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39–937—PDF 2007

S. HRG. 110–313

PRESIDENT’S FISCAL YEAR 2008 BUDGET

(REVENUE PROPOSALS)

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 6, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

ADMINISTRATION WITNESS

Paulson, Hon. Henry M., Jr., Secretary, U.S. Department of the Treasury,

Washington, DC ................................................................................................... 5

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Grassley, Hon. Chuck:

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

Paulson, Hon. Henry M., Jr.:

Testimony .......................................................................................................... 5

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

Responses to questions from committee members ......................................... 45

(III)

(1)

PRESIDENT’S FISCAL YEAR 2008 BUDGET

(REVENUE PROPOSALS)

TUESDAY, FEBRUARY 6, 2007

U.S. SENATE, COMMITTEE ON FINANCE,

WASHINGTON, DC.

The hearing was convened, pursuant to notice, at 2:45 p.m., in

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

(chairman of the committee) presiding.

Present: Senators Conrad, Bingaman, Lincoln, Wyden, Schumer,

Stabenow, Cantwell, Salazar, Grassley, Lott, Snowe, Smith, and

Roberts.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

In his Poetics, Aristotle wrote, ‘‘Beauty depends on . . . symmetry.’’ What is true of poetry is also true of policy: attractiveness

depends on balance.

The budget before us today is badly off balance. The budget is

not on the level because it omits major costs. Beyond the current

year, the budget includes nothing to fix the Alternative Minimum

Tax. We know that fixing the Alternative Minimum Tax will cost

at least $60 billion next year, and will cost more than that every

year thereafter.

Already the AMT forces 5,000 Montana families to pay higher

taxes, but this number is slated to multiply many times over. We

obviously need to stop this stealth tax once and for all.

The budget shows an incoherent path for military spending apart

from Iraq. The budget asks for 10-percent growth for military

spending for the upcoming year, but then the budget proposes average growth of just 2.25 percent for each of the 4 years thereafter.

That amounts to a shaky assumption.

The budget omits most of the cost of the wars in Iraq and Afghanistan in 2009, and the budget omits all those costs in 2010 and

2012.

And the budget is literally unbalanced. The budget claims to reach a surplus of $61 billion 5 years from now, but if all of those

omitted costs are included the budget will not be balanced 5 years

from now.

The administration’s proposals actually worsen the deficit in

every year. Compared to doing nothing at all, the budget increases

total deficits from 2007 to 2012 by more than $1 trillion. The budgVerDate 11-MAY-2000 15:00 Mar 18, 2008 Jkt 095484 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 39937.000 SFIN1 PsN: SFIN1
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et makes, at best, a shaky attempt to collect the taxes that people

owe, but do not pay. According to IRS, this tax gap is $345 billion a year, and the proposals that I see so far, which I have pressed the Secretary and

IRS Commissioner Everson to come up with, are very shaky, very

paltry. I want Congress to do its part by passing legislation where

needed. The Congress needs to appropriate sufficient funds for the

IRS to do its job.

Secretary Paulson has committed that he will come before this

committee soon for a hearing devoted entirely to the President’s

plan to reduce that gap. The administration has tried, but the

budget does not make a significant dent in it. The administration,

I think, needs to do much better.

The budget makes an unequal effort to address long-term deficits. The administration appears to blame long-term deficits on

spending in just three programs: Social Security, Medicare, and

Medicaid. The administration seems to imply that we need to significantly cut benefits in these programs.

But the budget has the wrong diagnosis, and so proposes the

wrong cure. The primary cause for long-term deficits is rising costs

throughout our health care system, and the budget is uneven in its

effort to address those costs.

Our new CBO Director, Peter Orszag, made that point quite well

when he recently said, ‘‘It’s a mistake to look at containing health

care costs just within the Federal programs themselves, Medicare

and Medicaid. The underlying driver of the cost of those programs

is the underlying rate of cost growth in the health sector as a

whole, and tackling that problem is perhaps the fundamental fiscal

challenge, and an important economic challenge facing the Nation.’’

Nearly 1 in 5 Montanans is struggling to get by without health

insurance. Health care premiums have nearly doubled since the

year 2000. We must do better to control health care costs.

And the administration’s reasoning ability must be unbalanced,

insofar as Social Security is concerned. The budget proposes the administration’s failed privatization boondoggle one more time. Americans said no to privatizing Social Security, and I think that will

stand.

I want to work together with the White House on positive ideas

that will help Social Security without raising taxes and without

cutting benefits. That should be our beginning.

There are things we can do to rescue Social Security without cutting benefits and without raising taxes. But if the administration

once again tries to privatize Social Security, I will fight it again

and we will win again.

The budget makes an unstable commitment to maintain America’s economic leadership. The budget needs to do more to make

sure that all American families have a chance at the American

dream. We must support education—support it—and encourage

businesses to innovate—encourage them. Those are the keys to creating a cutting-edge workforce and new jobs here in America.

We need to expand quality education for students of all ages. We

need to give teachers the moral and financial support they deserve.

We should boost research with incentives as innovative as the

ideas that we wish to support.

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Then we should promote the export of innovative American products into foreign markets under trade rules that are fair and firm.

We should work to increase savings for families, increase savings

in the government. We should leave our grandchildren a financial

boost, not a burden. We should work toward energy independence

with the fuels that we know today, and we should work to develop

those fuels yet undiscovered. We should reform our tax code to reflect our economic strengths and our priorities.

So, let us restore balance to the Nation’s fiscal policy. Let us

straightforwardly report the true costs that lie before us. Let us

steadily collect the taxes that people owe but do not pay. Let us

equitably address rising health care costs, and let us lay a solid,

level foundation on which to build a stronger America.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you very much for holding this, what

I think has become kind of a traditional budget hearing that we

have with various members of the Cabinet. We welcome you, Mr.

Secretary.

Before I give a few remarks, there are a couple of things that I

would like to compliment you about, personally, unrelated to policy.

One of those is, I think we are seeing that it is beneficial to the

country to have a person like you who is willing to take a slight

pay cut and come back into public service.

Second, I have followed a lot of things you have said in the newspaper and other media. I think it is very beneficial to have somebody with a bottom-line approach like yours and with key financial

market experience, very much an asset, not only with what goes on

here in the United States, but in the international arena as well.

Today we focus, of course, on the revenue side of the budget. It

is almost entirely in this committee’s jurisdiction. The President’s

budget acknowledges that the bipartisan tax relief has not gutted

the tax base. In fact, we have been, and are projected to continue

for the mid-term, on the revenue glide path, above the historic average of revenue to Gross Domestic Product.

And if I could remind people that we have had a policy that, regardless of what the marginal tax rates are over the last 40 to 50

years, somewhere between 18 and 19 percent of Gross Domestic

Product ought to be run through the Federal Treasury as Federal

taxation.

I think we continue down that road for two basic reasons. One,

it is a level of taxation that there is not a revolt by the American

people against, and accepted by people. Second, just think how the

economy has done so well over that period of time: more money left

in the pockets of people will do more economic good than if 535

members of Congress spend it. So, we have continued that policy.

The President, right now, is in that historic level of taxation.

Now some on the other side would argue that better-than-historic

average taxation is not enough to fund the government. But that

is, in fact, a different debate. That is a debate about higher taxation as a deficit-reduction matter. It is a fair debate to have, but

we ought to be intellectually honest about it.

4

What is clear today is that the bipartisan tax relief, with the Alternative Minimum Tax accounted for, has a track record of maintaining the Federal revenue base. That is good news for Democrats,

and Republicans ought to celebrate.

Democrats from the bluest of the so-called blue States ought to

be most appreciative, because it is families in those high-income,

high-cost, and high-tax areas that have benefitted greatly from the

bipartisan tax relief plans.

I am referring to the marginal tax rate, the marriage tax relief,

increased child tax credit, retirement savings incentive, education

tax relief, death tax relief, and, yes, Alternative Minimum Tax relief.

It always amazes me then how members from these high-tax

States complain the loudest about the common-sense tax relief that

eases the burden of taxation felt most heavily in those very States.

I can assure you that we will hear hostility to tax relief from those

bluest of blue State members.

I raise this point because the main reason for the partisan opposition to these bipartisan plans has been based on concerns about

the effect of tax relief on the Federal revenue base.

So today I would ask my friends, anybody who wants to call

themselves liberals in this body, Republican or Democrat, to take

a ‘‘chill pill’’ and accept the good news of the track record.

Now, of course we do have fiscal crises coming. The baby boom

generation will be retiring in big numbers in the next decade. That

is an entitlement problem. It is not derived from the current or future State of the Federal revenue base.

The revenue base is fine unless the predilection of a particular

member is to solve the entitlement program with record levels of

Federal taxation. That is a separate debate, but we ought to be

transparent about it.

The President’s budget continues this good news and keeps the

burden of taxation in check. In addition, the President’s budget

contains a comprehensive set of initiatives on the tax gap, which

is very much an interest of people on this committee, and the Congress generally.

The President’s budget also lays bare the defects in the tax treatment of health insurance, which has something to do about not

only the cost of health care to the taxpayers of this country through

Medicare and Medicaid, but the cost of health care generally, as my

Chairman has pointed out. I would not disagree with him on what

he said on that point.

Mr. Secretary, this committee has a long history of bipartisanship, civility, and problem-solving. I want to pledge to continue to

work with you on the big problems the budget may tackle.

I will certainly let you know my views in clear terms, but I also

give you alternatives and revisions if there is disagreement. I hope

that everyone here, Republican and Democrat, can agree with me

on that point.

As I take a look at the President’s budget, I would like to challenge every member of the bipartisan committee to take a bipartisan, constructive approach. I will use a couple of examples. One,

if members have reservations about the proposals on tax treatment

of health insurance, then let me hear an alternative.

5

Or another example. If the tax gap proposals on information reporting are not comprehensive enough, the critics ought to propose

a more comprehensive result.

This would be a fair way to engage this budget discussion, to be

constructive, if you in turn propose an alternative or a modification. We have that responsibility.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Grassley, very, very much.

Secretary Paulson, we are honored to have you here. Thank you

very much. I know you are pretty busy. I am sure you have to go

to a lot of committees, and I know it takes time sometimes from

your work, your job. But thank you very much for coming before

us. We would very much like to hear your statement on the President’s budget.

STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY,

U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Secretary PAULSON. Thank you. Again, thank you very much,

Mr. Chairman.

Let me, first of all, thank you and Senator Grassley. I will give

you a brief opening statement and then I hope, during the course

of the discussion, we will have an opportunity to answer some of

the questions that you raised.

First of all, I am very pleased to be here today to provide an

overview of the President’s budget for fiscal year 2008. As the Secretary of the Treasury, my top priority is keeping America’s economy strong for our workers, our families, and our businesses, and

the President’s budget supports that goal.

Let me also apologize a little bit for my voice. I have a cold and

I testified this morning, also.

But anyway, we start from a position of strength.

The CHAIRMAN. Actually, warm water is better than cold water.

Secretary PAULSON. All right.

The CHAIRMAN. Could we get you some water?

Secretary PAULSON. I have some water.

The CHAIRMAN. Do you want some hot water? We will give you

some here.

Secretary PAULSON. I have some water, and I am fine.

The CHAIRMAN. All right.

Secretary PAULSON. We start from a position of strength. Our

economy appears to be transitioning from a period of above-trend

growth to a more sustainable level of about 3-percent growth.

More than 7.4 million jobs have been created since August of

2003. Our unemployment rate is low at 4.6 percent, and over the

last 12 months real wages have increased 1.7 percent. Economic

growth is finding its way into workers’ paychecks as a result of

lower inflation. That means family budgets are going further.

Strong economic growth also benefits the government’s fiscal position. In the first quarter of fiscal year 2007, budget receipts totaled $574 billion, an increase of 8 percent over the same period

in fiscal year 2006. As a result of increased revenues over the last

2 years, we have brought the Federal budget deficit down to 1.8

percent of GDP.

6

The President has submitted a budget that reflects our strong

economy and our Nation’s priorities: continued job creation and

wage growth, vigorous prosecution of the war on terror, increased

access to affordable health insurance, improved energy security,

and a strong fiscal position from which we can address our longterm challenges such as strengthening Social Security and Medicare for future generations.

