U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

35–149 2007

PRESIDENT’S FISCAL YEAR 2008 BUDGET WITH 

U.S. DEPARTMENT OF THE TREASURY 

SECRETARY HENRY PAULSON 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

FEBRUARY 6, 2007 

Serial No. 110–5 

Printed for the use of the Committee on Ways and Means 

( 


bajohnson on PROD1PC77 with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


bajohnson on PROD1PC77 with HEARING
iii 

C O N T E N T S 

Page 

Advisory of January 30, announcing the hearing ................................................. 2 

WITNESS 

The Honorable Henry Paulson, Secretary, U.S. Department of the Treasury ... 6 


bajohnson on PROD1PC77 with HEARING

bajohnson on PROD1PC77 with HEARING
(1) 

PRESIDENT’S FISCAL YEAR 2008 BUDGET WITH 

U.S. DEPARTMENT OF THE TREASURY 

SECRETARY HENRY PAULSON 

TUESDAY, FEBRUARY 6, 2007 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The Committee met, pursuant to notice, at 10:00 a.m., in room 

1100, Longworth House Office Building, Hon. Charles B. Rangel 

(Chairman of the Committee) presiding. 

[The advisory announcing the hearing follows:] 


bajohnson on PROD1PC77 with HEARING
2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

January 30, 2007 

FC–5 

Chairman Rangel Announces a Hearing on the 

President’s Fiscal Year 2008 Budget with 

U.S. Department of the Treasury 

Secretary Henry Paulson 

House Ways and Means Committee Chairman Charles B. Rangel today announced the Committee will hold a hearing on President Bush’s budget proposals 

for fiscal year 2008. The hearing will take place on Tuesday, February 6, in 

the main Committee hearing room, 1100 Longworth House Office Building, 

beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be limited to the invited witness, the Honorable Henry M. Paulson, Jr., 

Secretary of the Treasury. However, any individual or organization not scheduled 

for an oral appearance may submit a written statement for consideration by the 

Committee and for inclusion in the printed record of the hearing. 

FOCUS OF THE HEARING: 

On February 5, 2007, President George W. Bush will submit his fiscal year 2008 

budget to Congress. The budget will detail his tax proposals for the coming year, 

as well as the budget for the Treasury Department and other activities of the Federal government. The Treasury plays a key role in many areas of the Committee’s 

jurisdiction, including taxes and customs. 

In announcing the hearing, Chairman Rangel said, ‘‘I have enjoyed working with 

Secretary Paulson and look forward to his presentation of the President’s budget. 

A budget is a statement of principles and I am hopeful that Democrats and Republicans can listen to the Administration’s presentation and work together to find solutions to the issues facing American families.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, February 20, 2007. Finally, please note that due to the change in House mail policy, 

the U.S. Capitol Police will refuse sealed-package deliveries to all House Office 

Buildings. For questions, or if you encounter technical problems, please call (202) 

225–1721. 


bajohnson on PROD1PC77 with HEARING
3 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman RANGEL. The Committee on Ways and Means will 

come to order. We have the distinct privilege and honor to hear 

from the Secretary of Treasury, who, in addition, is the President’s 

Economic Adviser. 

I attended a meeting this morning of the Democratic Chair people. I am pleased to report to you, Mr. Secretary, that you have the 

confidence of the Democratic leadership as well as the Chairmen 

of the legislative Committees that your office has jurisdiction over. 

I will say publicly what I have said privately, that we really appreciate and believe in your sincere desire to have this 110th Congress have some legislative accomplishments. We think it is important for the Democratic and Republican legislators to fulfill our obligations to the American people to move away from the partisan 

fights that we have gained a reputation for and to move forward 

with all that we can to at least try and hopefully resolve some of 

the critical problems that our great Nation faces. 

Mr. McCrery has been more than cooperative. He has a sincere 

desire that we get something accomplished in a bipartisan way. 

Publicly I want to thank you for the efforts that you made in working with me and others to make it easier to do. 

In order to set the record straight, the President really has to be 

a party to this. He has the pulpit, and he can create a climate that 

would allow us to move forward in a bipartisan way, without being 

profiles in courage but for him to be able to encourage us to continue along this line. Now, it is not for legislators to tell the President what he should put in his budget. He is the President, and 

he has that responsibility. There is a certain politics involved here 


bajohnson on PROD1PC77 with HEARING
4 

that is pretty clear to the American people after listening to the 

campaign. 

So, it would seem to me the answer is not what Democrats want 

or not what Republicans want but what we together can do. Following my own advice, I am not even going to talk about private 

accounts. That is something you talk about when you are fighting, 

not when you are trying to work out something. When I take a look 

at some of the cuts that are proposed, $637 billion for privatization, 

$66 billion for cuts in Medicare, restricting food stamps, building 

in cuts in Medicaid, cuts in children programs and the request that 

we make permanent his tax cuts; well, it sounds to me like this is 

pre-campaign talk. I just want someone at the White House to 

know that the Democrats won. We want to work with Republicans. 

To get back to where we were, we need the President to try to 

understand that the State of the Union was a missed opportunity, 

the talk that he gave in my district to the association for a better 

New York would have been a great opportunity, the Democratic retreat, we were so honored to have him there, but he could have 

broke new ground. I really think that the Administration, without 

sacrificing principle, can make us all feel that we have got a job 

to do. It is going to be difficult. It is going to be politically painful, 

but it will be a lot less painful if the President was on board. 

I shared my concerns with Mr. McCrery, and he says, well, don’t 

throw over the apple cart. I say, this train has not even left the 

station, so it is no problem. We have got plenty of time to attempt 

to do the things that we talked about, but I would be less than candid if I didn’t say that we need some help. We need it publicly, and 

we are not asking the President to back off of anything—or Republicans—except that we all have to be prepared to give. At the end 

of that, the Congress wins and the country wins. 

So, on a more positive note, I want to thank you for your outstanding contributions, and I look forward to continuously working 

with you, and from time to time, you can share your ideas with 

your client, the President of our great Nation. 

I would like to yield to Mr. McCrery. 

Mr. MCCRERY. Thank you, Mr. Chairman. 

Welcome Secretary Paulson. Thank you for coming to visit with 

us today to talk about your end of the President’s budget and other 

issues that may arise in your jurisdiction. 

I certainly understand where Chairman Rangel is coming from 

with his remarks about some of the things in the President’s budget. That is normal. It is not unusual at all. I don’t think it is any 

surprise to anyone that President Bush thinks the best way to fix 

Social Security is to use personal—establish personal accounts that 

are funded by payroll taxes. That doesn’t mean that he thinks that 

is the only way to solve the problem. I would point to page 144 of 

the President’s budget itself to the language, quote, The President 

is committed to strengthening the Social Security system and has 

reiterated his commitment to a bipartisan reform process in which 

participants are encouraged to bring different options for strengthening Social Security to the table. 

I know, Mr. Secretary, in my conversations with you in private, 

you have expressed similar goals. You and the President want all 

of us to come to the table, bring our ideas and let us sort them out 


bajohnson on PROD1PC77 with HEARING
5 

and come up with a bipartisan conclusion that we can all embrace 

and finally fix that problem for the American people. 

So, I don’t have a problem with Chairman Rangel’s comments. I 

don’t have a problem with the President’s budget. I certainly don’t 

have a problem with the statement I just read directly from the 

budget encouraging us to participate in a bipartisan process to 

solve this problem. 

Mr. Chairman, I have a more lengthy statement that I would 

submit for the record. In that statement, I commend the President’s budget for talking about the need to look at entitlement programs generally for the long-term impact on our programs. I applaud the President for coming out with, not a new idea but certainly a new idea coming from the President of the United States, 

with respect to health care and trying to create a more equitable 

tax treatment of health benefits in this country to encourage those 

who are currently without insurance to be able to obtain health insurance for their families. You also do in the budget, Mr. Secretary, 

under your part of the budget, address several pieces of the socalled tax gap, and I applaud the Treasury for including some proposals in the budget for trying to capture some of that tax gap. 

So, with that, Mr. Chairman, I would yield the remainder of my 

time and thank you for hosting the Secretary. 

[The prepared statement of Mr. McCrery follows:] 

Opening Statement of The Honorable Jim McCrery, a Representative in 

Congress from the State of Louisiana 

I join you in extending a warm welcome to Secretary Paulson. I look forward to 

his testimony and will therefore keep my comments brief. 

I do, however, want to touch upon three issues that I hope today’s hearing will 

explore in greater depth. 

First, let me congratulate the President and the Secretary for crafting a budget 

that extends the expiring 2001 and 2003 tax cuts while still reaching balance by 

2012. Given the very strong economic growth and larger-than-expected tax receipts 

we have seen in recent years, it is nice to see that reflected in the government’s 

bottom line. 

Nevertheless, I hope that our short-term success does not divert our attention 

away from the very serious long-term challenges facing our country in the form of 

unchecked entitlement growth combined with dramatic demographic shifts. 

Said more simply, the cost of providing Social Security and Medicare to each beneficiary will grow at the same time the country will have fewer workers supporting 

a growing number of retirees. 

Earlier this year, GAO Comptroller General Walker warned that, ‘‘. . . social insurance commitments and other fiscal exposures continue to grow. They now total 

approximately $50 trillion—about four times the nation’s total output (GDP) in fiscal year 2006—up from about $20 trillion, or two times GDP in fiscal year 2000.’’ 

I remain hopeful that we can find a way to work across partisan lines and with 

our friends across the Capitol as well as at the White House to begin to tackle these 

problems which are growing worse, not better, despite our strengthened economy. 

Second, I applaud the President for including in his budget a bold examination 

of the tax treatment of employer-sponsored health benefits. The current exclusion 

of these benefits from taxation is in many ways an accident of history. 

By coupling the taxation of these benefits at the employee level with a substantial 

deduction, available to any American with health insurance, the proposal helps level 

the playing field between those lucky enough to have coverage through a job and 

the increasing numbers of Americans who must shop for insurance in the individual 

market. 

As I noted last week, I would prefer to provide assistance through tax credits instead of a deduction and believe any such change should be accompanied by reforms 

of the individual market to help keep policies available and affordable. 

But the President’s proposal should force us to think deeply about the future of 

the health care delivery system, and I urge this panel to take up this challenge. 


bajohnson on PROD1PC77 with HEARING
6 

Finally, I am pleased to see that the Administration is increasing its efforts to 

close the so-called tax gap, the difference between taxes owed and taxes paid. 

I caution my colleagues, however, that as attractive as the tax gap may be as a 

rhetorical target, finding it is almost as difficult as finding the pot of gold at the 

end of a rainbow. Efforts to close the gap often involve placing burdens, such as increased information reporting, on individuals and companies already fully in compliance with the Tax Code. 

My colleagues will recall that it was not so long ago that the Congress acted in 

a bipartisan manner to reform the IRS because of alleged abuses of taxpayer rights. 

Efforts to close the tax gap that fail to consider the burdens we are placing on 

law-abiding citizens as well as the benefits of increased compliance could prove to 

be terribly short-sighted. 

f 

Chairman RANGEL. Thank you. 

Mr. Secretary, we hope that you are our new best friend. We look 

forward to working with you, and you may give us your testimony 

and thank you for coming. 

STATEMENT OF THE HONORABLE HENRY M. PAULSON, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary PAULSON. Chairman Rangel, Ranking Member 

McCrery, Members of the Committee. Thank you very much. I am 

very pleased to be here today to provide an overview of the President’s budget for fiscal year 2008. As the Secretary of Treasury, my 

top priority is keeping America’s economy strong for our workers, 

our families and our businesses. The President’s budget supports 

that goal. 

We start from a position of strength. Our economy appears to be 

transitioning from a period of above-trend growth to a more sustained level of about 3 percent growth. More than 7.4 million jobs 

have been created since August of 2003. Our unemployment rate 

is low at 4.6 percent, and over the last 12 months, real wages have 

increased 1.7 percent. 

Economic growth is finding its way into workers’ paychecks as a 

result of low inflation. That means family budgets are going further. Strong economic growth also benefits the government’s fiscal 

position, and in the first quarter of fiscal year 2007 receipts total 

$574 billion, an increase of 8 percent over the same period in fiscal 

year 2006. 

As a result of increased revenue over the last 2 years, we have 

brought the Federal budget deficit down to 1.8 percent of the Gross 

Domestic Product (GDP). 

The President has submitted a budget that reflects our strong 

economy and our Nation’s priority for continued job creation and 

wage growth, vigorous prosecution of the war on terror, increased 

access to affordable health insurance, improved energy security, 

and a strong fiscal position from which we can address long-term 

challenges such as strengthening Social Security and Medicare for 

future generations. 

The budget supports a strong economy by maintaining fiscal discipline. It maintains our current tax policy, which has helped our 

country rebound from recession to its current robust health. With 

a steadily growing economy, tax revenues combined with fiscal discipline should bring the Federal budget into balance in 5 years. In 

fact, we are submitting a budget that includes a surplus in 2012, 


bajohnson on PROD1PC77 with HEARING
7 

which is achievable if we keep our economy growing. While no one 

has a crystal ball, our economic assumptions are close to the consensus of professional forecasters. 

