what he said about it, he said, 
``policies that focus on education, job training and skills, 
and that facilitate job search and job mobility, seem to me to 
be promising means of moving toward that goal.'' In effect, if 
we are going to be involved in our economy, close the gaps on 
the debt, and provide opportunity to education, is that piece, 
and those things around it. Would you agree with that 
statement?
    Secretary Paulson. Yes.
    Mr. Etheridge. And I think we do. Now, that being said, let 
me just share--because I believe budgets really are moral 
documents as well as numbers, and I think too many times we get 
engaged in budgets and we forget it is about people who are on 
the ground. And if we cut at the federal level and do our job, 
it rolls to the State, to the local, and business gets caught 
in the gap. And ultimately it is a combination of those who 
make it happen. In this budget, when we talk about defense of 
this country, we are cutting COPS programs by 95 percent. Those 
are people that are on the ground helping people. First 
responders are being cut roughly 65 percent and a variety of 
education programs, about 44, are being eliminated. We may 
agree with some or may disagree, but I happen to know a lot of 
them, having been a State superintendent for eight years, that 
are absolutely important to the local units, because they catch 
students who fall through the gaps.
    And as we look at those issues--let me give you one more 
and then I will let you respond. It gets back to our issue of 
where we have built up huge debts and we are borrowing money 
from overseas. And it piggybacks on something some other 
colleagues have said. Historically, when we ran a national 
debt, a deficit, we sold the money by and large to ourselves. 
We sold bonds, we bought them through Treasury notes, et 
cetera. Currently we are seeing that debt explode, is probably 
the best way to put it. It is being bought by countries like 
Iran, Venezuela, Libya, Saudi Arabia, a host of other people. 
They are being bought through European or Caribbean banks.
    Does it bother you that a lot more of our debt is being 
held by foreign countries? In some cases those countries that 
we have--China is a large purchaser. And the list is long. Does 
it bother you that we are selling it on the market, they are 
picking it up, they are people who we are trying to deal with 
diplomatically, and they have leverage on our debt?
    Secretary Paulson. there is a good number of things that 
bother me. That is not high on the list.
    Mr. Etheridge. Why?
    Secretary Paulson. Trying to be very brief. We have, as I 
said, about $4.4 trillion of treasuries that are held in the 
public markets. And if we are going to be growing ourselves at 
the rate we are growing, and not saving, and there are these 
big global imbalances, we need people to buy our treasuries and 
there is a great--these are very liquid markets, and there is 
great diversity. Let me just take China as an example.
    The two biggest holders of our debt are--the Japanese own 
roughly $650 billion. The Chinese about, I think the last I saw 
was $346 billion. And of that, part will be held by the 
government, central banks, and part will be held by 
individuals. Our treasuries trade about $1 billion a day, so 
the Chinese hold less than one day's trading volume. And people 
own our debt because they believe--they've got confidence in 
this economy, and it gives them the best risk-adjusted rate of 
return.
    So again, as I look at those numbers very carefully and 
there is a great diversity, we are part of the global economy. 
And so there are some other things I worry about but that is 
not--I am not discounting it. I am just saying it is not high 
up the list for me.
    Mr. Etheridge. Well, I had another question, but I will not 
go there because I am running out of time, Mr. Chairman. But 
the point is that you talk about the growth we are having over 
the last several years, and you can just give a yes or no 
hopefully on this one. With the large deficit we are running 
with borrowed money, isn't that having an impact on our GDP, 
because we are infusing an awful lot of money that we aren't 
generating?
    Secretary Paulson. I would say this. The current account 
deficit, which is part of the reason we have got the holders 
overseas, we have really reached a fortunate point in time, 
that gets right--for four quarters in a row, our exports have 
been growing faster than our imports. And so you look at the 
latest GDP number. We had one percentage point of growth in 
there for exports. So it is getting better.
    Chairman Spratt. Mr. Becerra.
    Mr. Becerra. Mr. Chairman, thank you.
    Mr. Secretary, thanks for staying over. I appreciate it 
very, very much. I will try to make my questions somewhat 
pointed so that hopefully you can give me some directed answers 
as well.
