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




 
                  TAXES AS PART OF THE FEDERAL BUDGET

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

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 23, 2010

                               __________

                           Serial No. 111-44

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

               SANDER M. LEVIN, Michigan, Acting Chairman

CHARLES B. RANGEL, New York          DAVE CAMP, Michigan
FORTNEY PETE STARK, California       WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                RICHARD E. NEAL, Massachusetts, Chairman

MIKE THOMPSON, California            PATRICK J. TIBERI, Ohio, Ranking 
JOHN B. LARSON, Connecticut          Member
ALLYSON Y. SCHWARTZ, Pennsylvania    JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
KENDRICK B. MEEK, Florida            GEOFF DAVIS, Kentucky
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

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


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 16, 2010 announcing the hearing................     2

                               WITNESSES

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation..     8
Len Burman, Daniel Patrick Moynihan Professor of Public Affairs 
  at the Maxwell School, Syracuse University, Center for Policy 
  Research, Syracuse, New York...................................    96
Robert Greenstein, Executive Director, Center on Budget and 
  Policy Priorities, Washington, D.C.............................   112
Douglas Holtz-Eakin, President, American Action Forum, Arlington, 
  Virginia.......................................................   126


             HEARING ON TAXES AS PART OF THE FEDERAL BUDGET

                              ----------                              


                        TUESDAY, MARCH 23, 2010

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:00 p.m. in 
Room 1100 Longworth House Office Building, the Honorable 
Richard Neal [chairman of the Committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

         Neal Announces Hearing on Taxes and the Federal Budget

March 16, 2010

By (202) 226-8933

    House Ways and Means Select Revenue Measures Subcommittee Chairman 
Richard E. Neal (D-MA) announced today that the Subcommittee on Select 
Revenue Measures will hold a hearing on the role of taxes as part of 
the federal budget. The hearing will take place on Tuesday, March 23, 
2010, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 2:00 p.m.
      
    Oral testimony at this hearing will be limited to invited 
witnesses. 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:

      
    The hearing will focus on the outlook for federal tax revenues, 
including projections and estimates for extensions of major expiring 
provisions. The hearing will also explore the role of tax revenues in 
the federal budget as concerns grow about the rising budget deficits in 
both the short and long-term.
      

BACKGROUND:

      
    Recently, the Congressional Budget Office (CBO) projected that the 
federal budget would show a deficit of $1.3 trillion for 2010, and that 
federal deficits were projected to average about $600 billion per year 
over 2011-2020 (CBO, ``The Budget and Economic Outlook: Fiscal Years 
2010 to 2020,'' January 2010). According to CBO, its baseline 
projection could understate the budget deficits because it assumes 
major tax cuts from 2001, 2003, and 2009 would expire as scheduled and 
that protection from the impact of the Alternative Minimum Tax (AMT) 
would not be extended, as it has been in prior years. CBO's baseline 
projections show revenues rising to 20.2 percent of GDP (gross domestic 
product) by 2020 even though revenues were only 14.9 percent of GDP in 
2010. Much of this increase in revenue comes from the expiration of 
major individual income tax cuts.
    On February 18, 2010, President Obama announced by Executive Order 
the formation of the Bipartisan National Commission on Fiscal 
Responsibility and Reform. The Commission is charged with finding 
solutions to fiscal challenges confronting the nation, including 
reducing the deficit. Already, opponents of higher taxes have urged the 
still-forming Commission to remove any tax increase from consideration, 
arguing that such increase would harm economic growth. Others argue 
that all policy options, including higher revenues from taxes, must be 
part of the debate. In the House of Representatives, the decision to 
raise or lower taxes initiates within the Ways and Means Committee.
    In announcing the hearing, Chairman Neal stated, ``With the 
creation of the Bipartisan National Commission on Fiscal Responsibility 
and Reform, President Obama has expressed his willingness to work with 
Congress to move towards a balanced federal budget. With next year's 
deficit expected to exceed $1.3 trillion, it is clear we face 
significant challenges if we are to meet the President's ambitious 
goals. As a Member of the committee with jurisdiction over tax revenues 
and many federal spending programs, I look forward exploring all policy 
options for reducing the federal budget deficits.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://democrats.waysandmeans.house.gov, 
select ``Hearings''. Select the hearing for which you would like to 
submit, and click on the link entitled, ``Click here to provide a 
submission for the record.'' Once you have followed the online 
instructions, submit all requested information. ATTACH your submission 
as a Word or WordPerfect document, in compliance with the formatting 
requirements listed below, by close of business Tuesday, April 6, 2010. 
Finally, please note that due to the change in House mail policy, the 
U.S. Capitol Police will refuse sealed-package deliveries to all House 
Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-1721 or (202) 225-3625.
      



      

FORMATTING REQUIREMENTS:

      
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    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
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Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://democrats.waysandmeans.house.gov.
      
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman NEAL. Let me call this hearing to order. And I 
hope that all could take their seats.
    I want to welcome everyone to this hearing of the Select 
Revenues Measures Subcommittee on Taxes as Part of the Federal 
Budget.
    In yesterday's Washington Post, there was an interesting 
story with a headline you might have thought was satire. It 
read, ``IMF Tells Wealthy Nations to Watch Debt''. I wonder why 
the IMF has to do that.
    But as you read the article, it becomes clear that what the 
U.S. is grappling with, so many others are too. The IMF 
official warned that the average debt-to-GDP ratio in the 
wealthiest countries is projected to reach levels that 
prevailed after World War II, and that this debt will drag down 
the potential for the wealthiest nations to continue our 
economic recovery.
    And so while we are in good company, it's not much comfort. 
We have a responsibility to frankly be responsible, as the 
world's largest economy. And while we have a budget Committee 
here in the House, tasked with setting out budget targets each 
year, this Committee has jurisdiction over a wide swath of 
spending and entitlement programs, and certainly over all tax 
revenues.
    Today our witnesses will talk about both historical and 
projected data on spending and taxes. We will also hear from 
Joint Tax that the deficit picture is not pretty, even before 
the extension of some awfully popular tax cuts.
    In order to be responsible, this Committee is going to have 
to make some very difficult decisions. It was the Economist, 
John Maynard Keynes, who said, ``If I owe you a pound, and I 
have a problem, I have a problem. But if I owe you a million, 
the problem is yours.''
    This problem is ours and ours alone. I hope this hearing 
will be the first of many, setting out how we can reform our 
Tax Code in anticipation of moving our economy forward.
    Now let me recognize my friend, Mr. Tiberi, for his opening 
statement.
    Mr. TIBERI. Thank you, Mr. Chairman. It is great to be here 
with you again, the first hearing of this year for this 
Subcommittee. I hope we have several more.
    During his 1986 state of the union address, President 
Ronald Reagan said, ``Government's view of the economy could be 
summed up in a few short phrases: If it moves, tax it; if it 
keeps moving, regulate it; and if it stops moving, subsidize 
it.''
    I think those words echo in the minds of the country's job 
creators as we sit here today, businesses' large domestic 
employers, American businesses trying to compete around the 
globe, individual entrepreneurs, and small business owners, the 
driving force of our economy, find themselves under incredible 
pressure.
    A good portion of it is uncertainty, as a result of the 
global recession we find ourselves working to claw ourselves 
out of.
    But I can tell you, Mr. Chairman, that another source of 
that pressure is what they see coming out of Washington, D.C., 
in the form of more taxes, more spending, more entitlements, 
and more regulation.
    If you'll indulge me for a moment, let me tell you exactly 
what I mean. A week ago today, I left my central Ohio district, 
but before I left, I sat down with a group of business owners. 
One of them told me a story. Ten years ago, he borrowed all the 
money he could: Friends, relatives, mortgaged his house to the 
hilt, and started a business, his dream, his garage. He's 55 
years old today, and that business employs 300 people. He pays 
taxes, a lot of them.
    He told me that ten years later, faced with the same choice 
today, he wouldn't make that decision. He wouldn't make that 
decision to start that business, because of what he sees as 
policies coming out of Washington, D.C. that cause the risk to 
be greater than the reward, through our taxes, through our 
regulatory environment, and through mandates.
    I know there are vast differences of opinion between your 
side of the aisle and mine with respect to topics of taxes and 
spending.
    But the simple facts are, we can't tax ourselves out of a 
situation. To try to do so won't make our businesses more 
competitive here at home, won't help American companies with 
world-wide operations compete against their foreign 
counterparts, and won't encourage would-be entrepreneurs and 
innovators to take that risk.
    Historical data makes it clear, we don't have a revenue 
problem, we have a spending problem. In fact, over the past 40 
years, total revenues have averaged approximately 18.2 percent 
of GDP, while outlays have averaged 20.7 percent.
    There's a huge concern about record budget deficits in both 
long and short-term. And I think we all agree on that.
    As you noted, when announcing today's hearing, the decision 
to raise or lower taxes initiates within this Committee. You 
also noted the Committee has jurisdiction over many federal 
programs. And while it may not be the focus of today's hearing, 
I certainly hope that in the future, we look at ways to slow 
the government's growth of federal entitlement spending. And 
that will factor in to part of this debate at some point.
    Thank you, Mr. Chairman, for your leadership. And I look 
forward to hearing the witnesses' testimony today.
    [The prepared statement of Mr. Tiberi follows:]

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    Chairman NEAL. Thank you, Mr. Tiberi.
    Let me welcome our witnesses today. First we'll hear from 
Tom Barthold, the Chief of Staff at the Joint Committee on 
Taxation.
    Next, we will hear from Len Burman, the Daniel Patrick 
Moynihan Professor of Public Affairs at the Maxwell School at 
Syracuse University.
    Then we will hear from Bob Greenstein--who has arrived--the 
Executive Director of the Committee on Budget and Policy 
Priorities here in Washington.
    Finally, we will hear from Douglas Holtz-Eakin, the 
President of the American Action Forum, in Arlington, Virginia.
    This is an extremely knowledgeable panel that we've 
assembled today, and we are fortunate to have their insights on 
this important topic. Without objection, any other members 
wishing to insert statements as part of the record may do so. 
And all written statements submitted by the witnesses will be 
inserted into the record, as well.
    And with that, I would like to recognize Mr. Barthold for 
his opening statement. And if we could get Mr. Barthold, and 
perhaps we could have Mr. Burman. And then we will go to vote, 
and come back.
    Mr. Barthold.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
                     COMMITTEE ON TAXATION

