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79–764—PDF 2012

S. HRG. 112–733 

PRESIDENT’S BUDGET FOR FISCAL YEAR 2013 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

FEBRUARY 14, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

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

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

ADMINISTRATION WITNESS 

Geithner, Hon. Timothy F., Secretary, Department of the Treasury, Washington, DC ............................................................................................................. 6 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

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

Geithner, Hon. Timothy F.: 

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

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

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

Grassley, Hon. Chuck: 

Letter from Senator Grassley to Douglas W. Elmendorf and Thomas 

A. Barthold, dated January 15, 2010 .......................................................... 121 

Letter from Douglas W. Elmendorf to Senator Grassley, dated March 

4, 2010 ............................................................................................................ 123 

Hatch, Hon. Orrin G.: 

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

Prepared statement with attachment ............................................................. 128 

Roberts, Hon. Pat: 

Prepared statement .......................................................................................... 135 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 137 

U.S. Chamber of Commerce .................................................................................... 144 

(III) 

(1) 

PRESIDENT’S BUDGET FOR FISCAL YEAR 2013 

TUESDAY, FEBRUARY 14, 2012 

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

The hearing was convened, pursuant to notice, at 10:05 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Bingaman, Kerry, Wyden, Schumer, Cantwell, 

Nelson, Menendez, Carper, Cardin, Hatch, Grassley, Snowe, Kyl, 

Crapo, Coburn, and Thune. 

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

Batchelder, Chief Tax Counsel; Alan Cohen, Senior Budget Analyst; Jeff VanderWolk, International Tax Counsel; and Tom Klouda, 

Professional Staff Member, Social Security. Republican Staff: Chris 

Campbell, Staff Director; Jeff Wrase, Chief Economist; and Nick 

Wyatt, Tax and Nomination Professional Staff Member. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Thomas Jefferson once said, ‘‘The value of an idea lies in the 

using of it.’’ Yesterday, President Obama issued his budget proposals for the next 10 years. Treasury Secretary Tim Geithner is 

here to discuss them. We need to determine how to best use these 

ideas to create jobs, reduce the deficit, and create economic growth. 

The top issue facing our country and the number-one priority of 

this budget is job creation. We have made real progress in our job 

creation efforts. The jobs picture is improving, and the economy is 

showing positive signs. We have added 3.7 million jobs in the last 

23 months. The number of people applying for jobless benefits each 

week has fallen steadily. Yet there are still far too many people out 

of work: 12.8 million Americans are unemployed. We need to do 

more to spur economic growth and help businesses create jobs. 

The President’s budget contains critical policies to do just that, 

starting with the payroll tax cut. Extending this tax cut through 

the end of the year will save families real money, an average of 

$1,000. These families will spend this extra money at local businesses, pumping it through our economy. The budget also renews 

unemployment benefits for workers who have lost their jobs 

through no fault of their own. These workers are sure to spend 

these benefits, which will help support and create more jobs. 

According to our nonpartisan scorekeeper, the Congressional 

Budget Office, every $1 in unemployment benefits can create nearVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
2 

ly $2 in economic growth. Failure to extend the payroll tax cut in 

unemployment insurance would cost up to half a million jobs. We 

cannot let that happen to working families or our economy. 

Continuing our smart, aggressive trade policy to open new markets to America’s world-class goods is also key to our competitiveness and jobs here at home. Last year we passed three free trade 

agreements with Colombia, Panama, and South Korea. These 

agreements will generate $12 billion in new U.S. exports and create tens of thousands of new jobs here at home. We also extended 

a critical worker assistance and training program to ensure American workers have the tools they need to compete and take advantage of new trade opportunities. 

This year I am working with my colleagues and the administration to grant permanent normal trade relations to Russia. Once we 

do, U.S. exports to Russia could double over the next 5 years. This 

will create more American jobs, particularly in the services, agriculture, manufacturing, and high-tech sectors. 

This budget would extend tax provisions that expired at the end 

of 2011, known as the traditional extenders. These included deductions for college tuition and for State and local sales taxes. And 

they include a tax credit for research and development to encourage innovation. We should extend these tax breaks for families, individuals, and businesses, and do so now. 

We also need to end the cycle of year-to-year extension and uncertainty for families and businesses. We should work together to 

enact comprehensive tax reform. We must make the tax code fairer 

and more predictable. This budget takes a step in this direction by 

making the 2001 and 2003 tax cuts for middle-class Americans permanent, providing permanent estate tax relief and solving the 

problem of the Alternative Minimum Tax. 

We cannot stop there. Uncertainty is not the only problem with 

our tax system. The tax code and regulations are now as thick as 

a stack of a dozen Bibles. We need to simplify it and close loopholes. We must ensure that it helps businesses compete in the global economy and create jobs. I look forward to working with my colleagues and the administration to create a better tax system that 

meets our 21st-century needs. 

The President’s budget also makes much-needed investment in 

America’s infrastructure, which is sorely needed at a time when 

unemployment in the construction industry is hovering around 15 

percent. The Senate’s highway bill has passed out of several committees, including this one, with bipartisan majorities. It will provide nearly $110 billion over 2 years to support road safety, mobility, interstate commerce, and jobs. It is time to enact this into law. 

In addition to creating jobs, the President’s budget takes important steps to bring the deficit and Federal debt held by the public 

under control. We have already reduced Federal deficits significantly. Earlier this year we enacted the Budget Control Act of 

2011, which reduced spending by $900 billion, and the health reform law provided the biggest deficit reduction in more than a decade. 

Nevertheless, Federal budget deficits and debt are still too large. 

We must adopt policies that will stabilize debt as a percent of GDP 

by the latter part of the next 10 years. This budget meets that test. 

3 

I look forward to continuing our work on deficit reduction and job 

creation in the coming years. 

There is another reason that we must continue to focus on deficit 

reduction along with job creation this year: a perfect fiscal storm 

is waiting at the end of this year. First, the 2001, 2003, and 2010 

tax cuts expire. Two days later, an automatic sequester of many 

Federal programs will take place. The debt limit will need to be 

raised at about the same time. This is what we will face if we do 

nothing to reduce deficits and control Federal debt in the coming 

year. 

Any deficit reduction we develop must be balanced and it must 

be fair. Everyone must contribute, but no one should have to make 

undue sacrifices. Unfortunately, one area of the budget falls short 

of this standard. The cuts to rural assistance programs I believe 

are too deep. But we all must work together to achieve meaningful 

deficit reduction. We cannot do this at the expense of job creation 

and protecting programs that folks in rural areas depend on. 

Deep cuts to agriculture programs will pull the rug out from 

under our hardworking producers and unjustly target rural States 

like Montana. Rural development programs provide important economic development, infrastructure, and housing resources. Cuts to 

these programs have a devastating effect on the economies of rural 

communities and paralyze our ongoing economic recovery. We need 

to enact deficit reduction in a smart way. I look forward to working 

with my colleagues and the administration to do so. 

So let us work together to enact significant deficit reduction in 

a way that preserves and enhances our job creation efforts. Let us 

take these ideas and find the best way to use them. 

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

The CHAIRMAN. I will now turn to my good friend, Senator 

Hatch. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you. Thank you, Senator Baucus, 

Mr. Chairman. I want to thank you for holding today’s hearing. We 

welcome you, Secretary Geithner, to the committee. 

Let us begin by noting that total public debt outstanding is over $15.3 trillion, larger than the size of our Gross Domestic Product. 

A debt-to-GDP ratio above 100 percent is clearly unsustainable and 

puts us in the ranks of the many European countries currently in 

a severe debt crisis and unable to borrow at sustainable interest 

rates. 

The Nation deserves a budget that responsibly addresses this 

debt crisis, yet last year the President delivered a budget that was 

unanimously rejected on the Senate floor. It did not receive a single 

yes vote, even from Senate Democrats. I will be interested to see 

if my colleagues are going to vote for this one. 

Yesterday, the President laid out his most recent budget plan. 

Unfortunately, it similarly fails to address the Nation’s glaring fiscal crisis, and it will probably never be brought to a vote. We have 

not seen a budget resolution from the Senate Budget Committee in 

years, despite it being legally required. 

4 

Last year, the President’s budget did eventually get a vote, and 

there is only room for improvement on that result. But the Senate 

Majority Leader seems to have no inclination to debate a budget 

on the Senate floor, having stated that the Budget Control Act 

means that we do not have to debate fiscal year 2013 spending totals since they have already been determined. 

If so, then we do not need to discuss a large part of what the 

President unveiled yesterday, which should make for a quick hearing today. Still, we have to do our due diligence. In reviewing the 

budget released yesterday by the President, it is clear that his plan 

would only make our fiscal problems worse and harm our economy 

by imposing around $1.9 trillion of stifling tax hikes. 

Earlier this month the President suggested at the National Prayer Breakfast that these tax hikes are divinely inspired. That certainly was an interesting take on the Bible, as far as I am concerned. In the President’s interpretation, ‘‘Render unto Caesar the 

things which are Caesar’s and unto God the things that are God’s’’ 

becomes ‘‘just give it all to Caesar.’’ 

Who knew that cosmic justice would be rendered by the Department of Education and HUD? Who knew that the separation of the 

wheat from the chaff would in fact be performed by the Obama administration, picking winners and losers in the name of fairness? 

Perhaps churchgoing citizens should just cut to the President’s 

chase and, instead of tithing or putting an envelope in the basket 

at church, they can just send their money directly to the divinely 

ordained Treasury. The fact is, this budget is politically, not divinely, inspired. 

This budget is a plan for a permanently larger, European-style 

government. It does not send our country down a sustainable fiscal 

path. It does nothing to change the President’s unwavering devotion to tax-and-spend policies and failed stimulus schemes that 

have and will continue to generate historic deficits and levels of 

debt. 

It does nothing to wind down the mortgage giants Fannie and 

Freddie, to restore private flows of capital into our Nation’s system 

of mortgage finance, or to remove the government’s effective takeover of our housing markets. It does nothing to address our entitlement spending crisis, whistling past the graveyard as Social Security, health care, and disability trust funds are in death spirals towards bankruptcy. 

The President presents this budget with its accelerated spending 

and class warfare as one of fairness and compassion. But is it fair 

to American workers to jeopardize economic growth through higher 

taxes? Is it fair to taxpayers to ignore the mortgage giants Fannie 

and Freddie, which continue to drain their wallets? Is it fair to the 

disabled to pretend that the looming bankruptcy of the disability 

trust fund will not happen in 2016? It is going to if we do not do 

something about it. 

Is it fair to look at Social Security and turn the other way in the 

interest of avoiding hard choices that might make a reelection campaign uncomfortable? Secretary Geithner, I look forward to your 

testimony today on the President’s plan and what it might do to 

the economy. 

5 

I have to say though that I wish you would be careful in your 

public economic pronouncements. It is disturbing and unwarranted 

when you claim, for example, that Republicans’ resistance to the 

President’s stimulus proposals for more taxing, spending, and borrowing—as in his so-called jobs bill—means that Republicans do 

not want to do anything to help the economy or that Republicans’ 

resistance to wasteful stimulus somehow increases the risk of recession. 

These claims are simply not true, and they are certainly not productive. Putting aside these discouraging political statements, perhaps we could be given an explanation of why the administration 

appears to believe that the economic recovery is vibrant enough to 

be hit with more taxes, despite clear warnings from the Congressional Budget Office of significant negative effects on growth, yet 

at the same time it is not vibrant enough to stop the runaway 

spending of the current administration. 

It seems that for President Obama the recipe always calls for 

more taxes to fund more government. The result is this budget, 

which ignores the source of our Nation’s fiscal challenges—a spending problem that is only getting worse. No matter what budget 

baseline you choose to consider, the CBO projects that Federal revenues as a share of GDP will rise above the long-run average as 

the economy recovers, even with a continuation of current tax 

rates. But spending as a share of GDP is projected to indefinitely 

stay above historic norms, pushing our economy and the size of our 

government further and further down the path that several major 

European countries have followed to fiscal ruin. 

We also know that our fiscal outlook is very sensitive to future 

developments, including what might happen to interest rates or inflation. CBO tells us that, if interest rates run just 1 percent higher than assumed in their baseline budget projection, interest outlays over the next 10 years will increase by over $1 trillion. That 

is for just a 1-percent increase. If rates spike up precipitously once 

our creditors lose patience with the administration’s unwillingness 

to chart a sustainable fiscal course, we could easily face deeply 

painful adjustments like those currently being experienced in Europe. 

On the other hand, according to CBO, if inflation turns out to be 

1 percentage point higher each year than under its baseline, then 

the deficit would actually fall over the next 10 years. While the 

economy would suffer, the government would benefit from higher 

inflation, and it would be up to the Fed to avoid the temptation to 

inflate for budgetary gain. I certainly hope that the Fed’s recent 

appetite for mixing monetary and fiscal policies comes to an end 

and that we do not have to worry about the temptation to inflate 

our way out of our debt. 

Our unsustainable fiscal path poses great and growing risks to 

the economy, and the President’s budget does nothing to diminish 

these risks. In fact, given the riskiness of our fiscal path and the 

temptation to inflate away some of our debt, Warren Buffett, whom 

the administration appears to turn to for its formulation of tax policy, weighed in with advice for investors to steer clear of currencybased investments like U.S. Treasury securities. As Mr. Buffett 

said, ‘‘ ‘In God We Trust’ may be imprinted on our currency, but the 

6 

hand that activates our government’s printing press has been all 

too human.’’ On bonds like Treasuries, the Oracle advises, ‘‘Right 

now, bonds should come with a warning label.’’ 

Secretary Geithner, Mr. Buffett is advising investors to shy away 

from investments such as Treasury securities, and it will be interesting to know if you agree with this advice. My hope is that his 

recent musings do not become a new Buffett rule for investors not 

to buy Treasuries, because, if investors heed that advice in large 

numbers, the spikes in interest rates that I worry about will materialize and the low-cost financing of our $15.3-trillion debt that the 

U.S. temporarily enjoys will evaporate in a hurry. 

We need to resist the siren song of cheap financing, partly 

brought on by the Federal Reserve’s massive purchases of Treasury 

securities to help push rates down. Unfortunately, the administration remains lulled in by the siren song and takes current low rates 

as a reason to spend more and pile up even more debt to finance 

a bloated European-sized government. 

Secretary Geithner, I look forward to your testimony on the 

President’s budget—testimony that I only received late yesterday, 

after the deadline you were supposed to honor for submission. 

Again, Mr. Chairman, I want to thank you for holding today’s hearing, but I am really concerned. I do not see any real resolution to 

the problems that this country is currently facing. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator, very much. 

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

The CHAIRMAN. I am now pleased to welcome our witness, Treasury Secretary Tim Geithner. As you know, Mr. Secretary, your 

statement will be automatically included in the record, and I would 

urge you to summarize and just take your time. 

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY, 

DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Hatch, and members of the committee. Thanks for the chance 

to come before you today and talk about the President’s budget. 

Our economy today is gradually getting stronger, but we have a 

lot of tough work still ahead of us as a country. Over the last 21⁄2

years, despite the financial headwinds from the crisis, despite the 

severe cutbacks by State and local governments, despite the crisis 

in Europe, despite the increase in oil prices we saw last spring, despite the tragedy in Japan, despite all those shocks and headwinds, 

the economy has grown at an average annual rate of 2.5 percent. 

Private employers have added 3.7 million jobs over the past 23 

months. Private investment in equipment and software is up more 

than 30 percent. Productivity has improved. Exports across the 

American economy, from agriculture to manufacturing, are expanding rapidly. Americans are saving more and bringing down debt 

levels. The financial sector is in much stronger shape, helping meet 

the growing demand for capital and for credit. 

Now, these improvements are signs of the underlying resilience 

of our economy, the resourcefulness of American workers and companies, and the importance of the swift and forceful actions we took 

7 

to stabilize the financial system and to pull the economy out of the 

worst economic crisis since the Great Depression. 

But I want to emphasize this: we still face very significant economic challenges, particularly for households and families across 

the country. Americans are still living with the acute damage 

caused by the crisis. 

The unemployment rate is still very high. Millions of Americans 

are living in poverty, still looking for work, suffering from a fall in 

the value of their homes, or struggling to save for retirement, or 

to pay for college. We face, as you both said, unsustainable fiscal 

deficits. In the face of these challenges, the President’s budget calls 

for substantial additional support for economic growth and job creation alongside longer-term reforms to improve economic opportunity and to restore fiscal responsibility. 

Most urgently, I want to start with this as the chairman did. 

Congress must extend the payroll tax cut and emergency unemployment insurance by the end of this month. If Congress fails to 

act, 160 million Americans will immediately pay more in payroll 

taxes, and 5 million people looking for work will lose or be denied 

Unemployment Insurance benefits over the rest of the year. 

We will continue to encourage Congress to support additional actions to cut taxes for workers and businesses, to preserve the jobs 

of teachers and first responders, to put construction workers back 

to work, and to help more Americans refinance their mortgages to 

take advantage of lower interest rates. Beyond these immediate 

steps, the President’s budget outlines a longer-term strategy to 

strengthen economic growth and improve economic opportunity 

while reducing our fiscal deficits to more sustainable levels. 

Now, I know the conventional wisdom in Washington is that this 

debate we begin today does not matter because Congress is too divided to legislate in this election year. But this debate is a very important debate. It matters because this is a fundamental debate 

about economic priorities, about how to increase growth and opportunity, how to strengthen health care and retirement security, how 

to reform our tax system, how to live within our means. 

It is important also because of the stark array of choices we face 

at the end of this year with the expiration of the Bush tax cuts and 

the sequester. We govern with limited resources, and we have to 

make choices about how to use those resources more wisely. Any 

strategy to address these economic challenges has to answer a few 

key questions: how much do we have to cut; which program should 

be cut, expanded, or protected; how should we share the burdens 

of deficit reduction? 

The President’s budget reduces projected deficits over the next 10 

years by $4 trillion, $3 trillion on top of the caps and cuts in the 

Budget Control Act. Overall, the President’s plan would lower the 

deficit from just under 9 percent of GDP in 2011 to around 3 percent of GDP in 2018. 

A deficit at that level will stabilize the overall level of debt-toGDP in the second half of the decade, putting us back on the path 

of fiscal sustainability and better positioned to confront the remaining challenges we would still face that come from the rise in Medicare, Medicaid, and Social Security costs as more Americans retire. 

8 

Under the President’s budget, non-defense discretionary spending is projected to fall to its lowest level as a share of the economy 

since Dwight Eisenhower was President, and the President’s plan 

would significantly slow the rate of growth in spending in Medicaid 

and Medicare, both through the Affordable Care Act and the additional Medicare and Medicaid reforms proposed in the budget. 

But, as we reduce spending, we also have to protect investments 

that are critical to expanding economic growth and opportunity. 

That is why the budget proposes a series of targeted investments 

in education, innovation, manufacturing, and in infrastructure. 

Now, in order to achieve this balance—significant savings but 

some important investments—we are proposing to raise a modest 

amount of additional revenues through tax reform. We propose tax 

reforms that raise revenues because we do not believe it is possible 

to meet our national security needs to preserve a basic level of 

health care and retirement security or to compete effectively in the 

global economy without some increase in revenues as part of a balanced deficit reduction plan. 

The President’s plan includes $2.50 of spending cuts for every 

dollar of revenue increases. These revenue increases are focused on 

the top 2 percent of American taxpayers, not the remaining 98 percent. Although we illustrate in our budget a range of specific tax 

changes that could be added onto the present tax system to generate those increases in revenue, we think the best approach to get 

there is through comprehensive tax reform. We have outlined a 

broad set of principles for tax reform to make the system more simple and more fair and do a better job of encouraging investment in 

the United States. 

The increases in revenue we propose, which are roughly 1 percent—I say 1 percent—of GDP, if structured as we propose, we do 

not believe would have a material adverse impact on economic 

growth, particularly if compared to a comparable reduction in, for 

example, Medicare benefits or spending on infrastructure. 

Now, I know there are members of Congress who are critical of 

these proposals and would prefer a different strategy, and the 

President’s plan should be judged against those alternatives. There 

are some who have suggested we should cut deeper and faster, 

with more severe austerity now. That approach, though, would 

damage economic growth, it would reverse the gains we have 

achieved in getting more Americans back to work and healing the 

damage caused by the financial crisis, and it would push more 

Americans into poverty. 

Some have suggested that we try to restore fiscal balance without raising any additional revenue from anyone, or even by cutting 

taxes further. To do so, though, would entail deep cuts in benefits 

for retirees and low-income Americans, cuts in investments and 

education and innovation that would hurt growth and opportunity, 

and cuts in defense spending that would damage our national security interests. We do not support, and we will not support, those 

alternative strategies. 

Now, the President’s plan includes some very tough reforms, but 

with a balanced mix of spending cuts and tax reforms. It preserves 

some room—modest room—for us to make investments that would 

9 

improve opportunity for Americans and help make growth stronger 

in the future. 

It protects the basic commitment we make to retirement security 

and health care for the elderly and the poor, and it provides substantial immediate help for the average American alongside these 

long-term reforms to restore fiscal responsibility. This plan will not 

solve all the Nation’s challenges, but it will put us in a much 

stronger position to deal with those challenges. 

Thank you. I would be happy to answer your questions. 

The CHAIRMAN. Thank you, Mr. Secretary. 

[The prepared statement of Secretary Geithner appears in the 

appendix.] 

The CHAIRMAN. I would like to focus a little on infrastructure. I 

personally believe this country is behind in building roads, streets, 

highways, bridges, and airports, and just modernizing our infrastructure. At the same time, that will all cost money. So, if you 

could just address a little bit that sort of trade-off on what is 

spending, what is investment, and how you see us moving in the 

future with needed expenditures on infrastructure—— 

Secretary GEITHNER. Of course, we agree. If you look at the state 

of American infrastructure today—roads, highways, rail, airports— 

by any measure, we will require very substantial investments over 

a very long period of time to get those into shape. 

The absence of investment acts like a tax on business and makes 

business more expensive—harder to get your goods to market competitively. So we think it is good economic policy and good fiscal 

policy to recognize that imperative and to plan now for a sustained, 

substantial investment in infrastructure. 

Now, we propose to pay for that through a mix of the traditional 

means we use today as well as a relatively small portion of the savings we gain from winding down the costs of the wars in Iraq and 

Afghanistan. We have laid out in the budget a substantial multiyear program for doing that. There are some people who think we 

can afford to do more than that, but it is tough because you have 

to find the resources to do it. But this is the approach we think is 

prudent. 

The CHAIRMAN. How do you answer the question, you are just 

adding to the deficit by allocating money to just spend on infrastructure? 

Secretary GEITHNER. In this case, as well as all the additional investments we propose in education, in innovation, in basic science 

and research, we are meeting the basic test of fiscal responsibility. 

We are showing how to not just pay for them, but to pay for them 

in the context of a plan that brings our deficits down over a sustained period of time to a level that is more sustainable. So, we 

meet that basic test of responsibility. 

Now, these investments we think have pretty high economic return. I think most economists would agree with that. They do not 

just get people back to work very quickly and help bring the unemployment rate down, but they have higher long-term returns in 

terms of the efficiency, the competitiveness of the economy. Again, 

it is like a tax on business today when you leave infrastructure in 

the poor position it is in today. 

The CHAIRMAN. The multiplier effect is pretty significant? 

10 

Secretary GEITHNER. We think it is, yes. 

The CHAIRMAN. All right. 

Second, with respect to tax reform, is the administration going 

to send up a fairly specific set of proposals on tax reform? If so, will 

it tend to focus on corporate taxes? If you could just give us a little 

flavor of what you plan to send up. 

Secretary GEITHNER. We have laid out some general principles to 

guide individual and corporate tax reform. We think that process 

is going to take, realistically, some time. When we have done it in 

the past, it has taken years. We want to start laying the foundation 

for those reforms. 

We are, within the next couple of weeks—I think by the end of 

this month—going to lay out a framework of elements that we 

think should guide the discussion on corporate tax reform to 

produce a system that does a better job of improving incentives for 

creating and building things in the United States. 

So, there will be a little bit more to come in the next couple of 

weeks on corporate taxes. It is not going to be comprehensive, complete, in the form of a legislative language detailed proposal, but 

we are going to lay out a core set of elements in a sort of framework to begin that discussion. 

Again, we view these things—the proposal on individual and on 

corporate—as foundation laying for the necessary debate we have 

to have as a country on how to fix this tax system and make it do 

a better job of creating growth in a way that is more simple, more 

fair. 

The CHAIRMAN. But the proposals will be more in the nature of 

corporate tax reform as opposed to individual? 

Secretary GEITHNER. Yes. In the next couple of weeks, we will do 

a framework on elements for corporate reform. We are not going 

to go beyond where we are on the individual for the foreseeable future. On the individual side we have been pretty specific about the 

basic elements we think should guide individual reform. 

And, as you know—and I know there is a lot of opposition to that 

up here—we have suggested that the burden for the revenues that 

would have to come on the individual side should fall on the most 

fortunate 2 percent of Americans through an increase in the effective tax rate on those individuals. 

The CHAIRMAN. But you are not going to just, as was the case 

in 1986, have a Treasury I or a Treasury II? 

Secretary GEITHNER. No. 

The CHAIRMAN. You are more specific. You are more on your 

principles. 

Secretary GEITHNER. We are going to try—on the corporate side, 

we are going to be more specific than principles, but not as detailed 

as legislative language. We are going to take that approach because 

we actually think—this may not be true—that there is a lot of common ground in the broad elements of what we heard from the Hill 

on the corporate side, and so we want to maximize the chance we 

can take advantage of that to build consensus on something that 

is going to work. 

Now, we are going to start in a different place than, for example, 

your colleague in the House started. We are going to start a little 

11 

tougher in different ways. But there is going to be a fair amount 

of common elements in the basic strategy. 

I think we are both guided by the important objective of saying, 

what can we do to make it more likely that you are seeing more 

things created, designed, and built in the United States with more 

investment in the United States? 

The CHAIRMAN. Thank you very much. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

Mr. Secretary, an op-ed which was written by then-Senator 

Obama’s senior economic advisors, Drs. Furman and Goolsbee, in 

the August 14, 2008 edition of the Wall Street Journal—I would 

ask unanimous consent that that be put in the record. 

The CHAIRMAN. Without objection. 

[The article appears in the appendix on p. 131.] 

Senator HATCH. In that op-ed, Drs. Furman and Goolsbee stated 

that then-Senator Obama’s tax proposal would reduce revenues to 

less than 18.2 percent of GDP. However, the President’s 2013 budget has revenues headed up to 20.1 percent of GDP by 2022. According to CBO, revenues have averaged 17.9 percent of GDP over the 

last 40 years and are projected to rise to 18 percent by 2017, even 

if we extend all of the bipartisan tax relief of 2001 and 2003. 

In other words, even if we extend all of the 2001 and 2003 tax 

relief, revenues are already headed higher than their historical average, according to CBO. OMB puts revenues even higher as a 

share of GDP from 2014 onward. 

Now, I have three questions, if you could answer them. First, 

considering that taxes are already heading higher than where they 

have been historically, should we really be raising them even more 

as the President proposes in his budget? Secondly, has the President abandoned his position that revenues should be less than 18.2 

percent of GDP in his budget? And third, is he committed to keeping the size of government permanently higher, given that spending as a share of GDP has averaged over 24 percent during the 

President’s term, a share the size of which we have not seen since 

1946, at the end of the 2nd World War, and which is projected to 

remain above 22 percent, which is 4 percentage points higher than 

when President Clinton left office? 

Secretary GEITHNER. Let me start by just noting for comparison 

that I think, in what people refer to as the Ryan budget, the Republican budget from last year, in that budget, revenues as a share 

of GDP are projected to average 19 percent over the budget window. 

It is not clear how they get there, but even in that context there 

is a recognition that revenues are going to need to be higher than 

their historic average, and that is principally because, Senator 

Hatch, of the costs produced by the fact that more Americans are 

retiring and becoming eligible for Medicare and Social Security. 

Now, you are right, and I say it over and over again, that we believe the only way to get to a more sustainable fiscal position is to 

raise revenues through tax reform. We proposed, through tax reform, raising about 1 percent of GDP in additional revenues. That 

is just 1 percent of GDP. 

12 

Now, we do not do that because we want to do it, we do it because we see no other way to restore fiscal sustainability. One way 

to think about the choice is this: that is about $1.5 trillion over 10 

years, 1 percent of GDP. If you do not do that and you cannot borrow the money, because we cannot go out and borrow $1.5 trillion 

to avoid that, then you have to find $1.5 trillion in cuts to Medicare 

or low-income programs or national security to achieve that. 

We have looked very hard at that, as many people have, and we 

do not see the basis of doing that. That is why not just the 

Simpson-Bowles Commission, but the bipartisan Senate group, or 

Domenici-Rivlin, all looked at this basic challenge and said, we do 

not see how you get to fiscal responsibility without this balanced 

plan with a modest increase in revenues. 

Now, you can ask the question which is, what is the best way 

for that to happen? Of course, we all want to make sure that happens in a way that is fair and does not hurt economic growth or 

incentives for investment. Again, we believe that the modest increases in the effective tax rate that would come from these reforms, they would only fall in the top 2 percent of Americans. 

We think it would be better for economic growth long-term and 

for fairness than if those tax increases were replaced by cuts in, let 

us say, Medicare benefits or cuts in infrastructure investment or in 

education. That is the judgment we are making. Now, I know that 

is not universally shared, but we think the economics are quite 

good, quite sound, and it is a more responsible approach. 

Senator HATCH. Mr. Secretary, if there are no actions by the end 

of this year, ordinary income and dividends will face a top tax rate 

of 39.6 percent, and the capital gains rate will rise to 20 percent. 

An additional 3.8-percent tax on unearned income of top earners is 

also scheduled to take effect in 2013 as part of Obamacare. 

According to a recent study, if Congress does not act, the integrated tax rate on dividends would rise to 68.6 percent, and the 

rate on capital gains would rise to 56.7 percent. The result would 

be that the dividend rate would be the highest among major economies, and the capital gains rate would be the second-highest. 

With the scheduled increases in taxes on capital income, with the 

U.S. headed towards some of the highest taxes on such income in 

the developed world, and with the Congressional Budget Office telling us that such taxes will prove to be a significant drag on growth, 

could you explain whether you believe that those high tax rates are 

good for the economy and our international competitiveness? 

And could you also explain how the President’s budget proposal, 

which would also significantly increase tax rates on capital income, 

is consistent with his objective of not returning the economy to one 

overly financed with debt, as his tax hikes on capital would exacerbate distortions in the tax code that favor debt financing over equity financing? 

Secretary GEITHNER. That is a good and thoughtful, complicated 

question, so let me try to be responsive to those concerns. 

Senator HATCH. All right. 

Secretary GEITHNER. I think the basic choice we face is, can we 

restore fiscal responsibility without raising revenues through tax 

reform? Now, the statistics you cited are a good argument for tax 

reform. And, although you are right that we have proposed some 

13 

specific changes you could do on top of the current tax system to 

raise more revenues, we think a better way to get there is though 

comprehensive tax reform that would lower rates and broaden the 

base. We think you can do that in a way that would be balanced 

well, these basic objectives of growth and fairness longer-term. But 

your concerns I understand, but they are a good argument for 

doing this through tax reform. 

Again, I think the basic divide between us though is not really 

this. The basic divide between us is, can you restore fiscal responsibility and still meet our commitments to retirees and seniors, still 

preserve some capacity to invest in education and infrastructure 

and meet our national security needs, can you meet those objectives without adding any revenues, without getting any revenues 

out of our current tax system? We do not think you can do that. 

That is why we are drawn to this position reluctantly, and we 

think that the burden of those increased revenues can be most fairly borne by the most fortunate 2 percent of Americans. 

You can say you should spread the pain more broadly, but the 

average American is going to bear most of the brunt of the burden 

of the deficit that is going to come through spending restraint. 

So again, we face constraints on our resources we have not faced 

in generations. It is going to require us making very tough choices. 

But I do not see how you get there if you are unable to counter, 

to contemplate, and to embrace modest increases in revenues 

through tax reform. I just do not think it is possible. 

The CHAIRMAN. Senator Bingaman? 

Senator BINGAMAN. Thank you very much. Thank you for being 

here. 

I am just trying to get my mind around the various things that 

you anticipate happening or are proposing ought to happen with regard to the Federal budget over the next year or two. As I understand it, the President’s budget calls for a portion of the Bush tax 

cuts being allowed to expire, that is, the expiration of high-income 

tax cuts. That raises $1.433 trillion, as I understand it, over the 

10-year period. 

In addition to that, you are proposing—as you pointed out, that 

represents about 1 percent of the deficit reduction that this budget 

contemplates—$1 of deficit reduction for every $2.50 of spending 

cuts. Of the spending cuts that you are proposing, how much of 

that is contemplated in the sequester that has already been enacted by the Congress? 

Secretary GEITHNER. What Congress did last summer was, really, two important things. They put in place very tight caps on discretionary spending, defense and non-defense, for 10 years which 

produced savings—CBO measured it at roughly over $1 trillion. 

But then it also put in place this sequester which would provide 

automatic cuts of another roughly $1 trillion as a device to frankly 

motivate Congress, to encourage Congress to embrace a more comprehensive, balanced package of reforms. 

If Congress does not act to put in place a deficit reduction plan 

of comparable magnitude or greater—we would propose greater— 

then that sequester will force deep cuts in defense and the rest of 

the government—very deep cuts, and really very damaging cuts. 

There is no reason why we should face that prospect. But the seVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
14 

quester was designed to encourage Congress to replace those automatic cuts with a more carefully designed substantial additional 

down-payment on deficit reduction. 

Senator BINGAMAN. So your budget has put forward an alternative to allowing the sequester to take place, as you see it? 

Secretary GEITHNER. That is right. We propose a $4-trillion plan. 

One trillion is already in place in the caps that were enacted last 

August. 

Senator BINGAMAN. Right. 

Secretary GEITHNER. We propose an additional $3 trillion in other reforms. Those $3 trillion, if embraced by Congress, will 

allow Congress to avoid the more damaging effects of the sequester. 

Senator BINGAMAN. Now, you say that we are going to need to 

raise revenue as part of tax reform. Tax reform is not going to happen by the end of this year. It is going to happen in the next Congress, or a future Congress. So you are saying that, even after Congress does what you are suggesting on the revenue side in this 

budget, it should then contemplate a tax reform package that will 

raise revenue of about 1 percent of GDP. Is that my understanding? 

Secretary GEITHNER. That is one way to think about it. There are 

two ways to do this. One is to say, if we are left with the current 

tax system, we have to find a way to generate more revenue in a 

way that is fair. We lay out in the budget how we would propose 

to do that. 

We propose to do that by letting the Bush tax cuts for the top 

2 percent of Americans, those marginal tax rates, go back to where 

they were at the end of the Clinton administration and to limit the 

value of deductions and exclusions for the top 2 percent of Americans. The combined effect of those two proposals would generate 

the roughly 1 percent of GDP in revenue. 

A better way to do that is through comprehensive tax reform 

that would lower rates and broaden the base. If you meet the other 

tests we have laid out in the President’s principles, you could generate a reasonable amount of revenue, allow a fair and balanced 

deficit reduction plan, and leave yourself with a better tax system, 

a more fair tax system, a more efficient tax system, probably something better for broader economic growth. 

You can do it either of those two ways. But, as you point out, we 

have a bit of a problem now because we do not have that much 

time. That is why we need to have this debate now, because we 

have to start to do the foundation laying, the tough decision we 

have to make in the lame duck and beyond. 

Senator BINGAMAN. One of the sort of frameworks that we all 

seem to have bought into around here is the notion that, at the end 

of this year, we ought to have the payroll tax go back to where it 

used to be, 6.2 percent. It seems to me that, if we are concerned 

about reforming the tax code, it would make a lot of sense to find 

a way to continue in the future, in future years, with a lower payroll tax as an incentive for more people to be hired in jobs. 

I know we got ourselves into this by saying we are going to fund 

Social Security through a payroll tax, but, if we had another way 

to fund Social Security, that would allow us to cut the payroll tax 

permanently. I know when the President proposed his temporary 

15 

cut in the payroll tax as a stimulus to the economy, a lot of the 

criticism was, the problem with this is not that he is proposing to 

cut the payroll tax, it is that it is not a permanent cut. Do you 

think it would make sense for us to contemplate a permanent cut 

in the payroll tax as part of tax reform? 

Secretary GEITHNER. I do not at this point. It is an interesting 

idea, though. I guess it is possible, conceivably, that as part of comprehensive tax reform you could find a different mix of what we 

call payroll taxes today and other types of income taxes. It is possible. But I do not think that is realistic, given the other constraints we face. 

The CHAIRMAN. Senator Grassley? 

Senator GRASSLEY. Mr. Secretary, the first question I am going 

to ask you to respond to in writing because I want it to be longer, 

or whatever it takes for you to answer it. But it comes from the 

President’s proposal for a fiscal responsibility fee. The President 

has been asking for this in his budget for 3 straight years, imposing a fee on TARP recipients to help recoup the cost of TARP. 

When the President first proposed this in 2010 for fiscal year 

2011, I asked CBO and Joint Tax to analyze who would bear the 

brunt of this new fee. CBO responded, ‘‘The cost of the proposed 

fee would ultimately be borne to varying degrees by an institution’s 

customers and employees and investors.’’ 

So he is proposing the same thing this year, and so I would like 

to include in the record, Mr. Chairman, the questions I asked CBO 

and their responses. 

The CHAIRMAN. Without objection. 

[The information appears in the appendix on p. 121.] 

Senator GRASSLEY. So what I would like to have you do is read 

that and indicate if you agree or disagree with CBO’s analysis, and, 

particularly, if you disagree with any of CBO’s responses, I would 

ask that you provide a detailed explanation of why you disagree. 

Thank you. 

I would like to ask you my first question about the economic impact of tax increases. As you know, on January 1, 2013, when the 

tax decreases of 2001 and 2003 sunset, our Nation is going to see 

a $3.5-trillion tax increase. CBO estimated the economic effect of 

this tax increase along with a few other policies. CBO estimates 

that the unemployment rate at the end of 2013 could be as much 

as 2 percentage points higher and that growth of GDP could be 3 

percentage points lower. 

Mr. Bernanke came before the committee last week, and I asked 

him about this, and I would like to quote him: ‘‘If no action is taken 

on January 1, 2013, between expiration of tax cuts, sequestration, 

and a number of other measures, there will be a very sharp change 

in the fiscal stance of the Federal Government, which by itself with 

no compensating action would indeed slow the recovery. CBO predicts a 1.1-percent growth and an increase in unemployment in 

that year, and that is based entirely on their current law assumptions, so they are assuming that contraction will take place.’’ 

Mr. Secretary, do you agree with Chairman Bernanke’s and 

CBO’s assessment that the failure to prevent this tax increase will 

have serious negative impacts on our economy in terms of GDP 

growth and unemployment? 

16 

Secretary GEITHNER. Absolutely. But just one short qualification. 

What the President is proposing is to extend the bulk of those tax 

cuts that go to 98 percent of taxpayers and to let expire those that 

affect only the top 2 percent of Americans; in addition to that, to 

limit the value of deductions and exclusions they get. 

The impact of that mix of tax reforms and spending would be 

very, very modest on growth. But you are right to point out, as the 

Chairman has and the CBO has, if you let all the Bush tax cuts 

expire and add on to that the impact of the sequester, that would 

be a very damaging blow to the economy. 

Senator GRASSLEY. You are right to say that a modified version 

of the sunset would maybe help to some extent, but I think you 

have to take into consideration—this is my rebuttal to you—that 

where most of those tax increases would impact would affect small 

business, which creates 70 percent of the new jobs in America and 

about 25 percent of our employment. 

My last question. The President’s budget includes a number of 

tax increases, some of which I understand are being labeled as tax 

reforms. However, the President’s budget does not include a comprehensive tax reform proposal. It seems that the tax increases included in the President’s budget are being used to pay for more of 

the President’s spending priorities. Could you explain how these 

tax increases can then also be used to offset the cost of comprehensive tax reform? 

Secretary GEITHNER. I am happy to do that. Just one quick qualification. The tax proposals that are in the President’s budget that 

would affect the top 2 percent of American taxpayers affect only a 

very small portion of small businesses. 

Senator GRASSLEY. Yes. Three percent. But they provide 25 percent of the jobs in America. 

Secretary GEITHNER. And of those small businesses that are affected, most of them, roughly half of them, earn more than a million dollars in basic taxable income. So we are not talking about 

tax changes that we think would have a material affect on what 

most people would judge as small businesses. 

On your question about the President’s tax proposal and the 

spending plans, let me put this in broader context. The President’s 

budget proposes to save substantial amounts of money across the 

government. It proposes to cut spending on national security quite 

substantially. It proposes hundreds of billions of dollars of cuts in 

Medicare and Medicaid. 

It proposes to shrink what people call the discretionary part of 

the government, meaning the whole part of the government—it is 

not about defense, national security, Medicare, Medicaid, or Social 

Security—to cut that to the smallest share of GDP since Eisenhower was President. 

Now, alongside that, because we want to get our deficits down 

to a sustainable level, we are proposing some tax reforms that 

would raise revenue, that is correct. If you do not embrace those 

tax reforms that raise revenue, then you have to find another $1.5 

trillion in cuts. You are not going to be able to find them without 

going right to Medicare, Medicaid, or national security. 

So we do not propose this with anything but a basic view of the 

nature of the constraints we face and the responsibility we bear to 

17 

put these deficits on a path to more sustainable—we do not do it 

because we think revenue increases are terrific, are great. It is best 

to always avoid them. It is just, we face some choices, and we do 

not see how you get an economy that is going to grow in the future 

consistent with our basic commitments on national security or to 

retirement health care security without this modest amount of additional revenues. 

The CHAIRMAN. Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. First of all, I think that one of the critical issues facing this economy, and it has persistently, is the lack 

of confidence about the future and the lack of direction and certainty about various policies that are emanating from government 

or not emanating from Congress and the administration. 

