[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE PRESIDENT'S FISCAL YEAR 2014
REVENUE AND ECONOMIC POLICY PROPOSALS
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, APRIL 16, 2013
__________
Serial No. 113-4
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
www.gpo.gov/fdsys/browse/
committee.action?chamber=house&committee=budget
U.S. GOVERNMENT PRINTING OFFICE
80-291 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
TOM PRICE, Georgia CHRIS VAN HOLLEN, Maryland,
SCOTT GARRETT, New Jersey Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California JOHN A. YARMUTH, Kentucky
TOM COLE, Oklahoma BILL PASCRELL, Jr., New Jersey
TOM McCLINTOCK, California TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma GWEN MOORE, Wisconsin
DIANE BLACK, Tennessee KATHY CASTOR, Florida
REID J. RIBBLE, Wisconsin JIM McDERMOTT, Washington
BILL FLORES, Texas BARBARA LEE, California
TODD ROKITA, Indiana DAVID N. CICILLINE, Rhode Island
ROB WOODALL, Georgia HAKEEM S. JEFFRIES, New York
MARSHA BLACKBURN, Tennessee MARK POCAN, Wisconsin
ALAN NUNNELEE, Mississippi MICHELLE LUJAN GRISHAM, New Mexico
E. SCOTT RIGELL, Virginia JARED HUFFMAN, California
VICKY HARTZLER, Missouri TONY CARDENAS, California
JACKIE WALORSKI, Indiana EARL BLUMENAUER, Oregon
LUKE MESSER, Indiana KURT SCHRADER, Oregon
TOM RICE, South Carolina
ROGER WILLIAMS, Texas
SEAN P. DUFFY, Wisconsin
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, April 16, 2013................... 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 3
Questions submitted for the record....................... 55
Hon. Chris Van Hollen, ranking member, Committee on the
Budget..................................................... 4
Prepared statement of.................................... 5
Hon. Jacob J. Lew, Secretary, U.S. Department of the Treasury 7
Prepared statement of.................................... 8
Response to questions submitted for the record........... 58
Questions submitted for the record by:
Hon. Diane Black, a Representative in Congress from the
State of Tennessee..................................... 55
Hon. Bill Flores, a Representative in Congress from the
State of Texas......................................... 56
Hon. Tom Rice, a Representative in Congress from the
State of South Carolina................................ 56
Hon. Barbara Lee, a Representative in Congress from the
State of California.................................... 57
THE PRESIDENT'S FISCAL YEAR 2014
REVENUE AND ECONOMIC POLICY PROPOSALS
----------
TUESDAY, APRIL 16, 2013
House of Representatives,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in room
210, Cannon House Office Building, Hon. Paul Ryan, [chairman of
the Committee] presiding.
Present: Representatives Ryan, Price, Garrett, Campbell,
Calvert, McClintock, Lankford, Black, Flores, Rokita, Woodall,
Nunnelee, Hartzler, Walorski, Messer, Williams, Van Hollen,
Schwartz, Yarmuth, Pascrell, Castor, McDermott, Lee, Cicilline,
Jeffries, Pocan, Lujan Grisham, Huffman, Cardenas, Blumenauer,
Schrader.
Chairman Ryan. All right. The hearing will come to order.
First, I would like to start on a somber note, Just to say that
our hearts and our prayers go out to the victims of the
terrorist attack in Boston. And we have some colleagues here
from that neck of the woods, and we think about them at this
time. And this is a moment where those of us who have kids, hug
them a little tighter. And those of us who attend these Intel
briefings and vote on these issues see the human side of it.
So, it goes without saying but it needs to be repeated that,
you know, our hearts and minds go out to those who were the
victims of the explosion in Boston yesterday.
Secretary Lew. It is nice to call you Secretary. You have
been here a number of times as OMB director. Congratulations on
your new post. I hope that your signature has improved since
before. You and I have had some good jokes about that. It is
nice to have you here in your new capacity as treasury
secretary. I know that despite our agreements, we appreciate
you taking the time to join with us today. You have four
budgeting hearings as treasury secretary, and we appreciate you
giving us this morning of your time.
Yesterday was tax day. And tax season was a lot more
stressful than it needed to be. Our tax code is a Rubik's cube
that Americans spend six billion hours each year trying to
crack. Today the code is four million words long, enough to
fill 70,000 pages. In fact, it is so long, that roughly 90
percent of Americans pay for professional help to file their
tax returns. This costs them $160 billion each year, $160
billion spent by Americans each year just filling out their
taxes. And then after all that trouble, the process leaves
them, as our colleague Todd Young put it the other day, feeling
like either a crook or a sucker.
We also have the highest corporate tax rate in the
industrialized world, which hurts workers most of all. A high
corporate tax rate means that they will take home less pay than
they otherwise would. So I am glad that the president's budget
calls for corporate tax reform. And we agree on the problem. A
complex code does not help anybody but the well-connected. Now,
we need to work on a solution because we cannot simply stop at
the corporate rate. Under the president's budget, the big
companies would pay no more than 28 percent of their income in
taxes. But small businesses would pay up to 39.6 percent of
their income in taxes. That, in our opinion, is unfair. It
hurts jobs.
We need to reform the individual tax code as well. The
Administration wants to limit deductions at the individual
level but they do not want to use the money to lower the rates
to spur economic growth. Instead, they want to use it to pay
for more spending. In fact, the president's budget, which just
was released last week calls for $1.1 trillion tax hike to pay
for a nearly $1 trillion in new spending. In short, the
president's plan is to take more from families to spend more in
Washington. We think that is the wrong approach, and we do not
think that is going to help the economy. And we have seen this
movie before. Under this budget, we will have to run deficits
at or close to $1 trillion for five straight years. Yet
millions of Americans are out of work or are living in poverty,
the highest rates we have seen in a generation. This
Administration's response seems to be more of the same: more
spending, higher taxes, and record debt.
Well, we cannot keep spending money we just do not have. We
need a new approach. We need an approach that encourages
economic growth. The longer we delay fundamental reform, the
longer we delay a real recovery, because our national debt is
weighing down our country like an anchor. It is weighing down
our economy. It is making it harder for us to get ahead. The
Administration claims that if we approve this budget, we will
have reduced the deficit by $4.3 trillion. This is not true.
But I want to break this down, and Chart 1 will show me how.
The Administration says that we have reduced the deficit by
$2.6 trillion since Republicans took control of the House in
2010. They start their clock a little late. The president is
responsible for all the policies that were enacted before then
when he was in office for the first two years. And if you add
back the money for stimulus, for the payroll tax holidays, for
the extension of unemployment benefits, for the 24 percent
increase in domestic discretionary spending, then total deficit
reduction, when you net it all out, comes to only about $500
billion that has already been achieved, not the higher $2.6
trillion number. You see, you have to add both sides of the
ledger book. And all those savings have already been signed
into law. So, that $500 billion is really kind of irrelevant to
this new budget. So this budget claims that the deficit is
going to be reduced by $1.8 trillion. That is the second line
on the chart. But once you take out all the baseline games and
add back all the nearly $1 trillion in spending increases in
this budget, when the gimmicks are removed, when the spending
is counted, the total deficit reduction comes to a paltry $119
billion.
So we see this budget as a disappointment because it is a
missed opportunity. We need a new approach in Washington to
meet the country's most pressing challenges. And that is what
we are offering. We offered a plan to balance the budget. We
offered a plan that balances it in 10 years, which we think is
critical to growing a healthy economy. We extend opportunity
for the young. We guarantee a secure retirement for the
seniors. And we think that we need to get back to work to
repair the safety net so that it is there in a reliable,
responsible, sustainable way for the most vulnerable. But we
cannot simply dwell on our differences. We have to move
forward. We have got three plans on the table, which is
something we have not been able to say for a number of years.
So even if we cannot agree on everything, we need to agree on
something. We need to have a down payment on our debt.
So I would like to learn more about the president's
proposals today. I would like to explore where are those areas
we can finally, maybe, find some common ground with you,
Secretary Lew. And I am hoping that at the end of the day, we
can make a down payment for the country, and make this divided
government work in any way we can. And with that, I would like
to yield to Mr. Van Hollen.
[The prepared statement of Chairman Paul Ryan follows:]
Prepared Statment of Hon. Paul Ryan, Chairman,
Committee on the Budget
Welcome, everybody. To start, I want to thank Secretary Lew. Mr.
Secretary, I want you to know that despite our disagreements, we
appreciate your taking the time to join us today.
Well, yesterday was Tax Day. And tax season was a lot more
stressful than it should have been. Our tax code is a Rubik's Cube that
Americans spend 6 billion hours each year trying to crack. Today, the
code is about 4 million words long--enough to fill 70,000 pages. In
fact, it's so long that roughly 90 percent of Americans pay for
professional help to file their returns. That costs them $160 billion
each year. And after all that trouble, the process leaves them--as my
colleague Todd Young put it--feeling like either a crook or a sucker.
We also have the highest corporate tax rate in the industrialized
world--which hurts workers most of all. A high corporate tax means they
will take home less pay than they otherwise would. So I'm glad this
budget calls for corporate tax reform. We agree on the problem. A
complex code doesn't help anyone but the well-connected. Now, we need
to work on a solution--because we can't stop at the corporate rate.
Under the President's budget, the big companies would pay no more than
28 percent of their income in taxes. But small businesses would pay up
to 39.6 percent. That's unfair. That hurts jobs. We need to reform the
individual code too.
The administration wants to limit deductions at the individual
level. But they don't want to use that money to lower rates and spur
economic growth. Instead, they want to use it to pay for more spending.
Their budget calls for a $1.1 trillion tax hike to pay for nearly $1
trillion in new spending. In short, the President's plan is to take
more from families to spend more in Washington.
We've seen this movie before. Under this budget, we will have run
deficits at or close to $1 trillion for five years straight. Yet
millions of Americans are out of work or living in poverty. This
administration's response is more of the same: more spending, higher
taxes, record debt. We can't keep spending money we don't have. We need
a new approach--one that encourages economic growth. The longer we
delay fundamental reform, the longer we delay a real recovery--because
our national debt is weighing down our economy like an anchor.
The administration claims that if we approve this budget, we will
have reduced the deficit by $4.3 trillion. But that's not true. Let's
break this number down:
The administration says we've reduced the deficit by $2.6
trillion since Republicans took control of the House. They start the
clock a little late. The President is responsible for all the policies
he enacted before then. Add back the money for the stimulus, for the
payroll-tax holidays, for the extensions of unemployment benefits, for
the 24 percent increase in discretionary spending, and total deficit
reduction comes to only about $500 billion.
And all those savings have already been signed into law.
So that $500 billion is irrelevant to this new budget.
So the President then claims that this budget reduces the
deficit by $1.8 trillion. But once you take out all the baseline games
and add in the nearly $1 trillion spending increase in this budget, the
total deficit reduction comes to a paltry $119 billion.
So the President's budget is a disappointment--because it's a
missed opportunity. We need a new approach in Washington to meet our
country's most pressing challenges. That's what our side is offering.
Our plan balances the budget in ten years to foster a healthier economy
and to help create jobs. Our plan expands opportunity for the young. It
guarantees a secure retirement for seniors. And it repairs the safety
net for the most vulnerable.
We can't simply dwell on our differences. We've got to move
forward. We've got to find common ground. Even if we can't agree on
everything, we need to make a down payment on our debt--now. So I want
to learn more about the President's proposal today--and see where we
can find common ground.
With that, I yield to the ranking member.
Mr. Van Hollen. Thank you, Mr. Chairman. I want to start by
joining the Chairman by keeping in our thoughts and prayers the
people of Boston, especially the victims and their families.
And I would also to join you, Mr. Chairman, in welcoming Mr.
Lew to this Committee, the first time as secretary of the
Treasury. Congratulations to you, Mr. Lew, and thank you for
your service, and thank you for being here to talk about the
president's budget. And I believe the president's budget
accomplishes two important objectives. One, and foremost, it
focuses on job growth now. We all know that we have seen job
growth in our economy over the last 30-plus months. But we also
know that it is still not where we want it to be. Second, the
president's budget reduces the deficit in a steady, credible,
and balanced way, such that it is under 2 percent of GDP at the
end of the two-year window.
Now, I saw, Mr. Secretary, that one of your first visits
overseas was to talk to some of our European partners, and that
trip generated headlines like these: ``Treasury Secretary Jack
Lew Pushes Europeans to Focus on Growth over Austerity.'' And I
think that is good advice in Europe. It is also good advice
right here at home. And while the president's budget does focus
on growth over austerity, unfortunately, the House Republican
budget does not, because the House Republican budget would keep
in place the very immediate and deep sequester cuts which the
non-partisan independent Congressional Budget Office says will
result in 750,000 fewer jobs by the end of this year alone. And
the Congressional Budget Office projects that three-quarters of
the fiscal year 2014 deficit is due to slow employment levels,
underemployment in the economy. So we need to be focused on
that right now rather than pursuing European-style austerity in
the budget as our Republican colleagues' budget does.
You also had a visit to China. I think your first visit,
Mr. Secretary, was to China. And I mentioned in the last budget
hearing we had that I have a major biotech company in our
district, that last year, laid off more than 1,000 people
because of ``the uncertain budget environment here at home with
respect to investment in science and research.'' And this year,
because of the sequester, they have a hiring freeze in place.
The one place they point out they are hiring is in China. It
says, ``We have instituted a hiring freeze across the company
with China being the only exception.'' And they point out, ``It
is not because of lower wages paid in China. It is because the
Chinese are copying what has historically been a very
successful U.S. model of investing in science and research.''
And it would be very shortsighted if we pursue the austerity
approach to cut those investments at a time when many of our
major international competitors are following that successful
model. So I appreciate the fact that the president's budget
focuses on those investments and shows that we can continue to
make important investments at the same time that we reduce our
deficit in a steady way. And for some of our members who are
new to this Committee, the last time we had a balanced budget
in this country was when Jack Lew was the head of OMB during
the Clinton Administration.
Chairman Ryan. That was the last time he was the head of
OMB.
Mr. Van Hollen. When he was the head of what now? You are
right. When he was head of OMB during the Clinton
Administration, and, of course, when he left that post, we had
projected surpluses. That was before two wars on the credit
card. That was before we put a new prescription drug plan on
the credit card, and, of course, it was before two back-to-back
tax cuts that disproportionately benefitted the very wealthy.
So, Mr. Lew, it is good to continue to have you on the
president's economic team, and I would just point out that the
approach you have taken here to reducing the deficit is a
balanced one; meaning you continue to build on the cuts that
have been made, $2.5 trillion in deficit reduction already, but
you do it in a targeted way, and you do it in part by closing
some of those tax loopholes that the Chairman mentioned. The
difference is that the Republican budget does not close one
single tax loophole for the purpose of reducing the deficit,
whereas the president's budget does close those tax breaks for
folks at the very high end for the purpose of reducing the
deficit in a balanced way.
Let me just close, Mr. Chairman, by urging us to try and
come together as soon as possible to bridge the differences
between these budgets. The Chairman said we need to get
together and move forward; I agree. And that is why we call
upon the Speaker to immediately appoint conferees to a budget
conference. There has been a lot of discussion in this
Committee about how to president's budget was somewhat late. In
the law, in the budget law, the conference committees are
supposed to have completed action by April 15. So as right now,
the Congress is out of compliance with the Budget Act. The
fastest way to try and come into compliance as fast as possible
is to appoint conferees and follow the regular order, something
our Republican colleagues have been calling for. So let's get
on with this. Mr. Speaker, you should appoint conferees to a
budget conference right now so we can begin to bridge those
differences and move forward. Thank you, Mr. Chairman, thank
you Mr. Secretary.
[The prepared statement of Chris Van Hollen follows:]
Prepared Statment of Hon. Chris Van Hollen, Ranking Member,
Committee on the Committee
Thank you Mr. Chairman, I want to start by joining the Chairman in
keeping in our thoughts and prayers the people of Boston, especially
the victims and their families. And I'd also like to join you, Mr.
Chairman, in welcoming Mr. Lew to this Committee--the first time as
Secretary of the Treasury. Congratulations to you, Mr. Lew, and thank
you for your service, and thank you for being here to talk about the
President's budget.
And I believe the President's budget accomplishes two important
objectives. One, and foremost, it focuses on job growth now. We all
know that we've seen job growth in our economy in the last 30-plus
months, but we also know that it's still not where we want it to be.
Second, the President's budget reduces the deficit in a steady,
credible, and balanced way, such that it's under 2 percent of GDP at
the end of the two year window.
Now, I saw, Mr. Secretary, that one of your first visits overseas
was to talk to some of our European partners, and that trip generated
headlines like these: `Treasury Secretary Jack Lew Pushes Europeans to
Focus on Growth over Austerity.' And I think that's good advice in
Europe, it's also good advice right here at home.
And while the President's budget does focus on growth over
austerity, unfortunately the House Republican budget does not, because
the House Republican budget would keep in place the very immediate and
deep sequester cuts, which the non-partisan, independent Congressional
Budget Office says will result in 750,000 fewer jobs by the end of this
year alone. And the Congressional Budget Office projects that three
quarters of the fiscal year 2014 deficit is due to slow employment
levels, underemployment in the economy. So we need to be focused on
that right now rather than pursuing European-style austerity in the
budget, as our Republican colleagues' budget does.
You also had a visit to China. I think your first visit, Mr.
Secretary, was to China. And I mentioned in the last budget hearing we
had that I have a major biotech company in our district that last year
laid off more than 1,000 people because of `the uncertain budget
environment here at home with respect to investments in science and
research.' And this year, because of the sequester, they have a hiring
freeze in place.
The one place they point out they are hiring is in China. It says,
`we have instituted a hiring freeze across the company with China being
the only exception.' And they point out it's not because of lower wages
paid in China, it's because the Chinese are copying what has
historically been a very successful U.S. model of investing in science
and research. And it would be very shortsighted if we pursue the
austerity approach to cut those investments at a time when many of our
major international competitors are following that successful model.
So I appreciate the fact that the President's budget focuses on
those investments and shows that we can continue to make important
investments at the same time that we reduce our deficit in a steady
way. For some our members who are new to this committee, the last time
we had a balanced budget in this country was when Jack Lew was the head
of OMB during the Clinton administration. And, of course, when he left
that post we had projected surpluses.
That was before we put two wars on the credit card; that was before
we put a new prescription drug plan on the credit card; and, of course,
it was before two back-to-back tax cuts that disproportionately
benefited the very wealthy.
So, Mr. Lew, it's good to continue to have you on the President's
economic team. And I would just point out that the approach you have
taken here to reducing the deficit is a balanced one--meaning you
continue to build on the cuts that have been made, $2.5 trillion of
deficit reduction already, but you do it in a targeted way. And you do
it, in part, by closing some of those tax loopholes that the Chairman
mentioned. The difference is that the Republican budget does not close
one single tax loophole for the purpose of reducing the deficit,
whereas the President's budget does close those tax breaks for folks at
the very high end for the purpose of reducing the deficit in a balanced
way.
Let me just close, Mr. Chairman, by urging us to try and come
together as soon as possible to bridge the differences between these
budgets. The Chairman said we need to get together and move forward. I
agree, and that's why we call upon the Speaker to immediately appoint
conferees to a budget conference.
There's been a lot of discussion in this Committee about how the
President's budget was somewhat late. In the law, in the budget law,
the conference committees are supposed to have completed action by
April 15th--so as right now the Congress is out of compliance with the
Budget Act. The fastest way to try and come into compliance, as fast as
possible, is to appoint conferees and follow the regular order--
something our Republican colleagues have been calling for. So let's get
on with this. Mr. Speaker, you should appoint conferees to a budget
conference right now so we can begin to bridge those differences and
move forward.
Thank you, Mr. Chairman, and thank you, Mr. Secretary.
Chairman Ryan. Mr. Lew, the floor is yours.
STATEMENT OF HON. JACOB J. LEW, SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Lew. Thank you, Mr. Chairman, Ranking Member Van
Hollen. I also would like to begin by expressing sympathy for
the people of Boston. Our thoughts and prayers are with them.
And as the president said yesterday, we are sparing no effort
as the investigation goes on into this horrible act.
It is a pleasure to be here with you today to testify on
the president's budget. I would like to begin by kind of
reviewing where we are in our economy. Our economy is stronger
today than it was four years ago. But we must continue to
pursue policies that help create jobs and accelerate growth.
Since 2009, the economy has expanded for 14 consecutive
quarters. Private employers have added nearly 6.5 million jobs
over the past 37 months. The housing market has improved,
consumer spending and business investment have been solid, and
experts have expanded. But very tough challenges remain. While
we have removed much of the wreckage from the worst economic
crisis since the Great Depression, the damage left in its wake
is not fully repaired. Families across the country are still
struggling, unemployment remains high. Economic growth needs to
be faster. And while we have made progress, we must do more to
put our fiscal house in order. At the same time, political
gridlock in Washington continues to generate a separate set of
headwinds, including harsh indiscriminate spending cuts from
the sequester that will be a drag on our economy in the months
ahead if they are not replaced with sensible deficit reduction
policies like the ones we are proposing.
This budget is animated by the simple notion that we can
and must do two things at once: strengthen the recovery in the
near term while reducing the deficit and debt over the medium
and long term. This has been the president's longstanding
approach to fiscal policy, and when you compare the trajectory
of our economic recovery with those of other developed
economies in recent years, it is clear why the president
remains committed to this path. It is important to bear in mind
that our deficits are already falling. In the last few years,
the president and Congress have come together to hammer out
historic agreements that substantially cut spending and
modestly raise revenue. When you combine these changes with
savings from interest, we have locked in more than $2.5
trillion of deficit reduction over the next 10 years. And now
we are putting forth policies that will lower the budget
deficit to below 2 percent of GDP, and bring down national debt
relative to the size of the economy in 10 years.
We restore the nation's long term fiscal health by cutting
spending and closing tax loopholes, taking a fair and balanced
approach. At the same time, the budget incorporates all
elements in the Administration's offer to Speaker Boehner last
December, demonstrating the president's readiness to stay at
the table and make the difficult choices to find common ground.
Consistent with that offer, the budget includes things the
president would not normally put forward, such as means
testing, Medicare through income-related premiums, and adopting
a more accurate but less generous measure of inflation, known
as chained CPI. It includes these proposals only so we can come
together around a complete and comprehensive package to shrink
the deficit by an additional $1.8 trillion over 10 years, and
to remove the fiscal uncertainty that hampers economic growth
and job creation. This framework does not represent the
starting point for negotiations. What it represents is a fair
balance between tough entitlement savings and additional
revenues from those with the greatest incomes. The two cannot
be separated and were not separated last December when we were
close to a bipartisan agreement.
