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74–448—PDF 2011

S. HRG. 112–428 

BUDGET ENFORCEMENT MECHANISMS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 4, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

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

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Gramm, Hon. Phil, vice chairman, UBS Investment Bank, UBS AG, New 

York, NY ............................................................................................................... 5 

Irving, Dr. Susan J., Director for Federal Budget Analysis, Strategic Issues, 

Government Accountability Office, Washington, DC ........................................ 8 

Van de Water, Dr. Paul N., senior fellow, Center on Budget and Policy 

Priorities, Washington, DC ................................................................................. 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 35 

Gramm, Hon. Phil: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 37 

Responses to questions from committee members ......................................... 40 

Hatch, Hon. Orrin G.: 

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

Prepared statement with attachments ........................................................... 41 

Irving, Dr. Susan J.: 

Testimony .......................................................................................................... 8 

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

Responses to questions from committee members ......................................... 60 

Rockefeller, Hon. John D., IV: 

Prepared statement .......................................................................................... 64 

Van de Water, Dr. Paul N.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 66 

Responses to questions from committee members ......................................... 70 

COMMUNICATION

AARP ........................................................................................................................ 73

(III) 

(1) 

BUDGET ENFORCEMENT MECHANISMS 

WEDNESDAY, MAY 4, 2011 

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

The hearing was convened, pursuant to notice, at 10:09 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Conrad, Bingaman, Carper, Cardin, Hatch, 

Kyl, Enzi, and Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; 

Alan Cohen, Senior Budget Analyst; Tom Klouda, Professional 

Staff Member, Social Security; Lily Batchelder, Chief Tax Counsel; 

David Hughes, Tax Advisor; John Angell, Senior Advisor; Tiffany 

Smith, Tax Counsel; and Claire Greene, Detailee. Republican Staff: 

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

Maureen McLaughlin, Detailee. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Confucius said, ‘‘He who does not economize will have to agonize.’’ 

Over the last decade, this country has failed to live within a 

budget. The debt held by the public as a percent of our total economy is now quite high, about 69 percent of the gross domestic product. 

Now is the time for us to remember the warning Confucius gave. 

It is time to craft deficit reduction legislation that will stabilize 

debt held by the public by 2014 or 2015, and it should continue to 

reduce the deficit in the following years, as well. At the same time, 

the debt ceiling needs to be raised to accommodate dollars we have 

already spent. 

As we consider a framework for major deficit reduction over time, 

one policy we may want to consider is a budget enforcement mechanism. How would we create a budget enforcement mechanism? 

First, we could set a limit tied to a specific measure of our economy. This limit could be the level of debt held by the public or the 

level of Federal spending as a percent of our economy. Then, if our 

economy reaches that limit, it would trigger an automatic response. 

It could trigger an across-the-board reduction in spending, an increase in revenue or a reduction in tax expenditures, or some combination. 

2 

The trigger would encourage efforts to pass a deficit reduction 

package and to conclude in a timely manner. If necessary, it would 

make sure the deficit reduction this economy needs is accomplished. 

The President has proposed a mechanism called the Debt Failsafe Trigger. Others have put forward their own proposals. One 

proposal put forward by Senators Corker and McCaskill would cap 

spending at 20.6 percent of GDP within 10 years. If the cap was 

breached, an automatic across-the-board spending cut would take 

effect. 

This type of proposal presents some significant challenges. First, 

it would encourage domestic spending programs to be administered 

through the tax code, and our tax system would become even more 

complex. 

This proposal would also cut Social Security, Medicare, and Medicaid. These cuts would have huge negative impacts on the most 

vulnerable Americans who count on these programs to make ends 

meet. 

But there is a catch. If Medicare, Medicaid, and Social Security 

were exempted from an across-the-board cut, the cuts to other programs would be far too large to bear, and that is a significant 

downside to this type of trigger. 

We must also consider the President’s trigger proposal. His plan 

would place a cap on debt as a percent of GDP instead of spending 

as a percent of GDP. The target would be to stabilize debt as a percent of our economy by the middle of the next decade and continue 

reducing the debt in the years that follow. 

This approach provides more tools to meet our significant fiscal 

challenges. It would allow us to use both revenues and spending to 

decrease the deficit and debt. 

There is certainly a precedent for this type of trigger. President 

Reagan’s 1984 budget included a ‘‘contingency tax’’ that would have 

only been triggered on if economic conditions reached certain levels. The proposal would have triggered a 1-percent tax surcharge 

on individuals and corporations, as well as an excise tax of $5 per 

barrel of oil. That was in President Reagan’s 1984 budget. 

Today we will ask how a trigger mechanism would work. In what 

years should the trigger be set? Should the trigger take place in 

just one year or are there advantages to phasing in or extending 

the trigger over a series of years? And how would a trigger affect 

our economy in an economic downturn? 

In a sluggish economy, revenue slows and spending on unemployment benefits and Medicaid increases, which adds to the deficit. As 

a result, a trigger would slow spending to compensate. 

But the worst time to be cutting spending is in an economy battling to recover, because cutting spending would deepen the economic decline. We must ensure that any trigger we consider would 

not worsen our economy and leave people out in the cold when they 

need help the most. 

I look forward to taking a close look at these trigger proposals 

today. It is my hope that this type of proposal can help us get our 

deficit and debt under control so our economy can grow and create 

the jobs that Americans deserve. 

Senator Hatch? 

3 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. I appreciate your 

calling these hearings so that we can examine in detail the sources 

of our Nation’s debt, the drivers of our annual deficits, and, of 

course, the fiscal challenges posed by both. 

As we all know, Congress is facing a big challenge with the upcoming debate over hiking the debt ceiling. This is the third time 

Congress has been asked to raise the debt ceiling under this administration, once as part of the stimulus bill, twice in December 

of 2009, and again in February of last year—three requests to raise 

the debt limit from this administration in 3 years. 

Obviously, the government’s spending is out of control. The citizens of Utah could not be any more clear about what they want us 

to do. They want us to stop the spending. And I suspect that members of this committee and of the entire Senate are hearing the 

same from citizens and taxpayers who are tired of spending as 

usual. 

National polling data is consistent with what I hear from Utah 

taxpayers. A new USA Today/Gallup poll shows that Americans 

are pessimistic about the economy and the sustainability of our Nation’s fiscal trajectory. According to this poll, Americans ‘‘overwhelmingly blame too much spending for soaring Federal deficits 

and want to rely more on spending cuts than tax hikes to get it 

under control.’’ 

Well, I can certainly heartily agree with that. 

Another poll from Resurgent Republic indicates that almost half, 

47 percent, of respondents want substantial spending cuts attached 

to legislation that would increase the debt ceiling. That might give 

a glimmer of hope to those who wish to continue our current spending spree. 

But they should not get too excited. The same poll showed that 

35 percent opposed raising the debt ceiling altogether. Only 11 percent of voters support a clean debt ceiling hike. 

Why are the people in this country demanding spending restraint? As a Nation, we are on the verge of a real fiscal crisis. The 

government continues to borrow money to fuel its spending habits. 

Spending is now trending at historic highs, 25.3 percent of GDP in 

the latest fiscal year. 

Meanwhile, our debt is at an all-time high, and, assuming the 

continuation of current policy supported by both Republicans and 

Democrats, it is trending towards 100 percent of GDP. 

And the American people get it. They understand what is causing all of this debt. The same poll from USA Today found that, by 

a margin of over 3 to 1, Americans say the deficits result from too 

much spending rather than too little revenue. 

There is no pulling the wool over the eyes of the people on this 

issue, there is no spinning the people into thinking that our problem is a lack of revenue, and there is no convincing taxpayers that 

the solution to out-of-control spending, government spending, is 

that we should give the government more money to spend. 

Mr. Chairman, I ask unanimous consent that a copy of both of 

these articles be inserted into the record. 

The CHAIRMAN. Without objection. 

4 

[The articles appear in the appendix on p. 44.] 

Senator HATCH. Congress would be following the will of the people if it attaches spending restraint-based fiscal reforms to the debt 

ceiling increase. But what will happen if, once enacted, those fiscal 

reforms fall prey to gimmicks, are waived or otherwise undermined? 

My sense is that the people will come to this Capitol with pitchforks and torches, they will be so upset. And they would be right 

to do so. 

Yet, if history is any guide, these reforms may ultimately leave 

the people betrayed and disappointed. Congress has attempted to 

pass meaningful legislation to control Washington spending before. 

First, in 1974, Congress passed the Congressional Budget Impoundment Act, which created the House and Senate Budget Committees, in addition to the Congressional Budget Office. 

Eleven years later, in 1985, Congress passed the Balanced Budget and Emergency Deficit Control Act, otherwise known as the 

Gramm-Rudman-Hollings bill. Now, I very much appreciate Senator Gramm’s willingness to come back and testify regarding this 

legislation today and any other wisdom that he can give us. We all 

know how effective he was when he was in the U.S. Senate, and 

I think people on both sides of the aisle have great and dear affection for Senator Gramm. 

We need to make sure, though, that this time is different. Every 

so often, the American people make it absolutely clear to Congress 

that Washington needs to get spending under control, and Congress has responded. But after a few years, when the people go 

back to their businesses and families, Washington always returns 

to its big spending ways. Slowly, but surely, Congress end-runs the 

spending restraints the people had previously insisted upon. 

Just as an example, the vaunted statutory pay-go rule was supposed to rein in deficit spending. Yet, since the enactment of statutory pay-go, the cost of end-running this rule resulted in $280 billion in additional deficit spending. 

Now, this time has to be different. This time we must make 

meaningful and lasting reforms. We must make the fundamental 

changes to our spending programs that might be tough today, but 

that will make maintenance of budget discipline easier in the future. 

The fact is we really cannot be having this debate again in another 5 years. We are already nearing a point where it is too late 

to enact the changes that the markets demand. And failure to act 

now will have a lasting detrimental impact on families, businesses, 

and the economy. 

The markets have taken notice of Washington’s profligate ways, 

and they are responding as you would expect. When Standard and 

Poor’s placed the United States’ AAA bond rating on a negative 

outlook, citing a greater than 1-in-3 chance of a downgrade within 

the next 2 years, that should have served as a shot across the bow 

of this committee and the entire Congress. 

So today’s hearing is both crucial and timely. No matter what 

happens with the debt ceiling, we need to make sure that Congress 

and the President stick to the fiscal reforms attached to the legislaVerDate Nov 24 2008 20:29 Jun 15, 2012 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 R:\DOCS\74448.000 TIMD
5 

tion. Both parties must accept responsibility, buckle down, and 

make the tough decisions, even when it hurts. 

