Copyright 2000 Federal News Service, Inc.
Federal News Service
February 9, 2000, Wednesday
SECTION: CAPITOL HILL HEARING
LENGTH: 19118 words
HEADLINE:
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: 10:09 A.M., EST DATE: WEDNESDAY,
FEBRUARY 9, 2000
WITNESSES: SECRETARY OF TREASURY
LAWRENCE SUMMERS
BODY:
REP.
ARCHER: Welcome, Mr. Secretary. And we're happy to have you before the
committee.
Before I begin my prepared statement, I'm going to discuss a
recent concern that is disturbing to me and I believe to all of the members of
the committee on both sides of the aisle. And I refer to the steady stream of
news reports about computer hackers disabling major Internet websites and
accessing consumer credit information. Obviously, our committee is concerned
because your Treasury Department computer systems must guard some of the most
sensitive records of the American people, and that is the IRS records and tax
records of all of our citizens. And I know that the IRS and the Treasury have
world class computer security measures in place and I'm sure that this is a top
priority for you and Commissioner Rossotti, but I commit publicly to you that
you have the full support of this committee to help protect the privacy of the
American people. Of course, this committee oversees other agencies that protect
similar information, like Social Security, wage information, Medicare health
records, and a host of other personal records, and we will focus on those areas
as well. But we must do everything we can to apprehend Internet hijackers and
put an end to this cyber-terrorism. And perhaps you'd like to comment briefly
before I make my statement relative to the budget which is before us today. SEC.
SUMMERS: Mr. Chairman, we share your, we share, we share your concern and I will
be speaking with Commissioner Rossotti about this question of integrity of our
systems. Frankly, privacy at the IRS has been a top priority for us for a number
of years, and we have taken steps working with this committee with respect to
employees who have made unauthorized use of the systems and issues of that kind.
I might just say, Mr. Chairman, that financial privacy generally is
something that is a very, very important issue for us, and there is both the
question of what is illegal hacking, and there is also the question of what is
absolutely legal in terms of the widespread dissemination of information. And as
the president made clear in the state of the union address, this is something on
which we will be suggesting legislation to the Congress this year to further
protect financial privacy, and we welcome your interest in this area.
REP. ARCHER: Well, it's important that we do work together, and this is
something that knows no party lines. It's something that we need to cooperate
fully on.
Now, having said that, I'd like to turn to the president's
budget request. After saying in 1998 that we should save Social Security first,
and saying in 1999 we should "save Social Security now," the president appears
to have abandoned this pledge in his budget request. He apparently told
reporters just last week that while he would like to save Social Security, in
his words, he can't. It's a little disappointing when the most powerful elected
official in the free world says, "I can't."
More disappointing and
confusing perhaps is that the president has changed his mind again on the idea
that the federal government should invest Social Security funds in private
financial markets. We went through that with the original request, and it was
negated powerfully by Alan Greenspan, who sat in exactly the chair where you
are, after it was proposed, and the president then left it out of his October
Social Security proposal. Now in the budget it's back in again, and I'm eager to
know why when there is massive concern on the part of people across the country
on a bipartisan basis of having the federal government own corporations in this
country.
I also would like to know why it's necessary to keep raising
taxes on the American people at a time when the tax take is at a peacetime high,
we not only have balanced the budget, we're paying down the debt, we're
protecting every dime of the Social Security surplus, and our fiscal house, I
believe we both would agree, is on a solid foundation.
Last year, the
president signed a tax relief bill that was funded largely out of the non-Social
Security surplus. Why does the White House believe that we should push for tax
hikes. There are plenty of other items that we need to discuss, like helping
low-income seniors with the high cost of prescription drugs, making health care
more affordable and accessible, continuing with the success of welfare reform,
and creating better jobs and growth here at home by opening markets overseas.
So, these are some of the things that I look forward to hearing your
thoughts on. And with that I yield to Mr. Rangel for any opening statement he
might like to make. And without objection, each member will be permitted to
enter any written statements into the record. Mr. Rangel.
REP. RANGEL:
Thank you so much, Mr. Chairman, and welcome again, Mr. Secretary. And on behalf
of the full committee, we welcome Sylvia Matthews, who is the new deputy OMB
director.
And, you know, when you first stated saying that you were
disturbed, Mr. Chairman, I took a deep breath, because I didn't know where you
were going to go with that. I was hoping that you were disturbed because there
were reports that we weren't working closely together in a bipartisan way in
order to do the best for the Congress and the country. And, there are many
things that I have problems with in the president's budget, but I do hope and
truly believe that it would be helpful to both Democrats and Republicans if we
could get something done in this session, because I'm not convinced that the
voters are just going to blame the majority party. They just might not be that
sophisticated and take it out on us too.
So, if we are concerned about
Social Security and Medicare and prescription drug benefits, patient bill of
right, education initiatives, it would seem to that there was a time when the
president met with the House and Senate leaders and that some of these things
could be worked out not to adopt what the president's creative imagination would
present to us, but to select from those things that just made sense, whether
they're Republican or Democrat, to see whether or not we could work together on
it.
This type of thinking was shattered when I found out that the
Republican, shall I say leadership, decided that the marriage penalty relief
would be the first thing coming out of the Ways and Means Committee. And I know
how important it is for the majority to get this thing done before Valentine
Day, because these things are important that we send a message to the voters for
Valentine Day that we love them and we want to give them relief. But how we can
do this before we have a budget, I don't know. And I know that you've abandoned
the 792 tax cut bill, and you've accepted the George W. Bush
$1.3 trillion tax cut bill. And I understand that instead of
bring it all to us at once, since we can't digest it no more than the American
people can, that we will be getting it in little slices, but at some point it
ads up.
Now, I think that the first slice that we get is the
$182 billion marriage tax penalty that benefits mostly people
who don't have a penalty. That doesn't bother me because I'm just as politically
perhaps as you are. But what bothers me is that this is an opportunity to tell
Mr. Summers and Ms. Matthews to take a message back to the president there's
some things that we want to get done, that we're gonna select those things and
we hope we work together because the majority does not have enough votes to
override the president. So, clearly, if we can't override the president, we
gonna have to work with the president. And as unfortunate as it may seem,
sometimes you may even have to work with me and the Democrats. But if we gonna
get anything done, we have to stop just taking shots at each other, but suggest
how in a more positive way we can get something, no matter how small it may
appear to be, done.
So, I really think that the president has laid out
for the nation a blueprint of exciting ideas that some of which we may not be
able to do. Maybe we won't be able to do it because we have other priorities.
Maybe we may not be able to do it because we won't agree that it's the best way
to do it. But out of two hours of suggestions, many of which we were able to get
the majority party to give support at least in applauding, I would like to
believe that out of that meeting with the president, or at subsequent meetings,
we can agree to do something. And I do hope that the president is receptive to
that, one, because it's important to the American people and the Congress, but
two, because both Chairman Archer and President Clinton will not be returning.
And I would like to be a part of leaving some type of legacy in being able to
say that they've done something that the country and the Congress will treasure.
And I think we can do that and still have enough differences to have a
knock-down-drag-out fight in November to see which team, the Democratic team or
the Republican team, the American people would want, because I am convinced that
there is not that much difference between what we would want; it's just how do
we get there.
So I welcome you coming. I certainly will be working with
you. And of course if we can't work together, there is another way to do it, and
I prefer to do it in a bipartisan way. Thank you, Mr. Chairman.
REP.
ARCHER: Mr. Summers, welcome again. We are happy to have you before the
committee, and we will be pleased to hear your verbal presentation. And without
objection, your entire written statement will be printed in the record.
SEC. SUMMERS: Thank you very much, Mr. Chairman, Congressman Rangel.
It's a pleasure for Ms. Matthews (sp) and I to be here to discuss the
president's fiscal year 2001 budget at a remarkable moment in our nation's
economic history.
It was reported yesterday that productivity had grown
at a five percent annual rate in the third and fourth quarters of last year --
performance that is nearly unprecedented, and performance that suggests that we
live in a moment of great possibility.
The president's top priority in
formulating this budget was to preserve our progress and to build our future.
Above all, preserving our progress means maintaining budget surpluses and
continuing to pay down the debt at a rapid rate. It is the pay-down of debt that
makes room for the investments that allow us to take advantage of the
opportunities of this moment in information technology, in biotechnology, in
productivity-creating machinery and equipment.
The president's budget
has five primary objectives. Let me summarize them in turn. First, debt
reduction. This is a budget that provides for the elimination of the national
debt by 2013, and steady reductions in its magnitude in the meantime. Debt
reduction is tantamount to a tax cut in two important respects: because it
removes the burden on taxpayers of interest payments, and ensures the principal
payments will not need to be made on newly-issued debt in the future; and
because, as we have seen, reducing federal debt and expected federal debt
reduces pressure on interest rates, allowing them to decline. Each one percent
reduction in the interest rate over ten years results in an approximately
$250 billion tax cut in the form of lower mortgage costs for
American families.
And budgeting for debt reduction has another
important benefit: it increases the resilience of our economy with respect to
the shocks and uncertainties that will happen with respect to any forecast. By
reloading the fiscal cannon, it gives us a chance to respond to any future
problems that may arise. And by creating valuable fiscal space it allows us to
address the challenges of an aging society.
The second objective of the
president's budget is to meet the needs of an aging society. Paying down the
debt will eliminate -- ultimately eliminate -- the nearly $200
billion in interest costs that are contained in this year's budget. The question
naturally arises of what is the best use of the fiscal space that is thereby
created. And here the president's budget gives a clear answer: support for
Social Security, funding of our existing obligation to Social Security
beneficiaries.
Now, Mr. Chairman, the president's budget does provide
for a portion of those transfers to be invested in equities. And that reflects
judgments that we discussed at some length when I testified before this
committee in early November about the importance of allowing Social Security
beneficiaries to take advantage of the returns that the private market can
provide, and the miracle of compound interest that we discussed. But it is our
judgment that this is best done within the context of a defined benefit
framework that does not transfer risk to Social Security beneficiaries, that
conserves and minimizes administrative costs.
The budget also calls for
the modernization of the Medicare program in three important respects: by
providing seniors with prescription drug coverage -- if Medicare were enacted
today it would surely include a prescription drug benefit; second, by providing
a choice-based approach involving competition, but an approach that encourages
the selection of lower-cost care alternatives, provides financial incentives for
seniors to choose those alternatives, but avoids -- and this is crucial --
financial coercion that could interfere with existing relationships between
seniors and their care- givers; and reflecting the rising side of the aging
population, the aging of the aged population as life expectancy increases, the
president's budget also proposes to fortify the Medicare trust fund with the
savings from debt pay-down, and allots several hundred billion dollars for that
purpose.
Third, the president's budget establishes a framework in which
it is possible to provide significant targeted tax cuts, and it proposes some
$350 billion in tax cuts over 10 years in a number of crucial
areas. These include the promotion of savings through a new program of
retirement security accounts that works with the grain of the existing
employer-provided pension system and private financial- institution-provided IRA
system, but works to provide extra incentives to motivate the 75 million
Americans who do not have a pension or 401(k) to save; expansion of educational
opportunity, by allowing the deduction of as much as $10,000 in
higher education costs for middle- income families; steps to make health care
more affordable, by tripling the long-term care credit and helping those who
have lost jobs to maintain continuity in their insurance in a number of ways;
support for working families, including crucially a reduction in marginal tax
rates under the earned income tax credit programs and targeted and appropriate
marriage penalty relief; tax simplification through the alternative minimum tax
and increases in the standard deduction. There are also measures contained in
the president's budget to address environmental concerns, to address the digital
divide, and to support philanthropy.
