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PERSPECTIVES ON DEFICIT REDUCTION: 

A REVIEW OF KEY ISSUES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 26, 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 

RICHARD BURR, North Carolina 

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 

Greenstein, Robert, president, Center on Budget and Policy Priorities, Washington, DC ............................................................................................................. 4 

Lindsey, Dr. Lawrence B., president and chief executive officer, The Lindsey 

Group, and former Director of the National Economic Council, Fairfax, 

VA .......................................................................................................................... 6 

Ettlinger, Michael, vice president for economic policy, Center for American 

Progress, Washington, DC ................................................................................... 9 

Edwards, Chris, director, tax policy studies, Cato Institute, Washington, DC .. 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 33 

Edwards, Chris: 

Testimony .......................................................................................................... 10 

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

Ettlinger, Michael: 

Testimony .......................................................................................................... 9 

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

Greenstein, Robert: 

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

Prepared statement .......................................................................................... 50 

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 61 

Lindsey, Dr. Lawrence B.: 

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

Prepared statement .......................................................................................... 63 

COMMUNICATIONS

AARP ........................................................................................................................ 69

Center for Fiscal Equity .......................................................................................... 78 

(III) 

(1) 

PERSPECTIVES ON DEFICIT REDUCTION: 

A REVIEW OF KEY ISSUES 

TUESDAY, JULY 26, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:16 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Conrad, Bingaman, Wyden, Nelson, Menendez, 

Cardin, Hatch, Snowe, Kyl, Coburn, Thune, and Burr. 

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

Batchelder, Chief Tax Counsel; John Angell, Senior Advisor; Alan 

Cohen, Senior Budget Analyst; Claire Green, Detailee, Social Security; and Tom Klouda, Professional Staff Member, Social Security. 

Republican Staff: Mark Prater, Deputy Chief of Staff and Chief Tax 

Counsel; and Chris Campbell, Staff Director. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

President Lyndon Baines Johnson once said, ‘‘Yesterday is not 

ours to recover, but tomorrow is ours to win or lose.’’ 

Yesterday’s fiscal choices created the budget crisis we face today. 

To pay for yesterday’s spending decisions, we now are forced to 

raise the Federal debt limit. 

Raising the debt limit does not mean an increase in future 

spending. It only permits the Treasury to pay the debts we have 

already incurred. If we do not act, the full faith and credit of the 

United States will be compromised. If we do not act, we will default 

on our obligations in just 1 week. This would result in catastrophic 

consequences for our economy and cause interest rates to skyrocket. 

Americans would not be able to access credit to buy a home, a 

car, or take out a loan to attend college. Businesses would not be 

able to meet payroll, much less expand. 

The economy would contract, and people would lose jobs. It could 

lead to another recession or depression. We cannot let this happen. 

But to enact legislation to raise the debt ceiling, we will need to 

pass a significant deficit reduction package. The deficit reduction 

decisions we make today will determine our economic future. 

We need to solve this crisis today in a way that improves our 

economy tomorrow. 

2 

Any deficit reduction package must be fair. It must be balanced. 

And no one should be left destitute. That is particularly important 

when it comes to Social Security. 

Social Security is not the cause of our deficit problem. It should, 

therefore, not be a scapegoat for the solution. One proposal that 

has been part of the discussion is the Ryan plan that was approved 

by the House of Representatives. This plan is simply unbalanced. 

It would hurt too many families in Montana and across the country. And, by cutting $48 billion from programs that serve our country’s farmers and ranchers, the House budget would hit rural 

America far too hard. 

While the House budget cuts agriculture by more than 20 percent, it fails to address the escalation in defense spending. Defense 

spending has roughly doubled in the last decade. 

The solution to our budget crisis must be equitable, and it must 

be lasting. To create a fair package, we have to find savings in security and non-security discretionary spending, mandatory spending, and also revenues. We have to make tough choices, but we 

cannot balance the budget on the backs of seniors and the middle 

class, while preserving tax breaks for the wealthiest Americans and 

special interest loopholes. 

Now is not the time for a ‘‘my way or the highway’’ approach. We 

must all be willing to find common ground. Deficit reduction is just 

too important. 

If Congress does not act, the debt held by the public as a percent 

of GDP will reach a remarkable 87 percent at the end of the next 

decade and continue growing. If, however, we enact $2.5 trillion of deficit reduction now, we 

could stabilize our debt at 75 percent of GDP. This would leave us 

close to our current level of debt at 69 percent of GDP. 

If we want to make further progress, we will need even more 

spending cuts or revenue increases. Finding those dollars will not 

be easy. Deficit reduction never is. But we have to act before August 2, and we need to reach an agreement as soon as possible. 

Over the last 3 months, this committee has held four hearings 

to examine major issues Congress is considering as part of a deficit 

reduction package. One idea our hearings explored is enacting an 

initial package of deficit reduction now, with a path to further deficit reduction in the future. 

If legislation with further deficit reduction is not enacted in the 

future, then severe consequences would occur. This should provide 

strong incentives for both the House and the Senate to follow 

through with deficit reduction. 

Today, we are fortunate to have an expert panel to discuss the 

array of proposed plans. There is already substantial agreement on 

both sides of the aisle regarding areas where we can achieve deficit 

reduction. But it is time to build on this agreement. Democrats and 

Republicans have to come together. We have to craft a fair and balanced package to reduce the deficit and raise the debt limit, and 

act now. 

So let us work together now to prevent our country from defaulting, and produce a fair and balanced approach to reducing the deficit and ensure our economic progress continues and provides 

Americans with the opportunities they deserve. 

3 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. Thank you for holding this hearing, which continues the series of hearings that we 

have had on deficit reduction. 

This hearing is timely given that the debt limit impasse, unfortunately, continues to grind on. 

I would like to welcome all of our witnesses and thank them for 

their presence and their testimony and their efforts. 

Mr. Chairman, I would like to briefly point out that many of 

these so-called plans for dealing with the debt limit seem to involve 

instructions to this committee to undertake ‘‘tax reform’’ in short 

order and with revenue raising as the principal objective. Part of 

that so-called reform usually is a direction to change tax expenditures. 

Now, Mr. Chairman, I believe that, with an income tax system 

that is roughly 100 years old, we are in need of reform. I believe, 

however, that we need fundamental and comprehensive tax reform 

to broaden the tax base and lower tax rates. 

I believe that we need tax reform to promote fairness, simplicity, 

growth in jobs and the economy, and, of course, efficiency. 

I do not believe that revenue raising, in and of itself—accomplished by horse trading of selected tax expenditures against each 

other—is true reform, and I do not believe that such actions are 

good for jobs and the American people. 

I do believe that we should thoroughly examine tax expenditures 

in the context of tax reform and not as one-off efforts at raising 

revenue to pay for the spending status quo. 

But note, Mr. Chairman, that the Joint Committee on Taxation 

lists over 217 so-called tax expenditures. Of those, the President 

picked maybe three in order to get more tax revenue. He proposed 

hitting oil producers, including small ones; he proposed hitting 

users of LIFO accounting, which includes many small manufacturing companies; and he proposed hitting commercial jet producers, after having previously set up additional tax expenditures 

to benefit them. 

What the President has proposed or leaked out to the press is 

hardly reform and is nowhere near comprehensive. We need to look 

at the forest of individual and corporate tax expenditures and not 

merely three trees that appeal to focus groups or along the campaign trail. 

A comprehensive examination of tax expenditures will require an 

examination of a host of factors, including distributional effects and 

interactions among various features of the tax code. And a comprehensive examination will look across all tax expenditures. 

Many tax expenditures are valued highly by Americans across 

the political and income spectrums, such as incentives for charitable giving. Other tax expenditures seem to benefit some at the 

expense of others, such as deductions for State and local taxes, 

which work as a subsidy from taxpayers in low-tax States with low 

4 

levels of government to wealthy taxpayers in high-tax States with 

robust levels of government spending. 

We need to look across the board at tax expenditures and not 

simply at whatever subset happens to serve political or campaign 

interests. And we need to clean out our tax code. It is riddled with 

tax expenditures which, while often instituted with good intentions, 

have generated an inefficient tax code. 

The code is a mess, and it has created an environment where 

Americans no longer trust that everyone pays their fair share due 

to loopholes, tax breaks, tax arbitrage, tax gimmicks, or whatever 

you want to call them. 

We need fundamental and comprehensive tax reform, not a quick 

revenue fix to get us past August 2. 

Mr. Chairman, I look forward to the testimony that we are about 

to hear, and I want to thank you for calling this meeting. 

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

The CHAIRMAN. Thank you, Senator. I appreciate it very much. 

I would now like to introduce our witnesses. We have a very distinguished panel, many of whom we have already met before. We 

deeply appreciate their returning. 

The first witness is Mr. Robert Greenstein, who is president for 

the Center on Budget and Policy Priorities. Next, Dr. Lawrence 

Lindsey. Dr. Lindsey is president and chief executive officer of the 

Lindsey Group and former Director of the National Economic Council. Third is Michael Ettlinger, vice president for economic policy, 

Center for American Progress. And finally, Mr. Chris Edwards, director of tax policy studies at the Cato Institute. 

Thank you all for coming. Our usual practice is for your entire 

statements to be included in the record automatically, and I would 

like each of you to summarize your statements for approximately 

5 minutes. I will start with you, Mr. Greenstein. 

STATEMENT OF ROBERT GREENSTEIN, PRESIDENT, CENTER 

ON BUDGET AND POLICY PRIORITIES, WASHINGTON, DC 

Mr. GREENSTEIN. Thank you, Mr. Chairman and members of the 

committee. 

As I do not have to tell you, the Nation is on an unsustainable 

fiscal path, and, as a number of bipartisan commissions have recommended, we need to stabilize the debt as a share of the economy, 

which entails reducing deficits to no more than about 3 percent of 

GDP. 

The timing is important. Chairman Bernanke recently noted that 

it would be unwise to put strong austerity measures into effect 

right away while the economy is still weak. 

In my few minutes, I would like to discuss a few principals and 

make a few observations about achieving deficit reduction, first and 

foremost of which is that deficit reduction plans really need to be 

inclusive, including domestic programs, defense, and revenues 

alike. 

Now, I know the revenue point is a controversial one, but if we 

look, in particular, at tax expenditures, we really find that a very 

large amount of spending occurs in the form of tax expenditures or 

what Alan Greenspan has called tax entitlements. 