The budget supports a strong economy by maintaining fiscal discipline. It maintains our current tax policy, which has helped our

economy rebound from recession to its current robust health. With

a steadily growing economy, tax revenues, combined with fiscal discipline, should bring the Federal budget into balance in 5 years.

In fact, we are submitting a budget that includes a surplus in

2012, which is achievable if we keep our economy growing. While

no one has a crystal ball, our economic assumptions are close to the

consensus of professional forecasters.

The President’s budget addresses important domestic priorities.

Health care is high on the list. Under current law, the tax subsidy

for health insurance purchased through employers will average

more than $300 billion a year over the next 10 years. For that huge

expenditure, we get a system in which rising costs are a burden to

families and business and in which millions of people have no insurance at all.

The President’s proposal would make health care more affordable

and more accessible. It would give all taxpayers who buy health insurance, whether on their own or through their employer, and no

matter what the cost of the plan, the same standard deduction for

health insurance: $15,000 for a family or $7,500 for an individual.

The President’s proposal would help hold down health care costs

by removing the current tax bias that encourages over-spending.

Costs would become clear, giving patients more power to make informed choices about their health care spending.

The proposal would also jump-start the individual insurance

market so consumers have more choices than are available today.

Health care would become more consumer-driven, more affordable,

and more accessible for millions of Americans.

Energy security is another concern of the American people, and

it is a priority addressed in the President’s budget. President Bush

has put forth an ambitious goal of reducing America’s projected

gasoline consumption by 20 percent over the next 10 years. We can

achieve this goal by dramatically increasing the supply and use of

alternative fuels and improving fuel efficiency by reforming and increasing the CAFE standard.

The expanded fuel standard will provide entrepreneurs and investors a guaranteed demand for alternative fuels, which will accelerate private investment and technological development.

Reforming CAFE will allow us to increase the fuel economy of

our automobiles as fast as technology allows. With a more diverse

supply and better fuel efficiency, we can make our economy less

vulnerable to supply disruptions and confront climate change

through technologies that reduce carbon dioxide emissions.

Finally, the President’s budget, by emphasizing fiscal discipline

and economic growth, lays the right foundation for dealing with enVerDate 11-MAY-2000 15:00 Mar 18, 2008 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 39937.000 SFIN1 PsN: SFIN1
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titlement reform—a challenge we all have a responsibility to address.

Strengthening Social Security and Medicare is the most important step we can take to ensure the retirement security of our children and grandchildren, the long-term stability of the Federal

budget, and the continued growth of the American economy.

I look forward to sitting down with Democrats and Republicans

without preconditions and finding common ground on these critical

issues.

Mr. Chairman, the President’s budget priorities—a strong economy, national security, fiscal discipline, health care, energy innovation, and laying the groundwork for entitlement reform—are the

right priorities for America and for the workers, businesses, and investors who drive our economy.

I am confident that working together we will keep our economy

strong and chart a course for maintaining our global economic leadership in the years ahead.

Thank you for the opportunity to discuss this today. I now welcome your questions. Thank you.

[The prepared statement of Secretary Paulson appears in the appendix.]

The CHAIRMAN. Well, thank you, Mr. Secretary.

Clearly, we need to—and I am trying to avoid this overworked

phrase—work together. I think nothing of consequence ever occurs

without cooperation, without all of us working together.

After all, we are a democracy and everyone has a stake in the

outcome. We have two ends of Pennsylvania Avenue. The rules of

the Senate and House, although a bit different, still try to provide

for some kind of resolution.

And to achieve the kind of budget we want to reduce the deficits,

it is very helpful if a budget that is proposed to us is very much

in good faith. I think many parts of this budget are helpful, but a

few parts jump out at me and make it difficult for us to negotiate

in good faith with the same starting place, that is, with facts we

all agree on.

And two that come to mind are AMT and war costs, Iraq costs.

The budget includes only 1 year of AMT. I do not think there is

anybody in this room who thinks this Congress and this administration are going to agree in only 1 year over the next 5 years, the

next 10 years. There is not anybody in this room—I might dare

say, presumptuously, yourself. I think you know that we are going

to have to address AMT for a period longer than 1 year.

As you also know better than the rest of us, because after all you

are the Treasury Secretary, that it is very expensive. It is $60, $70

billion a year in the out years, fixing the AMT. That is pretty expensive. Those numbers add up. Yet, they are not in the budget.

The budget does not address subsequent years, other than the first

year.

If we are going to work together to find solutions here, it seems

to me that the budget should reflect reality. That is not in the

budget.

Another is the war cost and the Iraq costs. The budget says, the

administration’s budget, that it will increase defense spending, I

think, 10 percent in the next year or two, and then at 2.25 percent

8

increase in defense spending in the next years after the next couple. I do not think anybody here thinks that is realistic. We are

going to spend more. After all, that is the fate that has been assigned to us as the United States of America.

Then take the Iraq costs. The administration includes no Iraq

war costs, as I see it, near as, I think, 2009, 2010, 2011, 2012.

Maybe a little bit in 2009, I have forgotten. But virtually none. I

know a lot of us want to get out of Iraq and Afghanistan, but I

think the truth of the matter is, we are probably going to have to

spend something in those years.

So let us assume those are added back in a reasonable way. If

that is the case, it seems to me that we have a budget that is not

in balance. That is not good. But the main thing is, we need to

know what the facts are here so we all know what we are dealing

with here so we can work together.

So, I would just like your reactions to that. That is, AMT, defense, as well as Iraq not being included in this budget.

Secretary PAULSON. Right. Well, let me deal with them one at a

time. I started off saying this is a very credible, very transparent

budget.

Let us start with AMT. I think we are all in agreement here. I

have not heard anybody say that we think the Alternative Minimum Tax should go into effect without extending the current

patch. It is a cruel and unintended tax on the middle class. As a

matter of fact, I think it will be a surprise tax on some of them

if we let it go into effect, which we will not.

Now, what we have done in the budget is put forward an additional year of AMT tax relief, which is the so-called 1-year patch.

I have not been here for the last 6 years, but I understand that

is what Congress has generally done every year for the last 6

years.

What we are saying in this budget, and what we are essentially

saying to all of you, is this is a major issue. It is not an easy problem. It is a tough issue. We have put forward a 1-year patch, and

it is very transparent. Then this will give us time to work together

to come up with a permanent solution.

The CHAIRMAN. I understand. Everybody has numbers and estimates, but one figure I saw was between three-quarters of a trillion

and $1 trillion for a 10-year period to ‘‘fix’’ AMT, depending upon

whether the tax cuts are extended or not. It is very expensive. Not

to include that, or at least a nod to that, I think, is not helpful.

Secretary PAULSON. I am acknowledging that it is a tough issue,

that it is expensive, and it is something that we want to work on

with all of you.

The CHAIRMAN. All right.

Secretary PAULSON. It is something for which Congress, every

year for the last number of years, has proposed the so-called 1-year

patch.

The CHAIRMAN. Right.

Secretary PAULSON. We have put forward an additional 1-year

patch. With it, we have more than a year or two to work on this.

Now, in terms of Iraq, again, if people say to me the costs of the

war in Iraq are uncertain looking ahead, I agree with you. But

what we have is a supplemental of $170 billion this year. There is

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$145 billion next year, laid out transparently. In 2009, there is $50

billion, which is a placeholder because it is so uncertain.

We need to keep this economy growing and keep the revenues

coming in. Again, we are forecasting that our revenues are going

to grow at 5.4 percent a year over the budget window. The last

quarter, they grew at 8 percent. Last year, they grew at 11.8 percent.

So, again, if you are saying to me it is a challenge to deal with

AMT and some of these other costs——

The CHAIRMAN. Right.

Secretary PAULSON [continuing]. I agree with you. But to say it

is not transparent or it is not credible, I would take exception.

The CHAIRMAN. I appreciate that. My time has expired. I am encroaching on my colleagues’ time here.

Senator Grassley?

Senator GRASSLEY. Thank you, Mr. Chairman.

Mr. Secretary, I am not going to go through this history that I

gave you, about 40 or 50 years’ history of where the policy of taxation has been between 18 and 19 percent of Gross Domestic Product, but it did get up to 21 percent before we reduced taxes. Individual income taxes got to a high of 10.3 percent of Gross Domestic

Product. We brought revenues down to about 16 percent of GDP.

Two years ago they were at 17 percent, today they are about 18.2

or 18.4, and I think the 40-year average is about 18.2.

So I bring this up because a lot of people around here think that

increasing taxes is the only way of getting the deficit down. The allegation is that somehow the bipartisan tax relief bills that we

passed in 2001, and to some extent 2003, gutted the Federal revenue base.

So, a simple question. Really, one question, but let me say it in

three questions: whether or not you agree with the critics; is the

only path to fiscal discipline to maintain record levels of Federal

taxation as a percentage of the economy; is it safe to say, as these

critics do, that there is no down side to future economic growth if

we return to record levels of Federal taxation?

Secretary PAULSON. Thank you very much, Senator Grassley. I

agree with your proposition. If you look back over a 40- or 50-year

period of time, taxes as a percentage of GDP have been in the area

of 18 percent.

Since the President’s proposals brought taxes down in terms of

the rate of taxes, we have seen revenues coming in at a record

level, and it is now at 18.4 percent of GDP. We have also seen big

declines in the fiscal deficit.

I think the reason people are raising questions about the deficit

right now really has to do not with the fiscal deficit immediately,

but looking to the longer term and the need for entitlement reform.

So, to that extent I concur with people saying it would be great

to come to the table and deal with these longer-term entitlement

issues, but I do not concur with people who say that what this

economy needs is a tax increase, because it does not.

This economy is doing very, very well, and all of us should hope

that we keep this expansion growing and growing. I think one of

the real keys to our budget forecast really is that we keep the economy growing. Fiscal discipline, but a growing economy.

10

Senator GRASSLEY. Thank you.

Let me ask a question on the issue that the Chairman brought

up about AMT. There are all sorts of statistics I could give you, but

if we do not do something this year, and the administration is

doing it, 23 million people would be hit by it. That something may

be temporary, as the administration has proposed. But that all

aside, I want to bring up the issue that many people feel that the

only way to deal with the AMT is to insist that you cannot reform

AMT unless we offset the revenue loss from this unintended tax

with a tax increase on other taxpayers.

So, for example, their basic position is that the harm of those 23

million people is secondary to retaining the Federal revenue from

this unintended, broadly applicable tax. The President’s budget,

like the Congressional budgets advocated by those on the other

side, also count the vast amount of revenue from this unintended

tax over the long term.

My question: is it fair to condition AMT reform on the substitution of revenue when we never intended the AMT to generate the

projected revenue in the baseline from these very people who are

going to be paying it who were never intended to pay it, and we

think we can collect it? It seems idiotic to me. Why should AMT

reform be secondary to the maintaining of the unintended stream

of revenue?

Secretary PAULSON. Senator, AMT reform is very important. It

should not be secondary. You are absolutely right. If we did not

patch AMT this year, we would have an additional 21 million taxpayers hit by AMT, and that number will rise over time.

So, clearly, we need to reform the AMT. I also agree with you

that this economy does not need a tax increase right now. It just

is unnecessary, and it would be unhelpful.

The CHAIRMAN. Thank you very much, Senator.

Senator Conrad?

Senator CONRAD. Thank you, Mr. Chairman.

Thank you, Mr. Secretary. We have enjoyed our conversations

that we have had. I think you are very sincere about wanting to

tackle these long-term fiscal imbalances.

But I think we have to be brutally frank with each other, with

the American people, and with our colleagues on the question of

revenue and spending and the relationship with growth of deficits

and debt.

Everybody is entitled to their opinion, but they are not entitled

to their own facts. The revenue base of the country is really very

clear. We had a revenue base in this country in 2000 of just over

$2 trillion. It took us 6 years to get back to that revenue base.

So I know people want to just talk about the revenue growth of

the last couple of years. They do not want to talk about the steep

revenue decline that occurred before the last 2 years.

The combination of cutting the revenue base and increasing

spending—and let us go to that chart that talks about spending,

because our colleagues have been in charge of the spending of the

country the last 6 years, and the spending has gone up, up and

away.

Spending is up 40 percent. Revenue is down. Spending was up.

What is the result? Let us go to the debt chart that shows the reVerDate 11-MAY-2000 15:00 Mar 18, 2008 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 39937.000 SFIN1 PsN: SFIN1
11

sult: revenue down, spending up. Guess what happened? The debt

exploded.

