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



 
                PRESIDENT'S FISCAL YEAR 2008 BUDGET WITH

                    U.S. DEPARTMENT OF THE TREASURY


                        SECRETARY HENRY PAULSON

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 6, 2007

                               __________

                            Serial No. 110-5

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 30, announcing the hearing...................     2

                                WITNESS

The Honorable Henry Paulson, Secretary, U.S. Department of the 
  Treasury.......................................................     6


                PRESIDENT'S FISCAL YEAR 2008 BUDGET WITH



                    U.S. DEPARTMENT OF THE TREASURY



                        SECRETARY HENRY PAULSON

                              ----------                              


                       TUESDAY, FEBRUARY 6, 2007

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

    The Committee met, pursuant to notice, at 10:00 a.m., in 
room 1100, Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 30, 2007
FC-5

               Chairman Rangel Announces a Hearing on the

                President's Fiscal Year 2008 Budget with

                    U.S. Department of the Treasury

                        Secretary Henry Paulson

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced the Committee will hold a hearing on President Bush's budget 
proposals for fiscal year 2008. The hearing will take place on Tuesday, 
February 6, in the main Committee hearing room, 1100 Longworth House 
Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be limited to the invited witness, the 
Honorable Henry M. Paulson, Jr., Secretary of the Treasury. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    On February 5, 2007, President George W. Bush will submit his 
fiscal year 2008 budget to Congress. The budget will detail his tax 
proposals for the coming year, as well as the budget for the Treasury 
Department and other activities of the Federal government. The Treasury 
plays a key role in many areas of the Committee's jurisdiction, 
including taxes and customs.
      
    In announcing the hearing, Chairman Rangel said, ``I have enjoyed 
working with Secretary Paulson and look forward to his presentation of 
the President's budget. A budget is a statement of principles and I am 
hopeful that Democrats and Republicans can listen to the 
Administration's presentation and work together to find solutions to 
the issues facing American families.''
      

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noted above.

                                 

    Chairman RANGEL. The Committee on Ways and Means will come 
to order. We have the distinct privilege and honor to hear from 
the Secretary of Treasury, who, in addition, is the President's 
Economic Adviser.
    I attended a meeting this morning of the Democratic Chair 
people. I am pleased to report to you, Mr. Secretary, that you 
have the confidence of the Democratic leadership as well as the 
Chairmen of the legislative Committees that your office has 
jurisdiction over.
    I will say publicly what I have said privately, that we 
really appreciate and believe in your sincere desire to have 
this 110th Congress have some legislative accomplishments. We 
think it is important for the Democratic and Republican 
legislators to fulfill our obligations to the American people 
to move away from the partisan fights that we have gained a 
reputation for and to move forward with all that we can to at 
least try and hopefully resolve some of the critical problems 
that our great Nation faces.
    Mr. McCrery has been more than cooperative. He has a 
sincere desire that we get something accomplished in a 
bipartisan way. Publicly I want to thank you for the efforts 
that you made in working with me and others to make it easier 
to do.
    In order to set the record straight, the President really 
has to be a party to this. He has the pulpit, and he can create 
a climate that would allow us to move forward in a bipartisan 
way, without being profiles in courage but for him to be able 
to encourage us to continue along this line. Now, it is not for 
legislators to tell the President what he should put in his 
budget. He is the President, and he has that responsibility. 
There is a certain politics involved here that is pretty clear 
to the American people after listening to the campaign.
    So, it would seem to me the answer is not what Democrats 
want or not what Republicans want but what we together can do. 
Following my own advice, I am not even going to talk about 
private accounts. That is something you talk about when you are 
fighting, not when you are trying to work out something. When I 
take a look at some of the cuts that are proposed, $637 billion 
for privatization, $66 billion for cuts in Medicare, 
restricting food stamps, building in cuts in Medicaid, cuts in 
children programs and the request that we make permanent his 
tax cuts; well, it sounds to me like this is pre-campaign talk. 
I just want someone at the White House to know that the 
Democrats won. We want to work with Republicans.
    To get back to where we were, we need the President to try 
to understand that the State of the Union was a missed 
opportunity, the talk that he gave in my district to the 
association for a better New York would have been a great 
opportunity, the Democratic retreat, we were so honored to have 
him there, but he could have broke new ground. I really think 
that the Administration, without sacrificing principle, can 
make us all feel that we have got a job to do. It is going to 
be difficult. It is going to be politically painful, but it 
will be a lot less painful if the President was on board.
    I shared my concerns with Mr. McCrery, and he says, well, 
don't throw over the apple cart. I say, this train has not even 
left the station, so it is no problem. We have got plenty of 
time to attempt to do the things that we talked about, but I 
would be less than candid if I didn't say that we need some 
help. We need it publicly, and we are not asking the President 
to back off of anything--or Republicans--except that we all 
have to be prepared to give. At the end of that, the Congress 
wins and the country wins.
    So, on a more positive note, I want to thank you for your 
outstanding contributions, and I look forward to continuously 
working with you, and from time to time, you can share your 
ideas with your client, the President of our great Nation.
    I would like to yield to Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman.
    Welcome Secretary Paulson. Thank you for coming to visit 
with us today to talk about your end of the President's budget 
and other issues that may arise in your jurisdiction.
    I certainly understand where Chairman Rangel is coming from 
with his remarks about some of the things in the President's 
budget. That is normal. It is not unusual at all. I don't think 
it is any surprise to anyone that President Bush thinks the 
best way to fix Social Security is to use personal--establish 
personal accounts that are funded by payroll taxes. That 
doesn't mean that he thinks that is the only way to solve the 
problem. I would point to page 144 of the President's budget 
itself to the language, quote, The President is committed to 
strengthening the Social Security system and has reiterated his 
commitment to a bipartisan reform process in which participants 
are encouraged to bring different options for strengthening 
Social Security to the table.
    I know, Mr. Secretary, in my conversations with you in 
private, you have expressed similar goals. You and the 
President want all of us to come to the table, bring our ideas 
and let us sort them out and come up with a bipartisan 
conclusion that we can all embrace and finally fix that problem 
for the American people.
    So, I don't have a problem with Chairman Rangel's comments. 
I don't have a problem with the President's budget. I certainly 
don't have a problem with the statement I just read directly 
from the budget encouraging us to participate in a bipartisan 
process to solve this problem.
    Mr. Chairman, I have a more lengthy statement that I would 
submit for the record. In that statement, I commend the 
President's budget for talking about the need to look at 
entitlement programs generally for the long-term impact on our 
programs. I applaud the President for coming out with, not a 
new idea but certainly a new idea coming from the President of 
the United States, with respect to health care and trying to 
create a more equitable tax treatment of health benefits in 
this country to encourage those who are currently without 
insurance to be able to obtain health insurance for their 
families. You also do in the budget, Mr. Secretary, under your 
part of the budget, address several pieces of the so-called tax 
gap, and I applaud the Treasury for including some proposals in 
the budget for trying to capture some of that tax gap.
    So, with that, Mr. Chairman, I would yield the remainder of 
my time and thank you for hosting the Secretary.
    [The prepared statement of Mr. McCrery follows:]
  Opening Statement of The Honorable Jim McCrery, a Representative in 
                  Congress from the State of Louisiana
    I join you in extending a warm welcome to Secretary Paulson. I look 
forward to his testimony and will therefore keep my comments brief.
    I do, however, want to touch upon three issues that I hope today's 
hearing will explore in greater depth.
    First, let me congratulate the President and the Secretary for 
crafting a budget that extends the expiring 2001 and 2003 tax cuts 
while still reaching balance by 2012. Given the very strong economic 
growth and larger-than-expected tax receipts we have seen in recent 
years, it is nice to see that reflected in the government's bottom 
line.
    Nevertheless, I hope that our short-term success does not divert 
our attention away from the very serious long-term challenges facing 
our country in the form of unchecked entitlement growth combined with 
dramatic demographic shifts.
    Said more simply, the cost of providing Social Security and 
Medicare to each beneficiary will grow at the same time the country 
will have fewer workers supporting a growing number of retirees.
    Earlier this year, GAO Comptroller General Walker warned that, ``. 
. . social insurance commitments and other fiscal exposures continue to 
grow. They now total approximately $50 trillion--about four times the 
nation's total output (GDP) in fiscal year 2006--up from about $20 
trillion, or two times GDP in fiscal year 2000.''
    I remain hopeful that we can find a way to work across partisan 
lines and with our friends across the Capitol as well as at the White 
House to begin to tackle these problems which are growing worse, not 
better, despite our strengthened economy.
    Second, I applaud the President for including in his budget a bold 
examination of the tax treatment of employer-sponsored health benefits. 
The current exclusion of these benefits from taxation is in many ways 
an accident of history.
    By coupling the taxation of these benefits at the employee level 
with a substantial deduction, available to any American with health 
insurance, the proposal helps level the playing field between those 
lucky enough to have coverage through a job and the increasing numbers 
of Americans who must shop for insurance in the individual market.
    As I noted last week, I would prefer to provide assistance through 
tax credits instead of a deduction and believe any such change should 
be accompanied by reforms of the individual market to help keep 
policies available and affordable.
    But the President's proposal should force us to think deeply about 
the future of the health care delivery system, and I urge this panel to 
take up this challenge.
    Finally, I am pleased to see that the Administration is increasing 
its efforts to close the so-called tax gap, the difference between 
taxes owed and taxes paid.
    I caution my colleagues, however, that as attractive as the tax gap 
may be as a rhetorical target, finding it is almost as difficult as 
finding the pot of gold at the end of a rainbow. Efforts to close the 
gap often involve placing burdens, such as increased information 
reporting, on individuals and companies already fully in compliance 
with the Tax Code.
    My colleagues will recall that it was not so long ago that the 
Congress acted in a bipartisan manner to reform the IRS because of 
alleged abuses of taxpayer rights.
    Efforts to close the tax gap that fail to consider the burdens we 
are placing on law-abiding citizens as well as the benefits of 
increased compliance could prove to be terribly short-sighted.

                                 

    Chairman RANGEL. Thank you.
    Mr. Secretary, we hope that you are our new best friend. We 
look forward to working with you, and you may give us your 
testimony and thank you for coming.

