[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                    THE PRESIDENT'S FISCAL YEAR 2014

                 REVENUE AND ECONOMIC POLICY PROPOSALS
=======================================================================


                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, APRIL 16, 2013

                               __________

                            Serial No. 113-4

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
TOM PRICE, Georgia                   CHRIS VAN HOLLEN, Maryland,
SCOTT GARRETT, New Jersey              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              JOHN A. YARMUTH, Kentucky
TOM COLE, Oklahoma                   BILL PASCRELL, Jr., New Jersey
TOM McCLINTOCK, California           TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma             GWEN MOORE, Wisconsin
DIANE BLACK, Tennessee               KATHY CASTOR, Florida
REID J. RIBBLE, Wisconsin            JIM McDERMOTT, Washington
BILL FLORES, Texas                   BARBARA LEE, California
TODD ROKITA, Indiana                 DAVID N. CICILLINE, Rhode Island
ROB WOODALL, Georgia                 HAKEEM S. JEFFRIES, New York
MARSHA BLACKBURN, Tennessee          MARK POCAN, Wisconsin
ALAN NUNNELEE, Mississippi           MICHELLE LUJAN GRISHAM, New Mexico
E. SCOTT RIGELL, Virginia            JARED HUFFMAN, California
VICKY HARTZLER, Missouri             TONY CARDENAS, California
JACKIE WALORSKI, Indiana             EARL BLUMENAUER, Oregon
LUKE MESSER, Indiana                 KURT SCHRADER, Oregon
TOM RICE, South Carolina
ROGER WILLIAMS, Texas
SEAN P. DUFFY, Wisconsin

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, April 16, 2013...................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
        Questions submitted for the record.......................    55
    Hon. Chris Van Hollen, ranking member, Committee on the 
      Budget.....................................................     4
        Prepared statement of....................................     5
    Hon. Jacob J. Lew, Secretary, U.S. Department of the Treasury     7
        Prepared statement of....................................     8
        Response to questions submitted for the record...........    58
    Questions submitted for the record by:
        Hon. Diane Black, a Representative in Congress from the 
          State of Tennessee.....................................    55
        Hon. Bill Flores, a Representative in Congress from the 
          State of Texas.........................................    56
        Hon. Tom Rice, a Representative in Congress from the 
          State of South Carolina................................    56
        Hon. Barbara Lee, a Representative in Congress from the 
          State of California....................................    57


                    THE PRESIDENT'S FISCAL YEAR 2014
                 REVENUE AND ECONOMIC POLICY PROPOSALS

                              ----------                              


                        TUESDAY, APRIL 16, 2013

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Price, Garrett, Campbell, 
Calvert, McClintock, Lankford, Black, Flores, Rokita, Woodall, 
Nunnelee, Hartzler, Walorski, Messer, Williams, Van Hollen, 
Schwartz, Yarmuth, Pascrell, Castor, McDermott, Lee, Cicilline, 
Jeffries, Pocan, Lujan Grisham, Huffman, Cardenas, Blumenauer, 
Schrader.
    Chairman Ryan. All right. The hearing will come to order. 
First, I would like to start on a somber note, Just to say that 
our hearts and our prayers go out to the victims of the 
terrorist attack in Boston. And we have some colleagues here 
from that neck of the woods, and we think about them at this 
time. And this is a moment where those of us who have kids, hug 
them a little tighter. And those of us who attend these Intel 
briefings and vote on these issues see the human side of it. 
So, it goes without saying but it needs to be repeated that, 
you know, our hearts and minds go out to those who were the 
victims of the explosion in Boston yesterday.
    Secretary Lew. It is nice to call you Secretary. You have 
been here a number of times as OMB director. Congratulations on 
your new post. I hope that your signature has improved since 
before. You and I have had some good jokes about that. It is 
nice to have you here in your new capacity as treasury 
secretary. I know that despite our agreements, we appreciate 
you taking the time to join with us today. You have four 
budgeting hearings as treasury secretary, and we appreciate you 
giving us this morning of your time.
    Yesterday was tax day. And tax season was a lot more 
stressful than it needed to be. Our tax code is a Rubik's cube 
that Americans spend six billion hours each year trying to 
crack. Today the code is four million words long, enough to 
fill 70,000 pages. In fact, it is so long, that roughly 90 
percent of Americans pay for professional help to file their 
tax returns. This costs them $160 billion each year, $160 
billion spent by Americans each year just filling out their 
taxes. And then after all that trouble, the process leaves 
them, as our colleague Todd Young put it the other day, feeling 
like either a crook or a sucker.
    We also have the highest corporate tax rate in the 
industrialized world, which hurts workers most of all. A high 
corporate tax rate means that they will take home less pay than 
they otherwise would. So I am glad that the president's budget 
calls for corporate tax reform. And we agree on the problem. A 
complex code does not help anybody but the well-connected. Now, 
we need to work on a solution because we cannot simply stop at 
the corporate rate. Under the president's budget, the big 
companies would pay no more than 28 percent of their income in 
taxes. But small businesses would pay up to 39.6 percent of 
their income in taxes. That, in our opinion, is unfair. It 
hurts jobs.
    We need to reform the individual tax code as well. The 
Administration wants to limit deductions at the individual 
level but they do not want to use the money to lower the rates 
to spur economic growth. Instead, they want to use it to pay 
for more spending. In fact, the president's budget, which just 
was released last week calls for $1.1 trillion tax hike to pay 
for a nearly $1 trillion in new spending. In short, the 
president's plan is to take more from families to spend more in 
Washington. We think that is the wrong approach, and we do not 
think that is going to help the economy. And we have seen this 
movie before. Under this budget, we will have to run deficits 
at or close to $1 trillion for five straight years. Yet 
millions of Americans are out of work or are living in poverty, 
the highest rates we have seen in a generation. This 
Administration's response seems to be more of the same: more 
spending, higher taxes, and record debt.
    Well, we cannot keep spending money we just do not have. We 
need a new approach. We need an approach that encourages 
economic growth. The longer we delay fundamental reform, the 
longer we delay a real recovery, because our national debt is 
weighing down our country like an anchor. It is weighing down 
our economy. It is making it harder for us to get ahead. The 
Administration claims that if we approve this budget, we will 
have reduced the deficit by $4.3 trillion. This is not true. 
But I want to break this down, and Chart 1 will show me how.
    The Administration says that we have reduced the deficit by 
$2.6 trillion since Republicans took control of the House in 
2010. They start their clock a little late. The president is 
responsible for all the policies that were enacted before then 
when he was in office for the first two years. And if you add 
back the money for stimulus, for the payroll tax holidays, for 
the extension of unemployment benefits, for the 24 percent 
increase in domestic discretionary spending, then total deficit 
reduction, when you net it all out, comes to only about $500 
billion that has already been achieved, not the higher $2.6 
trillion number. You see, you have to add both sides of the 
ledger book. And all those savings have already been signed 
into law. So, that $500 billion is really kind of irrelevant to 
this new budget. So this budget claims that the deficit is 
going to be reduced by $1.8 trillion. That is the second line 
on the chart. But once you take out all the baseline games and 
add back all the nearly $1 trillion in spending increases in 
this budget, when the gimmicks are removed, when the spending 
is counted, the total deficit reduction comes to a paltry $119 
billion.
    So we see this budget as a disappointment because it is a 
missed opportunity. We need a new approach in Washington to 
meet the country's most pressing challenges. And that is what 
we are offering. We offered a plan to balance the budget. We 
offered a plan that balances it in 10 years, which we think is 
critical to growing a healthy economy. We extend opportunity 
for the young. We guarantee a secure retirement for the 
seniors. And we think that we need to get back to work to 
repair the safety net so that it is there in a reliable, 
responsible, sustainable way for the most vulnerable. But we 
cannot simply dwell on our differences. We have to move 
forward. We have got three plans on the table, which is 
something we have not been able to say for a number of years. 
So even if we cannot agree on everything, we need to agree on 
something. We need to have a down payment on our debt.
    So I would like to learn more about the president's 
proposals today. I would like to explore where are those areas 
we can finally, maybe, find some common ground with you, 
Secretary Lew. And I am hoping that at the end of the day, we 
can make a down payment for the country, and make this divided 
government work in any way we can. And with that, I would like 
to yield to Mr. Van Hollen.
    [The prepared statement of Chairman Paul Ryan follows:]

             Prepared Statment of Hon. Paul Ryan, Chairman,
                        Committee on the Budget

    Welcome, everybody. To start, I want to thank Secretary Lew. Mr. 
Secretary, I want you to know that despite our disagreements, we 
appreciate your taking the time to join us today.
    Well, yesterday was Tax Day. And tax season was a lot more 
stressful than it should have been. Our tax code is a Rubik's Cube that 
Americans spend 6 billion hours each year trying to crack. Today, the 
code is about 4 million words long--enough to fill 70,000 pages. In 
fact, it's so long that roughly 90 percent of Americans pay for 
professional help to file their returns. That costs them $160 billion 
each year. And after all that trouble, the process leaves them--as my 
colleague Todd Young put it--feeling like either a crook or a sucker.
    We also have the highest corporate tax rate in the industrialized 
world--which hurts workers most of all. A high corporate tax means they 
will take home less pay than they otherwise would. So I'm glad this 
budget calls for corporate tax reform. We agree on the problem. A 
complex code doesn't help anyone but the well-connected. Now, we need 
to work on a solution--because we can't stop at the corporate rate. 
Under the President's budget, the big companies would pay no more than 
28 percent of their income in taxes. But small businesses would pay up 
to 39.6 percent. That's unfair. That hurts jobs. We need to reform the 
individual code too.
    The administration wants to limit deductions at the individual 
level. But they don't want to use that money to lower rates and spur 
economic growth. Instead, they want to use it to pay for more spending. 
Their budget calls for a $1.1 trillion tax hike to pay for nearly $1 
trillion in new spending. In short, the President's plan is to take 
more from families to spend more in Washington.
    We've seen this movie before. Under this budget, we will have run 
deficits at or close to $1 trillion for five years straight. Yet 
millions of Americans are out of work or living in poverty. This 
administration's response is more of the same: more spending, higher 
taxes, record debt. We can't keep spending money we don't have. We need 
a new approach--one that encourages economic growth. The longer we 
delay fundamental reform, the longer we delay a real recovery--because 
our national debt is weighing down our economy like an anchor.
    The administration claims that if we approve this budget, we will 
have reduced the deficit by $4.3 trillion. But that's not true. Let's 
break this number down:
     The administration says we've reduced the deficit by $2.6 
trillion since Republicans took control of the House. They start the 
clock a little late. The President is responsible for all the policies 
he enacted before then. Add back the money for the stimulus, for the 
payroll-tax holidays, for the extensions of unemployment benefits, for 
the 24 percent increase in discretionary spending, and total deficit 
reduction comes to only about $500 billion.
     And all those savings have already been signed into law. 
So that $500 billion is irrelevant to this new budget.
     So the President then claims that this budget reduces the 
deficit by $1.8 trillion. But once you take out all the baseline games 
and add in the nearly $1 trillion spending increase in this budget, the 
total deficit reduction comes to a paltry $119 billion.
    So the President's budget is a disappointment--because it's a 
missed opportunity. We need a new approach in Washington to meet our 
country's most pressing challenges. That's what our side is offering. 
Our plan balances the budget in ten years to foster a healthier economy 
and to help create jobs. Our plan expands opportunity for the young. It 
guarantees a secure retirement for seniors. And it repairs the safety 
net for the most vulnerable.
    We can't simply dwell on our differences. We've got to move 
forward. We've got to find common ground. Even if we can't agree on 
everything, we need to make a down payment on our debt--now. So I want 
to learn more about the President's proposal today--and see where we 
can find common ground.
    With that, I yield to the ranking member.

    Mr. Van Hollen. Thank you, Mr. Chairman. I want to start by 
joining the Chairman by keeping in our thoughts and prayers the 
people of Boston, especially the victims and their families. 
And I would also to join you, Mr. Chairman, in welcoming Mr. 
Lew to this Committee, the first time as secretary of the 
Treasury. Congratulations to you, Mr. Lew, and thank you for 
your service, and thank you for being here to talk about the 
president's budget. And I believe the president's budget 
accomplishes two important objectives. One, and foremost, it 
focuses on job growth now. We all know that we have seen job 
growth in our economy over the last 30-plus months. But we also 
know that it is still not where we want it to be. Second, the 
president's budget reduces the deficit in a steady, credible, 
and balanced way, such that it is under 2 percent of GDP at the 
end of the two-year window.
    Now, I saw, Mr. Secretary, that one of your first visits 
overseas was to talk to some of our European partners, and that 
trip generated headlines like these: ``Treasury Secretary Jack 
Lew Pushes Europeans to Focus on Growth over Austerity.'' And I 
think that is good advice in Europe. It is also good advice 
right here at home. And while the president's budget does focus 
on growth over austerity, unfortunately, the House Republican 
budget does not, because the House Republican budget would keep 
in place the very immediate and deep sequester cuts which the 
non-partisan independent Congressional Budget Office says will 
result in 750,000 fewer jobs by the end of this year alone. And 
the Congressional Budget Office projects that three-quarters of 
the fiscal year 2014 deficit is due to slow employment levels, 
underemployment in the economy. So we need to be focused on 
that right now rather than pursuing European-style austerity in 
the budget as our Republican colleagues' budget does.
    You also had a visit to China. I think your first visit, 
Mr. Secretary, was to China. And I mentioned in the last budget 
hearing we had that I have a major biotech company in our 
district, that last year, laid off more than 1,000 people 
because of ``the uncertain budget environment here at home with 
respect to investment in science and research.'' And this year, 
because of the sequester, they have a hiring freeze in place. 
The one place they point out they are hiring is in China. It 
says, ``We have instituted a hiring freeze across the company 
with China being the only exception.'' And they point out, ``It 
is not because of lower wages paid in China. It is because the 
Chinese are copying what has historically been a very 
successful U.S. model of investing in science and research.'' 
And it would be very shortsighted if we pursue the austerity 
approach to cut those investments at a time when many of our 
major international competitors are following that successful 
model. So I appreciate the fact that the president's budget 
focuses on those investments and shows that we can continue to 
make important investments at the same time that we reduce our 
deficit in a steady way. And for some of our members who are 
new to this Committee, the last time we had a balanced budget 
in this country was when Jack Lew was the head of OMB during 
the Clinton Administration.
    Chairman Ryan. That was the last time he was the head of 
OMB.
    Mr. Van Hollen. When he was the head of what now? You are 
right. When he was head of OMB during the Clinton 
Administration, and, of course, when he left that post, we had 
projected surpluses. That was before two wars on the credit 
card. That was before we put a new prescription drug plan on 
the credit card, and, of course, it was before two back-to-back 
tax cuts that disproportionately benefitted the very wealthy.
    So, Mr. Lew, it is good to continue to have you on the 
president's economic team, and I would just point out that the 
approach you have taken here to reducing the deficit is a 
balanced one; meaning you continue to build on the cuts that 
have been made, $2.5 trillion in deficit reduction already, but 
you do it in a targeted way, and you do it in part by closing 
some of those tax loopholes that the Chairman mentioned. The 
difference is that the Republican budget does not close one 
single tax loophole for the purpose of reducing the deficit, 
whereas the president's budget does close those tax breaks for 
folks at the very high end for the purpose of reducing the 
deficit in a balanced way.
    Let me just close, Mr. Chairman, by urging us to try and 
come together as soon as possible to bridge the differences 
between these budgets. The Chairman said we need to get 
together and move forward; I agree. And that is why we call 
upon the Speaker to immediately appoint conferees to a budget 
conference. There has been a lot of discussion in this 
Committee about how to president's budget was somewhat late. In 
the law, in the budget law, the conference committees are 
supposed to have completed action by April 15. So as right now, 
the Congress is out of compliance with the Budget Act. The 
fastest way to try and come into compliance as fast as possible 
is to appoint conferees and follow the regular order, something 
our Republican colleagues have been calling for. So let's get 
on with this. Mr. Speaker, you should appoint conferees to a 
budget conference right now so we can begin to bridge those 
differences and move forward. Thank you, Mr. Chairman, thank 
you Mr. Secretary.
    [The prepared statement of Chris Van Hollen follows:]

      Prepared Statment of Hon. Chris Van Hollen, Ranking Member,
                       Committee on the Committee

    Thank you Mr. Chairman, I want to start by joining the Chairman in 
keeping in our thoughts and prayers the people of Boston, especially 
the victims and their families. And I'd also like to join you, Mr. 
Chairman, in welcoming Mr. Lew to this Committee--the first time as 
Secretary of the Treasury. Congratulations to you, Mr. Lew, and thank 
you for your service, and thank you for being here to talk about the 
President's budget.
    And I believe the President's budget accomplishes two important 
objectives. One, and foremost, it focuses on job growth now. We all 
know that we've seen job growth in our economy in the last 30-plus 
months, but we also know that it's still not where we want it to be. 
Second, the President's budget reduces the deficit in a steady, 
credible, and balanced way, such that it's under 2 percent of GDP at 
the end of the two year window.
    Now, I saw, Mr. Secretary, that one of your first visits overseas 
was to talk to some of our European partners, and that trip generated 
headlines like these: `Treasury Secretary Jack Lew Pushes Europeans to 
Focus on Growth over Austerity.' And I think that's good advice in 
Europe, it's also good advice right here at home.
    And while the President's budget does focus on growth over 
austerity, unfortunately the House Republican budget does not, because 
the House Republican budget would keep in place the very immediate and 
deep sequester cuts, which the non-partisan, independent Congressional 
Budget Office says will result in 750,000 fewer jobs by the end of this 
year alone. And the Congressional Budget Office projects that three 
quarters of the fiscal year 2014 deficit is due to slow employment 
levels, underemployment in the economy. So we need to be focused on 
that right now rather than pursuing European-style austerity in the 
budget, as our Republican colleagues' budget does.
    You also had a visit to China. I think your first visit, Mr. 
Secretary, was to China. And I mentioned in the last budget hearing we 
had that I have a major biotech company in our district that last year 
laid off more than 1,000 people because of `the uncertain budget 
environment here at home with respect to investments in science and 
research.' And this year, because of the sequester, they have a hiring 
freeze in place.
    The one place they point out they are hiring is in China. It says, 
`we have instituted a hiring freeze across the company with China being 
the only exception.' And they point out it's not because of lower wages 
paid in China, it's because the Chinese are copying what has 
historically been a very successful U.S. model of investing in science 
and research. And it would be very shortsighted if we pursue the 
austerity approach to cut those investments at a time when many of our 
major international competitors are following that successful model.
    So I appreciate the fact that the President's budget focuses on 
those investments and shows that we can continue to make important 
investments at the same time that we reduce our deficit in a steady 
way. For some our members who are new to this committee, the last time 
we had a balanced budget in this country was when Jack Lew was the head 
of OMB during the Clinton administration. And, of course, when he left 
that post we had projected surpluses.
    That was before we put two wars on the credit card; that was before 
we put a new prescription drug plan on the credit card; and, of course, 
it was before two back-to-back tax cuts that disproportionately 
benefited the very wealthy.
    So, Mr. Lew, it's good to continue to have you on the President's 
economic team. And I would just point out that the approach you have 
taken here to reducing the deficit is a balanced one--meaning you 
continue to build on the cuts that have been made, $2.5 trillion of 
deficit reduction already, but you do it in a targeted way. And you do 
it, in part, by closing some of those tax loopholes that the Chairman 
mentioned. The difference is that the Republican budget does not close 
one single tax loophole for the purpose of reducing the deficit, 
whereas the President's budget does close those tax breaks for folks at 
the very high end for the purpose of reducing the deficit in a balanced 
way.
    Let me just close, Mr. Chairman, by urging us to try and come 
together as soon as possible to bridge the differences between these 
budgets. The Chairman said we need to get together and move forward. I 
agree, and that's why we call upon the Speaker to immediately appoint 
conferees to a budget conference.
    There's been a lot of discussion in this Committee about how the 
President's budget was somewhat late. In the law, in the budget law, 
the conference committees are supposed to have completed action by 
April 15th--so as right now the Congress is out of compliance with the 
Budget Act. The fastest way to try and come into compliance, as fast as 
possible, is to appoint conferees and follow the regular order--
something our Republican colleagues have been calling for. So let's get 
on with this. Mr. Speaker, you should appoint conferees to a budget 
conference right now so we can begin to bridge those differences and 
move forward.
    Thank you, Mr. Chairman, and thank you, Mr. Secretary.

    Chairman Ryan. Mr. Lew, the floor is yours.