Now, we can sit around here and say, well, tax cuts pay for

themselves. But it did not prove to be the case. It did not prove

to be the case in the real world. The Treasury’s own analysis

showed that tax cuts do not pay for themselves.

I would go further and ask the Secretary, do you not have built

into this budget a large tax increase? Is there not a large tax increase built into this budget? I would be very specific. If you only

have an AMT fix for 1 year, the estimated AMT revenue for the

following 4 years is over $320 billion. Is that not the case?

I would ask the Secretary, is the revenue that you anticipate

from the increased AMT revenues over the 4 years where there is

not a fix in this budget for the AMT, do you not anticipate $320

billion?

Secretary PAULSON. Senator, I thought I was pretty clear in my

last statement in saying that what we have done is propose an

AMT patch for 2008. I have said that this is a tax, if it goes into

effect without the patch, which would be unacceptable to the President, unacceptable to me and this administration. I think it is unacceptable to you and others. I said this is a tough issue.

Senator CONRAD. Well, Mr. Secretary, the only way this budget

balances, is you have a $320-billion tax increase built into these

budget assumptions.

Secretary PAULSON. What we have done right here with the

AMT, what we have done with this budget, is the same thing, as

far as I can see, that Congress has done about it every year for the

last 6 years.

Senator CONRAD. Well, that is why the debt has exploded.

Secretary PAULSON. If we get back to the debt and the deficit

again—I heard your question, or I guess it was a comment. I started off by saying I really respect the fact that you are a deficit hawk

and that you care so much about fiscal discipline. I would say,

when I saw your first chart on the revenues, that I was on Wall

Street when the stock market bubble burst.

I looked at the economy in 2000, and it was a little bit like an

Alice in Wonderland economy. The stock market bubble burst. We

went into a recession. We were hit with September 11. We had the

corporate scandals. The tax rates were cut, and cut significantly,

and I think that played a big role in getting us back where we are

right now.

I have never argued that tax cuts, in terms of a fiscal deficit, pay

for themselves entirely, but I am very encouraged, and I think everybody should be encouraged.

Senator CONRAD. Can I just ask on that question, according to

Treasury’s analysis, how much of a tax cut is paid for?

Secretary PAULSON. It would depend. Let me tell you, this is not

an exact science. It would depend on which tax.

Senator CONRAD. Is the rough conclusion of Treasury not that

roughly 10 percent of a tax reduction is offset by the economic

growth that is developed by that?

Secretary PAULSON. I would not come to that conclusion.

12

Senator CONRAD. Well, is that not Treasury’s own analysis? Have

you not done an analysis down at Treasury that reaches that very

conclusion?

Secretary PAULSON. I would say Treasury has done an analysis

on a variety of things, on different taxes, looking at dynamic effects. But the point I was trying to make, Senator, is that the tax

cuts have been fundamental to where we are today.

When you looked at the total debt—and again, I look at the public debt outstanding very, very closely. I saw that it averaged 46

percent of GDP in the 1990s, and right now we are in the area of

37 percent, with the projection going down as a percentage of GDP

over the next couple of years.

Senator CONRAD. Sir? Sir, honestly. Be honest with people, now.

Secretary PAULSON. I am talking about public debt.

Senator CONRAD. The gross debt. What I put up here is the gross

debt of the United States.

Secretary PAULSON. Oh, gross debt.

Senator CONRAD. The gross debt of the United States, if you put

back the things that you have left out, is approaching 70 percent,

and headed nowhere but up. I am sorry we cannot continue. My

time has expired.

Secretary PAULSON. Excuse me, because I stand corrected. I was

looking at the public debt outstanding. With the gross debt, of

course, 44 percent of the debt is in the Medicare and Social Security trust funds.

Again, there you and I are on the same page. I think what we

really need to do is come to the table and deal with the real problem, which is the longer-term issue we have staring us in the face

with entitlements.

The CHAIRMAN. All right. Thank you very much, Senator.

Senator Bingaman?

Senator BINGAMAN. Thank you very much, Mr. Secretary, for

being here.

Let me ask you, on the energy security issue, we have on the

books today several tax credits that are intended to move us away

from our addiction to oil and traditional fuels to the use of new alternative energy sources, alternative fuels. Many of those are

scheduled to expire at the end of 2008.

We have written to you and to the President, I believe several

of us have, urging that those be extended for at least 5 years, probably longer, because without that there is not the confidence. You

know better than I do that the investment community needs to

know that those tax credits are there or else they are not going to

invest in projects. That is not in the administration’s budget to extend those tax credits. They are all scheduled to expire at the end

of next year.

Do you favor extending those tax credits for at least 5 years so

that we can give people some confidence that they are going to be

there? The production tax credit on wind energy and solar energy,

in particular.

Secretary PAULSON. I know what you are referring to, Senator.

Let me say to begin with, I really appreciate your leadership on

this issue because you and the President are in the same place in

terms of the need for alternative fuels.

13

Now, with regard to those tax credits, we extended them last

year. We are very pleased to talk with you about this some more.

What we were getting at with the President’s energy proposal was

to lay out something that was bold in terms of a proposal that

would greatly increase the demand when you are looking at all of

the renewables and alternative sources of fuel to replace $35 billion

of gasoline over the next 10 years. We thought that would have a

very big impact on the demand and do much of the same things

we are looking to do with the tax credits. But I understand your

point on the tax credit, and we will be talking to you about it.

Senator BINGAMAN. From my perspective, at least, they sort of

address different parts of the problem. What the President said is,

renewable fuels need to be expanded dramatically.

Secretary PAULSON. Right.

Senator BINGAMAN. And let us set higher targets for that. He has

also said we need more efficient CAFE standards.

But as far as renewable energy production: wind power, solar

power, geothermal, those types of things——

Secretary PAULSON. We should look at those together.

Senator BINGAMAN. Yes. Those are all scheduled to expire the

end of next year. I think it is crazy to just keep running right up

to the deadline and then extending them for another year or 18

months like we did last year.

Secretary PAULSON. I have your point. We extended them last

year. I look forward to talking to you about it.

Senator BINGAMAN. Let me ask, just to be sure I am understanding it, part of the revenue you are counting on in this budget

is $3.5 billion into the Treasury in the first 5 years after you open

ANWR for leasing. Is that right?

Secretary PAULSON. Three and a half billion.

Senator BINGAMAN. In bonus bids or something once ANWR is

leased.

Secretary PAULSON. I worked with Rob Portman on the budget

very broadly, but in terms of that portion of it, you will have to ask

Secretary Bodman or Rob when he is testifying here.

Senator BINGAMAN. All right. Well, I would just suggest that that

is not a realistic revenue stream, given the changes in Congress.

This is not directly on the budget, but I wanted to take the opportunity to ask you about it since you are the key player in the

administration on this issue. You talked about the importance of

fiscal discipline, plus a growing economy.

Part of our challenge in having a growing economy is the current

account deficit. As I understand it, as I see it, the current account

deficit, as it is currently growing, is unsustainable.

The portion of the current account deficit attributable to our

trade with China is the fastest-growing part of the current account

deficit. I just wondered what you could tell us, if anything, about

prospects for dealing with this current account deficit. Or is it your

view that it is not one of the threats to our growing economy?

Secretary PAULSON. Well, let me tell you, Senator, this is something near and dear to my heart. It is something I am very focused

on. I would say the good news with the current account deficit and

with the deficit with China—and I will give you the good news

14

first—is that we have hit what looks like a cross-over point. In the

last 4 quarters, our exports were greater than our imports.

With regard to China, in the last quarter our exports increased.

Last year, our exports increased 33 percent, our imports were 19

percent. So when you looked at the most recent GDP numbers, we

had 1 percent over GDP growth that was attributable to the fact

that our exports were growing. I see a very, very important part

of my job as fighting to open up markets, advocating opening up

markets, for U.S. products and services overseas.

Now, with regard to China, that is a big part of it. Yes, I believe

we can make progress, and substantial progress, over time with

China. I see Senator Schumer looking carefully at me, and he and

I have talked about this a lot.

But the currency flexibility in the short-term is something we are

pushing on, getting to a fully market-determined currency in the

intermediate term. But then the real way we are going to make the

most progress here is going to have to deal with structural changes

and real structural reforms in China, because they are saving at

50 percent and they do not have balanced growth in their economy.

There is not consumption-led growth. Meanwhile, we have a low

savings rate, and in our economy we are growing.

So, a lot of what we are working on with the Strategic Economic

Dialogue with China are reforms that are going to take longer to

put in place, but we need to make progress, which will, in turn,

open up their economy to a greater extent for U.S. products and

services.

The CHAIRMAN. Thank you very much, Senator.

Senator BINGAMAN. My time is up. Thank you.

The CHAIRMAN. Thank you.

Senator Wyden? He is not here. Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

Thank you, Mr. Secretary. In general, as I look at this budget,

I think its priorities are not in sync with the American people. So

much goes to the war in Iraq and tax cuts for the very wealthy,

that there is almost nothing left for the meat-and-potato issues like

health care and education and transportation. But I do not want

to have a debate on priorities of that broad nature.

Let us talk, even, about priorities within the tax cuts. I have to

say that I am saddened by those priorities as a New York Senator,

as an American, although as DSCC chair you are making my job

a whole lot easier.

Let me say why. There are $2 trillion in new tax cuts in the

budget. Yet, one of the most popular, one of the most important,

one of the most effective tax cuts for the middle class, which is tuition deductibility for people making up to $150,000 a year, is eliminated in this budget.

How can the administration find room for $2 trillion in new tax

cuts and not find $2 billion a year to pay to make it easier for middle-class families to send their kids to college? We are not talking

about tax cuts versus spending. We are right within the realm of

tax cuts. I think it shows how misplaced the priorities of this administration are. They are so eager to help people at the very high

end of the spectrum, that even when it is a tax cut, they ignore

the middle class.

15

Just one example. There is $800 billion to reduce that top rate,

to continue to reduce the top rate from 39 to 35. Do you not think,

Mr. Secretary, it would be in sync with the country’s priorities,

with the country’s needs, to make that a tiny little bit less and help

middle-class people deduct the costs of tuition for college?

Explain to me the reasoning that went behind the elimination of

the college tuition tax deduction, while at the same time keeping

just about all of the tax cuts on the wealthiest people who can afford college easily on their own?

Secretary PAULSON. Well, I would say, in terms of the tax cuts

and their effect overall, Senator Schumer, I think when the American people look at what has been accomplished through the tax

cuts at the low end and look at the fact that there are now 5 million people in America——

Senator SCHUMER. Mr. Secretary, I am sorry to interrupt, but we

only have 5 minutes. I am not asking about tax cuts in general. I

am asking the priorities. Why did the administration eliminate it?

I have pride of authorship here. I wrote this provision with Senator

Snowe.

Secretary PAULSON. All right.

Senator SCHUMER. So it was bipartisan. Why did the administration propose to eliminate the college tuition tax deduction? Do you

think it does not work? Do you think middle-class families do not

need the help?

Secretary PAULSON. On that one, you would have to talk with

Secretary Spellings. I know how important the education programs

are to her and to the President. I think there is a record that they

can all be proud of.

Senator SCHUMER. Just off the top of your head, does it make

any sense?

Secretary PAULSON. In terms of that, I do not think the Treasury

Secretary should go off the top of his head.

Senator SCHUMER. You have a pretty good head. I have known

it for years.

Secretary PAULSON. It does not have a lot of hair on it right now.

[Laughter.]

Senator SCHUMER. No. It does not have a lot on it for people paying for college.

Secretary PAULSON. I take your point.

Senator ROBERTS. Can we not make these comments about hair?

Secretary PAULSON. I am sure the Secretary will call you right

away.

Senator ROBERTS. Mr. Chairman, parliamentary inquiry. Can we

agree that the follicly challenged caucus can be respected here?

[Laughter.] I am a new member so I would like to——

The CHAIRMAN. I think that is right, because it is growing in

number. [Laughter.]

Secretary PAULSON. I see a number of perfect heads.

The CHAIRMAN. Yes.

Senator SCHUMER. All right. Next question. Tax gap. Now, the

President’s budget proposes 16 changes to the tax code to increase

compliance and reduce the tax gap. The budget also includes additional resources for IRS enforcement.

