SPEAKERS CONTENTS INSERTS Tables
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44–244 CC
1998
PRESIDENT'S FISCAL YEAR 1998 BUDGET
HEARINGS
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
FEBRUARY 11 AND 12, 1997
Serial 105–17
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
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BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
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CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
MICHAEL R. McNULTY, New York
WILLIAM J. JEFFERSON, Louisiana
JOHN S. TANNER, Tennessee
XAVIER BECERRA, California
KAREN L. THURMAN, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. The electronic version of the hearing record does not include materials which were not submitted in an electronic format. These materials are kept on file in the official Committee records.
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C O N T E N T S
Advisories announcing the hearings
WITNESSES
U.S. Department of the Treasury, Hon. Robert E. Rubin, Secretary; accompanied by Jacob J. Lew, Deputy Director, Office of Management and Budget
U.S. Department of Health and Human Services, Hon. Donna E. Shalala, Secretary
SUBMISSIONS FOR THE RECORD
American Bankers Association, statement
Chicago Board of Trade, and Chicago Mercantile Exchange, joint statement
Home Care Association of America, Jacksonville, FL, Dwight S. Cenac, statement
International Swaps and Derivatives Association, Inc., New York, NY, statement
Interstate Conference of Employment Security Agencies, Inc., Debra R. Bowland, letter
National Association of Realtors, Russell Booth, statement and attachments
UBA, Inc., Eric J. Oxfeld, letter and attachments
PRESIDENT'S FISCAL YEAR 1998 BUDGET
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TUESDAY, FEBRUARY 11, 1997
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 1:10 p.m., in room 1100, Longworth House Office Building, Hon. Bill Archer (Chairman of the Committee) presiding.
[The advisories announcing the hearings follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225–1721
FOR IMMEDIATE RELEASE
January 27, 1997
No. FC–1
Archer Announces Hearings on
President's Fiscal Year 1998 Budget
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Congressman Archer (R–TX), Chairman of the Committee on Ways and Means, today announced that the Committee will hold hearings on President Clinton's fiscal year 1998 budget proposals that are under the jurisdiction of the Committee. The hearings will take place on Tuesday, February 11, 1997, beginning at 10:00 a.m. and Wednesday, February 12, 1997, beginning at 9:30 a.m., in the main Committee hearing room, 1100 Longworth House Office Building.
In view of the limited time available to hear witnesses, oral testimony at these hearings will be heard from Administration witnesses only. On February 11, testimony will be heard from Secretary of the Treasury Robert E. Rubin. On the morning of February 12, testimony will be heard from Secretary of Health and Human Services Donna E. Shalala, and in the afternoon from Donald C. Lubick, Assistant Secretary of the Treasury for Tax Policy. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
On February 6, President Clinton will submit his fiscal year 1998 budget to the Congress. The official presentation of the Administration's tax, Medicare, and welfare proposals represents the beginning of the process towards agreement on a balanced budget by fiscal year 2002.
In announcing the hearings, Chairman Archer stated: ''These hearings are the first of many opportunities the Administration will have to present their plan to balance the budget. I am eager to hear the President's proposal for ending decades of deficit spending. I am hopeful these hearings will mark the start of a bipartisan commitment to get our job done.''
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FOCUS OF THE HEARING:
The Committee will receive testimony on the President's revenue proposals from Secretary Rubin. In addition, the Secretary is expected to discuss general spending trends, and revenue and deficit projections, including economic trends forecast by the Administration.
The following day, the Committee will focus on the details of the Administration's Medicare and welfare proposals, and additional details of the Administration's revenue proposals.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) copies of their statement and a 3.5 inch diskette in WordPerfect or ASCII format, with their address and date of hearing noted, by the close of business, Thursday, February 27, 1997, to A. L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Committee office, room 1102 Longworth House Office Building, at least one hour before the hearing begins.
FORMATTING REQUIREMENTS:
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Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages including attachments. At same time written statements are submitted to the Committee, witnesses are now requested to submit their statements on 3.5 inch diskette in WordPerfect or ASCII format.
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record.
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The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms.
Note: All Committee advisories and news releases are available on the World Wide Web at 'TTP://WWW.HOUSE.GOV/WAYS_MEANS/'.
The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 202–225–1904 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative
formats) may be directed to the Committee as noted above.
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NOTICE—CHANGE IN TIME
ADVISORY
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FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225–1721
FOR IMMEDIATE RELEASE
February 7, 1997
No. FC–1–Revised
Time Change for Full Committee Hearing on
Tuesday, February 11, 1997,
on the President's Fiscal Year 1998 Budget
Congressman Bill Archer (R–TX), Chairman of the Committee on Ways and Means, today announced that the full Committee hearing on the President's fiscal year 1998 budget previously scheduled for Tuesday, February 11, 1997, at 10:00 a.m., in the main Committee hearing room, 1100 Longworth House Office Building, will begin instead at 1:00 p.m. Additionally, the afternoon hearing session scheduled for Wednesday, February 12, 1997, on the President's fiscal year 1998 budget has been canceled.
All other details for the hearing remain the same. (See full Committee press release No. FC–1, dated January 17, 1997.)
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Chairman ARCHER. The Committee will come to order. The Chair invites guests, staff, and Members to take their seats.
This is an important and historic hearing today because for the first time since 1969, we are going to seriously discuss a real balanced budget for the people of this country, and I welcome you, Mr. Secretary, to participate in that and thank you for joining us today, particularly with the knowledge that you are a little bit under the weather, so we are very, very grateful and we will try to release you as soon as possible.
If there was ever a year to balance a budget, this is it, and as difficult as the task may be, the American people expect us to work together and to get the job done. Let us do it.
This country has two major legislative goals that I want to see signed into law and your good efforts are crucial to both of them. Number one, I want to balance the budget without raising taxes on the American people, and the best way to do that is to provide permanent tax relief so we can downsize the power of Washington and upsize the power of people, increase their individual freedom and their opportunities and responsibilities.
Number two, as you know and I think most people in this country know by now, I want to totally abolish the Federal income tax and replace it with a new tax that is fairer, simpler, less intrusive in the lives of individual Americans, and one that is conducive to even greater economic growth. The budget you have submitted to the Congress advocates balance by 2002, but I am concerned it approaches that important goal with too high a level of taxation and with too much spending. I believe we can balance the budget with fewer taxes and less spending, and I look forward to working in a bipartisan fashion with you and the Democrats on the Hill to achieve that result.
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On Sunday, together with the leaders of the House and the Senate, I sent a letter to the President urging him to propose a new tax system to take our Nation into the 21st century. The recent announcement by the IRS that it has spent over $4 billion on a new computer system that does not work is yet another reason why we need a new Tax Code for America. We need a code that can be administered after the expenditure of that large amount of money. If the current Tax Code is so complicated that the IRS cannot design a computer capable of dealing with it, then maybe it is time to give the American people a newer, fairer, and simpler code. So I am looking forward to your proposal, which I understand you are working on, so that we can work together on this issue.
I have many other thoughts about the specific proposals in the budget which I intend to address during the questioning period. But for now, that concludes my opening and welcoming statement to you, which is a very sincere welcoming one in the hopes that we can work together.
[The opening statement follows:]
INSERT OFFSET FOLIO 1 HERE
[The official Committee record contains additional material here.]
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Chairman ARCHER. I yield to the Ranking Minority Member, Mr. Rangel, for any statement he might like to make.
Mr. RANGEL. I was just about to yield to the less-senior Members for their opening statements, but since that did not fly the last time, I will stick by the Committee's rules.
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Chairman ARCHER. The Chair would not object.
Mr. RANGEL. We will do it the right way this time.
Let me join in in this first hearing in the spirit of bipartisanship as we move forward. I would like to say, I am so pleased with the expressions of the Chairman and his willingness, publicly as well as at this hearing, to work with the President and to work with the administration. In the spirit of bipartisanship, I would like to take a shot at the IRS for the record so that we can get it out of my system and we can move forward.
I do not think the President needs any help in how to reach a balanced budget. This is the first time, as you pointed out, a President has done more than talk about it. President Clinton actually did it. And as you say, we have to start talking about upgrading the power of people. The most powerful State of the Union speech I have ever heard was the one that President Clinton recently gave where he focused on education as a top priority within the balanced budget plan.
All of us are concerned with the cost of incarceration, of jails, police, crime, drugs, violence, unwanted children, poverty, unemployment. If we had to find just one key, I think the President has found it. That is improving the educational system of this great republic so that we can be competitive.
And while it is true Members have different ways that they could achieve the balanced budget, I think Republicans have gone out of their way to say this is a document they can work with. Some of the Democrats have problems with it. But as long as we can put the rhetoric and passion of the past behind us and seriously attempt to work our will so that our Nation can continue to move forward economically, we can accomplish our goal. I think you deserve a great deal of praise, Mr. Rubin, as does our President. Together I hope we can do even better. I hope you recover from the flu soon and we wish you well.
Again, Mr. Chairman, I want to thank you and congratulate you for the spirit in which we are starting these hearings.
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Chairman ARCHER. Thank you, Mr. Rangel.
[The opening statement of Mr. Ramstad follows:]
INSERT OFFSET FOLIO 2 HERE
[The official Committee record contains additional material here.]
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Chairman ARCHER. Mr. Secretary, you may proceed with your testimony, and again, welcome. We are glad to have you with us.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S. DEPARTMENT OF THE TREASURY; ACCOMPANIED BY JACOB J. LEW, DEPUTY DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
Mr. RUBIN. Thank you, Mr. Chairman. I also have with me, as you can see, Jack Lew, who is the Deputy Director of OMB. Mr. Lew and I will be delighted to respond to questions when I complete my testimony.
I want to start, Mr. Chairman, by thanking you, Mr. Rangel, and the other Members for giving me this opportunity to discuss the President's 1998 budget. It is a budget of which we are very proud, and we gladly welcome the opportunity to discuss it with you today.
