[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE PRESIDENT'S FISCAL YEAR 2013
REVENUE AND ECONOMIC POLICY PROPOSALS

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

HEARING

before the

COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2012

__________

Serial No. 112-20

__________

Printed for the use of the Committee on the Budget

Available on the Internet:
www.gpo.gov/fdsys/browse/
committee.action?chamber=house&committee=budget

U.S. GOVERNMENT PRINTING OFFICE
72-699 WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, gpo@custhelp.com.

COMMITTEE ON THE BUDGET

PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas KAREN BASS, California
TODD C. YOUNG, Indiana SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

Professional Staff

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

C O N T E N T S

Page
Hearing held in Washington, DC, February 16, 2012................ 1

Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 3
Hon. Timothy F. Geithner, Secretary, U.S. Department of the
Treasury................................................... 5
Prepared statement of.................................... 9
Response to questions submitted for the record........... 64
Hon. Todd Rokita, a Representative in Congress from the State
of Indiana, questions submitted for the record............. 64

THE PRESIDENT'S FISCAL YEAR 2013
REVENUE AND ECONOMIC POLICY PROPOSALS

----------

THURSDAY, FEBRUARY 16, 2012

House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 2:00 p.m. in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Chairman Ryan, Garrett, Akin,
Price, Chaffetz, Stutzman, Lankford, Black, Ribble, Flores,
Mulvaney, Huelskamp, Rokita, Ginta, Van Hollen, Schwartz,
Doggett, Blumenauer, Yarmuth, Pascrell, Honda, Ryan of Ohio,
Wasserman Schultz, Moore, Castor, Tonko, and Bass.
Chairman Ryan. The hearing will come to order. Welcome,
everyone, to this important hearing. And I would like to thank
Secretary Geithner for joining us. This is your second hearing
today and fourth this week, so you are halfway there. You are a
glutton, I will tell you that. We know that defending this
budget is no easy task so we really do appreciate your time.
Secretary Geithner. Not as hard as your job on your budget.
Chairman Ryan. It is going to be a fun day.
Secretary Geithner. You have my sympathy, you do.
Chairman Ryan. I do. I appreciate it. You are about to get
mine, but in a different way. It is pretty well known that one
of your favorite sayings, which I really enjoy this, is ``A
plan beats no plan.'' It is a phrase you used often during the
financial crisis to describe the need for policymakers to plan
for every contingency in order to stay ahead of events.
You were in the middle of the firestorm of the crash. As a
Fed New York chair, you of all people know this. I remember
those days vividly. I remember your predecessor and the
Chairman of the Federal Reserve coming here, talking about
crises, deflationary spirals, all about the impending collapse
of the economy. It was a very, very ugly moment. And what came
out of that was ugly legislation. It was ugly legislation
because the whole thing caught us by surprise, all of us. And
the circumstances could not be more different today, because
back then we faced a crisis that most people didn't see coming.
Today we are facing the most predictable crisis in our
Nation's history. And yet for a fourth year in a row, you
brought us this. This is no plan. This is no plan to restrain
spending, to grow the economy, and, most of all, it is no plan
to save us from a debt-fueled crisis which will be an economic
disaster for all of us.
If a plan beats no plan, then why has the President once
again decided to duck from the drivers of our debt? Why has he
once again given us more broken promises instead of leadership?
Excuses instead of accountability? Instead of cooperation where
agreement is possible, and we would like to think there is some
of that, why have we seen the President turn his back on the
bipartisan solutions that have been percolating out there? Why
has he decided to base his reelection strategy on dividing
Americans for political gain, in our estimation?
After House Republicans put forward a serious solution in
our budget last year, the President had an opportunity to
advance plans for meeting our challenges, to advance
alternatives, to then compromise, and if in fact there is a
growing bipartisan consensus for the reforms that are needed.
There is a growing bipartisan consensus on contentious issues
like entitlement spending and tax reform, reforms based on
premium support which would shrink Medicare by introducing
choice in competition.
They have a bipartisan history. The history dates back to
John Barrow and Bill Frist and Bill Thomas under the Clinton
Commission. It continues with the work done by Alice Rivlin and
Pete Domenici at the bipartisan Policy Center. And it includes
the work that I have recently done with Senator Ron Wyden from
Oregon to put a bipartisan option for saving and shrinking
Medicare.
Fundamental tax reform also has a bipartisan history. In
1986, I was in high school at the time, but I read the book. We
did fundamental tax reform that lowered tax rates and broadened
the base. The congressional sponsors of that bill: Dick
Gephardt and Bill Bradley.
So I would argue that this is not necessarily a left versus
right issue, this is about those who are willing to tell the
people the truth about our Nation's fiscal challenges and those
who continue to duck from those challenges.
This budget takes the latter approach. It represents a very
clear threat to the health and retirement security for American
seniors. It threatens our prosperity by fueling growth of
government with ever higher taxes. And it commits our children
and our grandchildren to a diminished future. I don't know how
you conclude otherwise.
Secretary Geithner, you would probably be the first to
acknowledge that having no plan is a plan in and of itself. It
is a plan for failure. It is a plan to stay in the debt crisis.
And having no plan means we are planning for decline as a
Nation. The point of this hearing is to find out why that kind
of future for our country is apparently acceptable in this
budget and to this administration. I hope your testimony can
provide answers.
I look forward to a great conversation. And with that, I
want to yield to the Ranking Member Mr. Van Hollen.
[The prepared statement of Chairman Paul Ryan follows:]

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

Welcome all, to this important hearing.
I'd like to thank Secretary Geithner for joining us. This is your
second hearing today and your fourth this week.
We know that defending this budget is no easy task, so we
appreciate your time.
Mr. Secretary, it's pretty well known that one of your favorite
sayings is ``plan beats no plan.''
It's a phrase you used often during the financial crisis to
describe the need for policymakers to plan for every contingency in
order to stay ahead of events.
I remember those days well.
We had you, your predecessor at Treasury, and the Chairman of the
Federal Reserve, all coming here to warn us about the impending
collapse of the U.S. economy.
Because that crisis took us by surprise, the legislation that
resulted was ugly.
But the circumstances could not be more different today.
Back then, we faced a crisis that very few people saw coming.
Today, we are facing the most predictable crisis in our nation's
history.
And yet, for the fourth year in a row, you've brought us this.
This, Mr. Secretary, is no plan. It is no plan to restrain
spending. It is no plan to grow the economy. And most of all, it is no
plan to save the nation from the debt-fueled economic disaster before
us.
If plan beats no plan, then why has the President once again
decided to duck from the drivers of our debt?
Why has he once again given us broken promises instead of
leadership--and excuses instead of accountability?
Instead of cooperation where agreement is possible, why have we
seen the President turn his back on bipartisan solutions?
And why has he decided to base his re-election strategy on dividing
Americans for political gain?
After House Republicans put forward serious solutions in our budget
last year, the President had an opportunity to advance plans for
meeting our challenges.
In fact, there is growing bipartisan consensus for the reforms that
are needed--even on contentious issues like entitlement spending and
tax reform.
Reforms based on premium support, which would strengthen Medicare
by introducing choice and competition, have a bipartisan history.
This history dates back to the Breaux-Thomas commission under
President Clinton, it continues with the work done by Alice Rivlin and
Pete Domenici at the Bipartisan Policy Center, and it includes my
cooperation with Sen. Ron Wyden to put forward a bipartisan option for
saving and strengthening the Medicare guarantee.
And fundamental tax reform also has a bipartisan history. In 1986,
we did fundamental tax reform that lowered rates and broadened the
base.
The congressional sponsors of that bill? None other than Dick
Gephardt and Bill Bradley.
So I would argue that this is not a Left vs. Right issue. This is
about those who are willing to tell people the truth about our nation's
enormous challenges, and those who continue to duck from those
challenges.
This budget takes the latter approach.
It represents a very clear threat to the health and retirement
security of America's seniors, it threatens our prosperity by fueling
the growth of government with ever-higher taxes, and it commits our
children and grandchildren to a diminished future.
Secretary Geithner, you would probably be the first to acknowledge
that having no plan is itself a plan.
It is a plan for failure. Having no plan as a nation means planning
for decline.
The point of this hearing is to find out why that kind of future
for our country is apparently acceptable to your administration.
I hope your testimony can provide the answers--and the
accountability--that the American people deserve.
With that, I yield to the Ranking Member, Mr. Van Hollen.

Mr. Van Hollen. Thank you very much, Mr. Chairman. Welcome,
Mr. Secretary. I think as the Secretary will testify, in fact
this budget represents a plan. It represents a responsible
plan, a good plan. And the debate we really have in this
committee is not between plan and no plan, it is between two
very different visions of how we move forward in this country.
And what this budget does is three essential things. Number
one, it helps to nurture and move forward our very fragile
recovery. I think we all know that when President Barack Obama
was sworn in, the economy was in total free-fall. In fact, we
now know in the last quarter of 2008 we were in free-fall at a
rate of negative 8.9 percent of GDP. Mr. Chairman, you
mentioned that when the previous Secretary of Treasury came
here, the economy was in crisis. That is exactly right. And
that is the crisis the President inherited.
In January when the President was sworn in, we were losing
over 800,000 jobs every month. Now, the first thing the
President and the previous Congress did was to put a net under
that free-fall and then begin to reverse it. We passed the
Recovery Act, we passed legislation to help rescue the auto
industry successfully, and many other measures. And the reality
is that today for the last 23 months we have seen over 3.5
million jobs, private sector jobs, created in this country. So
that is good news.
Is it enough? Certainly not. And that is why the
President's budget lays out a strategy for continuing to
nurture that recovery and continuing to help businesses hire
more people and grow the economy. One piece of that is
something I hope we will get done later today in the House and
tomorrow, which is to extend the payroll tax cut and extend UI
for another 10 months, very important provisions to the economy
and to the American people.
But that is not enough. The plan the President put forward
in his budget, similar to the one he brought before the
Congress last September, the American Jobs Act, also contains
another number of important provisions. If you look at the
unemployment figures, you will find while we have seen a growth
in private sector jobs, you continue to see layoffs in the
public sector; teachers losing their jobs, firefighters,
emergency responders. That is why the President's plan says we
need to provide a little assistance to the States.
The President's plan also calls for a $50 billion
investment in infrastructure. Absolutely necessary. We have
over 13 percent unemployment in the construction industry. We
have roads that need to be built, we have schools that need to
be renovated. This is a win-win. It is often curious to me to
hear people say that building an aircraft carrier helps create
jobs, which it does, but building roads doesn't. You know, you
got to make sure we have the defense budget not just for a
strong defense, but it is a job creator building an aircraft
carrier. Yes, it is. Building a road is as well. And so why we
would decide to not invest in our infrastructure, which has
been essential to our past economic growth and essential to our
future economic growth, is a mystery to me. And the President
has put forward a good plan there.
What else does this budget do? It makes critical
investments in the future. I am sure the Secretary is going to
talk about that. Look at the GI bill. The GI bill helped send
millions of Americans to college to get a better education. It
has paid off not just for them, but for the country. Look at
investments this country has made in the past in science and
research. Research at DARPA helped lead to the Internet, helped
the United States get a head start. We want to invest in this
country in science and research so that we can maintain a
competitive edge.
And finally, this budget takes a balanced approach to
reducing the deficit in a predictable way. It reduces the
deficit as a percent of economy to under 3 percent. It gets it
down to 2.8 percent at the end of the 10-year window, and it
does it in a balanced approach, balanced way.
And, frankly, that is what our Republican colleagues object
to. It is not that you don't have a plan. You have a plan, you
have a balanced plan, you have a plan that says we are going to
make some tough cuts in discretionary spending that goes down
to the lowest level as a percent of GDP since the Eisenhower
Administration in this budget. They cut over $350 billion in
health mandatory; they cut other mandatories as well. But they
also do something else. They propose tax reform not just to
simplify the code which is absolutely essential, but they do it
in a way that other bipartisan commissions have done--Simpson-
Bowles and Rivlin-Domenici--to also help us reduce our deficit.
And the reality is that our Republican friends have taken this
position, and I want everyone to understand. When they talk
about tax reform, not one penny from closing loopholes in the
Tax Code can go to deficit reduction, not one penny. That would
be a violation of the pledge taken by 98 percent of House
Republicans.
And so the dilemma we have is not between no plan and plan;
it is between a responsible balanced plan that the President
has submitted and a plan that we have seen before from this
committee and others, which I would say is totally lopsided.
Because if you are not asking the folks who have done really
well, folks at the very high end of the income scale, if you
are not asking them to go back to paying the same rates as they
were during the Clinton Administration when the economy was
booming, then you got to--simple math--you got to find it
somewhere else. And what that budget did is take $700 billion
out of Medicaid. That is about a third of Medicaid cut.
Mr. Chairman, it totally--it places the risk of rising
health care costs on seniors through a plan that ends the
Medicare guarantee, and it slashes important investments in
infrastructure, education, science and research. So those are
the choices we have. And Mr. Secretary, I know you are going to
elaborate on the plan that you have. I think it is a good plan,
it is a responsible plan and it is a balanced plan. Thank you,
Mr. Chairman.
Chairman Ryan. So I guess we are just going to agree to
disagree on that.
Secretary Geithner, the mic is yours.

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY,
U.S. DEPARTMENT OF THE TREASURY

Secretary Geithner. Chairman Ryan, Ranking Member Van
Hollen, and members of the committee, thanks for giving me the
chance to come talk to you today about these important
questions. I am going to talk about four things, just briefly,
about the economy and the challenges we face there, then a bit
on the near-term imperatives on growth and jobs. I will lay out
the broad elements of our strategy and then I will talk about
the contrast between us, where we disagree. I will give our
version of where we disagree.
First, on the economy. The economy today is gradually
getting stronger, but we have a lot of tough work still ahead
of us.
Over the past 2\1/2\ years, despite the financial headwinds
from the crisis as people bring down debt and we work through
the housing construction bubble, despite the severe cutbacks by
State and local governments, despite the crisis in Europe,
despite the rise in oil prices last spring, despite the
terrible damage to confidence caused by the specter of default
this summer, despite all those shocks and headwinds, the
economy is growing at an average annual rate of 2\1/2\ percent
since growth resumed in the summer of 2009. Private employers
have added 3.7 million jobs over the past 23 months. Private
investment in equipment and software is up by more than 30
percent. Productivity has improved. Exports across the American
economy, from agriculture to manufacturing, are expanding
rapidly. Americans are saving more and bringing down their debt
levels. The financial sector is in much stronger shape, helping
to meet the growing demands for credit and capital.
Now, these improvements are signs of the underlying
resilience of our economy, the resourcefulness of American
workers and businesses, and they are signs of the importance of
the swift and forceful actions we took with the Fed to
stabilize the financial system and to pull the economy out of
the worst economic crisis since the Great Depression. But we
still face very significant economic challenges, particularly
for the average working family in this country. Americans are
still living with the acute damage caused by the crisis. The
unemployment rate is still very high. Millions of Americans are
living in poverty, still looking for work, suffering from the
fall in the value of their homes, or struggling to save for
retirement or pay for college. And for these reasons the
President's budget calls for substantial additional support for
economic growth and job creation alongside longer-term reforms
to improve economic opportunity, improve long-term growth
prospects and restore fiscal sustainability.
I want to applaud the congressional leadership for the
progress they have achieved. They reached an agreement to
extend the payroll tax cut in emergency unemployment insurance.
And this is my second point. Don't stop there. There are
more things that we can do with bipartisan support, things that
are traditionally headed by bipartisan support, that will be
good to make the economy stronger in the short term. And just
because we agree--we disagree now on the long-term shape of tax
reform and entitlement reform, it doesn't have to get in the
way of doing more things now that would help the economy in the
short term.
I will just give you three examples. More help to get
construction workers back on the job with a substantial
infrastructure program would be good policy. Helping Americans
refinance to take advantage of lower mortgage rates would be
good policy. And better incentives for investing in the United
States would be good policy. All those things are things that
have had broad bipartisan support in the past and we shouldn't
let the big disagreements we have on the ultimate shape of tax
reform and entitlement reform get in the way of movement on
those things now. So don't stop with the payroll tax extension.
Now, beyond these immediate steps, and this is my third
point, the President's budget lays out a long-term strategy to
strengthen economic growth and improve economic opportunity
while reducing our deficits to more sustainable levels. And I
know the conventional wisdom here in Washington is that this
debate does not matter because Congress is too divided to
legislate in this election year. But this is a very important
debate. It matters because it is about fundamental economic
priorities: how to increase growth and opportunity, how to
strengthen health care and retirement security, how to reform
our tax system, how we return to living within our means.
We have to govern with limited resources and we have to
make choices about how to use those resources more wisely,
particularly given the millions and millions of Americans who
will become eligible over the coming decades for Medicare and
Social Security. And it is important because, as you all know,
at the end of this year we face the expiration of the Bush tax
cuts and the possible imposition of the sequester, and together
that will force us to come to agreement on another substantial
down payment on fiscal reform.
So it is a debate we have to have now and we need to get
work on how to build consensus on how to move forward in this
case, even though we are so far apart on some of the
fundamental choices.
Now, in the President's budget we propose reform that would
save $4 trillion over 10 years, $3 trillion on top of the caps
on discretionary spending we agreed to in August. Now, if
Congress were to enact these reforms, they would lower the
deficit from just under 9 percent of GDP in 2011 to just under
3 percent of GDP in 2018. That would stabilize the overall debt
burden as the share of the economy in the second half of the
decade. That would put us back on the path towards fiscal
sustainability and leave us in a much better position to
confront the remaining challenges we face--and they are
formidable, still--that build in future decades as more
Americans retire.
Now, under this plan, discretionary spending is projected
to fall to its lowest level as a share of the economy since
Dwight Eisenhower was President. And the President's proposal
would also slow the rate of growth of spending in Medicare and
Medicaid, both through the Affordable Care Act reforms and the
additional proposals we have laid out in the budget for
additional Medicare and Medicaid savings.
But as we reduce spending, we also have to protect
investments that are important to expanding future economic
growth, and that is why the budget makes a series of targeted
investment proposals in education, in innovation and
manufacturing infrastructure. These are not expensive
proposals; they are things we can afford, and we propose to pay
for them within a framework that reduces our deficits to more
sustainable levels.
Now, in order to achieve this balance, this balance between
significant substantial deficit reduction over time with still
some room for investments that matter, we are proposing to
raise a modest amount of additional revenues through tax
reform. The President's plan proposes roughly $2.5 in spending
cuts for every dollar of revenue increases. These revenue
increases would fall only on the top 2 percent of Americans,
not on the rest of the 98 percent of Americans. They would
raise revenues by roughly 1 percent of GDP, although slightly
less than the proposals in the Simpson-Bowles Commission. And
focusing these revenue proposals on the top 2 percent is in our
judgment a more fair and a better way to achieve fiscal
sustainability, better for the economy and better than the
impact of an equivalent amount of cuts in things like benefits
to middle-income seniors or to infrastructure or even defense
spending.
We propose tax reforms that raise revenues not because we
think it is good politics for us or that any of us like to do
it, we propose it because we do not believe it is possible to
meet our national security needs, to preserve a basic level of
health care and retirement security, to compete effectively in
the global economy, without some increase in revenues as part
of a balanced plan.
Now, we illustrate in the budget a range of specific tax
changes that could be added onto the present tax system to
raise the necessary amount of revenue. But we think the best
approach to get there would be through comprehensive tax
reform. We have outlined a general set of principles that would
be designed to make the system more fair, more simple, better
at encouraging investment in the United States.
We are going to lay out in the coming weeks a broad
framework for corporate tax reform designed to achieve that
objective: more simple, more fair, lower rates, broadened base,
better for investment in the United States. And we think that
is a good place to start. And I hope, as the chairman said at
the beginning, there is the prospect of bipartisan consensus on
a framework of tax reform like that.
Final point. I know there are Members of Congress who are
critical of these proposals and would prefer a different
strategy, and you should judge our plan against those
alternatives.
Let me say where we agree and I think where we disagree.
Where we agree is that our fiscal deficits are unsustainable.
They have to be brought down over time and will do a lot of
damage to economic growth in this country. And we agree that
commitments we made to Medicare and Medicaid are unsustainable
and unaffordable over the long run.
But we disagree in some fundamental respects. Some of you
have suggested that we cut deeper and faster with more severe
austerity now. In our judgment that would damage economic
growth, it would reverse the gains we have achieved at getting
more Americans back to work, and it would put more Americans
into poverty. A program of severe immediate austerity now is
not a growth strategy. We can't cut our way to economic growth,
and you would have to be very attentive to an economy still
healing from the crisis to make sure we are doing things that
help growth and not hurt growth in the short run.
Second, probably a more fundamental contrast between our
two plans is that there are some on your side who have
suggested we try to restore fiscal balance without raising any
additional revenue from anyone, or even by cutting taxes
further. Now, in our judgment to do so would necessarily entail
deep cuts in benefits for retirees and low-income Americans--
cuts in investments, in education, and innovation and would
hurt growth, and cuts in defense spending that would damage our
national security interests.
So the choice we face is not about whether we should reduce
our deficits, because we all know we have to do that. It is
about how fast we do it, how quickly we do it. But
fundamentally it is about whether to do it with a balanced plan
that helps growth in the short run and the long run, or with a
plan that will place more of the burden on cuts in national
security, Medicare, low-income programs, education, innovation
and infrastructure in ways that we think will be unfair and
damaging to our interests as a country.
Now, these are tough reforms, but it is a balanced mix of
spending cuts and tax increases. It gives us room to make
investments that will improve opportunities for Americans. It
will help protect our basic commitment to retirement security
in health care for the elderly and the poor. It provides
substantial immediate additional help for the average American,
alongside a reform to help restore long-term sustainability.
It is not going to solve all our challenges. Even if you
embrace these proposals today, we would still be left with
substantial additional challenges, but it would put us in a
much better position to meet those challenges.
Thank you, Mr. Chairman. I would be happy to try to respond
to your questions.
Chairman Ryan. Thank you.
[The prepared statement of Secretary Geithner follows:]

Prepared Statement of Hon. Timothy F. Geithner, Secretary,
U.S. Department of the Treasury

Chairman Ryan, Ranking Member Van Hollen, and members of the
Committee, thank you for giving me the opportunity to appear before you
today to discuss the President's Fiscal Year 2013 Budget.