16

However, the budget only chips away at a tiny percentage of the

enormous tax gap. You estimate you will raise about $2 to $3 billion a year. To me, this is the best way to raise revenues to make

sure people who owe taxes actually pay them when they are not

complying. Should we not do much more to close the tax gap than

we are doing in this budget?

Secretary PAULSON. Well, Senator, let me tell you, this is something I focused on a great deal because, after arriving in Washington, Chairman Baucus let me know how important it was to

him. I know it is important to you, and it is important to others.

As someone who has paid plenty of taxes in my lifetime, the idea

that people are not paying taxes is not appealing to me, and it is

not appealing to the American people.

Now, I would say to you that we have asked for increased resources for the IRS, and there are 16 legislative proposals on the

tax gap. I just urge everyone who thinks we should do more to,

first of all, let us pass these proposals, pass the ones we had up

here last year. Then the other thing is, I will spend time working

with Senator Baucus at his hearings, but I will tell you what I

have learned in looking at this. I have spent a fair amount of time

looking at it.

I have learned, first of all, we need more information. We need

to do more research. But based upon the research we have done,

the conventional wisdom has always been more enforcement—of

course, we are increasing enforcement—and simplification. Simplification helps.

But the biggest reason for the tax gap, by far the biggest reason,

is under-reporting of income, and it is individual income.

Senator SCHUMER. Yes. Agreed.

Secretary PAULSON. And it is business and farm income and the

related self-employment taxes. So when you look at it, it is small

businessmen, it is farmers, and it is under-reporting Schedule C filers.

When I have looked at what needs to be done, I concluded that

there is not a pot of gold to pay for AMT to balance the budget,

unless we sign on for specific reporting provisions, increased reporting that I would recommend against. I would bet you, if we

talked about it, you would not be supportive of some of these things

yourselves.

So I think one of the things we can do as part of the hearings

is to sort of educate the American people and figure out how to go

after that part of the tax gap we can get, and, boy, we will go after

it very enthusiastically.

The CHAIRMAN. Thank you. Thank you, Mr. Secretary and Senator Schumer.

Senator Lott?

Senator LOTT. Thank you, Mr. Chairman. Boy, I have been interested in some of this discussion today, particularly with regard to

AMT. I was in hopes that the chairman of the Budget Committee

would still be here, because I wondered if perhaps he was going to

build into his budget an AMT fix.

In the past we have had this 1-year patch, done in a bipartisan

way. But at least once I went to the floor with an extensive repeal

17

of the AMT and panic set in all over the place; everybody ran for

the hills.

So it is easy to talk about doing it, but as a matter of fact, when

I actually laid down an amendment one time on the floor, everybody took off. So, this is a responsible way to deal with it. If we

are ready to go with a big fix, I would like to see it in the budget

resolution.

Now, with regard to the college deduction, I will say to my colleague from New York, is middle-income now up to $150,000 a

year?

Senator SCHUMER. When you have to pay $35,000 of tuition each

year, it sure is.

Senator LOTT. I just wanted to make sure. I did not realize that

the middle-income level had gone up to $150,000. But also, I would

note that on at least one or two occasions last year I thought when

we had a chance to pass the college deduction language, the Senator from New York voted against it.

Senator SCHUMER. We passed it because of my efforts and those

of others. It is now law for this year. But they are proposing to

eliminate it for next year.

Senator LOTT. Did we not have a discussion on this last year in

which there was resistance to this?

Senator GRASSLEY. Well, first of all, I would give Senator

Toricelli credit for getting it passed in 2001.

Senator LOTT. Well, I do think that this is something that perhaps we can work on, but I do think also maybe there should be

some more reasonable limits on it. Yes?

Secretary PAULSON. Excuse me, Senator Schumer. Let me say

what I learned from my colleagues behind me is that it is currently

in law, and it just was not one of the extenders in the budget, so

it is scheduled to expire in 2007.

Senator SCHUMER. I would just say, all the others were in extenders, including the rate reduction.

Secretary PAULSON. Well, let me tell you, sir, this is one where

it is still there, and we will have plenty of time to talk with you

about extending it.

Senator LOTT. And for whom. I think that is an important question, too.

Let me just say this, Mr. Secretary. Thank you for being here.

Thank you for what you are doing. I think this is a case where we

have the right man for the right job at the right time.

I appreciate the fact that you have been coming up here, talking

to members of the Senate, Republican and Democrat, talking

about, can we do some big things together? Can we address some

of the fundamental issues that are a problem for our country’s future? I hope you will continue to do that.

Now, with regard to the budget and the tax provisions, I have

language here. I believe the economy, perhaps, is as strong now as

it has ever been in history when you look at all the numbers. When

you look at the inflation rate, the unemployment rate, wages and

salaries are up, and productivity, right across the board.

I will make it, since we have a time problem here, two quick

questions together. Do we not have an exceedingly strong economy,

18

and have the tax cuts we put in place not led dramatically to that

result?

Secretary PAULSON. Well, Senator, I clearly believe, and I have

said before, that the tax cuts laid a very strong foundation for this

economy in many ways, small business, large business, individuals.

So, it has made a big difference in the economy.

Second, in terms of the economy, as I have said a good number

of times, if you had asked me last January if I thought we would

be sitting here with the economy as strong as it is and that we

would have made the transition as successfully, appeared to make

the transition from a growth rate that was unsustainable to one

that really seems sustainable, the so-called ‘‘soft landing’’, I——

Senator LOTT. And what was the growth rate the last fiscal year?

Secretary PAULSON. Well, the growth rate for the last fiscal year

was, I believe, 3.6 percent.

Senator LOTT. And what is it projected to be for the coming year?

Secretary PAULSON. Well, I think it will be something in the

neighborhood, we would hope, close to 3 percent. But remember, we

were growing at a level, in the fourth quarter of last year and the

first quarter of this year, that just seemed unsustainable.

Senator LOTT. Right.

Secretary PAULSON. And we had a housing market that was

clearly growing at an unsustainable level. So to be able to have it

weather that correction and have the kind of GDP growth number

that we had for the fourth quarter, I think it is very encouraging.

Senator LOTT. Well, let me just say that we got it in this great

shape before you got here and we just expect that you would keep

it growing like that. That was humor. [Laughter.]

Now, one other thing in this budget I do like. I do not think it

is all we need to do, but I do think one of those big issues we need

to talk about and try to find a way to work together on, is health

care delivery. Affordability and accessibility is a problem in America.

Secretary PAULSON. Yes.

Senator LOTT. In rural States, in cities, middle-income families.

I mean, it is getting to be a big problem. Yet, we have not been

able to find a way to come together. I think the President’s proposal is an interesting one. Perhaps we need to do more. We can

expand it.

I would like, Mr. Chairman, to ask that, as soon as is reasonably

possible, that you would schedule a full-blown hearing on what the

President has proposed and other options that might be out there.

Because if you look at any kind of polling or just ask individuals,

tell me your top three issues or problems that you really have a

problem with, they would say, well, maybe energy, and health care

clearly would be in the top three. So, I would urge you to do that.

The CHAIRMAN. Well, I say to my friend, we plan to have several,

in fact. This is so important. The main goal of the hearings is to

try to get to the underlying costs of health care. It is not just Medicare and Medicaid, which are going up because health care costs

are going up. But the underlying costs affect everybody.

Senator LOTT. Well, a number of us have worked on this in the

past in a bipartisan way. John Breaux had some interesting ideas,

I think Olympia Snowe and Senator Wyden. I mean, we all should

19

get together on this and try to see if we cannot pick up what the

President has proposed and build on that and produce a result.

Secretary PAULSON. Right. I thank you because I do believe that

the proposal gets at the underlying cost of health care.

The CHAIRMAN. Senator Snowe? Thank you. Thank you, Mr. Secretary.

Senator SNOWE. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. To follow up on a number of issues here,

and something that Senator Schumer raised as well in terms of

balancing priorities.

We are in an entirely different context today in talking about extending all of the tax cuts, making them permanent. I was here in

2001. We obviously did it for the reasons that Senator Grassley

mentioned, that taxes, as a percent of GDP, had risen to their highest level since World War II, about 21 percent. Now we know it obviously has done much good.

On the other hand, does it really make sense at this point in

time to extend all the tax cuts at a cost of $1.7 trillion when you

consider the fact that, according to Joint Committee on Taxation,

approximately 88 percent of capital gains go to those earning more

than $200,000, and about 22 percent of the 2001 and 2003 tax cuts

go to those who earn more than $1 million?

At a time when we are talking about the widening income gap

in America, is it not worth preserving our options and making

some changes and alterations? Isn’t that especially true at a time

when we are talking about significant spending reductions in programs such as Medicare and Medicaid, totaling $102 billion, or the

SCHIP program to help insure the uninsured children in America,

in which there is a gap even as we speak? With the current level

of funding, there are more than 9 million uninsured children across

this country. That is what I do not understand.

Why are we replaying the debate from the past? We are in 2007.

We have enormous challenges. When we passed that tax cut back

in 2001, I can well remember everybody talking about the projected

surpluses as far as the eye can see of $5.6 trillion.

Now, I always say, they are here today but could be gone tomorrow. They are all projections, and they are theoretical. So why talk

about extending all of the tax cuts so that we can enhance the

wealthy in America?

Yet at the other end, if you look at the disparities according to

the latest census data in 2005, a household in the 90th income percentile earned $114,000, or 11 times as much as a family in the

10th income percentile.

So as we see, the income for households at the top has grown

over the last 30 years, while the incomes of households at the bottom remain flat, so we are just exacerbating that with the proposals that have been presented in this budget.

Senator Schumer mentioned the tuition tax deduction. Again, it

does help middle-income Americans, two people struggling. The

cost of higher education is $40,000 plus. So I do not know why we

have to insist on this debate of the past.

Recognize where we are today and do something different and be

discerning about which tax cuts are extended. Why do it now when

20

they are not expiring for another 3 years? Why not look at it very

carefully?

Secretary PAULSON. Senator, first of all, thank you for your comments. You dealt with a number of things. You dealt with the underlying increase in income disparity, which is a 30-year trend in

this country and is, in my judgment, related a great deal to technological advancement to a much greater extent, and also to

globalization.

Now, I do believe, and I know you know this, when you look at

the President’s tax cuts, on the low end of the income scale, they

clearly helped. There are 5 million taxpayers who now are no

longer paying Federal income tax. When you look at any of the

data there, it has helped.

Now, in terms of your question about whether we should not be

considering raising taxes right now, again, I would look at it and

say that the tax cuts worked. We have an economy that is quite

strong. As Senator Grassley said, we have taxes that are now 18.4

percent of GDP. They are back up above the 40-year average.

This puts us in a position of strength so we can now deal with

what are going to be the major, major issues. The major economic

issues of the next 25 years are going to be entitlements and the

need for entitlement reform, and we can approach that from a position of strength.

Even your comments about Medicare, again, I just take those in

the spirit in which they were put out here. The Medicare proposal,

which we would like to talk to members of the committee about,

at least takes a small step in slowing down the trajectory of that

growth over a 10-year period, from 7.4 to 6.7 percent, slowing it

down, introducing means testing, for instance. So, I understand

how deeply you feel about these issues. I look forward to talking

to you more about it.

Senator SNOWE. I appreciate that. I hope we can, because I think

we have to focus on middle-income America. Even on the AMT, by

making the tax cuts permanent, it is going to cost more. The AMT

is going to capture more people—as I understand it, up to 30 million—by making the tax cuts permanent. So, I think we have to be

looking at these issues, not just giving a Band-Aid approach.

Secretary PAULSON. No. On AMT, make no mistake about it, we

need a long-term resolution there, and we are focused—and I am

really focused—on the average worker. Right now with the economy growing, the average American worker/taxpayer is doing much

better than he or she would be doing in a no-growth or a slowgrowth economy. So they are starting to see some real gains. We

can keep this economy going, and they will see more.

The CHAIRMAN. All right. Thank you, Senator.

Senator SNOWE. I appreciate it. Thank you.

The CHAIRMAN. Next on the list is Senator Roberts.

Senator ROBERTS. Well, thank you, Mr. Chairman. How is your

cold, Mr. Secretary? Are you getting over that damn cold?

Secretary PAULSON. Doing better.

Senator ROBERTS. Good. I am glad you are feeling well.

How many people did you bring with you behind you over there?