This past weekend, I was in Berlin. I went over Friday night and came back Saturday night, which I do not recommend. But I was in Berlin for a meeting with our G–7 economic partners. It was not long ago, and I remember well, when other industrial nations wanted to criticize the United States for not facing our problems, problems that affected not only us but them, as well, and we were viewed as yesterday's economy.
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The situation is now exactly the opposite. At G–7 meetings today, the United States is once again viewed as the world's economic leader, and we are enormously respected for having dealt squarely with the problems that we face, both in the private sector and the public sector, and in the public sector for having made dramatic progress with respect to fiscal responsibility. I do have a chart here that shows the American deficit as a percentage of GDP, and as you can see, we now have the lowest deficit-to-GDP ratio in the G–7.
In Berlin, we also discussed many of the other issues that the President discussed in his State of the Union as issues which are critical to the economic health of any nation in today's global economy—education and the critical effect that has on productivity, the importance in all of our Nations of bringing the least well off into the economic mainstream and tremendous productivity gains that can come therefrom, and how essential it is for all of our Nations, but particularly the United States, to maintain a leadership position with respect to the issues of the global economy.
Mr. Chairman, I believe we have an extraordinary opportunity to build on what has been accomplished over the last several years, accomplished both in the public and the private sectors, to put our country in a very strong position for the next century, and I believe the President's budget is designed to accomplish exactly that.
We are, as you said, in a historic time, within striking distance of balancing the budget. This certainly is building on what was accomplished in 1993. The 1993 deficit reduction program led to a reduction in the deficit from 4.7 percent of GDP to what is now 1.4 percent of GDP. That deficit reduction, in turn, lowered interest rates, increased business confidence, and those factors contributed very substantially to the economic recovery that we have enjoyed the last 4 years. Just as deficit reduction has been critical over the last 4 years, so it is absolutely critical going forward.
I also believe there is a change in public attitude toward fiscal responsibility in this country. We have the political environment in which we can accomplish this year the historic objective the Chairman mentioned in his opening remarks.
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Moreover, there is a new factor at work in the global economy that provides an enforcement for fiscal discipline which did not exist but will exist ever forward, in my opinion, and that is the power of the global financial markets to punish those nations that practice fiscal laxity with high interest rates, which in turn are inimical to economic growth.
We can, should, and must work together to capitalize on the moment we now have, and I believe it is very likely that in this context we will, in fact, put in place balanced budget legislation this year.
The President's budget does this and gets us to balance by 2002. It does so using realistic numbers and sound policies, by protecting priorities the President believes are critical to future productivity and a healthy society.
I can remember from my days on Wall Street how often administrations' forecasts were based on rosy scenarios, and then when the deficits came in, they were higher than projected, not only undermining fiscal responsibility but also creating cynicism about government. Under President Clinton, we have used prudent and realistic economic assumptions, and as a result, deficits have been lower than either OMB or CBO in each of the past 4 years, and I think we have a chart to that effect, too. It is over there.
Our 1998 budget is done in exactly the same spirit of sound policies and prudent, realistic economic and technical assumptions. I said a moment ago, in each of the last 4 years, the deficit has come in under the deficit projected in the budget, which I would guess must be pretty much unprecedented in the fiscal history of this country.
Our budget also makes tough choices. For example, it eliminates 254 programs outright for roughly $2.9 billion in savings. We carefully looked in the discretionary benefits, discretionary accounts for each of the agencies to make sure that we have done everything we could to bring spending down, at the same time maintaining the critical function of those agencies. We auction broadcast spectrum. We closed corporate loopholes, eliminated subsidies that may have made sense at one time but are no longer warranted.
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We cut $100 billion from Medicare over 5 years, in our judgment, in ways that will not adversely affect beneficiaries, and certainly in ways that will not affect their out-of-pocket expenses, and the list goes on. In the course of doing this, the Part A Hospital Trust Fund, which was otherwise estimated to be exhausted in 2001, will be extended to 2007.
At the same time, Mr. Chairman, we all recognize, and I know you recognize, that there are long-term entitlement problems due to demographic trends, problems that have not been addressed in either the congressional majority's budgets of the last 2 years or the President's budget, and it is for this reason the President has called for a bipartisan process to deal with long-term entitlement problems.
Raising another subject, if I may, that is germane at the present time, Mr. Chairman, in the State of the Union, the President said he was totally committed to balancing the budget and then he said he was equally convinced we should not have a balanced budget amendment because, in his judgment, it would subject our Nation to unacceptable economic risks in perpetuity and also because it would increase risks to the Social Security system. That is a view I very strongly share.
Within the context of any totally balanced budget, it is extremely important that we invest in areas critical to future productivity and U.S. global leadership. There are many initiatives in the budget toward these ends. What I would like to do today is to focus on a few, particularly those that involve use of the tax system.
We have the President's proposed middle-income tax cuts which are designed to help middle-income people obtain the skills they need to prosper in the modern economy. They increase savings and improve child care that is through our child tax credit. We also have programs to help move people from welfare to work and more broadly to help distressed inner cities.
Before proceeding to discuss various other programs, let me stop for a moment to talk about the total of the tax cuts. We have proposed a total of $100 billion over 5 years. That is, in our judgment, a moderate, and because of its structure, a carefully targeted tax program designed to serve the purposes that I mentioned a moment ago. We believe it strikes the correct balance between advancing the goals of the balanced budget and providing tax relief. Tax cuts that are much higher would, in our opinion, require program reductions that would unduly harm our economy and our society.
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In many areas, the President's budget and the congressional view of the budgetary matters have many similarities. In the tax area, they are not particularly close. Hopefully, we can close this gap. What we should not do, in our judgment, and we must not do, is to get engaged in a bidding war over tax cuts.
Now, to go back to the President's priorities, areas critical to future productivity, the administration proposes extending the R&D tax credit for another year. It proposes substantial additional spending on education and training, as well as the education tax credits and deductions I already alluded to, a new effort to ensure health care for children, and new initiatives to encourage businesses to hire former welfare recipients and to help States and cities locate jobs to move families from welfare to work.
I mention moving families from welfare to work in the context of enhancing productivity because I believe that bringing welfare recipients into the economic mainstream and eliminating the social cost associated with welfare is critical to the future economic growth of the country and affects everyone. Revitalizing our cities and moving welfare recipients to work are part of a much broader effort to bring the economically disenfranchised, whether urban or rural, many of whom are not welfare recipients, into the economic mainstream.
The budget contains tax incentives to clean up environmentally contaminated land in distressed areas known as brownfields, new empowerment zones, and increased investments in the CDFI, Community Developed Financial Institutions, fund.
The concept is to empower the disenfranchised to join the economic mainstream and is based on a strong belief in the private sector and in bringing in the private sector to help solve these problems with proper incentives.
As I said a moment ago, it is the President's strong view that while these issues of the inner city are indeed social issues, they are also economic issues for all of us, and that all of us have a vital interest in seeing them effectively addressed.
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The third area I wish to mention in our budget regards the importance of providing adequate resources to maintain U.S. leadership in the global economy. The budget seeks a significant increase in overall funding to sustain our international engagement and our role, as the President likes to say, as the world's indispensable nation.
There was no question in our G–7 meeting this past Saturday in Berlin that there is only one country in today's world that can provide leadership on the critical issues of the global economy and that is the United States. But if we are going to maintain our ability to have the leverage we now have and to shape the world's agenda on economic issues, we must meet our commitments to the United Nations, we must meet our commitments to the World Bank and its sister institutions, and we must participate in all of these institutions in a meaningful way on an ongoing basis, and we do so not for charitable reasons but because doing so serves our economic and national security self-interest.
Mr. Chairman, let me conclude by saying, as I said earlier, that I believe we have a historic opportunity to complete the job that we began in 1993 and balance the budget, and to do so in a way that promotes the areas that are critical to future productivity, economic health, and societal health for our country.
Let me conclude by thanking you again for the opportunity to discuss the President's budget. Mr. Lew and I would now be delighted to respond to any questions you may have.
[The prepared statement and attachments follow:]
Statement of Hon. Robert E. Rubin, Secretary, U.S. Department of the Treasury
Mr. Chairman, I appreciate this opportunity to appear today to discuss the President's budget proposal for fiscal year 1998.
This weekend I was in Berlin for a meeting of our G–7 economic partners. It wasn't so long ago when the other industrial nations roundly criticized the United States at G–7 meetings for not attending to its economic affairs and we were viewed as yesterday's economy. That situation is now exactly the opposite. The United States is once again viewed as the world's economic leader.
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They understand that the primary source of U.S. economic strength today results from having squarely faced our challenges—in both the private and public sectors—including dramatic progress in restoring fiscal order. In Berlin, we also discussed the issues which the President emphasized in his State of the Union: how the globalization of the economy and the information revolution has made it more important than ever to have an educated workforce; how we must initiate policies which will bring more people into the economic mainstream; and how essential it is for all nations to remain engaged in the world. Meeting these challenges will further advance U.S. economic strength going forward, and that is the right path for the rest of the world as well.
It is in this context that I want to talk about the President's budget this morning.
We are in strong economic shape today and within striking distance of balancing the budget. This would not have happened without the deficit reduction program enacted in 1993, which has reduced the size of the deficit from 4.7% to 1.4% of GDP. That deficit reduction, in turn, inspired broad business confidence and drove down interest rates, which then drove and sustained the economic recovery. In fact, the United States now has the best economic conditions among all of the developed major industrial nations. Our economy has created over 11 million new jobs since 1993; inflation has remained low; exports are booming; and we've experienced record levels of investment, which is critical to future productivity. And just as deficit reduction has been the critical factor in these economic conditions, so is it critical to a strong economy over the long-term.
We have an historic opportunity to work together and finish the job. There is strong support among the public for balancing the budget and there is, I believe, a change of attitude in Washington about the importance of fiscal responsibility. Moreover, the global capital markets have created a powerful new incentive for fiscal order, by punishing fiscal laxity with high interest rates that are inimical to economic health. We can, should and must work together to capitalize on this moment and get the job done.
