[Joint House and Senate Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 112-142
COMBINED HEARINGS HELD BY THE JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
=======================================================================
HEARINGS
before the
JOINT SELECT COMMITTEE
ON DEFICIT REDUCTION
CONGRESS OF THE UNITED STATES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
----------
SEPTEMBER 13, SEPTEMBER 22,
OCTOBER 26, AND NOVEMBER 1, 2011
----------
Printed for the use of the Joint Select Committee on Deficit Reduction
S. Hrg. 112-142
COMBINED HEARINGS HELD BY THE JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
=======================================================================
HEARINGS
before the
JOINT SELECT COMMITTEE
ON DEFICIT REDUCTION
CONGRESS OF THE UNITED STATES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 13, SEPTEMBER 22,
OCTOBER 26, AND NOVEMBER 1, 2011
__________
Printed for the use of the Joint Select Committee on Deficit Reduction
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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
----------
SEPTEMBER 13, 2011
The History and Drivers of Our Nation's Debt and Its Threats
Opening Statements
Page
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman,
Joint Select Committee on Deficit Reduction.................... 1
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
chairman, Joint Select Committee on Deficit Reduction.......... 2
Becerra, Xavier, a U.S. Representative from California........... 3
Kyl, Jon, a U.S. Senator from Arizona............................ 4
Baucus, Max, a U.S. Senator from Montana......................... 5
Upton, Fred, a U.S. Representative from Michigan................. 6
Clyburn, James, a U.S. Representative from South Carolina........ 6
Portman, Rob, a U.S. Senator from Ohio........................... 7
Kerry, John, a U.S. Senator from Massachusetts................... 9
Camp, Dave, a U.S. Representative from Michigan.................. 10
Van Hollen, Chris, a U.S. Representative from Maryland........... 10
Toomey, Pat, a U.S. Senator from Pennsylvania.................... 11
Witness
Elmendorf, Dr. Douglas W., Director of the Congressional Budget
Office......................................................... 12
----------
SEPTEMBER 22, 2011
Overview: Revenue Options and Reforming the Tax Code
Opening Statements
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
chairman, Joint Select Committee on Deficit Reduction.......... 53
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman,
Joint Select Committee on Deficit Reduction.................... 55
Witness
Barthold, Thomas A., Chief of Staff, Joint Committee on Taxation. 56
----------
OCTOBER 26, 2011
Overview: Discretionary Outlays, Security and Non-Security
Opening Statements
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman,
Joint Select Committee on Deficit Reduction.................... 117
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
chairman, Joint Select Committee on Deficit Reduction.......... 119
Witness
Elmendorf, Douglas, Ph.D., Director, Congressional Budget Office. 120
----------
NOVEMBER 1, 2011
Overview of Previous Debt Proposals
Opening Statements
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
chairman, Joint Select Committee on Deficit Reduction.......... 152
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman,
Joint Select Committee on Deficit Reduction.................... 153
Witnesses
Bowles, Erskine, Co-Chair, National Commission on Fiscal
Responsibility and Reform...................................... 154
Simpson, Hon. Alan, Co-Chair, National Commission on Fiscal
Responsibility and Reform...................................... 156
Domenici, Hon. Pete, Co-Chair, Debt Reduction Task Force,
Bipartisan Policy Center....................................... 158
Rivlin, Dr. Alice, Co-Chair, Debt Reduction Task Force,
Bipartisan Policy Center....................................... 161
----------
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Barthold, Thomas A.:
Testimony.................................................... 56
Prepared statement........................................... 297
Responses to questions from committee members................ 383
Baucus, Max:
Opening statement............................................ 5
Prepared statement........................................... 203
Becerra, Xavier:
Opening statement............................................ 3
Prepared statement........................................... 204
Bowles, Erskine:
Testimony.................................................... 154
Prepared joint statement..................................... 457
Camp, Dave:
Opening statement............................................ 10
Clyburn, James:
Opening statement............................................ 6
Prepared statement........................................... 205
Domenici, Hon. Pete:
Testimony.................................................... 158
Prepared joint statement..................................... 466
Elmendorf, Dr. Douglas W.:
Testimony...................................................12, 120
Prepared statement.........................................206, 417
Responses to questions from committee members................ 283
Hensarling, Hon. Jeb:
Opening statement...................................2, 53, 119, 152
Prepared statement...............................287, 412, 453, 501
Kerry, John:
Opening statement............................................ 9
Prepared statement........................................... 288
Kyl, Jon:
Opening statement............................................ 4
Murray, Hon. Patty:
Opening statement...................................1, 55, 117, 153
Prepared statement...............................289, 414, 454, 510
Portman, Rob:
Opening statement............................................ 7
Prepared statement........................................... 291
Rivlin, Dr. Alice:
Testimony.................................................... 161
Prepared joint statement..................................... 466
Responses to questions from committee members................ 494
Simpson, Hon. Alan:
Testimony.................................................... 156
Prepared joint statement..................................... 457
Toomey, Pat:
Opening statement............................................ 11
Upton, Fred:
Opening statement............................................ 6
Prepared statement........................................... 293
Slide titled: Score of PPACA: 2014-2023...................... 512
Van Hollen:
Opening statement............................................ 10
Prepared statement........................................... 295
THE HISTORY AND DRIVERS OF OUR NATION'S DEBT AND ITS THREATS
----------
TUESDAY, SEPTEMBER 13, 2011
United States Congress,
Joint Select Committee
on Deficit Reduction,
Washington, DC.
The committee met, pursuant to call, at 10:33 a.m., in Room
SH-216, Hart Senate Office Building, Hon. Patty Murray [co-
chairman of the committee] presiding.
Present: Senator Murray, Representative Hensarling, Senator
Baucus, Representative Becerra, Representative Camp,
Representative Clyburn, Senator Kerry, Senator Kyl, Senator
Portman, Senator Toomey, Representative Upton, and
Representative Van Hollen.
OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM
WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Chairman Murray. Good morning. This hearing of the Joint
Select Committee on Deficit Reduction will come to order.
As my co-chair, Representative Hensarling, mentioned at our
meeting on Thursday, we have agreed to alternate chairing these
hearings, with him chairing the hearings that are held on the
House side, and I will be doing the ones here in the Senate.
I want to recognize and thank all of our fellow committee
members for being here today, as well as our witness, Dr.
Elmendorf, for joining us today.
And I want to thank all the members of the public who are
here today as well. We appreciate your presence and ask that
you help us maintain decorum by refraining from any displays of
approval or disapproval during this hearing.
Before I start, I do want to announce that the joint select
committee's Web site is now up and running. Members of the
public can go to http://www.deficitreduction.gov/, where they
can provide us input and ideas to this committee and where all
public hearings will be streamed live, starting today.
Today, we are going to start off with brief opening
statements from committee members--15 minutes for Democrats and
15 minutes from the Republican side. We will then hear from Dr.
Elmendorf. And following his testimony, we will have some time
for questions and answers.
The topic of today's hearing is ``The History and Drivers
of Our Nation's Debt and Its Threats.'' I think this is a
fitting opening for us for the difficult work this committee
has ahead of us. We are tasked with tackling a problem that
wasn't created overnight and that didn't come about just in the
last few years.
Our debt and deficit problems have a lengthy and complex
history, and we will not be able to truly address them without
a deep and honest understanding of the policies and
circumstances that have led us to where we are today.
The challenges that we face are real, and our task will not
be easy. But I am confident we can get it done because we have
done it before.
Like a number of my fellow committee members, I was here
back in the '90s, when we were facing serious deficits and a
mounting public debt. I was proud to work with President
Clinton and Republicans in Congress to balance the budget in a
way that truly worked for the American people, a way that made
smart cuts to Government spending that were desperately needed,
included revenues, and continued to make the strong investments
in healthcare, education, and infrastructure that helped lay
down a strong foundation for economic growth.
The balanced and bipartisan work we did not only balanced
the budget and it not only helped set our country up to create
millions of new jobs, but it also put us on track to completely
pay down our debt by 2012, which was a great accomplishment.
But as we all know, a lot has changed since then. For many
reasons, our deficit and debt have exploded in the years since.
Some of these reasons have to do with Government policies here
at home, some with decisions made regarding our policies
overseas, and others due to the financial and economic crisis
that has devastated families and businesses here over the last
few years.
I am looking forward to hearing more about the scope and
drivers of our deficit and debt from Dr. Elmendorf today. And I
am confident the members of this committee can help bring our
Nation together once again around a balanced and bipartisan
path to fiscal health and economic growth.
[The prepared statement of Chairman Murray appears in the
appendix.]
Chairman Murray. With that, I will call on my co-chair, Mr.
Hensarling, for his opening statement.
OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE
FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Co-Chair Hensarling. Thank you, Madam Co-Chair.
The purpose of today's hearing is to really highlight the
unsustainable nature of our Nation's debt. And I believe the
term ``unsustainable,'' frankly, is understated.
I certainly want to welcome Dr. Doug Elmendorf, head of the
CBO, who, when I was a member of the Budget Committee, I have
had an opportunity to work with, truly a professional in this
town. Sir, I look forward to your testimony.
In the last organizational meeting we had, I mentioned the
work by Professors Carmen Reinhart and Kenneth Rogoff, ``This
Time Is Different.'' Through their historical study of
financial crisis, they indicated that letting debt rise above
90 percent of GDP was, frankly, a recipe for bad things to
happen to a nation.
Well, this year, our Nation has raced past that tipping
point. Our gross debt has now surpassed 100 percent of GDP. And
I believe there are two crises in our Nation--not just the debt
crisis, but the jobs crisis--and they are clearly connected.
The explosive growth in our Nation's debt hampers our job
creation today.
Last week, I quoted a small business person from the 5th
District of Texas on the subject. Today, I want to quote from a
few more, names you may be more familiar with.
Bernie Marcus, former chairman and CEO of Home Depot, which
employs 255,000. ``If we continue this kind of policy, we are
dead in the water. If we don't lower spending and if we don't
deal with paying down the debt, we are going to have to raise
taxes. Even brain dead economists understand that when you
raise taxes, you cost jobs.''
Mike Jackson, CEO, AutoNation, 19,000 employees. ``The best
thing that this town could do to help this economic recovery
become sustainable is to deal with the deficit and to see tax
reform.''
Jay Fishman, chairman and CEO of Travelers Insurance
Company. ``What is really weighing on their minds is not
knowing how the coming explosion in Federal debt is going to
affect their borrowing costs, liquidity, cost of doing
business, and prices.''
Finally, 2 or 3 months ago, the U.S. Chamber came out with
a survey, their small business survey, 83 percent of
respondents said that America's debt and deficit have a
negative impact on their business.
So I would make the point, Madam Co-Chair, that a path to
credible deficit reduction is a jobs program, and we should not
be deterred in that mission. We have a spending-driven debt
crisis. The deficit reduction will be a jobs plan.
And I look forward again to hearing the comments of our
colleagues as we go about this important work and of the
testimony of Dr. Elmendorf. And I yield back.
Thank you.
[The prepared statement of Co-Chair Hensarling appears in
the appendix.]
Chairman Murray. We will now turn to our members, beginning
with Representative Becerra.
OPENING STATEMENT OF HON. XAVIER BECERRA,
A U.S. REPRESENTATIVE FROM CALIFORNIA
Representative Becerra. I thank the two co-chairs and thank
Dr. Elmendorf for being with us.
The creation of this Joint Select Committee on Deficit
Reduction is the direct result of legislative policies and
economic recessions that have hit us over the last 10 years and
that have caused the Congressional Budget Office's 10-year
estimated $5.6 trillion surplus in 2001 to turn into a more
than $6 trillion deficit that we see today. So to know where to
go with the work that we have to do, you have to know from
where we came.
Today, we will hear about how we lost our way. What we will
hear is that a select few in this country enjoyed the
additional Government spending that occurred in those 10 years
while the rest of Americans are being confronted with paying
the tab.
In January 2001, CBO's assessment in its yearly Budget and
Economic Outlook report was this, ``The outlook for the Federal
budget over the next decade continues to be bright. Assuming
that current tax and spending policies are maintained, CBO
projects that the mounting Federal revenues will continue to
produce growing budget surpluses for the next 10 years.''
But as we all know, current tax and spending policies were
not maintained. Dr. Elmendorf, it is exactly these policies
that induced the Federal deficit, which I want to explore in my
questioning with you today.
Decisions were made to extinguish a $5.6 trillion surplus.
The individual and groups who received the most benefits should
be willing and ready to ante up, to meet their patriotic duty
to contribute revenues and necessary spending decisions to heal
this country's long-term fiscal situation.
We need to ask ourselves was it the senior citizen, the
student, or the Wall Street banker who received the benefit of
this spending binge? When we have our answer, we should ask the
appropriate person or group to pay their fair share to right
the wrong of running up the Government's debt.
I look forward to working with my colleagues to take the
responsibility of improving job creation in this country and
fixing the long-term deficits that we face by ensuring that
those responsible for our deficits pay their fair share.
And with that, I yield back the balance of my time.
[The prepared statement of Representative Becerra appears
in the appendix.]
Chairman Murray. Thank you very much.
Senator Kyl?
OPENING STATEMENT OF HON. JON KYL,
A U.S. SENATOR FROM ARIZONA
Senator Kyl. Thank you, Madam Chairman.
And welcome, Mr. Elmendorf.
The subject of the hearing today is ``The History and
Drivers of the Nation's Debt and Its Threats.'' Obviously, you
need to know what the problem is before you can develop
solutions.
One of the things we will hear is that entitlement spending
is a key driver of our debt. And I think there is a consensus
about that on both sides of the aisle. The concern I have is
that some people fear that that means that the solution has to
be a cut in benefits or a cut in payments to providers for
programs like Medicare and Medicaid, for example, and I would
like to focus very specifically on a potential alternative to
that.
There may be very substantial savings that can be obtained
from administrative efficiencies that would not involve cuts in
these programs. That is one of the things that I will be
talking to Dr. Elmendorf about today.
We hear a lot of talk about waste, fraud, and abuse. It is
a trite phrase, but the reality is there is a significant
amount of truth to it. And I think, especially with regard to
Medicare and Medicaid, we have to find ways to achieve these
administrative savings.
Let me just quote from one of the experts from Cato
Institute, Mike Cannon. In a Forbes blog less than 2 months
ago, he says, ``Judging by official estimates, Medicare and
Medicaid lose at least $87 billion per year to fraudulent and
otherwise improper payments, and about 10.5 percent of Medicare
spending and 8.4 percent of Medicaid spending was improper in
2009.''
Others, like Harvard fraud expert Malcolm Sparrow, say
actually that is low. He said loss rates due to fraud and abuse
could be 10, 20, maybe even 30 percent in some segments.
Obviously, this is an important subject to address. And in
order to do that, we may have to spend a little bit more money
on the front end for people who can review the claims that are
filed and so on, in order to make sure that they don't pay
improper claims.
But at the end of the day, one of the reasons we haven't
attacked this problem is that the CBO has had a very difficult
time in scoring potential savings based upon potential
approaches to the problem. And what I want to explore with Dr.
Elmendorf today is how CBO can help our committee find ways to
achieve administrative efficiencies, saving a lot of the money
that we should not be spending, so that we do have the money to
spend on the beneficiaries and the providers of important
programs like Medicare and Medicaid.
Madam Chairman, Mr. Chairman, thank you.
Chairman Murray. Senator Baucus?
OPENING STATEMENT OF HON. MAX BAUCUS,
A U.S. SENATOR FROM MONTANA
Senator Baucus. Thank you, Senator Murray.
I want to begin just by echoing what Senator Kyl said. I
think there is a lot of fraud and waste in the Medicare and
Medicaid, which we don't properly attack, and much of that is
due to scoring requirements that we have to adhere to. And I
would hope that we could somehow create a way to get beyond
that. It is an excellent point, and I am glad that he made it.
One of our Founding Fathers, Patrick Henry, once said, ``I
know of no way of judging the future, but by the past.'' And
today, we examine the past for lessons to improve our economic
future--to reduce the deficit, create jobs, and create the
certainty our country needs to thrive in the global economy.
The world is watching us. They are watching us closely.
They are watching what we do and the next steps that we take as
a country to confront our deficits. We can do this. We have
already begun the process by cutting $900 billion. We have
already done it. We have taken a first step.
And while the road ahead will not be easy, we have a duty,
I think, to think even bigger, aim higher, ensure our country
is on sound fiscal footing for the long term. We have a duty, I
think, to ensure that we approach these cuts in a balanced way
that creates jobs.
When I was home in Montana again last weekend, I heard over
and over again, people said, ``Max, let's get it done.
Appreciate you being on that committee. Get it done. We need
our country to get it done.''
I know every member of this panel hears the same comments
from their constituents when they are home, just as every
Member of Congress does. And I urge us to listen to the wishes
of our employers.
We are just the hired hands. We are just the employees. The
people that we work for, the people that elect us or unelect us
want us to get this done in a balanced, fair way.
Today, we review the sources of our problem. It is obvious
that the factors that created our current deficit are the cost
of two wars; long-term healthcare costs, which we began to
tackle in health reform; a stagnant economy, which increased
spending; and reduced Federal revenues, which are at historic
lows.
Today, Federal revenues make up about 15 percent of GDP,
compared to, for example, about 17 to 19 percent during the
Reagan administration. A combination of factors created the
deficit. It will take a combination of factors to resolve it.
There is no silver bullet. So let's get together and get our
work done.
[The prepared statement of Senator Baucus appears in the
appendix.]
Chairman Murray. Thank you very much.
Representative Upton?
OPENING STATEMENT OF HON. FRED UPTON,
A U.S. REPRESENTATIVE FROM MICHIGAN
Representative Upton. Well, thank you, Madam Chair.
And I intend to be brief. Chris Van Hollen reminded us last
week that we had 77 days to get this thing done. That means we
have about 72 days now, and we are going to leave some extra
days, hopefully, for you, Dr. Elmendorf, to have your green
eyeshade guys and women be able to put this package together
for us to reach the goal.
Last week, I sat with Chairman Camp and Chairman Baucus--
and Chairman Baucus, again, my folks in Michigan this last
weekend assured me that they are rooting for us as well to get
a solution to the problem that they all really do understand.
And I know the three of us were on our feet when the President
talked about entitlement reform, specifically Medicare and
Medicaid. And I must say that I was disappointed that I did not
see the President's written proposal come up like he did some
others yesterday.
So I just want to say I am looking forward to working with
all my colleagues here. I am going to submit my full statement
for the record so that we can go back, so that we, in fact, all
can go to work to get this thing done.
I yield back.
[The prepared statement of Representative Upton appears in
the appendix.]
Chairman Murray. Thank you very much.
Representative Clyburn?
OPENING STATEMENT OF HON. JIM CLYBURN,
A U.S. REPRESENTATIVE FROM SOUTH CAROLINA
Representative Clyburn. Thank you very much, Madam Chair,
Mr. Chairman.
Dr. Elmendorf, thank you for taking the time to talk with
us today.
I think it is appropriate that today's hearing is entitled,
``The History and Drivers of Our Nation's Debt and Its
Threats.'' If we want to solve the related problems of debt and
joblessness, we need to know how these problems arose. In 2000,
we had a $236 billion surplus and had begun paying down our
National debt. The economy was booming for all Americans,
unemployment was at 4 percent, and the poverty rate dipped to
its lowest level since 1979.
Instead of building on the policies that have served us so
well, we embarked upon two wars, one of which was dubious at
best. Using credit cards, we instituted two tax cuts, totaling
$544 billion, which were tilted in favor of millionaires and
billionaires. We created a new prescription drug benefit
program, which CBO estimates will cost $967 billion over the
next 10 years, and allowed mortgage lenders to gamble away the
economic prosperity of millions of American families.
And then it was declared that deficits don't matter. This
special committee was created because deficits and debt do
matter. Now we find ourselves with painfully slow growth,
unacceptably high unemployment, deficits as far as our eye can
see, and a mounting long-term debt burden.
As we work together to achieve significant deficit
reduction, it is important for us to remember how we got here.
Many factors got us into this situation, and many factors are
needed to get us out.
We must balance the budget with a balanced approach that
includes job creation, revenue increases, and smart spending
cuts. Shared sacrifice will be required. We cannot solve the
problem on the backs of the most vulnerable in our society who
did nothing to cause the problem.
I am willing to make tough compromises. I have said that if
the distance between an opponent and me is five steps, I am
willing to take three, as long as the opponent takes the other
two.
Dr. Elmendorf, thank you again for being here, and I look
forward to discussing these issues with you in the Q&A period.
Thank you, and I yield back.
[The prepared statement of Representative Clyburn appears
in the appendix.]
Chairman Murray. Senator Portman?
OPENING STATEMENT OF HON. ROB PORTMAN,
A U.S. SENATOR FROM OHIO
Senator Portman. Thank you, Madam Chair.
And welcome to Director Elmendorf. As you all know, this
committee is going to be relying heavily on you for your
analysis and for your scoring. And to you and your colleagues
behind you, I thank you in advance for the many hours that you
will put in. Our success or failure will depend in large
measure on your good work. So we need you and look forward to
your responses to our many requests.
I listen to my colleagues' comments this morning, and I
must say I am delighted that you are here today because we need
to have a little objective analysis of how we got to where we
are, and I know you will provide that. I hope you will also
talk about the appropriate baseline for us to use to examine
our proposals.
When measuring new proposals, the baseline questions help
us determine ``compared to what,''--whether it is a spending
issue or revenue issue. And as you know, I have some concerns
about the current law baseline because I don't think it is
realistic. And I want you to address that today, if you could.
Is the current-law or current-policy baseline more realistic?
Or is there another one like the long-term extended baseline,
alternative fiscal scenario? All these questions matter greatly
in our work.
We have a $1.5 trillion task over the next 10 years. This,
of course, is a huge challenge. But I would also like your
analysis of how that compares to what you see as the real
fiscal challenge over the next 10 years and the real economic
challenge we face.
As many of the colleagues on the committee have mentioned
this morning, obviously our economy is directly linked to what
we do. And we will hear about this today from you. We will see
how we got in this situation we are in, largely because of
economic conditions. Just as in the late '90s because of the
growing economy we were able to come to a unified balanced
budget faster than anybody expected.
Using your data and the current policy baseline, as I look
at $1.5 trillion, I think it is about 4 percent of projected
spending over the next 10 years. So, in that sense, $1.5
trillion seems realistic. It is also, as I look at it, based
on, again, your data and the current policies, less than 20
percent of the projected increase in the deficit over the next
10 years.
So $1.5 trillion seems to me to be something we should be
doing at the very least. Again, I look forward to your insights
on that and what is the most realistic baseline.
I hope you and your colleagues will also help us better
understand the impacts of policy choices over the coming
decades. As I look at your projections, it seems to me that
deficit and debt levels would be devastating to our economy
over the second, third, and fourth 10 years if we don't do
something about the longer-term impact.
So while we could within this budget window find ways to
get to $1.5 trillion, it will not be something that markets
will react to well, in my view, unless we also are looking at
long-term impacts. I would love to have your view there.
The long-term budget estimates are so unsustainable that
your alternative budget scenario simply stops calculating the
national debt after 2036 because it is so unsustainable. We
will have crossed into totally unchartered territory.
Clearly, entitlement spending is driving those long-term
deficits to impossible levels. I am interested in hearing what
reforms you think can protect those in need, which we must do,
while at the same time modernizing these programs and placing
them on a sustainable path for future generations.
Again, thank you for being before us. And more importantly,
thank you for all the hard work you will be doing with us over
the next several weeks.
[The prepared statement of Senator Portman appears in the
appendix.]
Chairman Murray. Thank you.
Senator Kerry?
OPENING STATEMENT OF HON. JOHN KERRY,
A U.S. SENATOR FROM MASSACHUSETTS
Senator Kerry. Madam Chairwoman, thank you.
We all agree that we are facing an unsustainable financial
future, and under the CBO's alternative fiscal scenario, the
debt is going to reach 82 percent of GDP by 2021. That is
higher than any year since 1948, and we all agree we can't let
that happen.
But to avoid that dismal scenario, we are going to have to
be pretty clear-eyed about the way that we got here and the
forces that keep us on this dangerous trajectory. I think it is
factual to say that this road began now more than a decade ago.
Some would argue even longer.
But you have economic meltdown, two wars, rounds of the
largest tax cuts in history that did not produce the jobs that
were predicted, and then efforts to forestall larger economic
collapse more recently. All of these contributed.
Demographic challenges loom large in the outyears, and it
is more than just a spending problem, narrowly defined. And I
think we do the dialogue a disservice by oversimplifying it
because if it was a mere spending issue, it would be a lot
easier to solve. But also because many tax expenditures are a
form of spending in disguise.
Now while there may be partisan interpretations of how we
got here, there is a bipartisan consensus not just about the
urgency of action to dig us out of this mess, but about the
approach that it requires. When I say bipartisan, three
bipartisan groups that looked at the problem in recent months--
Rivlin-Domenici, Simpson-Bowles, and the so-called Gang of
Six--have all said--all, unanimously--that any real solution
needs to be balanced with a mix of revenues and spending cuts
and long-term reforms.
Now we benefit from their guideposts, and we also benefit
from the cautionary lessons, important cautionary lessons of
other countries. That means not fixating on austerity measures
alone, particularly in the short term.
We have seen the damage that they have caused across
Europe, and we can't put our own fragile economy in jeopardy by
taking actions that will slow economic growth and decrease job
creation. We need growth, not just revenue and not just cuts.
And any economist worth their salt, any business person in
America today will tell us creating jobs today helps reduce the
deficit tomorrow.
Last week, the Committee for a Responsible Budget, a
bipartisan organization including some of our country's leading
experts on budget issues, including the co-chairs of the fiscal
commission, recommended that this committee go big, go long,
and go smart. I think Director Elmendorf's testimony today
helps solidify the reality that we need to go big and reap
savings of more than $1.5 trillion to address long-term
deficits. We need to go long and address our long-term budget
issues. And most importantly, we need to go smart and address
the budget without preconceived dogmas or political agendas.
So I look forward to delving into these issues today with
you, Dr. Elmendorf, and thank you for coming here to help us
shape fair, balanced, thoughtful recommendations for this
committee.
[The prepared statement of Senator Kerry appears in the
appendix.]
Chairman Murray. Representative Camp?
OPENING STATEMENT OF HON. DAVE CAMP,
A U.S. REPRESENTATIVE FROM MICHIGAN
Representative Camp. Thank you, Madam Chair.
There has been a lot of important things already said this
morning. Our time is short today. Both in the committee and as
Mr. Upton pointed out, our time is short in terms of trying to
meet the responsibilities we have been given under the Budget
Control Act.
So I look forward to hearing from Mr. Elmendorf. I think it
is important that we just get down to business. So I will yield
back the balance of my time.
Chairman Murray. Thank you.
Representative Van Hollen?
OPENING STATEMENT OF HON. CHRIS VAN HOLLEN,
A U.S. REPRESENTATIVE FROM MARYLAND
Representative Van Hollen. Thank you, Madam Chairman.
Yesterday, there were two important developments that
relate to our work. First, the President submitted to the
Congress a jobs plan that is fully paid for over 10 years.
Every day that Americans are out of work is another day that
the country is hurting and the deficit is growing.
The fastest and most effective way to reduce the deficit in
the short term is to put Americans back to work. I hope this
committee will address that reality in our work as we move
forward.
Second, yesterday, as Senator Kerry mentioned, the co-
chairs of the Bipartisan National Commission on Fiscal
Responsibility, Alan Simpson and Erskine Bowles, called upon
this committee to ``go big,'' urging us to use this unique
opportunity to develop a plan to reduce the deficit by about $4
trillion over 10 years, including the almost $1 trillion in
savings from the Budget Control Act. They are right. I believe
we should proposal a plan of that size.
The bipartisan Simpson-Bowles commission, the bipartisan
Rivlin-Domenici commission, as well as the Gang of Six, have
provided us with a framework of how to achieve that goal. What
is clear in all of them is that we need a balanced approach to
reduce the deficit, one that contains savings achieved from
modernizing certain programs, as well as savings gained by
simplifying and reforming the tax code in a way that generates
revenue.
Addressing a problem of this magnitude requires shared
responsibility in order to grow our economy and reduce the
deficit. The testimony we will hear today from Mr. Elmendorf
demonstrates why such a balanced approach is necessary. It
vividly illustrates the policy choices driving our deficit are
the significant cuts made to revenue, combined with increasing
retirement and healthcare costs due to the retirement of the
baby boomers.
Let's not duck those realities. Let's follow the advice of
the three other bipartisan commissions and go big. I don't
agree with every one of their proposals, but those three groups
have provided this bipartisan group with a framework from which
to start.
Time is short. The clock is ticking. I hope we will get to
work and follow that balanced framework approach that has been
set by, again, three other bipartisan groups that look to
tackle the issues that this committee is asked to address.
Thank you, Madam Chairman.
[The prepared statement of Representative Van Hollen
appears in the appendix.]
Chairman Murray. Thank you.
Senator Toomey?
OPENING STATEMENT OF HON. PAT TOOMEY,
A U.S. SENATOR FROM PENNSYLVANIA
Senator Toomey. Thanks, Madam Chair.
And Dr. Elmendorf, thank you. I look forward to working
with you as well.
Just a couple of points I wanted to stress. I think the
point has been made, but I want to underscore that the problem
that we face is, of course, much worse than what the current
law baseline would seem to suggest. That is not a criticism. It
is simply an observation.
The current law baseline is not meant to be a predictor of
the future. If it were, it would be a really bad one, as we
know.
In addition, some things have changed since you did that.
The economy has gotten weaker. I would argue the sovereign debt
crisis in Europe has gotten worse. So these things have
aggravated the situation.
And then there is the fact that I think the risks are
greater for downside surprises than upside surprises, if you
will--things like the contingent liabilities that are lurking
out there, which could come home to roost at any point in time.
The assumptions that you make about interest rates are not
necessarily unreasonable. But if they are wrong, it is most
likely that rates will be much higher rather than lower,
significantly aggravating our problem. So I want to underscore
that I think we should be striving to do every bit as much as
we possibly can.
I hope that we will be able to dwell somewhat today on just
how significant the big entitlement programs are the long-term
drivers of this problem. And I hope we will be able to discuss
what I see as a real danger in taking the approach that I think
you might be advocating, although I am not entirely clear--the
danger of delaying the spending cuts for fear that we will
weaken a fragile economy.
On page 29 of your testimony, you do go through a list of
the risks associated with delaying spending cuts now. I would
argue that if we tolerate or aggravate the current deficit
problem with the promise that we will work it all out in the
future, that is a very, very dangerous direction to head in.
And at the end of the day, there is no free lunch, and a
Government spending expansion here is actually going to do more
harm than good.
So, finally, the one point that I really want to underscore
is just the importance of growth. If we can have policies that
will encourage maximizing economic growth, all problems are
easier to solve with a strong, growing economy. And I think
that should guide our decisions.
With that, Madam Chair, I yield the balance of my time.
Chairman Murray. Thank you very much.
With that, we will turn to our witness for today. Dr.
Douglas Elmendorf is the eighth Director of the Congressional
Budget Office. His term began on January 22, 2009.
Before he came to CBO, Dr. Elmendorf was a senior fellow in
the Economic Studies Program at Brookings Institution. As the
Edward M. Bernstein Scholar, he served as co-editor of the
Brookings Papers on Economic Activity and the Director of the
Hamilton Project, an initiative to promote broadly shared
economic growth.
He has served as an assistant professor at Harvard
University, a principal analyst at the Congressional Budget
Office, a senior economist at the White House Council of
Economic Advisers, a Deputy Assistant Secretary for Economic
Policy at the Treasury Department, and an Assistant Director of
the Division of Research and Statistics at the Federal Reserve
Board. In those positions, Dr. Elmendorf has gained a wide
range of expertise on budget policy, Social Security, Medicare,
national healthcare reform, financial markets, macroeconomic
analysis and forecasting, and many other topics.
So I am very glad that he has agreed to join our committee
here today. Dr. Elmendorf, thank you so much for taking the
time and for helping us get through this. And we would look
forward to your testimony.
STATEMENT OF DOUGLAS ELMENDORF, PH.D.,
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Dr. Elmendorf. Thank you, Senator Murray, Congressman
Hensarling, and all the members of the committee.
I appreciate the invitation to talk with you today about
the economic and budget outlook and about CBO's analysis of the
fiscal policy choices facing this committee and the Congress.
The Federal Government is confronting significant and
fundamental budgetary challenges. If current policies are
continued in coming years, the aging of the population and
rising costs for healthcare will push up Federal spending
measured as a share of GDP well above the amount of revenue
that the Federal Government has collected in the past. As a
result, putting the Federal budget on a sustainable path will
require significant changes in spending policies, significant
changes in tax policies, or both.
Addressing that formidable challenge is complicated by the
current weakness of the economy and the large numbers of
unemployed workers, empty houses, and underused factories and
offices. Changes that might be made to Federal spending and
taxes could have a substantial impact on the pace of economic
recovery during the next few years, as well as on the Nation's
output and people's income over the longer term.
I will talk briefly about the outlook for the economy and
the budget and then turn to some key considerations in making
fiscal policy. The financial crisis and recession have cast a
long shadow on the U.S. economy. Although output began to
expand 2 years ago, the pace of recovery has been slow, and the
economy remains in a severe slump.
CBO published its most recent economic forecast in August.
That forecast was initially completed in early July and updated
only to incorporate the effects of the Budget Control Act. In
our view, incoming data and other developments since early July
suggest that the economic recovery will continue, but at a
weaker pace than we had anticipated.
With output growing at only a modest rate, CBO expects
employment to expand very slowly, leaving the unemployment
rate, as depicted by the dots in the figure, close to 9 percent
through the end of next year. I should say all these figures
are taken from the written testimony and nearly in the order in
which they appear in the testimony.
As a result, we think that a large portion of the economic
and human costs of this downturn remain ahead of us. The
difference between output and our estimate of the potential
level of output, shown by the gap between the lines in the
figure, has cumulated so far to about $2.5 trillion. By the
time output rises back to its potential, which will probably be
several years from now, we expect that cumulative shortfall to
be about twice as large as it is today, or $5 trillion.
Not only are the costs associated with this shortfall and
output immense, they are also borne unevenly, falling
disproportionately on people who lose their jobs, are displaced
from their homes, or own businesses that fail.
I want to emphasize that the economic outlook is highly
uncertain. Many developments could cause economic outcomes to
differ substantially in one direction or the other from those
we currently anticipate. If the recovery continues as expected
and if tax and spending policies unfold as specified in current
law, deficits will drop markedly as a share of GDP over the
next few years.
Under CBO's baseline projections, shown by the dark blue
portion of the bars in the figure, deficits fall to about 6
percent of GDP in 2012, about 3 percent in 2013, and smaller
amounts for the rest of the decade. In that scenario, deficits
over the decade total about $3.5 trillion.
But as a number of you have said, those baseline
projections understate the budgetary challenges because changes
in policy that will take effect under current law will produce
a Federal tax system and spending for some Federal programs
that differ sharply from the policies that many people have
become accustomed to.
Specifically, CBO's baseline projections include the
following policies specified in current law. First, certain
provisions of the 2010 Tax Act, including extensions of lower
rates and expanded credits and deductions enacted in 2001,
2003, and 2009, all expire at the end of next year.
Second, the 2-year extension of provisions designed to
limit the reach of the alternative minimum tax, the extensions
of emergency unemployment compensation, and the 1-year
reduction in the payroll tax all expire at the end of this
year.
Third, sharp reductions in Medicare's payment rates for
physician services take effect at the end of this year.
Fourth, funding for discretionary spending declines over
time in real terms in accordance with the caps established
under the Budget Control Act.
And fifth, additional deficit reduction of more than $1
trillion will be implemented as required under the act.
Changing provisions of current law so as to maintain major
policies that are in effect now would produce markedly
different budget outcomes.
For example, and shown by the full bars in the figure, if
most of the provisions of the 2010 Tax Act were extended, if
AMT was indexed for inflation, and if Medicare's payment rates
for physician services were held constant, then deficits over
the coming decade would total $8.5 trillion, rather than the
$3.5 trillion in the current law baseline. By 2021, debt held
by the public would reach 82 percent of GDP, higher than in any
year since 1948.
Yesterday, CBO released an analysis of the enforcement
procedures of the Budget Control Act. As shown in the slide, we
estimate that if no legislation originating from this committee
is enacted, the following would occur over the next decade.
Reductions in the caps on discretionary appropriations for
defense would cut outlays by about $450 billion. Reductions in
the caps on discretionary appropriations for nondefense
purposes would cut outlays by about $300 billion. And
reductions in mandatory spending would yield net savings of
about $140 billion. The total reduction deficits would be about
$1.1 trillion.
The estimated reductions in mandatory spending are
comparatively small because the law exempts a significant
portion of such spending from the enforcement procedures. As a
result, about 70 percent of the total savings would come from
lower discretionary spending. Cuts in defense and nondefense
spending of that magnitude would probably lead to reductions in
the number of military and civilian employees and in the scale
and scope of Federal programs.
Beyond the coming decade, as you know, the fiscal outlook
worsens, as the aging of the population and rising costs for
healthcare put significant and increasing pressure on the
budget under current law. When CBO issued its most recent long-
term outlook in June, debt held by the public was projected to
reach 84 percent of GDP in 2035 under current law and about 190
percent of GDP under policies that more closely resemble the
current policies.
Although new long-term projections would differ because we
would incorporate the latest 10-year projections, the amount of
Federal borrowing that would be necessary under current
policies would be clearly unsustainable. In sum, the Federal
budget is quickly heading into territory that is unfamiliar to
the United States and to most other developed countries as
well.
As this committee considers its charge to recommend
policies that would reduce future budget deficits, its key
choices fall into three broad categories listed in the slide.
How much deficit reduction should be accomplished? How quickly
should deficit reduction be implemented? What form should
deficit reduction take? Let me take up these questions briefly
in turn.
First, regarding the amount of deficit reduction, there is
no commonly agreed upon level of Federal debt that is
sustainable or optimal. Under CBO's current law baseline, debt
held by the public is projected to fall from 67 percent of GDP
this year to 61 percent in 2021. However, stabilizing the debt
at that level would still leave it larger than in any year
between 1953 and 2009.
Lawmakers might determine that debt should be reduced to
amounts lower than those shown in CBO's baseline and closer to
those we have experienced in the past. That would reduce the
burden of debt on the economy, relieve some of the long-term
pressures on the budget, diminish the risk of a fiscal crisis,
and enhance the Government's flexibility to respond to
unanticipated developments. Of course, it would also require
larger amounts of deficit reduction.
Furthermore, lawmakers might decide that some of the
current policies scheduled to expire under current law should
be continued. In that case, achieving a particular level of
debt could require much larger amounts of deficit reduction
from other policies.
For example, if most of the provisions in the 2010 Tax Act
were extended, the AMT was indexed for inflation, and
Medicare's payment rates for physicians were held constant,
then reducing debt in 2021 to the 61 percent of GDP projected
under current law would require other changes in policies to
reduce deficits over the next 10 years by a total of $6.2
trillion, rather than the $1.2 trillion needed from this
committee to avoid automatic budget cuts.
In 2021 alone, the gap between Federal revenues and
spending if those policies were continued and no other
budgetary changes were made, as shown by the right pair of bars
in the figure, is projected to be 4.7 percent of GDP. Putting
debt on a downward trajectory relative to GDP in that year
would require a much smaller deficit. Reaching that objective,
declining debt relative to the GDP from that starting point
would require a reduction in the deficit of about 2.5 percent
of GDP, or $600 billion in that year alone.
Your second set of choices involves the timing of deficit
reduction, which involves difficult tradeoffs summarized in the
slide. On one hand, cutting spending or increasing taxes slowly
would lead to a greater accumulation of Government debt and
might raise doubts about whether the longer-term deficit
reductions would ultimately take effect.
On the other hand, implementing spending cuts or tax
increases abruptly would give families, businesses, and State
and local governments little time to plan and adjust. In
addition, and particularly important given the current state of
the economy, immediate spending cuts or tax increases would
represent an added drag on the weak economic expansion.
However, credible steps to narrow budget deficits over the
longer term would support output and employment in the next few
years by holding down interest rates and reducing uncertainty,
thereby by enhancing confidence by businesses and consumers.
Therefore, the near-term economic effects of deficit reduction
would depend on the balance between changes in spending and
taxes that take effect quickly and those that take effect
slowly.
As shown in this next slide, credible policy changes that
would substantially reduce deficits later in the coming decade
and beyond without immediate spending cuts or tax increases
would both support the economic expansion in the next few years
and strengthen the economy over the longer term.
Moreover, there is no inherent contradiction between using
fiscal policy to support the economy today while the
unemployment rate is high and many factories and offices are
underused and imposing fiscal restraint several years from now
when output and employment will probably be close to their
potential. If policymakers wanted to achieve both a short-term
economic boost and longer-term fiscal sustainability, the
combination of policies that would be most effective, according
to our analysis, would be changes in taxes and spending that
would widen the deficit today, but narrow it later in the
decade.
Such an approach would work best if the future policy
changes were sufficiently specific, enacted into law, and
widely supported so that observers believe that the future
restraint would truly take effect.
Your third set of choices involves the composition of
deficit reduction. Federal spending and revenues affect the
total amount and types of output that are produced, the
distribution of that output among various segments of society,
and people's well-being in a variety of ways.
In considering the challenge of putting fiscal policy on a
sustainable path, many observers have wondered whether it is
possible to return to previous policies regarding Federal
spending and revenues. Unfortunately, the past combination of
policies cannot be repeated when it comes to the Federal
budget. The aging of the population and rising costs for
healthcare have changed the backdrop for budget decisions in a
fundamental way.
Under current law, spending on Social Security, Medicare,
and other major healthcare programs, the darkest line in the
figure, is projected to reach about 12 percent of GDP in 2021,
compared with an average of about 7 percent during the past 40
years. That is an increase worth 5 percent of GDP. Most of that
spending goes to benefits for people over age 65, with smaller
shares for blind and disabled people and for nonelderly, able-
bodied people.
In stark contrast, under current law, all spending apart
from Social Security and the major healthcare programs and
interest payments on the debt is projected to decline
noticeably as a share of the economy. That broad collection of
programs includes defense, the largest single piece; the
Supplemental Nutrition Assistance Program, formerly known as
food stamps; unemployment compensation; veterans benefits;
Federal civilian and military retirement benefits;
transportation; health research; education and training; and
other programs.
That whole collection of programs has incurred spending
averaging 11.5 percent of GDP during the past 40 years. With
expected improvement in the economy and the new caps on
discretionary spending, it falls in our projection by 2021 to
less than 8 percent of GDP, the lowest share in more than 40
years, under current law and in our baseline projections.
Putting those pieces together and including interest
payments, between 1971 and 2010, as shown by the left pair of
bars in the figure, Federal spending averaged about 21 percent
of GDP. But under current law for 2021, as shown by the right
pair of bars, CBO projects it to grow to about 23 percent of
GDP.
Alternatively, if the laws governing Social Security and
the major healthcare programs were unchanged and all other
programs were operated in line with their average relationship
to the size of the economy during the past 40 years, Federal
spending would be much higher in 2021, around 28 percent of
GDP. That amount exceeds the 40-year average for revenues as a
share of GDP by about 10 percentage points.
In conclusion, given the aging of the population and rising
costs for healthcare, attaining a sustainable Federal budget
will require the United States to deviate from the policies of
the past 40 years in at least one of the following ways. Raise
Federal revenues significantly above their average share of
GDP, make major changes in the sorts of benefits provided for
Americans when they become older, or substantially reduce the
role of the rest of the Federal Government relative to the size
of the economy.
My colleagues and I at CBO stand ready to provide the
analysis and information that can help you in making these
important choices.
Thank you. I am happy to take your questions.
[The prepared statement of Dr. Elmendorf appears in the
appendix.]
Chairman Murray. Thank you very much, Dr. Elmendorf.
As we begin the work that has been outlined for us as a
committee under the Budget Control Act, I think it is helpful
for us to have a clear understanding of the scope of the
problem, and you laid that out very clearly for us. I think we
all agree this task is pretty enormous, and we have to come
together around a balanced approach that addresses our fiscal
situation, but also focuses on making sure that we remain
competitive and looks at our long-term growth.
So I wanted to start by just asking you to expand a little
bit on what you were just talking about and talk to us about
what we should consider in weighing the tradeoffs between
helping our economy in the short term to help create growth and
not causing significant harm in the long term.
Dr. Elmendorf. In our judgment, and this is consistent with
a consensus of professional opinion, cuts in spending or
increases in taxes at a moment when there are a lot of unused
resources in the economy--unemployed workers, empty homes,
unused factories and offices--and when monetary policy is
finding it difficult to provide further support for economic
activity because the Federal funds rate is already very close
to zero, then under those conditions cuts in spending and
increases in taxes will tend to slow the economic recovery.
