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DEPARTMENT OF THE TREASURY

BUDGET PRIORITIES FOR FISCAL YEAR 2004

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 5, 2003

Serial No. 108–2

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

GIL GUTKNECHT, Minnesota 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

PAT TOOMEY, Pennsylvania 

DOC HASTINGS, Washington 

ROB PORTMAN, Ohio 

EDWARD SCHROCK, Virginia 

HENRY E. BROWN, JR., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

ROGER WICKER, Mississippi 

KENNY HULSHOF, Missouri 

THOMAS G. TANCREDO, Colorado 

DAVID VITTER, Louisiana 

JO BONNER, Alabama 

TRENT FRANKS, Arizona 

SCOTT GARRETT, New Jersey 

GRESHAM BARRETT, South Carolina 

THADDEUS MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

[Vacant] 

[Vacant] 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

DENNIS MOORE, Kansas 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

ROSA DELAURO, Connecticut 

CHET EDWARDS, Texas 

ROBERT C. SCOTT, Virginia 

HAROLD FORD, Tennessee 

LOIS CAPPS, California 

MIKE THOMPSON, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

KENDRICK B. MEEK, Florida 

RAHM EMMANUEL, Illinois 

ARTUR DAVIS, Alabama 

DENISE MAJETTE, Georgia 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, February 5, 2003 ............................................ 1

Statement of: 

Hon. John W. Snow, Secretary, Department of the Treasury ...................... 7

Prepared statement and additional submissions of: 

Hon. Jim Nussle, a Representative in Congress from the State of Iowa ..... 3

Mr. Snow: 

Prepared statement ................................................................................... 9

Response to Mr. Scott’s question regarding OMB figures ..................... 31

Response to Mr. Thompson’s question regarding municipal bonds ....... 42

Response to Mr. Ford’s question regarding Medicaid funding .............. 57

Response to Mr. Davis’ question regarding excise taxes on charitable 

foundations ............................................................................................. 59

Response to Mr. Davis’ question regarding the President’s goal for 

charitable tax breaks ............................................................................. 59

Response to Mr. Ford’s question regarding the tax cut proposal .......... 63

A submission for the record by Hon. Roger F. Wicker, a Representative 

in Congress from the State of Mississippi .................................................. 39

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DEPARTMENT OF THE TREASURY BUDGET 

PRIORITIES FOR FISCAL YEAR 2004

WEDNESDAY, FEBRUARY 5, 2003

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10:10 a.m. in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Gutknecht, Toomey, 

Hastings, Schrock, Brown, Putnam, Wicker, Bonner, Franks, Garrett of New Jersey, Barrett of South Carolina, McCotter, DiazBalart, Hensarling, Spratt, Moran, Moore, Neal, Edwards, Scott, 

Ford, Capps, Thompson, Baird, Cooper, Meek, Davis, Emanuel, and 

Majette. 

Chairman NUSSLE. Members and guests will take their seats. I 

know there is a lot of interest in this hearing, and there is obviously, today, a lot of other interesting things happening around the 

country and the world, and I know Members, staff and our witness 

will be needed in other areas of the Capitol, so I want to make sure 

that we begin on time. 

This is the full committee hearing on the President’s growth and 

jobs plan, the tax relief package in the President’s fiscal year 2004 

budget. Today’s witness is the Honorable John W. Snow, Secretary, 

Department of the Treasury. And as I said to the Secretary prior 

to him taking the witness table, he has spent more time on Capitol 

Hill this week than he has spent in his new office. And that is part 

of the risks of the job, and part of the job description, of course, 

is to consult with Congress, and we appreciate you doing so in this 

manner. Today we have a number of issues that we would like to 

discuss with you, Mr. Secretary. I would like to welcome you. 

The Secretary, upon his confirmation, became the 73rd United 

States Secretary of the Treasury. I look forward to working with 

you, and have every faith that the President has picked the right 

person to help strengthen and stabilize the economy and help us 

create jobs for all Americans. 

Treasury Secretary Snow comes before us today with extensive 

working knowledge and expertise in economics and job creation. 

Secretary Snow has had a long and impressive career in both the 

private sector and public service to this country. He was the chairman and chief executive officer of CSX Corporation. He has served 

as the chairman of the Business Roundtable, and was a former cochairman of the influential Conference Board’s Blue Ribbon Commission on Public Trust and Private Enterprise. He also served as 

2

the co-chairman of the National Commission on Financial Institution Reform Recovery and Enforcement in 1992 that made the recommendations following the savings and loan crisis. 

Secretary Snow’s previous public service includes serving at the 

Department of Transportation as the Administrator of the National 

Highway Transportation Administration; Under Secretary, Assistant Secretary for the Governmental Affairs; and Deputy Assistant 

Secretary for Policy, Plans and International Affairs. Secretary 

Snow has a Ph.D. in economics from the University of Virginia, a 

law degree from George Washington University, and has taught economics in the University of Maryland, University of Virginia, as 

well as law at the George Washington University. He also served 

as a visiting fellow at the American Enterprise Institute, and distinguished fellow at the Yale School of Management. 

Mr. Secretary, yesterday this committee had the opportunity to 

hear from the President’s Director of the Office of Management and 

Budget, Mitch Daniels. He came presenting the President’s overall 

budget. Today we look forward to your testimony with respect to 

how the President’s budget proposes to strengthen and stabilize the 

economy and create jobs. 

At the beginning of the hearing on the President’s budget, I 

thought it was important to point out an underlying question about 

the budget. A question that I have, a question that this committee 

will continue to have as we will review it, and a question that I 

am sure that all Americans have, and that is: Is it a fiscally responsible blueprint for governing America during some very challenging times? 

Today as we examine the Treasury Department’s budget proposals as well as the President’s proposal to strengthen the economy, I believe the question should be, do these proposals grow and 

strengthen the economy both now and in the long run? 

There is no question that our economic recovery needs to gain 

more traction in order to create jobs and opportunities. The looming question is really how to do it, how to help it. I, for one, think 

we need to look longer than just this first year, but many years 

down the road as we consider the proposals that we have to make. 

Last week, the Congressional Budget Office presented its new 

economic outlook numbers to this committee which showed that 

under current conditions, if we do nothing, we will return to surpluses somewhere around 2007, according to the Congressional 

Budget Office. However, if we can increase growth by only half a 

percent, we might be back in the black roughly a year earlier. And 

I will show you a chart that I believe depicts just that sentiment. 

Faster growth can improve or does improve the fiscal outlook. With 

just a half a percent, we can get back in the black, according to 

baseline, just in 1 year. Imagine if we can get a full percent or even 

more. 

We also learned from the Congressional Budget report that the 

largest cause for the deficits we faced in the past two fiscal years 

has been due to a weak economy. I will show you a chart that we 

believe depicts that; 68 percent in fiscal year 2002, and 55 percent 

in fiscal year 2003 can be attributed to the economy. It seems only 

logical then that we must focus on measures that increase longterm growth and strengthen the economy. 

3

It has always seemed to me that the Washington model is that 

we should ask families to tighten their belts year-after-year and 

pay higher and higher taxes to fund additional Washington spending, but we never seem to ask Washington to tighten its belt so 

that the American people can keep more of their money. So spending restraint will be a hallmark of the budget that we present. I 

think the President, though, hit the nail on the head last week during the State of the Union Address when he said, quote, ‘‘Jobs are 

created when the economy grows. The economy grows when Americans have more money to spend and invest, and the best and fairest way to make sure Americans have that money is not to tax it 

away in the first place.’’ It seems pretty basic, it seems pretty logical, and it seems like a good foundation for a policy that we can 

build on. 

So, the highest priority in crafting the budget will be promoting 

the overall strength and stability of our country; strength and stability in our defense, strength and stability in our homeland security, and that is strength and stability in our economy. The lesson 

of the last 2 years is that there is no substitute—no substitute for 

the strength and stability of America and our economy. And that 

is the subject of today’s hearing, our economy, how to strengthen 

and stabilize it for the long term. 

And with that, I turn to my friend and colleague Mr. Spratt for 

any opening comments he would like to make. 

[The prepared statement of Mr. Nussle follows:]

PREPARED STATEMENT OF HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF IOWA

Good morning. 

When President Bush submitted his fiscal year 2004 budget yesterday, the underlying question for me was: is it a fiscally responsible blueprint for governing? 

From what I have read at this point, and based on the ambitious agenda he laid 

out in last week’s State of the Union speech, the answer seems to be yes. 

The President’s critics will scoff at that. They will point to the substantial nearterm deficits in the budget deficits that the President and his aides have not glossed 

over. Those deficits are troubling especially coming just 2 years after we anticipated 

budget surpluses as far as the eye can see. 

But we all know what happened. Our economy, which had slowed dramatically 

in 2000, slid into recession just as President Bush took office. Later that year, terrorism struck here on our own soil, further challenging our national and economic 

confidence. Our necessary response rebuilding and shoring up here at home, and 

taking on terrorism where it breeds, overseas has required a commitment of will 

and resources. 

All these factors are still active today. At the same time, we continue to face increasingly urgent demands in areas such as education and health care. Budget deficits are among the results. 

But fiscal responsibility is not just about making numbers add up a certain way. 

It is fundamentally about governing; and governing requires striking a balance 

among competing demands, weighing desires against needs, and facing obligations 

not only to today’s generation, but also to tomorrow’s. 

Today’s principal obligations are clear. We must prevail in the war against terrorism, committing all the resources necessary for that task. 

We must provide for and enhance the security of our homeland. This is not a onetime job; it is a permanent and ongoing task especially when we are trying to protect ourselves against evil minds who spend all their time calculating ways to terrorize and kill. 

Both of these, along with the other needs cited above will require government 

spending and will result in continued deficits for a time. But what matters is that 

we don’t lose control of spending. We must not commit to strategies that win popular support today, only to balloon in costs that will be imposed on our own children. 

4

Last, but most important, we must help restore the strength and stability of our 

economy. According to last week’s projections by the Congressional Budget Office, 

without action, this economy will continue to limp along with unemployment rates 

at about 6 percent for the next several years. This is not acceptable to the President; 

it is not acceptable to me; above all, it is not acceptable to all those families struggling to make ends meet. It takes a growing economy to provides jobs and opportunities which restores Americans’ hope that they can make their lives better through 

their own efforts. 

When it comes to stabilizing and strengthening the economy, most of the ‘‘stimulus’’ plans I have heard of focus only on the short-term, which does not provide 

either the stability or the long term strengthening that is needed. Such proposals 

are the economic equivalent of a crash diet versus a healthy lifestyle. 

The President’s plan, in contrast, recognizes that families and businesses need to 

be able to plan for the future. Whether it is a family planning for it child’s education 

or a business looking at a capital expenditure, we need short-term and long-term 

solutions. People who are out of work don’t just need a job for the rest of year; they 

need jobs that will be created to last for years to come. 

At the same time we do need to be very careful about controlling spending. 

Our current situation is very much like the situation many families throughout 

the country are facing. When faced with tough times, they still buy the family groceries and cover the cost of emergencies but don’t remodel their kitchen. 

As we begin to construct this year’s budget we must adhere to this same principle. 

While I support the goal of ending deficits, the highest priority in crafting the 

budget will be promoting the overall strength and stability of our country. 

There is no question that we face trying times but we have done so in the past 

and have always come out stronger as a nation and as a people. 

We must restore the stability and strength of this economy and this nation. 

Our budgets need to look beyond the next election and toward the next generation.

Mr. SPRATT. Mr. Snow, welcome to our committee. You bring impressive credentials and experience to the Treasury, and we look 

forward to working with you over the years to come. Among those 

welcoming your coming indirectly was an organization that you 

used to belong to named the Concord Coalition. I believe you were 

a prominent and ardent member of that organization. On Sunday, 

the Concord Coalition published a full-page ad in the New York 

Times—I didn’t know they had that kind of money. It’s a manifesto, really, about the Bush budget. And here is what they said, 

the organization of which you were once a very ardent and enthusiastic member: 

‘‘Guns and butter and tax cuts, can we have it all? To enact permanent new tax cuts in the face of new spending pressures, the 

prospect of war in Iraq, inevitable postwar costs, massive but indispensable homeland security, a major prescription drug add-on for 

Medicare is to proclaim that America can painlessly have it all. 

Unfortunately, we can’t. Sooner or later someone has to pay the bill 

for guns and butter and tax cuts. Many worry about class warfare. 

Almost no one seems to be worried about another form of warfare, 

generational warfare. That is what we risk if we continue to live 

beyond our means and to pass the IOUs on to our children and 

grandchildren.’’

They go on to say: ‘‘When is a tax cut not really a real tax cut? 

Many advocates of permanent tax cuts apparently believe that debt 

is a painless alternative to taxes. In fact, deficits merely shift the 

tax burden into the future. But haven’t we shifted more than 

enough onto our children and grandchildren? According to Social 

Security and Medicare trustees, these two programs are on track 

to consume between a quarter and a third of worker payroll. This 

is an unthinkable burden. Adding more would be unconscionable. 

At a time when the young men and women of the Armed Forces 

5

are being asked to risk their lives, make the ultimate sacrifice, are 

the rest of us going to sacrifice by shifting even more of our tax 

burden onto future generations?’’

A pretty strong statement, and it is on our minds very much. 

One of the things that we are proud of, Mr. Secretary, is that during the 1990s we moved the budget deficit from $290 billion in 

the red in 1992—fiscal year 1992, the last year of the Bush administration—to a surplus of $236 billion in the year 2000. That was 

a phenomenal accomplishment, and a lot of things converged to 

make it all happen. Now we are seeing the slow unraveling of the 

discipline that made it happen. This is one of our favorite charts 

because it shows what happened in the Clinton years. He inherited 

a $290 billion deficit, the biggest in peacetime history, and moved 

it over 8 years—the bottom line of the budget getting better every 

one of those 8 years—moved it out of deficit into surplus to the 

tune of $236 billion. 

Among other things, that made it possible when the Bush administration came to office for us to be having an earnest debate here 

about actually repaying some of the national debt as a prelude to 

saving and making solvent Social Security and Medicare for the 

long run. This would be our way to pave the way for the baby 

boomers’ retirement, which begins to occur in 2008, 77 million baby 

boomers marching to their retirement right now, the first to retire 

in 2008. 

Let me show you a simple linear graph that depicts—this is 

chart No. 7—the path that we were on when we began the Bush 

administration. The curve marked February 2001 shows you the 

curve that we anticipated following in order to diminish, pay back, 

buy back the Federal debt held by the public. And we had a realistic prospect of paying all that debt off by 2011. I don’t think we 

would have ever reached that point, but nevertheless we had a 

path plotted to do that. Both sides were working in concert on that. 

The upper curve is where we are now, February 2003, just 2 years, and the difference is $5 trillion. That is a stunning estimate 

of the situation we find ourselves in. We have seen a fiscal reversal 

of $7.8 trillion. We have gone from a surplus projected in 2001 of 

$5.6 trillion today, if we implement the policies you propose today, 

of a cumulative deficit of $2.2 trillion. That is a $7.8 trillion swing, 

and I think you would agree it is a swing in the wrong direction. 

We are going the wrong way. 

The problem we have looking at this budget—could I have chart 

No. 12—is as we look across the top line and exclude the Social Security Trust Fund, because, after all, it is a trust fund, we have by 

law said it should be taken off budget. We have had motions in this 

committee to adopt amendments and make permanent law a provision that would have made it illegal to ever combine the two accounts. In any event, we think it is proper to focus on the budget 

deficit and the general accounts of the budget, the basic budget of 

the United States, and look at the top line. 

The chairman was just talking about seeing some daylight at the 

end of this forecast period. I don’t see any. The deficit this year and 

the general accounts to the budget, excluding Social Security, is 

going to be $468 billion. That is before any cost is attributed to 

fighting the war in Afghanistan. By 2008, it declines to $433 bilVerDate Feb 1 2002 16:58 Apr 30, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\108TH\108-2\HBU036.000 HBUDGET1 PsN: DICK
6

lion. Between 2004–08, 5 years, we accumulate $2.140 trillion in 

additional debt. Now, some of it we are able to put in the Social 

Security Trust Fund, but it is still debt of the United States, it is 

an obligation that has to be paid, and we just don’t believe that 

that is a path we should be taking. 

And let me show you chart No. 6. We have had an economic 

downturn that was not forecast in January of 2001. OMB is now 

saying that of the $5.6 trillion surplus, $3.2 trillion has disappeared because of economic adjustments. So that is tantamount 

to saying the surplus was overstated by 60 percent to start with—

40 percent to start with. But in any event, this shows the additional tax cuts that you have got right now. By OMB’s estimation, 

if you did nothing further, we would have gone from a $5.6 trillion, 

to a $129 billion deficit, cumulative deficit, between now and 2011. 

From $5.6 trillion down to $129 billion. 

The additional $2 trillion that is showing up on the bottom line of the budget you are presenting us, the additional $2 trillion in 

debt and deficits that we are going to be incurring are because of 

policy choices you are proposing in this budget, and the lion’s share 

of those policy choices that leads us to bigger deficits is shown right 

there in the tax cuts that are being proposed by this administration. It will cost about $600 billion to make permanent the 2001 

tax cuts. It will cost a little more than $600 billion if we adopt the 

so-called jobs and growth package that you presented. We think it 

is an antigrowth package because it adds debt, and debt in turn 

will stifle growth in the economy. 

And finally, we don’t think you can find a way around, nor we—

we are both in the same box—on the alternative minimum tax. Between now and the end of this forecast period, we have got to deal 

with the problem and the cost of fixing the AMT so that 340 million taxpayers aren’t affected by the alternative minimum tax, 

which is substantial. It is at least $600 billion itself. 

If you put those three together, that is over $1.8 trillion on your 

tax agenda. You may not have the AMT actually displayed in your 

budget this year, but there is no way around it. Congress and the 

administration will have to deal with it, and we want to talk to you 

about that in the question period. But if you put those three together, that is $2 trillion. If you add everything up and adjust it 

for debt service, that is $4.4 trillion. That is why this budget is sagging. That is why we have got the bottom line going into the red, 

mired in the red in deficit for as far as the eye can see. 

Those are our concerns. We would like to get back to the path 

we were on when we were paying down debt and preparing for the 

retirement of the baby boomers, shoring up Social Security and 

Medicare for the long run. And frankly, as we look at your budget, 

we don’t see how you get there. It is not just the fact that we see 

a dire picture of deficits as far as we can forecast, but that there 

is no plan spelled out here for the resolution of that problem. So 

we fear that we are seeing a cyclical deficit become a structural 

deficit and becoming every more—every year in your budget becoming more intractable. 

Respectfully, that is what we submit our concerns to be, and that 

is why we are glad to have you here today. We want to ask you 

some serious questions about this situation. 

7

Chairman NUSSLE. Without objection, all members will be allowed to put a statement in the record at this point. 

Mr. Secretary, welcome to the committee. This is your first opportunity before the House Budget Committee. We hope it is not 

your last. But we do hope in the intervening period you do have 

the opportunity to go in and set up your office and begin to work, 

and not spend your entire career on Capitol Hill; but we are glad 

that you are with us today and willing to spend some time with 

us. Welcome, and we are pleased to receive your testimony at this 

time. 

STATEMENT OF JOHN W. SNOW, SECRETARY OF THE 

TREASURY 

Secretary SNOW. Mr. Chairman, thank you very much for that 

gracious welcome to the committee, and, Ranking Member Spratt, 

distinguished members of the committee, it is an honor to be here 

before you on my second day on the job. You are going to have a 

lot more in-depth knowledge of a lot of these issues than I will, but 

I am going to struggle through and do my best, and in the weeks 

and months ahead I look forward to getting much, much better acquainted. 

I think the chairman and the ranking member framed the issues 

we need to deal with extremely well, and I look forward to engaging on those very pared set of issues in the months ahead. 

Let me begin by addressing some of those issues and by offering 

my views on what I take to be the essential background for the 

budget. First, the economy, the condition the economy is in and 

how we got there; and then turn to the President’s economic 

growth plan, which I think promises creation of real jobs, acceleration of the recovery that we are on but which is a little wobbly; and 

for the longer term going to the Congressman Spratt’s set of issues 

and the chairman’s set of issues, higher growth rates, the higher 

growth rates that will enable us to meet those unfunded promises, 

those huge promises to the future that we made to future generations, and to have the flexibility that real output and wealth and 

a bigger economy gives us to deal with whatever issues the country 

may face. 

As every American knows by now, whether from having lost a 

job, from knowing someone who has lost a job, or from worrying 

simply about losing their own job, our economy took a turn for the 

worse beginning in the summer of 2000. I come out of the transportation business, and I will remember forever looking at the carload 

numbers and the containerload numbers and the bargeload numbers and the truckload numbers that came across my desk as a private citizen running a large transportation company in the summer 

of July of 2000. It was a striking downturn that began. It wasn’t 

seen in the rest of the economy for some months to come, but the 

industrial sector began a long downturn that still isn’t in a state 

of recovery, a 2 year—probably the longest downturn of the industrial sector that we have experienced in two or three decades. 

By the time President Bush took office, that undercurrent was 

running strongly against the economy, and we were clearly in a period of declining growth heading into a recession. The unprovoked 

and unprecedented terrorist attacks of September 11, compounded 

8

those economic difficulties, compounded a recession that was already by that time well under way. At the same time, the discovery 

of the abuses that were apparent in some corporate businesses and 

on the part of some corporate business leaders slowed the recovery 

further and undermined confidence in our equity markets and in 

our capital markets. 

In response to this confluence of adverse events, the President 

led decisively, and acting with the Congress in a bipartisan fashion 

took the steps necessary to protect a shaken Nation and a fragile 

economy. In 2001, when relief was most needed, he signed a sweeping tax relief package, the most sweeping in a generation, and as 

evidence of the damage to the economy became clearer and clearer 

in 2002, March, acted again to further bolster the economy. 