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The President's budget will get us to balance by 2002. It does so using real numbers and no gimmicks while protecting our priorities and investing in our people. In prior Administrations, budgets were too often based on rosy economic scenarios—and, when the actual deficits came in much higher than projected, the result was not only a higher deficit but increased public cynicism about the ability of the government to get its fiscal house in order. Under President Clinton, we have used prudent and realistic economic assumptions. As a result, actual deficits have come in lower than either OMB or CBO have projected in each of the last four years, which, I believe, is unprecedented. Our 1998 budget is done in the same spirit of sound policies and prudent, realistic economic and technical assumptions.
Our budget makes tough choices. It eliminates 254 programs outright for $2.9 billion in savings, combs discretionary spending, auctions broadcast spectrum, and contains a number of proposals to close corporate loopholes and improve compliance. Our proposal cuts Medicare spending by $100 billion over five years, but without adversely affecting the quality of care for beneficiaries or the amount they must pay out-of-pocket. In the absence of change, the Part A Hospital Trust Fund will become insolvent in 2001. The President's proposal extends the solvency of the Part A trust fund to 2007. At the same time, we recognize that there are obviously long term entitlement problems due to demographic trends such as the aging of the baby boomers, which we must address through a bipartisan process.
Mr. Chairman, as the President said in his State of the Union Address, balancing the budget requires votes by Congress, and the President's signature. It does not require a balanced budget amendment. Indeed, as strongly committed as the President is to a balanced budget, he has an equally strong conviction, which I firmly share, that a balanced budget amendment is a threat to our economic health and should not be adopted. Such an amendment will not make for us the tough policy choices that we ourselves must make to balance the budget, and it will subject our economy to unacceptable risks.
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Within the context of moving toward a balanced budget it is extremely important that we invest in areas critical to future productivity and U.S. global leadership. There are, obviously, many specific initiatives in the budget worth mentioning, and most of them were mentioned last week by OMB Director Raines in his testimony before the Senate Budget Committee, but today I would like to focus on just a few significant ones—the President's proposals aimed at giving middle class people the opportunity to obtain the skills they need to prosper in this economy, as well as proposals to move the residents of our inner cities and distressed rural areas into the economic mainstream.
First, the President's tax program provides targeted tax cuts for the middle class.
The Administration's program would make it easier for middle class families to raise children, save for retirement, and pay for post-secondary education. In addition, the Administration is proposing to eliminate capital gains taxes for nearly all homeowners when they sell their home.
The President is proposing tax cuts that total $100 billion over five years. I believe that amount strikes the correct balance between advancing the goals of a balanced budget, and providing tax relief. Tax cuts that are much higher than the Presidents' proposals would require us to make program reductions that would unduly harm our economy and our society. In many areas, the Congressional budget and the Presidential budget are close: not on tax cuts. I hope we can close this gap. What we should not do is engage in a ''bidding war'' over tax cuts.
Second, the President's budget bolsters areas critical to future productivity. The surest way to enhance productivity, and maintain our country's competitive edge in the future, is by investing in areas that have long term payoffs. To that end, the Administration proposes extending the R&D tax credit for another year; substantial additional spending on education and training; a new effort to ensure health care for children; and new initiatives to encourage businesses to hire former welfare recipients and to help states and cities locate jobs to move families from welfare to work. I mention moving families from welfare to work in the context of enhancing productivity because I believe that bringing welfare recipients into the economic mainstream and eliminating the social costs associated with welfare is critical to the future economic growth of the country and affects everyone. Welfare reform is an economic issue, as well as a social issue. Revitalizing our cities and moving welfare recipients to work is part of a much broader effort to bring the economically disenfranchised, many of whom are not welfare recipients, into the economic mainstream. The budget contains tax incentives to clean up environmentally contaminated land in distressed areas, known as brownfields; new empowerment zones; and increased investments in Treasury's CDFI fund. This is the right time to implement these leaner, private-sector oriented approaches toward fostering growth in the inner cities as we move to balance the budget.
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The final area I wish to mention regards the importance of providing adequate resources to maintain U.S. leadership in the global economy.
The budget seeks a significant increase in overall funding to sustain our international engagement, and our role, as the President says, as the world's indispensable nation. To shape world events to advance our security and economic self-interest, we must meet our international obligations and support and lead in the United Nations and in the international financial institutions, such as the World Bank, the International Development Association and the International Monetary Fund. We should do so not for charitable reasons, but because it is in the economic self-interest and national security self-interest of the United States and our citizens. Bringing developing countries into the economic mainstream raises living standards, promotes political stability—and it increases markets for U.S. exports.
Mr. Chairman, as I said earlier, I believe we have an historic opportunity to complete the job we started in 1993 and balance the budget; and to do so in a way that protects our priorities, both for now and the future. Let me conclude by thanking you again for this opportunity to discuss the President's budget proposal. I look forward to working with all of you this year.
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Appendix: Summary of Tax Provisions
The President's FY 1998 budget provides much-needed tax relief for middle-income families, and tax incentives to boost investment in distressed areas and promote hiring of the economically disadvantaged. It also eliminates unwarranted corporate tax subsidies, closes tax loopholes, and improves tax compliance, and it reinstates the expired excise and other taxes that are dedicated to various trust funds.
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Middle Class Bill of Rights
These tax cuts will help middle-class families pay their bills, raise their children and send them to college, upgrade their own skills, and plan for retirement.
$500 Child Tax Credit.
Taxpayers would receive a $500 nonrefundable credit ($300 in 1997, 1998 and 1999) for each dependent child under the age of 13. The credit would be phased-out for taxpayers with adjusted gross income (AGI) between $60,000 and $75,000. Beginning in 2001, both the amount of the credit and the phase-out range would be indexed for inflation.
Education and Training Incentives.
The Budget provides carefully targeted education and training incentives to make postsecondary education more accessible for middle-income Americans and to make 14 years of education the norm.
HOPE Scholarship Tax Credits. Taxpayers would be able to claim a nonrefundable tax credit of up to $1,500 per year (indexed for inflation beginning in 1998) for two years, to cover tuition and fees for themselves, their spouses, or their dependents while enrolled at least half-time in the first two academic years of a degree program. To take the credit in the second year, the student must have attained the equivalent of at least a B minus grade point average in course work completed before that year. No credit is available if the student is convicted of a drug-related felony. Federal grants (but not loans or work-study payments) reduce the allowable credit. The credit is phased out for families filing a joint return with modified AGI between $80,000 and $100,000 (between $50,000 and $70,000 for single filers), indexed for inflation beginning in 2001. The credit would apply to course work beginning after June 1997.
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Education and Job Training Tax Deduction. As an alternative to the HOPE scholarship, taxpayers could elect to deduct up to $10,000 per year ($5,000 in 1997 and 1998) of tuition and fees for students enrolled at least half-time in a degree program or for courses to improve job skills. The deduction is taken in determining AGI, so it is available to all taxpayers whether or not they itemize. Unlike the HOPE Scholarship credit, which is calculated per-student, the deduction does not vary with the number of students in a family. The deduction is phased out at the same income levels as the HOPE Scholarship credit and would apply to course work beginning after June 1997.
Expanded Tax-Free Treatment for Forgiveness of Student Loans. The Budget eliminates the tax liability that normally arises when debt is forgiven, if the lender is a charitable or educational institution that lends money to a student to pay for education and then forgives the loan after the student fulfills a commitment to perform community or public service at low pay for a certain period of time. The same tax-free treatment would also apply when the Federal government forgives a loan made through the direct student loan program for a student who has been making income-contingent repayments for an extended period.
Tax-Free Employer-Provided Educational Assistance. Currently, up to $5,250 of tuition paid by an employer pursuant to a qualified educational assistance program need not be included in the income of the employee. However, the exclusion for undergraduate education expires in mid-1997, and the exclusion ceased to apply to graduate-level courses after mid-1996. The budget would reinstate the exclusion for graduate-level assistance retroactive to its prior expiration, and would extend both undergraduate-and graduate-level assistance through December 31, 2000.
Ten Percent Tax Credit to Small Businesses that Provide Educational Assistance to Employees. For taxable years beginning after December 31, 1997, and before January 1, 2001, small businesses (employers with average annual gross receipts of $10 million or less for the prior three years) would be allowed a 10 percent income tax credit for payments for education of employees by third parties under an employer-provided educational assistance program.
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Expansion of Individual Retirement Accounts.
The Budget expands the availability of deductible individual retirement accounts (IRAs) by doubling, over time, the current income limits for deductible contributions. In 1997 through 1999, eligibility would be phased out for couples filing joint returns with AGI between $70,000 and $90,000 ($45,000 and $65,000 for single filers). Beginning in 2000, eligibility would be phased out for couples filing joint returns with AGI between $80,000 and $100,000 ($50,000 and $70,000 for single filers). The income phaseout, as well as the $2,000 annual contribution limit, would be indexed for inflation beginning in 2001. As under current law, any individual who is not an active participant and whose spouse is not an active participant in an employer-sponsored plan would be eligible for deductible IRAs without regard to their income.
In addition, beginning in 1997, taxpayers would have the option of either deducting the amount deposited in an IRA account, or foregoing an immediate deduction and be free of tax and penalties when the funds are withdrawn from a new Special IRA, provided the funds remain in the Special IRA for at least five years.
Finally, penalty-free early withdrawals from either type of IRA would be expanded to include withdrawals to pay for higher education costs, first-home purchases, long-term unemployment, and catastrophic medical costs of certain family members not covered under current law.
Exclusion of Gain on Sale of a Principal Residence.
The Budget provides substantial simplification and tax relief for millions of Americans by replacing the current-law tax treatment of capital gains on home sales with an exclusion of up to $500,000 of gain for married taxpayers filing joint returns ($250,000 for other taxpayers). The exclusion is available every two years, so long as the taxpayer used the house as a principal residence for at least two of the five years prior to the sale. The exclusion generally applies to sales on or after January 1, 1997.
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INSERT OFFSET FOLIO 3 HERE
[The official Committee record contains additional material here.]
