```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
  PRESIDENT'S FISCAL YEAR 2003 BUDGET WITH TREASURY SECRETARY O'NEILL
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                            FEBRUARY 5, 2002
                               __________

                           Serial No. 107-54
                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
79-512                       WASHINGTON : 2002
________________________________________________________________________
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

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.

                            C O N T E N T S

                               Page______
Advisory of January 29, 2002, announcing the hearing.............     2

                                WITNESS

U.S. Department of the Treasury, Hon. Paul O'Neill, Secretary....    11

                       SUBMISSION FOR THE RECORD

National Society of Accountants, Alexandria, VA, statement.......    76

  PRESIDENT'S FISCAL YEAR 2003 BUDGET WITH TREASURY SECRETARY O'NEILL

                              ----------                              

                       TUESDAY, FEBRUARY 5, 2002

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:08 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

January 29, 2002

No. FC-10

             Thomas Announces a Hearing on the President's

                      Fiscal Year 2003 Budget with

                       Treasury Secretary O'Neill

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's fiscal year 2003 budget proposals within the 
jurisdiction of the Committee. The hearing will take place on Tuesday, 
February 5, 2002, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable Paul O'Neill, 
Secretary, U.S. Department of the Treasury. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      

BACKGROUND:

      
    On January 29, 2002, President George W. Bush will deliver his 
State of the Union address, in which he is expected to outline numerous 
budget and tax proposals. The details of these proposals are expected 
to be released on February 4, 2002, when the President is scheduled to 
submit his fiscal year 2003 budget to the Congress. In recent weeks, 
the President has reaffirmed his commitment to returning our economy to 
prosperity as soon as possible by offering tax relief that will promote 
economic growth. The President's proposals include accelerated 
depreciation of investment, reduction of marginal tax rates, reform of 
the corporate alternative minimum tax, and tax credits for individual 
health insurance.
    In announcing the hearing, Chairman Thomas stated, ``The President 
has advanced several important proposals within the jurisdiction of the 
Committee on Ways and Means such as on economic stimulus and tax 
credits that expand health insurance coverage. I look forward to 
receiving the President's budget and discussing his proposals with 
Secretary O'Neill.''
      

FOCUS OF THE HEARING:

      
    The Committee will receive testimony on the President's fiscal year 
2003 budget proposals from Secretary O'Neill. The Secretary is expected 
to discuss the details of the President's proposals that are within the 
Committee's jurisdiction.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
``[email protected],'' along with a fax copy to 
202/225-2610 by the close of business, Tuesday, February 19, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the full Committee in room 1102 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse unopened and 
unsearchable deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit 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. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
``[email protected],'' along with a fax copy to 
202/225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely 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. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov/.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Thomas. Good morning. And welcome back, everyone. 
I do want to indicate that, not with us, Clay Shaw, who is not 
going to be with us for a portion of time because of a medical 
reasons in the family. Paul Ryan is not with us because he and 
his wife Janna had a baby girl, Elizabeth Ann, born on 02/02/
02, which that he quite properly is there instead of here. So 
if any of you were concerned about Paul Ryan's priorities, I 
believe he is a dedicated Member, but he is a dedicated father 
more.
    The President's fiscal year 2003 budget plan is, above all 
else, I think on target for the times we are living in. And 
because of the considerable foreign and domestic challenges 
that our Nation now faces, a wealth of unanticipated 
circumstances and fiscal demands has forced us to change our 
thinking just since September 11th. We have been attacked as a 
Nation, and I believe we must respond as a Nation. And that has 
fundamentally altered the physical landscape.
    The President's proposal is part of a strategy to protect 
our country and citizens. I think it is quite right that for 
now, it cannot be business as usual. President Bush has 
presented us with a sound fiscal blueprint, its underlying 
growth assumptions are measured and reasonable. Its fundamental 
and concise goals, win the war, protect the homeland and revive 
the economy, make sense in our current extraordinary 
circumstances. Those three factors, win the war, protect the 
homeland, revive the economy, I believe fundamentally define 
the President's 2003 budget.
    Maintaining the viability of our domestic economic life 
demands action. The President's agenda, as he said in the State 
of the Union, can be summed up with one word: jobs. The war 
against terrorism must and will shape the fiscal agenda for the 
next at least several years. Yet ensuring economic security and 
job creation matter enormously to people across this country. 
People need to know that they will have a paycheck if not now, 
soon. The President's proposals constitute a sensible fiscal 
strategy that will serve as a platform for strong and sustained 
economic growth.
    As we know, the economy has been in recession since March 
of last year. We believe now there is more good news than bad. 
Unemployment hasn't risen as much as had been feared. 
Production of durable goods, at least on the short-term 
measurables, is on the rise. Fourth quarter GDP or gross 
domestic product came in a bit stronger than expected.
    Indeed the Chairman of the Federal Reserve signaled his 
growing confidence that recovery is underway based upon 
statements that were made in front of Senate Committees last 
week.
    Those who argue that last spring's tax bill has contributed 
to the recession, in my opinion, are frankly out of touch with 
the facts. Most of that law hasn't yet kicked in. The laws of 
economics don't get repealed when disaster strikes. Cutting 
taxes still generates economic growth and raising them in a 
recession still spells trouble.
    Lower taxes don't just put money in people's pockets. They 
help fund the business investment, innovation and expansion 
that must form the backbone of a long-term economic 
revitalization. They encourage further competition and the 
return of venture capital to the marketplace.
    Against the backdrop of a recovering economy, the need for 
economic stimulus is perhaps less obvious than in the first 
months after September 11th. The House acted in October to pass 
a stimulus package, again in December in a slightly modified 
form. The Senate has yet to act. And based upon the latest 
headlines, it seems as though there may be an attempt to make 
sure that the Senate cannot complete a package which reflects 
the will of the Senate.
    It also, I don't believe, means that a stimulus package is 
no longer necessary. Part of the comments that I will direct 
toward the Secretary would be his feeling about the need for a 
stimulus package. Perhaps in October, we would have been a bit 
bolder and stronger, but even today, perhaps there may need to 
be a package.
    The aftermath of September 11th has, to a degree, shaken 
the people's confidence in their economic future. Markets are 
not yet convinced that we have the right plan. We should not be 
shy in insisting on action to ensure the durability of economic 
recovery. In the face of current danger, waiting to see what 
happens is rarely the right strategy.
    Since we were last in session, a number of events have 
occurred that I believe forces us to shape the Committee's 
hearing agenda as well as it required a reshaping of the 
President's budget. On February 13th I want to announce that we 
will be holding a hearing focusing on health insurance tax 
credits for the uninsured. And beginning on February 26th, in 
consultation with the Ranking Member, I want to schedule a 
series of hearings. This Committee, as well as other 
committees, will have responsibilities focused on the question 
of retirement security. And this Committee, as it almost always 
does, should not react to a single specific circumstance but 
rather look at the broad underlying fundamentals as to whether 
or not they need correction.
    So perhaps we could start on February 26th looking at 
defined contribution pensions, the question of individual 
retirement savings, 401(k)s and that sort. We would then move 
to a defined benefit plan hearing focusing on what are called 
in the steel industry ``legacy costs,'' as well as other 
defined benefit plans and the veracity of the system that we 
have constructed in the past to sustain those programs 
notwithstanding the failure of companies, leading to a series 
of hearings on Social Security solvency and reform for the 21st 
century.
    So we will have an aggressive agenda out in front of us 
addressing somewhat immediate concerns, but hopefully placing 
them in the context of long-term fundamental adjustments to the 
system.
    Mr. Secretary, it is a pleasure to have you with us. And 
prior to asking you to speak to us for your assigned period of 
time, the Chair would now recognize the Ranking Member, the 
gentleman from New York.
    [The opening statement of Chairman Thomas follows:]
Opening Statement of the Hon. Bill Thomas, Chairman, Committee on Ways 
     and Means, and a Representative in Congress from the State of 
                               California
    Good morning. And welcome back, everyone. The President's fiscal 
year 2003 budget plan is, above all else, on target for the times we 
are living in. And because of the considerable foreign and domestic 
challenges that our nation now faces, a wealth of unanticipated 
circumstances and fiscal demands has forced us to change our thinking 
just since September 11th. We have been attacked as a nation, and I 
believe we must respond as a nation. And that has fundamentally altered 
the fiscal landscape.
    The President's proposal is part of a strategy to protect our 
country and citizens. I think it is quite right that for now, it cannot 
be business as usual. President Bush has presented us with a sound 
fiscal blueprint. Its underlying growth assumptions are measured and 
reasonable. Its fundamental and concise goals--win the war, protect the 
homeland and revive the economy--make sense in our current 
extraordinary circumstances. Those three factors--win the war, protect 
the homeland, revive the economy--I believe fundamentally define the 
President's 2003 budget.
    Maintaining the viability of our domestic economic life demands 
action. The President's agenda, as he said in his State of the Union 
address, can be summed up with one word: jobs. The war against 
terrorism must and will shape the fiscal agenda for the next at least 
several years. Yet ensuring economic security and job creation matter 
enormously to people across this country. People need to know that they 
will have a paycheck--if not now, soon.
    The President's proposals constitute a sensible fiscal strategy 
that will serve as a platform for strong and sustained economic growth. 
As we know, the economy has been in recession since March of last year. 
We believe now there is more good news than bad. Unemployment hasn't 
risen as much as had been feared. Production of durable goods, at least 
on the short-term measurables, is on the rise. Fourth quarter GDP came 
in a bit stronger than expected. Indeed, the chairman of the Federal 
Reserve signaled his growing confidence that recovery is underway in 
his statement before a Senate committee last week.
    Those who argue that last spring's tax bill has contributed to the 
recession, in my opinion, are frankly out of touch with the facts. Most 
of that law hasn't yet kicked in. The laws of economics don't get 
repealed when disaster strikes. Cutting taxes still generates economic 
growth and raising them in a recession still spells trouble.
    Lower taxes don't just put money in people's pockets. They help 
fund the business investment, innovation and expansion that must form 
the backbone of a long-term economic revitalization. They encourage 
further competition and the return of venture capital to the 
marketplace.
    Against the backdrop of a recovering economy, the need for economic 
stimulus is perhaps less obvious than in the first months after 
September 11th. This House acted in October to pass a stimulus package, 
and again in December in a slightly modified form. The Senate has yet 
to act. And based upon the latest headlines, it seems as though there 
may be an attempt to make sure that the Senate cannot complete a 
package that reflects the will of the Senate.
    I don't believe that a stimulus package is no longer necessary. 
Part of the comments that I will direct towards the Secretary would be 
his feeling about the need for a stimulus package. Perhaps in October, 
we would have been a bit bolder and stronger, but even today, perhaps 
there may need to be a package.
    The aftermath of September 11th has, to a degree, shaken the 
people's confidence in their economic future. Markets are not yet 
convinced that we have the right plan. We should not be shy in 
insisting on action to ensure the durability of economic recovery. In 
the face of current danger, waiting to see what happens is rarely the 
right strategy.
    Since we were last in session, a number of events have occurred 
that I believe force us to shape the committee's hearing agenda, as 
well as it required a reshaping of the President's budget. I want to 
announce that on February 13th we will be holding a hearing focusing on 
health insurance tax credits for the uninsured. And beginning on 
February 26th, in consultation with the ranking member, I want to 
schedule a series of hearings. This committee, as well as other 
committees, will have responsibilities focused on the question of 
retirement security. And this committee, as it almost always does, 
should not react to a single specific circumstance but rather look at 
the broad underlying fundamentals as to whether or not they need 
correction.
    So perhaps we could start on February 26th by looking at defined 
contribution pensions, the question of individual retirement savings, 
401(k)s. We would then move to a defined benefit plan hearing, focusing 
on what are called in the steel industry ``legacy costs.'' We would 
also look at other defined benefit plans and the veracity of the system 
that we have constructed in the past to sustain those programs, 
notwithstanding the failure of companies. This would lead to a series 
of hearings on Social Security solvency and reform for the 21st 
century.
    So we will have an aggressive agenda out in front of us, addressing 
somewhat immediate concerns but hopefully placing them in the context 
of long-term fundamental adjustments to the system.
    Mr. Secretary, it is a pleasure to have you with us. And prior to 
asking you to speak to us for your assigned period of time, the Chair 
would now recognize the ranking member, the gentleman from New York.

                                

    Mr. McDermott. Mr. Chairman, may I ask just a question. Are 
your remarks written so we could all have a copy?
    Chairman Thomas. Some of them are, some of them are not. 
But I will get them to you since they are now done.
    Mr. McDermott. I think they are very important remarks for 
us to sort of hold. I would like to have a copy, if I may. 
Thank you.
    Mr. Rangel. Mr. Chairman, I cannot tell you how excited I 
am about the consultations that we will have as relates to 
anything but, more specifically, the retirement security. Am I 
to read into that that Enron will also be a part of our 
discussions at these hearings as relates to 401(k)?
    Chairman Thomas. I tell the gentleman, obviously, that is 
the specific example, but I think we need to look at the 
broader consequences and, in fact, the market reflecting the 
question of debt versus equity and instruments utilized in that 
underlying some of the concerns about the retirement package.
    Mr. Rangel. Well, we look forward to working with you on 
this and other subjects.
    Mr. Secretary, again, welcome to our Committee, and thank 
you so much for your courteous call to me yesterday.
    This Committee has the responsibility of maintaining a 
sound tax policy for our Nation during times of peace and war, 
and we will be very carefully following where we go in the 
budget situation because the war and the popularity of the 
President has dramatically changed the political tone of the 
Members on both sides of the aisle.
    There is no question in my mind that all Americans would 
want the President and this Congress to spend whatever is 
necessary in order to protect our national security. In the 
President's State of the Union message, however, the question 
as to the extent we are being threatened was not as clear as 
the attack on the World Trade Center. That is to say, that 
America recognizes when it is being attacked. America 
recognized our search for Usama bin Laden, and America stands 
ready to support our men and women to do what has to be done.
    The President seems to have expanded the threat to the 
United States by the evil axis. Most of us haven't the 
slightest clue of what that means or the extent that we have to 
be prepared or the extent that this will be included in our 
defense budget, and we don't know whether the list will 
ultimately include Somalia or Libya. But we do know one thing, 
that we have to take this one step at a time when we are 
talking about the budget.
    Because there are some ongoing things that are going to 
happen, regardless of how the threats to our national security 
appear to be in the President's eye and as explained to us, I 
assume, at some later date. I am talking specifically about our 
Social Security system.
    Some of us believe that, with the majority party, the 
system is not a very popular system, nor is Medicare a popular 
system. It bothers us to see that the money that we are 
spending now for defense is coming out of the funds that people 
are paying in order to put into the Social Security system. The 
rhetoric that we have had, lockboxes and strongboxes and budget 
restrictions, has now been thrown to the wind because it is 
wartime.
    But as we look at the numbers that are given to us by the 
Congressional Budget Office (CBO), we see a large amount of the 
surplus being wiped away now and in the immediate future, and 
not so much because of our war expenses but a large part 
because of our tax cuts.
    I think that all of us share the direction that the 
President is taking in terms of wanting to reduce the tax 
liability on all of our citizens. We may differ as to the 
income tax groups that receive the benefits at the expense of 
lower income workers, but that is a political question that can 
be debated. The real question, however, is that if we project 
tax cuts, you know, even past 2011, and we have to rely on the 
rosy scenarios that are given to us by economists with two 
hands, it just seems to us that we cannot feel that secure 
about getting back to the surpluses that we have recently 
enjoyed and the security that we had in knowing that people 
would retire and have the funds there.
    Can you hear me? Anyway, I will just conclude by saying 
that it looks as though--and I hope that people in the 
Administration would put Social Security back on the priority 
list.
    The last we heard, the President appointed a bipartisan 
commission that agreed with him in terms of where he would like 
to see the Social Security go. But the commission reported, 
don't do anything. They didn't say, don't do it because it is 
an election year, but that is the way we think. 2002, don't do 
anything there.
    Then I think it said it would take something like a 
trillion dollars to make the transition, which Mr. Clay and Mr. 
Matsui agree that it would take that.
    I do hope that as we talk about the war effort that we also 
talk about the security of our older folks and health care and 
give us some assurances that we are not just dealing with 
speculations but we are dealing with taxpayers' money. No one 
is more patriotic than me, but I don't know how far this thing 
is going.
    I listen to Ms. Condoleezza Rice and she said, listen 
closely, because the President will be sharing with us what he 
meant by the evil axis. Well, I got my own evil axis I would 
like to slip in there, too, if the President has got a list. 
But we will see where it goes. But, right now, we support the 
President. We support the war effort.
    We thank you so much for coming to share your views with 
us.
    [The opening statements of Mr. Rangel and Mr. Crane 
follow:]
  Opening Statement of the Hon. Charles B. Rangel a Representative in 
                  Congress from the State of New York
    This committee has the responsibility of maintaining a sound tax 
policy for our nation in peace and war. And we will be very carefully 
following where we go in the budget situation because the war and the 
popularity of the President has dramatically changed the political tone 
of members on both side of the aisle.
    There is no question in my mind that all Americans would want the 
President and this Congress to spend whatever is necessary to protect 
our national security. Since the President's State of the Union 
address, however, there is a question as to extent that we are being 
threatened. It is not as clear as the attack on the World Trade Center. 
That is to say that America recognizes when it is being attacked and 
recognizes that Osama Bin Laden was involved and America stands ready 
to support our men and women to do what has to be done.
    Our President seems to have extended the threat to the United 
States to the ``evil axis.'' Most of us do not have a clue as to what 
that means or the extent to which we have to be prepared, or the extent 
to which it would be included in the defense budget. And we do not know 
if ultimately the list will include Somalia or Libya, but we do know 
one thing. We have to take this one step at a time when talking about 
the budget because there are some ongoing things that are going to 
happen and, regardless of the threats to our national security, appear 
to be in the President eye and explained to us I assume at some later 
date.
    I am talking specifically about our Social Security system. Some of 
us believe that, with the majority party, the system is not a popular 
system. Nor is the Medicare system popular. It bothers us to see that 
the money that we are now spending for defense is coming out of the 
funds that people are paying into the Social Security system.
    The rhetoric that we have had with lockboxes and strong boxes and 
budget restrictions now have been thrown to the wind because it is 
wartime. But, as we look at the numbers that have been given to us by 
the Congressional Budget Office, we see a large amount of the surplus 
being wiped away now and in the immediate future and not so much 
because of our war expenses, but in large part because of our tax cuts. 
I think that all of us hear the direction that the President is taking 
in terms of wanting to reduce the tax liability on all of our citizens. 
We may differ on the income tax group that receives the benefits at the 
expense of lower income workers, but that is a political question that 
has to be debated.
    The real question, however, is: if we are projecting tax cuts even 
past 2011 and we have to rely on the scenario given to us by 
economists, it just seems to us that we can not feel that secure about 
taxes and surpluses that we have enjoyed and the security that we had 
knowing that people would retire and have the funds there.
    I conclude by saying that I hope that those in the administration 
would put Social Security back on the priority list. The last we heard 
the President appointed a bipartisan commission that concurred with him 
on where he would like the Social Security to go. But the commission 
reported, do not do anything. They did not say do not do it because it 
is an election year, but that is the way we think: 2002, do not want to 
do anything there. Then, I think it said something like it would take a 
trillion dollars to make the transition, which Mr. Shaw and Mr. Matsui 
agree that it would take that. And I do hope that, as we talk about the 
war effort, that we talk about the security of our own approach to 
health care and give us some assurances that we are not just dealing 
with speculation but we are dealing with taxpayers money.
    No one is more patriotic than me, but I do not know how far this 
thing is going? I listened to Ms. Condoleezza Rice and she said that, 
listen closely because the President will be explaining what he means 
by the ``evil axis.'' Well, I have got my own evil axis and I can add 
to it if the President has a list. But we will see where it goes. For 
now, we support the President, we support the war effort, and we thank 
you so much for coming to share your views with us.

                                

   Opening Statement of the Hon. Philip M. Crane a Representative in 
                  Congress from the State of Illinois
    Mr. Chairman, I want to thank you for holding this very important 
hearing on the President's budget proposal. I also want to thank 
Secretary O'Neill for appearing on behalf of the Bush Administration 
today.
    Today we stand at a historic intersection in the future of our 
great nation. The events of September 11th have reshaped our 
priorities. Our Nation is at war. We must focus on winning the war on 
terrorism abroad and protecting our citizens at home. At the same time 
we must continue the policies begun by the Bush Administration to make 
sure our economy is on sound footing and to create jobs. I am pleased 
that President Bush's budget strikes a balance in achieving both of 
these goals. And while I would like to see more in the way of tax 
relief for hard-working Americans, the tax relief provided in this 
budget is a great start.
    The President has put forward a budget that includes several items 
I have championed for nearly a decade. In particular, I have championed 
legislation to allow nonitemizers to deduct their charitable 
contributions and to permit tax-free withdrawals from IRAs for 
charitable contributions and I am glad to see President Bush included 
similar provisions in his budget. The President has called for greater 
involvement by citizens in charitable endeavors. While we should all 
strive to give time and money to such efforts, anything we can do 
through tax relief to help Americans move money to charitable 
organizations is a step in the right direction.
    Likewise, I have long supported the idea that Americans, who are 
beneficiaries of an employer-sponsored flexible spending arrangement, 
be able to rollover their unused funds for future health care needs. 
Over time, this will reduce the pressures on employers by allowing 
individuals to accumulate funds for future health care needs. I've also 
noted that the President has proposed permanently extending Archer 
Medical Savings Accounts. While other reforms are needed in the program 
to encourage all insurers to offer the product, removing the time 
limitation on Archer MSAs is a positive step. I am hopeful that 
removing the uncertainty of the previous law, that limited Archer MSAs 
to five years and thus, discouraged insurers from getting into the 
market, will now pass and millions of Americans will look at this as a 
viable option for obtaining health insurance.
    In that vein, I believe that we must also allow individuals to 
deduct all of their medical expenses not covered by private insurance 
or a government program. Prior to 1986, there was no limitation on such 
deductions. However, the '86 tax bill created a scheme whereby only 
expenses that exceed 7.5% of adjusted gross income are deductible. I 
plan to introduce legislation that will zero out the AGI limitation, 
and help millions of Americans who get no tax benefit for their out-of-
pocket health care costs.
    I was also happy to see that the President's budget will help more 
children get a quality education by improving on the No Child Left 
Behind Act. It does so by providing for a refundable credit of 50 
percent of the first $5,000 of qualifying education expenses for 
parents who move their kids to schools where they can get a better 
education. While my enthusiasm is tempered slightly by the fact that 
the definition of ``qualifying student'' is restricted to one who is 
enrolled in a failing school, this provision takes a substantial step 
towards giving parents the ability to decide where their children will 
be best educated, a goal which I wholeheartedly support.
    In short, this is a good, sound budget. It provides for our 
priorities of winning the war on terrorism, Homeland defense and 
stimulating the economy and creating jobs. I commend President Bush, 
Secretary O'Neill and the entire Administration for their efforts and 
look forward to working with them in the coming months to get this 
budget signed into law.

                                

    Chairman Thomas. Thank you.
    Mr. Secretary, you are the Secretary of the Treasury. We 
are going to have the Secretary of Health and Human Services 
and the Director of the Office of Management and the Budget. I 
would simply request, perhaps in vain, that Members attempt to 
focus on the issues that are predominantly under the 
jurisdiction of the Department of the Treasury. We will have 
ample opportunity to direct other questions to the appropriate 
departments or agencies. With that, Mr.----
    Mr. Kleczka. Will the Chairman yield for a question on 
that?
    Mr. Chairman, is not the Secretary of the Treasury a 
trustee on either Social Security or Medicare?
    Chairman Thomas. Yes. I will tell the gentleman that, as I 
indicated, it was a request by the Chair. And, clearly, being a 
trustee of those funds opens him up to a number of questions.
    Mr. Kleczka. I just wanted to clarify that. I know it is 
germane to his position in this government.
    Chairman Thomas. I would tell the gentleman if we were to 
examine Medicare, as we probably are going to in great detail 
tomorrow morning, and we would venture into questions 
suggesting that the President's 6.5 interest in 
Medicare+Choice, while not directed toward metropolitan 
statistical areas the way we would like, isn't a good policy, 
that kind of a question probably is not most appropriately 
directed to a trustee of the fund but to the principal 
administrator of the program itself. That was the thrust of the 
Chair's request.
    Mr. Kleczka. But the general health of the various trust 
funds would be somewhat germane.
    Chairman Thomas. Absolutely.
    Mr. Kleczka. Thank you very much.
    Chairman Thomas. With that, Mr. Secretary.

STATEMENT OF THE HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT 
                        OF THE TREASURY

    Mr. O'Neill. Thank you, Chairman Thomas.
    Chairman Thomas. You might want to check your mike. They 
are very unidirectional.
    Mr. O'Neill. Do we have sound now?