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

    Secretary PAULSON. Chairman Rangel, Ranking Member McCrery, 
Members of the Committee. Thank you very much. I am very 
pleased to be here today to provide an overview of the 
President's budget for fiscal year 2008. As the Secretary of 
Treasury, my top priority is keeping America's economy strong 
for our workers, our families and our businesses. 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 sustained level of about 3 percent growth. More than 7.4 
million jobs have been created since August of 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, and in the first quarter of 
fiscal year 2007 receipts total $574 billion, an increase of 8 
percent over the same period in fiscal year 2006.
    As a result of increased revenue over the last 2 years, we 
have brought the Federal budget deficit down to 1.8 percent of 
the Gross Domestic Product (GDP).
    The President has submitted a budget that reflects our 
strong economy and our Nation's priority for 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.
    The budget supports a strong economy by maintaining fiscal 
discipline. It maintains our current tax policy, which has 
helped our country 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 5 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 the list. Under current law, 
the tax subsidy for health insurance purchased by employers 
will average more than $300 billion a year over the next 10 
years. For that huge expenditure, we get a system in which 
rising coverages 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 employers, and 
no matter what the cost of the plan, the same standard tax 
deduction for health insurance, $15,000 for 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 
overspending. Costs would become clear, giving patients more 
power to make informed choices about their health care 
spending. The proposal would also jump start the individual 
insurance market so consumers have more choices than are 
available today. Health care would become more consumer-driven, 
more affordable and more successful for millions of Americans.
    Energy security is another concern of the American people. 
It is a priority addressed in the President's budget. President 
Bush has put forward an ambitious goal of reducing 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 Corporate Average Fuel Economy (CAFE).
    The expanded fuel standard will provide entrepreneurs and 
investors a guaranteed demand for alternative fuels, which 
accelerate private investment and technology 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 Americans, 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 leadership in the years ahead.
    Thank you very much for this opportunity to have this 
discussion today, and I now welcome your questions.
    [The prepared statement of Secretary Paulson follows:]
Statement of The Honorable Henry Paulson, Secretary, U.S. Department of 
                              the Treasury
    Washington, D.C.--Chairman Rangel, Ranking Member McCrery, 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 3 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 2 
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 overspending. Costs would become clearer, 
giving patients more power to make informed choices about their health 
care spending. The proposal would also jump start 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 RANGEL. Thank you, Mr. Secretary.
    I would ask the members here to adhere to the 5-minute rule 
so that all members would get a chance to ask questions of the 
distinguished Secretary.
    Mr. Stark may inquire.
    Mr. STARK. Thank you, Mr. Secretary.
    I am concerned that, in your budget, you have cut slightly 
over a hundred billion from Medicare and Medicaid in 5 years 
and $300 million over 10. I would say at the outset that you 
have suggested some areas in which we can save money, fraud, 
perhaps overpayment to some providers, perhaps underpayment to 
others.
    However, with the savings, and this is the first--I have 
been looking at Medicare budgets now for over 30 years. This is 
the first budget in the history of that 30 years where there 
has been no increase in benefits. That money, I suppose, is 
going to be spent in Iraq. Normally, if we save money in one 
area of Medicare, we might cut inner city hospitals, but then 
we might use that savings to help rural hospitals or vice 
versa. You have taken the entire savings and taken it away from 
us.
    Not only that, what you have ignored is health care for 
children, State Children's Health Insurance Program (SCHIP) is 
underfunded. I couldn't believe that the President could be so 
unthinking as to want to deny poor children health care and 
that is exactly what this budget does. I won't talk about Leave 
No Child Behind. That is in another Committee. All of those 
programs are being underfunded or cut, and I am curious of our 
prerogative to deal with Medicare here. It would be a little 
easier for me if you said you want to take some of that hundred 
billion and fund SCHIP to include some more children who need 
medical care. That would seem to be a humane thing to do. I 
wouldn't even mind if you said you would fund some education 
with our hundred--I don't know if anybody here with a rural 
hospital will suggest that, but in addition, you have flat 
funded for 10 years. You have taken out the inflation growth 
that providers have come to expect.
    Now I have been lobbied by every hospital and every doctor 
in this country over the course of 30 years, and I think you 
have created a hornet's nest that won't end. I think that you 
have got every hospital, every teaching hospital, every rural 
hospital, every inner city hospital to say, well, never again 
will we get an increase. I don't see that that is a program 
that is politically survivable or morally survivable.
    So, my question is, would you consider our taking that 
hundred billion and using it within purview for programs that 
would provide medical care benefits or health benefits to those 
unfortunate people who now don't have any?
    Secretary PAULSON. Congressman Stark, thank you.
    Thank you for your comments. As I think you all know, the 
Medicare and health care needs of the American people are 
vitally important, and so as I have gone around and talked with 
people, everyone agrees this is a major, major issue that we 
need to do something about. I think the way you should 
interpret what has gone on in this proposal is that just about 
everybody recognizes we have. Medicare payments, entitlement 
payments, growing at a rate that is unsustainable. So, what we 
have done here to start the discussion--and we really welcome 
everybody's ideas. To start the discussion, we put forward a 
proposal that brings the trajectory of growth and takes growth 
down from 7.4 percent over 10 years to 6.7 percent. The 
principles behind these changes--and I am sure that Secretary 
Leavitt can talk about it in some detail--but the principles 
are not just program efficiency, but also means testing. Given 
this, I think, the right way to look at this is to say that 
when we talk about Social Security, the idea is let us 
encourage people to come forward, put ideas on the table, and 
hear from people on both sides with the thought that there is 
some chance that we could craft a permanent solution.
    I think when you look at the Medicare area, this is a very 
complicated area getting into the health care, and no one 
believes that it will be possible to come up with, in one fell 
swoop, a permanent solution. So, the way to look at this is 
that, these are some ideas for dealing with the issue, and we 
will look forward to working with you in getting comments as we 
go forward here.
    Chairman RANGEL. Mr. McCrery.
    Mr. MCCRERY. Mr. Secretary, the gentleman from California 
talked about creating--well, cutting parts of Medicare and then 
spending it within Medicare or within health care. Certainly in 
the Balanced Budget Act (BBA) (P.L. 105-33), back in 1997, we 
made--we created significant savings to the budget and did not 
plow all of that back into health care, so there is certainly 
precedent for doing that.
    If we were not to do that, Mr. Secretary, if we were to 
simply spend any savings that we create by reform or change on 
the Medicare system on other parts of Medicare or health care, 
we wouldn't address the long-term fiscal impact that we are 
facing, would we, of that particular entitlement program?
    Secretary PAULSON. Congressman, you are absolutely right. 
The issue--the big fiscal issue--we are facing as a country is 
not the fiscal deficit we have today, which is 1.8 percent of 
the GDP. The reason we are all so concerned about it is looking 
a number of years down the road and looking at the growth of 
Medicare and Social Security and what these programs mean. So, 
if we don't start dealing with these issues today, it will have 
to be in the future, and it will be just a lot more costly all 
the way around.
    Mr. MCCRERY. Let us explore what would happen if we don't 
deal with them or if we deal with them in the way suggested by 
the gentleman from California.
    Today, Social Security, Medicare and Medicaid represent 
about 8.5 percent of GDP or about 40 percent of the Federal 
budget. Now, your office, the Congressional Budget Office 
(CBO), Government Accountability Office (GAO), Congressional 
Research Service (CRS), have all said, if you don't do anything 
to change the rate of increase in spending in these programs, 
by, say, the year 2030, those programs will represent about 15 
percent, almost double, what they do today of GDP, and that 
would equate to about 75 percent of the Federal budget.
    Now, that is if we keep the budget at about 18 to 19 
percent of GDP. Of course, the alternative is to increase 
taxes, and increase the budget, so that it is not 75 percent of 
the budget.
    So, my question to you, Mr. Secretary, if we allow the 
budget to increase substantially as a percentage of GDP, and 
revenues to support that budget as a percent of GDP going from 
the historical average since the 1960s of 18.2 of GDP to 
support the Federal Government to something clearly in excess 
of 20 percent, if not 23, 24, 25 percent of GDP, does that 
sound an alarm to you in terms of our economy, in terms of 
economic growth, or does that not bother you?
    Secretary PAULSON. Of course, it sounds an alarm, and that 
is why it is just so important to deal with these issues today. 
As I have said frequently, we will deal with these issues 
whether it is today or whether it is years in the future. The 
longer we wait to deal with the problem, the more costly it is 
going to be either in terms of the cost to our economy overall 
or future benefit reductions that will happen to the younger 
generations, which can also affect them in terms of 
competitiveness. That is what these proposals represent. They 
are a starting point for a discussion in terms of how to scale 
back the trajectory of the growth.
    Mr. MCCRERY. Unfortunately, I think what is in the 
President's budget and basically what we did in BBA is the old 
way of doing things. We are just ratcheting down reimbursement 
rates. I would estimate that Mr. Stark is right; if we continue 
to do that, we have only got the complaints from the health 
care industry, not much constructive criticism, just 
complaints. It will be hard for policymakers to pursue that, so 
we ought to start thinking about substantive fundamental 
reforms and how we deliver that care and pay for it rather than 
just ratcheting down reimbursements rates.
    Chairman RANGEL. Thank you.
    Mr. Levin may inquire.
    Mr. LEVIN. Thank you very much, Mr. Secretary, and welcome. 
I very much want to reinforce, if I might, the statement of our 
Chairman, Mr. Rangel.
    I do think that the budget--and you are not responsible for 
a good part of it--it shows the real difference between our two 
parties. It will be important to bridge the gulf, but it is a 
very wide one.
    I just went through some of the budget cuts. COPS, almost 
eliminated. Community Service Block Grants that provides needed 
services, eliminated. Special Ed, nothing done to meet our 
obligation to fund it. The only major water program that we 
have, the revolving fund, would be cut. The Advanced Technology 
Program eliminated. The Manufacturing Extension Program, so 
important for the manufacturing sector, is reduced by over 50 
percent. On and on. So, the gulf is a major one. It surely is 
true of Social Security.
    The last couple of years showed that private accounts are a 
nonstarter. The public will not accept it, and the President 
places it in the budget. It is going to take more than good 
will. It is going to be someone to accept the verdict of the 
American people.
    Let me talk to you about a trade-related issue, and that is 
the yen. I have been reading your comments. There has been a 
lot of discussion about the Chinese currency manipulation but 
less so about what the Japanese are doing.
    In the book by John Taylor, he acknowledges, from 2002 to 
2004, our country not only acquiesced with the Japanese but 
essentially participated in the weakening of the yen even 
though, to quote Mr. Taylor's comments, those interventions 
make U.S. exports less attractive. Of course, their exports 
more attractive.
    The yen today is weaker than the level at which this 
Aministration before your time essentially participated in 
bringing about.
    If you look in the automotive sector that is two-thirds 
more or less of our deficit with Japan, the exports, now--and I 
don't think this is understood of Japanese cars--now is 
increasing and is higher I think than it ever has been. So, 
when Europeans, and you are going to the G7 meeting, are 
complaining about the weak yen and what it is meaning for their 
exports and for imports from Japan, I would like you to comment 
because you seem at one point to say you are going to look at 
it very, very carefully, but then in the headlines say this: 
Europe's yen drive hits United States/Japan wall, and it is 
mainly because of your comment that it is fundamentals that are 
driving it, not policies, I guess, of the Japanese government.
    So, explain to the people of this country and to the 
manufacturing sector, why now with the yen weaker than it was 
rigged at in 2002, 2004, with the approval of the U.S. 
Government, why you are going to go to the G7 meeting and 
essentially say to the Japanese that Europeans are wrong, we 
are with you?
    Secretary PAULSON. Okay. I will--and you are right. I will 
be going to the G7 meeting, leaving on Thursday. You are right 
that I have a job to be vigilant and watch all currencies, and 
particularly given some of the publicity coming out of Europe, 
I have looked at the yen carefully.
    Let me step back and say that for the 1990s and the first 
part of this century--the first couple years, 2001, 2002, 2002 
into 2003--we had a situation where the world's second largest 
economy, Japan, wasn't growing. It was a drag on the world 
economy. Through a number of economic reforms by the Koizumi 
government, we now have the very fortunate situation because we 
have a Japanese economy growing. However, we still have 
deflation in Japan. So, while it is growing, and we all are 
benefiting from that growth, it is important to keep it 
growing.
    Now putting that aside, I have a market background, and I 
really believe in the underlying strength of markets, 
competitive markets, open markets, where currencies are set in 
an open competitive market. So, in the discussions we are 
having, it is important to keep in mind that the Chinese don't 
have an open competitive marketplace yet, as you well know. 
They are showing more currency flexibility than they have 
shown, but they need to get to the point where their currency 
will be considered in the marketplace.
    Now with regard to Japan, it is true that the yen is 
trading at or near a 20-year low, clearly on a trade-weighted 
basis. As far as we can see, there has been no intervention 
into their currencies since very early in 2004. This is a 
currency that is traded in the competitive open marketplace. I 
understand that some people might not like where it is trading. 
It is my job to support and fight for free competitive markets. 
I believe that the yen is trading in a competitive marketplace 
based upon underlying economic fundamentals.
    Chairman RANGEL. I don't like to interrupt the Secretary, 
but in order to let the newer members get a chance to speak, I 
am going to ask you to try to have your question prepared in 
such a way that it gives the Secretary an opportunity to 
respond within those 5 minutes.
    My friend from California, Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Secretary, it is good to have you here.
    I would like to continue in this same area of currency. I 
am very pleased to hear your emphasis on free markets. I think 
that is so important. I would like to direct my questions 
toward the currency, and I know you have been involved with 
this quite a bit with China. A great deal of emphasis has been 
placed on the specific exchange rate between the dollar and the 
Chinese currency.
    I am less interested in getting to a specific rate because 
no one really knows--can really say what an appropriate rate 
is. Only the market can do that. Thus I am more interested in 
seeing that the mechanism to determine that rate is a market 
driven one.
    Mr. Secretary, could you tell me what the mechanisms are 
the Chinese are developing to create market driven currency and 
what steps must it take and most importantly, how long will it 
take?
    Secretary PAULSON. Let me say, Congressman, first of all, I 
appreciate your question because I think you are right. We are 
emphasizing the need for greater flexibility and more movement 
in the short term. We will be arguing about what the right rate 
is until we get a competitive and open market determination of 
the currency. They have taken a number of steps to move in that 
direction. For example, Chinese banks are the ones that are 
trading within the band. There are a number of smaller steps 
that are similar to that. What we are pressing toward is 
reforms that will put them in a place where in the intermediate 