They will tend to reduce the levels of output and employment
relative to what would otherwise be.
At the same time, and this is also quite consistent with a
consensus professional opinion, over time, as our economy moves
back toward potential output and those unused resources become
used again, under those sorts of economic conditions, cuts in
spending or increases in taxes that reduce outsize budget
deficits are good for the economy, bolster output and incomes.
That may seem like a paradox, but it isn't really. It is
just reflecting the view that the effect of Federal fiscal
policy on the economy depends on economic conditions and on the
stance and abilities of monetary policy.
And that is why, in our judgment, the analysis that we have
done and presented to the Congress on a number of occasions
over the past few years, to provide the greatest boost to
economic activity now and over the medium run and long run, the
combination of fiscal policies likely to be most effective
would be policies that cut taxes or increase spending in the
near term, but over the medium and longer term move in the
opposite direction and cut spending or raise taxes.
Chairman Murray. Okay. Thank you.
Dr. Elmendorf, as you know, several bipartisan groups have
released reports in the last 9 months with recommendations for
reining in our deficit and spending and stemming the rise of
Federal debt. All of them came with a balanced approach, and I
am concerned that Congress has not yet included revenues or
entitlements, as we have focused only so far on discretionary
spending cuts and caps, when I think we need to be looking at
balanced approaches.
Now some have made it clear that they want entitlements off
the table. Others have made it clear they want revenues off the
table. Unfortunately, that leaves only a relatively very small
amount of discretionary and mandatory spending that Members so
far have been willing to focus on.
Would you agree that while cuts and caps we instituted
within the Budget Control Act can help somewhat with the long
term, what we really need is a comprehensive approach that does
address both revenue and mandatory programs?
Dr. Elmendorf. So, Senator, as a matter of arithmetic,
there are a lot of different paths to reducing budget deficits,
and it is not CBO's role to make recommendations among those
alternative paths. I think the crucial point, though, is that
the more large pieces of the puzzle one takes off the table,
then the greater the changes will need to be in the remaining
pieces.
You can see this very clearly in this picture. In 2021,
this pictures shows, under current law, revenues being about 21
percent of GDP. If one instead wants to----
Senator Baucus. Can you explain that? We can't see it.
Chairman Murray. It is hard to see.
Dr. Elmendorf. I am sorry. So this is Figure 14 in the
written testimony, if you have that in front of you? What the
left-hand--I will explain it.
Senator Baucus. Exhibit 14?
Dr. Elmendorf. Yes. Exhibit 14.
Senator Baucus. Thank you.
Dr. Elmendorf. Figure 14 in the written testimony. The
left-hand set of bars shows the averages over the last 40
years. The far left bar is revenues. Revenues have averaged
about 18 percent of GDP. Then the right-hand bar shows the
major pieces of spending. The bottom chunk is Social Security
and major healthcare programs. This is----
Senator Baucus. Could you try a page?
Chairman Murray. Page 42.
Senator Baucus. Forty-two. Thank you.
Dr. Elmendorf. The left-hand piece, as I said, is revenues.
They have averaged 18 percent of GDP. The right-hand bar shows
spending, Social Security, and the major healthcare programs--
that is Medicare, Medicaid, now CHIP--in the future, including
subsidies to be provided through insurance exchanges. In the
past, that has averaged about 7 percent of GDP.
All other non-interest spending--that is other mandatory
spending, it is defense spending, it is nondefense
discretionary spending--has averaged 11.5 percent of GDP. And
interest payments have averaged about 2.25 percent of GDP. With
the deficit, that has been a little under 3 percent.
For 2021, under current law, revenues would rise to be
about 21 percent of GDP. Social Security and the major
healthcare programs would be 12, a little over 12 percent of
GDP. That is 5 percent of GDP more than the average for the
past 40 years, and that is the essence of the point that the
aging of the population and rising costs for healthcare have
changed the backdrop for the decisions that you and your
colleagues make.
If those policies continue to operate--those programs
continue to operate in the way they have operated in the past,
they will be much more expensive than they have been in the
past because there will be more people collecting benefits, and
each person will be collecting more in benefits. And that is
the crucial driver of the future budget trajectory relative to
what we have seen in the past.
The other category, other non-interest spending, as you can
see, is already much smaller in 2021 under current law and our
projections than it has been historically. And that is a
combination of improvement in the economy, which we think will
reduce the number of people on food stamps, collecting
unemployment insurance, and so on, but also discretionary
spending caps that reduce both defense spending and nondefense
discretionary spending in real terms and thus reduce them
fairly sharply as shares of GDP.
Chairman Murray. Dr. Elmendorf, I am out of time.
Dr. Elmendorf. Sorry.
Chairman Murray. And as chair, I am trying to keep
everybody to that. But I appreciate that response and want to
turn it over to my co-chair, Congressman Hensarling.
Co-Chair Hensarling. Thank you, Madam Co-Chair.
And Dr. Elmendorf, maybe we will continue on this line of
questioning. Is it possible to pull up your Figure 12 from your
testimony, if somebody could help me with that?
Dr. Elmendorf. Figure 12?
Co-Chair Hensarling. Page 39 of your testimony. I believe
it is entitled Figure 12.
Now as I understand it, this chart is a chart of historic
and projected growth on Social Security, Medicare, other major
healthcare programs. You wouldn't happen to have this chart
plotted against growth in GDP, would you?
Dr. Elmendorf. So these are shares of GDP. This is spending
on these programs expressed as a percentage of GDP.
Co-Chair Hensarling. Okay. But historic average, post World
War II GDP has averaged what, roughly 3 percent annual economic
growth?
Dr. Elmendorf. I think that is about right, Congressman. I
don't know for sure.
Co-Chair Hensarling. Okay. On your Figure 14, again, Social
Security and major healthcare programs have averaged 7.2
percent of GDP. Current law, going to 12.2 percent of GDP in
just 10 years. So from 7.2 to 12.2, not quite double, but
certainly that could be described as explosive growth, could it
not?
Dr. Elmendorf. Very rapid, Congressman. Yes.
Co-Chair Hensarling. We won't parse terms. As I am looking
at some of your CBO data just for the last 10 years, apparently
Social Security has grown at an average of 5.8 percent,
Medicare 9.1 percent, Medicaid 8.8 percent in the last decade.
And again, we now have a revised GDP growth outlook coming out
of your August revision of your baseline.
So, is it a fair assessment that we have Social Security,
Medicare, other healthcare programs that are potentially
growing two and three times the rate of growth in our economy?
Dr. Elmendorf. They have grown much faster in the past, and
our projections are for them to continue to outpace economic
growth. Of course, the exact amount is uncertain, but the gap
in the growth rates that we have seen historically has been
very large, as you said.
Co-Chair Hensarling. Now, Senator Toomey certainly in his
comments talked about the current law baseline, and although an
important exercise, it is certainly not dispositive to the task
in front of us. But under a current law baseline, Medicare
physicians are due to take essentially a 30 percent pay cut
next year. Correct?
Dr. Elmendorf. Yes. That is right.
Co-Chair Hensarling. Does CBO--I believe recently you
testified that CBO did not have a model to really impact--to
show the impact of such a cut on healthcare delivery. Is that
correct? Is CBO developing a model, or is that beyond the scope
of what you do?
Dr. Elmendorf. It is in the long-term plan, Congressman. We
and others have raised concerns that the much slower growth
projected for payments to physicians through Medicare relative
to the private sector could affect the access to care or
quality of care received by beneficiaries. But we do not have a
model and are not about in the near term to have a model that
would enable us to make any more specific predictions along
those lines, I am afraid.
Co-Chair Hensarling. Well, what I am trying to get at is
clearly--and again, I quoted the President, who I don't often
agree with, in our last organizational meeting, where he said,
``The major driver of our long-term liabilities, everybody here
knows, is Medicare and Medicaid and our healthcare spending.
Nothing comes close.'' And I take it you would probably agree
with that assessment as well, Dr. Elmendorf?
Dr. Elmendorf. Yes. That is right.
Co-Chair Hensarling. But I am also trying to get to the
qualitative aspect of this, too, in our current systems, and
you say CBO is developing a model. I know that CMS actuaries
have said as essentially if that under the current baseline
that, ``Medicare beneficiaries would almost certainly face
increasingly severe problems with access to care.'' That is the
Medicare actuaries, August of 2010.
The Medicare trustees 2011 report, talking about the
growing insolvency, ``Beneficiary access to healthcare services
would be rapidly curtailed.''
The President's Administrator for Centers for Medicare and
Medicaid Services has said, ``The decision is not whether or
not we will ration care. The decision is whether we will ration
with our eyes open.''
So, to some extent, Dr. Elmendorf, even though CBO doesn't
have a model, we are looking at not just programs that are
driving the insolvency of our country, but in many respects,
left unreformed, is also shortchanging the beneficiaries as
well. Would you agree with that assessment, or again, until you
have your model, that is----
Dr. Elmendorf. I think all I can say, Congressman, is that
the extent of the pressure on providers of care to Medicare
beneficiaries may depend a lot on the time horizon over which
one looks. When the actuaries make projections for 75 years
into the future, they have shown a picture that I have seen in
testimonies about the relative payment rates to providers many,
many decades into the future.
The sorts of changes that are in train for the coming
decade might affect access to care or quality of the care, as I
have said, but would be much less severe in those effects than
if those same policies were left in place for the remainder of
the 75-year period that the actuaries make projections for. So,
but beyond that, we just don't have a way of trying to quantify
for you the extent of the impact on beneficiaries.
Co-Chair Hensarling. Apparently, the trustees in CMS do so
far. In an attempt to lead by example and follow the lead of my
co-chair, I see my time is now ended.
Thank you, Dr. Elmendorf.
Dr. Elmendorf. Thank you.
Chairman Murray. Representative Becerra?
Representative Becerra. Dr. Elmendorf, thank you very much
for your testimony, and you focused quite a bit of your time on
what is coming up, which, if we are not careful, could be
pretty bad.
But we are dealing right now with a $14 trillion national
debt plus--$14 trillion-plus national debt and fairly massive
deficits today, and we have been charged to come up with
savings from these current and past deficits of at least $1.5
trillion.
And so, let me ask that a few charts that I have, the first
chart actually is a chart CBO's work done in 2001 that I would
like to have raised. It is called ``Changes in CBO's Baseline
Projections of the Surplus Since January 2001,'' and what I
would like to do on that chart, if we can get that up, is just
point out what was being projected by your office back in 2001
and then analyze--and I think all my colleagues have copies of
those charts with them--and analyze that.
Now it is very difficult to make out these tables and make
much sense of them. But for those who can make out the lines,
the numbers on those charts, the very top line, the total
surplus as projected in January----
Senator Baucus. Xavier, could you tell us what page that is
on?
Representative Becerra. It should be a separate package
that you got----
Senator Baucus. Oh, it is a handout.
Representative Becerra. It is a separate handout. That is
correct. It should be----
Dr. Elmendorf. I think this is a table that CBO has
published and posted on its Web site, but it is not included in
the testimony that I brought today.
Representative Becerra. That is correct. And I only will
make a couple of points here since it is difficult to read all
the numbers on the table. But the first one is that the top
line there, total surpluses as projected in January 2001,
projected that after--from 2001 to 2011, if you totaled it up,
we have surpluses of $5.610 trillion.
And if you go down to the very bottom of the chart, towards
the very bottom, to the line that says ``Actual Surplus or
Deficit,'' under the year 2002 column, by the year 2002, there
was a negative 158, which means a deficit of $158 billion.
So that while the projections in 2001 were for record
surpluses totaling over 10 or so years, $5.6 trillion, by the
second year, by 2002, we were already beginning to run
deficits, not surpluses. So we knew well in advance of the year
2011 that the Federal Government was beginning to run
deficits--in fact, record deficits--that could ultimately harm
our economy.
I have another chart that uses the data from the CBO that
we just discussed and tries to put it in a little easier form
to analyze. And the Pew Center did this chart, taking the data
from the Congressional Budget Office to try to segment out
where that change from surplus to deficit went. All those
dollars that were spent, all the revenue through the tax code
that was lost, where did it go?
And obviously, the biggest piece of the pie on the right,
technical and economic, that is what I think you described
earlier as shortfall in Nation's output. In other words, all
the things that have caused us to have less output than we had
expected, projected. The recession and so forth probably
constitutes the biggest portion of that.
After that, the second biggest slice of the pie that drove
our deficits, you can see, are the tax cuts in 2001 and 2002,
the Bush tax cuts. Actually, you could put together our defense
costs, which are here in the very bottom, ``Operations in Iraq
and Afghanistan'' at 10 percent, and ``Other Defense
Spending,'' a little bit further up to the left, at 5 percent,
and you have 15 percent of the pie due to defense spending, and
so on.
And interestingly enough, increase in net interest, money
we pay just on the interest we owe on that national debt, is
one of the largest items as well. So nothing productive comes
of making those payments.
I raise all that because as we talk about where we should
target our solutions, we should know what has driven us most
towards these large annual deficits that now give us this over
$14 trillion national debt.
And the final chart that I wanted to raise because it also
points out the actual discretionary spending part of the pie,
which you spent some time on--not the tax expenditures, not the
spending we do through the tax code, which is the largest
portion, but through the allocations we make every year through
the budgeting process, the appropriation process. Hard to tell
again, unless you have a chart in your hand, but the largest
item shows the change in spending from 2001 to 2010, the
greatest percentage of that added spending in those 10 years
was in the Department of Defense, much of it because of the war
in Iraq and the war in Afghanistan. But fully two-thirds of the
costs or the extra spending that was done from 2001 to now 2010
has come in spending done in the Department of Defense.
You could compare that to, say, the Veterans Department,
Veterans Affairs Department. The share of the new spending over
that 10-year period that went to veterans was about 5 percent.
Education, you can see further down the list. The new spending
beyond what was expected in 2001, it is about 1 percent.
And I think that is important to sort of gauge that. And as
much as I hope we have a chance to get into some of this and
talk about where we have to go, I think it is important to know
where we are coming from. And so, I thank you for being here to
help us gauge those responses into the future.
I yield back.
Chairman Murray. Senator Kyl?
Senator Kyl. Thank you, Madam Chairman.
Rather than make a speech, which would probably have the
effect of dividing us if I responded to my colleague, I would
like to focus on areas where we might find agreement, going
back to my opening statement, and to begin with a quotation
from the President.
In March of last year, he said, and I quote, ``It is
estimated that improper payments cost taxpayers almost $100
billion last year alone. If we created a Department of Improper
Payments, it would actually be one of the biggest departments
in our Government.''
Well, this committee can address the question of improper
payments, but I think we are going to need CBO's help in order
to do that. For 2010, GAO estimated total improper payments at
over $125 billion. And according to its report, Medicare,
Medicaid, and unemployment insurance ranked 1, 2, and 3 in
total improper payments. Their figures were slightly below
those I quoted earlier.
But the bottom line is that if you had $100 billion, as the
President says, in overpayments each year, over a decade, that
is $1 trillion. More than $1 trillion when you compound it. It
is an area we need to address.
And since it doesn't involve cuts in benefits or
fundamental reform of programs--which I happen to think we
should do, but I am trying to stay on areas where we can reach
bipartisan consensus here--we are going to need help in scoring
how to approach this.
My first question I guess I should ask is do you agree,
whether it is with these specific numbers or not, with the
President's contention, let's just say, that at least there is
a significant amount of inappropriate payment for some of the
programs that I have mentioned?
Dr. Elmendorf. So I agree with that. I have two quick
comments. One is that there is a difference, of course, between
improper payments and fraud. Fraud is a much narrower category
involving certain legal issues.
Some improper payments are simply that people didn't put
Social Security numbers into forms where they should have or so
on. And if the forms were filled out properly, the payments
might be still made.
So just people should understand that when they see some of
these largest numbers for improper payments, that is a much
broader set of situations than the sort of thing that we read
of prosecutions regarding in the newspaper.
Second point to make, of course, is not just whether the
improperness or the fraud is out there, but what policy levers
the Government has to go after that. Of course, those programs
are not trying to encourage improper payments or fraud. There
is an active effort on the part of the Justice Department, as
well as the part of the departments running these programs, to
crack down on fraud. And you do see stories in the newspaper
about prosecutions.
So the question that we can help the committee work on is
what policy levers are available that can try to wring some of
that money out of the system?
Senator Kyl. Exactly so. And that is where we need your
advice. And the comment about fraud is obviously correct. I
think fraud is not the most significant part of these
overpayments, but it is important.
One question is would we benefit in a cost-benefit analysis
by devoting more resources to trying to root that out? We
should deal with that. Another would deal with whether or not
hiring additional people to check before the check goes out
rather than audit after we find the problem would be
beneficial.
The prompt payment requirements represent part of the
challenge that we have here, as I understand it. So, now, is it
true that CBO has--well, let me just ask, has CBO itself done
an analysis of these numbers?
Dr. Elmendorf. I don't have numbers comparable to the ones
you quoted to use. But we do spend a fair amount of time
working with Members of Congress, working with the people at
CMS, and so on to think about ways that policies could be
changed that would try to reduce the level of those payments.
And as you know, the Budget Control Act, in fact, included
provisions for raising the caps in discretionary spending to
cover some of those increased efforts that you described.
Senator Kyl. Right.
Dr. Elmendorf. And we included in our estimate of the
effects of that act the savings that we thought would accrue in
terms of reduced payments.
Senator Kyl. Well, just to summarize, will you work with us
to try to help us identify the potential policy that could
result in, on a cost-benefit analysis, significant savings if
we were to implement it?
Dr. Elmendorf. Yes. We certainly will. But can I just also
caution, I am not against our working with you on any issue
that you want us to work with you on, but there is no evidence
that suggests that this sort of effort can represent a large
share of the $1.2 trillion or $1.5 trillion or the larger
numbers that some of you have discussed as being the objective
in savings for this committee.
Senator Kyl. Well, the GAO, if the GAO report is right, if
what the President said is right, if there is over $100 billion
in just 1 year alone, then even if we get 25 percent of that,
it is a significant amount of money. It is at least something
that I think on a bipartisan basis we can agree on because it
doesn't involve fundamental reform of the program, it seems to
me.
Now there is a second area that I wanted raise here, too,
and that is asset sales. There are a lot of different reports.
CRS, for example, in 2009 said the Government held well over
10,000 unneeded buildings, spending $134 million just to
maintain them. The President's budget assumed savings by
selling property and so on.
One of the things we would also like to ask you to do, and
I know you have scored the President's proposal, but that was a
proposal that relied on incentives to sell property. If we
simply mandated the sale of property, I think we would need
your advice about how to structure that so that we would get
the best return for the sales that we would want to accomplish.
Will you work with us on that potential area of--that is
revenue rather than savings, but it all amounts to the same
thing in terms of helping us with our problem.
Dr. Elmendorf. Yes, Senator. Of course, we will work with
you. I would caution again. We have done a fair amount of work.
We have given testimony on this topic, and there is no evidence
that the amount of savings that could be--or extra revenue that
could be reaped by the Government through efforts in this
direction could represent any substantial share of numbers that
begin with ``t'' for trillion.
The Base Closure and Realignment effort has not yielded
significant amounts of money for the Government in terms of
selling the property. It saved money in terms of operating some
of these facilities, but not much has been sold.
When one sees these numbers of thousands of Government
properties not being used, many of them by number are shacks in
the middle of nowhere that don't have market value. And the
properties that have the most value--there has been some back
and forth I have seen in the newspapers about property in Los
Angeles--then the people who live around it are fighting very
hard to prevent the Federal Government from selling it.
Not to discourage you from passing laws to the contrary.
But what happens are the things that are most valuable is that
the people who are there are using it or potentially using it
or want the area to stay that way tend to push back very hard,
and history suggests that very little money is actually reaped.
But we are certainly ready to work with you on policies in
that direction.
Chairman Murray. Senator Baucus?
Senator Baucus. Thank you, Senator Murray.
Again, I want to follow up with Senator Kyl's questions. I
think we should explore this much more vigorously than we have
in the past, and I think you and I and others will try to work
with you to try to find some solutions here.
On the version I have of your statement, it is page 5. You
are talking about the timing of deficit reduction, and you
state that according to analysis, essentially, credible policy
changes that would substantially reduce deficits later in the
coming decade for the longer term, the thought being spending,
cuts in spending are efficient, would both support economic
expansion in the next few years and the strength of the economy
longer term.
My basic question is, could you give us some examples about
how we could achieve both goals, namely jobs and deficit
reduction? That is really one of the key questions here is how
do we do this?
There are probably several ways. You mentioned that deficit
reduction has to be, in the longer term, credible because we
can't do something that is not credible. It has to work, but we
have to find the balance. And I wondered if you could give us a
couple examples in how we accomplish that?
Dr. Elmendorf. Well, there are a number of possibilities,
Senator. We released a report in January of 2010 that analyzed
a set of alternative proposals for spurring job growth. We
looked at increased transfer payments. We looked at cuts in all
sorts of different types of taxes. We looked at other types of
Government spending increases.
And I don't want to be appearing to steer the committee in
any particular direction among those choices because the
choices involve not just the effects on the economy--and we did
estimate quantitatively the impact on output and employment.
They also involve choices about what you want the Government to
do, what sorts of activities it should be engaged in, what the
role of the Government should be relative to the private
sector.
So the set of choices in making stimulative policy, in
addition to doing deficit reduction policy, are far beyond our
technical role. I think the crucial points, though, are that
cuts in taxes or increases in spending in the near term will
spur output and employment in the near term. But just by
themselves, they will reduce output and incomes later on
because of the extra debt that is accumulated.
Senator Baucus. Right. I----
Dr. Elmendorf. If one wants to also improve the medium and
longer-term outlook for the economy, then one needs to have
deficit reduction that offsets the extra costs in the near term
and reduce the deficit further relative to the unsustainable
path of current policies.
Senator Baucus. I appreciate that. In fact, I think I have
your chart, your table, that is entitled ``Estimated Effects of
Policy Options on Output and Employment.'' And I applaud you
for it because, according to that chart, you, for example, with
respect to jobs as to cumulative effects on employment, in
2010, '11, '10 to '15, you have highs and lows that you rate.
You know, this creates more jobs than that.
So you give us a sense of what--for example, increasing the
aid to the unemployed is very high in terms of its economic
effect and helping people without jobs, but also with respect
to the economy and GDP. So I appreciate that, and I will work
with you to try to find ways to address that.
I would like to turn to another question, and that is I
don't want to steal from my good friend Rob Portman. He can
follow up a lot more. But it is sort of the baseline question.
And you say that we can get to 61 percent of GDP in 2021 under
current law. But I think most of us here in this room don't
think that current law is very realistic. There are going to be
changes, and you list some of the changes in your statement,
namely, the tax cuts--2010 tax cuts, AMT indexed for inflation,
Medicare payment rates, and so forth.
And if we were to assume that those provisions are going to
be extended as something called the current policy, that
instead of trying to get--instead of $1.2 trillion as to 61
percent of GDP in 2021, the figure I have is about $6.2
trillion.
Dr. Elmendorf. Yes. That is right. The cost of extending
those expiring provisions amounts to about--including the
interest cost that would result, amounts to about $5 trillion
over the coming decade. So the choice of the Congress about
those policies is much larger an impact potentially than the
stated target deficit reduction of this committee.
Senator Baucus. All right. So let's say we want to reduce
the deficit by, what, 6.2--5 plus 1.2 is 6.2, let's say, for
example.
Dr. Elmendorf. Okay.
Senator Baucus. What would the composition of that
reduction be if we reduce the deficit somewhat in parallel, in
tandem with proportion to the causes of the additional $5
trillion? I guess it would just be----
Dr. Elmendorf. Well, most of the extra $5 trillion under
your scenario comes from a reduction in taxes. So if one wanted
to offset that, that is what you are suggesting, then one would
need to raise significant tax revenue through some other
channel.
I mean, I think I understand the purpose for this hearing
of talking about the history of debt and how we got here. And I
think you are extending that a bit into the future, looking at
what policy changes would get us to a certain place. But I
think really the fundamental question for you is not how we got
here, but where you want the country to go. What role do you
and your colleagues want the Government to play in the economy
and the society?
Senator Baucus. That is right.
Dr. Elmendorf. And if you want a role that has benefit
programs for older Americans like the ones we have had in the
past and that operates the rest of the Government like the ones
we have had in the past, then more tax revenue is needed than
under current tax rates.
On the other hand, if one wants those tax rates, then one
has to make very significant changes in spending programs for
older Americans or other aspects of how the Federal Government
does its business.
Senator Baucus. That is exactly right, and I don't want to
take time here. But it is just really the question. Where do we
want to go? And do we want to have AMT indexed, for example? Do
we want to have SGR, the physicians payment rate? Do we want to
increase taxes for middle-income Americans beginning 2013, or
upper income, or not?
I mean, these are basic questions we are going to have to
ask ourselves, and they all have consequences, really. And the
consequences if we want to do all that is what we just agreed
on. Namely, it is a $5 trillion addition to our job here. But
in addition, we have what the President is going to have us do
with his jobs plan.
Thank you.
Dr. Elmendorf. Yes, Senator.
Chairman Murray. Representative Upton?
Representative Upton. Well, thank you again, Dr. Elmendorf.
I want to underscore what our friend Mr. Kyl said about
fraud and abuse. I mean, there is nothing more irritating to
any of us here or certainly to our constituents, and any
assistance that you could help us on that I know would be low-
hanging fruit in a major way for us to include as part of the
package.
Let me ask just an early question as to timing of this
whole event. We are tasked to have a vote prior to November
23rd. What is the timing--I mean, other than as soon as
possible. What is the realistic date that truly we have to have
our documentation submitted to you?
I know sometimes a lot of our Members are frustrated trying
to get a CBO score. I know that there is not a higher priority
for you all to do this. But what is really the date that you
are going to want the material so that we can complete the work
by the statute?
Dr. Elmendorf. As you know, Congressman, from your work on
the Energy and Commerce Committee, in order to process----
Representative Upton. Which would feed into the queue ahead
of Ways and Means in terms of the committee----[Laughter.]
Dr. Elmendorf. It is an iterative process in which we often
see preliminary versions of ideas and offer some preliminary
feedback. But if this committee intends to write legislation
that would change entitlement programs in specific ways, that
process usually takes weeks of drafting to make sure that the
letters of the law that you are writing accomplish the policy
objectives that you are setting out to accomplish.
And as part of that drafting process is our estimating
ultimately the effects of the letter of the law as it is being
written. So it will take us at least a few weeks.
I have a terrific set of colleagues who are incredibly
talented and work unbelievably hard. But we need to do our jobs
right, and that means not just pulling numbers out of the air.
So we have said in discussions with some of the staff of the
committee that, with all respect, your decisions really need to
be mostly made by the beginning of November if you want to have
real legislation and a cost estimate from CBO to go with that
before you get to Thanksgiving.
Representative Upton. Now I want to get a better
understanding of some of the estimates of the cost impact to
the Affordable Care Act. As we know, the bill increased taxes
on some of our Nation's most innovative job creators, reduced
Medicare spending significantly. The tax increases and Medicare
cuts were traded to create three new entitlement programs,
which have yet to take effect, and according to our staff's
projections, which are based on your most recent baseline,
those new entitlement programs will cost the Nation nearly $2
trillion over the first 10 years from '14 to 2023.
So, question one, have you all estimated the full 10-year
costs for each of these entitlement programs, Medicaid, health
coverage subsidies and the creation of the CLASS Act, for the
'14 to '23 period when they are fully implemented?
Dr. Elmendorf. No, Congressman. We have not.
Representative Upton. Do you anticipate doing that at all?
Dr. Elmendorf. No. As you know, we produced estimates for
the 10-year period that was under consideration when the law
was being considered, and then we provided a rougher sense of
what we thought would happen in the second decade from that
point in time.
As the time moves forward and the budget window moves out,
we will ultimately end up with a 10-year budget window that
will be from 2014 to 2023. But even then, it is not obvious
that we will have an estimate of the effects of that
legislation by itself.
Some pieces of that legislation create new institutions,
new flows of money that didn't exist before, insurance
exchanges and subsidies. And those lines of our cost estimate
will, in some sense, become real flows of money at that point
in time.
But much else of that legislation made changes in existing
programs, in payments through Medicare and so on. And we will
never know for sure what money actually is flowing differently
because of that piece of legislation . We will see flow for
certain purposes through certain accounts, but isolating the
effects of that legislation won't really be possible.
The prescription drug benefit is one of the few pieces of
legislation where we can look back at how we did. In a sense,
that is because much of that legislation--not all, but much of
it, the big part--created a whole new stream of money that
would have been zero otherwise. So we can see the difference.
But for most legislation that the Congress passes, one can
never really go back and tell. That is the risk of our table
that we gave to Congressman Becerra and others. One can never
really go back and tell what happened. And so, the healthcare
legislation will be like that at some point.
Representative Upton. Well, if there is a way that you
would take the percentage of GDP and try to match that up with
the outyears and look at 9, 10, 11, 12 years out? Is that a
thought that you might take up?
Dr. Elmendorf. Well, so we did. So we can talk with you
further, Congressman. We did do an estimate as the net effect
of the law, the share of GDP over the second 10 years. And we
talked in our estimates at the time about some of the bigger
pieces of the legislation, things that were growing rapidly or
growing more slowly or so on.
That sort of calculation is not really possible to do on
the level of little specific provisions. It is just too broad a
brush we need to paint with at that horizon, given the
uncertainty involved. But if there are other ways of looking at
those pieces that would be helpful to you, we are happy to try
to do that.
I think we made very clear--I hope nobody is confused about
this--that legislation created significant new entitlements
that raise Federal outlays. It also made other reductions in
outlays and raised revenues in ways that on balance we think
and still think reduce budget deficits. But that was a net
effect of very large changes with different signs, and that
increases the uncertainty surrounding those estimates of the
net effects.
Representative Upton. Thank you.
Chairman Murray. Thank you.
Representative Clyburn?
Representative Clyburn. Thank you very much, Madam Chair.
Dr. Elmendorf, since we have been sitting here, we received
notice that the Nation's poverty rate has increased to 15.1
percent, up almost a full percentage point. Now back in, I
think it was September 2010, in testimony before the Senate
Budget Committee, you said this.
``Regarding structural changes, the end of the housing
boom, and the recession have all induced a reshuffling of jobs
among businesses, occupations, industries, and geographical
areas. Those developments suggest that gains in employment in
the next several years will rely more than usual on the
creation of new jobs with different businesses in different
industries and locations and requiring workers with different
skills.''
Do you still feel that to be true?
Dr. Elmendorf. Yes, we do, Congressman. We think that much
of the extra unemployment we are seeing now is what economists
would call a cyclical response to a weakness in the demand for
goods and services. But that some of the extra unemployment we
see now is more what economists call a structural problem,
which involves, importantly, the mismatches that we discussed
in the passage you read, also relates to unemployment insurance
benefits and other factors in the economy.
We made a rough attempt to quantify those pieces in our
August update. But the upshot of that is to say that we think
there is an important piece of current unemployment that
relates to this kind of structural mismatch that would--makes
it harder for those people to go back to work, because it is
not so much going back as it is going on to something else.
Representative Clyburn. Then that means then your view is
there is not much that can be done in the short term to attack
this?
Dr. Elmendorf. I wouldn't quite say that. It is
challenging. I mean, I think what I would say is that the
cyclical part of the unemployment, that part that is responsive
to the weakness in demand for goods and services, can be
addressed through aggregate economic policies.
The people who are unemployed for structural reasons, in a
sense, because of the sort of the thing that they knew how to
do in the place that they live isn't being done there or
anywhere anymore, that isn't amenable to broad macroeconomic
policy. It might be responsive to certain types of more focused
policies--training programs, for example.
I think the broad brush summary of training programs is
that it is hard to make them work, but not impossible. I don't
want to suggest that. But I think it is just a different sort
of policy that would need to be considered in order to help
some of those people find new jobs, to help other people create
the jobs that those people would be able to do.
Representative Clyburn. Well, just let me say, to be
certain, I am just as concerned as my good friend Senator Kyl
is about fraud and abuse. I want to cull that out of the system
as well as we possibly can.
The problem I have, though, is that with these kinds of
numbers and with what you have just laid out, it means that
those in need are increasing rapidly. And the question then
becomes if you look at the median family, household income
declining 2.3 percent, that means that irrespective of what may
be happening to people who may not be deserving of the
assistance, there are increases occurring among the needy very
rapidly, and we have not done anything to absorb that
challenge.
Dr. Elmendorf. Certainly right, Congressman, about the
number of people who are hurting. One thing I would say is that
the Federal budget automatically does some things for those
people. Food stamp participation is up. A lot more money is
flowing out that way. Unemployment insurance, even apart from
extensions, will pay benefits to more people if more people are
unemployed.
So some of the automatic features of entitlement programs
end up helping those people, but I don't want to suggest that
that has inoculated them against the overall problems that they
face.
Representative Clyburn. That means our burden of doing
smart cuts is greater than what it may appear just looking at
the numbers. It means we really need to look into all of these
programs and see exactly where cuts ought to be made rather
than just dealing with a number.
Thank you very much. I yield back.
Dr. Elmendorf. Yes, Congressman.
Chairman Murray. Senator Portman?
Senator Portman. Thanks, Madam Chair.
Building on what my colleague, Congressman Clyburn, just
said and what Co-Chair Hensarling talked about earlier in terms
of the impact of the deficit and debt on the economy, Dr.
Elmendorf, have you got a reaction to the Rogoff and Reinhart
study, which shows that once you are at 90 percent of gross
debt, which we are already, that you have an impact on GDP,
therefore on jobs, therefore on the kind of issues that
Congressman Clyburn talked about?
Dr. Elmendorf. So we are certainly familiar with that work,
Senator. Carmen Reinhart is a member of our panel of economic
advisers. We benefit from her expertise.
I think the thing to note about the study, first of all, as
it was said, is that they are looking at gross debt. So those
are larger numbers than the numbers that you will see from me.
We focus on debt held by the public.
Senator Portman. Right.
Dr. Elmendorf. The other thing to say is that they divided
the world into buckets in a sense, different levels of debt.
That doesn't prove that there is some particular tipping point
at 90 percent. It says that above--but their evidence shows
that above that level, economies tend not to do well.
We just had an issue brief last year about the risk of a
fiscal crisis, and in other things that we have written, that
we don't think it is possible to identify a particular tipping
point. But there is no doubt that as debt rises, risks of
fiscal crises rise. The Federal Government loses the
flexibility to respond to unexpected international developments
or problems at home because of this looming debt.
And we are, as I said, moving into territory that is
unfamiliar to most developed countries for most of the last
half century.
Senator Portman. In fact, in looking around the world, and
there is a recent report by Alberto Alesina of Harvard
University showing that the most successful and pro-growth test
of reduction took place in countries that relied chiefly on
austerity programs, spending cuts. And nations that relied more
on tax increases were less successful in reducing the deficits
and had slower economic growth.
Have you looked at some of these countries that have gone
through the same process we are going through now, and what
comment can you give us today on what we can learn from the
experience of those countries? And maybe if you know about
Professor Alesina's study?
Dr. Elmendorf. So I do know Alberto's work. There have been
a number of studies, as you know, looking at the international
experience of countries that have faced fiscal crises and have
undertaken austerity programs. The IMF looked at a very similar
set of data to the work of Alberto and Silvia and came to a
different conclusion, in fact. Their conclusion was that in
countries that really set out to do fiscal austerity, the
results tended to not be good in the short term.
I think the principal lesson of looking at countries like
Greece and others is that it is a terrible situation to end up
in, where one has to make drastic, abrupt changes in policy.
But if you look at Greece or Ireland or the experience in the
UK, which did not face such a crisis but has made a very
determined pivot in its policy, those economies are not doing
very well right now.
And I think leaders in those countries felt they had no
alternative, given where they had gotten to, that they were at
a point where people were not lending the governments money
anymore or were about to stop lending them money, in the view
of the governments. So they had to make drastic changes. But
that is not a situation that we would like to find ourselves in
as a country.
Senator Portman. It appears as though we are heading there
if you look at the current policy baseline and some of the more
realistic assumptions that my colleague, Senator Baucus, talked
about. If you look at your chart with regard to baselines, you
say that we have about a $3.5 trillion deficit increase over
the decade under the current law baseline, but under current
policy that you have, you say it is about $8.5 trillion.
I would add tax extenders in there like the R&D tax credit
and others, and possibly, you are up to about $9.3 trillion.
Dr. Elmendorf. Yes.
Senator Portman. So, again, the $1.5 trillion is a
relatively small part of the problem. It is about 17.5 percent,
by the way, of your $8.5 trillion number. So I do think that as
we look at our work, we are going to need your help on looking
at more realistic baselines. We are making very difficult
choices on things like alternative minimum tax, SGR, and ending
the UI extension and payroll tax and so on.
In terms of what drives that, your Figure 14, I think, is
very instructive, which talks about the major healthcare
programs. Earlier, there was discussion about President Obama's
comments. ``The major driver of our long-term liabilities,'' he
said, ``everybody here knows is Medicare and Medicaid and our
healthcare spending. Nothing comes close.''
Assuming you agree with that, which I assume you do?
Dr. Elmendorf. Yes.
Senator Portman. What do you think ought to be the primary
focus of this committee?
Dr. Elmendorf. Again, Senator, it is really not the place
of me or CBO to offer recommendations about how to proceed. But
there is no doubt that the aspect of the budget that is starkly
different in the future relative to what we have experienced in
the past 40 years is spending on programs for older Americans
and spending on healthcare.
And the reasons those programs are so much more expensive
in the future is partly due to changes in policy over time, but
most importantly due to a greatly increased number of older
Americans and higher cost for healthcare. As a matter of
arithmetic, it is possible to raise taxes or carve away at the
rest of the Government in a way that can support those programs
in this form for some time, but there should be no illusion
about the magnitude of the changes required in other policies
to accommodate that.
If one really leaves those programs in place, then, in
fact, under current law already the rest of the Government
would be much smaller relative to the size of the economy in
2021 than it has been historically. And one would need to raise
revenues substantially.
I mean, this is a 5 percent of GDP increase in the cost of
Social Security and major healthcare programs in 2021, relative
to the 40-year average. Five percent of GDP is a very big
number, and that is why I think many people believe that there
should be changes in that part of the budget.
Senator Portman. So if the 22.7 percent of GDP is spending
in that 2021 estimate under, again, current law and not even
current policy, the major driver is Social Security and major
healthcare programs. That is as compared to the historic
average the last 50 years of about 20.8 percent.
Revenues there go from 18 percent historic average up to
20.9 percent. My understanding is even under current policy,
revenues go up above the 18 percent level. So your $8.2
trillion----
Dr. Elmendorf. A little bit.
Senator Portman [continuing]. Or the $9.3 trillion, which
is I think a more realistic estimate, also includes a slight
increase in revenues, is that correct, as a percent of GDP?
Dr. Elmendorf. I think a slight increase. Yes. That is
right, Senator.
Senator Portman. Twenty-two percent, I think, is the
number.
Dr. Elmendorf. I am not sure exactly. But, yes, a slight
increase.
I would just add one fact here. The number of Americans
over the age of 65 is going to rise by about one third in the
coming decade. One third more beneficiaries of Social Security
and Medicare a decade from now, roughly, than there are today.
And on top of that, with higher healthcare costs per person,
one can see why these programs in their current form are
becoming much more expensive over time.
Senator Portman. Thank you.
Chairman Murray. Senator Kerry?
Senator Kerry. Thank you, Madam Chairman.
Dr. Elmendorf, I want to try to move through a couple of
things fairly quickly, if we can. You said a moment ago that
the aspect of the budget that is starkly different is, I think
you said, the number of older Americans and the cost of
healthcare. Is that correct?
Dr. Elmendorf. Yes. That is right.
Senator Kerry. And those are the two things that you said
are starkly different about the aspect of the budget today?
Dr. Elmendorf. Today, and in the future. Yes, even more so
in the future.
Senator Kerry. But isn't it accurate that we have balanced
the budget I think since World War II five times, and that each
time we have balanced the budget, revenues have been somewhere
between 19 and 21 plus percent of GDP? Is that accurate?
Dr. Elmendorf. That sounds right, Senator. I have not
checked exactly.
Senator Kerry. And assuming that is accurate, we are
currently at 15 percent, 15.3 I think is your prediction for
this year, of revenues to GDP. Correct?
Dr. Elmendorf. Yes. That is right.
Senator Kerry. So isn't it fair to say that, in fact, there
is an aspect about our budget today that is starkly different,
which is the level of revenues relative to GDP. It is starkly
different, isn't it?
Dr. Elmendorf. Yes. That is right, Senator.
Senator Kerry. And it is starkly different in that it is
well lower than the historical average of when we balanced the
budget or not balanced the budget?
Dr. Elmendorf. Yes. That is right.
Senator Kerry. So let me ask you, given that reality and
given the reality that you and others--I think last year, the
Committee on Fiscal Future of the United States, which was a
joint effort of the National Academy of Sciences and the
National Academy of Public Administration--developed four
budget scenarios.
They had one budget scenario where you had nothing but
cuts, another budget scenario where you had nothing but tax
increase, and then two in between. The only way they could keep
the revenues at the historical average and keep the spending at
a decent level was basically with cuts. But that doesn't get
you where you need to go in terms of some of this historical
average and not winding up with major, major cuts in terms of
the benefits of Medicare or Medicaid.
So if you want to avoid--you made the statement to us a
moment ago that we have to make a decision about what we want
to do. Most people have accepted that we don't want to have
major reductions to--we have reforms, yes. We need to do a
better job of making them fiscally sound. But I haven't heard
anybody stand up on either side of the aisle and say there
ought to be huge cuts in benefits.
If that is true, then aren't we forced into a situation
where we look somewhere near the historical norm with respect
to the revenue to GDP percentage?
Dr. Elmendorf. So if one wants to leave spending on Social
Security and the major healthcare programs roughly in line with
what would happen under current law, then one needs to either
further carve away at all the other functions of the
Government, or one needs to raise revenues above their
historical average share of GDP by a significant amount, or one
could do combinations of those.
But there is no way to simultaneously let Social Security
and the major healthcare programs grow the way they would under
current policies or anything close to that and operate the rest
of the Federal Government in line with its role in the economy
over the past 40 years and keep revenues the same share of GDP
they have been on average in the past 40 years. And the reason
those things are inconsistent, even though they worked in the
past 40 years, is because the number of people who will be
older and the number who will be--and the amount they will be
collecting in health benefits will be so much larger in the
future than in the past.
Senator Kerry. Well, I happen to agree with that judgment
that you have made, and I think it is a very important one with
respect to how we approach this.
I also want to--we are going to obviously have some time
here to discuss the healthcare piece, but isn't it true that,
well, the Medicare excess cost growth, how does that compare to
the excess cost growth in overall healthcare spending over the
next decade?
I think in recent estimates that you found that Medicare in
the excess cost growth was actually lower than the historical
average now. Isn't that true?
Dr. Elmendorf. Yes. So excess cost growth, meaning not
necessarily excessive in the judgmental sense, but just faster
growth in benefits per person than in the growth of GDP per
person, that sort of excess cost growth in Medicare under
current law is pretty close to zero for the coming decade. That
would be a very sharp change from the experience of the past 40
years.
Senator Kerry. And what do----
Dr. Elmendorf. In relation to the discussion we had earlier
about payment rates to providers.
Senator Kerry. So what do we attribute that significant
reduction in the Medicare cost growth rate?
Dr. Elmendorf. So importantly, to features of the law, like
the cuts in payment rates to physicians due to take effect the
end of this year and like a number of the other cuts to
provider payments enacted in last year's major health
legislation.
Senator Kerry. So that has had a beneficial effect in terms
of restraining growth in Medicare--in Medicare cost?
Dr. Elmendorf. Yes. That is right.
Senator Kerry. Thank you. I will reserve my time at this
point.
Chairman Murray. Representative Camp?
Representative Camp. Well, thank you.
Director Elmendorf, I am sure you remember, as last year
you testified before the President's National Commission on
Fiscal Responsibility and Reform on a topic very similar to
what you are covering today. It seems as if your presentation
then said, then and now, that we need to get control of the
automatic spending increases that have been built into the
Government's budget. Is that a fair statement of your testimony
then and now?
Dr. Elmendorf. Well, again, I think we said that those
pieces are growing very rapidly and that to accommodate that,
as it stands, would require very large changes in other aspects
of the money the Government spends or collects.
Representative Camp. Those are the significant drivers of
our current situation.
Dr. Elmendorf. Yes.
Representative Camp. So what programs in particular are at
the core of CBO's projections for the long-term Government
spending? And which programs are responsible for the largest
increases in Government spending?