From my point of view, this was precisely the right medicine administered at precisely the right time. These actions—and I commend the Congress for your action—these actions were essential to 

avoid a much deeper and much harsher downturn. And the actions 

made the recession the shortest and, I think, the shallowest in 

modern times—the mildest since World War II. I am absolutely 

convinced that without these measures—and certainly they added 

to those deficit numbers that were on the charts that you showed 

me—but without these measures, we surely would have had a 

much deeper and much more difficult recession to contend with. 

In the face of extreme adversity, our economy, like our Nation, 

remains resilient. Despite the economic slowdown, the attack on 

our homeland, the war in Afghanistan, weakened investor confidence, and the current uncertainty surrounding the economy as 

a result of the Iraqi situation, the economy is recovering, but the 

problem is it is not recovering on a fast enough pace or a sure 

enough pace. And as the President has said, we can and we must 

do better. Relative success isn’t sufficient. Relative success isn’t 

enough. Too many Americans are out of work today, and too many 

Americans are insecure about their tomorrows. As long as there are 

Americans who want a job and can’t find one, the economy isn’t 

growing fast enough. 

That is why the President’s jobs and growth package is so important. Under that proposal, 92 million taxpayers and their families 

would receive tax relief this year. A typical family of four with 

earnings of $39,000 would receive total tax relief of over $1,000, I 

think it is $1,100-some, compared to the taxes they paid in 2002. 

And importantly, they would get that tax relief not just in 2003, 

they would get that tax relief year in and year out thereafter, each 

and every year thereafter. And his plan will create hundreds of 

thousands of additional jobs by the end of this year and well over 

a million by the fourth quarter of 2004. 

The package will not only help America return to its economic 

potential—and this is an important point that I am sure the committee will want to join with me—it will increase that potential. It 

will put us on a higher growth path. It will eliminate inefficiencies 

in the economy, distortions in equity markets, and, by doing so, 

will increase the output of the economy. It will create a more abundant future with more good jobs and greater capacity to address 

these problems. I think that is what everyone in this room, and everyone across America is seeking. 

9

Before I turn to the budget, let me offer a word on deficits. Congressman Spratt is correct. I have been a hawk on deficits in the 

past. I was a hawk on deficits—and you will want to question me 

on this—at a time when we were in an entirely different world. I 

was a proponent of the balanced budget amendment with President 

Bush during his—first President Bush—during his administration. 

I was active in the Business Roundtable in bringing about the balanced budget agreement between the Congress and the administration in the mid-1990s, and I am proud of that. 

Let me be clear: Deficits matter. Deficits are important. They are 

never welcome, but there are times, times like these, when they 

are unavoidable, particularly when we are compelled to address 

critical national needs as we are today. Are these deficits welcome? 

Absolutely not. Are they understandable? Yes, indeed. 

The surpluses that were talked about that we enjoyed were the 

product of a strong economy, not a weak economy. We will not return to economic strength by taxing the economy further when it 

is struggling any more than we would increase our Nation’s security by failing to fund its defense when we are threatened. The prescription for returning to balanced budgets is pretty straightforward. I think the chairman talked about it in his opening comments. Hold the line on spending and grow the economy. Pick the 

economic growth up half a point, a quarter of a point, three-quarters of a point, and we get entirely different numbers. Hold spending a half a point or a quarter of a point compounded with higher 

growth, we get entirely different numbers. This is the direction the 

President has chosen of course, to create real jobs, more real jobs 

that last, and, of course, to put the Nation on a higher growth path 

for the future. 

Mr. Chairman, I look forward to responding to the questions of 

the committee and working with the committee in hopefully the 

months and weeks—the weeks and months ahead. Thank you very 

much. 

Chairman NUSSLE. Thank you, Mr. Secretary. And again, welcome to the committee, and good luck with and congratulations on 

your new position. 

[The prepared statement of Secretary Snow follows:]

PREPARED STATEMENT OF HON. JOHN W. SNOW, SECRETARY, DEPARTMENT OF THE

TREASURY

Chairman Nussle, Ranking Member Spratt, and distinguished members of the 

Budget Committee, I welcome the opportunity to appear before you today to discuss 

the President’s budget for fiscal year 2004. 

Let me begin by offering my views on the essential background for this budget: 

the United States economy and President Bush’s economic growth plan, which 

promises to create jobs, accelerate America’s economic recovery, and increase our 

growth for years to come. 

As every American knows by now—whether from having lost a job, knowing someone who has, or worrying about losing theirs—our economy took a turn for the 

worse beginning in the summer of 2000. By the time President Bush took office an 

undercurrent was running against the economy. The unprovoked and unprecedented 

terrorist attacks of September 11, 2001 compounded a recession that was well underway, while the discovery of serious abuses of trust by some corporate business 

leaders slowed our recovery from it. 

In response to this confluence of adverse events, President Bush led decisively. 

Acting with Congress in a bipartisan fashion, he took the steps necessary to protect 

a shaken nation and a fragile economy. In 2001 when relief was needed, he signed 

the most sweeping tax relief in a generation. As evidence of the damage became 

10

clearer, he acted again in March 2002 to further bolster the economy. This was precisely the right medicine at precisely the right time. These actions made the recession shorter and shallower than it would have been. In fact, by most measures it 

was the mildest since World War II. 

In the face of extreme adversity, our economy, like our nation, remains resilient. 

Despite a sequence of economic slowdown, attack on our homeland, war in Afghanistan, and weakened investor confidence, the economy is recovering. But as the 

President has stated, we can and must do better. Relative success is not sufficient. 

Too many Americans are out of work today, and too many Americans are insecure 

about their tomorrows. 

We must build on the proven strengths of our economy. We must continue to 

move toward policies that will create more good jobs and raise living standards for 

all. As long as there are Americans who want a job and cannot find one, the economy is not growing fast enough. That’s why President Bush’s jobs and growth package is so important. Under the President’s proposal, 92 million taxpayers and their 

families would receive a tax cut in 2003. A typical family of four with two earners 

making a combined $39,000 will receive a total of $1,100 in tax relief, compared to 

the taxes they paid in 2002, under the President’s plan—and not just this year, but 

in each and every year after. And his plan will create hundreds of thousand of additional jobs by the end of this year and well over a million more by the end of next 

year. 

The package will not only help America return to its economic potential, it will 

increase it, creating a more abundant future with more good jobs and raising real 

wages. I believe that is what everyone in this room and across America seeks. 

Before I turn to the budget, a word about deficits. Deficits matter. They are never 

welcome. But there are times, such as these, when they are unavoidable, particularly when we are compelled to address critical national needs. It is important to 

remember, even without the President’s economic growth and jobs package, homeland security, and the war on terrorism, we would have deficits now. Are these deficits welcome? No. Are they understandable? Yes. 

The surpluses we enjoyed were the product of a strong economy, not a weak one. 

We will not return to economic strength by taxing our economy when it is struggling, any more than we would increase our nation’s security by failing to fund its 

defense when it is threatened. The prescription for returning to balanced budgets 

is straightforward: hold the line on spending and grow the economy. This is the direction the President has chosen: a course to create real jobs that last. We are not 

going to let terrorism and its effects bring either our Nation or our economy to its 

knees. 

Finally, we should remember that current deficits are small relative to our unique 

circumstances and to our economy as a whole. Even at their depth, they remain considerably below the typical levels following a recession over the last 30 years and 

they begin a pronounced improvement after next year. 

We face new threats and challenges. Job creation and economic growth are keys 

not only to our near-term but our long-term success as well. If we are to meet the 

threats of today and the challenges of tomorrow, we must have a strong economy. 

In fact, we must seek a higher level of prosperity for America than we have 

known—one which puts us on an even higher growth path, one which unlocks the 

fullest potential and talents of the American people. That means encouraging hard 

work, rewarding hard work, and creating the opportunities for work for all Americans. These are the values that brought America to where we are today and they 

are the ones that we must allow to lead us into the future. We must also remember 

that our success and our example in this endeavor promises not only a brighter, better future for our people and our children, but for the rest of the world as well. 

The Jobs and Growth Package, our new initiatives to promote savings, our proposal to promote health care coverage, to encourage charitable giving, and to promote responsible energy production, and improved compliance measures from the 

Internal Revenue Service are all important budget initiatives. Each of these is described in more detail in our request. 

The Treasury Department’s portion of the 2004 budget is nearly a third reduced 

from 2003, owing mainly to the separation of homeland security functions from the 

Treasury Department this year. Adjusting for that change, Treasury’s request is an 

increase of about 3.5 percent over last year’s request. 

Treasury’s budget request will allow us to build on our recent accomplishments 

and highlights our commitments to: 

1. Fight the war against terrorist financing; 

2. Ensure that the tax system is fair for all Americans through a comprehensive 

compliance effort that includes high income taxpayers; 

3. Increase Treasury’s efficiency and effectiveness by streamlining operations; and 

11

4. Maintain the integrity of our nation’s financial systems and currency. 

I look forward to discussing that plan and the rest of the President’s budget with 

you today.

Chairman NUSSLE. I guess I want to start with what you said 

we ought to question you on, and that is you are a deficit hawk. 

And like so many people around here, the words of the last 10 

years have been put to music about balancing the budget, keeping 

it balanced, you know, never going back to those days when we 

were running deficits, some would say, as far as the eye can see. 

How did we get here? How did we get to this point? You say deficits matter. We all think deficits matter, I would say, and I believe 

that is now joined in a bipartisan way. So if deficits matter, A, how 

did we get here, and B, what are we going to do about it? 

Secretary SNOW. One of the charts that was put up suggested 

where the biggest part of the problem lay: The economic slowdown, 

which has cost us over $3 trillion from those forecasted surpluses 

of just a few years ago. We didn’t squander that surplus. We never 

had it. It was a forecast. It wasn’t real dollars in hand. 

And I think the thing to keep in mind here is just how humble 

people who make forecasts should be; that the economic slowdown 

was not foreseen. The slowdown in the growth of Government revenues, which was greater than the slowdown in the economy, wasn’t 

foreseen any more than at the end of the 1990s—1996, 1997, 1998, 

the vast increase in governmental revenues was foreseen. That 

vast surge in governmental revenues was the product of what? It 

seems to me it was clear. It was the product of a very buoyant and 

unsustainable stock market that created a lot of capital gains taxes 

for the Federal Government that had not been in the budget before 

and which are not there today. It created an awful lot of revenue 

for the Federal Government growing out of the exercise of options 

at a time when options were buoyed up by this very effervescent 

stock market, by incentive compensation that was a primary part 

of corporate world that ballooned during this period and created 

lots of additional and unforeseen revenues at the Federal Government. 

That is over now. It disappeared. And the economic slowdown 

and the consequence of the stock market decline, I think, are the 

single most important factors in explaining the difference between 

where we were several years ago and where we are today, to say 

nothing of the cost of the war on terrorism and the economic uncertainty that goes with the Iraqi situation. 

Chairman NUSSLE. Well, let me hone in then on revenues, since 

that is the reason why the bottom line has changed so dramatically 

is the revenues have not come in. We can talk about the fact that 

there was additional emergency spending, there was certainly new 

homeland security spending, there was spending certainly over and 

above what was anticipated that certainly contributed to it. But the 

economic downturn had quite a bit to do with the lack of revenues 

coming into the Treasury. As you said, it was not predicted, it was 

not forecasted. I am dying to ask, why? I mean, we missed—and 

when I say we, I mean CBO, OMB, and Treasury, missed these 

forecasts by $50 billion at a chunk. Why? How can this be within 

6 months—and this is your second day, so I guess the passion beVerDate Feb 1 2002 16:58 Apr 30, 2003 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\108TH\108-2\HBU036.000 HBUDGET1 PsN: DICK
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hind the question is that hopefully this has got to be one of the 

first issues that is tackled. 

And let me put out a suggestion as to what might be going on. 

Our tax system that we have right now, we cannot predict the revenue that it will generate. The current tax system has gotten so 

complicated, so convoluted, so based on things that are outside of 

anybody’s control that no human being now is able to predict what 

it will generate, because for the first time, as I understand it, since 

1929, regardless of where the economy was going and heading, this 

is the first 2-year period that revenues actually dropped in actual 

dollars from the previous year. And to me that is a signal of the 

Tax Code and our inability to manage revenues more than probably 

any other issue that is out there. And I’d ask your comment or observations on that. 

Secretary SNOW. I think you are putting your finger on a very 

important issue here. Predicting the economy is one thing, and predicting the revenues that go to the Federal Government as a consequence of changes in the economy is another. The latter seems 

to have greater margins of error in it than the margins of error associated with predicting the economy. So the revenue stream is 

even more uncertain than the economy itself, which has always got 

a measure of uncertainty about it. So clearly, there is a disconnect. 

It is a disconnect I don’t think we understand. And the best people 

in the world of understanding these things are beside me here and 

over at the Treasury Department and up here in the Congress. We 

all missed it. We all missed it big. As I said, I think, earlier, it 

ought to make us humble, and it ought to make us go back and 

think harder about these interconnections between the economy, 

the Tax Code, and the Government’s revenue streams. 

Chairman NUSSLE. All right. But then if that is the case, if we 

can’t forecast tomorrow and can’t forecast next year, let us just not 

do anything. Let us just freeze where we are. Let us freeze spending; let us not change the Tax Code. According to CBO, we grow 

out of it. According to OMB, we will grow out of it in 2 or 3 years. 

Let us not do anything. 

Why is the President suggesting at this moment in time that we 

do something? And I am asking you this, to some extent, tongue 

in cheek. I mean, we are supposed to freeze at this moment in time 

and do nothing as a government? We are not supposed to change 

the tax policy of this country? That is what I hear so many people 

saying: Don’t do anything. Well, in 2 or 3 years we will be out of 

it. I mean, is that true, that all of a sudden we are going to grow 

out of it in 2 or 3 years by doing nothing over those next 2 or 3 

years? 

Secretary SNOW. No. I think the President’s program is animated 

by the answer to your question, which is, no, we can’t leave it the 

way it is. We need to take the steps to assure that the recovery, 

which will generate additional revenues—that the recovery stays in 

place and accelerates; that those additional jobs are created; that 

the economy grows in the short term. But more importantly, because this package is—the President’s growth program—has got a 

long-term component as well as a short-term component that I 

hope we will be able to get into later, it assists the economy now. 

It creates some 500,000 additional jobs by year end, the fourth 

13

quarter of this year, a million and 3 or 4 by the fourth quarter of 

next year. That is a lot of jobs. 

Now, that helps a lot of people who are out looking for work. I 

want to see as many ‘‘Help Wanted’’ signs going up all over America as possible. But what we need to do is get this economy on a 

higher growth path long term. The way to do that, I think, is to 

take actions like those the President proposes on the dividend, because clearly, the double taxation of dividends weakens the economy. It distorts the economy. If you tax equity capital more, you 

get less of it. If you tax anything, you get less of it. And so we have 

less equity capital. As a consequence, we have more debt in the 

system than we otherwise would have. And I am—we will get into 

this later, but the important thing about the package is that it 

serves both short-term and critically important long-term goals of 

speeding up the economy in the short term, assuring more jobs, 

and putting us on that more abundant growth path in the future, 

which allows us to address these questions that are on your mind. 

Chairman NUSSLE. I have had a chance to talk to a few Iowa 

business folks, big employers within my district and State, and who 

were similarly situated to yourself not too long ago, and I asked 

them what we need to do to create jobs. And I will tell you, what 

they tell me is that there is money out there—a lot of people sitting 

on money right now. A lot of people are sitting, waiting. They are 

waiting because of lack of confidence, on one hand. They tell me 

they are waiting because of the uncertainty over the war that is 

looming. And they tell me they are just uncertain about the future. 

And so, I guess, my last question would be, having sat in that 

situation not too long ago around the boardroom table making decisions about product lines and job creation and actually creating a 

job, unlike the Government which hasn’t created a job except a government job in its entire existence, tell us what is the trigger. 

What is the trigger? With low interest rates right now and the cost 

of capital as low as it has ever been, what is the trigger to get 

someone like yourself who sits around that table, whether it is a 

big boardroom table or it is a small business kitchen table at home, 

that triggers them to create that next one or two jobs? What is the 

trigger? What is the way that we can get this thing going? 

Secretary SNOW. I think the main trigger is confidence, and confidence comes from people seeing their disposable income rise, and 

seeing it rise not just in a one-time event, but the prospect for a 

permanent increase in what they can take home, what they can 

spend, what they really have, their after-tax income in their pocket 

going up. 

That is what this first and foremost does. It puts lots of additional money in the hands of 92 million Americans. That will stimulate the economy because it will give people confidence in their future. And it is the multiple-year aspect of this. Making these future 

tax cuts permanent will telescope to the future and cause people 

to say, wow, I am going to have another $1,000 a year, I am going 

to have another $2,000 a year to spend. It makes them feel more 

confident about their future. 

Business will respond as consumers—as they see the prospects 

for their business improving, as they see their returns improving. 

An important feature of this legislation is that small businesses, 

14

which are the biggest job generator in America, will find themselves with more net income and more cash flow. They will have 

more cash flow and net income because of the expensing provision, 

which is an attractive and important feature of the bill, but also 

because of the reduction in the marginal tax rates. And of course, 

so many small businesses use the flow-through method of paying 

taxes, they will find their marginal tax rates being reduced. As 

their marginal tax rates are reduced, what does that mean? It 

means their business is more profitable. As their business becomes 

more profitable, has more free cash flow, they are more inclined to 

go out and expand to take on additional customers, to make some 

capital investments, and to put up those help wanted signs that I 

said earlier I would like to see more of going up all over America. 

Chairman NUSSLE. Thank you, Mr. Secretary. 

Mr. Spratt. 

Mr. SPRATT. Thank you, Mr. Chairman. 

Mr. Secretary, I was here during the 1980s and here during the 

1990s, and you were a close observer of the process then, I think 

you would agree. The way we got to where we were in 2000, with 

a surplus of $236 billion and the bottom line of the budget that it 

improved every year that the Clinton administration was in office 

is that we had a plan and we had a process. The process grew out 

of the Budget Enforcement Act of 1990, which we adopted as part 

of the budget summit agreement made with Mr. Bush, laying the 

foundation for what happened in the 1990s. 

Those rules are now all gone. The PAYGO rule is gone, discretionary spending ceilings are gone, sequestration is gone. All of the 

disciplines are gone. And the last vestige of any kind of budget 

plan expired last year. We have no plan; we have no process. So 

how do we get rid of these enormous deficits and back to a balanced budget without a plan and without a process? 

Now, I know that you are proposing the renewal of some of these 

budget process provisions such as the PAYGO rule. There is an old 

adage around here that it is pay as you go, and that you pay, and 

I will get a free ride. That is a typical attitude on both sides of the 

aisle among all Members of Congress. 

As I understand it, you want to renew that rule, but you don’t 

want it applied your proposals; it won’t apply to your tax cuts, and 

it won’t apply to your entitlement increases; is that correct? 

Secretary SNOW. Congressman, the PAYGO rules and the other 

sequestration rules and those things that came about in the 1990s 

were good policies. I supported those at that time. We got to those 

good numbers you are looking at because of those rules in part 

where spending was under much tighter control in that period of 

the mid-1990s on than it had been heretofore. And I forget precisely what it was, but over about a 5- or 6-year period there, 

spending rose at less than the rate of inflation, I think. 

Mr. SPRATT. But we had a plan, and we had to limit it someplace 

at least. We didn’t always adhere to it, we fudged on it, but nevertheless it constrained spending significantly and achieved results. 

Alan Greenspan sat there and said, I will admit, I was a cynic. I 

was a skeptic. I didn’t think it would work. But I have to say—he 

said—I think that this contributed successfully to the successes of 

the 1990s. 

15

Secretary SNOW. I take some pride in having been associated 

with groups that were in the forefront of urging Congress to adopt 

those rules. I don’t think it was the Concord Coalition that I was 

a member of, though. 

Mr. SPRATT. I beg your pardon? 

Secretary SNOW. But, you know, I know Pete Peterson and the 

Concord Coalition and Warren Rudman, and I think they had done 

a lot of good work as well. But those PAYGO rules and sequestration rules and so on were clearly part of the game plan that restrained spending that helped us get to that promised land of balanced budgets, but aided greatly, I think you would agree with me, 

by that surge of governmental revenues that came about because 

of the buoyant stock market and the high productivity and rising 

real wage rates. We had an awful lot of good things going on. 

Mr. SPRATT. It was a convergence of all of those things. But if 

we hadn’t had the budget disciplines in place, we wouldn’t have 

taken maximum advantage. You wouldn’t have seen the effect on 

the bottom line. But my question to you is the here and now, right 

now. If you want to see the renewal of those, shouldn’t they apply 

to your tax cut proposal this year, your increase in Medicare benefits? 

Secretary SNOW. No, I wouldn’t. If you are asking me whether we 

should have offsets——

Mr. SPRATT. That is what the PAYGO rule means. If you don’t 

have offsets——

Secretary SNOW. If you are asking me whether there ought to be 

offsets to the tax reductions, I would candidly say no, because if 

you do that, then you don’t get the benefits of the tax reductions. 

And we need those tax reductions to put so many people back to 

work. I mean, it is 2 million people over the course of the next 3 

years that get back to work because of this. And I think that is awfully important, too, to have—as we deal with international security, we deal with economic security at home. 

Mr. SPRATT. Why propose it then, the renewal of the PAYGO 

rule, if it is not going to be applicable? 

Secretary SNOW. The PAYGO rule should apply to spending. 

Mr. SPRATT. Well, it does. That is what we are talking about. 

Secretary SNOW. Well, I don’t view a tax reduction as spending. 

Mr. SPRATT. Well, it always applied to tax reduction and spending from the very beginning. So you are just talking about a 

PAYGO rule that has limited application. And would you apply it 

to your proposal, to, let us say, Medicare prescription drugs? 

Secretary SNOW. No, I don’t think we would. 

Mr. SPRATT. That is spending, isn’t it? 

Secretary SNOW. It is a spending, but it is part of a larger program to reform a system that is badly in need of reform. 

Mr. SPRATT. Well, I would agree with you about the need for prescription drug coverage, but you just proposed a rule, but then dispensed with all the applications of the rule. 