    Chairman Thomas. There we go.
    Mr. O'Neill. We have sound.
    Thank you Chairman Thomas, Congressman Rangel, Members of 
the Committee. Mr. Chairman, with your permission I have a 
short statement I would like to read, if it is OK with you.
    Chairman Thomas. Without objection.
    Mr. O'Neill. I can do it quickly.
    Thank you for inviting me to testify today. We have had a 
year to work together, and you know I am an optimist about the 
future of the U.S. economy. I believe our economy has potential 
to grow substantially; in fact, to lead the world in the rate 
of productivity improvement as we have been for a very long 
time.
    Even after a difficult year, my optimism about the 
fundamentals of the U.S. economy has not changed. I believe the 
data show we were on the verge of recovery before the September 
11th terrorist attacks and that our resilience and 
determination have brought us back to the early stages of 
recovery today. We see more and more signs every day indicating 
that the seeds for recovery are there and only need nourishing 
to speed the process of putting Americans back to work. I 
believe we will return to prosperous economic growth rates of 3 
to 3.5 percent as soon as the fourth quarter of this year, 
especially if we are able to pass still-needed economic 
security legislation to hasten and strengthen our recovery.
    Strengthening our economy is a key goal of the President's 
budget. A return to our normal growth rates means jobs for the 
1.4 million persons who have lost jobs during this slowdown.
    Just as the strengthening economy means greater prosperity 
for our Nation's people, it also means greater strength for our 
government. It means greater revenues going into the Treasury, 
without raising taxes, giving us resources to address the 
Nation's needs and the retirement of even more Federal debt--
leading to long-term economic security for our children. Even 
with all that must be done to enhance our security, we expect 
that a return to economic growth will bring us back to 
government surplus in 2005.
    The economy's slowdown began in mid-2000, when GDP and job 
growth slowed sharply. Business capital spending began to 
plummet in late 2000 and accelerated its decline in 2001, 
dragging down the economy. In August we were beginning to see 
the evidence of an economic rebound. I firmly believe that, had 
it not been for the terrorist attacks of September 11th, that 
we would have seen an end to the economic downturn and would 
have avoided a recession.
    The September 11th attack created shock waves that rippled 
throughout all sectors of the economy. Financial markets were 
shut down for almost a week, air transportation came to a 
standstill, and, as a result, GDP fell 1.3 percent at an annual 
rate in the third quarter.
    By late November, the National Bureau of Economic Research 
declared the United States was in a recession. They designated 
the end of the previous expansion for March, 2001, but they 
observed, as I have said, that the slowdown might not have met 
their qualitative standard for recession without the sharp 
declines in activity that followed the terrorist attacks.
    In sum, the scorecard for the economy in 2001 reflected a 
combination of adverse events: The private sector lost more 
than 1.5 million jobs, the unemployment rate rose 1.8 
percentage points, industrial production was off nearly 6 
percent during the year, and industry was using less than 75 
percent of its capacity at the end of the year.
    As bad as these numbers are, they could have been worse. 
The well-timed bipartisan tax relief package put $36 billion 
directly into consumers' hands in the late summer and early 
fall, providing much-needed support as the economy sagged. It 
was the right thing to do, at just the right time.
    It is not surprising, then, that both the Congressional 
Budget Office and the Office of Management and Budget project 
deficits for this year and next as a result of the economic 
slowdown and the response to the September 11th attacks.
    The President has presented a budget to speed our recovery.
    First, the budget includes tax relief to stimulate job 
creation. The President's proposals--accelerated depreciation, 
speeding up the reduction in the 27 percent income tax rate, 
addressing the corporate AMT or alternative minimum tax, and 
checks to those who didn't benefit from last summer's tax 
rebates--enjoy bipartisan support in both Houses of Congress. I 
am eager to work with all of you to complete work on a package 
to create jobs and assist dislocated workers with extended 
unemployment insurance (UI) benefits and temporary assistance 
for health care.
    Second, the President's budget proposes strict fiscal 
discipline, increasing spending for national security and 
homeland defense and holding the line on other spending. His 
management agenda calls for performance measures to be used to 
determine where budget increases are allocated so that our 
resources go into the projects and programs that make the 
biggest difference in people's lives. As the experience of the 
1990s shows, this discipline is crucial to ensuring that we do 
not return to systemic deficits of the past. But fiscal 
discipline alone will not guarantee budget surpluses. We must 
return 3 to 3.5 percent annual growth to ensure surpluses for 
years to come.
    The focus must be on restoring growth. Surpluses will then 
follow naturally. Raising taxes would stifle the process of 
getting Americans back to work. Raising taxes is a bad idea as 
our recovery is struggling to take hold. According to 1999 
data, the most recent available, 33 million small business 
owners and entrepreneurs pay taxes under the individual income 
tax rates. They have made business plans that assume that the 
tax relief enacted last summer will take place as scheduled. 
Eighty percent of the benefit of cutting the top two rates goes 
to small business owners and entrepreneurs. These are the 
engines of job creation in our economy.
    We believe tax relief should be accelerated as the 
President has proposed to boost job creation. Such relief will 
have minimal or no effect on long-term interest rates. 
According to a recent analysis by the Council of Economic 
Advisors, an expected $1 trillion change in the public debt 
over 10 years would tend to raise the long-term interest rates 
by 14 basis points. Since the tax cut last year, the 10 year 
nominal rate has averaged 4.93 percent, which is substantially 
below the 6.16 percent averaged from 1993 to the year 2000.
    Restoring growth is the key to America's future. Restoring 
growth will ensure we have the resources in Washington to fight 
the war on terrorism, to provide for homeland defense and 
provide the services the American people expect and demand. The 
President's budget will help to ensure that both peace and 
prosperity are restored to the American people as soon as 
possible.
    That is my statement, Mr. Chairman.
    [The prepared statement of Secretary O'Neill follows:]
 Statement of the Hon. Paul O'Neill, Secretary, U.S. Department of the 
                                Treasury
    Good morning Chairman Thomas, Congressman Rangel and members of the 
committee. Thank you for inviting me to testify today. Now that we've 
had a year to work together, you should know that I am an optimist 
about the US economy. I believe we always have untapped potential that 
can be unleashed to spread prosperity throughout the nation. Never has 
that been more true than right now. Even after a difficult year, my 
optimism about the fundamentals of the US economy has not changed. I 
believe we were on the verge of recovery before the September 11 
terrorist attacks, and that our resilience and determination have 
brought us back to the early stages of recovery today. We see more and 
more signs every day indicating that the seeds for a recovery are 
there, and only need nourishing to speed the process of putting 
Americans back to work. I believe we will return to prosperous economic 
growth rates of 3 to 3.5 percent, as soon as the fourth quarter of this 
year, especially if we are able to pass still-needed economic security 
legislation to hasten and strengthen our recovery.
    Strengthening our economy must be our primary goal. It is the focus 
of the President's budget. That must be our goal, because a return to 
our normal growth rates means jobs for the 1.4 million Americans who 
have lost jobs during this recession. Just as a strengthening economy 
means greater prosperity for our nation's people, it also means greater 
strength for our government. It means greater revenues going into the 
Treasury, without raising taxes, giving us resources to address the 
nation's needs, and the retirement of even more federal debt--leading 
to long-term economic security for our children. Even with all that 
must be done to enhance our security, we expect that a return to 
economic growth will bring us back to government surplus in 2005.
    The economy's slowdown began in mid-2000, when GDP and job-growth 
slowed sharply. Business capital spending began to plummet in late 
2000, and accelerated its decline in 2001, dragging down the economy. 
In August we were beginning to see the evidence of an economic rebound. 
I firmly believe that had it not been for the terrorist attacks of 
September 11th, that we would have seen an end to the economic downturn 
and would perhaps have avoided a recession. The September 11 attacks 
created shockwaves that rippled throughout all sectors of the economy. 
Financial markets were shut down for almost a week. Air transportation 
came to a standstill. As a result, GDP fell 1.3 percent at an annual 
rate in the third quarter.
    By late November, the National Bureau of Economic Research declared 
that the US was in a recession. They designated the end of the previous 
expansion to be March 2001, but they observed that the slowdown might 
not have met their qualitative standards for recession without the 
sharp declines in activity that followed the terrorist attacks.
    In sum, the scorecard for the economy in 2001 reflected a 
combination of adverse events:
           The private sector lost more than 1.5 million jobs.
           The unemployment rate rose 1.8 percentage points.
           Industrial production was off nearly 6 percent 
        during the year.
           Industry was using less than 75 percent of its 
        capacity.
    As bad as these numbers are, they could have been worse. Our well-
timed bipartisan tax relief package put $36 billion directly into 
consumers' hands in the late summer and early fall, providing much 
needed support as the economy sagged. It was the right thing to do, at 
just the right time.
    It's not surprising then that both the Congressional Budget Office 
and the Office of Management and Budget project deficits for this year 
and next as a result of the economic slowdown and the response to the 
September 11 attacks. Last April's budget forecast a fiscal 2002 
surplus of $283 billion. The Mid-Session review figures, released in 
August, took account of the impact of the President's tax relief 
package and projected a $195 billion surplus in fiscal 2002. The new 
budget forecasts a fiscal 2002 deficit of $9 billion, assuming no 
policy action to stimulate the economy. The reduced surplus estimates 
are the result of the economic downturn and the response to the 
September 11 attacks. CBO's projections confirm that tax relief played 
a minor role in the surplus decline in the next few years--accounting 
for less than 12 percent of the decline in 2002 and less than 28 
percent in 2003.

                                                                 FY02
                                                               surplus
                                                                 (in
                                                              billions)
April 2002 budget baseline:................................         $283
Changes from:
  weaker economy/technical changes.........................         -197
  enacted spending.........................................          -54
  tax relief...............................................          -40
                                                            ------------
February 2003 budget baseline:.............................           -9

    The CBO budget projects a 10-year surplus of $1.6 trillion. Last 
August, after factoring in the tax relief package, the CBO projected a 
$3.4 trillion surplus for the next 10 years. The recession and the war 
on terrorism depleted the 10-year projections by $1.8 trillion. The 
lesson from these numbers is simple--10-year projections are a useful 
discipline but they do not predict the future. None of last year's 10-
year estimates foresaw the events of September 11 or a negative $660 
billion worth of ``technical changes'' that are now included in the new 
10-year estimates by agreement among the technical experts. We do know 
about the here and now, and we should deal with the here and now, 
reigniting growth to restore long-term surpluses.
    The Administration's growth projections are similar to the 
consensus of private forecasts. Over 90 percent of the Blue Chip 
Economic Indicators panel members say the recession will end before 
April of this year. We share that assessment. Personally, I am 
optimistic that the economy will do even better than our budget 
assumptions suggest. For the near term, we expect the economy to grow 
2.7 percent during the four quarters of 2002. That projection includes 
the foreseeable effects on the economy of the President's economic 
security package.
    The lesson is clear. A strong economy is crucial to restoring 
budget surpluses. Some would suggest that we need surpluses to improve 
our economy. They have the logic backwards. Growth creates surpluses, 
not the other way around.
    The federal budget was in deficit every year from 1970 through 
1998. From 1970 through the early 1990s, government spending growth 
exceeded government revenue growth by \3/4\ of a percentage point a 
year, on average. Fiscal discipline was imposed by the historic Omnibus 
Budget Reconciliation Act, signed in 1990 by President Bush. With 
fiscal restraint made an integral part of the budget process, once the 
economy took off in the 1990s, revenue growth was double the pace of 
spending growth. It was the rapid economic growth of the 1990s that 
generated the burgeoning budget surpluses, which appeared even as 
federal outlays grew about 3.5 percent a year from 1993 through 2000.
    Today the economy is recovering. The tax cut of last May helped to 
keep the economic downturn shallow and it will continue to help. Energy 
prices have retreated. The Federal Reserve has reduced short-term 
interest rates 11 times since the beginning of 2001. Measures of 
consumer confidence are bouncing back. The index of leading indicators 
increased sharply in December for the third straight gain. Motor 
vehicle sales have remained strong. And initial filings for 
unemployment benefits are in decline. But we all know that unemployment 
itself is a lagging indicator. Although the current trend is positive, 
too many people will remain out of work. And given the choice, they'd 
rather have a regular paycheck than an unemployment check.
    The President has presented a budget to speed our recovery. First, 
the budget includes tax relief to stimulate job creation as a crucial 
tool to speed our recovery and put Americans back to work. The 
President's proposals--accelerated depreciation, speeding up the 
reduction in the 27 percent income tax rate, adjustments to the 
corporate AMT so it doesn't cancel out tax relief, and checks to those 
who didn't benefit from last summer's tax rebates--enjoy bipartisan 
support in both houses of Congress. I'm eager to work with all of you 
to complete work on a package to create jobs and assist dislocated 
workers with extended unemployment benefits and temporary assistance 
with health care.
    Second, the President's budget proposes strict fiscal discipline--
increasing spending for national security and homeland defense, and 
holding the line on other spending. His management agenda calls for 
performance measures to be used to determine where budget increases are 
allocated--so that our resources go into the projects and programs that 
make the biggest difference in people's lives. As the experience of the 
1990s shows, this discipline is crucial to ensuring we do not return to 
systemic deficits of the past. But fiscal discipline alone will not 
guarantee budget surpluses. We must return to 3 to 3.5 percent annual 
growth to ensure surpluses for years to come.
    The focus must be on restoring growth. Surpluses will then follow 
naturally. Raising taxes would stifle the process of getting Americans 
back to work. This is a bad idea, as our recovery is struggling to take 
hold. According to 1999 data, the most recent available, 17 million 
small business owners and entrepreneurs pay taxes under the individual 
income tax rates. They have made business plans that assume that the 
tax relief enacted last summer will take place as scheduled. Eighty 
percent of the benefit of cutting the top two rates goes to small 
business owners and entrepreneurs. These are the engines of job 
creation in our economy.
    Tax relief should be accelerated, as the President has proposed to 
boost job creation. Such relief will have minimal, or no, effect on 
long-term interest rates. According to a recent analysis by the CEA, an 
expected $1 trillion change in the public debt over 10 years would tend 
to raise the long-term interest rate by 14 basis points. Since the tax 
cut last year, the 10-year nominal rate has averaged 4.93 percent, 
which is substantially below the 6.16 percent averaged from 1993 
through 2000.
    Restoring growth is the key to America's future. Restoring growth 
is the key to ensuring we have the resources in Washington to fight the 
war on terrorism, provide for homeland defense and provide the services 
the American people demand. The President's budget will help to ensure 
that both peace and prosperity are restored to the American people as 
soon as possible.

                                

    Chairman Thomas. Thank you very much, Mr. Secretary.
    I do understand that the President and you believe that a 
stimulus package is still desirable. The question is whether or 
not the makeup of that package would be roughly the same as it 
was when the House first acted in October and then followed up 
in December with the second package that was passed.
    One of the differences between the first and the second 
package was an attempt by the House to collect the concerns on 
the unemployed, both in terms of the unemployed benefits and 
the health insurance protection that we knew would probably 
occur if events had transpired the way they normally do. The 
House passes a bill, the Senate passes a bill, we go to 
conference, and we make those kinds of adjustments. So the 
December bill was I think an attempt on the part of the House 
to say, had we gone to conference, this is what we think the 
bill would have looked like in an attempt to provide the Senate 
with a structure that they could pass relatively quickly. As we 
know, that didn't occur. We are now into February.
    I still believe that the assistance for the unemployed 
portion of the package probably, if anything, is more 
underscored as we move to the date when they begin to run out 
of the usual 26-week benefits.
    I don't think also there is much additional concern about 
maintaining consumer demand. Some of us were pleasantly 
surprised and some economists were wrong that when the auto 
program of 0 interest financing ended in October most people 
believed that they would eat significantly into auto sales for 
December and January. It appears there was only about a 5 
percent drop. It wasn't nearly as much as most people thought 
it would be.
    In addition, the individual tax rates, especially at the 
middle income level, 27 to 25, given who pay that level of 
taxes, could certainly be a bit of consumer demand as well.
    But what I have been concerned about is the whole business 
segment of the package. More and more, the argument that 
probably was largely unnecessary, and now it is completely 
unnecessary, when the whole question of inventories, 
liquidating inventories and then the need to rebuild was one of 
the keys to economic recovery. To me, dealing with expensing, 
especially on short-term depreciation, is very much the same as 
consumer demand, if we could get some purchases done in the 
short term.
    Alan Greenspan in front of the Senate said that there were 
some negative aspects to a short-term expensing. I think we 
understand them. My concern is that does the Administration, 
does the Treasury, do you have a concern about the way in which 
the depreciation package would be structured?
    The Senate seems adamant that they don't want any kind of 
depreciation structure for more than 12 months. They define 
that as short term. I understand ``permanent.'' That means 
really long term. But I don't know that 12 months is a 
significant or important or really appropriate definition for 
short term; and I believe that some of the debate is going to 
hinge on the way in which we view 12 months, 24 months, 36 
months, probably 48 months on the outside in an area that we 
think could have a relatively immediate and stimulative effect 
on the economy, even today.
    Comments on the structure of the expensing on depreciation, 
length of it, amount, where and how it would stimulate the 
economy.
    Mr. O'Neill. Thank you, Mr. Chairman; and thank you for the 
review of the process.
    As we in the Administration have been engaged with you and 
with your counterparts on the other side of the Hill, we have 
been greatly appreciative of the work that has been done in 
this Committee under the Chairman's leadership in both in the 
October work and subsequently in the December work in order to 
provide a basis for what we believed was going to be a basis 
for action in the Senate so that we could have finished this 
stimulus work before the Congress went home for the Christmas 
recess.
    We continue to believe that what you did in the Committee 
and included in the bill that you sent over to the Senate in 
December is the right basis for dealing with accelerated 
depreciation, and we are hopeful that the Senate will see the 
wisdom of what you have done and will quickly deal with this 
issue so that we can get it behind us and we can assure what we 
believe are the consequences of this action, which is to add 
momentum and speed to the economic recovery that we all want.
    I don't know anyone who would like to go slower or would 
like to end up at a lower level than 3 or 3.5 percent. The 
President continues to believe the stimulus proposal that you 
passed in December is the right direction to go and that we 
should do it now.
    Chairman Thomas. Thank you very much, Mr. Secretary. The 
gentleman from New York wish to inquire?
    Mr. Rangel. Thank you. Yes.
    Mr. Secretary, we are flattered when you talk about the 
good work of this Committee and the leadership of our Chair, 
but you should know that it is really not the Committee, it is 
the Chair and the majority.
    First of all, what this stimulus package--I have had more 
discussions with you on this subject and Treasury Department 
than I have been able to have with the Chairman on this subject 
of the stimulus package. And so--the Members, the Democratic 
Members have even less than I. So that if you want to 
compliment the Chair for the way that he has handled this, that 
is okay with me.
    The second thing is that the Committee should get no credit 
for the second stimulus package, but you should give that 
credit to the Rules Committee. Because that bill never came 
before the Ways and Means Committee. It went to the Leadership, 
the Rules Committee and came to the floor. But we will accept 
the compliments.
    But you should know that the President's efforts to be 
bipartisan stops when he gets to the doors of this Committee. 
That is tragic, and it is unfortunate, and this is especially 
so during a time of war. But, as I have indicated, I am so 
pleased that war appears to have brought us together for at 
least the hearing of the 26th, and let's have a good beginning 
on that.
    I am sorry that the Chair didn't give me a list of the 
questions that he would suggest that I ask you, but, at the 
risk of going off on the Social Security thing, it is just hard 
for us to understand how it is, at a time where all of us, 
whether Democrats or Republicans or the Administration, was 
concerned about Social Security, that we find ourselves because 
of the recession, because of war, because of homeland security, 
that the funds that are coming in right now are basically funds 
that are supposed to be earmarked--not lockboxed but earmarked 
for Social Security Medicare.
    We can understand how during a time of war that we do the 
best we can with what we have to work with, but if indeed the 
President is now protecting and asking the American people and 
the Congress to consider making the tax cuts that have been put 
into place permanent and if you know as a trustee that we 
expect to have a real 40 million people to become eligible for 
Social Security and Medicare benefits, it just defies sound 
fiscal policy that we should be talking about tax cuts at a 
time that we are having deficits and at a time where the Social 
Security fund is not secure and at a time where the processes 
of reform don't appear to be on the near horizon.
    So we just hope, as the Secretary of Health and Human 
Services, as the Secretary of Defense and other people come to 
support their particular responsibilities, that we could hear 
the same strength in your voice and testimony in terms of 
protecting the Social Security trust fund. Because war is 
supposed to be a time of sacrifice, and it seems as though one 
of the major contributions that the Administration is proud of 
is that those that make the most will be getting the largest 
tax cuts, and that will be their contribution to the war 
effort, while those who are depending on the Federal Government 
for a lot of services, that is where fiscal responsibility 
comes, because that is where we all have to make sacrifices.
    So I, for one, am very concerned that--my concern about 
people getting from government what they are entitled not be 
confused with a lack of patriotism. If it is going to be that 
we don't have money to do these things because of sound fiscal 
policy, why do we say up front that we want tax cuts before we 
can see how we can balance the budget and do these things? 
Maybe the tax cuts should be even deeper than projected. But to 
do it beyond 5 years, beyond 10 years, based on speculation 
seems to be--not to be sound fiscal policy.
    I look forward to your response on that, Mr. Secretary.
    Mr. O'Neill. Thank you.
    First, let me say--and certainly you know this as well--
that every dollar that the government collects for Social 
Security and Medicaid is credited to the trust fund. No person 
out there who is watching this on television should have any 
concern that the Social Security funds are not being credited 
to the trust fund. Every dollar of Social Security money that 
is collected goes into the trust fund.
    The question that you raised or the comment you raised 
about the tax system is an interesting one. I have had a chart 
prepared that I think bears some examination. This is a chart 
that shows what the expectation is for revenue growth by the 
Federal Government over the years between fiscal year 2001 and 
2011. What this chart shows is that, with the tax system that 
is in place as agreed, voted by the Congress, I think with lots 
of shared--a sense of accomplishment last June, the revenue 
taken in by the Federal Government over this 10-year period is 
going to increase by 55 percent.
    So, contrary to some impressions that are left, that 
somehow Federal revenues are going down, this is the fact. With 
the tax law as it is enacted, with the perspective of further 
rate reductions and other provisions, the U.S. Federal tax 
revenue will increase by 55 percent over this time period.
    The little yellow parts of these bars, which you may have 
trouble seeing from a distance----
    Mr. McDermott. Could we, as Members of the Committee, have 
a copy of that? We can't see very well. Some of us have elderly 
eyes, and it would be nice if you would bring some copies for 
all of us.
    Mr. O'Neill. We do have some copies.
    Mr. McDermott. We know the people at home can see it on the 
television, but we can't see it.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512A.001
    
                                

    Mr. O'Neill. The yellow parts of these bars illustrate the 
amount of revenue reduction from what would otherwise be 
associated with the agreed tax cuts of last year, and I think 
the data makes the point very well.
    Now related to this set of facts is this fact: That even 
with the tax enactment of last year, your Federal Government, 
our Federal Government, is going to be collecting about 19 
percent of the GDP in Federal taxes, which will leave us above 
the trend line growth rate that has existed for a very long 
time.
    I didn't bring the detailed chart, but I will make that 
available for the record so that you can see the agreed tax 
policy effect on the Federal Government's share of the GDP. 
This is the chart. As I say, I will make it available so the 
whole Committee has in your own hands this data--set of facts 
about what it is we are proposing to do in terms of raising 
money from the people.
    Mr. Rangel. Thank you.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512B.002
    
                                

    Chairman Thomas. The Chair would ask unanimous consent that 
a series of questions submitted by Mr. Shaw be placed in the 
record. Without objection.
    The gentleman from Illinois wish to inquire?
    [Questions submitted from Mr. Shaw to Secretary O'Neill, 
and his responses follow:]
Question 1: Does the administration's proposal to expand IRS's direct 
        assistance to taxpayers filing online (EZ File) potentially 
        create a conflict with private accountants and tax return 
        preparers, running counter to OMB's Circular A-76?
    Response: The Administration's proposal to give taxpayers the 
option to file their tax return online without charge is based on two 
principles: no one should be forced to pay extra just to file his or 
her tax return, and the IRS should not get into the software business.
    First, the ability to file electronically is an important benefit 
for all taxpayers because it is simple, is less prone to errors, and 
results in quicker refunds. Electronic returns also save the Government 
time and money. In the 1998 IRS Restructuring and Reform Act, Congress 
recognized the value of electronic returns and established a goal of 
having at least 80 percent of all returns filed electronically by 2007. 
The Administration's proposal will greatly enhance the IRS' ability to 
meet this goal.
    Second, however, Treasury does not intend for the IRS to get into 
the software business. Taxpayers have, and will retain, the ability to 
seek professional or other assistance in preparing a tax return. 
