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63–076 2010

TAXES AS PART OF THE FEDERAL BUDGET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MARCH 23, 2010

Serial No. 111–44 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

SANDER M. LEVIN, Michigan, Acting Chairman 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK B. MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN–WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

RICHARD E. NEAL, Massachusetts, Chairman 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

ALLYSON Y. SCHWARTZ, Pennsylvania 

EARL BLUMENAUER, Oregon 

JOSEPH CROWLEY, New York 

KENDRICK B. MEEK, Florida 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

PATRICK J. TIBERI, Ohio, Ranking Member 

JOHN LINDER, Georgia 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

GEOFF DAVIS, Kentucky 

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

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

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

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

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

is further refined. 


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iii 

C O N T E N T S 

Page 

Advisory of March 16, 2010 announcing the hearing ........................................... 2 

WITNESSES 

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation ..................... 8 

Len Burman, Daniel Patrick Moynihan Professor of Public Affairs at the 

Maxwell School, Syracuse University, Center for Policy Research, Syracuse, 

New York .............................................................................................................. 96 

Robert Greenstein, Executive Director, Center on Budget and Policy Priorities, Washington, D.C. ........................................................................................ 112 

Douglas Holtz-Eakin, President, American Action Forum, Arlington, Virginia . 126 


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(1) 

HEARING ON TAXES AS PART OF THE 

FEDERAL BUDGET 

TUESDAY, MARCH 23, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:00 p.m. in Room 

1100 Longworth House Office Building, the Honorable Richard 

Neal [chairman of the Committee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Neal Announces Hearing on Taxes and the 

Federal Budget 

March 16, 2010 

By (202) 226–8933 

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal (D–MA) announced today that the Subcommittee on Select Revenue 

Measures will hold a hearing on the role of taxes as part of the federal budget. The 

hearing will take place on Tuesday, March 23, 2010, in the main Committee 

hearing room, 1100 Longworth House Office Building, beginning at 2:00 

p.m. 

Oral testimony at this hearing will be limited to invited witnesses. However, any 

individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed 

record of the hearing. 

FOCUS OF THE HEARING: 

The hearing will focus on the outlook for federal tax revenues, including projections and estimates for extensions of major expiring provisions. The hearing will 

also explore the role of tax revenues in the federal budget as concerns grow about 

the rising budget deficits in both the short and long-term. 

BACKGROUND: 

Recently, the Congressional Budget Office (CBO) projected that the federal budget 

would show a deficit of $1.3 trillion for 2010, and that federal deficits were projected 

to average about $600 billion per year over 2011–2020 (CBO, ‘‘The Budget and Economic Outlook: Fiscal Years 2010 to 2020,’’ January 2010). According to CBO, its 

baseline projection could understate the budget deficits because it assumes major 

tax cuts from 2001, 2003, and 2009 would expire as scheduled and that protection 

from the impact of the Alternative Minimum Tax (AMT) would not be extended, as 

it has been in prior years. CBO’s baseline projections show revenues rising to 20.2 

percent of GDP (gross domestic product) by 2020 even though revenues were only 

14.9 percent of GDP in 2010. Much of this increase in revenue comes from the expiration of major individual income tax cuts. 

On February 18, 2010, President Obama announced by Executive Order the formation of the Bipartisan National Commission on Fiscal Responsibility and Reform. 

The Commission is charged with finding solutions to fiscal challenges confronting 

the nation, including reducing the deficit. Already, opponents of higher taxes have 

urged the still-forming Commission to remove any tax increase from consideration, 

arguing that such increase would harm economic growth. Others argue that all policy options, including higher revenues from taxes, must be part of the debate. In 

the House of Representatives, the decision to raise or lower taxes initiates within 

the Ways and Means Committee. 

In announcing the hearing, Chairman Neal stated, ‘‘With the creation of the 

Bipartisan National Commission on Fiscal Responsibility and Reform, 

President Obama has expressed his willingness to work with Congress to 

move towards a balanced federal budget. With next year’s deficit expected 

to exceed $1.3 trillion, it is clear we face significant challenges if we are 

to meet the President’s ambitious goals. As a Member of the committee 

with jurisdiction over tax revenues and many federal spending programs, 

I look forward exploring all policy options for reducing the federal budget 

deficits.’’ 


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DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

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

http://democrats.waysandmeans.house.gov, select ‘‘Hearings’’. Select the hearing 

for which you would like to submit, and click on the link entitled, ‘‘Click here to 

provide a submission for the record.’’ Once you have followed the online instructions, 

submit all requested information. ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by 

close of business Tuesday, April 6, 2010. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

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

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

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

hearing record. 

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

Chairman NEAL. Let me call this hearing to order. And I hope 

that all could take their seats. 

I want to welcome everyone to this hearing of the Select Revenues Measures Subcommittee on Taxes as Part of the Federal 

Budget. 

In yesterday’s Washington Post, there was an interesting story 

with a headline you might have thought was satire. It read, ‘‘IMF 

Tells Wealthy Nations to Watch Debt’’. I wonder why the IMF has 

to do that. 


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But as you read the article, it becomes clear that what the U.S. 

is grappling with, so many others are too. The IMF official warned 

that the average debt-to-GDP ratio in the wealthiest countries is 

projected to reach levels that prevailed after World War II, and 

that this debt will drag down the potential for the wealthiest nations to continue our economic recovery. 

And so while we are in good company, it’s not much comfort. We 

have a responsibility to frankly be responsible, as the world’s largest economy. And while we have a budget Committee here in the 

House, tasked with setting out budget targets each year, this Committee has jurisdiction over a wide swath of spending and entitlement programs, and certainly over all tax revenues. 

Today our witnesses will talk about both historical and projected 

data on spending and taxes. We will also hear from Joint Tax that 

the deficit picture is not pretty, even before the extension of some 

awfully popular tax cuts. 

In order to be responsible, this Committee is going to have to 

make some very difficult decisions. It was the Economist, John 

Maynard Keynes, who said, ‘‘If I owe you a pound, and I have a 

problem, I have a problem. But if I owe you a million, the problem 

is yours.’’ 

This problem is ours and ours alone. I hope this hearing will be 

the first of many, setting out how we can reform our Tax Code in 

anticipation of moving our economy forward. 

Now let me recognize my friend, Mr. Tiberi, for his opening 

statement. 

Mr. TIBERI. Thank you, Mr. Chairman. It is great to be here 

with you again, the first hearing of this year for this Subcommittee. I hope we have several more. 

During his 1986 state of the union address, President Ronald 

Reagan said, ‘‘Government’s view of the economy could be summed 

up in a few short phrases: If it moves, tax it; if it keeps moving, 

regulate it; and if it stops moving, subsidize it.’’ 

I think those words echo in the minds of the country’s job creators as we sit here today, businesses’ large domestic employers, 

American businesses trying to compete around the globe, individual 

entrepreneurs, and small business owners, the driving force of our 

economy, find themselves under incredible pressure. 

A good portion of it is uncertainty, as a result of the global recession we find ourselves working to claw ourselves out of. 

But I can tell you, Mr. Chairman, that another source of that 

pressure is what they see coming out of Washington, D.C., in the 

form of more taxes, more spending, more entitlements, and more 

regulation. 

If you’ll indulge me for a moment, let me tell you exactly what 

I mean. A week ago today, I left my central Ohio district, but before I left, I sat down with a group of business owners. One of them 

told me a story. Ten years ago, he borrowed all the money he could: 

Friends, relatives, mortgaged his house to the hilt, and started a 

business, his dream, his garage. He’s 55 years old today, and that 

business employs 300 people. He pays taxes, a lot of them. 

He told me that ten years later, faced with the same choice 

today, he wouldn’t make that decision. He wouldn’t make that decision to start that business, because of what he sees as policies comVerDate Nov 24 2008 20:19 Jul 11, 2011 Jkt 063076 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63076.XXX 63076

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ing out of Washington, D.C. that cause the risk to be greater than 

the reward, through our taxes, through our regulatory environment, and through mandates. 

I know there are vast differences of opinion between your side of 

the aisle and mine with respect to topics of taxes and spending. 

But the simple facts are, we can’t tax ourselves out of a situation. To try to do so won’t make our businesses more competitive 

here at home, won’t help American companies with world-wide operations compete against their foreign counterparts, and won’t encourage would-be entrepreneurs and innovators to take that risk. 

Historical data makes it clear, we don’t have a revenue problem, 

we have a spending problem. In fact, over the past 40 years, total 

revenues have averaged approximately 18.2 percent of GDP, while 

outlays have averaged 20.7 percent. 

There’s a huge concern about record budget deficits in both long 

and short-term. And I think we all agree on that. 

As you noted, when announcing today’s hearing, the decision to 

raise or lower taxes initiates within this Committee. You also noted 

the Committee has jurisdiction over many federal programs. And 

while it may not be the focus of today’s hearing, I certainly hope 

that in the future, we look at ways to slow the government’s 

growth of federal entitlement spending. And that will factor in to 

part of this debate at some point. 

Thank you, Mr. Chairman, for your leadership. And I look forward to hearing the witnesses’ testimony today. 

[The prepared statement of Mr. Tiberi follows:] 


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Chairman NEAL. Thank you, Mr. Tiberi. 

Let me welcome our witnesses today. First we’ll hear from Tom 

Barthold, the Chief of Staff at the Joint Committee on Taxation. 

Next, we will hear from Len Burman, the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School at Syracuse 

University. 

Then we will hear from Bob Greenstein—who has arrived—the 

Executive Director of the Committee on Budget and Policy Priorities here in Washington. 

Finally, we will hear from Douglas Holtz-Eakin, the President of 

the American Action Forum, in Arlington, Virginia. 

This is an extremely knowledgeable panel that we’ve assembled 

today, and we are fortunate to have their insights on this important topic. Without objection, any other members wishing to insert 

statements as part of the record may do so. And all written statements submitted by the witnesses will be inserted into the record, 

as well. 

And with that, I would like to recognize Mr. Barthold for his 

opening statement. And if we could get Mr. Barthold, and perhaps 

we could have Mr. Burman. And then we will go to vote, and come 

back. 

Mr. Barthold. 