           STATEMENT OF HON. JACOB J. LEW, SECRETARY,
                U.S. DEPARTMENT OF THE TREASURY

    Secretary Lew. Thank you, Mr. Chairman, Ranking Member Van 
Hollen. I also would like to begin by expressing sympathy for 
the people of Boston. Our thoughts and prayers are with them. 
And as the president said yesterday, we are sparing no effort 
as the investigation goes on into this horrible act.
    It is a pleasure to be here with you today to testify on 
the president's budget. I would like to begin by kind of 
reviewing where we are in our economy. Our economy is stronger 
today than it was four years ago. But we must continue to 
pursue policies that help create jobs and accelerate growth. 
Since 2009, the economy has expanded for 14 consecutive 
quarters. Private employers have added nearly 6.5 million jobs 
over the past 37 months. The housing market has improved, 
consumer spending and business investment have been solid, and 
experts have expanded. But very tough challenges remain. While 
we have removed much of the wreckage from the worst economic 
crisis since the Great Depression, the damage left in its wake 
is not fully repaired. Families across the country are still 
struggling, unemployment remains high. Economic growth needs to 
be faster. And while we have made progress, we must do more to 
put our fiscal house in order. At the same time, political 
gridlock in Washington continues to generate a separate set of 
headwinds, including harsh indiscriminate spending cuts from 
the sequester that will be a drag on our economy in the months 
ahead if they are not replaced with sensible deficit reduction 
policies like the ones we are proposing.
    This budget is animated by the simple notion that we can 
and must do two things at once: strengthen the recovery in the 
near term while reducing the deficit and debt over the medium 
and long term. This has been the president's longstanding 
approach to fiscal policy, and when you compare the trajectory 
of our economic recovery with those of other developed 
economies in recent years, it is clear why the president 
remains committed to this path. It is important to bear in mind 
that our deficits are already falling. In the last few years, 
the president and Congress have come together to hammer out 
historic agreements that substantially cut spending and 
modestly raise revenue. When you combine these changes with 
savings from interest, we have locked in more than $2.5 
trillion of deficit reduction over the next 10 years. And now 
we are putting forth policies that will lower the budget 
deficit to below 2 percent of GDP, and bring down national debt 
relative to the size of the economy in 10 years.
    We restore the nation's long term fiscal health by cutting 
spending and closing tax loopholes, taking a fair and balanced 
approach. At the same time, the budget incorporates all 
elements in the Administration's offer to Speaker Boehner last 
December, demonstrating the president's readiness to stay at 
the table and make the difficult choices to find common ground. 
Consistent with that offer, the budget includes things the 
president would not normally put forward, such as means 
testing, Medicare through income-related premiums, and adopting 
a more accurate but less generous measure of inflation, known 
as chained CPI. It includes these proposals only so we can come 
together around a complete and comprehensive package to shrink 
the deficit by an additional $1.8 trillion over 10 years, and 
to remove the fiscal uncertainty that hampers economic growth 
and job creation. This framework does not represent the 
starting point for negotiations. What it represents is a fair 
balance between tough entitlement savings and additional 
revenues from those with the greatest incomes. The two cannot 
be separated and were not separated last December when we were 
close to a bipartisan agreement.
    This budget provides achievable solutions to our fiscal 
problems, but as crucial as these solutions are, we have to do 
more than just focus on our deficit and debt. The significance 
of balancing the budget is clear. As Ranking Member Van Hollen 
noted, during the Clinton Administration I helped negotiate the 
groundbreaking agreement with Congress to do just that. And as 
budget director, I oversaw three budget surpluses in a row, and 
worked with many on the left and right on a plan to pay off our 
debt. But that does not mean we should only make deficit 
reduction our one and only priority. In addition to ensuring 
that we have sound fiscal footing, this budget lays out 
initiatives to fuel our economy now and well into the future. 
Every one of these initiatives is paid for in our deficit 
reduction package, meaning they do not add a dime to the 
deficit.
    As the president explained in his state of the union 
address, the surest path to long-term prosperity is to 
strengthen the middle class. His budget does that by zeroing in 
on three things: bringing more jobs to our shores, equipping 
American workers with the skills that they need for the United 
States to be more competitive, and making sure hard work 
amounts to a decent living. We will strengthen manufacturing 
and domestic energy production, invest in infrastructure and 
worker training, and expand opportunities for children and 
those hardest hit by the recession. The president has provided 
a detailed blueprint for growing our economy and cutting our 
deficits, and, as his budget shows, we do not have to choose 
between the two, and indeed, we must not. We can adopt a 
powerful jobs and growth plan even as we embrace tough reforms 
to stabilize our finances.
    The debate we are engaged in is very important. It is part 
of a complex sorting-out process that will determine our 
nation's future. But as everyone on this Committee knows, the 
path before us is going to be a struggle. It will require 
difficult decisions that will directly affect the daily lives 
of millions of Americans, and it matters that we get this 
right. I thank you and look forward to answering your 
questions.
    [The prepared statement of Jacob Lew follows:]

           Prepared Statment of Hon. Jacob J. Lew, Secretary,
                    U.S. Department of the Treasury

    Chairman Ryan, Ranking Member Van Hollen, and members of the 
committee, thank you for the opportunity to appear before you today to 
discuss the President's Fiscal Year 2014 Budget.
    The President's Budget is based on a belief that an agreement to 
achieve balanced deficit reduction is consistent with making--and fully 
paying for--targeted investments critical to continued economic growth 
and job creation. The Budget includes the President's compromise offer 
to Speaker Boehner to reduce the deficit by an additional $1.8 
trillion, in addition to the more than $2.5 trillion already enacted, 
and fully pays for all new initiatives to ensure that they do not add 
to our deficit burden.
                            i. introduction
    The United States economy has made substantial progress toward 
recovering from the worst financial crisis since the Great Depression. 
Despite significant headwinds--both as a result of the crisis and from 
other temporary shocks--the economy has grown at an average annual rate 
of just over 2 percent over the last three and a half years. We have 
seen steady improvement in the labor market, where private sector 
employers have added nearly 6.5 million jobs since the trough of the 
labor market in February 2010. The housing market, which had been a 
significant drag on economic growth throughout the recession and into 
the early stages of the recovery, is now gaining upward momentum.
    While our economy is stronger today, more work must be done to help 
create jobs and accelerate growth. Even though the unemployment rate, 
at 7.6 percent, is at its lowest level in four years, it is still too 
high. Too many Americans are still struggling to find work. Despite 
recent improvements in the housing market, many families remain 
underwater on their mortgages and credit-worthy borrowers continue to 
have trouble getting the financing they need to buy a home or refinance 
existing mortgages. Although corporate profits are at an all-time high, 
America's middle class continues to struggle.
    The President's Budget addresses these challenges in a way that 
builds on the momentum of the economic recovery. It takes a credible 
approach to bringing our deficits down to a sustainable level; at the 
same time, it makes important investments to help build a foundation 
for sustainable economic growth. These proposals are based on the 
conviction that an agreement is within our reach, and that it is also 
possible to achieve both our fiscal goals and our long-term priorities.
    While deficit reduction is necessary to put our nation on a sound 
fiscal course, we have to bear in mind that the recovery remains 
fragile. Cutting spending too deeply or too soon would harm the 
recovery in the near term, undermining our shared fiscal goals and our 
ability to make necessary investments for growth over the long term.
    The proposals in the Budget are targeted at growth and 
opportunity--cutting where we can and investing where we will see the 
strongest return, both now and into the future. Specifically, the 
Budget calls for increased investment in innovation and infrastructure 
to make the United States a more attractive place for job creation. It 
introduces initiatives to bolster education and worker training so 
Americans have the necessary skills to compete in a global economy. And 
it puts forward policies that are designed to give all Americans the 
opportunity to share in the benefits of economic growth. These measures 
will help grow and strengthen the middle class, which has been the key 
engine of prosperity in the United States. Additionally, they are fully 
paid for, so they will not add to the deficit.
    Ultimately, the central challenges addressed in the President's 
Budget--strengthening growth now, investing in our future, and putting 
our nation on a sound fiscal footing--complement and depend on each 
other. Investing in our economy today will help us grow in the future 
and that, in turn, makes our fiscal challenges considerably more 
manageable. Committing to a credible path for deficit reduction today 
allows for investments that enhance our long-term growth.
                     ii. balanced deficit reduction
    When the President came into office four years ago, he inherited a 
large fiscal deficit--projected to be more than 9 percent measured as a 
share of the economy before any of his policies were enacted. As the 
economy has been healing, both the expiration of cyclical spending and 
a pickup in economic growth have contributed to a more sustainable path 
for the country's finances.
    Over the past two and a half years, we have made considerable 
progress in reducing the size of the deficit, which fell to about 7 
percent of GDP in FY 2012--the fastest pace of deficit reduction over a 
similar time frame since just after WWII. Moreover, following current 
policy, the deficit will continue to decline over the next 10 years, 
owing to a mix of spending cuts and tax reforms including $1.4 trillion 
in spending cuts to discretionary programs (as a result of both the 
Budget Control Act of 2011 and other appropriations bills enacted since 
2011), as well as over $600 billion in revenue from the American 
Taxpayer Relief Act of 2012. Taking into account interest savings, this 
amounts to more than $2.5 trillion in deficit reduction over the 10-
year window, not including savings from winding down the wars in Iraq 
and Afghanistan. But we need to do more to ensure that our long-term 
fiscal outlook continues to improve.
    We must continue to achieve deficit reduction in a balanced way. It 
must include entitlement reform and spending reductions. We must also 
pursue tax reform that closes loopholes and addresses deductions and 
exclusions that allow the wealthy to pay less in taxes as a percentage 
of income than many middle-class families. Individual tax reform must 
be coupled with reform of the U.S. business tax system to enhance 
American competitiveness, lower rates, broaden the tax base, and level 
the playing field for companies without losing any revenue. All told, 
these initiatives constitute a balanced approach to deficit reduction. 
Such a balanced approach does not force unnecessary cuts to education, 
energy, and medical research and does not endanger Medicare and Social 
Security.
    The President's Budget takes this balanced approach with additional 
spending cuts and increased revenues through tax reform. These policies 
will reduce the deficit to roughly 1.7 percent of GDP by the end of the 
budget window and put the nation's debt on a declining path, reaching 
73.0 percent of GDP by 2023.
    The additional $1.8 trillion in deficit reduction proposed in this 
Budget comes from closing tax loopholes and reducing tax benefits for 
those who need them least; continued health care reform; savings from 
mandatory programs; additional cuts to discretionary spending; and 
savings from using a more accurate measure of inflation, plus the 
reduced interest payments resulting from lower borrowing.
    The most important pieces of the compromise offer made by the 
President include:
     Tax Reform: $580 billion in additional revenue from tax 
reform that closes tax loopholes and reduces tax benefits for those who 
need them least and that will support the creation and retention of 
high-quality jobs.
     Health Savings: $400 billion in health savings that build 
on the health reform law and strengthen Medicare.
     Other Mandatory Savings: $200 billion in savings from 
other mandatory programs, such as reductions to farm subsidies and 
reforms to federal retirement contributions.
     Discretionary Savings: $200 billion in additional 
discretionary savings, with equal amounts from defense and non-defense 
programs--that is $200 billion below the Budget Control Act spending 
caps that were lowered even further by the American Taxpayer Relief Act 
of 2012.
     Consumer Price Index: $230 billion in savings from 
switching to the use of chained-CPI.
     Interest Payments: Almost $200 billion in savings from 
reduced interest payments on the debt and other adjustments.
    I will address each of the key elements of the President's 
compromise offer, all of which are in the Budget.
                components of balanced deficit reduction
Tax Reform
    As a first step toward balanced deficit reduction and tax reform, 
the President proposes enacting two individual tax reform measures that 
would raise $580 billion by broadening the tax base for high-income 
taxpayers, and ensuring that the very wealthy pay federal tax rates at 
least equal to those paid by middle-class Americans. The first measure 
sets a 28 percent maximum rate at which upper-income taxpayers could 
benefit from itemized deductions and certain other tax preferences to 
reduce their tax liability. The second puts in place the Buffet rule, 
which requires those individuals with incomes over $1 million to pay no 
less than 30 percent of income after charitable contributions in taxes. 
At the same time, the Budget includes business tax reform that will 
provide greater certainty and improve global competitiveness while 
preserving the revenue collected today.
Health Care Reform Savings
    The President's Budget builds on the health care cost savings 
driven by the Affordable Care Act by reducing excess payments for 
health care services and supporting reforms that boost the quality of 
care. The Budget also includes structural changes that will help 
encourage Medicare beneficiaries to seek high-value health care 
services, while preserving the basic structure and promise of the 
program. These actions would save an additional $400 billion.
Other Spending Cuts and Savings
    The Budget calls for a total of $400 billion in additional 
discretionary and non-health mandatory spending cuts over the next 10 
years. Savings in mandatory programs outside of health care include 
reforms to agricultural subsidies and federal retirement benefits as 
well as from a variety of smaller savings initiatives across the 
agencies.
    The budget includes an additional $200 billion in spending cuts, 
split evenly between defense and nondefense spending. On its current 
trajectory, discretionary spending is projected to decline to its 
lowest level as a share of the economy since the end of the 1950s; the 
discretionary cuts included in the President's offer to Speaker Boehner 
would push discretionary spending even lower. The President's cuts are 
coupled with targeted investments that are imperative to growth and 
opportunity, such as early childhood education.
    In addition, the Budget includes additional savings of $230 billion 
by changing the standard measure of inflation used to adjust spending 
programs and the tax code from the standard CPI to a chained CPI, 
coupled with protections for the most vulnerable. The chained CPI is a 
more accurate measure of inflation in that it does a better job of 
reflecting the substitution of goods in response to relative price 
changes.
  iii. strengthening the middle class by investing in the u.s. economy
    In addition to the proposals to stabilize our finances, the 
President's Budget offers a number of policies aimed at making targeted 
investments to promote long term growth. These policies make domestic 
job creation more attractive by increasing investment in innovation, 
infrastructure, and manufacturing. The Budget also offers policies to 
increase access to and the affordability of education and job training 
programs. At the same time, it includes proposals so that the gains 
from these policies can be shared by all Americans.
Promote Greater Competitiveness in Global Markets
    A number of proposed initiatives are designed to enhance our 
ability to sell American-made goods and services to the rest of the 
world. The Budget increases funding for agencies involved in trade 
promotion and trade financing so that these agencies can help the 
United States achieve the goal set in 2010 by the National Export 
Initiative (NEI) to double U.S. exports over a five-year period. In 
addition to the NEI, the Budget prioritizes completing ongoing trade 
negotiations--such as the Trans-Pacific Partnership--and opening new 
negotiations--like the Transatlantic Trade and Investment Partnership 
with the European Union--to help strengthen trade ties with the Asia-
Pacific region and the European Union, respectively. In addition, more 
resources for trade enforcement will help make sure that our workers 
and businesses exporting their products and services overseas are 
operating on a level playing field.
    Currently, the U.S. corporate tax system provides incentives for 
companies to relocate operations abroad by allowing them to reduce 
their tax liability. The President's Budget changes that by reforming 
the corporate tax system to encourage domestic job creation without 
losing any revenue. Part of that effort will include removing 
deductions for moving production overseas and providing a new tax 
credit for firms that bring foreign operations back to U.S. soil.
Investing in Innovation, Infrastructure, and Manufacturing
    As global markets become more open and as economic activity abroad 
continues to strengthen, it is crucial that U.S. firms and workers 
remain on the technological frontier. That is why we need to invest in 
Research and Development (R&D), infrastructure, and our manufacturing 
base. These investments will help foster job creation, raise living 
standards, and keep our nation competitive in a global economy.
    The President's Budget increases funding for non-defense R&D 
investment to $70 billion, a roughly 9 percent increase over its 2012 
level of $64 billion. These investments are targeted to areas most 
likely to unleash transformational technologies that will create the 
businesses and jobs of the future. History has shown that federal 
support for R&D has helped spur new technologies, including the 
internet, global positioning systems, and clean energy.
    Similarly, federal investments in public infrastructure projects, 
such as the national highway system, have led to significant gains in 
our nation's productive capacity. In recent years, however, work to 
maintain and improve public infrastructure has failed to keep pace with 
the rate of deterioration and obsolescence. As CEOs tell me every time 
we meet, our aging infrastructure has become a detriment to our future 
growth prospects, and modernizing infrastructure must be a national 
priority.
    The President meets this obligation by directing $50 billion toward 
infrastructure upgrades and repairs. And to get started on the most 
urgent projects as quickly as possible, the Budget would create a ``Fix 
it First'' program that puts people on the job right away to clear out 
the backlog of deferred work on highways, roads, bridges, transit 
systems, and airports. But taxpayers need not shoulder the entire cost 
of these projects: the President's Budget calls for a Partnership to 
Rebuild America. This program helps leverage private investment in 
infrastructure by starting a National Infrastructure Bank as well as by 
enacting America Fast Forward bonds, which help facilitate and reduce 
the cost of financing new projects. These initiatives will help lay the 
foundation for long-term economic growth and also help generate new 
high-quality middle-class jobs today.
    Growing our manufacturing sector also generates new, high-quality 
middle-class jobs. The Budget makes a one-time down payment of $1 
billion to establish manufacturing innovation hubs in various regions 
around the country. The Budget also includes funding to launch 
Manufacturing Technology Acceleration Centers oriented toward improving 
supply-chain efficiency. Finally, the Budget prioritizes investments 
and initiatives to make the United States a world leader in clean 
energy.
Investing in the American Workforce
    If we want to make America more competitive in the global economy, 
we must equip America's workers with the high-tech skills that the 21st 
century requires.
    The Budget takes a number of steps to help Americans acquire these 
skills. It proposes to work together with states to make high-quality 
preschool available to every four-year old in America. It rewards 
school districts that develop new partnerships with colleges and 
employers, and focus on science, technology, engineering, and 
mathematics (STEM) so that high school students are better prepared for 
the jobs of tomorrow. And it expands access to higher education by 
making college more affordable. The Budget makes the American 
Opportunity Tax Credit--which helps students pay for college expenses--
permanent. At the same time, it reaffirms the Administration's strong 
commitment to the Pell Grant program, which provides grant assistance 
to low- and moderate-income students and provides a mechanism to keep 
interest rates for student loans from rising--at a time when market 
rates are low.
    In addition to investing in education, the Budget strongly supports 
training and employment programs to help workers gain skills and find 
new jobs or careers. One specific focus is on modernizing, 
streamlining, and strengthening government delivery of job training 
services. The Budget proposes a Universal Displaced Worker program that 
would reach over 1 million workers per year with a set of core 
services, combining the best elements of two more narrowly targeted 
programs. In addition, starting in fiscal year 2015, the Budget 
provides $8 billion for the Community College to Career Fund; this Fund 
supports state and community college partnerships with businesses, 
thereby enhancing the skills of American workers.
Strengthening the Middle Class
    Investing in U.S. firms and workers is critical to maintaining 
competitiveness, but it is also important to make sure that all 
Americans have an opportunity to benefit from the resulting economic 
gains.
    To this end, the President's Budget includes tax proposals that are 
geared toward rebalancing the tax code in a way that eases the burden 
on the middle class, including closing specific loopholes that benefit 
only a small group of the wealthiest Americans. The Budget also 
contains a number of proposals designed to build ladders of opportunity 
so that hard work is rewarded and inequality and poverty are reduced.
    The Budget creates a Pathways Back to Work fund to make it easier 
for workers, particularly the long-term unemployed, to remain connected 
to the workforce and gain new skills for sustained employment. The 
Budget would also increase the minimum wage to $9.00 an hour by the end 
of 2015 and index it to inflation thereafter.
    Taken as whole, the policies put forth in the President's Budget 
enhance America's competitiveness and, in doing so, create a healthy 
environment for fostering a strong, growing middle class--a key engine 
for sustainable economic growth in which hard work is rewarded and 
every American has an opportunity to advance and succeed. At the same 
time, we maintain our commitment to our most vulnerable citizens and to 
our seniors.
    Moreover, these new policy initiatives are fully funded, so that 
the Budget is able to make essential investments in the nation's future 
while also reducing the deficit.
                             iv. conclusion
    In summary, the U.S. economy has made significant progress toward 
recovering from the worst financial crisis since the Great Depression. 
However, it is important to recognize that we should be doing more to 
secure the recovery, create jobs, and improve the future prospects of 
the nation.
    We have made significant gains in the labor market, but 
unemployment remains unacceptably high at 7.6 percent and too many 
Americans are still looking for work. Congress has already passed some 
parts of the American Jobs Act. We can further support the recovery in 
the private sector by passing the rest. Similarly, activity in the 
housing market appears to be gaining momentum, but we need to do more 
to support credit-constrained families who want to buy a house or 
refinance their existing mortgage.
    The President's FY 2014 Budget, by including the components of the 
President's December compromise offer to Speaker Boehner, reiterates a 
commitment to coming together around a balanced plan to reach more than 
$4 trillion in total deficit reduction over the 10-year budget window. 
At the same time, it prioritizes growth-oriented policies that are 
designed to enhance U.S. competitiveness and strengthen the middle 
class, ensuring that the resulting economic gains can be shared broadly 
among all Americans.
    In conclusion, it is important to note that this framework does not 
represent the starting point for negotiations. It represents a fair 
balance between tough entitlement savings and additional revenues from 
those with the greatest incomes. The two cannot be separated, and were 
not separated last December when we were close to a bipartisan 
agreement.
    This is my first opportunity to appear before you as Treasury 
Secretary, but this is far from the first budget that I have worked on. 
There is no doubt that this is a serious proposal at a serious time. 
There is a path to a bipartisan agreement that moves the country 
forward. This budget deals with the world as it is now and as it will 
be in the future. It makes difficult choices. It includes a powerful 
jobs and growth plan. And it is the right course of action for our 
nation and our economy, and a path for bipartisan agreement to move the 
country forward.
    Thank you. I look forward to taking your questions.

    Chairman Ryan. Thank you. If you could bring up the first 
chart, please.


    I wanted to explore tax reform with you a bit. Your budget 
calls for lowering the corporate tax rate to 28 percent. 
Question one: Do you propose to do that on a static revenue-
neutral basis?
    Secretary Lew. Mr. Chairman, do you mean do we plan to use 
traditional scoring?
    Chairman Ryan. Yeah.
    Secretary Lew. Yes, we do plan to use traditional scoring.
    Chairman Ryan. But the 28 percent lowering, you plan on 
offsetting that and paying for it within base broadening, is 
that correct?
    Secretary Lew. Well, Mr. Chairman, to be clear, we propose 
that business tax reform be done in the context of overall tax 
reform, and that the overall tax reform needs to fill a gap 
that we have to get our fiscal house in order of $580 billion 
of additional revenue. I think that the business piece, we have 
said, should be done in a way where we broaden the base and 
lower the rates so that American can be more competitive. But 
the overall tax package is going to have to raise revenue.
    Chairman Ryan. Okay, but at least we agree in the first 
thing that you said, which is, lower rates, broaden the base in 
order to lower the rates. And you do not specify how to pay for 
lowering the rates, just that we should do it through base 
broadening to be determined through tax reform, correct? I am 
not trying to lay a trap.
    Secretary Lew. We have had a number of indicative 
provisions in there, but I think there will have to others, and 
the business of broadening the base is a difficult one. It is 
going to require a lot of bipartisan consensus because each of 
the provisions that we would consider base broadening, has, you 
know, zealous advocates saying that they need it desperately.
    Chairman Ryan. The point I am trying to make is some have 
been critical of our proposals, which were to lower the rates 
and the broaden base, and do it through tax reform. It sounds 
like you are basically saying do the same thing, but on the 
corporate rate. Well, the point is, it is tough to do. It is a 
lot of zealous advocates to certain tax expenditures, and so we 
need to do this together through broad based tax reform through 
base broadening. So all I am saying is there is an area of 
consensus on the proper approach.
    Secretary Lew. I think there is some agreement, but I do 
not want to exaggerate. To be clear, the president's budget and 
the president's policy is he needs to have raisers, and the 
raisers would come from high income taxpayers.
    Chairman Ryan. Well, I want to get to that in a second.
    Secretary Lew. Yeah, who are the people who benefit from 
when corporations do well.
    Chairman Ryan. I want to get to that in a second. Here is 
what is unique about us, us being the U.S. Among, I know this 
chart is kind of tough to see, among the OECD countries, the 
industrialized world, we have a unique disproportion of 
businesses that file as individuals.
    Most other countries do not do this. Most other countries 
tax their businesses all sort of the same as businesses. And so 
when you see the international corporate tax rate at 25 
percent, that means most businesses in other nations are taxed 
at the average rate of 25 percent or lesser or higher based 
upon the average. The problem is, in America, most of our 
businesses file as what we call pass-throughs, subchapter S 
corporations, partnerships, LLCs. And what you see here is, the 
red bar, these are all businesses that make in excess of a 
million dollars in profits, so not even the small of the small 
businesses. Most of our companies in American are not 
corporations. They are pass-throughs. And eight out of 10 of 
our businesses according to your data, are pass-throughs; nine 
out of 10 in states like Wisconsin.