This budget provides achievable solutions to our fiscal
problems, but as crucial as these solutions are, we have to do
more than just focus on our deficit and debt. The significance
of balancing the budget is clear. As Ranking Member Van Hollen
noted, during the Clinton Administration I helped negotiate the
groundbreaking agreement with Congress to do just that. And as
budget director, I oversaw three budget surpluses in a row, and
worked with many on the left and right on a plan to pay off our
debt. But that does not mean we should only make deficit
reduction our one and only priority. In addition to ensuring
that we have sound fiscal footing, this budget lays out
initiatives to fuel our economy now and well into the future.
Every one of these initiatives is paid for in our deficit
reduction package, meaning they do not add a dime to the
deficit.
As the president explained in his state of the union
address, the surest path to long-term prosperity is to
strengthen the middle class. His budget does that by zeroing in
on three things: bringing more jobs to our shores, equipping
American workers with the skills that they need for the United
States to be more competitive, and making sure hard work
amounts to a decent living. We will strengthen manufacturing
and domestic energy production, invest in infrastructure and
worker training, and expand opportunities for children and
those hardest hit by the recession. The president has provided
a detailed blueprint for growing our economy and cutting our
deficits, and, as his budget shows, we do not have to choose
between the two, and indeed, we must not. We can adopt a
powerful jobs and growth plan even as we embrace tough reforms
to stabilize our finances.
The debate we are engaged in is very important. It is part
of a complex sorting-out process that will determine our
nation's future. But as everyone on this Committee knows, the
path before us is going to be a struggle. It will require
difficult decisions that will directly affect the daily lives
of millions of Americans, and it matters that we get this
right. I thank you and look forward to answering your
questions.
[The prepared statement of Jacob Lew follows:]
Prepared Statment of Hon. Jacob J. Lew, Secretary,
U.S. Department of the Treasury
Chairman Ryan, Ranking Member Van Hollen, and members of the
committee, thank you for the opportunity to appear before you today to
discuss the President's Fiscal Year 2014 Budget.
The President's Budget is based on a belief that an agreement to
achieve balanced deficit reduction is consistent with making--and fully
paying for--targeted investments critical to continued economic growth
and job creation. The Budget includes the President's compromise offer
to Speaker Boehner to reduce the deficit by an additional $1.8
trillion, in addition to the more than $2.5 trillion already enacted,
and fully pays for all new initiatives to ensure that they do not add
to our deficit burden.
i. introduction
The United States economy has made substantial progress toward
recovering from the worst financial crisis since the Great Depression.
Despite significant headwinds--both as a result of the crisis and from
other temporary shocks--the economy has grown at an average annual rate
of just over 2 percent over the last three and a half years. We have
seen steady improvement in the labor market, where private sector
employers have added nearly 6.5 million jobs since the trough of the
labor market in February 2010. The housing market, which had been a
significant drag on economic growth throughout the recession and into
the early stages of the recovery, is now gaining upward momentum.
While our economy is stronger today, more work must be done to help
create jobs and accelerate growth. Even though the unemployment rate,
at 7.6 percent, is at its lowest level in four years, it is still too
high. Too many Americans are still struggling to find work. Despite
recent improvements in the housing market, many families remain
underwater on their mortgages and credit-worthy borrowers continue to
have trouble getting the financing they need to buy a home or refinance
existing mortgages. Although corporate profits are at an all-time high,
America's middle class continues to struggle.
The President's Budget addresses these challenges in a way that
builds on the momentum of the economic recovery. It takes a credible
approach to bringing our deficits down to a sustainable level; at the
same time, it makes important investments to help build a foundation
for sustainable economic growth. These proposals are based on the
conviction that an agreement is within our reach, and that it is also
possible to achieve both our fiscal goals and our long-term priorities.
While deficit reduction is necessary to put our nation on a sound
fiscal course, we have to bear in mind that the recovery remains
fragile. Cutting spending too deeply or too soon would harm the
recovery in the near term, undermining our shared fiscal goals and our
ability to make necessary investments for growth over the long term.
The proposals in the Budget are targeted at growth and
opportunity--cutting where we can and investing where we will see the
strongest return, both now and into the future. Specifically, the
Budget calls for increased investment in innovation and infrastructure
to make the United States a more attractive place for job creation. It
introduces initiatives to bolster education and worker training so
Americans have the necessary skills to compete in a global economy. And
it puts forward policies that are designed to give all Americans the
opportunity to share in the benefits of economic growth. These measures
will help grow and strengthen the middle class, which has been the key
engine of prosperity in the United States. Additionally, they are fully
paid for, so they will not add to the deficit.
Ultimately, the central challenges addressed in the President's
Budget--strengthening growth now, investing in our future, and putting
our nation on a sound fiscal footing--complement and depend on each
other. Investing in our economy today will help us grow in the future
and that, in turn, makes our fiscal challenges considerably more
manageable. Committing to a credible path for deficit reduction today
allows for investments that enhance our long-term growth.
ii. balanced deficit reduction
When the President came into office four years ago, he inherited a
large fiscal deficit--projected to be more than 9 percent measured as a
share of the economy before any of his policies were enacted. As the
economy has been healing, both the expiration of cyclical spending and
a pickup in economic growth have contributed to a more sustainable path
for the country's finances.
Over the past two and a half years, we have made considerable
progress in reducing the size of the deficit, which fell to about 7
percent of GDP in FY 2012--the fastest pace of deficit reduction over a
similar time frame since just after WWII. Moreover, following current
policy, the deficit will continue to decline over the next 10 years,
owing to a mix of spending cuts and tax reforms including $1.4 trillion
in spending cuts to discretionary programs (as a result of both the
Budget Control Act of 2011 and other appropriations bills enacted since
2011), as well as over $600 billion in revenue from the American
Taxpayer Relief Act of 2012. Taking into account interest savings, this
amounts to more than $2.5 trillion in deficit reduction over the 10-
year window, not including savings from winding down the wars in Iraq
and Afghanistan. But we need to do more to ensure that our long-term
fiscal outlook continues to improve.
We must continue to achieve deficit reduction in a balanced way. It
must include entitlement reform and spending reductions. We must also
pursue tax reform that closes loopholes and addresses deductions and
exclusions that allow the wealthy to pay less in taxes as a percentage
of income than many middle-class families. Individual tax reform must
be coupled with reform of the U.S. business tax system to enhance
American competitiveness, lower rates, broaden the tax base, and level
the playing field for companies without losing any revenue. All told,
these initiatives constitute a balanced approach to deficit reduction.
Such a balanced approach does not force unnecessary cuts to education,
energy, and medical research and does not endanger Medicare and Social
Security.
The President's Budget takes this balanced approach with additional
spending cuts and increased revenues through tax reform. These policies
will reduce the deficit to roughly 1.7 percent of GDP by the end of the
budget window and put the nation's debt on a declining path, reaching
73.0 percent of GDP by 2023.
The additional $1.8 trillion in deficit reduction proposed in this
Budget comes from closing tax loopholes and reducing tax benefits for
those who need them least; continued health care reform; savings from
mandatory programs; additional cuts to discretionary spending; and
savings from using a more accurate measure of inflation, plus the
reduced interest payments resulting from lower borrowing.
The most important pieces of the compromise offer made by the
President include:
Tax Reform: $580 billion in additional revenue from tax
reform that closes tax loopholes and reduces tax benefits for those who
need them least and that will support the creation and retention of
high-quality jobs.
Health Savings: $400 billion in health savings that build
on the health reform law and strengthen Medicare.
Other Mandatory Savings: $200 billion in savings from
other mandatory programs, such as reductions to farm subsidies and
reforms to federal retirement contributions.
Discretionary Savings: $200 billion in additional
discretionary savings, with equal amounts from defense and non-defense
programs--that is $200 billion below the Budget Control Act spending
caps that were lowered even further by the American Taxpayer Relief Act
of 2012.
Consumer Price Index: $230 billion in savings from
switching to the use of chained-CPI.
Interest Payments: Almost $200 billion in savings from
reduced interest payments on the debt and other adjustments.
I will address each of the key elements of the President's
compromise offer, all of which are in the Budget.
components of balanced deficit reduction
Tax Reform
As a first step toward balanced deficit reduction and tax reform,
the President proposes enacting two individual tax reform measures that
would raise $580 billion by broadening the tax base for high-income
taxpayers, and ensuring that the very wealthy pay federal tax rates at
least equal to those paid by middle-class Americans. The first measure
sets a 28 percent maximum rate at which upper-income taxpayers could
benefit from itemized deductions and certain other tax preferences to
reduce their tax liability. The second puts in place the Buffet rule,
which requires those individuals with incomes over $1 million to pay no
less than 30 percent of income after charitable contributions in taxes.
At the same time, the Budget includes business tax reform that will
provide greater certainty and improve global competitiveness while
preserving the revenue collected today.
Health Care Reform Savings
The President's Budget builds on the health care cost savings
driven by the Affordable Care Act by reducing excess payments for
health care services and supporting reforms that boost the quality of
care. The Budget also includes structural changes that will help
encourage Medicare beneficiaries to seek high-value health care
services, while preserving the basic structure and promise of the
program. These actions would save an additional $400 billion.
Other Spending Cuts and Savings
The Budget calls for a total of $400 billion in additional
discretionary and non-health mandatory spending cuts over the next 10
years. Savings in mandatory programs outside of health care include
reforms to agricultural subsidies and federal retirement benefits as
well as from a variety of smaller savings initiatives across the
agencies.
The budget includes an additional $200 billion in spending cuts,
split evenly between defense and nondefense spending. On its current
trajectory, discretionary spending is projected to decline to its
lowest level as a share of the economy since the end of the 1950s; the
discretionary cuts included in the President's offer to Speaker Boehner
would push discretionary spending even lower. The President's cuts are
coupled with targeted investments that are imperative to growth and
opportunity, such as early childhood education.
In addition, the Budget includes additional savings of $230 billion
by changing the standard measure of inflation used to adjust spending
programs and the tax code from the standard CPI to a chained CPI,
coupled with protections for the most vulnerable. The chained CPI is a
more accurate measure of inflation in that it does a better job of
reflecting the substitution of goods in response to relative price
changes.
iii. strengthening the middle class by investing in the u.s. economy
In addition to the proposals to stabilize our finances, the
President's Budget offers a number of policies aimed at making targeted
investments to promote long term growth. These policies make domestic
job creation more attractive by increasing investment in innovation,
infrastructure, and manufacturing. The Budget also offers policies to
increase access to and the affordability of education and job training
programs. At the same time, it includes proposals so that the gains
from these policies can be shared by all Americans.
Promote Greater Competitiveness in Global Markets
A number of proposed initiatives are designed to enhance our
ability to sell American-made goods and services to the rest of the
world. The Budget increases funding for agencies involved in trade
promotion and trade financing so that these agencies can help the
United States achieve the goal set in 2010 by the National Export
Initiative (NEI) to double U.S. exports over a five-year period. In
addition to the NEI, the Budget prioritizes completing ongoing trade
negotiations--such as the Trans-Pacific Partnership--and opening new
negotiations--like the Transatlantic Trade and Investment Partnership
with the European Union--to help strengthen trade ties with the Asia-
Pacific region and the European Union, respectively. In addition, more
resources for trade enforcement will help make sure that our workers
and businesses exporting their products and services overseas are
operating on a level playing field.
Currently, the U.S. corporate tax system provides incentives for
companies to relocate operations abroad by allowing them to reduce
their tax liability. The President's Budget changes that by reforming
the corporate tax system to encourage domestic job creation without
losing any revenue. Part of that effort will include removing
deductions for moving production overseas and providing a new tax
credit for firms that bring foreign operations back to U.S. soil.
Investing in Innovation, Infrastructure, and Manufacturing
As global markets become more open and as economic activity abroad
continues to strengthen, it is crucial that U.S. firms and workers
remain on the technological frontier. That is why we need to invest in
Research and Development (R&D), infrastructure, and our manufacturing
base. These investments will help foster job creation, raise living
standards, and keep our nation competitive in a global economy.
The President's Budget increases funding for non-defense R&D
investment to $70 billion, a roughly 9 percent increase over its 2012
level of $64 billion. These investments are targeted to areas most
likely to unleash transformational technologies that will create the
businesses and jobs of the future. History has shown that federal
support for R&D has helped spur new technologies, including the
internet, global positioning systems, and clean energy.
Similarly, federal investments in public infrastructure projects,
such as the national highway system, have led to significant gains in
our nation's productive capacity. In recent years, however, work to
maintain and improve public infrastructure has failed to keep pace with
the rate of deterioration and obsolescence. As CEOs tell me every time
we meet, our aging infrastructure has become a detriment to our future
growth prospects, and modernizing infrastructure must be a national
priority.
The President meets this obligation by directing $50 billion toward
infrastructure upgrades and repairs. And to get started on the most
urgent projects as quickly as possible, the Budget would create a ``Fix
it First'' program that puts people on the job right away to clear out
the backlog of deferred work on highways, roads, bridges, transit
systems, and airports. But taxpayers need not shoulder the entire cost
of these projects: the President's Budget calls for a Partnership to
Rebuild America. This program helps leverage private investment in
infrastructure by starting a National Infrastructure Bank as well as by
enacting America Fast Forward bonds, which help facilitate and reduce
the cost of financing new projects. These initiatives will help lay the
foundation for long-term economic growth and also help generate new
high-quality middle-class jobs today.
Growing our manufacturing sector also generates new, high-quality
middle-class jobs. The Budget makes a one-time down payment of $1
billion to establish manufacturing innovation hubs in various regions
around the country. The Budget also includes funding to launch
Manufacturing Technology Acceleration Centers oriented toward improving
supply-chain efficiency. Finally, the Budget prioritizes investments
and initiatives to make the United States a world leader in clean
energy.
Investing in the American Workforce
If we want to make America more competitive in the global economy,
we must equip America's workers with the high-tech skills that the 21st
century requires.
The Budget takes a number of steps to help Americans acquire these
skills. It proposes to work together with states to make high-quality
preschool available to every four-year old in America. It rewards
school districts that develop new partnerships with colleges and
employers, and focus on science, technology, engineering, and
mathematics (STEM) so that high school students are better prepared for
the jobs of tomorrow. And it expands access to higher education by
making college more affordable. The Budget makes the American
Opportunity Tax Credit--which helps students pay for college expenses--
permanent. At the same time, it reaffirms the Administration's strong
commitment to the Pell Grant program, which provides grant assistance
to low- and moderate-income students and provides a mechanism to keep
interest rates for student loans from rising--at a time when market
rates are low.
In addition to investing in education, the Budget strongly supports
training and employment programs to help workers gain skills and find
new jobs or careers. One specific focus is on modernizing,
streamlining, and strengthening government delivery of job training
services. The Budget proposes a Universal Displaced Worker program that
would reach over 1 million workers per year with a set of core
services, combining the best elements of two more narrowly targeted
programs. In addition, starting in fiscal year 2015, the Budget
provides $8 billion for the Community College to Career Fund; this Fund
supports state and community college partnerships with businesses,
thereby enhancing the skills of American workers.
Strengthening the Middle Class
Investing in U.S. firms and workers is critical to maintaining
competitiveness, but it is also important to make sure that all
Americans have an opportunity to benefit from the resulting economic
gains.
To this end, the President's Budget includes tax proposals that are
geared toward rebalancing the tax code in a way that eases the burden
on the middle class, including closing specific loopholes that benefit
only a small group of the wealthiest Americans. The Budget also
contains a number of proposals designed to build ladders of opportunity
so that hard work is rewarded and inequality and poverty are reduced.
The Budget creates a Pathways Back to Work fund to make it easier
for workers, particularly the long-term unemployed, to remain connected
to the workforce and gain new skills for sustained employment. The
Budget would also increase the minimum wage to $9.00 an hour by the end
of 2015 and index it to inflation thereafter.
Taken as whole, the policies put forth in the President's Budget
enhance America's competitiveness and, in doing so, create a healthy
environment for fostering a strong, growing middle class--a key engine
for sustainable economic growth in which hard work is rewarded and
every American has an opportunity to advance and succeed. At the same
time, we maintain our commitment to our most vulnerable citizens and to
our seniors.
Moreover, these new policy initiatives are fully funded, so that
the Budget is able to make essential investments in the nation's future
while also reducing the deficit.
iv. conclusion
In summary, the U.S. economy has made significant progress toward
recovering from the worst financial crisis since the Great Depression.
However, it is important to recognize that we should be doing more to
secure the recovery, create jobs, and improve the future prospects of
the nation.
We have made significant gains in the labor market, but
unemployment remains unacceptably high at 7.6 percent and too many
Americans are still looking for work. Congress has already passed some
parts of the American Jobs Act. We can further support the recovery in
the private sector by passing the rest. Similarly, activity in the
housing market appears to be gaining momentum, but we need to do more
to support credit-constrained families who want to buy a house or
refinance their existing mortgage.
The President's FY 2014 Budget, by including the components of the
President's December compromise offer to Speaker Boehner, reiterates a
commitment to coming together around a balanced plan to reach more than
$4 trillion in total deficit reduction over the 10-year budget window.
At the same time, it prioritizes growth-oriented policies that are
designed to enhance U.S. competitiveness and strengthen the middle
class, ensuring that the resulting economic gains can be shared broadly
among all Americans.
In conclusion, it is important to note that this framework does not
represent the starting point for negotiations. It represents a fair
balance between tough entitlement savings and additional revenues from
those with the greatest incomes. The two cannot be separated, and were
not separated last December when we were close to a bipartisan
agreement.
This is my first opportunity to appear before you as Treasury
Secretary, but this is far from the first budget that I have worked on.
There is no doubt that this is a serious proposal at a serious time.
There is a path to a bipartisan agreement that moves the country
forward. This budget deals with the world as it is now and as it will
be in the future. It makes difficult choices. It includes a powerful
jobs and growth plan. And it is the right course of action for our
nation and our economy, and a path for bipartisan agreement to move the
country forward.
Thank you. I look forward to taking your questions.
Chairman Ryan. Thank you. If you could bring up the first
chart, please.
I wanted to explore tax reform with you a bit. Your budget
calls for lowering the corporate tax rate to 28 percent.
Question one: Do you propose to do that on a static revenue-
neutral basis?
Secretary Lew. Mr. Chairman, do you mean do we plan to use
traditional scoring?
Chairman Ryan. Yeah.
Secretary Lew. Yes, we do plan to use traditional scoring.
Chairman Ryan. But the 28 percent lowering, you plan on
offsetting that and paying for it within base broadening, is
that correct?
Secretary Lew. Well, Mr. Chairman, to be clear, we propose
that business tax reform be done in the context of overall tax
reform, and that the overall tax reform needs to fill a gap
that we have to get our fiscal house in order of $580 billion
of additional revenue. I think that the business piece, we have
said, should be done in a way where we broaden the base and
lower the rates so that American can be more competitive. But
the overall tax package is going to have to raise revenue.
Chairman Ryan. Okay, but at least we agree in the first
thing that you said, which is, lower rates, broaden the base in
order to lower the rates. And you do not specify how to pay for
lowering the rates, just that we should do it through base
broadening to be determined through tax reform, correct? I am
not trying to lay a trap.
Secretary Lew. We have had a number of indicative
provisions in there, but I think there will have to others, and
the business of broadening the base is a difficult one. It is
going to require a lot of bipartisan consensus because each of
the provisions that we would consider base broadening, has, you
know, zealous advocates saying that they need it desperately.
Chairman Ryan. The point I am trying to make is some have
been critical of our proposals, which were to lower the rates
and the broaden base, and do it through tax reform. It sounds
like you are basically saying do the same thing, but on the
corporate rate. Well, the point is, it is tough to do. It is a
lot of zealous advocates to certain tax expenditures, and so we
need to do this together through broad based tax reform through
base broadening. So all I am saying is there is an area of
consensus on the proper approach.
Secretary Lew. I think there is some agreement, but I do
not want to exaggerate. To be clear, the president's budget and
the president's policy is he needs to have raisers, and the
raisers would come from high income taxpayers.
Chairman Ryan. Well, I want to get to that in a second.
Secretary Lew. Yeah, who are the people who benefit from
when corporations do well.
Chairman Ryan. I want to get to that in a second. Here is
what is unique about us, us being the U.S. Among, I know this
chart is kind of tough to see, among the OECD countries, the
industrialized world, we have a unique disproportion of
businesses that file as individuals.
Most other countries do not do this. Most other countries
tax their businesses all sort of the same as businesses. And so
when you see the international corporate tax rate at 25
percent, that means most businesses in other nations are taxed
at the average rate of 25 percent or lesser or higher based
upon the average. The problem is, in America, most of our
businesses file as what we call pass-throughs, subchapter S
corporations, partnerships, LLCs. And what you see here is, the
red bar, these are all businesses that make in excess of a
million dollars in profits, so not even the small of the small
businesses. Most of our companies in American are not
corporations. They are pass-throughs. And eight out of 10 of
our businesses according to your data, are pass-throughs; nine
out of 10 in states like Wisconsin.
And so here is the question. If we now have a 39.6
statutory tax rate on these pass-through businesses, but we go
down to a 28 percent tax rate on corporations, do you not think
that is kind of unfair? Do you not that that puts those
successful small businesses at a competitive disadvantage where
they are paying a tax rate that is 10 percentage points higher
than their corporate competitor that is a C corp?
Secretary Lew. Mr. Chairman, I think this Administration
has had a very strong record of putting forward tax proposals
to benefit small businesses. We have had 18 separate proposals.
So we very much agree that there need to be incentives for
small businesses.
Chairman Ryan. But what I am asking you is the rate, their
actual rate that they pay. First of all, we were at 35 for
years. Now the top statutory rate is 39.6 for these businesses,
35 for corporations. You want corporations to go to 28, but
keep the small businesses at 39.6. Do you not think that
difference is discriminatory? Do you not think that puts them
at a competitive disadvantage?
Secretary Lew. One of the reasons that it is important,
just as an intellectual matter, do individual and business tax
reform at the same time, as those businesses make their
decision how to organize, they need to know what the individual
tax code is and what the business tax code is. There will be
opportunities for small businesses to perhaps file as corporate
taxpayers and get the benefit of lower rates when we have a
statutory rate that is lower because we have eliminated a lot
of the special provisions that keep the statutory rate high. I
think as we all know, the average rate is much lower than the
statutory rate.
