[Joint House and Senate Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



                                                                       

                  OVERVIEW OF PREVIOUS DEBT PROPOSALS

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

                                HEARING

                               before the

                         JOINT SELECT COMMITTEE
                          ON DEFICIT REDUCTION
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 1, 2011

                               __________








 Printed for the use of the Joint Select Committee on Deficit Reduction





                  U.S. GOVERNMENT PRINTING OFFICE
71-157 PDF                WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001






              JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

                   JEB HENSARLING, Texas (R) Co-Chair

                 PATTY MURRAY, Washington (D) Co-Chair

XAVIER BECERRA, California (D)       JON KYL, Arizona (R)
FRED UPTON, Michigan (R)             MAX BAUCUS, Montana (D)
JAMES CLYBURN, South Carolina (D)    ROB PORTMAN, Ohio (R)
DAVE CAMP, Michigan (R)              JOHN KERRY, Massachusetts (D)
CHRIS VAN HOLLEN, Maryland (D)       PAT TOOMEY, Pennsylvania (R)

                      Mark Prater, Staff Director

                   Sarah Kuehl,Deputy Staff Director

                                  (ii)




                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........     2
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................     3

                               WITNESSES

Bowles, Erskine, Co-Chair, National Commission on Fiscal 
  Responsibility and Reform......................................     4
Simpson, Hon. Alan, Co-Chair, National Commission on Fiscal 
  Responsibility and Reform......................................     6
Domenici, Hon. Pete, Co-Chair, Debt Reduction Task Force, 
  Bipartisan Policy Center.......................................     8
Rivlin, Dr. Alice, Co-Chair, Debt Reduction Task Force, 
  Bipartisan Policy Center.......................................    11

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bowles, Erskine:
    Testimony....................................................     4
    Prepared joint statement.....................................    58
Domenici, Hon. Pete:
    Testimony....................................................     8
    Prepared joint statement.....................................    62
Hensarling, Hon. Jeb:
    Opening statement............................................     2
    Prepared statement with attached charts......................    97
Murray, Hon. Patty:
    Opening statement............................................     3
    Prepared statement...........................................   106
Rivlin, Dr. Alice:
    Testimony....................................................    11
    Prepared joint statement.....................................    62
    Responses to questions from committee members................    90
Simpson, Hon. Alan:
    Testimony....................................................     6
    Prepared joint statement.....................................    53
Upton, Hon. Fred:
    Slide titled: Score of PPACA: 2014-2023......................   108

                                 (iii)

 
                  OVERVIEW OF PREVIOUS DEBT PROPOSALS

                              ----------                              


                       TUESDAY, NOVEMBER 1, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 1:37 p.m., in Room 
1100, Longworth House Office Building, Hon. Jeb Hensarling [co-
chairman of the joint committee] presiding.
    Present: Representatives Hensarling, Becerra, Camp, 
Clyburn, Upton, and Van Hollen.
    Senators Murray, Baucus, Kerry, Kyl, Portman, and Toomey.
    Chairman Hensarling. The committee will come to order.
    Before I recognize myself for an opening statement, I wish 
to make a few preliminary remarks.
    Number one, I wish to remind all of our guests that the 
manifestation of approval or disapproval, including the use of 
signs or placards, is a violation of the rules which govern 
this committee. The chair wishes to thank our guests in advance 
for their cooperation in maintaining order and decorum.
    This is the fourth hearing of the Joint Select Committee on 
Deficit Reduction, entitled ``Overview of Previous Debt 
Proposals.''
    I want to thank our witnesses. First, I wish to thank them 
for their service to their country, all long-time, storied 
public officials.
    Senator Alan Simpson, who served as a Senator from Wyoming 
for 18 years, served as chairman of the Veterans Committee, a 
member of the Finance, Judiciary, and Aging Committee, and 
obviously the co-chair of President Obama's National Commission 
on Fiscal Responsibility and Reform.
    Additionally, Erskine Bowles, who served as chief of staff 
to President Bill Clinton and was appointed by President Obama 
to also co-chair the National Commission on Fiscal 
Responsibility and Reform.
    Senator Pete Domenici, the longest-serving Senator in New 
Mexico's history, although New Mexico is still a fairly young 
State; a storied career as chairman of the Budget Committee; 
serves as a senior fellow at the Bipartisan Policy Center.
    Finally, Dr. Alice Rivlin, who was a vice chairman of the 
Federal Reserve, director of the OMB in the first Clinton 
administration, and the founding director of the Congressional 
Budget Office, and served with Senator Domenici on the 
Bipartisan Policy Center's Task Force for Debt Reduction.
    Again, I want to thank each of our witnesses for their 
work. There are many other fine organizations and think-tanks 
that have added value to the process. This particular committee 
chose to hear from these four individuals and these two bodies.
    With that, the chair will now yield to himself for an 
opening statement.

OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE 
  FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Hensarling. What I do believe we will hear from 
each of our witnesses is that America at least does indeed face 
a legitimate debt crisis. Not only are we operating on borrowed 
money, we are operating on borrowed time as well.
    In that vein, I never tire of reminding not only myself but 
the public and my colleagues that although we have a statutory 
goal to reduce the growth of the deficit over 10 years by $1.5 
trillion, backed up by a $1.2 trillion sequester should we 
fail, more importantly we have a statutory duty to proffer 
legislation that would significantly improve the Nation's long-
term fiscal imbalance.
    What could not be clearer is that unless we offer 
fundamental and structural reforms to our Nation's entitlement 
programs, especially health care, we will not only end up 
failing in our duty, we may fail our Nation as well.
    Health-care costs, measured by GDP, roughly have doubled 
since the time of my birth until I entered the workforce and 
have risen about two-thirds since then and are growing at what 
all acknowledge to be an unsustainable rate. Every agency and 
think-tank that I am aware of, every academic study shows that 
Medicare will go broke in 9 to 13 years. The President himself 
has said, ``The major driver of our long-term liabilities--
everybody here knows it--is Medicare and Medicaid and our 
health-care spending. Nothing comes close.'' I continue to 
agree with the President.
    Unfortunately, Social Security faces its problems as well. 
My children will likely put more money into Social Security 
than they take out--at best, generational unfairness; at worst, 
a form of generational theft.
    We have previously heard from the Congressional Budget 
Office that tax revenues, upon the recovery of this economy, 
will once again produce roughly 18.5 percent of GDP. We also 
know that there are many tax increases that are already built 
into current law. But spending, principally driven by our 
health-care and retirement programs, is due to roughly double 
in size, to 40 percent of GDP, over the course of a generation 
from where it was just a few short years ago.
    Certainly, we cannot tax our way out of this crisis. We 
cannot solve it by simply tinkering around the edges of our 
entitlement programs. For the sake of our economy, our jobs, 
our National security, and our children's future, many people 
say it is time to, ``go big.'' I agree, but going big is not 
merely measured by slowing the rate of growth of the deficit 
over the next 10 years. Going big must be measured in solving 
the problem--in other words, fundamental and structural reforms 
of our entitlement programs, giving every American the 
opportunity for quality health care and quality retirement 
security at a cost that does not harm our jobs and diminish our 
children's future.
    [The prepared statement of Chairman Hensarling appears in 
the appendix.]
    With that, I will now yield for an opening statement to my 
co-chair, Senator Murray of Washington.

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Co-Chair Murray. Thank you very much, Co-Chair Hensarling.
    And I want to thank all of our colleagues and especially 
our witnesses who have all come today. We really appreciate 
your being in front of this committee today. And I want to 
thank all the members of the public who are joining us, as 
well.
    We have all been working very hard over the past 2 months, 
but with 23 days left to go until our deadline and with even 
less time before we need to have a plan ready to be voted on, 
we are now entering the critical final phase of this process. 
And, as we all know, the consequences of failure are 
unacceptable. The triggers that have been put in place would be 
devastating for our National defense and for middle-class 
families and the most vulnerable Americans that depend on this 
country for things like education and housing and even 
nutrition assistance for women and infants.
    Markets, rating agencies, and businesses across the country 
are watching closely to see if Congress can solve this problem. 
And the American people are looking to us to break out of the 
gridlock and partisan rancor that has dominated D.C. recently 
and to deliver the kinds of results that they expect and they 
deserve.
    That is why members of this committee have been clear: We 
need to find a way to come together around a bipartisan deal. 
So I believe it is very appropriate that we are having this 
hearing with these witnesses as we move into these final few 
weeks.
    Before us we have Democrats and Republicans who were able 
to come together around big and balanced proposals that tackle 
some of the most difficult challenges facing our Nation. The 
two groups went about it in slightly different ways, and I 
don't agree with each piece of each plan, but they provide 
serious models for big and balanced bipartisan proposals.
    And as I know we will hear more about it today, these 
proposals achieved bipartisan support and came together only 
because they were balanced, they included concessions from all 
sides, and they required all Americans to share in the 
sacrifices that this endeavor calls for. Neither of these 
bipartisan proposals included only spending cuts, and they 
didn't simply address entitlements or only raise revenues. They 
put everything on the table. They made tough decisions, and 
because of that, they were able to put together balanced 
packages that garnered bipartisan support.
    So, as this committee moves into the home stretch, hearing 
more about the importance of a balanced approach is going to be 
very helpful. As our witnesses today can address, a bipartisan 
deal isn't possible if Members refuse to come out of their 
partisan or ideological corners. It is not enough for either 
side to simply say they want to reduce the deficit. Now is the 
time when everyone needs to be putting some real skin in the 
game and offering serious compromises.
    Democrats have made clear that we are prepared to do that. 
We have said we are very open to painful concessions and 
compromises if Republicans are, as well. And we have put 
forward serious ideas to reflect that. But these concessions 
will only be made and only considered in the context of a 
balanced deal that doesn't just fall on the middle class and 
most vulnerable Americans. But that requires big corporations 
and the wealthiest among us to share in the sacrifice.
    The American people realize that. They overwhelmingly 
support a balanced approach, which is why this is the kind of 
deal every bipartisan group that has successfully tackled this 
issue has made. It is the kind of solution I am looking forward 
to hearing more about from our witnesses today, and it is the 
kind of deal I hope that every member of this committee is 
prepared to make.
    So, again, I want to thank our witnesses for being here 
with us to have this critical conversation. The bipartisan, 
balanced plans that you have put forward provide a strong 
foundation for this committee, and we look forward to hearing 
your testimony and having a chance to ask our questions. So, 
again, thank you to all of you for being here today.
    [The prepared statement of Co-Chair Murray appears in the 
appendix.]
    Chairman Hensarling. Thank you, Senator Murray.
    And now we will hear from our panel. I have no idea why you 
are seated in this order, but we are going to start with you, 
Mr. Bowles.
    Each witness will be recognized for 5 minutes, at which 
time members will have 10 minutes for questions.
    Mr. Bowles, we are now prepared to receive your testimony.

 STATEMENT OF ERSKINE BOWLES, CO-CHAIR, NATIONAL COMMISSION ON 
                FISCAL RESPONSIBILITY AND REFORM

    Mr. Bowles. Thank you, Mr. Chairman. I am delighted to be 
here. I am delighted to be in the company of these three great 
Americans. And I want to thank you for inviting me to come.
    Both Alan and I thought long and hard about what we wanted 
to say today. We have submitted something in writing to you, 
but, instead, I would like to just speak to you from a few 
notes I have made.
    I know most of you. I have worked closely with almost all 
of you on both sides of the aisle. I have great respect for 
each of you individually, but, collectively, I am worried you 
are going to fail--fail the country.
    When Alan and I first got into this, we thought we were 
doing it for our 15 grandkids. I have nine, and he has six. But 
the closer we got to the numbers, the more we realized we 
weren't doing it for our grandkids, we weren't even doing it 
for our kids; we were doing it for us. That is how dire the 
situation is today.
    I think that we face the most predictable economic crisis 
in history. I know that the fiscal path we are on here in 
Washington is not sustainable. And I know that each of you know 
it and you see it, because it is as clear as day.
    When Alan and I travel around the country and we talk to 
people and we ask them, why do you think we have these 
deficits, they tell us, oh, it's got to be waste, fraud, and 
abuse, it's got to be foreign aid, oil company subsidies. And, 
yes, all of those are a small part of the problem. But the big 
problem really comes from four sources, and you know it.
    The first is health care. We spend twice as much as any 
developed country in the world on health care. And, 
unfortunately, if you look at the outcomes, our outcomes don't 
match the outlays. We rank somewhere between 25th and 50th in 
things like infant mortality, life expectancy, preventable 
death. And so the rapid growth of health care and the 
unsustainable growth of health care is our number-one problem.
    The second biggest problem today, I believe, is that we 
spend in this country more than the next 14 largest countries 
combined on defense. Admiral Mullen, Chairman of the Joint 
Chiefs of Staff, who just stepped down, recently said that our 
biggest national security problem is these deficits and this 
debt because it will consume every dollar of resource we have. 
We believe that we have to make reasonable cuts in defense.
    Third, I believe that we have the most ineffective, 
inefficient, anticompetitive tax system that man could dream 
up. What we believe you need to do is broaden the base, 
simplify the Code, eliminate or at least greatly reduce this 
backdoor spending that is in the Tax Code, and use that money 
to bring down rates and reduce the deficit.
    And the fourth cause of the deficit is simply interest on 
the debt. And if there is one thing I am familiar with, it is 
the power of compound interest. And when interest rates go back 
to normal, this country is going to experience the power of 
compound interest.
    This is a problem we can't grow our way out of. We could 
have double-digit growth for decades and not solve this 
problem. And, as the chairman said, it is not a problem we can 
solely tax our way out of. Raising taxes doesn't do a darn 
thing to change the demographics of a country or change the 
fact that health care is growing at a faster rate than GDP. And 
it is also not a problem that we can solely cut our way out of. 
I think you all have proven that over the last year.
    That is why our commission came up with a balanced plan of 
$4 trillion of deficit reduction over the next decade. We 
didn't make the $4 trillion number up because the No. 4 bus 
rode down the street. Four trillion is not the maximum amount 
we need to reduce the deficit, it is not the ideal amount, it 
is the minimum amount we need to reduce the deficit in order to 
stabilize the debt and get it on a downward path as a percent 
of GDP.
    We based this proposal on six basic principles. Those 
principles are that we shouldn't do anything to disrupt a very 
fragile economic recovery, so we made very light cuts in 2011 
and 2012 and did not get spending back to pre-crisis levels in 
2013, when we did get it back to pre-crisis levels in real 
terms.
    Secondly, we didn't want to do anything that hurt the truly 
disadvantaged, so we didn't make any big cuts or any cuts in 
things like food stamps or SSI or workers' comp. And we 
actually did some things to improve Social Security, while 
making it sustainably solvent.
    Third, we do want to make sure this country is safe and 
secure, but we have to realize, as Admiral Mullen said, that 
our biggest national security problem is these deficits.
    Fourth, we thought the President was right, or at least 
half-right, in his State of the Union when he said America must 
invest in education, infrastructure, and high-value-added 
research if we are going to be competitive in a knowledge-based 
global economy. What he left out is we have to do it in a 
fiscally responsible manner. We live in a world of limited 
resources; that means choices and priorities.
    Fifth, as I said earlier, we believe we have to revise the 
Tax Code, simplify the Tax Code to broaden the base, to reduce 
the tax expenditures, and use the proceeds to reduce rates and 
to reduce the deficit.
    And, lastly, we have to be serious about spending cuts. We 
have to cut spending wherever it is, whether it is in the Tax 
Code, the defense budget, the nondefense budget, discretionary 
budget, or the entitlement budget.
    I believe if you all go big, if you are bold, and if you do 
it in a smart manner, that the American people will support you 
if you make these big, bold, smart decisions. I hope for the 
country's sake you will.
    Thank you very much.
    Chairman Hensarling. Thank you, Mr. Bowles.
    Senator Simpson, you are now recognized.

