[Congressional Record Volume 143, Number 46 (Thursday, April 17, 1997)]
[Senate]
[Pages S3303-S3309]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                               THE BUDGET

  Mr. BENNETT. Mr. President, this time of year is budget time. Since 
it is budget time, it is a time when the Senate Chamber has been filled 
with speeches about budgets, debt, the economy, taxes, and all the rest 
of the subjects that have to do with our joint effort--joint, meaning 
Members of both parties, Members of both Houses, Members of both 
branches, the executive as well as the legislative--to achieve a 
balanced budget by the year 2002. That is a very laudable goal, one 
that has been put off for too long. I am delighted to be here 
representing the State of Utah as the Congress launches itself in this 
effort.
  However, as I have listened to these speeches on both sides of the 
aisle, it has occurred to me that there is more political sloganeering 
than analytical analysis that leads toward a better understanding of 
the problems we face. Therefore, I take the floor today in an effort to 
lay out what I think is a clear understanding of where we are and what 
we are looking at with respect to the budget, our deficit, and our 
future.
  One of Washington's most thoughtful and capable political reporters, 
David Broder, did a column on this subject in which he addressed the 
issue of whether or not we should have tax cuts in the middle of the 
debate over balancing the budget. He coined a magnificently succinct 
phrase. He lauded those who said we must put off tax cuts until the 
budget is balanced, stating it this way: ``In other words, eat your 
spinach before you get the dessert.''
  It is a great phrase and worthy of Mr. Broder's skill as a 
journalist. It also happens to be wrong.
  It implies that tax cuts are without nourishment and have no 
contribution to the meal. They are a reward for doing your job rather 
than an integral part of doing your job. Much as I respect Mr. Broder 
and those who have echoed this sentiment in this Chamber, I think that 
they are in error. We must examine the whole circumstance of where we 
are in order to understand the role that proper tax policy can play.
  Now, in this Chamber, one very familiar image has been with us during 
this debate which, like David Broder's phrase, is very compelling and 
very easy to understand. The image is drawn by people on both sides of 
the

[[Page S3304]]

aisle, of a family, sitting around the table in their kitchen, going 
over the family budget. The father says to the members of the family, 
``We cannot balance our family budget. Our income is not sufficient to 
cover the expenses.'' Then the father says to the mother, and solemnly 
to the gathered children, ``We have only two choices. We can either 
somehow convince the boss down at the factory to give us a raise or we 
can cut our expenditures. Since the boss is not inclined to give us a 
raise, we will have to tighten our belts, do the right thing, and cut 
back on our expenditures.''

  After we conger that image to mind, those in this Chamber are told 
the Government is the same way. We must tighten our belts, stop the 
spending, cut down on the expenditures just like that family. Again, it 
is a powerful image. It is easily remembered. It surrounded by a great 
deal of emotion, and it is wholly wrong, just like the spinach and the 
dessert.
  In the process of hearing about the families, we always see this 
chart. It is displayed by people on both sides of the aisle. This is 
the chart showing what is happening to the national debt. The national 
debt is so low it did not show up on the chart in the years prior to 
1941, and then gradually it starts creeping up and stays about level 
and then suddenly it explodes and people point to this chart and 
remember the family, and say a family that is going into debt this 
rapidly is headed for absolute disaster.
  I want to ask you to consider a different image, a different table, 
and a different group sitting around the table, that will help us 
understand, in my view, what is really going on in the economy. Instead 
of a family sitting around the table talking about their finances, let 
us consider a group of business people sitting around a boardroom table 
of a company. The chief executive officer of the company, we will give 
him the title of chairman of the board, the chairman of the board calls 
his people together and says to them, ``We have a deficit in this 
company of about $1 million a month. If we cannot solve that deficit 
problem we will go bankrupt. What can we do to deal with a deficit of 
$1 million a month?''
  His first expert steps up and says, ``Mr. Chairman, I have examined 
this issue very carefully and I can tell you what it is we need to do. 
Without question, we can solve our problem if we simply raise our 
prices. We are selling $50 million a month worth of our products. So if 
we raise our prices 2\1/2\ percent, we will make enough money to cover 
our $1 million a month deficit.'' Case closed. All you need to do is 
raise your prices.
  The next expert stands up and says, ``Mr. Chairman, I have been 
considering this. Raising prices is absolutely the worst thing you 
could do. As a matter of fact, I know the answer to our problem. We 
must cut prices. Yes, our problem is that our competition is cutting 
into our market share. We are losing sales right and left because our 
prices are too high. If we simply cut our prices by 5 percent across 
the board, the increased volume will do two things for us. No. 1, our 
total sales will go up; and No. 2, our cost of sales will come down as 
we get economies to spread over a larger number of units. So I disagree 
absolutely with the first expert. He says raise prices, and I say cut 
prices.''
  Then the third expert stands up and addresses the chairman in our 
boardroom and he says, ``No, they are both wrong. The price structure 
is just fine. What we must do is spend more money on plant and 
equipment. Our factory is outmoded, our costs are enormously high in 
the factory. If we spend another $50 million on the factory and 
retooling and new equipment, we would cut our overall cost of 
manufacturing by more than $1 million a month, and we would get out of 
the deficit circumstance.''
  When he sits down, the fourth expert stands up and she says to the 
chairman of the board, ``Mr. Chairman, they are all wrong. We do not 
need to raise prices or cut prices. We certainly do not need to 
increase spending. All we need to do is cut spending, cut the overhead. 
Our overhead is running about $11 million a month, and if we cut it 10 
percent that would give us the $1 million a month we need to come to a 
break-even position.''
  So there sits the chairman of the board. He has four groups advising 
him. The four groups are saying to him, ``raise prices, cut prices, 
increase spending, cut spending.'' He thanks them all for their 
efforts. They leave. He is there, left alone with his assistant who 
does not have a great deal of experience in the business, and looks at 
the chairman of the board and says to him, ``OK, you have four options. 
Which one are you going to take?'' Because we are dealing with a wise 
chairman who has a great deal of experience in the free market system, 
he smiles at his assistant and says, ``All four.''