We may agree to disagree, as the President has often said, but 

we cannot agree to pass this debt on to our children. Doing so is 

irresponsible, immoral, and unacceptable. 

So I look forward to hearing from our witnesses and hope that 

some of their recommendations can guide Congress as it moves forward in the coming weeks and months. And I want to thank each 

of our three witnesses this morning for being here and giving us 

the benefit of their good understanding. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Hatch. 

I would now like to introduce our witnesses. We have a very distinguished panel today. 

First—I am most honored—our first witness is a former colleague of this committee, the honorable Phil Gramm. Phil Gramm 

is now vice chairman of UBS Investment Bank. Phil, welcome back 

to this committee. We very much appreciate your intellectual insights. You are pretty far ahead of most people, and it is deeply appreciated your taking the time to be here today. 

The next witness is Dr. Susan Irving. Susan is the Director for 

Federal Budget Analysis, Strategic Issues, at the U.S. Government 

Accountability Office. I might say, in passing, that Susan once 

worked for me. She was on my staff many years ago. I am glad to 

see you back again, Susan. 

Finally, Dr. Paul Van de Water, senior fellow at the Center on 

Budget and Policy Priorities. Thank you very much, Paul, for being 

here, too. 

Let us get going here. You know our regular order: statements 

in the record, summarize about 5 minutes. And I would like to try 

to keep all comments and the questions that we ask to about 5 

minutes, too. Sometimes that slips over a little bit, but this time 

we are going to try to keep it pretty close to 5. 

Phil, why don’t you proceed? 

STATEMENT OF HON. PHIL GRAMM, VICE CHAIRMAN, 

UBS INVESTMENT BANK, UBS AG, NEW YORK, NY 

Senator GRAMM. Mr. Chairman and Senator Hatch, thank you 

very much for inviting me back. 

In the last 9 years, I have gotten a few invitations to testify, but 

I have always thought there is nothing worse than an old guy who 

leaves who will not leave. [Laughter.] And so I have never been 

back in any kind of official capacity before now. 

I thought this subject was so important—and it is a subject that 

I was very much involved in—I thought maybe I might have something to contribute. So I accepted your generous offer, and I am 

very honored to be here. 

Today’s debate is similar in some ways to the debate we had in 

1985 that produced Gramm-Rudman. In other ways, the problems 

we face today are a lot more menacing and, obviously, are more 

challenging, from your point of view. 

I think the deficit we face today would have been unimaginable 

in 1985. The economy was booming in 1985. Social Security had 

been reformed and would be in the black for over 30 years. We 

6 

were winning the Cold War and looking forward to a huge peace 

dividend. And the baby-boomer retirement was something we 

talked about, but it was a distant happening. 

Today, everything is different. We are in the most disappointing 

recovery of the post-war period. Baby-boomers are retiring in 

record numbers, driving Medicare deep into the red, and Social Security will quickly follow. 

We are fighting three conflicts simultaneously. Defense spending 

is stretched thin. If we do not have a crisis now, I do not know how 

anybody will ever make a case that we have a crisis. If there ever 

was a circumstance that ought to sort of, in old religious terms, 

bring people to the foot of the cross, it seems to me that this is it. 

Everybody here, except Senator Cardin, was here when Gramm- Rudman became law. We were facing a $2-trillion debt ceiling vote 

that seemed unimaginable at the time. Gramm-Rudman was introduced with 43 bipartisan cosponsors. It got 75 votes in the Senate, 

and it became law. 

It was easy in 1985, as it is easy now, to criticize somebody else’s 

proposal, and it was very hard to come up with anything that people could agree on. But one thing that people did agree on was, you 

could not be for nothing. It was impossible to take a position that 

there was not a problem, and you could be against somebody else’s 

proposal, but you could not be against any proposal. 

Doing nothing was not a tenable political option, and I think the 

same is true today. I think Gramm-Rudman showed, as a process, 

that, if you are thinking about building a 4-sided fort to deal with 

the deficit and pulling up the drawbridge and going back to sleep, 

you are going to be disappointed. 

I think the best you can hope for is a mechanism that helps force 

action, a mechanism that encourages hard choices and compromise. 

Did Gramm-Rudman work? Well, it did not balance the budget. 

I would say the answer is a qualified yes. Under Gramm-Rudman, 

the rate of growth in spending fell from 11.1 percent in 1985 to 4.7 

percent in 1986 to 1.4 percent in 1987. 

During the period when Gramm-Rudman was in effect, spending 

grew by a slower rate than any time since the 1950s. Any member 

of the Finance Committee will remember that we adopted a new 

entitlement during the Gramm-Rudman constraints, the so-called 

catastrophic coverage. And it was catastrophic. It was the only entitlement in American history that was ever paid for. 

Now, I do not know if it was a result of the fact it was paid for— 

I suspect it was—people hated it, and it was repealed. 

In the end, Gramm-Rudman reduced the deficit as a percentage 

of GDP from 5.1 percent to 2.8 percent in 1989, the year that the 

automatic triggers were pulled and Gramm-Rudman went out of 

existence. 

And I want to remind you—because I am sure everybody has forgotten—under the original law, you had a bunch of triggers that, 

if something occurred, it was declared an emergency and various 

things happened. And two of those triggers were, one, if you had 

an armed conflict, which we had with the Iraqi war, and, two, if 

you had a recession, which we had in the recession of 1990. Either 

of those events would set aside Gramm-Rudman, and that is what 

happened. 

7 

I have a minute left, or am I over? 

The CHAIRMAN. Go ahead. 

Senator GRAMM. Looking back at Gramm-Rudman, I think there 

are some things that we should learn from the process, and the lessons ought to be applied to whatever you adopt now, and they are 

the following things. 

One, having points of order in the Senate, but not in the House 

does not make any sense, and, if we are going to have an enforcement mechanism, it ought to require supermajority votes in both 

houses of Congress. 

Second, we had a sequester based on estimates of CBO, but I 

think it is clear that you need an end-of-the-fiscal-year look-back 

sequester so you do not get off track. If you get too far off your 

glide path on deficit reduction, then the deficit becomes a threat to 

your process instead of your process being a threat to the deficit. 

It is clear to me that the greatest weakness of Gramm-Rudman 

was the emergency designation. This was a weakness of GrammRudman, and it was a weakness of all the follow-on procedures. 

As you may remember, we once declared funding of the Census 

to be an emergency, even though we had taken the Census every 

decade for 200 years. It was an emergency because it was a Census 

year. The process was completely perverted. It did produce bipartisanship, and that was in cheating the system. 

I think the simplest way of doing it, looking back, is just to require a 60-percent vote. If you cannot get a 60-percent vote in both 

houses of Congress, it is not an emergency. And trying to define 

what is an emergency just creates all kinds of problems. 

A final couple of points. We have always used automatic spending cuts to enforce our deficit reduction mechanisms. We used them 

in Gramm-Rudman, we used them in the budget summit agreement. They were supported by Speaker Foley and by Majority 

Leader Mitchell. We used them in the pay-as-you-go process that 

was championed by Speaker Pelosi and Speaker Reid and signed 

into law by the President as part of raising the debt ceiling in February of 2010. 

The logic of this enforcement mechanism is that our spending 

programs are a creation of Congress and they represent Congress’s 

priorities. It was never our objective in Gramm-Rudman that the 

triggers be pulled. The objective was to force action, to force compromise. 

I am worried about a mechanism where, if Congress and the 

President fail, you would have an automatic tax increase. I think 

that is sort of a ‘‘heads I win, tails you lose’’ process that would 

probably produce a situation where we would never reach a compromise. 

I think we followed the spending procedure and law. We have 

never had an automatic enforcement mechanism that involved revenues, and I think for good reason. 

Finally, let me conclude, Mr. Chairman—and I appreciate your 

indulgence—America has no guarantee that we are always going to 

be the richest, freest, and happiest people in the world. America is 

as strong as we make it or as weak as we let it become. 

I think we have a crisis, and we need to act. I personally believe 

that passing a debt ceiling without addressing this problem is irreVerDate Nov 24 2008 20:29 Jun 15, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\74448.000 TIMD
8 

sponsible. I do not understand, when the President supported a 

budget mechanism as part of the last debt ceiling increase, why 

that is opposed now. 

Finally, if you can take action, if you can work out a compromise 

that reforms entitlements, controls spending, sets out a long-term 

concrete program, that is always preferable. Action is always preferable to process. 

There are a lot of ideas out there. Senator Hatch has written 

many great constitutional amendments to set a balanced budget on 

constitutional footing. Senator Corker has made a proposal on 

spending. We have our experience with Gramm-Rudman. 

But whatever we do, there should be two things. One, it should 

start now. Doing something and then not starting it until Jesus 

comes back creates the impression we have done something, and it 

actually hurts the whole process. And second, it really needs to be 

set out where it is binding, where it is not easy to get out of, because there is always pressure to try to get around it. 

I think this is important. I think you have a lot of work to do, 

and I think every Congress affects the future of the country, but 

I think this Congress will have a bigger effect than most. 

Thank you, Mr. Chairman. 

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

The CHAIRMAN. Thank you, Senator Gramm. I appreciate your 

experience and imparting that to us. 

Dr. Irving, you are next. You might turn on your microphone. 

STATEMENT OF DR. SUSAN J. IRVING, DIRECTOR FOR FEDERAL BUDGET ANALYSIS, STRATEGIC ISSUES, GOVERNMENT 

ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Dr. IRVING. Obviously, the panel lacks technological competence 

here. None of us is young, I guess. [Laughter.] 

Chairman Baucus, Senator Hatch, Chairman Conrad, members 

of the committee, thank you very much for including me as you 

seek to look at ways to facilitate and then enforce decisions you 

make to change the long-term path of our Federal fiscal policy. 

Those of you who have seen the work GAO has done over the 

years know that we have been—I hate to say ranting—talking 

about the unsustainability of the long-term outlook since we first 

issued long-term simulations in 1992 to members of this committee 

and the Budget Committee. 

I would like to start with some elements of what I think process 

in general does for you and what is important, and then turn to 

enforcement, because it is in the context of process that you implement enforcement. 

It will come as no surprise that I will agree, in part, and that 

I have a slightly different take, in part, with Senator Gramm. One 

of the first questions you have to address in the process in general 

is the time horizon. 