    As I mentioned yesterday when you were testifying before 
the Ways and Means Committee, the disconnect that I think 
occurs between an economy that you and others have said is 
moving and booming, and the fact that Americans are feeling 
very insecure about their future I think has to do with the 
fact that today more and more we are seeing the disparity 
between what we produce and who gets it. More and more we see 
folks who are wealthy getting far more than those who are 
middle class. And today, nothing more than the CEO salaries of 
some of our large corporations is testament to that, when you 
see people making tens of millions of dollars in one year, and 
you've got workers who are finding they have to fight to just 
struggle to maintain their wages at the previous year's level, 
and maybe get a small increase.
    As we talk about our choices and our priorities, I look at 
the fact that we are spending all--the President's budget 
spends all the Social Security surplus monies in the trust fund 
over the next five or six years for nothing related to Social 
Security, that we still have seen the highest deficits we have 
ever seen, record deficits, and while they are coming down, 
they are still massive.
    And today we pay more simply on interest on what we owe in 
our national debt than we have ever paid before. Some $250 
billion is spent by this government simply to pay the interest. 
It doesn't reduce the principal of what we owe. It is not money 
available in the future for us to reduce taxes or to provide 
more services. It just goes to pay interest, like somebody who 
is paying interest on their mortgage, you are never doing 
anything to the mortgage in this case. All we are doing is 
paying interest on the national debt.
    And so when we think about that in our choices and 
priorities, and realize that today we have men and women who 
are sacrificing for this country, especially in places like 
Iraq and Afghanistan, I have to ask you as Secretary of 
Treasury, do you think it is appropriate for us, for this 
government, for the President to be proposing that we further 
cut taxes that will principally benefit the wealthiest in this 
country? And some estimate that if you play these tax cuts out, 
that the individuals who are making about $1 million or so a 
year will get about $162,000 in tax cuts in 2012 dollars. So as 
you play these out in perpetuity, you are giving folks who are 
millionaires this massive tax cut, and then have folks who are 
right now in Iraq making small money, for the purpose of 
defending our country and its freedoms. So the question is 
first, is it appropriate for us to be cutting taxes at a time 
of war, when this country has never before this war and this 
President cut taxes when we are in a state of war?
    Secretary Paulson. I have said I do believe that the tax 
policy makes sense. And again I think what you are doing is you 
have mixed two facts; one of which is a greater divergence in 
income, which is a trend that is been going on for some time. 
It is related to a number of things. Technology has got to be a 
big part of it; and the President's tax relief which, you know, 
a lot of that was at the low end.
    Mr. Becerra. but if we are not doing anything to reduce the 
debt burden, today a child born--while we are speaking a child 
will be born in this country. That American child today has 
what I would consider a birth tax stamped right on his or her 
forehead, that is about $29,000 today that that individual is 
born owing as part of the American family, for that massive 
debt of over $9 trillion.
    And so maybe we have room for tax cuts, maybe we have room 
for wise spending programs, wise services that we provide, but 
at a time when we have servicemen and women who are sacrificing 
their lives, should we be skewing tax cuts towards mostly folks 
who are making a massive amount of money?
    Secretary Paulson. Well, I would focus on that child is 
being born today, and what is coming down the road, and I just 
see a huge need, very important need to deal with this growth 
in the entitlement programs.
    Mr. Becerra. There, I agree with you, but can I ask you--I 
am going to run out of time real quickly. I wanted to get into 
these fee increases for veterans' healthcare, the short-
changing of the No Child Left Behind education program that the 
President passed by about $15 billion for 2007 authorization 
levels, but let me just ask one last question.
    The enforcement of the tax laws, where we have so many 
people who are not paying taxes when they owe it, where you 
have many good hard-working Americans who do, how do you deal 
with that tax gap of some $345 billion the IRS estimates that 
we don't collect, when your proposals that you provide in 
essence talk about collecting $3 billion a year over the next 
five years, of that $345 billion that people are stealing from 
the American taxpayers, under their noses, when--when you don't 
collect the taxes that someone owes, another American has to 
increase taxes----
    Chairman Spratt. Mr. Becerra, he answered that in some 
length earlier. We will get that in the record for you.
    Mr. Becerra. That is fine.
    Chairman Spratt. Just so he can give a brief answer to it.