Let me highlight one area, if I
could, Mr. Chairman, of the president's tax offsets, and that is the area of
corporate tax shelters. There is, in my judgment, ample room for raising a
debate about a variety of tax subsidies of various kinds that are contained in
the budget. But it seems to me that we all ought to be able to agree that
transactions that are devoid of economic substance, and are marketed in secret
ought to be curbed, revenue considerations apart, in support of the maintenance
of the integrity to the system. And yet it has become increasingly clear to
thoughtful observers of our tax system that these transactions are increasing
and are becoming increasingly pervasive, and a source of pressure to honest
taxpayers. And it would be my hope that, wherever we come down on the broad
range of business subsidies, we and the Congress could work together to address
this problem of abusive shelters, which it seems to me is coming to be a very
serious problem in the same way that the individual tax shelter problem became a
very serious problem in the 1980s before legislative action was taken.
Fourth, spending targeted to key priorities. Let me highlight one aspect
of the president's budget. It is built around a current services baseline. That
baseline starts from a government that is smaller today in terms of public
employees, smaller today in terms of total spending as a share of GNP, smaller
today in terms of discretionary spending as a share of GNP, and smaller today in
terms of domestic discretionary spending as a share of GNP than at any time
since the 1960s. And it shrinks the government steadily over 10 years by each of
those measures.
With this budget, the government as a share of GNP will
be smaller than at any time since the middle of President Eisenhower's term.
This is a conservative fiscal, prudent fiscal assumption in which all of
our initiatives are financed by changes in the pattern of government spending.
To budget for a lower rate of growth than this would be to count on slower
growth and discretionary spending than we had between 1981 and 1993, or slower
growth in discretionary spending than we have had since 1993. It would, it seems
to me, take a great risk of relying on cuts that ultimately would not come, and
thereby putting our fiscal progress, our debt reduction, which is so crucial to
the maintenance of prosperity, at substantial risk.
Within this
restricted current services envelope, the president's budget includes a number
of initiatives: health care initiatives to substantially expand coverage;
education to reduce class sizes, to enable a million more children to
participate in Head Start by 2002; and to repair the nation's classrooms; and
law enforcement, where among other things we are proposing the largest ever
expansion in our effort to prosecute firearms violations, involving 300 more
agents, 200 more inspectors, and 1,000 more prosecutors.
Let me
highlight finally, fifth, an area that I know is of great concern to you, Mr.
Chairman, and that is our international engagement. At a moment of such economic
strength for our country, we must always remember that as Chairman Greenspan
once testified, we cannot forever be an oasis of prosperity in a troubled world.
And that is why it is crucial that we find the way to move together to support
an open global trading system, including the passage of the permanent normal
trading relations bill that is essential for China entry into the WTO, and the
African Growth and Opportunity Act, and the enhanced CBI. It is also in our
judgment particularly important in this year we do our part to include support
for the poorest countries, including continued funding of the highly-indebted
poor country debt relief initiative. And I would highlight something that I
think is of particular concern to me: our proposed measures, including a tax
credit, to accelerate the development and delivery of vaccines for infectious
diseases that kill more than a million people each year, such as AIDS, malaria
and tuberculosis.
To conclude, we are at a special moment in our
national economy. But, above all, it is not a moment for complacency. We cannot
assume that without proper choices we will always enjoy this good fortune.
Indeed, even with proper choices we may not always enjoy this good fortune. That
is why it is crucial that we act responsible this year to continue paying down
the debt, to prepare for the liabilities of an aging society, to prudently
assure that we can continue to fund core government; and then to provide tax
benefits to American families to meet some of their most important needs. We can
do all of that working together. Thank you very much, Mr. Chairman.
REP.
ARCHER: Mr. Secretary, thank you for your succinct presentation. Does Ms.
Matthews (sp) wish to make any statement?
MS. MATTHEWS (sp): No, thank
you, Mr. Chairman.
REP. ARCHER: We are happy to have you with us.
MS. MATTHEWS (sp): Thank you.
REP. ARCHER: This problem that you
mentioned toward the end of your presentation is a very serious one. FISC, which
is one of our few tools to help exports, is negated by the Europeans, then it
will fall very heavily on the jobs -- good jobs -- that have been created for
exports. And I am glad you mentioned it, because we need to work together in
every possible way to find some relief from this. I am constrained to say that
there is one easy answer, and that is to abolish the income tax and go to a
consumption tax, and I wish I could have intrigued the president to join with me
in pushing for that. But apparently that will be for a later day. That in one
fell swoop would take care of the problem, not only the disadvantage, but give
us a fair advantage under the world trading rules.
I think ultimately we
must come to it, because otherwise we are going to see, as we heard testimony
from witnesses last year, more and more American corporations being merged to
become foreign corporations. We saw it with Chrysler. Out tax code
single-handedly forced Chrysler to become a German corporation at the end of the
merger, and that testimony is in the record from a Chrysler executive. Bankers
Trust is now Deutsche Bank because of our tax code. Amoco is now BP because of
our tax code. and we will see more and more and more of that if we do not get
serious about eliminating the massive negative impact of the way that we
tax foreign-source income. And this FISC part
is only a small part of that entire problem, and I will work very, very
aggressively with you in trying to find an answer to it.
Mr. Secretary,
there are so many things that I would like to ask about. I am going to limit it
to a couple, and then other members of course will want to have their turn at
the questioning. You provide significant increases in spending, but you don't
talk about how we can eliminate wasteful spending. We just found out that the
Defense Department's records are so bad that we cannot even have an audit and
determine missing billions of dollars. The same is true of the Department of
Education, where billions of dollars have been unlocated. It seems to me that we
should start talking about eliminating wasteful spending before we start talking
about increases in spending.
Let me go on to the debt. I am looking at
the figures in your budget relative to the aggregate debt of this country. And
if I read them correctly, they go up every year from the year 2000 through the
year 2013, necessitating an increase in the debt ceiling. And yet you say you
are going to pay off the debt. Well, obviously you are not paying off the debt
if we have got to have an increase in the debt ceiling. And it's almost like a
shell game: you are transferring debt being held from one group to being held
for another group, but the aggregate is going up. And that is still money that
future taxpayers are going to have to pay off. And those debt service charges
continue to go up, and they are going to have to be paid.
And I think we
ought to -- I think we ought to be very forthright with the American people,
both Republicans and Democrats, because we both get involved in this. And we are
not paying off the debt, either one of us. The debt is going up. And debt
service charges, depending on what interest rates are, are going up too. And
that is a very serious factor for this country.
And, finally, I would
ask you to comment on why you believe that you need to have $14
billion of extra revenue coming into the federal government at a time when the
tax rate is the highest in peacetime. Your budget, integrating all of the
revenue items, and all of the tax reduction items, is a net -- by your numbers,
they may be different by CBO and Joint Committee, we haven't had time to get
those numbers yet -- but by your numbers, is an increase of $14
billion that would be taken into the federal Treasury on a net basis.
And I can't for the life of me understand why the productivity and the
people of this country are going to have to put more money into the Treasury at
a time when revenues are skyrocketing. And I'd be happy to have your comments on
that.
SEC. SUMMERS: Mr. Chairman, I'm glad you've given me the
opportunity to address three important issues. First, with respect to government
waste. We have over the years taken management of the government very seriously.
And that's why the civilian labor force of the government is one-sixth -- is
one-sixth smaller than it was in 1993.
At Treasury, for example, we've
reduced our workforce by 10 percent, even though there are a lot more tax
returns and a lot more people crossing -- crossing the border than there were.
We think that represents real progress, though there's a lot more to do.
You are absolutely right in raising the concern about funds that cannot
be fully accounted for. When these programs were began -- of taking on the task
for the first time of accounting for all federal assets as a result of
legislation we've worked together with the Congress on in the mid-1990s -- there
was far more in the way of unaccounted-for assets. And year after year, we have
improved the quality of financial controls. And that is a crucial task for us
all to continue.
Let's recognize that we are making progress in
improving our financial controls. We are making progress in shrinking
government, we are making progress in shrinking civilian government for the
first time in a very, very long time.
REP. ARCHER: Mr. Secretary, just
very quickly -- ah yes, so much more to do in so little time. You may proceed.
SEC. SUMMERS: There's a great deal to do. The establishment of a fully
satisfactory set of controls isn't something that's going to happen this year,
it may not be something that happens in the next several years. But we are
getting much better controls on these expenditures and we are doing much more
with much less for the first time in a long time.
With respect to the
debt, it is the convention of economists, of financial analysts, of almost all
experts who look at these issues to focus on the publicly held debt -- to focus
on the publicly held debt, because that represents the obligation of the
government to its citizens and to net out the intra-governmental debt, much as,
in looking at the financial position of my family, one would net out any debt
obligations between me and my wife.
And it is the publicly held debt
figures to which I was speaking. It is that which reflects pressure on credit
markets, it is that that is reflected in the unified deficit. And I would argue
very strongly -- I think this is a judgment that experts of both parties would
agree on -- that it is the publicly held debt and the net interest flow of the
federal government that is relevant for analyzing the government's fiscal
position.
Your third -- the third issue is an important one, and that
was the question with respect to the gross versus the net tax cuts. As I
indicated, the president's budget has $350 billion in gross tax
cuts. It has $100 billion in tax offsets such as the tax on
corporate shelters that I referred in my testimony. It also does include a
number of other measures that generate revenues for the federal government.
Some of those are measures such as user fees, which do generate receipts
but which we don't think of as a tax. Some of those represent -- a large part of
those represent tobacco policy, which we feel is the best way of stopping a
fraction of the 3,000 kids who start to smoke each day, 1,000 of whom will die
from starting to smoke. We think that's an appropriate public health investment
in our country's future. It's a judgment on which one can disagree, but the
motivation for it is very clearly not the generation of revenue, it is the
protection of the public health.
REP. ARCHER: Mr. Secretary, again, I
compliment you on the succinctness of your responses, which the committee
appreciates. And a tax is a tax is a tax. A tax on cigarettes means that those
people who use cigarettes are going to have less money to spend on other things.
It is highly regressive, it hits very, very hard the lowest- income people. It
has not been proved to be a deterrent, but it is a tax. And it's raising more
revenue out of the economy.
User fees -- and you've tried to reclassify
certain things from a tax to a user fee. But a user fee technically is only
something which is voluntary. If you want to use a service, then you pay a fee.
That's the technical definition of whether it is a fee rather than a tax.
And I would say that what you are calling fees will not pass muster in
most cases under that definition. But in any event, you're raising by your own
figures $14 billion more out of the economy, net, than is
currently being raised today. And the tax revenues are burgeoning already. And
we just have a disagreement about whether that's an appropriate thing to do.