Treasury believes that the best way to accomplish this is by forging a 
new partnership with existing private sector expertise. Treasury and 
IRS officials, along with members of the IRS Oversight Board and the 
Electronic Tax Administration Advisory Committee, have begun a dialog 
with representatives of the tax preparer industry to explore ways to 
provide taxpayers with the option to e-file.
Question 2: What potential privacy issues has Treasury identified and 
        how are you prepared to deal with them?
    Response: Treasury believes that the facilitation of electronic 
filing will enhance taxpayer privacy. Some taxpayers do not file 
electronically now because they don't want to send their personal tax 
information to the IRS via a third party. There should be ways to 
address this concern. For example, in the case of self-preparers, the 
availability of direct electronic filing would eliminate the need for 
taxpayers who have this concern to share their sensitive financial 
information with a third party.
    The IRS is currently in a dialog with industry to find ways to 
expand e-filing opportunities and explore solutions. It should be noted 
that the IRS's continuing partnership with the private sector on e-file 
initiatives requires a strict adherence to the privacy rules applicable 
to tax return preparers in section 7216 of the Internal Revenue Code.
Question 3: What internal agency conflicts potentially could arise by 
        having IRS assuming roles as both tax return preparer and its 
        existing role for developing regulations, collecting, and 
        auditing tax returns?
    Response: The Administration's e-filing proposal simply stated is 
``to provide taxpayers with the option to file their tax return on-line 
without charge''. Treasury believes the best way to accomplish this is 
by forging a partnership with existing private sector expertise in the 
field. Taxpayers have the ability to seek professional or other 
assistance in preparing a tax return.
    This proposal should not create any conflicts with, and is 
consistent with, the IRS' traditional regulatory and enforcement roles. 
IRS already provides an automated tax return option via telephone, 
called Tele-file, for Form 1040EZ filers. In addition, the IRS has 
provided taxpayers with guidance and assistance for many years. IRS 
forms, instructions, and publications, for instance, are already 
available to taxpayers for free, and include comprehensive guides on 
various tax issues as well as taxpayer duties and obligations. The IRS 
has held a number of Taxpayer Assistance Days throughout the country 
that allow taxpayers to discuss problems or issues directly with an IRS 
representative. The IRS sponsors the Volunteer Income Tax Assistance 
(VITA) and Tax Counseling for the Elderly (TCE) programs, which provide 
free tax preparation assistance. The IRS also provides automated and 
live assistance through toll-free numbers, as well as information 
through its web site. All of these efforts are an important part of the 
IRS' mission to explain, and guide taxpayers through, compliance with 
the tax laws.

                                

    Mr. Crane. Thank you, Mr. Chairman.
    Mr. Secretary, I have been a long-time supporter and active 
proponent of medical savings accounts (MSA) and am pleased to 
see a permanent extension of Archer MSAs in the President's 
budget. The 5-year revenue loss for Archer MSAs is nearly $2 
billion. However, we know in the real world that the tax 
changes we make, whether they be MSAs or reducing marginal tax 
rates or increasing incentives for savings, have an effect on 
people's economic behavior; and you provided a fine explanation 
whereby this behavior translates into reduced health care 
costs. Yet in the revenue estimates we typically only pay lip 
service to this behavior, and in many cases we completely 
ignore it.
    For example, since MSAs reduce health costs, then to the 
extent that the government pays for health care in the form of 
Medicaid or other programs the score should go down by some 
amount.
    It is my understanding that you have the authority to issue 
a Treasury directive that could make the revenue estimating 
process more transparent or impose dynamic scoring, the result 
being potential revenue savings for proposals like Archer MSAs. 
I would like to know what steps, if any, you are contemplating 
in regard to this matter, and I would like to offer my 
assistance in working with you.
    Mr. O'Neill. Thank you very much, Congressman Crane.
    Since I have been at Treasury, we have been working hard on 
this the subject of estimation and looking at ways that we can 
bring to the Congress and to the American people not just the 
static estimates of the past but, as you characterize it, 
dynamic estimates so that everyone will have an opportunity to 
see the difference and as we go through time we can see which 
estimates turn out to be more correct through this process.
    My own view is that we should not have one system or the 
other, but we should have both. We should explain the 
assumptions that are incorporated in these alternative analytic 
schemes, and we would all benefit from learning which models 
better represent the reality as we collect experience.
    Mr. Crane. Thank you, Mr. Secretary.
    Chairman Thomas. The gentleman from California, Mr. Stark, 
wish to inquire?
    Mr. Stark. Thank you, Mr. Chairman.
    Mr. Secretary, the President's inadequate budget is a 
product and consequence of your failed economic policy. A year 
ago, we had a record surplus of $5.6 trillion; and with those 
resources we could have strengthened Social Security, secured a 
prescription drug benefit that was worth anything, and 
simultaneously provided homeland security and defense. Instead, 
the President and his Administration pushed through a tax cut 
that squanders our prosperity on those who least need it.
    Now, appallingly, the President has called to make these 
tax cuts permanent. Apparently, the rich aren't rich enough, 
particularly Enron and his friends there. In the meanwhile, the 
seniors who cannot afford prescription drugs, parents who 
cannot afford child care, families who do not have health care, 
and poor people in need of housing are left out in the cold and 
out of the President's plan.
    The President should be ashamed. This budget neither 
represents sound economic policy nor the moral values the 
President so fervently espouses. This budget underfunds 
critical programs that Americans count on in their everyday 
lives. Efforts to strengthen Social Security, provide a 
prescription drug benefit, protect our environment, expand 
health care coverage to the uninsured get rhetorical mention in 
the budget but absolutely no significant funding.
    Now, the President is right to devote resources to 
improving security and national defense around the world, but 
his naive devotion to tax cuts helps him dismantle Social 
Security and Medicare, his avowed intention.
    This budget is disappointing on a grand scale, and we will 
suffer the consequences for years to come. The President 
announced during his State of the Union speech that he wants to 
make these tax cuts permanent. CBO just reported that making 
the tax cut permanent would decrease revenues by $569 billion 
and result in a debt service payments increase of $58 billion, 
for a total cost of more--$627 billion more than exists in the 
entire Medicare trust fund which you will spend and deplete if 
you follow this budget.
    This amount of money also--which $600 billion would enable 
us to provide a Medicare prescription drug benefit to all 
beneficiaries, not just some cockamamie discount card.
    Why, why did the President give wealthy individuals in this 
country absolute priority over Medicare beneficiaries?
    Mr. O'Neill. If I may, Congressman Stark, go back to the 
foundation of your comments. What the CBO--for those out there 
in the televisionland, what the Congressional Budget Office 
projections show is that for the year 2002, as we have moved 
forward from a year ago when the agreed budget projection was 
for a surplus of $313 billion, the following facts have 
contributed to the CBO's January projection of negative $21 
billion: The tax law effect on the $313 billion: $38 billion; 
defense appropriations: $33 billion; nondefense appropriations 
debt service and other cost: $20 billion. So the January, 2001, 
projection of $313 billion surplus was reduced by $91 billion 
by those events. $38 billion again for the tax law change, and 
the rest for defense and nondefense appropriations.
    The rest of the change in the surplus estimate was a 
consequence of $148 worth of economic effect because of the 
slowness in the economy, and I would observe that both the 
Administration and the independent Congressional Budget Office 
numbers were basically the same. And a further $94 billion was 
a consequence of so-called technical changes. So the tax law 
had an effect of 15 percent at most in the change on the budget 
protection.
    Mr. Stark. But what about for the 10 years?
    Mr. O'Neill. For the 10 years it is interesting to observe 
that, according to the CBO, of the $5.6 trillion estimate that 
existed in January of 2001, $1 trillion, $275 billion is 
related to the tax law change. And I find it really very 
interesting and telling that----
    Mr. Stark. I might just notice the red, Mr. Secretary----
    Mr. O'Neill. Six hundred sixty----
    Mr. Stark. Reduction because of the tax cut and the blue is 
the reduction because of defense and the other blue is 
nondefense. So about 70 percent of the reduced budget surplus 
is over 10 years come from the June tax cut. So if you want to 
show us your rosy scenario here of 10 years, let's look at the 
results of the tax cut over 10 years so we are comparing an 
apple and an apple, okay?
    Mr. O'Neill. I'm sorry, Congressman, I don't understand 
your concept. If you are looking at what happened----
    Chairman Thomas. Excuse me. The Chair would be interested 
in seeing the chart. I cannot read the bottom of it. Could I 
see the chart for just a second, Mr. Stark? I appreciate it.
    Mr. Secretary, these are assumptions prepared by the 
Committee on Ways and Means' Democratic staff.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512C.003
    
                                

    Mr. O'Neill. I have not seen these numbers before. This is 
certainly--I would say to you that this is not a correct--what 
you have here is not even close to a correct characterization, 
according to the independent Congressional Budget Office.
    Mr. Stark. It is their numbers, Mr. Secretary.
    Mr. O'Neill. May I give you this table from the 
Congressional Budget Office? It shows, if I may use the numbers 
with you of the $5.6 trillion, that the change in the tax law 
that was enacted last June and acclaimed by Members on both 
sides, reduced that surplus estimate by $1,275,000,000. Others 
changes include $300 billion for defense.
    I do not hear anyone say we should not do defense spending. 
There is $249 billion for nondefense appropriations, and the 
debt service is 595, an unavoidable cost of a slower economy.
    Importantly, economic changes and technical changes account 
for $1.589 trillion because of economic changes. And I call 
attention to the fact because I think this is quite important 
in looking at these 10-year numbers, there is $660 billion 
worth of change in the surplus estimates related to so-called 
technical adjustments by the estimators.
    [The table follows:]

                                Summary Table 1.--Changes in CBO's Baseline Projections of the Surplus Since January 2001
                                                                (In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Total,     Total,
                                  2002      2003      2004      2005      2006      2007      2008      2009      2010      2011    2002-2006  2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Surplus as Projected in        313       359       397       433       505       573       635       710       796       889      2,007      5,610
 January 2001.................
Changes
  Legislative
    Tax act a.................       -38       -91      -108      -107      -135      -152      -160      -168      -187      -130       -479     -1,275
    Discretionary spending....       -44       -49       -52       -54       -56       -57       -58       -59       -60       -61       -255       -550
    Other.....................        -4        -6        -5        -3        -4        -2        -2        -2        -2        -2        -23        -33
    Debt service b............        -5       -12       -22       -32       -44       -57       -72       -88      -106      -124       -114       -562
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal................       -91      -158      -186      -197      -238      -268      -293      -317      -355      -317       -870     -2,420
Economic......................      -148      -131       -95       -81       -75       -75       -76       -79       -82       -88       -530       -929
Technical c...................       -94       -84       -62       -51       -64       -64       -65       -64       -65       -45       -356       -660
--------------------------------------------------------------------------------------------------------------------------------------------------------
        Total Changes.........      -333      -373      -343      -330      -377      -406      -433      -460      -502      -450     -1,757     -4,008
Total Surplus or Deficit (-)         -21       -14        54       103       128       166       202       250       294       439        250      1,602
 as Projected in January 2002.
Memorandum:
  Changes in the Surplus by
   Type of Discretionary
   Spending
Defense.......................       -33       -29       -29       -29       -29       -29       -30       -30       -31       -32       -149       -301
Nondefense....................       -11       -20       -23       -25       -26       -28       -28       -29       -29       -30       -106       -249
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: For purposes of comparison, this table shows projections for 2002 through 2011 because that was the period covered by CBO's January 2001 baseline.
  The current projection period extends from 2003 through 2012.
a The Economic Growth and Tax Relief Reconciliation Act of 2001, which was estimated at the time of enactment to reduce revenues by $1,186 billion and
  increase outlays by $88 billion between 2002 and 2011.
b Reflects only the change in debt-service costs that results from legislative actions. Other effects on debt-service costs are included under economic
  and technical changes.
c Technical changes are revisions that are not attributable to new legislation or to changes in the components of CBO's economic forecast.

                                

    Mr. Stark. If you care to put that in, Mr. Secretary, then 
you get 40 percent, approximately, for the tax cut, 40 percent 
for the economic changes, and less than 10 percent due to the 
nondefense and defense.
    Mr. O'Neill. I stipulate that characterization. I don't 
think your chart shows that.
    Mr. Stark. That is the same chart without the economic, and 
this is the same chart with it. But the program that you have 
put forth is reflected in that chart because you do not have 
anything to do with the economic changes.
    Mr. O'Neill. That does not look like 43 percent.
    Chairman Thomas. The gentleman's time has expired.
    The Chair would indicate if any other Members have charts, 
we would like to duplicate them so that Members can see them. I 
had not anticipated a duelling chart hearing. But if Members 
could at least look at them.
    The reason I made this statement earlier is that it is the 
fine print in the bottom in terms of who it is coming from and 
what the assumptions are associated with the very brightly 
colored and large columns that is oftentimes more important 
than the columns themselves.
    Does the gentleman from New York wish to inquire?
    Mr. Houghton. Yes, thank you, Mr. Chairman.
    Glad to have you here, Mr. Secretary. I have just one 
direct question. Maybe you would like to elaborate on it.
    The Administration has indicated they are undertaking a 
project to achieve significant simplification of the Tax Code. 
Would you like to break that down a little bit?
    Mr. O'Neill. Thank you very much, Congressman. As I have 
had an opportunity to testify here before, I think we have a 
major challenge with our Tax Code because it is so enormously 
complicated. We have begun an effort to identify changes that 
we can work with the Committee and with other oversight bodies 
to do things that we can administratively, and to shape into 
perhaps objects of legislation changes that would be helpful to 
individual Americans as they try to respond to the complexity 
of our Tax Code.
    I think one of these areas that is very difficult is one 
that Commissioner Rossotti has put in front of me, as I have 
challenged him, as to how we can simplify the Tax Code. That 
area is in the area of how we define ``child'' from the point 
of view of the Tax Code.
    It turns out that we have many different definitions of 
what a ``child'' is, believe it or not, when it comes to the 
use of the Tax Code. Chairman Rossotti has said to me that he 
believes if he had to deal with the definition of ``child'' in 
the earned income tax credit, that he would be found wanting; 
which is to say, that he does not believe he could easily 
understand how to apply the definition of ``child'' as we have 
incorporated it in the Tax Code for this purpose.
    So in this area and in many others, we are looking at ways 
that we can create a simplification and better compliance and 
reduced costs of administration, because with all of the good 
intentions that I'm sure are reflected in the 10,000-plus pages 
of the Tax Code, we obviously have room for improvement.
    We are working out a way to identify those things and to 
take administrative action where we can to work with you to 
bring some of these things through the legislative process, 
where that is required.
    Chairman Thomas. Does the gentleman from California, Mr. 
Matsui, wish to inquire?
    Mr. Matsui. Thank you, Mr. Chairman. Thank you very much, 
Mr. Secretary, for appearing before us. We appreciate it.
    Mr. Stark showed you a chart that basically took into 
consideration legislative changes and not changes or 
reexamination and changes in the projections in the economy. 
The chart that I have up there at this particular time shows 
what happened to the surplus, the $5.6 trillion surplus that we 
estimated January of the year 2001.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512D.004
    
                                

    If we look at the yellow bar, it indicates basically a 
change in the economic projections. Essentially, 42 percent of 
the surplus was reduced because of the reexaminations. In fact, 
if one looks at this in terms of year by year, the yellow bar 
actually is high this year; it is about 70 percent because of 
the recession, and then it decreases over the next 9 years. But 
it is still a large number in the year 2010, mainly because the 
projections in 2001 were very, very optimistic and are less 
optimistic now.
    The red line or red bar basically is the June tax cut 
accumulated over 10 years without making it permanent. That 
comprises 41 percent of the total, of the total surplus. Then 
you have defense, which includes the war effort, incidentally. 
The defense increases by the President and also the war effort 
are included, which is only 9 percent of the surplus, which is 
about $560 billion, and the nondefense spending, which is 
increases in housing and those other expenditures, is about 8 
percent.
    So the war effort is basically a very small part of the 
reduction of the surplus. The large part of it in terms of what 
we can do as legislators and what the President can do as the 
Executive is basically the tax cut. The tax cut is 41 percent 
of the reduction in the surplus.
    If I may, Mr. Secretary, you answered a question that Mr. 
Rangel asked, and said that the trust fund, all the money 
coming in in payroll taxes is credited to the trust fund; which 
is correct, it is credited to the trust fund. But you also said 
at some prior time that ``it seems very unwise to think about 
using the Social Security Trust Fund moneys in some other way'' 
besides putting it in Social Security ``because at their 
current levels and with the current benefit structures, we are 
not accumulating enough money.''
    What is interesting, Mr. Secretary, is that the tax cut is 
$1.3 trillion over 10 years. You take the loss of interest in 
that and it is about $1.6 to about $1.7 trillion.
    In the President's revised budget, using essentially CBO 
numbers, in the President's revised budget the tax cut is the 
same, but in the baseline currently, the trust funds over the 
next 5 years, the Social Security Trust Fund, the range from 
other expenditures plus the tax credits is $298 billion. That 
is under the current baseline.
    Under the President's projection over the next 5 years, it 
goes up by $606 billion to a total of $904 billion. In other 
words, $904 billion over the next 5 years will be used--instead 
of putting it into the Social Security Trust Fund for people's 
retirement, will be used for tax cuts and other expenditures. I 
think that number is undisputable.
    In fact, over a 10-year period, the total amount raided 
from the Social Security Trust Fund, that is, individual's 
payroll taxes, is $1.5 trillion, which is about the same 
amount, incidentally, as the tax cut over the next 10 years, if 
you do not make it permanent, just if you keep the tax cut 
temporary.
    I guess what my concern is, Mr. Secretary, and I think the 
concern of a lot of people, and as the American public finds 
out more and more about this, I'm sure it will be a concern as 
well, is that because the tax cut equals the amount we are 
raiding the Social Security Trust Fund, it is almost exact, it 
is ironic, over the next 10 years. And because the tax cut--the 
top 1 percent, which is the average income of $1.1 million on 
the average tax return--the top 1 percent gets 38 percent of 
that tax cut, and the elevator operator and the waitresses at 
the House dining room are paying for that tax cut through their 
payroll taxes.
    I wonder if one can explain, Mr. Secretary, the equity in 
that. It just it seems to me to be inequitable. If there were 
Socrates or Aristotle, they would say perhaps there would be a 
moral dimension to it, but we do not talk about moral issues in 
the Congress.
    It would just seem to me that it would be totally 
inequitable if in fact we allow this tragedy to happen. That 
is, the tax cuts are being paid for by individuals' payroll 
taxes, and people who are making $15,000 and $20,000 are paying 
tax cuts for people making over $1 million a year.
    Could you please help me with that and perhaps alleviate my 
concerns and fears about that?
    Mr. O'Neill. Yes. Thank you very much, Congressman Matsui, 
for your comments.
    Let me start with the first data that you discussed, and 
observe again that while it is true that $5.6 trillion estimate 
from last January's, which was broadly agreed by both internal 
and external economists, has been reduced by $1.275 trillion 
over this next 10-year period, by CBO's estimates and by our 
own. It does not seem to us that it is a good idea, and the 
President said very directly it does not seem a good idea to 
him, to raise taxes on the American people.
    Now, to the point of what is happening with the Social 
Security money, let me say again, all of the money collected 
for Social Security is being credited to the Social Security 
trust funds. If we had a surplus this year instead of the 
effect of the war effort and the slowdown in the economy, the 
extra cash balance represented by a surplus would be used to 
pay down debt held by the public.
    I think it is really important that we not frighten the 
American people, and especially people that are on Social 
Security, that anyone has any intent of defaulting on the 
obligation that the Congress and Administrations since 1935 
have warranted to individual Americans that their Social 
Security will be there.
    Mr. Matsui. Excuse me, but you should tell Mr. Moynihan and 
Mr. Parsons on the Social Security Commission, because they are 
the ones who frighten the American public that that money may 
not be there, even though it is being credited. You even said 
that yourself.
    I am a little troubled by the inconsistency there.
    Chairman Thomas. The gentleman's time has expired.
    Mr. O'Neill. May I make one more point on the distribution 
of the tax consequences of the tax bill? It is really this: If 
you look at, under our current tax system, who is paying 
individual income taxes, 85 percent of all of the tax income 
from individual income taxes is coming from individuals and 
families that earn more than $75,000 a year.
    Mr. Stark. That is payroll taxes?
    Mr. O'Neill. I am talking about the individual income tax. 
That is the subject that we were talking about here.
    Chairman Thomas. The Chair believes part of its 
responsibility is to allow people who are perhaps watching to 
understand what is happening here in terms of the dueling 
charts.
    The chart that was up there, this one from 02 to 10, is the 
impact on the Federal budget. And frankly, whether the taxes 
are permanent or not, it would have virtually no change on this 
particular chart. And it shows the portion of the budget 
surplus which was anticipated as to where it would go to the 
various categories.
    The chart held up by the Secretary of the Treasury are the 
consequences of this yellow line on the economy in the larger 
question of revenues coming in to pay for the Federal 
Government's costs.
    So to a certain extent, the charts could be perfectly 
accurate but they were really showing different things. And the 
gentleman from Illinois' question about static versus dynamic 
scoring becomes extremely important at this point, but I will 
leave that to other Members to inquire.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes, Mr. Chairman. Thank you.
    Mr. Secretary, I believe this chart was distributed by 
Treasury. It shows the percent of GDP that revenues constitute, 
that revenues to the Federal Government constitute.
    I believe everybody on the Committee was handed this chart, 
so if you would refer to it, it shows that since World War II, 
revenues to the Federal Government have averaged about 18 
percent of GDP.
    When Congress passed and the President signed the tax cut 
last year, revenues to the Federal Government were at pretty 
much an all-time high of around 21 percent of GDP.
    So it is true that the tax cut reduced the surplus. We knew 
that. Hello. We wanted to reduce the surplus. The government 
was taking in too much money. We wanted to return some of that 
money to the people who earned it. We wanted to let the people 
who were earning that money keep more of their own money to 
create jobs, to create prosperity.
    Had it not been for that tax cut, the recession we are 
currently in would have been much deeper, wouldn't it, Mr. 
Secretary?
    Mr. O'Neill. You are absolutely right.
    Mr. McCrery. And revenues would have gone down even more, 
wouldn't they, Mr. Secretary?
    Mr. O'Neill. Absolutely.
    Mr. McCrery. So those folks who are concerned about the 
budget, the deficit, the debt, should know that economic growth 
is the key to the surplus or to the deficit, not some marginal 
tax rate for some category of income earner. It is economic 
growth, that is the key.
    This chart clearly shows any time we have had a recession 
since World War II, revenues have dipped below the average line 
except for--which one, Mr. Secretary?
    Mr. O'Neill. This one.
    Mr. McCrery. The one we are in right now.
    Mr. O'Neill. Exactly.
    Mr. McCrery. We are still taking in, even with the tax cut, 
even with the recession, 19 percent of GDP, 1 percent above the 
post-war average for revenues to the Federal Government. My 
goodness, how much do you want the government to take, 25 
percent, 30 percent? How much of the very character of our 
society do you want to change by the government taking more and 
more and more?
    That is why we had the tax cut, to preserve the nature of 
our economic system, to preserve the system that has made this 
the best country in the world, which produces the most jobs, 
the most exports. You name it, we do it. Why? Because of our 
economic system, because we let people work and keep most of 
their money.
    So, Mr. Secretary, I applaud your Administration for 
leading us to getting our taxes under control, which we now 
have pretty much done. We would like to do a little more to 
help the economy grow more quickly and more robustly as we come 
out of this recession, but 19 percent of GDP for revenues to 
the Federal Government it seems to me is not only adequate but 
is higher than we are accustomed to taking in.
    Let us talk about the debt and interest rates real quickly. 
Is there any historical correlation that you are aware of, Mr. 
Secretary, between deficits and long-term interest rates?
    Mr. O'Neill. No. As a matter of fact, I think the economic 
data very clearly shows us that long-term rates are a function 
of two things: one, the necessary real rate of return to 
capital; and second, inflation and inflation expectations. It 
is very clear.
    Mr. McCrery. And maybe a third would be the money supply.
    Mr. O'Neill. I'm sorry?
    Mr. McCrery. The money supply would enter into that as a 
condition of interest rates, but certainly not deficits.
    Mr. O'Neill. Absolutely not.
    Mr. McCrery. If you look at historical charts showing 
deficits and draw a line for long-term interest rates, there is 
absolutely no correlation. So this phony argument about, oh, 
gosh, if we run a deficit during a recession, which we have 
always done, we are going to get these long-term interest rate 
spikes is just nonsense.
    So Mr. Secretary, please continue to fight for commonsense 
economic policy and tax policy for this country, and just maybe 
we will begin to grow again and the surplus will take care of 
itself. Thank you.
    Mr. O'Neill. Thank you very much. Mr. Chairman, we can make 
this chart available in paper form to the Committee, too. What 
this shows is interest rates are at 40-year lows. This chart 
captures interest rate performance back to 1965 and through the 
current period.
