[Senate Hearing 113-258]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-258
 
                  PRESIDENT'S FISCAL YEAR 2014 BUDGET 

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 11, 2013

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance

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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         PAT ROBERTS, Kansas
DEBBIE STABENOW, Michigan            MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHN CORNYN, Texas
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware           JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         ROB PORTMAN, Ohio
SHERROD BROWN, Ohio                  PATRICK J. TOOMEY, Pennsylvania
MICHAEL F. BENNET, Colorado
ROBERT P. CASEY, Jr., Pennsylvania

                      Amber Cottle, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     4

                         ADMINISTRATION WITNESS

Lew, Hon. Jacob J., Secretary, Department of the Treasury, 
  Washington, DC.................................................     5

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    39
Hatch, Hon. Orrin G.:
    Opening statement............................................     4
    Prepared statement...........................................    42
Lew, Hon. Jacob J.:
    Testimony....................................................     5
    Prepared statement...........................................    44
    Responses to questions from committee members................    51

                                 (iii)


                  PRESIDENT'S FISCAL YEAR 2014 BUDGET

                              ----------                              


                        THURSDAY, APRIL 11, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:35 p.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Max Baucus 
(chairman of the committee) presiding.
    Present: Senators Stabenow, Nelson, Menendez, Carper, 
Cardin, Bennet, Casey, Hatch, Cornyn, Thune, and Portman.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; John Angell, Senior Advisor; Lily Batchelder, Chief 
Tax Counsel; Tiffany Smith, Tax Counsel; and Tom Klouda, 
Professional Staff Member, Social Security. Republican Staff: 
Jeff Wrase, Chief Economist.

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

    The Chairman. The committee will come to order.
    Alexander Hamilton once said, ``The necessities of a nation 
in every stage of its existence will be found at least equal to 
its resources.'' In 1790, when Hamilton was appointed America's 
first Treasury Secretary, he set out to build our young 
Nation's financial system and pay down its debt. As Hamilton 
did this, he submitted the first budget to Congress and put the 
United States on track to be a thriving nation.
    Today, more than 2 centuries later, we meet to hear from 
our new Treasury Secretary, Jack Lew, about this year's budget 
and the administration's plans to meet the necessities of our 
Nation.
    The budget must be a reflection of our priorities, more 
than just numbers on a page, and should serve as a roadmap, 
guiding our Nation on a fiscally sustainable path. We must cut 
our debt, also invest in and protect our priorities, and create 
new jobs.
    My bosses, the people of Montana, tell me they want to see 
a balanced plan that will bring us together and get the economy 
running at full speed and create jobs for folks in Montana and 
across the Nation. I was pleased that the President's proposal 
takes some steps to find a middle ground. It calls for spending 
cuts and deficit reduction of an additional $1.8 trillion, 
while at the same time continuing to invest in national 
priorities, such as education and infrastructure.
    Of special importance to me, the budget supports my battle 
against veterans' unemployment. It would permanently extend the 
tax credit I authored for businesses that hire unemployed 
veterans. Our veterans deserve to come home to good-paying jobs 
and a Nation that honors their sacrifices. Making these tax 
credits permanent would help bring down unemployment among our 
Nation's heroes.
    I am also glad to see the administration addressing my 
concerns with bureaucratic red tape at the VA. Recent backlogs 
in disability claims are disgraceful. A 10-percent increase in 
funding for the VA will help veterans get the care and support 
they need and deserve.
    The budget also makes important investments in keeping 
America safe by sustaining the current ICBM force through 2030. 
I led the Senate ICBM caucus in a letter to Defense Secretary 
Hagel last week calling for this. North Korea's recent actions 
have sent a clear wake-up call to the White House that a strong 
ICBM force is the best deterrent strategy to keep America safe, 
and also gives us the most deterrence for our money.
    However, in many areas the President's budget is yet 
another example of how Washington still does not understand 
rural America. We cannot balance the budget on the backs of 
rural jobs. The President would cut $38 billion from 
agriculture jobs over 10 years, which I believe undermines our 
work toward a strong, long-term farm bill this year.
    In Montana, agriculture supports 1 in 5 jobs. The farm bill 
is our jobs bill, and I will not support anything that gets in 
the way of our ability to get it done.
    As we address our budget challenges and work to cut the 
debt, this committee must focus like a laser on creating jobs. 
Nearly 4 years into the economic recovery, close to 12 million 
people are actively looking for work. An additional 7.6 million 
Americans are stuck working part-time because they cannot find 
full-time jobs. Just last week, we heard that new job creation 
is at anemic levels: only 88,000 jobs were added to the economy 
in March, making it the slowest job growth in nearly a year.
    Job creation must remain the top priority of the 
administration, this Congress, and this committee. Some 
economists have attributed this slow job growth to austerity 
measures, known as the sequester. The sequester cuts started to 
hit in early March, and the impact is being felt in Montana and 
across the country.
    I voted for every bill I could to stop these indiscriminate 
cuts. I voted for the Democrats' plan to replace the sequester, 
and I voted for the Republicans' plan to give the President 
more flexibility in where the cuts should occur. Unfortunately, 
neither plan passed.
    Frankly, I think we should try again. I was pleased to see 
that the President's budget looks to replace the sequester with 
more thoughtful cost-saving measures. The slow pace of our 
economic recovery demands that we replace sequestration with a 
responsible, long-term deficit reduction proposal that protects 
jobs and spurs the economy.
    Much progress has already been made in reducing the 
deficit. Congress has enacted two budget-trimming bills that 
reduce deficits by $2.5 trillion over the next 10 years. When 
savings from ending the wars in Iraq and Afghanistan are added, 
Federal deficits will be reduced by almost $3.5 trillion over 
10 years.
    This belt tightening is having a real effect. The 
Congressional Budget Office projects a stable debt-to-GDP ratio 
over the next several years, and the deficit will be cut in 
half by 2015.
    CBO also expects the rate of Medicare and Medicaid spending 
to slow significantly. Current projections for the programs' 
costs through the end of the decade are $200 billion less than 
they were in March 2010. That said, there is still more work to 
be done to responsibly cut our debt in a way that does not 
impede our economic recovery.
    As I mentioned earlier, Mr. Lew, I am committed to 
strengthening Social Security and Medicare to ensure these 
programs will be there for future generations. The President 
has made some bold proposals in his budget to reform both 
programs.
    The President's proposal calls for Medicare cuts well above 
the level passed in the Senate budget, and the Senate budget 
put a firewall around Social Security. I am disappointed by the 
President's proposal to change how cost-of-living adjustments 
are calculated for seniors and military retirees.
    Cutting Montana seniors' benefits without asking the 
wealthiest Americans to chip in to the Social Security trust 
fund is not right. Any reform of Social Security should be for 
the solvency of the program, not deficit reduction. We will 
delve into these issues in more depth.
    Finally, we have been hard at work on this committee for 
more than 2 years on comprehensive tax reform. The lackluster 
economic growth we are seeing shows we must simplify the code. 
We need a pro-growth tax code that closes loopholes while 
giving America's businesses the certainty they need to compete 
globally and plan and expand operations.
    The Finance Committee is meeting weekly, discussing the 
code issue by issue and working together to modernize America's 
tax system. We are working to make it simpler and fairer for 
families.
    Just 2 months ago you sat before this committee and told us 
you are going to work with us on tax reform. I appreciate that. 
You said you are willing to take on this challenge, and this 
committee will hold you to your word.
    Today I look forward to hearing exactly how the budget 
helps your words become reality. The President's budget has 
proposed raising $600 billion in revenue over 10 years. The 
Senate budget proposed raising $975 billion over 10 years. It 
seems the President is working to carve middle ground, just 
like I am working to do when we close loopholes and simplify 
the code.
    We will close billions of dollars of loopholes. Some of 
this revenue should be used to cut taxes for America's families 
and help our businesses create jobs, and some of the revenue 
raised in tax reform should also be used to reduce the deficit. 
It is all about finding common ground so we can move forward 
together.
    Secretary Lew, we welcome you. This is your first 
appearance before the committee as Treasury Secretary. We 
appreciate that. So, let us remember our priorities and heed 
Secretary Hamilton's advice to look at the necessities of our 
Nation as we assess our resources.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

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

    Senator Hatch. Thank you, Mr. Chairman.
    Thank you, Secretary Lew, for joining us here today. We 
appreciate it. Yesterday, after a couple of months' delay, we 
received the President's fiscal year 2014 budget proposal. Now, 
while there are, in my opinion, a few glimmers of hope in the 
budget, it is overall a disappointment to me.
    The President's budget never balances: not this fiscal 
year, not in 10 years, not ever. Instead, under the President's 
budget, the Gross National Debt would be $25.4 trillion in 
2023, or 96 percent of our GDP at that time.
    The economists in the Congressional Budget Office have 
repeatedly told us that such high levels of debt threaten 
economic growth and leave us in a position where we are unable 
to respond to unforeseen crises or emergencies.
    In addition, the President's budget takes only baby steps 
towards reforming our unsustainable entitlement programs, 
falling fall short of the structural changes needed to preserve 
these programs for future generations.
    Now, many have touted the proposals in this budget to adopt 
the chained CPI for many parts of the Federal Government, 
including Social Security cost-of-living adjustments, as a 
demonstration of the President's willingness to work on 
entitlement reform. While one may conclude that this is a step 
in the right direction, and I have, it is only a small step. In 
fact, in the grand scheme of things, it barely registers. Under 
the President's budget, overall Social Security spending over 
the next 10 years is virtually the same as it would be absent 
any of his proposals.
    Put simply, that means, despite many claims to the 
contrary, this budget contains no substantive changes to Social 
Security. The story is the same on entitlement spending across 
the board. Of course, we know that, according to the experts, 
Social Security is going to go bankrupt from a disability 
standpoint, Social Security Disability, in 2016.
    Again I will say, the story is the same on entitlement 
spending across the board. Over the next 10 years, according to 
the President's suggested baseline, we will spend $7 trillion 
on Medicare, $4.1 trillion on Medicaid, and $11.2 trillion on 
Social Security, for a combined $22.4 trillion.
    With trillions of scheduled spending, the President's 
budget proposes to curtail spending on these programs by only 
$413 billion over 10 years relative to his adjusted baseline, 
which amounts to a minuscule 1.8-percent reduction in 
entitlement spending. Now, that is not reform in any meaningful 
sense. It is nowhere near the structural reforms we need to get 
our entitlement programs on a path to solvency.
    In addition to increased spending, the President's budget 
calls for even more taxes. Now, this comes after the $1 
trillion in taxes imposed under Obamacare and the more than 
$600 billion in taxes the President got out of the fiscal cliff 
deal.
    The budget includes higher taxes on estates, the Buffett 
tax, a financial crisis responsibility tax, fresh taxes on 
retirement savings, more taxes on commercial aviation, 
increased taxes on energy producers, and on and on.
    All told, the budget contains nearly $1 trillion in tax 
increases, which in my opinion is simply unacceptable. That 
said, I do have to say that I am encouraged by some of the 
proposals in the budget dealing with corporate tax reform. With 
this budget, the administration has finally admitted that it 
would be open to revenue-
neutral corporate tax reform.
    Many Democrats in the Senate have supported this position, 
though the idea was soundly rejected in the budget that 
recently passed in the Senate. Contrary to what the President 
has proposed, the Senate Democratic budget envisions higher 
taxes on corporations to finance even more government. It will 
be interesting to see how this apparent conflict will be 
resolved and which course my colleagues on the other side of 
the aisle really decide to take.
    Of course, my praise for the President's proposal on tax 
reform is tempered by the fact that it is limited to the 
corporate side of the tax code. While the President seems 
content to lower rates on corporations in order to make them 
more competitive in our global economy, he also is apparently 
fine with asking flow-through businesses--which file as 
individuals--for even more taxes. If we want tax reform to 
result in real economic growth and to improve the 
competitiveness of American businesses, it needs to be 
comprehensive, focusing on both the corporate and individual 
tax codes.
    Now these are just some of the concerns that I have with 
the budget that was released yesterday. In addition, there 
remain many unspecified details in the President's budget, 
which I hope we can begin to clarify at today's hearing with 
you, Secretary Lew. I look forward to the Secretary's 
testimony.
    Once again, I want to thank you, Mr. Chairman, for holding 
today's hearing.
    The Chairman. Thank you, Senator.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. Mr. Lew, we appreciate very much you taking 
the time to come explain the President's budget. You know our 
regular practice. Your statement will be included in the 
record. Just speak for however long you want to just explain 
the budget.