  STATEMENT OF ALAN SIMPSON, CO-CHAIR, NATIONAL COMMISSION ON 
                FISCAL RESPONSIBILITY AND REFORM

    Mr. Simpson. Senator Murray and Representative Hensarling, 
it is a pleasure to be here.
    I look at this panel, and I, too, know many of you. But at 
this stage of life, I have been around the track a while in 
this game. Never worked with finer people than Erskine and 
Alice and Pete, and have been working through years.
    We don't need charts when we go out. We don't use 
PowerPoints. We just say, if you spend more than you earn, you 
lose your butt. And if you spend a buck and borrow 42 cents of 
it, you got to be stupid. Now, people do hear that. It is a 
rather wretched thing to say. And then you say, today your 
country is borrowing $4.6 billion and will borrow that tomorrow 
and the next day and the next day. If that has any common sense 
to the American people, it certainly has escaped us.
    Now, my dad was a Governor and U.S. Senator. I know the 
game of inside baseball, and I know many of you well. As we 
wandered through this place a year ago, people came up and 
said, ``Save us from ourselves.'' That is not a very smart 
thing to say in the duties you have to perform. So this is the 
toughest thing you have ever been in or ever will be in, 
without question, what you are doing. You have my deepest 
admiration and respect, all of you.
    And you all know what you have to do. In your gut, you know 
what you have to do.
    So some will say, well, you and Erskine have nothing to 
lose; you are not in the game. Well, that is true. But Dick 
Durbin and Tom Coburn had a lot to lose--a couple of diverse 
ideological allies. They had something to lose, and they 
stepped right up to the plate and did it. They voted for our 
report. There were five Democrats, five Republicans, and one 
independent.
    I used to take these people on when I was in the Congress. 
I did not do this suddenly. I am the only living person that 
had a hearing on the AARP. They went goofy, absolutely 
ballistic. ``Why would you have a hearing on us? We do great 
things.'' Well, that is enough of that.
    So anyway, I have dealt with professional veterans, I have 
dealt with extremists of the senior citizens, I have dealt with 
emotion, guilt, fear, racism, I did immigration, Social 
Security. I have done it all. And I never lost an election.
    I dealt with Peter Rodino, a great Democrat, and Ron 
Mazzoli. We did things. I took on the professional veterans. I 
never heard anything out of Lloyd Bentsen and Bob Dole and Dan 
Inouye when did we veterans stuff. It was always from some guy 
that had never done anything, never even been in the military.
    And in immigration I was called a bigot and a racist, and 
yet that bill brought 3 million people out of the dark. I was 
very proud of that. But it never got very far because the right 
and the left said, this is a national ID card, heh, heh, heh. 
That came from the right and the left.
    People admire guts and courage. They may fight you, they 
may vilify you, but they will admire you. I have been the toast 
of the town one day and toast the next. I have been on the A 
list and the Z list in this town when I was here. It is a funny 
place. You are on the cover of Time one month, and 6 months 
later you are doing it.
    And just a quick note about Grover Norquist. If Grover 
Norquist is now the most powerful man in America, he should run 
for President. There is no question about his power. And let me 
tell you, he has people in thrall. That is a terrible phrase. 
Lincoln used it. It means your mind has been captured; you are 
in bondage with the soul.
    So here he is. I asked him, he said, my hero is Ronald 
Reagan. I said, ``Well, he raised taxes 11 times in his 8 
years.'' He says, ``I don't know, I didn't like that at all.'' 
I said, ``Well, he did it. Why do you suppose?'' He said, ``I 
don't know. Very disappointing.'' I said, ``Probably did it to 
make the country run.'' Another sick idea.
    And let's just look at the AARP. Just this morning, I saw 
that ad. That is the most disgusting--the most disgusting--ad I 
have ever seen. I don't know what the people got paid, 
especially the actors, but I can tell you this, they are well 
paid. They said, ``We are 50 million. We are watching you. We 
remember, and we vote.'' I tell you, that is a really ugly 
thing.
    But let me tell you about the AARP. Let's remember what 
they will be when they do nothing. We asked them what they 
would do to help, and they had said, we have two things we will 
tell you. They never did. But let me tell you what will happen 
with their view of the world, which is to do nothing to restore 
the solvency of Social Security. In the year 2036, you are 
going to waddle up to the window and get a check for 23 percent 
less. And then I hope that they will remember the AARP. I 
certainly will, and a lot of young people will too.
    So anyway, it is a tough job, and you are going to have to 
do it. People are out there who are going to say, I have helped 
you forever, and now I never ask you for a thing, but here we 
are. And that is going to put a lot of heat. Well, the market 
will call the shots from now on. Won't need anything but that. 
Interest rates will go up, inflation will go up by the failure. 
And guess who gets hurt? The little guy. The vulnerable guy 
that everybody babbles about day and night will be the one hit 
with the hammer on the schnozz.
    So remember the definition of ``politics.'' In politics 
there are no right answers, only a continuous flow of 
compromises among groups resulting in a changing, cloudy, and 
ambiguous series of public decisions where appetite and 
ambition compete openly with knowledge and wisdom.
    Thank you very much.
    [The prepared joint statement of Mr. Bowles and Mr. Simpson 
appears in the appendix.]
    Chairman Hensarling. Thank you, Senator.
    Dr. Rivlin, you are now recognized.
    Dr. Rivlin. I am going to defer to my colleague, Senator 
Domenici, if that is all right, to go first.
    Chairman Hensarling. Absolutely.
    In that case, Senator Domenici, you are recognized. If you 
could pull the microphone a little closer to you, Senator.

STATEMENT OF HON. PETE DOMENICI, CO-CHAIR, DEBT REDUCTION TASK 
                FORCE, BIPARTISAN POLICY CENTER

    Mr. Domenici. Thank you, Mr. Chairman. I just wanted to 
say, the reason she asked for that privilege is we have our 
discussion with you planned in that order. And so we thank you 
very much.
    First of all, let me say to the two co-chairs and the 
members of the committee, thank you for the opportunity to 
discuss with you today both the economic and fiscal challenges 
our Nation faces and our comprehensive plan to stabilize the 
national debt.
    More than 18 months ago, Dr. Alice Rivlin and I decided 
that we should continue our decades-long work for a rational 
Federal fiscal policy. Our only stipulation was that everything 
is on the table. She and I agreed. We then invited 17 other 
members to join us in what became the Bipartisan Policy 
Center's Debt Reduction Task Force.
    I tell you all of this because I think the history of the 
men and women that worked on this is very important to show you 
what kind of Americans we have out there who are worried about 
the future and will step up to the table and do what is 
necessary. The condition of their membership, those that joined 
us, was that they, too, would agree that everything was on the 
table.
    Our task force ranged from Mayor Marc Morial of New Orleans 
to former Oklahoma Governor Frank Keating. Imagine the 
difference in the two. Some of you know. Yet they agreed. They 
agreed that we were in trouble, and they agreed that we had to 
solve the problem. We had liberals, conservatives, think-tank 
budget policymakers, former members of Presidential cabinets, 
people with business and labor experience. Our task force was 
as diverse a group of serious American citizens as you could 
get to address what we all believed is a looming crisis for our 
Nation.
    Last November, we issued our report. It has been much 
discussed, and you and your staffs have seen it. Our 
recommendations, after many days, were unanimous. And they were 
controversial, as they should be, because they were also 
serious. Individually, each of us might have preferred a 
different mix of solutions, but each compromised to find a set 
of policies that we could all support.
    Since then, we have seen unemployment continue to exceed 9 
percent, our economy continue to stagnate. At the same time, we 
have endured a damaging fight over the debt-ceiling increase. 
We have seen another series of the melodramas on annual 
appropriations. And we have seen another year of deficits 
exceeding $1 trillion and a debt that had ballooned to over $10 
trillion--that is, the debt held by the public.
    With spending projected to grow faster than revenues, we 
will be forced to borrow more and more every year if we do not 
change our policies. This fiscal projection is clearly 
unsustainable. Now, everybody has to learn that word because 
that is probably the best word to explain where we are. We are 
an America with an unsustainable economic policy, and it will 
ruin us sooner or later.
    This unsustainable nature has been so attested to by the 
Federal Reserve Chairman, Ben Bernanke; the head of the 
International Monetary Commission; President Obama; and almost 
all fiscal experts have used that word, ``unsustainable.'' You 
are there trying to fix the unsustainable and make it 
sustainable.
    Righting our fiscal house will take three things: renewed 
economic growth; cutting Federal spending, especially 
entitlements, driven in large part by Medicare and Medicaid; 
and pro-growth fundamental tax reform that yields significant 
net new revenues.
    The Medicare proposal that Alice and I present to you today 
is the only reasonable bipartisan plan to fundamentally reform 
that program, make it more efficient, and preserve it for 
future generations.
    We also present to you a comprehensive pro-growth tax 
reform that clears out all the special interests that are in 
the Code. We, like our friends who chaired the President's 
commission--and I listened carefully to their recommendations 
today--they recommended a fairer and simpler tax system. We 
have one similar to it, but I would think that, if you look 
carefully at it, it better solves the problem that we have 
today.
    Now, let me be blunt. A plan that does not fundamentally 
restructure Medicare and other health entitlements will fail to 
adequately address the debt crisis that we face. Both sides, 
those who are against any fundamental health entitlement reform 
and those who oppose any revenue increases, will be equally 
complicit in bringing the Nation closer to the fiscal brink.
    I hope you heard that. I said it, and it is not like me. I 
don't usually say that about things. But I did say, if we don't 
do this, those who are for fixing health care and those who are 
for tax increases, and they say, ``We will do not one without 
the other; we will do only one,'' then they are both complicit 
in letting America destroy itself, letting this great democracy 
destroy itself, because we don't want to make tough decisions.
    Additionally, while not currently the largest driver of our 
deficits, Social Security finances are unstable, and we must 
soon take action to implement some small fixes that will keep 
the system on solid ground for generations to come. And that 
can be done. That is not so difficult. Citizens will understand 
that.
    What will happen if we continue to try to wriggle around 
these facts? When the debt-ceiling-increase battle caused 
short-term disturbances in the markets, when that happened, I 
had hopes that the fiscal reality would push the President and 
the Congress to real, fundamental action. Then, because of the 
turmoil in North Africa and the European debt problems of the 
highest order, investors rushed into quality, seen as the 
American sovereign debt. So instead of seeing higher interest 
rates for American debt, we have seen much lower interest 
rates. Instead of the stock market collapse, Dow Jones has been 
rising and going down steadily and on the upside during the 
last month. That is not normal for the situation we are in, but 
I just told you why it was.
    So, are those of us who predict serious, perhaps 
calamitous, consequences for our fiscal policies, are we wrong? 
I think not. Right now, to borrow a phrase, American debt is 
the best house in a truly terrible neighborhood. Yes, we have 
rats, holes in the roof, and grass growing window-high, but 
other houses for global investors to store their money are even 
worse. And that accounts for us having lower interest rates.
    However, it won't always be so. The neighbors might fix 
their houses or the whole neighborhood might burn. Either way, 
we will pay for our neglect with slower future growth. And that 
is the death knell for those in middle America who have been 
part of America's prosperity. Future growth and a less 
prosperous country, far less able to play a leading role in the 
world, is what we will present to the world if we don't fix 
this problem.
    I am told that the Joint Select Committee doesn't have the 
time to truly do comprehensive reform. I believe it can create 
time through a fast-track mechanism using section 404 of your 
enabling legislation, and which we expand upon in the appendix 
documents in your folder. And I can say to you, those in your 
folder from us today, the five or six, make real sense and give 
you answers to almost every problem that you have before you.
    I am told that the wise exchange of short-term political 
pain for long-term fiscal gain won't happen. I hope that is not 
true. Without substantial new revenues and structural 
entitlement reform, our fiscal ship is destined to capsize.
    I am told that we need to put these kind of tax and 
entitlement changes off until 2013, an odd-numbered, 
nonelection year. Well, 2011 is an odd-numbered nonelection 
year. And although I am not making a prediction, we might not 
get to the next one unscathed. I am saying we might have the 
calamity before that event.
    I know that the JSC has enormous power. What I don't know 
is whether or not they will use that power. Now, I have left 
one remark that was very important--I left it out here, and I 
want to find it so we can be sure that you understand--that 
those who say they will not support tax revenues unless we have 
entitlements, that is a good position if, in fact, you are 
saying, I will do it if we get both. But both are complicit. If 
they fail to act because each blames the other, they will both 
be complicit if they don't both cooperate in participating in 
this deficit reduction. Not one, not the tax raisers, not the 
entitlement cutters, but both will be complicit and will have 
caused America to suffer what we have described here today.
    I thank you very much.
    Chairman Hensarling. Thank you, Senator Domenici.
    Now we will turn to Dr. Rivlin. You are recognized.