  Yes, Mr. President, all four. When you manage a business that is 
constantly changing from day to day, as every business is, and you 
realize that you cannot put in a static pattern and then leave it 
forever, you realize that you have some products that are not price 
sensitive, and you can raise the price and thereby increase your 
margins without having any punishment in the marketplace. You have some 
products that are, perhaps, overpriced or need a lower price in order 
to increase their hold on the market, so you cut the prices on those 
products.
  Yes, you have some increased spending for plant and equipment, 
research and development. It is the future of your business that 
depends on your increased spending in those areas. Of course, there are 
always areas where you have to cut spending.
  In Government terms, what we are saying with this pattern is, if this 
were the Government sitting around that table instead of a business, 
there would be some areas where you would cut taxes, some areas where 
you would raise taxes, some areas where you would cut spending, and 
some areas where you would raise spending. It is not the simple either/
or circumstance of the family sitting around the kitchen table. It is 
the very challenging management problem of a business sitting around 
the board table and trying to figure out how to maximize its profits 
and, at the same time, make the right kind of investments for the 
future.
  With that new image in our minds, let's address what is, I think, the 
fundamental question here: How do we manage the economy intelligently? 
Particularly, the challenge is, how do we manage an economy--think of 
it in business terms--that is doing $7 trillion worth of business every 
year? Just think of this. If you were the chief executive officer of a 
business that was doing $7 trillion worth of business every year, how 
would you manage that challenge? You obviously would have to look at 
all four of the options I have outlined.
  Well, in order to understand how to manage this economy, we start by 
asking ourselves, where are we? You cannot manage a business without 
accurate data, without accurate information and reports. In other 
words, we can't do the business of the country without accurate 
information.
  I submit to you, Mr. President, that while this chart is enormously 
popular and enormously emotional in the message that it sends, like the 
vision of the family sitting around the kitchen table, it is not 
adequate. No, the numbers are not inaccurate; the numbers are correct. 
But the question is: Debt compared to what?
  If I may repeat an example I have given on the Senate floor before to 
illustrate this point, I will take you back to my own business career. 
When I was hired as the chief executive officer of the Franklin 
Institute in Salt Lake City, that company had debt of $75,000. When I 
left, prior to my run for the U.S. Senate 6\1/2\ years later, the 
company had debt of $7.5 million. If you were to put that on a chart 
like this, your reaction would be: Bennett is a really irresponsible 
executive. When he took over the company, the debt was way down here at 
$75,000, and when he left, it was way up here at $7.5 million. Aren't 
we glad to be rid of him? But you have to ask yourself ``the debt 
compared to what?"
  When I took over as CEO of the company, it had four employees, it had 
sales about $250,000 to $300,000 per year. At the $300,000 figure, the 
debt was 25 percent of sales. And we were not getting a margin of 25 
percent of sales on our profit. The debt of $75,000 threatened the very 
existence of that company. When I left the company and the debt was 
$7.5 million, the sales were over $80 million. We had more than $7.5 
million in cash on the balance sheet.

[[Page S3305]]

 The only reason we didn't pay the debt off is there were prepayment 
penalties built into some of the mortgages we had signed, and it was 
financially more beneficial to keep the cash than to pay the prepayment 
penalties. So the mere size of the debt had nothing to do with the 
measurement of my stewardship as CEO of that company.
  I will say, as an aside, that since I have left the company, the 
sales have now gone to over $400 million. It is a very clear cause and 
effect that getting rid of me caused the company to more than triple.
  Let us, therefore, in the Government context, take this chart down 
and put up another one relating to the example I have given from the 
business world--debt compared to the size of the company, or, in this 
case, the size of the country. What is the size of the country? Here we 
have a chart that shows gross domestic product, GDP, or the size of the 
Nation's economy. Back in the 1940's, the economy was about a trillion 
dollars in inflation-adjusted dollars, 1992 dollars. You can see the 
steady growth up, so that now, in 1996, as I say, we are a $7 trillion 
economy, headed toward $8 trillion by 2002.