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION 

Mr. BARTHOLD. Thank you, Mr. Chairman, Mr. Tiberi. My 

name is Thomas Barthold, and I’m the Chief of Staff of the Joint 

Committee on Taxation. And it’s a pleasure to present some background information on projections of the U.S. tax system, and the 

outlook for deficits, and also to highlight some looming issues in 

the individual income tax. 

I prepared a deck of slides, which are mounted up here. And I 

don’t pretend to have the time to go through all of them. The staff 

also prepared a more detailed background pamphlet that was made 

available to you and the general public. 

Just to state where we’ve been historically, the first slide just 

gives you a picture of federal receipts as a percentage of gross domestic product since 1934. I think the point that was partly made 

by Mr. Tiberi is that essentially since 1950, receipts as a percentage of GDP have bounced around between 16–1/2 and 19–1/2 percent.

But that picture of receipts sort of masked an overall difference 

in terms of the evolution of the U.S. Federal Revenue System. And 

the next slide breaks that down into our major components, which 

is the individual income tax, our employment taxes, the payroll 

taxes, corporate income taxes, and then the lesser revenue sources 

of excise taxes and estate and gift taxes. 

As you can see, the major change over this period is that while 

the individual income tax remains our largest source of federal revenues, over 40 percent annually, for the past 60 years, the role of 

employment taxes has grown substantially over that period, while 

the relative importance of corporate income taxes has declined. Of 

course, these are in percentage terms; not dollar figures. 


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Just to show you where we are today, I have a simple pie chart. 

Individual income tax, we project, will account for 43 percent of 

federal revenues in 2010. The social insurance tax is 40 percent; 

corporate income tax 9 percent. 

A point that I hope to have a couple minutes to highlight later 

is the looming changes in the individual income tax that face the 

Committee, because of the expiration of many of the provisions, enacted as part of EGTRRA and JGTRRA. That leads to a changed 

outlook for 2011. So, the comparison pie chart available to you 

shows that under baseline projections, without any action by the 

Congress, individual income tax receipts will rise to 48 percent of 

federal revenues, Social insurance taxes will commensurately decline. 

Mr. Neal had asked to present some information from both our 

Joint Tax projections and Congressional Budget Office projections 

relating to the growth of revenues and outlays, and the deficit. 

This next slide looks at outlays, revenues, and deficits as a percentage of gross domestic product under baseline projections. 

As you’ll see, in part, because the expiring provisions in the individual income tax, and because the Congressional Budget Office 

projects that the economy will recover from our recent recession, 

revenues will grow, and our quite high short-run deficits will decline. But they will persist at a level of near 3 percent of GDP, to 

the year 2020. 

A number of members have asked: Well, what happens if we 

were to extend all the EGTRRA and JGTRRA sunsets, and provide 

AMT relief, as the Congress has been doing annually now for just 

about the past decade? 

This next slide shows the effect of those policies, and essentially 

it would increase the deficit by about 2 percent per year, throughout the ten-year period. So, while I said that we’d be at roughly 3 

percent of GDP in 2020, it would be about 5 percent of GDP in 

2020. 

I should note that the policies that are projected there, that it’s 

not any particular choice of ours; it was just simple to say, ‘‘Let’s 

look at not letting all these provisions expire.’’ And the AMT relief 

is done by indexing the exemption amount and the thresholds. 

The next slide shows the same facts, with a focus on the deficit, 

as opposed to outlays and revenues. 

I’d like to talk for a few minutes about the changes that are coming in the individual income tax, the expiration of a number of the 

EGTRRA and JGTRRA provisions. The individual income tax is defined by its basic standard deduction, its personal exemptions, the 

rate brackets, and then a number of other provisions, such as the 

child credit, the earned income tax credit, and the new makingwork-pay credit. 

Part of the EGTRRA legislation was to provide marriage penalty 

relief. That was done by effectively having the standard deduction 

for taxpayers married filing jointly be double that of singles. The 

reason this is highlighted in blue on my chart is to note the change 

between 2010 and 2011, when that relief would change. 

The other big basic change, of course, is the change in the rate 

structure. I know the arrows look a little bit complicated, but 

what’s happening is that for tax payers who would be in the 10 


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percent bracket in 2010, they would now all return to the 15 percent bracket. Some taxpayers in the 15 percent bracket in 2010, 

will remain in the 15 percent bracket. Some married filing jointly, 

who had received some rate relief as part of the doubling of the 

thresholds in EGTRRA, would go to the 28 percent bracket. The 25 

percent bracket returns to 28, et cetera, as detailed. 

That’s for ordinary income. 

There’s also the special maximum rate amounts for capital gain 

and qualified dividend income. 

Another perhaps important change to note is the child tax credit 

has a maximum value currently of $1,000. In 2011, that drops 

down to $500. 

The significant change in earned income tax parameters, is that 

the Congress had created a category for three or more children. 

That reverts to just the two or more child category. 

I’ll skip over a couple of the additional slides, to turn to the Alternative Minimum Tax (AMT). The Alternative Minimum Tax 

problem that you have dealt with over the past several years, without adjusting exemptions or other policy change, is projected to affect over 25 million taxpayers for 2010. If we were to take the 2009 

alternative minimum tax and index it, that number of affected taxpayers would fall to about $4.1 million. 

In the interest of time, I’ll skip to the last couple slides, which 

I think encapsulate the effects of the expiration of EGTRRA and 

JGTRRA by making a hypothetical calculation for a married couple 

with no children, assuming that all their income is wage income. 

The brown line will be their 2011 tax liability. The blue line is 

their current law tax liability. For a comparable picture, if the couple has two children, the difference is, that they can be eligible for 

a larger earned income tax credit for lower income tax payers. And, 

for most of the taxpayers on this income chart, they’d be eligible 

for the child tax credit. 

In conclusion, the staff has tried to provide the members with a 

lot more detail. And, I’d be happy to explain any of the additional 

detail that the members might like to enquire about. 

Thank you, Mr. Chairman. 

[The prepared statement Mr. Barthold follows:] 


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Testimony By Thomas A. Barthold 

Chief of Staff Joint Committee on Taxation 


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Chairman NEAL. Thank you, Mr. Barthold. We have a series of 

votes on the floor, which are going to take about 20 minutes. So 

what I’d like to do is to recess the Committee until the last vote. 

And we’ll be back as promptly as we can. 

Thank you. 

[Recess.] 

Chairman NEAL. Could we ask our witnesses and guests to take 

their seats, please? 

Our next witness will be Len Burman, who is the Daniel Patrick 

Moynihan Professor of Public Affairs at the Maxwell School at Syracuse University in the Center for Policy Research. And Pat Moynihan was one of my all-time favorite Congressional figures. 

Mr. Burman. 

STATEMENT OF LEN BURMAN, DANIEL PATRICK MOYNIHAN 

PROFESSOR OF PUBLIC AFFAIRS, MAXWELL SCHOOL AT 

SYRACUSE UNIVERSITY 

Mr. BURMAN. Thank you, Mr. Chairman. It’s actually a huge 

honor for me to have a chair in Senator Moynihan’s name. 

Chairman Neal, Ranking member Tiberi, and Members of the 

Subcommittee, thank you very much for inviting me to testify. 

I applaud the Subcommittee for taking on the difficult but extremely important task of addressing our long-term budget challenges before disaster strikes. 

My testimony makes three points. I am only going to summarize 

them in my oral remarks. The first, continuing the current course 

of enormous and growing deficits is not an option. Ignoring our 

budget constraints could produce an economic calamity of unprecedented proportions, a wrecked economy, confiscatory taxes, and an 

eviscerated government, a nightmare scenario, whatever your political preferences are. 

The budget can’t be tamed by spending cuts or tax increases 

alone. And as unpalatable as they may be, you’re going to have to 

raise taxes. And not just on the rich. 

The best way to increase tax revenues is through tax reform, in 

particular subjecting the nearly 200 spending programs that are 

run through the Tax Code, to the same scrutiny applied to direct 

spending. 

A colleague read my testimony and said, ‘‘It’s really depressing.’’ 

So I’m going to try to be more upbeat in my oral remarks. 

Anybody who cares about our children and our grandchildren 

wants to avoid catastrophic budget failure. And happily you’re in 

a position to do it. After the very partisan and sometimes nasty 

health reform debate, I think the public is clamoring for bipartisanship. And deficit reduction is a great bipartisan issue. 

Both sides have an enormous stake in avoiding budget catastrophe. And neither side can do it alone. Democrats and Republicans would reduce the deficit in different ways. But you have to 

recognize the continued stalemate and inertia as the worst possible 

option. And this is a case where bipartisanship is essential. 

Neither tax increases nor spending cuts are politically popular. 

But fiscal responsibility is. And I think tax increases would be 

more palatable if paired with a credible commitment to control 

spending. 


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So why do I say the tax increases are inevitable? I’ve got a slide, 

which I hope will appear, showing CBO’s summary of the demographic trends. Basically, they’re two big issues. One is demographics, and the other is health care. 

The demographics are basically that the working-age population 

is declining relative to the retirees, so that the share that the number of people paying for each recipient of benefits—Medicare, Medicaid, and Social Security—is declining over time. In 2010 there are 

4.7 workers per retiree. By 2028, that ratio drops to three. 

If you hold health care cost growth to the rate of GDP—which 

isn’t what’s happened historically—but if you could do that, primary spending—this is spending not including interest on the 

debt—primary spending as a share of GDP goes to 20 percent in 

2012—that’s after the recession is expected to be largely over—and 

23 percent in 2030. And continues to creep up. That’s the blue line 

in the chart. 

So the point is that primary spending, even under the most optimistic of scenarios, is going to far exceed historical tax revenues. 

And spending grows at historical rates, which is about 2–1/2 percent faster than GDP, spending on health care, then the primary 

spending as a share of GDP would go to 25 percent in 2030 and 

27 percent in 2040. 

And keep in mind that this assumes this is before even accounting for the interest on the debt. 

We have to slow health care cost growth. But it’s unlikely to 

grow slower than GDP. The bottom line is that taxes as a share 

of GDP will have to grow, if we want to avoid a catastrophic budget 

failure. 

So the question is, if we have to raise taxes, what’s the best way 

to do it? I think Doug’s going to talk about the problems of raising 

tax rates, and their effects on economic growth. 