    Mr. BARTHOLD. Thank you, Mr. Chairman, Mr. Tiberi. My name 
is Thomas Barthold, and I'm the Chief of Staff of the Joint 
Committee on Taxation. And it's a pleasure to present some 
background information on projections of the U.S. tax system, 
and the outlook for deficits, and also to highlight some 
looming issues in the individual income tax.
    I prepared a deck of slides, which are mounted up here. And 
I don't pretend to have the time to go through all of them. The 
staff also prepared a more detailed background pamphlet that 
was made available to you and the general public.
    Just to state where we've been historically, the first 
slide just gives you a picture of federal receipts as a 
percentage of gross domestic product since 1934. I think the 
point that was partly made by Mr. Tiberi is that essentially 
since 1950, receipts as a percentage of GDP have bounced around 
between 16-1/2 and 19-1/2 percent.&
    But that picture of receipts sort of masked an overall 
difference in terms of the evolution of the U.S. Federal 
Revenue System. And the next slide breaks that down into our 
major components, which is the individual income tax, our 
employment taxes, the payroll taxes, corporate income taxes, 
and then the lesser revenue sources of excise taxes and estate 
and gift taxes.
    As you can see, the major change over this period is that 
while the individual income tax remains our largest source of 
federal revenues, over 40 percent annually, for the past 60 
years, the role of employment taxes has grown substantially 
over that period, while the relative importance of corporate 
income taxes has declined. Of course, these are in percentage 
terms; not dollar figures.
    Just to show you where we are today, I have a simple pie 
chart. Individual income tax, we project, will account for 43 
percent of federal revenues in 2010. The social insurance tax 
is 40 percent; corporate income tax 9 percent.
    A point that I hope to have a couple minutes to highlight 
later is the looming changes in the individual income tax that 
face the Committee, because of the expiration of many of the 
provisions, enacted as part of EGTRRA and JGTRRA. That leads to 
a changed outlook for 2011. So, the comparison pie chart 
available to you shows that under baseline projections, without 
any action by the Congress, individual income tax receipts will 
rise to 48 percent of federal revenues, Social insurance taxes 
will commensurately decline.
    Mr. Neal had asked to present some information from both 
our Joint Tax projections and Congressional Budget Office 
projections relating to the growth of revenues and outlays, and 
the deficit.
    This next slide looks at outlays, revenues, and deficits as 
a percentage of gross domestic product under baseline 
projections.
    As you'll see, in part, because the expiring provisions in 
the individual income tax, and because the Congressional Budget 
Office projects that the economy will recover from our recent 
recession, revenues will grow, and our quite high short-run 
deficits will decline. But they will persist at a level of near 
3 percent of GDP, to the year 2020.
    A number of members have asked: Well, what happens if we 
were to extend all the EGTRRA and JGTRRA sunsets, and provide 
AMT relief, as the Congress has been doing annually now for 
just about the past decade?
    This next slide shows the effect of those policies, and 
essentially it would increase the deficit by about 2 percent 
per year, throughout the ten-year period. So, while I said that 
we'd be at roughly 3 percent of GDP in 2020, it would be about 
5 percent of GDP in 2020.
    I should note that the policies that are projected there, 
that it's not any particular choice of ours; it was just simple 
to say, ``Let's look at not letting all these provisions 
expire.'' And the AMT relief is done by indexing the exemption 
amount and the thresholds.
    The next slide shows the same facts, with a focus on the 
deficit, as opposed to outlays and revenues.
    I'd like to talk for a few minutes about the changes that 
are coming in the individual income tax, the expiration of a 
number of the EGTRRA and JGTRRA provisions. The individual 
income tax is defined by its basic standard deduction, its 
personal exemptions, the rate brackets, and then a number of 
other provisions, such as the child credit, the earned income 
tax credit, and the new making-work-pay credit.
    Part of the EGTRRA legislation was to provide marriage 
penalty relief. That was done by effectively having the 
standard deduction for taxpayers married filing jointly be 
double that of singles. The reason this is highlighted in blue 
on my chart is to note the change between 2010 and 2011, when 
that relief would change.
    The other big basic change, of course, is the change in the 
rate structure. I know the arrows look a little bit 
complicated, but what's happening is that for tax payers who 
would be in the 10 percent bracket in 2010, they would now all 
return to the 15 percent bracket. Some taxpayers in the 15 
percent bracket in 2010, will remain in the 15 percent bracket. 
Some married filing jointly, who had received some rate relief 
as part of the doubling of the thresholds in EGTRRA, would go 
to the 28 percent bracket. The 25 percent bracket returns to 
28, et cetera, as detailed.
    That's for ordinary income.
    There's also the special maximum rate amounts for capital 
gain and qualified dividend income.
    Another perhaps important change to note is the child tax 
credit has a maximum value currently of $1,000. In 2011, that 
drops down to $500.
    The significant change in earned income tax parameters, is 
that the Congress had created a category for three or more 
children. That reverts to just the two or more child category.
    I'll skip over a couple of the additional slides, to turn 
to the Alternative Minimum Tax (AMT). The Alternative Minimum 
Tax problem that you have dealt with over the past several 
years, without adjusting exemptions or other policy change, is 
projected to affect over 25 million taxpayers for 2010. If we 
were to take the 2009 alternative minimum tax and index it, 
that number of affected taxpayers would fall to about $4.1 
million.
    In the interest of time, I'll skip to the last couple 
slides, which I think encapsulate the effects of the expiration 
of EGTRRA and JGTRRA by making a hypothetical calculation for a 
married couple with no children, assuming that all their income 
is wage income.
    The brown line will be their 2011 tax liability. The blue 
line is their current law tax liability. For a comparable 
picture, if the couple has two children, the difference is, 
that they can be eligible for a larger earned income tax credit 
for lower income tax payers. And, for most of the taxpayers on 
this income chart, they'd be eligible for the child tax credit.
    In conclusion, the staff has tried to provide the members 
with a lot more detail. And, I'd be happy to explain any of the 
additional detail that the members might like to enquire about.
    Thank you, Mr. Chairman.
    [The prepared statement Mr. Barthold follows:]

                    Testimony By Thomas A. Barthold
               Chief of Staff Joint Committee on Taxation

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    Chairman NEAL. Thank you, Mr. Barthold. We have a series of 
votes on the floor, which are going to take about 20 minutes. 
So what I'd like to do is to recess the Committee until the 
last vote. And we'll be back as promptly as we can.
    Thank you.
    [Recess.]
    Chairman NEAL. Could we ask our witnesses and guests to 
take their seats, please?
    Our next witness will be Len Burman, who is the Daniel 
Patrick Moynihan Professor of Public Affairs at the Maxwell 
School at Syracuse University in the Center for Policy 
Research. And Pat Moynihan was one of my all-time favorite 
Congressional figures.
    Mr. Burman.

 STATEMENT OF LEN BURMAN, DANIEL PATRICK MOYNIHAN PROFESSOR OF 
     PUBLIC AFFAIRS, MAXWELL SCHOOL AT SYRACUSE UNIVERSITY

    Mr. BURMAN. Thank you, Mr. Chairman. It's actually a huge 
honor for me to have a chair in Senator Moynihan's name.
    Chairman Neal, Ranking member Tiberi, and Members of the 
Subcommittee, thank you very much for inviting me to testify.
    I applaud the Subcommittee for taking on the difficult but 
extremely important task of addressing our long-term budget 
challenges before disaster strikes.
    My testimony makes three points. I am only going to 
summarize them in my oral remarks. The first, continuing the 
current course of enormous and growing deficits is not an 
option. Ignoring our budget constraints could produce an 
economic calamity of unprecedented proportions, a wrecked 
economy, confiscatory taxes, and an eviscerated government, a 
nightmare scenario, whatever your political preferences are.
    The budget can't be tamed by spending cuts or tax increases 
alone. And as unpalatable as they may be, you're going to have 
to raise taxes. And not just on the rich.
    The best way to increase tax revenues is through tax 
reform, in particular subjecting the nearly 200 spending 
programs that are run through the Tax Code, to the same 
scrutiny applied to direct spending.
    A colleague read my testimony and said, ``It's really 
depressing.'' So I'm going to try to be more upbeat in my oral 
remarks.
    Anybody who cares about our children and our grandchildren 
wants to avoid catastrophic budget failure. And happily you're 
in a position to do it. After the very partisan and sometimes 
nasty health reform debate, I think the public is clamoring for 
bipartisanship. And deficit reduction is a great bipartisan 
issue.
    Both sides have an enormous stake in avoiding budget 
catastrophe. And neither side can do it alone. Democrats and 
Republicans would reduce the deficit in different ways. But you 
have to recognize the continued stalemate and inertia as the 
worst possible option. And this is a case where bipartisanship 
is essential.
    Neither tax increases nor spending cuts are politically 
popular. But fiscal responsibility is. And I think tax 
increases would be more palatable if paired with a credible 
commitment to control spending.
    So why do I say the tax increases are inevitable? I've got 
a slide, which I hope will appear, showing CBO's summary of the 
demographic trends. Basically, they're two big issues. One is 
demographics, and the other is health care.
    The demographics are basically that the working-age 
population is declining relative to the retirees, so that the 
share that the number of people paying for each recipient of 
benefits--Medicare, Medicaid, and Social Security--is declining 
over time. In 2010 there are 4.7 workers per retiree. By 2028, 
that ratio drops to three.
    If you hold health care cost growth to the rate of GDP--
which isn't what's happened historically--but if you could do 
that, primary spending--this is spending not including interest 
on the debt--primary spending as a share of GDP goes to 20 
percent in 2012--that's after the recession is expected to be 
largely over--and 23 percent in 2030. And continues to creep 
up. That's the blue line in the chart.
    So the point is that primary spending, even under the most 
optimistic of scenarios, is going to far exceed historical tax 
revenues. And spending grows at historical rates, which is 
about 2-1/2 percent faster than GDP, spending on health care, 
then the primary spending as a share of GDP would go to 25 
percent in 2030 and 27 percent in 2040.
    And keep in mind that this assumes this is before even 
accounting for the interest on the debt.
    We have to slow health care cost growth. But it's unlikely 
to grow slower than GDP. The bottom line is that taxes as a 
share of GDP will have to grow, if we want to avoid a 
catastrophic budget failure.
    So the question is, if we have to raise taxes, what's the 
best way to do it? I think Doug's going to talk about the 
problems of raising tax rates, and their effects on economic 
growth.
    Most economists would say that the best way to increase 
revenues would be to broaden the base. That is, to take on tax 
expenditures, all of those programs, those spending programs 
run through the tax system, that undermine the tax base and 
make it harder to raise revenues.
    You know, even if we wanted to raise rates as a way to deal 
with the deficit, the Tax Policy Center recently did a study, 
where they said that if we just raised the top two rates and we 
wanted to get the deficit down to 2 percent of GDP between 2015 
and 2019, the top rate would have to increase to 91 percent. 
And that's before accounting for all the avoidance that would 
produce.
    It's just not going to happen. We're not going to be able 
to solve the problem by raising rates just on the rich. And 
even raising rates across the board to get the deficit down 
would require top rates of over 50 percent.
    And again, that's before accounting for behavioral 
response. And it doesn't account for the fact that spending is 
going to increase dramatically over time.
    Well, the advantages of base-broadening as opposed to 
raising rates is that base broadening could actually improve 
economic efficiency. They reduce the opportunities for tax 
sheltering and avoidance, and they simplify the tax system.
    And there's a big economic cost to tax compliance.
    Now I know that some conservatives object to the notion of 
tax expenditures. They say that it assumes the government owns 
all your money, unless they let you keep it.
    But the point about tax expenditures is that they are 
spending programs, and they're just run through the tax system. 
Some things make sense to run through the tax system. But a lot 
of them don't. And they should get the same kind of scrutiny 
that direct spending programs have.
    So what I propose in the testimony--I'd be happy to 
discuss, if you're interested--is the idea of including tax 
expenditures as part of the regular budget process, that you 
should apply the same kind of scrutiny to low-income housing 
tax credit as you do to housing vouchers.
    And I think you're also going to have to consider other 
sources of revenue. But I figure that would be a subject for 
another day.
    Thank you very much. And I'd be happy to answer your 
questions.
    [The prepared statement of Mr. Burman follows:]