SEC. SUMMERS: I think we may. Let me just emphasize that a large share
of the tobacco policy represents a penalty on tobacco companies if they are not
sufficiently successful in reducing the incidence of youth smoking. And so it
seems to me that a fine for failing to achieve a public health objective as a
policy one could argue both sides of. But it doesn't seem to me best to think of
it as a tax.
And of course, no one has to pay any of this who chooses
not to smoke. So by your voluntary -- by your voluntary criterion, which I'm not
sure I would agree with, but by that criterion, one could distinguish the taxes
If I could just take up one other point. It's sometimes suggested that
taxes are at some kind of high -- high level at this point. But I would just
hasten to observe that if you look at the tax burden on a family with half the
median income or the median income or twice the median income, it is lower than
it has been any time in the last two decades.
It is true that taxes
relative to GNP are at a relatively high level. That is a reflection of two
things. It is a reflection of the fact that income is at a high level relative
to GNP because of the strength of the stock market and all of that. And it is a
reflection of the fact that something we're working to try to address -- but
that the income gains over the last two decades have gone heavily to those who
are in higher tax brackets, and heavily in the form of profits that are
particularly heavily taxed.
And those two considerations account for the
taxes to GNP ratio having risen. But I think we do need to be clear, with anyone
who's listening to this hearing, that if you measure the tax burden on a family
with the given median income, that tax burden at the federal level, either for
income taxes or income plus payroll taxes, has fallen over the last two decades.
REP. ARCHER: Well, no matter how you spin it, Mr. Secretary, the takeout
of our economy is at the highest percentage of GDP in peacetime history. That's
a fact. That money is coming out of the productive private sector into the
government. And the danger is that that will perhaps be a magnet to pull up the
total spending level which may become entrenched at the highest level of GDP in
history, and which then would be difficult to maintain if you have a change in
the economy.
But I'd love discussing this more with you. You're the
economist and I'm not. Mr. Rangel.
REP. RANGEL (D-NY): Thank you. I find
intriguing that the figure of tax is not a tax but a penalty, because I've been
wrestling with the Republican marriage penalty tax relief. And they're giving
the relief to people who have no penalty and indeed have a bonus.
And so
it would be good if we could have a course between the White House and the
Congress in what words mean. But I like the word "penalty" instead of "taxes."
(Laughs.) (Scattered laughter.)
Let's see now what we're up against.
When the president met with the Congressional leaders were you present?
SEC. SUMMERS: Yes.
REP. RANGEL: It hasn't been shared with us in
the minority, but do you have some guideline as to where the Republican
leadership is taking us with the tax bill?
SEC. SUMMERS: I think it's
best to let the -- let the Republican leadership state their own -- state their
own intentions, and I would rather not be put in the position of trying to
characterize or predict their judgments. I'm happy to speak for the
administration.
REP. RANGEL: Was this a secret meeting that you had? I
mean, this is a meeting to determine where we can cooperate, I thought, between
the Congress and Executive Branch. I assumed they raised areas that they wanted
to work with the president.
SEC. SUMMERS: I think there was -- I think
there was -- I think there is a sense that we would like to work together. We
certainly in the administration would like very much to work together with the
Congress and both houses and both parties to try to accomplish the key things
I've been talking about: paying down debt, helping health --
REP.
RANGEL: No, no. It's clear where the administration is coming from. But you see,
we don't have a budget from the Republicans so we don't have a blueprint to work
with. And I assume that nothing was given to you to share with us.
Social Security -- we don't have a bill in the House. Was that discussed
with the president or you to see whether we can work together on that? Because
it doesn't bother me that they don't talk with me, but -- but did they talk with
the president about bill -- Social Security?
SEC. SUMMERS: Certainly
there's no specific private proposal of which I'm aware.
REP. RANGEL:
Okay. Well, I would hate to see this year go by without us really dealing with
the question of education initiatives. It's so important that our country be
prepared to keep up with the advancements in technology. And I know many of my
Republican friends would want to support some initiatives there.
Certainly the earned income tax credit provision is just the equitable
thing to do with some many people become instantly wealthy and this would give
an opportunity to pull hard-working people out of poverty.
The Speaker
has said he shares the new market initiatives working with J.C. Watts
empowerment zones. Are people talking with you about how we've got to work this
thing together, especially in the tax portion of it?
SEC. SUMMERS: You
know, my hope would be that, Mr. Rangel, that coming out of this hearing, we
could move towards trying to establish a framework for the budget this year,
into which some of the crucial tax components could fit.
And in addition
to the earned income tax credit and school construction and digital divide that
you've mentioned, I would highlight the alternative minimum tax and I would
highlight the retirement savings questions as areas where I very much hope that
we can work together.
REP. RANGEL: Well listen, it's clear that many
objections are going to be raised on the point of view of you, the president and
the administration. What I'm trying desperately hard to find out is did you get
a sense of any areas in which the majority can work in a positive way with the
president or are we just talking about your hopes and the president's hopes?
SEC. SUMMERS: I think it is best for me not to hold myself out as a
spokesman, as a spokesman for the majority, Congressman Rangel.
REP.
RANGEL: Well --
SEC. SUMMERS: Certainly, I think we've all seen and
welcomed statements indicating a desire, such as the one the chairman expressed
today, to work together on a range --
REP. RANGEL: Okay. All right. All
right.
SEC. SUMMERS: -- of these issues, and my hope would be that that
will prove to be possible.
REP. RANGEL: Okay. Now -- now that you have
all these hopes on the table, there's a bill coming to the floor tomorrow, a
marriage tax penalty bill. Now, did the Republicans discuss this with the
president? It was included in his state of the union, and while it's a
dramatically different approach, did they reach out to you and say "Can we work
out something on this issue?"
SEC. SUMMERS: No. I've communicated my
view to chairman -- my view in a letter to both you and to Chairman Archer with
respect to that proposal.
REP. RANGEL: But what is your view in respect
to this proposal?
SEC. SUMMERS: I've written indicating that the
president believes that it is important to address marriage penalty issues, but
it should be done in the right way, in the right framework, at the right time,
and expressing the judgment that I and the president's other senior advisors
would not be able to recommend that he sign the current legislation because of
the absence of an overall framework for a tax cut of this magnitude.
REP. RANGEL: I've been used as an interpreter for White House language,
and I've been telling my friends here that you not recommending that the
president sign means veto, but I -- I understand that you can't say that.
Well, if you're going to veto the bill and they still are going to push
the bill, then it seems to me that your hopes for cooperation in taxes are not
well-founded.
SEC. SUMMERS: Well, I'm an optimist. I think there are
real opportunities -- real opportunities this year. It seems to me that there's
a great deal of consensus on the idea of paying down debt. I've been encouraged
by the number of people who have shared the view that we need to provide that
prescription drug benefit, by the number of people who recognize that choice in
Medicare is possible without financial coercion, and who see that really in the
tax area the priority is helping middle class families at crucial points in
their lives, and particularly helping those who have been left behind. I think
there's an increasing number of voices who are recognizing that. And my hope
would be that it be possible to work together to do things that will strengthen
our national economy, because it won't always be this strong, and this is a
moment when we have a real opportunity to work together.
REP. RANGEL:
Well, your inspiring presentation has given me now hope, so I'm going to hope
that the majority would put the Archer-Shaw Social Security concept into some
type of legislative language so we can get the administration to look at it. I'm
going to hope that the death penalty provisions and the tax cuts that have been
placed on the patient bill of rights, and that the Republican retirement savings
incentives and the tax cuts that are on the minimum wage bill, and the exciting
education saving accounts and the community renewal of J.C. Watts, and the
repeal of the Social Security earning test -- I mean, I'm only up to
$1.4 trillion, but still this is a part of an overall concept
the Republicans have put together in small part. And so, we only have the first
slice of this trillion dollar package for tomorrow, but if you have hope, I'm
going to have hope that one day the majority would come to us with the rest of
these very important issues to see whether we can work together with you and the
president.
But, if that doesn't happen, you might want to pick out the
most important things, like the vaccine and the trade bills and what not, and
maybe we'll operating on plan two. But I'm going to have hope too. Mr. Chairman,
I hope you were nearly as inspired as I was by the secretary's internal desire
and hope that you and I work more closely together.
REP. ARCHER: I'm
always inspired by your comments, Mr. Rangel.
REP. RANGEL: Thank you.
REP. ARCHER: Mr. Crane.
REP. CRANE: Well, first I'd like to
remind Mr. Rangel that Congress makes policy. The function of the White House is
to administer policy.
Let me touch on one other thing and that's FISK
(?), and that is a major concern because it can have a profound impact on our
ability to remain competitive in world markets. And our chairman talked about
how his consumption tax would eliminate that disadvantage that potentially we're
confronted with. I've pushed for a sales tax, though -- or not a sales tax, a
flat tax, for 30 years that would eliminate any tax on business whatsoever on
the grounds that they don't pay taxes in the first place. It's a cost like
plant, and equipment, and labor, and you've got to pass them through and get a
fair return. Either one of those approaches would eliminate that problem that
we're facing.
One other issue that you touched upon, Mr. Secretary, is
the tobacco tax, and are we contemplating taxing sugar too? Are we?
SEC.
SUMMERS: Not that I'm -- I'm not aware of any proposals that the president has
put forward --
REP. CRANE: Because excessive consumption of sugar, you
know, puts on all that fat and, you know, that's injurious to your health.
Shouldn't we punish people for, you know, going down that path?
SEC.
SUMMERS: I'd certainly be prepared -- certainly I'd consider it. It's not
something that -- that's not something we've put forward. Let me emphasize the
thrust of the president's policy in the tobacco area. It is focused on kids. It
is focused on people below the age of, below what we normally take to be the age
of consent, who become addicted before reaching the age of 18. I don't remember
the precise figure, but it's something like three-quarters of smokers have
become addicted before the age of 18. And so, it becomes a rather different kind
of context than another of other issues.
REP. CRANE: Well, if you'll
yield, Mr. Secretary, putting that huge tax on a pack of cigarettes, that's
going to discourage that teenager, right, from going to the market because he
can't lay his hands on all that money, is that it?
SEC. SUMMERS: Let me
say, let me just, let me just say that there is an extensive body of evidence
that, on another occasion if the committee is prepared to take this issue up
seriously, I'd be pleased to come present to the committee documenting the price
responsiveness of cigarette demand, particularly among young people, to the
level of prices. That evidence comes from cross-state comparisons. That evidence
comes from inter-temporal comparisons. That evidence comes from international
comparisons. It's corroborated by the work of Nobel Prize winners like Gary
Becker. There are a number of aspects of the tobacco question that one can
debate, but the proposition of price elasticity in response to the tax I think
is one of the better established facts in empirical microeconomics.
REP.
CRANE: Well, I hope it doesn't encourage any young kid whose got a breakdown in
terms of moral standards to engage in increased theft, stealing, you know, to
finance that bad habit.
Let me turn to another subject that is a major
concern to me, and it has to do with trade. And given the failed outcome at
Seattle, how have our objectives changed for achieving further trade
liberalization, and what's the administration strategy for achieving those
objectives?