 STATEMENT OF DR. ALICE RIVLIN, CO-CHAIR, DEBT REDUCTION TASK 
                FORCE, BIPARTISAN POLICY CENTER

    Dr. Rivlin. Thank you, Co-Chairs Murray and Hensarling and 
members of the committee.
    I share Senator Domenici's views and those of Mr. Bowles 
and Senator Simpson that this committee can change the course 
of economic history for the better.
    The United States faces two huge challenges at once: 
accelerating growth in job creation and reducing future 
deficits to stabilize the debt. There is no choice between jobs 
and fiscal responsibility. Both are essential, and they 
reinforce each other. This committee, with its extraordinary 
powers, has the opportunity and the obligation to address both 
challenges.
    To achieve success, the committee will have to go well 
beyond the minimum charge of $1.2 trillion in savings over the 
next 10 years, because even savings of this magnitude would 
leave the debt rising faster than the economy can grow. We 
believe you should craft a grand bargain involving structural 
entitlement and tax reform that would save at least $4 trillion 
over 10 years. To do so, the committee should take full 
advantage of the authority given to you in section 404 of the 
act and write instructions to authorizing committees to produce 
tax and entitlement reforms to be considered on a fast track.
    A grand bargain would reduce the chances of a devastating 
double-dip recession that could lead to a stagnant lost decade. 
It would also reassure citizens and markets that our political 
process is functioning in the public interest, not stuck in 
partisan gridlock or overwhelmed by special interests.
    I was privileged to serve on both the Simpson-Bowles 
Commission and the Domenici-Rivlin Task Force. Both groups 
worked hard to find a combination of policy changes that would 
enhance growth and put the budget on a sustainable path. The 
arithmetic of the problem, far more than political 
considerations, drove them to similar proposals. Both concluded 
that two major course changes were essential: structural reform 
in health programs, especially Medicare, and comprehensive 
reform of the individual and corporate income taxes that would 
raise more revenue from a more pro-growth tax system. Both also 
advocated freezes in domestic and defense discretionary 
spending to encourage weeding out low-priority activities in 
favor of more important ones.
    The Budget Control Act capped discretionary spending. We 
believe that further reductions in discretionary spending would 
risk harming essential government functions. For the same 
reason, we urge you to avoid the sequester. Instead, this 
committee should focus on reducing the growth of health-care 
spending and reforming the Tax Code. Our report offers solid 
bipartisan proposals to do this.
    Our proposal for Medicare reform, which we call ``defined 
support,'' would preserve traditional Medicare for all seniors 
who prefer a fee-for-service system. It would also offer an 
array of comprehensive health plans competing with traditional 
Medicare to deliver the same benefits. Plans could not refuse 
any Medicare beneficiary and would be compensated on a risk-
adjusted basis. The Federal contribution would be determined by 
competitive bidding on a regional exchange.
    We believe that the competition on a well-regulated 
exchange would lead providers and plans to deliver care more 
cost-effectively and reduce spending growth. As a fail-safe, 
the Federal contribution would be capped at GDP growth plus 1 
percent. Excess costs, if any, would result in an increased 
premium, but low- and moderate-income beneficiaries would be 
protected from these increased payments. This bipartisan 
proposal would preserve Medicare for our rapidly rising 
population of seniors.
    On tax reform, while growth in spending must be controlled, 
we do not believe that the projected tsunami of retirees can be 
absorbed by Federal programs without increasing revenues. 
Stabilizing the debt by spending cuts alone would cripple 
essential government functions and responses to human needs.
    Moreover, as our colleagues have stressed, our current Tax 
Code is riddled with exclusions, exemptions, deductions, and 
other special provisions that distort economic activity, narrow 
the tax base so much that rates are unnecessarily high. Our 
proposed Tax Code would have only two individual rates, 15 and 
28 percent, and one corporate rate, 28 percent. Most special 
treatment of income or spending would be eliminated or phased 
out. Capital gains, dividends, and so-called carried interest 
would be taxed at ordinary rates. Credits would be allowed for 
earned income, children, charitable contributions, mortgage 
interest on primary residences up to a limit, and retirement 
contributions. The exclusion of employer-paid health care from 
taxable income would be phased out, which we regard as both a 
tax and a health-care reform.
    We believe, like our colleagues, that this simpler Tax Code 
would be both fairer and more conducive to economic growth. It 
would raise more revenue than current policy, but less than 
current law, and do it in a more progressive fashion.
    We fully appreciate the difficulty of the choices facing 
this committee and hope you have the courage to restore fiscal 
responsibility and avoid the truly dire consequences of 
partisan gridlock.
    Thank you very much.
    [The prepared joint statement of Mr. Domenici and Dr. 
Rivlin appears in the appendix.]
    Chairman Hensarling. I thank you, Dr. Rivlin.
    Thank you for the entire panel.
    The chair will now yield to himself for 10 minutes.
    I believe one of the things I have heard from all of the 
panelists--and I have certainly heard the revenue message, and 
we will go back to that--but I think I heard particularly you, 
Senator Domenici, say that the number-one challenge that we 
have with respect to our debt is health care. Is that correct?
    And I think, Mr. Bowles, I heard you say something similar.
    Is there a consensus among the panel that the number-one 
challenge we face in our structural debt crisis is health care? 
No one is diverting from that?
    Dr. Rivlin, I have a question, then, for you.
    Mr. Domenici. Mr. Chairman, I want----
    Chairman Hensarling. Yes, Senator Domenici.
    Mr. Domenici. I just wanted to ask if they would put up the 
chart that is very explicit on this. You cannot miss it.
    Chairman Hensarling. If you have a number for me, I would 
be glad to have the staff put it up.
    Mr. Domenici. We don't use this, so I don't know--somebody 
said they would put it----
    Chairman Hensarling. I bet you somebody enterprising will 
be able to find that.
    Mr. Domenici. They showed me just before we met.
    Chairman Hensarling. ``Wake up, folks, it's health care.'' 
That appears to be how you entitled your slide. If the staff 
can pull that one up, please.
    Mr. Domenici. I would ask them if they could put it back.
    Dr. Rivlin. There it is.
    Chairman Hensarling. Well, that is one of them.
    Dr. Rivlin. That is it.
    Chairman Hensarling. That is it?
    Mr. Domenici. That is these various governmental functions 
versus GDP. And look which one, that blue line up there, that 
is health care. Look at the lines underneath. Those are big-
ticket items that people think--but look at what is happening 
to health care.
    I am going to give you a word. If we do not produce a plan 
that would permit CBO to say that the line has been bent--the 
line has been bent--if that isn't in the plan, then you have 
not caused in a major way a reform of health care. Because if 
that line keeps going that way, you have solved nothing. So it 
must start to bend someplace.
    Chairman Hensarling. So you are not speaking of simply 
slowing the rate of growth; you are talking about a plan that 
actually bends the cost curve.
    Mr. Domenici. That is correct. And that is what we do.
    Chairman Hensarling. Dr. Rivlin, having the honor and, 
actually, pleasure of serving with you and Senator Simpson and 
Mr. Bowles on President Obama's Fiscal Responsibility 
Commission, I was somewhat familiar with your plan, with House 
Budget Committee Chairman Paul Ryan, on a Medicare premium 
support system. And you now have what I believe you have called 
a defined support system. And as I was listening to your 
testimony, it includes an aspect of maintaining some facet of 
the current fee-for-service aspect of Medicare.
    But could you tell me why this form of defined support is 
critical to saving us from the national debt crisis? And how 
does it differ from your earlier premium support plan with 
Chairman Ryan?
    Dr. Rivlin. I think it differs in several respects. The 
most important one is the one you noted, that it preserves 
traditional Medicare for anyone who wants it. And I think that 
is important. It is important to seniors, and it is important 
to have--you should forgive the expression--a public option.
    But in addition to traditional Medicare, it sets up 
Medicare exchanges, where seniors would choose among an array 
of plans that provided at least the same benefits as Medicare 
and competed with each other and with traditional Medicare to 
produce them in the most cost-effective way. We believe that 
that would control the costs, that the costs would go up much 
less rapidly. And that would be part of bending the curve, as 
the Senator says.
    We have, however, a fail-safe mechanism in there. If the 
competition does not result in bending the curve enough, we 
would say the defined support, the Federal contribution, would 
not go up faster than the GDP grows plus 1 percent. And if it 
did, there would be additional premiums for those choosing the 
more expensive plan, but those premiums would not apply to low-
income people.
    That is the plan in a nutshell.
    Chairman Hensarling. Thank you.
    A question for you, Mr. Bowles and Senator Simpson. And, 
again, it was both an honor and a pleasure to serve on your 
commission. I again want to say that I think you have 
contributed mightily to the Nation's consciousness. And I hope 
that whatever success that this Joint Select Committee 
achieves, part of it will certainly be on your shoulders and 
your previous good work.
    Let me ask this question, having served alongside you all. 
And there was much great work that was done on the Commission. 
One of my personal reservations was that the Commission did not 
adopt the Rivlin-Ryan premium support plan. I thought the work 
particularly in Social Security--and if I have time, I want to 
go back to what you do on the 75-year solvency.
    But on Medicare, which is really a larger, long-term 
challenge, we seemed on the Commission to apply much smaller, 
short-term reforms. You did put the 1-percent-plus-GDP cap, if 
I recall right, on total health-care spending, with a trigger 
of expedited procedures, if I recall right, to go to both 
bodies to fix the problem, but it wasn't a hard trigger.
    So, two questions. Do you believe in the defined support 
system policy that was just articulated by Senator Domenici and 
Dr. Rivlin? And if you do, why didn't we adopt something like 
that in Simpson-Bowles? I assume either, one, you didn't agree 
with the policy or, two, you didn't have the votes. Or maybe 
there is a third option.
    Mr. Bowles. Probably both.
    What we tried to do was to look at it on a realistic basis. 
If you look at the cost of Medicare and Medicaid alone today, 
it is about 6 percent of GDP, and it is growing like a weed. 
And that excludes what it takes to do--the $267 billion to do 
the doc fix, over $76 billion to repeal the CLASS Act. So it 
really is a big portion of our cost. It is, as, again, was said 
earlier, it is also, I believe, our biggest challenge from a 
fiscal viewpoint.
    As we looked at the Affordable Health Care Act which was 
recently passed, it was the contention of the Democrats on our 
commission that the cuts that were made to Medicare in the 
Affordable Health Care Act, along with the pilot programs that 
were set up, would reduce the rate of growth of health care to 
GDP plus 1.
    Chairman Hensarling. If I could interrupt, most of those 
cuts on the provider side, if I recall.
    Mr. Bowles. That is correct. That is correct.
    We didn't think that would happen; we didn't think those 
cuts were enough. So we did about $500 billion of additional 
cuts over and above that, with the hope that those cuts would 
slow the rate of growth of health care to GDP plus 1.
    But assuming that that didn't happen, you know, to us, 
there was no choice but to get the rate of growth to health 
care to that level, and we said there were certain options that 
would have to be considered at that point in time. And those 
options did include a premium support plan, it did include a 
robust public option, it did include even a single- or an all-
payer plan.
    Chairman Hensarling. I see my time is about to run out 
here. Let me quickly cover two other subjects.
    With respect to both of your plans on raising revenue, I do 
note that, as part of that, marginal rates are brought down in 
both plans. Is that correct? The witnesses are saying ``yes.''
    I have less than a minute remaining in my time. Also, I was 
looking for certain common elements of your plans, one of which 
is global chained CPI throughout the entirety of government 
programs. And in the very short time that we have left, maybe I 
could get a 30-second answer out of each of you, why you 
thought that was a critical part of the solution.
    Senator Domenici--okay, well, Dr. Rivlin, a brief answer on 
chained CPI?
    Dr. Rivlin. Yes, it is a technical change that economists 
have, for quite a while, decided was a better way, a more 
accurate way of measuring the cost of living for this purpose. 
And it would affect all government programs, including the Tax 
Code.
    Chairman Hensarling. So the COLA would still be there; it 
simply would rise at a different rate.
    Dr. Rivlin. Oh, absolutely. It is just a technical change 
in how you calculate the COLA and the index that is used for 
other programs with COLAs, including the Tax Code, which 
indexes the brackets.
    Chairman Hensarling. Senator Simpson, I am technically out 
of time, but could I get a quick answer on chained CPI?
    Mr. Simpson. Everything we looked at, people had looked at 
it. It is better. Although there are suggestions for something 
else, CPI-I, but that is experimental. This one looks like 
everyone would adopt it. And if we could do it government-wide, 
it saves billions.
    Chairman Hensarling. I thank you, Senator.
    The co-chair will now yield to his co-chair, Senator 
Murray, for 10 minutes.
    Co-Chair Murray. Thank you very much.
    And, again, thank you to all of you for your wise counsel 
on a very serious challenge.
    Let me just start, it seems both of your prospective 
proposals would achieve deficit reduction of at least $4 
trillion over the next 10 years through the use of a balanced-
approach framework that includes reductions in spending and 
increases in revenue.
    So let me just ask all of you, maybe by show of hands, do 
all of you believe that to get a balanced program that 
addresses the fiscal crisis, do we need both spending cuts, 
including entitlement reform, and revenue increases? Show of 
hands?
    Mr. Simpson. No question, yes.
    Co-Chair Murray. Okay. Well, let me start, then, with 
Senator Simpson and Ms. Rivlin. Maybe both of you can answer 
for your sides. Tell us why a balanced approach that includes 
both reductions in spending and increases in revenue was 
proposed by your committees.
    Mr. Simpson. Well, we know you can't cut-spending your way 
out of this, you can't tax your way out of it. If you get into 
some of the rates that would happen if you are doing taxes or 
whatever it is, it can't be.
    And we tire of the phrase ``tax increase'' when we are 
digging around in a $1.1 trillion stack of stuff called tax 
expenditures, which really affect about 5 percent of the 
American people. The little guy has never heard of half of 
them. And we said, let's take those, let's take those. And when 
you take one of those out, to call that a tax increase is a 
terminological inexactitude. It would be called a lie, in other 
words. And that is where that is. This is a fake, to say that 
you get rid of a tax expenditure and it is a tax increase.
    So we said we are not going to get into that business of 
tax increase so that Grover won't have a stroke over in his 
shop; we are just going to go around Grover and let Grover 
rant. Because I will tell you one thing, if he and the AARP--if 
we are in thrall to those two groups, we haven't got a prayer, 
and neither have you.
    Co-Chair Murray. Dr. Rivlin?
    Dr. Rivlin. I agree, we were attacking expenditures in the 
Tax Code, and they are almost identical with expenditures that 
are called spending.
    There is another reason, however, why you need a balanced 
approach, and that, I think, is the demographics. This 
government is going to have to absorb a doubling of the number 
of people over 65 in the next couple of decades. That is an 
awful lot of people. That isn't changing the role of 
government; that is absorbing a lot more people, which we can't 
do unless we have some more revenue.
    We must bend the curve on health care. We must fix Social 
Security. But we can't do it in such a drastic way that we can 
absorb all of those people without some more revenue.
    Co-Chair Murray. Okay.
    Mr. Domenici. Madam Chairman?
    Co-Chair Murray. Yes, Senator Domenici?
    Mr. Domenici. Might I just say, I think you all know, at 
least you, Madam Chairman, and a couple of other Senators there 
know me and have known me for a long time. And I didn't come on 
this committee trying to get anything--I didn't have any 
preconceived percentages that we used to work on. I said, let's 
start over.
    And the truth of the matter is, even when you fix Medicare 
in any reasonable way and bend the curve so that over 20 years 
you really get some savings, the deficit is still too big 
unless you decide to fill that gap with something. In other 
words, you don't have a viable budget versus the economy 
situation. So you have to look to the only thing that is left, 
because you have done the others. And we did it that way.
    Co-Chair Murray. I very much appreciate that response.
    And, Mr. Bowles, let me ask you, in the guiding principles 
and values that were established by your commission to guide in 
the development of your recommendations, you state that 
``growth is essential to restoring fiscal strength and balance, 
and deficit reduction must not disrupt the fragile economic 
recovery.''
    CBO and many economists agree that the rate of economic 
growth in the recovery projected for the remainder of this year 
and through 2012 was considerably stronger when your commission 
put out its recommendation than it is today.
    So I wanted to ask you if you believe, first of all, that 
the Commission was successful in adhering to those economic 
principles, but also whether, given the weaker projections for 
today, whether we should be doing more now for economic growth 
and reducing unemployment.
    Mr. Bowles. First of all, our commission, it was the number 
one founding principle in our commission that we didn't want to 
do anything that we considered to be overtly stupid, and we 
felt it would be overtly stupid to do anything to disrupt what 
is clearly a very fragile economy and in fact a very fragile 
economic recovery.
    Therefore, if you look at the cuts that we made in 2011 and 
2012, you will see that those cuts are quite small. However, we 
thought it was very important for us to get spending down, and 
so we did make significant cuts in spending in 2013, and those 
spending cuts do get us back to 2008 levels or pre-crisis 
levels of spending.
    When we came forward with that provision, lots of people 
thought, you know, that we were being too conservative. They 
said the recovery is real, that if you look at things like back 
in December, as you asked about, there was an increase in 
factory production, existing home sales were going up, retail 
sales were going up, it looked like banks were starting to lend 
to small businesses, unemployment was starting to come down, 
and investor sentiment was strong, and therefore people said at 
that point in time the recovery is real.
    We, on the other hand, felt while the recovery may be real, 
it was very, very fragile, and the reason we thought it was 
fragile, and I think that has been proven to be right over 
time, is that we were very concerned about demand. Demand comes 
from three basic sources. You know, the consumer is still two-
thirds of GDP, and in our cases we looked at consumer debt or 
household debt, it was still about 120 percent of household 
income, it was about $13 trillion outstanding. Over half of it 
was at floating rates. And if you think that a rise in food 
prices and gas prices took a bite out of consumer demand, you 
wait until interest rates go up. So we didn't see the consumer 
who had suffered a decline in their home value and a loss of 
income driving the economic recovery.
    Second leg of growth would come from business. It is a fact 
small businesses can't grow and can't create jobs without 
capital, and banks simply weren't lending to small businesses, 
and so we didn't see that the small business community would be 