Dr. Elmendorf. So if one looks at Figure 12 from the
written testimony on page 39, and coming up on the screen for
those with very good eyesight, one can see that this picture
shows growth over the next decade in Social Security and in
Medicare and in other major healthcare programs.
Representative Camp. Do the other major healthcare programs
include all of the Healthcare Act, long-term care and other
Medicaid increases?
Dr. Elmendorf. So the other major healthcare programs are
Medicaid, the Children's Health Insurance Program, and
subsidies through insurance exchanges, and some related smaller
spending.
Representative Camp. And the long-term care entitlement?
Dr. Elmendorf. The long-term care entitlement, as you
recall, actually raises money for the Government in the first
decade of its life. And I don't know if that has been netted
out here or not. I don't think so, actually, Congressman.
But one can see from this picture that the largest increase
as a share of GDP over the coming decade among these three
categories is the other major healthcare programs, followed by
Social Security and Medicare.
Representative Camp. All right.
Dr. Elmendorf. And that is principally, I think, because of
a great increase in the number of beneficiaries from the
expansions enacted last year and continued sharp increases in
costs for beneficiaries in those programs.
Representative Camp. In your prepared testimony before the
President's commission, you also included a chart, which--if we
could pull that up now, and everyone has a copy of this chart
at their desk in their packet--which showed real GDP per capita
under different economic conditions. You will notice under the
alternative fiscal scenario, the line stops between 2025 and
2030.
And you explained then that that line stops because
economic growth collapses and that it simply can't handle debt
loads that high. Is that an accurate statement of what you
testified before the President's commission?
Dr. Elmendorf. Yes. That is right. We have updated this
picture in our long-term projections from this year. But
similarly, Congressman, not at quite the same point, the amount
of debt under this alternative scenario becomes so large that
our models don't know what to do with it.
I don't think the economy would actually get that far at
all because the people in the economy will be looking ahead and
foreseeing what is happening. I think, in fact, much more
serious problems will come sooner than we show in these
pictures.
Representative Camp. And I think you said that the
Government debt has become so high that you don't know what to
do with it because private investment ceases to function and
the economy ceases to function under that scenario. Is that
correct?
Dr. Elmendorf. Ceases to function at some point. Again, I
think that the freezing up would probably come sooner than we
show in those pictures because of an anticipation of that
problem.
Representative Camp. And I think that analysis really does
go along with what other analysts have said of the country's
debt-to-GDP ratio when it exceeds 90 percent, and I am talking
total debt to GDP ratio, that it reduces economic growth, as
others have said in their time, by about 1 percent at that
level.
Dr. Elmendorf. Yes. I think the models that we are using
here are consistent with a consensus approach to estimating
this sort of issue.
Representative Camp. And am I correct to say that our total
debt-to-GDP ratio is over 90 percent at this time?
Dr. Elmendorf. Yes. I think that is right, Congressman.
Representative Camp. And what impact do you think these
massive levels of debt relative to GDP have on the economy in
general and specifically on the prospects for job creation?
Dr. Elmendorf. Those levels of debt are a burden on the
economy. They reduce our output and our incomes relative to
what we would enjoy if we had done less borrowing and had done
more saving.
Representative Camp. This committee has been tasked under
the Budget Control Act with finding $1.5 trillion in deficit
reduction over a 10-year period. What is the size of the
economy over the next 10 years?
Dr. Elmendorf. So GDP today is about $15 trillion. We think
it grows over the course of the coming 10 years. If you have
done that calculation, Congressman, I would be happy to hear
the number from you.
Representative Camp. Well, just assuming over 10 years,
$150 trillion, we are talking about 1 percent of our economy,
are we not, in terms of rough numbers?
And the reason I want to point out this number is you
mentioned the impact of us making decisions about spending that
might have impacts on the economy, and I just want to put in
perspective, over the next 10 years, these reductions in debt
that we are asked to find over the next 10 years roughly
represent about 1 percent of the economy. And I am talking very
rough numbers.
Dr. Elmendorf. So I think that sounds about right to me,
Congressman. And I agree that the problem is very large by the
standards of the incremental fiscal policy decisions that the
Congress normally makes. But it should not be viewed as
unsolvable. Changes in policy can put us on a different path.
Representative Camp. And in terms of outlays, I think this
amount over the next 10 years represents about 3 percent of our
outlays, and as I think Senator Portman mentioned as well. And
so, I think we need to put it in perspective that while I am
not underplaying how difficult this might be, but in terms of
impacting the economic trajectory of the United States economy,
we are not over the next 10-year period in significant
percentages of either economy or outlays. Most families and
businesses have had to do with less than 3 percent, and I think
it is something over a 10-year period, they have obviously had
to do with less than that.
Dr. Elmendorf. Yes.
Representative Camp. And just lastly, I realize my time has
expired. I do want to just ask you one quick thing.
We may come to agreement on impacts within the 10-year
budget window, but we may have decisions that are outside of
the 10-year budget window. And I just wanted to ask if you
would be willing to work with us to find ways to measure the
impact of policies outside the traditional budget window and if
you would commit to helping us do that?
Dr. Elmendorf. Yes. Absolutely, Congressman.
Representative Camp. Thank you very much, and I yield back.
Chairman Murray. Representative Van Hollen?
Representative Van Hollen. Thank you, Madam Chairman.
Let me just start, Dr. Elmendorf, by thanking you for your
testimony and just say that--and this goes for Republicans and
Democrats alike--we are all entitled to our own opinions, but
not to our own facts. And the last time that our budget was
balanced was back in the 2001, 2000 time period. And in fact,
during that time, revenues as a percent of GDP was 20.6 percent
in the year 2000 and 19.5 percent in the year 2001.
And the last time spending was 18 percent of GDP was about
1967, and it has risen since then largely because we, as a
nation, decided to make sure that older Americans in their
retirement had the health security they needed. So it is
important to keep those facts in mind as we go forward.
Now you posed a very fundamental question to this
committee, and let me ask you this. If we were to try and
continue with current retirement and healthcare, security
programs in the future, we would need significant changes to
revenue beyond current law, would we not, in order to fund them
and balance our budget, assuming we kept the rest of Government
constant?
Dr. Elmendorf. Yes. That is right, Congressman.
Representative Van Hollen. And if we were to try to
preserve those--let me ask you this. If we were to continue
current revenue policy without any changes, it would require
very deep cuts to those retirement and security programs, would
it not, if we were to try and bring down the deficit?
Dr. Elmendorf. If you also maintain the rest of the
Government in accordance with its historical pattern, yes,
Congressman.
Representative Van Hollen. That is right. And as you
pointed out in your testimony, in fact, over the next 10 years
as a percent of GDP, that is going down, is it not?
Dr. Elmendorf. Yes.
Representative Van Hollen. Okay. So that is the fundamental
question, and I think we recognize that we have to deal with
the outyear issues. We have a demographic challenge. We have
more and more people retiring. But as you just pointed out, if
we want to avoid huge cuts to Medicare and to Social Security,
we also have to deal with the revenue piece. In other words, we
have to increase revenues beyond current policy if we want to
avoid very deep cuts.
So I think it is important that we look at the revenue side
of the equation right now, and you have presented that to us in
your testimony. And I think it is time for this committee to
get real and recognize that, yes, there are spending issues,
especially in the outyears, but there is also a revenue issue.
Now, as you point out, under current law, the 10-year
cumulative deficit is $3.4 trillion. Correct? Under current
law.
Dr. Elmendorf. I think it is a $3.5 trillion.
Representative Van Hollen. Three and a half trillion
dollars?
Dr. Elmendorf. Yes.
Representative Van Hollen. And as you point out on page 19
of your testimony, if we continue current tax policy and the
current physician payments under Medicare, that will rise from
$3.4 trillion to over $8.5 trillion. That is there in your
testimony.
Dr. Elmendorf. Yes.
Representative Van Hollen. Now you mentioned those two
factors together, but I think it is important to point out that
of that over $5 trillion, that the huge bulk of it has to do
with continuing current tax policy, does it not?
Dr. Elmendorf. Yes.
Representative Van Hollen. And in fact, by my calculation,
you get just under $4 trillion on revenue. And if you add the
debt service associated with that, you are talking about $4.5
trillion of your $5 trillion dealing with current revenue
policy. Is that right?
Dr. Elmendorf. Yes. That is right.
Representative Van Hollen. So, just to be clear, if this
committee were to adjourn today and the Congress were to
adjourn for the next 10 years and go away, we would actually
achieve greater deficit reduction than if we went, took the
Simpson-Bowles advice and went big. Is that not right?
In other words, we would get over $4 trillion over that 10-
year period, even if we fixed the doctor, physician
reimbursement piece, right?
Dr. Elmendorf. So if--let me make sure I have this right.
If you extended those expiring tax provisions----
Representative Van Hollen. That is right.
Dr. Elmendorf [continuing]. And indexed the AMT for
inflation----
Representative Van Hollen. Yes.
Dr. Elmendorf [continuing]. Then that would add to deficits
by $4.5 trillion or so. That would be larger than the amount of
savings if this committee stayed----
Representative Van Hollen. It is simple math, right? It
would be more than the $4 trillion that a lot of people talked
about, right?
Dr. Elmendorf. Yes. That is right.
Representative Van Hollen. Okay. So I think it is
important, as we look at this challenge, to look at both sides
of the equation there. And what we are talking about, just so
we can translate this into what the American people have
experienced, what we would be talking about is essentially
going back to the same tax rates and tax policy that was in
effect during the Clinton administration, a period of time when
20 million jobs were created and the economy booming.
Now I am not suggesting we go back to that particular tax
policy, but if you look at Simpson-Bowles compared to current
law, they provide about a $2 trillion tax cut compared to
current law, as opposed to $4 trillion. If you look at Rivlin-
Domenici, they propose about a $1 trillion tax cut compared to
current law, approximation.
So if we are really going to address this challenge, let's
recognize that if we don't deal with the revenue piece, as Dr.
Elmendorf said, you are talking about dramatic cuts to health
and retirement security for America's seniors. We have to take
a balanced approach. That is why the other bipartisan groups
took that kind of approach.
Thank you, Madam Chairman.
Chairman Murray. Senator Toomey?
Senator Toomey. Thank you, Madam Chairman.
Since my colleagues have raised this issue, I just want to
touch on a couple of things that didn't quite make it into the
conversation so far. Isn't it true that as recently as 2007 the
current tax rate structure yielded revenue that was about 18.5
percent of GDP?
Dr. Elmendorf. I think that is right, Senator. Yes. The
current level, of course, is very low because the economy is
very weak.
Senator Toomey. Exactly. And the main reason that total
revenue as a percentage of GDP is so much lower than the
historical levels is because we have an economy that is still
effectively in a recession, very high unemployment, very weak,
lack of growth. Isn't that right?
Dr. Elmendorf. Yes. That is right.
Senator Toomey. And as recently as 2007, the deficit that
we had that year was about, if I remember correctly, less than
1.5 percent of GDP, I believe. And if we could get to the point
where we consistently had deficits of 1.5 percent of GDP, then
our debt as a percentage of our economy would clearly be
declining, and we would have, to a very large extent, solved
this problem, if not completely.
Dr. Elmendorf. Yes. That is right. If you could--yes. That
is right.
Senator Toomey. To the level of the deficit that we had in
2007, with the current tax rates. Let me ask a couple of other
questions, if I could?
You went through, and I don't think there is any dispute
that excessive debt has all kinds of negative implications--we
all acknowledge that--including the possibility that we get to
the point where you have a financial crisis, an economic
freezing up.
Isn't it true that it is essentially impossible to know
precisely when you get to that point?
Dr. Elmendorf. Absolutely.
Senator Toomey. So it is just not knowable?
Dr. Elmendorf. I think it is just not knowable.
Senator Toomey. Right. Isn't there a danger that the
magnitude of the debt is already impeding economic growth,
having a chilling effect on investment and risk taking? Isn't
that possible?
Dr. Elmendorf. I think the level of debt is probably
weighing on economic activity. All things equal, of course, we
wish we had less.
Senator Toomey. Right.
Dr. Elmendorf. I think the question is how to proceed from
here.
Senator Toomey. I guess the point I want to make is given
that it is probably already weighing on economic growth and
given that we acknowledge that continuing down this path
eventually leads to a full-blown crisis and we can't know when,
that suggests to me that it is very dangerous to delay making
meaningful reform. And while there is some concern that curbing
the size of the deficit in the short run impedes economic
growth, I would argue that it is already happening.
And if we--if the future promised reductions in the deficit
either weren't credible or at some point became less credible,
then we could discover we are already in that territory where
the financial crisis could emerge. Isn't that a danger that we
would run in delaying this?
Dr. Elmendorf. I think there are disadvantages to delay,
Senator, as we said in the written testimony and as I repeated
here. Again, based on our analysis, which I think is consistent
with a consensus of professional opinion, immediate increases
in taxes or cuts in spending would slow the economic recovery.
But that is not meant to imply that there aren't a variety of
factors that can matter in different ways, not meant to imply
that we are sure we have that right.
But that is, I think, the consensus of professional
opinion.
Senator Toomey. It might be, but there certainly is an
alternative point of view about that, especially with regard to
the spending side.
Dr. Elmendorf. Yes, Senator. That is right.
Senator Toomey. And even though you and I might disagree on
this debate somewhat, I am sure you would agree that when it
comes to its impact on economic growth, not all Government
spending is equal.
Dr. Elmendorf. That is absolutely right.
Senator Toomey. Spending in your models would generate more
rather than less. Similarly, not all tax cuts are comparable,
right?
Dr. Elmendorf. Exactly.
Senator Toomey. Some encourage economic growth more than
others?
Dr. Elmendorf. Exactly.
Senator Toomey. And in fact, crudely speaking and broadly
speaking, that spending and tax cuts, while they may
arithmetically have the same impact on the deficit if you
assume they have no other implications, in fact, they do have
other implications?
Dr. Elmendorf. That is right. And when we do economic
modeling of the consequences of alternative fiscal policies, we
try to capture that. We incorporate the level of marginal tax
rates on labor and capital and those effects on work and on
saving.
Senator Toomey. Right. And on page 33 of your testimony,
you observe that lower marginal rates enhance the incentive to
work and save and invest, and that has a pro-growth feedback on
the economy.
One of the things we haven't discussed, but I would like
your reflection on, is the possibility of a revenue-neutral tax
reform that simplifies the code, broadens the base, and lowers
marginal rates. Wouldn't that tend to enhance growth and,
therefore, enhance revenue to the Government?
Dr. Elmendorf. Yes. That is right, Senator. The magnitude
of that effect, of course, depends on the specifics of the
policies that would be enacted.
Senator Toomey. Right. And so, I wonder if you have a rule
of thumb that you could share with us. For instance, for a
given incremental increase in the rate of growth on average,
what kind of impact does that have on the deficit over an
extended period of time?
Dr. Elmendorf. Well, so we offer our rules of thumb for
that in the back of our annual Budget and Economic Outlooks.
And the magnitude of that effect I will offer to you in one
moment.
Senator Toomey. A figure that comes to mind, and maybe you
could confirm or refute, is that a 0.1 percent of additional
growth on average sustained over 10 years is roughly $300
billion in additional revenue? Is that about----
Dr. Elmendorf. Yes. That is just right.
Senator Toomey. So a full percent, I mean, this may not be
perfectly linear, but it certainly goes in the same direction?
Dr. Elmendorf. Yes. It almost certainly isn't perfectly
linear, and we offer these rules of thumb for small changes
because we are just not sure what else might happen with very
large----
Senator Toomey. The point is a small, sustained change in
growth has a huge impact on the deficit or reducing the
deficit. Would you agree with that?
Dr. Elmendorf. Yes. That is right.
Senator Toomey. Thank you.
Thank you, Madam Chairman.
Chairman Murray. I thank you very much. And we have gotten
through our first round here, and I appreciate everybody
keeping it concise.
I am going to have to use the prerogative of my chair to
make a small change at this time. The House is going to be
having votes at approximately 1 p.m. There are 12 of us, and
the time is very short. So unless somebody throws something at
me, I am going to limit each of us to 2 minutes in the final
round and would ask everybody to please keep it to that
timeframe.
Dr. Elmendorf, let me just ask, as you have been talking
about, in the long-term budget report from January, CBO
included an analysis on the impact of lower than expected
economic growth on the Federal budget. I wanted to ask you,
what does CBO estimate is the impact on the deficit projections
in the near term and over the next 10 years if GDP growth
continues to weaken beyond what is reflected in the current
estimates?
Dr. Elmendorf. So, certainly, a weaker economy implies
worse budget outcomes, primarily because tax revenues fall.
Also because there is some extra spending in some of the
entitlement programs that we talked about a moment ago.
We have not done quantitative estimates of budget outcomes
for other particular scenarios beyond what is in these rules of
thumb that we have offered in our volume in January. And the
rules of thumb are rough because a lot of things can or may not
rise and fall with the rest of the economy.
We have been surprised in the past few years at some of the
outcomes of tax revenue even given the state of the economy.
But there is no doubt that a weaker economy is worse for the
budget and a stronger economy is a lot better for the budget.
The challenge is how to move the economy, and it is not easy to
move a $15 trillion economy.
Chairman Murray. Thank you.
I do have a question about sequestration. I am going to
submit it for the record because I do think it is important. As
hard as the choices we are looking at here, we need to
understand the impact of that, and I appreciate the information
you have put out on that.
But the significant impacts to sequestration I think need
to be understood by our committee as well. So I will submit
that for the record.
Dr. Elmendorf. I will be happy to answer it, Senator.
Chairman Murray. And reserve my time and turn it over to
Mr. Hensarling.
Co-Chair Hensarling. Dr. Elmendorf, I think it was Senator
Kerry who brought up that revenues today are roughly at 14
percent of GDP. Doesn't your latest budget estimate under a
current policy baseline show that revenues go back to their
historic norm of 18 percent of GDP in 2014?
Dr. Elmendorf. Yes. That is right, Congressman. They are a
little over 15 percent today, and the improvement in the
economy and other underlying factors in the tax code we think
will push that up to a little over 18 percent under current
policy.
Co-Chair Hensarling. Your alternative fiscal scenario,
which is a current policy baseline, also shows spending going
from a historic average of roughly 20.5 percent up to 34
percent of GDP. Is that correct?
Dr. Elmendorf. That sounds about right, Congressman.
Co-Chair Hensarling. So is it fair to say that with respect
to revenues, one is episodic related to the lack of economic
recovery, the other is structural. Is that a fair assessment?
Dr. Elmendorf. Yes. Both factors are at work right now,
Congressman, and----
Co-Chair Hensarling. Let me continue on there. Those who
have advocated or have brought up that historically when the
budget has been balanced, taxes have gone beyond their historic
norm of roughly 18 percent of GDP to closer to 20 percent of
GDP. And again, this is your alternative fiscal scenario shows
that spending by 2035 goes up to 33.9 percent, and the same
alternative fiscal scenario shows that taxes already on a path
to increase from 18 percent of GDP to 18.4.
So following the analysis of those who advocate that in
order to achieve a balanced budget that revenues have to come
up from what you say they are already rising, from 18.4 to,
say, 20 percent of GDP, wouldn't the analysis also suggest
under a balanced approach that spending has to decrease
essentially 14 percentage points under your alternative fiscal
scenario to reach its historic norm?
Dr. Elmendorf. So, Congressman, I would rather not parse
the meaning of the word ``balance,'' given its role, apparent
role in your discussions. But you are right that if revenues
were at 20 percent of GDP, then balancing the budget, given the
assumptions, it would require a reduction in spending.
Co-Chair Hensarling. Thank you.
Chairman Murray. Representative Becerra?
Representative Becerra. Dr. Elmendorf, I think I am going
to start calling you ``Sergeant Friday.'' You are here
essentially giving us at least your best interpretation of the
facts, and we appreciate that because you are not trying to
give us opinion. You are not telling us whether in 5 years or
10 years we should reduce the benefits we give to seniors under
Medicare or make a change to our defense and security needs.
You are simply telling us what the numbers show and leaving
it to us as policymakers to come up with a good mix. And I
appreciate that. I suspect your mother or father or your
grandmother or grandfather are probably also pleased that you
are just talking numbers and not saying what should be done to
them with regard to Medicare or Social Security or anything
else.
One quick point, with regard to the discussion of our long-
term costs, you mentioned Medicare and Social Security and
Medicaid. Medicare and Medicaid, because they deal with
healthcare and healthcare costs, are in a different boat than
Social Security, are they not, in terms of their long-term
costs?
Dr. Elmendorf. Yes. That is right. The increases in
spending for those programs that we project under current law
are a lot greater over time than for Social Security.
Representative Becerra. And indeed, Social Security, by
about 2028, 2030, starts to stabilize and stays pretty constant
in terms of its cost to the Federal Government into the
outyears, right?
Dr. Elmendorf. Yes. Roughly so. After the baby boom
generation has primarily retired, that line roughly levels out.
Representative Becerra. And because you are dealing with
facts, you are not here to tell us about how to make that fix
to healthcare because the reality is that Medicare and Medicaid
are simply reimbursement or financing systems. If we were to
just cut benefits for a senior, that doesn't necessarily mean
that their healthcare cost will drop. That shifts the cost more
into the pocket of the senior to pay for that care if Medicare
just reduces what it reimburses?
Dr. Elmendorf. I think it depends on the policy, of course.
But there are some policies that shift cost, and there may be
some policies that reduce overall costs.
Representative Becerra. Thanks, Sergeant Friday. Appreciate
it.
Dr. Elmendorf. Thank you, Congressman.
Chairman Murray. Senator Kyl?
Senator Kyl. Thank you, Dr. Elmendorf.
Just one question in the interest of time here. While I
know you agreed with Senator Toomey's observation that there is
another point of view or other points of view, regarding your
argument that cuts in spending now can harm economic growth or
delay economic recovery, that is true of defense spending as
much as other spending. Is that not correct?
Dr. Elmendorf. It is true of potentially all types of
spending. There may be differences across types, but I think
that is a more subtle distinction.
Senator Kyl. Yes. And here, with defense, for example, you
have high unemployment of returning veterans to begin with. You
have the reduction in end strength. You have more people
potentially unemployed. You have people making radios and
building ships and so on. And if those cuts, therefore, end up
reducing the employment in those industries and the amount of
money spent in those areas, obviously, it could delay economic
recovery.
Dr. Elmendorf. Yes. That is right, Senator.
Senator Kyl. Thank you.
Chairman Murray. Senator Baucus?
Senator Baucus. Thank you, Madam Chairman.
I wondered, Dr. Elmendorf, if you could just again, we
discussed a little bit of it already, what changes either let's
say in tax policy will stimulate the economy most, if you could
rank them somehow?
Dr. Elmendorf. Well, as it turns out, in the table which
you are looking, Senator, from our January 2010 report, we did
consider the effects of a set of alternative tax cuts. We have
not updated this table since that point. If we did, I think the
numbers would be slightly different, but probably not
fundamentally different.
Reductions in payroll taxes that we studied here were among
the more powerful levers, followed by expensing of investment
costs, and then followed below that by a little bit by broader
reductions in income taxes. And the reason for that difference
is principally that the money that is saved by employers or
employees in payroll taxes we think translates into a fairly
comparatively large amount of incremental spending. And also in
the case of a cut to what employers pay amounts to at least a
temporary discount on the cost of hiring workers.
Senator Baucus. Let me change subjects. If we have a
revenue-neutral tax reform, corporate or individual, and the
tax reform, let's say, on the individual side is dramatic,
broaden the base, lowering the rate, et cetera, how much growth
would result from a very simplified tax code along those lines?
Dr. Elmendorf. A tax code with a broader base and lower
rates would spur economic growth, but the magnitude is
something we would have to take specific proposals from you
back to our models and work hard on them for a while before we
could hazard any sort of quantitative estimate.
Senator Baucus. Okay. Thank you.
Dr. Elmendorf. Thank you, Senator.
Chairman Murray. Representative Upton?
Representative Upton. Thank you.
I am concerned about the impact of the Affordable Care Act
on job creation. Can you provide us a detailed explanation of
the methodology used to calculate how many employers will
actually drop their healthcare coverage for their employees?
Dr. Elmendorf. I can provide a brief summary in the next
minute and three-quarters, Congressman. We have a model of
health insurance coverage in which employees and employers are
trying to obtain coverage at low cost, but also giving weight
to the quality of the coverage they receive.
In our analysis, the Affordable Care Act encourages some
employers to provide insurance coverage who would not have
otherwise because of the mandate for insurance coverage and
some of the subsidies. On the other hand, it encourages other
employers who would have offered coverage not to offer any
more. And we think that latter effect outweighs the former, and
we have a small reduction in employer-sponsored insurance
coverage.
Our estimates are very consistent with the estimates of
other people, with large-scale models like those at the Urban
Institute. Obviously, there is a tremendous amount of
uncertainty around those estimates, and there have been some
surveys that have suggested there would be more employer
dropping.
At this point, based on the things that we have seen since
we did those estimates, we are comfortable those estimates make
sense. But it is an issue where we have been asked to explore
the sensitivity of the budgetary effects to alternative
outcomes in terms of employer-sponsored insurance coverage, and
we are working on those estimates now.
Representative Upton. Could you actually provide us maybe a
dial-up? I don't know what your percentage is. I thought it was
like as low as 5 percent or less?
Dr. Elmendorf. It is a small percentage. I am not exactly
sure.
Representative Upton. Yes. And I wonder if you could
provide us an estimate, if it was maybe 10 or 20 percent?
Dr. Elmendorf. So the challenge we have is that it matters
a lot for budgetary cost who ends up with and without employer-
sponsored health insurance coverage. So we can't really do just
a scaling up in that sense. We have to understand in the model,
and there are ways to change the assumptions in the model to
give different answers. But we need to do that because that
will affect the budgetary cost.
It is also not obvious that the budgetary cost is as large
as it may seem at first. If people are not getting employer-
sponsored coverage and move to the exchanges, they will pay--
the Government will pay more for their coverage. On the other
hand, the employers will have extra money that they were
previously using to buy health insurance with. Most economists
think that money will turn up as wages for workers. They will
pay taxes on that.
If it doesn't, it will turn up as additional corporate
profits, and they will pay tax on that. So the overall
budgetary effects will depend on the combination of changes in
exchange subsidies, in Medicaid costs, and in tax receipts. But
we are working on that, Congressman.
Representative Upton. Thank you.
Chairman Murray. Thank you.
Representative Clyburn?
Representative Clyburn. Thank you, Madam Chair.
Dr. Elmendorf, let me look at revenue from a different
perspective here. Is it fair to say that the decrease--or the
increase in unemployment has decreased revenue going into the
Federal coffers?
Dr. Elmendorf. Yes. That is right, Congressman.
Representative Clyburn. If we had a decrease in
unemployment of just, say, 0.5 percent--from 9.1 to 8.6--what
would be the level of revenue increase?
Dr. Elmendorf. I can't do that in my head, Congressman. It
would help, but I don't know. And it would help partly because
we would pay less unemployment insurance benefits and partly
because of people who are earning money would pay taxes on
those earnings.
Representative Clyburn. So it is a double whammy.
Dr. Elmendorf. Both sides of the budget would be affected.
Representative Clyburn. I would like to see some computer
printout.
Dr. Elmendorf. I will task my computer with that
assignment, Congressman.
Representative Clyburn. I appreciate it. Thank you.
Chairman Murray. Senator Portman?
Senator Portman. I think Congressman Clyburn has just made
a great point, which is the economy plays such a huge role
here. And since this is a hearing about the history of how we
got here, I have gone back and looked at your May 12, 2011,
report, which talked about earlier 32 percent of the difference
between a $5.6 trillion surplus projected and the $6.2 trillion
deficit, which is an $11.8 trillion swing, 32 percent of that
is because of the economy.
And about 33 percent of it is new spending. About a third
of that spending is for global war on terror--Iraq,
Afghanistan, and other spending on the war on terror. It is
about 39 percent is due to new spending when you add the 6
percent that is the stimulus.
Fifteen percent is the Bush tax cut. By the way, over 70
percent of that went to those making less than $250,000 a year.
And then the rest is interest and the AMT and the rebates in
2008.
So I think it is a great point that the economy is going to
drive so much of this. And we talked about this earlier, but
you said that you thought that increasing taxes at this point
would have a negative impact, just as you thought that certain
spending cuts would have a negative impact on economic growth
and jobs.
But then, in response to Senator Baucus, you said that some
tax reform, particularly lowering the rates, broadening the
base, would have a positive economic impact. Can you briefly
speak to that as it relates to the corporate tax code and the
possibility also of lowering the rate to make the U.S. more
competitive?
Dr. Elmendorf. So I think that in terms of both the
individual income tax and the corporate income tax, economists
widely agree that lower tax rates and broader base would be
good for the economy both because the lower rates would reduce
the disincentive to worker to save and also because broadening
the base itself can, if done in certain ways, reduce the
incentives for misallocating capital resources.
Again, to actually estimate the effects on the economy, we
or our colleagues at the staff of the Joint Committee on
Taxation would need to have specific proposals and would need
to spend some time trying to model those. It is a very
complicated business, as you know, Senator.
Senator Portman. How long would it take you?
Dr. Elmendorf. I will not commit to that. Offhand, if we
have proposals from you, we will work on them as fast as we
possibly can. I will certainly promise you that.
Senator Portman. And prioritize them, right?
Dr. Elmendorf. We are giving very high priority to the work
of this committee, Senator.
Senator Portman. Thank you, Madam Chair.
Chairman Murray. Senator Kerry?
Senator Kerry. There is a big distinction, is there not,
almost obvious, Dr. Elmendorf, if 98 percent of America was
getting a tax cut and 2 percent, who happen to be the
wealthiest people whose decisions are very different and whose
impact on the economy is very different, there is a big
difference in that versus sort of a blanket discussion of all
of the tax cut versus none. Correct?
Dr. Elmendorf. In terms of the economic effects, yes,
Senator.
Senator Kerry. Yes.
Dr. Elmendorf. We think that is right.
Senator Kerry. And I think that is part of the modeling
that needs to be done here because I think that distinction
will be very telling in a lot of ways.
What I want to ask is I think it would be helpful to all of
us on the committee, I have great respect for the Rogoff-
Reinhart analysis. In fact, I suggested we might get them in
here, and I think it is an important one. But, and here is the
``but,'' and I would like you to draw the distinction for us.
Your analyses and much of our discussion centers around the
public debt. The public debt is 62 percent, I believe, of GDP.
But we have had a number of references here to the gross debt,
which obviously includes all of the trust funds and so forth,
where there is a very different impact because of the full
faith and credit of the United States and printing and so
forth.
Help us understand how that distinction might play out in
our deliberations, particularly with respect to the impact on
interest rates. I think the public debt has far more impact on
interest rates than on the economic judgments, does it not? So
maybe you can just educate us a little bit on that distinction
between them.
Dr. Elmendorf. Yes, Senator. So CBO focuses on debt held by
the public because we think that is a better measure of the
impact of Federal borrowing on financial markets today than
gross debt. Of course, any snapshot of what the Government owes
at a point in time will be very incomplete without looking at
where the fiscal trajectory is going, and that is why we always
combine our reporting on current levels of debt held by the
public with projections of revenues and spending. And
certainly, financial markets are very attentive not just to the
current amount of debt, but also to the amount of debt they
would expect the Government to be trying to get them to buy in
years ahead.
But our view is that debt held by the public, together with
these projections for the future, offers you and your
colleagues a fairly complete, by no means perfect, but a fairly
complete picture of the Federal budget situation.
Gross debt, which, as you said, includes money, includes
bonds held by various Government trust funds, we think does not
really measure the amount of--does not measure the amount of
debt that the private financial system has been asked to absorb
today, nor is it a very good measure of what will happen in the
future because for some programs, the amount of debt held in
those trust funds is a lot less than the amount that they will
need to pay benefits under current law. In other cases, the
amount of debt held in the trust funds doesn't actually
correspond to future spending. So we just don't think that is
the most useful measure.
Now in the work that Carmen Reinhart and Ken Rogoff did,
they viewed that as the best available measure for the set of
countries over the period of time that they have done this
analysis for. And I don't want to put words in their mouth, but
we have discussed this issue with Carmen.
And, but I think in our case, because we do these very
elaborate projections on a very detailed level of the budget,
that combining those projections with debt held by the public
gives you and your colleagues the best sense of where this
country stands today.
Senator Kerry. Thank you.
Chairman Murray. And Representative Camp?
Representative Camp. Thank you very much.
I just wanted to point out that as part of the fiscal
commission, I researched how often Federal revenues exceeded 20
percent of GDP in the history of our country, and we found they
have only done it three times since--in the history of our
country--in 1944, in 1945, and 2000.
And in 2000, they were 20.6 percent of GDP revenues, and
that was really largely due to the threefold increase in
capital gains from $40 billion in 1999 to $12 billion--or $121
billion in 2000. So that was what drove that.
Is that and----
Dr. Elmendorf. I think that is right, Congressman.
Representative Camp. Thank you.
And in the 11 fiscal years since 1940, we have had surplus
revenues for 4 of those years between 19 and 20 percent, and
for 7 of those years, they were less than 19 percent of GDP.
So I have a letter that outlines all of this that I would
like to submit for the record. And I just think it is important
to point out that, again, during the 12 years in which the
budget was in surplus, outlays never exceeded 19.4 percent of
GDP, and I think it is important to keep those revenue levels
in historical perspective.
Chairman Murray. Representative Van Hollen?
Representative Van Hollen. Thank you, Madam Chairman.
I would again point out that the last time Federal spending
was around 18 percent of GDP or lower was about 1967. We made a
decision in this country to provide for health security for
seniors. So we have really got to look at that period of time
since then if we want to continue that commitment, including
what years the budget was in balance, which was in 2000-2001
period.
Look, Dr. Elmendorf, I think you have made a very good
point in your testimony. I know you are not making
recommendations, but I think your testimony was clear that you
can't address the deficit challenge without modernizing the
health security programs, unless you have large increases in
taxes above even current law. But unless you change current tax
policy, you can't address the deficit situation without deep
cuts in health security programs.
Now I just want to have a quick question. You mentioned
that there are some tax policies that generate more economic
activity, some that generate less. You mentioned the payroll
tax holiday is one that generated relatively more than some of
the others because more money in people's pockets.
Isn't it also true that with respect to spending programs,
there are some that generate more activity than others in the
economy and that investments in the area of infrastructure and
education provide for economic growth? Isn't that also the
case?
Dr. Elmendorf. Yes. But just give me one moment to say that
I want to be careful about the pieces of the budget. There are
revenues. There is Social Security and the major healthcare
programs on my chart, and there is the rest of the budget. And
I don't think you disagree with this, Congressman.
But the thing that is not possible to do is to maintain
Social Security and the major healthcare programs in their
current state and maintain the rest of the Federal Government
at the same share relative to the size of the economy it has
been in the past and maintain revenues at their historical
average share of GDP.
Representative Van Hollen. Right.
Dr. Elmendorf. One needs to move at least one. One could
also choose to move any two or three of those as you choose.
What is not possible, as a matter of arithmetic, given the
aging of population and rising healthcare costs, is to have all
three of those pieces look like they looked historically.
And different policies on the spending side do have
different effects in economic growth, and they do at different
horizons. So some policies might be more effective this year or
next. Others might be more effective over longer periods of
time, and we can try to provide that sort of information to you
and others if you are interested in that.
Representative Van Hollen. I appreciate that, Dr.
Elmendorf. I am just making the point that both tax policies,
as well as investment, spending policies, both can have
positive economic impact. Is that right?
Dr. Elmendorf. Yes. That is right.
Representative Van Hollen. Thank you.
Chairman Murray. Senator Toomey?
Senator Toomey. Thanks, Madam Chairman.
Dr. Elmendorf, one of the challenges that we face is how we
can address these challenges in a credible way, right? How, for
instance, willing will future Congresses be to abide by
spending caps or other kinds of reductions or disciplines that
we might try to impose? And of course, we cannot tie the hands
of future Congresses.
So I wonder if you might reflect on ways that we could
maximize the chances that future--that spending restraints that
we would hope to achieve would, in fact, come to pass, whether
that would be through strengthening existing budget enforcement
mechanisms, creating new ones, or other ways that we might do
that.
Dr. Elmendorf. I think, Senator, the most effective way to
ensure that changes you discuss today actually become--take
effect later is to enact those changes into law today.
Enforcement procedures are only a backstop. Ultimately, the
Congress will need to enact changes in the legislation
governing certain programs or provisions to the tax code if it
wants to make those changes.
And if specific changes are enacted into law this year,
then I think there is a much greater chance that they will take
effect when the time comes than if what is enacted into law
this year is simply a set of objectives for total amounts of
spending or total amounts of taxes or other sorts of
benchmarks.
Senator Toomey. So structural reforms in a program are
likely to have more enduring results than long-term caps
designated. Would you agree with that?
Dr. Elmendorf. Yes, I think that is right. And I think we
have seen that historically. The original Gramm-Rudman
legislation, Gramm-Rudman-Hollings, was cast aside because the
overall target that it set for the deficit proved to be
impossible to meet. Whereas the provisions of the early 1990s,
the PAYGO provisions that tried to make it more difficult for
the Congress to make deficits worse, seem, to most observers,
to have been at least somewhat effective during the period when
the Congress was very concerned about budget deficits.
So I think it is the important aspect of this for both the
long-term effects and also for the shorter-term effects in
terms of people believing the deficits will be smaller in the
future comes from specificity in putting provisions into law
today, even if they are timed to take effect, for various
different reasons, at different points in the future.
Senator Toomey. Thank you.
Chairman Murray. Thank you very much.
I want to thank all of our committee members for being so
accommodating. Dr. Elmendorf, certainly, for your input and
your staff's input for today as well.
I want to remind all of our members that they have 3
business days to submit questions for the record, and I hope
that the witness can respond quickly to that.
Dr. Elmendorf. Yes, we will.
Chairman Murray. Great. Thank you.
And members should submit their questions by the close of
business on Friday, September 16th.
[The information follows:]
Chairman Murray. Without objection, the joint committee
stands now adjourned.
[Whereupon, at 1:10 p.m., the committee was adjourned.]
OVERVIEW: REVENUE OPTIONS
AND REFORMING THE TAX CODE
----------
THURSDAY, SEPTEMBER 22, 2011
United States Congress,
Joint Select Committee
on Deficit Reduction,
Washington, DC.
The committee met, pursuant to call, at 10:08 a.m., in Room
2123, Rayburn 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.
One of the preliminary announcements, the chair wishes to
again remind our guests that any manifestation of approval or
disapproval, including the use of signs or placards, is a
violation of the rules which govern this committee; and the
chair wishes to thank our guests in advance for their
cooperation and compliance.
Today's hearing of the Joint Select Committee on Deficit
Reduction is entitled Revenue Options and Reforming the Tax
Code. We want to welcome our witness, Dr. Tom Barthold, the
Chief of Staff for the Joint Committee on Taxation.
Dr. Barthold, thank you for your time. Thank you for your
service. We look forward to your testimony. I suppose, more
precisely, testimonies.
We may have set a Congressional first today with two panels
and one witness. We will have our first testimony by our
witness on business tax reform. There will be a round of
questions by our members. Then we will have a second testimony
by our witness on individual tax reform.
Members of the joint committee have agreed to limit opening
statements to those of the two co-chairs. So at this time I
will recognize myself 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. In last week's testimony regarding the
drivers of our structural debt, we heard Congressional Budget
Office Director Doug Elmendorf say that, although government
revenues are certainly temporarily down, he expects them to
again reach their historic norm of a little over 18 percent of
GDP in short order. However, he reminded us that spending is
due to explode to over 34 percent of GDP in the years to come,
that principally driven by entitlement spending programs, some
of which are growing at two, three, and four times the expected
rate of growth of our economy.
As I have maintained since the first meeting of the Joint
Select Committee, there are many actions that this committee
can take that would be helpful in addressing our structural
debt crisis. However, we simply cannot and will not succeed
unless our primary focus is about saving and reforming social
safety net programs that are not only beginning to fail, many
of their beneficiaries but simultaneously going broke. If we
fail to do this and choose to solely or primarily address our
debt crisis by increasing the Nation's tax burden, I fear the
consequences.
Former CBO Director Rudy Penner, in testimony before the
Simpson-Bowles Commission, of which a number of us serve,
stated, ``the U.S. total tax burden, which is considerably
below the OECD average, would be higher than today's OECD
average by mid-century; and within a few years after that we
would be the highest taxed nation on Earth.''
Also appearing before Simpson-Bowles was former CBO
Director and current Social Security and Medicare trustee
Robert Reischauer, who stated, ``the longer we delay, the
greater risk of catastrophic economic consequences. The
magnitude of the required adjustments is so large that raising
taxes on the richer corporations, closing tax loopholes,
eliminating wasteful or low-priority programs and prohibiting
earmarks simply won't be enough.''
Finally, when he served as CBO Director, Dr. Peter Orszag,
in a letter to Budget Committee Chairman Paul Ryan, stated,
``the tax rate for the lowest tax bracket would have to be
increased from 10 percent to 25 percent. The tax rate on
incomes in the current 25 percent bracket would have to be
increased to 63 percent. And the tax rate of the highest
bracket would have to be raised from 35 percent to 88 percent.
The top corporate income tax rate would also increase from 35
percent to 88 percent.''
So the ability, wisdom, and consequences of addressing our
debt crisis through tax increases will continue to constitute a
rigorous debate by our committee. My hope, though, is that we
may be able to achieve rigorous agreement that fundamental tax
reform, even just limited to American businesses, can result in
both revenue from economic growth for the Federal Government
and more jobs for the American people. Seemingly, both the
President of the United States and the Speaker of the House
agree.
Most Americans agree that there is something fundamentally
wrong with our Tax Code when a small business in east Texas
pays 35 percent and a large Fortune 500 company pays little or
nothing. There is also something fundamentally wrong with our
Tax Code when an American company pays 35 percent and its chief
European competitor only pays 25 percent. We should seize the
opportunity and correct this for the sake of both bringing in
more revenues for economic growth and addressing our jobs
crisis at the same time.
At this time, I will recognize my co-chair, Senator Patty
Murray, for her opening statement.
[The prepared statement of Chairman Hensarling appears in
the appendix.]
OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM
WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Co-Chair Murray. Well, thank you very much, Co-Chairman
Hensarling; and I want to thank our witness, Thomas Barthold,
for taking the time to be here today, as well as all of our
colleagues and the members of the public and the audience that
are watching on television.
We all know the American people are looking at this
committee with great optimism but also with real skepticism.
They have heard the partisan rhetoric that has dominated our
Nation's capital recently; and, quite frankly, they are tired
of it. When it comes to this committee and its work, they don't
care how it impacts one party's fortune versus the other. They
don't care how it impacts one special interest versus another.
Their only question to us is how will it impact their life.
They want to know if we can help their spouse or family member
or neighbor get back to work. They want to know if we can make
a real dent in the deficit so their children are able to
compete and succeed and can it be done in time for families
that are losing faith with each passing day.
Answering those questions is going to take honesty from
every member of this committee, honesty with one another and
honesty with the American people about what it is going to
take. It is going to mean looking at every part of our budget
and realizing that there is spending that has grown too fast,
job investments that still need to be made, entitlements that
are expanding too quickly, and a Tax Code that has become
riddled with corporate giveaways and special interest carve-
outs for the richest Americans. But more than anything else it
is going to take the shared realization that solving our
deficit crisis and putting Americans back to work will mean
taking a truly balanced approach.
Now, to this point, in Congress we have begun the process
of addressing spending. In fact, the Budget Control Act that
established this committee cut more than $1 trillion from our
National deficit, and that was on top of caps to appropriations
bills that had already been put in place.
But as the overwhelming majority of American families and
economists and every serious bipartisan commission that has
examined this issue has agreed spending cuts alone are not
going to put Americans back to work or put our budget back in
balance. We have to address both spending and revenue.
So I am looking forward to hearing from Mr. Barthold about
the tax reforms and revenue this committee can explore. I am
interested in hearing about the loopholes and tax expenditures
my colleagues on both sides of the aisle have agreed are too
often wasteful and market distorting but are options for
broadening the base and lowering the rate, boosting the economy
and bringing in additional revenue and about keeping our Tax
Code truly progressive.
Revenue and the Tax Code is just one side of the ledger,
but it is an important one, and it needs to be part of a
balanced and bipartisan plan we owe it to Americans to come
together on this committee and pass. I am pleased this
committee has begun the hard work of negotiations over the last
few weeks, and I am hopeful that we can come together and
deliver the results that Americans deserve: a balanced plan
that helps get our economy back on track, gives businesses the
stability to hire again, and ensures that middle-class families
and the most vulnerable are not bearing the burden of balancing
our budget alone.
Thank you very much.
[The prepared statement of Co-Chair Murray appears in the
appendix.]