What is that, five, six, seven, eight, nine? What?

21

Secretary PAULSON. You know, it is interesting. This is the second or third time they get to hear me testify.

Senator ROBERTS. And there are how many? Five? Six? I am not

complaining about it, I just want to know how many.

Secretary PAULSON. It looks like there are several people here to

watch.

Senator ROBERTS. All right. I want them to take their pen out

and I want them to write the word ‘‘R-E-L-I-E-F,’’ and I want them

to put ‘‘tax’’ in front of it. Then I want them to take their erasers,

if they have erasers with pens—and that does not make much

sense, but at any rate—quit talking about tax cuts, talk about tax

relief. There is a whole different connotation.

If you say ‘‘tax cuts’’ we get a chorus from the other side, more

especially Senator Schumer and the DSCC and all that—he

brought it up, I did not. And I like Chuck Schumer. We used to

play basketball together in the House gym, very slowly. [Laughter.]

So, I respect his views. He is the only person in the Senate who

calls me ‘‘Patty.’’ That is what they do in New York. If anybody else

called me ‘‘Patty,’’ I would probably pop him in the nose, being

from Dodge City.

But if you say ‘‘tax cuts,’’ he will say—he is not here right now,

I can say this—‘‘for the rich.’’ Then he defines who is rich. Senator

Snowe just made a good attempt at that. Ten percent of the highest-paying rich people pay about 50 percent of the taxes. I have

never quite understood that. But if you said ‘‘tax relief,’’ sir, it

would be a whole other connotation. So tell all your people, just do

not say ‘‘cuts.’’ You say ‘‘tax relief,’’ it affects everybody.

Now, let me tell you who I am interested in.

Secretary PAULSON. Yes. Five percent will pay 56.5 percent of the

taxes.

Senator ROBERTS. Oh. Five percent, 56.5 percent. I am even low

on my estimates, so thank you for correcting me, sir.

I set up something when I first became a Senator some time ago

called Committee on Technology and the Future. Everybody

thought, all right, we are going to take a look at agriculture, we

are going to take a look at aviation, we are going to take a look

at the Life Science initiative in Kansas City, we are going to take

a look at oil and gas and see what we can do for Kansas to prevent

the out-migration of our young people.

From the tax code standpoint, from the State standpoint, and

from the emphasis standpoint of the State legislature, guess what?

We were wrong in terms of trying to list them all. You know who

led the charge in regards to Kansas and trying to pull ourselves

out of the economy? Small business. Small business. And you know

what the catalyst was there? Technology. Information technology.

Now, my question is, in that pile of books over there in the budget that Trent Lott has abdicated or given back to the committee,

you have doubled the small business expensing limit to $200,000,

you have doubled the phase-out threshold to $800,000.

Given that small businesses are responsible for the majority of

jobs that are created in this country—that is not only in Kansas,

it is everywhere—I would like to know if you can tell me what impact this is making, or what impact you are making in making this

tax relief permanent—note, I said ‘‘relief’’—at a higher level will

22

have on our economy, because I think the small business benefit

is a very important provision.

And in addition, since I am running out of time already, a followup question. I know what the question will be on the other side

from somebody. Raising taxes for those in the highest tax bracket.

Is it not true that an increase in this tax rate would impose a

greater tax burden on the small business than on a Fortune 500

company that could somehow work around it? I am talking about

the marginal tax rate on small business.

Secretary PAULSON. Right.

Senator ROBERTS. Two questions.

Secretary PAULSON. Yes. Thank you very much. I am going to do

the last one first because there is no doubt that bringing the top

rate down really benefitted small businesses.

Many, many small business filers are Schedule C filers, so that

made a big difference. Small businesses have been a real engine of

growth in this economy and in this country, so that is very, very

fundamental.

Your first question also had to deal with small businesses and

tax relief for small businesses and the need to make that permanent. Again, I am with you.

Senator ROBERTS. Well, basically I am asking the same question

Senator Bingaman said in terms of making it permanent under the

banner of consistency and predictability, because a small business

man and/or woman would like to have that.

My time is up. Thank you for yours.

The CHAIRMAN. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Secretary, I wanted to talk to you about the administration’s

health proposal. I think it is very obvious now that economists on

both sides, Democrats and Republicans, are saying that the Federal

tax rules on health both promote inefficiency and disproportionately reward the most affluent.

You have a high-flying CEO, he can write off the costs in his

taxes of getting a designer smile, but a hardworking gal in a hardware store does not get much of anything.

So I very much want to work with you and the administration—

we can talk about the details—to fix these policies that are outdated. I was very pleased that Senator Lott mentioned working on

these issues in a bipartisan way.

But fixing the tax code on health alone does not fix the broken

health care marketplace and does not expand coverage. Until we

get everybody covered, the people who are uninsured, in effect,

send their bills to those who are insured.

So my question is, is the administration open to expanding its

health care proposal to consider additional coverage and steps that

would fix the broken marketplace, which go hand in hand?

Secretary PAULSON. Right. Senator, thank you very much for

your comment. Let me begin by saying that I totally agree with you

on the current system. I think one thing we should all agree on,

and we can all agree on, is that the current tax preference, which

goes only to those who get insurance provided by their employer,

23

is biased, it is unfair, it leads to distortions. So, your question really gets at accessibility.

Clearly, we put this proposal forward, not to say this is, in and

of itself, the solution. As you will hear when Secretary Leavitt is

up here testifying, his Affordable Choices Initiative, working at the

State level, is really aimed also at access.

One of the big drivers of this proposal is access for the 47 million

people who do not have health insurance, and also fairness to the

17 million who are getting insurance through individual markets

and getting no tax benefit. So, we in the administration are concerned about access, and we are very open to working with you and

others to build on this proposal, to improve upon it, and make it

more inclusive.

We do recognize this, in and of itself, is not the whole solution.

We just think it is a big step forward. To those who do not welcome

it, we would say, why is it you would prefer the current system?

But let us take it, let us build on it, and let us talk about ways

to increase access.

Senator WYDEN. I appreciate your answer, Mr. Secretary. I just

hope, because this is going to be a short year, certainly by the fall,

a presidential campaign—rumor has it, it has already started—is

going to be under way.

I hope that very soon there will be bipartisan efforts in the Senate, working with the administration, to look at tax policies that

made sense for the 1940s and do not make sense now, but that the

administration, as we get Senators to come to work with you, will

also see that there is a clear linkage—a clear linkage—between expanding coverage and fixing the broken marketplace and what the

administration wants to do.

You are nodding, and I think I will just state for the record that

I was pleased with the nod. If all we do, if all the Congress does

is make the tax changes, then what will happen is citizens in Senator Stabenow’s State or my State will go out in the marketplace,

for example, and they will face insurance company cherry picking

and healthy people will get covered and sick people will not. So,

there are other pieces to the puzzle.

Secretary PAULSON. There are other pieces to the puzzle. Developing the insurance market, the private insurance market, is a key

part of this. I would just note that the administration has another

part, too. It is not just the tax change. The tax change is critical

because that cannot be done at the State level. Only the Federal

Government can remove that bias and free up that money for more

equitable use and to create access.

But the Affordable Choices Initiative, which you will hear about

from Secretary Leavitt, is a big initiative to increase access and do

other things at the State level. We look forward to working with

you and figuring out how to improve all of these proposals.

Senator WYDEN. My time has expired. I happen to think the tax

reforms are also critical. But even more critical is putting the

pieces of the puzzle together. I am glad that you acknowledged

that, and I thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Senator Salazar?

24

Senator SALAZAR. Thank you very much, Chairman Baucus and

Senator Grassley, and thank you, Secretary Paulson, for your service to our country.

I have two questions. My first question is about energy. We have

had conversations before, including conversations that I have had

with President Bush on the importance of energy, and I happen to

think that there is probably nothing that is more important for us

in this country than to get our way towards getting rid of the addiction on the importation of oil, as Senator Bingaman was talking

about earlier.

So my own concern, as I looked at the budget, as I went through

it last night, is we seem to have a lot of great statements being

made by the President and others about our move to get rid of the

addiction on the importation of oil, and then on the other hand we

have a budget that does not walk the talk.

When I go through parts of the budget—and I will not go

through the whole thing. I visited the National Renewable Energy

Lab with the President and many of his people last year. It has a

3-percent decrease in funding. It seems to me that that is going the

opposite way of where we ought to be going on technology and research.

The wind energy program—we have the wind energy industry

that has taken off all over this country—has a 26-percent cut in the

budget. The solar budget, where we are now covering lots of ways

in which we can capture that energy, is down 10 percent. I could

go on and on down the list in terms of what I think is a budget

that does not match the President’s statement in the State of the

Union, or other conversations that we have had.

So I would like you to respond how, from your point of view, this

budget squares up with this vision of energy independence that the

President has spoken about.

Secretary PAULSON. Right. Let me say, Senator, I know the

President shares your objective. I do, also. I would say one of the

things that has been most encouraging to me when I have spent

time at the Department of Energy with Sam Bodman and his people, talking to some of the scientists there, is where we are with

some of the technologies and some of the advancements that are

not that far away.

Secretary Bodman will be able to talk to you about this, but I

really believe that in a number of these areas that are so crucial,

more money, in and of itself, is not the answer. They are making

real progress. They have the money they need. I know you are not

suggesting that we just throw money at problems, but I do think

you will see we have made progress.

In terms of this energy security, the President and his team

looked at this issue and found that we are dependent upon foreign

sources of oil for two-thirds of our oil. And guess what? Where are

we the most dependent? The transportation sector. So getting more

diversity of fuel for the transportation sector was a big emphasis.

So this is really quite bold.

Senator SALAZAR. Let me just say, Secretary Paulson, I appreciate that comment. I appreciate learning a lot more about the

budget and the pieces that are in there in energy.

25

I will tell you that in a hearing that we had on biofuels just within the last week in the Energy Committee, the experts from around

the country—not Republicans and not Democrats, but experts—are

simply telling us that the 2017 Renewable Fuel Standard that the

President spoke about is simply not achievable with the current

level of investment. If we are going to make achievement on that

goal, it is going to take a lot more in terms of investment, on research, on a whole host of things.

So we will carry on our conversation about energy, because I do

think that is an area where there can be some more bipartisan

movement as we move forward.

I have another question for you, though, because I know my time

is limited. That is on the deficit. Some people worry about the deficit more than others, but it seems to me that at the first step of

understanding the deficit we need to have a very realistic picture

of what our budget situation is.

I echo the comments that Senator Conrad made to you earlier,

that the budget really does not present the full fiscal picture of our

country because it does not account for the out-year costs of the

war in Iraq and Afghanistan.

I anticipate, in Afghanistan, we are going to be there for a number of years. The debate is going on about Iraq, but I presume we

are going to be investing significant resources even beyond 2008.

Yet, those are not accounted for.

The AMT issue, which is a multi-billion dollar issue, also is not

accounted for beyond this year. So, one of the things that I would

ask you, as Secretary of the Treasury, is to help us lay out that

candid fiscal picture on the table so we can look forward in a bipartisan fashion to try to address the issue of the deficit.

Secretary PAULSON. Senator, let me say, I am just going to give

you one sentence on energy, which is, the 35 billion gallons of alternative fuels, the fuels that are going to substitute for 35 billion gallons of gasoline by 2017, will create real demand. I know some people think we are too aggressive, some not aggressive enough.

Now, in terms of the budget question——

The CHAIRMAN. That is two sentences.

Secretary PAULSON. What?

The CHAIRMAN. I am sorry. I am just teasing. That was two sentences.

Secretary PAULSON. All right. Sorry.

And in terms of the budget question, I think it was a very similar question to what Senator Conrad asked, and the Chairman

made a similar point. With regard to the budget, I am very focused

when we look out a number of years at what we have staring us

in the face in terms of entitlement.

In terms of the war costs, we have been as transparent as we

know how. Again, to get into more detail, you will have to deal

with Rob Portman and Secretary Gates; that is in the middle of

their lane.

But I can tell you, from the budget perspective, we have the sup- plemental for this year. You have the $145 million for next year

in the budget, for 2008. I would just say to you, it is impossible to

know right now what the cost of Iraq will be in 2009. That is why

I would think about that $50 billion number as a placeholder. So,

26

that is as transparent as we know how to be. I know people would

like more certainty, but it just is not possible.