I. INTRODUCTION

Three years after the worst financial crisis since the Great
Depression, our economy is gradually getting stronger. The decisive
actions we took to combat the financial crisis, combined with the
President's policies to restart job growth and support the economy,
have helped lay the foundations for continuing growth. Over the last
two and a half years, the economy has grown at an average annual rate
of 2.5 percent, exceeding growth in the year prior to the recession.
Private employers have added 3.7 million jobs over the past 23 months,
including more than 400,000 manufacturing jobs. Growth has been led by
exports, which have grown 25 percent in real terms over the last 2\1/2\
years, and by business investment in equipment and software, which has
risen by 33 percent during the same period.
While the economy is regaining strength, we still face significant
economic challenges. Unemployment, at 8.3 percent, is still far too
high, and the housing market remains weak. The damage inflicted by the
crisis presents continued difficulties for consumers and businesses
alike. In addition, the debt crisis in Europe and the slowing of major
economies elsewhere in the world present potential impediments to our
economic growth.
The harm caused by the crisis came on top of a set of deep,
preexisting economic difficulties. In the years leading up to the
crisis, the average middle-class family saw few gains in income,
productivity growth slowed, and the fiscal policies of the previous
Administration turned record budget surpluses into substantial
deficits.
In my testimony, I want to outline the President's strategy for
addressing these immediate and underlying challenges. This strategy
entails a carefully designed set of investments and reforms to improve
opportunity for middle-class Americans and strengthen our capacity to
grow, combined with reforms to restore a sustainable fiscal position.
The Budget proposes three specific steps to boost growth and secure
the United States' position as the most competitive economy in the
world.
Improving access to education and job training, so that
our workers are the best prepared in the world for the jobs of the 21st
century.
Promoting manufacturing and innovation, with a particular
focus on research and development and jumpstarting advanced
manufacturing, so that the United States remains the world's most
competitive economy and firms create well-paying jobs here at home.
Investing in infrastructure, in order to create job
opportunities now and enhance productivity in the long run.
Under the President's plan, these critical investments are combined
with a balanced plan for deficit reduction. The Budget reduces
projected deficits by a total of more than $4 trillion over the next 10
years by adding more than $3 trillion in deficit reduction to the
approximately $1 trillion in savings already enacted through the
discretionary caps included in the Budget Control Act (BCA). These
savings are sufficient to stabilize our debt as a share of the economy
by 2015 and begin placing our debt on a downward path.
More than two-thirds of the total deficit reduction is achieved
through savings in entitlements and other spending programs, and
discretionary spending is projected to fall to its lowest level as a
share of the economy since Dwight Eisenhower was President.
These significant cuts are phased in over time to protect the
economic recovery. Cutting spending too deeply or too soon would damage
the economy in the short-term, impede our ability to make necessary
investments for long-term growth, and achieve deficit reduction at the
expense of the most vulnerable Americans, including seniors and the
poor.
In order to achieve a sustainable fiscal position, we must combine
these cuts with savings achieved through reforms to our tax code that
make it simpler, fairer, and more efficient.
Sustainable deficit reduction requires the right combination of
policies: we must have a tax system that collects revenue fairly and
supports growth and investment, but does not place undue burdens on
families and businesses; spending cuts and entitlement reforms that
reduce expenditures but do not harm the economy or the most vulnerable
Americans; and investments that give us the ability to grow but do not
misallocate valuable government resources.
The central challenges addressed in the President's Budget--
strengthening growth now, investing in our future, and putting our
nation on a sound fiscal footing--complement and depend on each other.
Investing in our economy will help us grow and make our fiscal
challenges more manageable. Locking in credible deficit reduction, in
turn, will make room for investments that enhance our long-term growth.

II. INVESTING IN OUR COMPETITIVENESS

Education and Training
An educated and skilled workforce is critical for the United States
to compete in the global economy. We once led all advanced economies in
the percentage of our population that graduated from high school and
college, but today we are not providing enough Americans with the
educational skills they need. America has fallen to 16th among advanced
countries in the proportion of young people with a college degree, and
many Americans of all ages need further education and training in order
to succeed in today's economy.
The Budget takes a number of steps to make sure that higher
education is attainable and affordable. The President has increased the
maximum Pell Grant by 20 percent to $5,635, and in academic year 2010-
2011, Pell grants supported the educational aspirations of 9.3 million
low- and moderate-income students, who received $35.6 billion in
grants, an average of $3,831 for each student. This year's Budget
maintains the expanded maximum Pell grant of $5,635 through FY 2013.
Moreover, as part of the bipartisan December 2010 tax compromise,
the President extended through 2012 the American Opportunity Tax Credit
(AOTC) he created as part of the Recovery Act. The AOTC is projected to
provide nearly $19 billion in credits to over 9 million families this
year. This year's Budget proposes to make the American Opportunity Tax
Credit permanent, so it can offer up to $10,000 in tax credits over a
four-year college career.
In addition, the Budget provides $8 billion for the Community
College to Career Fund in the Departments of Labor and Education to
support State and community college partnerships with businesses to
build the skills of American workers. A $12.5 billion Pathways Back to
Work Fund will also help jump-start America's economy by putting
thousands of long-term unemployed and low-income Americans back to work
and helping them gain skills for the jobs of the future. The Budget
also provides support for a new initiative designed to improve access
to job training across the nation and make it easier for those looking
for work to access help in their communities and online.

Innovation and Manufacturing
As the global economy becomes more and more advanced, it is crucial
that U.S. firms and workers remain on the cutting edge. Investment in
research and development (R&D) creates good jobs for American workers,
raises living standards, and keeps our economy competitive.
Private businesses are likely to underinvest in R&D, because they
cannot capture all of the gains from their investment. A substantial
portion of the benefits, however, accrues to the broader business
community or the public at large. Federal investments in research and
development have played an important role in spurring the internet,
global positioning systems, and clean energy.
Though private sector investment in R&D has continued to grow, when
the President took office, public investment in R&D was near its lowest
levels in half a century as a share of the economy. The FY 2013 Budget
proposes a number of important investments in R&D:
The Budget includes $141 billion for Federal R&D--
investments that will promote the development of a variety of high-
priority technologies, from next generation robotics to nanotechnology
to improved cybersecurity. The budget also keeps spending on the
National Institutes of Health steady at $31 billion.
Of this, the Budget provides $2.2 billion for Federal
advanced manufacturing R&D, a 19 percent increase over 2012.
The Budget proposes simplifying, expanding, and making
permanent the Research and Experimentation Tax Credit, to provide a
crucial incentive for businesses to invest in R&D.
Another key part of creating good-paying jobs for American workers
is to make sure that our manufacturing sector remains on the cutting
edge. The Budget includes several key investments to support
manufacturing:
The Budget sets aside $149 million in the National Science
Foundation, an increase of $39 million above the 2012 enacted level,
for basic research targeted at developing revolutionary new
manufacturing technologies in partnership with the private sector.
The President's Advanced Manufacturing Partnership invests
in a national effort to develop the emerging technologies that will
create high-quality manufacturing jobs. For example, the Budget
includes $21 million for the Advanced Manufacturing Technology
Consortia program, a new public-private partnership that will develop
road maps for long-term industrial research needs and fund research at
universities and government laboratories directed at meeting those
needs.
The Administration also supports a range of investments
and initiatives to bring about a clean energy economy and create jobs
for the future, especially manufacturing jobs. For example, the Budget
provides $290 million to help meet the goal of doubling the pace of
energy intensity improvements across America's industries over the next
decade, as well as funding to double the share of electricity that
comes from renewable energy sources by 2035.

Infrastructure
Our nation's aging infrastructure is a drag on growth and
productivity. In order to compete in the global economy, American
businesses require a world-class infrastructure. In the long-run, a
modern infrastructure lowers costs for both businesses and individuals.
And there is tremendous short-term value as well--according to the
Congressional Budget Office, infrastructure investment is one of the
most efficient job-creation programs available. With more than 2.2
million fewer construction workers on the job than at the pre-crisis
peak, and with interest rates at historically low levels, now is the
right time for greater public investment in infrastructure.
The President's Budget provides funding for crucial
infrastructure investments. Specifically, the Budget proposes investing
$476 billion over the next six years in our nation's surface
transportation system, which builds upon our proposal to immediately
invest $50 billion to help workers get back on the job. The savings
achieved through our orderly drawdown of forces in Iraq and Afghanistan
will pay for these investments, with the other half of those savings
used to reduce projected deficits.
The Budget also calls for the creation of a National
Infrastructure Bank, a bipartisan idea that will leverage private
capital with more flexible financing so that we can build worthwhile
projects efficiently and effectively, based on their merits.
The Budget also provides significant new investments for
the modernization of public schools and community colleges so that
those who attend have access to a safe environment with modern
technology.
Finally, the President has proposed a national effort
through the $15 billion Project Rebuild to put construction workers
back to work rehabilitating and refurbishing hundreds of thousands of
vacant and foreclosed homes and businesses, which will also help
counteract the effects of blight on home prices in affected
neighborhoods.

III. CONTINUING TO BUILD FISCAL SUSTAINABILITY

When President Obama came into office he inherited an annual budget
deficit equal to 9.2 percent of GDP. Moreover, there was a need for
additional steps to stop the economy's free fall, and so Congress and
the President enacted the American Recovery and Reinvestment Act and
other short-term programs, which temporarily added to the deficit. The
expiration of this recession-related spending, economic growth, and the
spending cuts mandated by the BCA, including both the approximately $1
trillion in spending caps and the $1.2 trillion that is to occur
through sequestration, by themselves are projected to reduce the
deficit to 3.7 percent of GDP by 2018.
However, between 2018 and 2022 the deficit under this baseline
budget would actually start rising again, reaching 4.7 percent of GDP
in 2022. The President's Budget therefore goes beyond the additional
$1.2 trillion in deficit reduction required by the BCA, identifying
additional spending cuts and revenue raisers that reduce the deficit by
over $3 trillion over the next 10 years, while paying for the policies
to strengthen growth and invest in our future.
By identifying savings far greater than the BCA, the Budget allows
us to meet the BCA's goals while replacing the sequester's $1.2
trillion in damaging, arbitrary cuts with more responsible--and more
substantial--reductions. We believe this is the right approach. As the
President has made clear, it is not acceptable to simply repeal the
sequester without a responsible combination of policies to replace it--
policies such as the ones outlined in this Budget.
Overall, the President's plan lowers the deficit from just under
nine percent of GDP in 2011 to around three percent of GDP in 2018,
after which it stabilizes through 2022.
Our fiscal situation is improved by the fact that taxpayers are
being repaid for many of the investments made in banks under the
Troubled Asset Relief Program (TARP). We estimate that investments made
through TARP bank programs, for example, will return more than $20
billion in gains to taxpayers.

Spending Cuts
Meaningful deficit reduction requires serious cuts to government
spending. This will not be easy, but the President's Budget identifies
areas where cuts are necessary, while protecting the most vulnerable
Americans and investments in our future. As described below, President
Obama proposes to reduce spending by reorganizing the government,
cutting discretionary spending consistent with targets set forth in the
bipartisan BCA, and reforming entitlements.

Non-security Discretionary Spending
The $1 trillion in savings from the discretionary spending caps
mandated by the BCA, which the President signed into law, reflect the
hard choices that need to be made in order to meet our obligation to
building a fiscally sustainable foundation. Achieving these cuts will
not be easy and will require us to continue to make tough choices.
The President's Budget meets this challenge, identifying more than
200 cuts, consolidations, and savings proposals. This is on top of the
ongoing effort by the Administration to make government more efficient
by reducing administrative overhead costs, reforming the government
purchasing process, and embracing competitive grant programs. The
Budget makes these cuts in a way that asks all to shoulder their fair
share.
The President has also asked for the power to reorganize the
executive branch to cut out needless duplication, enhance the
efficiency and effectiveness of government programs, and improve
service delivery. The President has already proposed consolidating into
one department the business and trade components of the Department of
Commerce, the Small Business Administration, and several additional
agencies to better support our nation's economic growth through trade,
entrepreneurship, and innovation.
As a result of these cuts, non-security discretionary spending will
fall to just 1.7 percent of GDP in the final year of the Budget
horizon, as compared to approximately 3 percent this year.

Discretionary Defense Spending
Just as we must reprioritize our non-security spending to meet the
challenges of the new economy, we must also rethink our defense
spending in light of the evolving global environment. The conflicts our
military confronted over the past decade are winding down: our troops
have exited Iraq, operations in Afghanistan are increasingly being
turned over to the Afghan people, and we have dealt a devastating blow
to al Qaeda by eliminating Osama bin Laden and other leaders. This
provides us with the opportunity not simply to cut spending, but rather
to take the hard lessons learned from the past decade of conflict to
create a military that secures the safety of the United States while
taking into account the more fiscally constrained environment in which
we are operating.
Over the next year, the overall defense budget, including overseas
contingency operations reductions, will be down by 5 percent from the
2012 enacted level. On January 5, the President announced the Defense
Strategic Review (DSR), which will set priorities for our national
defense over a longer period. The review is designed to provide us with
a leaner, more technically advanced fighting force, better designed to
address the threats of today's world. In particular, the strategy calls
for strengthening our presence in the Asia-Pacific region, along with
continued vigilance in the Middle East and North Africa. We will also
continue to invest in our critical partnerships and alliances,
including NATO.
The DSR is designed to reduce defense spending over the next 10
years by $487 billion relative to last year's Budget, which will slow
the growth of defense spending. The President's Budget will allow us to
make significant and thoughtful reductions in defense spending without
implementing the damaging path of the BCA sequester.

Mandatory Spending
Achieving fiscal sustainability in the long term will require
changes to mandatory spending programs. The President is proposing $270
billion in savings over 10 years in mandatory programs outside of
health care. This includes the modernization of the pay and benefits of
federal workers and the military, and increasing the efficiency of our
agricultural support programs. The Budget also proposes increasing the
retirement security of American workers by giving the Board of the
Pension Benefit Guaranty Corporation (PBGC) the authority to gradually
adjust the premiums it charges pension plan sponsors, as well as a
proposal to restore solvency to the unemployment insurance program.
Together, these latter two proposals would reduce the federal deficit
by more than $60 billion over 10 years.
However, as the population ages and health care costs continue to
rise, one of the biggest challenges in addressing our long-term fiscal
sustainability results from projected spending on health programs due
to aging of the population and excess health care cost growth.
The Affordable Care Act (ACA) was a significant step toward
controlling health care spending. According to analysis from the
Congressional Budget Office, the ACA is estimated to reduce the deficit
by more than $100 billion from 2012 to 2021 and by more than $1
trillion in the second decade. It is projected to reduce Medicare's
average annual growth by 1.5 percentage points. One of the most
important steps we can take right now for long-term deficit reduction
is to implement the ACA fully and effectively.
Still, more needs to be done. The Budget therefore proposes an
additional $362 billion in health care savings over the next 10 years,
through better administration and innovation, strengthening program
integrity, aligning payments with costs of care, and strengthening
provider payment incentives to improve quality of care. The Budget also
includes structural changes that will help encourage Medicare
beneficiaries to seek high-value health care services.

Tax Reform
While the proposed spending cuts are an important component of
reducing our deficit, the President has recognized that we cannot
responsibly address our fiscal situation without raising additional
revenue. As a share of GDP, tax revenues from 2009 to 2011 were at
their lowest level as a share of the economy since 1950. Our current
tax code is inefficient and filled with loopholes. We need a tax system
that is simpler and more efficient, one where businesses and
individuals play by the rules and pay their fair share. Comprehensive
tax reform will strengthen our competitiveness, promote fiscal
sustainability, and restore fairness.
As the President has emphasized, these reforms should follow a set
of key principles. They should be fiscally responsible, so that the tax
code promotes jobs and growth while collecting appropriate levels of
revenue. The code should be simpler, combining lower tax rates for
individuals and corporations with fewer loopholes and carve-outs--which
will increase efficiency so that businesses compete based on the
products and services they provide, not the tax breaks they are able to
collect. And finally, it should be fair, so that middle-class Americans
are not carrying more than their fair share of the tax burden.

Individual Tax Reform
As with corporate tax reform, for individual reform the best path
would be to enact comprehensive tax reform that meets the principles
the President laid out last September and revisited as part of the
State of the Union. The key to these reforms is fairness.
The individual income tax cuts of the last decade were tilted
toward the wealthy and have contributed to tax revenues falling to near
their lowest level as a share of GDP in 60 years. As we consider
individual reforms, families with incomes under $250,000 should not see
a tax increase. But the most fortunate Americans, the wealthiest 2
percent, must contribute a greater share of their income in order to
correct the imbalance in our system. And in keeping with the Buffett
Rule, high-income families should not face tax rates that are lower
than those faced by middle-income families.
As we move to consider these reforms, the Budget presents a path
that raises the appropriate amount of revenue within the context of the
current tax system. The President's Budget proposes a number of steps
in line with his tax reform principles, including:
Allowing the high-income 2001 and 2003 tax cuts to expire;
Setting a maximum 28 percent rate at which upper-income
taxpayers could benefit from itemized deductions and certain other tax
preferences to reduce their tax liability; and
Eliminating the carried interest loophole that allows some
to pay capital gains tax rates on what is essentially compensation for
services.
These steps in the direction of a reformed system would reduce the
deficit by about $1.5 trillion over the next 10 years and would set in
motion the process of broader reform.