Most economists would say that the best way to increase revenues would be to broaden the base. That is, to take on tax expenditures, all of those programs, those spending programs run through 

the tax system, that undermine the tax base and make it harder 

to raise revenues. 

You know, even if we wanted to raise rates as a way to deal with 

the deficit, the Tax Policy Center recently did a study, where they 

said that if we just raised the top two rates and we wanted to get 

the deficit down to 2 percent of GDP between 2015 and 2019, the 

top rate would have to increase to 91 percent. And that’s before accounting for all the avoidance that would produce. 

It’s just not going to happen. We’re not going to be able to solve 

the problem by raising rates just on the rich. And even raising 

rates across the board to get the deficit down would require top 

rates of over 50 percent. 

And again, that’s before accounting for behavioral response. And 

it doesn’t account for the fact that spending is going to increase 

dramatically over time. 

Well, the advantages of base-broadening as opposed to raising 

rates is that base broadening could actually improve economic efficiency. They reduce the opportunities for tax sheltering and avoidance, and they simplify the tax system. 

And there’s a big economic cost to tax compliance. 


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Now I know that some conservatives object to the notion of tax 

expenditures. They say that it assumes the government owns all 

your money, unless they let you keep it. 

But the point about tax expenditures is that they are spending 

programs, and they’re just run through the tax system. Some 

things make sense to run through the tax system. But a lot of them 

don’t. And they should get the same kind of scrutiny that direct 

spending programs have. 

So what I propose in the testimony—I’d be happy to discuss, if 

you’re interested—is the idea of including tax expenditures as part 

of the regular budget process, that you should apply the same kind 

of scrutiny to low-income housing tax credit as you do to housing 

vouchers. 

And I think you’re also going to have to consider other sources 

of revenue. But I figure that would be a subject for another day. 

Thank you very much. And I’d be happy to answer your questions. 

[The prepared statement of Mr. Burman follows:] 


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Prepared Statement of Len Burman 

Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School 

Syracuse University, Center for Policy Research 


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Chairman NEAL. Thank you Mr. Burman. 

Mr. Greenstein. 

f 


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STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE 

DIRECTOR, COMMITTEE ON BUDGET AND POLICY PRIORITIES 

Mr. GREENSTEIN. Thank you very much. 

Our team of budget experts at our Committee, led by three 

former senior CBO officials, has produced budget projections that 

indicate that if current policies remain unchanged, the debt will 

soar to about 300 percent of GDP by 2050. 

To avert that problem and stabilize the debt at its current share 

of the economy would require about a 28 percent increase in taxes 

or a 22 percent reduction in expenditures for every federal program 

in the budget every year for the next 40 years between now and 

2050. 

The two main sources of rising federal expenditures over the long 

run, are, not surprisingly, rising costs throughout the whole U.S. 

health care system, public and private, and the aging of the population. 

Those factors will drive up the costs of Medicare, Medicaid, and 

Social Security. And it is the growth and the cost of those three 

programs alone that accounts for all of the increase in non-interest 

spending as a share of GDP, over the next 40 years and as far as 

the eye can see. 

In fact, total federal spending for all programs other than Medicare, Medicaid, and Social Security, including all entitlements 

other than those three, is projected to decline as a share of the 

economy, both in the coming decade and in the decades after that. 

That’s not where the problem comes from. 

It also should be noted that the 2001 and 2003 tax cuts are implicated here. If policy makers were to let those measures expire 

on schedule at the end of 2010, or to fully pay for them, that would 

shrink the fiscal gap between now and 2050 by about two-fifths. 

Another way to look at it is that the cost of making permanent 

the tax cuts for people over $250,000 a year would itself cost as 

much over the next 75 years, or nearly as much over the next 75 

years, as the entire 75-year Social Security shortfall. 

Stated another way, if you think, correctly, that the Social Security shortfall is a contributor to the long-term fiscal problem, then 

if one makes the tax cuts for people over $250,000 permanent, one 

essentially doubles that in size. 

So the bottom line is that we really need a balanced approach 

here, that includes a combination of sustained reform to the health 

care system, reductions in federal expenditures, and increase in 

federal revenues. 

To be sure, the single most important step over the long term is 

slowing the growth of health care spending. The new legislation 

makes important first steps. Much more will need to be done over 

time, as we learn more how to do that. 

But even with further major reforms in health care, it is likely 

to prove impossible to hold health care costs to their current share 

of the economy. 

Older people have more health care costs than younger people, 

and the population’s aging. And the primary cause of increase from 

year to year in health care costs, is advances in medical technology, 

and the country is not going to say, ‘‘We don’t want the benefits 

of medical breakthroughs.’’ 


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So an older society with more medical breakthroughs is inevitably going to spend more as a share of GDP on health care. And 

this means that the answer to the question of whether we can 

achieve fiscal sustainability wholly on the spending side is, as Len 

Burman also said, ‘‘No.’’ 

This leads to the conclusion that higher taxes along with reductions in projected spending, both need to be on the table, which in 

turn leads me to the conclusion that unlike the last round of major 

tax reform in 1986, coming tax reform efforts cannot be revenueneutral. They need to make a contribution for long-term deficit reduction. 

As Len noted, a key part of this needs to be looking at tax expenditures, or what Alan Greenspan, among others, has referred to 

as ‘‘tax entitlements.’’ 

People often talk of taxes and spending as though they’re entirely separate parts of the budget. With tax expenditures now over 

a trillion dollars a year, roughly equal in cost to Medicare and Social Security combined, the distinction between taxes and spending 

becomes increasingly suspect. And as Len has noted, there’s a lot 

of inefficiency in that part of the budget. 

On the corporate side, we often hear it said correctly that the top 

marginal U.S. corporate income tax rate is above that of our competitors. But we don’t hear as often, but it’s right there in the 2007 

Bush Treasury Department Study of Corporate Income Tax, is that 

the effective corporate tax rate in the United States is actually 

lower than the average for our competitors. We have a high rate 

and very narrow corporate tax base, which means that there 

should be room to reduce corporate preferences enough, both to reduce the top corporate rate, and to get a contribution to deficit reduction out of that reform. 

Final point I’ll make is many analysts and also the President 

have set an important goal of getting the deficit down to the point 

where the debt doesn’t continue to rise as a share of the economy. 

Which means we’ve got to get the deficit down after the economy 

recovers to no more than 3 percent of GDP. 

That will take a variety of actions. And the Congress faces key 

tests in the next several months that will have a heavy bearing on 

whether or not we can really get to 3 percent of GDP in the years 

ahead. Specifically it is critical to allow the tax cuts for high-income households to expire on schedule, and to hold the line on the 

2009 estate tax parameters. 

Extending the high income tax cuts, rather than allowing them 

to expire, would add $826 billion to the debt over the coming decade and more in decades after that. Weakening the estate tax 

would add tens of billions of dollars on top of that. 

Now returning to the top marginal rates that we had in the Clinton years, when high-income people thrived, the economy boomed, 

small businesses created jobs at a faster rate than they did in this 

current decade, seems like an imminently sensible first step. And 

the bottom line, once again, is that the long-term fiscal challenge 

is so serious that everything needs to be on the table, both program 

expenditures and revenues. 

[The prepared statement of Mr. Greenstein follows:] 


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Prepared Statement of Robert Greenstein 

Executive Director Center on Budget and Policy Priorities 


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Chairman NEAL. Thank you, Mr. Greenstein. 

Mr. Holtz-Eakin. f 


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STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Chairman Neal, Ranking Member Tiberi, 

and Members of the Committee, thank you for the chance to appear today. I too have a written statement that I’ve submitted for 

the record, and look forward to the conversation. 

I will make only a few points, much of which you’ve heard many 

times before, and even on this panel. 

The first is that the fiscal outlook for the United States is, indeed, very bleak. 

For quite some time, successive issues of the CBO’s long-term 

budget outlook have painted the picture fairly clearly. Spending on 

Social Security will rise from about 4–1/2 percent of GDP now to 

about 7 percent due to the retirement of the baby boom. Spending 

on Medicare and Medicaid will rise similarly from 4–1/2 percent of 

GDP to under optimistic projections, 12 percent of GDP, under pessimistic even higher. 

That means those three programs combined are about 20 percent 

of GDP, which is the traditional size of the Federal Government. 

Layer on everything else that the government is expected to do, 

and you’re looking at an increase somewhere in the vicinity of 30 

percent. 

It is not sensible to believe that you can grow your way out of 

such a problem. It is not sensible to believe that you can tax your 

way out of such a problem. Raising 30 percent of GDP in taxes on 

economic performance and leave behind a economy for our children 

that is badly impaired. 

So the major innovation, if that’s the right word, in recent times, 

has been that this bleak fiscal picture, which used to take two to 

three decades to evolve, has been compressed into a single decade. 

If you look at the CBO’s analysis of the President’s budget proposals, they show deficits that never fall below $700 billion over 

the next decade. The deficit in 2020 would be $1.2 trillion, even 

after the economy is presumed to have fully recovered. 

And this is a deficit picture that is driven by spending. In that 

budget projection, the revenues are 19.6 percent of GDP, well above 

the traditional levels in the United States. Spending is 25 percent 

of GDP, well above normal levels. Eliminating spending down to 20 

percent of GDP would bring that budget into balance ten years out. 

So in terms of the numbers, you can see quite clearly that the 

spending explosion is the source of the coming budget troubles. 

I think it is very important to address this issue and address it 

quickly. 

Number one, in the good news scenario, if we run deficits of this 

type, we will impair the ability to educate workers for the next generation; we will impair the ability to equip them with new technologies and the latest in the ability to raise their productivity. 

And we will condemn that generation to slower economic growth, 

slower rising wages, than they deserve. And we’ll leave behind a 

tremendous debt on top of that. 

It’s fundamentally unfair to them. 

In the bad-news version of this—the one that Len Burman is 

studying so carefully—we have a catastrophe. And the financial criVerDate Nov 24 2008 20:19 Jul 11, 2011 Jkt 063076 PO 00000 Frm 00130 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63076.XXX 63076

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sis so devastates this economy that it makes the past several years 

look much less threatening than they felt to live through. 

