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PRESIDENT’S FISCAL YEAR 2009 BUDGET

(REVENUE PROPOSALS)

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 5, 2008

(

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

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

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, Department of the Treasury, Washington, DC ............................................................................................................. 6

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Grassley, Hon. Chuck:

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

Paulson, Hon. Henry M., Jr.:

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

Prepared statement .......................................................................................... 33

Responses to questions from committee members ......................................... 35

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 44

(III)

(1)

PRESIDENT’S FISCAL YEAR 2009 BUDGET

(REVENUE PROPOSALS)

TUESDAY, FEBRUARY 5, 2008

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

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

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

(chairman of the committee) presiding.

Present: Senators Bingaman, Lincoln, Wyden, Stabenow, Salazar, Grassley, Hatch, Snowe, Kyl, Smith, Crapo, Roberts, and

Sununu.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The French poet and filmmaker Jean Cocteau said, ‘‘True realism consists in revealing the surprising things which habit keeps

covered and prevents us from seeing.’’

A good budget must be realistic. It must be realistic in the sense

of presenting a true reflection of reality. At the same time, a good

budget must also be realistic in Cocteau’s sense of revealing things

that habit keeps covered.

Today we will test President Bush’s final budget against the

measure of realism. We will discuss the President’s economic agenda with his chief economic advisor, the Secretary of Treasury,

Hank Paulson.

As we meet, America’s economy is slowing. Secretary Paulson

has been the administration’s lead negotiator on economic stimulus. Thus, I begin our discussion by commending the Secretary for

his work to forge the stimulus bill that passed the House, and I encourage Secretary Paulson to be open to improvements that the

Senate will make to the package.

I am thinking of improvements like extending the tax rebate to

20 million seniors whom the House bill left out, and I am thinking

of the quarter-million disabled veterans that the House bill left out.

I am confident that the Senate will pass these changes. I am also

hopeful that the administration will find it realistic to endorse

them as well.

Turning to the President’s budget proposal, it claims to project

a surplus in the year 2012, even while making permanent the 2001

and 2003 tax cuts that expire in 2011. A surplus would be a fine

outcome if the projections were realistic, but they are not. The

President’s budget achieves surplus in 2012 only by omitting sevVerDate 11-MAY-2000 14:55 Feb 22, 2010 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 54764.000 SFIN1 PsN: SFIN1
2

eral massive costs. It provides $70 billion for the wars in Iraq and

Afghanistan in fiscal year 2009 and nothing in any year thereafter.

Clearly, it will have to be more than $70 billion, even in 2009.

It omits all costs beyond 2008 for fixing the Alternative Minimum Tax. In my home State of Montana, about 6,000 families

paid the AMT last year. Without a fix after 2008, this number

would greatly multiply. The admission of any AMT fixes in those

5 years unrealistically lowers the cost of extending the 2001 and

2003 tax cuts.

The budget’s growth rates for non-defense discretionary spending

are unrealistically low in each of the out-years. If these costs were

not omitted, the President’s budget would not be in surplus in

2012. This administration’s last budget ends with the same lack of

candor that characterized those that preceded it.

The budget also proposes deep and misguided cuts for Medicare

and Medicaid. The health portion of this budget is not realistic policy, but an ideological statement. For Medicare, this budget proposes more than $182 billion in cuts over 5 years, but the budget

proposes no cuts to private plans in Medicare despite extensive evidence that these plans are over-paid. The budget also cuts Medicaid. It would reduce spending by $17

billion over 5 years. All of these cuts would have devastating effects

on medical care for seniors, people with disabilities, children, and

the poor, whom Medicare and Medicaid service. Congress will not

carry out those proposals.

On taxes, the President once again requests that Congress simply make permanent its 2001 and 2003 tax cuts. Once again, this

proposal fails the test of realism. I helped to enact the 2001 tax

cuts, but we need to examine the effectiveness of each of these tax

changes. It is only realistic to acknowledge that this discussion

must be part of a larger debate on tax reform.

The budget also reflects the President’s lukewarm commitment to administering the tax laws effectively. Every year, $345 billion

of taxes legally owed go unpaid. Allowing this tax gap to continue

is fundamentally unfair to honest, hardworking Americans who pay

what they owe on time. They should not have to carry the tax burden of those who do not.

Last year at my insistence, the Treasury developed a plan to reduce the tax gap. I question the administration’s commitment to

see that plan through. The budget simply does not have sufficient

resources to carry it out.