Corporate Tax Reform
Right now, the United States has one of the highest statutory
corporate tax rates in the world, but the large number of loopholes and
special interest carve-outs means that effective tax rates vary widely
by industry, even by company, and allow some corporations to avoid
paying income taxes almost entirely. Even though our statutory
corporate tax rate is among the world's highest, the corporate tax
revenue we collect, as a percentage of GDP, is relatively low for
advanced economies.
There are too many tax provisions that favor some industries and
investments and benefit only those who receive them, rather than
society as a whole. This creates problems beyond forgone revenue: it
forces some businesses to carry a larger share of the tax burden than
they would under a more equitable system, and it also hurts overall
economic growth by distorting incentives for investment and job
creation.
Soon, the Administration will release a framework for reforming the
corporate tax system. This proposal will lower the maximum statutory
rate, limit the ability of firms to shift profits to low-tax
jurisdictions, eliminate tax expenditures that have no positive
spillovers to society as a whole, and bring a sense of permanence to
various provisions in the corporate income tax code. In short, it will
help level the playing field for businesses and allow the government to
collect needed revenue while promoting economic growth. The President's
Budget proposals, if implemented, would move the existing corporate tax
code in the direction of these principles but would not eliminate the
need for deeper reforms.
iii. conclusion
In today's testimony, I have outlined the President's plan for
addressing our substantial economic challenges through the combination
of targeted investments, spending cuts, and tax reform.
In closing, I want to emphasize that bolstering economic growth in
the long run and controlling our deficits both depend a great deal on
us taking strong steps to support the economy right now.
A common mistake in the wake of financial crises is for governments
to withdraw support for the economy too soon. Though recent economic
data has been somewhat promising, we have a long way to go to fully
recover from the worst shock to our economy since the Great Depression.
Failure to act in the face of these challenges is one of the biggest
threats to our economy ahead in 2012 and 2013.
I hope Congressional leaders make progress toward extension of the
payroll tax cut and emergency unemployment insurance. These measures
will put more money in the pockets of American families at a time when
they need it most and will help support the broader economy. The
savings to families are significant: a full year of the tax cut will
save $1,000 this year for the typical household earning $50,000, and
the extension of emergency unemployment insurance will prevent millions
of UI claimants who are looking for work from losing or being denied
benefits.
But we still have more to do. We must continue to work together to
support the housing market, whose weakness is a stress on millions of
families and a drag on overall growth. To this end, the President
recently announced new policies designed to aid the housing market,
including broad-based refinancing for responsible homeowners that would
save the typical family $3,000 a year. We are also working with the FHA
and FHFA to take a range of steps to improve access to mortgage credit,
and the FHFA also recently launched a pilot program to convert
foreclosed homes into rental properties.
Congress should also consider the plan set forth by the President,
first in the American Jobs Act, and now in the Budget, to create jobs
and strengthen our economy. The President's Budget cuts taxes for
American workers. It cuts taxes for small businesses, so they can hire
more people, and cuts taxes for businesses that add employees. It
protects the jobs of teachers, police, and firefighters. And it puts
construction workers back to work on much-needed projects. There are 13
million Americans looking for work. We have an obligation to them.
Implementation of these short-term steps will help strengthen the
economy as we enter the next fiscal year. The President's Budget for FY
2013 provides a path forward that will help our nation grow now and in
the future. These are important proposals. They are balanced proposals.
And they will help make our economy and our nation stronger.

Chairman Ryan. I guess we will just, like I said to Mr. Van
Hollen, agree to disagree on a few of those points. Here is the
crux that I want to get to. Do you think this budget averts the
deterioration of our fiscal problem?
Secretary Geithner. Well, as I said, we are not claiming
this solves all the problems facing the country, but it does
meet the critical essential test.
Chairman Ryan. Which is?
Secretary Geithner. Of restoring our deficits to a more
sustainable position for the next 10 years. And the test there,
which is a test you embrace in your plan too, is to make sure
you get deficits down below 3 percent of GDP and hold them
there. And if you do that, then what happens is our overall
debt burden as a share of the economy stops growing at a level
we can manage and starts to come down. So we meet that test,
and we help lower the trajectory of cost growth in the outer
decades that comes from millions of Americans retiring. But we
still would face, even with this framework, more work to do in
that long-term demographic challenge.
Chairman Ryan. Well, bring up slide 13, because I just
don't see the rhetoric matching the results. And out of your
budget, page 58, in analytical perspectives you say that--this
is your budget. It says that the government's position
gradually deteriorates, that our fiscal condition deteriorates.
These are your numbers.
Secretary Geithner. What it shows, Mr. Chairman, is----
Chairman Ryan. This is your deficit path, your debt path.
Secretary Geithner. And it shows just exactly what I said.
Which is, if you look at 2012 for the next 10 years, it
stabilizes that debt burden as a share of the economy. And then
what happens is--and this is exactly what I said----
Chairman Ryan. And so it will just allow it to take off
after that?
Secretary Geithner. No, no. And you are right. And as
millions of Americans retire, then those costs in Medicare and
Medicaid start to increase again. And that is why we are saying
openly and directly to you that we are going to have some work
to do.
Chairman Ryan. That is one way of putting it.
Secretary Geithner. No, but--and what you do is, I think on
your budget, although I know you are going to have a new one
coming, is you would lower that path in ways that would
substantially increase the burden of health care costs on
middle-income seniors. And although we agree with you, we are
going to have more work to do, but we are not going to adopt an
approach that would undermine that basic benefit.
Chairman Ryan. Go ahead and show slide A if you can.

Chairman Ryan. So you brought it up. I know you didn't
necessarily want to see this chart. The red is the status quo.
That is the baseline we are on.
Secretary Geithner. You could have taken that to 3,000 or
to 4,000.
Chairman Ryan. This is last year's budget. Yeah, right. We
cut it off at the end of the century because the economy,
according to CBO, shuts down in 2027 on this path.
Secretary Geithner. I like that chart. I saw this chart
yesterday. But if you look at the--you are talking about like,
I think, more than half a century going out.
Chairman Ryan. Yeah.
Secretary Geithner. But if you look at the gap between us--
--
Chairman Ryan. I understand the gap.
Secretary Geithner. Between 10 and 20, it is a pretty small
gap. And that gap, though, that 10 to 20 gap, which is all we
are debating today, is a gap where you are achieving that
slightly diminished path.
Chairman Ryan. Here is the point. This is your time, so we
will just take a long time. Here is the point. Leaders are
supposed to fix problems. We have a $99.4 trillion unfunded
liability. Our government is making promises to Americans that
it has no way of accounting for them.
And so you are saying, yeah, we are stabilizing it but we
are not fixing it in the long run. That means we are just going
to keep lying to people, we are going to keep all these empty
promises. And so what we are saying is in order to avert a debt
crisis--I mean, you are the Treasury Secretary. If we can't
make good on our bonds in the future, who is going to invest in
our country? We do not want to have a debt crisis.
And so it comes down to confidence and trajectory. Do we
have confidence that we are getting our fiscal situation under
control, that we are preventing the debt from getting at these
catastrophic levels? And to go back to the preceding chart,
number 13, you are showing that you have no plan to get this
debt under control. You are saying we will stabilize it, but
then it is just going to shoot back up.
And so my argument is that is Europe. That is bringing us
toward a European debt crisis, because we are showing the
world, the credit markets, future seniors, people who are
organizing their lives around the promises that are being made
to them today. We don't have a plan to make good on this.
Secretary Geithner. Mr. Chairman, as I said, maybe we are
not disagreeing in a sense that I made it absolutely clear that
what our budget does is get our deficits down to a sustainable
path over the budget----
Chairman Ryan. And then it takes back off.
Secretary Geithner [continuing]. Over the budget window.
And why--let's talk about why do they take off again, why do
they do that?
Chairman Ryan. Because we have 10,000 people retiring every
day.
Secretary Geithner. That is right. We have millions of
Americans retiring every day and that will drive substantial
further rate of growth in health care costs. And so you were
right to say we are not coming before you today to say we have
a definitive solution to that long-term problem. What we do
know is we don't like yours, because what yours would do is put
an undue burden on a middle-income senior and substantially
raise the burden on them for rising health care costs. Now, you
are right, though, that government is about you have to make
choices between the immediate and the urgent and the important.
Chairman Ryan. In the interest of time, we are fine that
you don't like our path. That is what politics and Republicans
and Democrats and difference of opinions are all about. But if
we don't come up with a plan for this country, we are going to
pull the rug out from under people who are relying on these
benefits.
Now, we don't agree with your interpretation of our plan
because we provide more for the poor and the middle income and
less for the wealthy. We think that is the smart way to go on
funding these important guaranteed programs.
Secretary Geithner. I don't----
Chairman Ryan. Put that aside.
Secretary Geithner. I don't think that is a fair
description of your plan.
Chairman Ryan. Well, actually I do. But we can go back and
forth on this. Put all that aside. If we don't start showing
the country that we have a plan to make good on these promises
to secure these health and retirement benefits, then we are
going to have a debt crisis.
Let me try to go to something where maybe we have a little
more agreement on. On tax reform, I have enjoyed reading some
of your quotes where you said that there is a better way to do
tax reform than, say, what you are proposing in the budget. I
think you say, a better way to do it is to lower rates and
broaden base. I couldn't agree more. We have had all these
bipartisan ideas, we have had all these bipartisan working
groups.
Let me just go to a couple of charts. And this is for more
or less my friends. Go to number 10 if you can, slide 10.

Chairman Ryan. A lot of folks think that if we lower tax
rates, then the rich are just going to rip everybody off, that
they are going to get away with murder. Take a look at the
facts. When we have lowered tax rates over--since 1980, the
share of the tax burden for the wealthier people has gone up.
1986 is a good example. Right there, the shares shot up. So the
wealthy actually pay a higher proportion of the tax burden as
those tax rates have gone down. Why? Three reasons. We provided
middle- and lower-income relief for families throughout that
time. Cutting top rates actually increased economic growth,
upper mobility and prosperity. And third----
Secretary Geithner. Not so much, actually.
Chairman Ryan. Well, as far as----
Secretary Geithner. Alas.
Chairman Ryan. Well, I will get to the next one. I will
show you an adjustment of that. And third, we have taken away
loopholes that benefit the well-off.
Secretary Geithner. Also not so much.
Chairman Ryan. No, no. That is the point I am trying to get
to. So in 1986 we closed loopholes, lowered rates. We went from
a 70 percent rate down to a 21 percent rate over that decade
alone. And so let's go to slide 14.

Chairman Ryan. This shows--this is the CBO's chart--the
index of progressivity in federal taxes. This one is controlled
for changes in income distribution, which goes to your earlier
point. It shows you that in 1980 to today, we are not lowering
the distribution of the tax burden. It shows you that like
after 1986, by closing loopholes and lowering rates, we can get
better growth and the wealthier actually will pay a higher
proportion of the burden. And that is controlling for changes
in income distribution.
So the point I am trying to make here is there ought to be
a bipartisan element of compromise here, because what we have
shown, for those who are worried about the distribution or the
burden, you can actually keep higher-end people paying more of
the tax burden and get a better system. But we need another
round of base broadening and rate lowering.
Secretary Geithner. Can I respond?
Chairman Ryan. It has popped up like weeds since 1986, so
it is time for a new round. That is my point.
Secretary Geithner. Can I respond to this?
Chairman Ryan. Yeah.
Secretary Geithner. As I said, I agree with you that we are
going to need tax reform. We should all embrace it. The basic
elements that we are going to need will lower rates and broaden
the base. So let's talk about----
Chairman Ryan. On individuals as well?
Secretary Geithner. Yeah, absolutely. So let's talk about
what I think separates us still in terms of basic strategy. The
dominant plans out there that have bipartisan support--Simpson-
Bowles, Domenici-Rivlin, the Senate Six--share in common with
us a basic recognition that you need through tax reform to find
a way to generate a modest amount of additional revenues.
So in our proposal, in our budget, revenues and shares of
GDP would rise modestly back up to around 20 percent. That is
slightly lower than where they end up in Simpson-Bowles, but a
little higher than you are going to get through current law,
about 1 percent of GDP higher. And I think in your framework
last year, you show revenues rising to 19 percent of GDP.
Chairman Ryan. Right.
Secretary Geithner. Although you don't necessarily
explicitly embrace revenue-raising tax reform, you are sort of
assuming growth will bring that, which we don't think is
possible.
Chairman Ryan. That is what the basis does, right.
Secretary Geithner. So I think the two main differences
between how we think about this today--but we have to test this
when we start to get serious about it--is an explicit
commitment you need from both sides that is part of a balanced
plan. You need tax reform that is going to raise an additional
1 percent of GDP in revenues.
Chairman Ryan. So putting all of that aside----
Secretary Geithner. And one other difference. And you have
to ask yourself how do you want to allocate that burden. In
Simpson-Bowles, Rivlin-Domenici and in the Senate Six
proposal--and we would take the same approach--is you are going
to have to have effective tax rates, which as you know are very
low at the high end. You have to have effective tax rates go up
modestly. And we think they should go up, really, for only
those top 2 percent of Americans.
Chairman Ryan. Let me there--just because the time is
cutting out and he has got to go to a signing thing--I want you
to go. This is actually bipartisan. That is not what you are
proposing in this budget. Everything you are saying sounds
great, but you are proposing to raise tax rates and then add
more complexity to the Tax Code. You have all this green stuff,
all these tax credits.
Secretary Geithner. As I said in my opening remarks, we are
showing you--someone is trying to motivate tax reform because
we are saying if you have to raise----
Chairman Ryan. By proposing the opposite of it?
Secretary Geithner. No, no. I want to be clear on this. We
are saying that if you have to raise, as part of a balanced
plan, 1 percent of GDP revenues, as every other bipartisan pool
has said you have to do, and you are going to do it on top of
the current tax system, here are some ways to do it.
But we are saying then, the President says this over and
over again, we think the best way to get there is through rate
lowering, base broadening, more simple, more efficient and more
fair. But the main fundamental difference between us is how
much revenue--if you guys can commit explicitly as revenue
through tax reform, we will be on the way. But then we will
have a debate about who should bear that burden. And our
judgment is the top 2 percent of Americans should bear that
burden through a higher effective tax rate. That is our
judgment.
Chairman Ryan. Let me get you there. And I am going to have
the last word, so we will keep going around. And I am not
trying to pop you here, but this is what is frustrating to us;
your rhetoric never matches your actions. I am not talking
about you personally, I am talking about the administration.
Secretary Geithner. I don't think that is fair, Mr.
Chairman.
Chairman Ryan. No. You are showing us a budget to raise tax
rates and add complexity to the Tax Code.
Secretary Geithner. Right. Like when you----
Chairman Ryan. And add your mark to the Tax Code.
Secretary Geithner. The burden of governing when you
propose a budget, as you know, is----
Chairman Ryan. This is your fourth one.
Secretary Geithner. That is right, exactly.
Chairman Ryan. And you haven't proposed what you have said
in four budgets.
Secretary Geithner. No, that is not true. What we said is,
here is what you have to do as part of a balanced comprehensive
deficit reduction plan if you are going to get enough revenues
out of the system to do this in a fair way. Here is what you
have to do. And what we propose to do in this context is to
modestly increase the effective tax rate on the top 2 percent.
Chairman Ryan. All right. The top effective rate goes to
44.8 percent on individuals.
Secretary Geithner. Not the top marginal rate.
Chairman Ryan. Well, first of all, just assume for the sake
of arguing that I am right, which this thing has been fact-
check a million times. The point is you are raising effective
marginal tax rates. In Wisconsin, nine out of ten businesses
file as individuals.
Secretary Geithner. We are only going to raise them if you
decide to agree to raise them and you decide you would rather
not do comprehensive tax reform. But you are right, they will
raise an effective tax rate in the top 2 percent.
Chairman Ryan. I just want to be kind to everybody else.
These things you say you are not putting in your budget. This
is the fourth budget. And we hear all this happy talk about
coming together, but we don't see those proposals in black and
white in your budget.
Secretary Geithner. One last thing. We have never claimed
that this budget included a comprehensive proposal for
individual tax reform, never claimed it, because we spent, as
you know, 4 months working with the House Republican leadership
this summer on a way to get a balanced plan with comprehensive
individual tax reform that raised revenue alongside substantial
savings in Medicare and Medicaid.
Chairman Ryan. I am----
Secretary Geithner. And we found in that process, frankly,
that you were not really there yet, not quite ready. And so for
that reason, we have decided that let's do some foundation
laying and lay out some broad principles.
Chairman Ryan. I don't even know how to respond to that.
Mr. Van Hollen.
Mr. Van Hollen. Again, welcome, Mr. Secretary. Having
participated in some of those rounds, my sense was they
basically collapsed because of the fundamental issue that we
are debating right here in this committee, which is whether or
not to take a balanced approach to addressing our deficit and
challenge. And we did not have a partner to compromise on a
balanced approach.
Let me just say what the co-chairs of the bipartisan
Simpson-Bowles Commission said with respect to the budget.
Everyone recognizes, including you, that as you get into the
second 10 years we have got a lot of work to do together. But
here is what they said. ``In the framework he announced in
April and what he submitted to the Select Committee in
September, the President embraced many of the goals and
principles outlined by the fiscal commission and incorporated
some of the policies we proposed. We are pleased that the
President's latest budget continues to focus on deficit
reduction and are also encouraged to see real, specific
policies for limiting tax expenditures, slowing health care
cost growth, and reducing spending throughout the government.''
I would suggest that if we could have a partner in coming
to that balanced approach that we talked about, we would be
able to tackle some of these things.
Now, I would like to put up a chart just to address what is
a sort of continuing myth, which is that relatively small
changes in the top marginal rates are the chief driver of job
growth. And that has just been proven false by history on
numerous occasions.

What you see here is after the 1993 budget agreement when
the top marginal rate was raised to 39.6 percent, you saw over
20 million jobs created during that period after the 2001-2003
tax cuts, so-called Bush tax cuts, where they reduced the top
rate. By the end of that period you saw a net loss of jobs.
Now, obviously there are lots of things going on. But the
major point here is that minor changes in the top marginal tax
rate are not the primary drivers of growth in our economy. Of
course, the other benefit of that higher rate was, as the
Secretary said, it brought in more revenue, which meant that at
the end of that 10-year period in the year 2000, it was the
last time we actually had a balanced budget, a balanced budget
which helps contribute to long-term economic stability and
growth. So I think it is important to keep in mind these
historical facts as we debate the whole question of tax policy.
Now, I want to go to another slide here, because
yesterday--well, just very briefly this shows the trajectory of
the President's budget as proposed. It is a plan, it is a
responsible plan. And as the Secretary testified, it gets the
deficit below 3 percent, 2.8 percent of GDP at the end of the
10-year window. And many have said this is a budget full of
gimmicks.
For those of you who are newer to this committee I want to
show you what President Obama's budget would look like if we
used the so-called gimmicks that were used in the previous
administration's budget, just because a lot has been made of
that.

If we go to the next slide, what you see on the left are
all the costs that were not counted in the Bush budget over the
10-year period. In other words, the Bush budget assumed that we
weren't going to fix the AMT, they assumed that for the 10
years the AMT would spring back into effect and you would have
a tax increase on more than 25 million Americans. They assumed
that we would never take care of the doc fix. And so if you
were to convert President Obama's budget into the President
Bush methodology, you get the following.
Let me go to the next slide please.