Chairman Ryan. So you are suggesting that we keep the
statutory rate high, and if a business does not like it, they
should become a corporation? Is that kind of what you are
saying, the relief that the Administration envisions for them?
Secretary Lew. I think that we share the concern for small
businesses. We have proposed, on 18 separate occasions, tax
benefits to help small businesses. We would look forward to
working on a bipartisan basis to make sure that there are
strong incentives for small business. I think that the rate
that you are describing is not, for the most part, raising
revenue because it is hitting small businesses. It is hitting a
lot of people with considerable income that comes from
corporate income, that comes from financial services income,
that comes from law firm income. So I think it is important
that we not mix things up. If we want to encourage small
business, we can work together. I think we agree we want to
encourage small businesses.
Chairman Ryan. Yes, see, there is the issue, which is we
can add more loopholes to the code to try and alleviate
pressure from taxes, but instead of having the loopholes, why
do we not plug the loopholes and just lower the rates. That
way, these businesses get to decide for themselves what to do
with their capital, how to invest their capital, how to create
jobs. There is where we are going to have an issue when it
comes to tax reform. I do not want to dwell on this because I
am putting myself on a clock as well so we can get to everybody
else here. Has the president made any proposals since he has
been president that raise taxes on families earning less than
$200,000, or $250,000 for joint filers?
Secretary Lew. The president's pledge that his tax policies
should not hit people below 250 have been borne out by the
policies that we have enacted and by the policies we propose. I
know there is some disagreement in categorizing certain things,
but I would be happy to have that conversation with you.
Chairman Ryan. Well, I am not trying to lay another trap, I
am just trying to say, first of all, the Supreme Court says
that the health insurance mandate is a tax that obviously hits
everybody. The 2.3 percent tax on medical devices, that hits
everybody, including people making less than $200,000. The
cigarette tax, smokers do not just make about $250,000. But the
new 28 percent tax rate limitation on deductions, that kicks in
at families making $223,000. The point I am trying to make is,
you are already kind of reneging on this promise, and the
biggest tax increase proposal you have in your budget does that
as well. It taxes families below your definition of middle-
income thresholds. And the point I am trying to make here is,
you cannot get all of this revenue you want to fuel all of the
spending without taxing middle class people. There just are not
enough high income earners there, the kind of money that you
are looking for from taxes, to pay for all of this spending.
And I think your budget acknowledges this by the fact that you
are actually proposing to tax people below the threshold that
you define as being middle income.
Secretary Lew. Mr. Chairman, I would be happy to go and
give you a quick answer on those issues. In terms of health
care, it was designed as a responsibility fee to make sure that
everyone had coverage, and that when people go to the hospital,
they are carrying their own fair share of the burden. We
designed it that way, Congress designed it that way. The fact
that the Supreme Court chose to see it as something that fell
under the taxing powers does not make it a tax in terms of the
way it was enacted, the way it was conceived, or what it does.
Chairman Ryan. Irrespective of the fact that your lawyers
argued it was a tax in order to maintain its constitutionality.
Secretary Lew. You know, legal arguments can define
categories that have different boundaries for different
purposes. I think that the reality is that if you do not have
health insurance and you go to the hospital, somebody else is
paying the bill. And it is a way of making sure people pay
their own way. On the cigarette tax, we dearly hope that people
decide not to buy cigarettes, not to smoke, that fewer young
people smoke. We will get more benefits to this country from
lower health care costs and better health, and we will be net-
net better off. So it is something that people make the choice
on whether or not to smoke. It is designed to discourage
smoking.
Chairman Ryan. That is fine. Look, the fact is it hits
people who are middle income. The point I am trying to make is,
if you want to get all this kind of tax revenue you are talking
about, it does not just come from the movie star or the hedge
fund manager. It does, from your own budget's acknowledgement,
come from middle income people, lower income people. I have got
a minute left. Secretary Lew, when do you project the X date to
hit? This is on the debt limit. As you know, May 19 is the
statutory date where the clock is so-called reset. You have
extraordinary measures. What is your latest projection on when
you think those extraordinary measures play out?
Secretary Lew. Mr. Chairman, it is very challenging this
year to make a precise prediction, and we do not have, at this
moment, a precise prediction. It was a late filing season in
the tax code this year because the law was enacted in January.
So we do not have even a good sense of what the cash flow on
revenues is.
Chairman Ryan. What month do you think it is going to hit?
Secretary Lew. I hate to answer when I do not know with
clarity. You know, the sequester? We do not have a good sense
of what the outlay impact month to month will be of the
sequester, and there is some very uneven payments that we
cannot schedule the timing of. So we could be plus or minus
quite a considerable period of time if I were to give you an
estimate today. So we are going to need to keep working on
this.
Chairman Ryan. Well, just keep us updated, all right?
Secretary Lew. I think the important thing that we need to
recognize is that May 19 was set as a statutory limit. It was a
date that was set, not a number that was set. And the right
thing to do is to extend the debt limit to remove any
uncertainty so we are not in this place where people are
wondering how many days or weeks do we have. May 19 was set as
a date, and we certainly hope Congress will act accordingly.
Chairman Ryan. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. Again, Mr.
Secretary, thank you for being with us. And I had not planned
to raise it, but the Chairman once again raised the ObamaCare
issues, including the fees, which he referred to as taxes,
whatever you want to call them. I think it is important to
point out that the Republican budget assumes that stream of
revenues. In fact, they claim to balance their budget over 10
years, but as the chart up here will show, at the 10-year mark,
their budget is about $7 billion in surplus, but they count on
two sources of savings from ObamaCare.
One, the Medicare savings, which we achieve by ending
overpayments to some of the insurance companies and modernizing
the incentive structure, but also the revenue stream included
in ObamaCare. Without those elements, or some substitute which
they have not told us about, their budget would not be in
balance. And I think that is an important point to make.
Chairman Ryan. Gentleman care to yield on that?
Mr. Van Hollen. I am happy to yield with extra time.
Chairman Ryan. See his explanation on corporate tax reform.
Mr. Van Hollen. So let's now go to the issue of taxes
because the Chairman suggested the president's plan could have
an impact on middle income taxpayers. As you pointed out, the
president has been very clear on drawing the distinction
between asking higher income individuals to pay their fair
share of the burden and not put additional burdens on middle
income taxpayers. I know you have had a chance to look at the
math in the Republican budget where they would drop the top
individual rate from 39 percent to 25 percent, claim to do it
in a manner that is deficit-neutral, and the analyses that I
have seen, including those from the Administration, show that
the only way to accomplish those two objectives is if you, in
fact, increase the tax burden on middle income families by
somewhere, on average, of $2,000 to $3,000. Could you comment
on that?
Secretary Lew. Congressman, first of all, I want to go back
and agree with you on the question of how to think about the
health care bill. The fact that people are paying for health
insurance and getting health insurance is very different than
leaving the payments there but not giving them the health
insurance. And it is just they cannot be compared. On the
question of the budget that the majority here has put forward,
it has an enormous reduction in tax rates. It does not specify
how to pay for it, and there are not enough tax deductions at
the top to pay for it. So if you are going to lower the top
rate as much as that budget would do, it would put billions of
dollars, trillions of dollars of burden on middle income
taxpayers. How it was designed would have to be something that
was worked out, but there is just not enough room at the top in
order to pay for it. So if you are going to lower the rates at
the top, even if you were to eliminate the benefits, you could
not manage to pay for that rate reduction without raising taxes
on people below. Whether it is $1,000 or $2,000, you would have
to look at a specific design to know. I cannot comment at that
level of specificity. But it would be a significant increase, I
think, on middle income taxpayers.
Mr. Van Hollen. No, I appreciate that, and just to amplify
on the earlier point you made where the Republican budget
actually gets rid of the health care benefits but keeps the
savings, including the revenue stream in the budget, is sort of
giving people the toughest end of the bargain on both ends,
right? And it would also create havoc in our health care system
if you were to take away the new people who will now be covered
by insurance going into the exchanges in that process.
Could you just elaborate a little bit more on this
distinction that you made? There is a lot of talk about how
businesses that file as pass-through entities are small
businesses. There is a lot of misconception about that. When
you dig a little deeper, you find out that those so-called
small businesses include businesses on the Fortune 100 list,
they include a whole lot of Washington lobbyists who are making
hundreds and hundreds of thousands of dollars, Washington
attorneys, other folks. So as we talk about tax reform and this
distinction between pass-through entities and corporate tax
entities, I think it is important to remember that the
Administration's proposals have always protected true small
businesses, mom and pops, but do believe that some of those
very high income filers should pay more. Could you elaborate on
that?
Secretary Lew. Congressman, if you look at where the
revenue at the top end of the spectrum comes from, it is mostly
coming from very wealthy individuals and larger businesses. I
think that when we had a bipartisan agreement at the beginning
of this year to resolve the issue of the top rates, it was not
raising taxes on small businesses, you know, in any kind of a
broad way. I do not disagree with the notion that we need to
encourage small business. That is why we have had a lot of
specific incentives for small business. But we have to be very
targeted in how we do. If we are going to try to help small
businesses, we ought to make sure the benefits go to small
business, not to the wealthiest individuals who really can
afford to pay more.
Mr. Van Hollen. You are right, and there is a long list of
corporations that I am sure most Americans would not consider
small businesses, who filed as pass-through taxpayers. Let me
just say word about the compromises. You pointed out the
president included in his budget proposals that have been made
by Speaker Boehner and Republican Senate Leader Mitch
McConnell, including chained CPI, which creates concerns among
many of us, many in the president's party. And yet the House
Republican budget does not include the provisions that they
themselves asked for, nor do they include any revenue from
closing the tax breaks that we hear a lot of talk about on the
Republican side. We know that Speaker Boehner during, those
discussions with the president last winter, talked about a
trillion dollars in revenue that could be generated from
closing tax loopholes, and he specifically said by closing tax
loopholes and breaks that disproportionately benefit very
wealthy people. Early on in the process, he made a big
announcement about how he could find $800 billion by closing
tax breaks that disproportionately benefit very wealthy people.
So you would have thought the in the spirit of compromise,
that Speaker Boehner and the House Republicans would have
included those things that the Speaker put on the table, and I
hope that since the president has gone way out there and moved
to meet the Republicans at least halfway, that in the coming
weeks, we will see our Republican colleagues put back on the
table the things the Speaker himself had called for.
And we all know that one of the issues we are going to be
confronting in the next weeks and months, as you and the
Chairman pointed out, is the debt ceiling. And I hope we have
all learned from our experience in the summer of 2011 that it
is irresponsible and reckless for the United States to suggest
that it will not meet its financial obligations, whether they
are to bondholders, whether they are to Social Security
recipients, whether they are due to other people who have
contracted with the United States government. Now, in the House
in the next couple weeks, we are expected to take up a bill
that says, ``You know what? We can prioritize our debts. You
know, there are some debts that we will say come first, but
other debts and obligations that the United States government,
including this Congress, have taken on. You know what? They do
not have as high a priority.'' Could you, Mr. Secretary, as
secretary of the Treasury now, comment on what impact it would
have on our economy, and what signal it would send to the
international economy, if the United States were to default on
any of its obligations.
Secretary Lew. Congressman, I have to say that the notion
that you can prioritize which of the obligations that Congress
has authorized should be paid is one that just does not work.
It does not prevent default, it just shifts what obligation you
are defaulting on. And we have never in the history of this
country defaulted on our obligations, and we cannot even let
that be considered as an option. I do not think there is any
alternative but for Congress to pass an extension of the debt
limit. It would be a mistake to repeat the kind of
brinksmanship that we saw in 2011; it hurt confidence in our
economy. And there is no alternative. Congress cannot reduce
the spending that it has already obligated. Those are
obligations, and the United States pays its bills.
Mr. Van Hollen. I am not sure lots of people recognize that
the last point that you made very quickly, which is these are
obligations which the United States Congress has already voted
to undertake, right?
Secretary Lew. Correct.
Mr. Van Hollen. The Congress has voted to take on these
obligations. The United States has made commitments based on
those commitments. Could you just amplify that point?
Secretary Lew. Congressman, there is no spending that has
taken place that has been authorized by Congress. It has either
been appropriated or it is provided for through permanent
legislation. And when the United States undertakes an
obligation, whether it is an obligation to pay rent, to pay for
materials, to pay for labor, or to pay bondholders, they are
all obligations that were authorized by Congress. Failing to
pay an obligation that has been authorized would be
unprecedented. It would be a form of default. And all the
prioritization does would sequence which bills would be paid,
but it would not leave you in a position to pay all your bills.
Chairman Ryan. Thank you. Mr. Price.
Mr. Price. Thank you, Mr. Chairman. I want to welcome you,
as well, Mr. Secretary. I think it is important as we work
through this budget season to talk about the goals of budgets.
And the goal of our budget on the Republican side was to
create, is to create, the greatest amount of opportunity for
the greatest amount of success for the greatest number of
people to return and to expand the American dream. We believe
that our budget would do that. Sadly, we do not believe that
the president's budget gets us moving in that direction as the
president's budget, your budget that you submitted, increases
debt, increases dependency, increases spending, increases
taxes, in fact, grows the government instead of growing the
economy, with a budget that never, ever, ever gets to balance,
unlike your experience in one of your periods at OMB.
That being said, though, I am intrigued by a couple things
that you said. One, I think I heard you say that the
Administration is interested in moving forward with corporate
and individual tax reform simultaneously. Is that correct?
Secretary Lew. Correct, as part of an overall fiscal plan.
Mr. Price. As part of an overall fiscal plan in order to
lower the corporate rate; does the Administration contemplate
removing deductions, credits, expenditures on the individual
side to cover a decrease in corporate tax rates?
Secretary Lew. Our notion has been that we cannot lose any
revenue through corporate tax reform, and so I would think that
we can only lower the rate on the business side as much as we
are able to broaden the base on the business side. I think we
have a pretty big hole to fill in terms of a fiscal plan, $580
billion.
Mr. Price. If you go to silos.
Secretary Lew. Well, I think if you view tax reform
overall, it is going to have to raise $580 billion. If you did
the corporate business side on a revenue-neutral basis, that
means that the 580 would come from the individual's side, and
we think it should come from the top end.
Mr. Price. So there is some potential to utilize closure of
expenditures on the individual's side.
Secretary Lew. No, I did not say that. We have not
entertained the notion that there would be individual revenue
raisers to pay for business rate cuts.
Mr. Price. A couple other quick points. I know that you
have recently met with some of the European officials, France
and Germany, I believe, and you are certainly aware that the EU
countries are contemplating a raising a new tax on U.S.
retirees and other investors by taxing financial transactions
here in the United States. I know that last week in response to
a question from Congressman Neal, you said that it was the
Administration's policy that it is not acceptable policy, from
our perspective, for other countries to create a tax that has
an extraterritorial reach and would levy a tax on a transaction
in the United States. Would you support legislation that would
prohibit that kind of tax from the EU?
Secretary Lew. Congressman, I have delivered a very clear
message to our European friends that it is unacceptable, and I
think we need to work with the various institutions in Europe
to make sure that they do not impose taxes here. I think we
would have to look and see what the shape of it was before I
could answer that question. So I do not know what the impact of
the legislation would be. I think, from the question you are
asking, I think we totally agree that it is unacceptable for a
foreign government to levy a tax in the United States.
Mr. Price. We have got a bipartisan group that is moving
forward with a piece of legislation on that.
Secretary Lew. I look forward to working with you on that.
Mr. Price. I want to move to IRAs. You propose in your
budget a cap to IRAs, and the White House has said, curiously,
some individuals can accumulate substantially more than is
needed to fund reasonable levels of retirement. Is it the
Administration's position that it is the role of the federal
government to define what a reasonable level of retirement is,
not from the governmental subsidy standpoint, but from what
individuals are allowed to accumulate?
Secretary Lew. No, to be clear, our policy does not limit
what people can save for retirement, it just limits the
availability of tax benefits. And we have said that $3 million
is a limit that is where the tax benefit should no longer be
available. But we have never said that people should not save
as much as they choose to for their retirement.
Mr. Price. So you do not believe that it is the federal
government's role to define a reasonable level of retirement?
Secretary Lew. Well, our policy would have no impact on
people's decisions, you know, without regard to taxes.
Mr. Price. But it does. The tax policy affects activity,
does it not?
Secretary Lew. Well, the tax benefit does not have to be
there. If somebody sees the value of saving and the compounding
over time, and they want to save more, they can do that.
Mr. Price. But if you tax something, you get less of it,
correct?
Secretary Lew. Well, the special tax incentive for saving
for retirement, the average American has on the order of
$50,000 saved for retirement. I think our goal has to be to
have more and more people participate in retirement savings to
build that leg of the stool so that more Americans have it. And
in a world of tough choices, the tradeoff between a $3 million-
plus retirement and getting people into the system is clear.
Mr. Price. We would suggest, Mr. Secretary, that it is not
the federal government's role to define what that reasonable
level is, and that all individuals ought to be treated the same
and equally so that greater opportunity, greater success,
greater dreams being realized.
Secretary Lew. And to be clear, we do not discourage people
from saving without the benefit of the special tax provision.
Chairman Ryan. Ms. Schwartz.
Ms. Schwartz. Thank you. Just to be clear on that last
point, I would say that I agree with you that people should be
able to save all they want, but to understand that if we are
actually creating a tax benefit to do that, that those middle
class families and lower middle class families are subsidizing
those who are then saving over $3 million. So it is really not
a question of government. It is really a question of what do
taxpayers, most of whom are middle income or lower middle
income, subsidizing multi-millionaires. That is the question.
So, what I wanted to ask you about was about economic
growth, and the focus of the president's budget on deficit
reduction, on meeting our obligations but also on economic
growth, and the role we could play in getting the tax policy
right and the incentives right to stimulate and to engage with
the private sector to build private sector jobs. I do want to
ask specifically about manufacturing and advanced
manufacturing, and as I do, I want to say that I believe very
strongly, I think that Mr. Van Hollen said this, that we do
need to do the basic research, and we do need to incentivize
that by funding NIH and some of the energy work we do. But then
we also want to be able to produce those products here in the
United States.
Now, so, three points I want to make, and then I would like
you to respond to them. I very much appreciate the fact that, I
am representing Pennsylvania, there are communities that have
struggled after a loss of a major plant closing, base closing.
So I wanted you to just take a moment to talk about the
initiative that is in the budget that would encourage
communities hard-hit by plant closings or changes in the
economy, if you would define that better about what kind of
incentives would be available to bring manufacturing back,
particularly advanced manufacturing, a very skilled workforce.
I recently visited with Acting Secretary Rebecca Blank at a
training facility that is run by a union, a few new unions,
about workers, new skills that are really quite high tech, I
have to say. So I wanted you to talk about that.
Also, I wanted to bring up the fact that I actually have,
it is a bipartisan bill to incentivize manufacturing of
innovative products, those products that are made off of a
patent. Again, we are competing internationally. We have seen
the EU interest, and Britain just reducing the tax rate for
advanced manufacturing for products made off of patents. I
wondered if you would speak to the possibility of doing
something like that in the United States so that we do not do
all the research, create the product, have the innovation, get
the patent, and then go make it somewhere else. And so if you
would speak to that.
And third, just to follow-up on the conversation about the
corporate tax rate and small business tax rate, the fact is
that that is a choice that businesses are making. That is their
choice to be treated as a pass-through, to use the individual
rates, and, truthfully, they do it because it is cheaper for
them. That is what they do. They could decide, and some of them
have thousands of employees, Mr. Ryan talked about the fact
that he is concerned about those businesses that have profits
of over a million. This is not your mom and pop cleaners on the
corner, or a little store that has profits. This is not
receipts. These are profits of over a million dollars, possibly
considering themselves to be big business at this point in
corporations. So I hope we get that right. I co-chair the
working group on the Ways and Means Committee on small
businesses, and we are deeply concerned about this very issue,
about what kind of rate they receive or can make the choice
for.
So, long question, I apologize. But those three areas are a
keen concern to us about how to incentivize manufacturing, make
sure that not-such-small businesses pay the proper rate, and as
we lower corporate rates, that you can take advantage of those,
which they certainly can. So, Mr. Lew.
Secretary Lew. Congresswoman, I will quickly try to answer
all three pieces. In terms of our incentives for what we call
the new manufacturing communities tax credit, it is really
designed to be of assistance to communities that have been hit
by the kinds of dislocations that you described. We have left
open, a little bit, the design of it. It could either be
designed like the new markets tax credit or more like the
advanced energy credit.
Ms. Schwartz. Which would work very well.
Secretary Lew. And we would look forward to working with
Congress on a bipartisan basis to getting it right in terms of
designing it.
Ms. Schwartz. I would be very interested, and also which
kind of communities get hard-hit could be able to take
advantage of this.
Secretary Lew. On the question of corporate tax rate, you
know, I think for any entity that chooses to go into a system
with a top rate that is higher, they are doing it because the
net tax burden is lower. So I think your fundamental point is
correct. Our goal is, when we look at the business tax side, is
answering this question of why are companies moving overseas.
There are lower statutory rates overseas which are driving some
companies to make the decision to relocate in other countries.
That is not good. It is not good for headquarters jobs, it is
not good for long-term job growth in America. So we view it as
being part of our growth and jobs agenda to have the corporate
business tax rate be more competitive in the world.
Ms. Schwartz. Which is why we are all interested in
lowering those rates.
Chairman Ryan. Thank you. Mr. Garrett.
Mr. Garrett. Thank you. Mr. Secretary, thank you. I want to
talk about transparency from a practical and policy
perspective, first of all with regard to your answers on the
Affordable Health Care Act, since the term you are using is
responsibility fee. Okay, I understand that. Would you support,
then, if I dropped in a piece of legislation saying going
forward that that is exactly what the ObamaCare or Affordable
Health Care Act is, it is a responsibility fee. Will the
Administration support legislation designating that since that
is what you just said?
Secretary Lew. I think that we have legislation, we are
implementing legislation.
Mr. Garrett. No, no, no. Yes or no. I am going to give you
a bunch of yes or no questions.
Secretary Lew. We are happy with the ACA as it stands.