                    Prepared Statement of Len Burman
  Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell 
                                 School
            Syracuse University, Center for Policy Research

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    Chairman NEAL. Thank you Mr. Burman.
    Mr. Greenstein.

                                 

 STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, COMMITTEE 
                ON BUDGET AND POLICY PRIORITIES

    Mr. GREENSTEIN. Thank you very much.
    Our team of budget experts at our Committee, led by three 
former senior CBO officials, has produced budget projections 
that indicate that if current policies remain unchanged, the 
debt will soar to about 300 percent of GDP by 2050.
    To avert that problem and stabilize the debt at its current 
share of the economy would require about a 28 percent increase 
in taxes or a 22 percent reduction in expenditures for every 
federal program in the budget every year for the next 40 years 
between now and 2050.
    The two main sources of rising federal expenditures over 
the long run, are, not surprisingly, rising costs throughout 
the whole U.S. health care system, public and private, and the 
aging of the population.
    Those factors will drive up the costs of Medicare, 
Medicaid, and Social Security. And it is the growth and the 
cost of those three programs alone that accounts for all of the 
increase in non-interest spending as a share of GDP, over the 
next 40 years and as far as the eye can see.
    In fact, total federal spending for all programs other than 
Medicare, Medicaid, and Social Security, including all 
entitlements other than those three, is projected to decline as 
a share of the economy, both in the coming decade and in the 
decades after that. That's not where the problem comes from.
    It also should be noted that the 2001 and 2003 tax cuts are 
implicated here. If policy makers were to let those measures 
expire on schedule at the end of 2010, or to fully pay for 
them, that would shrink the fiscal gap between now and 2050 by 
about two-fifths.
    Another way to look at it is that the cost of making 
permanent the tax cuts for people over $250,000 a year would 
itself cost as much over the next 75 years, or nearly as much 
over the next 75 years, as the entire 75-year Social Security 
shortfall.
    Stated another way, if you think, correctly, that the 
Social Security shortfall is a contributor to the long-term 
fiscal problem, then if one makes the tax cuts for people over 
$250,000 permanent, one essentially doubles that in size.
    So the bottom line is that we really need a balanced 
approach here, that includes a combination of sustained reform 
to the health care system, reductions in federal expenditures, 
and increase in federal revenues.
    To be sure, the single most important step over the long 
term is slowing the growth of health care spending. The new 
legislation makes important first steps. Much more will need to 
be done over time, as we learn more how to do that.
    But even with further major reforms in health care, it is 
likely to prove impossible to hold health care costs to their 
current share of the economy.
    Older people have more health care costs than younger 
people, and the population's aging. And the primary cause of 
increase from year to year in health care costs, is advances in 
medical technology, and the country is not going to say, ``We 
don't want the benefits of medical breakthroughs.''
    So an older society with more medical breakthroughs is 
inevitably going to spend more as a share of GDP on health 
care. And this means that the answer to the question of whether 
we can achieve fiscal sustainability wholly on the spending 
side is, as Len Burman also said, ``No.''
    This leads to the conclusion that higher taxes along with 
reductions in projected spending, both need to be on the table, 
which in turn leads me to the conclusion that unlike the last 
round of major tax reform in 1986, coming tax reform efforts 
cannot be revenue-neutral. They need to make a contribution for 
long-term deficit reduction.
    As Len noted, a key part of this needs to be looking at tax 
expenditures, or what Alan Greenspan, among others, has 
referred to as ``tax entitlements.''
    People often talk of taxes and spending as though they're 
entirely separate parts of the budget. With tax expenditures 
now over a trillion dollars a year, roughly equal in cost to 
Medicare and Social Security combined, the distinction between 
taxes and spending becomes increasingly suspect. And as Len has 
noted, there's a lot of inefficiency in that part of the 
budget.
    On the corporate side, we often hear it said correctly that 
the top marginal U.S. corporate income tax rate is above that 
of our competitors. But we don't hear as often, but it's right 
there in the 2007 Bush Treasury Department Study of Corporate 
Income Tax, is that the effective corporate tax rate in the 
United States is actually lower than the average for our 
competitors. We have a high rate and very narrow corporate tax 
base, which means that there should be room to reduce corporate 
preferences enough, both to reduce the top corporate rate, and 
to get a contribution to deficit reduction out of that reform.
    Final point I'll make is many analysts and also the 
President have set an important goal of getting the deficit 
down to the point where the debt doesn't continue to rise as a 
share of the economy. Which means we've got to get the deficit 
down after the economy recovers to no more than 3 percent of 
GDP.
    That will take a variety of actions. And the Congress faces 
key tests in the next several months that will have a heavy 
bearing on whether or not we can really get to 3 percent of GDP 
in the years ahead. Specifically it is critical to allow the 
tax cuts for high-income households to expire on schedule, and 
to hold the line on the 2009 estate tax parameters.
    Extending the high income tax cuts, rather than allowing 
them to expire, would add $826 billion to the debt over the 
coming decade and more in decades after that. Weakening the 
estate tax would add tens of billions of dollars on top of 
that.
    Now returning to the top marginal rates that we had in the 
Clinton years, when high-income people thrived, the economy 
boomed, small businesses created jobs at a faster rate than 
they did in this current decade, seems like an imminently 
sensible first step. And the bottom line, once again, is that 
the long-term fiscal challenge is so serious that everything 
needs to be on the table, both program expenditures and 
revenues.
    [The prepared statement of Mr. Greenstein follows:]

                Prepared Statement of Robert Greenstein
       Executive Director Center on Budget and Policy Priorities

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    Chairman NEAL. Thank you, Mr. Greenstein.
    Mr. Holtz-Eakin.
                                 

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
                             FORUM