My biggest concern is that we have not created an environment 

of confidence, as represented in this budget here today. By all accounts, this is the worst post-recession recovery in the history of 

our country. We have the longest term of unemployment. 

We have already increased the national debt by 44, 45 percent 

under this administration, and we are going on to the fourth consecutive year of historic annual deficits. So we have seen action on 

the spending side, yet we still have a sub-par, anemic, weak recovery. If you look to the future, as Senator Grassley indicated about 

the CBO projections, the fourth quarter of 2013 is a 1.1-percent 

economic growth projection, with 9.1 percent unemployment. 

So it is not only the concerns about the facts today that are eroding the confidence of the private sector to invest and take the risk 

and to hire people, and hence we have this poor recovery, but it is 

also concerns about the future. I just do not see any certainty in 

the President’s budget. 

There is no certainty on the tax reform side, that is for sure, or 

on the tax code, on regulatory reform, no sustainable, credible debt 

reduction plan, because debt also affects the confidence of the private sector. I mean, 84 percent of small businesses have indicated 

the size of the national debt affects their feelings and their confidence about the future of their own business. We know what this 

current tax code is doing to affect the ability to create jobs. 

So where is it in this budget that you would suggest that it creates certainty for the future so that the private sector would be 

willing to take the risk and get the kind of robust recovery that the 

American people deserve? In fact, I just read a study that was 

issued by three academics last fall, and they talked precisely about 

this point. They said, ‘‘A major factor behind the weak recovery and 

gloomy outlook is a climate of policy-induced economic uncertainty, 

and that U.S. policy uncertainty is at historically high levels.’’ They 

went on to say, ‘‘If we had the 2006 levels of policy uncertainty, it 

would have yielded 2.2 million jobs over 18 months.’’ I think the 

point is, there are not any policy prescriptions here, as I see it, in 

this budget, so uncertainty continues to reign. If there is anything 

that is certain about the budget, it is that there will be more uncertainty, in my view. 

Secretary GEITHNER. Thank you, Senator Snowe. You will not be 

surprised that I disagree with your diagnosis of the problems facVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
18 

ing the American economy. I think we disagree fundamentally on 

how best to solve them. 

But let me cite a few things in evidence and support of the contrary argument. I know people say on your side of the aisle that 

what is hurting the American economy now is a set of policies from 

Washington—from Congress, the administration—that is hurting 

business and hurting business confidence. 

That is a centerpiece of concerns we hear about the challenges 

facing the American economy. And yet, profits as a share of GDP 

are above the levels they were before the crisis. The profitability 

of industries that are in the public eye in terms of reform and regulation, like energy and health care, are very high. Levels of productivity growth have been improving through the recovery. 

Investment, private investment in equipment and software, is up 

30 percent. If you look at any measure of basic health of the business sector outside of construction, which is still weighed down by 

the crisis, the basic balance sheets of American business, levels of 

profitability and expected profitability are very, very strong. 

The economy, though, is still suffering badly from all the aftereffects of the crisis. You can see it in the high unemployment rates, 

and you can see it in the high levels of poverty and the weakness 

in construction. Now, we have laid out—I know they are tough and 

they are going to be controversial, and I know you guys do not like 

the tax stuff in there—but we have laid out a very responsible, 

very tough set of fiscal reform plans. If those were embraced by the 

Congress tomorrow, there would be substantially more confidence 

around the world in the capacity of this political system in Washington, in our ability to go back to living within our means. 

It would be embraced and welcomed, and you would leave people 

much more confident about the future of this country in terms of 

growth and opportunity. You were also right to emphasize, and I 

think Senator Hatch did this very well, if we sit here and do nothing about these long-term fiscal problems, even though interest 

rates are 2 percent today, over time, over the long run, that will 

hurt us. It will starve key things we have to do. It will hurt confidence in the country. That is a problem we are going to have to 

deal with. We cannot ignore that. It is why we want to start the 

debate now about how we lay a foundation for consensus on broader reforms. 

But I do not believe there is a credible argument to make that 

uncertainty about our fiscal deficits or uncertainty about the design 

of regulation in Washington today is having a material adverse effect on the American economy today. The American economy is suffering from lots of different things. It is not suffering from that. 

Again, if it were to be the case, then you would see very, very 

different numbers in profitability, things we can measure. This is 

in terms of how much they are investing. You see it in interest 

rates, you see it in equity prices, you see all sorts of things we can 

measure today. 

Having said that, I agree with you that it would be better for the 

country for Congress to provide some certainty about how we are 

going to address these long-term fiscal problems, and we should 

begin that sooner, not later. 

The CHAIRMAN. Senator Menendez? 

19 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, thank you. Thank you for your service to our 

country. I just want to ask—I have heard some of my colleagues 

ask questions about the long range. Does anyone believe or would 

you say that the budget that is presented would be different if we 

were not facing a decade of tax cuts, largely unpaid for; two wars 

raging abroad in Iraq and Afghanistan, totally unpaid for; a new 

entitlement program in the Medicare Part D that is unpaid for; and 

the reality of, instead of a free market—which I am a huge supporter of—a free-for-all market in which the excesses of some entities became the collective risk of all of us as Americans? Would the 

budget be different if that had not been the preface which this administration was working on? 

Secretary GEITHNER. Of course. When President Clinton left office in 2001, CBO projected 10 years of trillions of dollars of surpluses. When President Bush left office, CBO projected trillions 

and trillions of dollars of deficits. Those deficits were the result of 

two factors. The first factor is the one you referred to, a decision 

by the President and the Congress not to pay for two wars, very 

expensive tax cuts, and a very substantial expansion in Medicare. 

The deficits are also the product, though, of two recessions, a milder recession in the early part of President Bush’s first term, and 

a terribly severe recession that began in 2007. 

Now, a modest portion of our future deficit is the result of policies we proposed. Somewhere between 10 and 15 percent of the 

projected deficits are the result of the factors of budget proposals 

we have made. 

Now, you are right that we would be in a much stronger position 

today—we would not face anything like the changes we face today 

on the tax side or the spending side—if we had not made those 

choices as a country under the previous administration on fiscal 

policy. We took a remarkably strong fiscal position and we jeopardized future generations of Americans by eroding those huge gains 

on fiscal discipline, and absolutely that puts us in a weaker position today. 

Senator MENENDEZ. And one of the concerns I have, or things I 

applaud in listening to, certainly, the President’s State of the 

Union speech—and I see some elements in this budget—is the effort to in-source. Now, I would like to bring your attention to something that I and members of this committee, some of the members 

of this committee, have that we believe can be helpful to us in this 

time. 

A critical element of our economy is the severe downturn in the 

real estate market that our country faced and is still reeling from. 

Studies have shown that more than $1 trillion of commercial real 

estate loans will be maturing in just the next few years. 

So some of us are concerned, just as we saw with home mortgages, if these borrowers cannot secure other funding options, equity, to replace debt, then, when the loans come due, commercial 

properties around the country could be in serious trouble. 

In 2007, the IRS issued a ruling called Notice 2007–55 that further compounded the problem at a critical time, right when we 

were in the midst of this, which is why Senator Enzi and I introduced the Real Estate Investment and Jobs Act. 

20 

It is a common-sense approach that takes some modest steps to 

reform the Foreign Investment in Real Property Tax Act in order 

to reduce barriers to foreign investment that we can no longer afford. I mean, I do not think in the global economy which we live 

in, this makes sense in the national interests of the United States 

and our economy. 

Can we work with you to ensure that our tax laws are not posing 

unnecessary barriers to much-needed investment during these 

challenging times, and does Treasury have any thoughts on whether the FIRPTA law may cause foreign capital to go to similar investments in other countries instead of the United States? 

Secretary GEITHNER. Thank you, Senator. Let me just respond 

briefly, and I would be happy to respond in more detail separately. 

We have two objectives we have to bear in mind as we look at 

these kind of proposals and reforms. One is, we want to make sure 

that U.S. and foreign investors are really on an even playing field, 

are really treated equally. We do not want the system to favor foreign investors at the expense of U.S. investors, for obvious reasons. 

We have to be careful, as you know, when we look at any reform, 

of how we are going to pay for it. If it is going to cost money, we 

have to figure out how we are going to pay for it. So with those 

two constraints, of course, we will look at any proposal and are 

happy to talk about it with you in more detail. 

Senator MENENDEZ. Thank you. 

The CHAIRMAN. Thank you, Senator. 

Senator Kyl? 

Senator KYL. Thank you, Mr. Chairman. 

Because time is short here, let me do what some of the media 

people call a lightning round, if I could. I think these questions— 

at least some of them—can be answered yes or no. 

The first has to do with fairness, which the budget talks some 

about. Do you think it is fair that the top 1 percent of earners in 

the United States pay just about 40 percent of the income taxes? 

Secretary GEITHNER. I do, because I do not see how the alternatives are fair, are more fair. 

Senator KYL. All right. 

Do you think it is fair that—now, this was the Wall Street Journal’s figure in an editorial this morning, which you probably saw— 

the top 3 percent pay as much as the other 97 percent of taxpayers 

in income tax? 

Secretary GEITHNER. Well, again, I do, because, again, life is 

about choices and alternatives. If they are not going to pay it, then 

you have to find the resources elsewhere in asking middle-class 

families to pay more or cutting the benefits to middle-class retirees. 

Senator KYL. All right. 

And that brings me to the third one. Is it fair that the bottom 

almost 50 percent pay no Federal income tax? 

Secretary GEITHNER. As you know, Senator, because we talk 

about this a lot, I do not think that is a fair description of our current tax system. Those millions of Americans pay payroll taxes. 

Senator KYL. Yes. And the payroll taxes are supposed to pay for 

Social Security, are they not? So there is a specific benefit allegedly 

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21 

poses that we reduce the amount of payroll taxes paid into the system with the payroll tax holiday extension, is that not correct? 

Secretary GEITHNER. Well, only temporarily. Of course, that temporary shortfall is made up by transfers which automatically happen. 

Senator KYL. Right. And the 50 percent of the people who do not 

pay Federal income tax then are not contributing to the general 

revenues that are making up for the lost payroll taxes, right? 

Secretary GEITHNER. Well, maybe another way to think about 

this is, some people say we are a large insurance company attached 

to an army. The biggest drivers of spending are Medicare, Social 

Security, Medicaid, too. 

Senator KYL. That is all true. That is beside the point of my 

question. 

Secretary GEITHNER. All Americans—— 

Senator KYL. I am trying to talk about fairness here. If you are 

going to get off on Medicare and Medicaid, maybe you could help 

persuade some on the other side of the aisle that addressing those 

entitlements would be a good way for us to help reduce our budget 

deficit. 

Secretary GEITHNER. I agree with you that we have made 

unsustainable commitments in Medicare and Medicaid. We are 

going to have to slow the rate of growth in those commitments. The 

alternatives—— 

Senator KYL. One of the proposals in the budget, was it not, was 

that there be somewhat of a premium increase means-tested for 

Medicare Part B, and I think D. Is that correct? 

Secretary GEITHNER. I think you are right. You have a modest 

set of changes that would in effect increase the share of those benefits paid for by the most fortunate Americans. That is correct. 

Senator KYL. Right. 

Let me ask you a couple of other questions to get to this question 

of how you do tax reform. You talked about lowering rates, broadening the base, eliminating the special privileges, and so on. The 

President had a good statement in the State of the Union Address. 

He talked about an economy where everyone gets a fair shot, does 

their fair share, and everyone plays by the same set of rules. That 

is the basic premise here. 

So how does the proposal in the budget meet this test when it 

eliminates the manufacturing deduction for certain taxpayers, but 

then doubles it for certain other taxpayers but not for other manufacturing? 

Secretary GEITHNER. Good question. I will be talking about this 

in more detail—— 

Senator KYL. I mean, obviously not everybody is going to be playing by the same set of rules here in terms of tax charges. 

Secretary GEITHNER. A good question and a fair question. Let me 

say that the basic framework that we think should guide corporate 

tax reform—although we will say some more in the next couple of 

weeks—we are going to propose a broad reform that will lower 

rates, broaden the base, and eliminate and wipe out a very substantial fraction, dozens and dozens and dozens, of special tax preferences for businesses. 

Senator KYL. While creating a whole bunch of new ones. 

22 

Secretary GEITHNER. No, no, no. While preserving a very limited 

number that are targeted against really one core objective, which 

is to make sure that we are improving incentives for designing, creating, and building stuff in the United States. 

Senator KYL. All right. Now, let me just stop you there. We are 

talking about picking winners and losers. You would increase or 

create tax incentives for building advanced technology vehicles at 

the expense of other kinds of vehicles. I should not say at the expense of, but not for other kind of vehicles. Is that correct? 

Secretary GEITHNER. Well, you are putting me in a slightly difficult position because I have said that, in the next 2 weeks, we 

will lay out a more comprehensive set of proposals here, and I 

know I will have a chance to debate those then. 

But you are right to say that we are proposing to preserve a very 

limited number of core incentives for investment in the United 

States. We are doing that because we think there is a compelling 

economic case for doing that, and we are going to eliminate dozens 

and dozens of specific corporate tax preferences. We think that 

trade-off is a pretty good trade-off for the—— 

Senator KYL. We will look forward to seeing—excuse me. I just 

have 5 seconds left. The Treasury Department is where I get the 

statistic or the citation for the proposition that the people who 

would be hit by the so-called millionaire’s surtax, according to your 

definition, 80 percent of them are business owners. Is that a correct 

statement? 

Secretary GEITHNER. I will have to go back and look, but again, 

I want to emphasize the following. It is roughly 2 percent of taxpaying individuals and slightly higher—only a slightly higher portion of taxpaying small businesses. Now, again, if we do not do 

that, though, whom are you going to ask to bear the burden? 

Senator KYL. All right. Are these job creators or not? Are these 

the people who hire other people? 

Secretary GEITHNER. Another way to think about this is, look at 

the—— 

Senator KYL. Well, yes or no? 

Secretary GEITHNER. Well, yes, they will apply to a small fraction 

of American businesses. 

Senator KYL. Can I just ask you one last thing? My time is up. 

Secretary GEITHNER. A small fraction. 

Senator KYL. Is it true that the majority of jobs, especially coming out of a recession, are created by small businesses? 

Secretary GEITHNER. You are right that small businesses create 

a substantial fraction of jobs. But again, we are proposing changes 

that affect a tiny fraction of small businesses. And look at the 

record of job creation by small businesses during the period. We 

have a recent experience with this, which is the period in the second half of the 1990s when they faced similar tax rates to what we 

are proposing, and the record of job creation was very, very good. 

The CHAIRMAN. Senator Coburn? 

Senator COBURN. Mr. Secretary, thank you for your service. 

A couple of questions on your opening statement. According to 

the things that I have read, in your statement you talked about 

productivity gains and increased savings. However, the most recent 

data show that the productivity gains are declining, and we actuVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
23 

ally went, not negative, but we had a marked decline in the savings rate over the last 2 months. So the trend now is not as you 

described in terms of productivity or savings. Is that correct? 

Secretary GEITHNER. You are right about the last few months. 

But I think if you look at the broad pattern since the recovery 

began, both those statements are true. That is very important because, again, we were living beyond our means, not saving enough, 

borrowing too much. Productivity growth in the United States 

throughout this recovery, in contrast to what we see in Germany, 

for example, has really been pretty strong, encouragingly strong. 

Senator COBURN. The other thing is the assumption that you 

have made a couple of times in answering questions that, if we 

were to not get the revenue from raising rates on this 2 percent 

that you describe, we had no other option but to cut Medicare or 

those programs that benefit our retirement programs and our safety net programs. I want to challenge you on that for a minute. 

The GAO, last February, released a report outlining duplication. 

They will issue a report at the end of this month on the second 

third of the Federal Government. According to my calculations for 

both of those, we could save $100 billion a year eliminating duplication in the Federal Government. There are no proposals in this 

budget to actually do that. 

I am very complimentary of what now OMB Director-designate Jeff Zients has done. But there is also $100 billion in fraud in 

Medicare and Medicaid. That is $200 billion a year. That is $2.4 

trillion. So it is not right to assume that we could not run the Federal Government more efficiently and that the only option is to 

raise revenues. The size of the Federal Government is twice the 

size it was 10 years ago. 

The question that I would have for you is, does the administration not truly think, in all areas of operating the Federal Government, that we could become much more efficient, especially for example in fraud or in duplication, that we could not achieve significant savings that would go a long ways towards eliminating or lessening our budget deficit and eliminating the amount of money we 

are going to have to borrow to cover that? 

Secretary GEITHNER. I completely agree with you, Senator, and 

you have shown great leadership in this area, that there is substantial unexploited room across the Federal Government to use 

the taxpayers’ resources more wisely. I completely agree with that. 

The President agrees with that. We are committed to that, and 

we are happy and would like nothing better to define better ways 

to achieve those savings, and we will keep doing that. But the reason I said what I did is partly because of the choices we saw made 

in what we call the Ryan budget, the budget that Republicans embraced last year, because that was a budget that showed what you 

have to do if you are not going to raise revenues or taxes. What 

that budget showed is, if you are going to reduce deficits to a level 

you need to without raising revenues, then you have to do very, 

very deep cuts in benefits in those programs. 

Now, you are right, there may be more savings we can get, but 

I think the judgment I made is generally correct that, if you are 

not going to find this 1 percent of GDP in revenues, you are going 

to have to find it in cuts across national security, Medicare beneVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
24 

fits, Medicaid benefits, low-income programs, and infrastructure 

and education type things. That will force us to contemplate cuts 

that we think go beyond what makes sense for the country. 

Senator COBURN. Well, you are talking $150 billion a year. I am telling you, I think if you and I sat down we could find $150 billion 

a year that do not produce an economic multiplier greater than 

one, that we in fact could find efficiencies and effectiveness changes 

in the Federal Government that would not require us to do this. 

Now, I am on record as saying we need to have tax reform, so 

my next and final question to you is, most people agree that if we 

were to lower the rates and broaden the base and significantly 

eliminate the $30 billion a year that the very wealthy in this country get through tax credits and breaks, that we could in fact markedly improve our economy. 

So my question is, you are saying you want to build a base. Why 

have you not come out and said, here is what we did? SimpsonBowles outlined that, the Gang of Six outlined that. There have 

been several proposals. Why not put something on the table and 

say, let us do this before the end of the year? Let us do major tax 

reform and let us make it fairer, flatter, and more effective. 

Secretary GEITHNER. Good question. Maybe the most honest way 

to answer that is that we took a run at trying to negotiate a framework like that with the Republican leadership in the House over 

the course of the summer, as you know, at substantial political 

cost, and we found no basis for agreement on even the broad framework you said correctly was embraced by Simpson-Bowles and by 

the Senate bipartisan committee of Rivlin-Domenici. 

Without that willingness, without that indication by Republican 

leadership, we are just trying to be realistic. What we are trying 

to do is to help make the case why reform is so important, why reform is a better way to get there than just adding more and more 

tax increases on the current system. 

But just realistically, given the experience we had over the last 

year, we do not see the basis yet. Maybe it will come. I would say, 

without it we are not going to get the changes in health care 

spending that we all know are necessary because we just do not see 

realistically, politically, how we are going to get meaningful progress on that front without the kind of balance we need on the revenue side. 

The CHAIRMAN. Senator Carper? 

Senator CARPER. Thanks. 

Let me just start off—Senator Coburn has raised again the idea 

of a grand compromise, where Democrats agree to some reforms 

with respect to entitlements and Republicans agree to some additional new net revenues. 

I think that is—I have thought this for 18 months—what we 

ought to do. I think there are a number of us here, Democrat and 

Republican, who believe that is the right path to take and I hope 

we can get back on that path later, maybe later this year. 

I want to thank you for your service and for the work that you 

are doing, not just here, but abroad and in Europe as they work 

through their difficulties, and hopefully towards a good end. 

The administration—we had a chance to chat just a little bit before the hearing began, and I mentioned the President, under curVerDate Nov 24 2008 20:27 Mar 25, 2013 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 R:\DOCS\79764.000 TIMD
25 

rent law, has rescission powers. When the President signs an appropriations bill into law, he or she can then send a rescission message to propose to rescind or reduce spending in certain line items. 

Under current law, the Congress can or cannot vote on that. If they 

choose to ignore it, it goes away. What, historically, we have done 

is ignore it and those proposed rescissions go away. 

In 1996, the Congress passed, and President Clinton signed, as 

you will recall, legislation that said the President could not only 

line item veto appropriations, but also entitlements and also tax 

measures, and that those would become effective unless two-thirds 

of the House and two-thirds of the Senate were to override those 

actions by the President. 

That power is made permanent for the President in the 1996 legislation. What a number of us—Senator McCain and I, and others, 

including people sitting here to my right—have authored and cosponsored and have now passed in the House is legislation to say, 

let us try for 4 years, a 4-year test drive, to give the President the 

authority to go through an appropriations bill or an omnibus bill 

and to pick out certain line items that we would have to vote up 

or down on. We could vote it down with a simple majority in the 

Senate, 51 votes, or vote it down with a simple majority in the 

House, 218 votes, but we would have to vote on it. If it is defeated, 

then it goes away. 

So we think it provides some extra accountability for the President and, frankly, for the Congress. We can try it for 4 years, see 

how it works. If it helps, good. Maybe we can make it better. If it 

does not work, then we stop doing it. So I appreciate the administration’s support for this, and I just wanted to go on record for that. 

I do not know if there has been any discussion here on clean energy tax policy, but I just want to mention one thing. A lot of other 

countries in the world derive a considerable amount of electricity 

from the wind. Some of that is on land, some of it is off their 

shores. We do not derive any electricity from the wind off of our 

shores, but there is a great opportunity for us to do that. 

So there are some people who think that all we need to do is to 

extend a production tax credit, wind production tax credit, and that 

will help incentivize the deployment of offshore windmill farms off 

of Maryland, or Delaware, New Jersey, or North Carolina, all the 

way up to Maine. What we have learned is that the wind production tax credit does not get the job done. Nobody is going to build 

a windmill farm off of any of our coasts in the United States until 

there is an investment tax credit that will help out. 

Senator Snowe and I have offered legislation that provides for an 

investment tax credit, a 30-percent investment tax credit, and it 

would inure to whomever deploys the first 3,000 megawatts of electricity that are generated off of our shores. So it is not 1 year, 2 

years, 3 years, 4 years, but it would basically be first-come, firstserved. If you get your windmill farm out there and producing electricity, whoever comes up with the first 3,000 megawatts, you get 

the tax credit. 

Would you just give us some reaction to that in terms of whether 

that seems to make any sense, whether that is consistent with 

where the administration wants to go? As it turns out, the cost of 

26 

that is just, I think, a couple of billion dollars a year over 10 years. 

It is not a heck of a lot of money because it goes away. 

Secretary GEITHNER. Senator, I would be happy to talk to you in 

more detail about that and look at that carefully. There are different ways to do these things. But we agree that we want to make 

sure that we are preserving, even after comprehensive tax reform, 

a set of well-designed special incentives for improving, not just energy efficiency, but our use of renewable energy resources. We are 

absolutely supportive of that and happy to work with you on the 

most effective way to do that. 

Senator CARPER. All right. Thanks very much. 

Can you give us, lastly, just a quick update on TARP? How are 

we doing in terms of getting our money back with interest, without 

interest? Where are we losing, where are we gaining? Thank you. 

Secretary GEITHNER. We are doing really exceptionally well by 

any measure. The CBO estimates the total costs of TARP are in 

the $25-billion range. My suspicion is, over time that will prove 

high. 

Senator CARPER. It will prove what? 

Secretary GEITHNER. High. I think the bank part of the program—banks have already yielded about a $20-billion return to the 

taxpayer, positive return to the taxpayer. We have a lot of risk 

still, a lot of losses in the investments we made in the automobile 

industry to help facilitate that restructuring, and other pockets of 

the programs. 

But the costs are vastly lower than what people thought, hundreds and hundreds of billions of dollars lower than what people 

thought. We have most of that money back already, and we are on 

a very good path to show a very high return. 

I think if you look at it across all the programs, the Feds, the 

FDICs, even with the cost in the GSEs alongside TARP, most independent forecasters think that the overall cost of this will be very 

small, a tiny fraction, for example, of what the country paid to resolve a much smaller crisis, the S&L crisis, which cost us 3.5 percent of GDP. 

Senator CARPER. All right. Thanks very much. 

The CHAIRMAN. Senator Kerry? Excuse me. Senator Cardin, you 

are next, then Senator Kerry. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. 

First, Secretary Geithner, let me thank you, and thank you for 

your presentation, thank you for your service. I agree that we need 

to have a balanced approach, whether it is dealing with our budget 

deficit, as the administration’s budget deals with revenues, or 

spending, both of which we will have to do. It also deals with deficit reduction, but recognizing that we are in a recovery and that 

we need to make investments in education, job training, and infrastructure, which I agree with. 

I want to concentrate, if I might, on the middle class and how 

important it is to grow the middle class. I look at the numbers and 

see a shrinking middle class and wonder where the consumers are 

going to be who buy the products that we want to produce. 

I take a look at the administration’s budget, and on the revenue 

side everyone talks about the revenues that it generates. Well, that 

27 

is using a baseline that is current policy rather than current law. 

If we used current law, the revenues actually would be a lot different. 

With current law, if we do not change it, the middle class is 

going to get socked. I mean, the tax rates will go up, and the Alternative Minimum Tax is liable to come back in. So part of the administration’s budget is to concentrate, as I see it, on helping the 

middle class grow by using the tax code to provide some basically 

additional revenues in the hands of the consumers of America. 

Second, we have mentioned several times education. Education is 

the ticket for being able to participate in the opportunities of America. Colleges are becoming out of reach, and the administration’s 

policy, as I understand it in this budget, is not only to protect Pell 

grants but also to deal with the cost of college education for American families. 

Could you just comment for a moment, from the administration’s 

point of view, how important it is to help the middle class and to 

grow the middle class? 

Secretary GEITHNER. Absolutely. I think you said it very well. 

Let me just highlight a few things. The basic tax framework we 

laid out is a very strong framework for the middle class. It protects 

the existing tax benefits they enjoy. It expands some for higher 

education, for example, to make it easier to afford a college education. 

The President’s budget protects and preserves basic health care 

retirement security for middle-class Americans. That is critically 

important. We are asking Americans across the economy to bear 

much more risk and uncertainty living in this global economy 

today. Providing that guarantee of protection for health care and 

retirement security is critically important. 

The budget proposes a series of very important investments with 

reforms to improve the quality of education, access to training opportunities so Americans come out of college or community college 

with better skills, with the skills the economy most needs today. 

As you know, there are millions of jobs that go unfilled today because employers cannot find Americans with those skills, in engineering, for example. It is very important for us to fix that. 

The infrastructure investments the President proposes are good 

economic strategy because they improve the competitiveness of 

American business, but they also have the benefit of creating substantial employment opportunities for Americans in construction 

who are still bearing most of the burden for the cost of the crisis. 

So those are just some examples. And I think you are right, that 

is a good prism though which you should view all these proposals, 

through which you should look at these against the alternatives. 

This package of things is a very strong framework of programs to 

help improve, not just retirement security and health care security, 

but opportunity for middle-class Americans. 

Senator CARDIN. I just want to underscore this point. If we do 

not help the middle-class families, the recovery is going to be much 

longer than we want it to be. We look at the current housing 

issues, which still are burdens to middle-class families. A lot have 

not been able to get over the fact that they now have negative 

value in their homes and how they are going to deal with that. 

28 

Then we look at gasoline prices that are increasing, which is having a major impact on confidence right now. Every time we go to 

the gasoline station, we pay another couple of dollars to fill up our 

tank. So all that, I think, is putting pressure on middle-class families. I would hope, as we evaluate the budget, that we use the 

prism of middle-income families to judge. If we do nothing, it is 

going to be bad for middle-income families. We need to get together 

and come forward with the type of framework that the President 

has laid out. 

So, thank you very much. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Kerry? 

Senator KERRY. Thanks, Mr. Chairman. 

Mr. Secretary, thank you for the terrific job that you are doing, 

an important job, and particularly with respect to some of our interests in other markets on a global basis: Europe, China, elsewhere. 

I think Senator Kyl was questioning you, going after the question 

of the impact of the tax increase on the upper-income people and 

small business. I would like to just give you an opportunity to be 

able to speak to that for a minute. What is the sort of downstream 

impact on small business, and what would be the impact on small 

business, obviously, of getting a deficit deal of reducing the cost of 

capital and putting America on a stronger economic track. 

Secretary GEITHNER. Well, I should say by introduction, just in 

the category of ‘‘stay tuned,’’ in the framework of corporate tax reform proposals that we will lay out next week, we will be very specific about what we think we can do to help protect small businesses from bearing an undue burden as we go forward. 

But the tax changes we proposed, we believe, would fall appropriately and overwhelmingly on those limited number of Americans 

who are in the best position to bear that burden. So as I said—and 

we have said many, many times before, and I think Senator Grassley even used this number—it is true that they will affect a portion 

of small businesses, but a very, very small portion of small businesses, 2 to 3 percent, roughly, depending on how you measure it. 

Many of those businesses are not small businesses in any way 

most humans would think about it. They include in that definition 

partners in a law firm or principals in a private equity or hedge 

fund business. 

Many of those businesses may be small by some definition, but 

earn very substantial amounts of money. So again, we believe that 

we have designed these carefully to make sure the burden falls on 

those few people in the American economy who are in the best position to bear that burden, have benefitted most from the boom in 

the financial sector. 

Again, we think you have to judge these by the alternative. If 

you do not do those proposals, do not embrace those proposals, then 

you are going to have to find some way to raise resources or cut 

benefits or spending on the rest of the American people, and we do 

not see any need to do that. 

Senator KERRY. Now, Mr. Secretary, besides our own budget 

choices, and particularly the payroll tax in the next days, probably 

the next largest looming impact, apart from our macro deal that we 

29 

need to make before the end of this year, the biggest looming question mark on our economy may well be Europe and other people. 

I would like to ask you to speak to that, and specifically it is my understanding that there is something like $760 or $770 trillion 

worth of derivatives out there in the market. What kind of risk 

does that pose to us in terms of the lack of knowledge of what is 

out there, particularly given what is happening in Europe, in 

Greece, Italy, and so forth? 

Secretary GEITHNER. An excellent question. So let me just start 

with this. Senator Snowe referred to the fact that the recovery has 

been moderate. Growth is only moderate, slower than the average 

of post-war recessions, recoveries from recessions. It is very important to understand why that is the case. Growth has averaged 2.5 

percent since growth began. 

Growth following a financial crisis produced by too much debt, 

too much building of houses, is always going to be weaker than following a typical recovery. There was no possibility that the American economy, digging out of the worst financial crisis since the 

Great Depression, was going to grow like we did in the average of 

past recoveries because, as individuals bring down their debt burdens and as you work through the huge imbalances we saw in construction, growth by definition is going to be slower than anybody 

would like. 

But on top of those headwinds and the additional headwinds of 

State and local governments cutting back, we have had the combined effects on growth of higher oil prices produced by the Arab 

Spring, the catastrophe in Japan and Thailand later on, and the 

crisis in Europe. 

The crisis in Europe so far has had a pretty substantial negative 

impact on growth here and around the world. European leaders, 

though, are making some progress. They have a ways to go, but 

they are starting to build more confidence around the world that 

they have a plan in place that will at least avoid the prospects of 

financial catastrophe in Europe. 

Even though growth may be weaker and they still face years and 

years of difficult reforms, they seem more committed now to avoiding a catastrophe, an implosion, a blow-up in Europe that would 

have a very adverse impact in the United States. That is a very 

good thing for us because it means, even if growth in Europe is 

weaker than any of us would like, we are less likely to face the 

after-shocks of a sustained period of Europe living on the edge of 

crisis. 

Now, the derivatives markets are still a substantial source of 

risk. Even with all the benefits they bring to people’s capacity to 

hedge risk, they come with significant risk. But because we have 

forced U.S. financial institutions to hold much more capital against 

those risks, not just in derivatives but more generally, we think the 

American financial institution is in a much better position to withstand, not just the pressures we have seen in Europe so far, but 

could see from other shocks down the road. 

But the risk out there still in derivatives is one reason why we 

want to see the reforms that Congress enacted, in Wall Street reform, allowed to take effect, and we are working very, very closely 

with the other regulators to bring much more transparency to 

30 

those markets. Senator Cantwell has been a leader in this context, 

pushing for much more transparency to force much more of those 

markets onto standardized exchanges and clearinghouses so there 

is more transparency, better risk mitigation. We are making substantial progress in that direction, but we have some work to do. 

Senator KERRY. Thank you very much, sir. Thanks. 

The CHAIRMAN. Thank you, Senator. 

Senator Schumer, do you want to—— 

Senator SCHUMER. I will defer. I just want to get settled. 

The CHAIRMAN. Right. 

Senator Wyden? 

Senator WYDEN. I think Senator Cantwell is next. 

The CHAIRMAN. Oh, Cantwell. I am all mixed up here. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. 

Mr. Secretary, I appreciate that the budget has tax provisions in 

it for the new market tax credit, the energy tax credit, and the lowincome housing tax credit, all things that I think are stimulative 

to the economy and important for economic development. 

I am curious about two aspects of that. One: things that need to 

be done now—I am assuming you are probably still a New York 

filer, but States that have income tax—— 

Senator SCHUMER. I hope so. [Laughter.] 

Senator CANTWELL [continuing]. Have the ability to deduct their 

income tax from their Federal liability. States that rely primarily 

on a sales tax, do you believe they should have the same benefit, 

and do you think they should have certainty to that benefit? 

Secretary GEITHNER. I understand your concern about that question; I fully understand it. I guess it is possible when Congress gets 

around to thinking about comprehensive individual corporate tax 

reform, we would have to look carefully at that stuff. But we do not 

have any plans to change that now, but of course we would be sensitive to your concerns and are happy to work with you on that. 

Senator CANTWELL. So do you think States like Washington, 

Florida, and Texas deserve certainty on whether they get to deduct 

their sales tax from their Federal income tax? Do they deserve that 

certainty now? 

Secretary GEITHNER. I think it would be good for Congress across 

the board to give not just States, but businesses and individuals, 

much more certainty about their tax treatment. That is one example of where certainty is good, but there are lots of others too. 

Senator CANTWELL. All right. Because right now we do not have 

that certainty. The fact that these States basically watch other 

States get a deduction that is about $236 billion on the tax rolls 

as far as deduction, and we are talking about $16 billion here, and 

we cannot get certainty—it is a fairness issue. 

The fact that every year we have to go through this, States like 

Florida, Washington, Nevada, and many others, is just—this is 

about tax fairness and certainty. So when you do not give the certainty as we do now, that means people are not buying automobiles, they are not making those—we have thousands, tens of 

thousands of people who itemize on our tax returns in the State. 

31 

Secretary GEITHNER. You make your case very well. I totally understand your concerns. I am happy to spend more time with you 

in digging through those. 

Senator CANTWELL. Well, if the administration would just advocate for certainty on this now, that would be a huge help. 

Secretary GEITHNER. I am a big fan of certainty. 

Senator CANTWELL. All right. 

And then on the other extenders, they have lapsed, so we are 

still in this period. So what is the administration doing to help us 

get these done now as opposed to waiting till a lame duck or next 

year? 

Secretary GEITHNER. We are consulting very, very closely with 

your chairman of this committee, the ranking member, and their 

counterparts in the House, on how Congress is going to deal with 

this. Again, you are highlighting a very important question, which 

is, we have a tax system where we have, really, a tremendous number of temporary tax provisions, and many of them have a lot of 

value, a lot of justification for them, many may not anymore. 

But the value of all of them is undermined by the fact that there 

is so much uncertainty about whether they are going to exist and 

be preserved, and really it is no way to run a country, to leave a 

country like the United States with this degree of uncertainty year 

by year, month by month. 

It is already February 14, and, again, I think this is another good 

example of where it is important for Congress to—Congress may 

not be able to solve every problem facing the country now, but this 

is a pretty easy problem to solve. 

Senator CANTWELL. Now? 

Secretary GEITHNER. Now. 

Senator CANTWELL. All right. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. 

First, I agree with Senator Cantwell’s position on extenders. I 

think to let them wait means a lot of things will not happen. We 

know that people will not invest in, for instance, clean energy and 

windmills and things if they say, well, maybe in the lame duck 

they will do it retroactively. 

I have something of great importance to New York, the mass 

transit deduction, which you cannot do. People are losing out on 

their monthly deductions right now. They have lost them for January, they will lose them for February if we cannot get it done and 

not have it done by March. It is only $240 million, but it equalizes. 

So I hope you will heed Senator Cantwell’s advice on that. I want 

to say first, I think the budget the President proposed is a very 

good budget on both the tax side and the spending side. I know 

there are many who say, just cut everything. That is not going to 

make America number one. 

Deficit reduction is important, we all know that, but so is getting 

the economy going. To me, the number-one thing that will keep our 

economy number one is having the best schools in the world. If we 

do not have the best schools in the world, we could have a zero deficit and we will not stay number one. 

32 

So the President’s much more measured approach, particularly 

by using some of the money returning because of Iraq and Afghanistan and putting that into the places where we need to bolster the 

country—infrastructure, research, education—makes eminent 

sense, and I think it makes eminent sense to the American people. 

Many of our colleagues, they talk about, let us cut everything. 

But they say, when they are asked about infrastructure—some of 

the Tea Party people, to their credit—I have Tea Party people in 

New York who say to me, infrastructure is not a government function; the government should not do it. Then I ask them, so you 

think every highway and every bridge and every water project 

should be private? No, I do not mean that. But I think that debate 

is a good thing. 

I would like to focus a little on the tax side here. Again, imposing 

the Buffett rule, which is the President’s moniker, I guess, or he 

created the moniker—it is Warren Buffett’s moniker—using the 

revenue to repeal the AMT, which is an existential threat to the 

middle class, is a very good thing. 

It allows Warren Buffett to pay a little more in taxes and allows 

his secretary to get a permanent tax cut. It is a good principle; it 

works. We have to work the math out to see that it has some degree of balance. But there are a few misgivings I have, as you 

might imagine, knowing me as well as you do. 

First, I think you are being a little too patient. By that, I mean 

the administration is characterizing many of the ideas as longrange principles for a tax code revamp that probably will not happen until the President’s second term. 

My view is, why wait? Why should we not be debating these 

issues now? I want to tell my Republican colleagues, it is my view 

that the Buffett rule is going to be on the floor of this Senate and 

we are going to debate it this year. Now, maybe the same thing 

will happen on the Buffett rule as happened on payroll tax: there 

will be such public outcry that some of our colleagues will say, well, 

maybe we should go along, as they just did even on the payroll tax 

not being paid for. 

I think we should debate the issue of a surtax on the highest income people this year. We are going to put those on the floor and 

debate them and let our colleagues and let the American people see 

where our colleagues are. I am not so sure that nothing happens. 

So, that is one. 

Step two. Your budget does not provide any specific—do you 

agree that it is a good idea to debate these earlier? 

Secretary GEITHNER. I do. As I said before you came in, a lot of 

people think these debates do not matter because Congress has not 

been doing them this year, and I think that is not a great approach 

to take. We have to have this debate. We are not going to be able 

to delay these choices indefinitely. We have some very tough 

choices at the end of the year in a lame duck session. Better to debate them now. 

Senator SCHUMER. Good. I agree. We might be surprised—pleasantly—about progress that we might make, and particularly as the 

Republican primaries end and there is a nominee. Instead of that 

nominee moving as far to the right as possible, they have to try to 

33 

move as far to the center as possible. There is a different political 

climate as well. 

So, the Buffett rule. You did not mention anything specific in 

your budget. You did not outline what kind of specific Buffett rule 

you would like. Do you have concerns if the Senate presses ahead 

with the Buffett rule? We have one person who has dropped in 

such a bill—I co-sponsored it—Senator Whitehouse. I am sure the 

chairman would have a great deal of wisdom on what to do here 

in the committee. Would you have any problems with us putting 

some specifics on the table? 

Secretary GEITHNER. Well, it always depends on the specifics. 

But we are broadly comfortable with the approach Senator Whitehouse laid out in his proposal. Now, you can do it different ways, 

but we have no concerns about Congress going ahead with something in that broad neighborhood. 

Senator SCHUMER. Good. All right. One final—well, my time is 

up. All right. Thank you. Is it all right? 

The CHAIRMAN. Go ahead. Yes, go ahead. 

Senator SCHUMER. All right. Just one final point. This is a place 

the administration and I have disagreed, and that is on $250,000 

versus a million. I know the revenue concerns with $250,000. The 

problem is, in my State, I imagine in some others—certainly in 

Senator Menendez’s, Senator Kerry’s, Senator Cantwell’s States— 

there are a lot of people who make above $250,000 who are not 

rich. Property is much more expensive, taxes higher, et cetera, et 

cetera, et cetera. 

So, if the administration believes $250,000 is the right cut-off for 

capping deductions and extending the Bush tax cuts, why is it not 

also proposing a Buffett rule that hits on the same rung of the ladder? Why do we not just all move to the nice $1 million Buffett 

rule? 

Secretary GEITHNER. Excellent question, well phrased. Of course, 

I am familiar with your views on this issue; we have talked about 

it a lot. But again, we are trying to balance a lot of different competing considerations, and we are trying to figure out, what is the 

most fair way, given the fiscal realities we face, to make sure that 

we can support the types of investments, benefits, we think we 

need. That is why we are making this choice, but of course we understand and respect your proposal. 

Senator SCHUMER. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator SCHUMER. And thanks to Senator Wyden for letting me 

go. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. It has been a long morning. I have 

tried to listen carefully on this comprehensive tax reform issue, and 

see if you can sort a little bit of this out for me, if you will. You 

mentioned 3 times that we ought to have comprehensive tax reform. That is a good thing. 

Yet, when you look at the budget, its corporate reform is, in effect, going to come now—that is what has been announced—and individual reform would come sometime later. So corporate reform is 

not comprehensive, it is in effect piecemeal. If you would, start 

34 

with me in terms of how your view would get the country to comprehensive tax reform, because we both agree that is what is needed, and there is bipartisan support for it. 