Mr. Garrett. Okay, so you will not support what you just
gave testimony to the Committee. With regard to transparency on
practicality policy, is it true, I just want to get through
this one quickly, that as you come here as secretary that you
formerly worked on in the financial sector working for a firm
that crafted a unique provision in your contract that you would
be paid an extra bonus for taking a federal position like you
have now?
Secretary Lew. That is not what my employment agreement
said.
Mr. Garrett. Anything close to that?
Secretary Lew. I receive no extra compensation. I just did
not lose my pay for the prior year.
Mr. Garrett. So the articles in the Wall Street Journal
saying that there is a $400,000 payment, that you were able to
keep that payment if you got a job.
Secretary Lew. I went through all these issues at my
confirmation hearing.
Mr. Garrett. I understand. But I am not a senator, I am a
congressman. So is it yes or no? You were not able to keep that
money because you took this Administration. I have never had
anybody come before this Committee that ever had language in
their contract. That is why I was just curious about that.
Secretary Lew. I was paid for my work in the prior year.
Mr. Garrett. Okay. Regarding transparency, then, with
regard to the GSEs, right now there are explicit guarantees for
the GSEs that has cost American taxpayers $183 billion to bail
them out. Would it not be appropriate, and honest, and
transparent if we actually put the GSEs on budget?
Secretary Lew. You know, we have moved to put all of the
expenses that the federal government expects to take on budget.
Mr. Garrett. All of GSEs, their debt should all be on
budget.
Secretary Lew. We have put on budget the things that have
an impact on budget.
Mr. Garrett. Well, obviously there is a continuing impact
of the GSEs, and we are going to continue to pay out for them
if they go the other way, so business, the private sector,
where it used to be, is not allowed to have these things off
budget anymore, so should that not be the way here on the
federal government level, too?
Secretary Lew. Well, Congressman, we are showing on the
federal budget the impact on the federal budget. What we are
also doing is we are winding down the assets that are in
conservatorship and reducing the taxpayer's exposure.
Mr. Garrett. The answer is no, you do not to be totally
transparent and put the entire GSE obligation on budget.
Secretary Lew. I am describing what we have chosen to do.
Mr. Garrett. Which is not to put it on.
Secretary Lew. Which is put the burden that shows up on the
federal government on the budget.
Mr. Garrett. Reclaiming my time. With regard to FHA, they
originally, in their projection, showed a negative cost cohorts
from 1992 to 2011, which basically means that we were able to
expend that money on our side. At the end of the day, the
actual amount came out to be $18 billion on the upside, which
means they were off by around $22 billion. In light of the fact
that there is an automatic line of credit, does this concern
you, and does it concern you that they are not treating the FHA
with a fair value basis accounting?
Secretary Lew. I think that we do treat the FHA properly. I
think that the legislation that provided for the FHA provided a
band within which they are functioning.
Mr. Garrett. Right. But, obviously, they have been wrong
with their projections from 1992 to 2011 every single year, and
so they have been wrong in part because they did not have to
use fair value accounting.
Secretary Lew. I do not believe that is the reason.
Mr. Garrett. Are you saying you have you tried to change
that?
Secretary Lew. I do not believe that is the reason the
estimates have changed.
Mr. Garrett. But they have been wrong during each one of
those years, correct?
Secretary Lew. The estimates have been corrected in both
directions over the period of time you are describing.
Mr. Garrett. Well, collectively, it is an over $40 billion
collective figure.
Secretary Lew. I am just saying, I do not think it is an
issue of fair market accounting. It has to do with the levels
of activity.
Mr. Garrett. You think that you were going to propose to
make it more transparent and accurate in their protections of
their revenue?
Secretary Lew. We have shown in this budget the impact as
it is presently estimated.
Mr. Garrett. With regard to the GSEs, your predecessors
made promises for four years with regard that they were going
to do and reform in that area; do you have any intentions in
the short term to make any recommendations?
Secretary Lew. We have continued to work on it. There is
policy being discussed. I think the important thing is that as
we are working on a longer term plan, we are winding down the
assets.
Mr. Garrett. Do you have a date you have coming for us?
Secretary Lew. I cannot give you a date right now.
Mr. Garrett. With regard over the counterswap markets, we
understand there are two plans going out with the SEC and the
CFDC; do you believe that is an appropriate arbitrate that is
going on between these two, and will you take any role to make
sure that they act jointly in their manner going forward on
this?
Secretary Lew. Well, through the FSOC, there is a
discussion that goes on at in a lot of these.
Mr. Garrett. More than discussion, will you actually action
like you have with the money market fund?
Secretary Lew. As chair of FSOC, I will use the authority
that I have. I do not take the place of the regulatory
agencies.
Mr. Garrett. You do in other areas.
Secretary Lew. It is not a broad power to tell them what to
do, but we are working closely on the important issues of
implementing Dodd-Frank.
Chairman Ryan. Thank you. Mr. Yarmuth.
Mr. Yarmuth. Thank you, Mr. Chairman, and Secretary Lew,
nice to see you here today. I want to get to the issue of tax
fairness on the individual, and I agree with my Republican
colleagues. A lot of times when I resist the notion to talk
about fairness because that is always going to be in the eyes
of the beholder, and what somebody at moderate or lower income
considers fair is going to be a lot different than what
somebody at a higher income level would think. And you use the
word of the wealthier Americans can afford a certain tax
payment. I kind of resist that word as well because just the
ability to afford it is not a rationalization for any tax rate,
lower or higher. I am interested, though, in the concept of
what has happened with income growth in the country over the
last few years because this seems to me to be the justification
to asking wealthier Americans to pay more, because it is not
just because they are wealthier, it is just that they are
making more and more of the national income. Could you give us
a little bit of data on what has happened with the upper 1
percent of income growth as opposed to everybody else?
Secretary Lew. Congressman, I think that is exactly the
point. We have seen income growth at the high end eclipsing
income growth in the middle and the bottom. You can only tax
income where it falls, so if you end up with very disparate
distribution of income, the tax system ought to reflect that.
And I do not think it is a question of saying it is because
they can afford it. Obviously, that is part of it. You do not
want anyone to be bearing a burden they cannot afford. But it
is also where the income is, and if we want to do anything to
correct the distribution of income in this country, our tax
laws have to be part of that. I think we made big progress at
the beginning of this year in raising the top rate to 39.6. I
think that was an enormous step. It was the biggest step in a
long time in terms of dealing with some of that inequity. I do
not think you can do it expressly through the tax code. We have
to look at growing the economy and creating good, high-paying
jobs, and there needs to be a really strong engine of middle
class job creation in this country. And that is what our budget
is really aimed at doing.
Mr. Yarmuth. That is a perfect segue into my next question,
because a lot of people are concerned about what a federal
budget, whomever it comes from, does to promote job growth, and
you have incorporated many of the provisions of the American
Jobs Act in the budget, and I am very happy about that. The
Republican budget seems to rely solely on the dynamic of
cutting taxes as a way to create more jobs. There is nothing
else in there that I can find that has any kind of job creation
effect. So judging from the fact when we cut taxes in 2001 and
2003, those tax cuts did not result in robust job growth, as
far as I can remember. And so is there any reason to believe
that the economy has changed in such a way over the last 10
years that the dynamic would change and significant tax cuts at
this point would result in job growth?
Secretary Lew. Congressman, I think we have seen there are
some tax policies that actually stimulate economic growth. The
payroll tax cut was a very effective way for a short period of
time because it put money in the pockets of people who spend
most of their paycheck. Tax cuts at the high end do not seem to
stimulate the economy very much because a lot of the benefit of
the tax cut is going into savings. And if you are trying to
stimulate demand, it is getting money into the hands of people
who are spending their paycheck. So I think it depends on the
nature of what the tax policy is.
I think if you look at this budget one of the important
things it does is it backs out the sequester. The sequester was
not designed to be good policy, it was designed to be bad
policy, and that turns out to be something you can accomplish.
If you set out to design bad policy, you can deliver bad
policy. The reason it was meant to be bad policy was to create
an incentive for Congress to act and reach a bipartisan
agreement on good policy. The sequester will be a drag on the
economy. It will cost us a half a percent of GDP if it stays in
place. Now, at a time when we are struggling to get in to the
mid 2s in terms of GDP growth, if we could have another half a
percent of GDP, that is hundreds of thousands of jobs. Now, I
think that is an important enough reason to come together in
the sensible center. If you look at the specifics, our budget
promotes not just pieces of the Jobs Act, but it has short-term
spending increases of infrastructure to jumpstart building,
what every CEO I meet with tells me we need to compete in the
future, which is the roads, the bridges, the seaports, and the
airports to compete in the 21st century.
And I do not think education can be left out. Education is
both the opportunity for the future, and it is real short-term
employment. This is the first recovery that I have ever seen
where state and local hiring is a headwind the way it is in
this recovery, and the more we can put people back to work
teaching, the better we are going to be in the future and the
short term.
Chairman Ryan. Thank you. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman, and thank you, Mr.
Secretary. The vast majority of people who smoke in America are
low and moderate income people. So the cigarette tax increase
in the president's budget will, generally, largely hit low and
moderate income people with a tax increase that is in the
president's budget of somewhere between $6.5 billion a year to
$10 billion a year, depending on the year. That is just fact,
but that is actually not what I want to focus on. What in the
budget you did was the cigarette tax increased funds and a new
entitlement program. This was done in California, my home
state, some time ago, and guess what? You said that you expect
the cigarette tax revenues to decline because you hope it will
discourage people from smoking. Your budget numbers do not
quite reflect that, but let's presume that is the case. That
has been the case in California. Then what you have is you now
have an entitlement created that runs out of money. In fact, we
have that situation in California, where this entitlement will
completely run out of money by 2016. Even in your budget, in
the president's budget, it shows that this new entitlement, at
the end of the 10-year budget window, has a deficit of $5
billion, and over time, the entitlement will increase while the
revenue source will decrease. Is this not exactly what got us
into the deficit problem we are in, and you are just
replicating it with a new program?
Secretary Lew. Congressman, I think the budget projection
shows what we expect the revenue will be. I was, earlier in the
hearing, expressing my hope that we would see a decline in
smoking. It is not what is reflected in the numbers or the
analysis.
Mr. Campbell. But then the deficit would be even worse.
Secretary Lew. If I could just respond to your question. If
we get the revenue, then we pay for the program, and that is
within the budget estimate. I have to look at what the last
year issue that you are describing is. I was not working on the
year-to-year numbers as treasury secretary of the spending
side. The benefit of reduced smoking, if it were to occur,
would reduce spending dramatically. I mean, if you look at what
is driving health care costs in this country, it is things like
smoking and obesity. So either way, we are going to cover the
cost. We are either going to cover it with a revenue, or there
will be savings because of better health care outcomes.
Mr. Campbell. But not in this new entitlement that has been
created, because you show a deficit in the entitlement, so you
have an entitlement that will not have a funding source.
Secretary Lew. We have proposed a funding source to cover
it through this period. What happens after the period, I have
to look at.
Mr. Campbell. And I know you have not been able to look at
every line item, but it actually does not. By your own numbers,
it runs a deficit through most of the 10-year window. Let me
ask you about another thing in the budget. The funding for the
International Monetary Fund, the IMF, I believe you have $63
billion in there, which, on the margin, everything we spend
will be borrowed, so that $63 billion which we will borrow in
order to increase funding to the International Monetary Fund.
And you also propose to make it a mandatory program, basically
an entitlement. So given the domestic programs under pressure
currently, given the deficit that we have, do you, does the
president believe that borrowing $63 billion to further fund
the IMF is a good use of resource?
Secretary Lew. To be clear the proposal that we are making
on the IMF is to swap what we have contributed to the new
agreement to borrow into the IMF. It is really a shifting.
Mr. Campbell. But we could get that money back.
Secretary Lew. We have made the commitment. We have made
that commitment already. We are proposing just moving it to a
different place because it has better effect there.
Mr. Campbell. It is kind of almost in an escrow account
now. This will actually be moving it to the IMF is what you
propose, but, so, you believe that that is something we should
and should spend money on, even given that the amount of it,
$63 billion, is almost the amount of the sequester.
Secretary Lew. Yeah, I think when you look at the IMF, it
is complicated because we had assets that back up what we put
in the IMF, so in terms of what the actual exposure is, it is
not quite the same as direct spending. But I think the
important thing about IMF is the policy. The policy is that we
have a veto in the IMF, we have a controlling voice when we
need to, we have leverage so the United States can influence
the economic decisions around the world, and it is something
that our international leadership depends on.
Mr. Campbell. In my last 25 seconds, I believe you want to
also make it a mandatory program, effectively making
contributions to the IMF an entitlement, to use another word.
Why do you want that?
Secretary Lew. I am sorry, could you repeat that?
Mr. Campbell. You make it a mandatory program, the IMF,
contributions to the IMF; why?
Secretary Lew. I mean, it actually could be done either
way. It is an existing funding stream, we are proposing moving
it, and we would be open to working with the Congress on doing
it in the most expeditious way. And I would just point out, I
think that one of the reasons we are talking about different
numbers on the tobacco tax covering the program is that you are
looking at budget authority and we are looking at outlays, but
I would be happy to follow up.
Chairman Ryan. Thank you. Mr. Pascrell.
Mr. Pascrell. We have heard, Mr. Chairman, plenty of
rhetoric about how the budget House Democrats propose never
balances. And good morning, Secretary, great to see you.
Secretary Lew. Good morning.
Mr. Pascrell. When was the last time we had a balanced
budget in this country, Mr. Lew?
Secretary Lew. It was in 2001.
Mr. Pascrell. And what were you doing?
Secretary Lew. I was the director of the Office Management
of Budget.
Mr. Pascrell. How many times after World War II, where we
ran up a massive war time deficit, but before the Clinton
administration; before the Clinton administration, did the
budget balance?
Secretary Lew. There were years when there was balance, but
there was no other period when there were three consecutive
years of balance or surplus.
Mr. Pascrell. How did we end up reducing our public debt
throughout that time period without technically balancing the
budget the entire time? How did we do that? Is that magic? Is
that finagling the numbers?
Secretary Lew. The truth is our economy was growing faster
than were deficits, and as long as the economy is growing
faster, you are making progress, and we were able to, through
growth in the interwar period, very much reduce, almost
eliminate, the deficits that were built up to pay for World War
II.
Mr. Pascrell. Before I ask my next question on that, then
we go back to 2008, we had a choice, 2009, when we had no
growth, to continue and sustain what we were doing, and that
was nothing the federal government, and trying to improve the
job market and the economy, and I listen to folks on the other
side who tell me, ``Well we had this great deficit in 2009,
2010, and debt,'' and they are absolutely right. But are they
suggesting, Secretary Lew, that we should have done nothing,
had no February supplemental 2009? Is that what they are
suggesting? What would have happened if that happened?
Secretary Lew. Congressman, I cannot speak to what others
are suggesting. I can tell you that when I left office in
January of 2001, we projected a surplus of $5.6 trillion for
the next 10 years. When President Obama took office, it was the
exact opposite. So before he began, the surplus had been turned
in to a deficit.
Mr. Pascrell. Was our budget, Mr. Secretary, in primary
balance in those years I was just talking about before? With
the economy growing faster than the annual budget deficits, is
that what you are saying?
Secretary Lew. That is the definition of primary balance or
surplus.
Mr. Pascrell. Now does the budget the president propose,
which you are advocating, your running point on this, does that
get the primary balance?
Secretary Lew. It does.
Mr. Pascrell. Tell us how we do that.
Secretary Lew. Well, we reduce the deficit as a percentage
of GDP in the end of the 10-year window to less than 2 percent,
and somewhere just around 3 percent, you go in to primary
balance. It depends on what interest rates are year to year,
what the exact number is. But for the second half of the budget
window, we are in primary balance and surplus, in terms of
primary balance calculations.
Mr. Pascrell. I think it is important, that question needs
to be asked over and over again, and your response needs to be
remembered. I am pleased that this budget also includes an
exemption to annual state volume cap on tax exempt qualified
private activity bonds; for the furnishing of water, for the
furnishing of our sewer system which needs billions and
billions of dollars in order to keep up with the time. In fact,
if you add up the needs of the infrastructure, whether it be
the sewage, whether it be the drinking water, whether it be the
waste water, it adds up to $1,200,000,000,000. So you started a
down payment on this, and recommending what you recommended.
And by the way, for every billion dollars that is invested into
the very things I am talking about, we create about 150,000
jobs. Does that grow the economy?
Secretary Lew. When we are investing in businesses and
growing jobs, we are growing the economy.
Mr. Pascrell. So when you talk about growing the economy,
you do not necessarily have to be talking about cutting taxes.
Secretary Lew. Cutting taxes do not directly grow the
economy. It is business activity that grows the economy. It is
creating jobs that grows the economy. It is creating demand
that grows the economy.
Mr. Pascrell. Was there very much business activity in
2008?
Secretary Lew. Our economy was sliding, and with no obvious
endpoint in 2008. If we had not stepped in strongly in 2009,
both to deal with the financial crisis and the economic crisis,
there was no telling where things would go. And you look at the
experience we have had versus others who went right into
austerity, we are growing, and they are not.
Mr. Pascrell. And there is no doubt, Mr. Secretary, that if
we did not have that money voted upon in February 2009, we
would have been in a worse place.
Chairman Ryan. Thank you. Mr. McClintock.
Mr. Clintock. Thank you, Mr. Chairman. Mr. Secretary, I am
a big fan of your work with the Clinton administration, I will
get to that in just a moment. But first, I have to take strong
exception with your testimony that a provision to support the
public credit by assuring the first call on revenues goes to
support the public credit is somehow unworkable or cannot
amount to defaulting on our other obligations. The fact is most
other states have provisions in their constitutions to do so,
and have for hundreds of years. Last year, Fed Chairman Ben
Bernanke told the Senate that he credited the relative
stability and municipal markets, quote, he says, ``which
suggests that investors still are reasonably confident that
there will not be any default among major borrowers. One reason
they might believe that is because most states have rules which
put debt repayment and interest payment at a very high priority
above many other obligations of the state and locality,'' end
quote. Mr. Bernanke sat right you are sitting now and told this
very Committee, quote, ``My concern is about defaulting on the
debt, and for me that is a very high priority so a debt
prioritization bill would help on that count very much.''
Now, since Mr. Bernanke is the president's appointee, I
have got to believe that internally the administration is of
two minds on this subject, and I would urge you to listen to
your Fed chairman and look to centuries of experience of other
states. No state has ever used such a provision to protect
their credit as an excuse not to pay for their other bills. On
the contrary, these provisions protect their credit, and
actually support and maintain their ability to pay all of their
obligations in the event of a shortfall. Protecting the public
credit supports all of the other obligations of the government,
and it is a necessary provision in a government like ours that
is now borrowing nearly 40 cents of every dollar it spends. Put
it very simply, when you are depending on your credit cards to
pay your bills, you better make the minimum payment first, and
I urge you to reconsider your position on that.
But now to the happier discussion of the success of the
Clinton administration under your management. Is it correct
that President Clinton decreased federal spending by nearly 4
percent GDP during his eight years in office?
Secretary Lew. There was a big cut in spending while he was
in office; there was also a lot of economic growth and more
revenue.
Mr. Clintock. Is it correct that President Bush increased
federal spending by 2 percent of GDP during his eight years
that followed?
Secretary Lew. I would have to go back and check the
numbers, Congressman.
Mr. Clintock. I believe it is, and I believe you might also
find that it is correct that President Obama has increased
federal spending by another 2 percent of GDP just in the last
five years. Is it correct that President Clinton dramatically
decreased entitlement spending by signing the Welfare Reform
Act?
Secretary Lew. He did sign Welfare Reform, yes.
Mr. Clintock. Is it correct that President Bush
dramatically increased entitlement spending with his Medicare
Part D?
Secretary Lew. I cannot disagree with that.
Mr. Clintock. In fact, the biggest expansion of entitlement
spending up until that point since the Great Society, as I
recall.
Secretary Lew. It was a program I thought at the time
should have been paid for.
Mr. Clintock. And is it correct that President Obama has
dramatically increased entitlement spending even more with his
so-called Affordable Care Act?
Secretary Lew. Yeah. The Affordable Care Act net saved the
bottom line, so I think it is actually very distinguishable
from the prescription drug benefit.
Mr. Clintock. Do you not agree that it is a massive
expansion of entitlement spending?
Secretary Lew. So, Congressman, I would be happy to address
the issues you raised.
Mr. Clintock. The issue I have raised is very simple. Why
can the president's budget not be more like President Clinton's
and a lot less like President Bush's?
Secretary Lew. The reality of demographics, and the
difference in where we were in the 1990s and where we are
today, is that my generation, the baby boom, is starting to
retire. We have tens of millions of people coming onto Social
Security and Medicare, and that is what is driving those
percentages of spending. So I think we have a fundamental
question: Are we going to keep faith with that generation?
Mr. Clintock. Now the biggest single expenditure in the
history of the United States was the so-called Stimulus Bill at
the outset of this Administration that cost almost as much as
the entire Iraq war from start to finish. So, you know, do not
give me, ``Well this beyond our control;'' it was entirely
within your control. It was within President Clinton's control,
and, again, my only problem with President Obama and his budget
is not that he has changed George Bush's policies. The problem
is he has taken the worst of them and doubled down on them.
Secretary Lew. Congressman, we have agreed in 2011 to over
a trillion dollars of savings on discretionary spending. It is
much larger than the reductions in discretionary spending made
in the Clinton years. We have had major savings in the
Affordable Care Act that added to the life of Medicare trust
fund. We are proposing in this budget considerable new savings
including fundamental structural reforms in entitlement
programs. So I do not disagree that we need to have more
savings, but we also need revenue to get to the goal.
Chairman Ryan. Ms. Castor.
Ms. Castor. Good morning, Secretary Lew. Thank you for
being here to discuss the president's budget. It is a balanced
plan. It reduces the deficit by $1.8 trillion over the next
decade. And I would like to commend the Administration and you
for including an element that boost jobs and economic growth
that is starkly missing from the Republican budget plan. But I
would mostly like to thank the Administration for standing with
American families, especially our older neighbors, our parents,
and our grandparents because President Obama keeps the promise
of Medicare, unlike the Republican plan. The Republican plan,
again, proposes to turn Medicare into a voucher. It does not
decrease costs. Over time, it simply shifts the costs to our
older neighbors, and our parents and grandparents. It is not
consistent with American values. And at the time when, as you
noted, we have this new demographic crisis with the retirement
of this big baby boom population, you keep the promise, and you
achieve savings in Medicare through very important reforms. So
thank you for that.