The President’s budget addresses important domestic priorities. 

Health care is high on the list. Under current law, the tax subsidy 

for health insurance purchased by employers will average more 

than $300 billion a year over the next 10 years. For that huge expenditure, we get a system in which rising coverages are a burden 

to families and businesses, and in which millions of people have no 

insurance at all. The President’s proposal would make health care 

more affordable and more accessible. It would give all taxpayers 

who buy health insurance, whether on their own or through their 

employers, and no matter what the cost of the plan, the same 

standard tax deduction for health insurance, $15,000 for family or 

$7,500 for an individual. 

The President’s proposal would help hold down health care costs 

by removing the current tax bias that encourages overspending. 

Costs would become clear, giving patients more power to make informed choices about their health care spending. The proposal 

would also jump start the individual insurance market so consumers have more choices than are available today. Health care 

would become more consumer-driven, more affordable and more 

successful for millions of Americans. 

Energy security is another concern of the American people. It is 

a priority addressed in the President’s budget. President Bush has 

put forward an ambitious goal of reducing gasoline consumption by 

20 percent over the next 10 years. We can achieve this goal by dramatically increasing the supply and use of alternative fuels, and 

improving fuel-efficiency by reforming and increasing Corporate 

Average Fuel Economy (CAFE). 

The expanded fuel standard will provide entrepreneurs and investors a guaranteed demand for alternative fuels, which accelerate 

private investment and technology development. Reforming CAFE 

will allow us to increase the fuel economy of our automobiles as 

fast as technology allows. With a more diverse fuel supply and better fuel efficiency, we can make our economy less vulnerable to 

supply disruptions and confront climate change through technologies that reduce carbon dioxide emissions. 

Finally, the President’s budget, by emphasizing fiscal discipline 

and economic growth, lays the right foundation for dealing with entitlement reform, a challenge we all have a responsibility to address. Strengthening Social Security and Medicare is the most important step we can take to ensure the retirement security of our 

children and grandchildren, the long-term stability of the Federal 

budget, and the continued growth of the American economy. 

I look forward to sitting down with Democrats and Republicans 

without pre-conditions and finding common ground on these critical 

issues. 

Mr. Chairman, the President’s budget priorities, a strong economy, national security, fiscal discipline, health care and energy innovation, and laying the groundwork for entitlement reform, are 

the right priorities for Americans, businesses, and investors who 

drive our economy. I am confident that working together we will 


bajohnson on PROD1PC77 with HEARING
8 

keep our economy strong and chart a course for maintaining our 

global leadership in the years ahead. 

Thank you very much for this opportunity to have this discussion 

today, and I now welcome your questions. 

[The prepared statement of Secretary Paulson follows:] 

Statement of The Honorable Henry Paulson, Secretary, U.S. Department of 

the Treasury 

Washington, D.C.—Chairman Rangel, Ranking Member McCrery, Members of 

the Committee: 

I am pleased to be here today to provide an overview of the President’s budget 

for fiscal year 2008. As the Secretary of the Treasury, my top priority is keeping 

America’s economy strong for our workers, our families, and our businesses. And the 

President’s budget supports that goal. 

We start from a position of strength. Our economy appears to be transitioning 

from a period of above-trend growth to a more sustainable level of about 3 percent 

growth. More than 7.4 million jobs have been created since August 2003. Our unemployment rate is low at 4.6 percent. And over the last 12 months, real wages have 

increased 1.7 percent. Economic growth is finding its way into workers’ paychecks 

as a result of low inflation. That means family budgets are going further. 

Strong economic growth also benefits the government’s fiscal position. In the first 

quarter of fiscal year 2007, budget receipts totaled $574 billion, an increase of 8 percent over the same period in fiscal year 2006. As a result of increased revenue over 

the last 2 years, we have brought the federal budget deficit down to 1.8 percent of 

GDP. 

The President has submitted a budget that reflects our strong economy and our 

Nation’s priorities: continued job creation and wage growth, vigorous prosecution of 

the war on terror, increased access to affordable health insurance, improved energy 

security, and a strong fiscal position from which we can address long-term challenges such as strengthening Social Security and Medicare for future generations. 

This budget supports a strong economy by maintaining fiscal discipline. It maintains our current tax policy, which has helped our economy rebound from recession 

to its current robust health. With a steadily growing economy, tax revenues combined with fiscal discipline should bring the federal budget into balance in five 

years. In fact, we are submitting a budget that includes a surplus in 2012, which 

is achievable if we keep our economy growing. While no one has a crystal ball, our 

economic assumptions are close to the consensus of professional forecasters. 

The President’s budget addresses important domestic priorities. Health care is 

high on this list. Under current law, the tax subsidy for health insurance purchased 

through employers will average more than $300 billion a year for the next ten years. 

For that huge expenditure we get a system in which rising costs are a burden to 

families and businesses, and in which millions of people have no insurance at all. 

The President’s proposal would make health care more affordable and more accessible. It would give all taxpayers who buy health insurance, whether on their own 

or through their employer, and no matter the cost of the plan, the same standard 

tax deduction for health insurance—$15,000 for a family, or $7,500 for an individual. The President’s proposal would help hold down health care costs by removing the current tax bias that encourages overspending. Costs would become clearer, 

giving patients more power to make informed choices about their health care spending. The proposal would also jump start the individual insurance market, so consumers have more choices than are available today. Health care would become more 

consumer-driven, more affordable, and more accessible for millions of Americans. 

Energy security is another concern of the American people, and it is a priority 

addressed in the President’s budget. President Bush has put forth an ambitious goal 

of reducing America’s projected gasoline consumption by 20 percent over the next 

10 years. We can achieve this goal by dramatically increasing the supply and use 

of alternative fuels, and improving fuel-efficiency by reforming and increasing 

CAFE. 

The expanded fuels standard will provide entrepreneurs and investors a guaranteed demand for alternative fuels, which will accelerate private investment and 

technological development. Reforming CAFE will allow us to increase the fuel economy of our automobiles as fast as technology allows. With a more diverse fuel supply and better fuel efficiency, we can make our economy less vulnerable to supply 

disruptions and confront climate change through technologies that reduce carbon dioxide emissions. 


bajohnson on PROD1PC77 with HEARING
9 

Finally, the President’s budget, by emphasizing fiscal discipline and economic 

growth, lays the right foundation for dealing with entitlement reform—a challenge 

we all have a responsibility to address. Strengthening Social Security and Medicare 

is the most important step we can take to ensure the retirement security of our children and grandchildren, the long-term stability of the federal budget, and the continued growth of the American economy. I look forward to sitting down with Democrats and Republicans, without pre-conditions, and finding common ground on these 

critical issues. 

Mr. Chairman, the President’s budget priorities—a strong economy, national security, fiscal discipline, health care and energy innovation, and laying the groundwork 

for entitlement reform—are the right priorities for America and for the workers, 

businesses, and investors who drive our economy. 

I am confident that, working together, we will keep our economy strong and chart 

a course for maintaining our global economic leadership in the years ahead. 

Thank you for the opportunity to discuss this today—and I now welcome your 

questions. 

f 

Chairman RANGEL. Thank you, Mr. Secretary. 

I would ask the members here to adhere to the 5-minute rule so 

that all members would get a chance to ask questions of the distinguished Secretary. 

Mr. Stark may inquire. 

Mr. STARK. Thank you, Mr. Secretary. 

I am concerned that, in your budget, you have cut slightly over a hundred billion from Medicare and Medicaid in 5 years and $300 

million over 10. I would say at the outset that you have suggested 

some areas in which we can save money, fraud, perhaps overpayment to some providers, perhaps underpayment to others. 

However, with the savings, and this is the first—I have been 

looking at Medicare budgets now for over 30 years. This is the first 

budget in the history of that 30 years where there has been no increase in benefits. That money, I suppose, is going to be spent in 

Iraq. Normally, if we save money in one area of Medicare, we 

might cut inner city hospitals, but then we might use that savings 

to help rural hospitals or vice versa. You have taken the entire savings and taken it away from us. 

Not only that, what you have ignored is health care for children, 

State Children’s Health Insurance Program (SCHIP) is underfunded. I couldn’t believe that the President could be so unthinking 

as to want to deny poor children health care and that is exactly 

what this budget does. I won’t talk about Leave No Child Behind. 

That is in another Committee. All of those programs are being underfunded or cut, and I am curious of our prerogative to deal with 

Medicare here. It would be a little easier for me if you said you 

want to take some of that hundred billion and fund SCHIP to include some more children who need medical care. That would seem 

to be a humane thing to do. I wouldn’t even mind if you said you 

would fund some education with our hundred—I don’t know if anybody here with a rural hospital will suggest that, but in addition, 

you have flat funded for 10 years. You have taken out the inflation 

growth that providers have come to expect. 

Now I have been lobbied by every hospital and every doctor in 

this country over the course of 30 years, and I think you have created a hornet’s nest that won’t end. I think that you have got every 

hospital, every teaching hospital, every rural hospital, every inner 

city hospital to say, well, never again will we get an increase. I 


bajohnson on PROD1PC77 with HEARING
10 

don’t see that that is a program that is politically survivable or 

morally survivable. 

So, my question is, would you consider our taking that hundred 

billion and using it within purview for programs that would provide medical care benefits or health benefits to those unfortunate 

people who now don’t have any? 

Secretary PAULSON. Congressman Stark, thank you. 

Thank you for your comments. As I think you all know, the 

Medicare and health care needs of the American people are vitally 

important, and so as I have gone around and talked with people, 

everyone agrees this is a major, major issue that we need to do 

something about. I think the way you should interpret what has 

gone on in this proposal is that just about everybody recognizes we 

have. Medicare payments, entitlement payments, growing at a rate 

that is unsustainable. So, what we have done here to start the discussion—and we really welcome everybody’s ideas. To start the discussion, we put forward a proposal that brings the trajectory of 

growth and takes growth down from 7.4 percent over 10 years to 

6.7 percent. The principles behind these changes—and I am sure 

that Secretary Leavitt can talk about it in some detail—but the 

principles are not just program efficiency, but also means testing. 

Given this, I think, the right way to look at this is to say that when 

we talk about Social Security, the idea is let us encourage people 

to come forward, put ideas on the table, and hear from people on 

both sides with the thought that there is some chance that we 

could craft a permanent solution. 

I think when you look at the Medicare area, this is a very complicated area getting into the health care, and no one believes that 

it will be possible to come up with, in one fell swoop, a permanent 

solution. So, the way to look at this is that, these are some ideas 

for dealing with the issue, and we will look forward to working 

with you in getting comments as we go forward here. 

Chairman RANGEL. Mr. McCrery. 

Mr. MCCRERY. Mr. Secretary, the gentleman from California 

talked about creating—well, cutting parts of Medicare and then 

spending it within Medicare or within health care. Certainly in the 

Balanced Budget Act (BBA) (P.L. 105–33), back in 1997, we 

made—we created significant savings to the budget and did not 

plow all of that back into health care, so there is certainly precedent for doing that. 

If we were not to do that, Mr. Secretary, if we were to simply 

spend any savings that we create by reform or change on the Medicare system on other parts of Medicare or health care, we wouldn’t 

address the long-term fiscal impact that we are facing, would we, 

of that particular entitlement program? 

Secretary PAULSON. Congressman, you are absolutely right. 

The issue—the big fiscal issue—we are facing as a country is not 

the fiscal deficit we have today, which is 1.8 percent of the GDP. 

The reason we are all so concerned about it is looking a number 

of years down the road and looking at the growth of Medicare and 

Social Security and what these programs mean. So, if we don’t 

start dealing with these issues today, it will have to be in the future, and it will be just a lot more costly all the way around. 


bajohnson on PROD1PC77 with HEARING
11 

Mr. MCCRERY. Let us explore what would happen if we don’t 

deal with them or if we deal with them in the way suggested by 

the gentleman from California. 

Today, Social Security, Medicare and Medicaid represent about 

8.5 percent of GDP or about 40 percent of the Federal budget. Now, 

your office, the Congressional Budget Office (CBO), Government 

Accountability Office (GAO), Congressional Research Service (CRS), 

have all said, if you don’t do anything to change the rate of increase in spending in these programs, by, say, the year 2030, those 

programs will represent about 15 percent, almost double, what 

they do today of GDP, and that would equate to about 75 percent 

of the Federal budget. 

Now, that is if we keep the budget at about 18 to 19 percent of 

GDP. Of course, the alternative is to increase taxes, and increase 

the budget, so that it is not 75 percent of the budget. 