Setting the time horizon for which you want to look at the budgetary impact of policy decisions is not just an abstract question for 

those of us who play in the analytic arena. If the time horizon is 

too short, you may have insufficient information about the longterm costs of a program. 

9 

It is not hard to design a program that saves money for 3 years 

and then balloons. I am old enough to remember various forms of 

IRAs that did that. 

Similarly, it can create an artificial incentive to shift the dates 

of certain payments. This is one of the things that happened under 

early Gramm-Rudman; because of a 1-year snapshot, it was very 

easy to move dates. First, you move something to the next fiscal 

year; then next year, you move it back to the previous fiscal year. 

And although the snapshot looked all right, the fundamental underlying structure had not been changed. 

In addition, although you have to look at both the near-term and 

the long-term, you should recognize that the long-term estimates 

are much less certain than the near-term ones. But you can know 

about the order of magnitude and the direction of the costs. 

We know now that insurance programs can look like they are 

profit centers in the budget when they are not. Again, I am old 

enough to remember when PBGC looked like a profit center in the 

Federal budget. 

Because all of you are confronted with more decisions and more 

important issues than you can possibly be asked to make in any 

one day, the budget structure and rules determine which decisions 

are surfaced for you to make, the nature of the tradeoffs. And you 

think of that most clearly when you look at the design of discretionary caps. 

Should you separate out defense and non-defense? Should you 

separate out security and non-security? Should you, within the discretionary caps, distinguish between support for investment and 

support by consumption? Let me be clear here. I am not suggesting 

that investment is an excuse for more spending or borrowing. Rather, investment can be a component within an agreed-upon threshold. 

Furthermore, a process should be enforceable. It should provide 

both for some transparency and for accountability. I think this last 

is especially important when you go to design enforcement. You 

want accountability for full costs as in the example I gave of insurance. You also want accountability for actions. Targeting enforcement to actions makes it more likely to succeed. 

The first Budget Act, of course, was not aimed at getting to a 

particular outcome. The 1974 act was about a power shift. It was 

designed to give the Congress as an institution more power vis-a`- 

vis the Executive Branch. Creating the Congressional Budget Office gave you your independent source of estimates rather than 

being dependent on when OMB would get around to estimating 

your proposal, depending on how the President felt about it. And 

as such, I would argue this was one of the most important shifts 

in power to the Legislative Branch, of which I am proud to be part. 

As Senator Gramm has described, Gramm-Rudman-Hollings set 

targets and then used a snapshot and a sequester for enforcement. 

I think it set the basis for the Budget Enforcement Act, which 

learned from some of the things that worked less well. For example, Gramm-Rudman held Congress accountable for results regardless of whether those results stemmed from a failure of Congress 

to act or from a downturn in the economy. That made it much 

harder to explain why you had taken hard actions when the results 

10 

did not match. Similarly, the sequester did not distinguish between 

those areas where Congress had made tough decisions and those 

where it had not. 

This creates an almost perfect prisoner’s dilemma. Under such a 

structure, the worst thing in the world to be would be the only subcommittee that complied with its sub-cap. If the totals that came 

out of the Appropriations Committee exceeded the overall discretionary cap, the sequester was imposed on all subcommittee bills, 

including those that had complied with sub-caps. 

I think, as Senator Gramm pointed out, no process change can 

force agreement where one does not exist, but it can help encourage one. It can make it easier to explain the tough choices you 

know you have to take, and it can help to enforce and reduce seepage. 

The Budget Enforcement Act (BEA), as I mentioned, built on the 

lessons of Gramm-Rudman. It succeeded as far as its reach. The 

discretionary caps controlled appropriations; we will agree there 

was a little problem with emergencies, which I would be happy to 

discuss. 

BEA sought to limit the expansion of entitlement programs—direct spending programs—and of revenue reductions, including tax 

expenditures. It did not seek and did not accidentally succeed in 

changing the path of the current structure of either tax or direct 

spending laws, and the problem we all face today is the need to go 

beyond the ‘‘stop digging.’’ It is now time to change the path. 

Now, what do I think the lessons we learned from those are? Enforcing an agreement is easier than creating one. Covering the full 

range of programs and activities rather than exempting large portions can strengthen the effectiveness. Targeting sequestration to 

areas that exceed their agreed-upon level creates better incentives 

than punishing everyone regardless of action. Focusing on a longer 

time horizon can help find a sustainable path rather than artificially shifting costs into the future. That does not mean all savings 

should be shifted to the future. Incorporating a provision under 

which Congress would periodically look back to see what the path 

looks like can help bring the process closer to achieving the goal. 

So I would agree with Senator Gramm about the need to monitor. I would come out with a different approach. 

Enforcement of discretionary spending is technically pretty easy. 

It is controlled through the appropriations process, and controlling 

congressional action is the same as controlling results. 

The decisions you have to make about discretionary spending are 

the level of the cap and how you will design the cap. Will you set 

firewalls between different categories? Will you advantage some 

over the other? 

If you select subcategories, I would strongly encourage you to target the enforcement by category. And how will you handle the necessary safety valve for something like an emergency? 

You need to find some sort of definition. Periodically, one shows 

up in the budget resolution. But you need to figure out what it 

takes to enforce the definition. And I would suggest you think 

about for how long is something an emergency. We might all agree 

that massive hurricanes in August are an emergency for the fiscal 

year that begins less than a month from then. Is it still an emerVerDate Nov 24 2008 20:29 Jun 15, 2012 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\74448.000 TIMD
11 

gency in 2 years? Why is spending for hurricanes or floods that occurred 3 years ago still considered an emergency? I think that you 

can certainly tighten that up. 

For entitlements, for revenues, for spending that is run through 

the tax code, controlling legislative action is not the same as controlling results. Even if you could come up with caps, they will not 

change the underlying structure of the gap between revenues and 

the spending that goes on automatic pilot. 

In a way, what you need is a set of targets that puts you on a 

downward path. Then measure success on specific goals for that 

downward path based on estimates as you go. 

One approach would be to select a debt-to-GDP goal, not for each 

year, but for 5 or 6 or 10 years from now, and then set a path in 

the form of either spending targets or something else that is measurable and enforceable. 

Ideally, in the first year or two you would enact the legislation 

that leads to achieving the goal. You do not want to be coming back 

every year unless you have to make adjustments. And then you 

would monitor progress along the path, because, if it slips either 

because of the economy or because we have several Katrinas, heaven help us, you could decide to adjust the date at which you 

achieve your goal by enacting a new wedge-shaped policy. 

What do I think, in general, you need to pay attention to in designing enforcement and penalties? It should be painful enough 

that it is not an attractive option. You do not want people to say, 

‘‘Oh, instead of taking the hard cuts, I would rather say ‘the guillotine made me do it.’ ’’ 

The goal is to encourage action. So the penalty or enforcement 

mechanism should not be perfectly designed to be an answer you 

could all live with easily. It should be tied to actions so as to avoid 

perverse incentives, and it should not be so draconian that it is not 

convincing. I think this is the point the Senator made when he 

talked about, when it gets totally out of hand, it is not convincing. 

You all, unfortunately, have some experiences with that every year 

vis-a`-vis the SGR adjustments. 

Finally, because this is something I have spent a great deal of 

time on, I would like to say something about the debt limit. The 

debt limit is widely misunderstood to be a policy tool when it is not 

currently designed to be one. 

The debt limit is not a credit limit. The debt limit reflects the 

spending and tax decisions that all of you and your colleagues, with 

whichever president was in office, have jointly made in the past. 

It is not like the limit on your credit card. It is more the question 

of whether you will pay the bills you have already charged. 

To use the debt limit as a policy tool would require tackling the 

debt limit at the time spending and revenue laws are enacted. Congress did this 3 times in the last several years with the Emergency 

Economic Stabilization Act of 2008, with the Housing and Economic Recovery Act of 2008, and with the American Recovery and 

Reinvestment Act of 2009. It raised the debt limit to match the 

spending or revenue cut, i.e. the increase in debt estimated to come 

from that piece of legislation. That is to say, you and your colleagues and President Bush and then President Obama recognized 

that you were enacting legislation that led to an increase in debt. 

12 

You could use the debt limit as a tool in advance, but right now, 

it is a weakness in our fiscal regime that it comes after the fact. 

If H.R. 1 had become law in January, you would still be hitting the 

debt limit this spring. 

I stand more than happy to answer any questions and, of 

course—as part of an agency that works for you all—to help any 

of you as you go on designing this proposal. 

And thank you for your indulgence on my time. 

[The prepared statement of Dr. Irving appears in the appendix.] 

Senator HATCH [presiding]. Thank you. 

Dr. Van de Water, we will take your testimony. 

STATEMENT OF DR. PAUL N. VAN de WATER, SENIOR FELLOW, 

CENTER ON BUDGET AND POLICY PRIORITIES, WASHINGTON, DC 

Dr. VAN DE WATER. Senator Hatch, members of the committee, 

I appreciate the opportunity to be here with you this morning. 

The Balanced Budget Act of 1985, known as Gramm-RudmanHollings, set annual deficit targets and imposed automatic spending cuts if the targets were expected to be missed. 

The deficit targets proved unrealistic and unachievable, however. 

They were modified in 1987 and effectively repealed in 1990. 

Gramm-Rudman was originally supposed to balance the budget 

by 1991, but the actual deficit in that year amounted to 4.5 percent 

of GDP, the equivalent of nearly $700 billion in today’s terms. 

The Budget Enforcement Act of 1990 replaced fixed deficit targets with a process designed to enforce compliance with the deficit 

reduction measures agreed to at the 1990 budget summit. The BEA 

established caps on discretionary spending and a pay-as-you-go requirement affecting mandatory spending or revenues such that 

they not add to the deficit. 

These procedures were backstopped by automatic spending cuts 

that applied to precisely the same programs specified in GrammRudman. Unlike Gramm-Rudman, however, the BEA proved successful. 

Based on this experience, most observers have concluded that 

budget procedures are much better at enforcing deficit reduction 

agreements, as the BEA did, than at forcing such agreements to be 

reached, as the Gramm-Rudman legislation attempted to do. 

Nonetheless, proposals were again surfacing to change the budget process in an effort to force deficit reduction. For example, 

S. 245, introduced by Senator Corker, would limit Federal spending 

to 20.6 percent of GDP, the average from 1970 through 2008. 