  Under those circumstances, this chart is suddenly going to look a 
little different when you compare it to gross domestic product. This is 
the result that you get on this chart. Federal debt, as a percentage of 
our gross domestic product, looks a little different than Federal debt 
in nominal dollars. We reached the highest point of debt in our history 
during the Second World War, at 130 percent of gross domestic product. 
As soon as the war was over, it started coming down and continued to 
come down until it leveled off at around 30 percent of gross domestic 
product in the 1970's. It started back up in the mid-1970's and 
dramatically back up in the mid-1980's.
  This is a comforting chart in that it says that the previous chart is 
not wholly accurate when you compare debt to GDP, and a discomforting 
chart when you realize that our debt is rising as a percent of our 
economy for the first time in peacetime in our history. Always before, 
the debt has been tied to a war. And when the war is over, debt as a 
percentage of GDP comes down. For the first time in our history, it has 
started to go up in peacetime; that is a very disturbing trend. I will 
deal with that in just a moment.
  Now, the question is, why? Why is the debt starting to come up? There 
are those on the other side of the aisle who have a very quick answer, 
summarized in two words: Ronald Reagan. Ronald Reagan is the one who 
caused all of this to happen. Look how the debt exploded during the 
Reagan years; it is all because of the disastrous Reagan tax cuts. It 
seems to me that we cannot, in this body discuss the tax cut that 
happened in terms of the marginal rate in the 1980's, without 
automatically adding in front of the phrase ``tax cut,'' the words 
``disastrous Ronald Reagan,'' as the words to describe it--as if it is 
all one word, a legal term of art.
  I want to discuss whether or not the ``disastrous Reagan tax cuts'' 
are responsible for this rise in the national debt. Let's take a look 
at who pays the income taxes in this country and, also, what the 
history has been of the tax rate. Here is the history of Federal tax 
receipts and personal tax rates on this chart. The red line on the 
bottom is Federal tax receipts expressed, again, as a percentage of 
gross domestic product. This is what we are measuring everything 
against, this chart showing the lines going up.
  Do you notice a clear trend, Mr. President? Virtually from the end of 
the Second World War until now, Federal tax receipts have remained rock 
solid, within a narrow band, no lower than 18.5 percent and no higher 
than 19.5 percent of gross domestic product, averaging around 19 
percent year after year. That is where it was, 19 percent, when the top 
marginal rate under Harry Truman was 91 percent. Then we had a tax cut. 
The rates went down slightly. John F. Kennedy recommended that it come 
down to 70 percent, and many people in this body were scandalized, 
saying we can't afford that heavy a tax cut, we can't afford to lose 
the revenue. So it came down from 90 percent to 70 percent. What 
happened to the receipts? They didn't change.
  Well, you had this one blip that Lyndon Johnson put through to help 
pay for the Vietnam war in the tax rate, and it showed up with an 
upward blip in the tax revenue. But quickly the tax revenue went back 
to the 19 percent line and the tax rate stayed at 70 percent until the 
time came to drop it to 50. When the tax rate dropped from 70 percent 
to 50, what happened to the tax revenues? They stayed solid. As a 
matter of fact, they went up a little when the drop of 70 percent to 50 
percent happened as the marginal rate.
  Then Ronald Reagan convinced the Congress to pass the ``disastrous 
Reagan tax cuts.'' The marginal rate came all the way down to 28 
percent. What happened to the revenues? They stayed right solid at 19 
percent. Bill Clinton said, ``We have to get more revenue to balance 
the budget,'' and he forced the marginal rate, with Congress' help, 
back up to close to 40 percent. Actually, when you add Medicare on top 
of it, it is more than 40 percent. What happened to the revenue? 
Nothing. It stayed around 19 percent.

  You cannot blame the ``disastrous Reagan tax cuts'' for the increase 
in the debt as a percentage of gross domestic product, because they had 
little or no effect on the tax receipts as a percentage of gross 
domestic product. Those are the facts.
  Now, I said in my example that the businessman will be asked both to 
raise prices and cut prices. One of the interesting debates we have 
around here is that Members of the Republican Party stand up and accuse 
Bill Clinton of pushing through the ``largest tax increase in 
history.'' Then the Members of the Democratic Party stand up and say, 
``That's not true, the largest tax increase in history was put through 
by''--the same two words, Mr. President--``Ronald Reagan.''
  Who is right? Well, if you take nominal dollars, the Republicans are 
right. The Clinton tax increase was the largest in history. If you take 
constant dollars, adjusted for inflation, the Democrats are right. 
Ronald Reagan's tax increase was the largest in history. Now, he didn't 
call it a tax increase; he called it ``revenue enhancements,'' which 
infuriated conservative groups around town that looked upon him as 
their hero.
  Reagan did exactly the thing that the businessman in my example did. 
He both raised prices on some products and cut prices on others. He 
raised taxes on gasoline, for example, while cutting tax rates on 
incomes. And what happened to the economy in the Ronald Reagan years? 
Let's go back to this chart.
  As I say, this chart is the inflation-adjusted gross domestic 
product. The reason for all the fancy colors is not just to help keep 
you awake, Mr. President, but to demonstrate the differences in the 
various administrations. Understand that something that is done in one 
President's administration doesn't necessarily produce a result in that 
administration. Many times, the effects are felt years later. 
Nonetheless, to give us some guidance, here we have the growth of the 
economy during President Eisenhower's administration. It started up 
more vigorously in John F. Kennedy's administration. Why is that? That 
is the period of time we came down from 90 to 70. I don't know whether 
there is a direct cause-and-effect correlation, but it is certainly a 
significant enough issue to look at. We dropped the top marginal rate, 
and the rate of growth in the country goes up through Kennedy and 
remains through Johnson. Then you get a recession. It is flat in the 
last year of Johnson's administration and in the first year of Nixon's 
administration. Incidentally, Mr. President, that is the only year on 
this chart where we had a balanced budget--1969. It is an interesting 
correlation. It was flat. Then it starts to go up. But you get a 
recession that hits you; Nixon-Ford. Here is this recession, and Jimmy 
Carter becomes President. As we come out of that recession and get the 
advantage of the recovery out of that recession in his first 2 years, 
hits the 3d year, and gets another recession, and it becomes flat 
again. Ronald Reagan was President while we had what the economists 
called the ``double dip.'' The Carter recession; then they came out of 
it in 1981, and then the more serious recession that followed, and 
seriously it came down. But once that recession was over, the rate of 
growth that came out of those years for the balance of

