Copyright 2000 Federal News Service, Inc.
Federal News Service
February 9, 2000, Wednesday
SECTION: CAPITOL HILL HEARING
LENGTH: 12917 words
HEADLINE:
AFTERNOON SESSION OF A HEARING OF THE HOUSE WAYS AND MEANS
COMMITTEE
SUBJECT: FY2001 BUDGET
CHAIRED BY:
REPRESENTATIVE BILL ARCHER (R-TX)
LOCATION: 1100 LONGWORTH
HOUSE OFFICE BUILDING, WASHINGTON, D.C.
TIME:
1:02 P.M., EST DATE: WEDNESDAY, FEBRUARY 9, 2000
WITNESSES: SECRETARY OF TREASURY LAWRENCE SUMMERS AND
SYLVIA MATHEWS, DEPUTY DIRECTOR, OMB
BODY:
REP. ARCHER: Mr. Secretary, I know
that you have a lot of demands upon your time, and I inquire as to how long you
can comfortably stay with us.
SEC. SUMMERS: The discomfort level would
start rising geometrically after 2:00. (Laughs.)
REP. ARCHER: All right.
Well, we will see if we can expedite the inquiry -- SEC. SUMMERS: Thank you.
REP. ARCHER: -- so that we can release you, as it were, at 2:00. Next on
the list -- is Mr. Nussle here? There he is. He passes. Is Ms. Dunn here? Mr.
Collins? Mr. Portman.
REP. ROB PORTMAN (R-OH): Thank you, Mr. Chairman.
And thanks to you, Mr. Secretary, for being willing to be patient and stay for
the second round. I have lots of questions. And what I'd like to start with, if
I could, is picking up where we left off a moment ago on the pension issue. You
mentioned in your dialogue with the chairman the importance of increasing the
private savings rate in this country. And mind you, nothing would be more
important with regard to the tax code and what we could do this year than
encouraging people to save more for their own retirement, where we have a
crisis, I believe, among baby boomers in not saving enough.
We also have
a Social Security crisis that we've talked about a lot today and the solvency of
Social Security and the backstop that private retirement savings can offer is
another reason to move forward.
And finally, we have half the workforce,
about 75 million Americans, who have no pension coverage today, which I think is
something this Congress and the president and the administration ought to focus
on, because it is unacceptable. We have a proposal, as you know, to allow all
Americans to save more for their own retirement. In this budget you have again
picked up some of the so-called Portman- Cardin provisions. I know Mr. Cardin,
who is here with us now, is also interested in talking about some of the
differences between your proposals and ours.
But I want to start by
focusing on the fact that there are a lot of similarities. And we appreciate the
movement that you have made, I think, toward the Portman-Cardin proposal in the
area of now called retirement savings accounts, was the USA accounts. I think
the RSA proposal that you have is an improvement from the USA accounts. It
frankly takes away some of what I viewed to be counterproductive proposals that
could compete with the private side.
I do have some questions about how
RSAs would work, and if I could just quickly go through some of those questions.
And to the extent you have an answer today, it would be very helpful, I think,
for our further understanding. If you don't, we're happy to have you follow up
in writing to the appropriate person.
First, how would they work in
terms of the employee and the employer? One of the concerns that I have, of
course, is if it's based on a matching basis from the government, does the
employer have to know what the employee's adjustable gross income is to make
that calculation? And how would that work?
Second -- and this is, I
think, in relation to that in terms of the practicality -- if there is a tax
credit provided as the match, what is the timing of that? Is it practical for an
employer or a financial institution -- because, as you know, financial
institutions can also be involved in this -- to provide that match before the
tax credit is available? And I see a timing issue there.
If you could
briefly address those practical issues, and then one other -- let me just go
ahead and put it on the table, because it's really a question of how it would
work. When there is no tax liability -- for instance, a governmental entity, a
non-profit, a hospital, where you don't have the ability to take advantage of
that tax credit, how would this work?
SEC. SUMMERS: Let me first say
that our objective is to find common ground with you and Congressman Cardin and
the others who are working in this area. Towards that end, the president's
budget contains a number of new proposals -- new for us -- proposals that
incorporate many of the elements that you've been working on. And my hope would
be that we could forge a common approach that would meld all our priorities. And
my understanding is that my staff has already begun meeting with yours and
Congressman Cardin's towards that objective.
With respect to the
questions that you raised, we would envision a procedure that benchmarked the
size of the accounts towards last year's AGI, so there would be no
record-keeping burden on employers, but a relatively simple certification by the
individual. The time value of money issues with respect to the credit is
something I think we'd have to work on. Once the program was started and there
was a regular flow of new accounts at the financial institution or new pensions
and a regular flow of estimated tax payments, I would expect that they could be
dovetailed very closely. But there are some startup issues, and those are things
we'd be happy to work with you to find the best way to address.
With
respect to non-profits, this is something that is of concern to us. Our
expectation would be that non-profits would contract with some kind of financial
institution that was for-profit, that was involved in the benefits, who would be
able to make use of the credits and would pass on the benefits to the employees
of the non-profit. Those are very important issues, and we would be -- I've
given you what our preliminary thoughts are. But these would be things we'd be
very happy to work with you and other members of Congress on.
REP.
PORTMAN: I appreciate that, and I do think there's an opportunity to make
progress here. I've been disappointed, as you know, with Treasury's inability to
accept some of what I view very modest increases in limits. And you mentioned
earlier in your dialogue with the chairman, you were concerned about raising
limits.
All we do in our legislation is take the limits that somebody
can put into a 401(k), for instance, back to where they were in the early 1980s.
In the aggregate, it's not even keeping up with inflation, as you know. And it's
not just about allowing people who are bumping up against the limits now to be
able to save more for their retirement, which I think is a good idea. It's about
allowing small businesses, most of whom offer no pension at all today, to offer
pensions to workers who are low- or middle-income workers.
And we have
to understand how those decisions are made. They're made by business owners.
They're made by managers who will have an incentive to set up a plan if they can
see some benefit to it. And I would hope we can take the blinders off, talk
about the crisis that's at hand, which is half of America's workers not having a
pension, get the politics aside, get out of the rich-poor debate, and really
begin to help all Americans save more for their own retirement.
SEC.
SUMMERS: I would agree with that orientation. And to the extent that raising
limits can be constructive in raising the number of employers who covered by
pensions, we'll be particularly enthusiastic. And I think we all agree that that
75 million people without pensions represents a major problem in our country.
And there will undoubtedly be a combination of approaches that will be most
effective. We obviously feel that we've suggested some constructive ideas. We've
incorporated some of your ideas which we think are particularly constructive,
and we're certainly prepared to work in a spirit of compromise to try to find
the best way forward in this area.
REP. PORTMAN: Thank you, Mr.
Chairman. I have lots of other questions that I'll be following up later.
SEC. SUMMERS: Thanks.
REP. ARCHER: Mr. Hulshof.
REP.
KENNY HULSHOF (R-MO): Thanks, Mr. Chairman. Mr. Secretary, thank you for bearing
with us. I have some technical questions regarding qualified zone academy bonds
and the new proposal on qualified school modernization bonds that I'll probably
need to follow up in writing, because my time will not permit. And I would
appreciate, as Treasury (has done in the past?), to respond to those questions.
What I do want to do, Mr. Secretary, is to focus and make some comments.
And maybe there'll be some time at the conclusion that you can respond to any of
these points or none of these points, as you so deem. What I'd like to highlight
are what I believe are some inconsistencies, from what I've been hearing through
the questions that you've sat through this morning.
Earlier you said
that we are, quote, "in a remarkable moment in our nation's economic history."
And I don't disagree with that. What I find troubling, however, is an
insistence, as we look at the president's budget, on raising taxes and user
fees, especially in an era of surplus. That to me seems to be somewhat
inconsistent.