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Empowering Communities and the Economically Disadvantaged
The Budget will spur private-sector participation in revitalizing distressed communities and generate job opportunities for long-term welfare recipients.
Tax Incentives to Clean Up Blighted ''Brownfields'' in Distressed Areas.
To encourage companies to clean up abandoned, contaminated industrial properties located in distressed communities, remediation costs incurred in connection with the abatement or control of certain environmental contaminants would be immediately deductible if incurred for a qualified site. Qualified sites include business or income-producing properties located in specified high-poverty areas where it has been certified that hazardous substances are present or potentially present in the property. The deduction would be subject to recapture as ordinary income upon a subsequent disposition of the property at a gain. The proposal would apply to expenses incurred after the date of enactment.
Additional Empowerment Zones and Enterprise Communities.
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The Secretary of Housing and Urban Development would be authorized to designate two urban empowerment zones in addition to the six urban and three rural zones designated on December 21, 1994. This would have the effect of extending the current empowerment zone tax incentives to these additional areas, with technical modifications. In addition, 20 additional empowerment zones and 80 additional enterprise communities, which will be subject to modified eligibility criteria, would be authorized. These additional zones would have available a different combination of tax incentives than those available to existing zones. Among the 20 zones, 15 would be in urban areas and 5 would be in rural areas. The 80 communities would be divided between 50 urban areas and 30 rural areas. Areas within Indian reservations would be eligible for designation.
Tax Credits for Community-Oriented Equity Investments.
The Community Development Banking and Financial Institutions Act of 1994 created the Community Development Financial Institutions (CDFI) Fund to provide equity investments, grants, loans, and technical assistance to financial institutions that have community development as their primary mission. The Budget would make $100 million in nonrefundable tax credits available to the CDFI Fund to allocate among equity investors between 1997 and 2006. The allocation of credits is capped at 25 percent of the amount invested in any project and would be determined by the CDFI Fund using a competitive process.
Tax Credits to Facilitate the Transition from Welfare to Work.
The goal of the Welfare Reform Act of 1996 (the Welfare Act) is to move individuals from welfare to work. To help achieve this goal, the Budget includes a new welfare-to-work credit that would enable employers to claim a 50-percent credit on the first $10,000 of annual wages paid to certain long-term public assistance recipients for up to two years. In addition, the Budget would expand the existing Work Opportunity Tax Credit to include able-bodied adults, ages 18–50, who have met their responsibilities under the law but are subject to the time limits for food stamps under the Administration's proposal to amend the Welfare Act. These proposals would be effective from the date of enactment through September 30, 2000.
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Estate Tax Relief for Small Businesses and Farms
Under current law, estate tax attributable to certain closely held businesses may be paid in installments (interest-only for four years, followed by up to ten annual installments of principal and interest). A special four-percent interest rate is provided for the tax deferred on the first $1 million of value. Only certain types of business arrangements are eligible for the installment payment provision, and a special estate tax lien applies to property on which the tax is deferred during the installment payment period. The Budget increases the value cap on the special low interest rate from $1 million to $2.5 million, expands the availability of these rules to other comparable business arrangements, and authorizes the Secretary to accept security arrangements in lieu of the special estate tax lien. These proposals would be effective for decedents dying after 1997.
Other Tax Relief Provisions
Extension of Expiring Tax Provisions. The Budget would extend each of the following provisions for one year from their current expiration date:
• The 20-percent credit for research and experimentation expenditures (expiring May 31, 1997);
• The 35-percent Work Opportunity Tax Credit for employment of targeted hard-to-employ groups (expiring September 30, 1997);
• The 50-percent credit for qualified clinical testing of certain drugs for rare diseases or conditions (known as ''orphan drugs'') (expiring May 31, 1997); and
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• The fair-market-value deduction allowed for contributions of appreciated stock to private foundations (expiring May 31, 1997).
Equitable Tolling of the Statute of Limitations.
To ensure that disabled persons are fairly treated when filing for tax refunds, the statute of limitations for refunds from the Internal Revenue Service would be delayed when the individual is under a sufficient medically determined disability and no other person has been authorized to act on the taxpayer's behalf in financial matters. The proposal would be effective for taxable years ending after the date of enactment.
Tax Incentives for Economic Development of the District of Columbia.
To encourage employment of disadvantaged residents and to revitalize those D.C. areas where development has been inadequate, tax incentives are proposed.
Tax Credit for Economic Development of Puerto Rico.
To provide a more efficient and effective tax incentive for the economic development of Puerto Rico, the Budget modifies the economic-activity credit for Puerto Rico by extending it indefinitely, opening it to newly established business operations, and removing the income cap.
Foreign Sales Corporation (FSC) Benefits for Computer Software Licenses.
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To reflect technological advancements, the Budget extends the current FSC export benefit to include computer software licensed for reproduction abroad, effective for licenses granted after the date of enactment.
Closing Corporate Tax Loopholes and Other Revenue Measures
The Budget includes proposals previously proposed by the Administration to eliminate unwarranted corporate tax subsidies, close tax loopholes, and improve tax compliance. Such measures include:
• Proposals focused on financial products, to maintain the distinction between debt and equity, curtail arbitrage opportunities, prevent avoidance of gain recognition on functional sales, and properly measure income;
• Proposals focused on corporate transactions, to prevent tax-free disguised sales of businesses, prevent the manipulation of the stock redemption rules to distort income, eliminate the use of inventory methods that mismeasure income, and reduce corporate subsidies such as percentage depletion on lands received from the Federal government at a bargain price;
• Proposals focused on the international tax rules, to measure export income more accurately, prevent manipulation of the foreign tax credit rules through artificial labels, and eliminate distortions resulting from the use of derivative financial instruments; and
• Proposals focused on increasing tax compliance, for example by tightening the substantial understatement penalty for very large corporations, expanding withholding on gambling winnings, and streamlining debt collection procedures for non-means tested, recurring Federal payments.
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Extension of Expired Excise and Other Trust Fund Taxes.
The Budget also proposes reinstatement of the excise and other trust fund taxes that have expired: the Airport and Airways Trust Fund excise taxes; the Hazardous Substance Superfund Trust Fund excise and income taxes; the Oilspill Liability Trust Fund excise taxes; and the Leaking Underground Storage Tank Trust Fund excise tax. These are not new taxes: they have been applied for years to finance specific programs, such as the provision of air traffic control services and the cleanup of certain hazardous waste sites. Each of these taxes would be extended through 2007.
Tax Simplification and Taxpayers' Rights
The Administration continues to support revenue-neutral initiatives designed to promote sensible and equitable administration of the tax laws, including simplification, technical corrections, compliance, and taxpayers' rights measures. In the near future, the Administration will propose to Congress a package of such measures.
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Chairman ARCHER. Thank you, Mr. Secretary.
To me, this is one of the most important things we will do for our children and their children. All of us recognize today that the average debt service charge for every child born this year is going to be almost $300,000 during their lifetime and that will go up until we balance the budget.
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Under the President's budget, I believe I saw an estimate that the debt will increase $1.2 trillion before it gets into balance, so those interest service charges will continue to increase. And although we might pat ourselves on the back that we have the lowest deficit relative to GDP of any of the G–7 countries, that meter on interest charges is still running for future generations.
So I am glad you are here to say today, We are going to change that and we are going to get this budget balanced. I believe we have to exert all effort on both of our sides to come together. It is not going to be easy. There are very difficult choices involved in this, and we are going to have to find ways we can bridge those choices between each other.
But I am pleased you have expressed a willingness to have a real balanced, a real credible balanced budget which will be evaluated as in balance by the Congressional Budget Office. Is that correct, because that is what I——
Mr. RUBIN. Ultimately, the balanced budget—ultimately, we are committed to having a balanced budget that is so scored by the CBO.
Chairman ARCHER. And that is an extremely important starting point. We have not yet received the evaluation or scoring of the Congressional Budget Office on your budget. I assume we will have it within the next week or so.
Mr. LEW. Mr. Chairman, we have been working with the Congressional Budget Office. Our understanding is that they are trying to do it very quickly, but it normally takes 6 weeks, so you would have to check with the CBO as to how quickly they will have it finished.
Chairman ARCHER. All right. Well, in any event, I think they are pushing it as fast as they can, but until we get that, we have, to a degree, an uncertain starting point, and it is a little difficult to question you today about things that might happen until we know for sure how the Congressional Budget Office is going to evaluate this budget.
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For example, on the tax reductions, whether they will be, in fact, permanent or whether they will trigger off at the end of the year 2000, and that is a significant item of interest to the Members of this Committee and also to the country. But I am not going to probe that specifically with you because we do not have that yet. We do not have the data from the Congressional Budget Office.
But I would hope you would agree that if, in fact, the Congressional Budget Office evaluates your budget as not being in balance—forget about the details of the triggers on the taxes and the other things—but if they evaluate it as not being in balance, you will go back and revise your budget and submit another one to us that will be scored in balance so we will have a starting point that we can work from.
Mr. RUBIN. Mr. Chairman, we are not so sure that is the process. We have submitted a budget that, in our judgment, goes to balance. Now, they are going to come back with their evaluations. We will then be working with the Congress, and ultimately, we all have to work together to get to a budget that is scored as being in balance by CBO. But I am sure there will be a lot of discussions and negotiations before we reach that point.
Chairman ARCHER. I think that is going to make it far more difficult. If we start from a basic document that is not in balance, based on the agreed upon——
Mr. RUBIN. Well, ours will——
Chairman ARCHER [continuing]. Critical evaluators' determination, which you have just agreed——
Mr. RUBIN. Yes, but as you well remember, last year, or 2 years ago—I guess both cases, actually—by virtue of the trigger mechanisms that we will submit—have we submitted them yet, Jack?
Mr. LEW. We have submitted it in outline form to the Congressional Budget Office, and we would be happy to make it available to the Committee, as well.