5 

The tax code now has over $1 trillion a year in tax expenditures, 

which substantially exceeds the cost of Medicare and Medicaid 

combined, the cost of Social Security, and it is about double the 

cost of all non-security discretionary programs. 

Health care, obviously, is another very big issue in the long run. 

It will need to be the single-largest contributor to deficit reduction, 

from slowing the rate of growth of health care costs throughout the 

U.S. health care system in the public and private sectors alike. 

But, and there is a conundrum here, big savings in Medicare and 

Medicaid are not achievable in the next decade without seriously 

impeding access to care and likely starting to ration care on the 

basis of income. We need substantial reforms in health care delivery and payment systems, but it is going to take time to identify, 

test, and institute reforms on a very broad scale. 

Rushing, pell mell, into untested approaches risks violating the 

Hippocratic oath and doing so on a mass scale. And also, a part of 

our conundrum is that, while measures to restore long-term Social 

Security solvency are essential, they will not yield significant deficit reduction savings in the decade ahead due to the bipartisan 

agreement that changes in Social Security benefits should not substantially affect people who are already retired or are nearing retirement. 

So the difficulties of securing large savings in the next 10 years 

in these areas without doing very serious damage is why a number 

of experts—including the aforementioned Martin Feldstein, including former OMB and CBO director Peter Orszag, and, most recently, including Alan Greenspan—have called for letting all of the 

2001 and 2003 tax cuts expire on schedule at the end of 2012 or 

paying for any parts of those that policymakers wish to extend. 

That one step would reduce deficits to about 3.5 percent of GDP 

after the economy recovers. It would put us in striking distance of 

stabilizing the debt in the years ahead, and, crucially important, it 

would buy us time to identify and institute the major changes in 

the U.S. health care system that will be essential over the long 

run. 

Let me say a word about the topic of spending caps. Caps can 

and have been placed on discretionary spending. I am sure they 

will be again. But capping mandatory spending is a very different 

proposition. Programs like unemployment insurance, food stamps, 

and Medicaid expand automatically when the economy weakens. 

Economists refer to these programs as automatic stabilizers that 

help to limit the decline in purchasing power in a slumping economy. Without the automatic stabilizers, recessions would be more 

frequent, longer, and deeper, and the risk of major recessions turning into depressions would be heightened. 

Caps on total Federal spending, as well as the constitutional balanced budget amendment, would keep the automatic stabilizers 

from working and would risk doing significant damage to the economy, businesses, and workers. 

Let me close with one final point. I hope there will be a key principal in deficit reduction—and the chairman already alluded to this 

in his opening remarks—that we would do it in a way that does 

not increase poverty, hardship, and inequality. 

6 

We are a country that already has higher levels of poverty and 

inequality than other Western industrialized nations. The BowlesSimpson plan erected a principle to protect the disadvantaged and 

to achieve deficit reduction in ways that do not increase poverty. 

In April, a group of Christian leaders from the Catholic Bishops 

to evangelical leaders called on policymakers to honor this principal and draw what they called a circle of protection around programs for the poor. And a few weeks ago, a group of leaders of 

major national charities and nonprofits—the head of the United 

Way, Feeding America, Independent Sector, and leading civil rights 

organizations—issued an unusual joint letter in which they stated, 

and I am quoting, ‘‘Any agreement on deficit reduction should neither cut low-income assistance programs directly nor subject these 

programs to cuts under automatic enforcement mechanisms.’’ 

I would simply note that virtually all major deficit reduction or 

fiscal responsibility laws of the past quarter century—the 1985 and 

1987 Gramm-Rudman-Hollings laws; the 1990, 1993, and 1997 deficit reduction packages; and the 2002 pay-as-you-go law—did abide 

by these principles, and I hope the current Congress will do so 

again. 

Thank you very much. 

[The prepared statement of Mr. Greenstein appears in the appendix.] 

The CHAIRMAN. Thank you very much, Mr. Greenstein. That was 

very interesting. 

Dr. Lindsey, you are next. 

STATEMENT OF DR. LAWRENCE B. LINDSEY, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, THE LINDSEY GROUP, AND 

FORMER DIRECTOR OF THE NATIONAL ECONOMIC COUNCIL, FAIRFAX, VA 

Dr. LINDSEY. Thank you, Mr. Chairman and members of the committee. I appreciate this opportunity to be here today. 

In the past few weeks, your job has been extremely difficult. Unfortunately, I do not think I am going to make it any easier with 

some of my comments. 

Media attention has been focused on the issue of the debt cap. 

Actually, I think the more important issue is getting long-term control of our fiscal finances. 

The credit rating agencies have noticed this. Although, again, a 

lot of attention is focused on the debt cap, the S&P warned back 

on July 15 that it might downgrade U.S. debt. Their main justification was not the debt ceiling but, and I am going to quote, ‘‘if we 

conclude that Congress and the administration have not achieved 

a credible solution to the rising U.S. Government debt burden and 

are not likely to achieve one in the foreseeable future.’’ 

Earlier this year, there was a lot of talk about a clean debt ceiling increase. That misses the point. I think instead we have to 

focus on solving the long-term debt problem. 

My concern about the failure to take this opportunity to reduce 

long-term government spending and our debt situation is amplified 

by a belief that the official deficit estimates are far too optimistic. 

First, these deficit projections are predicated on overly optimistic 

expectations for economic growth. 

7 

For example, the President’s budget projected growth of 3.1 percent this year, 4 percent in 2012, 4.5 percent in 2013, and 4.2 percent in 2014. We know that growth in the first half of this year was 

roughly 1.5 percentage points less than what the President’s budget projected. 

Moreover, there is an academic consensus that growth after a financial crisis tends to be at trend, not well in excess of trend. The 

budgetary consequences of overestimating growth, as in the President’s budget, are dramatic. If you page further back through the 

President’s budget, the budget points out that missing growth by 

1 point in 1 year increases the 10-year deficit by $750 billion. 

Thus, just the 6-month shortfall that has already occurred during 

the first half of this year means an increase in the 10-year deficit 

of a bit over $500 billion. 

If the economy rebounds to a trend rate of growth of 2.5 percent 

starting in the current quarter, the cumulative shortfall in GDP by 

the end of 2014 would be 5.5-percentage points, implying a 10-year 

increase in the projected national debt of more than $4 trillion. 

This overwhelms anything that is now being considered as far as 

deficit reduction goes. 

Second, Federal borrowing costs are now well below historic 

norms. In the past 20 years, these costs have averaged 5.7 percent. 

Currently, they are just 2.5 percent. This means that a mere normalization of borrowing costs would mean an extra $700 billion per 

year by the end of the current decade and a gradual ramp-up to 

normalized rates would add $4.9 trillion to the Treasury’s interest 

costs over the next decade relative to maintaining current rates. 

I might add that the CBO does have a more modest ramp-up in 

rates that accounts for about half of this in its long-term projections. 

The real concern here should not be a gradual normalization of 

rates. The recent lessons from Europe or the many lessons of history from previous sovereign debt crises indicate that the government bond markets function smoothly for a long period of time and 

then suddenly crash. 

This has two implications for the budgetary risks we face. One, 

rates might ultimately move well beyond the normalized average of 

the last 2 decades; and two, that move is likely to happen much 

sooner and much more quickly than either we or the CBO now 

project. 

The two risks just mentioned, which I call the growth risk and 

the interest rate risk, place enormous constraints on the prudent 

conduct of fiscal policy. It is urgent that we undertake significant 

long-term deficit reduction, and it is equally urgent that we do so 

in a way that minimizes any adverse consequences for economic 

growth. 

These constraints provide clear guideposts for what should happen. First, the focus should be primarily on long-term expenditure 

reductions, not short-run cuts. There is a demand-side element to 

growth which must be respected. This does not mean no cuts in 

current expenditures, but near-term spending cuts should probably 

be limited to perhaps 0.5 percent of GDP in the next fiscal year, 

with much larger spending cuts to follow. 

8 

This is precisely why long-term reform to entitlement spending 

that sharply reduces total spending over many decades is so crucial. It has little or no long-term impact on growth and, by freeing 

up resources over the long-term, probably enhances our long-term 

growth prospects. 

Second, the focus of both budgetary and regulatory actions 

should be on cost-benefit analysis. There has been a lot of talk 

about government investment. The key is not whether one can 

theoretically call a spending action an investment, but whether the 

action produces a positive rate of return for the economy. 

Consider high-speed rail. I will admit I regularly ride the Acela 

between New York and Washington, and, therefore, I am a tremendous beneficiary of the government subsidies to Amtrak. 

So, in my personal interest, please do not take that away. But 

Amtrak barely makes money on the northeast corridor routes, 

which are the most economically promising part of the market for 

rail transportation in the country. Money spent on extending highspeed rail to 80 percent of the Nation’s population will produce a 

negative rate of return, making such an investment about as effective as putting one’s money in Bernie Madoff’s hedge funds. 

Third, this analysis can be extended to the tax side of the budget. 

Fiscal sustainability is much more difficult to achieve with tax increases than with long-term expenditure cuts because of the general rule that the private sector allocates resources in a manner 

that yields a higher return than does the public sector. If the private sector does not allocate money that produces a positive return, 

the firm or the individual who makes that investment decision 

loses their own money. 

This not only concentrates the mind, it also reduces the available 

resources to those who make poor economic decisions. 

This does not necessarily mean that higher revenues should not 

be part of the equation, but the key point to make is that the 

phrase should be revenues, not rates. Some revenue increases can 

actually improve economic allocation by removing subsidies to inefficient activities. 

But tax rates work in the opposite direction. Higher tax rates 

muffle market signals and reduce economic efficiency. This fact was 

recognized by the President’s own debt commission, which reduced 

rates while raising revenue. 

In sum, Mr. Chairman, the need for long-term deficit reduction 

is urgent and has been neglected. We are taking enormous risks 

with the country’s future as a consequence. Such reduction must 

focus on the long-term expenditure side of the equation, particularly entitlements. And while discretionary spending and extra revenue might be part of the solution, decisions on these issues must 

face a rigorous cost-benefit test. 

Thank you, sir. 

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

The CHAIRMAN. Thank you, sir, very much. 

Mr. Ettlinger? 