able to lead us out of the recovery, and with big businesses 
who had plenty of capital, their capital was basically on 
strike because they didn't have confidence in the direction the 
country was going or didn't know which direction the country 
was going in, and lastly, it is hard to see business really 
lead us out of a recovery when the construction industry is 
really on its backside.
    The third level of economic growth would come from 
government. We didn't foresee an additional big stimulus 
package coming out of Washington to add growth to the economy, 
and if you look at what State and local governments were doing, 
they were actually cutting spending and laying people off, 
trying to balance their budgets. So we didn't see where the 
growth would come to drive the economic recovery.
    Myself, I believe we are in a structural contraction which 
will lead to a prolonged period of relatively slow growth and 
relatively high unemployment.
    Co-Chair Murray. Dr. Rivlin, your plan also addressed the 
concern of accelerating the recovery and phasing in some kind 
of deficit reduction, and I think you also were worried about 
the demand. Can you talk to us about what you did in your 
proposal?
    Dr. Rivlin. Yes, we were very worried about inadequate 
demand, and so we not only phased in the deficit reduction 
slowly, but we called for a 1-year, both sides, employer and 
employee, payroll tax holiday on the grounds that that was 
needed to stimulate demand upfront before we could safely phase 
into the deficit reduction that we were calling for. That was 
at a time when the economy was somewhat stronger; it seems to 
us even more necessary now.
    Co-Chair Murray. Did you have anything besides the payroll 
tax to stimulate jobs in your plan?
    Dr. Rivlin. No. We put that in as a kind of symbol of how 
concerned we were, a full year payroll tax holiday for employer 
and employee is, I think, $650 billion. That is a lot. Now, you 
could do it different ways. But we put it in to symbolize the 
fact that we were really worried about inadequate demand.
    Mr. Domenici. Madam Chairman, I might comment on that. 
Frankly, I was very surprised in looking at the group of people 
that were on this debt reduction group, when it came to this 
issue, they were as worried as on any issue I had seen because 
they were really fearful that the economy was not going to 
recover. Frankly, we don't know what will make it recover, but 
Alice has appropriately told you what came about, how we came 
about what we did, and it is a lot of money. I guess some of us 
said that it might have been a much better thing to have done 2 
years ago than whatever we tried to bring jobs. This might be a 
better way than anything we did, so we said let's suggest it.
    Co-Chair Murray. Okay, appreciate that very much. My time 
has expired, so thank you very much.
    Chairman Hensarling. The co-chair now recognizes Senator 
Kyl from Arizona.
    Senator Kyl. Thank you. First to Senator Domenici and 
Senator Simpson, it is great to see you both again, and to all 
four panelists, thank you for the, what, thousands of hours 
that you have put in on these subjects, and it has been helpful 
to everyone. Senator Simpson, you never disappoint. This is a 
serious subject but a little levity sometimes can help, and I 
appreciate that.
    You talked about eliminating so-called tax expenditures, 
and I just have one quick question for you, a comment on taxes, 
and then I would like to talk about entitlement reform. If you 
eliminated the so-called tax expenditures, the biggest four of 
which on the personal side are deductions for medical expenses, 
charitable contributions, mortgage interest payments, and 
payments of State and local taxes, and you don't reduce 
marginal tax rates commensurately, the roughly one-third of 
Americans who itemize would have a higher effective tax burden, 
would they not? In other words, they would pay more in income 
taxes?
    Mr. Simpson. Well, we, in getting rid of the 1 trillion 100 
billion suggested that the $100 billion would go toward 
reduction of the debt and the rest of it would come out, and we 
would give the people of America what they have been asking 
for, broaden the base, lower the rates, get spending out of the 
code, and we said we will give three rates: 0 to 70 grand you 
pay 8 percent, 70 grand to 210 you pay 14, and everything over 
210 you pay 23, and take the corporate rate to 26 from 36. But 
if you want to put something back, go ahead. The issue being if 
you want it, pay for it. So then you could go to rates of 12 
and 18 or whatever you want to do. We said give--on home 
mortgage interest deduction, give them a 12\1/2\ percent 
nonrefundable tax credit, that helps the little guy. If you 
want to do charitable contributions, give them a 12\1/2\ 
percent nonrefundable tax credit. We realize those things, 
municipal bonds. But at some point you just say, look, you were 
told to bring home the bacon, the lobbyists got you what you 
wanted, and now it is over, the fun and games is over.
    Senator Kyl. So do I understand of the $1.1 trillion, $1 
trillion of that would go for rate reduction?
    Mr. Simpson. That is correct.
    Senator Kyl. And only $100 billion for debt reduction?
    Mr. Simpson. That is correct, Jon, and it is good to see 
you, we served together, but let me just say, if you want to 
put something back, and they are wonderful things, earned 
income tax credit, you can get the violin out if you want to 
talk about what you are doing.
    Senator Kyl. Let me not take the time to do all that.
    Mr. Simpson. No, I don't want to do that.
    Senator Kyl. Let me just make one observation, and then I 
do want to get to the entitlement spending. Both the Fiscal 
Commission and the Bipartisan Policy Center have suggested that 
one of the options here is to tax capital gains and dividends 
at ordinary income tax rates.
    Now, you started the testimony by noting that you wouldn't 
want to do anything to disrupt a fragile economic recovery, 
sort of along the line of first do no harm, and my own 
observation is I think you could do great harm by effectively 
doubling the capital gains and dividends taxes because those 
represent areas of capital formation and investment in our 
economy.
    Let me just make a quick observation here. The government 
receives capital gains revenues when taxpayers sell appreciated 
assets. The technical terms are called realizations. Now, 
Congress tried taxing capital gains at the same rate as 
ordinary income before--this was back in 1986--and the 
resulting capital gains revenues were dismal. In fact, they 
shrunk and remained depressed for a decade until Congress 
lowered the capital gains rate in 1997. Higher capital gains 
taxes mean fewer realizations, a higher cost of capital, less 
activity in the capital markets, and less economic growth.
    The health care bill that was passed last year already 
increases capital gains and dividends rates by another 3.8 
percent, and that means that the very lowest capital gains rate 
under your suggestion would be 26.8 percent, the highest would 
be 32.8. In other words, more than double the existing rate, 
and even the Joint Committee on Taxation would say that a rate 
that high will actually lose, not gain, revenue, and that 
doesn't even account for the negative impact on economic 
growth.
    Other economists, ones who testified before our Finance 
Committee, said letting the top capital gains and dividends 
rate drift up to 20 percent will erase the theoretical revenue 
gain from increasing the tax rate and will lower both economic 
growth and wages. If the rate is pushed even higher, more 
revenue and GDP will be lost, and wages will be even lower.
    So I would just ask you all, as we continue to visit about 
these things, to think about this. Your views are important to 
the committee, but in this one respect I think it could be very 
counterproductive by lowering economic growth, not really 
raising revenues, and it would make our deficit problem worse.
    Now, let me turn to entitlements here because, Dr. Rivlin, 
I think you said something very important in response to 
Representative Hensarling's questions, and I want to make sure 
that I have this right. First of all, I think it would be 
useful for you to explain the benefits of a defined support or 
a premium support such as you recommend. If you could do that 
generally. But also correct me if I am wrong, but I understood 
you to describe the plan laid out in your submitted testimony, 
which is a little different than the original Domenici-Rivlin 
in that at least there are two attributes. First of all, you 
would actually--do you actually set the contribution, the 
Federal contribution level first by the second lowest bid, 
which would include fee for service but have the fail-safe, as 
you described it, that in no event would it go up more than GDP 
plus 1 with a sort of means tested premium support in the event 
that it did so? If that is not accurate, please tell me how I 
am wrong.
    Dr. Rivlin. Senator, you have it exactly right. We have 
improved this plan, I think, over our original one. It is now 
more like the bipartisan plan in the Breaux-Thomas proposal of 
the late 1990s, and one of the complaints that we got about the 
way we did it originally was it didn't reflect the actual costs 
of health care. When you do it by a bidding process, then it 
does reflect the actual cost.
    Senator Kyl. And also, as you are describing the benefits 
of this, talk about how you select the second lowest bid 
because I think that is a very clever way to do this.
    Dr. Rivlin. Well, that is arguable. There are different 
ways of doing it, but we thought----
    Senator Kyl. I thought it was.
    Dr. Rivlin [continuing]. Selecting the second lowest bid 
gave--it wasn't the lowest, which might well be flukishly low 
for some reason, but people then who wanted to go to the even 
lower bid, the one that wasn't selected could do so and could 
get some money back.
    Senator Kyl. They would pocket the difference between the 
second bid and the one----
    Dr. Rivlin. Right.
    Senator Kyl. And if they wanted to be no dollar out of 
pocket, they would take the second lowest bid plans.
    Dr. Rivlin. Right.
    Senator Kyl. And of course anybody could offer plans at 
that level, and if somebody offered a plan that was more 
expensive, perhaps it had a different set of benefits or 
whatever, then they could pay for it, but the Federal premium 
support would only be at that second lowest bid.
    Dr. Rivlin. That is right. So it gives you a way of making 
the competition real, and we believe that would bring the costs 
down.
    Senator Kyl. I agree with that. Now let me go back to my 
first question there. Discuss the benefits of that premium 
support concept generally because I think it is not necessarily 
well understood. And then the final question I will ask is, 
that is not all that you would recommend. You also recommend--
and this is really a question for all of you, but additional 
changes to the existing system that we have in order to 
potentially reduce expenditures, things like combining the part 
A and part B, increasing premiums under certain circumstances. 
I have forgotten whether you get into the co-pay issue or not. 
But could you also discuss whether some of those things are 
useful to do even if we do the premium support, but in any 
event, certainly if we don't do it.
    Dr. Rivlin. Yes, and I think also the things that Erskine 
Bowles mentioned, that the pilot programs and attempts to find 
better ways of delivering care and government support and 
private support for innovations and testing those things and 
putting them out in the public domain, that is all a very good 
thing to do, and we think it will pay off in the end, and it is 
not incompatible with our defined support plan because once you 
have those innovations out there in the public domain, the 
private sector is going to pick them up, Medicare will use 
them, things will get better.
    Senator Kyl. Hopefully reduce costs.
    Mr. Domenici. Mr. Chairman, Madam Chairman, might I just 
follow up with Senator Kyl with one observation? On this one 
that you are speaking of on Medicare, the first thing that we 
did was to note the objection to a new system, and it was 
generally right upfront that you are abolishing Medicare, and 
so this new plan starts with the premise, we will have both 
programs, and you can choose, and that put us on a completely 
different path with our members than before, and it is very 
different than anything you all have considered, excuse me, you 
all in the House have considered heretofore when you took this 
subject up.
    Senator Kyl. An important observation. Thank you.
    Mr. Bowles. Actually, I didn't say it, Senator, but in our 
plan we did try to address this issue. Our belief was the 
current benefits structure encourages overuse, and there are 
currently a hodgepodge of different co-pays and deductibles and 
premiums. We wanted more cost sharing in our plan, we wanted 
people to have some skin in the game, we wanted to get rid of 
first dollar coverage for that reason. So we went to one 
deductible on part A and part B of $550. We had a 20 percent 
payment up to $5,500, and then a 5 percent co-pay up to $75,000 
and capped out at that level. We also on Medigap, we had no 
Medigap would be available for the first 500 and then 50/50 up 
to $5,000.
    Senator Kyl. All of those I think are very useful 
suggestions, and I appreciate them all. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes the gentleman from California, 
Congressman Becerra.
    Representative Becerra. Thank you, Mr. Chairman. To all of 
you, thank you very much for your service to this country and 
for the work you have done to give us some templates that we 
can use to try to resolve this issue for not just the Congress 
but for our country.
    I enjoy always hearing from the four of you because you 
have shown us that you can be big, you can be bold, and you can 
be balanced and still try to move the country forward, so I 
thank you for that, and as I said to both Alan and Erskine on 
many occasions, I thank you so much for attacking those sacred 
cows that too often get in the way of Congress being able to 
deal with those things that are most important. I honestly 
think, and I served on that Commission with you, as I said 
before, I thought you put all the elements in place. I would 
have put the mixture of those elements differently, but I 
compliment you today, as I did back then, and I applaud you for 
what you did in putting together the template of what could be 
a solution for the country.
    I think I heard you all say this, but I want to make sure 
about this. While we are still suffering through these 
difficult economic times and back when we were going through 
this with the Commission, and Director Rivlin, I know that you 
and Senator Domenici were also going through this as well when 
you were coming up with your plan, times were tough. Well, they 
are still tough, and I suspect all of us back when we were 
going through the work of these two Commissions thought that 
the country, the economy was doing far better.
    Is it still your premise that we should really concentrate 
on getting the economy back on track, getting Americans back to 
work before we go too heavily into trying to find these savings 
by making cuts in some of these important investments that we 
have? And I will open it up to anyone to answer. Director?
    Dr. Rivlin. It is a timing question, Mr. Becerra. We 
believe that drastic cuts in spending right now would be 
damaging to the economy, as would tax increases right now. We 
need to let the recovery happen and indeed stimulate it with 
proposals that we have been talking about. But that doesn't 
mean putting off the deficit reduction. One of the best things 
we could do for the growth of the economy right now is for this 
committee to legislate long-run reduction in the deficit on the 
entitlement and tax side right now. We can't wait until after 
2013 or some other time to do that. The markets and the public 
have got to see that it is going to happen, that we are 
serious, and that it is in law. Then it doesn't have to take 
effect right away, but it has got to be in the law.
    Representative Becerra. So let it play itself through, get 
it done, let it play itself out, you have time for it to take 
effect long term as you see the economy begin to recover?
    Dr. Rivlin. Right. But don't wait to legislate it.
    Representative Becerra. Got it, got it.
    May I ask a question regarding revenues? You all tackled 
the issue of revenues, you did it in somewhat different ways, 
but for the most part you did something that I thought was very 
important. You tried to also show the public that while we 
would increase real revenues, we would ultimately try to reduce 
the rates and give people a fair taxation system, and so that 
while we were still able to generate revenues, which we need, 
you are able also to tell the public that they are going to 
have a system that works better for them, and so that they 
could understand the simplicity and the fairness of it.
    In both plans I believe, and we have had a little 
discussion on this, you equalized the taxation for capital 
gains and dividends to ordinary income or, in layman's terms, 
an asset, an investment in stocks or bonds would now be taxed 
at the same rate that the income earned by a hard working 
American would be taxed at, so they would be treated equally. 
You also found ways to reduce the rates overall for all income 
groups, and you went after what I know in the Bowles-Simpson 
Commission became known as tax earmarks, those tax expenditures 
which I believe, Senator Simpson, you mentioned totaled over a 
trillion dollars. And so you came up with a mix. Again, you 
tackled some sacred cows, and you came up with a mix.
    Is it still your sense that that type of a mix can work for 
this committee? Open it up to anyone.
    Mr. Domenici. Sir, I will say absolutely, and I would say 
to my friend Senator Kyl when he talks about capital gains, if 
you look at my record, I have voted in favor of capital gains 
for my 36 years in the Senate, but I didn't have a chance to 
lower the rates like we are lowering them at the same time that 
you were looking at capital gains. In this case that is what 
happened. We lowered the rates.
    Now, I heard from the best experts this country could put 
before me when I was chairing that the best way to effect 
growth in this country is to lower the rates on all people. 
That was the best instrument of growth. They didn't say except 
for capital gains. They said it is the best instrument for 
growth, and we lowered it all substantially, so we put back 
into the code the instruments of growth which is the lowering 
of the rates on middle America and all Americans, which we did 
in ours and they did in theirs. Theirs is a little stronger in 
terms of, as Al explained it, they have come down lower so you 
can put back some things.
    I would tell you, we also included in this, so you don't 
forget, we put in the medical expenses, which is the largest 
tax expenditure. It is bigger than homeowner interest rates. We 
phased that out over a long term. That is a very difficult one, 
but we did it in ours, and you all should know that is part of 
the reason we got the rates we got.
    Representative Becerra. And, Erskine, I think you called 
the tax expenditures backdoor spending through the Tax Code?
    Mr. Bowles. It is, Congressman. It is just spending by 
another name. I was flabbergasted, I was appalled to see that, 
you know, having listened to all the talk about earmarks all 
these years which are in the appropriations bills, there are 
about $16 billion worth of annual earmarks a year. There are 
$1.1 trillion worth of annual earmarks in the Tax Code. And it 
is just spending by another name. It is somebody's social 
policy. And if you were to eliminate them and use 92 percent of 
the proceeds to reduce rates and only 8 percent of the proceeds 
to reduce the deficit, you could reduce the deficit by about 
$100 billion a year, so a total over a 10-year window of about 
a trillion dollars, and you could take rates to 8 percent up to 
$70,000, 14 percent up to $210,000, and have a maximum rate of 
23 percent. You could take the corporate rate to 26 percent, 
and you could pay for a territorial system so that $1 trillion 
that is captured overseas could be brought back to this country 
to create jobs over here. I believe that would create dynamic 
growth in this country and produce revenues far beyond what we 
have forecast. So I am very excited about broadening the base 
and simplifying the code. I think it makes a lot of difference.
    Representative Becerra. And I would love to focus on a 
couple more areas of spending. I know that when we talk about 
spending you also were willing to tackle this issue of the 
discretionary side of the budget, the kind of spending we 
typically talk about, but most people don't recognize that 65 
percent of all the spending increases that occurred over the 10 
years, the last 10 years came out of just one department, the 
Department of Defense, mostly because of the war, but because 
of the growth in some of our military projects and contracts 
and so forth. I know that you tried to tackle that some and I 
appreciate the work that you did there.