Chairman Hensarling. I thank my co-chair; and at this time,
Dr. Barthold, I wish to yield to you for your testimony on
business tax reform. You are recognized.
STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION
Mr. Barthold. Thank you, Mr. Hensarling, Ms. Murray, and
members of the Joint Select Committee. I thought I would use
the time on this first panel to try and give you a very brief
overview of the Federal tax system with an emphasis on business
taxation under our system. My submitted testimony provides
substantially more detail than, of course, I will be able to go
into here.
I am going to concentrate on just a packet of slides that
has been placed at each of your chairs.
If you turn to the first page of that, Figure 1 really just
tells you that the Federal revenue system in the United States
is comprised of five tax sources, of which the individual
income tax is the largest, the payroll taxes are the second,
corporate income tax is the third largest component, followed
by a series of excise taxes and the estate and gift tax.
Figure 2 then documents for you that in fact this has been
the case. This has been the basic structure of the U.S. tax
system for many, many, many, many years. The one broad trend
that you will see in Figure 2 is that employment taxes have
grown in importance largely with the expansion of the Social
Security system through--over the decades and Medicare, and the
importance of the corporate income tax has declined since the
post-World War II era.
Figure 3 really just documents I think a point that Co-
Chairman Hensarling made that Doug Elmendorf presented to you a
week ago, and this is sort of the history of Federal receipts
as a percentage of the economy.
Looking over the next decade, there is some significant
changes in the tax system scheduled to occur with the
expiration of many current tax provisions after 2011 and then
again after the close of 2012; and Figure 4 shows you projected
revenues by source, the increasing revenues from the individual
income tax, the payroll tax, and the corporate income tax, et
cetera, for the debt next decade.
And just to scale that to the economy, Figure 7 provides
the same information scaled to GDP.
Now, these prior charts that I have turned through very
quickly divided the tax world into an individual income tax and
a corporate income tax. But I think it is important for us to
recognize that many business enterprises in the United States
are not C-corporations, and so that means they are not subject
to the corporate income tax. And in fact a significant amount
of business income is taxed directly to the individual return.
And so what Figure 6 shows you is just the number of
business entity types and how it has changed over the past 40
years or so, with Figure 7 providing particular detail on the
growth of S-corporations and partnerships in comparison to C-
corporations over the past 30 some years. As you can see in
Figure 7, these pass-through entities, these alternative
business forms, this includes State-chartered LLCs with which I
know many of you are aware from your constituents, have become
increasingly important in terms of the number of business
entities.
But it is not just number of entities, of course, when we
look at the tax system. It is the amount of revenue. And Figure
8 gives you a very quick look at the growth of net income
reported by these entities and reported by C-corporations,
again over the last 30 years. What this chart shows is the
relative growth of non-C-corporate business income as a
percentage of GDP.
The same information is really sort of emphasized in the
projections that we are making for the coming decade. When you
look at Figure 9, we project that the sum of income reported to
sole proprietorships, to S-corporations and partnerships and
other pass-through business forms will grow by 80 percent over
the coming decade, comprising a larger and larger share of
taxpayers' adjusted gross income.
Now, that said, it is also important to have a very good--I
guess it will be very brief in this case--overview of how we
tax business income in the United States. And the rules for
taxing business income, whether it be through an S-corporation
or a C-corporation, are really essentially the same. We look at
the gross income of the enterprise less allowable deductions.
Allowable deductions include all ordinary and necessary
business expenses such as salaries and wages, the fringe
benefits for such things as retirement and health and other
fringe benefits that employers provide employees, the cost of
raw materials, advertising expenses, and an important expense
for many business enterprises is the deduction for interest
expense for borrowed capital. It is probably important to note
in this case that interest expense is deductible to businesses,
but dividend payments, another form in which capital invested
is rewarded, is not deductible.
We provide rules for cost recovery for long-lived assets,
referred to as the modified accelerated capital recost system
makers. In other words, it accounts for the depreciation, the
economic loss in value from long-lived assets.
Now, in addition, currently, there is a special deduction
related to domestic production activities. This has the effect
of lowering the effective tax rate on qualifying activities.
Taxes on business income apply to the U.S. taxpayer's worldwide
income wherever it is earned, but certain active income earned
abroad may have its tax deferred until the income earned abroad
is repatriated to the United States.
Currently, the top rate of tax for C-corporations, which
applies to almost all large corporations, so just about any
corporate name you can think of, the statutory rate is 35
percent. There are smaller--there are lower tax rates for
smaller levels of income.
If you turn to Figure 12 in the packet before you it shows
you a brief history of corporate income tax rates, and so you
can see the 35 percent rate. The number inside the little
bubble tells you the income level at which that rate becomes
applicable, and so you can see both the bracket level as well
as the rate and how that has changed since the mid-1970s.
Now, the co-chairman asked me to take a couple of moments
and introduce the concept of tax expenditures and how they
might be important, both in the context of business income and
the individual income tax. The detailed presentation provides a
large list and shows you some of the evolution of tax
expenditures through time. Just to be clear, the notion of a
tax expenditure is relative to sort of a theoretically pure
income tax, what might be considered a special exclusion, a
special rate, a special credit, or a special deduction.
And Table 5, the next page in your packet, shows you the
largest tax expenditures as calculated by my staff colleagues
for corporations encompassing the period 2010. We are
projecting over 2010 to 2014, and you can see the 10 largest
tax expenditure items are an estimate of those items.
One point I would like to note is that, although this list,
this top 10 list, when you look in the detailed presentation,
has changed over time, two items have been in the list of top
10 expenditures every time we have done the analysis since
1975, and that is some form of accelerated depreciation and the
exclusion of interest on general purpose State and local debt
held by business entities.
It has also been the case that the reduced rates for
smaller levels of corporate income have been a feature of our
tax expenditure analysis and our corporate tax system every
year since the early 1980s. And generally also since the early
1980s one of the largest tax expenditures has always been
either a deduction or a tax credit or you can take the sum of
the two for research expenses.
I think at this point I have probably given you a very,
very quick and rough overview, but it is probably time for me
to turn it over to the committee so that you can ask specific
questions, and I would be happy to answer any question.
Thank you very much.
[The prepared statement of Mr. Barthold appears in the
appendix.]
Chairman Hensarling. Thank you, Dr. Barthold, and we look
forward to your second testimony as well.
The co-chair will yield to himself for the first round of
questions.
On your Figure 3, Federal receipts as a percentage of GDP--
as I understand it we, unfortunately, do not have these slides
for our monitors--but what I appear to see is a chart that
tells me that essentially since World War II that our Federal
receipts as a percentage of GDP have been somewhere between 15
and 20 percent; and, as I understand it, the average is about
18, 18\1/2\ of GDP in the post-war era?
Mr. Barthold. That is correct. Since 1950, the average is
actually 17.9 percent; and since 1971 the average has been 18
percent. So it has been----
Chairman Hensarling. Okay. So roughly 18 percent, and it
has operated within a fairly, I guess, relatively speaking,
narrow band.
It is also my understanding that during this same time
period that we have seen marginal rates go as low as 28 percent
and as high as perhaps 90 percent perhaps in the late 1950s,
early 1960s, is that correct?
Mr. Barthold. You are referring to the rates of the--the
top rate.
Chairman Hensarling. The top marginal bracket in the
income.
Mr. Barthold. And I actually have a--I think I have a nice
picture of that for the second panel. But, yes, sir, you are
correct.
Coming out of World War II and then during the Korean War,
the top marginal Federal tax rate on the individual income
tax--and this applied to ordinary income. There was a special
treatment of income from the sale of capital assets--but was as
high as 90 percent. It was then reduced to 70 percent in the
Kennedy round of tax cuts in the early 1960s. The marginal tax
rate individual income then was reduced further. In the mid-
1970s, we made a split between earned and unearned income, with
the top rate on unearned income remaining at 70 percent and on
earned income dropping to 50 percent.
Chairman Hensarling. Dr. Barthold, if I could--and I didn't
see a chart here--but would the same correlation prove roughly
true for corporate tax receipts?
Mr. Barthold. We did have--one of the figures, Figure 2,
sir, showed the Federal tax receipts as a share of total
receipts.
Chairman Hensarling. But not as a share of GDP.
Mr. Barthold. I have a supplemental table.
Chairman Hensarling. But to some extent does this not
suggest that there are limits to the amount of revenue that are
going to be gained by increases in marginal brackets if they
have ranged from anywhere on the personal level from 28 to 90
percent. We still see roughly that revenues appear to be
falling within this particular band. And so that was my
question. And at some time I would like to see, if we could,
that correlation of the corporate to GDP.
It is my understanding that--from data from the Joint
Committee on Taxation--that roughly 50 percent of small
business profits are taxed at the top two individual rates, is
that correct?
Mr. Barthold. I believe we have published that number, sir,
yes.
Chairman Hensarling. Okay. And one of your charts also
shows that there has been a large increase, I believe, in--I am
trying to find the chart--in the number of non-C-corp entities.
I guess it is your Figure 6, perhaps.
Mr. Barthold. Yes. In the packet before you, Figure 7----
Chairman Hensarling. Oh, I am sorry. It is Figure 7. So
certainly since the late 1970s there has been a huge increase
in essentially what are known as pass-through entities?
Mr. Barthold. That is correct, sir.
Chairman Hensarling. So is it fair to say then that
increases in the top two individual tax rates could impact--
again, by your testimony--50 percent of small business
profits--I don't know how many individual small businesses that
is. Your Figure 7 would suggest that, again, we have a large
number of pass-through entities that at least potentially could
be impacted by that.
The next question I have really has to do with the pro-
growth aspect that could be derived from some kind of
fundamental business entity tax reform. I guess also to some
extent your Figure 7 would suggest that tax reform in the realm
of C-corps alone may prove problematic unless you deal with
pass-through entities as well. Is that a fair----
Mr. Barthold. Well, what I was trying to emphasize was that
when we think of business income it is not just taxed in the
Federal system through the tax on C-corporations, that there is
a lot of business income that is reported on individual
returns. But the concepts in terms of how we measure that
income, the depreciation schedules, the treatment of research
expenses, advertising expenses, are the same regardless of the
entity cut.
Chairman Hensarling. My time is about to wind down. I want
to try to get in one more question.
I am curious about the type of model that JCT would use and
what type of academic studies that have been researched
regarding the potential pro-growth aspects of fundamental
business entity tax reform.
I have seen a lot of information come over the transom.
There was a 2010 Milken Institute Jobs for America report that
concluded that taking our U.S. corporate tax rate to the OECD
average of 25 percent could create 2.1 million private-sector
jobs by 2019. I have seen a study by the Journal of Public
Economics from a few years ago that found that a 10 percentage
point reduction in U.S. corporate tax rate could boost GDP
growth per capita by 1.1 to 1.8 percent per year. Can you give
us a little bit more information concerning what model you use
and how is it derived? What other studies have you looked at
that might suggest to the committee the positive pro-growth
aspects of fundamental business entity tax reform?
Mr. Barthold. How long do I have, sir?
Chairman Hensarling. Unfortunately, my time ran out. We
will give you about 30 seconds, and then I will yield to my co-
chair.
Mr. Barthold. Well, I will give it very quickly.
We do multiple types of modeling for the members of
Congress. The basic modeling that we do is based off of
microsimulation models, and it is against the Congressional
Budget Office macroeconomic baseline. And when we do that we
look at many different changes in behavior in terms of choices
that either individuals or businesses make. But for consistency
in reporting to Congress and subject to the budget resolutions,
we do not include a feedback effect in terms of this
legislative package will increase or decrease the growth rate
of the economy.
So for the past near decade now under House Rule 13 we have
been providing, as part of House Ways and Means Committee
reports on tax bills, supplemental information of macroeconomic
analysis; and we have three different primary macroeconomic
models that we use to emphasize different assumptions and to
emphasize different features that people think are important in
the macroeconomy. And in that analysis we look at the effect on
changes in labor force participation rates, in savings rates,
in cross-border capital flows, and changes in investment
incentives and how businesses respond----
Chairman Hensarling. Dr. Barthold, if I could, I am setting
a poor example here. So at this time allow me to my co-chair,
Senator Murray.
Senator Kerry. Mr. Chairman, I hope we are not being a
prisoner of the clock where if any member asks a question--I am
here to learn, and I hate to be truncating important data with
such rigidity and ask that we allow the witness to answer.
Representative Camp. Mr. Chairman, I would just say, having
chaired committees, if we don't stay on the clock, we will
never get through everyone's opportunity to have more than one
chance at questioning. So I appreciate what the Senator is
saying, but we are going to have to keep this moving. And we
can always follow up with Mr. Barthold after. He is a
government employee, and we can always talk to him after this
hearing.
Chairman Hensarling. We will have at least two rounds of
questioning per member and two panels, so I appreciate that.
And, again, I am not setting a particularly good example. And
if other members wish to have the witness explore this
particular question further they certainly can, but at this
time allow me to yield to my co-chair, Senator Murray.
Co-Chair Murray. Thank you very much.
And thank you again, Dr. Barthold. I appreciate your
testimony.
This hearing is divided into corporate and individual tax
sections, but I really wanted to start with the key issue
facing millions of Americans today, and that really is jobs.
We have heard a great deal about the negative impact the
current economic situation and high unemployment rate has on
the economy both in terms of demand for social services but
also in reduced tax revenue. We have also heard this committee
could have a positive effect on the fiscal situation of this
country if we would support pro-growth policies in the short
run, even if they result in greater spending, while promoting
gradual and real changes to spending and revenues in the medium
and the long term.
In terms of taxes, last week CBO Director Elmendorf
testified that CBO had considered various tax proposals and
weighed their effectiveness in stimulating the economy. He
mentioned reductions in payroll taxes as among the most
powerful, followed by expensing of investment costs for
businesses, and then followed below that by just a little bit
broader reductions in income taxes.
I wanted to ask you if JCT has performed a similar analysis
of any kind and whether or not, if you did, your conclusions
match or differ from CBO.
Mr. Barthold. Thank you, Senator.
We have not tried to replicate work that the Congressional
Budget Office did, but we have, in a number of different
projects for the Ways and Means Committee and other members of
the tax-writing committees, looked at some of the effects of
payroll tax reductions expensing provisions. And so let me just
address the way we approach that, and I think the Congressional
Budget Office's approach is similar.
Expensing. Okay, expensing works to essentially reduce the
cost of capital, reduce the cost of acquisition of new
equipment by businesses. So it increases the after-tax return,
makes it more attractive to make those investments. When we do
our macroeconomic analysis, then we show that that leads to an
increase in investment.
Now, what becomes important also in that analysis is what
is the context of the overall legislative package. Is it just
providing expensing relief for expensing of capital equipment
for a large number of years? Is it offset in some way?
It is also important to think about how the Fed might react
in terms of its policy for trying to moderate inflation. We
don't--of course, right now, in the current environment, we
don't think of inflation as a real--real problem. So as a
general statement, yes, expensing can be a very powerful pro-
investment incentive.
You mentioned payroll tax. We have looked at payroll tax.
It usually is the effect that it depends are we talking--and
this would be true of expensing, also--is it a permanent
reduction in the payroll tax or a temporary reduction in the
payroll tax? Is it offset in some way? So there is those same
general questions.
But then the principle, of course, is that if it reduces
the payroll tax and increases the after-tax wage that has two
effects. There is a cash flow effect. There is a short-run
stimulus in terms of aggregate demand, more money in my pocket.
I can potentially spend more, but it also makes it more
attractive for me to work longer hours.
Now, me personally, you already have me work fairly long
hours, so that wouldn't be a personal effect. But it could mean
that my wife might decide to, as she is currently not in the
labor force, but maybe she would say, well, there is a better
after-tax return to being in the labor force. And so labor
supply would increase. And that is pro growth.
But it is important to think in terms of the overall
legislative package as well. We can't just say because a
package has this in it that automatically you get one result
all the time.
Co-Chair Murray. Well, let me talk on corporate tax reform.
As you well know, the U.S. corporate tax rate is 35 percent at
the Federal level, 39 percent when the average State corporate
tax is included. The average rate for other industrial
countries of OECD is 25 percent, and only Japan has as high a
rate.
I think most people do agree that such high tax rates make
the United States a less attractive place in which to do
business. Our corporate Tax Code also distorts business
decisions making. Instead of making and improving their widgets
or hiring new people, they spend too much time and effort
devising business strategies aimed simply at tax avoidance. I
think we know that all of that reduces the number of jobs that
are created here at home, where we are all focused, and puts
greater strain elsewhere on us in terms of government spending.
Companies in my home State have consistently been telling
me that they care less about keeping a particular tax
expenditure, even when they benefit from it, than having a
predictable system of taxes with lower marginal rates. Right
now, they don't necessarily want to game the system to pay a
lower rate. They will use every loophole that is available to
them, obviously. But they tell me that they would rather focus
their efforts on making things and selling products around the
world.
So I think we all agree that our corporate Tax Code needs
substantial reform, and I think it is important to do both the
individual and the corporate side together because a
significant number of businesses operating as pass-through
entities pay taxes on the individual side. So to ensure the
competitiveness of U.S. business it is important, I believe, to
coordinate reforms for individual and corporate taxes; and I
want to ask you if you agree that there are advantages to doing
more comprehensive tax reform, as opposed to just looking at
the corporate side.
Mr. Barthold. In terms of business income, Senator, I think
that was the point I was trying to emphasize in my brief run-
through. It was to note that there are businesses that are
organized as C-corporations.
I should note when you look at the supplemental material
that I provided, while I have said there are a lot of non-C-
corporate businesses in terms of assets, large C-corporations
own the vast majority of assets and earn the vast majority of
business taxable income.
Now, that said, I have noted that non-C-corporate entities
are growing in number, and the income attributable to those
entities is growing relative to the overall tax base. Because
we define business income the same way, if we are looking--I
think we should not look just at corporate reform but business
income reform. And it would from a practical point of view,
sort of a practical legislative point of view, from sort of the
legislative weenie aspect, it would be very difficult to wall
off a number of provisions and say we will have one set of
rules if you are this type of entity and a potentially very,
very different set of rules if you are another type of entity.
Because then we would have to double back and have rules to
keep people from--to restrict their entity choice, and that
would be a bad outcome, to restrict entity choice.
Co-Chair Murray. Okay. Thank you very much. My time has
expired.
Chairman Hensarling. The co-chair now recognizes Senator
Kyl of Arizona.
Senator Kyl. Thank you.
Dr. Barthold, just to follow up on one of Senator Murray's
questions with regard to the effect of short-term payroll tax
deduction policy, in your studies did you find any evidence
that either the payroll reductions--well, just take the most
recent, but if you want to go back to the Bush administration,
if you can recall that as well--did that have a stimulative
effect on the economy and was it responsible for any job
creation? Obviously, we had job reductions during that period
of time. Did the temporary aspect of it reduce its
effectiveness and was the need for people to deleverage such
that, rather than spending a lot of that money, they ended up
paying off debts or saving the money? Were those possible
effects that reduced the effectiveness of that temporary
policy?
Mr. Barthold. Senator Kyl, just to be clear, you are
talking about the tax rebates under the Bush administration.
Senator Kyl. There was a tax rebate under Bush, and then
more recently we had a payroll tax one-year policy, which some
would like to see extended.
Mr. Barthold. Since we have done some work recently on the
payroll tax reduction, let me try and answer your question by
addressing that.
As I think I noted to Senator Murray, there is really sort
of two aspects to that in terms of macroeconomic analysis. An
increase in take-home pay can have a stimulative effect. It
increases the taxpayer's cash flow and the consumer can consume
more, if it is short--and that is true in the short term. There
is mixed empirical results on whether if someone just has a
very short-term increase in pay how much is saved as opposed to
how much is spent. So there is an effect in terms of the
efficacy as opposed to a long-run change, but there still is
that short-run demand effect.
Now, a second aspect that we talked about is, well, what is
the supply effect, the labor supply response? To a short-run
policy you would not expect a dramatic labor supply response,
because labor supply decisions tend to be a little bit longer-
run decisions. Now, we had used one of our macroeconomic models
to analyze a proposal to extend by 1 year a payroll tax
reduction comparable to the one that is in present law----
Senator Kyl. Could I just interrupt you? Rather than
speculating about what might happen in the future if the
current policy is extended, what is the evidence of what has
happened during the policy that is in effect now?
Mr. Barthold. Well, there is no academic study or solid
empirical evidence right now. I mean, there is only sort of
casual empiricism, because the data is not available. One
problem with economics and analyzing the effects of policies is
it sometimes takes 2, 3, 4 years to get the data and do a good
analysis. So I don't have a good answer for you in terms of the
effect of the policy that is currently in place right now.
Senator Kyl. So given that there are some of these other
factors, temporary versus permanent, short term versus longer
term, and obvious deleveraging that is going on in the country
right now, all of those are factors that you would have to put
into your analysis about what potentially might happen in the
future.
Mr. Barthold. As I had noted, it is important to think of
the overall context of the legislative package. You can't just
say because it has this one piece in it that you get a
guarantee.
Senator Kyl. Cause and effect is complicated in the
economy.
Mr. Barthold. Well, there is many--a number of the other
things that you mentioned will also affect business decisions
and potentially employment decisions.
Senator Kyl. Could I--we are all going to complain about
the fact our time is short.
I think I have got some yes-or-no questions, and I would
like to ask you if you could just answer these true or false or
yes or no. Let me just ask you about some general economic
principles or statements. And these are, as you said, generally
speaking, and then you qualified some of the other things that
you said, and I totally appreciate that. But, generally, there
is a positive relationship between economic growth and jobs,
true or false?
Mr. Barthold. Certainly.
Senator Kyl. Right. True.
There is a positive relationship between economic growth
and resulting revenues to government.
Mr. Barthold. That is also true, sir.
Senator Kyl. There is a positive relationship between
economic growth and reduced Federal spending on need-based
programs.
Mr. Barthold. Well, that will depend--I have got to give
you a qualified one there, because it depends on what is
happening in terms of where income is being earned.
Senator Kyl. Fair enough.
There is a positive relationship between economic growth
and deficit reduction.
Mr. Barthold. Well, that will depend on a lot of----
Senator Kyl. Again, if we don't go spend all the money, all
else being equal.
Mr. Barthold. That would be true, sir.
Senator Kyl. Right.
Senator Murray was saying tax policy affects economic
growth.
Mr. Barthold. That is what our macroeconomic analysis is
trying--it tries to provide members with information about how
it might or when it might not.
Senator Kyl. It may do it in a lot of different ways.
The official revenue estimates from the Joint Committee on
Taxation account for behavioral responses of individuals but
not larger economic growth effects. Is that a fair way to state
your revenue tables?
Mr. Barthold. That is fair shorthand. We work against the
Congressional Budget Office macroeconomic baseline and receipts
baseline, and so we do not assume that the large economic
aggregates of total income, total investment, employment, and
inflation are altered.
Senator Kyl. Right. But you also said earlier, I think in
response to Representative Hensarling's question, that the
Joint Committee on Taxation is capable of providing estimates
of growth effects since it provides this analysis to the House.
But these growth effects are not incorporated in the official
score of a proposal, is that correct?
Mr. Barthold. It certainly is the case they are not part of
budget rules and budget scorekeeping. The information that we
provide is a range of outcomes that reflect sensitivity to
different assumptions. But, yes, we do provide that information
to the House under Rule 13.
Senator Kyl. Right. Where is our light or timer? So I am
over. Sorry. Dadgum, I had a really good closing question.
Chairman Hensarling. The Senator from Arizona will have
another opportunity to ask that question.
At this time, the chair will yield to Congressman Becerra
of California.
Representative Becerra. Thank you, Mr. Chairman.
Mr. Barthold, good to see you again just 24 hours later. We
saw you in Ways and Means, and we thank you for that testimony
as well.
Let me ask if we can get your Table number--I am sorry--
yeah, Table number 5 from your charts. And I would like to talk
a little bit about the tax expenditures, at least those in this
chart that apply to corporations.
Expenditures seem to have quite a bit to do with the actual
taxes paid by a company. And so while we hear about the
corporate tax rate in America being around 35 percent, if you
are able to qualify for some of these tax breaks, these tax
expenditures, you can reduce what you effectively pay to the
Federal Government in taxes so that your actual tax payments
will be less than at a 35 percent rate.
And, actually, that is not the chart I am referring to. It
is Table, not Figure 5. So if we can go to the--it was your
last chart. That is correct. You have that one. Just so we get
it correct on the screen. It should be the very last chart I
believe you presented.
Mr. Barthold. In the handout that I gave you, it was the
last item before part two.
Representative Becerra. Right. I am not sure if folks can
see that clearly.
But I wanted to just move into that a little bit because,
quite honestly, through the Tax Code we select winners and
losers on the corporate side in terms of income taxes; and I
suspect we will see with regard to tax expenditures these same
kinds of tax breaks that are on the individual side of the Tax
Code that we select winners and losers as well. And if I could
ask a question. If we were to remove, for example, the first
tax break that you list, a deferral of active income of
controlled foreign corporations, $70 billion over a 4- or 5-
year period, who would lose?
Mr. Barthold. For the benefit of the committee, the
particular tax expenditure line item that Congressman Becerra
is referring to, deferral of active income of controlled
foreign corporations, relates to the point that I gave in my
overall testimony that the United States taxes business income
on a worldwide basis. But in the case of active income earned
abroad the taxpayer may elect not to repatriate that income,
and if the taxpayer so makes that election the tax is deferred
until the taxpayer chooses to do that.
So if the Congress were to decide to repeal deferral, just
to take shorthand, it would mean that the income would all be
taxed at the current statutory rates. Since this is about
income that is earned abroad by corporations, we are largely
talking about U.S.-headquartered multinational corporations,
and so it is the income that is earned on overseas investments
and overseas sales by those corporations.
Representative Becerra. And just going through the list,
you have a tax credit for low-income housing. I would assume if
we were to remove that tax break the $27 billion that goes to
those who take advantage of that tax break probably affects the
housing market. And if you were to go to the expensing of
research and experimental tax expenditure, where it is $25.5
billion, that it is those companies that do research and
experimentation that can claim on their taxes that they did
certain research or experimenting activities and therefore get
to reduce their tax burden.
So we could decide, based on what we eliminate or leave,
who becomes a winner and who becomes a loser. And so we have to
be very careful how we do this, because we could influence
actions of a lot of important companies that do business here
and maybe do business elsewhere but are American companies. And
so how we decide to reform the Tax Code could have a major
impact.
Obviously, those are all--the list of those different types
of tax breaks list a good chunk of money that we don't collect
because we give the tax break to those individual companies
that could qualify. So as we talk about making changes we could
pick--we could end up selecting the winners and losers.
Let me ask another question in the brief amount of time
that I have with regard to tax collection. We know that there
is owed tax money that is not collected. In some cases, it is
not intentional. People make a mistake on their filing. In some
cases we know, and we have had cases where it has been proven,
that people intentionally try to avoid paying their fair share
of the taxes.
There are estimates about how much we don't collect in
taxes that is owed. I don't know if there is any recent
estimate, but I know there was one from about 10 years ago that
was somewhere around $345 billion or $350 billion. Has there
been any update to that estimate of uncollected taxes?
Mr. Barthold. The research division of the Internal Revenue
Service runs what they call the National Research Project, and
they are working on updating those estimates. But the estimates
that you cite of about $350 billion in terms of what is
referred to as the tax gap per year I think are the most
recent, but they are a couple of--at least a couple of years
old, sir.
Representative Becerra. And with my time expiring I will
see if I can explore this a little bit more when we come back
and talk again about the individual income tax. So thank you
very much for your testimony.
Mr. Barthold. You are welcome, sir.
Chairman Hensarling. The co-chair now recognizes
Congressman Upton of Michigan.
Representative Upton. Well, thank you, Mr. Chairman.
And thank you, Mr. Barthold, for not only being here with
us today but, as I understand it, you will be with us a number
of times in the days ahead answering some questions, so I
appreciate that flexibility.
We know that the U.S. corporate tax rate is the second
highest that there is. And as we look back at the size of the
top 20 companies in the world 50 years ago, 17 of them were
U.S. based; in 1985, 13 of the top 20 companies were in the
U.S.; and, today, it is about six.
The companies that I talk to, particularly in Michigan and
before this committee here in Energy and Commerce, one of the
things that they talk quite a bit about is certainty in the Tax
Code. There is a lot of--and there has been--discussion,
working with Chairmen Camp and Baucus as well, to hear their
comments from the many hearings that they have had,. But the
R&D tax credit, which stops and starts and stops and starts, is
a real frustration. Accelerated depreciation has been a
bipartisan idea for a long time to encourage investment here in
this country and export products overseas.
How would changes in these two, accelerated depreciation
and R&D, and maybe moving the dials a little bit in terms of
increased deductions or whatever, how would those help us with
investment in jobs in this country? What would you encourage us
to do as you have examined the Tax Code? Have you done studies
along these lines?
Mr. Barthold. Well, Congressman, let me refer back to the
example that Senator Murray raised and you said that Doug
Elmendorf broached with you a week ago; and that is, what does
expensing do?
Well, expensing is one form of accelerated depreciation. It
is kind of like super-accelerated depreciation. Accelerated
depreciation methods, again, they go to the cost of capital for
business. Even from a sort of simple cash flow method it means
that you have more cash available after tax from being able to
recover more of your cost sooner. Or if you look at it in what
economists refer to as the user cost of capital model looking
over the lifetime of the asset, by having costs reduced early
over the life of the asset, as opposed to later over the life
of the asset, the present value of the returns to the asset are
increased, so it makes it a better investment.
So accelerated depreciation is a policy that encourages
investment in the United States.
Similarly, you mentioned the research credit and expensing
of research activities. From sort of a--from a----
Representative Upton. But do you have studies showing that
if we did X or Y it would allow companies to do more investing
here, allowing more people to work and pay taxes, a whole
number of positive things for the economy? Is there a laundry
list of things that can help us?
Mr. Barthold. The joint committee staff responds to
members' legislative initiatives, so we don't have really many
formal studies that say do this as opposed to do that.
Now, we have--in some of our macroeconomic work that we
have undertaken to provide supplemental information to the Ways
and Means Committee, we have looked at the role of expensing,
we have looked at the role of reduced corporate tax rates, some
of the same points that I made to the Senator earlier.
There are a number of academic studies which we review to
help inform our work, both in terms of our conventional
estimates and our macroeconomic work, on the impact of
incentives for research, on the impact of accelerated
depreciation; and most of the economic findings are that there
is an effect. There is differences of opinion as to how large
the effect is. But the incentives generally are, as the
theoretical discussion would suggest, that they are pro-
investment, or pro-research in the United States.
Representative Upton. Do you have any studies that show if
we increased the capital gains rate from the current 15
percent, what it would do to capital investment by companies if
we raised it to 20 or 25 percent?
Mr. Barthold. Well, again, Congressman, no study per se on
point. And you are asking about what would be the macroeconomic
effect of that change.
So to walk through, that is tax on capital gains affects
the--let's think of it on corporate stock--the shareholders
after-tax return to investment. So there is a couple of ways in
which the shareholder gets returns through investment. There is
a tax on dividends. There is----
Representative Upton. But the company itself, if it----
Mr. Barthold. Well, capital gain--remember, the capital
gain, of course, relates to the change in the value of the
company shares which can occur sort of two primary ways. The
company is very profitable, and so its income earning potential
increases, and so the value of the stock is, over the longer
haul, sort of the discounted value of the potential net income
of the company. So if the company is successful and its income
goes up, the value of the stock should go up. And a higher tax
on capital gains at then the individual level would say the
return to me saving and putting my money in equities as opposed
to maybe putting my money in the bank or buying debt
instruments or some alternative investments makes that after-
tax return a little bit less, so I may choose to do other
things.
So our macroeconomic analysis tries to look at the more
general portfolio effect of what are the different saving
options that individuals have; what does this do to the
taxation of the overall kind of net return to saving.
Net saving is important in the macroeconomy, because that
is really the wherewithal to invest. Those are the funds to
invest. And we think that taxpayers do respond to the net
return to saving, and if the net return to saving is reduced
there will be a little bit less saving. That works through the
macroeconomy. It is hard to sort of trace one particular aspect
of that saving return, but that would be an important aspect.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair will now recognize Senator Baucus of Montana.
Senator Baucus. Thank you, Mr. Chairman. I would just like
to just address a bit this point that the top two rates, if
they were raised, hurt small business. It is true, as has been
mentioned already here today, that 50 percent of small business
income is subject to the top two rates, but it is not true that
50 percent of small businesses, employers, are subject to the
top two rates. In fact, only 3 percent are. And it is also,
isn't it true, Mr. Barthold, that again only 3 percent of
taxpayers with pass-through business income are subject to the
top two rates; is that correct?
Mr. Barthold. I believe that is a statistic that----
Senator Baucus. About 3 percent of taxpayers, not 50
percent, but 3 percent of taxpayers?
Mr. Barthold. There are a large number of businesses, pass-
through businesses, the owners of which, so the recipients of
the pass-through income, who are not in the top tax brackets.
Senator Baucus. And in addition, isn't it true that about
half of the 3 percent are taxpayers like bankers or celebrities
that earn large salaries and don't employ anybody but really
invest a small portion of their income in publicly traded pass-
throughs like, say, a REIT?
Mr. Barthold. Could you----
Senator Baucus. About half of that, half of the 3 percent
are people who don't really employ people, but they are
businesses that invest their income?
Mr. Barthold. Certainly a number of the recipients of what
you would consider active business income are the passive
investors in those businesses. That is certainly----
Senator Baucus. I was trying to make the main point that
only about 3 percent of pass-through income is affected by the
top two rates.
There is a lot of talk about corporate tax reform, which I
think it is good. In general the talk is we need to broaden the
base, lower the rates, et cetera, and there is a lot of talk
about lowering the top corporate rate to make it more
competitive with other countries in the world, and that is
good, but a lot of that would include eliminating, reducing
many of the tax expenditures. Some will point out that the
effective U.S. corporate rate is roughly comparable to the
effective tax rate of other companies in other countries.
I want to ask you if that is generally true, that our
effective tax rate is competitive with other countries?
Mr. Barthold. It is not always clear what some people mean
by the effective tax rate, what some----
Senator Baucus. After you deduct all the credits,
exclusions, and all that.
Mr. Barthold. Well, but there is also--it is after you
deduct and it is a little bit over what time period. So I have
seen the studies that you cite that say that, and so what you
say is true that there are studies that say that, but part of
what they are calculating is if you look at book reported
income and book reported taxes of U.S. public corporations,
they would not include in the taxes the taxes that are deferred
abroad on what they consider income----
Senator Baucus. Right. I don't want you to misunderstand. I
am for going down this road. I think we should lower our
corporate rates very significantly. However, I have also seen
other data that show that today the different industries in the
United States enjoy, there is a big difference among which
industries in the United States enjoy tax expenditures compared
with other industries. It is a big variation. For example, the
manufacturing industry and the real estate industry take much
better use of, because they are available, of the tax
expenditures than, say, the services industry, the retail
industry.
So I am really trying to point out that if there were very
significant changes, base broadening, and rate lowering of the
corporate tax income that there would be big dislocations. Some
industries would be hurt a lot compared to others, and some
would benefit compared to others, and I think it is only
important for us to know which those industries are and if we
go down this road then to know what the transition rules should
be to affect these different industries and then try to decide
which of these industries are really more important for jobs
and growth in America compared to others.
Now, we don't want--nobody likes to pick winners and losers
here, but it may be that some of these industries do provide
more jobs than some others, and I think it is important that we
note what they are. So it would help me, anyway, if Joint Tax
could come up with some kind of a study that shows which
industries benefit the most today compared to those that don't.
Mr. Barthold. Senator, I will follow up with you and your
staff. I think, as you know from work that we have done for you
in the past, I mean, we do identify certain features of the Tax
Code by the primary industry of the taxpayer, and we have done
some analysis for you in the past. We can do some more.
Senator Baucus. In part I am just trying to point out, this
is not an easy undertaking, corporate tax reform. It takes
time, and often when we go down this road it is more
complicated than we think, and there are unintended
consequences of major changes that we might otherwise make. It
is important that we think through what the intended
consequences are to try to avoid some of the unintended
consequences.
My time's expired.
Chairman Hensarling. The co-chair now recognizes Senator
Portman of Ohio.
Senator Portman. Thank you, Mr. Chairman, and I appreciate
Chairman Baucus' comments, both saying that he supports heading
down the road of lowering these rates, which are high relative
to our global competitors, but also the fact that this requires
hard work, and I am hoping this committee can roll up its
sleeves and with his guidance and Chairman Camp's guidance get
into some of these tough issues because he is right, this is
complicated.
I will tell you that as recently as yesterday a CEO of an
Ohio manufacturing company that does business overseas came to
me and said, I am at the point that I believe that a lower rate
is a better deal for me and my company than me taking advantage
of many of the current preferences that are in the code for
industrial companies, as the chairman said, and that would be
consistent with what Co-Chair Murray said earlier about
companies in her State that have come to her.
So this is a path, I agree with Chairman Baucus, worth us
pursuing, and with the extraordinary procedural opportunities
before this committee, I am hoping that this committee will use
this opportunity.
I have two sort of simple questions that I have about the
tax reforms that we have been discussing today. One is, you
know, what should the tax burden be on the economy? And I think
that is sort of the fundamental question that we need to answer
in this committee, and that goes right to your testimony, Mr.
Barthold, because in Figure 3 you talk about the 18 percent
historical average, percent of GDP of taxes, and then in Figure
5 you talk about what is going to happen over the coming
decades, and you see that percent of GDP in Figure 5 going up
significantly from 18 percent.
So, one, we need to figure out what is the right burden on
the economy, and that I think is properly reflected as the
percent of GDP, and then the second question is really the
fundamental one everyone has been asking today, what is the
best way to collect those taxes. I suppose some would say it is
a VAT tax or maybe some other consumption tax. I don't think
this committee has the time and ability to get into that level
of reform, but I do think that there has been a lot of work
done by Chairman Baucus, Chairman Camp, and others to look at
this to know that there is a way to lower rates and broaden the
base, and best is in the eye of the beholder I suppose.
Some have talked about distribution and fairness, some have
talked about efficiency, the cost of compliance, which is
really a separate issue from the impact on economic growth,
although it relates to it, and then finally, you know, what is
the most efficient way to allocate resources and what impact
will that have, as Mr. Barthold has talked about today, on
economic growth, and that is the sweet spot for this committee,
as I see it, you know, how do we do smart tax reform that, one,
does not provide additional new burdens on the economy that
make an already weak economy even weaker, and we can't do that.
President Obama has said that, President Clinton apparently
said that today somewhere, but the second one that is smart so
that it does generate more economic activity, and as a
consequence of that more efficient Tax Code that generates more
economic activity, generates more revenue.
So it is a consequence of the fact that it does have an
impact on economic growth. This feedback has to be measured,
and this is one of the frustrations that many of us have had
over the years, is that although there is plenty of economic
analysis out there showing this is true, and you have talked
about it this morning, Mr. Barthold, it needs to be reflected
somehow and measured so that good policy can result, and so in
the short time we have on this committee, I am really hoping
that we will be able to have those measurements and we will be
able to, with the Congressional Budget Office, be able to show
what the impact is of various tax reform proposals.
On the corporate rate, since we are talking about that now,
we don't collect as much revenue as we should, due in part to
the complex, inefficient, and loophole-ridden Tax Code we have
got, and therefore most economists agree that fundamental
corporate tax reform is going to produce more economic growth,
and therefore, again, as a consequence, more revenues.
Can you just quickly go through how you can give us that
information? Let me try to summarize what I heard you say
earlier, and you can correct me. One, you have a standard
model, and that model will provide us with some behavioral
changes. We talked earlier about allocating resources more
efficiently under a Tax Code that makes more sense, and
individual and firm responses I understand you can incorporate
within your standard model. Is that correct?
Mr. Barthold. Our conventional estimates always include
behavioral responses of many different types, sir, yes.
Senator Portman. So we will get some feedback through your
standard modeling, your conventional modeling. Second, you have
a macroeconomic effect you now do, you talked about House Rule
XI, and you provide that as a supplemental analysis to Chairman
Camp of Ways and Means Committee. That macroeconomic analysis
you do is something that is made public, correct?
Mr. Barthold. It is included in the House committee reports
on a reported bill, yes, sir.
Senator Portman. And can you extrapolate from the
macroeconomic effects that you are already studying--you have
the model to do it--as to what the revenue feedback is going to
be from, say, an increase in GDP?
Mr. Barthold. Senator, we have reported, as part of the
reports, changes in GDP, changes in employment, changes in
investment, and changes----
Senator Portman. Labor market?
Representative Barthold [continuing]. In revenues from the
resulting growth, again across a range of sensitivity
assumptions, to give sort of the breadth of possibilities.
Senator Portman. And labor market as well?
Mr. Barthold. Employment, yes, yes, sir.
Senator Portman. And so you have provided revenue estimates
from those changes----
Mr. Barthold. No, not revenue----
Senator Portman [continuing]. In GDP and labor market?
Mr. Barthold. No, I wouldn't want to call them revenue
estimates. You could, I guess, you know, think of taking the
next step and saying what is the feedback that was identified
and add that back in.
Senator Portman. So it could be done?
Mr. Barthold. Chairman Camp of Ways and Means held a
hearing yesterday, as Mr. Becerra had noted, and they discussed
some of those issues, and I can provide the members here later
with copies of that testimony. We gave some examples of some
macroeconomic----
Senator Portman. But Mr. Barthold, let me just say because
my time is short, I know this committee would be very
interested in knowing what that feedback is, and again you all
do great analysis. We need to be sure we have that analysis
that in the real world there is going to be changes that will
result in revenue changes, and we need to be able to consider
that, and we have to do it in a short period of time here,
which is several weeks.
I know my time has expired, but let me also just put on the
table, you also do a compliance analysis, and if you go from a
compliance, say, 88 percent compliance to 89 or 90 percent
compliance, that can have huge revenue changes, and then you do
a complexity analysis which can also impact that; is that
correct?
Mr. Barthold. We do a complexity analysis. We are trying to
study doing more comprehensive compliance analysis.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair now recognizes Congressman Clyburn of South
Carolina.
Representative Clyburn. Thank you very much, Mr. Chairman.
Mr. Chairman, it is my humble opinion that the overarching
mission of this committee is to find common ground. Now,
recently, the House Republicans released a jobs plan in which
they referred to the Tax Code, and I quote, has grown too
complicated and cumbersome and is fundamentally unfair. I could
not agree more with this assessment. I think it is unfair that
wages are often taxed at a higher rate than investments, I
think it is unfair that the wealthiest among us get the most
tax breaks, and I think it is unfair that a number of top
corporations who are making record profits pay more to their
CEOs than they do in taxes.
Now, as we pursue common ground, I want to know whether or
not you would agree that the number I have seen is that those
people making over a million dollars a year, that is like
three-tenths of 1 percent of our entire population.
Mr. Barthold. That figure sounds correct, Congressman.
Representative Clyburn. Okay. If that figure is correct,
and you say that it is, I think the question before us today,
one of the questions is, is it fair to value wealth more than
we value work? Because if we are willing to say that our Tax
Code reflects our value system, our Tax Code seems to currently
put a greater value on wealth and dividends than it does on
work and wages. Now, is it class warfare to seek some equity in
the Tax Code? That is my question. Do you think it is tax
warfare? I am not asking--I don't know whether it is or not,
but do you think?
Mr. Barthold. Well, Congressman, I don't offer an opinion
on that sort of a question. I try and my staff tries to provide
information to Members such as yourself so that you can make
appropriate judgments for the American people.
Representative Clyburn. Thank you. That is fair. Let me ask
something about--I am a great believer that there is something
that we ought to pursue in this committee called, we may call
it consumption tax, we may call it a value-added tax, I don't
know what we might want to call it, but isn't it true that
every major economy with which the United States competes
really funds their government through consumption taxes?
Mr. Barthold. All the Western European economies have
individual income taxes, payroll taxes, corporate income taxes,
some excise taxes such as we do, some estate or inheritance
taxes such as we do, and in addition they all have a value-
added tax.
Representative Clyburn. Well, then, if CRS's estimates are
correct that a value-added tax could be levied on a taxable
base of $8.8 trillion, if we exempt food, health care, housing,
higher education, and social services, that would leave a
taxable base of around $5.1 trillion. Do you agree that a VAT
is a viable option?
Mr. Barthold. Through time, Congressman, a number of
Members of Congress and, in fact, the Ways and Means Committee
in the late 1990s held a series of hearings. They asked us to
explore a number of issues related to value-added taxation. Our
staff has identified for Congress a number of policy issues for
them to think about. Conceptually, legislatively, yes, it
would, you know--it is a viable option to create a VAT. It
would take a lot of work, a lot of decisions by the Members,
and a lot of technical work to get the law up and functioning
for taxpayers.