So, my question to you, Mr. Secretary, if we allow the budget to 

increase substantially as a percentage of GDP, and revenues to 

support that budget as a percent of GDP going from the historical 

average since the 1960s of 18.2 of GDP to support the Federal Government to something clearly in excess of 20 percent, if not 23, 24, 

25 percent of GDP, does that sound an alarm to you in terms of 

our economy, in terms of economic growth, or does that not bother 

you? 

Secretary PAULSON. Of course, it sounds an alarm, and that is 

why it is just so important to deal with these issues today. As I 

have said frequently, we will deal with these issues whether it is 

today or whether it is years in the future. The longer we wait to 

deal with the problem, the more costly it is going to be either in 

terms of the cost to our economy overall or future benefit reductions that will happen to the younger generations, which can also 

affect them in terms of competitiveness. That is what these proposals represent. They are a starting point for a discussion in 

terms of how to scale back the trajectory of the growth. 

Mr. MCCRERY. Unfortunately, I think what is in the President’s 

budget and basically what we did in BBA is the old way of doing 

things. We are just ratcheting down reimbursement rates. I would 

estimate that Mr. Stark is right; if we continue to do that, we have 

only got the complaints from the health care industry, not much 

constructive criticism, just complaints. It will be hard for policymakers to pursue that, so we ought to start thinking about substantive fundamental reforms and how we deliver that care and 

pay for it rather than just ratcheting down reimbursements rates. 

Chairman RANGEL. Thank you. 

Mr. Levin may inquire. 

Mr. LEVIN. Thank you very much, Mr. Secretary, and welcome. 

I very much want to reinforce, if I might, the statement of our 

Chairman, Mr. Rangel. 

I do think that the budget—and you are not responsible for a 

good part of it—it shows the real difference between our two parties. It will be important to bridge the gulf, but it is a very wide 

one. 

I just went through some of the budget cuts. COPS, almost eliminated. Community Service Block Grants that provides needed services, eliminated. Special Ed, nothing done to meet our obligation to 


bajohnson on PROD1PC77 with HEARING
12 

fund it. The only major water program that we have, the revolving 

fund, would be cut. The Advanced Technology Program eliminated. 

The Manufacturing Extension Program, so important for the manufacturing sector, is reduced by over 50 percent. On and on. So, the 

gulf is a major one. It surely is true of Social Security. 

The last couple of years showed that private accounts are a nonstarter. The public will not accept it, and the President places it 

in the budget. It is going to take more than good will. It is going 

to be someone to accept the verdict of the American people. 

Let me talk to you about a trade-related issue, and that is the 

yen. I have been reading your comments. There has been a lot of 

discussion about the Chinese currency manipulation but less so 

about what the Japanese are doing. 

In the book by John Taylor, he acknowledges, from 2002 to 2004, 

our country not only acquiesced with the Japanese but essentially 

participated in the weakening of the yen even though, to quote Mr. 

Taylor’s comments, those interventions make U.S. exports less attractive. Of course, their exports more attractive. 

The yen today is weaker than the level at which this 

Aministration before your time essentially participated in bringing 

about. 

If you look in the automotive sector that is two-thirds more or 

less of our deficit with Japan, the exports, now—and I don’t think 

this is understood of Japanese cars—now is increasing and is higher I think than it ever has been. So, when Europeans, and you are 

going to the G7 meeting, are complaining about the weak yen and 

what it is meaning for their exports and for imports from Japan, 

I would like you to comment because you seem at one point to say 

you are going to look at it very, very carefully, but then in the 

headlines say this: Europe’s yen drive hits United States/Japan 

wall, and it is mainly because of your comment that it is fundamentals that are driving it, not policies, I guess, of the Japanese 

government. 

So, explain to the people of this country and to the manufacturing sector, why now with the yen weaker than it was rigged at 

in 2002, 2004, with the approval of the U.S. Government, why you 

are going to go to the G7 meeting and essentially say to the Japanese that Europeans are wrong, we are with you? 

Secretary PAULSON. Okay. I will—and you are right. I will be 

going to the G7 meeting, leaving on Thursday. You are right that 

I have a job to be vigilant and watch all currencies, and particularly given some of the publicity coming out of Europe, I have 

looked at the yen carefully. 

Let me step back and say that for the 1990s and the first part 

of this century—the first couple years, 2001, 2002, 2002 into 

2003—we had a situation where the world’s second largest economy, Japan, wasn’t growing. It was a drag on the world economy. 

Through a number of economic reforms by the Koizumi government, we now have the very fortunate situation because we have 

a Japanese economy growing. However, we still have deflation in 

Japan. So, while it is growing, and we all are benefiting from that 

growth, it is important to keep it growing. 

Now putting that aside, I have a market background, and I really believe in the underlying strength of markets, competitive marVerDate Aug 31 2005 07:39 May 10, 2007 Jkt 035149 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\35149.XXX 35149

bajohnson on PROD1PC77 with HEARING
13 

kets, open markets, where currencies are set in an open competitive market. So, in the discussions we are having, it is important 

to keep in mind that the Chinese don’t have an open competitive 

marketplace yet, as you well know. They are showing more currency flexibility than they have shown, but they need to get to the 

point where their currency will be considered in the marketplace. 

Now with regard to Japan, it is true that the yen is trading at 

or near a 20-year low, clearly on a trade-weighted basis. As far as 

we can see, there has been no intervention into their currencies 

since very early in 2004. This is a currency that is traded in the 

competitive open marketplace. I understand that some people 

might not like where it is trading. It is my job to support and fight 

for free competitive markets. I believe that the yen is trading in 

a competitive marketplace based upon underlying economic fundamentals. 

Chairman RANGEL. I don’t like to interrupt the Secretary, but 

in order to let the newer members get a chance to speak, I am 

going to ask you to try to have your question prepared in such a 

way that it gives the Secretary an opportunity to respond within 

those 5 minutes. 

My friend from California, Mr. Herger. 

Mr. HERGER. Thank you, Mr. Chairman. 

Mr. Secretary, it is good to have you here. 

I would like to continue in this same area of currency. I am very 

pleased to hear your emphasis on free markets. I think that is so 

important. I would like to direct my questions toward the currency, 

and I know you have been involved with this quite a bit with 

China. A great deal of emphasis has been placed on the specific exchange rate between the dollar and the Chinese currency. 

I am less interested in getting to a specific rate because no one 

really knows—can really say what an appropriate rate is. Only the 

market can do that. Thus I am more interested in seeing that the 

mechanism to determine that rate is a market driven one. 

Mr. Secretary, could you tell me what the mechanisms are the 

Chinese are developing to create market driven currency and what 

steps must it take and most importantly, how long will it take? 

Secretary PAULSON. Let me say, Congressman, first of all, I appreciate your question because I think you are right. We are emphasizing the need for greater flexibility and more movement in 

the short term. We will be arguing about what the right rate is 

until we get a competitive and open market determination of the 

currency. They have taken a number of steps to move in that direction. For example, Chinese banks are the ones that are trading 

within the band. There are a number of smaller steps that are 

similar to that. What we are pressing toward is reforms that will 

put them in a place where in the intermediate term they can have 

an exchange rate that is set in a competitive marketplace. I am 

placing a big emphasis on developing capital markets because having a competitive bond market and money market and yield 

curve—all of these things—will make that much more possible. 

Mr. HERGER. Now some say that may be an excuse; developing 

these capital markets is an excuse for doing that. Can you explain 

the importance of China’s broader financial reforms and how they 

must go hand in hand with this currency? 


bajohnson on PROD1PC77 with HEARING
14 

Secretary PAULSON. Yes, thank you very much for that question. The biggest reason for our trade imbalance is that China has 

an economy that is too geared toward exports, or over-investment 

and exports, and China doesn’t have enough domestic-led consumption to balance growth. So, as long as we are growing and not saving, and they are saving at 50 percent a year and don’t have the 

domestic consumption, we are going to have problems. So, a big 

part of the dialogue is aimed at encouraging the Chinese to continue with their path of reform, whether it means opening up to 

U.S. products or to foreign competition, in the services area and in 

other areas, and moving toward reform, which will lead to more 

balanced growth. 

Mr. HERGER. How are we coming along with this, and what are 

we doing to ensure that we are putting the proper most balanced 

emphasis toward the Chinese to ensure that they move at what 

seems to be a turtle’s pace? 

Secretary PAULSON. Well, you are right, that the biggest difference is on timing, that we agree on the principles. There are big 

differences on timing. So, that what we have put together is a strategic economic dialogue, which is a plan that gets us speaking with 

one voice to the top decisionmakers of China on a regular basis. 

There are two big meetings a year, multiple meetings throughout 

the course of a year, so we can track progress and work on some 

of these more fundamental reforms. So, that, in a nutshell, is what 

the platform is. 

Chairman RANGEL. Mr. McDermott, you may inquire. 

Mr. MCDERMOTT. Thank you. 

Secretary Paulson, besides being Secretary of Treasury, you are 

also a trustee of Medicare. It is your job to make the program fiscally sound. As you know, we are hurdling toward $250 billion in 

Medicare cuts to physicians in the very near future with no offset 

in the budget. So, I assume you think that is what is going to happen. It seems to me that the money that is being cut from Medicare 

is being used to pay for the tax cuts. I wonder how you square your 

responsibility as a trustee of Medicare with the need to make appropriate payments to physicians and cutting $300 million out of 

Medicare or $300 billion out of Medicare. It seems to me those two 

issues are sort of unresolvable, I guess is the word. 

Secretary PAULSON. Congressman, we have got the same objective, the same goal. In other words, it is quite easy to square the 

positions because when I look at our current fiscal position, we 

have an economy that is growing and that is reducing the deficit. 

I don’t think any of us would have concern about the deficit at this 

level were it not for the problem you have alluded to. I think we 

have a strong economy which gives us a strong basis for stepping 

up and dealing with some of these bigger issues. So, when I look 

at my responsibilities as a trustee of Medicare and Social Security, 

and I look at what I see coming down the road, I just realize how 

important it is to—— 

Mr. MCDERMOTT. Is it your position that these cuts to physician’s payments is appropriate? 

Secretary PAULSON. I have not looked at every single one of 

those provisions with the kind of detail that Mike Leavitt has. If 

you ask me, do I believe that it is a good step to start an important 


bajohnson on PROD1PC77 with HEARING
15 

discussion to say let us take the trajectory of growth to these benefits that are growing at over 7 percent over a 10-year period and 

let us modestly slow the rate of growth and think about principles 

like program efficiency and means testing; yes, I think it is a positive step. 

Mr. MCDERMOTT. One of the things that is troublesome about 

this budget; we are gutting—we are taking out big chunks out of 

Medicare. Medicare is growing at 7 percent a year. Well, private 

health insurance is growing at 10, 11, 12 percent an average over 

the last 5 or 6 years, and we are saying we want to shift people 

out of the public sector and put them into the private sector. It 

seems to me that this is really not very fiscally sound to move 

them from a program growing at 7 percent to moving them to the 

private sector. That is what this privatization is really about, Medicare is getting people out of the public program and getting them 

into these private programs that are supposedly so economically 

sounding but are growing at almost twice the rate of Medicare. 

How can you justify that? 

Secretary PAULSON. I have absolutely no trouble justifying 

slowing the rate of growth for Medicare spending. That is just 

something that is absolutely essential. 

Mr. MCDERMOTT. Why would you want to shift people into the 

private sector? 

Secretary PAULSON. If you tell me that the cost of health care 

is growing too quickly, I agree with you. I think one of the things 

that we have focused on is the standard deduction for health care. 

The President’s budget is one way of getting at this, and while it 

doesn’t totally solve it, I think it is a big step forward. 

Mr. MCDERMOTT. So, you would be opposed to the Congress doing anything about that $250 billion cut to physician’s payments. 

If we came up with a proposal you would tell the President we 

don’t think that is a good idea. 

Secretary PAULSON. I didn’t say that. I said that—— 

Mr. MCDERMOTT. So, you expect us to fill the hole that has 

been created by this budget? 

Secretary PAULSON. I didn’t say that either. 

Mr. MCDERMOTT. Where are you on that? 

Secretary PAULSON. What you heard me say is, I thought this 

was a positive step. We look forward to getting your ideas and talking about them. 

Mr. MCDERMOTT. Thank you. 

Chairman RANGEL. Mr. Camp, you may inquire. 

Mr. CAMP. Mr. Secretary, you are right. This process the President presents a budget and then the Congress also presents a 

budget, and I want to say I appreciate that you have come up here 

with a budget that balances without raising taxes because I think 

that is going to be one of the big debates that we have. 

I appreciate the deficit has shrunk by 58 percent over the last 

3 years. That is according to CBO. That is Congress’s numbers, not 

Administration’s numbers and that is despite all we are doing on 

Katrina, Homeland, and the war on terror. As you said, it is near 

1 percent of GDP, which is projected to be the case for the next few 

years, and well below the 40-year average of 2.4 percent for the 

deficit as a percentage of GDP. 


bajohnson on PROD1PC77 with HEARING
16 

What you have shown us is, with a little spending restraint, we 

can balance the budget. If you can outline for us two priorities with 

regard to the budget on entitlement spending and the rational behind that, I would appreciate hearing that. 