    With the limited amount of time that I have, I would like 
to touch on health care, and I appreciate what each of the 
Commissions tried to do on health care, but let me just pose 
one question. Perhaps you can help us with this. We could do 
any number of things to try to reduce the cost of Medicare and 
Medicaid for the American public, but at the end of the day if 
we do nothing to try to help lower the cost of health care 
overall, not just within the public sector, within Medicare/
Medicaid, we will simply have shifted the expense of health 
care in Medicare/Medicaid to those who use health care through 
Medicare/Medicaid, to our seniors and our disabled because the 
reality is that today the cost of health care under Medicare is 
growing slower than the cost of health care in the private 
insurance market. We went through that in the Bowles-Simpson 
Commission, how it is really strange, we are talking about the 
crisis in health care. The reality is if you were to get rid of 
Medicare and send seniors over to the private sector insurance 
market, they would actually end up paying more because the cost 
of private insurance is growing at a faster clip than is 
Medicare/Medicaid. So the issue is, how do we corral the cost 
of health care which it could hit Medicare/Medicaid, so that 
way we don't end up just shifting costs from the people, the 
taxpayers, to the actual beneficiaries, in this case our 
seniors who are now retired.
    So if you can give that some thought, that would be very 
instructive. I know that the health reform of last year meant 
to do that, to try to help corral the cost in the private 
sector, but if we don't do something about overall health care 
costs, simply telling seniors that they will end up paying more 
in Medicare doesn't help with our health care costs.
    Thank you for your service to this country and your time.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes Congressman Upton of Michigan.
    Mr. Upton. Well, thank you, Mr. Chairman, and I certainly 
want to agree with each of you that these deficits are 
unsustainable. I appreciate your candor, your service, your 
hard work. Believe me, we know a little bit about your work 
because we together have spent hundreds of hours as well over 
the last number of weeks, and you underscore my respect for 
each of you as truly great Americans.
    As you may know, my home State of Michigan, Dave Camp's as 
well, we have had 34 consecutive months of double digit 
unemployment, and as I talk to people back home, as I was again 
this past weekend, people know we are in a rut. Senator 
Simpson, they know exactly what you are talking about. And 
they, in fact, are relying on us to try and get our car out of 
the ditch and back in first gear.
    I put a chart, I can't see it very well up here, but I 
think you have a chart I think in front of you that scores the 
President's health care plan from 2014 to 2023, and that 10-
year outlay plan shows that spending, the effects on the 
Federal deficit will be almost $2 trillion in additional 
spending over the next 10 years.
    [The chart appears in the appendix on p. 108.]
    Representative Upton. And each of you noted in your various 
proposals that the Federal budget is on this unsustainable 
path, and you identified health care as one of the most 
important items that this committee and the Nation should be 
focusing on.
    So as you see from this chart, that the exchange subsidies 
are certainly the primary driver of this dramatic expansion of 
Medicaid. CMS actually certified that because of the 
President's proposal, nearly 25 million more Americans will be 
on Medicaid after 2014 because of that expansion, which means 
that more than one in four Americans will be, in fact, a 
Medicaid beneficiary.
    So based on that and the statements that you have made 
about the budget crisis, do you believe that we should revisit 
the expansion of the Medicaid program in the President's 
proposal? Erskine? Sorry that you start on that end.
    Mr. Bowles. No, no, I am very happy to answer any question 
that you ask. You won't smell any fear on us out here.
    Mr. Simpson. Go right ahead.
    Mr. Bowles. We had great questions that if the affordable 
health care plan could actually slow the rate of growth of 
health care to GDP plus 1. Because we had those questions, we 
did believe it would solve the problem of providing more people 
health care, but we didn't think it solved the problem of how 
to control the cost of health care, and therefore we made the 
$500 billion worth of additional cuts to both Medicare and 
Medicaid and certain other Federal health care programs in 
order to--and hoping that that would slow the rate of growth. 
If it didn't slow the rate of growth, then what we said is 
there has got to be an overall cap on all of these areas of 
spending, of Federal health care spending, and you are going to 
have to look at some options like a premium support plan, like 
the robust public option, like a single payer plan.
    Representative Upton. Alice? Or, I am sorry, Alan.
    Mr. Simpson. We just knew that whatever you call it, if you 
want to use the negatives or call it ObamaCare or any kind of 
care you want to, it won't work. It can't work because all you 
have to do is use common sense. You have this imploding of 
people, you have diabetes, you have one person in America 
weighs more than the other two, you have got guys who choose to 
do tobacco, who choose to do booze, who choose to do designer 
drugs, and all of them will be taken care of. You have got 
preexisting conditions in 3-year-olds. What happens through 
their 60 years or 50 years of life? All you have to do is 
forget the charts and know that if you torture statistics long 
enough, they will eventually confess, and know that this 
country cannot exist on any kind of situation where a guy who 
could buy this building gets a $150,000 heart operation and 
doesn't even get a bill. Now, that is nuts, and that is where 
we are in America. There is no affluence testing, you have got 
to raise co-pays, you have got to knock down providers, you 
have got to deal with physicians, you have got to have 
hospitals keep one set of books instead of two. That would be a 
start.
    Representative Upton. Alan, what did you do about Medicaid? 
Because originally you all had, as I understand it, you were 
going to convert it into a block grant for the States, and it 
is my understanding that you dropped that proposal; is that 
right?
    Mr. Bowles. We were never going to convert it into a block 
grant for the States. One of the things that--we felt that was 
too big of a shift, too unproven of a theory. What we did 
advocate is testing it in 10 States. It is on the theory that 
one size doesn't fit all, that Governors can cover more people 
with less cost if they have control of the funds. So we said 
let's test it in 10 States. If it does prove to be something 
that does lower the cost of health care and still provides 
coverage to people who need it, then we could support it, but 
you ought to test it first. I think that is what you would do 
in the business world, I think that is what you would do in 
most places.
    It is now being tested in Rhode Island. It is working very 
well. I understand Washington State is actually asking if they 
can test it. So I do think it is one of the things that will 
prove out over time.
    Representative Upton. So beyond those tests did you ask for 
any other reforms on the Medicaid side?
    Mr. Bowles. Yes, we did.
    Representative Upton. And they were?
    Mr. Bowles. As an example, having run the public hospital 
in North Carolina for the last 5 years, you know, you can see 
the gaming that goes on in the Medicaid program by the 
payments, since it is a shared cost program, that is 
approximately 50/50 between the States and the Federal 
Government, you know, the docs would up the amount they would 
charge in order to cover higher fees charged by the State. They 
would both come out even, but the taxpayers would end up with 
about a $50 billion bill for that. So we cut out that kind of 
gaming in the State Medicaid programs.
    Representative Upton. Now, Alice, one of the proposals that 
you all recognized on the Medicaid side was this program called 
the per capita cap, which for those in the audience would 
actually, each State would receive an allotment determined by 
the number of folks in the specific categories for Medicaid 
based on the State population number for those numbers, and 
then that would be increased each year by GDP plus 1 beginning, 
I want to say, in 2014, 2015. Do you--are you a part of that 
proposal? I know way back when. Are you still supporting that 
idea?
    Dr. Rivlin. We looked at a number of ways to reduce the 
rate of growth of costs in Medicaid. One was splitting the 
responsibility between the Federal Government and the States. 
Medicaid is really two programs. It is acute care, which is 
largely for children and their mothers, and it is long-term 
care, and one of the things we looked at was split the 
responsibility for those two between the Federal Government and 
the States. We thought that would help make it clearer who is 
responsible for what, and not have the matching program that 
results in a certain amount of gaming. We also wanted to get 
rid of the kind of gaming that goes on in Medicaid, as Mr. 
Bowles has suggested, and one thing we were very clear about 
was the dual eligibles, those who were eligible for both 
Medicaid and Medicare. There is some impediments to their 
getting into managed care and management of their usually 
multiple diseases, and we wanted to fix that.
    Representative Upton. And what did you do in terms of added 
State flexibility to allow the States to be able to have 
greater control over what services were eligible?
    Dr. Rivlin. That is certainly a possibility. We did not, 
frankly, come down very clearly. We offered a menu of options 
on what to do about Medicaid. I think it is the hardest 
problem, much harder than Medicare, and we thought we had a 
good plan for Medicare. We offered a menu for Medicaid.
    Representative Upton. On Medicare, both Ways and Means and 
Energy and Commerce have jurisdiction over this issue, and I 
know that as many of us have looked at this, we have felt that 
it is the toughest entitlement to try and curb the cost curve 
downwards. We have heard a little bit about A and B, putting 
them together, the deductibles, the co-pay. It is my 
understanding that both of your groups also increased the age, 
is that right, for eligibility?
    Dr. Rivlin. No, we did not. We didn't even do it for Social 
Security. But we certainly did not for Medicare.
    Mr. Bowles. We have it as one of the options out in the 10-
year window. It is not in the first 10-year window.
    Representative Upton. And when you looked at all the 
options that you considered, what was the one that was the 
first--what was the priority order that you came up with in 
terms of where you thought we--what we ought to do to reform 
Medicare?
    Mr. Bowles. We did not prioritize outside of a 10-year 
window. We said that drastic steps are going to be taken, those 
drastic steps must include looking at things like Alice and 
Paul's premium support plan, it has to look at a robust public 
option, it has to look at things like block granting Medicaid 
to the States, it has to look at things like a single payer 
plan, it has got to look at things like raising the eligibility 
age for Medicare. That is what we--those are the options we saw 
that would have to be considered if, in fact, you can't slow 
the rate of growth to GDP plus 1.
    Chairman Hensarling. Before yielding to the next panel 
member, Senator Simpson, I think I have been informed that you 
have to depart in 20 minutes, if that is----
    Mr. Simpson. Mr. Co-Chairman, I could wait a few minutes 
after that. I have to get to Dulles to catch a 5:30 flight to 
Denver so I can get out of town before they find out I have 
been here.
    Chairman Hensarling. Well, certainly Senator, we sincerely 
appreciate your participation today, and you will be excused 
from the panel whenever you need to depart.
    Mr. Simpson. Let me share with the co-chairs that Erskine 
Bowles has a remarkable thing to present to you, and if I do 
have to leave early, I would have given him my time. It is very 
important that you hear what I think is a solution for you that 
only he, in his brightness, can propose. You can do anything 
you want with it, but I think it will get you somewhere where 
we think you want to get, and Erskine, as I say, if I leave, 
whatever time you would have allowed to me, but I want to hear 
from my colleague who came to the Senate when I did, Max, and I 
will stick around to about 25 or 20 of. Thank you so much.
    Chairman Hensarling. Thank you, Senator, and the co-chair 
notes that Mr. Bowles now has your proxy.
    Mr. Simpson. Yes, he does.
    Chairman Hensarling. And the co-chair will yield to the 
gentleman from Montana, Senator Baucus.
    Senator Baucus. Thank you, Congressman Hensarling. Everyone 
wants to reform the Tax Code. I don't know anyone who doesn't. 
But it is in the eyes of the beholder, what is reform to one 
might not be reform to the other. You have mentioned the $1.1 
trillion in tax expenditures. I think it is important for 
everyone to know that only about $200 billion of those are 
itemized deductions. The rest are other tax expenditures, which 
include the employer-provided health insurance, for example, 
the retirement income provisions, R&D tax credit, there is a 
whole host of others in addition to itemized deductions. So if 
the proposal is to repeal them all in return for lower rates 
and deficit reduction, people have to realize what that means. 
A lot of people have relied on those provisions, employees have 
because that is in-kind income that is not taxed generally, as 
well as the R&D tax credit to make America strong, and 
retirement provisions so people can save for the future.
    Now, the question that comes to my mind is how quickly do 
you recommend we tackle all of that? We have a November 23rd 
deadline, and I think one of you suggested, I think it was Mr. 
Bowles, you suggested that this be delegated to maybe the tax 
writing committees so that we do tax reform with some kind of a 
kicker at the end, penalty if the committees in the Congress 
don't act, et cetera. I would like you to comment on that. I am 
also waiting for the Bowles solution at the end of this 
presentation. I hope it includes something that addresses what 
I am talking about.
    Address revenue. When you gave your presentation, Mr. 
Bowles, I might say we are all big fans of all four of you. You 
have worked so hard. When each of the four of you were 
speaking, you could hear a pin drop. You spent so much time on 
this subject and so conscientiously, so thoughtfully, people 
know that. But when you, Mr. Bowles, mentioned one of your four 
principles, as I recall, one of them was tax reform, but you 
didn't say much about revenue, how you raise revenue.
    My understanding is that the Commission suggested something 
in the neighborhood, I have forgotten exactly what it was, 
maybe a trillion dollars in new revenue to be offset with the 
spending cuts, and is that true? It is my understanding that 
you need to make permanent middle income tax cuts but not the 
upper income. You, in effect, propose raising revenue on the 
current policy basis of about $1 trillion. Does that sound 
about right?
    Mr. Bowles. Well, you know, you were on our commission and 
you attended a few of our meetings, so I think you probably 
know exactly what we did. What we did was, we did in the 
baseline extend the Bush tax cuts for everyone except the top 2 
percent.
    Senator Baucus. Right.
    Mr. Bowles. And then we reformed the Tax Code by broadening 
the base and simplifying the code and by eliminating the tax 
expenditures in our zero option plan, and in the zero option 
plan all of the tax expenditures did disappear, and 92 percent 
of the money went to reduce rates and 8 percent went to reduce 
the deficit. None of it went to additional spending.
    Senator Baucus. Right. So I think the answer to Senator 
Kyl's question would be about $100 billion for deficit 
reduction; is that correct?
    Mr. Bowles. That is about $100 billion a year 
approximately.
    Senator Baucus. How can that be enough revenue when there 
is such spending cuts recommended in your plan? I think you 
have a two-to-one ratio of revenue raised to spending cuts.
    Mr. Bowles. I think it was even more than that, Senator. I 
think it was, depending on how you counted, we had about a 
trillion dollars worth of additional revenue coming in, and we 
had about $3 billion worth of spending cuts, and we were 
working----
    Senator Baucus. $3 trillion.
    Mr. Bowles. Excuse me?
    Senator Baucus. Trillion.
    Mr. Bowles. Trillion, excuse me. And we were working 
towards that number. We were trying to get it to be no more 
than one-third revenue and two-thirds spending cuts, and we 
tried to get it to be one-quarter and three-quarters.
    Senator Baucus. Going back to my first question, do you 
recommend that we here try to enact all those, cut all those 
tax expenditures and set rates or delegate it to the tax 
writing committees?
    Mr. Bowles. Well, we do recommend that you delegate it to 
the tax writing committees and set up a framework in this 
Commission. I don't think you can possibly rewrite the tax law 
between now and November 23rd and get it scored nor do I think 
you can rewrite the entitlement legislation and get it scored 
by November 23rd, but you can provide instructions to the 
appropriate committees.
    Senator Baucus. To raise how much revenue?
    Mr. Bowles. To raise about a trillion dollars worth of 
revenues.
    Senator Baucus. Which is included in the reform with 
broadening the base and lowering the rates?
    Mr. Bowles. Yes.
    Mr. Domenici. I wonder if you would yield to me for one 
minute?
    Mr. Bowles. Sure.
    Mr. Domenici. Mr. Chairman, could I just offer a 
suggestion?
    Senator Baucus. Certainly.
    Mr. Domenici. We felt ourselves extremely confronted by the 
problem of shortness of time for such a big job of reforming 
the Tax Code. Some of us were here when Bob Packwood was the 
chairman in the Senate and that effort took place. It took much 
longer than you need, but it took 2 or 3 years, 2\1/2\, 3 years 
or more. What we did in our testimony and what we have sent to 
you in a packet is we have taken Section 404 of the law that 
created you, which is a section that we think intentionally 
gave you an extreme amount of authority and more flexibility 
than we have been talking about, and that flexibility we think 
permits you to set up a direction with specific things you 
asked the tax writing committee to do, and that they have to do 
it by a date certain, which could be 3 months from now, 4 
months.
    Senator Baucus. I appreciate that.
    Mr. Domenici. You would go to the committees. It is not 
reconciliation. It is an instruction.
    Senator Baucus. We want tax reform in the worst way, all of 
us do. We are trying to figure out the best process and the 
best way to do it.
    Second, I would like to ask about defense spending. It is 
my understanding that the Fiscal Commission recommended roughly 
$800 billion in defense cuts. When I compare that with the 
sequestration, which is about $800 billion, a little bit more, 
not much, the Budget Control Act in August cut about 350, 
referring to some accounting. Does that mean that you suggest 
another $450 billion in defense cuts?
    Mr. Bowles. We recommended about $1.7 trillion worth of 
discretionary cuts in outlays. It was about $2 trillion in 
budget authority from the President's proposed discretionary 
budget. I think he proposed, Senator Baucus, $11.7 trillion in 
discretionary spending. We proposed to cut it to $9.7 trillion, 
and the cost of the way the budget authority plays out slower 
in the form of outlays, it worked out to about $1.7 trillion. 
We said that should be split proportionally between security 
and non-security spending. We also recommended that there be a 
firewall between security and non-security spending over a 
period of time so that the future Congresses wouldn't come back 
and load it all up on the nondefense side and not on the 
defense side.
    Senator Baucus. Right, right. In the same vein I think the 
Commission recommended a cap on something called Overseas 
Contingent Operations.
    Mr. Bowles. Yes, we did.
    Senator Baucus. There is currently not a cap; is that 
right?
    Mr. Bowles. [Witness nods.]
    Senator Baucus. Isn't it true--you may not know this; you 
probably do--that the Appropriations Committee transferred $9 
billion over to Overseas Contingent Operations to escape the 
limitation?
    Mr. Bowles. I don't know about that.
    Senator Baucus. That is going on. So you therefore would 
suggest a cap to help minimize that? I think your cap is $50 
billion?
    Mr. Bowles. We were trying to keep the OCO from being a 
slush fund.
    Senator Baucus. Thank you. That is what I am getting at.
    Yes, Alan?
    Mr. Simpson. May I say that whatever you do, and that will 
be so appropriate, just do a plan. You don't have to worry 
about, you know, who is doing this or the timetable and so on 
because let me tell you why the rating agencies don't mess with 