Representative Clyburn. Thank you. In the 50 seconds I have
got left, let me be clear, when we talk about a 35 percent
corporate tax rate in this country and comparing that with the
rates in other countries, we really are not comparing apples to
apples, we are actually comparing our rate to countries that
have a value-added tax?
Mr. Barthold. As I noted, sir, most of the----
Representative Clyburn. In addition.
Mr. Barthold. Those countries do have a value-added tax in
addition to their corporate tax.
Representative Clyburn. Thank you very much. I will yield
back my 16 seconds to someone else.
Chairman Hensarling. We thank the gentleman for yielding.
The co-chair now recognizes Congressman Camp of Michigan.
Representative Camp. Thank you, Mr. Chairman, and thank
you, Mr. Barthold, for your testimony yesterday on economic
models for analyzing tax reform.
Figure 1 of the handout that you gave us shows the Federal
receipts by source, and I just want to underscore, it shows
more than 47 percent of those receipts to the Federal
Government come from individuals, and only just over 8 percent
come from corporations or what we call C corporations.
Mr. Barthold. That is correct, sir.
Representative Camp. Corporate income. And in Figure 4 in
your projection of Federal revenues to come, which I think goes
through 2021, it basically shows receipts from corporations
being flat going forward, but yet revenue from individuals is
shown to be increasing over time. Is that a fair statement of
the two charts? I see another line on individual----
Mr. Barthold. It is a little bit a matter of scale. You can
see the green line, the corporate tax, does increase.
Representative Camp. Slightly.
Mr. Barthold. As expensing. It is currently slightly
lowered by the fact that we have had bonus depreciation
followed by expensing.
Representative Camp. But the point is the individual is
going to go up at a faster rate, receipts to the Federal
Government, projection of Federal revenues to the government is
going up greater from individuals than from corporations?
Mr. Barthold. Yeah, I believe that is consistent with our
projection.
Representative Camp. And some of that is related to your
testimony about the number of entities that are organized as
pass-throughs, which pay taxes as individuals, so some of that
is business activity that you are seeing increase in that
chart, and isn't the United States somewhat unique that so much
business activity takes place in the form of pass-through
entities, S corporations, LLCs, partnerships, and isn't it fair
to say that other countries do not have as much business
activity taking place in a pass-through form?
Mr. Barthold. These sorts of entities are more prevalent in
the United States, but I am not expert enough in all the other
countries to make a blanket statement.
Representative Camp. All right. But corporate reform alone
would then leave out many employers, leave them out of the
equation because of the way that business activity is organized
in the United States. So as we compare around the world, we
need to understand that.
Moving to corporate rates, which are a major factor in
where businesses decide to invest and to locate, it has been
said by yourself and others we have this high statutory rate,
and with capital being increasingly mobile, it has become a
much more important factor. The high corporate rate makes
investment and job creation in the U.S. less likely as we
compare around the world, and if you look particularly at
Canada, who is certainly a key ally of ours but also a key
trading partner, one of our largest trading partners, but when
it comes to trade, they are one of our key competitors, you
look in 1990 they had a 41\1/2\ percent corporate rate, in 2010
it was 29, 2011 it is 16.5, in 2012 their corporate rate is
going to go to 15 percent.
Now, we have a high statutory rate, second highest in the
world, in the OECD countries, but we have a number of
expenditures, tax expenditures that then lower that rate, and
that affects different sectors, as Chairman Baucus pointed out,
in different parts of our economy in different ways, but aren't
these other nations getting to their lower rates by eliminating
these tax expenditures around the world?
Mr. Barthold. Some of the other tax reforms that I am
familiar with have made trade-offs of that sort. For example,
Germany has lowered their statutory rate, and they made the,
one of the trade-offs they made was to lower their statutory
rate while lengthening cost recovery, cost recovery periods.
That was a policy choice that they have made. So the reduction
in special provisions I think as reported by the OECD, that
they have noted that that has been a factor in a number of
worldwide tax reforms.
Representative Camp. And as Chairman Upton pointed out, the
number of large companies headquartered in the U.S. has
declined as other economies have emerged or changed their tax
policy, and we are finding that many major employers are
located in other countries rather than the U.S.
Mr. Barthold. It is certainly a fact that worldwide large
corporations, that fewer of the top 50, the top 100 are U.S.-
headquartered companies. So I am sure there is many factors
that have accounted for that, you know, the growth of other
countries, but that is certainly a fact, sir.
Representative Camp. The other factor we face as a nation
is the number of expiring business tax provisions, and can you
comment on how that has grown? I mean, I remember as they used
to call it the Rostenkowski 13, the 13 business tax
expenditures that were expiring. How many do we have now that
expire on a regular basis? Do you have that?
Mr. Barthold. Okay, well, we actually, as I know you are
familiar, Mr. Camp, we publish annually a list of expiring
Federal tax provisions. Just for the other members, and I will
get a copy of this for all the joint select committee, it is
our document JCX2-11. We have done this annually for more than
a decade, and it used to be a lot thinner publication. I think
we are up to expiring within the next 2 years 150 or more
different provisions of law.
You know, it certainly creates uncertainty both at the
individual level and at the business level of what is the law
going to be next year, what is the law going to be 2 years from
now, and obviously there are a lot of important policy choices
that go into--that the members have to face as well.
Representative Camp. Thank you, Mr. Barthold.
Chairman Hensarling. The co-chair now recognizes Senator
Kerry of Massachusetts.
Senator Kerry. Thank you very much, Mr. Chairman. I want to
focus later on some of the tax expenditures probably more on
the individual, but I think it is important to note that 80
percent of all of the money the Federal Government raises in
taxes, 80 percent of it goes out right back into tax
expenditures. Only 20 percent of what we raise actually goes
into things we spend, pay for at the Federal level. 95 percent
of those tax expenditures, 95 percent of that 80 percent goes
to 10 top expenditure items.
So I have got a lot of questions about the efficiency of
that, among other things, and the choices that are made, which
I think we have to look at, but I want to just say at the
outset I second powerfully what Senator Portman said about our
opportunity here, given the mandate and given the structure of
this committee and its presentation to the Congress to take
advantage of this to try to get that sweet spot which he talked
about, which is really simplifying this, putting in place the
most efficient choices that will drive our economy, that
therefore will raise revenues and help us deal both with the
deficit as well as jobs at the same time, and I think that is
the key thing here.
One of the things I would like to focus on very quickly is
just this question, simple question. We hear a lot about the
top tax rate with respect to corporations, and, yes, it is the
second highest statutory rate, but the effective rate is what
matters to people. Business people know how to judge the bottom
line, and they make judgments accordingly, and we fall in the
middle on that.
Can you just say very quickly whether the committee should
in its thinking here be looking at the top statutory rate or is
it the effective rate that is more important?
Mr. Barthold. Senator Kerry, as an economist, I think it is
the effective marginal tax rate on investments that is really a
key factor in terms of both growth and economic efficiency
allocation across sectors. Now, that said, the effective
marginal tax rate depends on the statutory rate. It also
depends upon cost recovery, so it depends on how this is
structured.
Senator Kerry. The key would really be the interplay with
whatever the expenditures and incentives and other pieces are,
that is the important piece?
Mr. Barthold. Yes.
Senator Kerry. But we have to always keep that in mind, not
just be frozen on the rate, but look at the overall complexity
of what we create underneath it.
Mr. Barthold. You want to look at the overall structure of
how you are taxing the income.
Senator Kerry. Now let me jump to that for a minute. I have
been concerned for a long time about this issue of whether or
not we inadvertently and in some cases maybe purposefully
incent investment in other countries, that we are creating jobs
in other countries because of the structure of the Tax Code,
and the Fiscal Reform Commission recommended that we move to a
territorial system and replace the current practice of taxing
active foreign source income when it is repatriated, and this
is obviously a current struggle. It is potentially a source of
income as well as a better Tax Code and maybe a more
competitive one.
Could you share with the committee whether we can strike
the right balance and have a system that is globally
competitive, but encourages job creation and investment in the
United States even as we were to create a territorial
structure? Is that doable?
Mr. Barthold. Well, strike the right balance is a difficult
assessment for me, Senator. That would--that is----
Senator Kerry. Well, can you envision a tax structure that
does do that?
Mr. Barthold. Let me, to be responsive to your question,
highlight a few issues, some of which we have already talked
about. Investment in the United States, things that are
important to investment in the United States can be the
effective marginal tax rate on the income earned by those
investments, so the statutory rate, cost recovery matter.
Research in the United States, many countries provide research
incentives. We provide research incentives, so sort of weighing
the relative, again the return to what is the return to income
earned from research undertaken in the United States as opposed
to research undertaken abroad would be a factor.
When we look at territorial systems, we have to think
about, well, what does it say about location of any--some
investments in the United States as opposed to abroad. One
feature of a territorial system which I will take generically
as a dividend exemption system so that income earned abroad
would only be taxed at whatever rate the foreign country has
brought. If we lower our domestic rate and all other countries
leave their rates the same, then under a territorial system the
U.S. is relatively more attractive than it was before.
Senator Kerry. But some of those countries--if I could just
interrupt you for a minute, isn't it a fact that none of our
major U.S. trading partners have a complete exemption with all
taxes?
Mr. Barthold. It is typically--there are some that are 95
percent exemption, let's call it substantially complete.
Senator Kerry. Is there a particular country you would
point to where you think the model has sort of struck that
balance?
Mr. Barthold. I think there is a number of interesting
features with policy decisions for the members to consider from
a number of different countries, so I would----
Senator Kerry. Could you perhaps share with us? I think it
would be great if you and your terrific staff could present us
with a sense of how to perhaps strike this balance, whether
there are some provisions. What we don't want to do, what we
are currently doing, everybody is talking about this massive
amount of American corporate revenue sitting abroad that
doesn't come home because it doesn't want to be taxed. We have
had one round of sort of a grace amnesty, so to speak. It
didn't work so well. And the question is whether or not we can
find a way to see that money more effectively, the capital
formation component put to better use, and still not wind up
encouraging a company to go abroad to create the jobs. I mean,
there is a balance there, it is difficult.
Mr. Barthold. It is definitely a policy balancing act, sir.
I am happy to try and work through options with the members of
the committee if that is the direction you want to go. It is
complex because----
Senator Kerry. It is complex, but you have to acknowledge
that what we are living with today is not effective or
efficient.
Mr. Barthold. What we have today is also complex and
certainly has some incentives that people find creating
inefficiencies.
Senator Kerry. Thank you.
Chairman Hensarling. The co-chair now recognizes Senator
Toomey of Pennsylvania.
Senator Toomey. Thanks, Mr. Chairman. I am glad to be
following Senator Kerry, and I want to underscore my agreement
with him and Senator Portman on how important it is that we
really make every effort to do something substantial on the tax
reform side. This is the most pro-growth thing we can do is to
fundamentally reform our Tax Code. It is a way to generate very
substantial revenue while lowering marginal tax rates. That
creates jobs, that helps reduce our deficit problem. It can
enhance fairness, which we desperately need to do.
So I appreciate your testimony. I am glad we are focusing
on this.
I wanted to follow up a little bit on the vein that Senator
Kerry was just discussing. You know, tax expenditures
justifiably get a bad name because so many of them are, in my
view, egregious flaws in the code, especially those that are
narrowly targeted and have a distorting impact. But not all tax
expenditures, not everything that we described as tax
expenditures meets that description.
The first one on the list here on Table 5 is the deferral
of active income, right?
Mr. Barthold. Correct.
Senator Toomey. This reflects, of course, the fact that we
choose not to tax at the time that it is earned income that is
earned by overseas subsidiaries. If you looked at this as
number one on the list and the biggest number by far on the
list, you could superficially at a quick glance suggest, well,
maybe this is a good source of revenue. But, in fact, I would
argue that our current system puts us at a competitive
disadvantage because despite whatever number there is on this
form, we tax foreign income when it is brought home to a much
larger degree than most of our competitors; isn't that true?
Mr. Barthold. That is correct, sir.
Senator Toomey. So if we were to actually tax it at the
time that it is earned, we would be taking the competitive
disadvantage we have now and making it worse, right?
Mr. Barthold. You would be creating a higher tax rate on
the total income of the U.S. corporation.
Senator Toomey. Well, exactly, and we would be increasing
the disparity, the difference between that tax rate that we
charge on overseas income and that which our competitors
charge?
Mr. Barthold. To the extent that the competitor is in lower
tax locations.
Senator Toomey. Which most are?
Mr. Barthold. Yes, sir.
Senator Toomey. So one of the things that--well, I just
think we should be very conscious of the fact that reducing tax
expenditures, it matters very much which ones and how we were
to go about doing it. I am in favor of moving in the direction
of a territorial system, and I think of a lot of Pennsylvania
companies, whether it is U.S. Steel or Heinz or Air Products
and Chemicals, companies that have substantial operations
overseas, they exist to serve local markets overseas, and what
I would hate to see us do is a move in the direction that
creates an even greater incentive than there already is to have
corporate headquarters somewhere else because that costs us
jobs, it costs us a lot of good jobs. So my preference would be
that we move in the direction of a more territorial system.
I would like to get back to another line of questioning
that Senator Portman raised, and that is how your methodology
quantifies the feedback of variations in policy. So as I
understood you, you acknowledge that personal incentives affect
behavior, and so you used an example of a reduction in the
payroll tax might create an incentive for someone to enter the
workforce because their after-tax earnings would be that much
higher. Of course that is true of any reduction in marginal
income tax rates, payroll or ordinary income.
Mr. Barthold. That is correct, sir.
Senator Toomey. And so my question is, when you analyze
something like that, do you actually attempt to quantify the
number of people who would enter the workforce in response to
that greater incentive to work?
Mr. Barthold. When we undertake our macroeconomic analysis,
we report employment effects. Now, the employment effects are
usually in terms of hours of work, which you can then loosely
translate into, you know, numbers of individuals, but hours can
also be overtime by currently employed individuals.
Senator Toomey. Okay. So you acknowledge that. Do you also,
then, in your calculation attribute a new source of revenue
from these new workers, the fact that they are paying payroll
tax, at a somewhat lower rate perhaps, but they are paying tax
and they didn't before?
Mr. Barthold. This goes to a point we have broached a
couple of times. Our macroeconomic analysis that we have been
undertaking for about a decade is geared at providing
supplemental information to the Members of Congress relating to
tax policy changes that they are considering, and so what we
routinely report are changes in gross domestic product, changes
in employment, changes in investment, and we also report what
this would, could mean in terms of feedback effects on revenues
because general, a general premise is if national income grows,
the tax base will grow, and so there will be more income
subject to tax.
So in very loose terms, the answer to your question is yes.
This is not reported for budget scorekeeping purposes or for
House or Senate rule scorekeeping purposes, points of order,
and the like.
Senator Toomey. Okay. I see I am running out of time. I
just want to underscore, I think this is a problem with the
scorekeeping methodology. I mean, your analysis, you
acknowledge that a reduction in a marginal income tax rate does
not have a linear impact in reducing revenue because of the
positive feedback effect that offsets at least some of that,
but yet we don't capture that, we don't quantify that, as I
understand you to describe your process of scoring a given
change in tax policy.
Mr. Barthold. The macroeconomic analysis we do is not part
of scoring for Congressional scorekeeping and rule purposes.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chair now recognizes
Congressman Van Hollen of Maryland.
Representative Van Hollen. Thank you, Mr. Chairman. Thank
you, Mr. Barthold, for your testimony. I just want to briefly
turn to the question of pass-through entities because a lot of
people have described these pass-through entities as if they
were all small businesses, and I would just like to read from
your testimony before the Senate Finance Committee July 14,
2010, where you say ``the staff of the Joint Committee on
Taxation estimates that in 2011 just under 750,000 taxpayers
with net positive business income, 3 percent of all taxpayers
with net positive business income, would have marginal rates
that fell above $250,000;'' is that correct?
Mr. Barthold. If you are reading from something I said.
Representative Van Hollen. I just want to make sure that
fact remains true. And you have this very important caveat
right here in your testimony then. ``These figures for net
positive business income do not imply that all the income is
from entities that might be considered `small,' in quotations.
For example, in 2005, 12,862 S corporations and 6,658
partnerships had receipts of more than $50 million.''
Now, my point here is not--isn't that these aren't good
businesses. We should get over this conversation that all of
these are small mom and pop entities because they are just not.
If you had a Washington law firm with 500 partners, and those
partners each took a draw of a million dollars, under this
analysis they would be included as 500 distinct business
entities, correct?
Mr. Barthold. They would be----
Representative Van Hollen. They would be included in your
figure of 750,000?
Mr. Barthold. How did you structure your law firm?
Representative Van Hollen. As a partnership.
Mr. Barthold. The partnership, we did a number of counts,
and actually just to refer you to some more recent work that we
have done, appendix tables in the prepared testimony that you
have before you today, 10, 11, and 12, show you some ways that
you can distribute partnerships and S corporations by size,
either by the----
Representative Van Hollen. I was just going to ask you
that, Mr. Barthold.
Mr. Barthold. Well, that is why I----
Representative Van Hollen. Just so members realize as we
have this conversation, on page 54, if you look at your charts,
you will see that the top 2.2 percent of S corporations with
gross receipts of more than $10 million received 61.7 percent
of all the gross receipts of S corporations. Very small group.
And if you look at the top 0.8 percent of partnerships with
gross receipts of more than $10 million, they received 83.4
percent of all gross receipts, all gross receipts. 83.4 came
from the top 0.8 percent of the partnerships. So we should
remember when we are talking about this issue that we are
talking about in many cases individual partners at big law
firms and big lobbyist firms and considering each one of them
some kind of small business generator. I just don't think--I
think people need to take that into account.
Now, I want to ask you about the modeling.
Mr. Barthold. Mr. Van Hollen, the only thing I wanted----
Representative Van Hollen. Mr. Barthold, let me just--I am
sorry, I have got 2 minutes. I want to ask you about the
modeling here because Dr. Elmendorf testified before our
committee, and he said that if we are to keep in place the tax
cuts that were implemented in 2001, 2003 rather than allow them
to lapse in our current law, we would have much larger deficits
in the outyears, cumulatively 4.5 percent deficits.
Now, as I understand your testimony, higher deficits,
especially during a period of time of full employment, which we
all hope to get back to, that those higher deficits can have a
drag on the economy; is that correct?
Mr. Barthold. The higher deficit requires higher government
financing, and so potentially long run crowding out of private
investment.
Representative Van Hollen. And that crowding out is
especially true when you have full employment, correct?
Mr. Barthold. Well, it is not good anytime.
Representative Van Hollen. That is right. So now to get
back to your scoring, though, when tax cuts are scored, whether
they were 2001, 2003, because you do not take into account some
of those macroeconomic effects, you also don't take into
account the fact that those tax cuts could contribute to larger
deficits in the outyears and slow down the economy in terms of
GDP, right?
Mr. Barthold. Our macroeconomic analysis, when we provide
it to the Ways and Means Committee, as you know, sir, accounts
for what is happening with the deficit, how the package is
funded, and so it does reflect potential crowding out, if that
would occur.
Representative Van Hollen. Right. But I guess it does not
take the next step, which would be analogous to some of the
points that are being raised, which is that that crowding out
leads to lower GDP, which then leads to lower----
Mr. Barthold. Our macroeconomic analysis will show that.
Representative Van Hollen. Right, but will it show the
feedback, then, the feedback loop in terms of growth, in terms
of your scoring? I am talking about your scoring.
Mr. Barthold. On scoring, again, to emphasize the point
just made to Senator Toomey, we use our conventional, as does
the Congressional Budget Office, we use our conventional
models, which are scored against the Congressional Budget
Office macroeconomic baseline where we are not assuming that
GNP aggregate investment, aggregate employment, inflation rate,
none of those factors.
Representative Van Hollen. Thanks. I hear you. So you don't
take that into account, the low growth rate?
Mr. Barthold. Or conventional.
Representative Van Hollen. On CBO, when they score
investments, when CBO looks at the investment side, investment
infrastructure and education, they don't take into account
either the positive economic growth benefits of that in terms
of receipts, do they?
Mr. Barthold. In their conventional estimates, they do not
account for positive effects or the potential crowding out,
depending on----
Representative Van Hollen. Right. It is analogous on the
CBO side in terms of investment to what you do on the tax side,
correct?
Mr. Barthold. Correct, sir.
Representative Van Hollen. Thank you. Thank you, Mr.
Chairman.
Chairman Hensarling. That completes the first round of
questioning for the first panel. We will go to the second round
of questioning. The co-chair will yield to himself.
Dr. Barthold, in my opening statement I quoted from a
letter from former CBO Director Dr. Peter Orszag that I believe
under a current policy baseline, if solved on the tax side,
that the tax rate for the lowest tax bracket would go from 10
to 25, the 25 to 63, the 35 percent bracket to 88, the top
corporate income tax rate would also increase from 35 to 88
percent. Has the Joint Committee on Taxation performed any
analysis that is similar to Dr. Orszag's analysis or would you
have an opinion on his opinion?
Mr. Barthold. I can very clearly say no because I am
actually not even sure what he did and what you quoted, so I
know we haven't done anything quite analogous to that. I would
be happy to have my staff colleagues--I mean, we can take a
look if you would like.
Chairman Hensarling. Perhaps at a later time. I would
appreciate that.
Let me go to another subject matter, and that is who
actually ends up paying our corporate tax rate in America? I
suppose as a practical matter many view corporations as tax
collectors and not taxpayers, so clearly there is some impact
on consumers perhaps in the form of higher prices, depending
upon the elasticity of demand for the product or service,
workers in lower wages, and then certainly to shareholders in
the form of potentially lower stock prices.
Now, the last data that has come across my desk is a
Congressional Budget Office analysis of about 4 or 5 years ago
entitled International Burdens of the Corporate Income Tax that
seemed to indicate in their analysis that 70 percent of the
burden of the corporate income tax falls on labor in the form
of lower wages. I don't necessarily believe you would be
familiar with that particular study, but has JCT undertaken a
similar study? Do you have opinions? Have you reviewed the
academic literature on the subject? Do you have an opinion?
Mr. Barthold. I mean, you are discussing really one of the
big long-time important questions in economics, and that is
what is the incidence of any tax or in particular the incidence
of the corporate tax. In some of the economic literature there
has been some ebb and flow in terms of its view. It is often--
it had long been thought that perhaps substantially all the
burden of the corporate tax fell not just on corporate
shareholders because at its sort of simplest terms the
corporate income tax is a tax on the income earned by the
equity owners of the firm, but more generally that it would
have an effect on the overall, on all owners of capital, but
some of the more recent empirical work and theoretical work,
some of which you just cited, has looked at the increased
cross-border mobility of capital and even fixed capital,
relocation of factories from one country to another country to
suggest that there is a greater responsiveness to after-tax
returns of capital than perhaps after-tax returns of labor, and
by that they have attempted to measure and come up with results
such as you have noted that perhaps a substantial amount of the
burden of the corporate tax actually falls on labor, by, if we
make capital flee the U.S., there is less capital in the U.S.,
it is capital that is key to generating labor productivity, and
it is labor productivity that helps determine wages.
Chairman Hensarling. Dr. Barthold, my time has expired. So
at this time let me yield to my co-chair, Senator Murray of
Washington.
Co-Chair Murray. Thank you very much. We hear that
corporate tax reform or any tax reform must be revenue neutral,
and as our Nation faces $14 trillion in debt, I think we need
to be focused on job creation and long-term debt reduction.
Your predecessor on JCT, Dr. Kleinbard, testified to the Senate
Finance Committee last week, and he said, quote, we have to
abandon our nostalgia for the Tax Reform Act of 1986. That tax
reform effort was revenue neutral because it could afford to
be, and that was also of course preceded and followed by major
tax increases.
We hear today a lot of stories about profitable
corporations, even major corporations that are using tax
expenditures in order to reduce and in some cases eliminate
their tax bill completely. This is infuriating for average
taxpayers who are dutifully paying their taxes and don't
benefit as much from these big loopholes, and I am not talking
about failing companies here who might need a break. I am
talking about large, profitable companies.
During this economic downturn Congress has provided
generous incentives to encourage business activity; namely,
through the Tax Code, and even before the downturn there were
corporations that were very profitable but paid no share of
Federal corporate income taxes.
So I want to ask you if you have an assessment of what it
costs our Treasury in terms of lost revenue from profitable
corporations that don't pay corporate income taxes.
Mr. Barthold. Basically our tax expenditure analysis
provides most of the assessment that you are asking about, but
it does it on a provision-by-provision basis. You can't--
because of interactions between them, you can't really add them
up and say this is the aggregate amount lost, but the way we
estimate, measure the tax expenditure is we look at what the
business' tax liability would be with and without the provision
in question, and so if it is a corporation that is in a loss
position, there would be no tax liability regardless of the
provision, so it is only looking at where there are otherwise,
it would be positive taxable income. I hope that is responsive
to your question.
Co-Chair Murray. It is a response. In my last 30 seconds I
just wanted to ask you about this repatriation issue because we
are hearing a lot about that. Some people say it will raise
revenue, some people claim it loses revenue. What is your take?
Mr. Barthold. We have undertaken some estimates of a
particular proposal or a couple of different proposals, and our
assessment is that if we repeated the Section 965 repatriation
holiday that was enacted in 2004, that under the current
baseline that that would lose revenue. There would be short-run
revenue increases but long-term revenue losses, generally from
longer term erosion in the corporate tax base.
Co-Chair Murray. Okay, thank you very much. Appreciate it.
Chairman Hensarling. The co-chair recognizes Senator Kyl of
Arizona.
Senator Kyl. Thank you, Mr. Chairman. Let me just ask one
follow-up question to the other questions I was going to ask in
the interest of time here. You have heard a lot of frustration
up here about the fact that while you can provide estimates to
us of some of the behavioral impacts, that they are not
reflected in the official estimates that you provide to us.
My question is how we could change that or how we could
better take advantage of the behavioral estimates that you do
provide. Would it require a statutory change or simply some
kind of change within Joint Tax Committee to provide those
behavioral effects, those feedbacks that you talked about as
part of your official scoring estimates?
Mr. Barthold. Well, just as a reminder, I mean, we do
provide information to the Members now, and----
Senator Kyl. Understood, but you made it clear that they
are not part of the official scoring.
Mr. Barthold. So, I mean the Members--the budget rules are.
I am not a budget rule expert, and I am not sure if you wanted
to change budget rules or have information reported in a
different fashion for us. I mean, we try to provide information
to Members in a form that is useful to them. So I am really not
sure how to answer your question about what to do about budget
rules or decisions that the Select Committee might want to
tackle.
Senator Kyl. Appreciate that. What would it take for us,
for you to include those estimates that you talked about, the
feedback effects and so on, in your official revenue tables, in
your official scores of tax changes?
Mr. Barthold. Well, as I said, for the Ways and Means
Committee now on a reported bill, we do provide the
macroeconomic analysis with sensitivity. So it is available for
Members of Congress to read the conventional estimate and the
macroeconomic analysis and then make their decisions based upon
that. So as a mechanical, just as a mechanical feature, there
is really nothing. I will----
Senator Kyl. Well, but there----
Representative Barthold [continuing]. Note there are
certain time constraints.
Senator Kyl. If I could just interrupt, I understand--you
understand our problem----
Mr. Barthold. Right.
Senator Kyl [continuing]. Which is that people are going to
look at the score, how much of a 10-year savings have we
achieved, did we meet our goal of 1.5, and if we can't score--
you and CBO are the arbiters here in some sense of the success
of our policies in terms of everybody being willing to agree
that it had that effect. The estimates that you give us are
very useful to us, but it is not going to count in the score if
there isn't a way to include it. So I am just asking, is it a
matter of policy or practice? Is it something that CBO has as a
policy that we would need to change? Is there a statutory
change that we would have to make to include this? And if you
don't know and would need to think about it, then could we
visit with you some more so that we could help figure it out?
Mr. Barthold. Certainly help. I might suggest that Mr. Van
Hollen, who is on the House Budget Committee, might--would
probably know more about this than----
Senator Kyl. We will put the burden on him to answer the
question then.
Mr. Barthold. I am not trying to shrug the responsibility.
Senator Kyl. You don't have to know the answer, but we
need----
Mr. Barthold. I am not a budget law expert. I mean, I think
the question that you are posing, Senator, is one about House
and Senate rules and about the budget law. The macroeconomic
analysis that we provide currently is under a requirement under
House rules. The complexity analysis that we provide with any
bill was a result of legislative action, statutory action that
Senator Portman was one of the primary movers on back in the
late 1990s. So some of the things that we report to Members are
a result of statute, some are as a result of rule.
Senator Kyl. We can answer that question. I appreciate your
response. Thank you very much.
Thanks, Mr. Chairman.
Chairman Hensarling. The co-chair now recognizes
Congressman Becerra of California.
Representative Becerra. Mr. Barthold, I think we have
entered this interesting realm of asking you to predict the
weather. We know this is a large economy, and when it is
intertwined with the economies of the rest of the world it
becomes very difficult for you to come up with estimates of
what a tweak here will do or a tweak there will do, but you do
have conventions that you use to help you make decisions, and
we have to rely on those. We have to rely on the Congressional
Budget Office working with you to help us come up with these as
good as you can estimates of what might happen. You have
developed these over the years, have you not?
Mr. Barthold. Yes, sir, and we try to, you know, update the
modeling, the data, the thinking on a continuous basis.
Representative Becerra. Are you using what you believe are
the best models that we have to date?
Mr. Barthold. We think we are doing--I mean, we think we
have very good models. They are more sophisticated than they
were 10 years ago, 15 years ago. We have upgraded in a number
of areas.
Representative Becerra. You could use some of the less
conventional, some of the unconventional models that are out
there that haven't been as road tested as the models you use.
They may show in the future to be more accurate than yours, but
they also may show that they will have been less accurate than
the ones that you use?
Mr. Barthold. We look at work by outsiders all the time to
help inform ourselves.
Representative Becerra. Let me ask you this. In 30 days can
you come up with a better model than what you are using now to
tell us what the impact will be of anything we do on tax policy
or budgetary policy?
Mr. Barthold. Well, I am sorry to say, Mr. Becerra, but in
a 30-day time period you are probably stuck with us as we are.
Representative Becerra. Okay.
Mr. Barthold. I mean, and as you had noted, yesterday I
tried to outline some of the breadth and I believe
sophistication of our modeling.
Representative Becerra. And what you do will inform us as
we try to move forward. We may look at what you do and say we
agree completely, we may disagree, but at some point we have to
make a decision what we will use as the model. And what you are
saying to us is that you have given us the best model that you
can, at least within the next 30 days.
Let me ask you another question. Using that model, we have
heard discussion about corporate tax reform. There is talk
about eliminating those tax breaks that certain companies get
over other companies and then using the money to plow back into
the system to help reduce the rates for all the companies. That
way you broaden the base, and you make it a fair Tax Code for
all companies. If you were to eliminate all the tax breaks that
right now corporations take advantage of and put the money into
lower rates, using the model we have, does that help us, the 12
of us, reduce the deficits that we currently see?
Mr. Barthold. Lowering--if you did something to----
Representative Becerra. You plow back all the money that
you get from removing all the tax breaks into just lowering
rates, using the current model that you use, do we reduce the
deficits?
Mr. Barthold. Let me make an important point, and I hope I
don't--I guess I will probably exhaust your time, for which I
apologize.
As we have noted a couple of times, one of the large
corporate overall business tax expenditures is accelerated
depreciation. As I have noted, cost recovery is important in
terms of determining the effective marginal rate or the user
cost of capital. So it is not just looking at the statutory
rate. It is also what is the statutory rate and over--and how
do you get to recover costs for invested capital that determine
the profitability of investments and so the decision to invest.
So if you scale back accelerated cost recovery and use the
benefits of that to reduce the corporate rate, you are, on one
hand, saying you are making investment less attractive by
scaling back the capital cost recovery and, on the other hand,
saying you are making it more attractive by reducing the
marginal rate on the income when it is ultimately taxed. And
that in itself is not automatically pro growth, because you are
going in one direction with cost recovery and the other
direction with rate.
We have--can I have a--I am sorry, sir.
Chairman Hensarling. The witness can finish, please.
Mr. Barthold. We have done some preliminary work. A couple
of my colleagues presented some of this work just this last
spring at a symposium at a national tax association. And it
suggested within our corporate model that getting rid of
accelerated depreciation and plowing just that money back into
corporate tax rate is probably not going to be pro growth. It
is going to be much more neutral.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair wishes to announce to members that a vote for
House Members is expected at 1:30. Doing a rough calculation
and in consultation with my co-chairman, I would like to ask
unanimous consent that for the second panel that the first
round of questioning be limited to 5 minutes and the second
round of questioning be limited to 1 minute. In a rough
calculation, it means that all members would be able to ask
their questions.
Without objection, so ordered.
Members are also encouraged, if they so choose, to
consolidate questions they may have on both panels at this time
in the interest of time.
The chair now recognizes Congressman Upton of Michigan.
Representative Upton. Thank you, Mr. Chairman.
I just want to say I am one of those folks not only on this
panel but I think in the entire Congress that wants to simplify
the tax code, that knows that we need real tax reform, we want
to simplify the code, we want to broaden the base, we want more
people working, we want to add to economic growth. It would be
great if we could do it in this panel. I don't know if we can.
And if we can't, we will do a long-term plan to work with
Chairman Camp to make sure that that happens.
In Michigan, we have had some really tough times. You may
know that our unemployment is over 11 percent, and we have had
32 consecutive months at double-digit unemployment.
My district is right on the State line. We have a new
Governor. We have a new legislature. And they began to pick up
the pieces and passed some tax reform and got rid of some
business taxes. The person that was most upset was the Governor
of Indiana, because he had billboards in my district that said
``Michigan businesses, come on down'', and they did.
So as I look at what we have to do on tax reform, we know
that we have to compete with other nations around the world.
And to comment on one of the things. I am going to yield back
to you on some of my time. In the last Congress we passed a
currency manipulation bill aimed at China, H.R. 2378. And I
know I saw a headline today in some of the news that some of
the business groups are very concerned that if this legislation
came about again it would perhaps lead to retaliation by
Chinese companies against American firms.
I am wondering, if you all did a study as to what the
impacts of the Chinese currency manipulation really mean as it
relates to U.S. businesses that export or involve trading
partners in China. Have you all done anything on that?
Mr. Barthold. We work with the Congressional Budget Office
on what we call indirect tax effects of nontax legislation, but
I do not think that we did any work on the currency bill, sir.
Representative Upton. Would it be possible to ask you maybe
or do I have to go through Chairman Camp to get a request in on
that?
Mr. Barthold. No, we work for all the Members of Congress.
I am not that familiar with the legislation, so I will ask a
couple of my colleagues to look into it.
Representative Upton. Okay. I yield back.
Chairman Hensarling. The co-chair recognizes Senator Baucus
of Montana.
Senator Baucus. Thank you, Mr. Chairman.
Mr. Barthold, it has been thrown around here by several
people that there is about $1 trillion worth of tax
expenditures annually. Could you tell me, I assume that is just
a total, that it has not been--those provisions are not all
scored. Because if you were to score all those, you reach a
number maybe the same as or slightly different than just adding
them all up.
Mr. Barthold. The tax expenditure estimates are
nonbehavioral estimates, and they are taken--and they are
really just a measure of, if you are claiming this particular
tax benefit, given your current tax position, what is the value
of that benefit to you. It is not to say that if you were to
eliminate that benefit that everything else that that taxpayer
is doing would remain the same and you would be able to recoup
all of that money.
For example, I mean, in the business tax expenditures, just
to pick on one, the low-income housing tax credit, now, some
businesses that invest in these low-income housing partnerships
through which they earn the tax credits they generally view
that as a profitable investment. So if we were to repeal that--
and part of the way it is profitable is because it is tax
sheltered. Well, we asked the question, where does that money
go? What else happens?
Senator Baucus. I know. But that does raise revenue. The
repeal would raise revenue.
Mr. Barthold. The repeal would raise revenue, but it would
not raise revenue equal to the value that----
Senator Baucus. That is my question. That is the point I am
making. So if you total up all the deductions, the credits--
let's just take the deductions, itemized deductions, the
standard deductions, what would that be, roughly?
Mr. Barthold. We will have to get it for you, Senator.
Senator Baucus. Okay. Therefore, you can't answer the next
question, which is, if we want revenue neutrality, how much
would that lower rates, individual rates?
Mr. Barthold. I will have to--we will have to undertake
that analysis. Some members have asked. We are actually in the
process of trying to do something close to that.
Senator Baucus. The first cut is just the itemizers or the
standard deduction.
Mr. Barthold. Uh-huh.
Senator Baucus. The next level let's add, okay, exclusions
and above-the-line measures. Let's say we repeal those.
Mr. Barthold. Okay.
Senator Baucus. And then, to some degree, you get the
business income. We have got interest, expense, and was it 199
deferral and so forth. It is difficult, because some of this
applies to C-corps only and some doesn't.
So if you could just--the major categories show what the
revenue effect is. If Category 1, if they were all repealed in
Category 1, those are the standard deduction and itemized
deductions, that is one. Next is exclusions and so forth,
employee health care exclusion, for example. And then the other
would be other business income. And what the corresponding rate
reduction would be for----
Mr. Barthold. I will follow up with your staff on that for
you, sir.
Senator Baucus. Thank you.
Chairman Hensarling. The co-chair now recognizes the
Senator from Ohio, Mr. Portman.
Senator Portman. Thank you, Mr. Chair.
I think all of us are going to be really interested in that
information because that goes to all the issues we talked about
earlier about a more efficient Tax Code and how low can the
rate get, how much can you broaden the base.
I want to go through some specific corporate tax reform
ideas that have come up today and maybe some concerns that have
been raised and get your quick response, if I could. Because I
think we have got a good hearing today on the big picture, but
we left some things unanswered.
First is the impact on so-called pass-throughs. And I know
there has been a discussion about pass-throughs. It is more
than 80 percent of U.S. businesses. I believe that is the
latest number. It is sole proprietors and partnerships, sub-Ss
and LLCs in my State.
If you lowered the corporate rate and did so by getting rid
of some of the existing preferences and those preferences also
applied to the pass-throughs, it would seem unfair. They would
still have a relatively high rate and yet they would not get
the advantage of any of the changes and preferences. How would
you address that apparent inequity to be sure that our smaller
businesses who are pass-throughs and organized not as C-corps
do not find themselves disadvantaged by corporate reform?
Mr. Barthold. Well, Senator Portman, I noted earlier that I
thought that it would be technically extremely, extremely
difficult to wall off the elimination of preference items to
one business entity and not--that it would create a lot of
behavioral questions that you might or might not want to
address about are you forcing people to change their choice of
their preferred business entity, would you try to prohibit
people from switching entity form.
As to other options, I imagine you could think of things
that you might do that could provide a new preference of some
sort for the pass-through--for pass-through entities. We could
explore options with you on that one.
But one of the reasons I emphasize that business income is
taxed as a C-corporation and business income is also taxed on
the individual return was to make exactly that point, that you
want to think of business income when you look at some of the
reforms that you might have in mind and not----
Senator Portman. Mr. Barthold, my time is short, and I
apologize.
One way to do it, it seems to me, is to look at the C-corp
separately so you wouldn't apply it to individual rates. You
just apply it to the----
Mr. Barthold. But it is very difficult to wall that off. I
mean, C-corporations participate in partnerships, for example,
on research ventures with individuals and other non-C-
corporations.
Senator Portman. Well, this is something, if you can get
back to us on that, it would be very helpful. Because I know
there are a number of us who have concerns about that and have
some ideas about it. But we need to follow up on that.
Second is the expiring provisions. You talked about 150
over the next couple of years. Certainly the issue of certainty
and predictability that everyone has raised here today should
enter into that. In other words, some of these expiring
provisions aren't nearly as effective as they should be because
companies can't rely on them. And what is that impact in terms
of economic growth and again in terms of extrapolating to
revenue.
On depreciated and expensing, you talked about that in
response to Mr. Becerra. I think we would love to see something
on the complexity of current depreciation rules and some of the
inefficiencies in the current system. So it is not just
accelerated depreciation we are talking about, it is the whole
system. Although you indicate it reduces cost of capital for
investment and capital formation. It has also got a lot of
complexity involved with it, which makes it less efficient than
it could be.
And then, finally, the territorial side, which we don't
have time to go into, evidently, since the chair is rightly
stopping me, but we would love more information on, as Senator
Kerry said, other ideas there.
Chairman Hensarling. The gentleman from South Carolina,
Congressman Clyburn, is recognized.
Representative Clyburn. Thank you, Mr. Chairman.
Mr. Chairman, in 1986, a Republican President and a
Democratic Congress found common ground and came to a
bipartisan agreement that is similar to the one we are trying
to get to today. In that agreement, capital gains rates as well
as income tax rates were the same--I think it was 28 percent--
and it stayed the same for about 4 years. Can you tell us
whether or not there was any significant decrease in
investments in the United States during that 4-year period?
Mr. Barthold. I don't know the answer to that question off
the top of my head. Between 1986 and 1990, the economy
generally grew at a reasonable pace.
Representative Clyburn. That same 4-year period there was
growth.
Now, since 1990, we have had subsequent reductions in the
capital gains tax rate. Have we seen any significant increase
that can be attributed to that--to that reduction?
Mr. Barthold. Well, attributing broad macroeconomic
outcomes to specific provisions is always very difficult. I
mean, of course, in 1991 we did have an economic downturn. We
then had strong, strong growth. We had a downturn again at the
turn of the century.
Representative Clyburn. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chairman recognizes Congressman
Camp of Michigan.
Representative Camp. Thank you, Mr. Chairman.
The administration has expressed some interest in reducing
the corporate rate, although we have not seen any detailed
proposals or form of proposals. But most analysis is suggesting
a corporate rate somewhere in the mid 20s. And the
administration has suggested raising the top rate on
individuals and pass-through entities to 40 percent or more.
Figure 7 of your handout shows how many more pass-through
returns than C-corp returns, and the number of pass-through
returns are increasing while C-corps are declining. And figure
8 shows the aggregate net income as a percentage of GDP of
pass-through entities as being a significant player in the
economy. So, regardless of size, I guess my point is there is a
lot of economic activity and a lot of jobs in the U.S. that are
connected to pass-throughs.
My question for you is, what would be the economic
consequences of taxing individuals in pass-throughs at a rate
that is about 15 percentage points higher than would be a rate
on C-corps if in fact we did tax return and how might that
distort decisions on how businesses were organized, if you have
an opinion on that.
Mr. Barthold. Well, I think the economics are largely as
you laid out, Mr. Camp. I mean, one additional factor to add in
is, remember, C-corporation income tax is a second level of
tax. Shareholders receive distributions, dividends, or capital
gains. So there is corporate tax and then there is a tax at the
individual level.
So the sum--if we were to reduce the corporate tax, that
would make a C-corporation relatively more attractive than
other business entities. We might see some change, might see
some diminished growth in one form at the expense of the other.
Representative Camp. All right. Thank you.
The other question I have is, again, since 1940, there has
been a budget surplus about 11 years in the U.S., looking at
your Figure 3 chart on Federal receipts as a percentage of GDP.
In only one of those years, 2000, was it over 20 percent, and
that was largely the result of capital gains. Now, outlays or
spending in that same period since 1940 never exceeded 19.4
percent of GDP of our economy, is that correct?
Mr. Barthold. That sounds right, but I did not reproduce
the figure, so I assume Doug Elmendorf presented that to the
Joint Select Committee.
Representative Camp. Doesn't that suggest then if we have
been able to have a budget surplus in 11 years since 1940 yet
we never had spending above 19.4 percent in those years and
revenues were only above, as a percentage of our economy, only
once in the year 2000 above that amount, doesn't that suggest
that the answer has been--to controlling deficits has been to
control spending, rather than to increase revenue to
unsustainable levels?
Mr. Barthold. Well, I am here just to be the tax weenie,
Mr. Camp. I really don't have a good answer for that.
Representative Camp. Thank you.
Chairman Hensarling. The chair recognizes Senator Kerry of
Massachusetts.
Senator Kerry. Thank you very much.
Dr. Barthold, have you, given the nonpartisan status of the
Joint Tax Committee, ever compiled a list of those, quote,
incentives that are not having either the intended economic
impact or that don't--you know, aren't worth the level of
foregone or forgiven revenue? Do you have a list of suggestions
you might make to the committee about----
Mr. Barthold. Not in recent memory have we really published
a hit list of the type that you are suggesting. I mean, we
have--as background work for both the Ways and Means Committee
and the Finance Committee when they have reviewed different
provisions in the, Code we have presented--
Senator Kerry. Would it be possible for you in these next
weeks, given the work, the analysis and, the various modeling
that you have done, do you not have already a foundation of
conclusions and evidence with respect to those things that are
sort of most productive?
Mr. Barthold. Probably not on as many as there are.
Senator Kerry. On some, would you give us some?