9 

STATEMENT OF MICHAEL ETTLINGER, VICE PRESIDENT FOR 

ECONOMIC POLICY, CENTER FOR AMERICAN PROGRESS, 

WASHINGTON, DC 

Mr. ETTLINGER. Thank you, Chairman Baucus, Ranking Member 

Hatch, members of the committee, for the opportunity to be here 

today to discuss the Federal budget deficit. 

Let me start by saying that, odd as it may seem given the tone 

of the debate right now, I have actually found the last several 

months encouraging with respect to the Nation’s ability to address 

our long-term deficit challenges. That is because we are actually 

now putting the real choices on the table. We are seeing what a 

plan to reduce the deficit without tax increases really looks like. 

We are seeing what tax increases might be necessary to preserve 

favored spending programs. And we simply were not going to make 

progress until we had an open discussion of the tradeoffs involved 

or the real choices to be made. 

So, in the big picture, I view that as important progress, even if 

immediately, as the deficit issue has been linked to the debt ceiling, we face a crisis. 

One of the most contentious questions with respect to addressing 

the long-term deficit problem is whether to include taxes as part 

of the solution. Thanks to the House of Representatives’ budget 

resolution, we now have some sense of what a plan that does not 

include taxes might look like. 

It, of course, essentially ends Medicare in any sense that people 

are familiar with. Seniors would get vouchers that would not increase in value with rising health care costs, and would carry more 

and more of the costs and lose access to care. Medicare too would 

be slashed, hurting not just lower-income Americans, but with 70 

percent of nursing home residents benefitting from Medicaid, much 

of the burden would fall on the middle class. 

The cuts would also reach areas of public investment that are 

important to economic growth: a 50-percent cut in education, 37- 

percent cut in transportation and infrastructure, and a 20-percent 

cut in scientific research. 

That is why we believe that taxes should be part of the answer. 

The U.S. is currently collecting the lowest level of taxes since 1950 

as a share of GDP. Obviously, some of this is the result of the recession, but it is also the result of a tax system that is simply inadequate to our needs. 

We have substantially lower taxes than other countries. Of economically advanced countries, from 2004 through 2008, only Mexico, Chile, Turkey, and South Korea had lower taxes than the 

United States, putting us at 26 of the 30 OECD countries. 

If the U.S. were to raise taxes to the level of Canada, which 

would make us rank 19th, we would basically solve our deficit 

problem. That is not to say that we should solve our deficit problem 

by raising our taxes to the level of Canada and not address spending, but there is room to raise taxes without putting us at economic 

risk. 

And, in particular, there is room to raise taxes on higher-income 

Americans. Tax rates on the wealthy have dropped precipitously 

even as their incomes have grown hugely. Adjusting for inflation, 

10 

the income of the top 1 percent has more than tripled from 1979 

to 2007, and it went up 50 percent from 2001 to 2007. 

Let us consider the consequences of letting the Bush tax cuts on 

the wealthy expire in this context. Given the rate at which the income of the wealthy rises, letting the Bush tax cuts for the wealthy 

expire would be the equivalent of a 1-time 10-month pay freeze on 

the richest 1 percent. 

Given that the middle class has seen a decade-long and counting 

pay freeze, that does not seem like either too much to ask or likely 

to do grievous economic harm. 

Nevertheless, there are those who argue that it would cause 

great harm to the economy. But the tax system we would be returning to, that of the Clinton presidency, certainly produced better 

results than the Bush tax system, which is, in effect, still the tax 

system we were operating under during the Great Recession and 

its aftermath. 

It is telling that during the period from when taxes were increased on the well-off under President Clinton in 1993 to their cut 

under President Bush, the income of the top 1 percent almost doubled. It does not appear that higher taxes dampened the wealthiest 

1 percent’s enthusiasm for investing, hiring, doing the things they 

do to increase their incomes, which also benefit the economy. 

Finally, just as spending cuts are not the entire answer, neither 

are tax increases, of course. Raised too high, taxes can, in fact, do 

economic harm, and there are areas of spending that should be addressed whether there was a deficit problem or not. Defense spending and improving government efficiency should top the list. And 

in the long run, we have to bring health care costs under control. 

To conclude, the devil is obviously in the details when it comes 

to addressing the long-term deficit issues we face. The solution can 

and will, I believe, involve both spending and taxes, because the alternatives are unacceptable. 

Thank you. 

[The prepared statement of Mr. Ettlinger appears in the appendix.] 

The CHAIRMAN. Thank you, sir. 

Next, Mr. Edwards. 

STATEMENT OF CHRIS EDWARDS, DIRECTOR, TAX POLICY 

STUDIES, CATO INSTITUTE, WASHINGTON, DC 

Mr. EDWARDS. Thank you, Chairman Baucus and Senator Hatch. 

Thanks for inviting me to testify today. 

Federal spending has soared from 18 percent of GDP a decade 

ago to 24 percent of GDP today. The CBO, in its alternative fiscal 

scenario, expects spending to rise up to 34 percent by 2035. That 

would almost double the size of the U.S. Government between 2000 

and 2035. 

President Obama last night called for a balanced solution to the 

debt problem, but CBO projections show that our problem is not 

balanced. When the economy fully recovers, CBO shows that revenues will rise up to 18 percent of GDP, with all current tax cuts 

in place, which is the normal level. But it is spending that keeps 

rising to abnormally high levels. 

11 

The United States used to be a smaller-government country, and 

I believe we prospered because of it. Current OECD data shows 

that total Federal-State-local spending right now in the United 

States is 41 percent of GDP. That is just 4 percentage points less 

than the OECD average of 45 percent. 

If you wind the clock back, we used to always have a 10 percentage point spending advantage compared to other OECD countries. 

We used to be 10 percentage points smaller. We have closed that 

gap, and we are now becoming just kind of another average OECD 

welfare state. 

If the CBO projections are correct and we do not make any 

spending reforms, total American Government will consume over 

half of the economy by 2035. I think that would create a dismal future, especially for young Americans, with fewer opportunities and 

a huge burden of taxes to support the elderly, in particular. In the last few years, Congress has deficit-spent $5 trillion in 

sort of a Keynesian fashion to try to pump up the economy. But 

despite that $5 trillion of deficit spending over the last 4 years, we 

have had the slowest economic recovery since World War II. 

The biggest Keynesian stimulus since World War II, slowest economic recovery since World War II—what I conclude from that is 

that economists and policymakers, frankly, are lousy at trying to 

micromanage and stimulate the economy in the short run. 

All the focus should be on the long run. Economists know more 

about what spurs economic growth in the long run, and we should 

pursue long-run spending reforms. 

In the long run, higher government spending will damage economic growth. Former Council of Economic Advisors Chairman Michael Boskin explained it as kind of, the government works with 

a leaky bucket. When government takes tax actions, when it takes 

spending actions, it creates distortions on both sides of the budget. 

So, Boskin says, for example, if the government has a $1 spending 

program, it causes $1.50 damage on the tax side of the economy, 

and that $1 of spending will only bring benefits perhaps of 50 cents 

on the dollar because the government is already so big. 

So a new spending program for $1 causes $1.50 of damage to the 

economy and we only get 50 cents of benefit from it. The larger 

that government gets, the leakier the government bucket becomes, 

and that is why rising spending in coming years and decades, unless we make reforms, will suppress the GDP growth more and 

more. 

The more government grows, the more GDP will be suppressed. 

And I would note that CBO’s long-range forecasts do not take this 

into account. CBO long-range forecasts show the government growing as a share of the economy, but they do not take into account 

that suppression of GDP that will almost certainly occur if that 

happens. 

So, what do we do about this? Well, we need to go line by line 

through the Federal budget to find the unneeded programs, as 

President Obama originally said he would. At Cato we have a 

website, downsizinggovernment.org, where we do go line-by-line 

through the Federal budget, finding all the programs we can cut. 

I am glad now that the Senate and the House are sort of converging on a spending cut plan to attach to the debt limit increase. 

12 

I would note that even the numbers that are being thrown around, 

like $3 trillion over 10 years, are, frankly, pretty small cuts. CBO has Federal spending in 2021 at $5.7 trillion. So Speaker Boehner has proposed a $3-trillion spending cut plan. In rough 

terms, that is about $300 billion a year. So that would reduce 2021 

spending from $5.7 trillion to about $5.4 trillion. That is not very 

much. That is only a 5-percent cut. 

So all the debate that is going on now really only amounts to a 

5 percent cut 10 years from now. I think Congress, frankly, should 

easily be able to achieve that level of cuts, and I would suggest 

that Congress look at Senator Coburn’s much larger set of cuts that 

he released a couple weeks ago. 

His staff went through the budget line-by-line and really did a 

great research job, with thousands of end notes, finding the programs that do not make any sense anymore. 

So to sum up, I think Congress should explore spending cuts in 

every area of the budget—entitlements, discretionary, defense—and 

I think cuts would benefit the economy both in the short run and 

the long run. 

Thank you. 

[The prepared statement of Mr. Edwards appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Edwards, very much. 

Gentlemen, this perhaps puts it a bit too simply, but one of the 

big differences between the plans outlined by the speaker and the 

majority leader of the Senate yesterday has to do with when the 

debt limit would be increased, as a length of time, as in the number of dollars that would be contributed to deficit reduction. 

Essentially, under Majority Leader Reid’s plan, it is about $2.7 

trillion, if I have the numbers correct, of reduction, so that the debt 

limit would be increased and not have to be increased again until 

after the election, whereas, under the speaker’s plan, it is a 2-step 

plan, with about half that, initial spending caps, discretionary 

spending caps, and then there would have to be a second reduction 

in spending and/or increase in revenue to the deficit to allow a second debt limit increase before the end of 2012. 

I would like to ask each of the four of you, on that point alone, 

one step bigger past 2012 or two steps smaller, two steps total past 

2012, if either of those make a lot of difference, in your mind. 

Mr. Greenstein? 

Mr. GREENSTEIN. Huge difference. 

The CHAIRMAN. And why? 

Mr. GREENSTEIN. Because I think, if we pursue the speaker’s 

plan, we really run a much greater risk of a default 6 months from 

now, when we will be in a much more polarized political atmosphere than we already are. 

If you look at the speaker’s plan, his plan—Mr. Reid’s plan—will 

have about $1.2 trillion in discretionary cuts. That is not going to 

come back on the table. The speaker’s aides are saying that the Republican leaders would only appoint members to the joint committee who have agreed not to raise any taxes. That leaves only entitlements. 

