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30–403—PDF 2006

S. HRG. 109–630

PRESIDENT’S FISCAL YEAR 2007 BUDGET

(REVENUE PROPOSALS)

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 7, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

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

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

ADMINISTRATION WITNESS

Snow, Hon. John, Secretary, U.S. Department of the Treasury, Washington,

DC .......................................................................................................................... 6

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 43

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 46

Grassley, Hon. Charles E.:

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

Prepared statement .......................................................................................... 47

Lincoln, Hon. Blanche L.:

Proposed legislation .......................................................................................... 51

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 53

Schumer, Hon. Charles E.:

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

Snow, Hon. John:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 56

Responses to questions from committee members ......................................... 69

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 143

Thomas, Hon. Craig:

Prepared statement .......................................................................................... 145

(III)

(1)

PRESIDENT’S FISCAL YEAR 2007 BUDGET

(REVENUE PROPOSALS)

TUESDAY, FEBRUARY 7, 2006

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

The hearing was convened, pursuant to notice, at 9:30 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Lott, Snowe, Kyl, Thomas,

Bunning, Baucus, Rockefeller, Conrad, Jeffords, Bingaman, Lincoln, Wyden, and Schumer.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. We welcome Secretary Snow back. This will be

the first in a series of hearings that the Finance Committee will

hold on the administration’s budget. Today we focus on the revenue

side. The Secretary will be our sole witness today.

The President now has presented his State of the Union address,

and he rightly noted in that address the tone in Washington, DC.

Hopefully, everyone from the President on down will keep a commitment to problem-solving, civility, and discussion and, most importantly, bipartisanship.

I do not think I have to remind people listening, but I think this

committee has a very good reputation for bipartisanship. I think

we are all committed to maintaining that, regardless of what the

President said in his State of the Union message.

In that spirit, I would like to start out with some positive news

that every member, conservative, moderate, liberal, Republican,

Independent, or Democrat, would find satisfying, and that is that

Federal revenue is up.

The good news is, we are way ahead of where we thought we would be at this point last year. Revenue is up $274 billion in 2005

over 2004. That happens to be a record.

Back in 1993, taxes were raised. Then-chairman of this committee, Daniel Patrick Moynihan, termed that bill ‘‘a world record

tax increase.’’ In fact, the revenue raised here in the last 12

months in terms of year-to-year change is much higher than that

was, even when there was a tax bill passed to raise taxes. The good

news is that the additional revenue came in without raising taxes

on the American taxpayer.

A lot of times around here people get it backwards. You have

heard about the old-country saying that goes something like, the

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tail does not wag the dog, the dog wags the tail. Some people think

that the only way to fix a budget is to raise taxes.

A tax increase, they believe, will make the economy better. It is

kind of like the Federal tax tail wagging the American economic

dog. I have a chart here. Now, I kid my friend from North Dakota

that I may not have as many charts as he has. It is not an effort

to denigrate your State at all. I do not have as many charts as

what he is going to show you, but we have quality charts. [Laughter.]

I should take my wife’s advice. Every time I try to be funny, I

screw up. [Laughter.] So I am going to listen to Mrs. Grassley the

rest of the time.

[The charts appear in the appendix on page 49.]

If you take a look at this chart, members of the committee and

Mr. Secretary, you will see that the Federal revenue responds fairly dramatically to the economic growth.

Take a look at those peaks and valleys as I explain here. In

times of good economic growth, Federal revenues rise. In times of

economic recession, Federal revenues decline. I am not going to

point to all of those because I think it is pretty clear. There are

just two lines there.

So in the case that I am talking about, when we put in place a

tax relief program in 2003, economic growth started back up. Now,

some would protest that this was a bad move. They claim that this

tax relief, especially with respect to the encouragement of investment income, made the budget and the economy worse.

In fact, as you can see from this chart, it shows just the opposite.

Growth has spiked up and so have Federal revenues as well. As

you see, the big, high point there, the red mark, in year 2005 is

the figure that I gave earlier in my remarks.

Now, the bottom line is that everyone should be happy that the

economic dog, a growing national economy, is wagging the Federal

revenue tail. It means more Americans are working, investments

are performing better, and more money is coming in to the Federal

treasury. Everybody wins under this scenario.

I would like to bring out the other, and last, chart that I think

puts the revenue side of the Federal budget into perspective, a perspective of over the last 50 or 60 years, I guess. This chart shows

that, over the post-World War II period of time, Federal taxes have

taken around 18 percent of our economy.

Now, that is a 60-year average. It shows that we had a sharp

drop in the wake of the stock market bubble, 9/11, and other factors in the early part of this decade. That is that very low dip that

you have there in 2002 and a couple of years beyond.

Now, with all of the bipartisan tax relief in place, we are on a

path that gets us pretty close to the historical average of 18 percent over the last 60 years. Now, if you look closely, you will see

that once the effect of the tax relief sunsets out there in the year

2010, that, not surprisingly, as a percentage of GDP, taxes will still

be far above that historic average.

Now, some would like to go that way right now. My concern is

that the effect is that the revenue tail would be the focus. We

would be taking our eye off the ball—or in this case, as I have been

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using the dog as an example, off the dog—of our growing national

economy.

Now, I am not saying that there are not problems with the budget in the mid- and long-term. We all know there are, and that is

going to be emphasized by a lot of members of this committee, both

Republican and Democrat.

Certainly these projected deficits have to be dealt with. The deficits, however, are driven by Federal spending. Federal spending is

off the track. It is high as a percentage of our economy. It is

trending between 1 and 2 percentage points higher than the historical average of the revenue that has been coming in to the treasury, which is that dotted line. It is on the spending side, not on

the revenue side.

As you see, the projected gross of revenue coming in for the next

several years, and ending up at the time the tax decreases sunset,

will be way above the historical average.

The critics of a bipartisan tax relief plan come to the table with

one agenda only: to raise taxes. The harshest critics are those who

are least willing to look at the spending side of the ledger. That

is where the problem is. Just look at how hard it was for us to get

a bipartisan deficit reduction bill through the Senate.

Since today’s hearing is about revenues, I wanted to put this part

of the budget into context. I want us to reflect on the good news

of a growing economy, the program of bipartisan tax relief, and the

growing amount of Federal revenue. There is good news, but we

must have tough news in that we have to get the spending side of

the budget under control.

Mr. Secretary, today we will examine the administration’s budget

revenue proposals. We look forward to constructive discussion in

these areas.

Now I would call on my friend, Senator Baucus.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Mr. Chairman, I appreciate very much your statement there. I just think it is important for us to remember, too, that there are lots of sides to this

budget.

I think it is important that we not get too hung up on matters

such as percentage of revenue 1 year as opposed to another, because, although that is interesting, it really, in my judgment, does

not get to the heart of the matter, and that is, what are the budget

choices we are making here and what does that imply for our future?

The proverb says, a good man leaves an inheritance to his children’s children. Today we discuss the budget and American competitiveness. The budget is a statement about what kind of world

we will leave to our children and our children’s children.

Will we leave them prosperity or will we leave them debt? Will

we leave them better jobs or will we leave them Third World

wages? Will we leave them a brighter life or will we leave them a

standard of living in decline? That is what the budget is about, and

that is why we must focus on America’s competitive place in the

world.

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For the last 5 years, the Federal budget has left debt to our children. The President’s budget released yesterday continues that legacy in the current year, the next year, and the years beyond. From

1997 to 2001, the Federal debt held by the public declined by about

$1,600 per person. That lightened by $6,400 the burden hanging

over every family of four.

But since 2001, the government has been adding burdens to our

children and our children’s children. The budget before us today

shows that, from the end of fiscal year 2001 to the end of fiscal

year 2008, this administration will have added more than $7,700

in publicly held Federal debt for every man, woman and child in

America.

That is about $31,000 of new debt for a family of four, thanks

to the current budget policies. That is one way in which this administration’s fiscal policies are taking from our children and our

children’s children.

Moreover, the government borrows much of this money from central banks in China, Japan, and other foreign country’s institutions. America is borrowing 80 percent of the world’s annual savings.

Let me repeat that statement: America is borrowing 80 percent

of the world’s annual savings. We are handing our children and our

children’s children a set of obligations that they will owe to foreign

central banks.

The budget affects whether our children will receive the education they need to compete. The budget affects whether health

care costs will hobble American families and businesses. The budget affects whether American research and development will remain

on the cutting edge.

I am not saying that crafting the budget is easy. We all agree

that we need more funds for our troops to ensure our National security. Yet I want to leave to our children and our children’s children an economy where health care coverage is our economy’s

strength, not its greatest burden.

I want to leave to our children and our children’s children an

economy where workers and companies look to foreign shores with

hope and ambition, not fear and trepidation. I want to leave to our

children and our children’s children an economy that sets records

for investment, not records for deficit.

Whether we succeed or fail is a matter of choice. Will we choose

to invest in education? Will we choose to re-think how we fuel our

economy and our cars? Will we choose to guarantee that every

American has health care coverage? Will we choose to discipline

our budget?

I believe that our country is ready for tough choices, so I have

spent much of the last year developing an agenda to help us make

the right choices to ensure that we have a competitive economy in

the future.

Over the past 7 months, I spoke on the floor of the Senate to

identify seven key areas that determine economic competitiveness.

These areas are: education, energy, health care, research and development, taxes, international trade, and national savings.

Two weeks ago, I unveiled a detailed seven-part plan for ensuring our economic competitiveness now and in the future. I was

5

heartened that the President’s State of the Union address, and now

his budget, included proposals for improving our economic competitiveness. I look forward to working together with him, and with the

Chairman of the committee, to enact these proposals.

But the President’s plan is not bold enough. It needs to be much

bolder. In some areas, the President’s plan goes in the wrong direction and should not be adopted.

Here is how a couple of the areas shape up. On education, clearly, we must improve math and science education, as the President

indicated. But I do not want to just encourage kids to take math

and science, I want them to know that if they take those classes

and choose to major in those subjects, we will make their college

tuition free.

The President wants to bring more math and science professionals into the classroom. I want to double their salaries and keep

them there.

On energy, I am for increasing research that can lead to energy

independence, as the President wants, but I do not want to just increase funding. I want to create an Advanced Research Projects

Agency for Energy, ARPA-E, an independent arm with the Energy

Department that would follow the lead of DARPA and Defense, to

find the most cutting-edge solutions to our energy problems. It

would help to shake up our addiction to foreign oil.

On health care, competitiveness demands that we address the

spiraling health care costs. Compassion demands that we extend

the security of meaningful health insurance coverage to millions of

uninsured Americans. I am concerned that the President’s budget

proposals would do little or nothing to reduce costs or expand coverage.

Moreover, his emphasis on health savings accounts and high deductible policies could make meaningful coverage even less available to those who most need it.

I am also concerned at the President’s emphasis on individual

health insurance plans that would undermine coverage for the

more than 60 percent of Americans who get health care insurance

through their employers.

In my State of Montana, 52 percent of the non-elderly have coverage through their employers; 9 percent of Montanans have individual insurance. We need to treat that 9 percent fairly, but without undermining the employer-based system that covers 52 percent

of our citizens. We need to extend coverage to the 22 percent of

Montanans who have none at all.

On research and development, clearly we must make the R&D

tax credit permanent, as the President wants. But I also want to

simplify and streamline the credit to make sure that American

innovators can get it and use it to do great things.

On savings, I am for increased savings, as the President wants.

We need to increase savings to spur increased investments. Increased investment spurs greater productivity, and greater productivity makes our products more competitive in the global economy.

But his proposals on personal savings create incentives for those

who already save to move their funds around, and they will not

have the effect of increasing personal savings. Rather, we must

provide workers with new opportunities to save and help those

6

with too little income to benefit from current tax incentives to save

for the future.

We cannot forget public savings. When governments run surpluses, they contribute to savings. When they run deficits, they detract from savings. This administration has been running massive

deficits.

We need tough pay-go rules to force the President and the Congress to pay for any new entitlement spending or tax cuts. We did

not have those rules during the last few years, and this contributed

to deficits becoming far too large. Will we have such rules in the

future? I hope so. But, unfortunately, the President opposes them.

I think they are critically necessary.

Let us choose to be good public servants. Let us leave an inheritance of prosperity, not debt, to our children and our children’s children. Let us leave them a brighter life in the competitive world to

come.

