[Senate Hearing 112-733]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-733

 
                PRESIDENT'S BUDGET FOR FISCAL YEAR 2013

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 14, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance



                  U.S. GOVERNMENT PRINTING OFFICE
79-764                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                         ADMINISTRATION WITNESS

Geithner, Hon. Timothy F., Secretary, Department of the Treasury, 
  Washington, DC.................................................     6

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    47
Geithner, Hon. Timothy F.:
    Testimony....................................................     6
    Prepared statement...........................................    50
    Responses to questions from committee members................    60
Grassley, Hon. Chuck:
    Letter from Senator Grassley to Douglas W. Elmendorf and 
      Thomas A. Barthold, dated January 15, 2010.................   121
    Letter from Douglas W. Elmendorf to Senator Grassley, dated 
      March 4, 2010..............................................   123
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement with attachment...........................   128
Roberts, Hon. Pat:
    Prepared statement...........................................   135

                             Communications

Center for Fiscal Equity.........................................   137
U.S. Chamber of Commerce.........................................   144

                                 (iii)


                PRESIDENT'S BUDGET FOR FISCAL YEAR 2013

                              ----------                              


                       TUESDAY, FEBRUARY 14, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:05 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Bingaman, Kerry, Wyden, Schumer, 
Cantwell, Nelson, Menendez, Carper, Cardin, Hatch, Grassley, 
Snowe, Kyl, Crapo, Coburn, and Thune.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Lily Batchelder, Chief Tax Counsel; Alan Cohen, 
Senior Budget Analyst; Jeff VanderWolk, International Tax 
Counsel; and Tom Klouda, Professional Staff Member, Social 
Security. Republican Staff: Chris Campbell, Staff Director; 
Jeff Wrase, Chief Economist; and Nick Wyatt, Tax and Nomination 
Professional Staff Member.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    Thomas Jefferson once said, ``The value of an idea lies in 
the using of it.'' Yesterday, President Obama issued his budget 
proposals for the next 10 years. Treasury Secretary Tim 
Geithner is here to discuss them. We need to determine how to 
best use these ideas to create jobs, reduce the deficit, and 
create economic growth.
    The top issue facing our country and the number-one 
priority of this budget is job creation. We have made real 
progress in our job creation efforts. The jobs picture is 
improving, and the economy is showing positive signs. We have 
added 3.7 million jobs in the last 23 months. The number of 
people applying for jobless benefits each week has fallen 
steadily. Yet there are still far too many people out of work: 
12.8 million Americans are unemployed. We need to do more to 
spur economic growth and help businesses create jobs.
    The President's budget contains critical policies to do 
just that, starting with the payroll tax cut. Extending this 
tax cut through the end of the year will save families real 
money, an average of $1,000. These families will spend this 
extra money at local businesses, pumping it through our 
economy. The budget also renews unemployment benefits for 
workers who have lost their jobs through no fault of their own. 
These workers are sure to spend these benefits, which will help 
support and create more jobs.
    According to our nonpartisan scorekeeper, the Congressional 
Budget Office, every $1 in unemployment benefits can create 
nearly $2 in economic growth. Failure to extend the payroll tax 
cut in unemployment insurance would cost up to half a million 
jobs. We cannot let that happen to working families or our 
economy.
    Continuing our smart, aggressive trade policy to open new 
markets to America's world-class goods is also key to our 
competitiveness and jobs here at home. Last year we passed 
three free trade agreements with Colombia, Panama, and South 
Korea. These agreements will generate $12 billion in new U.S. 
exports and create tens of thousands of new jobs here at home. 
We also extended a critical worker assistance and training 
program to ensure American workers have the tools they need to 
compete and take advantage of new trade opportunities.
    This year I am working with my colleagues and the 
administration to grant permanent normal trade relations to 
Russia. Once we do, U.S. exports to Russia could double over 
the next 5 years. This will create more American jobs, 
particularly in the services, agriculture, manufacturing, and 
high-tech sectors.
    This budget would extend tax provisions that expired at the 
end of 2011, known as the traditional extenders. These included 
deductions for college tuition and for State and local sales 
taxes. And they include a tax credit for research and 
development to encourage innovation. We should extend these tax 
breaks for families, individuals, and businesses, and do so 
now.
    We also need to end the cycle of year-to-year extension and 
uncertainty for families and businesses. We should work 
together to enact comprehensive tax reform. We must make the 
tax code fairer and more predictable. This budget takes a step 
in this direction by making the 2001 and 2003 tax cuts for 
middle-class Americans permanent, providing permanent estate 
tax relief and solving the problem of the Alternative Minimum 
Tax.
    We cannot stop there. Uncertainty is not the only problem 
with our tax system. The tax code and regulations are now as 
thick as a stack of a dozen Bibles. We need to simplify it and 
close loopholes. We must ensure that it helps businesses 
compete in the global economy and create jobs. I look forward 
to working with my colleagues and the administration to create 
a better tax system that meets our 21st-century needs.
    The President's budget also makes much-needed investment in 
America's infrastructure, which is sorely needed at a time when 
unemployment in the construction industry is hovering around 15 
percent. The Senate's highway bill has passed out of several 
committees, including this one, with bipartisan majorities. It 
will provide nearly $110 billion over 2 years to support road 
safety, mobility, interstate commerce, and jobs. It is time to 
enact this into law.
    In addition to creating jobs, the President's budget takes 
important steps to bring the deficit and Federal debt held by 
the public under control. We have already reduced Federal 
deficits significantly. Earlier this year we enacted the Budget 
Control Act of 2011, which reduced spending by $900 billion, 
and the health reform law provided the biggest deficit 
reduction in more than a decade.
    Nevertheless, Federal budget deficits and debt are still 
too large. We must adopt policies that will stabilize debt as a 
percent of GDP by the latter part of the next 10 years. This 
budget meets that test. I look forward to continuing our work 
on deficit reduction and job creation in the coming years.
    There is another reason that we must continue to focus on 
deficit reduction along with job creation this year: a perfect 
fiscal storm is waiting at the end of this year. First, the 
2001, 2003, and 2010 tax cuts expire. Two days later, an 
automatic sequester of many Federal programs will take place. 
The debt limit will need to be raised at about the same time. 
This is what we will face if we do nothing to reduce deficits 
and control Federal debt in the coming year.
    Any deficit reduction we develop must be balanced and it 
must be fair. Everyone must contribute, but no one should have 
to make undue sacrifices. Unfortunately, one area of the budget 
falls short of this standard. The cuts to rural assistance 
programs I believe are too deep. But we all must work together 
to achieve meaningful deficit reduction. We cannot do this at 
the expense of job creation and protecting programs that folks 
in rural areas depend on.
    Deep cuts to agriculture programs will pull the rug out 
from under our hardworking producers and unjustly target rural 
States like Montana. Rural development programs provide 
important economic development, infrastructure, and housing 
resources. Cuts to these programs have a devastating effect on 
the economies of rural communities and paralyze our ongoing 
economic recovery. We need to enact deficit reduction in a 
smart way. I look forward to working with my colleagues and the 
administration to do so.
    So let us work together to enact significant deficit 
reduction in a way that preserves and enhances our job creation 
efforts. Let us take these ideas and find the best way to use 
them.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. I will now turn to my good friend, Senator 
Hatch.

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Well, thank you. Thank you, Senator Baucus, 
Mr. Chairman. I want to thank you for holding today's hearing. 
We welcome you, Secretary Geithner, to the committee.
    Let us begin by noting that total public debt outstanding 
is over $15.3 trillion, larger than the size of our Gross 
Domestic Product. A debt-to-GDP ratio above 100 percent is 
clearly unsustainable and puts us in the ranks of the many 
European countries currently in a severe debt crisis and unable 
to borrow at sustainable interest rates.
    The Nation deserves a budget that responsibly addresses 
this debt crisis, yet last year the President delivered a 
budget that was unanimously rejected on the Senate floor. It 
did not receive a single yes vote, even from Senate Democrats. 
I will be interested to see if my colleagues are going to vote 
for this one.
    Yesterday, the President laid out his most recent budget 
plan. Unfortunately, it similarly fails to address the Nation's 
glaring fiscal crisis, and it will probably never be brought to 
a vote. We have not seen a budget resolution from the Senate 
Budget Committee in years, despite it being legally required.
    Last year, the President's budget did eventually get a 
vote, and there is only room for improvement on that result. 
But the Senate Majority Leader seems to have no inclination to 
debate a budget on the Senate floor, having stated that the 
Budget Control Act means that we do not have to debate fiscal 
year 2013 spending totals since they have already been 
determined.
    If so, then we do not need to discuss a large part of what 
the President unveiled yesterday, which should make for a quick 
hearing today. Still, we have to do our due diligence. In 
reviewing the budget released yesterday by the President, it is 
clear that his plan would only make our fiscal problems worse 
and harm our economy by imposing around $1.9 trillion of 
stifling tax hikes.
    Earlier this month the President suggested at the National 
Prayer Breakfast that these tax hikes are divinely inspired. 
That certainly was an interesting take on the Bible, as far as 
I am concerned. In the President's interpretation, ``Render 
unto Caesar the things which are Caesar's and unto God the 
things that are God's'' becomes ``just give it all to Caesar.''
    Who knew that cosmic justice would be rendered by the 
Department of Education and HUD? Who knew that the separation 
of the wheat from the chaff would in fact be performed by the 
Obama administration, picking winners and losers in the name of 
fairness?
    Perhaps churchgoing citizens should just cut to the 
President's chase and, instead of tithing or putting an 
envelope in the basket at church, they can just send their 
money directly to the divinely ordained Treasury. The fact is, 
this budget is politically, not divinely, inspired.
    This budget is a plan for a permanently larger, European-
style government. It does not send our country down a 
sustainable fiscal path. It does nothing to change the 
President's unwavering devotion to tax-and-spend policies and 
failed stimulus schemes that have and will continue to generate 
historic deficits and levels of debt.
    It does nothing to wind down the mortgage giants Fannie and 
Freddie, to restore private flows of capital into our Nation's 
system of mortgage finance, or to remove the government's 
effective takeover of our housing markets. It does nothing to 
address our entitlement spending crisis, whistling past the 
graveyard as Social Security, health care, and disability trust 
funds are in death spirals towards bankruptcy.
    The President presents this budget with its accelerated 
spending and class warfare as one of fairness and compassion. 
But is it fair to American workers to jeopardize economic 
growth through higher taxes? Is it fair to taxpayers to ignore 
the mortgage giants Fannie and Freddie, which continue to drain 
their wallets? Is it fair to the disabled to pretend that the 
looming bankruptcy of the disability trust fund will not happen 
in 2016? It is going to if we do not do something about it.
    Is it fair to look at Social Security and turn the other 
way in the interest of avoiding hard choices that might make a 
reelection campaign uncomfortable? Secretary Geithner, I look 
forward to your testimony today on the President's plan and 
what it might do to the economy.
    I have to say though that I wish you would be careful in 
your public economic pronouncements. It is disturbing and 
unwarranted when you claim, for example, that Republicans' 
resistance to the President's stimulus proposals for more 
taxing, spending, and borrowing--as in his so-called jobs 
bill--means that Republicans do not want to do anything to help 
the economy or that Republicans' resistance to wasteful 
stimulus somehow increases the risk of recession.
    These claims are simply not true, and they are certainly 
not productive. Putting aside these discouraging political 
statements, perhaps we could be given an explanation of why the 
administration appears to believe that the economic recovery is 
vibrant enough to be hit with more taxes, despite clear 
warnings from the Congressional Budget Office of significant 
negative effects on growth, yet at the same time it is not 
vibrant enough to stop the runaway spending of the current 
administration.
    It seems that for President Obama the recipe always calls 
for more taxes to fund more government. The result is this 
budget, which ignores the source of our Nation's fiscal 
challenges--a spending problem that is only getting worse. No 
matter what budget baseline you choose to consider, the CBO 
projects that Federal revenues as a share of GDP will rise 
above the long-run average as the economy recovers, even with a 
continuation of current tax rates. But spending as a share of 
GDP is projected to indefinitely stay above historic norms, 
pushing our economy and the size of our government further and 
further down the path that several major European countries 
have followed to fiscal ruin.
    We also know that our fiscal outlook is very sensitive to 
future developments, including what might happen to interest 
rates or inflation. CBO tells us that, if interest rates run 
just 1 percent higher than assumed in their baseline budget 
projection, interest outlays over the next 10 years will 
increase by over $1 trillion. That is for just a 1-percent 
increase. If rates spike up precipitously once our creditors 
lose patience with the administration's unwillingness to chart 
a sustainable fiscal course, we could easily face deeply 
painful adjustments like those currently being experienced in 
Europe.
    On the other hand, according to CBO, if inflation turns out 
to be 1 percentage point higher each year than under its 
baseline, then the deficit would actually fall over the next 10 
years. While the economy would suffer, the government would 
benefit from higher inflation, and it would be up to the Fed to 
avoid the temptation to inflate for budgetary gain. I certainly 
hope that the Fed's recent appetite for mixing monetary and 
fiscal policies comes to an end and that we do not have to 
worry about the temptation to inflate our way out of our debt.
    Our unsustainable fiscal path poses great and growing risks 
to the economy, and the President's budget does nothing to 
diminish these risks. In fact, given the riskiness of our 
fiscal path and the temptation to inflate away some of our 
debt, Warren Buffett, whom the administration appears to turn 
to for its formulation of tax policy, weighed in with advice 
for investors to steer clear of currency-based investments like 
U.S. Treasury securities. As Mr. Buffett said, `` `In God We 
Trust' may be imprinted on our currency, but the hand that 
activates our government's printing press has been all too 
human.'' On bonds like Treasuries, the Oracle advises, ``Right 
now, bonds should come with a warning label.''
    Secretary Geithner, Mr. Buffett is advising investors to 
shy away from investments such as Treasury securities, and it 
will be interesting to know if you agree with this advice. My 
hope is that his recent musings do not become a new Buffett 
rule for investors not to buy Treasuries, because, if investors 
heed that advice in large numbers, the spikes in interest rates 
that I worry about will materialize and the low-cost financing 
of our $15.3-trillion debt that the U.S. temporarily enjoys 
will evaporate in a hurry.
    We need to resist the siren song of cheap financing, partly 
brought on by the Federal Reserve's massive purchases of 
Treasury securities to help push rates down. Unfortunately, the 
administration remains lulled in by the siren song and takes 
current low rates as a reason to spend more and pile up even 
more debt to finance a bloated European-sized government.
    Secretary Geithner, I look forward to your testimony on the 
President's budget--testimony that I only received late 
yesterday, after the deadline you were supposed to honor for 
submission. Again, Mr. Chairman, I want to thank you for 
holding today's hearing, but I am really concerned. I do not 
see any real resolution to the problems that this country is 
currently facing.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator, very much.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. I am now pleased to welcome our witness, 
Treasury Secretary Tim Geithner. As you know, Mr. Secretary, 
your statement will be automatically included in the record, 
and I would urge you to summarize and just take your time.