Germany or France or Great Britain, because each of those 
countries have a plan. All these people are waiting for is a 
plan. You can decide how many teeth you want to put in the jaw, 
but just do a plan, and you will see dramatic effects around 
the world with the rating agencies.
    Senator Baucus. I agree with you very much. One question on 
the premium support, we don't have much time here. A concern 
some have is this, that with the election, to put it in rough 
terms, it would be a death spiral. That is that people 
currently on, the insurance companies will package sales of 
policies to the most healthy, so the most healthy people will 
buy these new policies, leaving the less healthy in Medicare, 
and the more that happens, the more the sicker people are in 
Medicare, so Medicare, the more it happens, Medicare costs just 
go up, up, up because the sickest are there. I am sure it is 
something you gave a lot of thought to. But some have raised 
this question. I am curious.
    Dr. Rivlin. Some have raised it, but we don't think it is 
true of our plan. We think we have avoided that possibility by 
the rules that we put in, any plan on the exchange would have 
to accept anybody, and they would be compensated on a risk-
adjusted basis. I mean, they got more for people who are older 
and sicker, therefore they have no incentive to not serve those 
people.
    Senator Baucus. Again, I just want to thank you all very 
much. You have offered a tremendous contribution to this 
country, all of you. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes the gentleman from Ohio, Senator 
Portman.
    Senator Portman. Thank you, Mr. Chairman, and thank you to 
the four patriots who are sitting before us, trying to avoid 
what Erskine Bowles talked about today and in the Budget 
Committee testimony as the most predictable economic crisis our 
country has ever faced, and I appreciate the discussion today. 
We talked about a lot of the same issues that this group of 12 
has been grappling with, revenues, of course, but also 
spending.
    I would like to focus, if I could, on some of the issues 
that we have talked about, but maybe with a little different 
angle. If you wouldn't mind putting up that Bipartisan Policy 
Center chart, again, whoever is in charge of the charts, that 
is the one that Senator Domenici asked to be put up earlier. 
This is the chart that shows that health care spending as a 
percent of our GDP is set to just about double in the next 25 
years. So just take my word for it, you don't need to see it; 
no, if you guys can put that chart up, I would appreciate it 
because it is the backdrop to this question.
    Erskine Bowles said current benefits encourage 
overutilization. He talked about some of the things that could 
be done, including higher co-pays, higher premiums, talked 
about part A and part B being combined, having a single 
deductible that is a little higher. He also said that in the 
Simpson-Bowles proposal that you all recommended reducing--
there it is--reducing health care spending over a 10-year 
period by $500 billion, and I assume to Senator Simpson and Mr. 
Bowles that that refers to the GDP plus 1, that is what that 
would mean, $500 billion, given this enormous growth or, to use 
your words, unsustainable growth in health care expenses.
    And let me ask you about a couple of ways to get there that 
we haven't talked about yet. One is means testing. It seems to 
me this is one where Republicans and Democrats alike ought to 
be able to come together. I could give you some interesting 
statistics, a two-earner couple retiring today will pay about 
$119,000 in lifetime Medicare taxes and receive about $357,000 
in lifetime Medicare benefits. That is 119 in taxes for 357 in 
benefits, which goes to the advertisement that you talked 
about, Al. So that is about three bucks in benefits for every 
dollar in taxes. If you multiply this by the 77 million 
retiring baby boomers, it is not hard to see why we have an 
unsustainable program.
    Now, we can talk about this in terms of being sure, as Dr. 
Rivlin just said, that those at the lower end of the income 
scale are taken care of, but at the same time I think it is 
difficult to justify giving upper income seniors benefits that 
so far exceed what they paid into the system. Can you all just 
comment on that? We haven't talked about that specifically. How 
do you feel about means testing, particularly on the part B and 
part D premiums?
    Mr. Simpson. Well, you have to, you follow the nomenclature 
here, you never want to use the word ``mean'' in anything 
especially. You call it affluence testing, and then you get 
juice, and that is what you should do. You are going to have to 
start affluence testing some of these benefits. There is no 
possibility of people who, as I say, literally, and you know 
them in your own community, who use these systems and pay 
nothing.
    Senator Portman. How about co-pays?
    Mr. Simpson. Co-pays have to go up, and you have to 
affluence test in that. These are my personal views.
    Senator Portman. Could we see a show of hands from the 
panel because the photographers love this, how many are for 
affluence testing?
    Mr. Simpson. It would be when they ask the Republicans for 
nine bucks worth of spending and one buck worth of revenue, and 
all hands shot up like robots. You don't want to get into that.
    Senator Portman. But this worked.
    Mr. Simpson. I do favor that affluence testing, I think I 
always talked about it, Bob Kerry and I have talked about it, 
Max remembers Bob Kerry and I and Danforth and Bradley were all 
involved in that years ago when we were here. You have to 
start, and it will be called un-American, cruel, evil, breaking 
the contract, I can hear the music and the violins in the back 
already, and it won't work anymore.
    Senator Portman. Okay. Let me go to a tougher one. I don't 
know if we have----
    Dr. Rivlin. Can I chime in on that? We already do have in 
the part B premiums some----
    Senator Portman. And in part D now.
    Dr. Rivlin. And part D, and we are certainly in favor of 
increasing that.
    Senator Portman. Okay. Erskine, you talked a little bit 
about, again, some other ideas, and I am going to put you on 
the spot here, my friend, because one was raising the age. How 
do you feel about raising the eligibility age, given the 
statistics on longevity? Eligibility age on Medicare I am 
talking about.
    Mr. Bowles. We actually did not have that in our plan. As I 
have thought about it since that time, you know, under the 
Affordable Health Care Act, we provide subsidies for people who 
have really chronic illnesses and for people who have limited 
incomes to get so that they can afford health care insurance in 
the private sector, and that didn't exist before the Affordable 
Health Care Act, and that means that people 65, 66, 67 would 
still be able to get health care insurance.
    So as I think about it, I could support raising the 
eligibility age for Medicare since we have other coverage 
available through the Affordable Health Care Act.
    Senator Portman. Let's go to tax reform for a second if I 
could. All of you are talking about broadening the base, and 
Chairman Baucus, and I am sure Chairman Camp is going to 
address this, too, something they are very interested in, 
simplifying the code, being able to do so by reducing marginal 
rates and getting rid of some of the underbrush. One thing we 
haven't talked about is corporate reform. As you all know, we 
have the second highest corporate tax rate among our trading 
partners. Japan is slightly higher, and they are intending to 
take theirs down. The average of all the developed countries, 
the OECD countries, is 26 percent, we are at 35 percent, but in 
fact we are not because you have to add State taxes on to that, 
and the average is about 6 percent, which happens to be Ohio's 
rate, so you are talking about 41 percent, and we do not have a 
territorial system, we have a worldwide system, which also puts 
us at a disadvantage, we are told, by all of our companies.
    Could I see a show of hands on this, do you all support 
getting the corporate rate down to a competitive level? I would 
define that as 25, 26 percent and territoriality, does 
everybody agree with that?
    Senator Portman. Oh, Alice. I almost got Alice.
    Dr. Rivlin. Well, if you are pinning us down to a rate, I 
mean, we did take the rate down to 28 in ours.
    And, actually, we didn't do territoriality. And the reason 
was interesting. Simpson-Bowles had strong representation from 
big, multinational corporations on it. They spoke very 
eloquently for territoriality. Our business representation was 
more small business. They were not enthusiastic about 
territoriality. So we left it out.
    Mr. Bowles. Yeah, we did. We took the corporate rate to 26 
percent, and we went to a territorial system to pay for it.
    Senator Portman. Pete?
    Mr. Domenici. I support ours, the one we have been 
describing. We didn't come down as far as them, but 28 is ours.
    I think the problem we have with the public on that is it 
is discussed in isolation by the commentators. They just say we 
are lowering taxes on fat cats, corporations. But when it is 
part of an overall plan, they got a big----
    Senator Portman. Yeah, I am talking about not lowering the 
tax, so it would be revenue-neutral, so there would be no 
reduction in the taxation. In fact, you would get growth from 
that, based on all the economic analysis that we have seen, 
which would add more revenue that was not revenue from 
increasing taxes but revenue from growth and other feedback 
effects.
    Mr. Domenici. I don't disagree. I was just giving you an 
explanation that I have heard.
    Senator Portman. Yeah. I appreciate it.
    With regard to balance, because that has come up here--the 
co-chair talked about balance, you all talked about ratios and 
balances--what is the right balance? I think, first, can--you 
talked about this earlier, in terms of where you all were 
headed and where you ended up. Could you or Senator Simpson 
give us a sense of what you believe is the right balance here 
between revenue that is generated, again, through tax reform, 
but new revenue, on the one hand, and, on the other hand, 
reductions in spending? What is the right balance?
    Mr. Bowles. We thought it was no less than two-thirds, and 
we worked toward three-quarters coming from spending, as 
opposed to one-quarter or one-third coming from revenue. If you 
look at the projections for 2020, it had spending, I think, at 
about 25 percent and revenue at 19 percent. And we didn't want 
to see revenue go above 21 percent. And, obviously, we wanted 
to see if we could drive spending down to where revenue was so 
we could balance the budget at some point in time.
    Senator Portman. Yeah. Well, that is interesting, because 
you are right, you know, we are now at about a historical 
average of about 18.4 percent on revenue. And we are lower now 
with the recession, but even under CBO's statistics showing 
that the tax cuts would all continue, we get back up to that 18 
percent in the next several years.
    One final--well, I see my time has expired. Listen, again, 
I want to thank you all for your help today and the help you 
have given us up to this point, all of you who have made 
contributions to our efforts, both individually and as part of 
your groups. And we are going to need your help going forward. 
Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The co-chair now recognizes the gentleman from South 
Carolina, Congressman Clyburn.
    Representative Clyburn. Thank you very much, Mr. Chairman.
    Let me add my voice of thank-yous to all four of our 
panelists here today, and thank them so much for their service.
    I want to start with a statement. I have asked--and it has 
been put up--for a chart to be put up here, looking at a bar 
graph that I suspect a lot of us have seen in the last week or 
so and we talked about when Dr. Elmendorf was before this 
committee. It shows the widening wealth gap that is existing 
within our country today, and it covers basically the last 30 
years.
    Now, we have 3,143 counties in the United States. Of those 
3,143 counties, 474 of them, 15 percent of those counties, more 
than 20 percent of their citizens have been living beneath the 
poverty level for the last 30 years.
    And it is kind of interesting because I didn't think about 
this through the weekend because, about several months ago, I 
joined with Congresswoman Emerson on trying to focus on these 
counties and trying to direct resources to these counties. Back 
when we did the American Recovery and Reinvestment Act, the 
stimulus bill, in the rural development section of that bill we 
were successful in getting that bill to focus on these counties 
by directing the expenditure of at least 10 percent of those 
funds into those counties where 20 percent or more have been 
beneath the poverty level for the last 30 years. So when this 
report came out from CBO a couple weeks ago, it focused my 
attention once again to those communities.
    Now, when I first came on this panel, I said that I wanted 
to focus on the human side of this deficit. So what I would 
like to ask today is whether or not it is feasible to do $1.5 
trillion reduction in deficit by cuts only. What will that do 
to that bottom 20 percent that has seen only 18 percent growth 
in their income over the last 30 years and those communities 
where 20 percent or more of their population have been beneath 
the poverty level for the last 30 years? What would it do to 
those communities and those people if we were to reduce this 
deficit only by cuts that have been proposed?
    I would like to hear from all four of you on that.
    Mr. Bowles. Yeah, I am delighted to go first on that.
    As you know, Mr. Clyburn, if you go east of I-90 and you 
are in North Carolina, we have more counties that fall into 
that category than any other place in the Union. If that part 
of the North Carolina was a State by itself, it would be the 
poorest state in the Union. So, as you know, I had many of our 
universities, from Fayetteville State to Elizabeth City State, 
that operated and served the people in those communities.
    I think if you think about what you have already done, if 
you look at the continuing resolution, you took about $400 
billion of cuts through the continuing resolution. And then if 
you think about--I always think about what you all are working 
on now with the Budget Control Act in two parts, and the first 
part was $900 billion in cuts. So you had another $900 billion 
in cuts that have already been done.
    So you have done about $1.3 trillion worth of cuts already 
before you guys start on what you are doing.
    Representative Clyburn. Right.
    Mr. Bowles. I have always thought it has to be some 
combination of revenue and cuts in order to get to the $4 
trillion number that we focused on. I do think it is important 
for all of you to think about the fact that these deficits are 
just eating the budget alive. And they don't leave any money 
left over to do the kind of economic development work in these 
poor counties that you want to see done if these deficits 
continue to grow and interest on the deficits continue to 
occur.
    What we tried do was to make sure in the analysis, in the 
plan that we put forward that we didn't make any cuts in the 
income support programs like SSI and food stamps and workers' 
compensation. In addition, we tried to make sure that on things 
like Social Security that we actually upped the minimum payment 
to 125 percent of poverty to help those people who really 
needed it. And we gave people a 1 percent bump-up per year 
between 81 and 86, because that is when every Democrat and 
Republican economist that came to see us said that is when 
people need it the most.
    So we tried to be sensitive to those people that were most 
disadvantaged while we did make the kind of cuts we had to make 
in order to put our fiscal house in order.
    Mr. Simpson. We have enjoyed our time with you during our 
work. And you have been very cordial and listened to us, and I 
appreciate that deeply.
    Representative Clyburn. Thank you.
    Mr. Simpson. The irony to me is that if we don't get there 
and the strike comes, the tipping point--Dick Durbin always 
asks, where is the tipping point? I don't know where it was, 
but I do know that it will come swiftly. And it will come by 
the ratings and the markets. It won't come by anything that any 
chart has ever disclosed before.
    And, at that point in time, interest rates will go up and 
inflation will go up. And the very people who will be hurt the 
very worst in that procedure are the very people you speak of 
with such passion. This is a tremendous irony to me. By doing 
little or nothing and the tipping point comes, the little guy 
is going to get hammered worse than ever he is or she is now. 
That is the irony--the strange, hideous irony.
    Representative Clyburn. That is true, Senator. But wouldn't 
you say that, if we were do it, let's do a $1.5 trillion 
deficit reduction and let's do it on the backs of those same 
people, then what happens to that chart in the next 30 years, 
where we have a 275 percent increase in income for those people 
who are in the upper 1 percent and if you are in the upper 
quintile you saw an increase of around 56 percent and the lower 
quintile only 18 percent?
    So let's just say, let's do it. Let's cut the deficit by 
$1.5 trillion. Let's do it by cutting Medicare, Medicaid, 
cutting Pell Grants, cutting education, cutting health care. 
And we will have saved the markets, but what will we have done 
to these 474 communities? That is my question.
    Dr. Rivlin. I think that is not a question that we should 
answer, because you shouldn't do that.
    And there are two points. And I think we are all making the 
same two points. One is, we need to cut the deficits, but not 
by hurting vulnerable people. You should avoid doing that. And, 
secondly, that the importance of avoiding a double-dip 
recession and a lost decade of growth is extreme and will hurt 
those people most if you don't avoid it.
    Mr. Domenici. I am the last here, and you have heard almost 
anything humankind can think of, but I would suggest to you 
that the answers that were given are really relevant and 
important.
    And one of the reasons that our group did not get as big of 
reductions in appropriated accounts as other plans was because 
we came upon the idea that we were going to have to come up 
with some revenue and we ought to have a budget that was 
understanding in this area, or it would, quite properly, be 
attacked with equal vigor to destroy it as we were trying to 
create a country that was strong again. And so we did take care 
of the problem you talk about.
    But I would tell you from my own experience as I leave the 
scene, one time I asked a very wise man, ``What do we do to 
help poverty?'' And the person said, ``I can tell you in one 
word.'' And I thought, you must have direct ties with the Holy 
Spirit. And he said, ``Educate.'' He said, ``Would you like it 
again? Educate.''
    Representative Clyburn. Absolutely.
    Mr. Domenici. And that is what he said, is that people must 
get educated. Well, that won't solve the bread on the table, 
but any plan you have in mind should obviously look at whether 
the poor people are getting educated or not.
    Representative Clyburn. I appreciate that.
    Mr. Domenici. And that is the first step out, has got to be 
that.
    And, secondly, the country has to grow or there is nothing 
to split, there is nothing to give to our people. So whatever 
programs you are talking about have to have growth in them. 
That is why all our tax plans are growth tax plans. Theirs is; 
ours is. We call it that. And we asked experts, and they say, 
your tax plan will cause far better growth than the plan we are 
under now.
    That is why we cut corporate taxes. And people shouldn't 
immediately say, what do you cut the fat cats for? They aren't 
making as much here to give to our people in wages because they 
are going elsewhere because our taxes are too high. So it is 
not what people say. The reality is competition. We can't force 
them to stay in America if our taxes are too high.
    So I think education and a fair tax for corporations 
belongs on this litany, maybe not first but somewhere.
    Chairman Hensarling. The time of the gentleman has expired.
    Representative Clyburn. Thank you.
    Chairman Hensarling. The co-chair now will recognize the 
gentleman from Michigan, Congressman Camp. And before I do, I 
just wish to thank him for arranging for the Joint Select 
Committee to use the Ways and Means Committee room. And your 
chair is very comfortable. Thank you.
    Representative Camp. Thank you.
    Well, I also want to thank our witnesses for being here and 
for all of your hard work and your testimony today.
    I do have a question. Mr. Bowles, in the Simpson-Bowles 
plan, you recommended that the United States move to a 
territorial tax system. And I agree with that recommendation 
because I think our current system is one that really means 
that our companies and workers aren't competitive. Do you share 
that view, and is that why you recommended moving to that 
system?
    Mr. Bowles. Yes. I have read your--I guess it is what this 
committee put out, the Ways and Means Committee put out, and I 
was very much in favor of what you put out.
