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62–358—PDF 2009

S. HRG. 111–740

PRESIDENT’S FISCAL YEAR 2010

BUDGET PROPOSAL

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

MARCH 4, 2009

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

BILL NELSON, Florida

ROBERT MENENDEZ, New Jersey

THOMAS R. CARPER, Delaware

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 6

WITNESS

Geithner, Timothy F., Secretary, Department of the Treasury, Washington,

DC .......................................................................................................................... 4

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Geithner, Timothy F.:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 55

Responses to questions from committee members ......................................... 63

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 6

(III)

(1)

PRESIDENT’S FISCAL YEAR 2010

BUDGET PROPOSAL

WEDNESDAY, MARCH 4, 2009

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Lincoln, Wyden, Schumer, Stabenow, Cantwell, Nelson, Menendez, Carper, Grassley,

Hatch, Snowe, Bunning, Crapo, Roberts, Ensign, Enzi, and Cornyn.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Alan Cohen, Senior Budget Analyst;

Cathy Koch, Chief Tax Counsel; Tiffany Smith, Tax Counsel; Tom

Klouda, Professional Staff Member, Social Security; and Pat

Bousliman, Natural Resources Advisor. Republican Staff: Mark

Prater, Deputy Chief of Staff and Chief Tax Counsel; and Jim

Lyons, Tax Counsel.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

The book of Deuteronomy commands, ‘‘You must have completely

honest weights and completely honest measures if you are to endure long in the land the Lord your God has given you.’’

This is a very good budget because it is an honest budget. The

budget is honest about the cost of the wars in Iraq and Afghanistan

in all of the 10 years that it covers. The budget is honest about the

cost of fixing the Alternative Minimum Tax in all 10 years. The

budget is honest about the need for health care reform. As President Obama told Congress last week, health care reform cannot

wait, it must not wait, and it will not wait another year. This budget makes good on that promise.

The budget is honest about the growth rates for discretionary

spending in all 10 years. The budget is honest about providing estimates for 10 years, not just 5. The budget is honest about providing a placeholder for additional funds that might be needed this

year for financial stabilization, and the budget is honest about the

need for revenues to fund the government.

Now, just because this is an honest budget does not mean that

this is an easy budget. The budget presents some difficult realities,

and it presents some hard choices, but the budget is fiscally responsible.

2

For the first several years of this budget, the economy will be in

a recession. During a recession, revenues fall. During a recession,

spending on Unemployment Insurance, Medicaid, and other meanstested benefits automatically increases. To spur the economy, we

enacted a powerful fiscal stimulus program. All these things cause

the deficit to increase.

But most economists agree that during a recession, running deficits is the right thing to do. The decreased revenues and increased

spending help to lessen the harm of the recession. Almost all of the

effect of these measures on the deficit goes away once the recession

is over.

The honest measure of whether a budget is fiscally responsible

is not the size of the deficit during a recession. The honest measure

is the size of the deficit once the recession is over. The honest

measure of whether the deficit is high is the size of the deficit relative to the size of the economy.

On that basis, once the recession is over, the deficits projected in

this budget are fiscally responsible. By fiscal year 2013, the deficit

is projected to be 3 percent of the economy, and it remains at this

level throughout the remaining years of the budget.

Why is this a responsible level? Because debt held by the public

will remain stable as a share of the economy. Debt held by the public is projected to be about 66 percent in 2013, and it will be about

the same in 2019. Keeping the debt held by the public stable is fiscally responsible.

And this budget is responsible because it addresses the most important challenge to our fiscal future: the growth in health care

spending. Our number-one objective this year is to enact comprehensive health care reform. We need health care reform that

provides coverage to all Americans, improves the quality of health

care delivered, and contains the growth of health care spending.

This budget provides a down-payment for health reform. The budget includes explicit policy proposals whose proceeds will go into this

fund. In the coming months, this committee will explore these proposals.

We will also need to look at other ways to make the health care

system more efficient. This includes examining the enormous role

that taxes play in promoting health care. Currently, the law does

not include the value of employer-subsidized insurance in employees’ taxable income, and there are numerous deductions from income for people who save for health costs, contribute toward

employer-provided health care plans, and incur out-of-pocket medical expenses.

These exceptions are projected to reduce income tax receipts by

more than $200 billion in 2009, and that amount is projected to

grow every year thereafter. Thus, one of the first places to begin

tax reform is with health care reform.

I am also glad to see that the budget would help lower- and

middle-income American families. The budget makes permanent

many of the tax cuts enacted in 2001 and 2003. These include

lower tax rates, marriage penalty relief, and expansions to the

child tax credit, adoption credit, and childcare credits.

The budget also makes permanent the zero-percent and 15-

percent capital gains rates for low- and middle-income taxpayers.

3

To help family businesses and farms, the budget can provide certainty under the estate tax, setting the exemption and tax rate at

2009 levels.

The budget also makes permanent several provisions enacted as

part of the Economic Recovery bill. The Making Work Pay Credit

will allow working Americans to take more of their hard-earned

money home. The American Opportunity Tax Credit will help students pay for college, and families with children will get assistance

from the expansion of the Earned Income Tax Credit and the Refundable Child Tax Credit. And the budget promotes savings for

families by expanding the Saver’s Credit and making it refundable,

and by providing for automatic 401(k) and IRA enrollment.

The budget provides tax cuts for businesses as well. The President’s budget also proposes several provisions that would raise revenue, and the committee will explore them this year.

I am pleased to see that the President’s budget includes a proposal to codify the Economic Substance Doctrine. That is something

that Senator Grassley and I have been trying to do for years. It is

an important tool in cutting back abusive tax transactions.

Mr. Secretary, I know that you are focused on offshore tax evasion because of the international revenue proposals in the budget.

Any background that you could give us today on these proposals

would be welcome, and I look forward to working with you on legislation to recover the tens of billions of tax revenue dollars hidden

overseas.

I am pleased to see that this budget includes funds for additional

efforts by the IRS for reducing the tax gap. Every year, more than

$345 billion of Federal tax revenue is owed, but is uncollected.

Each additional dollar spent wisely on enforcement returns $5 to

the Treasury. The budget includes $7.2 billion for a multi-year enforcement effort by the IRS.

Along the same lines, I am pleased to see proposals in the budget

that provide for reducing fraud in health care, Social Security Disability payments, and Unemployment Insurance payments.

And, Mr. Secretary, we will also have questions for you today beyond the budget. Stabilizing our financial system is one of the

greatest public policy challenges facing the government. I hope

today that you can give us an update on capital injections into

banks, aid to the auto industry, AIG, Citigroup, and the mortgage

foreclosure relief program.

And I would like to also hear about any plans you may have to

ask for an additional $750 billion for financial stabilization included in the budget on a contingent basis.

So I commend the President and you, Mr. Secretary, on the honesty of the budget. I commend you for taking on the tough challenges of the work ahead of us, and I look forward to rolling up our

sleeves and getting that work done.

Senator Grassley is not here. I know he will be joining us shortly.

So, Mr. Geithner, why don’t you proceed to your statement? As

you know, your full statement will be automatically included in the

record.

4

STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY,

DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Secretary GEITHNER. Chairman Baucus, members of the committee, it is an honor to appear before you today to talk about the

President’s budget and the administration’s economic agenda.

I want to just summarize the main points in my testimony, and

I look forward to answering your questions.

We start this administration, this Congress, with a deepening recession, an intensifying housing crisis, and a financial system

under stress. Since the recession began, 3.6 million Americans have

lost their jobs, millions more have lost or are at risk of losing their

homes, are struggling to obtain loans for cars, for higher education,

and many businesses are finding it harder to get credit.

This crisis has helped cause a dramatic deterioration in our fiscal position. We start with a $1.3-trillion deficit, the largest as a share

of GDP the Nation has faced since the second world war.

As a Nation today, we face extraordinary challenges, and these

challenges require extraordinary actions. In passing the American

Recovery and Reinvestment Act, the administration and the Congress have put in place a very powerful mix of programs to get

Americans back to work and to stimulate private investment.

The combined effect of these investments and tax measures will

be to save or create between 3 and 4 million jobs, and to increase

real GDP by 3.2 percentage points by the end of 2010 relative to

what would have occurred in the absence of that program.

Now, alongside the Recovery Act, the administration is moving

to repair our financial system so that it can provide the credit necessary for businesses across the country to expand, and for families

to finance the purchase of a home, or a car, or to meet their basic

needs.

The deepening recession is putting greater pressure on banks,

and in response, many banks are pulling back on credit. So right

now, critical parts of our financial system are working against recovery. This is a very dangerous dynamic, and to arrest it we need

to make sure that our banks have the resources necessary to provide credit to the economy, and we need to act directly to get the

credit markets working again.

The President has also launched a broad plan to help address the

housing crisis. This plan will help homeowners meet their mortgage obligations and enable them to refinance to take advantage of

lower interest rates. Just this morning, we took the important step

of releasing the details of our loan modification plan and Treasury

guidelines for servicers, and this will help struggling borrowers

begin to see lower payments, more affordable payments, right

away.

These actions in all three areas are essential to lay the foundation for recovery. The President’s budget builds on this foundation

to set us on the path to higher long-term growth rates.

The first step, Mr. Chairman, as you said, in addressing our Nation’s fiscal problems is to be honest about them. This budget

breaks from the past by honestly and transparently presenting the

fiscal challenges our country faces. We include the cost of fixing the

AMT each year, reimbursements to Medicare physicians, the likely

costs of future foreign wars and natural disasters, and the potenVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
5

tial need, in an abundance of caution, for additional financial crisis

funding. We offer a 10-year, rather than a 5-year, budget presentation.

This budget proposes to address the most critical challenges our

economy faces in health care, in energy, and in education, within

a framework that puts us on a path to fiscal responsibility and to

fiscal sustainability.

As you know, the soaring cost of health care is crippling families,

businesses, and our long-term budget prospects. There is no path

to addressing our long-term entitlement challenges that does not

require major health care reform. Our budget begins this process

by reducing costs and inefficiencies, increasing quality and prevention, and moving towards more affordable coverage for all Americans.

Just to cite one example, the Hospital Quality Improvement Program in the budget proposes to pay for performance and reimburse

hospitals for the quality of services they provide rather than merely the quantity of the services they provide. Health care reform is

a moral imperative, it is an economic imperative, and it is a fiscal

imperative.

Our budget also puts forth a significant commitment to reduce

our dependence on foreign oil, a dependence that threatens our

economy, our environment, and our National security interests. Investments in energy efficiency and renewal of energy will help create new American jobs and industries and lead the way to a new,

green economy.

If we are truly committed to making our Nation both more prosperous and more just, we must recognize that it defies both our

basic values and economic common sense to deny any child in our

country the quality education they need to compete in the 21stcentury global economy.

Our budget calls for more resources for early childhood education, new incentives for teacher performance, and a significant

increase in the PELL grant, together with President Obama’s

American Opportunity Tax Credit, which provides up to $10,000 of

tax relief for a single student going to 4 years of college.

On the tax side, the budget rewards work and encourages savings and investment that will spur growth. The budget proposes to

make permanent the Making Work Pay Tax Credit for 95 percent

of working Americans, and to expand the Earned Income Tax Credit. It also includes a zero capital gains tax provision for small businesses and a permanent extension of the R&E tax credit.

The budget proposes to address the tax gap by tackling tax shelters and other efforts to abuse our tax laws, and over the next few

months the President will propose a series of detailed legislative

proposals and enforcement measures to help reduce tax avoidance.

I want to emphasize that we propose no new revenue increases

in our budget, none, until we are safely into recovery in 2011. At

that point when the consensus of private forecasters projects significantly positive growth rates for the overall economy, the budget

restores tax rates to the pre-2001 level for families making more

than a quarter of a million dollars a year.

Even with the critical long-term investments in our economy proposed in the budget, the President’s budget keeps, overall, nonVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
6

defense discretionary spending well below its long-term average as

a share of the economy. Overall outlays return to historical norms

once you account for the interest costs associated with our inherited deficits and the impact of the baby boom retirement and rising

health care costs on entitlement programs.

The President and I share a commitment to working with the Finance Committee and with the Congress to put our Nation back on

the path of fiscal sustainability once recovery has been firmly established. The President’s budget does this by making tough

choices to cut the deficit in half in 4 years, and to reduce deficits

to the level that is necessary so that overall debt is not rising, no

longer growing as a share of the economy. If we do not do this,

then we face the risk that government borrowing will, over time,

crowd out private borrowing, resulting in higher interest costs and

weaker growth.

When I last served in the Treasury Department in the 1990s, fiscal responsibility helped create a virtuous circle of greater confidence, strong private investment, strong productivity growth, and

higher overall gains in income, more broadly shared across the

American economy.

Now, addressing these problems, these challenges that confront

our country, will not be easy, but we are a strong and resilient

country. We have overcome challenges—extraordinary challenges—

in the past and we will do so in the future if we work together,

the administration and the Congress, in putting forth effective proposals to address these challenges.

Thank you. I would be happy to answer any questions.

The CHAIRMAN. Thank you, Mr. Secretary.

[The prepared statement of Secretary Geithner appears in the

appendix.]

The CHAIRMAN. I now turn to Senator Grassley for any opening

statement he might have.

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. I would apologize to the Secretary, because I

was speaking on the floor of the Senate.

There seems to be a common refrain on the Democratic side that

those on the Republican side cannot somehow, and should not,

criticize the future record deficits and debt that the President’s

budget will produce. The premise of that position is that the last

administration produced similar deficits. Moreover, the common refrain goes that the current administration, and implicitly the

Democratic leadership in Congress, had no hand in creating the

current fiscal situation.

Now, it is very true that President Obama inherited a big deficit,

and not a deficit that we can be proud of. We on this side do not

dispute that. But to say that it was bequeathed solely by those on

our side, I think is misleading. I have a chart that will demonstrate

that here. This chart shows the relative level of deficits over the

past 8 years. The chart shows the effect of the economy that the

last administration inherited: the flat investment pattern of 2000,

the tech bubble bursting in 2001, the corporate scandals of 2001

and the economic shock of terrorist attacks on 9/11. These all ocVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
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curred at the start of the last administration. They contributed to

the sharp downturn in the fiscal situation that you see demonstrated there those years.

When the bipartisan tax relief kicked in, the deficits came down,

you will see, in the period of 2004 to 2007. In 2007, we entered a

period of divided government, Democratic control of the Congress.

Unless I am missing something, all of the fiscal policy in the period

of 2007 and 2008 was the product of a Democratic Congress and

a Republican President. A Democratic Congress made policy bequests, and resulting deficit and debt, to President Obama, and a

Republican administration joined in that bequest.

So President Obama inherited the deficit and debt, and of course

it is very, very large, as you can see there with the last column.

But that bequest was bipartisan. Mr. Secretary, as head of the New

York branch of the Federal Reserve, you were a very key player in

creating the Troubled Asset Relief Program, and a good chunk of

the big deficit and debt is attributable to that policy.

I point this out to set the record straight so that we can constructively—with emphasis upon ‘‘constructively’’—tackle the large fiscal

problems we face, together.

Now I turn to today’s hearing. A little over 4 years ago at this

same annual hearing, I criticized the last administration in one important respect: for the lack of transparency in its budget. The criticism arose from the administration’s—the Bush administration’s—

failure to include an extension of the Alternative Minimum Tax

patch in its budget. It was towards the end of that hearing, and

Senator Wyden brought this up, waiting his turn, in the final

round of questions.

That exchange with Secretary John Snow led to a bipartisan effort to repeal the AMT. In 2007, when control of the Congress shifted to my friends on the other side, I likewise criticized them for

not including an un-offset AMT patch in their budget. In addition,

I pressed them to include extensions of popular tax relief provisions

this committee developed in 2001 and 2003.

Both the last administration and the leadership on the other side

adjusted their budgets to account for AMT relief and to deal with

the broad-based expiring tax provisions. In neither case was all of

the tax relief fully accounted for. In neither case was the revenue

side of the budget fully transparent. President Obama’s budget

breaks new ground in terms of transparency. That is, of course, a

very good thing. The budget reflects extension of the AMT patch,

although it needs to be fixed to fully hold middle-income families

harmless.