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Mr. RUBIN. Yes. We will have a budget that scores under CBO—I mean, it may have some adjustments and some of the changes we have made, and that is a different issue to have to deal with, but we may still have a difference with them as to whether, ultimately, a budget balance will be reached because of the trigger mechanisms or because of the realization of the assumptions that we have been using, which we think are realistic. So I do not think it necessarily will parse out quite as easily or the way you have just described. In other words, you could easily have——
Chairman ARCHER. Well——
Mr. RUBIN. You could have the situation we have had the last 2 years, that we had a budget that we believe, based on the exact same kinds of numbers we have used over the last 4 years, will ultimately balance and would balance without having to use the trigger mechanisms because, by using what we think to be prudent and realistic numbers, the actual numbers will turn out to be at least as good as our projections, if not better.
On the other hand, in what we think is the rather small chance that did not happen, we have a trigger mechanism that brings us back down so that CBO can score us as having reached balance whether or not our numbers turn out to be accurate.
Chairman ARCHER. I understand that when you submit your budget, you have to do it on the basis of the OMB numbers. That is all you have to go with. And you submit it up here in good faith on those numbers, and I understand that.
But if we have the agreement that we in the end are going to have to have a balanced budget that has been evaluated by the Congressional Budget Office as being in balance, then it seems to me we will hurry along our negotiations if the beginning document can be evaluated by them as being in balance, rather than saying that somewhere down the line, we are going to——
Mr. RUBIN. Mr. Chairman, they can evaluate it, and I believe 2 years ago they did—last year, they did evaluate a document as being in balance because their view was that if our numbers come out to be right, we balance, and if our numbers turn out to be wrong, we have an adjusting mechanism. So I do not think their evaluation is going to solve the problem that you are trying to address.
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Chairman ARCHER. The main thing I am trying to get at is what their evaluation is going to be. But if their evaluation comes back and says it is not in balance, even though you feel certain they will say it is in balance, if it is not in balance, then we have to have a new starting point and I hope we can agree on that.
Now, let me, if I can, get on to a couple of other things. First, the balanced budget amendment is something that I will be happy to debate with you for several hours in another forum. That is not our Committee's jurisdiction and so I hope we will not spend a lot of time in our questioning today trying to debate the pros and cons of the balanced budget constitutional amendment.
But I do think we might talk for 1 minute about the basic assumptions you mention because they become exceedingly important in determining whether the budget is or is not going to be in balance, and I must say that having lived a life with many ups and downs, both in the stock market and also with the economy and what is being called by economists the business cycle, that things do not go up forever, that they do not stay stable forever.
If I am correct, your budget is based on assumptions that we basically have growth similar to what we have had in the last 4 years, with very little inflation, pretty much as far as the eye can see. Am I accurate in that?
Mr. RUBIN. The assumption we have made, Mr. Chairman, which is the same assumption the blue chip private sector forecasters, the group of 50 forecasters that are the blue chip has made, is that we will have—I think our projection was 2 percent growth over the 5-year period. If there are ups and downs, our assumption is that they will even out over time. We are slightly more conservative than the average of the private sector forecasters.
Chairman ARCHER. What about the window outside of the 5 years? What about the long-term projections for your basic assumptions? What are they, in general?
Mr. RUBIN. Well, we have, as you know—I do not know if you have seen it or not, but in the budget document, we have both our 5-year budget and then we have a projection that if we reach balance in accordance with this set of policy prescriptions by the year 2002, we will then remain in balance until the year 2020——
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Chairman ARCHER. No, I understand that, but I am asking about the basic assumptions——
Mr. RUBIN. The basic theory, and I think, Mr. Chairman, it is a sound theory, is the same one the blue chip uses in terms of taking into account ups and downs, and that is that over time, if you have—and you surely will, I agree with you, you will have ups and downs, that those will even out so that over time, you—just as last quarter was above the potential full-capacity rate of growth of the economy, so it was above what you could expect to achieve on an ongoing basis for the other quarters, but our expectation is that over time, those things will equal out.
Chairman ARCHER. But as I read your basic assumptions, nowhere in this 25-year period, roughly, do you show any recession.
Mr. RUBIN. No. Let me put that a little differently, if I may, Mr. Chairman. We do not see a recession as far out as we can reasonably look to see right now, but if you look out over the 25 years, the theory that we operated on I think is consistent with how private sector forecasters look at very long periods of time. It is assumed that there will be downs and ups, but that the downs will be compensated for by the ups and that they will even out to something that is approximately the full capacity rate of growth of the economy.
Chairman ARCHER. But the problem, though, Mr. Secretary, is that they do not even out as a result of the reactions in a democracy. When you go into a recession, you do a lot of things that are different. Government takes a different role, spending goes up, and there are demands for things that do not otherwise exist and that does not average out. A lot of that stays in place permanently. I am not going to belabor this anymore, because other Members may——
Mr. RUBIN. In theory, though, if we could get back to true balance, which you are committed to and we are committed to, at least the model or the theory of it is just what you said. The automatic stabilizers would work when we are below capacity. That would help us get back to balance. And then when we were functioning above capacity, you would actually get a small surplus, and once again, you would have an evening out.
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Chairman ARCHER. But history teaches us it does not even out, and that is what bothers me. It is like the story of the river that is only 1 foot deep and how could you drown in it because it is an average of 1 foot deep, but there are potholes in there that are 8 feet deep and if you happen to hit that, you drown. So I am a little concerned about the idea that this is just going to keep going along without change, but I have overused my time and we have probably worn that subject out.
Mr. Rangel.
Mr. RANGEL. Thank you, Mr. Chairman.
First, let me join with you in saying that the question of a constitutional amendment should be left up to those Committees that have the luxury of debating the issue as it relates to a balanced budget while we concentrate on actually balancing the budget, as suggested. There are going to be many bumps and differences of opinion on the road toward balance. I assume these difficulties may arise on the Republican as well as the Democratic side of the aisle. But I think we start, Mr. Secretary, with a spirit that you should appreciate. We are not going to stop until we reach that conclusion and present to the President and the Nation our solution—a commitment that has been kept.
The question of bipartisanship, of course, is viewed differently by different people. I remember former Speaker Jim Wright used to talk about horse and rabbit stew. It was so delicious. Everyone liked it and they asked for the recipe for the stew. The cook responded, Oh, it is just equal horse and equal rabbit. And they said, Well, it certainly is good, but it tastes rather horsey. And the cook said, Well, maybe that is because we use one horse and one rabbit. [Laughter.]
So we on the Democratic side hope that in the spirit of bipartisanship, we are not the rabbit. We will be working very closely with our Republican colleagues and the President of the United States to make certain we can all take pride in reaching this historic moment together as partners in government.
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Thank you so much.
Chairman ARCHER. Mr. Crane.
Mr. CRANE. Thank you, Mr. Chairman.
Let me just remind my distinguished colleague and friend Charlie that it is not Committees that debate balanced budget amendments or any other amendment, it is States.
Mr. RANGEL. Very good. Thank you so much. We will leave it to the Governors. [Laughter.]
Mr. CRANE. Mr. Secretary, I got what is called an Executive Alert Service publication dated February 4. It was prior to your G–7 visit to Berlin. But in this, if you have not seen it, it says that in Berlin, Secretary Rubin is expected to make a push for vigorous economic stimulus policies by other governments, especially Japan and Germany, and the U.S. Government is very concerned that severe budget austerity as presently enforced with Maastricht criteria and Japan's new austerity budget threatens to detonate a systemic financial crisis. Is that accurate?
Mr. RUBIN. What are you reading from, Mr. Crane?
Mr. CRANE. It is called the Executive Alert Service. It is based here in Washington, DC.
Mr. RUBIN. Yes. I am not familiar with it. I do not want to cast aspersions on a publication I am not familiar with, but we are not concerned about a systemic—what is it, a systemic financial crisis? No. We do not have concern about a systemic financial crisis. We do have concern that Japan has had a low rate of growth for 4 or 5 years now and conditions are uncertain, and we do feel it is very important that Japan focus on domestic demand and growth. Germany reported the highest unemployment since, I think, the end of the Second World War last Friday, so clearly, there are a lot of issues that need to be addressed in other countries of G–7 if they are going to have robust economies, and that is important to us.
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Mr. CRANE. But is it fair to say, which is a part of their quotation, about our government being concerned that budget austerity, in Germany and Japan especially, should be addressed by stimulating further expenditures?
Mr. RUBIN. It was President Clinton's fundamental economic strategy to employ fiscal responsibility in this country to get us back on the right track in 1993, and in our judgment, that was the right strategy for this country. It was the right strategy for other countries. But on the other hand, you have to use common sense in doing it.
What we did in 1993 during the transition, we met with the President for 6 hours and we sat down and tried to make a judgment as to what pace you could phase in fiscal contraction and get interest rates that would, by virtue of their falling, create an offsetting positive impact, and as a consequence, have net economic growth. It is a question of the condition and circumstance in each of these countries and their total package of macroeconomic policies with respect to those circumstances that raises the questions about their growth prospects.
Mr. CRANE. The only reason it jumped out at me when I saw it this morning was, Are we not basically committed to a course of budget austerity to get our books in balance and is that consistent with the thinking of the administration?
Mr. RUBIN. Oh, listen, our fundamental policy from the day we stepped in the Oval Office was deficit reduction, and we put in place a very tough program in 1993 and it has worked. I think the question of what each of these countries has to do is to construct a total package of macroeconomic policies that accompany their fiscal objectives, but also on net provide it with a robust domestic economy, and right now in both Japan and Germany, there are serious issues.
Mr. CRANE. All right. Well, I wholeheartedly approve of your commitment to budget austerity; namely, that we get our books in balance by 2002. We may disagree over particulars, and I will have the staff make up a copy of this and give it to you so you can examine it personally.
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Mr. RUBIN. Thank you.
Mr. CRANE. Thank you, Mr. Chairman.
Chairman ARCHER. Mr. Thomas.
Mr. THOMAS. Thank you, Mr. Chairman.
Thank you, Secretary Rubin. I am obviously interested in the larger budget package and the tax questions as a Member of the Ways and Means Committee, but as Chairman of the Health Subcommittee, I am more concerned about subsets or particulars.