And a realistic budget would reveal the surprising degree to

which our economy has grown more integrated and global. A realistic budget would shed the habits that prevent us from showing

our commitment to American workers, farmers, and fishermen

through Trade Adjustment Assistance. The budget rightly increases

funding for the TAA for workers and TAA for firms programs, but

astonishingly discontinues funding for the equally critical TAA for

farmers program.

We have the opportunity to get Trade Adjustment Assistance

right this year. Reformed and expanded TAA is my top trade priority. Other items on the agenda. Free trade agreements with Columbia, Korea, and Panama will take a back seat until new, robust

TAA is in place.

3

Finally, budget deficits projected for 30, 40, or 50 years from now

are unsustainably large. The President’s budget falls into the old

habit of just blaming the three big entitlement programs, Social Security, Medicare, and Medicaid. But a realistic budget would reveal

the surprising truth, that the long-term problem is not an entitlements problem, it is a health care problem.

Health care costs are growing faster than the economy in the private health care sector as much as in the government programs.

We must find a way to control the growth of health care costs in

the entire economy. The solutions for the private sector will help

Medicare and Medicaid, and vice versa. The President’s budget is

wrong and argues that we should just cut benefits in Medicare,

Medicaid, and Social Security. We cannot solve the problem of

growing health care costs on the backs of seniors, people with disabilities, and the poor.

So let us work together to formulate an economic policy that presents a true reflection of reality. Let us work together to formulate

an economic policy that addresses challenges that habit keeps covered. Let us work together to formulate an economic policy that

truly meets the test of realism.

I will turn to my colleague, Senator Grassley.

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Today we focus on the revenue side of the

budget. It is almost entirely in this committee’s jurisdiction. Today

we will focus on what the President is proposing for taxes, but my

guess is, for the rest of this year everybody concerned about tax

policy is going to be focused on what the presidential candidates

are saying about taxes. It is very clear that there is quite a distinction between the approaches of the two political parties as the presidential campaign comes up.

Every candidate for President of the United States on the Democratic side wants to let the tax laws of 2001 and 2003 expire, by

which we would have the biggest tax increases in the history of the

country without a vote of Congress, whereas Republican candidates

have pledged to have the tax policy of 2001 continue beyond the

year 2010, and that is part of the President’s budget. But I think

the focus is not going to be on the President’s budget, the focus is

going to be on what the next President will do, whoever he or she

is.

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 a revenue glide path that

is above the historic average of revenue as a percentage of Gross

Domestic Product.

Now, some on the other side may argue that higher-than-historic

average taxation is not enough to fund the government; they have

the idea of yet bigger government. But that is 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.

This is a debate that should be fully engaged when the parties

nominate their presidential candidates; as I indicate, that will be

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the debate for the rest of the year. The debate ought to be about

where the level of taxation ought to be. It implicates this budget

over the short-term, the mid-term, and the long-term.

For instance, my guess is that my friend, Senator Wyden, might

bring up tax reform and the plan that he has worked so hard on.

A key question on tax reform is whether we assume all tax relief

that expires at the end of 2010 is in place or not. If we assume current law, then the level of higher taxes American families will face

on average is over $2,000. If we assume current law, tax relief provisions are not going to be permanent beyond 2010. If we extend

bipartisan tax relief, American families will get to keep what they

have now. Again, middle-income families that we’re talking about

would have $2,000 more in their pockets.

We will see some on the other side focus on the next 2 fiscal

years, where the stimulus proposal takes effect. If you look back at

the debates that we had in 2002 and 2003, there was a lot of focus

on fiscal year 2004. That was a year when a lot of stimulus kicked

in. Revenues dipped then, but they came roaring back in fiscal

years 2005, 2006, and 2007.

Another point needs to be taken into account for the next 2 fiscal

years. It is this: the stimulus package is bipartisan, and Democrats

control both bodies of Congress. So my friends on the other side,

you own the deficit effects of the economic stimulus package just

as much as the President does.

For those of us who are participating in that process, including

this Senator, we bear responsibility as well. You cannot take credit

for responding to the economic downturn and be critical of the deficit impact of the package that we are legislating.

So, as we look at the trend line in the budget, let us bracket the

impact of the stimulus package. What is clear today with the stimulus package accepted 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 that Democrats and Republicans should agree on.