SEC. SUMMERS: Congressman Crane, we are engaged in quite
active consultations with a number of countries around the world to try to
establish a basis for consensus that would allow a new round of WTO to move
forward. Crucial issues include agriculture, include the treatment of services,
include the definition of the ambit of the round, what kind of rules are going
to apply to investment, if that's going to be a subject that's going to be
treated, and, of course, what kinds of discussions are going to take place with
respect to issues of environment and labor.
The president spoke in
considerable detail to the U.S. position in his address in Davos, and made what
I think is the central point, which is that there in no alternative to a free
trade, open markets approach, but that for such an approach to be sustainable
and successful, it's essential that it be complemented by efforts to address the
other consequences of global integration, much as took place as interstate
commerce increased in the United States in the first part of this century. And I
would say this, that in terms of starting the round, in terms of moving ahead
with trade, the most important decision that will be made in the United States
will be the decisions as to whether Congress gives impetus to the global trading
system by passing China's entry into the WTO and by passing the Africa and the
CBI initiatives. And my hope would be that it will be possible for us to give
impetus to that system through those two pieces of legislation.
REP.
CRANE: One quickie question, and that has to do with many foreign delegations
and others expressed concern over the president's remarks regarding labor
standards and trade sanctions out in Seattle. And with that comment still
echoing in the minds of delegates, how can we take the next steps to create an
atmosphere of cooperation?
SEC. SUMMERS: We've been speaking to
countries all over the world. I had a chance to discuss these questions on my
visit to India and Indonesia. I think there is an increasing recognition that it
is absolutely unacceptable for labor and environment to be used as cloaks for
protection. But at the same time, if we're all coming together in a smaller
world, we have to find approaches to address what everyone agrees is a real
problem -- children who are working in mills rather than being in schools, and
environmental problems that cross international borders. And while we're going
to have to work to find the formula, I think there is now considerable agreement
on ends and the question at issue really goes to means.
REP. ARCHER: The
gentleman's time is expired. Mr. Thomas.
REP. THOMAS: Thank you very
much, Mr. Chairman. Welcome, Mr. Secretary. I was pleased to see in the written
testimony that you've provided, on pages 4 and 5, half of page 4 and half of
page 5, so about a full page focusing on Medicare, and the heading was
"Modernizing Medicare." However, in the first paragraph you say, "But there is
now a very broad consensus that it's time to reform Medicare." And so my
assumption is that modernizing is also reform. I wouldn't want to get into a
semantic squabble about what's going on.
I'm also pleased because in
that first paragraph, in talking about the president's interest in extending
competition, that was one of the core interests of the Medicare commission, I
was pleased that, frankly, the president chose you and your department to put
together a competitive market structure for fee for service. I think the
majority is ready to sit down and talk about competitive models, both for fee
for service and for managed care. Some of the president's proposals we think are
forward-looking and positive. Obviously there are some that have been items that
have been presented to both Democratic and Republican congresses and simply
haven't been accepted, but the core of working together I think, is there.
Should I read anything at all into the fact that the White House chose
the Treasury Department to put together a competitive model on Medicare rather
than using the Health Care Financing Administration, which is currently charged
with the responsibility of running the old- fashioned structure of Medicare?
SEC. SUMMERS: Let me just say, Congressman Thomas, I appreciate the kind
words about the Treasury Department. But I would hasten to point out that, as is
the case with virtually all of the proposals that the administration puts
forward, they reflect the hard work of an inter-agency process overseen by a
principle --
REP. THOMAS: I understand that, but I have a very short
period of time. And my question would be, was there any discussion -- are you at
liberty to be able to tell us? Because in looking at the model that the Treasury
Department put together, from my perspective it was not inconceivable that you
could have simply then added a little frosting on top of that nice cake that you
baked for competition, saying we should use a new entity to oversee the
competitive model. We, of course, on the commission would have called it the
Medicare board. You can call it anything you want as long as Treasury is the one
that proposes the structure. Is that an area, do you think, we could work toward
modernizing and reforming Medicare?
SEC. SUMMERS: Let me say, the
administration has real concerns about making sure that there is full political
accountability with respect to any mechanism that's established for overseeing
competition. But we very much want to be in discussion with the Congress to find
the right approaches to choice.
REP. THOMAS: I appreciate that. So if I
have the thesaurus that the gentleman from New York has, where you won't say
veto, you didn't say no. So my assumption is that's an area that we can work,
and I appreciate that response. One of the concerns in terms of reform in the
next paragraph is on prescription drugs. It's still a kind of a stand-alone
proposal which isn't integrated. And frankly, prescription drugs as part of the
tool chest for medicine today really does tend to integrate the use of drugs
with the other more traditional medical practices. And I would hope that we have
the ability to move forward on looking at perhaps an integrated prescription
drug program, along with more traditional Medicare.
I also noticed that
the president changed the proposal from last year, because I know there was
major criticism along the fact that it wasn't a very good structure that you
proposed because you had to have a certain level to get your money back at the
front end, and then at the $2,000 amount, people were paying
100 cents on the dollar. I wish I could have seen some structure to this
$35 billion proposal. But I assume that's going to come out.
Last question. I assume you folks did not recommend a veto to the about
$16 billion adjustment to Medicare called the Balanced Budget
Refinement Act. The president signed the bill. So my assumption was that where
we place the money, especially for hospitals on outpatient, for skilled nursing
facilities and for home health care, that all of us were concerned that seniors
were going to be denied services, because the original package in 1997 didn't
have as fine a crafted tools that we would have liked to adjust the marketplace.
CBO is now telling us -- and I would be anxious to see what OMB's
numbers are -- that from just the last baseline estimate to today's revision,
that we are going to be getting about $62 billion over five
years of ongoing Medicare savings. In the light of those numbers, why would your
administration recommend cutting Medicare by an additional $70
billion over 10 years when you just voted last year to put $16
billion back in?
SEC. SUMMERS: Congressman Thomas, we'll be getting new
information on the long-run baseline, of course, when the actuaries prepare
their report on Medicare in April or whenever it comes out; in April or in May.
The administration certainly did hear the same voices that the Congress heard in
passing the Balanced Budget Refinement Act last year. Our proposals do
contemplate certain economies that we believe are still possible within the
Medicare program, but does so in a rather more limited --
REP. THOMAS:
I'm sorry. Did I read the budget wrong? There isn't $70 billion
of reduced payments which are extenders for the BBA? Does the budget not contain
that?
SEC. SUMMERS: Sorry, I indicated that it does --
REP.
THOMAS: Okay.
SEC. SUMMERS: -- but I indicated that those proposals were
scaled back from the proposals that had been contained in last year's budget and
in the mid-session review.
REP. THOMAS: So instead of
$109 billion in cuts, you scaled them back to
$70 billion in cuts. That still doesn't answer the question of
why you voted to put money in last year and you're still on a track of, albeit
reduced cuts, $70 billion over 10 years of cutting back on
Medicare when we're trying to get it right. And I guess my response to you would
be I would love to sit down and work on a competitive model.
I think we
can save some money over projection and that we ought to take any surplus that
we're now getting from Medicare and reinvest it so that we can create a better
Medicare, but not go back to the old-fashioned cutting Medicare, which to a very
great extent is what the president's program offers, because if we can make
savings, then we don't have to make that massive transfer in the president's
program to argue that we can get to 2025. We know we're going to make it to the
teens. And there can be some mid-course corrections that, in fact, if Medicare
is saving money, we can reinvest it to build a better Medicare, include
prescription drugs, and more importantly, take care of low-income seniors.
REP. ARCHER: The gentleman's time --
REP. THOMAS: But I just
really don't understand why the president offered $70 billion
of cutting Medicare over 10 years.
SEC. SUMMERS: May I turn that to Ms.
Matthews?
REP. ARCHER: Okay. Ms. Matthews, as quickly as possible,
please. The gentleman has exceeded his time limit.
MS. MATTHEWS: I'll be
brief. Our proposals get back to something that the chairman raised in his first
presentation about waste, fraud and abuse and ensuring that we have appropriate
payments for things. I think we believe that the proposals this year are not
extenders, as we did last year, to taking a policy and extending it, but instead
looking at areas such as competition and other places where we believe there are
inappropriate or double payments or those sorts of things.
REP. THOMAS:
So last year you were cutting back on potential benefits. This year you've kind
of tweaked it a little bit, and the $70 billion in reductions
are not, in fact, squeezing down Medicare under extenders? You're saying there
are no BBA extender positions in the president's budget?
MS. MATTHEWS:
Distinguishing in the policy last year, what we did was --
REP. THOMAS:
No, the question was, are there no Medicare extenders in the president's budget
which would cut Medicare?
MS. MATTHEWS: In the president's budget, there
are some of the things that were included in the last year's package.
REP. THOMAS: And that's why this year's is less than last year's,
because you're simply cutting less from the 100-plus down to 70.
REP.
ARCHER: The chairman is constrained to transfer further discussion of this into
the hearings of the Health Subcommittee, which will, I'm sure, be voluminous
this year.
REP. THOMAS: Mr. Chairman, I'd love to have the secretary
there, but they never send him.
REP. ARCHER: Maybe you can get Ms.
Matthews to come. Mr. Matsui.
REP. ROBERT MATSUI (D-CA): Thank you very
much, Mr. Chairman. I want to just make three observations, then ask one
question, Secretary Summers. I want to, first of all, thank you and Ms. Matthews
for being here today as well. First of all, I appreciate very much the fact that
you mentioned the three big trade bills -- the CBI, the African trade bill, and
China's entry into the WTO. I think the fact that you, in a budget hearing,
mentioned this shows the commitment of the administration to pass all three of
these this year, obviously with the cooperation of the House and Senate.
Secondly, I'd like to just discuss very briefly the comment that the
chairman made with respect to the president's resolve in terms of Social
Security. He said the president can't deal with this issue this year, something
to that effect. The president is certainly willing -- wants to complete Social
Security and have a reform package to his desk this year. The problem is it's in
our hands, the Congress's hands, at this time.
The president came up
with a proposal in the form of the Bradley- Rangel bill last year. The
administration, in its budget package, has come up with a proposal. It gives a
50-year life to Social Security. Now the issue is, how does the Congress deal
with it? We can continue to keep pressing the president, but he's got a
proposal, and now it's really up to us.
Lastly -- and I don't need a
response on this right now in terms of my comments -- Mr. Rossotti is doing a
very good job in terms of management of the IRS. But there is a concern,
according to press reports, about enforcement, about collections. And I really
hope that you in the Treasury Department will begin to really get into this
issue.
I know Mr. Rossotti is trying to address it, but nevertheless,
I'm afraid that if we allow this process to continue on for the indefinite
future, we could find ourselves, as we were in the early '80s, where collections
were down and morale was down, and obviously we had a huge underground economy
that it took us years before basically tax reform somewhat brought it back. But
I know the direction. We don't want abuse. On the other hand, we want to make
sure that the principal focus of the IRS is collecting taxes that are
legitimate.
The last thing, I want to ask you a little bit about FISC
(sp). I think the chairman raised that issue. We did have (DISC?), as you know.
That was declared ineffective or inappropriate by the GATT, I think in the early
'80s, and then we came up with the FISC (sp). We've appealed the loss that we
had, and I understand the decision should be somewhat in the next few months.