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY, DEPARTMENT OF 
                  THE TREASURY, WASHINGTON, DC

    Secretary Geithner. Thank you, Mr. Chairman, Ranking Member 
Hatch, and members of the committee. Thanks for the chance to 
come before you today and talk about the President's budget.
    Our economy today is gradually getting stronger, but we 
have a lot of tough work still ahead of us as a country. Over 
the last 2\1/2\ years, despite the financial headwinds from the 
crisis, despite the severe cutbacks by State and local 
governments, despite the crisis in Europe, despite the increase 
in oil prices we saw last spring, despite the tragedy in Japan, 
despite all those shocks and headwinds, the economy has grown 
at an average annual rate of 2.5 percent.
    Private employers have added 3.7 million jobs over the past 
23 months. Private investment in equipment and software is up 
more than 30 percent. Productivity has improved. Exports across 
the American economy, from agriculture to manufacturing, are 
expanding rapidly. Americans are saving more and bringing down 
debt levels. The financial sector is in much stronger shape, 
helping meet the growing demand for capital and for credit.
    Now, these improvements are signs of the underlying 
resilience of our economy, the resourcefulness of American 
workers and companies, and the importance of the swift and 
forceful actions we took to stabilize the financial system and 
to pull the economy out of the worst economic crisis since the 
Great Depression.
    But I want to emphasize this: we still face very 
significant economic challenges, particularly for households 
and families across the country. Americans are still living 
with the acute damage caused by the crisis.
    The unemployment rate is still very high. Millions of 
Americans are living in poverty, still looking for work, 
suffering from a fall in the value of their homes, or 
struggling to save for retirement, or to pay for college. We 
face, as you both said, unsustainable fiscal deficits. In the 
face of these challenges, the President's budget calls for 
substantial additional support for economic growth and job 
creation alongside longer-term reforms to improve economic 
opportunity and to restore fiscal responsibility.
    Most urgently, I want to start with this as the chairman 
did. Congress must extend the payroll tax cut and emergency 
unemployment insurance by the end of this month. If Congress 
fails to act, 160 million Americans will immediately pay more 
in payroll taxes, and 5 million people looking for work will 
lose or be denied Unemployment Insurance benefits over the rest 
of the year.
    We will continue to encourage Congress to support 
additional actions to cut taxes for workers and businesses, to 
preserve the jobs of teachers and first responders, to put 
construction workers back to work, and to help more Americans 
refinance their mortgages to take advantage of lower interest 
rates. Beyond these immediate steps, the President's budget 
outlines a longer-term strategy to strengthen economic growth 
and improve economic opportunity while reducing our fiscal 
deficits to more sustainable levels.
    Now, I know the conventional wisdom in Washington is that 
this debate we begin today does not matter because Congress is 
too divided to legislate in this election year. But this debate 
is a very important debate. It matters because this is a 
fundamental debate about economic priorities, about how to 
increase growth and opportunity, how to strengthen health care 
and retirement security, how to reform our tax system, how to 
live within our means.
    It is important also because of the stark array of choices 
we face at the end of this year with the expiration of the Bush 
tax cuts and the sequester. We govern with limited resources, 
and we have to make choices about how to use those resources 
more wisely. Any strategy to address these economic challenges 
has to answer a few key questions: how much do we have to cut; 
which program should be cut, expanded, or protected; how should 
we share the burdens of deficit reduction?
    The President's budget reduces projected deficits over the 
next 10 years by $4 trillion, $3 trillion on top of the caps 
and cuts in the Budget Control Act. Overall, the President's 
plan would lower the deficit from just under 9 percent of GDP 
in 2011 to around 3 percent of GDP in 2018.
    A deficit at that level will stabilize the overall level of 
debt-to-GDP in the second half of the decade, putting us back 
on the path of fiscal sustainability and better positioned to 
confront the remaining challenges we would still face that come 
from the rise in Medicare, Medicaid, and Social Security costs 
as more Americans retire.
    Under the President's budget, non-defense discretionary 
spending is projected to fall to its lowest level as a share of 
the economy since Dwight Eisenhower was President, and the 
President's plan would significantly slow the rate of growth in 
spending in Medicaid and Medicare, both through the Affordable 
Care Act and the additional Medicare and Medicaid reforms 
proposed in the budget.
    But, as we reduce spending, we also have to protect 
investments that are critical to expanding economic growth and 
opportunity. That is why the budget proposes a series of 
targeted investments in education, innovation, manufacturing, 
and in infrastructure.
    Now, in order to achieve this balance--significant savings 
but some important investments--we are proposing to raise a 
modest amount of additional revenues through tax reform. We 
propose tax reforms that raise revenues because we do not 
believe it is possible to meet our national security needs to 
preserve a basic level of health care and retirement security 
or to compete effectively in the global economy without some 
increase in revenues as part of a balanced deficit reduction 
plan.
    The President's plan includes $2.50 of spending cuts for 
every dollar of revenue increases. These revenue increases are 
focused on the top 2 percent of American taxpayers, not the 
remaining 98 percent. Although we illustrate in our budget a 
range of specific tax changes that could be added onto the 
present tax system to generate those increases in revenue, we 
think the best approach to get there is through comprehensive 
tax reform. We have outlined a broad set of principles for tax 
reform to make the system more simple and more fair and do a 
better job of encouraging investment in the United States.
    The increases in revenue we propose, which are roughly 1 
percent--I say 1 percent--of GDP, if structured as we propose, 
we do not believe would have a material adverse impact on 
economic growth, particularly if compared to a comparable 
reduction in, for example, Medicare benefits or spending on 
infrastructure.
    Now, I know there are members of Congress who are critical 
of these proposals and would prefer a different strategy, and 
the President's plan should be judged against those 
alternatives. There are some who have suggested we should cut 
deeper and faster, with more severe austerity now. That 
approach, though, would damage economic growth, it would 
reverse the gains we have achieved in getting more Americans 
back to work and healing the damage caused by the financial 
crisis, and it would push more Americans into poverty.
    Some have suggested that we try to restore fiscal balance 
without raising any additional revenue from anyone, or even by 
cutting taxes further. To do so, though, would entail deep cuts 
in benefits for retirees and low-income Americans, cuts in 
investments and education and innovation that would hurt growth 
and opportunity, and cuts in defense spending that would damage 
our national security interests. We do not support, and we will 
not support, those alternative strategies.
    Now, the President's plan includes some very tough reforms, 
but with a balanced mix of spending cuts and tax reforms. It 
preserves some room--modest room--for us to make investments 
that would improve opportunity for Americans and help make 
growth stronger in the future.
    It protects the basic commitment we make to retirement 
security and health care for the elderly and the poor, and it 
provides substantial immediate help for the average American 
alongside these long-term reforms to restore fiscal 
responsibility. This plan will not solve all the Nation's 
challenges, but it will put us in a much stronger position to 
deal with those challenges.
    Thank you. I would be happy to answer your questions.
    The Chairman. Thank you, Mr. Secretary.
    [The prepared statement of Secretary Geithner appears in 
the appendix.]
    The Chairman. I would like to focus a little on 
infrastructure. I personally believe this country is behind in 
building roads, streets, highways, bridges, and airports, and 
just modernizing our infrastructure. At the same time, that 
will all cost money. So, if you could just address a little bit 
that sort of trade-off on what is spending, what is investment, 
and how you see us moving in the future with needed 
expenditures on infrastructure----
    Secretary Geithner. Of course, we agree. If you look at the 
state of American infrastructure today--roads, highways, rail, 
airports--by any measure, we will require very substantial 
investments over a very long period of time to get those into 
shape.
    The absence of investment acts like a tax on business and 
makes business more expensive--harder to get your goods to 
market competitively. So we think it is good economic policy 
and good fiscal policy to recognize that imperative and to plan 
now for a sustained, substantial investment in infrastructure.
    Now, we propose to pay for that through a mix of the 
traditional means we use today as well as a relatively small 
portion of the savings we gain from winding down the costs of 
the wars in Iraq and Afghanistan. We have laid out in the 
budget a substantial multi-year program for doing that. There 
are some people who think we can afford to do more than that, 
but it is tough because you have to find the resources to do 
it. But this is the approach we think is prudent.
    The Chairman. How do you answer the question, you are just 
adding to the deficit by allocating money to just spend on 
infrastructure?
    Secretary Geithner. In this case, as well as all the 
additional investments we propose in education, in innovation, 
in basic science and research, we are meeting the basic test of 
fiscal responsibility. We are showing how to not just pay for 
them, but to pay for them in the context of a plan that brings 
our deficits down over a sustained period of time to a level 
that is more sustainable. So, we meet that basic test of 
responsibility.
    Now, these investments we think have pretty high economic 
return. I think most economists would agree with that. They do 
not just get people back to work very quickly and help bring 
the unemployment rate down, but they have higher long-term 
returns in terms of the efficiency, the competitiveness of the 
economy. Again, it is like a tax on business today when you 
leave infrastructure in the poor position it is in today.
    The Chairman. The multiplier effect is pretty significant?
    Secretary Geithner. We think it is, yes.
    The Chairman. All right.
    Second, with respect to tax reform, is the administration 
going to send up a fairly specific set of proposals on tax 
reform? If so, will it tend to focus on corporate taxes? If you 
could just give us a little flavor of what you plan to send up.
    Secretary Geithner. We have laid out some general 
principles to guide individual and corporate tax reform. We 
think that process is going to take, realistically, some time. 
When we have done it in the past, it has taken years. We want 
to start laying the foundation for those reforms.
    We are, within the next couple of weeks--I think by the end 
of this month--going to lay out a framework of elements that we 
think should guide the discussion on corporate tax reform to 
produce a system that does a better job of improving incentives 
for creating and building things in the United States.
    So, there will be a little bit more to come in the next 
couple of weeks on corporate taxes. It is not going to be 
comprehensive, complete, in the form of a legislative language 
detailed proposal, but we are going to lay out a core set of 
elements in a sort of framework to begin that discussion.
    Again, we view these things--the proposal on individual and 
on corporate--as foundation laying for the necessary debate we 
have to have as a country on how to fix this tax system and 
make it do a better job of creating growth in a way that is 
more simple, more fair.
    The Chairman. But the proposals will be more in the nature 
of corporate tax reform as opposed to individual?
    Secretary Geithner. Yes. In the next couple of weeks, we 
will do a framework on elements for corporate reform. We are 
not going to go beyond where we are on the individual for the 
foreseeable future. On the individual side we have been pretty 
specific about the basic elements we think should guide 
individual reform.
    And, as you know--and I know there is a lot of opposition 
to that up here--we have suggested that the burden for the 
revenues that would have to come on the individual side should 
fall on the most fortunate 2 percent of Americans through an 
increase in the effective tax rate on those individuals.
    The Chairman. But you are not going to just, as was the 
case in 1986, have a Treasury I or a Treasury II?
    Secretary Geithner. No.
    The Chairman. You are more specific. You are more on your 
principles.
    Secretary Geithner. We are going to try--on the corporate 
side, we are going to be more specific than principles, but not 
as detailed as legislative language. We are going to take that 
approach because we actually think--this may not be true--that 
there is a lot of common ground in the broad elements of what 
we heard from the Hill on the corporate side, and so we want to 
maximize the chance we can take advantage of that to build 
consensus on something that is going to work.
    Now, we are going to start in a different place than, for 
example, your colleague in the House started. We are going to 
start a little tougher in different ways. But there is going to 
be a fair amount of common elements in the basic strategy.
    I think we are both guided by the important objective of 
saying, what can we do to make it more likely that you are 
seeing more things created, designed, and built in the United 
States with more investment in the United States?
    The Chairman. Thank you very much.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Mr. Secretary, an op-ed which was written by then-Senator 
Obama's senior economic advisors, Drs. Furman and Goolsbee, in 
the August 14, 2008 edition of the Wall Street Journal--I would 
ask unanimous consent that that be put in the record.
    The Chairman. Without objection.
    [The article appears in the appendix on p. 131.]
    Senator Hatch. In that op-ed, Drs. Furman and Goolsbee 
stated that then-Senator Obama's tax proposal would reduce 
revenues to less than 18.2 percent of GDP. However, the 
President's 2013 budget has revenues headed up to 20.1 percent 
of GDP by 2022. According to CBO, revenues have averaged 17.9 
percent of GDP over the last 40 years and are projected to rise 
to 18 percent by 2017, even if we extend all of the bipartisan 
tax relief of 2001 and 2003.
    In other words, even if we extend all of the 2001 and 2003 
tax relief, revenues are already headed higher than their 
historical average, according to CBO. OMB puts revenues even 
higher as a share of GDP from 2014 onward.
    Now, I have three questions, if you could answer them. 
First, considering that taxes are already heading higher than 
where they have been historically, should we really be raising 
them even more as the President proposes in his budget? 
Secondly, has the President abandoned his position that 
revenues should be less than 18.2 percent of GDP in his budget? 
And third, is he committed to keeping the size of government 
permanently higher, given that spending as a share of GDP has 
averaged over 24 percent during the President's term, a share 
the size of which we have not seen since 1946, at the end of 
the 2nd World War, and which is projected to remain above 22 
percent, which is 4 percentage points higher than when 
President Clinton left office?
    Secretary Geithner. Let me start by just noting for 
comparison that I think, in what people refer to as the Ryan 
budget, the Republican budget from last year, in that budget, 
revenues as a share of GDP are projected to average 19 percent 
over the budget window.
    It is not clear how they get there, but even in that 
context there is a recognition that revenues are going to need 
to be higher than their historic average, and that is 
principally because, Senator Hatch, of the costs produced by 
the fact that more Americans are retiring and becoming eligible 
for Medicare and Social Security.
    Now, you are right, and I say it over and over again, that 
we believe the only way to get to a more sustainable fiscal 
position is to raise revenues through tax reform. We proposed, 
through tax reform, raising about 1 percent of GDP in 
additional revenues. That is just 1 percent of GDP.
    Now, we do not do that because we want to do it, we do it 
because we see no other way to restore fiscal sustainability. 
One way to think about the choice is this: that is about $1.5 
trillion over 10 years, 1 percent of GDP. If you do not do that 
and you cannot borrow the money, because we cannot go out and 
borrow $1.5 trillion to avoid that, then you have to find $1.5 
trillion in cuts to Medicare or low-income programs or national 
security to achieve that.
    We have looked very hard at that, as many people have, and 
we do not see the basis of doing that. That is why not just the 