President Obama’s budget, like the Republican administration’s

and congressional budgets, includes extension of the bipartisan tax

relief packages of 2001 and 2003. Unlike these budgets, however,

this budget repeals the tax relief for major categories of taxpayers.

On principle, President Obama’s budget agrees with the basic point

many of us on this side have been making for several years, that

is, failure to extend current tax law relief is a tax increase.

Getting that discussion on this level, which focuses on the merits

of existing tax policy, is an improvement in the debate. For far too

long—2 years, to be exact—we operated in an environment where

the fiscal effects of extending current-law tax policy and spending

8

policy were subject to entirely different levels of scrutiny. Expiring

entitlement provisions and spending were not accounted for, increases in appropriation spending over the baseline were not accounted for, but every dollar of current-law tax relief was treated

as the sole cause of deficits. Common sense would tell you that, for

budget purposes, a dollar increase in spending should be treated

the same way as a dollar of tax relief.

So I want to thank my President, President Obama, for bringing

more transparency to the revenue baseline. It will enable those of

us on Capitol Hill to more accurately discuss the tax policy changes

as policy changes.

Turning to those changes, there is good news. I am pleased that

the President recognizes the importance of some economic growth

incentives. Last year, many on our side applauded President

Obama’s proposal for a zero capital gains rate for small businesses

and start-up ventures.

For reasons I do not understand, the Democratic leadership resisted the proposal, even though Senators Kerry and Snowe introduced it in a bipartisan bill. Why, in a $787-billion bill, we could

not err on the side of an aggressive capital formation incentive is

beyond me. President Obama planted the flag for this incentive

once again. He will continue to get my support and the support on

our side for his doing that.

I mentioned the good news on the AMT patch. I am pleased that

much of 2001 and 2003 tax relief is made permanent in the budget.

The first bit of bad news is that those bipartisan packages are not

extended in full. These are bad signals to send to workers, small

business owners, and investors. I have to wonder if these signals

might have something to do with a further downturn in the economy.

The second bit of bad news is that there is a new hidden marginal rate increase embedded in the budget. It is a proposal to

place a ceiling of 28 percent on deductions for mortgage interest,

charities, and State and local taxes. Let us review the bidding on

the top two rates. The budget returns to the Clinton-era 36-percent

and 39.6-percent tax brackets. In addition, the hidden marginal tax

rate hikes known as PEP and Pease return. This is where we need

more transparency by not reinstating PEP and Pease, but being

more honest and having a 42- or 43-percent top marginal tax rate,

if that is where you really want to go. These marginal rate hikes

are particularly punitive to small business.

I would ask the Secretary to pay attention, because yesterday I

heard what he said on television, that only 10 percent of the small

business people would be hit. I want him to know that over half

of the owners of small businesses employ between 20 and 500 employees, and are owned and operated by taxpayers that are targeted for these heavy marginal tax rates. I do not understand why

you would charge small business operators more than you would

charge corporations, but that is the effect of this.

In other words, I want to emphasize for the Secretary, over half

are between 20 and 500 employees. Small business employs over

half of the private sector workers in America; two-thirds of the

small business workers are employed by firms employing between

20 and 500 employees. Those larger small businesses are also busiVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
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nesses most likely to expand or contract, depending on business

conditions.

I would like to have you check the latest Small Business Administration data. It will tell you that small business created all the

new jobs in this country in 2004. For 2007, the latest year for

which data is available, small business created 74 percent of the

new jobs.

A materially higher tax rate will, whether the other side wants

to admit it or not, affect the ability of those businesses to expand

and create jobs because it reduces after-tax cash flow. It reduces

the after-tax rate of return from business activity. Expansion

means more workers, contraction obviously means fewer workers.

So I would challenge anybody to tell me how raising the 33-

percent bracket for small business to as high as 40 percent will

positively affect that small business. I would challenge anyone to

tell me how raising the 35-percent bracket for small businesses to

as high as 42 percent will positively affect that business.

Mr. Secretary, I believe the President, and all of us, want to

grow private sector jobs, so it is hard to see how this dramatic tax

increase, which zeroes in on dynamic job-creating small businesses,

will grow the private sector job base. In fact, private sector job loss

seems more likely.

Mr. Chairman, last year we had a very informative hearing on

the financial effects of the cap-and-trade tax. Then-Congressional

Budget Office Director, Mr. Orszag, testified that cap-and-trade

proposals are that: taxes. The budget reflects that view in how the

cap-and-trade proposal is treated. We need to take a very close look

at this proposal, particularly the tax burden it would place on

American consumers, workers, and businesses. Furthermore, we

need to know the actual amount of revenue the administration expects to raise under these proposals. The President’s budget has it

at $646 million, but it might raise a lot more than that.

Finally, there is a heavy business tax in this budget. We need

to have a dialogue about those proposals. I am proud of all the Finance Committee loophole-closing proposals that Chairman Baucus

and I have developed since 2001, some $200 billion in all, bringing

in money that would not otherwise be there. But we need to be

careful to separate loophole closures from generic tax increases on

business.

One proposal in this budget dealing with treatment of overseas

business income could put American companies at a competitive

disadvantage. Tax increases that ultimately result in American

companies shedding American jobs are not the right way to go.

We have an even bigger fiscal crisis coming. The baby boom generation will be retiring in big numbers in the next decade, and that

is an entitlement problem. It is not derived from the current or future state of the Federal revenue base. Under this budget, the revenue base is set at above the historic average as a percentage of

the economy. Unless the predilections of particular members are to

solve the entitlement problem solely with record levels of Federal

taxation, we need to deal with runaway entitlement spending. I do

not see the 800-pound fiscal gorilla dealt with in this budget.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

10

Mr. Secretary, I want to begin by just complimenting the President for focusing so much on health care reform. The President, Director Elmendorf, and Director Peter Orszag at OMB, have all said

basically the path to economic recovery is through health care reform. That is clear, because health care costs are rising at such a

rapid, rapid rate in America today, affecting, as you said, not only

individuals who pay enormously high health care costs in America

through higher premiums or higher co-pays or out-of-pocket, but

also businesses because of the huge cost of doing business in America, compared with the health care cost of doing business in other

countries, and third, the fiscal hit that State budgets, and certainly

the Federal budget, are taking. I commend you for including a

down-payment on health care reform.

My concern, frankly, though, is the viability of that downpayment and how the budget and how the administration will help

Congress get health care reform enacted, and certainly cost containment and budget questions are front and center. The $634 billion in the budget is basically split: half of that is proposed cuts

on the provider side, Medicare and Medicaid; the other half is basically the 28-percent limitation on itemized deductions.

I am curious, to say the least, about that. Those proposed savings

are generally outside of health care reform. I would hope that the

administration would look to try to find savings within health care

reform, because the reason for health care reform is to help improve quality, but also to cut costs, including fiscal costs. I am just

curious if you might comment on that. I am especially concerned

about the 28-percent limitation. It has nothing to do with health

care. There are other tax provisions that have a lot to do with

health care, but that one does not. I am wondering about the viability of that provision.

So, if you could just talk a little bit about the provisions in the

President’s budget related to how we get health reform passed, and

if you would also focus a little more on how we find savings within

the context of health care reform, because certainly reforming our

delivery system is one way to get savings, and so forth. If you

could.

Secretary GEITHNER. Thank you, Mr. Chairman. I just want to

begin by emphasizing again how important health care reform is

to the American economy, to American business, not just in manufacturing, but small business across the country. As many of you

recognize, and as you said in this area, one of the most important

things we can do is to reduce the rate of growth in those health

care costs. That will bring huge benefits to businesses across the

country. It is a very important thing to do.

What the President has proposed in the budget is, he laid out a

set of broad principles to guide comprehensive health care reform.

You have seen those principles. We want to work with the Congress on a package of proposals that meet those principles, and we

want to do so in a way that is fiscally responsible, that we can afford to do within our means.

How we do that is, we start the process tomorrow with a very

important meeting that brings together leadership in the Congress

with health care experts to try to begin a process of comprehensive

reform.

11

Now, you are right to say that the down-payment in the budget

proposes to allocate revenues from other sources to help finance

this important initiative. We recognize there are other ways to do

this. Many of you in this committee have put forward other proposals. We are absolutely committed to working with you on how

to produce a package of reforms that meets the President’s broad

principles in a way that is fiscally responsible for the country. We

recognize there are more paths to that than what we laid out in

the budget, but we wanted to put on the table—to improve the

credibility of our commitment to do this—concrete proposals that

would achieve that.

The CHAIRMAN. But you are not wedded to the 28-percent limitation?

Secretary GEITHNER. Let me just say on that, this is important

to do. That provision will affect 1.2 percent of taxpayers in America, who account for a modest fraction of charitable contributions.

Our view is, that will have modest effects on actual giving. The

most important thing you can do for overall charitable giving is to

get the economy strong. That has the biggest effect on giving as a

whole. So, we think this is a modest effect. Again, what we wanted

to do is to lay out very concrete proposals to try to make sure that

people understand that we need to do this in a way that is broadly

fiscally responsible.

The CHAIRMAN. Is the administration willing to have a discussion

with Congress on the employee exclusion, health care exclusion?

Secretary GEITHNER. Of course, we are willing to listen to all

ideas that meet these broad principles.

The CHAIRMAN. That is more health-related. It is also very regressive. I might say, if you add it all together, even if you include

the payroll tax component, it is about $300 billion a year.

Secretary GEITHNER. One of the principles in the President’s

budget is, again, to try to preserve our employee-based health care

system. As you know from his comments during the campaign——

The CHAIRMAN. Right.

Secretary GEITHNER [continuing]. That is a very important part

of our system. We would like to preserve that. But again, we recognize there are other ways to do this, and we want to work with you

on how best to put together an effective package of reforms that is

fiscally responsible, that meets the President’s broad principles.

The CHAIRMAN. I appreciate that. My time is up. I just urge the

administration to dig down deeper to try to find viable savings and

concentrate on savings within health care reform. Thank you.

Senator Grassley?

Senator GRASSLEY. Would you skip over me?

The CHAIRMAN. Sure.

Senator GRASSLEY. And then take me as the next Republican, or

just after somebody else.

The CHAIRMAN. Senator Bingaman, you were the first to arrive.

Senator BINGAMAN. Thank you very much, Mr. Secretary, for

your testimony.

Let me ask about the issue of stabilizing the financial system. I

think you made the point repeatedly that the way to do that is to

get credit flowing again. To do that, we need to deal with the trouVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
12

bled assets that are currently on the books of the financial institutions in this country.

The proposal, as I understand, that you have made as to how to

do that is to have this partnership with the private sector. That

would involve Treasury making low-interest, non-recourse loans to

private investors to buy troubled assets. At least, that is my understanding of it. I think that has been criticized. Paul Krugman said

it was an attempt to socialize the losses, while privatizing the

gains.

Could you describe for me how this will work? How does this

plan actually get these troubled assets off of the books of these financial institutions so that they can get on with the business of

providing credit to the economy?

Secretary GEITHNER. Thank you, Senator. Let me just start by

underscoring again how important it is to recovery that we get the

financial system providing credit again. The Recovery and Reinvestment Act will not be as powerful as it needs to be if the small

businesses that would otherwise benefit from those programs cannot borrow to finance the investments they need to support their

broad objectives.

Now, to achieve this objective, we need to do several things.

First, we need to make sure that banks have the capital and resources they need to lend. Now, in a recession, demand for credit

falls, necessarily falls. In a recession that follows a big boom in

credit, credit will fall more than it would otherwise fall.

What we have to do is to make sure it does not fall below that

economically viable level, because if that happens you are going to

see the recession deepen and intensify. But the first really important thing we need to do is make sure the banks have the resources they need to be able to provide credit to the economy. It

is hard for them to do that in the market now because of this broad

uncertainty hanging over the financial system about the depth and

duration of the recession, of the losses that will come, where those

losses will fall across a financial system—and breaking that dynamic is very important. For that to happen, the government has

to be willing, on a temporary basis, with tough conditions, to make

capital available as a bridge to private capital.

The second most important thing we need to do—the basic machinery necessary for credit to work in our country is broken, in

some respects. The pipes are clogged, so the securitization markets

are not functioning. So a critical second part of our program is to

act directly to get credit flowing again, to get those markets starting to open up. The entire small business lending market, the auto

finance market, the student loan market, the consumer credit markets, depend on that machinery. So yesterday we announced, jointly with the Fed, a very powerful program of direct financing by the

government to help get those assets, get those markets starting to

open again.

Now, in addition to that, we are going to lay out, within the next

couple of weeks, details of a new program that would marry government financing—in this case from the mix of the Fed and the

FDIC—alongside some capital from the government, some private

capital, to help provide financing to help unfreeze those markets

for legacy assets. Those markets are now not working, partly beVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
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cause of this uncertainty about the recession and the losses associated with that, but they are not really working because there is

just no financing available. The absence of financing is partly a reflection of the shortage of capital in the system, and there is just

great uncertainty about recession.

So it is good policy, it is good economics, and it is smart for the

taxpayer for the government to be willing to, on appropriate terms,

provide financing to meet that need. By using private capital along

with public capital, you can reduce the risk that the government

ends up dramatically over-paying for those assets, taking risks that

we cannot understand and manage, doing so at greater cost to the

taxpayer.

Our program has these three critical elements, again: a program

of capital as a bridge to private capital, very substantial direct support to get credit markets opening up again, and a carefully designed program of government financing alongside private capital

to help unfreeze these markets for legacy assets. Those are each

necessary and important things to do. Our obligation is to do those

in a way that has the least cost to the taxpayer, the greatest protections for the taxpayer, and greatest overall benefit to get credit

flowing again. That basic principle trade-off is going to guide what

we do.

Senator BINGAMAN. I still have 6 seconds, so let me ask another

question. [Laughter.]

Secretary GEITHNER. I apologize. I apologize, Senator.

Senator BINGAMAN. The assets that you are purchasing—am I

right, though, that we are going to be providing these low-interest,

non-recourse loans to private investors and essentially take on all

of the risk on the down-side, while they get the benefit on the upside?

Secretary GEITHNER. Yes. Understand, these questions are hard

to answer until you see the details of the proposal, but again, the

objective is just the opposite. The objective is to make sure that

there is private capital in there to absorb that loss, to help protect

the taxpayer from those losses, and again, help us have a program

that does not leave us with a risk that we are overpaying for a risk

we do not understand and cannot manage effectively.

The government financing will be provided on sensible terms,

again, terms so that as markets stabilize, conditions normalize, demands for that financing will normally fade away. So the art in

this is to do it in a way that, for the financing the government provides, it is priced so that it is uneconomic, as conditions stabilize,

for private investors to continue to borrow from the government.

They will want to replace that financing, because it will be more

economic, from the private sector.

But you will see. We have laid out the details of our capital assistance program. We laid out the details of this direct lending program to get securitization markets starting to open up again, and

you will see us, in the next couple weeks, lay out the details of how

we structure this fund to achieve the objectives I laid out.

Senator BINGAMAN. Thank you very much.

The CHAIRMAN. Senator Grassley?

Senator GRASSLEY. Thank you.

14

Mr. Secretary, when we met in my office and when you appeared

before this committee in your nominee status, I started our discussion by referring to an op-ed piece that appeared on August 14,

2008 in the Wall Street Journal by Drs. Furman and Goolsbee.

They indicated that an Obama administration would seek to keep

the revenue base at or close to the historic average of GDP. At that

point, CBO reported that over the past 40 years, it has been

around 18.3 percent.

At the hearing that I just referred to, you indicated that, in general, you agreed with Drs. Furman and Goolsbee’s target. Now, the

budget before us stays very close to that average in the first 5

years, but trends about one-half point above the average in the last

5 years, though it peaks at 19.5 the last year.

So my question: do you disagree with those, including some of

the Democratic congressional leadership, who argue that the only

path to fiscal discipline is to maintain record levels of Federal taxation as a percentage of the economy? That is number one. Lastly,

do you recognize that there is a down side to future economic

growth if we return to record levels of Federal taxation?

Secretary GEITHNER. Senator, let me say it this way: it is absolutely critical that, as we move to get recovery back on track, that

we commit to the American people that we are willing to get the

fiscal deficit on a path to sustainability within a reasonable horizon.