The bill would impose automatic across-the-board cuts to close 

any gap between projected spending and the cap. If the required 

spending cuts were achieved solely through this mechanism, they 

would total about $1.3 trillion in Social Security, $860 billion in 

Medicare, and $550 billion in Medicaid over the cap’s first 9 years. 

Other proposals, such as S.J. Res. 10, would limit spending to 

even lower levels and would have even more severe consequences. 

Placing such a cap on total spending would essentially absolve 

revenues, including tax expenditures, from playing any part in the 

effort to bring long-term deficits under control. In fact, it would encourage the conversion of spending programs into tax expenditures, 

13 

which would not count against the cap. And it would favor subsidies provided through the tax code, which generally favor corporations and high-income individuals, over other forms of assistance which primarily benefit low- and moderate-income people. 

Former Senator Pete Domenici and former OMB Director Alice 

Rivlin recently proposed a more promising process that they call 

save-as-you-go, or SAVEGO. SAVEGO expands on the 1990 budget 

enforcement procedures in a way intended to prompt policymakers 

to agree on the changes necessary to put the Federal budget on a 

sustainable path. 

Under SAVEGO, the President and Congress would establish a 

debt-to-GDP target and a path to achieve it. Then the debt stabilization path would be translated into annual deficit reduction 

amounts for separate categories of spending and revenues. 

If Congress failed to achieve the necessary savings, SAVEGO 

would impose automatic spending cuts and reductions in tax expenditures or other revenue increases within each category. 

A plus of SAVEGO is that it would require specific amounts of 

savings which are under the direct control of policymakers rather 

than setting deficit or debt targets, which, as Ms. Irving said, shift 

when the economy or other factors change. 

It thereby avoids harming the economy by requiring larger budget cuts or tax increases when the economy weakens, and it does not 

interfere with automatic stabilizers, such as unemployment insurance and food stamps. 

Another positive aspect of SAVEGO is that its automatic changes 

would affect both spending and revenues. If an automatic mechanism only affected mandatory spending programs, but not revenues, reaching a deficit reduction agreement would become less 

likely since opponents of an agreement that included revenues 

could achieve their goal simply by sitting on their hands. 

Some argue, as Senator Gramm has, that since previous budget 

enforcement mechanisms did not involve automatic tax changes, 

automatic tax changes are not needed today. But new circumstances demand new approaches. 

First, the budgetary situation is different. Today’s budget problem, as both of the previous witnesses have said, is worse than that 

of the 1980s, and we cannot afford to ignore half of the budget in 

devising solutions. 

Second, the political environment is different. In the 1980s, 

President Reagan was seeking large increases in the defense budget, and requiring the defense budget to bear half of any automatic 

cuts kept the President’s feet to the fire. 

Today, automatic tax changes must play the role that automatic 

defense cuts played in the 1980s. 

One problem with the SAVEGO proposal is that it does not provide for the exemption of low-income programs from sequestration, 

as has been the case under Gramm-Rudman and every one of its 

successors. 

It is essential that these exemptions be maintained in any new 

budget enforcement legislation. 

As many of our Nation’s religious leaders have recently reminded 

us, the Nation needs to substantially reduce future deficits, but not 

at the expense of hungry and poor people. 

14 

And the success of pay-go during the 1990s demonstrates that 

exempting low-income programs from sequestration does not weaken the enforcement mechanism. 

This concludes my remarks, Mr. Chairman. Thank you very 

much. 

[The prepared statement of Dr. Van de Water appears in the appendix.] 

The CHAIRMAN. Thank you, everybody. 

One question that is kind of popping around here is, with any 

trigger, should spending and revenue both be included or just 

spending? Some say both. 

I would like your views. All three have spoken a bit on that subject, but let me just go down the table, and I will start left to right. 

Dr. Van de Water, you said that revenue should be included. But 

if we had a trigger and, say, it is debt as a percent of GDP, that, 

by some definition, might automatically include revenue. 

But the deeper question is, should revenue be included in any 

trigger? 

Dr. VAN DE WATER. Well, I have made my position, as you have 

said, Mr. Chairman, quite clear—— 

The CHAIRMAN. Say it again. 

Dr. VAN DE WATER [continuing]. In both my prepared remarks 

and my oral statement. 

But just to make two brief additions. First of all, as you correctly 

suggested in posing your question, there is, of course, a distinction 

between the automatic enforcement mechanism, on the one hand, 

which I think all three of us have said should be the last resort. 

Senator Gramm said, and I wrote this down, ‘‘Action is always 

preferable to process.’’ I certainly agree fully with that statement. 

And, of course, if you, the Congress, are trying to reduce the deficit, 

revenues are always an option in that sense, even if not included 

in the enforcement mechanism. 

But I do think it is important that they be included in the enforcement mechanism for precisely the reason I gave; namely, if 

you are trying to bring groups with disparate views to the table, 

the enforcement mechanism has to threaten some action that both 

groups find unpleasant, and it is not necessarily going to be the 

same thing for both sides. 

As I pointed out, in the 1980s, President Reagan found automatic 

defense cuts as being very unattractive, and that was the mechanism that was decided upon at that time to make sure that his side 

was brought to the table. 

The CHAIRMAN. My time is expiring. 

Quickly here, Dr. Irving, your point, your thoughts. 

Dr. IRVING. I guess in order to conserve your time, I will just say, 

yes, I think that you need to include revenues and spending in the 

trigger, in the enforcement mechanism and their design options. 

The CHAIRMAN. Why revenue? Some think no revenue. Why do 

you think revenue? 

Dr. IRVING. First of all, I think that the problem is too large, that 

it cannot be solved without dealing with both sides. Analytically, 

you cannot raise taxes fast enough, even if people were to agree 

with it. And I do not think the American people are prepared to 

15 

give up enough of what they currently get from government to settle on 18 percent of GDP, which is the historical average. 

As a result, I think, both for the reasons Paul mentioned and because if you have settled on a design and a program, you want the 

enforcement to also be 2-sided. 

Also, I think it is a mistake to pretend that spending is just a 

group of politicians spending money against the will of the people, 

and tax cuts are always wonderful. It has been my experience 

when I travel—and I do not deal with constituents the way you all 

do, but I get lots of phone calls, and I do travel—that everybody 

is in favor of small government until they are not. 

Everybody hates big government, but have you seen the polls? 

What they want to cut is foreign aid, and they want to cut it to 

10 percent of the budget when it is currently 1 percent. 

People believe in emergency assistance—when the States have a 

natural disaster, they dial area code 202. People turn to their Federal Government for a great many things, sir. 

The CHAIRMAN. Senator Gramm? 

Senator GRAMM. Well, Mr. Chairman, I think people are confusing what they want the outcome to be with the enforcement 

mechanism. 

I think we have never had automatic tax increases because the 

whole concept of setting up a structure where government fails and 

people’s taxes go up, is simply not workable. And what I am concerned about is, if we want to prejudge what we want the outcome 

to be or what some people want the outcome to be in the enforcement mechanism, then we are just setting up a blind formula to 

do our work. 

If Congress wants to raise taxes, it ought to do it. If it does not, 

it should not. If it wants to cut spending, it should do that. But 

the idea of having an automatic mechanism that is going to raise 

taxes if Congress and the President fail to get the job done is a 

nonstarter with the public, and I think it is sort of a pernicious 

provision that will induce some people to say, ‘‘Well, let us just do 

nothing and let this formula make the hard choices.’’ And as you 

said, you would end up with a nightmare of a tax code. 

The CHAIRMAN. So, basically, your thought is, do not include revenue because the public does not want it. 

Senator GRAMM. Well, the public does not want it. It does not 

make sense. Spending programs are a creation of Congress. They 

represent Congress’s priorities, and they are a forcing action if you 

cannot—if you write the mechanism so that you cannot get out of 

it by cheating or by finding a way around it, then I believe you will 

force action. 

The CHAIRMAN. Some think that tax expenditures are spending 

created by Congress. 

Senator GRAMM. I think it depends on how you view it. I think 

if you lower the amount that people can deduct on mortgage interest on their home and their taxes go up, they see it as a tax increase. 

I am not saying that they should not be looked at. I think they 

should be looked at, and I think we should dramatically reduce 

them and lower rates, both corporate and individual rates. But the 

16 

idea of having a mechanism where, if government fails, the taxpayer pays, just sounds alien to our process, to me. 

The CHAIRMAN. Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Senator Gramm, you are currently a vice chairman of the investment banking division of UBS Bank. Now, we hear so often about 

the ‘‘catastrophic’’ events that would occur if the U.S. were to reach 

the debt limit of $14.3 trillion later this year. 

Now, Secretary Geithner notified us earlier this week that he 

could potentially hold off until August before raising the limit as 

required. 

Now, I am interested in your perspective regarding the international community, since they are one of the primary holders of 

our debt. 

Senator GRAMM. Well, Senator Hatch, I visit with People’s Bank 

of China, the Bank of Japan, and the Bank of Korea at least 3 

times a year each, and, needless to say, when I visit with them, 

the topic is finance, the value of the dollar, the Federal deficit, the 

strength of the American economy. 

These three institutions are the largest holders of dollar-denominated assets in the world, and most of them are Treasury notes 

and bills. I have never had any one of those three banks ask me 

about the debt ceiling. 

They are very concerned about the value of the dollar. They are 

very concerned about inflation. They are very concerned about the 

deficit and the debt. But to the degree that they are concerned 

about the debt ceiling, no one has ever asked me a question about 

it. 

I think that what we have done here is we have this specter of 

the world coming to an end which has been created out of this silly 

notion that Congress is going to pass a clean debt ceiling, when, 

under President Obama, last year, they could not pass a clean debt 

ceiling when the President’s party controlled vast majorities in 

both houses of Congress. 

So it is not going to happen. I think that is clear. 

Do I think we should pass a debt ceiling? Yes. And I think the 

sooner we could work out a compromise as to what we are going 

to do to deal with the deficit and pass it, the better off we would 

be. 

But this holding out the specter that the world is coming to an 

end I think is a gross overstatement. I do not think Congress would 

want the President to have the powers he would have if we did not 

pass a debt ceiling. He could cut spending in areas he wanted to, 

spend in areas he wanted to. 

You have lots of legislation, much of it going back to the Civil 

War, that gives the President vast powers. 

So let me restate my position so it is clear what I am saying. I 

think we need to pass a debt ceiling. I think it is like the bill collectors at the door. The credit card analogy is a good one, but that 

is not where it stops with real families. They pay their bills, but 

they get the credit cards, they get the butcher knife, they sit down 

at the kitchen table and they cut up the credit cards, and I think 

that is what we ought to do on this debt ceiling. 