    And so here is the question. If we now have a 39.6 
statutory tax rate on these pass-through businesses, but we go 
down to a 28 percent tax rate on corporations, do you not think 
that is kind of unfair? Do you not that that puts those 
successful small businesses at a competitive disadvantage where 
they are paying a tax rate that is 10 percentage points higher 
than their corporate competitor that is a C corp?
    Secretary Lew. Mr. Chairman, I think this Administration 
has had a very strong record of putting forward tax proposals 
to benefit small businesses. We have had 18 separate proposals. 
So we very much agree that there need to be incentives for 
small businesses.
    Chairman Ryan. But what I am asking you is the rate, their 
actual rate that they pay. First of all, we were at 35 for 
years. Now the top statutory rate is 39.6 for these businesses, 
35 for corporations. You want corporations to go to 28, but 
keep the small businesses at 39.6. Do you not think that 
difference is discriminatory? Do you not think that puts them 
at a competitive disadvantage?
    Secretary Lew. One of the reasons that it is important, 
just as an intellectual matter, do individual and business tax 
reform at the same time, as those businesses make their 
decision how to organize, they need to know what the individual 
tax code is and what the business tax code is. There will be 
opportunities for small businesses to perhaps file as corporate 
taxpayers and get the benefit of lower rates when we have a 
statutory rate that is lower because we have eliminated a lot 
of the special provisions that keep the statutory rate high. I 
think as we all know, the average rate is much lower than the 
statutory rate.
    Chairman Ryan. So you are suggesting that we keep the 
statutory rate high, and if a business does not like it, they 
should become a corporation? Is that kind of what you are 
saying, the relief that the Administration envisions for them?
    Secretary Lew. I think that we share the concern for small 
businesses. We have proposed, on 18 separate occasions, tax 
benefits to help small businesses. We would look forward to 
working on a bipartisan basis to make sure that there are 
strong incentives for small business. I think that the rate 
that you are describing is not, for the most part, raising 
revenue because it is hitting small businesses. It is hitting a 
lot of people with considerable income that comes from 
corporate income, that comes from financial services income, 
that comes from law firm income. So I think it is important 
that we not mix things up. If we want to encourage small 
business, we can work together. I think we agree we want to 
encourage small businesses.
    Chairman Ryan. Yes, see, there is the issue, which is we 
can add more loopholes to the code to try and alleviate 
pressure from taxes, but instead of having the loopholes, why 
do we not plug the loopholes and just lower the rates. That 
way, these businesses get to decide for themselves what to do 
with their capital, how to invest their capital, how to create 
jobs. There is where we are going to have an issue when it 
comes to tax reform. I do not want to dwell on this because I 
am putting myself on a clock as well so we can get to everybody 
else here. Has the president made any proposals since he has 
been president that raise taxes on families earning less than 
$200,000, or $250,000 for joint filers?
    Secretary Lew. The president's pledge that his tax policies 
should not hit people below 250 have been borne out by the 
policies that we have enacted and by the policies we propose. I 
know there is some disagreement in categorizing certain things, 
but I would be happy to have that conversation with you.
    Chairman Ryan. Well, I am not trying to lay another trap, I 
am just trying to say, first of all, the Supreme Court says 
that the health insurance mandate is a tax that obviously hits 
everybody. The 2.3 percent tax on medical devices, that hits 
everybody, including people making less than $200,000. The 
cigarette tax, smokers do not just make about $250,000. But the 
new 28 percent tax rate limitation on deductions, that kicks in 
at families making $223,000. The point I am trying to make is, 
you are already kind of reneging on this promise, and the 
biggest tax increase proposal you have in your budget does that 
as well. It taxes families below your definition of middle-
income thresholds. And the point I am trying to make here is, 
you cannot get all of this revenue you want to fuel all of the 
spending without taxing middle class people. There just are not 
enough high income earners there, the kind of money that you 
are looking for from taxes, to pay for all of this spending. 
And I think your budget acknowledges this by the fact that you 
are actually proposing to tax people below the threshold that 
you define as being middle income.
    Secretary Lew. Mr. Chairman, I would be happy to go and 
give you a quick answer on those issues. In terms of health 
care, it was designed as a responsibility fee to make sure that 
everyone had coverage, and that when people go to the hospital, 
they are carrying their own fair share of the burden. We 
designed it that way, Congress designed it that way. The fact 
that the Supreme Court chose to see it as something that fell 
under the taxing powers does not make it a tax in terms of the 
way it was enacted, the way it was conceived, or what it does.
    Chairman Ryan. Irrespective of the fact that your lawyers 
argued it was a tax in order to maintain its constitutionality.
    Secretary Lew. You know, legal arguments can define 
categories that have different boundaries for different 
purposes. I think that the reality is that if you do not have 
health insurance and you go to the hospital, somebody else is 
paying the bill. And it is a way of making sure people pay 
their own way. On the cigarette tax, we dearly hope that people 
decide not to buy cigarettes, not to smoke, that fewer young 
people smoke. We will get more benefits to this country from 
lower health care costs and better health, and we will be net-
net better off. So it is something that people make the choice 
on whether or not to smoke. It is designed to discourage 
smoking.
    Chairman Ryan. That is fine. Look, the fact is it hits 
people who are middle income. The point I am trying to make is, 
if you want to get all this kind of tax revenue you are talking 
about, it does not just come from the movie star or the hedge 
fund manager. It does, from your own budget's acknowledgement, 
come from middle income people, lower income people. I have got 
a minute left. Secretary Lew, when do you project the X date to 
hit? This is on the debt limit. As you know, May 19 is the 
statutory date where the clock is so-called reset. You have 
extraordinary measures. What is your latest projection on when 
you think those extraordinary measures play out?
    Secretary Lew. Mr. Chairman, it is very challenging this 
year to make a precise prediction, and we do not have, at this 
moment, a precise prediction. It was a late filing season in 
the tax code this year because the law was enacted in January. 
So we do not have even a good sense of what the cash flow on 
revenues is.
    Chairman Ryan. What month do you think it is going to hit?
    Secretary Lew. I hate to answer when I do not know with 
clarity. You know, the sequester? We do not have a good sense 
of what the outlay impact month to month will be of the 
sequester, and there is some very uneven payments that we 
cannot schedule the timing of. So we could be plus or minus 
quite a considerable period of time if I were to give you an 
estimate today. So we are going to need to keep working on 
this.
    Chairman Ryan. Well, just keep us updated, all right?
    Secretary Lew. I think the important thing that we need to 
recognize is that May 19 was set as a statutory limit. It was a 
date that was set, not a number that was set. And the right 
thing to do is to extend the debt limit to remove any 
uncertainty so we are not in this place where people are 
wondering how many days or weeks do we have. May 19 was set as 
a date, and we certainly hope Congress will act accordingly.
    Chairman Ryan. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. Again, Mr. 
Secretary, thank you for being with us. And I had not planned 
to raise it, but the Chairman once again raised the ObamaCare 
issues, including the fees, which he referred to as taxes, 
whatever you want to call them. I think it is important to 
point out that the Republican budget assumes that stream of 
revenues. In fact, they claim to balance their budget over 10 
years, but as the chart up here will show, at the 10-year mark, 
their budget is about $7 billion in surplus, but they count on 
two sources of savings from ObamaCare.