Now again, we propose to do that, beginning when we believe we

are confident recovery will be in place, the economy will be growing

again at reasonable rates. But when that happens, it is very important that we bring those deficits down. We laid out in the budget

a concrete mix of spending and tax measures that will achieve that

objective.

Now, as economies recover, revenues rise relative to GDP. You

are absolutely right, that you need to look very carefully at the impact of the overall tax burden on the American economy and the

effect that it has on incentives for investment and savings and

growth. That basic approach underpins the proposals we have

made in this budget.

So I agree with you, it is very important we get the budget down

to a sustainable level over time. If we do not do that, we are going

to be living with lower levels of private investment and higher interest rates. That will be bad for growth. That is a critical imperative. How we do that is important too. We lay out a mix of policies

on the spending side and on the resource side that we think will

get our economy in a position where we are stronger for the future.

Senator GRASSLEY. All right.

A new question. As modified by the stimulus bill, under section

1202 of the code, 75 percent of the gain realized on the sale or exchange of certain small business stock held for more than 5 years

is excludable from gross income, and the remaining gain is taxed

at 28 percent. So, effectively it is a 7-percent rise. However, thenSenator Obama, in his election campaign, called for such small

business corporation stock to be completely exempt from capital

gains taxation. I favor that as well.

An amendment I introduced to do that was not adopted in the

stimulus bill. Now, to the President’s credit and as a follow-through

15

to his campaign pledge, in the proposed budget, the President

again calls for complete capital gains tax exemption on the sale of

that small business stock.

However, I would like to suggest a couple of things that the

President’s proposal could contain to achieve the maximum benefit

from his proposal. I do not know the specifics, so maybe he already

has these in mind: (1) the proposal should make section 1202 gain

not subject to AMT; (2) the proposal should increase from $50 million to $75 million the amount of aggregate gross assets the corporation could have and still qualify as a qualified small business

corporation. This is appropriate, given that the $50-million limit

was set in 1993.

So my questions are two: would the administration support completely exempting the sale of section 1202 stock from the Alternative Minimum Tax; and would the administration support increasing aggregate gross asset limits from $50 to $75 million to

keep up with inflation from when it was originally set?

Secretary GEITHNER. Senator, I just want to begin by saying

thank you for emphasizing the importance of that measure. I believe this is a good budget for small businesses. It is very important to point out that 97 percent of small business income occurs

to people below the $250,000 a year threshold. It is important to

point that out. It is very important to say, as you said, that the

budget proposes a zero capital gains rate tax on investments in

small businesses.

Now, the specific provisions you made, we are happy to consider.

We would like to hear a little more from you about how those could

be designed. Again, we are happy to think about them carefully

and get back to you.

Senator GRASSLEY. I am done, Mr. Chairman.

Let me just suggest to him that this is one area where, if you

want bipartisanship, you are going to get it.

The CHAIRMAN. Thank you, Senator.

Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman.

I listened to your entire testimony before the Ways and Means

Committee yesterday. Unfortunately, you misspoke. This committee, the Finance Committee, did not approve of the way your

taxes were handled. You stated to the Ways and Means Committee

that we approved it.

Secretary GEITHNER. No, Senator. Could——

Senator BUNNING. Yes. Well, you can play both tapes, and you

will find out that you misstated.

Secretary GEITHNER. Senator, what I said is that I had disclosed

fully to the committee and the committee had put that into the

public domain. That is the only thing I said yesterday.

Senator BUNNING. No. The word ‘‘approved’’ came in.

Secretary GEITHNER. Not by me, but——

Senator BUNNING. Yes, by you.

Secretary GEITHNER. No.

Senator BUNNING. Well, I mean, we can get the tapes of both

committees, and you will find that we did not approve. We questioned you on it. Some were very unhappy with it and some just

passed it on. So, that is over.

16

You say the budget does not raise taxes on American families making less than $250,000, but the budget also has a cap-andtrade system that will auction off emission permits to tip the scales

in favor of less-efficient and more costly energy sources. That will

result in higher costs for energy and manufactured goods for all

Americans. How does that not break the President’s promise not to

raise taxes on Americans making less than $250,000?

Secretary GEITHNER. Senator, the President believes, as do a

large majority of the American people, that it is very important

that we reduce our dependence on foreign oil and we move now to

put in place a foundation to encourage greater efficiency in the use

of energy and greater use of clean energy technologies. Now, you

cannot do that without changing the incentives that Americans

face for how they use energy. The cap-and-trade proposal——

Senator BUNNING. Well, we could argue about how we are going

to get there.

Secretary GEITHNER. True. But I think the important point I

want to make is that to do that requires that you change the incentives for how Americans use energy. Now, in the President’s proposal, which of course we have——

Senator BUNNING. We have been doing that in 2005 and 2007.

Both the two energy bills that we passed did exactly what you are

proposing.

Secretary GEITHNER. Well, we are going to have to do dramatically more in that area, I think, to achieve this broad objective.

Senator BUNNING. I agree, because all of the things are not included.

Secretary GEITHNER. Right. And what the President proposes is

that we work with Congress on a comprehensive cap-and-trade proposal. As you know, the resources that that proposal will raise are

going to be devoted to making the Making Work Pay tax cut permanent—this will affect 95 percent of working Americans—to devote additional resources to helping facilitate this transition to

cleaner energy technology, and, if it raises additional resources, we

will devote those to helping to directly affect those individuals who

might face higher energy costs if they do not change their behavior

of how they use energy. But we believe that over——

Senator BUNNING. Then the ability to trade or to auction off

emission permits is a way that the less-efficient are more rewarded

than the more-efficient, because they can go and still not comply

and buy the emission permits that are available.

Secretary GEITHNER. Senator, the cap-and-trade system has been

applied successfully in our country, in parts of the country, to reduce acid rain. It has been used in other countries with substantial

effect, too.

Senator BUNNING. Well, but there’s a cost involved there.

Secretary GEITHNER. But——

Senator BUNNING. Because I live in Kentucky, so I pay the cost.

Secretary GEITHNER. Well, Senator, again, what this proposal is

designed to do is to change the incentives Americans face for how

they use energy so that——

Senator BUNNING. I have one more question. Go ahead.

Secretary GEITHNER. All right. So that, again, we make more

progress in energy independence and improving energy efficiency,

17

and facilitating a transition where we are relying much more heavily on clean technologies.

Senator BUNNING. All right. Thank you.

I have one more question, and it involves LIFO. This will disadvantage American companies, such as retail companies, and particularly companies in my State of Kentucky, the bourbon industry.

LIFO minimizes artificial inflation gains and accurately reflects replacement costs.

One example of how it is used, in the Kentucky bourbon industry, whose aging process, under Federal law, requires that bourbon

be held in inventory several years before it can be sold, repealing

LIFO would harm U.S. companies and favor their foreign competitors. At a time of economic distress when we are trying to encourage more U.S. manufacturing, the repeal of LIFO moves in precisely the wrong direction. Why would we want to repeal LIFO

now, after it has been in place for more than 7 decades?

Secretary GEITHNER. Senator, I have heard a lot of concerns

about this specific provision. There are a significant number of tax

professionals who believe this is good tax policy, good economic policy. But I have heard from many people a lot of concerns about

what impact this might have, and we are going to have to look

carefully at those concerns and the extent to which we can mitigate

those concerns. But I understand them, and would be happy to

spend more time understanding specifically the concerns you are

worried about in terms of how they affect particular industries.

Senator BUNNING. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Secretary, I strongly support the views Chairman Baucus

has expressed today, that starting tomorrow at the health care

summit, put these Federal health care tax rules on the table. It is

clear to me that Democrats and Republicans alike agree that these

rules are a $250-billion monument to regressivity and inefficiency.

If you do what Chairman Baucus has suggested today, it seems

to me you get a two-fer. One, you get savings immediately on the

health care side while still protecting the middle class and honoring the President’s promise that people can keep the coverage

they have, and second, you are going to get savings in the future

because you change people’s behavior, so in the future President

Obama and other presidents will not have to come back and say,

we need money from non-health care accounts to fund health care.

Now, you have said you are going to study this. That is constructive. But what I would like to know is, do you personally share the

view that these Federal health care rules, as constituted today, are

regressive and promote inefficiency?

Secretary GEITHNER. Senator, what I personally believe is, it is

critically important for our country that we come together on a

comprehensive health care reform package that meets the broad

principles the President laid out, and does so in a fiscally responsible way.

Now, you and your colleagues have shown great leadership in

identifying a very carefully designed way of meeting that objective

within the framework of the health care system. As I said to you

18

before, and I will say it again now, we will look very closely at

those ideas and those proposals.

Senator WYDEN. It is not about looking at my ideas, Mr. Secretary. Economists, Senators—I mean, it is almost a universally

held opinion now in terms of the scholarship in this area, that

these rules are regressive and promote inefficiency. I just want to

know if you disagree with those kinds of arguments.

Secretary GEITHNER. Well, I——

Senator WYDEN. Whether it is Milton Friedman——

Secretary GEITHNER. Right.

Senator WYDEN [continuing]. Whether it is Bob Greenstein. I

mean, literally, across the political spectrum, people agree with

this.

Secretary GEITHNER. Senator, I agree, there is broad support

among economists——

Senator WYDEN. Great.

Secretary GEITHNER [continuing]. For what you laid out. I agree

with that. I think what we want to do is fix this. There are a lot

of things we are going to have to change. There is lots of room for

improvement, lots of ways to solve this. We want to work with you

on how to do it.

Senator WYDEN. Very good.

Let me ask you a question about taxes. In the last decade, there

have been thousands and thousands of changes in the tax law. It

comes to three for every working day now. It is very harmful to

businesses who need certainty and predictability to grow to face

this relentless blizzard of tax law changes. Are you at all concerned

about how the effect of the many more tax changes you propose

now will impact businesses that want to grow in 2009, knowing

that they are going to face more proposed changes in 2010 when

tax reform comes along?

Secretary GEITHNER. Senator, I do agree with you that there are

a wide range of aspects of our tax code that add to uncertainty, and

that uncertainty makes it hard for businesses to make decisions

long-term. I completely agree with you about that. As we work together towards ways to improve our overall tax system, tax code,

addressing that question will be a critically important thing.

The most important thing we face today is to get recovery on

track, figure out a way to make these long-term improvements in

health care, education, and energy infrastructure in ways that are

fiscally responsible. The budget proposes a very comprehensive set

of changes designed to achieve that. It is not going to satisfy everybody. It will come with other concerns. But we think, as a whole,

this package of changes will improve our fundamentals as a country and leave the economy in a stronger position going forward.

Now, the budget does not solve all problems. There are a whole

range of other features of our tax code that are not addressed in

this budget that we would like to build consensus on addressing.

I hope we have the chance to begin that process with this committee and your colleagues in the Congress.

Senator WYDEN. I hope you will also say, with your tax changes,

though, that you are really setting the table for tax reform in 2010,

because you look at all the changes people have gone through just

in 2008 and 2009. If you are sitting somewhere in Montana and

19

Oregon, you are trying to grow your business, you have already

had thousands that you have had to assimilate in the last few

years.

Then you are facing more proposed in 2009, with tax reform coming at you in 2010. The first thing you do is, you say I am going

to be a little cautious about investing, knowing that perhaps what

I am doing today may be affected by changes that are coming up

literally in a matter of months.

Secretary GEITHNER. True. But I think the overall impact of

these changes, again, are good for business, they are good for investment, and we are being very clear that we are not going to

raise taxes until recovery is firmly established, and we are very

clear about what taxes will change as we emerge from recovery. So,

you are right that certainty is very important. I am sure we can

do better. I hope that we are beginning to lay that foundation for

broader reform.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much.

Senator Enzi?

Senator ENZI. Thank you, Mr. Chairman. I, too, want to emphasize how pleased I am that there is health care reform emphasis

in the budget, and also some recognition that there are some

health care reform costs involved in it. I also want to say how

much impressed I am with the leadership of Senator Baucus on

health care reform. The Senate has been involved in it for some

time.

But that is not where I am going to ask my questions. I have another favorite area, which is workforce training. I have been trying

for 4 years to get some more flexibility built into workforce training

so that we could train people to some of the higher-skilled jobs that

we are now exporting to other countries. It ties in with the goal of

creating or saving 3.5 million jobs, a marvelous goal. Now, I understand creating jobs. What I wondered was how you rate the saving

of jobs. What is a saved job?

Secretary GEITHNER. Well, that is a loss avoided, or a rise in unemployment avoided by getting growth back on track. Again, without a very substantial program of investments and tax incentives,

we would face the prospect of a much deeper recession, much higher levels of unemployment. So the President’s commitment is

framed that way because our first obligation, again, is to reduce

the risk of further job losses and lay a foundation for recovery in

employment.

Senator ENZI. But are all jobs not kind of tenuous at the moment, so all 130 million, or however many there are, are being

saved by what we are doing?

Secretary GEITHNER. Well, I am not sure I fully understand what

we are debating. I think that you are right, the economy is going

through a——

Senator ENZI. I am just asking for more emphasis on the created

jobs rather than the saved jobs.

Secretary GEITHNER. Yes. I——

Senator ENZI. So that we are expanding the skill levels of the

people whom we are employing.

Secretary GEITHNER. Yes.

20

Senator ENZI. And I hope that the administration will take a

look at that Workforce Investment Act to get that flexibility in

there, because those are the people who are without jobs. The ones

who still have jobs that are tenuous, we need to do everything we

can to save those. But——

Secretary GEITHNER. We want to save them, we want to create

more jobs, and we want to make the average American worker

more productive in the future, not just through things like worker

training, but also by improving basic quality of education outcomes.

I absolutely share that objective, and we would be happy to work

with you on that specific provision.

Senator ENZI. Thank you. I am just trying to keep the transparency in there.

Secretary GEITHNER. All right.

Senator ENZI. I need to talk to you about a very small part of

the budget, but one that affects a number of States, including the

chairman’s State. About 3 years ago, we had a tax that was about

to expire, and we put together a rather tenuous group of people to

extend that tax and solve some other problems, one of which was

the problem of orphan miners’ health insurance. That orphan

miner does not mean they do not have parents, it means that their

company no longer existed. But we were able to save that.

We were able to move up the amount of time that it took to do

reclamation in some of the States that had very little money coming in, and we encouraged the other States that had been responsibly taking care of their problem to look at some other things, like

more efficient energy, cleaner energy. I think the States have been

doing that.

But there is a provision in this budget that now jerks the money

away from those States that had been responsibly doing it and

ends their alternative, clean energy, or additional energy projects.

I am hoping you will take a look at the history and see how tenuous that was, and see how widespread it is. It is such a small part

of the budget, I am sure we can work out something. But all I am

asking is that you take a look at the history and see what——

Secretary GEITHNER. I will take a look at it and come back to you

with a response.

Senator ENZI. Thank you. In my remaining few seconds here, I

am going to express some concern for small businessmen. I think

that quite a few of the people that have already been in this

$250,000 tax level are ones who have S corporations, limited liability corporations, single proprietorships, other businesses where the

money from their business flows right to their bottom line on taxes,

even though they have to plow a lot of that back into their business

to keep their business going. It will be a huge blow to them, and

their businesses, and their ability to stay in business if the housing, the charitable giving, and the increased taxes hit them.

Is there any way that we can exclude the small businesses on

this? Is there any way we can give them some kind of relief? I am

just asking.

Secretary GEITHNER. Senator, as I said before, our estimates are

based on the proposals in the President’s budget to allow the marginal tax rates at the very high end, above $250,000, to return to

their 2001 levels. That specific proposal, we believe, will affect a

21

very small percentage of small business owners. The estimates that

I was given yesterday by independent analysis were roughly 3 percent of small business owners.

I think it is important that we look at the overall impact, again,

of these proposals in the budget on the basic environment in which

businesses operate. I think the combination of the fact that most

small businesses will see no increase in taxes, or some will see a

reduction in taxes, combined with what we are going to try to do

to health care costs, combined with the other broad incentives for

investment when we were creating this budget, is a strong and

powerful package of incentives because we believe, as you do, that

small businesses are a critical source of not just innovation and vitality in our economy, but of job growth.

So it is a critically important objective, and we are open to work

with you and your colleagues on other ways, including the ones

that Senator Grassley suggested, and we will look at all of the proposals to help meet that, because we share the importance of this

objective.