Mr. Van Hollen. That top red line is the President's
budget, using the straightforward accounting techniques, and
says 2.8 percent of GDP. That blue line, that is what President
Obama's budget could claim if you used the Bush
Administration's accounting gimmicks. So the Secretary has
acknowledged that we have got a lot of work to do as we deal
with the demographic changes 10 years and beyond.
Chairman Ryan. What that tells me is your enemy is OMB.
Mr. Van Hollen. Well, what it tells me is that this is--
well, except for in this case, right, OMB actually did it the
way I think we would want them to do in terms of calculating
the likely outcome.
Now, I just want to end with this, because I do have to go
over and sign the conference committee report, and I think
everybody agrees that would be a good thing. I am going to have
to leave a little early because I have got to go sign the
conference committee report in the payroll tax cut conference.
But Mr. Secretary, you have raised the issue, the chairman
has raised the issue. Fundamentally we have got to figure out a
way to come together to resolve these issues. There are some
basic disagreements. We believe that it is important in the
short term to continue to take measures that are described in
the President's budget to boost job growth.
I remember more than a year ago, a lot of our Republican
colleagues were pointing to the new government in the U.K. as
an example of how we should proceed here. We should have an
austerity budget. Well, I think the Secretary can talk about
what the GDP numbers, growth numbers are in the U.K. these
days. They are not very good. It is a good thing we didn't
follow that proposal.
The second is as we look to the future taking this balanced
approach, and the Secretary has pointed out that when you take
the kind of measures with respect to health care that were
taken in the chairman's budget last time, what you do is shift
the risk of rising health care costs to seniors on Medicare.
And rather than take that approach, we need to spend a lot more
time finding a way to reduce the growing health care costs
throughout the American health care system.
Now, the reality is the Affordable Care Act put in place a
lot of mechanisms that we believe will begin to do that and
will prove successful. But there is more work to be done there.
But I think that what we need to do there is come together in a
way that deals with the fundamental problem, not just shift the
problem from Medicare to senior citizens. And that is at the
heart of what this is all about in trying to find a balanced
approach. Because if you don't ask the folks who have done
really well to put in more, then you are going to have to take
more and more out of middle income and seniors.
Mr. Secretary, I just want to end by asking with respect to
the experience we have seen with some of the governments that
took strict austerity approaches, what is the evidence so far?
Secretary Geithner. Well, it all depends on the
circumstances. You are right to point out the U.K. experience.
But we are not in the position the U.K. is, nor anything like
the rest of Europe in this context, in the sense that we enjoy
still--and you can see it in the prices of U.S. financial
assets--enormous confidence around the world that this country,
this Congress, this city, this government, will ultimately find
a way to put in place a more substantial system of long-term
fiscal reforms. And so there is confidence out there in markets
that ultimately Congress is going to come to get them to do the
right thing soon enough in this context, and that is why we are
able to borrow at relatively low rates, and you see that
confidence in U.S. financial markets.
If we were to, in the face of being able to borrow at 2
percent for 10-year money, if we were to now decide we are
going to try and turn this deficit swollen by the crisis,
swollen by the Bush economic policies, and try to reduce that
balance in 2 years or 3 years, you would kill this economy. You
would kill this economy and you would dramatically set back the
long-term cause of deficit reduction, because you would swell
the long-term deficits by inducing another crisis. That is not
what the Ryan budget proposes, I would point out, although
there are some people who have suggested that we need to cut
faster now.
Mr. Van Hollen. Thank you, Mr. Chairman.
Chairman Ryan. You bet. Mr. Garrett.
Mr. Garrett. Thank you, Mr. Secretary. So let me get this
straight, what your testimony has been so far. That you agree
that the tax system that we have in this country is far too
complex and is not working, but you are not going to give us a
new tax reform system now that would be simpler; but, rather,
would get a plan in this budget, give us a more complex tax
system until later on in the term.
Secretary Geithner. No, you don't--I know you don't like
the proposals, specific tax proposals.
Mr. Garrett. Well, isn't it more complex, is what you just
said?
Secretary Geithner. Oh, absolutely. If you try to get more
revenues out of the current tax system in a rational way, you
are going to do things that are complicated, there is no doubt
about it. And that is why it would be better to do it through
tax reform.
Mr. Garrett. That is my point. So you are saying that you
are giving--the system is too complex today--so you are giving
us a proposal that is even more complex.
Secretary Geithner. It is just the nature of the beast in
this context.
Mr. Garrett. Mr. Secretary, I would think of all people,
especially you, that you would understand that our system is
too complex for the average individual to understand how to
fill out their return; that you would be coming to us not
today, but prior to this, with a simpler tax system today and
not waiting until the end of your term.
Secretary Geithner. I know we are going to have a chance to
do this together, but I think that we are lighting the
fundamental difference. Even in tax reform that raises the
revenues that, for example, Simpson-Bowles suggests we need, or
Rivlin-Domenici suggests we need, or the Senate Six suggests we
need, in that context the effective tax rate on somebody is
going to go up because you are raising revenues.
Mr. Garrett. Mr. Secretary, with all due respect, that is
not the question.
Secretary Geithner. No, it is.
Mr. Garrett. No. I am asking the question so I know what
the question was. The question is, when are you going to give
us a simple tax reform? And your answer is, not now.
Secretary Geithner. Not in this budget, no, we are not.
Mr. Garrett. Thank you. That is the question. When are you
going to give us----
Secretary Geithner. When we have evidence on your side that
you guys are willing to, as part of a balanced fiscal plan,
raise revenues through tax reform. And that is what we spent so
much time with your leadership discussing in the summer.
Mr. Garrett. I understand. So in other words----
Chairman Ryan. Will the gentleman yield?
Mr. Garrett. I will yield.
Chairman Ryan. That is leadership. So wait for other people
to do something; then we will react?
Secretary Geithner. Mr. Chairman, you know, you guys just
spent 6 months threatening to default on obligations you gave
us, you bequeathed to us. Now, if you call that leadership,
that is fine with me. But what we did is, and it was in the
spirit that we have to work this out in a bipartisan way, is we
sat down with your leadership for months to try to work out
whether we could find consensus on a balanced program.
Mr. Garrett. Reclaiming my time, Mr. Secretary. And during
all those months we never got from you the same thing that you
are telling us right now, you are never going to give to us.
Secretary Geithner. Did the leadership share with you the
proposals we discussed?
Mr. Garrett. We never got legislation, formal legislation
from you.
Secretary Geithner. Nor did we get it from you. We didn't
get it from you either.
Mr. Garrett. On entitlement reform and on tax reform, we
have.
Secretary Geithner. Not on tax reform you didn't. You just
said we would like to get to 25, that was it. That is not a tax
reform plan.
Mr. Garrett. So where is your tax reform plan? That is why
we are here today, is to learn where this administration----
Secretary Geithner. Congressman, if you want to bludgeon me
into admitting we are not giving you an individual tax reform
plan, I confess, it is not in the budget. We are not giving it
to you. If you want to use your time for that, that is fine.
Mr. Garrett. All right. My second question is, where is
your entitlement reform plan?
Secretary Geithner. We have in the budget----
Mr. Garrett. Are you going to do same thing?
Secretary Geithner. No, hold on--$360 billion of specific
scoreable savings in Medicare and Medicaid over the 10-year
budget window, and an additional $250 billion of other
mandatory savings. Those will be part of a----
Mr. Garrett. Mr. Secretary, let me rephrase my question.
Where is your long-term entitlement reform plan? Not 10-year
budget window, the long-term reform.
Secretary Geithner. Congressman, if you want to use your
time that way, that is fine. We are not proposing to solve the
problems in the country for the next hundred years because we
feel like if we can agree on how to fix them for the next 10
years, people might have more confidence we can work on the
next 50 to 100 years. If we can't agree on how to solve the
next 10 years, why are you so worried about and focused on the
next century or millennium? If you think that we can't solve--
if we can't solve this problem----
Mr. Garrett. Reclaiming my time, Mr. Secretary. You are
willing to take shots at the plan that Mr. Ryan has proposed,
which does try to solve it over the long term, and you are
critical of those plans, significantly of those plans. All we
would like to have is, in a debate or a dialogue on this, is to
say, here is the plan that we have proposed, Mr. Ryan has
proposed; where is the plan that you have proposed long term?
Not 100 years, not 80, 60, 40.
I will yield to the chairman.
Secretary Geithner. I think you guys got to make a
decision. You can either decide----
Chairman Ryan. Well, I was hitting the gavel because it is
getting----
Secretary Geithner. I think you have to decide just for
consistency, okay? Are you going to say you do not like our
plan, which proves we have a plan or we don't have a plan. You
can't have it both ways in this case. Now, we are not claiming
to do what you would do to Medicare. We are not claiming that.
We are not going to do it.
Chairman Ryan. I am going to run this tight, because we got
a lot of people here and you have a schedule.
We don't see it that way, the Chairman of the Federal
Reserve doesn't see it that way. Ms. Schwartz.
Ms. Schwartz. I thank you. Mr. Chairman, I hope that we are
fair that there are seconds to go. And I am not sure you have
to gavel people down before the time is up.
Chairman Ryan. They weren't coming close.
Ms. Schwartz. I understand that, but it wasn't because the
time was up; you were just finished with hearing it. And I
think there is a very clear difference of opinion.
Secretary Geithner. Is it going to go this way all day for
us?
Ms. Schwartz. Not for me. You are going to have another
4\1/2\ minutes of a little more comfort zone here. The fact is
that there is a very different approach here. And I think that,
Mr. Secretary, you spoke very well and very clearly about the
fact that the President is putting forward a 10-year plan. And
that is actually pretty good, I think, given that we have gone
through a very tough time and seen our way through it. And
growing jobs and stabilizing the deficit and being able to make
investments that ensure economic competitiveness would be a
very good outcome over the next 10 years.
So either we can disagree, the other side can disagree. But
calling on the President for not having picked their time frame
seems to be not what the argument really is. The argument is
that they actually disagree with the plan that the President
has put forward.
What I wanted you to talk about, because you have already
well articulated where we have come from and the challenges
ahead, is that one of the key differences between what the
Republicans want to do, which is simply cut everything, is to
not only the balanced approach, but to make the kind of
investments that are going to ensure America's economic
competitiveness. You outlined some in your testimony.
I wanted you to just take a few minutes to talk about how
important it is to make the kind of investments in research and
development. I am particularly interested in advanced
manufacturing and innovation. And I did want you to not only
talk about what is in the budget, but to mention two ideas that
I have, one you and I have talked about a good bit that is very
successful already, that I would like to see us do again, which
is the therapeutic tax credit. This was the billion dollars
that we made sure went to over 3,000 companies, startup biotech
companies across this country, companies that are alive today,
working on therapies and devices that may cure, save lives,
save money.
I would like to see that be done again if we reach
someplace where we can actually move forward, because I think
it is really important for the United States of America to stay
on the cutting edge of innovation, particularly in life
sciences, and this is one way to do it. I appreciate the level
of funding for NIH and some of the other work you are doing in
R&D.
The other piece has to do with the issue of incentivizing
innovative businesses that use patents. And this has been a tax
policy in other nations that has been successful in drawing out
new industries, innovative industries that are making products
based on a patent, and a new patent. So I am working on
legislation that would do that here. It would provide some tax
incentives, again, so we can grow those new--the growth
industries.
So I wanted to mention those two specifics and give you a
couple of minutes to talk about, really in a very positive way,
how we are not going to get out of this tough economy but we
are actually going to continue to grow and be the leaders in
the world economically.
Secretary Geithner. Well, I am happy to take a closer look
at those two specific proposals and welcome your support for
them. Again, the simplest way to describe what we think makes
sense for long-term growth and opportunity is better education
outcomes, support for basic science and research, not just NIH
and medical discoveries, but of course across a range of parts
of science critical to future technological development.
Ms. Schwartz. Right. Energy has been a big piece of that.
Secretary Geithner. Energy, better incentives for
investment and manufacturing.
Ms. Schwartz. Great productivity and technology.
Secretary Geithner. And a substantial long-term investment
infrastructure. So that those core things, education,
innovation, infrastructure and better incentives for
investment, that is what we think should be the core of the
strategy. If you look at the combined cost of those things they
are very modest, well within our capacity to afford as a
country. But you got to do so in ways that are responsible,
that we pay for those things, and we in the budget lay out how
we propose to pay for those reforms.
Ms. Schwartz. Well, I very much appreciate that. And again,
I think that we will try and keep this a little more civil, at
least every other speaker, and give you the opportunity to
really lay out what is a very clear vision for this country and
a contrast, unfortunately, to the other side.
And I appreciate what you said about a willingness of the
administration or another administration that has reached out
so often and in great detail to the other side of the aisle and
not gotten the cooperation back. I will end again on a positive
note, having just signed the conference committee report. We
actually got a conference committee working. It did its work
and it reached a compromise. I think it does protect 160
million Americans who need that 2 percent payroll deduction,
and unemployment, and, of course, on the Medicare physician
side. So I look forward to that coming to the floor.
Secretary Geithner. My compliments for that. And as I said,
again, don't stop there. Try to figure out a way to go further.
Chairman Ryan. Mr. Akin.
Mr. Akin. I think the only place I am agreeing with you is
the overall captions and headlines. I agree with that part. And
then everything below I am assuming you have trouble with. So
starting with----
Secretary Geithner. Some of your headlines we agree with,
too.
Mr. Akin. One of them is that you talked about maintaining
national security. And it seemed like another one was create
and grow jobs in the economy. Those things, I don't think you
get any kick from any of us.
The first question is specific. And that is, does this
budget set out in a specific plan something to prevent the
sequestration or the 10 percent cut in national defense? Is
there something where you are committing that you want to stop
that sequestration so that we do not take that 10 percent cut?
Secretary Geithner. A good question and thanks for asking
it. Again, if you count the savings, roughly $1 trillion
savings, in the caps on discretionary spending we agreed on in
August, then we propose an additional $3 trillion in savings
roughly split 50/50 between spending cuts and revenues. So the
spending cuts alone are enough to meet the test you have to
meet in the sequester. And our spending reduction proposals
primarily are the $350 billion or so we would save from
Medicare and Medicaid and the 250 or more billion dollars we
would save from other mandatories. But the budget contains a
range of other savings to achieve that.
And we believe that that mix of policies, both spending and
the revenue side, it goes well beyond what you need to replace
the sequester and it would be better than letting the sequester
hit.
Mr. Akin. So if that happens, is the sequester
automatically just repealed?
Secretary Geithner. I can't remember exactly the way the
legislation is written. But if Congress were to embrace reforms
that achieve more than the savings required by the sequester,
then the sequester does not go into effect.
Mr. Akin. And do those reforms include tax increases?
Secretary Geithner. Well, again, that is a suggestion you
would have to make. We think they are going to have to
ultimately. But we have a magnitude of savings proposals that
would exceed the required amount to suspend the sequester. It
is a different mix, though.
Mr. Akin. The first thing is, I just came from Armed
Services Committee, and your top military leadership all saying
a sequestration is a total and complete disaster.
The second thing was jobs in the economy. One of the items
on your tax increases here is you are going to repeal the
percentage depletion for hard mineral fossil fuels; i.e., coal.
Now, the administration has already been pretty tough on the
coal companies in terms of permits. There is a lot of foot-
dragging so they can't get their permits.
Increasing the size and expanding the Streams Act
apparently makes it very hard for Longwall. And now this thing
here is going to increase the taxes on coal companies; is that
correct.
Secretary Geithner. Well, you are right that we do propose
and have proposed for some time dialing back, eliminating,
reducing the very generous substantial subsidies we provide for
a number of parts of the energy sector. And we think that is
necessary, we think it is good energy policy, good economic
policy. And I would remind you that I think, as you know----
Mr. Akin. Well, let me just get real practical on you,
though. If you get rid of the depletion allowance, it means
that the coal company's taxes are going to go up, right?
Secretary Geithner. Well, if you remove a tax subsidy for a
specific industry then, yes, their taxes go up.
Mr. Akin. Okay. So their taxes currently are running about
22 percent. What will happen if you get rid of the depletion
allowance for coal?
Secretary Geithner. I would be happy to respond to you in
writing. But it would be worth noting that the average tax rate
paid by American business today is in the high 20s. So the
reason why they get to pay only 22 or 18, whatever it is for
the energy industry, is because other businesses across the
economy are paying more. And that is not efficient, it is not
fair. It is better to have a flatter, more even system. That is
why we are proposing to remove those subsidies.
Mr. Akin. The depletion allowance, if you remove it,
basically is going to shut down the coal industry. Now, I know
the President, I have at least have heard it reported that he
is pretty favorable to that idea. But the fact of the matter is
there are an awful lot of jobs. There are mines closing now all
over the place. And so if you continue the foot-dragging and
the permits, you increase the groundwater situation so you
can't mine underneath an intermittent stream or something that
has no water in it a good part of the year. And then you get
rid of this depletion allowance, which makes a certain amount
of sense, because when you dig the coal out, then once the coal
is gone there isn't anything there.
And so they have the same thing for like sod farms. You
take enough sod off the top, then there isn't any more top
soil.
So you are basically going to shut the coal industry down.
And I am thinking that doesn't seem like jobs in the economy;
to me it seems like war on the private sector.
Secretary Geithner. We don't believe, Congressman, that our
proposals have that risk, but of course, happy to talk to you
in more detail about what makes sense in this context.
Chairman Ryan. Thank you. Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman.
Mr. Secretary, I couldn't agree with you more that progress
does not have to wait for another election or a new
administration. It is interesting to watch what has happened. A
year ago there were some threatening to shut down the
government over Big Bird and Planned Parenthood. Then the
summer, you know, you mentioned, you know, there were some who
were seriously arguing that we not honor paying the debts that
we have already incurred.
Secretary Geithner. It wasn't just a few, it wasn't just
some.
Mr. Blumenauer. Yes. Later, in fact this year, we had
people go home for the Christmas holiday over the debate about
the payroll tax. But actually the people sometimes are heard.
And we watched folks come back from the holiday and approve
what had been essentially rejected. And we are going off to
sign off on a conference committee that is extending it for the
rest of the year, unpaid for, which you couldn't have imagined
if you just listened to the rhetoric, including some around
this table earlier in the year.
I was struck by what our chairman said about 1986 and tax
reform. I thought that was a fascinating period. But I would
like you to comment on a couple of differences. Because I look
at 1986 as something that made a difference, and I don't have
enough time to put the charts up, that talk about much higher
performance of this economy when the tax rates were much
higher. There are things like investing in education, in
infrastructure, that matter deeply. But 1986 featured--it did
not have 235 Members of the House of Representatives who signed
a pledge that they are not going to raise anybody's taxes on
anything, because as you well know, there were lots of changes
in that reform that ended up raising taxes on a number of
people despite cries that it was going to shut them down. It
actually didn't.
Ronald Reagan signed off on something that correlated
taxation on individual work and investment. We had people in
both parties who were working together, a President who
repeatedly actually raised taxes. Ronald Reagan raised a gas
tax in 1982, a nickle a gallon, back when that was real money.
So it seems to me one of the big differences in 1986 versus now
is that we had two parties that were willing to make
adjustments, raise taxes where necessary. They had some
confidence going back and forth, working together. There were
no signed pledges that things were off the table.