    One, the Medicare savings, which we achieve by ending 
overpayments to some of the insurance companies and modernizing 
the incentive structure, but also the revenue stream included 
in ObamaCare. Without those elements, or some substitute which 
they have not told us about, their budget would not be in 
balance. And I think that is an important point to make.
    Chairman Ryan. Gentleman care to yield on that?
    Mr. Van Hollen. I am happy to yield with extra time.
    Chairman Ryan. See his explanation on corporate tax reform.
    Mr. Van Hollen. So let's now go to the issue of taxes 
because the Chairman suggested the president's plan could have 
an impact on middle income taxpayers. As you pointed out, the 
president has been very clear on drawing the distinction 
between asking higher income individuals to pay their fair 
share of the burden and not put additional burdens on middle 
income taxpayers. I know you have had a chance to look at the 
math in the Republican budget where they would drop the top 
individual rate from 39 percent to 25 percent, claim to do it 
in a manner that is deficit-neutral, and the analyses that I 
have seen, including those from the Administration, show that 
the only way to accomplish those two objectives is if you, in 
fact, increase the tax burden on middle income families by 
somewhere, on average, of $2,000 to $3,000. Could you comment 
on that?
    Secretary Lew. Congressman, first of all, I want to go back 
and agree with you on the question of how to think about the 
health care bill. The fact that people are paying for health 
insurance and getting health insurance is very different than 
leaving the payments there but not giving them the health 
insurance. And it is just they cannot be compared. On the 
question of the budget that the majority here has put forward, 
it has an enormous reduction in tax rates. It does not specify 
how to pay for it, and there are not enough tax deductions at 
the top to pay for it. So if you are going to lower the top 
rate as much as that budget would do, it would put billions of 
dollars, trillions of dollars of burden on middle income 
taxpayers. How it was designed would have to be something that 
was worked out, but there is just not enough room at the top in 
order to pay for it. So if you are going to lower the rates at 
the top, even if you were to eliminate the benefits, you could 
not manage to pay for that rate reduction without raising taxes 
on people below. Whether it is $1,000 or $2,000, you would have 
to look at a specific design to know. I cannot comment at that 
level of specificity. But it would be a significant increase, I 
think, on middle income taxpayers.
    Mr. Van Hollen. No, I appreciate that, and just to amplify 
on the earlier point you made where the Republican budget 
actually gets rid of the health care benefits but keeps the 
savings, including the revenue stream in the budget, is sort of 
giving people the toughest end of the bargain on both ends, 
right? And it would also create havoc in our health care system 
if you were to take away the new people who will now be covered 
by insurance going into the exchanges in that process.
    Could you just elaborate a little bit more on this 
distinction that you made? There is a lot of talk about how 
businesses that file as pass-through entities are small 
businesses. There is a lot of misconception about that. When 
you dig a little deeper, you find out that those so-called 
small businesses include businesses on the Fortune 100 list, 
they include a whole lot of Washington lobbyists who are making 
hundreds and hundreds of thousands of dollars, Washington 
attorneys, other folks. So as we talk about tax reform and this 
distinction between pass-through entities and corporate tax 
entities, I think it is important to remember that the 
Administration's proposals have always protected true small 
businesses, mom and pops, but do believe that some of those 
very high income filers should pay more. Could you elaborate on 
that?
    Secretary Lew. Congressman, if you look at where the 
revenue at the top end of the spectrum comes from, it is mostly 
coming from very wealthy individuals and larger businesses. I 
think that when we had a bipartisan agreement at the beginning 
of this year to resolve the issue of the top rates, it was not 
raising taxes on small businesses, you know, in any kind of a 
broad way. I do not disagree with the notion that we need to 
encourage small business. That is why we have had a lot of 
specific incentives for small business. But we have to be very 
targeted in how we do. If we are going to try to help small 
businesses, we ought to make sure the benefits go to small 
business, not to the wealthiest individuals who really can 
afford to pay more.
    Mr. Van Hollen. You are right, and there is a long list of 
corporations that I am sure most Americans would not consider 
small businesses, who filed as pass-through taxpayers. Let me 
just say word about the compromises. You pointed out the 
president included in his budget proposals that have been made 
by Speaker Boehner and Republican Senate Leader Mitch 
McConnell, including chained CPI, which creates concerns among 
many of us, many in the president's party. And yet the House 
Republican budget does not include the provisions that they 
themselves asked for, nor do they include any revenue from 
closing the tax breaks that we hear a lot of talk about on the 
Republican side. We know that Speaker Boehner during, those 
discussions with the president last winter, talked about a 
trillion dollars in revenue that could be generated from 
closing tax loopholes, and he specifically said by closing tax 
loopholes and breaks that disproportionately benefit very 
wealthy people. Early on in the process, he made a big 
announcement about how he could find $800 billion by closing 
tax breaks that disproportionately benefit very wealthy people.
    So you would have thought the in the spirit of compromise, 
that Speaker Boehner and the House Republicans would have 
included those things that the Speaker put on the table, and I 
hope that since the president has gone way out there and moved 
to meet the Republicans at least halfway, that in the coming 
weeks, we will see our Republican colleagues put back on the 
table the things the Speaker himself had called for.
    And we all know that one of the issues we are going to be 
confronting in the next weeks and months, as you and the 
Chairman pointed out, is the debt ceiling. And I hope we have 
all learned from our experience in the summer of 2011 that it 
is irresponsible and reckless for the United States to suggest 
that it will not meet its financial obligations, whether they 
are to bondholders, whether they are to Social Security 
recipients, whether they are due to other people who have 
contracted with the United States government. Now, in the House 
in the next couple weeks, we are expected to take up a bill 
that says, ``You know what? We can prioritize our debts. You 
know, there are some debts that we will say come first, but 
other debts and obligations that the United States government, 
including this Congress, have taken on. You know what? They do 
not have as high a priority.'' Could you, Mr. Secretary, as 
secretary of the Treasury now, comment on what impact it would 
have on our economy, and what signal it would send to the 
international economy, if the United States were to default on 
any of its obligations.
    Secretary Lew. Congressman, I have to say that the notion 
that you can prioritize which of the obligations that Congress 
has authorized should be paid is one that just does not work. 
It does not prevent default, it just shifts what obligation you 
are defaulting on. And we have never in the history of this 
country defaulted on our obligations, and we cannot even let 
that be considered as an option. I do not think there is any 
alternative but for Congress to pass an extension of the debt 
limit. It would be a mistake to repeat the kind of 
brinksmanship that we saw in 2011; it hurt confidence in our 
economy. And there is no alternative. Congress cannot reduce 
the spending that it has already obligated. Those are 
obligations, and the United States pays its bills.
    Mr. Van Hollen. I am not sure lots of people recognize that 
the last point that you made very quickly, which is these are 
obligations which the United States Congress has already voted 
to undertake, right?
    Secretary Lew. Correct.
    Mr. Van Hollen. The Congress has voted to take on these 
obligations. The United States has made commitments based on 
those commitments. Could you just amplify that point?
    Secretary Lew. Congressman, there is no spending that has 
taken place that has been authorized by Congress. It has either 
been appropriated or it is provided for through permanent 
legislation. And when the United States undertakes an 
obligation, whether it is an obligation to pay rent, to pay for 
materials, to pay for labor, or to pay bondholders, they are 
all obligations that were authorized by Congress. Failing to 
pay an obligation that has been authorized would be 
unprecedented. It would be a form of default. And all the 
prioritization does would sequence which bills would be paid, 
but it would not leave you in a position to pay all your bills.
    Chairman Ryan. Thank you. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. I want to welcome you, 
as well, Mr. Secretary. I think it is important as we work 
through this budget season to talk about the goals of budgets. 
And the goal of our budget on the Republican side was to 
create, is to create, the greatest amount of opportunity for 
the greatest amount of success for the greatest number of 
people to return and to expand the American dream. We believe 
that our budget would do that. Sadly, we do not believe that 
the president's budget gets us moving in that direction as the 
president's budget, your budget that you submitted, increases 
debt, increases dependency, increases spending, increases 
taxes, in fact, grows the government instead of growing the 
economy, with a budget that never, ever, ever gets to balance, 
unlike your experience in one of your periods at OMB.
    That being said, though, I am intrigued by a couple things 
that you said. One, I think I heard you say that the 
Administration is interested in moving forward with corporate 
and individual tax reform simultaneously. Is that correct?
    Secretary Lew. Correct, as part of an overall fiscal plan.
    Mr. Price. As part of an overall fiscal plan in order to 
lower the corporate rate; does the Administration contemplate 
removing deductions, credits, expenditures on the individual 
side to cover a decrease in corporate tax rates?
    Secretary Lew. Our notion has been that we cannot lose any 
revenue through corporate tax reform, and so I would think that 
we can only lower the rate on the business side as much as we 
are able to broaden the base on the business side. I think we 
have a pretty big hole to fill in terms of a fiscal plan, $580 
billion.
    Mr. Price. If you go to silos.
    Secretary Lew. Well, I think if you view tax reform 
overall, it is going to have to raise $580 billion. If you did 
the corporate business side on a revenue-neutral basis, that 
means that the 580 would come from the individual's side, and 
we think it should come from the top end.
    Mr. Price. So there is some potential to utilize closure of 
expenditures on the individual's side.
    Secretary Lew. No, I did not say that. We have not 
entertained the notion that there would be individual revenue 
raisers to pay for business rate cuts.
    Mr. Price. A couple other quick points. I know that you 
have recently met with some of the European officials, France 
and Germany, I believe, and you are certainly aware that the EU 
countries are contemplating a raising a new tax on U.S. 
retirees and other investors by taxing financial transactions 
here in the United States. I know that last week in response to 
a question from Congressman Neal, you said that it was the 
Administration's policy that it is not acceptable policy, from 
our perspective, for other countries to create a tax that has 
an extraterritorial reach and would levy a tax on a transaction 
in the United States. Would you support legislation that would 
prohibit that kind of tax from the EU?
    Secretary Lew. Congressman, I have delivered a very clear 
message to our European friends that it is unacceptable, and I 
think we need to work with the various institutions in Europe 
to make sure that they do not impose taxes here. I think we 
would have to look and see what the shape of it was before I 
could answer that question. So I do not know what the impact of 
the legislation would be. I think, from the question you are 
asking, I think we totally agree that it is unacceptable for a 
foreign government to levy a tax in the United States.
    Mr. Price. We have got a bipartisan group that is moving 
forward with a piece of legislation on that.
    Secretary Lew. I look forward to working with you on that.
    Mr. Price. I want to move to IRAs. You propose in your 
budget a cap to IRAs, and the White House has said, curiously, 
some individuals can accumulate substantially more than is 
needed to fund reasonable levels of retirement. Is it the 
Administration's position that it is the role of the federal 
government to define what a reasonable level of retirement is, 
not from the governmental subsidy standpoint, but from what 
individuals are allowed to accumulate?
    Secretary Lew. No, to be clear, our policy does not limit 
what people can save for retirement, it just limits the 
availability of tax benefits. And we have said that $3 million 
is a limit that is where the tax benefit should no longer be 
available. But we have never said that people should not save 
as much as they choose to for their retirement.
    Mr. Price. So you do not believe that it is the federal 
government's role to define a reasonable level of retirement?
    Secretary Lew. Well, our policy would have no impact on 
people's decisions, you know, without regard to taxes.
    Mr. Price. But it does. The tax policy affects activity, 
does it not?
    Secretary Lew. Well, the tax benefit does not have to be 
there. If somebody sees the value of saving and the compounding 
over time, and they want to save more, they can do that.
    Mr. Price. But if you tax something, you get less of it, 
correct?
    Secretary Lew. Well, the special tax incentive for saving 
for retirement, the average American has on the order of 
$50,000 saved for retirement. I think our goal has to be to 
have more and more people participate in retirement savings to 
build that leg of the stool so that more Americans have it. And 
in a world of tough choices, the tradeoff between a $3 million-
plus retirement and getting people into the system is clear.
    Mr. Price. We would suggest, Mr. Secretary, that it is not 
the federal government's role to define what that reasonable 
level is, and that all individuals ought to be treated the same 
and equally so that greater opportunity, greater success, 
greater dreams being realized.
    Secretary Lew. And to be clear, we do not discourage people 
from saving without the benefit of the special tax provision.
    Chairman Ryan. Ms. Schwartz.
    Ms. Schwartz. Thank you. Just to be clear on that last 
point, I would say that I agree with you that people should be 
able to save all they want, but to understand that if we are 
actually creating a tax benefit to do that, that those middle 
class families and lower middle class families are subsidizing 
those who are then saving over $3 million. So it is really not 
a question of government. It is really a question of what do 
taxpayers, most of whom are middle income or lower middle 
income, subsidizing multi-millionaires. That is the question.
    So, what I wanted to ask you about was about economic 
growth, and the focus of the president's budget on deficit 
reduction, on meeting our obligations but also on economic 
growth, and the role we could play in getting the tax policy 
right and the incentives right to stimulate and to engage with 
the private sector to build private sector jobs. I do want to 
ask specifically about manufacturing and advanced 
manufacturing, and as I do, I want to say that I believe very 
strongly, I think that Mr. Van Hollen said this, that we do 
need to do the basic research, and we do need to incentivize 
that by funding NIH and some of the energy work we do. But then 
we also want to be able to produce those products here in the 
United States.
    Now, so, three points I want to make, and then I would like 
you to respond to them. I very much appreciate the fact that, I 
am representing Pennsylvania, there are communities that have 
struggled after a loss of a major plant closing, base closing. 
So I wanted you to just take a moment to talk about the 
initiative that is in the budget that would encourage 
communities hard-hit by plant closings or changes in the 
economy, if you would define that better about what kind of 
incentives would be available to bring manufacturing back, 
particularly advanced manufacturing, a very skilled workforce. 
I recently visited with Acting Secretary Rebecca Blank at a 
training facility that is run by a union, a few new unions, 
about workers, new skills that are really quite high tech, I 
have to say. So I wanted you to talk about that.
    Also, I wanted to bring up the fact that I actually have, 
it is a bipartisan bill to incentivize manufacturing of 
innovative products, those products that are made off of a 
patent. Again, we are competing internationally. We have seen 
the EU interest, and Britain just reducing the tax rate for 
advanced manufacturing for products made off of patents. I 
wondered if you would speak to the possibility of doing 
something like that in the United States so that we do not do 
all the research, create the product, have the innovation, get 
the patent, and then go make it somewhere else. And so if you 
would speak to that.
    And third, just to follow-up on the conversation about the 
corporate tax rate and small business tax rate, the fact is 
that that is a choice that businesses are making. That is their 
choice to be treated as a pass-through, to use the individual 
rates, and, truthfully, they do it because it is cheaper for 
them. That is what they do. They could decide, and some of them 
have thousands of employees, Mr. Ryan talked about the fact 
that he is concerned about those businesses that have profits 
of over a million. This is not your mom and pop cleaners on the 
corner, or a little store that has profits. This is not 
receipts. These are profits of over a million dollars, possibly 
considering themselves to be big business at this point in 
corporations. So I hope we get that right. I co-chair the 
working group on the Ways and Means Committee on small 
businesses, and we are deeply concerned about this very issue, 
about what kind of rate they receive or can make the choice 
for.
    So, long question, I apologize. But those three areas are a 
keen concern to us about how to incentivize manufacturing, make 
sure that not-such-small businesses pay the proper rate, and as 
we lower corporate rates, that you can take advantage of those, 
which they certainly can. So, Mr. Lew.
    Secretary Lew. Congresswoman, I will quickly try to answer 
all three pieces. In terms of our incentives for what we call 
the new manufacturing communities tax credit, it is really 
designed to be of assistance to communities that have been hit 
by the kinds of dislocations that you described. We have left 
open, a little bit, the design of it. It could either be 
designed like the new markets tax credit or more like the 
advanced energy credit.
    Ms. Schwartz. Which would work very well.
    Secretary Lew. And we would look forward to working with 
Congress on a bipartisan basis to getting it right in terms of 
designing it.
    Ms. Schwartz. I would be very interested, and also which 
kind of communities get hard-hit could be able to take 
advantage of this.
    Secretary Lew. On the question of corporate tax rate, you 
know, I think for any entity that chooses to go into a system 
with a top rate that is higher, they are doing it because the 
net tax burden is lower. So I think your fundamental point is 
correct. Our goal is, when we look at the business tax side, is 
answering this question of why are companies moving overseas. 
There are lower statutory rates overseas which are driving some 
companies to make the decision to relocate in other countries. 
That is not good. It is not good for headquarters jobs, it is 
not good for long-term job growth in America. So we view it as 
being part of our growth and jobs agenda to have the corporate 
business tax rate be more competitive in the world.
    Ms. Schwartz. Which is why we are all interested in 
lowering those rates.
    Chairman Ryan. Thank you. Mr. Garrett.
    Mr. Garrett. Thank you. Mr. Secretary, thank you. I want to 
talk about transparency from a practical and policy 
perspective, first of all with regard to your answers on the 
Affordable Health Care Act, since the term you are using is 
responsibility fee. Okay, I understand that. Would you support, 
then, if I dropped in a piece of legislation saying going 
forward that that is exactly what the ObamaCare or Affordable 
Health Care Act is, it is a responsibility fee. Will the 
Administration support legislation designating that since that 
is what you just said?
    Secretary Lew. I think that we have legislation, we are 
implementing legislation.
    Mr. Garrett. No, no, no. Yes or no. I am going to give you 
a bunch of yes or no questions.
    Secretary Lew. We are happy with the ACA as it stands.
    Mr. Garrett. Okay, so you will not support what you just 
gave testimony to the Committee. With regard to transparency on 
practicality policy, is it true, I just want to get through 
this one quickly, that as you come here as secretary that you 
formerly worked on in the financial sector working for a firm 
that crafted a unique provision in your contract that you would 
be paid an extra bonus for taking a federal position like you 
have now?
    Secretary Lew. That is not what my employment agreement 
said.
    Mr. Garrett. Anything close to that?
    Secretary Lew. I receive no extra compensation. I just did 
not lose my pay for the prior year.
    Mr. Garrett. So the articles in the Wall Street Journal 
saying that there is a $400,000 payment, that you were able to 
keep that payment if you got a job.
    Secretary Lew. I went through all these issues at my 
confirmation hearing.
    Mr. Garrett. I understand. But I am not a senator, I am a 
congressman. So is it yes or no? You were not able to keep that 
money because you took this Administration. I have never had 
anybody come before this Committee that ever had language in 
their contract. That is why I was just curious about that.
    Secretary Lew. I was paid for my work in the prior year.
    Mr. Garrett. Okay. Regarding transparency, then, with 
regard to the GSEs, right now there are explicit guarantees for 
the GSEs that has cost American taxpayers $183 billion to bail 
them out. Would it not be appropriate, and honest, and 
transparent if we actually put the GSEs on budget?
    Secretary Lew. You know, we have moved to put all of the 
expenses that the federal government expects to take on budget.
    Mr. Garrett. All of GSEs, their debt should all be on 
budget.
    Secretary Lew. We have put on budget the things that have 
an impact on budget.
    Mr. Garrett. Well, obviously there is a continuing impact 
of the GSEs, and we are going to continue to pay out for them 
if they go the other way, so business, the private sector, 
where it used to be, is not allowed to have these things off 
budget anymore, so should that not be the way here on the 
federal government level, too?
    Secretary Lew. Well, Congressman, we are showing on the 
federal budget the impact on the federal budget. What we are 
also doing is we are winding down the assets that are in 
conservatorship and reducing the taxpayer's exposure.
    Mr. Garrett. The answer is no, you do not to be totally 
transparent and put the entire GSE obligation on budget.
    Secretary Lew. I am describing what we have chosen to do.
    Mr. Garrett. Which is not to put it on.
    Secretary Lew. Which is put the burden that shows up on the 
federal government on the budget.
    Mr. Garrett. Reclaiming my time. With regard to FHA, they 
originally, in their projection, showed a negative cost cohorts 
from 1992 to 2011, which basically means that we were able to 
expend that money on our side. At the end of the day, the 
actual amount came out to be $18 billion on the upside, which 
means they were off by around $22 billion. In light of the fact 
that there is an automatic line of credit, does this concern 
you, and does it concern you that they are not treating the FHA 
with a fair value basis accounting?
    Secretary Lew. I think that we do treat the FHA properly. I 
think that the legislation that provided for the FHA provided a 
band within which they are functioning.
    Mr. Garrett. Right. But, obviously, they have been wrong 
with their projections from 1992 to 2011 every single year, and 
so they have been wrong in part because they did not have to 
use fair value accounting.
    Secretary Lew. I do not believe that is the reason.
    Mr. Garrett. Are you saying you have you tried to change 
that?
    Secretary Lew. I do not believe that is the reason the 
estimates have changed.
    Mr. Garrett. But they have been wrong during each one of 
those years, correct?
    Secretary Lew. The estimates have been corrected in both 
directions over the period of time you are describing.
    Mr. Garrett. Well, collectively, it is an over $40 billion 
collective figure.
    Secretary Lew. I am just saying, I do not think it is an 
issue of fair market accounting. It has to do with the levels 
of activity.
    Mr. Garrett. You think that you were going to propose to 
make it more transparent and accurate in their protections of 
their revenue?
    Secretary Lew. We have shown in this budget the impact as 
it is presently estimated.
    Mr. Garrett. With regard to the GSEs, your predecessors 
made promises for four years with regard that they were going 
to do and reform in that area; do you have any intentions in 
the short term to make any recommendations?
    Secretary Lew. We have continued to work on it. There is 
policy being discussed. I think the important thing is that as 
we are working on a longer term plan, we are winding down the 
assets.
    Mr. Garrett. Do you have a date you have coming for us?
    Secretary Lew. I cannot give you a date right now.
    Mr. Garrett. With regard over the counterswap markets, we 
understand there are two plans going out with the SEC and the 
CFDC; do you believe that is an appropriate arbitrate that is 
going on between these two, and will you take any role to make 
sure that they act jointly in their manner going forward on 
this?
    Secretary Lew. Well, through the FSOC, there is a 
discussion that goes on at in a lot of these.
    Mr. Garrett. More than discussion, will you actually action 
like you have with the money market fund?
    Secretary Lew. As chair of FSOC, I will use the authority 
that I have. I do not take the place of the regulatory 
agencies.
    Mr. Garrett. You do in other areas.
    Secretary Lew. It is not a broad power to tell them what to 
do, but we are working closely on the important issues of 
implementing Dodd-Frank.
    Chairman Ryan. Thank you. Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman, and Secretary Lew, 
nice to see you here today. I want to get to the issue of tax 
fairness on the individual, and I agree with my Republican 
colleagues. A lot of times when I resist the notion to talk 
about fairness because that is always going to be in the eyes 
of the beholder, and what somebody at moderate or lower income 
considers fair is going to be a lot different than what 
somebody at a higher income level would think. And you use the 
word of the wealthier Americans can afford a certain tax 
payment. I kind of resist that word as well because just the 
ability to afford it is not a rationalization for any tax rate, 
lower or higher. I am interested, though, in the concept of 
what has happened with income growth in the country over the 
last few years because this seems to me to be the justification 
to asking wealthier Americans to pay more, because it is not 
just because they are wealthier, it is just that they are 
making more and more of the national income. Could you give us 
a little bit of data on what has happened with the upper 1 
percent of income growth as opposed to everybody else?
    Secretary Lew. Congressman, I think that is exactly the 
point. We have seen income growth at the high end eclipsing 
income growth in the middle and the bottom. You can only tax 
income where it falls, so if you end up with very disparate 
distribution of income, the tax system ought to reflect that. 
And I do not think it is a question of saying it is because 
they can afford it. Obviously, that is part of it. You do not 
want anyone to be bearing a burden they cannot afford. But it 
is also where the income is, and if we want to do anything to 
correct the distribution of income in this country, our tax 
laws have to be part of that. I think we made big progress at 
the beginning of this year in raising the top rate to 39.6. I 
think that was an enormous step. It was the biggest step in a 
long time in terms of dealing with some of that inequity. I do 
not think you can do it expressly through the tax code. We have 
to look at growing the economy and creating good, high-paying 
jobs, and there needs to be a really strong engine of middle 
class job creation in this country. And that is what our budget 
is really aimed at doing.
    Mr. Yarmuth. That is a perfect segue into my next question, 
because a lot of people are concerned about what a federal 
budget, whomever it comes from, does to promote job growth, and 
you have incorporated many of the provisions of the American 
Jobs Act in the budget, and I am very happy about that. The 
Republican budget seems to rely solely on the dynamic of 
cutting taxes as a way to create more jobs. There is nothing 
else in there that I can find that has any kind of job creation 
effect. So judging from the fact when we cut taxes in 2001 and 
2003, those tax cuts did not result in robust job growth, as 
far as I can remember. And so is there any reason to believe 
that the economy has changed in such a way over the last 10 
years that the dynamic would change and significant tax cuts at 
this point would result in job growth?
    Secretary Lew. Congressman, I think we have seen there are 
some tax policies that actually stimulate economic growth. The 
payroll tax cut was a very effective way for a short period of 
time because it put money in the pockets of people who spend 
most of their paycheck. Tax cuts at the high end do not seem to 
stimulate the economy very much because a lot of the benefit of 
the tax cut is going into savings. And if you are trying to 
stimulate demand, it is getting money into the hands of people 
who are spending their paycheck. So I think it depends on the 
nature of what the tax policy is.
    I think if you look at this budget one of the important 
things it does is it backs out the sequester. The sequester was 
not designed to be good policy, it was designed to be bad 
policy, and that turns out to be something you can accomplish. 
If you set out to design bad policy, you can deliver bad 
policy. The reason it was meant to be bad policy was to create 
an incentive for Congress to act and reach a bipartisan 
agreement on good policy. The sequester will be a drag on the 
economy. It will cost us a half a percent of GDP if it stays in 
place. Now, at a time when we are struggling to get in to the 
mid 2s in terms of GDP growth, if we could have another half a 
percent of GDP, that is hundreds of thousands of jobs. Now, I 
think that is an important enough reason to come together in 
the sensible center. If you look at the specifics, our budget 
promotes not just pieces of the Jobs Act, but it has short-term 
spending increases of infrastructure to jumpstart building, 
what every CEO I meet with tells me we need to compete in the 
future, which is the roads, the bridges, the seaports, and the 
airports to compete in the 21st century.
    And I do not think education can be left out. Education is 
both the opportunity for the future, and it is real short-term 
employment. This is the first recovery that I have ever seen 
where state and local hiring is a headwind the way it is in 
this recovery, and the more we can put people back to work 
teaching, the better we are going to be in the future and the 
short term.
    Chairman Ryan. Thank you. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary. The vast majority of people who smoke in America are 
low and moderate income people. So the cigarette tax increase 
in the president's budget will, generally, largely hit low and 
moderate income people with a tax increase that is in the 
president's budget of somewhere between $6.5 billion a year to 
$10 billion a year, depending on the year. That is just fact, 
but that is actually not what I want to focus on. What in the 
budget you did was the cigarette tax increased funds and a new 
entitlement program. This was done in California, my home 
state, some time ago, and guess what? You said that you expect 
the cigarette tax revenues to decline because you hope it will 
discourage people from smoking. Your budget numbers do not 
quite reflect that, but let's presume that is the case. That 
has been the case in California. Then what you have is you now 
have an entitlement created that runs out of money. In fact, we 
have that situation in California, where this entitlement will 
completely run out of money by 2016. Even in your budget, in 
the president's budget, it shows that this new entitlement, at 
the end of the 10-year budget window, has a deficit of $5 
billion, and over time, the entitlement will increase while the 
revenue source will decrease. Is this not exactly what got us 
into the deficit problem we are in, and you are just 
replicating it with a new program?
    Secretary Lew. Congressman, I think the budget projection 
shows what we expect the revenue will be. I was, earlier in the 
hearing, expressing my hope that we would see a decline in 
smoking. It is not what is reflected in the numbers or the 
analysis.
    Mr. Campbell. But then the deficit would be even worse.
    Secretary Lew. If I could just respond to your question. If 
we get the revenue, then we pay for the program, and that is 
within the budget estimate. I have to look at what the last 
year issue that you are describing is. I was not working on the 
year-to-year numbers as treasury secretary of the spending 
side. The benefit of reduced smoking, if it were to occur, 
would reduce spending dramatically. I mean, if you look at what 
is driving health care costs in this country, it is things like 
smoking and obesity. So either way, we are going to cover the 
cost. We are either going to cover it with a revenue, or there 
will be savings because of better health care outcomes.
    Mr. Campbell. But not in this new entitlement that has been 
created, because you show a deficit in the entitlement, so you 
have an entitlement that will not have a funding source.
    Secretary Lew. We have proposed a funding source to cover 
it through this period. What happens after the period, I have 
to look at.
    Mr. Campbell. And I know you have not been able to look at 
every line item, but it actually does not. By your own numbers, 
it runs a deficit through most of the 10-year window. Let me 
ask you about another thing in the budget. The funding for the 
International Monetary Fund, the IMF, I believe you have $63 
billion in there, which, on the margin, everything we spend 
will be borrowed, so that $63 billion which we will borrow in 
order to increase funding to the International Monetary Fund. 
And you also propose to make it a mandatory program, basically 
an entitlement. So given the domestic programs under pressure 
currently, given the deficit that we have, do you, does the 
president believe that borrowing $63 billion to further fund 
the IMF is a good use of resource?
    Secretary Lew. To be clear the proposal that we are making 
on the IMF is to swap what we have contributed to the new 
agreement to borrow into the IMF. It is really a shifting.
    Mr. Campbell. But we could get that money back.
    Secretary Lew. We have made the commitment. We have made 
that commitment already. We are proposing just moving it to a 
different place because it has better effect there.
    Mr. Campbell. It is kind of almost in an escrow account 
now. This will actually be moving it to the IMF is what you 
propose, but, so, you believe that that is something we should 
and should spend money on, even given that the amount of it, 
$63 billion, is almost the amount of the sequester.
    Secretary Lew. Yeah, I think when you look at the IMF, it 
is complicated because we had assets that back up what we put 
in the IMF, so in terms of what the actual exposure is, it is 
not quite the same as direct spending. But I think the 
important thing about IMF is the policy. The policy is that we 
have a veto in the IMF, we have a controlling voice when we 
need to, we have leverage so the United States can influence 
the economic decisions around the world, and it is something 
that our international leadership depends on.
    Mr. Campbell. In my last 25 seconds, I believe you want to 
also make it a mandatory program, effectively making 
contributions to the IMF an entitlement, to use another word. 
Why do you want that?
    Secretary Lew. I am sorry, could you repeat that?
    Mr. Campbell. You make it a mandatory program, the IMF, 
contributions to the IMF; why?
    Secretary Lew. I mean, it actually could be done either 
way. It is an existing funding stream, we are proposing moving 
it, and we would be open to working with the Congress on doing 
it in the most expeditious way. And I would just point out, I 
think that one of the reasons we are talking about different 
numbers on the tobacco tax covering the program is that you are 
looking at budget authority and we are looking at outlays, but 
I would be happy to follow up.
    Chairman Ryan. Thank you. Mr. Pascrell.
    Mr. Pascrell. We have heard, Mr. Chairman, plenty of 
rhetoric about how the budget House Democrats propose never 
balances. And good morning, Secretary, great to see you.
    Secretary Lew. Good morning.
    Mr. Pascrell. When was the last time we had a balanced 
budget in this country, Mr. Lew?
    Secretary Lew. It was in 2001.
    Mr. Pascrell. And what were you doing?
    Secretary Lew. I was the director of the Office Management 
of Budget.
    Mr. Pascrell. How many times after World War II, where we 
ran up a massive war time deficit, but before the Clinton 
administration; before the Clinton administration, did the 
budget balance?
    Secretary Lew. There were years when there was balance, but 
there was no other period when there were three consecutive 
years of balance or surplus.
    Mr. Pascrell. How did we end up reducing our public debt 
throughout that time period without technically balancing the 
budget the entire time? How did we do that? Is that magic? Is 
that finagling the numbers?
    Secretary Lew. The truth is our economy was growing faster 