Secretary SNOW. I am suggesting that we would defeat the very 

purpose of the tax reductions if we tried to offset the effect of the 

tax reductions. 

Mr. SPRATT. I understand the point, but if you are going to make 

that point and make it in the manner you made it, then we 

16

shouldn’t even be proposing in your budget that we have a PAYGO 

rule or—a renewal of the PAYGO rule. 

Secretary SNOW. Well, I am talking about the PAYGO rules applying primarily to spending. I think we have to deal with the discretionary spending is where it applies. 

Mr. SPRATT. The chairman touched on a very sensitive subject for 

anybody who operates in the realm of the budget, and that is the 

lateness and the reliability of early Treasury forecasts of revenues 

and the composition of revenues. And this is not a new topic; it has 

been around for a long time. We keep prodding and pushing the 

Treasury to come up with better estimating techniques so we can 

know far sooner than 18 months or 2 years what is the composition 

of income taxes, corporate taxes, whatever, in a particular fiscal 

year or calendar year. Do you have any plan for doing that—I know 

you have only been on the job for 2 days—improving those techniques? 

Secretary SNOW. If I had a better way do it right now, I would 

tell you, but I don’t. 

Mr. SPRATT. Well, let me suggest to you the reason everyone bought into that fantastic forecast, $5.6 trillion in surpluses, was 

that it facilitated your tax cut proposal. We were warning that this 

was a blue sky estimate. You said you saw estimates of the economy slumping in August of 2000. 

Secretary SNOW. Industrial sector. 

Mr. SPRATT. Industrial sector. Transportation sector. The MBER 

says the recession started in March of 2001. The tax cuts weren’t 

passed until June of 2001. So what happened is those who were 

pushing the tax cuts ignored the storm clouds that were gathering 

over the economy that people like John Snow at CSX were seeing; 

others were seeing them. They ignored those storm clouds and 

didn’t want to acknowledge that that $5.6 trillion was probably an 

overestimate. Treasury and OMB now say it is an overestimate to 

the tune of $3.2 trillion due to economic adjustments alone. They 

didn’t want to acknowledge that likelihood. 

And here is what their budget looked like: If you designed a surplus, which excluded the Medicare surplus and the Social Security 

surplus; and those were the terms we were talking about on both 

sides of the aisle then, that we should stay out of both of those 

trust accounts. We were forswearing ever again borrowing and 

spending those surpluses. This is what the surplus would have 

looked like, and this is how it was applied in the budget that was 

adopted in the first year of the Bush administration. 

And you see that top green sliver of a line, that layer at the very 

top? After the blue spending proposals and the green tax cuts, that 

was all that was left in the near term between 2002 and 2005, 

2006 as a margin for error. And having made a very extravagant 

project—well, what turns out to be a blue sky projection of the 

economy and the surplus, they then came up with a budget that 

left no margin for error even though, as I said, storm clouds were 

gathering and people were questioning whether or not this surplus 

could indeed be obtained. That is what happened. And the reason 

you bought into it was because it made possible these tax cuts. 

Now, at this point in time, if I could get the bridge chart—there 

we go. This is a little complicated for the screen, but this comes 

17

straight out of OMB numbers. This shows where the April 2001 

surplus projection lay, $5.637 trillion. These are economic adjustments that OMB now says should be made to that. Those include 

technical as well as just economic growth adjustments. They don’t 

break them down, unfortunately. That means the adjusted surplus 

that can really be expected to obtain in that period of time, 2002–

11, the cumulative surplus is $2.463 trillion, and all of that virtually is Social Security. There is no on-budget surplus after that. 

Then here are the enacted policies: tax cuts, the stimulus tax 

cuts, and then other enacted legislation, a large part of which goes 

to homeland defense and national security. The total of those enacted policies comes to $2.592 trillion. That means of the available 

surplus, adjusted available surplus, is already spent to the tune of 

$129 billion. That is the next item there. That shows you how 

much already has been spent. So, anything you do now goes dollar 

for dollar to the bottom line, adds dollar for dollar to the deficit, 

and, as the Concord Coalition said, that is a way of charging it up 

to our children. That is what it amounts to, shifting forward the 

burden of it. And the total amount of deficits that you are incurring 

is $2.122 trillion, and all of that—almost all of that results from 

policy decision making right now. You are saying it is OK to proceed from now because this is what OMB tells us. This is going to 

be the price tag of adopting this budget unless something falls out 

of the sky and gives us a higher rate than 3 percent, which is what 

they are assuming already, a pretty robust rate of growth for a 10-

year period of time. Doesn’t that give you concern? 

Secretary SNOW. The—sure. 

Mr. SPRATT. As a self-described deficit hawk, you are about to pursue policies that will increase the deficit by $2.122 trillion. 

Secretary SNOW. Let us go back and talk about how we got there. 

Mr. SPRATT. OK. 

Secretary SNOW. The 2001 tax reduction was good policy. Who 

doesn’t think that? 

Mr. SPRATT. But that is over now. I am talking about——

Secretary SNOW. But it builds into these numbers. 

Mr. SPRATT. I have got that in enacted policy. I am telling you, 

you are standing at the point with a cumulative deficit between 

2002 and 2011 is $129 billion, and you are proposing to add $1.993 

trillion to it, OMB numbers. 

Secretary SNOW. OMB numbers that they will acknowledge, Congressman, understate the revenues for the future and build in all 

of the costs of the President’s growth package. So they are worstcase sorts of numbers. I think the economy can grow faster, and 

it certainly will have more revenues in it than the numbers that 

OMB presented to you as they acknowledged, I think, that it was 

a pessimistic case on governmental revenues. So the picture is better than that. 

Now, am I happy to have deficits of any amount? No. But as I 

said, deficits sometimes, regrettable as they are, are an essential 

part of carrying on the essential business of the country, the critical business of the country, homeland security now, and domestic 

security. And I think it is important to bear in mind the size of 

these deficits. These deficits are relatively small compared to the 

size of the economy and historic deficits coming out of recession, as 

18

is the debt level of the country. They are manageable, and they will 

be receding after a couple years. I think the OMB administrator 

had them going down, as was shown in one of these charts. They 

are deficits that we can work our way out of if we can grow this 

economy faster. And I would make the bet on growing the economy 

faster to work our way out while maintaining tight spending controls. 

Mr. SPRATT. But you will admit you have got fairly robust growth 

built into this budget already. It is better than 3-percent real 

growth for the next 10 years, averaging out over 10 years better 

than 3-percent robust growth, real growth. 

Secretary SNOW. I will have to check that to confirm that you are 

right. If you are, I will certainly acknowledge it. I had thought that 

OMB had explicitly not taken into account the growth effects, or 

had discounted some of the growth effects of the President’s package, but had scored the entire cost of that package. 

Mr. SPRATT. Let me just ask you a final question. I don’t want 

to monopolize this, but this is a very important part of the decisions that lie ahead of us. This is our back of the envelope tab of 

what is on the agenda, the Bush administration’s tax cut agenda. 

The first couple of items are done deals. They are enacted law. 

The tax cut of June 2001, the cost of it a $1.349 trillion without 

including any additional debt service. The stimulus package in 

March of 2002, $42 billion. And now you’ve got on the table a 

growth package, a small portion of which has been passed, a socalled growth package. It will be implemented over a period of 

time. The cost between now and 2013 is $615 trillion. That is an 

OMB number. You are also proposing making permanent the 2001 

tax cuts, which cost about $692 billion. 

As I said, I think you have to include the alternative minimum 

tax. The Treasury was the first to blow the whistle on the alternative minimum tax. They put out a report a couple of years ago 

and said, given current trends the number of tax filers who will be 

confronting the AMT will grow from 2 million to 39 million over the 

next 10 to 12 years. I have forgotten the time frame. The numbers 

are roughly correct. You know and I know politically we will have 

to deal with it, and equitably we should deal with it, because when 

we pay off the alternative minimum tax it was a way of saying to 

upper bracket taxpayers you are not going to be able to wipe out 

all your income tax liability with reductions and credits and preferences and so forth. You got to pay at least the minimum tax. We 

never meant for that to apply to middle income taxpayers, but it 

soon will. But the number who have to confront the AMT every 

year grows from 2 million to 10 million. Politically, the pressure for 

doing something about it has to be dealt with. You said that for 

several years, your Treasury Department has, both administrations. The AMT has to be confronted, the committee deals with it. 

Don’t you agree it has to be included? If you talk about this time 

frame, we are talking 2004–13, and you don’t include the AMT, you 

are fooling yourselves and you are fooling the American people. 

Secretary SNOW. I think it will be addressed but it should be addressed by the Congress and the administration as part of an overall tax reform package rather than as a one-off item. 

19

Mr. SPRATT. What you are saying though it has to be offset, is 

that what you are saying? That would mean revenue increases 

somewhere. 

Secretary SNOW. It is an issue that needs to be addressed. I am 

granting you that. How and when is something I really don’t have 

an opinion on at this time. 

Mr. SPRATT. Between now and 2013, the taxpayers affected by it 

will grow from 2 million to 24 million. Don’t you think before 2013 

within the time frame we are talking about, well, within it, you 

have to deal with this issue; therefore it has to be included in the 

tally of the tax cuts likely? 

Secretary SNOW. But I think it should be addressed in the larger 

context of real, broad tax reform. 

Mr. SPRATT. Let me ask you one final question. It is time to clean 

the closet out. We need to scrub the code down as we did in 1986. 

It is long past due. And one of the anomalies in the code we could 

deal with in a tax reform package would be the taxation of dividends. Why not put it in a revenue neutral tax reform package? 

And indeed why not make it for the corporate Tax Code the big 

chip just as the ITC and accelerated depreciation was. It was a 

trade-off to get lower rates. Why not play this chip and say to corporate America we will give you this if you will agree to get rid of 

these loopholes and the exclusions that lower the effective rate of 

corporate taxes from 35 percent to 15 percent? Aren’t you passing 

up a real opportunity there to induce real change and a good cleaning out of the corporate Tax Code? 

Secretary SNOW. There are a variety of ways to do things. However you look at this proposal, it is just good economics. 

Mr. SPRATT. But it is not good bargaining. Put it on the table and 

corporate Americans say this is what we will give you if you will 

agree to get rid of these loopholes and these things that let you expatriate and locate in Bermuda and avoid taxes. This is the incentive to you. We are going to handle the double taxation dividends 

problem in return for your concession on these issues. 

Secretary SNOW. There are a number of advantages from the exclusion on the dividends, one of which is it reduces the incentive 

to do the very thing that you find objectionable and I find objectionable, inversions and tax shelters, abuse of tax shelters and things, 

because if you are not paying income tax on it there is nothing to 

shelter. 

Mr. SPRATT. You have to have something to show. 

Secretary SNOW. There is a byplay here between the dividend exclusion and encouraging good taxpayer behavior. 

Mr. SPRATT. I agree, and put them in the same package and you 

got something you can pass. Thank you, sir. 

Secretary SNOW. Let me close though. I think you and I maybe 

didn’t agree on everything there, but I think we can agree on the 

need for better estimates and I will go to work on that. 

Mr. SPRATT. I would hope we found broader common ground than 

that. 

Chairman NUSSLE. Just to complete the record, I was curious, is 

the proposal offered by the Democrats compliant with PAYGO and 

offset and revenue neutral? 

20

Mr. SPRATT. If you are not going to play by the rule, we are not 

going to play by the rule. 

Chairman NUSSLE. Just wanted to make sure the record was 

complete. 

Mr. Gutknecht. 

Mr. GUTKNECHT. Thank you, Mr. Chairman. Mr. Snow, we welcome you to the committee and to Washington again. The first 

question I have for you, are you a volunteer or a conscript? I suspect you are somewhere in between. You don’t have to answer that 

question. You know it bothers me sometimes when they take words 

that I used back in 1995 and throw back at me today. Things have 

changed. And clearly the economy is different today than it was in 

1995 and the circumstance we find ourselves in is different than 

it was in 1995. 

I do want to agree with you on everything that has been said. 

As we look at projecting what the economy is going to do, what revenues we are going to produce, we can agree now that this is a very 

humbling business. But I do want to come back to some things because I didn’t hear the kind of answers that I think ultimately the 

American people want to hear. The chairman asked a pretty interesting question. Why don’t we just freeze everything? I mean most 

Americans would be happy if the Federal Government would just 

freeze an awful lot of the spending and allow the economy to catch 

up. 

Let me give you an example. And we sort of have this debate 

sometimes between CBO and OMB and what Alan Greenspan says 

and other people say about where the economy is and where it is 

going, but according to our official bean counters at the Congressional Budget Office this year the Federal Government will increase revenues to the tune of 3.7 percent. Now yesterday Mr. Daniels was here and I await a little better explanation because in 

many respects I was proud of the fact that he stole a line from me 

that the Federal budget shouldn’t grow any faster than the average 

family budget. But the average family budget is not growing at 4.5 

percent, at least by my estimate. And I want to come back to this 

point. If revenues are going to increase by 3.7 percent this year and 

the Bureau of Labor Statistics tells us that the CPI is going to increase at 1.8 percent, that is about half, I guess on behalf of an 

awful lot of Americans, why isn’t 3.7 percent enough for the Federal Government? 

Secretary SNOW. Well, Congressman, I am fairly new in this job 

and didn’t have too much to do with preparing the budget for the 

United States, but I think the short answer—and it is a question 

better addressed to Mitch Daniels than to me, but I think the short 

answer is that there are pressing national priorities. There is the 

priority of homeland security, which takes a very significant part 

of that increase in the budget expenditures for next year. There are 

also initiatives in a number of other areas, the prescription drug 

proposal that I think enjoys widespread support, is part of a broad 

Medicare reform program that makes sense. 

There is a cost to not doing things as well as a cost to doing 

things. If we don’t do a growth package like this, what do we tell 

the 2 million people who don’t have jobs who otherwise would have 

had jobs because of the growth package? How do we explain that 

21

we failed to take the action that makes the economy stronger? The 

action you all took in and the Congress took in 2001 was an essential action. It cost. It certainly had—scoring it, it produced more 

deficit than it produced revenues, but it was good policy. And I 

think if we keep focused on doing good policy, and then asking ourselves what is the opportunity cost, what do we give up because we 

don’t do it and then look at what shouldn’t we do. Should we not 

maintain the homeland security? Should we not wage the war on 

terrorism? Should we not try to put 2 million people back to work? 

Should we not take the growth up a percentage point over where 

it is otherwise? I think the foregone alternatives of not doing these 

thing are actually greater than the costs of incurring the budgetary 

impact of doing them. 

Mr. GUTKNECHT. I agree with you generally that allowing people 

to keep more what they earn during times when the economy is 

soft is really a good thing to do. My concern is on the spending 

side. You said there is broad based support for this program. You 

will find here in Washington there is broad based support for virtually every spending program. It is the responsibility of this committee to try and restrain that spending so we can actually have 

a balanced budget and ultimately create room for additional tax relief. 

The problem I have with the budget that the White House sent 

up is they say ‘‘yes’’ to almost every one of these priorities and you 

come back to the basic number. To a lot of Americans allowing the 

Federal Government to have a growth in their revenue of 3.7 percent ought to be enough to fund the legitimate needs of the American people. And at some point I think we all have to come to grips 

with the tough decisions we have to make, and we need some help 

from folks like you to get that done. 

Thank you. 

Chairman NUSSLE. Mr. Moran? 

Mr. MORAN. Thank you, Mr. Chairman. You know, this is exactly 

what President Bush the first called ‘‘voodoo economics.’’ It is 

Reagan redux. Some of us remember in 1980 when David Stockman spun us the same kind of pitch. Deep tax cuts for the wealthiest taxpayers, dramatic increases in defense spending, which the 

Democrats didn’t oppose, and then of course what the Democrats 

label as Draconian cuts in social programs, which they felt was 

part of the long-term agenda. When President Bush the first came 

into office and there was some resonance of his description of it as 

‘‘voodoo economics’’ because it didn’t pan out, and it quadrupled the 

Federal debt in just 8 years. In 1990 he put together a bipartisan 

budget summit, raised taxes marginally on the top rates and balanced the budget. President Clinton followed up with a balanced 

budget and raised taxes on the highest taxpayers, who, incidentally, including yourself, over the last 8 years have taken back 

more after tax income than at any time in American history, so it 

obviously didn’t hurt, but it balanced the budget. And so it left us 

with a $5.6 trillion surplus at the beginning of 2001. And that was 

the justification that we were given for the deep tax cuts of 2001. 

And we were even told and I remember, in fact the chairman suggested it, that the growth could well be more than this, that—the 

suggestion was we really didn’t need to worry about surpluses and 

22

what the loss of revenue would do because the economy was going 

to keep growing. And so we left very little margin for error. And 

now you are telling us, as we have been told five times now, that 

this budget is going to grow the economy. In February of 2001, we 

were told that this budget will grow the economy. We were told 

again in the mid-session review in July of 2001. Again in February 

of 2002. Again in July of 2002. The same spin. And yet we have 

had the worst job growth in 58 years. We have had the worst economic growth in 50 years. It is the worst first 2 years of any presidency from an economic perspective. And yet you are telling us, 

well, we really shouldn’t worry much about the fact that we have 

got deficits as far as the eye can see because economic growth is 

going to be better than what you suggest. 

And yet we look at the analysis that OMB has given us, your 

economic growth figures are more favorable than CBO’s or the Blue 

Chip forecast. Your unemployment rate is less than CBO or the 

Blue Chip forecast. The interest rates that you say you would pay 

are lower than CBO or the Blue Chip forecast, and yet you think 

you can tell us these numbers, give us this Pollyannish projection 

and, you know, everything is going to be OK. 

The worst aspect of this whole economic plan is that you are cutting taxes in every way possible on unearned income at the expense of earned income. In other words, the people who are paying 

for the $4.4 trillion of tax cuts, including interest costs over the 

next 10 years, the people who are paying for that are the ones who 

are payroll taxes into Social Security, FICA taxes, because you are 

taking $2.2 trillion out of that Social Security money and using 

that to offset the cost of the tax cuts. So you take it from those who 

can most afford it and take it—and eliminate tax on those who can 

most afford paying them and then sticking those who can least afford it. That is our biggest problem with it. 

And you know, in fact, Mr. Nussle used the expression our problem is a lack of confidence that people are not investing, they are 

waiting because of the uncertainty. You said it triggers their confidence. I agree with you, the stock market has lost $5 trillion since 

your President took office and it is primarily a lack of confidence. 

So if you have any response, I would be interested in hearing it, 

Mr. Snow. 

Secretary SNOW. Congressman, I hardly know where to begin, 

but let me take on a few of your points. You are right, the economy—the Nation has been subject to a deep and far reaching set 

of shocks that help explain the situation we are in today, not the 

least of which is the extraordinary meltdown of the Nasdaq and the 

equity markets generally. I think it is actually $7 trillion that has 

evaporated with gigantic wealth effects. 

Mr. MORAN. I didn’t want to exaggerate. 

Secretary SNOW. That is probably over the whole period. Then 

the recession, then 9/11, then the corporate scandals, crisis of confidence in corporate leadership, on and on. We have had a set of 

shocks, a series of shocks to the economy that are of far reaching 

proportions, and yet the economy remains resilient. It is really a 

credit to the strength of this economy and to past policies that the 

economy could respond as well as it did. I will come see you some 

time and talk about the numbers. 

23

The Blue Chip estimates actually are for more robust growth 

rates than the growth rates that the administration has and for 

lower unemployment. Well, I won’t read it to you, but I have it 

here. For instance, in 2003 the administration unemployment rate 

is—well, I won’t read all these to you because it will take up too 

much time. On the issue of fairness, because we always come back 

to this issue of fairness, I think it is important to come back to the 

fact that the burden of the Government, the burden of the revenues 

is higher on the top taxpayers after this proposal than it is before 

that proposal; that is, if you enact, if the Congress enacts this proposal, the highest income taxpayers will be paying a larger share 

of the total obligations of the Federal Government than they do before, and the lowest income taxpayers will be paying a lower share 

of the total obligations of the Federal Government. 

Mr. MORAN. Is that after estate taxes? 

Chairman NUSSLE. The gentleman’s time has expired. Mr. 

Toomey. 

Mr. TOOMEY. Thank you very much, Mr. Chairman, and, Mr. 

Snow, welcome to the committee. I can’t quite see you there but I 

know you are there. I want to comment briefly and follow up on 

a comment one of my colleagues just made that we are looking at 

Reagan redux, and all I can say is I just vigorously hope he is 

right. It is amazing to me. When Ronald Reagan came to office and 

dramatically slashed taxes, especially marginal income, including 

taxes on the highest wage earners in our country and because he 

dramatically increased the incentives to work and save and invest, 

he ushered in a 17 year long economic boom that has created more 

wealth, prosperity and opportunity than this country or any country on the face of the Earth has ever seen. How anybody can look 

at that and say that was a bad thing is fascinating to me. It is baffling to me. It was a wonderful thing, and it was driven primarily 

by dramatic reductions in taxes. 

There is another aspect of this debate which is almost a little 

overwhelming to me, and that is that the same folks who are so 

concerned about the size of the deficits are the very same folks who 

want to spend even more money. We have had huge increases in 

spending in recent years. And my good friends on the other side—

and I don’t doubt their sincerity about their concerns with the deficits, but the fact is they are only going to get worse if we keep the 

spending going. 

The President proposed a budget which is a refreshing change 

from the previous administration in that he is trying to hold the 

line on spending. I hope we can do more. I am going to work to 

try to reduce spending below the level the President has proposed. 

But I understand in Congress that is going to be really tough to 

do. So if we end up right where the President is, we need to take 

that as the given, that level of spending, high in my judgment but 

maybe that is where we end up, the question then I think becomes 

which is better for the economy, to finance that as the President 

has proposed, almost entirely with taxes, but with a little bit, about 

2.7 percent of our economy with debt, or should we instead raise 

taxes and finance the rest of it also by taking money away from 

the wage earners of America and doing it all with taxes instead of 

this combination? I think that is the question before us. 