[[Page S3306]]

Reagan term in the first 2 years of Bush's term was historically one of 
the finest we have ever had. Is there any reason for that? Well, that 
just happens to coincide with ``the disastrous Reagan tax cuts.'' This 
line that says percentage of GDP, unchanged by the change in tax rates 
and corresponds with the GDP that is going through the roof. Nineteen 
percent of this kind of growth produces a whole lot more revenue to the 
Government than 19 percent of a recession.

  We cannot blame the tax policy relating to the top marginal rates for 
the deficit and our problems. It is very clear that the deficit is not 
driven by income tax policy.
  If I might digress for just a moment, I would like to explain one of 
the reasons why the change in the income tax marginal rate does not 
produce a change in the percentage of income that comes in. This next 
chart demonstrates that because it tells us who pays the income taxes 
in this country.
  The top 1 percent of households produce 13.8 percent of the income in 
this country. Many people say that is very unfair and they want to do 
something about it. But that is where we are. The top 1 percent of 
households produces 13.8 percent of the income. They pay 28.7 percent 
of the income taxes, or more than twice the percentage of the income 
that they receive. If you go to the top 5 percent, they get 27.8 
percent of the income and pay 47 percent of the income taxes. In other 
words, the taxes that are paid on this chart, nearly half of them are 
paid by people in the top 5 percent of our wage earners. If you go down 
to the top 10 percent, this goes to 60 percent of the income taxes. 
What that means is that when you change this rate, the people who earn 
the most income, over here, have options as to what they will do with 
their money, and they will change their investment pattern to adapt to 
the Tax Code, consequently avoiding things that are high tax and moving 
into areas that are low tax, the result being that the percentage that 
they pay remains constant as measured in terms of GDP.
  So what you want to do, again back to this chart, is make sure that 
the GDP is going up as rapidly as it was during the Reagan years in 
order to maximize your income because your income is going to remain a 
constant percentage of that GDP by virtue of who it is that pays the 
income tax.
  Back to this chart, briefly. The bottom 50 percent pay virtually no 
income taxes at all. The bottom 50 percent gets roughly 15 percent of 
the Nation's wealth and they pay less than 5 percent of the Nation's 
income taxes. They, however, pay payroll taxes. They don't pay income 
taxes, but their payroll tax burden is inordinately high.
  At this point, Mr. President, I would call the Senate's attention to 
a piece that appeared in the Washington Post on the 15th of April 
written by our colleague from Nebraska, Bob Kerrey, and ask unanimous 
consent that it appear at the end of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. BENNETT. Senator Kerrey has summarized the problem for the people 
in the bottom half of income earners superbly well, and pointing out 
that they actually pay a higher effective rate on their income than 
people who pay income taxes down in this particular area of the chart. 
They do it in the form of payroll taxes, and that, as I have said on 
this floor many times before, is just one of the reasons why a complete 
restructuring of the Tax Code is absolutely necessary. But this is not 
the time. I don't have the time today to discuss that issue all over 
again. I am sure I will have a speech on that subject when we get into 
that later on.