The other stark contrast is in long-term care for our older
neighbors. I mean, it has not gotten a lot of attention because
people know and understand Medicare a lot more, but the
horrendous cuts that the Republican budget makes to the ability
of our parents and grandparents to live their retirement years
in dignity really is scandalous, in my view. What Medicaid is,
is it allows people to stay in their homes and not enter
skilled nursing, but then, at the end of their life, or with a
severe diagnosis, they are able to have dignity, and get the
skilled nursing and long-term care that they need. In contrast,
the president stands with families to ensure that that lifeline
will continue to exist. I want to commend the Administration
again for standing with families all across this country.
But I wanted to direct your attention to another important
issue. It has been a scourge on the state of Florida and my
community, and because you are here, this is a good opportunity
for me to raise it directly with you, and that is the problem
with tax refund fraud tied to identity theft. Something that
all of us can agree on is preventing criminals from stealing
billions of taxpayers' dollars through fraudulent tax returns.
There are many bipartisan efforts underway. I have a bill with
my Republican colleague, Rich Nugent from Florida, that
addresses the issue, but it really comes down to your oversight
and the IRS stopping these fraudulent refunds from being
issued. Tax refund fraud tied to identity theft is an epidemic.
If it has not happened in your district yet, you just wait. It
is spreading across the country, and it must be stopped.
The treasury inspector general, Mr. Secretary, for tax
administration estimates that the IRS could issue $21 billion
in fraudulent refunds tied to identity theft over the next five
years, and the taxpayer advocate reported in January that
identity theft case receipts increased by more than 650 percent
from fiscal year '08 to '12, and at the of '12, the IRS had
almost 650,000 identity theft cases in its inventory. What is
happening is organized criminals are stealing the Social
Security numbers of children, seniors, even the deceased. They
are filing tax returns using stolen taxpayer names and Social
Security numbers, and when the real taxpayer files for a
refund, or claims their refund, that return is rejected, and
their life is severely impacted for years. And the problem is,
for those of you that have dealt with these complaints, is they
face a labyrinth of procedures, drawn-out timeframes for
resolution. It is an epidemic in Florida, Georgia, New York,
California, Texas, Ohio, but, Mr. Secretary, this is spreading,
and what are you doing to urge the IRS to get in front of this
problem so we do not have this huge hole in the Treasury? Thank
you.
Secretary Lew. Congresswoman, I am not sure I have time to
respond. I would be happy to if I did. The IRS is getting very
much ahead of it and trying to deal with the problem as we know
it today. Made a good deal of progress. The problem is that the
hackers just keep figuring out new ways to get in. So this is
not a problem we can solve once and consider it over. We have
to be vigilant on an ongoing basis in order to make sure we are
doing what I think we all agree is right to protect our tax
payers, our Social Security recipients from that kind of attack
and fraud.
Chairman Ryan. Thank you. Mr. Lankford.
Mr. Lankford. Thank you, Mr. Secretary, for being here. Can
you define for me a term that you used earlier, that is primary
balance? You say in the second half of the president's budget
they reach primary balance.
Secretary Lew. Yeah, Congressman, primary balance is a term
that economists use to describe when the only deficit that we
have is the debt service for previously accumulated debt.
Mr. Lankford. What is our interest payment right now?
Secretary Lew. I would have to look up the exact number,
Congressman.
Mr. Lankford. It is around $224 billion a year, is my
understanding. Do you remember what the interest payment is
anticipated at the end of the 10-year window?
Secretary Lew. Yeah, it is several hundred billion higher
than that. It grows because we have a very large debt, and
because interest rates are going to go up over that period.
Mr. Lankford. If it is consistent with CBO's estimation, by
the end of this 10-year window, it is $857 billion a year in
interest payments. So I am a little confused by your statement
to say we get to balance all but about that last trillion
dollars. That last trillion dollars we still have not balanced,
but we call it balance except for $857 billion of that. Does
that seem consistent?
Secretary Lew. In that last year, the deficit is less than
2 percent of GDP, and that means that with the economy growing
faster than that, debt, as a percentage of GDP, is coming down.
Mr. Lankford. I do, I understand, because we see that in
our budget where we actually get to actual balance where we are
paying out what we are bring in, and an actual balance because
of the growth as well. I have seen some of the growth
estimations on it. I do want to ask you a little bit about, the
president's budget has quite a bit about oil, and gas, and coal
taxation. Why were those three specific industries picked out
to say normal business expensing will be taken away from those
three?
Secretary Lew. Well, that is not actually what the budget
says, that normal business expensing will be taken away. It is
the exact opposite.
Mr. Lankford. So wages, fuel, vehicles, all that; that is
normal business expensing.
Secretary Lew. We would apply normal business expensing. We
would not give the extraordinary treatment that the extracted
industries have gotten in the past.
Mr. Lankford. So like the 199 that every domestic
manufacturing gets? They should get that as well?
Secretary Lew. I would have to look at the specific
provisions.
Mr. Lankford. Well, I would say, the 199 manufacturing tax
credit, right now, every domestic manufacturer of anything gets
this 199 tax credit right now. So that should be left in
because that is a normal business tax?
Secretary Lew. What drives the policy that is in our budget
on oil and gas is that for, really, the better part of 100
years, we have had very generous tax treatment for oil and gas.
It helped build the oil and gas industry in this country. That
is an industry that is very competitive and no longer needs the
special depletion and other rules that go to it. It should be
treated at a level playing field with other kinds of
businesses.
Mr. Lankford. So current businesses now should not have
normal business expensing because 30 years ago, 40 years ago,
businesses were successful. This business is successful. What I
am trying to figure out is the philosophy, I guess, behind it.
Secretary Lew. Well, the philosophy, I can tell you, is
clear. It is that they should be treated more like normal
businesses, not in an extraordinary way they have been treated.
Mr. Lankford. Okay.
Secretary Lew. And if there are specific issues to work
through there, we would look forward to working through those.
Mr. Lankford. The budget, the Greenbook actually coming out
of Treasury, actually uses the term ``neutral.'' They want to
have neutral investment into oil and gas and coal on that. Or,
actually, they use just the term neutral investment in energy.
But it is interesting, there is about $40 billion normal
business expenses taken away from oil and gas and coal, and in
just in one line item, there is about $20 billion that is added
to a lot of other areas. Is that neutral to take away from one
and give to another, because at one point it refers to it being
neutral energy policy, want to just make all our tax treatment
neutral, and the other areas, it gives significant to clean
energies, which, by the way, I have no problem with. As far as
having clean are in our American portfolio, that is a good
thing.
Secretary Lew. We have made clear in our budget that our
goal is to encourage investment in renewable and clean energy,
and, in a sense, give them the benefit that the extractive
technologies got when they were young industries.
Mr. Lankford. Is it the anticipation that in the next 10 to
15 years, that all of the renewables will be able to catch up
and surpass what is currently done with oil and gas and coal?
Do you have a guess on how long the time would be?
Secretary Lew. I do not have an estimate.
Mr. Lankford. See the problem I have is, I have no problem
with wind and hydro-electric and all that, solar. I have no
problem with those. But the assumption that we are going to
take away normal business expensing from oil and gas and coal,
and which will slow down the production and which will increase
price, it is the same as the cigarette tax. The cigarette tax
we have currently, in the budget it actually says, we want to
decrease usage of cigarettes by increasing the price. So we are
going to get revenue and also get this outcome. It seems to be
the same with oil and gas and coal. We are going to decrease
usage of that by increasing the price at the pump, for home-
heating oil, for electricity. We will increase the price of
those, and try to then supplement off onto other areas, which
every economy that I have seen that deals with energy economy,
says those technologies are not there probably not for 30 years
or more to even get close to catching up. It is about 9 percent
of our portfolio now. We are trying supplement the other 91
percent.
Secretary Lew. Congressman, I actually do not think that is
how our proposals on the oil and gas industries would work, but
I would be happy to follow up with you.
Chairman Ryan. Thank you. Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman. Welcome, Secretary
Lew. I have sat here and listened to this debate about debt,
and cutting and cutting and cutting, and then I thought about
what the president proposed, which is really a vision for the
future of investment. And I was thinking to myself, you have
big shoes to fill. I mean, I can imagine Albert Gallatin coming
in here and explaining why they bought the Louisiana Purchase.
Why did they make an investment in a bunch of land way out
there with nothing on it that anybody could see? And we would
have said, in this climate, ``Oh, we should not spend the
money. We should not invest,'' I am sure. And the same with
Secretary Seward who bought that famous icebox; we call it
Alaska. We would have never invested in that because, ``Well,
why are we wasting our money? We have got a civil war going on.
And why should we be out there spending and investing on
something like Alaska?''
And what I would like you to talk about is we have watched
Europe deal with the same economic situation we are dealing
with, and they have had such magnificent success with their
austerity measures. I think the unemployment rate in Spain is
now 22 percent, and something similar in Italy, and yet we have
continued to invest despite the resistance of the Republicans.
We have continued to invest, and we are moving forward. I would
like you to contrast what is going on in Europe with what is
going on here because I think the lesson is clear.
Secretary Lew. Congressman, when I was in Europe last week,
I tried to emphasize both what we have in common and where we
have taken a different path. What we have in common is that we
all need to deal with the realities of middle and long-term
fiscal realities where we have got to reduce deficits and get
our fiscal house in order. But we have to do it in a way that
is balanced so that we can also get the growth and the job
creation that will enable us to have the kinds of healthy
economies that will make it possible to achieve those goals. I
think if you do your cutting upfront, what you are doing is
actually slowing down your ability to rebound, grow, and get
the kind of fiscal correction that we need here and they need
there.
So it is a question of timing and balance, not a question
of are we acknowledging the need for both. The president's
budget is very clear. He accomplishes more than $4 trillion of
deficit reduction in this 10-year window. But he does it in a
way where we grow the economy and we create jobs while we are
doing it. I do not believe you can cut your way out of these
problems alone. If we do not educate the next generation to
have the jobs we need, there will be millions of jobs that go
unfilled, or those jobs will go elsewhere. We have to have the
best-trained workforce in order to grow. And I think that same
argument can be made on infrastructure and many other areas.
Now we cannot do it without regard to the fiscal reality. We
need to be on a path where five years from now, 10 years from
now, we are steadily reducing the deficit, and the debt is a
percentage of GDP. And the president's budget does both.
Mr. McDermott. As the jobs increase, and more people are
being paid and, therefore, are paying taxes, that helps the
itself by making the GDP increase.
Secretary Lew. Absolutely. We balanced the budget in the
1990s because we encouraged the kind of confidence in the
economy that kept the economy growing and jobs being created.
Mr. McDermott. Can you give me any reason why the sequester
cuts to the National Institutes of Health would be good for the
economy? And do you see any way the Republicans can justify
those cuts to the National Institutes of Health?
Secretary Lew. No, Congressman, I cannot. I mean, for 30
years I have worked on issues related to the funding to the
National Institutes of Health, and there has always been a
broad bipartisan agreement that it was the right thing to do to
grow our economy, to have the intellectual power to compete in
the future, and to solve the mysteries that are associated with
the worst diseases we have in this country. I cannot imagine
that there would be any willingness to affirmatively enact the
kinds of cuts that the sequester would impose on NIH.
Mr. McDermott. My mind or my memory is not perfect, but it
seems to me during the Bush administration we made a major
increase in our investment in the National Institues of Health.
Secretary Lew. We did.
Mr. McDermott. I hear one of my colleagues sort of saying
that the Bush era was a terrible one because all these things
went up, and the debt went up, and all the rest. But is it not
true that we made a major investment under Bush in the National
Institutes?
Secretary Lew. There was a major investment in the Clinton
administration, there was a major investment in the Bush
administration, and there has been a major investment in the
Obama administration. It has been something that there has been
bipartisan agreement on. I would note that the head of NIH in
the Bush administration, Dr. Zerhouni, has been very critical
of the impact of the cuts on sequester, both in terms of
medical research and in terms of future economic growth.
Chairman Ryan. Thank you. Ms. Black.
Mrs. Black. Thank you, Mr. Chairman, and thank you for
being here, Mr. Lew. I want to go back to questioning from the
gentleman from Georgia related to the limit on individual tax
advantage retirements. Mr. Lew, this cap would apply equally to
men and woman, is that correct?
Secretary Lew. It is neutral with regard to gender.
Mrs. Black. So do you think that woman need less retirement
income than men do?
Secretary Lew. No, I do not think that this is a revision
that say men or women need more or less. This is a provision
that says that the tax benefit should only be available up to a
certain amount, and the amount is $3 million.
Mrs. Black. Okay, so in that case, then, I am at a loss on
this policy because your limit is based on a gender-neutral
contribution, and women do live longer than men, and so
annuities are more expensive. And this means any cap on a tax
advantage retirement plan that is set equally for both males
and females, a female will necessarily be unable to really
actually purchase the same level of annuity that a male would
be able to. So did the president take this into consideration
before putting this policy forward on how it would affect woman
disproportionately?
Secretary Lew. Congresswoman, the vast majority of
Americans have retirement savings that are under $100,000. The
average is more like $50,000. So we are talking about very,
very few people. If you would like to work together on ways to
make sure it is adjusted by life expectancy, we could look at
things like that. But this was really a way of saying that in a
world of tough choices, to have tax incentives for very, very
large retirement savings is something we could not afford.
Mrs. Black. Well, let me just say this. I believe, after
being in the public sector for a number of years, that carrots
are always better than sticks, and I want to put a carrot out
there to encourage people to do all they can on their own to be
able to save and have as much as they can for their retirement
as they would like to have, and I do not know if this policy
really does that.
Secretary Lew. If I could say on that, we think that one
way to put that carrot out there would be to have auto IRAs
where people are automatically signed up and opt out so that
more people end up getting into the practice of saving for
their retirement. The more Americans that save for their
retirement, the better off we will be.
Mrs. Black. I do not discount the fact that we need to do
everything we can with a carrot to get people to save. I do not
believe the government should get involved with sticks. So let
me go back to, in your opening remarks, I found it very
interesting that you did talk about since the president came
into office that the economy now is stronger, unemployment is
lower. But you said something, and I did not get all of it
down. I did write down your reference to political gridlock
stopping the economy from moving forward. Am I correct in what
I heard you say, that it was political gridlock that you
attributed to the lack of full recovery?
Secretary Lew. I was referring to political gridlock being
something that is a drag on the economy. We cannot say there is
only one thing. If you look back to 2011, political gridlock
was not a good thing for the economy.
Mrs. Black. So let me to go to what I hear from my
constituents, in particular the job creators in my district. I
ask them all, ``What keeps you up at night?'' And this is what
they tell me. They tell me one thing that keeps them up are the
massive deficits which create the crushing debt that they do
not know what is going to happen to them next with a new tax.
Secondly, the mandates that are put upon them. In particular,
right now, their hair is on fire. We are trying to decide,
since we do not even have the regulations out there about what
they are going to do with keeping health insurance for their
employees. And third are all the new regulations that hit them.
I hear it many times from the banking industry with the Dodd-
Frank. But I hear it continually from my industries that it is
the EPA and the new regulations that come out that are not
always cost benefit analysis done, or scientific information to
say that they are really necessary. And so this is what I hear,
this is what I hear continually, constantly from my 19
different counties, and that is really what gets the economy
growing is jobs.
And then my final question, and I have very little time
here for you to answer this, but you made another comment that
just really bothered me, that what we have to do is correct the
distribution of income. Is this really what the
Administration's policy is, is that the policy of government to
correct the distribution of income in a policy?
Secretary Lew. So, Congresswoman, that is quite of number
of issues that I can very quickly try to run through. On the
regulatory side, this Administration has had a stronger record
on cost benefit analysis than any recent administration;
stronger than the Clinton administration, stronger than the
Bush administration. And in areas like EPA, we have done things
like the Clean Car Rules where it has been trailblazing in
terms of the kind of agreement where business and environmental
interests come together for better economic outcome.
On the questions on the new laws, we are working to
implement them as quickly as possible. You know, it was a
little challenging in the early years because Congress was
resisting appropriating money, and it was a challenge to keep
up with it, but we are getting there, and we will implement
both the Affordable Care Act and Dodd-Frank on schedule.
In terms of the income distribution question, what I meant
to be saying and what I believe is that we have a problem in
this country that we have had disparity of income growing, and
it is just something that has to inform how we make our
policies, and I do believe the tax code should be a force for
correction in that.
Mrs. Black. We are out of time, Mr. Chairman, I realize
that, but I would like in writing a little more explanation on
income distribution because I do not believe that is the
government's responsibility. Upward mobility for everyone is
what we should be doing. Thank you.
Secretary Lew. I agree with that, but I am happy to respond
in writing.
Chairman Ryan. The gentleman will respond to the gentlelady
in writing. Ms. Lee.
Ms. Lee. Thank you very much, and good to see you. And
congratulations, Secretary.
Secretary Lew. Thank you.
Ms. Lee. And thank you and everyone at Treasury on behalf
of the American for the work that you do each and every day.
Secretary Lew. Thank you.
Ms. Lee. Of course, the president clearly sees the link
between the morally correct thing to do and the economically
smart thing to do. After all, the budget is a reflection of our
nation's values. He prioritizes job creation before blindly
making these broad cuts to programs that millions of Americans
rely on for economic security. Vital nutritional programs are
protected in this budget, investments in mental health, and
crime prevention, and also effective treatment of HIV and AIDS.
Also, I am glad to see these very innovative strategies as it
relates to, for instance, the Promise Neighborhood, commitment
to education, as well as universal preschool for every child in
America which is a huge factor in reducing poverty throughout
our country. Also, the budget extends the very important
expansion of the child tax credit, the earned income tax
credit. I could go on and on, but I just have to say, in stark
contrast to the Republican budget where their $6 trillion tax
cuts for the wealthiest of Americans, and 66 percent of the
Republican budget, they cut our nation's safety net, yet we
have 50 million people living in poverty. And so I just want to
thank you and the president for that because much of our
discussion here since I have been on this Committee has been,
how do we look the strategies to lift the 50 million people who
are living in poverty now out, and put on a pathway out of
poverty. So thank you for this.
I want to ask you one thing, a couple questions. When
nearly 50 million people are living in poverty, and they are
cut off from the economic security of our country, how does
that impact our overall economic security of the country?
Secondly, one of the parts of the budget that is very troubling
to me, personally, and others is chained CPI. You came up, I
think, with the protections that are put in place to shield the
very elderly and the most vulnerable from this, but yet, if it
is not so bad, why do you come up with protections when middle
income seniors rely on this also? And so I do not quite
understand the protections, yet it is okay to do.
With regard to Cuba, the Office of, what is it, Foreign
Asset Control? You continue to spend resources on enforcing
strict travel and trade sanctions with Cuba, a country that,
dating back to 1998, the Defense Intelligence Agency said it
was not a threat to United States National Security, yet it is
still on the list of terrorist countries. And so what in the
world is going on and over at OFAC? And, in fact, how many
times have you blocked or intercepted terrorism-related
financial transaction supported by the Cuban government?
Secretary Lew. Congresswoman, starting with the question
that you asked on the economic impact of people below poverty
not being fully integrated into the economy, not getting the
full benefit, it is a real issue. I mean, you look at the job
listings in this country. We have millions of jobs that are not
filled while we have millions of kids who have never had a job.
That is not good for the economy, it is not good for the kids
who are not getting into the labor market and developing the
work history that will make them be stronger as individuals and
stronger contributors to the economy. Our budget tries to deal
with that. It tries to deal with the fact that we have to make
sure that our young people get the skills they need, and I have
not heard anyone stronger supporting that than CEOs who are
trying to invest in the United States. They come and they say,
``We need to make sure we have the workers we need for the
future and the infrastructure to get our products to market.
That is where the government can help us.'' And I think we have
that obligation, if we care both about our people and or
economy, to get that right.
On chained CPI, you know, it does the effect of lowering
the increase. Not the base benefits, but the increase because
it is a different level of inflation. I think that the
president made clear that it is not something he would have
chosen to do, but in an attempt to find an agreement, we have
been told time and again that it is something that would have
to be part of an agreement that would be acceptable to
Republicans in this environment. It is something we can defend
on a technical basis because it is more accurate, and because
for middle class people, it is a burden that is relatively
small. Even $10 a month for the most vulnerable is a big deal.
If you lived to be 90 years old, and all you have is your
Social Security, that $10 can be the difference between food
the last couple days of the month. So I think we do have to
distinguish between what impact going to a more correct measure
would have. And we have put it in in a way that we think is
fair by saying that the most vulnerable will have their
benefits go up. Not because we have the overall adjustment
being faster, but because we will make the decision to go in
and make sure they are not hurt.
Chairman Ryan. Thank you. Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman. Thank you, Mr.
Secretary Lew, for appearing here again today. I have four sets
of questions that I am going to run through quickly, and then
you can answer at the end or answer supplementally. First has
to do with the CPA, I always looks at the underpinnings of the
budget, how it is constructed because the choice of the
underpinnings or the assumptions can drive the outcome
substantially. And, in particular, I noticed that the president
used estimates related to GDP growth, unemployment, inflation,
and interest rates that were generally more optimistic than
either the CBO or the Blue Chip forecast. So I would like to
have the information about two things. Why did we use these
more optimistic rates, number one. Number two, what would
happen if we reset these rates to the assumptions that the CBO
is using?
Secondly, I think that you and president, and we in the
House of Representatives all agree on one thing with respect to
moving this country forward, and that is, we need to grow
economic pie, we need to grow opportunity for everybody. And so
the questions on that subject are kind of like this: How do we
grow the economic pie and opportunity when we are raising taxes
on the economy? The president is proposing to raise taxes to a
level as a percentage GDP that were higher than even during the
Clinton administration. So how do we think that is going to
generate more jobs and more economic growth? The second part of
this question is this: If you raise taxes on business, how do
you expect that business to invest more in R&D, and hiring
people, and property, plant, and equipment? How do we expect
those businesses to produce more and better products and
services at lower cost? Those are things we need to think
about.
