[Senate Hearing 112-779]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-779
 
                 CONFRONTING THE LOOMING FISCAL CRISIS

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



                                HEARING

                               before the

                          COMMITTEE ON FINANCE

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 19, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance




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                          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

                               WITNESSES

Domenici, Hon. Pete, senior fellow and co-chair, Debt Reduction 
  Task Force, Bipartisan Policy Center, Washington, DC...........     5
Rivlin, Hon. Alice, co-chair, Debt Reduction Task Force, 
  Bipartisan Policy Center, and senior fellow in the Economic 
  Studies Program, Brookings Institution, Washington, DC.........     8

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    37
Domenici, Hon. Pete:
    Testimony....................................................     5
    Prepared statement, joint with Hon. Alice Rivlin.............    39
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................    56
Rivlin, Hon. Alice:
    Testimony....................................................     8
    Prepared statement, joint with Hon. Pete Domenici............    39

                             Communications

Center for Fiscal Equity.........................................    59
U.S. Chamber of Commerce.........................................    66

                                 (iii)


                 CONFRONTING THE LOOMING FISCAL CRISIS

                              ----------                              


                         TUESDAY, JUNE 19, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:15 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Conrad, Wyden, Nelson, Menendez, Cardin, 
Hatch, Grassley, Snowe, Crapo, Cornyn, Coburn, and Thune.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Alan Cohen, Senior Budget Analyst; Lily Batchelder, 
Chief Tax Counsel; Matt Kazan, Health Policy Advisor; Tom 
Klouda, Professional Staff Member, Social Security; Andrea 
Chapman, Detailee; and Claire Green, Detailee. Republican 
Staff: Chris Campbell, Staff Director; and Jeff Wrase, Chief 
Economist.

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

    The Chairman. The hearing will come to order.
    President Truman once said, ``America was built on courage, 
on imagination, and an unbeatable determination to do the job 
at hand.'' We are here today to discuss the fiscal crisis we 
face at the end of this year. Overcoming this crisis is the job 
at hand.
    We are pleased to have Senator Pete Domenici and Dr. Alice 
Rivlin with us. They are co-chairs of the Debt Reduction Task 
Force at the Bipartisan Policy Center.
    In November 2010, Senator Domenici and Dr. Rivlin released 
a comprehensive debt reduction plan. That plan has helped 
inform the debate for more than a year and a half. It has been 
updated and, as we approach the looming fiscal crisis, it takes 
on new importance.
    At the end of this year, our fiscal landscape is scheduled 
to change dramatically: the 2001, 2003, and 2009 tax cuts, the 
patch on the Alternative Minimum Tax, and other key tax 
provisions, will all expire. That would cause steep tax 
increases on middle-class families.
    The across-the-board sequester of many Federal programs 
will kick in. Medicare's physician payment system will force a 
deep cut that threatens seniors' access to doctors. Sitting 
back and letting all this happen would mean a disaster for our 
country. In fact, the nonpartisan Congressional Budget Office 
projects it could throw us back into recession. It doubtlessly 
also would deal a blow to U.S. standing in the world community.
    During the first half of 2013, GDP would shrink by 1.3 
percent, according to CBO. Over the entire year, GDP would grow 
only half a percent. Canceling the sequester and failing to 
raise more revenue and maintain the status quo would also be 
disastrous.
    It would tell the American people and the world that we are 
not serious about our deficit reduction. If we do not find 
additional revenue and we cannot agree on spending cuts, debt 
held by the public could reach more than 100 percent of GDP by 
fiscal 2022.
    We need a comprehensive debt reduction plan that does not 
shock the system with deep, immediate cuts. Instead, we need a 
practical, responsible plan that gives confidence to the 
markets and the country.
    What would such a plan look like? The plan should 
substantially lower deficits and debt over the next 10 years 
and beyond. The plan needs to be fair, and everyone must 
contribute. The plan needs to be balanced. This will require 
cuts in spending. We need more revenue to pay for America's 
needs. We do not just face a spending problem or only a revenue 
problem; it is both.
    The plan must stabilize and decrease debt held by the 
public as a percent of GDP. The plan should ramp up slowly to 
allow the recovery to continue. The plan must not count any 
Social Security changes towards deficit and debt reduction. 
Social Security has not added one dime to the deficit or debt.
    Finally, the plan needs to meet the political challenges we 
face. The Rivlin-Domenici plan we will examine today meets many 
of these criteria. It is balanced and fair and requires both 
revenue increases and spending cuts. The plan generates 
sizeable debt reduction to stabilize the debt held by the 
public as a percent of GDP by 2014. It would shrink the debt-
to-GDP ratio thereafter.
    However, the plan contains some proposals that concern me. 
The plan, for example, includes changes in Social Security 
which, in my judgement, should be dealt with separately and not 
as a part of deficit reduction.
    The plan changes Medicare to a premium support program, and 
it turns Medicaid into a block grant. These proposals only 
shift costs onto seniors, States, and the disabled. Any changes 
made to Medicare and Medicaid should focus on saving money by 
making the health care system more efficient and more focused 
on quality of care.
    Many of the Rivlin-Domenici tax changes are politically 
challenging as well. Some limit future opportunities. For 
example, the plan repeals all tax incentives that go to 
colleges without proposing anything in their place.
    With the fiscal crisis we are facing at the end of the 
year, Congress needs to come together and agree on a 
combination of revenues and spending cuts. It is the only way 
forward. So let us work together to show we are serious about 
our deficit problem, and look to the Domenici-Rivlin plan for 
inspiration. Let us remember President Truman's words, and do 
the job at hand.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

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

    Senator Hatch. Well, thank you, Mr. Chairman. I am 
particularly pleased to welcome Pete Domenici--our Senator from 
New Mexico, who was, in my opinion, one of the all-time great 
Senators here--and Dr. Rivlin, for whom we have tremendous 
respect. Both of you have done your best to try to assist in 
these problems that we have. We appreciate your coming here to 
discuss options for addressing our Nation's fiscal challenges.
    Given the enormous and growing uncertainties associated 
with the country's fiscal position, it is far past time that 
Congress and the President act to right our fiscal ship. Market 
uncertainty is already growing as a result of the historic tax 
increases set to take effect at the end of this year.
    Because Federal law requires certain employers to give 
advanced notice to workers facing layoffs, the automatic budget 
cuts, or sequestration, set to begin at the start of next year, 
mean that we can expect major layoff notices from defense 
contractors and others starting this fall, should that be the 
case.
    At a time when job growth is anemic, unemployment remains 
above 8 percent, and the American workers are struggling, it is 
unconscionable to gamble with the economy by choosing to ignore 
the fast-approaching fiscal cliff. This is not the time to 
privilege 
election-year talking points and political brinkmanship over 
economic growth and the American families and businesses that 
depend on it.
    Make no mistake, the private sector is by no means doing 
just fine. Since the President took office, the unemployment 
rate for government workers has averaged 4.2 percent. By 
contrast, when you include the private sector, the unemployment 
rate has averaged 9.2 percent during the President's term. 
Overall, unemployment has been above 8 percent for 40 
consecutive months, while the unemployment rate for government 
workers over the same period has averaged just over 4 percent.
    Only someone who is entirely out of touch with the plight 
of Americans could read these numbers and conclude that the 
private sector is doing just fine. American families and 
workers in the private sector are hurting and have been for far 
too long. They cannot afford any more hits.
    So Congress and the President should be working now to 
avert the fiscal cliff that threatens all Americans at every 
income level with massive tax hikes. It is long past due to 
begin reforms of a tax code that is a burden on families and 
businesses and a drag on our economy.
    Over the past few years, we have seen many plans to do just 
that, including one our witnesses will address today. What has 
been noticeably absent, however, is engagement by the 
administration and leadership by the President.
    We hear from the Treasury officials that the administration 
has ``principles'' for corporate tax reform, for individual 
taxes, and for Social Security and other entitlements, but I 
suspect, because it is an election year, they refuse to talk 
about the specifics.
    In spite of his claim that his proposals are available for 
all to see, no one I know has seen the President's plan for 
reforming Medicare or Social Security or the tax code. All we 
hear are vague principles with the only definitive 
characteristic being more redistribution.
    But a sentiment, no matter how strongly felt, is not a 
plan. The lack of leadership from the President at such a 
critical moment for our economy is remarkable, in my opinion. 
He has ignored numerous fiscal plans that have been crafted by 
bipartisan groups like the one we will hear about today, which 
was originally crafted in November of 2010.
    One of today's witnesses, Dr. Rivlin, expressed frustration 
about the President's passive stance toward our slow-rolling 
fiscal crisis as far back as June of last year, writing that 
``leadership can't be delegated to commissions or task forces. 
Mr. President, please get out front.''
    Now, I would like to echo that frustration and urge the 
President to get out front. Steer us away from this fiscal 
cliff. Work with us to tackle our unsustainable deficits and 
debt and entitlements, and assist us in reforming our broken, 
antiquated tax system, or code.
    Mr. Chairman, I commend you for your continued leadership 
on these matters. I commend you for taking the step this month 
of outlining your framework and principles for tax reform, and 
I look forward to working with you on tax reform. I hope to 
work with you in addressing the fiscal cliff that is creating 
enormous uncertainty for families and businesses and 
contributing to further slowing and weakening of the economy.
    I invite the President and the administration, including 
officials at the Treasury, to join us. While I understand that 
this is an election year, we cannot let that stand in the way 
of doing what is right for the American people.
    Once again, Mr. Chairman, I want to thank you for holding 
today's hearing, and I want to thank these two tremendous 
witnesses for appearing. I certainly look forward to their 
testimony and appreciate all the efforts that they have made, 
under very trying circumstances, to come up with the approaches 
that they have come up with.
    We just welcome both of you, and we are really happy to 
have you here.
    The Chairman. Thank you, Senator Hatch.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. I would like to welcome formally and 
introduce our witnesses. Let me begin by saying I have the 
deepest regard and respect for both of you. You, Senator 
Domenici, former chairman of the Budget Committee, I know how 
hard you worked on budgets to get our fiscal house in order. I 
do not know of anybody who worked harder than you.
    Then, Dr. Rivlin, I remember your assisting us many years 
ago, when I was over in the House of Representatives, with 
budget issues. You too have been as dedicated in public service 
and getting our fiscal house in order, and I thank you so very, 
very much. All the rest of the positions that you have held are 
very impressive, including former Director of the White House 
Office of Management and Budget and many other positions, 
including the one you have been serving on today, as co-
chairman of the Debt Reduction Task Force.
    Thank you both very much. You do not need introductions, 
either one of you, but I just want to tell you how much I 
appreciate you. I think I can speak for every member of the 
Senate about just how hard you have worked and just how deep 
our admiration is.
    Senator Domenici, why don't you proceed? You know the 
order. Just go ahead.