24

We will wrestle with the spending level. We will probably end up 

somewhere around where the President is. And I would just ask 

you to comment on which is better for the prosperity of America, 

for the economy of our country, for job prospects to just raise taxes 

and finance it all with taxes or to have this modest component of 

debt? 

Secretary SNOW. You framed the essential issue here, Congressman, better than I did. It is that notion of opportunity cost. What 

do we give up if we don’t give the taxpayers more of their own 

money? And on the other hand, what does it cost us in real terms 

if we try to finance it through tax increases. I think framed that 

way there is only one answer you can come to; it is clearly better 

to go down the path the President is taking us. Sure, we have a 

little higher debt, still debt that is in the really modest range by 

comparison with the past, 2.5 percent, 2.7, coming down well below 

that in the years ahead. 

The other side of this is who would propose a tax increase to accomplish that objective. I don’t think you would, and I don’t think 

you would get the objective. You would have lower employment and 

lower growth and ultimately less Federal Government revenues. 

Mr. TOOMEY. I agree. As to the question of the total amount of 

public debt—and I would love to see us have a balanced budget 

this year. I think you have been quite right in framing this as plausible alternatives right now, but could you just comment on—we 

are running about low 30s as a percentage—our debt as a percentage of GDP in America. Of course that is not including the unfunded commitments of the major entitlement programs, which obviously require profound reform, but where do we rank amongst 

major industrialized nations? What statistics could you share with 

us to put that in context? 

Secretary SNOW. Maybe we could put up a chart that would be 

helpful on the overall question of the Federal debt held by the public. I don’t have offhand, maybe somebody here does, our debt 

versus other countries. I think our debt is significantly lower than 

the debt as a percent of GDP by most OECD countries. But what 

this chart shows, of course, is that the debt that is projected out 

for the years ahead is lower than the debt we have experienced in 

most of the period since the 1980s. It is a manageable level of debt. 

Would it be better if we could have it lower? Absolutely yes. But 

could we accomplish the national objectives without this level of 

debt? I don’t think we could either. 

Mr. TOOMEY. Thank you, and a last quick question. I think the 

President’s proposal for a new round of tax relief is vitally important for both the short-term and even more importantly for the 

long-term sustainable growth. It seems to me capital formation is 

a critical component in maximizing—long-term maximizing sustainable growth. Do you believe that is correct and the double taxation on dividend—eliminating that double taxation on dividend 

absolutely has to have a strong positive effect on capital formation? 

Secretary SNOW. I think there are a few who would dispute that. 

Even those who wouldn’t favor the proposal would acknowledge 

that the double taxation of dividends hurts our national capital formation. As I said earlier, anything you tax more of, you get less 

of. And we are taxing capital formation, equity capital formation 

25

and encouraging overuse of debt as a consequence. The marketplace left to itself would use more debt—less debt and more equity. 

Because of the Tax Code we have higher debt to equity ratios than 

we otherwise would have. And that is not a good thing for the economy. What sense does it make to penalize equity capital formation? 

What sense does it make to discourage corporations paying out 

dividends to their shareholders. I have sat in on any number of 

meetings where senior management and the board thinks about 

how to reward shareholders. They say what can we do here. Well, 

you can buy somebody because you can use debt to buy somebody. 

You can buy in your shares. You can use debt to buy in your 

shares. That is tax deductible. You can make some internal investments or you can pay out dividends. What is the conclusion most 

companies come to? That is a tax inefficient way to reward our 

shareholders, so we do less of it. By leveling the playing field on 

dividends, we are going to do something that is important for corporate governance. One of the charges today, one of the concerns 

today in the capital markets is how accurate are these numbers. 

Are the numbers being managed? You can’t manage cash. Once we 

are paying out more cash dividends, the best possible way to show 

shareholders what your real earning power is and I think by eliminating the double taxation, we are going to see many companies, 

like Microsoft announced recently, will begin paying dividends. 

Mr. TOOMEY. Thank you. 

Chairman NUSSLE. Mr. Neal. 

Mr. NEAL. Thank you very much, Mr. Chairman. Mr. Secretary, 

for the last two sessions of Congress, I have filed legislation on corporate inversions. I think in the last session there were 187 signatures on a discharge petition, and it deals primarily with the issue 

of those companies who move to Bermuda for the purpose of avoiding U.S. Corporate taxes. Do you think that in a time of potential 

war and deficits that it is patriotic for these companies to move to 

Bermuda for the purpose only and solely for avoiding American corporate taxes? 

Secretary SNOW. Well, if you are asking me whether I am a fan 

of inversions, the answer is no. 

Mr. NEAL. Do you think we should do something about it? 

Secretary SNOW. I understand the department has a number of 

studies underway on that subject. I think it is a subject that needs 

to be looked at. The Tax Code certainly shouldn’t be inducing abusive tax avoidance behavior. And I don’t know enough about the 

subject, as you do. 

Mr. NEAL. Let me help you. Mr. Secretary, I have been on the 

Ways and Means Committee for more than a decade and I have 

heard the chairman of the Ways and Means Committee—and since 

some of us here suffer from amnesia, let me use a reminder—I 

have heard prominent members of the Ways and Means Committee 

say that upon their watch they were going to pull the Tax Code up 

by its roots. And then I heard we were going to dismantle the tax 

system. And I heard the former majority leader talk all the time 

about moving toward a new tax system. And I heard candidates for 

President say we are going to a long funeral procession for the Tax 

Code. 

26

Do you really believe in the next couple of years you are going 

to change the Tax Code here, Mr. Secretary? 

Secretary SNOW. I hope we improve it some. 

Mr. NEAL. Do you think we are going to move to a flat tax or 

a consumption tax in the next couple of years? 

Secretary SNOW. I don’t know. You and the Members of the Congress would probably have a better sense of that than I. But I 

think the proposal, the President’s tax proposal certainly produces 

a better tax system, a simpler tax system. If you tax something 

only once, it is a lot simpler than if you tax it twice. 

Mr. NEAL. Well, for these guys in Bermuda, there is no tax at 

all. 

Secretary SNOW. But they move there because they are trying to 

avoid taxes, and if you don’t tax the dividends, you remove the reason for them to go abroad. If people don’t have to pay taxes, then 

they don’t seek shelters. 

Mr. NEAL. What do you think the IRS would do to individual taxpayers if they moved to Bermuda for the purpose of avoiding taxes? 

Secretary SNOW. I don’t know. 

Mr. NEAL. We could save $4 billion, Mr. Secretary, by just asking 

these folks to pay their share. Business people applauded me at a 

Chamber of Commerce luncheon last week with 1,200 people in the 

audience when I said when these folks don’t pay, you pay more. 

Not a bad applause line for business people. They understand it. 

The American people understand fairness in the tax system. You 

answered earlier saying we should always come back to fairness. 

Not a bad position to start from, never mind to come back to. 

Finally Mr. Secretary, what kind of job do you think Secretary 

Rubin did during his years in the Clinton administration? 

Secretary SNOW. I am an admirer. 

Mr. NEAL. Do you think he was more right than wrong in the 

suggestions he made? 

Secretary SNOW. Tell me which particular suggestion you have in 

mind. 

Mr. NEAL. Suggesting that we pay down deficits. 

Secretary SNOW. I wish Bob Rubin had become more a champion 

of tax reductions. I talked to him about that and I never could persuade him of the benefits of some lower marginal tax rates. 

Mr. NEAL. The problem I hear is the former majority leader said 

when we passed those three budgets, which I voted for with Bush 

Sr. and Clinton twice, I remember the former majority leader saying that we were headed to fiscal Armageddon. And then I heard 

the former chairman of the Budget Committee say that we were 

headed toward the greatest depression in the history of the country. Now I hear Rubinomics is dead after we proceeded on a course 

of success that is unparalleled in American history. Would you 

agree with that in terms of economic prosperity during those 6 

years? 

Secretary SNOW. I take my hat off to everybody who had a hand 

in bringing about the balanced budget in that period. My preference, though, would have been to see it done with a little different mix of tax increases and spending reductions; in other 

words, less on the tax increase side and more on the spending restraint side. 

27

Mr. NEAL. I think my time is up, Mr. Chairman. 

Chairman NUSSLE. Mr. Hastings. 

Mr. HASTINGS. Again, if I could ask my friend from Alabama to 

lean back and my friend from Arizona. Mr. Secretary, I want to 

congratulate you for being here and having been on the Hill. The 

chairman alluded to that when you have only been on the job for 

a couple of days. You have been inundated with a lot of things. I 

know that you haven’t had an opportunity to really look at very 

closely and I congratulate you coming up here and really taking the 

heat. 

Couple of comments on the data that you have been thrown at, 

and you did respond to Mr. Spratt that there is probably agreement between the two of you on the one issue that you try and do. 

Projecting ahead is a very inexact science and you are being inundated to comment on things that will happen 11 years from now. 

And we know we will probably be way off—pick a factor. I am sure 

that will happen. But let me pick up on a very basic issue as to 

where the policies that are being suggested by this administration 

and past policies by prior administrations. If the idea of having—

in fact for many years, the idea of trying to get the economy going 

is to have some sort of Government stimulus, infrastructure and so 

forth. If that were the case and the fact that the Government is 

spending, we should never be in a recession if that were a very accurate model, it seems to me. What you are doing is—and the 

President is doing is—let us trust the people more by giving them 

more of their money. 

So my very basic question to you is, does the economy tend to 

perform better when there is more government intervention or less 

government intervention? And based on whatever your answer is—

and I hope it is B—tell me why that is the case and why we should 

be looking at that long term. 

Secretary SNOW. Well, I think there is clearly a role for government in a lot of spheres. But there is also no doubt about the fact 

that the reduction in the role of government over the last 30 years 

or so—less transportation regulation is one example and deregulation in many, many spheres—has been a big boost to the economy. 

And I am a big believer in minimizing—maximizing the role of the 

private sector. I think the strength of this country of ours and the 

strength of this economy is that we really give a large role to the 

private sector. We let the private sector work. We let markets work 

and we contrast the performance in the United States with the performance, say, in Europe. And the defining difference is the fact 

that we believe in markets. We let labor markets work. We let capital markets work. And we have embraced market principles here, 

whether in the international trade arena with trade liberalization 

or in domestic markets, in banking and finance with GrammLeach-Bliley, on and on and on. We have made this economy much 

more responsive, much more competitive and much more efficient. 

As we do that, we grow more. We create more good jobs—not just 

more jobs, but more good jobs, more jobs with rising real wage 

rates. 

So I am a very strong believer in the competitive marketplace 

and letting the competitive marketplace operate. Clearly there has 

to be rules, but letting the competitive marketplace be the driver 

28

of economic performance and making that bet on peoples’ initiative 

and spending their own money and making their own decisions and 

responding to the forces of the competitive marketplace, which disciplines all of us, I think is the surest and safest course for rising 

outputs and higher standards of living. I agree with you 100 percent. 

Mr. HASTINGS. Mr. Secretary, thank you very much for that response. I was fascinated when Milton Friedman essentially wrote 

a book or a thesis on how a pencil is made. I mean the dynamics 

in the marketplace is absolutely incredible. And where we are trying to go is to make that obviously more of a long-term phenomenon than a short-term phenomenon. So I give you a great deal 

of credit for taking that initiative. But more than that, once again, 

I think you do a wonderful service coming up here with only 2 days 

on the job and taking what you are taking. 

Secretary SNOW. Mr. Chairman, if I could expand on the Congressman’s point for just a minute. In the 1970s, I had the privilege of serving in the Ford administration in a role where my responsibility was to develop the transportation policy initiatives 

heading the policy shop over at DOT under Secretary Bill Coleman, 

and we worked with the best economists in the world, best at quantifying market impacts and so on, and we developed these proposals. We didn’t get them through. They were enacted when President Carter and his administration picked them up and moved 

them forward and ran with them and got a congressional blessing 

on them. 

None of us, none of us who were doing the forecasts on the economic gains from eliminating truck and rail regulation had any 

idea how much the wealth effects would be, how gigantic and huge 

the savings for the economy as a whole would be. None of us forecasted the fact that in the railroad transportation business, transportation rates today in real terms are 40-percent lower than they 

were back then. In the trucking industry it is also 40-percent lower 

in real terms, and with better service and with greater profitability. What happened there, we unleashed the marketplace, and 

when we unleash the marketplace all sort of wonderful and unforeseen things happen. 

I think that is going to happen with the President’s dividend proposal. That is why I so strongly support it. 

Chairman NUSSLE. Mr. Edwards. 

Mr. EDWARDS. Thank you, Mr. Chairman. I would like to address 

two reasonable questions raised by a Republican colleague in this 

committee. One is, does the economy perform better or worse with 

more or less government intervention? And I would suggest Enron 

is an example where the company would have fared a heck of a lot 

better and millions more might be employed today if we had more 

government intervention rather than less. I don’t believe the sound 

bite that the least government is always the best government. And 

I say that as someone who is a great defender of our private market system. 

Second question raised by our colleague from Pennsylvania, and 

I think this gets to the root of the difference here about this year’s 

debate between Republicans and Democrats. He said how can anyone disagree with the Reagan fiscal policies of the 1980s. I am one 

29

person who does disagree with those policies because they led to 

the tripling of our national debt in less than a decade, and perhaps 

that is not a concern to some members of this committee. It should 

be a great concern because it will be a huge burden to our children 

and grandchildren, and there is nothing economically sound, there 

is nothing fair about paying for today’s tax cuts by charging the 

cost of those to our children and grandchildren. 

Now, Mr. Secretary, what I am hearing this administration saying is several things regarding the budget. First, when the economy 

is good and we have surpluses, let us cut taxes and give that 

money back, thus ignoring the fact, the reality we already have a 

$6 trillion national debt. Well, then when the economy turns 

around and is bad, let us have tax cuts to stimulate the economy. 

Tax cuts under any situation may be good politics, but I think it 

is irresponsible policy. And if I were an American businessman listening to this debate today, I think what would concern me more 

than the fact that we are having to face the largest deficit in the 

history of America is that former Republican budget hawks are 

now rationalizing and explaining away the significance of having 

the largest deficit in the history of America. 

And the next thing I hear this administration saying is this 

budget deficit is moderate and manageable. It may be moderate 

compared to the next worst case in the history of the United 

States, 1992, but I don’t consider a $300 billion deficit this year 

and, even more importantly, deficits as far as the eye can see to 

be moderate or manageable. The impact upon our children will be 

devastating when they have to pay the debt tax, the interest on the 

national debt. The impact on businesses when this economy starts 

back up again and we have higher interest rates because of huge 

deficits will inhibit growth, not help growth. 

Third thing, this administration says this budget is a growth 

budget. I would challenge this administration to show me in the 

history of the world any nation that took the philosophy that longterm deficit spending is a growth stimulator. There is no evidence 

of that throughout the history of the country. And I believe this is 

a growth inhibiting budget because it endorses massive national 

deficits for years to come. 

Next, I am hearing we are not responsible for the largest deficit 

in the history of the United States. Obviously, you are not responsible for the war against terrorism or the attacks on this country. 

We all understand that. But you are responsible for proposing $2.8 

trillion in tax cuts while we face these problems and know we have 

to pay for these problems. The fact is we would not have the largest deficit in the history of the United States today had it not been 

for the $1.3 trillion tax cut that some of us did predict 2 years ago 

would lead to deficit spending. 

Finally, I hear you talk about cutting spending. Yet the six largest programs of the Federal Government that represents 74 percent 

of spending are Social Security, defense, Medicare/Medicaid and 

health, interest on the debt, education and training. This administration and this budget is proposing increases in three of the six 

largest programs. The fourth we have no choice. We must pay the 

interest on the debt. That leaves Social Security and Medicaid. 

Mr. Secretary are you proposing cuts in those two programs? 

30

Secretary SNOW. Congressman, thank you for those good questions. First of all, on the issue of the manageability of the debt 

load, clearly as Mitch Daniels said to you, we are in a deficit position and we will be for some years to come. But the green line 

there shows that those deficits are relatively moderate compared 

with past periods as a percent of GDP and that they are shrinking 

as a percent of GDP and are well within what is manageable. I 

think the important thing about a deficit—and you raise a good 

question. We have to keep that question in mind always. But the 

important thing about a deficit is does it influence the way financial markets react and respond, because if it influences the way financial markets react and respond then we will get higher interest 

rates. And financial markets react and respond if they think the 

deficit is large and growing relative to GDP or the debt is large and 

growing relative to GDP and if they think it is going to be sustained. I think financial markets are accepting these deficits that 

are projected. I think they are bigger than they are going to be, 

frankly, for the reasons I went through earlier. But the important 

thing is to make sure that they shrink over time and stay modest, 

shrink both in absolute and in relative terms. 

And of course we are now living in a period where financial markets reacts instantaneously to the information they have available 

to them. They have this information. They have seen this coming. 

And interest rates I think are the lowest in 40 years. So while I 

very much share your concern about deficits, I will come back to 

the point that the level that we are at today is manageable and is 

not an undue burden. 

Chairman NUSSLE. Gentleman’s time has expired. Mr. Brown. 

Mr. BROWN. Thank you, Mr. Chairman. Thank you for coming. 

You have only been on the job a couple of days but you are not 

short of advice, and we appreciate you coming today and letting us 

kind of pick you a little bit. But we debated the tax cuts and we 

recognized that the economy was in a downturn and the highest 

tax level was over 39 percent we felt it was too much and lowered 

those rates down to 35 percent. We felt like the death tax was unfair and we eliminated that and now propose eliminating the double taxation on dividends and the unfair tax, the marriage penalty. 

All of those were issues we felt were relative issues that needed to 

be adjusted. And yet we find in the economy, we look at the long 

range plan of over 5-percent unemployment over the next several 

years. Those issues must be addressed. The economy has got to be 

put back on the right track. We appreciate your efforts to help us 

mend that. 

Are there any viable alternatives you see—suggestions from the 

other side—other than to cut the tax at the lowest level? And you 

know with this tax rate, you have already expanded that. Balancing the budget using the Social Security proceeds, there has 

been a lot of debate about how to do that and whether they are 

going to have a locked box exactly—how we intend to do it. But 

under the code itself, the only investments we can have in the Social Security proceeds are in Federal instruments. So how do we 

separate that? I don’t think we can take the Social Security proceeds and just put it in a locked box and not gain any kind of a 

return. 

31

Would you explain on how that might work? 

Secretary SNOW. I am trying to understand how a locked box 

would work and what the concept of a locked box really is. Social 

Security is a pay-as-you-go system, and it is a system with 

intergenerational obligations. It is currently running a surplus. We 

know that that surplus will run out at some point in the future. 

Every dollar—every penny of that surplus is credited to the trust 

fund and is backed by the full faith and credit of the United States. 

So there is no taking away, there is no—I hear this term from 

time-to-time, raiding the trust fund. That is a misuse of the language. There is no raiding of the trust fund. To create a locked box 

without a return, as long as it is cash you put into it, seems to me 

that would be sort of a far-fetched notion. That wouldn’t make any 

sense. The only reason why it would make any sense out of the notion of a locked, box and you can help me understand this better, 

is that you take the money and pay down the debt. But the reason 

that deficits are going up is that we have these urgent national 

needs like putting people back to work, as you alluded to, and getting the economy growing. So going that way wouldn’t seem to 

make much sense. And I am puzzled by just what the locked box 

concept means in this context where the only way I can make any 

economic sense out of the idea of a locked box is that you use it 

to pay down the debt. And if you do that, then we aren’t accomplishing these important objectives. 

I hope that is responsive. 

Chairman NUSSLE. Mr. Scott. 

Mr. SCOTT. Thank you. Mr. Snow, welcome. It is a pleasure to 

see you here and I hope you bring some Virginia fiscal responsibility to this administration. Now I know this budget isn’t your 

fault, but it is the President’s budget that you are having to defend. 

One of the things you mentioned was growing our way out of it. 

And I just wanted to get the record straight. Is it not true that the 

OMB figures for real growth, inflation, unemployment and interest 

rates for the future are more favorable than CBO and the Blue 

Chip consensus? And if you don’t know——

Secretary SNOW. I don’t know, but I will check the record for you. 

I had thought that there were a number of private forecasters that 

had more robust growth and lower unemployment. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. SCOTT’S QUESTION REGARDING OMB FIGURES

Of course, there are some slight differences among the different forecasts. The administration’s budget forecast is finalized in late November to early December, in 

order to have time to develop budget numbers that correspond to the economic figures. CBO and Blue Chip figures were assembled a month or two later and therefore are based on somewhat more information. Even so, there is really remarkable 

similarity in the results. 

Over the 6 years of the forecast period, the administration estimated real GDP 

growth to average 3.3 percent, only a shade higher than the 3.2 percent contained 

in the CBO and Blue Chip forecasts. 

The 5.3 percent average unemployment rate forecast by the administration for the 

6 years matches the Blue Chip. CBO estimates 5.5 percent. 

The administration’s view of inflation does show slower growth—an average of 1.6 

percent over the 6-year forecast horizon for the GDP price index, compared to 2.0 

percent in the other two forecasts. CPI growth is estimated at 2.2 percent by the 

administration and 2.4 percent by the CBO and Blue Chip. 

32

Slower inflation means that the administration projects slower growth of nominal 

GDP than in the other two forecasts—a rate of 4.9 percent compared to 5.2 percent 

(the sum of real GDP growth and growth of the GDP price index). This would work 

against the administration’s budget forecasts since lower nominal GDP would result 

in lower tax receipts. 

Even after accounting for slower growth of indexed programs, which are based on 

the CPI, the budget impact narrows but the Blue Chip and CBO figures would still 

be slightly more favorable for budget estimates. 

Overall, while we can point to modest differences among the forecasts, it seems 

that all are very much within a narrow range.

Mr. SCOTT. My reading of the President’s budget shows it is more 

favorable in each of those categories. One of the things we mentioned as a recovery—unfortunately this budget doesn’t have much 

help for the recovery. The things that will help the recovery are the 

short-term expenditures, especially the cheap ones like accelerated 

depreciation which, long term, don’t adversely affect the budget 

very much but have a stimulative effect now or temporary increase 

in unemployment benefits that don’t lock in payments but give you 

the benefit right now. The backloaded tax cuts will have nothing 

to do with stimulating the economy now. 