Secretary GEITHNER. A good question. You are right to say, why 

not do it all at once? I think realistically that is how it is going 

to happen. But what we are saying is that we want to provide a 

little bit more detail in terms of framework for core elements of corporate at this stage. 

We think that is the best way to start to get the debate going. 

I think you are right that, ultimately maybe, these things have to 

happen together. You cannot do corporate ahead of individual. 

There are lots of good reasons for that. You have spoken a lot about 

that, and you have been a big champion of comprehensive reform. 

But part of what we are trying to do is to get people to think 

about a comprehensive approach to improving incentives for investment in the United States. We think one way to do that is to try 

to get discussion earlier on how to redesign the corporate tax system to support that objective. But I understand your point that, ultimately, these things have to go together. 

Senator WYDEN. Let me ask one other point and then kind of get 

a sense of what will come next. You also talk about—I think the 

way you described it was—foundational principles. The foundational principles in 1986, I think, still have a lot of support up here 

in the Congress, bipartisan support. 

The idea was to cut breaks on businesses and individuals, keep 

a simpler code for both individuals and businesses, and retain progressivity. What I am concerned about is that, if we are not careful, 

we could end up with a different foundation. In effect, you would 

see changes on the business side. You have correctly described, you 

are going to clean out these business breaks in order to reform the 

corporate side, but we could end up with more complexity as well. 

So like the last question, how do you see us getting to the 

foundational principles, as you describe, that are so key and keeping them within that 1986 approach with how we are going along 

the lines you have described? 

Secretary GEITHNER. Those are the right principles. We would 

very much support those. In general, you want to clean up and 

eliminate—reduce, scale back—a bunch of the special preferences/ 

tax expenditures across the tax code and use those to make affordable a reduction in the overall marginal tax rates, to preserve a 

basic level of progressivity for obvious reasons, and to leave yourself a system that is more simple, more efficient, better for growth, 

easier for people to comply with. Those are the constraints we 

should all live with in this context. 

I do not think we are going to put those at risk by showing—we 

have shown a lot of elements of what we think should guide the 

individual tax discussion, even though we have not done a comprehensive proposal. We are going to provide a comparable level of 

additional elements of what we think should guide the corporate 

proposal, but that will be guided by the nice way you framed the 

core objectives parameters. 

Senator WYDEN. The only point I would make in terms of summing up is, the key in 1986 was of course the presidential bully 

pulpit, and that the executive branch, every single time out, talked 

35 

about how you had to fit the pieces together. I am glad you said 

what you did. In the end, it is probably all going to have to come 

together. 

But we have to get that message about 2 hours earlier, because 

we have been sitting here for 2 hours and hashing through all of 

the specifics in terms of corporate reform and how you would clean 

it out, and what would go first and the like. Absent somebody— 

particularly at 1600 Pennsylvania Avenue—with all of you who are 

out and about the country, it is going to be very hard to build it 

here. 

I think we have a lot to work with. Chairman Baucus and Chairman Camp clearly want to move in this direction. But 2 hours in 

we finally got to a key point, which is, we are going to have to 

bring this together. We are going to have to bring it together 

around 1986 principles. I hope you and everyone in the administration will start using that bully pulpit, because that was the key in 

1986. 

Secretary GEITHNER. I agree with that, and I think you made the 

point right. 

Can I just say one thing, Mr. Chairman, on this? 

The CHAIRMAN. Absolutely. 

Secretary GEITHNER. You know this very well, Senator, better 

than I do. Our challenge here is much greater than it was in 1986 

because the scale of our fiscal problems is much greater, and we 

do not have the luxury of offering people a substantial net tax cut 

to individuals, or to do something that does not raise revenues 

overall so we can contribute to deficit reduction. We do not have 

that luxury now. We do not have the ability—even with all the unpleasant features of our tax code today, it is in many ways a cleaner, less—I guess I do not really want to go there. 

Senator WYDEN. I do not think you would want to call this system cleaner than anything. 

Secretary GEITHNER. I was going to make a point, which is that 

in the 1986 Act, as you know, it was possible at that point to provide individuals, at least at the first stage of that reform, a very 

substantial net tax cut. 

Now, President Reagan, to his credit, 2 years later took back 

about two-thirds of that tax cut because it proved unsustainable, 

unaffordable. The country today, even though there is a lot of support for the President’s proposals, we face I think a much more difficult political environment in the current context. 

But I completely support you on the principles. These are going 

to have to happen together. We recognize that. I agree with you 

also that, when Congress is ready to move on this, we are going 

to have to get to looking at a much more comprehensive framework 

of reform. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for coming today. I appreciate your 

statements about support for tax reform. I think everybody here 

wants to get on with that issue and hopefully do something that 

36 

will lower rates and broaden the base. But I just am still waiting 

for the White House to put forward a proposal on that. 

I think that it has been said here earlier, but I think the proposals in the budget this year actually sort of take us backwards 

when it comes to the issue of tax reform. You have all kinds of new 

tax rates coming in, the proposed Buffett rule, raising dividend and 

capital gains tax rates. It strikes me at least that, if we are serious 

about tax reform, that the administration ought to put forward a 

plan that would actually accomplish tax reform that would allow 

us to move forward. 

Now, there is one thing that I did want to ask you about, and 

that has to do with the proposal that qualified dividends be taxed 

at the same low rate as capital gains. That was in last year’s budget. And in fact, last year I think in the 2012 budget, word-for-word, 

the quote was something to the effect that ‘‘taxing qualified dividends at the same low rate as capital gains for all taxpayers reduces the tax bias against equity investment and promotes a more 

efficient allocation of capital.’’ 

The budget this year, however, proposes to tax dividends as ordinary income, which, if you have your way, will be at a top rate of 

39.6 percent. So, if you include the new 3.8-percent surtax included 

in the health reform, that means the top rate on dividends would 

be over 43 percent before you even consider that the income was 

already taxed at the 35-percent rate at the corporate level. The 

question is, is it not true that such a high tax burden on dividends 

is actually going to promote an inefficient allocation of capital? 

Secretary GEITHNER. I do not think so. But, Senator, I would say 

that one way to think about this is, it helps explain why ultimately 

we need tax reform. As I said earlier, what we did is, we have done 

this to say, if you try to do a balanced deficit reduction plan and 

do that with a mix of spending and tax reforms and you are raising 

revenue on top of the current tax system, then you have to embrace 

a mix of things like what we proposed. 

But it is a good reason to think about why it is good to do this 

for tax reform. Again, we expect we will get an opportunity to work 

with you on tax reform, particularly given the looming expiration 

of the Bush tax cuts at the end of this year. I think that the reason 

why we proposed this in the budget is just for the crude reality 

that we face unsustainable deficits, and we are proposing those 

changes in the tax treatment of dividend income for the top 2 percent of Americans. 

Again, just for the top 2 percent of Americans we are proposing 

those, because we are also proposing very substantial cuts in defense spending, in non-defense discretionary, in Medicare and Medicaid, and other mandatory programs. To balance that out and 

make sure there is a bit more shared sacrifice in this context, we 

felt, in order to achieve a more sustainable deficit, we had to find 

some initial revenue. 

Again, this is a very limited proposal; it affects only the top 2 

percent of taxpaying Americans. We think they can handle it and 

the economy can afford it. But you are right to point out, the better 

way to get to a more sensible tax system as part of a deficit reduction plan overall is through a comprehensive tax reform process. 

37 

Senator THUNE. I mean, are you going to propose a tax reform 

plan at some point? Because when this was done last time in 1986, 

there was a proposal put forward by, at that time, the Reagan administration to reform the tax code, and it was the starting point. 

Congress picked that up, worked from it, and came up with the 2- 

rate structure that we ended up with, at least for a while. 

I mean, we all say we are going to do this, but the clock is ticking. If we punt this down the road to the next Congress, who 

knows what the excuse will be next year for not moving forward 

with this? I mean, is there something that is going to be forthcoming? 

Secretary GEITHNER. I agree with you. I said this earlier: better 

sooner than later. We cannot defer indefinitely. Even if we did not 

have the incentive of the expiration of the tax cuts at the end of 

this year, it would be a good thing to try to get moving on this now. 

But as you know, we spent a substantial amount of time this summer working in particular with the House Republican leadership 

on how to set out broad parameters for tax reform. 

As you know, we were unsuccessful in that effort, and we feel 

like, frankly, we need to see a better, clearer recognition on the Republican side you would be willing to consider tax reform to raise 

revenues as part of a balanced deficit reduction plan before we 

think there is going to be the basis for a more serious negotiation. 

It is because of what we tried this summer that we decided to do 

some more foundation laying for tax reform rather than putting out 

a comprehensive tax reform plan now. 

Senator THUNE. The tax rates, when they go up at the end of the 

year—if that happens; hopefully it will not—what does that do to 

economic growth? 

Secretary GEITHNER. Well, as I said earlier today, and one of 

your colleagues said this, if you were to allow all the Bush tax cuts 

to expire and this sequester to hit, that would be a very damaging, 

adverse blow to the economy. Of course, no one is proposing that. 

We are proposing to extend the Bush tax cuts that go to 98 percent 

of Americans, to let expire those that affect only the top 2 percent 

of Americans. 

We are proposing to limit deductions for those Americans, too. 

Those are pretty modest in terms of their impact on the economy, 

and it is because of that concern for the middle class and for the 

overall economy that we are not proposing to allow to expire what 

we call the middle-class tax cuts. 

Senator THUNE. The same discussion was held 2 years ago, and 

at that time I think the administration concluded that raising 

taxes on people above $200,000 would be harmful to the economy. 

Secretary GEITHNER. That is not quite—— 

Senator THUNE. That is why the extension was made at the time. 

Secretary GEITHNER. That is not—— 

Senator THUNE. We are facing the same circumstances now. 

Secretary GEITHNER. We may, but that is a very good point. 

Thank you for asking that question this way. As you know, at that 

point our view was, we should protect the vast bulk of Americans, 

98 percent of Americans, from any increase in their tax burden. 

But we could afford, and the prudent thing was to allow, the tax 

cuts for the top 2 percent to expire. 

38 

Now, as you know, your side of the aisle would not support that. 

You were not willing to allow the tax cuts for the top 2 percent to 

expire, and the only way we were able to prevent a tax increase 

on 98 percent of Americans was to agree temporarily with the position you took. But the economy absolutely could have absorbed the 

impact of letting the tax cuts for the top 2 percent expire. It would 

have been a very, very modest change. Even then, with growth as 

modest as it is, we could have afforded the impact then. 

Senator THUNE. I would just, in closing, Mr. Chairman—I see my 

time has expired—point out, however, that 4 out of 5 people who 

pay at that higher rate above the $200,000 income threshold are 

small business owners. I mean, people who have businesses and 

they have flow-through income, they are people who create jobs. I 

think that was a calculation that was made, not only by those of 

us in Congress, but also by the administration when the decision 

was made 2 years ago to extend all the rates. 

Secretary GEITHNER. We should probably agree to a moratorium 

on this debate, because we do it every time I am in this room, over 

and over and over again. You say small businesses, and we say 2 

to 3 percent. You acknowledge 2 to 3 percent. We say it is only 2 

to 3 percent. 

In any case, we can allow the independent arbiters to judge the 

impact on small business, but there is no credible argument that 

exists to suggest that those tax proposals we are making would affect more than that very, very small fraction of small businesses. 

As you know, a large number of those firms you call small businesses are lawyers in law firms, partners in hedge funds, private 

equity. But we have had this debate many times, and we probably 

should agree to—— 

Senator THUNE. There are probably a lot of people up here who 

would not mind taxing lawyers. I am just kidding. [Laughter.] 

But, no. I mean, I do think that you can argue that it is 2 to 3 

percent, but it is also the people who do own the businesses and 

the people who are creating the jobs. Right now it strikes me, at 

least, that we want to have policies that encourage job creation and 

economic growth. I think it would be counterproductive to raise 

taxes on the people who are creating the jobs. 

Secretary GEITHNER. Again, we share that general objective with 

you. The only disagreement we have is that we do not believe there 

is a feasible way or a fair way to restore fiscal sustainability without asking a very small fraction of the most fortunate Americans 

to bear a modestly higher burden for the privilege of being Americans. 

The only reason we propose that is because the alternative to 

that, since we cannot go out and borrow $1.5 trillion to afford continuing those tax cuts, is to cut deeply into defense spending, Medicare benefits, programs for the poor, or investments in education 

and infrastructure. 

If we thought there was a way to avoid that, we would join you 

in embracing that, but we just do not think the basic fiscal realities 

of the country give us an alternative. 

Senator THUNE. And reforming entitlement programs might be a 

solution to that. 

39 

Secretary GEITHNER. And we are going to take a different approach to you on that, as you know. But again, I remind you that 

the President’s budget proposes $350 billion, roughly, of savings 

from Medicare and Medicaid over the budget window. 

Senator THUNE. Out of providers? 

Secretary GEITHNER. No—substantially out of providers but not 

only out of providers. 

Senator THUNE. Mostly. 

Secretary GEITHNER. And again, not to compare or go back to 

history, but you could ask your staff to make the following comparison to you. Can I just make one more point? Which is, compare the 

level of savings from Medicare—since you guys want to be for courage on entitlements—in the President’s budget over the next 10 

years to those in the Republican alternative from last spring. 

We are proposing tough, difficult reforms in Medicare and Medicaid in the hundreds of billions of dollars range, alongside these 

other cuts across government. We think to go significantly deeper 

than that would be unfair to middle-class retirees. 

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

I think Senator Hatch has a follow-up question. I am going to 

have to leave. But I very much hope—and it will probably happen 

when you send up your corporate reform idea—that we have this 

debate that we are all talking about during the year so we do not 

wait until the end of the year. If we have it now, the result is going 

to be a lot more constructive and make a lot more sense. 

But thank you very much for your testimony, and thank you very 

much for being so helpful and so constructive today. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

I will not keep you much longer, Mr. Secretary. I know you want 

to go. You wanted to go when you first got here, and I would not 

blame you. 

Secretary GEITHNER. I would be happy to continue it. 

Senator HATCH. No. Let me just say this. On Senator Kyl’s question, the Joint Committee on Taxation did say that the bottom 51 

percent of all households do not pay any income taxes at all. You 

raised the issue that they pay payroll taxes. Yes, but that is Social 

Security. We all do that. But about 23 million of them, according 

to Joint Tax, receive refundable tax credits that are more than they 

pay in payroll taxes. So in essence they are not really paying anything. Another 15.5 million people get refundable tax credits that 

are more than both what they and their employer pay in payroll 

taxes. 

Now, I am not suggesting that we should tax the truly poor. I 

do not think anybody wants to do that. We want to help them. I 

have spent 36 years here trying to help people. But I am suggesting that we have to lift people out of the current situation 

where they are paying taxes, and that base needs to be spread, and 

there is no way we will ever get there, it seems to me, with this 

administration’s approach. Because you want to raise taxes on the 

upper 2 percent, but I do not see any of that money going for deficit 

reduction. 

Now, maybe you think it is, but I do not see any of it going for 

deficit reduction. I do not see us making real headway. I see us as 

40 

at 100 percent of GDP in national debt. I see our spending has now 

gone up to over 24 percent, or something like that, of GDP, from 

around 18. We all know that we are spending too much. These are 

some of the things that are driving me bats up here. 

Tell me how you are going to get the deficit down when the 

President comes up with all kinds of more programs to spend 

money on, and in the process we are not lifting the economy at all, 

we are making it a worse economy. I have also added to that that 

it is based upon low interest rates that we know are going to go 

up. Now, I think those are fair questions. 

Secretary GEITHNER. Totally fair questions. Could I respond to 

those questions? 

Senator HATCH. Sure. Sure. 

Secretary GEITHNER. Let me just try to go through those questions. Let me just first start with the magnitude of our debt problems, because you used a bunch of numbers I want to put in perspective. 

Senator HATCH. Well, tell me they are wrong. 

Secretary GEITHNER. You are absolutely right that we have 

unsustainable deficits, and if we do not figure out a way to restore—— 

Senator HATCH. But where does this budget make a difference in 

deficits? 

Secretary GEITHNER. One of the great things about our country, 

Senator Hatch, is that we use a neutral, independent arbiter of our 

policies and yours to judge their impact on the deficit. Our policies, 

which CBO will evaluate for you, will show, if Congress were to 

enact them, they would bring our deficits down from their current 

unsustainable levels to a level that is sustainable. We define sustainable, as most economists would, as the level—and this is the 

minimum you have to do—where the debt stops growing as a share 

of our economy. 

If the Congress were to adopt these proposals, even under reasonably conservative assumptions, then our debt burden as a share 

of the economy—this is debt held by the public and debt net of financial assets, which is the appropriate way to measure it—will 

stabilize in the 70s as a percent of GDP. Now, that would be good 

if we were lower over time. 

Senator HATCH. Are you telling me the deficit is going to go 

down? I do not believe that. 

Secretary GEITHNER. Oh, absolutely. 

Senator HATCH. You are going to have to prove that to me, because I do not believe it one bit. 

Secretary GEITHNER. It depends on what Congress does, of 

course. In the Constitution, we can only propose and Congress has 

to enact. But if Congress were to enact the President’s proposals—— 

Senator HATCH. I am talking about the President’s proposals. 

Secretary GEITHNER. Then they will bring the deficit down from 

the current level of just above 8.5 percent of GDP. 

Senator HATCH. I have a lot of respect for you. I think you are 

a very bright man, and you have had one of the toughest jobs in 

history, and I acknowledge that. But I do not believe you can make 

that case. 

41 

Secretary GEITHNER. Oh, absolutely. 

Senator HATCH. You will have to make it in writing to me. 

Secretary GEITHNER. You do not have to trust our judgment because, again, the great strength of our country is that CBO can 

show you. 

Senator HATCH. I will trust your judgment. You write it to me. 

You can write it—— 

Secretary GEITHNER. All right. 

Senator HATCH [continuing]. How you think we are going to 

knock the deficit down with the current budget that this President 

has offered to us. 

Secretary GEITHNER. Oh, absolutely. Absolutely it will come 

down dramatically over time. In fact, it will come down much faster than you think. I think what we disagree on really is whether 

we should cut much more quickly than we propose to cut—as I said 

in my opening remarks, our judgment is, that would hurt the economy quite badly—— 

Senator HATCH. No, I think—— 

Secretary GEITHNER [continuing]. Or how we do it, and the composition of it. 

Senator HATCH. I would just like to lift our workers and our 

economy by providing more opportunity. 

Secretary GEITHNER. We share that goal. 

Senator HATCH. I know we do. 

Secretary GEITHNER. Yes. I just want to point out one thing. You 

are right to say that rates are low today. Interest rates are low 

today. 

Senator HATCH. They are not only low, they are almost nonexistent. 

Secretary GEITHNER. Well, the 10-year yield of treasuries is 

about 2 percent. 

Senator HATCH. Yes. 

Secretary GEITHNER. And you are right that that is a reflection 

of lots of different things. But it is—— 

Senator HATCH. Have you factored in, if they start going up to 

normal rates—— 

Secretary GEITHNER. I am going to embrace—— 

Senator HATCH. Sorry. Sorry to interrupt. 

Secretary GEITHNER. I am going to explain it to you. They are 

low in part because of the concern in Europe and because growth 

is not that strong anywhere. But they are also low because investors around the world judge those securities, those Treasury securities, as a relatively safe bet. 

They believe that the Congress of the United States ultimately 

will act to restore fiscal responsibility soon enough so we can avoid 

the risks you and I both would worry about a lot, which is that, 

if Congress does not act, that over time those interest rates would 

rise and hurt growth. There is no risk of that. I do not see any risk 

of that now, but we would be better positioned to avoid that risk 

if Congress were to enact a sensible set of deficit reduction proposals over time. 

Right now, by almost any measure you can look at about how 

people judge the relative security of U.S. financial assets, including 

Treasuries, they judge us as in a very strong position to meet our 

42 

long-term fiscal challenges because they have a lot of confidence ultimately this Congress will act and come together and do some sensible things in that context. But that requires action by the Congress. 

Senator HATCH. Mr. Secretary, I just have to ask a couple of 

other questions because of what I have heard here today. I do not 

agree with you on your analysis, but you have all kinds of economists working with you, and I cannot ignore the fact that you are 

in a position to be able to make that statement. 

But why does the President want to raise taxes in any way on 

small businesses with unemployment at 8.3 percent? I mean, do 

small businesses with taxable income over $200,000 not help the 

unemployment situation by creating and retaining jobs? 

I mean, we all know that businesses would get hit with the 

President’s tax hikes even if their owners do not take one penny 

out of the business and instead plow it all back into worker salaries or into building the business. The President says small business create two-thirds of the new jobs in this country. My worry 

is, why does he want to take more of their money that they could 

use to hire more workers and retain the ones that they have? 

Now, I know you are aware that 50 percent of all flow-through 

business income is subject to the President’s proposed rate hikes. 

That is a fact. You seem to dismiss concerns about increasing taxes 

on businesses with incomes over $200,000 in taxable income, 

whether their owners take out any of their income at all. Now, why 

are you not more concerned about increasing taxes on these small 

businesses with jobs still as scarce as they are? And remember, 

this President promised unemployment would not go above 8 percent if this stimulus was enacted. It has been over 8 percent for 

32 straight months now. 

And let me make one last comment about this, and then of 

course I am glad to hear your response. I think I have been very 

fair to you over your tenure. 

I think you are a very bright guy, and I think that you are a very 

smart guy and a very hard worker. I think you are very wrong on 

a lot of things, to be honest with you. But let me just say this. Why 

hammer millionaires and small business owners, who are the job 

creators, especially in rural America? According to CRS, 75 percent 

of those making $1 million or more in income are small business 

owners. Seventy-five percent. 

Now, that group already pays plenty. Their effective tax rate is 

29 percent. So they are already paying the Buffett rule, there is no 

doubt about it. I just have a real rough time with this. We have 

to keep increasing taxes, but we cannot provide any incentives to 

the economy, especially small businesses, that really create 70 percent of the jobs, and get us so we pull out of this so that it is more 

than 49 percent paying the whole freight in this country. 

Secretary GEITHNER. Senator, I of course respect your views on 

this, and we have had a lot of conversation about this, so let me 

just say a few things in response. But I do not think I am going 

to change your mind. 

Senator HATCH. We have not had too many on this one. I mean, 

you and I have not, I will put it that way. 

43 

Secretary GEITHNER. We have significantly reduced taxes on 

small businesses in the first 3 years of the President’s first term. 

We propose in the budget additional reductions in taxes on small 

businesses. For example, zero capital gains on new investments in 

small businesses, extending very generous expensing provisions. 

We think those are good economic policy, given the challenges we 

face as a country. 

Senator HATCH. I agree with that. 

Secretary GEITHNER. Now, I am not a politician, but I have never 

met anybody in public office who ever wants to be in favor of raising any taxes on anybody. But as you know and as you have said 

eloquently, we face unsustainable fiscal deficits. We have to find a 

way to figure out how to dig our way out of that and restore some 

balance. 

As you have heard us discuss all morning, we do not see a way 

to do that that is fair and consistent with our other obligations as 

officials without some modest increase in revenues, and we want 

to make sure that those revenues come from the people who are in 

the best position to bear that burden. These proposals will affect 

a very, very, very small, tiny fraction of small businesses. 

Now, it does affect some small businesses, but most of those 

small businesses, a very substantial fraction of them, are not small 

by any definition, and they make substantial amounts of earnings. 

I think more than half make more than $1 million in taxable income after expenses. 

So we do not do this with any enthusiasm. We just do it out of 

the recognition that we face terribly difficult fiscal challenges. We 

are adding substantial burdens on average Americans because of 

the broader cuts in spending happening across the government, 

across the economy. 

We think, to avoid putting additional burdens on middle-class 

Americans, on retirees, on a defense budget that is already being 

cut substantially, we have to find some ways to raise some revenues sensibly through tax reform. That is why we are taking this 

approach. We do not do it with any enthusiasm, we just think it 

is better than the alternatives. 

Senator HATCH. All right. I have only been here 36 years, but I 

have gone through it over and over where a Democratic administration has come in and said, we just need more taxes and we will 

cut spending. We have given them the more taxes, and the spending has never been cut. 

Secretary GEITHNER. Well, again, I think this is a good debate 

to have. I think, again, if you look at any independent evaluation 

of what we have proposed on the spending side, you will see that 

we are proposing to cut spending by between $2.5 and $3 trillion, 

depending on if you include interest. Between $2.5 and $3 trillion 

over 10 years in spending cuts across the government, all parts of 

the government, including defense, with substantial savings for 

Medicare and Medicaid. 

Now again, it is only in that context—$2.5 in spending cuts for 

every $1 of revenue increases—that we think a modest amount of 

revenue makes some sense. Again, we have to make choices. Governing is about choices, about alternatives. If we do not do that 

44 

modest amount of revenues, where are we going to find the savings 

to make sure we can live within our means? 

Now, if you are going to not find 1 percent of GDP in revenues, 

you are going to have to figure out a way to cut benefits, cut education, cut Medicare and Medicaid, or cut defense further. 

Senator HATCH. Yes. There are no entitlement reforms being offered by this administration. 

Secretary GEITHNER. But Senator—— 

Senator HATCH. Not a dime of it. 

Secretary GEITHNER. That is not true. The budget includes $360 

billion—— 

Senator HATCH. No restraint of growth. 

Secretary GEITHNER [continuing]. In savings and reforms to 

Medicare and Medicaid. Compare the Medicare ones to the alternatives we have seen from your side of the aisle. You guys go 

much, much deeper in transforming changes to Medicare over time 

that we would never support, but we are trying to find responsible, 

sensible ways to get more savings out of the Medicare and Medicaid system because, as we all recognize, we have made unsustainable commitments in those programs. 

Senator HATCH. And also in the budget you are taking credit for 

war reductions and a lot of other things that may or may not be 

real. 

Secretary GEITHNER. Well, I am glad you raised that question. 

We are treating the overseas contingency operations—which is the 

budget that pays for foreign wars—more carefully and more responsibly even than the Republican budget of last year. We are 

treating it, like the Republicans last year, we are proposing to 

count those savings and allocate a substantial fraction. But we allocate the savings differently. 

We are proposing to put most of it to deficit reduction, part of 

it to a substantial infrastructure investment program. But in general, we are being consistent with the way those things have been 

treated, not just in the Republican budget more recently, but in the 

past. 

Senator HATCH. Well, let me just say this. You have a tough job, 

and I do not want to make it any tougher than it is. But I am really concerned because I do not think anybody up here wants to cut 

entitlement programs if they can avoid it. But we also know that 

is where we have to find savings if our kids, grandkids, and greatgrandkids, in our case, want to have a future. I just do not see it 

in this particular budget, in the President’s budget. 

Look, you have a very difficult job. You work very, very hard. I 

do not think you get as much credit as you deserve. On the other 

hand, I do not agree with you. I actually think that this administration is putting us into real jeopardy. I do not blame you for that, 

completely. [Laughter.] 

But we are going to have to get real about this. 

Secretary GEITHNER. I think, Senator, we recognize that we are 

going to have to have pretty significant changes to the trajectory 

of growth in Medicare and Medicaid. 

45 

Senator HATCH. I do not see it in this budget. 

Secretary GEITHNER. Well, you can ask for more. But then you 

have to decide how you are going to get more and how deep you 

are going to go in benefits. 

Senator HATCH. That is what we are talking about. You are our 

guy. 

Secretary GEITHNER. But I was going to make a slightly different 

point, which is that, as you know, we do not think it is realistic 

or fair to consider even those changes we propose on entitlement 

reform without changes to the tax system. 

Senator HATCH. All right. Now, I agree with that. 

Secretary GEITHNER. You have to do entitlement reform—— 

Senator HATCH. I think we do need to modify our tax system. I 

do not think there is any question about it. But we ought to make 

it so that we can create jobs and opportunities—— 

Secretary GEITHNER. Right. 

Senator HATCH [continuing]. And magnify the small business 

community, which I do not think your budget does. 

Secretary GEITHNER. Well, we are going to have to raise some 

revenues from the tax system. We cannot do it without raising revenues. So, when we talk about entitlement reform alongside tax reform, we are talking about entitlement reform that saves real 

money and tax reform that helps contribute to deficit reduction. We 

think you need both those things. We are not going to move forward on either one without the other. 

Senator HATCH. Well, I think we are over-taxed now. I do not 

want to raise revenues. I would rather have us make the tough decisions and see what we can do to get things under control. 

Now, I know you want to get down to the dinner. I have so many 

more questions. Very seldom am I all by myself so I can ask anything I want. 

Secretary GEITHNER. Well, I will come see you. Invite me to come 

see you, and I will come talk to you. 

Senator HATCH. All right. I will invite you to come see me. I just 

want you to know that you have inherited a very difficult job in 

one of the toughest times in history. I have respect for how hard 

you work. I know that you are trying to do the best you can. I 

would like to see you convince this President of some of the things 

that you and I both know he ought to be convinced of. 

But in any event, I always respect people who work hard, and 

you are one of the hardest workers I have seen. I wish you would 

work a little less hard on some of these crazy ideas that this administration has. But I just want you to know that I really appreciated your testimony today. I have appreciated the amount of time 

you have given to this committee, and I appreciate how hard you 

really work. 

So with that, we will let you go. I do not see anybody else. We 

will let you go, and thank you for taking the time. You are going 

to come see me, though. 

Secretary GEITHNER. Thank you, sir. 

Senator HATCH. And you are going to convince me about some of 

these things. 

46 

Secretary GEITHNER. Thank you. Thank you. 

Senator HATCH. All right. Thanks so much. 

With that, we will recess until further notice. Thank you. 

[Whereupon, at 12:28 p.m., the hearing was concluded.] 

(47) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


79764001.eps
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worker assistance and training program to ensure American workers have the tools they need to 

compete and take advantage of new trade opportunities. 

This year, I am working with my colleagues and the Administration to grant permanent normal trade 

relations with Russia. Once we do, U.S. exports to Russia could double over the next five years. This will 

create more American jobs, particularly in the services, agriculture, manufacturing and high-tech 

sectors. 

This budget would extend tax provisions that expired at the end of 2011, known as the "traditional 

extenders." These include deductions for college tuition and for state and local sales taxes, and they 

include a tax credit for research and development to encourage innovation. We should extend these tax 

breaks for families, individuals and businesses and do so now. 

But we also need to end the cycle of yea r-to-year extension and uncertainty for families and 

businesses. We should work together to enact comprehensive tax reform. We must make our tax code 

fairer and more predictable. 

This budget takes a step in this direction by making the 2001 and 2003 tax cuts for the middle Class 

permanent, providing permanent estate tax relief and solving the problem ofthe alternative minimum 

tax. 

We cannot stop there. Uncertainty is not the only problem with our tax system. The tax code and 

regulations are now as thick as a stack of a dozen bibles. We need to simplify it and close loopholes, and 

we must ensure that it helps businesses compete in the global economy and create jobs. I look forward 

to working with my colleagues and the Administration to create a better tax system that meets our 21"_ 

centu ry needs. 

The President's budget also makes much-needed investments in America's infrastructure, which is 

sorely needed at a time when unemployment in the construction industry is hovering around 15 

percent. 

The Senate's Highway Bill has passed out of several committees - including this one - with bipartisan 

majorities. It will provide nearly $110 billion over two years to support road safety, mobility, interstate 

commerce and jobs. It's time to enact it into law. 

In addition to creating jobs, the President's budget takes important steps to bring the deficit and Federal 

debt held by the public under control. We have already reduced Federal deficits significantly. Earlier 

this year we enacted the Budget Control Act of 2011, which reduced spending by $900 billion, and the 

health reform law prOVided the biggest deficit reduction in more than a decade. 

Nonetheless, Federal budget deficits and debt are still too large. We must adopt policies that will 

stabilize debt as a percent of GDP by the latter part of the next ten years. This budget meets that test. 

I look forward to continuing our work on deficit reduction and job creation in the coming years. 

There is another reason that we must continue to focus on deficit reduction, along with job creation, 

this year: A perfect fiscal storm is waiting at the end of the year. First, the 2001, 2003 and 2010 tax cuts 

expire. Two days later, an automatic sequester of many Federal programs will take place, and the debt 
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limit will need to be raised at about the same time. This is what we'll face if we do nothing to reduce 

deficits and control Federal debt in the coming year. 

Any deficit reduction we develop must be balanced and fair. Everyone must contribute, but no one 

should have to make undue sacrifices. Unfortunately, one area of the budget falls short of this 

standard. The cuts to rural assistance programs are too deep. While we all must work together to 

achieve meaningful deficit reduction, we can't do this at the expense of job creation and protecting 

programs that folks in rural areas depend upon. 

Deep cuts to agricultural programs will pull the rug out from our hard-working producers and unjustly 

target rural states like Montana. Rural development programs provide important economic 

development, infrastructure and housing resources. Cuts to these programs have a devastating effect 

on the economies of rural communities and paralyze our ongoing economic recovery. 

We need to enact deficit reduction in a smart way. I look forward to working with my colleagues and 

the Administration to do so. 

So let us work together to enact significant deficit reduction. Let us do so in a way that preserves and 

enhances our job creation efforts. Let us take these ideas and find the best way to use them. 

### 
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Statement of Secretary Timothy F. Geithner 

Committee on Finance 

U.S. Senate 

February 14, 2012 

Chairman Baucus, Ranking Member Hatch and members of the Committee, thank you for giving 

me the opportunity to appear before you today to discuss the President's Fiscal Year 2013 

Budget. 

I. INTRODUCTION 

Three years after the worst fmancial crisis since the Great Depression, our economy is gradually 

getting stronger. The decisive actions we took to combat the financial crisis, combined with the 

President's policies to restart job growth and support the economy, have helped lay the 

foundations for continuing growth. Over the last two and a half years, the economy has grown at 

an average annual rate of 2.5 percent, exceeding growth in the year prior to the recession. 

Private employers have added 3.7 million jobs over the past 23 months, including more than 

400,000 manufacturing jobs. Growth has been led by exports, which have grown 25 percent in 

real terms over the last 2 It, years, and by business investment in equipment and software, which 

has risen by 33 percent during the same period. 

While the economy is regaining strength, we still face significant economic challenges. 

Unemployment, at 8.3 percent, is still far too high, and the housing market remains weak. The 

damage inflicted by the crisis presents continued difficulties for consumers and businesses alike. 

In addition, the debt crisis in Europe and the slowing of major economies elsewhere in the world 

present potential impediments to our economic growth. 

The harm caused by the crisis came on top of a set of deep, preexisting economic difficulties. In 

the years leading up to the crisis, the average middle-class family saw few gains in income, 

productivity growth slowed, and the fiscal policies of the previous Administration turned record 

budget surpluses into substantial deficits. 

In my testimony, I want to outline the President's strategy for addressing these immediate and 

underlying challenges. This strategy entails a carefully designed set of investments and reforms 

to improve opportunity for middle-class Americans and strengthen our capacity to grow, 

combined with reforms to restore a sustainable fiscal position. 

The Budget proposes three specific steps to boost growth and secure the United States' position 

as the most competitive economy in the world. 

• Improving access to education and job training, so that our workers are the best prepared 

in the world for the jobs of the 21 sl century. 

• Promoting manufacturing and innovation, with a particular focus on research and 

development and jumpstarting advanced manufacturing, so that the United States remains 

the world's most competitive economy and firms create well-paying jobs here at home. 
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• Investing in infrastructure, in order to create job opportunities now and enhance 

productivity in the long run. 

Under the President's plan, these critical investments are combined with a balanced plan for 

deficit reduction. The Budget reduces projected deficits by a total of more than $4 trillion over 

the next 10 years by adding more than $3 trillion in deficit reduction to the approximately $1 

trillion in savings already enacted through the discretionary caps included in the Budget Control 

Act (BCA). These savings are sufficient to stabilize our debt as a share of the economy by 2015 

and begin placing our debt on a downward path. 

More than two-thirds of the total deficit reduction is achieved through savings in entitlements 

and other spending programs, and discretionary spending is projected to fall to its lowest level as 

a share of the economy since Dwight Eisenhower was President. 

These significant cuts are phased in over time to protect the economic recovery. Cutting 

spending too deeply or too soon would damage the economy in the short-term, impede our 

ability to make necessary investments for long-term growth, and achieve deficit reduction at the 

expense of the most vulnerable Americans, including seniors and the poor. 

In order to achieve a sustainable fiscal position, we must combine these cuts with savings 

achieved through reforms to our tax code that make it simpler, fairer, and more efficient. 

Sustainable deficit reduction requires the right combination of policies: we must have a tax 

system that collects revenue fairly and supports growth and investment, but does not place undue 

burdens on families and businesses; spending cuts and entitlement reforms that reduce 

expenditures but do not harm the economy or the most vulnerable Americans; and investments 

that give us the ability to grow but do not misallocate valuable government resources. 

The central challenges addressed in the President's Budget-strengthening growth now, 

investing in our future, and putting our nation on a sound fiscal footing--complement and 

depend on each other. Investing in our economy will help us grow and make our fiscal 

challenges more manageable. Locking in credible deficit reduction, in tum, will make room for 

investments that enhance our long-term growth. 

II. INVESTING IN OUR COMPETITIVENESS 

Education and Training 

An educated and skilled workforce is critical for the United States to compete in the giobal 

economy. We once led all advanced economies in the percentage of our population that 

graduated from high school and college, but today we are not providing enough Americans with 

the educational skills they need. America has fallen to 16th among advanced countries in the 

proportion of young people with a college degree, and many Americans of all ages need further 

education and training in order to succeed in today's economy. 
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The Budget takes a number of steps to make sure that higher education is attainable and 

affordable. The President has increased the maximum Pell Grant by 20 percent to $5,635, and in 

academic year 2010-2011, Pell grants supported the educational aspirations of9.3 million lowand moderate-income students, who received $35.6 billion in grants, an average of$3,831 for 

each student. This year's Budget maintains the expanded maximum Pell grant of$5,635 through 

FY2013. 

Moreover, as part of the bipartisan December 2010 tax compromise, the President extended 

through 2012 the American Opportunity Tax Credit (AOTC) he created as part of the Recovery 

Act. The AOTC is projected to provide nearly $19 billion in credits to over 9 million families 

this year. This year's Budget proposes to make the American Opportunity Tax Credit pennanent, 

so it can off'erup to $10,000 in tax credits over a four-year college career. 

In addition, the Budget provides $8 billion for the Community College to Career Fund in the 

Departments of Labor and Education to support State and community college partnerships with 

businesses to build the skills of American workers. A $12.5 billion Pathways Back to Work 

Fund will also help jump-start America's economy by putting thousands of long-tenn 

unemployed and low-income Americans back to work and helping them gain skills for the jobs 

of the future. The Budget also provides support for a new initiative designed to improve access 

to job training across the nation and make it easier for those looking for work to access help in 

their communities and online. 

Innovation and Manufacturing 

As the global economy becomes more and more advanced, it is crucial that U.S. finns and 

workers remain on the cutting edge. Investment in research and development (R&D) creates 

good jobs for American workers, raises living standards, and keeps our economy competitive. 

Private businesses are likely to underinvest in R&D, because they cannot capture all of the gains 

from their investment. A substantial portion of the benefits, however, accrues to the broader 

business community or the public at large. Federal investments in research and development 

have played an important role in spurring the internet, global positioning systems, and clean 

energy. 

Though private sector investment in R&D has continued to grow, when the President took office, 

public investment in R&D was near its lowest levels in half a century as a share of the economy. 

The FY 2013 Budget proposes a number ofimportant investments in R&D: 

• The Budget includes $141 billion for Federal R&D - investments that will promote the 

development of a variety of high-priority technologies, from next generation robotics to 

nanotechnology to improved cybersecurity. The budget also keeps spending on the 

National Institutes of Health steady at $31 billion. 

• Of this, the Budget provides $2.2 billion for Federal advanced manufacturing R&D, a 19 

percent increase over 2012. 
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• The Budget proposes simplifying, expanding, and making permanent the Research and 

Experimentation Tax Credit, to provide a crucial incentive for businesses to invest in 

R&D. 

Another key part of creating good-paying jobs for American workers is to make sure that our 

manufacturing sector remains on the cutting edge. The Budget includes several key 

investments to support manufacturing: 

• The Budget sets aside $149 million in the National Science Foundation, an increase of 

$39 million above the 2012 enacted level, for basic research targeted at developing 

revolutionary new manufacturing technologies in partnership with the private sector. 

• The President's Advanced Manufacturing Partnership invests in a national effort to 

develop the emerging technologies that will create high-quality manufacturing jobs. For 

example, the Budget includes $21 million for the Advanced Manufacturing Technology 

Consortia program, a new public-private partnership that will develop road maps for 

long-term industrial research needs and fund research at universities and government 

laboratories directed at meeting those needs. 

• The Administration also supports a range of investments and initiatives to bring about a 

clean energy economy and create jobs for the future, especially manufacturing jobs. For 

example, the Budget provides $290 million to help meet the goal of doubling the pace of 

energy intensity improvements across America's industries over the next decade, as well 

as funding to double the share of electricity that comes from renewable energy sources by 

2035. 

Infrastructure 

Our nation's aging infrastructure is a drag on growth and productivity. In order to compete in 

the global economy, American businesses require a world-class infrastructure. In the long-run, a 

modem infrastructure lowers costs for both businesses and individuals. And there is tremendous 

short-term value as well-according to the Congressional Budget Office, infrastructure 

investment is one of the most efficient job-creation programs available. With more than 2.2 

million fewer construction workers on the job than at the pre-crisis peak, and with interest rates 

at historically low levels, now is the right time for greater public investment in infrastructure. 

• The President's Budget provides funding for crucial infrastructure investments. 

Specifically, the Budget proposes investing $476 billion over the next six years in our 

nation's surface transportation system, which builds upon our proposal to immediately 

invest $50 billion to help workers get back on the job. The savings achieved through our 

orderly drawdown of forces in Iraq and Afghanistan will pay for these investments, with 

the other half of those savings used to reduce projected deficits. 