17 

I do not think we ought to be frightened out of taking action that 

needs to be taken. The danger to America is much greater if we 

do nothing than it is if we simply raise the debt ceiling. 

Senator HATCH. All right. Now, you were a key player in the 

Senate fiscal battles around here for almost a couple of decades. 

The fundamental question I have for you is, how do we get a bipartisan deficit reduction deal to stick once the ink from the President’s pen dries? 

Senator GRAMM. Say that one more time, Senator. 

Senator HATCH. Well, if we can get a bipartisan deficit reduction 

deal put together, how do we get it to last, to stick? 

Senator GRAMM. Well, you know, that has always been the problem when we have had deals in the past. The taxes stick in many 

cases. We do not live up to the spending end of the bargain. 

That lack of credibility is one of our problems in doing something. But I think what Congress has to do is get its game face on, 

that there really is a crisis, and it is amazing, when you decide you 

have to do something, what you are capable of doing. 

And I will just give you an example. Everybody knows that we 

are going to have to do something about Social Security. When Social Security was created, the average American did not live to be 

65. Now, the average time that people are living is in the high 70s 

for men and the 80s for women. 

We are going to have to raise the retirement age. We are already 

doing it to 67. We ought to do it to 70, and everybody knows it. 

There was no cost of living increase under Social Security. Now, 

we index by the wage rate, which is a multiple of inflation. If we 

just went back to inflation, we would have a big impact. 

Those two changes would eliminate long-term actuarial imbalance. And then we need to look at means testing these programs 

and Medicare. 

Senator HATCH. Well, right now, this committee is examining the 

issues around tax reform, and, after the grand bargain in 1986, my 

friends on the other side were pining for broad-based tax increases. 

The same thing happened after the Andrews Air Force Base deal 

of 1990, and they got them in the 1993 Clinton tax hike bill. 

On the other side of the ledger, after the bipartisan deal of 1997, 

my friends on the other side were pushing to break the appropriations spending caps of that deal. 

And I guess the question I have is, how can we ever be assured 

that a deal is a deal? This is something that worries me. 

Senator GRAMM. Well, I think you have to—whatever you do, you 

have to do it all at the same time. You cannot say, well, we are 

going to make these decisions in the future, but we are making 

these decisions now. 

I think you have to set out multiyear appropriations. You have 

to reform entitlements. You have to have some enforcement mechanism. And I think our problems in the past represent an impediment, but this is such a big crisis. I think we have to find ways 

to get around that and to develop some trust. 

Senator HATCH. My time is up, Mr. Chairman, and I am sorry 

I took so long. 

The CHAIRMAN. Thank you, Senator Hatch. 

Next, Senator Bingaman. 

18 

Senator BINGAMAN. Let me just ask, Dr. Van de Water, you 

talked about the SAVEGO, save-as-you-go proposal, that Senator 

Domenici and Alice Rivlin proposed as a debt-to-GDP target, establishing a debt-to-GDP target. 

That is very different than what Senators Corker and McCaskill 

have proposed, where it is a spending-to-GDP target, as I understand it. 

Could you just describe the merits or demerits of those two models? If we were to set a target, should it be based on debt-to-GDP 

rather than spending-to-GDP, in your opinion? 

Dr. VAN DE WATER. Yes, Senator Bingaman, I do think that focusing on debt or deficit is the right thing to do. 

Obviously, we have deficits because spending exceeds revenue, 

and deficits can be reduced either through reining in spending or 

increasing revenues. 

In fact, given the magnitude of the problem, at least Dr. Irving 

and I both feel that it is necessary to look at both sides of the ledger, that the problem is too big to be solved just through spending 

reductions, particularly given the continued increase in health care 

costs. 

The growth in costs was reined in significantly in public programs and Medicare through the Affordable Care Act, but it is a 

problem that is not affecting just public programs, but health care 

spending generally. 

Also, as Senator Gramm just referred to, we are now in the first 

phases of the retirement of the baby-boom generation, which is 

going to be driving up spending for Social Security, Medicare, and 

Medicaid by several percentage points of GDP in coming years. 

So, given our current situation, I think it would be much preferable to focus on deficit and debit rather than simply one side of 

the budget ledger. 

Senator BINGAMAN. Dr. Irving, I gather from your comments, you 

basically agree that that is a more appropriate way to structure 

any kind of long-term deficit reduction plan; is that right? 

Dr. IRVING. Yes, sir. 

Senator BINGAMAN. Senator Gramm, let me ask you on that narrow issue. I know you are not in favor of any automatic enforcement by way of a tax increase. I have understood that. But do you 

think it would make more sense to have a target, whatever target 

is arrived at, be done in terms of debt-to-GDP rather than particular spending levels to GDP? 

Senator GRAMM. I used to dream of us paying off the debt. Boy, 

that dream is a long way from any kind of reality today. 

You can do it either way. I think it probably makes better sense 

to do spending or deficits, but you can make it work either way. 

And I just would say—not to beat a dead horse—on the automatic tax increase issue, that we are still—what is the best way 

to deal with the deficit may be one thing, but what kind of automatic mechanism you want to use to force it I think is another 

thing. 

And I never was in favor of an automatic cut. I always worked 

to try to come up with a compromise. And the strength of it was 

that you could say, I hate doing what I am doing, but I do not hate 

19 

it as much as just this senseless across-the-board cut. It was a 

shield, as well as a forcing mechanism. 

But I am just afraid, if you have automatic tax increases, that 

that could actually encourage people to let this mindless process 

work, and I think that would have a pernicious effect on the whole 

process, is my thinking. 

Senator BINGAMAN. Any others have thoughts on that last point? 

Dr. IRVING. Senator, I think, as I indicated, that you want the 

enforcement to be unpleasant enough that people wish to avoid it. 

I do not share the view that the public hates all the spending programs. I think the reason we are in this situation is that, in general, people love spending and hate paying for it. 

I am not sure I see any difference between an automatic surtax 

or other tax enforcement being a statement of failure rather than 

an automatic spending cut. 

Both of them are statements about the fact that Congress was 

unable to reach agreement on enacting legislation with the President and that it failed to achieve the target it had set for itself. 

So it seems to me, the triggering of any automatic procedure is 

a statement of a kind of failure, and it should look, as I say, plausible, but not be perfectly designed to be a good alternative. 

Senator BINGAMAN. Thank you. 

The CHAIRMAN. Thank you, Senator. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. And let me thank all 

of our witnesses. 

Dr. Irving, I agree with you that the debt ceiling is not the right 

vehicle that we should be using. The debt ceiling should be handled 

with the recognition that it is the completion of prior decisions that 

have been made. 

But we are looking at a debt enforcement mechanism that will 

be most likely considered in conjunction with the debt ceiling issue. 

I do have two concerns that have already been raised. Federal 

fiscal policy has to have the tools necessary to deal with our economy. The Federal Government can deal with our economy. 

Many of the approaches used to reinvigorate the economy are 

countercyclical, and that needs to be built into any enforcement 

mechanisms. 

The second concern is about the most vulnerable Americans. 

When you take a look at enforcement mechanisms, particularly in 

this current political climate, it is unclear whether we will have the 

same sensitivity that was demonstrated with Gramm-Rudman and 

with the balanced budget enforcement mechanisms to recognize 

that there are certain programs that need to be given special consideration. 

Now, I want to focus on the first question the chairman asked, 

regarding tax and revenue issues. I listened very carefully to Senator Gramm’s comments, and I also listened to Dr. Van de Water’s 

comments. And it seems to me that you are in a committee that 

is probably friendlier towards Senator Gramm at this particular 

moment because it is the Finance Committee, and the Finance 

Committee is the committee that has general jurisdiction over 

many of the tax expenditures. 

20 

But if we had appropriators here, they may have a different view 

on this. And it seems to me that, if we are going to get budget discipline, we have to recognize the realities that, in today’s world, the 

tax expenditures are, in many cases, very similar to appropriations 

bills. 

We use the tax code to advance our energy policies. We use the 

tax code to advance our housing policies. We use the tax code to 

advance our health policies. And the list goes on and on. 

So I am not sure I understand the distinction, Senator Gramm, 

that you raised as to why the enforcement mechanism, if it is going 

to be real, should not put pressure on the tax expenditure side and 

why it should only be limited to the appropriations side, whether 

it is by the annual appropriations bills or mandatory spending. 

I underscore this by saying that, if we are going to have enforcement, it seems to me, if the enforcement is going to require us to 

act, then—and I agree with you. I do not want to see the trigger 

pulled. I like to see action. 

You made a comment that you thought if revenues were in there, 

it would make it less likely that we would act. It seems to me it 

makes it more likely that we would act, because it makes it even 

more challenging for how the across-the-board will affect the political environment that we all live in. 

Senator GRAMM. Let me respond that I see a difference between 

money that the American worker has and money that government 

is spending. 

Now, it is true that we let working families deduct their mortgage interest payments on their home from their taxes, and it is 

true that that is a tax expenditure. 

It is also true that I would be willing to get rid of every tax expenditure and just cut rates. I am no big defender of so-called tax 

expenditures. 

But to suggest to working families that, if we do not get our job 

done, if you do not get your job done, if the President and the Congress cannot work out some way to deal with this problem, that 

part of the solution is going to be taking money away from them— 

and I am glad you are going to be trying to sell that and not 

me—— 

Senator CARDIN. Well, I have a hard time selling—— 

Senator GRAMM [continuing]. Because I just do not think it 

makes any sense. 

Senator CARDIN. I am going to have a hard time with students 

telling them that these across-the-board cuts are going to take 

money away from their aid programs or that in health care, that 

the health centers are going to have to reduce the number of people 

who can receive treatment. I can go down the list of who is impacted by across-the-board cuts, and I could not agree with you 

more, I never want to see that happen. 

I want to see us act, and I think the trigger mechanisms are 

there to force us to act. But I must tell you, I differ with you. I 

think tax expenditures are more focused toward higher-income 

families than the across-the-board impact of the budget expenditure cuts. 

Higher-income people are more likely to take advantage of tax 

expenditures than lower- and middle-income families. 

21 

So, from the point of view of equity, I would take exception. From 

a political standpoint, you might be right, and that is why I think 

including tax expenditures makes it more likely that Congress 

would prevent the triggers from taking effect. 