The CHAIRMAN. Thank you, Senator Baucus.

Now we go to our Secretary, who needs no introduction. Welcome, Secretary Snow.

STATEMENT OF HON. JOHN SNOW, SECRETARY,

U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Secretary SNOW. Thank you, Mr. Chairman, members of the committee. I thank you again for the opportunity to be here. This is

my fourth appearance, Mr. Chairman, as you know, before this

committee to discuss the President’s budget. We meet at a time

when the American economy is performing very, very well. We are

on a good path.

We are on a path that sees the economy growing at a good,

healthy rate. We are on a path that sees the American economy

creating lots of jobs. We are on a path that sees the unemployment

rate coming down.

Last Friday’s numbers indicated that labor markets are strengthening and unemployment is now down to 4.7 percent. I think when

I first appeared before you it was over 6 percent. In that interim

period, there have been 4.7 million jobs created.

Capital spending, which had been anemic, Mr. Chairman, as you

know, when I first appeared before you in February of 2003—had

been weak for a number of quarters—has now been strong for a

number of quarters. So we are on the right path.

When we ask ourselves why, we see the role of this committee,

the Congress, you, Mr. Chairman, in making possible the tax cuts

of 2003, which stand right at the center, right at the heart of the

strong recovery we have seen since they were signed into law in

May of 2003.

This budget would continue the economic policies that brought

prosperity to America. It would continue the low tax environment

that you talked about in your opening statement. By making the

tax cuts permanent, it would avoid raising the level of taxes to a

level which is well above the historic average in the United States.

Keeping tax levels at the historic average makes a lot of sense.

It is consistent with better economic performance, more growth,

more capital formation, and, Senator Baucus, better long-term outVerDate 11-MAY-2000 14:51 Oct 25, 2006 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 30403.000 SFIN1 PsN: SFIN1
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looks for our children and grandchildren, because, when we have

capital formation, we are promoting growth in the future.

This budget also is committed to fiscal discipline. It holds government spending below the level of inflation. In the non-security,

non-homeland area, it reduces actual spending.

It is consistent with the President’s commitment to cut the deficit

in half by the time he leaves office. We are well on the way to do

that. If it had not been for Katrina and the Katrina effects, we

would have seen the deficit come in much lower this year after

coming in for fiscal year 2005 at a level that was about 2.6 percent

of GDP, and we are on a path to bring us below 2 percent by the

time the President leaves office.

So the economy is strong. We are on the right path. Government

revenues, as the Chairman’s chart shows, are at the highest level

ever in American history, and that is with the lower average tax

rates, lower marginal tax rates. More Americans are working than

at any time in our history. More Americans own their own home

than at any time in our history.

The net wealth of the country is the highest at any time in our

history, and the GDP is far and away the highest than at any time

in our history. I would urge you, Mr. Chairman and members of

the committee, to continue the good policies reflected in this budget

which have us on a good path.

With that, I would be pleased to try to respond to your questions.

[The prepared statement of Secretary Snow appears in the appendix.]

The CHAIRMAN. Mr. Secretary, I am glad to see the President’s

budget has put a lot of focus on health care. I know this is an issue

that all of us here in the committee hear a lot about. Senator Baucus mentioned it in his opening statement. There are real problems

that require real solutions.

I notice when I say ‘‘solutions’’ that there is more than one solution necessary because there is no magic bullet. But one thing that

we clearly need to do is to make it easier for Americans to play a

more active role in their health care decisions. This should help

with the quality of care, as well as just giving basic care.

Health savings accounts are a big part of our move in that direction. In my State in particular, I hear a lot of small business people

who want to cover their workers but are finding annual doubledigit increases in employee health insurance costs to be very burdensome. Some of these small business owners are already showing

an interest in health savings accounts.

Yet, some who are in opposition to health savings accounts refuse

to give up the attitude that they have, that only the healthy and

the wealthy are going to be able to get into these, or will be

trending in that direction.

How do you respond to those critics, and what kind of data do

you have, and does the President have, in proposing these measures that will help show that it is benefitting everybody in America, not just the so-called healthy and wealthy?

Secretary SNOW. Mr. Chairman, the HSAs address the twin

issues of rising health care costs and availability. They have proven

themselves to be a valuable component that helps address both of

these issues. Already, some 3 million people have HSAs. Of that 3

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million, 1 million are people who did not have insurance before. So,

the evidence to date is positive.

There is the argument that they will lead to so-called adverse selection, the healthy and the wealthy will be the beneficiaries. That

does not seem to be the case. The evidence is not consistent with

that hypothesis.

The data we have shows that, so far—and this data is continuing

to come in—42 percent of all the people in these plans have less

than $50,000 in earnings, hardly the wealthy; 45 percent are at

least 40 years old, and 20 percent are at least 50 years old, hardly

the young.

The HSAs are really, in my view, an issue of fairness. Most

Americans get their health care, some 85 percent or so who have

insurance, through employer-provided plans, which are very taxadvantaged.

An awful lot of people work for small business, are self-employed,

and do not have health care, and they buy health care—if they buy

health care, if they can afford it—on an after-tax basis, which

makes it much more costly to that self-employed person or to that

employee who does not have health care but wants health care.

What the HSAs do is make health care available on a basis that

eliminates this tax disadvantage to the small business person and

to the self-employed. They are not a panacea. We are not suggesting them as a panacea.

But, Mr. Chairman, I think they are proving their value, and we

propose to enhance them, make them even more attractive and capable of playing an even bigger role in the health care system.

The CHAIRMAN. I will go to Senator Baucus now. I have a little

bit of time left, but I am going to reserve that and go to Senator

Baucus.

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Secretary, when will we need to increase the debt limit?

Secretary SNOW. The letter I sent in December to the Congress,

House and Senate, indicated that we will need to raise it by midFebruary.

Senator BAUCUS. Do you have any recent data that affects that,

those dates, that time?

Secretary SNOW. No, the recent data confirms that that is the

time.

Senator BAUCUS. Now, you also say you have a drop-dead date,

perhaps, using extraordinary means, some time in March. When in

March would that be? What does ‘‘drop dead’’ mean?

Secretary SNOW. Well, it means we have exhausted the capacity.

Senator BAUCUS. But when?

Secretary SNOW. Mid-March.

Senator BAUCUS. Mid-March.

I am just curious. The budget does not reflect, is it not true, AMT

costs for 2007? It does not include additional costs for 2007.

Secretary SNOW. We put in the patch for 2006.

Senator BAUCUS. I am talking about 2007.

Secretary SNOW. No, you are right.

Senator BAUCUS. It does not for 2007. So the fiscal 2007 deficit

would be higher, actually. Would that not cost, what, about $38 billion per year?

9

Secretary SNOW. On that order. That is right.

Senator BAUCUS. And Iraq, Afghanistan, for 2007, the supplementals. What will that be?

Secretary SNOW. 2007 has Iraq in, I think, at $50 billion, as I

recall it.

Senator BAUCUS. About $50 billion, I think. Right.

And 2008? I am just pointing out that, in a realistic sense, the

deficit is probably under-stated. It is probably much greater, given

AMT needs, which is a given, and Iraq and Afghanistan supplementals, which always come in in addition to budgets.

With respect to HSAs, my concern, frankly, is the same as with

the Social Security private accounts initiative proposed by the

President. That is, this emphasis primarily is on an individual deciding for himself what his Social Security account is going to be.

That is moving away from the traditional system where we have

a shared solution here. Current employees pay retirement benefits

for current retirees. It is a national system. It is a plan. We Americans are all helping each other out.

The assumption behind the President’s proposal last year for privatization of Social Security was just the opposite. It is the value

that we are not all together, it is everybody out for themselves.

That is my concern about HSAs. It is pretty much, everybody is

out for themselves. It is not a shared system, not a shared plan.

When everybody is out for themselves, it is usually the bigger and

stronger that do better and the weaker do less well.

Anybody can do anything with figures. But it just stands to reason, if you look at HSAs, clearly, particularly with the recommended changes, clearly it is going to help the wealthier and the

healthier people in America. It is going to hurt chronically ill

Americans. Chronically ill Americans cannot get the benefits of

HSAs because they have much higher health care costs.

Rather, if you are younger, you are healthy. Also, if you are also

blessed to have some money as a younger, healthier person, this

makes great sense. It saves money, and so forth.

But if you are not wealthy and if you have chronic health care

needs, as some Americans do, I do not see how this is going to help

them. In fact, I see it hurting them due to the principle of adverse

selection. Why is that not right?

Secretary SNOW. Well, it is simply, Senator, not consistent with

the data that I cited.

Senator BAUCUS. But is it not true that the data, so far, are very

incomplete? We do not have any.

Secretary SNOW. Well, there are 3 million people under these

plans. One million, we know, did not have health care coverage

prior to the HSAs being available. We know it is pretty broadly distributed. We know it has a lot of people who are earning less than

$50,000 a year, and we know it has a lot of people who are over

50.

So you just, it seems to me, cannot get away from the fact that

there are a lot of people in America today who work for small business or are self-employed who are at a terrible tax disadvantage in

acquiring health care.

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If we can put them on a par with people who get their health

care through an employer system, we do something worthwhile. We

lower the cost of health care for them.

If you lower the cost of their getting a policy, it stands to reason

those people are going to get policies. There are a lot of middle income, low income people working for small business.

Senator BAUCUS. But why would this also have the effect of encouraging employers to move over into HSAs?

Secretary SNOW. Well, we hope it does encourage many employers, if they do not provide health care, to do it.

Senator BAUCUS. And therefore have the consequence of adverse

selection.

Secretary SNOW. Senator, the health care system that we have

in the country today functions largely through employers.

Senator BAUCUS. And this will have the effect of discouraging

that, undermining that.

Secretary SNOW. I think it will have the counter effect of encouraging many employers, who today cannot afford policies for their

employees, to make those policies available.

Senator HATCH. Senator, your time is up.

Senator BAUCUS. Thank you. Just one more point. If there are

only 1 million newly-insured HSAs, that means 2 million already

had insurance.

Secretary SNOW. And now they have insurance on a lower-cost

basis.

Senator BAUCUS. Insurance that has less coverage. Poor insurance. It is insurance with less coverage because they are the

healthier and the wealthier.

Secretary SNOW. Well, you are looking at only one dimension

here of the compensation package. As somebody who spent years

in the private sector, I can tell you the compensation, all-in compensation, is a function of a number of things. Wages, bonuses,

cash, is part of it.

Senator BAUCUS. Yes.

Secretary SNOW. But it is also health care benefits, it is pension

benefits, it is fringe benefits, it is paid vacations.

Senator BAUCUS. I would like to get into that, but my time has

expired. Thank you very much.

Secretary SNOW. All right.

Senator HATCH. Thank you, Senator.

Senator Thomas?

Senator THOMAS. Thank you. Mr. Secretary, a couple of fairly

broad notions. You have a vision, as I understand it, in your policies, to recommend an independent commission to study entitlement obligations such as Medicare and Medicaid, and so on. Would

you elaborate a little on what your vision is for that Commission?

Secretary SNOW. Thank you, Senator. Yes. As you know, the

President, last year, came to the Congress and proposed broad reforms in Social Security to put Social Security, long-term, on a

healthier, sounder financial basis. As we look out to the decades

ahead, the most pressing problem is Medicare and the unfunded

obligations that Medicare presents to the country.

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I think the President recognizes that, if we are going to do broadbased reform of the so-called entitlements—Social Security and

Medicare—it has to be done on a bipartisan basis.

His call for a bipartisan Commission grows out of his desire to

deal with this issue, to put the issue on the table, and continue to

press forward to find answers, recognizing that it has to be done

in a bipartisan way.

Senator THOMAS. I hope we can pursue that. It just seems like

we deal, and I know we have to deal with the yearly issues, but

we have to look, it seems to me, a little further in the future. Hopefully that is what we are doing in health care.

It is interesting. We are all very proud of having a private sector

system as opposed to a Federal system. On the other hand, we are

paying more per capita in this country for health care than anyone

else in the world.

So I hope that this whole savings idea can be looked at as a way

of fundamental change in our health care system. We are having

quite a few systems, however, in savings. We have two or three different ones. We have talked about several of them, whether they

be RSAs or ERSAs, or a whole system of savings.