 STATEMENT OF HON. JACOB J. LEW, SECRETARY, DEPARTMENT OF THE 
                    TREASURY, WASHINGTON, DC

    Secretary Lew. Thank you very much, Chairman Baucus, 
Ranking Member Hatch, and members of the committee. I 
appreciate this opportunity to testify on the President's 
budget.
    Our economy is much stronger today than it was 4 years ago, 
but we must continue to pursue policies that help create jobs 
and economic 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, and the housing 
market has improved. Consumer spending and business investment 
have been solid and exports have expanded, but very tough 
challenges remain.
    While we have removed much of the wreckage of 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, and economic 
growth needs to be faster. While we have made substantial 
progress, we need to 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 more sensible deficit reduction policies.
    This is my first opportunity to appear before you as 
Treasury Secretary and to discuss from this vantage point how 
we need to confront these difficult challenges, but it is far 
from the first budget I have worked on. In my experience, a 
good budget offers practical solutions to the problems of its 
time.
    The President's budget does that by making the investments 
that will drive a growing economy and by reining in our 
deficits responsibly so we can replace the across-the-board 
cuts from sequestration immediately and restore fiscal 
stability over time.
    A good budget must also be grounded in reality, and this 
budget deals squarely with the world as it is now and as it 
will be in the future. It reflects the need for compromise to 
find a path that can command bipartisan support, and it 
recognizes issues of major consequence, like the fact that our 
demographics are shifting with the retirement of the baby boom 
and the number of retirees is growing; like the fact that 
millions of Americans are living in poverty today; like the 
fact that wages and incomes for middle-class Americans have not 
improved for more than a decade; and that, despite the 
significant strides achieved through the Affordable Care Act, 
health spending remains a key driver of long-term deficits.
    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 long-standing 
approach to fiscal policy. 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 so 
committed to this path.
    I just returned from meetings in Europe, and it is clear 
that, in countries where austerity measures were implemented 
too quickly, those economies have stumbled. Ours is a different 
story. Notwithstanding the need to do more, our economy 
continues to expand with the support of growth-oriented 
policies even as we make meaningful progress to reduce our 
deficit.
    It is important to bear in mind how meaningful that 
progress has been. 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 the savings from 
interest, we have locked in more than $2.5 trillion in deficit 
reductions over the next 10 years. Today we are putting forward 
policies that will lower the budget deficit to below 2 percent 
of GDP and bring down the national debt relative to the size of 
the economy over the next 10 years.
    We restore the Nation's long-term fiscal health by cutting 
spending and closing tax loopholes, taking a fair and balanced 
approach. The budget achieves this balanced approach through 
very specific steps, such as reforming agriculture subsidies 
and eliminating tax preferences for companies that move 
operations and jobs overseas.
    At the same time, the budget incorporates all elements of 
the administration's offer to Speaker Boehner last December, 
demonstrating the President's readiness to stay at the table, 
make very difficult choices, and find common ground.
    Consistent with that offer, the budget includes things the 
President would normally not 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 is a drag on economic growth 
and job creation.
    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 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. Now I know the 
significance of balancing the budget, and I will never take a 
back seat when it comes to fiscal responsibility.
    Under President Clinton, I helped negotiate the ground-
breaking agreement with Congress to balance the budget. 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.
    It will come as no surprise that I was profoundly 
disappointed to see those surpluses squandered, but that does 
not mean we should make deficit reduction our one and only 
priority, not when our world demands that we both confront our 
fiscal challenges and make targeted investments to propel 
broad-based growth.
    So, 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 have 
not added one dime to the deficit.
    As the President explained in the State of the Union 
address, the surest path to long-term prosperity is to 
strengthen the middle class. This budget does that by zeroing 
in on three things: bringing more jobs to our shores, making 
sure American workers have the skills needed to do those jobs, 
and making sure hard work amounts to a decent living.
    To generate more jobs in the United States, we focus on 
growing our economy by making it more competitive. The budget 
launches advanced manufacturing hubs around the country, 
invests in research and technology, and cuts red tape to expand 
domestic energy production, including clean energy and natural 
gas.
    It also puts people to work right away repairing our 
deteriorating roads, railways, bridges, and airports so our 
economy can compete in the future. We have made considerable 
headway over the last few years to improve education and worker 
training, and we can go even further by helping students 
acquire the skills that today's economy demands.
    That means joining with States to give every child a solid 
preschool education; that means reconfiguring high schools so 
students can get the high-tech, high-wage skills that 
businesses need; and it means making college more affordable.
    Finally, the budget would help lift communities hit the 
worst by the recession, and it would adjust the minimum wage so 
that full-time workers are not stuck in poverty. The proposal I 
just outlined is part of the President's framework for growing 
our economy and cutting our deficits.
    As this budget shows, we do not have to choose between the 
two, and we must not. We can adopt a powerful jobs and growth 
plan even as we embrace tough reforms to stabilize our 
finances. This is the way a budget will help make our economy 
stronger and help jobs now and in the future.
    Before I close, I want to say that the debate that we are 
engaged in is very important. It is part of a complex sorting-
out process that will determine our Nation's future. But 
everyone on this committee knows that 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--entrepreneurs and immigrants, soldiers and veterans, 
the young and the elderly, the working poor and the very well-
off--and it really matters that we get it right.
    With that in mind, I come here today optimistic about what 
we can accomplish. I believe we can find common ground to put a 
stop to the unnecessary stand-offs and manufactured crises, 
that we can come together to forge an agreement to right our 
fiscal ship, and that we can make the compromises that are 
necessary to meet our obligations to future generations.
    I thank you for the opportunity to appear today, and I look 
forward to answering your questions.
    The Chairman. Thank you, Mr. Secretary.
    [The prepared statement of Secretary Lew appears in the 
appendix.]
    The Chairman. I wonder if you could explain how your 
chained CPI works, the proposal. As I understand it, it is 
about a 0.3-
percent reduction in cost-of-living increases beginning in 
2015, then there are other provisions for those over age 75, 
which I cannot quite comprehend. But if you could explain, what 
is it?
    Let us take someone in Butte, MT who is 65, or let us say 
67 years old. What reduction in benefits will she receive 
beginning in 2015? What dollar reduction will she receive? I 
suppose it is compounded too, so over time, when she gets a 
little older--I do not know what happens, going through the 
age-75 window, then out of the window, and so forth.
    But explain what it is, please, and how much of a reduction 
will this lady in Butte, MT expect to see in her Social 
Security paycheck? I raise it also in the context of, I am a 
little concerned that this is--I do not know. You could answer 
the question. Chained CPI is being used partially to reduce the 
debt.
    My view very strongly is that Social Security should be 
handled outside of debt and deficit reduction. Second, I do not 
know why--and I do not see it in this proposal--you do not 
increase the cap on earnings to a higher rate. To me that is a 
lot more fair, how to find more revenue for the Social Security 
trust fund, than it is to reduce the benefits that this lady in 
Butte, MT is going to get in 2015. Explain the proposal, 
please.
    Secretary Lew. Well, Mr. Chairman, I guess I would like to 
begin by saying the President has made clear that, while he has 
put chained CPI in his budget and it is something he did 
propose in December to Speaker Boehner as part of an overall 
package to reach a bipartisan agreement on our long-term 
deficit, it is not his first choice of policy.
    We have been through 2\1/2\ years of negotiations where, at 
every stage of the negotiations, we have heard clearly that one 
of the things that will have to be in any deal, we are told by 
Republican leaders, is chained CPI.
    The President agreed to it for the reason that he wanted a 
deal, and because it can be justified technically. What chained 
CPI does is, it just changes the way we measure inflation 
increases. It does not actually cut anyone's benefit from what 
it is today. It changes the measure by which inflation 
increases will be calculated in the future.
    The Chairman. It will be cut more than it otherwise would 
be.
    Secretary Lew. The changes with inflation increases will be 
in the future.
    The Chairman. But she will receive less than she otherwise 
would receive.
    Secretary Lew. Yes. And the principle behind chained CPI is 
that, as prices for one kind of good or service go up, people 
choose what to buy. So, if you are buying apples, oranges, and 
bananas, and the price changes, you will change the mix of 
apples, oranges, and bananas.
    Most economists believe that chained CPI actually reflects 
more accurately what is the inflation rate, but I am not going 
to disagree that it is a lower adjustment than the adjustment 
that would be in place if we did not make the change.
    That is a real impact, and it is something that we should 
only do if it is part of a broad plan where there is shared 
sacrifice and everyone is doing their part. The President has 
made clear that he is not going to accept a deficit-reduction 
package that disproportionately puts the burden on that 
retiree.
    The Chairman. Why not increase the wage cap?
    Secretary Lew. I think if we were to propose increasing the 
wage cap, I do not think it would probably meet the same 
definition of looking for that middle ground where the parties 
could agree. It is something that has been discussed in Social 
Security reform.
    Were we discussing Social Security reform, I would agree 
with you that it is something that should be looked at, but I 
think in the context of trying to reach a bipartisan agreement 
to get our fiscal house in order, we have heard loud and clear 
that there are one, two, or three critical issues that would 
have to be in, and we have been told by leaders on the other 
side that this is one.
    It is something that we can justify, so I am not walking 
away from the proposal. I can defend it as being a more 
accurate measure of inflation, but it does put a burden on 
anyone who would receive benefits.
    Now, we do have a provision in our proposal--and we would 
only accept chained CPI if a provision of this sort were 
included--that for those who are most on the margin, that there 
be some adjustment in their benefit so that, if you are on a 
very minimal disability benefit, if you are very old, in a 
category of retirees who are most vulnerable, that there would 
be an adjustment in your benefit.
    Some of the savings that we would get from switching to 
chained CPI would go towards making those adjustments. We think 
that is critical and the only fair thing to do. This effort to 
reach a bipartisan agreement on putting our fiscal house in 
order is something that is going to require sacrifice from all.
    It is one of the reasons we believe so strongly that 
revenues have to be part of the package. I do not think you can 
ask a retiree to pay that burden if you are not asking those 
who have the highest incomes to take some reduction in the 
benefits they get from their deductions in the tax code, which 
is where tax reform and raising revenue through tax reform 
comes in.
    The Chairman. My time is expired.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    Mr. Secretary, I am sorry. It does not appear to me that 
this budget does much as far as addressing the runaway, out-of-
control, unsustainable entitlement spending. The budget does 
take one small step forward by proposing a switch to the 
chained CPI for indexing Federal programs, though it allows for 
carve-outs even on that provision, as you have mentioned.
    The budget proposes to curtail spending on Social Security, 
Medicare, and Medicaid by only $413 billion over 10 years 
relative to the President's adjusted baseline, which amounts to 
only a 1.8-
percent, as I view it, reduction in an entitlement spending 
base of $22.4 trillion over the next 10 years.
    Now that, in my opinion, is nowhere close to being what is 
needed. The budget includes nothing resembling structural 
changes to entitlements, by which I mean changes in eligibility 
requirements and fundamental reforms such as the Medicare and 