Senator GRAMM. I would just say—and then I am going to be 

quiet on this subject—but I would just say that it would be one 

thing if you cut these deductions as part of a budget agreement 

and you voted on it and it was debated, but I think it is quite another thing when it just happens automatically, and it happens because of a failure in the government. 

And, again, I understand that you have all these people who are 

beneficiaries of various parts of the tax code, but they view it that 

they are already paying taxes. Forty-nine percent of the people pay 

all the taxes in the country, and the idea of raising their taxes 

more if government does not do its job, in essence, so spending can 

be higher, maybe as part of a budget deal that deals with the crisis, you could sell it, but as an automatic process, I do not think 

so. 

Senator CARDIN. The spending will not be higher, because the 

automatic reductions will be primarily on the spending side. So 

spending is going to take the largest hit. 

The use of automatic reductions represents a failure. We all recognize that. The goal here is to prevent the triggers from being exercised. As a matter of fairness and a matter of effectiveness, you 

get more likely results by making it comprehensive. 

The CHAIRMAN. Senator Enzi? 

Senator ENZI. Thank you, Mr. Chairman. And I am not going to 

get into a debate with any one of the three. I really appreciate the 

comments that you have made, but, Senator Gramm, I have so 

much missed your ability to debate on the fly and to phrase quickly 

and to explain in simple, but very forceful words. 

And I appreciate the testimony that all three of you are giving 

today, but as I say, I have missed the kind of testimony and debate 

that you do. 

Senator GRAMM. Well, thank you, Senator. 

Senator ENZI. And I appreciate the comments that you made. 

Now, both you and Dr. Irving mentioned look-back sequester. 

Could you tell me a little bit more how a look-back sequester would 

work? 

Senator GRAMM. Yes. I did not go through Gramm-Rudman because I knew I was going to have a time problem, but basically, 

when the OMB does its snapshot of where we are in terms of the 

deficit, that is where the sequester occurred, if one was due, given 

a failure to meet the target. 

But then, at the end of the fiscal year, things often change. Almost every State government which has a constitutionally required 

balanced budget has a look-back process where, at the end of the 

year, they have to make these final adjustments. 

I think that is critical because, if you let things change and the 

deficit gets too big, then your process is no longer credible, and that 

is why this look-back process is so critical. 

It is why dealing with the emergency designation, which was totally abused under the old system, and why having real points of 

order that keep the process in place unless there really is such an 

22 

upheaval and convulsion that Congress is willing to stand up and 

repeal it, are critically important. 

It is worse to do a process that really has no effect than it is to 

do nothing, because then you mislead people. 

Senator ENZI. Thank you. 

Dr. Irving? 

Dr. IRVING. Senator, thank you for giving me a chance to clarify, 

because I was not so much talking about a sequester as much as 

a process. 

Imagine a package where you set a target that is several years 

out and then you set a path to that target. You would do your enforcement based on actions that the Congress takes. 

So if Congress, in year one, enacts legislation with discretionary 

spending, direct spending, limits on tax expenditures, revenues, 

that together as a package meet that multiyear path to achieve 

that debt-to-GDP target or whatever target you pick, no enforcement would be triggered that year, because you would have done 

what you had to do. 

On the other hand, there are automatic stabilizers in the Federal 

budget. That is, revenues drop when we have a recession. So, at 

the end of the year, I would recommend looking back and asking, 

‘‘Did something happen to push us off the path we thought we enacted?’’ If it happened because the U.S. went into another deep recession, you would not want to recoup the slippage right away, but 

Congress should have to explicitly decide on what path it wants to 

take to recoup that slippage. 

That is, ‘‘Now it looks like we do not get to the debt/GDP ratio 

of X percent in 2020 unless we do more; today we are going to 

enact some more things that kick in in 6 months or a year from 

today to get us back on that path,’’ so that the enforcement is always tied to the actions, but you do not let things like the economy 

or the floods or whatever just mean, ‘‘Oh well, too bad, we did not 

make it.’’ 

And you get yourself back on the path on some reasonable basis. 

That also means you do not have to overturn the automatic stabilizers, because, regardless of whether you want to actively initiate 

countercyclical bills, presumably you do not want to overturn the 

automatic countercyclical nature of the Federal budget. 

Senator ENZI. Thank you. 

Senator Gramm, what do you think about this sequester package 

being over a period of years with a readjustment, and how detailed 

do you think that we ought to be? 

Senator GRAMM. Well, you know the debate about, do you want 

to set out a program where people know what it is versus one that 

can adjust based on what is happening in the economy, is an old 

debate. 

I would have to say, given our experience in the last 3 years 

under both President Bush and President Obama, that the idea of 

stimulating the economy by spending money has pretty well been 

discredited. 

You might not think so. 

Dr. IRVING. But I did not say adding stimulus. I just said you 

might not want to overturn the automatic stabilizers. 

23 

Senator GRAMM. I think you are better off, within limits, to have 

fixed targets. I think, as strange as it sounds, given the magnitude 

of our problems today, you probably need a 10-year program to 

bring the deficit under control, if you are really going to enforce 

these targets. 

And the important thing to the economy, the important thing to 

investors, is not that you are going to do it tomorrow. It is that you 

are going to do it. And, if you get a credible process, you are going 

to get immense credit in the market. You are going to affect investment, you are going to affect equity values based on the credibility 

of your program. 

But the deficit is so big now that, to have a credible program you 

could really enforce would probably be about a 10-year program. 

Senator ENZI. Thank you. My time has expired. 

The CHAIRMAN. Thank you. 

Next, Senator Carper. 

Senator CARPER. Thank you. 

Senator Gramm, nice to see you. 

Senator GRAMM. Nice to see you. 

Senator CARPER. Welcome back. 

Senator GRAMM. Thank you. 

Senator CARPER. And our two other witnesses, very nice of you 

to come and join us today. 

There is a fair amount of discussion in here today about two primary ways to reduce deficits, and one of those is to cut spending, 

and the other is to raise taxes. And I want us to focus for a little 

bit today, move a little bit off of topic actually, but it still relates 

to deficit reduction, but I think there are two other ways that deserve not just our attention, but our action. 

And one of those is to make sure that we are growing the economy and to make sure that we are actually heeding the advice of 

a guy named John Chambers, who is the CEO of Cisco. 

He likes to say that the jobs in the 21st century are going to go 

to States or to nations that do two things especially well. One of 

those is to create a world-class workforce; second is to create a 

world-class infrastructure, broadly defined. 

I would add to that a third one—actually, the President added 

a third one in his State of the Union address—and that is to make 

sure that we are making smart investments, not just the government, but as a Nation, smart investments in R&D that has commercial application so we can innovate and come up with products 

and technologies that we can build here in the United States and 

sell around the world. 

The President likes to say that if we are going to win the 21st 

century, we are going to have to out-educate, out-innovate, outcompete everybody else, and I think he is on the right track. 

My question of the three of you today is actually the kind of R&D 

investments you think make most sense. And, if you all could do 

that just very briefly, please, and then I will have one other question. I want to talk a little bit about culture and thrift, creating a 

culture of thrift to replace the culture of the spendthrift in our Nation’s Federal Government. 

So, do you want to go first, Senator Gramm? 

24 

Senator GRAMM. Let me try to be brief, because you want to give 

everybody a chance to answer. I think the investment that makes 

the most sense is private investment, and I think any way we can 

find to encourage private investment, we want to do it. 

I would strongly commend to the committee, having spent 9 

years working all over the world and working with a lot of American companies, we need to do something about the corporate tax 

rate, and how wonderful it would be to have a markup where you 

just eliminate all the deductions, lower the rate, and then, if somebody wants to put it back, they have to debate it and they have 

to get a vote on it. 

This corporate tax rate is really doing us a lot of harm. It is inducing people to invest abroad. It is inducing people not to bring 

the money back. Countries all over the world have cut it, and we 

are at a terrible disadvantage. 

I think deficit reduction that is credible will encourage private 

investment. There have been some ideas out there related to infrastructure. My colleague at UBS, Robert Wolf, wrote an article in 

the Wall Street Journal about an infrastructure bank. He testified 

on the subject. And unlike a lot of people who are proposing basically to create another government agency that will give grants and 

stuff, his conception is about an institution that actually makes 

loans, operates at a profit, and I think that is the only kind of approach that would have any chance of being adopted or working. 

So, again, private investment is better because it is more likely 

to be successful over the long term. 

Senator CARPER. Dr. Irving? 

Dr. IRVING. Senator Carper, I am not about to pick a type of 

R&D, but one of the things we have suggested in the past is that, 

within whatever level of discretionary cap you select, you might 

wish to pay attention to the allocation between support for consumption and a fairly strict definition of investment, which we limited to R&D infrastructure and education and training. 

It is worth noting, of course, that the deficit is a kind of disinvestment by the Federal Government. 

Senator CARPER. Thank you. 

Dr. Van de Water? 

Dr. VAN DE WATER. Thank you, Senator. Like Dr. Irving, I am 

not going to get into areas where I do not have a lot of expertise, 

but I think just two points. 

One, I would agree with Senator Gramm on part of his point on 

the corporate tax rate. We were discussing tax expenditures earlier. This is one area where there are a lot of tax expenditures, 

and, clearly, most economists would agree that it would be better 

to get rid of a lot of the tax preferences in the corporate tax structure and have lower marginal rates. 

The only point where I would at least modestly disagree is that, 

while private investment is obviously very good, there are areas 

where private investment is just not going to take place and where 

the Federal Government needs to step in. 

For example, Pell grants for low-income students: that is not 

going to be done by the private sector; highways, other aspects of 

transportation, are public responsibility. And, of course, there are 

25 

forms of basic research which are clearly a public good, and they 

are not going to take place privately. 

Senator CARPER. All right. Those are good points. Thanks a lot. 

And my time has expired. Let me just close by making this observation. 

I think everything I do, I can do better. My guess is everybody 

in this room, all of us, everything we do, we can probably do better. 

The same is true of the Federal Government, and one of the things 

I have been encouraging all of us to do, Executive Branch, Legislative Branch, is to look at almost every program, every nook and 

cranny of the Federal Government, and ask this question: Is it possible for us to get better results for less money or better results for 

the same amount of money? 

And you take what some would describe as a culture of spendthrift in our Federal Government and replace it with a culture of 

thrift; not just for a day, not just for a week, but really as sort of 

a permanent change of mind. 

Thanks, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. And I want to thank 

our panel. 