• The Budget also calls for the creation of a National Infrastructure Bank, a bipartisan idea 

that will leverage private capital with more flexible financing so that we can build 

worthwhile projects efficiently and effectively, based on their merits. 

• The Budget also provides significant new investments for the modernization ofpubJic 

schools and community colleges so that those who attend have access to a safe 

enviromnent with modem technology. 
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• Finally, the President has proposed a national effort through the $15 billion Project 

Rebuild to put construction workers back to work rehabilitating and refurbishing 

hundreds of thousands of vacant and foreclosed homes and businesses, which will also 

help counteract the effects of blight on home prices in affected neighborhoods. 

III. CONTINUING TO BUILD FISCAL SUSTAINABILITY 

When President Obama came into office he inherited an annual budget deficit equal to 9.2 

percent of GOP. Moreover, there was a need for additional steps to stop the economy's free fall, 

and so Congress and the President enacted the American Recovery and Reinvestment Act and 

other short-term programs, which temporarily added to the deficit. The expiration of this 

recession-related spending, economic growth, and the spending cuts mandated by the BCA, 

including both the approximately $1 trillion in spending caps and the $1.2 trillion that is to occur 

through sequestration, by themselves are projected to reduce the deficit to 3.7 percent of GOP 

by 2018. 

However, between 2018 and 2022 the deficit under this baseline budget would actually start 

rising again, reaching 4.7 percent of GOP in 2022. The President's Budget therefore goes 

beyond the additional $1.2 trillion in deficit reduction required by the BCA, identifYing 

additional spending cuts and revenue raisers that reduce the deficit by over $3 trillion over the 

next 10 years, while paying for the policies to strengthen growth and invest in our future. 

By identifying savings far greater than the BCA, the Budget allows us to meet the BCA's goals 

while replacing the sequester's $1.2 trillion in damaging, arbitrary cuts with more responsibleand more substantial-reductions. We believe this is the right approach. As the President has 

made clear, it is not acceptable to simply repeal the sequester without a responsible combination 

of policies to replace it-policies such as the ones outlined in this Budget. 

Overall, the President's plan lowers the deficit from just under nine percent of GOP in 2011 to 

around three percent of GOP in 2018, after which it stabilizes through 2022. 

Our fiscal situation is improved by the fact that taxpayers are being repaid for many of the 

investments made in banks under the Troubled Asset ReJiefProgram (TARP). We estimate that 

investments made through T ARP bank programs, for example, will return more than $20 billion 

in gains to taxpayers. 

Spending Cuts 

Meaningful deficit reduction requires serious cuts to government spending. This will not be 

easy, but the President's Budget identifies areas where cuts are necessary, while protecting the 

most vulnerable Americans and investments in our future. As described below, President Obama 

proposes to reduce spending by reorganizing the government, cutting discretionary spending 

consistent with targets set forth in the bipartisan BCA, and reforming entitlements. 
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Non-security Discretionary Spending 

The $1 trillion in savings from the discretionary spending caps mandated by the BCA, which the 

President signed ipto law, reflect the hard choices that need to be made in order to meet our 

obligation to building a fiscally sustainable foundation. Achieving these cuts will not be easy 

and will require us to continue to make tough choices. 

The President's Budget meets this challenge, identifying more than 200 cuts, consolidations, and 

savings proposals. This is on top of the ongoing effort by the Administration to make 

government more efficient by reducing administrative overhead costs, reforming the government 

purchasing process, and embracing competitive grant programs. The Budget makes these cuts in a 

way that asks all to shoulder their fair share. 

The President has also asked for the power to reorganize the executive branch to cut out needless 

duplication, enhance the efficiency and effectiveness of government programs, and improve 

service delivery. The President has already proposed consolidating into one department the 

business and trade components of the Department of Commerce, the Small Business 

Administration, and several additional agencies to better support our nation's economic growth 

through trade, entrepreneurship, and innovation. 

As a result of these cuts, non-security discretionary spending will fall to just 1.7 percent of GDP 

in the final year of the Budget horizon, as compared to approximately 3 percent this year. 

Discretionary Defense Spending 

Just as we must reprioritize our non-security spending to meet the challenges ofthe new 

economy, we must also rethink our defense spending in light of the evolving global environment. 

The conflicts our military confronted over the past decade are winding down: our troops have 

exited Iraq, operations in Afghanistan are increasingly being turned over to the Afghan people, 

and we have dealt a devastating blow to al Qaeda by eliminating Osama bin Laden and other 

leaders. This provides us with the opportunity not simply to cut spending, but rather to take the 

hard lessons learned from the past decade of conflict to create a military that secures the safety of 

the United States while taking into account the more fiscally constrained environment in which 

we are operating. 

Over the next year, the overall defense budget, including overseas contingency operations 

reductions, will be down by 5 percent from the 2012 enacted level. On January 5, the President 

announced the Defense Strategic Review (DSR), which will set priOrities for our national 

defense over a longer period. The review is designed to provide us with a leaner, more 

technically advanced fighting force, better designed to address the threats of today' s world. In 

particular, the strategy calls for strengthening our presence in the Asia-Pacific region, along with 

continued vigilance in the Middle East and North Africa. We will also continue to invest in our 

critical partnerships and alliances, including NATO. 

The DSR is designed to reduce defense spending over the next 10 years by $487 billion relative 

to last year's Budget, which will slow the growth of defense spending. The President's Budget 
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will allow us to make significant and thoughtful reductions in defense spending without 

implementing the damaging path of the BCA sequester. 

Mandatorv Spending 

Achieving fiscal sustainability in the long term will require changes to mandatory spending 

programs. The President is proposing $270 billion in savings over 10 years in mandatory 

programs outside of health care. This includes the modernization of the pay and benefits of 

federal workers and the military, and increasing the efficiency of our agricultural support 

programs. The Budget also proposes increasing the retirement security of American workers by 

giving the Board of the Pension Benefit Guaranty Corporation (PBGq the authority to gradually 

adjust the premiums it charges pension plan sponsors, as well as a proposal to restore solvency to 

the unemployment insurance program. Together, these latter two proposals would reduce the 

federal deficit by more than $60 billion over 10 years. 

However, as the population ages and health care costs continue to rise, one of the biggest 

challenges in addressing our long-term fiscal sustainability results from projected spending on 

health programs due to aging of the population and excess health care cost growth. 

The Affordable Care Act (ACA) was a significant step toward controlling health care spending. 

According to analysis from the Congressional Budget Office, the ACA is estimated to reduce the 

deficit by more than $100 billion from 2012 to 2021 and by more than $1 trillion in the second 

decade. It is projected to reduce Medicare's average armual growth by 1.5 percentage points. 

One of the most important steps we can take right now for long-term deficit reduction is to 

implement the ACA fully and effectively. 

Still, more needs to be done. The Budget therefore proposes an additional $362 billion in health 

care savings over the next 10 years, through better administration and innovation, strengthening 

program integrity, aligning payments with costs of care, and strengthening provider payment 

incentives to improve quality of care. The Budget also includes structural changes that will help 

encourage Medicare beneficiaries to seek high-value health care services. 

Tax Reform 

While the proposed spending cuts are an important component of reducing our deficit, the 

President has recognized that we carmot responsibly address our fiscal situation without raising 

additional revenue. As a share of GDP, tax revenues from 2009 to 20 II were at their lowest 

level as a share of the economy since 1950. Our current tax code is inefficient and filled with 

loopholes. We need a tax system that is simpler and more efficient, one where businesses and 

individuals play by the rules and pay their fair share. Comprehensive tax reform will strengthen 

our competitiveness, promote fiscal sustainability, and restore fairness. 

As the President has emphasized, these reforms should follow a set of key principles. They 

should be fiscally responsible, so that the tax code promotes jobs and growth while collecting 

appropriate levels of revenue. The code should be simpler, combining lower tax rates for 

individuals and corporations with fewer loopholes and carve-outs-which will increase 
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efficiency so that businesses compete based on the products and services they provide, not the 

tax breaks they are able to collect. And finally, it should be fair, so that middle-class Americans 

are not carrying more than their fair share of the tax burden. 

Individual Tax Reform 

As with corporate tax reform, for individual reform the best path would be to enact 

comprehensive tax reform that meets the principles the President laid out last September and 

revisited as part of the State of the Union. The key to these reforms is fairness. 

The individual income tax cuts of the last decade were tilted toward the wealthy and have 

contributed to tax revenues falling to near their lowest level as a share of GDP in 60 years. As 

we consider individual reforms, families with incomes under $250,000 should not see a tax 

increase. But the most fortunate Americans, the wealthiest 2 percent, must contribute a greater 

share of their income in order to correct the imbalance in our system. And in keeping with the 

Buffett Rule, high-income families should not face tax rates that are lower than those faced by 

middle-income families. 

As we move to consider these reforms, the Budget presents a path that raises the appropriate 

amount of revenue within the context of the current tax system. The President's Budget 

proposes a number of steps in line with his tax reform principles, including: 

• Allowing the high-income 2001 and 2003 tax cuts to expire; 

• Setting a maximum 28 percent rate at which upper-income taxpayers could benefit from 

itemized deductions and certain other tax preferences to reduce their tax liability; and 

• Eliminating the carried interest loophole that allows some to pay capital gains tax rates on 

what is essentially compensation for services. 

These steps in the direction of a reformed system would reduce the deficit by about $1.5 trillion 

over the next 10 years and would set in motion the process of broader reform. 

Corporate Tax Reform 

Right now, the United States has one of the highest statutory corporate tax rates in the world, but 

the large number ofloopholes and special interest carve-outs means that effective tax rates vary 

widely by industry, even by company, and allow some corporations to avoid paying income 

taxes almost entirely. Even though our statutory corporate tax rate is among the world's highest, 

the corporate tax revenue we collect, as a percentage ofGDP, is relatively low for advanced 

economies. 

There are too many tax provisions that favor some industries and investments and benefit only 

those who receive them, rather than society as a whole. This creates problems beyond forgone 

revenue: it forces some businesses to carry a larger share of the tax burden than they would 

under a more equitable system, and it also hurts overall economic growth by distorting incentives 

for investment and job creation. 
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Soon, the Administration will release a framework for reforming the corporate tax system. This 

proposal will lower the maximum statutory rate, limit the ability of firms to shift profits to lowtax jurisdictions, eliminate tax expenditures that have no positive spillovers to society as a whole, 

and bring a sense of permanence to various provisions in the corporate income tax code. In 

short, it will help level the playing field for businesses and allow the government to collect 

needed revenue while promoting economic growth. The President's Budget proposals, if 

implemented, would move the existing corporate tax code in the direction of these principles but 

would not eliminate the need for deeper reforms. 

III. Conclusion 

In today's testimony, I have outlined the President's plan for addressing our substantial 

economic challenges through the combination oftargeted investments, spending cuts, and tax 

reform. 

In closing, I waot to emphasize that bolstering economic growth in the long run and controlling 

our deficits both depend a great deal on us taking strong steps to support the economy right now. 

A common mistake in the wake of financial crises is for governments to withdraw support for the 

economy too soon. Though recent economic data has been somewhat promising, we have a long 

way to go to fully recover from the worst shock to our economy since the Great Depression. 

Failure to act in the face of these challenges is one of the biggest threats to our economy ahead in 

2012 and 2013. There are two key areas where Congress can provide immediate, meaningful 

support: 

First, Congress should extend the payroll tax cut and emergency unemployment compensation 

set to expire at the end of this month. These extensions will put more money in the pockets of 

American families at a time when they need it most and will help support the broader economy. 

Private sector economists estimate that if these programs are not extended through the end of 

2012, it will shave about haIfa percentage point from our GDP this year. After a fourth quarter 

of 20 II in which government cutbacks took nearly I percentage point off of GDP growth, we 

cannot afford to further undermine our support for the economy. And the savings to families are 

significant: if extended, the tax cut alone will save $1,000 this year for the typical household 

earning $50,000, while the extension of emergency unemployment insuraoce will prevent 4.5 

million ill claimants who are looking for work from losing benefits, helping them and 8.3 

million people living with them over the next 10 months. 

Second, we must continue to work together to support the housing market, whose weakness is a 

stress on millions of families and a drag on overall growth. To this end, the President recently 

armounced new policies designed to aid the housing market, including broad-based refinancing 

for responsible homeowners that would save the typical family $3,000 a year. We are also 

working with the FHA and FHF A to take a range of steps to improve access to mortgage credit, 

and the FHF A also recently launched a pilot program to convert foreclosed homes into rental 

properties. 
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Finally, Congress should consider the plan set forth by the President, first in the American Jobs 

Act, and now in the Budget, to create jobs and strengthen our economy. The President's Budget 

cuts taxes for American workers. It cuts taxes for small businesses, so they can hire more 

people, and cuts taxes for businesses that add employees. It protects the jobs of teachers, police, 

and firefighters. And it puts construction workers back to work on much-needed projects. There 

are 13 million Americans looking for work. We have an obligation to them. 

Implementation of these short-term steps will help strengthen the economy as we enter the next 

fiscal year. The President's Budget for FY 2013 provides a path forward that will help our 

nation grow now and in the future. These are important proposals. They are balanced proposals. 

And they will help make our economy and our nation stronger. 
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Senator Baucus 

SENATE COMMITTEE ON FINANCE 

"The President's Fiscal Year 2013 Budget Proposal" 

Hearing - February 14,2012 

Witness: Timothy Geithner, Secretary of the Treasury 

OUESTIONS FOR THE RECORD 

1. Last year, I worked with Ways and Means Chairman Camp and the Administration 

to reauthorize Trade Adjustment Assistance (T AA). T AA helps workers, firms, 

ranchers, and farmers by providing the assistance they need to better compete in the 

global economy. I was pleased that both the TAA for Workers and the TAA for 

Firms programs were funded at the authorized level in the President's fiscal year 

2013 budget. However, I was disappointed to see that the TAA for Farmers 

program was not funded. In addition, I was surprised to see a new proposal for a 

Universal Dislocated Worker Program, which is intended to replace TAA for 

Workers<during fIScal year 2014. What is the Universal Dislocated Worker 

Program and what benefits and services will be provided to America's 

workers? Will these services and benefits water down what T AA-eligible workers 

can receive today or will this provide more workers access to T AA-Ievel services and 

benefits, which have helped hundreds of thousands of American, get retrained and 

back into good-paying jobs? And will this be a discretionary or mandatory 

program? 

A streamlined re-employment system for workers who have lost their job through no 

fault of their own, the Universal Displaced Worker (UDW) program would integrate the 

current Trade Adjustment Assistance (T AA) for workers and Workforce Investment Act 

(WIA) Dislocated Worker programs. UDW will provide better assistance to more 

people, regardless of why they became displaced. 

The UDW program would infuse $28 billion over 10 years into the workforce system, on 

top of the funding that would be available for TAA and the WIA Dislocated Worker 

program, to provide displaced workers in America with access to the training and reemployment services they need for success. Beginning in 2014, the new, streamlined 

program would serve as many as 1 million workers per year - more than doubling the 

number served through TAA and the WIA-Dislocated Worker program in the last nonrecessionary year. 

Benefits available to displaced workers through UDW will include: 

• $8,000 over two years for training - significantly more than is available under 

the WIA Dislocated Worker program. 

• Income support of about $150-$300 for up to 78 weeks beyond Unemployment 

Insurance (UI) benefits - income support beyond UI is not available under the 
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WIA Dislocated Worker program, while T AA for Workers offers income support 

within the first 104 weeks of layoff and an additional period of up to 78 weeks to 

complete training. 

• Additional services not currently available to all WIA Dislocated Worker 

participants: 

o Job search and relocation allowances of up to $1,250 per worker. 

o Wage insurance for up to two years for workers over 50 who have reemployment eamings ofless than $50,000. 

o Guaranteed employment and case management services, to direct trainees 

to the most effective and proven training programs. 

Under the Administration's proposal, UDW will be a mandatory program; it will provide 

a universal suite of services to a substantially larger number of unemployed workers. 

The UDW program design is broadly comparable to the well-regarded T AA and WIA 

programs. These programs have been evaluated rigorously over the years. 

• Longer-term technical training programs at community colleges have been found 

to be cost-effective when undertaken by displaced workers who opt in at their 

own initiative. 

Other components of the current TAA program will also be included in the UDW 

program, including income support for those in training (except that UDW will provide 

additional stipends for credit-constrained low-income workers), wage insurance for older 

workers who accept a new job at a lower wage, and access to One-Stop Centers providing 

a range of services for the unemployed and under-employed. 

2. In a period of economic growtb, tax revenues and decreased spending on benefits 

belp replenish tbe State and Federal UI trust funds. In a recession, tbe UI tax 

revenues fall and benefit spending increases, wbich may lead to State UI Trust Fund 

insolvency. Tbe taxable wage base currently being used bas remained at $7,000 since 

1983. In 1983 it represented 40 percent of tbe average annual wage, but today 

represents less than 20 percent of tbe average wage. 16 states index tbeir wage bases, 

but currently 33 state programs bave a tax base between $7,000 and $15,000. Many 

State Unemployment Insurance Trust Funds are insolvent because tbey were not 

adequately prepared for the most recent economic downturn. Wbat ideas does tbe 

President's budget layout for policies tbat could better prepare State Trust Funds 

in tbe future? 

The President's 2013 Budget Proposal would increase the Federal Unemployment Tax 

Act (FUTA) taxable wage base from $7,000 to $15,000 of taxable payroll earnings in 

2015, while decreasing the effective FUTA tax rate from 0.8 percent (after a proposed 

reenactment and extension of the FUTA surtax) to 0.37 percent. In real dollars, a Federal 

UI taxable wage base of$15,000 in 2015 (which would be indexed to wage growth for 

subsequent years) is projected to be slightly less than the $7,000 FUTA tax base 

established by President Reagan in 1983. The proposed reduction in the FUTA tax rate 
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would offset the taxable wage base increase, holding Federal UI tax revenues constant. 

The President also proposes offering UI tax relief to employers in indebted states.' 

These changes, if enacted, would have three important effects. 

I. The UI tax burden would be more equitably distributed. 

• Currently, because the FUTA tax base is capped at a relatively low level, the 

Federal UI tax rate is applied to a relatively large share oflow-wage workers' 

earnings while the share of high-wage workers' earnings subject to the FUTA 

tax is relatively small. 

• By law, no state may have a taxable wage base that falls below the FUTA 

taxable wage base without adversely affecting the availability to many 

employers in the State of credits against FUT A taxes for State UI tax paid by 

the employer. Assuming states with a low tax base did raise their UI taxable 

wage base, the burden of state UI tax rates would be distributed more 

equitably as well. 

• States would be free to offset the tax base increase in whole or in part by 

lowering state tax rates. However, a majority of the states need to increase 

state UI tax revenues in order to restore their own trust fund accounts to a 

positive balance and greater solvency. 

2. By law, most employers in states that chose not to raise their taxable wage base to 

at least equal the Federal level would not be able to take full advantage of the 

FUTA tax credit for the employers' state UI tax payments. 

• Provided that Federal advances (loans) to a state are repaid on a timely basis, 

employers receive the full FUT A credits. 

• When balances in state accounts in the unemployment trust fund (UTF) are 

negative for an extended period, the FUT A credit is reduced, thereby 

increasing employer tax rates. Part of the FUTA credit goes instead toward 

paying down outstanding state unemployment trust fund account loans, 

following formulas established in law. 

3. Importantly, for indebted states, the President's proposal would suspend for two 

years (2012 and 2013) the FUTA credit reductions that would result in employer 

tax rate increases, and would also suspend interest payments on state debt to the 

Federal UI trust fund. 

These are reasonable, sound measures designed to restore balances in state 

accounts in the UTF. Partly because of extremely low state account balances just 

prior to the recession, as of May 2,2012, state trust funds in 25 states had 

outstanding loan balances from the Federal UI trust fund totaling almost $36 

billion. The President's Budget includes the following projections from the 

Department of Labor: 

• Revenues and interest income for state UI trust fund accounts are projected to 

exceed outlays in FY2012jor thejirst time since 2007. 

'Fiscal Year 2013 Budget of the u.s. Government, p.146. 
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• State trust fund account balances, net of loans, are projected to increase by 

$2.9 billion in FY2012 and $4.7 billion in FY2013. Net balances are not 

projected to become positive again until FY2016. 

States have been understandably reluctant to raise UI tax rates until recovery is 

firmly established. Now that confidence is returning, the President's Budget 

proposes appropriate measures to help put state trust fund balances on a firm 

footing. The UI system is widely recognized to be an important macroeconomic 

stabilizer. A strong Ulprogram is in the best interests of the country. The 

President's Budget proposes much-needed changes that will strengthen this 

system. 

Senator Bingaman 

1. Under current law, the Treasury Secretary is empowered to make a systemic risk 

determination, which then allows certain additional actions to be taken, such as the 

orderly liquidation of a failing financial institution. The law authorizes the Federal 

Reserve and FDIC to recommend to the Secretary that he make such a 

determination. If the Secretary makes a systemic risk determination, the law 

requires him to document his decision, and a GAO review of the determination is 

automatically triggered. (See 12 U.S.C. 5383(c)(I) and 12 U.S.C. 1823(c)(4)(G)(iii); 

see also 12 USC 5611(c)(1).) 

But if the Secretary declines to make a systemic risk determination, there is no 

documentation requirement and no GAO review is triggered. A 2010 GAO report 

noted that on two occasions in 2009, the Federal Reserve and the FDIC 

recommended the Treasury Secretary make a systemic risk determination, but the 

Secretary did not do so (GAO-tO-l00). GAO wrote, "When a determination is not 

made ••• Congress cannot be assured that Treasury's reasoning would be open to 

the same scrutiny required in connection with a formal systemic risk determination 

because Treasury does not have to act upon the [law's] documentation and 

accountability measures." 

I am concerned that there is no documentation requirement if the Secretary declines 

to make a systemic risk determination after receiving a recommendation from tbe 

Federal Reserve and FDIC. An event tbat creates systemic risk is by definition a 

serious matter for the economy. If the Treasury Secretary disagrees with the Board 

of Governors of the Federal Reserve about something this significant, it would seem 

sensible to require the Treasury Secretary to document why he disagrees, and to 

require GAO to review the decision. 

Do you agree that the Treasury Secretary should document those instances when he 

declines to make a systemic risk determination after receiving a recommendation 

from the Federal Reserve and FDIC that be make such a determination? Do you 
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agree that GAO should review those instances and have access to those documents? 

I would be interested in hearing your thoughts about this matter. 

The Treasury Department is committed to principles of transparency and accountability. 

Accordingly, the Treasury Department, in the nonnal course of business, would 

document any decision made by the Treasury Secretary to make a systemic risk 

detennination (or other similar detennination) after receiving relevant recommendations 

from the Federal Reserve Board and the FDIC. These documents were provided to GAO 

for its 2010 report. 

It is important to note that any statutorily required GAO review and report may be more 

infonnative when the Treasury Secretary makes a systemic risk detennination than when 

the Secretary declines to do so. Documentation of an affinnative detennination would 

provide substantial infonnation supporting a decision to resolve a financial finn under the 

orderly liquidation authority of Title II ofthe Wall Street Refonn Act, consenting to the 

creation of a debt guarantee program under section 1105 of the Wall Street Refonn Act, 

or making a systemic risk detennination under section 13(c)(4)(G) of the Federal Deposit 

Insurance Act. Nevertheless, we would anticipate that any final documents regarding a 

decision by the Treasury Secretary not to make a systemic risk detennination would be 

made available to GAO at the appropriate time and in connection with a GAO review. 

Senator Thune 

1. Mr. Secretary, there are reports that the Treasury Department is considering 

allowing Argentina to restructure its official debt through the Paris Club. As you 

know, the portion of this debt owed to the US government, approximately $300 

million, is relatively small compared to the over $3.5 billion Argentina owes private 

US creditors. ludeed, studies have shown that if Argentina were to pay what it owes 

private Americans, the US Treasury would receive far more revenue from the taxes 

on those payments than it would from settling the government-ta-government debt. 

Given these facts, can you provide assurance that the Treasury Department will 

withhold approval of a Paris Club deal for Argentina until Argentina has satisfied 

all awards under the US-Argentine bilateral investment treaty and the outstanding 

US court judgments against it? Additionally, there are reports that Treasury 

appears willing to break with longstanding Paris Club practice to allow a 

restructnring without requiring a separate monitoring agreement with the 

IMF. Can you provide assurance that this is not the case and that Argentina will be 

held to the same standard as other nations that have restructured their debt? 

Argentina's arrears to U.S. government agencies total about $550 million, and U.S. 

government efforts, including in the Paris Club, are appropriately focused on recovering 

full payment on these loans extended on behalf of American taxpayers. Imposing 

additional conditions that are unrelated to the government's claims could undennine the 

government's recoveries, which would not be in the taxpayers' interest. Any arrangement 
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we conclude will be in accordance with Paris Club principles and in the direct interest of 

U.S. taxpayers. 

We are not aware of any studies that show that more than the $550 million Argentina 

owes the U.s. government would be collected in taxes were Argentina to pay other 

creditors. In any case, Administration efforts to recover on loans extended on behalf of 

our taxpayers in no way diminishes our urging of Argentina to resolve the claims of 

private American investors. 

2. In your testimony, you argued that the President's FY13 budget is more aggressive 

on entitlement reform in the next ten years than Representative Paul Ryan's budget 

is in the next ten years. As you may know, the Ryan budget focused on ensuring 

that individuals closest to retirement would not be affected. Do you have an 

estimate of how your budget curbs growth in entitlements in the second ten years 

compared to a similar time-window in the Ryan budget? 

The Administration displays projections of the budgetary effects of Social Security, 

Medicare, and Medicaid over the next 75 years in Table 5-1 of the FY 2013 Analytical 

Perspectives Long Term Budget Outlook chapter. These long-tum projections come 

from a model that is separate from the one used to produce detailed programmatic 

estimates and results are not shown as effects relative to the baseline. For this reason, 

and because of different underlying economic assumptions, the published projections of 

entitlement programs in the President's Budget cannot be directly compared to those 

produced for Representative Ryan's plan. 

Senator Carner 

1. Many of our energy tax incentives that need to be extended every year, or every 

other year, are heavily focused on renewable energy. For example, the investment 

tax credit (ITC) that is in place now for wind is crucial for a fledgling offshore wind 

industry. The ITC expires at the end of this year - well before any offshore wind 

project can start construction in this country. Without an ITC offshore wind 

extension, we may not see any offshore wind projects developed in this country for 

the foreseeable future. 

However, our permanent energy tax incentives seem to be more focused on fossil 

fuel incentives. For example, we have several permanent tax incentives for drilling 

for oil- at a time when oil companies are seeing record profits and increased 

global demand for oil production. 

Should we prioritize our energy tax incentives to focus on start-up industriessuch as offshore wind - that need the greatest investment assistance in the shortterm, but will give our country energy security in the long-term? Should we 

consider removing some of our permanent tax credits and make some of our 
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renewable tax credits (like what Senator Snowe and I are trying to do for offshore 

wind) for a longer time? 

The Administration shares your concerns regarding fossil fuel subsidies and the need for 

permanent incentives for renewable energy. The President's FY 2013 budget proposes to 

eliminate tax subsidies for fossil fuel production which would raise about $41 billion 

over the next ten years. In addition, the President's Framework for Business Tax Reform 

proposes to make the tax credit for the production of renewable electricity permanent and 

to make it refundable so it can benefit all businesses that qualify. This will provide a 

strong, consistent incentive to encourage all investments in renewable energy 

technologies like wind and solar. 

2. Senator Olympia Snowe and I introduced the Incentivizing Offshore Wind Power 

Act (S.1397) last year, which extends investment tax credits for the first 3,000 MW 

of offshore wind facilities placed into service. We have been told by numerous 

stakeholders that offshore wind investment tax credits are vital for this new clean 

energy technology because there is a much longer lead time for the permitting and 

construction of offshore wind turbines, compared to onshore wind energy. 

Evidently, traditional wind production tax credits will not help the offshore wind 

industry because of the long-term investment time. Nor will a short-term extension 

of the investment tax credit, as is in the President's budget, because no project in 

this country will be completed by 2014. I request technical assistance from your 

staff to review S.1397 and provide any comments on how to improve the legislation 

or how best incentivize this brand new industry. 

Although the credit proposed in S. 1397 is not part of the President's budget proposals, 

the staff of the Office of Tax Policy would be happy to provide technical assistance in the 

development of your tax legislation. Please have your staff contact Sandra Salstrom in 

our Office of Legislative Affairs at 202-622-1900 determine how that assistance can be 

provided. 

3, The U.S. has been a global leader in clean energy technology 

innovation. Unfortunately, our innovations are being mass-produced somewhere 

else besides this country. We design it and China builds it costing us jobs and 

billions in trade deficits. According to a recent Economic Policy Institute study, we 

import 10 clean energy technology products from China for every one product we 

export to China. 

In the President's budget, there is a $5 billion extension of a tax credit for qualified 

manufactures that wanted to refurbish, expand, or establish a facility that makes 

clean energy technology - commonly known as the 48C tax credit. This seems to me 

a smart way to continue to grow our clean energy manufacturing base so we can 

compete in the global clean energy market - would you agree? What else can we do 

to expand our clean energy manufacturing? 
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We agree that the section 48C program should be renewed and expanded. The $2.3 

billion cap on the credit resulted in the funding of less than one-third of the technically 

acceptable applications that were received. Rather than turning down worthy projects 

that could be deployed quickly to create jobs and support economic activity, the program 

- which has proven successful in leveraging private investment in building and equipping 

factories that manufacture clean energy products in America - should be expanded. An 

additional $5 billion in credits would support nearly $17 billion in total capital 

investment, creating tens of thousands of new construction and manufacturing jobs. 

Because there is already an existing pipeline of potentially eligible projects and 

substantial interest in this area, the additional credit can be deployed quickly to create 

jobs and support economic activity. 

The President's FY 2013 Budget includes a number of other tax proposals to expand our 

clean energy manufacturing sector. These include a proposal to approximately double 

the domestic activities production deduction for manufacturers of advanced energy 

property and a proposal to enhance and make permanent the research and 

experimentation credit. The President has also proposed to provide $2.2 billion in 

funding for advanced manufacturing research and development at the National Science 

Foundation, the Department of Defense, the Department of Energy, the Department of 

Commerce, and other Federal agencies. 

4. I strongly believe that our country needs to move off of foreign oil, and continue to 

grow our domestic sources of fuel. I have especially been interested in advanced 

biofuels fuels that could be "dropped-in" our current infrastructure - such as 

biodiesel and biobutonal. And very interested in advanced biofuels that are made 

from renewable sources other than the food we feed ourselves or our livestocksuch as cellulosic and algae. 

Over the past few years, the federal government has taken some encouraging steps 

to incentivize these types of fuels. However, I also understand the current incentives 

to encourage the growth of these types of advanced biofuels has not been enough. 

How should we structure our tax incentives so that they maximally encourage 

growth in the advanced biofuels industry? How could we better encourage drop-in 

renewable fuels like biobutonal, biodiesel and advanced fuels like algae and 

cellulosic? 

The President's FY 2013 budget proposes an extension of the existing tax credits for 

biodiesel, but the Administration also recognizes the importance oftaking promising 

cellulosic and advanced biofuels technologies to scale. To help advance the 

commercialization process, the Administration has set a goal of breaking ground on at 

least four commercial-scale cellulosic or advanced biorefineries before the end of2013. 

We have already met this goal, one year early. In addition, the President has challenged 

the Secretaries of Agriculture, Energy, and the Navy to investigate how they can work 

together to speed the development of drop-in biofuels. Competitively priced drop-in 
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biofuels could help meet the fuel needs of the Navy, as well as the commercial aviation 

and shipping sectors. 

Senator Enzi 

1. The FY 2013 budget includes a variety of proposals to eliminate any tax preferences 

for the oil, gas, and coal industries. Repealing those tax preferences will cost jobs in 

states like Wyoming where American energy is produced. Further, increasing taxes 

on those industries will lead to higher prices for consumers on their electricity bills 

and at the pump. With a weak economy and rising oil prices, does it really make 

sense to propose a tax increase that will make energy more expensive for all 

Americans? 

The fossil fuel tax preferences the Administration proposes to repeal distort markets by 

encouraging inefficient investment. To the extent these subsidies crowd out investments 

in other energy sources, they are detrimental to long-term energy security and are also 

inconsistent with the Administration's policy of reducing greenhouse gas emissions and 

encouraging the use of renewable energy sources. And since these subsidies promote 

inefficient investment, they result in underinvestment in other, potentially more 

productive, areas of the economy. 

When considering the elimination of these subsidies the Administration carefully 

considered the impact that these subsidies would have on the overall economy. Our 

analysis indicates that changes in domestic fossil fuel production costs resulting from loss 

of these subsidies would have little effect on U.S. fuel prices. Regarding oil, the 

domestic price of oil is determined by global supply and demand because oil is an 

internationally traded commodity. The U.S. contribution to world oil supply is relatively 

small and thus any changes likely will not significantly change the world oil price, and 

U.S. consumers would see little impact from the removal of oil tax preferences. The 

subsidies for the coal and natural gas industries amount about one percent of average total 

revenues in these industries. As a result, the final market impact on consumption and 

production is likely to be very small. 

2. This is the 4th budget in which you proposed repealing incentives from the oil, 

natural gas, and coal industries. Since Congress has not enacted this same proposal 

in any other year, isn't it disingenuous to continue claiming the savings from the 

repeal ofthese incentives? 

For the reasons set forth above, we continue to believe that the repeal of these subsidies is 

the correct policy approach. 

3. Does the FY 2013 budget proposed by President Obama spend more money in 

actual dollars in 2022 versus 2013 or does it anticipate real spending cuts? 
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As a share ofGDP, outlays are expected to decline from 23.3 percent in 2013 to 22.8 

percent in 2022. To accomplish this, the President's FY2013 budget proposes significant 

spending cuts across the Budget in both discretionary and mandatory programs. 

The Administration's Budget proposals bring discretionary spending as a share ofthe 

economy down from 8.7 percent in FY2011 to 5.0 percent in FY2022, the lowest level in 

more than 50 years. In inflation-adjusted and population-adjusted terms, this represents a 

drop from $1.3 trillion in 2013 to just under $0.98 trillion in 2022. The Budget Control 

Act, which the President signed into law in August 2011, placed caps on discretionary 

spending that achieves nearly $1 trillion in deficit reduction over the next 10 years. In 

order to meet these spending caps, the Administration combed through the Budget to 

identifY programs that were ineffective, duplicative outdated, or of lower priority and 

needed to be cut or consolidated. 

The Administration recognizes that savings in mandatory spending programs are also 

necessary to achieve fiscal sustainability in the long term. The Budget proposes $278 

billion in savings over the next 10 years in mandatory programs outside of health care. 

Additionally, the Budget puts forth $360 billion in savings to Medicare, Medicaid, and 

other health programs over the next decade to make these programs more effective and 

efficient. 

4. Currently, the Pension Benefit Guaranty Corporation (PBGC) has a number of 

trust funds under the Corporation's administration. The two largest are the Trust 

Fund for Single Employer Plans (Single Fund) which receives assets from plans 

taken over by the PBGC and the Revolving Trust Fund (Revolving Fund) which 

receives premium monies from companies and which sends out benefit payments to 

beneficiaries. These trusts were created when the PBGC was a much different 

agency and had much less capital to invest and fewer benefits to payout to 

beneficiaries. Accordingly, the Revolving Fund is backed by the Department of 

Treasury's General Fund to hclp facilitate the smooth receipt of premiums and the 

smooth delivery of benefits as well as to help cover any shortfall in the Revolving 

Trust assets to pay benefits. As a result, the PBGC's Revolving Trust is scored on 

the Federal Government's balance sheet. In addition, any increase in premiums 

paid by companies to the PBGC end up as being as scored as a "savings" to the 

balance sheet even though these monies are intended to pay for PBGC costs and to 

reduce its deficit. 

Now that the PBGC is nearly a $100 billion financial institution, should the Trust 

Fund structure be changed so that the Department of Treasury's General Fund is 

no longer the backup for the PBGC's Revolving Trust? 

PBGC is a government corporation created by the Employee Retirement Income Security 

Act ("ERISA"). ERISA specifies that the U.S. Government does not stand behind the 

obligations ofPBGC. 
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• There is no specific Treasury backup provision, general fund or otherwise, for the 

revolving funds or PBGC. 

• Under section 4005(c) of ERISA, PBGC is authorized to issue notes or debt 

instruments to the Secretary of the Treasury not to exceed in aggregate $100 

million. 

For the past ten years PBGC has had no capital; in fact, it has more annuity liabilities 

than assets. PBGC single-employer and multiemployer insurance programs had a 

combined negative net position "deficit" of $26 billion, as of September 30, 2011. 

PBGC's investment assets consist of premium revenues, which are accounted for in the. 

revolving funds and assets from trusteed plans and their sponsors, which are accounted 

for in the trust fund. 

PBOC Investments (includes cash & investment income receivables) 

(Dollars in Millions) As ofSeptermber 30, 2011 

Single-Employer Multemployer 

Program Program Total 

Revolving funds (premiums) $17,278 $1,732 $19,010 

Trust fund (trusteed plans) 54,480 not applicable 54,480 

Total $71,758 $1,732 $73,490 

Since 1981, the PBGC revolving funds have been "on-budget" (i.e., premium receipts 

into the revolving fund and disbursements for pension benefits out of the revolving funds 

are included in the federal budget as Federal revenue and Federal expenditures, 

respectively). Cash and other investments that PBGC obtains when failed DB plans are 

trusteed to PBOC are not scored as Federal Revenue because they are considered nonappropriated funds. Accordingly, disbursements for pension benefits out of the trust fund 

are not treated as Federal expenditures. 

Premiums are collected by the government, for a government purpose, investments in the 

revolving funds are restricted to Treasury securities. 

PBOC currently faces a significant negative net position "deficit" in its combined singleemployer and multi employer programs, with the expectation that its current assets will 

not cover expected future liabilities. The PBGC Board recognizes that the deficit of the 

PBOC cannot be addressed primarily through the investment policy. 

In its FY 2012 and FY 2013 budget proposals, the Administration proposed a way to set 

premiums that would improve PBGC's ability to meet current and future commitments to 

retirees while at the same time encourage the preservation of better funded defined 

benefit pension plans. Without such action, the PBGC's deficit will increase and we may 

face, for the first time, the need for taxpayer funds. To avoid this outcome and to 

strengthen retirement security for American workers, we strongly encourage Congress to 

support this proposal 
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5. Should increases in PBGC's preminms intended to pay down PBGC's deficit be 

sequestered in Federal Government's balance sheet so that these "savings" cannot 

be used for other purposes? 

The Administration proposes that the increases in PBOC premiums reduce the deficit and 

not be used for other purposes. As noted earlier, the increase would increase the PBOC's 

capacity to meet its commitments without taxpayer funds. 

6. What changes can the Department of Treasury make to ensure that increased 

PBGC premiums be used solely to pay down PBGC's deficit or to administer 

benefits? 

The Administration's PBOC premium proposal would reduce the PBOC deficit. The 

Secretaries of Labor (Chair), Commerce, and Treasury make up the PBOC Board of 

Directors (Board). The Board is responsible for establishing and overseeing the policies 

ofPBOC. The statutory role of the PBOC Director is to manage and administer PBOC 

subject to policy established by the Board. The Board supports PBOC's commitments to 

preserve plans and protect pensioners, pay pension benefits on time and accurately to 

retirees and beneficiaries, and maintain high standards of stewardship and accountability. 

To ensure this, it is essential that PBOC does its work professionally. The Board is 

committed to improving PBOC management. 

The actual reduction of the PBOC deficit is independent of how premiums are scored for 

budget purposes. The failure ofPBOC to satisfy its statutory obligations would expose 

$2 trillion in retirement benefits owed to 44 million workers and retirees to the risk of 

loss. The PBOC Board and PBOC look forward to working with Congress to strengthen 

the PBOC and preserve the defined benefit pension system on which so many Americans 

depend. 

7. In September of 2011, the Internal Revenue Service (IRS) announced a New 

Voluntary Worker Classification Settlement Program intended to allow companies 

and small businesses to reclassify independent contractors as workers without 

incurring penalties and fees. 

How many businesses have gone through this settlement program? 

As of February 29, 2012, the IRS had received 395 applications: 159 had been completed 

(closing agreement executed and payment received), III were in the process of being 

completed (closing agreement out for signature), 112 were being processed, and 13 had 

been rejected or withdrawn. (The majority, ifnot all, of those rejected were due to the 

taxpayer requesting to reclassify for prior periods while the settlement program is 

prospective only.) 
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8. What information is disclosed to businesses prior to the settlement programs? 

The Voluntary Worker Classification Program (VCSP) is voluntary, so businesses must 

opt to come in under the program. Businesses can learn more about VCSP in 

Announcement 2011-64, which provides information about the program, and by going to 

IRS.gov, which contains further information including Form 8952, Application for 

Voluntary Classification Settlement Program (which tracks the VCSP closing agreement) 

and its instructions, FAQs, and a news release. 

9. Does the IRS provide information on the ramifications of reclassification of 

independent contractor statns with respect to state tax and labor laws, federal labor 

laws and/or employee retirement/health laws? 

Under the VCSP, tbe IRS does not comment on or make determinations about past 

periods or about other laws or issues that are outside its employment tax jurisdiction. The 

VCSP deals only with Federal employment taxes and is prospective only. The IRS does 

not share VCSP information with the states or the Department of Labor, and there are no 

referrals or other coordination witb employee benefits issues. Under the VCSP, no 

determination or representations are made witb respect to past periods, and coming in 

under the VCSP is not an admission of wrongdoing or misclassification for past periods. 

Under the VCSP, a taxpayer will not be audited for employment tax purposes for prior 

years with respect to tbe classification of workers. If a taxpayer's application for the 

VCSP is rejected, it will not automatically trigger initiation of an audit for prior periods; 

the taxpayer could be audited for another reason, but not as a result of applying to the 

VCSP. 

10. If a company completes the settlement program, will the company be responsible for 

back pay, overtime, and/or retirement benefits for the time the new employee 

previously spent as an independent contractor for the company? 