In particular, I think about the woman in Bryan, Texas who
owns a chain of dry-cleaning and laundry shops, and right now
she is just locked down. She just got her taxes filed last
week. Now she is locked down. She has got 19,000 pages of
regulations related to ObamaCare that are crushing her, and she
is not hiring today because of that. And so my question is
this: On top of that, how is she going to better off and able
to hire more employees, and pay them a better wage, and invest
in new locations when the president is proposing to raise taxes
on her? Another example is the president has this attack on oil
and gas companies which already pay the highest effective tax
rate in the country at 41 percent versus what most companies
pay at 26 percent. So how does this encourage more investment
in natural gas which has done more than any government policy
to clean our air? Our emissions today are lower than the Kyoto
Protocol, and it is because of the investment in natural gas.
And so now the president says we want to raise taxes on this
industry so we can get less investment in natural gas, and
therefore dirtier environment, theoretically.
The third thing, and I would assume that you believe, and
the president believes, and we in the House believe that we
need a more accountable and a more efficient government, so I
would bring up a slide to remind us about the way this
government seems to operate. This picture of Jeff Neely sitting
in a hot tub. As we may remember, Jeff Neely was a GSA employee
who wasted millions of taxpayer dollars on conferences. This
person is back on the payroll, and he makes just under $220,000
a year. He got bonus during his last year. So I have not seen
anything in the president's budget that creates a smaller, more
accountable, more efficient government. We have got a GAO
report here that identifies tens of billions of dollars in
waste, and overlap, and duplication. I did not see any attempt
in the president's budget to take care of that. Another area,
and part of the stimulus, the Department of Energy had a slush
fund it used to invest in things like Solyndra and Fisker, and
in light of the stellar results of those organizations or those
investments, I would like to have an answer as to why are we
doubling down on more stimulus types of payments? Why do we
think that that is going to somehow work better this time than
it did the last time?
The next area is what I am going to call trying to help
people come out of poverty. Since the war on poverty was
started, we have spent $19 trillion, but we have got more
people in poverty than ever before under our current economic
policies. We have also got more people on food stamps than ever
before. Why did the president not propose a plan to scrap
current welfare and poverty programs and start with something
new so we can focus on getting paychecks for these folks and
give them a hand up instead of keeping them locked down where
they are today? So why do we not stop the White House parties?
You know, for every day, every hour that we keep Air Force One
unused, we can pay for 18 days to keep the White House open for
visitors? Why are we taking so many presidential vacations?
I have run out of time. I have a rhetorical question. How
can we call the president's budget using a balanced approach
when the budget never balances? Thank you, I yield back.
Chairman Ryan. I'll give the gentleman the ability to
respond in writing. Mr. Cicilline.
Mr. Cicilline. Thank you, Mr. Chairman. Thank you, Mr.
Secretary, for being here, and congratulations. You know, there
has been a lot of discussion this Committee about deficit
reduction, both in this hearing and in all of our budget
considerations, and the president's budget cuts the deficit by
an additional $1.8 trillion over the next 10 years, reducing
the deficit to 1.7 percent of the economy of GDP by 2023, and,
again, importantly in a downward path beginning in 2016. That
is, of course, in addition to the deficit reduction we have
already done combined of $2.5 trillion, so we are now, with
those two figures combined, at, or actually exceeded, the
deficit reduction recommend by Simpson-Bowles. And there is a
lot of discussion about that, but the reality is, as you know,
Mr. Secretary, deficit reduction in and of itself is not an
economic development strategy or a growth strategy. And one of
the most effective ways that I believe we can grow the economy,
and ultimately deal with this deficit, is to really get people
back to work and to grow jobs in this country. And this budget
reflects, for me, three important ways that we can do that that
will really help to strengthen the foundation of our economy.
You said in your testimony cutting taxes alone does not
create jobs, and it is, of course, the demand of the middle
class, a good job, a middle class family demanding the goods
and services business produces that really creates jobs. So
people talk about the job creators. The job creators in the
country are the middle class families who have a job, who are
purchasing the goods and services the business produces. My
friends on the other side of the aisle proposed a budget that
the Economic Policy Institute says will cost 2 million jobs in
2014; add to that the sequestration which is not replaced, a
loss of another 750,000 jobs. And so what I would like to ask
you to speak about is really what this budget does to create
growth and create jobs because, to me, that is the real crisis
facing this country.
I am from a state that has either the first, or second, or
third highest unemployment rate in the country, and what my
constituents want to know is, how is our federal budget
reflecting the urgent priority of getting people back to work?
The three areas that I am particularly pleased that the
president is focused on is manufacturing and the development of
manufacturing innovation institutions to really rebuild
American manufacturing, which is a real growth opportunity for
Rhode Island, and I think for this country. Investing in
infrastructure to rebuild our bridges, roads, ports. If we are
going to have an economy to compete in the 21st century we need
to have infrastructure capable of supporting that economy. It
is a way to put people back to work and rebuild America. And
third, education. The great investments in pre-K, protecting
the student loan interest rates from doubling; the STEM
initiative that I hope you will turn in to STEAM, and add art
and design is part of that, you know, STEM to STEAM, but the
education investments are critical. So if you could speak to
those three areas, and how they really get to the most
important area, I think, we facing our country, and that is
getting people back to work.
Secretary Lew. Well, Congressman, I could not agree more
the fundamental goal we have is growth and job creation. It is
really the idea that is infused in every part of this budget,
and it is the goal that everything comes together towards. At a
macro level, we have things that we know we can do to create a
better rate of growth and more jobs. Replacing the sequester,
which is costing us jobs, with sensible, middle, and long-term
deficit strategies that are balanced between revenues and
spending, that will create jobs by creating economic growth.
Economic growth means jobs. A half percent of GDP makes a big
difference.
In the specific areas that you have raised, manufacturing,
infrastructure, and education, these are obviously pillars of
what the president sees both as the keys to our economic
future, but also things that we can do today to create jobs.
The truth is, our manufacturing initiatives are not about 10,
20, 30 years from now. They are about this coming year; it is
incentives to invest now. The research and development is about
the future, but the manufacturing tax incentives are for today.
Infrastructure, we ought to be working in now, not 10 years
from now, to repair or bridges, our ports. We will regret it if
we find ourselves in better economic times with higher interest
rates and more problems with our bridges and our ports. We do
not get to put that off forever. And education, I would say
that it is, again, good for the economy today and good for the
economy in the future. Every opportunity we create for early
childhood education, or higher education, or middle school
education, that means teachers in the classroom, it means
schools being open, and it means our young people getting the
skills they need, so that 10, 20, 30 years from now we still
have the best-trained workers in the world. That is what this
budget is about. Thank you.
Chairman Ryan. I understand you have a time crunch,
Secretary Lew. Can you hang until 12:30 so we can get through
the rest of our witnesses? Is that possible? And if so, what I
would propose, and I hate to do this to my fellow colleagues,
but Mr. Van Hollen and I have been talking about this, is
knocking the time down to three minutes each, in order to get
to accommodate everybody, if you can stay until 12:30. Does
that work for you Secretary Lew?
Secretary Lew. Yes, Mr. Chairman, I can.
Chairman Ryan. All right, thank you. So we will knock it
down to three minutes. And it is Mr. Williams. Mr. Williams is
next. Yep.
Mr. Williams. Thank you for being here. I am a small
business owner; have you ever run a business?
Secretary Lew. I have worked in businesses, I have not had
my own business.
Mr. Williams. But you have not run one.
Secretary Lew. I do not have my own business.
Mr. Williams. Okay. Are you concerned that the debt our
country is obtaining is going to eventually go into higher
interest rates?
Secretary Lew. Well, I think economic growth will lead to
higher interest rates. I think we have to plan, as our budget
does, on a time of higher growth and higher interest rates.
Mr. Williams. Where do you think the interest rates will be
five years from now?
Secretary Lew. Well, our budget projects interest rates
coming slowly back to a more normal level.
Mr. Williams. Five percent, 6 percent?
Secretary Lew. I do not think our budget goes that high.
Mr. Williams. If you are in business and you have low
interest rates like we do today, most businesses right now are
paying down their debt. They are not waiting for higher
interest rates. Do you not think it would be a good idea to
start paying our debt down?
Secretary Lew. Well, look, I think we should not have built
the debt up with tax cuts we could not afford, and putting wars
on the credit card, and the Medicare prescription drug benefit
we could not afford, so I am going to take back seat to nobody.
I ran three surpluses. We are not there. When we hit a
recession, we had no capacity to deal with it other than by, we
were in deficit, we had a bigger deficit; we now have to slowly
work our way out, and this budget gets us to a solid, stable
place.
Mr. Williams. What is the highest rate that you think can
be charged to a small business?
Secretary Lew. I am sorry?
Mr. Williams. We are at 39 percent now, one of the highest
in the nation. I can tell you, that does not help small
business. What is the highest rate you and president think we
can charge small business before they just collapse, and break,
and quit hiring people?
Secretary Lew. Well, obviously, businesses choose whether
to organize on the corporate side or the individual side. We
have proposed bringing the business tax rate down to 28
percent. We have not proposed any increase beyond the current
39.6 on the individual side, and the better we do at broadening
the base, the better we will do at lowering the rates.
Mr. Williams. Was not the sequester President Obama's idea?
I have heard you talk about it today as a bad policy. The
bottom line is, was it not his deal?
Secretary Lew. You know, it is not as simple a question as
that. It was a very difficult negotiation where we were
negotiating with the Republicans who refused to put taxes on
the table, and it was the only thing everyone could agree on.
Mr. Williams. All right, I get it. Let me just close by
saying this. I am a small business owner, and I can tell you,
you are not helping small business, okay. The burden that this
Administration is putting on small businesses is unbelievable.
I would suggest you look at Texas, maybe even North Dakota, and
see what less government and competition, what it does. When
you start talking about raising minimum wage and capping the
maximum wage in this country, that is a bad deal. It should be
a country of unlimited opportunity, not unlimited liability, of
which you all are putting us in. Small business is hurting. You
need to understand that. And I hope we do not get to where the
norm is 7.8 percent unemployment, where you can save $50,000,
and that is all you can save. Fifteen percent of the people in
poverty; I hope that is not the norm. I fear that it is, and I
just think that it is a dangerous course for our country. Thank
you.
Chairman Ryan. Thank you. Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman. Of course, the
proposal from the Administration is not to cap something at
$50,000, it is to stop having taxpayers subsidize savings
beyond 3 million; big difference, I think. Secretary Lew, we
appreciate your patience. You have been here countless times,
and the balanced approach you are attempting to do with the
Administration. I would just put one item on the table that we
would like to explore with you further, dealing with
infrastructure finance. In the past, the Administration has
supported an effort to reinstitute the superfund tax which
expired in 1995, so there is virtually no money in the
superfund. And it stalls clean up around the country. This was
a deal that was made with the petrol/chemical industry years
ago; gave them a little escape hatch which they still enjoy,
but they are not investing to help clean it up, and I hope that
we can talk with the Administration about that, and, at some
point, have a conversation about what we are going to do with
the transportation trust fund in freefall because of the
outstanding efforts of the Administration to improve fuel
efficiency. If we are going to fund transportation based on
gallons pumped, we are going to be in a downward spiral over
time, and we need to have an opportunity to look at that. And I
hope that there is an opportunity to, at some point talk, about
a vehicle mile travel fee that would help stabilize and move
forward.
But I wanted to just get your brief reaction, I know you
are not Secretary of Defense, but the top line considerations
where you have moved to try and help offset some of the costs
of the sequestration, looking at bases which are far surplus to
what we need at home and abroad, and maybe stopping the decline
in the percentage that military personnel pay retirees for
their health care, which is actually going down, but is going
up for everybody else. Some of my friends on the other side of
the aisle, particularly those in responsibility, are somehow
pretending that this would be outrageous, that it is a
violation of all that is holy and it is not going to get their
support. Can we move forward with the Department of Defense if
we do not start looking at some of these areas?
Secretary Lew. Congressman, while it is not currently in my
area of responsibility, I spent a good deal of time working
with the Defense Department on its strategic plan when I was
OMB director and chief of staff, and I think that the strategic
plan the Defense Department put together to save $500 billion
over 10 years is one of the best pieces of strategic budget
planning that I have ever seen. It is hard choices without a
doubt, but it reflects the military and civilian leadership
making the balanced choices of how do we secure our national
defense and still hit the target. I think the sequester is the
opposite. The sequester is across-the-board cuts that do not
make sense, that do not move our national security interests
forward, and it is something that should be replaced by
sensible policy.
Mr. Blumenauer. I hope Congress will be able to make some
tough decisions along with you.
Chairman Ryan. Thank you. Mr. Rokita.
Mr. Rokita. I thank the Chairman and I thank Mr. Lew for
joining us here today. Good afternoon now, by the way,
appreciate you staying.
Secretary Lew. Good afternoon.
Mr. Rokita. I want to pick up on some of the things that
Mr. McClintock was saying. Of course, he has this bill that is
going to prioritize our payments, and I would associate with
his comments in saying that it works in several states, and I
heard your testimony that said, well, it just will not work for
the federal government. But let's assume for a minute that we
have a prioritization bill that becomes law. What level of
detail would you expect from Congress so as the Treasury
Department could not override or ignore the prioritization
process that that bill, which would become law again, would
have in it? That is to say, under what circumstances do you
think you can override a law that would direct prioritization?
Secretary Lew. Congressman, and to be clear, I did not say
that you could not write a law that would say which bills you
pay first. Clearly, you could write a law that says which bills
you pay first.
Mr. Rokita. No, you said we would go into default; does not
matter what area we would go into default.
Secretary Lew. What I said, what I believe is correct and
is something we really need to focus on, is that if you were to
do that, if you were to lock in this idea that if we pay one
set of bills and not the others we are avoiding default, that
is not correct. If you do not pay all of our obligations, it is
one or another form of default. You are just choosing what to
default on.
Mr. Rokita. Let's go back to my question. Assuming you have
this law, all right, what level of detail would you expect so
that you, as the Department of Treasury, could not override
anything it says?
Secretary Lew. Well, I am not sure that I understand. I
mean, we comply with laws when they are written, and were you
to write a law, we would comply with the law. That is not the
issue. The issue is that that law does not solve the problem.
Mr. Rokita. It is my time, I just want to be clear that if
a bill came out of this Congress and it was a law, you would
intend to follow it to the letter.
Secretary Lew. We always endeavor to follow the law.
Mr. Rokita. Okay, all right, just want to be sure. But you
will follow it? Endeavoring and following, it is slightly
different, right?
Secretary Lew. Yeah, I cannot comment on a law that I have
not read. The truth is there are sometimes ambiguities, and if
there are ambiguities, we need to discuss them. But if you are
asking me the question, could you set an order, of course you
can set an order. I am saying it is a mistake to think that
solves the problem. The only thing that solves the problem is
Congress extending the debt limit so we can pay all our
obligations and avoid default.
Mr. Rokita. Understood what you are saying. I do not
necessarily agree, but I understand what you are saying. On
this $3 million cap that would pay out roughly $205,000 a year,
new policy, can you tell me, and, by the way, the Wall Street
Journal estimates that 6 percent of the population will be
impacted by this new cap. I remember your testimony saying it
will be a very small amount of people, but Wall Street Journal,
at least, says 6 percent. I heard a lot of complaining about
the 1 percent. Are we now targeting the 6 percent, and what
after them?
Secretary Lew. No, Congressman, our position is clear. We
want all Americans to save for their retirement. We want to
encourage people who do not save to save, and we want to make
it easier, not harder. But in a world of tough choices when
most average families have less than $100,000, an average of
$50,000 saved for retirement, saying that the tax benefit ends
at $3 million is a reasonable trade-off to make.
Chairman Ryan. Thank you. Mr. Huffman.
Mr. Huffman. Thank you, Mr. Chair, and Mr. Secretary,
thanks for being here. I want to associate myself with those
who have expressed opposition to you over chained CPI, but I
also appreciate the fact that the administration has very
specifically linked that to hundreds of billions of dollars in
new tax revenue that, so far, our Republican colleagues have
flatly rejected. So I do not know how likely that bargain is at
this point, but one thing that strikes me as very possible, if
not likely in this Congress, is comprehensive immigration
reform. And so I wanted to ask your thoughts as we think about
the budget horizon that we are discussing today about how
comprehensive immigration reform could affect these budget
numbers and our broader economy as well.
Secretary Lew. Congressman, I have not been, in my current
capacity, working on immigration reform, but I have worked on
the issue on many occasions over the last 30 years, and I think
as a student of American history, one can only conclude that
one of the things that has made us the strong country we are is
that we are constantly refreshing ourselves with people who
want to come here and work hard, play by the rules, and make a
contribution. I think immigration reform would open the
opportunity to fair legal participation in our economy to many
people whose only goal is to contribute to society, and that is
going to be good in terms of the economy. The fact is, our
economy has work to be done, and I think there is hopefully
going to be a bipartisan agreement that is fair, that protects
our borders, that is very much in keeping with both concerns
that we bring people out of the shadows, but that we also
insist on compliance with our laws.
Mr. Huffman. With respect to both the deficit and the debt
at the 10-year horizon, would it be fair to assume that
comprehensive immigration reform would have a positive effect
on both of those things?
Secretary Lew. I would have to go back and look
analytically at the numbers. Intuitively, I think that makes
sense, but I have not seen an analysis.
Mr. Huffman. Thank you, Mr. Secretary.
Chairman Ryan. Fifty-three seconds to spare. You will
learn. Mr. Nunnelee.
Mr. Nunnelee. Thank you, Mr. Chairman. Thank you, Mr. Lew,
for being here.
Secretary Lew. Good to be here.
Mr. Nunnelee. January 1 we had a $600 billion tax increase
added to a $1 trillion tax increase that went into effect as
part of the Affordable Care Act. And then shortly after that,
we had cause for additional tax increases. The president's
budget has got an excess of a trillion dollar increase in
taxes, so I guess the start of the question, does the
Administration think that the American people are not paying
enough money to Washington?
Secretary Lew. Congressman, the Administration has had
consistent view that we have a very, very big hole in our
budget, a fiscal gap that has to be closed with a fair balance
of $2 of spending to $1 of revenue. In December there was
extensive discussion where Republican leaders were saying we
could raise a trillion dollars by broadening the base and
closing loopholes. We want to work together to do that and get
the job done in a balanced, fair way, with $2 of spending cuts
for $1 of revenue.
Mr. Nunnelee. But you got 1.6 trillion January 1. We did
not get any $2 spending cut for that.
Secretary Lew. Well, no, we enacted the spending cuts
first. In 2011, we enacted over a trillion dollars of spending
cuts. So we have already got over twice as much spending cuts
as we do revenue. We need to finish the job. We need to look at
everything we have done since we started trying to close this
$4 trillion gap. And it will get to 2:1 if the president's plan
is the basis for an agreement.
Mr. Nunnelee. The Administration continues to say that
balanced budgets are not necessary. At what point does our
national debt cause a problem? Is there a ceiling?
Secretary Lew. Look, our national debt cannot continue to
grow as a percentage of GDP without it becoming a problem. That
is why the president's budget brings it down to around 73
percent, the debt as a percentage of GDP, at the end of this
10-year window. That is why the budget deficit is brought down
to under 2 percent of GDP at the end of this window. You know,
I wish that the hole was not as deep as it was when the
president took office. I wish that we did not have an economy
that was in freefall that needed to be brought back to health.
But that was what the world looked like in 2009. Our economy is
now growing. We need to be on a path with the kind of balanced
deficit reduction that is consistent with growth and job
creation, and we would to look forward to working on a
bipartisan basis to get that done so we can get the confidence
in the economy that would, I think, be really good for the
economy.
Mr. Nunnelee. All right, and then the president came forth
with a plan to address some of the problems with Social
Security, and then he started blaming the Republicans. Does the
president stand by his plan?
Secretary Lew. I am not sure which plan you are referring
to right now.
Mr. Nunnelee. The issue dealing with growth and Social
Security.
Secretary Lew. Well, the president has, for a number of
years, and continues to believe that we should work on a
bipartisan basis to have a balanced, fair approach that
protects Social Security's basic structure but that, along the
lines of the 1983 agreement, has a bipartisan approach for
long-term, 75-year solvency. It is best to do that not in the
context of the budget.
Mr. Nunnelee. All right. Thank you, Mr. Chairman.
Chairman Ryan. Thank you. Mr. Jeffries.
Mr. Jeffries. Thank you, Mr. Chairman, and thank you, Mr.
Secretary, for your testimony. There seems to be a consistent
narrative amongst many in the House, amongst many on the other
side of the aisle that this Administration has taken us on a
fiscally unsustainable course, pursuant to that narrative, as a
result of an unlimited desire to expand and an unwillingness to
get that spending under control. But am I correct that it is
this Administration that has reduced the deficit by $2.5
trillion over the last several years?
Secretary Lew. Congressman, yes, we, together with
Congress, reduced the deficit by $2.5 trillion. We have also
reduced the deficit as a percentage of GDP in half, and we are
on a track towards taking it down to under 2 percent.
Mr. Jeffries. Now we have a constitutional obligation to
protect the full faith and credit of the United States, and
this has played itself out as it relates to the flirtation with
possibly defaulting in connection with the debt ceiling. And
part of the reason why some have suggested that the debt
ceiling is problematic and our need to raise it is problematic
is because of a misconception as it relates to what the debt
ceiling represents. The debt ceiling is a backward-looking
vehicle that gives the Administration the opportunity to pay
for bills that have already been incurred, is that not correct?
Secretary Lew. That is absolutely correct, Congressman.
Mr. Jeffries. And most of the obligations that have already
been incurred, or many of those obligations relate to policies
and decisions that were made during the eight years of the
prior administration. Is that not correct?
Secretary Lew. They relate to all the permanent laws that
are in place and all the annual appropriations that have been
enacted.
Mr. Jeffries. So that would include the tax cut in 2001 and
in 2003 that were not paid for, correct?
Secretary Lew. Absolutely.
Mr. Jeffries. And that would include the prescription drug
benefit backed by the pharmaceutical industry that was not paid
for in 2003, correct?
Secretary Lew. Yes.
Mr. Jeffries. And that would include the war that was
entered into as it relates to Iraq for weapons of mass
destruction that were never found. Is that correct?
Secretary Lew. All spending that was authorized by Congress
is included, and the spending that you have described is all
part of what is being covered.
Mr. Jeffries. And now based on your experiences in the
Clinton administration, would it be fair to say that perhaps
the best strategy in order to deal with the debt problem as
well as the deficit issues that we confront, as evidenced by
the fact that the Clinton administration turned over a surplus
that was subsequently blown by the Bush administration, is not
the best strategy to invest and to grow our economy?