    Mr. HOLTZ-EAKIN. Chairman Neal, Ranking Member Tiberi, and 
Members of the Committee, thank you for the chance to appear 
today. I too have a written statement that I've submitted for 
the record, and look forward to the conversation.
    I will make only a few points, much of which you've heard 
many times before, and even on this panel.
    The first is that the fiscal outlook for the United States 
is, indeed, very bleak.
    For quite some time, successive issues of the CBO's long-
term budget outlook have painted the picture fairly clearly. 
Spending on Social Security will rise from about 4-1/2 percent 
of GDP now to about 7 percent due to the retirement of the baby 
boom. Spending on Medicare and Medicaid will rise similarly 
from 4-1/2 percent of GDP to under optimistic projections, 12 
percent of GDP, under pessimistic even higher.
    That means those three programs combined are about 20 
percent of GDP, which is the traditional size of the Federal 
Government.
    Layer on everything else that the government is expected to 
do, and you're looking at an increase somewhere in the vicinity 
of 30 percent.
    It is not sensible to believe that you can grow your way 
out of such a problem. It is not sensible to believe that you 
can tax your way out of such a problem. Raising 30 percent of 
GDP in taxes on economic performance and leave behind a economy 
for our children that is badly impaired.
    So the major innovation, if that's the right word, in 
recent times, has been that this bleak fiscal picture, which 
used to take two to three decades to evolve, has been 
compressed into a single decade.
    If you look at the CBO's analysis of the President's budget 
proposals, they show deficits that never fall below $700 
billion over the next decade. The deficit in 2020 would be $1.2 
trillion, even after the economy is presumed to have fully 
recovered.
    And this is a deficit picture that is driven by spending. 
In that budget projection, the revenues are 19.6 percent of 
GDP, well above the traditional levels in the United States. 
Spending is 25 percent of GDP, well above normal levels. 
Eliminating spending down to 20 percent of GDP would bring that 
budget into balance ten years out.
    So in terms of the numbers, you can see quite clearly that 
the spending explosion is the source of the coming budget 
troubles.
    I think it is very important to address this issue and 
address it quickly.
    Number one, in the good news scenario, if we run deficits 
of this type, we will impair the ability to educate workers for 
the next generation; we will impair the ability to equip them 
with new technologies and the latest in the ability to raise 
their productivity. And we will condemn that generation to 
slower economic growth, slower rising wages, than they deserve. 
And we'll leave behind a tremendous debt on top of that.
    It's fundamentally unfair to them.
    In the bad-news version of this--the one that Len Burman is 
studying so carefully--we have a catastrophe. And the financial 
crisis so devastates this economy that it makes the past 
several years look much less threatening than they felt to live 
through.
    So I think this is imperative to get going on this, because 
it cannot just be a tax solution, and because these spending 
programs are hard to change. You need to start right now to get 
this problem under control.
    Even if you are successful in doing all of that, I still 
think it's imperative for the members of this Committee in 
particular to look hard at the U.S. Tax Code, which simply 
requires an enormous amount of work at this point in time.
    In my written testimony, I laid out my ideas for what I 
think the Tax Code is. I'm a big fan of consumption-based 
taxation.
    I'll simply point out at the moment we have these very 
severe problems. The U.S. individual income tax has evolved 
over time into essentially a surtax on high-income Americans. 
It is no longer a broad-based revenue raiser. Almost a majority 
of Americans are excluded from the income tax at this point. 
And that income tax is poorly suited to the economic lives of 
the people who tax us. We spend an enormous amount of time 
trying to locate capital income somewhere on the globe, 
somewhere risk adjust it, get it at the right point in time and 
tax it. And we fail again and again and again.
    The financial markets outwit us. I think we should develop 
a tax system that recognizes that reality, and eliminates from 
tax the return on capital income, but does it in a sensible 
fashion. And I outlined that in my testimony.
    The second thing is that our corporation income tax really 
is placing us at a competitive disadvantage. Not only is the 
rate too high. We are the last country on the globe attempting 
to tax worldwide corporate income. We are literally swimming 
against the tide and losing jobs every day, as a result. It 
needs to be addressed and addressed quickly.
    And lastly, for those individuals who are not affluent 
Americans, who are simply trying to get ahead, the kinds of 
refundable tax credits and other disguised spending programs in 
the Tax Code, as they are phased out, they are creating high 
effective marginal tax rates, tax rates that are higher on our 
modest Americans than they are on the top end.
    And it's been increasingly difficult for people to get 
ahead. And I think we ought to look carefully at the incentive 
effects on lower-income Americans of the net effect of the 
income tax plus the phase-outs of refundable credits. It's a 
real impediment to their ability to get ahead.
    I thank you for the chance to be here today, and I look 
forward to your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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    Chairman NEAL. Thank you very much, Mr. Holtz-Eakin.
    Mr. Barthold, we've heard a lot of testimony today about 
greater scrutiny for tax expenditures. And obviously Joint Tax 
would be the first place that we would turn for assistance on 
this regard.
    Can you tell me what the Committee currently at Joint Tax 
may be doing in this regard?
    Mr. BARTHOLD. Yes, Mr. Neal. One standard thing that we do 
annually is prepare for the Budget Committees and for the Ways 
and Means Committee and the Finance Committee a list of tax 
expenditure provisions and our estimates of tax expenditures. I 
should note, the tax expenditure estimates are not the same as 
revenue estimates--but it shows more the scale of activity that 
is encompassed by the tax expenditure.
    We also stand ready to work with any member who wants to 
investigate any particular provision. And we are also doing 
some work on our own in light of the House of Representatives 
directive in the extender legislation that the House passed 
that would have directed us by statute to undertake a formal 
study.
    We have begun to try and put together a study and make a 
plan to study some of the provisions that were identified in 
that legislation, notwithstanding that that legislation has not 
become law, but because the members were interested.
    Chairman NEAL. And Professor Burman, one of your charts 
references the post-war average of tax revenues at 18.3 percent 
of GDP. Mr. Holtz-Eakin has told us that attempts to keep taxes 
at this ratio will generate, as he says, ``an unmanageable 
federal debt spiral.''
    However, other conservatives are warning that we must be 
mindful of this ratio. How does this compare to other similar 
economies, and how should we manage it, in your judgment, going 
forward?
    Mr. BURMAN. Our taxes are still low, relative to virtually 
all the other OECD countries. I think Japan has a lower tax 
burden than we do. The highest overall tax burden, the last 
time OECD compiled them, was 48 percent for Denmark.
    Now our total tax burden is higher than 18 or in the 20 
percent it was before the recession; because we also collect a 
fair amount of taxes at the state level as well. But overall, 
the total taxes are about 30, 35 percent of GDP.
    So there is some scope before we would be competing for the 
top of the tax competition.
    But I should also point out that, you know, we're not 
Denmark. I don't think it would be possible for us to raise 
taxes at 48 percent of GDP. But our taxes are low, by 
comparison.
    Chairman NEAL. All right.
    And Mr. Holtz-Eakin, am I correct that it was during your 
tenure at CBO that you studied the impact on that economy of an 
across-the-board tax cut to determine whether in fact this 
popular tax cut would ``pay for itself?'' Can you tell us today 
whether you agree with this assertion that tax cuts pay for 
themselves? And you know I wasn't letting you out of the room 
without raising that question, would you?
    [Laughter.]
    Mr. HOLTZ-EAKIN. I'm shocked. No. I've never believed that 
tax cuts pay for themselves, as a generic statement. That's not 
a sensible way to think about it.
    You need to decide what you're going to spend in a 
disciplined fashion, and taxes exist to finance those 
expenditures.
    Chairman NEAL. I appreciate that answer, largely because, 
you know, we went back and forth on this at Budget some years 
ago. And your position has been consistent on it. And I'm 
indeed appreciative of that.
    Mr. Greenstein, I was a little bit confused by something in 
your testimony, where you compare the long-term cost of 
extending the 2001 and 2003 tax cuts for the wealthiest 
taxpayers with the cost to cover the entire Social Security 
shortfall over 75 years.
    Would you break down that comparison?
    Mr. GREENSTEIN. Yes. This comparison sometimes surprises 
people, because they're used to estimates for tax cuts just for 
the first ten years, and we're used to Social Security 
estimates over 75 years. Well, you obviously can't compare a 
ten-year-cost of one item to a 75-year-cost of another item.
    The estimates from the Treasury that are in the President's 
budget show that the cost were we to continue the tax cuts for 
people over $250,000 a year that the President has proposed be 
allowed to expire. If one were to continue those, the Treasury 
estimate is that the cost is about 1/2 of 1 percent of GDP.
    Most revenue estimates, when CBO does its long-term 
estimates, generally the estimates are that once you have a set 
of policies in place in the Tax Code, that the amount of 
revenue that they bring in tends to stay constant over time as 
a share of GDP, unless you change them.
    So following the standard methods, the estimate here would 
be that if these tax cuts when fully in effect over the coming 
decade, if they stayed in effect, were 1/2 of a percent of GDP, 
their cost over 75 years would be expected to be about half of 
a percent of GDP.
    Now the CBO estimate of the size of the 75-year Social 
Security surplus is also a half a percent of GDP. The Social 
Security actuary's estimate, which we tend to rely on a little 
bit more, is 7/10 of a percent of GDP.
    So we're somewhere in the half to 7/10 of a percent of GDP 
cost for the imbalance in Social Security over 75 years, and 
were we to make the tax cuts permanent for people over 
$250,000, that's half a percentage point of GDP.
    So the two are roughly the same in their cost over time. As 
long as you compare apples to apples, in other words, the same 
periods of time, the costs are comparable.
    Chairman NEAL. Thank you.
    And Mr. Barthold, I know you have a chart showing how the 
extension of the 2001 and 2003 tax cuts will impact those 
families hit by AMT. Can you tell us how many families will be 
on the AMT by 2020 if we do not extend the AMT patch, and how 
many filers is that to the total number of filers?
    Mr. BARTHOLD. Yes, Mr. Chairman. In 2020, our current 
projections for individual tax filers is that there'll be 
approximately 146.5 million filers in 2020. And we estimate 
that without change, that the AMT would affect approximately 50 
million or slightly over a third of the universe of individual 
tax filers in 2020.
    Chairman NEAL. Mm-hmm. Thank you, Mr. Barthold.
    Now I'd like to recognize Mr. Tiberi for the purpose of 
inquiry.
    Mr. TIBERI. Thank you, Mr. Chairman.
    I'm going to lay this out and then ask a question of the 
three of you. We've heard the President say on many occasions 
that we here must budget our money--your money--the same way 
that the American people do their budgets. And I think 