So I wonder if you could just elaborate from your vantage
point, because you really didn't have a chance to elaborate on
some of the give-and-take, where it appeared from those of us
on the outside, that the President and the Speaker were making
progress before somebody's chain was yanked. But if you want to
talk about 1986 versus today or the process, I would welcome
your thoughts.
Secretary Geithner. I do agree that it is going to be
harder now than in 1986, in part because of the politics in the
Republican Party and how that has changed. I think what is
interesting about 1986 is Ronald Reagan designed and proposed a
tax reform plan that resulted in a very substantial increase in
taxes on businesses in order to pay for a very substantial tax
cut on individuals that he subsequently decided he had to
reverse. And he reversed, much to his credit, because he was
worried about the long-term fiscal problems. He reversed a
substantial part of that individual tax cut in the coming years
because he realized it was irresponsible and unsustainable. I
think the--but I want to try and take the positive side of this
debate because----
Mr. Blumenauer. Please.
Secretary Geithner. The question is whether we are coming
closer together or moving farther apart. I don't know, if you
look back the past year, despite all the noise and despite how
divisive it has been, we did some very good important
foundation-laying in the Republican leadership on entitlement
reform and tax reform. You saw the appropriations process
really work at the end of last year. It took us longer than we
thought, but you just got a bipartisan agreement to extend the
payroll tax cut and extend unemployment insurance.
And we think there is a lot of room still on things good
for growth and jobs, like on infrastructure or on helping
people refinance their mortgages, for example, or investment
incentives where we think there has traditionally been a lot of
bipartisan support and we should be able to move forward on
those kind of things.
So our hope is that we can find some practical things we
can agree on, even while we are trying to narrow our
differences on the big things.
Mr. Blumenauer. Thank you, Mr. Secretary.
Chairman Ryan. Dr. Price.
Mr. Price. Thank you, Mr. Chairman. Mr. Secretary, welcome.
I think that the American people by and large want us to
get the job done. And there is a lot of misinformation and
disinformation that comes out of Washington. We have heard some
of it in this room this afternoon. The fact of the matter on
the payroll issue is that there were some folks who were
staying in town trying to solve this and some folks that fled.
The folks that fled were our Democratic colleagues in the
Senate. Uncertainty in the market is destructive to job
creation. I assume you agree?
Secretary Geithner. Well, I guess I would say right now,
the biggest source of uncertainty in keeping growth modest is
concern about the weakness in demand.
Mr. Price. Uncertainty for employers, what their tax rate
is going to be, what the consequences of this policy or that
policy are going to be. When there is uncertainty then when we
talk to small and large job creators they say we have just got
to wait. Is that not the case?
Secretary Geithner. There can be. But I don't think there
is much evidence today that that uncertainty about the long-
term deep questions we are facing is having a material damaging
effect on growth now. What is hurting growth now is the fact
that people still have too much debt, we are still working
through the housing problems; and we faced a terrible triple
storm, triple threat of Europe, oil and Japan last year, apart
from the debt limit damage.
Mr. Price. Let me just take on the uncertainty for just a
moment, if I may, because the uncertainty on the other side was
a 2-month fix to these things. And we had passed through the
House one year a payroll tax, a holiday tax reduction, one year
of unemployment benefits extension, and a 2-year plug for the
physician doc fix.
But I want to talk about taxes on small businesses.
Yesterday I was intrigued because in one of the committees--I
can't remember which one--in which you testified, you said that
taxes on small businesses would indeed go up with this plan.
Secretary Geithner. For 2 percent or 2 to 3 percent of
American small businesses.
Mr. Price. And I appreciate that honesty. And if we look at
the 2 to 3 percent of those that file those business tax
returns, that is actually 32 percent of the business owners and
employs 33 million people. Those 2 to 3 percent employ 33
million people in this country in small businesses.
Secretary Geithner. I don't know if those numbers are
right. But as you guys--we talked about this before, but let me
just mention two things in that context. That definition of
small businesses includes all sorts of people most Americans
won't think of as small businesses. It includes lawyers in law
firms, partners in law firms, partners in hedge funds and
private equity firms. And half of those small businesses you
just referred to have income after expenses of more than a
million dollars.
Mr. Price. I promise you, who thinks those folks are small
businesses are the secretary working for that attorney or that
physician, are the clerk in the small store, the small outlet.
They certainly know they are working for a small business. And
when you raise taxes on small businesses, what happens is that
you get less of what the small business does. And so when you
get----
Secretary Geithner. How were they doing in the second half
of the 1990s?
Mr. Price. We are not comparing it to the second half of
the 1990s. What we are comparing it to is where we are right
now and where we could be. And that is the difference between
this budget and the budget that we will propose. That is, that
we have a pro-growth budget, one that keeps tax rates the same
or reduces tax rates. Because increasing taxes to chase ever-
increasing spending, which is exactly what your budget does, is
insanity, and the American people know it, which is why they
look to Washington and they say, ``What the heck is going on?''
Secretary Geithner. But Congressman, are you saying that
the budget you are going to propose is going to have no revenue
increases in it?
Mr. Price. No. In fact, we do increase revenue and we do it
in a neutral way so that we include loopholes, broaden the
base, lower the rates.
Secretary Geithner. But is it neutral, or does it raise
revenue?
Mr. Price. We raise revenue over time so that you can
accommodate the changes in the demographics in society, without
a doubt.
Secretary Geithner. How do you raise revenue, though?
Mr. Price. I am happy to be on the panel at the Treasury
Department when you invite me down. I would be happy to do
that. But the fact of the matter is----
Secretary Geithner. This is important because----
Mr. Price. Mr. Secretary, the fact of the matter is in this
budget that you have, you increase taxes $1.9 trillion, $1.9
trillion. If you are increasing taxes to balance a budget, that
is one thing. If you are increasing taxes to expand ever-
increasing spending, that is something absolutely different.
Secretary Geithner. And we are not----
Mr. Price. And that is what is so frustrating to the
American people.
Secretary Geithner. That is a good question, but that is
not what we are doing. Now, you were right. As I said, we are
proposing to raise taxes by citing more than 1 percent of GDP.
Mr. Price. $1.9 trillion.
Secretary Geithner. Citing more than 1 percent of GDP.
Mr. Price. $1.9 trillion.
Secretary Geithner. Over 10 years.
Mr. Price. $1.9 trillion.
Secretary Geithner. We are doing that alongside roughly 2-
to-1 the ratio of spending cuts. Now, if you do not want to----
Mr. Price. The spending cuts that you say you have are in
fact already in law, already in law. What you do, you are
raising taxes $1 for every $0.83.
Secretary Geithner. Congressman, that is not true, but the
good thing about it----
Chairman Ryan. We are running a tight clock. Stop, please.
Secretary Geithner. Let me respond to the question.
Chairman Ryan. No, no.
Mr. Yarmuth, you are going to miss your schedule if we keep
doing this. You want to be out of here by 4:30, right? Mr.
Yarmuth.
Mr. Yarmuth. Thank you, Mr. Chairman. Mr. Secretary, thank
you for being here. And I want to first of all congratulate you
on what I think is the clearest articulation of our short-term
economic needs and our long-term challenges that I have yet
heard. And I think anybody watching your appearance here and
listening to that would understand that we need different
approaches over the next few years than what we do for the next
40, and I appreciate that very much.
Secondly, I would like to say or ask you, we have seen all
these charts with long, big lines going out 40, 50, 60, 70
years. With changes in technology, medical research,
demographics, culture, world situations and so forth, how
reasonably reliable do you think those projections are for 40
years from now or 50 years from now?
Secretary Geithner. Not at all.
Mr. Yarmuth. About as much as betting on a Kentucky Derby
horse probably?
Secretary Geithner. Just to give you an example, when the
Clinton Administration left office in 2000, CBO projected
surpluses over the next 10 years of roughly $5 trillion. And in
that 8-year period we swung from $5 trillion projected
surpluses to projected deficits in the range of about $8
trillion. So that just shows you what can happen in a short
period of time when people make bad policy choices or when you
face financial crises. So 10 years is hard to predict, 20 years
is impossible, 40 years is ridiculous.
Mr. Yarmuth. Thank you for that. And I do want to make one
comment on Mr. Price's question to you about small business
owners. They have used, Republicans have used this argument a
lot. And they say that this 2 percent of small business owners
represents 30 percent of small business income. Does that not
essentially undermine their point? Because this very small
percentage of small business owners is making a lion's share of
all the income from small business owners, and therefore it is
kind of hard to argue that 4.6 percent more of their taxes is
going to be a real impediment to them.
Secretary Geithner. They may be small by somebody's
definition, but they are rather rich is another way to say it.
I think the more important thing to say is if you are not going
to raise revenues by allowing the effective tax rates to rise
modestly for the top 2 percent of Americans, top 2 percent of
small businesses, who are you going to ask to pay more taxes,
or whose benefits are you going to cut? That is another way to
think about the trade-off. And the reason why this is so
important for the outlook for the business community is if you
try and find that 1 percent of GDP in revenues in this near-
term period through cuts in infrastructure defense spending,
Medicare benefits, low-income programs, infrastructure, then
you will do more damage for the demand--to the demand for their
products. They will have less products that they can sell. They
won't be better off for that reason.
So we think this is a better package for growth in the
alternative if you are going to commit to lower the deficits.
Mr. Yarmuth. Okay. I can't let you get away, since you are
talking about products. I have to mention the proposal of the
administration again this year to do away with the LIFO
accounting, which would have very dramatic effects on the
bourbon distilling industry in my State and something that has
become a growing export.
Yesterday I asked Mr. Zientz whether or not in constructing
the proposal to end LIFO that there was a consideration of the
broader economic impact of ending that. And of course I am
particularly interested in the distilling industry; other
people would in others. Has there been an analysis of the
broader economic impact?
Secretary Geithner. We have looked very carefully, as we
always do, at the impact of those proposals on the industries
affected. And in our judgment the impact is modest and
manageable. But of course, no one likes to see their taxes go
up. And our basic problem of course is because we as a
government with limited resources is who are we going to ask to
pay for those special tax permits? Now, these are not special
in the sense they did go to a broader range of industry. As I
understand it, they have been a long tradition. I completely
understand the merits of them. But our fundamental problem is
that we face unsustainable deficits and we have to find a way
to make the system more fair so that businesses in similar
circumstances are paying roughly the same effective tax rate.
Mr. Yarmuth. Well, is there an analysis, because I know for
instance one corporation based in my district, Brown-Forman,
which does $3.4 billion worth of business, pays I think
something like $800 million in excise taxes on its product, a
heavily taxed industry. Is there something we could look at and
have as part of the record that we could analyze? I know part
of this is about oil and gas, and that is the lion's share of
it. But oil and gas doesn't taste at all like bourbon, and I
would be happy to demonstrate that to you.
Secretary Geithner. I think the chairman should serve
bourbon at our hearings.
Mr. Yarmuth. If you have that kind of analysis, I would
love to get it.
Secretary Geithner. I would be happy to try to get as much
information as we can to you in that context.
Mr. Yarmuth. Thank you, Mr. Secretary.
Chairman Ryan. Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Secretary. I appreciate it.
Are you calling upon the Senate to pass your budget?
Secretary Geithner. I thought you might ask this question,
because I have heard you guys do this over the last few days. I
am not a budget process expert. You guys are the Budget
Committee. But I will offer a few things in response to that.
The Senate does not need a budget resolution in order to pass
appropriations bills, pass tax cuts, tax reforms, pass
entitlement reforms, pass mandatory savings. As you know, pass
the Americans Jobs Act, pass the payroll tax cut. So that is a
budget process question. What we want to do is, we would like
the Senate and the House together to find more things they can
do together that would improve economic growth and jobs.
Mr. Chaffetz. I would love to hold hands with Harry Reid.
We have done our job in the House in the past and passed a
budget here. It is a simple question: Are you calling upon the
United States Senate to pass the President's budget?
Secretary Geithner. We are absolutely calling on the United
States Senate to embrace, the House as well, to embrace the
fiscal reforms we propose in the budget, absolutely.
Mr. Chaffetz. Are you calling upon the Senate to pass the
President's budget? When is it reasonable for them to do that?
Secretary Geithner. I answered your question. Can I just
say one thing? The test of governing and legislating, if I am
not mistaken, is not for you to send the Senate things that you
know will not have bipartisan support. That is not a test of
legislating, I don't think.
Mr. Chaffetz. I am asking about a Democratic President,
President Obama and this administration, and you as the
Secretary of the Treasury, are you calling upon the Senate,
which is controlled by the Democrats, to vote on and pass your
budget?
Secretary Geithner. As I said, absolutely we would like the
Senate and the House to act on the Senate reforms that the
President has put in the budget. That is what a budget is for.
But I was just pointing out that you said that you have done
your job by sendng the Senate legislation. I don't think that
is a test of legislating in a divided country with a divided
government.
Mr. Chaffetz. So is it fair for me to say that you are not
calling upon the United States Senate to pass this budget?
Secretary Geithner. No, it would be fair to say what I just
said, which is that, yes, we would like the Senate and the
House to pass sensible fiscal reform that would help the
economy. We would like that to happen.
Mr. Chaffetz. I find it stunning that the Senate has yet to
pass a budget, more than 1,000 days. It is terribly
frustrating.
Secretary Geithner. You can use me as you want, but you
guys are using your time poorly, because you guys have been
saying it for 5 days in a row.
Mr. Chaffetz. I don't want you to tell me how to do my job,
because we are doing our job here. We are passing budgets and
we are passing legislation that sits and stalls in the United
States Senate. And it is frustrating. You can smile and laugh
about it all you want.
Secretary Geithner. No, I am saying I can help you with
other questions, I can't help you with that one because that is
about the Senate.
Mr. Chaffetz. Well, and that is part of the challenge, is
that the White House is not calling upon the Senate to get
involved in this game and pass a budget. That is the way we
come to a reconciliation, that is how we work these things out,
is when we pass something, they pass something, they come
together in a conference and we work on it. But if they refuse
to do their job, if they refuse to actually--and the White
House is just going to sit here, giddy, with that silly little
smirk, and laugh about it like we can't do anything about it,
then we make no progress, and that is part of the frustration.
Let me ask you about the January budget and economic
outlook that was put out by CBO that estimated that the
stimulus didn't cost $787 billion but actually cost $821
billion. Would you agree or disagree with that analysis?
Secretary Geithner. I haven't seen that, but I would like
to take a look at it and get back to you.
Mr. Chaffetz. Thank you. I would sincerely appreciate it.
On page 2 of your testimony at the very top paragraph, for
members who are looking at this, you have this one particular
sentence in here that I would take some issue in. It is the end
of the first paragraph of the top page, numbered page 2.
``These savings are sufficient to stabilize our debt as a share
of the economy by 2015 and begin placing our debt on a downward
path.''
What is troubling here is when I look at the total debt
held by the Federal Government. When President Obama took
office it was roughly $9 trillion, now it is going to be
projected, under your numbers and your budget, to be at $26
trillion. The President has never put forward a budget that
actually balances to actually pay down the debt; is that
correct?
Secretary Geithner. We propose reforms that, as I said,
would reduce the budget deficit to a level that is sustainable,
defined as a level that stabilizes the debt burden at an
acceptable share of the economy and starts to bring it down.
Mr. Chaffetz. What percentage would that be? What
percentage of debt is acceptable?
Secretary Geithner. Well, the deficit level you need to
stabilize the debt has to be slightly below 3 percent of GDP.
And if we do it in time frame, then that would stabilize the
debt burden as a share of the economy. And we measure this as
net debt held by the public net of financial assets in the 70s
as a percent of GDP. And that level is a manageable burden for
us.
But as we all said, and your charts show, that is a start.
Because if you only do that, then in the succeeding decades
those costs start to grow again.
Chairman Ryan. Thank you. Mr. Pascrell.
Mr. Pascrell. I would like to address the $25 billion
agreement amongst the 49 State attorneys general and the five
largest mortgage lenders. In New Jersey, homeowners will
receive $762 million in direct relief, with the majority going
to refinancing. However, the overall agreement, $17 billion for
a principal reduction is nothing compared to the $700 billion
total in negative equity for homeowners in this country. That
is to me a big deal.
In August of 2010, the New York Fed in this document found
that a principal writedown of a mortgage with 18 percent
negative equity would cut the probability of default 40
percent--that is a big deal--within 1 year of modification.
Considering that nearly half of all outstanding mortgages
are owned by Freddie Mac and Fannie Mae--correct, my friend
from New Jersey--it seems we have a simple solution. Tell me
where it isn't so simple.
Secretary Donovan recently commented on Fannie and Freddie,
we need to break the logjam of principal reductions. And as you
well know, Treasury has offered triple incentives to banks and
mortgage companies willing to cut mortgage principal for
underwater homeowners through the Housing Affordable
Modification Program. You have talked about some time, haven't
you?
The need for principal reduction is very apparent, not only
in New Jersey but some other States, obviously, while the
decline in the median price, median price, of a single-family
house, home, outpaced the national average by 3.7 percent drop,
a 3.7 percent drop, with Bergen County having an 8 percent drop
last year--that is big--and an even higher drop of 8.4 percent
in Passaic County, right next to it.
Mr. Secretary, the need for principal reduction for Freddie
and Fannie-held mortgages is apparent. Is it contained within
the President's 2012 budget? And if it isn't, why isn't it?
Secretary Geithner. It doesn't need to be in the budget,
because we believe that Fannie and Freddie have the clear
authority to provide principal reductions in cases where it is
clearly beneficial to the taxpayer to do it. And there are a
range of types of mortgages where that is the case. So we, as
it sounds likes you support, we are working closely with the
GSEs, with Fannie and Freddie, with the FHFA, to encourage them
to take another look at the math, because we think it is in the
taxpayers' interest for them to do it.
Mr. Pascrell. Well, this is important, Mr. Secretary,
because most of what we have done in the last 6 years has not
helped this problem. I would lay before you that just as many
as we have helped, the few that we have helped, we have had a
few more added to that list. And you know that quite well. This
is going on and on and on.
What help does the taxpayer get if somebody can't meet the
nut and then has to get out of his house, bring down the whole
neighborhood? If he can't pay his taxes, then somebody on the
rest of the street has to pay his taxes. And this is dragging
down on the entire economy. I don't really see anything
tangible--I will listen with the minute I have left--in this
budget that addresses the deepest problem going on in America.
Because that is our dream. People worked hard for their homes,
and we think it is better to put them out so we lessen risk?
That is where Fannie and that is where the other group is,
period.
Secretary Geithner. But Congressman, I am agreeing with
you. I think the only reason--the thing I was saying which is
that we believe FHFA has the authority now, and that is why it
is not in the budget. And we think they have the authority to
do in a way that is good for the taxpayer. Our problem is we
don't have the authority to compel them to do it, because when
Congress passed the law that put them into conservatorship,
Congress--and these were Democrats in this context, in the
Senate--wanted to keep them purely independent of the executive
branch, and that is our constraint.
But we are working with them on, and I think we can
probably make some progress in this area.
Mr. Pascrell. I hope so, because I would conclude in the
final seconds that I have that this gnawing problem is never
going to get us back to the promised land. I am telling you, we
have not, either side, has not done the job. And why Fannie and
why Freddie seem to be on holy ground, I don't know.
Thank you, Mr. Chairman.
Chairman Ryan. Thank you.
Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
And thank you, Mr. Geithner. It is good to see you and
thanks for being here.
I just want to follow up a little bit on Mr. Chaffetz'
questioning. The budget. Do you think a budget is important?
Secretary Geithner. Absolutely.
Mr. Stutzman. Last year's budget that the administration
proposed, do you remember how many votes it got in the Senate
once it was forced to vote on it?
Secretary Geithner. Well, in the way it was done, it got
very few votes.
Mr. Stutzman. Zero, right?
Secretary Geithner. Because it was the way it was done.
Mr. Stutzman. Because of the way it was done.
Secretary Geithner. Again, I am not a budget process
expert but it was because--you know.
Mr. Stutzman. It didn't get any votes. And I guess my
question is, is this a waste of time for us? If last year's
budget, which is similar to this year's budget coming from the
administration, this seems to be a waste of time. If it is not
going to get a single vote in the Senate, Democrat-controlled
Senate, why do we even want to go through this process? Why
even go through the time of putting a budget together if you
haven't worked with your Democrat colleagues in the Senate, who
didn't give you one single vote?
Secretary Geithner. No, that is not what I said. Of course,
again, I said we spent a fair amount of time over the summer,
as you know, working with the Republican leadership. Of course,
we worked closely with the Democrats, and the proposals in this
budget to try to build on the talks we had over the course of
the summer, and, of course, even the work of the supercommittee
in the fall.
So we think this is good policy. And the reason why it is
worth you paying attention to it is because if Congress were to
adopt it, it would be good for the country.
Mr. Stutzman. My point is, doesn't it show you how far
apart you are from even your own Democrat colleagues?
Secretary Geithner. No, I am not worried about our distance
from our Democratic colleagues.
Mr. Stutzman. But you can't even get a single vote in the
Democrat-controlled Senate.
Secretary Geithner. I am not worried about the distance
between us and the Democrats. I am a little worried about the
distance between us and some Republicans, but that is why it is
good to have this debate.
Mr. Stutzman. According to your own Treasury Department,
over 80 percent of businesses in the U.S. are unincorporated
pass-through entities paying taxes at the individual level. I
am in that category as a farmer in Indiana. And of the
businesses that have profits of $1 million or more, over 60
percent are unincorporated pass-throughs.
My question is, the President's tax policies, including
those in the health care legislation, would push the tomorrow
individual tax rate to 44.8 percent. Do you think there is a
disparity if you take the upper income tax rate at 39.6
percent; if you take PEP, reinstate PEP, that is 2 percent; and
Medicare taxes of 3.2 gives you 44.8 percent? Do you think that
is a disparity between small business owners and corporations,
who pay an upper tax rate of 35 percent?
Secretary Geithner. Well, I think to do a fair comparison
of the economics of taxation, you have to look at the effective
tax rate on those pass-throughs and the effective tax rate on
the corporations, and I think if you do that, you will find the
disparity very small.
Mr. Stutzman. Do you have any numbers?
Secretary Geithner. I will be happy to try to respond to
you in detail on that.
Mr. Stutzman. Okay. The President also said that failing to
extend the payroll tax cuts at the current level would
obviously amount in a large tax increase, but in the budget,
you don't extend that payroll tax cut after this year.
Secretary Geithner. That is right.
Mr. Stutzman. Why not?
Secretary Geithner. Because there are things you have to do
to come out of a crisis you only want to do on a temporary
basis. And so we have proposed a lot of different things on a
temporary basis.
For example, last year, we proposed and you all embraced a
1-year period of 100 percent expensing for businesses. You
couldn't make that permanent in a responsible way, but it is
good policy for a short-term process. There are some things you
should do on a temporary basis. This is one of them.
Mr. Stutzman. But CBO is saying that we could see the
economy stagnant for the next 5 years. Why not make it a 5-year
fix, or a 5-year rate, instead of making it towards the end of
2012 when it looks political?
Secretary Geithner. A good question. CBO's analysis that
shows what I think you show, very moderate growth for a long
period of time, is on the assumption that all the Bush tax cuts
expire, which is not something we support. As you know, we want
to extend them for 98 percent of Americans. So it is our
judgment that the economy is likely to be in a position at the
end of next year where it can withstand the effects of this
short-term temporary payroll tax expiring.
Mr. Stutzman. But this is what I get tired of, because I
really believe we need a civil debate in Washington, and I get
tired of Republicans being thrown under the bus saying
Republicans want to destroy Medicare and Social Security, when
that is not the case whatsoever, but then the President turns
right around and cuts the payroll tax rates, which would
actually fund Social Security and Medicare, so there is less
money going into those programs.
Secretary Geithner. That is not true though.
Mr. Stutzman. It is the same thing though. I mean, there is
less money going into Social Security and Medicare, right?
Secretary Geithner. No. The way the law works, any
shortfall that comes from like a temporary payroll tax cut is
made up automatically by general revenues. So that has no
impact----
Mr. Stutzman. That is still from the taxpayer. It still is
going to come from the taxpayer. Those funds don't see any less
money going in?
Secretary Geithner. No. That is the way the law works. I
think the question is shall we be--I am not sure I understand.
Do you want to extend the payroll tax cut longer?
Mr. Stutzman. I am fine with that.
Secretary Geithner. I don't think you can justify doing
that. But we will have to work through this at the end of the
year.
Chairman Ryan. The time has expired.
And I would remind our witness: You are the witness; they
are the questioners. This is a legislative branch on this side
of the table. You are the executive branch on that side of the
table. So let's keep the questions the way that the
Constitution is.
Secretary Geithner. Sometimes I have to ask a clarifying
question just so I can answer your question.
Chairman Ryan. Okay. All right, let's make sure it is that.
We are to Ms. Castor.
Ms. Castor. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
I would like to ask you about identity theft and tax fraud,
because in the fall of last year, my local police chief, she
said where are all the criminals on the street? All the drug
dealers were gone. All the other petty theft criminals gone off
the street. They thought we are doing a great job. Crime is
down. Then they raided a motel with rooms where they had
laptops set up one after another, and they found where all the
criminals were, and they were filing fraudulent identities to
claim the--filing the tax returns to get refunds. And they have
quite a racket going on. They call it TurboTax, because it is
so easy. And they can put in hundreds of these. And you should
see what the Postmaster General has, just row after row of
those debit cards, the green dot, other checks coming to Post
Office boxes, some that they have been able to get.
In fact, the bust last year was $130 million worth, and
they think that is just the tip of the iceberg. And this is not
just in Tampa, Florida. This is happening all over the country,
and we have got to get a handle on it.
Here is one of the problems. The Tampa Police Department
advised me that their investigation was complicated at every
turn by laws that prohibits the IRS from sharing information.
While we all value those personal privacy protections, there
must be a way for IRS to cooperate with local and Federal law
enforcement to investigate the fraud. For example, in the big
TurboTax bust, they even had taped confessions by some of the
people, but because there was a missing link in the evidence on
the actual tax return, they could not bring them to
prosecution. The U.S. Attorney is completely frustrated. Law
enforcement all across my State is very frustrated.
So here are the two primary issues. First, what can you do
to address that? We filed legislation, my Republican colleague
who is a former sheriff, Representative Nugent, he understands
this. But we can't wait for legislation. And, two, the IRS has
got to have better screens and filters, checks, especially now
here is tax filing season. The Tampa Police Department said
just in the first part of the year now, they have $9 million
more in fraudulent returns that they have recovered. So we have
got to get a handle on this to protect the taxpayer. And if we
are looking for cost savings, we can start by putting a stop to
this fraud.
Secretary Geithner. You are right, and I appreciate your
drawing attention to this problem. And Doug Shulman as the
Commissioner of the IRS is doing a very good job trying to get
us in a better place to try to reduce the ability of Americans
to again illegally benefit from tax benefits they are not
entitled to.
One thing we are going to need is we are going to need some
more resources for the IRS to make sure they have enough in the
enforcement budget. But I would be happy to look at your
legislation and consult with the IRS and have my colleagues
come talk to your staff and see if we can figure out how to
reduce the remaining barriers.
Ms. Castor. Yes. And colleagues, I ask for your help as
well. If you go back and talk to your local law enforcement and
they tell you they are not aware of it, they just haven't found
it yet. Because it is so easy. They steal the identities of
people who are deceased. We have had cases where people working
in nursing homes go in and steal personal information. Even
children go file.
And, see, here is the problem with the IRS. They have said
if your refund is less than $10,000, that is not enough for us
to investigate. And that is a real problem. They have got to
come up with some strategies where if somebody has a Post
Office box and they are getting 25 checks, the IRS has got to
be aggressive on this thing.
Secretary Geithner. They are very aggressive, but remember,
they don't have unlimited resources so they have to devote
those resources to where they think the highest return is in
getting better tax compliance done. But I agree with you we
have a problem. We are working on it. I will be happy to come
talk to you about how best to solve it. And I very much
appreciate the support we have gotten to make sure the IRS has
the resources they need to have to do a better job in this
area.
Ms. Castor. Thank you very much.
Chairman Ryan. All right, 25 seconds.
Mrs. Black.
Mrs. Black. Thank you, Mr. Chairman, and thank you, Mr.
Geithner, for be here today. Of course, we had some time
together yesterday and----
Secretary Geithner. We did. I enjoyed it.
Mrs. Black. And we are spending a little time together
today.
I want to start out by making a comment about this division
and divisiveness here on Capitol Hill. It has disappointed me
in the last year I have been here. I came from a State
legislature where I worked with bipartisan support on very
difficult issues, and I know what that is like. It is hard
work. It is hard to do.
But I have gone through the budget, and I must say I
haven't read the whole thing yet, but I did read the first
pages of this budget very carefully, and it is the President's
message. I want to read a couple of things here to remind
people that this is not a way to start out a discussion of
bipartisanship when you have in the very first pages of this
document divisiveness.
So here it says, I presented to congressional Republicans
another balanced plan to achieve $4 trillion in deficit
reduction. Unfortunately, Republicans in Congress blocked both
our deficit reduction measures in almost every part of the
American Jobs Act for the simple reason that they were
unwilling to ask the wealthiest Americans to pay their fair
share.
It goes on several pages and I am not going to read the
whole thing, but it just continues to talk about Republicans,
Republicans being the bad people who don't want to work with
him. This does not set a tone of bipartisanship, and this is
the leader of our country. And I have got to start out by
saying that, because this is very disappointing to me, that
that would be the first pages of this document, before we even
get into talking about what is good or what is bad in here.
Now, let me turn your attention to something that again is
very important to me as someone who comes from a health care
background. First I want to ask you, would you agree that
Medicare is the biggest driver of our debt?
Secretary Geithner. Over the next 50 years, yeah, but not
over the next 10.
Mrs. Black. But you don't believe that currently with
10,000 seniors retiring every day, that it is a driver of our
debt currently?
Secretary Geithner. No. Obviously, the biggest parts of
spending in the budget are Medicare and Medicaid and Social
Security and the defense budget.
Mrs. Black. Right.
Secretary Geithner. So those costs actually matter a lot.
But the growth that really starts to hurt us builds a little
bit more gradually.
Mrs. Black. Well, and you are right, because we did see the
chart at the beginning, and you even acknowledged there that
that begins to grow pretty rapidly with the retirement, the
rising number of millions of Americans retiring.
Secretary Geithner. Starting 20 to 30 years from now, yes.
Mrs. Black. But what you are saying to me is that we should
not worry about that now, because that is not to be worried
about until 20 years down the road?
Secretary Geithner. No, not at all. I am a very strong
supporter of early action on these things, because the longer
you wait, the more damage you are putting the country in.
But what I am pointing out is that we believe it would be a
substantial step forward for us to come together and agree on
how to fix our problems for the next 10 years, even if we can't
agree on how to solve them for the next 100 years.
Mrs. Black. I know my time is running out very rapidly
here, so I do want to--at some point in time, I am going to
send you some questions and have you answer them for my
purposes of writing. But the President did acknowledge this was
a problem, because he had the Bowles-Simpson Commission take a
look at this, and they actually had some pretty bold
entitlement reforms in there, in the document ``The Moments of
Truth.'' Did the President adopt any of those in this document
that we are looking at?
Secretary Geithner. I am glad you raised that. But I just
would point out that we are much closer to the broad strategy
in Simpson-Bowles than is what people refer to commonly as the
Republican budget. So if you look, for example--with maybe one
exception, the sense that neither the Republican budget nor our
budget provides the details of the Social Security reform plan.
But if you look at the broad balance of spending and tax cuts,
we are much closer to Simpson-Bowles than is the Republican
budget, even on----
Mrs. Black. But we don't have--and I am going to reclaim my
time because I only have 48 seconds left here. We did not see
bold measures in this budget reform, because what I have read
in there and what I have seen is that the way that this
administration determines that we should balance this budget at
this point in time with the Medicare is on the backs of our
providers.
Secretary Geithner. Well, we are proposing $370 billion
roughly, you can decide whether that is bold or not, over 10
years. It is a substantial chunk of money. And you are right,
we think this is fair. We are putting those primarily on
pharmaceutical providers and on other providers of health care.
Mrs. Black. Like physicians.
Secretary Geithner. Not significant on physicians actually.
And some modest changes to beneficiaries in that context. But
you know you can choose a different of doing it, but if you
don't do it that way, you are going to do it on beneficiaries.
Chairman Ryan. Ms. Bass.
Ms. Bass. Thank you, Mr. Secretary, for your time.
I just wanted to ask you a couple of questions, and then I
thought before my time is ended that you might want to take a
few minutes to respond to several things that you didn't really
have an opportunity to respond to because your time ran out.
But you said a few minutes ago that you felt that the
budget that you are presented stabilizes the debt burden in a
few years as a percentage of the GDP, I think you said down to
3 percent. But I wanted to know if you could specifically
describe a few ways that that happens?
Secretary Geithner. It takes $4 trillion in deficit
reduction over 10 years to get the deficit down to the level
where you achieve that measure of sustainability, and we have
proposed to do that with a mix of spending cuts and revenue
increases in the ratio of roughly 2.5 to one. The spending cuts
come in the form of the trillion dollars in caps and cuts on
discretionary, meaning defense and nondiscretionary spending we
agreed to in August, combined with an additional $1.5 trillion
in spending cuts that are composed in part of substantial
reforms to Medicare and Medicare and other mandatory programs,
like, for example, farm subsidies. Then alongside that, we have
proposed a little more than $1.5 trillion in revenue increases,
which is roughly 1 percent of GDP.
The combination of those things would reduce the deficit
over the next 5 to 7 years to below 3 percent of GDP, which
again is the level you need to achieve what people call primary
balance. That is the place where revenues cover your
expenditures minus interest. And for an economy like ours,
which normally grows at 2.5 percent, that is a level that would
stabilize our debt burden at a manageable level. Again, that
only buys us 10 years or so. Ten years is a long time though, a
pretty substantial contribution. We will have to go beyond that
and build on the Affordable Care Act Reforms and these Medicare
reforms and do other things to help get our health care
commitments to a more sustainable level.
Ms. Bass. Thank you, I appreciate that.
You know, as I listen to my colleagues on the other side of
the aisle, especially in the early questioning, there were
several questions that came up around tax reform and also
entitlement reform. And I am new here as a freshman Member, so
it is just my second year, but I wanted to know if maybe
historically you could give a couple of examples where a
President put forward a budget that included major policy
changes along with the budget? Because it would seem to me, and
I certainly want to see tax reform especially, but I don't know
if it would even be appropriate for it to be included in a
budget.
Secretary Geithner. Well, you are right. I think the
Chairman would know this in some ways better than I, but you
are right that the major tax reform changes that come were not
proposed in budgets. They were done through a separate process,
normally beginning with broad frameworks from the
administration and then that started a process of negotiation
on the Hill, and the tax-writing committees normally took over
the burden of that responsibility.
On the entitlement reform side, you are also right to point
out that probably the most successful example we have seen of
entitlement reform, which is the Social Security agreements
reached under President Reagan, came out of reforms that were
proposed by a bipartisan commission chaired by Chairman
Greenspan at that point. Also they were not included in
Reagan's budget. So that is good history and good example.
So we have laid out both in the budget and outside the
budget some framework for reforms, but that can only be the
beginning of the process. It is never intended to be the end of
the process, because as you know, the way the balance of power
is written in the Constitution, Congress has the power of the
pen and has to write the laws of the land.
Again, finally, it is just obvious to say this, and this is
the challenge we face, you cannot do these things without
finding bipartisan agreement. And we did some--I know we were
disappointed by the outcome, but we did some very important
foundation laying over the summer in those negotiations with
the House Republican leadership and Democratic leadership. And
we did some important foundation laying even in the
supercommittee dialogue, and we are going to build on that
going forward to figure out how to find a way to come closer
together.
Ms. Bass. Maybe we need to see some of those proposals,
because it seems like my colleagues on the other side of the
aisle haven't seen some of the proposals that have been put
forward, one by the administration and maybe some proposals
that the Republican leadership might have been considering.
Secretary Geithner. Well, again, you have got to start by
exchanging ideas, and you have to start by debating the
fundamental principles. Once you have agreement on a broader
framework, then it is easier move forward on some of the
details. But I think to be fair, we are not really debating
whether plans exist. We are debating whether we like our plans
or not, and you guys like your plans, and we like our plans at
the moment, and we have to figure out how to make them overlap
a bit.
Chairman Ryan. Mr. Ribble.
Mr. Ribble. Well, Mr. Secretary, thanks. It is good to see
you again.
Secretary Geithner. Good to see you.
Mr. Ribble. I am sure this isn't always the funnest part of
your job.
Secretary Geithner. Actually, I know it doesn't look it,
but I enjoy this discussion because these are debates we have
to have that are about fundamental things. And, as I said, you
know, we like our plans. We know you like yours. We have got to
figure out, you know, how to do something together.
Mr. Ribble. I completely agree with you. Let me tell you, I
ran for this seat after spending 35 years in the private sector
owning my own company.
Secretary Geithner. What were you thinking, is what I want
to ask you.
Mr. Ribble. That is a legitimate question to ask, but I
will answer that question for you, and then we will talk. I ran
because I am afraid for my grandchildren, and it is straight
and forward and as simple as that.
I am here for them, because we have a problem. And if we
cannot somehow, the administration and the Congress,
Republicans and Democrats, finally recognize that we have a
major problem and admit it and be honest with the American
people and honest with each other, we cannot solve this
problem. And I think we both agree on that.
Secretary Geithner. I completely agree with you.
Mr. Ribble. So I would ask my Republican colleagues and my
Democratic colleagues, I would plead with them on behalf of my
grandchildren to stop demonizing every good idea and instead
debate it on its merits and come up with a solution. And I am
willing to do that, and I am willing to work with you to do
that. We need solutions. Here are some concerns I have.
Last week, Mr. Bernanke said the best approach would be to
put in a long-term strategy.
Secretary Geithner. Absolutely. I agree with that.
Mr. Ribble. I understand that going beyond a 10 year window
is difficult. But I am concerned on two things----
Secretary Geithner. He meant 10 years I think though.
Mr. Ribble. What is that?
Secretary Geithner. I think he meant 10 years. He would be
thrilled with 10 years.
Mr. Ribble. He probably would be thrilled with 10 years,
but we haven't really got a strategy to address some key
drivers that I am concerned about, and one is cost of Medicare.
We came up with an idea, and it got pretty badly demonized last
year, and they are going to use it as television commercials,
but it was an idea that warranted debate.
And the other one is interest payments. I am going to talk
to you about interest, because I think interest is really
critical. You have got nearly $5 trillion of interest over the
next decade. By the end of the decade, interest payments almost
triple from almost 6 percent of outlays to just a little over
16 percent of outlays.
Could I have figure three brought up on the screen here
while we are talking.
Based on the projection, if we look the at trend lines
here, it is going to go to 25 or 30 or 40 percent, given that
the estimates that you use for interest payments, interest
rates stay pretty much the same. I want to know what your
feelings are about confidence regarding interest rates if we
continue--if the trend line there continues beyond 2022.
Secretary Geithner. Excellent question, and it is a very
important point. You are using the nominal deficit number, and
what matters for confidence and credibility in interest rates
and growth is whether your debt burden as a share of the
economy stabilizes at a moderate level. And if you were to do
that chart as a percentage of GDP, which one of your colleagues
did I think today earlier today at least, you will show that