Senator ENZI. Thank you. My time has expired.

The CHAIRMAN. Thank you very much, Senator.

Senator Nelson, you are next.

Senator NELSON. Mr. Secretary, good morning to you. On the

question about folks not paying what they owe in their taxes, particularly some of the banks that have used the offshore tax

schemes—and that is estimated somewhere in the range of $40 to

$70 billion a year that they are not paying—that is a heap over the

10-year budgeting period that we have, $400 to $700 billion.

A recent GAO study showed that of the 100 largest U.S. publicly

traded corporations, that 83 have subsidiaries in offshore tax havens. For example, Citigroup, which by the way is one of the major

recipients of bailout funds, has 427 subsidiaries in tax havens, and

there are 90 of those subsidiaries in the Cayman Islands alone.

What can we do? And I do not say ‘‘you,’’ I am saying ‘‘we.’’ I

have filed a bill with others, including Senator Levin, to address

this issue. But what should the U.S. Government do to close these

loopholes before we continue to ask taxpayers to bail them out,

when they are not paying their fair share of taxes?

Secretary GEITHNER. Senator, I share your concern, and I think

you are right to point out it is not fair to people who pay their

taxes for people to continue to have the ability to evade U.S. taxes

by taking advantage of offshore tax havens and a range of other

provisions in current law which makes it possible to evade U.S.

taxes. That is why, in the budget, there is a clear commitment by

the President to come to the Congress with a comprehensive set of

proposals for reducing international tax avoidance.

As part of that, we are going to have to bring a much more ambitious effort to deal with offshore tax havens. That is not going to

be enough, though. There is a range of other things that are in the

tax code now which create incentives to shift investment jobs overseas, create other opportunities to evade U.S. taxes, and we are

going to come and give you the best set of proposals we think we

can come up with to try to meet this broad objective.

I think you are right, it is not fair, particularly given the scale

of the fiscal challenges we inherit and the important long-term inVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
22

vestments we are going to need to make. The only way to get ourselves back to a fiscally responsible path is do a better job of dealing with this challenge.

Now, you know in the budget there is a very substantial request

for improved enforcement resources. The IRS and the Commissioner are going to be in a position to come and explain in more

detail how he plans to use those. But we are going to look at the

full range of ideas, including the ones you have referred to in your

bill. Of course, this committee has shown great creativity and leadership in this area in the past, and we would like to build on those

suggestions.

Senator NELSON. That is wonderful news and a refreshing attitude.

Mr. Chairman, this, of course, will be a matter in front of your

committee, and I value your leadership on addressing these tax

loopholes.

The CHAIRMAN. It is a very important question, and I am very

glad, frankly, this is being addressed more forcefully by this administration.

Senator NELSON. And very forcefully.

The CHAIRMAN. It is a big problem. Yes.

Senator NELSON. And I am very appreciative.

The CHAIRMAN. Right. There are lots of ideas and a lot of them

sound good on the surface, but the main point is to be effective in

closing down these loopholes.

Secretary GEITHNER. I think the hard thing is, of course, everybody is for closing the tax gap.

The CHAIRMAN. Right.

Secretary GEITHNER. But when you look at the specifics, sometimes that enthusiasm fades. So, we need to make sure that we are

putting together as comprehensive and as carefully designed a set

of proposals as we can. We have no alternative but to do a better

job in this area.

The CHAIRMAN. Now is the best time to do it.

Secretary GEITHNER. Right.

The CHAIRMAN. Thank you.

Senator NELSON. May I, in my remaining time, Mr. Chairman,

just ask one more question?

The CHAIRMAN. Certainly.

Senator NELSON. What we have, as I see on the issue of housing,

we are having voluntary loan modifications made by banks, but

they are putting them back into a loan modification. It may be another adjustable rate mortgage that, when the time comes, is not

going to solve the problem. We have this kind of revolving situation

that is delaying the inevitable.

The housing plan that you put forth has incentives for voluntary

modifications to those fixed mortgages. What can we do to put the

protections in there to help the homeowners from not being forced

or encouraged to sign up for another mortgage that they cannot afford?

Secretary GEITHNER. You are absolutely right that many of the

modifications that have been done to date do not fundamentally

improve the overall debt burden of the borrower and will still leave

23

them in an unsustainable position. What this program does is try

to address that.

So the program provides a powerful set of incentives to produce

more affordable mortgages for people who meet these carefully designed eligibility tests, because we do not want to be devoting taxpayer resources to support homeowners who do not need the assistance, nor do we want them to be directed to homeowners who really knowingly borrowed dramatically beyond their means.

But what this proposal does is provide, as I said, a powerful set

of incentives, incentives of both types—what I might say, persuasive force and some economic inducements—to provide substantial

improvements in affordability for people who meet this important

test, where, with those changes, you are going to be put in an economically viable position, able to stay in your home in that case.

Now, that is not the only thing this plan does. Can I just, Mr.

Chairman, quickly——

The CHAIRMAN. Briefly.

Secretary GEITHNER. I am sorry. This is very important. Critical

and important to the rest of the program the President announced

is to try to bring mortgage rates down for all Americans. The role

that Fannie and Freddie play in our housing market is a critical

part of that.

We announced a significant set of measures to achieve that objective and, for the first time, we let a new program that would help

Americans that have somewhat higher than typical loan-to-value

ratios take advantage of the reduction in mortgage rates already by

refinancing, where they previously did not have the opportunity to

refinance. Those things, together, we think will help address this

acute crisis that is causing so much damage.

The CHAIRMAN. Senator Snowe, you are next.

Senator SNOWE. Thank you, Mr. Chairman.

Mr. Secretary, the President said that, in order to have a full recovery, then you have to really resolve the credit crisis. You have

acknowledged in your statement very emphatically that the credit

crisis has not been resolved, that the dynamic continues to be that

the banks simply are not lending. That is difficult for my constituents, and I think it is true of most Americans, as to why the banks

are not lending. I do not know if we know what they are lending,

if they are lending, which banks have been participating in the top

program, are refusing to disclose the data on whether or not they

are lending.

So I would like to ask you exactly, what do you know, what can

you tell us, and more importantly what can you tell Americans, in

terms of, when do we expect that this credit crunch is going to be

resolved, or at least eased? Because at this point there is no discernible evidence on Main Street, certainly in my State. I think

that is true across the country. That is deeply disturbing, frankly,

because months have gone on. We have obviously given $250 billion

to banks specifically for this purpose, not to mention the multitrillions in all venues to rejuvenate the economy.

So what can you tell us in this regard about, what is your

timeline and measurement for the credit crisis to ease, and whether or not the banks are disclosing exactly what they are doing with

this money?

24

Secretary GEITHNER. Senator, this is critically important, and everything we are trying to do to get the economy back on track depends on trying to make sure that our banks are lending and credit

markets start to open up again.

As part of the program we have initiated, we are going to put

in the public domain much more detailed reporting, bank by bank,

by TARP recipient, what is actually happening to their lending and

overall balance sheets, so you will be able to see, the American

public will be able to see, for those institutions that get assistance

in this context, what is actually happening to lending.

As a condition for new assistance, we are going to make sure

that they have to give us a report in advance that explains how

they are going to use that assistance to increase lending above the

levels that would otherwise have prevailed, and you will be able to

see that on an ongoing basis.

Now, across the country, in our very diverse mix of banking institutions, you have some institutions that were not part of the problem and are strong and are going to expand lending and are growing, but you have other parts of the system where they are going

to need more capital in order to help support recovery, and our program is designed to provide that.

Now, you are absolutely right that this is still a deepening recession and a deepening credit crunch, but I just want to point out

that many costs, many measures of borrowing costs, have come

down. Mortgage interest rates have come down, borrowing costs are

lower for banks than they would otherwise have been, and you are

starting to see some aspects of the corporate lending market start

to open up again.

But we are at the beginning of that process, and it is going to

take more efforts by us to do that. I think the best measure that

you are going to see of improvement is, again, when those borrowing costs start to come back down to more normal levels. That

will be the critical test of success, and that is going to take more

time, but it is going to require more carefully designed, appropriately conditioned capital from your government, as well as a

much more powerful set of direct credit supports to the markets

that are critical for consumers and small businesses, and that is

what we are doing.

Senator SNOWE. Well, are you planning to release the list of all

450 banks that have received assistance under the TARP program,

and what they have done with that money?

Secretary GEITHNER. Well, we produced the report——

Senator SNOWE. Going retroactively as well as prospectively, all

the banks?

Secretary GEITHNER. Right. Well, we are putting all the terms of

past assistance on the website for people to see it, to be able to see

the recipients and the precise terms. We released just last week a

new report that looks at the largest banks in the country, which

account for most of the lending, so you can see on, I think it is a

monthly basis, exactly what is happening to lending by them, detailed by institution. And going forward, as a condition for any new

assistance, you are going to see much more detailed reporting requirements, so, again, you and your colleagues and the American

25

people will be able to see, bank by bank, what is actually happening.

Now, again, it is very important to point out that in a recession,

particularly after a huge credit boom like this, demand for credit

by even the strongest companies will slow, and you are seeing that

happen. What we need to do is to make sure that the credit crunch

does not deepen the recession. That requires more action by the

government because, in a crisis like this, the private sector is not

willing to take risks that would otherwise be economic.

Senator SNOWE. Well, it is going to undermine the value of the

stimulus plan once it is under way.

Secretary GEITHNER. Absolutely.

Senator SNOWE. And you said yesterday that this crisis will be

much worse if we do not move quickly. I think we have moved very

quickly on all fronts here since this whole scenario unfolded last

fall with, some say, exposures up to $9 trillion. So I do think that

it is absolutely vital that this gets under way, and you have projected growth for 2010, or at least the Office of Management and

Budget, of 3.2 percent.

So obviously that is predicated on certain assumptions of what

is going to occur this year, so that is why it is important to let the

American people, and all of us, know exactly when you think that

is going to unfold, because that is twice the growth rate that the

Congressional Budget Office is projecting for 2010. That is a quantum leap from a 6.2-percent contraction in this last quarter and

minus 1.3 percent projected for this year.

The CHAIRMAN. Senator Cantwell?

Secretary GEITHNER. You are absolutely right. The economic recovery depends on financial recovery.

Just one thing about the forecast.

The CHAIRMAN. Very briefly.

Secretary GEITHNER. The administration’s forecast is within the

range of estimates that CBO has produced to try to measure the

effect of stimulus on the forecast. It is also within the range of private forecast estimates for 2010, and most private sector economists expect to see the economy start to recover in the second half

of this year, but it will depend in part on how quickly we move,

not just to get stimulus in place but, as I said, to get more support

into the financial system again.

The CHAIRMAN. Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman. My colleagues

have asked so many questions, Secretary Geithner. I feel like I

have many myself, and I could go either talking about the bailout

or talking about the tax code, so hopefully I can get through a couple of these.

First of all, AIG has been bailed out 4 times since September, to

the tune of $160 billion: September 16th at $85 billion; October 8th

at $37 billion; November 10th at $40 billion, I believe; and then recently, March 2nd, $30 billion, is the newest proposal.

Why has Treasury not come forward and said who are the affected counter-parties, the people who are most affected by the collapse, so that we know why we are doing this?

Secretary GEITHNER. Senator, thank you for asking this. AIG got

itself in this position because there was no effective oversight,

26

where it took on enormous leverage in a large hedge fund attached

to a set of very well-designed, well-performing insurance businesses. This company operates in countries around the world. It is

an enormously important entity in this context. Its failure, in the

judgment of your government, would have caused catastrophic

damage to the savings of Americans, to interest rates, to pension

values, and you would have seen—and I share this judgment—

much greater damage than even we saw with the failure of Lehman.

Now, the world——

Senator CANTWELL. If you could just clarify more on that, because you are saying basically it would have been bad for America.

What I want to know is, who would it have been bad for and how

would it have caused the problems for common Americans and

their savings?

Secretary GEITHNER. The biggest effects would have been not on

the direct counter-parties to the affiliate of AIG that sold a bunch

of credit protection. The biggest effects, and the most troubling effects, like what you saw in Lehman—but I think it would have

been bigger in this case—would have been on broader confidence

in the financial system, in asset values, in interest rates, and in

willingness of people to take risk in exposure to financial institutions. That would have caused much more damage. That is harder

to quantify, harder to understand.

But in the AIG case it is very important, because millions of

Americans, here and around the world, depend on AIG for insurance policies and a range of different types of savings products. So

the judgment your government made in that context was—and I

think it was the right judgment—that the effect on confidence

would have been very dramatic, I think more dramatic than even

in the case of the failure of a major investment bank.

Senator CANTWELL. Well, Secretary Geithner, with all due respect, I think that is the question of the day: confidence in the

plan. The plan is slowly dripping out and people do not understand

where it is going. They do not understand the AIG bailouts and

where and who it was benefitting, they do not know what specific

industries and companies we were helping to preserve those opportunities for Americans, and they do not understand the plan overall.

Secretary GEITHNER. Senator, just again on AIG, because it is

very important on AIG, the world has gotten dramatically worse

since September of 2008. You are seeing that across the financial

system, across life insurance companies generally. The world is

more fragile today even than it was then, and therefore the consequences of allowing a disorderly failure of AIG would be at least

as damaging today as it was then.

It is our judgment that the best way to protect the American

economy from that risk is to stabilize this institution and let it be

in a position where it can pursue a restructuring over time that

leaves us, and the taxpayer, better overall. That is why we are

doing this, because of those broader benefits.

We believe this is the least-costly way to protect the economy

from that. I wish it were not so. It would be much better for us,

and for you, if we had another alternative to this path that would

27

contain the damage to the economy as a whole. But that alternative does not exist.

Senator CANTWELL. I am not sure that we are getting to the

point that I wanted to get to, so I think what I will do is I will

skip to something else. Then maybe you and I could have a longer

conversation about that. But I do think that people really do want

to understand the specifics behind that particular bailout, and

more details about the plan.

This particular proposal in the budget on taxes. I have a question

in the sense that there is a lot of junk in the code. My colleagues

have been bringing that up. Some people do not pay their taxes,

but obviously there are a lot of loopholes. Some other people have

been bringing that up.

Why not look at a broader approach to the tax policy than coming in with this proposed change to the marginal rates? Are you

convinced that we would have to have this high of a change to the

marginal rates if, in fact, we would have taken a more systemic approach to this problem? Coming from software, when you have errors or bugs in the code, it is a problem. It affects everything in

the system.

That is where we are today. We have a lot of errors and a lot

of bugs in this code, and how do we know that this plan that you

are proposing would not be less impactful if we had actually taken

a larger approach to closing some of those and cleaning up some

of the problems in the tax code, something I know the chairman

has talked about, doing a major overhaul of the system.

Secretary GEITHNER. Well, we do propose a lot of changes in the

tax code, particularly things that allow people to take advantage of

ways of avoiding U.S. taxes. So we are proposing a lot of changes

to those. But you are right.

As I said earlier, we are not proposing, in this budget, comprehensive tax reform, but we would like to begin the process of

working with you and your colleagues on other changes we can put

in place, not just to simplify the tax code, not just to provide more

certainty to business, not just to make it more fair, not just to

make sure it provides better incentives for growth, but so that we

are making a more efficient overall system. But we could not do

that kind of comprehensive reform in this budget, so we would like

to begin that process with you. We are not claiming, of course, in

this budget to try to take on those myriad of other problems, but

we would like to begin that process with you.

The CHAIRMAN. Thank you, Senator.

Senator Stabenow?

Senator CANTWELL. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator STABENOW. Thank you. Thank you very much, Mr.

Chairman.

Mr. Secretary, welcome. I would also reiterate what our chairman has indicated about health care, and I appreciate the focus

and how critically important this is to the economy and to jobs in

the United States, and certainly to manufacturers as well.

I do want to take a moment. A lot of important questions have

been asked today, a lot of issues on our minds, but I am going to

zero in on something—not surprising to you—which relates to the

28

auto industry and auto financing and people being able to get loans

and so on. And I do want to, just as an aside, indicate, with all of

the dollars that Senator Cantwell was talking about being asked

for for AIG, the relatively small amount of money that General Motors and Chrysler are asking for by April of $6.5 billion looks like

a rounding error compared to AIG and a number of other things,

and will keep 3 million people working in this country. So, editorial

comment.