Under the WTO's ruling, we have to come up with a final rule before --
or a final approach to this issue by October 1st of this year. This is obviously
a major incentive for U.S. corporations to export. If we lose this opportunity,
by the third quarter of this year it could have a significant impact on our
competitiveness. It's being appealed now.
Is there any effort by the
administration, one, to try to come up with a compromise perhaps on it with the
Europeans, which have actually filed the initial action? is there any effort to
perhaps take a look at some alternatives? I don't want to concede a loss yet,
but at least we need to have something in place if, in fact, we're not
successful.
SEC. SUMMERS: Let me say on FISC (sp) that this is a very
important issue, and I've asked Deputy Secretary Eizenstat to take the lead in
the department and for the administration on this issue. The case was appealed
on January 19th and January 20th, and our people felt that they received a fair
hearing, and then a number of aspects were explored. We don't yet know the
decision.
Clearly what would be best, from our point of view, would be a
decision that upheld the U.S. position. And we're working very hard in an
advocacy context for such a decision. In the event that such a decision is not
forthcoming, I think it will be important to work as a matter of urgency to
craft a solution that preserves the incentive and does so in a way that is
WTO-legal. And we will be pleased to work with members of this committee and the
Senate Finance Committee to achieve that objective in as expeditious and
effective a way as possible.
I might just mention, if I could,
Congressman Matsui, with respect to your very thoughtful question on compliance,
that this is something that Commissioner Rossotti and I have talked a great deal
about. And I think it is our feeling that perhaps the greatest threat in that
area to the integrity of the system is around the corporate tax shelter issue,
and the essence of that issue is frankly a tendency to play what some refer to
as the audit lottery, carrying out these transactions and just sort of hoping
that nobody notices. And the commissioner has taken a number of administrative
steps to increase enforcement in this area. But it is our feeling that
containing the abuse problem -- and again, this is a separate issue from what
everyone thinks about various kinds of subsidies -- containing the abuse problem
will require certain legislative remedies, and it would be our hope again,
regardless of what happens on the larger tax picture, that just in terms of
maintaining the integrity of our system. That would be something we could all
discuss this year.
REP. MATSUI: And let me say this -- and I know my
time has expired, and you don't need to respond to it, unless you really feel it
is appropriate -- but I think it is important to deal with obviously tax
shelters. It is about 23 to 30 billion dollars over five years.
But the
larger issue I think in my comment to you was the potential for people to say we
don't have to comply any longer. It's a voluntary system. We don't have to
comply any longer because the service isn't going to check up on us and enforce
the laws anyway. And I think if you recall back in the early '80s we were
talking about a potential loss, and no one really knew exactly how much, of an
underground economy in excess of $200 billion -- went
$100 billion to $200 billion a year. And so
we're -- I'm talking about a much larger issue that I think deals with the whole
process of the service and what it stands for.
SEC. SUMMERS: You are
raising a very crucial issue -- and I see Congressman Portman sitting here, who
has been enormously thoughtful as a member of the commission on these issues.
You know, the judgment that we've come to, and it is really really
heavily Commissioner Rossotti's judgment, is that just as business has moved
past the idea that there is a trade-off between quality and cost, and with
things like (fixed-signal ?) programs have come to recognize that pursuing the
highest quality is often the way of pursing the lowest cost. We believe that
thinking of this in terms of a pendulum that swings between customer service and
enforcement is not the right way. And we are working very hard, and I think it
would be a serious mistake for anyone to rely on the IRS's lack of enforcement
capacity in the years ahead. In a set of ways involving information technology,
I think we are going to be providing better service to the vast majority of
honest taxpayers; and, if I might put it this way, more appropriate service to
the small minority taxpayers. But this is an absolutely critical priority for
us. And if you look to Commissioner Rossotti's I really thought exemplary report
on his first two years and his strategy for the IRS going forward, I think you
will find that it is responsive to the kinds of concerns you are addressing,
which are enormously important.
REP. ARCHER: Well stated, Mr. Secretary.
The gentleman's time has expired.
Mr. Shaw.
REP. SHAW: Mr.
Secretary, a few minutes ago you described yourself as an optimist. I have been
an optimist, particularly on Social Security. The other day I saw a report that
says optimists live longer, which also made me more optimistic. But I will say I
am losing my optimism when it comes to the question as to whether this president
or this Congress is going to be able to work together to solve the problem of
Social Security.
I also have to express profound disappointment that in
a 12-page statement that you have provided us here in the Ways and Means
Committee, only a half a page is devoted to Social Security, which consumes a
very large percentage of the budget over which you preside. And this hearing is
about the national budget.
But my optimism is further diminished into
pessimism when I read what is contained in that actually less than half a page
in your statement, that the administration is suggesting two things with regard
to Social Security reform. One is accumulating more federal debt within the
trust fund, which you and I both know, and we have discussed this in the past,
is going to be a call upon our kids and our grandkids to pay off. This is not a
real economic asset. Chairman Greenspan has testified as that. As a doctor in
economics you are well aware of that.
So this really does nothing to
help out the further generations, even though we may not run out of Treasury
bills until after 2050- something under the president's plan. As those Treasury
bills are paid off, that is going to call upon the taxpayers. And as we are
getting closer to a situation where we are going to have two workers supporting
each retiree, when Social Security originally had 40-some workers supporting
each retiree -- what an awful thing to leave to our kids, to let them know --
and our grandkids -- that for them to take care of their parents' pension, that
there is only going to be two of them paying into the system to take care of
them. This is a terrible legacy.
And I am also very, very disappointed
by the fact that the president has proposed in his budget that we use the Social
Security trust fund to buy into the corporate sector of this country. That is
classic privatization of the Social Security trust fund. The American people
don't want it. Poll after poll say they don't want it. I don't think there is
anyone on either side of the aisle -- I don't think there is any Democrat that
is supporting privatization of Social Security. If they are, stand up and say
it, because I don't think the president has any takers with this. So you have
not only given us something that is dead on arrival, this thing died months ago.
This I think died years ago when the president first brought it up, and he
pulled back from it, and now it's gone nowhere.
I'd also like to say to
my good friend Charlie Rangel that he's talking about reaching across the aisle
on January 5th in a letter. I asked him to comment on the Archer-Shaw plan. We
have been reaching out. We reached out to the leadership on the Democrat side in
the Congress, Mr. Gephardt and the other Democrat leadership. And we have been
met with nothing but a wall of silence. In order to solve the problem of Social
Security in this country, it has got to be done in a bipartisan fashion. And you
can't do it in a bipartisan fashion unless we are willing to reach out across
the aisle and work with each other. There is no question in my mind but that we
are being stonewalled as a political motivation -- I'm not talking about people
necessarily on this committee -- but I am very concerned that we are getting
absolutely no leadership from the White House on this, and we are getting no
leadership from the leadership on the Democrat Party with regard to saving
Social Security. It's time that we move together.
The president has put
out as part of his budget and part of his plan -- he has had it sitting out
there for several years now -- the question of USA accounts. Those are private
accounts that are set up for American workers. Why can't we bring that into the
Social Security system so that we leave the Social Security system totally
alone, as Mr. Archer and I do under our plan. We don't touch it, it stays
exactly as it is. But we take funds and set up individual retirement accounts --
don't take it out of Social Security -- this is totally separate, apart, that is
out there for the retirement of tomorrow's seniors that will be used to save the
system so that they won't get absolutely lambasted by a system that our
generation refused to fix. Would you care to comment on that?
SEC. SUMMERS: You've raised a number of very important issues in
your comments, Congressman Shaw. Let me just first say that I did have an
opportunity, as you know, to testify before the committee in early November, and
on Social Security, and at that time I had a rather lengthy and detailed
statement defending the administration's perspective and presenting the
administration's perspective. And I also provided I think rather extensive
comments on the individual accounts approach. So we certainly have done our
part, I believe, in reaching out and seeking to consult to find a common
solution.
With respect to --
REP. SHAW: Secretary Summers, I
have to interrupt you here. I delivered to you a letter personally to be
delivered to the president, just asking him to meet with Mr. Archer and with me,
or with Mr. Archer or someone on this side in order to try to map out this
private ground. This was done months ago. And this letter was sent to you, and
you assured me you were going to deliver it to the president's desk, and I am
sure you did. I have heard nothing. Mr. Archer and I have sent letters to the
president. We have heard nothing. The president told us over a year ago at the
White House summit on Social Security that he is going to be sending us a plan
that will save Social Security for all time. We are still waiting. What is
wrong?
SEC. SUMMERS: Let me say -- let me say, Congressman Shaw, from my
perspective looking at this from an economist, what we have is a defined benefit
pension plan that works well for beneficiaries, that is at this point
underfunded. That's the actuarial deficit. It seems to me that the responsible
course for the trustees of a defend benefit pension plan that is underfunded in
the private sector context would be to look and see if it was an extremely
profitable year, and larger contributions could be made --
REP. SHAW: --
Mr. Archer and I have introduced a plan that also continues it as a defined
benefit pension plan with the possibility of increases in pensions in amounts
that people are relying upon in retirement.
SEC. SUMMERS: And I think we
have recognized that the proposal you put forward is a valuable contribution to
the debate. We have expressed concerns about the magnitude of future budgetary
commitments that is implicit in a proposal of the kind that you and Mr. Archer
have put forward. There are concerns about what it could mean over the longer
term for the ultimate coalition and progressivity that Social Security depends
on. There are certain concerns about administrative costs and the fraction that
would be used up in administrative costs within a proposal of that kind. But we
are very much prepared to discuss, if there is formal legislation embodying it.
We in the administration at the Treasury Department would certainly be prepared
to provide commentary with respect to that formal legislation, and our concerns
regarding it.
But I would urge you, Congressman Shaw, to take seriously
the plan that the president has put forward as something that we can feasibly
accomplish this year. It is I think not accurate to suggest that it is simply
placing IOUs in the trust fund, because every penny that is contributed to the
Social Security trust fund in the president's plan represents a direct
allocation of interest saving that has resulted from debt pay-down. And
therefore we are taking resources and we are transferring them from one use, a
sterile payment of interests, to another use, the meeting of an existing
obligation for Social Security. I think that's fiscally responsible. I think
it's responsible, as a trustee of a large pension plan, to look at the way its
assets are managed and not to be willing to be very reluctant to see those
assets managed in a way that earns a lower return than almost any other defined
benefit pension plan in the country. That's why we have introduced the
discussion of equities.
If others are prepared to rule that opportunity
out, I think that's an unfortunate reduction in the scope for us to compromise
and find a common solution. We would very much like to see this get done, but it
does I think depend upon a willingness to take each other's proposals seriously.
And I think the administration has put forth a very constructive foundation for
anything that is going to happen in the Social Security area by extending the
life span of the Social Security trust fund out past the life span of the baby
boom generation, and doing so in a fully paid-for way, based on debt reduction.
I think it should also be supplemented by investment policy changes, but that is
an issue that can be separated in either direction from the issue of debt
pay-down.
REP. SHAW: Well, just in closing -- I know my time is long
past -- but just to say that the American people do not want us to privatize the
Social Security trust fund, and the Republicans are not going to privatize the
Social Security trust fund. But we are really anxious to talk to the president
or to talk to you to try to hammer out a program. You know our telephone
numbers. The president has our telephone numbers. And we are waiting for the
phone to right.