Medicaid reforms I proposed, which I shared with the President 
just last month. I gave five major approaches there.
    Now, Mr. Secretary, what further changes to entitlements, 
including changes in eligibility requirements and other 
structural changes, is the administration willing to consider 
in order to help ensure that Medicare and Social Security will 
be around for future generations, or is the administration 
content with the small steps taken in this budget? I do not 
think we can keep playing with this. I think we have to attack 
these problems, and we cannot just continue to go down the road 
and ignore them, at least in my opinion.
    Secretary Lew. Senator, I think I would have a different 
characterization of the proposal. I do not think they are small 
steps. I think $400 billion of savings in Medicare over 10 
years is more than the savings over 10 years in the House 
Republican budget. It is the largest Medicare savings, I 
believe, that has been proposed in the context of a budget. 
These are very serious steps.
    In Medicare, we have essentially proposed means-testing the 
program through an income-related premium that says that, if 
you can afford to, you are going to pay for Medicare when you 
retire. That is a structural change.
    When I met with leaders over the last 3 years and they 
named three structural changes we needed to do, one of them was 
chained CPI, a second was means-testing Medicare. The President 
has included two of those in this budget, and that is an 
enormous amount of movement. I think that to treat this as a 
small step is actually something that would jeopardize our 
ability to find an agreement in the reasonable middle.
    Senator Hatch. I am not saying it is a bad step, but it 
does not put us down the road as far as handling these 
problems. Like I say, there is no way of balancing the budget 
ever under the President's program. That may be a little 
unfair, since it is only covering so many years. I do not mean 
it to be unfair.
    But I am very concerned about it, because I hear every day 
that the Social Security disability program is going to be 
bankrupt in 2016 and that people are over-utilizing the 
program, people are in some ways defrauding the government: 
unwilling to work, unwilling to carry their load. I mean, there 
are a lot of things that I think we have to get under control 
or there will not be money there for anybody.
    Secretary Lew. Well, Senator, I actually think we make 
important steps in this budget. We do not represent that this 
budget is the long-term Social Security plan. The President has 
said for a number of years that we need to engage in long-term 
Social Security reform. I would personally make the argument, 
based on the experience we have had over the last 30 years, 
that for us to reach a bipartisan agreement on Social Security 
reform, it would be a lot better if it was not in the context 
of a deficit-reduction bill. We would have an easier----
    The Chairman. Then why are you doing that here?
    Secretary Lew. Well, we are not, actually, Mr. Chairman. 
What we are doing is, we are including one provision that has 
broad effect across the government, is a technical change which 
has an effect--I am not challenging that it has an effect that 
will mean smaller increases--but it also will affect the 
indexing brackets for the tax code. It is a more general 
policy. We have not put it forward as a Social Security reform 
solution. It will have some benefits to the Social Security 
trust fund, a not insignificant benefit, and that is a good 
thing, and that stays within the trust fund.
    The Chairman. I took some of Senator Hatch's time. Go 
ahead, Senator. Go ahead.
    Secretary Lew. Senator Hatch, if I could just respond to 
the question of, is it big enough and does it accomplish 
enough----
    Senator Hatch. Sure.
    Secretary Lew. This budget would bring down the deficit as 
a percentage of GDP to under 2 percent in the 10th year. That 
will mean we would have gone from a double-digit, over 10 
percent of the GDP deficit, to under 2 percent. That is an 
enormous change over a relatively short period of time. We have 
never said that this does all the work for all time.
    If you look at the 1980s and the 1990s, it took many 
attempts, and many successful attempts, to actually get to the 
point of balancing the budget. I think this budget does an 
enormous amount of good. If we could agree on this, it would be 
the right thing for the country for growth and for fiscal 
policy.
    Senator Hatch. Well, I have to tell you, I disagree with 
you on that. I think we could solve Social Security just by 
getting together and resolving the problems and making some 
tweaks that mean Social Security will be there for our kids and 
our grandkids, and in Elaine's and my case, even great-
grandkids.
    So I am very concerned about the continued tendency we have 
of just kicking the can down the road and not really facing 
these problems like we should face them. Look, I am counting on 
you to face them.
    I know that you are only one person in the administration, 
but nevertheless you are a lead person when it comes to these 
issues, and I hope that we can get you to do a better job in 
what we can do over the next 10 years in getting spending under 
control and also saving these programs that really are 
important but are not going to be there if we keep going the 
way we are going--or at least they are not going to be there to 
the extent that they are now.
    The Chairman. Yes.
    Senator Stabenow?
    Senator Stabenow. Thank you very much, Mr. Chairman.
    Welcome again to the committee. It is always good to see 
you. Obviously, with any budget, there are things that we look 
at that we agree with and things that we disagree with. Let me 
just start big-picture and thank you and the President for 
giving us a balanced approach. We have all been aiming for at 
least a $4-trillion deficit-reduction plan to be able to turn 
the corner on the huge debt that we have.
    Of course, we have already put in place $2.5 trillion of 
that, so now the question is, how do we do the rest of it in a 
way that actually grows the economy and is fair to middle-class 
families and does not just put the burden on seniors or 
families and so on, as I believe much of the $2.5 trillion in 
cuts already has done?
    I want to first also say that I appreciate very much your 
focus on veterans and what is a completely, totally 
unacceptable backlog at the VA. I share the chairman's comments 
on that and urge you to be moving as fast as possible there.
    I share the concerns about chained CPI and believe that, 
while we need to--and can--address long-term what needs to be 
done to strengthen Social Security with incremental change, it 
should not start by cutting benefits. There are other options 
for us that I think are much more fair, and I would hope that 
we would be doing those.
    I also want to just stress my support for what you have 
done in terms of focusing on jobs. I do not think we will ever 
get out of debt with over 11 million people out of work, so we 
need to focus on jobs. I do not think we have a strong economy 
unless we make things and grow things, fundamentally.
    So I want, as chair of the Agriculture Committee, with that 
hat on, just to indicate that I am supportive of what you have 
done in terms of limiting the direct payment subsidies, but I 
am very concerned about the cuts in conservation in this 
budget, as well as in crop insurance, so that is something that 
this Senate is taking a different approach on.
    But let me ask you a question related to making things and 
how we incentivize things. We talked this morning in our 
discussions on tax reform about section 199. I noticed that, in 
the framework for business tax reform, the President proposes 
to strengthen section 199 deductions and target them more 
towards manufacturing and establish an even stronger incentive 
for advanced manufacturing.
    Of course, everyone looks at me and sees automobiles, and I 
stress with colleagues that there is much more about 
manufacturing, from bio-medicine, bio-tech, clean energy, and 
so on. But I wonder if you might discuss more your vision as it 
relates to this very important section of the tax code.
    Secretary Lew. Senator, as we look to the economy of the 
future, we have to focus on advanced manufacturing. Even in the 
auto industry, as you know better than anyone else, one of the 
reasons we are going to be competitive in the future is that we 
are developing the technology of the future where we can have 
more fuel-efficient cars, and that is driven by advanced 
manufacturing.
    So we have tried to gear our budget towards the kinds of 
incentives that would help create a strong economy today with 
growing jobs today. That is why we have the provisions that we 
do on infrastructure, for example. We need the jobs to build 
the infrastructure. We also need the roads, the bridges, the 
ports, and the airports, because, when we manufacture things, 
we have to be able to ship them.
    As we look down the road, research and development and 
advanced manufacturing kind of go together. The United States 
has stayed at the cutting edge because we stayed at the cutting 
edge of knowledge. We are still at the cutting edge of 
knowledge. We have tried to bring our tax policy and our 
research and development policy in alignment so that we are 
encouraging the kinds of manufacturing to take place to take 
advantage of the knowledge we are creating in research and 
development.
    Senator Stabenow. Thank you.
    Then, just finally, I would say I was very pleased--as we 
look again at tax policy, at how we make sure we are doing 
things here at home and supporting investment at home--that a 
bill of mine that we have debated was passed here. It is called 
the Bring Jobs Home Act, and it stops incentives like allowing 
the write-off for closing up a plant, moving expenses, and so 
on, to send jobs overseas. I was pleased to see the President 
has a similar proposal in his budget and would ask that we 
continue, that you continue, to really focus on how we 
incentivize actually making things in America.
    Secretary Lew. I think, as you know, we think we have to do 
two things. We have to make it less attractive to move jobs 
overseas with provisions like that, and we have to make it more 
attractive to invest in the United States. We need to do that 
through specific incentives and through business tax reform 
where we lower our rates and have our statutory rate be more 
competitive with other countries. So we view these provisions 
as being very much interconnected.
    Senator Stabenow. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Cornyn?
    Senator Cornyn. Thank you, Mr. Chairman.
    Mr. Secretary, I want to start off by asking--with all due 
respect, the President's budget was released more than 2 months 
after the statutory deadline when it was due. The Senate has 
moved forward, under Chairman Murray and Ranking Member 
Sessions, and passed a budget; the House has passed a budget. 
Then here comes, 2 months after the statutory deadline, the 
White House's budget proposal. How are we supposed to take this 
seriously?
    Secretary Lew. Senator, I think we would all agree we have 
a lot of work ahead of us for there to be an agreement where 
the House and the Senate come together. We very much want that 
budget conference to be successful.
    We have done everything we can to create the kinds of 
positive signals, and not just signals, but taking considerable 
political risk putting things that are very big concessions on 
the part of the President out there to try to drive the process 
forward.
    I think, if we are going to reach an agreement, it is going 
to be both sides moving off of things that are dear to them and 
making decisions that are hard. We have just spent a fair 
amount of time talking about chained CPI. That is a very hard 
thing for the President to put on the table. I hope that there 
is a response that----
    Senator Cornyn. With all due respect, that is not hard for 
the President. He does not have to stand for election again. He 
recognizes that that is one of the elements of restoring 
Medicare and Social Security to sustainability. Right now they 
are on a path toward insolvency.
    Secretary Lew. Senator, I think the chairman's questions 
indicate that it is very hard. It is very hard for an awful lot 
of Senators and members, it is very hard for people who are 
going to see their increases smaller. I am not saying we do not 
support doing it. It is in the President's budget, and we 
support it.
    But I think treating it as if it is easy actually makes it 
harder to reach an agreement, because we are doing something 
hard, and we know that revenues are going to be hard for you. A 
balanced package is going to have to include both.
    Senator Cornyn. Well, you talk about balance. The fact is, 
this budget proposal never balances. Is that not correct?
    Secretary Lew. Our goal in this 10-year window was not to 
reach balance.
    Senator Cornyn. Is that not correct?
    Secretary Lew. I am not going to look at the far out-years. 
This is a 10-year budget.
    Senator Cornyn. No, I am talking about a 10-year budget 
proposal which never balances.
    Secretary Lew. No. I am saying, in the 10 years, it does 
not balance, but it reduces the deficit to under 2 percent of 
GDP. I think the programs that I have seen proposed that would 
reach balance within the 10-year window do much harm. We could 
have a debate about the policies that are in them, but the goal 
here would be to restore stability to the U.S. fiscal policy 
and put us on much stronger footing.
    Senator Cornyn. Do you agree that the growing Federal debt 
is a threat to economic growth and private sector job creation?
    Secretary Lew. I think that, as this budget indicates, we 
think we have to stabilize the deficit and the debt as a 
percentage of GDP and----
    Senator Cornyn. Secretary Lew, with all due respect, you 
are not answering my question. I asked you, do you think that 