 STATEMENT OF HON. PETE DOMENICI, SENIOR FELLOW AND CO-CHAIR, 
     DEBT REDUCTION TASK FORCE, BIPARTISAN POLICY CENTER, 
                         WASHINGTON, DC

    Senator Domenici. Thank you very much, Mr. Chairman, 
Senator Hatch. Thank you for your kind words. Let me say to all 
of you, it is a pleasure to be here.
    It has fallen to me since I left the Senate, for almost 
half of the time that I have been gone, that I have devoted 
time and energy to trying to come up with ways and means to 
help this great Nation get out of the terrible dilemma that we 
have in terms of our debt. It has been a real pleasure to work 
at the Bipartisan Policy Center with Dr. Alice Rivlin.
    The two of us have done this budgeting differently because 
we have done it bipartisanly from the very beginning. As we 
worked our way through, we had to get both Democrats and 
Republicans to support the proposition, so it is different than 
others. But if indeed you intend to have a bipartisan solution, 
then obviously you have to do some of the things we are talking 
about, some give-and-take.
    I would not have done it exactly the way we did, and I am 
sure Dr. Rivlin would not have, but, when you put it together, 
it is a bit more than you have indicated, Mr. Chairman. You 
have indicated, and I appreciate it, that we gave you 
inspiration. Frankly, I think we gave you a plan that is really 
doable.
    Some of the things in the plan are different than you have 
stated, and we are going to try to clarify them. Perhaps we had 
misspoken, perhaps we had given you some wrong documents, but 
we believe the solutions to Medicare are here in this proposal, 
both fiscal and as a matter of policy.
    I want to also open by saying to you--and I do not want to 
do this in denigration of any other committee--we no longer 
have to wait for a super committee. I want each one of you to 
know I am trying to look you right in the eyes and tell you 
that, in the U.S. Senate, you happen to be the super committee. 
We do not need to appoint one.
    What am I talking about? What I am talking about is, you 
have all of the jurisdiction basically that is needed to solve 
our fiscal problem. Some of you would rather, perhaps, that it 
not be the case. But Medicare is within your jurisdiction. You 
cannot fix the budget without fixing--that is, in some way 
reforming--Medicare so you push the costs in the future down.
    If you look at the major programs of our country, you will 
find that the only one that is up, up, and away is the cost of 
health care. All the others are controllable. We could fix them 
rather easily. But unless you fix Medicare, you cannot fix this 
deficit.
    It is a blue line on our chart, and our chart is here 
somewhere. I never go anywhere without it. I am known as the 
blue line chart man, Pete Domenici. I bring that blue line with 
me everywhere so you will understand what it is.
    You see where we have the major programs of the government. 
They are running almost side to side. Then you look and see the 
blue line, the line for health care spending, is up through the 
roof. We have to bend the blue line in the passage of a 
Medicare bill. Unless we do, we do not solve the problem.
    [The chart appears in the appendix on p. 42.]
    Senator Domenici. Now, let me repeat. Mr. Chairman, I heard 
you speak before on this issue, and I think you know it, but I 
want every member of the committee to know that you are the 
super committee. It falls on you to solve the Medicare problem, 
to solve the tax problem with a reform measure that will either 
be neutral in revenue or will gain revenue. We gain revenue in 
ours.
    But let me proceed to tell you that we have done very 
little to solve the deficit problem during the last 18 months: 
a lot of talk, no action. The only thing we have done is a 
little bit of work on the appropriations part of this budget, 
but not very much. The Budget Control Act brought to us the 
sequester that has an automatic $1 trillion in defense and 
domestic cuts. They are now scheduled to go into effect January 
2.
    I have to take time to tell you that that sequester is 
already law that has been adopted. It is indefensible for any 
of you who think we ought to do good work around here and that 
we ought to not go wild in getting rid of our defense of our 
country, to not take seriously that something has to be done to 
see to it that the sequester does not take effect.
    Now, you do not have total jurisdiction over that, so you 
are not the super committee on that, but on all the matters 
that have to do with long-term solutions for the budget, they 
belong on your two shoulders for the Democrats and Republicans 
on this committee. Whether you like it or not, you can solve 
the problem or you can let it go by.
    Now, we already know that the sequester is going to be a 
very big drag on the economy. That is shown to us by CBO. If 
you can join with others who want to make sense out of that 
part of the activities, it seems to me you would do us all a 
service if you could commit yourself to fix that sequester so 
we could get on with some other activities and not be worried 
about diminishing our defenses until we do not recognize that 
they exist.
    The sequester must be addressed. It is just one part of the 
looming fiscal cliff that we face. The Bush tax cuts, you know 
all of them, you have recited them. Believe it or not, none of 
those was part of solving the debt problem. They come along, 
and they happen to be due and payable, or due and you have to 
do something about them. They come into existence during the 
same time that we are trying to fix the debt. It makes it 
rather complicated for some, but that is just the way it is.
    Under ordinary times, perhaps Alice, a Democrat, would not 
be calling for substantial changes to the entitlement programs, 
and I, a Republican, would be against higher revenues. But this 
is not a normal time, and we cannot allow ideological purity, 
in my opinion, to stand in the way of what is right for our 
country. Otherwise, we might as well admit defeat and sit back 
and watch it go by while the accumulation of debt overwhelms 
our way of life.
    I, for one, will do everything I can to prevent that. We do 
not know what that means, but we do know that America will not 
be the same if our fiscal policy is permitted to go to zero and 
to become frigid and to become inoperative. Health care reform 
and tax reform that raises additional revenue are essential 
pieces to any serious plan.
    The first one is easy to show. Many of you have seen my 
chart--I told you about it--with the blue line. It is 
imperative that you understand that it must be fixed or you 
cannot fix the budget. Anybody who tells you they have a budget 
fix and they have not reformed Medicare so it costs less money 
over the next 20 years and the line is bent, anybody who says, 
I have a solution, but does not have a solution to Medicare, 
you should tell them to start over, go elsewhere, sell your pot 
of ideas someplace else, because it will not work without 
Medicare reform.
    We must continue to innovate and experiment with sensible 
cost-containment measures, but the challenge is not going to 
disappear overnight. You know the population is aging. The Baby 
Boom generation is just beginning to retire. This means that 
Medicare will face a flood of new beneficiaries.
    In fact, roughly 10,000 people are enrolling in Medicare 
every business day. These are unstoppable trends, and you have 
to account for them and change the program to take care of 
them. Because of these trends, even if action is taken now to 
tackle health care costs, and it should be, the U.S. government 
is destined to increase its health care spending in the near 
and medium term.
    In the meantime, without other changes, the government 
would continue running large deficits and racking up additional 
debt. Given the magnitude of the fiscal problem, this is an 
irresponsible course. So, in addition to seeking long-term 
solutions to the structural health care problem, the United 
States must employ other methods to reduce our deficit.
    Federal receipts are currently at a modern-day low because 
of the recession. They are coming in at 16 percent of GDP. But 
even if the Bush tax cuts are extended, revenues are projected 
to recover to 18 percent of GDP by 2017, which is roughly their 
average historically.
    I understand my time has expired, but I----
    The Chairman. Go ahead, Pete. Take a few more minutes. Go 
ahead.
    Senator Domenici. Well, I looked around, and I looked at 
your schedule, and you do not have any other witnesses besides 
the two of us, so I asked Alice by just poking her here like 
this, and she said, ``Proceed, finish,'' so I will. I am almost 
there.
    I want to say to all of you that what we have produced by 
way of a budget, a plan, should really be taken seriously by 
all of you. I think, Senator Coburn, we have been to see you, 
within the past 12 months, about the Medicare proposal.
    It is now refined and suggested, and, if it is adopted, or 
something close to it, you will have fixed, in our opinion, a 
major problem with Medicare. Hard to do, but if you look at it, 
it has to be done. We have to convince the seniors that their 
programs may not be around, if we do not fix them, to cover 
them in the out-years.
    In terms of taxes, it cries out for reform, even if we did 
not have a fiscal crisis. It cries out for reform. It is a 
mess. We were lucky in our committee. We had tax experts who 
were on our committee. It was bipartisan and had a lot of 
professionals. They have put together a major reform of our tax 
system that will make it clean, sharp, and productive. It will 
be a growth budget.
    The rates will come down, all the things you have been 
talking about, and we will structure it where it will, over the 
years, increase revenue somewhat to match up with the 
entitlement restraint, and you have a good budget. That is what 
we have done, and it is a very good plan. Alice is an expert at 
it and she has worked hard, and I want to now, with your 
permission, ask her to take her time and tell you about the 
major proposals that we have in our budget.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    [The prepared statement of Senator Domenici appears in the 
appendix.]
    The Chairman. Dr. Rivlin, welcome to the committee.

 STATEMENT OF HON. ALICE RIVLIN, CO-CHAIR, DEBT REDUCTION TASK 
   FORCE, BIPARTISAN POLICY CENTER, AND SENIOR FELLOW IN THE 
ECONOMIC STUDIES PROGRAM, BROOKINGS INSTITUTION, WASHINGTON, DC