You were quick to point out that the amount of government
spending as a percentage of GDP has gone down, and yet when the chairman pointed
out that the tax take on the American worker in this country continues to be at
the highest percentage of GDP, you were quick to explain that away. That to me
is somewhat inconsistent. I find that troubling.
Talking about waste,
fraud and abuse, Ms. Matthews made an excellent point to Mr. Thomas's question
about Medicare. We always invoke the mantra. We want to eliminate waste, fraud
and abuse. And yet, Mr. Secretary, you mentioned as far as expanding the earned
income tax credit. And I think we all share your opinion that this has been a
useful program as far as the income supplement to working Americans, and yet we
have got an over 20 percent error and fraud rate with the earned income tax
credit.
So as we talk about expanding it -- in other words, for every
five dollars that are being paid out in income supplements, one of those dollars
is not deserved under the law. And yet we're continuing to talk about this very
wasteful program. And we've had hearings on that, and representatives of your
office have talked about it. And I find that extremely troubling.
I want
to focus just another comment about something that I think in principle we agree
on and you talked about, corporate tax shelters. And I noticed my colleague from
Texas was nodding very vigorously in the affirmative. I know that this is an
issue that he finds very important. You talked about closing corporate
transactions that are void of substance. We agree with you.
But yet what
I find inconsistent, Treasury came to us in 1997, and maybe even before, but I
got here in 1997, but I remember we had hearings on the president's budget
proposals back in 1997 and Treasury asked us for some additional authority to
crack down on corporate shelters. Specifically, we passed a provision that would
require registration of corporate tax shelters. Two and a half years later, we
still are waiting for regulations and rules to come from Treasury on something
we passed two and a half years ago. And I find that inconsistent.
You
know, when we talk about tax cuts or tax fairness, we've heard every excuse
imaginable, not from you, Mr. Secretary, but from those who oppose tax cuts.
We've heard back in 1997, with the Taxpayer Relief Act, that it was inconsistent
to give tax cuts at a time when we were deficit spending. When we had the 1999
tax bill that we debated, we heard from some on the other side that this is not
the time. It would overheat the economy, the minority leader said on the floor.
And then there were others that said we can't cut taxes because the economy is
too fragile. When we had the extenders package that you supported -- I certainly
appreciate the fact that the president signed that R&D credit and these
extenders -- the thought was that we can't do that because it's not paid for.
Now we're hearing from the other side, "Well, we don't have this budget
document in place." And yet, to follow along what Mrs. Johnson said in her
comments, Mr. Secretary, and that is, there are so many areas of agreement,
whether it's the Portman-Cardin pension plan, whether it's the marriage penalty,
you know, whether it's the long- term dependent care -- you have a credit; we
had a deduction.
The point is that I find that our substance doesn't
match our rhetoric. And even here today in this hearing, there are so many
things that I think there's agreement on, and yet, when the rubber meets the
road, we aren't actually putting into practice what we profess regarding those
changes. And so, you know, one quick point because I see my time is running
short, and this is -- I know that there are some school bond proposals -- going
to the technical question -- school bond proposals that would invoke Davis-Bacon
prevailing wage requirements on school districts that utilize these tax credit
bonds.
If you can give me a yes or no answer on this. In the Treasury's
green book, it's silent on this issue. Where is the administration on
Davis-Bacon? And if that's something you need to respond in writing, that would
be fine. I've got some other questions that we'll submit in writing regarding
the school construction bond proposal. And with that, if you have any comments,
my time has expired, and so I would yield to you.
SEC. SUMMERS: I'll
respond in writing on the school construction question. I would stress, in
response to a number of your points, Congressman Hulshof, that we believe that
debt reduction, which (moves?) the obligation to pay principal, to pay interest,
takes pressure off interest rates and holds down their costs. It's probably the
most effective form of tax relief that we can provide and that we need to not do
anything that puts that at risk in terms of unrealistic budgeting.
REP.
HULSHOF: If the chairman would indulge me on that point. And just as you say,
we're trying to put pressure on interest rates. The Fed does not agree. I mean,
you know, Mr. Greenspan and the Federal Reserve is doing just the opposite as
far as pushing interest rates up to try to curtail so-called inflation; not to
put you at odds with the chairman, but --
SEC. SUMMERS: Congressman
Hulshof, I, of course, can't comment on Federal Reserve policy. What I can say
is that every -- and I use that word "every" advisedly -- serious professional
economist who has looked at these issues would agree that an environment of
paying down debt will be an environment of lower interest rates, whatever else
happens, than an environment without paying down debt. And that is the operative
principle and the reason why debt reduction is such an important and effective
form of tax cut.
The president's budget contains $350
billion in tax cuts for American families, and we're prepared to legislate those
any time we're sure that they are in the context of a program that is paying
down debt and assuring our ability to strengthen Social Security and Medicare.
With respect to tax shelters, the regs you described I expect will be
announced within the month -- within the next month. But frankly as we have
drafted them we realized that the legislative authorities were in some ways
insufficient and would permit tax shelters to still be marketed itself for those
who play the audit lottery. And that's why we will be coming back and asking for
new legislation.
With respect to the EITC, there are real compliance
problems. We addressed them in ways I mentioned -- more budgeting, Social
Security numbers, conforming definitions, tax preparers initiative. But I would
hesitate to say that I think it is quite a misleading suggestion about the
compliance statistics to suggest that one dollar out of every five is somehow
fraudulently wasted. The 20 percent figure refers to returns in which there is
some kind of error. The error is often not of large magnitude. The error is in
most cases not fraudulent, and in many cases comes from anomalies that the
president is proposing to simplify this year, such as the distinction between
earned income for EITC purposes and earned income for other purposes.
With respect to the taxes over GDP figure, we will just have to agree to
disagree. I don't see how it can be said that more capital gains from a stronger
economy constitutes a tax increase. And every -- even though it does raise tax
revenues -- and every evaluation of the situation of the typical working family
or the working family that is at half the typical income or twice the typical
income does say that they are paying less taxes today than at any point in the
last 20 years.
Finally, with respect to the question of revenue offset
measures that you raised, it seems to me that just as you take the position that
even at a time of surplus we need to eliminate any wasteful spending. It is also
appropriate to take the position that if there are tax measures that constitute
distortionary subsidies, or inappropriate measurements of income, that that is
something we should also be looking at for fairness and integrity of the tax
system, regardless of what the overall budget surplus is. And it is from that
perspective that the president has put forward his offset proposals.
REP. ARCHER: The gentleman's time has expired. The chair observes that
there are nine members that have not yet inquired, and the chair will attempt to
conclude the hearing at 2 o'clock. So the chair will be constrained to strictly
invoke the five-minute rule, so that every member will have their full five
minutes.
Mr. Cardin.
REP. CARDIN: Well, thank you, Mr. Chairman,
for calling on me -- but not the new interpretation of our five-minute rule.
Let me thank Mr. Summers for first his testimony, and for laying out I
think a very comprehensive budget that we can follow. And I guess just in
response to some of my colleagues' points about why we are so concerned about
voting tomorrow on a tax bill without having a budget, is that the
administration has laid out a very clear agenda: five objectives that you
spelled out, Mr. Secretary, at the beginning of your comments -- reducing the
debt and dealing with Social Security and Medicare to protect those programs,
targeted tax cuts and our international commitments, and some of our new
spending priorities. Most of that is within the jurisdiction of this committee.
It was interesting to hear comments about Social Security. Well, your budget
provides that we can preserve Social Security.