growing the Federal debt has a negative impact on economic 
growth and thus stymies job creation?
    Secretary Lew. Senator, I am answering the question. I 
think the question is, as a percentage of GDP, is our deficit 
and our debt something that is compatible with economic growth? 
I think our budget proposes a path that is.
    Senator Cornyn. Well, is it not true that the gross Federal 
debt grows by $8.2 trillion, to $25.4 trillion, by the end of 
this budget in 2023?
    Secretary Lew. Senator, gross of the Federal debt is a 
measure that is not what is typically used to measure exposure 
of a government. It is debt held by the public that is the 
measure that is typically looked at, both in the United States 
and internationally. We are stabilizing the debt held by the 
public and bringing it to a level that is consistent with 
international standards.
    Senator Cornyn. Well, the question I have is, does this 
budget not grow the Federal debt by some $8 trillion over the 
10-year window?
    Secretary Lew. The budget actually reduces--the baseline 
grows quite rapidly. The budget reduces the growth.
    Senator Cornyn. No, I am talking about the debt. I am not 
talking about the annual deficit. Is it not true that the gross 
Federal debt under this budget grows by $8.2 trillion over 10 
years?
    Secretary Lew. If there were no budget, the gross Federal 
debt would grow just because of the ongoing service of the debt 
and other issues. So the question is, are we improving things 
compared to the baseline? The answer is, we are improving it, 
and we are doing it in a way that is consistent with growth and 
creating jobs.
    Senator Cornyn. Well, let me ask you about--Carmen Reinhart 
and Kenneth Rogoff have written a book covering 700 years, if I 
am not mistaken, of fiscal crises and looked at the impact of 
large debt on economic growth. They have opined that a debt 
that exceeds 90 percent of the Gross Domestic Product reduces 
economic growth by about 1 percent.
    Currently, our gross debt is 106 percent of GDP and, under 
the President's proposal, gross debt would reach 97 percent of 
GDP in 2023. Do you not agree that this large Federal debt has 
a negative impact on economic growth and the kind of 
unemployment problems that the chairman talked about in his 
questions?
    Secretary Lew. Senator, I think it is important that we 
accomplish the deficit reduction and the reductions in the rate 
of growth of debt that are proposed in this budget, because I 
think, unattended to, the trend up is dangerous. I think that 
we do reach a level here that is sustainable and that most 
economists agree is sustainable because the economy is growing 
fast enough to sustain it. We have never said that this does 
all the work for all time.
    The President has said, if we could do this, we would have 
righted the ship, and then we go on. If you look at the 1980s 
and 1990s, it took many, many pieces of legislation to get the 
job done. This would be an enormous accomplishment, and it 
would be consistent with good growth and job creation.
    Senator Cornyn. Are you pleased with the 0.6-percent 
increase in the Gross Domestic Product that our economy saw in 
the last quarter?
    Secretary Lew. I think that, if you look over the last 14 
quarters, our economy has been growing in the 2.5-percent 
range, and we are doing better than most other developed 
countries. But we say flat-out, it is not good enough; we need 
to do better. One of the reasons I think it is so important to 
replace the sequester with sensible policies is that the 
sequester is going to cost half a percent of GDP growth, and I 
do not know how anyone could support that.
    The Chairman. Thank you, Senator.
    Senator Carper?
    Senator Carper. Thank you, Mr. Chairman.
    Before me I have three cups or glasses. This is a glass of 
water, this is a glass of water over here, and this is an 
almost empty cup of coffee. I have said to the President any 
number of times since the Deficit Commission completed its 
work, oh, gosh, over 2 years ago, ``Mr. President, if we 
believe that a comprehensive, broad-based deficit-reduction 
plan similar to what the Deficit Commission recommended, 11 out 
of 18 recommended this is where we want to go, why do you want 
to start off over here in terms of offering deficit reduction 
plans?'' He said, ``Well, this is the way it works. The 
Republicans are over here; if we want to end up here, we do not 
start off right here.'' He said, ``What we have done is start 
off over here.''
    I have said to the President, ``Mr. President, you have to 
lead. You have to show a willingness to lead on this.'' You 
have to come to the table and say, it is not just enough 
revenues. We know we need more revenues. We need to find ways 
to save money in entitlement programs and save the programs for 
future generations and save some money and not savage older 
people, and we need to change the culture in our government to, 
how do we get better results for everything that we do?
    I think the President, and I would just say this to my 
Republican colleague--he is not here anymore. His proposal is 
not over here anymore. It ain't here, but he has come a long 
ways. Some might think, well, he has done relatively little; we 
have chained CPI and a couple of other things.
    Actually, people in my caucus, they think he has gone maybe 
too far. I think he is on the right track. I want to applaud 
what he has done, and none of us has had a chance to study 
every bit of his proposal, but I think he is on the right 
track. I want you to take him a message and say--in the Navy we 
used to say, when people did a particularly good job, Bravo 
Zulu. But that is the message: Bravo Zulu.
    Let me just say, some of my colleagues will remember when--
oh gosh, it was a couple of months ago--Ben Bernanke, Chairman 
of the Federal Reserve, came and met with us in private. During 
the course of that meeting, he said, ``If we are really 
interested in growing the economy, what we need to do is 
demonstrate that we can govern. We--and that includes the 
executive branch--need to demonstrate that we can be fiscally 
responsible, and we need to demonstrate that we can provide 
some certainty with respect to the tax code.''
    If we want to grow the economy, that is what we need to do, 
and certainly we need to pull back the reins on spending. But 
he said we need to continue to make investments, smart 
investments in the workforce, especially the STEM skills--
Science, Technology, Engineering, Math--and number two, 
infrastructure, broadly defined--not just transportation, but 
broadly defined.
    The third thing he said we need to do is to incentivize the 
investments in research and development and products and 
technologies that can be commercialized to create products and 
services we can sell all over the world. Those are things that 
he said we want to do.
    I think if we really look at what the President has 
proposed, it is consistent with the values and the 
recommendations that have been suggested to us by, not a 
Democrat, not a Republican, but by a guy who is pretty smart 
and who has thought a lot about these issues.
    I want to ask you, if I can, we had some discussion earlier 
today, all of us Democrats, Republicans on this committee, and 
we talked about the research and development tax credit. It is 
stop and go. It is stop and go. Instead of being permanent, we 
let it run for a while, and then it stops. Then it dies for 6 
months, and then we crank it up again.
    What Senator Portman and I are working on is a proposal 
that simplifies it, that makes it permanent, and tries to find 
a way to maybe extend it to help small start-up companies, more 
innovative companies, if we can, in the first place. Give us a 
little advice on that. What does the administration think with 
respect to the R&D tax credit, and are we maybe on the right 
track or not?
    Secretary Lew. Senator, first, thank you for the kind words 
about the budget. I will take them back to the President. We 
agree on research and experimentation, that having there be 
certainty that it is going to be there is a good thing. There 
are only a few tax credits we have put in and made the proposal 
to make permanent, and it is one.
    The challenge in tax reform will be to go through all of 
the different provisions in the tax code that affect business 
decisions and reach the agreement of what we can and cannot 
afford to do. I, for one, think it would be a better decision 
to decide what you are going to do, make what you do permanent, 
and not have these constant debates over expiring provisions.
    Having been in the business world, I know how confusing it 
is when you do not know, towards the end of the year, whether a 
provision will be the same or different in just a few months' 
time. When you are in a business where placing something in 
service by a certain date is a key issue, it is a gamble 
whether or not you will qualify, and it changes the economics.
    So, in tax reform, some things will have to go. There is 
not going to be room for everything. But I, for one, believe it 
is better policy to make permanent policy and then revisit the 
tax code from time to time than to have lots of stop-and-go 
decisions.
    Senator Carper. Good. Thanks.
    If I could just add one last, quick thing. One of my 
disappointments in the President's budget proposal was his 
approach on tax credits for electricity developed by wind. It 
calls for just relying on the production tax credit. If we ever 
want to harness the wind off of our shores, it has to be 
through an investment tax credit.
    With the production tax credit, we will not have one 
windmill farm off the east coast of our country. I would just 
lay that at your feet. Olympia Snowe and I have offered 
legislation to pass this. Let us say the first 3,000 megawatts 
or 2,000 megawatts of electricity generated would be eligible 
for a 30-percent investment tax credit. Unless we take an 
approach like that, we are never going to see offshore wind, at 
least not in our life.
    Secretary Lew. I think, Senator, you know that development 
of renewable resources is very important. We have tried to put 
in the budget a combination of policies to create incentives 
for new technologies; obviously, the trade-offs of what you can 
afford and the boundaries of the fiscal plan are limited. But 
we look forward to working with you and other members on this 
issue.
    Senator Carper. You bet. Thanks so much. Thanks for coming; 
thanks for your hard work. Bravo Zulu.
    Senator Hatch [presiding]. Thank you.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    Mr. Lew, welcome back to the committee. Thank you for your 
service.
    I want to ask a question about something that was included 
in the budget that appears to re-litigate something that was 
just settled in the fiscal cliff deal, and that is the estate 
tax rules. Those were made permanent. Those were provisions 
that were enacted. It was a bipartisan bill, as you know, a big 
vote. Nothing else in that particular piece of legislation was 
re-litigated, but we did re-litigate the estate tax.
    I guess I am curious as to why the administration felt it 
necessary to go back to the 2009 parameters when it comes to 
that, which would lower the exclusion amount from $5 million to 
$3.5 million, and second, would raise the tax rate. I am 
wondering if you are aware what that means, that you would have 
roughly triple the number of farms subject to the estate tax 
and more than double the number of small businesses subject to 
the estate tax in doing that.
    By the way, there was a vote on the budget 2 weeks ago here 
in the Senate, and it got 80 Senate votes, Republican and 
Democratic, basically stating that the estate tax should either 
be repealed or reduced. So I guess my question is, why are we 
re-
litigating this after we just made it permanent when it has 
this kind of an impact on the very people whom we want to see 
creating jobs?
    Secretary Lew. Senator, the estate tax is an issue that has 
been debated for many years, and it has been adjusted on many 
occasions. The provision that was in the bill is one that was 
no secret. We agreed to it as part of an agreement, but we did 
not think it was very good policy, so it is not a surprise that 
we think the old rates and thresholds are better policy.
    We also did not think that it was right to propose a change 
immediately. A number of provisions are going to be revisited 
in 5 years, and we thought revisiting the estate tax in 5 years 
was appropriate. I do not think any of the things we do are 
permanent in the sense that future tax reform, future tax 
bills, cannot reconsider them, but every year you should not be 
reopening things. So we did not propose anything sudden. There 
is going to be a debate over tax reform.
    We think that, in the context of all the puts and takes and 
the hard trade-offs, that the estate tax should be part of 
that. I do not think we agree on the impact on small farms and 
small businesses, but I would look forward to working with you 
on that. We certainly do not mean to be creating burdens for 
small businesses and small farms.
    I think that it is also not the only issue. We thought the 
refundable credits should have been dealt with on the same 
basis as the estate tax, and it was done for 5 years. So our 
policy preference, if we were able to just enact a bill on our 
own, would be for the refundable credits to be permanent and to 
have a permanent treatment of the estate tax at the levels we 
have proposed.
    We understand it is going to take an ongoing discussion, 
but we think it is entirely consistent with where our view was 
at the end of last year and have tried very hard not to make it 
any kind of a sudden reversal.
    Senator Thune. Well, we can debate the impacts, but, if you 
look at what land values have done in places like the Midwest, 
you have a lot of people who are land-rich and cash-poor who 
would be harmed if we went back. That is why I think it was 