Have you looked at the whole program of savings? Our saving

system, as you know, as everybody knows, is down to where, for

the first time, we have had the lowest savings of any time in our

history, really.

So beyond health care, can we look more at a savings package

that is more coordinated? We have several out there that are a little discombobulated. Can we look at a whole savings package together that might help a little bit to change this whole savings

thing?

Secretary SNOW. Senator, you put your finger on a very important issue. Savings rates in the United States are too low. Household savings rates are too low. Fortunately, the corporate sector is

saving through retained earnings, but the national savings rates

need to increase for our own long-term well-being.

The budget calls for a streamlining of the diverse and varied savings vehicles that are almost incomprehensible when you look at

them, to try to create a much simplified and more effective form

of savings through three vehicles, one called a lifetime savings account, another one called a retirement savings account, and a third

one called an employment savings account.

Take the variety of savings accounts, expand the capacity, simplify the rules so that people can understand them better and will

have more incentive to put the money in because they are not so

restricted in what they can do. I think the proposals embraced in

this budget would help change the slope of that line that you put

up.

Senator THOMAS. Well, I appreciate that. I, just generally, hope

that we can do that. We are looking at, frankly, a society that looks

for more and more Federal Government programs. Quite frankly,

I think we ought to be looking at fewer.

If we can make some improvements in the concept of individual

responsibility as opposed to the government involved in everything

in our lives—we talk about doing something with the budget, and

at the same time the Ranking Member talks about more Federal

12

programs. Well, you cannot do both. So, I appreciate what you are

trying to do. Thank you.

Senator HATCH. Senator Conrad?

Senator CONRAD. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. It is good to have you here.

Secretary SNOW. Thank you very much, Senator Conrad.

Senator CONRAD. Mr. Secretary, when you describe everything, it

sounds great. It sounds as though there is no problem anywhere,

that everything is steady as she goes.

It reminds me a little of the guy who has his house mortgaged

to the hilt, he has charged up every credit card to the maximum,

is spending 20 percent more than he is earning, and says everything is great, because that is basically the posture of our country.

The debt is going up dramatically. The deficits are at a record.

We are spending between 15 and 20 percent more than we are taking in. Maybe it is useful to hear the other side of the story.

This is what is happening to the debt. There was no mention of

that by either the Chairman or yourself. But this is what the debt

was at the end of the first year of the Bush administration, $5.8

trillion.

At the end of this year, it is going to be $8.6 trillion, and we are

headed in the next 5 years for $12 trillion. So, the debt of the country is skyrocketing, and at the worst possible time, just before the

Baby Boomers retire.

Let us go to the next slide. Perhaps most alarming is the amount

of this debt that is now being held abroad, being held by foreigners.

It is interesting. It took 224 years and 42 Presidents to run up $1

trillion of debt held by foreigners; this President has managed to

double that amount—in fact, more than double that amount—in

just 5 years. That is an utterly unsustainable course.

Let us go to the next one. The Chairman said the only problem

is on the spending side of the equation. No. Deficits result from the

imbalance between spending and revenue. You have to look at both

sides of the equation. When we go back to 1980, here is the spending line, the red line. Spending has gone up.

The revenue side of the equation has collapsed. Revenue is down,

yes, in part because of 9/11, yes, in part because of economic slowdown, but also tax cuts. Tax cuts are a key reason that the revenue

side of the equation has collapsed. In fact, revenue last year is the

lowest it has been since 1959 as a share of Gross Domestic Product.

That is right. That is exactly right.

In terms of the economy, real median household income has declined 4 straight years. That, to me, is not a sign of an economy

going in the right direction. That is going in the wrong direction.

Let us go to the next slide. When we talk about the economic recovery, it is interesting to compare this recovery with the other recoveries that have occurred since World War II. What really is

striking is how much weaker this recovery is than all the other recoveries have been.

The red line shows what has happened with GDP growth in the

average of the nine previous recoveries. The black line is what has

happened in this recovery. What we see is 25 percent less growth

than the average of all the other recoveries since World War II.

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Let us go to the next one, which shows business investment.

Business investment is actually 50 percent below what we have

seen in the nine previous recoveries since World War II.

Let us look at the job picture, which is next, there. The red dotted line is average of recovery in the nine recessions since World

War II. The black line is this recovery. We are 6.8 million private

sector jobs behind the other recoveries.

Let us go to the final one. This is the John Snow that I agree

with. In 1995, John Snow’s balanced Federal budget would benefit

Americans in many ways. A balanced Federal budget is the best

choice to ensure a bright future for the Nation’s economy. I applaud you for that back in 1995.

What has changed? Is it conceivably sustainable for us to be multiplying the debt of the country, the debt of ours held by foreigners?

Is it conceivably possible that that is a sustainable course?

Secretary SNOW. Senator, the debt levels of a country are similar

in some ways to the debt levels of a household. The ability to service the debt is a function of the size of the business enterprise’s

cash flows or the size of the family’s earnings. For a country, it is

a function of the size of the GDP, the total output that we are capable of producing.

Our debt, as a fraction of GDP, is at levels that are low by historic standards, around the historic average of 40 percent. We are

going to come down over the budget cycle, very low by comparison

with other countries, like in the G–7, the industrialized countries

of the world.

I think there is no doubt that, given the deep and liquid capital

markets of the United States, we will continue to attract capital

from U.S. investors and from investors around the world. They invest in our markets because they get the best risk-adjusted returns

in those markets.

Senator HATCH. Senator Kyl, you are next.

Senator KYL. Mr. Secretary, thank you for putting these figures

into proper perspective.

According to the information that I have, and from CBO, the average revenue since World War II is 17.9 percent. In other words,

the share of the economy that the Federal Government collects in

taxes, as a percent of the GDP.

CBO projects that the share of the economy revenue will grow

from 17.7 percent of GDP in 2006 to 18 percent of GDP in 2010.

Is that your understanding of the figures?

Secretary SNOW. Yes, it is.

Senator KYL. So that we are almost exactly at the average of revenue collected in taxes as a percent of GDP in this next fiscal year.

Secretary SNOW. That is correct, Senator.

Senator KYL. Except for the spike in increased spending caused

by the hurricanes and the necessity of funding the wars in Afghanistan and Iraq, where would we be in terms of revenue collection

as a percent of GDP, at least in rough terms?

Secretary SNOW. The revenue collection, I think, is forecasted at

about 17.6, 17.7 percent, rising to that 17.9, 18 percent that you

cited.

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Senator KYL. And that revenue collection will continue, so that

if spending can be reduced, we would be well above the percent

that has been the average since World War II. Is that correct?

Secretary SNOW. Yes. Yes, Senator. In fact, if you take those

numbers out and do not have the tax reductions made permanent,

you are going to rise to 20 percent, which takes you over the historic average.

Senator KYL. Exactly. So it is important for us to look at the

spending side of the equation.

Now, just remind us, very briefly, with respect to discretionary

spending, what the President’s budget calls for for this coming

year.

Secretary SNOW. For non-security, non-defense spending, it is flat

with last year. It is down in real terms by inflation.

Senator KYL. Exactly. And is that roughly about a third of all of

our expenditures?

Secretary SNOW. Yes.

Senator KYL. All right. So the real challenge here is to try to find

a way to get a handle on the non-discretionary, or entitlement,

spending. What does the budget call for in that regard?

Secretary SNOW. The budget seeks to hold overall spending at

the rate of inflation.

Senator KYL. And the President tried to do that last year. He

called for a certain amount of restraint on spending. Do you recall

what last year’s budget called for?

Secretary SNOW. Yes. I think last year’s budget called for overall

spending not to exceed inflation.

Senator KYL. But was the entitlement spending reduction

against projected revenues not something on the order of $65 billion?

Secretary SNOW. I think the proposal in the budget was $65 billion.

Senator KYL. It was $65 billion, as I recall.

We ended up accomplishing a little less than $40 billion as I recall. Is that correct?

Secretary SNOW. That is right. That is right.

Senator KYL. So with respect to the chart that has the President’s picture on it, maybe it ought to have Congress’ picture on

it, I guess is what I am saying here, because the President would

have held the budget deficit to a much lower level, but Congress

could not muster the courage to generate a little less than $40 billion over a 5-year period. I just want to make it clear. You do not

have to respond to that.

But I think it is not helpful to politicize this issue to such an extent that we show the President’s picture as if he is the dictator

of the country, and he is the one that spent all of the money, when

in fact Congress had a great opportunity to achieve greater savings

and failed to do so.

Just in the last few seconds that I have, remind us again why

it is important for us to extend the current rates that we tax capital gains and dividends at, which are set to expire in 2008?

Secretary SNOW. Well, because they are important to keep the

economy growing. Those statistics I cited earlier about growth in

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the economy relate directly to the fact that Congress, back in 2003,

reduced capital gains and reduced dividends.

Senator KYL. If I could just interrupt. What would happen if we

did not extend them? What has the market already assumed?

Secretary SNOW. Well, I think the market today credits Congress

with the good sense that those tax reductions will stay in effect. If

they do not, then of course that is a tax increase. If we have a tax

increase, I think we would see a reversal of much of the positive

things we have seen.

The equity markets are up some 40 percent since those reductions were put in effect, many more companies are paying dividends today, and the dividends that are being paid are much higher. That helps corporate governance.

When I remember my days in corporate life, the CEOs often said

to the shareholders at the shareholder meeting, when asked to pay

higher dividends, well, we cannot do that, that is a tax-disadvantaged way to reward shareholders.

I think what was accomplished through the dividends reductions,

capital gains reductions, has helped corporate governance. It has

improved capital formation. We have seen 10 straight quarters,

Senator, of increased capital spending after a period where you had

9 straight quarters where capital spending was down. The equity

market is stronger, and so on.

The 4.7 million jobs came because businesses invested. When you

lower returns on taxes on capital, good things happen. Returns on

capital rise, businesses invest. As they invest, businesses expand,

and then they need more workers. It is the virtuous cycle we have

seen play out over the last 21⁄2 years.

Senator HATCH. Senator Wyden is next, then Senator Schumer

will follow Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Secretary, the current tax system is a paperwork nightmare

for millions of Americans, and it discriminates against people who

work for a wage.

Now, I want to change this in a bipartisan way. It will be a lot

easier to get that done if the administration will come off the sidelines and join the effort.

I would like to start by asking you to say, why can we not begin

immediately to work in a bipartisan way to simplify the tax code?

For example, in my legislation, S. 1927, the Fair Flat Tax Act, I

have a one-page 1040 form. It is kind of a revolution, because I

could fill it out myself, and it has been a long time since any of

us on the Finance Committee could fill out a tax form.

Why can we not begin, right now, on the simplification effort to

jump-start this whole reform? As you know, there have been 14,000

changes to the tax code. It comes to three every day for the last

20 years.

We are going to spend $140 billion this year complying with the

code. It is more than the government spends on higher education.

Why can the administration not join with all of us on this committee to begin immediately the simplification part of tax reform?

Secretary SNOW. Well, Senator, I applaud simplification, and applaud you for entering the fray with your legislation.

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We received the results of the Tax Panel report and their yearlong work late last year. This is the panel chaired by some of your

former colleagues, Senator Breaux, who used to sit next to you

there. Senator Connie Mack of Florida chaired it and Senator

Breaux was the vice chair.

They did a terrific job, I think, of looking at the code and trying

to consider what changes might make sense, including a lot of proposals for simplification, with a page that looks not too different

than yours, I think.

Senator WYDEN. Mr. Secretary, let me just interrupt, because

that is why I think we can get going now. I have met with Senator

Breaux. I have a one-page 1040 form. The Commission’s, for example, is a little longer. But for government work, they are about the

same.

Why can we not get going, though, and not wait 2 years for this

effort? We have a bipartisan group on this committee, Senator Baucus, Chairman Grassley. We can get to work on this and make

progress.

Secretary SNOW. You get a chance to do tax reform, as I look at

it—and we are in one of those periods—if you look back over the

record, about once every 20 years. JFK had far-reaching, broadbased tax reform initiatives, then Ronald Reagan, 20 years later.

Now we have a chance with this President, who has said he is committed to broad-based reform. There is no doubt about the fact

where the President stands. He wants a simpler, fairer tax system.