Simpson-Bowles Commission, but the bipartisan Senate group, or 
Domenici-Rivlin, all looked at this basic challenge and said, 
we do not see how you get to fiscal responsibility without this 
balanced plan with a modest increase in revenues.
    Now, you can ask the question which is, what is the best 
way for that to happen? Of course, we all want to make sure 
that happens in a way that is fair and does not hurt economic 
growth or incentives for investment. Again, we believe that the 
modest increases in the effective tax rate that would come from 
these reforms, they would only fall in the top 2 percent of 
Americans.
    We think it would be better for economic growth long-term 
and for fairness than if those tax increases were replaced by 
cuts in, let us say, Medicare benefits or cuts in 
infrastructure investment or in education. That is the judgment 
we are making. Now, I know that is not universally shared, but 
we think the economics are quite good, quite sound, and it is a 
more responsible approach.
    Senator Hatch. Mr. Secretary, if there are no actions by 
the end of this year, ordinary income and dividends will face a 
top tax rate of 39.6 percent, and the capital gains rate will 
rise to 20 percent. An additional 3.8-percent tax on unearned 
income of top earners is also scheduled to take effect in 2013 
as part of Obamacare.
    According to a recent study, if Congress does not act, the 
integrated tax rate on dividends would rise to 68.6 percent, 
and the rate on capital gains would rise to 56.7 percent. The 
result would be that the dividend rate would be the highest 
among major economies, and the capital gains rate would be the 
second-highest.
    With the scheduled increases in taxes on capital income, 
with the U.S. headed towards some of the highest taxes on such 
income in the developed world, and with the Congressional 
Budget Office telling us that such taxes will prove to be a 
significant drag on growth, could you explain whether you 
believe that those high tax rates are good for the economy and 
our international competitiveness?
    And could you also explain how the President's budget 
proposal, which would also significantly increase tax rates on 
capital income, is consistent with his objective of not 
returning the economy to one overly financed with debt, as his 
tax hikes on capital would exacerbate distortions in the tax 
code that favor debt financing over equity financing?
    Secretary Geithner. That is a good and thoughtful, 
complicated question, so let me try to be responsive to those 
concerns.
    Senator Hatch. All right.
    Secretary Geithner. I think the basic choice we face is, 
can we restore fiscal responsibility without raising revenues 
through tax reform? Now, the statistics you cited are a good 
argument for tax reform. And, although you are right that we 
have proposed some specific changes you could do on top of the 
current tax system to raise more revenues, we think a better 
way to get there is though comprehensive tax reform that would 
lower rates and broaden the base. We think you can do that in a 
way that would be balanced well, these basic objectives of 
growth and fairness longer-term. But your concerns I 
understand, but they are a good argument for doing this through 
tax reform.
    Again, I think the basic divide between us though is not 
really this. The basic divide between us is, can you restore 
fiscal responsibility and still meet our commitments to 
retirees and seniors, still preserve some capacity to invest in 
education and infrastructure and meet our national security 
needs, can you meet those objectives without adding any 
revenues, without getting any revenues out of our current tax 
system? We do not think you can do that. That is why we are 
drawn to this position reluctantly, and we think that the 
burden of those increased revenues can be most fairly borne by 
the most fortunate 2 percent of Americans.
    You can say you should spread the pain more broadly, but 
the average American is going to bear most of the brunt of the 
burden of the deficit that is going to come through spending 
restraint.
    So again, we face constraints on our resources we have not 
faced in generations. It is going to require us making very 
tough choices. But I do not see how you get there if you are 
unable to counter, to contemplate, and to embrace modest 
increases in revenues through tax reform. I just do not think 
it is possible.
    The Chairman. Senator Bingaman?
    Senator Bingaman. Thank you very much. Thank you for being 
here.
    I am just trying to get my mind around the various things 
that you anticipate happening or are proposing ought to happen 
with regard to the Federal budget over the next year or two. As 
I understand it, the President's budget calls for a portion of 
the Bush tax cuts being allowed to expire, that is, the 
expiration of high-income tax cuts. That raises $1.433 
trillion, as I understand it, over the 10-year period.
    In addition to that, you are proposing--as you pointed out, 
that represents about 1 percent of the deficit reduction that 
this budget contemplates--$1 of deficit reduction for every 
$2.50 of spending cuts. Of the spending cuts that you are 
proposing, how much of that is contemplated in the sequester 
that has already been enacted by the Congress?
    Secretary Geithner. What Congress did last summer was, 
really, two important things. They put in place very tight caps 
on discretionary spending, defense and non-defense, for 10 
years which produced savings--CBO measured it at roughly over 
$1 trillion.
    But then it also put in place this sequester which would 
provide automatic cuts of another roughly $1 trillion as a 
device to frankly motivate Congress, to encourage Congress to 
embrace a more comprehensive, balanced package of reforms.
    If Congress does not act to put in place a deficit 
reduction plan of comparable magnitude or greater--we would 
propose greater--then that sequester will force deep cuts in 
defense and the rest of the government--very deep cuts, and 
really very damaging cuts. There is no reason why we should 
face that prospect. But the sequester was designed to encourage 
Congress to replace those automatic cuts with a more carefully 
designed substantial additional down-payment on deficit 
reduction.
    Senator Bingaman. So your budget has put forward an 
alternative to allowing the sequester to take place, as you see 
it?
    Secretary Geithner. That is right. We propose a $4-trillion 
plan. One trillion is already in place in the caps that were 
enacted last August.
    Senator Bingaman. Right.
    Secretary Geithner. We propose an additional $3 trillion in 
other reforms. Those $3 trillion, if embraced by Congress, will 
allow Congress to avoid the more damaging effects of the 
sequester.
    Senator Bingaman. Now, you say that we are going to need to 
raise revenue as part of tax reform. Tax reform is not going to 
happen by the end of this year. It is going to happen in the 
next Congress, or a future Congress. So you are saying that, 
even after Congress does what you are suggesting on the revenue 
side in this budget, it should then contemplate a tax reform 
package that will raise revenue of about 1 percent of GDP. Is 
that my understanding?
    Secretary Geithner. That is one way to think about it. 
There are two ways to do this. One is to say, if we are left 
with the current tax system, we have to find a way to generate 
more revenue in a way that is fair. We lay out in the budget 
how we would propose to do that.
    We propose to do that by letting the Bush tax cuts for the 
top 2 percent of Americans, those marginal tax rates, go back 
to where they were at the end of the Clinton administration and 
to limit the value of deductions and exclusions for the top 2 
percent of Americans. The combined effect of those two 
proposals would generate the roughly 1 percent of GDP in 
revenue.
    A better way to do that is through comprehensive tax reform 
that would lower rates and broaden the base. If you meet the 
other tests we have laid out in the President's principles, you 
could generate a reasonable amount of revenue, allow a fair and 
balanced deficit reduction plan, and leave yourself with a 
better tax system, a more fair tax system, a more efficient tax 
system, probably something better for broader economic growth.
    You can do it either of those two ways. But, as you point 
out, we have a bit of a problem now because we do not have that 
much time. That is why we need to have this debate now, because 
we have to start to do the foundation laying, the tough 
decision we have to make in the lame duck and beyond.
    Senator Bingaman. One of the sort of frameworks that we all 
seem to have bought into around here is the notion that, at the 
end of this year, we ought to have the payroll tax go back to 
where it used to be, 6.2 percent. It seems to me that, if we 
are concerned about reforming the tax code, it would make a lot 
of sense to find a way to continue in the future, in future 
years, with a lower payroll tax as an incentive for more people 
to be hired in jobs.
    I know we got ourselves into this by saying we are going to 
fund Social Security through a payroll tax, but, if we had 
another way to fund Social Security, that would allow us to cut 
the payroll tax permanently. I know when the President proposed 
his temporary cut in the payroll tax as a stimulus to the 
economy, a lot of the criticism was, the problem with this is 
not that he is proposing to cut the payroll tax, it is that it 
is not a permanent cut. Do you think it would make sense for us 
to contemplate a permanent cut in the payroll tax as part of 
tax reform?
    Secretary Geithner. I do not at this point. It is an 
interesting idea, though. I guess it is possible, conceivably, 
that as part of comprehensive tax reform you could find a 
different mix of what we call payroll taxes today and other 
types of income taxes. It is possible. But I do not think that 
is realistic, given the other constraints we face.
    The Chairman. Senator Grassley?
    Senator Grassley. Mr. Secretary, the first question I am 
going to ask you to respond to in writing because I want it to 
be longer, or whatever it takes for you to answer it. But it 
comes from the President's proposal for a fiscal responsibility 
fee. The President has been asking for this in his budget for 3 
straight years, imposing a fee on TARP recipients to help 
recoup the cost of TARP.
    When the President first proposed this in 2010 for fiscal 
year 2011, I asked CBO and Joint Tax to analyze who would bear 
the brunt of this new fee. CBO responded, ``The cost of the 
proposed fee would ultimately be borne to varying degrees by an 
institution's customers and employees and investors.''
    So he is proposing the same thing this year, and so I would 
like to include in the record, Mr. Chairman, the questions I 
asked CBO and their responses.
    The Chairman. Without objection.
    [The information appears in the appendix on p. 121.]
    Senator Grassley. So what I would like to have you do is 
read that and indicate if you agree or disagree with CBO's 
analysis, and, particularly, if you disagree with any of CBO's 
responses, I would ask that you provide a detailed explanation 
of why you disagree. Thank you.
    I would like to ask you my first question about the 
economic impact of tax increases. As you know, on January 1, 
2013, when the tax decreases of 2001 and 2003 sunset, our 
Nation is going to see a $3.5-trillion tax increase. CBO 
estimated the economic effect of this tax increase along with a 
few other policies. CBO estimates that the unemployment rate at 
the end of 2013 could be as much as 2 percentage points higher 
and that growth of GDP could be 3 percentage points lower.
    Mr. Bernanke came before the committee last week, and I 
asked him about this, and I would like to quote him: ``If no 
action is taken on January 1, 2013, between expiration of tax 
cuts, sequestration, and a number of other measures, there will 
be a very sharp change in the fiscal stance of the Federal 
Government, which by itself with no compensating action would 
indeed slow the recovery. CBO predicts a 1.1-percent growth and 
an increase in unemployment in that year, and that is based 
entirely on their current law assumptions, so they are assuming 
that contraction will take place.''
    Mr. Secretary, do you agree with Chairman Bernanke's and 
CBO's assessment that the failure to prevent this tax increase 
will have serious negative impacts on our economy in terms of 
GDP growth and unemployment?
    Secretary Geithner. Absolutely. But just one short 
qualification. What the President is proposing is to extend the 
bulk of those tax cuts that go to 98 percent of taxpayers and 
to let expire those that affect only the top 2 percent of 
Americans; in addition to that, to limit the value of 
deductions and exclusions they get.
    The impact of that mix of tax reforms and spending would be 
very, very modest on growth. But you are right to point out, as 
the Chairman has and the CBO has, if you let all the Bush tax 
cuts expire and add on to that the impact of the sequester, 
that would be a very damaging blow to the economy.
    Senator Grassley. You are right to say that a modified 
version of the sunset would maybe help to some extent, but I 
think you have to take into consideration--this is my rebuttal 
to you--that where most of those tax increases would impact 
would affect small business, which creates 70 percent of the 
new jobs in America and about 25 percent of our employment.
    My last question. The President's budget includes a number 
of tax increases, some of which I understand are being labeled 
as tax reforms. However, the President's budget does not 
include a comprehensive tax reform proposal. It seems that the 
tax increases included in the President's budget are being used 
to pay for more of the President's spending priorities. Could 
you explain how these tax increases can then also be used to 
offset the cost of comprehensive tax reform?
    Secretary Geithner. I am happy to do that. Just one quick 
qualification. The tax proposals that are in the President's 
budget that would affect the top 2 percent of American 
taxpayers affect only a very small portion of small businesses.
    Senator Grassley. Yes. Three percent. But they provide 25 
percent of the jobs in America.
    Secretary Geithner. And of those small businesses that are 
affected, most of them, roughly half of them, earn more than a 
million dollars in basic taxable income. So we are not talking 
about tax changes that we think would have a material affect on 
what most people would judge as small businesses.
    On your question about the President's tax proposal and the 
spending plans, let me put this in broader context. The 
President's budget proposes to save substantial amounts of 
money across the government. It proposes to cut spending on 
national security quite substantially. It proposes hundreds of 
billions of dollars of cuts in Medicare and Medicaid.
    It proposes to shrink what people call the discretionary 
part of the government, meaning the whole part of the 
government--it is not about defense, national security, 
Medicare, Medicaid, or Social Security--to cut that to the 
smallest share of GDP since Eisenhower was President.
    Now, alongside that, because we want to get our deficits 
down to a sustainable level, we are proposing some tax reforms 
that would raise revenue, that is correct. If you do not 
embrace those tax reforms that raise revenue, then you have to 
find another $1.5 trillion in cuts. You are not going to be 
able to find them without going right to Medicare, Medicaid, or 
national security.
    So we do not propose this with anything but a basic view of 
the nature of the constraints we face and the responsibility we 
bear to put these deficits on a path to more sustainable--we do 
not do it because we think revenue increases are terrific, are 
great. It is best to always avoid them. It is just, we face 
some choices, and we do not see how you get an economy that is 
going to grow in the future consistent with our basic 
commitments on national security or to retirement health care 
security without this modest amount of additional revenues.
    The Chairman. Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. First of all, I think that one of 
the critical issues facing this economy, and it has 
persistently, is the lack of confidence about the future and 
the lack of direction and certainty about various policies that 
are emanating from government or not emanating from Congress 
and the administration.
    My biggest concern is that we have not created an 
environment of confidence, as represented in this budget here 
today. By all accounts, this is the worst post-recession 
recovery in the history of our country. We have the longest 
term of unemployment.
    We have already increased the national debt by 44, 45 
percent under this administration, and we are going on to the 
fourth consecutive year of historic annual deficits. So we have 
seen action on the spending side, yet we still have a sub-par, 
anemic, weak recovery. If you look to the future, as Senator 
Grassley indicated about the CBO projections, the fourth 
quarter of 2013 is a 1.1-percent economic growth projection, 
with 9.1 percent unemployment.
    So it is not only the concerns about the facts today that 
are eroding the confidence of the private sector to invest and 
take the risk and to hire people, and hence we have this poor 
recovery, but it is also concerns about the future. I just do 
not see any certainty in the President's budget.
    There is no certainty on the tax reform side, that is for 
sure, or on the tax code, on regulatory reform, no sustainable, 
credible debt reduction plan, because debt also affects the 
confidence of the private sector. I mean, 84 percent of small 
businesses have indicated the size of the national debt affects 
their feelings and their confidence about the future of their 
own business. We know what this current tax code is doing to 
affect the ability to create jobs.
    So where is it in this budget that you would suggest that 
it creates certainty for the future so that the private sector 
would be willing to take the risk and get the kind of robust 
recovery that the American people deserve? In fact, I just read 
a study that was issued by three academics last fall, and they 
talked precisely about this point. They said, ``A major factor 
behind the weak recovery and gloomy outlook is a climate of 
policy-induced economic uncertainty, and that U.S. policy 
uncertainty is at historically high levels.'' They went on to 
say, ``If we had the 2006 levels of policy uncertainty, it 
would have yielded 2.2 million jobs over 18 months.'' I think 
the point is, there are not any policy prescriptions here, as I 
see it, in this budget, so uncertainty continues to reign. If 
there is anything that is certain about the budget, it is that 
there will be more uncertainty, in my view.
    Secretary Geithner. Thank you, Senator Snowe. You will not 
be surprised that I disagree with your diagnosis of the 
problems facing the American economy. I think we disagree 
fundamentally on how best to solve them.
    But let me cite a few things in evidence and support of the 
contrary argument. I know people say on your side of the aisle 
that what is hurting the American economy now is a set of 
policies from Washington--from Congress, the administration--
that is hurting business and hurting business confidence.
    That is a centerpiece of concerns we hear about the 
challenges facing the American economy. And yet, profits as a 
share of GDP are above the levels they were before the crisis. 
The profitability of industries that are in the public eye in 
terms of reform and regulation, like energy and health care, 
are very high. Levels of productivity growth have been 
improving through the recovery.
    Investment, private investment in equipment and software, 
is up 30 percent. If you look at any measure of basic health of 
the business sector outside of construction, which is still 
weighed down by the crisis, the basic balance sheets of 
American business, levels of profitability and expected 
profitability are very, very strong.
    The economy, though, is still suffering badly from all the 
after-effects of the crisis. You can see it in the high 
unemployment rates, and you can see it in the high levels of 
poverty and the weakness in construction. Now, we have laid 
out--I know they are tough and they are going to be 
controversial, and I know you guys do not like the tax stuff in 
there--but we have laid out a very responsible, very tough set 
of fiscal reform plans. If those were embraced by the Congress 
tomorrow, there would be substantially more confidence around 
the world in the capacity of this political system in 
Washington, in our ability to go back to living within our 
means.
    It would be embraced and welcomed, and you would leave 
people much more confident about the future of this country in 
terms of growth and opportunity. You were also right to 
emphasize, and I think Senator Hatch did this very well, if we 
sit here and do nothing about these long-term fiscal problems, 
even though interest rates are 2 percent today, over time, over 
the long run, that will hurt us. It will starve key things we 
have to do. It will hurt confidence in the country. That is a 