  If the deficit is not caused by tax policy, the tax policy is 
producing roughly the same amount of income regardless of what we do 
with it, and indeed, if the tax policy causes the gross domestic 
product to increase rapidly, let's look at the spending side. That is 
the only other place that the deficit can come from.
  There are those in the Chamber who say, ``Well, it is all defense 
spending.'' Back to Reagan again, ``He is the problem because of his 
runaway spending for defense.''
  Let's look at defense spending again by our same measure as a 
percentage of gross domestic product. The defense spending--we left 
these years out because this is the Second World War and the aftermath 
of the Second World War. Here is the Korean war. The green bars are 
Eisenhower, Kennedy, Johnson, and so on all at the way through 
different colors. Here is what we are spending in the defense budget in 
the Korean war. When the Korean war was over it dipped off, and then, 
starting here in the mid-1960's, the Vietnam war. Again there was a 
peak in 1968, the last year of Lyndon Johnson's Presidency. And then 
the spending tapered off and went down still further in the Carter 
years, and then Ronald Reagan did, indeed, call for a cold war buildup 
in his attack on the Soviet Union, and you got a bulge. But notice at 
the highest point of spending for the cold war buildup, it was 
substantially lower than at any time in the Vietnam war and less than 
half the spending in the highest year of the Korean war.
  Now with the result of the cold war buildup having produced the 
destruction of the Soviet Union, we are reaping the peace dividend that 
people have been talking about for so many years. And the spending came 
down during President Bush's administration, and continues to come down 
during President Clinton's. It is now, as you go across the chart, at 
the lowest level it has been since 1940 as a percent of gross domestic 
spending.
  Spending on defense even in the years of Ronald Reagan's buildup 
could not be responsible for the budget gap. It simply wasn't that 
significant. You put it in historic context and it is below historic 
levels in the other conflicts we have been examined. So, if it is not 
defense spending, it must be nondefense spending--nondefense 
discretionary spending--that has done this. Let's look at that.
  Here is nondefense domestic discretionary spending from 1962, to 2002 
projected. Notice where it hits its highest point. It hits its highest 
point during the Carter years. 1976 is the year Jimmy Carter is 
elected; 1977 his first year, 1978; the highest point in 1978 tapers 
off a little bit. If we go back in history, we find that this was a 
time of great domestic spending expansion. Again it started in the 
Nixon-Ford years, carried over into the Carter years, and then began to 
come down. It is back up--1992, 1993, 1994, 1995, the Clinton years. 
While not competing with the Carter years, his spending is coming back 
up after having gone down. But this is not the picture of disaster. 
This is a picture of some stability in spending in this area.
  So if it is not defense spending, and it is not nondefense spending, 
what is it?
  Now let us put up the chart that deals with entitlements. Here are 
entitlements as a percentage of GDP. The yellow portion of the chart 
shows actual entitlements. The pink portion is the baseline projected 
for the years ahead through the year 2007. You will notice there is a 
serious increase right here--late 1970's. This again was a period when 
Congress significantly expanded Social Security SSI and Medicaid. It 
was at the same time, a period of recession, when you come over to this 
chart and find that the GDP is shrinking.
  So Congress is authorizing more spending while the economy is 
shrinking, and that produces these spikes. When the economy recovered, 
it starts to come down. But then you get another recession, and now it 
becomes even more serious in this recession that shows up in the first 
part of the Reagan term. Then the Reagan growth takes off, and you get 
that rapid growth period and you get a period where entitlement 
spending as a percent of GDP begins to come down.

  But when the growth slows down and you get into the recession that 
hits in the end of the Bush Presidency, beginning of Clinton, what 
happens? Entitlement spending goes up. Then you realize what is built 
in, and what is happening to our demographics. And you see the baseline 
that the Congressional Budget Office says is going to occur from here 
on in, and you are into historic highs.
  This is where the problem lies. It is not in defense spending. It is 
not in nondefense discretionary spending. It is in entitlements. And 
here is where it is showing up.
  We will put up another chart that shows the contrast between 
discretionary spending as represented by the red line and entitlement 
spending as

[[Page S3307]]

represented by the gray line. In this gray line, we have added another 
component that has not been in any of these figures up until now, and 
that is interest on the debt.
  It is interesting. Here in the 1960's, John F. Kennedy is President. 
The amount of mandatory spending is substantially less than half the 
amount of discretionary spending. No big deal. The lines cross just 
about the time that we have been talking about in the mid-1970's when 
the debt started to go up as a percentage of gross domestic product. 
They stayed pretty much the same. And then with the recession that hit 
in the early 1980's, the gray line starts to take off, leaving the red 
line somewhat constant, going up but not all that much. Clearly the 
problem is in the gray line. Clearly the challenge that is creating the 
deficit is not on the tax side, not on the spending for normal 
Government activities represented by the red line, and clearly the 
problem of the deficit is the gray line which is mandatory expenditures 
combined with interest which is in and of itself a mandatory 
expenditure.
  So that is where we are. Our challenge is to get the economy growing 
as rapidly as it did during the Reagan years, and then on the other 
hand begin to turn that gray line down so it can become a little bit 
flat. And that combination can bring us a balanced budget.
  How do we do that? Get the gross domestic product growing more 
rapidly, and get expenditures under control. Those are our twin 
challenges.