    Dr. Rivlin. Thank you, Mr. Chairman.
    Senator Domenici has explained our two major messages, 
which are, first, the fiscal cliff is a real one--it is more a 
wall than a cliff. If you allow all of these things to happen 
on the tax side and the spending side that would happen 
automatically, you will endanger the recovery.
    But the other looming crisis is the debt crisis, and the 
responsibility of this committee, we believe, is to help find a 
way to avoid the fiscal cliff, but substitute a grand bargain 
that will put our budget back on a sustainable track so that 
the debt is not rising faster than our economy can grow.
    The two key elements of such a plan, as Senator Domenici 
has said, are Medicare reform that reduces the rate of growth 
of that program in the future in a sensible way that preserves 
the program, and tax reform that gives us a fairer, simpler tax 
code that raises more revenue in the future.
    So let me talk briefly about those two proposals; first, on 
Medicare. Medicare is a hugely successful program. We need to 
preserve the Medicare guarantee of affordable health care for 
older and disabled people, and we need to do that, not in a way 
that will shift costs to the private sector or to vulnerable 
beneficiaries, but by making Medicare a leader in improving the 
efficiency and the effectiveness of health care delivery for 
everybody while reducing the rate of growth of health spending.
    Our plan would preserve traditional Medicare permanently as 
the default option for all seniors. It would strengthen the 
efforts which are embodied in the Affordable Care Act to 
identify improvements in cost-effectiveness of traditional 
Medicare through innovations in delivery and reimbursement 
incentives. But it would also offer seniors a choice, on a 
well-regulated exchange, between traditional Medicare and an 
array of private, comprehensive plans that offer at least the 
same benefits and which are required to accept everybody, no 
cherry-picking, but guaranteed issue and community rating.
    Those plans and traditional Medicare, in our view, should 
compete on a well-regulated exchange which would provide 
information on the prices and the outcomes of the plan. The 
government contribution, we believe, should be set at the 
second-lowest price established on those regulated regional 
exchanges.
    Now, an individual senior could stay in traditional 
Medicare, could choose the lowest-priced plan. If they chose 
the lowest one, lower than the second lowest, they get some 
money back. If they chose a plan with more benefits, they would 
have to pay more.
    We believe that competition on an exchange among those 
plans would achieve considerable savings over time; we 
estimate, conservatively, $300 billion over the next 10 years. 
But you cannot be sure of that, so as a fail-safe we would 
impose a cap on per capita cumulative Federal expenditures that 
would be at the rate of per capita GDP plus 1 percent, so you 
would know it would not increase faster than that.
    If, which we would not expect, the Federal expenditure 
reached that cap, then we would impose a means-tested premium 
but protect low-income seniors. Congress could, of course, 
decide to do it some other way.
    On the tax plan, we would propose, respectfully, to this 
committee that you adopt a new procedure. Instead of 
approaching tax reform by reviewing the current complexities of 
the tax code--all the exclusions, deductions, and credits--one 
by one and deciding how to change them, we would recommend that 
the committee take the radical approach of starting over.
    Assume that all income from whatever source is taxable, 
which would enable you to raise more revenue at much lower 
rates, and then go about deciding which modifications are 
absolutely essential even though they would raise the rates.
    We would urge you not to revert to excluding the employer-
paid health and other benefits from income, but to limit and 
phase out this exclusion that encourages both employers and 
employees to choose fringe benefits over wages as compensation.
    If you decide to encourage home ownership, then do it in a 
way that will help the middle class most rather than giving 
benefits to the high end. To this end, we would recommend a 15-
percent credit for mortgage interest, paid up to a limit, 
rather than the current deduction.
    Our plan is detailed in our longer testimony. It would have 
only two rates: 15 and 28 percent. It would have a corporate 
rate of 28 percent. It would tax capital gains and dividends as 
ordinary income. It would have a refundable child credit and a 
refundable earnings credit, and it would have a refundable tax 
credit for charitable contributions and mortgage interest, up 
to a limit.
    Despite these low top rates, this plan would be more 
progressive and raise considerably more revenue than the 
current tax code; we would estimate about $2.6 trillion over 
the next 10 years. Those are our two principal proposals, and 
we would be delighted to answer questions on these or other 
parts of the plan. Thank you.
    The Chairman. Thank you both very much.
    [The prepared statement of Dr. Rivlin appears in the 
appendix.]
    The Chairman. How does your plan differ from another major 
one that is out there? What is the major difference?
    Dr. Rivlin. Well, since I was on Simpson-Bowles, along with 
at least three members of this committee that I can see at the 
moment, let me answer that one. The basic structure is the 
same. You cannot stabilize the debt any other way except by 
reforming entitlements and raising more revenue from a reformed 
tax system.
    The tax approach is very similar because Simpson-Bowles did 
exactly what I suggested: they started over and said, let us 
tax everything and then add back in certain provisions. So the 
tax proposals are similar.
    Our health care proposal for Medicare, however, is 
different. Simpson-Bowles did not have a serious discussion--
although Representative Ryan and I tried--of premium support, 
and so Senator Domenici and I are quite proud of this 
compromise premium support plan. It is not like the original 
Ryan plan at all. It preserves traditional Medicare, but it 
does give an option of going to an exchange.
    Other aspects of Simpson-Bowles are similar, I think, to 
what we are proposing. Both Simpson-Bowles and Domenici-Rivlin 
placed limits on discretionary spending over the next decade. 
You have already done that in the Budget Control Act, so that 
part is done.
    The Chairman. Clearly your plan and Simpson-Bowles both 
suggest discretionary spending and entitlement cuts, as well as 
revenue increases. Could both of you explain the need for not 
only spending cuts, but also the need for revenue increases?
    I obviously ask the question because there is so much 
resistance in the Congress to additional revenue. How important 
is the need for additional revenue, and how strongly do you 
support additional revenue? What do you tell those who say ``no 
additional revenue''?
    Senator Domenici. Let us both comment on it.
    The Chairman. All right.
    Senator Domenici. I want to say to you first, as a former 
Republican Senator, remember that we put our plan together 
starting with bipartisan membership. So we were not a group of 
Republicans gathered to fix the budget and a group of Democrats 
gathered to fix it; we were a mixture, and we had to get an 
``aye'' vote for the plan so that we could present it to the 
public.
    So for starters, the partisan issue is one where Democrats 
say, if you are going to have significant tax increases 
attributable to tax reform, you have to--let me put it the 
other way.
    Republicans say, we will take that only if you reform 
health care so that we are not looking at a forever-increasing 
tax to pay for an ever-increasing health care. Together, you go 
with a tax proposal and a proposal that reforms Medicare. When 
you combine the two, you get bipartisan support.
    Now, there is another reason you need it, and that is, when 
you are finished with this product and you have done all you 
can, you are short money to get to the place where you have a 
fiscal policy that can survive. For it to survive, you have to 
end up putting revenue into the mix.
    The Chairman. How much revenue did you recommend?
    Dr. Rivlin. How much did we recommend?
    The Chairman. Yes.
    Dr. Rivlin. We, as I think I said of the plan that we would 
propose, we think, would raise about $2.6 trillion more over 
the next 10 years.
    The Chairman. And why is that so important? What do you 
tell members of Congress who say ``no revenue''?
    Dr. Rivlin. I think the basic reason is, we have a lot more 
seniors. We will have, in the relatively near future, twice as 
many seniors who are claimants for Medicare, Medicaid, and 
Social Security. The historic level of spending has been around 
20 to 21 percent of GDP, 20 percent at the last time we 
balanced the budget.
    But that was before we had all these seniors. So, if we are 
going to accommodate twice as many people, even if we do a good 
job of bending the health care cost curve, we are not going to 
bend it to zero. If we do a good job on that, we are still 
going to have this tsunami of retirees, and we cannot 
accommodate those within the same level of revenue without 
cutting out everything else that the government needs to do.
    From a practical point of view, when you are in a 
bipartisan commission--and I have been in two of them now--you 
start with, what can we do on the entitlements, and then you go 
to discretionary spending, and then you realize you have not 
gotten there yet.
    I think that was a hard moment for Senator Coburn and 
Senator Crapo especially in the Simpson-Bowles debate, but they 
are among my heroes because they stepped up to the plate and 
said, yes, we are going to need more revenues as well as to cut 
spending.
    The Chairman. My time has expired.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    Dr. Rivlin, the original 2010 version, as I see it, of the 
Domenici-Rivlin plan called for a value-added tax, which I 
think you called a deficit reduction sales tax. Now, that 
national sales tax was intended to apply to around, as I 
recall, 75 percent of consumer expenditures and would apply to 
home sales, purchases of food, and purchases of clothing.
    Now, according to your plan, the tax would have generated 
over $3 trillion between 2012 and 2020, and over $17 trillion 
between 2012 and 2040, if I have it right. Subsequently, as I 
understand it, you have chosen to drop the VAT--value-added 
tax--from your plan, citing likely lack of general support for 
a national sales tax in conjunction with an income tax.
    In place of the VAT you have decided--again, as I 
understand it--to increase the corporate tax rate from your 
initial proposed 27 percent to 28 percent, and to increase the 
upper tax rate on your income tax schedule also from the 
initially proposed 27 percent to 28 percent.
    Yet, I am not sure that your fiscal arithmetic adds up. I 
am not sure that those tax hikes would generate enough revenue 
to replace what your initial plan's national sales tax 
generated, or was proposed to generate.
    Now, would an increase in upper rates from 27 percent to 28 
percent generate the trillions of revenue that your initial 
plan relied on from a national sales tax, or have you also 
decided to make other changes to your plan in order to get more 
revenue?
    Dr. Rivlin. You are absolutely right, Senator Hatch. We did 
not make up all the revenue. The original plan had the debt 
reduction sales tax. We did not detect vast enthusiasm in this 
body or the other for a broad-based consumption tax, although 
we still think it is a good idea. So we revamped the plan and 
made the changes that you suggest, but our current plan does 
not raise as much revenue as the original one did.
    Senator Hatch. Now, this question is for either or both of 
our panelists. Your joint testimony identifies severe economic 
risks stemming from the fiscal cliff, including a strong 
likelihood that the economy would slip again into recession 
next year.
    You also highlight that effects from the fiscal cliff and 
other aspects of existing fiscal uncertainty begin to hit this 
year, and you identify CBO's projection that these fiscal 
uncertainties will lower GDP growth by at least another half of 
1 percent in the remainder of this year.
    Now, as a consequence, you conclude--correctly, in my 
view--by saying that ``we urge Congress to act quickly'' and go 
on to say that ``waiting until an always-difficult lame duck 
session may establish inaction as the default position, which 
could lead the Nation directly over the fiscal cliff.''
    Now, recently an economist at the Center on Budget and 
Policy Priorities wrote an article in which he argued that the 
economy would not be thrown immediately into recession early 
next year because of the fiscal cliff, and that there would be 
relatively modest negative effects over the first couple of 
months of next year. The idea was that it would be relatively 
painless to defer resolution of the fiscal cliff into the early 
months of next year, and fear of the cliff should not prod 
anyone into making ill-conceived budget deals during the 
remainder of this year.
    Rather, the author argues that pressures would mount early 
next year to strike a deal under the gun of an impending debt 
limit breach, and the short-term pain from a couple of months 
with no resolution would hurt, but it would not be a full-
blown, year-long recession.
    Now, Dr. Rivlin and Senator Domenici, I believe that it 
would be difficult to be more wrong than the recommendation I 
just described. Growing fiscal uncertainty from the fiscal 
cliff, sequestration, and the long list of other undone 
business during the year--as officials from the Federal Reserve 
and CBO warn--will negatively influence hiring, investment, 
business decisions, and the economy well before we hit the 
fiscal cliff at the end of the year. I believe we need to act 
well before the end of this year, preferably before autumn when 
we are likely to see layoffs in defense and other industries 
begin.
    I wonder if either or both of you would comment on whether 
you agree or disagree with that option proposed by the Center 
on Budget and Policy Priorities of gambling with the economy 
and waiting until next year to deal with the fiscal cliff and 
other fiscal matters. Do you agree or disagree that waiting 