With regard to the Alternative Minimum Tax, again, I think I

have been very clear in saying there is a need to come up with a

permanent solution.

What we have done is, we have gone ahead and put a 1-year

patch, 1 year of relief in the budget for this year, while we work

with you on a permanent solution. That has been the approach

that Congress has generally taken for the last 6 years. This is a

tough one.

The CHAIRMAN. Thank you, Senator.

Secretary PAULSON. This is one that we will work on together.

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

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman, very much. And

thank you, Mr. Secretary, for being here.

When I listen to all the comments of good news, I have to tell

you that it does not, unfortunately, filter down to middle-class families in my State, and I think in most States right now, who are

feeling tremendous unease. We have heard numbers about real

GDP growth up over 32 percent and real corporate profits up, increasing by 36 percent; S&P 500, adjusted for inflation, increased

by 58 percent.

But real wages for real people have declined over a decade. I

know that your response will probably be, there is a slight little increase now. But the reality is that, for most people, they are feeling

squeezed on all sides right now. That is the reality for most families.

And when we look at the fact, in addition to that, that the personal savings rate has been negative for an entire year only twice

before now, 1932 and 1933, that is the reality for most people that

are trying to make it.

When I look at your budget from the context of a middle-class

family, particularly related to manufacturing—and I am not talking about your father’s factory. I would welcome your coming and

taking a look at the most high-tech facilities with the most highly

trained workers in the world working there, and, in fact, their engineers, middle-class, and upper middle-class partners also are feeling greatly squeezed as it relates to what is happening in a global

economy.

Here is what I see in the budget, which is deeply concerning to

me, related to manufacturing. We see on very specific programs,

like the Manufacturing Extension Partnership, it is proposed to be

cut in half again, a major support for small- and medium-sized

businesses that has actually created jobs. The Advanced Technology Program is going from $73 million to $6 million. This is a

partnership with industry on cutting-edge technology in manufacturing almost totally eliminated.

Then I am just going to run through a bunch of things and then

let you respond. The alternative fuels tax credits that Senator

Bingaman talked about that expire at the end of next year. If we

are going to have confidence, if the marketplace is going to have

confidence, those need to be extended much farther out, as you

have already discussed with Senator Bingaman.

27

And the baby steps in research and development. When Senator

Salazar was talking about research and development, with all due

respect, given the extent to which the President talked about this

in the State of the Union, I expected something very big and very

bold, not something in the tens of millions. I would have expected

something much bolder when we are talking about moving forward

in research and development, which we desperately need to do.

Then I would say two other things. One, your health care deduction that the President has proposed will actually require large

manufacturers and other large businesses to pay taxes on the part

of the health care that they provide because it caps it at $7,500,

and our benefits are oftentimes higher than that. So we look at

that and then we look at the fact that it is hard to find trade enforcement dollars of any extent in here.

Finally, I would say, simply, this: trade adjustment authority

which is in here, trade adjustment assistance for people who are

benefitted or who are hit by all of this global economy and trying

to compete in a world where we do not have a level playing field

and we are not adequately, in my judgment addressing that, we

are placing $13 million—the President is—into the budget for retraining people caught in the middle of all of this. Yet, the traderelated job losses are calculated to be $54 billion, and the benefits

of trade are estimated to be $1 trillion.

If the benefits are $1 trillion, I would like to know what percentage you believe we should be giving workers who are impacted by

this and caught in a situation not of their making, that is absolutely squeezing the middle class of this country.

Secretary PAULSON. Senator, wow. That is a lot to respond to.

Let me be brief and start with the fact that your focus on the working men and women in this country and the average taxpayer is

a good one. It is one I know the President cares a lot about, and

it is one that I care a lot about.

So I am going to start by saying something that may sound obvious, but we just cannot forget it. That is, the most important thing

we can do for all of these men and women is keep the economy

growing, because, trust me, they will all do better with an economy

that is growing strongly than one that is growing very slowly or

one that is in decline.

I think you know what the President’s tax cuts did at the low

end, so I think you are aware of that. I do not need to tell you

about the people who are no longer paying Federal income taxes

and what has happened on the low end.

In terms of small business, perhaps we could do more. But I will

tell you, when you look at what has happened with taxes for small

businesses, there has been a lot that has been done. If there is

more that you think should be done, I would like to talk with you

about it, because there is a lot that has been done and that is absolutely key.

On the standard deduction for health care, you said one thing

that I may have misunderstood, but I just want you to know that

all of those expenses are deductible to the business. So all the

President is proposing here is that everyone who gets health insurance, if they get a basic health insurance policy, whether it is provided by an employer, or whether they are the waitress who does

28

not get health insurance, or the construction worker, they all are

going to get the same standard deduction.

So, that is really all there is to that, and it is very, very powerful

in terms of bringing access to those who do not have it, including

a big part of the American public that does not have access to

health care, and dealing with fairness.

The CHAIRMAN. Thank you very much.

Senator STABENOW. If I might, just one quick follow-up.

The CHAIRMAN. Senator, your time has expired. Quickly.

Senator STABENOW. I thank you, Mr. Chairman. Just on that

point. So you are saying that an amount above $7,500 for a worker is

still deductible by the business?

Secretary PAULSON. I am saying the business can pay whatever

they want and that is a deduction for the business. That is an expense. So what the President’s proposal deals with is the income,

the tax preference. So what happens is, if I am buying insurance

in the individual market, not in the employer market, I pay for it,

and I do not get a tax deduction. If my employer pays for that, that

income is excluded from my taxable wages.

The CHAIRMAN. Thank you, Senator.

Senator STABENOW. Thank you.

The CHAIRMAN. Thank you.

Senator Lincoln, you are next.

Senator LINCOLN. Oh. I thought Senator Smith was next.

The CHAIRMAN. He is our patient, last person.

Senator LINCOLN. Goodness. All right. Well, thank you, Mr.

Chairman.

The CHAIRMAN. Penultimate patience.

Senator LINCOLN. There you go.

I have several questions I would like to get to, so I will try to

ask as many of them as I can so you can respond in total.

First of all, however, is a compliment. I want to quickly extend

my thanks to you for the Treasury’s work on section 181 and the

guidance there. I told you the other day when you came to the committee that we had been working 2 years with Treasury to get an

answer in terms of guidance.

You gave me your word in that meeting that something would

be forthcoming. We have had a call from Treasury that it will be

forthcoming. I have not had the ability to see it or review it, but

I am anxiously awaiting that opportunity, and I appreciate you

being a man of your word. I am assuming it is down the road shortly. Is that correct?

Secretary PAULSON. It is.

Senator LINCOLN. I see your staff shaking their heads.

Secretary PAULSON. It very much is.

Senator LINCOLN. Thank you.

Secretary PAULSON. We were aware that this hearing was coming up, and we wanted to move quickly.

Senator LINCOLN. Well, I appreciate that very much.

One of the other things, the individual development accounts.

You were certainly well aware that the Nation just posted another

negative personal savings rate, the lowest it has been since the

Great Depression. In so many recent years the administration has

29

included the IDAs in their budget proposal, and they did not in this

one.

Secretary PAULSON. Well let me be very quick here. We put it

forward—it was complex—for a number of years. It got no traction

in Congress.

Senator LINCOLN. It passed the Senate in the 107th and 108th.

Secretary PAULSON. Yes, but we did not get it passed into law.

Senator LINCOLN. I would say that is pretty good traction.

Secretary PAULSON. So we have emphasized other programs. We

are happy with the budget’s approach because it is surely the right

objective, addressing low savings.

Senator LINCOLN. Well, I hope that you will. The administration

has indicated their support for it, and I hope that has not waned.

But if it has passed the Senate in two previous Congresses, I think

we can certainly work something out there.

One of the others is the bigger picture, actually, Mr. Secretary.

That is, the need to look at the whole ledger, not just entitlement

reform. That is certainly a critical issue that we have before us.

We had, also, the Chairman of the Federal Reserve, Chairman

Bernanke, and he has stated publicly in recent weeks that a dip

this year in the annual Federal budget deficit to $248 billion was

the calm before the storm, realizing that with ballooning entitlement payments that are looming before us in the next 20 years as

baby boomers retire and medical costs skyrocket, we have a problem ahead of us.

So I hope that we would have some kind of an agreement that

there, indeed, is a problem looming out there and you cannot solve

that problem simply by cutting domestic programs or looking at

one side of the ledger.

And I do not know where you stand on that, but certainly would

like to give you the opportunity to give your thoughts on needing

to look at the whole picture, tax revenues and outlays on entitlements. There are two sides of the ledger in this equation and we

are not going to solve entitlement problems by simply cutting domestic programs. So, I think that gives us a little bit of room for

discussion there.

I would also like to align myself with Senator Salazar and Senator Bingaman in terms of renewable fuels incentives. I do not

know, but you come from the investment world, and I cannot believe that you would not agree that if we are going to ask America’s

businesses to make the investment, the million-dollar investments

that we need to get the kind of up-and-running industry in renewable fuels that we need, we cannot be lackadaisical in the incentives that we offer them.

If all we do is renew those incentives through 2008 when we are

making permanent so many other incentives, it just indicates to

them we are not serious about really moving to renewable fuels

and lessening our dependence on foreign oil. So, I would just align

myself with those two Senators who really did try to make that

point, and I thought they did very well.

Then, last, on the health care deduction, just some clarifications,

perhaps. There are many of us on this committee who have worked

long and hard over the last several, 4 or 5 years to come up with

30

some types of answers to deal with the 47 million who are uninsured.

If you could just kind of help me, why you chose a flat deduction

rate as opposed to a percentage of cost, because I want to understand what your goal was in terms of, if it is to impose a cap to

disincentivize Cadillac plans, it seems we could have done that

through a percentage structure that was capped, if that is what

your goal was.

But the deduction that is proposed does raise some concern for

some of us. I am, again, trying to better understand what your objective is and what the plan is, but want to make sure that we do

not end up encouraging people to just buy the cheapest of plans,

and we end up with maybe perhaps more people covered, but covered more poorly. I do not think that really meets the overall objective that we want.

Secretary PAULSON. Well, I would say that the objective—and I

am going to get to your specific question—really was fairness,

eliminating biases toward Cadillac plans, and growth in health

care costs.

Senator LINCOLN. You mean, reducing the growth?

Secretary PAULSON. Costs going up. I will explain why in a

minute. But the goal was accessibility, affordability, and portability. The goal was to give people a standard deduction no matter

what your income is or where you purchase your policy—now, there

has to be a basic policy that meets certain requirements.

Senator LINCOLN. But for sustainability, you have indexed it to

inflation, not the inflation of medical costs.

Secretary PAULSON. Right.

Senator LINCOLN. So over the course of 10 years, you are going

to lose probably half of those people whom you actually get covered,

will you not?

Secretary PAULSON. Well, I would look at it as the glass half full.

I would say that if we are going to have some impact on bringing

down the rate of growth of health care costs, that will be a positive

result.

I think if you have a program that is meaningful and where it

is indexed to the cost of inflation, the people will look a lot more

carefully at the cost. I would say that the current system is, in

many cases, just nothing but prepaid health costs.

Senator LINCOLN. Well, I do not disagree that responsibility has

to be a part of it. But if you diminish the quality of the health care

that you are making available to them, then your long-term costs

are going to be greater because you are going to have——

The CHAIRMAN. You have to wrap up, Mr. Secretary, on that

question.

Secretary PAULSON. One way to do it is through deductibility. If

there is a deductible nature to these policies——

Senator LINCOLN. Is it refundable?

Secretary PAULSON. No. This is not a credit.

The CHAIRMAN. Thank you.

Secretary PAULSON. But this applies to——

The CHAIRMAN. Thank you.

Senator LINCOLN. But is it deductible from payroll?

The CHAIRMAN. Thank you. Thank you.

31

Secretary PAULSON. Yes. Yes.

The CHAIRMAN. We will have the next round if you want the next

round.

Senator Smith?

Senator SMITH. Thank you, Mr. Chairman. Secretary Paulson,

thank you for your presence here.

I just simply want to highlight that we have unemployment at

a historically low level of 4.6 percent, the economy has averaged

more than 3 percent growth over the last 5 years, the deficit is

shrinking rapidly, and all that has occurred in the midst of a tax

cut. It is much maligned and I wonder if it is much misunderstood.