    As I said in my testimony, it is simply not true that 
interest rates have trended up during this recent period, as 
you all have voted for tax relief for the American public. The 
10-year interest rates are lower than they have been, for a 
reference basis, by more than 100 basis points.
    So indeed, as the Congressman suggests, we believe we are 
on the right track and we should not be concerned about 
interest rates and where they are going. Inflation is under 
very good control at the moment.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512E.005
    
                                

    Chairman Thomas. I thank the gentleman. I think the 
Secretary could assume that if a chart is worth holding up, it 
is worth passing out. So if you have any more, we will 
anticipate it and we will make copies of it and have it 
available to Members.
    Does the gentleman from Pennsylvania, Mr. Coyne, wish to 
inquire?
    Mr. Coyne. Thank you, Mr. Chairman. Welcome, Mr. Secretary, 
and thank you for your testimony.
    In your written testimony today, you stated that the strict 
fiscal discipline contained in the President's budget is 
crucial to ensuring that we do not return to systemic deficits 
of the past. But the administration's budget in fact proposes 
systemic on-budget deficits, does it not?
    Mr. O'Neill. I would not say the intent is that they be 
systemic, and indeed, I suspect that--the reason I pointed out 
in my comments in the exchange with Mr. Stark the $660 billion 
worth of so-called technical correction in the 10-year data, it 
is necessary for us to give you hard numbers that you can look 
at for outyear periods.
    But as I said at the very opening of my testimony, I 
continue to be an optimist about the U.S. economy, and I will 
not be surprised if I am here next year to say to you, well, 
the estimators have changed their minds and the surpluses have 
come back because our economy is growing at a faster rate than 
was anticipated in January of 2002.
    Mr. Coyne. I don't think one could dispute the fact that 
every year from 2002 to 2007, the Administration's budget 
proposes on-budget deficits, excluding--if you want to take 
into consideration growth in the economy and additional 
revenue, that is one thing. But the budget as proposed clearly 
has on-budget deficits from 2002 to 2007.
    Mr. O'Neill. We are assuming on a unified basis we are 
going back into surplus in 2005.
    Mr. Coyne. In my judgment, for what it is worth, that just 
is not strict fiscal discipline.
    Mr. Secretary, last year we talked about a lockbox to 
secure the Social Security trust funds, and the 
Administration's budget request now proposes using all of the 
$179 billion in surplus Social Security revenues for 2003. What 
good was the lockbox that we enacted last year?
    Mr. O'Neill. I'm thinking about how to answer your comment 
about there not being fiscal discipline. The implication of 
what we have proposed not being fiscal discipline suggests one 
of two courses, it seems to me: One is to raise taxes, which we 
are against; and the other is to reduce spending from what the 
President has proposed, which obviously we do not think is the 
right thing for the country.
    The President has looked at the needs in our situation for 
prosecuting the war on terrorism and providing better 
protection for homeland security, and following up on all of 
the proposals and agreements that we have had together about 
expanding significantly education and medical care spending. 
And so the President's judgment is that this is the right 
combination of fiscal policy for this time, as he sees his 
responsibilities and as he sees all of the breadth of the 
engagement of the Federal Government from the perspective of 
all the people.
    And so, again, if this is not fiscal discipline, there are 
only two ways to get your version of fiscal discipline. One is 
to raise taxes, and the other is to reduce the spending the 
President has recommended. We do not favor either one of those.
    Mr. Coyne. Well, the President and the Administration are 
very quick to say that the Democrats want to raise taxes, but I 
have heard no Democrats say that they want to raise taxes. Now, 
do you categorize the possible freeze in future tax cuts as a 
tax increase? Is that what is defined as a raise in----
    Mr. O'Neill. I didn't make the rules, but as I understand 
it, if you all want to not follow through on the tax reductions 
that you all agreed to last year, that your own scoring 
committees would score any change in the effective date 
implementation as a tax increase. That is not my judgment, that 
is my understanding of your rules.
    So that if you decide that you are not going to follow 
along and let people have the child credits that are 
foreordained in the legislation you passed last year, or the 
marriage penalty relief that you all thought was a good idea, 
then it is going to show up on your account as a tax increase 
for the American people.
    So I would say that is a tax increase, yes.
    Mr. Coyne. Thank you.
    Chairman Thomas. The Chair is somewhat confused now in 
terms of the charts, because I thought one of the reasons the 
chart was put out was--the red bar was what is listed as the 
June tax cut, and if the red bar is big and ugly, you would 
assume that you would want to do something about the tax cut. 
Otherwise, I don't understand the meaning of this particular 
chart.
    I don't know that any Democrat has said they wanted to 
raise taxes, but when we show another chart in which the ugly 
red bar is the same as the economic consequences to the 
economy, and it is listed ``June tax cut,'' the assumption is 
you want to do something with it. And there is only one thing 
you can do with it, and that is to rescind it.
    When you give someone something and then take it away, 
whatever you want to call it, you have got to go back to the 
Treasury Secretary's chart to realize that the changes that 
were made will have a significant long-run positive impact on 
Federal revenues.
    So if no one is advocating a tax increase by virtue of 
using these charts, the Chair and others would be very 
interested in what the purpose of the chart was, other than to 
illuminate the fact that the Congress now has very expensive 
color copiers which allow us to make colorful displays.
    Mr. Matsui. Will the gentleman yield?
    Mr. McCrery. Another way to say it is, what is your point?
    Chairman Thomas. The gentleman from Louisiana wants to 
know, what is your point?
    Mr. Matsui. The point is, we just wanted to show the 
consequences of the actions of this Administration. Republicans 
control the House, they controlled the Senate for the first 6 
months of the last year, and of course the executive branch is 
controlled by the Republicans. We just want to show the 
consequences.
    What is going to happen is that we are going to have 
significant benefit cuts in Social Security as a result of this 
tax cut and because of the deterioration in the economy. But 
the tax cut will result in a major reduction in Social Security 
benefits.
    And so that is all we wanted to show. I mean, don't you 
want to be responsible for your actions? You should be held 
accountable for your actions.
    Mr. McCrery. So the gentleman has suggested----
    Mr. Matsui. If the gentleman would all of a sudden be 
concerned because we wanted to expose the American people to 
what they are doing----
    Mr. McCrery. If the gentleman is not proposing an increase 
in taxes, I would repeat, what is the gentleman's point?
    Mr. Matsui. Would the gentleman listen? I just explained 
it.
    Mr. McCrery. The gentleman did not explain it.
    Chairman Thomas. The gentleman wanted to show the 
consequences of decisions that have been made, signed into law, 
and the assumption is they don't like them.
    Mr. Matsui. We didn't vote for them.
    Chairman Thomas. The assumption is that there need to be 
changes made. I believe the point has been well made. Without 
saying it, the only obvious choice is to raise taxes.
    Mr. Matsui. Regular order.
    I just hope the other Members will be able to ask 
questions. If the Chairman wants to respond every time a Member 
goes through their questions, we will never let the lower-
ranking Members ask questions.
    Chairman Thomas. I think the gentleman should rely on the 
Chair in terms of allowing the lower-ranking Members. The Chair 
has introduced procedures at these hearings that have never 
been utilized in the past, and he, as well as I, having been a 
lower-ranking Member, remember we never got to ask questions.
    Does the gentlewoman from Washington wish to inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman. I think we 
need to get back to the point of this budget, and I appreciate 
your having helped out some of my neighbors in the Pacific 
Northwest with your funds for unemployment and coverage of 
medical benefits. I think that is very important.
    We are in a situation where up to 30,000 Boeing employees 
alone are going to be losing their jobs by the end of this 
year, and we have tried very hard to help out the companies 
that are going to be laying people off by some of our tax 
provisions, but also by adding to the generosity of companies 
like Boeing with some additional weeks of unemployment and 
general coverage of medical insurance. Thank you very much for 
that, Mr. Secretary.
    I wanted to--could we have order, Mr. Chairman, please?
    I wanted to make a point that seems to have fallen through 
the cracks. That is, as I read this budget, this budget says 
that for the next year or two, we will be in a deficit 
situation, where we projected pre-9/11 and the recession that 
accompanied that, that actually started in my part of the 
country in early 2000, that after 2 years we will go back into 
a surplus position.
    What happened when we projected $5.6 trillion is that we 
have dropped down now to a 10-year surplus of $1.6 trillion. 
That is a point often forgotten in the way people cover this 
whole situation that has happened to us in the United States, 
most of which is beyond our control, and as we look ahead and 
become involved in the very important budget process.
    Mr. Secretary, I want to talk to you about one area of this 
budget that is something I especially appreciate, and that is 
the speeding up of the tax relief provisions that the President 
signed in June.
    I am particularly happy that you have included a death tax 
permanency issue here, because I think that is so vitally 
important. When we see how tax relief can change behavior, and 
you look at the small business community alone, even though we 
phase out this death tax over the next 8 years, it still comes 
back to haunt us 9 months later. They are calling that the 
suicide area. They are calling that 9 months the time when 
somebody is going to have to die or pay some form of death tax. 
And beginning in October of 2010, that tax will come back once 
more to haunt us, not in its phaseout condition of the year 
before, but the way it was pre-June when it was signed by the 
President.
    So I would like to ask your impressions of how you think 
permanency is important, particularly with regard to the 
phasing out of the death tax; what behavioral changes you 
expect that we would see since people are still having the same 
unpredictability, still having to provide for estate planning 
and so forth?
    Mr. O'Neill. Well, it is my expectation that if we can take 
away the uncertainty that exists in the legislation the way it 
was finally agreed last year, that it will have a serious 
effect on how people conduct their financial affairs in 
anticipation of what we all know: that inevitably we are going 
to die and pass on our worldly assets to our heirs and assigns. 
And the current Tax Code which the reform bill was intended to 
fix last year induces all kinds of behavior to avoid taxes and 
try to skip generations, and I think frankly it results in the 
misallocation of capital that would otherwise pursue a normal 
good growth and not be driven by tax considerations, but, more 
substantially, by the expectation of accumulation for current 
and future generations.
    So I think in economic thought, there is no doubt that if 
we can give a sense of permanency to those who are accumulating 
wealth in the time between now and when these estate tax 
provisions would have full effect, and then assure to them that 
it will not be taken away in 9 months, that behavior will begin 
to change almost immediately, and many people who now pay very 
substantial amounts of money to estate planners can save that 
money and use it for investment, instead of trying to figure 
out how to cope with the Federal Tax Code.
    Ms. Dunn. Thank you.
    Mr. Secretary, I wanted to make one last comment. That is 
with reference to the gentleman from California, who said that 
the tax relief proposals were aimed at, to paraphrase, ``our 
rich friends.''
    He is talking about a single schoolteacher who makes 
$30,000 a year who is not in the 28 percent tax bracket. For 
him to consider that individual who cannot even afford housing 
in the community where she teaches as rich, I think is over the 
edge.
    We have to pay attention to the details as we discuss these 
things, because the rhetoric can be very hot and very flaming, 
but it also can be very incorrect, and it can end up in 
penalizing the people who should be helped out.
    Mr. O'Neill. Thank you.
    Chairman Thomas. The gentlewoman's time has expired. Does 
the gentleman from Georgia wish to inquire?
    Mr. Collins. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being with us here this morning.
    I have a question about the definition of ``displaced 
workers'' as we move forward with the health care benefits and 
the unemployment benefits in the stimulus package, and 
hopefully the others on the other side of the hall will get to 
this package very soon.
    I am referring to displaced workers who took voluntary 
leave from anywhere from 2 to 5 years so that maybe others 
would not be given a pink slip, but still they are displaced. 
It is all because of the economy and because of the emergency, 
because of the war efforts and all, that this came about.
    Has this been put on the platter at any point, that 
displaced workers would include anyone who did take a voluntary 
unpaid leave?
    Mr. O'Neill. Help me a little bit. I am not sure I 
understand the question. This is for people who are on unpaid 
leave, and the question is whether or not they would be covered 
by----
    Mr. Collins. They would be covered under the health care 
benefits, the Consolidated Omnibus Budget Reconciliation Act of 
1985 or COBRA payments that we had proposed in the stimulus 
package just before Christmas.
    Mr. O'Neill. I think not in the version that we favor. What 
we favor would provide assistance through a refundable tax 
credit to people who are actually displaced; not those who, as 
you say, have been in some sort of leave status. This would be 
for people who actually have been actively employed and then 
are unemployed subsequent to September 11.
    Mr. Collins. Well, that is the same thing. These people are 
unemployed, and there is no guarantee that they would be 
reinstated.
    Mr. O'Neill. I'm sorry?
    Mr. Collins. They are permanently unemployed, and there is 
no guarantee that they would be reinstated. Some just said ``I 
will take leave, unpaid leave,'' betting on the fact that they 
may be able to go back to work at some future point in time so 
maybe some others in a less good situation than they are would 
not have to be displaced.
    I do think they need to be taken into consideration if we 
go through with the health care benefits that we are proposing.
    Mr. O'Neill. All right.
    Mr. Collins. One other thing too, Mr. Secretary. It has 
been said that those who are earning $15,000 to $20,000 a year, 
it is unfair for them to pay for the tax relief for any other 
taxpayers. Very few people who make $15,000 to $20,000 pay any 
tax. In fact, under the earned income tax credit, most of the 
people receive back more than their payroll tax in benefits or 
through a refundable credit.
    It is also interesting, the comment you made about 85 
percent of the taxes collected come from families with an 
income of $75,000 or more per year. The 10-year growth of 
projections of 55 percent, have you used any projections that 
would show what would happen with the growth of income had 
there not been a tax reduction? We all know that with the 
recession, with the unemployment, revenues would be down. You 
show it with the----
    Mr. O'Neill. We have looked at, nationally, where would we 
be if you all had not enacted a tax cut, and it is fairly clear 
that the depth of the recession and the speed of going into a 
slow economic period would have been substantial.
    As a matter of fact, I think maybe we can account it to 
just good luck, if you wish, but the action that was taken by 
the Congress last year that began putting money, incremental 
money, back into the pockets of the people who earned it in 
July was fortuitously there, because it significantly softened 
what otherwise could have been a very sharp down period after 
the terrorist attacks.
    I think one of the reasons that I was more hopeful than 
almost anybody I know about the possibility of the fourth 
quarter being positive is because of the expectations I had for 
the interest rate cuts that Chairman Greenspan and the Fed put 
in place, and the tax action that you all took, which had begun 
to infuse the economy with people's money, which they, after 
all, had earned anyway, at the very beginning, on the 23rd of 
July, and then flowing through the economy like a strong 
current as we were recovering from the September 11 attacks.
    So I think while we may not be able to specifically 
quantify how many jobs we avoided losing because of the actions 
that you took and the actions of the Fed, I would say the 
numbers are in the hundreds of thousands, maybe more than that.
    Mr. Collins. I think it would have been much worse had we 
not put in place the tax relief, and I think we would have had 
a much quicker recovery had the other body engaged in truthful 
actions with the stimulus package.
    You know, Mr. Secretary, I have found that one of the major 
problems that we have here in Washington--and I am a small 
business guy, have been for 39 years, and always operate on 
what I refer to as cash flow. I never have called this thing 
that many have called a ``surplus,'' surplus. I call it 
positive cash flow, where at a point in time we were taking in 
more money than we were spending. The danger part of that is 
sometimes you get payday-rich and you begin to spend more than 
you should.
    But our problem in this town is that we focus more on the 
cash flow of the Treasury than we do the cash flow of 
individuals and of business. And that cash flow of individuals 
and businesses is where the cash flow of the Treasury comes 
from.
    The old rule of thumb is that the more you leave in the 
cash flow of the private sector, it has the potential of 
revolving or rotating itself some seven times. That is where 
you generate the revenue, the potential new revenues from the 
economy, is because those dollars will be used and turned over 
and over. And every time they turn, each entity of government, 
not just the Federal Government, will benefit from it.
    So I think if people in this body and in this Committee in 
particular would focus more on the cash flow of their 
constituency, the cash flow of the businesses that provide the 
jobs for their constituency, then you would see a better cash 
flow in Washington as a result, instead of sitting up here day 
after day trying to drive wedges between people back home 
because of their own political philosophy and their seeking of 
political power.
    Thank you, Mr. Secretary. I think you have done a very good 
job this morning. We appreciate your answers.
    Mr. O'Neill. Thank you.
    Chairman Thomas. The gentleman's time has expired. Does the 
gentleman from Michigan wish to inquire?
    Mr. Levin. Welcome, Mr. Secretary. I think the public would 
like some clear, simple answers, so let me ask you a few 
questions.
    Isn't it correct that the budget as proposed would use 
Social Security funds each of the 10 years?
    Mr. O'Neill. No.
    Mr. Levin. Yes?
    Mr. O'Neill. No.
    Mr. Levin. No?
    Mr. O'Neill. The Social Security funds, as I have said 
repeatedly----
    Mr. Levin. I didn't say about crediting.
    Mr. O'Neill. The Social Security funds will be credited to 
the Social Security accounts.
    Mr. Levin. OK. You say ``credited,'' but let's be clear. In 
terms of the surplus, the surplus in the Social Security funds 
would be reduced every year, would they not?
    Mr. O'Neill. No. It won't be reduced at all.
    Mr. Levin. Would there be----
    Mr. O'Neill. Maybe we should talk about income and balance 
sheets. Maybe your point is that we have an unfunded liability. 
I would stipulate that we have maybe a $10 trillion unfunded 
liability for Social Security which eventually we must deal 
with.
    Mr. Levin. And it would be increased every year under this 
budget?
    Mr. O'Neill. No. It won't be increased by the budget 
numbers. It will be increased as we have more people earning 
more money and earning credits, but it does not have anything 
to do with the revenue flow.
    Mr. Levin. Let me put it this way, then. You are saying 
that the unified budget goes into surplus after a number of 
years, right?
    Mr. O'Neill. Let me say this to you: If we kept books in a 
way that made clear what our purposes are, we would have a cash 
book, and it would largely be what we call the unified budget 
numbers. It shows the total inflows and outflows of the Federal 
Government.
    To the Members, the comment of Mr. Collins, it does make a 
lot of sense to pay attention to cash, because if you do not 
have enough cash, it means you have to borrow some. But----
    Mr. Levin. Mr. Secretary, I don't think anybody is going to 
understand this. We had a unified surplus projected of $5.6 
trillion, isn't that correct?
    Mr. O'Neill. We had.
    Mr. Levin. Now we have a unified surplus that has been 
dramatically reduced, correct?
    Mr. O'Neill. Right.
    Mr. Levin. What that means is that we are going into the 
surplus, and the Social Security fund--it is being reduced. It 
has to be.
    Mr. O'Neill. No. We are going into a position where we are 
going to borrow some money because we are not taking enough 
money in total to pay all of our debts.
    Mr. Levin. I will use your words: We are borrowing Social 
Security monies. We are borrowing monies that come in for 
purposes of Social Security.
    Mr. O'Neill. We are borrowing money from the general public 
to fully service current obligations.
    Mr. Levin. These are Social Security payroll taxes, are 
they not?
    Mr. O'Neill. And it is going into the Social Security Trust 
Fund.
    Mr. Levin. But we are using those monies for other 
purposes.
    Mr. O'Neill. Again, let me say, we have got arguably an $11 
trillion contingent liability for Social Security.
    Mr. Levin. No. We had a projected $5.6 trillion surplus. 
That now has been diminished dramatically. Half of that surplus 
was Social Security, and now we are below that amount, so we 
need to tell the public straight out that under this budget, 
Social Security and Medicare funds are being borrowed.
    Mr. O'Neill. The alternative is to invest them, to in 
effect buy back debt held by the public. We are mixing concepts 
here, and I think the American people would be really well 
served if we would not mix concepts. I am saying to you that 
we----
    Mr. Levin. I will go back to concepts. Let me just read to 
you. If we lockbox Social Security, as the President said we 
should do, effectively use it to pay down the public debt----
    Mr. O'Neill. Correct.
    Mr. Levin. And you all want to do Medicare, too; if that is 
the way it comes out, that is fine. We still have got, after 
implementation of the President's proposal, $1.5 trillion 
available, or more than 25 percent of the total projected 
surplus.
    So essentially you said if we wanted to lockbox those 
monies, fine. Paying them down, paying down the public debt, 
that is no longer happening with those monies, isn't that 
correct?
    The lockbox has been unlocked. Why don't you simply admit 
it? Has the lockbox been unlocked?
    Mr. O'Neill. Well, I think----
    Mr. Levin. Yes or no.
    Mr. O'Neill. I don't think it is a simple yes or no answer. 
The answer is, Social Security funds are always going to be 
used for Social Security and only for Social Security. And yes, 
we have cash coming in, and on balance, we are having to borrow 
a little bit of money this year because of the war and because 
of the slowdown in the economy.
    Mr. Levin. So we are borrowing--I don't mean to interrupt 
you, except the public needs a straight answer. We are 
borrowing that money, and as the chart showed, a small part of 
it is for defense. We are borrowing that money, so why don't 
you say so? And we are borrowing it for each of the 10 years.
    And then you say the deficits don't matter, and that is a 
shocking change. I just read to you, and I will finish what Mr. 
Greenspan had to say: ``. . . over the past year, some of the 
firmness of long-term interest rates, probably as the 
consequence of the fall of projected budget surpluses, 
including Social Security, and the implied less rapid paydowns 
of Treasury debt.''
    It is astonishing that somebody comes here--and Mr. McCrery 
says it is nonsense that surpluses or deficits matter, and you 
come here and say that fiscal discipline, the deficits versus 
surpluses, are irrelevant. Are they irrelevant? Is Mr. 
Greenspan totally wrong?
    Is Mr. Rubin, your predecessor, who castigates this 
Administration for the loss of--he says, ``this country is ill-
served by abandoning fiscal discipline, and this budget 
abandons fiscal discipline. It is the opposite of what was 
accomplished in the 1990s.'' Is Mr. Rubin dead wrong?
    Mr. O'Neill. The implication, Congressman, of your remarks 
is that you think we should either raise taxes or reduce 
spending for the things the President has recommended.
    The President believes under the circumstances we have 
right now, what we have put before you is the height of a 
responsible proposal because it takes care of prosecuting the 
war on terrorism, it takes care of heightened needs for 
homeland security to protect ourselves, and it takes care of 
lots of other spending to a total of over $2.1 trillion, and it 
does not raise taxes, which is the----
    Mr. Levin. Admit you are borrowing from Social Security to 
do that.
    Mr. O'Neill. We are not borrowing from Social Security, I'm 
sorry.
    Chairman Thomas. The gentleman's time has expired.
    Fully understanding the potential wrath the Chairman's 
comment may unleash, the Chair understood the gentleman from 
Louisiana not to say that long-term interest rates and deficits 
don't matter, but in fact there is no correlation between the 
two, was what the Chair thought was the thrust of the gentleman 
from Louisiana.
    Does the gentleman from Ohio, Mr. Portman, wish to inquire?
    Mr. Portman. I thank the Chair. There have been a lot of 
confusing statements made that I think have misled people who 
are trying to figure out what we are talking about here.
    I think Chairman Greenspan is exactly right in the sense 
that the most important single thing is economic growth, and 
that is the way we are going to solve our Social Security and 
our Medicare challenges.
    Just to be clear, the tax relief which was passed last 
spring that some are suggesting was not a good idea, and 
therefore should be repealed, is about economic growth.
    Mr. Secretary, you said in your testimony something about 
who benefits from the tax cuts. And could you talk just a 
little about those engines of economic growth who benefit from 
the tax relief, particularly the two highest rate reductions?
    Mr. O'Neill. Well, as I said in my testimony, and maybe I 
could amplify it a little bit with a more specific example, 
there are 33 million small businesses and entrepreneurs out 
there who are caught by these highest tax rates because they 
pay taxes on an individual basis. And last spring, after you 
all passed the tax relief bill, as is my custom, we had groups 
of people in to talk with us about what is going on in the 
economy.
    I thought it was a really dramatic example of the 
importance of this point, with one person who owned a florist 
shop. His comment was: ``Because of the tax changes you all 
have made, and because of my position in paying high individual 
rates, with your changes I am going to be able to hire one 
additional person.'' Just one additional person.
    I think that this is really a telling thing, that job 
growth in this country occurs one at a time, and that tax rates 
that we pull in here from those entrepreneurs reduce the 
potential and possibility of job growth, which is, after all, 
the engine of revenue accumulation here in Washington.
    The thing that is really important and not to forget is 
that we can have more revenue here, as my chart shows we will, 
if we can give encouragement to those who create jobs and pay 
taxes.
    Mr. Portman. I think that is the key. You talk about 80 
percent of the growth of the benefit in the top two rate 
reductions go to small businessowners and entrepreneurs. You 
also talk about the fact that we are now paying well above the 
historic average with regard to taxes, well above the 18 
percent. You also talked about distributional limits.
    But what you did not say is at the end of all these tax 
cuts, the wealthy will be paying a higher proportion of the 
income tax. You are talking about how people making $75,000 
bucks or more pay the vast majority of taxes, about 80 percent 
of the income taxes. Will they be paying more or less at the 
end of the Bush tax cuts?