We at Treasury now have the results of the panel and I commit

to you, Senator, we are working hard to come up with——

Senator WYDEN. When would you think we could actually start,

Mr. Secretary? I mean, people all over this country are getting

their 1099s, their W–2s. They’re shouting across the living room,

‘‘Honey, can you find that receipt from the copier that we bought

March of last year?’’ They want to know why we cannot begin this.

When do you think we can start?

Secretary SNOW. Senator, as soon as possible. I have the same

experience you do. I have traveled the country, and everywhere I

go I hear all sorts of things from people. I have never heard one

person say, Mr. Secretary, keep the code just the way it is, we love

every word of it. I have never heard anybody say that to me.

In fact, their sentiments are more like yours and more like the

other members of the panel. It is time to fix it. We agree with that.

We want to do it right, and we are hard at work to give the President recommendations that I hope you will be able to see and work

on in the not-too-distant future.

Senator WYDEN. Let me see if I can get one other question in,

again, to jump-start this. My proposal has three brackets, 15, 25,

and 35. The Commission has four brackets. So, again, we have an

opportunity to come together.

But the one area that I think is going to be toughest is, we have

to close the gap between the treatment of those who work for

wages and those who make their money from investment. How

would you propose doing that?

Secretary SNOW. Senator, I agree with you, it is a serious subject.

It is one that we are looking at hard. I think it is best for me to

refrain from offering thoughts on that until we pull together our

17

total package and are in a position to present it to the President.

But I would very much look forward to joining with you in a discussion on that, and the whole range of issues that the tax code presents.

Senator HATCH. Your time is up, Senator.

Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

Thank you, Mr. Secretary, for coming here to share your views

on the President’s budget proposal.

I have reviewed the major proposals. One thing that stands out

to me, is this. The President’s ideology puts him in a straightjacket.

The budget makes one thing clear: you cannot be an ideological

conservative and be compassionate at the same time. I would make four brief points about this. There are nearly $2

trillion in additional tax cuts, but most of it is geared to the very

well-to-do, people whose income is over $1 million, rather than the

middle class who are finding it harder and harder to make ends

meet with rising health care, tuition, and energy costs.

Dividend and capital gains cuts take precedence over reducing the AMT, which hurts people whose income is between $67,000 and

$200,000 a year.

Second, programs that decimate the needy and middle class, such

as cutting student loans—a hard one to believe—in the guise of

making courageous choices, when in reality a courageous budget

would have cuts for the bigger interests, big oil, corporate America,

and others who do very well here.

Third, there is a lot of fanfare for new programs, energy independence, more money for math and science teachers, but so few

dollars are dedicated to them that these necessary new initiatives

amount to all hat and no cattle.

Last, but not least, more and more debt. By the end of his second

term, President Bush will have presided over a near doubling of

the birth tax or the amount of publicly held debt owed by every

man, woman and child.

If we were to completely eliminate all non-defense discretionary

spending, zero dollars for education, veterans, transportation, et

cetera, there would still be a significant deficit.

So I have a great deal of problems with this budget, as is apparent. I would like to ask questions on each of them. I will have to

get to some on the second round, but let me get to my first problem.

We do not have the ability to do unlimited tax cutting here. The

choice that we seem to face is between the capital gains and dividends cuts, extending those, which the President’s budget proposes,

or reducing the Alternative Minimum Tax, which is really a dagger

pointed to the heart of the middle class and the upper middle class

in America.

Assuming that we do not have the ability to do both, to fully

fund both, why does the administration choose as its priority capital gains and dividends over the AMT? Assuming you would like

to do both, assuming we would all like to do both?

Second, if you face the choice, why does the budget choose capital

gains? You do choose it, so I do not want to ask you what you

would choose. Just give me an explanation for that.

18

Secretary SNOW. Well, Senator, first of all, I will confirm these

numbers with you, but I think that the lower tax rates on dividends and capital gains more broadly benefit average Americans

than AMT relief.

I will confirm these numbers with you. Something like over 40

percent of the taxpayers with income below, I think it is $50,000,

report income from dividends or capital gains.

Senator SCHUMER. No. As I understand it, while lots of those

people get dividends and capital gains, the overwhelming majority

of those dividends and capital gains are tax-free already because

they are in IRAs and other kinds of retirement. Mutual funds, et

cetera.

So, people below $50,000 do not benefit very much from a reduction. As I understand it, the majority of the capital gains and dividend cuts go to people whose income is over $1 million a year.

Secretary SNOW. Senator, we are talking about the number of

people——

Senator SCHUMER. Well, no. Let us talk about the dollars.

Secretary SNOW. The number of people affected. It is just remarkable how many households of moderate income benefit from

the equity market. I think it is over half of the American households.

Senator ROCKEFELLER. Sir, answer his question.

Secretary SNOW. I did. Over half of the American households.

Senator SCHUMER. But they do not pay tax on it, sir. They do not

pay tax, now, on it. They do not need this reduction. It is only people who have dividend and tax income apart from mutual funds,

and particularly apart from retirement accounts, who pay it.

Senator HATCH. Senator, your time is up.

Secretary SNOW. Yes. Senator, in addition to what I said, of

course, as I pointed out earlier in response to Senator Kyl’s question and Senator Thomas’s question, the lower tax rates on dividends and capital gains are at the heart of this very strong recovery we have seen, which has produced capital spending being up

for 10 straight quarters, job creation for 10 straight quarters, GDP

growth at about 4 percent for 10 straight quarters, and an economy

that is performing very, very well.

Senator SCHUMER. Mr. Chairman, my time has expired. I would

just ask unanimous consent that the Secretary submit to us what

percentage of taxpayers below $50,000 pays taxes on dividends and

capital gains, and how much. Is that all right, Mr. Secretary?

Secretary SNOW. Yes.

Senator SCHUMER. Thank you.

Senator HATCH. Senator Bunning?

Senator BUNNING. Let me enter into this. Thank you, Mr. Chairman.

Anyone who owns mutual funds outside of a retirement plan

pays on capital gains, everyone that owns mutual funds, because

you are required to pay taxes on capital gains if you are in a mutual fund, just like any other ordinary income. Believe me, it is significant.

I would like to get your thoughts on a couple of issues, Mr. Secretary. In 2004, CBO estimated that capital gains tax liabilities—

19

tax liabilities—for 2004 and 2005 would be $98 billion, a $27 billion

decrease from earlier projections made for those 2 years.

When we look at CBO’s most recent report, it shows payments

from capital gains taxes were $151 billion for 2004 and 2005, significantly higher than CBO estimated this time last year.

I understand that when Congress cut capital gains taxes in 1997,

actual 1997 and 1998 capital gains revenues were about 11 percent

higher than the original CBO estimates. Would you please comment on this?

Secretary SNOW. Yes. Yes, Senator. My comment is that both

CBO, and Treasury, to some extent, under-estimated the power of

those capital gains and dividends tax reductions in terms of what

they would do to the revenue stream of the United States.

I think the numbers you cite are the ones we know. What they

indicate is that, as you get the economy performing well, as you get

equity markets doing better, as we have seen in the wake of these

tax reductions, it produces its own stream of revenues.

We, as part of this budget, are establishing, in the Office of Tax

Analysis, a capacity to get at that question more precisely by doing

dynamic analysis of tax reductions to see how they affect GDP

growth, and that prepares the way for us to look at macroeconomic

variables and determine what effect that will have on Federal revenues. We need to do a better job of that.

Senator BUNNING. Do you know who was in control of the Congress when AMT was created as a tax?

Secretary SNOW. Yes.

Senator BUNNING. What party was controlling the House and the

Senate at the time?

Secretary SNOW. I think it was 1969. Yes.

Senator BUNNING. Thank you. You are just answering the significant year.

In the CBO report we received a few weeks ago, it was mentioned that the temporary rate decrease on overseas earnings

brought back into the United States during 2005 had a marked increase on tax revenues.

I am asking you the question, knowing the answer, can you tell

us how much in additional capital is estimated to have been

brought back into the United States as a result of this temporary

provision?

Secretary SNOW. I think it is something on the order of $300 billion.

Senator BUNNING. It is $340 billion, to be exact.

And do you know what that means to the revenue stream at 5.25

percent in taxes for the United States that would not have been

brought back? It means $18 billion additional of revenue for the

United States with just that 1-year window of a temporary provision. Think if we could do it for another year or two. That money

has to be reinvested in jobs and capital here in the United States.

Mr. Chairman, I have an opening statement I would like put into

the record, if you do not mind.

Senator HATCH. Without objection.

Senator BUNNING. And I will yield back.

Senator HATCH. Thank you.

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[The prepared statement of Senator Bunning appears in the appendix.]

Senator HATCH. Senator Bingaman?

Senator BINGAMAN. Thank you very much, Mr. Chairman. Thank

you, Mr. Secretary, for coming and giving us your views today.

Let me ask about another of the economic issues that I am concerned about. I think Senator Conrad expressed some of my concerns pretty well about the budget deficit. I guess I am also concerned, though, about the trade deficit, and we have not talked

about that yet this morning.

I have two charts I want to show you, and then I will ask you

a question.

Secretary SNOW. All right. Good.

Senator BINGAMAN. This first chart is the current account deficit

as a percentage of Gross Domestic Product. You can see that, at

the current time, it is over 6 percent.

Now, as far as I can tell, the only time in our country’s history

that it has been over 4 percent, let alone 6 percent, was right after

the War of 1812 when we were flooded with imports. Now it is over

6 percent. That concerns me.

Let me show you a second chart. This second chart relates to our

trade imbalance with China. As you can see, the first year of this

administration, or to take 2000, it was $84 billion. This last year,

it is $200 billion, give or take. Again, that concerns me. The estimate I have is that the overall current account deficit will exceed

$800 billion in 2006.

My concern on this is, I do not see a plan to deal with this on

the part of the administration. The head of the IMF, the managing

director of the International Monetary Fund, said recently that he

was very concerned about the record shortfall in the U.S. trade account.

It could result in an abrupt slow-down in U.S. consumer spending, a falling dollar. He said it is important to abandon the pretense that global imbalances do not matter and will cure themselves.

He cites two things that need to be done. First, he says, when

he looked at government action, we need to deal with U.S. fiscal

policy, and that is the issue we have been discussing where you say

everything is fine, but I disagree strongly. The other issue he cites

is exchange rate and structural policies in Asia.

Now, various people, both Democrat and Republican, have been

saying that we cannot continue to see the increase in our trade imbalance with China year after year after year without some change.

We were trying to get them to float their currency. They changed

it 2 percent, I believe, and everybody backed off.

But what is the administration’s plan for dealing with this

unsustainable situation?

Secretary SNOW. Senator, the problem you are talking about is

extraordinary complex. The solution to it is a shared responsibility

on the part of all of the major participants in the global economy.

The fundamental problem is the fact that the U.S. is generating

so many investment opportunities that exceed our own domestic

savings. Now we need to deal with our low savings rates. We have

talked about that.

21

We deal with that by bringing down the deficit, which the President’s budget proposal will do. It will bring it down to a level that

is low by historical standards. The budget brings the deficit down

to below 2 percent of GDP.

Senator BINGAMAN. But this is 2009. You do not dispute that, in

the rest of the 10-year period, it goes way, way back up again as

soon as you folks leave office.

Secretary SNOW. Well, where it really goes up is the decade after

that.

Senator BINGAMAN. Well, at any rate, any long-term projection of

the deficit is bad.

Secretary SNOW. I agree with you. But the long-term problem,

the 20s, 30s, and 40s, comes from these unfunded mandates. We

need to get at that. That is why the President suggested the bipartisan Commission. So, we need to work on our savings. We have

proposals to reduce our budget deficit, reduce the dissavings in the

government, but also to encourage the savings, the dialogue I had

with Senator Thomas.

But, Senator, it is awfully important that in other parts of the

world that are growing so slowly, Europe and Japan particularly,

that they address their slow growth rates, because their slow

growth rates are limiting the ability of those economies to generate

disposable income to buy from us, which is why, when the President talks at the G–8 summits, he is always putting a focus on the

rest of the world taking steps to improve the performance of their

economies.

The third piece of this—you put your finger on it—is greater

flexibility in exchange rates where they are rigid today, or too

rigid, and do not reflect underlying market forces.