Can I get chart No. 5? You have seen this chart several times. 

It reflects the tough choices that were made in 1993. They were unpopular, but they were responsible. And as a direct result of the 

votes that Democrats cast in 1993 that put us on that trajectory, 

the Republicans campaigned against us and took 50 seats. Now 

that green line right there is not an accident. It is in stark contrast 

to the projections in chart No. 3, which show that we are just 

spending Medicare, Medicaid—excuse me, Medicare, Social Security and then some as far as you can see. You are from Virginia, 

Mr. Snow, and you have seen the kind of work that Mark Warner 

has done and the responsible decisions he has made, and that is 

in stark contrast to what we heard yesterday when Mr. Daniels 

came and suggested that there is virtually no problem and he intends to make none of the tough choices. 

Could we have No. 14? Now, you indicated that this thing the 

deficit is manageable. I would like to ask you how we can manage—this stops at 2008. That is when the baby boomers start retiring in Social Security. With the substantial new taxes that have to 

be paid—not to pay down the debt but just to carry the debt. There 

is nothing in there for the war on Iraq. How are we going to be 

able to manage the Social Security and Medicare challenges of the 

baby boomers? 

Secretary SNOW. Congressman, thank you. Again, you are raising 

the right questions and the important questions. The way we manage those obligations to the future is to have a well performing 

economy and to have a bigger economy and to get the growth rates 

in the economy that will give us the flexibility to respond to those 

needs. I am troubled, as you are, by the long-term financial status 

and sustainability of Social Security and Medicare. The issues are 

a little bit different, but demographics drive both and of course rising health care costs particularly drives——

Mr. SCOTT. Do you acknowledge that as the thing gets worse, in 

terms of this budget it gets worse at a time when we need to be 

in a fiscal position to meet the biggest fiscal challenge America has 

ever seen, baby boomers retiring? 

33

Secretary SNOW. We need to be benefited by the strongest possible economy as well. 

Mr. SCOTT. So do I understand you to say that we are going to 

hope we grow out of it without any contingency plan? 

Secretary SNOW. No. I wouldn’t hope; I would pass this legislation so we do. 

Mr. SCOTT. Well, we see which direction we are going in, as far 

as I can see. 

Let me ask you another question. Do you believe the AMT needs 

to be fixed if we go from 2 million to 39 million Americans paying 

the AMT? 

Secretary SNOW. As I commented earlier in response to that 

question, it is an issue that clearly has to be addressed. I am not 

close enough to the facts yet to know how best to address it or 

what the time frame is. 

Mr. SCOTT. There are only a number of ways to fix it; that is, 

you can increase taxes, spending cuts, or increase debt. 

Secretary SNOW. Or you can make it part of a broad-based tax 

reform proposal. 

Mr. SCOTT. Which would increase taxes or reduce spending or increase debt. 

Secretary SNOW. Or grow the economy significantly faster than 

it would otherwise grow. I mean, I still think this code is a burden 

on the economy. I don’t want to shrink from coming forward on 

this, on that proposition, and I think lower marginal tax rates 

make good economic sense. 

Mr. SCOTT. Thank you, Mr. Chairman. And I would just like to 

point out that this budget has very favorable growth already in it, 

and in spite of that we are seeing, the numbers go south at a rate 

that we haven’t ever seen in the history of the United States. 

Secretary SNOW. Congressman, the very able chief economist for 

the Department of the Treasury, Butch Clarida, the Assistant Secretary for Economic Policy, tells me that I was basically right in 

saying that the Blue Chip is more favorable than the Treasury’s 

own estimates. And I will share that with you later. 

Chairman NUSSLE. Mr. Putnam. 

Mr. PUTNAM. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. We are delighted to have you here. In 

business, you never want to get in a fight with the railroad, but 

it must be quite a rude awakening on your second day on the job 

to be in this new position, because it is a little bit different than 

running a railroad, I am sure. 

Two years ago, as a freshman member of the committee, we 

opened up with the Treasury Secretary and had some really fascinating academic discussions about what to do with the surplus, 

all kinds of pontification over eliminating entire classes of debt instruments, and how the Government would actually deal with the 

cash that would be coming in. And certainly things have changed 

since then. 

As Mitch Daniels pointed out yesterday, even if we had never 

been attacked and incurred no costs of war or recovery from September 11, and no tax relief had become law, we still would be in 

deficit today as a consequence of the recession and the popped revenue bubble, as he put it. 

34

So I want to talk just a little bit about the dependence of the 

Federal Government on that revenue pyramid and where that revenue comes from. You have a high percentage of Americans who 

pay little or nothing in terms of Federal income taxes. For many 

of them, April 15 is a day when they become eligible to receive 

money rather than money is due. And for a fairly small percentage 

of Americans, the Federal Government depends a great deal on the 

revenues that they contribute to pay the bills. 

There are consequences to the structure, to that architecture of 

revenue. In the President’s State of the Union speech, he mentioned that, as an example, that a family of four making $40,000, 

if his plan were passed, would go from paying somewhere around 

just under $1,200 a year to $45 a year. 

So my first question would be, what is the social consequence of 

having a large percentage of your population that pays nothing for 

the national defense, for an interstate highway system, for the 

level of health care, for the benefits of national parks, what is the 

social consequence of having a huge percentage of your population 

believe that those things don’t cost anything or that they cost $45 

a year? 

Secretary SNOW. Again, a good question, probably one that is 

more philosophical than my practical nature allows me to give a 

good answer to. But I think there is something inherently troubling 

about the idea that people aren’t connected to the larger purposes 

of the country through the tax system and don’t take an interest, 

therefore, in a number of the issues that as citizens we would want 

to encourage people to take an interest in. For instance, the efficiency of their government, the tax policy itself, the fairness of the 

code. 

If you are not in the system, I think you are absolutely right, you 

take much less interest in the things that the system impacts and 

affects, and I think that is regrettable. If you asked me to design 

a code that was perfect, and I could do it and had all of you to vote 

for it, I would have a code that had fewer deductions, and more 

people part of it, and lower marginal tax rates. 

Now you will tell me how to get there, and I can’t tell you that. 

But in principle, I agree with you 100 percent. 

Mr. PUTNAM. Well, the flip side of that, of course, is that a small 

percentage of Americans are responsible for a high percentage of 

the revenue that comes into the Government. That is the source of 

great debate, and rightfully so. It is a fair thing to argue about in 

this committee and in the Congress at large. The President has 

taken the position that for tax relief to be meaningful, those who 

pay taxes ought to receive it. But the larger issue is that a percentage of that volatility in Government revenue is based on the dependence on the revenue generated from a strong stock market 

which is inherently volatile. 

So if you would, please, comment—and I don’t have the specific 

percentage of revenue that comes in as a result of capital gains and 

the dividends and things like that—but if you could share with us 

your thoughts on that and a better approach to make the revenue 

sources less volatile. 

Secretary SNOW. You know, I don’t have those numbers offhand, 

but I do remember a discussion with Mitch Daniels, saying that he 

35

was absolutely astonished by the importance of that top income tax 

category to fund the total Federal debt. And I forget the number, 

but the top 1 percent is something like 27 or 28 percent, and the 

top 5 percent is something like 47 or 50 percent. I mean, it is a 

small—a relatively small number of the taxpayers are paying a 

large portion of the total Federal Government revenue bill. I think 

everybody who follows the Federal budget was astonished to see 

those revenues grow as they did with the ebullient stock market 

we had in 1997 on, and was equally astonished by the collapse in 

capital gains and high-end options and performance shares and 

those things that created so much revenue. 

Which brings us back to the point we began with, with the chairman, about volatility of the Federal revenue depended on things 

like the stock market and bonuses. 

But in talking about an ideal tax system, I don’t think I am 

going to get a chance to identify or produce an ideal tax system. 

I think we have got to work with the tax system we have got for 

now, and make the marginal improvements we can. And the elements that the President has proposed I think are clearly not just 

minor adjustments, but very fundamental improvements in the 

code itself. 

Mr. PUTNAM. Well, I hope you do have that opportunity. Thank 

you for being here. 

Chairman NUSSLE. Mrs. Capps. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

And welcome, Mr. Secretary. I want to start with some comments 

that were made by my colleague, Mr. Baird, yesterday—they were 

provocative—when he was speaking with Mr. Daniels. He brought 

to our attention the size of the real budget deficit is actually $480 

billion in fiscal year 2004, if we exclude the Social Security surplus 

from our calculations. And that is the real deficit that we should 

be talking about. Social Security surplus as we describe it, that socalled lockbox, ought to be off limits. There are claims on that 

money that we all agree are going to need to be met in the near 

future. 

Second, Mr. Baird noted that we could not eliminate this $480 

billion deficit even if we eliminate every nondefense discretionary 

spending item in the budget. Not cut, but actually eliminate. 

Let us set aside that we have been discussing the need for shortterm deficits in the current situation which are unavoidable because of the downturns in the revenues to the Government from 

both the sluggish economy and the President’s tax cuts, which I actually voted for, combined with the needs in the war on terrorism 

both here and abroad. They have put a terrific strain on our budget. And these deficits, which Mr. Daniels has described as nothing 

to hyperventilate about, are probably that, if we consider just the 

short term. 

But I believe we should all be very worried about running these 

kinds of deficits year-after-year. And I would like you to address 

this. But I want you to do so, if you would, keeping in mind that 

the growth projections from the President already assume that the 

economy is going to grow 3.4 percent for the next four quarters, 

and then more than 3 percent annually for the next year. How can 

we reduce the deficits, already assuming this kind of growth? 

36

Secretary SNOW. Well, let me start by addressing the initial 

question; and that is, how best to look at the deficit. Is it the unified deficit, or is it the off-balance budget, the debt owed the public 

budget? 

I think it is better in terms of gauging the economic impacts of 

the economy to look at it on a unified basis, because it is the unified basis that creates the true picture of what is happening in financial markets, how much money needs to be actually borrowed, 

or how much of a surplus you actually have. So the financial markets will look at it in a unified basis, taking into account the funds 

from the entitlement programs as well. 

But I agree with your basic point. We can’t be content to have 

deficits as far as the eye can see, and particularly deficits that rise 

in future years. So I always come back to the point that deficits are 

unwelcome. They are not a happy thing. In this case, they happen 

to be a necessary thing for some period of time. But there is, I 

think, OMB Director Daniels probably yesterday emphasized his 

commitment to keeping us on a course of fiscal responsibility. The 

President certainly is committed to a course of fiscal responsibility. 

The deficits are on a unified basis, as I said, and showed in one 

of those charts we put up, relatively modest in terms of the past 

experiences and the debt is—this is the deficit itself—relatively 

modest, relative to, and manageable. When I talk about manageable, I mean in this level. 

Mrs. CAPPS. But could I follow up by saying, then, because I 

want to ask you another topic real briefly—I am assuming then 

from your answer that unless we include the Social Security Trust 

Fund and unless we grow the economy by more than 3 percent, 

that we are not going to be able to do this. 

But I actually would like to ask you a question that I asked Mr. 

Daniels yesterday; because now, as Treasury Secretary, you are 

also going to be or are a Medicare trustee. And I am concerned 

about the question that most of our constituents are asking about, 

which is how to reform Medicare in a way that will allow include 

coverage for their high-cost medications. 

The President’s proposal, putting at the core Medicare+Choice or 

a privatized insurance model, which I haven’t seen the insurance 

companies really jumping up and down about, but would also be 

paid for with $400 billion over the next 10 years. And I am wondering how you think we can manage doing this since these companies in my rural district have been raising their premiums and lowering their benefits, and then leaving because they have made the 

case that they can’t afford to be there. They are going to be coming 

to ask us for more money if they are in fact going to be the centerpiece of this Medicare program. 

Secretary SNOW. Medicare needs to be reformed. 

Mrs. CAPPS. Yes. 

Secretary SNOW. But it needs to be reformed with a prescription 

drug component. And it seems to me every Medicare enrollee 

should have outpatient prescription drugs. There would probably 

be broad-based agreement on that. The President’s program would 

use the marketplace, competitive providers under a structured system, so that there would be broad coverage, and avoid this adverse 

selection sort of set of issues that runs through insurance. 

37

And Tommy Thompson could give you a lot more detail on this, 

but I understand there is a low-income assistance component to the 

President’s package where they would receive additional assistance 

to acquire prescription drugs. 

But the larger issue, though, is how to make the system more efficient, how to create the right incentives inside the system. My 

predecessor, Paul O’Neill, spoke eloquently and at length about his 

efforts in Pittsburgh to go in and apply metrics to health care, to 

identify—to bring business practices in the Pittsburgh community 

to the health care providers, and the astonishing reduction in costs 

in health care delivery systems that came about over the course of 

a fairly brief period as these management practices, re-engineering 

metrics, and so on were applied. 

I think we can get a much more efficient health care system in 

America. And, if we don’t, we are going to have health care rising 

from what is it today, 14 percent, in a few years to be 17 percent, 

and if we don’t do it, thereafter 20 percent, an unsustainable 

growth in this component of the economy. 

So I guess I am agreeing with you. This is a subject that needs 

a lot of work. 

Mrs. CAPPS. Thank you. 

Chairman NUSSLE. Mr. Wicker. 

Mr. WICKER. Thank you, Mr. Chairman. 

Mr. Secretary, thank you so much for your testimony today. And 

I think all members of the committee will agree that the President 

made the right choice, and we think the Treasury is in good hands. 

And thank you for the give-and-take that we have had today. Certainly there are differences in philosophy between the two sides of 

this room. I think it is certainly fair to say we like tax cuts a little 

more over on this side than maybe my friends on the other side of 

the aisle. And it is fine for us to have that debate. 

I do think it is important, however, for us to make sure that the 

facts that are stated in this room and on the floor of the House of 

Representatives are correct, and so I am concerned at some of the 

disparaging remarks that I hear about the Reagan administration, 

and also some of the perhaps revisionist history that I hear regarding the early days of President Clinton’s administration with regard to budgetary policies and recommendations. And I will agree 

with my friend from Pennsylvania, Mr. Toomey. I will take 17 

years of sustained economic growth any time, the greatest standard 

of living that any country in the world has ever seen. I applaud the 

Reagan administration for ushering that in. And I was here as a 

staff member, Mr. Secretary, when Democrats came across the 

aisle in a Democrat-controlled House of Representatives and helped 

Republicans enact those Reagan tax cuts of 1981. 

But the thing that concerns me is when I hear that those tax 

cuts led to record deficits and the run-up in the national debt. So 

I asked someone to go get me the historical tables, and I had a 

staff member bring that over for me. And I see on page 29 of the 

historical tables provided by this committee, that in 1982, revenues 

increased to the Federal Government. Now, I will tell the truth, 

they decreased in 1983. But then after that, in spite of these draconian tax cuts, they went up in 1984, in 1985, 1986, 1987, 1988, and 

1989 to the point, Mr. Secretary, where revenues to the Federal 

38

Government increased during the Reagan administration by some 

60 percent in the face of these tax cuts. 

I would suggest to you, and I will ask you to comment in a moment after I make my second point, that maybe there was another 

reason for the deficits rather than lack of revenue. 

And then some of my friends from the other side of the aisle, Mr. 

Secretary, mentioned the Clinton surpluses. Of course, we on this 

side of the aisle like to think that the Republican majority that was 

elected in 1994 had a little something to do with the surpluses, but 

I think the truth probably is that the economy had a lot more to 

do with it than anything that we did. But the statement was made 

that President Clinton in the early 1990s had a plan and a process 

for getting us to a balanced budget, so I sent out for a copy of 

President Clinton’s February 1995 budget proposal. And I see that 

during my second month in office here as a member of the new Republican majority, President Clinton came before Congress and proposed annual deficits of $192 billion, $196 billion, $213 billion, 

$196 billion, $197 billion; and in 2000, $194 billion in deficits were 

proposed by President Clinton in 1995 before this very committee. 

[The information referred to follows:]

39

Now, we felt that we could take a different approach and a different process when we brought in the majority, and so we asked 

for a tax cut. And it took us a couple years to get it, but in 1997, 

with the help of some Democrats, we enacted a tax cut. And, you 

know, a couple of years after that we had achieved a balanced 

budget in spite of the fact that we had let the American people 

have a little more of their money back in the form of tax reductions. 

So I would ask you this two-pronged question, Mr. Secretary: In 

light of the fact that revenues increased some 60 percent during 

the Reagan administration and we still ran up this huge debt, don’t 

you think it was possibly excess Government spending and particularly entitlement spending that caused that deficit? And don’t you 


bubba96.eps
40

think that perhaps the economic growth caused us to be able to do 

a little better than President Clinton proposed to this very Congress during the first months of my time here on the Hill? 

Secretary SNOW. Congressman, I—what do they say in the courtroom—I associate myself with your comments. I think the obvious 

answer to your question is that expenditures rose at a rate that exceeded that 60-percent increase in revenues, and that was a mighty 

large increase in the revenues. 

Now, there was a peace dividend that came out of that eventually that affected the budgets of the 1990s in a very important way, 

and I don’t think we should forget that the investment in the defense under President Reagan and Bush produced a much different 

world and a much better world, and ended the Soviet Union as we 

knew it and gave us this large peace dividend. 

But the numbers are clear on that. If expenditures had been 

under tighter control, we would have had huge surpluses. And the 

numbers you cite from the Clinton budgets of the early 1990s was 

a reason that a number of us got concerned about the need for the 

balanced budget approach that certainly became very much part of 

the Contract With America, as I recall. 

Mr. WICKER. Well, I know that my time has largely expired, but 

I would just encourage the Secretary——

Chairman NUSSLE. It has. 

Mr. Thompson. 

Mr. THOMPSON. Thank you, Mr. Chairman. 

Mr. Secretary, thank you very much for being here. Could I get 

chart No. 14, please? And while that is coming up, I just want to 

say I was glad to hear you, in your response to Mrs. Capps, say 

that it was unacceptable to have debts as far as the eye can see. 

Because when you were making your presentation, you were asked 

are deficits—is debt understandable, and you said yes. My note 

was, but is it understandable to run them for as far into the future 

as these deficits are running? And as a deficit hawk, I believe that 

is totally unacceptable. So I am glad that you clarified that. 

Secretary SNOW. What I really said is that as long as they are 

a declining share, they don’t trouble me. I mean, I hope they recede 

just as soon as possible, and I share that with you. But, you know, 

in running, in serving on boards of major companies and so on, 

debt isn’t inherently a bad thing. We take on debt at CSX because 

we use the debt to then get high returns on investments. So debt 

isn’t inherently bad as long as the debt is used to accomplish something worthwhile. 

Mr. THOMPSON. Well, at this point I believe it is really out of control, and we are paying for that and we are going to pay for that 

into the future years. 

On the first page of your statement, you talked about the typical 

family of four with two wage earners making $39,000 who would 

enjoy an $1,100 tax break. And on chart No. 14, the debt tax chart, 

it shows the tax that these average family of four folks are having 

to pay. Is there any way that we can calculate into that the offset? 

Because it seems to me if you juxtapose your example with this 

chart, there is actually more money being paid, at least by some 

taxpayers, than they are actually getting back. And you can either 

answer that now or get that information back to me. 

41

Secretary SNOW. I would like to think about that. The notion of 

a debt tax is one I am still trying to get my mind around. 

Mr. THOMPSON. Well, that is what we are paying as a result of the interest we pay on our national debt. I think it is $1 billion a 

day that our taxpayers are paying that go to this interest. 

Secretary SNOW. But fortunately, it is—I think it is only 8 percent now of the total expense to the Government because——

Mr. THOMPSON. What goes down goes up as well. 

Secretary SNOW [continuing]. Interest rates are at historic lows. 

Mr. THOMPSON. The other issue that I wanted to touch on was 

the idea of the dividend tax repeal. And you explained I think at 

length why you thought that was good. But I have to go back to 

California this weekend, as everyone here has to go back to their 

home State. And California is going to experience about a $1.5 billion hit if in fact the dividend tax is repealed. If you add to that 

what the State treasurer predicts the cost to the State will be in 

regard to multiple bond funding over the next 10 years, it is about 

$18 billion and change. And this is going to be not only a direct 

hit to the State of California, but this is going to make it more difficult to fund some of the exact programs that you were talking 

about that will help bring us out of these bad economical times. It 

is going to hurt in both State and local government funding, everything from schools to firehouses to low-income housing. 

And that is a rough one to square, I don’t care which State you 

come from. But when you come from one as big as California, it is 

real tough. And when you come from a State that if you look at 

our GNP, our ranking amongst the industrial States, we are the 

fifth largest State. So if the United States is going to recover from 

this economic downturn, California is going to be a big part of that, 

and this really puts them back. 

And the other thing I want to say about dividend tax is, I understand that there is about 36 percent of the seniors that receive income from dividends, 64 percent don’t. So it also becomes a hard 

one to square when you are talking to that 64 percent who don’t 

get a dividend income, and try to explain to them why we should 

risk their economic security, especially in regard to Social Security 

and Medicare, to provide a tax cut to those 36 percent that do derive their income that way. 

And it just seems to me that we are—and it is usually us on this 

side of the aisle that we are accused by our friends on the other 

side of the aisle for setting up these debates regarding class warfare. But I think these are two examples of class warfare, one in 

regard to the underfunding or the disparity that is going to be created for funding for low-income housing, schools, and things of that 

nature, and the other in regard to people who derive their money 

from dividends vis-a-vis those who derive their money from an 

hourly job or a salaried job. 

Secretary SNOW. Let me respond briefly, and then maybe at some 

point come back and talk to you at some length on this. 

Again, Dr. Clarida has done some studies on this question. I 

don’t know that he has done California explicitly, but he may well 

have, or his people may well have. But the conclusion of the analysis of the net effects of the dividend proposal and the rest of the 

tax plan on the State budgets was that it had a positive influence 

42

on State budgets, not a negative influence. And you ask, well, how 

can that——

Mr. THOMPSON. Well, if you would, though. You are assuming 

that the States would pick that up somewhere else, and it becomes 

an administrative nightmare that is unaffordable if they try and 

create bureaucracies to track that income. 