    Mr. O'Neill. The higher income people will be paying a----
    Mr. Portman. They will be paying a large portion. We have 
historical high tax rates, a distribution that is even more 
progressive, and we are going to have economic growth that 
results from it. That is the point.
    With regard to Social Security, there have been a lot of 
misleading statements. To make something very clear, people 
have been saying we are dipping into the Social Security trust 
funds to pay for the cost of the war, to pay for this tax 
relief that is so important to economic growth. We know that is 
not true.
    Let's just be very specific here. Can you explain the 
difference between the Social Security surplus and the Social 
Security trust funds?
    Mr. O'Neill. Well, the Social Security Trust Fund is a 
trust that you all have established, and most significantly, it 
is a warrant to the American people that the word of the U.S. 
Government is good, and that as people mature into Social 
Security recipient status, that they will get what they 
expected to get.
    The President has said over and over again that this is a 
trust that will never be breached, and I think you all agree 
with that; that we are going to make good on the commitment 
that has been made to American citizens that when they get to 
retirement age, Social Security will be there for them in the 
form they expect it.
    Mr. Portman. The only way to change that is for Congress to 
take action to either reduce the benefit or change the revenue 
in some ways. Is anybody considering that? Is that in your 
budget?
    Mr. O'Neill. I cannot believe anyone would seriously 
consider----
    Mr. Portman. Before we scare those seniors and near seniors 
that may be watching us today, we are not talking about the 
trust fund. It is not touched by this. If there had been more 
surplus built up because the economy continued to do as well as 
it would have been doing, how would that surplus have been 
used?
    Mr. O'Neill. Would have been used to reduce debt held by 
the public.
    Mr. Portman. To pay down debt. That is the difference. I 
think it needs to be made clear. Income to Social Security 
trust funds can only be used for the purposes designated by 
law, which is Social Security benefits and funding the Social 
Security Administration. Isn't that the way the law currently 
reads?
    Mr. O'Neill. Yes, sir.
    Mr. Portman. I think it is very important, Mr. Chairman, 
that we not talk about dipping into the Social Security trust 
funds, because we are not doing that. We have made that very 
clear. I also would make the point again that it is incredibly 
important that we grow this economy. That is the single most 
important thing. That is what the tax relief is about. We would 
be deeper into recession if we didn't have it. I appreciate 
your testimony, Mr. Secretary.
    Mr. O'Neill. Thank you.
    Chairman Thomas. Does the gentleman from Maryland wish to 
inquire?
    Mr. Cardin. Thank you, Mr. Chairman. Mr. Secretary, 
welcome.
    I want to do something that is rarely done here. Rather 
than put up a chart to start off with, Mr. Chairman, I am going 
to go through the actual book, the Congressional Budget Office 
book, page 161, which gives the backup information to a chart 
that was used to indicate that we are still very high on the 
total number or total revenues we receive as a percentage of 
the gross domestic product.
    [The table follows:]

            APPENDIX F            HISTORICAL BUDGET DATA 161

                                                                        Table F-4
                                              Revenues by Major Source, 1962-2001 (As a percentage of GDP)
                                                                                                              Estate
                                                                 Individual  Corporate    Social    Excise      and     Customs  Miscellaneous    Total
                                                                    Income     Income   Insurance    Taxes     Gift     Duties      Receipts    Revenues
                                                                    Taxes      Taxes       Taxes               Taxes
1962...........................................................        8.0         3.6        3.0       2.2       0.4       0.2          0.1        17.5
1963...........................................................        7.9         3.6        3.3       2.2       0.4       0.2          0.2        17.8
1964...........................................................        7.6         3.7        3.4       2.1       0.4       0.2          0.2        17.5
1965...........................................................        7.1         3.7        3.2       2.1       0.4       0.2          0.2        17.0
1966...........................................................        7.3         4.0        3.4       1.7       0.4       0.2          0.2        17.3
1967...........................................................        7.6         4.2        4.0       1.7       0.4       0.2          0.3        18.3
1968...........................................................        7.9         3.3        3.9       1.6       0.4       0.2          0.3        17.6
1969...........................................................        9.2         3.9        4.1       1.6       0.4       0.2          0.3        19.7
1970...........................................................        8.9         3.2        4.4       1.5       0.4       0.2          0.3        19.0
1971...........................................................        8.0         2.5        4.4       1.5       0.3       0.2          0.4        17.3
1972...........................................................        8.0         2.7        4.5       1.3       0.5       0.3          0.3        17.6
1973...........................................................        7.9         2.8        4.8       1.2       0.4       0.2          0.3        17.6
1974...........................................................        8.3         2.7        5.2       1.2       0.3       0.2          0.4        18.3
1975...........................................................        7.8         2.6        5.4       1.1       0.3       0.2          0.4        17.9
1976...........................................................        7.6         2.4        5.2       1.0       0.3       0.2          0.5        17.2
1977...........................................................        8.0         2.8        5.4       0.9       0.4       0.3          0.3        18.0
1978...........................................................        8.2         2.7        5.5       0.8       0.2       0.3          0.3        18.0
1979...........................................................        8.7         2.6        5.5       0.7       0.2       0.3          0.4        18.5
1980...........................................................        8.9         2.4        5.8       0.9       0.2       0.3          0.5        18.9
1981...........................................................        9.3         2.0        6.0       1.3       0.2       0.3          0.5        19.6
1982...........................................................        9.2         1.5        6.2       1.1       0.2       0.3          0.5        19.1
1983...........................................................        8.4         1.1        6.1       1.0       0.2       0.3          0.5        17.4
1984...........................................................        7.8         1.5        6.2       1.0       0.2       0.3          0.4        17.3
1985...........................................................        8.1         1.5        6.4       0.9       0.2       0.3          0.4        17.7
1986...........................................................        7.9         1.4        6.5       0.7       0.2       0.3          0.5        17.5
1987...........................................................        8.4         1.8        6.5       0.7       0.2       0.3          0.4        18.4
1988...........................................................        8.0         1.9        6.7       0.7       0.2       0.3          0.4        18.1
1989...........................................................        8.2         1.9        6.6       0.6       0.2       0.3          0.4        18.3
1990...........................................................        8.1         1.6        6.6       0.6       0.2       0.3          0.5        18.0
1991...........................................................        7.9         1.7        6.7       0.7       0.2       0.3          0.4        17.8
1992...........................................................        7.7         1.6        6.6       0.7       0.2       0.3          0.4        17.5
1993...........................................................        7.8         1.8        6.5       0.7       0.2       0.3          0.3        17.6
1994...........................................................        7.8         2.0        6.6       0.8       0.2       0.3          0.3        18.1
1995...........................................................        8.1         2.1        6.6       0.8       0.2       0.3          0.4        18.5
1996...........................................................        8.5         2.2        6.6       0.7       0.2       0.2          0.3        18.9
1997...........................................................        9.0         2.2        6.6       0.7       0.2       0.2          0.3        19.3
1998...........................................................        9.6         2.2        6.6       0.7       0.3       0.2          0.4        19.9
1999...........................................................        9.6         2.0        6.7       0.8       0.3       0.2          0.4        20.0
2000...........................................................       10.3         2.1        6.7       0.7       0.3       0.2          0.4        20.8
2001...........................................................        9.8         1.5        6.8       0.7       0.3       0.2          0.4        19.6
 
SOURCE: Congressional Budget Office

                                

    Mr. Cardin. My reason for going to actually the source 
document is to sort of walk through this for a moment to show 
that it is true that income taxes over the last 40 years have 
remained somewhat constant as a percentage of our GDP. 
Corporate taxes have actually been reduced by about 50 percent 
during that period of time. And the big loser--or the big 
increase--has been on the social insurance taxes, which have 
doubled in that same period of time.
    I mention that because if you want to look at why we are 
having a high percentage of revenue, it has mostly been the 
growth in the social insurance programs, Social Security and 
Medicare; and I think that is why many of us are very concerned 
that, when we start looking now at the projections, we see that 
the surpluses that are generated, as Mr. Levin pointed out, by 
Social Security, that many of us last year thought would be 
used for a solution to the Social Security problem is now off 
the table. Because we don't have those dollars available to 
invest in Social Security.
    Mr. Secretary, I understand the one chart that we put up 
that talks about congressional action, what we did last year. 
We put that up just to point out that what Congress did last 
year, in regards to the projected surplus, about 80 percent was 
the tax cut; and that is why we lost the projected surpluses 
and we are now in deficit. Twenty percent was basically the war 
effort, increased spending. But 80 percent of what we did last 
year, what Congress did last year, was the tax cut.
    Now, Mr. McCrery said, why did we bring that up? I think it 
is at least instructive as to what we should do this year. What 
are we going to do this year? Now, first off has been the 
stimulus package. Are we going to reduce corporate taxes more? 
Is that what we plan to do? Or are we going to look at 
additional spending as part of the unemployment insurance? Or, 
as you point out in your statement, you support extending 
uninsurance--UI benefits and providing temporary relief for 
workers who have lost their insurance. I commend you for that.
    But why haven't we brought up a bill by total agreement now 
just on UI? In every recession we have brought forward a bill 
to increase UI benefits. You know and I know that that money 
will be put right back into the economy. It is the right thing 
to do, it stimulates the economy, and yet it is being held 
hostage for a larger stimulus package. Make no mistake about 
it. It is being used to try to get additional corporate tax 
reductions.
    I think we should work on all these issues. But in the 
meantime we passed a bill for the airlines, we are in the 
process of passing a bill for the insurance industry, we passed 
a lot of money to help New York, and we still haven't done 
anything for displaced workers.
    I implore you, as we go through this process, talk about 
what Congress can do. Try to at least spin out the people who 
have really been left out here, the displaced workers. Don't 
get that tied up in the politics of additional tax cuts. 
Because that is controversial. Many of us were told last year 
that everything was going to be all right as long as we passed 
this tax bill. Many of us said we thought the projections were 
wrong. Well, you made 6 or $700 billion of technical 
adjustments since last year. That means we made some mistakes 
last year in projecting the surplus. So we know we have a 
problem with displaced workers.
    Why can't we get along with and get that done now by 
agreement? I can assure you the Democrats are willing to work 
with the Republicans and move out a separate bill on UI. Why 
can't we do that at least? Isn't that the right thing to do?
    Mr. O'Neill. Congressman, I would remind that on October 
the 5th the President said he thought we should have a stimulus 
bill, and he spelled out the components that he thought were 
important to deal with: Include those people who were directly 
affected by the events of September the 11th, including those 
who were displaced workers, and to deal with those who had 
reduced incomes and to provide some basis for additional job 
creation. So I think the President has been very clear and we 
have worked very hard with this Committee, with the Chairman of 
this Committee through the month of October and November and 
December with the belief that it was necessary to take action 
on a stimulus bill and what we call an economic security 
package.
    The House passed versions of this twice, and we simply 
could not get the Senate to agree to determine----
    Mr. Cardin. I would suggest the Senate would be willing to 
take up a UI package by itself.
    Let me also suggest there is a $35 billion surplus in the 
tax. The money is sitting out there. It is available. It is 
temporary. It is immediate. And we have people now that have 
exhausted their regular benefits that are no longer getting 
unemployment insurance because Congress has not acted on this 
subject. We need your help. We need your leadership. Divide 
that out as we did for the airline industry. Divide that out as 
we are doing for the insurance industry. It was right when we 
did it for the airline industry. It was right what we are doing 
for the insurance industry. But the displaced workers, it is 
wrong that we haven't taken action and have separated out their 
issues.
    Thank you, Mr. Chairman.
    Mr. O'Neill. In December, I truly believe that if Senator 
Baucus had been free to bring our work to a conclusion we would 
have passed stimulus before the Congress went home at the end 
of December. And if we had been able to do what at least some 
important Members of the Senate had wanted to do, we would have 
passed terrorist risk insurance, too, which we failed to do. So 
there is no doubt we need action in these areas.
    I must tell you I think we worked with every good faith and 
every good intention with the direction from the President that 
he wanted these things done. We simply couldn't get them done 
in the Senate.
    Chairman Thomas. Thank the gentleman.
    Just for purposes of clarification, the gentleman used two 
phrases in regard to the stimulus: to ``reduce corporate taxes 
more,'' and then you said ``additional corporate tax 
reductions.'' The gentleman didn't mean to imply, did he, that 
last year's tax reduction package affected corporations?
    Mr. Cardin. No. If the Chairman would yield, I was 
referring to the historic reductions over the last 40 years of 
corporate taxes, which have been reduced by about 50 percent.
    Chairman Thomas. Thank the gentleman. There was some 
confusion on the Chair's part because, as everyone knows, there 
were no corporate tax reductions in last year's package.
    The gentleman from Pennsylvania, Mr. English, wish to 
inquire?
    Mr. English. Yes.
    First of all, Mr. Secretary, I would like to thank you for 
your demeanor at this hearing. In the face of some difficult 
questions and sometimes rather partisan lines of questioning, I 
think you have offered the American public some simple but 
intellectually honest answers. I think you have added a great 
deal to the debate by doing so.
    I would like to start my questioning by seeking a little 
further clarification. You are, I know, a student of economic 
history. Has this country ever run a surplus in wartime?
    Mr. O'Neill. No.
    Mr. English. Has this country ever run a surplus during a 
recession?
    Mr. O'Neill. No.
    Mr. English. I wonder, did this country not try to run a 
surplus in the early part of the Great Depression and at that 
point we saw the negative effect going into a surplus of trying 
to--of going into a serious recession of trying to run a 
surplus? The lessons of history suggest that maybe we should be 
running a modest deficit now. I am very comfortable with what 
the President has proposed.
    Now, I am delighted that your budget continues to 
accommodate--Mr. Chairman, I am not sure the Committee is in 
order right now.
    Chairman Thomas. The Committee will come to order.
    Mr. English. Regular order. Thank you.
    Getting back to my line of questioning, Mr. Secretary, I am 
delighted to see that in the President's budget you have 
continued to accommodate a stimulus package. Now we have heard 
some statements made here today, but the fact is the House has 
passed a stimulus package that was intended to provide direct 
assistance to workers, improve their unemployment benefits and 
I think at a very difficult time provide some assistance to 
working families.
    We have heard it suggested that the Administration should 
drop its support for stimulus in order to maintain those parts 
of the package that only provide assistance to workers. But I 
represent a district which being--having spent time in Western 
Pennsylvania you know is heavily manufacturing, is going 
through a much deeper recession right now than the rest of the 
country. Looking at the stimulus package, could you comment on 
the importance of some of the corporate provisions that are 
being dismissed on the other side? Specifically, does not the 
expensing provision help manufacturing firms like we have in 
Northwestern Pennsylvania, many of which are export oriented?
    Mr. O'Neill. Absolutely. In fact, you know, I think the 
point is--I prefer not to say these are corporate related--
these are business related. As I observed earlier, the real 
engine of economic growth in this country is small firms. All 
firms would benefit by being able to accelerate depreciation. 
As the comment was made earlier for those of you who have been 
in business or understand how business works, this would 
produce free cash flow, right now, either to protect jobs that 
are already out there or to add jobs for those firms that are 
seeing increased demand.
    There is no doubt that we should give this burst of 
assistance to business organizations so that they can attend to 
keeping and increasing job availability so our revenue can go 
up at the Federal level, not down. As you observed, we do not 
believe that it makes sense to raise taxes in a slow economic 
period and for the sake of an accountant's surplus.
    Mr. English. Specifically on that point, having been the 
Chief Executive Officer of a large manufacturing concern, is it 
not true that the companies that benefit from an expensing 
provision are precisely those companies which in a recession 
are making a heroic effort to invest back in their 
productionline, improve their productivity, and work their way 
back to profitability?
    Mr. O'Neill. Exactly right.
    Mr. English. By utilizing those provisions aren't they 
actually reducing their bottom line? They are not actually 
seeing a direct benefit. What we are seeing here, is it not 
true, that the Tax Code gets out of their way when they make 
critical capital investments that create jobs. So is this not a 
tax incentive for job creation in the purest sense?
    Mr. O'Neill. It preserves and creates jobs going forward.
    Mr. English. My time has expired but, again, Mr. Secretary, 
I thank you for taking the time to come here and offer I think 
a little bit of clarity in the fog.
    Mr. O'Neill. Thank you.
    Chairman Thomas. Thank the gentleman for having his 
questions and the answers remain within the 5-minute window. 
The gentleman from Washington wish to inquire?
    Mr. McDermott. Yes. Thank you, Mr. Chairman. I really 
appreciate your having such a fine hearing because we don't 
usually get much out of these hearings. They are kind of PR 
events.
    What I want to thank Mr. O'Neill for is admitting to Ms. 
Dunn that the real point of the $600 billion tax cut is to 
slide the estate tax out the door for the future, that it will 
change all the planning that is done by all the people on the 
top of the society. It is very good that you would admit that 
to us.
    The second thing that is good is that you admitted to Mr. 
Levin that we are going to borrow from Social Security. At 
least we got that out of you. Oh, now you are taking that back. 
So you are not even going to tell us that you are borrowing the 
money that is coming in for Social Security in this unified 
budget.
    But I want to go a little bit further and tell you why we 
keep hammering on this issue. This chart shows what happened in 
the Reagan years. That first blob of red is when they made a 
cut and had a military buildup at the same time, and it went 
down for the whole period of the 12 years. The green is what 
happened during the Clinton Administration, and we just barely 
got out of it, and now you are taking us back to the same 
place.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512F.006
    
                                

    Mr. McDermott. We heard--when I came to Congress in 1988, I 
heard, take Social Security off budget, stop stealing from 
Social Security, the Democrats are stealing from Social 
Security; and now you are doing exactly that. Now, why is that 
important? Let me tell you why it is important. The Enron 
Corporation went belly up and left thousands of people out 
there with nothing but their Social Security. And you said that 
you are an optimist. We said we would count how many times you 
said optimist. You said nine times you are an optimist.
    The fact is that it is hard to be optimistic if you really 
look at what is happening to, say, United Airlines. We gave 
them $15 billion to save the airlines, and here they are 
talking about going into Chapter 11.
    Now, what comes out--you know why they are going to have 
trouble doing that of course is that it is an Employee Stock 
Ownership Plan. Because all the pilots and all the mechanics 
have got their money tied up in that company, all their future. 
The only thing they know they will have is their Social 
Security. Because if it goes into Chapter 11 they could lose it 
all. They could lose it all.
    You can say, well, yeah, companies go into Chapter 11, and 
they come out. Yeah, like Eastern Airlines and Braniff and Pan 
Am. You can go right down the list of companies that went into 
Chapter 11 and didn't come out. So for these people out there 
who have been working all their lives in good-paying jobs, they 
are going to wind up with their Social Security or nothing.
    So when you say that you are going to do this, it is very 
hard for me to understand how do you explain to the American 
people that in 2008, when we will have a new President, one way 
or another, we are going to have the bulk of the 40 million 
baby boomers starting onto Social Security. We all know that. 
And if you were running a major company like an aluminum 
company or something you couldn't get away with taking the 
pension funds and giving them as stock dividends to your board 
and your executives. You would--well, we will see what happens 
to Enron. That is what they did. They gave stock dividends, 
they gave options, they gave it all away to the guys on the 
top, and the guys on the bottom got stuck.
    If you were running a company you would be up here in one 
of these four hearings that are going on on the Hill today 
about what Enron did. But as a government official you can come 
up here and say, well, we are going to ignore what is 
happening. We can see it in 2008 coming. The average retirement 
age today is 62, and that is when the baby boomers start 
coming. How can you say that this borrowing from Social 
Security somehow isn't going to have to be paid for right at 
the time when this thing gets the worst and you are giving out 
$600 billion more in taxes? You have got people showing up for 
the only check they are going to have for their senior years. 
How can you do that? Where is your planning for how you are 
going to pay off those moneys that you have taken out of the 
Social Security fund and put in?
    Mr. O'Neill. Well, let me say again we haven't taken any 
money out of the Social Security trust fund.
    But let me ask you a question, if it is appropriate for me 
to do that, Mr. Chairman. If I suggest that I infer from what 
you are saying is that we should put the contingent liability 
of the Social Security and all of their funds on the budget, I 
would buy that. Is that what the Member is recommending, that 
we begin running a balance sheet that shows the long-term 
obligation? I would agree with that.
    Mr. McDermott. You can't have it both ways.
    Mr. O'Neill. I am happy to have it that way.
    Mr. McDermott. Oh, sure. But that would show your 
irresponsibility pretty quickly.
    Mr. O'Neill. It would show that we have run a convention 
since 1935 of using current payroll taxes to pay those who are 
already retired. I don't think there is any dispute about that.
    I think people who are students of this subject know that 
we together, not just the Administration but the Federal 
Government, as represented by Administrations and Members of 
Congress, are going to have to make reforms in Social Security. 
And I think not just to deliver what we promise, because I have 
no doubt you all will never, ever renege on the commitments 
that you have made collectively to the American people about 
their Social Security benefits, but there is no doubt we are 
going to have to have reform.
    The President has said he believes that reform should move 
us toward a system of wealth accumulation; and he appointed a 
very wise, I think, and well-experienced bipartisan commission 
that worked on the subject last year and made some proposals. 
And the President has said we need to have an engagement and a 
conversation with you all about specifically how to move 
forward on this subject. So you know, again----
    Mr. McDermott. Mr. O'Neill, that commission suggested 
cutting benefits.
    Mr. O'Neill. I don't think that is--I think they looked at 
a number of different alternatives.
    Mr. McDermott. What other alternatives?
    Chairman Thomas. The time of the gentleman has expired. We 
can't get into that question. We will get into the question as 
we have hearings on Social Security directly.
    I do have a question to the gentleman from Washington on 
his chart. There is no indication of where it came from. My 
question has to do with the comparisons between years on money. 
Are these dollar amounts adjusted for inflation?
    Mr. McDermott. It came out of the CBO figures. We took--the 
whole thing was done by the Budget Committee using CBO figures. 
So if there is some problem the gentleman can talk to CBO about 
it.
    Chairman Thomas. The gentleman assumes they are adjusted 
for inflation or does not?
    Mr. McDermott. You wouldn't think the CBO would put things 
out that weren't adjusted for inflation, would you?
    Chairman Thomas. I understand the gentleman is now 
shoveling this chart off to the CBO once I asked a question 
about it. Because the Chair could also indicate that, if the 
gentleman would look prior to 1994, that the Democrats 
controlled Congress for the entire time that Social Security 
was going into the yellow and the red. It is only when the 
Republicans gained the majority in the House that it was turned 
around. That chart would show exactly the same results.
    So the Chair is trying to understand what it is that the 
gentleman is producing. If he now says he has no responsibility 
for this chart and it is CBO, the Chair has a hard time 
believing that it was structured quite this way by CBO.
    Mr. McDermott. Mr. Reagan had no impact. That is what you 
are telling us. That the Congress sat here and did it all by 
themselves, and Mr. Reagan just sat down there and twiddled his 
thumbs?
    Chairman Thomas. No. The Chair is simply saying that, under 
the Constitution, all revenue originates in the House. The 
gentleman just dismissed the control of the House by the 
Democrats. I believe it needs to be looked at in a more 
sophisticated way than this chart indicates. We hope we will do 
that during the hearing on Social Security, because, frankly, 
we are running out of time, and we need to quit approaching 
this from a partisan point of view and begin to look at 
societal solutions.
    The gentleman from Arizona wish to inquire.
    Mr. Hayworth. I thank the Chairman for the time.
    Mr. Secretary, thank you for coming. Though we may have had 
our distinctions somewhat publicly in the past, I would like to 
publicly commend you for your grasp of issues and for this 
morning again coming through a somewhat cantankerous if not 
hostile form of questioning from some of my colleagues.
    Indeed, Mr. Secretary, as I look at the plethora of charts, 
before I ask you a question, there is one question I just need 
to ask my colleagues with a show of hands. Does anyone on this 
Committee dias, anyone here at all, want to raise taxes? If you 
do, just raise your hand. It is a philosophical question.
    When all the charts are brought out to talk about how the 
world would be if we had a tax increase or we left taxes there, 
the clear implication to this Committee and the American people 
is that some folks in this room want to raise taxes. Now, 
either you do or you don't. You are telling us now here on the 
public record, no hands go up, so apparently you don't want to 
raise taxes. Thank you for that.
    Mr. Secretary----
    Mr. Rangel. Mr. Chairman, if we are----
    Mr. Hayworth. Regular order, Mr. Chairman.
    Chairman Thomas. The gentleman from New York is complaining 
that we are now doing equal demagoging, and he is concerned 
about that. If the gentleman would inquire about that.
    Mr. Rangel. If you agreed with the Chair, put up your hand. 
No hands go up. Let the record indicate that no one agrees with 
the Chair.