So I think this is imperative to get going on this, because it cannot just be a tax solution, and because these spending programs 

are hard to change. You need to start right now to get this problem 

under control. 

Even if you are successful in doing all of that, I still think it’s 

imperative for the members of this Committee in particular to look 

hard at the U.S. Tax Code, which simply requires an enormous 

amount of work at this point in time. 

In my written testimony, I laid out my ideas for what I think the 

Tax Code is. I’m a big fan of consumption-based taxation. 

I’ll simply point out at the moment we have these very severe 

problems. The U.S. individual income tax has evolved over time 

into essentially a surtax on high-income Americans. It is no longer 

a broad-based revenue raiser. Almost a majority of Americans are 

excluded from the income tax at this point. And that income tax 

is poorly suited to the economic lives of the people who tax us. We 

spend an enormous amount of time trying to locate capital income 

somewhere on the globe, somewhere risk adjust it, get it at the 

right point in time and tax it. And we fail again and again and 

again. 

The financial markets outwit us. I think we should develop a tax 

system that recognizes that reality, and eliminates from tax the return on capital income, but does it in a sensible fashion. And I outlined that in my testimony. 

The second thing is that our corporation income tax really is 

placing us at a competitive disadvantage. Not only is the rate too 

high. We are the last country on the globe attempting to tax worldwide corporate income. We are literally swimming against the tide 

and losing jobs every day, as a result. It needs to be addressed and 

addressed quickly. 

And lastly, for those individuals who are not affluent Americans, 

who are simply trying to get ahead, the kinds of refundable tax 

credits and other disguised spending programs in the Tax Code, as 

they are phased out, they are creating high effective marginal tax 

rates, tax rates that are higher on our modest Americans than they 

are on the top end. 

And it’s been increasingly difficult for people to get ahead. And 

I think we ought to look carefully at the incentive effects on lowerincome Americans of the net effect of the income tax plus the 

phase-outs of refundable credits. It’s a real impediment to their 

ability to get ahead. 

I thank you for the chance to be here today, and I look forward 

to your questions. 

[The prepared statement of Mr. Holtz-Eakin follows:] 


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Chairman NEAL. Thank you very much, Mr. Holtz-Eakin. 

Mr. Barthold, we’ve heard a lot of testimony today about greater 

scrutiny for tax expenditures. And obviously Joint Tax would be 

the first place that we would turn for assistance on this regard. 

Can you tell me what the Committee currently at Joint Tax may 

be doing in this regard? 

Mr. BARTHOLD. Yes, Mr. Neal. One standard thing that we do 

annually is prepare for the Budget Committees and for the Ways 

and Means Committee and the Finance Committee a list of tax expenditure provisions and our estimates of tax expenditures. I 

should note, the tax expenditure estimates are not the same as revenue estimates—but it shows more the scale of activity that is encompassed by the tax expenditure. 

We also stand ready to work with any member who wants to investigate any particular provision. And we are also doing some 

work on our own in light of the House of Representatives directive 

in the extender legislation that the House passed that would have 

directed us by statute to undertake a formal study. 

We have begun to try and put together a study and make a plan 

to study some of the provisions that were identified in that legislation, notwithstanding that that legislation has not become law, but 

because the members were interested. 

Chairman NEAL. And Professor Burman, one of your charts references the post-war average of tax revenues at 18.3 percent of 

GDP. Mr. Holtz-Eakin has told us that attempts to keep taxes at 

this ratio will generate, as he says, ‘‘an unmanageable federal debt 

spiral.’’ 

However, other conservatives are warning that we must be mindful of this ratio. How does this compare to other similar economies, 

and how should we manage it, in your judgment, going forward? 

Mr. BURMAN. Our taxes are still low, relative to virtually all 

the other OECD countries. I think Japan has a lower tax burden 

than we do. The highest overall tax burden, the last time OECD 

compiled them, was 48 percent for Denmark. 

Now our total tax burden is higher than 18 or in the 20 percent 

it was before the recession; because we also collect a fair amount 

of taxes at the state level as well. But overall, the total taxes are 

about 30, 35 percent of GDP. 

So there is some scope before we would be competing for the top 

of the tax competition. 

But I should also point out that, you know, we’re not Denmark. 

I don’t think it would be possible for us to raise taxes at 48 percent 

of GDP. But our taxes are low, by comparison. 

Chairman NEAL. All right. 

And Mr. Holtz-Eakin, am I correct that it was during your tenure at CBO that you studied the impact on that economy of an 

across-the-board tax cut to determine whether in fact this popular 

tax cut would ‘‘pay for itself?’’ Can you tell us today whether you 

agree with this assertion that tax cuts pay for themselves? And you 

know I wasn’t letting you out of the room without raising that 

question, would you? 

[Laughter.] 


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Mr. HOLTZ-EAKIN. I’m shocked. No. I’ve never believed that tax 

cuts pay for themselves, as a generic statement. That’s not a sensible way to think about it. 

You need to decide what you’re going to spend in a disciplined 

fashion, and taxes exist to finance those expenditures. 

Chairman NEAL. I appreciate that answer, largely because, you 

know, we went back and forth on this at Budget some years ago. 

And your position has been consistent on it. And I’m indeed appreciative of that. 

Mr. Greenstein, I was a little bit confused by something in your 

testimony, where you compare the long-term cost of extending the 

2001 and 2003 tax cuts for the wealthiest taxpayers with the cost 

to cover the entire Social Security shortfall over 75 years. 

Would you break down that comparison? 

Mr. GREENSTEIN. Yes. This comparison sometimes surprises 

people, because they’re used to estimates for tax cuts just for the 

first ten years, and we’re used to Social Security estimates over 75 

years. Well, you obviously can’t compare a ten-year-cost of one item 

to a 75-year-cost of another item. 

The estimates from the Treasury that are in the President’s 

budget show that the cost were we to continue the tax cuts for people over $250,000 a year that the President has proposed be allowed to expire. If one were to continue those, the Treasury estimate is that the cost is about 1/2 of 1 percent of GDP. 

Most revenue estimates, when CBO does its long-term estimates, 

generally the estimates are that once you have a set of policies in 

place in the Tax Code, that the amount of revenue that they bring 

in tends to stay constant over time as a share of GDP, unless you 

change them. 

So following the standard methods, the estimate here would be 

that if these tax cuts when fully in effect over the coming decade, 

if they stayed in effect, were 1/2 of a percent of GDP, their cost 

over 75 years would be expected to be about half of a percent of 

GDP. 

Now the CBO estimate of the size of the 75-year Social Security 

surplus is also a half a percent of GDP. The Social Security actuary’s estimate, which we tend to rely on a little bit more, is 7/10 

of a percent of GDP. 

So we’re somewhere in the half to 7/10 of a percent of GDP cost 

for the imbalance in Social Security over 75 years, and were we to 

make the tax cuts permanent for people over $250,000, that’s half 

a percentage point of GDP. 

So the two are roughly the same in their cost over time. As long 

as you compare apples to apples, in other words, the same periods 

of time, the costs are comparable. 

Chairman NEAL. Thank you. 

And Mr. Barthold, I know you have a chart showing how the extension of the 2001 and 2003 tax cuts will impact those families hit 

by AMT. Can you tell us how many families will be on the AMT 

by 2020 if we do not extend the AMT patch, and how many filers 

is that to the total number of filers? 

Mr. BARTHOLD. Yes, Mr. Chairman. In 2020, our current projections for individual tax filers is that there’ll be approximately 

146.5 million filers in 2020. And we estimate that without change, 


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that the AMT would affect approximately 50 million or slightly 

over a third of the universe of individual tax filers in 2020. 

Chairman NEAL. Mm-hmm. Thank you, Mr. Barthold. 

Now I’d like to recognize Mr. Tiberi for the purpose of inquiry. 

Mr. TIBERI. Thank you, Mr. Chairman. 

I’m going to lay this out and then ask a question of the three of 

you. We’ve heard the President say on many occasions that we here 

must budget our money—your money—the same way that the 

American people do their budgets. And I think everybody would 

agree with that statement, a simple concept. 

I’ve said before in this Committee and the full Committee that 

my dad and mom came to America, I am the son of immigrants. 

My dad some years made less than other years, some years he 

made more. Did not believe in credit. Never spent more than he 

made. Simple belief. And my mother and father do well today on 

a fixed income, because of that belief. 

Then we look at this document here, the budget. And some numbers are interesting. 

When you look back in this document, back in 2007, the American people sent us $2.5 trillion to spend. We spent $2.7 trillion. 

We spent too much. 

The deficit was about $160 billion. 

Then you go to two years later. Economy goes south. We spend 

$3.5 trillion. The American people sent us only $2.1 trillion. Obviously, we spent too much. 

Moving forward in this document, there are assumed tax increases between now and then to 2015, assuming that we catch up 

with those outlays, receipts go up to $3.6 trillion. My dad would 

say, ‘‘All right, you’re starting to budget like me.’’ No. Actually not. 

Outlays are $4.3 trillion. We’re again spending too much. 

You go to 2020, and we even get more revenue, $4.7 trillion; but 

we’re spending $5.7 trillion. We’re continuing to spend too much. 

Now, everyone’s fond of saying it will take both tax increases and 

spending cuts. Well, as long as I’ve been around—and I’d like to 

ask the former CBO Director first—have we ever actually cut 

spending first? 

Mr. HOLTZ-EAKIN. No. We’ve very rarely seen spending reductions in the United States federal budget. It’s continuous growth 

with one or two exceptions in the 1980s. 

Mr. TIBERI. And my predecessor was Budget Chairman, John 

Kasich, and he used to say, ‘‘Cut spending first.’’ And he acknowledged after that budget deal that they slowed the rate of growth, 

they didn’t actually cut spending. And some of that slowing of the 

rate of growth was in out-years. And some of that slowing of the 

rate of growth actually did not occur in the out-years, because Congress overrode it. 

Is that true, Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. Sure. I mean, this is a standard pattern. It’s 

easy to impose out-year restraint. But when the out-years arrive, 

often they get overridden. The most dramatic example is the sustainable growth rate mechanism for Medicare payments to doctors, 

which was out-year savings of large proportions, but which gets 

overridden every year. 