until early next year to confront our fiscal uncertainties, 
including the fiscal cliff, really would not hurt that much?
    Dr. Rivlin. That is a pretty loaded question, Senator.
    Senator Hatch. Well, it is, deliberately.
    Dr. Rivlin. I think we made clear in our testimony that we 
think the Congress should act as quickly as possible. If, in 
the face of the election, you could possibly get yourselves 
together to act immediately, or had acted last year, we would 
be very enthusiastic about that.
    It is true that the cliff does not hit all at once, but we 
should not create an image of an America that cannot even avoid 
this quite cataclysmic set of self-imposed problems--after all, 
nobody wanted the sequester to happen, and it imposes deep cuts 
in a mindless way on both defense and domestic programs, and no 
one wants the AMT to go into effect for more people, and I 
think no one wants all the tax cuts to expire at once.
    So letting that all happen would be an admission that our 
government is not working, and that would, I think, have 
serious repercussions in the markets, as some have pointed out.
    Senator Hatch. Thank you.
    Senator Domenici. Mr. Chairman, I just want to comment 
briefly. Thank you for your great answer, Alice. I believe you 
have to consider in your question the fact that we are talking 
about lame duck. I think it is very important, for some of you 
who have gone through lame duck, to make sure that you know it 
is not the best choice of an arena to which you would assign 
the solution of major problems, nor is it an arena that you 
would assign two problems to and say, that is all we are going 
to do, because that never happens. So, I just add that.
    Mr. Chairman, I want to make an observation, if you would 
permit me.
    The Chairman. Sure.
    Senator Domenici. We talked together, all three of us--Dr. 
Rivlin, you, and I--about revenues and reform of entitlements. 
We have to start--which I did not do--with, what are we trying 
to accomplish? It used to be we would talk about a balanced 
budget, and that was the operative approach.
    We are now talking about something different. We are 
talking about the ratio of debt-to-GDP, debt being the 
accumulation of deficits. We are looking to get to a point 
where we can live with a debt and would have a stable economy, 
and we are looking for somewhere around 60 percent.
    You note that some of those countries that are going down 
already are passing 100 percent. We are positive that our great 
country cannot survive 100 and 150 percent before something 
happens. We only did that once for the second World War, for a 
few years to win the war, but then we immediately dropped down 
to a much more stable ratio.
    We have to get back there. To get back there, you have to 
do something to the two tillers that push it, and that is, what 
kind of revenues are you going to have, and what do you do with 
entitlements?
    So what we had to do in a bipartisan way was say, how much 
can you get out of reform and restraint and cuts, put it over 
here, and then, what is left by way of debt? Where are you 
going to get it from? We said, we have to reform the tax code. 
Alice has explained how. I think it is the best reform around, 
and you all ought to look at it. It is simple. How you vote on 
it would be simple too. It would be much easier.
    So what we are saying is, when you have those two pillars 
and you are going to reform the taxes and say, how much do we 
have left that we have to solve for for our 60 percent, 65 
percent ratio, you cannot do it without some revenue. That is 
how it comes about. I did not do a very good job explaining it 
to you, and I thought I ought to try again. I probably did no 
better, but I feel better about it. [Laughter.]
    I thought you would care about that.
    The Chairman. Both are accurate. All right.
    Senator Conrad?
    Senator Conrad. Thank you, Mr. Chairman. Thanks for holding 
this hearing. Thanks to our witnesses, Senator Domenici, with 
whom I served for many years on the Budget Committee and whom I 
have deep respect for, and Alice Rivlin, who is a legend. We 
appreciate the extraordinary work you have done.
    I think, frankly, you have it about right. I served on 
Simpson-Bowles. In many ways I think your work product is 
actually somewhat superior to ours. I say that because, while 
there are a lot of similarities, you did take on fundamental 
reform of Medicare.
    My own conclusion is, we are going to have to do it. How we 
do it, that is critically important. We do not need to throw 
the baby out with the bath water, we do not need to shred 
Medicare in order to save it, but we do need to change some of 
the elements of how it functions in light of health care 
inflation and this gigantic growth in the Baby Boom generation. 
These are undeniable facts.
    The growth of the Baby Boom generation is not a projection. 
These people have been born. They are alive today. They are 
going to be eligible for Social Security and Medicare, and the 
trustees have told us we are headed for the cliff.
    So I mean, any prudent person, I think, would say, we are 
going to have to make some changes. Part of it is going to have 
to be done on the revenue side as well because, as you point 
out in your chart, in addition to the chart Senator Domenici 
referenced that shows Medicare as being the driver on the cost 
side, you also show, on the revenue side, that trying to do 
this with the ordinary level of revenue that we have had, 18 
percent of GDP, is not going to be enough in this context and 
that the times we have balanced the budget, we have not been at 
18 percent of GDP in revenue, we have been at 20 percent of 
GDP. Your chart shows that very 
clearly.
    I think one other thing that is so important and has not 
been said here today is, Director Rivlin, you have indicated 
that your plan calls for a $2.6-trillion revenue increase. But 
that is compared to current policy--current policy. If we would 
compare your plan to current law, it is actually a tax cut. It 
is a tax cut, my calculation is, of about $1.6 trillion.
    So when we use these words--and words matter a lot--and we 
say there is going to be more revenue, compared to what? 
Compared to current policy, it is more revenue. Compared to 
current law, it is less revenue. Is that not the case?
    Senator Domenici. Yes, it is. Yes, it is the case.
    Dr. Rivlin. Yes, absolutely.
    Senator Conrad. And you are talking about a revenue level, 
in 2022, of 20.6 percent of GDP. Is that correct?
    Dr. Rivlin. I think so.
    Senator Conrad. And that is exactly what the revenue level 
of the country was in the year 2000.
    Senator Domenici. That is right.
    Senator Conrad. That is exactly what it was, and we 
balanced the budget, and we quit taking Social Security money 
to finance the general operations of government. So I think you 
have it about right with respect to the revenue side of the 
equation. I think you are headed in the right direction on 
entitlement reform.
    I have a little bit of time here left. I would like to go 
to a question. One of the great vulnerabilities, obviously, of 
the Medicare reform that you are proposing is this question of 
cherry-picking. How do we prevent cherry-picking by those who 
offer insurance coverage?
    Dr. Rivlin. You enforce the rule that they cannot do it. 
You have a regulated exchange with rules. If they are going to 
offer their wares on the exchange, they have to take all comers 
and at the same price, and they have to offer what Medicare 
offers. There are certainly ways of throwing off the exchange 
anybody who does not abide by those rules. In the early days of 
Medicare Advantage there was a lot of cherry-picking, but even 
in Medicare Advantage the CMS has managed to get rid of that.
    Senator Conrad. Can I just say in conclusion, Mr. Chairman, 
to me one of the biggest challenges we confront in Medicare 
reform is dealing with this risk of cherry-picking. You are 
quite right, you do it through regulation. But I think we all 
know there are geniuses in this country at getting around 
rules. That is going to be, I think, one of the biggest tests.
    I thank the Chair.
    The Chairman. I appreciate that, Senator. I do not have 
time, but that is an excellent question. If the benefits are 
the same under insurance policies offered under the exchanges, 
and the benefits are the same as traditional Medicare, I just 
do not see how a private insurance company is going to make any 
money and get the same benefits, if they are required to give 
the same benefits, when administrative costs are going to be a 
lot higher than a private policy. But that is just a question 
in my mind that we can get to later. I do not want to take 
other Senators' time.
    Next is Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Thank you for this 
hearing.
    Let me join the bouquet-tossing contest. We all so 
appreciate the tremendous commitment you both have made to 
public service. I think what I am going to do is, because time 
is short, I am going to ask you a question on the health care 
front and then you, Senator Domenici, one about tax reform.
    Dr. Rivlin, it seems to me that there are now conservative 
people who oppose the Affordable Care Act, which includes 
health insurance exchanges so that Americans can compare 
policies, tight regulation to prevent the kind of cherry-
picking that Senator Conrad was talking about, and generous 
subsidies for low-income people. But some of those conservative 
folks who oppose that in the Affordable Care Act want to bring 
just that approach to Medicare reform.
    Then we have some liberal folks who do just the reverse. 
They support the President's approach in the Affordable Care 
Act for those under 65, but oppose it for those over 65.
    So you listen to all this, and it just is a philosophical 
head-scratcher. I mean, you wonder what it is going to take to 
bring people together. You have made a very constructive 
contribution, not just in the past but today, because I believe 
what I hear you saying is you permanently want to protect 
traditional Medicare, with its purchasing power, and in effect 
see that as a public option, while at the same time allowing 
for the private choices. Is that a fair description of what it 
is you are trying to do?
    Dr. Rivlin. It is, Senator Wyden. I think it is an anomaly. 
I have teased Congressman Ryan about this: why are you in favor 
of exchanges for Medicare but want to repeal the Affordable 
Care Act? I think the anomaly is equally true on the liberal 
side. Liberals wanted a public option in the Affordable Care 
Act. We already have it in Medicare.
    Senator Wyden. I think you have stated it very well.
    Senator Domenici. Senator Wyden?
    Senator Wyden. Yes, please. Senator Domenici?
    Senator Domenici. Might I just say, you cannot imagine 
being on my side of the aisle now, where I cannot do what you 
do. I can just talk, I cannot vote. When we announce what our 
plan is on Medicare, those who oppose it immediately say, this 
is a plan to do away with Medicare.
    So we wrote it in. In fact, we called the bill, at my 
suggestion, the Protect Medicare Act so that you would find, in 
the very language up at the top, it says Medicare is preserved, 
et cetera. Yet, they will stand right there and say, this does 
away with Medicare. You say, well, how does it? Here it says we 
keep it as a program.
    So, I am glad you raised the point so we get a chance to 
say that is something we did, and it will work. They say it 
will not work. It will work. They say there will not be any 
people on Medicare, they will be elsewhere. But that is just 
the rhetoric. We have no evidence of that.
    Senator Wyden. Let me ask you both a question about tax 
reform. This is something I have felt strongly about for years. 
Senator Coats and I have a bipartisan tax reform proposal. We 
build on a number of the elements that you all offer and the 
Simpson-Bowles report does. But I want to ask you a question 
about simplicity because I think this is a part of the tax 
reform issue that gets missed.
    Now, our numbers indicate that one taxpayer in five reports 
pass-through business income. These are essentially business 
owners or principals. So that is 27 million tax returns that 
claim pass-through income. In effect, 94 percent of those tax 
returns, about 25 million, are businesses with pass-through 
income of less than $250,000.
    If we simplify the tax code and get rid of some of these 
one-
category-after-another approaches with scores and scores of 
forms, is this not going to be a real shot in the arm to the 
cause of small business growth, given those numbers that I just 
outlined? Either one of you. Both of you took Medicare so well, 
I will let you both take tax reform also.
    Dr. Rivlin. Yes, I think so. Having the same top personal 
rate as a corporate rate is desirable because it gets rid of 
incentives to do your business one way or another, corporate or 
not, for tax reasons. That would help.
    Senator Wyden. Senator Domenici can respond quickly.
    Senator Domenici. I think without a doubt there is an awful 
lot of restraint in this economy because people have to spend 
all their time doing things that are unproductive--like filling 
out tax forms. We take those out if you add positives. I think 
it would be a big plus for the small business people.
    Senator Wyden. Thank you both. I look forward to working 
with you.
    Senator Cornyn?
    Senator Cornyn. Well, let me join those who express our 
appreciation to both of you for your leadership on this 
important issue. My sense is that the needle is moving in 
Congress, and members on both sides of the aisle understand 
what you have so eloquently expressed in terms of the dire 
nature of our current circumstances and what the pragmatic 
solutions are, going forward.
    That, perhaps, leads to more frustration, but not because--
if we have bipartisan consensus as to the nature of the problem 
and sort of the 80/20 rule, agree to 80 percent of what the 
solution should look like, maybe we could discard the 20 
percent we disagree on, and we can make great progress.
    But I just would like to get both of you to talk about the 
status quo, the sequester, the $1.2 trillion in cuts that will 
take place unless Congress and the President act. I am told by 
major defense contractors that they are going to be obligated, 
by collective bargaining agreements or other law, to begin 
sending notices to their employees in October that there will 