    Mr. Hayworth. Delightful. Mr. Secretary, seeing the actions 
of my friend remind me of the actions or inactions of the 
Senate Majority Leader, Mr. Daschle, who complained that the 
tax relief was the source of all this problem but when push 
came to shove said oh, no, we don't want to raise taxes. 
Although I note also he is going to resort to, apparently, some 
floor maneuvers to yet again do nothing on the economic 
security package.
    Mr. Secretary, in your opinion, if we had passed this 
economic security package in December as it looked like we 
could have done, where would the American economy be today?
    Mr. O'Neill. I think if we had acted in October I suspect 
we would have avoided tens of thousands of job losses that 
occurred because we didn't act. And I have no doubt that, with 
the components that were in the House-passed bills, people that 
you had to face when you went home in December who had 
exhausted their 26 weeks worth of unemployment insurance would 
have had a continuation of benefits. It must have been really 
difficult to explain to them why we couldn't do it here in 
Washington.
    So I have no doubt we would have been better off, and it 
would have been measured in macroeconomic terms but, more 
importantly, it would have been measured in the lives of 
individual people out there who were laid off or unable to find 
work because we couldn't get our act together here in 
Washington. Most particularly, the other side of the Capitol 
couldn't act.
    Mr. Hayworth. Mr. Secretary, I appreciate you coming down. 
It is interesting to hear some folks talk about holding certain 
portions of this hostage. I just find the irony that the Senate 
majority leader, who apparently champions the causes of the 
downtrodden, continues to delay action on this, thereby hurting 
the very people he purports to help.
    Mr. Chairman, thank you for the time. Mr. Secretary, thank 
you for your answer.
    Chairman Thomas. Thank the gentleman for his brevity. The 
gentleman from Wisconsin, Mr. Kleczka, wish to inquire?
    Mr. Kleczka. Thank you, Mr. Chairman.
    The question that was just asked is why wasn't the 
unemployment compensation extension granted by now? And the 
reason, as you know, Mr. Secretary, is that the Administration 
and Republicans insisted on tying in with that unemployment 
extension massive tax breaks for the business community under 
the guise of stimulus.
    One of the original bills that we passed out of this House, 
and I don't know if it came before the Committee, was a repeal 
of the alternative minimum tax for corporations, one which was 
retroactive back to 1986. So the effect of that policy was to 
give corporations like Ford and IBM a check from the Federal 
Government of $1.4 billion; General Motors, $800 million; 
Enron, $250 million. That is why unemployment compensation 
extension did not pass, because it was tied in with these tax 
breaks which are not justified. And as the Washington Post 
said, the only stimulus provided for in that bill was to 
stimulate campaign contributions to the supporters of that tax 
cut.
    You know, we have talked a lot about Social Security this 
morning. I find it just totally amazing that when my Republican 
colleagues were talking about a lockbox, locking away the 
balance of Social Security, locking away the balance in 
Medicare, that we were told by the Republicans that you 
Democrats spent the money, you spent the money, and you put 
worthless IOUs into the trust fund.
    Well, my Lord, how things have changed. Now the Republicans 
have taken over. The Republicans have the Administration. Now 
those things aren't happening anymore. Now we are borrowing and 
not spending it, and--as evidenced by the Secretary's own 
words--and these aren't worthless IOUs anymore, they are 
credits to the trust fund. My Lord, how things have changed in 
2 years--or a little over 1 year, I should say.
    Mr. Chairman, I would ask unanimous consent to put in the 
record two articles that appeared in the Los Angeles Times. 
Both are dated Tuesday, February 5th.
    Chairman Thomas. Without objection.
    Mr. Kleczka. The first one is entitled, Budget Sells Social 
Security Down Red Ink River; and the first paragraph indicates, 
in the budgets he delivered Monday President Bush relies on one 
source of new money more than any other to pay for his 
proposals: the trillions of dollars in Social Security funds 
being set aside for the start of the baby boom retirement. That 
is the one article.
    The article also has contained in it a chart which is 
almost identical to the one my colleague, Mr. McDermott, put up 
which was not agreed to by some of my Republican colleagues. 
But this one--it is the same kind of a chart--it indicates the 
source is the Office of Management and Budget.
    [The article follows:]
                                                 Los Angeles Times.
BUSH BUDGET PLAN
Budget Sells Social Security Down Red Ink River, Critics Say
By PETER G. GOSSELIN
TIMES STAFF WRITER
    February 5 2002

    WASHINGTON--In the budget he delivered Monday, President Bush 
relies on one source of new money more than any other to pay for his 
proposals: the trillions of dollars in Social Security funds being set 
aside for the start of the baby boom retirement.
    Although Bush and his aides warned in advance that the war on 
terror and the need for homeland defense would require dipping into the 
Social Security surplus and running deficits for a few years, the 
dimensions of what the administration had in mind were not apparent 
until the unveiling of the $2.13-trillion spending plan for fiscal 
2003. The measure took the breath away from some Democrats and 
independent analysts.
    ``The president is requiring the use of Social Security to pay for 
the normal operations of government,'' said Robert D. Reischauer, 
president of the nonpartisan Urban Institute and a Washington budget 
veteran. ``That's the most significant, and largely unrecognized, 
change he's making.''
    Declared Citigroup vice chairman and former Clinton administration 
Treasury Secretary Robert E. Rubin: ``This country is ill-served by 
abandoning fiscal discipline and this [budget] abandons fiscal 
discipline. It's the opposite of what was accomplished in the 1990s.''
    To be sure, that opinion was not universally shared, and no one 
claimed there was any danger to current retirees' benefits. Former 
Democratic Sen. Daniel P. Moynihan, who cochaired a recent commission 
on Social Security for Bush, said: ``My own view is that this is a war 
budget. This is a national emergency and the president is responding.''
    Still, many analysts expressed surprise, both at the extent of 
deficits in the new Bush budget and its extensive use of Social 
Security money to cover them. What most surprised them:
           Far from running only a few years of deficits, the 
        new budget assumes that the government's so-called ``on-
        budget'' spending, which covers everything from maintaining a 
        military to subsidizing Amtrak, will run $150 billion or more 
        in the red each year for the next decade, according to 
        documents and White House officials.
           Instead of covering the bulk of the costs with 
        expanding income tax revenue that can be expected with the 
        resumption of economic growth, the plan relies heavily on 
        Social Security money to nudge the overall budget--which 
        includes on- and off-budget spending, such as payments to 
        retirees--into the black by 2005.
           Although the president argues that the chief reason 
        the nation must run in the red is to pursue the war on terror, 
        his budget calls for new tax cuts--over and above the 10-year, 
        $1.3-trillion package approved last year--equal to or greater 
        than the new defense spending he seeks. The plan includes $590 
        billion in additional tax cuts over 10 years, but only $550 
        billion in new defense spending.
    ``Everybody concedes that deficit spending, if it is in response to 
an emergency like Sept. 11, is not a bad thing,'' said Robert Bixby, 
executive director of the anti-deficit Concord Coalition. ``But what's 
astounding is that this goes way beyond what was [once] a strong 
political consensus to save the Social Security surpluses.''
    In fact, before the September attacks, the president was at the 
center of that consensus. In addressing a joint session of Congress 
only one year ago, he declared that ``to make sure the retirement 
savings of America's seniors are not diverted in any other program, my 
budget protects all . . . of the Social Security surplus for Social 
Security, and for Social Security alone.'' His pledge was considered 
critical to winning congressional passage of his $1.3-trillion tax cut.
    But Bush and his aides appear to have decided that they cannot 
pursue their new military and homeland defense goals, protect the 
president's already approved tax cuts and maintain the Social Security 
surplus. And they apparently think there is little political cost to 
giving up on the surplus pledge.
    In part, that's because there is no immediate danger to retirees' 
checks. The system expects to collect more than $700 billion in revenue 
this fiscal year and pay out only about $470 billion in benefits. But 
analysts warn that failure to keep running surpluses and paying off 
Federal debt will leave the country in a painful bind as baby boomers 
retire in growing numbers, and will burden the smaller generation of 
workers that follows with rising Social Security tax costs.
    ``By paying down the debt, we were increasing national savings, 
reducing the upward pressure on mortgages and corporate debt, and 
cutting the government's own interest bill,'' Rubin said.
    Analysts drew the analogy to a couple paying off their home 
mortgage before retiring in order to cut monthly costs and save. They 
said that Washington was making the payoff in the nick of time because 
boomers are expected to begin leaving the work force in substantial 
numbers around the end of the decade.
    Rubin and other analysts said that the administration's sudden 
lurch into deficits demonstrates that last year's tax cuts were more 
than the country could afford, and that any further cuts would compound 
the problem. ``They're unwise and unjustified,'' said Reischauer.
    But it was unclear Monday whether congressional Democrats will find 
the political spine to oppose a president with sky-high public approval 
ratings in the midst of a war on terror.
    Capitol Hill Democrats criticized Bush for submitting a budget that 
goes into deficit, but they offered no suggestions about how to bring 
it back into the black.
    In fact, the lawmakers suggested they would support policies that 
would make the deficit even bigger: While supporting Bush's increases 
in defense and homeland security, Democrats opposed offsetting cuts in 
highway, environmental and other domestic programs. At the same time, 
Democrats insisted they would not seek a tax increase or rollback of 
last year's tax cut.
    About all that congressional Democrats would offer were ideas for 
curbing future tax cuts. Senate Budget Committee Chairman Kent Conrad 
(D-N.D.) said that the Democrats' budget proposal may include a 
``trigger'' that would turn off future cuts or spending increases if 
the tax revenue to pay for them do not materialize.
                                 ______
                                 
                                 [GRAPHIC] [TIFF OMITTED] T9512G.007
                                 
                                

    Mr. Kleczka. Mr. Chairman, the other article I would like 
to put in the record is the L.A. article entitled, Don't Tap 
Into Social Security. And in this particular article they have 
a poll. There is an L.A. poll, and here is what the poll 
indicates: that in a Times survey fully four-fifths of 
Americans, including more than two-thirds of the Republicans--
let me repeat that. The Times survey indicates fully four-
fifths of Americans, including more than two-thirds of 
Republicans, say they would rather defer future tax cuts than 
use Social Security money that way. Thank you, Mr. Chairman.
    [The article follows:]
                                                 Los Angeles Times.
TIMES POLL
Don't Tap Into Social Security
Nation: Four-fifths favor tax cut deferment over using the fund's 
        revenue to pay for other programs.
By RONALD BROWNSTEIN
Times Staff Writer
    February 5 2002

    WASHINGTON--Although Americans express resounding approval of 
President Bush's performance at home and abroad, an overwhelming 
majority would rather cancel later stages of his signature tax cut than 
tap Social Security revenue to pay for other government programs, a Los 
Angeles Times Poll has found.
    With war, the recession and the tax cut's cost straining the 
government's bottom line, the White House on Monday released a budget 
that projects Washington will need to divert $1.73 trillion in Social 
Security money to fund other programs through 2012. But in the Times 
survey, fully four-fifths of Americans--including more than two-thirds 
of Republicans--say they would rather defer tax cuts than use Social 
Security money that way.
    Those findings may be the most ominous clouds for Bush in a 
political environment defined mostly by his extraordinarily broad 
support.
    Congressional Democrats charge that Bush's tax cut, more than any 
other factor, obliterated the anticipated Federal budget surpluses and 
forced the government to dip deeply into Social Security revenue--
barely more than a year after a 2000 campaign in which both parties 
pledged to set aside that money in a ``lockbox'' to reduce the national 
debt.
    So far, the poll suggests, Democrats have not pinned the blame on 
Bush for the reversal: Substantially more Americans blame the terrorist 
attacks of Sept. 11 than the tax cut and Bush's policies for the return 
of federal deficits. And more Americans express faith in Bush than 
congressional Democrats to revive the economy.
    But on a series of questions, a majority of Americans indicated an 
openness to reconsidering the tax cut--something Bush has pledged will 
happen only ``over my dead body.'' Said Doris Walls, a secretary in 
Denton, Md., who responded to the survey: ``Absolutely do not use 
Social Security for anything other than Social Security. If they can't 
figure out some other way... don't go ahead [with the tax cut].''
    The Times Poll, supervised by Polling Director Susan Pinkus, 
surveyed 1,545 adults from Jan. 31 to Feb. 3. It has a margin of 
sampling error of plus or minus 3 percentage points.
    The survey, taken after Bush's State of the Union address Jan. 29, 
finds the president in a commanding position. Fully 80% of Americans 
say they approve of his job performance--down only slightly from his 
stratospheric 86% rating in November. (Even nearly two-thirds of 
Democrats give him positive marks.) Three-fourths say they approve of 
his handling of foreign policy; 83% endorse his performance on the war 
in Afghanistan.
    Jan Kendall, a small-businessowner in Slidell, La., offered a 
typical assessment. ``I don't think anyone could have done anything 
better on the war,'' she said. ``He held his cool when initially it 
would have been so easy to just start sending fliers over there.''
    Another measure of the confidence in Bush as commander in chief: 
More than three-fourths of Americans said they would support military 
action against Iraq, which he named as part of an ``axis of evil'' that 
threatens other countries.
    The backing Bush has generated through his performance in the 
crucible of war has spilled over to other issues, the survey found. By 
42% to 30%, Americans expressed more confidence in Republicans than 
Democrats to handle the major problems facing the country. That 
advantage may reflect the sense that terrorism has become the nation's 
top priority. Asked directly which party they trust to fight terrorism, 
Americans picked the GOP by more than 3 to 1.
    With his recent signing of landmark legislation reforming federal 
education programs, Bush has also erased the historic Democratic 
advantage on that critical domestic issue: More Americans express 
confidence in Bush (38%) than Democrats (30%) to improve the public 
schools. On health care--another issue that has long favored 
Democrats--Bush and congressional Republicans have fought the Democrats 
to a draw, the poll found.
    The survey found substantial support for several other priorities 
Bush laid out in his State of the Union address. For instance, more 
than eight in 10 respondents said they support his call for spending 
$38 billion on homeland security next year; a thin majority said it 
would support the request even if it means cuts in other domestic 
programs.
    Likewise, three-fourths of respondents endorsed his proposed $48-
billion increase in defense spending, and just over half said they 
would still support that added money even if it requires cuts in 
domestic programs. ``That has to be our top priority because we have to 
build up our armed forces; we have to get our country safe,'' said 
Sharon McCann, a homemaker in Bird City, Kan.
    On other fronts, two-thirds embraced Bush's proposal to build a 
national missile defense. And, though considerably more Americans 
expressed confidence in congressional Democrats than Bush to protect 
the environment, a narrow plurality sided with the president on the 
central environmental issue dividing the two parties: By 48% to 43%, 
Americans said they supported the administration's proposal to open 
part of the Arctic National Wildlife Refuge to energy exploration.
    But on the economy, Social Security and the Federal budget, the 
poll finds more hesitance about Bush--and a few outright chinks in his 
formidable political armor. The country appears torn between its 
general confidence in Bush, its attraction to walling off Social 
Security money and its uncertainty about the economic value of the tax 
cut at the heart of the president's domestic agenda.
    Approved last year, the tax cut totals $1.3 trillion and is set to 
be phased in over 10 years.
    The confidence in Bush is evident in the striking finding that two-
thirds of Americans support his handling of the economy, even though 
four-fifths say the country is in recession. A third of Americans say 
they trust Bush most to revive the economy, compared with 29% who look 
toward congressional Democrats and 19% for congressional Republicans. 
Even if that's a much smaller advantage than Bush enjoys on security-
related issues, rarely do voters express so much backing for a 
president's economic management when the economy is sputtering.
    Yet these questions divide the country along partisan lines unlike 
anything relating to the war on terrorism. For instance, nearly three-
fifths of Democrats picked congressional Democrats as best able to 
revive the economy, whereas over half of the Republicans picked Bush. 
Independents divided almost evenly between the two sides.
    These partisan divisions resurface in other economic questions. 
Overall, the country appears ambivalent about whether Bush's policies 
will strengthen the economy: 38% said yes, 41% said they will make no 
difference and 16% said they will weaken it. The country also is 
divided about his tax cut, with 43% saying it's been good for the 
economy and 47% saying it's either been bad (29%) or had no effect 
(18%).
    On both questions, Americans divided sharply along partisan and 
ideological lines. Conservatives such as McCann remain enthusiastic 
about keeping the tax cut law in place. ``If you have tax cuts, the 
economy does better; when you raise taxes, the economy doesn't do 
well,'' she said.
    But Gene Meyers, a retired architect and self-identified liberal in 
New York City, believes the tax cut has been a mistake. ``I think it's 
insane,'' he said. ``The president campaigned on a fiscally responsible 
[platform]. I cannot understand how you can be fiscally responsible and 
create deficits wantonly.''
    In the survey, many Americans shared Meyers' fear about deficits. 
Looking backward, Americans were not inclined to indict Bush for the 
return of the red ink: Just 11% blamed the tax cut and 13% Bush's 
policies, compared with 42% who blamed the terrorist attacks and 15% 
the recession.
    But looking forward, the poll found enormous resistance across 
party lines to tapping Social Security money, or raising the national 
debt, to pay for other government programs, as the budget Bush released 
Monday proposes to do.
    Asked whether future installments of the Bush tax cut scheduled for 
2004 and 2006 should go through if that meant the government would have 
to use Social Security revenue to fund other programs, Americans said 
no by 81% to 13%. Even roughly seven in 10 Republicans and 
conservatives said they would shelve the tax cut under those 
circumstances.
    Asked if the tax cut should go through if it meant tapping Social 
Security and increasing the national debt--as Bush's budget proposes 
for the next 3 years--84% said no. Looking toward the 2004 presidential 
election, 48% of registered voters said they are inclined to give Bush 
another term, whereas 30% said they would prefer a Democrat. But when 
asked which party they intend to support in this fall's congressional 
elections--47% picked the Democrats, 41% the GOP.

                                

  
    Chairman Thomas. Thank the gentleman. The gentleman from 
Illinois wish to inquire?
    Mr. Weller. Thank you, Mr. Chairman. Mr. Secretary, now it 
is good afternoon; and thank you for coming before the 
Committee today.
    I also want to commend you on your frankness and direct 
response to the questions being asked today.
    The Bush Administration has got a big challenge. You are 
fighting a war against terrorism. You are working to make our 
homeland more secure here at home. You are also working to get 
the economy moving again. And President Bush's speech last week 
was right to the point. It is all about jobs. We want to win 
the war against terrorism. We have to get this economy moving 
again.
    If you look at the history here, it is an established fact 
President Bush inherited a weakening economy when he came in. 
In January, his White House housewarming present was a weaker 
economy. He proposed the tax cut using 20 percent, 20 cents on 
the dollar, the surplus at that time, put some extra money in 
the pocketbooks of folks back home. And economists tell us it 
was working. In August, the economy was beginning to grow 
again. Unfortunately, the tragedy of the terrorist attack not 
only cost thousands of lives, but it has hurt our economy. 
Since September 11th over a million Americans have lost their 
jobs as a result of the terrorist attack and the psychological 
blow to the confidence of investors and consumers. Of course, 
we have been working now to try and get it going again.
    The President's budget that he has outlined this week works 
toward that goal, getting this economy moving again. Clearly, 
we have to win this war on terrorism. It is not going to begin 
and end in Afghanistan. It is going to take years. It is going 
to cost billions to make our local communities more secure. But 
we need to get this economy going again.
    One of the concerns I have got is there are some on the 
other side of the aisle, Senator Kennedy, Senator Jeffords and 
others, and perhaps some in this room, who have advocated 
raising taxes. You say, and you made it very clear this 
morning, that delaying the President's tax cut as it is going 
to be phased in, lowering the rates for small businesses and 
entrepreneurs, eliminating the marriage tax penalty, 
eliminating the death tax, giving greater opportunity to save 
for retirement, to increase the child tax deduction, you stated 
that killing that phase-in is a tax increase. And from your 
standpoint, as someone who was in business for years, what--you 
know, this type of tax increase as proposed by Senator Kennedy 
and Senator Jeffords and others, how would that impact their 
economic recovery?
    Mr. O'Neill. It would slow down the track that we would 
otherwise follow. It would reduce the number of jobs in the 
economy, compared to where we would otherwise be, and it would 
be a substantial negative.
    I think there really is a telling point, which I said 
earlier, that by the rules of the Congress, if--I can't believe 
this is possible, but if you were to decide to change the 
benefits that were flowing for child credits and marriage 
penalty and the other things that seemed so wise last year, 
your own rules would show it as a tax increase.
    So I think there is no doubt, both in substance and in fact 
and by scoring procedures, if you don't follow through on what 
you have already voted you are really voting for a tax 
increase. I think there is no doubt in the economic observation 
that as government takes more it reduces the economic potential 
of a society.
    Mr. Weller. You know, Mr. Secretary, I have heard not one 
word from a real-world economist saying we should increase 
taxes during a recession. Many economists also told me that 
small business people, investors and consumers, their 
confidence is based on continuity, and they are already making 
decisions today based on those changes in tax law. And if we 
were to change that tax law as they are basing their decisions 
upon it, it could jeopardize economic growth.
    So I appreciate--like you used to say, if it walks like a 
duck, quacks like a duck, it is a duck. In this case, if it is 
a tax increase, it is a tax increase; and that is what Senator 
Kennedy and Senator Jeffords and others have proposed.
    Chairman Thomas. The gentleman from Georgia wish to 
inquire?
    Mr. Lewis OF GEORGIA. Thank you, Mr. Chairman. Thank you, 
Mr. Secretary, for being here.
    Mr. Secretary, I want you to tell us what does this budget 
do to preserve Social Security and what does the budget do to 
strengthen Medicare?
    In addition, I want you to tell us how much does the budget 
take from Social Security, how much does the budget take from 
Medicare?
    Mr. O'Neill. Well, this budget fully funds the obligations 
that the Federal Government has to--under current law to Social 
Security and Medicare beneficiaries. It takes nothing away. In 
fact, the President has proposed that we make some 
modifications in benefits going forward for the Medicaid--for 
the Medicare population in the form of assistance with drug 
costs. So I think it is a very fulsome budget in meeting our 
responsibilities.
    Mr. Lewis OF GEORGIA. Mr. Secretary, could you tell me how 
much you will be borrowing from future retirees? It is my 
understanding over a period of 10 years we would be taking $1.4 
trillion from Social Security, $550 billion from Medicare. Am I 
right?
    Mr. O'Neill. No, you are wrong.
    Mr. Lewis OF GEORGIA. Tell me.
    Mr. O'Neill. We are going to take all the Social Security 
and Medicare money, and we are going to credit it to the Social 
Security trust fund. Now, from a cash flow point of view, once 
it is credited to those accounts where it belongs, from a 
financial accounting point of view--if you are saying to me, 
let's take that money then and use it to buy down the debt, we 
could do that. And then we will go out to the public, and we 
will borrow money to meet all of the cash flow obligations.
    It seems to me, you know, if this is really a serious 
conversation that we have been hearing this morning, we would 
solve all of this illusion that we are borrowing money from 
Social Security or Medicare by simply using all of that money 
to go ahead and buy down debt held by the public, and the next 
day we could borrow the money that is necessary to meet the 
cash obligations of the Federal Government, which we only do in 
response to laws passed by the Congress.
    We are just doing--we are executing the laws passed by the 
Congress. It really doesn't seem particularly enlightening to 
me for people out there in America to believe from this 
conversation that we in the Administration or you in the 
Congress would really seek to damage them by not having the 
money to meet our obligations to Social Security recipients and 
Medicare recipients going forward. I think nothing could be 
further from the truth.
    Mr. Lewis OF GEORGIA. When you do propose paying the 
credits back, would the funds be there when the baby boomers 
come of age?
    Mr. O'Neill. Well, again, I would say, as I did before, if 
implicit in this question is is it a good idea to put the 
unfunded liability of all of our trust funds on a balance sheet 
and begin using that as a discipline for how we do business 
here in Washington, I would sign up in a moment. I don't find 
many Members who want to do that.
    Mr. Lewis OF GEORGIA. Mr. Secretary, let me move to another 
area. I am deeply concerned about the Enron situation, not just 
for the thousand Enron employees, but in my home State of 
Georgia, the Georgia State employees and teacher retirement 
system lost more than $125 million. Is there anything in the 
budget--are you proposing anything to help these people?
    Mr. O'Neill. Help me a little bit. These are people who are 
employed by Enron?
    Mr. Lewis OF GEORGIA. No, these are people that invested 
their retirement fund in Enron stock, and they lost more than 
$125 million.
    Mr. O'Neill. The American people should pay for that?
    Mr. Lewis OF GEORGIA. No, I am asking.
    Mr. O'Neill. We have not proposed that the American people 
should pay off those people who lose money in any stock.
    Mr. Lewis OF GEORGIA. This is their pension. This is their 
retirement. We bail out the airlines. We help the major 
airlines. Can we help the people who lost hundreds, thousands 
and millions of dollars--in the case of Georgia, $125 million?