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Mr. TIBERI. The question is to Mr. Greenstein. Looking at these 

numbers, how do I tell my mom and dad that we are serious about 

controlling spending, and we want to budget like them, when they 

spend less when they make less. We spend more when we take in 

less, every single year? 

Mr. GREENSTEIN. Well, I think one really does need—the Federal Government actually is not the same as a family. Because it 

has a larger economic role in trying to prevent recessions from becoming depressions. 

Mr. TIBERI. So when the President says we should budget like 

a family budget, you disagree with that? 

Mr. GREENSTEIN. It’s oversimplified. 

Mr. TIBERI. Okay. 

Mr. GREENSTEIN. But let me even add, most families do not 

limit year by year, and most businesses do not limit year by year 

their spending to their intake. If a business wants to expand, it 

usually doesn’t save the money first. It borrows. That’s what business loans are. 

When a family buys a home or sends a kid to college, normally 

it takes out a mortgage or has an education loan. Now in those 

cases, if it’s a good investment for the business, and, you know, 

you’ve made a good deal on the home, certainly getting a college 

education, these are good investments. 

Not every investment a family makes and not every expenditure 

a government makes is a good investment. I’m not saying that. 

I’m just saying that it does make sense when necessary for families and firms, to borrow. It can make sense for the government in 

a decent economic time to have a modest amount of borrowing. 

But the exception is recessions. In recessions, since families can’t 

spend more, and states have to balance their budgets, if the Federal Government had to balance its budget during a recession, it 

would actually make recessions much more likely to turn into depressions. 

The current deficit that we are running this fiscal year is not a 

problem, it’s not bad economics. Were we to run that same level of 

deficit in a non-recession year, that would be terrible economics. 

So we do have to distinguish, based on the economic cycle. 

Mr. TIBERI. Thank you. 

Mr. BURMAN. Yeah. Thank you. I’d just like to make a brief 

comment, which is that the right level of spending is really for 

Congress to determine. 

I think a big problem is that for a long time, there’s been a complete disconnect between taxes and spending, so that basically 

spending seems like it’s free. And people’s taxes don’t go up, you 

know. Spending is certainly not a recent phenomena. 

President Bush said the problem wasn’t taxes, but it was spending. But he also enacted the largest new entitlement program since 

Medicare. And in the Clinton Administration, there was a tax increase that was paired with credible reductions in the growth of 

spending. And I think that was a significant factor in eliminating 

deficits at the end of the 1990s. 

So I think during normal times, setting things up so you’re actually raising enough revenues to pay for government would really 


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focus the public’s mind on whether the government is worth what 

they’re paying in taxes. 

Mr. TIBERI. Thank you. 

Chairman NEAL. Thank you, Mr. Tiberi. 

Now I’d like to recognize the gentleman from California, Mr. 

Thompson, to inquire. 

Mr. THOMPSON. Thank you, Mr. Chairman. Thanks for holding 

the hearing, and thanks to all of you for being here as witnesses 

today. 

I’d like to start with Mr. Greenstein. And by itself, I don’t think 

it’s a silver bullet; but I’d like to hear your understanding of how 

important statutory Pay-Go will help in this problem that we’re 

facing. 

As you know, it was part of how we did business in the 1990s, 

allowed to expire, and now back on the books. Do you have any insight on that? 

Mr. GREENSTEIN. I’m a strong supporter of Pay-Go. But I 

think it’s a necessary but not sufficient condition. Pay-Go—— 

Mr. THOMPSON. That was ‘‘not a silver bullet by itself’’ part? 

Mr. GREENSTEIN. Right. 

Pay-Go can be very useful in making it much more difficult for 

policy makers to take actions that dig the hole deeper. But Pay-Go 

by itself doesn’t address the hole we’re already facing. 

That’s basically the two sides of it. 

There’s a broader lesson there, I think, which is sometimes we 

look for a silver bullet, a Deus ex machine, as some kind of process 

change, that could somehow get policy makers to make decisions 

they otherwise wouldn’t make. 

That was the theory behind Gramm-Rudman-Hollings. Every effort on the books to force policy makers to take tough actions they 

don’t otherwise want to take has failed. Process there is not a substitute for actually having the will, hopefully on a bipartisan basis, 

to act. But where a process like Pay-Go can be effective, is in restraining actions that would make things worse. 

Mr. THOMPSON. Okay. I was at a briefing this morning on the 

whole fiscal problem issue. And I have a couple of charts here. And 

according to these charts, it shows that if we started to try and 

close this fiscal gap in 2020, it would require—if you look at just 

the spending cuts—a 44 percent reduction in spending; 2030 a 48 

percent reduction in spending; and 2040 a 57 percent reduction in 

our spending. 

And then the flip side of that is if you tried to do it with just 

tax increases, it would be a 52 percent tax increase in 2020, 64 in 

2030, and an 80 percent tax increase in 2040. 

And I see a couple of you nodding your head. Do you all agree 

with that assumption? 

Mr. HOLTZ-EAKIN. Our specific figures are different. But the 

trend is the same. 

Mr. THOMPSON. So it’s about—— 

Mr. HOLTZ-EAKIN. And the one thing you’re drawing from that 

is the sooner you get going, the better. 

Mr. THOMPSON. It’s pretty critical that we start now. 

Mr. GREENSTEIN. Yes. 


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Mr. THOMPSON. And Mr. Greenstein called it a hole, a fiscal 

hole that we’re in. Does that hole shallow up as TARP is paid back, 

the two wars end, the recession ends, and the Bush tax policy continues into effect next year? And can you quantify how shallow it 

gets? 

Mr. GREENSTEIN. Our projections assume all those things 

occur, and we assume that Iraq and Afghanistan phased down, 

that TARP winds down, I think our projections assumed all the 

Bush tax cuts were continued. So it would be a little less bad if 

those above $250—— 

Mr. THOMPSON. No, his tax policy was they go back, they revert after whatever the year is. 

Mr. GREENSTEIN. Yeah, our projection assumed they continued. And that AMT relief continued and the SGR relief continued, 

and the like. And when you make all those assumptions, you get 

debt-to-GDP ratio as somewhere around 300 percent or more by 

2050, deficits of 20 percent or higher of GDP by 2050. And so forth. 

Mr. THOMPSON. Okay. Mr. Holtz-Eakin, you had mentioned 

that a lot of this problem is driven by spending. And do you include 

tax expenditures as part of that spending problem? 

Mr. HOLTZ-EAKIN. I certainly concur that lots of these refundable credits are really just outlays and disguised spending in the 

Tax Code. 

I think it would be a very desirable thing for the Congress to 

change its budgetary treatment of refundable tax credits, so that 

every dollar was treated as—— 

Mr. THOMPSON. Well, not just refundable tax credits, but just 

tax expenditures in general. 

Mr. HOLTZ-EAKIN. And there are tax expenditures as well. You 

know, the most prominent are tax expenditures toward housing 

and health insurance, which are big consumption items for the 

American public. 

And as I laid out in my written testimony, I think moving toward 

a consumption-based system with a broader base and lower rates 

would be an enormous step forward for this country. 

We’re going to need every bit of growth that this economy generate, to even come close to meeting our promise of leaving the 

next generation a standard of living that’s comparable to the one 

we inherited. 

Mr. THOMPSON. Thank you. 

Chairman NEAL. The Chair would recognize the gentleman from 

Oregon, Mr. Blumenauer, to inquire. 

Mr. BLUMENAUER. Thank you Mr. Chairman. And we always 

say that we thank the Chair for this important hearing. I mean, 

that’s almost a reflex. 

But really, I think this hearing, I would love to force every Member of Congress to just take a few minutes, look at this outstanding 

testimony. There are some areas of difference in emphasis. But I 

think the main thrust is something that we ignore at our peril. 

And I am hopeful that there is some way that we can work to 

help identify the scale of the problem, because there appears to be 

almost no disagreement. A minor adjustment here or there. But 

given the route that we’re on, it’s rounding error. 


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The clarity about the need to have a combined program of adjustment to the way that government operates, level of service—I 

would put in operations as well in that—and revenue increases, 

that you just simply can’t go one way or another, I think you make 

a very compelling case. 

Actually what you are saying is scary to the politician, because 

it’s very easy for some to embrace the notion that it can all be adjusted through draconian spending cuts, which will never happen. 

But they feel better doing it, and it excites some people to hear 

that. 

We had a bunch of people here on Capitol Hill recently, who 

were, you know, battling between small government and no government. But that’s not where the American people are. 

The flip side is this notion that somehow this is going to be accomplished merely by taxing one percent of the population or two 

percent of the population, or five percent of the population is likewise a fantasy. 

And the way that you described both that it has to broaden and 

that it has to be balanced, I think is I find it compelling. I agree, 

and I just wish there was some way that this would be sort of in 

everybody on the plane when they fly home, that they’d have to 

look at for—well, for some of you, that’s not very long, but for— 

yeah, okay (laughing). Well, you’re a quick reader, Richie. 

And the final piece that just is so compelling is that we’ve got 

to do this in the context of reform. And I personally am intrigued 

with looking at some variation of consumption, value added. I 

mean, that’s another thing that distinguishes us from all these 

other countries. 

They have a system that is a little more efficient. It’s broaderbased. It’s not subject to the tax in political engineering that we 

have in this country, it appears to me. 

But there’s one area that I would like to just inquire a little bit. 

It hasn’t been mentioned. And I see it as a way, perhaps of getting 

into them. And part of it is, I think any four members of this Committee locked in a room for 30 minutes would come up with three 

scenarios of what we are going to do some time to Social Security 

over the next ten years. 

It’s just a question of whether we do it now or later. I mean, 

there’s not that much adjustment. We’re going to get there. And I 

hope that we don’t abandon the ability of our using it as a path 

to the future to have a rational conversation about the balance between revenue and spending. 

But I am also intrigued by the utilization of user fees to be able 

to finance a huge deficit that we’ve got now with our physical infrastructure. Transportation, water, superfund. I mean, there are opportunities to have user fees that are related to beneficial use; 

they’re related to ability to pay. They actually have broad support 

from the business community and organized labor and local government and academics. 

Would any of you care to speculate about the role that that 

might have in balancing the scale and providing critical services? 