everybody would agree with that statement, a simple concept.
    I've said before in this Committee and the full Committee 
that my dad and mom came to America, I am the son of 
immigrants. My dad some years made less than other years, some 
years he made more. Did not believe in credit. Never spent more 
than he made. Simple belief. And my mother and father do well 
today on a fixed income, because of that belief.
    Then we look at this document here, the budget. And some 
numbers are interesting.
    When you look back in this document, back in 2007, the 
American people sent us $2.5 trillion to spend. We spent $2.7 
trillion. We spent too much.
    The deficit was about $160 billion.
    Then you go to two years later. Economy goes south. We 
spend $3.5 trillion. The American people sent us only $2.1 
trillion. Obviously, we spent too much.
    Moving forward in this document, there are assumed tax 
increases between now and then to 2015, assuming that we catch 
up with those outlays, receipts go up to $3.6 trillion. My dad 
would say, ``All right, you're starting to budget like me.'' 
No. Actually not. Outlays are $4.3 trillion. We're again 
spending too much.
    You go to 2020, and we even get more revenue, $4.7 
trillion; but we're spending $5.7 trillion. We're continuing to 
spend too much.
    Now, everyone's fond of saying it will take both tax 
increases and spending cuts. Well, as long as I've been 
around--and I'd like to ask the former CBO Director first--have 
we ever actually cut spending first?
    Mr. HOLTZ-EAKIN. No. We've very rarely seen spending 
reductions in the United States federal budget. It's continuous 
growth with one or two exceptions in the 1980s.
    Mr. TIBERI. And my predecessor was Budget Chairman, John 
Kasich, and he used to say, ``Cut spending first.'' And he 
acknowledged after that budget deal that they slowed the rate 
of growth, they didn't actually cut spending. And some of that 
slowing of the rate of growth was in out-years. And some of 
that slowing of the rate of growth actually did not occur in 
the out-years, because Congress overrode it.
    Is that true, Mr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. Sure. I mean, this is a standard pattern. 
It's easy to impose out-year restraint. But when the out-years 
arrive, often they get overridden. The most dramatic example is 
the sustainable growth rate mechanism for Medicare payments to 
doctors, which was out-year savings of large proportions, but 
which gets overridden every year.
    Mr. TIBERI. The question is to Mr. Greenstein. Looking at 
these numbers, how do I tell my mom and dad that we are serious 
about controlling spending, and we want to budget like them, 
when they spend less when they make less. We spend more when we 
take in less, every single year?
    Mr. GREENSTEIN. Well, I think one really does need--the 
Federal Government actually is not the same as a family. 
Because it has a larger economic role in trying to prevent 
recessions from becoming depressions.
    Mr. TIBERI. So when the President says we should budget 
like a family budget, you disagree with that?
    Mr. GREENSTEIN. It's oversimplified.
    Mr. TIBERI. Okay.
    Mr. GREENSTEIN. But let me even add, most families do not 
limit year by year, and most businesses do not limit year by 
year their spending to their intake. If a business wants to 
expand, it usually doesn't save the money first. It borrows. 
That's what business loans are.
    When a family buys a home or sends a kid to college, 
normally it takes out a mortgage or has an education loan. Now 
in those cases, if it's a good investment for the business, 
and, you know, you've made a good deal on the home, certainly 
getting a college education, these are good investments.
    Not every investment a family makes and not every 
expenditure a government makes is a good investment. I'm not 
saying that.
    I'm just saying that it does make sense when necessary for 
families and firms, to borrow. It can make sense for the 
government in a decent economic time to have a modest amount of 
borrowing.
    But the exception is recessions. In recessions, since 
families can't spend more, and states have to balance their 
budgets, if the Federal Government had to balance its budget 
during a recession, it would actually make recessions much more 
likely to turn into depressions.
    The current deficit that we are running this fiscal year is 
not a problem, it's not bad economics. Were we to run that same 
level of deficit in a non-recession year, that would be 
terrible economics.
    So we do have to distinguish, based on the economic cycle.
    Mr. TIBERI. Thank you.
    Mr. BURMAN. Yeah. Thank you. I'd just like to make a brief 
comment, which is that the right level of spending is really 
for Congress to determine.
    I think a big problem is that for a long time, there's been 
a complete disconnect between taxes and spending, so that 
basically spending seems like it's free. And people's taxes 
don't go up, you know. Spending is certainly not a recent 
phenomena.
    President Bush said the problem wasn't taxes, but it was 
spending. But he also enacted the largest new entitlement 
program since Medicare. And in the Clinton Administration, 
there was a tax increase that was paired with credible 
reductions in the growth of spending. And I think that was a 
significant factor in eliminating deficits at the end of the 
1990s.
    So I think during normal times, setting things up so you're 
actually raising enough revenues to pay for government would 
really focus the public's mind on whether the government is 
worth what they're paying in taxes.
    Mr. TIBERI. Thank you.
    Chairman NEAL. Thank you, Mr. Tiberi.
    Now I'd like to recognize the gentleman from California, 
Mr. Thompson, to inquire.
    Mr. THOMPSON. Thank you, Mr. Chairman. Thanks for holding 
the hearing, and thanks to all of you for being here as 
witnesses today.
    I'd like to start with Mr. Greenstein. And by itself, I 
don't think it's a silver bullet; but I'd like to hear your 
understanding of how important statutory Pay-Go will help in 
this problem that we're facing.
    As you know, it was part of how we did business in the 
1990s, allowed to expire, and now back on the books. Do you 
have any insight on that?
    Mr. GREENSTEIN. I'm a strong supporter of Pay-Go. But I 
think it's a necessary but not sufficient condition. Pay-Go----
    Mr. THOMPSON. That was ``not a silver bullet by itself'' 
part?
    Mr. GREENSTEIN. Right.
    Pay-Go can be very useful in making it much more difficult 
for policy makers to take actions that dig the hole deeper. But 
Pay-Go by itself doesn't address the hole we're already facing.
    That's basically the two sides of it.
    There's a broader lesson there, I think, which is sometimes 
we look for a silver bullet, a Deus ex machine, as some kind of 
process change, that could somehow get policy makers to make 
decisions they otherwise wouldn't make.
    That was the theory behind Gramm-Rudman-Hollings. Every 
effort on the books to force policy makers to take tough 
actions they don't otherwise want to take has failed. Process 
there is not a substitute for actually having the will, 
hopefully on a bipartisan basis, to act. But where a process 
like Pay-Go can be effective, is in restraining actions that 
would make things worse.
    Mr. THOMPSON. Okay. I was at a briefing this morning on the 
whole fiscal problem issue. And I have a couple of charts here. 
And according to these charts, it shows that if we started to 
try and close this fiscal gap in 2020, it would require--if you 
look at just the spending cuts--a 44 percent reduction in 
spending; 2030 a 48 percent reduction in spending; and 2040 a 
57 percent reduction in our spending.
    And then the flip side of that is if you tried to do it 
with just tax increases, it would be a 52 percent tax increase 
in 2020, 64 in 2030, and an 80 percent tax increase in 2040.
    And I see a couple of you nodding your head. Do you all 
agree with that assumption?
    Mr. HOLTZ-EAKIN. Our specific figures are different. But 
the trend is the same.
    Mr. THOMPSON. So it's about----
    Mr. HOLTZ-EAKIN. And the one thing you're drawing from that 
is the sooner you get going, the better.
    Mr. THOMPSON. It's pretty critical that we start now.
    Mr. GREENSTEIN. Yes.
    Mr. THOMPSON. And Mr. Greenstein called it a hole, a fiscal 
hole that we're in. Does that hole shallow up as TARP is paid 
back, the two wars end, the recession ends, and the Bush tax 
policy continues into effect next year? And can you quantify 
how shallow it gets?
    Mr. GREENSTEIN. Our projections assume all those things 
occur, and we assume that Iraq and Afghanistan phased down, 
that TARP winds down, I think our projections assumed all the 
Bush tax cuts were continued. So it would be a little less bad 
if those above $250----
    Mr. THOMPSON. No, his tax policy was they go back, they 
revert after whatever the year is.
    Mr. GREENSTEIN. Yeah, our projection assumed they 
continued. And that AMT relief continued and the SGR relief 
continued, and the like. And when you make all those 
assumptions, you get debt-to-GDP ratio as somewhere around 300 
percent or more by 2050, deficits of 20 percent or higher of 
GDP by 2050. And so forth.
    Mr. THOMPSON. Okay. Mr. Holtz-Eakin, you had mentioned that 
a lot of this problem is driven by spending. And do you include 
tax expenditures as part of that spending problem?
    Mr. HOLTZ-EAKIN. I certainly concur that lots of these 
refundable credits are really just outlays and disguised 
spending in the Tax Code.
    I think it would be a very desirable thing for the Congress 
to change its budgetary treatment of refundable tax credits, so 
that every dollar was treated as----
    Mr. THOMPSON. Well, not just refundable tax credits, but 
just tax expenditures in general.
    Mr. HOLTZ-EAKIN. And there are tax expenditures as well. 
You know, the most prominent are tax expenditures toward 
housing and health insurance, which are big consumption items 
for the American public.
    And as I laid out in my written testimony, I think moving 
toward a consumption-based system with a broader base and lower 
rates would be an enormous step forward for this country.
    We're going to need every bit of growth that this economy 
generate, to even come close to meeting our promise of leaving 
the next generation a standard of living that's comparable to 
the one we inherited.
    Mr. THOMPSON. Thank you.
    Chairman NEAL. The Chair would recognize the gentleman from 
Oregon, Mr. Blumenauer, to inquire.
    Mr. BLUMENAUER. Thank you Mr. Chairman. And we always say 
that we thank the Chair for this important hearing. I mean, 
that's almost a reflex.
    But really, I think this hearing, I would love to force 
every Member of Congress to just take a few minutes, look at 
this outstanding testimony. There are some areas of difference 
in emphasis. But I think the main thrust is something that we 
ignore at our peril.
    And I am hopeful that there is some way that we can work to 
help identify the scale of the problem, because there appears 
to be almost no disagreement. A minor adjustment here or there. 
But given the route that we're on, it's rounding error.
    The clarity about the need to have a combined program of 
adjustment to the way that government operates, level of 
service--I would put in operations as well in that--and revenue 
increases, that you just simply can't go one way or another, I 
think you make a very compelling case.
    Actually what you are saying is scary to the politician, 
because it's very easy for some to embrace the notion that it 
can all be adjusted through draconian spending cuts, which will 
never happen. But they feel better doing it, and it excites 
some people to hear that.
    We had a bunch of people here on Capitol Hill recently, who 
were, you know, battling between small government and no 
government. But that's not where the American people are.
    The flip side is this notion that somehow this is going to 
be accomplished merely by taxing one percent of the population 
or two percent of the population, or five percent of the 
population is likewise a fantasy.
    And the way that you described both that it has to broaden 
and that it has to be balanced, I think is I find it 