I question the
Republicans on their tax proposals that will exceed a trillion dollars over 10
years, whether they can do that and still pay down the debt and deal with Social
Security. You have given us a blueprint that we can deal with Social Security. I
question whether the Republican budget allows us to really modernize Medicare,
to include prescription drugs for our seniors, which we need to do. I was
interested in Mr. Thomas's comments about competition. But I can tell you what
the Medicare Plus Choice has done in my state, a rather urban state, where now
14 of our 24 jurisdictions do not have any Medicare Plus Choice -- no option but
the fee for service -- as a result of changes we made. So I am not so sure there
is the interest of the private sector some of my colleagues believe in insuring
our seniors.
I do want to emphasize, though, a point made by Mr. Levin
on trade, because I do hope that we can develop a broader consensus in this
Congress on expanding international opportunity. Mr. Secretary, our concern
about labor and environment is not for protectionist policies to protect
American markets, but that we should be a leader in establishing international
core standards in these areas where it's right for us to be a leader in the
world, as we were on financial services, as we were on intellectual property
rights, we should be with labor and environment. And I think if you do that you
are going to find a broader consensus in this Congress on both sides of the
aisle on the trade agenda.
But let me in the few minutes I have just
underscore the point that Mr. Portman made on the private retirement and
savings, and the chairman made right before our break. The economic figures are
very encouraging for this nation. But we still need to save more. You understand
that, we understand that. And what the Portman-Cardin bill attempts to do is
make it easier for Americans to be able to save for their retirement by
eliminating some of the complexity and making it easier. And I want to -- just
to point -- I really do appreciate your comment about defining common ground. I
applaud the president's RSA proposal, because you put some money on the table.
We weren't quite that bold. We didn't quite spend as much on most of our
proposals as you are putting on the table. That's good, because we should be
willing to have targeted tax relief for people who are willing to put money away
for their retirement, particularly lower-wage workers. We agree with you we want
to get to that 70 million who do not have private retirement. We also want to
get to low-wage workers, small businesses and the decision-makers to have
pension plans so those 70 million can get pension plans.
And just one
last point on this, and I would invite your response. We are not suggesting
increasing the caps. We are suggesting that we go back and bring the caps where
they used to be. We've had such a regression in the ability of Americans to put
money away for private retirement, because we are so concerned that some people
might put more away than others, that we find that people aren't putting
anything away. So our objectives are to deal with the 70 million, but it's also
to deal with the low savings rate, to put more money into private retirement
plans, so we can have less pressure in the future on Social Security. Social
Security is supposed to be just one leg of a three-legged stool.
So I
really do appreciate your comments and your proposal on common ground on the
pension issues. But I invite you to work with us so that we can bring out
legislation in this Congress to deal with that issue. And I would like your
comments.
SEC. SUMMERS: I think I agree with everything -- I think I
agree with everything you said, Congressman Cardin, and I look forward very much
to working with you and Congressman Portman and other members of this committee
to address what I think is a macroeconomic problem for our country in terms of
too low a personal savings rate, and what is a personal problem for a large
number of individuals in terms of their preparation for retirement. I think this
is an issue which ought to, and I think does, reach across party lines, reach
across generational lines. And it is one that I would hope that as we pay down
the debt, strengthen Social Security and Medicare this year that we could also
work on it.
REP. CARDIN: Thank you, Mr. Secretary.
REP. ARCHER:
The gentleman's time has expired.
Mr. McInnis.
REP. SCOTT
MCINNIS (R-CO): Thank you, Mr. Chairman. Mr. Secretary, I will have a number of
questions here. I would like your response in writing, since I am limited to
five minutes.
Let me kind of put it in context, because you and I, I
think, come from opposing ends in regards to the estate tax. Of
course I always think of your quote when you were talking about estate
tax that the avocation or the repeal of the estate tax
is, quote, "About as bad as it gets," unquote. That was when you were the deputy
secretary. And then you went on to say that, quote, "When it comes to the estate
tax, there is no other case other than selfishness." Of course, as you know, my
district is comprised primarily -- my district is geographically larger than the
state of Florida, comprised primarily of farms and ranchers. And needless to
say, we take strong issue with that position.
Further on, I would like
you to confirm in writing so I am sure of the accuracy of the quote, but the
Washington Post on April 22nd, 1997, says, quote, "You have to raise revenues
somewhere, and the ability to pay seems like a good way to do it," unquote. So I
expected that the administration was going to continue in its opposition to
relief on estate tax, although I would be curious as to the upper-income level
of members of the Cabinet who are in the administration. My guess is that most
of them have taken steps to hire tax accountants to be sure
that they are not hit with this estate taxation, unlike the
middle class that they are advocating no repeal of the estate
tax.
What I didn't expect from the administration in the
budget, and what I would like confirmation from in a letter, is in fact an
estate tax increase. I knew you weren't going to give us any kind of relief out
there with the estate tax. I didn't expect an increase. And I would like to just
confirm that my numbers or the proposals are correct -- they restore the
phase-out of the unified credit for large estates. The administration proposes a
$1.1 billion increase in that element of the estate tax. They
propose a $214 million increase, and require consistent
valuation for estate and income tax purposes; a $55 million
increase in the estate tax for basis allocation for part- sale/part-gift
transactions; a $1.054 billion increase and conformed treatment
of surviving spouses in community property states; $18 million
includes the QTIP (ph) trust assets in surviving spouse's estates;
$6 billion, and eliminate non-business valuable discounts in
the estate tax; eliminate gift taxation exemption for personal residence trust,
$408 million; limit use of the Crummy (ph) powers,
$208 million. So the proposal in this new budget on an increase
in the estate taxation is $9 billion.
I'll move on to
the second issue. So I would like some comments in writing on that.
The
second issue is last year we had 28 members of this committee, Democrat and
Republican, signed a letter that I had drafted frankly opposing what we call
tracking stock. The administration somewhat appeared backtracked, but kind of
like the estate tax, they didn't give it up. And, lo and behold, as I look at
the new budget, you are back again but this time with a different mask. Now I
understand under the tracking stock that instead of taxing the issuing
corporation you are now going to tax the stockholder. So you still back on the
tracking stock. Apparently the administration is still taking the position --
and I stand to be corrected, I would hope, when you answer these questions --
but you are still in a position that apparently the tracking stock is an income
and should be taxes. Both of those issues are issues that I think are important.
The other thing -- and I will conclude my remarks here -- I believe
early in your remarks that you said that the drop in the interest rate allows
for a tax cut for -- the drop of the interest rate of mortgages is an
administrative way of a tax cut for families. Now, I kind of think the
administration and this economy takes credit for rain. And I want to tell you
under -- my understanding of this -- this is the market's benefit to the
families. This is not a tax cut to the families out there of the America, that
the administration and the Congress have decided to cut your mortgage rates.
That's a result of market functions, not the result of a tax cut. And I think
it's somewhat of a misappropriation of the term "tax cut" when you talk about
interest factors, interest rates being lowered out there, and you all of a
sudden now put that in the classification of a tax cut.
When I talk to
middle America out there, when I talk to the average person, and I go, Hey, if
the interest rate on your car, the financing of your car, drops from 10 percent
to 9 percent, is it a tax cut? -- they don't say it's a tax cut. I think there
is confusion for it. Thank you, Mr. Chairman. I would appreciate --
REP.
ARCHER: Unfortunately, Mr. Secretary, your answers will have to be submitted in
writing because the gentleman's time has expired.
REP. JOHNSON: (?) Mr.
Chairman, with that, though, I think some of the rest of us members would like
to have those answers as well. So if we could have that forwarded to us.
REP. ARCHER: Perhaps the gentle lady will provide time within her five
minutes. I have got to be able to release the secretary and still let everybody
have their five minutes.
SEC. SUMMERS: I would -- Mr. Chairman, I would
be prepared to stay until 2:03 in order to take three minutes to respond to the
gentleman's thoughtful question, if that would be all right.
REP.
ARCHER: Mr. Secretary, whatever you want.