term they can have an exchange rate that is set in a 
competitive marketplace. I am placing a big emphasis on 
developing capital markets because having a competitive bond 
market and money market and yield curve--all of these things--
will make that much more possible.
    Mr. HERGER. Now some say that may be an excuse; developing 
these capital markets is an excuse for doing that. Can you 
explain the importance of China's broader financial reforms and 
how they must go hand in hand with this currency?
    Secretary PAULSON. Yes, thank you very much for that 
question. The biggest reason for our trade imbalance is that 
China has an economy that is too geared toward exports, or 
over-investment and exports, and China doesn't have enough 
domestic-led consumption to balance growth. So, as long as we 
are growing and not saving, and they are saving at 50 percent a 
year and don't have the domestic consumption, we are going to 
have problems. So, a big part of the dialogue is aimed at 
encouraging the Chinese to continue with their path of reform, 
whether it means opening up to U.S. products or to foreign 
competition, in the services area and in other areas, and 
moving toward reform, which will lead to more balanced growth.
    Mr. HERGER. How are we coming along with this, and what are 
we doing to ensure that we are putting the proper most balanced 
emphasis toward the Chinese to ensure that they move at what 
seems to be a turtle's pace?
    Secretary PAULSON. Well, you are right, that the biggest 
difference is on timing, that we agree on the principles. There 
are big differences on timing. So, that what we have put 
together is a strategic economic dialogue, which is a plan that 
gets us speaking with one voice to the top decisionmakers of 
China on a regular basis. There are two big meetings a year, 
multiple meetings throughout the course of a year, so we can 
track progress and work on some of these more fundamental 
reforms. So, that, in a nutshell, is what the platform is.
    Chairman RANGEL. Mr. McDermott, you may inquire.
    Mr. MCDERMOTT. Thank you.
    Secretary Paulson, besides being Secretary of Treasury, you 
are also a trustee of Medicare. It is your job to make the 
program fiscally sound. As you know, we are hurdling toward 
$250 billion in Medicare cuts to physicians in the very near 
future with no offset in the budget. So, I assume you think 
that is what is going to happen. It seems to me that the money 
that is being cut from Medicare is being used to pay for the 
tax cuts. I wonder how you square your responsibility as a 
trustee of Medicare with the need to make appropriate payments 
to physicians and cutting $300 million out of Medicare or $300 
billion out of Medicare. It seems to me those two issues are 
sort of unresolvable, I guess is the word.
    Secretary PAULSON. Congressman, we have got the same 
objective, the same goal. In other words, it is quite easy to 
square the positions because when I look at our current fiscal 
position, we have an economy that is growing and that is 
reducing the deficit. I don't think any of us would have 
concern about the deficit at this level were it not for the 
problem you have alluded to. I think we have a strong economy 
which gives us a strong basis for stepping up and dealing with 
some of these bigger issues. So, when I look at my 
responsibilities as a trustee of Medicare and Social Security, 
and I look at what I see coming down the road, I just realize 
how important it is to----
    Mr. MCDERMOTT. Is it your position that these cuts to 
physician's payments is appropriate?
    Secretary PAULSON. I have not looked at every single one of 
those provisions with the kind of detail that Mike Leavitt has. 
If you ask me, do I believe that it is a good step to start an 
important discussion to say let us take the trajectory of 
growth to these benefits that are growing at over 7 percent 
over a 10-year period and let us modestly slow the rate of 
growth and think about principles like program efficiency and 
means testing; yes, I think it is a positive step.
    Mr. MCDERMOTT. One of the things that is troublesome about 
this budget; we are gutting--we are taking out big chunks out 
of Medicare. Medicare is growing at 7 percent a year. Well, 
private health insurance is growing at 10, 11, 12 percent an 
average over the last 5 or 6 years, and we are saying we want 
to shift people out of the public sector and put them into the 
private sector. It seems to me that this is really not very 
fiscally sound to move them from a program growing at 7 percent 
to moving them to the private sector. That is what this 
privatization is really about, Medicare is getting people out 
of the public program and getting them into these private 
programs that are supposedly so economically sounding but are 
growing at almost twice the rate of Medicare. How can you 
justify that?
    Secretary PAULSON. I have absolutely no trouble justifying 
slowing the rate of growth for Medicare spending. That is just 
something that is absolutely essential.
    Mr. MCDERMOTT. Why would you want to shift people into the 
private sector?
    Secretary PAULSON. If you tell me that the cost of health 
care is growing too quickly, I agree with you. I think one of 
the things that we have focused on is the standard deduction 
for health care. The President's budget is one way of getting 
at this, and while it doesn't totally solve it, I think it is a 
big step forward.
    Mr. MCDERMOTT. So, you would be opposed to the Congress 
doing anything about that $250 billion cut to physician's 
payments. If we came up with a proposal you would tell the 
President we don't think that is a good idea.
    Secretary PAULSON. I didn't say that. I said that----
    Mr. MCDERMOTT. So, you expect us to fill the hole that has 
been created by this budget?
    Secretary PAULSON. I didn't say that either.
    Mr. MCDERMOTT. Where are you on that?
    Secretary PAULSON. What you heard me say is, I thought this 
was a positive step. We look forward to getting your ideas and 
talking about them.
    Mr. MCDERMOTT. Thank you.
    Chairman RANGEL. Mr. Camp, you may inquire.
    Mr. CAMP. Mr. Secretary, you are right. This process the 
President presents a budget and then the Congress also presents 
a budget, and I want to say I appreciate that you have come up 
here with a budget that balances without raising taxes because 
I think that is going to be one of the big debates that we 
have.
    I appreciate the deficit has shrunk by 58 percent over the 
last 3 years. That is according to CBO. That is Congress's 
numbers, not Administration's numbers and that is despite all 
we are doing on Katrina, Homeland, and the war on terror. As 
you said, it is near 1 percent of GDP, which is projected to be 
the case for the next few years, and well below the 40-year 
average of 2.4 percent for the deficit as a percentage of GDP.
    What you have shown us is, with a little spending 
restraint, we can balance the budget. If you can outline for us 
two priorities with regard to the budget on entitlement 
spending and the rational behind that, I would appreciate 
hearing that.
    Secretary PAULSON. Yes. Well, again, thank you for the 
question.
    Just to step back and frame this, it was clear to me, and 
it is very, very clear to the President and others in the 
Administration, how important getting our arms around the 
entitlement issue is. It is very, very important. So, as we 
thought about it, and as I talked to people on both sides of 
the aisle, when you look at Social Security, there are big 
differences on policy, differences on personnel accounts and on 
taxes on both sides. However, people have at least identified 
the building blocks to put something together, the components, 
and they are clear. So, at least the hope is there that we can 
get people to come to the table and fashion a comprehensive 
solution that would lead to permanent solvency.
    The health care area is much more complex because there are 
very big policy differences. The economic components are not 
quite as clear, and so the thought here was to put two 
proposals out that will really start discussion and that we 
think are positive steps.
    There is a standard deduction for health insurance which, 
again, gets at developing access to private insurance and gets 
at helping reduce the rate of growth. Then there are the 
proposals in the Medicare area, which are really aimed at 
putting some ideas out there to slow the rate of growth and 
putting some principles out there that I have referred to 
before. You will hear a lot from Secretary Leavitt about his 
work at the State level, where I think a lot of this does need 
to get done and the affordable choice initiatives. So, I think 
that is the right way to frame it overall.
    Mr. CAMP. We had testimony from Comptroller Walker at the 
GAO who said that our liabilities, both entitlement, social 
insurance commitments and others, are now about four times our 
total output, and 6 years ago, they were only two times our 
total output. So, the trend lines are dramatic. So, I 
appreciate your testimony on that.
    Regarding the part of the health insurance proposal that 
allows States to use--have some flexibility with regard to 
disproportionate share funds which help the coverage to lower 
income populations, do you also think Congress should consider 
legislation to let individuals buy health insurance licensed in 
one State if they live in another----
    Secretary PAULSON. I would say that, clearly, we have 
worked and thought about ways to address the individual 
insurance market. That is something that we need to address.
    Mr. CAMP. Thank you, Mr. Chairman.
    Chairman RANGEL. Mr. Lewis, you may inquire.
    Mr. LEWIS OF GEORGIA. Mr. Secretary, welcome.
    Mr. Secretary, when you look at the budget, look at this 
budget--and I wanted to be nice here. This budget appears to me 
to be really down right uncaring when it comes to the most 
vulnerable element in our society, our seniors, when it comes 
to Medicare and our children. You said, we want to help our 
children, our grandchildren and maybe our great grandchildren, 
but the President's budget is proposing only $5 billion in new 
funding over 5 years for the SCHIP program. Then CRS tells us 
you need at least $15 billion to cover the children that are 
already in the program.
    How do you account for this?
    Secretary PAULSON. There is no doubt that health care is 
very, very important, and health care for our children----
    Mr. LEWIS OF GEORGIA. You said it is important, but the 
dollar input is not there. So, my concern is, it is a low 
priority.
    Secretary PAULSON. It is a budget proposal, and it is a 
budget proposal where we have a number of constraints to work 
within to increase the SCHIP funding. Again, we look forward to 
working with you on it. It just may be that the Congress 
believes that that is something that should be funded at a 
higher level. This is--this is, I think, a very serious 
proposal.
    Mr. LEWIS OF GEORGIA. How much in this budget are you 
proposing for the war in Iraq and Afghanistan over the next 2 
years?
    Secretary PAULSON. We have in the supplemental for this 
year roughly $170 billion. In 2008, it is approximately $145 
billion.
    Mr. LEWIS OF GEORGIA. So, you are speaking about $245 
billion in 2007 and 2008. Are there resources?
    Are there resources in the budget to do something about 
rebuilding the gulf coast.
    Secretary PAULSON. I missed your last question.
    Mr. LEWIS OF GEORGIA. To rebuild Mississippi and New 
Orleans.
    Secretary PAULSON. Yes. I don't know that number. I am sure 
that you will be able to get that from others, or we will get 
it to you.
    Mr. LEWIS OF GEORGIA. Thank you, Mr. Chairman.
    Chairman RANGEL. Okay.
    Mr. McCrery, in order to bring some balance here, I would 
like to call on the Democrat next here, Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. Secretary, I must tell you, I was personally very 
impressed and pleased by your initial comments upon becoming 
Secretary as you addressed the comments on the growing wage gap 
in America, so pleased that I used them at a Democratic retreat 
suggesting there might be a following on this Committee to work 
with you on a series of issues.
    Having said that, if I might go to an issue that I have 
been most consistent on for a long period of time, and that is 
the issue of the alternative minimum tax (AMT).
    Let me frame the question this way: I have sought outright 
repeal of the AMT. We all know it has long outlived its 
usefulness, but your budget recommends a 1-year patch for 2007, 
meaning 23 million would be hit by the AMT the following year 
and every other year of your budget. The Congressional Resource 
Service estimates it will hit families with three children 
earning as little as $61,000 per year. I am in sharp 
disagreement with the strategy of the 1-year patch. The former 
Chairman of this Committee reassured us time and again this 
issue was going to be put before the Congress and eventually 
the American people. However, we find ourselves back to where 
we were.
    I think the budget proposal, Mr. Secretary, could have done 
better by those families earning $62,000 a year or $61,500. We 
are putting off the long-term problem. I think you would 
probably agree with that. Specifically, aren't you saving money 
on the permanent extension of the 2001 and 2003 tax cuts by not 
fixing AMT? Let me ask you to estimate how many taxpayers will 
have some or all of their tax cuts taken back by the AMT in all 
of the years that your budget does not provide for AMT?
    Lastly, before you answer those questions, as I indicated 
in my opening remarks, your comments were most welcome by the 
members of this Committee. At the outset of you joining the 
Treasury, you indicated everything was on the table. I think we 
should begin from that premise. However, the Vice President's 
comments certainly are not consistent with the ones that you 
have offered. Maybe you could clear up the confusion for us and 
speak to the AMT questions I raised.
    Secretary PAULSON. I see I have 2 minutes and 18 seconds 
left to answer.
    Mr. NEAL. This is not like running Goldman Sachs, is it?
    Secretary PAULSON. You can say that again.
    First of all, with regard to the AMT, the President and I 
share your view that the AMT is a cruel tax, and it is an 
unintended tax. If it hits some of these families, it will be a 
surprise tax, too, because I think many people wouldn't see it 
coming.
    What we have done is propose the additional year of relief 
for AMT so we can work on a permanent solution together. We 
need a permanent solution to AMT. We are in total agreement 
there. What Congress has done for the last 6 years is patched 
it, generally 1 year of relief at a time. The budget proposal 
is consistent with that, and this is something that we will 
need to work on together.
    In terms of the numbers, and I am going to be roughly 
right, the AMT right now applies to 4 million people so without 
this patch or this relief for 1 year, it would touch 25 million 
people. By the end of the budget period, by 2012, it would be 
40 million people if we do not patch it.
    Of course, that is why we need to work together to find a 
permanent solution here. In terms of Social Security, the 
President has been very clear. He is very sincere about it, and 
I am very sincere that everything is on the table. People 
clearly are going to have their views. No one should be 
surprised that personal accounts are in the budget. That is his 
idea and a lot of people share that idea. There are different 
views on that and on taxes, but everything is on the table.
    Mr. NEAL. With Social Security we don't doubt your 
sincerity, we doubt the word ``crisis'' that was used by the 
Administration to speak to the issue.
    Lastingly, Mr. Rangel has encouraged me to begin hearings 
the first week in March on the AMT, and I hope the Treasury 
will be fully participatory in those hearings.
    Thank you.
    Chairman RANGEL. Mr. Ramstad.
    Mr. RAMSTAD. Thank you, Mr. Chairman. Mr. Secretary, good 
to see you again.
    I think there is a consensus in Congress as well as among 
the American people that we should address the pressing problem 
of the 45-47 million Americans without health insurance. It is 
a problem of access for many if not most of those people 
without health insurance, and it is certainly increasing costs 
for all of us in health plans by not having them in the larger 
insurance pool.
    Concerning the Administration's health insurance proposal, 
why did the President or the Administration design it as a 
standard deduction which only benefits families with an income 
tax liability, instead of a refundable tax credit which would 
also benefit low-income families that don't earn enough to have 
an income tax liability, the working poor, which constitute 
most of the uninsured? Why not do it with a refundable tax 
credit?
    Ironically, and historians can check this, but I believe at 
the beginning of the 109th Congress, the Administration 
submitted a bill in the Congress which was the best-kept secret 
around here to do just that: That is, to provide, through a 
system of refundable tax credits, health insurance coverage for 
all, to make it mandatory; just like when we drive a car we 
have to have our liability insurance, so would people be 
required to use that refundable tax credit or voucher to 
purchase basic coverage for themselves and their families.
    Secretary PAULSON. Congressman, thank you for your 
question.
    Let me begin by saying this is something that I have 
thought about a lot. Looking at the Tax Code, the preference 
for employer-provided health insurance is the biggest 
preference in the Tax Code. It will be approximately $3 
trillion over the next 10 years. So, I think the 
Administration's proposal is a very, very fundamental, major 
change.
    In terms of your question, I think you are right to focus 
on the 45-47 million uninsured, and the 17 million that are 
insured in the individual market, not in the employer market, 
who get none of this tax benefit.
    Just to clear up one misconception, even for those who 
don't pay any Federal income tax, where they are paying payroll 