    Secretary Paulson. Thank you, Mr. Chairman, but I will be 
very brief, and I appreciate because I did go into some depth. 
I would say that the number I think to focus on, which was last 
developed in an estimate in 2001 was 290 billion. And we have 
proposals to deal with this----
    Mr. Becerra. At 3 billion a year?
    Secretary Paulson. Well, I would say to you they are very 
serious proposals, and I would like to get those enacted and I 
would like to talk--you know, we also have a very robust audit 
function. I would just say to you, because you care a lot about 
the individual taxpayer and the honest taxpayer, many of the 
things we would have to do to go beyond that would place a very 
big burden on the taxpayer who is paying his full share because 
it will be greater reporting requirements. And you will get my 
answer----
    Mr. Becerra. I look forward to working with you on that 
issue. Thank you Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Becerra. Ms. Kaptur of 
Ohio.
    Ms. Kaptur. Thank you, Mr. Secretary, for remaining for the 
rest of us. You have a very important job. And in your 
testimony you paint a very rosy picture about the economy, even 
indicating real wages have risen 1.7 percent, which isn't a 
whole lot, but what you don't say is it is disproportionately 
shared. Those in the top one percent have had a relative income 
increase of $146,000 a year, while the average middle-class 
family in our country actually has fallen behind $1300 a year 
since the beginning of the Bush administration. They are paying 
more for gas, they are paying more for medicine, they are 
paying more for healthcare. Job growth is sluggish. During the 
Clinton administration, we had about 227,000 jobs being created 
annually, and by this administration 66,000. It is a quarter of 
what had happened before. We have a negative savings rate in 
this country. Our trade deficit knocks off almost a full point 
or more off our GDP, with nearly $1 trillion of trade deficit, 
and we have the highest vacancy rate in housing in over 40 
years. I am very worried about that. All across the country, 
and what is happening in the mortgage market.
    So my question to you is very--I have a couple simple ones. 
Has the Bush administration in its seven years of submissions 
to the Congress ever submitted a balanced budget to the 
Congress? The Bush administration. I know you haven't been 
there for the full seven years, but in any of the years, have 
you ever submitted a balanced budget, yes or no?
    Secretary Paulson. Have we achieved a balanced budget?
    Ms. Kaptur. Have you submitted a balanced budget, in any of 
the seven years that you have----
    Secretary Paulson. I haven't been here. You will have to 
ask someone else that question.
    Ms. Kaptur. Sir, you are the Secretary of Treasury.
    Secretary Paulson. I can tell you we have submitted a 
budget----
    Ms. Kaptur. You have never submitted a balanced budget. 
Please be realistic about what you have done. What is the 
amount of debt, the accumulated debt that the Bush 
administration has added to this economy? How much? over the 
seven years? Three point nine trillion, do you know that 
number?
    Secretary Paulson. I know the number.
    Ms. Kaptur. All right, thank you very much. Three point 
nine additional trillion dollars onto the nation's debt. Are 
you aware that interest payments on that debt has now grown to 
nine percent of our total budget, totaling nearly $300 billion 
a year, which is enough to fund half the federal agencies we 
have to fund in terms of discretionary funding? Are you aware 
of that? Nearly $300 billion a year in interest that we are 
paying?
    Secretary Paulson. I am aware of what the interest is.
    Ms. Kaptur. Are you aware of that 95 percent of the new 
issues, the new securities issues for that debt are purchased 
by foreign interests, 95 percent?
    Secretary Paulson. We just addressed the foreign holding.
    Ms. Kaptur. Alan Greenspan told me a few years ago that 
when I tried to encourage him to sell the debt in small 
denominations like Roosevelt did to the American people, 
through postal savings stamps, he told that we didn't need to 
do that because 20 bond houses on Wall Street handle all of our 
issues. Is that still true?
    Secretary Paulson. We have 20 primary dealers.
    Ms. Kaptur. Okay, 20 primary dealers. Can your office sends 
me those dealers, please? The names of those dealers?
    Secretary Paulson. Sure.
    Ms. Kaptur. All right, and do they receive a fee for this 
service they provide? Can you also give me how much they make 
in those annual fees, please? Do you have that information.
    Secretary Paulson. We will send you the information we 
have.