SEC. SUMMERS: Let me just say
with respect to interest rates, it's, as I think the words I used were
"tantamount to a tax cut" to take the pressure off credit markets and allow
interest rates to fall. And I don't believe for a moment that we would have
anything like the interest rate environment we do if we haven't made progress in
creating budget surpluses.
With respect to tracking stock, I would
simply say to you that I think it's appropriate for us to conform tax rules for
corporations to all forms of corporate distributions in some level-playing field
way. And that's the thrust of our corporate tracking stock regulation.
With respect to the estate tax, I have made clear both in writing and in
public comments immediately after the remarks you quoted that I had what might
be referred to as a learning experience with respect to those observations, and
they were not a fair statement with respect to the motives of those who
advocated estate tax repeal and have worked very hard in
connection with the 1997 legislation to provide tax relief to
farmers and to small businesses, and to be part of a program to generally raise
the limits on the estate tax.
With respect to the set of provisions that
you identified, to say that estate tax burdens are a legitimate concerns for
many small businesses and farmers. It is not to say that we shouldn't be
responsive to loopholes that arise in the estate tax and that in many cases were
not intended. The references to QTIP (ph) trusts, to the Crummy (ph) powers, to
certain valuation discounts, to residential trusts -- these all are various --
these are responses to various systems that have been designed over time to
avoid the intent of the estate tax as it was legislated. And I think it is much
better for us to debate what the appropriate level of that tax is and make
decisions explicitly rather than to allow loopholes to be expanded. And the
legislation is not directed at increasing the tax, but only responding to
loophole concerns that have arisen.
REP. ARCHER: Now Mr. Becerra.
REP. XAVIER BECERRA (D-CA): Thank you, Mr. Chairman. Mr. Secretary,
thank you very much for being here and for being so patient with your time. Let
me also compliment you, and certainly of course the president and the vice
president on the proposal that you have put before us in your budget to try to
address Social Security, Medicare, and certainly of course pay down the debt.
And if I can say that -- I would also congratulate you on what you did with the
EITC. I think it's great that we are looking at more ways to make work pay for
working families that otherwise would fall into poverty or what we have defined
as poverty. And, by the way, I think we should acknowledge Chairman Archer as
well, because he also had that proposal or a similar proposal on EITC.
You mentioned a number of things. You answered a number of questions on
a number of subjects. Let me just touch on a couple. FISC. I hope that Treasury
will take with as much seriousness the issue of FISC and what happens with the
WTO on that issue as the USTR is taking it with, because I think if we don't
treat that as a very high priority we could find ourselves at a great
disadvantage competitively speaking with our European counterparts, and I think
the last thing we want to see is a loss of jobs in this country because we are
not able to export on competitive terms with our European colleagues.
The digital divide -- I am glad that you spoke a little bit about that.
I am very pleased to see the president's proposal to help households acquire
computers and to help young people and adults obviously get connected. I am
fortunate to work with Mr. Portman on a bill we call the New millennium's
Classroom Act, which does something very similar -- it tries to provide a tax
deduction for companies or individuals that contribute computers to classrooms
and to senior citizen centers to help children and seniors get connected. So I
hope you will take a close look at that bill that we have.
And I am not
sure if it was mentioned, but because so much of your budget talks about working
families, I hope that we can count on you to work with us on an issue that is
affecting a number of states more and more dramatically every year, and that is
the whole issue of runaway productions in the entertainment industry. We are
seeing more and more countries like Canada offer tax credits to companies that
would leave the United States to do their productions abroad in places like
Canada, Australia, England. And as a result they are getting tax credits of up
to 40 percent on the production cost, principally in labor, and it has become
very difficult for a number of companies in the U.S. to stay here and for us to
compete to keep those companies here. And I hope that you will take a close look
at the opportunities to try to help those industries. And, by the way, we are
not talking about helping the movie star who makes 5 million to 20 million
dollars or the producer or the writer or the director who is making megabucks;
we are talking about for the most part the folks behind the camera, the stage
hands in productions, the boom individuals who operate all of the equipment.
You're talking about the caterers who provide the lunch to those who are actors,
who make a working man's wage. So if you could do us a favor and take a close
look at that -- that's becoming more and more an important issue.
And
finally, if I can focus the remainder of my time on an issue that I hope you'll
take a close look at, it deals with Customs. Customs right now has an
automations problem. It has a computer system that works to track product that
comes in that's imported into this country that uses 1980s technology. And as a
result, you've already experienced on occasions brownouts, delays in the ability
to move a lot of this product.
And with our in and out system of
production these days, where it's time-sensitive, to be able to bring in what
you need to produce your product, a lot of companies in this country would
suffer greatly if we found not just a brownout but a blackout, where products
that are supposed to be coming in to help manufacture here in America would not
reach their location.
I have a letter that I'll leave with you, rather
than getting to details since we are constrained on the time. But you're
probably familiar with the new system that Customs is trying to implement, the
ACE system. It would replace the ACS system that's in place right now. And the
problem becomes that at this stage, the administration has proposed only to fund
the modernization through a new fee. And I think most of us have seen that that
hasn't worked, and I would hope that you all would think seriously about other
options to try to do that.
I know that at some point there was an
exploration of the possibility of earmarking some of the merchandise fee that's
used right now and collected from importers to offset the cost of that
modernization, or perhaps using an appropriation, a straight appropriation to do
that.
But somehow or another, we have to get this resolved, because if
we don't get that new computer system in place, I think we're going to find that
we're all going to be hurt. But certainly American business will again suffer,
consumers will suffer, and our competitiveness will suffer. And I don't know if
you have any comment on the whole issue of Customs and automation, but I'd
welcome an answer.
SEC. SUMMERS: I'll take one minute to respond to your
four points, if I could. I've got a clock in front of me. On FSC, I agree, we're
absolutely committed. Deputy Secretary Eizenstat is leading the effort. On
computer donations, we share the objective with respect to the digital divide,
but we have some concerns about the form of your proposal, in terms of
encouraging overly old computer donations, rather than ours, which is focused on
newer equipment. But I'm sure we could work something out.
REP. BECERRA:
We'll work on that.
SEC. SUMMERS: On Hollywood, on runaway production in
the entertainment area, this points up the generally important issue of tax
competition which we're pursuing very actively through the OECD, because this is
an issue that rises in a number of contexts.
On ACE, we agree with you
on its importance. We've reconfigured the proposal in this year's budget to much
more clearly link the benefits to the business community to their contribution.
And I hope we can move forward with it, because you're absolutely right that
it's essential.
REP. BECERRA: Thank you very much. Mr. Chairman, thank
you very much.
REP. ARCHER: Mr. Lewis.
REP. RON LEWIS (R-KY):
Thank you, Mr. Chairman. Mr. Secretary, over the next 10 years, the federal
government is going to be taking in about $24 trillion in money
from the payers' -- the taxpayers' pockets in this country with a sizable
projected surplus. Do you think that the American people are not paying enough
to take care of the needs of the federal government?
SEC. SUMMERS: I
think there's room to meet the needs of the federal government and to provide
for appropriate tax relief, although I think we've had a real accomplishment in
the last seven years in reducing the number of federal employees by a sixth and
bringing government, by a wide variety of measures, down to its smallest size
since the 1960s, and that we've enjoyed the first decade in which we have been
significantly cutting discretionary spending, which I think represents a real
achievement for our country. But we've got to be very disciplined.
REP.
LEWIS: Well, let me ask you this. Do you think $170 billion in
net tax relief over 10 years is a significant amount of tax relief to the
people? That's basically seven-tenths of one percent. That's not a lot of tax
relief.
And let me say this. You have increased taxes by
$181 billion -- $69 billion of that comes out
of families in Kentucky -- tobacco farmers that are struggling. They just had a
45 percent cut in their quota. Last year, 30 percent. They're dying out there on
those family farms. Their income has been cut in half.