    Representative Camp. Do you believe that--in our proposal 
or draft discussion we have out there, there are ways to move 
to a territorial system that does not create incentives for 
companies and employers to move jobs to other parts of the 
world, or their investment or their R&D. But, also, I think it 
is possible to craft a plan that could get that policy wrong.
    In the Commission's meetings, our discussions, you were 
focused on moving to a territorial plan that did not make our 
companies less competitive. And do you think that can be done 
in the context of a revenue-neutral territorial plan?
    Mr. Bowles. Yeah, I do. And I think, you know, if you 
encourage--if you stay on a worldwide system and you almost 
force companies to leave those dollars overseas, then, 
naturally, if they are going to have to pay a big tax on those 
dollars to bring them back, I think the likelihood is more 
probable that they are going to create the jobs somewhere else 
rather than here.
    And that is one of the principal reasons I support a 
territorial system, in addition to the fact that everybody else 
in the world has gone to it with the exception of us.
    Representative Camp. You also really recommended a complete 
overhaul of our Tax Code. And I appreciate the model that you 
set up, where you tried to lower rates in exchange for doing 
away with various provisions or exceptions in the Code. And I 
think that really has shifted the debate on what tax reform 
might mean.
    Your reform proposal would raise revenue compared to the 
current policy baseline, but you didn't do it by raising taxes. 
A lot of people get those two things confused. And why did you 
choose that route of raising revenue really through reform 
rather than imposing new taxes?
    Mr. Bowles. Because I felt like, based on my experience in 
the business world and the economists that I talked to, that it 
would create dynamic growth in this country and create jobs and 
opportunities for people. And I felt it just made sense to get 
the spending out of the Tax Code and to use that money more 
efficiently, more effectively by lowering rates and reducing 
the deficit.
    Representative Camp. All right. Thank you.
    Dr. Rivlin and Senator Domenici, in your plan, you have had 
the government's share of our GDP around 21 percent, I believe. 
Is that correct?
    Dr. Rivlin. Yes.
    Representative Camp. And that is basically $1 out of every 
$5 of our economy would come to Washington, D.C. And that is 
more than the highest levels of revenue we have seen in the 
history of the Nation. And I think there has been only one time 
where the government's take has really gotten anywhere close to 
that level, and that was during the Internet bubble because 
there were enormous capital-gains revenues associated with 
that.
    Did you perform an analysis of the impact on the economy 
and on job creation of having government's revenue of GDP reach 
that level?
    Dr. Rivlin. No, not ourselves. We examined other people's 
research on this. I don't read the record as having much 
evidence at all, of a connection between the exact proportion 
of the Federal Government's revenue and economic growth.
    The reason ours went up was, as I have stated earlier in 
the hearing, we didn't see how, in this very new situation of a 
much older population and the tsunami of the baby boom, we 
didn't see how we could fulfill our obligations to those 
people, and perform the other services of government without 
having the government in that range.
    It has been there before; it is not a disaster. This is not 
taking on new government responsibilities. It is just saying, 
we have a lot more older people and we have to take care of 
them. And that is going to mean slightly higher government 
spending than we had in the days when the population was a lot 
younger.
    Representative Camp. Senator?
    Mr. Domenici. Yes. Let me just say, I, too, in my past 
life, have used percentages like that. I have learned that on 
many of them there is no reality attached to the number. Nobody 
can tell you that 20 percent, 19 percent is better than 19.5 or 
20.6. If you have the rest of the policies right, things will--
in our kind of economy, we will get growth.
    The problem we have in this country has been expressed over 
and over here today, and that is that the population is growing 
older, the population has less workers per retiree, and so you 
have a--when we looked at the 19 or 18.5 that was used as the 
historically significant number, we didn't have these 
demographics, we didn't have this kind of problem.
    So we solved it by trying our best to use the Tax Code to 
generate some extra revenue in the manner we have suggested 
here. And, at the same time, we have taken on the 
responsibility of some of the programs that are going to sink 
us if we sit by and say, we have to have 18.5 percent, and that 
is all on the revenue side, and then what are we going to do 
about the exploding costs of the programs? And I think we have 
solved it in a pretty reasonable manner. If you want to just 
say, let that one go out there, we will fix it someday, we 
can't fix Medicare to match the 21, much less the 18.5 that was 
historically right.
    So that is my answer. I think there is no absolutely 
positive evidence that any of these numbers are absolutely 
right. They are right, they are in the range, but if you do the 
other policies correct, we will survive with 21 percent, I am 
sure.
    Representative Camp. You also had two new tax structures in 
your proposal. One was what you described as a debt-reduction 
sales tax, or what most people would consider to be the value-
added tax. The other was the tax on sugared drinks, or 
beverages.
    Did you do an analysis about the cost of those two new tax 
structures, the implementation of two new tax structures on our 
economy and what that might mean?
    Dr. Rivlin. Well, you are right that we did have the debt-
reduction sales tax. We didn't call it a VAT, but you are 
right, it is analogous to that. I think that the Senator and I 
and the members of the group all believed that it would be 
sensible for the United States to move part of its tax burden 
off the income tax and onto a broad-based consumption tax. But 
this is not the moment to do that. And we realized that and 
eventually took it out, though we still believe in it, and 
revamped our income tax proposals to make up part of the lost 
revenue.
    The sugared drinks, you know, that is not going to change 
the economy. Whether it, at the margin, discourages people from 
drinking too much soda, I don't know. But we had some sentiment 
for doing it.
    Mr. Domenici. I would say, on the last one, sir, we didn't 
look at the economic significance of it. You have been chairman 
of a committee, and I understand you are now of a very 
significant--sometimes you are just outvoted and you have to do 
things that aren't necessarily the greatest.
    Representative Camp. Yeah, I get that part.
    Mr. Domenici. You got that.
    Representative Camp. All right. Thank you. Thank you very 
much.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    The co-chair now recognizes the gentleman from 
Massachusetts, Senator Kerry.
    Senator Kerry. Thank you very much, Mr. Co-Chair.
    First of all, I want to thank each of you for your 
extraordinary service, not just in this effort, which is 
important, but over the years. And we are particularly 
appreciative to this contribution to the dialogue. And I hope 
it will be a contribution to more than a dialogue, but to a 
result from this committee.
    I just want to spend a few moments on some of the context 
that brings us here.
    Administrator Bowles, you opened up with a comment that 
caught my attention--two comments. One, you said, this is the 
most predictable economic crisis in history that we are looking 
at coming at us, even as you pegged the minimum figure of $4 
trillion, which is what you think we ought to do. But then you 
said you are worried that you are going to fail. And I want you 
to speak to that for a moment.
    Mr. Bowles. You all have done a great job of stopping the 
leaks coming out of your committee for an extended period of 
time, but over recent days I have been able to put together 
some of the proposals that you all are considering. And I have 
also listened to some of the back-and-forth that has been in 
the press.
    And I have heard people talk about simply settling for $1.2 
trillion worth of deficit reduction, maybe $1.5 trillion, but 
more of the talk is at $1.2 trillion; doing it across the 
board, which is never the smart way to make any kind of--to 
control any of your budgets in any way, shape, form, or 
fashion. And I have even heard talk that if you end up doing 
$600 billion out of defense and $600 billion out of nondefense, 
that the day after the sequester takes place that you will have 
people in the House and the Senate be working to get around the 
sequester.
    I think that would be disastrous. I think people would look 
at this country and say, you guys can't govern. I think people 
would look at it and say, you know what, they are really not 
going to stand up to their long-term fiscal problems, and this 
is not going to be a powerful country in the future. And they 
would think that we were well on our way to becoming a second-
rate power. I think it would be a disaster.
    Senator Kerry. So I want to sort of build on that a little 
bit. We all know that the figure we should hit in order to 
stabilize the debt, which is the mission and ought to be the 
mission of the Congress, is $4 trillion.
    What is the impact in the marketplace, what would the 
impact be on a discounting of our debt, a write-down, if we hit 
$1.2 trillion or $1.5 trillion? Aren't we going to just be back 
here almost immediately with the very same issues sitting on 
the table?
    Mr. Bowles. You could lose the $1.2 trillion to $1.5 
trillion by an increase in interest rates back to the normal 
rate very quickly. You wouldn't be accomplishing very much if 
you did that.
    And plus, you know, the effect it would have on how people 
would look at this country would really be devastating. I can 
tell you, when we went through this whole debt default fiasco 
before August, I can tell you, globally, countries lost a lot 
of respect for America, and they lost confidence in us that we 
would really stand up and address our long-term problems.
    Senator Kerry. Now, Pete, I am sorry that Al had to leave, 
but you and I had the great pleasure of working together on a 
number of different issues, and I trust your judgment. And 
while we are not wearing partisan hats, hopefully, here, you 
are a Republican. And I would like you to share with us, sort 
of, your perception as a long-time legislator.
    When, in your memory, has a committee in Congress ever had 
the right to put together a proposal that would be voted on by 
expedited procedure in both Houses of Congress with a 51-vote 
majority without amendment?
    Mr. Domenici. The answer is never.
    But I would tell you, when we passed effectively in the 
Senate the bill that created the Budget Committee, it was an 
impoundment and budget act, as you recall. It was to 
deauthorize the authority of the President to impound and, at 
the same time, to create a Budget Committee. Senator Robert 
Byrd, the expert extraordinary on the Senate, spent weeks on 
end trying to figure out a way that you could assure the 
passage of bills that pertained to the budget and not destroy 
the filibuster rule. And, in the end, he quietly gave in.
    And the Budget Act, if you go look at it, it is a big, 
thick bill, but, nonetheless, if you read it and do what I did, 
I decided that it meant that I could take a reconciliation bill 
to the floor of the Senate and it could not be filibustered. 
And I defeated Robert Byrd because his own writing said he had 
found a way, without changing the rules of the Senate, to get 
around filibuster and give authority to a committee.
    So we gave the Budget Committee in the Senate the authority 
to act without filibuster. But nothing as powerful as this 
committee.
    Senator Kerry. And what would be the implication--I would 
like to ask all three of you. You answered this, to some 
degree.
    Director Rivlin, you have headed up the CBO, you have 
headed up the OMB, as well. What would be the implications, in 
your mind, of the United States of America not meeting what 
everybody understands is the financial challenge facing us, 
sort of, stabilizing the debt and beginning to get on a long-
term fiscal path? How would the world view this, particularly 
given the fragility of Europe right now and their efforts on 
Greece, Italy, Spain, et cetera?
    Dr. Rivlin. I think it could be devastating. I agree with 
Erskine and would be even stronger. I think we could face a 
long period of stagnant growth, another recession, which would 
be worse than the one we are slowly climbing out of.
    It is very hard to predict when this might happen or what 
the course might be. But, certainly, in the last few months, we 
have seen dramatically in Europe that sovereign debt of quite 
solid-seeming countries can go down very fast. And that could 
happen to us. And we could just lose the confidence of our 
trading partners and ourselves.
    I think the problem is, if we are seen by our own citizens 
as not being able to face up to problems and solve them, we are 
in deep trouble.
    Senator Kerry. And, importantly--I think it has been put on 
the table here clearly today, and I am sort of trying to 
reiterate this because I think it is important--it is possible 
to put revenue on the table to the tune of $1 trillion-plus, 
whatever, with tax reform, is it not? You do not have to raise 
the tax rates. In fact, you could do the tax reform with 
specific instructions to the tax committees to hold the rates 
down, lower the rates, get a lower range, broaden the base, 
correct?
    Dr. Rivlin. Right.
    Mr. Domenici. We actually went out of our way to get some 
experts together, the best experts in this town--and I think we 
know who they are--and asked them, does that section 404 give 
the kind of authority that you just alluded to, to direct to 
the committees that they perform the following and report it 
back? And that bill would carry with it in the Senate the same 
prerogatives that the original bill carried when you were 
created.
    Senator Kerry. Now, Pete, you and I met, and we talked 
about your concept with respect to health reform. And I 
appreciate the contribution of it, and I have been trying to 
work through how we might be able to do some of those things. 
There are some issues, I think, about how you guarantee the 
coordination of the lowest health-care plan and still get 
coverage in certain areas, but I don't want to get stuck on 
that for the moment. What I want to do is, sort of, deal with 
the bigger issue here.
    I assume all of you would agree that you can do structural 
reform in Medicare, in the entitlements, that is not 
necessarily just the premium support approach. Is that 
accurate?
    Mr. Domenici. That is accurate.
    Senator Kerry. Director Rivlin?
    Dr. Rivlin. Oh, certainly. There are several approaches. We 
like that one.
    Senator Kerry. And, for instance, the age thing that 
Senator Portman asked about, that is structural reform, isn't 
it?
    Dr. Rivlin. I actually wouldn't think of raising the age as 
structural reform.
    Senator Kerry. What would you think of? Give us some 
thoughts about structural reform that you think would 
conceivably alter it, whether it is dual-eligible, Part A, Part 
B. Are there other components? Or, how about this, that you 
begin to move the entire system off of fee-for-service where 
possible, where it works you would leave it, but you move into 
a value-based payment system?
    Dr. Rivlin. Yes. And that is roughly what we are proposing.
    Mr. Bowles. Senator Kerry, I have a lot of opinions about 
health care. I think the current system doesn't make any sense, 
to pay twice as much as any other developed country for health 
care and have our results rank somewhere between 25th and 50th. 
You know, we have 50 million, roughly, people who don't have 
health-care insurance. You know, I just ran the public health-
care system in North Carolina; it reports to the president of 
the university. And if you don't think those 50 million people 
get health care, you are crazy. They get health care, they just 
get it in the emergency room at five to seven times the cost it 
would be in the doctor's office. And that cost doesn't 
disappear; it just gets cost-shifted to those of us who have 
health-care insurance and in the form of higher taxes.
    You know, we have got to have real structural reform in 
health care. I believe all people ought to have health care, 
but I don't think anybody should get, on the government's 
checkbook or the taxpayers' checkbook, a Cadillac plan. I don't 
think anybody ought to get first-dollar coverage, because I 
think we ought to make sure that people have skin in the game.
    And if you are going to have everybody have coverage, then 
you have to have everybody have a medical home. And if 
everybody is going to have to have a medical home, then you 
darn well got to make sure that education institutions like 
mine are producing more primary-care doctors and more nurse 
practitioners and more physician's assistants and not so many 
specialists.
    I think if you want everybody to have prescription drugs, 
then I don't know why in the world you wouldn't have Medicare 
negotiate with the drug companies for prescription drugs if the 
taxpayers are going to pay for them. And I don't know why 
anybody who was getting drugs from the taxpayers ought not to 
have generic drugs.
    If you don't think that hospitals and doctors practice 
defensive medicine, you are absolutely crazy. They do. So we 
have to have some kind of real tort reform.
    And you are absolutely right, we have to go to paying for 
quality, not quantity.
    And at the end of the day, you know, nobody likes this, but 
without talking about death panels and that kind of crazy 
stuff, you are going to have to do something about the end-of-
life scenario.
    Those kinds of things have to be done if you are really 
going to address health care.
    Senator Kerry. Well, I thank you all.
    And I apologize to the chairman----
    Chairman Hensarling. The time of the gentleman has expired.
    The co-chair now recognizes the gentleman from 
Pennsylvania, Senator Toomey.
    Senator Toomey. Thank you very much, Mr. Co-Chair.
    And I also want to add my voice in thanks to the folks who 
have come here today for the work you have done. It has been 
enormously helpful.
    Let me touch on a couple of the issues and develop a few a 
little bit further, if I could.
    One, obviously, we all know, as a given, that the Federal 
revenue is ultimately a function of our economy. But I think it 
is worth noting, and I think you will all agree, that the 
growth in Federal revenue is related to the growth of the 
economy, but, in fact, Federal revenue will grow faster, as 
long as the economy is growing, than the growth of the economy.
    And since Dr. Rivlin is the professional economist on the 
panel, I wonder if you would just confirm that, as a general 
rule, if we have strong economic growth, we will have even 
faster Federal revenue growth.
    Dr. Rivlin. That used to be true, Senator, before we 
indexed the tax system. It is much less true now. If you have 
strong growth, Federal revenue will go up a little faster than 
the economy, not much. We gave away that tool, actually, with 
the indexing.
    Senator Toomey. All right. So we could have a discussion 
about how much that magnitude is, but, even now, there is some 
additional growth faster than GDP growth.
    One of the things that came out from our discussion with 
CBO about this is that one-tenth of 1 percent of additional GDP 
growth, on average, over 10 years they estimate results in 
about $300 billion of additional revenue to the government. 
Now, this is not perfectly linear, and I understand that, but, 
very roughly, if that were to be roughly true, less than half a 
percent of average greater economic growth would result in, 
coincidentally, about $1.2 trillion, which is the statutory 
goal here. I am not suggesting that that is an alternative to 
our doing the work that we do, but I think it underscores how 
important it is that whatever we do attempts to create an 
environment to maximize growth.
    My own view from the beginning has been that the most 
constructive thing we can do to maximize economic growth is 
major reform of both the corporate and the individual tax 
codes. I don't think there is any dispute about that. But I 
wanted to drill down a little bit.
    For instance, if we--there are many approaches one could 
take. Let's look at the individual side for a moment. And for 
the sake of argument, if we were to reduce the value of all the 
deductions that are currently available to individuals and we 
had an equivalent reduction in rates, for sake of argument, 
everybody agrees that would be very pro-growth. Is that right? 
There is a consensus on that?
    My understanding, from both Mr. Bowles and Senator Simpson, 
was that when you folks looked at this exercise of reducing 
deductions and credits and write-offs, lowering rates, you did 