extended.
    This is what we agreed to in the 2010 amendments, and then 
agreed to extend. I thought we had sort of settled that issue. 
So I think it is unfortunate that we are trying to come back 
and review this in light of the impacts that it would have on 
small businesses and farm and ranch families.
    One other question I wanted to ask you has to do with--
there were a number of things in the budget. In fact, there 
were some tax expenditures that were expanded. I do not have 
the specifics in front of me, but I am told it is about $100 
billion. There are specific areas in which there are taxes 
raised to fund specific things.
    The whole idea of tax reform, in many of our minds at 
least, was to get away from that in the tax code, to get the 
rates down--broad-based tax rate reform, lowering rates--and 
allow the market more to decide many of those things. It seems 
like what you are doing in the budget is heading in the 
opposite direction, rather than looking at greater 
simplification and fewer of these special provisions in the 
code that are favorable to a specific industry.
    Instead we have really been talking about--most of us have, 
at least, I think--getting away from a lot of that and really 
going to where we have rates reduced, which I think would 
benefit all the actors out there in the economy in a way that I 
think would create jobs and generate economic growth. So tell 
me a little bit why we are kind of going backwards, in my view, 
in terms of that approach.
    Secretary Lew. Senator, I guess I would describe it as more 
of a transition issue. I think we agree on where we want to get 
to. We want to get to a tax reform discussion where we broaden 
the base by eliminating lots of special deductions and credits 
and lowering the rates to improve the competitiveness of U.S. 
businesses so we create growth and more jobs. So I think we 
agree on that.
    At the same time, in a world before tax reform, anything we 
do, we have to pay for. So I do not think we can say we are 
accomplishing deficit reduction and then propose things that we 
say we will pay for later out of tax reform.
    So, if we go through this process, and we get to the point 
where we have a fiscal agreement where we agree on the amount 
of revenue we are going to raise in tax reform--we do business 
tax reform and individual tax reform--these issues will get 
resolved in a way that, in the future, everything would have to 
be pay-go, in our view.
    Until then, we did think it was important to extend the 
research and experimentation credit, and we thought we had to 
pay for it. So I would describe it more as a transition issue 
than as going backwards. If we had not put pay-fors in our 
budget and we had expansions of either tax or spending 
programs, then we could not say we were hitting our fiscal 
targets.
    So we are trying to accomplish two goals. Our driving 
concern is growth in job creation. We feel we need to get the 
deficit and the debt to a controllable point. We have, I think, 
accomplished both of those goals in the frame of our budget and 
would look forward to working on a bipartisan basis to getting 
agreement so we could move forward.
    Senator Thune. Mr. Chairman, one quick question. 
Macroeconomic scoring. Rob Portman offered an amendment to the 
Senate budget that was approved. Obviously, the budget is 
probably not going to end up going anywhere, but your thought 
on whether or not that might not be a good way of looking at 
many of these policy decisions and the behavioral impacts and 
what they would do to revenues. ``Yes'' or ``no'' on 
macroeconomics?
    Secretary Lew. Well, if you will permit me, it is a little 
more complicated than ``yes'' or ``no.'' Senator, we have 
discussed this; Senator Portman and I have discussed this. I 
think that there is a big difference between asking, should we 
look at an estimate and, should we score bills according to 
that estimate?
    As I understand the vote that took place in the Senate, it 
was that there should be scoring, what we call dynamic scoring. 
I think it is a very different proposition to scoring a tax 
bill that way, and our view is we should use traditional 
scoring for legislation.
    Senator Thune. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    Secretary Lew, thank you very much for being here and for 
what you are doing. So let me first start off by saying 
something nice. I think the budget that you have presented is 
balanced in that you look at ways in which we can manage our 
deficit and get it to a responsible level, and you get savings 
in every area, including in our tax expenditures, which I think 
is critically important, and I applaud you for putting that 
into your budget.
    I also want to compliment you on the growth initiatives. 
The only way that we are going to be able to get our economy 
growing and be able to get our budget into a proper, manageable 
deficit is by creating more jobs. I thank you for what you did 
in your budget on the ITC, on American opportunity tax credits, 
what you have done on infrastructure financing.
    I think all those are extremely important provisions that 
we need to get done and would help greatly to create the jobs 
that we need in our economy. So, I thank you for those 
provisions that you have included in your budget.
    I have some concerns, putting it mildly. The way that you 
treated our Federal workforce, I find just wrong. We have had 
conversations about this in the past. I am deeply disappointed. 
We have gone through this many times in the last year or so, 
and I thought we had reached some understandings on Federal 
retirement contributions and issues like that, but once again 
you have raised the issue that is going to cause some real 
heartburn, I must tell you, among those of us who very much 
recognize how our Federal workforce has already sacrificed, has 
gone through 2 years of pay freezes, and now you are expecting 
more. I find that disappointing.
    I want to talk about what you are doing on retirement 
savings in your proposal, because there are two provisions here 
that, working together, I think could cause some significant 
concern. I understand your proposal on the 28-percent 
limitation, and it is a generic way to deal with a problem 
dealing with higher-income taxpayers, and that certainly has 
merit.
    But, when you couple that with some of the other provisions 
you have, it seems to me that you are going to make it more 
difficult for people to put money away for retirement. The 
specific provision I would hope you would comment about is, I 
have read your proposal dealing with the maximum annuity 
permitted from a tax-qualified defined benefit plan, basically 
allowing a benefit of $205,000, and then it goes into a lot of 
conditions there.
    Then, once you reach that limit, you cannot make any 
further contributions unless, of course, the performance in the 
market is less than what you need in order to be able to pay 
for that amount, and then you can make a certain amount of 
contribution up to a certain other limit, and then you cannot 
make it again, and it goes on and on.
    My point is, we already have too much complexity in the 
laws. This is another major complexity that you are adding. 
When businesses are trying to decide whether they are going to 
have a plan or not, the number-one thing I hear the most of is 
the complexity issues and falling into traps, and is it really 
worthwhile for us to do this or not?
    So it seems to me that this proposal, coupled with the 
limit, is going to mean less people are going to put money away 
for retirement rather than more, putting more pressure on 
government programs. In this country, in the best of times, 
people do not put enough money away for savings and for 
retirement savings.
    So where is the sensitivity of the administration to try to 
help people save more?
    Secretary Lew. Senator, I know this is an area that you 
have worked on for many years, and I applaud your work in this 
area. I think we very much share the goal of encouraging 
retirement savings. That is why we continue to have the auto-
IRA proposal.
    Senator Cardin. But in the auto-IRA, the one thing that we 
found out is that, for lower wage workers and younger workers, 
the tax incentive, in and of itself, is not enough to get them 
to put money into a retirement plan. You need an employer's 
contribution and a saver's credit. If they do not qualify for a 
saver's credit and you do not have an employer-sponsored plan, 
I do not think the IRA will substitute for an employer-provided 
incentive to save.
    Secretary Lew. But there has been a fair amount of research 
done that suggests that just this change from opting in to 
opting out will make a big difference in participation rates, 
and that would be very important.
    On the question of the $3-million limit, there are tough 
choices in this budget. We look at a retirement landscape where 
the average American family has more like $50,000 than $3 
million saved for their retirement. Our goal is to bring up the 
number of people who are taking care and take the pressure off 
of Federal programs. It is getting more people to go from 50 to 
100 than getting more people up to 50.
    At $3 million in an IRA, that is a very, very rarified 
level of savings. We are not saying people cannot contribute, 
we are just saying that the tax benefits are not going to be 
the same. So you can still contribute, you just cannot 
contribute with before-tax dollars.
    Senator Cardin. I just will leave you with this point. We 
will get back to this debate. The complexity that you add, when 
individuals make the decisions whether to sponsor plans or not, 
all this just adds to a decision made by a small company 
particularly, that it does not pay for them to get into the 
field; therefore, none of their employees get the help.
    Secretary Lew. Well, I would look forward to working with 
you. That is certainly not the intention of the provision, and 
we would look forward to working on something that has the 
right effect and fits within the budget framework.
    The Chairman. Thank you, Senator.
    Senator Bennet?
    Senator Bennet. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for your testimony. Could you 
give us a little bit of a window into the next 10 years, that 
is, the second 10 years, and what the effect of these proposals 
looks like in those out-years?
    Secretary Lew. Well, obviously provisions liked chained CPI 
and the Medicare means-testing through the income-tested 
premium have growing effects in the out-years, just because the 
base grows and more people come in. I do not have the numbers 
in front of me in terms of the second 10-year impacts overall.
    This is a budget that would put us, at the threshold of 
those next 10 years, in a place where the debt would be in the 
70s as a percentage of GDP, mid-70s, the deficit would be under 
2 percent, and, between now and 10 years from now, we still 
have other work to do.
    We know, on a bipartisan basis, we need to do Social 
Security. We need to do work to make sure Social Security is 
funded for 75 years. So there are other things that we will do. 
This is not the only piece of legislation for all time.
    I would make the case that this puts us in a very strong 
position to then look at the solvency of Social Security 
without their being the complexity of it being thought of as a 
deficit-reduction measure, but really for the purpose of saving 
Social Security. I think the same about Medicare.
    There are things in this budget that would bring down the 
costs of Medicare. There are things that are happening, some of 
which are scored, some of which are not, that are helping to 
bring down the growth of health care costs. We need to keep 
working on that.
    Senator Bennet. What is amazing to me is that people in 
Colorado, I think, understand very well what you just said, and 
people in Washington, DC seem to have a hard time understanding 
it. There is a generation of people who think none of these 
programs is going to be there for them if we do not fix them, 
and they want us to fix them. I think increasingly they also 
would like to see a bipartisan approach to this fiscal problem 
that actually results in meaningful compromise, so we can get 
on to all the other work that we need to do.
    I wonder, in that context--because you were here during the 
Clinton years; you have been here during other years--when you 
think about things like the ratio of what we are spending to 
our GDP, the ratio of revenue as a percentage of our GDP in 
historical terms, where do we find ourselves after this budget 
is enacted?
    I think a fair standard--I mean, obviously one has to net 
for demographic changes and other kinds of things--but a fair 
standard, in my view, is, what was our parents' commitment to 
the next generation? What was our grandparents' commitment to 
the next generation? Are we living up to those commitments?
    Secretary Lew. Senator, I think this budget will reduce the 
growth trend, but it will not take away what is one of the 
fundamental drivers on the spending side, which is the 
demographic issue. As my generation, the baby boom, approaches 
and passes the retirement age, there are going to be 30 million 
more people retired. No matter what we do on the margins, just 
the base of covering that population in Social Security and 
Medicare is something that we have seen coming for literally 
50-plus years.
    I think the question of what we are prepared to do in terms 
of spending as a percentage of GDP has to be connected to the 
basic core question: are we committed to Social Security and 
Medicare being there? Because, unless we are going to tell the 
baby boomers that they are not going to qualify, then there are 
going to be pressures driving up spending.
    There is only so far you can cut discretionary spending. We 
have already gone pretty far, and this budget goes a little 
farther. Pretty soon you are not doing the things you need. You 
are eating your feed corn if you are not doing education, 