problem we are going to have to deal with. We cannot ignore 
that. It is why we want to start the debate now about how we 
lay a foundation for consensus on broader reforms.
    But I do not believe there is a credible argument to make 
that uncertainty about our fiscal deficits or uncertainty about 
the design of regulation in Washington today is having a 
material adverse effect on the American economy today. The 
American economy is suffering from lots of different things. It 
is not suffering from that.
    Again, if it were to be the case, then you would see very, 
very different numbers in profitability, things we can measure. 
This is in terms of how much they are investing. You see it in 
interest rates, you see it in equity prices, you see all sorts 
of things we can measure today.
    Having said that, I agree with you that it would be better 
for the country for Congress to provide some certainty about 
how we are going to address these long-term fiscal problems, 
and we should begin that sooner, not later.
    The Chairman. Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, thank you. Thank you for your service to our 
country. I just want to ask--I have heard some of my colleagues 
ask questions about the long range. Does anyone believe or 
would you say that the budget that is presented would be 
different if we were not facing a decade of tax cuts, largely 
unpaid for; two wars raging abroad in Iraq and Afghanistan, 
totally unpaid for; a new entitlement program in the Medicare 
Part D that is unpaid for; and the reality of, instead of a 
free market--which I am a huge supporter of--a free-for-all 
market in which the excesses of some entities became the 
collective risk of all of us as Americans? Would the budget be 
different if that had not been the preface which this 
administration was working on?
    Secretary Geithner. Of course. When President Clinton left 
office in 2001, CBO projected 10 years of trillions of dollars 
of surpluses. When President Bush left office, CBO projected 
trillions and trillions of dollars of deficits. Those deficits 
were the result of two factors. The first factor is the one you 
referred to, a decision by the President and the Congress not 
to pay for two wars, very expensive tax cuts, and a very 
substantial expansion in Medicare. The deficits are also the 
product, though, of two recessions, a milder recession in the 
early part of President Bush's first term, and a terribly 
severe recession that began in 2007.
    Now, a modest portion of our future deficit is the result 
of policies we proposed. Somewhere between 10 and 15 percent of 
the projected deficits are the result of the factors of budget 
proposals we have made.
    Now, you are right that we would be in a much stronger 
position today--we would not face anything like the changes we 
face today on the tax side or the spending side--if we had not 
made those choices as a country under the previous 
administration on fiscal policy. We took a remarkably strong 
fiscal position and we jeopardized future generations of 
Americans by eroding those huge gains on fiscal discipline, and 
absolutely that puts us in a weaker position today.
    Senator Menendez. And one of the concerns I have, or things 
I applaud in listening to, certainly, the President's State of 
the Union speech--and I see some elements in this budget--is 
the effort to in-source. Now, I would like to bring your 
attention to something that I and members of this committee, 
some of the members of this committee, have that we believe can 
be helpful to us in this time.
    A critical element of our economy is the severe downturn in 
the real estate market that our country faced and is still 
reeling from. Studies have shown that more than $1 trillion of 
commercial real estate loans will be maturing in just the next 
few years.
    So some of us are concerned, just as we saw with home 
mortgages, if these borrowers cannot secure other funding 
options, equity, to replace debt, then, when the loans come 
due, commercial properties around the country could be in 
serious trouble.
    In 2007, the IRS issued a ruling called Notice 2007-55 that 
further compounded the problem at a critical time, right when 
we were in the midst of this, which is why Senator Enzi and I 
introduced the Real Estate Investment and Jobs Act.
    It is a common-sense approach that takes some modest steps 
to reform the Foreign Investment in Real Property Tax Act in 
order to reduce barriers to foreign investment that we can no 
longer afford. I mean, I do not think in the global economy 
which we live in, this makes sense in the national interests of 
the United States and our economy.
    Can we work with you to ensure that our tax laws are not 
posing unnecessary barriers to much-needed investment during 
these challenging times, and does Treasury have any thoughts on 
whether the FIRPTA law may cause foreign capital to go to 
similar investments in other countries instead of the United 
States?
    Secretary Geithner. Thank you, Senator. Let me just respond 
briefly, and I would be happy to respond in more detail 
separately. We have two objectives we have to bear in mind as 
we look at these kind of proposals and reforms. One is, we want 
to make sure that U.S. and foreign investors are really on an 
even playing field, are really treated equally. We do not want 
the system to favor foreign investors at the expense of U.S. 
investors, for obvious reasons.
    We have to be careful, as you know, when we look at any 
reform, of how we are going to pay for it. If it is going to 
cost money, we have to figure out how we are going to pay for 
it. So with those two constraints, of course, we will look at 
any proposal and are happy to talk about it with you in more 
detail.
    Senator Menendez. Thank you.
    The Chairman. Thank you, Senator.
    Senator Kyl?
    Senator Kyl. Thank you, Mr. Chairman.
    Because time is short here, let me do what some of the 
media people call a lightning round, if I could. I think these 
questions--at least some of them--can be answered yes or no.
    The first has to do with fairness, which the budget talks 
some about. Do you think it is fair that the top 1 percent of 
earners in the United States pay just about 40 percent of the 
income taxes?
    Secretary Geithner. I do, because I do not see how the 
alternatives are fair, are more fair.
    Senator Kyl. All right.
    Do you think it is fair that--now, this was the Wall Street 
Journal's figure in an editorial this morning, which you 
probably saw--the top 3 percent pay as much as the other 97 
percent of taxpayers in income tax?
    Secretary Geithner. Well, again, I do, because, again, life 
is about choices and alternatives. If they are not going to pay 
it, then you have to find the resources elsewhere in asking 
middle-class families to pay more or cutting the benefits to 
middle-class retirees.
    Senator Kyl. All right.
    And that brings me to the third one. Is it fair that the 
bottom almost 50 percent pay no Federal income tax?
    Secretary Geithner. As you know, Senator, because we talk 
about this a lot, I do not think that is a fair description of 
our current tax system. Those millions of Americans pay payroll 
taxes.
    Senator Kyl. Yes. And the payroll taxes are supposed to pay 
for Social Security, are they not? So there is a specific 
benefit allegedly resulting from the payment into the system. 
But the President proposes that we reduce the amount of payroll 
taxes paid into the system with the payroll tax holiday 
extension, is that not correct?
    Secretary Geithner. Well, only temporarily. Of course, that 
temporary shortfall is made up by transfers which automatically 
happen.
    Senator Kyl. Right. And the 50 percent of the people who do 
not pay Federal income tax then are not contributing to the 
general revenues that are making up for the lost payroll taxes, 
right?
    Secretary Geithner. Well, maybe another way to think about 
this is, some people say we are a large insurance company 
attached to an army. The biggest drivers of spending are 
Medicare, Social Security, Medicaid, too.
    Senator Kyl. That is all true. That is beside the point of 
my question.
    Secretary Geithner. All Americans----
    Senator Kyl. I am trying to talk about fairness here. If 
you are going to get off on Medicare and Medicaid, maybe you 
could help persuade some on the other side of the aisle that 
addressing those entitlements would be a good way for us to 
help reduce our budget deficit.
    Secretary Geithner. I agree with you that we have made 
unsustainable commitments in Medicare and Medicaid. We are 
going to have to slow the rate of growth in those commitments. 
The alternatives----
    Senator Kyl. One of the proposals in the budget, was it 
not, was that there be somewhat of a premium increase means-
tested for Medicare Part B, and I think D. Is that correct?
    Secretary Geithner. I think you are right. You have a 
modest set of changes that would in effect increase the share 
of those benefits paid for by the most fortunate Americans. 
That is correct.
    Senator Kyl. Right.
    Let me ask you a couple of other questions to get to this 
question of how you do tax reform. You talked about lowering 
rates, broadening the base, eliminating the special privileges, 
and so on. The President had a good statement in the State of 
the Union Address. He talked about an economy where everyone 
gets a fair shot, does their fair share, and everyone plays by 
the same set of rules. That is the basic premise here.
    So how does the proposal in the budget meet this test when 
it eliminates the manufacturing deduction for certain 
taxpayers, but then doubles it for certain other taxpayers but 
not for other manufacturing?
    Secretary Geithner. Good question. I will be talking about 
this in more detail----
    Senator Kyl. I mean, obviously not everybody is going to be 
playing by the same set of rules here in terms of tax charges.
    Secretary Geithner. A good question and a fair question. 
Let me say that the basic framework that we think should guide 
corporate tax reform--although we will say some more in the 
next couple of weeks--we are going to propose a broad reform 
that will lower rates, broaden the base, and eliminate and wipe 
out a very substantial fraction, dozens and dozens and dozens, 
of special tax preferences for businesses.
    Senator Kyl. While creating a whole bunch of new ones.
    Secretary Geithner. No, no, no. While preserving a very 
limited number that are targeted against really one core 
objective, which is to make sure that we are improving 
incentives for designing, creating, and building stuff in the 
United States.
    Senator Kyl. All right. Now, let me just stop you there. We 
are talking about picking winners and losers. You would 
increase or create tax incentives for building advanced 
technology vehicles at the expense of other kinds of vehicles. 
I should not say at the expense of, but not for other kind of 
vehicles. Is that correct?
    Secretary Geithner. Well, you are putting me in a slightly 
difficult position because I have said that, in the next 2 
weeks, we will lay out a more comprehensive set of proposals 
here, and I know I will have a chance to debate those then.
    But you are right to say that we are proposing to preserve 
a very limited number of core incentives for investment in the 
United States. We are doing that because we think there is a 
compelling economic case for doing that, and we are going to 
eliminate dozens and dozens of specific corporate tax 
preferences. We think that trade-off is a pretty good trade-off 
for the----
    Senator Kyl. We will look forward to seeing--excuse me. I 
just have 5 seconds left. The Treasury Department is where I 
get the statistic or the citation for the proposition that the 
people who would be hit by the so-called millionaire's surtax, 
according to your definition, 80 percent of them are business 
owners. Is that a correct statement?
    Secretary Geithner. I will have to go back and look, but 
again, I want to emphasize the following. It is roughly 2 
percent of taxpaying individuals and slightly higher--only a 
slightly higher portion of taxpaying small businesses. Now, 
again, if we do not do that, though, whom are you going to ask 
to bear the burden?
    Senator Kyl. All right. Are these job creators or not? Are 
these the people who hire other people?
    Secretary Geithner. Another way to think about this is, 
look at the----
    Senator Kyl. Well, yes or no?
    Secretary Geithner. Well, yes, they will apply to a small 
fraction of American businesses.
    Senator Kyl. Can I just ask you one last thing? My time is 
up.
    Secretary Geithner. A small fraction.
    Senator Kyl. Is it true that the majority of jobs, 
especially coming out of a recession, are created by small 
businesses?
    Secretary Geithner. You are right that small businesses 
create a substantial fraction of jobs. But again, we are 
proposing changes that affect a tiny fraction of small 
businesses. And look at the record of job creation by small 
businesses during the period. We have a recent experience with 
this, which is the period in the second half of the 1990s when 
they faced similar tax rates to what we are proposing, and the 
record of job creation was very, very good.
    The Chairman. Senator Coburn?
    Senator Coburn. Mr. Secretary, thank you for your service.
    A couple of questions on your opening statement. According 
to the things that I have read, in your statement you talked 
about productivity gains and increased savings. However, the 
most recent data show that the productivity gains are 
declining, and we actually went, not negative, but we had a 
marked decline in the savings rate over the last 2 months. So 
the trend now is not as you described in terms of productivity 
or savings. Is that correct?
    Secretary Geithner. You are right about the last few 
months. But I think if you look at the broad pattern since the 
recovery began, both those statements are true. That is very 
important because, again, we were living beyond our means, not 
saving enough, borrowing too much. Productivity growth in the 
United States throughout this recovery, in contrast to what we 
see in Germany, for example, has really been pretty strong, 
encouragingly strong.
    Senator Coburn. The other thing is the assumption that you 
have made a couple of times in answering questions that, if we 
were to not get the revenue from raising rates on this 2 
percent that you describe, we had no other option but to cut 
Medicare or those programs that benefit our retirement programs 
and our safety net programs. I want to challenge you on that 
for a minute.
    The GAO, last February, released a report outlining 
duplication. They will issue a report at the end of this month 
on the second third of the Federal Government. According to my 
calculations for both of those, we could save $100 billion a 
year eliminating duplication in the Federal Government. There 
are no proposals in this budget to actually do that.
    I am very complimentary of what now OMB Director-designate 
Jeff Zients has done. But there is also $100 billion in fraud 
in Medicare and Medicaid. That is $200 billion a year. That is 
$2.4 trillion. So it is not right to assume that we could not 
run the Federal Government more efficiently and that the only 
option is to raise revenues. The size of the Federal Government 
is twice the size it was 10 years ago.
    The question that I would have for you is, does the 
administration not truly think, in all areas of operating the 
Federal Government, that we could become much more efficient, 
especially for example in fraud or in duplication, that we 
could not achieve significant savings that would go a long ways 
towards eliminating or lessening our budget deficit and 
eliminating the amount of money we are going to have to borrow 
to cover that?
    Secretary Geithner. I completely agree with you, Senator, 
and you have shown great leadership in this area, that there is 
substantial unexploited room across the Federal Government to 
use the taxpayers' resources more wisely. I completely agree 
with that.
    The President agrees with that. We are committed to that, 
and we are happy and would like nothing better to define better 
ways to achieve those savings, and we will keep doing that. But 
the reason I said what I did is partly because of the choices 
we saw made in what we call the Ryan budget, the budget that 
Republicans embraced last year, because that was a budget that 
showed what you have to do if you are not going to raise 
revenues or taxes. What that budget showed is, if you are going 
to reduce deficits to a level you need to without raising 
revenues, then you have to do very, very deep cuts in benefits 
in those programs.
    Now, you are right, there may be more savings we can get, 
but I think the judgment I made is generally correct that, if 
you are not going to find this 1 percent of GDP in revenues, 
you are going to have to find it in cuts across national 
security, Medicare benefits, Medicaid benefits, low-income 
programs, and infrastructure and education type things. That 
will force us to contemplate cuts that we think go beyond what 
makes sense for the country.
    Senator Coburn. Well, you are talking $150 billion a year. 
I am telling you, I think if you and I sat down we could find 
$150 billion a year that do not produce an economic multiplier 
greater than one, that we in fact could find efficiencies and 
effectiveness changes in the Federal Government that would not 
require us to do this.
    Now, I am on record as saying we need to have tax reform, 
so my next and final question to you is, most people agree that 
if we were to lower the rates and broaden the base and 
significantly eliminate the $30 billion a year that the very 
wealthy in this country get through tax credits and breaks, 
that we could in fact markedly improve our economy.
    So my question is, you are saying you want to build a base. 
Why have you not come out and said, here is what we did? 
Simpson-Bowles outlined that, the Gang of Six outlined that. 
There have been several proposals. Why not put something on the 
table and say, let us do this before the end of the year? Let 
us do major tax reform and let us make it fairer, flatter, and 
more effective.
    Secretary Geithner. Good question. Maybe the most honest 
way to answer that is that we took a run at trying to negotiate 
a framework like that with the Republican leadership in the 
House over the course of the summer, as you know, at 
substantial political cost, and we found no basis for agreement 
on even the broad framework you said correctly was embraced by 
Simpson-Bowles and by the Senate bipartisan committee of 
Rivlin-Domenici.
    Without that willingness, without that indication by 
Republican leadership, we are just trying to be realistic. What 
we are trying to do is to help make the case why reform is so 
important, why reform is a better way to get there than just 
adding more and more tax increases on the current system.
    But just realistically, given the experience we had over 
the last year, we do not see the basis yet. Maybe it will come. 
I would say, without it we are not going to get the changes in 
health care spending that we all know are necessary because we 
just do not see realistically, politically, how we are going to 
get meaningful progress on that front without the kind of 
balance we need on the revenue side.
    The Chairman. Senator Carper?
    Senator Carper. Thanks.
    Let me just start off--Senator Coburn has raised again the 
idea of a grand compromise, where Democrats agree to some 
reforms with respect to entitlements and Republicans agree to 
some additional new net revenues.
    I think that is--I have thought this for 18 months--what we 
ought to do. I think there are a number of us here, Democrat 
and Republican, who believe that is the right path to take and 
I hope we can get back on that path later, maybe later this 
year.
    I want to thank you for your service and for the work that 
you are doing, not just here, but abroad and in Europe as they 
work through their difficulties, and hopefully towards a good 
end.
    The administration--we had a chance to chat just a little 
bit before the hearing began, and I mentioned the President, 
under current law, has rescission powers. When the President 
signs an appropriations bill into law, he or she can then send 
a rescission message to propose to rescind or reduce spending 
in certain line items. Under current law, the Congress can or 
cannot vote on that. If they choose to ignore it, it goes away. 
What, historically, we have done is ignore it and those 
proposed rescissions go away.
    In 1996, the Congress passed, and President Clinton signed, 
as you will recall, legislation that said the President could 
not only line item veto appropriations, but also entitlements 
and also tax measures, and that those would become effective 
unless two-thirds of the House and two-thirds of the Senate 
were to override those actions by the President.
    That power is made permanent for the President in the 1996 
legislation. What a number of us--Senator McCain and I, and 
others, including people sitting here to my right--have 
authored and co-sponsored and have now passed in the House is 
legislation to say, let us try for 4 years, a 4-year test 
drive, to give the President the authority to go through an 