  I take you back to the image that we had at the beginning of this 
presentation, back into the boardroom where the CEO is sitting with his 
experts and they are telling him what he can do to manage his company 
more intelligently and solve the company's deficit problem. Remember 
the first recommendation he had, ``Raise prices.'' At the risk of 
offending some of the Members of my own party, I think there are places 
in this Government where we can raise prices. I think there are things 
we can do--if we want to use the Reagan euphemism, revenue 
enhancements--where we can charge more for the services we are 
rendering. That is heresy to people who say never ever raise taxes. I 
am one who says I won't ever vote for an increase in the marginal tax 
rate, but there are, all around the Government, things that could be 
raised, raised prices on those products that are not price sensitive 
and get a little more revenue into the Government.
  Then, the second expert told the CEO, ``Cut prices.'' We are being 
told, no, if you try that in the Government, that is dessert, not 
spinach. There is no nourishment to that. I think we have shown clearly 
that, properly done, cutting tax rates in the right places in the right 
way can do what we need to do to increase the revenue of the Government 
by increasing the gross domestic product. Where is the best place to 
start on that? Clearly, for me it is capital gains.
  Oh, says somebody, if you cut the rate on capital gains, you are 
going to benefit the rich because only the rich have capital gains.
  As I have shown you, Mr. President, the rich pay most of the income 
taxes, period. The issue is not: Are you going to benefit the rich? The 
issue is how are these people going to allocate their capital in the 
way that will produce the greatest benefit to the economy as a whole? I 
say to any Member of this body, go back home, gather the venture 
capitalists, the real estate investors, people who are involved with 
moving capital around in your home State, and ask them this question: 
Are there deals that should be done that would improve the economy in 
this State that are not being done because of the current capital gains 
tax rate? If you ask that question, as I have asked it in my State, the 
answer will be: Every day deals that should be done are not being done 
because of the capital gains tax rate.
  You have capital locked into mature investments which, if the capital 
gains tax rate were to come down, would immediately flow into 
entrepreneurial investments, thus creating new jobs. Alan Greenspan, 
who has been praised by Members of both parties for his deft handling 
of the monetary policy in this country, has said repeatedly on the 
record that the best capital gains tax rate for maximum benefit to the 
economy is zero. I would be happy to see that, but I am not going to 
put that proposal on the floor because I realize it will not pass. But 
if we were to do something about the capital gains tax rate, we would 
see the proper allocation of capital into the economy to produce the 
kind of growth that we need.
  People say, ``Oh, no, the stock market is going crazy and a capital 
gains tax adjustment would simply drive the stock market still farther 
and still higher and the only people that get rich are the rich.'' Some 
portions of the stock market are going up. The Dow is going up. The Dow 
consists of 30 stocks. The NASDAQ, which consists of substantially 
more, is not going up nearly as rapidly as the Dow, and the Russell 
2000, which consists of 2,000 companies down at the lower level, 
companies that are not in the Dow, they are not in the Standard & 
Poor's 500, they are down below that. The companies where the 
entrepreneurs are investing their money, and where the real new job 
growth in the future is going to come, is down substantially.
  The Russell 2000 index, which hit its peak in January of this year at 
around 370, is now down to 340. If that drop were on the Dow rather 
than the Russell 2000, we would have financial analysts jumping out of 
windows, saying look how much trouble we are in. What that tells us is 
people are taking their money out of entrepreneurial activity and 
putting it into the huge stocks that they think can weather the coming 
storm. If we were to do something about the capital gains tax rate, 
people would be willing to put their money into the entrepreneurial 
sector of the economy and we would be building a base for future growth 
in the gross domestic product that would be enormously beneficial for 
us in the long run.

  So back to my example. The first person said to the CEO, ``Raise 
prices.'' I say yes, there are places where we can raise revenue in the 
Government even now. The second person said to the CEO, ``Cut prices.'' 
I say yes, there are areas where we can cut tax rates and get benefit, 
where it is not dessert. It has just as much nourishment as spinach and 
probably tastes a good bit better. Then, of course, you will remember 
the third expert said to the CEO, ``Increase your spending, because you 
have an aging plant and aging equipment.'' The fact is, we need to 
increase spending in the Government in some areas.
  Our highways are in trouble; our airport and airway system could use 
some infrastructure spending. We are taking the money that is in the 
trust funds for both of those functions and we are spending it for 
something else. I think we need to take a long look at places where we 
are being penny-wise and pound-foolish in the long term, as far as some 
spending initiatives are concerned. I know that to some this sounds 
like heresy, coming from someone on the Republican side, but it is 
sound management and for the best of our country.
  Finally, we come to the final recommendation that was given to our 
CEO and that we hear around here a great deal, ``You have to cut 
spending.'' The answer is clearly, yes, we have to cut spending. Here 
is a chart that is not the past but the future, that demonstrates the 
challenge that we face. Like every estimate, it can be wrong, but it is 
the best estimate that we have. This is dealing with the two largest 
entitlement programs that we have, Medicare and Social Security. In the 
first 1996 set of bars, you see that Medicare, the red, is between 2 
and 3 percent of gross domestic product; Social Security, the green, 
between 4 and 5. Ten years later, in 2005, Social Security remains 
stable, right about the same place. But Medicare, if nothing is done to 
deal with it, will have grown significantly. Then go out 10 years more. 
Social Security has now grown fairly significantly and Medicare has 
caught up with it. In 2025, Social Security has grown again very 
dramatically, but Medicare has outstripped it. And, in the year 2035, 
Social Security has grown some more and Medicare is going way past it.
  This will not be of any concern to me. I will not be here in 2035. I 
may be here in 2025--my genes are such that I can expect to live to 
that year. But these young pages who are here on the