SEC. SUMMERS: Can I just say that -- you used the term,
Congressman Shaw, a couple of times "privatize the Social Security trust fund."
I would certainly agree that it would be a very poor idea to privatize Social
Security.
REP. SHAW: Well, that's what you do by buying equities, buying
corporate equities out of the trust fund. That's what your statement said. I
didn't make that up.
SEC. SUMMERS: It's not --
REP. SHAW: You
can read it back into the record if you want to, but that's what it says. It
would be privatization.
SEC. SUMMERS: Let me say that I don't think of
the federal employee retirement fund as being privatized. I don't think of the
Pension Benefit Guarantee Corporation as being privatized. I don't think of the
California public employees retirement system as being privatized, even though
each of those entities do as is best practices for defined benefit plan, invest
in equities.
REP. ARCHER: The gentleman's time has expired. But since my
name has been mentioned a couple of times, I am compelled to just very briefly
make a couple of comments. The American people do not view the Social Security
trust fund in the same way as they do the other pension plans that you mention,
Mr. Secretary. It is a very sacred fund to the American people. And the American
people do not trust the federal government to invest that sacred money in
private corporations -- for two reasons -- risk, number one; and, number two,
that the federal government should not control potentially any private
corporations in this country, so that they are in a position to set policy.
Those are the concerns Alan Greenspan has, they are the concerns of 80 percent
of the American people.
Now, very quickly, the president's so-called
plan in your budget is not really a plan, Mr. Secretary. It is simply a
place-holder. It simply makes a promise that in the years ahead when there is a
shortfall in the fund that the Treasury out of general revenues will write a
check to the trust fund. That has never before happened in the history of the
trust fund. That sacred trust fund has been set apart from the general Treasury.
I am surprised that AARP has not just gone up the wall about this, because they
year after year after year have opposed infusion of general Treasury funds into
the Social Security trust fund. The one -- there is no immediate reform in the
president's so-called plan, no restructuring, no reform, other than the small
part of the fund that would be invested in the private sector to gain added
earnings. You might call that a reform, but that's a reform that's dead on
arrival with the American people. So there really is no reform. It's a
place-holder.
Now, let me just finally say, because I have dealt with
this over so many years, as you know, Congress has never been able to handle a
significant reform of Social Security. It has happened either from presidential
leadership, as it did with President Carter in the late '70s, or it has happened
through the creation of a bipartisan commission. No other major reform of Social
Security has ever occurred simply from within the Congress.
I have tried
as hard as I know how. I tried to get Mr. Rangel to come over and say, What can
we do to join together on a plan? I've talked to Minority Leader Gephardt.
Nothing is happening, because Congress cannot develop this within its structure.
It just has not ever been able to do so. But the White House opposed the
commission that we created in this committee and that had strong bipartisan
support, and was voted for by the House of Representatives, because the
president said, I have my own method -- we are going to have a national dialogue
culminating in a White House conference, and we will then launch this effort
together. And I had high hopes after that conference as I walked across the
street from the Blair House to the White House with the president. And I don't
believe that I am at liberty now to repeat the private commitments that he made
to me. But they are very different than what has come out publicly.
And
I am not trying to create controversy now between me and the Congress and the
White House, but I will simply say that this will not happen without aggressive,
direct presidential leadership inasmuch as the White House did not want us to do
the bipartisan commission.
And where we are now will not find the
solution to Social Security this year, and I am terribly, terribly saddened
about that. And I apologize to the committee for resuming on the time of the
committee.
Ms. Johnson.
REP. NANCY JOHNSON (R-CT): Thank you,
Mr. Chairman. Mr. Summers, I have a rather specific question. But I certainly do
want to put on the record a couple of other things. First of all, at the
beginning of this hearing it looked like this committee has been acting in a
very partisan fashion. I want the record to note that the subcommittees are for
the most part run in a totally bipartisan fashion.
And it's because of
the chairman's -- the response that he's gotten. When the chairman of the Ways
and Means Committee calls the president and doesn't even get a call back after a
series of conversations, it really is a problem. So bipartisanship means both
sides have to work together. And I'm proud to say that a lot of -- most of the
legislation that actually comes out of this committee comes out as a result of
bipartisan action.
There is a lot of ground for bipartisan tax action in
this Congress. If you look at the package we've proposed to go with the minimum
wage bill, much of those details are already in your budget. And unless you're
just going to on principle oppose a tax package being coupled with a minimum
wage bill, there is plenty of ground for agreement. The low-income housing tax
credit, the pensions reform, the expensing for small business -- lots of things.
And if philosophically we believe that those provisions should help
offset the cost to small businesses of increasing the minimum wage, so people
don't have to get fired and jobs can be protected, I really don't think that
that's such a bad rationale. And I hope it won't be a rationale that will mean
that you will a priori decide not to support tax changes as part of the minimum
wage bill.
If you look at the Health Access Bill, I've heard the
president many times support our proposal to let people deduct the cost of their
health insurance premiums. Everybody else gets to deduct the cost of their
health insurance premiums, except individuals who pay their own health
insurance.
So in fairness, just plain fairness, there are things we need
to do this session. So I'll end up with a fairness issue on the marriage penalty
bill, but I do want to mention that I am very disappointed that your Medicare
proposal doesn't propose any new money back into Medicare.
We all know
that particularly in the area of hospitals, we only deferred certain problems
for one year. I have never seen a hospital system -- from our sophisticated
medical centers on which the quality of American health care depends and the
world depends, right down to little rural facilities -- under such crushing
distress. And I urge you to give specific directives to HCFA that they can make
proposals to increase spending in that area. They are not in the budget. But
you're going to support them.
I don't want to go through what we went
through last time, with your people sitting over there, knowing how serious the
problems were, saying we must address the problems, but not being able to make
specific proposals because you had cut Medicare in your budget. You cut it again
when you brought the tax package up to try to avoid the one percent across the
board. And so their hands are tied. Untie their hands. We have got to do
something again this year for hospitals. So on Medicare, this is not enough.
On retirement security, I hear you about that. And I'm pleased there's
some pension proposals in here. But your big money is for matching. At least
those people already have a pension plan. Fifty percent of working people in
America work for employers who provide no pension plan. And you have some
proposals that will help that. But let's get our money out there so that
everyone can have an income stream that will complement Social Security.
And that's why I don't understand why you would take $8
billion more out of the insurance industry that will increase the costs of the
kinds of retirement products that are the only option people have to really
creating retirement economic security -- that is, Social Security and a
complementary privately saved income stream. So on retirement security, I think
there is common ground. But I think there are some backhanded hits in your
budget. And the irony is that those provisions have already been rejected by
this committee and the House -- on many occasions by Democrats as well as
Republicans.
So lastly, let me get to the marriage penalty bill that
we're going to vote on tomorrow. I'm very pleased that in your bill, you do
provide for stay-at-home moms. Now, those can be described as people already
benefitting from the marriage bonus, that's true. But they are also the little
families in America making the greatest sacrifice to live on a single income.
And you provide a total of $1,000 new deductibility.
Can you tell me whether or not that -- how does that compare to the new
deductibility we provide for stay-at-home moms? Because if we care about
families and children, we have got to do something about the bias in the system
against those (kids ?) who are making the really tough choice of staying home
and taking care of their children. In addition to the provision specifically for
deductibility then I want to ask a question about refundability.
SEC.
SUMMERS: Let me respond if I could to five points in what you raised. First,
with respect to stay-at-home moms, our proposal does as you say directly benefit
them. We believe it does so in a more targeted, progressive and less costly way
than the alternative that the committee --
REP. JOHNSON: But why is it
less costly? Because it provides $1,00 and we provide --
SEC. SUMMERS: Because it's more targeted to be progressive.
REP.
JOHNSON: No, no. It's not more targeted to be progressive. I'm talking
specifically about the stay-at-home provision, which would be the same for every
stay-at-home -- is my understanding of your proposals from your write-up in
these summary pages. In other words, you're not going to provide a stay-at-home
deduction for a mom whose husband makes more than a certain income?
SEC.
SUMMERS: We have a -- excuse me, Congressman Johnson, I thought you were
speaking about the marriage penalty. And I think now I understand that you're
speaking about the child and dependent care.
REP. JOHNSON: Yes. They
have the effect that we get through a very simple mechanism in our marriage
penalty of helping stay-at- home moms or stay-at-home dads, or whatever the case
may be. You do it through other programs, but the impact is the same. Do you
limit that to very low-income families?
SEC. SUMMERS: We have certain
limits that -- I don't remember what the limit is. You receive the full benefit
up to an income of $59,000 in our proposal. And after that, it
phases down. My impression is that the limits are somewhat higher in your
proposal.
REP. JOHNSON: Do you take no consideration for the number of
children? Because $59,000 if you have three or four children is
really still pretty tough sledding. Anyway, the --
SEC. SUMMERS: This is
something that we're happy to work with the Congress on. And I think that is a
crucial point and in our EITC proposals, the question of multiple-child families
is something we very explicitly pick up on, because there is a real problem with
the way our tax system treats families -- and our AMT proposal treats families
with multiple children.
REP. JOHNSON: Now in the EITC area, have you
been able to lower the fraud rate below 20 percent, which are our most recent
figures? Do you have any more recent figures on error and fraud in the EITC?
SEC. SUMMERS: We don't have more recent figures, but we've taken a
number of steps, including the allocation of specific enforcement budget for the
EITC, including simplification measures to conform the Earned Income definitions
which we expect will significantly reduce the rate of error, and including an
outreach effort to tax preparers in this area and including a requirement the
EITC beneficiaries give their Social Security numbers.
REP. JOHNSON: I
will just say that having chaired the committee that oversaw that for a number
of years, we have worked hard to eliminate the amount of fraud there is. If
there were an appropriated program that had a 20 percent fraud rate around here,
it wouldn't be there long. And for us to expand a tax program that has a 20
percent fraud rate when there are very direct and simple ways to help people --
stay-at-home moms and make families stronger -- seems to me questionable.
But I am very pleased that you do recognize the need to provide better
support to stay-at-home moms and I hope your colleagues on this committee will
work with us on that provision in our marriage penalty bill. Thank you, Mr.
Chairman.
REP. ARCHER: Mr. Houghton.
REP. AMO HOUGHTON (R-NY):
Thank you, Mr. Chairman. Mr. Secretary, good to see you.
SEC. SUMMERS:
Good to see you.
REP. HOUGHTON: I have two questions. One has to do with
complexity, the other has to do with the Customs issue, in terms of ACE. In
complexity, we've -- and I happen to be on the Oversight Committee -- we've had
Val Overson (ph), who is the sort of a taxpayer advocate from the IRS come up
here.
And he says the number-one issue really with taxpayers is tax
complexity. And I totally agree with him. You know, you take a look at the
Treasury reductions to the budget, and I have a report here from 1995. And it
was that thick, and -- (laughs) -- and the one for this year is that thick.
Proposals have just geometrically increased.
This is not just the fault
of the administration. As a matter of fact, it's the fault of Congress also. We
complexify this whole thing. But it's bothersome.