But I do want to talk to you about the credit crisis that has

brought us to where we are, because it is a global credit crisis that

has made it impossible to raise capital for the auto industry, or

manufacturers in general, to invest in the technology we want

them to invest in, to get to the electric vehicles, or to even do daily

operations. We saw yesterday in the papers that Japan is going to

move forward with money for Toyota because of the global credit

crisis. So all of the companies in the world are facing this same

challenge, regardless of how people feel about individual companies.

But our dealers and suppliers do not have the credit that they

need to finance inventory, as you know, or to cover capital costs.

Financing companies lack funds to support dealers, to make consumer loans. With the consumer demand going down for buying the

second-largest purchase that a family buys, which is their automobile, and the economic crisis we have today, it is really a perfect

storm.

So I appreciate what you announced yesterday with the TALF

program, the Term Asset-Backed Securities Loan Facility program,

because it is very important to get credit flowing again.

However, we have a problem. I do not know if this is something

that you yet have been focused on, but the reality is that the program, as put forward, requires a AAA rating from two rating agencies. Given the uncertainty and the ongoing discussions right now

with the industry and with the government, some of the rating

agencies have declared they cannot affirm or assign a AAA rating

for securitizations of dealer floor plan financing lines, which obviously is a very serious issue at this point. In other words, they cannot use it. Even though you have announced it, they are not able

to use it. So I am wondering, how will TALF help issuers of dealer

floor plan securitizations that cannot meet this requirement at this

time?

Secretary GEITHNER. Senator, thank you for raising that. TALF

will help, but it is not going to solve all these problems. I think

that what we need to do, and what we are working on, is trying

to make sure that these companies lay out a restructuring plan

that puts them on a path of viability without government assistance over the longer term. That is a necessary condition for addressing this crisis in the automobile industry. We are also looking,

though, directly at whether we can, as part of that, do other things

to help get directly at these financing problems that are affecting

both suppliers and dealer inventory financing.

So we are looking very carefully at a range of different ways to

address that. You are right to say that we need to look at that

alongside trying to help facilitate the kind of substantial restructuring the industry needs as a whole.

29

Senator STABENOW. We know that the challenge for them is they

have to keep changing their numbers downward in terms of auto

sales. That is what is driving their ability to put forward various

options.

Secretary GEITHNER. Right.

Senator STABENOW. And you have seen the options. So the question of whether or not this new financing for auto loans can actually go to financing arms is absolutely critical. When we look at the

fact that the TALF program is using 3 rating agencies, SEC relies

on 10 different rating agencies. So I am wondering why the Fed is

choosing 3 versus 10, and would that not give us the ability to

more quickly help in this area if we were to use a different approach on the rating agencies?

Secretary GEITHNER. Well, I will pursue that specific question

with my colleagues at the Fed and have someone get back to you

on whether that is something we can address. But I think the really important thing is, we are going to have to look more comprehensively as we try to see whether we can responsively help facilitate the kind of path to long-term viability that is going to be

critical for the industry as a whole. But addressing the financing

things, you are right, is absolutely central.

Senator STABENOW. Thank you.

Thank you, Mr. Chairman.

Senator HATCH. Thank you.

I am next, according to the chairman.

Mr. Secretary, welcome to the committee. I do not know how you

can do all your work and keep testifying on Capitol Hill like you

have. It just seems to me it would be better to keep you working.

But now that you are here, we might as well ask at least some

tough questions. You stated that the President is determined to cut the $1.3-

trillion deficit by at least half in 4 years. The Congressional Budget

Office estimates that, if we did nothing at all, the deficit would decrease by 90 percent. Now, how can President Obama claim that

he will decrease the deficit by half when the deficit will automatically decrease at a much higher percentage?

Secretary GEITHNER. Senator, I have not looked at the details of

that study, but I do not think it is the right way to think through

this.

Senator HATCH. I think you need to look at the details.

Secretary GEITHNER. Yes. I will look at the details of it.

Senator HATCH. If that is true, why are we going through this?

I mean——

Secretary GEITHNER. Framed that way, it cannot be right.

Senator HATCH. Well——

Secretary GEITHNER. If we do not get growth back on track, we

will face higher long-term deficits. The fiscally responsible thing to

do now, if you worry about long-term sustainability, is to do what

we can to get recovery established and the economy going again.

Senator HATCH. All right. I will accept that. I would like you to

look at it, and would like you to answer that for me and get me

your criticisms of that particular approach.

Now, you indicate in your testimony that you recognize that

many small businesses are operated as sole proprietorships or

30

through partnerships or other flow-through entities; therefore, you

obviously realize that the individual tax rates have a profound effect on those businesses. Your testimony says that 97 percent of

small businesses would not be affected by the President’s plans to

increase the tax rates on single individuals making over $250,000,

or families making over $400,000.

Now, it may be true that a high percentage of small businesses

may be unaffected by these changes, but is this not because there

are so many millions of small businesses that are very small and

have just one, or maybe a handful, of employees? Now, if you were

to analyze the income earned by small businesses, would the answer not be quite different?

The data I have seen, which is from the Treasury, from your organization, indicate that between 7 percent and 9 percent of small

businesses pay tax at the top two marginal rates, but that these

taxpayers account for between 57 percent and 72 percent of flowthrough business income, and between 75 percent and 82 percent

of taxes. Of course, these larger small businesses are the ones with

most of the jobs, too.

Now, can you and the administration honestly tell me that you

believe the proposals that would raise the tax rates of individuals

will have no negative effects on job retention or creation of these

small businesses that pay taxes as individuals?

Secretary GEITHNER. Senator, I would like to get back to you

on those specific comparisons and give you a comprehensive

analysis——

Senator HATCH. Well, see, I think it is one thing to say that 97

percent are really not going to be affected when 5, to 7, to 9 percent

are almost everything it happens for.

Secretary GEITHNER. Right. I want to do this carefully. But I do

believe, and I think it is important to point out, I think this budget

is good for small businesses. It has some very important beneficial

effects for them. The best thing we can do for the economy as a

whole is to get growth back on track, and a critical part of that is

to try to address these crippling health care costs. So it is important to look at the entire package, not just the tax provisions.

Senator HATCH. No, I agree. But I also agree that you are oversimplifying the small business aspect, and I would like you to clarify that.

Secretary GEITHNER. Right. I will come back to you on that.

Senator HATCH. I think you need to clarify that.

Now, one last question, because my time is running out. In your

testimony you state that the Obama administration inherited the

worst fiscal situation in modern American history. From 2003 to a

month ago, you were president of the Federal Reserve Bank of New

York. Now, I am happy to have you here, but this is a tough question. You were president of the Federal Reserve Bank of New York,

which implements monetary policy, supervises and regulates financial institutions, and helps maintain the Nation’s payment systems.

Now, starting in September 2008, bank after bank, most of them

headquartered in New York, began to fail: Lehman Brothers, Bear

Stearns, AIG. The list goes on and on. Now, I bring this up because

the administration keeps beating that drum, that it ‘‘inherited

failed economic policies from the past 8 years.’’ Now, the economy

31

for the past 8 years, while not strong, was at least moderate and

only began to fail in the past couple of months.

So I can only assume that the administration is referring to the

recent collapse of the financial markets. As head of the Federal Reserve of New York, were you not an integral part of that failed economic policy? Is it not a little bit unfair to blame this all on the

prior administration? Except, you raised the issue that there could

have been more oversight. But you were the overseer.

Secretary GEITHNER. Senator, thank you for raising this. Just a

couple of things. I have said before——

Senator HATCH. These are important things to me.

Secretary GEITHNER. Absolutely. I have said before, before this

committee, and am happy to say it again now, that there were systematic failures in supervision and oversight across our financial

system.

Senator HATCH. It is not fair to blame the prior administration

for everything.

Secretary GEITHNER. And a lot of things contributed to this crisis. A lot of things, not just on the financial, but on the fiscal side,

contributed to this. But I just want to point out, just because you

mentioned this specifically, the Federal Reserve was not given responsibility for overseeing investment banks, insurance companies,

hedge funds, and non-bank financial systems that were a critical

part of making this crisis so intense. But you are absolutely right.

Senator HATCH. You seem to be blaming us up here.

Secretary GEITHNER. No, no.

Senator HATCH. Wait. I think you are right.

Secretary GEITHNER. No.

Senator HATCH. I think we could have done a better job.

Secretary GEITHNER. Well, I think we all could have done a better job, and we are going to have to do a better job. We are going

to come with comprehensive reform of the oversight structure of

our financial system, because we have this deep obligation, which

I feel very strongly about, to make sure that a crisis like this does

not happen again. But it is going to have to require comprehensive

changes in how we oversee, much more conservative oversight of

the core part of our system, and it is going to require better supervision of banks as well.

Senator HATCH. All right.

Senator Carper is next. Thank you very much.

Senator CARPER. Thank you, Senator Hatch.

Secretary Geithner, welcome. You are a busy man, and I know

you have a wife and children. Do you ever get to see them?

Secretary GEITHNER. I do. Thank you very much. They are very

important to me. I see them as much as I can, less than I would

like.

Senator CARPER. You will know you have been away too long

when you come home and your children say to you, daddy, you look

older than your pictures. [Laughter.] I recall my children saying

that to me a time or two earlier in their lives. Thank you for your

service.

I worry about the administration, especially with Treasury, your

ability to get your team around you. Can you just give us an update on how we are progressing there? Your Deputy Secretary,

32

Under Secretaries, Assistant Secretaries. How are we doing there?

Because obviously you need help.

Secretary GEITHNER. We are making some progress. We hope to

come before the committee soon with a full slate of very strong people, and we are doing this carefully, as you would expect, and trying to make sure that we have the best talent in the country,

frankly.

Senator CARPER. All right. Good.

I appreciated the opportunity to be with you last week at the

White House at the budget summit, and we talked a bit then about

an issue that you mentioned today already, and I think Senator

Nelson raised it, too. The issue is the tax gap. I think it galls most

people who pay their taxes, pay their fair share, to know that there

are some—in fact, quite a few—who do not pay much, and in some

cases, nothing at all.

We know, as I mentioned last Monday, if monies are withheld for

taxpayers for our income, there is almost 100-percent compliance

in terms of actually paying our taxes. If there is reporting for our

income, it is over 90 percent or more. In cases where there are

businesses or individuals who work with a cash economy, the actual amount of money that is paid for their taxes may actually be

less than 50 percent.

We have talked about—you asked me to cite, last Monday a couple of specific examples of things that we could do. I was pleased

to read in your budget that you proposed to go after folks who

owned rental incomes, to make sure that they are doing their fair

share.

Just take a minute or two and talk to us, just very directly,

about what this committee can do, on a consistent basis, to enable

folks in the IRS to go out and collect the monies that are owed, at

home and abroad, from the folks who owe it and who are dodging

their responsibilities?

Secretary GEITHNER. Well, as you proposed and as you know, I

think there is no solution to this that does not rely on better reporting and better enforcement capacity at the IRS, more carefully

deployed. So a centerpiece of what we do in this area will have to

have new proposals in this area. I am glad you pointed out the one

provision in the budget we put in as a specific example of that

stuff, but that is just a beginning.

Alongside these, as we said earlier, we are going to have to look

at how to deal with the offshore shelter problem, and a range of

other provisions in the tax code that make it quite easy to avoid

U.S. taxes. So, we are going to try to bring a comprehensive set of

proposals in that area, but I think you are right, that you have to

start with reporting, and you are going to have to start with better,

more carefully deployed enforcement resources. We are starting

that process.

Senator CARPER. Good. I chair a subcommittee on the Homeland

Security and Government Affairs Committee on financial management. We have held hearings, roundtables, to actually delve into

this issue. Now that I am a member of this committee, I very much

want to focus on it, as a matter of equity, and as we are looking

for offsets. When we want to reduce taxes in some other area, we

want to provide for spending in some other areas, we desperately

33

need offsets, and I look forward to working very closely with you

as a partner in this going forward.

Can we talk a little bit about carried interest, and talk about

what the administration has in mind there? I certainly appreciate

we have been talking about tax fairness, but I understand and appreciate the issue of tax fairness that comes into play, and also

with respect to, especially, carried interest, given the need for

greater long-term fiscal responsibility.

I also understand the need to generate additional revenues,

which we have talked about here. But I feel that it is important

for us to be smart about it and try to get it right. I am sure you

believe that as well. We do not want to intentionally undermine

business investment.

I think the proposed budget that you all have given us on this

point is preliminary, but is it possible for you to flesh out some of

the details of the carried interest proposal? Can you lay out the administration’s thinking about how this proposal might work in

practice? Do you think there is a case to be made for using more

targeted efforts to differentiate between, say, the tax treatment for

carried interest and from, say, private equity funds versus hedge

funds?

Secretary GEITHNER. Senator, we will put out the details in the

budget, but I just want to state the simple objective, as you did,

which is to treat partnership income as ordinary income. We think,

to be fair, you need to do that across all partnerships. It is, I think,

very hard to make the case that you can differentiate fairly among

different types, and that is why the provision is framed the way it

is.

But obviously getting this right is important and, as with any

issue, we would be happy to listen to any specific suggestions about

how to do this well. But I think to do it, to make it fair, you need

to treat partnership income as ordinary income, and you need to

do so in a way where you are treating partnerships alike.

Senator CARPER. All right.

Last question. I met a week or so ago with David Marvin, a very

smart guy from our State who used to run the DuPont Pension

Plan. He now runs a firm called Marvin and Palmer, and they used

to oversee investments, I think, of about $10 billion. Now they are

down to about $5 billion because of the economy and the markets.

He suggested to us that we do a couple of things. One, he suggested to us that the SEC goes back and reinstates the uptick rule.

He says it is a way to get after those who are literally, in some

cases, acting as predators to drive down stocks. I think he, or someone else, also suggested to us that, in looking at the capital gains

tax, that we actually try to incentivize people to hold stocks for a

long period of time. In some cases, just take away their capital

gains tax altogether if they hold it for 10 years or more, but for

those who are churning the market, selling stocks on a daily basis

and sometimes almost on a minute-to-minute basis, raising appreciably their capital gains tax. Any thoughts?

Secretary GEITHNER. I would like to think about the latter and

get back to you. On the former, on the uptick rule, that is really

an issue that Mary Schapiro, the SEC Commissioner, and her colleagues are looking at, and have been looking at. I will consult with

34

her when I get back and ask her if she could lay out to you and

your colleagues her thinking as she comes to this job and this issue

fresh about how to do this, what benefits it might bring.

Senator CARPER. Thank you so much. And thank you for your

service.

The CHAIRMAN. Thank you, Senator.

Senator Roberts, you are next.

Senator ROBERTS. Well, thank you, Mr. Chairman. And thank

you, Mr. Secretary. You have given an extremely articulate, determined, and ambitious presentation. It has been very impressive.

But this hearing sort of reminds me of the ‘‘Cool Hand Luke’’

movie. What we have here is a failure to communicate. And maybe

it is me, maybe it is you. I do not think it is you. You have this

down pat—pardon a terrible pun. [Laughter.]

But at any rate, I have three issues I want to ask you about. I

call them ant hill issues. I am reminded of the time that I urged

a colleague of mine not to stand where he was standing in giving

a speech. He said, ‘‘I am fine where I am.’’ I said, ‘‘No, you are not,

you are standing on an ant hill with red ants.’’ That is not a good

thing.

We have three ant hill issues that folks out in the country, despite your very articulate views and very determined views, that

they are raising. One, everybody knows that charitable organizations across the country are being asked to do more with less as

donors tighten their belts, even without the tax changes, while

more people are turning to charities for assistance.

Now, I have an analysis that found that, if the proposed tax

changes in the budget were in effect in 2006, that the itemized contributions would have been reduced by almost $4 billion. That is

$3.87 billion, to be totally accurate. In the Senate, we would round

that off at $4 billion. But at any rate, that is not modest. That is

a real problem.

The total value of charitable contributions that high-income households reported on their tax returns in 2006 was $81.26 billion. That is just not modest. I know it is not going to bring a halt

to charitable contributions, I would agree with you on that, but it

will reduce the contributions to charities at a time—the timing of

this is so worrisome—when Americans are relying more on charitable assistance. I do not understand why the administration would

try to create any disincentive that would reduce any donations to

charities at this particular time. So, there is one ant hill that I

want to go over with you.