Mr. Barthold. We did work on some. We can present----
Senator Kerry. It would be helpful to have your judgment on
that.
For instance--let me ask you a question. Are companies able
to significantly lower their effective tax rate by using
offshore subsidiaries to reassign the licensing of their
intellectual property?
Mr. Barthold. We have done some exploratory work on that,
and there are certainly cases where that appears to be the
case. We can't conclude that that is generally the case of all
multinational corporations, but there certainly is evidence
that income is being shifted abroad to foreign jurisdictions to
lower overall worldwide tax revenue.
Senator Kerry. Well, we know, for instance, there is one
single famous building in the Cayman Islands which has maybe
35,000, 40,000 registered companies that are not companies at
all.
Mr. Barthold. You are referring to Ugland House, I believe
is the name.
Senator Kerry. Yes, I am.
But, clearly, those are----
Mr. Barthold. But the point that you are making is what is
the availability under present law to take income that would
otherwise be part of the U.S. tax base and have it be reported
offshore. And that is just not--that is not as simple as the
existence of Ugland House, but there is a number of factors at
play.
Senator Kerry. Could you share with the committee those
factors. Congressman Camp just asked you I think an important
question about the pass-throughs and how they are treated and
how they might be treated relative to the C-corps. Could you
share with us your perception of is there one factor or what
are the most critical factors that have contributed to the
growth of the pass-throughs and the limited liability
corporations?
Mr. Barthold. Well, I think there is actually--there is not
one. I think there is a number of factors.
You used to do C-corporations--all public corporations
basically are C-corporations. And so if you were seeking at
some point the public capital markets you organized yourself as
a C-corporation.
Now, there has been a lot of financial innovation. The
ability of new start-ups, be they small or be they large, to
access broader pools of capital has not necessitated them to
necessarily go to the public market. So that has certainly been
one factor.
The 1986 Tax Reform Act repealed the general utilities
doctrine which was one legal doctrine that essentially made it
potentially more favorable to operate in C form.
And I will defer on a third and fourth.
Senator Kerry. Well, we will follow up with you.
Chairman Hensarling. The chair recognizes Senator Toomey of
Pennsylvania.
Senator Toomey. Thank you, Mr. Chairman.
Mr. Barthold, we both discussed the fact that there are
some very broad items that are often described as tax
expenditures, the reduction of which wouldn't necessarily,
obviously, be pro growth. You know, in the case of how we would
treat income that is earned overseas, you make the point of how
we treat depreciation.
But there is another entire category that is just
egregious, it seems to me, and that does cost us economic
growth by virtue of their being there. It seems to me we have
as many--maybe more than a dozen different subsidies for
various kinds of green energy amounting to over $2.5 billion a
year. We have ethanol tax credits that are nearly $6 billion a
year. We have domestic manufacturing deductions that you can
get by making a movie. We have credits for rehabilitating
privately owned houses. My question for you is, don't these
certainly amount to the government picking winners and losers
within the economy?
Mr. Barthold. Well, I think that precise point was made
earlier by one of the other members of the joint committee.
Winners, losers, they all reflect policy decisions made by
Congress at some point.
Senator Toomey. Right. Okay. So let me ask it this way. Do
these features distort economic activity compared to what it
would otherwise be?
Mr. Barthold. Certainly. And that is actually part of what
the tax expenditure notion is about if you favor one sector
over another sector.
Senator Toomey. Right. Isn't it generally likely that if we
use the Tax Code to distort economic activity on balance we are
going to have less economic growth than we would have if we
allowed the marketplace to allocate capital instead of
political people?
Mr. Barthold. As a general matter abstracting from the
potential for what economists call externalities, the general
economic thinking is that the market outcome allocates capital
most efficiently.
Senator Toomey. And, for instance, in a specific case when
it comes to these credits as they apply to energy, if you step
back and look at it, if we as a society decide we are going to
use the Tax Code to drive people toward the use of less
efficient sources of energy, aren't we poorer as a society on
balance as a result of that?
Mr. Barthold. Again, if you--up to whether there might be
market externalities involved, you are saying that by favoring
one sector over another you are distorting choice, which means
you are not getting as much total outcome as you otherwise
possibly could.
Senator Toomey. Well, yes.
Mr. Barthold. But you have made that choice for the
Congress----
Senator Toomey. Right. For whatever other reasons, from a
purely economic consideration, if you choose to use a less
efficient source of energy, you have less prosperity,
therefore, less growth and fewer jobs.
Mr. Barthold. That is correct, sir.
Senator Toomey. Thank you.
Chairman Hensarling. The chair now recognizes Congressman
Van Hollen of Maryland.
Representative Van Hollen. Thank you, Mr. Chairman.
I just want to agree with Mr. Camp and really with some of
the observations you made earlier, Mr. Barthold, with respect
to the need to consider corporate tax in conjunction with the
individual tax side, given the increasing use of pass-through
entities, so that we can make sure we understand the
interrelationship between those things.
Looking at the corporate side, because I think there is
consensus that, at the top rate, 35 percent, as has been said,
is obviously higher than a lot of our competitors, much higher.
Effective rates aren't necessarily all higher. But just so that
we know where we are heading here in terms of the revenue and
deficit impact that we have to make up if we want to do this in
a revenue neutral way, is there a rough rule of thumb as to
what it would cost in terms of lost revenue for every percent,
you know, reduction from, say, the 35 percent rate? I have
heard a rough rule of thumb about $100 billion a year.
Mr. Barthold. I will have to check that for you, Mr. Van
Hollen. We did a calculation like that in the past couple of
years. But the enactment of expensing, which sort of changes a
lot of the business cash flow over the 10-year period over
which we have measured this, changes that calculation a bit. So
I will get a new calculation.
Representative Van Hollen. It would be helpful for us just
to sort through this. Because if we wanted to do this within,
say, the corporate Tax Code we would have to look at which tax
expenditures we thought we should prune or eliminate in the
process.
Let me just go back--circle back to a question that has
been asked of you in different ways but with respect to
scoring. And you have mentioned the House rules, and I have
looked at some of the analyses that you have done with respect
to taking into account the GDP effects. And as I understand
your analyses, one of the reasons you might be reluctant to
include a set rule within the score is that they take into
account so many different factors in the economy, what
decisions the Fed makes, whether or not deficits--you know, the
cost of the tax cut is offset. I mean, is that one reason why
it is complicated--it complicates being able to have a hard and
fast rule on this?
Mr. Barthold. There is uncertainty. And the analysis that
we provided to the Ways and Means Committee is just reflective
of the uncertainty.
One of the points that you made, the uncertainty can arise
from when you are dealing with changes in tax policy, changes
in expenditure policy, you are dealing with what economists
call fiscal policy, and there has been always the uncertainty
of, well, if Congress takes one path of fiscal policy, what is
the Fed's monetary policy? Do they accommodate that fully or do
they partially offset that? That affects the macroeconomic
outcomes.
Representative Van Hollen. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. Dr. Barthold, before you begin your
next testimony, I would inform you and other members we would
anticipate that the hearing would conclude 1:30-ish, 1:45
perhaps. As a courtesy to you, the chair is certainly willing
to declare a 5-minute recess.
I see you are ready to plow on. You are recognized for your
second round of testimony.
Mr. Barthold. Well, thank you again.
What I thought I would do, if you can turn back to just the
little packet of pictures and tables, is I will try and give a
very, again, a brief overview of the structure of the
individual income tax, some prominent features. And then I
wanted to maybe address in a little bit more detail the notion
of going to our tax expenditure analysis that our staff
prepares annually as the ultimate template for considering tax
reform.
But, first, the basic structure of the individual income
tax.
An individual computes his or her taxable income by
starting from gross income. You reduce that by the sum of
deductions allowable to get to adjusted gross income. Those are
referred to as the above-the-line deductions. The taxpayer may
then choose to either claim the standard deduction or itemized
deductions, and then there is a deduction for personal
exemptions depending upon the taxpayer's family size.
Then graduated rates are applied to the taxpayer's taxable
income to determine a preliminary tax liability. We have at
present and have had for several years special lower maximum
rates on income from capital gains--realized capital gains and
qualified dividend income. And then the taxpayer from the
preliminary tax liability may reduce that tax liability by
certain allowable tax credits.
Overlaying this, as I know all the members are aware, we
have an individual alternative minimum tax, which is a separate
calculation which in concept was designed to limit the overall
ability to claim--and I will speak very loosely--too many
deductions or too many credits.
If you turn to the first page in the second part of the
pamphlet, these are just really kind of the key parameters, the
beginning of the key parameters through time in terms of
defining the individual income tax. We have reported here from
1975 through the current year the value of personal exemptions
and the standard deduction. The reason to note these is to note
that the individual income tax is a personalized income tax and
that it depends upon filing status--married, single, head of
household--and essentially the family size, the number of
personal exemptions.
Senator Portman. Would you tell us what page you are on?
Are you on 71?
Mr. Barthold. Senator Portman, if you go back to the
special packet of figures, there was a break page that said
part two. And it is because I organized the testimony as
individual and business, but the co-chair said they would like
to talk business first, so I put together this separate packet.
So if you go to the--if you then go to the second page that
is labeled Table 2, Federal individual income tax rates for
2011, I reproduced this here just to show you the rate
structure which begins with a bottom rate of 10 percent. But,
remember, you don't get to that 10 percent rate until you are
above the level of the sum of the standard deduction and the
personal exemption. So there is effectively what is known as a
zero bracket. Our top rate, as you can see, is 35 percent.
But I do want to note that, as you are well aware,
effective in 2013 under present law the current rate structure
of 10, 15, 25, 28, 33, and 35 becomes 15, 28, 31, 36 and 39.6.
For a little bit of history, the next page of your packet,
Figure 10, reproduces for joint filers for some selected years
the introductory point, the bracket point, and the value of the
rate of the highest statutory marginal rate. And so what you
can see is the history of the top bracket and the top rate
through time since 1975.
The top rate has declined from 70 percent to 35 percent,
soon to be 39.6. But the entry point at which you get to that
top rate has also declined. So the top bracket in real 2010
dollars used to be at an income of--taxable income of over
$800,000. Today, it is approximately $375,000.
Comparable to that on the next page is Figure 11, sort of
the history of where the bottom bracket begins. And you can see
through time that there has not been as much change in the
bottom bracket's rate, but the entry point in real dollar terms
has increased. Whereas in 1975 it was approximately $13,750,
measuring in today's dollars, now you have no tax liability at
all until an income as a joint filer of over $18,700.
Now, an additional feature of the last 35 years is that the
Congress has enacted a number of tax credits. Some are specific
to specific types of activities. In the previous discussion,
some energy discussions were noted. The two most significant
credits are the refundable credits, the earned income tax
credit and the child tax credit.
Turning now to the next page, on Table 3 I identify under
our current projections the 10 largest individual tax
expenditures as part of the Internal Revenue Code today. And I
wanted to note, as I did for business, that several of these
items have consistently been among the top 10 tax expenditure
items that we report and measure since we began this exercise
in 1975. Four have made the top 10 lists in eight of the sample
periods that we have taken over this period: the exclusion of
employer contributions for health care and health insurance
premiums, the net exclusion of pension contributions and
earnings from employer pension plans, the deduction for
mortgage interest on owner-occupied homes, and the deduction
for nonbusiness State and local taxes. That would be sales
taxes and/or State income taxes.
Now, earlier--I guess it was last December now--the
National Commission on Fiscal Responsibility and Reform
suggested that one approach to deficit control was to undertake
a serious tax reform and to do that by looking at what is
actually a long list of tax expenditures that the joint
committee staff publishes annually. The appeal of that is
probably made most clear in Figure 13, which is the very last
page of the pamphlet--of the packet.
It just shows in a simple numerical count--this is not
measuring dollars, and we have had a little bit of a
methodological change. I can explain that later, if you would
like. But that, basically, the number of tax expenditures has
grown through time. That what have may reasonably be deemed
special provisions of law that deviate from a more
theoretically pure income tax, that we have added additional
special provisions through time. And that is what the line
graph on page 13 shows.
The National Commission suggested, let's take a clean
slate, eliminate all or almost all the tax expenditures. And
one thing I would like to emphasize for the committee--and this
is coming from I guess persons must characterize themselves as
sort of a tax technician--there is a lot of decisions that the
members have to make to get to that clean-slate proposal. It is
really not as easy I think as a simple read of the Commission
report suggests of taking a clean slate.
First of all, it is not clear as a matter of crafting
legislation what it means to eliminate a tax expenditure and
take a clean slate. For example, I will take a very minor tax
expenditure but a tax expenditure nonetheless.
A number of employers provide fitness and weight equipment
in the workplace for their employees to use as a working place
fringe benefit. Well, in tax principle that is compensation to
the employee, and it is compensation that goes untaxed under
the individual income tax.
And so if we were to say, well, let's wipe out that tax
expenditure, how do I do that? Do I have to take a valuation of
the value of the weight equipment and attribute that to the
employees? You know, if someone is, you know, the classic couch
potato and they wouldn't touch an exercise machine for anything
so they don't go to the one at the workplace, does that person
get the inclusion or not? Or do we do some second-best approach
and say, well, we know that the employer incurred expenses to
provide those facilities. Let's deny a deduction to the
employer.
Those are--if we wanted to have a clean slate, those are a
lot of important decisions both in terms of how we craft the
law and in terms of what the ultimate revenue effect would be.
And that is the second point that I want to make. In looking at
our list of tax expenditures, the dollar value of a tax
expenditure, as calculated by my staff and colleagues, is not
the same as the estimated revenue effect to the Federal
Treasury from elimination of that provision.
As another example, home mortgage interest deduction, it is
on the top 10 list that I posited there. If we were to
eliminate the home mortgage interest deduction, it doesn't mean
that we automatically capture the full value of all that
deduction. You will see a lot of different behavioral effects.
I might decide to take some additional funds out of my savings
accounts and prepay part of my mortgage, reducing future
interest payments that I would be making and thus affecting the
tax liability and the tax revenues increases that would result
in denying me a deduction for my home mortgage interest. A new
home buyer might decide to buy a smaller home and thus incur a
smaller mortgage than they would under the present law
baseline.
So two key points I would like to keep in mind is a lot of
important decisions--because it is not obvious what it means to
eliminate some tax expenditures and we can't just add up the
dollars that we have--that my staff and I have reported as tax
expenditure values and say we can get all that and reduce the
deficit dollar by dollar by an elimination--we take into
account a lot of important behavior, and how the legislation is
crafted also affects that estimate.
Chairman Hensarling. Thank you, Dr. Barthold.
Before the co-chair recognizes himself, again in
anticipation of pending votes in the House, with the indulgence
of our friends from the Senate, the chair would like the take
the liberty of calling upon House Members first and then
yielding the gavel to my co-chair, Senator Murray, to conclude
the hearing.
So at this time I will yield to my----
Co-Chair Murray. To the co-chair, many people think that
this is a partisan divide. I want to just concede that the
Senate is being conciliatory in the manner of this committee in
allowing that to occur.
Chairman Hensarling. Duly noted for the record.
Dr. Barthold, I want to go back to your Figure 3, Federal
receipts as a percentage of GDP. And you have graced us--and I
mean that sincerely--with a number of charts that are very
helpful. I did not--do you have a similar chart that just deals
with Federal income tax receipts as a percentage of GDP with a
historical retrospective to the post war? I did not see one.
Mr. Barthold. I have it in the--not a picture, but I have
the back-up data for it, I believe, in the Appendix around page
7. If it would be helpful to have it in figure form, I can get
that.
Chairman Hensarling. At some point.
Because, again, I want to return to a question I had
earlier. Regardless of the ongoing debate about the wisdom of
raising individual marginal rates, I am just questioning from a
historical perspective just how promising of a reservoir of
revenue that may prove to be. Because I have looked at other
data--and, again, you don't have data right in front of me that
totally correlates--but I believe somewhere in the early 1950s
marginal rates were as high as 90 percent, yet income tax
revenue as a percentage of GDP was roughly 10 percent.
Somewhere in the late 1980s I believe the top marginal rate
dropped as low as 28 percent, and income tax revenue as a
percentage of GDP was somewhere in the 10\1/2\ to 11 percent
range, I believe. And at least the data I have seen that shows
wide disparities in the top marginal bracket yet income tax
revenue as presented to GDP has been roughly 9 to 10 percent.
Is that a fair reading of the data? Do you have data that is
similar or contrary to that----
Mr. Barthold. Page 49 of the large version of my testimony
has the individual income tax and the other Federal taxes as a
percentage of GDP year by year from 1950 to 2010.
And just to confirm your recollection, as you did note
earlier this morning, in coming out of World War II and then at
the time of the Korean War top individual marginal tax rates
were 90 percent or above. The 1986 Tax Reform Act lowered the
top individual tax rate to 28 percent, although there had been
other legislation prior to that. It didn't drop from 90 to 28.
There had been other legislation prior to that.
There were at the time, both in the 1950s and then later in
the 1960s, 1970s, 1980s, a lot of other things going on, both
in terms of the economy and, of course, in terms of tax policy.
Part of the 1986 Reform Act broadened the base, so it lowered
the rate and broadened the base. In the 1950s and 1960s, there
was some tax sheltering activity. Part of the 1986 Act was to
try and moderate, mitigate, tax sheltering activity with a
broader base and attract people into more regular investments,
as opposed to tax shelter investments.
Chairman Hensarling. Forgive me, Dr. Barthold, but my time
is running out here. I want to get in one or two more
questions.
In data we have seen from the Congressional Budget Office
under their alternative fiscal scenario, essentially their
current policy baseline, they show revenues growing in nominal
terms by $2.1 trillion over the next decade. Under a current
law baseline, they show tax revenues growing by $2.6 trillion
over the next decade. Do you have a similar analysis? Do you
agree or disagree with their figures that, either under a
current policy baseline or a current law baseline, that tax
revenues are predicted to increase?
Mr. Barthold. Just to reemphasize, Mr. Hensarling, we do
all our work consistent with the Congressional Budget Office
macroeconomic and receipts baseline. So, yes, we concur. If
that is how they characterized the current policy baseline, I
concur in Doug Elmendorf's projections. Those are the
projections that we use.
Chairman Hensarling. In the limited time that I have, with
respect to individual income tax rates, one of my colleagues
brought up the question of tax fairness, which is a very
important subject. It tends to be a subjective subject. It is
important for a number of reasons, I assume not the least of
which is compliance.
But with respect to the facts, the latest data I have seen
from the IRS I believe dates back to either 2007 or 2008 and
would indicate that the top 1 percent of wage earners pay
approximately 40 percent of the income taxes; the top 5 percent
pay approximately 60 percent of the income taxes. Do you agree
with that analysis?
Mr. Barthold. I will produce separate tabs for you on
that----
Chairman Hensarling. I appreciate that.
My time has expired. And, again, the gentleman from
California has perfect timing, so the co-chair will yield to
the gentleman from California, Congressman Becerra.
Representative Becerra. Thank you, Mr. Chairman.
Mr. Barthold, thanks again, and let me focus on a couple of
things.
We have heard quite a bit in the last several days about
the Buffett rule, that someone like Mr. Buffett, one of the
wealthiest men in the world, pays at a lower rate of taxation
than does his secretary. Could you tell us a little bit about
the features of the Tax Code that makes something like this
possible, that someone who is making so much money, not a
millionaire but a billionaire, could actually have an effective
tax rate that is lower than his secretary?
Mr. Barthold. I assume that what Mr. Buffett is referring
to is his average tax rate, which is the total amount of tax
that he pays over his total amount of income, although it is
possible he might be referring to his marginal tax rate. I am
honestly not clear on what he is claiming.
But let's assume that his secretary is paid less than
approximately $106,000 a year. So that would mean that the
secretary is--each additional dollar--and I will talk marginal
tax rate--is subject to the individual income tax rate and is
subject to the payroll tax rate. Now, Mr. Buffett, as you
posited, I don't know what salary he is paid, but his total
income is not all subject to the payroll tax rate, the Social
Security part of payroll.
Representative Becerra. So any individual that has an
income that exceeds $106,000, $107,000----
Mr. Barthold. That exceeds the wage base is not subject to
the Social Security part of the payroll tax. Their wage income
is still subject to the Medicare part of the payroll tax. So
that would be one factor.
Representative Becerra. So that helps lower the rate a bit
for those who are wealthier or who make over $107,000 in
income.
Mr. Barthold. In terms of a marginal rate.
Now, if we are looking at average tax rate it becomes a
little bit more complex. Because, as I noted here, depending
upon your filing status and number of dependants, the first
$10,000 to $15,000 to $18,000 of income is not subject to any
tax and, in some situations, you are eligible for the earned
income tax credit. Those features would go into calculating an
average tax rate.
Representative Becerra. Let me see if I can concentrate you
a little bit, because I know my time will expire.
Someone who has a lot of investment income, passive income,
you have got dollars in stocks or bonds, does the fact that
part of your income or a great portion of your income is
generated through those investments, through passive income,
have a great deal to do with the distortion we see in someone
very wealthy, having a high income paying at a lower rate than
his or her secretary?
Mr. Barthold. Both the relative average and/or effective
marginal rate would be affected by the composition of income.
Under present law, there is a top statutory tax rate on income
from capital gains of 15 percent.
Representative Becerra. So let me make sure. So capital
gains, right now, 15 percent is taxed. There is a 15 percent
tax on the gain on a particular investment, capital gains
investment.
Mr. Barthold. If you realize an asset that has a gain so
your stock appreciated in value and you sold it, the gain would
be taxed at a maximum of 15 percent.
Representative Becerra. Right. Let me see if I--okay.
Because I am going to quickly run out of time.
So your stock appreciated, you sold it, you had a gain on
it, a profit, you are taxed at 15 percent.
Mr. Barthold. That is correct.
Representative Becerra. The secretary gets a paycheck every
2 weeks, every month, sees the payroll deduction, pays taxes on
the income, could be at the higher level of up to 28 percent.
She is paying at 28 percent if she has got income that takes
her to that tax rate, but the profits on that stock that was
sold will only pay at the 15 percent. That could account for
part of why some folks who are very wealthy have a lower rate.
Now, another question. We often hear people say, well, some
Americans don't pay any taxes. What they are I think really
saying is they don't pay any Federal income taxes. Because most
Americans will tell you, I just went to the grocery store, and
I pay taxes, the sales tax. Every time I take a look at my
property tax bill and I have to make that payment, I pay taxes
on the property. There are certain excise taxes. So even
modest-income Americans are paying taxes of some sort, is that
correct?
Mr. Barthold. We have a lot of different taxes in the
United States, yes, sir.
Representative Becerra. Thank you.
I yield back my time. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chair recognizes Congressman
Upton of Michigan.
Representative Upton. Thank you, Mr. Chairman.
Again, I want to reiterate and put myself firmly in support
of tax reform. Though I wasn't here for Kemp-Roth I would love
to vote for Camp-Baucus at some point down the line, maybe in
the next 2 months.
Let me ask a couple of questions. One, you talked a little
bit about the mortgage interest deduction and the fact that it
may not be scored--if that was removed, it may not be scored at
the $484 billion, as you have reflected here on Table 3. Have
you actually--has Joint Tax actually done an analysis on if
that was removed what the impact would be, the jobs and
economic impact on home builders and roofers and the whole
impact on the construction sector across the country if that
was taken away?
Mr. Barthold. We have not been asked to do that, sir.
Some of our macroeconomic capability in the modeling we do
separately model a housing sector, but we have not looked at a
proposal that targets a large swath of mortgage interest
deductions either for new loans or existing loans.
Representative Upton. I think that would be very important
for the committee to understand in terms of the economic impact
if that was removed.
The second thing, I want to get back briefly to this cap or
if the 15 percent on capital gains was increased. Again, you
mentioned earlier my question--there is a question as to how
many folks, if you raised that percentage, would it be--would
folks not bank as much or save as much? Would they spend it?
What is the impact on jobs if that 15 percent capital gains tax
was raised in terms of the spending power that folks will have
taken away because they won't have that income for themselves?
Have you done any studies on that at all or not, particularly
maybe as reflected when we added a higher tax rate in earlier
years?
Mr. Barthold. Well, Congressman, under present law, that 15
percent rate moves to 20 percent in 2013.
And, again, we have not recently had any--really any
request to analyze a broader change to raise that rate, so we
have not undertaken a macroeconomic analysis. I don't even
think we have done one of our conventional estimates recently
for a change in that rate.
Representative Upton. The last question that I have is, I
know earlier this year former Assistant Treasury Secretary Pam
Olson told the Senate Finance Committee that if the AMT
survived tax reform that the committee should go back and start
over. I would like to think that we would have the same view
among the 12 of us here.
What are the compliance and complexity issues involved as
it relates to removing the AMT? I know, as I understand it,
when it first was put into place the view was that it was going
to impact about 16 American families, and today obviously it is
tens of thousands. So what advice do you have as it relates to
that?
Mr. Barthold. Well, the AMT was redesigned in 1986. And
really kind of the intent of Congress in 1986, it wasn't per se
a small number of higher-income families. It was really to say
we are broadening the base, and we wanted to put some overall
cap on the ability of people to take the deductions or special
credits or exclusions that remain. Now, that in and of itself
didn't automatically target it at any particular income level.
The targeting was by the exemption.
Complexity, the fact that you run a dual tax system and
that you plan or you have to prepare your taxes under one
schedule and then go recompute under a different schedule,
obviously additional time taken, additional complexity,
additional chance for error.
I think everyone on our staff, of course, recognizes that a
number of people are frustrated with sort of a dual system. It
is a difficult policy problem that I know the members face.
Chairman Hensarling. The co-chair now recognizes
Congressman Clyburn of South Carolina.
Representative Clyburn. Thank you, Mr. Chairman. Mr.
Barthold, thank you so much. I have two quick questions.
When Dr. Elmendorf testified last week, I asked him a
question about unemployment and what impact that number has on
the deficit. Could you give me some idea as to whether or not
you think there is any correlation between that unemployment
rate, job growth, and the deficit.
Mr. Barthold. Between job growth and----
Representative Clyburn. Job growth. Let me ask it another
way. The impact, reducing the unemployment. If you were to drop
unemployment from 9.1 to, say, 8.6, can you give us some idea
of what impact that would have on the deficit?
Mr. Barthold. Well, I am sure that Doug Elmendorf probably
gave a more precise estimate. I think the point that he----
Representative Clyburn. I assure you he didn't. He said he
would have to get back to us.
Mr. Barthold. Oh, he did, okay. Well, then, I will wait for
that, too, but I will tell you the general principle that is
going to, to get lower unemployment, you are getting stronger
economic growth. Stronger economic growth means that there is
more national income, which means that our tax base is
expanding, so if we could magically get more economic growth,
you know, doing nothing, then the deficit would decline from
increased economic growth, and so----
Representative Clyburn. So there is a correlation.
Mr. Barthold. I, too, will wait for Doug's analysis on
that.
Representative Clyburn. Let me ask you, what impact would
lifting the payroll taxes have, if you were to lift that cap, I
know it is $106,800 today, if that were moved to 212, 215?
Mr. Barthold. We have not had any cause to estimate a
proposal such as that. If the Joint Select Committee wanted to
explore that, we could provide an estimate of that proposal.
Representative Clyburn. Mr. Chairman, would it be okay to
ask for? I would like to see some analyses----
Mr. Barthold. Okay, we will provide that.
Representative Clyburn [continuing]. Incrementally up to
doubling it.
Mr. Barthold. Okay. So to a wage base of $212,000 was
your----
Representative Clyburn. Maybe 150, 175, 212, some
incremental steps.
Mr. Barthold. Okay, a couple of different halfway marks.
Representative Clyburn. Yes, sir.
Mr. Barthold. Okay, we will respond.
Representative Clyburn. Thank you. Finally, I also would
like to see, I understand you are going to get back to us with
the numbers as to who is paying how much, and I know I have
been hearing talk of late about whether or not the low income
pay their fair share of taxes. Could you provide us with some
kind of a profile of who the taxpayers are and what kind of
taxes they are paying?
Mr. Barthold. Okay. We have for both Ways and Means and
Finance for some hearing work have provided some analysis like
that. I will assemble that and I will get that to the Joint
Select Committee members.
Representative Clyburn. I would very much like to see that.
Thank you so much, and I yield back.
Chairman Hensarling. The chair recognizes Congressman Camp
of Michigan.
Representative Camp. Thank you, Mr. Chairman. The Joint
Committee on Taxation regularly publishes data on average tax
rates paid by Americans, do they not?
Mr. Barthold. Well, actually we don't make it a routine
practice, but we end up for work for your committee and for the
Finance Committee often preparing that information.
Representative Camp. And you have recently published the
data on that?
Mr. Barthold. Yes, we have.
Representative Camp. And it is made available to the
public?
Mr. Barthold. Yes, it is.
Representative Camp. And you are not alone, the IRS also
does this?
Mr. Barthold. The IRS reports with a lag because they
report on actual, compilations of actual tax returns filed.
Representative Camp. And the Congressional Budget Office
also does this, do they not?
Mr. Barthold. CBO does some distribution work using
slightly different modeling assumptions, but yes, they do.
Representative Camp. And according to the recent Joint
Committee on Taxation, and I just want to go at this point of
millionaires and billionaires pay lower rates than middle class
families, which has been out there in the public domain, and I
just want to go at this point.
Mr. Barthold. Certainly.
Representative Camp. According to your recent Joint
Committee on Taxation data on income, social insurance and
excise taxes, Americans with incomes between $50- and $75,000
pay an average tax rate of 12.8 percent, and Americans with
incomes over a million dollars pay an average tax rate of 23.6
percent?
Mr. Barthold. That is income and payroll taxes combined.
Representative Camp. Yes.
Mr. Barthold. Yes, sir, that sounds----
Representative Camp. That sounds correct? And the IRS backs
this up. Every agency does a little bit different analysis, but
they also have the most recent data saying on individual income
tax rates Americans making a million dollars or more pay an
average of 23.3 percent, so it pretty closely tracks what you
say, but they say Americans between $50,000 and $100,000 pay an
average rate of 8.9 percent.
Mr. Barthold. Okay.
Representative Camp. And CBO has a similar analysis.
According to their most recent data on Federal taxes, and that
is income, social insurance, corporate income taxes, and excise
taxes, and household income, the top 1 percent of American
households who earn an average, and they have a category of
1.7, above $1.7 million, pay an average tax of 31.2 percent,
and middle income families pay an average--and that is between
an average income of $60,700--pay 14.2 percent. So in America
it is just not the case that millionaires and billionaires pay
at a lower rate than middle class families.
Mr. Barthold. I was going to say that is why I was trying
to clarify for Mr. Becerra's question whether Mr. Buffett was
talking about marginal tax rates or whether he was talking
about average tax rates. What you are reporting are all what we
refer to as average tax rates, taking total amount of tax paid
and dividing it by your total income.
Representative Camp. Well, frankly, Mr. Buffett needs to
give his secretary a raise. But, I also want to talk about the
comparisons in income of salary versus capital gains, and they
are different, aren't they?
Mr. Barthold. One is return to investment, the other is
return to labor effort.
Representative Camp. And in common parlance, one is taxed
twice?
Mr. Barthold. Capital gains from equities, from stock, the
growth in the value that gives rise to the gain is in most
cases from increased earnings by the business, and the business
is taxed at the business level, as you noted. You can also have
capital gains on other capital assets that are not in corporate
form.
Representative Camp. But for the average American in terms
of the rhetorical discussion here, capital gains is taxed
twice, salaries are not. Now, salaries are deductible by
business entities, are they not?
Mr. Barthold. That is correct.
Representative Camp. And that is another difference; is
that correct?
Mr. Barthold. Well, that is your single level of tax.
Representative Camp. Right. So the comparison of the two is
not actually comparing two like commodities or two like things,
which is the point I wanted to make. So I appreciate your
comments, and I appreciate the work that the Joint Committee on
Taxation does analyzing tax data. It does track what the IRS
and the Congressional Budget Office are also saying about
average tax rates paid by both middle income and high income
Americans. So thank you for your testimony.
I yield back.
Mr. Barthold. Thank you, Mr. Camp.
Chairman Hensarling. Congressman Van Hollen of Maryland is
now recognized.
Representative Van Hollen. I thank you, Mr. Chairman. We
are talking about averages of averages. In other words, average
tax rates for average taxpayers over certain income levels. One
of the ideas of trying to make this fair is to make sure that
no individual taxpayer can take advantage of a lot of special
preferences, and I would point out that the top 400 richest
Americans, all making over $110 million per year and making an
average of $271 million a year, paid only 18 percent of their
income in income tax in 2008, the effective rate.
But what I really want to turn to is the larger
conversation about tax expenditures that has been discussed by
many tax experts for a long time but has gotten more popular
discussion as a result of Simpson-Bowles and some of the other
commissions that have looked at this. And there are a number of
ways to deal with the tax expenditure issue. One is to look
them over and decide to eliminate them or a subset of them.
That could be used to reduce the deficit, raise revenue, and
also to buy down rates.
Another way to do it is along the lines of one of the
proposals the President made, which is for higher income
earners, for example at the 35 percent rate you would say their
deductions, regardless of what specific deduction it was, would
get the 28 percent deduction level as opposed to 35 percent so
that higher income individuals weren't getting, you know, a
disproportionate benefit from the deduction.
A third way, and this is what I want to focus on, is to not
look at any particular deduction but to find a way to limit the
overall number of deductions. Then you don't have to
necessarily get in a fight over whether this has important
social policy or another policy. One way that has been done in
the past was something named after former Congressman Pease,
Don Pease, which is still an aspect of the Tax Code which sort
of phases out your deductions based on your income, and one of
the concerns that have been raised by some people about that,
including some of our Republican colleagues, is it changes
indirectly your marginal, your top marginal rates.
But there is another way to go about this, and I want to
explore that, and this is in the interest of searching for
common ground, and Martin Feldstein, who was of course the
Chairman of the Council of Economic Advisers under President
Reagan, has written about this. He has written about it in The
Wall Street Journal, the headline of the article, ``The Tax
Expenditure Solution to Our National Debt;'' written about it
in The Washington Post, headline ``How to Cut the Deficit
Without Raising Taxes;'' and I do want to just read a portion
of his article.
It says, ``There is a way to cut budget deficits without
raising taxes. Tax expenditures are the special feature of the
U.S. income tax law that subsidize a variety of things,'' and
he says ``with respect to the Simpson-Bowles proposals, their
most extreme suggestion is to eliminate all tax expenditures
raising a trillion dollars a year in tax revenue, and then use
all but $80 billion of that to cut taxes.'' He goes on to
comment, ``I think that devotes too little money to deficit
reduction at a time when fiscal deficits are dangerously
large,'' and then he goes on to present another alternative
because, as you pointed out, there may be tax expenditures that
whether for policy or political reasons people aren't going to
want to go after. So rather than picking one, he says ``let's
try and get at this overall issue,'' and here is his practical
alternative, and I am quoting, ``Congress should cap the total
benefit taxpayers can receive from the combined effect of
different tax expenditures. The cap could be set as a
percentage of an individual's adjusted gross income and perhaps
subject to an absolute dollar amount.''
Mr. Barthold, my question to you is, that approach, does it
address the concerns some have raised with respect to the so-
called Pease approach in that the approach being presented by
Martin Feldstein does not affect the top marginal rates or the
marginal rates?
Mr. Barthold. The short answer is yes. Do you want me to
explain why?
Representative Van Hollen. Yes, if you could, because again
I am offering this in the spirit of common--you know, trying to
find some common ground here.
Mr. Barthold. By contrast, the Pease provision basically
says if you earn more income, I take more of your itemized
deductions away. So that has the effect, as it is drafted, of
increasing your marginal rate by 3 percent. So if you were
otherwise in a 31 percent bracket, your effective marginal tax
rate on earning additional income, and if you are subject to
the Pease provision, would be 31 percent.
Now, what Professor Feldstein has proposed is a cap that is
based against--on adjusted gross income, and so as you earn
more income, as your adjusted gross income goes up, the cap
actually goes up, and so if the cap were binding on some
taxpayers, the effect of the Feldstein proposal would be to I
earn an additional $100, well, that will increase my allowable
deductions by whatever the percentage cap is, so that I maybe
even increase my deductions a little bit, which means my
taxable income goes up by $100 or if the cap is binding,
slightly less than $100. So that leaves the marginal tax rate
either unchanged or in some cases will reduce it.
Now, I, too, read The Wall Street Journal op-ed piece by
Professor Feldstein, and he had proposed a cap of 2 percent.
Representative Van Hollen. Right.
Mr. Barthold. Now, most of our States do have State income
taxes which are deductible against the Federal income tax, and
the State income taxes are generally at a rate above 2 percent,
so the State income tax would generally go up and increase your
itemized deductions, which means it is really sort of a wash.
You wouldn't get that reduced marginal rate effect, but you
would be held constant.
Representative Van Hollen. At the Federal level you could
actually have a reduction in your marginal tax rate?
Mr. Barthold. Well, not if you are in a State with State
income----
Representative Van Hollen. Okay, and I would just----
Mr. Barthold. It would never increase the marginal rate.
Representative Van Hollen. Right.
Mr. Barthold. It would only hold it constant or reduce it.
Representative Van Hollen. Thank you. And I just urge my
colleagues to take a look at this concept.
Chairman Hensarling. The co-chair recognizes his co-chair,
Senator Murray of Washington.
Co-Chair Murray. Thank you very much. I wanted to ask your
opinion about this notion that tax expenditures are just
another form of government spending. I have heard Chairman of
the Federal Reserve, former Chairman Alan Greenspan, Martin
Feldstein that was just being referred to. Both have argued
that tax expenditures are simply a difference in form than in-
kind as direct government spending, and I wanted to ask you,
what is your assessment on whether or not tax expenditures are
just simply government spending in an alternative package?
Mr. Barthold. Well, Senator, that is--the construct of the
tax expenditure is to say where am I doing something special,
and there is a lot of different ways that government
policymakers can choose to do something special. I mean, you
could have a direct subsidy or you could have implicitly a
subsidy through the Internal Revenue Code. So in that sense you
think of tax expenditures as spending by another name.
Now that sort of begs the question of why on policy merits,
you know, you decided, you know, the Congress decided to do it,
why they decided to do it this way. In some cases a direct
spending program could be easier to administer and more
efficacious, could require fewer rules. It is possible that the
opposite could also be the case, that it could be, you know,
easier to administer a tax benefit than, you know, a specific
new government program.
So, remember, it is a notion measured against a more, an
idea of a more theoretically pure income tax and saying where I
am deviating from that is I am not measuring income correctly
or I am not measuring income theoretically correctly, and I am
putting a value to that deviation, and so I could have said,
here, measure someone's income correctly and then provide a
subsidy related to whatever the activity is that you wanted to
do.
Co-Chair Murray. Okay. Well, we have heard over and over
and over again about the need to review and reduce redundant,
wasteful, inefficient government spending. The Budget Control
Act, which we just did, cuts a trillion dollars over the next
10 years, that is a very important step in that direction.
These budget discussions and cuts are impacting directly a lot
of people now as we try to put together our appropriations
bills, those of us who are on that committee are watching the
pain. We have reduced and eliminated programs that benefit
students, we have cut support for police officers on the
street, we have reduced support for programs that keep people
in emergency shelters rather than homeless. I mean, these cuts
are having an impact.
However, we have still largely left untouched whether it
makes sense to keep a whole host of these tax expenditures,
whether we should continue mortgage interest tax breaks for a
yacht that qualifies as a second home, whether the entire
amount of Leona Helmsley's $8 billion charitable bequest for
the care of her dogs should be left untouched, whether Kentucky
thoroughbred horses should be given special tax breaks. We
actually even have a tax credit for employees on former Indian
lands in Oklahoma, which is now covering two-thirds of that
State.
So, you know, maybe some of these tax credits make sense,
maybe they don't. We have had an intense discussion here about
earmarks. We have not had an intense discussion about these tax
expenditures.
I wanted to ask you if you see any policy reason why we
could not analyze or consider individual tax expenditures as
candidates for elimination or modification outside of
comprehensive reform or do we have to wait for reform of this
whole system?
Mr. Barthold. Senator, those sort of decisions are in your
hands. I mean, the tax writing committees in their oversight
role are looking at a number of these provisions all the time,
so I mean, I guess I don't have an answer that is better than
that for you. You certainly can explore the merits of different
provisions.
Co-Chair Murray. Okay, thank you. I yield back my time.
Chairman Hensarling. The co-chair now recognizes Senator
Kyl of Arizona.
Senator Kyl. Just a couple questions, but following up on
Senator Murray's question, are tax expenditures just another
form of government spending? In looking at the 10 items listed
under tax expenditure in your Table 3, isn't it the fact that
only one of those, the earned income tax credit, is actually
scored as outlays, government outlays?
Mr. Barthold. That is true.
Senator Kyl. Second, relative to Representative Becerra's
line of questioning, just to put a little bit of an exclamation
point on this, let's say you are a teacher, you hold some
stocks or you have got a pension, it has got stocks in
companies, you get a dividend from that. The value of what you
receive is affected by what the corporation first had to pay in
its corporate taxes; isn't that correct?
Mr. Barthold. That is the point.
Senator Kyl. So the old saw that corporations don't pay
taxes, people do is actually true, and so when--and I presume
that Warren Buffet's income is largely derived from passive
income of one kind or another, dividends, capital gains,
whatever other kind of corporate earnings there may be on his
significant investments. So to really calculate what he pays in
taxes, you would also have to know what the companies that he
is invested in have paid in the way of corporate income taxes,
would you not?
Mr. Barthold. To figure out the full burden.
Senator Kyl. And that is true of anybody else with
investment, with stock investments, for example?
Mr. Barthold. Yes.
Senator Kyl. Thank you very much.
Co-Chair Murray [presiding.] I will yield to Senator
Portman.
Senator Portman. Thank you, Madam Chair. I would like to,
if I could, dig a little deeper on the individual side now that
we are over there, and I would go back to the basic question,
you know, what should the burden be, we have talked about that,
of taxation on a weak economy, and then what is the best
system.
Looking at your testimony, starting on page 35 you talk
about the Simpson-Bowles approach, and you make the point that
some of the revenue estimations from the Joint Committee on
Taxation are going to be different than some of the general
reporting from the Simpson-Bowles committee because there are
some interactions between some of these tax preferences.
However, my general question for you is, have you all had
the opportunity to do an analysis, to do a revenue estimate of
the Simpson-Bowles proposals? I know it is a menu, in essence.
If you could answer that, it would be helpful.
Mr. Barthold. Well, the short answer, Senator, is no, and
that is for the one reason that I elaborated on in the
testimony, and that is because underlying the idea of
eliminating tax expenditures is, need some policy calls on, you
know, what the Members intend to do, what effective date the
repeal mortgage interest deduction, would it be just for new
mortgages or would it be for all?
Senator Portman. I didn't provide you enough specificity to
be able to come up with a score, but you could come up with a
score if certain decisions were made on timing?
Mr. Barthold. There is a long--if decisions were made, we
would get to work, but there are a lot of decisions to be made.
Senator Portman. But do you disagree with their menu? In
other words, do you think that their analysis is accurate as to
the various rates that you could get to based on the reduction
of certain preferences?
Mr. Barthold. Well, I think I have to disagree some. What
they are saying is if you gave, you know, if you started with
several hundred billion dollars over, let's say, you know, a
10-year period, that that would enable you to achieve, you
know, X percentage point reduction in individual rates. That
part of the analysis is probably, you know, reasonably
consistent with the analysis that we would do.
The point that I was making was that you can't take this,
my top 10 list here and add it up and say, ah, that money is
available to reach that same amount of----
Senator Portman. Because there will be transitions, there
will be some timing issues.
Mr. Barthold. Well, not just transition, but our tax
expenditure calculations do not account for taxpayer behavior
that would occur if you eliminated them.
Senator Portman. Right, some of the interactions. Well, I
think that would be very helpful, if we could give you some
more specificity as to timing and specifically, you know, which
preferences we are talking about because those sorts of scores
are very valuable. I know you have done some of this for
Senator Wyden and his good work, he did with Judd Gregg last
year and with Senator Coats this year, I know you have some
joint tax estimates on both the individual and corporate side
there; is that correct?
Mr. Barthold. Well, you know, officially we never comment
on any work that we do for any individual Member, but if
Senator Wyden told you that we did work for him, I am sure we
did.
Senator Portman. I just revealed a great secret here. My
point is simply that there has been a lot of work done on the
impact of some of these changes and preferences and how it
would affect rates.
Mr. Barthold. We have done work on a number of provisions
that are like a number of things that people want to look at
when they talk about modifying tax expenditures, but, again, it
matters a lot what you want to do.
Senator Portman. Quickly, can we talk about AMT for a
second? Can you tell us what the cost is of eliminating AMT
over the next 10 years under the current law baseline?