tax, the standard deduction will still provide a real benefit.
    Having said that, you are right that a credit achieves the 
same objectives in the sense of dealing with the fairness 
issue, dealing with the uninsured, helping slow the cost of the 
growth of health care.
    So, why did we choose the standard deduction as opposed to 
the tax credit? We chose it because it was less of a radical 
departure from current policy. It was more consistent with 
current policy. Again, we would welcome the opportunity to talk 
about this with you. A credit is another reasonable approach.
    Mr. RAMSTAD. Mr. Secretary, I appreciate your candid 
response, which I believe it is. I hope we can work toward a 
refundable tax credit because obviously it would bring more 
people into the insurance pool and reduce health care costs for 
you all. Ironically, that proposal originated in the Heritage 
Foundation many, many years ago, so it is really not a radical 
proposal by any stretch of the imagination. I appreciate the 
fact that you recognize the merits.
    I want to ask one other question and make another point. I 
know in the context of a $2.9 trillion budget, $19 million is 
not a lot of money. It is a lot to the people in Minnesota who 
woke up yesterday with a wind chill factor that was minus 40 
degrees. That is 72 degrees colder than the inside of your 
freezer. It was cold. To cut out the heating aid for the poor, 
the Low Income Home Energy Assistance Program (LIHEAP) subsidy 
that so many seniors on fixed income--and I can tell you many 
horror stories of seniors at the end of the month not being 
able to pay for heating oil--I hope that is restored by 
Congress. I don't think that is appropriate.
    Secretary PAULSON. Thank you for the comment.
    Just to go back one last minute on health insurance, the 
standard deduction is a very serious, significant proposal that 
really makes a difference in a number of areas. I am very, very 
comfortable with that proposal. We thought that was the best 
policy.
    I do have to say in answer to your question that the credit 
achieves the same objectives, and it is another reasonable 
approach.
    Mr. RAMSTAD. Thank you, Mr. Secretary.
    Chairman RANGEL. Thank you, Mr. Secretary.
    The Chair recognizes Mr. Tanner.
    Mr. TANNER. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here. I am glad you are 
in town.
    I have been worried about our national debt for some time 
now and have spoken out about it. I have to tell you every 
Secretary, since I have been on the Committee for some 10 
years, when they come to present the budget, the budget always 
miraculously balances in the last year of the cycle, whatever 
the cycle is, 5 years or 10 years; and this one is not any 
different in that regard.
    I want to ask you two questions. One is, when do you 
anticipate hitting the debt ceiling; will it be before the end 
of this calendar year?
    The second matter, and this is what I am really worried 
about, as you know, we have borrowed in real money, that is not 
from a trust fund, $1.6 trillion in the last 60 months. Worse 
than that, $1.15 trillion, according to the Treasury 
Department, has been borrowed from non-U.S. interests. That is 
over 70 percent. Last year, the deficit was covered by 
borrowings, almost 90 percent of which was from non-U.S. 
citizens.
    Last year alone, this country wrote checks to non-U.S. 
interests, interest checks, of over $140 billion, more than we 
appropriate for education, Veterans Affairs, and the Justice 
Department combined, 10 times what the foreign aid bill is, and 
that is continuing. For example, we currently owe the Japanese 
interests $637 billion and China $346 billion, not to mention 
Hong Kong, another $51 billion. The China debt of $346 billion 
is up from $59 billion just 5 years ago.
    Now, if we are going to fight the global war on terror with 
borrowed money, what I have thought about and I would ask your 
comment on, what about a global-war-on-terror bond that 
Americans could buy, because if we are going to pay interest, 
let's pay it to ourselves.
    Thank you, Mr. Secretary.
    Secretary PAULSON. Thank you. In terms of your question on 
the debt ceiling, our best estimate is sometime this fall.
    Now, in terms of your question about foreign holdings of 
Treasuries, let me say to you that, with our economy growing at 
the rate it is growing, with the U.S. savings rate so low, and 
with savings so high overseas, with a number of our trading 
partners either not growing as fast as we would like them to 
grow or without domestic consumption in Japan, China, and some 
of the structural problems in Europe, we should be pleased that 
there is so much foreign interest in our securities.
    I have looked at the securities and how they are owned and 
held, and there is great diversity. For instance, you cited the 
Japanese and the Chinese. Those are the two biggest holders. As 
you said, taking the Chinese as an example, they hold $346 
billion. We have in Treasuries $4.4 trillion in public hands, 
with $500 billion traded every day. So, when you look at what 
the official sector, what the Government is holding, and the 
holdings of private citizens in China, it is less than one 
day's trading volume.
    There are many things that we look at with a certain amount 
of concern. This is not high up on that list because I think 
that foreign holders own Treasuries because they believe it 
gives them the best risk-adjusted return. The best thing we can 
do is keep our economy growing and keep confidence high. There 
is great diversity in the holdings.
    Mr. TANNER. I understand it is a matter of degree, and 
basically you have said this is not a high degree. At some 
point, Mr. Secretary, it seems to me that we are going to run 
into a national security matter if the financial leverage 
becomes such.
    I remember 6-8 months ago when the Japanese Prime Minister 
hinted that they might diversify to the euro, maybe a year ago 
now, and there were some jitters on Wall Street. You probably 
remember that as well as I do. I just am worried that if we 
continue to take the attitude that we have, at some point--and 
right now it is almost 50 percent of our privately held debt, 
publicly held debt, is owned by non-U.S. interests. It used to 
be 17 percent some 25 years ago. So, as we continue to rely on 
that, at some point--and it is all a matter of degrees, I agree 
with that. I wish we could sit down to talk about that. This is 
probably not the best forum to do that.
    Secretary PAULSON. I look forward to talking with you about 
that. We look at that carefully and closely. There is great 
liquidity in U.S. Treasuries, and they are diversely held. We 
can talk about it more off line.
    Chairman RANGEL. Thank you.
    Mr. JOHNSON. Thank you, Mr. Secretary. Thank you for being 
here and taking the heat.
    I know you are a trustee on the Social Security board, and 
I am wondering, one thing about Social Security that I 
routinely hear about from my constituents concerns unauthorized 
workers getting access to Social Security benefits. Some time 
ago the Social Security Administration negotiated an agreement 
with Mexico called totalization. I am sure you are familiar 
with it. As a trustee, could you and the other trustees nullify 
that deal so we don't have to do it here in the Congress?
    Secretary PAULSON. Maybe this is something we can get into 
detail on and talk about off line. Clearly it is my job to 
enforce the law. Clearly we want to make sure, and I feel very 
strongly that we need to make sure that Social Security 
payments are being handled properly and according to the law.
    Mr. JOHNSON. Right, but you agree we don't need an illegal 
Social Security payment to someone? I think you just said that.
    Secretary PAULSON. I appreciate your comments.
    Mr. JOHNSON. Thank you.
    On Social Security also, it seems to me that the basic 
program, the basic pilot program that was initiated to check on 
workers, the Social Security Administration assists the 
Department of Homeland Security in enabling employers to verify 
employment of new hires. It is possible that may not be the 
best way to do that. I think some of us believe the Social 
Security Administration should be the lead agency for employers 
to verify employment. They are far more competent at 
maintaining working histories of Americans than DHS could ever 
hope to be. It is frightening to think that tens of millions of 
Americans would need to pass through a law enforcement agency 
to get work authorization.
    If you agree, I would appreciate your help in that area, 
too. We think Social Security ought to be the lead agency. What 
is your opinion?
    Secretary PAULSON. My opinion is that it is being handled 
properly now. I recognize how important these issues are right 
now to many people up here on the Hill. So, on the whole 
questions of immigration, immigration reform, and Social 
Security, I appreciate your sensitivity to these issues. Again, 
I will be happy to spend time talking with you about it.
    Mr. JOHNSON. I appreciate that.
    Thank you, Mr. Chairman.
    Chairman RANGEL. The Chair recognizes Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for being here. I appreciate it.
    Let me see if I can go back to discuss the global picture 
about the budget. I think with things becoming difficult, I 
think we are finding the public is paying a little more 
attention to see how the numbers add up. I know that the 
President's budget suggests over the next 5 years we are going 
to go from deficits of about $240 billion to an actual surplus 
by 2012 of about $60 billion. I know in your capacity as 
Secretary of Treasury you also serve as a trustee for the 
Social Security program and the Medicare program.
    The numbers that the President provides us for these budget 
projections over the next 5 years include using every single 
cent of the Social Security surplus to bring the size of the 
deficit down. So, that deficit that is identified for 2007 as 
being a deficit of $244 billion includes in the President's 
calculation spending $190 billion of Social Security trust fund 
dollars to help offset the size of the deficit. So, that if you 
were to reserve the Social Security trust fund dollars for, 
say, Social Security in the future, the actual size of this 
deficit for this Federal Government is not $244 billion but it 
is about $434 billion. In fact, if you were to take out the 
Social Security trust fund dollars that the President uses for 
not Social Security but to help reduce the size of the deficit, 
in the year 2012, rather than have a $61 billion surplus, as 
the President says, this Federal Government would still have a 
deficit of $194 billion.
    So, over the course of those 5 years or so, 6 years, you 
are taking $190 billion in 2007; $203 billion in 2008; $218 
billion in 2009; $231 billion in 2010; $246 billion in 2011; 
and $255 billion out of the Social Security trust fund in 2012. 
That is well over $1.2 trillion in Social Security trust fund 
dollars that I think most people in America think are being 
paid into the system every day out of their checks, their 
Federal Insurance Contributions Act (FICA) deduction, for 
Social Security. Over the course of this budget that the 
President proposes over 5 years, every single cent that folks 
are contributing as they work is going not to Social Security, 
but to help reduce the size of the deficit.
    As a trustee for the Social Security program, explain to me 
how you would explain this to the American people and why they 
should have confidence that we are doing the right thing?
    Secretary PAULSON. I bet the President wishes he were here 
so he could answer this one himself.
    Let me say he is on the same page as you are, and so am I. 
As you said, and I can't confirm every number you threw out 
with great specificity, but I can say directionally it sure 
sounds right to me, and all of the numbers may be right. So, 
the issue really is: We need a permanent solution to Social 
Security.
    Mr. BECERRA. To take money out today, when we know we need 
a permanent solution for tomorrow, seems to be digging the hole 
even deeper.
    Secretary PAULSON. Well, let me say this. Another way of 
saying it, as I have said a couple of times before in 
testimony, is that the reason people focus on our current 
fiscal deficit is because we have the longer term problem, and 
you are talking about the accrued liability. So, that is why 
the President would like us all to come together and come up 
with a permanent solution.
    Mr. BECERRA. I think we would be willing to do that, but it 
is like playing with funny money. When you put forth a budget 
that doesn't tell the American people, wink-wink, we are 
actually using the money reserved for Social Security to help 
defray the costs of running the Government, and when your 
budget doesn't include the cost of trying to take care of the 
AMT which over the next 5 years is going to suck in 35 to 40 
million Americans into a tax bite that they were not expecting, 
and when you don't in the President's budget completely factor 
in the costs of this Iraq war over the long term, it makes it 
difficult to come up with accurate numbers. So, we should have 
truth in budgeting.
    So, rather than project a rosy picture of a surplus in 
2012, I think the American public are ready to swallow the pill 
and know just how difficult things will be.
    Secretary PAULSON. I have 13 seconds left. In terms of your 
comment about funny money as it relates to Social Security, I 
think as you well know----
    Mr. BECERRA. That was funny money relating to the budgeting 
process.
    Secretary PAULSON. There are two budgets, and this is the 
convention. There is the traditional cash budget, which is what 
you see here, and then there is the accrual budget, which the 
President will provide to Congress through the Financial 
Statements of U.S. Government.
    So, again, with Social Security, you are absolutely right, 
we need to come up with a way of fixing that and fixing that 
permanently. I don't know whether the Chairman would like me to 
address the other comments or questions.
    Chairman RANGEL. Thank you. The Chair recognizes Mr. 
Weller.
    Mr. WELLER. Thank you, Mr. Chairman.
    Good morning, Mr. Secretary. It is good to have you here. I 
appreciate your time before the Committee today.
    Let me begin with a couple of questions that need a yes or 
no answer.
    Some of my friends on the other side of the aisle advocate 
allowing the tax provisions that we enacted into law in 2001 
and 2003, the marginal rate reductions, for example, allowing 
them to expire. Would the Administration view that as a tax 
increase? Yes or no.
    Secretary PAULSON. Of course.
    Mr. WELLER. Yes or no. Is your mike on?
    Secretary PAULSON. I'm sorry. The question is letting some 
of the tax cuts expire. Let me say to you, Congressman, that 
the tax cuts have been very, very important for this economy, a 
key part of the growth, so we think it would be a mistake to 
increase taxes.
    Mr. WELLER. So, you consider that a tax increase then?
    Secretary PAULSON. I said it would be a mistake to increase 
taxes.
    Mr. WELLER. Say this Committee were to terminate or 
eliminate a tax on someone, do you consider that a tax cut?
    Secretary PAULSON. To terminate?
    Mr. WELLER. Say there is currently a tax that is being 
levied on an individual or group, we allowed that to expire, 
would you consider that a tax cut?
    Secretary PAULSON. Would I consider it a tax cut if there 
is a tax on a group, and we allowed it to expire?
    Mr. WELLER. Right.
    Secretary PAULSON. Clearly, if someone is no longer paying 
a tax that they were paying----
    Mr. WELLER. You would consider that a tax cut?
    Secretary PAULSON. I would consider that to be a reduction 
in an individual's taxes.
    Mr. WELLER. Mr. Secretary, many of us have advocated 
allowing the expiration of the Federal unemployment surtax, 
allowing that to expire. It was created in 1976. It was a 
temporary tax to pay for extended benefits during a recession 
in 1975. Currently there is about $30 billion in Federal 
unemployment accounts today, and looking back over what we 
allocate out of that and expend on unemployment benefits in our 
various programs, it comes out to about $5 billion a year. So, 
we have 6 years' worth of revenue in the Federal unemployment 
accounts already generated.
    Now that is due to expire, the current Federal unemployment 
surtax is due to expire in December, but your budget that you 
submit to Congress calls for extending it. If we were to allow 
it to expire under your definition, that would be a tax cut in 
this case for small business and employers. You advocate 
extending it. Do you consider that a tax increase by extending 
the unemployment surtax?
    Secretary PAULSON. First of all, the unemployment surtax is 
something that I know the Secretary of Labor is very involved 
in. That is something that is right in the middle of her plate.
    In terms of playing games as to whether something is a tax 
increase or a tax cut, it is what it is. If there is a tax that 
someone is paying and suddenly they are not paying it, it is 
obviously a tax cut.
    Mr. WELLER. Mr. Secretary, you are here today to represent 
the Administration across the board, and again the 
Administration has called for extending of this tax even though 
we have 6 years' worth of anticipated expenditures in 
unemployment accounts. Why do you feel a need to continue 
levying this tax on small businesses and other employers?
    Secretary PAULSON. This is something that I think you 
should talk with the Secretary of Labor about. This is 
something we have had some discussions with the Department of 
Labor about.
    Mr. WELLER. Well, you represent the Administration here 
today, and the Secretary of Labor is not here and I am 
directing the question to you, the Secretary of Treasury. This 
is a tax.
    Secretary PAULSON. I appreciate your point of view. It is a 
tax that is in the budget.
    Mr. WELLER. Why?
    Secretary PAULSON. Well, because we put it in the budget.
    Chairman RANGEL. Okay. Mr. Secretary.
    Mr. WELLER. Mr. Chairman, he wouldn't give me an answer 
beyond----
    Chairman RANGEL. He gave you one.
    Mr. WELLER. I am trying to understand why they put it in 