Secretary PAULSON. Yes. Well, again, thank you for the question. 

Just to step back and frame this, it was clear to me, and it is 

very, very clear to the President and others in the Administration, 

how important getting our arms around the entitlement issue is. It 

is very, very important. So, as we thought about it, and as I talked 

to people on both sides of the aisle, when you look at Social Security, there are big differences on policy, differences on personnel accounts and on taxes on both sides. However, people have at least 

identified the building blocks to put something together, the components, and they are clear. So, at least the hope is there that we can 

get people to come to the table and fashion a comprehensive solution that would lead to permanent solvency. 

The health care area is much more complex because there are 

very big policy differences. The economic components are not quite 

as clear, and so the thought here was to put two proposals out that 

will really start discussion and that we think are positive steps. 

There is a standard deduction for health insurance which, again, 

gets at developing access to private insurance and gets at helping 

reduce the rate of growth. Then there are the proposals in the 

Medicare area, which are really aimed at putting some ideas out 

there to slow the rate of growth and putting some principles out 

there that I have referred to before. You will hear a lot from Secretary Leavitt about his work at the State level, where I think a 

lot of this does need to get done and the affordable choice initiatives. So, I think that is the right way to frame it overall. 

Mr. CAMP. We had testimony from Comptroller Walker at the 

GAO who said that our liabilities, both entitlement, social insurance commitments and others, are now about four times our total 

output, and 6 years ago, they were only two times our total output. 

So, the trend lines are dramatic. So, I appreciate your testimony 

on that. 

Regarding the part of the health insurance proposal that allows 

States to use—have some flexibility with regard to disproportionate 

share funds which help the coverage to lower income populations, 

do you also think Congress should consider legislation to let individuals buy health insurance licensed in one State if they live in 

another—— 

Secretary PAULSON. I would say that, clearly, we have worked 

and thought about ways to address the individual insurance market. That is something that we need to address. 

Mr. CAMP. Thank you, Mr. Chairman. 

Chairman RANGEL. Mr. Lewis, you may inquire. 

Mr. LEWIS OF GEORGIA. Mr. Secretary, welcome. 

Mr. Secretary, when you look at the budget, look at this budget— 

and I wanted to be nice here. This budget appears to me to be really down right uncaring when it comes to the most vulnerable element in our society, our seniors, when it comes to Medicare and 

our children. You said, we want to help our children, our grandchildren and maybe our great grandchildren, but the President’s 


bajohnson on PROD1PC77 with HEARING
17 

budget is proposing only $5 billion in new funding over 5 years for 

the SCHIP program. Then CRS tells us you need at least $15 billion to cover the children that are already in the program. 

How do you account for this? 

Secretary PAULSON. There is no doubt that health care is very, 

very important, and health care for our children—— 

Mr. LEWIS OF GEORGIA. You said it is important, but the dollar input is not there. So, my concern is, it is a low priority. 

Secretary PAULSON. It is a budget proposal, and it is a budget 

proposal where we have a number of constraints to work within to 

increase the SCHIP funding. Again, we look forward to working 

with you on it. It just may be that the Congress believes that that 

is something that should be funded at a higher level. This is—this 

is, I think, a very serious proposal. 

Mr. LEWIS OF GEORGIA. How much in this budget are you 

proposing for the war in Iraq and Afghanistan over the next 2 

years? 

Secretary PAULSON. We have in the supplemental for this year roughly $170 billion. In 2008, it is approximately $145 billion. Mr. LEWIS OF GEORGIA. So, you are speaking about $245 billion in 2007 and 2008. Are there resources? 

Are there resources in the budget to do something about rebuilding the gulf coast. 

Secretary PAULSON. I missed your last question. 

Mr. LEWIS OF GEORGIA. To rebuild Mississippi and New 

Orleans. 

Secretary PAULSON. Yes. I don’t know that number. I am sure 

that you will be able to get that from others, or we will get it to 

you. 

Mr. LEWIS OF GEORGIA. Thank you, Mr. Chairman. 

Chairman RANGEL. Okay. 

Mr. McCrery, in order to bring some balance here, I would like 

to call on the Democrat next here, Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. Secretary, I must tell you, I was personally very impressed 

and pleased by your initial comments upon becoming Secretary as 

you addressed the comments on the growing wage gap in America, 

so pleased that I used them at a Democratic retreat suggesting 

there might be a following on this Committee to work with you on 

a series of issues. 

Having said that, if I might go to an issue that I have been most 

consistent on for a long period of time, and that is the issue of the 

alternative minimum tax (AMT). 

Let me frame the question this way: I have sought outright repeal of the AMT. We all know it has long outlived its usefulness, 

but your budget recommends a 1-year patch for 2007, meaning 23 

million would be hit by the AMT the following year and every other 

year of your budget. The Congressional Resource Service estimates 

it will hit families with three children earning as little as $61,000 

per year. I am in sharp disagreement with the strategy of the 1- 

year patch. The former Chairman of this Committee reassured us 

time and again this issue was going to be put before the Congress 

and eventually the American people. However, we find ourselves 

back to where we were. 


bajohnson on PROD1PC77 with HEARING
18 

I think the budget proposal, Mr. Secretary, could have done bet- ter by those families earning $62,000 a year or $61,500. We are 

putting off the long-term problem. I think you would probably 

agree with that. Specifically, aren’t you saving money on the permanent extension of the 2001 and 2003 tax cuts by not fixing 

AMT? Let me ask you to estimate how many taxpayers will have 

some or all of their tax cuts taken back by the AMT in all of the 

years that your budget does not provide for AMT? 

Lastly, before you answer those questions, as I indicated in my 

opening remarks, your comments were most welcome by the members of this Committee. At the outset of you joining the Treasury, 

you indicated everything was on the table. I think we should begin 

from that premise. However, the Vice President’s comments certainly are not consistent with the ones that you have offered. 

Maybe you could clear up the confusion for us and speak to the 

AMT questions I raised. 

Secretary PAULSON. I see I have 2 minutes and 18 seconds left 

to answer. 

Mr. NEAL. This is not like running Goldman Sachs, is it? 

Secretary PAULSON. You can say that again. 

First of all, with regard to the AMT, the President and I share 

your view that the AMT is a cruel tax, and it is an unintended tax. 

If it hits some of these families, it will be a surprise tax, too, because I think many people wouldn’t see it coming. 

What we have done is propose the additional year of relief for 

AMT so we can work on a permanent solution together. We need 

a permanent solution to AMT. We are in total agreement there. 

What Congress has done for the last 6 years is patched it, generally 1 year of relief at a time. The budget proposal is consistent 

with that, and this is something that we will need to work on together. 

In terms of the numbers, and I am going to be roughly right, the 

AMT right now applies to 4 million people so without this patch 

or this relief for 1 year, it would touch 25 million people. By the 

end of the budget period, by 2012, it would be 40 million people if 

we do not patch it. 

Of course, that is why we need to work together to find a permanent solution here. In terms of Social Security, the President has 

been very clear. He is very sincere about it, and I am very sincere 

that everything is on the table. People clearly are going to have 

their views. No one should be surprised that personal accounts are 

in the budget. That is his idea and a lot of people share that idea. 

There are different views on that and on taxes, but everything is 

on the table. 

Mr. NEAL. With Social Security we don’t doubt your sincerity, 

we doubt the word ‘‘crisis’’ that was used by the Administration to 

speak to the issue. 

Lastingly, Mr. Rangel has encouraged me to begin hearings the 

first week in March on the AMT, and I hope the Treasury will be 

fully participatory in those hearings. 

Thank you. 

Chairman RANGEL. Mr. Ramstad. 

Mr. RAMSTAD. Thank you, Mr. Chairman. Mr. Secretary, good 

to see you again. 


bajohnson on PROD1PC77 with HEARING
19 

I think there is a consensus in Congress as well as among the 

American people that we should address the pressing problem of 

the 45–47 million Americans without health insurance. It is a problem of access for many if not most of those people without health 

insurance, and it is certainly increasing costs for all of us in health 

plans by not having them in the larger insurance pool. 

Concerning the Administration’s health insurance proposal, why 

did the President or the Administration design it as a standard deduction which only benefits families with an income tax liability, 

instead of a refundable tax credit which would also benefit low-income families that don’t earn enough to have an income tax liability, the working poor, which constitute most of the uninsured? Why 

not do it with a refundable tax credit? 

Ironically, and historians can check this, but I believe at the beginning of the 109th Congress, the Administration submitted a bill 

in the Congress which was the best-kept secret around here to do 

just that: That is, to provide, through a system of refundable tax 

credits, health insurance coverage for all, to make it mandatory; 

just like when we drive a car we have to have our liability insurance, so would people be required to use that refundable tax credit 

or voucher to purchase basic coverage for themselves and their 

families. 

Secretary PAULSON. Congressman, thank you for your question. 

Let me begin by saying this is something that I have thought 

about a lot. Looking at the Tax Code, the preference for employerprovided health insurance is the biggest preference in the Tax 

Code. It will be approximately $3 trillion over the next 10 years. 

So, I think the Administration’s proposal is a very, very fundamental, major change. 

In terms of your question, I think you are right to focus on the 

45–47 million uninsured, and the 17 million that are insured in the 

individual market, not in the employer market, who get none of 

this tax benefit. 

Just to clear up one misconception, even for those who don’t pay 

any Federal income tax, where they are paying payroll tax, the 

standard deduction will still provide a real benefit. 

Having said that, you are right that a credit achieves the same 

objectives in the sense of dealing with the fairness issue, dealing 

with the uninsured, helping slow the cost of the growth of health 

care. 

So, why did we choose the standard deduction as opposed to the 

tax credit? We chose it because it was less of a radical departure 

from current policy. It was more consistent with current policy. 

Again, we would welcome the opportunity to talk about this with 

you. A credit is another reasonable approach. 

Mr. RAMSTAD. Mr. Secretary, I appreciate your candid response, which I believe it is. I hope we can work toward a refundable tax credit because obviously it would bring more people into 

the insurance pool and reduce health care costs for you all. Ironically, that proposal originated in the Heritage Foundation many, 

many years ago, so it is really not a radical proposal by any stretch 

of the imagination. I appreciate the fact that you recognize the 

merits. 


bajohnson on PROD1PC77 with HEARING
20 

I want to ask one other question and make another point. I know in the context of a $2.9 trillion budget, $19 million is not a lot of 

money. It is a lot to the people in Minnesota who woke up yesterday with a wind chill factor that was minus 40 degrees. That is 72 

degrees colder than the inside of your freezer. It was cold. To cut 

out the heating aid for the poor, the Low Income Home Energy Assistance Program (LIHEAP) subsidy that so many seniors on fixed 

income—and I can tell you many horror stories of seniors at the 

end of the month not being able to pay for heating oil—I hope that 

is restored by Congress. I don’t think that is appropriate. 

Secretary PAULSON. Thank you for the comment. 

Just to go back one last minute on health insurance, the standard deduction is a very serious, significant proposal that really 

makes a difference in a number of areas. I am very, very comfortable with that proposal. We thought that was the best policy. 

I do have to say in answer to your question that the credit 

achieves the same objectives, and it is another reasonable approach. 

Mr. RAMSTAD. Thank you, Mr. Secretary. 

Chairman RANGEL. Thank you, Mr. Secretary. 

The Chair recognizes Mr. Tanner. 

Mr. TANNER. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for being here. I am glad you are in 

town. 

I have been worried about our national debt for some time now 

and have spoken out about it. I have to tell you every Secretary, 

since I have been on the Committee for some 10 years, when they 

come to present the budget, the budget always miraculously balances in the last year of the cycle, whatever the cycle is, 5 years 

or 10 years; and this one is not any different in that regard. 

I want to ask you two questions. One is, when do you anticipate 

hitting the debt ceiling; will it be before the end of this calendar 

year? 

The second matter, and this is what I am really worried about, 

as you know, we have borrowed in real money, that is not from a 

trust fund, $1.6 trillion in the last 60 months. Worse than that, 

$1.15 trillion, according to the Treasury Department, has been borrowed from non-U.S. interests. That is over 70 percent. Last year, 

the deficit was covered by borrowings, almost 90 percent of which 

was from non-U.S. citizens. 

Last year alone, this country wrote checks to non-U.S. interests, 

interest checks, of over $140 billion, more than we appropriate for 

education, Veterans Affairs, and the Justice Department combined, 

10 times what the foreign aid bill is, and that is continuing. For 

example, we currently owe the Japanese interests $637 billion and 

China $346 billion, not to mention Hong Kong, another $51 billion. 

The China debt of $346 billion is up from $59 billion just 5 years 

ago. 

Now, if we are going to fight the global war on terror with borrowed money, what I have thought about and I would ask your 

comment on, what about a global-war-on-terror bond that Americans could buy, because if we are going to pay interest, let’s pay 

it to ourselves. 