I hope Mr. Durato, the head of the IMF, as he talks to us about

our need to improve our savings posture, will make the case to

countries who have rigid exchange rates to move to greater flexibility, because that is a big part of the problem, too.

Senator HATCH. Senator Jeffords?

Senator JEFFORDS. Mr. Secretary, you have made clear that the

administration does not want to increase taxes. But you would not

know that, from looking at the agricultural budget. The administration is proposing a whole new tax on dairy farmers.

I can tell you that in my State, these are struggling small businesses. The idea that they should shoulder higher taxes is lunacy.

Can you tell me why the administration wants to cut taxes for

wealthy investors, while increasing them on family farms?

Secretary SNOW. Senator, I do not have a clear understanding of

what the proposals are in the budget as they relate to dairy farms,

but I will look into that and get back to you.

You are right that the administration’s overall point of view is

that we should sustain a low-tax environment on American businesses and on capital formation, because the record is pretty clear

that it works. It has led to the creation of lots of jobs. It has led

to a very low unemployment rate and general prosperity in the

country.

But I do not have the answer to your question. I will look into

it and get back to you.

Senator JEFFORDS. I certainly would appreciate that.

22

Secretary SNOW. Thank you.

Senator JEFFORDS. Mr. Secretary, the deficit in 2004 was $413

billion, and the deficit this year is projected at $423 billion. Granted, we have seen a pattern of these estimates being on the high

side, but do you really see this as progress?

Secretary SNOW. Well, the deficit is going to be up this year, unfortunately, reflecting the commitment that the Congress has and

the President has to help deal with the victims of Katrina, the largest natural disaster our country has faced. That adds a considerable amount to this year’s deficit.

But getting beyond 2007 to 2008, 2009, you see the deficit coming

down and, as I say, getting down below 2 percent, getting down to

levels that are low by historical patterns.

Seeing the deficit go up is regrettable this year. It interrupts the

nice path, the nice downward path, we were on. But I think we

have an obligation to, as the Congress does, to deal with the victims of Katrina and those communities.

Senator JEFFORDS. The President has expressed his concern

about entitlements, and I certainly agree on the need to control

such spending. But one of the fastest-growing entitlements is debt

service, yet we hear little or nothing about that.

Will the budget the President has submitted increase or decrease

the deficit over the next 5 and 10 years, and if so, by how much?

Secretary SNOW. The debt is rising, as we have talked about. The

debt held by the public is still low by historical standards as a fraction of GDP, but it is rising, therefore, the service on it is rising.

But it still, Senator, will be relatively low by historic standards because interest rates are low.

We are blessed with low inflation and low interest rates. That is

helping to keep the net interest costs to the Federal Government

down. But the debt is rising. It will, you are right, be rising.

Senator JEFFORDS. Thank you. I would hope you would take a

look at our dairy farmers’ problem.

Secretary SNOW. Senator, I promise to do that and get back to

you.

Senator JEFFORDS. Thank you.

Senator HATCH. Senator Lott?

Senator LOTT. Thank you, Senator Hatch, our acting Chairman,

for this recognition.

Let me just say to you, Mr. Secretary, thank you for being here

again. Thank you for your leadership. I have followed your activities over the past 3 years and have been very proud of your efforts

to provide leadership as the Secretary of the Treasury, and with

the results.

I think that your efforts and what has happened with the economy has not gotten the attention that it deserves, so I am glad to

be with you and to have you here today with us.

I am particularly interested in the small business expensing provision. I have been down at another hearing, and I am not sure exactly what you have been asked, but I think this is a critical area.

It is one of the areas where we put some incentives in the

Katrina tax bill that now, as people have looked at it, they are very

pleased with that opportunity. I think it is already having a posiVerDate 11-MAY-2000 14:51 Oct 25, 2006 Jkt 095484 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 30403.000 SFIN1 PsN: SFIN1
23

tive effect on the future in the Katrina-devastated area in my

State, and hopefully in Louisiana, too.

Now, the proposal doubles the amount a small business can ex- pense to $200,000 per year, and it increases the allowable investment before the $200,000 limit begins to phase out.

Now, you are talking about how important this is as we look to

act on things that will help the economy. I would like for you to

comment a little bit more on what you are proposing here and the

likely effect it will have on jobs creation and economic growth.

Secretary SNOW. Senator, thank you. Thank you very much. The

2003 tax legislation contained a provision, under section 179, to

raise the allowable investment from $25,000 to $100,000.

We have seen a lot of jobs created by small business and by suppliers to small business as a result of the expanded spending that

that provision gave rise to. I think it has played a critical part in

the job picture we have seen.

Two jobs out of three get created by small businesses. This provision creates an incentive for small businesses to invest. When they

invest, they have more capital and they want to hire. We have seen

that happen.

Now, what we are proposing here is to take it even further, to double it, to go from $100,000 to $200,000.

Senator LOTT. Which is what we did in the Katrina tax cuts.

Secretary SNOW. Which is what you did in Katrina. We think

that it is helping in Katrina, helping in rebuilding businesses

there, and it would be a good boost for the overall economy. We

want to help small business.

Small business really is the engine of growth. This will create incentives for small business to expand, to grow, and to hire. It is

part of the President’s overall commitment to keep the economy on

the right path.

Senator LOTT. We argue here about the impact of these different

proposals, but one of the ways for that deficit to be controlled and

not be as high as is projected is to have growth in the economy.

There is no question that Katrina has added $100 billion to spending. You can extrapolate that right to the deficit we are dealing

with.

Now, certainly, under extraordinary circumstances, things like

that, you have to accept them, because we have an obligation there.

There was no way we could recover without it. Louisiana is going

to have a tough time getting through their problems, even with it.

But what would be the effect if we do not extend these tax cuts

we have in place? I mean, it is a huge tax increase. And, by the

way, people act on the anticipation of what is going to be available.

If they think, well, it is not going to be there, they are going to

start making decisions on that possibility.

Would you just comment on that in the remaining time?

Secretary SNOW. Senator, one important aspect of a well-functioning tax code is certainty, so people can plan for the future. I

think the market anticipates that those reductions on capital gains

and dividends will be made available. If Congress fails to do that,

fails to extend, then we have a tax increase.

Senator LOTT. Let me just interject there. I went up to New York

and met with a lot of these executives. I was stunned by the very

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matter-of-fact assumption that, yes, that is going to continue, that

is going to be in place. I said, ‘‘Why do you think so?’’ Basically

their attitude was, they could not contemplate the contrary. The

impact, if we did not do that, would have an immediate, precipitous, negative effect, I would think.

Secretary SNOW. I think it would, very much so. I think the

charts we put up showed that we have had 10 consecutive quarters

of increased capital spending, in part because of the lower dividends and lower capital gains that have been put into effect that

create an incentive for people to invest. We should not remove that

incentive from our economy, Senator.

Senator LOTT. Thank you very much, Mr. Secretary.

Secretary SNOW. Thank you.

Senator HATCH. Thank you, Senator Lott.

It is now my turn. Welcome back to the Finance Committee, Mr.

Secretary. It is good to see you again.

Secretary SNOW. Thank you, Senator.

Senator HATCH. We have on the floor right now, and will have

a cloture vote on even the motion to proceed, the asbestos reform

bill. As you know, there have been reports that up to 90 percent

of those cases are frivolous and that there have been tremendous

recoveries that really were unjustified, while the mesothelioma victims go without compensation, and many of the lung victims go

without compensation.

How would it affect the economy if we can proceed with that bill

and finally get something done there? It is a $140 billion trust fund

that is way higher than anybody thought it would be. But how

would that affect the economy?

Secretary SNOW. Senator, I think it would be positive. I applaud

you, Senator Lott, and others for your efforts on that legislation.

It removes a big uncertainty. When you remove uncertainties, you

create a more positive environment for businesses to go forward. I

think it would be very positive on the economy. I hope that legislation will carry.

Senator HATCH. Well, thank you. I found it fascinating that Federal revenues grew at a rate of nearly 15 percent last year, which

is the highest rate of growth since the early 1970s.

Maybe in real terms, since we have been keeping track—and it

is a tremendous result, and you have explained to what you attribute this tremendous growth, and I agree with you—revenue

projections for the current fiscal year are anticipated roughly

around 6 percent, which is still good, still very impressive, and

then slowing a bit in subsequent years.

Why do you say the revenue growth is slowing, and what can we

do to increase it while keeping our economic growth intact? You

have skirted this issue pretty well.

Secretary SNOW. Yes, Senator. The economy is getting closer and

closer over that budget cycle as we get out into 2007, 2008, 2009

to what the economists call the full employment level, where all the

available resources are employed, plant capacity goes up to the

level that there is not a lot of extra plant capacity, and the unemployment rate falls so that people who are looking for a job, and

cannot find one, can find a job.

25

Then, since we are not bringing more resources into the economy,

the economy’s ability to grow faster slows down. As that happens,

we get back to a rate of growth, I think, of 3.1 percent in those out

years, which economists say is their estimate of the point at which

you have full employment without inflation.

Well, if the economy slows down, then we would see some reduction in the receipts to the Federal Government. That is basically

what we are talking about there. But it is still a good growth rate,

that 3 percent. It is a rate consistent with non-inflation, full employment

Senator HATCH. I have seen years when we would have loved to

have had that growth rate.

Let me just ask you two separate questions, then you can answer

them. Can you explain what has happened with the revenue collected for dividends and capital gains since 2001? Did the tax rate

reduction on dividends and capital gains of 2003 have a serious impact on the revenue collected on these items?

If we allow the lower rate to expire as scheduled, can we expect

to see a large increase in revenue from dividends and capital gains?

That is all one question, but a bunch of questions within the one.

The second thing I would like to ask you about is, of the total

budget deterioration since 2001, to what extent was it caused by

the 2001 recession and the subsequent halting recovery? How much

was caused by the tax cuts and how much by the build-up in military and homeland security spending, in rough terms? We are talking about budget deterioration.

Secretary SNOW. Yes. Senator, I will get you a precise answer.

It is roughly about a third, a third, a third, although I think it is

weighted more heavily to the recession and to the collapse of the

equity markets, because what happened is, the government’s revenue stream, as was shown on one of those charts, came dramatically down with the collapse of the bubble, which took $7 trillion

out of the equity markets.

Those booming equity markets had created a lot of capital gains

and a lot of taxation on options that just disappeared. The revenue

stream went from something like 21 percent of GDP down to 15.5

or 15.6 with the recession and with the collapse of the market. So,

that, I think, was the single biggest part of it.

Then we had 9/11 and homeland security, which increased

spending. The tax cuts, I think, of the three, are the smallest part.

I will get you a precise answer. But the tax cuts were essentially

to get the economy going, to get the revenue stream rising up. Now

we see the revenue stream rising back up towards its historic levels. The tax cuts were critical to get people back to work and get

businesses investing.

Senator HATCH. Well, thank you. My time is up.

Senator Snowe, we will turn to you.

Senator SNOWE. Thank you.

Welcome, Mr. Secretary. In response to Senator Lott, in terms of

certainty, stability, predictability and extending the tax cuts, and

specifically the capital gains and the dividends, because otherwise

we will cause a tax increase in 2009, 2010, 2011, could we not say

the same would be true with respect to the Alternative Minimum

Tax? I am really concerned that there has been little or no attenVerDate 11-MAY-2000 14:51 Oct 25, 2006 Jkt 095484 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 30403.000 SFIN1 PsN: SFIN1
26

tion, essentially, focused on this issue that has a profound impact

on middle America.

So when we are talking about extending the tax cuts of 2001, I

think we also have to consider, what are our priorities and the timing of various issues, given the impact it is going to have on our

revenues, obviously.

Many of those tax cuts were critically important, but just to extend them will essentially capture 30 million Americans under the

AMT. If you allow it to lapse, it will capture 17 million. So, clearly,

this is a major issue that has to be addressed. I am surprised that

we are talking about just the capital gains and dividends. Unfortunately, the Senate is in a position this year—the whole Congress,

rather—in looking at that question, we have allowed AMT to expire.

So is it not a tax increase on middle America year to year, because this is a yearly extension as opposed to looking at two specific provisions that do not expire in 2009 and 2010—then we are

talking about other tax cuts that do not expire until 2010—rather

than concentrating on one of the biggest taxes on middle-income

America that probably could do more to generate growth in this

economy than anything else?