Under his plan, we do not raise the debt limit. Therefore, we can default in 6 months unless we pass $1.8 trillion in cuts—$1.5 trilVerDate Nov 24 2008 20:34 Sep 25, 2012 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 R:\DOCS\75673.000 TIMD
13 

lion in policy, $300 billion in interest, $1.5 trillion in essentially entitlement cuts 6 months from then. 

There are only three ways you can get $1.5 trillion in the next 

10 years. You can cut Social Security and Medicare for current 

beneficiaries, you can repeal the coverage expansions in the health 

reform law while leaving the revenue increase in Medicare cuts in 

that law, or you can eviscerate the safety net for the poorest Americans. 

The CHAIRMAN. Thank you. 

Mr. GREENSTEIN. And the proof of that is, take the Gang of 6 

plan. The Gang of 6 plan has net entitlement savings over 10 years 

of about $455 to $575 billion after you net out the SGR fix, $755 

to $875 billion before that. The speaker offered $700 billion to the 

President—— 

The CHAIRMAN. I am going to have to—— 

Mr. GREENSTEIN [continuing]. The President wanted $650 billion. 

The CHAIRMAN. I am going to have to let the others answer that 

question. We do not have a lot of time left. 

Dr. Lindsey, answer my question. 

Dr. LINDSEY. I do not think that worrying about the political calendar is really central. I would be more worried about the quality 

of the decisions being made. If it takes time to carefully sort 

through tax expenditures changes, entitlement changes, regular 

discretionary changes, I would much rather take that time. 

I do not think that the proposal that Senator Reid laid out is 

generally considered as having a credible amount of savings in it. 

Also, I would hope that, in the second step, we would go, not only 

to the $2.75 trillion, but that we would go beyond it, and there is 

no limitation from the group doing that. I actually think a group 

of 12 people getting together will produce a compromise, and that 

seems to be a more sensible approach. 

We have to do much more than 2.75, by the way. 

The CHAIRMAN. Mr. Ettlinger? 

Mr. ETTLINGER. I actually do think you have to pay attention to 

the political calendar in the sense that I do not think there is a 

lot to be learned about what the options are between now and 6 

months from now. I do not think that the conversation is going to 

further mature particularly. 

I think we know what we know now, and, if it is that hard now 

to do it, it is not going to be any easier 6 months from now. If anything, it is going to be harder. And I think that the markets will 

recognize it. 

So there is a real risk that the deal might not have the marketcalming ramifications that we hope it would have if it is only—if 

we have to do it again in 6 months. 

The CHAIRMAN. Mr. Edwards? 

Mr. EDWARDS. I would like the maximum amount of real cuts I 

can get, and I do not know what the best strategy to do that is. 

I fear, with a big package like Senator Reid’s, there is more of an 

incentive to put in what I call smoke-and-mirror spending cuts. I think the $1 trillion savings he apparently has from Iraq and 

Afghanistan costs is not a real spending cut. 

So having small packages, where we can focus on making sure 

that we have real cuts, makes a lot of sense. The reality is, there 

14 

is not a one-shot deal here. Congress, every year for the next decade, frankly, the rest of our lifetimes, is going to have to do spending cuts and more spending cuts, because $2 trillion or $3 trillion 

in spending cuts is not going to solve our problem. 

So, even aside from the debt limit debate, we are going to be 

fighting over 2012 appropriations and 2013 appropriations. 

We have reforms we have to do every year for many years. 

The CHAIRMAN. Thank you. Thank you all very, very much. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Dr. Lindsey and Mr. Edwards, both of you suggest that we face 

a spending problem, and not a revenue problem, and certainly not 

a problem of taxing Americans too little. At least that is the way 

I view your testimony. 

When I look at history and at the projections by the nonpartisan 

Congressional Budget Office and by the Office of Management and 

Budget, following recessions, revenues as a share of GDP seem to 

fall. Then as the economy recovers, revenues come back. 

Now, both CBO and OMB project that revenues as a share of 

GDP will rise to values above the post-World War II averages as 

a share of GDP in the near term, and that occurs in CBO projections even when it is assumed that the current income tax rates 

are extended. 

Those projections show me that we do not have a revenue problem or that tax rates are too low. OMB and CBO also project that 

spending as a percent of GDP will remain well above the post-war 

average. 

Now, Dr. Lindsey and Mr. Edwards, you seem to agree that we 

do not have a revenue problem, that we do not tax Americans too 

little. What do you see as problems with the idea that we need to 

increase taxes and revenues, and what do you see as benefits from 

reining in spending? 

Let’s start with you, Dr. Lindsey, first. 

Dr. LINDSEY. I think the math that you are laying out is best understood by—if you have a progressive rate structure and the economy grows, automatically, the tax share of GDP rises because the 

average rate on the economy will rise. 

Now, we have gone from an economy with a 91-percent top tax 

rate to one that is roughly 35, 38 now, and, essentially, the tax 

rates on a cyclical basis—the tax take of GDP is the same. 

That is why I think that is the math that explains it. 

Senator, I honestly would prefer a focus on quality and not quantity, on both the tax and the spending side. I think you have to 

look at the rate of return that is actually generated for the economy from various spending programs, and, quite frankly, some 

taxes are more harmful than others, and some tax expenditures actually would probably be better off if we did away with them. 

So, again, I am not religious about where you get the money. I 

just am religious in that I think we have to start to take seriously 

an evaluation of the cost-benefit analysis of everything we do. 

Senator HATCH. Mr. Edwards? 

Mr. EDWARDS. To build on what Larry said a little bit, the phenomenon of real bracket creep is very powerful when you see this 

in long-term economic projections. 

15 

The CBO’s ultimate fiscal scenario shows revenues rising to—I 

think it is 18.4 percent of GDP by 2021, and then they just kind 

of assume that that number stays fixed after that. But the reality 

is that that real bracket creep will keep pushing up revenues as 

a share of GDP over time if we have solid economic growth. 

The way I think about the proper size of the economy here is, 

when governments are small, they do really useful things. They 

provide crime control and national defense and the like. But when 

your government gets to 40 percent of GDP, all levels of government get to 40 percent of GDP, at the margin, that marginal investment that the government might make has a very low or perhaps negative value. 

At the same time, the higher the taxes become, the more distortions are created. So the bigger the government gets, the less and 

less return you get from it. 

Senator HATCH. Well, thank you. 

Dr. Lindsey, several members of Congress have recently entertained the notion of modifying so-called ‘‘tax expenditures,’’ what 

some call ‘‘loopholes’’ or ‘‘tax breaks’’ in order to resolve the debt 

limit impasse or to get more revenue for the Federal Government. 

Now, I believe that the principal objective of tax reform should 

not be simply to raise more revenue for the Federal Government. 

Rather, equity, efficiency, simplicity, growth in jobs and the economy, and reductions in the abilities of companies and households 

to arbitrage the tax system for lower taxes should all be prime considerations. 

From your experience, do you think that tweaking a tax expenditure here or a so-called loophole there is a fruitful way to address 

our Nation’s fiscal challenges? 

Dr. LINDSEY. Senator, I am on record in front of Chairman 

Conrad’s committee as being a virtual bomb-throwing radical on 

this issue. I do not think that—I think we have reached the limit, 

effectively, of income taxation. 

And this is a very unpopular view, but I think, ultimately, we 

have to do a substitute of some kind of business receipts tax base 

instead of an income tax. I really do not see any way, given the 

political process, to get from here to there. 

So I agree with you. Piecemeal moves might help. I would not 

object to any careful consideration of anything. But ultimately, I 

think we have to move away from an income-based system to an 

expenditure-based tax. 

Senator HATCH. My time is up, Mr. Chairman, 

The CHAIRMAN. Thank you, Senator. 

Senator Bingaman, you are next. 

Senator BINGAMAN. Thank you, Mr. Chairman. 

For most of the time that I have been here in the Senate, the 

fight over spending and taxes was carried on through the President’s proposed budget and through the appropriations process in 

an effort to get a budget resolution. 

And this year, for the first time, we have it being carried out as 

part of this threat to not raise the debt ceiling. So that is sort of 

the new leverage that is being used here. 

I guess I am concerned that, if you have two objectives, which 

we have—the need to raise the debt ceiling by Tuesday and, secVerDate Nov 24 2008 20:34 Sep 25, 2012 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\75673.000 TIMD
16 

ond, the need to achieve long-term deficit reduction—we run the 

risk that our effort to achieve long-term deficit reduction will be 

substantially impeded if we refuse to raise the debt ceiling by Tuesday. 

So I do not know if any of you have thoughts on that. 

Mr. Greenstein? 

Mr. GREENSTEIN. Well, to invoke an overused phrase that originated in extremely unfortunate circumstances, we have to make 

sure we do not destroy the village in order to save it. Clearly, if 

we default, among many untoward consequences, we are going to 

have increases in interest rates, and then the Federal Government 

will have to pay more for the interest on the debt, and the deficits 

and the debt actually get larger as a result. 

So nothing could be more counterproductive than to default in 

the name of dealing with deficits and debt. 

Senator BINGAMAN. Dr. Lindsey, did you have a perspective on 

that? When you were head of the President’s council or Director of 

the National Economic Council for President Bush, you did not 

have this problem of Congress saying we will not raise the debt 

ceiling. 

As I recall it, there were about seven different increases in the 

debt ceiling under President Bush. What is your thought about the 

tying of the two together, the tying of the long-term deficit reduction plan to giving permission to raise the debt ceiling? 

Dr. LINDSEY. You are right. There was not an issue in the 2 

years that I was there. But I remember—I think it was 2006, there 

was a debt ceiling vote. And, again, I am not pointing fingers, but 

I know Senator Baucus voted against it, and I know you voted 

against it. I am not sure Senator Nelson was in. 

But President Obama, who was then a Senator, he said the fact 

you are voting on a debt ceiling was an indication of a lack of leadership, and the entire caucus on your side voted against raising the 

debt ceiling. 

Again, let us be grown-up about this. This is one of the games 

that has been played in Washington a long time. It is part of the 

structure of the way things are done. It depends on which party is 

in the White House, which party is in the Congress. That is the 

way it happens. 