You know, is it
the president's desire to totally tax legal tobacco out of existence and the
family farmer?
SEC. SUMMERS: With respect to the tax cuts,
$170 billion is a lot of money where I come from. But --
REP. LEWIS: Out of $24 trillion? (Laughs.)
SEC.
SUMMERS: Three hundred and fifty billion dollars in gross tax cuts is even more.
With respect to tobacco, the core of the president's proposal is a youth penalty
that would fall on companies that induce -- whose products are sold to the young
people below the age of --
REP. LEWIS: Okay, let me ask --
SEC.
SUMMERS: -- 18. It would be -- you know, I'm sure that if there were proposals
to ensure that those penalties were borne by the companies, rather than passed
on to consumers --
REP. LEWIS: Well, where's the --
SEC.
SUMMERS: -- if it was approached along those lines, I'm sure that's something we
would be prepared to join in working on.
REP. LEWIS: Let me ask you
this. One of the major causes of death with teenagers today are automobile
accidents. Are we going to make automobile manufacturers responsible for
decisions made in the family home? One of the biggest causes of cancer today is
exposure -- overexposure to the sun. Are we going to make those manufacturers of
swimwear responsible for kids getting out on the beach and being overexposed to
the sun?
Are we going to have lookback provisions for every company in
this country for decisions that should be made in the home and the
responsibility should be there? Where will this all end? Are we going to always
have lookback provisions? Where is the responsibility here?
SEC.
SUMMERS: I think that's a fair and important question, and let me just emphasize
that whatever we do, it is very important that we protect the interests of
tobacco farmers, who are not the people who are responsible for all of this.
That said, we've had effective public health policies around automobile
accidents that have reduced the number of fatalities per mile by 50 percent over
the last 35 years. We've had effective policies in the other areas that you
cited that have reduced fatalities very substantially.
We frankly
haven't had similar effectiveness with respect to tobacco, even though tobacco
is a far, far greater cause of death than either of the examples you cited. This
is the best strategy, as judged by all the public health authorities -- to rely
on price to achieve the same kinds of benefits the government has achieved with
respect to the other kinds -- to the other sources of --
REP. LEWIS: My
time's getting short. Let me just interrupt just for a second and say this. When
I said "legal tobacco," there's a law of diminishing returns here. The reason
that the tobacco farmers have been cut by 45 percent is because they can't
afford to stay in business any longer. Illegal, underground tobacco products are
already being sold. Our kids are going to be exposed to illegal tobacco, where
they're going to be buying it at cheaper prices because you're going to force
the legal people out of business.
SEC. SUMMERS: Congressman Lewis,
that's something we'd be happy to discuss with you. I think the Bureau of
Alcohol, Tobacco and Firearms and others who have looked at this issue can make
a compelling case that youth penalties in the range that we are considering can
quite comfortably be administered. But the concern you're raising, if it did
lead to smuggling or illegal use, obviously is a very serious one, but it's one
we've given a lot of thought to and that I believe can be controlled.
REP. ARCHER: The gentleman's time has expired. Ms. Dunn.
REP.
DUNN: Thank you very much, Mr. Chairman, and welcome, Secretary Summers. I
enjoyed your presentation. It did clarify where the administration stands from
different points of view, and it will be useful as we compare your proposals to
those that we intend to propose as we put together our budget document.
But I did want to move back to asking you some questions about the death
tax. In some areas that I do a lot of work -- the minority community and women
business owners -- where we see women starting businesses at twice the rate of
men and they're small businesses. But they're businesses that are being built
and that these women would like to provide as a legacy to their children when
they finish their life.
The 1993 budget agreement increased the rates of
inheritance tax up to 53 and 55 percent. That puts us at the second-highest
inheritance tax rate of the whole world. Japan is the only country that's ahead
of us. That concerned me when it happened then.
But now, as I've done
work in the entrepreneurial community, I've learned that many minority groups,
particularly black enterprises, see that it takes about three generations to
create a business that provides the legacy, that provides them standing in the
community so that they can continue to do well in their lives. And for them, the
death tax becomes a true enemy.
Now I know that you agree with me that
we need to encourage entrepreneurial women and minority women to get into the
business market to become more independent. And I wanted to ask you, when the --
Congressman Tanner's bill, my bill, the death tax repeal that phases out death
tax in 10 years -- when it's supported by groups like the National Association
of Women Business Owners, the Black Chamber of Commerce, the National Indian
Business Council, the National Congress of American Indians, the United States
Hispanic Chamber of Commerce, the Hispanic Business Roundtable, the United
States Pan- Asian-American Chamber of Commerce and the Texas Conference of Black
Mayors, why doesn't the administration want to help by repealing the death tax?
In fact, why do they stand in the way of its repeal, even to the extent
of increasing it as they do in this budget? And I would like to know from you
the answer to that question. I think it would be very useful to those of us who
believe that this onerous tax should go away. I know that the administration's
position is in opposition to positions you took, for example, when you were
teaching at Harvard University. So I ask your comments.
SEC. SUMMERS:
Let me say first, just with respect to your last comment. The administration's
position is consistent with positions that I took as an academic. I did write
something that summarized the conclusions of another researcher who took a
position favoring the estate tax.
I think you have very powerfully
stated what is a very important concern, which is the proper treatment of small
businesses. And it should not be the way things work that the estate taxes force
the liquidation of small businesses. And we've proposed, supported in 1997 and
at other points a variety of proposals that are designed to provide relief from
what can be a liquidity problem, an enormous problem for small businesses at the
most threatening moment in the business' experience, when the founder or the
owner passes away. And that is a very real and large concern to us.
With
respect to the full-scale elimination of the estate tax as some have proposed,
we would share the view of many tax experts -- that the estate tax provides a
very important backstop to the income tax. And that if the estate tax were
completely removed, you would see a very substantial erosion not just of the
estate tax revenue, but also of the income tax revenue, as income was put into
various forms where it accumulated tax-free and there was never any taxation
with respect to the income that had been earned.
So we think it would be
dangerous to our fiscal integrity to full-scale repeal the estate
tax. We would also have a concern about the very large volume of
philanthropic contributions to the nation's universities, to the nation's
religious institutions, to the non- governmental organizations and social
organizations that do so much of the nation's work that would not be there but
for the deductibility that takes place under the estate tax.
So we would
be pleased to work on proposals to address the specific inequities with respect
to small business to the extent that they can be identified. But we do not
believe that it would be prudent to eliminate a tax that does after all, as real
as the issues are, only impact about seven-tenths of a percent of all American
estates.
REP. ARCHER: The gentlelady's time has expired. Ms. Thurman.
REP. THURMAN: Thank you, Mr. Chairman. Secretary, thank you very much
for being here today and spending all of this time with us.
First I'd
like to say something to our colleagues that I think is important, because we've
talked about this abuse and fraud issues. And you know, that is really some part
of our responsibility as well. We have Governmental Operations to overlook these
kinds of issues. I served on that committee. We had some 300 reports on defense
spending that we should have been looking at, but we did a lot of other
investigations instead. And I think we have to take some responsibility and then
in those findings -- how we're putting them into legislative proposals.
We in fact should take some credit for that, because we did that under
the EITC. We did that in 1995, we did it again in 1997 under the leadership
here. So I think we should be careful of how we address some of these issues.
Mr. Secretary, I would suggest though for some of us and the idea of
this Medicare issues and the idea that some things we're just cutting across the
board on hospitals and doing. I just met with my hospitals this last week, and
one of the things that they told me was because of the uninsured rate going up
-- of people not having the insurance -- it's created a real problem for them,
because of indigent health care.
So in your proposals -- I mean, you may
want to reiterate all of the new steps that you're taking to bring people into
insurance. Because I think this is very important, in the fact that we really
are helping the health-care system. So if you could just give us, you know, kind
of a little rundown a little bit more on that.