Secretary SNOW. Well, Senator, we will be addressing the AMT.

The AMT is such an integral part of the American tax system, such

a fundamental part of our code, that it needs to be addressed, we

think, in the context of broad-based tax reform.

The tax panel that I mentioned that reported in to us, chaired

by Senator Mack and Senator Breaux, had one approach to the

AMT, to have a fix on the AMT. We clearly are going to want to

have a fix, not a patch.

We propose a patch for this year, but we need a real fix for it.

But the fix has to be in the context of broad-based tax reform. I

pledge to you, that is how we will address it.

This is catching more and more people every year because the

AMT was never indexed for inflation. As a result, it reaches out

every year and grabs the sorts of numbers you were talking about.

At some point, it will be tens of millions of people ensnared in

this alternative tax system, the dual tax system, and we intend to

find an answer for that, but to do so in the context of broad-based

tax reform.

Senator SNOWE. Well, you see, I guess I am not clear in terms

of why it would not create as much uncertainty with middle-income

taxpayers and what it portends for the future. It is detrimental. It

is devastating, as a matter of fact. I think it is putting the cart before the horse.

In many instances, in looking at the context, why are we not considering all of this as opposed to assigning $1.4 trillion additional

revenues in the future, given all that we are expected to face with

the Baby Boomers’ retirement beginning this year, for example,

and the impact on entitlement, the growth of entitlement spending,

and of course what we have on the tax side, if we are going to use

those revenues for that purpose to the exclusion of looking at the

Alternative Minimum Tax, which is the greatest tax on middleincome America? You see, I just do not understand. I think it is

putting the cart before the horse.

27

Secretary SNOW. Well, Senator, it is being addressed, I can tell

you that right now. We are looking at it. I talked with Senator

Wyden earlier about our interest in working with him and others

who want to pursue broad-based tax reform, and an AMT fix will

be part of our broad-based tax reform.

Senator SNOWE. Well, I think it should be included in all that we

are considering, because we only have so much revenue, in the

final analysis, given the trajectory of the rising deficits.

I think that is the issue here that we have to focus on, what is

absolutely essential and what will motivate the economy. Clearly,

reducing marginal tax rates and addressing the Alternative Minimum Tax for middle-income America is one of them.

I think, certainly, we need to do that, given the fact that even

savings rates have gone down. It has been one of the lowest rates

since before World War II.

Thank you, Mr. Chairman. Thank you, Mr. Secretary.

Senator HATCH. Senator Lincoln? Then I am glad to turn this

back to Senator Grassley.

Senator LINCOLN. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. Just to follow up on Senator Snowe’s

question. So basically you are saying to us that, whether it is the

expansion of the Child Tax Credit or the AMT relief, that those are

appropriately reviewed in overall tax reform, but the extension of

the other taxes that do not actually expire until 2009 anyway do

not need to be taken up then?

Secretary SNOW. No. What I am saying is, I hope the Congress

will move now on the dividends and the capital gains. I think it

would send a terrible message not to.

Senator LINCOLN. Well, why is it different that we should take

those up immediately? You are advocating, or the President’s budget is advocating, permanent extension of many of those 2001–2003

tax cuts that are contained in his budget.

Secretary SNOW. Right. Right.

Senator LINCOLN. So you are making that a permanent extension, not to be reviewed in this tax reform that we are talking

about to be so essential in dealing with the ideas of Child Tax

Credit expansion and AMT?

Secretary SNOW. What we are proposing on dividends——

Senator LINCOLN. Which is permanency?

Secretary SNOW. Yes. Because we, I think, have seen the positive

results of that. We know it works. We know lowering the cost of

capital encourages capital formation, helps stimulate——

Senator LINCOLN. Well, both the past CBO Director, and I think

the current Acting Director, have commented that, regardless of

one’s views on the pro-growth nature of these cuts that you are advocating, it is not even close to accurate to say that the cuts will

pay for themselves.

Secretary SNOW. No, and we are not arguing that.

Senator LINCOLN. Well, if the revenue stream is so high, why are

we in such large debt? Why is there the incredible debt that we

have here? Do we not believe in any kind of pay-go?

Secretary SNOW. Well, the debt is made up of two components,

the debt held by the public, which basically reflects the annual

deficits——

28

Senator LINCOLN. I am talking about the debt we owe China.

Secretary SNOW. But that will come down.

Senator LINCOLN. Why is that?

Secretary SNOW. Well, because of the sort of spending restraints

that the President has called for in the budget, along with——

Senator LINCOLN. That goes to, kind of, my next question, that

the President does call for tremendous sacrifices in his budget. I

guess you explained that agencies were asked to make very tough

decisions in accordance with the President’s dedication to fiscal discipline.

I certainly applaud the President’s new-found belief that we need

to be paying for government spending and not borrowing from foreign countries. I find it more and more difficult that we are negotiating trade agreements with our bankers, now. I think it is going

to get even harder.

But it seems that most of the ideas for fiscal discipline that are

being promoted by the administration come in the form of cuts to

social programs that working families really need.

I guess my focus is really on children, Mr. Secretary, when we

see the largest reduction in spending on education in 26 years, and

we are talking about Child Tax Credits for working families.

At a time, I guess, when so many of our citizens—particularly

our most vulnerable, the elderly—are depending on Medicare, and

we are going through a real crisis now with our prescription drug

Part D, which obviously did not get any additional funding there—

I guess what I would like to know is, what sacrifice is the administration asking of those Americans at the higher incomes? Is that

reflected in the budget as well?

Secretary SNOW. Senator, this budget is one designed to put us

on a path that will bring the deficit to levels that are low by historical standards.

Senator LINCOLN. Is that why long-term bonds are returning less

than short-term bonds?

Secretary SNOW. The current interest rates on Treasury paper

are low by historical standards, and that is a positive thing. We

should be happy.

Senator LINCOLN. For short-term.

Secretary SNOW. Well, both short-term and long-term. Interest

rates are down, reflecting low—by historical standards—anticipated inflation, and I think, good monetary policy, good economic

policy overall. That is something we should be pleased about. I

think that situation will continue.

Senator LINCOLN. Are those sacrifices that the higher-income

earners are going to be making? Is there something there that I am

missing in the question I have asked?

If we are seeing the lowest investment in education for our future leaders of this country, and in terms of Child Tax Credits and

making sure that we provide it to all of our lower-income workers,

without an income increase and the fact that we have not deindexed the amount on the Child Tax Credit, we have a real concern there.

Secretary SNOW. Senator, I think if you look at the safety net,

you will see the safety net is in good repair and is strong. The best

29

thing you can do for people is to make sure that we have a good

economy that creates jobs.

Senator LINCOLN. Absolutely.

Secretary SNOW. The best thing for the American family is to

make sure that there is opportunity, and opportunity in jobs. I

think that is the focal point of this.

Senator LINCOLN. But the Bureau of Labor Statistics tells us

that incomes are continuing to fall further and further behind the

cost of living. With the jobs that are being created, with a stagnant

income, working families are not going to be able to contribute to

the economy like we want them to. And I do not know. I just do

not think that the ultra-wealthy can carry the whole burden of

keeping our economy great.

Secretary SNOW. Well, Senator, our economy benefits from people

in all the income categories.

Senator LINCOLN. Sure.

Secretary SNOW. On this question you are getting at, of fairness,

it is important to note that, after the tax cuts went into effect, the

highest-income people in the United States are now paying a larger

share of the total tax burden than they did before the tax cuts went

into effect.

That is because of things like the 10-percent category, the child

credits, the refundable child credit, and so on, as well as the fact

that the reductions in the tax rates were greater for people in the

lower-income categories than the higher-income categories.

So asking about sacrifice, I do not know if that is the right way

to look at this.

Senator LINCOLN. That is just the statement from the administration.

Secretary SNOW. But higher-income people are now paying more

than they did before, and many people have jobs who did not have

jobs, and the jobs that are being created, if you look at the statistics—and I will be glad to share them with you—something like 60

percent, are above the median income.

Senator LINCOLN. Well, how much of that——

The CHAIRMAN. Senator, your time is up.

Senator LINCOLN. All right. Can I just follow up his statement?

The CHAIRMAN. We will do that on the second round.

Senator LINCOLN. All right.

The CHAIRMAN. Mr. Secretary, there have been lots of States that

have been hard hit by the disconnect in the tax law that brings

into play the Alternative Minimum Tax with the incentive stock

options granted to workers.

On the one hand, the law encourages the taxpayer to hold onto

these stocks to get preferential tax treatment, but also subjects

them to the AMT when the option rights are exercised.

If the stock then declines after the option is exercised, the taxpayer is faced with a problem of a big AMT bill with no income to

pay for it. This is another in a long list of reasons why the AMT

needs to be repealed.

But getting back to these families across the Nation, they were

particularly hit when we saw the dot-com bubble burst in 2001. So,

unfortunately, these are old cases and would require retroactive

legislation beyond the 3-year rule of limitations.

30

I believe that the right solution here is something that we did

in 1998 for IRS to exercise its expensing authority in that restructuring bill to provide offers and compromise for purposes of effective tax administration.

I think that these cases fit well within the types of people Congress is trying to assist, people who have honestly paid their taxes

for years, but because the law is working at cross purposes, they

are caught between a rock and a hard place. Unfortunately, the

IRS and Treasury have been overly narrow in construing that authority given in 1998.

I have been pushing for quite some time now to get IRS and

Treasury to be more open-minded on this matter, and I would like

to note that I particularly appreciate the Taxpayer Advocate’s assistance in finding a solution to deal with the Iowa families hit by

the AMT on stock options.

So, Mr. Secretary, I would ask not so much a question, but would

ask that you please make a priority of looking into this to find a

workable solution to take advantage of the broad authority of the

offer-and-compromise program that can be helpful for honest taxpayers who are caught in that trap.

Secretary SNOW. Senator, I regret the hardship of your constituents, the unforseen hardship that occurs as a result of this unfortunate application of the AMT. It is yet another reason why the AMT

needs to be fixed, needs to be repealed. I will certainly follow up

on and see what administrative authority we might have.

I am told that some of these cases may go back 4 or 5 years.

They are over 3 years old, which would take us beyond the 3-year

statute of limitations. I want to look into that and see what we can

do, but I will pledge to you, we will try to find the best answer we

can.

The CHAIRMAN. Quite frankly, there are probably 10 times the

number of people in California that are affected by this as there

are in my State, but of course I hear more from the people in my

State.

On another point, recent articles in the Wall Street Journal and

New York Times have reported how U.S. multinationals have been

able to dramatically reduce their worldwide tax liabilities by transferring intangible assets to subsidiaries in low-tax countries—and

Ireland is a good example—and particularly technology companies

and drug companies have transferred an increasing amount of their

income-generated intangibles offshore to avoid U.S. tax.

For example, the Wall Street Journal reported that a 4-year-old

Irish subsidiary of Microsoft called Round Island One, Limited,

‘‘has a thin roster of employees, but controls more than $16 billion

in Microsoft assets. Virtually unknown in Ireland, on paper it has

quickly become one of the country’s biggest companies, with a gross

product of nearly $9 billion in 2004.’’

According to the article, much of this profit is from licensing software code that originated in the United States. Reporting this profit in Ireland helps Microsoft save half a billion dollars in annual

tax revenue.

The press reports indicate that it is through cost-sharing arrangements that companies like Microsoft are able to accomplish

such dramatic tax savings.

31

These companies enter into cost-sharing arrangements with their

foreign subsidiaries, giving those subsidiaries the right to a share

of whatever income or loss is generated by the intellectual property

developed under the arrangements. Instead of receiving royalties

from their foreign subsidies, the U.S. parent receives buy-in payments up front.

Our international tax regime has operated, since 1918, under the

fundamental principle of deferral, under which active business

earnings earned by subsidiaries of U.S. multinationals are not subject to U.S. tax until those earnings are repatriated to the U.S. parent, usually in the form of a dividend, but also in the form of royalties for the use of intangible property developed here at home.

The reason for this rule is to enable U.S. multinationals to remain competitive with companies based in countries that do not

tax foreign earnings at all, for example, a territorial system.