research and development, and infrastructure. So I think that 
these drivers of demographics are very important.
    We have put in this budget important meaningful reductions, 
and we are open--not just open, but the President for 3 years 
now has been putting forth principles for Social Security 
reform. I have spoken in this committee and in various Senate 
forums that I have heard loud and clear: doing that kind of 
work in the context of the fiscal challenge we have is almost 
impossible.
    So I think we need to get this work done, but I would hope 
there is no one in this room who does not want to be able to 
get to the point where we could say Social Security is sound 
for 75 years. We are not on the doorstep of a disaster. We have 
until 2037, I believe, in terms of the trust fund's solvency. 
But it is better to do it sooner rather than later, which is 
what the President has been saying for 3 years.
    Senator Bennet. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Casey?
    Senator Casey. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here today, thank you 
for your testimony and for your public service, your continuing 
public service. The last time we were here, we were going 
through all the years you have been serving; we will not 
reprise that today.
    I wanted to first of all commend a part of the budget 
proposal that deals with strategies that we know will lead to 
some measure of job growth, especially in the absence of a 
continuing reduction in the payroll tax. With that off the 
table and not operative, having other strategies in place like 
a tax credit for hiring and increasing wages, as the budget 
contemplates, will be helpful.
    I have legislation, and have had it for a while, to do just 
that. So I want to commend that and maybe come back to it. But 
I wanted to ask you a specific question on another, but I think 
related, topic, and that is Trade Adjustment Assistance.
    I know that in your testimony--I will just set forth this 
as a predicate to my question--on page 6, you say at one point, 
``One specific focus is modernizing, streamlining, and 
strengthening government delivery of job training services. The 
budget proposes a universal displaced worker program that will 
reach over 1 million workers,'' and it goes on from there.
    The impact or the result of that proposal, of course, would 
be to eliminate what we know of as Trade Adjustment Assistance, 
which I think is a mistake. When I consider it in the context 
of, not just the numbers--for example, in Pennsylvania, I guess 
the latest number from 2010 was we had over 200 Trade 
Adjustment Assistance petitions and a little less than 16,000 
Pennsylvania workers covered by Trade Adjustment Assistance.
    The value of it--and you know this; you have worked on 
this--is that, when someone is in an industry and a trade, and 
the economic winds blow so hard and in such a devastating way 
that they get their feet knocked out from under them, it allows 
them to be retrained. It allows them to have health care costs 
shared so they can get over the bridge from losing a job 
because of unfair foreign competition to a position of getting 
a new job or a new career.
    So I am very concerned about the proposal because of the 
benefits we have seen with TAA. The administration, I thought, 
did a great job of enhancing Trade Adjustment Assistance, and I 
just wanted to have you speak to that.
    Secretary Lew. Senator, I have to apologize a little bit on 
the detail here since, in my current role, I did not work on 
all the 
spending-side issues in detail.
    Senator Casey. All right.
    Secretary Lew. As OMB Director, I did. I am going on memory 
here, as opposed to exactly what is in the budget.
    Senator Casey. Sure.
    Secretary Lew. The intention in the proposal that we have 
on training is not to cut back on the availability of 
retraining support, but to broaden it, in a sense to give the 
kind of benefits that go to people who are affected by trade 
more broadly so that we have a stronger, more agile workforce 
that can be prepared for the jobs of the economy of today and 
tomorrow.
    It is very important, as we pursue trade policies that open 
markets and in a sense also open our markets, that we provide 
the kinds of protections to workers who are adversely affected, 
if in fact the changing flows of trade have an impact on them.
    I think that, overall, the proposals in the President's 
budget actually offer more, not less, protection, but I would 
be happy to have someone get back to you with more detail on 
the specific provisions that were included this year.
    Senator Casey. I appreciate that. My concern is, with this 
change, even though it is in the interest of consolidation and 
streamlining, that we would badly degrade our ability to 
provide that kind of assistance. But we can talk more about it.
    I wanted to get back to the first question I raised about a 
tax credit to incentivize hiring. If you could just talk about 
what undergirds that policy and how important you think that is 
in terms of our economic growth and being able to create jobs 
in the near term.
    Secretary Lew. Senator, we have tried, over the last number 
of years, to have broad incentives for hiring, incentives 
overall, incentives for small businesses, and this budget is 
really built around the core principle that what we need to do 
is promote growth and job creation.
    We would look forward to working with you as we go forward 
on how to create the best incentives. Even our core principles 
on business tax reform are all about investing in the United 
States, creating jobs in the United States, and making the tax 
code more friendly to doing business in the United States.
    Senator Casey. Thank you, Mr. Secretary.
    The Chairman. Thank you, Senator.
    Senator Nelson?
    Senator Nelson. Mr. Secretary, would you like some good 
news?
    Secretary Lew. I always like good news, Senator.
    Senator Nelson. Your Special IG for the spending of the 
TARP money on the Hardest Hit Fund has just accepted my request 
for an investigation on how the Hardest Hit Fund was not 
utilized in the State of Florida, and then how it was misused 
in the State of Florida by the government of the State of 
Florida.
    Indeed, the Hardest Hit Fund was to help those people stay 
in their homes who had lost their jobs, and it was money out of 
TARP under the theory that, if you can stay in your home, at 
the end of the day, it is going to be a lot better for their 
quality of life, a lot better for the values in the 
neighborhood, and it is going to cost the various levels of 
government a lot less to help people through this severe 
recession.
    Well, lo and behold, the State of Florida would never spend 
the money. They spent only 16 percent of the money that was 
allocated to Florida, and in some cases, where they spent the 
money was, it went to n'er-do-wells who never should have 
gotten it in the first place.
    This of course, to me, is an outrage in a State that is one 
of the ones, along with Nevada--my State of Florida was one of 
the ones hardest hit in the housing crisis, with people 
suffering as a result of the foreclosures, et cetera. I wanted 
to let you know that the Inspector General just let me know a 
few moments ago that they are conducting that investigation, 
and I think justice is being served.
    Now, I want to call to your attention something that this 
committee is doing that I have been working on with the 
chairman in my capacity of leading the Aging Committee. I had 
hearings 2 years ago in this committee and just yesterday in 
Aging on the fact that people are ripping off the taxpayer by 
stealing identities, primarily Social Security numbers, filing 
tax returns, and getting tax refunds, and your people are 
saying that this is over $5 billion a year in lost revenues to 
the Federal Government.
    So, it is of gargantuan proportions. I want to thank you, 
because you have included one part of the comprehensive 
approach to this problem in your budget, and that is the Death 
Master File. As of now, immediately upon death, Social Security 
publishes the Social Security numbers of the deceased. They are 
out there in the public domain. As a matter of fact, it is easy 
pickings for the crooks to take that identity. They get the 
identities other ways. They rob people's mailboxes and get 
their Social Security checks. So that is one part of it.
    What I want you to do, Mr. Secretary, is to take a look at 
the comprehensive bill that Senator Cardin, I, and Senator 
Schumer have filed in approaching this issue. The chairman is 
having a hearing on this in the full Finance Committee on tax 
day in just another week, and we would welcome the 
administration's support on the comprehensive approach to this 
problem.
    Secretary Lew. Senator, I would be happy to take a look at 
the bill, and we can get back to you on that. In terms of the 
problem, it is one that we share very much the concern over. 
Our concern is not just with the Death Master File issue that 
you raise, it is very much--if anything, more so--with the 
effect it has on living people who are, unbeknownst to them, 
losing their Social Security checks.
    I think you know better than anyone, no matter how well we 
do, we have to keep up with the effort because the cyber-
criminals who steal identities are always trying to get a step 
ahead. So, whatever protections you put in place, as soon as 
they are in place, you have to keep working on it because 
somebody is going to figure out a way to get around it. We look 
forward to working with you on that. There should not have to 
be a fear of lost identity, and we will work with you to do the 
best we possibly can.
    Senator Nelson. Mr. Secretary, as a point of personal 
privilege, I want to thank you, in your previous role as Chief 
of Staff, for working through some very thorny times 2 years 
ago on America's space program. As a result of us coming to 
closure and getting a bill that we passed out of the Senate 
unanimously and out of the House with a three-quarters vote, we 
now have America's manned space program back on track.
    In the budget that you have submitted for going and 
capturing an asteroid, bringing it into a stable lunar orbit, 
and then going and mining that asteroid and doing the kinds of 
things that we have to do to develop the technologies to go to 
Mars, which is the President's goal, it is working. People are 
finally recognizing it. I want to thank you for your personal 
intervention 2 years ago to help us bring consensus and get 
things back on track in our human space program.
    Secretary Lew. Thank you, Senator. I am glad that we are 
making progress.
    The Chairman. Thank you.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    Secretary Lew, it is good to have you before the committee 
as our new Treasury Secretary. We are talking about the budget 
today, so I cannot help myself. As two former budget directors 
here, this is going to get really wonkish and boring very 
quickly. But look, there are a couple of things in the budget I 
am pleased with. As you know, one is the way you dealt with 
corporate taxes, which I want to talk about in a second.
    The second is the fact that you are willing to take a first 
step--a small step, albeit, in terms of the size of the 
problem--with regard to our vital, but unsustainable, 
entitlement programs. I will say, just in answer to previous 
questions, there might have been some confusion.
    I will simply assert, without trying to get into an 
argument here, that, if you look at the baseline that we deal 
with, which is the Congressional Budget Office baseline--which 
just means that, if we go on auto-pilot and do not do anything, 
this is what the projection is on spending, what it is on 
taxes--this budget does not make a dent in the huge problem we 
all know we face: historic levels of debt and unacceptable 
deficits with an impact on today's economy and future 
generations.
    If you do an apples-to-apples comparison, the debt as a 
percent of the GDP is slightly higher in your budget as 
compared to just if we did nothing. With regard to the next 
several years, including every year of the Obama 
administration, as you know, the deficit, even in nominal 
terms, is higher than it is under the CBO baseline.
    So I am disappointed, as you can imagine, on that front, 
because I do not think it is up to the task that we have before 
us, which I think is an urgent one. But having said that, I do 
think, again, there are some hopeful things.
    On Social Security, I share the sentiments of some of my 
colleagues on this side of the aisle in saying we appreciate 
your looking at this issue and helping us to figure out ways to 
deal with the fact that, according to the Congressional Budget 
Office, we are seeing this doubling really of the entitlements 
over the next 10 years, specifically with Social Security. As 
you know, there is a $77-billion shortfall this year as 
compared to payments out and payroll taxes in.
    You mentioned the trust fund. It is not 2036 anymore; 
unfortunately, it is now 2033 for the Old Age and Survivors 
trust fund. It is 2016 when the trust fund goes bankrupt, as 
you know, for disability. So we have a huge problem here, and 
again I want to applaud you for taking that step of using the 
right measurement for inflation.
    If you could just briefly, given your vast experience in 
this and now at Treasury, talk about how that also is going to 
result in additional revenue, and why.
    Secretary Lew. Thank you, Senator. I will beg to differ on 
the analysis of the effect of our budget on the debt, and I 
would look forward to a conversation where we could go through 
all the detail on it.
    The CPI affects many different aspects of the government, 
as you know, on the spending side and on the revenue side. Tax 
brackets are indexed to it, as are many benefit programs. And, 
as I was saying to the chairman earlier, changing that cross-
cutting measure is something that we will do in the context of 