Mr. HOLTZ-EAKIN. I’d like to say something about both of those 

issues, actually. 


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On the infrastructure, I commend to you the report of a bipartisan private-sector commission that I served on, the National 

Transportation Policy Project. 

Mr. THOMPSON. Yep. 

Mr. HOLTZ-EAKIN. It weighs out very clearly the needs we 

have for quality infrastructure, their importance to economic 

growth; lays out how important it is for members to define the federal role. What is the genuinely federal role in infrastructure and 

serve that role well? 

Using user fees, so we get efficient use of the infrastructure and 

a funding mechanism for maintenance and repair. 

So I think that’s a very important thing to do. And to be done 

effectively, the kinds of programs we have at the federal level for 

funding infrastructure raise the money poorly, spend it worse. And 

we have to do a lot better. 

On Social Security, it is imperative to get going. And this is why. 

I’m 52 years old, I’m the trailing edge of the baby boom generation. 

The tradition in Social Security has been to exclude those in retirement that’s appropriate and those near retirement, who have been 

making plans. And the industry standard has been anyone 55 or 

older who’s not going to be subject to a reform. 

That means you have three years to get Doug Holtz-Eakin. And 

if you don’t get Doug Holtz-Eakin, you’ve grandfather the baby 

boom. And if you’ve grandfather the baby boom, you’ve grandfather 

the problem. 

Get to work. 

Mr. GREENSTEIN. Could I add two quick points to that? 

I think the user fees are a good idea and are a welcome part. 

One shouldn’t overstate how much of the big long-term problem 

user fees could close. They could be a significant contributor, but 

it would be modest in the scale of the overall budget hole. 

The other point relates to Social Security and to Mr. Thompson’s 

question about needing to get going sooner rather than later. We 

do need to recognize that while we need to close the Social Security 

gap and while the most important thing we need to do is to slow 

the rate of growth of health care costs, we’re not going to get big 

savings in those areas over the next ten years. 

If we acted tomorrow on Social Security, we would phase in any 

benefit changes over a long period of time. The 1983 Greenspan 

Commission started to raise the retirement age in 2000. The 1983 

increase in the retirement age isn’t fully in place until 2022. 

And look, there’s nobody calling for repealing it. That was part 

of the magic of getting public acceptance for it. And in the health 

care area, we don’t know enough yet about all the things we’ll ultimately need to do. 

So in the long run, health care needs to be the biggest contributor. But over the next ten years, if you’re going to get the deficit 

down to 3 percent of GDP, frankly revenues will probably have to 

be the majority of that, or you’re not going to get there. 

Over the longer term, the Social Security savings will get larger 

and phase in, and the health care savings need to get much larger. 

But that will take a few decades. 


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Mr. BLUMENAUER. To the chairman’s credit, we have had 

hearings before this Subcommittee, of the two national commissions. And I commend you for your work, and it’s very helpful. 

I guess, Mr. Chairman, if I could just close in 20 seconds? 

Chairman NEAL. Okay. 

Mr. BLUMENAUER. I don’t see the infrastructure user fees as 

making a huge difference. I see it, though, being first of all, because of our inequities in transportation funding and the deficit, 

we’re not subsidizing it with general fund, where we never did before. And it’s going to get worse, if we don’t do something. 

But I see it as a way to sort of break the mind set to get started 

along some of these readjustments. And maybe if we prove to ourselves that we can do this with popular support, we might be able 

to move forward. 

Thank you. Thank you, Mr. Chairman. 

Chairman NEAL. Thank you, Mr. Blumenauer. The Chair would 

recognize Mr. Yarmuth, the gentleman from Kentucky, to inquire. 

Mr. YARMUTH. Thank you, Mr. Chairman. And I’d like to associate myself with the remarks of Mr. Blumenauer virtually in their 

entirety. 

I have one kind of supposition on the issue of family conduct 

versus the Federal Government’s conduct. And I’ll throw it out to 

see if anyone has a different perspective. It seems to me that when 

you’re in a family setting, you have much greater control over the 

influences on your personal situation than the federal budget does 

and the Federal Government does. 

You can insure against unforeseeable circumstances, you can insure against storms or fires. You can quickly cut your expenditures, 

you have some control of how much money you can earn, you can 

take a second job. 

The government can’t necessarily control for a lot of circumstances that affect their expenditures: wars, natural disasters, 

recessions, those types of things. 

So I’m not sure it really is important, but it’s more of a rhetorical 

comment than something that’s useful in deciding what we do with 

this very serious real problem. 

Is that a fair assessment? Or can somebody—yes, Mr. HoltzEakin? 

Mr. HOLTZ-EAKIN. I think the important thing to recognize is 

that whether you believe it should add up every year, or whether 

you believe it should add up on average, which is I think what Bob 

would say—you can let the government run deficits at certain 

points in time—this country’s federal budget doesn’t add up at all, 

over any horizon. 

And in the process, we are borrowing that money largely from 

those overseas, who do not share our values. And we are giving up 

a control that we should not cede, and are creating a danger for 

ourselves in the process. 

That’s the key issue. 

Mr. BURMAN. States that need to balance their budgets actually 

do have rainy day funds that are supposed to be there for when, 

say there’s a recession and there’s a big reduction in tax revenues. 

They don’t manage them very well. 


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But there’s like this temptation to spend the money in the fund 

seems to be almost irresistible. But it actually would make sense 

to budget certainly for emergencies, because they happen. There’s 

bad weather, there’s other things. 

And certainly it would make sense to budget for the commitments, and actually set aside savings for the commitments that we 

know we’re going to have to meet down the road. But actually even 

if we could just balance the budget on average over the cycle, that 

would be a huge improvement over what we’re doing now. 

Mr. GREENSTEIN. I’m going to now disagree a little bit with 

each of my two panelists on the answers they gave you. 

There’s a recent article by Greg McCue, who was a conservative 

economist at Harvard, who was a chair of the Council of Economist 

Advisors for President George W. Bush. And McCue said, it is not 

necessary to balance the budget; but if you run deficits, they have 

to be modest enough that the debt doesn’t grow faster than the 

economy. 

So depending on exactly where you stabilize the debt, you can 

run deficits, on average, of about 2 percent to 3 percent of GDP. 

Our problem is not that our long-term fiscal path doesn’t reach 

budget balance. Our problem is that under our long-term fiscal 

path, even after this recession is over, deficits never get below 4 

percent of GDP, and then they shoot back up. 

If we were really able to get them down to 3 percent and hold 

them there, then we would stabilize the debt at its current share 

of the economy, and we wouldn’t have a huge problem. 

The only addendum to what Len was saying is actually our Center campaigns for states to do bigger, better-managed rainy day 

funds. States actually went into this downturn with rainy day 

funds that on average exceeded ten percent of their operating budgets, the biggest in recent record. 

But state revenues have fallen so dramatically in this downturn, 

that they wiped out rainy day funds that would have been adequate for a recession of the 2001 variety, but not adequate for the 

current one. 

Mr. YARMUTH. Right. I want to ask a question quickly before 

my time’s up. One of the things we hear constantly, whether it was 

in the context of health care debate, or whenever we’re talking 

about increasing marginal tax rates or whatever, is the impact on 

small business owners and the impact on entrepreneurial initiative, and so forth. 

Is there any reliable data? I was a small business person. I have 

two brothers who run businesses. My father was a very successful 

business person. And not one of them ever did anything because of 

marginal tax rates. 

So my question is, is there any reliable data out there, or research out there, that would establish one perspective or another 

on the impact on business behavior or business people’s behavior, 

related to tax rates? 

Mr. HOLTZ-EAKIN. Let me give you a self-promotional answer, 

which is I’ve written a number of articles with a variety of co-authors: Harvey Rosen, Bob Carroll, and others, which attempt to 

look at the influence of taxes, health care, and other policies on the 

start-up, the expansion, the survival of small and entrepreneurial 


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businesses. And we find substantial impacts of marginal tax rates 

on all of the decisions except the decision to start up. 

So how fast you grow, how many people you hire, how much investment you make, how long you survive appear to be heavily influenced by those kinds of things. 

The difficulty with any such research is, we don’t get data from 

the IRS, with labels that say ‘‘Entrepreneur Not.’’ 

Mr. YARMUTH. Mm-hmm. 

Mr. HOLTZ-EAKIN. We have to sort of make some rough justice 

calculations on who we want to call that. But I think there’s a very 

good case to be made that we should be respectful of this traditional source of advantage that the U.S. has in devising all of our 

policies, tax and otherwise. 

Mr. Burman. And most small businesses are actually fairly lightly taxed. Most of them have fairly modest incomes. And actually 

they’ve gotten tax cuts over the last ten years. Most of them were 

not subject to the estate tax either. 

And there is some evidence that suggest that other things the 

Federal Government has much more of an impact on small businesses than taxes. Like, for example, procurement rules for the 

Pentagon and regulations. 

And actually the recently passed health insurance reform I think 

could have a huge effect on small business, primarily by actually 

making health insurance a lot less expensive than it has been before, and allowing them to compete in terms of hiring workers with 

large firms, that have always had a huge advantage in terms of 

buying insurance. 

Mr. Greenstein. And I’ll just add, I haven’t looked at this in 

about a year or so. But the last time we looked, something like 

seven times as many small business proprietors got the earned income tax credit, as paid the top income tax rate? 

Most small business proprietors don’t make half a million or a 

million a year. 

Thank you. 

Chairman NEAL. Thank you, gentlemen. 

The Chair will recognize Mr. Heller, the gentleman from Nevada, 

to inquire. 

Mr. HELLER. Thank you, Mr. Chairman. And thanks for putting 

this hearing together. And I want to thank the witnesses for being 

here also. I appreciate you taking time out of your busy schedule 

to spend some time with us. 

I want to talk about some tax cuts that frankly do pay for themselves. And I want to talk about the capital gains rate, and use 

some examples. 

And going back to 2003, we had a tax rate which was lowered 

from 20 percent to 15 percent in our capital gains. The year before 

we had $50 billion in revenue. The year that the cut was actually 

put into place we increased our capital gains revenues by $2 billion, the next year by $25 billion, and then another $25 billion in 

2005. 