be layoffs.
    There have been some projections that as many as a million 
people in private sector jobs would lose their jobs in national 
security industries if in fact this sequestration takes effect 
as currently written, with half a trillion dollars out of 
defense spending.
    So Senator Hatch was asking you about the combination. I 
like your analogy: it is not so much a cliff but a wall we are 
getting ready to run into, and quite predictable.
    But the combination of the sequestration and its impact on 
private sector employment, beginning in October--not in the 
lame duck, not in January--combined with the prospect of the 
single-
largest tax increase in American history unless Congress acts, 
I am sure people are scratching their heads, as I am, 
wondering, why is the President not sitting down with top 
congressional leaders and saying, how do we avoid this, as 
opposed to, I am sad to say, the President does not seem very 
engaged in this.
    But I do not want to engage in politics, but I do want to 
ask you about the current path we are on unless something 
changes.
    Senator Domenici. Well, I appreciate the question, and I 
want to tell you that we will get to you, for you and your 
staff's perusal and use, the report that was done, a white 
paper report, over at the Bipartisan Policy Center. I was co-
chair of the group, along with the former head of the House 
Intel Committee--Dan Glickman--and former National Security 
Advisor Jim Jones, who is now over at our center.
    We took about 3 weeks or 4 weeks, with an excellent staff, 
and we analyzed that bill. The analysis of that bill shows that 
something broke when that was put together. It is not a typical 
bill. It is very difficult to understand. When you get right 
down to number crunching, it is not a 10-percent cut, it is a 
15-percent cut.
    When you get down to the bottom, who is doing what, you 
find that every program, every agency, every act, they are all 
cut, and there is no flexibility. When you have something that 
big with that much impact, it cries out for flexibility to save 
money, to do things right, to prevent harming people when they 
do not have to be. So whoever did that, we thank them for a 
rotten, terrible bill.
    The problem is, I do not know how Congress gets rid of it. 
I do know the Secretary of Defense has spoken eloquently about 
it. He got to use his budget hat a little bit from back in the 
days when he started there, and he says he cannot live with it. 
I think he will be working hard, but some of you have to take 
the lead in trying to find a legislative way to get rid of it 
or modify it.
    I hate to just kick the can on that one because it is 
everything you said: it is causing people not to invest, it is 
causing layoffs, it is causing uncertainty of a high magnitude. 
When that happens, it costs money, and it costs growth, and it 
costs jobs, and it costs businesses their business.
    Senator Cornyn. Senator Domenici, thank you very much. No 
one around here is claiming credit for the Budget Control Act 
and the sequester, as it was written.
    My time is just about up. I need to pass it off to Senator 
Grassley. But would you just let me ask this question that I 
think calls for a succinct answer: would you agree with me that 
if the sequester, as currently written, remains the law of the 
land and takes effect in January, together with the expiring 
tax provisions on December 31, if they are allowed to take 
effect without Congress and the President acting, that it is 
more likely than not that the United States' economy will be 
thrown into a recession?
    Senator Domenici. Well, I am not an economist, but I think 
that is the case. We are going to go negative. We are going to 
go negative, and we are going to lose jobs.
    Senator Cornyn. Dr. Rivlin?
    Dr. Rivlin. Well, I am an economist, and I would agree with 
you. But I also agree with the Senator that the answer is not 
just to postpone it. Do something better.
    Senator Cornyn. Thank you.
    Senator Grassley?
    Senator Wyden. Next is Senator Grassley, then Senator 
Nelson.
    Senator Grassley. Yes. Thanks to both of you for being here 
and for your expertise in this area, and more importantly your 
energy for it.
    I have two questions dealing with Medicare. One of them 
partly covers Medicaid as well. This 10-year budget window that 
we have to operate under is a problem because it is extremely 
difficult to find health care savings that CBO will agree save 
money in that window without using one of two tools. Congress 
either has to reduce provider payments or ask beneficiaries to 
pay more.
    While I agree that we need to make structural reforms to 
our health care entitlements to reign in their long-term costs, 
I think we need to temper our short-term expectations.
    Do you think that there are ways that we can achieve short-
term, scorable savings in health care through structural 
reforms?
    Dr. Rivlin. I think you point to a very real problem. In 
the short term, it is very difficult to do that. We do not make 
big claims for our plan saving a lot in the first 10 years. It 
is the second 10 years and the third 10 years that you ought to 
be worrying about.
    Now, there are some things that can be done in the near 
term, and we have proposed a few of them in Medicare: bundling 
payments and modernizing the structure of benefits a bit. But 
the long-run structural reform will take time, but that is 
fine. The threat is out there in the long run.
    It is not that we are so afraid that Medicare spending is 
going to rise very rapidly in the near term. That is partly 
because these new seniors that we are talking about, the ones 
who are just retiring, are younger than the average Medicare 
recipient. So, the pressure is not going to be as great in the 
near term.
    Senator Grassley. All right. If you wanted to add 
something, otherwise I will go on to my second question.
    Senator Domenici. Well, I would just say that, sometimes 
when we are working on trying to solve this fiscal problem, the 
recognition that a long-term fix is what is needed puts many 
people in the position that they do not know how you do that 
and do it now.
    Well, if you write a law that brings the cost curve down 
like this, if the law reads that way, you have changed the 
expectation, and that counts and that helps you with your 
fiscal soundness that you are trying to work out. So the long-
term is what we are looking for, yet it is hard to get scorable 
credit over the 10-year window, as you said. But we have to 
work with those people who do the scoring and get it done.
    Senator Grassley. My second question deals with long-term 
support services. This is a significant driver of cost of our 
entitlements, particularly for those who are dually eligible 
for both Medicare and Medicaid. Are there any structural 
reforms to those programs that you would recommend Congress 
consider to better organize spending for long-term support 
services that will be more efficient, as you suggest Medicare 
acute care reforms will in the end be more efficient? So in 
other words, you have a model that you argue will save money 
through more efficient spending for Medicare acute care 
services. How about the dual-eligibles, Medicaid, and long-term 
support services?
    Senator Domenici. I do not know.
    Dr. Rivlin. I think the dual-eligibles are the most 
difficult population that we have to deal with. They are 
elderly, and they are poor. We would recommend continuing to 
try to move the dual-
eligible population into managed care in the framework of 
Medicare.
    You also raised the question about long-term care. That is 
a really tough one, and it is a big expenditure for Medicaid, 
as you know. One suggestion we considered--we did not actually 
recommend this because we were not sure--was a division of 
responsibility between the Federal Government and the States 
with respect to Medicaid, one taking the acute care and the 
other taking the long-term care. It could go either way, but we 
thought a clearer division of responsibility there and getting 
rid of the gaming that the Federal match often incents would be 
something worth considering.
    Senator Domenici. I want to say we debated it a long time, 
but we could not come to a conclusion, so we just told you the 
options there; we did not conclude with one of them.
    Senator Wyden. Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    Do you think the political atmosphere will have changed 
sufficiently after the presidential election that, were the 
super committee to be sitting again, that it would not be 
deadlocked in a partisan 6:6 vote?
    Dr. Rivlin. He is the politician.
    Senator Domenici. Well, look, from my standpoint it seems 
to me so obvious that you have to act for your country. I mean, 
you have to put your mind-set almost like it is a war. I mean, 
you could lose it, and with it you would lose your status, your 
way of life. The very existence of the country could go 
flopping around for 20 or 30 years. Our money could have 
problems.
    So I think there has to be more evidence to more members 
that that really is right around the corner. It cannot be 
delayed forever; it is there. I believe this committee will 
still have the power to get most of it done. I do not think we 
are going to need a super committee; this will be the super 
committee.
    But I think the votes will be there to report something out 
either from this committee, or a super committee will be 
formed. I hope we do not form one. I hope we encourage this 
committee to do its job. You have most of the jurisdiction, and 
the rules are set. You have staff, and everything is kind of 
permanent. That is much better than inventing a committee, in 
my opinion.
    Senator Nelson. Well, I agree with you. The way I 
understand it, the sequester was never supposed to go into 
effect. It was such a meat cleaver coming down, that it was 
going to get the 12 people on the super committee to come to 
agreement. And here we are.
    Where in your plan does the 15-percent tax rate jump to the 
28 percent?
    Dr. Rivlin. We will find it. Go ahead.
    Senator Nelson. All right.
    Dr. Rivlin. I am not sure exactly what the income cut-off 
is.
    Senator Nelson. Well, while you are finding that, I assume 
a driving factor in your plan was--and it is excellent, and of 
course I say the same thing everybody else has said: thank you 
all for your long, long public service. You are great, both of 
you. You continue that public service.
    You have it?
    Dr. Rivlin. It is $51,000. That is presumably for a joint 
return?
    Senator Domenici. Individual.
    Senator Nelson. Individual, $51,000. That would----
    Dr. Rivlin. It is $102,000 for a couple.
    Senator Nelson. And that is what we think of today as 
adjusted gross income----
    Dr. Rivlin. Right.
    Senator Nelson [continuing]. Although you are not going to 
have all those deductions, save for the charitable and the 
mortgage interest. All right.
    Well, what is your general feeling about your work product, 
which is a considerable, simplified tax code? What does that do 
to stoke up the economic engine of the country?
    Senator Domenici. Well, again, I am lucky I work with an 
economist who has been through everything Washington has to 
challenge an economist with: CBO, OMB, et cetera. But I will 
answer first----
    Dr. Rivlin. Go ahead.
    Senator Domenici [continuing]. And she will say whatever, 
she will fill it in. It seems to me that sooner or later 
something has to be done. The economy is suffering from an 
awful lot of people not knowing what is going to happen. Some 
big things have to get solved because big things are tied in 
with small things. When you add it all up, there is just no 
vibrancy, not as much vibrancy as we need.
    We need something that will give us that. It seems to me a 
reformed tax code like the one we suggest, captured by the 
leadership and pronounced by them over and over to the American 
people as a solution to a difficult problem--here came a 
terrible problem, some good is going to come out of it, and 
here is the good. It might be the driver solution.
    Senator Nelson. Well, I agree with you.
    I want to get in one more question before my time runs out. 
I certainly agree with you there. Yours is a very simplified 
tax code, considerably.
    If the Supreme Court strikes down the individual mandate, 
the penalty, can you fix part of it with legislative statute 
solutions, such as a limited enrollment period, such as late 
enrollment fees, such as public campaigns to get into the 
health insurance exchanges?
    Dr. Rivlin. Yes. I do not think the mandate was a necessary 
part of the Affordable Care Act. You could have done it 
different ways, by penalizing not having insurance without 
actually mandating it.
    But to go back to your previous question, the other 
important thing is, we have lower marginal rates in our plan. I 
think that is conducive to higher economic growth.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Domenici. Might I say, Senator Nelson, I forgot, 
and I want to second the motion that the best way to get growth 
in an economy is to have lower marginal rates. That is the best 
way, and we have done about as good as anyone with ours in 
terms of that fact.
    Senator Nelson. Fifteen and twenty-eight. That is simple, 
and that is lower.
    Senator Wyden. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman. I want to also echo 
what has already been said and thank both of you for your great 
body of work and service. Mr. Chairman, it is always nice to 
have you back here. I wish we could get your biennial budget 
proposal through Congress. I think it would do a lot to improve 
the way things work around here.
    I wanted to ask a couple of questions. You assume $2.6 
trillion in revenue from the new revenue system and tax code 
that would be created under your proposal. According to the 
CBO, I think, for a 1-percent increase in economic growth, they 
assume about $310 billion in additional tax revenue.
    That, I assume, would be under the current, existing tax 
code. But I am wondering, of that number, how much of that 
revenue--or is there any of that, I should say maybe as a 
better way to ask it, that is assumed increased economic 
growth? Do you see, with a simpler, flatter tax code that is 
more competitive, that it would generate growth, and did you 
factor in what might happen as a result of that?