As noted in response to Question 9 above, there is no direct relationship between VCSP 

and whether a company will be responsible for back pay, overtime, and/or retirement 

benefits. Under the VCSP no determination or representations are made with respect to 

past periods, and corning in under the VCSP is not an admission of wrongdoing or 

misclassification for past periods. 

11. If a company completes the settlement program, is the company protected from civil 

litigation or criminal prosecution for any labor laws or employee benefit laws for 

the time the new employee previously spent as an independent contractor for the 

company? 
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Under the VCSP no determination or representations are made with respect to past 

periods, and coming in under the VCSP is not an admission of wrongdoing or 

misclassification for past periods. The VCSP deals only with Federal employment taxes 

and is prospective only. While the IRS will not disclose information to the states or the 

Department of Labor , the legal exposure, if any, that a company may have under other 

laws is not covered by the VCSP. 

12. The President's budget proposes to scale back the exclusion for deductions 

including monies placed into a 401(k) account to 28 percent. However, an 

individual who places money into a 401(k) account would be subject to immediate 

taxation for the monies above the 28 percent level. Then when the individual makes 

a distribution after age 70.5 all monies distribnted are subject to pay tax. 

Therefore, the individual would be subject to paying taxes twice for the same monies 

- the first time for the amounts over the 28 percent limit and the second time for the 

retirement distribution. 

Is it the Administration's intent to have this double taxation go into effect? 

Under the proposal, the value of deductions and exclusions of the amounts that highincome individuals elect to contribute to retirement plans would, like most other 

deductions and exclusions, be limited. The deduction or exclusion at a 28-percent rate 

that would be allowed at the time of the contribution in combination with the deferral of 

tax on earnings, however, remains valuable to high-income taxpayers, even with no 

explicit adjustment for the limitation in determining the amount oftax due on 

distributions. For the small group of taxpayers who are affected at all by the limit, the 

proposed limitation generally would reduce, but not eliminate, the tax benefits received 

for these elective retirement savings. However, I understand your concern, and the 

Administration would welcome the opportunity to work with you to specify the details of 

how a limitation on this exclusion for high-income taxpayers should be structured. 

13. Has the Administration's budget score for this provision include the double taxation 

ofthese retirement monies? 

Our estimate does not assume any adjustment to basis to account for the limitation in 

determining the tax liability on distributions from retirement accounts funded in part by 

elective contributions by high-income taxpayers. 

14. What would be the score without the double taxation? 

We have not estimated the cost of providing an adjustment to basis to account for the 

limitation on the tax value of elective contributions in determining the tax liability on 

distributions from these accounts. 
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From: Senator Hatch 

1. According to a recent study, if Congress doesn't act, the integrated tax rate on 

dividends would rise to 68.6 percent and the rate on capital gains would rise to 56.7 

percent. The result would be that the dividend rate would be the highest among 

major economies and the capital gains rate would be the second highest. 

With the scheduled increases in taxes on capital income, with the U.S. headed 

toward some of the highest taxes on such income in the developed world, and with 

the Congressional Budget Office telling us that such taxes will prove to be a 

significant drag on growth, could you explain whether you believe that those high 

tax rates are good for the economy and our international competitiveness? 

Could you also explain how the President's budget proposal, which would also 

significantly increase tax rates on capital income, is consistent with his objective of 

not returning the economy to one overly-financed with debt, as his tax hikes on 

capital would exacerbate distortions in the tax code that favor debt financing over 

equity financing? 

The revenue proposals put forth by the Administration fund necessary investments in our 

economy and help put our fiscal situation onto a sustainable path. The benefits from 

these actions outweigh any modest incentive effects from reducing the preferential tax 

rates on capital gains and dividend income for higher income households. Similar 

individual tax rates on capital income were in place for much of the 1990s, a time of 

strong and balanced economic growth. It is also important to note that for the purpose of 

making international comparisons of investment incentives, it is the corporate tax rate 

(and other provisions in the corporate tax system that are most relevant because they 

affect a corporation's investment decisions (e.g., the allocation of investment across 

borders) and its financing decisions. The importance of investor-level taxes is less clear, 

because the investor may be tax exempt (such as a college endowment fund) or a 

foreigner subject to source-base taxation. 

That being said, these particular revenue proposals do not reduce the bias towards debt 

financing in the tax code. The Administration believes it is better to handle this issue in 

the context of overall reform of the tax system. As discussed in the recently released 

"Framework for Business Tax Reform," the Administration supports reform of the 

corporate t-ax system that would broaden the base and lower the statutory rate, which 

would directly reduce the bias towards debt financing. In addition, further steps could be 

taken, such as potentially placing limits on the full deductibility of interest for 

corporations. We look forward to working with you and your colleagues in Congress to 

reform our tax system in a manner that raises revenues in a fair manner and in a way that 

reduces the economic distortions caused by our current tax system. 

2. Housing and mortgage markets remain broken, after a full three years during 

which the administration had opportunities to act. Treasury and other agencies 
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have instituted several housing relief programs, including HAMP; HAMP 2; HAMP 

2.5; PRA; 2MP; HARP; UP; HAFA; and more. 

Most ofthose programs have been widely seen as ineffective. And the Special 

Inspector General for TARP (SIGTAPR) has told Treasury several times that 

Treasury has not seemed to be trying very hard to achieve permanent mortgage 

modifications, and you often didn't even set targets to hit. It appears that you have 

had funds available for years to provide mortgage relief, but have not put the funds 

to use. One target that you did set was that HAMP would have led to up to four 

million mortgage modifications, but to date you are more than 75% below that 

target. 

After three years of reportedly not trying very hard to help struggling homeowners, 

now, at the beginning of an election year, the administration is making fresh claims 

that it is serious about mortgage relief. New possibilities are being raised of 

thousands of dollars of mortgage relief for homeowners with FICO scores as low as 

580 and loan-ta-value ratios of up to 140%. The administration's recent proposals 

for additional mortgage relief would push even more risk into FHA, which already 

stands a high chance of needing a bailout iu the near future (even if you account for 

any possible funds streaming into FHA from the recent "settlement" between major 

financial firms and State Attorneys General). 

Please identity all ofthe existing federal mortgage relief programs, how long each 

has been in place, how much is already available in funding for each program, and 

what the results have been relative to targets, if any, which were set? 

Please explain how existing mortgage relief programs at Treasury and those 

proposed by the President on page 21 of "Fiscal Year 2013: Budget of the U.S. 

Government" have or will identity and exclude outright speculators in housing to 

ensure that innocent taxpayers who played by all the rules and borrowed prndently 

are not bailing out those who borrowed irresponsibly to buy more house than they 

could afford absent upside realizations on their speculation the house price 

increases would persist? 

Please explain why fully three years into an administration which recently adopted a 

"We Can't Wait" slogan there have been three years during which, according to 

SIGTARP reports, administration officials have waited and have not devoted 

adequate attention to using available resources to attain permanent mortgage 

modifications and to setting goals. 

When the Obama Administration took office in January 2009, millions of 

American families could not make their monthly mortgage payments - having lost jobs 

or income - and were unable to sell, refinance, or find meaningful modification 

assistance due to a housing crisis that had been building for nearly a decade. The 

Administration took immediate steps to help responsible homeowners and began to 
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establish a broad set of programs designed to stabilize the housing market and keep 

millions of Americans in their homes, including: 

• Treasury's Mortgage-Backed Securities Purchase Program, initiated in 2008, 

which along with mortgage-backed securities purchases by the Federal Reserve, 

has helped to keep mortgage interest rates at historic lows and helped over 12 

million homeowners to refinance since April 2009. This program was unwound 

with the sale of these securities over the year ending March 2012, resulting in 

total cash returns to the taxpayer of$25 billion more than the initial investment; 

• The extension of the Homebuyer Tax Credit Program in November 2009 - a 

program originally created when Congress passed Housing Economic Recovery 

Act in 2008 that President Obama also expanded to assist homeowners who 

sought relocation after having been in their first homes for at least five years -

helped over 2 million homeowners purchase homes, bolstering macroeconomic 

demand; 

• The Home Affordable Refinance Program (HARP), initiated in March 2009, 

which helps underwater homeowners in Fannie Mae or Freddie Mac loans to take 

advantage of lower interest rates by refinancing into a more affordable mortgage -

to date, more than 1 million borrowers have refinanced through HARP and in 

December 2011, recent changes were announced that will allow for many 

thousands of additional families to begin the process of refinancing; 

• The Making Home Affordable (MHA) program, initiated in March 2009, which 

includes the Home Affordable Modification Program (HAMP) for first lien 

modifications and provides eligible, responsible borrowers with mortgage 

assistance and other alternatives to foreclosure - to date, over one million 

homeowners have been assisted by HAMP and the broader suite of related MHA 

programs; and 

• HUD's Loss Mitigation Program - which includes FHA's Loss Mitigation 

Interventions -- that have led to more than 1.3 million FHA loss mitigation 

interventions since April 2009. 

Before Treasury launched MHA, the mortgage industry was ilJ-equipped to respond to 

the foreclosure crisis. Their operations were focused on collecting payments on 

performing loans, and they did not have the systems, procedures or people to modify 

mortgages or otherwise help large numbers of delinquent borrowers. Borrowers had little 

meaningful assistance available and in fact before HAMP, borrowers who received 

private modifications saw a reduction in their monthly mortgage payment only 36 percent 

of the time. 

HAMP set a new standard for homeowners struggling with underwater mortgage 

payments, and required servicers to establish modification programs at a time when little 

meaningful assistance was available. By contrast to private modifications, almost 100 

percent ofHAMP loan modifications have led to payment reductions and have helped 

increase the proportion of private modifications that reduce monthly payments to 83 

percent. In addition to the more than 1.1 million families helped by HAMP modifications 

and other MHA assistance, the standards set by HAMP as to how to achieve sustainable 

modifications, as well as standards for consumer protection, have transformed the 
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industry and helped to cause an additional 4.1 million modifications that have occurred 

since the program was launched. As a result, there have been more than twice as many 

public and proprietary modifications performed as there have been foreclosures 

completed. 

Treasury developed standards for HAMP to ensure that responsible homeowners who 

meet the eligibility criteria are properly evaluated and offered meaningful modifications, 

or where appropriate, other alternatives to foreclosure. Treasury required servicers to 

increase staffing and to improve customer service through its extensive compliance 

program. Treasury developed a defined process for escalating homeowner complaints to 

be resolved promptly and fairly. And Treasury provided the most detailed public 

reporting on what mortgage servicers are performing, including through its quarterly 

Servicer Assessments for the largest servicers participating in MHA .. 

HAMP was designed as a "pay for success" program. Funds are only expended if 

homeowners receive permanent modifications and only ifthey continue to make their 

payments. Treasury developed prudent criteria and strong compliance measures to ensure 

that taxpayer funds are used wisely. 

Treasury has given careful consideration to all of the recommendations from its oversight 

bodies, such as the Special Inspector General for the Troubled Asset Relief 

Program (SIGTARP), of Treasury's various housing programs. We have implemented 

most of the recommendations made by the oversight bodies regarding our housing 

programs. 

Over the course of the mortgage crisis, Treasury has complemented HAMP with 

additional programs under MHA to meet the changing economic landscape, including the 

Second Lien Modification Program, which provides matching second lien modifications 

on eligible loans where the first lien was modified under HAMP; the Home Affordable 

Foreclosure Alternatives Program, which supports short sales and deeds-in-Iieu of 

foreclosures; and the Unemployment Program, which provides up to 12 months of 

forbearance for unemployed homeowners otherwise eligible for HAMP. 

Treasury further enhanced HAMP with the Principal Reduction Alternative Program, 

which provides incentives to participating servicers and investors to reduce the principal 

for underwater borrowers who have a hardship. Treasury also agreed to support the 

Federal Housing Administration'S (FHA) Short Refinance Program, designed to help 

underwater homeowners refinance into a FHA loan and reduce their negative equity. 

Treasury recently announced further changes to MHA, expanding the reach of the 

program and providing modifications for rental properties and homeowners with reduced 

incomes or higher levels of secondary debt. Expanding the reach of MHA to prevent 

avoidable foreclosure of both owner-occupied and rental properties supports Treasury's 

initial goal of stabilizing the housing market. Foreclosures - regardless of property 

ownership - have a negative impact on neighborhoods and communities. 
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Vacant properties cause home prices and property tax revenues to decline at the same 

time that law enforcement, fire protection and neighborhood stabilization costs to local 

governments increase. Additionally, single family homes are an important source of 

affordable rental housing and foreclosure of investor-owned homes disproportionately 

hurts low-and moderate-income renters. 

To continue providing protection against the potential misuse of taxpayer resources in 

light of this recent expansion, Treasury has limited the pool of additional eligible 

borrowers in a manner that excludes corporate investors or persons that own more than 

five properties. Treasury has also instituted a requirement that participating borrowers 

make three trial period payments before the modification becomes permanent to 

demonstrate that the borrower is committed to sustaining the modified mortgage. 

In addition, in 20 I 0, Treasury launched the Housing Finance Agency Innovation Fund for 

the Hardest Hit Markets (HHF), in February 2010, for state housing finance agencies in 

the nation's hardest hit markets to design innovative, locally targeted foreclosure 

prevention programs tailored to their local needs. States are experimenting with a number 

of different programs to help homeowners, including principal reduction, reinstatement, 

short sale/transition assistance, modification assistance, loan purchase and mortgage 

payment programs. Approximately 70 percent of total program funds are being targeted 

to help unemployed borrowers, primarily through reinstatement and programs that help 

homeowners pay their mortgage while looking for work. 

The total number of homeowners that will be helped by all these programs is difficult to 

predict but we continue to see a need for assistance through the steady pace of permanent 

modifications, unemployment forbearance plans, refinances and short sale agreements 

every month. 

In total, Treasury has allocated $29.9 billion to provide relief through MHA; $7.6 billion 

to the HHF; and $8.1 billion to the FHA's Short Refinance Program. As of January 2012, 

Treasury has set aside approximately $8.7 billion out of the $29.9 billion in MHA 

available funds for non-GSE modifications already executed, of which approximately 

$2.7 billion has been paid. The pay-for-success model of HAMP requires Treasury to set 

aside all future potential incentive payments assuming that every borrower is current for 

the life of their modification. 

The amount of funds ultimately spent depends on the number of homeowners that receive 

assistance. Therefore, keeping funds available through the end of the program will allow 

more homeowners to be assisted. While these programs have been vital to the recovery of 

our economy, the Administration believes that continued relief is needed and we 

welcome any suggestions Congress may have to improve or expand the reach of our 

mortgage assistance efforts. 

3. The Disability Insurance Trust Fund, one of the funds in the Social Security System, 

is projected to go bankrupt in 2016. The President's budget proposes around $1 

billion of additional so-called "program integrity" funds for the Disability Insurance 
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program, but does not propose reforms that would ensure that disabled Americans 

won't face a bankrupt program in just a few years. More broadly, we know that 

many of our entitlement programs, including Social Security generally, are 

actuarially unsound and will go bankrupt without reform. 

We also know that it is always best to reform unsustainable entitlement promises as 

soon as possible, to give those affected adequate time to adjust in terms of their 

lifetime savings and consumption patterns. 

Why are there no proposed fundamental reforms to entitlements in the budget, 

including reforms to the Disability Insurance program and the Old Age and 

Survivors Insurance program and the Medicare Hospital Insurance Program, when 

we know that Trust Funds backing entitlement promises will go broke starting as 

early as 2016? To be clear, I do not view the President's Budget proposals to achieve 

$360 billion of savings in Medicare, Medicaid, and other health programs over a 10-

year period to be fundamental reforms to programs that involve trillions of dollars 

annually. 

To begin, the Administration proposes significant savings for Medicare and Medicaid in 

the Budget. Those savings would build on the work we have done to reduce health care 

costs through the Affordable Care Act. 

The President's Budget acknowledges that more must be done to address entitlement 

spending beyond ten years; page 57 of Analytical Perspectives states: 

"Nonetheless, the Administration recognizes that there is considerable uncertainty 

in its long-term projections and that future challenges will require policy 

responses that have yet to be formulated. The projections in this chapter reflect 

the fact that, until these reforms are enacted, simply extending current laws and 

policies leaves the country with a large and growing publicly held debt. Reforms 

are needed to make sure that overall budgetary resources are sufficient to support 

future spending and that programs like Medicare Part A and Social Security, 

which are expected to be financed from dedicated revenue sources, remain selfsustaining. The Administration intends to work with the Congress to develop 

additional policies that will assure fiscal sustainability in the future." 

The Administration is committed to making our entitlement programs sustainable into the 

foreseeable future in a way that fairly shares the sacrifice and gives Americans ample 

time to prepare. 

As you note, to help protect the Social Security trust funds, the President's 2013 Budget 

requested $1 billion for SSA program integrity, including to complete over 650,000 

medical Continuing Disability Reviews that make sure that DI and SSI recipients 

continue to meet the medical criteria for those programs. In addition, the Administration 

has called for Congress to reauthorize SSA's demonstration authority for the DI program. 

Reauthorization of this authority is overdue and would let SSA build the evidence base 

for future program improvements. More substantial measures will be needed to safeguard 
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both the DI and OASI programs for the long run, however. The Administration has put 

forward a series of principles to guide Social Security reform and stands ready to work on 

a bipartisan basis to make that happen. 

4. The President wants to institute a so-called "Buffett Rule," though he doesn't spell 

out details. The objective, we are told, is greater equality. And we have seen 

repeated attempts in Congress sold under the same guise of equality to institute 

surtaxes on the so-called "rich" of 5.6%, or 0.5%, or 0.7%, or 3.25%, or 1.9%, or 

whatever tax rate it would take to implement whatever is the spending proposal of 

the day. None of these proposals had to do with generating equality directly through 

the tax code. Rather, they are tax hike proposals to fund more·government 

spending, or permanent tax hikes to fund supposedly temporary payroll tax cuts. 

If the administration really wants to engineer greater equality through the tax code, 

then any revenue from whatever is a Buffett Tax or upper-income surtax would be 

redistributed by lowering taxes on some other classes of taxpayers, though that is 

not what the proposals made thus far have sought to achieve. 

How do the President's proposed tax hikes redistribute income directly through the 

tax code? 

What is the ultimate objective-that is, according to whatever is your preferred 

measure of income equality (e.g., Gini index), what is the point at which we can say 

that we have attained an optimal level of fairness and equality, and who decides 

what the ultimate amount offairness is? 

The "Buffett Rule" is a principle that should be observed in reforming the tax code in a 

comprehensive manner. It is not a specific legislative proposal and therefore we have not 

estimated the effect that implementing the principle would have on revenue and on the 

after-tax distribution of income. As you know, those impacts will depend on the other 

features of the reformed tax system. 

The Administration has not set a specific metric for after-tax income equality that reform 

must achieve. However, high-income families should not pay effective tax rates that are 

lower than those faced by middle-income families (which is the essence of the Buffett 

Rule). In addition, the reformed tax system should be at least as progressive as the tax 

system would be under the President's Budget proposals. 

5. The Treasury Departmeut is responsible for U.S. currency policy. I wrote you and 

Ambassador Kirk last year asking for your views on S.1619, the Currency 

Exchange Rate Oversight Reform Act, before the Senate debated and voted on that 

legislation. I am disappointed that you did not provide those views. The 

Administration remained silent while the Senate acted on legislation which could 

have a profound impact on onr relationship with our second largest trading partner. 
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On January 18th I wrote you again, asking a number of questions, which I hope you 

will answer in response to this question for the record. 

First, what are the Administration's views on S. 1619? 

The President has been clear that we strongly share Congress's objective of providing a 

level playing field with China for our workers and companies. Aspects of the pending 

legislation do, however, raise concerns with our international obligations; ifiegislation 

were to advance, those concerns should be addressed. For any approach to be effective, it 

must be consistent with our international obligations. 

Second, what is the position the Obama Administration will take at an upcoming 

WTO seminar on the relationship between trade and currency in Geneva next 

month? 

At the World Trade Organization seminar on March 27-28, the United States emphasized 

the importance of market-determined exchange rate systems, enhancing flexibility to 

reflect underlying economic fundamentals, and avoiding persistent exchange rate 

misalignments and refraining from competitive currency devaluation - which in turn will 

facilitate balanced international trade. When trading partners believe others are allowing 

their exchange rates to adjust in line with fundamentals, there is less pressure for 

protectionism and more support for trade liberalization. The United States also 

underscored that the IMF has a core mandate to exercise rigorous surveillance over its 

members' exchange rate policies and it must carry out this vital core mission. 

Third, what are your views on proposals to include currency provisions in the 

Trans-Pacific Partnership negotiations and future trade agreements? 

We appreciate your interest and views on potentially developing new trade disciplines in 

the Trans-Pacific Partnership negotiations and future trade agreements. We also have 

taken note of considerable stakeholder interest in this issue, and we will want to be in 

close contact with you as we consider possible approaches to address persistent exchange 

rate misalignments. 

6. In both the recent State of the Union and in the 2013 Budget, the President requests 

fast track authority to reorganize the government. In the 2011 State of the Union the 

President identified 12 agencies that deal with exports as candidates for a major 

government reorganization. This year's plan, apparently, combines 6 trade 

agencies, including USTR, into one super-trade agency. 

I am not sure these changing reorganization plans are well thought out. Both the 

Chairman and I voiced serious concerns with absorbing USTR when this process 

began - and we were ignored. At the same time, other critical agencies seem to be 

left out. 

According to your own website, Treasury's Office of Trade and Investment Policy is 

responsible for the negotiation of trade and investment agreements, including free 

trade agreements and bilateral investment treaties, with the office taking either a 
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lead or supporting role in various facets of these negotiations; reviewing and 

addressing contemporary trade and financial services issues, as well as participation 

in the World Trade Organization. 

Why should such a critical trade policy office not be part of the President's trade 

reorganization plan? 

President Obama is committed to rethinking and reforming our government and has 

called on Congress to reinstate the authority that past Presidents had, for decades, to 

propose reorganizations of the government for expedited consideration by Congress. If 

Congress reinstates Presidential reorganization authority, his first focus would be to make 

it easier for America's businesses - which are America's job creators - to compete, 

export, and grow through a proposed consolidation of several agencies into one 

department. Treasury would work with the President's team to help develop and 

implement the new department with an integrated, strategic, government-wide focus to 

help businesses grow and thrive. 

Treasury's Office of Trade and Investment Policy works to promote open trade and 

investment policies internationally and tor the United States, functions integrally tied to 

the other work of thc Dcpartment. Under the Trade Expansion Act of 1962, Congress 

established an interagency trade policy mechanism, chaired by USTR, to assist with the 

implementation of these responsibilities, and mandated Treasury participation in that 

mechanism. Treasury's Office ofInternational Trade and Investment represents Treasury 

in this interagency process, works with other agencies to develop U.S. trade and 

investment policy. including in various bilateral and multilateral negotiations. and coleads ncgotiations on financial services. Under the President's reorganization plan. 

USTR would continue to chair the interagency trade policy process and Treasury· s Office 

of International Trade and Investment would continue to represent Treasury in the 

interagcncy process. 

7. The President writes in his budget that "we need an economy that is no longer 

burdened by years of debt." However, his budget would set in place significant and 

possibly world-record high, tax rates on income from capital investments. Of course, 

the President's proposed tax hikes would exacerbate a system already distorted by 

providing significant favor through the tax code for debt financing over eq uity 

financing. 

If the President really wishes to see an economy that is no longer burdened by debt, 

why does he propose tax policies that would give even more favor to debt finance 

over equity finance, which would place many sectors ofthe economy even more at 

risk during periods of economic weakness? 

This quote by the President is in reference to the debt of the federal government. The 

President's revenue proposals fund necessary investments in our economy to enhance 

current and future growth, while setting our overall fiscal situation onto a sustainable 

path. This requires a balanced approach that includes increasing tax revenues above 
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levels reflected by current policy and making significant cuts to Federal spending to put 

our fiscal house in order. 

8. Your testimony identifies that as a share of GDP, tax revenues from 2009 to 2011 

were at their lowest since 1950. Of course, given the depth of the recession and given 

that government revenues come from the economy, revenues did fall, but are 

projected by CBO to return soon to above the historic norm as a share of GDP, even 

with extension of current tax rates. What you failed to identify in your testimony, 

though, is that federal spending as a share ofGDP during that same period 

averaged 24.5%, a share that has not been surpassed sinee 1946 after the resourceintensive Second World War. Moreover, spending as a share of GDP is projected to 

remain elevated above historic post-war norms by over 2.5% of GDP under the 

President's fiscal proposals. Even well after projected recovery ofthe economy, fully 

five years from now, the President envisions a large federal spending footprint. 

I often hear from my friends on the other side ofthe aisle that now is not the time to 

stop spending. We need to wait until later, and then we will pivot, I hear. But I see 

no pivot in the President's budget toward spending levels consistent with historic 

norms relative to GDP. Does the administration continue to believe that the federal 

government spending will and should forever account for over 22% of our entire 

GDP? If it is believed that spending should be over 22% of GDP in the long run 

because of aging of the baby boom generation, then: why does the budget not 

address other drivers of the long-term fiscal outlook like Social Security and 

Medicare and Medicaid by making new policy proposals (aside from the relatively 

small $362 billion [over a 10 year period] or so of so-called "reforms" contained in 

the budget); what analysis by the administration shows that the difference between 

the administration's desired, over 22%, spending-to-GDP ratio and the post-World 

War II average spending-to-GDP ratio is the difference needed to account for 

impending demographic dynamics? 

Outlays as a share ofGDP averaged 20.2 percent from FYI960 to FY2008 (before the 

Great Recession hit). In the President's FY2013 Budget, outlays are scheduled to decline 

from a peak of25.2 percent ofGDP in FY2009 (at the height of the recession) to 22.8 

percent in FY2022. Cutting spending too deeply would endanger the economy as it 

recovers from the worst recession since the Great Depression of the 1930s, and impede 

our ability to make the investments necessary for strong growth over the longer term. 

These cuts in spending, along with an increase in tax receipts moves the Budget into 

primary balance - the point at which the deficit is no longer adding to the national debt -

in FY2018. According to the recent score of the President's Budget by the Congressional 

Budget Office, primary balance would be achieved two years earlier in FY20l6. Primary 

balance is an important yardstick with which to measure to budget progress. 

In order to accomplish more on the spending side, it is necessary to find balance in the 

growth ofmandatory/entitlement spending programs. Given demographics ofan aging 

population, certain mandatory spending categories are projected to grow rapidly. For 
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example, under the President's FY 2013 Budget, Social Security is projected to increase 

from 4.8 percent ofGDP in FY 2011 to 5.3 percent by FY2022; Medicare from 3.2 

percent to 3.8 percent ofGDP; and Medicaid from 1.8 percent to 2.3 percent over the 

same interval. 

The Administration also acknowledges that mandatory programs are an important area to 

find savings. We propose significant reductions in Medicare and Medicaid spending in 

the Budget. Those savings would build on the work we have done to reduce health care 

costs through the Affordable Care Act. 

The President's Budget acknowledges that more must be done to reduce entitlement 

programs such as Medicare, Medicaid, and Social Security form a significant and 

growing portion of the Budget, increasing from 44 percent in 2011 to more than 60 

percent in 2035, and that a balanced approach is critical to ensuring their long-term 

sustainability. 

"Reforms are needed to make sure that overall budgetary resources are sufficient 

to support future spending so that programs like Medicare Part A and Social 

Security, which are expected to be financed from dedicated revenue sources, 

remain self-sustaining. The Administration intends to work with the Congress to 

develop additional policies that will assure fiscal sustainability in the 

future." (Analytical Perspectives, page 57.) 

9. Moving into tbe President's fourtb year in office, many parts of onr bousing and 

mortgage-finance sectors remain broken. The federal government has essentially 

taken over mortgages and housing, and there are no detailed plans from tbe 

administration of its preferred approach for how to resurrect private-sector 

activity. A year ago, Treasury put out a required white paper laying out tbree 

already-known possible ways to reform the mortgage giants Fannie and Freddie to 

begin to replace government witb private flows of mortgage finance. 

That paper bas been sitting idle for a year, and tbe only efforts I see from the 

administration are efforts to furtber enmesh government into housing and housing 

finance. I see no effort and nothing in the President's budget, to plan a return of the 

private sector to the housing and housing finance markets. If anytbing, 

unfortunately, the President wishes to double down on the GSE model by proposing, 

again, an infrastructure bank that bas been rejected repeatedly by Congress and 

would place innocent taxpayers, again, at risk of loss. 

The administration bas had three years to devise a GSE reform plan. Yet there is no 

plan, even tbougb you and tbe President know tbat tbe mortgage finance system is 

essentially all government and is broken. I bope tbat simply because it is an election 

year, the administration does not want to kick tbe can furtber down tbe road in tbe 

interest of political expedience. I also bope that the administration is very careful 
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about loading up the Federal Housing Administration with more risk, given that the 

FHA is already at high risk of needing a federal bailout given that its reserves are 

just a tiny fraction of the obligations that it may face. 

Given the importance of the housing sector and the administration's identification 

of it as a sector that is holding back a stronger economic recovery, in the interest of 

greater certainty please identity what is the administration's specific plan to reform 

our mortgage finance system? 

We will continue to make progress this year building the foundation for reforms to the 

mortgage market in the United States, including a path for winding down the GSEs. In 

our white paper released last February, the Administration outlined a broad strategy with 

several options for reforming the housing finance system. We expect to layout more 

detail around approaches to reform soon. 

As we made clear last year, our immediate obligation is to repair the damage caused by 

the crisis to homeowners, neighborhoods and the broader housing market. In early 

February, the President spoke about the range of tools we're utilizing to this end, 

including broad-based refinancing for responsible homeowners; putting forward a single 

set of standards to fix the mortgage servicing system; and, in conjunction with the FHF A, 

the conversion of foreclosed homes into rental properties. 

Our plan for a more sustainable housing finance system calls for winding down the GSEs 

and bringing private capital back into the market to reduce the government's direct role in 

the housing market. We will better target our support for first-time hornebuyers and lowand moderate-income Americans, including the development of affordable rental options, 

stronger and clearer consumer protections, and a level playing field for all institutions 

participating in the housing finance system. For this to happen without hurting the 

broader economic recovery and adding further damage to those parts of the country 

hardest hit by the crisis, we need to get banks and private investors to come back into the 

market on a larger scale. This cannot happen without more clarity on the rules that will 

apply. We will continue to work to provide that clarity and pull forward the prospects for 

broader reform. 

10. The President proposes higher taxes on domestic energy producers or, more 

specifically, on domestic fossil fuel production. Yon and others have argued that 

those tax hikes would do nothing to energy prices, because energy markets are vast 

globally. Yet, if energy prices are unaffected, it would have to be the case that any 

decline in domestic production of energy would be accompanied by a like increase in 

foreign production. How does this lead to the President's stated goal of reducing 

U.S. reliance on foreign sources of energy? 

When considering the elimination of these subsidies, the Administration carefully 

considered the impacts on the economy. The fossil fuel tax preferences the 

Administration proposes to repeal distort markets by encouraging inefficient investment. 
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To the extent these subsidies crowd out investments in other energy sources, they are 

detrimental to long-term energy security and are also inconsistent with the 

Administration's policy of reducing carbon emissions and encouraging the use of 

renewable energy. Moreover, these inefficient subsidies also direct investment away from 

other, more productive, investment opportunities, putting a damper on future economic 

growth. 

The Administration also encourages the safe development of domestic oil and gas 

resources. The President directed the Department ofInterior to finalize a national 

offshore energy plan that makes 75 percent of our potential offshore resources available 

for development by opening new areas for drilling in the Gulf of Mexico and Alaska. 

Over the past few years, the United States has increased overall production of oil, 

reducing our dependence on foreign energy sources. The United States is the world's 

leading producer of natural gas. To find ways to hamess this abundant supply of natural 

gas once it's out of the ground, the Administration has proposed new incentives for 

medium- and heavy-duty trucks that run on natural gas or other alternative fuels in 

addition to other policies such as developing transportation corridors that allow trucks 

fueled by liquefied natural gas to transport goods. 

To further reduce our reliance on foreign oil it is also important to reduce our nation's 

demand for oil. The Environmental Protection Agency and the Department of 

Transportation have formally announced their joint proposal to set stronger fuel economy 

and greenhouse gas pollution standards for model year 2017-2025 passenger cars and 

light-duty trucks. When combined with other actions the Administration has taken to 

increase efficiency in the transportation sector, this announcement will save Americans 

$1.7 trillion, reduce oil consumption by 2.2 million barrels per day by 2025, and slash 

greenhouse gas emissions by 6 billion metric tons. 

The President identifies his continued goal of eliminating "unwarranted tax breaks 

for oil companies" and argues that current law provides a number of credits and 

deductions that are targeted toward certain oil and gas activities. Are any of the 

credits or deductions that the President wishes to eliminate or curtain that are 

targeted toward certain oil and gas activities credits and deductions available to 

firms producing in any other sector of the economy? If so, which ones? 

The domestic production deduction is available to manufacturers and certain other 

producers. The deduction for percentage depletion is available for natural resource 

deposits generally, and expensing of intangible drilling costs (IDes) is also available for 

geothermal wells. The remaining subsidies the Administration proposes to repeal (the 

enhanced oil recovery credit, the marginal well credit, the deduction for tertiary 

injectants, and the working interest exception to the passive loss limitation) are unique to 

oil and gas activities. 

11. Federal outlays in fiscal years 2010 and 2011 were 24.1% ofGDP, and are estimated 

to rise to 24.3% for fiscal year 2012 by OMB, and then edge down to 23.3% in fiscal 
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2013. In contrast, receipts as a share of GDP are estimated by OMB to reach 17.8% 

by 2013, just below the long-run average, after which they rise relative to historic 

standards. The message is that, as the recovery progresses, federal receipts are on a 

path to surpass the historical average relative to GDP, while the President wishes to 

keep a bloated sized government above 22% of the economy in the long run. 

Some people look to budget outcomes attained during the Clinton years and cite 

that the budget improved despite taxes having been increased. What they often fail 

to also observe is that while receipts as a share of GDP increased from 18% in fiscal 

year 1994 to 19.5% by fiscal year 2001, federal outlays as a percent of GDP fell frum 

21% to 18.2%. Revenues ruse by 1.5% ofGDP, but spending was cut by 2.8% of 

GDP. 

President Obama's plan would put spending as a share ofGDP at 4% ofGDP or 

more above where it was at the end of the Clinton years. And, it would put receipts 

at around 1 % higher as a percent of GDP than under Clinton. 

Many of my friends on the other side of the aisle argue that we do not have a 

revenue problem. But all projections show revenue climbing above historic norms as 

the economy eventually recovers. On the spending side, however, recovery will not 

significantly reduce government outlays, and the President seems content to keep 

spending at amounts significantly above historic norms. Administration officials 

sometimes argue that increased outlays relative to GDP will be required given 

absorption ofthe baby boom generation into retirement. 

Do you believe that the President's budget adequately acknowledges that the Nation 

has a spending problem and not a revenue problem over the long run? And do you 

believe that absorption into retirement of the baby boom generation will necessitate 

a federal goverument permanently sized at over 22% of GDP? 

Comparison with Clinton era spending is, as noted in the preamble to your question, 

complicated by changing demographics, particularly the retirement of the baby boom 

generation. This cohort was in its prime productive years in the 1990s and early 2000s, 

contributing significantly to revenue, while using mandatory programs, which include 

Medicare, Medicaid, and Social Security, much less intensively than older age groups. 

Now that the baby boom generation is retiring, they will increasingly. draw upon these 

mandatory programs. It is no secret that the key drivers of the long-term deficit are 

Medicare, Medicaid and to a lesser extent Social Security. 

Table 5-1 of Analytical Perspectives for the FY2013 Budget provides evidence of this 

trend. It shows that overall mandatory spending was just 9.9 percent of GDP in 1990, 

just prior to the Clinton era; in 2010 it was 13.6 percent and by 2040 it is projected to 

reach 16.4 percent. Even with the Affordable Care Act (ACA) and the Budget Control 

Act (BCA) in place, which will help constrain deficits over the next ten years and beyond 

including in the area of mandatory spending, more will need to be done to address the 

long-term budget issues related to mandatory spending. 
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That said, we have already made significant progress in reducing the deficit in the 

medium-term. In addition to the ACA and BCA, the President's FY2013 Budget 

includes an additional $3 trillion in deficit reduction over the next ten years. One 

important yardstick in measuring progress on the deficit is the primary balance the 

point at which the deficit is no longer adding to the national debt. The FY2013 Budget 

shows that primary balance will be achieved by 2018 (where aggregate spending less 

interest payments is exceeded by revenues). From FY2018 -2022, the Budget is 

projected to show a primary surplus equivalent to 0.4 percent of GDP. 

Despite these important achievements, the Administration recognizes that more will need 

to be done over the long term to keep entitlement spending in balance with the economy. 

However, our ability to bolster economic growth and control our deficits in the long term 

depends in large part on the actions we take in the near term to support our economy as it 

continues to recover from the deepest recession since the Great Depression. The 

Administration's Budget includes measures to shore up the economy and provides a 

credible plan for long-term fiscal responsibility. The Administration looks forward to 

working with Congress to keep mandatory and total spending at acceptable shares of 

GDP. 

12. Investor Warren Buffett, who the administration turns to for its formulation of tax 

and policy and social equality evaluation, weighed in recently with advice for 

investors to steer clear of currency-based investments, like U.S. Treasury securities. 

As Mr. Buffett says: In God We Trust may be imprinted on our currency, but the 

hand that activates our government's printing press has been all too human. On 

bonds like Treasuries, Mr. Buffett advises: Right now bonds should come with a 

warning label. 

Mr. Buffett is advising investors to shy away from investments such as Treasury 

securities. Do you agree with Buffett's advice to investors not to buy what he calls 

"currency-based investments," like U.S. Treasury securities? 

Investors purchase Treasury securities because they safe and highly liquid. As a nation, 

we benefit from the value that investors place on our securities, as we are able to fund 

ourselves at very low interest rates. This is evidenced by the fact that our interest 

expense as a percentage of GDP has fallen over the past several years, despite a 

significant increase in our borrowing needs. 

As the economy improves, interest rates will likely increase. This would be a healthy 

development, as Treasury yields have been depressed because of concerns about the U.S. 

economy and financial market stress emanating from Europe. But going forward, it is 

important that we maintain the trust of investors, and that is why the President has put 

forth a balanced plan for deficit reduction. 
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13. Prior to last year's Strategic and Economic Dialogue, you said: The renminbi 

remains substantially undervalued. China needs to let the exchange rate adjust at a 

faster pace to correct that undervaluation. 

The Financial Services Forum, a non-partisan financial and economic policy 

organization comprising the CEOs of20 ofthe largest and most diversified financial 

services institutions doing business in the United States, argues that reform and 

modernization of China's financial system - including greater foreign participation 

- must remain a key area of focus if genuine progress is to be made on reducing the 

trade imbalance and achieving a more market-determined Chinese currency. 

Unfortunately, despite your work, China still controls its closed banking system, its 

currency remains substantially undervalued, and China prohibits American 

financial services and products from competing openly and fairly. 

Liberalization of China's financial and banking system is key to China adopting a 

free-floating Chinese currency. 

What are you doing to open China's closed banking system to U.S. firms and spur 

financial liberalization? 

We agree that financial sector refonn has a critical role to play in China's economic 

transfonnation - both to support rebalancing of the economy more toward consumption, 

provide Chinese policymakers more tools to manage monetary policy, and create 

opportunities for American finns and workers. This is a common theme in our 

discussions with our Chinese counterparts. 

As our own financial sector has stabilized since the financial crisis and since our 

regulatory refonn path has been set with enactment of the Wall Street Refonn Act, we 

have re-invigorated discussions with China on financial sector liberalization. This 

includes pressing China to fully comply with its WTO commitments on financial 

services, pressing China to undertake continued financial sector liberalization beyond its 

WTO commitments, and pushing for the dismantling of administrative barriers in China 

that have the effect of disadvantaging foreign financial finns. 

While negotiations between two sovereign nations with diverse interests are always 

challenging, we have made meaningful progress on our financial refonn agenda with 

China and will continue to push for further progress. We have engaged WTO dispute 

mechanisms when necessary. Under the auspices of the Strategic and Economic 

Dialogue, China has committed to financial sector liberalization that extends beyond its 

WTO agreement and we continue to push China to fully open up its financial sector to 

foreign competition. For example, at the most recent Strategic and Economic Dialogue, 

China agreed to allow a higher level of foreign investment in securities joint ventures, 

which goes beyond China's WTO commitments, and to also allow higher levels of 

investment in futures joint ventures. Finally, through our bilateral efforts our Chinese 

counterparts have resolved certain administrative barriers that create an un-level playing 
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field for U.S. and other foreign financial firms. We will continue to focus on these 

issues .. 

14. In both the recent State of the Union and in the 2013 Budget, the Presideut requests 

fast track authority to reorganize the government. In the 2011 State ofthe Union, 

the President identified 12 agencies that deal with exports as candidates for a major 

government reorganization. This year's plan, apparently, combines 6 trade 

agencies, including USTR, into one super-trade agency. I am not sure these 

changing reorganization plans are well thought out. Both the Chairman and I 

voiced serious concerns with absorbing USTR into a large federal bureaucracy . 

when the Administration launched its review of possible government reorganization 

approaches - and we were ignored. Moreover, the fact sheet that the White House 

has distributed regarding its trade reorganization plan appears to leave critical 

trade agencies and offices out of the new super-agency. 

According to Treasury Department's website, Treasury's Office of Trade and 

Investment Policy is responsible for the negotiation of trade and investment 

agreements, including free trade agreements and bilateral investment treaties, with 

the office taking either a lead or supporting role in various facets of these 

negotiations; reviewing and addressing contemporary trade and financial services 

issues, as well as participation in the World Trade Organization (see 

http://www.treasury.gov/about/organizational-structure!officeslPagesl-Trade-andInvestment-Policy.aspx). Why should such a critical trade policy office not be part 

of the President's trade reorganization plan and the new super-trade agency? 