Number one, Are you pleased with your current health care program in terms of the way they are treating you with your current problems?
Mr. RUBIN. I am presently taking a bunch of pills that were prescribed to me by a White House staff aide last night, and if it works, I will be very pleased. And if not, I will know who to send my lawyer after. [Laughter.]
Mr. THOMAS. Something that others do not have the ability to use, I guess. [Laughter.]
The other thing that struck me, and it is very ironic in this business how coincidences occur, in your testimony you indicated that the President's program cuts Medicare spending by $100 billion over 5 years, and you indicate that the President is proposing tax cuts that total $100 billion over 5 years. So my assumption is it is a coincidence that the Medicare cuts equal the tax cuts in the President's budget. I assume that is a yes or no answer.
Mr. RUBIN. The answer is that those programs were developed totally independently of each other.
Mr. THOMAS. I had not perfected the coincidence argument. Perhaps some of my colleagues on the other side who spent a Congress perfecting the coincidence of two numbers being the same in a budget might want to pursue that.
Mr. RUBIN. If you are asking me if these were constructed separately or related to each other, the answer is, They were constructed totally——
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Mr. THOMAS. So your argument is there is no relationship. It is a pure coincidence that the Medicare cut number equals the tax cut——
Mr. RUBIN. Yes. That is not actually my argument, that is a fact.
Mr. THOMAS. It is a fact that they equal the same amount?
Mr. RUBIN. No. It is a fact that they were——
Mr. THOMAS. That is also a fact.
Mr. RUBIN [continuing]. Constructed—well, one of them is actually 98.4. The tax cut number in the budget, the 5-year number is 98.4
Mr. THOMAS. I just find it an ironic coincidence.
Mr. RUBIN. Well, life is full of irony, but the fact is that they were constructed independently and——
Mr. THOMAS. I understand, and I look forward to any written materials you wish to submit to support the argument that there is no relationship between the two.
On the home health care transfer, which we obviously do not have the CBO numbers on and so I have to rely on the OMB numbers——
Mr. RUBIN. Right.
[The following was subsequently received:]
The Secretary is not aware of any written materials that state this point but, having attended the Administration's meetings at which these numbers were developed, he is definitely confident that they were constructed independently.
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Mr. THOMAS. In your testimony you indicate that the budget extends the solvency of the Part A Trust Fund to 2007.
Mr. RUBIN. Correct.
Mr. THOMAS. Our best estimate currently is that without the transfer gimmick, the changes you propose will get us to 2004 or into 2004. Is that close enough for approximation here?
Mr. RUBIN. Well, you use the word ''gimmick.'' You mean without the policy changes with respect to home health——
Mr. THOMAS. Well, actually, I did not use the word gimmick. I am using it because Dr. Reischauer, former Director of the Congressional Budget Office, used it first and Dr. Charles Schultz, who was the Chairman of the Council of Economic Advisers under President Carter, used it first, and so I am relying on their interpretation.
Mr. RUBIN. Well, let me suggest, Mr. Thomas, that the facts are, we have $100 billion of Medicare cuts and the facts are that they said what we have done in the Part A Trust Fund, it extends—the actuaries say it extends it to 2007.
Mr. THOMAS. OK. My concern is that the first year of savings, OMB numbers, is only $14 billion, and if as prominent economists as these call it in actuality a gimmick, and we can extend the life of the trust fund until 2004 with the other programmatic changes and redirections that you have proposed, and since it is my understanding that two-thirds to three-quarters of the reductions in the budget to reach balance occur after President Clinton leaves office, and that 2004 is the last year of the next President's term, it seems to me that between 1998 and 2004, we ought to be able to sit down, and I would pledge to you that if we push back this transfer gimmick, we can begin to make programmatic policy changes that will be a wave in front of us, buying us years, and we have almost 8 years in which to do it.
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Mr. RUBIN. Let me, if I could respond to that——
Mr. THOMAS. Sure.
Mr. RUBIN. Part of it is what I already said and part of it, I would like to respond to a piece that you just mentioned for the first time.
It seems to me that the way to look at Medicare is to say what has been done in the total Medicare Program. The answer is, What was done in the total Medicare Program is $100 billion of cuts, and that was a bunch of tough decisions.
In terms of dealing with the technical question on the Part A Trust Fund, we did move home health care. I think that there are very good policy reasons for doing it.
Mr. THOMAS. You are proposing to move home health care.
Mr. RUBIN. Well, we move it in the budget and the budget is a proposal. That is exactly the same proposal which I believe you voted in favor of in 1995——
Mr. THOMAS. No, it is not exactly the same. It was a much smaller amount, and once we understood the errors of our way, we corrected it. We never did it again.
Mr. RUBIN. Well, I think you all voted for it twice in the House on the floor, if I remember correctly.
Chairman ARCHER. Mr. Secretary——
Mr. RUBIN. Be that as it may——
Chairman ARCHER. Mr. Secretary, you may finish your answer, but Mr. Thomas' time has expired.
Mr. RUBIN. OK. Good. [Laughter.]
I will finish at length. No. The only other thing I would say, Mr. Thomas, is that there are a number of ways of looking at how much of the deficit reduction occurs in the last 2 years, but let me just say, on a number you mentioned, Mr. Reischauer, whom you referred to, wrote a piece about 1 week ago in the Washington Post in which he said that it was, in his judgment, acceptable budget practice for something like 62 to 68 percent, because of the law of numbers, cumulative effect of numbers, of deficit reduction in a 5-year program to occur in the last 2 years. The CBO had an illustrative budget path that showed about 65 percent. With the President's budget, about 67 percent occurs in the last 2 years. And if you take out particularities with respect to the spectrum, it is about 65.5 percent. So it falls in the range both of Mr. Reischauer and the illustrative path of CBO.
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Chairman ARCHER. Thank you, Mr. Secretary.
Mr. Stark may inquire.
Mr. STARK. Thank you, Mr. Chairman, and thank you, Mr. Secretary.
I applaud your efforts to present a credible budget and I am pleased you do not have too many high-cost tax cuts in your budget which might, in fact, force us to get even tougher on Medicare to pay for those tax cuts. There will be pressure, I think, to increase the size of the tax cuts. I have heard press reports indicating that there is interest in tax cuts of over $200 billion. I hope we can have your commitment to keep the tax cuts in the range that they are now. A larger tax cut would make it difficult for us to preserve programs like Medicare and Medicaid and perhaps would force us to return to debates of the 104th Congress, which I do not think we want to do.
I would, in an effort to be bipartisan, like to beat up on your budget a little bit and suggest one thing. I do not argue against your middle-class relief package, but I am perplexed about weighting it so heavily toward families with college-bound children when the unmet needs of younger children seem to me to be more important.
As you are aware, there is a sizeable population of working families who would get no benefit from the proposed tax credit due to its nonrefundable design, and I am aware of the concerns the Treasury has had with refundable tax credits. We have 10 million uninsured children and the President graciously proposes to cover 5 million of those. But to me, that is a halfway solution and perhaps it is heartless. It still leaves millions of children without access to preventive care and without diagnosis and treatment, without which they will become much more expensive to society as a whole.
Now, I have looked at the variety of options. There is no free way to do this. Florida is one State that has a program that is school-based, at least in finding children who would qualify for a subsidy, and in using a refundable credit. It is pretty hard to phony-up a child, and if the credit can only be used for health care, it does not have the incentive for fraud that other refundable tax credits might.
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I would hope we could work together to find a way to expand the President's program to all children. I think we would all, on a bipartisan basis, get a good feeling out of providing health insurance to children if we could work it into the budget. That is my request and I thank you very much for being with us today.
Mr. RUBIN. Mr. Stark, if I could just make a comment or two, the President shares your concern about health care for children, as you know. I know Senator Daschle has made some proposals that also share that concern.
In terms of the education credit not being refundable, that is true, but on the other hand, we have made changes in the Pell grants which are really designed to accomplish the same purpose as making our child credit refundable. And, of course, we have increased funding for Head Start. But I think the spirit of everything you say, to me, at least, makes sense.
Mr. STARK. Thank you.
Thank you, Mr. Chairman.
Chairman ARCHER. Mr. Bunning.
Mr. BUNNING. Thank you, Mr. Chairman.
Mr. Secretary, welcome. I know our Chairman said we were not going to deal with the constitutional amendment to balance the budget, but since you brought it out in your remarks and the President certainly did in his State of the Union, I do not think it can be left out of our discussion with you today as far as the overall approach of balancing the budget. Because, maybe you do not know it, but we do not have the political will to do it without someone holding our feet to the fire.
So knowing full well that you are not for a constitutional amendment to balance the budget, I am wondering if we, in fact, had the political will to pass one with or without a Social Security exemption, would that not create some major problems in balancing the Federal budget over the next 5 years, if, in fact, the $60 to $65 billion in surplus for the system would also have to not be spent?
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Mr. RUBIN. Are you asking the question of the unified versus the nonunified budget, Mr. Bunning?
Mr. BUNNING. I am asking the question of the nonunified budget, if we removed the Social Security offset.
Mr. RUBIN. Well, as you correctly say, I do not believe we should have a balanced budget amendment. I think it is really a dire mistake in terms of the economic future of our country. But if we are going to have a balanced budget amendment, then as I have observed on other occasions, and I did not begin this conversation, but since you have, let me respond to it, I do believe that if you have the balanced budget amendment as proposed, it will create additional risks to Social Security. That is an analytic fact and I think it is unquestionable.
Mr. BUNNING. I do not think it——
Mr. RUBIN. The problem that——
Mr. BUNNING. That was not my question. I disagree with you 100 percent on that. That was not my question. My question was, With or without the Social Security exemption in a balanced budget amendment, why is it not a good idea, with or without it? With it in, I can understand——
Mr. RUBIN. Why is what not a good idea?
Mr. BUNNING. With the Social Security exemption in, I can understand the problems with the $65 billion each year, trying to find offsets.