Mr. Barthold. Yeah. I think we are a little bit above $1.1
or $1.2 trillion.
Senator Portman. Okay, and is that with or without
extension of the tax cuts? Are you talking current policy or
current law? Are you talking about under the current law
baseline?
Mr. Barthold. That is under present law, which assumes that
the current----
Senator Portman. Elimination of all the Bush tax cuts?
Mr. Barthold. Well, that the current--yes, that is letting
EGTRRA/JGTRRA expire and also the current AMT patch would
expire.
Senator Portman. Which affects the AMT costs, correct?
Mr. Barthold. That is correct. There is interaction----
Senator Portman. What about a patch, what is a patch under
the scenario of current law assuming that we are--it is about
600, 650?
Mr. Barthold. I don't recall. I think it is closer to $800
billion.
Senator Portman. Okay, and that again assumes--that sounds
like it might assume that the top two rates do not expire or
does that assume current law?
Mr. Barthold. Under--I think that is under current law,
yeah.
Senator Portman. Okay, we would love to have those numbers.
I think there is a consensus on the committee here that we want
to look at least at the idea of patching the alternative
minimum tax for all the reasons we talked about today.
Mr. Barthold. We will provide all the members with an
estimate of--when you say the patch, would you propose just
indexing the current----
Senator Portman. As Congress has done over the last
several----
Mr. Barthold. Well, Congress has done it three different
ways. We will come up with something for you.
Senator Portman. Okay. And in terms of AMT, have you also
looked at the impact on your macroeconomic analysis we talked
about earlier? In other words, if you keep the Tax Code as it
is and allow the AMT to hit another 20 or 30 million Americans,
what would the impact be on the macroeconomic side, including
GDP?
Mr. Barthold. Some of the AMT effect has been built in to
past work that we have done. Since the AMT is part of present
law, the way our macroeconomic analysis is undertaken is we
take our conventional modeling analysis and use that to
determine what the effective marginal tax rates are on
different classes of taxpayers, on wage income, on their return
to saving. So that is built in.
If your specific question is if we--have we done an
analysis that says maintain present law except for some change
in the AMT, no, we have not done such a macroeconomic analysis
isolating on----
Senator Portman. Okay. Thank you, Madam Chair.
Co-Chair Murray. Thank you. Senator Kerry.
Senator Kerry. I was reminded a little while ago, somebody
mentioned the Tax Reform Act of, I guess, 1986, the rates at 70
percent, I had the pleasure of voting to get rid of the 70
percent and come down to--I think originally we chose two
rates, as I recall it was 28 and 14 under the Reagan proposal.
Mr. Barthold. 14 and 28.
Senator Kerry. Yes, and then we found we couldn't make it
work, there wasn't sufficient revenue, et cetera, and we popped
it up to the 33, and then there were sort of these incremental
changes, so we have had some experience with this process.
What I would like to ask you first of all is, the tax
expenditures are substantially higher today, are they not, than
they were immediately after the Tax Reform Act of 1986?
Mr. Barthold. Senator Kerry, tax expenditures, remember it
is a measure of the value of, for example----
Senator Kerry. Well, both in total size and as a percentage
of tax receipts, they are substantially higher than they were
immediately after 1986?
Mr. Barthold. Well, one--a nuance I want to put to that is
the calculation of the tax expenditure depends upon the tax
rates. Since tax rates today are higher than they were
immediately after the 1986 act, absent anything else, the
measure of tax expenditure----
Senator Kerry. But the tax expenditure per se hasn't been
responsible for the growth? It is not the tax expenditure that
has suddenly changed; it is other things, is it not? Choices we
made about what to provide as a preference, perhaps?
Mr. Barthold. And that is what the last figure in my short
packet, you know, indicated was that Congress has made policy
decisions.
Senator Kerry. Exactly, and I want to come to that for a
minute because I think it is important for all of us to connect
those. I think we have got to understand the relationship
between those choices, that the actual tax expenditure itself
post-1986 is substantially the same as the one we have today,
but other things have happened. For instance, are some of the
growth of tax expenditures attributable to the increase in the
tax rates?
Mr. Barthold. Yes, that was the point I was just making, in
terms of measuring the value.
Senator Kerry. So that is one increase. Another increase,
didn't we contribute to them relatively substantially when we
passed the preferential treatment on capital gains and
dividends?
Mr. Barthold. That is one of the larger tax expenditures.
Senator Kerry. That increased that expenditure?
Mr. Barthold. Yes.
Senator Kerry. Likewise, the incentive on retirement
savings?
Mr. Barthold. Retirement savings, as I noted here, it makes
our top 10 list.
Senator Kerry. Right. And in total those are the things
that have most substantially contributed to the growth of the
tax expenditures, the policy choices we made?
Mr. Barthold. The policy choices that Congress has made are
the factor that make, that have changed the tax expenditure
budget. I will note that we did include in the appendix to the
submitted testimony a list of all the tax expenditure items
added since the 1986 act.
Senator Kerry. Right, and that is very helpful, and I think
we need to bear through it. What I want to bear down on, Dr.
Barthold, is all of the major proposals--I mean, I consistently
hear colleagues on both sides of the aisle, and I share this,
it would be great if we could simplify, it would be great if we
could create pro-growth outcome, it would be terrific if we
could broaden the base and reduce the rates. I think that--are
those worthy goals that we ought to be pursuing?
Mr. Barthold. Improved efficiency, more growth, it all
sounds pretty----
Senator Kerry. Right. Now, most of the proposals to do
those kinds of things envision reducing the sort of six
marginal rates, bring them down to three rates, and that is
what you hear most often, and a lower rate, corporate rate, the
25 percent seems to be the one that is sort of ringing bells
these days. Is it possible, in your judgment, to structure a
system that lowers the rates, broadens that base, and improves
progressivity and creates growth in your judgment? Can you
envision that based on your experience all these years in doing
this?
Mr. Barthold. It is feasible. You know, as a tempering
factor, you remember that it is often the case in policy-making
that goals will be in conflict. Reducing tax rates sometimes is
in conflict with reducing what you perceive to be the overall
fairness or equity of outcomes. Improving efficiency can mean
that sometimes things are made more complicated rather than
less complicated. So there can be lots of trade-offs. There is
lots of different policy decisions. But it is a worthy thing to
try.
Senator Kerry. Is it--well, in 1986, for instance, we tried
to get really super simple, we created those two rates, but
then we had that tax bubble that got created as a result. Can
you sort of just as a matter of helping people understand the
difficulty here just talk about that for an instance, of how
that bubble came about?
Mr. Barthold. How the bubble came about?
Senator Kerry. Yes.
Mr. Barthold. The bubble----
Senator Kerry. What I am getting at is, can we create a
system where you have two or three rates and you don't create a
bubble?
Mr. Barthold. The bubble sort of--remember the bubble was
marginal, was about marginal rates. What the bubble did was it
phased out the benefit of the standard deduction and the lower
rates if you were above certain income levels. So while the
bubble had this range of income over which the marginal rate of
tax was 33 percent and then the marginal rate of tax dropped
down to 28 percent, the effect of the bubble, by eliminating
essentially to such a taxpayer the benefit of a zero rate of
tax, the standard deduction or the personal exemption or the 14
percent bracket, had the effect of by the time you were at the
end of the bubble, your average tax rate was 28 percent, but
everywhere in the bubble your average tax rate was less than 28
percent, less than 28 percent but increasing. So the bubble
promoted overall progressivity but had the appearance--well, it
didn't have the appearance, it had the actual effect of a
marginal tax rate of 33 percent for someone in the bubble range
and then the marginal tax rate dropped back down to 28 percent
beyond the bubble range. But the person beyond the bubble range
had a higher average tax rate than a person in the bubble or a
person beneath the bubble.
Senator Kerry. So it is all very simple. We will get there.
Mr. Barthold. I hope that was responsive. It was sort of a
technical point.
Senator Kerry. No, it is an important point and I
appreciate it. Thank you.
Co-Chair Murray. Senator Toomey.
Senator Toomey. Thanks very much, Madam Chairman. I want to
go back to the topic of capital gains because I just think this
is very, very important, and the one observation that I want to
make is that I think it is abundantly clear that it is the
investment of accumulated capital that makes economic growth
possible, and any policy that diminishes that accumulated
capital is very, very dangerous in terms of its implications
for economic growth. Congressman Camp and Senator Kyl both
observed that when capital gains are imposed on the appreciated
value of a stock, it is almost certainly a form of double
taxation because the underlying stock has been--had the income
associated with it taxed in the first place, and that is
certainly completely true.
I would like to make another point about this which has to
do with inflation. Mr. Barthold, I am sure you would agree that
in the post-war era our economy has had no sustained periods of
deflation. We have had inflation of varying levels, but
consistently. And we charge, we impose a capital gains tax on a
nominal gain in value of an asset, not on the real gain. So
that is to say that we impose the capital gains tax on the
inflationary gain. Is that true?
Mr. Barthold. Yes, it is correct. We tax nominal values
throughout the Internal Revenue Code.
Senator Toomey. So if you had a sustained period where
inflation averaged just 3 percent, as the math works out in 24
years, the value of assets doubles. I shouldn't say the value,
the nominal price doubles, but yet the real value hasn't gone
up at all in that scenario, and yet we would still impose a
capital gains tax, wouldn't we?
Mr. Barthold. That is correct.
Senator Toomey. So, in effect, what we are doing in the
case of assets that appreciate in value, if the appreciation
were due only to really the loss of value of the dollar and
inflation, you would have zero real gain, and yet you would pay
a tax, so you would literally be paying a tax, despite having
no gain in real terms; isn't that true?
Mr. Barthold. That is correct, sir.
Senator Toomey. So it seems to me that this phenomenon has
long been part of the reason that at least we try to mitigate
that by having a capital gains rate that is lower than ordinary
income tax rates, just one of the rationales?
Mr. Barthold. That has been one of the stated policy
rationales, sir.
Senator Toomey. Thanks, and I will yield the balance of my
time.
Co-Chair Murray. Thank you very much. Under our agreement
we had agreed that each member would have an additional minute.
But, Mr. Barthold, you have been generous with your seat time
here. In the interest of being a good example, I will yield
back my time.
Representative Becerra, do you have one additional
question?
Representative Becerra. I do, I will make use rapidly of my
one minute.
Mr. Barthold, very interesting here because I think
everyone would agree that the Tax Code is neither simple or
transparent, and the reality is that complexity, the opposite
of simplicity, is what helps people hide what they should pay
in taxes, and so if you have complexity and at the same time
you don't have transparency, which is, acts like complexity in
helping you hide your income, you can get away without paying
what would be your otherwise fair share.
Now, it is really fascinating the way we treat corporations
because there is this concern that we tax twice income that
comes from a corporation because ultimately the individual is
the one that pays the taxes. Are any Americans forced to form a
corporation?
Mr. Barthold. No, sir. Corporate is an elective form of
business.
Representative Becerra. Right. So if it is so bad, why are
so many people forming corporations? Because they get certain
benefits by doing so, whether it is on the tax side or
otherwise. So I think we have to recognize that complexity and
transparency, whether it is on the corporate side or individual
side, should be removed so we can truly understand how we get
to a fair Tax Code.
I yield back.
Co-Chair Murray. Representative Van Hollen.
Representative Van Hollen. Thank you, Madam Chairman. Just
to pick up on Mr. Becerra's question, because we have heard a
lot about the double taxation of capital gains, but isn't it
true that there are many assets that get the preferred 15
percent capital gains rate that are not subject to another
layer of taxation, real estate, commodities, S corporations;
isn't that true?
Mr. Barthold. Yes, I made that point briefly when Mr. Camp
was discussing the issue.
Representative Van Hollen. Do you have any idea, you know,
how that compares in magnitude to the overlapping?
Mr. Barthold. Off the top of my head, I don't. Our staff
has looked at that, and I can report from--back to the
committee on, from what--the IRS creates a sale of capital
asset files where we get some detailed information on what sort
of assets do people realize in reporting capital gains. We will
run some tabulations on the SOCA file, and I will make that
available to the members of the Joint Select Committee.
Representative Van Hollen. Thank you, Mr. Barthold. Thank
you.
Co-Chair Murray. Thank you very much. I want to thank the
witness today for participating and all of our members who were
here today as well. I remind all of our members that they have
3 business days to submit questions for the record, and I would
ask the witness to try and respond as quickly as possible. So
all of our members should submit their questions by the close
of business on Tuesday, September 27th, and with that without
objection, the joint committee stands adjourned.
[Whereupon, at 1:45 p.m., the committee was adjourned.]
OVERVIEW: DISCRETIONARY OUTLAYS, SECURITY AND NON-SECURITY
----------
WEDNESDAY, OCTOBER 26, 2011
United States Congress,
Joint Select Committee
on Deficit Reduction,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m., in Room
SH-216, Hart Senate Office Building, Hon. Patty Murray [co-
chairman of the committee] presiding.
Present: Senator Murray, Representative Hensarling, Senator
Baucus, Representative Becerra, Representative Camp,
Representative Clyburn, Senator Kerry, Senator Kyl, Senator
Portman, Senator Toomey, Representative Upton, and
Representative Van Hollen.
OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM
WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Chairman Murray. This committee will come to order.
Before we begin, let me just remind all our guests that the
manifestation of approval or disapproval, including the use of
signs or placards, is a violation of the rules, which do govern
this committee. So I want to thank all of our guests in advance
for their cooperation in maintaining order and decorum.
First of all, thank you to my co-chair, Representative
Hensarling, all of my fellow committee members, and Dr.
Elmendorf for joining us here today, as well as the members of
the public here in person or watching us at home.
This committee has been working very hard over the last few
weeks to come together around a balanced and bipartisan plan to
reduce the deficit and rein in the debt. We have heard from our
colleagues. We have heard from the standing House and Senate
committees, from groups around the country, and close to
185,000 members of the public through our Web site, http://
www.deficitreduction.gov.
We continue our work now today with a hearing on
``Discretionary Outlays, Security and Non-Security.'' And I am
glad we are talking about this today because it is important
for us to understand how these policies fit into our overall
deficit and debt.
Nondefense discretionary spending represents less than one-
fifth of total Federal spending. Listening to the debates here
in D.C. over the last few months, you would think this small
piece of pie was a whole lot bigger. As I expect, we will hear
more about that from Dr. Elmendorf today.
Congress has gone to this relatively small pot with cuts
and spending caps again and again while leaving many other
pieces of the budget essentially untouched, including the law
that created this joint committee, which cut roughly $800
billion in discretionary spending. And all the focus on this
one area is especially striking, given that we are spending
about the same on nondefense discretionary programs in 2011 as
we did in 2001. Meanwhile, mandatory programs increased,
defense spending increased, and revenues plummeted.
So as this committee works together on a bipartisan plan to
reduce the deficit, we need to keep in mind the cuts that have
already been made, the role discretionary spending plays in our
overall deficit and debt problem, and the impact irresponsible
slashing could have on our economic recovery and middle-class
families across the country. As we all know, these aren't just
numbers on a page. They affect real people in real ways.
When food assistance for women and infants is cut, that
means greater challenges for struggling families. When
infrastructure investments are shelved, that means fewer jobs
and more crumbling bridges and roads. And when research,
education, and student loans are slashed, that means fewer
opportunities for our businesses and the next generation of
workers, which is really no savings at all since we end up
paying for it in the future.
So while we should certainly examine every piece of the
budget to see where we can responsibly make additional cuts, it
doesn't make sense to simply keep going after one small part of
the budget that disproportionately affects middle-class
families and the most vulnerable Americans. There has to be
balance.
Today, Dr. Elmendorf will be discussing discretionary
security spending, which has grown significantly in the years
since 9/11. This is an area where the stakes for our Nation are
high. From both a national security as well as a budgetary
perspective, we have to get this right.
As many of my colleagues have noted over the past few
weeks, it is an area that would be hit especially hard if this
committee doesn't come to a deal, and we move to sequestration.
So I am looking forward to a robust conversation today with Dr.
Elmendorf about these critical pieces of our Federal budget.
And before I turn it over to my co-chair, I just want to
say that over the last few weeks, this committee has been
working very hard to find common ground and a path toward a
balanced and bipartisan plan that can pass through this
committee, through Congress, and get signed into law. We aren't
there yet, but I am confident that we are making progress. And
I am hopeful that we are moving quickly enough to meet our
rapidly approaching deadline.
As I said from the start, if this committee is going to
work--and I believe that it must--we all need to be willing to
make some tough decisions and real compromises. I am willing to
do that, and I know many of my colleagues are as well.
Every day, we hear more and more about the effects of
failure that would be on our Nation's long-term fiscal health
and credit-worthiness. Over the next few weeks, it is going to
be up to all of us to demonstrate to the American people that
we can deliver the kind of results that they expect and that
they deserve.
[The prepared statement of Chairman Murray appears in the
appendix.]
With that, I would like to recognize my co-chair,
Representative Hensarling, for his opening statement.
STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE FROM
TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT REDUCTION
Co-Chair Hensarling. Well, I thank the co-chair for
yielding, and I want to thank her again for her leadership on
this committee and the spirit of negotiation that she brings.
There is no such thing as an unimportant hearing when it
comes to dealing with our Nation's structural debt crisis. And
certainly, within our Nation's discretionary budget are
contained many challenges and, frankly, many important
priorities that have to be debated and negotiated.
Not the least of which is what many of us view as the
number-one function of our Federal Government, and that is to
protect us from all enemies, foreign and domestic, and
specifically, our National defense budget, which continues to
shrink as a percentage of our economy, shrink as a percentage
of our budget, as we continue to live in a dangerous world.
When I look at the totality of our discretionary budget, I
do, again, find some common ground with my co-chair. And again,
although there is no such thing as an unimportant hearing or
unimportant section of the budget, in many respects, today we
may be debating the pennies, nickels, and dimes in a debt
crisis that is demanding half dollars and dollar bills.
There has been huge run-ups in our discretionary spending
since the President has come to office. This is not the forum
to debate the policies, but I think the numbers speak for
themselves.
Without the stimulus program, the Commerce Department has
increased from '08 to '10 102.9 percent. Without the stimulus,
EPA has increased 35.7 percent. Subtracting the stimulus,
Housing and Urban Development increased 22.2 percent. State
Department without the stimulus, up 132.2 percent, and the list
goes on.
Again, it is not at this forum to debate these particular
policies, but it is important to note the numbers that when
these particular budgets are growing, the family budget, which
pays for the Federal budget, has, unfortunately, contracted.
And it is the family budget that has to pay for the Federal
budget.
As an order of magnitude, we know that the discretionary
spending of our Nation is roughly 40 percent and shrinking. Our
entitlement spending is roughly 60 percent of the budget and
growing. We know outside of interest payments on our National
debt that our mandatory spending is principally driven by our
healthcare and retirement programs that are simultaneously
starting to disserve their beneficiaries and driving the Nation
broke as they grow at 5 and 6 and 7 percent a year, where,
unfortunately, our Nation, over the last few years, have
actually seen negative economic growth.
So, to put this in even a larger context, under the Budget
Control Act, we collectively have a goal, a goal of $1.5
trillion in deficit reduction. But we have a duty, a duty to
provide recommendations in legislative language that will
significantly improve the short-term and long-term fiscal
imbalance of the Federal Government.
Thus, the challenge before us remains that we must find
quality healthcare solutions, quality retirement security
solutions for our Nation at a cost that does not compromise our
National security, does not compromise job growth and our
economy, and does not mortgage our children's future.
Everything else we do, including dealing with the
discretionary budget, will be helpful. Nothing else will solve
the structural debt crisis or allow this committee to meet its
statutory duty, only these reforms. And so, prudent stewardship
of our discretionary budget is going to be helpful. It alone
cannot solve the crisis. It continues, though, to be an
important matter.
I look forward to hearing from our witness, and with that,
I will yield back, Madam Chairman.
[The prepared statement of Co-Chair Hensarling appears in
the appendix.]
Chairman Murray. Thank you very much.
With that, I will turn it over to Director Elmendorf for
your opening statement. And we all appreciate your taking the
time out of what we have given you as a very busy life, to take
time to come today and answer our questions. So thank you very
much, Dr. Elmendorf. Turn it over to you.
STATEMENT OF DOUGLAS ELMENDORF, PH.D.,
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Dr. Elmendorf. Thank you, Senator Murray, Congressman
Hensarling. I and the other folks at CBO are happy to be trying
to help this committee in its very challenging task.
To all the members of the committee, my comments today will
focus on four questions that are addressed in the written
testimony. First, what does discretionary spending comprise?
Second, what has been the historical trend in discretionary
spending? Third, how will discretionary spending evolve over
the next decade under current law? And fourth, how might the
path of discretionary spending be altered?
Before digging into that substance, though, let me briefly
clarify some of the terms I will use. When I talk about
discretionary funding, I am adding together the budget
authority that is appropriated for those programs and the so-
called obligation limitations that govern spending for certain
transportation programs. Those two types of funding provide
agencies with the authority to spend money. When the funds are
actually disbursed, they become outlays.
Also, through the testimony, I will focus on defense and
nondefense discretionary spending, rather than security and
non-security spending. Defense spending is a traditional
category that includes all of the spending on military
activities of the Department of Defense, plus spending for the
Department of Energy's atomic energy defense activities and
some defense-related activities of other agencies. Nondefense
spending is everything else in the discretionary category.
The Budget Control Act sets caps on discretionary spending
for 2012 and 2013 using different categories, security and non-
security, where security includes most, but not all of defense
and also includes appropriations for the Department of Homeland
Security, the Department of Veterans Affairs, and the
international affairs budget category.
However, in 2014 and beyond, the Budget Control Act
specifies a single cap on discretionary funding. There is an
entirely different set of caps in the law that would come into
play if legislation from this committee does not generate
sufficient deficit reduction. In that case, the further cuts in
spending that would be required are based on the traditional
defense and nondefense categories. Although to make the
situation truly confusing, the act labels those security and
non-security as well. We thought it would be most useful for
this testimony to focus on the familiar defense and nondefense
categories.
Let me now turn to the first substantive question, which is
what discretionary spending comprises. In fiscal year 2011,
total funding for discretionary programs was about $1.3
trillion, of which more than half went to defense and less than
half went to nondefense programs. If you turn now to the second
page of the handouts in front of you, you will see a big donut
that is labeled ``Defense Discretionary Funding for 2011.''
Of total defense funding for 2011, 43 percent, the biggest
piece on the right of the donut, went to operation and
maintenance, which pays for the day-to-day activities of the
military, the training of military units, the majority of costs
for the military's healthcare program, and compensation for
most of DoD's civilian employees. Another 22 percent of defense
funding went to compensation of military personnel, including
pay and housing and food allowances.
Procurement, representing 18 percent, funds the purchase
and upgrade of weapons systems. Appropriations for the wars in
Afghanistan and Iraq and related activities accounted for about
a quarter of total defense funding. They were distributed
across the categories shown here, are included in the amounts
reported.
If you turn to the next page of the handout, it shows a
comparable picture for nondefense discretionary funding for
2011. Seven broad categories accounted for about 80 percent of
the total. Education, training, employment, and social services
programs together claimed 16 percent. Transportation programs
received 15 percent of the total, with about half of that going
to highway programs.
Income security programs, mostly for housing and nutrition
assistance, represented 11 percent. That amount does not
include unemployment compensation, food stamps, or temporary
aid to needy families because they are all part of mandatory
spending.
Discretionary appropriations for veterans benefits,
primarily for the Veterans Health Administration, were 10
percent of total nondefense discretionary funding last year.
Health was another 10 percent, with about half of that amount
devoted to the National Institutes of Health.
International affairs and the administration of justice
were each about 9 percent, and a collection of smaller
categories makes up the remaining 20 percent.
Looking at nondefense discretionary spending as a whole,
about one-third is disbursed in grants to State and local
governments. Of those grants, about a third are devoted to
education and training programs and a quarter to transportation
programs, with the remainder going to environmental protection,
law enforcement, economic development, and various other
purposes.
Let me now turn to the second question in the testimony,
which is the historical trend in discretionary spending. This
is depicted in the next page of the handout.
Discretionary spending declined noticeably as a share of
GDP from the early 1970s to 2000, mostly because defense
spending declined relative to GDP from about 8 percent in 1970
to a low of 3 percent between 1999 and 2001. Defense spending
then climbed again.
Outlays for nondefense discretionary programs have averaged
about 4 percent of GDP during the past 40 years, with
considerable variation, as you can see, but no evident trend.
Thus, on average, such outlays increased during that period
roughly in line with the size and income of the population.
Nondefense discretionary outlays were elevated in the past
few years in part, as has been noted, because of funding from
the 2009 Recovery Act.
Altogether, discretionary spending amounted to about 9
percent of GDP in the past 2 years, higher than the 6 percent
in 2000, but lower than the 11 to 12 percent of the early
1970s.
The third question addressed in the testimony is how
discretionary spending will evolve over the next decade under
current law. To illustrate the potential impact of the caps on
discretionary appropriations set in the Budget Control Act and
the automatic enforcement procedures contained in that act, we
projected appropriations under several different assumptions,
including the three listed on the next page of the handout.
I apologize for those who don't have the handout. I think
that members of the committee should have it in front of them.
For other people, I am referring to figures and tables that are
in the written testimony, and there are a couple of slides that
are words also from the written testimony. Nothing I am saying
is new and is not in that testimony.
The largest numbers that we looked at, about $12 trillion
over the next decade, would come from extrapolating funding for
2011, adjusted for inflation. That is the way CBO constructed
its baseline projections in recent years before the caps in the
Budget Control Act.
The next set of numbers I will talk about assumes that
funding is equal to the new caps set in law, about $11.3
trillion over the decade. For illustrative purposes, I will
focus in a moment on the scenario under which the caps are met
through proportional reductions in defense and nondefense
spending. But many other combinations are possible, and the
written testimony offers a range of possibilities.
And the third and smallest numbers I will talk about,
totaling $10.4 trillion, incorporate the sequestration and
reduction in caps that we estimate would occur if no savings
resulted from the work of this committee.
The next page of the handout is Table 3 from the written
testimony and deals with defense spending. I will focus on just
the two rows of numbers near the bottom highlighted in blue.
I want to emphasize that the caps on defense spending do
not constrain appropriations for the war in Afghanistan or for
similar activities. And the automatic enforcement procedures
would not affect funding for such purposes either. So what you
are seeing here are numbers for the base defense budget.
The upper of those two blue rows shows the reduction in
defense spending moving from the path where the amount of
funding in 2011 has grown with the rate of inflation to a path
of proportional reductions in defense and nondefense spending
funding to meet the caps. Between 2012 and 2021, such
reductions would total $445 billion, the number shown at the
far right end of the blue bar, or about 7 percent.
The lower of the two blue rows shows the larger reductions
in defense funding and moving from the path where the amount of
funding jumped off 2011 and grew with the rate of inflation to
the path that would occur if this committee's work resulted in
no savings. Between 2012 and 2021, the cumulative reductions on
this path would total $882 billion, or 14 percent. In 2021
alone, defense funding, excluding war funding, would be $110
billion, or 16 percent, lower than it would be if such
appropriations kept pace with inflation.
If you skip the next page of that handout, which is a
continuation of the table, the figure beyond that shows defense
spending as a share of GDP. The light blue line on the left-
hand side shows the history of funding for the base defense
budget. The middle line on the right with the short dots shows
our projection, assuming proportional cuts in defense and
nondefense spending to meet the caps. The lowest line shows our
projection if the maximum automatic reductions are triggered.
Under those two assumptions, in 2021, funding for defense,
excluding war funding, would represent 2.7 or 2.5 percent of
GDP, compared with an average of 3.4 percent during the past
decade.
The next page of the handout is Table 4 from the written
testimony and deals with nondefense spending. Again, I will
focus on just the two rows of numbers highlighted in blue.
The upper of the two blue rows shows the reduction in
nondefense funding again and moving from the path where 2011
funding grew with the rate of inflation down to the path that
would result if the caps were met through proportional
reductions on the defense and nondefense sides. Between 2012
and 2021, such reductions would total $418 billion, or 7
percent.
The lower of the two blue rows again shows the larger
reductions in this time nondefense funding moving from this
inflation-adjusted path to the path if no savings result from
the work of this committee. Between 2012 and 2021, the
cumulative reductions would total $794 billion. In 2021 alone,
nondefense budget authority would be $99 billion, or 15
percent, lower than it would be if such appropriations kept
pace with inflation.
The next page of the handout shows nondefense funding as a
share of GDP, again Figure 6 from the written testimony. The
line on the left side shows the history of such funding. You
can see that nondefense discretionary funding spiked upward in
2009 but then fell back sharply in the past couple of years to
roughly its average share of GDP during the preceding decade.
The upper line on the right shows our projection, assuming
proportional cuts in defense and nondefense funding to meet the
caps. The lower line shows our projection if the maximum
automatic cuts are triggered. Under those two assumptions, in
2021, nondefense funding would represent 2.8 or 2.6 percent of
GDP, compared with an average of 4.1 percent during the past
decade.
The fourth and last question addressed in the testimony is
how the path of discretionary spending might be altered. Let me
make two quick points, which are summarized on the last page of
the handout.
First, for some programs, reductions may be particularly
challenging because funding increases that are greater than the
rate of inflation would be necessary to maintain current
policies or plans. For example, implementing the
administration's multiyear defense plans would require nearly
$500 billion more defense funding over the coming decade than
would occur if current funding increased at the rate of
inflation.
Other examples where an inflation-adjusted extrapolation of
current funding would be insufficient to fund current policies
include veterans healthcare and Pell grants for higher
education. Moreover, some observers believe that current
policies in some areas are insufficient to meet the Nation's
future needs.
For example, many analysts believe that current national
spending on infrastructure is inadequate to provide enough
roads, bridges, and other capital assets to maintain the
current level of services or to fund all the projects for which
benefits exceed costs. Of course, if spending on certain
programs is allowed to grow faster than inflation, then even
less room under the caps will be available for other
discretionary activities.
Secondly, CBO assumes in its baseline projections that
funding subject to the caps will be equal to the amounts
currently specified in law for those caps. That means that
legislation that reduced the funds available for a particular
discretionary activity or that achieve savings in undertaking a
particular activity would only reduce projected total
appropriations if the legislation also lowered the caps.
Without a reduction in the caps, funding for other
discretionary activities would probably fill the gap created by
any specific reduction or savings.
I hope this information is helpful to you, and I am happy
to answer any questions that you have.
Thank you.
[The prepared statement of Dr. Elmendorf appears in the
appendix.]
Chairman Murray. Thank you very much, Dr. Elmendorf. And
again, thank you for being here today and taking our questions.
As you know, this committee is working very hard together
to try and find a balanced plan to reduce our deficit and rein
in our debt. It is not an easy task. We all believe it is
necessary.
Over the past 10 years, domestic discretionary spending has
remained essentially flat after adjusting for inflation, and
this spending has remained stagnant despite the growing need to
have investments to spur job creation and assistance for those
in our country who have been hit the hardest because of this
recession.
In your testimony, you mentioned that discretionary outlays
during the past decade increased primarily due to the increase
in security spending after 9/11. So let me start by asking you
a few questions about the impact of past and potential cuts to
discretionary spending on our overall budget picture.
Would you agree that with the negotiations on the fiscal
year 2011 appropriations bills and discretionary spending caps
in the recent Budget Control Act, that Congress has already
made significant efforts to reduce discretionary spending?
Dr. Elmendorf. Yes, Senator. The current path of
discretionary spending under existing law is a good deal lower
than it would have been without the actions you described.
Chairman Murray. And isn't it the case that even if we
completely eliminated discretionary funding--everything from
NIH to elementary and secondary education, military base
construction, national parks, processing Social Security
checks--all of it, we would still face deficits of hundreds of
billions of dollars because we have not addressed entitlements
and revenues?
Dr. Elmendorf. I have not done that precise calculation,
Senator, but you are most definitely right that discretionary
spending is, and as Congressman Hensarling also noted, a
shrinking share of Federal outlays over time. And entitlement
programs, mandatory spending is a growing share of Federal
outlays, in some cases growing rather rapidly.
And without addressing that path of spending, it would be
extremely difficult to put the budget on a sustainable path.
Chairman Murray. Okay. Well, given the discretionary
spending cuts that Congress has already made, can you talk
about what the economic impact or effect of further efforts to
cut discretionary spending, both in fiscal year 2012 budget
process and in this committee's final product?
Dr. Elmendorf. So, over time, cuts in discretionary
spending reduce in general the services that the American
public receives, services in protection against foreign
enemies, services in the highways they can use or the national
parks they can visit, or other sorts of programs.
Those cutbacks have a variety of human costs. They can also
have economic costs depending on the nature of the cutback.
Even infrastructure spending, for example, where many analysts
think that the country should probably spend more, some sorts
of projects could have a very high economic return. Other
projects could have a very low economic return. So the nature
of the economic effects depends very much on the particular
changes in policy.
In addition, in the short term, given the large gap between
our economy's potential to produce output and the level of
goods and services being demanded and being produced, cutbacks
in Government spending or we believe increases in taxes in the
near term would reduce the level of economic activity and
employment relative to what would otherwise happen. I view that
as really a separate sort of effect from more of the medium-
term or longer-term effects, where the effects, as I said, vary
a good deal depending on the nature of the program being cut.
Chairman Murray. Okay. Well, all of us on this committee
know that we need to address the large, long-term drivers of
our unbalanced Federal budget. But I also really believe that
we have to take steps to strengthen that economic recovery and
address the jobs crisis that we are seeing today.
Now according to CBO's rule of thumb regarding economic
growth and its relationship to budget projections, CBO states,
and I quote, ``Stronger economic growth improves the budget's
bottom line. Weaker growth worsens it.''
Now CBO's projections for economic growth are now weaker
for 2011 and 2012 than CBO projected just earlier this year.
Correct?
Dr. Elmendorf. Yes, that is right. We have not written
formal projections. But if we would do a forecast today, yes,
it would be weaker than we wrote in August.
Chairman Murray. Okay. Well, nearly all of the economists
are telling us that growth continues to suffer from a
significant weakness in demand, and many are warning against
pursuing overly aggressive measures of austerity in the short
term. And I wanted to ask you, do you agree that a lack of
demand is one of the key factors holding back our economic
recovery?
Dr. Elmendorf. Yes. I think it is a widespread view among
analysts that lack of demand for goods and services is the key
factor holding back the recovery. The further question, of
course, is the source of that lack of demand.
Chairman Murray. Okay. So how does a reduction in
Government spending generally affect demand on the economy and
during an economic downturn?
Dr. Elmendorf. Reduction in Government spending will
generally reduce the demand for goods and services, either
because the Government is buying less itself or because it is
providing lower transfers to individuals to purchase goods
themselves.
Chairman Murray. Does tax increases or spending cuts have a
larger impact in reducing that demand and the economic growth?
Dr. Elmendorf. Depends on the specific tax increase or
spending cut that you have in mind, Senator. Certain forms of
Government spending, we think, have a large bang for the buck
in terms of effects on demands. Others have lower effects.
Certain kinds of tax increases would restrain demand by more
than other kinds of tax increases. It depends on the nature of
the spending or tax change, often on the recipient of the
spending or the payer of the tax.
Chairman Murray. Okay. Thank you very much. I appreciate
it.
Representative Hensarling?
Dr. Elmendorf. Thank you, Senator.
Co-Chair Hensarling. Thank you.
And Dr. Elmendorf, again, on behalf of the entirety of this
committee, I want to thank you and thank your staff. We know
that you are sorting through a number of homework assignments,
if you will, from various and sundry members here. And again,
we want to thank you with the diligence and professionalism you
bring to that task.
Dr. Elmendorf. Thank you, Congressman.
Co-Chair Hensarling. Again, when I look at the statutory
duty, as opposed to the statutory goal for this committee, our
duty is to, frankly, offer recommendations in statutory
language to address both the short-term and long-term
imbalance.
With respect to the short-term imbalance, is it not true
that the stimulus bill with interest amounts to over $1
trillion of spending, which accounts for a large temporary
growth in our discretionary budget?
Dr. Elmendorf. Yes. Although, as you know, Congressman,
only a part of the Recovery Act was about discretionary
spending. There were also increases in mandatory spending and
reductions in taxes. In total, we put it a little over $800
billion, and including interest, I think you are right, about
$1 trillion.
And it did lead to a bulge in discretionary funding and
then to an attenuated bulge in outlays because not all the
money got spent right away.
Co-Chair Hensarling. I don't know if you have at your
fingertips numbers with respect to agency growth? I had quoted
a few, and now that I look down, apparently the source is your
office. So I hope I am quoting your office correctly.
Dr. Elmendorf. I don't have those at hand, Congressman. But
if they are numbers from us, then you can certainly trust them.
[Laughter.]
Co-Chair Hensarling. So I can trust them. Well, then I
trust that when you add in the stimulus, the Commerce
Department has grown 219 percent from '08 to '10. That with the
stimulus, EPA has grown 130.8 percent. The Energy Department
has grown 170.7 percent with the stimulus. Education has grown
180.6 percent, at a time when the economy has actually seen
negative economic growth, and family paychecks have shrunk.
And unfortunately, again, this is not the forum in which to
debate the stimulus, but I think it has to be noted when we are
talking about areas of the budget where savings could be had,
at least the American people certainly deserve the facts.
I want to follow up on, to some extent, a point that my co-
chairman was making, and I believe I have this right. Correct
me if I am wrong. Under your alternative fiscal scenario, which
essentially is a current policy baseline, I believe it is at
2024 that all Federal revenues will simply be used to fund the
mandatory portion of the budget, which is essentially our
entitlement and interest. Is that correct?
Dr. Elmendorf. I am sorry. Again, Congressman, you have a
better hand around our facts than I have. But the qualitative
point you are making is certainly right that mandatory spending
just dominates the Government budget in an increasing way, in a
rapidly increasing way over time.
Co-Chair Hensarling. This actually came up in our earlier
hearing with you, and I think I have this correct. Under your
alternative fiscal scenario, you assume a growing revenue base,
do you not? Do you not assume revenues increasing to their
historic level of roughly 18, 18.5 percent of GDP?
Dr. Elmendorf. Yes, that is right.
Co-Chair Hensarling. And don't you also assume, in your
alternative fiscal scenario, the tax increases that are
contained within the Patient Protection and Affordable Care
Act? Do you recall if those are assumed in your fiscal----
Dr. Elmendorf. So what we do, as you know, in our extended
baseline scenario, we try to follow current law. The
alternative fiscal scenario is meant to track more closely what
many people think of as current policy.
What we do for revenues in that scenario is simply to hold
them at the historical average share beyond 2021 without trying
to specify ourselves what combination of specific tax policies
the Congress might enact to hold revenues at that level. So
there is no specific answer to whether any given tax is in or
out of that alternative scenario beyond 2021. We have just set
revenue at the historical average to provide information for
the Congress of what might happen if that sort of policy or set
of policies were continued.
Co-Chair Hensarling. I have a question about the overseas
contingency operation, the OCO funding. I believe that you have
recently readjusted your baseline, but we all know that the
President announced that our military engagement in Iraq will
end this year. And the President plans to completely reverse
the surge in Afghanistan, I believe, by this time next year.
But I still think you are showing a pretty hefty sum in the
overseas contingency operation line item. So can you explain to
us the assumptions underlying this OCO number?
Dr. Elmendorf. Yes, Congressman. What CBO does for any part
of discretionary spending that is not capped under law is to
take the latest funding that has been provided by the Congress
and to extrapolate that over the decade to grow with inflation.
So when we estimated the effects of the caps under the
Budget Control Act at the end of July and in early August, we
compared those caps not with the latest baseline projections we
published in March, but with the later level of funding that
the Congress had enacted at the end of March as part of the
deal to get through the rest of the fiscal year.
So, similarly now, although our latest baseline projection
was published in August, we would focus in estimating any caps
that one might impose on overseas contingency operations on the
difference between those caps and the level that is the latest
level that has been appropriated by the Congress. And that
latest level is about $119 billion on an annual basis.
If one extrapolates that $119 billion with growth for
inflation, one ends up with about $1.3 trillion over the coming
decade. And for that, as for other complements of discretionary
spending, we don't make an evaluation about how those numbers
compare with the likely demand for funds or with any particular
evaluation of the appropriateness of the spending. It is a
mechanical extrapolation.
If you thought we would spend less than that over time,
then one could----
Co-Chair Hensarling. If I could, Dr. Elmendorf, I see I am
already over my time. But I guess it is fair to say that under
your protocols and your rules, the President's recent
announcement that this money is essentially not going to be
spent anyway does not come into your calculation?
Dr. Elmendorf. Not until the Congress enacted a different
level of appropriations, Congressman.
Co-Chair Hensarling. Thank you. Thank you.
Chairman Murray. Thank you very much. Can I just ask how
closely has that extrapolation tracked over the last 5 years?
Dr. Elmendorf. Well, the written testimony shows the
pattern of funding the Congress has provided. For the past
several years, the annual funding was on the order of $160
billion. So this new level is about $40 billion below the level
that has prevailed in fiscal years 2009, 2010, and 2011.
Chairman Murray. Okay. Thank you.
We will now move to each of our committee members for 6
minutes, and we will begin with Representative Becerra.
Representative Becerra. Dr. Elmendorf, thank you very much
for being here, and thank you for the work you are helping us
do over these last several weeks and, hopefully, over the next
few weeks as well.
Let me just try to dispose of one question real quickly.
One of our major problems is the drop in revenues we have seen
over the last several years, and we are trying to tackle the
issue of how to best increase those revenues.
One of the ways you do that is through economic growth. If
folks are back at work, unemployment rates go down. That means
you are paying less in unemployment benefits, which is an
outflow of money, and you are also increasing your revenues
because people are paying taxes again.
My understanding is that if you increase the level of
employment by a certain amount, you will see a commensurate
decrease in the level of deficits and, of course, a
commensurate increase in the GDP. Can you give us a real quick
synopsis of what happens if we put people back to work?
Dr. Elmendorf. So the stronger the economy is, as you say,
Congressman, the more the Federal Government and other
governments collect in revenue and the less it pays out in
benefits of certain sorts. The biggest response is on the
revenue side.
If one is looking for a rule of thumb, people often say
that the Federal Government's effective tax rate on the margin
for an extra dollar earned is to collect about 25 cents of that
in Federal revenue. So an extra dollar of GDP might induce
another 25 cents or so of extra revenue. That is, of course, a
very, very rough rule of thumb, and the actual number would
depend very much on the way in which the economy improved and
who received the income and how it was taxed and so on.
Representative Becerra. So the more you put those 15
million Americans back to work, each of them earning even if it
is only an average American salary, that is thousands of
dollars per worker. That effect of a quarter of that dollar
that each one of those workers earns could be revenue to the
Government, which would help us decrease these deficits?
Dr. Elmendorf. That is right, Congressman. It depends, of
course, on what policies one invokes to move the economy back
closer toward full employment.
Representative Becerra. And that is where we invite you
part of this 12-person panel to help us with those answers.
Let me move on to another question with regard to
discretionary spending. My understanding is that your
projections, and you showed us through some of these charts,
are what you think might happen if the reductions in some of
these outlays and in the investments would occur both in
defense and nondefense over the next 10 years as a result of
the caps and then, if we are not able to come to some
agreement, as a result of the triggers in sequestration.
My understanding is under the caps, there are firewalls
which separate the savings that we would extract from defense
from nondefense, but that those firewalls exist for only 2
years. Your projections go out for 10 years. So are you saying
that the savings that you show in defense are guaranteed, or
that is what we presume if the projections continue forward,
that half of the savings will come from defense and half of the
savings in the caps will come from nondefense?
Dr. Elmendorf. So what the Budget Control Act does is to
establish separate caps on security and non-security funding
for fiscal years 2012 and 2013, and security funding is both
defense funding and some other pieces of funding as well. But
you are right. Beyond those first 2 years, there is no cap on
overall funding.
What we looked at in the written testimony was three
alternatives--one in which the reduction from the inflated
former baseline with inflated amounts, one in which that was
taken up almost entirely through cuts in defense spending; one
in which it was absorbed almost entirely through cuts in
nondefense funding; and one where it was met through a
combination, proportional cuts in defense and nondefense
funding. I presented the middle of those here for simplicity.
But we looked at the range because, in fact, it will be up to
future Congresses to decide.
Representative Becerra. And that is the point I was hoping
you would make is that it really depends on what Congress does
where we will see the savings occur?
Dr. Elmendorf. Yes. Absolutely.
Representative Becerra. Another quick question. Total up
all discretionary spending, whether it is for Pentagon, whether
it is for education, environmental protection, clean water,
clean air, food safety inspection, total that up. How does it
compare to the amount that we spend through the tax code
through what are known as tax expenditures, the tax earmarks?
Dr. Elmendorf. We haven't published an estimate of that,
Congressman. I have seen estimates that the sum of tax
expenditures is about $1 trillion a year. As I mentioned, the
total funding for discretionary purposes last year is about
$1.3 trillion.