deficits down to the level that it stops the debt from growing,
and that is the test we need. And if we were able to achieve
that, then you could be very confident, you could be very, very
confident that we would not face a rise in interest rates in
later years that would damage economic growth.
Mr. Ribble. So you are pretty comfortable with the interest
rates projections that you have in your budget?
Secretary Geithner. Absolutely I am, because they assume,
they have to assume that Congress would enact proposals to
bring the deficits down that far.
Mr. Ribble. Right. In the last 4 years of your budget, we
have an increasing, although not a percent of GDP, but an
increasing dollar value of debt each year.
Secretary Geithner. True. But, again, this is very
important. You know, we are a $14 trillion economy. We are
going to grow in nominal terms by 5 percent a year. So you have
to measure the debt as a share of the economy. It is not
helpful to look at it economically or financially----
Chairman Ryan. Bring up chart 5-1 from analytical
perspectives then. I mean, that is what he is saying.
Secretary Geithner. It shows you that it stabilizes as a
share of the economy in the second half of the decade. Now, as
I acknowledged, that is not enough, because if you just did
that and went home, then 20, 30 years out, it would start to
grow again, and that is the problem.
Mr. Ribble. It is a major problem, especially when you pile
on 16 percent of outlays on top of Medicare. This becomes
just--here we go, practically a crisis problem. And although I
realize you are concerned with the 10-year window, my youngest
grandson is 6. I am concerned beyond 2022.
Secretary Geithner. I am here for the same reason, of
course, and I totally agree with you. And I want to make sure
you understand, I am not minimizing the long-term problems. I
know them better than almost anybody. All I am saying to you is
that we budget in 10-year windows. That is our obligation. And
we are proposing a balanced budget to meet that simple test,
like Simpson-Bowles did in that context.
Mr. Ribble. I wish the President accepted Simpson-Bowles,
but he didn't, and it was his own commission. And we hear often
Simpson-Bowles being brought up, but it was his own commission,
and he didn't even accept it.
Actually, I yield back. I am out of time.
Chairman Ryan. We are at Mr. Honda now.
Mr. Honda. Thank you, Mr. Chairman, and welcome.
On the Simpson-Bowles, I think that one of the principles
they laid out when we talk about the Medicare and Medicaid,
Social Security, the principle they laid out for us was do not
address that on the backs of the vulnerable. And I think that
is a principle that the President has been looking at and
watching it, and that is the point I think of disagreement that
we have here, it seems to me.
Secretary Geithner. Can I say something on Simpson-Bowles
in that context? I think it is good. A few differences on
Simpson-Bowles, Congressman. Simpson-Bowles cuts much deeper on
defense than we do and your side would be comfortable with. It
has a Social Security package that it was disproportionately
weighted to benefit cuts, which gave us some concerns.
But if you look beyond those two differences, and those are
important differences, we are very close in broad strategy to
Simpson-Bowles. On the tax side, we are very close. We go
deeper on discretionary spending, on nondefense discretionary
than Simpson-Bowles proposed, and we have a pretty substantial
set of Medicare savings, Medicaid savings that are pretty
substantial relative to what they proposed in their 10-year
window. So we are actually very close on broad strategy to
Simpson-Bowles, with those two exceptions. And the proposals we
made last April and last September, not just in--they are built
on the budget, we show you how close we have come to that basic
context.
Where you guys are apart from Simpson-Bowles is on two
things. One is you have much higher defense levels than they
do, much higher, and you have much lower revenues. And that is
the difference. But if we could use that as a foundation for
negotiating something, which again we tried over the summer
several times, then we would be in a very good position.
Mr. Honda. Thank you.
Like my friend, Mr. Ribble, perhaps something in writing
explaining that, we could probably work with it. There was
another comment earlier regarding small businesses, and I think
you were attempting to define what small businesses were and
also trying to indicate where the 2 percent would be falling.
Could you do that, take some time and describe that?
Secretary Geithner. Okay. Based on the evidence we all use
by the independent arbiters, allowing the Bush tax cuts on what
we call the top 2 percent to expire as scheduled would affect 2
to 3 percent of small businesses.
Mr. Honda. Would you describe that? What kind of businesses
are those?
Secretary Geithner. And using the definitions that we all
adopted to use, that would include businesses that are neither
small nor of moderate income nor your typical Main Street
hardware store, because in that definition, any individual
partner in a law firm or in a hedge fund or private entity fund
or a lobbyist is treated as an individual small business. And,
yes, if that individual person, partner, makes more than
$250,000, we are proposing to raise their effective tax rate.
We do that because we are comfortable, given the experience
in the 1990s, that they can handle it. That was a great period
for job creation and investment and productivity growth. But we
also know if we don't ask them to bear that larger burden, then
somebody else will have to do it, and we don't think that would
be fair or good for economic growth.
Mr. Honda. So that population in the small businesses does
not even come close to looking like mom-and-pop businesses that
we----
Secretary Geithner. A tiny fraction of the businesses
affected by this would meet that definition of a mom-and-pop
store. To be in the definition, they would have to be a mom-
and-pop store, employ people, and after expenses, after
expenses, earn more than $250,000 a year. Now, I know a lot of
people don't think that is a lot of money, but we are proposing
to raise--and you have to look at the effective tax rate--a
modest increase in their effective tax rate that would restore
it basically to where it was in the second half of the 1990s,
which, frankly, small businesses would love to have the economy
they had in that period of time.
Mr. Honda. So I think that for the purposes of those that
are watching this, that the folks understand the distinction
between what you are talking about, small business that I guess
would be under the--what is it, S corporations or----
Secretary Geithner. Actually, it is businesses formed as
partnerships and have pass-through income.
Mr. Honda. Versus the small business that we usually go to
and trade on a corner or with our family businesses or our
family restaurants.
Secretary Geithner. Those may be structured that way, too.
But, again, the point is you have to have income after expenses
more than that threshold to be caught by it, and most of those
2 percent of businesses that get caught by that, about 50
percent, maybe slightly higher, make more than $1 million in
income after expenses.
Mr. Honda. Thank you very much. I appreciate that.
Chairman Ryan. Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman.
Thank you, Secretary Geithner, for joining us today.
I want to continue the line of discussion that my colleague
Reid Ribble started. The reason I am here also is I came from a
perfectly good job in the private sector, and things were
happening here that I thought were going to damage the future
of my family. My granddaughter's picture is on the back of my
voting card. That reminds me why I am here and that every
decision I make not only affects next year, the next 5 years,
the next 10 years, but affects her when she is 75. So let's put
figure 12 up for a minute if we can.
Now, it is 2065--figure 12, the next one. There we go. And
I know you think that these projections are no good. If you
wanted to, we could go to figure 3. Either one of them.
Directionally they both say the same thing. Do you think the
direction is wrong?
Secretary Geithner. Well, as I said, even if we stabilize
it for the next 10 years, it starts to grow again. Absolutely.
Mr. Flores. Right. Even what OMB says is that after 2022,
we have a problem, that things begin to deteriorate.
Secretary Geithner. Absolutely. And I am not saying--I just
want to make it clear. I am in violent agreement with you. That
does not mean, just the fact that it only starts to grow in the
second and third decade, doesn't mean we should wait until
then. I totally agree with you.
Mr. Flores. That is where I am going. So why would a budget
be prepared that would kick the can down the road? I mean,
let's assume it is 2065 and your granddaughter has just been
appointed by the new Republican President to be Secretary of
the Treasury. How are you going to tell her to finance this?
Secretary Geithner. I hope for her sake she is not.
Mr. Flores. Well, she saw the light.
Secretary Geithner. I think it is worth reminding everybody
that we fought a very tough fight, not just to extend health
care to tens of millions of Americans, but to lock in reforms
that on CBO's measure will take $1 trillion out of those long-
term forecasts in the second decade----
Mr. Flores. But that is already in this number, right?
Secretary Geithner. It is. And then we are imposing another
370 on top of that just in the first decade that will grow over
time----
Mr. Flores. That is built in this number, too.
Secretary Geithner. But we are making a difference on that,
on that process, and if we can find a way to go beyond that, we
would be happy to do that.
Our problem is that the way you have laid out to do that,
in our judgment, would shift too much of the burden to a
middle-income retiree. Now, I am trying to say it in the most
gentle way.
Mr. Flores. Well, let's rephrase it then. You have a clean
sheet of paper, and let's say you can't blame anything on me,
plus I have only been here 13 months, so how would you fix
this? These are your projections.
Secretary Geithner. What I would do is--that is a very good
question. So what I would do is I would lock in a sustainable
outcome for the next decade, and I would do that as quickly as
we can. And then I would take the experience we will have at
that point and what we are doing to help encourage people to
use health care more efficiently--and the debate we are having,
and Chairman Ryan deserves enormous credit for this, the debate
we are having is what model of how we provide health care to
people is best likely to improve how that is used and provided
so people use less of the stuff that has less value. That is
what we are debating.
Mr. Flores. Figure 3, please. Well, forget that one for
now. Let me go to a different question. What percentage of the
total tax load should the top 2 percent pay under the
President's definition of fairness?
Secretary Geithner. In our judgment, they should pay more
than they pay now.
Mr. Flores. Okay.
Secretary Geithner. By the amount we laid out.
Mr. Flores. So what percentage of total tax revenues is
that?
Secretary Geithner. Well, I am not sure I can do it that
way, but I will say it this way. We are proposing to put over a
10-year period of time an additional $1.5 trillion on the top 2
percent of Americans.
Mr. Flores. I was able to read that. I just want to know,
surely----
Secretary Geithner. I will be happy to give you the answer.
But I think the basic division we have, and, you know, this is
a rich debate we are having, but our judgment is in a system
where we have progressive taxation, we think it is fair to have
a modest increase in the effective tax rate for the top 2
percent. And the reason why we say this is because if we don't
do that, where are we going to find the savings. We have to ask
middle class Americans to pay more taxes, which I don't think
you want to support, or you have to, as I said, cut defense,
cut Medicare, cut infrastructure.
Mr. Flores. No, I will tell you what my proposal would be.
Let's grow the economy. Let's make the Federal Government small
and make the private sector large. Even Secretary Bernanke--
excuse me, Chairman Bernanke when he was here just last week
said if you had to choose to allocate resources between a big
government solution or a private sector solution, the private
sector is going to get it right. That is the reason I would
make a choice any day between a Keystone versus a Solyndra.
My time has expired. Thank you.
Chairman Ryan. Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Mr. Chairman.
Thank you very much, you are doing a great job. I am
enjoying just watching actually. I was going to just yield my
time to a Republican. It is much more entertaining.
Mr. Flores. Thank you.
Mr. Ryan of Ohio. Not that Republican. You know, it is
interesting, our friends on saying on the other side, Simpson-
Bowles, Simpson-Bowles. We had a vote in this committee and
there were some members of this committee who were actually on
Simpson-Bowles who voted against it, and we had a vote in this
committee that talked about just the structure, not even
necessarily the details of Simpson-Bowles, that a lot of the
Republicans voted against. And you could not get one Republican
on the other side to raise their hand and say, yes, I would be
for some tax increase on the wealthiest 2 percent, 1 percent,
.5 of the top 1 percent. You could not get one of them to raise
their hand----
Secretary Geithner. In the House. In the Senate, you got
some.
Mr. Ryan of Ohio. In the House, and say they were for it.
Exactly. So that it is the holdup. That is where the compromise
would come in. And we are saying----
Chairman Ryan. Would you yield, Mr. Ryan?
Mr. Ryan of Ohio. I would be happy to yield.
Chairman Ryan. House Democrats voted against Simpson-Bowles
as well. The Speaker of the House at the time opposed Simpson-
Bowles, your leader.
Mr. Ryan of Ohio. I understand.
Chairman Ryan. And many of us put out alternatives in place
of it.
Mr. Ryan of Ohio. I agree with you, Mr. Chairman, but I am
not the one sitting here blaming the administration for not
adopting Simpson-Bowles. I voted for that amendment that was in
the committee. It was me and Heath Shuler were the only two. I
remember exactly. And so the point is that those accusations
being made against the administration when there are very
members of this committee who had voted against Simpson-Bowles
and then turn around and blame the administration for not
adopting Simpson-Bowles, and the reason is because we can't get
a Republican to say they would raise taxes on Warren Buffett.
That is the bottom line. That is what this all comes down it.
And, you know, it is interesting, we have this debate every
time we have a major Cabinet official, we have got all this
nostalgia for Ronald Reagan. So I had to do a little homework
here. Tax Equity and Fiscal Response Act of 1982, tax increase
by Ronald Reagan; Highway Revenue Act of 1982, tax increase by
Ronald Reagan; Social Security Administration of 1983, tax
increase by Ronald Reagan; Deficit Reduction Act of 1984, tax
increase by Ronald Reagan; Consolidated Omnibus Budget
Reconciliation Act of 1985, tax increase by Ronald Reagan;
Omnibus Budget Reconciliation Act of 1985, tax increase;
Superfund amendments, tax increase; a CR in 87, tax increase;
omnibus Budget Reconciliation Act 1987, tax increase;
continuing resolution of 1988, tax increase by Ronald Reagan.
Which we now look back and say that was a fairly responsible
thing to do.
And to think of this man, who they put the candles up and
they burn the incense and have the big picture of Ronald
Reagan, to think of him running in a Republican primary today,
he would be behind Ron Paul--he would probably be out of the
race right now. I mean, we got to think about this when we are
talking about how we are all going to sit down and figure this
out. And I think everybody is willing to make tough decisions.
I think anybody that has been watching this recognizes that
the Speaker and the President had some semblance of a deal that
couldn't get passed an ideology. And nobody here wants to sit
here and say we need to raise taxes. But for God's sake, if we
can't at least ask Warren Buffett so we can continue to invest
in infrastructure, Pell grants, the kinds of things that are
going to lead to long-term investments.
I have one or two questions, very briefly. When you say the
tax rate may go up on someone who makes over $250,000, is it
for every dollar they make after $250,000, or it is for the
entire thing?
Secretary Geithner. No, it is just for the margin you earn
above that late.
Mr. Ryan of Ohio. So the first $250,000 would be taxed at
the current rate, and everything after your first $250,000
would be taxed at the higher rate.
Secretary Geithner. That is right. It is called a change in
the marginal tax rate.
Mr. Ryan of Ohio. A change in the marginal tax rate. And so
what does that mean for someone who makes $250,000 a year, or
say they make $300,000 or $350,000 a year. What would it mean
as far as an increase goes?
Secretary Geithner. It is a very, very small increase.
Mr. Ryan of Ohio. Hundreds of dollars? Thousands of
dollars?
Secretary Geithner. I don't know. I would be happy--I can't
do the math in my head, but it could be $1,000. But it is
modest, and you are making the point well.
Mr. Ryan of Ohio. So someone who made $350,000 next year,
in 2013 or 2014, would pay an additional say $500 to $1,000,
depending on how much they made more than $250,000. They would
pay an extra $500 or 1,000 bucks, as our country, as we see
from all these charts, we are all worried about our kids and
grandkids and nieces and nephews. We are all concerned. We all
have pictures of them in our office. No one has the high ground
on that. It is how do we fix it. And we are saying to ask these
folks to maybe pitch in an extra $500 or $1,000 when they make
$300,000 or $400,000 a year is a small price to pay.
Chairman Ryan. Thank you.
Mr. Mulvaney.
Mr. Mulvaney. Mr. Chairman.
At the outset, I would like to yield 15 seconds to my
colleague from Texas, Mr. Flores.
Mr. Flores. Thank you, Mr. Mulvaney.
Secretary Geithner, I do want to follow up on your offer.
Would you please send me a response to my question about what
percentage the top 2 percent will pay of the total taxes under
your formula?
Secretary Geithner. Sure. Absolutely.
Mr. Flores. Thank you. I yield back.
Mr. Mulvaney. Thank you, Mr. Chairman.
Secretary Geithner, it is always good to see you. I am
going to go a different direction and ask you on something that
I don't believe you have been asked today. I want to talk about
a global minimum tax, which is a concept that has been raised
just recently for I believe the first time. It was earlier this
week when the director of the White House National Economic
Council, Gene Sperling, said, and I am quoting now, that we
need a global minimum tax so that people have the assurance
that nobody is escaping doing their fair share as part of a
race to the bottom.
And then yesterday I believe in Milwaukee the President
said something similar but not exactly the same when he said
that from now on, every multinational company should have to
pay a basic minimum tax and every penny should go toward
lowering taxes for companies that choose to stay and hire in
the United States of America.
This is a concept that is new to me, and I am curious as to
whether or not you can shed any light as to what they are
talking about, what you are seeking to accomplish, how it would
work, just generally what is this global minimum tax we are
starting to hear about?
Secretary Geithner. Not as new as you think, because when
Chairman Camp laid out his proposals for corporate tax reform
last fall, I think, he proposed a global minimum tax to try to
achieve the same objective, to make sure that people can't take
advantage of tax havens just to shift income and investment and
avoid paying their fair share. So it is a principle that many
countries have embraced, and I think Chairman Camp recognized
it in that context.
The challenge is in trying to design it and set it at a
level that is consistent with the other objectives we have,
which is try to make sure that American companies are
competitive and we are improving investment incentives here in
the United States. And as I said, I think before you came in,
we are going to outline to the Congress in the next couple
weeks a broad framework for comprehensive corporate tax reform,
and in that context, we will give you a broader rationale for
what we think the right balance is.
Mr. Mulvaney. Let me tell you what concerns me, because I
went to--there was a reference in one of the publications that
I read this week to an America built to last, which is a
document the President and the administration put out right
around the time of the State of the Union, and one section
actually speaks to this same topic and calls upon us to remove
tax incentives to locate overseas through an international
minimum tax, and says the President is proposing to eliminate
tax incentives to ship jobs offshore by ensuring that all
American companies pay a minimum tax on their overseas profits,
and this is the part that got my attention, preventing other
companies from attracting American business through a unusually
low tax rates.
How would you propose do that?
Secretary Geithner. Well, again, you are giving me a little
bit more credit for the idea than we deserve in some sense,
because Chairman Camp proposed a similar strategy. What we are
both trying to do----
Mr. Mulvaney. I will be happy to ask Chairman Camp how he
would propose to do it, but right now I am asking you, how
would you propose it?
Secretary Geithner. We are going to give you a little more
detail in the next couple weeks on the framework, and we can
talk about it in fuller detail then. Because what you want to
do is look at the overall mix of a reduction in the overall
corporate tax rate, broadening the base and other types of
reforms in this context. But our common challenges, and we have
the same challenge, and this is an American challenge, not a
Republican or Democrat challenge, is that we have a tax system
now which at the margin, encourages people to shift investment
income to lower tax jurisdictions, and we would like to have a
tax system that improves the incentives for investing in the
United States.
It is a hard thing to do, particularly if you are trying to
do in a way that is fiscally responsible. But that is why we
are talking about a broad rate lowering, base-broadening
corporate tax reform, with safeguards to prevent people from
shifting income and investment overseas.
Mr. Mulvaney. And you are not the first member of the
administration to say those words in the 13 months that I have
been here; get rid of loopholes, broaden the base, simplify the
Tax Code. And it is music to my ears.
Secretary Geithner. Why have we waited so long, as you say?
Mr. Mulvaney. Why isn't it in this year's budget?
Secretary Geithner. Well, as your colleagues know, because
on the tax writing committee, we talked about this in some
detail in the spring, is we put together a pretty comprehensive
plan, but, you know, we had to spend a lot of time trying to
talk some of your colleagues out of defaulting on the country,
on the government. And we lost a little time in that context.
The supercommittee wanted to take a run at it. The
supercommittee wanted to take a run at it. We gave them a bit
of time.
Mr. Mulvaney. Reclaiming my time, Mr. Secretary, listen, I
am mildly encouraged by your answer because I was fully
expecting you to blame President Bush for it. So I am glad it
is my fault.
Secretary Geithner. No, no, no, I am not saying that. We
have a limited amount of time.
Mr. Mulvaney. My concern is with this rationale, if we are
starting to talk about preventing other countries from
attracting American businesses through unusually low tax rates,
that philosophy concerns me because that same philosophy could
be applied domestically as well as internationally. And I live
in a State that works very hard to lure business to South
Carolina with a favorable tax environment, and I would be very
concerned if this administration starts using this language,
not only internationally but domestically as well.
Secretary Geithner. I can assure you there is no risk of
that.
Chairman Ryan. Ms. Wasserman Schultz.
Ms. Wasserman Schultz. Thank you, Mr. Chairman.
Mr. Chairman, first of all, I want it associate myself with
the remarks of my colleague from Florida, Ms. Castor, related
to taxpayer identity theft and the resources Treasury expends
in pursuing that. We have the worst problem in the country in
Florida. I can't tell you the exponential increase in calls
from constituents to my office. A lot of our casework now is
helping constituents comb through the morass of having to
untangle the identity theft impact on their lives. So it is
really important.
Secretary Geithner. I couldn't agree with you more, and
again, we are happy to spend some time walking you through what
the IRS thinks which can do and what more we might need more in
terms of authority.
Ms. Wasserman Schultz. Specifically, though, and I had a
chance to talk to Mr. Zients about this as well, but I was glad
to hear some of our colleagues on the other side of the aisle
in reference to their grandchildren and the concern that that
they have about the long-term impact of deficits on their
grandchildren's lives, because that to me means there is an
opening for them to oppose the extension of the 2001 and 2003
Bush tax cuts for the wealthiest, most fortunate Americans,
which adds $700 billion to the deficit. So hopefully, the
Members that have made those references will go back and take a
hard look at their own records, because they have certainly
been participants, willing, very enthusiastic participants, of
adding to the deficit in recent months.
But my question of Mr. Zients yesterday, and I want to ask
you to proffer your opinion, is in terms of the balance that
the President proposed in his budget in dealing with the
deficit short term and long term, that there is a cut side of
the ledger and a revenue side of the ledger. The economic
experts, the folks who have testified here, have all cautioned
about the potential for short-circuiting recovery that we are
on, the 23 straight months of private sector job growth. So can
you talk about the balance that the President took in proposing
the budget the way he did and, in the alternative, the way we
have heard others propose that we should essentially get to
deficit reduction purely through cuts.
Secretary Geithner. Okay, two really important questions in
this context, which is can you do fiscal consolidation
responsibly without doing anything for growth in the short term
and without a balanced package that includes revenue? And our
judgment is no. And the reason why we feel that way is, of
course, we have an economy still healing from the financial
crisis. Growth is not strong enough to bring the unemployment
rate down as fast as we think is fair to the American people.
And that is why we proposed, like we did in the payroll tax cut
and as we proposed in the last 3 years, a series of targeted
measures to help job creation right now.
Now, you have to do those in a way that is responsible. You
have to make sure you pay for them. And you want to make sure
they are tied to long-term reforms so people have more
confidence we are going to go back to living within our means.
So that is why we proposed the combination of near-term things
for growth today married with long-term reforms to reduce our
long-term deficits.
The second key test for growth, although we seem to
disagree on this, is, should you do it with a balanced package,
modest revenues, more spending cuts, or a spending cut-only
approach?
Ms. Wasserman Schultz. And the ratio of spending cuts to
revenues is $2.50----
Secretary Geithner. It is two and half to one, depending on
how you measure it; some say three to one. If you do it with no
revenues though, you have to ask yourself, if you are going to
achieve the same deficit targets, and, again, your side wants
to go much deeper on the deficits, so you make the problem much
greater. Then you have to cut spending much more deeply and you
will find it very hard to find $1.5 trillion to $1.9 trillion
in spending cuts from defense, from Medicare, from low-income
programs, from infrastructure. And even if you try to do it,
you will probably do a lot of damage to the economy.
Ms. Wasserman Schultz. Just in my final 45 seconds, as we
have heard especially the reverence to Ronald Reagan and his
approach to deficit reduction and addressing economic
recessions, I want to quote him in 1985: We are going to close
the unproductive tax loopholes that have allowed some of the
truly wealthy to avoid paying their fair share. In theory, some
of those loopholes were understandable, but in practice, they
sometimes made it possible for millionaires to pay nothing
while a bus driver was paying 10 percent of his salary, and
that is crazy. It is time we stopped it.
I couldn't have said if better myself, and I yield back the
balance of my time.
Chairman Ryan. I will take the 10 seconds to simply say he
was selling tax reform at that time; Presidential leadership,
saying lower rates broaden base. Precisely what we would love
to see.
Mr. Van Hollen. Mr. Chairman, if I could just take 5
seconds, as part of it, I think we should remember that some
the adjustments he made was to tax capital gains and dividends
at the 28 percent level, the same rate that the bugs driver was
paying there. In other words, he wasn't showing preference to
hedge fund owners and others. He said everybody needs to be
treated equally. So I would be interested to hear if that is
one of the----
Chairman Ryan. That is below 35 percent.
Mr. Van Hollen. Well, it is a 28 percent level versus 15
percent for the hedge fund guys today.
Chairman Ryan. Mr. Huelskamp.
Mr. Huelskamp. Thank you, Mr. Chairman.
I appreciate the questions and the discussion of balance. I
had a question I asked of the administration representative
yesterday and tried to get an answer. But defining balance is
spending that is less than or equal to revenue. Again, about 99
percent of Americans would probably agree with that. When does
the Obama budget balance?
Secretary Geithner. It doesn't balance in the next 10
years, which is the only thing we project in that context. I
think in the Republican budget----
Mr. Huelskamp. Does it balance in the next 20 years?
Secretary Geithner. Well, in the Republican budget, it
balances in 2037. We probably balance----
Mr. Huelskamp. Does it balance in the next 55 years?
Secretary Geithner. Well, it sort of depends on what
choices the Congress makes. But, again, what we do----
Mr. Huelskamp. In your budget, when does it balance?
Secretary Geithner. We only forecast for 10 years. But you
are right, we don't achieve balance in 10 years, and we don't
know how to do that, just like you guys don't.
Mr. Huelskamp. The answer is never does it balance. I just
like you to--he probably wouldn't say that word.
But one thing I want to talk about though is a lot of times
we hear a lot of information from you, Mr. Secretary, about
what it is going to do to the economy if we do the following
initiatives or if we don't. And tomorrow will be the third
anniversary of what you and the administration projected would
be the economic salvation of this country; that would be the
passage of the stimulus package. I wonder if we could part a
chart up to see the what the results have been from that
package.
If you look at that chart, and, again, this is the
prediction from your office, from your President, of what would
happen if we passed the stimulus package. Again, the third
anniversary is tomorrow. And you find out that it didn't work,
Mr. Secretary. You were wrong. I am still visiting here.
You find out the end here, and these are just numbers, but
when you get to the end, you see we have an Obama jobs deficit
of 5.4 million Americans; 5.4 million Americans without a job,
based on your economic theory. Look at that unemployment rate.
We were promised at this time, we would be almost 6 percent
unemployment. We are well above that. Again, the Obama jobs
deficit is 5.4 million jobs.
And I know you have many proposals in the budget that
hopefully would tackle the jobs deficit that has been created
by I think bad economic policy.
But can you tell me which tax increases that you are
proposing, which tax increases will help eliminate the Obama
jobs deficit, which ones will create new jobs for Americans?
Secretary Geithner. Let me just start by referring you to
CBO's analysis or the Republican economist, who was John
McCain's economic adviser's analysis of the economic impact of
the Recovery Act, and they both agree that the Recovery Act
helped substantially in restoring growth to the economy and
saved millions of jobs.
Mr. Huelskamp. Mr. Secretary, my question is about tax
increases. These are your numbers. They are not mine. I was not
up here. And we can blame everybody in this room, but there are
a few freshmen like me who weren't here. So can you explain
which tax increases will close the Obama jobs gap? We were
promised an additional 5.4 million jobs that didn't appear. Can
you describe again which tax increases will help--out of your
$1.9 trillion of tax increases, which one will put 5.4 million
Americans back to work?
Secretary Geithner. I want to first dispel you of the
illusions in your presentation.
Mr. Huelskamp. Mr. Secretary, this is your number. Not
mine. This is your number.
Chairman Ryan. If the gentleman will yield, it is the
Roemer and Bernstein presentation, so it came from the
administration.
Secretary Geithner. It is not really the right question.
The right question is did the Recovery Act----
Mr. Huelskamp. I will ask the correct question. Mr.
Secretary, these are your numbers. And the numbers in your
budget are based on a similar philosophy, the President's tax
increase will create new jobs.
Secretary Geithner. The budget contains a comprehensive and
balanced set of reforms, both spending and tax reforms,
combined with investments that in our judgment, and you can ask
CBO to judge it, whether it would be good for growth or not,
and we are very confident it will be good for growth.
Mr. Huelskamp. And honestly, I hope you are right, but you
are 5.4 million jobs wrong. And you have been wrong again and
again and again. And for this room, it is about numbers. For
people in America, it is about real jobs for their families.
Secretary Geithner. I would say an adolescent perspective
on how to think about the impact of economic policy. The right
question is----
Mr. Huelskamp. Mr. Secretary, let me tell you a quick story
for someone that has actually been in the private sector and
actually helped create jobs, which I know that is not your
background. You have never started a business, as I understand.
Joe in Junction City said if the President raises the
capital gains tax, let me tell you, there is seven people in
Junction City, Kansas, that he won't hire because of your tax
increases. And you can say, well, that is not really what is
going to happen. But you tell Joe in Junction City that, no,
really, we are going to create jobs by raising taxes. It didn't
work in your stimulus package, and I don't think it is going to
work again.
So thank you, I yield back my time.
Chairman Ryan. Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman. Thank you, Mr.
Secretary. Can we go back to figure 8, please? I guess not.
Figure 12.
Secretary Geithner. You can start. I will catch up to you.
Mr. Rokita. I just want to understand, and this has been
alluded to a few times. Figure 8 is fine. These are the numbers
we projected from our budget last year, and it is in contrast
to what would happen if we did nothing. So you see, as you
mentioned earlier, with the baby boomers retiring at 10,000 per
day, what happens?
Then we go to figure 12, please. And that is your chart, I
believe. And it correctly indicates the plateau that you talk
about within the 10-year budget window, or you claim to
stabilize the-debt-to-GDP ratio. But you see a similar tidal
wave after that.
Now, from that I take that you and the administration are
prioritizing a constituency in the here and now. Republicans,
Democrats, Americans in the here and now, whoever they are,
that can vote for you, vote to reelect you, vote to reelect or
punish all of us now at the expense of a constituency that will
never reward any of us.
Secretary Geithner. No, I don't agree with that.
Mr. Rokita. That will never reward any of us. Because why?
Because whether they are Democrats or Republicans, they don't
exist yet. They are the children of tomorrow. They are the
children of my two boys.
You don't agree with that. Go ahead.
Secretary Geithner. I don't agree with that.
Mr. Rokita. How so?
Secretary Geithner. If you can go back to figure 8.
Mr. Rokita. Go back to figure 8.
Secretary Geithner. What is interesting about that chart
is, again, once you get past the next 10 years and you get to
the deepest fog of uncertainty about the decades beyond that,
is why does your green path--you call it path to prosperity--
why does that decline?
And the reason why it declines--and, Mr. Chairman, I
apologize for saying it this way, but I think it is true--is
that you guys propose to take hundreds and hundreds and
hundreds of billions of dollars out of low-income and middle-
class retirement programs. And that is why you get that number
down.
Now, the reason why we are having this debate is because we
don't think that is the fair, right way to do it. Now, you all
are invoking your children, which of course I respect. I have
children, too. And I spent my life in public service. And I am
in this job because I care so much about the basic economic
future of the country. We share that basic obligation.
I would just make the suggestion that, as President Reagan
recognized and I think most Presidents have had to confront,
you cannot govern a country if you commit never to raise taxes
on anybody, because things change, wars happen, crises happen,
and millions of Americans are retiring.
Mr. Rokita. If that is the case, reclaiming my time, thank
you, Mr. Secretary, if that is the case, what is the proper
amount for a Federal Government to confiscate from its people
in order to run its operations?
Secretary Geithner. Well, in our budget--that is a good
question, although I wouldn't use that word----
Mr. Rokita. Well, no, you are confiscating property. You
are confiscating the work and the money of individual citizens
to run your operations. And if the current level is not
accurate, is not appropriate, what is appropriate if it is
arbitrary, what is the appropriate amount for a Federal
Government to confiscate from its own people in order to run
itself?
Secretary Geithner. Can I just ask this question? Do you
think a tax to pay for the defense budget----
Mr. Rokita. Reclaiming my time. This is a simple question.
If we are wrong and we are not taking enough, what is the
proper amount to take?
Secretary Geithner. Okay. In our question, since you are
not using ``confiscation'' again, in our budget----
Mr. Rokita. What amount is it proper to confiscate?
Secretary Geithner. In our budget, if you were to adopt it,
revenues would rise to slightly more than 20 percent of GDP by
the end of the decade, which is lower than the revenue forecast
implied from the policies in the Simpson-Bowles plan for which
many of you have showed so much affection.
Mr. Rokita. Okay. So about a fifth of the GDP is
appropriate?
Secretary Geithner. Slightly higher than the historic
average, but lower than what Simpson-Bowles proposed.
Mr. Rokita. But right now we are a little bit below
average, but historically it has been about 18 to 20 percent?
Secretary Geithner. Yes.
Mr. Rokita. So it is not a revenue problem historically
that we have; it is a spending problem, if you agree with that
figure or if you agree with your own figure, figure 12?
Secretary Geithner. Well, we propose to reduce spending to
about 22 percent of GDP, a little higher than 22 percent of
GDP. And the reason why it is that high is because Americans
are retiring. So we can't suspend the reality of people
retiring, because we give people retirement security and health
care security in Medicare and Social Security, that causes
those spending levels to rise.
Mr. Rokita. Thank you. I yield back.
Chairman Ryan. Mr. Lankford.
Mr. Lankford. I do agree with you, by the way. This is a
long-look issue. We have a lot of people retiring right now. We
do have to make sure the safety net is there, we do have to
make sure Medicare is there, we have to make sure Social
Security is there.
A lot of the issues that we face are budget issues based on
population right now. We get that. So this cannot be some
immediate, we are going to solve it tomorrow. My concern is,
and we talked about this some last year, the term ``primary
balance'' and ``sustainable debts and deficits'' gives the
clear impression we will never balance, and we never plan to
pay down principal, ever. And I understand the process of
buying bonds and bills and all that, so I understand it is not
like a mortgage.
But there is some concern to say if the whole focus of the
administration is let's try to get us to a spot that we can
handle this, we are never planning to ever pay down principal,
ever. Is there something inherently bad about balancing the
budget?
Secretary Geithner. That is not quite fair, again, because
if you get the deficit, as we propose to, below 3 percent of
GDP, and you hold it there, then you do start to bring the
level of debt down as a share of the economy.
Mr. Lankford. No, no. Real dollars is what I am talking
about. I understand you are mixing the numbers there. You are
trying to get below the 3 percent of GDP. I am talking about
real dollars. Is it wrong to ever actually balance the budget?
Should that be a goal to balance the budget?
Secretary Geithner. I don't think I would say--it is maybe
not the ultimate way to think about an ultimate objective. I
guess I would say that you got to start--you are starting from
somewhere now. And it is hard to imagine governing a country--I
mean, just think about World War II, not to imagine the average
recession.
Mr. Lankford. That is an anomaly, obviously. Dealing with
World War II and a recession.
Secretary Geithner. These wars are pretty expensive, too.
Mr. Lankford. I am asking even at a point in the future, is
it an idea to say this should be our goal as a Federal
Government to balance our budget?
Secretary Geithner. Well, again, over the long run I would
not try to talk you out of having an objective to try to get to
balance. I wouldn't try and talk you out of that. But it is all
in how you get there and, frankly, how much flexibility you
leave the Chief Executive and the Congress to deal with the
unanticipated war or recession or a huge demographic boom.
Mr. Lankford. I understand. So--never mind. Let me ask
about a couple of things that just came up there that I am not
sure we have addressed. One of the things that has come up is
about the energy taxes that are in here and the shift on that.
Can you be more specific, because it is fairly vague on it as
far as where that target is, this $40 billion.
Secretary Geithner. Well, we are pretty specific in the
budget in a series of tax reforms--the energy sector, which
would reduce and remove a fair amount of expensive subsidies.
Mr. Lankford. So give me a specific type. There are eight
major--for instance, on the traditional fuels, there are eight
major tax pieces that are there. Which pieces would you
eliminate?
Secretary Geithner. Do you want me to read you from the
budget right now?
Mr. Lankford. No. Just give me the big ones. Like
intangible drilling costs, for instance.
Secretary Geithner. I think it is better for me to do it in
writing for you. I can't pull it out for you right now. But
maybe I could explain why we are doing it, if that helps.
Mr. Lankford. No. Let me ask why, and some of it is a
concern for me on--because the President was very clear, and I
was glad he was, during the State of the Union Address, saying
we need to be in all the above energy, we need to be in
domestic energy. He talked about how we have this increase in
production, which is a good thing for us as a State. Here is
the concern. If we now say, great, that is good, we are getting
more production, let's tax that more, do we get less of that or
do we get more of that as we tax?
Secretary Geithner. Good question and a helpful way to
think about it. We are in the middle of, and we are very
competent we are going to see a huge expansion in energy
production in this country, oil and natural gas, that is going
to come for a long period of time. We want to see a substantial
expansion on renewables, and we also want to see the country
use energy more efficiently for obvious reasons. Now, the
effective tax rate paid by the energy industry today is in the
high teens.
Mr. Lankford. Right. And because of that, we have huge
production coming on line because it is so capital-intensive.
Secretary Geithner. Well, I don't think I agree about the
economics of it. But again, it is true we are proposing to
increase the effective tax rate so we are closer to the average
everybody else pays, because we don't think there is a
compelling case for that generous a subsidy to the energy
industry, so we are proposing to dial it back. But I don't
think there is any risk that is going to get in the way of the
huge boomer in the midst of energy exploration and production
in the United States.
Mr. Lankford. I would disagree with you on that only
because it is incredibly capital-intensive and because most
productions are coming from smaller producers. It is not coming
from your larger--I mean, your larger companies, like your
Exxons and such, are different than the bulk of the production
that is done nationwide from very small companies, 12 to 40
people in a lot of these companies. And this very capital-
intensive focus, they have to have that, and their model is
built on that. If that goes away, then so does that production.
Secretary Geithner. Even with these changes, and I would be
happy to talk in more detail about this, even with these
changes, the economics of a debt-financed or a mixed-equity-
financed investment in a capital industry will be pretty
favorable still in energy, really quite favorable in energy.
And that is favorable today.
Mr. Lankford. I understand. That is just a tough gamble
when we are finally starting to get on top of it. I yield back.
Chairman Ryan. Nine minutes off.
Secretary Geithner. How are we doing?
Chairman Ryan. We are done.
Secretary Geithner. Do you want to keep going?
Chairman Ryan. But we said we would try to get you out of
here at 4:30. It is 4:39.
Let me just close, saying we just see things differently
and we will just have to agree to disagree on a lot of these
things and we will have you come back another time. Thanks for
taking the time.
Secretary Geithner. Can I just say one final word, just one
final word?
Chairman Ryan. This could go on for a while. Okay. Go
ahead.
Secretary Geithner. I think you could embrace it. Which is,
if you listen carefully to the debate, as I know you do, and
you look at how much Democrats have moved on Medicare and
Medicaid and other mandatory, to date it exceeds the amount of
movement you have shown on revenues for the high end. So if you
can come a little closer, we can get a little closer, but we
are not there yet.
Chairman Ryan. Backroom deals are not what the American
public are looking for. They are looking for budgets that show
the country what we believe in. They are looking for us to
lead, to govern, to propose ideas and then to get things done.
That is what we are trying to do.
Our friends in the Senate aren't even trying. You are
trying. You put a budget out. That is the law and you did that.
But your descriptions of your budget we just take issue with. I
think we can have a better economy through broad-based low-rate
tax reform. I think you agree with that. And you can get a
higher share of taxes from higher earners with a better tax
system that doesn't compromise growth.
Secretary Geithner. Not without a modest increase in
effective tax rate. But we will get there, I am sure we will.
Chairman Ryan. You really, really want to have that last
word. I am just not going to let you have it. This hearing is
adjourned.
[Questions submitted for the record and the response
follows:]