President Obama is committed to rethinking and reforming our government and has 

called on Congress to reinstate the authority that past Presidents had, for decades, to 

propose reorganizations of the government for expedited consideration by Congress. If 

Congress reinstates Presidential reorganization authority, his first focus would be to make 

it easier for America's businesses - which are America's job creators - to compete, 

export, and grow through a proposed consolidation of several agencies into one 

department. Treasury would work with the President's team to help develop and 

implement the new department with an integrated, strategic, government-wide focus to 

help businesses grow and thrive. 

Treasury's Office of Trade and Investment Policy works to promote open trade and 

investment policies internationally and for the United States, functions integrally tied to 

the other work of the Department. Under the Trade Expansion Act of 1962, Congress 

established an interagency trade policy mechanism, chaired by USTR, to assist with the 

implementation of these responsibilities, and mandated Treasury participation in that 

mechanism. Treasury's Office ofinternational Trade and Investment represents Treasury 

in this interagency process, works with other agencies to develop U.S. trade and 

investment policy, including in various bilateral and multilateral negotiations, and coleads negotiations on financial services. Under the President's reorganization plan, 

USTR would continue to chair the interagency trade policy process and Treasury's Office 
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ofInternational Trade and Investment would continue to represent Treasury in the 

interagency process. 

The Administration's fact sheet does, however, indicate that Treasury's Community 

Development Financial Institutions Fund (CDFIF) program will be absorbed into the new 

super-trade agency. But the mission ofthe CDFIF program is, according to Treasury's 

website, " ... to expand the capacity of financial institutions to provide credit, capital, and 

financial services to underserved populations and communities in the United States." (see 

http://www.cdfifund.gov/who_we_are/abouCus.asp). There does not appear to be much the 

CDFIF does that impacts U.S. trade policy. What is the nexus between the CDFIF program 

and U.S. trade or export policy? Why did the Office of Management and Budget absorb the 

CDFIF from Treasury into the new super-trade agency but ignore Treasury's Office of 

Trade and Investment? 

President Obama is committed to rethinking and reforming our government and has 

called on Congress to reinstate the authority that past Presidents had, for decades, to 

propose reorganization of the government for expedited consideration by Congress. If 

Congress reinstates this Presidential authority, his first focus would be to make it easier 

for America's businesses - which are America's job creators - to compete, export and 

grow through a proposed consolidation of several agencies into one department. 

The President's team would work with affected departments to develop and implement 

the new department with an integrated, strategic, government-wide focus to help 

businesses grow and thrive. The proposed consolidation of small business and 

community economic development programs, including Treasury's Community 

Development Financial Institutions Fund (CDFI), would enable the new Department to 

provide a comprehensive set of services to support small business growth. By 

integrating small business and economic development programs that are currently 

scattered across the Federal Government, customers would be better served and program 

effectiveness enhanced. The CDFI's mission, to promote economic growth in 

underserved communities and markets by supporting entrepreneurship and investment, 

would make it a natural fit for the new department. 

Treasury's Office of Trade and Investment Policy works to promote open trade and 

investment policies internationally and for the United States, functions integrally tied to 

the other work of the Department. Under the Trade Expansion Act of 1962, Congress 

established an interagency trade policy mechanism, chaired by USTR, to assist with the 

implementation of these responsibilities, and mandated Treasury participation in that 

mechanism. Treasury's Office ofInternational Trade and Investment represents Treasury 

in this interagency process, works with other agencies to develop U.S. trade and 

investment policy, including in various bilateral and multilateral negotiations, and coleads negotiations on financial services. Under the President's reorganization plan, 

USTR would continue to chair the interagency trade policy process and Treasury's Office 

of International Trade and Investment would continue to represent Treasury in the 

interagency process. 
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15. A series of disturbing developments continue to unfold in Argentina harming 

American business and economic interests. Many commentators and companies 

have noted that Argentina has taken a variety of WTO-illegal measures designed to 

block U.S. imports, and that Argentina is the first country ever to ignore 

international arbitral awards against it. The Administration must not allow such 

flagrant violations of Argentina's commitments and international obligations to 

continue without a sufficient response. Otherwise, the Administration's repeated 

promises regarding its commitment to trade enforcement account for little more 

than empty rhetoric. 

I understand that the Treasury Department is considering agreeing to a 

restructuring of Argentina's debt in the Paris Club. In particular, there are rumors 

that Treasury appears willing to break with the longstanding Paris Club practice of 

requiring a separate monitoring agreement with the IMF before moving forward 

with a debt restructuring for a country. Please clarify Treasury's position on this 

matter regarding Argentina. Will Treasury agree to restructure Argentina's debt 

without an IMF agreement in the face of Argentina refusal to live up to its 

commitments to the detriment of American business and economic interests? What 

steps has Treasury and the Administration taken to ensure that Argentina lives up 

to its trade and investment commitments? 

Treasury and the Administration are very concerned about Argentina's actions. We have 

made clear to the Argentines that we expect them to uphold their international 

obligations. 

Argentina's arrears to U.S. government agencies total about $550 million, and U.S. 

government efforts, including in the Paris Club, are appropriately focused on recovering 

full payment on these loans extended on behalf of American taxpayers. Imposing 

additional conditions that are unrelated to the govermnent's claims could undermine the 

government's recoveries, which would not be in the taxpayers' interest. Any arrangement 

we conclude will be in accordance with Paris Club principles and in the direct interest of 

U.S. taxpayers. 

We are not aware of any studies that show that more than the $550 million Argentina 

owes the U.S. government would be collected in taxes were Argentina to pay other 

creditors. In any case, Administration efforts to recover on loans extended on behalf of 

our taxpayers in no way diminishes our urging of Argentina to resolve the claims of 

private American investors. 

The United States also has raised the issue of non-payment of final arbitral awards with 

Argentina at high levels on many occasions over the past several years. On March 26, 

2012, the President announced that he was suspending Argentina's eligibility for 

Generalized System of Preferences (GSP) benefits, in light of the Argentine 

Govermnent's failure to act in good faith in recognizing and enforcing final arbitral 

awards to U.S. companies. In addition, USTR on many occasions has raised U.S. 

concerns in the World Trade Organization (WTO) regarding the nature and application of 
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trade-restrictive measures taken by Argentina, which are adversely affecting imports into 

Argentina from the United States and a growing number ofWTO Members. These 

measures include the overly broad use of non-automatic import licensing, trade balancing 

requirements, and pre-registration and pre-approval of all imports to Argentina. On 

behalf of the United States, USTR has asked Argentina to take immediate steps to 

address tbese concerns. At the March 30 meeting of the WTO Council for Trade in 

Goods, the United States and 13 otber WTO Members (including botb developed and 

developing countries) co-sponsored a joint statement to demonstrate the seriousness with 

which WTO Members view Argentina's import restrictions. 

16. As you may be aware, the Committee on Finance was actively involved in crafting 

the language that Chairman Levin and Ranking Member McCain inserted into the 

National Defense Authorization Act (NDAA) clarifYing Custom and Border 

Protection's (CBP) authority to disclose information to rights holders whose 

trademarks appear on suspected counterfeit imports. In particular, I am aware that 

counterfeit chips have made their way into sensitive defense department systems as 

well as critical civilian products like defibrillators, automobile air bags and antilock 

breaking systems. 

In the NDAA, Congress clearly intended for CBP to immediately return to its prior 

practice of sharing compete photograpbs or samples of potentially dangerous 

counterfeit imports with rights holders in order to ensure that counterfeit goods do 

not enter the stream of U.S. commerce to protect national security, health, and 

commercial harm to the U.S. economy and its citizens. Some of us felt that stronger 

language may be necessary to ensure that CBP shared Congress' commitment to 

stopping counterfeit goods from entering the United States. But even under the 

NDAA language as passed, it was our understanding that once enacted, nothing 

more than an email to CBP Port Officers would be required in order to implement 

the law. 

A month and a half have now passed since the enactment of the NDAA and CBP's 

authority was reaffirmed. I am very disturbed to learn that to date CBP has not 

reinstituted its prior practice now that CBP's erroneous interpretation of its 

authority has been clarified. I also understand that the Treasury Department is 

preventing CBP from adhering to the clear provisions and intent behind the NDAA 

on this matter until accommodations can be made to protect certain grey market 

interests. Can you please explain Treasury's position on the NDAA law and why it 

has not been fully implemented yet? When will Treasury fully implement these 

provisions in the NDAA? In the Lanham Act and the Tariff Act, Congress has 

clearly instructed Treasury and CBP to stop dangerous counterfeits from entering 

the United States. Please explain why Treasury is forestalling timely identification 

and seizure of counterfeits and what other economic or policy interest, such as 

protecting grey market goods, Treasury believes justifies its position? If the 

information I have received is incorrect, then please make that clear and please 

explain what steps Treasury is taking to ensure full implementation of the NDAA as 
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soon as possible. If Treasnry believes that policy or economic interests, inclnding 

protecting the grey market, trump combatting counterfeit goods and trump the 

NDAA, please provide your policy justification and the legal basis for that 

determination. 

I share your interest in expanding Customs and Border Protection's ability to share 

infonnation about and samples of imported goods suspected of being counterfeit with 

rightholders of the trademarks on those goods suspected of being counterfeited for 

purposes of detennining whether the imports are counterfeit. To that end the Treasury 

and the Department of Homeland Security published a rule on April 23, 2012 that will 

enable infonnation sharing. This matter is important both to our national security and to 

the strength of our Nation's economy. 

The Administration fully supports the infonnation sharing goal of the National Defense 

Authorization Act for fiscal year 2012 (NDAA), and had itself proposed legislation last 

July consistent with this goal. 

As for implementation of the infonnation sharing language of the national Defense 

Authorization Act, the following background is relevant: 

The Trade Secrets Act (TSA), a criminal statute, prohibits the unauthorized release by a 

Federal employee or officer of certain types of infonnation received by the government. 2 

The twin goals of the statute are protecting competition and encouraging business to 

share infonnation with the government. The Act "cover(s) practically any commercial or 

financial data collected by any Federal employee from any source" and that the 

"comprehensive catalogue of items" listed in the Act "accomplishes essentially the same 

thing as ifit had simply referred to 'all officially collected commercial infonnation' or 

'all business and financial data received.',,3 

The TSA does not, however, preclude the disclosure of infonnation "otherwise 

protected" by the statute if the disclosure is "authorized by law." Section SIS(g) of the 

NDAA creates authorizes the Secretary of the Treasury to make such disclosures. 

2 The TSA provides in relevant part: 

Whoever, being an officer or employee oflhe United States or of any department or agency thereof, ... 

publishes, divulges, discloses, or makes known in any manner or to any extent not authorized by law any 

information coming to him [or her] in the course of his [or her) employment or official duties or by reason 

of any examination or investigation made by, or return, report or record made to or filed with such 

department ... , which information concerns or relates to the trade secrets, processes, operations, style of 

work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, 

losses, or expenditures of any person, firm, partnership, corporation, or association ... ; shall be fined under 

this title, or imprisoned not more than one year, or both; and shall be removed from office or employment. 

18 U.S.C. 1905. 

3 CNA Financial Com. v. Donovan, 830 F.2d at 1140. 
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Current CBP regulations, promulgated in 1998 (63 FR 11996), and specifically taking 

into account the strictures and operation of the TSA, allow the sharing of certain 

information to facilitate border enforcement counterfeit trademarks (19 CFR l33.21). 

The regulations provide, in the case of suspected counterfeit trademarks, for sharing 

information and samples of seized counterfeit goods. Under the regulations, sharing 

certain TSA-protected information was authorized for counterfeit goods that are seized. 

However, under current regulations, prior to seizure, for goods that may be counterfeit, 

Customs may disclose only certain limited information to third parties regarding the 

importation of the merchandise. The procedures for this limited sharing were further 

elaborated in Customs Directive 231 0-008A, April 7, 2000. 

At no time in the past has CBP changed this official position on such information sharing 

and at no time has Treasury directed it to do so. The draft regulations noted above, 

however, would amend the existing regulations and allow CBP to share information with 

trademark right holders prior to the seizure of goods. 

As you know, CBP has faced challenges identifYing counterfeit semiconductor chips. 

Chips are very small and have highly technical features that may distinguish a legitimate 

chip from a counterfeit. Apparently even manufacturers can only identifY some 

counterfeits by examining the lot or code number on the chip, but manufacturers have 

declined to share lists of legitimate codes, or their meanings, with CBP. We seek the 

most rapid implementation possible in order to implement changes that will help CBP to 

overcome these obstacles. 

17. The President is, again, proposing something that he calls a "Financial Crisis 

Responsibility Fee." However gently labeled, the "fee" is a tax targeting "financial 

firms with assets over $50 billion. In your testimony, Mr. Secretary, you tout gains 

made on the Troubled Asset Relief Program, citing your estimate that "investments 

made throngh TARP bank programs, for example, will return more than $20 billion 

in gains to taxpayers." 

To date, what are the costs or gains associated with Troubled Assets Relief Program 

"investments" in American International Group, General Motors Corporation, and 

Ally Financial Inc.? 

The President's Budget states that: " ... shared responsibility requires that the 

largest financial firms pay back the taxpayer for the extraordinary support they 

received as well as to discourage excessive risk taking." 

What amount of financial resources will "financial firms with assets over $50 

billion" have to pay back to the taxpayer in order for those firms to have fully paid 

back to the point of having fully shared their responsibility, or is the responsibility 

perpetual? 

Does the President intend to levy his fee on Ally Financial Inc.? If not, why not? 
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Does the President intend to levy his fee on General Motors and Chrysler? If not, 

why not? 

Does the President intend to levy fees on money market mutual funds and 

participants in the tri-party repo market, segments of the financial system at the 

very heart of the recent financial crisis and segments that received extraordinary 

taxpayer support? If so, how will the fee be structured? If not, why not? 

While we know that the incidence of a tax does not necessarily fall on the person 

who writes a check to the government to pay the tax, please provide any analysis 

that the administration has performed on what the effect of the proposed 

responsibility "fee" would be on costs of financial services for American consnmers 

and on returns that American investors, including pension funds and retirees, would 

receive on deposits and investments in "the largest financial firms." 

Does the administration believe that there will be no effects, if a "Financial Crisis 

Responsibility Fee" were to be levied on financial institutions with assets over $50 

billion, on fees, returns on financial assets, or costs of financial services for 

American consumers and investors such as pension funds and retirees? 

In the event of any cost associated with the Troubled Asset Relief Program (T ARP), 

Congress required in the Emergency Economic Stabilization Act that the President put 

forward a plan "that recoups from the financial industry an amount equal to the shortfall 

in order to ensure that the Troubled Asset Relief Program does not add to the deficit or 

national debt." The proposed Financial Crisis Responsibility Fee is intended to address 

this requirement. 

The Financial Crisis Responsibility Fee would be assessed on U.S.-based bank holding 

companies, thrift holding companies, certain broker-dealers, and companies that control 

such institutions as of January 14, 2010, with world-wide consolidated assets of more 

than $50 billion. U.S. subsidiaries of foreign firms that fall into these categories and have 

assets in excess of $50 billion also would be covered. The fee is designed so that it 

would fall most heavily on firms that fund riskier activities with less stable, short-term 

forms of funding. Under the Administration's proposal, firms would pay a fee based 

upon their covered liabilities, which are generally the consolidated risk-weighted assets 

of a financial firm, less its capital, insured deposits, and certain loans to small businesses. 

Firms that take on more risk and fund those activities with less-stable sources of 

financing (e.g. through commercial paper or "repo" markets) would pay larger fees. 

Firms that fund activities with more stable sources of funding through a traditional 

banking model (e.g., funded using equity and insured deposits) would pay smaller fees. 

The fee proposal specifically excfudes small business lending. 

The fee is designed to limit the risk of any adverse impact on the large majority of 

financial institutions in the United States. By assessing the fee only on institutions with 

over $50 billion in assets, the fee excludes more than 99 percent of U.S. banks, which 
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currently provide the majority of small loans to businesses and farms across the country. 

If covered firms try to pass on the cost of the fee to their borrowers, they will likely lose 

market share to other institutions. The Congressional Budget Office, in its review of our 

proposal, highlighted these advantages by noting that the proposal "would improve the 

competitive position of small- and medium-size banks, probably leading to some increase 

in their share of the loan market." 

As of April 30, 2012, Treasury has recovered $264 billion from TARP's bank programs 

through repayments, dividends, interest, and other income, compared to the $245 billion 

initially invested. Treasury continues to recover additional funds and estimates that the 

bank programs will result in a lifetime positive return for taxpayers of more than $20 

billion. 

Treasury's estimated lifetime cost figures for T ARP are currently updated quarterly in 

conjunction with the Office of Management and Budget, which for outstanding 

investments in publicly-traded securities such as AIG and GM, are based on the 

aggregate value of the investments at market prices as of the date of the estimate (in this 

case February 29,2012). 

As of February 29,2012, the estimated lifetime cost of Treasury's investment in the 

American International Group (AIG) was $17.62 billion. Treasury holds additional AIG 

common shares that are projected to yield a positive return of$16.43 billion for the 

benefit of the Treasury, which means that the projected net AIG cost is approximately 

$1.19 billion. The Automotive Industry Financing Program (AIFP)-which includes 

Treasury's investments in General Motors, Ally Financial, and Chrysler-has an 

estimated lifetime cost of$21.7 billion. 

As of March 31, 2012, the combined market values of AIG and GM common stock had 

increased by approximately $1.78 billion, which has a corresponding decrease on the 

estimated cost of AIG and AIFP. However, cost changes associated with these common 

stock holdings are sensitive to conditions in the overall equity markets and should be 

expected to adjust. 

18. The President's Budget estimates that the Office of Financial Research (OFR) will 

incur $11 million in expenses in 2013 associated with implementation ofthe Federal 

Deposit Insurance Corporation (FDIC) implementation. 

What are those expenses? 

Section 210(n)(10) of the Wall Street Reform Act provides that certain reasonable 

implementation expenses of the FDIC incurred after the date of enactment of the Wall 

Street Reform Act shall be treated as expenses of the Financial Stability Oversight 

Council (Council). The FDIC must periodically submit requests for reimbursement for 

implementation expenses to the Chairperson of the Council, who shall arrange for prompt 

reimbursement to the FDIC of reasonable implementation expenses. The expenses are for 

rule writing and resolution planning consistent with the FDIC's implementation of its 
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responsibilities under Title II of the Wall Street Reform Act. For further details on these 

expenses, please contact the FDIC. 

The Budget also notes that after July 21,2012, funding of the OFR and the Financial 

Stability Oversight Council (and thus for these FDIC expenses) will be obtained through 

"assessments on bank holding companies with total consolidated assets 0[$50 billion or 

more and non-bank financial companies supervised by the [Federal Reserve's] Board of 

Governors." 

The Budget also notes that after July 21, 2012, funding of the OFR and the 

Financial Stability Oversight Council will be obtained through "assessments on 

bank holding companies with total consolidated assets of $50 billion or more and 

non-bank financial companies supervised by the [Federal Reserve's] Board of 

Governors." 

Are there any legal limits on what those assessments can be? 

Under section 155(d) of Wall Street Reform, assessments are limited to bank holding 

companies with total consolidated assets of$50 billion or greater and nonbank financial 

companies supervised by the Board of Governors. 

The budget for the OFR is determined by the Director of the OFR in consultation with the 

Chair of the Council. The Director of the OFR is a presidentially-appointed, Senateconfirmed position. 

The Council budget is determined by and approved by the members of the Council. 

The Budget also identifies an estimated increase, on page 1065 of the Appendix, in 

OFR full-time equivalent employment from 179 in 2012 to 312 in 2013. Please 

provide information about the positions that the OFR expects to fill during fiscal 

years 2012 and 2013. 

The OFR plans to build to steady state staffing levels of275-300 within the next twentyfour to thirty-six months. Below is a breakdown of the positions by department. 
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Workforce Plan 

Steady State 

Data Center - Business 

,1< Data Center - Infrastructure 

Research and Analvsis 

IlB Office of the Director and 

Support Offices 

Includes reimbursable support. Research staffing to be leveraged through 

networks with outside researchers. 

19. The President's Budget frequently mentions fairness, fair shares, and what is fair 

with respect to tax obligations and after-tax incomes of Americans. Yonr testimony 

on the President's Budget talks of a need for individual tax reform, and identifies 

that: "The key to these reforms is fairness." Of course, such pronouncements raise 

questions of defining what is fair and what is the ultimate objective of using tax 

policy to generate greater equality of after-tax incomes and, perhaps, wealth levels. 

Too much inequality in after-tax income can be socially corrosive and too little 

removes important incentives for productive activities. 

In terms of the objective, using a Gini index or whatever is your preferred measure 

of inequality of after-tax incomes, what is the administration's desired after-tax 

income distribution which would correspond to a situation in which the tax system 

and after-tax income distribution can be considered fair and equitable? 

In terms of the objective and historical experience, using a Gini index or whatever is 

your preferred measure of inequality of after-tax incomes, during what past year 

does the administration believe that the United States has generated the fairest and 

most equitable distribution ofthose incomes? 

In terms of the objective, using a Gini index or whatever is your preferred measure 

of inequality of after-tax incomes, how far do the President's tax proposals in his 

budget, some of which are motivated by the interest of attaining greater fairness, 

move the after-tax distribution in the direction of greater fairness? 

The President's Budget also frequently refers to "middle-class families" and their 

tax obligations relative to others. In terms of a measure of income, precisely what 
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(e.g., what range of such income) is the administration's definition of "middle 

class?" 

We understand that equity and efficiency must be balanced in designing a tax code that 

meets our revenue needs. The Administration has not set a specific metric for after-tax 

income equality that tax reform must achieve. However, high-income families should not 

pay effective tax rates that are lower than those faced by middle-income families (which 

is the essence of the Buffett Rule). In addition, the reformed tax system should be at least 

as progressive as the tax system would be under the President's budget proposals. 

In response to your question, about what past year the administration believes that the 

United States has generated the fairest and most equitable distribution of those incomes. 

The Administration has not made such a determination, and doing so would be very 

difficult. However, the Congressional Budget Office maintains an excellent time series 

of pre-tax income, tax burdens, and after-tax income that clearly demonstrates that 

income inequality has grown in recent decades. Similar data sets have also been 

generated for longer time periods by academic researchers. 

20. Secretary Geithner, you and others in the administration have claimed that the 

President's Budget contains $2.50 of spending cuts for every $1 of increased 

revenue. This number appears to rely partly on a calculation of deficit reduction 

over the next 10 years resnlting from a combination of the President's new 

proposals in his Budget and laws that were enacted last year. If we consider only 

future policy proposals ofthe President's Budget, and ignore spending cuts and tax 

increases that have already been enacted into law, what is the resulting ratio of 

spending cuts to increased revenues associated with the President's future policy 

proposals over the next 10 years? What would that ratio be if you do not count 

interest savings as spending cuts? 

The ratio of$2.50 in spending cuts for every $1 of increased revenue does indeed take 

into account previously enacted deficit reduction measures. As shown in Summary Table 

S-3 ofthe Budget, enacted outlay reductions in 2013 plus Budget spending proposals 

total $3.77 trillion. Enacted receipt increases plus Budget revenue proposals total $1.510 

trillion. The ratio of spending cuts to revenue increases is 2.5. 

Excluding deficit-reduction measures enacted with 2011 and 2012 full-year 

appropriations as well as the savings achieved by the Budget Control Act, the ratio of 

spending cuts to revenue gains is 1.34. However, this calculation ignores the significant 

achievements embodied by these earlier deficit reduction measures. Moreover, it ignores 

the substantial role already played by spending cuts in achieving deficit reduction, and 

therefore the need to now add revenues to the mix in order to achieve a balanced 

approach. 
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It is absolutely appropriate to include the interest savings generated by deficit reduction 

proposals. To exclude them from either calculation would provide an incomplete picture 

of the savings achieved through spending cuts. 

21. The President's Budget calls for tax hikes, some of which are motivated in the 

interest of greater fairness. Administration officials have cited what one official calls 

"mind boggling" shifts in the income distribution from 1979 to 2007. A recent 

Congressional Budget Office analysis has identified as one step to take to arrest 

decades of growth in income inequality adherence to "principles like the Buffett 

Rule, which states that those making more than $1 million should not pay a lower 

share of their income in taxes then middle class families." 

Please provide details of exactly how the administration would implement the 

Buffett idea iu the tax code in terms of changes in tax rates or allowable credits and 

deductions, and not merely in terms of establishing a vague "principle." 

Given those details, if the administration's desired Buffett idea were enacted, how 

much revenue per year do you estimate will be raised? 

Given the projected revenue that would be raised by the Buffett idea, please 

quantity what the effect wonld be on whatever is your preferred measure of aftertax income inequality. 

In the administration's desired implementation ofthe Buffett idea, will it be the case 

that increases in revenue from upper-income taxpayers will be coupled with changes 

in tax rates for other taxpayers such that redistribution occurs through the Buffet 

permutation of our tax code, or is the intention to use the revenue to fund more 

spending or other things? 

The "Buffet Rule" is a principal that should be observed in reforming the tax code in a 

comprehensive manner. It is not a specific legislative proposal and, therefore, we have 

not estimated the effect that implementing this principle would have on revenue or the 

after-tax distribution of income. As you know, the overall impact will depend on the 

other features of the reformed tax system. 

The Administration has not set a specific metric for after-tax income equality that tax 

reform must achieve. However, high-income families should not pay effective tax rates 

that are lower than those faced by middle-income families (which is the essence of the 

Buffett Rule). In addition, the reformed tax system should be at least as progressive as 

the tax system would be under the President's budget proposals. 

We look forward to working with this Committee to develop and implement 

comprehensive tax reform that is fiscally responsible, that leads to a Tax Code that is 

simpler and that has lower rates, that has a broader tax base that cuts inefficient and 
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unfair tax breaks, that promotes jobs and growth, and that ensures that high-income 

families do not pay effective tax rates that are lower than those faced by middle-income 

families. 

22. The President, in his Budget, states that last year there was " ... the willingness of 

Republicans in Congress to risk the first default in our Nation's history ... " Aside 

from being factually incorrect, it is not clear why Republicans in Congress have 

been singled out. An impasse in a debate over an issue typically involves more than 

one group of people. 

Given that there was a long-lived debt limit impasse among many engaged in the 

debate, does the administration agree that in symmetry to what the President wrote 

in his budget it was also the case that there was a willingness of Democrats in 

Congress to risk the first default in our Nation's history and a willingness ofthe 

administration to risk the first default in our Nation's history? 

During the debt limit impasse there was a willingness of the administration to inject 

uncertainty into the finances of American seniors and our troops when the President 

in July of last year identified, for example, that he could not guarantee that Social 

Security payments would be made on August 3 if a debt deal was not reached. 

However, the Treasury Department was projecting late in July and early in August 

that it would have sufficient cash and liquid assets to make the payments. There 

were assets that could have been liquidated, had the projections been too low, Social 

Security payments could have been made, thereby extinguishing a like amount of 

debt owed by Treasury to the Social Security Trust Funds. That would have opened 

up a corresponding like amount of additional headroom under the statutory debt 

limit which, in turn, would have allowed Treasury to issue a like amount of fresh 

debt to recapture the funds spent to make Social Security payments and, in the end, 

would have had no effect on where debt subject to the debt limit stood relative to the 

limit. Why did Treasury and the administration not respond during the debt limit 

impasse to my inquiries about Social Security payments and questions about how 

much in cash and liquid assets were available and projected to be available at the 

Treasury in late July and early August of last year? 

I also inquired of Treasury and voting members ofthe Financial Stability Oversight 

Conncil during the impasse concerning what contingency plans were being made for 

the possibility of default on U.S. obligations or a downgrade ofthe sovereign rating 

of the U.S., which unfortunately materialized after the impasse. I have to date not 

received adequate responses. Statement by Federal Reserve (Fed) officials and an 

entry in the minutes ora meeting of the Fed's Federal Open Market Committee 

clearly identify that contingency plans were developed, at least with input from the 

Fed and Treasury. Yet I have not received information about such plans that I 

requested, even after the impasse when the information is no longer "market 

sensitive." Reports in the press identify that the Treasury Secretary provided some 

assurances to an executive of a major Wall Street financial firm with respect to 
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contingency plans for dealing with Cunctioning of the payments system. The 

Treasury Secretary's telephone log shows communications between the Secretary, 

on August 1,2011, and Mr. Larry Fink, Mr. Lloyd Blankfein, Mr. Jamie Dimon, 

and Mr. Warren Buffett. Please provide me with any contingency plans developed 

by Treasury, alone or in conjunction with the Federal Reserve or other regulators. 

Please also identify information provided to executives of major financial firms or 

investors prior to resolution of the debt limit impasse concerning contingency plans 

oC the federal government Cor what were then possibilities of a U.S. government 

deCault or a downgrade ofthe U.S. sovereign credit rating. 

Beginning in January of last year, and continuing until the debt limit was raised on· 

August 2, 2011, Treasury repeatedly stated that there was no alternative to an increase in 

the debt limit. During this period, Secretary Geithner wrote at least ten letters to 

Members of Congress stressing the importance of raising the debt limit. Secretary 

Geithner made it clear that it would be irresponsible for "either party" to use the full faith 

and credit of the United States as a bargaining chip.4 

Treasury attempted to provide as much transparency as possible during the debt limit 

impasse, including providing monthly updates. Secretary Geithner received a letter from 

Senator Hatch on July 27,2011, requesting additional information regarding the debt 

limit. Secretary Geithner sent a response three business days later, on August 1, 2011. 

Treasury has responded to a number of follow-up inquiries from Senator Hatch over the 

ensuing months, including providing projections from July 29,2011 and August 1,2011 

regarding the projected cash balance on August 2, 2011. The most accurate and up-todate source of information on Treasury's cash position is the Daily Treasury Statement, 

which is made public every day and is available on Treasury's website. 

In the event that the debt limit had not been not raised by August 2, Treasury was 

prepared to alter its normal auction schedule for the sale of Treasury securities, and at a 

regularly scheduled meeting with primary dealers on July 29,2011, Treasury notified 

them that such alterations were possible. Treasury did not provide information regarding 

contingency plans to Wall Street that was not made available to Congress and the public. 

With respect to how Treasury would have operated if the debt limit had not been raised: 

In the period prior to August 2, 2011, Treasury considered a range of options, many of 

which had also been considered by previous Republican and Democratic 

Administrations. These options included gold and other asset sales; delaying payments; 

across-the-board payment reductions; and various ways of attempting to prioritize 

payments. However, after careful consideration of all of these ideas, we reached the 

same conclusion reached by previous Administrations: that these options could neither 

protect America's creditworthiness from irreparable harm, nor shield citizens from the 

severe economic effects of a default crisis. This is why Secretary Geithner maintained, as 

did previous Treasury Secretaries who faced debt limit impasses, that there was no viable 

alternative to a timely increase in the nation's borrowing authority. 

4 Letter from Sec. Geithner to Sen. Reid (May 2, 2011). 
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The decision of how we would operate ifthe United States exhausted its borrowing 

authority, if inaction by Congress had made it necessary, would have been made by the 

Secretary of the Treasury and the President of the United States. No such decision was 

made. Fortunately, Congress acted to increase the statutory debt limit and prevent a 

default crisis before such a decision became necessary. 

23. The President's Budget proposes a new $100-per-flight mandatory surcharge for air 

traffic services, with certain exemptions. I would like more information on this 

proposal. Given that this new surcharge is identified in the budget as a user fee, I 

presume that proceeds would be deposited in the Airport and Airway Trust Fund. 

Is this the case? 

The President recently signed the FAA Modernization and Reform Act of 2012, 

which reauthorizes FAA appropriations through FY 2015. Neither the Senate nor 

House passed FAA bills that were considered in a conference committee contained a 

$100 surcharge. I did not hear from the administration any advocacy to include this 

surcharge in the FAA bill during conference deliberations. 

Given that FAA reauthorization has been considered by Congress for the last 

several years, why wasn't this surcharge proposed in the context of FAA 

reauthorization? 

How was the administration's proposal developed, and what stakeholders did the 

administration meet with as the proposal was formnlated? Why was $100 set as the 

amount of the surcharge? 

The most recently available Congressional Budget Office estimates of receipts and 

outlays for the Airport and Airway Trust Fund show a Trust Fund surplus going 

forward. Given this, how did the administration reach the conclusion that it was 

necessary for the aviation community to more equitably share the costs of air traffic 

services? 

If the costs of air traffic services really are not equitably distributed, how does 

imposing an additional $100 surcharge on commercial and general aviation correct 

the deficiency in equitability? 

The "Analytical Perspectives" volume of the Budget notes that " ••• commercial and 

general aviation can pay very different aviation fees for those same air traffic 

services." If the President's proposal is enacted, wouldn't commercial and general 

aviation still pay different fees, if current fees were increased by $100 for both 

groups? 

For details on how the proposal was developed and with whom the proposal was 

discussed, I would direct you to the Department of Transportation which was the lead 

Administration agency in dealing with the FAA reauthorization legislation. 
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This fee would not eliminate the disparate fee treatment commercial and general aviation 

face. As you know, there are both fixed and variable costs imposed on the air traffic 

system by both general and commercial aviation. However, this fee does increase the 

percentage of total fees borne by general aviation, thus reducing the relative disparity in 

the treatment of the two sectors. 

Revenues would be deposited in the Airport and Airway Trust Fund. 

24. The President's Budget suggests newfound urgency to use funds for mortgage relief, 

including funds already available in the Troubled Asset Relief Program (TARP). 

Continued vigilant oversight ofTARP is, of course, necessary and, I am sure, 

welcomed by you. 

On February 1, 2012, Christy Romero was nominated to be the Special Inspector 

General for the TARP (SIGTARP). Given that Mr. Barofsky left the position nearly 

a year ago, why has it taken so long for his Deputy, Ms. Romero, to be nominated? 

It is my understanding that Ms. Romero served as acting SIGTARP. Because of the 

Federal Vacancies Reform Act, however, she reverted back to her previous position 

as Deputy Special Inspector General after 210 days. Given that the administration 

spent nearly a year searching for someone who was essentially already doing the 

job, what did the Administration do to fill the office of SIGT ARP for the past year? 

Do you pledge to fully cooperate with the office ofthe SIGTARP at all times and to 

direct all Treasury employees to do the same? 

Oversight has played an important and welcomed role in the Troubled Asset Relief 

Program (TARP). Since the program's inception, Treasury has maintained an active 

dialogue with SIGT ARP, as well as the other bodies with oversight responsibility over 

the TARP, including Congress, the Financial Stability Oversight Board, and the 

Government Accountability Office. 

We were pleased that Christy Romero was sworn in as the next Special Inspector General 

for the TARP on April 9 after being confirmed by the United States Senate. Treasury has 

had a productive working relationship with Ms. Romero and the many professionals who 

work for SIGTARP since Mr. Barofsky's departure. Assistant Secretary Massad is 

scheduled to meet weekly with Ms. Romero to discuss Treasury's current activities and to 

address any concerns ofSIGTARP. In addition, the Office of Financial Stability (OFS) 

interacts daily with Ms. Romero's team to ensure SIGTARP has the information 

necessary to conduct oversight ofTARP. 

25. The President's Budget proposes a six-year, $476 billion surface transportation 

reauthorization paid for in part with funds made available from ramping down 
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military operations overseas. It is my understanding that these funds will only exist 

in the curreut Congressional Budget Office baseline until they are not reflected in a 

current year's appropriations. After that, this spending as proposed by the 

President's budget would be scored as new spending. 

Currently, receipts iuto the Highway Trust Fund are less than outlays from the 

Trust Fund. Given that the President's budget does not alter this dynamic, how does 

the administration propose that Surface Transportation Reauthorization would be 

funded in six years, if the proposal contained in the FY 2013 budget were to be 

enacted into law? 

The President has always been on record as supporting enactment of a surface 

transportation bill that invests in our future in a fiscally responsible manner. The 2013 

Budget does exactly that - providing needed resources to rebuild America without adding 

to the deficit, fully offsetting the cost by reducing overseas military operations. 

The Administration looks forward to working with Congress to reauthorize surface 

transportation programs over both the short and long term. The Administration's Surface 

Transportation Reauthorization proposal treats all surface transportation spending 

(outlays) as mandatory and funding will be subject to "PAYGO" provisions. This is 

consistent with a fully paid for surface transportation bill that the Administration has 

consistently advocated. Moving the program from the current hybrid trust fund model 

into a fully mandatory program, consistent with how other trust funds are treated, will 

help enhance fiscal discipline in the future. 

26. Implementing aspects ofthe President's Budget would require increased staffing at 

the Treasury Department and filing of positions that require nominations from the 

President and, typically and Constitutionally, advice and consent ofthe U.S. Senate. 

Confusingly, the President, in responses to press inquiries on December 8 oflast 

year, stated: "But part of what's happened over on Capitol HiII- not just on this 

issue, but on every issue - is they will hold up nominations, well-qualified judges 

aren't getting a vote -- I've got assistant secretaries to the Treasury who get held up 

for no reason, just because they're trying to see if they can use that to reverse some 

sort of law that's already been passed. And that's part of what gets the American 

people so frustrated -- because they don't feel like this thing is on the level." 

(http://www.whitehouse.gov/the-press-officel2011112/08/statement-president).No 

one on my side of the aisle in Congress wishes to generate frustration, but the sense 

in which nominated Treasury officials are being held up by Republicans or that 

Republicans are holding up anyone in order to reverse a law leaves me confused. 

Perhaps I could receive clarification from the administration. Of course, Congress 

has a Constitutional obligatiou to exercise oversight responsibilities, and I would 

hope that our responsibilities are not viewed as hold ups. 

Which assistant secretaries of the Treasury are being held up and precisely what is 

the nature ofthe hold up? 
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I can't speak for the President, but my impression from reading the transcript of his 

remarks is that he was not referring to any pending nominations or placing responsibility 

on one party or another. 

Does anyone in the administration know which "law that's already been passed" 

was tbe subject ofthe President's remark, and can you identifY the manner in which 

anyone in Congress could reverse an existing law by in some sense holding up the 

nomination of assistant Treasury Secretaries? 

No. I can't speak for the President, but my impression from reading the transcript is that 

he was referring to the concerns he raised earlier in his remarks relating to the changes 

being sought to the Wall Street Reform Act regarding the Consumer Financial Protection 

Bureau. 

27. In discussing tax reform in your testimony on February 14, you mentioned that it 

was important to "retain progressivity." Please identifY: 

a. What you mean by retaining progressivity? 

b. Whether you believe the tax code is sufficiently progressive? 

c. Whether you believe the tax code should be more or less progressive than 

it currently is and, if so, how much and by what measure? 

d. Do you believe the tax laws should have as a goal wealth redistribution on 

equal par with a goal of revenue collection? 

e. If it could be proven that making the Code more progressive would harm 

GDP growth, would you believe it a mistake to make the Code more 

progressive? 

Regarding items (a) through (c), the Administration has not set a specific metric for aftertax income equality that reform must achieve. However, high-income families should not 

pay effective tax rates that are lower than those faced by middle-income families (which 

is the essence of the Buffett Rule). In addition, the reformed tax system should be at least 

as progressive as the tax system would be under the President's budget proposals. 

Regarding items (d) and (e), we know that equity and efficiency must be balanced in 

designing a tax code that meets our revenue needs. Our current Budget proposal does 

this. We look forward to working with this Committee on comprehensive tax reform that 

is fiscally responsible, and that leads to a Tax Code that is simpler with lower rates, that 

has a broader tax base that cuts inefficient and unfair tax breaks, that promotes jobs and 
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growth, and that ensures that high-income families do not pay effective tax rates that are 

lower than those faced by middle-income families. 

28. You support an extension of the Social Security Tax cut by two percentage points 

for the remainder of 2012. As I understand it, one of your reasons for that support is 

the persistently high rate of unemployment. I agree that unemployment remains 

persistently high and remains above projected rates promised by the President's 

stimulus. Do you anticipate supporting such a cut for 2013 or thereafter? What level 

of unemployment would indicate to administration officials a need for further 

extension ofthe payroll tax holiday beyond 2012? 

The extension of the payroll tax cut through the end of this year was signed into law on 

February 23,2012. The payroll tax cut extension is expected to help 160 million 

American workers at a time they need it most and also helps support the broader 

economy. 

The Administration in the FY2013 Budget currently assumes the payroll tax cut will 

expire as planned at the end of2012. 

29. In 2009, you and the President proposed limiting the tax benefit from itemized 

deductions to 28%. At that time, you estimated that this would raise $267 billion 

over ten years for the federal government. In 2011, you and the President expanded 

this proposal to include limiting the tax benefit from the section 911 foreign earned 

income exclusion, from the employer-provided health insurance exclusion, and from 

the exclusion for interest paid on statellocal bonds. It appears that you and 

President Obama have added to the list and now propose limiting the tax-benefit to 

28% for retirement contributions as well. You now estimate that this 28% cap 

would raise $584 billion over ten years for the federal government. Can you explain 

whether the retirement limitation: 

a. Would apply to 401(k), TSP, 403(b), and 457 plans? 

Yes, the proposal would limit the tax value of exclusions for employee 

contributions to these defined contribution plans to 28 percent for highincome taxpayers. 

b. Would include IRAs? 

Yes, the proposal would limit the tax value for contributions to IRAs to 28 

percent for high-income households. 

c. Would apply to both employee deferrals and to employer matcbes? 
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No, the limitation would not apply to employer matches. 

Would be taxed yet again when money is withdrawn from the account in retirement 

(or would the account somehow have a tax basis, or somebow be considered to be a 

hybrid, part-Roth and part-traditional, retirement account? 

Our estimate does not assume any adjustment to basis to account for the limitation on the 

value of contributions in determining the tax liability due on distributions. Note that for 

the small group of taxpayers who are affected at all by the limit, the proposed limitation 

generally would reduce, but not eliminate, the tax benefit received for these elective 

retirement savings because the account value grows tax-free over time. However, I 

understand your concern, and the Administration would welcome the opportunity to work 

with you to specify the details of how a limit on this exclusion for retirement 

contributions made by high-income taxpayers should be structured. 