By the way, there is a March 2009 study by Indiana University,

just brought to my attention, that indicates 47 percent of higher income donors would give less if the deductions for charitable giving

were eliminated.

The next ant hill question. I will try to make this—I am sorry,

I am just going to make these observations, and then, if we have

time, you can respond. I apologize for that. The proposal in the

budget that reduces the ability for taxpayers to claim itemized deductions for mortgage interest. My goodness. What does limiting

this tax incentive mean for individuals who have purchased a home

within their means and who intend to live in it, or have lived in

their home for a number of years, or for individuals who are lookVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
35

ing to purchase a home right now? Should we not give them some

certainty in the tax code with regard to the mortgage interest deduction? What does it mean for the value of their home? Is there

not a concern that limiting the deduction would further depress

home prices?

Now, I just do not understand that, and I would say that the

budget does propose to reinstate the 36- to 39.6-percent income tax

rates for individuals in regard to what has been referred to by Senator Hatch, and that is the third ant hill.

Basically, this is the situation where, in Kansas, we have over

60,000 small businesses which make up 97 percent of the State’s

employers. They are the leading job creators in the State, and this

budget will raise their taxes.

Now, you say it is modest. I think that is the word that you use.

But the National Federation of Independent Business, which Senator Hatch brought out, shows that 50 percent of the small business owners that employed between 20 and 249 workers would fall

into these two top brackets. Over half the Nation’s private sector

workers are employed by small businesses with 20 to 500 employees.

So, at a time when we want to create and preserve jobs in the

country, we should not be raising taxes on employers who are creating jobs, i.e., small business. I will tell you what is going to happen. This is the worry that I get back from my constituents and

the small business folks. They worry that, in order to pay this additional tax burden, they may have to lay off workers, reduce wages

or benefits, not hire new employees, pass these costs on to their

customers. None of these are good options.

So I have demonstrated three issues that I would call ant hill

issues. I know you have a very articulate response to this. I know

that is part of the President’s budget plan. I would urge you to get

off the ant hills and find it somewhere else.

Secretary GEITHNER. Ant hills may understate——

The CHAIRMAN. Mr. Secretary, I will just give you a chance to address those three ant hills, briefly.

Secretary GEITHNER. All right. On the first two, what we are proposing is, as part of a fiscally responsible package to help bring

about comprehensive tax reform, that in the context of comprehensive tax reform that we identify ways that will help finance this

very important priority. That is something that we have to work

with the Congress on. We know there are going to be different

views on how best to achieve that objective. We have heard a lot

of concerns about this specific provision. I understand the concerns

around them. We will have to work through these.

But what we are not proposing to do is, now, in the midst of a

recession, put in place these changes. We have put those out as

proposals to help make credible our commitment to comprehensive

tax reform. But it is something we are going to have to work with

you on and find a way to do, that we are all going to be comfortable

with.

I want to just make the same point on the small business side,

just to emphasize. It is very important that, until we emerge from

this recession, that we are keeping the overall burden of taxes on

businesses across the country at current levels, and the budget

36

does that. But it is also a critical imperative that, as we emerge

from this, that we get back on a path to fiscal responsibility. That

is going to be difficult to do, and we are going to have to do it in

a way of shared sacrifice. The President’s proposal is designed to

make sure that those burdens come only on those at the various

high end of the income spectrum, including in the business sector.

But——

The CHAIRMAN. Senator Cornyn, you are next.

Senator CORNYN. I know for sure, Mr. Chairman, that Senator

Ensign was here ahead of me, observing the early bird rule, but I

will defer to the chairman.

The CHAIRMAN. All right. Senator Ensign. It looks like he feels

like he should be recognized.

Senator CORNYN. Well, I will defer to him.

The CHAIRMAN. Senator Ensign?

Senator ROBERTS. No, he asked his questions. It is John’s turn.

The CHAIRMAN. Between the two of you, whatever you want to

do. You work it out.

Senator ENSIGN. Thank you, Mr. Chairman.

The CHAIRMAN. You are welcome.

Senator ENSIGN. I had to leave for about 15 minutes. I had another meeting.

The CHAIRMAN. Fine. Fine. Fine.

Senator ENSIGN. But I was here at the beginning.

The CHAIRMAN. Fine.

Senator ENSIGN. A couple of observations. First of all, all of the

spending goes together, whether it is called TARP, stimulus, omnibus, the budget, or other spending coming up in the future.

I applaud you and the administration for holding a Fiscal Responsibility Summit last week. I think that is exactly what we need

to be talking about. Our colleague, Evan Bayh, wrote an opinioneditorial this morning in the Wall Street Journal. I think he laid

it out exactly right. We have to start thinking about spending as

a whole. We have an omnibus bill that is in front of us today. This

omnibus bill is not one-time spending. It is an 8-percent increase

over last year, and it adds to the baseline. So it is not just the

$20-billion increase over last year. When you compound that over

10 years, it is hundreds of billions of dollars.

You mentioned in your opening statement that this administration was making tough choices. What I do not understand is why

you would not have stood up and said to the Congress, ‘‘All right,

yes, this may be last year’s work, but times have changed. The

economy has changed. We need to start making tough choices.’’

Every family in America is making those kind of choices right now.

They are asking themselves, what can we afford, what can we not

afford?

Every business in America is saying, where are we wasting

money? Where do we need to get tighter? We are not requiring that

of anybody in the government at the Federal level. My question for

you is, why did you not show leadership at this time? We would

have joined you in a bipartisan manner and said, ‘‘You know what,

let us be fiscally responsible right now.’’

Secretary GEITHNER. Senator, I am nodding because you are

making a fair point. But I want to point out that, in the 2010 budgVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
37

et, the President does identify some very substantial immediate

cuts in programs that we do not think the American people should

support anymore, that we do not think are effective.

Senator ENSIGN. On the discretionary side?

Secretary GEITHNER. Yes.

Senator ENSIGN. What are they, and what are the amounts?

Secretary GEITHNER. Well, one example is to eliminate the subsidies to middlemen in the student loan market. One example is

around overpayment for managed-care providers in Medicare.

There are other examples in there, smaller ones and larger ones.

Senator ENSIGN. Well, that is not discretionary, but that is all

right.

Secretary GEITHNER. Yes, that is a fair point. But again, in the

budget—I just want to emphasize this. In the budget, the President

proposes to bring non-defense discretionary expenditures down to

a lower share of GDP than we have seen over a long period of time.

And, very importantly——

Senator ENSIGN. That is if GDP grows.

Secretary GEITHNER. Well, that is true. But you need to measure

all these things against the size of the economy and the projections

in the President’s budget over the 5- to 10-year period.

Senator ENSIGN. If the projections are correct?

Secretary GEITHNER. True. But the long-term projections in there

are an economy that is growing at a sustainable rate. There is no

difference between CBO, OMB, and the private forecasters on what

that long-term rate is. Another thing that is very important, again.

Senator ENSIGN. Except that CBO and OMB are always wrong.

Secretary GEITHNER. Well, forecasts are never what they are.

But over time, the economy does tend to return to its potential

growth rates. But that is the forecast that underpins this.

But I just want to associate myself with your basic conviction

that we are going to have to get ourselves back on a path to sustainability, and we have to demonstrate to people we are willing

to do stuff that is hard and difficult. A test of that today is how

much opposition you have seen to the specific proposals we have

put on the table. I just emphasize that because it is not going to

be easy to do. It is going to——

Senator ENSIGN. I only have a minute left. I want to get one

more question and comment in. I just wish you would have taken

this opportunity to cut spending, and you wasted that opportunity.

There was an earlier question that Senator Enzi had on jobs created versus saved. I just wanted to follow up with that. You have

created a situation where you cannot be wrong. If the economy

loses 2 million jobs over the next few years, you can say, ‘‘Yes, but

it would have lost 5.5 million jobs.’’ If the economy gains a million

jobs, you can say, ‘‘Well, it would have lost 2.5 million jobs.’’

When you use the terms ‘‘created’’ or ‘‘saved,’’ you have given

yourself complete protection where you cannot be wrong, because

you can take any scenario and make yourself look correct on created or saved. That is why we are looking for a metric on the created side. It is easy to say ‘‘I saved’’ if we only lose 2 million jobs.

Secretary GEITHNER. Mr. Chairman, just very quickly. The President lays out in the budget an expected path for the economy over

time that builds in an expectation for what impact we think the

38

Recovery Act will have. The economy may perform better than that

or worse than that, but you will be able to use that as a way to

measure what the full force of American economic policy does over

this period of time.

Now, things will——

Senator ENSIGN. So we will be able to hold you to those numbers? If you do not meet those projections——

Secretary GEITHNER. No. I am just saying that—I am just saying

that——

Senator Ensign [continuing]. On GDP, then your stimulus package will have failed?

Secretary GEITHNER. No. You can measure the success of the

policies we put together—design and implement, because we have

to do it together—on what happens to growth in unemployment relative to what people thought would have happened in the absence

of these policies.

Now, what are we trying to do? We are trying to, again, reduce

the risk that the economy shrinks by more than it needs to, that

unemployment rises by more than it needs to, that more businesses

fail than need to do. We are trying to arrest the recession and prevent a deeper recession that will cause much more damage to the

fortunes of Americans. That is the obligation we all share, and that

is what these proposals are designed to do.

The CHAIRMAN. Senator Cornyn?

Senator ENSIGN. Thank you.

Senator CORNYN. Thank you, Mr. Chairman.

Secretary Geithner, let me ask you about two topics in the short

time we have together. I am concerned, in the proposed budget,

about the Nation’s oil and gas industry, and more specifically, I am

concerned about what the policies laid out in the budget would do

to increase our dependence on imported energy at a time when I

think the country is of the mood that we need to find more here

at home and use less as we pursue alternative energy sources.

But can you explain to me how the President’s proposal for a new

excise tax on offshore oil and gas production in the Gulf of Mexico

will actually encourage more domestic production as opposed to the

opposite?

Secretary GEITHNER. Senator, as you know, and I think it is clear

in the proposal, we do not believe it makes sense to significantly

subsidize the production and use of sources of energy that are dramatically going to add to our climate change imperative. We do not

think that is good economic policy, and we think changing those incentives is good for the country. You should view these provisions

through that basic prism. Now people will not necessarily agree

with that objective, but I think that is an important objective.

Now, again, just to do proportionality, the impact of these subsidies is very small relative to revenues produced by U.S. oil and

gas producers. I think you make a reasonable case that this impact

can be absorbed. But as I said, the overall objective is not to be

providing ongoing subsidies to forms of energy production that are

going to add to this critical long-term imperative of climate change.

Senator CORNYN. Do you understand that raising taxes on small

and independent energy companies/producers here who develop 90

percent of U.S. oil and gas, natural gas, will actually hurt job creVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
39

ation in that sector of the economy as opposed to help it, which I

thought is what we were about?

Secretary GEITHNER. Senator, what I know for sure is that we

start with a deeply unsustainable fiscal position and a deep and

deepening recession. We have to move forcefully to fix that set of

problems. That is going to require very tough choices about how to

get us back on a fiscally sustainable path. It is going to require

some shared sacrifice and burden across the American economy.

We are not going to be able, given where we started from, to get

us back to a sustainable fiscal position without doing things that

are going to be hard. I think this is a reasonable policy, given the

overall objective of, again, making sure we are not providing artificial incentives to produce and use energy that is going to make our

broader climate change imperatives worse.

Senator CORNYN. I understand your answer. My view is that

higher taxes on small and independent producers here in America

will make us more dependent on imported oil and gas while we

transition to cleaner energy alternatives, a goal we all share. It will

also hurt job retention and job creation in the energy sector, which

provides an awful lot of jobs in this country.

Let me just ask, in the short time we have remaining—I applaud

the President’s stated goal to reduce the budget deficit by 50 percent by the end of his first term, but I am mystified why the administration would not tackle what is a bigger problem, and that

is the unfunded liabilities of the Federal Government because of

entitlement spending, some $67 trillion. The way I read the proposed budget, this budget would actually make entitlement spending worse rather than better because it adds additional mandatory

spending of $357 billion.

Can you explain the rationale to me?

Secretary GEITHNER. Senator, the President shares your commitment to long-term entitlement reform because that is essential to

put us on a path to fiscal sustainability. The most important thing

we can do in the near term to get us on that path is to reduce the

rate of growth in health care expenditures. That is the principal

source of increases in these long-term entitlement costs. It is not

the only source, but it is the principal source.

There is no path to addressing those things without starting

with, and going through, health care reform that reduces cost

growth. But as you know from what he said in public and what we

began last week, there are other things we are going to have to do,

working with the Congress. We are trying to begin a process of

building consensus on how to get to the point where we are taking

on those other challenges that are not going to be addressed simply

by reforming health care. Health care, you have to start with,

though.

Senator CORNYN. Outside of reforming health care, a goal which

we all share, does the administration have any other proposals to

deal with these unfunded liabilities, $67 trillion?

Secretary GEITHNER. Well, Senator, as you saw in the agenda for

the Fiscal Summit, there are a comprehensive set of other areas for

policy where we need to begin a process of figuring out how to solve

those. But we have to start somewhere.

40

Senator CORNYN. And lastly, specifically, you have no proposal to

deal with the impending insolvency of Social Security in this budget.

Secretary GEITHNER. Senator, the budget does not propose a specific set of reforms to Social Security, but you are right to say this

is very important for us to do. We would like to begin the process

of working with the Congress on how to figure out how to put Social Security on a path to long-term viability. It is a very important

thing to do. As I said, health care is necessary, but it is not sufficient for addressing these long-term entitlement problems. You are

right to——

The CHAIRMAN. Senator Menendez, you are next.

Senator MENENDEZ. Thank you, Mr. Chairman.

Mr. Secretary, thank you for your service. On page 2 of your testimony, you talked about how both our economic and financial

problems are being compounded by problems in the housing market, with 2.5 million foreclosures, the $2.8-trillion lost in real estate

wealth. For the average American, this is the single-biggest asset

that they have and that they draw upon for a variety of reasons:

educating their kids, dealing with a medical emergency, retirement

future.

I have listened to a wide range of individuals in the housing universe from all different dimensions, and they come down on, it

seems to me, pretty much two universal things. One is, continue

to drive the rate down even further—and it is pretty low right

now—and second, extend the home ownership credit beyond new

home ownership to all.

What do you think of those proposals? If you do not like those,

how do we see stopping the collapse of the floor here on the housing market? Because it seems to me that that is pretty critical for

us to move forward in this economy.

Secretary GEITHNER. I think you are absolutely right that, although mortgage rates are lower, the spreads between mortgage

rates and treasuries are still at, in some areas, abnormally high

levels. We would like to continue to find ways to bring those

spreads down. That would be very beneficial to the broad objective

we share.

On the tax side, I need to think about that a little more carefully.

I do want to point out that we are moving very quickly to make

sure that the tax credit that was in the stimulus package is made

operational. We announced last week the details, importantly, that

people can take advantage of that tax credit against their 2008 income, which will make it have more power more quickly. But I am

happy to think through and take a look at additional things we

might be able to do on the tax side. It will be hard to do, I think,

but I am willing to look at that.

I do think the program the President announced will help, and

not just on the interest rate side, but on the refinancing side. It

will help by helping people who can stay in their homes take advantage of more——

Senator MENENDEZ. Those undoubtedly are worthy.

Secretary GEITHNER. Yes.

Senator MENENDEZ. I support them and have voted for them as

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place and values in homes, which, if it continues—now, keeping

people in their homes is great, making sure they can refinance is

great, but I think we need to do something more, and we look forward to working with you on that.

Secretary GEITHNER. I do think it is very important for people to

understand that the most important thing you can do for the housing market is to make sure that people do not lose their jobs. The

most important way to do that is to try to make sure this economy

gets back on track. That is what the Recovery Act is designed to

do.

Senator MENENDEZ. Senator Carper asked you about carried interest. I just want to ask one quick question. My understanding is,

the proposal in the President’s budget not only includes hedge fund

managers and others, but all who, in essence, use the provisions

of carried interest are going to be treated equally, in the same way.

Secretary GEITHNER. That is our proposal.