appropriations bill or an omnibus bill and to pick out certain 
line items that we would have to vote up or down on. We could 
vote it down with a simple majority in the Senate, 51 votes, or 
vote it down with a simple majority in the House, 218 votes, 
but we would have to vote on it. If it is defeated, then it 
goes away.
    So we think it provides some extra accountability for the 
President and, frankly, for the Congress. We can try it for 4 
years, see how it works. If it helps, good. Maybe we can make 
it better. If it does not work, then we stop doing it. So I 
appreciate the administration's support for this, and I just 
wanted to go on record for that.
    I do not know if there has been any discussion here on 
clean energy tax policy, but I just want to mention one thing. 
A lot of other countries in the world derive a considerable 
amount of electricity from the wind. Some of that is on land, 
some of it is off their shores. We do not derive any 
electricity from the wind off of our shores, but there is a 
great opportunity for us to do that.
    So there are some people who think that all we need to do 
is to extend a production tax credit, wind production tax 
credit, and that will help incentivize the deployment of 
offshore windmill farms off of Maryland, or Delaware, New 
Jersey, or North Carolina, all the way up to Maine. What we 
have learned is that the wind production tax credit does not 
get the job done. Nobody is going to build a windmill farm off 
of any of our coasts in the United States until there is an 
investment tax credit that will help out.
    Senator Snowe and I have offered legislation that provides 
for an investment tax credit, a 30-percent investment tax 
credit, and it would inure to whomever deploys the first 3,000 
megawatts of electricity that are generated off of our shores. 
So it is not 1 year, 2 years, 3 years, 4 years, but it would 
basically be first-come, first-served. If you get your windmill 
farm out there and producing electricity, whoever comes up with 
the first 3,000 megawatts, you get the tax credit.
    Would you just give us some reaction to that in terms of 
whether that seems to make any sense, whether that is 
consistent with where the administration wants to go? As it 
turns out, the cost of that is just, I think, a couple of 
billion dollars a year over 10 years. It is not a heck of a lot 
of money because it goes away.
    Secretary Geithner. Senator, I would be happy to talk to 
you in more detail about that and look at that carefully. There 
are different ways to do these things. But we agree that we 
want to make sure that we are preserving, even after 
comprehensive tax reform, a set of well-designed special 
incentives for improving, not just energy efficiency, but our 
use of renewable energy resources. We are absolutely supportive 
of that and happy to work with you on the most effective way to 
do that.
    Senator Carper. All right. Thanks very much.
    Can you give us, lastly, just a quick update on TARP? How 
are we doing in terms of getting our money back with interest, 
without interest? Where are we losing, where are we gaining? 
Thank you.
    Secretary Geithner. We are doing really exceptionally well 
by any measure. The CBO estimates the total costs of TARP are 
in the $25-billion range. My suspicion is, over time that will 
prove high.
    Senator Carper. It will prove what?
    Secretary Geithner. High. I think the bank part of the 
program--banks have already yielded about a $20-billion return 
to the taxpayer, positive return to the taxpayer. We have a lot 
of risk still, a lot of losses in the investments we made in 
the automobile industry to help facilitate that restructuring, 
and other pockets of the programs.
    But the costs are vastly lower than what people thought, 
hundreds and hundreds of billions of dollars lower than what 
people thought. We have most of that money back already, and we 
are on a very good path to show a very high return.
    I think if you look at it across all the programs, the 
Feds, the FDICs, even with the cost in the GSEs alongside TARP, 
most independent forecasters think that the overall cost of 
this will be very small, a tiny fraction, for example, of what 
the country paid to resolve a much smaller crisis, the S&L 
crisis, which cost us 3.5 percent of GDP.
    Senator Carper. All right. Thanks very much.
    The Chairman. Senator Kerry? Excuse me. Senator Cardin, you 
are next, then Senator Kerry.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    First, Secretary Geithner, let me thank you, and thank you 
for your presentation, thank you for your service. I agree that 
we need to have a balanced approach, whether it is dealing with 
our budget deficit, as the administration's budget deals with 
revenues, or spending, both of which we will have to do. It 
also deals with deficit reduction, but recognizing that we are 
in a recovery and that we need to make investments in 
education, job training, and infrastructure, which I agree 
with.
    I want to concentrate, if I might, on the middle class and 
how important it is to grow the middle class. I look at the 
numbers and see a shrinking middle class and wonder where the 
consumers are going to be who buy the products that we want to 
produce.
    I take a look at the administration's budget, and on the 
revenue side everyone talks about the revenues that it 
generates. Well, that is using a baseline that is current 
policy rather than current law. If we used current law, the 
revenues actually would be a lot different.
    With current law, if we do not change it, the middle class 
is going to get socked. I mean, the tax rates will go up, and 
the Alternative Minimum Tax is liable to come back in. So part 
of the administration's budget is to concentrate, as I see it, 
on helping the middle class grow by using the tax code to 
provide some basically additional revenues in the hands of the 
consumers of America.
    Second, we have mentioned several times education. 
Education is the ticket for being able to participate in the 
opportunities of America. Colleges are becoming out of reach, 
and the administration's policy, as I understand it in this 
budget, is not only to protect Pell grants but also to deal 
with the cost of college education for American families.
    Could you just comment for a moment, from the 
administration's point of view, how important it is to help the 
middle class and to grow the middle class?
    Secretary Geithner. Absolutely. I think you said it very 
well. Let me just highlight a few things. The basic tax 
framework we laid out is a very strong framework for the middle 
class. It protects the existing tax benefits they enjoy. It 
expands some for higher education, for example, to make it 
easier to afford a college education.
    The President's budget protects and preserves basic health 
care retirement security for middle-class Americans. That is 
critically important. We are asking Americans across the 
economy to bear much more risk and uncertainty living in this 
global economy today. Providing that guarantee of protection 
for health care and retirement security is critically 
important.
    The budget proposes a series of very important investments 
with reforms to improve the quality of education, access to 
training opportunities so Americans come out of college or 
community college with better skills, with the skills the 
economy most needs today. As you know, there are millions of 
jobs that go unfilled today because employers cannot find 
Americans with those skills, in engineering, for example. It is 
very important for us to fix that.
    The infrastructure investments the President proposes are 
good economic strategy because they improve the competitiveness 
of American business, but they also have the benefit of 
creating substantial employment opportunities for Americans in 
construction who are still bearing most of the burden for the 
cost of the crisis.
    So those are just some examples. And I think you are right, 
that is a good prism though which you should view all these 
proposals, through which you should look at these against the 
alternatives. This package of things is a very strong framework 
of programs to help improve, not just retirement security and 
health care security, but opportunity for middle-class 
Americans.
    Senator Cardin. I just want to underscore this point. If we 
do not help the middle-class families, the recovery is going to 
be much longer than we want it to be. We look at the current 
housing issues, which still are burdens to middle-class 
families. A lot have not been able to get over the fact that 
they now have negative value in their homes and how they are 
going to deal with that.
    Then we look at gasoline prices that are increasing, which 
is having a major impact on confidence right now. Every time we 
go to the gasoline station, we pay another couple of dollars to 
fill up our tank. So all that, I think, is putting pressure on 
middle-class families. I would hope, as we evaluate the budget, 
that we use the prism of middle-income families to judge. If we 
do nothing, it is going to be bad for middle-income families. 
We need to get together and come forward with the type of 
framework that the President has laid out.
    So, thank you very much. Thank you, Mr. Chairman.
    The Chairman. Senator Kerry?
    Senator Kerry. Thanks, Mr. Chairman.
    Mr. Secretary, thank you for the terrific job that you are 
doing, an important job, and particularly with respect to some 
of our interests in other markets on a global basis: Europe, 
China, elsewhere.
    I think Senator Kyl was questioning you, going after the 
question of the impact of the tax increase on the upper-income 
people and small business. I would like to just give you an 
opportunity to be able to speak to that for a minute. What is 
the sort of downstream impact on small business, and what would 
be the impact on small business, obviously, of getting a 
deficit deal of reducing the cost of capital and putting 
America on a stronger economic track.
    Secretary Geithner. Well, I should say by introduction, 
just in the category of ``stay tuned,'' in the framework of 
corporate tax reform proposals that we will lay out next week, 
we will be very specific about what we think we can do to help 
protect small businesses from bearing an undue burden as we go 
forward.
    But the tax changes we proposed, we believe, would fall 
appropriately and overwhelmingly on those limited number of 
Americans who are in the best position to bear that burden. So 
as I said--and we have said many, many times before, and I 
think Senator Grassley even used this number--it is true that 
they will affect a portion of small businesses, but a very, 
very small portion of small businesses, 2 to 3 percent, 
roughly, depending on how you measure it.
    Many of those businesses are not small businesses in any 
way most humans would think about it. They include in that 
definition partners in a law firm or principals in a private 
equity or hedge fund business.
    Many of those businesses may be small by some definition, 
but earn very substantial amounts of money. So again, we 
believe that we have designed these carefully to make sure the 
burden falls on those few people in the American economy who 
are in the best position to bear that burden, have benefitted 
most from the boom in the financial sector.
    Again, we think you have to judge these by the alternative. 
If you do not do those proposals, do not embrace those 
proposals, then you are going to have to find some way to raise 
resources or cut benefits or spending on the rest of the 
American people, and we do not see any need to do that.
    Senator Kerry. Now, Mr. Secretary, besides our own budget 
choices, and particularly the payroll tax in the next days, 
probably the next largest looming impact, apart from our macro 
deal that we need to make before the end of this year, the 
biggest looming question mark on our economy may well be Europe 
and other people.
    I would like to ask you to speak to that, and specifically 
it is my understanding that there is something like $760 or 
$770 trillion worth of derivatives out there in the market. 
What kind of risk does that pose to us in terms of the lack of 
knowledge of what is out there, particularly given what is 
happening in Europe, in Greece, Italy, and so forth?
    Secretary Geithner. An excellent question. So let me just 
start with this. Senator Snowe referred to the fact that the 
recovery has been moderate. Growth is only moderate, slower 
than the average of post-war recessions, recoveries from 
recessions. It is very important to understand why that is the 
case. Growth has averaged 2.5 percent since growth began.
    Growth following a financial crisis produced by too much 
debt, too much building of houses, is always going to be weaker 
than following a typical recovery. There was no possibility 
that the American economy, digging out of the worst financial 
crisis since the Great Depression, was going to grow like we 
did in the average of past recoveries because, as individuals 
bring down their debt burdens and as you work through the huge 
imbalances we saw in construction, growth by definition is 
going to be slower than anybody would like.
    But on top of those headwinds and the additional headwinds 
of State and local governments cutting back, we have had the 
combined effects on growth of higher oil prices produced by the 
Arab Spring, the catastrophe in Japan and Thailand later on, 
and the crisis in Europe.
    The crisis in Europe so far has had a pretty substantial 
negative impact on growth here and around the world. European 
leaders, though, are making some progress. They have a ways to 
go, but they are starting to build more confidence around the 
world that they have a plan in place that will at least avoid 
the prospects of financial catastrophe in Europe.
    Even though growth may be weaker and they still face years 
and years of difficult reforms, they seem more committed now to 
avoiding a catastrophe, an implosion, a blow-up in Europe that 
would have a very adverse impact in the United States. That is 
a very good thing for us because it means, even if growth in 
Europe is weaker than any of us would like, we are less likely 
to face the after-shocks of a sustained period of Europe living 
on the edge of crisis.
    Now, the derivatives markets are still a substantial source 
of risk. Even with all the benefits they bring to people's 
capacity to hedge risk, they come with significant risk. But 
because we have forced U.S. financial institutions to hold much 
more capital against those risks, not just in derivatives but 
more generally, we think the American financial institution is 
in a much better position to withstand, not just the pressures 
we have seen in Europe so far, but could see from other shocks 
down the road.
    But the risk out there still in derivatives is one reason 
why we want to see the reforms that Congress enacted, in Wall 
Street reform, allowed to take effect, and we are working very, 
very closely with the other regulators to bring much more 
transparency to those markets. Senator Cantwell has been a 
leader in this context, pushing for much more transparency to 
force much more of those markets onto standardized exchanges 
and clearinghouses so there is more transparency, better risk 
mitigation. We are making substantial progress in that 
direction, but we have some work to do.
    Senator Kerry. Thank you very much, sir. Thanks.
    The Chairman. Thank you, Senator.
    Senator Schumer, do you want to----
    Senator Schumer. I will defer. I just want to get settled.
    The Chairman. Right.
    Senator Wyden?
    Senator Wyden. I think Senator Cantwell is next.
    The Chairman. Oh, Cantwell. I am all mixed up here.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman.
    Mr. Secretary, I appreciate that the budget has tax 
provisions in it for the new market tax credit, the energy tax 
credit, and the low-income housing tax credit, all things that 
I think are stimulative to the economy and important for 
economic development.
    I am curious about two aspects of that. One: things that 
need to be done now--I am assuming you are probably still a New 
York filer, but States that have income tax----
    Senator Schumer. I hope so. [Laughter.]
    Senator Cantwell [continuing]. Have the ability to deduct 
their income tax from their Federal liability. States that rely 
primarily on a sales tax, do you believe they should have the 
same benefit, and do you think they should have certainty to 
that benefit?
    Secretary Geithner. I understand your concern about that 
question; I fully understand it. I guess it is possible when 
Congress gets around to thinking about comprehensive individual 
corporate tax reform, we would have to look carefully at that 
stuff. But we do not have any plans to change that now, but of 
course we would be sensitive to your concerns and are happy to 
work with you on that.
    Senator Cantwell. So do you think States like Washington, 
Florida, and Texas deserve certainty on whether they get to 
deduct their sales tax from their Federal income tax? Do they 
deserve that certainty now?
    Secretary Geithner. I think it would be good for Congress 
across the board to give not just States, but businesses and 
individuals, much more certainty about their tax treatment. 
That is one example of where certainty is good, but there are 
lots of others too.
    Senator Cantwell. All right. Because right now we do not 
have that certainty. The fact that these States basically watch 
other States get a deduction that is about $236 billion on the 
tax rolls as far as deduction, and we are talking about $16 
billion here, and we cannot get certainty--it is a fairness 
issue.
    The fact that every year we have to go through this, States 
like Florida, Washington, Nevada, and many others, is just--
this is about tax fairness and certainty. So when you do not 
give the certainty as we do now, that means people are not 
buying automobiles, they are not making those--we have 
thousands, tens of thousands of people who itemize on our tax 
returns in the State.
    Secretary Geithner. You make your case very well. I totally 
understand your concerns. I am happy to spend more time with 
you in digging through those.
    Senator Cantwell. Well, if the administration would just 
advocate for certainty on this now, that would be a huge help.
    Secretary Geithner. I am a big fan of certainty.
    Senator Cantwell. All right.
    And then on the other extenders, they have lapsed, so we 
are still in this period. So what is the administration doing 
to help us get these done now as opposed to waiting till a lame 
duck or next year?
    Secretary Geithner. We are consulting very, very closely 
with your chairman of this committee, the ranking member, and 
their counterparts in the House, on how Congress is going to 
deal with this. Again, you are highlighting a very important 
question, which is, we have a tax system where we have, really, 
a tremendous number of temporary tax provisions, and many of 
them have a lot of value, a lot of justification for them, many 
may not anymore.
    But the value of all of them is undermined by the fact that 
there is so much uncertainty about whether they are going to 
exist and be preserved, and really it is no way to run a 
country, to leave a country like the United States with this 
degree of uncertainty year by year, month by month.
    It is already February 14, and, again, I think this is 
another good example of where it is important for Congress to--
Congress may not be able to solve every problem facing the 
country now, but this is a pretty easy problem to solve.
    Senator Cantwell. Now?
    Secretary Geithner. Now.
    Senator Cantwell. All right. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Schumer?
    Senator Schumer. Thank you, Mr. Chairman.
    First, I agree with Senator Cantwell's position on 
extenders. I think to let them wait means a lot of things will 
not happen. We know that people will not invest in, for 
instance, clean energy and windmills and things if they say, 
well, maybe in the lame duck they will do it retroactively.
    I have something of great importance to New York, the mass 
transit deduction, which you cannot do. People are losing out 
on their monthly deductions right now. They have lost them for 
January, they will lose them for February if we cannot get it 
done and not have it done by March. It is only $240 million, 
but it equalizes.
    So I hope you will heed Senator Cantwell's advice on that. 
I want to say first, I think the budget the President proposed 
is a very good budget on both the tax side and the spending 
side. I know there are many who say, just cut everything. That 
is not going to make America number one.
    Deficit reduction is important, we all know that, but so is 
getting the economy going. To me, the number-one thing that 
will keep our economy number one is having the best schools in 
the world. If we do not have the best schools in the world, we 
could have a zero deficit and we will not stay number one.
    So the President's much more measured approach, 
particularly by using some of the money returning because of 
Iraq and Afghanistan and putting that into the places where we 
need to bolster the country--infrastructure, research, 
education--makes eminent sense, and I think it makes eminent 