Critical to protecting the U.S. tax base, our system of deferral is

an appropriate transfer pricing policy and effective enforcement of

the policy. The President’s Tax Reform Panel has pointed out that

transfer pricing is even more critical under a territorial tax system.

Now, the Treasury Department has recently proposed an overhaul of cost-sharing regulations, and, based upon these press reports, Treasury review of this area is very timely.

So, Mr. Secretary, would you please comment on the priority

given to finalizing these regulations?

Secretary SNOW. Mr. Chairman, it is a clear priority for us. We

share your concern, the concern you have just articulated. There is

a clear danger here that there has been migration of intellectual

and other intangible property offshore.

This type of migration can be accomplished through the costsharing sort of arrangements that you described. We feel that the

existing rules have not been effective in getting at this problem.

As a result, Treasury and the IRS undertook to overhaul, as you

noted, the regulations, and proposed regulations were issued sometime back in the summer, I think it was in August. They are being

commented on now. We would expect to have them made final

sometime in 2006. I agree with you, this is a serious issue and we

need to deal with it.

The CHAIRMAN. In order to quantify that, are you headed down the road of these regulations, bringing that $500 million that is

saved by Microsoft under this back into our treasury?

Secretary SNOW. Well, I think what this will do is reduce the opportunity for abuse here, and certainly remove some of the incentives to engage in the sorts of behaviors that deny revenues to the

U.S. Treasury.

The CHAIRMAN. All right.

Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

On that same discussion, what is Treasury doing to address the

tax gap? My understanding is, not very much. That is, it is about

$350 billion of income taxes legally owed, not collected by Uncle

Sam. That is $350 billion every year.

Just think of what we could do—lowering taxes and getting the

budget deficit down, getting a surplus, perhaps—if we could collect

that revenue.

32

My understanding is, the last really comprehensive study on this

issue by the IRS was in 2001. Maybe there is a more updated comprehensive study. But why can Treasury not get down to the bottom of this?

I also understand that this budget that you are proposing makes,

in real terms, cuts to the IRS budget; there is certainly no increase

in the IRS budget. So what are we doing about the tax gap?

Secretary SNOW. Well, Senator, I will start with agreeing with

you that it needs to be addressed. There are some proposals in the

budget, I think five proposals that we recommend, that would help

deal with it. But the tax gap——

Senator BAUCUS. That is, taxes legally owed, not collected.

Secretary SNOW. Legally owed, not collected. It is one of the challenging problems the IRS has. It always has to get the equation

right between enforcing the law and treating taxpayers and citizens properly. Most Americans pay their taxes honestly.

Senator BAUCUS. Does it not make sense for the IRS to have

some kind of plan here to reduce it? That is, even to quantify, like,

say, a certain percent reduction in the gap over, say, the next year,

another percent the following year, to really get at it so we do not

continue to just talk about this, as has been the case for many

years?

Secretary SNOW. Senator, the tax gap goes back many, many

years.

Senator BAUCUS. I am saying, many years.

Secretary SNOW. Many, many years. As you know, I think Commissioner Everson testified before you that you would be very unhappy with the sorts of behaviors you would see in the IRS if they

were to make——

Senator BAUCUS. We need a plan. We need a solution. We do not

need a recitation of difficulties. We just need a solution. We need

a plan, here.

Secretary SNOW. The IRS is continuing to work on it. They are

aware of this, Senator. They are continuing to work at it. They

have these proposals in the budget. We have taken up enforcement.

You have seen the enforcement budget strengthened over the last

couple of years.

Senator BAUCUS. Here is what we will do. Next time you appear

before this committee—I do not know when it is going to be—do

you think it makes sense for you to give us an update?

Secretary SNOW. I would be happy to.

Senator BAUCUS. Quantifying it.

Secretary SNOW. I will be happy to.

Senator BAUCUS. On what you are doing in real terms, not smoke

and mirrors, to actually reduce it. Can you do that?

Secretary SNOW. I will be happy to do that. I will lay out for you

how the IRS enforcement activities have grown as a proportion of

their total budget.

Senator BAUCUS. That may be. I am only interested in results

here to get that gap down.

Secretary SNOW. We are with you.

Senator BAUCUS. All right.

33

Second, you mentioned that 50 percent of Americans with incomes, I think, of $50,000, benefit from the current dividends and

capital gains reduction. That may be true.

But is it also true that, in terms of dollars, that wealthier Americans get by far the greatest benefit of this? Let me give you some

figures and you can tell me if you agree with this or not.

According to Joint Tax, three-quarters of the capital gains and

dividend income is held by taxpayers making over $200,000 a year.

That is three-quarters of the total gain or reduction in taxes is

made by taxpayers making over $200,000 a year, and 84 percent

of the capital gains income alone is held by taxpayers making over

$200,000 a year. Those are Joint Tax figures for this last year.

Now, the most recent data we have is 2003 from the IRS on the

distribution effect. That is, what income taxpayers get what benefits? What I have here, this is 2003, for taxpayers who earned

$50,000 a year or less, IRS figures, the average savings for them

with the cuts is $24 a year. That is about $2 a month.

Whereas, the average savings for taxpayers at $200,000 or more

for any of this, according to IRS figures, is about $7,900, close to

$8,000 a year. So, in terms of the distributional effects, by far most

of the benefit is for wealthy taxpayers.

Now, if you just contrast AMT, for example, with capital gains

and dividends, I think the data will show, Mr. Secretary, that the

average taxpayer who gets the bulk of the AMT relief is around

$50,000, $75,000, $150,000 taxpayer.

That is 52 percent of all the tax paid under AMT, a little more

than half, is by taxpayers in the income brackets of roughly

$75,000 up to about $200,000. Contrast that with the taxpayers

who get by far most of the gain under the capital gains dividends

reduction, who are taxpayers with income over $1 million.

In fact, you cannot see it from where you are, but I have the

chart here that shows it. I know you cannot see it, but the red is

capital gains dividends for taxpayers earning more than $1 million,

and the blue is for people who pay AMT.

So you can see, clearly, taxpayers in the higher-income bracket

get by far much greater benefit under capital gains dividends tax

laws than they do under AMT, which is another way of saying

AMT does not hurt wealthy taxpayers.

Wealthy taxpayers do not care about AMT. They do not care

about it because it does not affect them. But, rather, middle-income

taxpayers, those whose incomes are roughly $75,000 to $150,000,

$200,000, they really get hit. Those are the facts.

Secretary SNOW. Right.

Senator BAUCUS. After that, AMT has to be fixed, otherwise taxpayers this year, 2006, are going to have to pay. Whereas, the dividends/capital gains provisions are in effect this year, 2006, they are

in effect next year in 2007, they are in effect next year in 2008.

They do not expire until 2009.

So I am wondering why, in terms of priorities, is the administration not addressing the big tax increase that people are going to

pay under AMT, middle-income taxpayers, rather than being so

worried about helping those whose incomes are above $1 million in

a tax provision that does not expire until 2009?

34

Secretary SNOW. A couple of points, Senator. One, the AMT, as

I have said, is being addressed for a permanent fix.

Senator BAUCUS. Where?

Secretary SNOW. In the broad-based reform the President——

Senator BAUCUS. What reform? That thing is dead.

Secretary SNOW. The tax reform that the President is committed

to doing.

Senator BAUCUS. Nobody is paying attention to that.

Secretary SNOW. We do not accept that.

Senator BAUCUS. I am telling you, Congress——

Secretary SNOW. We are going to join with Senator Wyden and

try to——

Senator BAUCUS. Congress thinks it is dead. Let me tell you, Mr.

Secretary, Congress thinks it is dead. That is going nowhere.

Secretary SNOW. Well, Senator Wyden did not think it was dead.

Senator BAUCUS. No. He is not talking about that. He is talking

about something else. He is talking about efforts to simplify the tax

code.

Secretary SNOW. And so are we.

Senator BAUCUS. And not the Capital Gains Tax Reform Commission.

Secretary SNOW. As part of that, we are going to push for relief

from the AMT. It is part of our broad-based tax reform proposal.

Senator BAUCUS. Is it in the President’s budget, tax reform?

Secretary SNOW. The President is——

Senator BAUCUS. I do not see it in this budget, so I am just curious.

Secretary SNOW. The President is on record as strongly supporting broad-based tax reform.

Senator BAUCUS. It is not in the budget. It is not in the budget.

Anyway, my time has expired.

Secretary SNOW. His position on that is clear.

Senator BAUCUS. My time has expired. Thank you.

The CHAIRMAN. Before I go to Senator Wyden, this is a question

to Senator Baucus. You asked, the next time he appeared before

the committee. Now, that could be a long time on this tax gap.

We could arrange for you, I, and any members of the committee

that wanted to come to, maybe a month from now, maybe a rump

session just in case there is not a reason to have him up here for

a formal session.

Senator BAUCUS. Nothing that formal.

The CHAIRMAN. You want it to be open?

Senator BAUCUS. Open, definitely.

The CHAIRMAN. Well, yes. But that could be months from now.

Senator BAUCUS. It could be. It could be.

The CHAIRMAN. All right.

Senator BAUCUS. But I want the progress between today and a

month from now.

The CHAIRMAN. All right.

Senator BAUCUS. We need to have a plan here on the tax gap.

The CHAIRMAN. Yes. I was just going to offer you something

sooner.

Senator BAUCUS. I appreciate that.

The CHAIRMAN. All right.

35

Are you the next one, Senator Wyden?

Senator WYDEN. Yes.

The CHAIRMAN. Yes. Go ahead, Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Secretary, I do appreciate your willingness to work on bipartisan tax reform. My concern is that the sand is going to run out

of your hourglass pretty quickly.

Now, the reason there was tax reform in 1986, as you will recall,

the Republican President, early on in his second term, joined with

bipartisan members of this committee, Bill Bradley, Bob Packwood,

and others, and got it done. The reason that bipartisan group did

it is they pushed themselves. They set deadlines.

As a result, they were able to up-end the popular wisdom, which

is always, you cannot possibly reduce tax reform. Everybody always

says it until 10 minutes before legislation actually appears.

My concern is that you all do not have any deadlines that I can

actually pin down. So my question to you is, Mr. Secretary, again,

in the hopes that we can get a bipartisan effort under way, has the

President given to you a deadline when your recommendations for

tax reform would be given to him?

Secretary SNOW. No. We do not have any hard and fast time line

on this, as I indicated earlier. But we are committed to giving the

President our recommendations and working with the White House

on it so that we will be able to have a well thought through set

of proposals with a sense of where the analysis takes us towards

fairness, towards the growth, and the simplification, all those components combined. It is a big undertaking. It is a big undertaking.

We want to get it right, Senator. That is what I was saying. We

only get a chance once every 20 years. We want to get it right. We

have not put ourselves on an artificial time clock, but we are working on it hard, and we are going to give the President our thinking

as soon as we can.

Senator WYDEN. I just would tell you, I think without any deadlines, you cannot make it happen. I spent the whole year, Mr. Secretary—the entire year—scouring the tax system in order to

present my proposal.

The Congressional Research Service has given us what essentially is an informal estimate: it will save more than $100 billion

over 5 years. It will provide tax relief to millions of middle-class

people, people who make $80,000, $90,000.

I am not saying it is the last word, but it would give us a chance

to build on this tremendous effort of 1986. I think I am going to

move on now. If you do not set any deadlines, it is going to make

it very tough for the Chairman, Senator Baucus, all of us who

would like to work on this, to make progress.

I will tell you, I share your view. To really do AMT right, it has

to be part of a comprehensive effort. But yet, tax reform was not

even mentioned at the State of the Union address. So people are

waiting for some leadership, and I hope we will get it.

Secretary SNOW. I will look forward to continuing our discussion

on this.

Senator WYDEN. I want to do that.

36

Let me ask you about the question of tax policies that encourage

oil addiction. Now, the President, to his credit, has said we are addicted to oil and he wants to break the habit.

To do that, you have to end the ‘‘fix,’’ which in my view is reducing the billions of dollars of subsidies to the oil sector that Congress hands out. In fact, they were just increased last year as part

of the energy bill.

Would you support a significant reduction in those oil subsidies

now that the President wants to make a break with this oil addiction?

Secretary SNOW. Senator, I would have to look in detail at what

we have proposed here on energy. I think what we have primarily

done is try to create incentives for use of hybrids, new technologies,

biomass, windmills for fuel.