Senator MENENDEZ. If, in fact, it gets passed. All right.

And then, finally, you—and the chairman has worked mightily

on this. But in your testimony on page 6, you talk about the President advancing a series of legislative and enforcement measures to

reduce U.S. tax evasion and avoidance. You talk about proposed

rules to both reform U.S. corporations’ ability to defer foreign earnings and deter high-income individuals from using tax havens to

avoid taxation.

Last December, Chairman Baucus released a discussion draft of

proposed legislation to put reasonable limits on the use of excessive

offshore related-party reinsurance by foreign property and casualty

insurers that gives them a competitive tax advantage over those

who stay here domestically and do not do that.

The chairman’s proposal seems to me to be consistent with the

administration’s strong stance against offshore avoidance. Is this

something that the administration supports?

Secretary GEITHNER. It is something we are going to take a careful look at. It looks like a very positive step to us, but I will look

more carefully at it in the context of the proposals we are going to

bring forward on the broader international tax avoidance plan.

Senator MENENDEZ. Well, I look forward to working with the

chairman, and with you. It just seems to me that at the end of the

day we want the average taxpayer to pay their fair share.

Secretary GEITHNER. We do.

Senator MENENDEZ. It seems to me that those who game the system not to pay their fair share and create a domestic disproportionate set of circumstances for those who do make their investments here in the United States and follow the law within the context here in the United States, are at a competitive disadvantage,

and we need to end that.

Thank you, Mr. Chairman.

Secretary GEITHNER. I think it is necessary for fairness, and it

is necessary for fiscal responsibility.

The CHAIRMAN. Thank you, Senator.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

Thank you, Secretary Geithner. I am certainly pleased you could

be here today to discuss the administration’s budget outline. I

42

think it is very important to reiterate the point that the budget

really is a vision, or a blueprint, of how we plan to move the Nation

forward. I think it expresses values and goals, and hopefully lays

out a path forward towards a better tomorrow. Quite frankly, all

of us as Americans, that is what we are striving for, a better tomorrow.

I have so many questions and comments, and so little time. I

would like to applaud the administration, your statement here,

wanting to tackle health care reform, a new energy economy, making additional investments in education, all of which we know are

investments that pay dividends down the road.

But there is no doubt that we are in the here and now right now

in what we are dealing with. Those of us who talk to our constituents on a daily basis hear from them the concerns that they express about—going back to this past fall, just as Senator Snowe

mentioned—the government has made huge investments—huge investments—of taxpayers’ dollars. Our government came to us, the

administration came to us: the sky is falling. We have to act now.

We have to act now.

We are still hearing a lot of that, and yet we are not seeing the

results of what we were asked to do when the sky was falling this

fall. So I would just associate myself with my colleague from

Maine, Senator Snowe, that there has to be greater explanation. It

cannot just be posting who got money.

We need to know where that money is going and where those resources are happening, because I am having daily calls from my

constituency, who cannot access those dollars and who are desperate to create jobs and to keep their good businesses. Most of

these people are people who have acted in a fiscally conservative

way, who have investments and own their businesses outright and

want to continue with operating loans that will keep them making

payroll. I say, the sooner that you can get more of that information

out there, it is enormously helpful on the other end of the line,

which is the confidence end. We have to create confidence that

what we are doing here has tremendous effects and will bring

about tremendous effects.

But we have steep costs out there. They are leaving us massive,

massive deficits, Federal deficits and debt levels. I am concerned

about that long-term debt, and I am concerned about how the outline for your budget gets us to deficit reduction in the mid-point,

but in the out-years we continue to see that debt rise. I think that

is a concern.

Back to what Senator Cornyn brought up, talking about health

care costs. I believe that through health care reform we will help

deal with some of the costs, long-term costs, that exist out there.

Did you account for that in the revenue modeling?

Secretary GEITHNER. Well, in the revenue provisions of the budget we included these new proposals for helping to fund part of the

cost of long-term health reform. Am I answering your question? I

am not sure I am answering your question.

Senator LINCOLN. Well, somewhat.

Secretary GEITHNER. So where we propose revenues to help finance health care reform, we did put those in the budget.

Senator LINCOLN. All right.

43

The other question I would ask would be similar to what Senator

Snowe asked, and that is, why were your projections so much more

optimistic with the GDP projections that you had?

Secretary GEITHNER. Some of those projections you are comparing against—OMB’s, CBO’s—were done before stimulus.

Senator LINCOLN. Right.

Secretary GEITHNER. So that accounts for some of the difference.

Senator LINCOLN. So you are counting the stimulus in your predictions here.

Secretary GEITHNER. Yes. As every economist ultimately will.

But the CBO’s new estimates that are done post-Recovery Act have

a low and a high end estimated forecast. The administration’s forecast is within that estimate.

Senator LINCOLN. Why did you include continued war spending

at 2008 levels, adjusted for inflation? I mean, surely you know the

administration has a plan of what they are going to be doing and

an idea of what they are going to spend on the war based on what

we heard in the campaign. I mean, I am just curious to know why

you did that. That is a lot of spending.

Secretary GEITHNER. Senator, what matters is what we spend.

As you know, the President has made proposals to alter strategy

in Iraq and Afghanistan, and the budget accounts for an initial estimate of what that is going to do to spending going forward. That

is the critically important thing. In the budget, we had to start

somewhere. They started with a spending level that we inherited

from this administration with their strategy for those wars.

Senator LINCOLN. It just seems a little phantom to me in terms

of gimmicks and how you might do that.

The last two things I would just like to bring up, Mr. Secretary.

Senator Roberts and I have both been very concerned about the impact this economic crisis is having on individual retirement savings. It is enormous. Just in talking to my constituents, it is phenomenal, the pain they feel, the fear. We had a woman testify in

the Aging Committee just last week, in tears, about what has happened to her savings, to her husband’s, and what they are up

against. So I think that is a critical issue and am just hoping that

we will see some steps here to address some of those concerns.

In the past several years, the past 8 years, the budget that we

get up here always puts a disproportionate burden on rural America. I am saddened to say that I am not so sure that this budget

is any different. Rural America is a different place, it is a different

animal, and most of what we do here has a disproportionately negative effect on rural America.

These people are hurting just as bad, if not more, because they

are usually the first to see the downturn of an economy and they

are the last to see the upswing. I am not so sure some of them have

not come out of that last downturn. So, I certainly would appreciate you all taking a look at some of the disproportionate burdens

you are placing on rural America in your budget.

Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

44

Thank you, Mr. Secretary. These are not easy times, and I think

we all appreciate your efforts.

I would like to talk a little bit about small business. Not about

the tax rate, but the—we talked about this a little on the phone.

I am finding, in the last month, something that is really scary to

me. That is, profitable small businesses are having their lines of

credit pulled by banks.

One little story. I interviewed someone for a job. His father owns

a heating oil company, about 50 people, I think 8 trucks, in southwestern Connecticut. Profitable business. He gets a $4-million line

of credit from the bank at the beginning of the month to pay for

the oil, and he pays it back. Never missed a payment. The business

is about as profitable as it has always been. The bank has pulled

the loan, pulled the line of credit, and he cannot find another one.

That business is about to go under.

We have a hardware company in northern New York, exactly the

same thing. They say, well, the value of the inventory is lower.

They are pulling the line of credit. This is a business that started

in 1830. It employs 300 people. We have problems, again: Hickey

Freeman, 800 jobs in Rochester. They are not as profitable as they

were. People are not buying those suits. Nonetheless, it is a good,

ongoing business.

My great worry here is if banks are pulling—when we heard

banks are not lending, we assume nothing new is going to get

started. But if they are starting to pull lines of credit from profitable small- and medium-sized businesses, the unemployment numbers are going to skyrocket, and everything we have done in the

stimulus and in this budget will be undone. Can you give us some

idea of what the administration is planning to do about this? It is

a deadly problem, I would say.

Secretary GEITHNER. Sir, you are exactly right. It really is happening across the country.

Senator SCHUMER. And I think more in the last few months than

before. Is that——

Secretary GEITHNER. Well, the recession is deepening, and these

things feed on themselves.

Senator SCHUMER. All right.

Secretary GEITHNER. That is why they are so dangerous, so important to arrest. You are absolutely right, and all of your colleagues are eloquent in saying it, which is, financial crises and recessions are brutal and tragic and unfair, because the damage is

indiscriminate and people who were perfectly responsible get damaged by the actions of those who were irresponsible.

Senator SCHUMER. Right. Right.

Secretary GEITHNER. The necessary thing to do, apart from making sure the Recovery Act stuff takes effect quickly——

Senator SCHUMER. Yes.

Secretary GEITHNER [continuing]. Is to make sure that banks

have enough capital they can lend and that we are providing very

substantial support to get these credit markets to open up, which

is what we are doing.

Now, community banks need to get access to capital more quickly

under the existing programs. The stimulus package includes a very

45

important expansion of the small business lending program and the

guarantee fee.

Senator SCHUMER. Will the TALF work in this regard?

Secretary GEITHNER. The TALF, this direct lending program I referred to, we believe will be very helpful in trying to help get that

small business going again. There are other things we would like

to try to do, working with you and your colleagues. There are many

ideas in this committee and up here on the Hill that we would like

to reflect on. But the necessary thing is to make sure that banks

have the resources and the ability to lend, and many do. Some will

need a little temporary assistance as a bridge to private capital. It

is very important that we move to make sure those resources are

available.

Senator SCHUMER. Mr. Secretary, banks are pulling back. Even

with some of these banks—I do not want to give any names—there

are some who have received the capital infusion, some have not.

Secretary GEITHNER. Right.

Senator SCHUMER. But worse, these business people, small- and

medium-sized, search for other sources of lending, and no one is

making them a loan.

Secretary GEITHNER. Right. Well, again, there are banks across

the country that were careful and prudent and are able to expand

now because they have substantial buffers of capital. Many banks

are being more defensive because they are so worried about the impact of the recession. This is why it is so important that we make

sure that there is capital available where it needs to be, and that

we go to banks through programs like the TALF to try to get markets flowing again.

Senator SCHUMER. Right.

Secretary GEITHNER. We will do that on a scale sufficient——

Senator SCHUMER. When will the TALF program be set up for

small businesses so they will feel their loan is guaranteed and they

can continue this line of credit or issue a new line of credit to a

new company?

Secretary GEITHNER. The TALF program. We announced the detailed schedule of funding yesterday.

Senator SCHUMER. Right.

Secretary GEITHNER. And you are going to see it, within the next

few weeks, up and running, and you will start to see funding available for new loans, and that will help. But the really important

thing I want you to understand is, we are going to keep at this.

It is going to require more things, but you are absolutely right to

underscore the importance of this to help get recovery back on

track.

Senator SCHUMER. This will raise the unemployment rate and

send the economy down. When it is profitable businesses that are

going under because they cannot get credit, it is scary.

Secretary GEITHNER. Right. It is scary. It underscores, again,

why credit is so important to recovery. In our system, banks play

a critical role in that, not just the credit markets. You have to

move on both together.

Senator SCHUMER. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

46

Mr. Geithner, I have a question about Federal Aviation taxes. As

undoubtedly you know, we in the Congress attempted to pass reauthorization of the Aviation Trust Fund. This committee had jurisdiction over the revenue part of it, the Commerce Committee, their

part. It went to the floor, and it was not passed because of offsets

for highway funds, totally unrelated to airport issues.

Now, this administration’s budget, as I understand it, proposes

replacing the ticket tax revenue with some sort of user fee scheme.

I would like to tell you that that is not a good idea. I strongly encourage you to go back and just use the process that has worked

before. It is true, the current funding expires in March of this year,

so we have to pass some kind of a short-term extension.

But the administration prides itself on honesty in budgeting. I

think what it is basically trying to do is to convert the classification, the category of revenue, from taxes to fees, and therefore

avoid putting it in the budget. But still, it is going to be a cost imposed on people, and I just strongly urge you to work with this

committee and the Commerce Committee. We put together a bill

last year to address the reauthorization of the Airport Trust Fund.

Secretary GEITHNER. Well, Senator, we will take a careful look

at it. I do not think that was the motivation, but we will take a

careful look at how to do this.

The CHAIRMAN. Well, if that was not the motivation, what was?

Secretary GEITHNER. Maybe I should come back to you with a

more thoughtful case so we have a chance to understand your concerns and why you think there is a better approach for doing it,

but we will work with you.

The CHAIRMAN. Yes. Because I am just telling you, I do not think

it is a good idea, what you are trying to do here.

Secretary GEITHNER. I hear you.

The CHAIRMAN. I was struck with the comment that somebody—

I think it was some authority—made. It is a little bit different take

on the financial credit problems. It was this. If I have my data and

if I remember correctly, household debt as a percent of Gross Domestic Product is roughly 30 percent, 40 percent for a long time.

It started to creep up a little bit in maybe the 1990s. In the 2000s,

particularly in the last couple, 3 years, it has shot way up. The figure I recall is 100 percent of GDP. The last time that household

debt was that high was 1929. This person’s thought was, sure, part

of the problem is that banks are not lending, but part of the problem is that they are lending too much.

Secretary GEITHNER. They were lending too much.

The CHAIRMAN. And that is credit cards, home equity loans, or

whatnot. Homes, in the first place. Household debt. I do not think

a mortgage is included in household debt. But if you could just address that observation.

Secretary GEITHNER. Right. Well, I think, as I tried to say earlier, you are absolutely right that this is a crisis born of a period

of sustained over-borrowing by households, but also some parts of

the rest of the economy, and by governments. That is true around

the world. What that means is, there is a necessary adjustment

process we have to go through, and that will reduce and lower levels of borrowing for a sustained period of time.

47

What we need to be worried about, though, is the risk that, as

economists say, it overshoots and you see a greater reduction in

lending than is necessary for that process of adjustment to take

place. That is something we need to arrest and prevent. But you

are right to point out that part of what we are going through is

a necessary process of adjustment after a long period where people

were borrowing beyond their means. That will make this recession

deeper and more traumatic than it otherwise would have been.

The CHAIRMAN. Some things just do not change. I think Benjamin Franklin said, ‘‘He who goes a’borrowing goes a’sorrowing.’’

We just borrowed, all of us, way too much and now we are paying

for it.

Another question that Senator Cantwell somewhat touched on,

and I think a couple other Senators have, too. I think one reason

that confidence is not restored—there are tons of reasons, but one

is because people just do not understand TARP and TALF and all

these different toxic assets, and purchase, and repurchase, and so

on and so forth. They just do not understand it.

When you try to explain it, when Chairman Bernanke tries to explain it, when members of Congress try to explain it, it is just

Greek. It is another language. It just is not understandable. I wonder, is there some way you can kind of just explain, in English, so

the average American can understand? I think most members of

this Congress do not understand it.

Secretary GEITHNER. I completely agree. I think the instruments

are complicated, but the objective is relatively simple. The objective

is to try to make sure that banks are strong enough that they can

lend and provide credit and we get these pipes that are critical to

the credit markets unfrozen and unclogged.

The CHAIRMAN. Well, I just urge you to try to think this through,

and more in words and terms so the average American starts to

understand. I do not want to overstate this point, but I happened

to be listening to NPR, American Experience, or American something, about a week or two ago, trying to explain all of this in simple terms. They started a little balance sheet. This guy has $10 and

loaned to somebody who had a doll house, and so on, and they just

got it more and more and more, and I thought it was very well

done.

Secretary GEITHNER. Yes. I thought they did a very nice job. I

agree with you.

The CHAIRMAN. Yes. If somehow you can just talk about this in

more basic, sort of simple terms and put it in terms that the average American household relates to, that might help quite a bit, for

whatever it is worth.

Senator Grassley?

Senator GRASSLEY. Yes. I have a couple of questions, but before

I do that I would like to call your attention to something you probably would not know about, to check on it. I sent you a letter a few

days ago, seeking some information. I have a follow-up letter that

you are going to receive today, and it deals with private debt collection contracts and programs that we have. I need some information

on that. I appreciate that.

There are a number of things that I would like to talk to you

about: itemized deductions, Pease limitation, the related concept of

48

PEP, 28 percent limitations, basically what I would consider a hidden tax rate, and to find out—well, let me see if I can shorten this

up.