an overall balanced approach to dealing with our deficit 
problem over the next 10 years and getting to a place which we 
believe is sustainable: a deficit of under 2 percent of GDP.
    But it does have an impact. I mean, it has an impact on 
both the spending side and on the tax side. It will mean slower 
rates of increase in benefits, it will mean more rapid movement 
from one tax bracket to another. I think that these are issues 
that are real, but, if we are able to back out sequester and 
not be on a path towards the kind of mindless cuts that are 
hurting our national security and so many domestic priorities, 
if we are in a place where we can deal with the tax and other 
issues that we have put forward so that we can make sure we are 
training the workforce for the future and we have incentives 
for growth and for job creation, I think the net benefit will 
be a stronger economy that helps even the people who are paying 
a price. That is why the shared sacrifice is worth it.
    But it will have an effect, and it is very real. I do not 
know if you were in the room when I said this earlier, and I do 
not mean this in any way as an argumentative point, but I think 
this is just like the reality of the policy: this is hard. If 
it is not treated as doing something hard, it is not going to 
help us to reach the kind of sensible center. It is hard on 
both sides.
    Senator Portman. These are hard decisions. But as you 
indicate, the most important thing we can do is to restrain the 
spending, but at the same time grow the economy to ensure that 
we have more revenue coming in through growth and people have 
more job opportunities. The jobs numbers were so disappointing 
last month, and this is why your corporate reform proposal, I 
think, is critical.
    I will say, in this budget, as compared to your previous 
budgets, you did not take the preference closings, the loophole 
closings, and use them to reduce the deficit. Rather, you said 
they would be used for deficit-neutral and revenue-neutral tax 
reform. I think that is positive.
    I will say that I think the plan is not consistent 
necessarily with what you said earlier, which is a need to 
transition to a simpler and broader base in the corporate tax 
code, because you also, as you know, add about $54 billion in 
newer, expanded tax preferences that I think are tough to 
defend on an economic efficiency basis.
    So I am not talking about the R&D credit, which I agree 
with you on and agree with what my colleague Tom Carper said, 
whom I am working with on that, but I do think we have to avoid 
this temptation of continuing to complicate the code if we are 
going to get at this, as you say, goal of getting to a broader 
base that will improve economic growth for everybody.
    The final question is on the international side. That is 
one area where you did not speak to this concern that we hear 
from businesses all around the country, that we are competing 
really with one arm tied behind our back. If you could just 
address that briefly. Do you think that we should have a level 
playing field with foreign competitors to the extent that 
American businesses are not disadvantaged globally?
    Secretary Lew. Senator, I think that one of the real 
benefits of doing business tax reform is that we can make doing 
business in the United States more competitive and more 
attractive. Our statutory rate is high relative to other 
countries. Our average rate is in the middle. If we broadened 
the base and lowered the rate, that alone would make us more 
competitive.
    I know in the debate about whether we should have a 
worldwide or territorial system, I have said this before here, 
and I really believe this: it is not so much of a choice 
between the two. It is a question of how we get to a hybrid 
that works to make the U.S. investments attractive without 
losing an amount of revenue we cannot afford in the fiscal 
frame.
    It is going to be hard enough to raise the revenue that we 
need just to hit the contours of a bipartisan deficit-reduction 
package. I do not think we are going to be able to lose revenue 
in the course of doing business tax reform to do it. So we have 
tried to build a path towards the middle. We have taken some 
criticism for some of the provisions on our own side, and we 
are very, very much hoping that this is an opportunity to 
engage.
    Senator Portman. You also have some support on your side on 
this. I would just say that roughly $1.7 trillion that is 
locked up overseas now is part of how to pay for, as you say, 
some of these reforms, and that is an exciting opportunity.
    I have overstepped my time here, so thank you, Mr. 
Chairman. Thank you, Mr. Secretary.
    The Chairman. Yes. Thank you, Senator.
    Mr. Secretary, you have a great opportunity here, an 
opportunity to solve a problem no previous Treasury Secretary 
has solved, at least in my memory. That is the tax gap. It is 
big. It is huge. It is 300, 400 maybe, probably higher than 
that, billions of dollars a year of taxes legally owed but not 
collected and paid.
    One of your predecessors, Secretary Paulson, sitting right 
where you are now, did not address it. I asked him, what are 
you doing to address the tax gap? He did not say much. I asked 
him to give us a plan, data, benchmarks, dates by which he 
would begin to make sure that that gap was addressed and 
reduced.
    He would not do it. He did not do it. I got stonewalled. I 
went so far as to say I was going to hold up a couple of 
Assistant Secretaries until you give us something, and finally 
they gave us something that did not amount to anything. I 
cannot for the life of me understand. I know a lot of things 
are hard work. This is hard work too.
    But, for the life of me, I do not understand why the U.S. 
Government does not get its act together, the IRS and the 
Treasury Department, to essentially solve that problem. Just 
think of all the legitimate taxpayers in this country; they are 
paying their taxes. They do not like filing--pretty soon we are 
getting up to April 15th--but they do. They are good Americans.
    We still have a pretty high voluntary rate in this country. 
But why in the world can you not, as Treasury Secretary, 
finally take advantage of this opportunity, as a new Treasury 
Secretary, to do something about this? If you could just 
address that, please, because I just, for the life of me, 
cannot understand why we have not solved this in the past.
    Secretary Lew. Mr. Chairman, I would be happy to take a 
hard look at that. It is not something that we have worked on 
in detail in these past few weeks. I am not sure what inquiries 
were made when Secretary Paulson was there, but I am happy to 
go back and look and see----
    The Chairman. I ask all Treasury Secretaries this question.
    Secretary Lew. Yes.
    The Chairman. Irrespective of Secretary Paulson, I am 
asking you to do something about it.
    Secretary Lew. I hear the question, and I will follow up 
with you on it.
    The Chairman. Would you? I mean, Mr. Secretary, I am 
serious about this.
    Secretary Lew. Yes.
    The Chairman. I do not want this to be just shoved off. I 
want you to deal with it directly and honestly----
    Secretary Lew. I will take personal----
    The Chairman [continuing]. With some numbers. This is what 
it is, this is what we have to do about it. It ties into, I am 
sure, a lot of Medicare fraud that goes on in this country, a 
lot of billing which is fraudulent. That could be part of the 
tax gap. That is fraudulent. The tax gap only addresses taxes 
legally owed and not paid as opposed to fraudulent billing.
    Secretary Lew. Right.
    The Chairman. Senator Nelson talked about the master file 
and all the fraud there. I urge you to spend a little time with 
HHS and CMS and try to find out some way to address that as 
well.
    Secretary Lew. In principle, I cannot disagree with the 
idea that legally owed taxes should all be collected. The 
reason why it has been a problem is something I will look into 
and get back to you directly on.
    The Chairman. Would you, please?
    Secretary Lew. Yes.
    The Chairman. And also solve it. That would be better yet.
    Secretary Lew. Better yet.
    The Chairman. All right.
    Senator Hatch?
    Senator Hatch. I just have one more question, maybe two, to 
ask you. Once again, let me clarify for you, Mr. Secretary, 
that the steps in the budget on entitlements are really 
relatively minor. I do not care what rhetoric is there. The 
$400 billion in cuts you keep talking about are mostly derived 
from provider cuts and imposition of government price controls 
on prescription drugs for seniors. There is nothing structural 
on Medicare and Medicaid. Simply cutting providers is not 
structural reform. It is just not, plain and simple.
    Now, your budget cuts a courageous 1.8 percent from more 
than $22 trillion that the big 3 entitlements will spend over 
the next 10 years. I think you all have actually walked away 
from the real structural reforms that the administration itself 
has proposed in the past, including Medicare age eligibility 
and blended rates in Medicaid. I mean, what happened to those 
in this budget? So, claiming that this budget is an act of 
courage on entitlements is exactly that: it is just a claim. It 
is not reality.
    Now, I would be happy to hear your response to that, but I 
am concerned about it. I do not want to have anybody suffer, 
but we are all going to suffer in the future if we do not get 
this awful budget under control. Now is the time to do it, not 
4 years from now. So I am very concerned about that.
    Secretary Lew. Senator, I think, if you look at the 
provisions in our budget, there are structural changes that are 
quite significant.
    Senator Hatch. Like?
    Secretary Lew. The means-testing through income-related 
premiums raises premiums for Part B and Part D by $50 billion. 
That is essentially taking away benefits that would have been 
free by saying, you have to pay for them. It is the same as 
means-testing. It is a mechanism for doing it. We have modified 
the Medicare Part B deductible for new beneficiaries, meaning 
that the deductible goes up an increment each year. That means 
more money out of pocket.
    It is something we have heard called for for years, and it 
is in our budget. We have introduced home health cost sharing 
for new Medicare beneficiaries. I think it is important to have 
some of these things hit for new beneficiaries, not existing 
beneficiaries. If you are already 85, it is very hard to even 
have a small burden.
    Encouraging supplemental coverage, the Part B, the Medigap 
coverage, to be more efficient--right now we pay an awful lot 
of money because there is no first-dollar exposure. We have 
said that we are going to have a special Part B premium to take 
away some of the benefit of having Medigap coverage. We adjust 
the cost sharing for the Part D subsidies.
    So we have a list of very specific, real structural 
changes. I think that these are probably the most structural 
changes you have seen in a budget in a long time in terms of 
the impact on beneficiaries. It is a red line that an awful lot 
of Democrats never wanted us to cross. These, combined with the 
chained CPI, are real structural changes. We can debate whether 
or not it is big enough. It is a meaningful first step. But I 
think they are real. They are very real.
    Senator Hatch. How much do they amount to?
    Secretary Lew. There are $70 billion, roughly, of 
structural reforms.
    Senator Hatch. And an almost $4-trillion budget.
    Secretary Lew. Well, when we did the Balanced Budget 
Agreement, $70 billion was a lot of money.
    Senator Hatch. I think so too. It is just that it is not a 
lot of money in the overall effort to try to get spending under 
control and get this government under control. I think you have 
a tough job. I do not think there is any question about that. I 
think Republicans have had a tough job from time to time too. 
But unless we find some way of resolving some of these 
conflicts really, fully, structurally, and not just here and 
there, we are not going to get things under control.
    Secretary Lew. Senator, if I could respond on the 
retirement age question that you asked.
    Senator Hatch. Sure.
    Secretary Lew. We have taken different positions at 
different times. In 2011, when we were trying to reach a 
bipartisan budget agreement, the President was open to this 
idea. Between 2011 and now, we have done a lot of analysis 
which has actually caused us to rethink whether it was a policy 
that accomplished what we thought it did.
    In fact, it does not reduce health care spending. What it 
does is, it shifts the cost from the Federal Government to 
retirees. It actually increases national health care spending 
because, when you move from Medicare to private health 
insurance, health care spending goes up, not down. If our goal 
is to control how much of our economy goes to health care, 
raising the eligibility age does not do that. It is something 
that does save the Federal Government money, but it makes 
seniors pay the money, and they end up paying more for less.
    So we have put in other proposals that we think do a better 
job of accomplishing the real goal, and we view these as the 
kinds of proposals that are more than a good-faith effort. They 
are a serious move.
    I understand there is a desire that some have to go 
farther, but if we draw the line and say we are not going to 
consider anything unless it is above a certain amount, I think 
the chances of reaching an agreement go down. We have tried to 
increase the likelihood for a bipartisan budget agreement which 
would unlock the door to tax reform, which would unlock the 
door to removing the uncertainty over our economy, and I hope 
we can do that.
    The Chairman. Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. Thank you for 
keeping the opportunity available.
    Mr. Secretary, I am sorry that I did not hear all the other 
testimony. I was chairing a hearing on Syria, which is 
obviously very important to us. But I wanted to get here to 