Now you've attended to
this in a certain way in terms of your report. In terms of tax simplification,
you say you propose to redress a particular problem with the AMT, by allowing
taxpayers to deduct all their exemptions for dependents against the AMT. Well,
you know, that's a good idea, but it really doesn't get at the complexity.
Because I'm making out my tax form, and I have to still go through all
the arithmetic before I come to the point where maybe I will have an exemption
here. It's a very important issue. I think frankly, from a personal standpoint,
it's even more important than tax reduction -- the tax complexity issue. Yet I
don't see really either of us getting at this and I would appreciate any
comments you have.
Now the second issue is in terms of the Customs.
We've had the head of the Customs Service up here quite a few times. And he's
talked about this Automated Commercial System -- ACE -- and you know about this.
And it's really important.
The problem is one of money and where does it
come from and where does it go? It's going to cost another $200
million, and you say that is a good idea, but at the same time, it should be
paid for by user fees. And the business community sort of feels that they've
given at the office.
In other words, they have -- they pay in user fees
almost a billion dollars. And -- (laughs) -- the -- (off mike) -- Customs
Service about $900 million. And so sort of to lay on another
$200 million -- it doesn't really seem to me to make an awful
lot of sense.
So those are two issues -- the tax complexity, which is
really a huge mega-issue. And the other thing specifically in terms of helping
our Customs system -- Service.
SEC. SUMMERS: Let me say, Congressman --
and I agree with what you said about the seriousness of the tax complexity issue
and it's something we're very focused on. I think we've done some things that
are constructive, the AMT is constructive, raising the standard deduction and
reducing a number of itemizers is constructive. Expensing for small business is
constructive.
I think there's a lot more that can be done. I would say
that I think is a largest problem for a small minority of relatively fortunate
taxpayers. Some 30 million Americans are able to file their taxes by pushing
buttons on a telephone in less than seven minutes. The increased emphasis on the
use of software to do this is making many of the things that used to be very
computationally burdensome much less burdensome. So you're getting a kind of
simplification in that way.
But I think this is a crucial issue, and
it's one that we need to be in a position to work together on. I would be sorry,
though, if that were to be seen as a reason not to extend existing mechanisms.
And we've tried to work in our budget by -- achieving some of the social
objectives by working with existing mechanisms. Expanding the ITC, expanding the
Child and Dependent Care credit. And it seems to me those things provide
important benefits to families without creating increased complexity, but I
think it's a fair concern.
With respect to --
REP. HOUGHTON: Can
I just -- can I just interrupt a minute? I mean, I really think that we're
probably equally to blame with the administration. But in something like this,
you need leadership. And it really ought to come from the White House.
So last year, you know, there were 28 different tax credits, and this
year there were 18 or 20. I mean, it just seems to roll on and roll on and roll
on. So the only thing I ask you is if you could really think in terms of what
did the White House do to lead all of us? Because that's where the direction
must come from.
SEC. SUMMERS: We will carefully consider it. I would
also say that I think if you probe what people don't like about complexity, some
of it is the hassle of filling out their own returns. And some of it is the
sense that out of all that complexity, somebody else is getting an unfair break.
And the reason I put such emphasis in my remarks today on the corporate shelters
is that that, I think, is an important thing that is stimulating anger or even
outrage with respect to the code, and that if we don't address it, will do even
more in the future.
REP. HOUGHTON: Yeah.
SEC. SUMMERS: With
respect to ACE, I think we all have a common position that this is very
important to get done if we're going to have the efficient flow of goods across
our borders. I should say that we in the department have learned a lot from the
painful TSM experience at the IRS, the computer program at the IRS. And I think
we have this under control so that those kinds of mistakes will not be repeated.
Budget realities being what they are, this program is not, it seems to
me, likely to be fully funded without a contribution of the business community.
We have reconfigured the proposal that is in this year's budget relative to the
proposal that was in last year's budget so as to make very tangible that the
contribution the business community is making is going right to the things that
will benefit them.
But as important as this issue is, I don't think I
could responsibly propose measures that would reduce the number of people who
are monitoring narcotics on incoming flights or agents who were doing that kind
of work protecting our borders against drug incursions in order to invest more
heavily in this computer system.
So my hope would be that we could work
with the affected people in the private sector to find a solution. And we were
very mindful, in the design of this year's proposal, frankly, that, as you put
it, the private sector had given at the office and you had to find a proposal in
which what they were being asked to do was commensurate with some benefit that
they were going to receive. That's what we tried to do. And we're obviously
happy to work with members of this committee and the affected trade associations
--
REP. HOUGHTON: Yeah, I think that's important.
SEC. SUMMERS:
-- to try to find a solution to this problem.
REP. HOUGHTON: I think
it's really important, because the Customs Service clearly is important. This is
very, very important for the Customs Service. And you want to have people
working with it rather than bucking it all the time. And I think the private
sector has really made an enormous contribution already for that. Thanks very
much, Mr. Chairman.
REP. ARCHER: Mr. Coyne.
REP. WILLIAM COYNE
(D-PA): Thank you, Mr. Chairman. Welcome, Mr. Secretary. I wonder if you could
tell us, as a result of last year, the administration came around to signing
legislation relative to rectifying the 1997 Balanced Budget Act inequities
relative to hospitals. And I wonder if you or Ms. Matthews could explain, in the
proposal this year, are we doing more to try and rectify the problem that was
created as a result of the 1997 Balanced Budget Act relative to reimbursement
for hospitals?
MS. MATTHEWS: We do not have a specific extension or
additional proposal to the BBRA that we passed last year. What we did do is, in
trying to do our efficiency proposals, ensure that we do things that are
consistent with what we did last year in terms of some of the competition things
we discussed earlier. For example, in some of our proposals there are
distinctions made for rural hospitals that build upon some of the concepts that
were discussed as part of what passed and was signed last year.
REP.
COYNE: Well, can hospitals look with any encouragement to additional help in
this proposed budget, help from what occurred in the 1997 situation?
MS.
MATTHEWS: We do not currently have a proposal, as I said, that extends in the
same way that the BBRA did last year. There are proposals such as (GME?)
hospitals, those kinds of things, where we've doubled the funding on the
discretionary side from $40 million to $80
million. There are things specifically like that. But I think you're referring
in a particular area, and we don't have those.
REP. COYNE: Okay. On
another subject, I wonder if the secretary or yourself could tell us a little
bit about who is going to benefit from the proposal in the proposed budget about
the earned income tax credit and extending the benefits. What rate of income
level in the country is going to benefit from expansion of the EITC?
SEC. SUMMERS: I think most of the benefits will go to those with incomes
between, say, $10,000 and $30,000. And the
groups will principally be those with more than two children, married couples
who will avoid the marriage penalty, and those who are making special efforts to
save who will benefit from the conformity of the earnings definition.
Let me say that the EITC has probably been more successful than any
other social program we've had in moving people from poverty to work, and also
say that at this point, when, more than at any time in the last 35 years, our
economy's issue is jobs looking for people as well as people looking for jobs,
doing everything we can to stimulate work incentives and improve the supply of
labor is crucial if we're going to be able to keep growing at these rates
without running into bottlenecks.
REP. COYNE: Well, we have a
responsibility in Congress to do everything we can to ensure the solvency of the
Social Security program and the Medicare program. But in a time like this when
the economy is so strong, it seems that it's time to invest in public
infrastructure, to have a growth in the future of workmanship, for workers to
become more productive in the economy. And along those lines, what is this
budget going to do to invest in trying to make workers more productive and also
to help the public infrastructure of the country?
SEC. SUMMERS: Let me
comment on some components of that and then I'll turn to Ms. Matthews, if I
could. I think probably the most important -- among the most important
infrastructure investments we can make as a country are in satisfactory schools.
You know, it's wrong that with all the prosperity that we have, children in
America are beginning the school day at 4:00 because their schools work in three
shifts. Other children in America are going to school in closets. Other children
in America have the lunch period begin at 9:45 in the morning because the school
facility is so constricted. The restroom facilities in some of our schools are
an embarrassment.
And if we want kids to take learning seriously, it
seems to me we ought to take seriously the kind of facilities that we provide
them. And that's why one of our priorities in the tax area is the school
construction proposal. That's why we're also proposing measures for repair and
modernization of schools in the discretionary budget.
More generally, it
stands to reason -- and statistics confirm what common sense suggests -- that
when there are fewer kids per teacher, the kids learn more. When there's more
emphasis on quality, more learning takes place. So we are focused very much on
improvement in education. This year's budget includes the most robust
improvements in the education budget that we've had in a number of years, and I
think that's an important step. Ms. Matthews could probably add something on the
worker training side.
MS. MATTHEWS: On the worker training side, we are
continuing our youth formula grants. That includes the summer jobs programs. And
there are a number of programs specifically, such as the Head Start increase of
a billion dollars, (sort of?) starting at the very beginning of the educational
process. Additionally, our after-school monies, which we have put in before, are
there, and a smaller-schools initiative with regard to infrastructure type
issues. It relates to our building of schools and our modernizing of schools.
And another part of that is the digital divide. As part of our school
modernization plan on the tax side, it's building on the discretionary side. We
want to modernize and create an ability for those schools to wire and get the
computers in. Some of them don't have the ability to do that. Those are some
infrastructure as well as some of the other programmatic things we do in the
area of education.
REP. COYNE: Thank you.
REP. ARCHER: Mr.
Herger.
REP. WALLY HERGER (R-CA): Thank you, Mr. Chairman. Mr.
Secretary, it's good to have you with us. And I'd like to ask you concerning a
provision that I understand was recommended by the Treasury, was put in the
president's budget at the end of the budget cycle this last year for this year,
which the Congress did pass. I think it was done inadvertently. It had to do
with the installment sales method for the accrual method of selling small
businesses.
And the example of the way it used to be, small businesses,
maybe worth $100,000, who would be retiring, who would be
selling these small businesses, if they sold it over 10 years, there would be
$10,000 per year that maybe they'd receive in payments. And the
capital gains then would be on that $10,000, say, per year. And
what this has done is that now these small businesses have to pay all of the
taxes up front, which, say, on $100,000, 20 percent capital
gain would be $20,000. And, of course, what is happening is
that these businesses aren't able to sell for as much.
The buyers of
these small businesses, who many times are unable to obtain credit from the
banks, so their only way of getting into small businesses are through this
method, are unable to buy. Again, I feel that we are hearing, as members of
Congress, from literally hundreds of small business people throughout our
district, and it's not just my district, as I'm sure every congressional
district in the nation is hearing this.
My question is, were the results
of this, the end results of this, anticipated by Treasury, by the
administration, at the time that it was proposed? And if it wasn't -- I
understand that Chairman Archer did send a letter to the president requesting
that the correction be done in the president's budget. And my question would be,
was it anticipated? And if it was, why was this not included in the president's
budget?
SEC. SUMMERS: Thank you for raising that issue, Mr. Herger,
which touches on what's a very real concern for us as well. My colleagues in the
tax policy area at the Treasury and in the IRS have had a series of meetings
with the NFIB and other representatives of the affected parties, and I think
it's clear that these provisions have impacted in a way that was much more broad
than was originally intended.