than were deficits, and as long as the economy is growing 
faster, you are making progress, and we were able to, through 
growth in the interwar period, very much reduce, almost 
eliminate, the deficits that were built up to pay for World War 
II.
    Mr. Pascrell. Before I ask my next question on that, then 
we go back to 2008, we had a choice, 2009, when we had no 
growth, to continue and sustain what we were doing, and that 
was nothing the federal government, and trying to improve the 
job market and the economy, and I listen to folks on the other 
side who tell me, ``Well we had this great deficit in 2009, 
2010, and debt,'' and they are absolutely right. But are they 
suggesting, Secretary Lew, that we should have done nothing, 
had no February supplemental 2009? Is that what they are 
suggesting? What would have happened if that happened?
    Secretary Lew. Congressman, I cannot speak to what others 
are suggesting. I can tell you that when I left office in 
January of 2001, we projected a surplus of $5.6 trillion for 
the next 10 years. When President Obama took office, it was the 
exact opposite. So before he began, the surplus had been turned 
in to a deficit.
    Mr. Pascrell. Was our budget, Mr. Secretary, in primary 
balance in those years I was just talking about before? With 
the economy growing faster than the annual budget deficits, is 
that what you are saying?
    Secretary Lew. That is the definition of primary balance or 
surplus.
    Mr. Pascrell. Now does the budget the president propose, 
which you are advocating, your running point on this, does that 
get the primary balance?
    Secretary Lew. It does.
    Mr. Pascrell. Tell us how we do that.
    Secretary Lew. Well, we reduce the deficit as a percentage 
of GDP in the end of the 10-year window to less than 2 percent, 
and somewhere just around 3 percent, you go in to primary 
balance. It depends on what interest rates are year to year, 
what the exact number is. But for the second half of the budget 
window, we are in primary balance and surplus, in terms of 
primary balance calculations.
    Mr. Pascrell. I think it is important, that question needs 
to be asked over and over again, and your response needs to be 
remembered. I am pleased that this budget also includes an 
exemption to annual state volume cap on tax exempt qualified 
private activity bonds; for the furnishing of water, for the 
furnishing of our sewer system which needs billions and 
billions of dollars in order to keep up with the time. In fact, 
if you add up the needs of the infrastructure, whether it be 
the sewage, whether it be the drinking water, whether it be the 
waste water, it adds up to $1,200,000,000,000. So you started a 
down payment on this, and recommending what you recommended. 
And by the way, for every billion dollars that is invested into 
the very things I am talking about, we create about 150,000 
jobs. Does that grow the economy?
    Secretary Lew. When we are investing in businesses and 
growing jobs, we are growing the economy.
    Mr. Pascrell. So when you talk about growing the economy, 
you do not necessarily have to be talking about cutting taxes.
    Secretary Lew. Cutting taxes do not directly grow the 
economy. It is business activity that grows the economy. It is 
creating jobs that grows the economy. It is creating demand 
that grows the economy.
    Mr. Pascrell. Was there very much business activity in 
2008?
    Secretary Lew. Our economy was sliding, and with no obvious 
endpoint in 2008. If we had not stepped in strongly in 2009, 
both to deal with the financial crisis and the economic crisis, 
there was no telling where things would go. And you look at the 
experience we have had versus others who went right into 
austerity, we are growing, and they are not.
    Mr. Pascrell. And there is no doubt, Mr. Secretary, that if 
we did not have that money voted upon in February 2009, we 
would have been in a worse place.
    Chairman Ryan. Thank you. Mr. McClintock.
    Mr. Clintock. Thank you, Mr. Chairman. Mr. Secretary, I am 
a big fan of your work with the Clinton administration, I will 
get to that in just a moment. But first, I have to take strong 
exception with your testimony that a provision to support the 
public credit by assuring the first call on revenues goes to 
support the public credit is somehow unworkable or cannot 
amount to defaulting on our other obligations. The fact is most 
other states have provisions in their constitutions to do so, 
and have for hundreds of years. Last year, Fed Chairman Ben 
Bernanke told the Senate that he credited the relative 
stability and municipal markets, quote, he says, ``which 
suggests that investors still are reasonably confident that 
there will not be any default among major borrowers. One reason 
they might believe that is because most states have rules which 
put debt repayment and interest payment at a very high priority 
above many other obligations of the state and locality,'' end 
quote. Mr. Bernanke sat right you are sitting now and told this 
very Committee, quote, ``My concern is about defaulting on the 
debt, and for me that is a very high priority so a debt 
prioritization bill would help on that count very much.''
    Now, since Mr. Bernanke is the president's appointee, I 
have got to believe that internally the administration is of 
two minds on this subject, and I would urge you to listen to 
your Fed chairman and look to centuries of experience of other 
states. No state has ever used such a provision to protect 
their credit as an excuse not to pay for their other bills. On 
the contrary, these provisions protect their credit, and 
actually support and maintain their ability to pay all of their 
obligations in the event of a shortfall. Protecting the public 
credit supports all of the other obligations of the government, 
and it is a necessary provision in a government like ours that 
is now borrowing nearly 40 cents of every dollar it spends. Put 
it very simply, when you are depending on your credit cards to 
pay your bills, you better make the minimum payment first, and 
I urge you to reconsider your position on that.
    But now to the happier discussion of the success of the 
Clinton administration under your management. Is it correct 
that President Clinton decreased federal spending by nearly 4 
percent GDP during his eight years in office?
    Secretary Lew. There was a big cut in spending while he was 
in office; there was also a lot of economic growth and more 
revenue.
    Mr. Clintock. Is it correct that President Bush increased 
federal spending by 2 percent of GDP during his eight years 
that followed?
    Secretary Lew. I would have to go back and check the 
numbers, Congressman.
    Mr. Clintock. I believe it is, and I believe you might also 
find that it is correct that President Obama has increased 
federal spending by another 2 percent of GDP just in the last 
five years. Is it correct that President Clinton dramatically 
decreased entitlement spending by signing the Welfare Reform 
Act?
    Secretary Lew. He did sign Welfare Reform, yes.
    Mr. Clintock. Is it correct that President Bush 
dramatically increased entitlement spending with his Medicare 
Part D?
    Secretary Lew. I cannot disagree with that.
    Mr. Clintock. In fact, the biggest expansion of entitlement 
spending up until that point since the Great Society, as I 
recall.
    Secretary Lew. It was a program I thought at the time 
should have been paid for.
    Mr. Clintock. And is it correct that President Obama has 
dramatically increased entitlement spending even more with his 
so-called Affordable Care Act?
    Secretary Lew. Yeah. The Affordable Care Act net saved the 
bottom line, so I think it is actually very distinguishable 
from the prescription drug benefit.
    Mr. Clintock. Do you not agree that it is a massive 
expansion of entitlement spending?
    Secretary Lew. So, Congressman, I would be happy to address 
the issues you raised.
    Mr. Clintock. The issue I have raised is very simple. Why 
can the president's budget not be more like President Clinton's 
and a lot less like President Bush's?
    Secretary Lew. The reality of demographics, and the 
difference in where we were in the 1990s and where we are 
today, is that my generation, the baby boom, is starting to 
retire. We have tens of millions of people coming onto Social 
Security and Medicare, and that is what is driving those 
percentages of spending. So I think we have a fundamental 
question: Are we going to keep faith with that generation?
    Mr. Clintock. Now the biggest single expenditure in the 
history of the United States was the so-called Stimulus Bill at 
the outset of this Administration that cost almost as much as 
the entire Iraq war from start to finish. So, you know, do not 
give me, ``Well this beyond our control;'' it was entirely 
within your control. It was within President Clinton's control, 
and, again, my only problem with President Obama and his budget 
is not that he has changed George Bush's policies. The problem 
is he has taken the worst of them and doubled down on them.
    Secretary Lew. Congressman, we have agreed in 2011 to over 
a trillion dollars of savings on discretionary spending. It is 
much larger than the reductions in discretionary spending made 
in the Clinton years. We have had major savings in the 
Affordable Care Act that added to the life of Medicare trust 
fund. We are proposing in this budget considerable new savings 
including fundamental structural reforms in entitlement 
programs. So I do not disagree that we need to have more 
savings, but we also need revenue to get to the goal.
    Chairman Ryan. Ms. Castor.
    Ms. Castor. Good morning, Secretary Lew. Thank you for 
being here to discuss the president's budget. It is a balanced 
plan. It reduces the deficit by $1.8 trillion over the next 
decade. And I would like to commend the Administration and you 
for including an element that boost jobs and economic growth 
that is starkly missing from the Republican budget plan. But I 
would mostly like to thank the Administration for standing with 
American families, especially our older neighbors, our parents, 
and our grandparents because President Obama keeps the promise 
of Medicare, unlike the Republican plan. The Republican plan, 
again, proposes to turn Medicare into a voucher. It does not 
decrease costs. Over time, it simply shifts the costs to our 
older neighbors, and our parents and grandparents. It is not 
consistent with American values. And at the time when, as you 
noted, we have this new demographic crisis with the retirement 
of this big baby boom population, you keep the promise, and you 
achieve savings in Medicare through very important reforms. So 
thank you for that.
    The other stark contrast is in long-term care for our older 
neighbors. I mean, it has not gotten a lot of attention because 
people know and understand Medicare a lot more, but the 
horrendous cuts that the Republican budget makes to the ability 
of our parents and grandparents to live their retirement years 
in dignity really is scandalous, in my view. What Medicaid is, 
is it allows people to stay in their homes and not enter 
skilled nursing, but then, at the end of their life, or with a 
severe diagnosis, they are able to have dignity, and get the 
skilled nursing and long-term care that they need. In contrast, 
the president stands with families to ensure that that lifeline 
will continue to exist. I want to commend the Administration 
again for standing with families all across this country.
    But I wanted to direct your attention to another important 
issue. It has been a scourge on the state of Florida and my 
community, and because you are here, this is a good opportunity 
for me to raise it directly with you, and that is the problem 
with tax refund fraud tied to identity theft. Something that 
all of us can agree on is preventing criminals from stealing 
billions of taxpayers' dollars through fraudulent tax returns. 
There are many bipartisan efforts underway. I have a bill with 
my Republican colleague, Rich Nugent from Florida, that 
addresses the issue, but it really comes down to your oversight 
and the IRS stopping these fraudulent refunds from being 
issued. Tax refund fraud tied to identity theft is an epidemic. 
If it has not happened in your district yet, you just wait. It 
is spreading across the country, and it must be stopped.
    The treasury inspector general, Mr. Secretary, for tax 
administration estimates that the IRS could issue $21 billion 
in fraudulent refunds tied to identity theft over the next five 
years, and the taxpayer advocate reported in January that 
identity theft case receipts increased by more than 650 percent 
from fiscal year '08 to '12, and at the of '12, the IRS had 
almost 650,000 identity theft cases in its inventory. What is 
happening is organized criminals are stealing the Social 
Security numbers of children, seniors, even the deceased. They 
are filing tax returns using stolen taxpayer names and Social 
Security numbers, and when the real taxpayer files for a 
refund, or claims their refund, that return is rejected, and 
their life is severely impacted for years. And the problem is, 
for those of you that have dealt with these complaints, is they 
face a labyrinth of procedures, drawn-out timeframes for 
resolution. It is an epidemic in Florida, Georgia, New York, 
California, Texas, Ohio, but, Mr. Secretary, this is spreading, 
and what are you doing to urge the IRS to get in front of this 
problem so we do not have this huge hole in the Treasury? Thank 
you.
    Secretary Lew. Congresswoman, I am not sure I have time to 
respond. I would be happy to if I did. The IRS is getting very 
much ahead of it and trying to deal with the problem as we know 
it today. Made a good deal of progress. The problem is that the 
hackers just keep figuring out new ways to get in. So this is 
not a problem we can solve once and consider it over. We have 
to be vigilant on an ongoing basis in order to make sure we are 
doing what I think we all agree is right to protect our tax 
payers, our Social Security recipients from that kind of attack 
and fraud.
    Chairman Ryan. Thank you. Mr. Lankford.
    Mr. Lankford. Thank you, Mr. Secretary, for being here. Can 
you define for me a term that you used earlier, that is primary 
balance? You say in the second half of the president's budget 
they reach primary balance.
    Secretary Lew. Yeah, Congressman, primary balance is a term 
that economists use to describe when the only deficit that we 
have is the debt service for previously accumulated debt.
    Mr. Lankford. What is our interest payment right now?
    Secretary Lew. I would have to look up the exact number, 
Congressman.
    Mr. Lankford. It is around $224 billion a year, is my 
understanding. Do you remember what the interest payment is 
anticipated at the end of the 10-year window?
    Secretary Lew. Yeah, it is several hundred billion higher 
than that. It grows because we have a very large debt, and 
because interest rates are going to go up over that period.
    Mr. Lankford. If it is consistent with CBO's estimation, by 
the end of this 10-year window, it is $857 billion a year in 
interest payments. So I am a little confused by your statement 
to say we get to balance all but about that last trillion 
dollars. That last trillion dollars we still have not balanced, 
but we call it balance except for $857 billion of that. Does 
that seem consistent?
    Secretary Lew. In that last year, the deficit is less than 
2 percent of GDP, and that means that with the economy growing 
faster than that, debt, as a percentage of GDP, is coming down.
    Mr. Lankford. I do, I understand, because we see that in 
our budget where we actually get to actual balance where we are 
paying out what we are bring in, and an actual balance because 
of the growth as well. I have seen some of the growth 
estimations on it. I do want to ask you a little bit about, the 
president's budget has quite a bit about oil, and gas, and coal 
taxation. Why were those three specific industries picked out 
to say normal business expensing will be taken away from those 
three?
    Secretary Lew. Well, that is not actually what the budget 
says, that normal business expensing will be taken away. It is 
the exact opposite.
    Mr. Lankford. So wages, fuel, vehicles, all that; that is 
normal business expensing.
    Secretary Lew. We would apply normal business expensing. We 
would not give the extraordinary treatment that the extracted 
industries have gotten in the past.
    Mr. Lankford. So like the 199 that every domestic 
manufacturing gets? They should get that as well?
    Secretary Lew. I would have to look at the specific 
provisions.
    Mr. Lankford. Well, I would say, the 199 manufacturing tax 
credit, right now, every domestic manufacturer of anything gets 
this 199 tax credit right now. So that should be left in 
because that is a normal business tax?
    Secretary Lew. What drives the policy that is in our budget 
on oil and gas is that for, really, the better part of 100 
years, we have had very generous tax treatment for oil and gas. 
It helped build the oil and gas industry in this country. That 
is an industry that is very competitive and no longer needs the 
special depletion and other rules that go to it. It should be 
treated at a level playing field with other kinds of 
businesses.
    Mr. Lankford. So current businesses now should not have 
normal business expensing because 30 years ago, 40 years ago, 
businesses were successful. This business is successful. What I 
am trying to figure out is the philosophy, I guess, behind it.
    Secretary Lew. Well, the philosophy, I can tell you, is 
clear. It is that they should be treated more like normal 
businesses, not in an extraordinary way they have been treated.
    Mr. Lankford. Okay.
    Secretary Lew. And if there are specific issues to work 
through there, we would look forward to working through those.
    Mr. Lankford. The budget, the Greenbook actually coming out 
of Treasury, actually uses the term ``neutral.'' They want to 
have neutral investment into oil and gas and coal on that. Or, 
actually, they use just the term neutral investment in energy. 
But it is interesting, there is about $40 billion normal 
business expenses taken away from oil and gas and coal, and in 
just in one line item, there is about $20 billion that is added 
to a lot of other areas. Is that neutral to take away from one 
and give to another, because at one point it refers to it being 
neutral energy policy, want to just make all our tax treatment 
neutral, and the other areas, it gives significant to clean 
energies, which, by the way, I have no problem with. As far as 
having clean are in our American portfolio, that is a good 
thing.
    Secretary Lew. We have made clear in our budget that our 
goal is to encourage investment in renewable and clean energy, 
and, in a sense, give them the benefit that the extractive 
technologies got when they were young industries.
    Mr. Lankford. Is it the anticipation that in the next 10 to 
15 years, that all of the renewables will be able to catch up 
and surpass what is currently done with oil and gas and coal? 
Do you have a guess on how long the time would be?
    Secretary Lew. I do not have an estimate.
    Mr. Lankford. See the problem I have is, I have no problem 
with wind and hydro-electric and all that, solar. I have no 
problem with those. But the assumption that we are going to 
take away normal business expensing from oil and gas and coal, 
and which will slow down the production and which will increase 
price, it is the same as the cigarette tax. The cigarette tax 
we have currently, in the budget it actually says, we want to 
decrease usage of cigarettes by increasing the price. So we are 
going to get revenue and also get this outcome. It seems to be 
the same with oil and gas and coal. We are going to decrease 
usage of that by increasing the price at the pump, for home-
heating oil, for electricity. We will increase the price of 
those, and try to then supplement off onto other areas, which 
every economy that I have seen that deals with energy economy, 
says those technologies are not there probably not for 30 years 
or more to even get close to catching up. It is about 9 percent 
of our portfolio now. We are trying supplement the other 91 
percent.
    Secretary Lew. Congressman, I actually do not think that is 
how our proposals on the oil and gas industries would work, but 
I would be happy to follow up with you.
    Chairman Ryan. Thank you. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. Welcome, Secretary 
Lew. I have sat here and listened to this debate about debt, 
and cutting and cutting and cutting, and then I thought about 
what the president proposed, which is really a vision for the 
future of investment. And I was thinking to myself, you have 
big shoes to fill. I mean, I can imagine Albert Gallatin coming 
in here and explaining why they bought the Louisiana Purchase. 
Why did they make an investment in a bunch of land way out 
there with nothing on it that anybody could see? And we would 
have said, in this climate, ``Oh, we should not spend the 
money. We should not invest,'' I am sure. And the same with 
Secretary Seward who bought that famous icebox; we call it 
Alaska. We would have never invested in that because, ``Well, 
why are we wasting our money? We have got a civil war going on. 
And why should we be out there spending and investing on 
something like Alaska?''
    And what I would like you to talk about is we have watched 
Europe deal with the same economic situation we are dealing 
with, and they have had such magnificent success with their 
austerity measures. I think the unemployment rate in Spain is 
now 22 percent, and something similar in Italy, and yet we have 
continued to invest despite the resistance of the Republicans. 
We have continued to invest, and we are moving forward. I would 
like you to contrast what is going on in Europe with what is 
going on here because I think the lesson is clear.
    Secretary Lew. Congressman, when I was in Europe last week, 
I tried to emphasize both what we have in common and where we 
have taken a different path. What we have in common is that we 
all need to deal with the realities of middle and long-term 
fiscal realities where we have got to reduce deficits and get 
our fiscal house in order. But we have to do it in a way that 
is balanced so that we can also get the growth and the job 
creation that will enable us to have the kinds of healthy 
economies that will make it possible to achieve those goals. I 
think if you do your cutting upfront, what you are doing is 
actually slowing down your ability to rebound, grow, and get 
the kind of fiscal correction that we need here and they need 
there.
    So it is a question of timing and balance, not a question 
of are we acknowledging the need for both. The president's 
budget is very clear. He accomplishes more than $4 trillion of 
deficit reduction in this 10-year window. But he does it in a 
way where we grow the economy and we create jobs while we are 
doing it. I do not believe you can cut your way out of these 
problems alone. If we do not educate the next generation to 
have the jobs we need, there will be millions of jobs that go 
unfilled, or those jobs will go elsewhere. We have to have the 
best-trained workforce in order to grow. And I think that same 
argument can be made on infrastructure and many other areas. 
Now we cannot do it without regard to the fiscal reality. We 
need to be on a path where five years from now, 10 years from 
now, we are steadily reducing the deficit, and the debt is a 
percentage of GDP. And the president's budget does both.
    Mr. McDermott. As the jobs increase, and more people are 
being paid and, therefore, are paying taxes, that helps the 
itself by making the GDP increase.
    Secretary Lew. Absolutely. We balanced the budget in the 
1990s because we encouraged the kind of confidence in the 
economy that kept the economy growing and jobs being created.
    Mr. McDermott. Can you give me any reason why the sequester 
cuts to the National Institutes of Health would be good for the 
economy? And do you see any way the Republicans can justify 
those cuts to the National Institutes of Health?
    Secretary Lew. No, Congressman, I cannot. I mean, for 30 
years I have worked on issues related to the funding to the 
National Institutes of Health, and there has always been a 
broad bipartisan agreement that it was the right thing to do to 
grow our economy, to have the intellectual power to compete in 
the future, and to solve the mysteries that are associated with 
the worst diseases we have in this country. I cannot imagine 
that there would be any willingness to affirmatively enact the 
kinds of cuts that the sequester would impose on NIH.
    Mr. McDermott. My mind or my memory is not perfect, but it 
seems to me during the Bush administration we made a major 
increase in our investment in the National Institues of Health.
    Secretary Lew. We did.
    Mr. McDermott. I hear one of my colleagues sort of saying 
that the Bush era was a terrible one because all these things 
went up, and the debt went up, and all the rest. But is it not 
true that we made a major investment under Bush in the National 
Institutes?
    Secretary Lew. There was a major investment in the Clinton 
administration, there was a major investment in the Bush 
administration, and there has been a major investment in the 
Obama administration. It has been something that there has been 
bipartisan agreement on. I would note that the head of NIH in 
the Bush administration, Dr. Zerhouni, has been very critical 
of the impact of the cuts on sequester, both in terms of 
medical research and in terms of future economic growth.
    Chairman Ryan. Thank you. Ms. Black.
    Mrs. Black. Thank you, Mr. Chairman, and thank you for 
being here, Mr. Lew. I want to go back to questioning from the 
gentleman from Georgia related to the limit on individual tax 
advantage retirements. Mr. Lew, this cap would apply equally to 
men and woman, is that correct?
    Secretary Lew. It is neutral with regard to gender.
    Mrs. Black. So do you think that woman need less retirement 
income than men do?
    Secretary Lew. No, I do not think that this is a revision 
that say men or women need more or less. This is a provision 
that says that the tax benefit should only be available up to a 
certain amount, and the amount is $3 million.
    Mrs. Black. Okay, so in that case, then, I am at a loss on 
this policy because your limit is based on a gender-neutral 
contribution, and women do live longer than men, and so 
annuities are more expensive. And this means any cap on a tax 
advantage retirement plan that is set equally for both males 
and females, a female will necessarily be unable to really 
actually purchase the same level of annuity that a male would 
be able to. So did the president take this into consideration 
before putting this policy forward on how it would affect woman 
disproportionately?
    Secretary Lew. Congresswoman, the vast majority of 
Americans have retirement savings that are under $100,000. The 
average is more like $50,000. So we are talking about very, 
very few people. If you would like to work together on ways to 
make sure it is adjusted by life expectancy, we could look at 
things like that. But this was really a way of saying that in a 
world of tough choices, to have tax incentives for very, very 
large retirement savings is something we could not afford.
    Mrs. Black. Well, let me just say this. I believe, after 
being in the public sector for a number of years, that carrots 
are always better than sticks, and I want to put a carrot out 
there to encourage people to do all they can on their own to be 
able to save and have as much as they can for their retirement 
as they would like to have, and I do not know if this policy 
really does that.
    Secretary Lew. If I could say on that, we think that one 
way to put that carrot out there would be to have auto IRAs 
where people are automatically signed up and opt out so that 
more people end up getting into the practice of saving for 
their retirement. The more Americans that save for their 
retirement, the better off we will be.
    Mrs. Black. I do not discount the fact that we need to do 
everything we can with a carrot to get people to save. I do not 
believe the government should get involved with sticks. So let 
me go back to, in your opening remarks, I found it very 
interesting that you did talk about since the president came 
into office that the economy now is stronger, unemployment is 
lower. But you said something, and I did not get all of it 
down. I did write down your reference to political gridlock 
stopping the economy from moving forward. Am I correct in what 
I heard you say, that it was political gridlock that you 
attributed to the lack of full recovery?
    Secretary Lew. I was referring to political gridlock being 
something that is a drag on the economy. We cannot say there is 
only one thing. If you look back to 2011, political gridlock 
was not a good thing for the economy.
    Mrs. Black. So let me to go to what I hear from my 
constituents, in particular the job creators in my district. I 
ask them all, ``What keeps you up at night?'' And this is what 
they tell me. They tell me one thing that keeps them up are the 
massive deficits which create the crushing debt that they do 
not know what is going to happen to them next with a new tax. 
Secondly, the mandates that are put upon them. In particular, 
right now, their hair is on fire. We are trying to decide, 
since we do not even have the regulations out there about what 
they are going to do with keeping health insurance for their 
employees. And third are all the new regulations that hit them. 
I hear it many times from the banking industry with the Dodd-
Frank. But I hear it continually from my industries that it is 
the EPA and the new regulations that come out that are not 
always cost benefit analysis done, or scientific information to 
say that they are really necessary. And so this is what I hear, 
this is what I hear continually, constantly from my 19 
different counties, and that is really what gets the economy 
growing is jobs.
    And then my final question, and I have very little time 
here for you to answer this, but you made another comment that 
just really bothered me, that what we have to do is correct the 
distribution of income. Is this really what the 
Administration's policy is, is that the policy of government to 
correct the distribution of income in a policy?
    Secretary Lew. So, Congresswoman, that is quite of number 
of issues that I can very quickly try to run through. On the 
regulatory side, this Administration has had a stronger record 
on cost benefit analysis than any recent administration; 
stronger than the Clinton administration, stronger than the 
Bush administration. And in areas like EPA, we have done things 
like the Clean Car Rules where it has been trailblazing in 
terms of the kind of agreement where business and environmental 
interests come together for better economic outcome.
    On the questions on the new laws, we are working to 
implement them as quickly as possible. You know, it was a 
little challenging in the early years because Congress was 
resisting appropriating money, and it was a challenge to keep 
up with it, but we are getting there, and we will implement 
both the Affordable Care Act and Dodd-Frank on schedule.
    In terms of the income distribution question, what I meant 
to be saying and what I believe is that we have a problem in 
this country that we have had disparity of income growing, and 
it is just something that has to inform how we make our 
policies, and I do believe the tax code should be a force for 
correction in that.
    Mrs. Black. We are out of time, Mr. Chairman, I realize 
that, but I would like in writing a little more explanation on 
income distribution because I do not believe that is the 
government's responsibility. Upward mobility for everyone is 
what we should be doing. Thank you.
    Secretary Lew. I agree with that, but I am happy to respond 
in writing.
    Chairman Ryan. The gentleman will respond to the gentlelady 
in writing. Ms. Lee.
    Ms. Lee. Thank you very much, and good to see you. And 
congratulations, Secretary.
    Secretary Lew. Thank you.
    Ms. Lee. And thank you and everyone at Treasury on behalf 
of the American for the work that you do each and every day.
    Secretary Lew. Thank you.
    Ms. Lee. Of course, the president clearly sees the link 
between the morally correct thing to do and the economically 
smart thing to do. After all, the budget is a reflection of our 
nation's values. He prioritizes job creation before blindly 
making these broad cuts to programs that millions of Americans 
rely on for economic security. Vital nutritional programs are 
protected in this budget, investments in mental health, and 
crime prevention, and also effective treatment of HIV and AIDS. 
Also, I am glad to see these very innovative strategies as it 
relates to, for instance, the Promise Neighborhood, commitment 
to education, as well as universal preschool for every child in 
America which is a huge factor in reducing poverty throughout 
our country. Also, the budget extends the very important 
expansion of the child tax credit, the earned income tax 
credit. I could go on and on, but I just have to say, in stark 
contrast to the Republican budget where their $6 trillion tax 
cuts for the wealthiest of Americans, and 66 percent of the 
Republican budget, they cut our nation's safety net, yet we 
have 50 million people living in poverty. And so I just want to 
thank you and the president for that because much of our 
discussion here since I have been on this Committee has been, 
how do we look the strategies to lift the 50 million people who 
are living in poverty now out, and put on a pathway out of 
poverty. So thank you for this.
    I want to ask you one thing, a couple questions. When 
nearly 50 million people are living in poverty, and they are 
cut off from the economic security of our country, how does 
that impact our overall economic security of the country? 
Secondly, one of the parts of the budget that is very troubling 
to me, personally, and others is chained CPI. You came up, I 
think, with the protections that are put in place to shield the 
very elderly and the most vulnerable from this, but yet, if it 
is not so bad, why do you come up with protections when middle 
income seniors rely on this also? And so I do not quite 
understand the protections, yet it is okay to do.
    With regard to Cuba, the Office of, what is it, Foreign 
Asset Control? You continue to spend resources on enforcing 
strict travel and trade sanctions with Cuba, a country that, 
dating back to 1998, the Defense Intelligence Agency said it 
was not a threat to United States National Security, yet it is 
still on the list of terrorist countries. And so what in the 
world is going on and over at OFAC? And, in fact, how many 
times have you blocked or intercepted terrorism-related 
financial transaction supported by the Cuban government?
    Secretary Lew. Congresswoman, starting with the question 
that you asked on the economic impact of people below poverty 
not being fully integrated into the economy, not getting the 
full benefit, it is a real issue. I mean, you look at the job 
listings in this country. We have millions of jobs that are not 
filled while we have millions of kids who have never had a job. 
That is not good for the economy, it is not good for the kids 
who are not getting into the labor market and developing the 
work history that will make them be stronger as individuals and 
stronger contributors to the economy. Our budget tries to deal 
with that. It tries to deal with the fact that we have to make 
sure that our young people get the skills they need, and I have 
not heard anyone stronger supporting that than CEOs who are 
trying to invest in the United States. They come and they say, 
``We need to make sure we have the workers we need for the 
future and the infrastructure to get our products to market. 
That is where the government can help us.'' And I think we have 
that obligation, if we care both about our people and or 
economy, to get that right.
    On chained CPI, you know, it does the effect of lowering 
the increase. Not the base benefits, but the increase because 
it is a different level of inflation. I think that the 
president made clear that it is not something he would have 
chosen to do, but in an attempt to find an agreement, we have 
been told time and again that it is something that would have 
to be part of an agreement that would be acceptable to 
Republicans in this environment. It is something we can defend 
on a technical basis because it is more accurate, and because 
for middle class people, it is a burden that is relatively 
small. Even $10 a month for the most vulnerable is a big deal. 
If you lived to be 90 years old, and all you have is your 
Social Security, that $10 can be the difference between food 
the last couple days of the month. So I think we do have to 
distinguish between what impact going to a more correct measure 
would have. And we have put it in in a way that we think is 
fair by saying that the most vulnerable will have their 
benefits go up. Not because we have the overall adjustment 
being faster, but because we will make the decision to go in 
and make sure they are not hurt.
    Chairman Ryan. Thank you. Mr. Flores.
    Mr. Flores. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary Lew, for appearing here again today. I have four sets 
of questions that I am going to run through quickly, and then 
you can answer at the end or answer supplementally. First has 
to do with the CPA, I always looks at the underpinnings of the 
budget, how it is constructed because the choice of the 
underpinnings or the assumptions can drive the outcome 
substantially. And, in particular, I noticed that the president 
used estimates related to GDP growth, unemployment, inflation, 
and interest rates that were generally more optimistic than 
either the CBO or the Blue Chip forecast. So I would like to 
have the information about two things. Why did we use these 
more optimistic rates, number one. Number two, what would 
happen if we reset these rates to the assumptions that the CBO 
is using?
    Secondly, I think that you and president, and we in the 
House of Representatives all agree on one thing with respect to 
moving this country forward, and that is, we need to grow 
economic pie, we need to grow opportunity for everybody. And so 
the questions on that subject are kind of like this: How do we 
grow the economic pie and opportunity when we are raising taxes 
on the economy? The president is proposing to raise taxes to a 
level as a percentage GDP that were higher than even during the 
Clinton administration. So how do we think that is going to 
generate more jobs and more economic growth? The second part of 
this question is this: If you raise taxes on business, how do 
you expect that business to invest more in R&D, and hiring 
people, and property, plant, and equipment? How do we expect 
those businesses to produce more and better products and 
services at lower cost? Those are things we need to think 
about.
    In particular, I think about the woman in Bryan, Texas who 
owns a chain of dry-cleaning and laundry shops, and right now 
she is just locked down. She just got her taxes filed last 
week. Now she is locked down. She has got 19,000 pages of 