I really think we have to move—I am sorry to be cynical about 

it, sir, but I have been in this town since 1981 and, you know, look, 

you guys are going to—I think you guys are going to get together, 

you are going to pass something, it is going to all work out. It may 

not happen by August 2, but it is going to happen, because in the 

end, we are all Americans and we all come together. 

These are not easy issues to solve, but saying, that, oh, gee, they 

are playing a game and we have never played the game, I am 

sorry, Senator, that is just not true. 

Senator BINGAMAN. Well, you do admit, do you not, that there 

has never been a refusal to raise the debt ceiling by the Congress? 

I believe since the 1950s, we have raised it 89 times under both 

Republican presidents and Democratic presidents. We have never 

threatened to—never to the point where we were saying, if you do 

not agree to our plan for deficit reduction or for spending and 

taxes, we will refuse. 

17 

Dr. LINDSEY. Again, Senator, in 2006, I was not in government. 

I had been—I will just remind you what happened in 2006. We 

were in a situation like we are right now, where the Treasury— 

it was Secretary Snow—was trying to figure out how to make the 

bills. We had exceeded the borrowing authority. We were doing all 

kinds of gimmicks like we are now. 

The same thing happened then. I am sorry, sir—and I do not 

mean to be disrespectful at all—it has been part of this town on 

a bipartisan basis for as long as I have been here and probably 

long before that. 

Senator BINGAMAN. Let me just say—— 

Dr. LINDSEY. That is not a reason for you not to act. 

Senator BINGAMAN. Let me just say I do not recall the same situation—— 

Dr. LINDSEY. There was not an alternative deficit plan put up. 

At that point—— 

Senator BINGAMAN. I recall a very different circumstance, where 

it was clear that the debt ceiling would be raised, and I think the 

great confidence that you have that all of this is going to work out 

and it does not matter whether we get it done by Tuesday, is a confidence I do not share. 

The CHAIRMAN. Senator Coburn? 

Senator COBURN. I want to bring us back down out of the political. And, as I have studied and looked at this and as I talk to 

economists around the world and economists here, I would like to 

get your opinion—I do not care where it comes from—what is the 

dollar number that this country has to achieve over the next 10 

years, out of the $48 trillion that we are planning on spending 

right now over the next 10 years, to get us well? What do we have 

to eliminate in terms of dollars? I do not care where it comes from. 

For the American people to have the same opportunity and prosperity potential in the future, what is the number that we have to 

achieve over the next 10 years in lessening the role of the Federal 

Government, whether it is all out of taxes or whether it is all out 

of cuts, what is the number that you would think is necessary to 

achieve that? 

Mr. Greenstein? 

Mr. GREENSTEIN. I do not have a specific dollar number. The key 

is, we have to get deficits down so that we stabilize the debt as a 

share of GDP. We have to get it down to 3 percent or below. 

Now, if you use OMB assumptions, you get one number. If you 

use CBO assumptions, you get another number. If the economy recovers more slowly than either of them predict, you get a third 

number. 

So it is hard to know the precise number. 

Senator COBURN. Well, I can give you what those numbers are. 

If you use CBO’s optimistic estimates, you have to get at least $8 

trillion. If you use the Street’s average, you have to get $10.5 trillion to $11 trillion. 

So we are not talking about the real issue. The fact is, we are 

Greece if we do not do that. 

Mr. GREENSTEIN. Two quick thoughts. If you use mainstream 

CBO and OMB, the numbers are huge, but they are nowhere near 

18 

that high. And I do not want to minimize the importance of this, 

but I do not think we are Greece. 

Senator COBURN. Dr. Lindsey? 

Dr. LINDSEY. Senator, again, I think there is a quantity issue. I 

also think there is a quality issue. If the government could produce 

a magic machine that generated energy for free, I will tell you, I 

do not care if we had to borrow $4 trillion to do it, it would have 

a great rate of return, and we would be better off, and we should 

borrow the money to do it. 

The test always comes—always comes—not on a quantitative 

basis, but on a qualitative basis. The markets punish countries 

that take money in a way that weakens their economy and spend 

it in a way that does not strengthen their economy. So I think the numbers that you mentioned, that $8 trillion to $10 trillion, are probably the right numbers, but I think there 

needs to be a lot more emphasis on the quality of spending and the 

quality of taxes, because that is going to get us a long way right 

now. 

Senator COBURN. Mr. Ettlinger? 

Mr. ETTLINGER. Yes. So I think what is less important than the 

10-year aggregate is where you are headed and where you are ending up. And I do not have—I have not done the calculation you are 

asking for, but our view—my view has been that, certainly, by 

2015, 2016, we ought to have stabilized the debt-to-GDP. We ought 

to be close to primary balance. 

And in that year—we did an exercise where we came up with a 

plan to achieve that in 2015, and, relative to the President’s budget 

at that time, that would take $256 billion in 2015. 

So you can kind of scale that; it would take somewhat more in 

the years subsequent to that. Our view has been that we do not 

think that there should be huge amounts of deficit reduction, consistent with what Dr. Lindsey says, in the median term. 

But by 2015, we should be shooting for getting into primary balance and then sustaining it. And, if you got to there, you would be 

in a pretty healthy situation. 

Let me just add that I would say that I do not think that that 

should be our ultimate goal. I think we should do better than primary balance. But in terms of getting us healthy and getting us 

stable, that is where we see the goal being. 

Senator COBURN. But if you had primary balance, and you had 

6 percent—if you went back to historical interest rates, at primary 

balance at $256 billion, we are dead. So using primary balance— 

well, if you have a 6-percent interest rate, what you are going to 

have in 2015 is interest costs of about $1.3 trillion a year. 

So primary balance does not mean anything when the world 

says, here is our historical average interest cost. 

Mr. Edwards? 

Mr. EDWARDS. Three quick points. Yes, we have to stabilize our 

finances, and I think, as Larry pointed out, the risk is on the upside, there is no doubt about it, in terms of economic growth, in 

terms of interest rates, in terms of inflation. 

So you have to cut enough to stabilize our finances. But, secondly, running any deficits, as I am sure you would probably agree, 

frankly, is immoral. We are pushing costs onto future generations 

19 

of young people, young families in the future. Every $100 billion of 

deficit spending we do now is going to be a burden on them, which 

I think is totally unfair. 

And then, third, there is a whole issue of how big should spending be. I believe with smaller spending, you increase economic 

growth over the long run. 

So there are three different reasons why we have to cut spending. 

Senator COBURN. My time is up, but I want to just make one 

comment. 

If you, in fact, had a cogent policy to eliminate fraud in our 

health care programs, and you had a cogent policy to eliminate duplicate government programs, you would eliminate $2 trillion over 

10 years starting tomorrow, just that common-sense approach. 

That is the first $2 trillion. And nobody is talking about doing any 

of that. 

The CHAIRMAN. Senator Cardin, you are next. 

Senator CARDIN. Thank you, Mr. Chairman. 

Mr. Greenstein, I certainly agree with you that the test needs to 

be debt-to-GDP. I think that is the critical factor. 

But I just really—when we look at our America and the international community, we have a strong economy. It has to be 

stronger, there is no question about it. 

Our share of government as part of our economy is less than the 

industrial nations that we like to compare ourselves to, and we 

take a look at other factors. 

The amount of our economy we devote to our national defense is 

out of line with the rest of the industrial world. 

So we are looking at America from a competitive point of view. 

There are multiple factors. There is not one single factor, and I 

think we need to understand that, and we need to do a better job, 

because international competition is only getting more difficult, 

and America’s economy and job growth depend upon us getting this 

right. 

But we are faced with an August 2 deadline, and we have, at this 

stage, at least two competing ways in which we can get past August the 2nd, and they are, to get the debt ceiling increase, which 

everybody admits is one goal, and two, a glide path to deal with 

our deficit. 

And it is interesting. They differ in one significant way, and that 

has been a common theme I find here in Washington that has been 

an issue of our economy, and that is predictability. 

Now, we pay a heavy price, I believe, and I would like to get your 

view on it, for the failure to give predictability. Our appropriators 

have no idea what our budget is going to look like this year because they cannot get their allocations. We have to get that done. 

The Reid proposal puts us on a predictable path for the next 2 

years. It gives us confidence—if we were to pass that, we would 

have confidence as to what our budgets would look like for the next 

2 years, what our deficit reduction would look like for the next 2 

years—and establishes a joint committee for the longer-term 

issues. 

Now, I understand the unpredictability of a joint committee, but 

the Boehner proposal also has a joint committee, puts much more 

20 

on it, and leaves for a future determination whether, in fact, we 

will go through the same ordeal again in a few months. 

Now, I have heard the business community come in here and 

say, ‘‘Look, give us the ground rules and we will respond to whatever the ground rules are. Make decisions.’’ 

Our chairman talks frequently about how many temporary provisions we have in our tax code and how we have to deal with that 

to give the private sector the ground rules in order to respond. 

So I would just like you to focus on this one issue of predictability and how important it is for us to give the markets some degree of confidence that we have a game plan that the Democrats 

and Republicans both agree to. 

No, it may not have enough deficit reduction to satisfy your 

needs, but at least it is a game plan that gives some confidence 

that we in Washington could get things done. 

How important is that? 

Bob, you can start. 

Mr. GREENSTEIN. Senator, I am really scared that, 6 months 

from now, we really are going to look like potentially we could look, 

like a banana republic, in two respects. 

So I look at Senator Reid’s and I look at Chairman Boehner’s 

proposals, for example, for the discretionary spending level for 

2012, and I do not know whether those levels, which are pretty 

close to each other, would be the agreed-upon levels to which appropriations bills would be marked or whether the House of Representatives would then ignore that and continue to mark up—— 

Senator CARDIN. My understanding is, Senator Reid’s proposal 

will have the allocations to the appropriators. So we will have that, 

if that is agreeable. 

Mr. GREENSTEIN. My point is—is there an agreement in both 

houses that those are the levels we mark the appropriation bills to, 

or do we have the risk of a government shutdown in the fall and 

then 6 months from now? Your point—I think, if you follow the 

Boehner prescription, you would likely have a deadlocked joint 

committee with Republican members refusing to do anything on 

taxes, Democratic members looking at the phenomenal impacts of 

$1.5 trillion in entitlement cuts over 10 years, double or 2.5 times 

the Gang of 6, and we would have a deadlock, and we could have 

a default. 