Secretary SNOW. Well, I am told that there is a relatively simple 

adjustment that Treasury can do for the States to put that line on 

the State forms that can be accommodated if the States choose to 

decouple, I think is the phrase. 

But on your question of the municipal bonds and other such instruments that States and municipalities use, I don’t think the dividend proposal will have any major detrimental effect, because, as 

I think about those instruments, they are in different markets. I 

mean, people go into those municipal bonds because they want taxfree results, because they want stability, they want fixed incomes. 

There is a profile of the investor in those that is different than the 

profile of the investor in equities. And think of it this way. If you 

are looking for a cautious and safe haven, 1 day’s loss of market 

equity values will wipe out all the gains of the dividend exclusions. 

So I mean, I hear you, and there is maybe some byplay there, 

but I don’t think it would be dramatic. And then in terms of seniors, I think it is something like half of all the seniors who file tax 

returns get dividends of some kind. And I think that is an important fact to keep in mind as well. 

Mr. THOMPSON. Thank you. And I would like to see your information on the municipal bonds, because it is contrary to every economic analysis that I have had. 

Secretary SNOW. I will follow up with you on that. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. THOMPSON’S QUESTION REGARDING MUNICIPAL BONDS

Two concerns have been expressed about the possible effects on the market for 

tax-exempt bonds of the President’s proposal for eliminating the double tax on corporate earnings. Both relate to the demand on the part of investors to hold and acquire those obligations. The first relates to demand on the part of individuals, the 

second to demand by corporations. The concerns are that reduction in demand will 

translate into higher interest rates having to be paid by State and local governments. 

The Federal Reserve System’s Flow-of-Funds data for the end of 2002 show that 

individuals, either directly or indirectly through mutual funds and bank trust departments, held about 77 percent of the $1.8 trillion of outstanding tax-exempt 

bonds. Over the last two decades the portion held by individuals has risen while 

the volume outstanding has increased substantially. Individuals have increased 

their holdings because yields have been relatively high in comparison to the aftertax yields on taxable Federal and corporate bonds and defaults rare. They have done 

so even in years when the stock market was booming. Ending the double tax on corporate earnings will make ownership of corporate stock more attractive and corporate issuance of debt less attractive. In response we expect individuals to increase 

their holdings of equities and reduce their holdings of corporate debt. Because the 

dividend yield on equities will continue to be well below tax-exempt bond yields we 

expect individuals to continue to be attracted to the yield and safety provided by 

holding tax-exempt bonds. Any diminution in individual demand is likely to be so 

minor that it would be extremely difficult to detect given the normal fluctuation in 

interest rates generally. 

Three types of corporations hold significant amounts of tax-exempt bonds. At the 

end of 2002, property and casualty companies held about 10 percent of the total, 

commercial banks held about 7 percent and other corporations about 6 percent. Corporations find investment in tax-exempt bonds attractive in part because the spread 

between tax-exempt yields and yields on comparable taxable bonds has in recent 

43

years been significantly less than the maximum corporate tax rate. Some corporations, such as banks holding qualified small issuer bonds or corporations having less 

than 2 percent of their assets invested in tax-exempt bonds, additionally benefit 

from using interest payments associated with carrying tax-exempt bonds to shelter 

other income from tax. Moreover, banks are attracted to tax-exempt bonds to meet 

their obligations under the Community Reinvestment Act. Under current law relatively small spreads between taxable and tax-exempt rates and, in applicable 

cases, the ability to deduct cost-of-carry against other income raises the after-tax 

capital gains to shareholders from corporate investments in tax-exempt bonds well 

above returns on comparable taxable investments. Under the President’s proposal 

after-tax gains to shareholders will still be higher for corporate investments in taxexempts, given reasonable assumptions about the spread between taxable and taxexempt yields, corporate dividend payout rates and effective capital gains tax rates. 

As a result, Treasury analysts conclude that no significant reduction in corporate 

demand for tax-exempt bonds is likely to occur with the enactment of the President’s proposal.

[The following was prepared by staff in Treasury’s Office of Economic Policy:] 

THE BUSH PROPOSAL AND MUNICIPAL BOND YIELDS (JANUARY 27, 2003)

Some analysts suggest the proposal to eliminate the double taxation of corporate 

profits will increase municipal bond yields as investors shift their portfolios toward 

dividend-yielding stocks. However, research papers from several financial institutions suggest a number factors will prevent a significant effect on the municipal 

market. 

• Municipal investors have a low risk tolerance and want to preserve capital. According to Lehman Brothers, municipals have had an annual default rate of 0.004 

percent and since 1970 there has never been a default on a general obligation water, 

sewer, or public university bond rated by Moody’s. Eliminating the double taxation 

of corporate profits will not significantly reduce the difference in risk between stocks 

and municipals. 

• The gain in the after-tax dividend yield on stocks due to the Bush proposal 

could be wiped out in 1 day due to a change in the price of stocks. The standard 

deviation of monthly returns is 1.1 percent for municipals versus 5.4 percent for equities, according to Lehman Brothers. 

• Even if tax free, the dividend yield on most stocks is unimpressive versus longterm municipals. At present, the yield on the S&P 500 is about 1.75 percent versus 

almost 5 percent on municipals. 

• Municipals are already relatively cheap. Long-term municipals are offering 

yields very close to long-term Treasury bonds. Given the very low default rate on 

municipals, it is hard to envision municipals yielding more than Treasury bonds, 

given that the municipal yield is tax free at the Federal level. 

• Municipals offer investors a pre-determined dependable schedule of payments 

and a final maturity date. These cash flows allow investors (such as financial institutions) to match the timing and amount of cash flows on assets with the negative 

cash flows on liabilities. Stocks offer no guarantees as to dividend payments or the 

return of principal. 

• Investors purchase municipals for diversification purposes. 

• Investors are much more likely to shift out of corporate bonds than municipals. 

Compared to municipals, corporate bonds are much closer substitutes with equities 

and have similar underlying credit risk. Municipals are about ten times less likely 

to default than similarly rated corporates, according to UBS Paine Webber. 

• If investors want to shift out of municipals preferred securities are a slightly 

better substitute than common stock. However, according to Merrill Lynch, 72 percent of preferred securities pay interest, not dividends. Another 13 percent of preferred is issued by REITs and foreign issuers. So only 15 percent of preferred securities would get the benefit of the Bush proposal. That 15 percent consists of about 

$24 billion in shares outstanding versus a $1.8 trillion municipal market.

Chairman NUSSLE. Mr. Bonner. 

Mr. BONNER. Mr. Chairman, thank you very much. I am sorry 

that my colleague from Alexandria, VA left because I would have 

liked to have said this in his presence. But since he did, I am going 

to put it on the record regardless. 

44

Yesterday with Mr. Daniels and again today with the Secretary, 

it is troubling to hear comments made about ‘‘your’’ President. You 

know, I didn’t vote for President Clinton. My colleague from Illinois 

served with President Clinton. But he was my President. And 

President Bush is my President. And I think it is important, we 

are in this time of war where the war may expand, and in this time 

of national tragedy following the Columbia tragedy, that this is not 

‘‘your’’ President and ‘‘your’’ President’s budget. This is ‘‘our’’ President. And we can have a friendly debate about how the budget progresses, but I personally would like and hope that as future guests 

come before this committee, that we can refrain from making these 

characterizations that are derogatory toward the President of the 

United States. 

Mr. SPRATT. Would the gentleman yield so that I can respond? 

Mr. BONNER. Yes, sir. 

Mr. SPRATT. I think the gentleman makes a point. And I want 

to say that for a long time we have made it clear that President 

Bush is our President. And in particular, with respect to the war, 

we have said if a war comes, then we will be unstinting about the 

cost of it, because we want to see our forces prevail. I had an oped piece in the Washington Post yesterday which came down on 

this budget and the President, but it ended in the last paragraph 

by asking him for a bipartisan summit. And so I think that indicates a real spirit between us and them. He is our President. We 

want to see him succeed economically, geopolitically, and in every 

other way. 

Mr. BONNER. Mr. Secretary, you have only had a day on the job, 

and some of us on this end of the table have had about 21⁄2 weeks 

so we have got a jump start on you. 

I would like to make sure that I understand from your perspective—none of us have a crystal ball and none of us can predict with 

certainty what is going to happen in the outyears—but what would 

the effect be if we did nothing? 

Secretary SNOW. Well, if we did nothing in terms of boosting the 

economy, I think we would have a much less certain recovery. 

There is the Iraq war hanging over us, there is the threat of higher 

oil prices. There is this lack of confidence I think that permeates 

the world we live in today, and is seen most dramatically in the 

performance of equity markets and in investment in the industrial 

sector, which is waiting to see some reason why they should begin 

investing. For all those reasons, I think to fail to act would be a 

mistake. And the cost of failing to act is those additional jobs, those 

2 million additional jobs that would be created, that percent plus 

of additional GDP that we would have, the better lives, the better 

lives that people would have in a more prosperous economy. That 

is a high price to be paid for not embracing the better economic 

policies that take us to more prosperous country. 

Mr. BONNER. Prior to your coming to this job, you certainly had 

a distinguished career in the private sector. One of my concerns is 

if we don’t do something to make permanent the tax cuts of 2001, 

that we can’t give working families or corporate America any certainty about what the future holds. What would the effect be of 

doing nothing to make permanent the tax cuts of 2001? Putting 

yourself back in your former job, how can you plan past 2010 if 

45

there are some set provisions on many of these important tax reductions? 

Secretary SNOW. Well, one thing it would do would be to be approximately a 50-percent tax increase on the lowest taxpaying 

Americans. I think that is unacceptable. 

Mr. BONNER. Fifty-percent tax increase on the lowest——

Secretary SNOW. Taxpaying Americans. 

Mr. BONNER [continuing]. Taxpaying Americans. 

Finally, I would like to just associate myself with the point that 

the gentleman from Mississippi was making. The Wall Street Journal yesterday had an interesting and excellent op-ed piece that I 

would commend to all of the members of this committee. And if you 

have not had a chance, Mr. Secretary, to read it, I would suggest 

that you do as well: Growth in discretionary spending over the last 

5 years, 45 percent; in the last year alone, 9 percent. And we can 

blame tax cuts, we can blame a number of different factors. And 

I wasn’t a Member of Congress during the previous 5 years, but 

does not that increase shock the conscience? 

Secretary SNOW. I saw Mitch Daniels’ numbers that I think he 

maybe displayed here yesterday that lay out that scenario. We 

have abundantly funded a lot of discretionary programs over the 

last 5 or 6 years. I think that is absolutely true. And I don’t think 

we can afford to continue to do that. 

Mr. BONNER. Finally as I thank you again for coming, let me 

share with you a number. I spoke to a group of Federal employees 

on Friday in my district. And of course, they have different interests than some of the interests we might have. But I found it interesting in doing some research, during the first year of our Federal 

Government, your department, the Department of Treasury, had 39 

employees in 1789. I would hope that we could, as we move forward, find ways to move back toward a smaller government that 

is less obtrusive to the American people. Thank you again for your 

time. 

Secretary SNOW. You are suggesting that Alexander Hamilton 

had higher productivity than I do. 

Mr. EMANUEL. Don’t take it personally. 

Chairman NUSSLE. Mr. Baird. 

Mr. BAIRD. Thank you, Mr. Chairman. 

I wonder if I could have minority staff put slide No. 16 up, and 

the majority staff post the slide reflecting deficits percent of GDP. 

Mr. Secretary, in—could you post that slide reflecting deficits 

and percent of GDP? 

Secretary SNOW. Our slide? 

Mr. BAIRD. Your poster. You have referred to it throughout the 

day. 

You have made the point repeatedly, Mr. Secretary, that we 

must consider deficits as a percentage of GDP; yet in 1995, when 

you were talking about the benefits of a reduction in deficit, at that 

point the percentage of GDP—or the deficit as a percentage of GDP 

is approximately where it is now, according to the chart that I have 

seen. 

Now, if in 1995 you projected that a 2-percent—or that a reduction in deficits could lead to as much as a 2-percent—and that is 

slide No. 16—could lead to as much as a 2-percent reduction in inVerDate Feb 1 2002 16:58 Apr 30, 2003 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\108TH\108-2\HBU036.000 HBUDGET1 PsN: DICK
46

terest rates, if I am a family with a $200,000 home and my interest 

rates are reduced by 2 percent, I save about $4,000. You have talked today about the benefits of a $1,000 tax return 

for a family of four. It seems to me if my interest rates, if I could 

cut interest rates, I would be better off. 

So deficits are real and they do have consequences. And while it 

may be important to interpret deficits in the light of percent of 

GDP, your comments in 1995 suggesting deficits needed to be reduced are almost precisely where the deficit was today. 

Could you comment on that, please? 

Secretary SNOW. Sure, I would be delighted to. 

In 1995, the budget of the United States was projected to be in a sizeable deficit in the years going forward. That was the $200 billion-plus projections that were in the budget of the United States. 

Mr. BAIRD. Is that not where we are today, sir? 

Secretary SNOW. Yes, but with an economy that is 40 percent, 50-

percent bigger. 

Mr. BAIRD. But the fact that we are talking relative as a percent 

of GDP standardizes that out, Does it not? 

Secretary SNOW. Well, you are looking here at a set of numbers 

toward the end of the 1990s that reflected the totally unexpected 

growth of Government revenues from the buoyant stock market. In 

1995, when I got as concerned as I did—and it actually preceded 

that, Congressman. It preceded it in the early 1990s—in the late 

1980s, late 1980s, early 1990s. When I got concerned about this, I 

was looking at projections of the United States Government for 

annualized deficits that were up in the 4 and 5 percent range, not 

the 2 percent range. So I was talking about projections that we 

were all talking about at that time, and that were alarming not 

just to me but to many on both sides of the aisle. 

Mr. BAIRD. So you were referring at the time to projections? 

Secretary SNOW. Sure. 

Mr. BAIRD. And yet you didn’t say that in the comment. I am not 

trying to hold you. But the fact was, you were saying if we could 

lower it by 2 percent from where it is now. Your statement in 1995, 

sir, didn’t say if we could lower it from the projected rate; it referred to where we were at in 1995. And I would assert that we 

are about there now. And so deficits do have a cost. 

Let me ask you a second question, if I may. The gentleman here 

suggested you should lower the size of your agency. I have met 

with some of your agents recently, and they tell me that your agency is a toothless tiger; that when they go on enforcement efforts, 

people laugh at them and assert that if you try to make me pay 

my taxes, I will file complaints against you. 

Now, we all respect the fundamental rights of the American people to be treated fairly by the Department of Treasury, the IRS, et 

cetera. But what do you think we might be able to do in terms of 

generating additional revenue if those people who are laughing at 

your inspectors right now had some respect for them and there 

were some teeth in that? 

Secretary SNOW. Well, I think there is a significant augmentation of the Treasury budget to strengthen the enforcement hand of 

the Treasury. I think it is $100 million, focused on the higher-end 

income people, and other enforcement augmentations as well. 

47

Mr. BAIRD. I would applaud that. I have some concerns, however, 

that apparently, at least as I read the budget proposal, part of that 

will be privatized. And I have some concerns about the American 

people having what may well be hired guns trying to collect their 

taxes. I can tell you that in the realm of Medicare fraud enforcement, this has been an unabashed disaster, and you have got hired 

guns out treating people very shabbily. And we can say all we 

want, people love to criticize Federal employees, but I have seen no 

great evidence that a hired gun is going to treat a private citizen 

with greater respect than a Federal employee who at least is answerable to an elected Representative who they elected. So I just 

want to voice my concern. Thank you for your comments. 

Chairman NUSSLE. Mr. Franks. Mr. Garrett. 

Mr. GARRETT. Thank you. And I appreciate your being here with 

us and suffering through all this endless questioning. 

Secretary SNOW. Well, it is a good education for a new Secretary. 

Mr. GARRETT. And it is a good education for a new Member as 

well. And my only regret is I was not here when Mr. Putnam was 

here 2 years as a freshman, when the debate was how do we pay 

off some of these instruments. 

I am inclined to take the view that you held more back in 1995 

than perhaps you hold today as far as the importance of attacking 

the deficit problem. I agree with my chairman, I guess his rhetorical question that he made at the outset. He said, well, if we do 

nothing, we know where we are going to need to go; so, should we 

do nothing? 

And the answer, I agree with him is, no, we have to take this 

action. And I agree with the line of reasoning that you and the 

President have with regard to the tax cut, and I am completely behind the notion that the way to do this is to grow the economy and 

to grow revenue, and that will be the long-term solution to the 

problem. 

But getting to the issue of the deficit today, you made the comment that we have to be concerned about deficit spending. But one 

of the phrases you used was ‘‘except when there are critical needs 

to be addressed,’’ and I think everyone on both sides of the aisle 

will agree that we are in a period of time when there are certainly 

critical needs to be addressed. But as you said that, I was thinking 

that when is there a time in this Nation when we would not be sitting at these tables and say that there are not critical needs to be 

addressed? We had 40 years of the cold war, and I am sure the people that testified then would say there was a rationale for deficit 

spending, and there was a Great Society and there was certainly 

a need for moving in deficit spending in those times. I would hazard a guess that any one of us could come up with a program and 

say that this program that we sponsor for our district or the Nation 

is a critical need, and we could get over that hurdle of saying, well, 

this is the one that we have to address. 

The critical need that we are dealing with right now is the terrorism aspect, and I think our President is right when he came out 

right after 9/11 and said, this is not something that is going away 

in a month or 6 months from now; this is a long-term problem. 

So how do we—can you just for a moment address that issue of 

saying when we don’t have that? 

48

Secretary SNOW. What—the juxtaposition of critical needs in my 

opening comment was homeland security, the war or terrorism, and 

creating good jobs for Americans who are struggling. Those were 

the critical needs I referenced. 

Mr. GARRETT. And I agree with them. But I just think that going 

forward we are always going to have those critical needs. And how 

do we put them aside to say we want to move toward what Mr. 

Baird and others were saying, and along the line more in keeping 

with a balanced budget? I think, I hope, in the future that this 

committee is going to be grappling with the bigger rules that we 

are going to be discussing, that you were mentioning at the outset 

with regard to the framework and the rules, that Mr. Spratt and 

others were talking about as far as the framework that we deal 

with in budgets in the future. And you have mentioned the PAYGO 

rule and how that worked. 

And I guess my questions go along the line of this. I think I 

agree with, although I have to think about this a little bit more, 

your comment with regard to the PAYGO rule not applying to tax 

cuts. And I think that is right, but I have to give that more consideration. But you also made the comment that it should not apply 

to mandatory expenditures. And I will let you respond to this. My 

thought there is that if we are clever enough, any one of our absolutely critical needs we have in our districts, I think we are probably clever enough that if that was the rule that we had to live 

with, we could try to turn it into a mandatory expenditure so we 

could get beyond the rule. 

And I think your second comment along that line was if there are 

certain sorts of programs such as the Medicare program—if there 

are certain sorts of programs such as the Medicare reform, which 

we all agree on that we can save spending, then perhaps they 

should be able to get around rules such as that PAYGO rule. I 

would hazard the guess also that just about any spending initiatives that we have here on either side of the aisle, that we will always say that if we just spend more money on education or transportation or infrastructure, that we will posit the truth that it is 

going to actually save spending in the long term. 

So if we move all those things off the page, what is left even in 

discretionary spending that is still within the rules? 

Secretary SNOW. Well, if you are suggesting that the game can 

get rigged, in which everything is off the table, I would agree with 

you. All games can get rigged in ways that are destructive of the 

fundamental game. But on the larger set of questions you are raising here, how to frame this whole set of issues, I would have to 

defer I think to Mitch Daniels and people who know a lot more 

about this subject than I do. 

Mr. GARRETT. OK. Thank you very much. 

Chairman NUSSLE. Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

Mr. Secretary, I have two questions, one macro, one micro. You 

are new on the job; you have to sell a budget that you didn’t prepare. But I would urge you to read page 315 or 318 of this very 

thick book called Analytical Perspectives, because I am deeply worried that you have been saddled with an unconstitutional recommendation. And I know that you took the oath of office seriously 

49

to support and defend the Constitution. But when I read the bottom of that page, quote, ‘‘Under the President’s proposal, if an appropriations bill is not signed by October 1 of the new fiscal year, 

funding would automatically be provided at the lower of the President’s budget or the prior year’s level,’’ that could give 40 U.S. Senators the ability to terminate or radically reduce and cripple almost 

any spending program in the country. 

The Constitution gives Congress the power to appropriate the 

dollars for spending. So I would urge you to look at this proposal 

very closely, one that you did not formulate. And overall, I would 

like to urge the American people to get on-line and read some of 

these documents, because for all of your smooth skill and calm demeanor, there is a lot in here such as this proposal that is indeed 

radical, perhaps unconstitutional, and perhaps irresponsible. And it 

is important that all Americans tune in to these important although arcane issues. 

So, could I have your pledge to take a serious look at this proposal? 

Secretary SNOW. You can. I accept both the compliment and the 

challenge that you have given me. 

Mr. COOPER. Thank you. At the micro level, you have a very able 

staff. I am not like my colleague from Alabama who wants to deplete your staff. One of your ablest people is Pam Olson. She is 

now looking at an issue that has to do with municipal power company prepayment for electricity. A bond issue is currently being 

held up right now because she will allow prepayment for gas but 

not for electricity. We would like a fuel-neutral policy so that municipal power companies can help their people with electricity and 

gas, and be able to prepay for both. So I would just like to urge 

you and her to take a look at that micro issue, because it could 

help a lot of consumers all over America having a municipal power 

company. Thank you. 

Secretary SNOW. I will agree to do that. 

Mr. COOPER. Thank you. 

Chairman NUSSLE. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Secretary, let me echo the sentiments of one of my other colleagues, that it is indeed, as a freshman Congressman, great to 

meet somebody who has less seniority than me. 