[[Page S3308]]

floor will be in the height of their earning years in 2035, and they 
will be facing entitlements, in these two programs alone, which will 
eat up 15 percent of gross domestic product.
  If you remember, what was the line on revenues on the previous chart? 
It was 19 percent of gross domestic product is all we get with our tax 
system. If 15 percent of gross domestic product goes to two programs 
alone, that means there will be nothing left for anything else. And, as 
the debt goes up as a percent of GDP, interest becomes an increasing 
problem and you quickly will be at the point in these years, the years 
when these pages will be looking for jobs or hoping to support 
families, when the Government will not have any money for anything 
other than entitlements. That is the future if we do not do something 
to get this under control.
  My time has almost expired. This was not a speech to lay out detailed 
solutions. It was an attempt to put the debate in the right context, 
get it out of the context of the family sitting around the kitchen 
table. It is to understand that this economy operates more like a 
business and that it is a major economic entity that has to be managed 
intelligently. But it is very clear that entitlements have to be 
managed, along with the tax problem,  and the other spending problems. 
We must get entitlements under control or we cannot solve this puzzle.

  I suggest I would be willing to vote for means testing of 
entitlements; changing the definition of an entitlement, if you will, 
to this: You are entitled to this money if you need it. Absolutely the 
Government has it there for you. They are holding it for you, and as 
soon as you need it, the Government will give it to you. Instead of 
saying, ``You are entitled to Social Security payments, Ross Perot. You 
are entitled to Medicare, Donald Trump.''
  I say, ``Ross Perot, if you ever fall on evil times, Medicare will be 
there for you. Donald Trump, if you ever go back into bankruptcy, you 
can draw your Social Security check, absolutely. You are entitled to it 
if you need it.''
  The other issue we have to face, of course, is the question of cost-
of-living adjustments. Built into this projection is the assumption 
that the present cost-of-living adjustment formula is accurate and 
fair. The Boskin commission has looked at that and said, no, the cost-
of-living adjustments are overstated by at least 1.1 percent. We are 
going to have a debate about that on this floor. There are many people 
on both sides of the aisle who say, politically it would be crazy to 
try to do something about the way cost-of-living adjustments are 
calculated, let us just leave it as it is. I say to you the numbers say 
we cannot leave it as it is. We have to deal with reality.
  Social Security is a wonderful program. It was put in place in the 
1930's. Medicare is a wonderful program. It was put in place in the 
1960's. We now live in the 1990's in an entirely different economy 
facing an entirely different kind of future. I suggest that ultimately 
what we want to do, as we deal with the challenge of our budget and our 
Nation's fiscal sanity in the future, is take a clean sheet of paper 
and say, ``The tax system that was designed 60 years ago no longer 
meets our needs. Let us write a new one. The retirement program that we 
put in place for our senior citizens 60 years ago no longer meets our 
needs. Let us write an entirely new one. The health care plan we put in 
place for our senior citizens 30 years ago no longer meets our needs. 
Let us write an entirely new one.'' And see if we cannot, as good 
managers, devise a system that will take care of the poor, take care of 
the elderly, deal with the challenges of the flow of capital in our 
country, and at the same time see to it that we get back to the rate of 
growth that we enjoyed during the Reagan years while holding the 
spending down.
  All we need to do is see that the economy grows more rapidly than the 
Government does. That is all we need to do. That has to be our 
lodestar. We do not have to freeze the Government. We do not have to 
dismantle the Government. All we need to do is say we will follow 
policies that show that the economy will grow more rapidly than the 
Government will grow. When that happens--let's go back to the chart on 
debt as a percentage of GDP--we can see the bars start going in the 
right direction again. Once we get the discipline where the economy 
grows more rapidly than the Government, this trend will turn into this 
trend. The debt will start to come down as a percent of GDP in 
peacetime as it historically has, and our children can have confidence 
that we will have discharged our governmental stewardship 
intelligently.
  Mr. President, I recognize that this has been lengthy. I do not 
apologize for the length because of the importance of the subject. I 
felt that all of this information which is counter to much that has 
been said on this floor on both sides of the aisle is important to put 
into this debate. I hope my colleagues who disagree with me will come 
to the floor and respond. But I hope the responses will be in terms of 
intellectual analysis and fact rather than political sloganeering on 
both sides. The issue is too important to be left to sloganeering. The 
issue is too important to be left to posturing for the 1998 elections, 
in which I have a rather strong personal interest myself. The issue has 
to do with generations yet to come of our children and our 
grandchildren. We owe it to them to do more than shout political 
slogans to each other but to see to it that we address this issue on 
the basis of the reality of where we are and where it is that we can 
go.
  With that, Mr. President, I thank you for your time and attention and 
yield the floor.