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 benefited greatly from the

bipartisan tax relief. I am referring to the marginal rate relief,

marriage tax relief, increased child tax credit, education tax relief,

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

While we are talking about the AMT, I want to praise the administration for being transparent about the so-called patch. It is covered in the budget. It is not offset, and affects the bottom line of

the budget. The last Congressional budget was described as covering the AMT, but relied on unspecified and unscored offsets. I

pointed this defect out as we went through the budget process last

year. My prediction was proven true at the end of last year. I will

make the same prediction this year. My guess is, I will meet the

same denials, and we will have the same results.

So, Mr. Secretary, with respect to the AMT, your budget is more

transparent than I expect our budget is going to be. With that said,

Mr. Secretary, I do not think that your budget or the Congressional

budget should count AMT revenue for years beyond this fiscal year.

5

Transparent budgets would eliminate this revenue that we will not,

and should not, collect.

In Chairman Rangel’s words, ‘‘the mother of all tax reforms’’ was

transparent about AMT. Chairman Rangel put on the table, repeal.

He substituted a new tax on upper middle-income and higherincome taxpayers. Chairman Rangel’s proposal also used revenue

from the expiration of the bipartisan tax relief plans that I referred

to earlier. We can applaud Chairman Rangel for his leadership. He

has taken heat for the proposal. I agree with him on repeal of

AMT. It is a tax that was never intended to pull in 25 million

middle-income families.

I disagree with Chairman Rangel that we need to keep revenues

at historic highs as a percentage of GDP as a condition for repealing a tax that we never intended to collect in the first place from

middle-income taxpayers. Chairman Rangel is being transparent

about the AMT and his viewpoint that a high revenue base needs

to be maintained.

Mr. Secretary, though your budget counts AMT revenues beyond

fiscal year 2009, like Chairman Rangel, the administration’s budget accounts for the bipartisan tax relief of 2001 and 2003. As he

has done every year, the President proposes to make the tax relief

that virtually every American taxpayer enjoys permanent. It is

there in the black and white of the budget. It affects the bottom

line of the budget. It is very transparent.

Unlike Chairman Rangel and the administration’s budget, the

fiscal year 2008 Congressional budget is not transparent. It stated

by default what Chairman Rangel and the administration were

transparent about. What I am referring to is the fact that the Congressional budget basically assumed the post-2010 tax relief expired. That budget did contain an allusion to $180 billion of tax relief. It was a small fraction of what is involved. That tax relief was

subject to a trigger mechanism that would have made Rube Goldberg proud.

Mr. Chairman, we have a fiscal crisis. The baby boom generation

will be retiring, and that is going to cost 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 problem with record levels of Federal taxation. As I said before, that is a separate debate. We can have it.

We ought to have it, and we ought to be transparent about it.

The President’s budget keeps the burden of taxation in check.

The President’s budget also lays bare the defects in the tax treatment of health insurance. Finally, Mr. Secretary, I appreciate the

comprehensive set of tax gap initiatives that are in the budget.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

I will turn now to Treasury Secretary Paulson. Mr. Secretary, as

you well know, we would encourage you to limit your remarks to

5 minutes. Frankly, if you have a couple minutes more, that would

be all right. Your entire statement will be in the record. We look

forward to your presentation of the President’s budget.

Why don’t you proceed?

6

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

DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Secretary PAULSON. First of all, Chairman Baucus, Senator

Grassley, members of the committee, I am very pleased to be here

today to discuss the President’s budget for fiscal year 2009.

As Treasury Secretary, my highest priority is a strong U.S. economy that will benefit our workers, our families, and our businesses.

Through a measured approach that balances our Nation’s needs

with our Nation’s resources, the President’s budget supports that

priority.

This is especially important now as, after years of unsustainable

home price appreciation, the U.S. economy undergoes a significant

and necessary housing correction. This correction, combined with

high energy prices and capital markets turmoil, caused economic

growth to slow rather markedly at the end of 2007.

The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe that our economy will continue to

grow, although at a slower pace than we have seen in recent years.

Yet, the risks are clearly to the down side. President Bush knows

that economic security is of the utmost importance to the American

people.

In recent weeks the potential benefits of quick action to support

our economy became clear and the potential costs of doing nothing

too great, so we are gratified that Congress is advancing the

growth package to support our economy as we weather the housing

correction. We believe that a growth package must be enacted

quickly. It should be robust, temporary, and broad-based, and it

must get money into our economy quickly.