it with roughly a 10-to-1 ratio. For every dollar that was 
dedicated to lowering rates, there was a dollar dedicated to 
deficit. I think you had suggested that it was, like, 92 to 8?
    Mr. Bowles. Yeah, that is correct. Yeah.
    Senator Toomey. So 10 to 1, 11 to 1, that was about the 
ratio. Do you recommend that we take an approach like that, 
where we would, on the individual side, do that kind of 
simplification, lowering of rates, and have a ratio comparable 
to that?
    Mr. Bowles. I think you will run into some of the problems 
that Senator Baucus brought up. That is why we presented two 
options. If you go with the zero plan and get rid of all of the 
tax expenditures, then you do create enough resources that you 
can use only 8 percent of the resources and still generate a 
trillion dollars' worth of additional revenue that could go to 
reduce the deficit.
    However, if you are going to go back and not get rid of all 
of these tax expenditures but you are going to keep some of 
them--like, some of the Democrats will want to keep the Earned 
Income Tax Credit, they will want to keep the child tax credit, 
some of you may want to go to a credit for mortgage--to help 
people with their mortgage debt, some people might want to go 
to a credit for charitable contributions.
    So anything you keep gives you a smaller pie to work with. 
So if you are still going to come up with a trillion dollars of 
deficit reduction, then that 1-to-10 ratio won't work anymore.
    Senator Toomey. Okay.
    Does everybody on the panel agree that if any package were 
to include net tax revenue it ought to come in the context of 
reform that actually lowers marginal rates?
    Dr. Rivlin. Yes.
    Mr. Domenici. Yes.
    Mr. Bowles. Yes.
    Senator Toomey. Okay.
    Let me move over to health care for just a second. I am 
glad, I think, again, that there was a consensus, I think it 
was unanimous, that it is our health-care costs that is driving 
the deficit and debt crisis that we have.
    It has been my view, and I wonder if anyone disputes this, 
that, in fact, it is our Medicare plan that essentially drives 
the entire health-care sector. And while there is, obviously, a 
significant private-sector component, to a large degree it is a 
reaction to, and it acts in the context of, what Medicare does. 
And so Medicare is the real driver of the entire health-care 
picture.
    Do you agree with that?
    Mr. Domenici. Yes.
    Dr. Rivlin. Yes. And there are instances in which Medicare 
has actually done significant reforms and the private sector 
has followed.
    Senator Toomey. Right.
    Mr. Bowles. And I only agree with part of it. You said that 
Medicare was the only--I am not sure you said ``only,'' but 
Medicare is one of the drivers of our deficit problem. It is 
not the only driver. I think it is the number-one problem----
    Senator Toomey. What I said was that health care is, and I 
meant to say is the primary driver.
    Mr. Bowles. Yeah.
    Senator Toomey. Senator Kerry talked about structural 
reform. It seems, in my view, meaningful structural reform 
means getting away from fee-for-service. To me, that is the 
heart of Medicare, that is the heart of the design. And because 
we use this terminology and assume that everyone knows it, I 
will take a crack at describing what I think of as fee-for-
service, and tell me if I have characterized it right.
    But, essentially, what we have is a committee here in 
Washington that specifies the price it will pay for every 
conceivable medical procedure, the circumstances under which it 
will pay it, the people who are permitted to perform it, where 
they are allowed to perform it, in which venue. And it is a 
completely, you know, government-controlled mechanism, which 
also, by the way, doesn't account for whether the outcome is 
successful or not and whether the procedure needs to be 
repeated.
    Is that a fair characterization of fee-for-service?
    Mr. Bowles. I think what I said earlier in answer to 
Senator Kerry was that I think we are going to have to move 
from paying for quantity to paying for quality. And I think you 
are saying something very similar.
    Senator Toomey. Well, I am. I think, at the heart of this, 
this necessarily creates all kinds of inefficiencies, 
misallocations, perverse incentives. And the solution has to be 
to get away from this.
    I guess my last question for everybody, are all of you 
confident that----
    Mr. Domenici. Before you proceed----
    Senator Toomey. Senator?
    Mr. Domenici [continuing]. I did want to make an 
observation, that we recognized that Medicare had some very 
significant problems of the type you are alluding to, and that 
is why we are here suggesting that it be changed.
    Senator Toomey. Right.
    Mr. Domenici. At the same time, we have explained why we 
said, as we move----
    Senator Toomey. Right.
    Mr. Domenici [continuing]. We don't move so quickly with 
getting rid of one and establishing the other that we lose both 
or lose all reform.
    Senator Toomey. One of the things that concerns me is that, 
as long as we leave a significant fee-for-service component in 
place, I worry about whether the reforms are capable of 
defeating the mechanism and the misallocations and the, sort 
of, perverse effects of that fee-for-service.
    So I would ask this. Do you think it is possible to devise 
a plan that would transition completely away from fee-for-
service, some kind of premium support model that is defined to 
ensure that the most vulnerable people have the coverage that 
they need?
    Mr. Domenici. Well, I will say, for the time being and for 
the foreseeable future, it seems to me you cannot do that. You 
have to go with some transition. You wouldn't get the other 
done.
    That was the question, whether you can get it done. I am 
not an expert. I didn't sign on for this job to be an expert on 
Medicare. That is why I don't answer some of your questions. 
But I am saying, practically, I don't think it could be done 
now under this circumstance. We have to do something----
    Senator Toomey. Well, I am not suggesting that so much, but 
I appreciate the response.
    Dr. Rivlin?
    Dr. Rivlin. Well, I agree with the Senator. I think that 
the idea--we believe that, actually, competition on a well-
designed exchange between comprehensive health plans, 
particularly capitated plans, they would win out in a fair 
competition.
    There are parts of the country, especially rural parts of 
the country, where it probably isn't feasible right now to do 
that. And that is why we think there ought to be a transition, 
and that it is much less scary for seniors to say, ``If you 
like what you have, you can stay with it, but you are going to 
be offered something which is likely better.''
    Mr. Bowles. Yeah. And I would say, if you look at some of 
the pilot projects in the Affordable Health Care Act, they have 
some good examples in there of experiments that are going on 
today to do just what you are talking about.
    Senator Toomey. All right. Thank you all very much.
    Chairman Hensarling. The gentleman yields back.
    The co-chair now recognizes the gentleman from Maryland, 
Congressman Van Hollen.
    Representative Van Hollen. Thank you, Mr. Chairman.
    And I want to join my colleagues in thanking all of you for 
your terrific service to our country in many different 
capacities.
    Mr. Bowles, thank you for recognizing that actions the 
Congress has already taken to date, including passage of the 
Budget Control Act, has already achieved projected savings of 
close to a trillion dollars in discretionary funds, which isn't 
far from the targets that all of you set in your work, the 
major difference being you actually had a higher part of that 
coming from defense cuts. Is that not the case?
    Mr. Bowles. We actually divided ours between security and 
nonsecurity.
    Representative Van Hollen. Right. And so you were at about 
$1.2 trillion in discretionary. Half of that is $600 billion. I 
think the figures will show that your proposals took more than 
has been taken to date from the defense side of the equation.
    But I want to--I think many of us view your general 
approaches here as balanced approaches, balanced frameworks. So 
I want to put the discretionary piece to the side for a minute 
because we have come close to achieving, in some cases 
overachieving, your targets.
    In Simpson-Bowles, as you mentioned, Mr. Bowles, you had 
about $500 billion gross cuts in Medicare and Medicaid. You 
actually took some savings out of that. Net, it was around $400 
billion.
    But on the revenue, I just want people to understand, 
because what you had in both your plans was genuine--what us 
budget geeks call genuine CBO-, Joint Tax Committee-scorable 
revenue. And, as you mentioned, Mr. Bowles, your baseline 
assumed as part of your deficit projections that we would have 
about $800 billion, which is equivalent to about the amount of 
money that would be generated from allowing the rates for the 
folks at the very top to lapse, correct?
    Mr. Bowles. That is absolutely correct.
    Representative Van Hollen. That is right. And then on top 
of that you had proposals, through tax reform and the other 
things you have talked about, to generate another about $1.2 
trillion. Isn't that right?
    Mr. Bowles. Right. We--that is exactly right.
    Representative Van Hollen. All right. And so, again, on the 
Budget Committee, when we are comparing that to what we call 
the current policy baselines, compared to CBO that is about a 
$2.1 trillion, $2.2 trillion tax cut compared to current law. 
Of course it is a--excuse me, revenue increase. Compared to 
current law, it is a tax break.
    And looking at your testimony, Dr. Rivlin and Senator 
Domenici, you come in about the same place, $2.2 trillion on a 
current law baseline, correct?
    Mr. Domenici. Right.
    Dr. Rivlin. Right.
    Representative Van Hollen. All right. So let me just ask 
one other question with respect to tax reform. I take it, from 
looking at both your reports, that you would want tax reform to 
be done in a way that maintains at least the current 
progressivity of the Tax Code. Is that correct?
    Mr. Bowles. Yes.
    Mr. Domenici. We worked very hard to do that in ours.
    Representative Van Hollen. Thank you.
    Dr. Rivlin. Ours is actually slightly more progressive than 
the current.
    Representative Van Hollen. Right. So at least the current 
progressivity of the Tax Code.
    Now, you have both, in your written testimony, suggested we 
may want do two-step processes, downpayment and then something 
else. Dr. Rivlin, Senator Domenici, you specifically say, as 
part of that downpayment, you would include about $450 billion 
of what you call tax expenditure savings.
    I assume, therefore, that you see that as something you 
could do for deficit-reduction purposes, not necessarily at the 
same time as tax reform. And I think, if I look at the ones you 
have picked out, you think that they could be what we call 
rifle shots. Is that right?
    Dr. Rivlin. Right. But it should be consistent with--our 
notion is you have a tax reform idea.
    Representative Van Hollen. Yes.
    Dr. Rivlin. You move some of it forward.
    Representative Van Hollen. That is right. And, again, on 
net, your tax reform ideas would generate $2.2 trillion on the 
current policy baseline, correct?
    Dr. Rivlin. Right.
    Representative Van Hollen. Okay.
    Let me talk a minute about jobs and the economy, because 
the Congressional Budget Office has said that about a little 
over one-third of our current deficit today is as a result of 
the fact that we have a very weak economy, we are not operating 
at full potential. So I think all of us agree that we need to 
get the economy moving again.
    Dr. Rivlin, you pointed out that your plan with Senator 
Domenici had about $680 billion in payroll-tax relief. And I 
think you said the other day on one of the Sunday shows you 
would, ``go bigger'' than the President's job plan.
    Do you believe that something like that is necessary at 
this time?
    Dr. Rivlin. Yes. I think we are in danger of slipping into 
stagnation, and we should do something about it.
    Representative Van Hollen. Mr. Bowles, would you agree that 
it would be a bad idea this coming year to have every working 
American see an increase in their payroll tax relative to last 
year?
    Mr. Bowles. Yeah, on the payroll tax that was in the 
President's proposal, I think it was about $240 billion out of 
a $447 billion?
    Representative Van Hollen. That is right.
    Mr. Bowles. And it is hard for me, as a fiscal 
conservative, to say this, but I could support a continuation 
of the payroll-tax deduction for, you know, another year for 
employees.
    It is very hard for me to understand how an approximately 
$600 deduction for the employer on a temporary basis is going 
to be enough to get them to hire a full-time, permanent 
$30,000-a-year employee. So I don't think I would support the 
payroll-tax deduction for the employer. I could see supporting 
it for the employee if we could pay for it.
    Representative Van Hollen. Okay. Thank you.
    Just----
    Mr. Domenici. Could I say----
    Representative Van Hollen. Yes?
    Mr. Domenici [continuing]. On our end, I am for what we 
told you we are for, but I wouldn't argue if you followed his 
suggestion. As I see it, it is still alive. And what he is 
talking about is certainly better than nothing.
    Representative Van Hollen. Got it. Thank you. Thank you, 
Senator Domenici.
    On health care--and, Dr. Rivlin, you have testified many 
times in front of the Budget Committee and stated that you 
thought that the Affordable Care Act introduced a number of 
very important innovations. I agree with you that we need to do 
more in terms of modernizing the Medicare system to focus more 
on the value of care and the quality of care versus the 
quantity of care.
    I do have a question with respect to your version of the 
premium support plan, the most recent one. And that is, if you 
are confident in the market forces driving down the prices and 
if your argument is that Medicare is driving those market 
forces, then why would you need a fail-safe mechanism? In other 
words, why would you need to say, if you don't achieve the goal 
we want in savings, you have to have GDP plus 1? And if it is 
not keeping track with the market, isn't that just a cost 
transfer to Medicare beneficiaries?
    Dr. Rivlin. Well, I am not absolutely certain how the 
markets will work. We have seen even in the limited market that 
is Medicare Advantage that in some places they work well and 
come in under the fee-for-service and in other places they 
don't. We think this is a much more robust plan than Medicare 
Advantage.
    But the reason you want the fail-safe is so the Congress 
will absolutely know what they are going to spend going forward 
on Medicare. It is not going to grow faster than this. It is a 
defined contribution. And we think that is very useful.
    And as for the cost-shifting, there might be some cost-
shifting, but then you could arrange it so that it is not cost-
shifting onto lower-income people--it is means-tested, as we 
were saying before--it is cost-shifting onto people who can 
better afford it.
    Representative Van Hollen. Right. Well, I think that, 
again, I mean, if we are confident that the market forces were 
going to work the way intended, then I don't think there would 
be a need for a backup. I do know that Members of Congress and 
folks who are on the Federal Employees Health Benefit plan, for 
example, they bid, different plans bid, and there is a defined-
support mechanism that is set in law, 72 percent-28 percent. So 
I am not sure why we would be proposing something different for 
Medicare beneficiaries.
    Let me just close, Mr. Chairman, by saying we asked, 
actually, CBO to take a look at some of these ideas, including 
one where we just had competition among the managed-care plans 
and another one where we threw in the wrinkle of premium 
support. It wasn't the second-lowest bidder. It was more along 
the lines of what some other plans did, which was just 
marketplaces. And just having competition among the managed-
care plans they said came out a score of about $9 billion 
between 2014-2021. Adding in this other mechanism achieved 
about--it took you up to a total of about $25 billion.
    So it is pretty clear, at least from these numbers--and we 
can take a look at them--that we are going to need to do other 
things, that this is not a panacea, at least according to CBO's 
numbers, for dealing with the Medicare challenge, that we need 
to look at a lot of these other innovative ideas that are out 
there, including some of the things that have been talked about 
today.
    Thank you, Mr. Chairman.
    Chairman Hensarling. Thank you.
    The gentleman yields back.
    All time for Member questions has concluded.
    However, I would note, prior to Senator Simpson's 
departure, he did mention, Mr. Bowles, that you had something 
you might want to present. Without objection, I would certainly 
yield you a couple of minutes if I understand you have 
something else you wish to present to this committee.
    Mr. Bowles. I can do it very quickly. I tried to think, if 
I were sitting in your shoes or I was the go-between as I was 
in the what became the Simpson-Bowles plan, if it was possible 
for you all to get to the $3.9 trillion deficit reduction, 
given where your positions are today, and I think it is, I 
think you can get this done, and I will just go through briefly 
the arithmetic. And, again, you have got to flesh out the 
policies, but if you look at where I understand the two sides 
now stand, and this is from just listening, which is what you 
have got to do if you are the guy in the middle, you know, the 
proposals for discretionary spending, and these are all above 
what the $900 billion and the 400 that was in the continuing 
resolution, so this is in addition to the $1.3 trillion worth 
of spending cuts that have already been done, but you all are 
between $250 and $400 billion of additional cuts on 
discretionary, so I assumed that we could reach a compromise of 
an additional $300 billion on discretionary spending cuts.
    On health care you are somewhere between $500 and $750 
billion of additional health care cuts. I assumed that we could 
get to $600, and I got there by increases in the eligibility 
age for Medicare that I discussed with Senator Kerry when he 
was talking to me. That is about $100 billion. That would take 
you from the 500 where the Democrats are to $600 billion, and 
it happens to come not on the provider side, which I think 
would kind of balance that out.
    On other mandatory cuts, you are somewhere between 250 and 
400, so I settled on 300 there, and we had enough cuts in our 
plan to get you to 300 on the other mandatory. Interest will 
obviously just fall out at approximately 400 billion, the 
savings there. You agreed actually on CPI in your two plans of 
approximately $200 billion. The total of that is $1.8 billion. 
That left me a little short.
    That gets me to revenue. And on revenue I took the number 
that the Speaker of the House, I had read had actually agreed 
to, and I was able to generate $800 billion through revenue 
from the Speaker's recommendation, and if you did that without 
dynamic scoring, but you did it, and, you know, on dynamic 
scoring I am kind of on the Reagan plan, trust and verify, 
which we talked about earlier. If it actually comes, great, you 
will use it to reduce rates or you will use it to reduce the 
deficit. But if you add the $800 billion there and you do that 
slightly on a more, make it so the code is slightly more 
progressive after you have done it than before, then I think 
you have really got something that you might be able to work 
with the Democrats on.
    That would give you an additional total of $2.6 trillion 
added to the 1.3 you have already done. That is $3.9 trillion 
in deficit reduction, and I think that would create a lot of 
excitement with people in the country, and I think it would go 
a long ways toward building up confidence that we really could 
stand up to our problems.
    Chairman Hensarling. Thank you, Mr. Bowles. You certainly 
created some excitement with the press, I think. I would say, 
don't necessarily believe everything you read and hear about 
the proceedings of this committee.
    I do want to thank every single member of the panel on 
behalf of the Joint Select Committee for Deficit Reduction, not 
just for your presence here today away from your businesses and 
your families, but, frankly, more important, the entirety of 
what you have lent to the body of work to try to really address 
a very real crisis that we face. I do thank you for that. Your 
testimony was certainly sobering and helpful, and not the least 
of which was timely.
    I do want to remind all members that they have 3 business 
days to submit questions for the record, and I would ask our 
witnesses to respond promptly to the questions. Members should 
submit their questions by the close of business on Thursday, 
November 3rd.
    With no other business before the committee, without 
objection, the joint committee stands adjourned.
    [Whereupon, at 4:35 p.m., the joint committee was 
adjourned.]


                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              




                                    