Thank you, Mr. Secretary. 


bajohnson on PROD1PC77 with HEARING
21 

Secretary PAULSON. Thank you. In terms of your question on 

the debt ceiling, our best estimate is sometime this fall. 

Now, in terms of your question about foreign holdings of Treasuries, let me say to you that, with our economy growing at the rate 

it is growing, with the U.S. savings rate so low, and with savings 

so high overseas, with a number of our trading partners either not 

growing as fast as we would like them to grow or without domestic 

consumption in Japan, China, and some of the structural problems 

in Europe, we should be pleased that there is so much foreign interest in our securities. 

I have looked at the securities and how they are owned and held, 

and there is great diversity. For instance, you cited the Japanese 

and the Chinese. Those are the two biggest holders. As you said, 

taking the Chinese as an example, they hold $346 billion. We have 

in Treasuries $4.4 trillion in public hands, with $500 billion traded 

every day. So, when you look at what the official sector, what the 

Government is holding, and the holdings of private citizens in 

China, it is less than one day’s trading volume. 

There are many things that we look at with a certain amount of 

concern. This is not high up on that list because I think that foreign holders own Treasuries because they believe it gives them the 

best risk-adjusted return. The best thing we can do is keep our 

economy growing and keep confidence high. There is great diversity 

in the holdings. 

Mr. TANNER. I understand it is a matter of degree, and basically you have said this is not a high degree. At some point, Mr. 

Secretary, it seems to me that we are going to run into a national 

security matter if the financial leverage becomes such. 

I remember 6–8 months ago when the Japanese Prime Minister 

hinted that they might diversify to the euro, maybe a year ago 

now, and there were some jitters on Wall Street. You probably remember that as well as I do. I just am worried that if we continue 

to take the attitude that we have, at some point—and right now 

it is almost 50 percent of our privately held debt, publicly held 

debt, is owned by non-U.S. interests. It used to be 17 percent some 

25 years ago. So, as we continue to rely on that, at some point— 

and it is all a matter of degrees, I agree with that. I wish we could 

sit down to talk about that. This is probably not the best forum to 

do that. 

Secretary PAULSON. I look forward to talking with you about 

that. We look at that carefully and closely. There is great liquidity 

in U.S. Treasuries, and they are diversely held. We can talk about 

it more off line. 

Chairman RANGEL. Thank you. 

Mr. JOHNSON. Thank you, Mr. Secretary. Thank you for being 

here and taking the heat. 

I know you are a trustee on the Social Security board, and I am 

wondering, one thing about Social Security that I routinely hear 

about from my constituents concerns unauthorized workers getting 

access to Social Security benefits. Some time ago the Social Security Administration negotiated an agreement with Mexico called totalization. I am sure you are familiar with it. As a trustee, could 

you and the other trustees nullify that deal so we don’t have to do 

it here in the Congress? 


bajohnson on PROD1PC77 with HEARING
22 

Secretary PAULSON. Maybe this is something we can get into 

detail on and talk about off line. Clearly it is my job to enforce the 

law. Clearly we want to make sure, and I feel very strongly that 

we need to make sure that Social Security payments are being handled properly and according to the law. 

Mr. JOHNSON. Right, but you agree we don’t need an illegal Social Security payment to someone? I think you just said that. 

Secretary PAULSON. I appreciate your comments. 

Mr. JOHNSON. Thank you. 

On Social Security also, it seems to me that the basic program, 

the basic pilot program that was initiated to check on workers, the 

Social Security Administration assists the Department of Homeland Security in enabling employers to verify employment of new 

hires. It is possible that may not be the best way to do that. I think 

some of us believe the Social Security Administration should be the 

lead agency for employers to verify employment. They are far more 

competent at maintaining working histories of Americans than 

DHS could ever hope to be. It is frightening to think that tens of 

millions of Americans would need to pass through a law enforcement agency to get work authorization. 

If you agree, I would appreciate your help in that area, too. We 

think Social Security ought to be the lead agency. What is your 

opinion? 

Secretary PAULSON. My opinion is that it is being handled 

properly now. I recognize how important these issues are right now 

to many people up here on the Hill. So, on the whole questions of 

immigration, immigration reform, and Social Security, I appreciate 

your sensitivity to these issues. Again, I will be happy to spend 

time talking with you about it. 

Mr. JOHNSON. I appreciate that. 

Thank you, Mr. Chairman. 

Chairman RANGEL. The Chair recognizes Mr. Becerra. 

Mr. BECERRA. Thank you, Mr. Chairman. Mr. Secretary, thank 

you for being here. I appreciate it. 

Let me see if I can go back to discuss the global picture about 

the budget. I think with things becoming difficult, I think we are 

finding the public is paying a little more attention to see how the 

numbers add up. I know that the President’s budget suggests over 

the next 5 years we are going to go from deficits of about $240 billion to an actual surplus by 2012 of about $60 billion. I know in 

your capacity as Secretary of Treasury you also serve as a trustee 

for the Social Security program and the Medicare program. 

The numbers that the President provides us for these budget projections over the next 5 years include using every single cent of the 

Social Security surplus to bring the size of the deficit down. So, 

that deficit that is identified for 2007 as being a deficit of $244 billion includes in the President’s calculation spending $190 billion of 

Social Security trust fund dollars to help offset the size of the deficit. So, that if you were to reserve the Social Security trust fund 

dollars for, say, Social Security in the future, the actual size of this 

deficit for this Federal Government is not $244 billion but it is 

about $434 billion. In fact, if you were to take out the Social Security trust fund dollars that the President uses for not Social Security but to help reduce the size of the deficit, in the year 2012, 


bajohnson on PROD1PC77 with HEARING
23 

rather than have a $61 billion surplus, as the President says, this 

Federal Government would still have a deficit of $194 billion. 

So, over the course of those 5 years or so, 6 years, you are taking $190 billion in 2007; $203 billion in 2008; $218 billion in 2009; 

$231 billion in 2010; $246 billion in 2011; and $255 billion out of 

the Social Security trust fund in 2012. That is well over $1.2 trillion in Social Security trust fund dollars that I think most people 

in America think are being paid into the system every day out of 

their checks, their Federal Insurance Contributions Act (FICA) deduction, for Social Security. Over the course of this budget that the 

President proposes over 5 years, every single cent that folks are 

contributing as they work is going not to Social Security, but to 

help reduce the size of the deficit. 

As a trustee for the Social Security program, explain to me how 

you would explain this to the American people and why they 

should have confidence that we are doing the right thing? 

Secretary PAULSON. I bet the President wishes he were here so 

he could answer this one himself. 

Let me say he is on the same page as you are, and so am I. As 

you said, and I can’t confirm every number you threw out with 

great specificity, but I can say directionally it sure sounds right to 

me, and all of the numbers may be right. So, the issue really is: 

We need a permanent solution to Social Security. 

Mr. BECERRA. To take money out today, when we know we 

need a permanent solution for tomorrow, seems to be digging the 

hole even deeper. 

Secretary PAULSON. Well, let me say this. Another way of saying it, as I have said a couple of times before in testimony, is that 

the reason people focus on our current fiscal deficit is because we 

have the longer term problem, and you are talking about the accrued liability. So, that is why the President would like us all to 

come together and come up with a permanent solution. 

Mr. BECERRA. I think we would be willing to do that, but it is 

like playing with funny money. When you put forth a budget that 

doesn’t tell the American people, wink-wink, we are actually using 

the money reserved for Social Security to help defray the costs of 

running the Government, and when your budget doesn’t include 

the cost of trying to take care of the AMT which over the next 5 

years is going to suck in 35 to 40 million Americans into a tax bite 

that they were not expecting, and when you don’t in the President’s 

budget completely factor in the costs of this Iraq war over the long 

term, it makes it difficult to come up with accurate numbers. So, 

we should have truth in budgeting. 

So, rather than project a rosy picture of a surplus in 2012, I 

think the American public are ready to swallow the pill and know 

just how difficult things will be. 

Secretary PAULSON. I have 13 seconds left. In terms of your 

comment about funny money as it relates to Social Security, I 

think as you well know—— 

Mr. BECERRA. That was funny money relating to the budgeting 

process. 

Secretary PAULSON. There are two budgets, and this is the convention. There is the traditional cash budget, which is what you 

see here, and then there is the accrual budget, which the President 


bajohnson on PROD1PC77 with HEARING
24 

will provide to Congress through the Financial Statements of U.S. 

Government. 

So, again, with Social Security, you are absolutely right, we need 

to come up with a way of fixing that and fixing that permanently. 

I don’t know whether the Chairman would like me to address the 

other comments or questions. 

Chairman RANGEL. Thank you. The Chair recognizes Mr. 

Weller. 

Mr. WELLER. Thank you, Mr. Chairman. 

Good morning, Mr. Secretary. It is good to have you here. I appreciate your time before the Committee today. 

Let me begin with a couple of questions that need a yes or no 

answer. 

Some of my friends on the other side of the aisle advocate allowing the tax provisions that we enacted into law in 2001 and 2003, 

the marginal rate reductions, for example, allowing them to expire. 

Would the Administration view that as a tax increase? Yes or no. 

Secretary PAULSON. Of course. 

Mr. WELLER. Yes or no. Is your mike on? 

Secretary PAULSON. I’m sorry. The question is letting some of 

the tax cuts expire. Let me say to you, Congressman, that the tax 

cuts have been very, very important for this economy, a key part 

of the growth, so we think it would be a mistake to increase taxes. 

Mr. WELLER. So, you consider that a tax increase then? 

Secretary PAULSON. I said it would be a mistake to increase 

taxes. 

Mr. WELLER. Say this Committee were to terminate or eliminate a tax on someone, do you consider that a tax cut? 

Secretary PAULSON. To terminate? 

Mr. WELLER. Say there is currently a tax that is being levied 

on an individual or group, we allowed that to expire, would you 

consider that a tax cut? 

Secretary PAULSON. Would I consider it a tax cut if there is a 

tax on a group, and we allowed it to expire? 

Mr. WELLER. Right. 

Secretary PAULSON. Clearly, if someone is no longer paying a 

tax that they were paying—— 

Mr. WELLER. You would consider that a tax cut? 

Secretary PAULSON. I would consider that to be a reduction in 

an individual’s taxes. 

Mr. WELLER. Mr. Secretary, many of us have advocated allowing the expiration of the Federal unemployment surtax, allowing 

that to expire. It was created in 1976. It was a temporary tax to 

pay for extended benefits during a recession in 1975. Currently 

there is about $30 billion in Federal unemployment accounts today, 

and looking back over what we allocate out of that and expend on 

unemployment benefits in our various programs, it comes out to 

about $5 billion a year. So, we have 6 years’ worth of revenue in 

the Federal unemployment accounts already generated. 

Now that is due to expire, the current Federal unemployment 

surtax is due to expire in December, but your budget that you submit to Congress calls for extending it. If we were to allow it to expire under your definition, that would be a tax cut in this case for 

small business and employers. You advocate extending it. Do you 


bajohnson on PROD1PC77 with HEARING
25 

consider that a tax increase by extending the unemployment surtax? 

Secretary PAULSON. First of all, the unemployment surtax is 

something that I know the Secretary of Labor is very involved in. 

That is something that is right in the middle of her plate. 

In terms of playing games as to whether something is a tax increase or a tax cut, it is what it is. If there is a tax that someone 

is paying and suddenly they are not paying it, it is obviously a tax 

cut. 

Mr. WELLER. Mr. Secretary, you are here today to represent the 

Administration across the board, and again the Administration has 

called for extending of this tax even though we have 6 years’ worth 

of anticipated expenditures in unemployment accounts. Why do you 

feel a need to continue levying this tax on small businesses and 

other employers? 

Secretary PAULSON. This is something that I think you should 

talk with the Secretary of Labor about. This is something we have 

had some discussions with the Department of Labor about. 

Mr. WELLER. Well, you represent the Administration here 

today, and the Secretary of Labor is not here and I am directing 

the question to you, the Secretary of Treasury. This is a tax. 

Secretary PAULSON. I appreciate your point of view. It is a tax 

that is in the budget. 

Mr. WELLER. Why? 

Secretary PAULSON. Well, because we put it in the budget. 

Chairman RANGEL. Okay. Mr. Secretary. 

Mr. WELLER. Mr. Chairman, he wouldn’t give me an answer beyond—— 

Chairman RANGEL. He gave you one. 

Mr. WELLER. I am trying to understand why they put it in the 

budget. 

Secretary PAULSON. I am telling you. I would have to spend 

time with you off line. I have focused on some of the major things. 

This is something that I would need to get back to you on. 

Mr. WELLER. Mr. Secretary, the Chairman has been very generous by allowing me to continue when my time has expired. I 

would like an answer on the record in written form explaining why 

this tax increase was included in the Administration’s budget. 

Thank you. 