Representative Becerra. So we spend almost as much through
the tax code for certain constituencies as we spend through the
entire appropriations and allocations process through the
regular budgetary process. That is the type of spending that we
are not talking about today, the tax expenditures. But you did
discuss it some the last time you were here.
Dr. Elmendorf. Yes. Yes.
Representative Becerra. Appreciate that very much.
Final question. I want to thank you for the report you just
issued on the distribution of income in America and comparison
over the years. You, I think, highlighted some pretty startling
numbers about the disparity in income and wealth in America
today where the top 10 percent, 20 percent of Americans, and
actually, the top 1 percent of Americans, have really seen a
concentration of wealth go in their direction, as opposed to
essentially the very middle of America.
Can you give us a quick synopsis of what you found?
Dr. Elmendorf. So we have found, as other researchers have
found, Congressman, very pronounced widening of the income
distribution in this country, with reductions in the share of
national income going to the bottom four quintiles over the
1979 to 2007 period. And a very large increase, roughly a
doubling, in the share of national income going to the top 1
percent of the population.
Representative Becerra. Thank you. And I see that my time
is about to expire. So I thank you very much for all your
assistance.
Dr. Elmendorf. Thank you, Congressman.
Representative Becerra. Yield back.
Chairman Murray. Thank you.
Senator Kyl?
Senator Kyl. Thank you, Dr. Elmendorf.
Let me read to you an email that was sent to interested
Hill staff by the Associate Director for Legislative Affairs at
the Congressional Budget Office on October 17th. The subject of
the email is ``HHS CLASS Announcement on CBO's Baseline.''
``On Friday, the Secretary of HHS announced that the
department does not plan to implement the CLASS Act long-term
care insurance program under current law. Therefore, in its
next baseline budget projections, which will be issued in
January, CBO will assume that the program will not be
implemented unless there are changes in law or other actions by
the administration that would supersede Friday's announcement.
``Furthermore, following longstanding procedures, CBO takes
new administrative actions into account when analyzing
legislation being considered by the Congress, even if it has
not published new baseline projections. Beginning immediately,
therefore, legislation to repeal the CLASS provisions in
current law would be estimated as having no budgetary impact.''
Now this says that your longstanding policy is to take new
administrative actions into account. And as you testified in
response to Representative Hensarling's question, this would
suggest that you wouldn't necessarily wait for Congress to act.
The President is commander-in-chief. His troop announcement
that Representative Hensarling talked about is tantamount, in
effect, to a Congressional action. He has the ability to
withdraw the troops down.
What is the difference between his announcement that we
will have no presence in Iraq after Christmas and his previous
decision and announcement that we would withdraw in stages the
troops from Afghanistan over the ensuing year, what is the
difference between that announcement and the CLASS Act
announcement in terms of CBO baseline decisions?
Dr. Elmendorf. I think the difference, Senator, is a
difference between the treatment of mandatory spending and
discretionary spending, laid out at least by 1985 in the
Balanced Budget and Emergency Deficit Control Act and followed
since then by CBO in conjunction with the Budget Committees.
For mandatory spending, and the CLASS Act falls in this
category, a program where Congress has established certain
rules, parameters within which administrative actions can be
taken, we are always trying to provide our latest estimate of
the effects of that set of authorizations on the Federal
budget. And if there is news in the form of a very distinct
announcement that some program has been abandoned, then we
adjust the scoring base for those mandatory programs.
But for discretionary spending, our projections don't
respond to particular sets of programs or objectives because
the Congress can choose every year how much to provide for
certain purposes. So----
Senator Kyl. But if I could interrupt, this is a
distinction without a difference. The President is the
commander-in-chief. He is the person that deploys troops, not
Congress. So are you saying that that difference requires you
to wait until Congress acts, even though the commander-in-chief
has already made his announcement and begun the program for
withdrawal?
Dr. Elmendorf. Yes, Senator----
Senator Kyl. They have--in theater, they are making plans
as we speak on how they are going to withdraw the troops from
Iraq.
Dr. Elmendorf. But, Senator, with respect, I think it is a
distinction with a difference. We are not equipped to project
what defense funding the President will request in the future
or what funding the Congress will enact in the future.
Senator Kyl. So are you----
Dr. Elmendorf. This news from the administration is a
factor that will presumably affect the funding they request and
the funding Congress enacts, but not necessarily in a one-to-
one way that we could analyze.
Senator Kyl. So this memorandum that was sent should have
distinguished between mandatory and discretionary spending when
it talks about CBO's policy. ``CBO will assume the program will
not be implemented unless there are changes in law by the
administration that would supersede the announcement. Following
longstanding procedures, it takes new administrative actions
into account.''
So they should have distinguished between mandatory and
discretionary. Is that what you are saying?
Dr. Elmendorf. I think you are right, Senator. I should
have put that word in. But just to emphasize, the things I am
describing on both the discretionary and mandatory side are
procedures that go back at least a quarter century.
Senator Kyl. So then with regard to the so-called OCO
savings that the President included in his alleged budgetary
savings, it all depends upon whether the defense appropriations
legislation is passed or when that legislation is passed as to
whether you would change your baseline? Is that correct?
Dr. Elmendorf. Yes. So Congress enacts a different level of
appropriations at any point, then anything we would do after
that point would respond to that new level of enacted
appropriations.
Senator Kyl. Thank you.
So if we are able to get the appropriations bills completed
before the December 23rd deadline for this committee to act,
much of the alleged OCO savings would no longer be available
because of an adjustment in your baseline projections. Would
that be correct?
Dr. Elmendorf. Well, I don't know, Senator. It depends what
level appropriations you enacted.
Senator Kyl. To the extent they are lower than the previous
year's, would it not cut that amount from your baseline?
Dr. Elmendorf. To the extent that they are lower than the
$119 billion that has already been enacted for this fiscal
year----
Senator Kyl. Correct.
Dr. Elmendorf [continuing]. That is a good deal lower than
the $159 billion from the last fiscal year. If, in fact, the
Congress decided to enact appropriations for the rest of this
fiscal year that were below $119 billion for overseas
contingency operations, then that would bring down our
projection of those and the base against which we would
estimate further reductions, importantly.
Senator Kyl. Thank you very much.
Dr. Elmendorf. Thank you.
Chairman Murray. Senator Baucus?
Senator Baucus. Thank you, Madam Co-Chair.
I would like to just focus a little bit on defense
spending. Is it true that our current level of defense
spending, including OCO--otherwise known as overseas
contingency operation, otherwise known as war funding--is
higher now in historic terms compared with any other time in
American history except for World War II?
That is, is the current level of defense spending,
including war funding, greater now than during the Korean War?
Dr. Elmendorf. Yes, I believe that is true, Senator.
Senator Baucus. Okay.
Dr. Elmendorf. As I showed in my testimony, as a share of
GDP, that spending is----
Senator Baucus. No, I am not talking about--no, no. I am
not talking about share of GDP.
Dr. Elmendorf. In dollars----
Senator Baucus. Dollars.
Dr. Elmendorf. Dollars adjusted for inflation?
Senator Baucus. Dollars. Dollars. Dollars adjusted for
inflation.
Dr. Elmendorf. Yes. So, in dollars adjusted for inflation,
DoD spending was about $240 billion during the Korean War, and
in 2011, it is nearly $700 billion.
Senator Baucus. Okay. So the same would be true for the
Vietnam War? That is, we are spending more dollars----
Dr. Elmendorf. Yes.
Senator Baucus [continuing]. Than we did in Vietnam,
adjusted for inflation?
Dr. Elmendorf. Yes, Senator.
Senator Baucus. Adjusted for inflation. Thank you.
And more than we ever did during the Reagan administration,
adjusted for inflation?
Dr. Elmendorf. Yes, Senator.
Senator Baucus. And more than the Cold War average?
Dr. Elmendorf. Yes, Senator.
Senator Baucus. Which is the highest since World War II. Is
that correct?
Dr. Elmendorf. So by our--I think during the Reagan
administration, yes, that was higher than in the Vietnam War or
Korean War.
Senator Baucus. Okay. We have already touched on this, but
I just want to nail this down. The Budget Control Act, as you
mentioned, had two separate caps--for what is it, 2012----
Dr. Elmendorf. 2012 and 2013.
Senator Baucus [continuing]. And 2013, but no separate caps
for security and non-security thereafter?
Dr. Elmendorf. Yes, Senator.
Senator Baucus. Which means that the Appropriations
Committees of the Congress could decide to spend more on
security than is allowed under the caps in the first 2 years?
Dr. Elmendorf. Yes. It can pick any allocation under those
total caps that it chooses.
Senator Baucus. Anything they want to do under those total
caps?
Dr. Elmendorf. Yes. Now if this committee doesn't achieve
any additional savings, then the enforcement procedures
establish separate caps for defense and nondefense
discretionary spending.
Senator Baucus. Okay.
Dr. Elmendorf. But under the basic caps, you are right,
Senator.
Senator Baucus. Okay. So there are basic caps. There are
base caps in the act. Are there any caps on war spending?
Dr. Elmendorf. No, Senator. The caps do not constrain war
spending.
Senator Baucus. There are no caps on war spending?
Dr. Elmendorf. No. I think, technically, the caps would be
adjusted upward by any amount of spending that was designated
by the Congress for overseas contingency operation.
Senator Baucus. That is a technical point. The main point
is there are specific caps for security and non-security at
least for 2 years, then no caps in the act for subsequent
years, and no caps whatsoever on OCO.
Dr. Elmendorf. That is correct, Senator.
Senator Baucus. Nothing.
Dr. Elmendorf. Yes.
Senator Baucus. Okay. No caps on OCO.
Now has the Appropriations Committee sometimes gone to OCO
to spend dollars that are really arguably not war funding
because that is a kind of an extra pot of money to use? It is
there, and there are no caps on it. Has that ever happened?
Dr. Elmendorf. Senator, I can't speak to the motivations or
thought process of the Appropriations Committee. Certainly,
there will be inevitably some ambiguity in any effort to
allocate costs, and what costs are truly attributable to these
wars and what costs are not will be a matter of judgment. And--
--
Senator Baucus. Okay. Didn't the Senate Appropriations
Committee propose--maybe they actually did--to move $9.9
billion of base programs requested by the President to this
account?
Dr. Elmendorf. I think over the past few years, Senator,
there have been some movement of money that used to be
designated as OCO into base budgets, and I think some movement
in the other direction as well. I am afraid I don't have an
overall assessment of the numbers involved.
Senator Baucus. What about there are reports that--and this
obviously double-checked--$100 million was taken out of OCO for
migration and refugee assistance for places like Kenya and
Pakistan?
Dr. Elmendorf. I am sorry, Senator. I don't know.
Senator Baucus. But we do know that there is no limit on
the OCO account. And let me ask, how is it defined? What are
the definitions of what constitutes and does not constitute
appropriate spending out of the war account?
Dr. Elmendorf. So, in our presentations, we follow the
labeling provided by the Congress, and it is up to you and your
colleagues to decide what you support under various categories.
Senator Baucus. But it just kind of sounds like it is what
Congress wants to do.
Dr. Elmendorf. That is our--yes, Senator.
Senator Baucus. And that sometimes happens around here. But
you are saying there are no scoring rules under the Budget
Control Act that would restrict the migration of base defense
spending to OCO in the future?
Dr. Elmendorf. I think that it is up to the Congress, as I
said, to designate what it views as related to those operations
and what it views as part of spending that would happen anyway.
Senator Baucus. And if this committee were to say dollars
could not be spent on a certain program, my understanding is
that that would not be scored by your office?
Dr. Elmendorf. Again, a certain discretionary program--
Senator Kyl has taught me to be very careful about that.
Changes to mandatory programs, of course, we would do estimates
of. But changes in individual discretionary programs, we would
not take account of because we are relying on the overall level
of the caps.
Senator Baucus. Correct. Correct.
Dr. Elmendorf. And the squeezing of one particular program
without a change in the cap level----
Senator Baucus. Right.
Dr. Elmendorf [continuing]. We think would be filled by
other----
Senator Baucus. What if this committee were to establish
caps? Would that be scored? What if there were a cap on OCO?
Dr. Elmendorf. If the committee established caps on OCO
that were below the level of funding that is based on the
extrapolation with increases for inflation from the latest
enacted appropriations, then we would estimate savings from
that.
Senator Baucus. And you are suggesting about one-point--
what did you say?
Dr. Elmendorf. About $1.3 trillion.
Senator Baucus. About $1.3 trillion.
Dr. Elmendorf. Yes.
Senator Baucus. Uncapped?
Dr. Elmendorf. Yes. And that is just the--it is not magic.
That is the $119 billion, the most recently enacted,
extrapolated with inflation.
Senator Baucus. Extrapolated forward with no caps?
Dr. Elmendorf. Yes.
Senator Baucus. Okay. But if we were to set a cap, then
that would be scored?
Dr. Elmendorf. We would estimate the effects. Yes, Senator.
Senator Baucus. Thank you.
Chairman Murray. Thank you, Senator Baucus.
Representative Upton?
Representative Upton. Thank you, Madam Chair.
And again, Dr. Elmendorf, we appreciate your participating
today. And I just want to take us back to a question from
earlier days, and that is, as this committee works to try and
get an agreement, a solution, what is the real date that you
want us to give you the information that your worker bees can
turn out a reasonable number for us?
Dr. Elmendorf. So, as you know, Congressman, our legions of
skilled analysts are working very hard for this committee
already.
Representative Upton. Have they had time off until now?
Dr. Elmendorf. No, Congressman, I am afraid not. We have a
terrifically hard-working group, as you know.
As I said the last time I was here, if you have a set of
proposals that would make changes across a range of mandatory
spending programs, then that would require us some weeks to
work with legislative counsel and the staff of this committee
in refining the legislative language to accomplish the
objectives that you are setting out to accomplish and then for
us to produce a cost estimate.
And backing up from Thanksgiving, that left us looking at
the beginning of November, which we are very aware, as you are,
Congressman, is not very far away.
Representative Upton. Thank you.
What is the deficit as a share of GDP today?
Dr. Elmendorf. The deficit in fiscal year 2011 just
completed was about 8.5 percent of GDP.
Representative Upton. And if this committee fails and we
end up with a sequester, and we do the numbers that you
suggested here in your testimony for both defense and
nondefense. So that defense we would end up with a sequester
of, in essence, of $882 billion in savings over the 10 years
and a number of almost the same, $794 billion, in nondefense
over that same 10 years, and nothing on the entitlement side or
nothing on the mandatory side--just those two--where would we
go in terms of the debt as a percentage of GDP 10 years down
the road?
Dr. Elmendorf. So, Congressman, let me be clear. These
numbers at the bottom of these tables are a comparison of the
sequestered cap path to the inflated----
Representative Upton. Right. Right.
Dr. Elmendorf [continuing]. Extrapolation. It is not the
amount of the sequester or the enforced budget portion itself.
Remind you, our baseline projections for August incorporated
the $1.2 trillion that is under current law to be achieved
either through the actions of this committee or through these
enforcement procedures.
So whether the committee hits $1.2 trillion or hits the
last--the remainder is filled in to the enforcement, as long as
you don't save more than $1.2 trillion, you are putting
yourself back to our baseline projection from the summer. Under
that projection, allowing for the expiring provisions of the
tax code to expire and Medicare payments to doctors to be cut
very sharply and the other features of current law, deficits,
by the end of the decade, are 1.5 percent or so of GDP, and
debt is actually declining relative to GDP.
But that hinges absolutely critically on revenues rising
above their historical average share of GDP, as it would under
current law, and discretionary spending falling well below its
average share of GDP in order, essentially, to make room for
the great increase in Social Security and the major healthcare
programs.
Representative Upton. I didn't know if you saw the GAO
report that was released earlier this week as related to if
this committee fails that--or I want to say that $1 trillion in
savings is not sufficient, is the words that they used, for
stability, and they predicted, in essence, I believe, a credit
downgrade. Have you had a chance to look at that report?
Dr. Elmendorf. I have glanced at it, Congressman.
Representative Upton. Do you have any comments? I know it
just came out this week.
Dr. Elmendorf. One technical point, which is that they
offer two scenarios. One of which is close to our alternative
scenario based on current policy. The other of which they view
as closer to current law.
Nonetheless, what they do in that scenario is to limit the
increase in tax revenue as a share of GDP that would actually
happen under current law. Our extended baseline scenario
incorporates the rising revenues relative to the GDP that would
persist and go on beyond this next decade.
So both of their scenarios look worse than our better
scenario. It is just a difference in policy assumption about
tax revenue--tax policy. But we certainly agree very much with
the underlying point of the analysis that under current
policies, the U.S. Government is on an unsustainable fiscal
path and that the magnitude of changes that will be needed from
current policies is very large.
As I said the last time I testified here, if one wanted to
consider extending the expiring tax provisions and limiting the
reach of the alternative minimum tax and adjusting Medicare's
payments to doctors, the deficit over the coming decade becomes
$8.5 trillion rather than the $3.5 trillion under current law.
And debt would be rising relative to GDP to levels that we have
almost never seen in this country.
Representative Upton. Thank you.
Chairman Murray. Representative Clyburn?
Representative Clyburn. Thank you very much, Madam Chair.
And Dr. Elmendorf, thank you very much for being here again
today.
You may recall that at the first hearing I discussed a
little bit of the growing wealth gap that exists. I did that
with some references to unemployment numbers.
Now your recent report indicates that over the last 28
years--in my estimation, that is a generation. Over the last
generation, we have seen an increase in income of upper 1
percent households in America of 275 percent. During that same
time, we have seen an increase in the top 20 percent of 65
percent. But of the bottom 20 percent, only 18 percent.
Now over that same period of time, for the 60 percent of
the middle, we have seen income has grown only 40 percent. That
indicates to me that the middle income is shrinking relative to
the rest of the country.
Now if we were to extrapolate that out, as you talked
about, I would assume that we are where we are because of--
well, let me put it this way. To the extent that Government
policy has allowed this gap to exist, if we continue current
policy, then it is fair to say that we are going to experience
that kind of continued widening of the wealth gap in America,
in the United States.
Dr. Elmendorf. So, Congressman, one of the issues that we
wrestle with in our projections is the evolution of the income
distribution. The study that we did, as you know, ends with
data from 2007.
Representative Clyburn. Right.
Dr. Elmendorf. What has happened during the past few years
of the recession and financial crisis is not clear. Although if
you look in our study, some past recessions have shown some
narrowing of the income gap, particularly because higher income
people collect a relatively larger share of their income from
capital income, which tends to be more cyclical.
So just where things precisely stand today, I am not sure.
Our projections do incorporate some ongoing widening of the
income distribution, but whether is it is on the--whether the
events of the last 30 or so years will continue at that pace,
we don't know, and I don't think our projection calls for a
continued widening to that extent.
But neither do we see forces at hand that would cause that
to be reversed in coming years.
Representative Clyburn. So we don't see anything that could
possibly shrink that either?
Dr. Elmendorf. No, again, except for the effects of this
recession, which we don't have data for. But looking from here
on, we don't see those underlying factors reversing.
Representative Clyburn. I would assume then that this--I
have seen a whole lot in the media in recent days about who is,
in fact, paying the taxes in the country. I am assuming, as my
dad used to tell me, ``Don't argue about taxes, son, because if
you really owe them, that means you made something.''
So I am assuming that these people are not paying because
they don't owe anything. They don't owe anything because they
have not made anything. So that is just an assumption on my
part.
But let me look at this economic ladder that we talk about
a lot. If we are going to see a shrinkage in that gap, it would
seem to me that we need to start looking at how do you prepare
people to assume tax-paying responsibilities in our society?
And we do that by investing in their education, to the extent
that things like Pell grant, Head Start, Title I for
disadvantaged people, all of these things are designed to
prepare people to earn income and, therefore, pay taxes and not
be on the Government dole, as we like to say down South.
Am I to believe that if we dramatically reduce that
investment, then we will dramatically reduce people's abilities
to assume these responsibilities and to become taxpayers?
Dr. Elmendorf. You are raising important, but difficult
questions, Congressman. People's ability to earn income comes,
as you know, from a whole variety of forces on their lives.
Federal Government policy is one of those forces. And if
Federal policy were changed in a way that provided
significantly less support for people in obtaining educations
or getting skills, that could well affect their income in the
future.
But I don't have a way of quantifying that. It depends very
much on the specific programs. There is very large research
literature and a lot of experimentation in the world about
training programs, for example. And some seem to work well, and
some seem to work badly. And the ones that work well are
difficult sometimes to expand to a larger scale.
So just what role particular Government programs play,
again, is a much-studied question, and we do some work in that
area. But there isn't a very good general answer to how
important that is as a factor relative to other factors
influencing people's ability to earn income, as you say, and
then, through that, to pay taxes.
Representative Clyburn. Well, thank you very much, Dr.
Elmendorf. This time goes real fast here.
Dr. Elmendorf. Thank you, Congressman.
Representative Clyburn. My time has expired.
Chairman Murray. Senator Portman?
Senator Portman. Thank you, Co-Chair.
And thank you, Director Elmendorf, for being with us again
and for all the hard work that you and your team are doing in
responding to our many inquiries. Because I said that, I expect
mine to be prioritized. Kidding, guys. [Laughter.]
Dr. Elmendorf. We prioritize everybody first, Senator.
Senator Portman. Thank you, yes. Especially the committee,
I hope, because we do have a short period of time here, and we
have a lot of work yet to do.
You talked a little about jobs and the economy earlier, and
my colleague Congressman Clyburn just raised this issue, the
importance of jobs, which is, after all, one way you get people
paying taxes is to be sure they have the opportunity to earn
enough money to pay those taxes. And you had said that you
believe that demand was the key issue, and the source of that
lack of demand was the tough question.
And I would just ask you if you could comment on the
unsustainable fiscal path that you have outlined repeatedly,
including again today, and the fact that, as you said, we are
increasing the debt by anywhere from $3.5 trillion to $9
trillion over the coming decade, depending on whether you use
the current law or current policy baseline. Reminding us that
our commitment here is to reach $1.5 trillion and $1.2 trillion
to avoid sequester. That, of course, isn't even close to the
increase we are likely to see from the current $14.5 trillion
debt.
What impact does that have? I am sure you have looked at
the Rogoff and Reinhart study and others who have commented on
the impact of this unsustainable fiscal situation on our
current economy.
Dr. Elmendorf. So I think the unsustainable path matters in
the short run in various ways. Partly, the borrowing the
Government has done and anticipation of Government borrowing
can crowd out private investment to some extent. At the moment,
with private investment weak anyway, the magnitude of that
crowding out is less clear. In fact, we see Treasury interest
rates, as you know, being very low at the moment.
But there can be crowding out of investment. I think beyond
that, the uncertainty about fiscal policy is probably weighing
on households and businesses. They can recognize that there
will have to be, as a matter of arithmetic, changes in taxes
and/or spending relative to current policy, but they don't know
what those changes will be. And I think that sort of
uncertainty is naturally an inhibiting factor in decisions,
particularly commitments of money over time to invest in
factories and equipment, to invest by hiring people, for
households to invest in housing and durable goods.
That uncertainty is a piece, I think, of broader
uncertainty about Government policies. There are a lot of
different policies that are, I think, up in the air in a way.
And that policy uncertainty, of course, is a piece of a much
broader uncertainty about the state of the economy and the
income that households think they will have in the future and
the demand for the goods and services that businesses think
they will have in the future.
Senator Portman. Well, I appreciate that. And as an
economist, I appreciate your giving us really a sense of the
importance of our task because it is not just about cutting
spending, is it? It is about the economy and jobs. And although
we are not called the jobs committee, what we do will affect
that sense of certainty and predictability going forward.
Dr. Elmendorf. Yes.
Senator Portman. And again, not in the substantial ways
that we would hope, all of us, but it will make a difference
and take us in the right direction. The alternative, of course,
has been talked about today as well, which is if we don't do
our work, what impact that could have, even make our prospects
for economic growth more negative.
Let me use some figures here that you may not trust because
they are from the Office of Management and Budget. And you said
earlier that you trusted the CBO figures, but I think they are
consistent with yours. And let me start by saying I totally
agree with what you said earlier. Mandatory spending dominates
the Federal--or mandatory spending dominates the Federal
spending. That was your quote a few minutes ago.
Co-Chairs Murray and Hensarling have also made that same
point in various ways from a little different perspective, and
I totally agree with that. I think if this committee doesn't
get at the issue, which is the biggest part of our budget, over
50 percent of the budget--60 percent, if you include interest
on the debt--and the fastest-growing part of our budget has
gone from roughly 25 percent of our budget in the 1960s to over
50 percent today.
If we don't get at that, the largest part and the fastest-
growing part of the budget, we will, of course, not have
accomplished our goal. But having said that, let me give you
some statistics on the discretionary side, since that is the
topic of our hearing today. I will give you some numbers from
1990 until today.
Nondefense discretionary has risen during that time by 95
percent, which, by the way, is nearly double the 52 percent
growth in defense spending. So if you took 52 percent growth in
defense spending from 1990 until today, 95 percent on
nondefense. Now admittedly, the defense spending is not as high
because the increases we have seen have been more recent, from
2001, which reflected an increase from the cuts in the 1990s on
defense. So if you use just the last decade, defense would be
higher.
But let us look then at 2001 to 2011 on the nondefense
side. Outlays on the education side, discretionary spending up
116 percent in the last 10 years. International spending up 102
percent. Veterans spending up 100 percent. Community and
regional development spending up 71 percent. Health research
and regulation spending up 56 percent, and so on.
So I just think we need to keep both of these things in
mind. One, that if we don't deal with the spending issues, it
is tough to get this economy going. And second, we have seen
some substantial increases in the discretionary spending,
understanding that the BCA has now put those spending levels
under more constraints. Do you agree with those numbers?
Dr. Elmendorf. I don't know those--have this back of the
hand, Senator. But I would not argue with your numbers.
Senator Portman. Well, again, thank you for all your help
to help us achieve the goal we have all talked about today, and
we look forward to working with you going forward.
Dr. Elmendorf. Thank you, Senator.
Chairman Murray. Senator Kerry?
Senator Kerry. Dr. Elmendorf, thank you very much for being
here. Thank you for the terrific work you and your team are
doing. We appreciate it.
It is my understanding that CBO keeps regular estimates on
the number of jobs that have been created by the American
Recovery and Reinvestment Act. Is that correct?
Dr. Elmendorf. Yes, Senator. We are required to publish
estimates once a quarter.
Senator Kerry. Right. And so, just quickly, because I don't
want to spend much on time, is it not correct that without the
policies of the American Recovery and Reinvestment Act that GDP
would be lower and unemployment would be higher?
Dr. Elmendorf. Yes, Senator.
Senator Kerry. So it has had a positive impact on GDP and
on reducing unemployment?
Dr. Elmendorf. Those are our estimates, Senator. Yes.
Senator Kerry. Now, with respect to our work here in the
committee, I talked to you last time you were here about
``going big,'' about a $4 trillion total target if you include
the money already cut, $3 trillion if you don't. It is my
understanding that you already have in your baseline an
accounting for $1.2 trillion in deficit reduction by this
committee. Is that accurate?
Dr. Elmendorf. Yes.
Senator Kerry. So if all we do in this committee is $1.2
trillion, we, in effect, are not reducing the deficit below the
current levels or rates?
Dr. Elmendorf. That is right. That is because of these
automatic enforcement procedures. If you don't take explicit
action, there is a backup plan, which is the further cuts in
spending that I have outlined here.
Senator Kerry. Now with respect to the bigger deal, so to
speak, would you tell the committee or share with the committee
your perception of assuming you had a $3 trillion reduction,
which included something along the ratios we have all heard
about either in Rivlin-Domenici or in Simpson-Bowles or Gang of
Six, somewhere in the vicinity of 3-to-1 or 2-to-1 of cuts to
revenue, and assuming that the revenue were to come exclusively
from the highest-end people, that 275 percent increase in
income, can you make a judgment as to what the impact would be
on the marketplace and perceptions of deficit reduction or job
growth that come from the $3 trillion versus just achieving the
$1.2 trillion goal?
Dr. Elmendorf. So just looking at the aggregate deficit
reduction, I think it is clear that larger reductions coming
from the work of this committee would have a positive effect on
current spending and on current output and employment. And
conversely, that a failure of this committee to reach agreement
or for Congress to enact an agreement reached by the committee
would have a negative effect on confidence and, thus, on
spending.
Senator Kerry. And if we do simply $1.2 trillion or $1.5
trillion, which is the target goal, and that is all we do,
isn't it a fact that we are going to be back here in about a
year or 2 or 3, at maximum, dealing with the very same issues
that are on the plate now about the unsustainability of our
budget?
Dr. Elmendorf. Yes, Senator. And I think that is certainly
right.
Senator Kerry. So in terms of the duty that Co-Chair
Hensarling has talked about to provide language to
significantly reduce, the most important message to the
marketplace, I am told, comes if you achieve a $4 trillion
total, which is the only way to begin to stabilize the debt. Is
that not accurate?
Dr. Elmendorf. Yes, the amount that is needed depends, very
importantly, on how you view the expiring tax provisions and
some other provisions of current law that would take us away
from current policies to which people have become accustomed.
If one extends all or a large share of the expiring tax
provisions over the next few years, then the gap between
spending and revenues over the coming decade becomes much
larger, and much more other action is needed in order to
achieve any given objective for the path of debt relative to
the size of the----
Senator Kerry. Well, can you share with the committee what
would have a greater negative impact on growth--the failure of
the committee to come up with more than $1.2 trillion or $1.5
trillion and the marketplace signals that would send about the
continued fiscal plight of the country, or an ability to come
up with a $3 trillion or $4 trillion level that had that 3-to-
1, 2-to-1 ratio that I talked about with any revenue coming
either from closing tax loopholes or exclusively from that
high-end 275 percent increase income earner?
Which would have the greater negative impact on our
economy--finding some revenue from those folks and getting a
deal, or having no deal and not having that revenue?
Dr. Elmendorf. I am afraid, Senator, I can't analyze the
sort of policy proposals you are describing in my head.
Senator Kerry. Well, can you analyze----
Dr. Elmendorf. And we have not done an analysis of any of
the packages you have described.
Senator Kerry. But you can analyze--I mean, you have told
us that if we fail to come up with anything that deals with the
unsustainability, we are sending a bad message to the
marketplace, aren't we?
Dr. Elmendorf. Yes. Again, I think in terms of the amount
of deficit reduction, the more that this committee can achieve
over some period of time, the better that would be for current
confidence. But I can't weigh that off against the effects of
sort of a hypothetical combination of specific spending and tax
changes.
Senator Kerry. Well, leave the hypothetical out. Can you
tell us what, for instance, the expiration of the top end of
the Bush tax cut, if it went from 35 to 39.6 and it was part of
a $4 trillion deal, would that have a negative impact on growth
in our economy?
Dr. Elmendorf. So we actually did last fall, for the Senate
Budget Committee, provide estimates of the effects on the
economy of different ways of extending the expiring tax
provisions, and extending them had the negative effect of
reducing deficits, the positive effect of keeping marginal tax
rates lower and, thus, encouraging work and saving.
In our estimates, the negative effects of the extra debt
was larger than the positive effects of lowering marginal tax
rates for those particular policies we looked, again, over the
medium and longer term. But that is why the answer really
depends on the specifics of the policies.
Senator Kerry. Thank you very much. I appreciate it.
Chairman Murray. Representative Camp?
Representative Camp. Well, thank you, Co-Chair.
Mr. Elmendorf, is there anything in the Budget Control Act
that would prevent the Congress from changing how the sequester
would affect defense spending?
Dr. Elmendorf. I mean, the Congress could enact a change in
law that could override the Budget Control Act.
Representative Camp. So there is nothing in the Budget
Control Act that would prevent that?
Dr. Elmendorf. No. I mean, in general, as you know, any
Congress can reverse the actions of a previous Congress.
Representative Camp. I appreciate your response to a
question by Senator Murray that you believe that your
projections on GDP growth are too generous and that you believe
actually they would be lower, which would mean actually our
deficit is worse than you have projected in the past. But under
your projections, you are assuming a 30 percent cut to
physicians in Medicare, are you not?
Dr. Elmendorf. Yes.
Representative Camp. And you are assuming that taxes go up
$3.8 trillion, that everybody's taxes go up, certainly would
have a detrimental effect on the economy. And you are assuming
that there is a cut in discretionary spending.
So, as you project that and in answer to Mr. Upton's
question that deficits are going to decline as a percentage of
our GDP, it is based on all of these assumptions, which,
frankly, would impact that number particularly in one way. I
would just have to say----
Dr. Elmendorf. As you know, Congressman, it is not our
assumptions. We are following current law in that way.
Representative Camp. But these are assumptions you baked
into your proposals, into your testimony today. I am just
trying to point that out.
And under either of your long-term fiscal projections,
spending on entitlements or mandatory health programs, Social
Security, et cetera, will increase between 15 and 17 percent of
GDP, of our gross domestic product. And net interest costs will
increase to between 4 and 9 percent. And under either of those
scenarios, that crowds out discretionary spending, even if
assuming the highest levels of revenue this country has even
seen.
So I guess my question is under even the best of
assumptions, the rosiest of assumptions, total discretionary
spending under that sort of long-term scenario was about 1
percent of GDP versus the 9.3 percent it is today. And I guess
I would say to you, your response to that suggestion or those
calculations, do they sound correct to you?
Dr. Elmendorf. So, again, I don't have our long-term
numbers at hand. We extrapolate--for our projections over the
long term also, we extrapolate discretionary spending according
to some simple rule of thumb. What the Congress ultimately did
when it reached an unsustainable point, we can't predict.
Representative Camp. Well, presuming my question then that
if, under the rosiest of assumptions, given those long-term CBO
projections that discretionary spending is just 1 percent of
GDP, has that ever occurred in recent history?
Dr. Elmendorf. Well, I mean, I don't know about the 18th
century. But, no, it has not occurred in recent history.
Representative Camp. In recent history. Relatively recent
history.
Dr. Elmendorf. No.
Representative Camp. So we have never been at that level?
Dr. Elmendorf. No.
Representative Camp. And I think the question is could we
operate a functioning Government at just 1 percent of
discretionary spending of GDP?
Dr. Elmendorf. Nothing like the Government that we are now
accustomed to in either defense or nondefense programs.
Representative Camp. And again, with your testimony that
mandatory spending, as you said, dominates the Government
budget I think was your quote. You also said it is a growing
share of spending. It is growing rapidly. Doesn't this
illustrate that as part of what we are trying to do, the need
to rein in mandatory spending is obviously one of the
priorities that we need to address?
Dr. Elmendorf. Again, it is up to the committee to choose
what changes in policy it wants, but certainly, a growth in
mandatory spending, particularly for healthcare and also in
Social Security, is the feature of the budget that makes the
past unrepeatable. It is the change under current policies
because of the aging of the population and the rising costs of
healthcare that push up that spending in such a substantial way
that require us as a country and you as our elected leaders to
make choices to make the future different in some way from the
past.
And whether that is through changes in those programs or
changes in tax revenues or changes in other Government programs
is up to you, as you know.
Representative Camp. Thank you.
I yield back, Madam Chair.
[Disturbance in hearing room.]
Chairman Murray. The committee will be in order, please.
The chair wishes to remind all of our guests that----
[Disturbance in hearing room.]
Chairman Murray. I would request that the Capitol Police
restore order.
The committee shall recess until we are in order. [Recess.]
Chairman Murray. Thank you very much.
Representative, you can continue.
Representative Camp. No, I had yielded back, Madam Chair.
Chairman Murray. All right. We will turn to Representative
Van Hollen.
Representative Van Hollen. Thank you, Madam Chairman.
Thank you, Dr. Elmendorf, for your testimony.
Just to be clear, if the Congress was to take action to
repeal the defense portion of the sequester, all things being
equal, that would make the deficit worse. Correct?
Dr. Elmendorf. Yes.
Representative Van Hollen. Thank you.
Let me just go back to I think sort of an overall theme
here, which is that as a share of GDP, under current law,
nondefense discretionary spending is shrinking dramatically
over the next 10 years. Is that not the case?
Dr. Elmendorf. Yes, that is right, Congressman.
Representative Van Hollen. And in fact, it goes to below 3
percent in your chart, Figure 6, which as a percent of the
economy is about the lowest level since the Eisenhower
administration.
Now there have been many questions that relate to the level
of nondefense discretionary spending during the 2007-2008
period, which was a component of the Recovery Act. Just to be
clear, in your response to Senator Kerry's question, I think
you indicated very clearly that that spending as part of the
overall Affordable Care Act actually helped prevent the economy
from getting worse. Correct?
Dr. Elmendorf. I think you mean the Recovery Act--
Representative Van Hollen. Correct.
Dr. Elmendorf [continuing]. In 2009 and 2010 and this year.
Representative Van Hollen. That is right.
Dr. Elmendorf. And we believe that cuts in taxes and
increases in Government spending through that act increased
output and employment relative to what would have occurred
otherwise.
Representative Van Hollen. That is right. And as we look
forward in this committee, and I received a letter from you. I
think the calculation of the Congressional Budget Office is
that about a little over one-third of the current deficit that
we face is a result of the fact that the economy is not at full
employment. Is that right?
Dr. Elmendorf. That sounds right. Yes, Congressman.
Representative Van Hollen. So even though we have prevented
things from getting a lot worse more quickly, clearly, we have
a long way to go, and I wanted to follow up on a remark you
made with respect to infrastructure spending where you said,
``Many analysts think that the country should spend more in the
area of infrastructure.''
CBO, I know, has looked at infrastructure investments. Do
you believe that that is an effective way to try and boost job
growth, especially given the fact that we have over 14 percent
unemployment in the construction sector?
Dr. Elmendorf. Yes, Congressman. We think a variety of
Government spending programs, if increased, or Government tax
revenues, if reduced, would spur economic activity in the next
few years.
Representative Van Hollen. And I know CBO has also analyzed
different forms of investment to see which would be more
effective. There a lot of folks out there who are unemployed
through no fault of their own and who are continuing to look
for work. As I looked at your analyses, one of the most
effective ways to boost consumer demand, which, of course, is a
big soft spot, would be to extend support for people who are
out of work through no fault of their own. Is that right?
Dr. Elmendorf. Yes, Congressman.
Representative Van Hollen. Thank you.
And another issue that is looming on the horizon is as of
the beginning of next year, the current payroll tax holiday,
which is in effect for all working Americans, will lapse unless
the Congress takes action. And if that were to lapse and that
would mean that working people had less disposable income,
especially at this point in time, that would also dampen demand
in the economy, would it not?
Dr. Elmendorf. Yes, Congressman.
Representative Van Hollen. And all that dampening of demand
would mean less economic growth and fewer jobs, would it not?
Dr. Elmendorf. Yes.
Representative Van Hollen. Thank you.
A lot of ground has, obviously, been covered here. I would
just want to pick up on the question, comment really that our
Congressman Upton made, and I think we are all very aware of
the fact that the clock is ticking here. And in my view, we
have to accomplish an awful lot in a very short period of time,
especially given your constraints.
And I really hope that this committee is able to complete
its mission and come up with a package that serves two
purposes. One is to try and get the economy moving again and
put people back to work, and you have described some ways that
that could be done in response to questions. And as you have
also indicated, that can also help reduce the deficit over a
period of time because the sooner you get people back to work,
the more the economy gets back into gear, the more revenue that
will come in.
Secondly, we need to act to put in place a long-term,
credible, deficit reduction plan that does that in a steady way
without harming current jobs and economic growth, and we need
to do it, I believe, in a balanced way, like every other
bipartisan group that has looked at this challenge recently.
And so, I hope we can complete that mission.
As you have indicated in your testimony today and before,
in that long-term picture, there are two big components. One is
there is no doubt we have to get a grip on the increasing
costs, as a result of the baby boom retirement, rising
healthcare, no doubt about it. And there are smart ways to do
it, and then there are ways that I think would impose a lot of
unnecessary pain on Americans.
But we need to reform the healthcare system so that we
focus more on the value of care than the volume of care, more
on quality than on quantity, and then we have to deal with the
revenue issue. And we all know that in the past decade when
folks at the very top were paying a little more, the economy
performed just fine. Twenty million jobs were created. The
economy was booming. And so, it seems to me that this is a time
for shared responsibility to address our country's needs, and I
think your testimony made that very clear.
So thank you, Dr. Elmendorf.
Thank you. Thank you, Madam Chairman and Mr. Chairman.
Dr. Elmendorf. Thank you, Congressman.
Chairman Murray. Senator Toomey?
Senator Toomey. Thank you, Madam chairman.
And thank you, Dr. Elmendorf.
A couple of quick follow-ups here. First, I know it is your
view that the recent huge increase in spending and the
corresponding big deficits have generated more economic growth
and more job creation than we would have had in the absence of
those things. But surely you would agree that that essentially
asks for a comparison to a counterfactual, and as such, it is
completely impossible to prove?
Dr. Elmendorf. Yes. That is right, Senator.
Senator Toomey. Okay. I would just urge us to consider that
there is another theory here, which is that Government can't
really create demand on balance. It can substitute public
demand for private demand, but that it is illusory to think
that the Government can simply step in and make up for what is
perceived to be a shortfall of private sector demand.
And by the way, I would suggest that there are governments,
such as Greece and Italy and Portugal and Spain, who have
created a lot of demand domestically through their excessive
spending, and it is not working out so well for them.
I wanted to follow up on something. I might have
misunderstood this, but I thought I heard someone suggest that
nondefense discretionary spending has been essentially flat for
about the last decade. And I think we have touched on this in
various ways, but I just want to be very clear. In fact, by any
reasonable measure, nondefense discretionary spending has grown
dramatically, I would say.
The numbers I have are in 2000, we spent about $284 billion
in nondefense discretionary spending. In 2010, we spent $550
billion. We have had a slight reduction in 2011. But this is
growing, obviously, in nominal terms. It is growing in
inflation-adjusted terms. It is growing faster than inflation
plus population growth. It is growing faster than GDP, in fact.
Isn't that true?
Dr. Elmendorf. I think that is correct about outlays,
Senator, and I do show that in one of the figures. The issue,
though, worth pointing to is that funding, meaning the new
budget authority the Congress is providing for nondefense
discretionary purposes, is actually now back down already in
fiscal year 2011 as a share of GDP to roughly what it was over
the preceding few decades. And you can see that in Figure 6 of
the testimony.
Now you are right as in terms of nominal dollars or in
terms of real inflation-adjusted dollars, it is certainly up.
Senator Toomey. Right.
Dr. Elmendorf. And as a share of GDP, though, there is a
sharp distinction between the level of outlays in 2011, which
depended on previous year's funding, and the level of funding
in 2011, which is the jumping off point for future discussions
of appropriations.
Senator Toomey. My point is over this 10-year period, we
have seen huge growth in nondefense discretionary spending.
The last point I would just like to ask is I think it is
your view, but I would like to ask, is it your view that if we
were to pursue revenue-neutral tax reform that would have the
effect of broadening the base on which taxes are applied and
lowering marginal rates, that it is true both with respect to
such corporate reform or individual reform that that would have
a pro-growth effect on the economy, which, of course, in turn
generates more income for the Government?
Dr. Elmendorf. Yes, that is right. Again, the amount would
depend on the specifics of the proposal.
Senator Toomey. Absolutely. But to the extent that we
pursued that, we would be generating economic growth, therefore
jobs and revenue for the Treasury?
Dr. Elmendorf. Yes, Senator.
Senator Toomey. Great. Thanks very much.
Chairman Murray. Dr. Elmendorf, thank you very much for
coming today and testifying.
And I want to thank all of our members for being short and
concise. We have a lot of work to do and a shrinking amount of
time to finish it with.
Dr. Elmendorf, thank you to you and your entire team for
the tremendous amount of work that we are putting forward to
you, and appreciate all of that.
I do want Members to know that they have 3 business days to
submit questions for the record, and I hope the witnesses can
respond very quickly to that. So Members should submit their
questions by the close of business on Friday, October 28th.
Chairman Murray. I would also like to inform everyone that
we are going to have another hearing on November 1st. The topic
will be ``An Overview of Previous Debt Proposals.'' We will be
hearing from former Senator Simpson, Erskine Bowles, Alice
Rivlin, and former Senator Pete Domenici.
Without objection, this joint committee stands adjourned.
Dr. Elmendorf. Thank you, Senator.
[Whereupon, at 11:45 a.m., the committee was adjourned.]
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. 512.]
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
September 13, 2011
The History and Drivers of Our Nation's Debt and Its Threats
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September 22, 2011
Overview: Revenue Options and Reforming the Tax Code
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October 26, 2011
Overview: Discretionary Outlays, Security and Non-Security
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November 1, 2011
Overview of Previous Debt Proposals
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