Another issue, though --
you know, in all due respect to my colleagues, if I remember correctly under the
Social Security proposal that was given by Archer-Shaw, and in fact, for many of
us -- I can't speak for the president not returning a phone call -- but many of
us sat for almost an entire day with the chairman and others trying to learn the
intricacies of Social Security. You all weren't invited, but some, you know,
outside folks came in and gave us that.
But then in that proposal,
whether it was -- if I remember correctly it was done 60 percent of the
surpluses were going to be put into equities as well, or some sort of
investment. And I understand the difference between the private account and the
15 percent. But I don't think you can just say out there "Oh, you guys are doing
this, but you're not doing this." That's just -- that's just wrong.
Thirdly, I would like to ask, though -- and I'm particularly interested
in this proposal, which is on the sustainable or the renewable energies issues.
I'm co-chair of that. And in looking at the issues that we've been talking about
over the last couple of months -- how this economy has grown with technological
innovations -- what in this budget, because of your comment at the beginning of
yours was, you know, we have to make some choices here.
In this budget,
where do you see and what do you see as choices that we've made that will
sustain this economy?
SEC. SUMMERS: I think the most important --
REP. THURMAN: Wait -- one last thing; prescription drugs as well. If we
have a prescription benefit, which you've proposed or which has been proposed,
let me tell you the dollars we're going to save in Medicare by not hospitalizing
people because they can have their medicines and stay on their medicines and not
cut them in half to choose between food. They will stay out and we'll save money
there.
SEC. SUMMERS: I share your last point, and I think there's a
general issue in all the scoring exercises that we do that I think, probably
appropriately, we're very conservative about taking account of various feedback
effects. And just as the chairman has expressed concern at some points that we
don't take account of all the behavioral effects of tax policies and that raises
certain questions, I think similar kinds of questions can be raised with respect
to the economies that come from prescription drugs. All things considered, I
think in the formal scoring processes it's best to be conservative. But there
certainly is the effect that you describe.
With respect to promoting the
recovery, in a broad sense, the most important thing we're going to do to
promote the recovery is have the large-scale paydown of debt. In the sense of
sustainable development in the environmental sense, the most important
provisions are the increases in research and development at the Department of
Energy, and of particular importance to me, the tax credits for more-
miles-to-the-gallon automobiles, greater use of biomass and other kinds of
carbon-conserving policies. We've had a great achievement in that while we've
had this remarkable growth in the economy; we've actually had record low growth
in carbon emissions in recent years. That's a tribute to the move to the
information technology type economy, and that's something that I think that we
need to build on.
I think Ms. Matthews can say something about the
question you raised with respect to Medicare.
MS. MATTHEWS: I think it's
absolutely true and that we will be helping our hospitals by ensuring that their
indigent-care numbers go down. And I would just point to a couple of things
quickly. One is family care, which is the expansion of something that was passed
in 1997 on a bipartisan basis, which was the CHIP proposal. And it's expanding
it to cover the parents of those children, and in addition, also getting more
information so that children that are not yet covered are, as two examples.
REP. ARCHER: The gentle lady's time has expired. Mr. McCrery.
REP. JIM MCCRERY (R-LA): Thank you, Mr. Chairman. Mr. Secretary,
welcome, and thank you for staying so long. You made the point earlier that
spending by the federal government is at, oh, probably a 40-year low, or close
to it. I think if you go back to find the year in which spending as a proportion
of our national income was lower, you'd have to go back to 1966, if I'm not
mistaken. And I think that is good. I agree with you that it's good that we have
restrained spending to the extent that we have. We have made progress in
shrinking government at the federal level.
But I would want to make the
point that we could have done better had the Clinton administration not fought
the Republican Congress every year since we've been in control for more
spending. And here you are back again this year asking for more spending. And I
think President Clinton deserves some of the credit for restraining spending,
but I'm reminded of Secretary Shalala coming and sitting right where you are
back in 1995, promoting welfare reform, which was great; we were all for welfare
reform.
But her welfare reform program -- that is, the Clinton
administration's welfare reform program -- actually would have spent more money
than we were then currently spending on welfare, whereas, as you know, the
welfare reform program that was ultimately adopted by the Congress and finally
signed by the president after two vetoes actually reduced spending on welfare by
some $60 billion over five years.
And here we go again.
At a time when we have surpluses, when the federal government is taking in more
money than we need to finance government, as pointed out by Chairman Archer, tax
revenues, unlike spending, are at an all-time high for peacetime. Over 20
percent of our gross domestic product is coming into the federal government in
the form of revenues. And instead of coming in and saying, "Let's have a tax
cut, let's let the people who have created this strong economy keep some of
their money, to keep doing the good things they're doing," you all are coming in
asking us to increase taxes.
Your proposal, your budget proposal, as it
is designed, would continue the surpluses; you're right. But if the tax
increases and the fee increases that you have asked for don't materialize, then
you've got a problem with your budget. It doesn't work. The numbers don't work.
And since I think it's safe to say that this Congress is not in a mood to raise
taxes, I would like for you to explain to us any contingency plans that you have
for scaling back the spending increases that you all have proposed, just in case
we don't adopt the tax increases that you've proposed.
SEC. SUMMERS: Let
me respond, if I could, in three ways to what you've said. First, with respect
to the question of credit allocation, I think the news is good enough that we
can all take credit for what's happened, although I would note that spending has
increased and federal employment has increased by far less than it did either in
the legislation between 1981 and 1993 or in the executive branch's proposals
between 1981 and 1993.
With respect to the level of taxes, I would just
respectfully have to disagree. I honestly don't see how it's possible to argue
that higher stock prices and more capital gains taxes, coupled with more of the
income going to those in high brackets, constitutes a tax increase. And if one
looks at standardized families, one does once again see that taxes are lower
than where they've been in 20 years.
With respect to --
REP.
MCCRERY: Well, Mr. Secretary -- Mr. Secretary, though, if you compare the -- I
like your figure on spending, and I congratulate the administration and the
Congress for working together to get spending down to 18.7 percent of GDP this
year. But if you're going to compare apples to apples, you have to say the
federal government is taking in over 20 percent of GDP in the form of revenues.
And that's an all-time high for peacetime. So --
SEC. SUMMERS: Sir, I'm
familiar with --
REP. MCCRERY: -- as an economist, don't you have any
concerns that we are taking an ever-higher proportion of our national income
into Washington to redistribute?
SEC. SUMMERS: As an economist, I've
analyzed that figure very, very closely. And the increase does not derive from
any legislated change. It derives from higher stock prices and more capital
gains, with a constant tax law, and it derives from a change in the income
distribution towards those who are more highly-taxed. When one looks at the tax
law as a measure, one finds that it is taking less relative to income than any
time in the last 20 years.
With respect to the question of tax cuts, the
administration's budget, of course, does propose net tax cuts over the next 10
years, and quite significant gross tax cuts. You spoke of new spending, but
those calculations are done relative to one of the first two CBO baselines,
which would require either a scaling back of the defense buildup or cuts on the
order of 20 to 25 percent in a number of key areas of government expenditure.
And I'm not sure just what's envisioned by those who invoke that baseline.
Our judgment is that it's better to use a current services baseline,
because, just as we learned in the 1980s that it was important to avoid overly
optimistic economic forecasts, we believe that unrealistically optimistic
forecasts about future spending could put us in a situation where we were back
in deficit. These forecasts are volatile, and we can't always rely on the kind
of good news that's reflected in this year's forecast.
REP. ARCHER: The
gentleman's time has expired. Mr. Secretary, unfortunately, if we're going to
get to the other three members who have not inquired, assuming we stay strictly
within the five-minute rule, we're looking at another 15 minutes. Can you handle
that?