Chairman RANGEL. Just for the record, Mr. Secretary, was it 

the Administration and your office that recommended that this tax 

cut expire in 2010; is that correct? 

Secretary PAULSON. I don’t believe it was; no. 

Chairman RANGEL. The President’s tax cut. The one that expires in 2010. You call it a tax increase. It expires at the recommendation of the Administration. If it is a tax increase, it is because the Administration said at 2011, there would be a tax increase unless the Congress changes its mind. It is English. Did you 

support the expiration? 

Secretary PAULSON. I don’t know what you are talking about. 

Mr. WELLER. Would the Chairman yield? 

Chairman RANGEL. Yes. 

Mr. WELLER. The current tax, unemployment surtax is due to 

expire November 31, 2007. 


bajohnson on PROD1PC77 with HEARING
26 

Chairman RANGEL. Strike that. I am talking about the President’s major tax cut, just to get that out of the way so we can get 

rid of all of this expiration and tax increase. 

Secretary PAULSON. As you know, a key part of the budget is 

the need to make the tax cuts permanent. 

Chairman RANGEL. I am asking you whether or not you recommended to this Committee and to the Congress that whatever 

tax cuts it was, that expires in 2010? That is all I read. Is that so? 

Secretary PAULSON. I don’t know what tax cut you are talking 

about, Mr. Chairman. 

Chairman RANGEL. We have referred to it as the tax cut for the 

wealthy. That is how it is described. 

Mr. MCCRERY. Would the Chairman yield? 

Chairman RANGEL. Yes, of course. 

Mr. MCCRERY. To shed a little light on this, actually the Administration did not support sunsetting these tax cuts in 2010. 

That was an arcane requirement of the Senate rules under reconciliation, that anything passed under a reconciliation must sunset at the end of the budget window. When we passed those tax 

cuts, it was a 10-year budget window. So, that is why the tax cuts 

are sunset in 2010, not because that is what the Administration 

suggested. 

Chairman RANGEL. Well, they may not have suggested it, but 

they agreed to it. 

Secretary PAULSON. That was the Senate rules. 

Chairman RANGEL. We have to go back and see what happens 

when it does expire. I hate it to be considered a tax increase when 

the law is the law is the law. If it expires, it dies. 

Secretary PAULSON. I would say, Mr. Chairman, the law is one 

thing. I will tell you for the American people, that would be a big 

tax increase. 

Chairman RANGEL. Mr. Pomeroy. 

Mr. POMEROY. Thank you, Mr. Chairman. 

Mr. Secretary, in your statement you said that, ‘‘Energy is a priority addressed in the President’s budget. We can achieve that goal 

by dramatically increasing supply,’’ and yet I note when you look 

at the energy credits, you see section 45, renewable energy production tax credit expiring at the end of 2008; biodiesel tax credit expiring at the end of 2008; ethanol expiring in 2011, none of them 

provided for in the President’s budget. 

Is it your position that these would be recommended in next 

year’s budget? Do you anticipate continued support for the tax incentives on renewable fuels? 

Secretary PAULSON. I would say renewable fuels are a very, 

very important part of this Administration’s energy strategy. This 

is something we will look at and look at continually. The proposal 

that has been made in the energy security area is a very bold proposal, which will dramatically increase demand. It is going to spur 

a great deal of investment, we believe. 

Mr. POMEROY. Mr. Secretary, I might observe that not providing for a longer window on these tax credits is somewhat at 

odds with your stated goal, because as they try to line up the financing on behalf of these projects, only to see them expiring at the 

end of 2008, obviously that is going to in my opinion—maybe not 


bajohnson on PROD1PC77 with HEARING
27 

so much this month—but as we get closer to the actual expiration 

date, disincent capital. We will need to see more than exhortation 

from the Administration on that one. 

My final question, permanent AMT relief has to be passed. I believe you agree with that. 

The record should reflect that the Secretary was nodding. 

As I look at this, making the tax cut permanent is about a $1.8 

trillion fix to permanently deal with the AMT. You have not provided for the AMT fix other than the 1 year patch in the budget. 

I can only conclude from that that the Administration acknowledges there is going to be interplay between making the tax cuts 

permanent and taking some of that revenue that would be lost 

from making the tax cuts permanent and applying it to the AMT 

fix? By not having a commitment of resources in the budget, upon 

making the AMT fix permanent, the Administration acknowledges 

there is going to be an interplay between the other expiring tax 

provisions and AMT relief? 

Secretary PAULSON. Congressman, clearly we need to work on 

a permanent solution on the AMT. We are in agreement there. We 

need to work together. This is something we need to work with 

your Committee on. So, I am in agreement on that part of your 

statement. 

I have said before that I believe, and clearly the President believes, a tax increase is not something that would be good for this 

economy, and it is not something that we are recommending. So, 

I will just leave it there. We would like to work together to fix 

AMT. I don’t believe a tax increase is the way to do that. 

Mr. POMEROY. Where is the trillion dollars going to come from? 

If you take all of the expiring tax provisions, make them permanent, take them off the table at the outset, we are not going to discuss them in connection with the permanent AMT fix, where do 

you find the trillion dollars, Mr. Secretary? 

Secretary PAULSON. When you look at this issue, this is a 

tough issue. I think this is why Congress has been patching it 1 

year at a time. This is something we are going to have to work on 

together. It is not an easy one. 

Chairman RANGEL. In order to facilitate the Secretary’s schedule—and is it still noon? 

Secretary PAULSON. Yes. 

Chairman RANGEL. The Chair would ask you to confine your 

questions to 2 minutes to see whether or not we can have everyone 

at least get one question in. 

I recognize Mr. Lewis for 2 minutes. 

Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. 

Mr. Secretary, the Comptroller General, David Walker, has been 

before this Committee several times. This has been discussed by 

other members today, but the Secretary General says by the year 

2040—in fact that will be when my two kids, a daughter 24 and 

son 35 will be finishing up their working careers—but he tells us 

by 2040, there will not be enough revenue coming into the Federal 

Treasury to provide for Social Security, Medicare, and there will 

only be enough revenue to provide for interest on the debt. With 

this $50 trillion amount of unfunded liabilities and debt hanging 


bajohnson on PROD1PC77 with HEARING
28 

over the next generation’s head, do you agree with the Comptroller 

General on that scary prospect? 

Secretary PAULSON. I do. I think it is a serious problem. 

Mr. LEWIS OF KENTUCKY. So, it is not a matter whether benefits will be cut or the retirement age increased or the payroll tax 

increased. The Comptroller General says we can’t grow the economy enough to meet that demand. We can’t tax enough to meet 

that demand. We are going to have to fix those programs here and 

now or within the near future. Every Congress says well, we will 

wait until the next Congress. We had an opportunity to deal with 

Social Security in the last Congress, but it seems like Congress is 

more concerned about the next election than about the next generation. 

The President keeps putting proposals forward and asking Congress to work with it, work with this problem, and we tend to say 

we will do it sometime in the future. How pressing is it to do it 

as soon as possible? 

Chairman RANGEL. Thank you. Ms. Jones. 

Mrs. TUBBS JONES. Thank you, Mr. Chairman. 

I want to talk about public hospitals, but I don’t have the time. 

Could you look at the impact your budget has on public hospitals, 

like $24 billion? 

What I really want to focus on at this point is Individual Development Accounts (IDAs), which have been successful particularly 

over the last 7 years; 50,000 account holders have enrolled in programs with financial institutions. IDAs were in the budget for the 

past 6 years, and they are not in the budget this year. Why? 

Secretary PAULSON. I think IDAs are a good idea. We didn’t get 

a lot of traction from Congress on last year’s IDA proposal. We had 

to make some tough choices. 

Mrs. TUBBS JONES. What do you mean, you didn’t get traction? 

Secretary PAULSON. There just didn’t seem to be broad support 

for last year’s budget proposal. 

Mrs. TUBBS JONES. The people of America want it. You want 

the people to save in order to increase dollars for the Government 

and for work. So, regardless whether Members of Congress like 

IDAs, the people of America do. I think you need to rethink it. 

Secretary PAULSON. First of all, the concept in savings is a 

great idea. We have put forward other proposals, the Lifetime Savings Accounts and the Retirement Savings Accounts and others 

that are a similar thrust, but I hear you. I hear you, and I look 

forward to talking with you more about it. 

Mrs. TUBBS JONES. I would love to talk to you more about it. 

Thank you. 

Chairman RANGEL. Mr. Emanuel, 2 minutes. 

Mr. EMANUEL. Thank you, Mr. Chairman. 

Mr. Secretary, I know there have been a number of questions on 

the AMT. The President said on his retreat with us over the weekend, he doesn’t believe in tax increases. He thinks they are bad for 

the economy. Yet the budget, outside of just a 1-year fix on the 

AMT does rely on the revenue from the AMT to reach its goals in 

2012. The only way those numbers work is if there is a 1-year fix; 

and outside of that, you see the AMT increasing its grasp of more 

and more middle-class families. Given the paradigm of seeing tax 


bajohnson on PROD1PC77 with HEARING
29 

increases as bad for the economy, yet a budget that is touted as 

reaching balance relying on the AMT, can you reconcile those two 

concepts? 

Secretary PAULSON. Thank you. 

As we said, we believe that a permanent fix is necessary, and we 

really have to work toward a permanent fix. So, it is very important that we do that. This is a tough issue. 

Mr. EMANUEL. I understand that, but you also rely on, and 

some think, including the Washington Times, rosy scenarios on the 

economy. I am asking more specific questions. 

Would you agree that the budget outside of the 1-year fix in AMT 

relies on revenue coming from the AMT going from 4 million taxpayers up to 25 million taxpayers? 

Secretary PAULSON. Actually, if the AMT were allowed to go 

into effect without extending the patch, which we want to avoid, 

there would be 25 million AMT taxpayers today, and a good deal 

more in the future. 

Mr. EMANUEL. Getting back to brass tacks, in 2008 you see $82 billion raised from the AMT; 2009, $92.4 billion; 2010, $109.3 billion; 2011, $125.3 billion. Those are all your numbers. You agree 

if those numbers are in your budget, that would be the equivalent 

of a tax increase? 

Mr. Chairman, may I just get a ‘‘yes’’ or ‘‘no’’ on that? 

Secretary PAULSON. I would say, first of all, I see where you 

are going. 

Mr. EMANUEL. I would hope so. 

Secretary PAULSON. I think we are quite transparent in the 

budget. We said this is a 1 year fix. We need to find a permanent 

fix. 

Mr. EMANUEL. The rest of the revenue is a tax increase? 

Secretary PAULSON. I didn’t say that. 

Chairman RANGEL. Mr. Brady for 2 minutes. 

Mr. BRADY. Thank you. 

Mr. Secretary, I have a letter coming to you asking when the 

Treasury will update the regulations to provide flow-through treatment for banks organized as Limited Liability Corporations. We 

have been waiting several years for that update, from even before 

you got there, and I would like you to address it at some point. 

Secretary PAULSON. We will make sure that we get back to you 

on that. 

Mr. BRADY. I agree we ought not to be spending the Social Security surplus to balance this budget. I think it is more than a bit 

hypocritical that, over the last few years as we debated Social Security and the Republicans offered numerous plans to stop spending that surplus, not only did our Democrat colleagues not join 

with us, but they were prohibited, banned from working with us to 

try to save Social Security. Perhaps in this new Congress with this 

new world order, perhaps there will be a truly bipartisan effort beyond the crocodile tears to help finally address the issues of Social 

Security from both parties. 

My final point. The tax gap, $300 billion. It is a huge number. 

We ought to be doing everything we can to collect that. In real life, 

running a small business, we had aged receivables, 30, 60 and 90 

days, even a year or more. On paper they look like a huge amount 


bajohnson on PROD1PC77 with HEARING
30 

of cash to be collected, but in real life as you worked through them, 

you found they were much smaller than they showed on paper. 

In the spirit of not relying on funny money, understanding it 

takes an effort both within the Internal Revenue Service (IRS) and 

with professional groups who have expertise to collect it, how much 

of that $300 billion is gettable? How much in real life is gettable? 

Secretary PAULSON. Congressman, this is a question that is 

very difficult to answer, precisely because the last good research we 

had on the tax gap was in 2001. 

Having said that, I think you would find that a large portion of 

the tax gap is not gettable unless we are willing to have much 

more onerous requirements and reporting requirements for income 

that I wouldn’t support, and I would trust many Members of the 

Committee wouldn’t support if we talked about them in some detail. 

Chairman RANGEL. Mr. Kind is recognized for 2 minutes. 

Mr. KIND. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for being here and your accessibility in 

the last couple of months trying to work with many of us. 

One of the more disturbing aspects of this Administration’s budget policies has been the largest and fastest expansion of national 

debt in our Nation’s history: over 3 trillion new dollars accumulated in national debt in the last 6 years alone. As Mr. Tanner and 

Mr. Becerra indicated, a large portion is being held by foreign entities. 