regulations related to ObamaCare that are crushing her, and she 
is not hiring today because of that. And so my question is 
this: On top of that, how is she going to better off and able 
to hire more employees, and pay them a better wage, and invest 
in new locations when the president is proposing to raise taxes 
on her? Another example is the president has this attack on oil 
and gas companies which already pay the highest effective tax 
rate in the country at 41 percent versus what most companies 
pay at 26 percent. So how does this encourage more investment 
in natural gas which has done more than any government policy 
to clean our air? Our emissions today are lower than the Kyoto 
Protocol, and it is because of the investment in natural gas. 
And so now the president says we want to raise taxes on this 
industry so we can get less investment in natural gas, and 
therefore dirtier environment, theoretically.
    The third thing, and I would assume that you believe, and 
the president believes, and we in the House believe that we 
need a more accountable and a more efficient government, so I 
would bring up a slide to remind us about the way this 
government seems to operate. This picture of Jeff Neely sitting 
in a hot tub. As we may remember, Jeff Neely was a GSA employee 
who wasted millions of taxpayer dollars on conferences. This 
person is back on the payroll, and he makes just under $220,000 
a year. He got bonus during his last year. So I have not seen 
anything in the president's budget that creates a smaller, more 
accountable, more efficient government. We have got a GAO 
report here that identifies tens of billions of dollars in 
waste, and overlap, and duplication. I did not see any attempt 
in the president's budget to take care of that. Another area, 
and part of the stimulus, the Department of Energy had a slush 
fund it used to invest in things like Solyndra and Fisker, and 
in light of the stellar results of those organizations or those 
investments, I would like to have an answer as to why are we 
doubling down on more stimulus types of payments? Why do we 
think that that is going to somehow work better this time than 
it did the last time?
    The next area is what I am going to call trying to help 
people come out of poverty. Since the war on poverty was 
started, we have spent $19 trillion, but we have got more 
people in poverty than ever before under our current economic 
policies. We have also got more people on food stamps than ever 
before. Why did the president not propose a plan to scrap 
current welfare and poverty programs and start with something 
new so we can focus on getting paychecks for these folks and 
give them a hand up instead of keeping them locked down where 
they are today? So why do we not stop the White House parties? 
You know, for every day, every hour that we keep Air Force One 
unused, we can pay for 18 days to keep the White House open for 
visitors? Why are we taking so many presidential vacations?
    I have run out of time. I have a rhetorical question. How 
can we call the president's budget using a balanced approach 
when the budget never balances? Thank you, I yield back.
    Chairman Ryan. I'll give the gentleman the ability to 
respond in writing. Mr. Cicilline.
    Mr. Cicilline. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being here, and congratulations. You know, there 
has been a lot of discussion this Committee about deficit 
reduction, both in this hearing and in all of our budget 
considerations, and the president's budget cuts the deficit by 
an additional $1.8 trillion over the next 10 years, reducing 
the deficit to 1.7 percent of the economy of GDP by 2023, and, 
again, importantly in a downward path beginning in 2016. That 
is, of course, in addition to the deficit reduction we have 
already done combined of $2.5 trillion, so we are now, with 
those two figures combined, at, or actually exceeded, the 
deficit reduction recommend by Simpson-Bowles. And there is a 
lot of discussion about that, but the reality is, as you know, 
Mr. Secretary, deficit reduction in and of itself is not an 
economic development strategy or a growth strategy. And one of 
the most effective ways that I believe we can grow the economy, 
and ultimately deal with this deficit, is to really get people 
back to work and to grow jobs in this country. And this budget 
reflects, for me, three important ways that we can do that that 
will really help to strengthen the foundation of our economy.
    You said in your testimony cutting taxes alone does not 
create jobs, and it is, of course, the demand of the middle 
class, a good job, a middle class family demanding the goods 
and services business produces that really creates jobs. So 
people talk about the job creators. The job creators in the 
country are the middle class families who have a job, who are 
purchasing the goods and services the business produces. My 
friends on the other side of the aisle proposed a budget that 
the Economic Policy Institute says will cost 2 million jobs in 
2014; add to that the sequestration which is not replaced, a 
loss of another 750,000 jobs. And so what I would like to ask 
you to speak about is really what this budget does to create 
growth and create jobs because, to me, that is the real crisis 
facing this country.
    I am from a state that has either the first, or second, or 
third highest unemployment rate in the country, and what my 
constituents want to know is, how is our federal budget 
reflecting the urgent priority of getting people back to work? 
The three areas that I am particularly pleased that the 
president is focused on is manufacturing and the development of 
manufacturing innovation institutions to really rebuild 
American manufacturing, which is a real growth opportunity for 
Rhode Island, and I think for this country. Investing in 
infrastructure to rebuild our bridges, roads, ports. If we are 
going to have an economy to compete in the 21st century we need 
to have infrastructure capable of supporting that economy. It 
is a way to put people back to work and rebuild America. And 
third, education. The great investments in pre-K, protecting 
the student loan interest rates from doubling; the STEM 
initiative that I hope you will turn in to STEAM, and add art 
and design is part of that, you know, STEM to STEAM, but the 
education investments are critical. So if you could speak to 
those three areas, and how they really get to the most 
important area, I think, we facing our country, and that is 
getting people back to work.
    Secretary Lew. Well, Congressman, I could not agree more 
the fundamental goal we have is growth and job creation. It is 
really the idea that is infused in every part of this budget, 
and it is the goal that everything comes together towards. At a 
macro level, we have things that we know we can do to create a 
better rate of growth and more jobs. Replacing the sequester, 
which is costing us jobs, with sensible, middle, and long-term 
deficit strategies that are balanced between revenues and 
spending, that will create jobs by creating economic growth. 
Economic growth means jobs. A half percent of GDP makes a big 
difference.
    In the specific areas that you have raised, manufacturing, 
infrastructure, and education, these are obviously pillars of 
what the president sees both as the keys to our economic 
future, but also things that we can do today to create jobs. 
The truth is, our manufacturing initiatives are not about 10, 
20, 30 years from now. They are about this coming year; it is 
incentives to invest now. The research and development is about 
the future, but the manufacturing tax incentives are for today. 
Infrastructure, we ought to be working in now, not 10 years 
from now, to repair or bridges, our ports. We will regret it if 
we find ourselves in better economic times with higher interest 
rates and more problems with our bridges and our ports. We do 
not get to put that off forever. And education, I would say 
that it is, again, good for the economy today and good for the 
economy in the future. Every opportunity we create for early 
childhood education, or higher education, or middle school 
education, that means teachers in the classroom, it means 
schools being open, and it means our young people getting the 
skills they need, so that 10, 20, 30 years from now we still 
have the best-trained workers in the world. That is what this 
budget is about. Thank you.
    Chairman Ryan. I understand you have a time crunch, 
Secretary Lew. Can you hang until 12:30 so we can get through 
the rest of our witnesses? Is that possible? And if so, what I 
would propose, and I hate to do this to my fellow colleagues, 
but Mr. Van Hollen and I have been talking about this, is 
knocking the time down to three minutes each, in order to get 
to accommodate everybody, if you can stay until 12:30. Does 
that work for you Secretary Lew?
    Secretary Lew. Yes, Mr. Chairman, I can.
    Chairman Ryan. All right, thank you. So we will knock it 
down to three minutes. And it is Mr. Williams. Mr. Williams is 
next. Yep.
    Mr. Williams. Thank you for being here. I am a small 
business owner; have you ever run a business?
    Secretary Lew. I have worked in businesses, I have not had 
my own business.
    Mr. Williams. But you have not run one.
    Secretary Lew. I do not have my own business.
    Mr. Williams. Okay. Are you concerned that the debt our 
country is obtaining is going to eventually go into higher 
interest rates?
    Secretary Lew. Well, I think economic growth will lead to 
higher interest rates. I think we have to plan, as our budget 
does, on a time of higher growth and higher interest rates.
    Mr. Williams. Where do you think the interest rates will be 
five years from now?
    Secretary Lew. Well, our budget projects interest rates 
coming slowly back to a more normal level.
    Mr. Williams. Five percent, 6 percent?
    Secretary Lew. I do not think our budget goes that high.
    Mr. Williams. If you are in business and you have low 
interest rates like we do today, most businesses right now are 
paying down their debt. They are not waiting for higher 
interest rates. Do you not think it would be a good idea to 
start paying our debt down?
    Secretary Lew. Well, look, I think we should not have built 
the debt up with tax cuts we could not afford, and putting wars 
on the credit card, and the Medicare prescription drug benefit 
we could not afford, so I am going to take back seat to nobody. 
I ran three surpluses. We are not there. When we hit a 
recession, we had no capacity to deal with it other than by, we 
were in deficit, we had a bigger deficit; we now have to slowly 
work our way out, and this budget gets us to a solid, stable 
place.
    Mr. Williams. What is the highest rate that you think can 
be charged to a small business?
    Secretary Lew. I am sorry?
    Mr. Williams. We are at 39 percent now, one of the highest 
in the nation. I can tell you, that does not help small 
business. What is the highest rate you and president think we 
can charge small business before they just collapse, and break, 
and quit hiring people?
    Secretary Lew. Well, obviously, businesses choose whether 
to organize on the corporate side or the individual side. We 
have proposed bringing the business tax rate down to 28 
percent. We have not proposed any increase beyond the current 
39.6 on the individual side, and the better we do at broadening 
the base, the better we will do at lowering the rates.
    Mr. Williams. Was not the sequester President Obama's idea? 
I have heard you talk about it today as a bad policy. The 
bottom line is, was it not his deal?
    Secretary Lew. You know, it is not as simple a question as 
that. It was a very difficult negotiation where we were 
negotiating with the Republicans who refused to put taxes on 
the table, and it was the only thing everyone could agree on.
    Mr. Williams. All right, I get it. Let me just close by 
saying this. I am a small business owner, and I can tell you, 
you are not helping small business, okay. The burden that this 
Administration is putting on small businesses is unbelievable. 
I would suggest you look at Texas, maybe even North Dakota, and 
see what less government and competition, what it does. When 
you start talking about raising minimum wage and capping the 
maximum wage in this country, that is a bad deal. It should be 
a country of unlimited opportunity, not unlimited liability, of 
which you all are putting us in. Small business is hurting. You 
need to understand that. And I hope we do not get to where the 
norm is 7.8 percent unemployment, where you can save $50,000, 
and that is all you can save. Fifteen percent of the people in 
poverty; I hope that is not the norm. I fear that it is, and I 
just think that it is a dangerous course for our country. Thank 
you.
    Chairman Ryan. Thank you. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman. Of course, the 
proposal from the Administration is not to cap something at 
$50,000, it is to stop having taxpayers subsidize savings 
beyond 3 million; big difference, I think. Secretary Lew, we 
appreciate your patience. You have been here countless times, 
and the balanced approach you are attempting to do with the 
Administration. I would just put one item on the table that we 
would like to explore with you further, dealing with 
infrastructure finance. In the past, the Administration has 
supported an effort to reinstitute the superfund tax which 
expired in 1995, so there is virtually no money in the 
superfund. And it stalls clean up around the country. This was 
a deal that was made with the petrol/chemical industry years 
ago; gave them a little escape hatch which they still enjoy, 
but they are not investing to help clean it up, and I hope that 
we can talk with the Administration about that, and, at some 
point, have a conversation about what we are going to do with 
the transportation trust fund in freefall because of the 
outstanding efforts of the Administration to improve fuel 
efficiency. If we are going to fund transportation based on 
gallons pumped, we are going to be in a downward spiral over 
time, and we need to have an opportunity to look at that. And I 
hope that there is an opportunity to, at some point talk, about 
a vehicle mile travel fee that would help stabilize and move 
forward.
    But I wanted to just get your brief reaction, I know you 
are not Secretary of Defense, but the top line considerations 
where you have moved to try and help offset some of the costs 
of the sequestration, looking at bases which are far surplus to 
what we need at home and abroad, and maybe stopping the decline 
in the percentage that military personnel pay retirees for 
their health care, which is actually going down, but is going 
up for everybody else. Some of my friends on the other side of 
the aisle, particularly those in responsibility, are somehow 
pretending that this would be outrageous, that it is a 
violation of all that is holy and it is not going to get their 
support. Can we move forward with the Department of Defense if 
we do not start looking at some of these areas?
    Secretary Lew. Congressman, while it is not currently in my 
area of responsibility, I spent a good deal of time working 
with the Defense Department on its strategic plan when I was 
OMB director and chief of staff, and I think that the strategic 
plan the Defense Department put together to save $500 billion 
over 10 years is one of the best pieces of strategic budget 
planning that I have ever seen. It is hard choices without a 
doubt, but it reflects the military and civilian leadership 
making the balanced choices of how do we secure our national 
defense and still hit the target. I think the sequester is the 
opposite. The sequester is across-the-board cuts that do not 
make sense, that do not move our national security interests 
forward, and it is something that should be replaced by 
sensible policy.
    Mr. Blumenauer. I hope Congress will be able to make some 
tough decisions along with you.
    Chairman Ryan. Thank you. Mr. Rokita.
    Mr. Rokita. I thank the Chairman and I thank Mr. Lew for 
joining us here today. Good afternoon now, by the way, 
appreciate you staying.
    Secretary Lew. Good afternoon.
    Mr. Rokita. I want to pick up on some of the things that 
Mr. McClintock was saying. Of course, he has this bill that is 
going to prioritize our payments, and I would associate with 
his comments in saying that it works in several states, and I 
heard your testimony that said, well, it just will not work for 
the federal government. But let's assume for a minute that we 
have a prioritization bill that becomes law. What level of 
detail would you expect from Congress so as the Treasury 
Department could not override or ignore the prioritization 
process that that bill, which would become law again, would 
have in it? That is to say, under what circumstances do you 
think you can override a law that would direct prioritization?
    Secretary Lew. Congressman, and to be clear, I did not say 
that you could not write a law that would say which bills you 
pay first. Clearly, you could write a law that says which bills 
you pay first.
    Mr. Rokita. No, you said we would go into default; does not 
matter what area we would go into default.
    Secretary Lew. What I said, what I believe is correct and 
is something we really need to focus on, is that if you were to 
do that, if you were to lock in this idea that if we pay one 
set of bills and not the others we are avoiding default, that 
is not correct. If you do not pay all of our obligations, it is 
one or another form of default. You are just choosing what to 
default on.
    Mr. Rokita. Let's go back to my question. Assuming you have 
this law, all right, what level of detail would you expect so 
that you, as the Department of Treasury, could not override 
anything it says?
    Secretary Lew. Well, I am not sure that I understand. I 
mean, we comply with laws when they are written, and were you 
to write a law, we would comply with the law. That is not the 
issue. The issue is that that law does not solve the problem.
    Mr. Rokita. It is my time, I just want to be clear that if 
a bill came out of this Congress and it was a law, you would 
intend to follow it to the letter.
    Secretary Lew. We always endeavor to follow the law.
    Mr. Rokita. Okay, all right, just want to be sure. But you 
will follow it? Endeavoring and following, it is slightly 
different, right?
    Secretary Lew. Yeah, I cannot comment on a law that I have 
not read. The truth is there are sometimes ambiguities, and if 
there are ambiguities, we need to discuss them. But if you are 
asking me the question, could you set an order, of course you 
can set an order. I am saying it is a mistake to think that 
solves the problem. The only thing that solves the problem is 
Congress extending the debt limit so we can pay all our 
obligations and avoid default.
    Mr. Rokita. Understood what you are saying. I do not 
necessarily agree, but I understand what you are saying. On 
this $3 million cap that would pay out roughly $205,000 a year, 
new policy, can you tell me, and, by the way, the Wall Street 
Journal estimates that 6 percent of the population will be 
impacted by this new cap. I remember your testimony saying it 
will be a very small amount of people, but Wall Street Journal, 
at least, says 6 percent. I heard a lot of complaining about 
the 1 percent. Are we now targeting the 6 percent, and what 
after them?
    Secretary Lew. No, Congressman, our position is clear. We 
want all Americans to save for their retirement. We want to 
encourage people who do not save to save, and we want to make 
it easier, not harder. But in a world of tough choices when 
most average families have less than $100,000, an average of 
$50,000 saved for retirement, saying that the tax benefit ends 
at $3 million is a reasonable trade-off to make.
    Chairman Ryan. Thank you. Mr. Huffman.
    Mr. Huffman. Thank you, Mr. Chair, and Mr. Secretary, 
thanks for being here. I want to associate myself with those 
who have expressed opposition to you over chained CPI, but I 
also appreciate the fact that the administration has very 
specifically linked that to hundreds of billions of dollars in 
new tax revenue that, so far, our Republican colleagues have 
flatly rejected. So I do not know how likely that bargain is at 
this point, but one thing that strikes me as very possible, if 
not likely in this Congress, is comprehensive immigration 
reform. And so I wanted to ask your thoughts as we think about 
the budget horizon that we are discussing today about how 
comprehensive immigration reform could affect these budget 
numbers and our broader economy as well.
    Secretary Lew. Congressman, I have not been, in my current 
capacity, working on immigration reform, but I have worked on 
the issue on many occasions over the last 30 years, and I think 
as a student of American history, one can only conclude that 
one of the things that has made us the strong country we are is 
that we are constantly refreshing ourselves with people who 
want to come here and work hard, play by the rules, and make a 
contribution. I think immigration reform would open the 
opportunity to fair legal participation in our economy to many 
people whose only goal is to contribute to society, and that is 
going to be good in terms of the economy. The fact is, our 
economy has work to be done, and I think there is hopefully 
going to be a bipartisan agreement that is fair, that protects 
our borders, that is very much in keeping with both concerns 
that we bring people out of the shadows, but that we also 
insist on compliance with our laws.
    Mr. Huffman. With respect to both the deficit and the debt 
at the 10-year horizon, would it be fair to assume that 
comprehensive immigration reform would have a positive effect 
on both of those things?
    Secretary Lew. I would have to go back and look 
analytically at the numbers. Intuitively, I think that makes 
sense, but I have not seen an analysis.
    Mr. Huffman. Thank you, Mr. Secretary.
    Chairman Ryan. Fifty-three seconds to spare. You will 
learn. Mr. Nunnelee.
    Mr. Nunnelee. Thank you, Mr. Chairman. Thank you, Mr. Lew, 
for being here.
    Secretary Lew. Good to be here.
    Mr. Nunnelee. January 1 we had a $600 billion tax increase 
added to a $1 trillion tax increase that went into effect as 
part of the Affordable Care Act. And then shortly after that, 
we had cause for additional tax increases. The president's 
budget has got an excess of a trillion dollar increase in 
taxes, so I guess the start of the question, does the 
Administration think that the American people are not paying 
enough money to Washington?
    Secretary Lew. Congressman, the Administration has had 
consistent view that we have a very, very big hole in our 
budget, a fiscal gap that has to be closed with a fair balance 
of $2 of spending to $1 of revenue. In December there was 
extensive discussion where Republican leaders were saying we 
could raise a trillion dollars by broadening the base and 
closing loopholes. We want to work together to do that and get 
the job done in a balanced, fair way, with $2 of spending cuts 
for $1 of revenue.
    Mr. Nunnelee. But you got 1.6 trillion January 1. We did 
not get any $2 spending cut for that.
    Secretary Lew. Well, no, we enacted the spending cuts 
first. In 2011, we enacted over a trillion dollars of spending 
cuts. So we have already got over twice as much spending cuts 
as we do revenue. We need to finish the job. We need to look at 
everything we have done since we started trying to close this 
$4 trillion gap. And it will get to 2:1 if the president's plan 
is the basis for an agreement.
    Mr. Nunnelee. The Administration continues to say that 
balanced budgets are not necessary. At what point does our 
national debt cause a problem? Is there a ceiling?
    Secretary Lew. Look, our national debt cannot continue to 
grow as a percentage of GDP without it becoming a problem. That 
is why the president's budget brings it down to around 73 
percent, the debt as a percentage of GDP, at the end of this 
10-year window. That is why the budget deficit is brought down 
to under 2 percent of GDP at the end of this window. You know, 
I wish that the hole was not as deep as it was when the 
president took office. I wish that we did not have an economy 
that was in freefall that needed to be brought back to health. 
But that was what the world looked like in 2009. Our economy is 
now growing. We need to be on a path with the kind of balanced 
deficit reduction that is consistent with growth and job 
creation, and we would to look forward to working on a 
bipartisan basis to get that done so we can get the confidence 
in the economy that would, I think, be really good for the 
economy.
    Mr. Nunnelee. All right, and then the president came forth 
with a plan to address some of the problems with Social 
Security, and then he started blaming the Republicans. Does the 
president stand by his plan?
    Secretary Lew. I am not sure which plan you are referring 
to right now.
    Mr. Nunnelee. The issue dealing with growth and Social 
Security.
    Secretary Lew. Well, the president has, for a number of 
years, and continues to believe that we should work on a 
bipartisan basis to have a balanced, fair approach that 
protects Social Security's basic structure but that, along the 
lines of the 1983 agreement, has a bipartisan approach for 
long-term, 75-year solvency. It is best to do that not in the 
context of the budget.
    Mr. Nunnelee. All right. Thank you, Mr. Chairman.
    Chairman Ryan. Thank you. Mr. Jeffries.
    Mr. Jeffries. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for your testimony. There seems to be a consistent 
narrative amongst many in the House, amongst many on the other 
side of the aisle that this Administration has taken us on a 
fiscally unsustainable course, pursuant to that narrative, as a 
result of an unlimited desire to expand and an unwillingness to 
get that spending under control. But am I correct that it is 
this Administration that has reduced the deficit by $2.5 
trillion over the last several years?
    Secretary Lew. Congressman, yes, we, together with 
Congress, reduced the deficit by $2.5 trillion. We have also 
reduced the deficit as a percentage of GDP in half, and we are 
on a track towards taking it down to under 2 percent.
    Mr. Jeffries. Now we have a constitutional obligation to 
protect the full faith and credit of the United States, and 
this has played itself out as it relates to the flirtation with 
possibly defaulting in connection with the debt ceiling. And 
part of the reason why some have suggested that the debt 
ceiling is problematic and our need to raise it is problematic 
is because of a misconception as it relates to what the debt 
ceiling represents. The debt ceiling is a backward-looking 
vehicle that gives the Administration the opportunity to pay 
for bills that have already been incurred, is that not correct?
    Secretary Lew. That is absolutely correct, Congressman.
    Mr. Jeffries. And most of the obligations that have already 
been incurred, or many of those obligations relate to policies 
and decisions that were made during the eight years of the 
prior administration. Is that not correct?
    Secretary Lew. They relate to all the permanent laws that 
are in place and all the annual appropriations that have been 
enacted.
    Mr. Jeffries. So that would include the tax cut in 2001 and 
in 2003 that were not paid for, correct?
    Secretary Lew. Absolutely.
    Mr. Jeffries. And that would include the prescription drug 
benefit backed by the pharmaceutical industry that was not paid 
for in 2003, correct?
    Secretary Lew. Yes.
    Mr. Jeffries. And that would include the war that was 
entered into as it relates to Iraq for weapons of mass 
destruction that were never found. Is that correct?
    Secretary Lew. All spending that was authorized by Congress 
is included, and the spending that you have described is all 
part of what is being covered.
    Mr. Jeffries. And now based on your experiences in the 
Clinton administration, would it be fair to say that perhaps 
the best strategy in order to deal with the debt problem as 
well as the deficit issues that we confront, as evidenced by 
the fact that the Clinton administration turned over a surplus 
that was subsequently blown by the Bush administration, is not 
the best strategy to invest and to grow our economy?
    Secretary Lew. I think that the best strategy is a growing 
economy, growing jobs, and balanced bipartisan deficit 
reduction where you have a mix of spending and tax measures to 
get the job done in the right timeframe.
    Mr. Jeffries. Are there alternatives other than the chained 
CPI that could help strengthen the solvency of Social Security 
moving forward?
    Secretary Lew. There certainly are other measures that 
would strengthen the solvency of Social Security.
    Mr. Jeffries. Thank you.
    Chairman Ryan. Thank you. Ms. Lujan Grisham.
    Ms. Lujan Grisham. Thank you, Mr. Chairman, and thank you, 
Secretary Lew, for extending your time and joining us today. I 
am going to join in the efforts by many of my colleagues before 
me today that I appreciate your responses about moving the 
economy and investing in jobs, and I have mentioned to other 
folks who have come before this Committee that I am in a state 
that has got negative job growth, and I think the only state in 
the country, as we are seeing some improvements with negative 
job growth, so I am very excited about many provisions in the 
president's budget proposal that invest in job growth. I would 
also like to thank you for your investments in the budget for 
Indian Health Services. I actually proposed an amendment to the 
Republican budget that would fund HIS, which is woefully under-
funded, and the health care sector grows by 30 percent if we 
fully invest in health care jobs, and so I appreciate all of 
those efforts in bringing jobs to rural New Mexico.
    I also, quickly, since I have got such a little time, want 
to thank the Administration for prioritizing veterans, and I 
want to just highlight a couple. So we have got 63.5 billion 
for the Administration. It is an 8.5 increase over 2012, and it 
provides mental health care, telehealth, specialized care for 
women, veterans, and benefits for caregivers. Seven billion set 
aside for mental health services such as PTSD, sexual trauma, 
which is at 15.4 increase over the 2012 level, and $136 million 
to deal with the back log. Can you tell me, with these 
investments, and that we are working hard to get our veterans 
back to work, and with companies in New Mexico not hiring 
because of the sequester, can you give me a sense about how 
many jobs this might create, and how many veterans might be 
able to get back into the employment pipeline?
    Secretary Lew. Congresswoman, I can tell you the direction, 
but I would have to get back to you or have someone get back to 
you on the exact number of jobs.
    Ms. Lujan Grisham. Well, feel free to make a statement 
about that direction, what you see globally for the country, 
but please get back to me in writing about that job growth and 
those developments for veterans.
    Secretary Lew. The first principle is we have a sacred 
obligation to our veterans who have put their lives on the line 
to protect our country, to treat them right when they come 
home, and that means helping them to get the job training or 
the jobs they need, and the health care they need, and the 
support in their community that they need. This budget invests, 
in a very tight budget, billions of dollars to try and keep 
that promise. Now, apart from just the basic decency and 
fairness associated with our policy, it is good for the 
economy. Our soldiers come back with leadership skills, 
management skills, the ability to make a contribution that we 
cannot afford to lose. And it is only a plus when we match up a 
veteran with the kind of opportunity that gives them the chance 
to contribute as civilians as they did when they were in the 
military.
    Ms. Lujan Grisham. As my time wraps up, we have got the 
highest suicide rate by veterans that we have ever seen before 
in this country, and the number one homeless group is women 
returning veterans in my district. Thank you.
    Secretary Lew. Thank you. Mr. Cardenas.
    Mr. Cardenas. Thank you, Mr. Chairman. Thank you, Secretary 
Lew, for being here and extending your time with us. I was 
taken aback by one of my colleagues that talked about that it 
seems that some small business owners lose sleep at night 
because they are worried about the federal debt. I think that 
if people stop watching Fox News right before they go to bed, 
they might not have that problem. I used to own a small 
business, and never once, never once, was the federal debt ever 
on my mind. Really what was on my mind is focusing on my 
business, wondering, knowing, trying to figure out what I am 
going to do tomorrow, what I am going to do next month, hoping 
and looking forward to access the capital so that I could go 
ahead and hire more people, and grow my business, and therefore 
impact the economy locally, and, quite frankly, make more money 
for me and my family as well. So one of the things that I would 
like to ask you is, the president's budget, does it look to 
invest in education and training our current workforce and our 
future workforce?
    Secretary Lew. Yes, Congressman. We have a proposal, a 
number of proposals, that would help people get the skills 
training they need, really starting from high school all the 
way through workers who are displaced by the economy.
    Mr. Cardenas. Well, the president's budget actually talks 
about continuing and increasing investment in preschool as 
well.
    Secretary Lew. Correct. From preschool all the way through.
    Mr. Cardenas. Yeah.
    Secretary Lew. And, you know, one thing I would say from 
the perspective of how small businesses make decisions, I think 
all businesses make decisions based on where the order book is 
and where the market is. If we grow the economy, and if small 
businesses see that they are doing business in an environment 
where it is growing business, they are going to make the 
decisions to invest and hire. If they are afraid the economy is 
going to be shrinking, they are not going to take a risk by 
investing. I think that they fundamentally look to the bottom 
line of their business when they make their decisions.
    Mr. Cardenas. Well, I have a question for you in your vast 
experience in looking at budgets and understanding the dynamics 
between government and private industry. Do successful 
businesses grow while having debt on their books in this 
country?
    Secretary Lew. Many businesses have debt for their capital 
investment and other purposes.
    Mr. Cardenas. And so, basically, when we look at the 
economy and we look at the president's budget, the president's 
budget actually acknowledges that we have debt. The president's 
budget actually acknowledges that the best way that we need to 
grow our way out of this dynamic is to make sure that we 
continue to grow the economy, and even though the economy has 
been growing at a slower pace than any of us would like, the 
bottom line is that it has been growing pretty much throughout 
the majority of his presidency, correct?
    Secretary Lew. It has been growing for 14 consecutive 
quarters, and we need to continue that and increase the rate of 
it, but we also need to make the tough decisions to finish the 
work of making policy changes in a fair and balanced way.
    Mr. Cardenas. So running government like a business would 
mean continue to do growth, but, at the same time, 
acknowledging debt.
    Secretary Lew. Correct.
    Mr. Cardenas. Thank you.
    Chairman Ryan. Thank you. Mr. Pocan.
    Mr. Pocan. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary. I also just want to add I am really looking forward 
to seeing your signature on our currency. It will be an 
affirmation for many of us who received harassment from our 
teachers growing up in penmanship, so thank you.
    As a small business owner for over half my lifetime, I just 
want to reiterate a little bit about that. What you are doing 
by growing the economy, investing in infrastructure and 
research and development, having tax fairness in this budget 
that helps small business owners and middle class, and stopping 
the sequester that is hurting small business owners are all 
very much appreciated by those of us who are still in that part 
of the economy. I do want to ask you a question about taxes, 
but let me just, if in one minute, if you could try to answer. 
People kept talking about actual balance in the GOP budget, 
and, you know, there is a lot of fuzzy math in there, 
especially around the Affordable Care Ac. I mean, you can keep 
saying there is actually a balance. I can keep saying that I 
have a thick mane of hair, but I do not. Can you just reference 
that, the actual balance question on the GOP's health budget?
    Secretary Lew. I think that without knowing how that budget 
will pay for the tax cuts that it has proposed, we do not 
really know what it is going to accomplish. It is a pretty big 
hole. It is like a $5 trillion hole to cut tax rates. It is 
either going to have to raise taxes on middle class taxpayers, 
or it is not going to cover the tax cut that is proposed.
    Mr. Pocan. Since we are on taxes, this is specifically what 
I would like to ask. You know, we just had tax day yesterday. 
Small business owners across south central Wisconsin paid their 
taxes, the vast, vast, vast majority of them. However, we do 
have offshore tax abuse, and the GAO report that came just a 
little while ago talking about some of the tax expenditures 
talked about how this growing right now in the country. 
Specifically, can you just address a little about the 
Administration position on this? I mean, you know, I hear that 
there are 18,000 corporations in a five-story building in the 
Cayman Islands. I mean, clearly, that is nothing but tax 
avoidance. Can you just address that from the Administration 
perspective?
    Secretary Lew. The Administration very much wants to close 
opportunities to avoid taxation through abusive practices, and, 
you know, we have done a lot to create transparency so that we 
can see when businesses and individuals are taking income 
offshore in order to avoid taxation. I think there is a 
secondary issue, which is, what is legal that should not be, 
where we need to work together to look at how do we close some 
loopholes that should not exist. So there is the illegal forms 
of tax avoidance which we need to close down on, and we need to 
work together to try and shut down ways of legally avoiding 
taxes.
    Mr. Pocan. Would the Administration be open to some kind of 
language that might better define what a business operation is 
when it is overseas?
    Secretary Lew. It is something that we would look forward 
to working together on.
    Mr. Pocan. Great. Thank you very much.
    Chairman Ryan. Thank you. Thank you, Secretary Lew. We have 
got you done with seven minutes to spare. I appreciate your 
indulgence. You are three out of four. You have got your last 
one this afternoon. We are going to agree to disagree on some 
of these things. But I would like to think that we have 
explored a few possibilities where we can find common ground.
    Secretary Lew. I hope so.
    Chairman Ryan. So thank you very much. The meeting is 
adjourned.
    Secretary Lew. Thank you, Mr. Chairman.
    [Questions submitted for the record and their responses 
follow:]