So I am very worried about both the potential for a government 

shutdown and a default 6 months from now. 

Dr. LINDSEY. Senator Cardin, first, I would point out that the 

Senate did not pass a budget last year or this year. The economy 

still functioned, as far as uncertainty goes. 

When it comes to the specific plan, you ask, if you read what the 

S&P report was, the proposal that the majority leader has advanced would guarantee a credit write-down, markdown of the 

credit standing of the United States. 

What they stressed, I think, would actually increase uncertainty. 

Now I am not sure, to be honest, that Speaker Boehner’s plan 

would avert that. I think it would delay it. But I would rather 

delay being marked down than guarantee being marked down right 

away. 

21 

And so I think that a 2-step approach is far sounder than one 

that guarantees that the credit rating agencies downgrade us. 

The CHAIRMAN. Senator Menendez? 

Senator CARDIN. Mr. Chairman, I would like quick responses 

from the other two witnesses, if we could. 

The CHAIRMAN. Go ahead. 

Mr. ETTLINGER. Just quickly. I think that, Senator, in fact, uncertainty is a great problem here, and I think, in fact, there may 

already be economic harm being done by not reaching a debt limit 

agreement. 

We have had a couple of rough months in the economy, and that 

may well be the private sector reacting to the threat of a disaster 

happening on August 2 and their reluctance to hire people and put 

themselves on the line given that uncertainty. 

Mr. EDWARDS. Very quickly. There has long been uncertainty in 

both the tax and spending side of the budget. I mean, on the tax 

side, there is general agreement it is crazy to keep extending the 

R&D tax credit, for example, by a year or two at a time. Businesses 

cannot plan. 

On the spending side, we have issues—like the transportation 

funding now is totally up in the air. FAA funding is totally up in 

the air. Every year Amtrak comes before Congress, and they do not 

know how much money they are getting. 

So Amtrak or the FAA, they cannot do rational capital investment unless they have long-term certainty. I mean, I proposed, for 

a lot of transportation, FAA and Amtrak, to privatize, to set them 

up as independent for-profit or nonprofit corporations. That way, 

they can have rational long-term planning. 

Senator CARDIN. Okay. 

Senator HATCH [presiding]. Senator Menendez? You are going to 

have to reset the clock. 

Senator Menendez? 

Senator MENENDEZ. Thank you. Speaker Boehner, in his rebuttal 

last night, derided the idea of a balanced approach to achieving 

long-term fiscal balancing, which in Washington means, we spend 

more, you pay more. And while this might be, in my mind, a nicesounding platitude, I do not believe it is being straightforward with 

the American people. 

The reality of the situation is, we have the largest generation of 

retiring Americans the country has ever seen. We have promised 

this generation of Americans a certain standard of living through 

investments in Social Security and Medicare and Medicaid in terms 

of the quality of their lives. 

The question we are faced with is, how much of this promise are 

we going to keep, and how do we pay for it? 

And I think while, with all due respect, the speaker hides behind 

the term ‘‘spending,’’ he avoids the reality that is a fundamental 

question about that quality of life for millions of Americans and the 

responsibility to meet it. 

So, Mr. Greenstein, let me ask you: in terms of the impact on the 

standard of living for seniors in America, is there much of a difference between the Republican budget that was passed and the 

cut, cap, and balance process that the speaker presents as a viable 

option? 

22 

Mr. GREENSTEIN. I think the difference is very great. The cut, 

cap, and balance plan ultimately sought to reduce spending to 

about 18 percent of the gross domestic product. It averaged about 

22 percent under Ronald Reagan, when there were no babyboomers retired and health care costs per beneficiary were about 

one-third lower than they are today. 

You really cannot get to those numbers without massive changes 

in Social Security and Medicare and Medicaid that, in the next 10 

years, would require very deep cuts and big impacts on the standard of living. 

I think we all agree that we need to significantly slow the rate 

of growth of health care costs systemwide, including Medicare and 

Medicaid, in the long run. But we do not yet know all the ways, 

or many of the ways, to do that—without really compromising 

health care quality—that get us big savings in the next 10 years. 

Now, I used to think a balanced package went something like 

Senator Conrad’s plan that was 50/50, or the Rivlin-Domenici plan. 

Then there was the Gang of 6 plan that was 2:1. And now we are 

being told the plans that are 5:1, 10:1, 20:1 spending cuts to revenue increases are unacceptable even after no less than Martin 

Feldstein has said tax expenditures are the single-biggest source of 

wasteful spending in the Federal budget. 

So, yes, I think this is a serious issue for both seniors and vulnerable and low-income Americans. 

Senator MENENDEZ. Mr. Edwards, I saw on page 2 of your testimony that, in your view, the Bush tax rate cuts simply brought the 

United States into better competitive alignment with other advanced economies. Right? That is your testimony. 

Mr. EDWARDS. Right. 

Senator MENENDEZ. So I looked. U.S. average GDP growth under 

the Clinton years from 1992–2000 was 3.85 percent. The OECD average for the same time period was 2.93 percent. The U.S. average 

under the Bush years was 2.08 percent. The OECD average during 

those same years was 2.14. 

So how is it that, in terms of competitive advantage, our economy 

performed better by GDP growth relative to our competitors under 

the Clinton tax regime than the Bush tax regime? The numbers do 

not seem to bear out your view. 

Mr. EDWARDS. Of course, many things go into determining economic growth rates in addition to taxes. During the 1990s, a lot of 

stuff went right. We had the NAFTA free trade agreement. President Clinton brought spending down to, I think, at least a post1950s low of 18 percent of GDP. So there were a lot of spending 

cuts during the 1990s. 

We had baby-boomers at their peak earning years during the 

1990s. So they were highly productive and producing a lot of GDP. 

President Bush did a lot of stuff wrong, in my view. The wars 

have been enormously expensive, and I would differ from, I think, 

a lot of conservatives on this point. The wars, just like other domestic spending, are very damaging to the economy. It sucks 

money right out of the private economy and spends it on activities 

which do not benefit average persons’ consumption or standard of 

living. 

23 

So Clinton did a lot of things right, Bush made a lot of mistakes. 

But I do think if you look now, the average top personal income 

tax rate in the OECD is 42 percent this year. If you add State and 

local taxes onto our Federal top rate of 35, you get to about 42. 

So the United States is just about the average of other OECD 

countries today in terms of the top rate. 

Senator MENENDEZ. Yes. There are other taxes in those countries 

as well. 

The final point: I would agree with you that President Clinton 

did a lot of things right. As a matter of fact, they are instructive 

for us at this moment. When we had the Deficit Reduction Act, it 

was a combination of spending cuts, some entitlement changes— 

not as deep as the ones we are talking about now—and revenue. 

And the confluence of those three actions created the first balanced 

budget in a generation, record surpluses, low unemployment, low 

interest rates, low inflation, and the greatest peacetime economy in 

a generation. 

So it seems to me—I agree with you—he did a lot of right things 

that are instructive to what we need to be doing now. 

Thank you, Mr. Chairman. 

Senator HATCH. Thank you. 

Senator Burr? 

Senator BURR. Mr. Greenstein, you said that one of the plans 

had leverage of 20:1. Can you tell me who introduced that plan, or 

was that just a number you pulled out of the sky? 

Mr. GREENSTEIN. Neither. I am being rhetorical here. The point 

that I am making is, we are being told that plans that have any 

revenue contribution, regardless of the ratio, are not acceptable. 

Senator BURR. Right. I think you gave the impression that somebody was out there proposing something that was leveraged 20:1. 

Part of what Senator Menendez just said: predictability is important—let me tell you what is predictable. I agree with Dr. Lindsey. 

At the end of this process, we will raise the debt ceiling, and a year 

and a half from now we will have a $17.8-trillion debt limit. And 

in January of 2013, we will be faced with a decision of raising it 

again. 

So, Dr. Lindsey, let me ask you this. At what point does the sovereign debt of the world become so big that the global capital available either cannot or will not finance it? 

Dr. LINDSEY. Well, the ‘‘will not’’ always happens before the ‘‘cannot,’’ and that is what we have to pay attention to here, and that 

is what I would focus on in the credibility. 

Again, I think that the deficit estimates that are now laid out are 

far too optimistic, the point I made in my testimony. We are living 

in an artificially low interest rate environment, and I think that a 

$2.75-trillion deficit act this year would probably be barely enough 

to keep the markets happy until we have to repeat this times two 

or three in January 2013. 

Again, I do not think that the proposal that—I have great respect for him, but I do not think the majority leader’s proposal— 

I think we would be downgraded in August if the majority leader’s 

proposal is adopted, and it will be too late. 

But I think we have at least a chance of surviving until January 

under Speaker Boehner’s proposal. It is only a chance. It depends 

24 

on what the commission reports. But if I have a choice between 

being executed in the morning and being executed 6 months from 

now, I would at least go for the 6 months and hope something happened in between. 

Senator BURR. Does the global capital that is available to finance 

sovereign debt make an investment decision between investment in 

sovereign debt or investment in gross of economy? 

Dr. LINDSEY. The thing about sovereigns is, they rig the rules. 

And there is something out there—there is literature out there that 

has really caught on in the last year—called financial repression, 

and we are busily financially repressing the world markets into 

making sure they fund sovereign debt. 

We are doing it through risk ratings. We are doing it through 

Basel III, we are doing it through money creation, we are doing it 

through regulation. So you can coerce the private sector into funding the government. That always happens. The Bourges did it, and 

the Romans did it, and we will do it, and we are doing it right now. 

That is really not the test. 

The test is going to be what the impact of that is on the economy 

and the extent to which you starve private sector investment and 

growth as a result, and I think that is where the focus should be. 

Senator BURR. Mr. Greenstein, I think you have admitted that 

there needed to be some cuts. Let me just ask you. Would you consider means-testing Medicare and Social Security as an option? 

Mr. GREENSTEIN. History will show that I met with the chairman 

in 2003, he may recall. And when the prescription drug bill was 

being considered, I was one of the people who recommended that 

he support well-designed proposals to income-relate the premiums, 

which he did. I supported the proposals to strengthen the incomerelating of the premiums in the Health Care Reform Act. 

I do think we have to be careful as to how far we go. We do need 

to maintain these as universal social insurance programs with 

broad support. 