Questions Submitted for the Record by Hon. Todd Rokita, a
Representative in Congress From the State of Indiana

Secretary Geithner, as the European financial crisis continues to
unfold, American taxpayers rightfully continue to be concerned about
their exposure to a default by any one of the EU members. As the
largest contributor to the International Monetary Fund with quota
contributions totaling $65 billion, the United States provides an
additional line of credit to the IMF--known as the New Arrangements to
Borrow (NAB) which totals $100 billion. Our understanding is
approximately $9 billion in additional NAB funds have already been
tapped for Portugal and Ireland bailouts--countries that have debt to
GDP ratios of 93.36 and 92.5 percent (less than the US debt to GDP
ratio I might add).
1. Would you clarify what is the exact exposure to taxpayers?
Secretary Geithner, this question is important particularly since these
bailouts are going to countries that don't even meet their own
requirements for membership in the EU, the bailouts are well above the
quotas submitted by the members, and the IMF doesn't have enough
resources to continue bailing out countries at their current pace.
2. In 2010, the Board of Governors agreed to require members to
double their quota contributions. This means the United States would
owe an additional $65 billion. As you know, Congress must approve this
request. When do you plan to make it. What kind of assurances do we
have that our future participation in these bailout packages are not
just allowing countries ``to kick the can down the road'' so to speak.