Please, also, break down tbe $584 billion figure and explain how mucb of this comes 

from the application of the proposal to itemized deductions, how much from 

limiting the tax benefit for retirement contributions, and how mucb from limiting 

the exclnsions for foreign-earned income, employer-provided health insurance, and 

state and local bond interest. 

We have not estimated the components of the proposal separately and so this breakdown 

is unavailable. 

30. Tbe administration bas proposed tbat the Internal Revenue Code "provide tax 

incentives for locating jobs and business activity in the United States and remove tax 

deductions for sbipping jobs overseas." Tbe administration bas estimated tbat tbis 

would reduce revenue to the federal government by $90 million over 10 years. 

However, providing "tax incentives for locating jobs and business activity in tbe 

United States" presnmably reduces revenue to the federal government, while 

removing "tax deductions for sbipping jobs overseas" presumably raises revenue for 

the federal government. So, the $90 million figure is a net figure of these two 

provisions. Please identify the separate revenue estimate for each of these two 

provisions. That is, please identify, separately, the revenue estimate for "tax 

incentives for locating jobs and business activity in the United States" and tbe 

revenue estimate for removing "tax deductions for shipping jobs overseas." 

The proposed general business credit for expenses connected with insourcing is estimated 

to reduce tax revenue by $241 million over the FY 2013 -FY 2022 10-year budget 

window. The disallowance of deductions connected with outsourcing is estimated to 

increase tax revenue by $151 million over the FY 2013 - FY 2022 10-year budget 

window. 
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31. I was contacted last year by the Utah Retirement Systems (URS), which collectively 

cover approximately 175,000 retired and active workers in Utah. The letter outlines 

a serious issue in connection with Section 457 A of the Internal Revenue Code and its 

effect on the method by which URS compensates investment advisors. 

Specifically, the statutory language of Section 457A appears to be unclear as to the 

treatment of stock options, even though the legislative history contemplates, and 

guidance published by Treasury and the Internal Revenue Service allows, the use of 

certain stock options as permissible compensation. Section 457A(d)(3)(A) defines a 

"nonqualified deferred compensation plan" subject to the application of Section 

457A to have the same meaning given under Section 409A(d), except to also include 

in the definition any "plan that provides a right to compensation based on the 

appreciation in value of a specified number of equity units of the service recipient." 

However, the legislative history contemplates, and current IRS guidance allows, the 

use of certain stock options as permissible compensation. URS wants to use the 

types of stock based compensation permitted in the ms guidance. 

It is my understanding that other state pension administrators are also concerned 

with this issue. Stock option-based compensation plans are beneficial for U.S. public 

pension plan investors because they better align the interests of fund managers to 

investor interests over time and provide investors the ability to clawback 

compensation for poor performance by the fund manager or investment advisor. 

However, despite the legislative history and guidance by Treasury and the ms, fund 

managers are hesitant to engage in these transactions due to the lack of clarity in the 

statute. 

A technical correction to Section 457 A codifying the ms guidance would clarify the 

statutory language, resolve the uncertainty surrounding this issue, and provide 

consistency between the statute and the legislative history and administrative 

guidance. 

a. Would you support a technical correction to Section 457 A that adopts the 

Treasury and ms guidance? 

b. If not, in light of the fact that the technical correction would follow the 

current interpretation of Section 457A pnblished by Treasury and the 

ms, please explain in detail why you would not support such a technical 

correction? 

Early in 2009, the Treasury Department and IRS issued Notice 2009-8, which addresses 

the treatment of stock options under section 457 A. Notice 2009-8 states that certain 

types of nonqualified stock options and stock-settled stock appreciation rights, as 

described in the Notice, are excluded from the section 457 A definition of nonqualified 

deferred compensation and, therefore, are not subject to section 457 A. With this 

guidance, which may be relied upon by taxpayers, we believe that we have addressed the 

issue raised in your question. Before determining whether a technical correction to 
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section 457 A to address stock options is necessary, we would need to better understand 

the reason that a technical correction is being requested. 

32. Internal Revenue Code section 132(t) allows employers to provide certain "qualified 

transportation fringe" benefits that are not taxable to employees. A transit pass is 

stated expressly in the Code as a qualifying transportation fringe. A qualified 

transportation fringe includes a cash reimbursement only if a voucher or similar 

item that may be exchanged only for a transit pass is not readily available for direct 

distribution by the employer to the employee. The Code defines a transit pass to 

mean "any pass, token, farecard, voucher or similar item entitling a person to 

transportation (or transportation at a reduced price)" on mass transit or in a 

commuter highway vehicle. IRS regulations determined that a debit card that can 

be used to purchase items other than transit fare media is equivalent to cash and is 

not a voucher. There is no public information available that indicates whether the 

DOT TRANServe debit card can be programmed to restrict its use to only fare 

media purchases. 

The Department of Transportation (DOT) recently announced that all DOT 

TRANServe customers with participants who ride VRE, MARC and MT A 

commuter buses must migrate to the use of the TRANServe Debit Card immediately 

in order to continue to receive transit benefits. The DOT further stated that 

"TRANServe's Counsel has been working closely with Counsel from the U.S. 

Treasury Department, Financial Management Service and Internal Revenue Service 

regarding the relevant statutory and regulatory authorities. This is to ensure our 

debit card meets the requirements of IRS Revenue Ruling 2006-57 and does not 

create a taxable event or place a tax burden on the federal employee." DOT 

currently has contracts with three providers of paper transit vouchers for many 

transit services in several cities, including the VRE and MARC, so transit vouchers 

clearly are readily available for those services. The DOT mandate to use debit cards 

instead of transit vouchers when vouchers remain readily available appears to 

violate the non-taxable transportation fringe benefit rules, potentially putting 

thousands of federal employees at risk of unwittingly receiving taxable income when 

they use the debit cards to purchase transit fares. Also, using debit cards that could 

buy general merchandise as well as transit fares can be expected to increase waste, 

fraud and abuse at the expense of American taxpayers. 

Neither Treasury, IRS nor DOT have explained how the law was applied to the facts 

in order to reach the conclusion that switching to debit cards when vouchers were 

readily available meets the tax-free fringe benefits requirements and does not 

trigger taxable income to federal employees. Without knowing the rationale that 

was used and what the IRS told the DOT, it is impossible to determine whether the 

DOT's move to debit cards comports with the law and regulations so that workers 

will not be caught by surprise at tax time. This lack of transparency and 

accountability is unacceptable. 
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a. State tbe IRS and Treasury's current policy regarding qualified transportation 

fringe benefits, including, but not limited to, wben transit passes are considered 

not readily available, wben debit cards are considered as voucbers and wben 

tbey are considered as casb, and tbe circnmstances under wbicb casb or casb 

equivalents do not trigger taxable income for employees. 

The current interpretations relevant to your questions are set out in the regulations 

under Internal Revenue Code section 132(1) and in Revenue Ruling 2006-57. 

Section 132(1)(3) of the Code generally allows employers to use bona fide cash 

reimbursement arrangements to provide employees with qualified transportation 

fringe benefits. This section, however, prohibits use of such arrangements to provide 

transit benefits "if a voucher or similar item which may be exchanged only for a 

transit pass" is "readily available." Section 1.132-9, Q&A-16(b) of the Regulations 

specifies that a voucher or similar item is not readily available if the entity providing 

it imposes restrictions that effectively prevent the employer from obtaining vouchers 

appropriate for distribution to employees. A nonexclusive list of examples of such 

restrictions include: 

(\) Excessive fare media charges: The term "fare media charges" refers to extra 

fees that the voucher-provider requires employers to incur to furnish employees 

with vouchers. Such fees are excessive if the average annual fare media charges 

that the employer incurs to provide its employees with transit benefits via 

vouchers are more than one percent of the average annual value ofthe vouchers 

for a transit system. 

(2) Advance purchase requirements: A voucher-provider imposes an excessive 

advance purchase requirement if it "does not offer vouchers at regular intervals or 

fails to provide the voucher within a reasonable period after receiving payment for 

the voucher." The regulations clarifY that a requirement that employers purchase 

vouchers only once per year is an excessive advance purchase requirement, but a 

requirement that an employer purchase vouchers on a monthly basis is not. 

(3) Purchase quantity requirements: A voucher is not readily available if the 

voucher-provider requires the employer to purchase vouchers in quantities that are 

not reasonably appropriate to the number of employees who use public transit. 

(4) Limitations on denominations of available vouchers: A voucher is not readily 

available ifthe voucher-provider requires the employer to purchase vouchers in 

denominations that are not appropriate for distribution to the employer's 

employees. 

As discussed below, certain statutory restrictions applicable to Federal 

government agencies can result in vouchers not being readily available to those 

agencies although the vouchers would be available to a private employer in the 

same area whose employees are using the same transit system. 
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The position of the IRS has been that the administrative costs of distributing 

vouchers to employees would not prevent the vouchers from being readily . 

available. 

Revenue Ruling 2006-57, which became effective January 1,2012, provides guidance 

on the use of smartcards, debit or credit cards, or other electronic media to provide 

qualified transportation fringes. This includes guidance on when a debit or credit card 

can qualifY as a voucher, and when a debit or credit card can be used to administer a 

bona fide cash reimbursement system. 

b. Describe the complete fact pattern on which the advice from the IRSlTreasury to 

the DOT was based. 

DOT indicated that participants in the national capital region (NCR) who commute 

using transit systems that do not accept the Washington Metropolitan Area Transit 

Authority (WMA TA) SmarTrip card would need to begin receiving their monthly 

transit benefits via debit card in December of 20 11. As a result of changes in the 

SmarTrip card system, WMA T A notified transit providers and transit authorities in 

the NCR, including VRE, MARC, and MT A, that it would no longer accept paper 

vouchers after November, 20 II. 

DOT further indicated that no other voucher or transit pass was available for use by 

Federal government employers to provide benefits on these non-WMTA transit 

systems because of restrictions placed on the use of Federal funds under 31 U.S.C. 

section 3302. Under 31 U.S.C. 3302, Federal agencies are prohibited from holding 

public money outside of Treasury, meaning that agencies may not have a private 

entity or financial institution hold such money. The only entities that may hold public 

money are depositaries and financial and fiscal agents of the United States, which are 

designated by the Secretary of the Treasury and required to collateralize any public 

money they hold. See 12 USC 90, 265, 332, 1767 and 391. Agency funds deposited 

in an account to provide or reimburse for transit benefits are public money. Thus, a 

Federal agency may not use a private contractor to hold and distribute transit benefit 

funds. DOT's delivery of transit benefits via debit card involves the depositing of 

transit benefit funds to an account with a designated fiscal agent where they are held 

on behalf of the agency until utilized by cardholders. Funds in the account belong to 

the agency and funds that have been deposited to the account but that are not spent by 

cardholders for transit are returned to the agency. Our understanding is that the return 

of unused amounts to the agency was intended a means of complying with Executive 

Order 13150, which was issued in 2000, and provides for Federal agencies in the 

national capital region to provide transit benefits for commuting to the extent 

possible, as permitted under section 132(t). DOT interprets the order as limiting 

monthly transit benefits to the amounts used for commuting and as thus requiring any 

unused benefits remaining at the end of the month to be returned to the agency. DOT 

indicated that other methods of providing transit benefits for the VRE, MARC and 
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MT A systems did not satisfy the requirement to return unused amounts in a way that 

would not violate the requirements on handling Federal funds. 

Under these circumstances, the conclusion was that vouchers are no longer readily 

available and the use of debit cards (rather than cash, checks or electronic fund 

transfers to reimburse an employee for expenses incurred) is permitted as a means of 

implementing a cash reimbursement system. 

c. Explain the complete legal analysis developed by the IRSlTreasury that was 

provided to, or used to advise, the DOT, including, but not limited to, how the 

use of DOT TRANServe's debit cards when transit vouchers were readily 

available for VRE and MARC (and other transit services) does not constitute 

taxable income to federal employees. 

Please see the answer to "b." above. 

d. Provide any and all written comments, advice and guidance that were provided 

to the DOT by the IRSlTreasury regarding this matter, as well as a description 

of any oral comments, advice and guidance. 

On November 1, 2011, the IRS sent an email to DOT providing written advice. The 

text of that email was as follows: 

"Based on recent conversations between our offices and information provided 

by your office, we have concluded that your proposal to provide certain federal 

employees in "Service Area 1" (i.e., Maryland, the District of Columbia, and 

Virginia) with transit benefits via a merchant category code (MCC) restricted 

debit card complies with Code section 132(f). Specifically, and as more fully 

explained below, the information and preliminary testing data you have 

provided indicates that the debit card constitutes a "transit pass" in the Norfolk 

and Baltimore metropolitan regions, and its use in the National Capital Region 

(NCR) to purchase fare media on transit systems that do not accept the 

WMA T A SmarTrip card satisfies the requirements for a bona fide cash 

reimbursement program (and is usable as such since a transit pass does not 

appear to be otherwise readily available for use by DOT as a federal agency for 

these limited systems to be required under the Code and regs). Therefore, as we 

discussed and as set forth below, the distribution of benefits via debit card to 

certain federal employees in Service Area 1 will not result in additional income 

and wages to those employees. 

Participants in the NCR 

WMATA is the main transit system provider in the NCR. We understand that 

WMA TA is fully implementing a "purse" system auto load beginning on 

December I, 20 II. Under the purse system, funds stored on a participant's 

SmarTrip card will be separated into a Transit Benefit Purse, Personal Purse, 
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and Parking Benefit Purse. These funds will not be transferable from one purse 

to another. Funds in the Transit Benefit Purse can only be used to purchase fare 

media. Federal government employers will only fund a participant's Transit 

Benefit Purse, and unused monthly benefits will be credited back to the 

employer's account at the end of each month. Revenue Ruling 2006-57, which 

is effective January 1, 2012, provides that fare media stored on smartcards that 

is useable only as fare media for mass transit systems qualifies as a "transit 

system voucher." Once the purse system is implemented, the SmarTrip card 

will qualify fully as a transit pass as of the January 1,2012 effective date of 

Revenue Ruling 2006-57, because employer funds will be confined to the 

Transit Benefit Purse where they can only be used to purchase fare media. 

However, we understand that transit benefits loaded onto the SmarTrip card 

directly by individual employees will not be placed into separate purses. Thus, 

employees using debit cards to load benefits onto their SmarTrip cards will be 

able to use the benefits on their cards for either parking or fare media. Under 

these circumstances, the SmarTrip card would not qualify as a "transit pass" 

because it can be used to purchase both parking and fare media. Moreover, we 

understand that SmarTrip cards with Transit Benefit Purses loaded directly by 

employers are readily available to federal government employers. Thus, as we 

have discussed, beginning on January 1,2012, the law requires federal 

employers in the NCR to distribute transit benefits via the SmarTrip card 

Transit Benefit Purse to those employees who commute using transit systems 

that accept the SmarTrip card. 

We understand that participants in the NCR who commute using transit 

systems that do not accept the SmarTrip card will begin receiving their 

monthly transit benefits via debit card in December of 20 11. As a result of the 

new purse system, WMA T A has notified transit providers and transit 

authorities in the NCR, including VRE, MARC, and MT A, that it will no 

longer accept paper vouchers after November, 2011. You have indicated that 

no other vouchers or transit pass is available for use by federal government 

employers to provide benefits on these transit systems as a result of the 

restrictions placed on the use of federal funds under 31 U.S.C. section 3302. 

For this reason, the federal government is effectively prohibited from 

continuing to use WMA TA's SmarTrip program to indirectly provide federal 

employees with benefits on these transit systems through other providers. As 

we discussed, because transit passes are not readily available for distribution to 

participants who use transit systems that do not accept the SmarTrip card, the 

use of debit cards under these circumstances is permitted as a means of 

implementing a cash reimbursement system. Moreover, your debit card 

program qualifies as a bona fide reimbursement program because amounts are 

credited to the MCC-restricted debit cards equal to the employees' mass transit 

commuting expenses, debit card statements are subject to monthly review by 

federal agency employers to ensure that the cards are used only to purchase 

fare media, and excess amounts are returned to the employer at the end of each 

month. 
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Participants outside the NCR 

For participants working in the Norfolk and Baltimore metropolitan regions, 

we have concluded that the debit cards qualify as "transit passes" under section 

132(f). As tested thus far, the restrictions that are placed on the cards 

effectively permit employees to use them only to purchase fare media on mass 

transit systems. (You are working to address the few anomalies and will 

continue to track the use to ensure the anomalies don't continue or are 

addressed appropriately when they do occur.) Based on the facts you have 

provided regarding its operation in the Norfolk and Baltimore metropolitan 

areas, the debit card is consistent both with the statutory and regulatory 

standard for a transit pass for transit in these metropolitan areas. Moreover, the 

debit card is consistent with the intent behind the requirements of Revenue 

Ruling 2006-57 since the restrictions on the card appear to prevent recipients 

of the cards from using the cards for purposes other than purchasing fare media 

on mass transit systems. Accordingly, we consider the debit cards to qualify as 

transit passes in the Norfolk and Baltimore metropolitan areas, pending further 

testing of the cards." 

Please see the answer to "b." above for a summary of oral discussions. 

e. Does the IRS intend to open a guidance project during 2012 to consider qualified 

transportation fringes? If so, when will a notice requesting comments be issued? 

If not, why not, since the issue is on the guidance priority list. 

The Treasury Department and the Internal Revenue Service, along with DOT, have 

become aware of changes in technology that may give rise to the need for additional 

guidance on the use of electronic media to provide transit benefits. We are currently 

working on a notice requesting comments relating to these issues that we expect to 

publish. 

From: Senator Roberts 

1. Mr. Secretary. I'm struggling to understand the repeated rhetorical and policy 

attacks that this Administration has leveled against Business Aviation. These 

punitive messages have a chilling effect on the market and are making it more 

difficult for this critical indnstry to fully recover in this challenging economic 

environment. Mr. Secretary - can you go on the record and agree that Business 

Aviation is essential to our economy? That this industry would be a top contributor 

to your stated goals of doubling exports, retaining and building a robust 

manufacturing base in this country and ensuring that communities of all sizes can 

access and compete in markets across the state or across the world? Can you 

acknowledge that business aviation provides a large number of high paying 

manufacturing and services jobs across the country; helps companies to be efficient 
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and competitive in this global marketplace; is a lifeline to communities with little or 

no airline service; and, plays a vital part in this country's emergency preparedness 

and disaster assistance? 

I agree with you that the aviation industry is a vital part of the U.S. economy, and that it 

makes significant contributions to employment and to strengthening the nation's 

manufacturing base. The Aerospace Industries Association estimates that as of March 

2011, aviation employment (in aircraft, engines and parts) exceeded 400,000,5 while the 

Bureau of Economic Analysis indicates that 2010 investment in air transportation-related 

equipment and software totaled $10.5 billion. Besides these direct impacts, aviation 

stimulates other sectors of the economy, with one estimate suggesting that a $1 dollar 

increase in aviation manufacturing output can stimulate $2 worth of additional 

manufacturing activity.6 

Certainly the Administration recognizes the importance of a well-functioning national 

aviation system, to all communities. The Administration has taken steps through its 

aviation-related policies to strengthen the nation's aviation system. For example, the 

FAA Modernization and Reform Act of 20 12 will provide funds for the modernization of 

the air traffic control system which will help communities of all sizes throughout the 

country. 

More broadly, continuing to improve our nation's air traffic control systems through the 

NextGen program will help American air travelers save time and money and will save 

billions of gallons of jet fuel annually. The Treasury Department, along with the Council 

of Economic Advisers recently released a report, "A New Economic Analysis of 

Infrastructure Investment" which cited a study that found: "Total projected savings from 

NextGen implementation would result in $29 billion of net benefits annually for the 

United States by 2026." The full report can be found at: 

http://www.treasury.gov/resource-center/economicpolicy/Documents/20 J 20323 InfrastructureReport.pdf. 

2. Mr. Secretary, I have heard from people across Kansas and across the country who 

can't reconcile the President's strong support for building airplanes in this country, 

but clear distain for the people and companies wbo buy and use tbese US 

products. Do you understand tbat if you continne to say tbat we like manufacturing 

aircraft but will punish people who use them that we won't have a manufacturing 

base for long because you can't build products if there are no customers? 

We both agree that aircraft manufacturing in the United States creates and sustains jobs, 

stimulates investment, and helps strengthen the manufacturing sector more broadly. The 

Administration believes this sector is important to the nation's health and has taken 

5 Aerospace Industries Association, http://www.aia-aerospace.org/assets/statI2.pdf Including guided missiles, space 

vehicle parts, and search/navigation instruments raises the total to 621,000. 

6 The Economic Impact of Civil Aviation on the U.S. Economy, U.S. Department of Transportation - FAA August 

2011 (FAA Report) Tables 4 and 5. 

htlp:llwww.faa.gov/air traffic/publicationslmediaiFAA Economic Impact Rpt 2011.rulf 
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decisive action to strengthen its perfonnance. For example, The American Recovery and 

Reinvestment Act of 2009 provided funding to invest $200 million in FAA facilities and 

equipment and $1.1 billion in grants-in-aid for airports. Another example consists of the 

Export-Import (Ex-Im) bank financing programs that assist U.S. companies selling 

abroad. These programs have helped civilian aviation become an important contributor 

to our international trade position, with the U.S. civilian aviation industry supporting an 

$80 billion positive net trade balance in 2011. Not only does the Ex-1m Bank help 

industries such as aviation export more, it also does so in a fiscally prudent manner for 

the taxpayer. Since 2005, the Ex-Im Bank has returned almost $2 billion to the Treasury. 

To facilitate the important work that the Ex-Im bank accomplishes in aviation and other 

sectors, the Administration strongly urges Congress to enact reauthorizing legislation. 

3. Mr. Secretary, I see that LIFO repeal continues to be in your budget despite 

concern about the proposal that has increasingly been expressed from both sides of 

the aisle. One of the major problems I have with the proposal is the degree of 

retroactivity that is associated with it. As I understand the proposal, you would not 

simply terminate the LIFO method prospectively (which I would oppose in any 

event), but you would require all LIFO taxpayers, large and small, to pay over to 

the Treasury all ofthe tax benefits they have ever received from LIFO, even those 

benefits dating back 60 or 70 years -- the full period LIFO has been in existence. In 

other words, you would require that those taxpayers be treated as if they were never 

on LIFO in the first place. Quite apart from the harsh economic consequences to the 

companies that would therefore result from the proposal, do you really believe that 

a proposal so constructed is fair? 

The repeal of the last-in, first-out (LIFO) method would eliminate a tax deferral 

opportunity to taxpayers that hold inventories, the costs of which increase over time. In 

addition, LIFO repeal would simplify the Code by removing a complex and burdensome 

accounting method that has been the source of controversy between taxpayers and the 

IRS. 

Eliminating LIFO prospectively without requiring taxpayers to write up their beginning 

LIFO inventory to its first-in, first-out (FIFO) value would result in a permanent 

exclusion of taxable income to taxpayers. A more appropriate approach is to require this 

write-up, which would be no different than the effect of most tax accounting method 

changes. Generally, taxpayers are required to recognize the difference in taxable income 

as if they had always been using the new method of accounting, whether that cumulative 

result is a reduction to income or an increase. The cumulative difference is generally 

recognized over one to four tax years for most accounting method changes. The 

President's LIFO proposal allows taxpayers to recognize the income over a period of 10 

tax years to minimize the impact of additional tax liability. 
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4. Mr. Secretary, recently the President held an event he called an "Insourcing 

Forum" at which businesses that operate in America were highlighted. A number of 

the companies that participated in the forum are global businesses headquartered 

elsewhere but with good jobs here in America. The tax proposals put forth in the 

President's budget would reward companies for bringing jobs to America but 

punish American headquartered companies that must also compete for business in 

locations around the world: 

Mr. Secretary, do you understand that 95% of the world's consumers are outside of 

America and that just as the companies highlighted.by the President must operate 

here to service customers in the United States, American headquartered companies 

must also operate in countries where 95% of the world's consumers live? Why do 

your proposals aim to punish American companies for trying to compete for 

business and win customers all around the world? 

The Administration believes that tax refonn should properly balance the need to reduce 

tax incentives to locate overseas with the need for U.S. companies to be able to compete 

globally. The Administration understands that some overseas investments and operations 

are necessary to serve and expand into foreign markets in ways that benefit U.S. jobs and 

economic growth. 

However, as the President emphasized in his State of the Union address, it is important to 

end the tax deductions that U.S. companies now get for relocating operations overseas 

and instead provide tax credits for moving expenses when U.S. companies bring 

operations back home. The proposal to end deductions for relocating U.S. businesses 

overseas would not affect companies that are expanding into foreign markets, but, rather, 

would only affect companies that relocate an existing U.S. business activity overseas, 

resulting in a net loss of U.S. jobs. 

Moreover, there is strong evidence that corporations. use accounting mechanisms and 

transfer pricing strategies to shift profits from where they are actually earned to tax 

havens and other low-tax jurisdictions. This problem has become so large that U.S. 

subsidiaries in Bennuda report earning profits there that are more than six times that 

country's entire actual output. U.s. companies do not need to locate profits in tax havens 

in order to be competitive in foreign markets. 

As part of the recently-released framework for business tax refonn, the President is 

proposing a minimum tax on the foreign income that U.S. corporations earn abroad. This 

is a matter of fairness and a way to target tax havens and help prevent the global race to 

the bottom on corporate tax rates. The Administration's business tax refonn plan is 

intended to Jay the foundation for a dialogue with Congress and stakeholders on tax 

refonn. We are committed to working with Congress to enact comprehensive tax refonn, 

as well as working with Congress on the details of the minimum tax as part of that 

refonn. 
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From: Senator Stabenow 

1. MF Global: The MF Global bankruptcy is a fresh reminder of the importauce of 

effective market oversight. As Chairwoman ofthe Agriculture Committee, this 

bankruptcy has hit particularly close to home, affecting many farmers and ranchers 

from Michigan and the states of my fellow committee members. You made 

reference to your role in responding to the MF Global crisis in a speech on February 

2,2012. I have been active in soliciting policy responses to the bankruptcy and 

would like you to explain those comments further. As the investigations continue 

and we begin to discuss policy responses,what role do you envision Treasury or the 

Financial Stability Oversight Council playing in addressing the bankruptcy? 

The failure ofMF Global was handled in the United States primarily by the Securities 

and Exchange Commission (SEC) and the Commodity Futures Trading Commission 

(CFTC). The SEC and CFTC are investigating the events that led to MF Global's 

bankruptcy filing and analyzing the causes of the firm's failure. The lessons of the 

episode will then be considered for policy, supervision, and regulatory implications. At 

the time of MF Global's bankruptcy filing, the FSOC came together to discuss potential 

broader market impacts from the failure, and continues to consider how to address a 

similar situation in the future. 

2. Interuational Harmonization: Last week, EU negotiators agreed to a final text of 

the European Market Infrastructure Regulation (EMIR). This long-awaited reform 

will soon shift responsibility to the European Securities and Market Authority 

(ESMA) to draft detailed rules that will aim to make our global derivatives market 

safer and more transparent. As Europe enters this crucial stag~they have set a 

goal to complete the rules by year-end iu order to meet G-20 deadlines. What steps 

will you take, as Treasury Secretary and Chairman of the Financial Stability 

Oversight Council (FSOC), to ensure that the United States meets G-20 deadlines 

and that the rules are harmonized between both our regulators and European 

regulators so as not to create opportunities for regulatory arbitrage or put 

American companies at a competitive disadvantage? 

The U.S. and EU have closely cooperated in designing the basic framework for 

regulation ofOTC derivatives. We share a common approach to derivatives regulation, 

and our frameworks are largely aligned, even though we need to work through technical 

differences from time to time. This is a complicated area where we need a clearly 

articulated common approach across the U.S. regulatory agencies. Treasury is focused 

on creating a level playing field. Treasury's involvement in OTC derivatives issues 

helped to greater align U.S. and EU rules and led to a biweekly dialogue between the 

CFTC, the SEC, the European Commission, and the new European Securities Markets 

Authority (ESMA). Treasury has a regular dialogue with the European Commission and 

ESMA and closely monitors ESMA's implementing rules to strive for alignment between 

U.S. and EU rules." 
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79764.075

MAX BAUCUS, MONTANA, CHAIRMAN 

JOHN Q, ROCKEFEU.eRN, VVESTVIRGIMA CHUC!( GRASSUY, IOWA 

KENT CONMD, NOR'I'H DAKOTA OMIN. G, HATCH, UTAH JEFF 8/NGAMAN, NEW MEXICO OlYMPIA J. SNOWE, MAINE 

JOHN F. KERRY, MASSACHUSETTS JOHN Kyt" ARIZONA 

Bl.ANt:HE 1.., UNCOLN. AflMNSAS ,nM BUNNING, KENTUCKY RON WVOEN, OREGON MIKE CF\APO, IDAHO 

CHARLES E. SCHUMER. NEW YORK PAT ROBERTS, KANSAS DeBBIE STABENOW, MOIlGAN JOHN ENS.GN, NEVADA 

MAAIA CANTWEl.L. WASHtNGTON MICHAeL B, all!, WYOMING 

Bill. Na.5ON, R.Ol'IIDA JOHN COANYN. TEXAS ROBERT MEHENOEZ. NEW JERSEY 

THOMAS R. CARPER. DB.AWARE 

RUS5W.. SUWVAN, STAFF otftECTOR 

"CLAN DAVIS, REPUBLICAN STAFF DlFlECTOR AND CHIef COUNSEL 

Douglas W. Elmendorf 

Director 

Congressional Budget Office 

Ford House Office Building, Fourth Floor 

Washington, DC 20515 

Thomas A. Barthold 

Chief of Staff 

Joint Committee on Taxation 

1015 Longworth House Office Building 

Washington, DC 20515 

Dear Dr. Elmendorf and Dr. Barthold: 

SUBMITTED BY SENATOR GRASSLEY 

Bnitro ~tat£s ~cnat£ COMMITTEE ON FiNANCE 

WASHINGTON, DC 20510-6200 

January 15,2010 

There is widespread agreement with the President among taxpayers and members of Congress 

that financial institutions should repay every dime of government money they have received for 

fmancial stability. Yesterday, the President proposed a "Financial Crisis Responsibility Fee" to 

help facilitate that repayment. I agree with the goals the President articulated. We in Congress 

have a responsibility to ensure the legislative product carries out the goals the President set. 

Before Congress is asked to vote on legislation imposing such a fee, it will be important to 

understand the potential impact on consumers, the criteria for applying the fee to some entities 

and not others, and the implications for the security and stability of these institutions. I am 

writing to request that the Congressional Budget Office and the Joint Committee on Taxation 

provide an analysis addressing the following questions about the Obama Administration's 

proposed "Finaticial Crisis Responsibility Fee": 

1. Will the fee get passed on to consumers in any manner? If so, how will it get passed on 

to consumers? 

2. Will the fee reduce the amount of bonuses paid by the fmancial institutions that are 

subject to the fee? 

3. What impact will the fee have on the availability of credit generally? 

4. What impact will the fee have on the availability of credit fc,u small businesses? 

5. Are the financial institutions that the fee is imposed upon the same ones that caused the 

estimated losses under TARP? 

6. Are there entities that caused the estimated losses under TARP that are not subject to the 

fee? If so, which entities are they and what amount of the estimated TARP losses did 

each entity cause? 

7. Are there entities that will be subject to the fee that did not cause the estimated losses 

under TARP? If so, which types of entities are these? 
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8. Does the fee account for any additional losses from T ARP that the Administration may 

generate as a result of future disbul'Sement ofT ARP funds? 

9. The Administration has estimated that unrecouped losses fi'om T ARP could be, absent 

the proposed Financial Crisis Responsibility Fee, $U7 billion. a) Does this amount 

include the cost of IRS Notices that alleviate the tax burden on T ARP recipients that 

otherwise would have been imposed by Internal Revenue Code section 382 (i.e., Notices 

2008·100,2009·14,2009-38, and 2010·2)? b) Should an accounting ofTARP costs 

include the costs of these IRS Notices? c) What is the cost of these IRS Notices? 

10. What impact will this fee have on the United States' Gross Domestic Product? 

11. Will the fee increase the security of the affected financial institutions, thus diminishing 

the need for any future bailouts? 

12. Are there currently any federal or state taxes based on asset value? 

13. Does the Administration's cost estiniate include the cost of administration? 

14. What is your estimate of the cost of the T ARP program to date, including the cost of 

administration? 

IS. Do you estimate that all TARP losses will be repaid by 2013? 

16. What effect will this fee have on the administerability and complexity of the tax system? 

17. What is your estimate ofthe value of the financial assistance provided by the Federal 

Reserve since the enactment ofT ARP and what is the potential amount of losses 

associated with this assistance? 

18. Does the fee recoup any potential losses as a result of the Federal Reserve's assistance to 

various financial institutions? 

Thank you in advance for your assistance. Please do not hesitate to contact Jim Lyons at (202) 

224·4515 with any questions. 

Sincerely, 

~AJ~ Ranking Member 
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o CONGRESSIONAL BUDGET OFFICE 

U.S. Congress 

Washington, DC 20515 

Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Washington, DC 20510 

Dear Senator: 

Douglas W. Elmendorf. Director 

March 4, 2010 

This letter responds to questions you posed about the President's proposal for a 

"Financial Crisis Responsibility Fee": 

• Who would pay the fee? 

• What would be the impact of the fee on the stability of financial 

institutions and government outlays to cover future losses of those 

institutions? 

• What would be the impact of the fee on the availability of credit in general 

and for small businesses in particular? 

• What would be the impact of the fee on economic growth? 

• What are the estimated costs to the federal government of the Troubled 

Asset Relief Program (TARP) and the Federal Reserve's activities related 

to the fmancial crisis? 

• What is the overlap between firms that would pay the proposed fee and 

firms that generated losses for the T ARP? 

The Congressional Budget Office (CBO) is working with the staff of the Joint 

Committee on Taxation (JCT) to analyze the proposal. Although the 

Administration has laid out the broad outlines of the proposal, it has not specified 

how comprehensive the definitions of assets and liabilities would be for the 

purpose of assessing the fee. Those definitions would affect which institutions 

were covered, how institutions would react to the fee, and what its incidence 

would be. 
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The proposal 

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank 

and thrift holding companies, brokers, and security dealers, as well as U.S. 

holding companies controlling such entities. The fee, which would apply to frrms 

with consolidated assets of more than $50 billion, would be approximately 

0.15 percent of a firm's totalliabilities-excluding deposits subject to 

assessments by the Federal Deposit Insurance Corporation (in the case of banks) 

and certain liabilities related to insurance policies (in the case of insurance 

companies).1 The Administration estimates that the fee would generate revenues 

totaling about $90 billion from 2011 to 2020. 

Who would pay the fee? 

Preliminary estimates by JeT identified approximately 60 bank holding and 

insurance companies with assets in excess of the $50 billion threshold, which 

include most of the institutions that are likely to pay the fee. A small number of 

very large frrms would account for most of the payments. However, the ultimate 

cost of a tax or fee is not necessarily borne by the entity that writes the check to 

the government. The cost of the proposed fee would ultimately be borne to 

varying degrees by an institution's customers, employees, and investors, but the 

precise incidence among those groups is uncertain. Customers would probably 

absorb some of the cost in the form of higher borrowing rates and other charges, 

although competition from financial institutions not subject to the fee would limit 

the extent to which the cost could be passed through to borrowers. Employees 

might bear some of the cost by accepting some reduction in their compensation, 

inCluding income from bonuses, if they did not have better employment 

opportunities available to them. Investors could bear some of the cost in the form 

of lower prices of their stock if the fee reduced the institution's future profits. 

What would be the impact of the fee on the stability of fmandal institutions 

and future government outlays to cover future losses? 

In general, the effect of a 0.15 percent fee would be small because the fee is 

small-for instance, it represents a small fraction of the rate charged on an 

average bank loan to businesses, which currently is in excess of 3 percent. 

Because the proposed fee does not appear to be high enough to cause financial 

institutions to significantly change their financial structures or activities, it would 

not have a significant impact on the stability of financial institutions or 

IFinancial reporting done on a consolidated basis includes a wider range of assets and liabilities 

than that done on an unconsolidated basis; consolidated obligations of a parent company generally 

include the assets and liabilities of its subsidiaries. It is uncertain how comprehensive the 

definition of consolidation would be under the proposal-whether, for instance, the obligations of 

"special-purpose vehicles" controlled by the affected companies would be included. For some 

financial companies, assets and liabilities on a fully consolidated basis are many times larger than 

those carried on their balance sheets. 
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79764.079

significantly alter the risk that government outlays will be needed to cover future 

losses. 

The fee would provide incentives that might either increase or decrease 

institutions' risk taking, and CBO cannot predict whether the net impact would be 

to raise or lower the federal government's costs in the future. On the one hand, the 

fee could reduce the profitability of larger institutions, which might create an 

incentive for them to take greater risks in pursuit of higher returns to offset their 

higher costs.2 On the other hand, the fee would provide an incentive for larger 

financial institutions to reduce their dependence on liabilities subject to the fee. 

To the extent that institutions increased their reliance on equity, the risk of future 

losses would be reduced. However, fmancial institutions consider equity capital to 

be expensive, and introducing a fee of this size would probably not induce much 

of a substitution of equity for debt.3 More generally, whether a particular 

institution would have an incentive to change its investment or financing mix in a 

way that altered its risk profile would depend on a number of factors, including 

the relative cost of financing options and regulatory constraints. 

Imposing a fee on the largest banks would improve the competitive position of 

small- and medium-size banks, probably leading to some increase in their share of 

the loan market. How that development would affect the government's costs and 

risk exposure is unclear. Smaller banks have experienced higher failure rates 

historically, but their failures are less costly to resolve and less likely to pose a 

systemic risk to the economy.4 

What would be the impact of the fee on the availability of credit in general 

and for small businesses in particular? 

The fee would probably lower the total supply of credit in the financial system to 

a slight degree. It would also probably slightly decrease the availability of credit 

for small businesses. Small businesses often rely on smaller financial institutions 

for their credit needs, and those institutions would not be affected by the fee. 

2 Federally insured institutions have an incentive to take more risk than they otherwise would 

because their shareholders reap all of any gains but are partly protected from any losses. The 

expected gain from risk-taking is higher for less profitable institutions, which gain more from the 

downside protection of insurance. Because the fee could reduce profitability, it could increase the 

propensity to take risk. (The value of insurance accrues to equity holders rather than depositors 

because it allows banks to pay lower interest rates on deposits.) 

3 Large institutions might shift to funding sources not included among the liabilities covered by 

the fee-for example, by increasing their reliance on deposits. An increase in the total volume of 

insured deposits would increase the amount of liabilities bearing explicit federal insurance, but a 

substantial additional reliance on deposits would probably involve large uninsured deposits. Large 

institutions might also fund more loans by securitizing them-bundling them into securities and 

selling the securities to investors-if those securities would not be covered by the fee. 

4 The Federal Deposit Insurance Corporation is responsible for resolving bank failures. Under 

current law, its costs are covered by premiums charged to insured financial institutions and not by 

taxes or other federal revenues. 
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However, larger financial institutions also supply funding for small business 

loans, and that lending would probably be diminished a bit by the fee. 

What would be the impact of the fee on the economic growth? 

Because of its modest size, the fee would probably not have a measurable impact 

on the growth of gross domestic product. 

What are the federal government's costs from the TARP and the activities of 

the Federal Reserve related to the financial crisis? 

CBO estimates that the full cost of the TARP will be $99 billion (including 

realized losses and the present value of expected future losses on funds already 

disbursed and projected future disbursements), plus about $200 million a year for 

administrative costs.s In your letter, you asked whether receipts from the proposed 

fee would repay all of the TARP's losses by 2013. Although JCT does not yet 

have enough detail about the proposal to estimate expected revenues, the 

Administration's budget shows only $25 billion in receipts from the proposed fee 

through fiscal year 2013; moreover, CBO does not expect all of the TARP's 

transactions to be resolved by then. 

The Federal Reserve has purchased a substantial amount oflonger-term and 

riskier securities in support of the housing market and the broader economy. 

Those securities have a significantly higher expected return than the rate that the 

Federal Reserve pays on the reserves used to finance them. Consequently, CBO 

expects that, over the next several years, the Federal Reserve's remittances to the 

Treasury will be higher than previous levels.6 A forthcoming report by CBO will 

provide an estimate of the cost of the Federal Reserve's activities in response to 

the financial crisis. 

What is the overlap between firms that would pay the proposed fee and firms 

that generated losses for the T ARP? 

For the most part, the firms paying the fee would not be those that are directly 

responsible for losses realized by the T ARP. Some firms subject to the fee are 

expected to generate such losses, including the American International Group, 

GMAC Financial Services, and CIT Group (which filed for bankruptcy protection 

on November 1, 2009). However, the fee would not apply to firms in the 

automotive industry, which account for $47 billion of the program's estimated 

total cost of $99 billion. Other firms that would be subject to the fee have either 

paid back all of the funds received from the T ARP or are current on their 

repayment schedule and unlikely to generate losses from their participation in the 

program. However, all of the institutions that might be covered by the fee 

S See Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020 

(January 2010), Box 1-2, pp. 12-13. 

6 See Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 

2020. Chapter 4. 
127 


79764.081

benefited to varying degrees from the program's contribution toward stabilizing 

the nation's financial system and overall economy. 

I hope that you find this information helpful. If you have any further questions, 

please contact me or my staff. The primary staff contact is Deborah Lucas. 