          Questions Submitted for the Record by Chairman Ryan

    To gain a better understanding of the relationship of outlays, 
receipts, deficits and debt on a unified basis with daily Treasury 
statements, debt subject to limit, and the daily change in debt subject 
to limit, please respond to the following four questions and provide 
supplemental information that would help explain these relationships.
    1. While the Daily Treasury Statement contains helpful information, 
it is not clear how the reported daily outflows and inflows relate to 
the reported changes in total federal debt subject to the statutory 
debt limit. To help better understand that relationship, please provide 
a daily breakdown of spending, taxes and other receipts, intra-
governmental transactions, and the change in the operating cash balance 
that fully accounts for and explains the change in the opening and 
closing balances of total public debt subject to the statutory limit 
for each business day for the months of June and July 2012. In 
addition, please provide a table that crosswalks from the change in the 
operating cash balance to the change in the debt subject to limit for 
each of the days in this time period.
    2. Please describe the process for the preparation of the Fiscal 
Assistant Secretary's daily cash balance projections. Historically, how 
accurate are these cash balance projections?
    3. Were the cash balance projections to show expected cash outlays 
in excess of expected cash balances, what measures are available to 
Treasury?
    4. In an August 2012 report to Sen. Hatch, the Treasury Inspector 
General stated that ``because Congress has never provided guidance to 
the contrary, Treasury's systems are designed to make each payment in 
the order it comes due.''
    a. Please identify which of Treasury's systems are relevant to this 
statement and describe any rules and procedures governing the operation 
of these systems.
    b. Is the limitation described in the statement a technical 
limitation or a matter of policy?
    5. During testimony about the Chained-CPI, Secretary Lew stated 
that the use of Chained-CPI can be defended ``on a technical basis 
because it's more accurate.''
    a. Did the Administration exempt means-tested programs from 
Chained-CPI because they do not believe it is a more accurate measure 
for these programs?
    b. If they do believe it is a more accurate measure--why did they 
not apply Chained-CPI to these programs and address any concerns they 
have with the subsequent change in benefits through direct changes to 
the laws governing means-tested programs directly?

       Questions Submitted for the Record by Hon. Diane Black, a 
         Representative in Congress From the State of Tennessee

    1. Can you please explain to me what you meant in your comments 
that, ``[if] we want to do anything to correct the distribution of 
income in this country, our tax laws have to be part of that. I think 
we made big progress at the beginning of this year in raising the top 
rate to 39.6. I think that was an enormous step that was the biggest 
step in a long time in terms of dealing with some of that inequity.''
    Do you believe that Congress should redistribute wealth through the 
tax code?
    2. You mentioned in your remarks before the House Budget Committee 
that the administration has run the ``most aggressive cost-benefit 
analysis of the regulations released by each agency.''
    Have you run a report projecting the cost of the 14,000 pages of 
regulations released by various departments related to the Patient 
Protection and Affordable Care Act (PPACA)?
    What is that cost? How do you measure the cost-to-benefit ratio?
    Do you have a time frame for when the PPACA law will be fully 
implemented? At the end of the implementation process, do you play on 
sending a full estimate of the cost of the final PPACA regulations? Do 
you have an estimate of what that cost would be?
    3. In the Treasury Green Book, the administration proposes 
expanding the small business health insurance tax credit included in 
the health care law.
    How will this help small businesses since the administration has 
chosen to delay the small business exchanges (``SHOP exchanges'')?
    I've looked through the materials the administration has released. 
The firms must fill out seven worksheets to determine their eligibility 
and many of the small businesses in my district are confused, burdened, 
and are deterred from providing health insurance and even creating jobs 
as a result. How do you plan on guiding small businesses through this 
process?
    4. The President's budget extends and expands various refundable 
tax credits, which are actually cash transfer payments to individuals 
who, in many cases, do not pay any income taxes (and, in some cases, do 
not even pay payroll taxes). Of particular note, the budget proposes to 
reinstate, extend, or expand a variety of tax provisions that have 
substantial outlay components, such as the Earned Income Tax Credit, 
the American Opportunity Tax Credit, the Build America Bonds program, 
renamed as Fast Forward bonds, and the proposed Promise Zones.
    How does all of this increased spending through the tax code help 
with deficit reduction?
    How does this increased spending through the tax code help simplify 
the tax system to further the goals of fundamental tax reform?

       Questions Submitted for the Record by Hon. Bill Flores, a 
           Representative in Congress From the State of Texas

                                context
    Secretary Lew commented that people who exceed the $3 million cap 
can still contribute, but will simply not receive a tax break. This is 
a contradiction of the Treasury Department explanation where it says: 
``If a taxpayer reached the maximum permitted accumulation, no further 
contributions or accruals would be permitted, but the taxpayer's 
account balance could continue to grow with investment earnings and 
gains''.
    Transcript from hearing last week:

    Lew: And we're not saying people can't contribute. We're just 
saying that the tax benefits aren't going to be the same. So you can 
still contribute. You just can't get it with before tax dollars. You 
can't contribute it before tax dollars.
                      questions for secretary lew
    1. There are multiple proposals in the budget that will negatively 
impact retirement savings, including the 28% cap on itemized deduction, 
the $3 million cap and the chained CPI proposal (which will limit 
annual inflation adjustments for contribution and comp limits), has the 
government considered the effect that these three proposals could 
jointly have on individuals saving for a secure retirement?
    2. Have you looked at any behavior models to understand the 
potential impact on qualified plan formation or continuation, 
particularly in the small business context where a small business owner 
would lose the incentive to save within the qualified plan system?
    3. While I understand the $3 million cap is to target millionaires, 
we all recall the economic downturn not too long ago, and I am 
concerned that with any similar downturn, couldn't we have someone's 
supposed secure $3 million turn into $1 million, which would then not 
be enough to fund a comfortable retirement?
                          additional questions
    1. In terms of the proposal to place a $3 million cap on savings, 
won't this discourage savings more broadly? And wouldn't that be the 
wrong message for the government to send?
    2. Would you envision individuals needing to pay taxes immediately 
if they have funds over $3 million in their account? How about spouses 
who have inherited IRAs and may need that money to live comfortably?
    3. In terms of the actual number the government is proposing, what 
happens with a potential economic downturn? Or a changed life 
situation? Such a limitation does not take in account any possible 
changed circumstances.
    4. Has the government looked at how this could impact ESOP 
formation? Current ESOP participants?

         Question Submitted for the Record by Hon. Tom Rice, a
      Representative in Congress From the State of South Carolina

    Secretary Lew, I am deeply interested in a report from the Treasury 
Inspector General for Tax Administration regarding the Additional Child 
Tax Credit. You may recall this report. It was issued on July 7, 2011.
    Specifically, the report highlights the gross misuse of filers 
using individual taxpayer identification numbers to claim the 
Additional Child Tax Credit. In other words, filers who do not have a 
social security number and are not authorized to work in the United 
States.
    As you may know, ITIN filers' claims for the Additional Child Tax 
Credit have increased from $924 million in 2005 to $4.2 billion for 
2010. This information is detailed in the Treasury Inspector General 
for Tax Administration's report.
    We are giving billions in tax credits to individuals who are not 
authorized to work in our country. There is also evidence of ITIN 
filers claiming multiple children who do not even reside in our 
country.
    The Treasury Inspector General for Tax Administration's report 
directed both the IRS and the Department of Treasury to look into this 
staggering issue. Since the report was issued almost two years ago, I 
am very interested in the IRS and Department of Treasury's progress. 
What efforts have your agency made to end this blatantly fraudulent 
activity?

       Questions Submitted for the Record by Hon. Barbara Lee, a 
        Representative in Congress From the State of California

                               on poverty
    We know that unemployment remains too high, and income inequality 
is near historic highs, with incomes for low and middle income workers 
stagnating or even falling.
    While big corporations have more than recovered and are posting 
massive profits, Main Street families continue to struggle and small 
businesses across America don't have enough customers coming in their 
doors.
    1. What would be the economic impact of successfully implementing a 
national plan to cut the national poverty rate in half in a decade?
                      on the impact of chained cpi
    Today, the White House released a document outlining the 
protections put in place to shield the very elderly and families who 
rely on means tested programs from the impacts of Chained CPI.
    2. If Chained CPI does not amount to a $230 billion dollar benefit 
cut, why does anyone need protections from the impacts of Chained CPI 
as outlined by the White House yesterday?
                            on cuba and ofac
    Given the tight budgets, it is vitally important that we 
effectively allocate resources to the highest priority endeavors. One 
such office that I believe needs a thorough review is the Office of 
Foreign Asset Control (OFAC) which is tasked with a critical role in 
our nation's fight against acts of terrorism and the funding of groups 
and actors who support terror.
    OFAC continues to unnecessarily spend resources on enforcing strict 
travel and trade sanctions with Cuba, a country that, dating back to 
1998, the Defense Intelligence Agency has not considered a significant 
threat to U.S. national security.
    3. Mr. Secretary, when was the last time that the office of Office 
of Terrorism and Financial Intelligence or the Office of Foreign Asset 
Control blocked or intercepted a terrorism related financial 
transaction supported by the Cuban government?
               on the disparity in the unemployment rate
    The national unemployment rate is now at 7.6%, and has been slowly 
ticking downward for the last several months now. However, the rates 
for minorities--particularly African Americans at 13.3 percent and 
Hispanics at 9.2--have remained well above national average throughout 
the unemployment crisis, and are still unacceptably high.
    As part of the Omnibus Appropriations Act for FY2009--which was 
signed into law--the Department of Labor was required to provide a 
report outlining actions which can be taken related to reducing 
disparities in employment rates.
    4. Many economists find that increasing equitable access to 
economic opportunity is a better economic model that will lead to 
greater economic growth for all Americans, do you agree?
    5. How can the Treasury and our entire government act to 
effectively address this pervasive issue of unemployment in these 
communities?

    [Response to questions submitted follow:]

     Secretary Lew's Response to Questions Submitted for the Record

               chairman paul ryan qfrs for secretary lew
    To gain a better understanding of the relationship of outlays, 
receipts, deficits and debt on a unified basis with daily Treasury 
statements, debt subject to limit, and the daily change in debt subject 
to limit, please respond to the following four questions and provide 
supplemental information that would help explain these relationships.
    Question 1: While the Daily Treasury Statement contains helpful 
information, it is not clear how the reported daily outflows and 
inflows relate to the reported changes in total federal debt subject to 
the statutory debt limit. To help better understand that relationship, 
please provide a daily breakdown of spending, taxes and other receipts, 
intra-governmental transactions, and the change in the operating cash 
balance that fully accounts for and explains the change in the opening 
and closing balances of total public debt subject to the statutory 
limit for each business day for the months of June and July 2012. In 
addition, please provide a table that crosswalks from the change in the 
operating cash balance to the change in the debt subject to limit for 
each of the days in this time period.

    The Daily Treasury Statement summarizes the cash and debt 
operations of the U.S. Treasury. It consists of eight tables; five 
contain information about cash flows while three contain information 
about changes in debt outstanding and debt subject to limit.
    In some instances, daily cash flows are related to changes in the 
debt subject to the limit. For example, when Treasury auctions 
securities to the public its cash position increases by roughly the 
same amount. (Treasury's auction decisions are based on its goal of 
funding the government at the lowest possible cost to the taxpayer, and 
generally are not directly tied to the expenditures of any single day.)
    Other transactions may affect Treasury's cash position, but do not 
necessarily affect the debt subject to the limit. For example, various 
expenditures decrease Treasury's cash, but do not affect the 
outstanding debt, unless it is necessary to issue debt to finance those 
expenditures. Likewise, there are transactions that increase the 
outstanding debt subject to limit that do not have any impact on cash, 
such as the periodic payment of interest to Federal trust funds, which 
are invested in Treasury securities.
    Still other transactions create an indirect linkage between cash 
flows and outstanding debt subject to the limit. For example, when 
Treasury receives Federal withheld income and FICA tax payments, a 
portion of those payments is deposited in the Social Security trust 
funds, and that deposited amount is then invested in Treasury 
securities, as required by law. This investment increases the 
outstanding debt subject to the limit.
    The tables below summarize cash and debt activity appearing in the 
Daily Treasury Statements which covers all business days in June--July 
2012. (See attachment 1.)

    Question 2: Please describe the process for the preparation of the 
Fiscal Assistant Secretary's daily cash balance projections. 
Historically, how accurate are these cash balance projections?

    Treasury's Office of the Fiscal Assistant Secretary (OFAS), staffed 
exclusively by career officials, prepares estimates of Treasury's cash 
balances.\1\ These estimates depend on projections of receipts, outlays 
for government operations, and net cash flows from Treasury securities 
sold at auction (marketable activity) and the issuance and redemption 
of certain other Treasury securities, including State and Local 
Government Series (SLGS) and savings bonds (non-marketable activity).
---------------------------------------------------------------------------
    \1\ OFAS also prepares estimates of Treasury debt outstanding and 
debt subject to limit.
---------------------------------------------------------------------------
    OFAS prepares ``baseline'' cash balance projections on a quarterly 
basis. Treasury's projected marketable borrowing needs and assumed end-
of-quarter cash balances for the current and next calendar quarters, as 
calculated in the baseline, are announced publicly as part of 
Treasury's quarterly refunding announcements.
    OFAS updates its baseline projections on a regular basis. These 
updates inform daily cash position management decisions. Updated cash 
projections are also used by Treasury debt managers to adjust 
marketable financing plans to help ensure that Treasury has adequate 
cash to fully cover obligations presented for payment.
    There is necessarily a margin of error applicable to Treasury's 
projections. The margin of error for a projection one week in the 
future (at a 95 percent confidence level) has typically been roughly 
plus or minus $10 billion, and the margin of error for a projection two 
weeks in the future (at a 95 percent confidence level) has typically 
been roughly plus or minus $17 billion. At the 99 percent-plus 
confidence level, the margins of error are $14 billion for projections 
one week in the future, and $26 billion for projections two weeks in 
the future. In April 2013, receipts for the month came in a record $53 
billion stronger than projected as of the end of March. There is also 
significant volatility with regard to the receipts of a single day: on 
one day in recent years, Treasury recognized $9.6 billion more of 
receipts than it had forecast that same morning; on another day, 
Treasury recognized $15.7 billion less of receipts than it had forecast 
the business day before.

    Question 3: Were the cash balance projections to show expected cash 
outlays in excess of expected cash balances, what measures are 
available to Treasury?