Senator Gramm, welcome back. I was a staffer here when 

Gramm-Rudman-Hollings passed and—— 

The CHAIRMAN. Where were you? Where did you work? 

Senator THUNE. Jim Abdnor, back in 1985. But I remember explaining it as I would travel with my boss across South Dakota. 

But it was a very effective mechanism for some time until it got 

overtaken by subsequent congressional action, I think because the 

decisions became so hard. 

But it strikes me that we have to have some kind of an imposed 

discipline. There has to be an enforcement mechanism, because 

Congress has not demonstrated in the past the capacity or at least 

the will to make these hard decisions and these hard choices. 

And so I appreciate your perspectives on some of these various 

ideas that are circulating out there. 

I would like to direct, if I could, a question to Senator Gramm 

or Dr. Irving. Both of you have mentioned troubles with emergency 

spending designations and their effect on spending, and I wonder 

if maybe you could discuss further the need to have some sort of 

a supermajority in both the House and the Senate to approve any 

emergency spending, because it strikes me that, whenever there is 

a desire to spend money around here, we just declare it an emergency and we operate outside any kind of budgetary parameters 

that might exist. 

Senator GRAMM. Well, let me say, when we wrote GrammRudman, there was substantial concern about it, there was substantial opposition. So it had all kinds of emergency provisions in 

it. And, as I said earlier, we even declared the Census as an emergency at one point during the process, even though we have done 

it every 10 years for 200 years at that point. And we could hardly 

say it was an emergency. 

26 

I think the only real way to measure an emergency is, can you 

get a supermajority vote? If you cannot, you do not have an emergency. 

And I think given our experience with Gramm-Rudman—and 

congratulations on your proposal that tries to bring several different ideas together. If you cannot get a supermajority vote, you 

do not have an emergency. 

And I think, rather than trying to define an emergency so that 

people can then take the definition and figure out how to get 

around it, I think simply requiring both houses of Congress to have 

a supermajority vote to declare an emergency as it relates to each 

individual violation is the right way to go. 

Senator THUNE. Dr. Irving, anything to add to that? 

Dr. IRVING. Senator, I am not the world’s biggest fan of supermajorities. I vividly remember, but cannot cite in detail, an article 

Norman Ornstein once wrote pointing out that sometimes supermajorities end up expanding exceptions; if you have more than 50 

notes, but not quite two-thirds, what is the price of additional support? Those are his words, not mine. 

I am not convinced that there are very many things that you 

could not get a supermajority for by adding enough things. 

So what I have been worried about in the past in emergency 

spending is what I call hitchhikers; that is, flood relief or something on which everybody agrees—it would not even be hard to get 

100 percent agreement that it is an emergency, but the way we 

budget for emergencies in the basic budget does not allow room for 

them. Then suddenly you have something that gets added which is 

not an emergency and does not even get designated as one, but 

gets to ride through with less scrutiny. 

I worry about those. I worry a lot, as I said, I think before you 

arrived, about the time horizon on an emergency. For how many 

years is a flood still an emergency? 

I think we should think about fundamentally changing what we 

put in the budget for emergencies. It is a 5-year rolling average, 

but we take anything bigger than $500 million out of the average. 

It might be that the world is changing enough where that is too 

low a threshold. Also you would want to fence that money so that 

it is only available for emergencies and is not just a fund. 

But in the end, you can only enforce things that people are willing to enforce. The advantage of the definitions people have attempted to use in the past was they could serve as a kind of speed 

bump. Even if you have to stand up and explain why a proposal 

met that definition and you have to have a roll call vote, it will not 

work if you are determined to overturn it. But if there is a desire 

to limit it, it may help. 

That is not a very satisfactory answer, I realize. 

Senator THUNE. You had mentioned in your remarks too the insurance programs that often look like moneymakers in the shortterm, but then end up in the long-term being unsustainable. 

Could you discuss that observation as it relates to the CLASS 

Act that passed as part of the health care reform bill? 

Dr. IRVING. I am sorry to say that I do not know enough about 

the CLASS Act, but I will discuss the issue and our proposal in 

more general terms. Senator Cardin—who has just left—included 

27 

in a budget process bill that he and former Chairman Nussle designed, ‘‘We believe that you should adapt a version of credit reform to insurance, to include and account for the ‘missing premium.’ ’’ Let me elaborate. 

If the actuarial and fair premium would be $100 and we are 

charging $10, the budget should show $90. You are putting the 

government on the hook. Of course you would have to set up the 

kind of implementing mechanisms we have with credit reform. 

Under credit reform, we have changed the way we budget for 

loans and loan guarantees. Before, direct loans looked like grants, 

and loan guarantees looked free. Now we need to be able to compare insurance programs on a more even basis so that we understand the budget implications. Some will be easy to estimate because they are similar to private insurance. Some will be harder. 

But the estimates will only get better if they are going to show 

up in the budget, and I think that will let us do it. 

We have also suggested increasing information on something I 

think you cannot score, but where better disclosure is warranted: 

fiscal exposures, the kinds of things that are implicit promises. 

Fannie and Freddie come to mind. 

Senator THUNE. Right. Thank you. Mr. Chairman, my time has 

expired. Thank you. 

The CHAIRMAN. Thank you, Senator. 

As I understand you, Senator Gramm, you are essentially saying, 

do all you can and do a lot in terms of addressing the deficit before 

and, to some degree, independent of raising the debt ceiling. 

If that is correct, my next question is, how detailed do you think 

it must be to be credible? Let us say we were to set some kind of 

a trigger in place, but with other provisions, prior to addressing the 

debt ceiling. 

Whatever it is has to be credible, and I am asking what kinds 

of things you think would make it credible, as in what kind of 

down payment on deficit reduction, how much, and so forth. 

Senator GRAMM. Well, Mr. Chairman, let me say I think program 

changes are always credible. I am sure a lot of Americans poohpoohed the little reduction in the CR, but to actually reduce spending in a fiscal year was a pretty dramatic change in public policy. 

People were critical of the fact that unobligated balances were reduced and caused spending cuts, but, look, in the environment we 

are in, those unobligated balances would have been spent at some 

point, for sure. 

So I think action will be appreciated, whatever it is. I think the 

bigger, the more dramatic, the better. I think entitlement reform 

is critical, but also there has been such a growth in discretionary 

spending, I think that it has to be part of the equation. 

If you are going to have an enforcement mechanism, it has to be 

real, it has to be binding. The thing about supermajority votes is 

they force you to make a case that a waiver ought to be made. 

Under the pay-go sequester process—and I am not trying to be 

critical of it—it was waived every time by a majority vote in the 

House. 

I think to have credibility, you have to have a system people can 

look at and say, ‘‘This thing is going to be hard to get around.’’ It 

28 

is going to force members to get together and reach some kind of 

compromise. 

Again, I think the market will react, the economy will react to 

anything that is credible. 

We have the Fortune 500 companies today that are sitting on $2 trillion of cash. This recovery is lagging because investment has 

not taken off. I think anything that says to the private sector, 

‘‘Government is functioning, hard decisions are being made,’’ I 

think will get a positive response in the market. 

The CHAIRMAN. Why not, given all that, a trigger that has debt, 

not spending? Debt as an appropriate level of GDP, because that 

enables people to have a little cover as to how much of that is 

spending and how much of that is revenue. 

Senator GRAMM. That is not a big deal to me. 

The CHAIRMAN. Just to get something started here. 

Senator GRAMM. I think the advantage, Mr. Chairman, of the 

deficit rather than the debt is the public has an intuitive concept 

about balancing their budget. They find that appealing in government. 

Success in the debt is simply stopping it from growing, and that 

is something to be devoutly wished and would be a great achievement, but I just doubt it would be as easily understood. But either 

one would work. 

The CHAIRMAN. Turning to another subject, I agree that our corporate rate, statutory rate is way too high. We have to get it reduced. The question is, how do you reduce it enough, and I think— 

I could be wrong on this—but say, if the 35 reduced to 26, it would 

probably mean that all tax expenditures would have to be repealed, 

including deferral, including the R&D tax credit, and it is, obviously, something that does not make sense. 

So we have to find some system that lowers the rate. One possible way some have thought of is tax pass-throughs, treat them as 

corporations after they earn a certain income, because so much 

business income today is through pass-throughs, in addition to corporate—in addition to C corps. And just lowering the rate only and 

eliminating a lot of tax expenditures is not going to provide enough 

revenue to get the rate down to a low enough level to make the difference that most people are looking for. 

So we are going to have to maybe look at pass-throughs and say 

they have to be treated as corporations if they earn above a certain 

income. That is just one possibility. But we have to—there is so 

much pass-through income today, business income, we are going to 

have to figure out some way to address that as well, if we are going 

to get the corporate rate down to what you want. 

Senator GRAMM. Well, I think whatever you could do on the corporate rate would be beneficial, because, again, we are so far now 

out of line that I know you have seen—because you look at this 

stuff as much as anybody—that over a 10-year period, a substantial manufacturing facility, because of the tax rate, can be $1 billion more expensive in the United States than it would be, say, in 

Ireland. 

And it is something that—because other countries have taken action, that we are way—— 

The CHAIRMAN. There is no question. 

29 

Senator Hatch? 

Senator HATCH. Thanks again, Mr. Chairman. 

Dr. Irving, you said that the public does not hate spending programs, at least as I understand it. I basically think your implication is that those who oppose the unique mechanism of automatic 

tax hikes is the explanation for that. 

Those of us raising concerns about throwing taxes into a sequester are not saying that spending programs are not popular. What 

we do not buy into is this, number one, that taxation is the ultimate legislative power. Think of McCulloch v. Maryland, where 

they basically said that the power to tax involves the power to destroy. 

And as legislators and, most importantly, as representatives of 

the people, it seems to me we should be very reluctant to directly 

or indirectly yield that power. Now, I think Senator Gramm underscores the lack of accountability that comes with setting up an 

automatic tax increase. 

Number two, tax expenditure numbers do not translate on a 

dollar-for-dollar basis like spending. I would direct anyone who is 

interested in this point to the Joint Committee on Taxation’s tax 

expenditure pamphlet that they put out. 

And, number three, it has been said that the tax expenditures 

distribute to high-income taxpayers. Now, for some on the other 

side, it is implied that they should all be eliminated. 

Now, the reality is much simpler. Tax expenditures distribute to 

taxpayers, and that means the folks who have paid the freight for 

government, at least some of them do. That is the middle-income 

taxpayer, the upper-middle income taxpayer, and, of course, the 

high-income taxpayers. 