Senator WYDEN. But they are billions of dollars, Mr. Secretary,

in subsidies that the President says are not needed. Let me read

you this. The President said, ‘‘With $55 oil, we do not need incentives for oil and gas companies to explore.’’ That is the President’s

statement, yet those subsidies are in the budget.

What I would like to know is, would you work with us to carry

out the President’s wishes?

Secretary SNOW. The President feels that the best incentive is

the marketplace, but that the marketplace can be assisted here in

development of these alternative fuels and new technologies, the

hybrid technology, particularly.

Senator WYDEN. That is not what I asked, Mr. Secretary. In the

budget are billions of dollars of subsidies for the oil sector. I would

like to know if you will support reducing them.

We have gotten to the point, Mr. Secretary, where the oil executives themselves say these subsidies are not needed. That is what

they said when they came to the Energy Committee. So the President says they are not needed, the oil companies say they are not

needed, but it is not reflected in your budget document.

Secretary SNOW. Senator, let me go through the budget document and come back to you. But I do think it is reflected in some

ways. For instance, there is a proposal to repeal the accelerated recovery period for various natural gas distribution activities, other

things like that.

Let me go through it and come back to you and give it to you.

But my recollection is that it does include some of the features of

the sort you are calling for.

Senator WYDEN. I would only say—my time is up—that billions

of dollars of subsidies that the companies say they do not need remain in your budget. The President says they do not need it.

We ought to work in a bipartisan way, again, at a minimum, to

reduce those subsidies and, for example, say, let us get them to the

small companies and the independents, but we can make significant savings. Unfortunately, they are not in the budget.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

Thank you for your staying here a second round, Mr. Secretary.

I would like to go back to what we talked about in the first round.

I have looked up the statistics. These are IRS statistics.

37

For people making under $50,000, they have about 1 percent of

their income from dividends and capital gains. They would save

$11, on average, from the extension. People making between

$50,000 and $100,000, more, $77. Now, people making over $1 million would save $32,000, and 51 percent of the entire cut would go

to people making over $1 million, more than half.

Do you have any dispute with those numbers? This is taxes. This

is the amount they would save in their taxes.

Secretary SNOW. Senator, I would want to review them. But are

you agreeing with me now, with what I said earlier, that in terms

of the number of people getting the benefits, that it is disproportionately people making——

Senator SCHUMER. No. I do not have the numbers of people.

Secretary SNOW. If you will check my number, I will check yours.

Senator SCHUMER. Do you think the people under $50,000 are

going to be dancing in the streets because of an $11 tax reduction?

Secretary SNOW. I think, Senator, that the tax reductions on capital gains and dividends have been part of a strong recovery in the

American economy which has created a lot of jobs.

Senator SCHUMER. But you do not dispute that someone making

over $1 million, on average, gets $32,000. That is not a normative

argument, that is just a fact. Someone making under $50,000 gets

$11. Those are the IRS statistics. Do you dispute them?

Secretary SNOW. No.

Senator SCHUMER. All right. Thanks.

Secretary SNOW. But I hope you will not dispute the IRS findings

that the people in the top income levels, even with the benefits that

you are talking about, are paying a higher share of the total tax

bill today than they ever did before.

Senator SCHUMER. Oh, of course they are. I do not dispute that.

Their incomes are going up much more, too. That is how taxes

work. But I do not want to get into that. If you want to question

me at some point, that is just fine.

So here is my question to you. Faced with a choice of AMT relief

or capital and dividend extension, an immutable choice, you can

only do one or the other, there was a resolution in the Senate

which a majority of the Senate supported, 73 votes—I think our

Chairman may have voted for it; yes, you did—including our esteemed bipartisan, knowledgeable and wise Chairman, among the

other adjectives, all positive, that I do not want to delay the hearings with, voted for this, which said, ‘‘providing relief from the Alternative Minimum Tax in 2006 should be a higher priority for the

Congress than providing a tax cut on dividend and capital gains income in 2009.’’

Do you disagree with that?

Secretary SNOW. Senator, I think we are talking about something

that is pending right now in the reconciliation.

Senator SCHUMER. Correct. But it goes to your budget as well.

Secretary SNOW. It goes to the budget. Our view on that is that

we want to work with the conferees in the Senate and the House

to come out with a good outcome.

Senator SCHUMER. Well, so does everybody. That does not tell me

much, in all fairness. Everyone wants a good outcome. Everyone

wants an excellent outcome. Would you not agree with that?

38

Secretary SNOW. Of course.

Senator SCHUMER. But do you support the thrust of this amendment, which passed the Senate overwhelmingly?

The CHAIRMAN. To make it easier, I can also say that I said at

the time that I could vote for both, see.

Senator SCHUMER. Who asked you to make it easier, Mr. Chairman? [Laughter.]

The CHAIRMAN. You can answer any way you want. If you think

you are in conflict with me, do not worry about it.

Senator SCHUMER. Yes. But would you support that? Seriously,

do you support the sentiment of what I read, which passed the Senate with 73 votes?

Secretary SNOW. Do I think there is a good case for the AMT relief ? Yes. Do I think there is a good case, a strong case for tax dividends, both.

Senator SCHUMER. I understand. I think it is really important

that the administration is not willing to put its name on the line,

that they are going to bat, first and foremost, for these middle income and upper middle income people who desperately need relief

and are getting not $11 back or $77, but thousands of dollars in

increases because of the AMT.

I have to tell you, I think the administration is not making this

the priority that they should. They have not in this new budget

where capital gains and dividends get extended forever, but AMT

is just for 2006. I think many, many Americans, many, many voters, many swing voters, many voters from the other side are going

to find that a very disturbing thing.

Again, with this AMT burden which is going to, now, I think, 19

million people, all middle income, upper middle income, who struggle, too—I do not agree with those who say just help the very poor,

do not help the middle class—are going to be really upset about

this. That is what I would say. You can have the last word.

Secretary SNOW. Two things on that. One, we share fully your

desire to see the AMT fixed and that burden relieved from the taxpayers. We are committed to do that as part of the broad-based tax

reform I have been talking about.

On the percentages, I think it is something like 2.5 percent of

taxpayers below 50 percent will benefit from the 1-year extension

of the AMT patch, which is a smaller percentage, as we heard earlier.

Senator SCHUMER. Could I ask one more question, Mr. Chairman, since you were taking a little bit of my time?

Senator LINCOLN. He has to go, and I want to ask my question.

Senator SCHUMER. All right. Sorry.

The CHAIRMAN. I want to be fair to Senator Lincoln.

Senator SCHUMER. Fine.

The CHAIRMAN. I cut her off at 71⁄2 minutes. You have been there

7 minutes this time.

Senator SCHUMER. Well, that is 30 seconds’ worth.

The CHAIRMAN. But the main thing is, I would like to leave at

5 minutes to 12 and adjourn the meeting, because I have a speech

to Iowa constituents.

Thank you, Senator Schumer. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

39

Mr. Secretary, as I ended my first round, your comment that you

have hung on, both there and with Senator Schumer, is that the

higher-income group is paying more.

Really, the reason for that, in most instances, is that they have

been the greatest beneficiaries, and their incomes are higher. So,

I think it is important to put that in perspective.

I would like to also ask you, the budget offers very few offsets

for policies in the budget. However, one of the largest revenue offsets would raise $3.3 billion from low-income working families by

simplifying the refundable child credit, basically looking at the

number of children and the formula that deals with that.

Can you explain why the President thinks it is all right for these

hardworking families with children to have a tax increase, but no

one else? You might want to explain the details, exactly how the

revenue is being raised or which families will be hurt the most. But

from my indication, it looks like the families with children.

Secretary SNOW. Senator, let me just comment on your broad

thrust here, because I think it paints a picture that really is not

consistent with the facts.

The President’s tax cuts, which Congress enacted in 2001 and

2003, have had the effect overall of making the tax code more progressive. It did so in a variety of ways, but basically it reduced tax

rates less on higher-income people than it did on lower-income people.

Senator LINCOLN. Well, Mr. Secretary, and I just assume that

you and the President are aware that the threshold that earnings

must exceed in order for families to receive a refundable Child Tax

Credit rises each year with inflation, but the minimum wage has

not risen in over a decade.

So I know you understand that that results in a smaller and

smaller credit each year for poor working families, because those

parents make a minimum wage. So if the threshold in 2005 was

$11,000, which it was, a single parent working 40 hours a week,

52 weeks a year only brings home a salary of $10,712.

As we are seeing in many of the proposals, they are requiring

more and more work hours, particularly of single women with children, single mothers who are working minimum wage jobs.

Secretary SNOW. Senator, to go through the long answer here,

the detailed answer, would take more time than we have. But I

will send you a detailed answer here that shows that lower-income

families are coming out much better as a result of the President’s

tax relief package that the Congress adopted in 2001 and 2003.

Senator LINCOLN. I would certainly be happy to look at what you

want to send me, Mr. Secretary. But I do not think you can dispute

the fact that, without de-indexing the refundability of this Child

Tax Credit, you are going to continue to see the limits go up while

their wages remain stagnant.

So I guess, in terms of that, you are going to see more and more,

particularly single working moms, who are going to have less and

less access to a Child Tax Credit, presumably those who need it the

most.

Secretary SNOW. I will look into the details of that.

Senator LINCOLN. Well, Senator Snowe and I are working on

that. We would certainly love to have the administration support

40

us, and hope that we could count on you on that de-indexing of the

credit and the lowering of the income threshold.

As long as the million-dollar folks are going to benefit, it would

be great, I think, to see and recognize that there are working families in this country that fall below that threshold, which makes

them ineligible.

Secretary SNOW. Senator, I will send you a detailed discussion of

how the President’s tax reductions have helped lower-income people.

Senator LINCOLN. And I am not disputing that there has been

some help. I was one of the ones on the floor fighting for that. But

I guess the question I would have is, if you think it is all right to

leave out single, low-income workers from the Child Tax Credit,

which is going to continue to happen.

Secretary SNOW. Senator, we will look at the issue you raised. I

do not have the command of the facts at my fingertips now, but I

will look at it and respond to you.

Senator LINCOLN. Well, that would be great. The question would

certainly be whether you think it is all right to leave out those single, low-income working families from the Child Tax Credit.

The last thing I just want to touch back on was the last question

I had in the first round in terms of the sacrifices. In reviewing the

budget in a preliminary way, seeing the kind of cuts, the 63-

percent cut in children’s hospitals, the lowest funding for education, we have seen our rural health programs cut by 73 percent,

in terms of the Child Tax Credit, there is an issue there.

And then certainly the issue we have, a waiting list in Arkansas

for children who need after-school programs, but with this budget,

we are going to see over 19,000 children in Arkansas who are going

to be denied after-school services next year because of this budget.

I just am interested to know what the perspective of the administration is on the investment that needs to be made in our children

in terms of education, after-school care, health care, and the needs

that exist out there, and why it is not reflected in this budget.

Secretary SNOW. Well, I think you heard the President, in his

State of the Union message, make a strong declamation about the

importance of education and his commitment to strengthening the

educational capacity of our country to turn out numerate and literate children.

Senator LINCOLN. Right.

Secretary SNOW. To take the things that have worked to the secondary schools, as well as the primary schools, to focus on math

and science and make that broad-based commitment to have an

education system that turns out kids that really can compete.

Senator LINCOLN. Right.

Secretary SNOW. That was a strong message.

Senator LINCOLN. Yes. And I am so grateful for the President for

his optimism and his willingness to talk about those very challenging issues we face in this Nation.

I just hope that we can walk our talk on that, that we will not

just talk about it, but we will actually make those investments in

our children and our future leaders.

Thank you, Mr. Chairman. I appreciate your indulgence.

The CHAIRMAN. Thank you.

41

Mr. Secretary, we thank you very much. I have no closing comments. We just appreciate your cooperation, your patience, and look

forward to continuing to work with you, and ask you to give real

serious consideration to that AMT issue that I brought up.

Secretary SNOW. I will. I promise to do that, Mr. Chairman.

The CHAIRMAN. Thank you. Thank you very much.

Secretary SNOW. Thank you.

The CHAIRMAN. The hearing is adjourned.

[Whereupon, at 11:55 a.m., the hearing was concluded.]

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