the budget.
    Secretary PAULSON. I am telling you. I would have to spend 
time with you off line. I have focused on some of the major 
things. This is something that I would need to get back to you 
on.
    Mr. WELLER. Mr. Secretary, the Chairman has been very 
generous by allowing me to continue when my time has expired. I 
would like an answer on the record in written form explaining 
why this tax increase was included in the Administration's 
budget. Thank you.
    Chairman RANGEL. Just for the record, Mr. Secretary, was it 
the Administration and your office that recommended that this 
tax cut expire in 2010; is that correct?
    Secretary PAULSON. I don't believe it was; no.
    Chairman RANGEL. The President's tax cut. The one that 
expires in 2010. You call it a tax increase. It expires at the 
recommendation of the Administration. If it is a tax increase, 
it is because the Administration said at 2011, there would be a 
tax increase unless the Congress changes its mind. It is 
English. Did you support the expiration?
    Secretary PAULSON. I don't know what you are talking about.
    Mr. WELLER. Would the Chairman yield?
    Chairman RANGEL. Yes.
    Mr. WELLER. The current tax, unemployment surtax is due to 
expire November 31, 2007.
    Chairman RANGEL. Strike that. I am talking about the 
President's major tax cut, just to get that out of the way so 
we can get rid of all of this expiration and tax increase.
    Secretary PAULSON. As you know, a key part of the budget is 
the need to make the tax cuts permanent.
    Chairman RANGEL. I am asking you whether or not you 
recommended to this Committee and to the Congress that whatever 
tax cuts it was, that expires in 2010? That is all I read. Is 
that so?
    Secretary PAULSON. I don't know what tax cut you are 
talking about, Mr. Chairman.
    Chairman RANGEL. We have referred to it as the tax cut for 
the wealthy. That is how it is described.
    Mr. MCCRERY. Would the Chairman yield?
    Chairman RANGEL. Yes, of course.
    Mr. MCCRERY. To shed a little light on this, actually the 
Administration did not support sunsetting these tax cuts in 
2010. That was an arcane requirement of the Senate rules under 
reconciliation, that anything passed under a reconciliation 
must sunset at the end of the budget window. When we passed 
those tax cuts, it was a 10-year budget window. So, that is why 
the tax cuts are sunset in 2010, not because that is what the 
Administration suggested.
    Chairman RANGEL. Well, they may not have suggested it, but 
they agreed to it.
    Secretary PAULSON. That was the Senate rules.
    Chairman RANGEL. We have to go back and see what happens 
when it does expire. I hate it to be considered a tax increase 
when the law is the law is the law. If it expires, it dies.
    Secretary PAULSON. I would say, Mr. Chairman, the law is 
one thing. I will tell you for the American people, that would 
be a big tax increase.
    Chairman RANGEL. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman.
    Mr. Secretary, in your statement you said that, ``Energy is 
a priority addressed in the President's budget. We can achieve 
that goal by dramatically increasing supply,'' and yet I note 
when you look at the energy credits, you see section 45, 
renewable energy production tax credit expiring at the end of 
2008; biodiesel tax credit expiring at the end of 2008; ethanol 
expiring in 2011, none of them provided for in the President's 
budget.
    Is it your position that these would be recommended in next 
year's budget? Do you anticipate continued support for the tax 
incentives on renewable fuels?
    Secretary PAULSON. I would say renewable fuels are a very, 
very important part of this Administration's energy strategy. 
This is something we will look at and look at continually. The 
proposal that has been made in the energy security area is a 
very bold proposal, which will dramatically increase demand. It 
is going to spur a great deal of investment, we believe.
    Mr. POMEROY. Mr. Secretary, I might observe that not 
providing for a longer window on these tax credits is somewhat 
at odds with your stated goal, because as they try to line up 
the financing on behalf of these projects, only to see them 
expiring at the end of 2008, obviously that is going to in my 
opinion--maybe not so much this month--but as we get closer to 
the actual expiration date, disincent capital. We will need to 
see more than exhortation from the Administration on that one.
    My final question, permanent AMT relief has to be passed. I 
believe you agree with that.
    The record should reflect that the Secretary was nodding.
    As I look at this, making the tax cut permanent is about a 
$1.8 trillion fix to permanently deal with the AMT. You have 
not provided for the AMT fix other than the 1 year patch in the 
budget. I can only conclude from that that the Administration 
acknowledges there is going to be interplay between making the 
tax cuts permanent and taking some of that revenue that would 
be lost from making the tax cuts permanent and applying it to 
the AMT fix? By not having a commitment of resources in the 
budget, upon making the AMT fix permanent, the Administration 
acknowledges there is going to be an interplay between the 
other expiring tax provisions and AMT relief?
    Secretary PAULSON. Congressman, clearly we need to work on 
a permanent solution on the AMT. We are in agreement there. We 
need to work together. This is something we need to work with 
your Committee on. So, I am in agreement on that part of your 
statement.
    I have said before that I believe, and clearly the 
President believes, a tax increase is not something that would 
be good for this economy, and it is not something that we are 
recommending. So, I will just leave it there. We would like to 
work together to fix AMT. I don't believe a tax increase is the 
way to do that.
    Mr. POMEROY. Where is the trillion dollars going to come 
from? If you take all of the expiring tax provisions, make them 
permanent, take them off the table at the outset, we are not 
going to discuss them in connection with the permanent AMT fix, 
where do you find the trillion dollars, Mr. Secretary?
    Secretary PAULSON. When you look at this issue, this is a 
tough issue. I think this is why Congress has been patching it 
1 year at a time. This is something we are going to have to 
work on together. It is not an easy one.
    Chairman RANGEL. In order to facilitate the Secretary's 
schedule--and is it still noon?
    Secretary PAULSON. Yes.
    Chairman RANGEL. The Chair would ask you to confine your 
questions to 2 minutes to see whether or not we can have 
everyone at least get one question in.
    I recognize Mr. Lewis for 2 minutes.
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman.
    Mr. Secretary, the Comptroller General, David Walker, has 
been before this Committee several times. This has been 
discussed by other members today, but the Secretary General 
says by the year 2040--in fact that will be when my two kids, a 
daughter 24 and son 35 will be finishing up their working 
careers--but he tells us by 2040, there will not be enough 
revenue coming into the Federal Treasury to provide for Social 
Security, Medicare, and there will only be enough revenue to 
provide for interest on the debt. With this $50 trillion amount 
of unfunded liabilities and debt hanging over the next 
generation's head, do you agree with the Comptroller General on 
that scary prospect?
    Secretary PAULSON. I do. I think it is a serious problem.
    Mr. LEWIS OF KENTUCKY. So, it is not a matter whether 
benefits will be cut or the retirement age increased or the 
payroll tax increased. The Comptroller General says we can't 
grow the economy enough to meet that demand. We can't tax 
enough to meet that demand. We are going to have to fix those 
programs here and now or within the near future. Every Congress 
says well, we will wait until the next Congress. We had an 
opportunity to deal with Social Security in the last Congress, 
but it seems like Congress is more concerned about the next 
election than about the next generation.
    The President keeps putting proposals forward and asking 
Congress to work with it, work with this problem, and we tend 
to say we will do it sometime in the future. How pressing is it 
to do it as soon as possible?
    Chairman RANGEL. Thank you. Ms. Jones.
    Mrs. TUBBS JONES. Thank you, Mr. Chairman.
    I want to talk about public hospitals, but I don't have the 
time. Could you look at the impact your budget has on public 
hospitals, like $24 billion?
    What I really want to focus on at this point is Individual 
Development Accounts (IDAs), which have been successful 
particularly over the last 7 years; 50,000 account holders have 
enrolled in programs with financial institutions. IDAs were in 
the budget for the past 6 years, and they are not in the budget 
this year. Why?
    Secretary PAULSON. I think IDAs are a good idea. We didn't 
get a lot of traction from Congress on last year's IDA 
proposal. We had to make some tough choices.
    Mrs. TUBBS JONES. What do you mean, you didn't get 
traction?
    Secretary PAULSON. There just didn't seem to be broad 
support for last year's budget proposal.
    Mrs. TUBBS JONES. The people of America want it. You want 
the people to save in order to increase dollars for the 
Government and for work. So, regardless whether Members of 
Congress like IDAs, the people of America do. I think you need 
to rethink it.
    Secretary PAULSON. First of all, the concept in savings is 
a great idea. We have put forward other proposals, the Lifetime 
Savings Accounts and the Retirement Savings Accounts and others 
that are a similar thrust, but I hear you. I hear you, and I 
look forward to talking with you more about it.
    Mrs. TUBBS JONES. I would love to talk to you more about 
it.
    Thank you.
    Chairman RANGEL. Mr. Emanuel, 2 minutes.
    Mr. EMANUEL. Thank you, Mr. Chairman.
    Mr. Secretary, I know there have been a number of questions 
on the AMT. The President said on his retreat with us over the 
weekend, he doesn't believe in tax increases. He thinks they 
are bad for the economy. Yet the budget, outside of just a 1-
year fix on the AMT does rely on the revenue from the AMT to 
reach its goals in 2012. The only way those numbers work is if 
there is a 1-year fix; and outside of that, you see the AMT 
increasing its grasp of more and more middle-class families. 
Given the paradigm of seeing tax increases as bad for the 
economy, yet a budget that is touted as reaching balance 
relying on the AMT, can you reconcile those two concepts?
    Secretary PAULSON. Thank you.
    As we said, we believe that a permanent fix is necessary, 
and we really have to work toward a permanent fix. So, it is 
very important that we do that. This is a tough issue.
    Mr. EMANUEL. I understand that, but you also rely on, and 
some think, including the Washington Times, rosy scenarios on 
the economy. I am asking more specific questions.
    Would you agree that the budget outside of the 1-year fix 
in AMT relies on revenue coming from the AMT going from 4 
million taxpayers up to 25 million taxpayers?
    Secretary PAULSON. Actually, if the AMT were allowed to go 
into effect without extending the patch, which we want to 
avoid, there would be 25 million AMT taxpayers today, and a 
good deal more in the future.
    Mr. EMANUEL. Getting back to brass tacks, in 2008 you see 
$82 billion raised from the AMT; 2009, $92.4 billion; 2010, 
$109.3 billion; 2011, $125.3 billion. Those are all your 
numbers. You agree if those numbers are in your budget, that 
would be the equivalent of a tax increase?
    Mr. Chairman, may I just get a ``yes'' or ``no'' on that?
    Secretary PAULSON. I would say, first of all, I see where 
you are going.
    Mr. EMANUEL. I would hope so.
    Secretary PAULSON. I think we are quite transparent in the 
budget. We said this is a 1 year fix. We need to find a 
permanent fix.
    Mr. EMANUEL. The rest of the revenue is a tax increase?
    Secretary PAULSON. I didn't say that.
    Chairman RANGEL. Mr. Brady for 2 minutes.
    Mr. BRADY. Thank you.
    Mr. Secretary, I have a letter coming to you asking when 
the Treasury will update the regulations to provide flow-
through treatment for banks organized as Limited Liability 
Corporations. We have been waiting several years for that 
update, from even before you got there, and I would like you to 
address it at some point.
    Secretary PAULSON. We will make sure that we get back to 
you on that.
    Mr. BRADY. I agree we ought not to be spending the Social 
Security surplus to balance this budget. I think it is more 
than a bit hypocritical that, over the last few years as we 
debated Social Security and the Republicans offered numerous 
plans to stop spending that surplus, not only did our Democrat 
colleagues not join with us, but they were prohibited, banned 
from working with us to try to save Social Security. Perhaps in 
this new Congress with this new world order, perhaps there will 
be a truly bipartisan effort beyond the crocodile tears to help 
finally address the issues of Social Security from both 
parties.
    My final point. The tax gap, $300 billion. It is a huge 
number. We ought to be doing everything we can to collect that. 
In real life, running a small business, we had aged 
receivables, 30, 60 and 90 days, even a year or more. On paper 
they look like a huge amount of cash to be collected, but in 
real life as you worked through them, you found they were much 
smaller than they showed on paper.
    In the spirit of not relying on funny money, understanding 
it takes an effort both within the Internal Revenue Service 
(IRS) and with professional groups who have expertise to 
collect it, how much of that $300 billion is gettable? How much 
in real life is gettable?
    Secretary PAULSON. Congressman, this is a question that is 
very difficult to answer, precisely because the last good 
research we had on the tax gap was in 2001.
    Having said that, I think you would find that a large 
portion of the tax gap is not gettable unless we are willing to 
have much more onerous requirements and reporting requirements 
for income that I wouldn't support, and I would trust many 
Members of the Committee wouldn't support if we talked about 
them in some detail.
    Chairman RANGEL. Mr. Kind is recognized for 2 minutes.
    Mr. KIND. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here and your 
accessibility in the last couple of months trying to work with 
many of us.
    One of the more disturbing aspects of this Administration's 
budget policies has been the largest and fastest expansion of 
national debt in our Nation's history: over 3 trillion new 
dollars accumulated in national debt in the last 6 years alone. 
As Mr. Tanner and Mr. Becerra indicated, a large portion is 
being held by foreign entities.
    What would be the economic consequences to us, say for 
instance, China decided to take more of their capital and 
started investing it internally to deal with their aging 
population, their infrastructure needs, or perhaps more in 
emerging markets like in Asia or Africa or in the European 
Union; what would that mean to us economically if we started 
seeing these foreign entities start diversifying their holdings 
in other parts of the world?
    Secretary PAULSON. With regard to China, and I know this 
isn't what your question was directed at, but just narrowly, I 
actually think if China took more of their reserves and 
invested in their own population, safety nets and so on, it 
would be good for us. I think one of their problems is they are 
saving at 50 percent a year and we need some more balanced 
growth out of China.
    I understand what you are getting at, and I had a question 
earlier along the same lines. I know the amount of our Treasury 
securities that are held by overseas investors is of concern to 
a number of people. I would say this is not a major concern of 
mine today because there is so much diversity in the holdings.
    I do believe that overseas investors hold U.S. Treasuries 
because they believe they get the best risk-adjusted rate of 
return. By country and then by investors in the country, a lot 
of securities are held by private investors in the private 
sector, some by the official sector.
    Chairman RANGEL. Mr. Blumenauer is recognized for 2 
minutes.
    Mr. BLUMENAUER. Thank you, Mr. Chairman.
    Mr. Secretary, as somebody from the Northwest, I get a 
little concerned about having these issues dropped in regularly 
to accelerate the debt repayment from Bonneville Power 
Administration, BPA. I only have 2 minutes, but I would 
respectfully request some rationale for why, after BPA has 
accelerated over a billion dollars voluntarily of rate 
repayment when they could, to see this dropped in, which looks 
like a potential very significant rate increase for the people 
in the Pacific Northwest. It always has engendered bipartisan 
opposition. I don't think it is going to go anywhere; but more 
fundamentally, it doesn't look to me like it should. We would 
like to get some sense from you about the parentage of this and 
whether or not you folks are serious about drawing the line.
    We ought to be able to get past this rather than having 
this flawed each and every budget cycle. I would respectfully 
request getting some information on that if I could.
    Secretary PAULSON. I will get back to you on that, yes.
    Mr. BLUMENAUER. I would just ask if you can outline, other 
than ethanol, which seems to be unrealistic if we are going to 
continue to feed chickens and cattle, what are the initiatives 
in this budget to meet our greenhouse gas objectives in terms 
of lowering carbon emissions?
    Secretary PAULSON. Let me be clear, what the President was 
addressing with the energy bill was energy security. There is a 
collateral benefit in terms of carbon emissions and greenhouse 
gases in the transportation sector. That is clearly a benefit.
    This is really a very, very bold program because we import 
roughly two-thirds of our oil, much of it from troubled areas 
of the world. The transportation sector, the auto sector is 97 
percent, 98 percent, something like that, dependent on oil.
    So, the idea here was to do something where you would 