Unlike spending, tax expenditures vary with the rate structure 

and other components of the system. So I am a little bit concerned 

about some of the comments that have been made here. 

Dr. IRVING. Senator Hatch, thank you very much for giving me 

a chance to elaborate and possibly clarify. 

I agree that taxation is the ultimate legislative power and you 

would not want to hand over that power to someone else. 

Spending the public’s money is also a constitutional power, and, 

presumably, you would design a very specific automatic enforcement such that Congress had legislated it to kick in. 

I agree with you. At GAO, my colleagues in the tax area have 

done a great deal of work on tax expenditures, and we are very cognizant of the fact that they do not translate on a one-for-one basis. 

In part, it depends on which one you count first. 

Indeed, I think of them not so much like discretionary appropriations, but more like entitlement programs, in that they are automatic and they do not get reviewed. Yes, they advantage the upper 

income, but that is a function of the progressive income tax, except 

in the case of tax credits. 

I believe that the approach to reducing the debt-to-GDP ratio is 

going to involve both revenues and spending. I believe that an enforcement mechanism has to be unpleasant—which is why I am not 

so clear what exceptions I think should exist—and balanced. These 

lead me to raise some issues for your consideration. 

30 

Making the enforcement mechanism unpleasant and visible is 

probably why, in the past, people like Martin Feldstein 30 years 

ago, in the President’s 1984 budget, included surtaxes. They are 

much more visible and therefore make it much easier to say, ‘‘If I 

do not act, you will get hit with a tax increase,’’ because we have 

enacted a surtax contingent on a certain event. So I do not think 

of it as giving away the store. Across the board cuts in mandatory 

spending programs do not deal with the underlying structure of 

those programs. 

Similarly, across-the-board cuts in tax expenditures do not address the underlying question of whether the way you have provided assistance through the tax code is the way you wish to provide such assistance. 

At GAO we note that, among the greatest issues vis-a`-vis tax expenditures are that they do not get the kind of evaluation and scrutiny given spending programs and that they are not examined 

along with those spending programs. So, for instance, we may provide aid to one industry through a spending program, to another 

industry through a credit program, and to another industry 

through special tax provisions. However, we do not look at those 

as a whole. 

You, as the Finance Committee, can see the assistance run 

through the tax side. You do not get to compare it to the support 

that runs through appropriations, and, therefore, you do not get a 

whole picture of what is the best way—which tool do I wish to use 

for a given purpose. 

You are right. If you want to tackle tax expenditures, I think it 

would be good to tackle the underlying structure of the individual 

ones. Which ones do you wish to convert to credit so they are the 

same for everyone? 

Senator GRAMM. Mr. Chairman, may I just make the following 

comment, that the process that is being described here looking at 

tax credits, looking at expenditures, is what Congress is about. It 

is about what the legislative process is about. It is what compromise is about. 

But there is a big difference between saying, with a spending sequester, if Congress fails, Congress gets to spend less and saying, 

if Congress fails, working people get to spend less. 

Now I know, sitting here, you can clinically talk about tax expenditures, but let me tell you, Joe and Sarah Brown, who are getting the ability to deduct the mortgage interest on their home—the 

money they put into the plate at First Baptist Church—when you 

start saying, because Congress failed, we are raising your taxes, we 

are not spending—we are asking you to spend less even though you 

had no voice in this, no direct voice—I think you have jumped over 

a whole bunch of ditches that you are going to end up falling back 

into. 

And as far as President Reagan’s contingency tax, it was something Congress had to debate. It was something they could adopt 

or not adopt. He never proposed it as some kind of mechanism that 

would happen automatically, and I think that is the problem. 

I think, again, I am being repetitive, but I will make the point 

one more time. There is too much in this enforcement mechanism 

about getting into revenues. There is too much judgment about 

31 

what people think Congress ought to do rather than a mechanism 

that happens automatically if they fail to act. 

And I do not think you can punish working people because Congress does not do its job. You have to punish Congress. And for 

Congress, that is their ability to spend money. That is their ability 

to set their priorities, and I think that is the key dividing point, 

and I think it is why the idea of automatic tax increases will never 

fly. 

Senator HATCH. Well, thank you. I apologize for having had to 

leave the hearing for a few minutes. I had to go down to the Judiciary Committee. 

But let me just ask one last question, and then we will wrap this 

up, and this is a question for everybody on the panel, if you care 

to answer. 

Last November 21, Stephen Moore and Richard Vedder, they 

wrote an article in the Wall Street Journal. It updated a 20-yearold analysis of an Ohio University study of the relationship between higher taxes and future spending. 

Now, Moore and Vedder concluded that for every $1 in new revenue Congress raises, it spends $1.17. I would like the panel to just 

provide suggestions on how any tax hikes from a budget deal do 

not end up in spending, if you can. 

Let us start with you, Dr. Van de Water, then we will go to you, 

Dr. Irving, and then to Senator Gramm. 

Dr. VAN DE WATER. Well, I am not familiar, Senator, with the 

particular study that you cite. Obviously, the issue that we are discussing this morning, though, is precisely that of how to establish 

budget enforcement mechanisms that might, first of all, prompt action to reduce the deficit and, second, make sure that agreements, 

once reached, are adhered to. 

Senator HATCH. Let me just interrupt you for a second. In the 

late 1980s, Richard Vedder and Lowell Galloway of Ohio University, they coauthored an often-cited research paper for the Congressional Joint Economic Committee known as the ‘‘$1.58 study.’’ I do 

not know whether you have heard of that or not. 

Now, that study found that every new dollar of new taxes led to 

more than $1 of new spending by Congress, and subsequent revisions of the study over the next decade found similar results. Finally, this study came down to $1.17 with updated research, using 

standard statistical analysis that introduced variables to control for 

business cycle fluctuations, wars, and inflation. 

They found that over the entire post-World War II era through 

2009, each dollar of new tax revenue was associated with $1.17 of 

new spending. 

In other words, the message here is politicians spend the money 

as fast as it comes in—and a little bit more. 

Dr. VAN DE WATER. But what I was going to suggest, Senator, 

is I think that actually contrary, in some respects, to what Senator 

Gramm says, the enforcement mechanisms of the 1990 Budget Enforcement Act really did work. 

I would point people to a very useful review of that experience 

which the Congressional Budget Office did in early 2003 after the 

BEA provisions expired. There has been considerable discussion 

32 

this morning about emergency designations, eliminating balances 

from pay-go. 

But what the CBO analysis—and I just refreshed my memory 

with it this morning—clearly shows is that those developments, the 

extensive use of emergencies and so forth, did not start to come 

into play in any significant way until the Federal budget was actually balanced at the end of the 1990s. 

So I read that experience as being a quite positive one, suggesting that the budget enforcement provisions actually did work 

for as long as they were needed to achieve their goals. 

Senator HATCH. Dr. Irving? 

Dr. IRVING. Like Paul, I am not familiar with that study, and I 

would want to look at it, including, of course, how much of the 

spending growth was for things like Social Security benefits that 

are not connected to decisions at the time. 

But I am familiar with something that predated Paul’s time at 

the Center which actually came to the opposite conclusion on some 

of the deficit reduction agreements. The Center for Budget and Policy Priorities had an analysis looking at what happened when there 

were agreements in which there were both spending cuts and revenue increases. They found when there were revenue cuts, then the 

spending folks said, ‘‘Oh well, then I can spend, too.’’ In general, 

tax cuts and spending increases went together, or tax increases and 

spending cuts. 

But as I said, it is a recollection from the past. I have also seen 

the same study by CBO that Paul just referred to. If you are looking at a debt-to-GDP target over time and a path down on savings 

targets in terms of how you reduce and there is a commitment and 

an enforcement procedure, which is what you are looking at it, I 

do not think that result is inevitable. 

Senator HATCH. Senator Gramm? 

Senator GRAMM. Well, Mr. Chairman, I remember the 1990 

budget agreement. I sat through all those long sessions out at Andrews Air Force Base. And I also remember that we missed the discretionary target by $100 billion. At least my trusty aide tells me 

that he may have made that figure up, but in any case, you do not 

miss discretionary targets by accident. 

The only way you can miss a discretionary target is if you spend 

the money and you appropriate the money. It is not like entitlements. 

So I do not remember them being that good, but, look, any enforcement is better than none. The advantage of the 1990 agreement was, at least you had an agreement to try to enforce. Whether it was good or bad, everybody had their own opinion. 

I would just make two other points. One, when you raise people’s 

taxes, you affect their behavior as producers; and, two, I do not 

think, as we are throwing this term ‘‘tax expenditure’’ around, that 

we have a good definition. 

If you give somebody an Earned Income Tax Credit that they do 

not earn, so that you are paying right out of the Treasury, maybe 

that is a tax expenditure. If you give somebody a payment for producing something and it comes right out of the Treasury as a 

check, maybe that is an expenditure. 

33 

But letting people deduct their contribution to the church or 

their mortgage interest, maybe you should or should not do those 

things, but it is hard to call that a tax expenditure. 

Senator HATCH. That is a policy. 

Senator GRAMM. So it is true now that the largest welfare agency 

in the Federal Government is the IRS. The IRS is sending more 

checks to more people in larger amounts than any other agency, 

other than Social Security, Medicare, and Medicaid. 

So maybe if somebody wants to deal with this, they ought to get 

a better definition of what is a tax expenditure. But you are never 

going to convince working people that their ability to deduct child 

care is a tax expenditure. 

I think that is a distinction that gets lost in this kind of clinical 

term. You are raising people’s taxes if Congress fails, and I just do 

not think they will stand for it, and should not. 

Senator HATCH. Well, thank you. And another premise to the debate on our Federal situation that needs to be made, it seems to 

me—needs to be made clear—those on the other side make the assumption that our revenue base has been gutted and it is a main 

or primary cause of the deficit. 

Now, with taxation and current policy, revenues tend, over the 

long-term, to be around 18 percent, where spending tends to be 

around 20—a little bit more than 20 percent, about the average of 

the GDP. 

Now, spending and taxes are not equal players in the source of 

the problem, it seems to me. But let me just say this. I want to 

thank all three of you for being here. This has been an important 

hearing, as far as I am concerned, and I think everybody feels exactly the same way. 

And I know it takes time out of your busy schedules to be here, 

but we are grateful to you and grateful for the testimony that you 

have all given. 

With that, we will recess the committee. Thanks so much. 

[Whereupon, at 12:01 p.m., the hearing was concluded.] 

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