SEC. SUMMERS: Yes.
REP. ARCHER: Without objection, I would
insert in the record at this point a compilation of the figures in your budget,
based on your estimates, which show that there is a $14 billion
net tax and user fee increase, over and above what you give in the way of tax
relief. So these are your figures, Mr. Secretary, and they're right here in
black and white.
SEC. SUMMERS: I would hope that you would permit me to
insert a response to that analysis in the record.
REP. ARCHER:
Absolutely. Mr. Ramstad.
REP. JIM RAMSTAD (R-MN): Thank you, Mr.
Chairman. Mr. Secretary, thank you for your indulgence. It's good to see you
again. I have a question concerning one of the items in the revenue-raising
portion of the administration's budget, and I refer to the proposal affecting
employee stock ownership plans, the so-called ESOPs, that are for S corporation
employees.
First, I must say that I'm relieved that this year's proposal
doesn't go as far as last year's proposal, which would have effectively killed
this effective retirement savings program for thousands of S corp employees. As
you know, a strong bipartisan majority -- in fact, 23 members of this committee
-- I see Ms. Thurman shaking her head affirmatively -- a strong bipartisan
majority of this committee went on record opposed to that approach. So this
year's proposal certainly moves in a better direction. We're happy to see that,
Mr. Secretary. It seems that it's an attempt to preserve broad- based employee
ownership.
But I think there's a problem, and we certainly differ on
what constitutes broad-based. Quite candidly, we believe that the highly-
compensated employee test, so-called in the administration's proposal, is
unworkable. And the legislation that 23 of us, Democrats and Republicans alike
on this committee, have introduced, H.R. 3082, uses a control test to determine
whether an ESOP is truly benefiting rank- and-file employees.
The
important question, I think, here, Mr. Secretary, can I interpret the
administration's new proposal as an offer to work with us, to work with Congress
on preventing possible misuses of the 1997 law, which everyone agrees we should
do, but at the same time, preserving employee ownership opportunities for
rank-and-file workers of S corporations?
SEC. SUMMERS: If I understood
you right, Congressman, you're asking for my agreement on the dual principles
that we want to preserve the ESOP as an important tool and, at the same time, we
want to avoid any shelter opportunities created by the 1997 legislation, and we
want to do those two things in the most effective and reasonable way possible.
And we are absolutely prepared to work with you and members of this committee
towards those two objectives, and that's precisely the motivation behind our
proposals.
REP. RAMSTAD: Well, I certainly appreciate that movement and
that willingness to work together in a collaborative way, because the last thing
we want to do is kill ESOPs for S corporation employees. I mean, that makes
absolutely no sense at all when we're trying to improve and increase savings
programs and retirement programs. They're doing it right. And for us, for the
administration, for anybody to try to put a damper on this sort of employee
stock ownership plan, is, I think, counterproductive to any good public policy.
SEC. SUMMERS: I agree.
REP. RAMSTAD: And I'm glad to hear that
you do agree. So -- let me also just ask you parenthetically, could you provide
us with a definition of the term "highly-compensated employee" that you're using
in the proposal, this year's proposal?
SEC. SUMMERS: Not off the top of
my head, but --
REP. RAMSTAD: I didn't expect that, but --
SEC.
SUMMERS: Wait just one second. I've just been provided with the answer that you
may or may not find helpful, that we define "highly-compensated employee" for
this purpose in a way that parallels the definition of "highly-compensated
employee" in other areas of the pension law. (Laughter.)
REP. RAMSTAD:
Just to digress --
SEC. SUMMERS: It may be better for us to pursue some
parts of this in writing, because it would be difficult to underestimate my
degree of knowledge of these details. (Laughter.)
REP. RAMSTAD: Well,
just to digress, let's work together --
SEC. SUMMERS: Absolutely.
REP. RAMSTAD: -- and solve this dilemma. Let me use the remaining
minute. I want to focus on the president's prescription drug proposal. We all
agree that low-income seniors, for many of them, prescription drugs are at a
crisis; the lack of accessibility for the 35 percent certainly that aren't
covered under Medicare.
Why not, instead of spending
$76 billion, as the president's budget does, why not target
prescription drug coverage to low-income seniors? Why displace the coverage that
a majority of enrollees already have? Why not target the 35 percent of
low-income seniors? And I ask that in good faith. I'm not trying to politicize
this issue. In my judgment, this is the last issue that we should politicize. I
really don't understand why we don't target simply the 35 percent of those
Medicare beneficiaries without prescription drug coverage.
SEC. SUMMERS:
That's something we've given --
REP. ARCHER: Secretary, you have one
minute.
SEC. SUMMERS: (Laughs.) It's something we've given a lot of --
REP. ARCHER: It just expired. (Laughter.) Go ahead. (Laughs.) SEC.
SUMMERS: Thank you, Mr. Chairman. Three reasons. First, more than half of those
without prescription drugs have incomes above 150 percent of the poverty line.
Second, many of those with some coverage have completely inadequate coverage
that's important to build on. And our proposal contains incentives for the
preservation of that coverage and wraps a better form of coverage around that
base coverage.
Third, the strength of Medicare has traditionally been
its universality. Everybody pays in and everyone receives the benefits. And to
carve out certain portions of Medicare benefits and make them only available to
some individuals, it seems to me, would weaken the program. For those three
reasons, we favored a universal approach. A fourth reason is to avoid various
kinds of adverse selection effects.
REP. RAMSTAD: Well, finally --
REP. ARCHER: The gentleman's --
REP. RAMSTAD: Thank you, Mr.
Chairman.
REP. ARCHER: The gentleman's time --
REP. RAMSTAD: Let
me just say, I hope we can work together and I hope the administration doesn't
persist with an all-or-nothing approach to this, because it's too important.
REP. ARCHER: The gentleman's time has expired. Mr. Doggett.
REP.
LLOYD DOGGETT (D-TX): Thank you, Mr. Secretary, for your leadership on so many
issues. Let me say first that I really applaud the initiative that you've taken
on tax havens, these international tax havens that have been used to provide tax
shelters. And I'm already working on some legislation in this area, and I look
forward to cooperating with you.
Second, with reference to tobacco, do I
understand that your recommendation basically is to use the tax code to address
the problem of youth smoking, and the leading cause of preventable death today,
in much the same way we use the tax code to encourage research and development
or accomplish some other reasonable social objective?
SEC. SUMMERS: That
would be -- it could be put that way, Congressman Doggett. I think I would
prefer to think of it as not using the tax code by simply working to create a
youth penalty and an overall tobacco program that would reduce youth smoking,
and some of which would be administered through the tax system. But I think we
made much greater progress, frankly, with respect to most other forms of public
health problems than we have with respect to tobacco. And I think the price
sensitivity is very clear, and that's why --
REP. DOGGETT: That
certainly --
SEC. SUMMERS: -- this approach.
REP. DOGGETT: We
certainly have in some other areas, as you have noted. There is a smuggling
problem, and I do have some legislation on that that I think we need to work on.
But it just seems to me that your tobacco area that you are working on here on
tax deserves the title "death tax" much more than the misapplication of that
term to the alleged inheritance tax plight of the Steve Forbes family.
Let me say as a third area that I am concerned about that you have
addressed, and I am pleased to see you do it, is something similar to the
approach that I have advocated through H.R. 2255 on addressing corporate tax
shelters. During last year when this Congress largely ignored the problem of
abusive corporate tax shelters, and never got around to even having a hearing on
it until members were packing in the middle of November to leave town. I noted
recently that that period was described by a top official at the Internal
Revenue Service in the Wall Street Journal as one in which there was almost a
product of the week or a product of the day that these tax hustlers were
promoting. Let me just ask you if you would characterize the problem of abusive
shelter tax evasion as having grown much worse during 1999.