Sincerely, 

/&,u~ [;) ~Ljcc: Honorable Max Baucus 

Chairman 

Douglas W. Elmendorf 

Director 

Honorable Christopher J. Dodd 

Chairman, Senate Committee on 

Banking, Housing, and Urban Affairs 

Honorable Richard C. Shelby 

Ranking Member, Senate Committee on 

Banking, Housing, and Urban Affairs 

Honorable Sander M. Levin 

Acting Chairman, House Committee on 

Ways and Means 

Honorable Dave Camp 

Ranking Member, House Committee on 

Ways and Means 

Honorable Barney Frank 

Chairman, House Committee on 

Financial Services 

Honorable Spencer Bachus 

Ranking Member, House Committee on 

Financial Services 
128 


79764.082

STATEMENT OF HON. ORRIN G. HATCH, RANKING MEMBER 

U.S. SENATE COMMITIEE ON FINANCE HEARING OF FEBRUARY 14, 2012 

PRESIDENT'S BUDGET FOR FISCAL YEAR 2013 

WASHINGTON - U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Committee on Finance, 

delivered opening remarks at a committee hearing examining the President's budget proposal for 

FY 2013. Treasury Secretary Timothy Geithner testified before the Committee this morning. 

A full copy ofthe remarks, as prepared for delivery, follows: 

Thank you for holding today's hearing, Mr. Chairman, and welcome Secretary Geithner. 

let's begin by noting that total public debt outstanding is over $15.3 trillion, larger than the size of 

our gross domestic product. A debt-to-GDP ratio above 100 percent is clearly unsustainable and 

puts us in the ranks of the many European countries currently in a severe debt crisis and unable to 

borrow at sustainable interest rates. 

The nation deserves a budget that responsibly addresses this debt crisis. Yet last year, the 

President delivered a budget that was unanimously rejected on the Senate floor. It did not receive 

a single yes vote, even from Senate Democrats. Yesterday the President laid out his most recent 

budget plan. Unfortunately, it similarly fails to address this nation's glaring fiscal crisis, and it will 

probably never be brought to a vote. 

We haven't seen a budget resolution from the Senate Budget Committee in years, despite it 

being legally required. last year, the President's budget did eventually get avote, and there is only 

room for improvement on that result. But the Senate Majority leader seems to have no inclination 

to debate a budget on the Senate floor, having stated that the Budget Control Act means that we 

don't have to debate fiscal year 2013 spending totals since they have already been determined. If 

so, then we don't need to discuss a large part of what the President unveiled yesterday, which 

should make for a quick hearing today. 

Still, we have to do our due diligence, and in reviewing the budget released yesterday by the 

President, it is clear that his plan would only make our fiscal problems worse and harm our 

economy by imposing around $1.9 trillion of stifling tax hikes. Earlier this month, the President 

suggested at the National Prayer Breakfast that these tax hikes are divinely inspired. That certainly 

was an interesting take on the Bible. In the President's interpretation, render unto Caesar the 

things which are Caesar's, and unto God the things that are God's becomes, just give it all to Caesarl 

Who knew that cosmic justice would be rendered by the Department of Education and 

HUD? Who knew that the separation of the wheat from the chaff would in fact be performed by 

the Obama administration, picking winners and losers in the name of fairness? Perhaps church 

going citizens should just cut to the President's chase and instead of tithing or putting an envelope 

in the basket at church, they could just send their money directly to the divinely ordained Treasury. 

The fact is, this budget is politically, not divinely, inspired. This budget is a plan for a 

permanently larger, European-style government. It does not set our country down a sustainable 
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fiscal path. It does nothing to change the President's unwavering devotion to tax-and-spend policies 

and failed stimulus schemes that have and will continue to generate historic deficits and levels of 

debt. It does nothing to wind down the mortgage giants Fannie and Freddie, to restore private 

flows of capital into our Nation's system of mortgage finance, or to remove the government's 

effective takeover of our housing markets. It does nothing to address our entitlement spending 

crisis, whistling past the graveyard as Social Security, health care, and disability trust funds are in 

death spirals toward bankruptcy. The President presents his budget, with its accelerated spending 

and class warfare, as one of fairness and compassion. 

But is it fair to American workers to jeopardize economic growth through higher taxes? Is it 

fair to taxpayers to ignore the mortgage giants, Fannie and Freddie, which continue to drain their 

wallets? Is it fair to the disabled to pretend that the looming bankruptcy of the disability trust fund 

will not happen in 2016? Is it fair to look at Social Security and turn the other way in the interest of 

avoiding hard choices that might make a reelection campaign uncomfortable? 

Secretary Geithner, I look forward to your testimony today on the President's plan and what 

it might do to the economy. I have to say, though, that I wish you would be careful in your public 

economic pronouncements. It is disturbing and unwarranted when you claim, for example, that 

Republicans' resistance to the President's stimulus proposals for more taxing, spending. and 

borrowing - as in his so-called jobs bill - means that they do not want to do anything to help the 

economy or that Republicans' resistance to wasteful stimulus somehow increases the risk of 

recession. 

These claims are simply not true, and they are certainly not productive. Putting aside these 

discouraging political statements, perhaps we could be given an explanation of why the 

administration appears to believe that the economic recovery is vibrant enough to be hit with more 

taxes, despite clear warnings from the Congressional Budget Office of significant negative effects on 

growth, yet at the same time is not vibrant enough to stop the runaway spending of the current 

administration. It seems that for President Obama the recipe always calls for more taxes to fund 

more government. 

The result is this budget, which ignores the source of our nation's fiscal challenges - a 

spending problem that is only getting worse. No matter what budget baseline you choose to 

conSider, the CBO projects that federal revenues as a share of GOP will rise above the long-run 

average as the economy recovers, even with a continuation of current tax rates. But spending as a 

share of GOP is projected to Indefinitely stay above historic norms, pushing our economy and the 

size of our government further and further down the path that several major European countries 

have followed to fiscal ruin. 

We also know that our fiscal outlook is very sensitive to future developments, including 

what might happen to interest rates or inflation. CBO tells us that if interest rates run just one 

percent higher than assumed in their baseline budget projection, interest outlays over the next 10 

years will increase by over $1 trillion. That is for just a one-percent increase. If rates spike up 

precipitously once our creditors lose patience with the administration's unwillingness to chart a 

sustainable fiscal course, we could easily face deeply painful adjustments like those currently being 

experienced in Europe. 

On the other hand, according to CBO, if inflation turns out to be one percentage point 

higher each year than under its baseline, then the deficit would actually fall over the next 10 years. 
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While the economy would suffer, the government would benefit from higher inflation, and it will be 

up to the Fed to avoid the temptation to inflate for budgetary gain. I certainly hope that the Fed's 

recent appetite for mixing monetary and fiscal policies comes to an end, and that we don't have to 

worry about this temptation to inflate our way out of our debt. 

Our unsustainable fiscal path poses great and growing risks to the economy, and the 

President's budget does nothing to diminish those risks. In fact, given the riskiness of our fiscal path 

and the temptation to inflate away some of our debt, Warren Buffett, who the administration 

appears to turn to for its formulation of tax policy, weighed in with advice for investors to steer 

clear of currency-based investments, like U.S. Treasury securities. As Mr. Buffett says: In God We 

Trust may be imprinted on our currency, but the hand that activates our gavernment's printing press 

has been al/ too human. On bonds like Treasuries, the Oracle advises: Right now bonds should 

come with a warning label. 

Secretary Geithner, Mr. Buffett is adviSing investors to shy away from investments such as 

Treasury securities, and it will be interesting to know if you agree with this advice. My hope is that 

his recent musings don't become a new Buffet Rule for investors not to buy Treasuries, because if 

investors heed that advice in large numbers, the spikes in interest rates that I worry about will 

materialize, and the low-cost financing of our $15.3 trillion debt that the U.S. temporarily enjoys 

will evaporate in a hurry. 

We need to resist the siren song of cheap financing, partly brought on by the Federal 

Reserve's massive purchases of Treasury securities to help push rates down. Unfortunately, the 

administration remains lulled in by the siren song and takes current low rates as a reason to spend 

more and pile up even more debt to finance a bloated, European-sized government. Secretary 

Geithner, I look forward to your testimony on the President's budget, which I only received late 

yesterday, after the deadline you were supposed to honor for submission. And, again Mr. 

Chairman, thank you for holding today's hearing. 

### 
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From The Wall Street JourlUli 

August 14. 2008 

Opinion 

The Obama Tax Plan 

By Jason Furman and Austan Goolsbee 

Even as Barack Obama proposes fiscally responsible tax reform to strengthen our economy and 

restore the balance that has been lost in recent years, we hear the familiar protests and distortions 

from the guardians of the broken status quo. 

Many of these very same critics made many of these same overheated predictions in previous 

elections. They said President Clinton's 1993 deficit-reduction plan would wreck the economy. 

Eight years and 23 million new jobs later, the economy proved them wrong. Now they are 

making the same claims about Sen. Obama's tax plan, which has even lower taxes than prevailed 

in the 1990s - including lower taxes on middle-class families, lower taxes for capital gains, and 

lower taxes for dividends. 

Overall, Sen. Obama's middle-class tax cuts are larger than his partial rollbacks for families 

earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to 

less than 18.2% of GDP - the level of taxes that prevailed under President Reagan. 

Both candidates for president have proposed tax plans. But they are starkly different in their 

approaches and their economic impact. Sen. Obama is focused on cutting taxes for middle-class 

families and small businesses, and investing in key areas like health, innovation and education. 

He would do this while cutting unnecessary spending, paying for his proposals and bringing 

down the budget deficit. 

In contrast, John McCain offers what would essentially be a third Bush term, with his economic 

speeches outlining $3.4 trillion of tax cuts over 10 years beyond what President Bush has already 

proposed and geared even more to high-income earners. The McCain plan would lead to deficits 

the likes of which we have never seen in this country. It would take money from the middle class 

and from future generations so that the wealthy can live better today. 

Sen. Obama believes a focus on the middle class is appropriate in the wake of the first economic 

expansion on record where the typical family'S income fell by almost $1,000. The Obama plan 

would cut taxes for 95% of workers and their families with a tax cut of $500 for workers or 

$1,000 for working couples. In addition, Sen. Obama is proposing tax cuts for low- and middleincome seniors, homeowners, the uninsured, and families sending a child to college or looking to 

save and accumulate wealth. 
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The Obama plan would dramatically simplifY taxes by consolidating existing tax credits, 

eliminating the need for millions of senior citizens to file tax forms, and enabling as many as 40 

million middle-class filers to do their own taxes in less than five minutes and not have to hire an 

accountant. 

Sen. Obama also recognizes that small businesses are the engine of job growth in the economy. 

That is why he is proposing additional tax cuts, including a tax credit for small businesses that 

provide health care, and the elimination of capital gains taxes for small businesses and start-ups. 

The vast majority of small businesses would face lower taxes under the Obama plan than under 

the McCain plan. In addition, Sen. Obama supports reforming corporate taxes in a manner that 

would help create jobs in America and simplifY the tax code by eliminating distortions and 

special preferences. 

Sen. Obama believes that responsible candidates must put forward specific ideas of how they 

would pay for their proposals. That is why he would repeal a portion of the tax cuts passed in the 

last eight years for families making over $250,000. But to be clear: He would leave their tax 

rates at or below where they were in the 1990s. 

• The top two income-tax brackets would return to their 1990s levels of 36% and 39.6% 

(including the exemption and deduction phase-outs). All other brackets would remain as they are 

today. 

• The top capital-gains rate for families making more than $250,000 would return to 20% - the 

lowest rate that existed in the 1990s and the rate President Bush proposed in his 2001 tax cut A 

20% rate is almost a third lower than the rate President Reagan set in 1986. 

• The tax rate on dividends would also be 20% for families making more than $250,000, rather 

than returning to the ordinary income rate. This rate would be 39% lower than the rate President 

Bush proposed in his 2001 tax cut and would be lower than all but five of the last 92 years we 

have been taxing dividends. 

• The estate tax would be effectively repealed for 99.7% of estates, and retained at a 45% rate for 

estates valued at over $7 million per couple. This would cut the number of estates covered by the 

tax by 84% relative to 2000. 

Overall, in an Obama administration, the top 1 % of households - people with an average income 

of $1.6 million per year - would see their average federal income and payroll tax rate increase 

from 21% today to 24%, less than the 25% these households would have paid under the tax laws 

of the late 1990s. 

Sen. Obama believes that one of the principal problems facing the economy today is the lack of 

discretionary income for middle-class wage earners. That's why his plan would not raise any 

taxes on couples making less than $250,000 a year, nor on any single person with income under 

$200,000 - not income taxes, capital gains taxes, dividend or payroll taxes. 
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In contrast, Sen. McCain's tax plan largely leaves the middle class behind. His one and only 

middle-class tax cut - a slow phase-in of a bigger dependent exemption - would provide no 

benefit whatsoever to 101 million families who do not have children or other dependents, or who 

have a low income. 

But Sen. McCain's plan does include one new proposal that would result in higher taxes on the 

middle class. As even Sen. McCain's advisers have acknowledged, his health-care plan would 

impose a $3.6 trillion tax increase over 10 years on workers. Sen. McCain's plan will count the 

health care you get from your employer as if it were taxable cash income. Even after accounting 

for Sen. McCain's proposed health-care tax credits, this plan would eventually leave tens of 

millions of middle-class families paying higher taxes. In addition, as the Congressional Budget 

Office has shown, this kind of plan would push people into higher tax brackets and increase the 

taxes people pay as their compensation rises, raising marginal tax rates by even more than if we 

let the entire Bush tax-cut plan expire tomorrow. 

The McCain plan represents Bush economics on steroids. It has $3.4 trillion more in tax cuts 

than President Bush is proposing, largely directed at corporations and the most affluent. Sen. 

McCain would implement these cuts without proposing any meaningful steps to simplify taxes or 

eliminate distortions and loopholes. In addition, Sen. McCain has floated over $1 trillion in new 

spending increases but barely any specific spending cuts. 

As previously mentioned, the Obama plan is a net tax cut - his middle-class tax cuts are larger 

than the rollbacks he has proposed for families making over $250,000. Sen. Obama would pay 

for this tax cut by cutting spending - including responsibly ending the war in Iraq, reducing 

excessive payments to private plans in Medicare, limiting payments for high-income farmers, 

reducing subsidies for banks that make student loans, reforming earmarks, ending no-bid 

contracts, and eliminating other wasteful and unnecessary programs. 

While Sen. Obama would shrink the deficit from its current record levels, he recognizes that it is 

even more important to confront our long-term fiscal challenges, including the growth of health 

costs in the public and private sector. He also believes it is critical to work with members of 

Congress from both parties to strengthen Social Security while protecting middle-class families 

from tax increases or benefit cuts. He has done what few presidential candidates have been 

willing to do by making a politically risky proposal to strengthen solvency by asking those 

making over $250,000 to contribute a bit more to Social Security to keep it sound. 

Sen. Obama does not support uncapping the full payroll tax of 12.4% rate. Instead, he is 

considering plans that would ask those making over $250,000 to pay in the range of 2% to 4% 

more in total (combined employer and employee). This change to Social Security would start a 

decade or more from now and is similar to the rate increases floated by Sen. McCain's close 

adviser Lindsey Graham, and that Sen. McCain has previously said he "could" support. 

In contrast, Sen. McCain has put forward the most fiscally reckless presidential platform in 

modem memory. The likely results of his Bush-plus policies are clear. As Berkeley economist 

Brad Delong has estimated, the McCain plan, as compared to the Obama plan, would lower 

annual incomes by $300 billion or more in real terms by 2017, costing the typical worker $1,800 
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or more due to the effect of large deficits on national savings and thus capital formation. Sen. 

McCain's neglect of critical public investments would further impede economic growth for 

decades to come. 

Do not take the critics' word for it. Go look at the plans for yourself at 

www.barackobama.comltaxes. Get the facts and you will see the real priorities at stake in this 

election. America carmot afford another eight years like these. 

Messrs. Furman and Goolsbee are, respectively, economic policy director and senior economic 

adviser at Obamafor America. 
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The President's Budget for Fiscal Year 2013 

United States Senate Committee on Finance 

Tuesday, February 14,2012 

Statement for the Record 

Senator Pat Roberts 

Chainnan Baucus, Ranking Member Hatch, thank you for holding this hearing on the 

Fiscal Year 2013 Budget. I appreci~te the opportunity to comment on the President's 

proposals. I wasn't surprised yesterday to again see the President attack a key Kansas 

industry. I wasn't surprised, but I am dismayed. 

Once again, the Budget proposes to eliminate a depreciation method used by a key 

Kansas industry, general aviation. I find this particularly ironic, given the statements and 

descriptions of this budget purportedly being focused on boosting jobs, supporting growth, 

and improving opportunity for middle-class Americans. 

It's frustrating to see a significant number of proposals designed to draw jobs and 

business activity back to the U.S. At the same time, this budget attacks an industry that has 

never left our shores. It has weathered the economic down turn and has, for decades, 

provided the exact type of business opportunity; job growth, and economic benefit that the 

Administration wishes to keep here in the country. 

President Obama has on multiple occasions singled out the general aviation industry as 

an example of a "big" business that only serves the wealthy and should contribute more to 

lowering the deficit. The only problem with this claim is that it's completely devoid of 

reality. 

General aviation aircraft actually serve as essential business tools for a multitude of U.S. 

businesses of all shapes and sizes that rely on them to access multiple offices and facilities 

spread across the nation. Understanding that managers, sales teams and technical experts are 

often required to visit numerous offices in a short amount of time, and in regions of the U.S. 

that aren't served by large airports, general aviation is sometimes their only option. 

In fact, 90% of our country's airports aren't accessible by commercial aircraft. Beyond its 

essential use as a business tool, general aviation employs over 1.2 million workers, and 

annually contributes $150 billion to the U.S. economy. In 2010, general aviation delivered 

1,334 planes valued at $7.9 billion, with well over half attributed to exports - a number that 

supports President Obama's goal of doubling U.S. exports over the next five years. 

This industry is doing everything the President claims is a priority. So, it's confusing that 

the White House would again directly attack this industry with talks of repealing a tax 

provision that has contributed positively to job creation in a time of severe economic 

downturn. 
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There are two ways that Congress and the Administration can play small ball. Sadly, this is the 

most likely scenario given the state of the national economy. The most likely way is to delay 

action until after the election and, as a package, extend the debt limit through December 2013 in 

exchange for extending the expiring income, payroll, unemployment and medical payment 

provisions for an equal period of time, accepting the temporary pain of one year of sequestration. 

A slightly more ambitious version of this scenario, which leaves less to chance as far as the 

impact of the election (as a lame duck President has no interest in any compromise at all) is to 

extend the debt limit, doc fix suspension, the payroll tax cut, extended unemployment and tax 

rates for middle class and wealthy taxpayers through July 2013 in exchange for making certain 

tax cuts for lower income Americans permanent, including the 10".4 tax rate and expanded Child 

Tax Credit - offsetting some or all of the spending cuts that have already been agreed to. This 

allows discourse on tax reform without holding our most vulnerable citizens hostage. 

Should the President indicate that he is likely to let gridlock rule the day, a medium ball solution 

is more likely as opposition to a balanced solution evaporates as the likelihood of automatic tax 

cuts increases. The balanced solution is some combination of the cuts and tax reforms supported 

by the majority of the Fiscal Commission, also known as Bowles-Simpson, and the proposals of 

the Bipartisan Policy Center, also known as Rivlin-Domenici. Many of these proposals are 

similar and where they coincide seems like a fruitful place to start drafting legislation. Using the 

congressional budget process to begin enacting these provisions could occur in regular order, 

with the Department of the Treasury playing a supporting role in writing tax reform language. 

The large ball game would be to actually balance the budget and enact radical reform in 

entitlement revenue and spending provisions, a shift from income taxes for most filers to 

consumption taxes and higher tax rates on those most ability to pay. The Center for Fiscal 

Equity proposes a large ball solution with four major provisions: 

• A Value Added Tax (VAT) to fund domestic military spending and domestic 

discretionary spending with a rate between 10".4 and 13%, which makes sure very 

American pays something. 

• Personal income surtaxes on joint and widowed filers with net annual incomes of 

$100,000 and single filers earning $50,000 per year to fund net interest payments, debt 

retirement and overseas and strategic military spending and other international spending, 

with graduated rates between 5% and 25% in either 5% or 1 0% increments. Heirs would 

also pay taxes on distributions from estates, but not the assets themselves, with 

distributions from sales to a qualified ESOP continuing to be exempt. 

• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income 

cap, which allows for lower payment levels to wealthier retirees without making bend 

points more progressive. 

• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT 

with additional tax expenditures for family support, health care and the private delivery 

of governmental services, to fund entitlement spending and replace income tax filing for 

most people (including people who file without paying), the corporate income tax, 

business tax filing through individual income taxes and the employer contribution to 

OASI, all payroll taxes for hospital insurance, disability insurance, unemployment 

insurance and survivors under age 60. 
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We have no proposals regarding environmental taxes, customs duties, excise taxes and other 

offsetting expenses, although increasing these taxes would result in a lower VAT. American 

competitiveness is enhanced by enacting a VAT, as exporters can shed some of the burden of 

taxation that is now carried as a hidden export tax in the cost of their products. The NBRT will 

also be zero rated at the border to the extent that it is not offset by deductions and credits for 

health care, family support and the private delivery of governmental services. 

Some oppose VATs because they see it as a money machine, however this depends on whether 

they are visible or not. A receipt visible VAT is as susceptible to public pressure to reduce 

spending as the FairTax is designed to be, however unlike the FairTax, it is harder to game. 

Avoiding lawful taxes by gaming the system should not be considered a conservative principle, 

unless conservatism is in defense of entrenched corporate interests who have the money to game 

the tax code. 

Our VAT rate estimates are designed to fully fund non-entitlement domestic spending not 

otherwise offset with dedicated revenues. This makes the burden of funding governinent very 

explicit to all taxpayers. Nothing else will reduce the demand for such spending, save perceived 

demands from bondholders to do so - a demand that does not seem evident given their continued 

purchase of U.S. Treasury Notes. 

Value Added Taxes can be seen as regressive because wealthier people consume less, however 

when used in concert with a high-income personal income tax and with some form of tax benefit 

to families, as we suggest as part of the NBRT, this is not the case. 

The shift from an income tax based system to a primarily consumption based system will 

dramatically decrease participation in the personal income tax system to only the top 20010 of 

households in terms of income. Currently, only roughly half of households pay income taxes, 

which is by design, as the decision has been made to favor tax policy to redistribute income over 

the use of direct subsidies, which have the stink of welfare. This is entirely appropriate as a way 

to make work pay for families, as living wage requirements without such a tax subsidy could not 

be sustained by small employers. 

The income surtax is earmarked for overseas military, naval sea and international spending 

because this spending is most often deficit financed in times of war. Earmarking repayment of 

trust funds for Social Security and Medicare, acknowledges the fact that the buildup of these 

trust funds was accomplished in order to fund the spending boom of the 19808 without reversing 

the tax cuts which largely benefited high income households. 

Earmarking debt repayment and net interest in this way also makes explicit the fact that the 

ability to borrow is tied to the ability to tax income, primarily personal income. The personal or 

household liability for repayment of that debt is thertlfore a function of each household's 

personal income tax liability. Even under current tax law, most households that actually pay 

income taxes barely cover the services they receive from the goveroment in terms of national 

defense and general goveroment services. It is only the higher income households which are 

truly liable for repayment of the national debt, both goveromental and public. 

If the debt is to ever be paid back rather than simply monetized, both domestically and 

internationally (a situation that is less sustainable with time), the only way to do so without 

decreasing economic growth is to tax higher income earners more explicitly and at higher rates 

than under current policy, or even current law. 
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The decrease in economic class mobility experienced in recent decades, due to the collapse of the 

union movement and the rapid growth in the cost of higher education, means that the burden of 

this repayment does not fallon everyone in the next generation, but most likely on those who are 

living in high income households now. 

Let us emphasize the point that when the donors who take their cues from Americans for 

Tax Reform bundle their contributions in support of the No Tax Pledge, they are 

effectively burdening their own children with future debt, rather than the entire populace. 

Unless that fact is explicitly acknowledged, gridlock over raising adequate revenue will 

continue. 

Unlike other proposals, a graduated rate for the income surtax is suggested, as at the lower levels 

the burden of a higher tax rate would be more pronounced. More rates make the burden of 

higher rates easier to bear, while actually providing progressivity to the system rather than 

simply offsetting the reduced tax burden due to lower consumption and the capping of the 

payroll tax for Old Age and Survivors Insurance. 

One of the most oft-cited reforms for dealing with the long term deficit in Social Security is 

increasing the income cap to cover more income while increasing bend points in the calculation 

of benefits, the taxability of Social Security benefits or even means testing all benefits, in order 

to actually increase revenue rather than simply making the program more generous to higher 

income earners. Lowering the income cap on employee contributions, while eliminating it from 

employer contributions and crediting the employer contribution equally removes the need for any 

kind of bend points at all, while the increased floor for filing the income surtax effectively 

removes this income from taxation. Means testing all payments is not advisable given the 

movement of retirement income to defined contribution programs, which may collapse with the 

stock market - making some basic benefit essential to everyone. 

Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the 

NBRT, effectively expands the tax base to collect both wage and non-wage income while 

removing the cap from that income. This allows for a lower tax rate than would otherwise be 

possible while also increasing the basic benefit so that Medicare Part B and Part D premiums 

may also be increased without decreasing the income to beneficiaries. 

If personal accounts are added to the system, a higher rate could be collected, however recent 

economic history shows that such investments are better made in insured employer voting stock 

rather than in unaccountable index funds, which give the Wall Street Quants too much power 

over the economy while further insulating ownership from management. Too much separation 

gives COOs a free hand to divert income from shareholders to their own compensation through 

cronyism in compensation committees, as well as giving them an incentive to cut labor costs 

more than the economy can sustain for purposes of consumption in order to realize even greater 

bonuses. Employee-ownership ends the incentive to enact job-killing tax cuts on dividends and 

capital gains, which leads to an unsustainable demand for credit and money supply growth and 

eventually to economic collapse similar to the one most recently experienced. 
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The NBRT base is similar to a Value Added Tax (VAT), but not identical. Unlike a VAT, an 

NBRT would not be visible on receipts and should not be zero rated at the border - nor should it 

be applied to imports. While both collect from consumers, the unit of analysis for the NBRT 

should be the business rather than the transaction. As such, its application should be universalcovering both public companies who currently file business income taxes and private companies 

who currently file their business expenses on individual returns. 

In the long term, the explosion of the debt comes from the aging of society and the funding of 

their health care costs. Some thought should be given to ways to reverse a demographic 

imbalance that produces too few children while life expectancy of the elderly increases. 

Unassisted labor markets work against population growth. Given a choice between hiring 

parents with children and recent college graduates, the smart decision will always be to hire the 

new graduates, as they will demand less money - especially in the technology area where recent 

training is often valued over experience. 

Separating out pay for families allows society to reverse that trend, with a significant driver to 

that separation being a more generous tax credit for children. Such a credit could be "paid for" 

by ending the Mortgage Interest Deduction (MID) without hurting the housing sector, as housing 

is the biggest area of cost growth when children are added. While lobbyists for lenders and 

realtors would prefer gridlock on reducing the MID, if forced to chose between transferring this 

deduction to families and using it for deficit reduction (as both Bowles-Simpson and RivlinDomenici suggest), we suspect that they would chose the former over the latter if forced to make 

a choice. The religious community could also see such a development as a "pro-life" vote, 

especially among religious liberals. 

Enactment of such a credit meets both our nation's short term needs for consumer liquidity and 

our long term need for population growth. Adding this issue to the pro-life agenda, at least in 

some quarters, makes this proposal a win for everyone. 

The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the 

employer levy rather than retaining it under personal income taxes saves families the cost of 

going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed 

throughout the year with payroll. The only tax reconciliation required would be for the employer 

to send each beneficiary a statement of how much tax was paid, which would be shared with the 

government. The government would then transmit this information to each recipient family with 

the instruction to notify the IRS if their employer short-changes them. This also helps prevent 

payments to non-existent payees. 

Assistance at this level, especially if matched by state governments may very well trigger 

another baby boom, especially since adding children will add the additional income now added 

by buying a bigger house. Such a baby boom is the only real long term solution to the 

demographic problems facing Social Security, Medicare and Medicaid, which are more 

demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform. 

The NBRT should fund services to farnilies, including education at all levels, mental health care, 

disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, 

Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment 

to treatment for mentally ill and addicted offenders, funding for these services would be from the 

NBRT rather than the VAT. 
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The NBRT could also be used to shift governmental spending from public agencies to private 

providers without any involvement by the government - especially if the several states adopted 

an identical tax structure. Either employers as donors or workers as recipients could designate 

that revenues that would otherwise be collected for public schools would instead fund the public 

or private school of their choice. Private mental health providers could be preferred on the same 

basis over public mental health institutions. This is a feature that is impossible with the FairTax 

or a VAT alone. 

To extract cost savings under the NBRT, allow companies to offer services privately to both 

employees and retirees in exchange for a substantial tax benefit, provided that services are at 

least as generous as the current programs. Employers who fund catastrophic care would get an 

even higher benefit, with the proviso that any care so provided be superior to the care available 

through Medicaid. Making employers responsible for most costs and for all cost savings allows 

them to use some market power to get lower rates, but not so much that the free market is 

destroyed. Increasing Part B and Part D premiums also makes it more likely that an employerbased system will be supported by retirees. 

Enacting the NBRT is probably the most promising way to decrease health care costs from their 

current upward spiral - as employers who would be financially responsible for this care through 

taxes would have a real incentive to limit spending in a way that individual taxpayers simply do 

not have the means or incentive to exercise. While not all employers would participate, those 

who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be 

established so that participating employers might trade credits for the funding of former 

employees who retired elsewhere, so that no one must pay unduly for the medical costs of 

workers who spent the majority of their careers in the service of other employers. 

Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT 

credit. 

The Center calculates an NBRT rate of27% before offsets for the Child Tax Credit and Health 

Insurance Exclusion, or 33% after the exclusions are included. This is a "balanced budget" rate. 

It could be set lower if the spending categories funded receive a supplement from income taxes. 

These calculations are, of course, subject to change based on better models. 

In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility 

of including high income taxation as a component of a Net Business Receipts Tax. The tax form 

could have a line on it to report income to highly paid employees and investors and pay surtaxes 

on that income. 

The Center considered and rejected a similar option in a plan submitted to President Bush's Tax 

Reform Task Force, largely because you could not guarantee that the right people pay taxes. If 

only large dividend payments are reported, then diversified investment income might be undertaxed, as would employment income from individuals with high investment income. Under 

collection could, of course, be overcome by forcing high income individuals to disclose their 

income to their employers and investment sources - however this may make some inheritors 

unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it 

is preferable to leave filing responsibilities with high income individuals. 
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Dr. Lindsey also stated that the NBRT could be border adjustable. We agree that this is the case 

only to the extent that it is not a vehicle for the offsets described above, such as the child tax 

credit, employer sponsored health care for workers and retirees, state-level offsets for directly 

providing social services and personal retirement accounts. Any taxation in excess of these 

offsets could be made border adjustable and doing so allows the expansion of this tax to imports 

to the same extent as they are taxed under the VAT. Ideally, however, the NBRT will not be 

collected if all employers use all possible offsets and transition completely to employee 

ownership and employer provision of social, health and educational services. 

Thank you for the opportunity to address the committee. We are, of course, available for direct 

testimony or to answer questions by members and staff. 
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ON: 

TO: 

DATE: 

100 Years Standing for American 

U.S. CHAMBER OF COMMERCE 

St ement 

Of Commerce 

ADMINISTRATION TAX PROPOSALS IN FY2013 BUDGET 

THE SENATE FINANCE COMMITTEE 

FEBRUARY 14, 2012 

The Chambcr'sl11ission is to advance human progress thmugh an economic. 

political and sociul system ba<;(':d on individual th.."euom. 

incl.!mi\"c, initimi\'c. opportunity and rcspon~jbility. 
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INTRODUCTION 

The Chamber thanks Chairman Baucus and Ranking Member Hatch for the opportunity 

to comment on the tax proposals contained in the Administration's FY2013 budget (the 

"Greenbook"). The Chamber is disappointed with the proposals included in the Greenbook. 

These proposals are largely a rehash of prior year Greenbooks and once again offer no 

policies that make our tax code more competitive, fair, simpler, compliance-friendly or more 

pro-growth. Instead, we see the same policies of prior years and an even greater reliance on 

raising revenues through the tax code. 

The Chamber believes that as the Committee considers policies to drive job creation 

and economic growth and considers fundamental federal tax reform, it should firmly reject the 

proposals contained in the Greenbook and seek to undertake comprehensive tax reform to 

foster growth, competitiveness, innovation, ease of compliance, and job creation. As other 

countries, and even individual states within our own borders, move to adopt tax policies that 

foster growth, competitiveness, and innovation, these proposals generally would move the 

federal tax codel in precisely the opposite, and wrong, direction. 

IN GENERAL 

The Greenbook, in large part, repeats prior year tax proposals of this Administration, 

levying onerous tax increases on businesses of all sizes and picking winners and losers, while 

omitting pro-growth tax policy. It levies almost $2 trillion in new taxes, while providing only 

$146 billion2 of permanent tax cuts for business, $108 billion of which is comprised of one 

incentive - making the research and development (R&D) tax credit permanent - which 

generally is already renewed on an annual basis. 

TAX INCREASES 

Individual and Sma" Business Tax Hikes 

As in prior years, the Greenbook includes significant tax increases on upper income 

individuals, totaling over $1.5 trillion. These proposals filii to recognize that these increases hit the 

most successful U.S. small businesses that pay taxes at individual tax rates, hindering their 

ability to grow and create jobs. 

While this year's budget calls for implementation of a "Buffett" rule that results in a 

minimum effective tax rate of 30% on those making over $1 million, the rule appears nowhere 

in the Greenbook. Instead, the Greenbook once again targets those making over $200,000 or 

$250,000 jointly. The Greenbook ignores that our tax system is already highly progressive (in 

2009, according to the IRS, the top I % of the income distribution controlled about 17% of 

income and paid almost 37% of federal income taxes). It proposes an even more punitive system 

on those who save, invest, and create jobs. It proposes increasing the top marginal tax rates, 

reducing or eliminating itemized deductions, and limiting the rate at which the remaining 

I All references to the "code" are to the Internal Revenue Code of 1986, as amended. 

2 All revenue estimates are for 10 year periods and are provided by OMB. 
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deductions can be taken. Further, it proposes raising taxes on investment - taxing long term 

capital gains at 20%, up from 15%, and dividends at marginal rates as high as 39.6%, up from 

15%. These increased investment taxes are compounded by the Medicare hospital insurance 

(HI) tax of3.8% that kicks in next year. Additionally, the failure to maintain lower, 

synchronized capital gains and dividends rates, a departure from prior year proposals, 

discourages efficient capital allocation and decreases fairness. 

Quite simply, the Committee cannot ignore the negative impacts of these tax increases 

and must reject such policies in both the near and long term. Over the past 30 years, the number 

of pass-thru businesses - sole proprietorships, S-corporations, LLCs and partnerships - has 

nearly tripled. In 20 I 0, the Joint Committee on Taxation determined that a substantial share 

of new revenue (50"/0 for the increase in the top two rates) was directly attributable to the 

income reported for pass-thru businesses by their owners. In other words, small businesses 

would bear a substantial portion of these higher taxes. 

Further, increased investment taxes have real and damaging ramifications.3 Millions 

of Americans of all income levels would be adversely impacted by these tax hikes. Further, 

older Americans and those saving for retirement would be disproportionately hurt by 

investment tax hikes. Raising capital gains and dividends taxes has real adverse effects on the 

economy. Thus, the Chamber strongly opposes these tax hikes and the negative ramifications 

on investment, economic growth, and productivity that come with increased investment 

taxes. 

As the Committee considers fundamental tax reform, it is critical to recognize the 

significant numbers of entities who remit taxes under the individual Code; thus, careful 

consideration must be given to any reform that addresses the corporate tax rate without 

properly considering individual rates. Second, given the significant and increasing numbers 

of these. pass-thru entities, the Chamber believes proposals, such as these tax increases, must be 

rejected, as they thwart the growth of the very businesses that are the backbone of our 

economy. 

Other Business Tax Increases 

Also as in prior years, the Greenbook includes tax increases on larger business entities, 

totaling almost half a trillion dollars, achieved by, among other things, double taxing the profits 

American worldwide companies earn overseas, levying punitive new taxes on traditional energy 

producers and reinstating Superfund taxes, repealing longstanding accounting practices, and 

taxing the carried interest in partnerships as ordinary income. 

3 For more detailed information on the damaging impact of raising investment taxes and the Chamber's opposition 

to increased investment taxes, please see our September 14,2011 testimony to the Senate Finance Committee, 

available at http://wv.w.uschamber.com/sites/defaultifiles/110914testimonysenateFinance.pdf. For a recent detailed 

study on the international aspects of capital gains and dividends and the adverse economic consequences of high tax 

rates on this investment income, see E&Y, "Dividend and Capital Gains Taxation: A comparison of the US to other 

developed nations," (February 2012), available at 

http://www.theasLorgiassets/EY ASI Dividend and Capital Gains International Comparison Report 2012-02-

03.pdf. 
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International Taxation 

The Greenbook once again proposes to double tax the profits American worldwide 

companies earn abroad, by curtailing deferral, limiting foreign tax credits, and attacking the tax 

treatment of intangibles. The President's own fiscal commission report states that our system of 

taxing foreign source income is against the norm, and "[t]he current system puts U.S. 

corporations at a competitive disadvantage against their foreign competitors." His Export 

Council recommends creation of an international tax system "in which U.S. corporations can 

compete well with those in other OECD countries," going on to state that a "competitive 

territorial tax system for the United States should broadly follow the practice of our trading 

partners ... to make the U.S. tax system more competitive with its major trading partners." 

Despite this, the Greenbook moves in the opposite direction with $148 billion ofinternational 

tax increases that threaten to put American companies at even greater competitive disadvantage. 

The Chamber urges the Committee to reject these proposals and, instead, as it considers 

fundamental reform, consider ways to level the playing field for American businesses, such as 

adopting a territorial tax system as recommended by the President's Deficit Commission and 

Export Council. The Chamber believes any changes to international tax policy should make 

American companies more competitive, drive job creation, and stimulate overall economic 

growth. 

Punitive Energy Taxes 

The Greenbook also repeats its attack on oil and gas companies and coal companies 

from prior years, proposing large and onerous tax increases, totaling over $41 billion on 

these traditional energy producers. This represents continued attacks on oil and gas 

companies as well as coal companies. In addition to industry-specific punitive taxes, many 

of these companies also face tax hikes in the form oflast-in, first-out (LIFO) repeal and 

changes to the dual capacity rules. All of these tax increases result in increased energy costs 

and decreased energy security. 

Once again, these proposals punish industries such as oil and gas, who already face 

some of the highest effective tax rates of any industry sector and who create millions of highpayingjobs. The Greenbookjustifies these increased taxes on traditional energy sources to pay 

for "clean" energy and manufacturing incentives. The Chamber strongly urges the Committee 

to reject tax policies such as this, which preference one industry or sector to the detriment of 

anoth.er. Instead, the Chamber suggests the adoption of fundamental tax reform that would 

benefit the entire business community. 

Changes to Longstanding Inventory Accounting Methods 

In addition to the above tax increases, the Greenbook once again proposes repeal of 

longstanding accounting methods, solely to raise tax revenues. For example, the Greenbook, 

as in prior years, would repeal LIFO to raise $74 billion. The Chamber opposes the repeal of 

LIFO accounting as it would result in a punitive, retroactive tax increase for businesses, 

placing significant cash constraints on them and limiting their ability to manage inflation. 
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Companies would have to record illusory profits on their books, when no economic activity 

has occurred that wouldjusti£Y recording any profits. 

In addition to the repeal of LIFO, the Greenbook once again proposes repeal of the 

lower-of-cost-or-market (LCM) and subnonna.l goods accounting methods to raise $13 billion. The 

Chamber opposes the repeal of these accounting methods as they provide an important cushion 

during economic downturns. Without these methods, businesses are precluded from recognizing 

real economic losses in the year ofioss, and, rather, must wait until disposal of inventory. 

The repeal of these accounting methods originally was proposed as revenue offsets 

for unrelated initiatives. As the Committee considers short term policies and fundamental 

reform, the Chamber urges it to reject changes solely sought to raise revenue without 

consideration for the wide range of industries and businesses of all sizes that would be adversely 

impacted by these changes. 

Punitive Financial Service Sector Taxes 

The Greenbook once again proposes a financial crisis responsibility fee.4 This $61 billion 

tax will impede economic recovery by constraining commercial lending and capital investment, 

including much needed lending to small businesses. This tax also creates situations that may lead 

to double and excessive taxation. In short, this will be a tax bome by America's job creators and 

is simply the wrong tax at the wrong time. 

The punitive financial service sector taxes do not stop there. To raise another $14 billion, 

the Greenbook would tax "carried interest" - capital gains paid to managers of investment 

partnerships - as ordinary income. The Chamber believes that taxing carried interest as ordinary 

income would deter economic activity, reduce credit flow, and stifle job creation. Further, 

changing this longstanding law ignores the fact that state pension funds, charitable nest eggs, 

and universities rely on these partnerships and could face funding shortfalls if this tax hike 

drove talented management capital into other fields. 

Thus, as the Committee considers changes to tax policy, the Chamber urges it to seriously 

consider both the direct and indirect ramifications of these changes on the economy before 

adopting policies such as those described above. 

PRO-GROWTH TAX INCENTIVES 

While the Greenbook is full of tax increases, it provides little in the way of tax 

incentives to help businesses grow. As noted above, in contrast to the almost $2 trillion in new 

taxes businesses can expect to face, they would see only $146 billion of tax cuts, $108 

billion of which is attributable to making permanent the research and development 

(R&D) tax credit. The long touted incentives for manufacturing are minute in comparison 

to the tax hikes. 

4 For further infonnation on the adverse impacts of the proposed financial crisis responsibility fee, please see the 

2010 study conducted for the Chamber by Hal S. Scott, Nomura professor of international financial systems at 

Harvard Law School, "Financial Crisis Responsibility Fee: Issues for Policymakers." that demonstrates the adverse 

impacts this tax would have upon capital fonnation, available at http://w\\w.uschamber.com/reportslfinancial-crisisresponsibilitv. 
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