Response to Mr. Rokita's Questions Submitted for the Record

As the European financial crisis continues to unfold, American
taxpayers rightfully continue to be concerned about their exposure to a
default by any one of the EU members. As the largest contributor to the
International Monetary Fund with quota contributions totaling $65
billion, the United States provides an additional line of credit to the
IMF--known as the New Arrangements to Borrow (NAB) which totals $100
billion. Our understanding is approximately $9 billion in additional
NAB funds have already been tapped for Portugal and Ireland bailouts--
countries that have debt to GDP ratios of 93.36 and 92.5 percent (less
than the US debt to GDP ratio I might add).

1. Would you clarify what is the exact exposure to taxpayers?
Secretary Geithner, this question is important particularly since these
bailouts are going to countries that don't even meet their own
requirements for membership in the EU, the bailouts are well above the
quotas submitted by the members, and the IMF doesn't have enough
resources to continue bailing out countries at their current pace.

When the IMF draws on U.S. resources, the United States'
relationship is with the IMF--not the borrowing countries. U.S.
transactions with the IMF involve an exchange of assets, and when the
IMF draws on U.S. resources, the United States receives an equivalent
increase in interest-bearing assets in our international reserves. The
IMF has a solid balance sheet, large reserves, and de facto preferred
creditor status, which is recognized by its European members.
As of April 30, 2012, the United States had contributed $23.2
billion to total IMF loans outstanding through quota resources and
$10.9 billion through the NAB.

2. In 2010, the Board of Governors agreed to require members to
double their quota contributions. This means the United States would
owe an additional $65 billion. As you know, Congress must approve this
request. When do you plan to make it. What kind of assurances do we
have that our future participation in these bailout packages are not
just allowing countries ``to kick the can down the road'' so to speak.

We have not yet decided when we will submit a request for the
necessary legislation.
When the IMF lends, it does so subject to appropriate conditions
and with safeguards to assure it is repaid. Countries first and
foremost bear the burden of adjustment. But the IMF can promote more
orderly adjustment by offering financing to support economic reforms,
thereby providing some breathing space to countries in overcoming their
problems in ways that are less disruptive.
America's economic growth and job creation benefit substantially
from continued recovery in Europe and stable international financial
markets. The IMF's engagement alongside the European Union to help
restore macroeconomic and financial stability is in the best interests
of the United States.

[Whereupon, at 4:40 p.m., the committee was adjourned.]