    Dr. Rivlin. We do believe that, but we did not factor it 
in.
    Senator Thune. All right. So yours is all static in terms 
of the scoring with regard to the tax component.
    Dr. Rivlin. Well, we use, roughly, CBO methods.
    Senator Thune. All right.
    Senator Domenici. I do want to say that we had a lot of 
discussion about what level of taxation is right, and nobody 
knows the answer as to what is the best for America. I guess we 
would start by saying, from the vantage point of this Senator, 
the lower the tax, the better in terms of the economy and its 
capability to produce and grow. But is 20 percent too much? Is 
20 percent too low, just right? Nobody knows that. If you have 
the right mix elsewhere, it would seem to me you can thrive. 
That is what we hope we have gotten in this tax code.
    Senator Thune. Yes. Well, I think that, based on 
historically the way you have pegged that, as a percentage of 
GDP, it is about in the right place. The times when we have 
balanced the budget since 1969, which have been a handful of 
times, spending as a percentage of GDP has been significantly 
below where it is today too, I want to say somewhere on the 
order of 18.7 percent of GDP. So, obviously we have to get the 
spending issue addressed. That comes back to your other issue 
of entitlement reform.
    The only thing I question a little bit is the wisdom of 
having the gains rate the same as the ordinary income rate, or 
treating capital gains as ordinary income. It seems like 
whenever we have had a lower capital gains rate, we have seen a 
significant increase in revenue just from the economic activity 
and turnover that occurs with that. I like the simplicity of 
having the two rates, obviously.
    Dr. Rivlin. I do not think the actual record bears that 
out, Senator. We have looked carefully at the revenues from the 
capital gains tax and compared them to the rate, and that 
actually does not show that we have had less revenue from 
higher rates, except very temporarily when you announce in 
advance that you are going to raise the rate.
    Senator Thune. Right.
    Dr. Rivlin. Of course, a lot of people sell that higher 
rates produce less revenue. But for the long haul, the evidence 
actually does not say that.
    Senator Thune. All right.
    Let me ask quickly as well here about the Medicare reform 
component of this. I think the chairman asked how yours 
differed from Simpson-Bowles in terms of how it treats 
Medicare. I am interested in knowing, because I have seen this 
reported on. You sort of pioneered the whole idea of premium 
support. The House adopted, in the Ryan budget, a premium 
support plan, but I think, Dr. Rivlin, you have indicated in 
some of the things that I have seen, that that is not 
consistent with what you all had proposed.
    So I guess I am curious as to, how is the House budget 
proposal with regard to premium support in Medicare different 
from what you all put forward?
    Dr. Rivlin. Well, it depends which House budget you are 
talking about. The original Ryan budget of 2 years ago had a 
very severe version of premium support which did not preserve 
traditional Medicare and had a very punitive cap on the 
allowable increases in support, which was only at the cost-of-
living rate of increase. That would have ended traditional 
Medicare as we know it.
    However, in the meantime, Chairman Ryan has moved to the 
middle, under the influence of Senator Wyden among others, but 
especially embodied in the Ryan-Wyden/Wyden-Ryan version of 
premium support, which does have some differences from ours but 
is basically the same idea, that you preserve traditional 
Medicare as the default option and you allow seniors to choose 
on a well-
regulated exchange among private plans.
    So it does not end Medicare. It gives a choice, and we 
think a competitive situation which can lead to savings.
    Senator Thune. So we call that the Wyden effect?
    Dr. Rivlin. I call it the Wyden effect. [Laughter.]
    Senator Thune. All right. I see my time has expired, Mr. 
Chairman. Thank you all very much for your testimony.
    The Chairman. Thank you, Senator.
    Senator Menendez? Oh, he is not here. Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. I, too, echo the 
comments of all of our colleagues. Thank you very much for your 
long years of public service, including on these 
recommendations that you have brought forward.
    First, I want to encourage you to at least keep on your 
personal agendas the national consumption tax. I understand the 
popularity issues, but I tell you, I am concerned, even if we 
are able to pass tax reform, about how long that will last 
before it gets complicated again because of the desires of the 
political system to make adjustments in that base. A national 
consumption tax, I think, can be done in a fairer way than our 
current income taxes. It is border-
adjusted, and it has a lot of advantages.
    So I understand the reasons for your change, but I just 
really want to go on record to encourage you to continue that 
debate. I think we will get to it one of these days.
    On the recommendations for Medicare and health care costs, 
let me just give you my concern and get your response to it. It 
is not the exchanges. As a Democrat, I understand putting 
exchanges in Medicare. It is the concern that, to bring down 
cost with the premium support, you are assuming that there will 
be savings from the institutional players or consumers that 
will bring about delivery system reforms that will make our 
system more cost-effective.
    I am concerned about that. We have tried that once with 
Medicare+Choice, and it did not work. In my own State of 
Maryland, we had the insurance companies ultimately abandon it 
in our State. We then paid the private insurance industry a 
premium in order to get private insurance. Under your 
exchanges, you do have a fall-back of fee-for-service, but you 
do not really have a public insurance option that may be 
competitive. I welcome your thoughts on a public insurance 
option on managed care.
    I think the alternative is to look at direct delivery 
system reforms with accountability, with some form of 
enforcement. You have enforcement on your overall numbers based 
upon caps, and how they are enforced we are not exactly sure.
    I understand we have to get scorable savings, but I would 
feel more comfortable if we did it on direct involvement of 
delivery system reforms, particularly working with physician 
groups and hospitals in some form dealing with the more 
difficult and costly patients rather than trying to put the 
whole system in jeopardy where we may just be shifting costs 
from the Federal Government or from the State governments to 
the private sector or individuals, which may not, at the end of 
the day, really help our economy.
    Dr. Rivlin. First, on the consumption tax, I appreciate 
that. I think on somebody's agenda also ought to be still a 
carbon tax. I just wanted to get that in.
    Senator Cardin. Good.
    Dr. Rivlin. But on----
    Senator Domenici. Before you go on, let me say I agreed 
with the choice that we not continue on with the consumption 
tax. I see it as nothing but an obstacle--and we have plenty 
already--to getting things done. The carbon tax seems like, for 
some people, a good tax. To me, it does not, so I want to make 
sure I am on the record.
    The Chairman. I am sorry. You like the carbon tax or not?
    Senator Domenici. No, I do not.
    The Chairman. All right.
    Dr. Rivlin. We differ on that.
    Senator Domenici. We did not get it through our Task Force, 
either.
    Dr. Rivlin. Yes. We did not put it in our plan.
    The Chairman. All right.
    Dr. Rivlin. But let me come back to Senator Cardin's 
concern. First, we would encourage and keep all of the reforms 
that are embodied in the Affordable Care Act to try to do 
exactly what you are talking about with existing Medicare, 
Accountable Care Organizations, and innovations in payment 
systems. I think probably fee-for-service Medicare, whether you 
go with premium support or not, is likely to evolve in the 
direction that you suggest, and we would encourage that.
    We think it ought to be encouraged in the private sector as 
well. Although Medicare Advantage, as you point out, was badly 
structured at the beginning, and the history in Maryland was 
bad----
    Senator Cardin. No plans remained at the end of the day.
    Dr. Rivlin [continuing]. It has been improved and is 
actually working much better in a lot of places, including, I 
understand, Oregon. But you could think of what we want to do 
as a considerable improvement in Medicare Advantage by creating 
exchanges and having real competition, which has only slowly 
evolved in Medicare Advantage.
    Senator Domenici. I would like to comment and make sure 
that we do not overstate our case. The entirety of reform in 
the Medicare health delivery system, we did not do that. We did 
not have enough time, nor enough staff. We just proposed a 
reform for the overall structure of the system. Alice and I 
have a work in progress examining other healthcare reforms with 
ample staff who are trying to get at the whole package of 
problems and see how we can come up with solutions.
    Dr. Rivlin. Meaning the whole system, not just Medicare.
    Senator Domenici. Yes, the whole system. So that is a few 
months away from reality. We were not able to do that in our 
original efforts.
    Senator Cardin. Thank you.
    The Chairman. Thank you.
    Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman. I want to welcome 
both of you here today. Senator Domenici, having served with 
you on the Budget Committee when you were chairman, I certainly 
found that one of my best experiences here in the U.S. Senate. 
I want to thank you both, Dr. Rivlin as well, for your 
legendary and exemplary contributions and commitment to this 
effort in underscoring the urgency associated with these issues 
that these times demand.
    Hopefully we are going to address them in some way. That is 
one of my first questions, because I think, when it comes to 
tax reform, as you are recommending as part of entitlement 
reform, how do we go about this without the presidential 
leadership that is so essential to this debate?
    We had a witness testify before this committee last night 
from the Treasury Department, indicating that there were no 
plans in the works for comprehensive tax reform. So how does 
this effort get under way without strong support from the 
President at some point?
    I well recall when President Reagan delivered his State of 
the Union address back in 1984. He mentioned that one of his 
top priorities was tax reform. There was some laughter in the 
House chamber by members. He said, ``What, did I say something 
funny?'' So I think he was truly committed to it.
    That is what it is going to require in this instance, 
irrespective of the demands of the time. We are at a tipping 
point. I am not so sure that we are going to see the kind of 
drive that is necessary to get this accomplished in the time 
frame in which we should accomplish it.
    So, one, how essential is presidential leadership in this 
undertaking? Two, what is the time frame that you foresee, in 
the lame duck session or beyond, and what will the impact be on 
the economy if we fail to do this sooner rather than later?
    Senator Domenici. Well, I will lead off and then let Alice 
comment. I guess I would say to you, Senator, before I get on 
the substance, that I am sorry to see you leave. I read about 
your departure soon.
    Senator Snowe. Thank you.
    Senator Domenici. I left for different reasons than you. I 
think you know why I left.
    Senator Snowe. Yes.
    Senator Domenici. It turns out I did not have the exact 
illness that the doctors thought I had, so I am still able to 
function somewhat adequately, and I am feeling all right. I am 
hoping for you the very best in whatever you choose to do.
    Senator Snowe. Thank you.
    Senator Domenici. I wanted to say that we cannot, in my 
opinion, accomplish what must be done for this great country in 
terms of fiscal responsibility without the direct and total 
commitment of a President. That has to be there.
    I do not see how we can take on tax reform and things like 
Medicare reform without a President telling the American people 
why it is necessary. You can tell them, other people can tell 
them, but when it comes right down to it, when we have to 
change basic things to save the country, you have to have the 
President helping.
    I believe that that has to happen. I guess the rest is, I 
hope it happens, and the sooner the better, in my mind. I 
assume lame duck is not adequate time. Even the next session 
might not be adequate for the big package. But sooner rather 
than later ought to be the adage around here that we are 
following. ``Without the President we do not get it done'' 
ought to be the hue and cry from the Congress and the people of 
this country.
    Senator Snowe. Thank you.
    Dr. Rivlin?
    Dr. Rivlin. I agree with that. I think, with respect to the 
lame duck, which is sooner than we think, it is probably 
impossible to do the whole job in the lame duck. It is just too 
hard to reform the tax code and the entitlements and do 
everything in such a short time with a lame duck session. But I 
believe you could lay the groundwork, the framework that would 
require the next Congress to fill in the details and get it 
done by a date certain, and you really need to do that. I, too, 
will be sorry to see you leave the Senate.
    Senator Snowe. Thank you. Thank you.
    Well, CBO indicated that between the impact of the 
sequester and the failure to extend the current tax rates, 
there could be an effect on economic growth, anywhere from 1.5, 
1.7, to 3.5 percent on economic growth. So given that, what 
would you be proposing for the Congress to do with respect to 
those tax rates if we cannot achieve any kind of tax reform in 
the lame duck session?
    Dr. Rivlin. Well, I think you have to postpone the tax 
increases, but with a requirement to fold it into tax reform 
and entitlement reform that has some teeth in it in the next 
session. That would not be easy to design, but if there is the 
sense of urgency, which we feel there ought to be, then 
everybody has to be committed to doing that.
    Senator Domenici. I agree with that in substance and with 
reference to the genuine need to do something. I wholeheartedly 
agree.
    Senator Snowe. Can I just ask one other question? When do 