The same occurred back in 1997. We had a tax rate lowered from 

28 percent to 20 percent. That was in 1997. In 1996, our revenue 

was $66 billion. After the tax cut it was $80 billion. Went up to 

$89 billion the next year, and $111 billion the year after that. 


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So there are some tax cuts that do pay for themselves. I guess 

my question is, do you—I guess, Mr. Holtz-Eakin, what would you 

believe would be the impact of zeroing out the capital gains tax? 

Mr. HOLTZ-EAKIN. I’m all in favor of that. Indeed, in my written testimony, I favor a zero tax rate on all return to capital. Dividends, interest, capital gains. It is counterproductive to attempt to 

tax them in the modern global financial network we live in. 

So I believe there is a much better collection system that can 

meet the standards of fairness and progressiveness that everyone 

desires, but meet our standards for economic growth. And I’d be all 

for that. 

The issue about the budget, it’s not that you can’t find a couple 

of years where your cut rates and revenues go up thereafter. I 

would never dispute that. 

I think that way of framing the problem makes two mistakes. 

The first is, you want to set in place a Tax Code, which is stable 

for the long term, and so it’s sort of the long-term revenue generation that I care about. 

And number two, that makes it sound like taxes are somehow 

about balancing the budget. I want a tax policy that supports economic growth, and interferes as little as possible with the private 

sector, while paying the nation’s bills. 

I mean, those should be the standards by which we conduct these 

things. 

Mr. HELLER. Are you familiar—and my colleague, Mr. Linder, 

brought this to our attention—the Howser Law talks about the federal tax revenue and the marginal tax rates between 1950 and 

2007. And it talks about the top individual tax brackets as early 

as 1950, which was nearly 90 percent, and brings it all the way 

down into back in the 1970’s, where it was about 70 percent. Of 

course the Reagan tax cuts came in to about where we are today, 

at nearly 40 percent. 

And yet, the revenues as a percentage of the GDP, has stayed 

constant. Can you explain that? 

Mr. HOLTZ-EAKIN. I won’t attempt a complete explanation of 

Mr. Howser’s finding. But I’ll make the following observation. 

Which is, a lot of people have noted that we’ve raised the same 

amount of revenue on average for the federal budget. 

But the way we raise it matters. We had very high marginal tax 

rates in the 1970s, we had terrible economic performance. We 

might have raised the same fraction of GDP in revenues, but we 

didn’t do very well. 

We got marginal rates down, we broadened the base, we had a 

system that supported much stronger economic growth, survived 

through the 1980s and 1990s. I think we ought to set that as the 

standard for the way we raise taxes in the United States. 

Mr. HELLER. Thank you. I yield back, Mr. Chairman. 

Chairman NEAL. The Chair would recognize the gentleman from 

Illinois, Mr. Roskam to inquire. 

Mr. ROSKAM. Thank you, Mr. Chairman. Earlier, Mr. Greenstein and Mr. Holtz-Eakin expressed sort of different opinions— 

surprise, surprise—about worldwide tax treatment of American corporations or worldwide American corporations. And Mr. Tiberi and 


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I have spent a lot of time talking with a lot of folks around town 

and also back in our districts on this issue. 

And obviously it became a big issue with the President identifying that as a pay-for for health care. It was passed over this time, 

but clearly it’s back into the mix. 

Mr. HOLTZ-EAKIN, could you give a sense of perspective about 

the tax consequences, sort of the business activity consequences of 

taking this up, this sort of tax treatment, and put it in a little bit 

of a context for us? 

Mr. HOLTZ-EAKIN. Well, I think this is an important issue that 

this Committee is doomed to spend a lot of time on going forward. 

It will be the case, necessarily, that we will have to rely more on 

exports as a source of our economic vitality going forward. As a result, we are going to have to think about all policies through the 

lens of international competitiveness. 

Our tax system is one of those things. We do have the only tax 

system left, which attempts to tax on worldwide income instead of 

just on the income earned in the United States on a territorial 

basis. 

This puts us at a big disadvantage when firms choose where to 

place their headquarters. And we’ve seen, for example, AnheuserBusch becoming a subsidiary of InBev. And many other tax-related 

transactions of that type are coming. 

I think that’s a very bad thing, because the evidence suggests 

that once you lose the headquarters, you then quickly lose the research and development, and then the manufacturing. 

This is one of the reasons that this becomes increasingly clear 

that the real burden of the corporation income tax is falling on 

American workers. 

When I was at CBO, we did a study that showed that of every 

dollar in corporation income taxes that are paid, 70 cents comes in 

the form of lower wages and benefits for workers. 

I don’t see why we would want to have a tax system that systematically harms our workers and impedes their ability to sell around 

the globe. I think it’s a big issue for this Committee. 

Mr. ROSKAM. Mr. Greenstein, I wrote it down, and it’s a paraphrase. I don’t think you’d object to my paraphrase that your arguing the actual U.S. corporate tax rate is comparatively low, or more 

competitive than people like Mr. Holtz-Eakin would represent. 

Give it your best pitch. I just remain so incredibly unconvinced. 

But it’s my time, let’s use it. Give me your best pitch on why 

that’s—— 

Mr. Greenstein. You—— 

Mr. ROSKAM. I’m not hearing it from anybody else. 

Mr. GREENSTEIN. Okay. I actually think I may not have expressed it clearly in summarizing my testimony in five minutes. 

But your paraphrase really isn’t exactly what I’m saying. 

Mr. ROSKAM. Okay. Fair enough. What is it? 

Mr. GREENSTEIN. I would very much agree—I doubt that many 

people would disagree—that the current structure of the U.S. corporate income tax poses competitiveness problems. 

What I was saying is that the problem does not come from the 

total amount, the total dollars in corporate tax income we collect. 

We actually collect as a share of—this is the Bush Treasury DeVerDate Nov 24 2008 19:38 Jul 21, 2011 Jkt 063076 PO 00000 Frm 00162 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63076.XXX 63076

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partment study, I have it in my hand—it tells you that from 2000 

to 2005, the United States U.S. corporations paid an average of 

13.4 percent of their profits in the corporate income tax, and the 

OECD average was 16.1 percent. 

That’s not uncompetitive. The competitiveness problem comes 

from the wild inefficiency of the structure of our corporate income 

tax today. We have a high marginal rate. The code is shot through 

with all sorts of special preferences. 

You have some groups of corporations that pay high average effective corporate tax rates. You have certain kinds of corporations 

that pay close to negative corporate tax rates. We have inefficiencies across boundary countries. We have inefficiencies between different kinds of industries. In the U.S. you have inefficiencies compared to whether you debt finance your business or you save up the 

money and don’t borrow. 

The point that I was trying to make is that we could do major 

corporate tax reform, greatly address a number of these competitiveness and inefficiency problems, and actually take in somewhat 

more revenue at the same time, and be more competitive and economically efficient. 

I was not—— 

Mr. ROSKAM. I got it—— 

Mr. GREENSTEIN. Defending the current structure. 

Mr. ROSKAM. Fair enough. Which is why I didn’t interrupt you. 

So would you agree with the premise, would you accept the 

premise that if worldwide American corporations were paying more 

in taxes than their international competitors, that the net loser in 

that equation would be American workers? 

Mr. GREESTEIN. Actually, one of the first things I would do 

when asked that question, seriously, because I’m getting beyond 

my expertise, would be to ask somebody like Len Burman that 

question. 

And the question I would want to know, clearly, if you were asking corporations to pay dramatically more as a share of profits than 

corporations in other countries, you would probably be harming 

workers and investors both. 

The thing I’m less clear about is if the differences were small—— 

Mr. ROSKAM. I understand—— 

Mr. GREESTEIN. Would the impacts be very noticeable? 

Mr. ROSKAM. I understand. You know what? I’m out of time. I 

don’t want to abuse the time. But I’m happy to—— 

Chairman NEAL. I—— 

Mr. ROSKAM. You’re dying for the answer, aren’t you? 

Chairman NEAL. I’d like to hear what Burman’s got to say. Once 

he moved into Burman, I said ‘‘We’re on.’’ 

Mr. BURMAN. Thank you, Mr. Chairman. Thank you, Mr. 

Roskam. 

You know, the research on the incidence of the corporate taxes 

is all over the map. For a long time, the economists believed that 

most of the incidents fell on capital, that is, investors were the ones 

that paid the tax. 

Different models can produce different results. Even the study 

that was produced in Doug’s CBO, which was an excellent study, 


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said that the results depended a lot on assumptions about parameters, which was a huge amount of uncertainty. 

So it could be that a smaller share of the tax is borne by workers. 

The ideal tax system would be one where the corporate tax was 

basically just a withholding tax, and that ultimately the tax would 

be paid by shareholders. So at least if you have an income tax, 

Doug would say you shouldn’t tax savings at all. 

The reason you need a corporate tax primarily is because if corporations were untaxed, they would become a tremendous tax shelter. People would hide their income in corporations and use it as 

a way to avoid tax for a long period of time, including tax on labor 

income. 

The same kind of problem occurs with capital gains. If you had 

a zero capital gains tax rate it would open the flood gates for tax 

avoidance by most high-income people. And in fact, that happens 

even now with the 15 percent rate. 

So if you want to tax capital income—and we can talk about 

whether you want to do that or not—the issue is as in a lot of 

cases, it’s between fairness and economic efficiency. But if you want 

to tax capital income, you can’t have exemptions for particular 

forms of income. Otherwise, you have a huge incentive to convert 

whatever’s highly taxed and what’s taxed less. 

And you know, whatever else you think the tax system ought to 

look like, that’s completely wasteful. You have people whose whole 

occupation is figuring out ways to avoid tax for high-income people. 

And they’re smart people. They could actually be doing something 

productive otherwise. 

Mr. ROSKAM. And then just to yield back in just a second. 

Mr. BURMAN. Sure. 

Mr. ROSKAM. You know, it seems like you’re arguing a truism 

in a way, that the tax policy has consequences in real economic life. 

And that’s interesting, but it’s not revelatory. 

Mr. BURMAN. But it’s actually relevant that if you want to tax 

income, and you want to try to tax different forms of income the 

same, so that you’re not creating these opportunities for shifting 

from one form to another. 