create great demand on the supply side. Here there is a range 
of alternative sources of energy that are encompassed in this 
alternative fuel standard, which would displace 35 billion 
gallons in 10 years. Then there is the CAFE element, which is 
on the conservation side, 5 percent. Then of course there is 
the SPR, which deals with this. So, that is where the big 
thrust was, on energy security. There is a positive impact in 
terms of what it does to carbon emissions from automobiles.
    Chairman RANGEL. Mr. Reynolds is recognized for 2 minutes.
    Mr. REYNOLDS. I thank the Chairman.
    Mr. Secretary, we have known each other for a long time, 
much longer than you have been Secretary. I have always found 
you to be a pragmatist. I have always found you to listen.
    I went back and looked at your opening address which 
started 2 hours ago, and you laid out the strength of our 
economy. You brought forth the facts as you saw them on the 
President's budget, and you have addressed the panel's 
questions from both sides of the aisle.
    I have also heard you outline that to address Medicare and 
entitlement solutions, to look at Social Security and to look 
at something near and dear to my heart as it is to both sides 
of the aisle, AMT repeal, what you have talked about here is 
the current state of where we are, but you have always 
indicated a willingness that everything is on the table. It 
started in your opening remarks. I have heard it as you have 
answered questions.
    So, there are many tough challenges that the country faces. 
What I am hearing from the Treasury Department, and you as 
Secretary, is your willingness to look at plans, ideas and 
solutions this Congress from both sides of the aisle will bring 
forward, to see if there is an ability to bring about a 
consensus of a final solution; is that what I have been hearing 
today, Mr. Secretary?
    Secretary PAULSON. I think it is absolutely what you have 
been hearing, and there is no way we are going to solve some of 
the very big problems facing our economy, whether it is energy, 
whether it is health care, or whether it is Social Security, 
without having a bipartisan approach and a willingness to 
listen to both sides and consider everyone's ideas in crafting 
a final solution.
    Mr. REYNOLDS. I would think as you are Treasury Secretary, 
and as we have new leadership in the Congress, that we are all 
seeing there are not easy answers to permanent solutions.
    Secretary PAULSON. That is absolutely true.
    Mr. REYNOLDS. Thank you.
    Chairman RANGEL. Mr. Pascrell is recognized for 2 minutes.
    Mr. PASCRELL. This is a continuation, this budget, and I 
have all due respect to the Secretary by shifting the burden of 
taxes upon wages rather than total income. That is a pattern. 
You have kept the pattern. If you continue to do business as 
you are doing, in two decades we will have a $46 trillion 
deficit.
    I want to go to a very specific question to you concerning 
about how we oversee taxes collected, how we oversee corporate 
tax shelters, how we oversee those generous tax treatments of 
foreign investors.
    I would like you to address an issue that I found 
perplexing for myself. Last September, the IRS began turning 
over thousands of taxpayer files to private debt-collection 
companies. Under the plan the IRS has agreed to use private 
companies to collect the simplest forms of tax debt and would 
allow them to keep up to 24 percent of what they collect.
    Why would the IRS proceed with a plan to pay private 
collectors almost 25 cents for every dollar collected on the 
easiest cases if the IRS employees could collect much more cost 
effectively? Why aren't we going after those folks that have 
basically circumvented their tax obligations to the United 
States of America and pay a private concern, and now you are 
going to hire seven more firms in order to do this? Is it the 
job of this Government----
    Secretary PAULSON. It is an interesting comment, because I 
hear so many people talking about the tax gap and having people 
pay what they owe. I think when Commissioner Everson is up 
here, he can explain to you how these private collection 
agencies, are collecting, helping to collect money that is owed 
the Government that we wouldn't ordinarily be able to get 
within our budget.
    Now in terms of the IRS, this is the law, this is what we 
are supposed to be doing right now. I think we are managing it 
and Mark Everson is managing it with great care and making sure 
that the rights of the taxpayers are observed at the same time 
we are doing our best to collect the money.
    Chairman RANGEL. Ms. Berkley from Nevada is recognized for 
2 minutes.
    Ms. BERKLEY. I thank you, Mr. Chairman, and thank you very 
much, Secretary Paulson.
    This is the first time that I have spoken on the Committee 
on Ways and Means, so I am newer than you are. Usually I listen 
to everybody speak because I don't get to speak myself, and I 
learn something. I have to say I must be very thick today 
because the only thing I seem to have learned is that you are 
anxious to meet with us and work with us.
    I represent the fastest-growing community in the United 
States, Las Vegas. I have 7,000 new residents a month coming 
into town. When there is cuts in special education, and the 
SCHIP program, and the TRIO program, and Medicaid and the COPS 
program, it disproportionately hurts my community and the 
people that I represent. So, I have tremendous concern about 
the budget that has been presented to us due to the tax cuts, 
due to the cuts in the budget that may be 1 percent across the 
board, but believe me, they are going to hurt me more than 1 
percent.
    This is what I want to ask you. If we have--it seems to me 
that the budget that has been presented to us, unless I am 
missing something, is almost fraudulent. It is a fraud being 
perpetrated on the American people, and let me share with you 
why. There are certain built-in assumptions in this budget that 
you are presenting to us today that are clearly not ever going 
to happen. The fact that we are going to balance the budget in 
5 years is based on these budget assumptions that are 
contained. Let me share with you some of them.
    Medicare. There is no way that we are not going to work out 
some sort of reimbursement formula for our doctors. I cannot 
tell you how many docs call me in Las Vegas and tell me they 
can no longer afford to treat Medicare patients. I have got the 
fastest-growing senior population. Losing my doctors and not 
having them care for my seniors worries me a great deal.
    When it comes to veterans, we are not going to double the 
copay on their prescription medications. When it comes to 
LIHEAP, Congress is going to put money in. You can't zero out 
that program. People are going to die if we zero out that 
program. There are other assumptions like privatizing Social 
Security.
    Don't you think the time has come that we should level with 
the American people and present to them a budget not that we 
are going to work together on, but there are certain built-in 
assumptions here--when we go to the American people and tell 
them that we are going to have a balanced budget in 5 years, on 
what planet is that going to happen, because it is not going to 
happen here.
    Chairman RANGEL. Mr. Porter is recognized for 2 minutes.
    Secretary PAULSON. I guess----
    Ms. BERKLEY. Mr. Chairman, do you think you could ask the 
witness to answer my questions in writing?
    Secretary PAULSON. What my answer would be in writing or 
verbally is that I think this is a very credible, strong 
budget. It is a budget that is based on keeping this economy 
strong, keeping tax revenues coming in. In 2005, tax revenues 
increased 14.6 percent, 11.8 percent last year, 8 percent in 
the first quarter. In this budget we are assuming that tax 
revenues are going to grow at 5.4 percent over the next 5 
years. Over the last 20 years they have grown at 6 percent. So, 
it is based on a very strong and growing economy.
    What I hear from you is a disagreement over priorities in 
terms of where there should be cuts, where there should be 
spending. Again, I believe that this budget is quite 
transparent, and it is quite transparent in terms of where 
there is going to be spending and what the assumptions are.
    So, I think it is a credible, straightforward budget, and 
if we can keep the country growing and show a little bit of 
fiscal discipline, we can balance this budget by 2012.
    Chairman RANGEL. Mr. Porter of Nevada is recognized for 2 
minutes.
    Mr. PORTER. Thank you. I am anxiously awaiting your 
response to my colleague from Nevada. I will not take more time 
because she has addressed them so well.
    Regarding the deficit, 9/11. What impact has the financial 
burden on our country had on our deficit for 9/11? I think 
sometimes we forget how we got to where we are today.
    Secretary PAULSON. It is pretty remarkable because I was on 
Wall Street at the time the World Trade Center was hit--but 
even before then, we had the stock market bubble burst, and 
headed into a recession. So, when you look at what this country 
has gone through in terms of the bursting of the bubble, the 
recession, the 9/11 attacks, the corporate scandals, Hurricane 
Katrina, the spending for the war, and look at all of that and 
see a deficit that is 1.8 percent of GDP, this is something 
that I think has surprised many people. I think this says 
marvelous things about our economy, and we can be very pleased 
with where we are fiscally after everything we have been 
through.
    Still, we have got these big challenges staring us in the 
face, and I think that is what there is agreement on here. No 
one that has spoken is not concerned about the long-term 
economic challenges we have.
    Mr. PORTER. I appreciate your comment, and I think many 
times we would like to use history to our advantage, and 
sometimes which is not to use history. I think it is important, 
your comment. A lot of what we are facing today is the impact 
of a downturn in the early part of 2000 plus rebuilding our 
military to protect our homeland. I appreciate you being here 
today and putting that on the record for us.
    Chairman RANGEL. Mr. Meek from Florida is recognized for 2 
minutes.
    Mr. MEEK. Thank you for coming to the Committee. You have 
been asked a lot of the questions I was concerned about, but I 
am looking at this budget process as a give and take. You 
mentioned earlier that the Administration putting forth its 
will and desire, and I know that this Congress will do the 
same, and hopefully we can come to a table that will benefit 
the majority of the American people.
    I do know that the folks that are protected in this budget 
are the superwealthy and those that are connected, and we can 
argue back and forth about what is good and what is bad for the 
economy.
    One thing that I wanted to ask you about this morning is 
the fact that the proposal to increase the maximum Pell grant 
for low-income undergraduate students to be able to educate 
themselves was just announced last spring, but in the budget it 
shows no increase as it relates to the announcement last week, 
and that the Administration has--is standing behind that 
commitment they just made last week. Would you comment on that 
a little bit, sir?
    Secretary PAULSON. I don't have all the details on the Pell 
grants. I know that this is a very important program and is 
something that our Secretary of Education is very supportive 
of, as is the President.
    Mr. MEEK. Why isn't it reflected in your budget?
    Secretary PAULSON. I believe it is reflected in our budget.
    Mr. MEEK. It has been frozen for the last 4 years. It is at 
the same level, but, better yet, saying it will increase, that 
that was the announcement out of the White House last week.
    Secretary PAULSON. I will need to get back to you on the 
details of that. I can just say to you that when we are working 
to balance the budget, and we have the spending for 
discretionary nonsecurity items going up 1 percent a year; we 
make some tough choices, but in terms of that, that question, I 
will get back to you.
    Mr. MEEK. Thank you.
    Chairman RANGEL. Mr. Thompson.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    I want to associate myself with some of the things that my 
colleagues said previously, especially in regards to the health 
care stuff. In my district, hospitals are having a tough time. 
Docs aren't taking new Medicare patients. Docs are leaving the 
area, and the one area that looks promising is in the area of 
kids', children's, health care, and the SCHIP program is being 
cut. We really need to get away from the incremental messing 
with health care and figure out a good proposal.
    That is not my question. I just want to associate myself 
with that.
    Also--and in California it is going to be a $3 billion hit 
to hospitals alone in your budget, and this is going to be hard 
to reconcile.
    With regard to the AMT, it just seems foolish to me that we 
look at extending on a permanent basis tax cuts that don't go 
away for years and only deal with AMT on a 1-year proposal. I 
think we need to figure that out because it is 25 million 
people who are going to see a tax increase if we don't fix 
that.
    Now, my question is on the health tax deduction proposals, 
I am concerned that it looks like this is going to provide 
incentive for people, healthy people, younger people to leave 
their employer-based programs to opt for better prices rather 
than greater quality or greater scope. How many people do you 
estimate will actually leave their employer-based health care?
    Secretary PAULSON. I would say that in terms of the 
employer-based health care, my judgment is that most employers 
that provide health insurance now do so because it is a 
recruiting tool, and it is very, very important to their 
employees.
    Mr. THOMPSON. How many people do you think will abandon 
that?
    Secretary PAULSON. There has been a long-term decline going 
on here. In 2000, I think 69 percent of the businesses provided 
health insurance. On the employees' side, I don't think that 
you are going to see employees who are getting good health 
insurance from their employers leaving because of this program.
    Mr. THOMPSON. If this program provides such a good 
financial deal, of course they will.
    Secretary PAULSON. No. This program takes away the bias and 
the distortion. This program gives a standard deduction to 
everyone regardless of their income.
    Mr. THOMPSON. So, your estimates are that your employees, 
younger, healthier employees, won't leave their employer-
provided health plan for a cheaper one.
    Secretary PAULSON. I am saying there is no incentive in 
this program one way or the other, because this program gives 
the same standard deduction whether someone gets the insurance 
from their employer, whether they get it individually, or 
however they get it.
    Mr. THOMPSON. Are the TTBs still in this bill?
    Chairman RANGEL. Mr. Hulshof, thank you for your patience. 
You are recognized for 2 minutes.
    Mr. HULSHOF. Thank you for your indulgence. This is an 
annual exercise where Members get to point out things they like 
or don't like about the budget.
    Let me begin with my critique. I remain opposed to the 
President's proposal to sell our national forestlands, 
particularly in Missouri, to fund the Rural Schools Initiative. 
I absolutely believe that initiative is meritorious, deserves 
to be funded, but I think this proposal is misguided, and other 
funding streams have been offered, but they, too, have been 
unacceptable, at least in my view.
    Secondly, my colleague from Washington State challenged you 
on Medicare as if how dare the Administration look to a 
competitive model to try to find savings. Denigrating the 
private sector, he asked the rhetorical question, how do you 
justify it? My response to him would be two words: Part B, this 
public/private partnership that shows the competitive model 
can, in fact, work.
    Thirdly, my good friend from Massachusetts Mr. Neal says we 
should not use the word ``crisis,'' and yet--regarding Social 
Security, and yet in 328 days, the midpoint of this Congress, 
the first baby boomer begins to retire and look to the 
retirement system. So, maybe something--I will ask my good 
friend to come up with another word than ``crisis,'' but it 
needs to be addressed, and I applaud the Administration.
    Thank you for your unflagging support for alternative 
fuels, Mr. Pomeroy's bill, H.R. 196, of which I am proud to be 
his chief sponsor. I just yesterday addressed about 3,500 
people at the National Biodiesel Conference. There is a concern 
about the tax incentive going away in 2008. I hope the 
Administration, particularly you, continues to look at these 
tax incentives. I understand the angst from our friends in the 
livestock-producing arena as far as the price of commodities, 
and yet this tax incentive for ethanol and biodiesel are 
critical to continue to build this domestic demand, and I will 
continue our conversation about the definition of renewable 
biodiesel, which is something that your Department is about to 
promulgate regulations, but we don't have time to go into that.
    We continue to look forward to working with the 
Administration to continue to provide this strong economy that 
we have seen over these past years.
    Thank you, Mr. Secretary.
    Chairman RANGEL. Mr. McCrery, would you care to close?
    Mr. MCCRERY. Just to say thank you to the Secretary for 
staying over 15 minutes to accommodate our Members.
    Thank you.
    Chairman RANGEL. Well, we look forward to working with you, 
and this is just the beginning. We hope we end up at the 
station together.
    Thank you very much.
    Secretary PAULSON. Thank you very much.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Questions submitted from Members to Secretary Paulson 
follow:]
  Questions Submitted by Mr. Blumenauer to Treasury Secretary Paulson
    Question: I was pleasantly surprised to see that the Global 
Environment Facility (GEF) received not only the $80 million pledged 
for the 4th replenishment, but started down the path toward paying off 
our arrears from past shortfalls. Does this reflect a new commitment by 
the Treasury Department toward the GEF?