I do understand that there was a further element in the deal 

that was discussed between the President and Speaker Boehner on 

that front. Given my very limited knowledge of what it is, if it is 

what I thought it was, that did not sound unreasonable to me either. 

But there are limits as to how far we go there. 

Senator BURR. Well, let me just remind all. If we spend $3.7 trillion this year, we will collect $2.2 trillion. We have a delta of $1.5 

trillion. If you eliminated all discretionary spending and all the 

money we devote to defend the country, we are still $200 billion 

shy of balancing this year’s annual budget. 

Now, I agree with Dr. Lindsey that this is not the time to look 

at how we necessarily tighten the annual budget—we have to be 

more concerned with the long term. 

But the takeaway from that, on a 1-year snapshot, is, you cannot 

get there without reform of our entitlement programs. That is Social Security, it is Medicare, it is Medicaid. Unfortunately, we have 

allowed the term ‘‘reform’’ to be hijacked to mean cuts. 

When we talk about health care, it should be about outcome. Can 

you reform the Medicare system where the outcome is more positive for the participants and the cost is less for all who contribute? 

25 

I believe if we look at it from that standpoint, we can accomplish 

big things. 

If we continue to look at it from the political sides of this debate, 

where any cut is a cut in quality, which is not true—as Dr. Coburn 

pointed out before he left—if we committed to this, we could save 

$200 billion almost immediately. If we refocus how we look at the 

health care system and, more importantly, that means how we construct the health care system, if we insist that no changes can be 

made, let me assure you, the formula is there today for disaster 

down the road, whether that is 18 months from now when we are 

at $17.8 trillion and we start this debate again, or we get to a point 

where the capital available in the world chooses to finance the expansion of business and job creation versus financing sovereign 

debt. We will not be the only game in town forever. 

I thank the chair. 

The CHAIRMAN. Thank you very much, Senator. 

Next, Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. This is an important 

hearing. 

And let me take this discussion for a minute or two in a different 

direction. In my view, one of the best ways to cut the deficit is to 

generate real economic growth and more jobs. And, obviously, over 

the last couple years, we have thrown a lot of efforts at this cause. 

The Fed, of course, has dramatically slashed interest rates. We 

had the Economic Recovery Act. We had a whole host of housing 

initiatives to try to help hard-hit homeowners. But we are not generating the growth that we need. 

Now, my view is the one major unused tool in the economic tool 

shed is tax reform, and Chairman Baucus has had very good hearings on this issue. There is a long history of it being bipartisan, 

Democrats and Ronald Reagan teaming up. 

And it seems to me it can address all of the points that you are 

making here at the table. For example, Mr. Greenstein—whose 

work I have long admired—makes, I think, a very solid case with 

respect to the question of demand and what happens in an economy like this where middle-class folks and lower middle-class people are hurting and they are not going to the stores, they are not 

buying the washing machine, the consumer durables and the like. 

Significant bipartisan tax reform could, for example, give tax relief of $2,500 or $3,000 into the pockets of those folks who could 

get back into the economy, and it would be permanent tax relief— 

permanent tax relief, so that the middle-class person, the lower 

middle-class person, could get back into the economy. 

It is something that—I have listened to a lot of the hearing. It 

sure seems that the partisan divide is as sharp as ever. This is 

something with a history, where, under Chairman Baucus’s leadership, Senator Hatch, members on both sides of the aisle, we could 

go in a direction that has a history of really doing something to 

generate growth, which is certainly not the only way to cut the deficit—we would never say that—but could make a meaningful difference. 

What is your thought on, particularly, the idea of speeding up 

the timetable for tax reform, so that, because we see the history 

26 

that other steps have not worked, this is something where the 

timetable ought to be sped up? 

Let me just go right down the row. 

Mr. EDWARDS. I have long thought the single-best thing we could 

do for the U.S. economy is to cut our Federal corporate tax rate to 

get it in line with rates around the world, and there does seem to 

be bipartisan interest in that. 

The average corporate rate in Europe now is only 23 percent. 

Our Federal and State rate is 40 percent. It makes no sense. 

In the last couple years, because of the recession, there has been 

a lot of discussion, a lot of Keynesian economists who have said, 

well, we need more demand in the economy to get businesses investing. 

But, if you look at the S&P 500 companies, half of their sales and 

profits are abroad these days. So the issue is not just U.S. demand. 

The issue is global demand, and the issue is, how do we get companies like Intel and Caterpillar and the rest, GE, to invest here in 

the United States rather than to expand their factories abroad? 

And we all know it is an increasingly competitive world. So I 

think cutting the corporate rate now in a permanent way to give 

businesses long-term predictability, to 20 percent or so, would just 

be a fabulous thing to do. 

China and India keep growing. We want Intel Corporation to 

build new plants here in California and Arizona and elsewhere to 

supply that growing world market. 

So I have long been a fan of the corporate rate cut. 

Senator WYDEN. Tax reform is a way to use growth and job creation to cut the deficit and address the topic of the hearing. 

Mr. ETTLINGER. It is sort of obvious and simple, but one of the 

things government should do is sort of get the basics right. So 

there are a lot of aspects to that. One is investing in education, 

science, infrastructure—there is the spending side—and then there 

is certainly the tax side. 

I do not think anyone thinks we are doing it right when it comes 

to taxes right now. There are all sorts of skewed incentives that 

have been in effect in the code over the years, pulling the economy 

this way and that way on the micro level. 

I think we sort of lost track of what the purposes of a tax system 

are. So I think that, absolutely, we should launch on tax reform, 

and that could be a useful contribution to both getting growth 

going, which has, obviously, benefits for deficit reduction from that 

standpoint, and then simply from the revenue perspective. 

I do think that an important part of that reform, as you alluded 

to, Senator, is the demand side of the equation. Getting U.S. domestic demand up is, in fact, a very important component to getting our economy going, probably the component. 

It is true that companies sell—U.S. companies sell worldwide, 

but on the other hand, it is U.S. consumption and demand which 

most drives U.S. investment. So absolutely—— 

Senator WYDEN. Mr. Chairman, my time has expired. 

The CHAIRMAN. Go ahead. 

Senator WYDEN. If the other two could just address the issue. 

And to me, if there is some sense that you two think it would make 

to accelerate the timetable for tax reform, that would leave me 

27 

walking out of here to the next hearing I have to sprint to with the 

sense, again, that you are seeing some bipartisanship come, which, 

of course, is the coin of the realm right now. 

Dr. LINDSEY. Senator Wyden, I remember a few months ago we 

had this conversation. I think it was in Mr. Conrad’s committee. 

You had four economists, a broad spectrum up there, and they all 

said the same thing as to where we should go, and that is, move 

away from an income-based system and move toward a business receipts system. 

I am a firm believer in that. I think we should scrap the current 

system. I know it is not very popular. I think it was you who reminded me that the Senate voted something like 93–3 or something 

against what I was suggesting. 

All right. I am willing to be unpopular. But ultimately, the greatest reform we can make is to get rid of something where—the saying is: income is an opinion; cash is a fact. Once you go to a cashbased system, you get rid of the loopholes automatically, and I really think we have to move in that direction. 

Mr. GREENSTEIN. Well, tax reform, if done well, ought to have a 

positive effect on economic growth. But I really worry that we overstate the effect. It is not a magic elixir, and I worry that people 

will think, if only we do tax reform, then we do not need to make 

the other hard choices on both taxes and spending. 

I get nervous when I hear you talking about several thousand 

dollar tax cuts, which I think would be hard for us to afford. Bottom line, I am very much in favor of well-done tax reform that has 

the net effect of raising revenue and reducing the deficit. 

I actually think it would be a mistake to do revenue-neutral tax 

reform, because it would take off the table the tax expenditures 

that are the best possibility for a revenue contribution to deficit reduction, without achieving the deficit reduction. 

It would thereby put all of the burden on the spending side. I do 

not think members of Congress ultimately would be willing to do 

what you would have to do if you do 100 percent of deficit reduction on the spending side. 

So we would end up at higher deficits and debt, and the negative 

for the economy would outweigh the positive. 

Senator WYDEN. My time is up, Mr. Chairman. I only offer up 

that the proposition of having folks in the private sector with goodpaying jobs in the United States rather than the folks on unemployment and food stamps, that ought to be part of the equation. 

I think you agree with that, and I look forward to working with 

you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Conrad? 

Senator CONRAD. Thank you, Mr. Chairman. And thank you for 

holding this hearing. It is really an excellent panel of witnesses, 

and I appreciate your doing it. 

Let me chime in on the theme of Senator Wyden. I, too, believe 

that tax reform is one part of the way out of this thicket, to broaden the base, reduce rates, help make America more competitive. 

I would say, as a member of the commission, Dr. Lindsey, I actually pushed a hybrid system based on the overwhelming testimony 

28 

we had from people from very different philosophical backgrounds. 

The consensus was we ought to move to a hybrid system. 

We ought to have an income tax, but we also ought to have a 

consumption-based tax as well. And I know there is a concern that, 

if you have two systems, that is going to lead to even more government revenue. I, frankly, do not buy that argument. 

The overwhelming testimony before the Fiscal Commission was 

that a hybrid system would provide us benefits, and, unfortunately, 

the politics will not allow that at this particular time. 

Look, the hard reality that we confront is, the revenue is the lowest it has been as a share of GDP in 60 years. That is fact. Spending is the highest it has been in 60 years as a share of GDP. 

So to me, it is pretty self-evident you have to work both sides of 

the calculation. 

Senator Coburn said some things with which I agree. Senator 

Coburn and I have been locked in a room for hundreds of hours 

now, and I think we were kind of surprised by how many things 

we agree on. I tried to convince the commission to do a $6-trillion package of 

deficit reduction, because, when I do budgets, I can balance the 

budget in 10 years with $5.6 trillion of changes on the revenue and 

the spending side. 

I also happen to agree with Dr. Lindsey. You are, to me, absolutely right when you talk about quality versus quantity. You have 

to have both. You have to have quantity. We have to do trillions 

of dollars of deficit reduction. But how we do it is also critically important. 

And the fact is, not all spending is the same. There is spending 

that really does represent investment in education, in infrastructure. There is other spending that is pure consumption. 

On the revenue side, I believe it is also true. All tax plans that 

raise the same amount of money are not the same in terms of their 

economic effects. And we have to get smart about this. 