As I listen to the clash of ideas between my colleagues, it really

seems like a contest between trickle-down economics and trickledown government. You were a businessman, now you are in government. What helps the middle class most, trickle-down government or trickle-down economics?

Secretary PAULSON. Well, I have to tell you, I would not use either one of those terms. But what I really believe helps the middle

class the most is an economy that is growing, that is creating jobs,

and that is open to trade, open to competition, and is a dynamic,

growing economy.

Senator SMITH. Of all the tax cuts that were involved in the two

or three that we did with President Bush, which of the three have

made the most difference in terms of all the good news that we

enjoy today in our economy?

Secretary PAULSON. Wow.

Senator SMITH. Is it the marginal rate, dividend cut, capital

gains?

Secretary PAULSON. I would say a couple of things. One of the

earlier questioners talked about small business. I would say that

the cuts, which were individual cuts to some of the small businessmen, the Schedule C filers, were very, very vital.

I do not know how many small businessmen you know, but very

many of them put every extra penny they have back into the business.

Senator SMITH. Back in the business.

Secretary PAULSON. That makes a huge difference.

As someone who has watched capital markets, I thought the capital gains cut and the equalization with the tax rate on dividends

dealt with a very big distortion in our system, which biased corporate behavior, and not in a positive way. I think the lower rates

on dividends and capital gains will add to productivity and growth

longer-term, but those are two that I would cite.

Senator SMITH. Mr. Secretary, is it not true that while the top

rate went down, what, 3 percent, or 3 percentage points, the dollars

that the top 2 percent actually pay went up as a percent of GDP?

Secretary PAULSON. Yes. What has happened over time, as we

talked about earlier, is that the system is becoming more and more

progressive so this year the top 5 percent will pay 56.5 percent of

the income taxes.

Senator SMITH. Which is an increase after the Bush tax.

Secretary PAULSON. Yes. And the bottom 50 percent will pay 3.4

percent.

32

Senator SMITH. I think the thing that is most significant to me

is that, for the first time in a very long time, the wage growth is

going up faster than the rate of inflation. Is that correct?

Secretary PAULSON. Yes, it is.

Senator SMITH. When was the last time that occurred in our economic history?

Secretary PAULSON. Boy, I do not have the answer to that.

Senator SMITH. It was in the Reagan administration.

Secretary PAULSON. All I know was that it was the biggest thing

I looked at when I came here, and it has turned and is positive.

Senator SMITH. Is it a small blip or is it actually significant that

wages are rising faster than inflation?

Secretary PAULSON. Oh, I think it is significant. I always

thought—and you saw this—that if you can keep the productivity

up and keep creating new jobs, that ultimately real wage growth

should follow, and it has.

Senator SMITH. If you could suggest to us any corporate tax policies that would be important for American competitiveness in the

global economy, what would they be?

Secretary PAULSON. Well, I do not have a specific idea to throw

out, Senator. But one thing that I look forward to doing is having

conversations at Treasury and talking with this committee about

ideas that will lead to competitiveness and what can be done on the

corporate tax code to make us more competitive.

Senator SMITH. A question on health care. As I have listened to

the President’s plan, one of the questions I have had is, what is it

that is being over-bought by people with health care that the administration wants to eliminate?

Secretary PAULSON. Well, I would say that we have a system

right now that, in certain instances, incentivizes what we would

call Cadillac health insurance plans, which are plans that are really prepaying your health costs.

You go if you want to get a new pair of eyeglasses or get cosmetic

surgery, or whatever, and the first dollar will be paid by insurance,

and all of that benefit is tax-deductible to one group of people that

happens to be working for corporations that provide that kind of

benefit.

There is nothing wrong with the corporation providing that benefit and taking a tax deduction for that benefit, but for the individual it is very unfair for one group of individuals to get the tax

benefit and another group to get nothing at all.

Senator SMITH. Well, thank you, Mr. Secretary. My time is up.

I just want to note for the record that the last time that wages

went up faster than inflation was in the administration of Ronald

Reagan.

Secretary PAULSON. Thank you.

The CHAIRMAN. Isn’t that a coincidence? All right.

Senator Grassley?

Senator GRASSLEY. Yes. I thank you for letting me go ahead on

a second round, Mr. Chairman, so I can do another meeting.

Mr. Secretary, one of the President’s tax gap proposals is to require brokers to report cost basis on publicly traded securities. Obviously I congratulate you on that.

33

Earlier, Senator Baucus and I asked the Government Accountability Office to study these issues, and they recommended basis

reporting as a way to close the capital gains tax gap. We also have

support for that from the staff of the Joint Committee on Taxation

and from the Taxpayer Advocate of IRS.

The IRS has estimated the capital gains tax gap to be $11 billion

per year. Some academics have predicted that basis reporting

would bring in $250 billion over 10 years. But the President’s basis

reporting proposal is estimated to raise only about $6.7 billion over

a 10-year period of time. Now, that is a considerable gap.

So my question is about whether or not the President’s proposal

goes far enough. So could you explain why the President’s basis reporting proposal brings in less than 10 percent of the capital gains

tax gap, as estimated by the IRS?

And would you be willing to work with members of this committee, like Senator Schumer, so that we can do more about closing

this tax gap? Particularly, I think we have heard from Senators

today, and Senator Schumer is one of them who has complained,

about that not being an aggressive enough proposal.

Secretary PAULSON. Well, Senator, first of all, thank you for your

comment. And you are right in saying that 1 of the 16 legislative

proposals to get greater reporting to deal with the tax gap deals

with basis as it relates to capital gains.

Let me answer your question why there could be this discrepancy

in the numbers. People have been buying securities for many,

many years, so there is a big stock right now of built-in capital

gains. Our proposal deals with it prospectively. So it would go into

effect, if you pass it into law, in 2009, and then it would be basis

reporting on securities that are bought after it goes into effect.

So, those securities would be bought, the basis reporting would

be done, then when those securities are sold, we would reap the

benefits of that proposal. It was our judgment that it would be really quite a considerable burden, and it would be very difficult to do

something like that looking backwards at it. So, this is a prospective proposal, but we look forward to talking about it with you.

The CHAIRMAN. Thank you. Senator Grassley, if you want to pipe

in later, just jump in here.

I appreciate that answer. I appreciate Senator Grassley raising

the subject. Am I correct in saying that the administration’s proposals to address this gap yields only one cent on the dollar?

That is, the gap is roughly—the last estimate we saw included

payroll as well as income tax—$345 billion a year. The administration’s proposal intends to reduce that by $29 billion over 10 years,

which calculates to less than one cent on the dollar.

Secretary PAULSON. Well, here is the way I would answer that,

Mr. Chairman. First of all, this tax gap was last estimated in 2001.

The number that I would use would be $290 billion.

The CHAIRMAN. One percent.

Secretary PAULSON. Because that is the net tax gap.

The CHAIRMAN. Even using that number, it is one percent.

Secretary PAULSON. Number one. Let me say to you——

The CHAIRMAN. One cent on the dollar. Excuse me. One cent on

the dollar.

34

Secretary PAULSON. I think what we need to do, and the way we

are going to be able to address this together, because I know you

have been thinking about it for a long time——

The CHAIRMAN. Yes. I see Secretary Sullivan sitting behind you,

too. He is very much involved in this subject.

Secretary PAULSON. Yes. He has been thinking about it. He is

working on it. I know you will have ideas, and we will have ideas.

But we have put forward 16 legislative proposals that will make

progress.

But what I said earlier is, I do think when we look at the nature

of this, we really need to ask what percentage of this can we get,

and what can we get through proposals that we all think are reasonable and are not going to be burdensome or be bad policy to the

American taxpayer.

Because remember, just as the American taxpayer who pays all

of his or her taxes feels a great burden of those who do not pay,

to the extent that we impose greater reporting requirements, very

onerous reporting requirements in some instances, to try to get at

that tax gap, we will be imposing them all on the honorable and

honest men and women who do pay.

The CHAIRMAN. I appreciate that. But, Mr. Secretary, I will try

to be very diplomatic and courteous here, because generally that

works better than not.

Secretary PAULSON. Yes?

The CHAIRMAN. I am very disappointed. Very. You and I have

had many, many discussions on this subject. Many. Secretary Sullivan and I have had many, many discussions on this subject.

Many. I have with Commissioner Everson. I have with your predecessor, Secretary Snow. I think I have been too nice. I have been

saying to all of you for almost a year now, give us an estimate,

some benchmarks on how to reasonably address this gap.

We, the committee, will work with you. I remember I gave the

administration until the end of last fiscal year, September 30,

many months prior to September 30, trying to be helpful here, trying to work with the administration, be cooperative. I was

stonewalled. I was stonewalled by the administration. So, finally I

said, all right, Mr. Sullivan is not going to get confirmed until we

get a good understanding between myself and you, Mr. Secretary,

that we are going to address this in an honest, good-faith way.

It was based on good faith. I said, as you know, all right, Mr.

Sullivan can get confirmed, but that is on the understanding that

after the budget submission, the administration will come back

with a very strong, good-faith effort to address the so-called tax

gap.

I see now the administration proposing $647 million. Half of that

is current services. The only new spending is half of that, really.

The administration’s estimate is $29 billion of the $345 billion, the

$290 billion, will be collected under the administration’s proposals.

Again, that is about one cent on the dollar. That is totally unacceptable.

I am just saying, Mr. Secretary, when you come to appear before

this committee, I am looking forward to you and the administration

having much, much better, more sound efforts to address this problem.

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I do not think it is fair for you to say, all right, Congress, you

solve it. You are the Treasury Secretary. Commissioner Everson is

the Tax Commissioner. You know better than anyone else how to

address this. And this committee will work with you. We will be

very fair with you. This committee has been more than fair with

you in the past many, many months.

So I am just saying, I hope when we have this hearing that you,

Mr. Secretary, will come back, and Secretary Sullivan will come

back with some very solid ideas. We are not asking for the moon,

but we are asking for more than one cent on the dollar.

Secretary PAULSON. I would say several things. First of all, I

want to start where you ended up because you have been very fair

to me, and very fair overall to work with.

On this particular issue I think both of us owe it to the American

people to take some of the mystery out of this, because I do not

think it does anybody a service to let the American people think

there is a big pot of gold there and that we can tap into that gold

to fund all sorts of things without there being a big cost to that.

So, the first benchmarks I think we should have—and I really

mean this, and I mean this with all due respect—should be passing

the information-reporting legislative proposals we made last year,

passing those, and passing the 16 proposals in this year’s budget.

That will be important.

In terms of the enforcement budget for the IRS, I spent a lot of

time with Mark Everson on this, and he will talk with you directly.

He has invested very heavily over the last 4 years; the administration has invested over the last 6 years to increase enforcement.

He has said to me that this is as much money—he got every cent

he needed—because he said this is as much money as he can use

in terms of the IRS’s ability to hire, train, and assimilate the auditors. So, I think you will see that is very credible.

So what this is going to come down to when you look at this is

that there is no mystery here—a big, big chunk, by far the biggest

chunk of this tax gap is individuals and it is business income, and

it is the related self-employment income.

So, you are talking about small businesses, you are talking about

farmers, and we can just go through all the different things we

could do. I think it would be bad policy for everybody——

The CHAIRMAN. And that is what I am suggesting, that you come

back to us and say, all right, X percent is this category, Y percent

is another category. We can achieve A percent with this, A amount

with this, B amount with that, and so forth. You just start down

the line, which is a lot farther than I have heard from the administration thus far.

Secretary PAULSON. And another thing is—I really do say this

with all due respect—you have been studying this for a long time,

and this has been a major issue for you and this committee for 6

years. So we will lay out why we have done what we have done,

and we will talk with you about any other reasonable proposals to

help you. If you would like to do it, we will work with you. We will

help price it out for you. But again, I do think the things we have

put out are important proposals.

The CHAIRMAN. I do not want to belabor all of this now. But my

interest in this is still getting greater and greater and greater.

36

Secretary PAULSON. All right.

The CHAIRMAN. At the hearing, let us do us both a good favor

by coming up—you coming up—with more solid ideas. No one says

that we are looking for a pot of gold here, but instead of one cent

on the dollar, what about five cents on the dollar? What about 10

cents on the dollar? Ten cents on the dollar, you are starting to get

into real money. But so far you are just suggesting we can get one

cent on the dollar out of that gap, and that is not acceptable.