compelling. I agree, and I just wish there was some way that 
this would be sort of in everybody on the plane when they fly 
home, that they'd have to look at for--well, for some of you, 
that's not very long, but for--yeah, okay (laughing). Well, 
you're a quick reader, Richie.
    And the final piece that just is so compelling is that 
we've got to do this in the context of reform. And I personally 
am intrigued with looking at some variation of consumption, 
value added. I mean, that's another thing that distinguishes us 
from all these other countries.
    They have a system that is a little more efficient. It's 
broader-based. It's not subject to the tax in political 
engineering that we have in this country, it appears to me.
    But there's one area that I would like to just inquire a 
little bit. It hasn't been mentioned. And I see it as a way, 
perhaps of getting into them. And part of it is, I think any 
four members of this Committee locked in a room for 30 minutes 
would come up with three scenarios of what we are going to do 
some time to Social Security over the next ten years.
    It's just a question of whether we do it now or later. I 
mean, there's not that much adjustment. We're going to get 
there. And I hope that we don't abandon the ability of our 
using it as a path to the future to have a rational 
conversation about the balance between revenue and spending.
    But I am also intrigued by the utilization of user fees to 
be able to finance a huge deficit that we've got now with our 
physical infrastructure. Transportation, water, superfund. I 
mean, there are opportunities to have user fees that are 
related to beneficial use; they're related to ability to pay. 
They actually have broad support from the business community 
and organized labor and local government and academics.
    Would any of you care to speculate about the role that that 
might have in balancing the scale and providing critical 
services?
    Mr. HOLTZ-EAKIN. I'd like to say something about both of 
those issues, actually.
    On the infrastructure, I commend to you the report of a 
bipartisan private-sector commission that I served on, the 
National Transportation Policy Project.
    Mr. THOMPSON. Yep.
    Mr. HOLTZ-EAKIN. It weighs out very clearly the needs we 
have for quality infrastructure, their importance to economic 
growth; lays out how important it is for members to define the 
federal role. What is the genuinely federal role in 
infrastructure and serve that role well?
    Using user fees, so we get efficient use of the 
infrastructure and a funding mechanism for maintenance and 
repair.
    So I think that's a very important thing to do. And to be 
done effectively, the kinds of programs we have at the federal 
level for funding infrastructure raise the money poorly, spend 
it worse. And we have to do a lot better.
    On Social Security, it is imperative to get going. And this 
is why. I'm 52 years old, I'm the trailing edge of the baby 
boom generation. The tradition in Social Security has been to 
exclude those in retirement that's appropriate and those near 
retirement, who have been making plans. And the industry 
standard has been anyone 55 or older who's not going to be 
subject to a reform.
    That means you have three years to get Doug Holtz-Eakin. 
And if you don't get Doug Holtz-Eakin, you've grandfather the 
baby boom. And if you've grandfather the baby boom, you've 
grandfather the problem.
    Get to work.
    Mr. GREENSTEIN. Could I add two quick points to that?
    I think the user fees are a good idea and are a welcome 
part. One shouldn't overstate how much of the big long-term 
problem user fees could close. They could be a significant 
contributor, but it would be modest in the scale of the overall 
budget hole.
    The other point relates to Social Security and to Mr. 
Thompson's question about needing to get going sooner rather 
than later. We do need to recognize that while we need to close 
the Social Security gap and while the most important thing we 
need to do is to slow the rate of growth of health care costs, 
we're not going to get big savings in those areas over the next 
ten years.
    If we acted tomorrow on Social Security, we would phase in 
any benefit changes over a long period of time. The 1983 
Greenspan Commission started to raise the retirement age in 
2000. The 1983 increase in the retirement age isn't fully in 
place until 2022.
    And look, there's nobody calling for repealing it. That was 
part of the magic of getting public acceptance for it. And in 
the health care area, we don't know enough yet about all the 
things we'll ultimately need to do.
    So in the long run, health care needs to be the biggest 
contributor. But over the next ten years, if you're going to 
get the deficit down to 3 percent of GDP, frankly revenues will 
probably have to be the majority of that, or you're not going 
to get there.
    Over the longer term, the Social Security savings will get 
larger and phase in, and the health care savings need to get 
much larger. But that will take a few decades.
    Mr. BLUMENAUER. To the chairman's credit, we have had 
hearings before this Subcommittee, of the two national 
commissions. And I commend you for your work, and it's very 
helpful.
    I guess, Mr. Chairman, if I could just close in 20 seconds?
    Chairman NEAL. Okay.
    Mr. BLUMENAUER. I don't see the infrastructure user fees as 
making a huge difference. I see it, though, being first of all, 
because of our inequities in transportation funding and the 
deficit, we're not subsidizing it with general fund, where we 
never did before. And it's going to get worse, if we don't do 
something.
    But I see it as a way to sort of break the mind set to get 
started along some of these readjustments. And maybe if we 
prove to ourselves that we can do this with popular support, we 
might be able to move forward.
    Thank you. Thank you, Mr. Chairman.
    Chairman NEAL. Thank you, Mr. Blumenauer. The Chair would 
recognize Mr. Yarmuth, the gentleman from Kentucky, to inquire.
    Mr. YARMUTH. Thank you, Mr. Chairman. And I'd like to 
associate myself with the remarks of Mr. Blumenauer virtually 
in their entirety.
    I have one kind of supposition on the issue of family 
conduct versus the Federal Government's conduct. And I'll throw 
it out to see if anyone has a different perspective. It seems 
to me that when you're in a family setting, you have much 
greater control over the influences on your personal situation 
than the federal budget does and the Federal Government does.
    You can insure against unforeseeable circumstances, you can 
insure against storms or fires. You can quickly cut your 
expenditures, you have some control of how much money you can 
earn, you can take a second job.
    The government can't necessarily control for a lot of 
circumstances that affect their expenditures: wars, natural 
disasters, recessions, those types of things.
    So I'm not sure it really is important, but it's more of a 
rhetorical comment than something that's useful in deciding 
what we do with this very serious real problem.
    Is that a fair assessment? Or can somebody--yes, Mr. Holtz-
Eakin?
    Mr. HOLTZ-EAKIN. I think the important thing to recognize 
is that whether you believe it should add up every year, or 
whether you believe it should add up on average, which is I 
think what Bob would say--you can let the government run 
deficits at certain points in time--this country's federal 
budget doesn't add up at all, over any horizon.
    And in the process, we are borrowing that money largely 
from those overseas, who do not share our values. And we are 
giving up a control that we should not cede, and are creating a 
danger for ourselves in the process.
    That's the key issue.
    Mr. BURMAN. States that need to balance their budgets 
actually do have rainy day funds that are supposed to be there 
for when, say there's a recession and there's a big reduction 
in tax revenues. They don't manage them very well.
    But there's like this temptation to spend the money in the 
fund seems to be almost irresistible. But it actually would 
make sense to budget certainly for emergencies, because they 
happen. There's bad weather, there's other things.
    And certainly it would make sense to budget for the 
commitments, and actually set aside savings for the commitments 
that we know we're going to have to meet down the road. But 
actually even if we could just balance the budget on average 
over the cycle, that would be a huge improvement over what 
we're doing now.
    Mr. GREENSTEIN. I'm going to now disagree a little bit with 
each of my two panelists on the answers they gave you.
    There's a recent article by Greg McCue, who was a 
conservative economist at Harvard, who was a chair of the 
Council of Economist Advisors for President George W. Bush. And 
McCue said, it is not necessary to balance the budget; but if 
you run deficits, they have to be modest enough that the debt 
doesn't grow faster than the economy.
    So depending on exactly where you stabilize the debt, you 
can run deficits, on average, of about 2 percent to 3 percent 
of GDP.
    Our problem is not that our long-term fiscal path doesn't 
reach budget balance. Our problem is that under our long-term 
fiscal path, even after this recession is over, deficits never 
get below 4 percent of GDP, and then they shoot back up.
    If we were really able to get them down to 3 percent and 
hold them there, then we would stabilize the debt at its 
current share of the economy, and we wouldn't have a huge 
problem.
    The only addendum to what Len was saying is actually our 
Center campaigns for states to do bigger, better-managed rainy 
day funds. States actually went into this downturn with rainy 
day funds that on average exceeded ten percent of their 
operating budgets, the biggest in recent record.
    But state revenues have fallen so dramatically in this 
downturn, that they wiped out rainy day funds that would have 
been adequate for a recession of the 2001 variety, but not 
adequate for the current one.
    Mr. YARMUTH. Right. I want to ask a question quickly before 
my time's up. One of the things we hear constantly, whether it 
was in the context of health care debate, or whenever we're 
talking about increasing marginal tax rates or whatever, is the 
impact on small business owners and the impact on 
entrepreneurial initiative, and so forth.
    Is there any reliable data? I was a small business person. 
I have two brothers who run businesses. My father was a very 
successful business person. And not one of them ever did 
anything because of marginal tax rates.
    So my question is, is there any reliable data out there, or 
research out there, that would establish one perspective or 
another on the impact on business behavior or business people's 
behavior, related to tax rates?
    Mr. HOLTZ-EAKIN. Let me give you a self-promotional answer, 
which is I've written a number of articles with a variety of 
co-authors: Harvey Rosen, Bob Carroll, and others, which 
attempt to look at the influence of taxes, health care, and 
other policies on the start-up, the expansion, the survival of 
small and entrepreneurial businesses. And we find substantial 
impacts of marginal tax rates on all of the decisions except 
the decision to start up.
    So how fast you grow, how many people you hire, how much 
investment you make, how long you survive appear to be heavily 
influenced by those kinds of things.
    The difficulty with any such research is, we don't get data 
from the IRS, with labels that say ``Entrepreneur Not.''
    Mr. YARMUTH. Mm-hmm.
    Mr. HOLTZ-EAKIN. We have to sort of make some rough justice 
calculations on who we want to call that. But I think there's a 
very good case to be made that we should be respectful of this 
traditional source of advantage that the U.S. has in devising 
all of our policies, tax and otherwise.
    Mr. Burman. And most small businesses are actually fairly 
lightly taxed. Most of them have fairly modest incomes. And 
actually they've gotten tax cuts over the last ten years. Most 
of them were not subject to the estate tax either.
    And there is some evidence that suggest that other things 
the Federal Government has much more of an impact on small 
businesses than taxes. Like, for example, procurement rules for 
the Pentagon and regulations.