This is my second hearing of the Budget Committee and obviously your first, but we have both had the benefit of seeing a dizzying array of charts put on the screen here for us. I would like 

to know if the assumptions underlying—if you have the same understanding that I do. No. 1, I believe that I am being asked to believe that with some amount of clarity and exactitude, that we can 

figure out 10 years in the future exactly what the economy is going 

to be doing. And, at the same time, I believe these charts that have 

a large amount of red ink on them are based on the so-called static 

scoring of the President’s economic plan, and that I am being asked 

to believe that changes in tax rates have no impact on job creation 

or the economy. 

You saw the same charts that I did, Mr. Secretary. Is that your 

understanding as well? 

50

Secretary SNOW. Yes, broadly. I would not put enormous confidence in 10-year estimates of budget numbers. This may be the 

best that can be done, but I would look at them with a great deal 

of caution, as you are suggesting. 

I do agree with you that I think they do not reflect, and I think 

Mr. Daniels was clear in saying this, that they do not reflect the 

full growth component that would be expected from the tax package, but they do reflect the full cost component. So I would certainly agree with all three of your points, actually. 

Mr. HENSARLING. Mr. Secretary, even though the budget does not 

include the dynamic impact of the economic program, obviously you 

have seen a number of opinions expressed. What do you perceive 

is the consensus opinion of the economic impact of the President’s 

economic program? 

Secretary SNOW. Talking to colleagues in the business community, and the Business Roundtable put out an estimate. I have seen 

some others. I would say the official numbers of OMB probably are 

on the low side of the growth that will actually be achieved. And 

I think that is true of a variety of the private sector estimators. 

Mr. HENSARLING. Mr. Secretary, of all the charts that I have 

seen posted today, I notice that there are two that are fairly noticeable by their absence. Today, I have not seen one chart that plots 

the growth of Government over the last 10 years or projecting 10 

years forward, even though we did hear earlier today that as recently as last year we had a 9-percent increase in discretionary 

spending. 

I am under the impression that over the last 10 years Government spending has grown at approximately 6 percent. Obviously, 

the economy has not kept pace with that. There has been some 

criticism from my colleagues on the other side of aisle that your 

economic projections are too rosy; that 3 percent or 3.3 percent economic growth in the future is too rosy. 

So say, for example, hypothetically, if economic growth over the 

next 10 years was, say, 21⁄2 percent, and say the Government continued to grow at the rate of 6 percent, given that today the tax 

burden on the average American family is 40 percent—local, State, 

and Federal taxes—if these trends continue, do you have an opinion of what would happen to the tax burden on the American family? 

Secretary SNOW. Well, I can’t do all the math in my head, but 

I think the direction is pretty obvious. It would be a heavier burden. A heavier burden. 

Mr. HENSARLING. Thank you. 

Chairman NUSSLE. Mr. Emanuel. 

Mr. EMANUEL. Thank you, Mr. Chairman. 

This is our second hearing for some of our freshmen, and the second time that we have gone through lunch. And I wanted you to 

know I started this six-two and 250 pounds, and that is all I have 

got left. And that you kind of look around, and you begin to feel 

like you are in an Agatha Christy novel: And then there were none. 

Thank you very much, Mr. Secretary. Also I would like to repeat 

and echo my colleague: It is good to find somebody with less seniority than yourself. 

51

You know, I am going to take a faint attempt at bipartisanship 

and quote Ronald Reagan. ‘‘Facts are stubborn things.’’ The fact is, 

although a lot of people want to review the 1980s versus the 1990s 

and what led to economic growth, the fact is that in the 1990s we 

had a record period of job growth. Fact: We had a record reduction 

in the welfare roles. 

Fact is that we have also in the 1990s extended the trust fund 

for Medicare by 20 years. Fact, we had a drop in those who worked 

full-time and didn’t have health insurance, down to 38 million. And 

fact is we also had a drop in violent crime in this country and we 

did all that without tripling the Nation’s debt. So although people 

can take rightful pride comparing the 1980s and the 1990s as a period of economic growth and what happened, just a simple fact, and 

I would like to quote Ronald Reagan on that, ‘‘facts are stubborn 

things and those are just facts.’’ And that may be hard for some 

people to swallow, and I appreciate that, but that is what happened. 

And with that, I think it is worth noting since some people like 

to compare 17 years of Ronald Reagan’s economic growth, we do 

think something happened in the 1990s that was certainly magical. 

There is no doubt that it started with the entrepreneurs and the 

middle class families around the country, and also with the decisions, whether people like it or not, because I don’t want to just do 

nothing about welfare reform. We did something about welfare reform. And doing something in Washington does have an impact. 

The arguments to the 2001 tax bill was that the President inher- ited the recession and he needed a $1.3 trillion tax cut to get the 

economy moving. Since that time the economy has lost 21⁄2 million 

jobs. Four more million Americans are without health insurance 

that had health insurance before. And I think you will appreciate 

this, is that also nearly $1 trillion of corporate assets have been 

foreclosed on in chapter 11. And one of the facts I am most impressed with between the 1990s was the fact that we decreased the 

amount of people living in poverty but in fact in the last 2 years 

two more million people have been added to the poverty rolls in 

this country, just facts. 

And I do think the decisions we make here rather than just static and not doing anything have an impact on the economy and on 

what happens, and I do agree that we all want to see job growth 

and economic growth. We want to see deficits lower. But one of the 

things we want to see is every American participate in that and 

that hasn’t happened to date. The unemployment, the uninsured 

are not equally shared across every income group. And I agree with 

what you said, deficits can be manageable if they are seen as cyclical. But once the markets sees the perception go from cyclical to 

permanent, interest rates rise and that has an effect on mortgages, 

college loans, paying for health care bills and it becomes a tax on 

the families. And we are very close—and you may be right and I 

think you are right, right now they are seeing them cyclical. But 

that moment that perception changes in the market that they are 

permanent and fixed and structured, nothing we are talking about 

the tax cuts here will pale in comparison to the rising costs of managing to pay for a home, paying for college or paying for health 

care. 

52

With that, I do want to talk a second about savings. Fewer than 

5 percent of the American people participate in the IRAs as they 

exist, the Roth IRAs. And why do you think that increasing that 

limit is going to increase the participation that only 5 percent of 

the top bracket participate today? To my view since $3,000 a year 

is out of reach for a lot of Americans to put away, making it $7,000 

is only going to be putting more money away for those who want 

to participate and try to save. You are just going to go to the same 

people who today participate in the IRA and we are not going to 

extend it. 

Now I think if you look at all that money that is going to go toward that savings, some people see critical investments in agriculture. Folks like me see critical investments in education. Right 

now we can’t even pay for the President’s initiative of Leave No 

Child Behind. This budget, the amount of deficits we leave, the 

amount of debt we add and the ability not to invest it, Pell Grants 

or in education, do have consequences because American lives 

aren’t static. Washington may want to be static, but their lives are 

not. 

Secretary SNOW. I agree with much of what you had to say. 

Mr. EMANUEL. There is an act of bipartisanship right there. 

Secretary SNOW. One of the important proposals coming out of 

the Treasury deals with the issue you are raising, the low savings 

rates among the lower income, below the median people. The failure to use the IRAs and the Roths and 401s and so on—and I 

would urge you to take a look at this proposal. Pam Olson was 

mentioned earlier as somebody that the committee works with 

closely, which really she is the rowing oar on these LSAs and RSAs 

which would create a new savings vehicle. The current tax favored 

vehicles are just too complex on the one hand and too restrictive 

on the other. They limit the purpose so that that mother who 

wants to educate her child, she puts her money into the fund and 

the child gets sick, she can’t use it to help deal with the medical 

problems of that child, so they don’t use it. And I commend Pam 

and the Treasury Department for coming up with these proposals 

to make—create new savings vehicles to encourage more savings 

among middle income and lower income people. Wealthy people 

have lots of ways to save. It is the lower income people that need 

to have savings facilitated. So I urge you to take a look at these 

proposals. 

Chairman NUSSLE. Mr. McCotter. 

Mr. MCCOTTER. Thank you, Mr. Chairman, and I would like to 

thank the good member from Illinois for his bipartisan praise of 

the 1990s-led GOP House of Representatives. You mentioned something about the debt tax and that is something I heard a lot about. 

It is a new term, although I am fully expectant that I will be hearing that term over and over again at least for the next year and 

11 months. I think I might have an idea of what it is and I just 

want to see if I can be correct, and then I have a quick question. 

It seems to me that the debt tax is caused by politicians’ need to 

immediately spend money in the hopes that it will lead to longterm structural improvements in the economy when in the end it 

is basically a mortgage and a hope that Government spending will 

help improve the economy and the quality of peoples’ lives. This 

53

naturally will limit the amount of discretionary spending that will 

be available later. So in my mind it becomes basically a debt penalty. 

It gets confusing because we heard the overall accumulation of 

Government debt in relation to individual budgets, and there was 

never a proration for how the immediate spending influenced those 

future budgets. And I think that that was kind of apples to orangutans or something. I think under that kind of logic there are really five things that can be done. You can individually—you can raise 

taxes. You can individually cut prorated reductions in the programs 

that were benefited by the immediate spending at the expense of 

future spending. You can have larger cuts in all other programs 

whether affected or not. You can obviously go across the board 

spending freeze because we heard that will lead to a balanced 

budget or you can hope through some type of budgetary policies 

you can grow the economy and restrain spending and arrive back 

into a surplus situation. 

I didn’t study economics. I was a liberal arts guy so I may be 

wrong about some of that. But my question is in investing the 

1990s—I was a state legislator. I was a county commissioner prior 

to that—at the end of the 1990s, we saw, I think it was historically 

the largest increase in Government revenues and we also saw one 

of the largest increases in Government spending and that was followed by a recession. We have heard a lot about deficits having 

consequences on markets, a debt—the cost of having a debt at the 

national level. I was wondering if anyone had looked into the prospect of a national surplus also constituting negative consequences 

to our economy when the Government takes too much from entrepreneurs and the people who make this country great, the working 

men and women and then spends it inefficiently. 

Secretary SNOW. Congressman, you may not have studied economics formally but you have obviously learned it some other way, 

because you are framing the issues the way the economist would 

frame them. I saw a speech that Larry Summers gave recently in 

which he said no one can be well educated today if they don’t have 

a fundamental understanding of economics. And economics is basically the study of trade-offs and choices and the costs of alternative 

choices and framing the choices intelligently. You just did, and I 

agree with the way you framed them. It is important to always ask 

what is the cost of not doing what we are proposing as well as 

what is the cost of doing it. And where the cost of not doing, what 

you give up is greater than the cost of doing it, you should give it 

up. 

So I think the President’s program is the course that takes us 

and puts us on the best course in terms of those trade-offs that you 

have enumerated. 

Mr. MCCOTTER. I just want to thank you very much. In the final 

analysis, though, I do believe a historical precedent is important, 

and I do believe that had we perhaps at the State and local level, 

because I can’t address the national level, saved some of the money 

that the taxpayers put here into reserve accounts, into rainy day 

funds, perhaps we might not have offset the entire cost of this proposed budget but would have laid a foundation for a rainy day fund 

much like families have to do. And my concern is that we do not 

54

attempt to bolt the Federal budget on the backs of family budgets 

no matter what direction we take. 

Secretary SNOW. I agree with your large point there. 

Chairman NUSSLE. Ms. Majette. 

Ms. MAJETTE. Thank you, Mr. Chairman, and I would like to 

have displayed slide No. 3. Can you display slide No. 3? And good 

afternoon, Mr. Secretary. I appreciate your patience and your fortitude. In my previous life I was a trial court judge and I certainly 

wouldn’t have had a witness on the witness stand as long as you 

have been without a break. 

Secretary SNOW. Cruel and unusual. 

Ms. MAJETTE. But I certainly appreciate your being here this 

morning and this afternoon, and we have talked a lot about the 

cost of doing or not doing things and trade-offs. And before I ask 

my question I would just like to preface it with some reading that 

I did this morning, and this is from a book written by Richard 

Kriegbaum on leadership and particularly on the aspect of creating 

a budget. And he says that, ‘‘The core values of an organization are 

the promises its members make to each other. The budget is the 

most comprehensive and detailed description of what the organization has promised to do in expressing those values. What makes 

budgeting so difficult for a future oriented leader is that the budget 

is mostly about history, about keeping promises that have already 

been made. If the promises were made wisely, they will have created a good set of present opportunities, attract great people, secured a strong position in the market with a positive image and allowed for increasing net revenues. The need for growth is a product 

of the fundamental paradox in each budget. Driven mostly by the 

promises of history, the budget must also make promises to secure 

a future. The budget, mundane and arcane, is the ultimate leadership forum.’’ 

Now my question is given the fact that we have the baby 

boomers, the baby boom generation will begin to collect Social Security benefits starting in 2008 and also having the Medicare coverage and that those are promises that we have made, made by 

past and current Presidents and by past and current Congresses, 

how are we going to be able to honor those past and current promises in light of the deficit we already have and the proposed budget 

that will increase those deficits as we move forward to 2008? 

Secretary SNOW. I begin by saying that our commitments to Social Security and Medicare are sacrosanct. It is unthinkable that 

those commitments won’t be made. At the same time, it is important to recognize that, as you are suggesting, that the demographics of the country are putting us on an unsustainable basis 

in terms of the current course. So some fundamental reforms need 

to be thought about in both areas. 

The President has made clear his commitment to Social Security, 

but also is engendering a national dialogue on how to put it on a 

sustainable basis. The commission he appointed came up with 

three options. All included investment retirement accounts—I 

guess two of the three—all three had investment retirement accounts as part of the approach. The Social Security system needs 

savings. It needs an infusion of real savings. And we need to find 

a way to make that happen. It can only happen, though, I think, 

55

and we can only put Social Security on a sustainable basis if, one, 

we grow the economy, because that gives us the wherewithal to 

deal with the problems, and, secondly, if there is a bipartisan consensus to move forward on that issue. 

On Medicare, health care, the commitment is the same. The 

problem is a little different. It is driven by demographics, but also 

by this extraordinary increase in health care costs, which we have 

to rein in. We have to bring greater discipline and efficiency to the 

health care delivery system. We talk about that a lot. We talk 

about that a lot. But it is an issue that has to get joined. 

So I applaud you very deeply for putting that issue before the 

committee and before the Congress because it is one that we simply 

have to address. 

Ms. MAJETTE. Thank you. 

Chairman NUSSLE. Mr. Ford. 

Mr. FORD. Thank you. We are here, as you know, Mr. Secretary, 

talking about this budget stuff after or during the time in which 

Secretary Powell has made quite a compelling statement about the 

world taking steps against Iraq and even an invasion of Iraq. I 

know that you have a tough gig, made tougher by the fact that you 

didn’t really have a job in writing this budget, but you have to defend it and perhaps you do fully agree with it. But some of the 

things you said in the past which I think we tried to point out here 

are in conflict with the direction that this budget will take us. I 

want to ask specifically just a couple of questions. 

I am reading this morning in the CQR, one of the local newspapers here on the Hill, where your friend and colleague Glenn 

Hubbard makes the point that because of dynamic scoring that the 

costs of this tax cut, the $695 billion tax cut, would actually be less 

some $280-billion less, $278 billion to be exact, and that it would 

actually cost only $417 billion over 11 years. I was curious, one, if 

you are familiar with his talking about this and, two, if you agree 

with this dynamic scoring. 

Sounds a little like fuzzy math to me. I know a lot of people here 

have talked about what counties have to do and what families have 

to do. I would love to be able to go into a grocery store and fill up 

my grocery cart and say it looks like it is 250 but by the time I 

get to the counter maybe it will only be 185. I am curious to know 

if you agree with Glenn Hubbard’s estimation about this. 

Secretary SNOW. Actually I have not discussed that with the 

CEA chairman. 

Mr. FORD. If you could get back to me on that and maybe the 

chairman. I know he is a fan of dynamic scoring as well. Perhaps 

he can get back to those of us on the committee if he too agrees 

with Glenn Hubbard’s estimations here. 

Chairman NUSSLE. Will the gentleman yield? 

Mr. FORD. As long as you don’t take my time. 

Chairman NUSSLE. I will be glad to not take it from your time. 

I am just curious. So your point is that you see absolutely no impact at all from our fiscal policies on the overall economy and that 

it should not be taken into consideration? 

Mr. FORD. No, sir. I am just asking the question. Evidently you 

are giving me a partial yes. I would love——

56

Chairman NUSSLE. It is not a partial guess or a yes. I just wondered if you saw no impact at all from fiscal policy on the economy. 

Mr. FORD. Mr. Snow has run a railroad that runs through my 

city of Memphis, and has done very well in business. You, Mr. 

Nussle, have been head of the committee. I am just curious. I 

asked the question for this reason. I was not on the committee 2 

years ago, but I understand having voted against the budget that 

came out of this committee, there were a lot of estimates about how 

well the economy would perform after the tax cuts that Congress 

passed 2 years ago. Well, in fact, that has not happened. We heard 

a variety of reasons why. It is ridiculous some of the things that 

everybody said, particularly—I have a lot of friends on that side of 

aisle. But to suggest that Clinton had something to do with this or 

that Reagan had something to do with this or that one person deserves more credit than the other is ridiculous. Let us face the facts 

we face right now. If that is the case and if it does not happen, 

what is our fallback here, because we estimated over the next 2 

years all these things would happen with this tax cut and it is not 

happening. 

And I will be happy to yield to the chairman if he wants. The 

second question I would have for Mr. Snow with regard to the stimulus package, and I would love to get a copy of your memo you sent 

to Mr. Thompson on municipal bonds and other tax free instruments, including the low income housing tax credit that Ms. Johnson raised yesterday, I think, before the Ways and Means Committee. But I am curious about States. My State, like many others, 

is faced with these crushing burdens. Is there not an argument—

and I am not an economist. I went to a school where they teach 

it up at Penn and Wharton, but I didn’t take any of those classes. 

I was a liberal arts major like the former commissioner and State 

representative over there was. I am curious—it would seem to me 

though, what little I know, that the best thing we probably could 

do would be to help Governors avoid either raising taxes or cutting 

vital services. And if we don’t provide some direct aid to the States, 

is it your belief that that may offset what we may do here at the 

Federal level whether it is dividend taxes or payroll tax rebates or 

whatever we eventually settle on? 

Secretary SNOW. The best thing we can do for the States is to 

create a strong national economy that grows and as that strong national economy grows and the States have more jobs, more revenues will flow to the States. And the analysis I have done—I introduced Dr. Clarida earlier who has done these analyses. The States 

actually pick up in the aggregate more revenues as a consequence 

of this growth package than they would have otherwise. 

Mr. FORD. So it is your belief that providing direct aid to the 

States for health and education and other needs, and this is not to 

suggest that we don’t have other priorities but I am just curious, 

modifying the Medicaid formula so that my State—and Tennessee 

is faced with a $400 million shortfall this year and an expected 

larger one next year. That is small compared to some of the other 

States represented here. But you don’t believe that providing some 

direct aid in addition to the stimulus jobs and growth package that 

the President talked before Congress a week or two ago, you don’t 

believe direct aid could also help alleviate some of this burden and 

57

actually help create jobs and grow their economies at the State 

level as well? 

Secretary SNOW. I forget the numbers. You would know them because you were here yesterday when Mitch Daniels testified, but as 

I recall there was a—here is the chart—these are OMB numbers. 

You can see there has been a fairly sizeable increase in grants, 

Federal grants to State and local governments, and that is continuing in this budget. 

Mr. FORD. How much of that is Medicaid? I must have missed 

that part of Mr. Daniels’ testimony. It is my understanding a little 

over three-quarters of that was Medicaid funding if I am not mistaken. 

Secretary SNOW. The numbers escape me right now, but I will 

get back to you on that for sure. I know Medicaid is now, I think, 

the largest source of the grants to the States and I think the second largest item in most State budgets. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. FORD’S QUESTION REGARDING MEDICAID FUNDING

Total Federal grant-in-aid money to state and local governments was $351.6 billion in fiscal year 2002. It will rise 9 percent to an estimated $384.2 billion in 2003 

and an additional 4 percent to $398.8 billion in 2004 under our budget proposal. 

A huge 20 percent rise in Medicaid grants is slated for this year, boosting them 

from $147.6 billion in fiscal year 2002 to $176.8-billion under current law for fiscal 

year 2003. These grants are expected to rise 3 percent further to $182.5 billion in 

2004 (amount takes account of proposed legislation). 

The rise in Medicaid costs in fiscal year 2003 is expected to account for 89.6 percent of the increase in total grant-in-aid in that year, but the rise in fiscal year 2004 

would make up only about 39 percent of the increase in grant monies. 

Medicaid expenditures accounted for 42.0 percent of total Federal grant-in-aid to 

states in fiscal year 2002; the share is expected to rise to 46.0 percent in fiscal year 

2003 and account for 45.8 percent of grants in fiscal year 2004.

Mr. FORD. If you could have drafted this budget, Mr. Secretary, 

and you were trying to craft a stimulus package in light of the 

challenges we face and with the vast experience you have had in 

the private sector, public sector, is this the budget you would have 

drafted and presented to this Congress and suggested to this Nation to help create a rebound and a growth period, including job 

creation? 

I know I am going over my time. I think I know what you may 

say, but I am just curious if this is the budget you would have presented to this Congress had you been on from the very beginning 

with this administration. 

Secretary SNOW. I am very pleased to be in a position to advocate 

the policies reflected in this budget. I shy away from using the 

term ‘‘stimulus’’ because I think it mischaracterizes what this package is all about. 

Mr. FORD. I would agree. 

Secretary SNOW. It really is a growth package. 

Chairman NUSSLE. Mr. Secretary, let me just—excuse me—let 

me yield to Mr. Davis and then I will take some time at the end. 

Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman. Mr. Snow, I apologize to 

you that I missed a lot of your testimony. I have some pressing 

constituency issues in my office, but I did see a lot of you on television this morning. Let me ask a question that is totally different 

58

from what you have been asked about during most of the day. I 

want to go to the larger point of incentives that this budget creates 

and I want to talk about incentives in one particular area. I want 

to preface that by saying that two things are apparent to me as I 

look at the political context around this budget. 