Secretary Lew. I think that the best strategy is a growing
economy, growing jobs, and balanced bipartisan deficit
reduction where you have a mix of spending and tax measures to
get the job done in the right timeframe.
Mr. Jeffries. Are there alternatives other than the chained
CPI that could help strengthen the solvency of Social Security
moving forward?
Secretary Lew. There certainly are other measures that
would strengthen the solvency of Social Security.
Mr. Jeffries. Thank you.
Chairman Ryan. Thank you. Ms. Lujan Grisham.
Ms. Lujan Grisham. Thank you, Mr. Chairman, and thank you,
Secretary Lew, for extending your time and joining us today. I
am going to join in the efforts by many of my colleagues before
me today that I appreciate your responses about moving the
economy and investing in jobs, and I have mentioned to other
folks who have come before this Committee that I am in a state
that has got negative job growth, and I think the only state in
the country, as we are seeing some improvements with negative
job growth, so I am very excited about many provisions in the
president's budget proposal that invest in job growth. I would
also like to thank you for your investments in the budget for
Indian Health Services. I actually proposed an amendment to the
Republican budget that would fund HIS, which is woefully under-
funded, and the health care sector grows by 30 percent if we
fully invest in health care jobs, and so I appreciate all of
those efforts in bringing jobs to rural New Mexico.
I also, quickly, since I have got such a little time, want
to thank the Administration for prioritizing veterans, and I
want to just highlight a couple. So we have got 63.5 billion
for the Administration. It is an 8.5 increase over 2012, and it
provides mental health care, telehealth, specialized care for
women, veterans, and benefits for caregivers. Seven billion set
aside for mental health services such as PTSD, sexual trauma,
which is at 15.4 increase over the 2012 level, and $136 million
to deal with the back log. Can you tell me, with these
investments, and that we are working hard to get our veterans
back to work, and with companies in New Mexico not hiring
because of the sequester, can you give me a sense about how
many jobs this might create, and how many veterans might be
able to get back into the employment pipeline?
Secretary Lew. Congresswoman, I can tell you the direction,
but I would have to get back to you or have someone get back to
you on the exact number of jobs.
Ms. Lujan Grisham. Well, feel free to make a statement
about that direction, what you see globally for the country,
but please get back to me in writing about that job growth and
those developments for veterans.
Secretary Lew. The first principle is we have a sacred
obligation to our veterans who have put their lives on the line
to protect our country, to treat them right when they come
home, and that means helping them to get the job training or
the jobs they need, and the health care they need, and the
support in their community that they need. This budget invests,
in a very tight budget, billions of dollars to try and keep
that promise. Now, apart from just the basic decency and
fairness associated with our policy, it is good for the
economy. Our soldiers come back with leadership skills,
management skills, the ability to make a contribution that we
cannot afford to lose. And it is only a plus when we match up a
veteran with the kind of opportunity that gives them the chance
to contribute as civilians as they did when they were in the
military.
Ms. Lujan Grisham. As my time wraps up, we have got the
highest suicide rate by veterans that we have ever seen before
in this country, and the number one homeless group is women
returning veterans in my district. Thank you.
Secretary Lew. Thank you. Mr. Cardenas.
Mr. Cardenas. Thank you, Mr. Chairman. Thank you, Secretary
Lew, for being here and extending your time with us. I was
taken aback by one of my colleagues that talked about that it
seems that some small business owners lose sleep at night
because they are worried about the federal debt. I think that
if people stop watching Fox News right before they go to bed,
they might not have that problem. I used to own a small
business, and never once, never once, was the federal debt ever
on my mind. Really what was on my mind is focusing on my
business, wondering, knowing, trying to figure out what I am
going to do tomorrow, what I am going to do next month, hoping
and looking forward to access the capital so that I could go
ahead and hire more people, and grow my business, and therefore
impact the economy locally, and, quite frankly, make more money
for me and my family as well. So one of the things that I would
like to ask you is, the president's budget, does it look to
invest in education and training our current workforce and our
future workforce?
Secretary Lew. Yes, Congressman. We have a proposal, a
number of proposals, that would help people get the skills
training they need, really starting from high school all the
way through workers who are displaced by the economy.
Mr. Cardenas. Well, the president's budget actually talks
about continuing and increasing investment in preschool as
well.
Secretary Lew. Correct. From preschool all the way through.
Mr. Cardenas. Yeah.
Secretary Lew. And, you know, one thing I would say from
the perspective of how small businesses make decisions, I think
all businesses make decisions based on where the order book is
and where the market is. If we grow the economy, and if small
businesses see that they are doing business in an environment
where it is growing business, they are going to make the
decisions to invest and hire. If they are afraid the economy is
going to be shrinking, they are not going to take a risk by
investing. I think that they fundamentally look to the bottom
line of their business when they make their decisions.
Mr. Cardenas. Well, I have a question for you in your vast
experience in looking at budgets and understanding the dynamics
between government and private industry. Do successful
businesses grow while having debt on their books in this
country?
Secretary Lew. Many businesses have debt for their capital
investment and other purposes.
Mr. Cardenas. And so, basically, when we look at the
economy and we look at the president's budget, the president's
budget actually acknowledges that we have debt. The president's
budget actually acknowledges that the best way that we need to
grow our way out of this dynamic is to make sure that we
continue to grow the economy, and even though the economy has
been growing at a slower pace than any of us would like, the
bottom line is that it has been growing pretty much throughout
the majority of his presidency, correct?
Secretary Lew. It has been growing for 14 consecutive
quarters, and we need to continue that and increase the rate of
it, but we also need to make the tough decisions to finish the
work of making policy changes in a fair and balanced way.
Mr. Cardenas. So running government like a business would
mean continue to do growth, but, at the same time,
acknowledging debt.
Secretary Lew. Correct.
Mr. Cardenas. Thank you.
Chairman Ryan. Thank you. Mr. Pocan.
Mr. Pocan. Thank you, Mr. Chairman. Thank you, Mr.
Secretary. I also just want to add I am really looking forward
to seeing your signature on our currency. It will be an
affirmation for many of us who received harassment from our
teachers growing up in penmanship, so thank you.
As a small business owner for over half my lifetime, I just
want to reiterate a little bit about that. What you are doing
by growing the economy, investing in infrastructure and
research and development, having tax fairness in this budget
that helps small business owners and middle class, and stopping
the sequester that is hurting small business owners are all
very much appreciated by those of us who are still in that part
of the economy. I do want to ask you a question about taxes,
but let me just, if in one minute, if you could try to answer.
People kept talking about actual balance in the GOP budget,
and, you know, there is a lot of fuzzy math in there,
especially around the Affordable Care Ac. I mean, you can keep
saying there is actually a balance. I can keep saying that I
have a thick mane of hair, but I do not. Can you just reference
that, the actual balance question on the GOP's health budget?
Secretary Lew. I think that without knowing how that budget
will pay for the tax cuts that it has proposed, we do not
really know what it is going to accomplish. It is a pretty big
hole. It is like a $5 trillion hole to cut tax rates. It is
either going to have to raise taxes on middle class taxpayers,
or it is not going to cover the tax cut that is proposed.
Mr. Pocan. Since we are on taxes, this is specifically what
I would like to ask. You know, we just had tax day yesterday.
Small business owners across south central Wisconsin paid their
taxes, the vast, vast, vast majority of them. However, we do
have offshore tax abuse, and the GAO report that came just a
little while ago talking about some of the tax expenditures
talked about how this growing right now in the country.
Specifically, can you just address a little about the
Administration position on this? I mean, you know, I hear that
there are 18,000 corporations in a five-story building in the
Cayman Islands. I mean, clearly, that is nothing but tax
avoidance. Can you just address that from the Administration
perspective?
Secretary Lew. The Administration very much wants to close
opportunities to avoid taxation through abusive practices, and,
you know, we have done a lot to create transparency so that we
can see when businesses and individuals are taking income
offshore in order to avoid taxation. I think there is a
secondary issue, which is, what is legal that should not be,
where we need to work together to look at how do we close some
loopholes that should not exist. So there is the illegal forms
of tax avoidance which we need to close down on, and we need to
work together to try and shut down ways of legally avoiding
taxes.
Mr. Pocan. Would the Administration be open to some kind of
language that might better define what a business operation is
when it is overseas?
Secretary Lew. It is something that we would look forward
to working together on.
Mr. Pocan. Great. Thank you very much.
Chairman Ryan. Thank you. Thank you, Secretary Lew. We have
got you done with seven minutes to spare. I appreciate your
indulgence. You are three out of four. You have got your last
one this afternoon. We are going to agree to disagree on some
of these things. But I would like to think that we have
explored a few possibilities where we can find common ground.
Secretary Lew. I hope so.
Chairman Ryan. So thank you very much. The meeting is
adjourned.
Secretary Lew. Thank you, Mr. Chairman.
[Questions submitted for the record and their responses
follow:]
Questions Submitted for the Record by Chairman Ryan
To gain a better understanding of the relationship of outlays,
receipts, deficits and debt on a unified basis with daily Treasury
statements, debt subject to limit, and the daily change in debt subject
to limit, please respond to the following four questions and provide
supplemental information that would help explain these relationships.
1. While the Daily Treasury Statement contains helpful information,
it is not clear how the reported daily outflows and inflows relate to
the reported changes in total federal debt subject to the statutory
debt limit. To help better understand that relationship, please provide
a daily breakdown of spending, taxes and other receipts, intra-
governmental transactions, and the change in the operating cash balance
that fully accounts for and explains the change in the opening and
closing balances of total public debt subject to the statutory limit
for each business day for the months of June and July 2012. In
addition, please provide a table that crosswalks from the change in the
operating cash balance to the change in the debt subject to limit for
each of the days in this time period.
2. Please describe the process for the preparation of the Fiscal
Assistant Secretary's daily cash balance projections. Historically, how
accurate are these cash balance projections?
3. Were the cash balance projections to show expected cash outlays
in excess of expected cash balances, what measures are available to
Treasury?
4. In an August 2012 report to Sen. Hatch, the Treasury Inspector
General stated that ``because Congress has never provided guidance to
the contrary, Treasury's systems are designed to make each payment in
the order it comes due.''
a. Please identify which of Treasury's systems are relevant to this
statement and describe any rules and procedures governing the operation
of these systems.
b. Is the limitation described in the statement a technical
limitation or a matter of policy?
5. During testimony about the Chained-CPI, Secretary Lew stated
that the use of Chained-CPI can be defended ``on a technical basis
because it's more accurate.''
a. Did the Administration exempt means-tested programs from
Chained-CPI because they do not believe it is a more accurate measure
for these programs?
b. If they do believe it is a more accurate measure--why did they
not apply Chained-CPI to these programs and address any concerns they
have with the subsequent change in benefits through direct changes to
the laws governing means-tested programs directly?
Questions Submitted for the Record by Hon. Diane Black, a
Representative in Congress From the State of Tennessee
1. Can you please explain to me what you meant in your comments
that, ``[if] we want to do anything to correct the distribution of
income in this country, our tax laws have to be part of that. I think
we made big progress at the beginning of this year in raising the top
rate to 39.6. I think that was an enormous step that was the biggest
step in a long time in terms of dealing with some of that inequity.''
Do you believe that Congress should redistribute wealth through the
tax code?
2. You mentioned in your remarks before the House Budget Committee
that the administration has run the ``most aggressive cost-benefit
analysis of the regulations released by each agency.''
Have you run a report projecting the cost of the 14,000 pages of
regulations released by various departments related to the Patient
Protection and Affordable Care Act (PPACA)?
What is that cost? How do you measure the cost-to-benefit ratio?
Do you have a time frame for when the PPACA law will be fully
implemented? At the end of the implementation process, do you play on
sending a full estimate of the cost of the final PPACA regulations? Do
you have an estimate of what that cost would be?
3. In the Treasury Green Book, the administration proposes
expanding the small business health insurance tax credit included in
the health care law.
How will this help small businesses since the administration has
chosen to delay the small business exchanges (``SHOP exchanges'')?
I've looked through the materials the administration has released.
The firms must fill out seven worksheets to determine their eligibility
and many of the small businesses in my district are confused, burdened,
and are deterred from providing health insurance and even creating jobs
as a result. How do you plan on guiding small businesses through this
process?
4. The President's budget extends and expands various refundable
tax credits, which are actually cash transfer payments to individuals
who, in many cases, do not pay any income taxes (and, in some cases, do
not even pay payroll taxes). Of particular note, the budget proposes to
reinstate, extend, or expand a variety of tax provisions that have
substantial outlay components, such as the Earned Income Tax Credit,
the American Opportunity Tax Credit, the Build America Bonds program,
renamed as Fast Forward bonds, and the proposed Promise Zones.
How does all of this increased spending through the tax code help
with deficit reduction?
How does this increased spending through the tax code help simplify
the tax system to further the goals of fundamental tax reform?
Questions Submitted for the Record by Hon. Bill Flores, a
Representative in Congress From the State of Texas
context
Secretary Lew commented that people who exceed the $3 million cap
can still contribute, but will simply not receive a tax break. This is
a contradiction of the Treasury Department explanation where it says:
``If a taxpayer reached the maximum permitted accumulation, no further
contributions or accruals would be permitted, but the taxpayer's
account balance could continue to grow with investment earnings and
gains''.
Transcript from hearing last week:
Lew: And we're not saying people can't contribute. We're just
saying that the tax benefits aren't going to be the same. So you can
still contribute. You just can't get it with before tax dollars. You
can't contribute it before tax dollars.
questions for secretary lew
1. There are multiple proposals in the budget that will negatively
impact retirement savings, including the 28% cap on itemized deduction,
the $3 million cap and the chained CPI proposal (which will limit
annual inflation adjustments for contribution and comp limits), has the
government considered the effect that these three proposals could
jointly have on individuals saving for a secure retirement?
2. Have you looked at any behavior models to understand the
potential impact on qualified plan formation or continuation,
particularly in the small business context where a small business owner
would lose the incentive to save within the qualified plan system?
3. While I understand the $3 million cap is to target millionaires,
we all recall the economic downturn not too long ago, and I am
concerned that with any similar downturn, couldn't we have someone's
supposed secure $3 million turn into $1 million, which would then not
be enough to fund a comfortable retirement?
additional questions
1. In terms of the proposal to place a $3 million cap on savings,
won't this discourage savings more broadly? And wouldn't that be the
wrong message for the government to send?
2. Would you envision individuals needing to pay taxes immediately
if they have funds over $3 million in their account? How about spouses
who have inherited IRAs and may need that money to live comfortably?
3. In terms of the actual number the government is proposing, what
happens with a potential economic downturn? Or a changed life
situation? Such a limitation does not take in account any possible
changed circumstances.
4. Has the government looked at how this could impact ESOP
formation? Current ESOP participants?
Question Submitted for the Record by Hon. Tom Rice, a
Representative in Congress From the State of South Carolina
Secretary Lew, I am deeply interested in a report from the Treasury
Inspector General for Tax Administration regarding the Additional Child
Tax Credit. You may recall this report. It was issued on July 7, 2011.
Specifically, the report highlights the gross misuse of filers
using individual taxpayer identification numbers to claim the
Additional Child Tax Credit. In other words, filers who do not have a
social security number and are not authorized to work in the United
States.
As you may know, ITIN filers' claims for the Additional Child Tax
Credit have increased from $924 million in 2005 to $4.2 billion for
2010. This information is detailed in the Treasury Inspector General
for Tax Administration's report.
We are giving billions in tax credits to individuals who are not
authorized to work in our country. There is also evidence of ITIN
filers claiming multiple children who do not even reside in our
country.
The Treasury Inspector General for Tax Administration's report
directed both the IRS and the Department of Treasury to look into this
staggering issue. Since the report was issued almost two years ago, I
am very interested in the IRS and Department of Treasury's progress.
What efforts have your agency made to end this blatantly fraudulent
activity?
Questions Submitted for the Record by Hon. Barbara Lee, a
Representative in Congress From the State of California
on poverty
We know that unemployment remains too high, and income inequality
is near historic highs, with incomes for low and middle income workers
stagnating or even falling.
While big corporations have more than recovered and are posting
massive profits, Main Street families continue to struggle and small
businesses across America don't have enough customers coming in their
doors.
1. What would be the economic impact of successfully implementing a
national plan to cut the national poverty rate in half in a decade?
on the impact of chained cpi
Today, the White House released a document outlining the
protections put in place to shield the very elderly and families who
rely on means tested programs from the impacts of Chained CPI.
2. If Chained CPI does not amount to a $230 billion dollar benefit
cut, why does anyone need protections from the impacts of Chained CPI
as outlined by the White House yesterday?
on cuba and ofac
Given the tight budgets, it is vitally important that we
effectively allocate resources to the highest priority endeavors. One
such office that I believe needs a thorough review is the Office of
Foreign Asset Control (OFAC) which is tasked with a critical role in
our nation's fight against acts of terrorism and the funding of groups
and actors who support terror.
OFAC continues to unnecessarily spend resources on enforcing strict
travel and trade sanctions with Cuba, a country that, dating back to
1998, the Defense Intelligence Agency has not considered a significant
threat to U.S. national security.
3. Mr. Secretary, when was the last time that the office of Office
of Terrorism and Financial Intelligence or the Office of Foreign Asset
Control blocked or intercepted a terrorism related financial
transaction supported by the Cuban government?
on the disparity in the unemployment rate
The national unemployment rate is now at 7.6%, and has been slowly
ticking downward for the last several months now. However, the rates
for minorities--particularly African Americans at 13.3 percent and
Hispanics at 9.2--have remained well above national average throughout
the unemployment crisis, and are still unacceptably high.
As part of the Omnibus Appropriations Act for FY2009--which was
signed into law--the Department of Labor was required to provide a
report outlining actions which can be taken related to reducing
disparities in employment rates.
4. Many economists find that increasing equitable access to
economic opportunity is a better economic model that will lead to
greater economic growth for all Americans, do you agree?
5. How can the Treasury and our entire government act to
effectively address this pervasive issue of unemployment in these
communities?
[Response to questions submitted follow:]
Secretary Lew's Response to Questions Submitted for the Record
chairman paul ryan qfrs for secretary lew
To gain a better understanding of the relationship of outlays,
receipts, deficits and debt on a unified basis with daily Treasury
statements, debt subject to limit, and the daily change in debt subject
to limit, please respond to the following four questions and provide
supplemental information that would help explain these relationships.
Question 1: While the Daily Treasury Statement contains helpful
information, it is not clear how the reported daily outflows and
inflows relate to the reported changes in total federal debt subject to
the statutory debt limit. To help better understand that relationship,
please provide a daily breakdown of spending, taxes and other receipts,
intra-governmental transactions, and the change in the operating cash
balance that fully accounts for and explains the change in the opening
and closing balances of total public debt subject to the statutory
limit for each business day for the months of June and July 2012. In
addition, please provide a table that crosswalks from the change in the
operating cash balance to the change in the debt subject to limit for
each of the days in this time period.
The Daily Treasury Statement summarizes the cash and debt
operations of the U.S. Treasury. It consists of eight tables; five
contain information about cash flows while three contain information
about changes in debt outstanding and debt subject to limit.
In some instances, daily cash flows are related to changes in the
debt subject to the limit. For example, when Treasury auctions
securities to the public its cash position increases by roughly the
same amount. (Treasury's auction decisions are based on its goal of
funding the government at the lowest possible cost to the taxpayer, and
generally are not directly tied to the expenditures of any single day.)
Other transactions may affect Treasury's cash position, but do not
necessarily affect the debt subject to the limit. For example, various
expenditures decrease Treasury's cash, but do not affect the
outstanding debt, unless it is necessary to issue debt to finance those
expenditures. Likewise, there are transactions that increase the
outstanding debt subject to limit that do not have any impact on cash,
such as the periodic payment of interest to Federal trust funds, which
are invested in Treasury securities.
Still other transactions create an indirect linkage between cash
flows and outstanding debt subject to the limit. For example, when
Treasury receives Federal withheld income and FICA tax payments, a
portion of those payments is deposited in the Social Security trust
funds, and that deposited amount is then invested in Treasury
securities, as required by law. This investment increases the
outstanding debt subject to the limit.
The tables below summarize cash and debt activity appearing in the
Daily Treasury Statements which covers all business days in June--July
2012. (See attachment 1.)
Question 2: Please describe the process for the preparation of the
Fiscal Assistant Secretary's daily cash balance projections.
Historically, how accurate are these cash balance projections?
Treasury's Office of the Fiscal Assistant Secretary (OFAS), staffed
exclusively by career officials, prepares estimates of Treasury's cash
balances.\1\ These estimates depend on projections of receipts, outlays
for government operations, and net cash flows from Treasury securities
sold at auction (marketable activity) and the issuance and redemption
of certain other Treasury securities, including State and Local
Government Series (SLGS) and savings bonds (non-marketable activity).
---------------------------------------------------------------------------
\1\ OFAS also prepares estimates of Treasury debt outstanding and
debt subject to limit.
---------------------------------------------------------------------------
OFAS prepares ``baseline'' cash balance projections on a quarterly
basis. Treasury's projected marketable borrowing needs and assumed end-
of-quarter cash balances for the current and next calendar quarters, as
calculated in the baseline, are announced publicly as part of
Treasury's quarterly refunding announcements.
OFAS updates its baseline projections on a regular basis. These
updates inform daily cash position management decisions. Updated cash
projections are also used by Treasury debt managers to adjust
marketable financing plans to help ensure that Treasury has adequate
cash to fully cover obligations presented for payment.
There is necessarily a margin of error applicable to Treasury's
projections. The margin of error for a projection one week in the
future (at a 95 percent confidence level) has typically been roughly
plus or minus $10 billion, and the margin of error for a projection two
weeks in the future (at a 95 percent confidence level) has typically
been roughly plus or minus $17 billion. At the 99 percent-plus
confidence level, the margins of error are $14 billion for projections
one week in the future, and $26 billion for projections two weeks in
the future. In April 2013, receipts for the month came in a record $53
billion stronger than projected as of the end of March. There is also
significant volatility with regard to the receipts of a single day: on
one day in recent years, Treasury recognized $9.6 billion more of
receipts than it had forecast that same morning; on another day,
Treasury recognized $15.7 billion less of receipts than it had forecast
the business day before.
Question 3: Were the cash balance projections to show expected cash
outlays in excess of expected cash balances, what measures are
available to Treasury?