This tax code was devised when we did not have to worry about 

our competitive position. The United States dominated the world 

economy when we wrote this code. 

Is there anybody who believes we would write this code today if 

we were starting from scratch? I mean, I cannot think of a more 

anti-competitive, anti-growth code that one could write than the 

one we have. And in addition to that, more complex. 

Rocky Mountain Horror Show, that is the tax code that we have 

today. But I must say I am also struck by those who say, no revenue. To me, come on, revenue is the lowest it has been in 60 

years, and we are not going to have a revenue component? Let’s get 

real. 

Here we are in a circumstance in which we are running deficits 

that are equal to 40 percent of every dollar we spend. We are borrowing 40 cents of every $1 we spend. And we are not going to 

have a revenue component? 

I will tell you what. If there is not a revenue component, there 

is not going to be an entitlement reform component, I can assure 

you of that, because the politics of that are very clear. 

But you know what? If both sides would give some ground, if we 

would acknowledge there needs to be a revenue component—and 

29 

one that is carefully designed—and that there needs to be entitlement reform—which clearly there does, because the trustees tell us 

we are headed for insolvency. This is not imagining; it is going to 

happen. 

I would like to ask, Mr. Ettlinger—I was not here when you testified, and I apologize for that. I was in another hearing. For those 

who say, ‘‘Well, it is a job killer if you raise revenue,’’ I remember 

very well in 1993 we raised revenue, cut spending. We had the 

longest uninterrupted period of economic growth in American history, 24 million jobs created. 

And when I contrast that with the Bush administration, we had 

massive cuts and, at the end, we were at the precipice of collapse. 

So somehow this idea that there is a neat 1-for-1 relationship, 

you raise revenue, you kill jobs, can you—I understand you shared 

some information, I do not know if it was in your testimony that 

you delivered or in your prepared testimony, on the relationship between revenue and growth. 

Mr. ETTLINGER [sarcastically]. Yes. The Clinton era was terrible. 

I am sure we all remember all the high unemployment and job loss 

in the Clinton era. That tax structure, which, of course, people are 

drawing a line in the sand—we cannot go back to that tax structure because it would be so damaging to the economy—in fact, it 

was an era when—it was not just that we saw job growth in the 

top-line statistics, but we saw higher business investment; we saw 

higher growth in productivity. The real building blocks of economic 

growth were, in fact, much stronger in that era than, not just the 

Bush era, but they were stronger than actually the Reagan era 

which preceded it. 

So, as Mr. Edwards said earlier, there are many things that go 

on in an economy, not just taxes. So I would not necessarily say 

that, because there were higher taxes, and particularly higher 

taxes on the well-off, under President Clinton, that is the cause of 

the economic growth. But I think the truth is that there are always 

many other things going on and that taxes are a factor, but they 

are not the dispositive factor, and that well-designed taxes and 

that thoughtful tax policy can, in fact, be very conducive to economic growth. 

So I do think that the role of taxes is sometimes overblown in 

terms of the level of taxes and how it affects economic growth, and, 

in fact, it is a balance. It is a balance between how you spend that 

money—if you invest it wisely and do wise things with it, in fact, 

the higher taxes that pay for that investment and would reduce 

deficits can be a very strong net-plus, and I think we saw that during the Clinton era. 

Senator CONRAD. Let me just conclude, if I can, Mr. Chairman. 

I will never forget when I first got in this committee, Lloyd Bentsen, who was then the Secretary of the Treasury, called me down 

to the Treasury Department for lunch, and I assumed I was going 

with a group of Senators. 

I got there, and I was the only one there. And he joked with me. 

I had just taken his seat on this committee, and he said, ‘‘You have 

inherited the Danish seat,’’ because he is Danish, and I am Danish. 

And he said, ‘‘I wanted to make an impression on you.’’ And he 

had a little chart—I love charts—he had a little chart, and he had 

30 

all the debt of the country, all government debt, Federal, State, and 

local, all corporate debt, all individual debt, and then he had 1 percent. And you took 1 percent of all the debt of the country—and 

the point he was making is, interest rates and a change in interest 

rates make more difference in this economy than all of the tax proposals that were being discussed at the time. 

And he said, ‘‘Senator, the one thing I want to leave you with is, 

deficits do matter, debt does matter,’’ and I got the message. If you 

would calculate all debt today, all government, all corporate, all individual, I do not know what that number would be. I have asked 

my staff to calculate that, and it is somewhere in the $40 trillion 

range. One percent is a big, big number, and that is something that 

is critically important for us to remember. 

If we get a 1-percent increase in interest rates because of this 

debt divide that we have right now, that would increase the debt 

$1.3 trillion over the next 10 years. That is just the Federal Government debt. 

So we have a lot at stake. 

The CHAIRMAN. Senator Thune? 

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

our panel for their presentations today. 

And I know this has already been stated, and I apologize for 

being late. But, Dr. Lindsey, I enjoyed your op-ed in the Wall Street 

Journal a couple of weeks ago talking about the projections for future levels of debt and how understated they may be based upon 

any sort of return to normalcy in interest rates and more realistic, 

I would say, assumption about economic growth. 

In the whole sort of category of economic growth, I would be interested in your comments about tax reform, reforming the tax 

code, but doing it in a way that keeps revenue neutral, lowering 

rates, eliminating deductions, and what the dynamic effect of that 

might be and whether or not you would expect to see increased economic growth and increased revenue as a result of that. 

Dr. LINDSEY. The more efficient we are in anything we do, 

whether it is in our tax design or our spending design or in our 

regulatory process, which has been rather bad lately, the higher 

growth will be. 

Now, we have had growth slow on the one hand during the first 

half of this year. That has already taken basically three-quarters 

of a percent of GDP. In the long term, it will raise the debt by hundreds of billions of dollars. I think growth is actually essential to 

the entire proposition of the government’s health. 

Senator THUNE. But your view—if you get lower rates, you 

broaden the base, you get the dynamic effect of the additional—— 

Dr. LINDSEY. Both broadening the base and lowering the rates 

are efficiency-increasing changes in the tax system, and both 

should be done. I am actually more radical. I had mentioned this 

before. I think you should scrap the income-based system and go 

toward a business receipts tax system, and you can do that in a 

progressive way. But I think that is really going to be the end 

game here. 

Senator THUNE. Anybody else? Mr. Edwards, a comment on just 

how lowering rates impacts revenues and growth? 

31 

Mr. EDWARDS. Well, with different taxes, you get different sorts 

of revenue effects. I think all economists, tax economists, sort of 

agree with that. 

There is a difference of opinion about how big those behavioral 

responses are, but I think most economists would agree that the 

biggest behavioral or dynamic responses are from taxes on capital—capital gains and corporate income taxes in particular. 

There is academic research by Kevin Hassett at AEI and by Jack 

Mintz, who is one of Canada’s tax economists. They argue that sort 

of the revenue-maximizing corporate rate is 25 percent. Our current Federal/State rate is 40. 

So in other words, they argue—and they look at the crosscountry statistics—they argue if you dropped our corporate rate 

over time, the additional economic growth would be enough to create enough of a dynamic response for a revenue-neutral rate cut, 

just from a pure rate cut. 

Particularly, in a globalized economy, we have to be particularly 

concerned about taxes on capital. There is a reason why just about 

every OECD country has cut their taxes on capital more than their 

taxes on labor, because capital is more mobile. And so we have 

seen the top corporate rate drop from—a typical rate a few decades 

ago was 45 percent. The average rate in the OECD now is about 

25 percent. 

Ministries of finance and economists in every capital around the 

world are realizing this, that you shoot yourself in the foot by having high tax rates on capital. 

Senator THUNE. Do you think that when the economy has recovered, that our tax revenues, taxation, will get back to historical 

averages? 

Mr. EDWARDS. In my testimony, I mentioned this, but the CBO 

projections show that, by 2021, we get back up to 18.4 percent of 

GDP in revenue, with all the current tax cuts extended. That is the 

long-term sort of average. 

And the revenues will keep rising after that because of what is 

called real bracket creep in the tax code. 

Senator THUNE. And the argument that we do have lower revenue, which we do, than we have had in a long time, primarily gets 

corrected when the economy recovers. 

The spending, however, which is significantly above historical 

averages, is going to continue, is it not, at that high level, as you 

look at the decade ahead of us? 

Mr. EDWARDS. Right. If you look at the CBO’s sort of long-run 

do-nothing, no-reform projections, revenues rise back up to 18 percent of GDP for the long run, sort of a flat line, but spending keeps 

on growing, growing, and growing. 

And so it seems to be clear that this is not a balanced problem 

we face. It is a 1-sided kind of a spending problem. 

Senator THUNE. The biggest driver of deficits in future years is 

health spending. And I do not know, maybe you have responded to 

this already, but did the health care bill increase or decrease 

health spending, and what is going to be the effect, positive or negative, for the Nation’s fiscal situation as a result of the passage of 

that legislation? 

32 

Dr. LINDSEY. We have already had 1,400 waivers just to try to 

patch the thing together. In 2013, I guarantee you, you are going 

to be back here revising that bill, because it will lead to either fiscal collapse or a health system collapse, or both. 

So you are probably shy. You are probably underestimating the 10-year costs by about $1.3 trillion. That is my best back-of-theenvelope calculus from the health care reform bill. 

Mr. GREENSTEIN. I would disagree. I think, as in many things, 

there is uncertainty, but that the best estimates we have are those 

from the Congressional Budget Office. CBO says modest reduction 

in deficits in the first 10 years, reductions in the broad range of 

a half a percentage point of GDP in future decades. 

There is a risk that some of the savings do not hold. There is also 

the potential that a number of the demonstrations and pilots and 

research produce breakthroughs, and we get much better cost containment. 

Senator THUNE. Mr. Chairman, I see my time has expired. 

The CHAIRMAN. Thank you very much. And thank you, all of you, 

especially Dr. Greenstein, because, if you had not made that point, 

I would have, because the Congressional Budget Office did say 

compared with law, prior passage, that it does, on the margin, tend 

to reduce health care costs in this country. 

Thanks, everybody, very much. Thanks for the hearing. I hope 

this helps us in our major effort these next few days in getting the 

debt ceiling increased and the deficits down. 

The hearing is adjourned. 

[Whereupon, at 11:54 a.m., the hearing was concluded.] 

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A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


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COMMUNICATIONS


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