Mr. ROSKAM. Right. Thank you. 

Chairman NEAL. I thank the gentleman. 

I think we can get the questioning in here. We have two panelists, who would still like to inquire, and the Chair would recognize 

the gentleman from New York, Mr. Crowley, to inquire. 

Mr. CROWLEY. Thank you, Mr. Chairman. There’s general 

agreement that the nation’s deficits are too large. I say generally, 

not universally but general agreement. 

[Buzzer goes off.] 

Mr. CROWLEY. And they’re off. I believe, as many of my colleagues, I think on both sides of the aisle agree, that we need to 

address this issue, both for now and for the long term. 

But we need to make sure that we know all the facts and that 

they’re in place. When President George W. Bush became President, with strong majorities of his party in the Congress, the federal debt stood at $5.7 trillion and the U.S.A. enjoyed annual budget surpluses. 


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Eight years later, when George W. Bush left office and the overall majority of his term being served by a Republican Congress, the 

nation’s debt stood at over $10.6 trillion, a $5 trillion increase over 

that time. 

China became our nation’s biggest lender, and the nation was 

running trillion-dollar annual deficits, thanks in part to a $700-billion kiss to the nation’s banks from the Republican party and 

President Bush. 

Those are facts. Now in the past two years the debt has increased another $2 trillion, with most of that being dedicated to 

fighting the recession. But to insure that we reigned in our nation’s 

debt and end the Republican policies of borrow and spend, this caucus, the Democratic caucus, passed and President Obama signed 

into law Pay-Go, or pay-as-you-go budgeting legislation, which 

means that all new spending or tax cuts must be fully offset or 

paid for, so that it does not add to our nation’s deficit. 

Essentially this acts as a giant check on the spending and borrowing power of Congress. It worked in the 1990s and I believe it 

will work again. 

Democrats have ended the days of credit card living in Washington. Congress is starting to manage the Federal Government 

like the way our constituents manage their own household expenses. 

Republicans who cry about deficit spending, oppose this measure 

and oppose common sense solutions to address our nation’s deficit. 

Republicans have also opposed common-sense tax loopholes closures, like allowing rich Americans to avoid taxes by hiding their 

income in Swiss bank accounts without punishment. 

Now maybe I shouldn’t say that these are all rich Americans. 

But I know there aren’t too many people in my district in Queens 

and the Bronx with Swiss bank accounts. 

Now Republicans will oppose legislation to close tax loopholes 

that allow foreign companies to avoid paying U.S. taxes, giving 

them an unfair competitive advantage over U.S. companies. 

I think we should be putting Americans and America’s workers 

first. And I wish my Republican colleagues would join me in that 

thinking. 

These are near-term ways to address our nation’s debt. In the 

long term, the President has just signed legislation this afternoon 

to provide near universal health care through the free market to 

all Americans, and this bill will save Americans $1.3 trillion over 

the next 20 years, according to the CBO. Now this is the non-partisan reliable Congressional Budget Office. 

Mr. Holtz-Eakin, do you trust the number crunchers at the Congressional Budget Office? Yes or no? 

Mr. HOLTZ-EAKIN. Yes, I do. 

Mr. CROWLEY. You do. I thank you for agreeing that those 

numbers are accurate. 

Mr. HOLTZ-EAKIN. No, I did not say that. 

Mr. CROWLEY. But you trust them? 

Mr. HOLTZ-EAKIN. I trust the number crunchers, but not the 

numbers. 


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Mr. CROWLEY. You trust the number crunchers, but so the determinations which come out there, their analyzing of the facts are 

inaccurate? You said one or the other. 

Mr. HOLTZ-EAKIN. They are, by law, required to analyze the 

proposals as written by the Congress. And if the Congress leaves 

things out, as this Congress did, they don’t price them. If this Congress makes assumptions that I believe to be politically unrealistic, 

they can’t make that judgment. I couldn’t when I was at CBO, and 

did not. It’s not their role. 

And so I think there’s a distinction between trusting the number 

crunchers and believing the projections that come out. 

Mr. CROWLEY. Well, according to the CBO, the number 

crunchers that you trust, the CBO has stated that the bill that was 

just signed into law today will save the American taxpayer $1.3 

trillion in future debt. The only people that I think who would object to that would be the Chinese bankers, who have thrived during 

the eight years of Republican controlled Congress here in the 

House and Senate, and that presidency. 

The expected deficit for the Fiscal Year 2010 for the U.S.A. is 

$1.3 trillion. The total amount of discretionary funding passed by 

Congress for 2010 is: Non-defence $670 billion, defense $556 billion, for a total discretionary spending of $1.2 trillion. 

So if the government stopped all food safety inspection, stopped 

patrolling the borders, ended homeland security protection, closed 

down the national parks, completely defunded the military, and 

stopped funding for all transportation projects for the entire year, 

we would not close the deficit. We would still have a deficit. 

This shows that spending is only a small part of the problem. So 

it’s factually wrong to say it is spending alone that is causing our 

debts. 

And I see my time has run out. I want to give my colleague an 

opportunity to ask a question as well. With that, I’ll yield back the 

balance of my time. 

Chairman NEAL. I thank you, gentlemen. The Chair would recognize the gentleman from Texas, Mr. Doggett, to inquire. 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you, Mr. 

Crowley. 

I’m interested in the testimony concerning tax expenditures. 

While I think we may bring different perspectives or reasoning, 

that there is a growing point of view ranging across philosophical 

lines that the complexity of our Tax Code, and our use of the Tax 

Code for what is really expenditure purposes needs to get further 

review. 

I gather, Mr. Holtz-Eakin, that you agree we need to focus attention on the deductions, the credits, the preferences that are in our 

Tax Code, that amount to a form of expenditure, in the same manner that we focus on direct expenditures. 

Mr. HOLTZ-EAKIN. Oh, yeah. Let me take this opportunity to 

agree with both Len and Bob Greenstein on something. Len and I 

would disagree on the ideal tax system, but many of the tax expenditures would be the same problem in both our systems. 

Mr. DOGGETT. Right. 


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Mr. HOLTZ-EAKIN. So we’d agree on things we needed to close, 

especially consumption items that are being favored. And I agree 

with Bob a lot about difficulties in the corporation income tax. 

The biggest obstacle to serious tax reform will be the business 

community, because they always hate having their own rifle shop’s 

preferences taken away; but it really needs to get done. 

Mr. DOGGETT. Thank you very much. And with that in mind, 

though not targeting any particular tax provision, I included in the 

version of the extender’s legislation that passed the House in a December, a study—and I think you made reference to that—so that 

we would at least begin an evaluation process of the extender provisions that you’re always at work on that, Mr. Barthold? 

Mr. BARTHOLD. We’re trying, Mr. Doggett. The Congress has 

kept us pretty busy on some other issues. 

[Laughter.] 

Mr. DOGGETT. I know we have—— 

Mr. BARTHOLD. But I will say that yes, we are at work. 

Mr. DOGGETT. But I gather all of you also agree that we need 

to be in the extender, since they come up every year or every couple of years, that we need some systematic evaluation of those and 

what purposes they accomplish, in much the same way we would 

hope we get for direct expenditures. 

Mr. Burman. Yeah. And I would actually apply the same scrutiny to programs that don’t come up for extension every few years. 

Mr. DOGGETT. That’s the next step. 

Mr. BURMAN. Yeah. 

Mr. DOGGETT. Is to try to see it applied more broadly. Because 

these tax expenditures—and you mentioned the low-income housing tax credit—I authored the higher education tax credit, about 

$13 billion worth, in the stimulus. But it seems to be we need to 

be looking at how effective that is as a mechanism versus some of 

the direct expenditure programs in determining what the benefits 

are, though one’s through the Tax Code, and one’s through the appropriations bill. 

Mr. BURMAN. I think you know this. But I mean, the extender 

exercise itself is very revealing of the problems we’re facing. 

You think of the research and development tax credit. It makes 

no sense from an economics point of view to have this extended 

year by year by year. We can’t do a long-range research and plan 

in the presence of that. It’s being done strictly for budgetary reasons. 

So it is time to be honest about what we’re spending and finance 

it, and put in place something that is a long-run incentive to do the 

kinds of innovations we need in the United States. 

Mr. DOGGETT. As well as specifically on that, the report of the 

Government Accountability Office to really look at credits like that, 

to see if they are serving their purpose, and are spurring research, 

or simply rewarding conduct that would have happened anyway. 

Mr. GREENSTEIN. Let me say, there are two additional issues. 

I don’t have the answer to the question I’m about to raise of precisely what we should do; but I think we need to think about some 

different kind of or additional kind of budgetary presentation on 

tax expenditures. 


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Actually, Doug referred to refundable tax credits before. They are 

the ones that do get the most attention now. All of the refundable 

part of the refundable tax credits show up in the budget as outlays, 

not as revenue reductions. 

But all the other tax expenditures that show up as revenue reductions, they all just get buried in this overall 18 percent of GDP, 

or whatever it is the current figure is, you know, for revenue collections. 

And if we could somehow break them out and highlight, whether 

we call them outlays—maybe we make up a different term, because 

they’re not precisely the same—but something that highlights how 

they’re different from other parts of the Tax Code. 

You know, I don’t think many people understand we have subsidies in spending and we have subsidies in the Tax Code. 

So that child care program for low and moderate income families, 

the block grant. So that’s just—that’s government spending, that’s 

big government. But for middle and upper income families, we give 

them a child care subsidy too. We do it through a tax break, a tax 

credit. And that sort of is, oh that’s good, because that’s a reduction 

in taxes owed. 

And we need some kind of leveler playing field, where subsidies 

are viewed as subsidies, whether they’re on the spending or the tax 

side of the budget. 

Mr. DOGGETT. Thank you, Mr. Chairman. Thanks to each of 

you. 

Chairman NEAL. I thank the gentlemen. 

I want to thank our panelists today for their testimony on this 

important subject. You may receive some written follow-up questions from members, and I hope you will respond promptly, so that 

we might include those responses in the record. And personally, I 

want to say thank you. This was very helpful, very considerate. 

Thank you. 

This meeting stands adjourned. 

[Whereupon, at 4:08 p.m., the Subcommittee was adjourned.] 

Æ 


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