    Answer: The Administration's request of $80 million for annual 
payment toward the fourth replenishment and $27 million for arrears 
clearance reflects numerous factors. Most importantly, it reflects the 
GEF's newfound commitment to manage for results. The organization took 
an important step forward when it agreed to distribute resources 
according to performance and needs, consistent with best practices at 
other international financial institutions. The GEF has also committed 
to strengthening fiduciary standards and improving its strategies for 
intervention in substantive areas including biodiversity, reducing 
greenhouse gas emissions, and promoting sustainable land use. Finally, 
the institution is engaged in a rethinking of its project development 
and project management processes, so that donors can have greater 
confidence that it allocates resources effectively and efficiently to 
maximize gains for the global environment. These were reforms that 
Treasury pushed for and achieved in the fourth replenishment, in what 
was a contentious negotiation. Under these circumstances, we felt that 
increasing our appropriation request to include a payment on arrears 
would provide an important signal that the United States supports 
recent progress in the GEF. U.S. arrears to the GEF have risen to 
$170.6 million as of the end of FY2007. It is important to fund the GEF 
request fully, both the U.S. commitment to the GEF-4 and arrears, to 
enable the United States to retain its leading position on driving key 
reforms, effectiveness, and transparency at the GEF.

    Question: We have begun to see the positive impact of debt 
cancellation in those impoverished countries that benefited from the 
2005 debt agreement reached in Gleneagles, but many more impoverished 
countries require 100% debt cancellation. In the UK, Gordon Brown has 
named 67 countries as requiring full debt cancellation. Will the U.S. 
government work to negotiate cancelation for these additional 
countries, following on the heels of the President's State of the Union 
address where he noted debt relief as among ``our best hope[s] for 
lifting lives and eliminating poverty''?