raise a concern or two I have. Again, congratulations on your 
successful confirmation, which I was pleased to vote for.
    I want to echo the chairman's concerns about the chained 
CPI. I think it has real effects upon seniors and veterans. I 
understand the desire of the White House to find a middle 
ground to strike a deal, but that is one of those issues that 
may be a step too far.
    But I specifically wanted to say I see the administration's 
infrastructure investment plan, and there are many elements of 
it I applaud, including the reform of the Foreign Investment in 
Real Property Tax Act laws to increase investment in the U.S. 
and create jobs.
    As you know, these tax rules were drafted 30 years ago, 
before the current crisis could be foreseen, and impose 
significant penalties on foreign investments in domestic real 
estate that do not exist in other types of U.S. investments, 
such as corporate stocks and bonds.
    To me it is pretty common-sense, especially given the 
current economic circumstances, that we should be looking at 
ways to reduce penalties for foreign investment in the United 
States. But my understanding is that the administration is 
making this a legislative proposal, even though the Treasury 
Department has the authority to begin reforming FIRPTA rules 
tomorrow. So, am I right about that, that you are seeking a 
legislative proposal?
    Secretary Lew. I believe that is correct, Senator. I would 
have to go back and check on where the line is between what we 
have administrative authority for and--we do not usually ask 
for legislation if we think we can do it.
    Senator Menendez. We had a great deal of conversations with 
your predecessor in this regard, and I think we had moved 
forward in an understanding that, in fact, you can 
administratively deal with what you want to achieve 
legislatively by repealing the relevant parts of the 2007-55 
IRS notice while Congress works on the rest of the issue.
    I would just say, I urge you to look at that. We have 
bipartisan legislation here that does basically this, but we 
have always advocated that the administration, including the 
last several years when we raised this with Secretary Geithner, 
has the power to do this. I would just echo the words of the 
President: what are we waiting for? It is one of those things 
that you already put in your own infrastructure development 
that you have a great ability to ultimately affect in the short 
term. So, can you look at that and get back to me?
    Secretary Lew. Senator, I will go back and look at it and 
get back to you.
    Senator Menendez. I would appreciate that.
    I also appreciate that the budget includes a proposal to 
eliminate capital gains on investments in small businesses, an 
effort that I am taking over from Senator Kerry. He used to do 
this, and I was strongly supportive of it. I am keenly 
interested in how any business tax reform proposal affects 
small businesses.
    Earlier today, we were discussing, among members of the 
committee, different opportunities, and one of the ones that I 
look at is the vast majority of small research-intensive 
companies that are not yet profitable, like, for example, in 
the biotech field, in the cutting edge of what allows us to be 
globally competitive, yet they have huge dividends to develop.
    But they take sometimes more than a decade to mature, so I 
hope that you would work with me and with the committee to 
ensure that, as we look at business tax reform, that we will 
take into account the needs of these companies to assure that 
America remains the best country in the world in producing 
successful, 
cutting-edge small businesses. Is that something that you can 
be supportive of?
    Secretary Lew. Senator, we very much have been working to 
try to create incentives for small businesses to invest and 
hire and grow. Over the course of this administration, we have 
had, I believe, 18 separate incentives outside of the context 
of tax reform. That has meant rather complicated provisions. 
One of my own personal concerns for small business is, if you 
have to jump through an awful lot of hoops to get the benefit, 
it may be that, even though the benefit is there, you do not 
get it.
    I think as we work together through tax reform, one of our 
goals ought to be to make the system simpler so that it is 
easier for small businesses to incorporate and not be subject 
to tax burdens that are unfair. We will look forward to working 
with you on that. As we lower the corporate tax rate, I think 
you will actually see some migration of businesses from the 
partnership form to the corporate form.
    Senator Menendez. I appreciate the simplification aspects, 
and those are desirable. My final point here is that many of 
what we consider some of the best-paying jobs--some of the 
important research on Alzheimer's, Parkinson's, certain 
cancers--are being done by small biomedical and biotech firms.
    Of course, their breakthroughs often take a decade or more, 
and there is no profit margin, so, at the end of the day, how 
we treat them in the tax process can either spur the industry 
and have it grow and have us continue to be a leader in the 
world, or can oppress it, because the big guys, they have the 
tax liabilities from which to get the benefits. These smaller 
ones do not.
    Thank you, Mr. Chairman.
    Secretary Lew. We would look forward to working with you.
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Mr. Secretary, when are we going to reach our debt limit?
    Secretary Lew. Well, the debt extension set a date certain 
of May 18th, I believe. So the debt limit gets hit because that 
is the date set when it expires. It was not an amount, it was a 
date.
    The Chairman. All right.
    So what extraordinary measures can you take, and how long 
can you delay that?
    Secretary Lew. To the extent that we have to use 
extraordinary measures, as you know, it is very difficult to 
predict with great precision. It is particularly difficult this 
year because we had a late tax filing season, given the late 
enactment of the tax bill, so we do not have as clear a picture 
on what the revenues look like as we normally do. We will have 
a better idea at the end of the tax filing season.
    The Chairman. By what date, roughly?
    Secretary Lew. Well, I cannot give you an exact date.
    The Chairman. Roughly. Roughly.
    Secretary Lew. Our view is that the right thing is for the 
debt limit to be extended by May 18th so we do not get into the 
question of how much time can extraordinary measures get you. I 
know in the past Treasury was pressed to give a specific date 
and then the date was challenged, because you do not really 
have a specific date. It depends on what the cash flow is.
    The cash flow this year is particularly difficult to 
predict because sequester is a whole new phenomenon. It is 
slowing down spending in some areas, but maybe not as fast as 
would be expected. We also have some very lumpy receipts that 
may or may not come in. So I am not sure I could give you a 
date plus or minus a month right now. I think that the real 
message is that, when we hit the debt ceiling, it should be 
extended. Putting us in a space where there is uncertainty as 
to when we actually run out of room because of extraordinary 
measures would be a mistake.
    The Chairman. There are some who suggest that, if and when 
the limit is reached, that Social Security be paid, interest on 
the debt be paid, but then the Treasury Secretary has 
discretion on which other programs to pay, I guess depending 
upon how quickly the money comes in.
    Could you address that proposition, please?
    Secretary Lew. I think the suggestion that we can 
prioritize what payments we may totally misses the point. Every 
obligation that we have as a Federal Government has been 
authorized by Congress, and it is backed by our full faith and 
credit. For the entire history of the United States, we have 
paid our bills.
    To introduce the notion that there are some bills we pay 
and other bills we do not pay just suggests that we are going 
to default on one or another obligation. I think that would be 
a mistake. I think that it would just put us into a totally 
different place than we have ever been. There is a reason why 
the United States is the rock-solid standard for safety and 
security. I think we have a solemn obligation to maintain that.
    The Chairman. Well, I agree with you. I just wanted you to 
get that statement on the record.
    There has been a lot of discussion about increases in 
Medicare costs that I find do not always, in my perspective, 
hit the main point. The main point is, as you mentioned 
earlier, it is not only because of demographics, more seniors 
every year--I think it is 10,000 new seniors every day--but it 
is also because health care costs are going up. It is both. It 
is not only demographic, it is just, health care costs in this 
country for everybody, for seniors and for everybody, are going 
up.
    I think--and I do not know if you have analyzed this--the 
ratio is about 60/40. Sixty percent of the increase in Medicare 
costs is due to more seniors, and 40 percent is just due to 
health care costs going up. The proposals that I see in the 
budget and I see elsewhere only address the 60 percent side of 
it; they only address the 40 percent side of it.
    I would just be interested in your thoughts as to what you 
think is the cause for U.S. health care costs going up as high 
as they are. I know the bill we passed is supposed to address 
some of that but does not completely, although there are some 
provisions in there which are designed to address and slow down 
the rate of growth in health care costs. I know that CBO has 
made some estimates that the rate of growth has come down, and 
so forth.
    But I just would like to see the administration put more 
emphasis on some of the causes for the increase of health care 
costs in this country. A lot of them revolve around Accountable 
Care Organizations and all the provisions that are in the Act. 
But there are some who think that we could dramatically reduce 
health care costs if fee-for-service were significantly 
reduced.
    Right now, only about 5, 10 percent of Medicare payments 
that were fee-for-service are no longer fee-for-service, which 
is a very slow change to reimburse based on quality and 
outcomes as opposed to quantity. I am just surprised and 
disappointed that there is not more emphasis in the 
administration's budget on more quickly addressing costs. I 
would just like your thoughts about that.
    Secretary Lew. Mr. Chairman, this is a very important 
question. It is something that, from the beginning of this 
administration, we have focused on. The Affordable Care Act 
actually did make a big difference. I think that the 
observation that CBO made that we are seeing a reduction in the 
rate of growth of health care costs is very significant.
    I think that that reduction has been realized even before 
many of the provisions of the Affordable Care Act are actually 
in place. So I think we can expect to see more progress than 
was originally projected. One of the challenges we have, and 
this is one of the places where budget scoring and policy do 
not tie together----
    The Chairman. I understand all that. I understand all that. 
But I am just urging you, as creative as you are, to find some 
way to address that.
    Secretary Lew. Look, I think this question of quality 
versus quantity is critically important. Most of the 
legislative proposals that you can come up with are very hard 
to get scored. I think we have to do things even if they do not 
score, if we think they are the right policy to bend the cost 
curve.
    The Chairman. I agree.
    Secretary Lew. Simple things like fitness and weight. We 
know that the costs to Medicare and the health system overall 
are growing in large part because of things that people control 
in their own daily lives. You do not get scoring for things 
that deal with that, so it is sometimes treated as kind of a 
silly set of issues because it feels soft, but, if you know 
that heart disease, diabetes, and all other kinds of things 
that end up meaning quality of life is lower and costs of 
health care are higher, it ought to be something we deal with.
    Because we are in this world of doing things with an eye 
towards deficit reduction, I am afraid we miss some of the 
opportunities to do things that actually really will change the 
direction of health care costs. I think that we have to be 
willing to do some things, even if they do not score.
    The Chairman. Did you read that Steve Brill piece in Time 
magazine?
    Secretary Lew. I did when it came out.
    The Chairman. You read it?
    Secretary Lew. Yes.
    The Chairman. Your view of it?
    Secretary Lew. I read it very quickly. I would rather look 
at it in more detail before offering a view. I think that there 
have been lots of stories about examples of things in the 
health care system that require attention. Frankly, a lot of 
those things will be getting attention in the course of the 
implementation of the Affordable Care Act. I think one of the 
questions we have to ask is, when the Affordable Care Act is 
fully implemented, what remains to be done? I would be happy to 
go into that.
    The Chairman. I just urge you to read it again more slowly 
and----
    Secretary Lew. I am reading things more and more quickly in 
magazines these days.
    The Chairman. I know you are, but that was a very important 
piece.
    Secretary Lew. Yes, it was. It was.
    The Chairman. It is similar to the Atul Gawande piece that 
got the President's attention a couple of years ago.
    Secretary Lew. From the New Yorker.
    The Chairman. The New Yorker. It got a lot of people's 
attention. But this is another one that is an important piece.
    Thank you very much.
    Secretary Lew. Thank you, Mr. Chairman.
    The Chairman. And again, good luck to you.
    [Whereupon, at 4:25 p.m., the hearing was concluded.]



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