SEC.
SUMMERS: You know, it's the nature of this problem that it is very difficult to
track, because it takes multiple years until one can fully analyze corporate
returns. And those who engage in these transactions don't take out
advertisements indicating that they have engaged in these transactions. And so
any evidence has to be inherently circumstantial. But from the conversations we
have had with a range of practitioners, I think both Commissioner Rossotti and I
have come away with the sense that there is more and more pressure to engage in
these transactions. And in part it takes the form of a kind of competitive
pressure where chief tax officers of corporations are told by their CFOs, you
know, the other CFOs, chief tax officers, are engaging in that transaction --
why won't you? And that increasingly law firms are giving opinions in support of
transactions that they would have been unwilling to several years before because
of the competitive pressure. And so it is our sense that this is a problem that
is of growing significance.
REP. DOGGETT: I believe you referred to that
as a race to the bottom in your written testimony. In our last and only hearing
on this, Mr. Keyes, who has been a real head cheerleader for these abusive tax
sheltered, indicated he had no familiarity with the boss transaction marketed by
his company. I was so pleased to see Treasury move forward to deal with the boss
problem. And my question would be to you: Why is it that legislation is
necessary? Why can't you just go and solve these problems administratively?
SEC. SUMMERS: Let me say we have had I think a number of successes in
dealing with these problems administratively, and I am proud of the work my
colleagues have done, which I think has saved the Treasury over the last three
years literally tens of billions of dollars as a consequence of their alertness.
But I don't think we can rely for the integrity of our tax system on an
approach based on Treasury staff picking up rumors, going in investigating,
finding out about transactions and closing them. It seems to me that the people
who, and the companies who engage in these transactions, know that these are
transactions of a somewhat questionable nature. And it seems to me appropriate
that they be expected to flag these transactions so that they can be clearly
considered. And if they are within the law, no one should pay more taxes than
the law requires them to pay, but they should flag these transactions rather
than be encouraged to carry them out by stealth. And it seems to me that where
we have situations, not where people make an honest era or a controversial
judgment is ruled against them, but where there are transactions that are devoid
of economic substance, if we want to deter those types of transactions, some
increases in penalties seem to us to be appropriate in those cases.
It
also seems to me appropriate that as part of the simplification that a number of
people have espoused here, that rather than encouraging reliance on a common-law
approach, where everybody reads a lot of different court cases to seek to
understand what the definition of "economic substance is," it seems to
appropriate to codify what is meant by "economic substance," and for this to be
an area in which policy is set by the Congress rather than by the judiciary. And
so for all these reasons it seems to me appropriate to legislate in this area,
although you have my assurance that the department and the IRS will do what we
can within our authorities, but we want to be very careful not to overstep our
authorities. And that's why we are looking to Congress for what we regard as
very much necessary legislation.
REP. DOGGETT: Thank you.
REP.
ARCHER: The gentleman's time has expired. The last member to inquire, you will
be happy to hear, Mr. Secretary, is Mr. English.
REP. ENGLISH: And thank
you, Mr. Chairman. Hopefully, as in the Bible, the last shall be first. I thank
you for the opportunity to inquire, Mr. Secretary. There are some things in your
budget that I really don't care for. Probably at the head of that list is the
$70 billion in unitemized Medicare cuts, and I understand why
they are in there. I do think you have -- you deserve credit for having included
a number of tax changes that could be positive, including, I would specifically
reference, the end of the Section 415 restrictions on multi-employer defined
benefit plans which unnecessarily restrict the pension rights of many workers in
this country. You have proposed the elimination of the 60-month limit on student
loan interest deduction. That makes a great deal of sense. You have proposed to
extend the exclusion from employer-provided education assistance to graduate
education, and I have come to recognize how important that is.
Mr.
Secretary, I am interested in your comments on the earned income tax credit,
because I think that the modest proposal you put forward probably does not
increase fraud and is probably worth doing for the working poor. But that is
something that I want an opportunity to examine. If I might, because my time is
limited, I would appreciate your written response on a number of points. One,
you propose modifying the Section 179 expensing provision for small business,
which is a very important provision all out of proportion to its size. You
propose putting the additional limit on it, liberalizing it elsewhere, of
applying it only to firms with $10 million in gross receipts.
If you would, I am interested in that proposal and I would like your further
justification of it.
I would like you to outline for me in writing in
proposing your exemption from severance pay, the exemption of severance pay from
the income tax, which seems to be a solid proposal going in the direction of
income stabilization, why you apply it only to the first
$2,000, if it is for some reason other than simply limiting the
revenue loss. I would look forward to your justification of your proposal to tax
the gains from the sale of a principal residence if it is a residence that has
been obtained through a like kind exchange within the prior five years. I don't
understand the abuse you are trying to address here, if there is one. In my
view, I don't want to see us move back in the direction of taxing the capital
gains on residences for taxpayers. That is one of the best things -- that
exclusion is one of the best things we have been able to do in recent years. And
I would like you to justify, if you would, why you have proposed again moving to
monthly payments of UC taxes for small employers. I don't see that that does
anything positive in terms of regulation or record-keeping, except impose an
enormous paperwork on many small employers. And if you could get back to me in
writing on those.
I would like you to comment now -- while, as I have
noted, support some of the things the administration has proposed in the area of
education tax policy, I am disappointed that you have not proposed any
additional tax break for college savings. That seems to me to be something we
ought to be encouraging. We ought to be taking college savings out from aid
calculations. And I wonder if you could comment on why the administration didn't
pursue this area, and how your proposed college opportunity tax cut would
interact with the HOPE scholarship, with a phase-out starting at
$50,000 in some cases. That to me seems to be an extremely low
threshold. I look forward to your comments.
SEC. SUMMERS: We will get
back to you in writing on the multiple concerns you raised.
With respect
to education, the so-called RSA, retirement savings accounts, despite their
name, would be available for college education, and would involve withdrawals
for college education. We have had some concerns about how some of the education
savings account proposals could be turned into an estate planning technique
frankly, and that's why we prefer our retirement savings account approach. With
respect to the college -- with respect to the college opportunity deduction, my
understanding is that it would have a substantially higher income limit than you
suggested -- somewhere closer to $100,000. And --
REP.
ENGLISH: That's for joint filers I think though. I think for single-income
filings it starts at 50,- to 60,000. Is that not correct?
SEC. SUMMERS:
It is lower for -- it is, as you suggest --
REP. ENGLISH: Okay.
SEC. SUMMERS: -- lower for single filers. We also have the existing IRAs
and the existing approach to qualified state tuition plans -- does provide
additional incentives for saving. And with respect to your question about
college financial aid formulas, speaking personally, I have very considerable
sympathy for your view, although in the reauthorization legislation a year or
two ago it wasn't possible to make that change in the higher education area.
My sense is that we now have, particularly if we have the RSAs, the
IRAs, the qualified state tuition plans, very substantial inducements to save
for tuition, but that it is important also to provide direct assistance as
college education has become economically more important, particularly for the
third and fourth years. Only about a third of Americans who begin college
actually graduate. And that points up the importance of support in the third and
fourth years.
REP. ENGLISH: Thank you, Mr. Chairman.
REP.
ARCHER: The gentleman's time has expired.
Ms. Mathews, thank you for
your patience and for appearing with the secretary today. And, Mr. Secretary,
thank you very much. We appreciate your responses. We appreciate the
succinctness with which you deliver them. And we appreciate your patience for
spending so much time with us today.
There being no further business
before the committee, the committee will stand adjourned.
SEC. SUMMERS:
Mr. Chairman, thank you very much for the way in which you and the other members
have conducted this hearing. And I appreciate your discipline in helping to keep
me brief, and so that we were all able to bring this to a conclusion. Thank you.
END
LOAD-DATE: February 10, 2000