    Answer: We have indeed begun to see promising results in the 
heavily indebted poor countries that have demonstrated a commitment to 
economic reform and poverty reduction, and have therefore benefited 
from debt reduction under the Heavily Indebted Poor Countries (HIPC) 
Initiative and the Multilateral Debt Relief Initiative (MDRI). Our 
policy has been to use the limited U.S. budge resources available for 
debt relief for those countries that have unsustainable debt burdens, 
including those that qualify for HIPC and MDRI debt relief. The United 
States does not yet have the resources required to meet all of its 
commitments for those countries, and we hope that Congress will see fit 
to fund fully the President's FY2008 request for debt relief.
    For low-income countries in general, the United States has 
significantly increased its development assistance. From 2000 to 2005, 
the United States nearly tripled its official development assistance 
(ODA) from $10 billion to $27.5 billion and nearly quadrupled its ODA 
to Sub-Saharan Africa from $1.1 billion to $4.1 billion, nearly twice 
the level of that provided by any previous administration.

    Question: Those countries currently eligible for 100% debt 
cancellation through the IMF and World Bank's debt program are required 
to undertake a series of economic policy reforms to obtain cancelation, 
including moves to privatize electricity and water services as well as 
implementing spending caps in health care and education. Is the U.S. 
Treasury concerned about the years of delays caused by these economic 
reform requirements in the HIPC, or Heavily Indebted Poor Countries, 
program, and possible negative impacts on sustainable economic growth 
and poverty reduction?

    Answer: It is important that the debt relief provided under HIPC 
and MDRI is well used, and contributes to sustainable growth and 
poverty reduction. Hence, the programs require that governments commit 
to a sound macroeconomic framework, through a program with the IMF, and 
to specific reforms that are agreed between the government and the 
international financial institutions. HIPC and MDRI are in fact aimed 
at increasing the government funding for poverty reduction programs. 
While a sound fiscal framework does require limits on spending, the IMF 
does not actually impose spending caps on ``health care education.'' 
The governments decide their spending priorities, which are reflected 
in the IMF programs. In the case of privatizations, these are decided 
by the governments, and designed to improve efficiency and the delivery 
of services, and to ease fiscal burdens on the governments.

    Question: Last month the Intergovernmental Panel on Climate Change 
released a consensus report of thousands of scientists around the world 
saying that evidence of global warming is ``unequivocal'' and human 
activities are the major factor driving the temperature rise. What 
major new initiatives to combat global warming has the administration 
included in the FY 2008 Budget request?

    Answer: Each year the President's Office of Management and Budget 
(OMB) issues a Federal Climate Change Expenditures Report to Congress, 
generally in the spring. Upon completions, OMB will post the FY2008 
report on its website.
    The Administration's overall portfolio of climate change programs 
focuses on reducing the scientific uncertainties associated with 
climate change; advancing energy-efficient, renewable, and other low- 
or non-emitting technologies; and improving standards for measuring and 
registering emissions reductions.
    One of two important categories of spending on climate change-
related programs is Climate Change Science, which includes the U.S. 
Climate Change Science Program (CCSP). The CCSP has been established to 
integrate the work of the U.S. Global Change Research Program (USGCRP) 
with the activities of the Climate Change Research Initiative (CCRI). 
The other category is Climate Change Technology. This category 
comprises the U.S. Climate Change Technology Program (CCTP) and the 
subset of CCTP activities identified as the National Climate Change 
Technology Initiative priorities. The CCTP is a multi-agency effort 
that incorporates a variety of technology research, development, and 
deployment activities--including voluntary partnerships and grant 
programs--that reduce greenhouse gas emissions.

    Question: The President has recommended a permanent extension and 
liberalization of many tax credits, such as increased small business 
expensing, brownfields tax incentives, and the deduction for teachers' 
out of pocket classroom expenses. What is the administration's proposal 
with regard to the Renewable Production Tax Credit, current set to 
expire in 2008? Why has this successful program, which helps level the 
playing field for wind and solar power, not been extended?

    Answer: The Tax Relief and Health Care Act of 2006 extended the 
renewable electricity production tax credit through January 1, 2009. 
The tax credit is for qualifying facilities placed in service before 
that date and can be claimed for the first 5 to 10 years of operation, 
depending on the technology. The Administration supports the use of 
renewable power and will continue to examine the role incentives play 
in supporting renewable power. In addition to the Federal production 
tax credit, numerous Federal and State programs provide assistance that 
promote deployment of renewable energy technologies. The President's 
Advanced Energy Initiative also provides for continued investments in 
important clean energy technologies of the future that can help reduce 
emissions and improve energy security. The Administration will be 
watching developments underway in renewable energy technology and in 
the market over the coming year, and will make a determination at the 
appropriate time whether to advocate a further extension of the credit.

    Question: The Superfund program, created to clean up the nation's 
worst hazardous waste sites, is funded by holding potentially 
responsible parties accountable for cleaning up waste sites they 
create. Until 1995, a dedicated tax on petroleum, chemical feedstocks, 
and corporate income was used to fund the clean up of ``orphan sites,'' 
where no responsible party could be identified or where the responsible 
party did not have the financial resources to assist with cleanup. This 
tax brought in close to $2.5 billion in revenues to the Federal 
government each year. Has the administration given any thought to 
requesting reinstatement of this tax?

    Answer: At this time, the Administration is not seeking 
reinstatement of the Superfund taxes that expired in 1995. The 
Administration's FY 2008 Budget proposes to continue to fund the 
Superfund program through appropriations from the general fund, 
interest accrued on the unexpected invested balance in the Superfund 
Trust Fund, recoveries of cleanup costs from responsible parties, and 
fines and penalties.

                                 
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