    Ms. Kaptur. All right, is Goldman Sachs one of those 
dealers?
    Secretary Paulson. I believe they are.
    Ms. Kaptur. All right. Are you the former CEO of Goldman 
Sachs?
    Secretary Paulson. Yes.
    Ms. Kaptur. Are they still a dealer in our public 
securities?
    Secretary Paulson. They are still----
    Ms. Kaptur. Thank you very much. Could you also provide 
this to me for the record: for our earned income tax credit, 
States like Ohio are foregoing over $250 million to our 
citizens who don't get those refunds. In my congressional 
district probably $20 million is foregone by the public that 
should be receiving, working people should be receiving those 
dollars back. Could your staff make a recommendation to us on 
how every single American who qualifies for the EITC can get 
it, and how much you can simplify the procedures for that? Or 
does Congress have to do that for you?
    Secretary Paulson. Well, this is a very high priority of 
mine, and we are doing a good deal of work on this right now.
    Ms. Kaptur. All right. Finally, thank you very much, I 
would appreciate the recommendations of your staff on how to 
simplify the filings for that.
    Secretary Paulson. We are working with Chairman Rangel on 
that.
    Ms. Kaptur. All right. Finally, are you aware of a deal 
that was signed during the Reagan Administration with the U.S. 
Treasury, and I suppose the Federal Reserve, with the Saudis, 
having to do with how petrodollars would be recirculated in our 
economy as a backup? Over $1 trillion? Are you familiar with 
that agreement?
    Secretary Paulson. No, I am not.
    Ms. Kaptur. Could you ascertain for me if it is still in 
effect, the amount, and who might have signed it, and whether 
or not it has expired? Thank you very much. I appreciate that. 
How soon can expect to receive the names of the dealers and the 
fees that they are paying for handling our public debt 
securities?
    Secretary Paulson. We will do that as soon as we can get it 
together for you.
    Ms. Kaptur. Within a month?
    Secretary Paulson. We will get it to you as soon as we can 
pull it together
    Ms. Kaptur. Thank you, Mr. Secretary, very much.
    Secretary Paulson. I am delighted I stayed for your 
questions. Let me just make a couple of comments.
    I begin by saying that I was on Wall Street in 2000, 2001. 
I saw the impact of the bursting stock market bubble. So I 
think part of the economy you were talking about in such 
glowing terms was an Alice in Wonderland economy, the stock 
market bubble burst. We went into a recession. There was a 9/11 
attack. I would respectfully suggest you are being a bit too 
pessimistic about this economy, which is growing nicely. The 
numbers I cited were for the average, you know, for the average 
worker, you know, compensation being up in real terms, 1.7 
percent.
    Ms. Kaptur. Mr. Secretary, please. You have to look at the 
distribution of that. I hear what you are saying.
    Secretary Paulson. I am talking about the average. You 
know, I am very aware of the distributional effects. The 
average worker has over the last year seen real gains.
    But I will get back to you with as much of the information 
as I can get together.
    Ms. Kaptur. In a most incredible statement that was ever 
made, and I will end with this, Mr. Chairman, when Alan 
Greenspan was head of the Federal Reserve in 2000, when we were 
finally beginning to balance our annual budgets and pay down 
our long-term debt, and it was coming down after severe effort 
by this Congress, by Leon Panetta, by President Clinton, by 
many members of Congress who lost their seats because they 
voted to try to balance that budget over a series of years, and 
I can remember Alan Greenspan saying publicly, ``You know, now 
that we are getting to the point were we might actually sell 
off all these debt securities and balance our budget, well, you 
know, we are in uncharted waters. We might not want to do this. 
We don't know what having no debt might mean for the future.''
    That statement has troubled me ever since he made it 
because I was so proud as an American that we were finally 
paying off our bills.
    Chairman Spratt. Ms. Kaptur, we have got to let the 
Secretary go because he is due out of here at 12:30.
    Thank you for your forthright answers, for your 
forbearance. We are glad you are where you are, and we are 
looking forward to working with you.
    Secretary Paulson. Thank you, Mr. Chairman.
    Chairman Spratt. Thank you very much.
    [Whereupon, at 12:38 p.m., the Committee was adjourned.]

                                  
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