What would be the economic consequences to us, say for instance, China decided to take more of their capital and started investing it internally to deal with their aging population, their infrastructure needs, or perhaps more in emerging markets like in Asia 

or Africa or in the European Union; what would that mean to us 

economically if we started seeing these foreign entities start diversifying their holdings in other parts of the world? 

Secretary PAULSON. With regard to China, and I know this 

isn’t what your question was directed at, but just narrowly, I actually think if China took more of their reserves and invested in their 

own population, safety nets and so on, it would be good for us. I 

think one of their problems is they are saving at 50 percent a year 

and we need some more balanced growth out of China. 

I understand what you are getting at, and I had a question earlier along the same lines. I know the amount of our Treasury securities that are held by overseas investors is of concern to a number 

of people. I would say this is not a major concern of mine today because there is so much diversity in the holdings. 

I do believe that overseas investors hold U.S. Treasuries because 

they believe they get the best risk-adjusted rate of return. By country and then by investors in the country, a lot of securities are held 

by private investors in the private sector, some by the official sector. 

Chairman RANGEL. Mr. Blumenauer is recognized for 2 minutes. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

Mr. Secretary, as somebody from the Northwest, I get a little 

concerned about having these issues dropped in regularly to accelerate the debt repayment from Bonneville Power Administration, 


bajohnson on PROD1PC77 with HEARING
31 

BPA. I only have 2 minutes, but I would respectfully request some 

rationale for why, after BPA has accelerated over a billion dollars 

voluntarily of rate repayment when they could, to see this dropped 

in, which looks like a potential very significant rate increase for the 

people in the Pacific Northwest. It always has engendered bipartisan opposition. I don’t think it is going to go anywhere; but more 

fundamentally, it doesn’t look to me like it should. We would like 

to get some sense from you about the parentage of this and whether or not you folks are serious about drawing the line. 

We ought to be able to get past this rather than having this 

flawed each and every budget cycle. I would respectfully request 

getting some information on that if I could. 

Secretary PAULSON. I will get back to you on that, yes. 

Mr. BLUMENAUER. I would just ask if you can outline, other 

than ethanol, which seems to be unrealistic if we are going to continue to feed chickens and cattle, what are the initiatives in this 

budget to meet our greenhouse gas objectives in terms of lowering 

carbon emissions? 

Secretary PAULSON. Let me be clear, what the President was 

addressing with the energy bill was energy security. There is a collateral benefit in terms of carbon emissions and greenhouse gases 

in the transportation sector. That is clearly a benefit. 

This is really a very, very bold program because we import 

roughly two-thirds of our oil, much of it from troubled areas of the 

world. The transportation sector, the auto sector is 97 percent, 98 

percent, something like that, dependent on oil. 

So, the idea here was to do something where you would create 

great demand on the supply side. Here there is a range of alternative sources of energy that are encompassed in this alternative 

fuel standard, which would displace 35 billion gallons in 10 years. 

Then there is the CAFE element, which is on the conservation side, 

5 percent. Then of course there is the SPR, which deals with this. 

So, that is where the big thrust was, on energy security. There is 

a positive impact in terms of what it does to carbon emissions from 

automobiles. 

Chairman RANGEL. Mr. Reynolds is recognized for 2 minutes. 

Mr. REYNOLDS. I thank the Chairman. 

Mr. Secretary, we have known each other for a long time, much 

longer than you have been Secretary. I have always found you to 

be a pragmatist. I have always found you to listen. 

I went back and looked at your opening address which started 

2 hours ago, and you laid out the strength of our economy. You 

brought forth the facts as you saw them on the President’s budget, 

and you have addressed the panel’s questions from both sides of 

the aisle. 

I have also heard you outline that to address Medicare and entitlement solutions, to look at Social Security and to look at something near and dear to my heart as it is to both sides of the aisle, 

AMT repeal, what you have talked about here is the current state 

of where we are, but you have always indicated a willingness that 

everything is on the table. It started in your opening remarks. I 

have heard it as you have answered questions. 

So, there are many tough challenges that the country faces. 

What I am hearing from the Treasury Department, and you as SecVerDate Aug 31 2005 07:39 May 10, 2007 Jkt 035149 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\35149.XXX 35149

bajohnson on PROD1PC77 with HEARING
32 

retary, is your willingness to look at plans, ideas and solutions this 

Congress from both sides of the aisle will bring forward, to see if 

there is an ability to bring about a consensus of a final solution; 

is that what I have been hearing today, Mr. Secretary? 

Secretary PAULSON. I think it is absolutely what you have been 

hearing, and there is no way we are going to solve some of the very 

big problems facing our economy, whether it is energy, whether it 

is health care, or whether it is Social Security, without having a 

bipartisan approach and a willingness to listen to both sides and 

consider everyone’s ideas in crafting a final solution. 

Mr. REYNOLDS. I would think as you are Treasury Secretary, 

and as we have new leadership in the Congress, that we are all 

seeing there are not easy answers to permanent solutions. 

Secretary PAULSON. That is absolutely true. 

Mr. REYNOLDS. Thank you. 

Chairman RANGEL. Mr. Pascrell is recognized for 2 minutes. 

Mr. PASCRELL. This is a continuation, this budget, and I have 

all due respect to the Secretary by shifting the burden of taxes 

upon wages rather than total income. That is a pattern. You have 

kept the pattern. If you continue to do business as you are doing, 

in two decades we will have a $46 trillion deficit. 

I want to go to a very specific question to you concerning about 

how we oversee taxes collected, how we oversee corporate tax shelters, how we oversee those generous tax treatments of foreign investors. 

I would like you to address an issue that I found perplexing for 

myself. Last September, the IRS began turning over thousands of 

taxpayer files to private debt-collection companies. Under the plan 

the IRS has agreed to use private companies to collect the simplest 

forms of tax debt and would allow them to keep up to 24 percent 

of what they collect. 

Why would the IRS proceed with a plan to pay private collectors 

almost 25 cents for every dollar collected on the easiest cases if the 

IRS employees could collect much more cost effectively? Why aren’t 

we going after those folks that have basically circumvented their 

tax obligations to the United States of America and pay a private 

concern, and now you are going to hire seven more firms in order 

to do this? Is it the job of this Government—— 

Secretary PAULSON. It is an interesting comment, because I 

hear so many people talking about the tax gap and having people 

pay what they owe. I think when Commissioner Everson is up 

here, he can explain to you how these private collection agencies, 

are collecting, helping to collect money that is owed the Government that we wouldn’t ordinarily be able to get within our budget. 

Now in terms of the IRS, this is the law, this is what we are supposed to be doing right now. I think we are managing it and Mark 

Everson is managing it with great care and making sure that the 

rights of the taxpayers are observed at the same time we are doing 

our best to collect the money. 

Chairman RANGEL. Ms. Berkley from Nevada is recognized for 

2 minutes. 

Ms. BERKLEY. I thank you, Mr. Chairman, and thank you very 

much, Secretary Paulson. 


bajohnson on PROD1PC77 with HEARING
33 

This is the first time that I have spoken on the Committee on 

Ways and Means, so I am newer than you are. Usually I listen to 

everybody speak because I don’t get to speak myself, and I learn 

something. I have to say I must be very thick today because the 

only thing I seem to have learned is that you are anxious to meet 

with us and work with us. 

I represent the fastest-growing community in the United States, 

Las Vegas. I have 7,000 new residents a month coming into town. 

When there is cuts in special education, and the SCHIP program, 

and the TRIO program, and Medicaid and the COPS program, it 

disproportionately hurts my community and the people that I represent. So, I have tremendous concern about the budget that has 

been presented to us due to the tax cuts, due to the cuts in the 

budget that may be 1 percent across the board, but believe me, 

they are going to hurt me more than 1 percent. 

This is what I want to ask you. If we have—it seems to me that 

the budget that has been presented to us, unless I am missing 

something, is almost fraudulent. It is a fraud being perpetrated on 

the American people, and let me share with you why. There are 

certain built-in assumptions in this budget that you are presenting 

to us today that are clearly not ever going to happen. The fact that 

we are going to balance the budget in 5 years is based on these 

budget assumptions that are contained. Let me share with you 

some of them. 

Medicare. There is no way that we are not going to work out 

some sort of reimbursement formula for our doctors. I cannot tell 

you how many docs call me in Las Vegas and tell me they can no 

longer afford to treat Medicare patients. I have got the fastestgrowing senior population. Losing my doctors and not having them 

care for my seniors worries me a great deal. 

When it comes to veterans, we are not going to double the copay 

on their prescription medications. When it comes to LIHEAP, Congress is going to put money in. You can’t zero out that program. 

People are going to die if we zero out that program. There are 

other assumptions like privatizing Social Security. 

Don’t you think the time has come that we should level with the 

American people and present to them a budget not that we are 

going to work together on, but there are certain built-in assumptions here—when we go to the American people and tell them that 

we are going to have a balanced budget in 5 years, on what planet 

is that going to happen, because it is not going to happen here. 

Chairman RANGEL. Mr. Porter is recognized for 2 minutes. 

Secretary PAULSON. I guess—— 

Ms. BERKLEY. Mr. Chairman, do you think you could ask the 

witness to answer my questions in writing? 

Secretary PAULSON. What my answer would be in writing or 

verbally is that I think this is a very credible, strong budget. It is 

a budget that is based on keeping this economy strong, keeping tax 

revenues coming in. In 2005, tax revenues increased 14.6 percent, 

11.8 percent last year, 8 percent in the first quarter. In this budget 

we are assuming that tax revenues are going to grow at 5.4 percent 

over the next 5 years. Over the last 20 years they have grown at 

6 percent. So, it is based on a very strong and growing economy. 


bajohnson on PROD1PC77 with HEARING
34 

What I hear from you is a disagreement over priorities in terms 

of where there should be cuts, where there should be spending. 

Again, I believe that this budget is quite transparent, and it is 

quite transparent in terms of where there is going to be spending 

and what the assumptions are. 

So, I think it is a credible, straightforward budget, and if we can 

keep the country growing and show a little bit of fiscal discipline, 

we can balance this budget by 2012. 

Chairman RANGEL. Mr. Porter of Nevada is recognized for 2 

minutes. 

Mr. PORTER. Thank you. I am anxiously awaiting your response 

to my colleague from Nevada. I will not take more time because 

she has addressed them so well. 

Regarding the deficit, 9/11. What impact has the financial burden on our country had on our deficit for 9/11? I think sometimes 

we forget how we got to where we are today. 

Secretary PAULSON. It is pretty remarkable because I was on 

Wall Street at the time the World Trade Center was hit—but even 

before then, we had the stock market bubble burst, and headed 

into a recession. So, when you look at what this country has gone 

through in terms of the bursting of the bubble, the recession, the 

9/11 attacks, the corporate scandals, Hurricane Katrina, the spending for the war, and look at all of that and see a deficit that is 1.8 

percent of GDP, this is something that I think has surprised many 

people. I think this says marvelous things about our economy, and 

we can be very pleased with where we are fiscally after everything 

we have been through. 

Still, we have got these big challenges staring us in the face, and 

I think that is what there is agreement on here. No one that has 

spoken is not concerned about the long-term economic challenges 

we have. 

Mr. PORTER. I appreciate your comment, and I think many 

times we would like to use history to our advantage, and sometimes which is not to use history. I think it is important, your comment. A lot of what we are facing today is the impact of a downturn in the early part of 2000 plus rebuilding our military to protect our homeland. I appreciate you being here today and putting 

that on the record for us. 

Chairman RANGEL. Mr. Meek from Florida is recognized for 2 

minutes. 

Mr. MEEK. Thank you for coming to the Committee. You have 

been asked a lot of the questions I was concerned about, but I am 

looking at this budget process as a give and take. You mentioned 

earlier that the Administration putting forth its will and desire, 

and I know that this Congress will do the same, and hopefully we 

can come to a table that will benefit the majority of the American 

people. 

I do know that the folks that are protected in this budget are the 

superwealthy and those that are connected, and we can argue back 

and forth about what is good and what is bad for the economy. 

One thing that I wanted to ask you about this morning is the 

fact that the proposal to increase the maximum Pell grant for lowincome undergraduate students to be able to educate themselves 

was just announced last spring, but in the budget it shows no inVerDate Aug 31 2005 07:39 May 10, 2007 Jkt 035149 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\35149.XXX 35149

bajohnson on PROD1PC77 with HEARING
35 

crease as it relates to the announcement last week, and that the 

Administration has—is standing behind that commitment they just 

made last week. Would you comment on that a little bit, sir? 

Secretary PAULSON. I don’t have all the details on the Pell 

grants. I know that this is a very important program and is something that our Secretary of Education is very supportive of, as is 

the President. 

Mr. MEEK. Why isn’t it reflected in your budget? 

Secretary PAULSON. I believe it is reflected in our budget. 

Mr. MEEK. It has been frozen for the last 4 years. It is at the 

same level, but, better yet, saying it will increase, that that was 

the announcement out of the White House last week. 