Secretary PAULSON. What I am trying to do is focus on real, credible proposals.

The CHAIRMAN. Good.

Secretary PAULSON. If we can enact them——

The CHAIRMAN. You bring them up here.

Secretary PAULSON [continuing]. They will make a difference.

The CHAIRMAN. We will have our hearing.

Secretary PAULSON. And a number of them are like the ones that

Senator Grassley asked about.

The CHAIRMAN. All right. Well, that is fine.

Secretary PAULSON. You have to get them in place for a while to

let them work.

The CHAIRMAN. You bring them up here. We will have this hearing, and we will have a great opportunity to address this.

Secretary PAULSON. All right. Thank you.

The CHAIRMAN. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

Mr. Secretary, I just wanted to touch briefly on an issue that I

did not get in on my first round. I am becoming more and more

alarmed about the issue of the growing economic inequality in this

country, and I think other members have expressed that. I know

I have heard Senators on both sides of the aisle concerned about

it.

There was a recent article in the Tax Notes which outlined the

growing economic disparity that we are facing. In fact, I think the

article even contained a quote or two from you, which actually was

quite promising. You did agree there that income distribution and

wage growth is one of the major economic challenges facing our

country, so I was pleased to see those quotes from you.

But an important point in the article is that the distribution of

labor income, specifically in the U.S., has gapped widely in recent

years. To the point that Senator Smith was making about the top

percentage paying more taxes, they are also making more money.

I mean, with the top 10 percent receiving about 50 percent of the

total increase in labor income, it creates, obviously, that dynamic.

The problem is, we are squeezing the middle class out.

For me, I represent a State where 50 percent of the people I represent have an adjusted gross income of less than $25,000, and 80

percent of them have an adjusted gross income of less than

$50,000. If you are raising a family, that is tough.

If you are getting squeezed out in terms of where those income

dollars are going, there is a real problem, particularly if you are

seeing cuts in the programs that reinforce you, whether it is the

availability of college, or even just good K–12 that gives you the opportunities.

37

So I guess my real question is, first, does the administration recognize this as a growing problem? Do you see it as a concern? If

so, what kind of steps do you think that are proposed in this budget are going to turn this kind of thing around?

Secretary PAULSON. Well, Senator Lincoln, thank you for the

comment. Clearly the administration recognizes what is happening

in terms of the income divergence in this country—you have heard

me speak about it, the President spoke about it the other day in

New York, a number of people have thought about it. This has

been a trend, as I said, that has been going on for some time.

Senator LINCOLN. And the middle class, I think—to Senator

Lott’s question—was $135,000. Was that correct?

Secretary PAULSON. In terms of how you define the middle class,

I cannot put a dollar number on it. I would just tell you that this

trend has been going on for a long time. And I think you are focused on the right thing, which is what is happening at the bottom,

and what is happening with the middle class. We would like to see

more progress there.

Senator LINCOLN. I mean, is there something specific in the

budget that you want to point to?

Secretary PAULSON. I would say the most important thing in the

budget, and I know this is not exactly what you want to hear——

Senator LINCOLN. You are going to say building the economy.

Secretary PAULSON [continuing]. Is keeping this—and you are

seeing this—economy growing. Let me just tell you, if this economy

were not growing or if it were in decline, just think what the issue

would be. We are seeing positive movement right now.

Senator LINCOLN. I do not disagree, necessarily, with that. But

if the top 10 percent are receiving 50 percent of the total increase

in the labor income, is there not something we can do in your budget suggestions—we will certainly be looking for them up here—in

ways to make sure that we are assisting in the growth of the middle class as opposed to its demise?

Secretary PAULSON. Well, I have to say that the best, the most

important thing there is, you just ask anybody in the middle class,

is a good job. That is key to everything.

Central to that is making sure that the American people have access to education, and quality education, quality training so that

they have the skills they are going to need in this 21st century

economy. I read with interest Chairman Bernanke’s speech, I think

maybe it was yesterday—it was quite recently—on that topic.

Senator LINCOLN. But we also see that No Child Left Behind has

never been fully funded. We are talking about good education. If

we are talking about incentivizing in terms of college education for

middle-income families, I mean, raising children on $50,000 a year

is tough.

I mean, talk about savings. If you want to talk about savings for

this income category, where are the extra dollars every month that

they are going to be able to put aside if they are still trying to provide for children and, in most instances, taking care of aging parents?

Secretary PAULSON. Boy, I understand. It is not easy. I would

just say that, hopefully, the tax relief has helped. Hopefully——

38

Senator LINCOLN. Well, not many of those actually get a huge

benefit out of a dividend deduction.

Secretary PAULSON. No. I would say the new lower rate and

other rates coming down, some of them, the EITC, the child tax

credit.

Senator LINCOLN. If we had made it refundable and de-indexed

it, we would be making sure that all of those low-income workers

were really making a benefit.

Well, I appreciate it. My time has expired, and I went way over

last time. But I do hope you will work with us, because there is

an important part of creating a very strong fabric in this country.

And it does not just come from the top or supporting the bottom,

it means making sure that every inch of that fabric is strong.

Secretary PAULSON. I think that is the key. I think what all of

us are focused on is getting the bottom up through real growth

there.

The CHAIRMAN. Thank you, Senator.

Mr. Secretary, just one little fine point on this difference between

the income tax that is collected and the taxes owed but not collected. Senator Grassley and I were over at the IRS just last week.

We just got in the car and went over there and met with Commissioner Everson and his top people, maybe about 20 of them or so,

on this subject.

Secretary PAULSON. Yes.

The CHAIRMAN. It was helpful. My goal essentially was to impress upon them how important it is for them to begin to address

this problem, and that we want to work with them.

But I got the distinct impression that they need help in several

ways. One, is resources. I know there are some resources in this

budget, but just 1 year. It is not multi-year.

Secretary PAULSON. We got everything we needed.

The CHAIRMAN. Yes. But I am just saying what my impression

is.

Secretary PAULSON. All right.

The CHAIRMAN. It is computers, it is hardware, it is software. It

is a lot of stuff they need.

Secretary PAULSON. You are not going to get me to defend the

computers and hardware in the government, or in Treasury, or in

the IRS.

The CHAIRMAN. Yes. Exactly. So you know.

Secretary PAULSON. We have more to do there.

The CHAIRMAN. Yes, we definitely do.

Secretary PAULSON. When we have money.

The CHAIRMAN. Also, there was a little sense of, everyone over

there is so siloed and so focused on their own little areas, that they

are not really thinking about how to get at the tax gap.

I have talked to personnel over there who said they did not even

hear about the tax gap, they did not even know about it, working

there, until they came to the Congress and worked in the Congress.

Did not even know about it.

So I am saying to you, as a very successful, creative man, I am

sure when you were at Goldman, your prior job, that you instructed

your people to be pretty creative and to come up with some new

ways of doing things, not the old ways, but the new ways, because

39

we have to find a way to attack this problem in a very solid, creative way.

The ideas that have come forth in the President’s budget, and

you have enumerated one of them, come across as kind of off-theshelf stuff. The agency has not been challenged enough by you to

say, ‘‘Come on, let us solve this thing. Come up with ways to solve

it. You come back to me with ways to solve it,’’ and just a lot more

firm direction from you to the agency.

I think that would go a long way. We in the committee are trying

to help that process by meeting with them and saying we want to

help you, we will work on legislation that you think is needed. But

we need a lot more from you, that is you personally, as well as

from the Commissioner at the IRS and the people over there, to address it. We are not going to let this go away.

Secretary PAULSON. Right.

The CHAIRMAN. I am sure we can do a lot better than one cent

on the dollar. Much better.

Secretary PAULSON. Mr. Chairman, I understand your comment.

I just want to let you know that this is something that we have

been focused on. In terms of enforcement and in terms of going

after the corporate side, in going after tax shelters, abuses and so

on. I think you will find that Mark Everson has been very aggressive and creative in doing this.

In terms of the legislative proposals we have, I actually think

that some of the ones that have not been passed before may be difficult to get passed. When I have looked at some of the ones that

have come forward, I have proposed them because we want to

make a difference. But each one of them on the reporting side creates a burden that there will be one sector, one group that will not

like it.

The CHAIRMAN. I understand. I understand.

Secretary PAULSON. I wish I could report to you that when it

came to the tax gap, the under-reporting, that there was a way to

deal with under-reporting of income other than legislative proposals that require us to go further. There is a whole list of things

we could do, a whole list of things that we have talked about, but

most of them have to do with asking everyone to bear unacceptable

burdens. Who knows why people do not pay? Some may not pay because they do not understand, some may not because they want to

avoid taxes.

But we would have to ask everyone, for example, when there is

a cash transaction, whether it is to pay the plumber, whether it is

the farmer’s wife selling eggs, or whatever, to fill out a 1099, give

it to the other side, and send it to the IRS. These things all have

a cost to them.

I know you are creative too, and I know you have a creative staff

and committee, and you have been thinking about this for a long

time. I think we should roll up our sleeves. We will look at all of

the ideas you have. We will give you the things we are considering.

But I do think, whether they are off the shelf, which I do not

think they are, I would say a really good start would be passing

into legislation the proposals we have, and then doing more. Let us

just keep working on it as we find things that make sense.

40

The CHAIRMAN. You will find this committee will receive your

ideas in more than good faith.

Secretary PAULSON. Good.

The CHAIRMAN. More than good faith. We just need to get them.

Secretary PAULSON. You have 16 of them.

The CHAIRMAN. Yes. But it is only one cent on the dollar. That

is not very far.

Secretary PAULSON. Well, let me tell you something.

The CHAIRMAN. That is $29 billion.

Secretary PAULSON. We are talking about real money. Let us go

get that real money and then we will keep——

The CHAIRMAN. But I think your suggestions will be in better

faith if they do not dribble in—something that is fairly significant

rather than something that is pretty paltry.

Secretary PAULSON. I think you will find what has been done on

the enforcement side and what has been done over the last 4 years

is significant. I think we are going to have to do more work on this

with you for you to see that this could not be in better faith, and

if there are other things that we could see that would not be more

harmful than helpful and would not be, in our judgment, bad policy, we would be proposing them.

The CHAIRMAN. Right. Correct me if I am wrong here, I think the

current compliance rate on the individual side is about 83 percent.

Commissioner Everson said they can reach 90 percent by the year

2010. I do not know if that is with new proposals or just doing a

better job.

Secretary PAULSON. I have talked with Commissioner Everson a

lot about this, and you should talk with him. I will tell you what

I know: he has brought in about $15 billion through direct efforts.

He believes, and I know some other people believe, that there is an

indirect effect; there is a behavioral effect that results from that.

So he would say that there are billions of additional dollars that

have come in as a result of what he has done.

What we are proposing to you are other steps. He has done that

through enforcement efforts, and he is going to keep doing that. We

are putting money in the budget. But what we are talking about

now is going after the big percentage of this, which involves underreported income, and it is going to mean more reporting.

It is going to be greater reporting, and there is just a list of

things. We could say that every transaction has to be done with a

credit card or electronically, keep the receipt, send it to the IRS.

There is a whole host of things you could do.

The CHAIRMAN. Good. We are making progress here.

Secretary PAULSON. Well, I would say that I do not want to do

those things, because I think it is going to be onerous and bad policy. But, as we lay it out, you may want to.

The CHAIRMAN. Oh, no, no. That is not fair. I mean, I want you

to come up—I think most American taxpayers are not happy that

they are paying taxes and a lot of other people are not paying their

taxes.

Secretary PAULSON. Including this one.

The CHAIRMAN. Right. So I think that is the challenge to both

of us, but especially to you because you are the one who has the

41

resources and knows what works and does not work to come up

with——

Secretary PAULSON. Our resources are available to you, Mr.

Chairman.

The CHAIRMAN. No, that is not fair.

Secretary PAULSON. Yes, it is. Any idea you have, we will give

you the numbers. This is not rocket science.

The CHAIRMAN. We are asking you to come up with some ideas.

This next hearing is going to be a really good hearing.

Secretary PAULSON. I look forward to it.

The CHAIRMAN. I hope it is good in the positive sense, not a good

hearing in the negative sense.

The hearing is adjourned.

Secretary PAULSON. Thank you.

The CHAIRMAN. Thank you.

[Whereupon, at 5 p.m., the hearing was concluded.]

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