First of all, it is evident that whether we agree or disagree with 

the whole range of cutbacks that are made in this budget that 

there are a range of objective cuts or reductions in the rate of 

growth for a number of social programs that I consider important, 

from education, health care, Head Start, you name it. Because of 

that, it strikes me that there is going to be a much greater reliance 

on the private sector, a much greater reliance on the private sector 

to step up to the plate when it comes to charitable giving. The 

President has spoken very eloquently of compassionate conservatism. He has spoken very eloquently of the private sector and the 

private community in this country assuming some of the burden 

that the Government may be advocating. 

Given that set of premises, I want to ask you about this budget’s 

failure to provide more incentives for charitable giving. Pull out 

just a few facts that I have seen in the budget. The President is 

proposing a $500 charitable deduction for nonitemizers. Now based 

on numbers that I have seen, the average charitable gift for most 

taxpayers is $348. The range between $348 and $500 is significant 

at that level, so as a practical matter most people who were giving 

charitably will not receive a tax incentive. 

Give you some more numbers. Two years ago when the President sent his first tax cut plan up to Congress, he proposed a $90 billion—what would have amounted to a $90 billion charitable tax 

break over a 10-year period, about $9 billion a year. That plan was 

not successful. In this go-around, the President comes back with a 

$20 billion plan for reductions in charitable giving over 10 years. 

That seems to be a significant retreat on the part of the President. 

Two other aspects I will point out to you. A lot of charitable foundations—in fact, my understanding is that all private charitable 

foundations, while they are not taxed in the normal fashion, pay 

an excise tax that totals up to $1.4 billion a year. This budget provides no relief from that excise tax. 

Finally, as I understand it right now, if people withdraw money 

from an IRA and attempt to give it to charities, that is still taxed. 

Now that is a classic case of double taxation. The budget the President proposes does nothing about that. 

So my question to you is this: Given the extraordinary shift from 

public sector to private sector the President seems to contemplate, 

how can you justify to us and, more importantly, to our constituents why the President doesn’t do more in this budget to encourage 

charitable giving? 

Secretary SNOW. I am not as conversant with this subject as you 

obviously are, but I will give you two broad answers. One, the best 

way to stimulate charitable giving is to have a stronger economy 

so people have more money in their pockets, more disposable income. This proposal does that. I am confident of that. The IRA proposal that we talked about earlier, Congressman, when you weren’t 

here, the Treasury proposals there, does permit transfers to charities. It creates a more flexible use of these savings accounts and 

59

I think will encourage savings generally and, by creating more 

flexible uses, will be helpful to charity generally. And I understand 

that in the budget there is some several $100 million in effect directed to charitable causes. 

Mr. DAVIS. Let me ask two follow-up questions, Mr. Secretary. 

Would you support the legislation that has been introduced in the 

Senate, as I understand it and that some of us will cosponsor in 

the House, that would lift the excise tax on the charitable foundations? 

Secretary SNOW. I have to study that. I am not up enough—I 

wouldn’t want to give an off the top of my head answer. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. DAVIS’ QUESTION REGARDING EXCISE TAXES ON

CHARITABLE FOUNDATIONS

The administration’s fiscal year 2003 and fiscal year 2004 budgets include a proposal to simplify the excise tax on private foundation investment income. The administration has not proposed repeal of the excise tax. Under current law, the excise 

tax rate is 2 percent, but the tax rate may be reduced to 1 percent if the foundation’s charitable distributions exceed its average level of charitable distributions 

over the five preceding years. The administration proposal is intended to provide 

simplification and some amount of tax relief for foundations by replacing the current 

two-tier rate structure with a single 1-percent tax rate. The current formula, in addition to imposing recordkeeping burdens, can discourage foundations from increasing charitable distributions in a particular year, because it would be more difficult 

for the foundation to qualify for the reduced rate in subsequent years.

Mr. DAVIS. One more question. Can you give me some explanation of why the President has by his own terms retreated from 

his $90 billion goal of 2 years ago as far as charitable tax breaks 

to a considerably less ambitious goal of $20 million? 

Secretary SNOW. This is an area that I am beyond my ken. I 

wasn’t here when the President made whatever the original proposals are and I am not really familiar with what the proposals are 

in this budget, but I will be happy to look into that. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. DAVIS’ QUESTION REGARDING THE PRESIDENT’S GOAL

ON CHARITABLE TAX BREAKS

The administration’s fiscal year 2004 budget proposals reflect legislative developments. The charity bills considered in the House and the Senate in the 107th Congress were both much more modest bills than earlier proposals. In addition, there 

were bi-partisan meetings between Congressional leaders and the White House last 

year that produced a consensus package. The current budget proposals reflect those 

considerations and would provide significant new support and incentive for taxpayers to increase their charitable contributions.

Mr. DAVIS. Thank you, Mr. Secretary. Thank you, Mr. Chairman. 

Chairman NUSSLE. Let me just take a little bit of time here because Mr. Ford brought this up and I have enormous respect for 

my good friend from Tennessee. Just to make it clear, I am not a 

fan of either static nor dynamic scoring. I am a big fan, though, of 

accurate scoring, and we haven’t had that under any model that I 

have seen as of now and that frustrates me and I know it frustrates the gentleman from Tennessee. So just to correct the record. 

Mr. FORD. I didn’t mean to cast any aspersions. I know I heard 

a lot of people talking about dynamic this and dynamic that yesterday and I thought I heard you saying you support dynamic scoring. 

60

Chairman NUSSLE. And that gets me to the second part. I am not 

sure what to call it, but—well, let me just ask the Secretary. Does 

the President in the budget that has been presented before Congress score his growth package in a dynamic scoring model or 

methodology? 

Secretary SNOW. The budget builds in some of the growth that 

would come as a result of the tax incentives in the plan, but it is 

not fully built in; that is, it doesn’t play through all the consequences of enhanced incentives for savings, investment and consumption, nor does it, to my knowledge, fully take into account the 

removal of the inefficiencies that are associated with the current 

Tax Code, in the area, for instance, of the dividends. So the way 

I look at it, it certainly scores all the costs of it, but probably 

doesn’t reflect all the benefits. 

Chairman NUSSLE. And I guess it is puzzling because I asked the 

same question of Mr. Daniels yesterday and he said no, it is not 

dynamically scored. In fact, the way I understood it was that if, in 

fact, OMB’s growth figures are less than CBO’s and Blue Chip and 

both Blue Chip and CBO assume nothing basically is changing, I 

don’t know how anyone could assume that that scores dynamically, 

or assumes any growth or assistance from the growth package that 

the President has put forward. And I guess that is what I am getting at. I am wondering why you don’t in the budget assume 

growth larger than status quo from this growth package. 

Secretary SNOW. I think it is—the decision to err on the side of 

conservatism basically lies at the base of that decision and build 

in conservative numbers rather than otherwise. That is the only 

explanation that I can see for it. 

Chairman NUSSLE. Let me ask you one other thing because the 

gentleman from Tennessee said this. He said obviously there was 

no changes or there was no growth, there was no economic benefit 

from the package—the growth package from 2001, the tax cuts 

from 2001. And unless I am missing something, that not only was 

not your testimony but I am not aware of any economist that suggests that this was a recession that is typical based on the dynamics that were out there at the time, that there is nobody with any 

kind of economic credentials that is suggesting that there was no 

impact in a positive way from the 2001 tax cuts that were passed. 

Now somebody may think it didn’t go far enough or it could have 

had more economic impact, but to suggest that there was no dynamic impact, just, I am surprised at because I am not familiar 

with any school of thought that suggests that there was absolutely 

no impact from the 2001 tax cuts. What is your belief on that? 

Secretary SNOW. Well, my belief is that the 2001 package was essential to avoid a deep recession and was the right medicine at the 

right time. And if it hadn’t been done, if Congress hadn’t stepped 

up to the plate with the 2001 tax package where I was sitting in 

the private sector, I was looking at the prospect of a very deep and 

serious recession. We ended up with—I think it is the shallowest 

and shortest recession since the Second World War. So I think it 

was the right medicine at the right time and the consequences 

were obvious. The Congress, by taking the steps you did, put us on 

a much faster recovery than would have been the case otherwise. 

61

That means lots of additional jobs and lots less misery for a lot of 

people. 

Mr. FORD. Mr. Chairman, I didn’t actually suggest that there has 

been no impact, if I can indulge for one moment. I was only making 

the point—two points. One, there is an estimated $278-billion less 

that—$278-billion less of an impact on the bottom line, and there 

was a lot of impact on what the package that was passed in 2001 

would accomplish. Now if I am hearing correctly, instead of losing 

by five touchdowns, we lost by three. Might have covered the 

spread, but we still lost. And the only point I was trying to make, 

I still want an answer from you, Mr. Chairman, and maybe you 

have answered it already, but from the Secretary, is there a belief 

in the White House about what Mr. Hubbard said, that the cost of 

this tax cut, that the economic surge could offset 40 percent of the 

plan’s cost? I think that is a pretty significant offset. 

Chairman NUSSLE. Did he say ‘‘could’’? What is the quote? 

Mr. FORD. ‘‘White House official says economic surge could offset——’’

Chairman NUSSLE. Could? 

Mr. FORD. Clearly——

Chairman NUSSLE. Not definite, not ‘‘I am betting my house on 

it,’’ but ‘‘could?’’ Why isn’t that fair to say that could be the case? 

Using your analogy, using the analogy of the gentleman walking 

through the grocery store buying food and that it has no impact at 

the end of the counter, doesn’t recognize, but it does have an impact because at the end of the day hopefully he has had dinner and 

hopefully his stomach is full. So there was an impact. 

Mr. FORD. Walking through the grocery store and hoping that 

things go on sale before you arrive at the counter is my point. I 

am only telling you what the man said. Now if you agree—I am 

asking the Secretary. If you agree with Mr. Hubbard in his characterization that it could be offset by 40 percent, there is no need to 

be defensive with me. You and I represent people we have to go 

home and explain this to. 

Chairman NUSSLE. Let me reclaim my time and answer your 

question. Yes, it could. 

Mr. FORD. Fair enough. 

Chairman NUSSLE. And let me continue to reclaim my time and 

suggest to you that I don’t believe that dynamic scoring which, A, 

nobody can yet define and, B, there aren’t any models that anyone 

that I am aware of is yet ready to roll out and suggest this is the 

be all and end all economic model. But to suggest what we currently suggest, that fiscal Government policy has no impact—no 

impact on today, tomorrow, the next year, 10 years from now—is 

living in an unbelievable vacuum that I don’t think is realistic either. But to be able to predict it, no, I think you are correct and 

that is why we share, whether it is bipartisan or whatever, is that 

we need better, more accurate scorekeeping and more accurate estimates as we look at today, tomorrow and the future. 

Mr. FORD. Do you think Mr. Hubbard, who holds a fairly significant position at the White House, him making this comment that 

it could cost $278-billion less, but could that influence some of you 

and our colleagues here in the Congress? Could it have us believe 

that this thing won’t cost as much and somehow or another——

62

Chairman NUSSLE. Why is it unfair for us to consider—let me 

just ask it back. Why is it unfair for us to consider whether this 

could affect us in a positive way when I have been hearing all day 

for the last 2 days how it could not from your side; that it may not; 

that it may be the worst medicine? If you could look at the positive, 

you can look at it from the negative. 

Mr. FORD. I am holding fast to the notion that could not. But I 

wanted to get Secretary Snow on record as saying that he believed 

that he could. 

Chairman NUSSLE. Reclaiming my time, that is why we have 

budgets. That is why we have plans. That is why we have parties. 

That is why we have votes. And that is why we need to have this 

discussion and we need to put our plans on the table. We hope to 

see a plan from your side. We have seen the plan from the President. We hope to see a plan from your side and then we will be 

able to make a decision. 

Mr. Spratt. 

Mr. SPRATT. Three quick points. If I could, Mr. Secretary, give 

you a handwritten request for some additional information. I just 

had no other method other than to hand write it out. We would like 

some backup data about the assumptions about the revenues that 

will be gained or realized from your new savings proposals and 

then the revenue losses that will ensue as these tax shelters build 

up and accumulate. I think your 5-year summary is that it will 

generate $14 billion in revenues over 10 years. We would like the 

assumptions you are making about who will transfer out of traditional vehicles into new vehicles. 

Second point, I could offer as a witness, but ask the former chief 

economist of OMB who is sitting right behind me, Joe Minarik, 

who has been in this budget process for 20-odd years, and he will 

tell you that OMB does consider the behavioral effects of various 

economic policies in putting their documents together. They don’t 

get into alchemy. They don’t get into magic elixirs and things like 

that. They take very basic views, which is what we want them to 

do. There is a passage from David Stockman about how the first 

cut on the 1981 tax cuts was treated, where the bottom line came 

out and he gave it to Mary Wheatenbaum and said what can we 

do about this, we can never sell that, and Mary Wheatenbaum says 

I can take care of it right here. That is where the assumptions will 

come from. Very gut judgments. We don’t want that, OMB, Treasury or CBO or anywhere else. We want very, very basic assumptions that have been demonstrable in the past from other fiscal 

policies. 

And finally, Mr. Chairman, as we spoke, the Treasury issued a 

bulletin indicating that the Government is about to run out of borrowing authority by February 20, according to the Treasury’s forecast. They will hit the ceiling and will have to engage in some stopgap practices in order to keep going. I doubt that we will get anything about that around here by February 20, but I am concerned 

that this is a sign of things to come. It may not be the last time 

we will have to raise the debt ceiling. 

Mr. FORD. I would still be curious. I know Mr. Nussle has answered, but I would be curious to know at some point after you 

have had an opportunity to review Mr. Hubbard’s estimation about 

63

what could happen, I would be curious to know your thoughts, if 

you share his belief that an economic surge could offset 40 percent 

of the $695 billion tax cut proposals. I know you said you hadn’t 

had a chance to look at it. I would appreciate if you would be able 

to respond to that. 

[The information referred to follows:]

MR. SNOW’S RESPONSE TO MR. FORD’S QUESTION REGARDING THE TAX CUT PROPOSAL

I believe the extra economic growth produced by the administration’s Economic 

Growth Package will offset a significant portion of the official budget estimate of its 

cost. A study released by the Business Roundtable shows the tax cut will offset onethird of the official cost estimate, with most of the offset generated by the dividend 

proposal. A simulation run by the Council of Economic Advisers suggests revenue 

from extra economic growth could offset about half of the official cost of the proposal 

during the 2003–07 period. 

The tax cut will reduce the cost of capital for corporate equity investments, leading to an increase in the stock of corporate capital. By reducing tax distortions, it 

will also enhance the efficiency with which capital is allocated. Other potential gains 

from the tax cut include those from lower debt ratios, more appropriate corporate 

payout ratios, higher labor supply, and greater investment by small businesses.

COMPARISON OF ECONOMIC ASSUMPTIONS 

[Calendar years] 

Projections Average 

2003 2004 2005 2006 2007 2008 2003–08

Real GDP (billions of 1996 dollars): 

CBO January ................................................... 9,673 10,018 10,358 10,697 11,037 11,380 ...............

Blue Chip Consensus January 2 ..................... 9,704 10,050 10,383 10,709 11,041 11,384 ...............

2004 Budget ................................................... 9,710 10,061 10,414 10,760 11,102 11,446 ...............

Real GDP (chain-weighted):1

CBO January ................................................... 2.5 3.6 3.4 3.3 3.2 3.1 3.2

Blue Chip Consensus January 2 ..................... 2.8 3.6 3.3 3.1 3.1 3.1 3.2

2004 Budget ................................................... 2.9 3.6 3.5 3.3 3.2 3.1 3.3

Chain-weighted GDP Price Index:1

CBO January ................................................... 1.6 1.7 2.0 2.1 2.1 2.2 2.0

Blue Chip Consensus January 2 ..................... 1.6 1.9 2.1 2.1 2.1 2.1 2.0

2004 Budget ................................................... 1.3 1.5 1.5 1.7 1.7 1.8 1.6

Consumer Price Index (all urban):1

CBO January ................................................... 2.1 2.2 2.5 2.5 2.5 2.5 2.4

Blue Chip Consensus January 2 ..................... 2.2 2.2 2.5 2.6 2.5 2.5 2.4

2004 Budget ................................................... 2.2 2.1 2.1 2.2 2.2 2.3 2.2

Unemployment rate:3

CBO January ................................................... 5.9 5.8 5.4 5.3 5.3 5.2 5.5

Blue Chip Consensus January 2 ..................... 5.9 5.5 5.1 5.1 5.1 5.1 5.3

2004 Budget ................................................... 5.7 5.5 5.2 5.1 5.1 5.1 5.3

Interest rates:3

91-day Treasury bills: 

CBO January ................................................... 1.4 3.5 4.8 4.9 4.9 4.9 4.1

Blue Chip Consensus January 2 ..................... 1.6 2.9 4.2 4.4 4.6 4.4 3.7

2004 Budget ................................................... 1.6 3.3 4.0 4.2 4.2 4.3 3.6

10-year Treasury notes: 

CBO January ................................................... 4.4 5.2 5.6 5.8 5.8 5.8 5.4

Blue Chip Consensus January 2 ..................... 4.4 5.2 5.6 5.8 5.7 5.7 5.4

2004 Budget ................................................... 4.2 5.0 5.3 5.4 5.5 5.6 5.2

Sources: Congressional Budget Office; Aspen Publishers, Inc., Blue Chip Economic Indicators.

1 Year over year percent change.

2 January 2003 Blue Chip Consensus forecast for 2003 and 2004; Blue Chip October 2002 long run for 2005–08. 

3 Annual averages, percent. 

Chairman NUSSLE. Mr. Davis. 

Mr. DAVIS. I don’t want to weigh into this debate, but I want to 

take advantage of your expertise to clarify something for myself 

64

here. When we talk about or when I have read a lot about these 

notions of dynamic scoring, for some reason it seems that the debate seeks to estimate the economic impact of fiscal policy, of tax 

cuts, things of that nature. Can you shed some light for me, Mr. 

Secretary, about why these theories of dynamic scoring don’t estimate the impact of, say, more spending on things such as education 

and health care, because it is my uninformed theory since I am not 

an economist, it is my theory that those things have some effect on 

the health of our economy as well, but it seems that people who 

engage the dynamic scoring issue don’t focus on the potential economic impact from those things? 

Secretary SNOW. I think, and I don’t pretend to be an authority 

on this subject, I agree with the chairman that what we ought to 

do is do accurate scoring. But accurate scoring ought to take into 

account the way people respond, and people do respond to tax incentives. 

Just a little story, I was in Beaufort, SC just last weekend and 

the historian was showing my wife and me and some friends 

around Beaufort. Beaufort is a unique city because it was occupied 

all during the war and the people left early in the Civil War and 

the antebellum homes are maintained. It was never destroyed. And 

on this tour, the historian pointed out the various houses and noted 

that a number of these houses didn’t have any doors and that was 

curious. We asked him why. He said it was the first tax shelter. 

He said Beaufort in those days taxed houses by the number of 

doors, so people put in windows. 

Mr. Chairman, just an illustration of the point, Tax Code is 

noted by people and they adjust their behaviors in accordance with 

it. 

Mr. DAVIS. I do want to make one point before I yield the floor, 

Mr. Secretary. I have no doubt that that is true at some level, but 

the point I will leave you with is this. As we look at the priorities 

facing our country that it seems to me if we make the adequate investments in health care, if we make the adequate investments in 

education, that too will have an impact on people’s behavior, because it will do one very fundamental thing. It will move people 

who have been at the margins of our economy into a more secure 

position, the middle class. It will ratchet up people’s economic 

power, and I will leave you with the observation that that is something we should take into account. 

Chairman NUSSLE. Mr. McCotter. 

Mr. MCCOTTER. Quickly, I agree with that, but I think that the 

best way for people to come off the margins is to make more money 

and keep it and make the decisions on how to invest that money 

in their own lives through their family budgets. And the good news 

for the good Representative from Memphis, I was at the grocery 

store last night, and I am living a bachelor’s life with my wife 500 

miles away and I decided that ice cream was two for five bucks. 

I have a sweet tooth, what can I say? I go up to the counter and 

it dawns on me it is two for $5 if you have a bonus card for the 

grocery store. I immediately altered my behavior given the economic conditions to save myself about $2.50, and I am now a member of that grocery store’s bonus club. So I think that economic decisions even down to the micro, micro——

65

Mr. FORD. You maybe ought to get Mr. Hubbard and Mr. Snow 

one of those bonus cards, too. 

Mr. MCCOTTER [continuing]. And everyone’s decisions are affected economically by the conditions in which they find themselves. The trouble we are having is not really an argument or a 

debate between you and Chairman Nussle. I think in many ways 

the reason we get economic forecasts that we find to be suspect or 

debatable is the same reason that every economic forecaster is not 

a very, very wealthy person. No one is right 100 percent of the 

time, and we have to make our best, most educated guess, whether 

it is dynamic, static or whatever, but primarily the needs of our 

constituents. 

Chairman NUSSLE. Mr. Secretary, we always save the best discussion for last and I think that you have seen a little bit of our 

interests here today on the Budget Committee, and we very much 

appreciate you spending the time that you have with us when you 

certainly could be getting settled at your office. So we wish you 

Godspeed in your new position. I would commend to you that estimations—certainly I think you have heard here today—are an important priority and you work for the President, not necessarily the 

Congress, but if we could put it on your ‘‘to do’’ list, that would 

greatly assist us and, secondly, just to give you encouragement as 

a fellow tax reformer, be bold, don’t shy away. Even though you 

may not see the light at the end of the tunnel just yet, there are 

many of us who are looking to you and others for leadership in this 

regard, so be bold with regard to tax reform. I think it is important 

at this juncture in our Nation’s history. 

I appreciate your time, and we look forward to the time we will 

spend together in the future. 

Secretary SNOW. Thank you very much. I look forward to being 

invited back. 

Chairman NUSSLE. With that, the hearing is adjourned. 

[Whereupon, at 1:50 p.m., the committee was adjourned.]

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