Treasury maintains an appropriate cash balance to ensure that
unforeseen fluctuations in cash balances do not negatively impact our
debt management strategy. While Treasury strives to maintain a regular
and predicable auction schedule, we also have the capacity to announce,
issue, and settle a same-day cash management bill (CMB) should cash
balance projections suggest that we are facing a cash shortfall.
Question 4: In an August 2012 report to Sen. Hatch, the Treasury
Inspector General stated that ``because Congress has never provided
guidance to the contrary, Treasury's systems are designed to make each
payment in the order it comes due.''
a. Please identify which of Treasury's systems are relevant to this
statement and describe any rules and procedures governing the operation
of these systems.
Each year, Treasury issues over one billion payments valued at over
$2.4 trillion. Treasury issues these payments on behalf of Federal
agencies and programs. An agency submits an electronic payment request
to Treasury specifying the amount and recipient of the payment.
Treasury then prepares the electronic payment or, in some cases, a
paper check.
This is a highly automated process where Treasury uses one of three
centralized systems: one for domestic payments, one for international
payments, and one for letter-of-credit or ``draw down''-type payments.
Because of the volume of payments, this is a precisely scheduled
operation where agencies electronically transmit large batches of
payment requests for processing by Treasury. A single batch may contain
millions of payment requests.
There is little time delay between when an agency submits a batch
of requests and when Treasury releases the resultant payments into the
banking system. During that brief period, Treasury's automated systems
perform four sequential functions to:
1. Ensure the internal integrity and consistency of the thousands
of payment requests in the batch;
2. Confirm that the payment recipients are screened through
Treasury's Office of Foreign Asset Control. (In the future, Treasury is
scheduled to start pre-payment screening of all payments except tax
refunds); \2\
---------------------------------------------------------------------------
\2\ Improper Payments Elimination and Recovery Improve Act of 2012
(Public Law 112-248).
---------------------------------------------------------------------------
3. Offset any eligible payments to collect delinquent debt owed to
Federal and State Governments\3\ and other authorities; and,
---------------------------------------------------------------------------
\3\ Debt Collection Improvement Act of 1996 (Public Law 104-134).
---------------------------------------------------------------------------
4. Create the necessary accounting entries to update the financial
reports of the agency and Treasury.
On average, Treasury issues approximately 80 million separate
payments per month; the automated systems that perform these four
functions operate almost continuously.
b. Is the limitation described in the statement a technical
limitation or a matter of policy?
Given the volume of payments and the time it takes to process them,
we process payments as they arrive, not based on policy matters, other
than improper payments and debt collection requirements.
Question 5: During testimony about the Chained-CPI, Secretary Lew
stated that the use of Chained-CPI can be defended ``on a technical
basis because it's more accurate.''
a. Did the Administration exempt means-tested programs from
Chained-CPI because they do not believe it is a more accurate measure
for these programs?
b. If they do believe it is a more accurate measure--why did they
not apply Chained-CPI to these programs and address any concerns they
have with the subsequent change in benefits through direct changes to
the laws governing means-tested programs directly?
In the interest of achieving a bipartisan deficit reduction
agreement, the President's FY2014 Budget contains the President's
compromise offer to Speaker Boehner from December. As part of that
offer, the President is willing to accept proposals to switch to the
chained CPI, but the Presidents' openness to chained CPI depends on two
conditions: the change must be part of a balanced deficit reduction
package that includes substantial revenue raised through tax reform,
and the change must be coupled with measures to protect the vulnerable
and avoid increasing poverty and hardship. That is why the Budget
chained CPI proposal includes a Social Security benefit enhancement for
the very elderly and others who rely on Social Security for a long
period of time and does not apply the chained CPI to means-tested
benefit programs.
representative tom rice qfrs for secretary lew
Question 1: Secretary Lew, I am deeply interested in a report from
the Treasury Inspector General for Tax Administration regarding the
Additional Child Tax Credit. You may recall this report. It was issued
on July 7, 2011.
Specifically, the report highlights the gross misuse of filers
using individual taxpayer identification numbers to claim the
Additional Child Tax Credit. In other words, filers who do not have a
social security number and are not authorized to work in the United
States.
As you may know, ITIN filers' claims for the Additional Child Tax
Credit have increased from $924 million in 2005 to $4.2 billion for
2010. This information is detailed in the Treasury Inspector General
for Tax Administration's report.
We are giving billions in tax credits to individuals who are not
authorized to work in our country. There is also evidence of ITIN
filers claiming multiple children who do not even reside in our
country.
The Treasury Inspector General for Tax Administration's report
directed both the IRS and the Department of Treasury to look into this
staggering issue. Since the report was issued almost two years ago, I
am very interested in the IRS and Department of Treasury's progress.
What efforts have your agency made to end this blatantly fraudulent
activity?
Since the release of the TIGTA Report in July, 2012, the IRS has
taken significant steps to protect the integrity of the ITIN program
and the Additional Child Tax Credit. There reforms include adopting
TIGTA's recommendation that filers be required to submit originals of
their identity documents in order to obtain ITINS, as well as other
measures. In a follow-up report on this issue released in June, 2013,
TIGTA concluded, ``The IRS initiated corrective actions to address the
majority of recommendations included in our prior audit report. These
actions are significantly improving the identification of questionable
ITIN applications.''
The Treasury Department and the IRS have considered this issue
carefully and have concluded that, under current law, individuals
filing with Individual Taxpayer Identification Numbers (ITIN)s are
eligible for the Additional Child Tax Credit, and the IRS does not have
authority under current law to deny the refundable child credit to
Individual Taxpayer Identification Number (ITIN) filers. Nothing in the
Internal Revenue Code requires that the individual claiming the credit
must have a Social Security number, in contrast to the earned income
tax credit, which does contain such a requirement. Nonetheless, to
address issues of improper payments, the IRS has internal procedures to
identify potentially improper claims for refundable credits, including
the Additional Child Tax Credit, which it refines on an ongoing basis.
Under these procedures, refunds associated with potentially improper
claims may be frozen until the IRS audits the return to determine
whether the claim should be allowed.
representative diane black qfrs for secretary lew
Question 1: Can you please explain to me what you meant in your
comments that, ``[if] we want to do anything to correct the
distribution of income in this country, our tax laws have to be part of
that. I think we made big progress at the beginning of this year in
raising the top rate to 39.6. I think that was an enormous step that
was the biggest step in a long time in terms of dealing with some of
that inequity.''
Do you believe that Congress should redistribute wealth through the
tax code?
I believe that the tax code can be effectively and appropriately
used to make the distribution of after-tax income somewhat less skewed
towards the very well off than it would be otherwise. I also believe
that it is appropriate for the most-well-off American families to bear
a somewhat higher share of the cost of the provision of government
services than they did in the prior decade. It is only fair that those
who benefit the most from our system of government contribute a modest
share of income toward its cost.
Question 2: You mentioned in your remarks before the House Budget
Committee that the administration has run the ``most aggressive cost-
benefit analysis of the regulations released by each agency.''
Have you run a report projecting the cost of the 14,000 pages of
regulations released by various departments related to the Patient
Protection and Affordable Care Act (PPACA)?
What is that cost? How do you measure the cost-to-benefit ratio?
Do you have a time frame for when the PPACA law will be fully
implemented? At the end of the implementation process, do you play on
sending a full estimate of the cost of the final PPACA regulations? Do
you have an estimate of what that cost would be?
OMB designates and reviews ``significant regulatory actions'' as
that term is defined in section 3(f) of Executive Order 12866. These
include rules with an annual economic impact greater than $100 million.
For any rule that is covered by E.O. 12866 and reaches the $100 million
threshold (i.e., ``economically significant'' regulatory action),
Treasury analyzes the costs and benefits of the proposed rule and its
alternatives, consistent with OMB Circular A-4. For rules that do not
reach the economic threshold, but that are designated by OMB as
significant regulatory actions, Treasury adheres to the principles set
forth in Executive Orders 12866 and 13563. With respect to IRS rules,
pursuant to OMB guidance implementing E.O. 12866, and longstanding
agreements between OMB and Treasury, only IRS legislative rules that
constitute ``significant regulatory actions'' are subject to E.O. 12866
review. Thus, pursuant to longstanding practice across several
Administrations, most IRS rules are not subject to E.O. 12866 review.
The timeframe for implementing the Affordable Care Act is generally
determined by the statute, and we are working diligently to meet that
timeframe. As is the case with any new tax provision, we carefully
evaluate whether transition rules are appropriate to relieve new
statutorily imposed compliance burdens. Many provisions have already
taken effect and have been fully implemented. Most of the major
coverage-related provisions take effect in 2014 and will generally be
reflected on returns filed in 2015. As with other provisions of the tax
code, we may continue to address issues and provide guidance on
implementation even after provisions take effect.
Question 3: In the Treasury Green Book, the administration proposes
expanding the small business health insurance tax credit included in
the health care law.
How will this help small businesses since the administration has
chosen to delay the small business exchanges (``SHOP exchanges'')?
I've looked through the materials the administration has released.
The firms must fill out seven worksheets to determine their eligibility
and many of the small businesses in my district are confused, burdened,
and are deterred from providing health insurance and even creating jobs
as a result. How do you plan on guiding small businesses through this
process?
The small business exchange, or SHOP, is under the jurisdiction of
the Department of Health and Human Services (HHS). My understanding is
that for the 2014 coverage year, the SHOP will be open and many small
employers will be able to purchase coverage and receive a tax credit
for providing that coverage to their employees.
The IRS has a dedicated webpage and has devoted other resources to
help small employers benefit from the small employer tax credit. And
while many small employers have already claimed the credit, we have
received feedback suggesting that the tax credit be made simpler, more
generous, and available to even more businesses. In response to this
feedback, the President's last two Budgets have proposed a package of
changes that would (1) increase the maximum size of a firm eligible for
the credit from firms under 25 full-time employees (FTEs) to firms
under 50 FTEs, (2) adopt a more generous phase-out schedule, and (3)
simplify the credit calculation by eliminating the uniformity
requirement and the cap based on average premiums in the state where a
firm is located. We look forward to working with Congress to improve
this tax credit.
Question 4: The President's budget extends and expands various
refundable tax credits, which are actually cash transfer payments to
individuals who, in many cases, do not pay any income taxes (and, in
some cases, do not even pay payroll taxes). Of particular note, the
budget proposes to reinstate, extend, or expand a variety of tax
provisions that have substantial outlay components, such as the Earned
Income Tax Credit, the American Opportunity Tax Credit, the Build
America Bonds program, renamed as Fast Forward bonds, and the proposed
Promise Zones.
How does all of this increased spending through the tax code help
with deficit reduction?
These tax credits support important social or economic goals, many
of which benefit lower and middle-income American families. For
example, the Earned Income Tax Credit is highly effective in preventing
poverty among working families. Continuing these tax credits has a
budgetary cost, but the Administration believes that this cost is
justified by the benefits they provide. In the Administration's Budget,
these costs are more than offset by other changes.
How does this increased spending through the tax code help simplify
the tax system to further the goals of fundamental tax reform?
Simplicity is one goal of a desirable fiscal system, but it is not
the only goal, and the best choice of policies will involve
appropriately managing trade-offs among competing goals such as
simplicity, efficiency, and equity. It might indeed be the case that
the important policy goals of such programs as the Earned Income Tax
Credit and the American Opportunity Tax Credit can be achieved more
simply under a fundamentally reformed tax system. I look forward to
working with you in developing a tax reform proposal that improves
equity and efficiency and raises adequate revenue in a simple manner.
representative barbara lee qfrs for secretary lew
On Poverty: We know that unemployment remains too high, and income
inequality is near historic highs, with incomes for low and middle
income workers stagnating or even falling.
While big corporations have more than recovered and are posting
massive profits, Main Street families continue to struggle and small
businesses across America don't have enough customers coming in their
doors.
Question 1: What would be the economic impact of successfully
implementing a national plan to cut the national poverty rate in half
in a decade?
The national poverty rate has declined dramatically over the past
half century, from 22.4 percent in 1959 to 11.3 percent in 2000. The
largest decline over this period occurred prior to 1970, largely as a
result of social programs enacted during the 1960s. Over the past
decade, the poverty rate has trended upward and in 2011 stood at 15.0
percent. Cutting the poverty rate in half from its current level would
lower the national poverty rate to approximately 7.5 percent, well
below the previous historic low of 11.1 percent recorded in 1973.
Economic growth is critical to poverty reduction. The World Bank
estimates that, on average, a 1 percent increase in economic growth
reduces poverty by 1.25 percent. The Administration is concerned about
the long-term consequences of rising poverty for the nation's economic
prospects and remains focused on reducing poverty by increasing broad-
based economic growth and expanding economic opportunities for all
Americans.
On the Impact of Chained CPI: Today, the White House released a
document outlining the protections put in place to shield the very
elderly and families who rely on means tested programs from the impacts
of Chained CPI.
Question 2: If Chained CPI does not amount to a $230 billion dollar
benefit cut, why does anyone need protections from the impacts of
Chained CPI as outlined by the White House yesterday?
The adoption of chained CPI for indexation of federal programs is
estimated to reduce deficits during 2014-2023 by $230 billion. Lower
outlays account for approximately $130 billion of this reduction and
are achieved through slower growth in benefits.
The President's FY2014 Budget contains the President's compromise
offer to Speaker Boehner from December. As part of that offer, the
President is willing to accept proposals to switch to the chained CPI,
but the Presidents' openness to chained CPI depends on two conditions:
the change must be part of a balanced deficit reduction package that
includes substantial revenue raised through tax reform, and the change
must be coupled with measures to protect the vulnerable and avoid
increasing poverty and hardship. That is why the Budget chained CPI
proposal includes a Social Security benefit enhancement for the very
elderly and others who rely on Social Security for a long period of
time and does not apply the chained CPI to means-tested benefit
programs.
On CUBA and OFAC: Given the tight budgets, it is vitally important
that we effectively allocate resources to the highest priority
endeavors. One such office that I believe needs a thorough review is
the Office of Foreign Asset Control (OFAC) which is tasked with a
critical role in our nation's fight against acts of terrorism and the
funding of groups and actors who support terror.
OFAC continues to unnecessarily spend resources on enforcing strict
travel and trade sanctions with Cuba, a country that, dating back to
1998, the Defense Intelligence Agency has not considered a significant
threat to U.S. national security.
Question 3: Mr. Secretary, when was the last time that the office
of Office of Terrorism and Financial Intelligence or the Office of
Foreign Asset Control blocked or intercepted a terrorism related
financial transaction supported by the Cuban government?
As Cuba is designated as a state sponsor of terrorism, the Treasury
Department reports the blocking of millions of dollars each year
related to Cuba in the Terrorism Assets Report. However, because our
sanctions regime on Cuba targets not only the Government of Cuba, but
also its nationals, defined to include entities and individuals, the
reported figures include assets in which either the Government of Cuba
or a Cuban national has an interest. In the most recent Terrorism
Assets Report, Treasury reported a net increase of $8.1 million of
blocked funds related to Cuba in 2012, for a total of $253.1 million of
blocked funds related to Cuba.
On the Disparity in the Unemployment Rate: The national
unemployment rate is now at 7.6%, and has been slowly ticking downward
for the last several months now. However, the rates for minorities--
particularly African Americans at 13.3 percent and Hispanics at 9.2--
have remained well above national average throughout the unemployment
crisis, and are still unacceptably high.
As part of the Omnibus Appropriations Act for FY2009--which was
signed into law--the Department of Labor was required to provide a
report outlining actions which can be taken related to reducing
disparities in employment rates.
Question 4: Many economists find that increasing equitable access
to economic opportunity is a better economic model that will lead to
greater economic growth for all Americans, do you agree?
We agree. Despite the progress we have made under President Obama,
more needs to be done to get America's job seekers back to work. Too
many Americans still lack opportunities to make use of all of their
talents and potential. All of us would benefit from a fuller employment
of their skills. That is why the Administration supports programs such
as the universal preschool initiative outlined in the FY 2014 Budget
that help in giving all children the tools they need to succeed. It is
also why the Administration is addressing challenging labor market
conditions through programs that equip individuals with the skills and
tools they need to succeed, encourage the creation of jobs in in-demand
industry sectors and occupations, and strengthen actions that address
discriminatory practices.
Question 5: How can the Treasury and our entire government act to
effectively address this pervasive issue of unemployment in these
communities?
The Administration is very concerned about the persistent high
level of unemployment and is committed to policies that aim to improve
labor market conditions. These include employment subsidies, worker
retraining, and investment in infrastructure, among other policies. For
instance, efforts are currently underway to upgrade and revitalize
America's community colleges so that any individual will have the
opportunity to further their education, gain skills, and acquire
industry-recognized credentials. The FY2014 budget introduces several
initiatives to encourage job growth as well as bolster education and
worker training, such as modernizing, streamlining access, and
strengthening the delivery of job training services through the
American Job Centers.
representative bill flores qfr for secretary lew
Context: Secretary Lew commented that people who exceed the $3
million cap can still contribute, but will simply not receive a tax
break. This is a contradiction of the Treasury Department explanation
where it says: ``If a taxpayer reached the maximum permitted
accumulation, no further contributions or accruals would be permitted,
but the taxpayer's account balance could continue to grow with
investment earnings and gains''.
Transcript from hearing last week:
Lew: And we're not saying people can't contribute. We're just
saying that the tax benefits aren't going to be the same. So you can
still contribute. You just can't get it with before tax dollars. You
can't contribute it before tax dollars.
Question 1: There are multiple proposals in the budget that will
negatively impact retirement savings, including the 28% cap on itemized
deduction, the $3 million cap and the chained CPI proposal (which will
limit annual inflation adjustments for contribution and comp limits),
has the government considered the effect that these three proposals
could jointly have on individuals saving for a secure retirement?
The provisions that you note are unlikely to have any discernible
effect on most individuals' ability to save for a secure retirement.
While we all agree that too few Americans are saving enough for
retirement, that concern does not extend to the few individuals who
have accumulated amounts in tax-preferred savings vehicles that are
sufficient to provide more than $205,000 per year for the life of the
participant and an assumed spouse (and would be subject to the cap on
tax-advantaged retirement accumulations to which you refer, and which
today would currently be approximately $3.4 million). Similarly, the
28-percent limit on certain tax expenditures will have little impact on
retirement security because only high-income taxpayers are subject to
the 28 percent limitation on the value of the tax benefit from
retirement contributions, and even with that limitation, they would
still receive a larger tax incentive to save for retirement than most
middle-class families. Furthermore, the proposal recognizes that
retirement savings are taxed when they are distributed, and allows
affected taxpayers an adjustment to basis for the additional tax paid
as a result of the 28-percent limit. The proposal to use the chained-
CPI instead of the current CPI slows the growth of contribution limits
to bring them in line with what most experts regard as a more accurate
measure of average change in the cost of living. As noted in the
Budget, this last proposal would only be considered in the context of a
comprehensive deficit reduction effort.
Question 2: Have you looked at any behavior models to understand
the potential impact on qualified plan formation or continuation,
particularly in the small business context where a small business owner
would lose the incentive to save within the qualified plan system?
We agree that tax incentives for both higher- and lower-wage
employees (including the self-employed) are an important part of our
system of voluntary saving for retirement. The proposal will have
little if any impact on this incentive for the vast majority of
beneficiaries. Almost no small business employers would ever reach the
cap on retirement savings, which is an amount sufficient to provide an
annuity of $205,000 per year. Even those who do will have an incentive
to continue to offer tax-subsidized plans for their employees because
retirement plans are an important recruitment and retention tool.
Question 3: While I understand the $3 million cap is to target
millionaires, we all recall the economic downturn not too long ago, and
I am concerned that with any similar downturn, couldn't we have
someone's supposed secure $3 million turn into $1 million, which would
then not be enough to fund a comfortable retirement?
Fluctuating values in retirement accounts is an important concern.
However, the proposal to limit the tax benefit to accumulations
sufficient to provide an annual income over $200,000 will have little
if any impact on retirement security. First, a $205,000 annuity should
be more than sufficient to provide for a secure retirement. Second, the
few individuals who would be subject to this provision are still free
to save additional amounts outside of the tax-favored system. And
third, if accumulated levels fall below an amount sufficient to fund
the maximum allowable tax-favored annuity, the taxpayer would be
permitted to resume contributions.
Question 4: In terms of the proposal to place a $3 million cap on
savings, won't this discourage savings more broadly? And wouldn't that
be the wrong message for the government to send?
The proposal will not have any discernible impact on overall
saving. While we all agree that too few Americans are saving enough for
retirement, that concern does not extend to the very few individuals
who have accumulated amounts in tax-preferred savings vehicles that are
sufficient to provide income of $205,000 per year. Moreover, those few
affected individuals are still free to save additional amounts outside
of the tax-favored system. There is little evidence that tax-
preferences for retirement saving substantially increase the amount
saved by higher-income individuals once a reasonable amount has been
accumulated, and thus little reason to believe they will save less if
those tax benefits are modestly curbed.
Question 5: Would you envision individuals needing to pay taxes
immediately if they have funds over $3 million in their account? How
about spouses who have inherited IRAs and may need that money to live
comfortably?
No, a taxpayer who has already accumulated sufficient retirement
saving to fund an annuity of more than $205,000 (in today's dollars)
will not have to pay tax immediately. The taxpayer would continue to
enjoy tax-deferred growth of retirement saving and would merely be
prohibited from making additional tax-favored contributions.
The proposal would have no impact on IRAs inherited by a spouse.
Question 6: In terms of the actual number the government is
proposing, what happens with a potential economic downturn? Or a
changed life situation? Such a limitation does not take in account any
possible changed circumstances.
If a taxpayer's account balance falls below the limit (assets
sufficient to fund a retirement annuity of $205,000), because of an
economic downturn or other reasons, he or she will be allowed to resume
making contributions. Note that the limit is the same as the maximum
defined benefit pension today, and that a $205,000 annuity should
provide for a secure retirement.
Question 7: Has the government looked at how this could impact ESOP
formation or current ESOP participants?
ESOPs receive additional tax preferences beyond that of a typical
qualified retirement plan and have desirable non-tax related features
that can also benefit firms, which would not be affected by this
proposal. Therefore, the proposal would have little, if any, impact on
ESOP formation. Since very few ESOP participants would ever reach the
limit, the vast majority of current ESOP participants would be
unaffected by the proposal.
attachments
[Whereupon, at 12:23 p.m., the Committee was adjourned.]