sense to the American people.
    Many of our colleagues, they talk about, let us cut 
everything. But they say, when they are asked about 
infrastructure--some of the Tea Party people, to their credit--
I have Tea Party people in New York who say to me, 
infrastructure is not a government function; the government 
should not do it. Then I ask them, so you think every highway 
and every bridge and every water project should be private? No, 
I do not mean that. But I think that debate is a good thing.
    I would like to focus a little on the tax side here. Again, 
imposing the Buffett rule, which is the President's moniker, I 
guess, or he created the moniker--it is Warren Buffett's 
moniker--using the revenue to repeal the AMT, which is an 
existential threat to the middle class, is a very good thing.
    It allows Warren Buffett to pay a little more in taxes and 
allows his secretary to get a permanent tax cut. It is a good 
principle; it works. We have to work the math out to see that 
it has some degree of balance. But there are a few misgivings I 
have, as you might imagine, knowing me as well as you do.
    First, I think you are being a little too patient. By that, 
I mean the administration is characterizing many of the ideas 
as long-range principles for a tax code revamp that probably 
will not happen until the President's second term.
    My view is, why wait? Why should we not be debating these 
issues now? I want to tell my Republican colleagues, it is my 
view that the Buffett rule is going to be on the floor of this 
Senate and we are going to debate it this year. Now, maybe the 
same thing will happen on the Buffett rule as happened on 
payroll tax: there will be such public outcry that some of our 
colleagues will say, well, maybe we should go along, as they 
just did even on the payroll tax not being paid for.
    I think we should debate the issue of a surtax on the 
highest income people this year. We are going to put those on 
the floor and debate them and let our colleagues and let the 
American people see where our colleagues are. I am not so sure 
that nothing happens. So, that is one.
    Step two. Your budget does not provide any specific--do you 
agree that it is a good idea to debate these earlier?
    Secretary Geithner. I do. As I said before you came in, a 
lot of people think these debates do not matter because 
Congress has not been doing them this year, and I think that is 
not a great approach to take. We have to have this debate. We 
are not going to be able to delay these choices indefinitely. 
We have some very tough choices at the end of the year in a 
lame duck session. Better to debate them now.
    Senator Schumer. Good. I agree. We might be surprised--
pleasantly--about progress that we might make, and particularly 
as the Republican primaries end and there is a nominee. Instead 
of that nominee moving as far to the right as possible, they 
have to try to move as far to the center as possible. There is 
a different political climate as well.
    So, the Buffett rule. You did not mention anything specific 
in your budget. You did not outline what kind of specific 
Buffett rule you would like. Do you have concerns if the Senate 
presses ahead with the Buffett rule? We have one person who has 
dropped in such a bill--I co-sponsored it--Senator Whitehouse. 
I am sure the chairman would have a great deal of wisdom on 
what to do here in the committee. Would you have any problems 
with us putting some specifics on the table?
    Secretary Geithner. Well, it always depends on the 
specifics. But we are broadly comfortable with the approach 
Senator Whitehouse laid out in his proposal. Now, you can do it 
different ways, but we have no concerns about Congress going 
ahead with something in that broad neighborhood.
    Senator Schumer. Good. All right. One final--well, my time 
is up. All right. Thank you. Is it all right?
    The Chairman. Go ahead. Yes, go ahead.
    Senator Schumer. All right. Just one final point. This is a 
place the administration and I have disagreed, and that is on 
$250,000 versus a million. I know the revenue concerns with 
$250,000. The problem is, in my State, I imagine in some 
others--certainly in Senator Menendez's, Senator Kerry's, 
Senator Cantwell's States--there are a lot of people who make 
above $250,000 who are not rich. Property is much more 
expensive, taxes higher, et cetera, et cetera, et cetera.
    So, if the administration believes $250,000 is the right 
cut-off for capping deductions and extending the Bush tax cuts, 
why is it not also proposing a Buffett rule that hits on the 
same rung of the ladder? Why do we not just all move to the 
nice $1 million Buffett rule?
    Secretary Geithner. Excellent question, well phrased. Of 
course, I am familiar with your views on this issue; we have 
talked about it a lot. But again, we are trying to balance a 
lot of different competing considerations, and we are trying to 
figure out, what is the most fair way, given the fiscal 
realities we face, to make sure that we can support the types 
of investments, benefits, we think we need. That is why we are 
making this choice, but of course we understand and respect 
your proposal.
    Senator Schumer. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Schumer. And thanks to Senator Wyden for letting me 
go.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. It has been a long morning. I 
have tried to listen carefully on this comprehensive tax reform 
issue, and see if you can sort a little bit of this out for me, 
if you will. You mentioned 3 times that we ought to have 
comprehensive tax reform. That is a good thing.
    Yet, when you look at the budget, its corporate reform is, 
in effect, going to come now--that is what has been announced--
and individual reform would come sometime later. So corporate 
reform is not comprehensive, it is in effect piecemeal. If you 
would, start with me in terms of how your view would get the 
country to comprehensive tax reform, because we both agree that 
is what is needed, and there is bipartisan support for it.
    Secretary Geithner. A good question. You are right to say, 
why not do it all at once? I think realistically that is how it 
is going to happen. But what we are saying is that we want to 
provide a little bit more detail in terms of framework for core 
elements of corporate at this stage.
    We think that is the best way to start to get the debate 
going. I think you are right that, ultimately maybe, these 
things have to happen together. You cannot do corporate ahead 
of individual. There are lots of good reasons for that. You 
have spoken a lot about that, and you have been a big champion 
of comprehensive reform.
    But part of what we are trying to do is to get people to 
think about a comprehensive approach to improving incentives 
for investment in the United States. We think one way to do 
that is to try to get discussion earlier on how to redesign the 
corporate tax system to support that objective. But I 
understand your point that, ultimately, these things have to go 
together.
    Senator Wyden. Let me ask one other point and then kind of 
get a sense of what will come next. You also talk about--I 
think the way you described it was--foundational principles. 
The foundational principles in 1986, I think, still have a lot 
of support up here in the Congress, bipartisan support.
    The idea was to cut breaks on businesses and individuals, 
keep a simpler code for both individuals and businesses, and 
retain progressivity. What I am concerned about is that, if we 
are not careful, we could end up with a different foundation. 
In effect, you would see changes on the business side. You have 
correctly described, you are going to clean out these business 
breaks in order to reform the corporate side, but we could end 
up with more complexity as well.
    So like the last question, how do you see us getting to the 
foundational principles, as you describe, that are so key and 
keeping them within that 1986 approach with how we are going 
along the lines you have described?
    Secretary Geithner. Those are the right principles. We 
would very much support those. In general, you want to clean up 
and eliminate--reduce, scale back--a bunch of the special 
preferences/tax expenditures across the tax code and use those 
to make affordable a reduction in the overall marginal tax 
rates, to preserve a basic level of progressivity for obvious 
reasons, and to leave yourself a system that is more simple, 
more efficient, better for growth, easier for people to comply 
with. Those are the constraints we should all live with in this 
context.
    I do not think we are going to put those at risk by 
showing--we have shown a lot of elements of what we think 
should guide the individual tax discussion, even though we have 
not done a comprehensive proposal. We are going to provide a 
comparable level of additional elements of what we think should 
guide the corporate proposal, but that will be guided by the 
nice way you framed the core objectives parameters.
    Senator Wyden. The only point I would make in terms of 
summing up is, the key in 1986 was of course the presidential 
bully pulpit, and that the executive branch, every single time 
out, talked about how you had to fit the pieces together. I am 
glad you said what you did. In the end, it is probably all 
going to have to come together.
    But we have to get that message about 2 hours earlier, 
because we have been sitting here for 2 hours and hashing 
through all of the specifics in terms of corporate reform and 
how you would clean it out, and what would go first and the 
like. Absent somebody--particularly at 1600 Pennsylvania 
Avenue--with all of you who are out and about the country, it 
is going to be very hard to build it here.
    I think we have a lot to work with. Chairman Baucus and 
Chairman Camp clearly want to move in this direction. But 2 
hours in we finally got to a key point, which is, we are going 
to have to bring this together. We are going to have to bring 
it together around 1986 principles. I hope you and everyone in 
the administration will start using that bully pulpit, because 
that was the key in 1986.
    Secretary Geithner. I agree with that, and I think you made 
the point right.
    Can I just say one thing, Mr. Chairman, on this?
    The Chairman. Absolutely.
    Secretary Geithner. You know this very well, Senator, 
better than I do. Our challenge here is much greater than it 
was in 1986 because the scale of our fiscal problems is much 
greater, and we do not have the luxury of offering people a 
substantial net tax cut to individuals, or to do something that 
does not raise revenues overall so we can contribute to deficit 
reduction. We do not have that luxury now. We do not have the 
ability--even with all the unpleasant features of our tax code 
today, it is in many ways a cleaner, less--I guess I do not 
really want to go there.
    Senator Wyden. I do not think you would want to call this 
system cleaner than anything.
    Secretary Geithner. I was going to make a point, which is 
that in the 1986 Act, as you know, it was possible at that 
point to provide individuals, at least at the first stage of 
that reform, a very substantial net tax cut.
    Now, President Reagan, to his credit, 2 years later took 
back about two-thirds of that tax cut because it proved 
unsustainable, unaffordable. The country today, even though 
there is a lot of support for the President's proposals, we 
face I think a much more difficult political environment in the 
current context.
    But I completely support you on the principles. These are 
going to have to happen together. We recognize that. I agree 
with you also that, when Congress is ready to move on this, we 
are going to have to get to looking at a much more 
comprehensive framework of reform.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for coming today. I appreciate 
your statements about support for tax reform. I think everybody 
here wants to get on with that issue and hopefully do something 
that will lower rates and broaden the base. But I just am still 
waiting for the White House to put forward a proposal on that.
    I think that it has been said here earlier, but I think the 
proposals in the budget this year actually sort of take us 
backwards when it comes to the issue of tax reform. You have 
all kinds of new tax rates coming in, the proposed Buffett 
rule, raising dividend and capital gains tax rates. It strikes 
me at least that, if we are serious about tax reform, that the 
administration ought to put forward a plan that would actually 
accomplish tax reform that would allow us to move forward.
    Now, there is one thing that I did want to ask you about, 
and that has to do with the proposal that qualified dividends 
be taxed at the same low rate as capital gains. That was in 
last year's budget. And in fact, last year I think in the 2012 
budget, word-for-word, the quote was something to the effect 
that ``taxing qualified dividends at the same low rate as 
capital gains for all taxpayers reduces the tax bias against 
equity investment and promotes a more efficient allocation of 
capital.''
    The budget this year, however, proposes to tax dividends as 
ordinary income, which, if you have your way, will be at a top 
rate of 39.6 percent. So, if you include the new 3.8-percent 
surtax included in the health reform, that means the top rate 
on dividends would be over 43 percent before you even consider 
that the income was already taxed at the 35-percent rate at the 
corporate level. The question is, is it not true that such a 
high tax burden on dividends is actually going to promote an 
inefficient allocation of capital?
    Secretary Geithner. I do not think so. But, Senator, I 
would say that one way to think about this is, it helps explain 
why ultimately we need tax reform. As I said earlier, what we 
did is, we have done this to say, if you try to do a balanced 
deficit reduction plan and do that with a mix of spending and 
tax reforms and you are raising revenue on top of the current 
tax system, then you have to embrace a mix of things like what 
we proposed.
    But it is a good reason to think about why it is good to do 
this for tax reform. Again, we expect we will get an 
opportunity to work with you on tax reform, particularly given 
the looming expiration of the Bush tax cuts at the end of this 
year. I think that the reason why we proposed this in the 
budget is just for the crude reality that we face unsustainable 
deficits, and we are proposing those changes in the tax 
treatment of dividend income for the top 2 percent of 
Americans.
    Again, just for the top 2 percent of Americans we are 
proposing those, because we are also proposing very substantial 
cuts in defense spending, in non-defense discretionary, in 
Medicare and Medicaid, and other mandatory programs. To balance 
that out and make sure there is a bit more shared sacrifice in 
this context, we felt, in order to achieve a more sustainable 
deficit, we had to find some initial revenue.
    Again, this is a very limited proposal; it affects only the 
top 2 percent of taxpaying Americans. We think they can handle 
it and the economy can afford it. But you are right to point 
out, the better way to get to a more sensible tax system as 
part of a deficit reduction plan overall is through a 
comprehensive tax reform process.
    Senator Thune. I mean, are you going to propose a tax 
reform plan at some point? Because when this was done last time 
in 1986, there was a proposal put forward by, at that time, the 
Reagan administration to reform the tax code, and it was the 
starting point. Congress picked that up, worked from it, and 
came up with the 2-rate structure that we ended up with, at 
least for a while.
    I mean, we all say we are going to do this, but the clock 
is ticking. If we punt this down the road to the next Congress, 
who knows what the excuse will be next year for not moving 
forward with this? I mean, is there something that is going to 
be forthcoming?
    Secretary Geithner. I agree with you. I said this earlier: 
better sooner than later. We cannot defer indefinitely. Even if 
we did not have the incentive of the expiration of the tax cuts 
at the end of this year, it would be a good thing to try to get 
moving on this now. But as you know, we spent a substantial 
amount of time this summer working in particular with the House 
Republican leadership on how to set out broad parameters for 
tax reform.
    As you know, we were unsuccessful in that effort, and we 
feel like, frankly, we need to see a better, clearer 
recognition on the Republican side you would be willing to 
consider tax reform to raise revenues as part of a balanced 
deficit reduction plan before we think there is going to be the 
basis for a more serious negotiation. It is because of what we 
tried this summer that we decided to do some more foundation 
laying for tax reform rather than putting out a comprehensive 
tax reform plan now.
    Senator Thune. The tax rates, when they go up at the end of 
the year--if that happens; hopefully it will not--what does 
that do to economic growth?
    Secretary Geithner. Well, as I said earlier today, and one 
of your colleagues said this, if you were to allow all the Bush 
tax cuts to expire and this sequester to hit, that would be a 
very damaging, adverse blow to the economy. Of course, no one 
is proposing that. We are proposing to extend the Bush tax cuts 
that go to 98 percent of Americans, to let expire those that 
affect only the top 2 percent of Americans.
    We are proposing to limit deductions for those Americans, 
too. Those are pretty modest in terms of their impact on the 
economy, and it is because of that concern for the middle class 
and for the overall economy that we are not proposing to allow 
to expire what we call the middle-class tax cuts.
    Senator Thune. The same discussion was held 2 years ago, 
and at that time I think the administration concluded that 
raising taxes on people above $200,000 would be harmful to the 
economy.
    Secretary Geithner. That is not quite----
    Senator Thune. That is why the extension was made at the 
time.
    Secretary Geithner. That is not----
    Senator Thune. We are facing the same circumstances now.
    Secretary Geithner. We may, but that is a very good point. 
Thank you for asking that question this way. As you know, at 
that point our view was, we should protect the vast bulk of 
Americans, 98 percent of Americans, from any increase in their 
tax burden. But we could afford, and the prudent thing was to 
allow, the tax cuts for the top 2 percent to expire.
    Now, as you know, your side of the aisle would not support 
that. You were not willing to allow the tax cuts for the top 2 
percent to expire, and the only way we were able to prevent a 
tax increase on 98 percent of Americans was to agree 
temporarily with the position you took. But the economy 
absolutely could have absorbed the impact of letting the tax 
cuts for the top 2 percent expire. It would have been a very, 
very modest change. Even then, with growth as modest as it is, 
we could have afforded the impact then.
    Senator Thune. I would just, in closing, Mr. Chairman--I 
see my time has expired--point out, however, that 4 out of 5 
people who pay at that higher rate above the $200,000 income 
threshold are small business owners. I mean, people who have 
businesses and they have flow-through income, they are people 
who create jobs. I think that was a calculation that was made, 
not only by those of us in Congress, but also by the 
administration when the decision was made 2 years ago to extend 
all the rates.
    Secretary Geithner. We should probably agree to a 
moratorium on this debate, because we do it every time I am in 
this room, over and over and over again. You say small 
businesses, and we say 2 to 3 percent. You acknowledge 2 to 3 
percent. We say it is only 2 to 3 percent.
    In any case, we can allow the independent arbiters to judge 
the impact on small business, but there is no credible argument 
that exists to suggest that those tax proposals we are making 
would affect more than that very, very small fraction of small 
businesses.
    As you know, a large number of those firms you call small 
businesses are lawyers in law firms, partners in hedge funds, 
private equity. But we have had this debate many times, and we 
probably should agree to----
    Senator Thune. There are probably a lot of people up here 
who would not mind taxing lawyers. I am just kidding. 
[Laughter.]
    But, no. I mean, I do think that you can argue that it is 2 
to 3 percent, but it is also the people who do own the 
businesses and the people who are creating the jobs. Right now 
it strikes me, at least, that we want to have policies that 
encourage job creation and economic growth. I think it would be 
counterproductive to raise taxes on the people who are creating 
the jobs.
    Secretary Geithner. Again, we share that general objective 
with you. The only disagreement we have is that we do not 
believe there is a feasible way or a fair way to restore fiscal 
sustainability without asking a very small fraction of the most 
fortunate Americans to bear a modestly higher burden for the 
privilege of being Americans.
    The only reason we propose that is because the alternative 
to that, since we cannot go out and borrow $1.5 trillion to 
afford continuing those tax cuts, is to cut deeply into defense 