    Mr. O'Neill. The Congress passed--for the airlines, the 
Congress passed an emergency--a $5 billion cash flow assistance 
bill--it was agreed among all the Members and the 
Administration--and a $10 billion provisional loan guaranty 
program. I think that is true.
    But I don't see the parallel between that where, in effect, 
the Federal Government shut down, appropriately so, all of the 
air travel for a period of time and because of the terrorist 
attacks, which was an attack on all the American people, I 
think you acted in a wise way to make sure that the airline 
industry did not go into complete liquidation. I think that was 
a wise thing.
    The general import of your other question is that somehow 
we should save the American taxpayers--if individuals make 
investments in individual companies and it doesn't turn out 
well that the American taxpayer should make up that difference. 
I don't find that is a very good idea.
    Mr. Lewis OF GEORGIA. Maybe not on your watch. But some 
time ago, Mr. Secretary, we bailed out the S&Ls and why not 
bail out the retirees? They only depend on Social Security. I 
guess that would be the only thing left. But if we steal from 
Social Security and leave all of this red ink, there won't be 
much of anything left for anyone.
    Chairman Thomas. The gentleman's time has expired. The 
gentleman from Tennessee wish to inquire?
    Mr. Tanner. Thank you very much, Mr. Chairman. Thank you, 
Mr. Secretary.
    I do not have a chart. I think the conversation this 
morning has been enlightening in that probably charts should 
be--that are 10 years in nature should be taken with a grain of 
salt. Both of us know that the charts we had last year showing 
what was going to happen over the next 10 years are totally in 
error. I would suggest that most of the charts we have seen 
this morning about what is going to happen in the next 10 years 
are probably in error.
    Let me tell you what bothers me about the budget. It is the 
obligation on the next generation. We have had a lot of talk 
about what is Social Security borrowing and so forth. I agree. 
It really doesn't matter if one begins to talk about the debt 
of the country and the debt of the individual citizens who live 
here.
    As you know, the Blue Dogs talked about that last year. We 
said, wait a minute. We ought not to go into a 10-year 
projection and use up most, if not all of it, based on what we 
think is going to happen. We couldn't foresee the war. We 
couldn't foresee a natural disaster. We couldn't foresee a lot 
of things. We can't this year, over the next 10.
    We are not reducing the Nation's debt like we thought we 
were going to. I think you will agree with that statement. Our 
financial condition as a nation has deteriorated from the time 
you were here last year till today in a rather major way, given 
10-year projections as the measure of that financial condition. 
Would you not agree that we have deteriorated in that regard?
    Mr. O'Neill. We have had some change, but it is very 
interesting to see where we are going. I showed you earlier the 
chart that I think represents a real truth that we are going to 
have a huge increase in revenue at the Federal level over the 
next 10 years without fail. I think there is no doubt about 
that. And it is also true that government debt burden is going 
to fall as interest costs are a smaller and smaller fraction of 
Federal spending in total. So I think we are going back--by our 
light, we are going back on a track of debt reduction as we go 
through this 10-year period.
    So while there is some delay in how fast we are going to 
buy back the debt, it is still our intent with our program and 
the tax regime to reduce the outstanding debt held by the 
public.
    Mr. Tanner. Well, Mr. Secretary, that is nice to know. But 
I know this: Common sense tells me that we are borrowing money 
and paying interest on that money every year, that we are not 
retiring the debt like we thought we were, and just from that 
standpoint common sense tells me our condition is worse, not 
better than it was last year.
    Now you can talk about how you parse that out, but I also 
know that you are right when you say restoring growth in the 
economy is a key to getting out of this. I know that as the 
government borrows money it puts upward pressure on interest 
rates. And as interest rates rise, then the money available in 
the private sector to create jobs may not be as fluid as 
thought.
    So all I am saying is I don't think this budget that you 
have presented has enough correlation between income, outgo and 
debt retirement. Because over the next 10 years you do not 
foresee in this budget an on-budget surplus, that is, monies 
available to pay down debt for the future generations that 
don't come from the social insurance tax or some other. I think 
that is a shortcoming of this budget, and I hope you will look 
at it.
    I would say this: When people say that if one suggests that 
any part of the tax cut that is to be phased in over the next 
10 years by deferring it is raising taxes, then it seems to me 
that we raise taxes in 2011 when we passed it, in a way 
probably the most major increase in American history.
    All I am saying is, as Mr. Greenspan said, when we look at 
the next 9 years--and you will be back next year, I hope, and I 
hope we are all here--I hope you will figure out a way to 
present a budget that gets us into a surplus situation in the 
on-budget area before another 9 years goes by. I don't think 
that is the best we can do. Thank you.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Missouri, Mr. Hulshof, wish to inquire?
    Mr. Hulshof. I do. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary.
    I think some of the questioning, not of the last 
questioner, my friend from Tennessee, but I think some of the 
questioning of you this morning has been a bit unfair. They 
have taken statements that you made before September the 11th 
and previous appearances here and then comparing where we are 
today as a nation with our economy and saying with righteous 
indignation which I think has been misplaced, in the words of 
one of my colleagues, what a shocking change.
    Well, our Nation has experienced a shocking change. None of 
us could have anticipated the terrorist attacks or the 
recession or homeland security, the round-the-clock rebuilding 
and recovery effort. So I think comparing statements that you 
may have made to us a year ago to today I think is a little bit 
unfair to you. I do want to thank you for your strong support 
of what this Committee has put forward in the short-term 
economic stimulus bill.
    I think it is interesting to point out that in December 
1999, speaking of statements, some time ago, in a speech that 
then Governor Bush made to the greater Des Moines Iowa Chamber 
of Commerce, he said this: I also believe in tax cuts for 
another practical reason, because they provide insurance 
against economic recession. Sometimes the economists are wrong, 
then Governor Bush said. I can remember recoveries that were 
supposed to end but didn't and recessions that weren't supposed 
to happen but did. I hope for continued growth, but it is not 
guaranteed. A recession would doom our balanced budget. But if 
delayed until a downturn begins, tax cuts would come too late 
to prevent a recession. Putting more wealth in the hands of the 
earners and creators of wealth now before trouble comes would 
give our current expansion a timely second wind. End quote.
    Again, this was in December 1999. So I applaud your 
endorsement of what we have tried to do in the short term as 
far as economic stimulus. I agree that a stimulus is still 
necessary, as you have stated in your testimony, to hasten and 
to strengthen our recovery.
    What I want to do, though, in the last minute or so that I 
have, is move away from the short-term stimulus to long-term 
certainty. As you pointed out and as my colleague in the State 
of Washington questioned you earlier, the President last 
Tuesday in the State of the Union stated, for the sake of long-
term growth and to help Americans plan for the future, let's 
make those tax cuts permanent, end quote.
    Now, my colleague, Paul Ryan, who is where he needs to be 
right now with his wife and newborn daughter, he and I have 
cosponsored H.R. 2316 that would sunset the sunset, that is, to 
make the tax cuts permanent. I think probably most Americans 
may not realize as they are perusing their 1040s now that the 
increased child tax credit or the phaseout of the marriage 
penalty or certainly the phaseout of the Federal death tax, 
that those are temporary in nature because of that arcane 
technical budget rule that put the sunset on an agriculture tax 
cut.
    I would say, to make the record complete, that when Mr. 
Stark was inquiring and talked about a CBO budget estimate, the 
joint tax told us last November if we had made the tax cuts 
permanent in the last fiscal year it would have been a cost to 
the government of $112 billion.
    Now we are now in a new fiscal year. I know that for those 
that live or die by these estimates--I acknowledge what Mr. 
Tanner said--these estimates we know are going to be wrong, but 
that is not the sum of money that--I think there is some fault 
and assumptions that the Congressional Budget Office has made 
as far as their claim that this would be a $627 billion hit. 
But putting the numbers aside, I think from a public policy 
point of view that this is the right thing to do.
    You talked about the positive economic implications of 
making the tax cut permanent. What I hope we don't get into is 
kicking along these extenders as we do with research and 
development or work opportunity tax credit or welfare to work 
tax credit. Can you envision a situation where we were to 
continue to phase out the death tax maybe in 2-year increments 
or 4-year increments? Would that satisfy the certainty, Mr. 
Secretary?
    Mr. O'Neill. No, I think permanent is really permanent. And 
I suppose it is--maybe it is too much to hope for, but it would 
be great if we could get to a position where--maybe we could 
create another device to show that people care by voting, that 
they care about these things, instead of actually leaving the 
cliff-hanging uncertainty of whether or not the Congress is 
going to come through with things that everyone seems to agree 
with are necessary and desirable to do.
    Mr. Hulshof. As my final comment I would echo what Mr. 
Tanner said, again, my friend from Tennessee, on December 31st 
of 2010: We will have lower tax rates. And if Congress does 
nothing, the lower 10 percent tax bracket will go up to 15 
percent, the lower 35--the 35 percent tax rate will go up, 
again, close to 40 percent.
    Putting aside whether a suspension of the current tax cuts 
is a tax increase or not, certainly if Congress fails to act 
would you agree with me that on January 1, 2011 we are going to 
see significant tax increases if Congress fails to act?
    Mr. O'Neill. Absolutely.
    Mr. Hulshof. Thank you. No further questions, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. The gentleman from 
California, Mr. Becerra, wish to inquire?
    Mr. Becerra. Thank you, Mr. Chairman.
    Mr. Secretary, thank you very much for being here and your 
patience as we go through all these questions.
    I think over the next year we are all trying to figure out 
how we get through this debacle that we see economically. No 
one could have expected the recession to hit as quickly as it 
did last year. Certainly no one expected 9/11. But now that we 
confront it, we have to deal with it.
    I appreciate the remarks that you have made and the 
President's State of the Union address. Clearly, it is going to 
be a choice of a balance of priorities, where we choose. I 
don't think there is any question that the President outlined 
the need for more homeland security, the need to be able to 
defend against terrorism. So as we weigh the balance--weigh the 
competing interests and engage in that balancing act, I think a 
lot of us are asking ourselves, what are the President's real 
priorities?
    We understand that he has indicated an interest in 
increasing homeland security, and I don't think anyone will 
question the need for that. Whether you weigh that against 
Social Security or education or tax cuts, I think all of us are 
prepared to do what is necessary when it comes to homeland 
security.
    When it comes to the war on terrorism, I believe the 
President himself said it probably is costing us a billion 
dollars a month. So that is about $12 billion a year. If you 
were to extend that for 10 years, and God forbid that for the 
next 10 years we are under the same scenario, that would be 
$120 billion over the next 10 years to deal with terrorism.
    When I look at the President's budget on education, I start 
to have some concerns. Because while I agree that we need to do 
what we can on homeland security and while I agree that we have 
to deal with terrorism, if you assume it is $120 billion over 
the next 10 years, and, as I said, God forbid it is, none of 
those priorities will eat up the Social Security trust fund or 
the Medicare trust fund. But, yet, the President's budget takes 
at the end of 10 years close to $2 trillion out of those trust 
funds that are meant for retirement and medical services to the 
elderly.
    Then when you look at the President's budget, while he 
increases spending on defense, which in some cases I believe is 
very necessary, he cuts programs like summer job programs. He 
eliminates them. He eliminates the program to reduce class size 
throughout the Nation, completely eliminates the funding for 
it. He eliminates all funding for school construction.
    I must tell you in Los Angeles, where I live, in my 
district we are having to build more than 60 schools in the 
next 5 years just to meet the rate of growth. We are not 
talking about even reducing the size of the classroom.
    So it concerns me greatly when we see so much money going 
out and we see that the tax cut that we passed last year--I did 
not vote for it but that passed last year and that the 
President is proposing would now eat into it even worse.
    To me, for us to have a year ago voted and for the 
Administration to have talked about a lockbox for Social 
Security, to say we are going to keep that money locked away, 
none of us will touch it, we will keep our greedy fingers off 
of it, all of a sudden we find that vote was--I remember going 
back home. Many people said it would be it was worthless. That 
lockbox has been blown apart by this budget.
    I don't see how we can justify to the American people doing 
differently than what they themselves must do. We all go into 
deficit spending. I think we all understand that. When we buy a 
home, we don't pay the money up front for that home. We take 
out a mortgage. That is deficit spending. But we know it is for 
a good reason, so over the next 20 or 30 years that we are 
going into deficit spending on that mortgage. When we provide 
for our kids' college education, we go into deficit spending 
because we know there is a good at the end of that when our 
child receives that degree.
    I don't see how we believe that in providing tax cuts that 
will benefit megacorporations or the wealthiest of Americans--
because the estate tax cut repeal, for example, which would 
benefit only the 2 percent richest Americans, American 
families, certainly does nothing to help the 98 percent of 
other Americans--that we can justify that balancing act and 
talking about tax cuts versus Social Security or tax cuts 
versus education or tax cuts versus homeland security.
    Mr. Becerra. If I am going to spend money and save some 
money, and certainly I hope we will, I would hope that the 
President would come back to us and say, ``These are my 
priorities.''
    What I see right now as the President's priority is tax 
cuts above Social Security, tax cuts above prescription drugs 
for seniors, tax cuts above some review programs for low-income 
children who otherwise spend their days on the street corners, 
and tax cuts above even something as important as special 
education, which for years the Federal Government has refused 
to fund at the level it had committed to more than 15 years 
ago. We committed as a government to fund 40 percent of all the 
costs of special education. We only do about 10 to 12 percent.
    So I hope, Mr. Secretary, that you will go back and talk to 
the President about what our priorities are and we will come 
back in a bipartisan fashion and do something for the American 
people.
    Thank you, Mr. Chairman.
    Mr. O'Neill. Mr. Chairman, may I just say a couple of 
things on these comments?
    First of all, I hope I made it really clear that we do not 
think we should raise taxes in this slow economic period. And 
then your question about priorities, maybe you don't join me, 
maybe you think we should raise taxes----
    Mr. Becerra. Mr. Secretary, I never said we should raise 
taxes.
    Mr. O'Neill. You join us in not wanting to raise taxes. 
Then I would ask how would you rearrange, given what the 
President has said--and we have to prosecute the war on 
terrorism, we have to deal with homeland security, and then you 
mentioned education several times.
    Let me tell you the numbers for education. In 1996, 
discretionary spending for the Department of Education was $23 
billion. The President's proposal for 2003 is $50,310,000,000. 
If that is not an expression of priority--and maybe you are 
saying, well, it was all done before, the number in 2000 or 
fiscal year 2001 was $40 billion, I think it speaks to the 
issue of whether or not the President cares about education; he 
cares about it, he puts his money where his mouth is, and he 
has not reduced it. He has increased hugely education-proposed 
spending. He led the charge that gave us the hope of 
fulfillment of ``no child left behind.''
    So I don't think it is true. No one should believe that 
this President has chosen prosecuting the war on terrorism over 
the importance of educating children. That is simply not true.
    Mr. Becerra. Mr. Secretary, he has proposed to eliminate 
rural education programs, drug prevention programs, reduce 
drug-free school programs. We can use those programs in our 
districts, Mr. Secretary.
    Chairman Thomas. The gentleman's time has expired.
    Mr. O'Neill. Just one more comment. This President has made 
deliberate decisions about programs that either have not worked 
or which can be funded under these broader education 
authorities that give more discretion to the local recipients 
instead of earmarks from here in Washington.
    Mr. Becerra. Dropout prevention programs should be 
eliminated?
    Chairman Thomas. The gentleman's time has expired. The 
gentlewoman from Florida?
    Mrs. Thurman. Mr. Secretary, I, like everybody else, thank 
you for being here today, but I do kind of want to answer what 
you just said about priorities.
    Remembering in 1996, and when you recognized the $24 
billion that was suggested for education as to now, that was a 
Republican Congress. There were a lot of us fighting for 
additional dollars for education, but we at that time were also 
concerned about deficits and deficit spending, and we were 
trying to put ourselves on an economic track.
    In fact, in 1997, this Committee voted for a balanced 
budget amendment or a balanced budget, and in fact where we did 
tax cuts, where we did what we thought was proper for getting 
this economy going. So I don't think you can just say, you 
know, all of a sudden accept the fact that now all of a sudden 
everybody believes we can just jump it up to $40 billion and 
not worry about what is happening with the deficit.
    I would also say to some that have left now, let me just 
say, when we talk about Kennedy, when we talk about Jeb Bush in 
Florida, he is under a constitutional amendment on a balanced 
budget. Does he not have the same concerns as homeland 
security? Are we not asking our law enforcement at the State 
and local levels to worry about that as well? Do you not 
believe that his educational priorities are not the same?
    We all believe in these priorities. We believe in the 
Medicaid system at our State level. But they are in a different 
situation because they have a balanced budget. They had to 
delay their tax cut. They are now in session having to overhaul 
their whole tax system, about which, by the way, there is a lot 
of concern of what is going on.
    So I think when you start listing people and who raises 
taxes and who does this, isn't it more important that the 
debate should be about the balance of what we are doing for 
this country; that we are looking at all of the issues that are 
of a concern, not pointing fingers, where if you say this you 
are raising taxes, if you say that you are balancing the 
budget? I just think that is hogwash.
    I will tell you, Mr. Secretary, and the rest of the folks 
here, I was in the drugstore the other day talking to my 
pharmacist, picking up my medicine for my husband, who has a 
kidney transplant, as many of you know, and it was $1,500. 
Thank God we have health insurance. And the pharmacist said to 
me, well, Karen, what is going to happen with the prescription 
drug plan? I said, I think we might have a card, it might give 
10 percent. He said, you know, Karen, quite frankly, we already 
have that. We have the People's Plan, we have this plan. It 
might save a little here, might save a little there.
    He said, ``Well, what else?'' I said, well, I think that 
all of us stood very strongly with the President on the idea of 
what was going on with the war. All of us came in here with the 
idea that we needed to stand shoulder to shoulder with him. We 
looked at the $40 billion, we looked at the bailout, we did 
those kinds of things.
    But I said, ``You know, Billy, I am really kind of 
concerned where we are going now with the deficit.'' He said, 
``Let me tell you about this conversation that was taking 
place.'' And if you can imagine walking in to the pharmacist, 
and what happens when you go into the drugstore, especially 
when you live in a small town, everybody knows everybody.
    This guy looked at him and he said ``You know, I listened 
to the President the other day. If I had wanted a loan for 
myself, I would have gone to the bank and gotten it.'' That is 
what they feel like is happening, we are taking a loan out, 
that we are taking a loan out that some people did not 
necessarily want; you know, that they think that now they can 
pass that on to their children or their grandchildren to pay 
that loan back.
    Quite frankly, these were the same people that came to me 
when I ran in 1993 and said, Mrs. Thurman, please do something 
about the deficit. Please do not put us in that situation. They 
talked about Social Security and they talked about those 
things.
    So let me just say that I think that one of the other 
things that we have to say when we talk about not scaring the 
American people, and I agree, but one of the things that we do 
not talk about is what will go on when we have not asked the 
question: How far out do we see Medicare now? How far out do we 
see Social Security? We know those dates were extended the last 
couple of years to '36 or '37. At 2025 they start to fall back 
in. We can say that.
    But I think what people are feeling, and I would agree with 
Mr. Becerra on what is happening at home, you know, what are we 
doing? We take a credit and put it in there. If I do that and 
then I write a check, I get an overdraft. The overdraft I get I 
have to pay a penalty on. That is kind of what we are doing 
with this now.
    So I do not want to get into all of this, but please, let 
us forget all of this stuff about who is raising taxes, who is 
not raising taxes. That is not what this debate is about. There 
is a fundamental philosophical difference in what we believe 
should be a balanced approach and one that keeps us on the 
right track for financial security for this country.
    Chairman Thomas. I thank the gentlewoman. Does the 
gentleman from Kentucky, Mr. Lewis, wish to inquire?
    Mr. Lewis OF KENTUCKY. Thank you, Mr. Chairman. Mr. 
Secretary, thank you for being here today.
    One of my concerns about this hearing today is that I have 
parents that are 85 years old, and if they are watching today, 
I think there would be a certain amount of concern for them, 
because my friends on the other side of the aisle seem to want 
to put fear in their hearts that Social Security is not safe; 
that sometime in the future it is not going to be there because 
of tax relief for other people in this country. And they also 
got some tax relief.
    My son and my daughter-in-law, they work in a factory. Both 
of them together make about $60,000 a year. They need tax 
relief. Forty percent of their income is in local, State, and 
Federal taxes, so they have a major tax burden. And if you add 
in regulatory costs, it is probably about 50 percent of their 
income. They need help. They work weekends to try to make ends 
meet, and overtime.
    To try to bring into the debate in this country about how 
we should use our national resources, to try to instill 
generational envy, and to put fear in the hearts of senior 
citizens I think is a sad thing, but that is what we keep 
hearing.
    I do not think there is anyone who is probably here today, 
Republican or Democrat or whatever, that does not have family 
members that are on Social Security, that does not have family 
members that could use some tax relief. So I think it is a sad 
state of affairs when the once-proud Democrat Party now is 
relegated to the point of where the only thing they have to 
offer is fear and class envy, and they have no solutions.
    If you ask them, well, are you for tax increases? No, we 
cannot do that. Are you for cutting spending? Well, we need 
more spending in this, we need more spending in that. What 
answers do they have? I would have hoped that today, when we 
have hearings like this and hearings in the future, that they 
could bring something to the table besides fear and envy. That 
is not what this country is all about.
    When that is all they have to offer, you know--my mom and 
dad basically have been Democrats all their lives until just 
here recently, and I think they feel pretty sad about where 
that party has come to.
    Mr. Hulshof. Would the gentleman yield?
    Mr. Lewis OF KENTUCKY. Yes, I will be happy to yield.
    Mr. Hulshof. I appreciate the gentleman from Kentucky. I 
know my friend from Florida is still here in the room. But a 
comment that I would like to make as far as she was talking 
about real life examples about where we are, I would share this 
with her and Members of the Committee.
    My wife and I make our home in Columbia, Missouri. Back in 
1999, the foundation of our house caved in. This was an 
emergency, it was unforeseen, so we had some choices to make 
around our kitchen table and the family budget. The choice we 
made was that we should go into debt for a short period of 
time. So we obtained a home equity loan because, again, this 
was an emergency, an unforeseen event.
    I think that is where we are right now with our national 
economy. The gentlewoman talked about priorities, and I agree 
with her general statements. But for what happened on September 
11, I believe we would still be in a surplus. I think that the 
President's budget would be in balance but for the increased 
requirements of the war on terrorism and homeland defense.
    I see my friend from Dakota shaking his head. But in 
reasonable lines of disagreement, I would say this is a 
singular unforeseen situation that now confronts us. I bring 
our family example just to illustrate that fact. I appreciate 
the gentleman yielding.
    Mr. Lewis OF KENTUCKY. I just want this question answered 
directly, and I think you have done a good job of it. The 
Social Security Trust Fund is going to pay the Social Security 
benefits to my mom and my dad and to all the millions of senior 
citizens out there. They do not have to worry about it. They do 
not have to be fearful. If they were able to come to that 
fearful conclusion today that that might be the case, tell them 
right now, straighten the record, that is not the case; their 
benefits are solid, they are going to be paid for.
    Mr. O'Neill. Nothing could be clearer. The Congress of the 
United States and the President are never going to fail the 
obligation they have to the people to pay Social Security 
benefits as and when they are due.
    Mr. Lewis OF KENTUCKY. Thank you.
    Chairman Thomas. Does the gentleman from Texas wish to 
inquire?
    Mr. Doggett. Mr. Chairman, thank you. Mr. Secretary, though 
we have very different perspectives on public policy, I 
sincerely thank you for your service to our country in these 
very troubling times.
    Mr. O'Neill. Thank you.
    Mr. Doggett. Mr. Secretary, the year 2001 will certainly go 
down as an historically bad year for Enron in Houston, but here 
in Washington, on tax policy, it seems to me it was a rather 
good year. Enron successfully sought favorable treatment in 
that collection of subsidies and preferences that was called an 
energy bill; Enron successfully supported efforts to block an 
international crackdown on offshore tax havens; Enron's 
accounting firm Arthur Andersen was successful in opposing any 
legislation on abusive corporate tax shelters; Enron 
successfully led the AMT coalition, as we discussed, in 
obtaining House approval of repeal of the AMT; and instead of 
contributing something to the cost of the war on terrorism, to 
actually asking for a check for $254 million back.
    Can you tell the American people today of any tax break 
that Enron requested in the last year that this Administration 
did not embrace?
    Mr. O'Neill. I am stunned by the question, because I have 
no idea of what Enron was for with regard to taxes. I have no 
idea what they were for.
    I think what was passed last year was the tax proposal 
recommended by the President, which the Congress responded to 
in quite a complete way, which was for the benefit of 
individual taxpayers.
    Mr. Doggett. Let me ask you, then, about comments that you 
made last year. Last May, you indicated that you absolutely 
supported the abolition of all corporate income taxes and 
capital gains taxes on business in your interview in London. 
You called the present corporate tax system an abomination.
    Mr. O'Neill. I did.