    Treasury maintains an appropriate cash balance to ensure that 
unforeseen fluctuations in cash balances do not negatively impact our 
debt management strategy. While Treasury strives to maintain a regular 
and predicable auction schedule, we also have the capacity to announce, 
issue, and settle a same-day cash management bill (CMB) should cash 
balance projections suggest that we are facing a cash shortfall.

    Question 4: In an August 2012 report to Sen. Hatch, the Treasury 
Inspector General stated that ``because Congress has never provided 
guidance to the contrary, Treasury's systems are designed to make each 
payment in the order it comes due.''
    a. Please identify which of Treasury's systems are relevant to this 
statement and describe any rules and procedures governing the operation 
of these systems.

    Each year, Treasury issues over one billion payments valued at over 
$2.4 trillion. Treasury issues these payments on behalf of Federal 
agencies and programs. An agency submits an electronic payment request 
to Treasury specifying the amount and recipient of the payment. 
Treasury then prepares the electronic payment or, in some cases, a 
paper check.
    This is a highly automated process where Treasury uses one of three 
centralized systems: one for domestic payments, one for international 
payments, and one for letter-of-credit or ``draw down''-type payments.
    Because of the volume of payments, this is a precisely scheduled 
operation where agencies electronically transmit large batches of 
payment requests for processing by Treasury. A single batch may contain 
millions of payment requests.
    There is little time delay between when an agency submits a batch 
of requests and when Treasury releases the resultant payments into the 
banking system. During that brief period, Treasury's automated systems 
perform four sequential functions to:
    1. Ensure the internal integrity and consistency of the thousands 
of payment requests in the batch;
    2. Confirm that the payment recipients are screened through 
Treasury's Office of Foreign Asset Control. (In the future, Treasury is 
scheduled to start pre-payment screening of all payments except tax 
refunds); \2\
---------------------------------------------------------------------------
    \2\ Improper Payments Elimination and Recovery Improve Act of 2012 
(Public Law 112-248).
---------------------------------------------------------------------------
    3. Offset any eligible payments to collect delinquent debt owed to 
Federal and State Governments\3\ and other authorities; and,
---------------------------------------------------------------------------
    \3\ Debt Collection Improvement Act of 1996 (Public Law 104-134).
---------------------------------------------------------------------------
    4. Create the necessary accounting entries to update the financial 
reports of the agency and Treasury.
    On average, Treasury issues approximately 80 million separate 
payments per month; the automated systems that perform these four 
functions operate almost continuously.

    b. Is the limitation described in the statement a technical 
limitation or a matter of policy?

    Given the volume of payments and the time it takes to process them, 
we process payments as they arrive, not based on policy matters, other 
than improper payments and debt collection requirements.

    Question 5: During testimony about the Chained-CPI, Secretary Lew 
stated that the use of Chained-CPI can be defended ``on a technical 
basis because it's more accurate.''
    a. Did the Administration exempt means-tested programs from 
Chained-CPI because they do not believe it is a more accurate measure 
for these programs?
    b. If they do believe it is a more accurate measure--why did they 
not apply Chained-CPI to these programs and address any concerns they 
have with the subsequent change in benefits through direct changes to 
the laws governing means-tested programs directly?

    In the interest of achieving a bipartisan deficit reduction 
agreement, the President's FY2014 Budget contains the President's 
compromise offer to Speaker Boehner from December. As part of that 
offer, the President is willing to accept proposals to switch to the 
chained CPI, but the Presidents' openness to chained CPI depends on two 
conditions: the change must be part of a balanced deficit reduction 
package that includes substantial revenue raised through tax reform, 
and the change must be coupled with measures to protect the vulnerable 
and avoid increasing poverty and hardship. That is why the Budget 
chained CPI proposal includes a Social Security benefit enhancement for 
the very elderly and others who rely on Social Security for a long 
period of time and does not apply the chained CPI to means-tested 
benefit programs.
             representative tom rice qfrs for secretary lew
    Question 1: Secretary Lew, I am deeply interested in a report from 
the Treasury Inspector General for Tax Administration regarding the 
Additional Child Tax Credit. You may recall this report. It was issued 
on July 7, 2011.
    Specifically, the report highlights the gross misuse of filers 
using individual taxpayer identification numbers to claim the 
Additional Child Tax Credit. In other words, filers who do not have a 
social security number and are not authorized to work in the United 
States.
    As you may know, ITIN filers' claims for the Additional Child Tax 
Credit have increased from $924 million in 2005 to $4.2 billion for 
2010. This information is detailed in the Treasury Inspector General 
for Tax Administration's report.
    We are giving billions in tax credits to individuals who are not 
authorized to work in our country. There is also evidence of ITIN 
filers claiming multiple children who do not even reside in our 
country.
    The Treasury Inspector General for Tax Administration's report 
directed both the IRS and the Department of Treasury to look into this 
staggering issue. Since the report was issued almost two years ago, I 
am very interested in the IRS and Department of Treasury's progress. 
What efforts have your agency made to end this blatantly fraudulent 
activity?

    Since the release of the TIGTA Report in July, 2012, the IRS has 
taken significant steps to protect the integrity of the ITIN program 
and the Additional Child Tax Credit. There reforms include adopting 
TIGTA's recommendation that filers be required to submit originals of 
their identity documents in order to obtain ITINS, as well as other 
measures. In a follow-up report on this issue released in June, 2013, 
TIGTA concluded, ``The IRS initiated corrective actions to address the 
majority of recommendations included in our prior audit report. These 
actions are significantly improving the identification of questionable 
ITIN applications.''
    The Treasury Department and the IRS have considered this issue 
carefully and have concluded that, under current law, individuals 
filing with Individual Taxpayer Identification Numbers (ITIN)s are 
eligible for the Additional Child Tax Credit, and the IRS does not have 
authority under current law to deny the refundable child credit to 
Individual Taxpayer Identification Number (ITIN) filers. Nothing in the 
Internal Revenue Code requires that the individual claiming the credit 
must have a Social Security number, in contrast to the earned income 
tax credit, which does contain such a requirement. Nonetheless, to 
address issues of improper payments, the IRS has internal procedures to 
identify potentially improper claims for refundable credits, including 
the Additional Child Tax Credit, which it refines on an ongoing basis. 
Under these procedures, refunds associated with potentially improper 
claims may be frozen until the IRS audits the return to determine 
whether the claim should be allowed.
           representative diane black qfrs for secretary lew
    Question 1: Can you please explain to me what you meant in your 
comments that, ``[if] we want to do anything to correct the 
distribution of income in this country, our tax laws have to be part of 
that. I think we made big progress at the beginning of this year in 
raising the top rate to 39.6. I think that was an enormous step that 
was the biggest step in a long time in terms of dealing with some of 
that inequity.''
    Do you believe that Congress should redistribute wealth through the 
tax code?

    I believe that the tax code can be effectively and appropriately 
used to make the distribution of after-tax income somewhat less skewed 
towards the very well off than it would be otherwise. I also believe 
that it is appropriate for the most-well-off American families to bear 
a somewhat higher share of the cost of the provision of government 
services than they did in the prior decade. It is only fair that those 
who benefit the most from our system of government contribute a modest 
share of income toward its cost.

    Question 2: You mentioned in your remarks before the House Budget 
Committee that the administration has run the ``most aggressive cost-
benefit analysis of the regulations released by each agency.''
    Have you run a report projecting the cost of the 14,000 pages of 
regulations released by various departments related to the Patient 
Protection and Affordable Care Act (PPACA)?
    What is that cost? How do you measure the cost-to-benefit ratio?
    Do you have a time frame for when the PPACA law will be fully 
implemented? At the end of the implementation process, do you play on 
sending a full estimate of the cost of the final PPACA regulations? Do 
you have an estimate of what that cost would be?

    OMB designates and reviews ``significant regulatory actions'' as 
that term is defined in section 3(f) of Executive Order 12866. These 
include rules with an annual economic impact greater than $100 million. 
For any rule that is covered by E.O. 12866 and reaches the $100 million 
threshold (i.e., ``economically significant'' regulatory action), 
Treasury analyzes the costs and benefits of the proposed rule and its 
alternatives, consistent with OMB Circular A-4. For rules that do not 
reach the economic threshold, but that are designated by OMB as 
significant regulatory actions, Treasury adheres to the principles set 
forth in Executive Orders 12866 and 13563. With respect to IRS rules, 
pursuant to OMB guidance implementing E.O. 12866, and longstanding 
agreements between OMB and Treasury, only IRS legislative rules that 
constitute ``significant regulatory actions'' are subject to E.O. 12866 
review. Thus, pursuant to longstanding practice across several 
Administrations, most IRS rules are not subject to E.O. 12866 review.
    The timeframe for implementing the Affordable Care Act is generally 
determined by the statute, and we are working diligently to meet that 
timeframe. As is the case with any new tax provision, we carefully 
evaluate whether transition rules are appropriate to relieve new 
statutorily imposed compliance burdens. Many provisions have already 
taken effect and have been fully implemented. Most of the major 
coverage-related provisions take effect in 2014 and will generally be 
reflected on returns filed in 2015. As with other provisions of the tax 
code, we may continue to address issues and provide guidance on 
implementation even after provisions take effect.

    Question 3: In the Treasury Green Book, the administration proposes 
expanding the small business health insurance tax credit included in 
the health care law.
    How will this help small businesses since the administration has 
chosen to delay the small business exchanges (``SHOP exchanges'')?
    I've looked through the materials the administration has released. 
The firms must fill out seven worksheets to determine their eligibility 
and many of the small businesses in my district are confused, burdened, 
and are deterred from providing health insurance and even creating jobs 
as a result. How do you plan on guiding small businesses through this 
process?

    The small business exchange, or SHOP, is under the jurisdiction of 
the Department of Health and Human Services (HHS). My understanding is 
that for the 2014 coverage year, the SHOP will be open and many small 
employers will be able to purchase coverage and receive a tax credit 
for providing that coverage to their employees.
    The IRS has a dedicated webpage and has devoted other resources to 
help small employers benefit from the small employer tax credit. And 
while many small employers have already claimed the credit, we have 
received feedback suggesting that the tax credit be made simpler, more 
generous, and available to even more businesses. In response to this 
feedback, the President's last two Budgets have proposed a package of 
changes that would (1) increase the maximum size of a firm eligible for 
the credit from firms under 25 full-time employees (FTEs) to firms 
under 50 FTEs, (2) adopt a more generous phase-out schedule, and (3) 
simplify the credit calculation by eliminating the uniformity 
requirement and the cap based on average premiums in the state where a 
firm is located. We look forward to working with Congress to improve 
this tax credit.

    Question 4: The President's budget extends and expands various 
refundable tax credits, which are actually cash transfer payments to 
individuals who, in many cases, do not pay any income taxes (and, in 
some cases, do not even pay payroll taxes). Of particular note, the 
budget proposes to reinstate, extend, or expand a variety of tax 
provisions that have substantial outlay components, such as the Earned 
Income Tax Credit, the American Opportunity Tax Credit, the Build 
America Bonds program, renamed as Fast Forward bonds, and the proposed 
Promise Zones.
    How does all of this increased spending through the tax code help 
with deficit reduction?

    These tax credits support important social or economic goals, many 
of which benefit lower and middle-income American families. For 
example, the Earned Income Tax Credit is highly effective in preventing 
poverty among working families. Continuing these tax credits has a 
budgetary cost, but the Administration believes that this cost is 
justified by the benefits they provide. In the Administration's Budget, 
these costs are more than offset by other changes.

    How does this increased spending through the tax code help simplify 
the tax system to further the goals of fundamental tax reform?

    Simplicity is one goal of a desirable fiscal system, but it is not 
the only goal, and the best choice of policies will involve 
appropriately managing trade-offs among competing goals such as 
simplicity, efficiency, and equity. It might indeed be the case that 
the important policy goals of such programs as the Earned Income Tax 
Credit and the American Opportunity Tax Credit can be achieved more 
simply under a fundamentally reformed tax system. I look forward to 
working with you in developing a tax reform proposal that improves 
equity and efficiency and raises adequate revenue in a simple manner.
           representative barbara lee qfrs for secretary lew
    On Poverty: We know that unemployment remains too high, and income 
inequality is near historic highs, with incomes for low and middle 
income workers stagnating or even falling.
    While big corporations have more than recovered and are posting 
massive profits, Main Street families continue to struggle and small 
businesses across America don't have enough customers coming in their 
doors.

    Question 1: What would be the economic impact of successfully 
implementing a national plan to cut the national poverty rate in half 
in a decade?

    The national poverty rate has declined dramatically over the past 
half century, from 22.4 percent in 1959 to 11.3 percent in 2000. The 
largest decline over this period occurred prior to 1970, largely as a 
result of social programs enacted during the 1960s. Over the past 
decade, the poverty rate has trended upward and in 2011 stood at 15.0 
percent. Cutting the poverty rate in half from its current level would 
lower the national poverty rate to approximately 7.5 percent, well 
below the previous historic low of 11.1 percent recorded in 1973.
    Economic growth is critical to poverty reduction. The World Bank 
estimates that, on average, a 1 percent increase in economic growth 
reduces poverty by 1.25 percent. The Administration is concerned about 
the long-term consequences of rising poverty for the nation's economic 
prospects and remains focused on reducing poverty by increasing broad-
based economic growth and expanding economic opportunities for all 
Americans.

    On the Impact of Chained CPI: Today, the White House released a 
document outlining the protections put in place to shield the very 
elderly and families who rely on means tested programs from the impacts 
of Chained CPI.

    Question 2: If Chained CPI does not amount to a $230 billion dollar 
benefit cut, why does anyone need protections from the impacts of 
Chained CPI as outlined by the White House yesterday?

    The adoption of chained CPI for indexation of federal programs is 
estimated to reduce deficits during 2014-2023 by $230 billion. Lower 
outlays account for approximately $130 billion of this reduction and 
are achieved through slower growth in benefits.
    The President's FY2014 Budget contains the President's compromise 
offer to Speaker Boehner from December. As part of that offer, the 
President is willing to accept proposals to switch to the chained CPI, 
but the Presidents' openness to chained CPI depends on two conditions: 
the change must be part of a balanced deficit reduction package that 
includes substantial revenue raised through tax reform, and the change 
must be coupled with measures to protect the vulnerable and avoid 
increasing poverty and hardship. That is why the Budget chained CPI 
proposal includes a Social Security benefit enhancement for the very 
elderly and others who rely on Social Security for a long period of 
time and does not apply the chained CPI to means-tested benefit 
programs.

    On CUBA and OFAC: Given the tight budgets, it is vitally important 
that we effectively allocate resources to the highest priority 
endeavors. One such office that I believe needs a thorough review is 
the Office of Foreign Asset Control (OFAC) which is tasked with a 
critical role in our nation's fight against acts of terrorism and the 
funding of groups and actors who support terror.
    OFAC continues to unnecessarily spend resources on enforcing strict 
travel and trade sanctions with Cuba, a country that, dating back to 
1998, the Defense Intelligence Agency has not considered a significant 
threat to U.S. national security.

    Question 3: Mr. Secretary, when was the last time that the office 
of Office of Terrorism and Financial Intelligence or the Office of 
Foreign Asset Control blocked or intercepted a terrorism related 
financial transaction supported by the Cuban government?

    As Cuba is designated as a state sponsor of terrorism, the Treasury 
Department reports the blocking of millions of dollars each year 
related to Cuba in the Terrorism Assets Report. However, because our 
sanctions regime on Cuba targets not only the Government of Cuba, but 
also its nationals, defined to include entities and individuals, the 
reported figures include assets in which either the Government of Cuba 
or a Cuban national has an interest. In the most recent Terrorism 
Assets Report, Treasury reported a net increase of $8.1 million of 
blocked funds related to Cuba in 2012, for a total of $253.1 million of 
blocked funds related to Cuba.

    On the Disparity in the Unemployment Rate: The national 
unemployment rate is now at 7.6%, and has been slowly ticking downward 
for the last several months now. However, the rates for minorities--
particularly African Americans at 13.3 percent and Hispanics at 9.2--
have remained well above national average throughout the unemployment 
crisis, and are still unacceptably high.
    As part of the Omnibus Appropriations Act for FY2009--which was 
signed into law--the Department of Labor was required to provide a 
report outlining actions which can be taken related to reducing 
disparities in employment rates.

    Question 4: Many economists find that increasing equitable access 
to economic opportunity is a better economic model that will lead to 
greater economic growth for all Americans, do you agree?

    We agree. Despite the progress we have made under President Obama, 
more needs to be done to get America's job seekers back to work. Too 
many Americans still lack opportunities to make use of all of their 
talents and potential. All of us would benefit from a fuller employment 
of their skills. That is why the Administration supports programs such 
as the universal preschool initiative outlined in the FY 2014 Budget 
that help in giving all children the tools they need to succeed. It is 
also why the Administration is addressing challenging labor market 
conditions through programs that equip individuals with the skills and 
tools they need to succeed, encourage the creation of jobs in in-demand 
industry sectors and occupations, and strengthen actions that address 
discriminatory practices.

    Question 5: How can the Treasury and our entire government act to 
effectively address this pervasive issue of unemployment in these 
communities?
    The Administration is very concerned about the persistent high 
level of unemployment and is committed to policies that aim to improve 
labor market conditions. These include employment subsidies, worker 
retraining, and investment in infrastructure, among other policies. For 
instance, efforts are currently underway to upgrade and revitalize 
America's community colleges so that any individual will have the 
opportunity to further their education, gain skills, and acquire 
industry-recognized credentials. The FY2014 budget introduces several 
initiatives to encourage job growth as well as bolster education and 
worker training, such as modernizing, streamlining access, and 
strengthening the delivery of job training services through the 
American Job Centers.
            representative bill flores qfr for secretary lew
    Context: Secretary Lew commented that people who exceed the $3 
million cap can still contribute, but will simply not receive a tax 
break. This is a contradiction of the Treasury Department explanation 
where it says: ``If a taxpayer reached the maximum permitted 
accumulation, no further contributions or accruals would be permitted, 
but the taxpayer's account balance could continue to grow with 
investment earnings and gains''.
    Transcript from hearing last week:
    Lew: And we're not saying people can't contribute. We're just 
saying that the tax benefits aren't going to be the same. So you can 
still contribute. You just can't get it with before tax dollars. You 
can't contribute it before tax dollars.

    Question 1: There are multiple proposals in the budget that will 
negatively impact retirement savings, including the 28% cap on itemized 
deduction, the $3 million cap and the chained CPI proposal (which will 
limit annual inflation adjustments for contribution and comp limits), 
has the government considered the effect that these three proposals 
could jointly have on individuals saving for a secure retirement?

    The provisions that you note are unlikely to have any discernible 
effect on most individuals' ability to save for a secure retirement. 
While we all agree that too few Americans are saving enough for 
retirement, that concern does not extend to the few individuals who 
have accumulated amounts in tax-preferred savings vehicles that are 
sufficient to provide more than $205,000 per year for the life of the 
participant and an assumed spouse (and would be subject to the cap on 
tax-advantaged retirement accumulations to which you refer, and which 
today would currently be approximately $3.4 million). Similarly, the 
28-percent limit on certain tax expenditures will have little impact on 
retirement security because only high-income taxpayers are subject to 
the 28 percent limitation on the value of the tax benefit from 
retirement contributions, and even with that limitation, they would 
still receive a larger tax incentive to save for retirement than most 
middle-class families. Furthermore, the proposal recognizes that 
retirement savings are taxed when they are distributed, and allows 
affected taxpayers an adjustment to basis for the additional tax paid 
as a result of the 28-percent limit. The proposal to use the chained-
CPI instead of the current CPI slows the growth of contribution limits 
to bring them in line with what most experts regard as a more accurate 
measure of average change in the cost of living. As noted in the 
Budget, this last proposal would only be considered in the context of a 
comprehensive deficit reduction effort.

    Question 2: Have you looked at any behavior models to understand 
the potential impact on qualified plan formation or continuation, 
particularly in the small business context where a small business owner 
would lose the incentive to save within the qualified plan system?

    We agree that tax incentives for both higher- and lower-wage 
employees (including the self-employed) are an important part of our 
system of voluntary saving for retirement. The proposal will have 
little if any impact on this incentive for the vast majority of 
beneficiaries. Almost no small business employers would ever reach the 
cap on retirement savings, which is an amount sufficient to provide an 
annuity of $205,000 per year. Even those who do will have an incentive 
to continue to offer tax-subsidized plans for their employees because 
retirement plans are an important recruitment and retention tool.

    Question 3: While I understand the $3 million cap is to target 
millionaires, we all recall the economic downturn not too long ago, and 
I am concerned that with any similar downturn, couldn't we have 
someone's supposed secure $3 million turn into $1 million, which would 
then not be enough to fund a comfortable retirement?

    Fluctuating values in retirement accounts is an important concern. 
However, the proposal to limit the tax benefit to accumulations 
sufficient to provide an annual income over $200,000 will have little 
if any impact on retirement security. First, a $205,000 annuity should 
be more than sufficient to provide for a secure retirement. Second, the 
few individuals who would be subject to this provision are still free 
to save additional amounts outside of the tax-favored system. And 
third, if accumulated levels fall below an amount sufficient to fund 
the maximum allowable tax-favored annuity, the taxpayer would be 
permitted to resume contributions.

    Question 4: In terms of the proposal to place a $3 million cap on 
savings, won't this discourage savings more broadly? And wouldn't that 
be the wrong message for the government to send?

    The proposal will not have any discernible impact on overall 
saving. While we all agree that too few Americans are saving enough for 
retirement, that concern does not extend to the very few individuals 
who have accumulated amounts in tax-preferred savings vehicles that are 
sufficient to provide income of $205,000 per year. Moreover, those few 
affected individuals are still free to save additional amounts outside 
of the tax-favored system. There is little evidence that tax-
preferences for retirement saving substantially increase the amount 
saved by higher-income individuals once a reasonable amount has been 
accumulated, and thus little reason to believe they will save less if 
those tax benefits are modestly curbed.

    Question 5: Would you envision individuals needing to pay taxes 
immediately if they have funds over $3 million in their account? How 
about spouses who have inherited IRAs and may need that money to live 
comfortably?

    No, a taxpayer who has already accumulated sufficient retirement 
saving to fund an annuity of more than $205,000 (in today's dollars) 
will not have to pay tax immediately. The taxpayer would continue to 
enjoy tax-deferred growth of retirement saving and would merely be 
prohibited from making additional tax-favored contributions.
    The proposal would have no impact on IRAs inherited by a spouse.

    Question 6: In terms of the actual number the government is 
proposing, what happens with a potential economic downturn? Or a 
changed life situation? Such a limitation does not take in account any 
possible changed circumstances.

    If a taxpayer's account balance falls below the limit (assets 
sufficient to fund a retirement annuity of $205,000), because of an 
economic downturn or other reasons, he or she will be allowed to resume 
making contributions. Note that the limit is the same as the maximum 
defined benefit pension today, and that a $205,000 annuity should 
provide for a secure retirement.

    Question 7: Has the government looked at how this could impact ESOP 
formation or current ESOP participants?

    ESOPs receive additional tax preferences beyond that of a typical 
qualified retirement plan and have desirable non-tax related features 
that can also benefit firms, which would not be affected by this 
proposal. Therefore, the proposal would have little, if any, impact on 
ESOP formation. Since very few ESOP participants would ever reach the 
limit, the vast majority of current ESOP participants would be 
unaffected by the proposal.
                              attachments











    [Whereupon, at 12:23 p.m., the Committee was adjourned.]

                                  
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