you expect the level of taxes as a percent of GDP to hit 20 
percent, under your proposal?
    Dr. Rivlin. Not soon, because it is way down.
    Senator Snowe. Right.
    Dr. Rivlin. And that depends on how fast the economy 
recovers.
    Senator Snowe. Yes. And your target for spending as a 
percentage of GDP?
    Dr. Rivlin. It is ultimately a couple of percentage points 
above our revenues. The answer I am told, to when, under our 
revenue projections, you would get to the 20 percent would be 
around 2019, but that, as I said, depends on how fast we 
recover.
    We are not, as Senator Domenici said earlier, aiming for a 
balanced budget, not because we would not like it but because 
we think the first thing you have to do is stabilize the debt, 
make sure that it is not growing faster than the GDP, and that 
would imply a deficit of around 2 percent. That is about what 
we achieve under our plan.
    Senator Snowe. Thank you.
    Yes?
    Senator Domenici. I want to remind the committee again, and 
I will say it to you, Senator Snowe, remember, our package was 
put together by Democrats and Republicans, so we do not come 
here starting with one side or the other. We have already gone 
through the compromises, and how much is enough to cut, how 
much is too much.
    People on each side going their own way can find fault with 
this because it is not theirs, but we cannot do theirs unless 
Democrats have the power, or the Republicans, to take over 
everything. The problem is there, and it must be solved by 
Senators, not by parties, it seems to me, so everybody has to 
understand that.
    Senator Snowe. Well, congratulations. I commend you. It is 
a great example to set for the Congress to pursue and, again, 
reinforces the notion of the fiscal calamity that awaits us if 
we fail to address these over-arching issues sooner rather than 
later.
    So, thank you.
    The Chairman. Thank you, Senator.
    You both say that the tax cuts should be extended into next 
year. I think if I heard you, Dr. Rivlin said we should then 
work to enact some kind of tax reform process which presumably 
generates revenue, but some kind of reform which has teeth in 
it.
    There are some who say if we extend the tax cuts to next 
year, 2013, that we are just kicking the can down the road, 
that Congress will not do what it needs to do to raise revenue, 
and that is, raise taxes, as you suggest you have to do in your 
plan. If the tax cuts are extended into next year, then the 
argument is, you are just kicking the can down the road. We are 
not going to do our work.
    On the other side of that coin, people say, let them all 
expire, let the rates all go back up, and then we will start to 
cut taxes next year. Then the pressure is on the Congress to 
actually do something by cutting taxes in a way that is 
consistent with tax reform.
    What do you say to those who have a little problem with 
your recommendation? Your recommendation is to let all the tax 
cuts be extended another year. That is easy to do politically. 
What do you say to those who charge that that is just kicking 
the can down the road?
    Senator Domenici. Well, Mr. Chairman, I am not sure--on the 
record they can check--but I do not think I have said verbally 
that I favor the extension.
    The Chairman. Oh, I misunderstood.
    Senator Domenici. It is all right. I mean, I do not think 
there is any alternative, so I think we have to do that. But I 
want you to know that our Bipartisan Policy Center has not left 
this issue, the one you raise, unattended. We are currently 
working on a process which would assure that we could have the 
vote on the tax cuts that you say must occur, but require it to 
be part of a process change that would force action on tax and 
entitlement reform in the next Congress.
    In other words, it would be a mechanism for assuring that 
it would happen, and the kick-the-can effect would not be real 
because there would be a process adopted that would stop the 
kick-the-can, because the next thing would force the necessary 
reform.
    The Chairman. Well, what would some of the real teeth be?
    Senator Domenici. Well, we are not through with it yet. It 
is just our best effort to try to solve that, or come up with 
something that would help you solve that problem. It is not 
ready yet.
    The Chairman. So when do you think you might have these 
teeth?
    Senator Domenici. I do not know. I remember getting a 
briefing from the staff. It is hard as can be. It has our 
smartest people on it, and it is tough, but they have convinced 
me that it is worth a try. It would relate in some way to the 
process that you and I have learned and call reconciliation, 
that is for sure, and there is one other comment. Yes, the 
continuing resolution would be the vehicle through which you 
would attach that, and we would have it ready by then.
    The Chairman. All right. Well, frankly, if you could have 
it ready before then---- [Laughter.]
    We are all in this together. We are all on the same team. 
We are just trying to figure out how to address the cliff.
    Senator Domenici. Thank you.
    The Chairman. We can help each other, frankly.
    Dr. Rivlin. But the basic point is, we are not in favor of 
just extending the tax cuts. You have to imbed it, as I said to 
Senator Snowe, in some kind of process that forces you to come 
to grips with the real problem.
    The Chairman. Yes. And I am just trying to determine what 
that process is that is credible, credible to the markets, 
credible to the country, and so forth.
    I would like to return a little bit to Medicare and ask 
whether you have cranked the new CBO estimates into your 
projections, your Medicare projections, if nothing is done. It 
is my understanding that CBO has just come out with a new 
report saying basically, over the next 10 years, Medicare will 
grow at the same rate as the economy, and long-term it will 
grow about 1.6 percent above GDP. Historically, Medicare grew 
at about 2.5 percent above GDP.
    The point being, health care costs, on their own, are 
starting to rise a little less quickly than they were earlier. 
I hear a lot of this anecdotally, too, talking to hospitals 
moving toward integrated systems. They are becoming much more 
efficient. Many American companies are trying to cut their 
health care costs and are doing a pretty good job, in some 
respects, of cutting their costs.
    It is true there will be more seniors who will be retiring 
at age 65, although I vaguely remember a CBO report roughly a 
year or two ago that said, if you look at the composition of 
the rate of growth of Medicare costs, about one-third--I will 
be very charitable--or 20 percent to 30 percent is really 
because of additional seniors.
    Senator Domenici. Is what?
    The Chairman. Because of the additional number of seniors, 
the Baby Boom retiring. But the rest of it, the bulk of it, is 
health care costs going up for everybody.
    Senator Domenici. Right.
    The Chairman. Not just for seniors, but for everybody. It 
is true, if these CBO numbers are accurate, even if the current 
trend continues--trends never do, but if it does continue--that 
that would seem to me to indicate that there is not quite the 
urgency to address entitlements with quite the same aggressive 
attack mode as you have indicated in your report. Times have 
changed a little bit.
    I honestly believe part of that change in the rate of 
growth of health care costs is due to the health care law we 
passed. The United States' providers and consumers realize we 
are in a new era, and the new era is getting more control of 
our costs and delivery system reform. So both the U.S. 
Government--under CMS, say--and the private sector are working, 
and with the Innovation Center too, working together in joint 
public projects to find more efficiencies through greater 
innovation in cutting health care costs. So I just wonder 
again. My first question is, have you cranked in those new 
projections by CBO in your estimates?
    Dr. Rivlin. Yes, and they are encouraging, I agree with 
you. It is one of the reasons why one should have faith, I 
think, that the health care delivery system is improvable. We 
are seeing some improvements now. But we still believe that it 
would be a sensible thing to do, to offer seniors a choice on 
an exchange where the private sector would also be competing by 
virtue of some of these same changes to offer better product at 
lower cost.
    The Chairman. I am not challenging you, but I am just 
trying to get some information here.
    Dr. Rivlin. All right.
    The Chairman. If the benefits are the same, if an insurance 
policy offered in an exchange provides the same benefits as are 
currently provided under Medicare, where are the savings?
    Dr. Rivlin. Well, actually the evidence shows that in some 
cases the competition produces still lower costs than Medicare. 
In some parts of the country it does not, but having the 
competitive situation there would tend to move the whole system 
toward more efficient and more cost-effective care.
    The Chairman. Yes. I know that is the theory, but I am just 
curious because Medicare's administrative costs are so low. 
Commercial health insurance administrative costs are quite a 
bit higher.
    Dr. Rivlin. They are, but----
    The Chairman. The benefits are going to be the same. I am 
just curious where the savings are going to be.
    Dr. Rivlin. Much of the waste, I think, in Medicare comes 
from the fact that it is primarily now a fee-for-service system 
with little opportunity to have incentives for coordination of 
care and all of the things that we think are conducive to 
better care at lower cost.
    The Chairman. That is true, somewhat. But there is such a 
trend now, and there is such momentum to move away from fee-
for-service and more toward other forms of reimbursement, 
whether it is--as you know much better than I, Dr. Rivlin--
bundled payments, ACOs, medical homes, and all the different 
ways to get off this fee-for-service reimbursement-in-volume 
kick.
    We had right where you are sitting, or virtually where you 
are sitting, in this room last week health insurance companies 
and medical groups describing all the efforts they are taking, 
moving toward compensation based on outcomes, and it is 
teamwork and getting costs much lower than they were before. 
That would apply to the private sector as well as to Medicare. 
So, we are moving directly toward what you are just suggesting, 
that is, away from fee-for-service. Very clearly, that is what 
is happening here.
    Dr. Rivlin. Yes, I think that is right.
    The Chairman. But that is going to help reduce the costs, 
frankly. At least, that is the theory. Already, the rate of 
reduction is going up.
    Dr. Rivlin. I think it is more than a theory; I think it is 
happening.
    The Chairman. Yes. I think it is, too.
    Dr. Rivlin. We would like to accelerate it happening.
    The Chairman. And so would we.
    Senator Domenici. I am not sure it is happening. We have to 
wait a little bit longer.
    The Chairman. All right.
    Senator Domenici. You speak of anecdotal--I will not burden 
you. I would not. But I am clearly a senior, right?
    The Chairman. No, you are not a senior.
    Dr. Rivlin. Me too.
    Senator Domenici. I just celebrated my 80th, you know. 
People think 60, but they forget that I was here 36 years of my 
life.
    But anyway, I was going to tell you just what the doctors 
choose to do to make me stay well leads me to believe that 
there is an infinite amount of money that they can spend on the 
human body to try to make sure things work. I have had more 
spent on me; I do not want to add it up and give it to you 
because it would be a case study for you.
    But what I would like to say with reference to our answers, 
we are glad that you have talked with us and you see our--on 
Medicare and health care, we studied it from the standpoint of 
fiscal responsibility. That was our job. We now have another 
group of people who are working day and night on the entire 
system, and that is not us, that is others.
    Dr. Rivlin. We are part of it.
    Senator Domenici. Yes. We are part of them, as members of a 
group. All I am getting at is, we may not know all the answers 
that you seek of us because we did not have a lot of time to 
study in detail the more intricate health care issues.
    The Chairman. Well, I appreciate that. I think we are all 
concerned about personal responsibility too, because very often 
doctors prescribe medication and prescribe something to 
patients, and the patients do not do what they are supposed to 
be doing or take the medications they are supposed to be 
taking. You kind of led briefly into the question of personal 
responsibility, and that is something else that we have to 
address.
    Senator Domenici. Well, that is clearly a part of it, no 
question.
    The Chairman. I will finish here with one point. In reading 
this morning's paper, I was just struck with a chart that is 
showing, even adjusted for inflation, how, since 2001, median 
hourly wages are basically constant, or have fallen slightly.
    But the bigger drop was in employer-provided health 
insurance, and there was also a bigger drop in employer-
provided retirement benefits. If that is happening, I think 
that is private sector. I am sure it is private sector. If that 
is happening, that there are fewer and fewer benefits, and 
employees have less health insurance today than 10 years ago, I 
am just a little concerned about what changes it might make in 
Medicare and addressing the entitlements question in a way that 
does not decrease benefits to seniors.
    Now we, in the health care bill, as you know, reduced the 
reimbursement rate that goes to providers, whether it is 
pharmaceuticals, hospitals, et cetera, et cetera, as a way to 
get at the health care problem. But that did not reduce any 
beneficiaries' benefits, it just cut the amounts that providers 
were otherwise getting. They went along with it. They did not 
love it, but they went along with it. Why? Because they would 
get lower margins and get greater volume under the mandate.
    I raise this because I saw this chart today. Given the 
semi-
recession that we are coming out of, and because fewer people 
have health insurance today than before, I wonder how wise it 
is, when we attack entitlements, to do something that reduces 
seniors' benefits.
    Dr. Rivlin. Mr. Chairman, I think you have pointed to one 
of the reasons why we needed the Affordable Care Act. It was a 