    Mr. Doggett. And you said, ``Not only am I committed to 
working on this issue, but the President is also intrigued 
about the possibility of fixing this mess,'' and it was 
reported that you said that even though ``abolishing corporate 
taxation would lead to higher personal income taxes,'' you 
thought repeal would be good for the country.
    We now know that Enron used 881 subsidiaries, at last 
count, located in tax havens, and other devices that led it to 
pay modest or no Federal income taxation for the last several 
years. A number of other Fortune 500 corporations have also 
paid little or nothing toward our national security in recent 
years.
    Is this a sign of healthy progress toward the goal that you 
advocated of ``no corporate taxation,'' or is it an indication 
that the Treasury Department does not share former Secretary 
Summers' view that abusive corporate tax shelters are the 
leading tax compliance problem in the country today?
    Mr. O'Neill. Well, you have mentioned a whole lot of 
attributed things to me.
    Let me make the record clear, because I have said this over 
and over again: I think the Federal Government's tax system is 
an abomination, and when I go out and talk to people around 
this country I do not find anyone who disagrees with me. If you 
can find someone who thinks what has been crafted here in 
Washington is a wonderful tax system that should be a model for 
the rest of the world, I wish you would send them to me so they 
could convince me that I do not know what I am talking about.
    But as one who has lived under this tax system, with its 
increasing complexity, and paid taxes every year myself in 
substantial amounts since 1950, I can tell you it is an 
abomination. Maybe some are proud of it, but I do not think we 
should be too proud of it. It needs to be fixed.
    And then, more directly to your question, am I in favor of 
an inequitable, unfair tax treatment for people in this 
country, absolutely not. Am I for people with higher incomes 
paying higher taxes? You bet. I don't know what other 
principles you would like for me to say. Have no doubt, I think 
I am on the right side of the angels in understanding what is 
wrong with this tax system and the need for us to work together 
to make it something Americans can be proud of.
    I think one of the great dangers we have in this country is 
that this tax system has become so complicated that even fair-
minded Americans can make the case that it is too complicated 
for them to understand and respond to, and that is dangerous to 
our democracy.
    Mr. Doggett. Finally, Mr. Secretary, last year at the 
Senate Finance Committee you said, ``I believe that our tax 
system should be structured so that growth rates of zero or 1 
percent . . . we are in balance.''
    Mr. O'Neill. I agree with that.
    Mr. Doggett. ``That is to say that the tax system produces 
enough revenue under conditions of low or no growth that we are 
not borrowing from our children, that we are paying on a 
current basis for the things we have said are an appropriate 
object of public spending.''
    And you told this Committee, Mr. Levin in specific, that 
the deficits of the Reagan-Bush years ``put ourselves in a 
ditch that was horrendous.'' What you said then I believe 
applies today, to show the folly of this borrow and spend 
budget proposal that will wreck Social Security and cut Social 
Security benefits in the future.
    Thank you so much.
    Mr. O'Neill. I think with a combination of a war and a 
recessionary period, if there was ever a reason why we should 
be very marginally a negative, those are the reasons why we 
should do it. The President has said over and over again if not 
for the war, if not for the effect of terrorism, if not for the 
slow economy, we would be in balance and we would be in 
substantial surplus in fact.
    I think, again, at zero rates of growth, which is about 
where we are, we have a very small negative number. And if 
someone believes we should raise taxes, they ought to say so, 
instead of having this deficit. If somebody believes we should 
not spend money to provide funds for our troops in Afghanistan, 
they should say so. If someone wants to cut education funding, 
they ought to say so.
    The President has weighed all these things, and his 
judgment is in the books that we have sent to you.
    Mr. Doggett. I am just saying the same thing you said last 
year. Thank you.
    Chairman Thomas. The gentleman's time has expired. The 
gentleman from By Gosh, North Dakota.
    Mr. Pomeroy. North By Gosh, Dakota.
    Chairman Thomas. Excuse me, North By Gosh, Dakota.
    Mr. Pomeroy. Mr. Secretary, thank you for being with us 
today. During your long distinguished private sector career, 
you have made reports to many boards of directors regarding the 
financial condition of the company. I doubt you have ever 
reported a reversal in financial position as dramatic as what 
you are reporting to us today.
    Mr. O'Neill. I never ever had an occasion to restate 
earnings, ever.
    Mr. Pomeroy. That is wonderful, although what you are 
stating to us today is a $4 trillion picture to the negative 
different than what it was 1 year ago with very troubling 
conditions.
    I would like a chart to reflect what it means in terms of 
our ability to retire national debt. Based on your numbers, Mr. 
Secretary, 1 year ago we were projecting a virtual elimination 
of the national debt by the year 2008. This year's numbers, 
shown in red, show virtually no elimination of national debt. 
It continues at the existing high levels for the foreseeable 
future. The reason for failure to pay down debt is because when 
the cash comes in on Social Security, we give Social Security 
an IOU and we spend the cash on running the government.
    Mr. Secretary, do you believe that it will be easier for 
the Federal Government of the United States to meet its 
commitment to Social Security if the Federal debt held by the 
public is at a lower level rather than a higher level?
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512H.008
    
                                

    Mr. O'Neill. I don't think the two are tied together in the 
way that you have suggested. I have said over and over again 
that I think that without a doubt none of you and none of your 
successors are ever going to fail the obligation made to Social 
Security recipients to deliver the benefits you promised. You 
are not ever going to do that.
    Mr. Pomeroy. I would like to pursue that. I do not mean to 
interrupt, but our time is short.
    Next decade, we will run into a situation where in order to 
continue to meet the full obligations of Social Security we 
will have to be redeeming some of the bonds held by the Federal 
Treasury. It will not be funded just on cashflow coming in from 
the payroll taxes. Is that correct?
    Mr. O'Neill. We are going to have to have the funds to pay 
our obligations. I'm sure we will have.
    Mr. Pomeroy. Basically, Social Security moves into deficit 
next decade, is that correct?
    Mr. O'Neill. The annual income from the then-working work 
force will be lower than the obligation requirements. 
Therefore----
    Mr. Pomeroy. Therefore, Mr. Secretary, in order to keep 
those obligations absolutely current, as you have committed to 
again today, we are going to have to take funds from the 
General Fund budget in order to make up for us not coming in 
with Social Security?
    Mr. O'Neill. That is not necessarily so. It depends on what 
action the Congress and the Administration might take going 
forward to amend and reform Social Security so that----
    Mr. Pomeroy. Are you suggesting that in order to bring 
these payments into line we might actually need to reduce 
benefits because the cash will not be sufficient?
    Mr. O'Neill. I would not suggest that. I am not ready to 
believe that----
    Mr. Pomeroy. Mr. Secretary, what other changes could we 
make that would, by the middle of next decade, bring this into 
balance, what is coming in on the payroll tax and what is----
    Mr. O'Neill. I think, as you observed, and we have had 
endless conversations about this this morning, in 1 year's time 
there has been a substantial change. That does not mean that 
the facts are going to be different, it just means that the 
estimates are going to be different.
    I would submit to you that there is a $660 billion so-
called technical change in the estimates. I do not know that it 
is not possible that next year we will have a $660 billion 
technical correction to go the other way. I mean----
    Mr. Pomeroy. Mr. Secretary, I have another chart for you 
that shows that while we are already running in deficit 
position, passing the $600 billion making the tax cuts 
permanent also proposed by the President takes us from a bad 
situation into a worse situation.
    If you want to get out of a hole, it seems to me the first 
thing you stop doing is you stop digging. It appears to me the 
Administration would take us into even deeper deficit 
positions, taking us even deeper into debt and making it even 
more unlikely we will be able to meet the Social Security 
responsibilities.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9512I.009
    
                                

    Mr. O'Neill. I think it is just--I just have to tell you, I 
think it is really bad public policy to put up there starting 
with ``raids,'' when I think you would stipulate in private 
there is no such thing as a raid because the trust funds are 
intact; they are crafted with all the money that is collected 
from all the people, no matter what. No one is raiding the 
trust funds.
    I would associate with the comment that said we should stop 
using language that incorrectly describes our fiscal situation 
because it is misleading the people who do not understand 
enough about public policy to know that certain assertions are 
wrong. It only scares them.
    Mr. Pomeroy. Mr. Secretary, I will conclude. Thank you for 
responding to my questions.
    I would observe in conclusion, to the extent that Social 
Security proceeds, cash coming in on Social Security taxes, are 
used to fund the functions of government, used for the 
operating costs of government, you have made meeting the Social 
Security obligation you have spoken so forcefully of much more 
difficult going forward.
    Mr. O'Neill. If you don't mind me saying so, the important 
public policy question is, as we have maturing Social Security 
obligations, do we have the balance sheet at the Federal level 
to support them, and I would say to you without any fear of 
contradiction our balance sheet will support the obligations we 
have made to the American people, without a doubt.
    Mr. Pomeroy. It seems to me we have viewed the surplus as 
people's money, but the debt as our children's obligation. I 
think that is unfortunate.
    Thank you, Mr. Chairman.
    Chairman Thomas. Could I ask the gentleman, once again in 
terms of his charts, are the dollar projections adjusted for 
inflation or are they nominal dollars?
    Mr. Pomeroy. Let me ask----
    Chairman Thomas. I believe, in looking at the chart, that 
they are not justified for inflation, they are nominal dollars. 
And at some point the Chair may put some basic ground rules in, 
because this is, I believe, the third chart in a row that has 
used nominal dollars and not adjusted dollars.
    It is fine if you want to do it, but I believe for purposes 
of clarity we really ought to have a common yardstick.
    Mr. Rangel. Mr. Chairman, I would ask if the Secretary's 
figures are adjusted for inflation, because I was under the 
impression that we were using the same standards as the 
Administration was using. And if that is so, then tell them, 
too.
    Chairman Thomas. They did not present the chart that the 
gentleman from North Dakota is presenting.
    Mr. Rangel. They have been presenting a lot of charts this 
morning.
    Chairman Thomas. I understand that. That was six charts 
ago.
    Mr. Rangel. That was a small chart. He can answer it. Are 
you adjusted----
    Chairman Thomas. The gentleman from Louisiana? The 
gentleman still has not inquired. The gentleman from Louisiana.
    Mr. Rangel. Mr. Chairman, just as a matter of courtesy, you 
have made the point half a dozen times as to whether or not our 
charts are adjusted for inflation, which I thought was a very 
good question. I now ask, could you ask the same question for 
the Administration?
    Chairman Thomas. Sure.
    Mr. O'Neill. For the chart where it is appropriate to use 
constant dollars, we have done so. We have used nominal dollars 
where--for ease of explanation, we have done that.
    Mr. Rangel. We would like to adopt that answer as our own.
    Chairman Thomas. The gentleman from Louisiana.
    Mr. McCrery. Mr. Chairman, the import of your question with 
respect to Mr. Pomeroy's first chart is that the nominal 
dollars, which is what Mr. Pomeroy's chart shows, nominal 
dollars, the nominal dollars are not nearly as important as the 
percentage of our national income that those nominal dollars 
represent.
    And if he had put up another chart showing the rise, the 
estimated rise in economic growth in the country, then he would 
have reflected the lowest percentage of our national income 
represented by that national debt, that publicly held debt, 
since 1984 for this coming year.
    And if he had followed on out as many years as he did on 
his chart, it would have shown the lowest percentage of 
national debt as a percent of our national income since 1940, 
except for 1 year, 1974.
    So to be honest with everybody from describing the impact 
of that debt, he should have put up another chart showing that 
juxtaposed with our national income.
    Chairman Thomas. The gentleman from Texas deserves to be 
heard. But prior to that, the Chair will exercise the 
prerogative of indicating that the elimination of the debt 
suddenly changed the Chairman of the Federal Reserve's 
testimony last year and we began to worry about it, just 
exactly what we would do.
    I think the point of the gentleman from Louisiana is the 
relationship, it is the percentage of the debt to income that 
is most significant; and in that regard, in a bipartisan way 
over the last decade we have begun to move in the right 
direction.
    Does the gentleman from Texas wish to inquire?
    Mr. Brady. I do, finally, Mr. Chairman.
    Mr. Secretary, thank you for being here. I am a Houston 
area Congressman. Our community, our region, has been hurt very 
seriously by the collapse of Enron. I have neighbors who are 
now out of work and have lost their retirement. Politicians who 
try to score political points off the misery of the Enron 
workers cannot go any lower than they are going. They ought to 
be ashamed of themselves. That means you, Lloyd, and the 
Democratic colleagues who join in.
    Mr. Doggett. That is really uncalled for.
    Mr. Brady. No, it is not. You are going to sit there and 
listen to a different message.
    The message is especially important since we need to be 
working together to help those folks. One of the silver linings 
of September 11 was watching Congress pull together and unite 
as a country to help those who had really been hurt. The other 
night the President asked us to do the same thing, to help 
people who have been laid off from Enron, Boeing, General 
Motors, or any other even small business, even, in America.
    The fact of the matter is since September 11, through the 
rest of that year, we lost almost 8,000 jobs a day. Eight 
thousand people had to go home every day and tell their family 
they are out of work, their whole lives were changed, dreams 
had been destroyed, everything was going bad. Things have 
gotten a little better, but it is still very serious.
    The fact of the matter is we do agree that we need 
unemployment benefits for those folks who have been laid off. 
We agree. Unfortunately, it is still stalled in the Senate. We 
agree people ought to have help with health care, help with 
health care in the short term. Unfortunately, that is still 
stalled in the Senate due to politics. We agreed that families 
need help, we agreed that States need unemployment insurance, 
we agreed that people need to go back to work. Unfortunately, 
all of that is still stalled in the Senate due to politics.
    The fact of the matter is if we do not agree on anything 
else, we ought to agree that if we get this economy moving, we 
can help those people. If we pass that stimulus plan we can 
help them in the short term get through things, but most 
importantly to get a job, which is what they really want to get 
their lives back in order today.
    The fact of the matter is the President's tax relief I 
think has helped the economy. The reason we do not have a 
surplus today and we are off track is Congressional spending. 
Some of it we need for homeland security, a good amount of it, 
but other of it is just needless pork barrel projects.
    We have to discipline ourselves. But the biggest culprit is 
the economy. The only way we are going to balance the budget 
and start paying down the debt again, preserve Social Security 
and Medicare, and get people back to work is to get this 
economy moving now. There is no way to escape it. That is what 
we ought to be agreeing upon as Republicans and Democrats.
    My question to you is, I know the President has more than 
met our leaders in the Senate halfway. I know he continues to 
do that. Don't we need the economic stimulus bill to pass the 
Senate today, just as importantly as it was back this fall?
    Mr. O'Neill. We do, and for exactly the reasons that you 
have given. I couldn't add anything to improve on what you have 
said. That is exactly right.
    Mr. Brady. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Mr. Secretary, 
thank you very much. You are kind to allow all of the Members 
to inquire. Just let the Chair say we appreciate your efforts 
to help us chart a course through a year that no one 
anticipated.
    Thank you very much. Good luck.
    The hearing stands adjourned.
    [Whereupon, at 1:33 p.m., the hearing was adjourned.]
    [Questions submitted from Mr. Neal to Secretary O'Neill, 
and his responses follow:]

    Question 1: The Department of Treasury's explanation of the 
President's revenue proposals states a concern that, ``The individual 
alternative minimum tax (AMT) may impose financial and compliance 
burdens upon taxpayers who were not originally intended targets of the 
AMT.'' I share your concerns. Would you explain why the Administration 
chose to extend only until 2004 the exemption of nonrefundable personal 
credits from the application of the AMT, as opposed to making this 
exemption permanent as were some other expiring provisions?

    Question 2: Last year's enacted tax changes increased the 
individual AMT exemption amount by $2000 for single filers, and $4000 
for married couples filing jointly. While your proposed budget 
permanently extends provisions which expire in 2010, this provision 
unfortunately expires at the end of 2004. If this provision is not 
extended, more than twice as many taxpayers will be subject to the AMT 
in 2005 over the prior year. Do you agree that, for millions of 
unsuspecting taxpayers, their taxes in 2005 will increase?

    Response: The Administration's 2003 Budget proposal to extend the 
Tax Code provision permitting nonrefundable personal credits to be 
offset against the AMT for 2 years (through taxable years 2002 and 
2003) is only an initial step in dealing with the AMT problem. The 
Administration intends to work with Congress to develop a more 
comprehensive approach to the AMT.

    [A submission for the record follows:]
 Statement of the National Society of Accountants, Alexandria, Virginia
    Mr. Chairman, the National Society of Accountants (NSA) is pleased 
to submit testimony for the hearing record on President Bush's fiscal 
year 2003 budget proposals. The NSA and its affiliated state 
organizations represent 30,000 accountants, tax practitioners, business 
advisors and financial planners providing services to over 19 million 
individuals and small business. Most of our members are sole 
practitioners or partners in small to medium sized firms. NSA 
represents the accountants for Main Street, not the accountants for 
Wall Street.
IMPROVE TAX ADMINISTRATION
    The Administration proposes a six-part modification to the IRS 
Restructuring Act of 1998 (RRA98). We concur with the provision to 
allow taxpayers to enter into less than full pay installment agreements 
with the IRS. This is a common sense provision whose implementation is 
long overdue. The proposal to modify IRS employee infractions subject 
to mandatory termination is a positive change to the RRA98.
    Another proposal would curb frivolous submissions and filings by 
raising penalties for filing frivolous tax returns from $500 to $5,000 
and impose a $5,000 penalty for repeatedly filing or failure to 
withdraw after notice certain other submissions. While generally 
supportive, we caution that if improperly crafted these new measures 
could dampen legitimate resubmissions and filings, such as a 
resubmission of an Offer-In-Compromise (OIC) based on new or updated 
taxpayer information. In a similar vein, the proposal to terminate an 
installment agreement for failure to make timely tax deposits and file 
tax returns should contain allowances for circumstances beyond the 
control of the taxpayer.
    We support the change that would eliminate the requirement that the 
IRS Chief Counsel provide an opinion for any accepted OIC equal to or 
exceeding $50,000. In our view, the Chief Counsel has not added any 
value to the program to begin with and in fact has been a detriment to 
the process by withholding approval of offers on policy grounds rather 
than on legal sufficiency.
    On the issue of the OIC program in general, NSA maintains that the 
program remains fundamentally flawed and ultimately no amount of 
``process'' improvement will help. Until the program is moved from 
compliance oriented personnel and reassigned to settlement oriented 
personnel who are allowed to design and administer a settlement 
oriented program, the goal of achieving what is potentially collectible 
at the earliest possible time and at the least cost to the government 
while providing taxpayers a fresh start toward future voluntary 
compliance will remain unfulfilled.
IRS NATIONAL RESEARCH PROGRAM
    Recently, the IRS unveiled a new compliance study, known as the 
National Research Program, to revamp its audit selection process. As we 
understand the program, the tax returns of up to 50,000 individuals and 
small business' would be subject to review at various levels of 
intensity. The program would select 2000 taxpayers for detailed line-
by-line examination for ``calibration'' purposes.
    First and foremost, we do not question the right of the IRS to 
perform audits to ensure compliance with tax laws. Nor do we object to 
the need for the Service to gather statistics for use in improving the 
process. We do object to the perceived need to subject even 2000 
taxpayers to the burden and hardship of intrusive line-by-line audits 
whose sole reason for selection is to satisfy a debatable statistical 
need for ``calibration.'' We believe that the IRS has other tools and 
techniques at its disposal to gather the information needed to improve 
the audit process, such as data from closed cases. The IRS can and 
should find another way.
    An audit of a tax return is by definition an adversarial process. A 
notice of audit from the IRS even to a compliant taxpayer is a cause 
for concern and anguish and many will seek, at substantial cost, 
professional representation to protect their interests. Adding to the 
mix is the fact that much of the tax code is subject to interpretation 
and judgment calls based on facts and circumstances. Reasonable people 
can and do differ on how the tax law applies to a given situation.
    To defuse the adversarial aspects and to enhance taxpayer 
cooperation and faster resolution of issues, the IRS should grant the 
taxpayer limited immunity for problems discovered during the audit 
(barring any criminal behavior on the part of the taxpayer). If the 
goal of the NRP is to gather better data and truly improve the audit 
process then IRS should provide these taxpayers something in return for 
compelled cooperation as compensation for the intrusion and expense 
caused by these audits.
    Mr. Chairman, the scars from the overly intrusive Taxpayer 
Compliance Measurement Program (TCMP) of the past are still fresh. We 
are deeply concerned, even after assurances from senior IRS management 
to the contrary, that this program will morph itself into an updated 
version of the TCMP. At the very minimum, we recommend that the Ways 
and Means Committee rigorously exercise its oversight authority to 
prevent this program from reincarnating into another TCMP nightmare.
FREE ON-LINE TAX FILING
    The President's budget contains a proposal to allow taxpayers to 
file their taxes ``free'' through an IRS web site as part of the E-
Government initiative. The NSA is committed to electronic filing of tax 
returns and in the wake of the September 11 terrorist attack issued a 
``Call to Arms'' for its members to file returns electronically and use 
EFTPS for tax deposits as a means of reducing mail to the IRS service 
campuses. Unfortunately we must oppose the President's e-file 
initiative.
    First, the government should not compete with the private sector. 
Even if the IRS starts off with a ``bare bones'' service, pressure will 
be brought to bear each year to add new features and enhancements and 
permit the filing of more complex returns. It also raises conflict of 
interest issues by having the IRS serve as tax preparer, tax collector 
and tax prosecutor.
    Second, the initial development and on-going maintenance of an on-
line filing service is expensive. This ``free'' service will cost 
taxpayers plenty. The resources of the IRS are better spent improving 
its woefully inadequate taxpayer service and assistance systems. It has 
no business in the tax return preparation industry. Even a system 
designed and built in ``partnership'' with the IRS raises cost, 
perception and privacy concerns.
    Third, we see no market failure that requires government 
intervention. The private sector already provides excellent tax 
preparation and filing service at reasonable cost. The private sector, 
volunteer groups and the IRS provide a variety of free services to low-
income taxpayers. The cost issue is merely a smoke screen.
    Why should we spend additional money to fund a new program when it 
is painfully obvious that the IRS has significant difficulties even 
with its current programs as evidenced by a less than 75% correct 
response rate to taxpayer questions. In most schools, 75% is a grade of 
``D'' and does not inspire confidence that free e-filing as envisioned 
in the President's budget will be successful or fair.
EXTENSION OF TIME FOR E-FILED RETURNS
    The Administration proposes to extend the April filing date from 
April 15 to April 30 for individuals filing returns electronically to 
help encourage the growth of electronic filing. We sincerely doubt that 
this change will have any effect on getting more electronic returns 
filed. The early filers do so to get their refunds sooner. The 
procrastinators file later because they have balance due returns. Why 
reward them with an extra 15 days to file and pay?
    To truly promote electronic filing, IRS should devote more funds to 
advertising of benefits to taxpayers and tax practitioners. Removing 
barriers that limit or discourage the practitioner community from 
participating as electronic return originators would also be a major 
step forward.
TAX CREDITS AND THE AMT TRAP
    The President's budget contains a number of initiatives using tax 
credits, including refundable credits, to provide incentives and 
promote certain behavior and activities. We choose not to argue the 
merits of the proposals, but rather, focus on the mechanics.
    Based on our reading of the description of these proposals we 
cannot determine how they interrelate with the alternative minimum tax. 
Our concern is simple: if there is no ability for a taxpayer to offset 
alternative minimum tax (AMT) by the ``regular'' tax credit the credit 
becomes meaningless for many taxpayers. The expansion of the AMT into 
the lives of middle-class Americans makes it imperative for Congress to 
consider the AMT implications on any new deduction and tax credit 
offered under the ``regular'' tax system and grant similar treatment 
under the AMT.
TAX SIMPLIFICATION
    We applaud the Administration for beginning a ``thorough review of 
means of simplifying the tax code'' and developing both short term and 
longer-term tax simplification proposals. NSA is ready to work with the 
Administration, Congress and other groups to produce meaningful reform.
    The Administration stated its ``Highest priority will be given to 
simplification proposals that will yield the largest benefits, i.e. 
that will affect the most people and have the largest effects in 
reducing compliance burdens and administrative costs.'' We are 
encouraged that the Administration leads off the list with the 
individual AMT.
    Much has been written on the adverse effect of the individual AMT 
and need not be restated here. We believe the individual AMT is a 
predator on the middle-class and the time has come for Congress to slay 
this monster. For every year that Congress delays action on AMT the 
price tag for repeal increases. In the not-to distant future the AMT 
will be the defacto tax system for many taxpayers undoing the many of 
the benefits targeted under the regular tax for the middle class. This 
was never the intent of Congress.
    Much of the groundwork for simplification has occurred. The 
recently released National Taxpayer Advocate Office 2001 report to 
Congress contains many important recommendations supported by NSA. 
Likewise, the Joint Committee on Taxation's 2001 simplification study 
(JCS 3-01) is a useful starting point. The Nation's taxpayers deserve a 
better tax system. The time has come for the political system to 
deliver.

                                
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