Mr. RUBIN. Right.
Mr. BUNNING. We are not going to go back retroactively and pick up the $450 to $500 billion that is also supposed to be sitting there and we know we have already spent that for other purposes. Why is a normal balanced budget without Social Security a bad deal?
Mr. RUBIN. Oh, a balanced budget amendment?
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Mr. BUNNING. Yes.
Mr. RUBIN. Oh. I am sorry. Oh, I would be delighted to respond to that. You want to know why I think a balanced budget amendment is a bad idea? I think for the same reasons the 1,100 economists and 11 Nobel Prize laureates——
Mr. BUNNING. You are going to have to talk just a little louder because I cannot——
Mr. RUBIN. I am sorry. My reasons track very much with the reasons the 1,100 economists and 11 Nobel Prize laureates had when they signed a letter which was then run as an ad in the New York Times a week or two ago. The automatic stabilizers which have played such an enormous role in moderating the business cycle in the post-World War II period, and as you know, the downsides of the business cycle in the post-World War II period have been enormously more mild than the prewar period. A lot of that is due to automatic stabilizers.
I believe there is significant risk that—I think there is no question of the significant risk that with a balanced budget amendment, the automatic stabilizers will not work as they have during this postwar period, therefore running the risk that recessions will become worse recessions and worse recessions will become severe recessions.
Second, you have a debt limit provision which requires super majorities in both houses. Given the difficulties of getting debt limit votes, it increases the risk of default.
Third, there is a real possibility of legislative impasse. If you have legislative impasse, then budget decisions will go into the courts or into the unilateral action of the President, which, in turn——
Mr. BUNNING. All right. I know my time is almost up.
Mr. RUBIN. I am responding to your question. I am sorry.
Mr. BUNNING. Well, I understand that, but if we remove Social Security from the balanced budget in the offset——
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Mr. RUBIN. Right.
Mr. BUNNING [continuing]. Then why do you object to it?
Mr. RUBIN. Well, you have solved one set of problems, and it is a serious set of problems, which is the additional risk to Social Security the balanced budget amendment creates, but what you have not solved is the nub of the issue which is that under the system as it now exists, if we start to have a slowdown, your unemployment insurance payments go up, your tax revenues go down, and that automatically moderates the recession.
Mr. BUNNING. OK. Thank you.
Chairman ARCHER. The gentleman's time——
Mr. BUNNING. The same problem exists in the budget when you tried to make 70 percent of the budget cuts in the last 2 years. That is physically impossible to do.
Thank you.
Chairman ARCHER. The gentleman's time has expired.
Mr. RUBIN. No. That actually is not so—first of all, we do not cut 70 percent. And second, in the law of numbers, if you cut 1 percent each year, you will find out it comes out to about 62 to 65 percent in the last 2 years. It is the cumulative law of numbers.
Chairman ARCHER. The gentleman's time has twice expired.
Mr. Houghton.
Mr. Matsui.
Mr. MATSUI. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for coming. I have problems with some of the tax cuts. As Mr. Stark has indicated, the $1,500 credit and the $10,000 deduction raise a number of questions, and it is my hope we can work together if, in fact, these two tax provisions look like they might become law sometime down the legislative process.
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Certainly, the B-average situation, I have been doing some research in this and talking with some community college administrators and there is obvious concern about that, as well, because inner-city children, low-income children may not do as well as middle-income children when it comes to a B average, particularly the first year of community college.
So some of these things are matters I would like to continue to discuss with you and your staff. But I would say, overall, the budget is a very credible document and had the budget hit the floor today or if it should hit the floor tomorrow, it would be something I would be prepared to vote for because I think it is extremely credible. Obviously, this is step one of a number of steps that you plan to take.
The one area where I would like to add a caution, and this would be my only observation, actually, is in the tax cut and the dangers of having a bidding war that might go on, which I believe you mention in your opening statement. In the last 2 years of this budget, about $150 billion in spending cuts will have to occur in discretionary programs. In addition, entitlement reform will have to occur, particularly in the two big areas of health care and retirement benefits.
As you know, Mr. Secretary, the possibility of having the trigger you have suggested and the budget suggests is probably remote. I think when all is said and done, there will not be a trigger. You might disagree with that, but that is my analysis on the basis of experience here and working on the legislative process, particularly on budget resolutions and in the reconciliation process.
That being the case, if, in fact, the tax cut becomes too large, you are going to have in the year 2000 and beyond entitlements to deal with, the discretionary program cuts of about $150 billion or more, and also how to deal with these enormous tax cuts which I believe will really start to occur in the outyears, not in the beginning. Because if, in fact, we have a capital gains tax, there might even be a revenue gain in the first 2 or 3 years, but there will be significant revenue losses in years 5, 6, 7, and 8.
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So it is my hope the President and his staff draw a line someplace. It does not have to be made public. It should not be made public, but draw a line someplace in this legislative process that you at least commit to yourself that you will not cross, because you know what happened—in fact, I met you in 1981 when a number of us met with many of your counterparts in the business community, that these things do get out of control and it is possible to get out of control in this situation. So that is the only matter I would like to add a caution on.
I have no further questions.
Thank you.
Mr. RUBIN. Mr. Matsui, I agree with the spirit of what you have said and I think we also, and I am going to just repeat what you said—I think it is very important—in addition to looking at the effect of tax cuts within the window, it is very important that we look at the effect of tax cuts in the period subsequent to the window.
Chairman ARCHER. Mr. McCrery.
Mr. MCCRERY. Thank you, Mr. Chairman.
Mr. Secretary, welcome. You and I may not agree on everything with respect to public policy, but I will say that I am pleased to have someone as capable as you in your position at this time.
Mr. RUBIN. Thank you.
Mr. MCCRERY. Having said that, let us get into some areas of possible difference. First of all, I liked your charts, but you left out one chart that I think probably should be exposed in the debate about the budget and that is the debt of the United States expressed as a percent of our GDP. Do you know what that is?
Mr. RUBIN. The debt as a percentage right now—we have it here, actually. You are talking about—there are two different——
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Mr. MCCRERY. Yes. Just——
Mr. RUBIN. All debt, or debt held except by the trust funds?
Mr. MCCRERY. You probably have both, so let us use the Federal debt first, and then if you want to do general——
Mr. RUBIN. The Federal debt is roughly $5 trillion and GDP—we will get you the exact numbers, but roughly $5 trillion and the GDP is roughly $7 trillion.
Mr. MCCRERY. Yes. It is around 70 percent, is it not?
Mr. RUBIN. But remember, that includes the debt held by the trust funds.
Mr. MCCRERY. Right.
Mr. RUBIN. So if you take out—if you had the debt held by the public—we will get you the exact numbers. I think it is around 50 percent, but do not hold me to that. We will get you the exact numbers.
Mr. MCCRERY. Including the trust funds, it is closer to 70 percent?
Mr. RUBIN. It would be up around—that is a touch high, I think. It is between 65 and 70, I believe, but we will get you the exact numbers.
[The following was subsequently received:]
In February 1997, the gross national debt, including debt held by federal accounts, was 69.4 percent of GDP. Source: Historical Tables, Table 7–1 (p. 103).
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—————
Mr. MCCRERY. And that is, except for a few peaks in our history, that is fairly high.
Mr. RUBIN. Well, the debt quadrupled between 1980 and 1992.
Mr. MCCRERY. Let us not discuss how we got there. It is there and we have to deal with it.
Mr. RUBIN. Well, I am not the one—I am just making the observation.
Mr. MCCRERY. I am saying that——
Mr. RUBIN. It has actually come down a touch as a percentage of GDP since then.
Mr. MCCRERY. We cannot go back in time. All we can do is prepare for the future and that is what I hope you are trying to do, Mr. Secretary, and that is why we are here.
Mr. RUBIN. Look, I agree, we need to balance the budget. I have no argument about that.
Mr. MCCRERY. Yes, but your previous charts, I think, lessen the argument for balancing the budget, and I just wanted to point out that it is not just the deficit but the debt that we have to worry about. Obviously, by getting the balance and staying at balance, we are going to reduce that debt as a share of our GDP and that is, I think, advisable at this time.
Mr. RUBIN. Yes. We have actually, by having deficits as low as we have had in the last couple of years, we actually have started the process already of reducing the debt-to-GDP ratio——
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Mr. MCCRERY. Exactly.
Mr. RUBIN [continuing]. That you correctly say is critically important.
Mr. MCCRERY. So you agree we should continue to try to reduce the debt as a percent of GDP?
Mr. RUBIN. Absolutely.
Mr. MCCRERY. Thank you. You also mentioned, I think in response to a question, that we may have some surpluses in some years between now and 2020, is that right?
Mr. RUBIN. I said that—I was actually responding to Chairman Archer's comment that in years when you had recessions, you would have some deficits, and then I said, Yes, but once you get to structural balance, then when you had periods during which you were performing above the full capacity rate of growth of the economy, in theory, at least, if you have structural balance over all, you would have some surpluses and that would balance out. That was my comment.
Mr. MCCRERY. If we were to have a surplus in a given year, do you have any plans or proposals for how to use that surplus?
Mr. RUBIN. That really is not a problem immediately in front of us. I have not given it any thought.
Mr. MCCRERY. So would it be advisable to try to run a surplus between now and 2020 in a good year?
Mr. RUBIN. I think once you hit structural balance, at least in theory, and I guess I think in practicality, too, it would be.
Jack, do you want to comment?
Mr. LEW. Congressman, in our long-term analysis, we show surpluses pretty much throughout the period 2002 through 2020, and we have no policies that call for additional spending to bring that down. Obviously, beyond 2020, there are additional structural issues in Medicare and Social Security that we have talked about and the challenge once we reach structural balance between now and 2020 is to go on and deal with the remainder of the problem.
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Mr. MCCRERY. I would hope you would maybe give some thought to some policy being provided for dealing with a surplus, even though you are right, we do not have to worry about that in the next couple of years, but perhaps 10 years from now we will, we hope, or 15 years, because we do have some problems long term that are going to be very difficult to solve.