spending, Medicare benefits, programs for the poor, or 
investments in education and infrastructure.
    If we thought there was a way to avoid that, we would join 
you in embracing that, but we just do not think the basic 
fiscal realities of the country give us an alternative.
    Senator Thune. And reforming entitlement programs might be 
a solution to that.
    Secretary Geithner. And we are going to take a different 
approach to you on that, as you know. But again, I remind you 
that the President's budget proposes $350 billion, roughly, of 
savings from Medicare and Medicaid over the budget window.
    Senator Thune. Out of providers?
    Secretary Geithner. No--substantially out of providers but 
not only out of providers.
    Senator Thune. Mostly.
    Secretary Geithner. And again, not to compare or go back to 
history, but you could ask your staff to make the following 
comparison to you. Can I just make one more point? Which is, 
compare the level of savings from Medicare--since you guys want 
to be for courage on entitlements--in the President's budget 
over the next 10 years to those in the Republican alternative 
from last spring.
    We are proposing tough, difficult reforms in Medicare and 
Medicaid in the hundreds of billions of dollars range, 
alongside these other cuts across government. We think to go 
significantly deeper than that would be unfair to middle-class 
retirees.
    The Chairman. Thank you, Mr. Secretary, very much.
    I think Senator Hatch has a follow-up question. I am going 
to have to leave. But I very much hope--and it will probably 
happen when you send up your corporate reform idea--that we 
have this debate that we are all talking about during the year 
so we do not wait until the end of the year. If we have it now, 
the result is going to be a lot more constructive and make a 
lot more sense.
    But thank you very much for your testimony, and thank you 
very much for being so helpful and so constructive today.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    I will not keep you much longer, Mr. Secretary. I know you 
want to go. You wanted to go when you first got here, and I 
would not blame you.
    Secretary Geithner. I would be happy to continue it.
    Senator Hatch. No. Let me just say this. On Senator Kyl's 
question, the Joint Committee on Taxation did say that the 
bottom 51 percent of all households do not pay any income taxes 
at all. You raised the issue that they pay payroll taxes. Yes, 
but that is Social Security. We all do that. But about 23 
million of them, according to Joint Tax, receive refundable tax 
credits that are more than they pay in payroll taxes. So in 
essence they are not really paying anything. Another 15.5 
million people get refundable tax credits that are more than 
both what they and their employer pay in payroll taxes.
    Now, I am not suggesting that we should tax the truly poor. 
I do not think anybody wants to do that. We want to help them. 
I have spent 36 years here trying to help people. But I am 
suggesting that we have to lift people out of the current 
situation where they are paying taxes, and that base needs to 
be spread, and there is no way we will ever get there, it seems 
to me, with this administration's approach. Because you want to 
raise taxes on the upper 2 percent, but I do not see any of 
that money going for deficit reduction.
    Now, maybe you think it is, but I do not see any of it 
going for deficit reduction. I do not see us making real 
headway. I see us as at 100 percent of GDP in national debt. I 
see our spending has now gone up to over 24 percent, or 
something like that, of GDP, from around 18. We all know that 
we are spending too much. These are some of the things that are 
driving me bats up here.
    Tell me how you are going to get the deficit down when the 
President comes up with all kinds of more programs to spend 
money on, and in the process we are not lifting the economy at 
all, we are making it a worse economy. I have also added to 
that that it is based upon low interest rates that we know are 
going to go up. Now, I think those are fair questions.
    Secretary Geithner. Totally fair questions. Could I respond 
to those questions?
    Senator Hatch. Sure. Sure.
    Secretary Geithner. Let me just try to go through those 
questions. Let me just first start with the magnitude of our 
debt problems, because you used a bunch of numbers I want to 
put in perspective.
    Senator Hatch. Well, tell me they are wrong.
    Secretary Geithner. You are absolutely right that we have 
unsustainable deficits, and if we do not figure out a way to 
restore----
    Senator Hatch. But where does this budget make a difference 
in deficits?
    Secretary Geithner. One of the great things about our 
country, Senator Hatch, is that we use a neutral, independent 
arbiter of our policies and yours to judge their impact on the 
deficit. Our policies, which CBO will evaluate for you, will 
show, if Congress were to enact them, they would bring our 
deficits down from their current unsustainable levels to a 
level that is sustainable. We define sustainable, as most 
economists would, as the level--and this is the minimum you 
have to do--where the debt stops growing as a share of our 
economy.
    If the Congress were to adopt these proposals, even under 
reasonably conservative assumptions, then our debt burden as a 
share of the economy--this is debt held by the public and debt 
net of financial assets, which is the appropriate way to 
measure it--will stabilize in the 70s as a percent of GDP. Now, 
that would be good if we were lower over time.
    Senator Hatch. Are you telling me the deficit is going to 
go down? I do not believe that.
    Secretary Geithner. Oh, absolutely.
    Senator Hatch. You are going to have to prove that to me, 
because I do not believe it one bit.
    Secretary Geithner. It depends on what Congress does, of 
course. In the Constitution, we can only propose and Congress 
has to enact. But if Congress were to enact the President's 
proposals----
    Senator Hatch. I am talking about the President's 
proposals.
    Secretary Geithner. Then they will bring the deficit down 
from the current level of just above 8.5 percent of GDP.
    Senator Hatch. I have a lot of respect for you. I think you 
are a very bright man, and you have had one of the toughest 
jobs in history, and I acknowledge that. But I do not believe 
you can make that case.
    Secretary Geithner. Oh, absolutely.
    Senator Hatch. You will have to make it in writing to me.
    Secretary Geithner. You do not have to trust our judgment 
because, again, the great strength of our country is that CBO 
can show you.
    Senator Hatch. I will trust your judgment. You write it to 
me. You can write it----
    Secretary Geithner. All right.
    Senator Hatch [continuing]. How you think we are going to 
knock the deficit down with the current budget that this 
President has offered to us.
    Secretary Geithner. Oh, absolutely. Absolutely it will come 
down dramatically over time. In fact, it will come down much 
faster than you think. I think what we disagree on really is 
whether we should cut much more quickly than we propose to 
cut--as I said in my opening remarks, our judgment is, that 
would hurt the economy quite badly----
    Senator Hatch. No, I think----
    Secretary Geithner [continuing]. Or how we do it, and the 
composition of it.
    Senator Hatch. I would just like to lift our workers and 
our economy by providing more opportunity.
    Secretary Geithner. We share that goal.
    Senator Hatch. I know we do.
    Secretary Geithner. Yes. I just want to point out one 
thing. You are right to say that rates are low today. Interest 
rates are low today.
    Senator Hatch. They are not only low, they are almost non-
existent.
    Secretary Geithner. Well, the 10-year yield of treasuries 
is about 2 percent.
    Senator Hatch. Yes.
    Secretary Geithner. And you are right that that is a 
reflection of lots of different things. But it is----
    Senator Hatch. Have you factored in, if they start going up 
to normal rates----
    Secretary Geithner. I am going to embrace----
    Senator Hatch. Sorry. Sorry to interrupt.
    Secretary Geithner. I am going to explain it to you. They 
are low in part because of the concern in Europe and because 
growth is not that strong anywhere. But they are also low 
because investors around the world judge those securities, 
those Treasury securities, as a relatively safe bet.
    They believe that the Congress of the United States 
ultimately will act to restore fiscal responsibility soon 
enough so we can avoid the risks you and I both would worry 
about a lot, which is that, if Congress does not act, that over 
time those interest rates would rise and hurt growth. There is 
no risk of that. I do not see any risk of that now, but we 
would be better positioned to avoid that risk if Congress were 
to enact a sensible set of deficit reduction proposals over 
time.
    Right now, by almost any measure you can look at about how 
people judge the relative security of U.S. financial assets, 
including Treasuries, they judge us as in a very strong 
position to meet our long-term fiscal challenges because they 
have a lot of confidence ultimately this Congress will act and 
come together and do some sensible things in that context. But 
that requires action by the Congress.
    Senator Hatch. Mr. Secretary, I just have to ask a couple 
of other questions because of what I have heard here today. I 
do not agree with you on your analysis, but you have all kinds 
of economists working with you, and I cannot ignore the fact 
that you are in a position to be able to make that statement.
    But why does the President want to raise taxes in any way 
on small businesses with unemployment at 8.3 percent? I mean, 
do small businesses with taxable income over $200,000 not help 
the unemployment situation by creating and retaining jobs?
    I mean, we all know that businesses would get hit with the 
President's tax hikes even if their owners do not take one 
penny out of the business and instead plow it all back into 
worker salaries or into building the business. The President 
says small business create two-thirds of the new jobs in this 
country. My worry is, why does he want to take more of their 
money that they could use to hire more workers and retain the 
ones that they have?
    Now, I know you are aware that 50 percent of all flow-
through business income is subject to the President's proposed 
rate hikes. That is a fact. You seem to dismiss concerns about 
increasing taxes on businesses with incomes over $200,000 in 
taxable income, whether their owners take out any of their 
income at all. Now, why are you not more concerned about 
increasing taxes on these small businesses with jobs still as 
scarce as they are? And remember, this President promised 
unemployment would not go above 8 percent if this stimulus was 
enacted. It has been over 8 percent for 32 straight months now.
    And let me make one last comment about this, and then of 
course I am glad to hear your response. I think I have been 
very fair to you over your tenure.
    I think you are a very bright guy, and I think that you are 
a very smart guy and a very hard worker. I think you are very 
wrong on a lot of things, to be honest with you. But let me 
just say this. Why hammer millionaires and small business 
owners, who are the job creators, especially in rural America? 
According to CRS, 75 percent of those making $1 million or more 
in income are small business owners. Seventy-five percent.
    Now, that group already pays plenty. Their effective tax 
rate is 29 percent. So they are already paying the Buffett 
rule, there is no doubt about it. I just have a real rough time 
with this. We have to keep increasing taxes, but we cannot 
provide any incentives to the economy, especially small 
businesses, that really create 70 percent of the jobs, and get 
us so we pull out of this so that it is more than 49 percent 
paying the whole freight in this country.
    Secretary Geithner. Senator, I of course respect your views 
on this, and we have had a lot of conversation about this, so 
let me just say a few things in response. But I do not think I 
am going to change your mind.
    Senator Hatch. We have not had too many on this one. I 
mean, you and I have not, I will put it that way.
    Secretary Geithner. We have significantly reduced taxes on 
small businesses in the first 3 years of the President's first 
term. We propose in the budget additional reductions in taxes 
on small businesses. For example, zero capital gains on new 
investments in small businesses, extending very generous 
expensing provisions. We think those are good economic policy, 
given the challenges we face as a country.
    Senator Hatch. I agree with that.
    Secretary Geithner. Now, I am not a politician, but I have 
never met anybody in public office who ever wants to be in 
favor of raising any taxes on anybody. But as you know and as 
you have said eloquently, we face unsustainable fiscal 
deficits. We have to find a way to figure out how to dig our 
way out of that and restore some balance.
    As you have heard us discuss all morning, we do not see a 
way to do that that is fair and consistent with our other 
obligations as officials without some modest increase in 
revenues, and we want to make sure that those revenues come 
from the people who are in the best position to bear that 
burden. These proposals will affect a very, very, very small, 
tiny fraction of small businesses.
    Now, it does affect some small businesses, but most of 
those small businesses, a very substantial fraction of them, 
are not small by any definition, and they make substantial 
amounts of earnings. I think more than half make more than $1 
million in taxable income after expenses.
    So we do not do this with any enthusiasm. We just do it out 
of the recognition that we face terribly difficult fiscal 
challenges. We are adding substantial burdens on average 
Americans because of the broader cuts in spending happening 
across the government, across the economy.
    We think, to avoid putting additional burdens on middle-
class Americans, on retirees, on a defense budget that is 
already being cut substantially, we have to find some ways to 
raise some revenues sensibly through tax reform. That is why we 
are taking this approach. We do not do it with any enthusiasm, 
we just think it is better than the alternatives.
    Senator Hatch. All right. I have only been here 36 years, 
but I have gone through it over and over where a Democratic 
administration has come in and said, we just need more taxes 
and we will cut spending. We have given them the more taxes, 
and the spending has never been cut.
    Secretary Geithner. Well, again, I think this is a good 
debate to have. I think, again, if you look at any independent 
evaluation of what we have proposed on the spending side, you 
will see that we are proposing to cut spending by between $2.5 
and $3 trillion, depending on if you include interest. Between 
$2.5 and $3 trillion over 10 years in spending cuts across the 
government, all parts of the government, including defense, 
with substantial savings for Medicare and Medicaid.
    Now again, it is only in that context--$2.5 in spending 
cuts for every $1 of revenue increases--that we think a modest 
amount of revenue makes some sense. Again, we have to make 
choices. Governing is about choices, about alternatives. If we 
do not do that modest amount of revenues, where are we going to 
find the savings to make sure we can live within our means?
    Now, if you are going to not find 1 percent of GDP in 
revenues, you are going to have to figure out a way to cut 
benefits, cut education, cut Medicare and Medicaid, or cut 
defense further.
    Senator Hatch. Yes. There are no entitlement reforms being 
offered by this administration.
    Secretary Geithner. But Senator----
    Senator Hatch. Not a dime of it.
    Secretary Geithner. That is not true. The budget includes 
$360 billion----
    Senator Hatch. No restraint of growth.
    Secretary Geithner [continuing]. In savings and reforms to 
Medicare and Medicaid. Compare the Medicare ones to the 
alternatives we have seen from your side of the aisle. You guys 
go much, much deeper in transforming changes to Medicare over 
time that we would never support, but we are trying to find 
responsible, sensible ways to get more savings out of the 
Medicare and Medicaid system because, as we all recognize, we 
have made unsustainable commitments in those programs.
    Senator Hatch. And also in the budget you are taking credit 
for war reductions and a lot of other things that may or may 
not be real.
    Secretary Geithner. Well, I am glad you raised that 
question. We are treating the overseas contingency operations--
which is the budget that pays for foreign wars--more carefully 
and more responsibly even than the Republican budget of last 
year. We are treating it, like the Republicans last year, we 
are proposing to count those savings and allocate a substantial 
fraction. But we allocate the savings differently.
    We are proposing to put most of it to deficit reduction, 
part of it to a substantial infrastructure investment program. 
But in general, we are being consistent with the way those 
things have been treated, not just in the Republican budget 
more recently, but in the past.
    Senator Hatch. Well, let me just say this. You have a tough 
job, and I do not want to make it any tougher than it is. But I 
am really concerned because I do not think anybody up here 
wants to cut entitlement programs if they can avoid it. But we 
also know that is where we have to find savings if our kids, 
grandkids, and great-grandkids, in our case, want to have a 
future. I just do not see it in this particular budget, in the 
President's budget.
    Look, you have a very difficult job. You work very, very 
hard. I do not think you get as much credit as you deserve. On 
the other hand, I do not agree with you. I actually think that 
this administration is putting us into real jeopardy. I do not 
blame you for that, completely. [Laughter.]
    But we are going to have to get real about this.
    Secretary Geithner. I think, Senator, we recognize that we 
are going to have to have pretty significant changes to the 
trajectory of growth in Medicare and Medicaid.
    Senator Hatch. I do not see it in this budget.
    Secretary Geithner. Well, you can ask for more. But then 
you have to decide how you are going to get more and how deep 
you are going to go in benefits.
    Senator Hatch. That is what we are talking about. You are 
our guy.
    Secretary Geithner. But I was going to make a slightly 
different point, which is that, as you know, we do not think it 
is realistic or fair to consider even those changes we propose 
on entitlement reform without changes to the tax system.
    Senator Hatch. All right. Now, I agree with that.
    Secretary Geithner. You have to do entitlement reform----
    Senator Hatch. I think we do need to modify our tax system. 
I do not think there is any question about it. But we ought to 
make it so that we can create jobs and opportunities----
    Secretary Geithner. Right.
    Senator Hatch [continuing]. And magnify the small business 
community, which I do not think your budget does.
    Secretary Geithner. Well, we are going to have to raise 
some revenues from the tax system. We cannot do it without 
raising revenues. So, when we talk about entitlement reform 
alongside tax reform, we are talking about entitlement reform 
that saves real money and tax reform that helps contribute to 
deficit reduction. We think you need both those things. We are 
not going to move forward on either one without the other.
    Senator Hatch. Well, I think we are over-taxed now. I do 
not want to raise revenues. I would rather have us make the 
tough decisions and see what we can do to get things under 
control.
    Now, I know you want to get down to the dinner. I have so 
many more questions. Very seldom am I all by myself so I can 
ask anything I want.
    Secretary Geithner. Well, I will come see you. Invite me to 
come see you, and I will come talk to you.
    Senator Hatch. All right. I will invite you to come see me. 
I just want you to know that you have inherited a very 
difficult job in one of the toughest times in history. I have 
respect for how hard you work. I know that you are trying to do 
the best you can. I would like to see you convince this 
President of some of the things that you and I both know he 
ought to be convinced of.
    But in any event, I always respect people who work hard, 
and you are one of the hardest workers I have seen. I wish you 
would work a little less hard on some of these crazy ideas that 
this administration has. But I just want you to know that I 
really appreciated your testimony today. I have appreciated the 
amount of time you have given to this committee, and I 
appreciate how hard you really work.
    So with that, we will let you go. I do not see anybody 
else. We will let you go, and thank you for taking the time. 
You are going to come see me, though.
    Secretary Geithner. Thank you, sir.
    Senator Hatch. And you are going to convince me about some 
of these things.
    Secretary Geithner. Thank you. Thank you.
    Senator Hatch. All right. Thanks so much.
    With that, we will recess until further notice. Thank you.
    [Whereupon, at 12:28 p.m., the hearing was concluded.]