And we expect in the very near future to
provide regulatory guidance that I think will, at least in a large part, and
perhaps completely, clear up what have been very legitimate concerns. And I
think we're working in tandem with the groups that represent many of the small
businesses, because this is a serious problem. And I would be happy to ask my
colleagues to provide you or your staff with a more detailed briefing on what's
involved.
REP. HERGER: Very good. I appreciate it. And that will help us
very much, because these businesses who are selling right now, of course, are
being very dramatically affected. I'm authoring legislation, along with my --
it's bipartisan; Mr. Tanner from this committee, Mr. Matsui; we have some 21
members just of Ways & Means who are in legislation to legislatively correct
this. Of course, this will take some time.
But if you could work on this
in the meantime to help these businesses that are being affected right now, that
would be very helpful. And I would gather by what you're saying that -- or let
me just ask, we'd really appreciate your support as well, not only in correcting
it now but changing the legislation, repealing what I believe was inadvertent,
certainly by the Congress, and I believe, by what you're saying, by the
administration.
SEC. SUMMERS: Let me suggest that those who are more
knowledgeable than I about the technical details take this up. You have my
commitment to address, in a regulatory way, the abuse that -- the overly
broadness of the past legislation. And whether we're in precise agreement on any
specific proposal or not is not something I can say until I've had a chance to
review it. But I think we will be able to act, and act very quickly, frankly, on
a shorter time frame that would be possible legislatively to address this
concern in large part, and I very much appreciate your having raised it.
REP. HERGER: Mr. Summers, thank you very much.
REP. ARCHER: Mr.
Secretary, obviously it's going to take some significant additional time to let
all members have an opportunity to inquire. My guess is that you may need a wee
bit of relief at this point. So the chair is going to recess the committee, and
hopefully everybody can grab a bite of lunch and return at a quarter to 1:00.
REP. : Mr. Chairman, could I read something into the record very
quickly? Because there was a question as to the definition of privatize or
privatization a moment ago.
REP. ARCHER: Without objection, so ordered.
REP. : In the American Heritage dictionary, privatizing is described as
"to change an industry or a business, for example, from government or public
ownership or control to private enterprise." And the American Academy of
Actuaries describes privatization as "the broad concept of investing funds in
the private sector, which in turn implies accumulating substantial advance
funding, is known as privatization."
Thank you, Mr. Chairman.
REP. ARCHER: The chair -- Mr. Secretary, if you can accommodate another
five minutes, Mr. Levin is going to have to go to another meeting and would like
to get his five minutes' questioning. I'll leave it up to you. If you can handle
another five minutes --
SEC. SUMMERS: I would be delighted.
REP.
ARCHER: -- the chair will recognize Mr. Levin.
SEC. SUMMERS: I can
remain with Mr. Levin as long as Mr. Levin wishes.
REP. SANDER LEVIN
(D-MI): No, I'll take my five minutes. And I think the chairman will grant
another five minutes on the other side. Thank you, Mr. Chairman.
Mr.
Secretary, Mr. Crane raised the trade issue, and I'm glad he did. And in
response, reflecting your own views and that of the president, as he articulated
at Davos so well, you talked about the need for expanded trade and also for an
expanded perspective of trade in this new era. And in terms of a new perspective
to incorporate considerations of the environment and labor, you referred to
child labor. But I trust, when you refer to labor, we're talking about and
you're talking about, as the president did, the issues of core labor standards,
not universal minimum wages but core labor standards, as articulated by the ILO.
Let me also say a word about the reference to waiting for a call from
the president on Social Security. And I just hope the Republican majority would
look back at how they handled the marriage penalty. As I understand it, when
there was the meeting of the leadership with the president, there wasn't even a
reference to this first step in their tax program. And I think that if we're
going to get off on the right foot in terms of bipartisanship, there needs to be
a willingness on the part of the majority to raise issues like the marriage
penalty and try to work them out before they're simply sprung on the minority.
And one other quick question or comment, and this relates to Mr. Shaw's
reference to privatization. However one thinks about investment of equities by
the government, a small portion, I don't think it's fair to refer to that as
privatization. And you mentioned that.
Let me now close by just talking
about the share of income that people today pay in federal income tax. And you
discussed this earlier, but I think the record should be clear. I have from the
Treasury Department a chart that talks about the federal income and FICA tax
rates, and it uses the median income for a four-person family. And as I read the
chart, it shows that that average combined tax rate that we're now talking about
for the median income is less today than it was in 1979. Is that correct? Do I
read that chart correctly?
REP. LEVIN: It's projected rate for 1999 is
15.11 compared to 16.97 20 years ago. And that's reflected in the CBO chart that
compares the effective tax rate -- this is the federal tax rate -- projected '99
compared to 1981. And I just want to read the figure for the lowest quintile 4.6
compared to 8 percent in '81; the second quintile, 13.7 compared to 15 percent;
the middle quintile, 18.9 versus 19.5; the fourth quintile, 22.2 compared to
22.9. The only increase is for the highest quintile. And I just want to -- the
retort is, Well, that takes money out of private investment. So if you would
comment quickly on what really has happened in terms of the federal tax rate and
the fact that the highest income category is paying a higher tax rate, but
whether that has had a negative impact in terms of growth in this country.
SEC. SUMMERS: Let me make these comments, if I could, Congressman Levin.
First, from the mid 1990s on we have had what some would call the greatest --
and it is certainly one of two or three greatest economic expansions in the
history of our country -- driven by productivity growth, driven by capital
formation and investment. We have had record levels of investment as a share of
GNP, record levels of investment in absolute terms, and record levels of growth
in investment during this period. And so it seems to me difficult to argue that
we have seen new or serious impediments to the capital formation process from
anything we have done with tax policy. And indeed I would argue that the budget
surpluses have been major sources of strength for investment.
The tax
rates for the same family configured in the same way for something like 90
percent of American families have come down, and are lower now than they were at
any time in the last 20 years. As I indicated earlier, the statistic is
frequently cited that a ratio of taxes to GNP has gone up. That's a reflection
of two things. It's a reflection of the fact that income relative to GDP has
gone up because there is more foreign income, because there is more capital
gains than there once was, so in some sense GDP is not really the right
denominator for looking at taxes. And the other factor that it represents is
that a larger share of income represents corporate profits, which are taxed at
the corporate level, and represents income to higher-income people, but is taxed
at a higher rate.
And so -- and this is the crucial point -- the changes
in the taxes-to-GNP ratio do not reflect tax increase policies. They reflect
instead changes in the pattern of who is receiving the income. The universally
agreed technique for measuring the impact of policies is to look at taxpayers
configured in a given situation and see what happens to their tax burden. And by
that standard, for the vast, vast majority of Americans, taxes have declined
since the late 1970s, taxes have declined since the early and mid --
REP. LEVIN: Federal taxes.
SEC. SUMMERS: Federal taxes.
REP. LEVIN: Thank you. And thank you, Mr. Chairman, for your indulgence.
REP. ARCHER: You're welcome, Mr. Levin.
I must say I can't just
let that stand, because as usual, when you deal with statistics, there are any
numbers of ways to perceive them, present them, analyze them, and ultimately
reach conclusions. Mr. Secretary, what you did not mention is that as we sit
here today America has the lowest private savings rate in all of its history --
in all history. It is negative. What you did not allude to is that a great part
of the investment on which we are presently building our economy is foreign
investment, the savings of foreigners who save far in excess of what we do in
this country. And the great danger to the stock market, the cloud that hangs
over the stock market, is that if these foreigners begin to have more confidence
in their own domestic economies than in ours, there could be a outflow of this
investment capital, and we would be in very big trouble. So we do need to be
concerned about that. I think you probably share that concern. I'm not saying
it's imminent, but it is a cloud hanging over the economy.
Now, if we
are not to care about what percent of GDP the federal government is taking, that
all that we care about is what median families are paying in taxes, then we can
increase taxes on everything that doesn't relate to median families, and it
doesn't affect anybody. As an economist you know that's not true. The embedded
cost of the income tax represents roughly 20 percent in the price of the
products on average in this country, according to the very, very comprehensive
study done at Harvard by one of your colleagues. And so if you keep taxing
everything else, and you say, Oh, but the median families' taxes haven't gone up
-- you are ignoring this take out of the economy that must be paid for by the
median families in the price of their products which is hidden from them. And so
on the thesis that Mr. Levin and you were exchanging, we could take 50 percent
of the GDP provided that the median family didn't show any increase in taxes.
REP. LEVIN: That's not --
REP. ARCHER: And that clearly would
not be wise. And so the percent that we are taking out of the economy,
particularly at a time when this goes in the other direction, which it will at
some point, some time -- I don't know when -- it may be 10, 15, 20 years from
now -- will leave us at this bigger demand at the federal level. And you and I
may disagree, but I think this is something to be concerned about.
SEC.
SUMMERS: Mr. Chairman, let me clarify very explicitly my position. You are of
course correct that if you raised taxes on some people but not the median
person, and you looked only at the median person, that would be a misleading
statistic. And that is why I was careful to cite those with half the median
income, those with the median income, those with twice the median income. But I
think you could agree, I suspect, that if the stock market goes up and more
individuals realize capital gains, and nothing else changes, it would be quite
misleading to describe that situation as a tax increase on the American people.
And yet the statistic that is frequently cited comparing taxes to GNP suggests a
tax increase when that has taken place.
If the distribution of income
changes and no tax law is changed, so that more income is received by those in
the 28 percent bracket relative to those in the 15 percent bracket, then more
taxes will be collected, but again, and compared to GNP, but again it would be
hard to see that as having been a legislative tax increase. We'd be happy to do
more comprehensive analysis. But what I can assure you that analysis will show
is that the increase in the tax ratio to GNP that is of concern to you is
something we do need to investigate. But we will find that it is not a
consequence of tax law policy changes, but is instead a consequence of the two
factors that I have been citing, an increase in income that is not reflected in
GDP, such as capital gains, and a change in composition of income towards those
with higher marginal taxes -- towards those who have higher tax rates. And it
would surprise me if one took the view that a stock market increase constituted
a tax increase. And yet that's the logic of the comparison of taxes to GNP.
With respect to savings, I can only agree with you, and I think we can
take common satisfaction that whereas our countries' national savings rate had
reached its historic low ever in 1992, as a consequence of the progress we have
made in increasing public savings, that national savings rate has more than
doubled over the last seven years. And I think we have made great progress in
the public area, and I think we can all agree on the importance of working to
increase private savings. And I was particularly encouraged by Congresswoman
Johnson's suggestion that we stress the needs of the 70 to 75 million Americans
who don't have any kind of pension plan. And I think if we can agree on that as
a primary objective rather than raising the limits for those who are already
most fortunate, I think if we can agree on the 70 million as Mrs. Johnson
suggested, then I think we would be in a very strong position to work out an
approach that I believe would be the most effective approach and provide the
greatest incremental benefit in encouraging personal and private savings.
REP. ARCHER: Mr. Secretary, we will continue this comprehensive economic
discussion at a seminar somewhere later. But for the time being the committee
will be recessed now until 1 o'clock.
(Recess.) (END OF MORNING SESSION;
PM SESSION WILL FOLLOW)
END
LOAD-DATE: February
10, 2000 