Secretary PAULSON. I will need to get back to you on the details of that. I can just say to you that when we are working to balance the budget, and we have the spending for discretionary nonsecurity items going up 1 percent a year; we make some tough 

choices, but in terms of that, that question, I will get back to you. 

Mr. MEEK. Thank you. 

[The information follows: PENDING] 

Chairman RANGEL. Mr. Thompson. 

Mr. THOMPSON. Thank you, Mr. Chairman. 

I want to associate myself with some of the things that my colleagues said previously, especially in regards to the health care 

stuff. In my district, hospitals are having a tough time. Docs aren’t 

taking new Medicare patients. Docs are leaving the area, and the 

one area that looks promising is in the area of kids’, children’s, 

health care, and the SCHIP program is being cut. We really need 

to get away from the incremental messing with health care and figure out a good proposal. 

That is not my question. I just want to associate myself with 

that. 

Also—and in California it is going to be a $3 billion hit to hospitals alone in your budget, and this is going to be hard to reconcile. 

With regard to the AMT, it just seems foolish to me that we look 

at extending on a permanent basis tax cuts that don’t go away for 

years and only deal with AMT on a 1-year proposal. I think we 

need to figure that out because it is 25 million people who are 

going to see a tax increase if we don’t fix that. 

Now, my question is on the health tax deduction proposals, I am 

concerned that it looks like this is going to provide incentive for 

people, healthy people, younger people to leave their employerbased programs to opt for better prices rather than greater quality 

or greater scope. How many people do you estimate will actually 

leave their employer-based health care? 

Secretary PAULSON. I would say that in terms of the employerbased health care, my judgment is that most employers that provide health insurance now do so because it is a recruiting tool, and 

it is very, very important to their employees. 

Mr. THOMPSON. How many people do you think will abandon 

that? 

Secretary PAULSON. There has been a long-term decline going 

on here. In 2000, I think 69 percent of the businesses provided 

health insurance. On the employees’ side, I don’t think that you are 


bajohnson on PROD1PC77 with HEARING
36 

going to see employees who are getting good health insurance from 

their employers leaving because of this program. 

Mr. THOMPSON. If this program provides such a good financial 

deal, of course they will. 

Secretary PAULSON. No. This program takes away the bias and 

the distortion. This program gives a standard deduction to everyone regardless of their income. 

Mr. THOMPSON. So, your estimates are that your employees, 

younger, healthier employees, won’t leave their employer-provided 

health plan for a cheaper one. 

Secretary PAULSON. I am saying there is no incentive in this 

program one way or the other, because this program gives the 

same standard deduction whether someone gets the insurance from 

their employer, whether they get it individually, or however they 

get it. 

Mr. THOMPSON. Are the TTBs still in this bill? 

Chairman RANGEL. Mr. Hulshof, thank you for your patience. 

You are recognized for 2 minutes. 

Mr. HULSHOF. Thank you for your indulgence. This is an annual exercise where Members get to point out things they like or 

don’t like about the budget. 

Let me begin with my critique. I remain opposed to the President’s proposal to sell our national forestlands, particularly in Missouri, to fund the Rural Schools Initiative. I absolutely believe that 

initiative is meritorious, deserves to be funded, but I think this 

proposal is misguided, and other funding streams have been offered, but they, too, have been unacceptable, at least in my view. 

Secondly, my colleague from Washington State challenged you on 

Medicare as if how dare the Administration look to a competitive 

model to try to find savings. Denigrating the private sector, he 

asked the rhetorical question, how do you justify it? My response 

to him would be two words: Part B, this public/private partnership 

that shows the competitive model can, in fact, work. 

Thirdly, my good friend from Massachusetts Mr. Neal says we 

should not use the word ‘‘crisis,’’ and yet—regarding Social Security, and yet in 328 days, the midpoint of this Congress, the first 

baby boomer begins to retire and look to the retirement system. So, 

maybe something—I will ask my good friend to come up with another word than ‘‘crisis,’’ but it needs to be addressed, and I applaud the Administration. 

Thank you for your unflagging support for alternative fuels, Mr. 

Pomeroy’s bill, H.R. 196, of which I am proud to be his chief sponsor. I just yesterday addressed about 3,500 people at the National 

Biodiesel Conference. There is a concern about the tax incentive 

going away in 2008. I hope the Administration, particularly you, 

continues to look at these tax incentives. I understand the angst 

from our friends in the livestock-producing arena as far as the 

price of commodities, and yet this tax incentive for ethanol and biodiesel are critical to continue to build this domestic demand, and 

I will continue our conversation about the definition of renewable 

biodiesel, which is something that your Department is about to promulgate regulations, but we don’t have time to go into that. 


bajohnson on PROD1PC77 with HEARING
37 

We continue to look forward to working with the Administration 

to continue to provide this strong economy that we have seen over 

these past years. 

Thank you, Mr. Secretary. 

Chairman RANGEL. Mr. McCrery, would you care to close? 

Mr. MCCRERY. Just to say thank you to the Secretary for staying over 15 minutes to accommodate our Members. 

Thank you. 

Chairman RANGEL. Well, we look forward to working with you, 

and this is just the beginning. We hope we end up at the station 

together. 

Thank you very much. 

Secretary PAULSON. Thank you very much. 

[Whereupon, at 12:15 p.m., the hearing was adjourned.] 

[Questions submitted from Members to Secretary Paulson follow:] 

Questions Submitted by Mr. Blumenauer to Treasury Secretary Paulson 

Question: I was pleasantly surprised to see that the Global Environment 

Facility (GEF) received not only the $80 million pledged for the 4th replenishment, but started down the path toward paying off our arrears from 

past shortfalls. Does this reflect a new commitment by the Treasury Department toward the GEF? 

Answer: The Administration’s request of $80 million for annual payment toward 

the fourth replenishment and $27 million for arrears clearance reflects numerous 

factors. Most importantly, it reflects the GEF’s newfound commitment to manage for 

results. The organization took an important step forward when it agreed to distribute resources according to performance and needs, consistent with best practices 

at other international financial institutions. The GEF has also committed to 

strengthening fiduciary standards and improving its strategies for intervention in 

substantive areas including biodiversity, reducing greenhouse gas emissions, and 

promoting sustainable land use. Finally, the institution is engaged in a rethinking 

of its project development and project management processes, so that donors can 

have greater confidence that it allocates resources effectively and efficiently to maximize gains for the global environment. These were reforms that Treasury pushed 

for and achieved in the fourth replenishment, in what was a contentious negotiation. Under these circumstances, we felt that increasing our appropriation request 

to include a payment on arrears would provide an important signal that the United 

States supports recent progress in the GEF. U.S. arrears to the GEF have risen to 

$170.6 million as of the end of FY2007. It is important to fund the GEF request 

fully, both the U.S. commitment to the GEF–4 and arrears, to enable the United 

States to retain its leading position on driving key reforms, effectiveness, and transparency at the GEF. 

Question: We have begun to see the positive impact of debt cancellation 

in those impoverished countries that benefited from the 2005 debt agreement reached in Gleneagles, but many more impoverished countries require 100% debt cancellation. In the UK, Gordon Brown has named 67 countries as requiring full debt cancellation. Will the U.S. government work to 

negotiate cancelation for these additional countries, following on the heels 

of the President’s State of the Union address where he noted debt relief as 

among ‘‘our best hope[s] for lifting lives and eliminating poverty’’? 

Answer: We have indeed begun to see promising results in the heavily indebted 

poor countries that have demonstrated a commitment to economic reform and poverty reduction, and have therefore benefited from debt reduction under the Heavily 

Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Our policy has been to use the limited U.S. budge resources available 

for debt relief for those countries that have unsustainable debt burdens, including 

those that qualify for HIPC and MDRI debt relief. The United States does not yet 

have the resources required to meet all of its commitments for those countries, and 

we hope that Congress will see fit to fund fully the President’s FY2008 request for 

debt relief. 


bajohnson on PROD1PC77 with HEARING
38 

For low-income countries in general, the United States has significantly increased 

its development assistance. From 2000 to 2005, the United States nearly tripled its 

official development assistance (ODA) from $10 billion to $27.5 billion and nearly 

quadrupled its ODA to Sub-Saharan Africa from $1.1 billion to $4.1 billion, nearly 

twice the level of that provided by any previous administration. 

Question: Those countries currently eligible for 100% debt cancellation 

through the IMF and World Bank’s debt program are required to undertake a series of economic policy reforms to obtain cancelation, including 

moves to privatize electricity and water services as well as implementing 

spending caps in health care and education. Is the U.S. Treasury concerned 

about the years of delays caused by these economic reform requirements 

in the HIPC, or Heavily Indebted Poor Countries, program, and possible 

negative impacts on sustainable economic growth and poverty reduction? 

Answer: It is important that the debt relief provided under HIPC and MDRI is 

well used, and contributes to sustainable growth and poverty reduction. Hence, the 

programs require that governments commit to a sound macroeconomic framework, 

through a program with the IMF, and to specific reforms that are agreed between 

the government and the international financial institutions. HIPC and MDRI are in 

fact aimed at increasing the government funding for poverty reduction programs. 

While a sound fiscal framework does require limits on spending, the IMF does not 

actually impose spending caps on ‘‘health care education.’’ The governments decide 

their spending priorities, which are reflected in the IMF programs. In the case of 

privatizations, these are decided by the governments, and designed to improve efficiency and the delivery of services, and to ease fiscal burdens on the governments. 

Question: Last month the Intergovernmental Panel on Climate Change 

released a consensus report of thousands of scientists around the world 

saying that evidence of global warming is ‘‘unequivocal’’ and human activities are the major factor driving the temperature rise. What major new initiatives to combat global warming has the administration included in the 

FY 2008 Budget request? 

Answer: Each year the President’s Office of Management and Budget (OMB) 

issues a Federal Climate Change Expenditures Report to Congress, generally in the 

spring. Upon completions, OMB will post the FY2008 report on its website. 

The Administration’s overall portfolio of climate change programs focuses on reducing the scientific uncertainties associated with climate change; advancing energy-efficient, renewable, and other low- or non-emitting technologies; and improving standards for measuring and registering emissions reductions. 

One of two important categories of spending on climate change-related programs 

is Climate Change Science, which includes the U.S. Climate Change Science Program (CCSP). The CCSP has been established to integrate the work of the U.S. 

Global Change Research Program (USGCRP) with the activities of the Climate 

Change Research Initiative (CCRI). The other category is Climate Change Technology. This category comprises the U.S. Climate Change Technology Program 

(CCTP) and the subset of CCTP activities identified as the National Climate Change 

Technology Initiative priorities. The CCTP is a multi-agency effort that incorporates 

a variety of technology research, development, and deployment activities—including 

voluntary partnerships and grant programs—that reduce greenhouse gas emissions. 

Question: The President has recommended a permanent extension and 

liberalization of many tax credits, such as increased small business expensing, brownfields tax incentives, and the deduction for teachers’ out of pocket classroom expenses. What is the administration’s proposal with regard 

to the Renewable Production Tax Credit, current set to expire in 2008? 

Why has this successful program, which helps level the playing field for 

wind and solar power, not been extended? 

Answer: The Tax Relief and Health Care Act of 2006 extended the renewable 

electricity production tax credit through January 1, 2009. The tax credit is for qualifying facilities placed in service before that date and can be claimed for the first 

5 to 10 years of operation, depending on the technology. The Administration supports the use of renewable power and will continue to examine the role incentives 

play in supporting renewable power. In addition to the Federal production tax credit, numerous Federal and State programs provide assistance that promote deployment of renewable energy technologies. The President’s Advanced Energy Initiative 

also provides for continued investments in important clean energy technologies of 


bajohnson on PROD1PC77 with HEARING
39 

the future that can help reduce emissions and improve energy security. The Administration will be watching developments underway in renewable energy technology 

and in the market over the coming year, and will make a determination at the appropriate time whether to advocate a further extension of the credit. 

Question: The Superfund program, created to clean up the nation’s worst 

hazardous waste sites, is funded by holding potentially responsible parties 

accountable for cleaning up waste sites they create. Until 1995, a dedicated 

tax on petroleum, chemical feedstocks, and corporate income was used to 

fund the clean up of ‘‘orphan sites,’’ where no responsible party could be 

identified or where the responsible party did not have the financial resources to assist with cleanup. This tax brought in close to $2.5 billion in 

revenues to the Federal government each year. Has the administration 

given any thought to requesting reinstatement of this tax? 

Answer: At this time, the Administration is not seeking reinstatement of the 

Superfund taxes that expired in 1995. The Administration’s FY 2008 Budget proposes to continue to fund the Superfund program through appropriations from the 

general fund, interest accrued on the unexpected invested balance in the Superfund 

Trust Fund, recoveries of cleanup costs from responsible parties, and fines and penalties. 

Æ 


bajohnson on PROD1PC77 with HEARING