                               Exhibit 1

               [From the Washington Post, Apr. 15, 1997]

                           The Forgotten Tax

                            (By Bob Kerrey)

       Today the income tax comes due for its annual flogging. 
     April 15 is the day we reserve for outpourings of frustration 
     about taxes. But the fact is that for average American 
     families, the biggest tax burden is felt not on this day but 
     on every single pay day, when 12.4 percent of their wages are 
     taken to provide retirement income for senior citizens and 
     operating revenue for government. This tax, known as FICA 
     (the Federal Insurance Contributions Act), funds the most 
     popular and successful government program in America today: 
     Social Security.
       FICA is forgotten when tax-cutting time arrives. But 
     because of the way the income and the Social Security payroll 
     taxes are structured FICA is often the biggest tax burden. A 
     household is likely to pay 15 percent income tax, with large 
     chunks of earnings shielded from it, but the 12.4 percent 
     payroll tax applies flatly to all wages up to $65,400.
       Consider: In 1995, the median U.S. household earned 
     $34,076, placing it in the 15 percent tax bracket. Because 
     standard exemptions and deductions shielded more than half 
     its earnings, a family of four earning that amount paid just 
     over $2,600 in income tax.
       But because the payroll tax--6.2 percent paid by the 
     employee and 6.2 percent more by the employer--was assessed 
     against the family's entire income, it paid more than $4,200 
     in FICA. This disparity holds true for a family of four 
     making as much as $56,600 or an individual making $30,000. I 
     include the employer's share in those figures because that 
     6.2 percent represents lost potential earnings and bears at 
     least partial responsibility for stagnating wages. But for a 
     large number of Americans--particularly the self-employed--
     the payroll tax is larger even without an employer match.
       The payroll tax to be sure, is collected for good purpose. 
     By providing income for current retirees, Social Security has 
     drastically reduced the rate of poverty among the elderly. It 
     deserves its distinction at the most popular and successful 
     government program in America.
       But as tax policy, FICA also imposes serious burdens on 
     working families. It is not just regressive, it's super-
     regressive. Because income above $65,400 is exempt, 
     individuals earning more than that amount actually pay less 
     as a percentage of income than those making less. It has 
     economic flaws as well: All of FICA's proceeds go to 
     consumption, either by current retirees or the government. 
     None of the money is invested; to the contrary, the fact that 
     these wages are being taxed means they are unavailable for 
     families to invest for their own retirement and reap the 
     benefits of the soaring value of capital in a global economy.
       Most important, without reforms, the social contract on 
     which Social Security rests--that each generation allows its 
     wages to be taxed to provide retirement income, in return for 
     a promise that it will receive retirement income from the 
     next generation's taxes--is threatened by the program's 
     looming insolvency.
       There is a way to address each of these problems--Social 
     Security's insolvency and the tax burden on working 
     families--while strengthening the basic income-transfer 
     premise of the program. I have proposed reform under which 
     families would invest two percentage points of what they now 
     pay into Social Security--2 percent of their total income--in 
     Personal Investment Plans under their own control. These 
     plans would provide a vehicle for building retirement wealth. 
     By adjusting the age of eligibility for full benefits, 
     correcting the consumer price index and

[[Page S3309]]

     other reforms, my proposal would shore up Social Security's 
     solvency to ensure it continues to provide retirement income 
     as well.
       Because my proposal diverts income currently being paid in 
     taxes to individual accounts owned by the taxpayer, it 
     constitutes a tax cut that totals $300 billion over five 
     years--50 percent bigger than even the most lavish ambitions 
     of the Republican leadership of Congress.
       Under this proposal, the hypothetical four member family 
     described above would see its payroll tax burden reduced from 
     $4,200 to just over $3,500, with the difference invested for 
     the family's retirement. At 8 percent return--which is less 
     than the historical long-term performance of the stock 
     market--over the course of a 45-year working life, the family 
     would build more than $300,000 in wealth.
       And it would build a stake in America's success in a global 
     economy. It is often lamented that the principal beneficiary 
     of the globalizing economy has been corporate wealth, which 
     is more readily shared with shareholders than employees. 
     Employees with advanced skills prosper, those who lack skills 
     are left behind, and the gap between the two is growing.
       Just as troubling--more bothersome is some ways--is the gap 
     in wealth. Skilled workers prosper in a global economy. So do 
     owners of capital. The millions of middle-class Americans who 
     own mutual funds and whose wealth is growing as corporate 
     America thrives know this.
       But the gap between those who own capital--and therefore a 
     stake in America's success in the world--and those who do not 
     is fast becoming a chasm. to take just one measure, a recent 
     survey found that among households earning $35,000 or less--
     51 percent of all households and those most likely to pay 
     more in payroll tax than income tax--only 18 percent own 
     mutual funds. This is compared with 41 percent of households 
     earning $35,000 to $49,000, 58 percent of those making 
     $50,000 to $74,000 and 73 percent of households earning 
     $75,000 or more.
       Thus some households not only lack a stake in America's 
     global success; they are often the ones most threatened by 
     it. These are the families that see their wages stagnate and 
     their jobs downsized while corporate profits--and the wealth 
     of those who own a stake--rise on each report of their 
     misery. Part of the solution is ensuring they have the skills 
     to climb the income ladder; another is ensuring laws are 
     written so workers are treated fairly. The other part of the 
     solution--just as vital--is ensuring those workers own a 
     stake in America's success.

  Mr. REID addressed the Chair.
  The PRESIDING OFFICER. The Chair recognizes the Senator from Nevada.

                          ____________________