Basically, we are interested in the fact that, as I stated in my

opening statement, I consider this a 2-, 3-, or maybe in some instances, 4-percent increase in the tax rate above 39.6 or above 36.

The purpose of it, I think, is to be a hidden marginal tax rate, so

it does not look so bad.

So my preference would be to completely eliminate PEP and

Pease without any offsetting tax rate increase. The next best option

for me would be to have PEP and Pease eliminated with an offsetting tax rate increase, and the worst option would be to have it

back in full force in 2011. So given the President’s stated laudable

commitment to transparent budgeting, I would think that the administration would not desire a return to what we call PEP and

Pease.

So my question: is the administration committed to having PEP

and Pease returned in 2011 or would it instead be willing to have

PEP and Pease completely eliminated in exchange for a higher tax

rate?

Secretary GEITHNER. Senator, I would like to spend a little time

on this issue. I would like to take a careful look at that. I think

you are right. We need to give you a clear assessment of the combined impact of these changes. I will come back to you with a more

thoughtful view on how we could address your concerns.

Senator GRASSLEY. Well, if there is an intellectual basis for it, I

sure do not see it. I think it is just simply because somebody did

not want to cost 40 percent when we had the 1990 tax bill, I think

it was.

I want to ask you about another consequence of the President’s

proposals to fully reinstate—again, back to the Pease limitation—

and to limit itemized deductions to 28 percent for single filers and

families above $250,000. The most recent IRS data available, tax

year 2006, shows 3.2 million filers with adjusted gross incomes of

$200,000 or more claimed the deduction for State and local income

taxes on their itemized returns. The amount of these 3.2 million

deductions was $121 billion, or nearly $38,000 per return. In my

State, 22,000 people were affected by it; in New York State,

313,000 were affected by it.

If the proposals in the President’s budget to limit itemized deductions to 28 percent for higher-income filers are adopted, does this

not amount to a tax hike on State and local income taxes for more

than these 22,000 in Iowa and the 300,000 in New York, that I

used as examples? That is question number one.

But put another way, if the Federal tax benefit of the State and

local income tax deduction is cut back, is the net effect to the taxpayers not higher State and local taxes? Would that not be contrary to what we are trying to accomplish by giving the States so

much aid so they do not have to raise taxes?

Secretary GEITHNER. Yes. Senator, I understand this concern,

but I would just come back to the context. Again, what we did is,

as part of a proposal to lay the foundation for comprehensive tax

reform, we identified a series of ways we could help pay for this

and do it in a fiscally responsible way. But that is a process we are

49

going to have to have with you and your colleagues. There are

going to be different views on how we can meet those broad objectives. Of course, we are going to be open to working through this

in a way that meets these broad objectives.

But the context is, again, as part of an effort to build consensus

on comprehensive tax reform, we wanted to identify ways to do this

that we could in a way that would make it fiscally responsible. But

I understand those concerns, and we will work with you on how

best to address those.

Senator GRASSLEY. All right.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Enzi, you are next.

Senator ENZI. Thank you, Mr. Chairman.

A person in Montana had a proposal that was passed on to small

businessmen in Wyoming who talked to me about it, and it was a

way to take care of small businessmen in this retracting market for

loans and things. What he was suggesting was, for each employee

that a small business employs, that they receive a $20,000 unsecured loan directly from the Federal Government, at low interest.

Now, I asked some questions about that, because that could

amount to a whole lot. But fitting in with your ‘‘save’’ or ‘‘create,’’

they suggested that we ought to talk about ‘‘rehire’’ or ‘‘create,’’ and

‘‘rehiring’’ being that ‘‘saved jobs’’ number.

They were not particularly tied to $20,000, it was just a good

idea that they had. But it would stimulate loans in direct relation

to something that was achieved. So, I just hope you will put that

down as a possibility. I am not asking a question, just mentioning

that, because I thought there was some validity there and a lot of

flexibility, but maybe some kind of a solution for small business.

Returning to the budget, Mr. Secretary, the President’s budget

request asks for $750 billion for financial stabilization, but plans

to lose, apparently, $250 billion. I would like to know how you arrived at that number. Is the 33-percent loss Treasury’s investment

strategy for this money?

Secretary GEITHNER. Senator, thank you for raising it. Absolutely

not. The estimate in the budget reflects the OMB/CBO judgment

on how to score the potential risk of the subsidy costs associated

with investments in the financial sector. That is the ratio I believe

they used for the TARP legislation that was passed by the Congress last year, and that is the basic framework for it. But that is,

of course, not our investment strategy. It is just an estimate of the

potential subsidy cost in a program of that magnitude.

I want to underscore just a point, though. This is not a request

to the Congress. It is not an estimate of the potential future cost.

It is just a recognition of reality, that it is possible that we are

going to need to do this with more resources, and so we wanted to

put in the budget—in an abundance of caution like we do for other

types of expenditures, wars and natural disasters—a place holder.

Senator ENZI. Well, why would you not put the whole $750 billion in there though instead of just the amount of loss that is anticipated?

Secretary GEITHNER. Well, only because what matters in the

budgetary context is that, again, under the established procedures

50

by CBO, what matters is the estimated subsidy costs associated

with those types of investments. So we are doing what I think is

conventional, good budget accounting.

Senator ENZI. So, if it is just a placeholder, as a reserve until it

is needed, who is going to make the determination about when the

money is needed and, if and when it is needed, why can you not

just come back to the committee and the Congress and ask for it

at that point?

Secretary GEITHNER. That is what we will do. But we were laying out as realistic a budget as we could, consistent with the range

of other changes we made to how we think about natural disasters

and wars. We thought, to be consistent in that context, it was better to acknowledge the reality that it is possible we need to come

back to the Congress for more resources. But this is not a request.

If we reach that judgment, we will come to you with a request. We

will explain to you why we think it is necessary, how much it will

cost, and give you the opportunity to reflect on whether that is in

the interests of the country.

Senator ENZI. I am glad to hear that, because the last time the

Department of Treasury asked for a blank check it was provided

to them, and the results, I think, were disastrous as far as what

we thought it was going to go to. With all of the questions we have

had on AIG, I think that is true, not just speculation. So I am really pleased at your assurance that you will be coming back and have

something very specific for us in the way of a plan with that.

Thank you, Mr. Chairman.

Secretary GEITHNER. Mr. Chairman, I misspoke in answering

Senator Grassley’s last question in using the words ‘‘comprehensive

tax reform’’ rather than ‘‘health care reform’’ twice. What I wanted

to say was, these proposals to change deductibility, we put on the

table in the context of a proposal to begin a discussion on comprehensive health care reform, and it was in that spirit that we

identified ways to do that in a way that was fiscally responsible.

I just misspoke about comprehensive tax reform.

The CHAIRMAN. I appreciate that.

Secretary GEITHNER. Although we are interested in tax reform,

too.

The CHAIRMAN. I appreciate that Freudian slip. [Laughter.] I am

sure you are thinking about tax reform. All right.

Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman.

I would like to go back to the deductibility question. I was curious, Secretary Geithner. How was the threshold of $250,000 arrived at?

Secretary GEITHNER. You mean, in the President’s broad tax proposals?

Senator CANTWELL. Yes.

Secretary GEITHNER. Well, he laid out a set of proposals in the

campaign. It is very clear to the American people that he thought,

as we move forward and make investments that are critical to our

long-term future, that we are going to need to bring more fairness

and balance to the tax code, and that would require letting those

tax cuts on Americans earning more than $250,000 expire and reVerDate 11-MAY-2000 14:16 Dec 09, 2010 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 62358.000 TIMD PsN: TIMD
51

storing those marginal tax rates to the level they were in 2001. So

what he is doing in the budget is——

Senator CANTWELL. So it was just taken from the campaign? I

mean, there is——

Secretary GEITHNER. It is a commitment that he made to the

American people in the campaign.

Senator CANTWELL. And what do you think, given the limitation

on deductions, the tax rate might actually be on those families?

Secretary GEITHNER. Well, the proposals on deductibility change

the tax treatment of a set of deductions. What they do is restore

the level of deductibility for charitable contributions and other

things to the level that prevailed at the end of the Reagan administration. It was still a level roughly double what the typical American gets in that context. Again, we think that is fair and reasonable. But we made these proposals only in the context of trying to

begin a broad conversation on how to bring about comprehensive

health care reform.

Senator CANTWELL. Well, I mean, these policies that we have,

whether it is deductibility for mortgages, or my colleague brought

up local taxes, like sales taxes or charitable contributions. These

are all things in the code. It seems to me if we want to debate

whether we give those deductions in the code, it would be a better

way to decide what to do as opposed to putting an arbitrary cap

basically at 28 percent on all itemized deductions.

Secretary GEITHNER. Well, again, we are restoring the level of

deductibility to a point that has been achieved in the past because

we are trying to identify ways to achieve health care reform in a

way that is fiscally responsible. So, it is in that context that we are

proposing this.

Now, of course we are going to have a debate on this, and we

should have a debate on it. As many of your colleagues have said,

many people would like to do this without going beyond the health

care system itself. But we will have to work through this with you.

Senator CANTWELL. Well, we certainly want to work with you. I

think the committee will, if you can see from the questions that

people had on this. Not all States are alike, and this will have a

different impact. I would ask you to look at that, what you think

for those families, particularly in a State where deductibility of

sales tax, itemization of sales tax, is a big issue, what the rate actually might end up being on these families, because I think it

might be higher than you are anticipating.

Secretary GEITHNER. A fair question. We will provide a full range

of analysis to that impact as we go through this process.

Senator CANTWELL. Thank you.

I thank the chair.

The CHAIRMAN. Thank you, Senator.

I have a couple of questions here, and I think Senator Grassley

has one.

When people talk about the debt, what is the difference between

publicly held debt and total debt? Is the concept of debt held by the

public, publicly held debt, irrelevant in terms of markets and so

forth?

Secretary GEITHNER. Yes. The economically relevant measure is

the next debt held by the public, of the general government.

52

The CHAIRMAN. So when people talk about total debt, what is the

relevance of that to markets or to the economy?

Secretary GEITHNER. It should not be relevant. Really, the right

economically relevant measure is the net debt outstanding held by

the public. That is the level that affects whether you are crowding

out prior to investment and whether interest rates are going to be

higher, or whether they will be lower. But by that measure alone,

because of where we are starting from, that is on a rising path, and

we have to stabilize it.

The CHAIRMAN. Right. Right.

It is my understanding that the budget deficits, as a percent of

GDP, are roughly constant, around 3.2 percent, something like

that, 3 percent, roughly.

Secretary GEITHNER. Right. The level of deficit that stabilizes the

debt-to-GDP ratio is roughly in the range of 3.

The CHAIRMAN. Right.

Secretary GEITHNER. Ideally it would be a little below 3, but

roughly in that range. That is driven by the rate at which you

think the economy may be able to go sustainably over time and

what level of interest rates prevail over time.

The CHAIRMAN. Maybe you answered this already. What is an acceptable sustainable rate, that is, deficits as a percent of GDP, generally? Was there a goal you were striving toward?

Secretary GEITHNER. Well, 3 percent is that—do you mean the

level of debt outstanding to GDP or the level of——

The CHAIRMAN. No, no.

Secretary GEITHNER. Three percent is the level that is consistent

with this definition of sustainability, which again is the level which

stabilizes the debt-to-GDP ratio, the level of debt relative to the

overall income produced by the economy in a given year.

The CHAIRMAN. All right.

Now, let us look at debt for a moment. Right now, I think it is

around, roughly, 38 to 40 percent as a percent of GDP. Then I

think it increases up to close to 67 percent in a year or two. Then

that is flat, that level.

Secretary GEITHNER. That is right. That is right.

The CHAIRMAN. This raises the question, what is a proper level

of debt-to-GDP? When do you start getting nervous?

Secretary GEITHNER. I would say, most economists believe that

is a manageable burden for a country with our basic structure of

growth potential. It is important to say that even that measure

slightly overstates what the level will actually be, because that

measure includes a bunch of borrowing to fund investments in the

financial sector, which will have a return to them over time.

The CHAIRMAN. What would some examples be?

Secretary GEITHNER. Well, when the government makes investments in capital, it provides lending against collateral, and they

will slightly overstate that ultimate burden on the economy as a

whole. But in any case, in our judgment this fiscal package, if

adopted by the Congress, would put us in a sustainable fiscal position over that timeframe with a level of debt-to-GDP which is stable at acceptable levels.

The CHAIRMAN. All right. Thank you.

Senator Grassley?

53

Senator GRASSLEY. I do not disagree with anything you just said

there, but the way I like to tell my constituents is, on the annual

deficit, we have a 40-year average of about 3.2 percent, and we

have grown that way and have improved our economy very much

and improved the standard of living. It seems to me like a 40-year

average of the national debt is about 40 percent of Gross National

Product.

Secretary GEITHNER. That is right. And because of the cost of the

crisis and to solve the——

Senator GRASSLEY. Yes. Then it goes up to 60.

Secretary GEITHNER. That is right.

Senator GRASSLEY. Yes.

But again, I guess I would say, for 40 years, that that level of

debt has not been harmful to the economy because it has been

manageable.

I want to talk about just one thing. This is probably going to be

semantics to you, but to some of us who take seriously a President

saying he should not, or will not, increase taxes for people under

$250,000, I want to explain how I think he is not abiding by that.

Now, on his cap-and-trade tax increase, it raises revenue of $646

billion over an 8-year period. This $646-billion tax increase will be

paid by all Americans in the form of higher energy prices, including

electricity and fuel, as well as higher taxes on all goods and services, because of shipment and other reasons.

For example, a single taxpayer making between $95,000 and

$200,000 will receive no benefit under the Making Work Pay Credit. Married couples filing jointly who make between $190,000 and

$250,000 do not receive any benefit whatsoever from the extension

of the Making Work Pay Credit but are hit by a tax increase on

the energy they use, as well as other goods and services, as a result

of the cap-and-trade tax increase.

Furthermore, many Americans, including many low-income

Americans, do not get the Making Work Pay Credit. For example,

those Americans who are unemployed or are in school do not receive the Making Work Pay Credit, but they still will get hit with

a tax increase from the cap-and-trade tax. In addition, this would

impose a very large tax increase on those in the transportation industry—truckers, for example, or rural Americans who have to

drive significant distances to their workplace.

Therefore, the President’s cap-and-trade tax increase is inconsistent with his promise to not raise taxes a dime on those making

under $250,000 if you are married, and $200,000 if you are single.

Is that not correct?

Secretary GEITHNER. Senator, cap-and-trade would increase the

cost of energy for those types of energy that are particularly

carbon-intensive. It does increase the cost of energy. That is necessary if you are going to change how people use energy and make

a serious effort to reduce energy dependence on foreign oil and to

address climate change.

What the President proposes to do is to use those resources and

direct them to not just facilitate the transition to a cleaner energy

economy, but to offset those costs on the people most affected by

them. That is, I think, a reasonable strategy. It is good policy. For

54

people whose behavior and use of energy does not change, their

cost of energy will go up.

But again, the President is proposing to devote those resources

to making the Making Work Pay tax cut permanent, to facilitating

the transition to more energy-efficient, cleaner energy technology,

and, if there are additional resources beyond what we have laid out

in the budget, then they will be devoted also to help compensate

for those higher costs. But again, you cannot achieve these objectives without changing the incentives for how people use energy.

Senator GRASSLEY. This might be hard to argue against changing

people’s habits, but you are admitting in your answer to me—so a

question: for those people who are not going to get the advantages

of the Making Work Pay Credit, who are going to pay higher energy costs, which is a government-imposed requirement, that is the

effect of a tax, and also, by the way, this budget does not allocate

that money yet. Now, it might.

Secretary GEITHNER. Senator, the way I would say it is that,

again, the resources raised by this will be devoted to offsetting

those increased costs, and, if there are additional resources raised

by this beyond what we identified in the budget, then those will be

devoted to those people most affected by this. But again, the impact

depends a little bit on what happens to behavior and how people

use energy.

Senator GRASSLEY. Thank you, Mr. Chairman.

Thank you, Mr. Secretary.

The CHAIRMAN. Thank you, Mr. Secretary. This has been most

productive, and we wish you well. Thank you.

Secretary GEITHNER. Thank you, Mr. Chairman.

[Whereupon, at 12:54 p.m., the hearing was concluded.]

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