One last question about the tax proposals. You entertained a question earlier about the difference between OMB scoring and CBO scoring and I think you said you were going to try to reconcile that and, I presume, once it is reconciled, come up with some additional spending cuts to reach balance by 2002. Is my assumption correct?
Mr. RUBIN. No. What I said in response to the Chairman, it is a little bit more complicated than that.
Mr. MCCRERY. It always is, Mr. Secretary, with you, but try to help me.
Mr. RUBIN. It is not just that we have duality, it is that we believe very strongly in our numbers, and we think the fact that the deficit has come in under our projection the last 4 years is a strong basis for believing in our numbers, and that is the basis on which our budget is done. On the other hand, we have also provided trigger mechanisms, though I do not think we have given the details to Congress yet.
Mr. LEW. We have provided the details in outline form——
Mr. RUBIN. Oh, we have.
Mr. LEW [continuing]. And would be happy to submit them to the Committee for the record.
Mr. RUBIN. And it is those trigger mechanisms that would come into play if, in fact, circumstances turn out to be worse than our numbers, which we do not expect to have happen. That way, CBO can score our budget and, we expect, will score our budget as being in balance under Congressional Budget Office standards even though the budget track is based on our numbers with the reconciliation to——
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Mr. MCCRERY. I think I have got you now, Mr. Secretary.
Mr. RUBIN. Good.
Mr. MCCRERY. So if CBO turns out to be closer than OMB——
Mr. RUBIN. Excuse me? I am sorry.
Mr. MCCRERY. If CBO estimates turn out to be closer than OMB's, then your trigger mechanisms come into effect——
Mr. RUBIN. Correct.
Mr. MCCRERY [continuing]. Most of which deal with taxes, I believe——
Mr. RUBIN. Well, some deal with taxes and some with spending, right.
Mr. MCCRERY. And so it is possible under your budget proposal that, in fact, over a 5-year period, we could have a tax increase and not a tax decrease.
Mr. RUBIN. We do not expect that to happen for the reason that we do not expect—or certainly the most likely outcome, in our judgment, at least, is the circumstances that accord with our numbers.
Mr. MCCRERY. I understand you do not think it will, and I believe you when you say your numbers are honestly arrived at and you really believe your assumptions, and I grant you that. But would you say it is possible that CBO is closer to what will be the facts than——
Chairman ARCHER. The gentleman's time——
Mr. MCCRERY. And if so, you will have a tax increase and not a tax cut.
Mr. RUBIN. I will stick with what I said. I think it is likely—
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Chairman ARCHER. The gentleman's time has expired.
Mr. RUBIN. Will turn out to be correct.
Chairman ARCHER. Mr. Ramstad.
Mr. RAMSTAD. Thank you, Mr. Chairman.
Mr. Secretary, I would like to focus on the administration's forecasts of economic trends, if we could for 1 minute, because I have serious questions about the value of the dollar and its impact on trade. As you know probably as well, Mr. Secretary, as anyone in this country, the value of the dollar against the Japanese yen has appreciated over 50 percent just since the spring of 1995.
How do you explain such a huge jump in the value of the dollar? It seems to me and to most economists I have talked to, if left alone, the market force would not have lifted the value of the dollar to such a lofty level.
Mr. RUBIN. Well, we are getting into a little bit of a difficult territory. Let me tell you why, if I may. I did this sort of thing for 26 years before I came to government. I actually ran trading operations. That is what I did for a living, and they were big and they were global, so that is the sort of world that I know a little bit about.
Anything the Secretary of the Treasury says about markets has a tendency to affect the markets, and so what I have done in the time—in the first 2 years in the White House, now in 2 years as the Secretary of the Treasury, is really to say almost nothing about why I think markets have behaved the way they have and to really just address the policy. If you would like, I would be happy to discuss this with you privately sometime, but I think it is really very undesirable for me to discuss market behavior in a public forum.
Mr. RAMSTAD. I certainly do not mean to put you on the spot, but obviously——
Mr. RUBIN. It is a legitimate question you are raising. I am just saying that my answer could set off all sorts of effects that we might not consider to be in our interest.
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Mr. RAMSTAD. And I can appreciate that and I do understand that, and I also am concerned the strong value of the dollar has hurt corporate profits, job creation, and capital spending——
Mr. RUBIN. Oh, may I respond to that?
Mr. RAMSTAD. Yes.
Mr. RUBIN. Oh, that is a policy issue I can respond to. We have had, as you know, a record number of jobs created in the last 4 years. We have had unemployment fall to 5.4 percent, even though most economists felt it could not fall below 6 percent without regenerating inflation.
And I think that, as I have said on many occasions, while many factors contribute to this, and I think the deficit program of 1993 being the principal one, the strong dollar has contributed to this because what a strong dollar—the exchange rate, your terms of trade with the rest of the world—a strong dollar brings us lower inflation and lower inflation brings us lower interest rates. It increases confidence in dollar-denominated assets which in turn brings us lower interest rates. So I think a strong dollar has actually contributed to the prosperity we have had in the last 4 years.
Mr. RAMSTAD. I understand that, too, Mr. Secretary, but it is certainly a fact that about 20 percent of Fortune 500 earnings come from international operations tied to either yen or European currencies, and I just heard or read that the chairman of IBM said that fourth quarter earnings there would have been at least 33 percent higher if it were not for the rebounding dollar. Northwest Airlines, which I represent, has been concerned. Pfizer, AMP, other multinationals have talked about the so-called double whammy. Overseas revenues, as you know, buy fewer dollars and economic conditions overseas have been weak and have hurt sales.
I guess my main concern is that if we lose market shares to foreign firms with cost in yen or European currencies, how easy is it for U.S. companies to regain market share when the value of the dollar depreciates?
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Mr. RUBIN. Well, I think the key to competitiveness in the world economy for American businesses—what American business has done so well for the last, oh, roughly 10 years now, I guess—is to address its own efficiency, and by doing so, American business has reestablished competitiveness across a broad array of industries. I do not believe the dollar should be used as an instrument of trade policy.
But as I said in Berlin, or, rather, I said in Washington and then we all said in Berlin on Saturday, the dollar had fallen greatly against the yen and against the mark and has now corrected itself, and in our judgment, those asymmetries have been corrected and things have come back into a normal mode.
Mr. RAMSTAD. And I appreciate your comments here today. I certainly hope you feel better. I did not mean to put you on the spot, but I did recognize, as I am sure a lot of people did, what seemed to be a recognition on your part of the problem over the weekend as reported in the press and that is encouraging and I look forward to that private discussion because I would like to get into it in more depth, representing, as I do, many multinationals that are very concerned.
Thank you, Mr. Secretary.
Chairman ARCHER. The gentleman's time has expired.
Mrs. Kennelly.
Mr. Coyne.
Mr. COYNE. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. In response to Congressman Stark's question concerning the refundable tax credit for education, you indicated the nonrefundable component is addressed in another section of the President's budget.
Mr. RUBIN. The Pell grants.
Mr. COYNE. Would you care to elaborate on that?
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Mr. RUBIN. Yes. It is addressed in a compensating increase in our Pell grant proposals, and let me ask Jack Lew if he would respond to that.
Mr. LEW. We have been proposing over the past several years annual increases in the Pell grant award amount, and in this year's budget we proposed increasing it to $3,000, which would have the effect of substantially increasing the amount of the Pell grant award to people currently in the program, and it would on the margin increase the income threshold so that the lower middle-income families that are just missing eligibility now will become eligible.
That is the most efficient means of delivering a subsidy to a very targeted population and it is a program that works very well. We think that that is a very effective means of spreading the benefits of opportunity to education and targeting it to that group in particular.
Mr. COYNE. Does your proposal address those segments of the population unable to take a $1,500 tax credit?
Mr. LEW. Yes, sir. It is a grant, so it is delivered in a student's financial aid package as part of the cash award that they obtain in order to go to school. They would have access to guaranteed loans, to student loans, as well. But for a student for whom cash was a problem, the Pell grant would be a very effective means.
Mr. COYNE. Mr. Secretary, as you know, there is a National Commission on Restructuring the Internal Revenue Service. The commission is charged, inter alia, to make the IRS efficient and more responsive to the taxpayers. Many people were critical of the $4 billion investment that was made in the IRS computer program. In fact, some would call it a total loss. Is that your assessment, that that $4 billion investment has gained us nothing?
Mr. RUBIN. The answer—I am glad you asked that, Mr. Coyne. I meant to respond to Chairman Archer when he mentioned it and then got caught up in other questions. The answer to your question is, No. There has been a very substantial investment in systems modernization in the Internal Revenue Service. I am not quite sure where that $4 billion number came from, but we believe the correct number is a somewhat lower number.
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Be that as it may, at least $1 billion of that is in what in effect was a replacement of existing equipment, of other equipment that would have had to have been replaced in any case, and the rest of that has been spent in various ways, some of which has had good returns, some of which has not. But the answer to your question is, No, there has been substantial value received for that invested.
Having said that, some of that money has been spent in ways that have not worked. The key, in my opinion, and this is a critically important question in terms of our national interest, is that problems in the systems in IRS have developed over decades. There was a very good article in the New York Times, I do not know, a day or two or three ago, I have forgotten exactly, that tracks it back to some decades back.
We are absolutely and totally committed at Treasury to working in a proactive oversight capacity with the IRS to remedy these problems and get this thing back on the right track, and toward that end, we have an outstanding new chief information officer who has been there several months. We have set up a management oversight operation, institutionalized it in the Treasury. We have taken various other steps.
But I think it is critically important that we all approach this in a constructive fashion so we can return the IRS to the place it needs to be to do the Nation's business, and if we all work together constructively, I believe we can accomplish that.
But no, I think there has been a lot of value, electronic filing, telefiling, reduction of the FTEs by about 12.5 percent over the last several years that have resulted from that systems expenditure, and how much of that has actually wound up not having value, I do not know the answer to, but it is nothing like the $4 billion that was reported in the press.
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