                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              




[GRAPHIC] [TIFF OMITTED] T9764.002

[GRAPHIC] [TIFF OMITTED] T9764.003

[GRAPHIC] [TIFF OMITTED] T9764.004

[GRAPHIC] [TIFF OMITTED] T9764.005

[GRAPHIC] [TIFF OMITTED] T9764.006

[GRAPHIC] [TIFF OMITTED] T9764.007

[GRAPHIC] [TIFF OMITTED] T9764.008

[GRAPHIC] [TIFF OMITTED] T9764.009

[GRAPHIC] [TIFF OMITTED] T9764.010

[GRAPHIC] [TIFF OMITTED] T9764.011

[GRAPHIC] [TIFF OMITTED] T9764.012

[GRAPHIC] [TIFF OMITTED] T9764.013



[GRAPHIC] [TIFF OMITTED] T9764.015

[GRAPHIC] [TIFF OMITTED] T9764.016

[GRAPHIC] [TIFF OMITTED] T9764.017

[GRAPHIC] [TIFF OMITTED] T9764.018

[GRAPHIC] [TIFF OMITTED] T9764.019

[GRAPHIC] [TIFF OMITTED] T9764.020

[GRAPHIC] [TIFF OMITTED] T9764.021

[GRAPHIC] [TIFF OMITTED] T9764.022

[GRAPHIC] [TIFF OMITTED] T9764.023

[GRAPHIC] [TIFF OMITTED] T9764.024

[GRAPHIC] [TIFF OMITTED] T9764.025

[GRAPHIC] [TIFF OMITTED] T9764.026

[GRAPHIC] [TIFF OMITTED] T9764.027

[GRAPHIC] [TIFF OMITTED] T9764.028

[GRAPHIC] [TIFF OMITTED] T9764.029

[GRAPHIC] [TIFF OMITTED] T9764.030

[GRAPHIC] [TIFF OMITTED] T9764.031

[GRAPHIC] [TIFF OMITTED] T9764.032

[GRAPHIC] [TIFF OMITTED] T9764.033

[GRAPHIC] [TIFF OMITTED] T9764.034

[GRAPHIC] [TIFF OMITTED] T9764.035



[GRAPHIC] [TIFF OMITTED] T9764.037

[GRAPHIC] [TIFF OMITTED] T9764.038

[GRAPHIC] [TIFF OMITTED] T9764.039

[GRAPHIC] [TIFF OMITTED] T9764.040

[GRAPHIC] [TIFF OMITTED] T9764.041

[GRAPHIC] [TIFF OMITTED] T9764.042

[GRAPHIC] [TIFF OMITTED] T9764.043

[GRAPHIC] [TIFF OMITTED] T9764.044

[GRAPHIC] [TIFF OMITTED] T9764.045

[GRAPHIC] [TIFF OMITTED] T9764.046

[GRAPHIC] [TIFF OMITTED] T9764.047

[GRAPHIC] [TIFF OMITTED] T9764.048

[GRAPHIC] [TIFF OMITTED] T9764.049

[GRAPHIC] [TIFF OMITTED] T9764.050

[GRAPHIC] [TIFF OMITTED] T9764.051

[GRAPHIC] [TIFF OMITTED] T9764.052

[GRAPHIC] [TIFF OMITTED] T9764.053

[GRAPHIC] [TIFF OMITTED] T9764.054

[GRAPHIC] [TIFF OMITTED] T9764.055

[GRAPHIC] [TIFF OMITTED] T9764.056

[GRAPHIC] [TIFF OMITTED] T9764.057

[GRAPHIC] [TIFF OMITTED] T9764.058

[GRAPHIC] [TIFF OMITTED] T9764.059

[GRAPHIC] [TIFF OMITTED] T9764.060

[GRAPHIC] [TIFF OMITTED] T9764.061

[GRAPHIC] [TIFF OMITTED] T9764.062

[GRAPHIC] [TIFF OMITTED] T9764.063

[GRAPHIC] [TIFF OMITTED] T9764.064

[GRAPHIC] [TIFF OMITTED] T9764.065

[GRAPHIC] [TIFF OMITTED] T9764.066

[GRAPHIC] [TIFF OMITTED] T9764.067

[GRAPHIC] [TIFF OMITTED] T9764.068

[GRAPHIC] [TIFF OMITTED] T9764.069

[GRAPHIC] [TIFF OMITTED] T9764.070

[GRAPHIC] [TIFF OMITTED] T9764.071

[GRAPHIC] [TIFF OMITTED] T9764.072

[GRAPHIC] [TIFF OMITTED] T9764.073

[GRAPHIC] [TIFF OMITTED] T9764.074

[GRAPHIC] [TIFF OMITTED] T9764.075

[GRAPHIC] [TIFF OMITTED] T9764.076

[GRAPHIC] [TIFF OMITTED] T9764.077

[GRAPHIC] [TIFF OMITTED] T9764.078

[GRAPHIC] [TIFF OMITTED] T9764.079

[GRAPHIC] [TIFF OMITTED] T9764.080

[GRAPHIC] [TIFF OMITTED] T9764.081

[GRAPHIC] [TIFF OMITTED] T9764.082

[GRAPHIC] [TIFF OMITTED] T9764.083

[GRAPHIC] [TIFF OMITTED] T9764.084

[GRAPHIC] [TIFF OMITTED] T9764.085

[GRAPHIC] [TIFF OMITTED] T9764.086

[GRAPHIC] [TIFF OMITTED] T9764.087

[GRAPHIC] [TIFF OMITTED] T9764.088

[GRAPHIC] [TIFF OMITTED] T9764.089

                             Communications

                              ----------                              




[GRAPHIC] [TIFF OMITTED] T9764.091

[GRAPHIC] [TIFF OMITTED] T9764.092

[GRAPHIC] [TIFF OMITTED] T9764.093

[GRAPHIC] [TIFF OMITTED] T9764.094

[GRAPHIC] [TIFF OMITTED] T9764.095

[GRAPHIC] [TIFF OMITTED] T9764.096

[GRAPHIC] [TIFF OMITTED] T9764.097

[GRAPHIC] [TIFF OMITTED] T9764.098

[GRAPHIC] [TIFF OMITTED] T9764.099

[GRAPHIC] [TIFF OMITTED] T9764.100

[GRAPHIC] [TIFF OMITTED] T9764.101




                                   