    And actually the recently passed health insurance reform I 
think could have a huge effect on small business, primarily by 
actually making health insurance a lot less expensive than it 
has been before, and allowing them to compete in terms of 
hiring workers with large firms, that have always had a huge 
advantage in terms of buying insurance.
    Mr. Greenstein. And I'll just add, I haven't looked at this 
in about a year or so. But the last time we looked, something 
like seven times as many small business proprietors got the 
earned income tax credit, as paid the top income tax rate?
    Most small business proprietors don't make half a million 
or a million a year.
    Thank you.
    Chairman NEAL. Thank you, gentlemen.
    The Chair will recognize Mr. Heller, the gentleman from 
Nevada, to inquire.
    Mr. HELLER. Thank you, Mr. Chairman. And thanks for putting 
this hearing together. And I want to thank the witnesses for 
being here also. I appreciate you taking time out of your busy 
schedule to spend some time with us.
    I want to talk about some tax cuts that frankly do pay for 
themselves. And I want to talk about the capital gains rate, 
and use some examples.
    And going back to 2003, we had a tax rate which was lowered 
from 20 percent to 15 percent in our capital gains. The year 
before we had $50 billion in revenue. The year that the cut was 
actually put into place we increased our capital gains revenues 
by $2 billion, the next year by $25 billion, and then another 
$25 billion in 2005.
    The same occurred back in 1997. We had a tax rate lowered 
from 28 percent to 20 percent. That was in 1997. In 1996, our 
revenue was $66 billion. After the tax cut it was $80 billion. 
Went up to $89 billion the next year, and $111 billion the year 
after that.
    So there are some tax cuts that do pay for themselves. I 
guess my question is, do you--I guess, Mr. Holtz-Eakin, what 
would you believe would be the impact of zeroing out the 
capital gains tax?
    Mr. HOLTZ-EAKIN. I'm all in favor of that. Indeed, in my 
written testimony, I favor a zero tax rate on all return to 
capital. Dividends, interest, capital gains. It is 
counterproductive to attempt to tax them in the modern global 
financial network we live in.
    So I believe there is a much better collection system that 
can meet the standards of fairness and progressiveness that 
everyone desires, but meet our standards for economic growth. 
And I'd be all for that.
    The issue about the budget, it's not that you can't find a 
couple of years where your cut rates and revenues go up 
thereafter. I would never dispute that.
    I think that way of framing the problem makes two mistakes.
    The first is, you want to set in place a Tax Code, which is 
stable for the long term, and so it's sort of the long-term 
revenue generation that I care about.
    And number two, that makes it sound like taxes are somehow 
about balancing the budget. I want a tax policy that supports 
economic growth, and interferes as little as possible with the 
private sector, while paying the nation's bills.
    I mean, those should be the standards by which we conduct 
these things.
    Mr. HELLER. Are you familiar--and my colleague, Mr. Linder, 
brought this to our attention--the Howser Law talks about the 
federal tax revenue and the marginal tax rates between 1950 and 
2007. And it talks about the top individual tax brackets as 
early as 1950, which was nearly 90 percent, and brings it all 
the way down into back in the 1970's, where it was about 70 
percent. Of course the Reagan tax cuts came in to about where 
we are today, at nearly 40 percent.
    And yet, the revenues as a percentage of the GDP, has 
stayed constant. Can you explain that?
    Mr. HOLTZ-EAKIN. I won't attempt a complete explanation of 
Mr. Howser's finding. But I'll make the following observation. 
Which is, a lot of people have noted that we've raised the same 
amount of revenue on average for the federal budget.
    But the way we raise it matters. We had very high marginal 
tax rates in the 1970s, we had terrible economic performance. 
We might have raised the same fraction of GDP in revenues, but 
we didn't do very well.
    We got marginal rates down, we broadened the base, we had a 
system that supported much stronger economic growth, survived 
through the 1980s and 1990s. I think we ought to set that as 
the standard for the way we raise taxes in the United States.
    Mr. HELLER. Thank you. I yield back, Mr. Chairman.
    Chairman NEAL. The Chair would recognize the gentleman from 
Illinois, Mr. Roskam to inquire.
    Mr. ROSKAM. Thank you, Mr. Chairman. Earlier, Mr. 
Greenstein and Mr. Holtz-Eakin expressed sort of different 
opinions--surprise, surprise--about worldwide tax treatment of 
American corporations or worldwide American corporations. And 
Mr. Tiberi and I have spent a lot of time talking with a lot of 
folks around town and also back in our districts on this issue.
    And obviously it became a big issue with the President 
identifying that as a pay-for for health care. It was passed 
over this time, but clearly it's back into the mix.
    Mr. HOLTZ-EAKIN, could you give a sense of perspective 
about the tax consequences, sort of the business activity 
consequences of taking this up, this sort of tax treatment, and 
put it in a little bit of a context for us?
    Mr. HOLTZ-EAKIN. Well, I think this is an important issue 
that this Committee is doomed to spend a lot of time on going 
forward. It will be the case, necessarily, that we will have to 
rely more on exports as a source of our economic vitality going 
forward. As a result, we are going to have to think about all 
policies through the lens of international competitiveness.
    Our tax system is one of those things. We do have the only 
tax system left, which attempts to tax on worldwide income 
instead of just on the income earned in the United States on a 
territorial basis.
    This puts us at a big disadvantage when firms choose where 
to place their headquarters. And we've seen, for example, 
Anheuser-Busch becoming a subsidiary of InBev. And many other 
tax-related transactions of that type are coming.
    I think that's a very bad thing, because the evidence 
suggests that once you lose the headquarters, you then quickly 
lose the research and development, and then the manufacturing.
    This is one of the reasons that this becomes increasingly 
clear that the real burden of the corporation income tax is 
falling on American workers.
    When I was at CBO, we did a study that showed that of every 
dollar in corporation income taxes that are paid, 70 cents 
comes in the form of lower wages and benefits for workers.
    I don't see why we would want to have a tax system that 
systematically harms our workers and impedes their ability to 
sell around the globe. I think it's a big issue for this 
Committee.
    Mr. ROSKAM. Mr. Greenstein, I wrote it down, and it's a 
paraphrase. I don't think you'd object to my paraphrase that 
your arguing the actual U.S. corporate tax rate is 
comparatively low, or more competitive than people like Mr. 
Holtz-Eakin would represent.
    Give it your best pitch. I just remain so incredibly 
unconvinced. But it's my time, let's use it. Give me your best 
pitch on why that's----
    Mr. Greenstein. You----
    Mr. ROSKAM. I'm not hearing it from anybody else.
    Mr. GREENSTEIN. Okay. I actually think I may not have 
expressed it clearly in summarizing my testimony in five 
minutes. But your paraphrase really isn't exactly what I'm 
saying.
    Mr. ROSKAM. Okay. Fair enough. What is it?
    Mr. GREENSTEIN. I would very much agree--I doubt that many 
people would disagree--that the current structure of the U.S. 
corporate income tax poses competitiveness problems.
    What I was saying is that the problem does not come from 
the total amount, the total dollars in corporate tax income we 
collect. We actually collect as a share of--this is the Bush 
Treasury Department study, I have it in my hand--it tells you 
that from 2000 to 2005, the United States U.S. corporations 
paid an average of 13.4 percent of their profits in the 
corporate income tax, and the OECD average was 16.1 percent.
    That's not uncompetitive. The competitiveness problem comes 
from the wild inefficiency of the structure of our corporate 
income tax today. We have a high marginal rate. The code is 
shot through with all sorts of special preferences.
    You have some groups of corporations that pay high average 
effective corporate tax rates. You have certain kinds of 
corporations that pay close to negative corporate tax rates. We 
have inefficiencies across boundary countries. We have 
inefficiencies between different kinds of industries. In the 
U.S. you have inefficiencies compared to whether you debt 
finance your business or you save up the money and don't 
borrow.
    The point that I was trying to make is that we could do 
major corporate tax reform, greatly address a number of these 
competitiveness and inefficiency problems, and actually take in 
somewhat more revenue at the same time, and be more competitive 
and economically efficient.
    I was not----
    Mr. ROSKAM. I got it----
    Mr. GREENSTEIN. Defending the current structure.
    Mr. ROSKAM. Fair enough. Which is why I didn't interrupt 
you.
    So would you agree with the premise, would you accept the 
premise that if worldwide American corporations were paying 
more in taxes than their international competitors, that the 
net loser in that equation would be American workers?
    Mr. GREESTEIN. Actually, one of the first things I would do 
when asked that question, seriously, because I'm getting beyond 
my expertise, would be to ask somebody like Len Burman that 
question.
    And the question I would want to know, clearly, if you were 
asking corporations to pay dramatically more as a share of 
profits than corporations in other countries, you would 
probably be harming workers and investors both.
    The thing I'm less clear about is if the differences were 
small----
    Mr. ROSKAM. I understand----
    Mr. GREESTEIN. Would the impacts be very noticeable?
    Mr. ROSKAM. I understand. You know what? I'm out of time. I 
don't want to abuse the time. But I'm happy to----
    Chairman NEAL. I----
    Mr. ROSKAM. You're dying for the answer, aren't you?
    Chairman NEAL. I'd like to hear what Burman's got to say. 
Once he moved into Burman, I said ``We're on.''
    Mr. BURMAN. Thank you, Mr. Chairman. Thank you, Mr. Roskam.
    You know, the research on the incidence of the corporate 
taxes is all over the map. For a long time, the economists 
believed that most of the incidents fell on capital, that is, 
investors were the ones that paid the tax.
    Different models can produce different results. Even the 
study that was produced in Doug's CBO, which was an excellent 
study, said that the results depended a lot on assumptions 
about parameters, which was a huge amount of uncertainty.
    So it could be that a smaller share of the tax is borne by 
workers.
    The ideal tax system would be one where the corporate tax 
was basically just a withholding tax, and that ultimately the 
tax would be paid by shareholders. So at least if you have an 
income tax, Doug would say you shouldn't tax savings at all.
    The reason you need a corporate tax primarily is because if 
corporations were untaxed, they would become a tremendous tax 
shelter. People would hide their income in corporations and use 
it as a way to avoid tax for a long period of time, including 
tax on labor income.
    The same kind of problem occurs with capital gains. If you 
had a zero capital gains tax rate it would open the flood gates 
for tax avoidance by most high-income people. And in fact, that 
happens even now with the 15 percent rate.
    So if you want to tax capital income--and we can talk about 
whether you want to do that or not--the issue is as in a lot of 
cases, it's between fairness and economic efficiency. But if 
you want to tax capital income, you can't have exemptions for 
particular forms of income. Otherwise, you have a huge 
incentive to convert whatever's highly taxed and what's taxed 
less.
    And you know, whatever else you think the tax system ought 
to look like, that's completely wasteful. You have people whose 
whole occupation is figuring out ways to avoid tax for high-
income people. And they're smart people. They could actually be 