response to the fact that, over time, employers have been 
dropping health insurance and we have more and more people at 
relatively low wages--wages have not been increasing very 
much--who do not have health insurance. The health reform was a 
response to that.
    Fortunately, seniors are covered by Medicare, and everybody 
has that who is over the age of 65. We do not read anything 
that we are proposing as undermining Medicare. We hope that it 
will make it more efficient. But it is not any attempt to 
reduce the benefits to seniors.
    The Chairman. Thank you very much.
    Senator Domenici. I think you raise a good point. We have 
to be careful about the issue you raised. It is a serious one. 
We certainly are not--to my knowledge as we worked on this, 
there was no effort to try to reduce benefits. I think that we 
were addressing ways to save on costs that should not be in the 
system, and we worked hard on that and gave you the best we 
could.
    The Chairman. Thank you.
    Are you ready, Senator Menendez? Do you want to take over?
    Senator Menendez. Mr. Chairman, I would never want to take 
over from you. [Laughter.]
    The Chairman. Senator Menendez.
    Senator Menendez. But I am happy to be recognized next.
    The Chairman. The great Senator from New Jersey.
    Senator Menendez. Thank you.
    Let me thank both of you for your great work. I appreciate, 
Dr. Rivlin, your service. Senator Domenici, it is great to see 
you again back here with us.
    Senator Domenici. Thank you.
    Senator Menendez. I may not agree with every decision that 
you made; I do not think anybody ever will in any of these 
plans. But I think you have made some enormous service to 
getting a lot of the critical issues that are important to 
address out there, and I think that is a great service to both 
the Congress and to the American people.
    I want to pursue one or two things to get your thinking on 
them. One is, I understand under your plan, while lowering the 
top income tax rate, you would effectively end the tax break 
for investment income. That is, tax rates would be lower but 
the government would basically no longer pick favorites between 
a worker's salary and an investor's profit.
    In addition to your report, several other deficit reduction 
plans and President Reagan's 1986 Tax Reform Act all included 
this trade-off, which would go a long way to ensuring that 
those who make the most pay a similar amount of tax as middle-
class families do.
    Can you explain how you came to this trade-off, and do you 
believe that equalizing the tax treatment of ordinary and 
investment income is key to a bipartisan success in finding a 
deal of the type of magnitude that you both outlined?
    Dr. Rivlin. It was key to our finding an agreement. I think 
it is a sensible way to construct a new tax code.
    Senator Domenici. Before you came here, I said that we are 
fortunate, and we want to make sure you know that what you get, 
the work product you get, is bipartisan. We took votes on the 
issue that you have raised, and that is the way that the 
overwhelming majority wanted this package to be. So, they put a 
good deal of bipartisan thinking into the package.
    Actually, for a couple of members of the group, tax reform 
was the most important part of this bill, without which they 
would not have supported the recommendations. So I assume that, 
taken separately, a number of those--one or two that I can 
think of--probably would have been against what you are talking 
about.
    But to get the whole package, including tax reform and 
lower rates, Republicans joined Democrats in our meetings, so 
we come to you with that established. I do not know what theory 
was in their minds about it, but they were for different 
treatment for investment, as you have explained it and as Alice 
has indicated our cause to be.
    Senator Menendez. Your testimony underscores a critical 
need for Washington to remember that our first project must be, 
as you put it, to accelerate economic growth and job creation. 
I understand that you are still supporting a payroll tax cut as 
the primary job creation measure in your proposal.
    Can you explain how your proposal compares to the 
President's payroll tax cut from his jobs plan, and do you 
believe, given the current uncertainty, particularly in the 
European crisis, that it would be important to move forward 
with a similar proposal for 2013?
    Dr. Rivlin. When we put this plan together, which was 
actually at the end of 2010, the President had not yet 
proposed, or the President and the Congress together had not 
yet proposed, a payroll tax cut, a payroll tax holiday.
    We believed that it was really important to focus on job 
creation in the near term, so we put in our proposal a full 
year tax holiday, for both sides, employer and employee, as an 
indicator of that importance. That is a lot of stimulus. Some 
of that was picked up in the agreement made subsequently, but 
not all of it.
    We have not re-thought what you would do with the payroll 
tax rate right now, but the basic message is, we believe that 
it is important to keep the recovery going, that the fiscal 
cliff would stop that recovery, and therefore you need to avoid 
the fiscal cliff and do the long-term reform at the same time.
    Senator Domenici. I think it is little-known, but the truth 
of the matter is that a good stimulus approach would have been 
a payroll tax--we call it a payroll tax holiday. We put it in 
our plan for a full year, as indicated, and still it had not 
caught on with anyone.
    Although a small piece of it was enacted for the past 
couple years, we went through a year when the entire holiday 
still had not caught on, and it was still in ours. We 
recommended it. It seemed to this Senator that, for all the 
stimulus people were talking about, the payroll tax was far 
more simple and probably far more effective. But I do not think 
we ought to do it at this point. It is very expensive, and we 
ought to get on with the next stage of our plan--the deficit 
reduction--which is what we are talking to you about.
    Senator Menendez. One final comment, if I may, Mr. 
Chairman. I appreciate the way in which you approach the 
challenges, the fiscal challenges, because I get concerned when 
I see some of our colleagues in the other body and their 
suggestion of how we meet those fiscal challenges. You cannot 
put this all on the back of the middle class in this country, 
which in my mind is the core of what upholds our ability in 
terms of the Federal Government and its resources.
    There is a disproportionate effect upon the middle class in 
the context of some of the provisions, like the House budget. 
In your proposal, while the middle class shares in the 
responsibilities, it is not disproportionate. I am wondering if 
you were thinking about that in the context of how you 
fashioned this, or is that just how it came out? Was there a 
focus there in that respect?
    Dr. Rivlin. Yes, we certainly focused on it, and, 
particularly in the tax proposal, we wanted it to be at least 
as progressive as the current tax code, and we made that 
happen.
    Senator Domenici. I think that the last point that Dr. 
Rivlin made you can find in the report: that our plan is more 
progressive than the tax code we are replacing. We worked very 
hard to make sure that we confirmed with the experts that that 
is what we were doing.
    For some, it was a real shock when the experts said, yes, 
our plan is progressive and it is better than we are now. That 
is because it really is made progressive when you close 
loopholes and lower the rates, and we also had something in 
there that took care of the working poor. It started way back 
under President Ronald Reagan. That model is embedded in this, 
although taxes will be computed in a different, more simple way 
than before.
    But that is in there, and that helped us get more 
progressivity. I think we are substituting the word 
``progressive'' for the broad-scope effect on the American 
working people. I think progressiveness is what we found to 
satisfy that yearning on our part that would be fair.
    Senator Menendez. Thank you both.
    Thank you, Mr. Chairman.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Dr. Rivlin, let me follow up on an important point I think 
the chairman was getting into there with respect to the 
trajectory of the health care costs. I think the chairman is 
right: these numbers that are coming out have been encouraging 
over the last year or so. I think we have a pretty good sense 
of what it is about. We are moving towards more coordinated 
care and away from fee-for-
service.
    I think the chairman's roundtable that we had just a week 
or so ago was also very constructive in this regard. It was 
essentially talking about bringing private innovation to other 
parts of government, to Medicare in particular.
    What I think you are talking about is, let us say ``no'' to 
coupon care. Let us say ``no'' to this idea of just a voucher, 
where you are going to give people some flat sum of money and 
it is never, for the senior, going to keep up with their actual 
health care costs.
    What you would like to do in order to build on some of 
these positive developments that we have seen recently is, in 
effect, keep the purchasing power of traditional Medicare, try 
to say that, when the private sector choices are good and they 
have been certified by government, you put them into an 
exchange for the first time, and in effect then traditional 
Medicare and the private sector would hold each other 
accountable and improve each other and in effect allow us to 
take the next steps in encouraging the trends that the chairman 
has correctly pointed out. Is that a fair recitation?
    Dr. Rivlin. Yes, I agree with that. It has sometimes 
worried people who have looked at our plan. They said, would 
the oldest and sickest recipients not remain in traditional 
Medicare and the younger, healthier ones go into the private 
sector? We do not think so.
    We think there is some evidence now that private plans are 
getting themselves together to figure out, how do you deliver 
care to people who have, say, multiple conditions that many 
older people have, like diabetes and heart problems, and figure 
out, how do you deliver care effectively to them in a 
coordinated way and compete for that business?
    Now, they would not, as you say, get just a sum of money, a 
voucher. They would get a risk-adjusted payment, which would 
compensate them for taking older and sicker people, but we 
believe that the competition there could result in benefits to 
people who have really quite difficult situations.
    Senator Wyden. Well, thank you both.
    Mr. Chairman, I think the point you made with respect to 
those promising trends coming out of, particularly the 
Accountable Care Organizations and the demonstration projects, 
is spot-on. I think the debate that we are going to obviously 
have is, what else can come after that? But I certainly share 
your view on that point. I thank our witnesses, and thank you, 
Mr. Chairman.
    The Chairman. Thank you.
    If I might ask----
    Senator Domenici. Mr. Chairman, could I comment on his 
question?
    The Chairman. Sure.
    Senator Domenici. Let me say to you, Senator, we appreciate 
the analysis and the way you explained this system we are 
studying, because much of the rhetoric to it is hard for us to 
handle because people just say, this is going to lead to the 
sickest getting the worst treatment and those who are well 
getting the best treatment.
    We just have to say, that is not what is going to happen. 
Now we have refined it where we can do what you described here, 
and it is obvious we can make it right, make it fair, and make 
it do its job. As you explained it, that helps everybody, and 
we thank you for your interest in it.
    The Chairman. I have to leave here, so I would appreciate a 
short answer. As I understand it, you project about a $2-
trillion savings over 20 years for your optional premium 
support recommendation. I am just curious how you arrived at $2 
trillion and what the basis for the $2 trillion is. Where does 
that estimate come from, and so forth? Is it an estimate, or is 
it a cold calculation, a cold data set and you just grind it 
out? I am just curious where it comes from.
    Dr. Rivlin. It is a projection. As you point out 
implicitly, we do not get much savings--we get some savings--in 
the first 10 years, but more in the second. The reason for that 
is that the CBO baseline to which we are comparing this goes up 
much more rapidly in the second 10 years.
    The Chairman. Yes. I am just curious. I do not have many 
opportunities to ask you questions. How did you arrive at that 
number?
    Dr. Rivlin. By projecting the----
    The Chairman. What did you use to make that projection?
    Senator Domenici. We have to get people to help us, if you 
do not mind.
    The Chairman. All right. Right.
    Dr. Rivlin. Well, a lot of the analysis that we did 
depended on looking at what is already happening in Medicare 
Advantage, that in many places--in fact, in more populous 
places where more people live--Medicare Advantage plans are 
already cheaper than the fee-for-service plan. So, it depended 
partly on projecting that kind of benefit.
    The Chairman. Well, that is helpful. I appreciate that.
    Dr. Rivlin. The analysis of the savings is the same for the 
first 10 years as the second 10 years. It is the baseline that 
is different. I thought that was what you were referring to.
    The Chairman. Right. No, you answered my question in the 
first part of your answer, namely by looking at Medicare 
Advantage competition.
    Dr. Rivlin. Right.
    The Chairman. There are results under Medicare Advantage.
    Dr. Rivlin. Yes, and other competitive systems.
    The Chairman. Right. I have to run. I am way late. Go 
ahead. Yes, Pete?
    Senator Domenici. But there is also a cap in there.
    The Chairman. Sure. All right.
    Dr. Rivlin. Yes.
    The Chairman. Good. Thank you very, very, very much. We 
look forward to your updated analysis with the trigger and the 
vehicle in tax reform. Thanks a lot. I appreciate it very much. 
This is an issue we obviously care deeply about. I think if we 
will increase our analysis and focus, we will get the result 
that we all want. Thank you very much.
    Senator Domenici. Very good.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 12:22 p.m., the hearing was concluded.]


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