doing something productive otherwise.
    Mr. ROSKAM. And then just to yield back in just a second.
    Mr. BURMAN. Sure.
    Mr. ROSKAM. You know, it seems like you're arguing a truism 
in a way, that the tax policy has consequences in real economic 
life. And that's interesting, but it's not revelatory.
    Mr. BURMAN. But it's actually relevant that if you want to 
tax income, and you want to try to tax different forms of 
income the same, so that you're not creating these 
opportunities for shifting from one form to another.
    Mr. ROSKAM. Right. Thank you.
    Chairman NEAL. I thank the gentleman.
    I think we can get the questioning in here. We have two 
panelists, who would still like to inquire, and the Chair would 
recognize the gentleman from New York, Mr. Crowley, to inquire.
    Mr. CROWLEY. Thank you, Mr. Chairman. There's general 
agreement that the nation's deficits are too large. I say 
generally, not universally but general agreement.
    [Buzzer goes off.]
    Mr. CROWLEY. And they're off. I believe, as many of my 
colleagues, I think on both sides of the aisle agree, that we 
need to address this issue, both for now and for the long term.
    But we need to make sure that we know all the facts and 
that they're in place. When President George W. Bush became 
President, with strong majorities of his party in the Congress, 
the federal debt stood at $5.7 trillion and the U.S.A. enjoyed 
annual budget surpluses.
    Eight years later, when George W. Bush left office and the 
overall majority of his term being served by a Republican 
Congress, the nation's debt stood at over $10.6 trillion, a $5 
trillion increase over that time.
    China became our nation's biggest lender, and the nation 
was running trillion-dollar annual deficits, thanks in part to 
a $700-billion kiss to the nation's banks from the Republican 
party and President Bush.
    Those are facts. Now in the past two years the debt has 
increased another $2 trillion, with most of that being 
dedicated to fighting the recession. But to insure that we 
reigned in our nation's debt and end the Republican policies of 
borrow and spend, this caucus, the Democratic caucus, passed 
and President Obama signed into law Pay-Go, or pay-as-you-go 
budgeting legislation, which means that all new spending or tax 
cuts must be fully offset or paid for, so that it does not add 
to our nation's deficit.
    Essentially this acts as a giant check on the spending and 
borrowing power of Congress. It worked in the 1990s and I 
believe it will work again.
    Democrats have ended the days of credit card living in 
Washington. Congress is starting to manage the Federal 
Government like the way our constituents manage their own 
household expenses.
    Republicans who cry about deficit spending, oppose this 
measure and oppose common sense solutions to address our 
nation's deficit.
    Republicans have also opposed common-sense tax loopholes 
closures, like allowing rich Americans to avoid taxes by hiding 
their income in Swiss bank accounts without punishment.
    Now maybe I shouldn't say that these are all rich 
Americans. But I know there aren't too many people in my 
district in Queens and the Bronx with Swiss bank accounts.
    Now Republicans will oppose legislation to close tax 
loopholes that allow foreign companies to avoid paying U.S. 
taxes, giving them an unfair competitive advantage over U.S. 
companies.
    I think we should be putting Americans and America's 
workers first. And I wish my Republican colleagues would join 
me in that thinking.
    These are near-term ways to address our nation's debt. In 
the long term, the President has just signed legislation this 
afternoon to provide near universal health care through the 
free market to all Americans, and this bill will save Americans 
$1.3 trillion over the next 20 years, according to the CBO. Now 
this is the non-partisan reliable Congressional Budget Office.
    Mr. Holtz-Eakin, do you trust the number crunchers at the 
Congressional Budget Office? Yes or no?
    Mr. HOLTZ-EAKIN. Yes, I do.
    Mr. CROWLEY. You do. I thank you for agreeing that those 
numbers are accurate.
    Mr. HOLTZ-EAKIN. No, I did not say that.
    Mr. CROWLEY. But you trust them?
    Mr. HOLTZ-EAKIN. I trust the number crunchers, but not the 
numbers.
    Mr. CROWLEY. You trust the number crunchers, but so the 
determinations which come out there, their analyzing of the 
facts are inaccurate? You said one or the other.
    Mr. HOLTZ-EAKIN. They are, by law, required to analyze the 
proposals as written by the Congress. And if the Congress 
leaves things out, as this Congress did, they don't price them. 
If this Congress makes assumptions that I believe to be 
politically unrealistic, they can't make that judgment. I 
couldn't when I was at CBO, and did not. It's not their role.
    And so I think there's a distinction between trusting the 
number crunchers and believing the projections that come out.
    Mr. CROWLEY. Well, according to the CBO, the number 
crunchers that you trust, the CBO has stated that the bill that 
was just signed into law today will save the American taxpayer 
$1.3 trillion in future debt. The only people that I think who 
would object to that would be the Chinese bankers, who have 
thrived during the eight years of Republican controlled 
Congress here in the House and Senate, and that presidency.
    The expected deficit for the Fiscal Year 2010 for the 
U.S.A. is $1.3 trillion. The total amount of discretionary 
funding passed by Congress for 2010 is: Non-defence $670 
billion, defense $556 billion, for a total discretionary 
spending of $1.2 trillion.
    So if the government stopped all food safety inspection, 
stopped patrolling the borders, ended homeland security 
protection, closed down the national parks, completely defunded 
the military, and stopped funding for all transportation 
projects for the entire year, we would not close the deficit. 
We would still have a deficit.
    This shows that spending is only a small part of the 
problem. So it's factually wrong to say it is spending alone 
that is causing our debts.
    And I see my time has run out. I want to give my colleague 
an opportunity to ask a question as well. With that, I'll yield 
back the balance of my time.
    Chairman NEAL. I thank you, gentlemen. The Chair would 
recognize the gentleman from Texas, Mr. Doggett, to inquire.
    Mr. DOGGETT. Thank you, Mr. Chairman, and thank you, Mr. 
Crowley.
    I'm interested in the testimony concerning tax 
expenditures. While I think we may bring different perspectives 
or reasoning, that there is a growing point of view ranging 
across philosophical lines that the complexity of our Tax Code, 
and our use of the Tax Code for what is really expenditure 
purposes needs to get further review.
    I gather, Mr. Holtz-Eakin, that you agree we need to focus 
attention on the deductions, the credits, the preferences that 
are in our Tax Code, that amount to a form of expenditure, in 
the same manner that we focus on direct expenditures.
    Mr. HOLTZ-EAKIN. Oh, yeah. Let me take this opportunity to 
agree with both Len and Bob Greenstein on something. Len and I 
would disagree on the ideal tax system, but many of the tax 
expenditures would be the same problem in both our systems.
    Mr. DOGGETT. Right.
    Mr. HOLTZ-EAKIN. So we'd agree on things we needed to 
close, especially consumption items that are being favored. And 
I agree with Bob a lot about difficulties in the corporation 
income tax.
    The biggest obstacle to serious tax reform will be the 
business community, because they always hate having their own 
rifle shop's preferences taken away; but it really needs to get 
done.
    Mr. DOGGETT. Thank you very much. And with that in mind, 
though not targeting any particular tax provision, I included 
in the version of the extender's legislation that passed the 
House in a December, a study--and I think you made reference to 
that--so that we would at least begin an evaluation process of 
the extender provisions that you're always at work on that, Mr. 
Barthold?
    Mr. BARTHOLD. We're trying, Mr. Doggett. The Congress has 
kept us pretty busy on some other issues.
    [Laughter.]
    Mr. DOGGETT. I know we have----
    Mr. BARTHOLD. But I will say that yes, we are at work.
    Mr. DOGGETT. But I gather all of you also agree that we 
need to be in the extender, since they come up every year or 
every couple of years, that we need some systematic evaluation 
of those and what purposes they accomplish, in much the same 
way we would hope we get for direct expenditures.
    Mr. Burman. Yeah. And I would actually apply the same 
scrutiny to programs that don't come up for extension every few 
years.
    Mr. DOGGETT. That's the next step.
    Mr. BURMAN. Yeah.
    Mr. DOGGETT. Is to try to see it applied more broadly. 
Because these tax expenditures--and you mentioned the low-
income housing tax credit--I authored the higher education tax 
credit, about $13 billion worth, in the stimulus. But it seems 
to be we need to be looking at how effective that is as a 
mechanism versus some of the direct expenditure programs in 
determining what the benefits are, though one's through the Tax 
Code, and one's through the appropriations bill.
    Mr. BURMAN. I think you know this. But I mean, the extender 
exercise itself is very revealing of the problems we're facing.
    You think of the research and development tax credit. It 
makes no sense from an economics point of view to have this 
extended year by year by year. We can't do a long-range 
research and plan in the presence of that. It's being done 
strictly for budgetary reasons.
    So it is time to be honest about what we're spending and 
finance it, and put in place something that is a long-run 
incentive to do the kinds of innovations we need in the United 
States.
    Mr. DOGGETT. As well as specifically on that, the report of 
the Government Accountability Office to really look at credits 
like that, to see if they are serving their purpose, and are 
spurring research, or simply rewarding conduct that would have 
happened anyway.
    Mr. GREENSTEIN. Let me say, there are two additional 
issues. I don't have the answer to the question I'm about to 
raise of precisely what we should do; but I think we need to 
think about some different kind of or additional kind of 
budgetary presentation on tax expenditures.
    Actually, Doug referred to refundable tax credits before. 
They are the ones that do get the most attention now. All of 
the refundable part of the refundable tax credits show up in 
the budget as outlays, not as revenue reductions.
    But all the other tax expenditures that show up as revenue 
reductions, they all just get buried in this overall 18 percent 
of GDP, or whatever it is the current figure is, you know, for 
revenue collections.
    And if we could somehow break them out and highlight, 
whether we call them outlays--maybe we make up a different 
term, because they're not precisely the same--but something 
that highlights how they're different from other parts of the 
Tax Code.
    You know, I don't think many people understand we have 
subsidies in spending and we have subsidies in the Tax Code.
    So that child care program for low and moderate income 
families, the block grant. So that's just--that's government 
spending, that's big government. But for middle and upper 
income families, we give them a child care subsidy too. We do 
it through a tax break, a tax credit. And that sort of is, oh 
that's good, because that's a reduction in taxes owed.
    And we need some kind of leveler playing field, where 
subsidies are viewed as subsidies, whether they're on the 
spending or the tax side of the budget.
    Mr. DOGGETT. Thank you, Mr. Chairman. Thanks to each of 
you.
    Chairman NEAL. I thank the gentlemen.
    I want to thank our panelists today for their testimony on 
this important subject. You may receive some written follow-up 
questions from members, and I hope you will respond promptly, 
so that we might include those responses in the record. And 
personally, I want to say thank you. This was very helpful, 
very considerate. Thank you.
    This meeting stands adjourned.
    [Whereupon, at 4:08 p.m., the Subcommittee was adjourned.]

                                 
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