The Senate has begun to consider its version of this bill, and I

am hopeful that you will complete your consideration soon. If we

keep moving along the fast track and Congress sends the President

a bill that meets our shared principles, rebate payments can start

in May and be completed in the summer. Together, the payments

to individuals and investment incentives for businesses will help

create more than half a million jobs by the end of this year.

In addition to an economic growth plan to help us weather this

housing correction, the administration will continue to focus on aggressive action to provide alternative options to foreclosures. This

includes encouraging Hope Now Alliance’s outreach to struggling

homeowners. Congress can do its part by finalizing the FHA Modernization and Government-Sponsored Enterprises Regulatory Reform bills, and by passing legislation that will allow States to issue

tax-exempt bonds for innovative refinancing programs.

We continue to monitor capital markets closely and to advocate

strong market discipline and robust risk management. Working

through the current stress is our first concern. Through the President’s Working Group on Financial Markets, we are also reviewing

underlying policy issues, as it is just as important to get the longterm policy response right.

While we are in a difficult transition period as markets reassess

and re-price risk, I have great confidence in our markets. They

have recovered from similar stressful periods in the past, and they

will do so again.

7

The administration will also continue to press for long-term economic policies that are in our country’s best interests: a pro-growth

tax system, entitlement reform, and a balanced budget. To that

end, the President’s budget makes the 2001 and 2003 tax relief

permanent, and keeps the Federal budget on track for a surplus in

2012.

In the future as in the past, our long-term economic growth will

also be enhanced by supporting international trade, by opening

world markets to U.S. goods and services, and by keeping our markets open. Congress can help create jobs and economic opportunity

by passing the pending free trade agreements with Columbia, Panama, and South Korea.

I appreciate the cooperation and the cooperative and bipartisan

spirit that has brought the Congress and the administration together to support our economy and look forward to that spirit continuing as we work through this period.

Thank you, Mr. Chairman.

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

The CHAIRMAN. Thank you, Mr. Secretary. I very much appreciate your openness to Senate improvements on the House-passed

stimulus package. I very much appreciate that because, clearly, the

Senate is going to act as it should act.

We also should act very quickly. The basic date we have all given

each other is by February 15; we certainly can pass and have on

the President’s desk a stimulus package which reflects the Senate

improvements to the House bill by then. I very much thank you for

your expression of openness and working with the Senate in the

sense of improvements to the House-passed bill.

I have a question, though, about the budget. Just a basic kind

of yes or no sort of answer. That is, would the projected surplus

in the President’s budget not evaporate if an AMT patch was included for not only 2009, but for the subsequent years? My calculations are, according to CBO, that the cost of the AMT fix is about

$75 billion in 2009, $76 billion in 2010, $71 billion in 2011. Then

it is down to $42 billion in 2012.

But then the budget’s assumption of extension of the 2001 and 2003 tax cuts increases that, so the total for 2012 is about $103 billion, which does not include Iraq or supplemental costs, which are

not included. So is it mathematically true that, if an AMT patch

were included and it would have an interactive effect on the extension of the 2001 and 2003 tax cuts, that the budget would not be

in surplus in that year?

Secretary PAULSON. Mr. Chairman, let me, first of all, react to

your comment on the stimulus. The sooner we get this enacted and

signed, we can begin work immediately on working toward getting

the checks out to the American people. So the day this is signed

is the day we can make real progress with the IRS to begin reprogramming, and so on.

So, first of all, I just appreciate very much you and the leadership of the Senate working collaboratively to get this done quickly.

Second, as you know, I am not here to negotiate a stimulus package at a public hearing. I have strong preference for the approach

the House takes. I recognize that you are working with similar

8

principles, and I think we will work through this and come out to

a satisfactory, quick end. I just appreciate the spirit with which

you are driving this.

Now, to get to your question about AMT, I want to even come

back and say something about transparency. I believe that this is

a transparent budget on every issue. I think we are very transparent on AMT, because we have the AMT patch in this budget.

The CHAIRMAN. For 2009 only.

Secretary PAULSON. For 2009.

The CHAIRMAN. Only.

Secretary PAULSON. That is right. Then beyond 2009, it is also

very transparent, that we have the revenues in the budget. We say

very explicitly, this is a tax that we think, if it goes into effect, is

going to be an unexpected tax on the American people. I agree with

Senator Grassley. Then what we said——

The CHAIRMAN. I might ask that, if you have the patch in one

year, why do you not have the patch for subsequent years?

Secretary PAULSON. The reason we do not is, I think we have

been very clear in saying we think that we need to look at this

issue in the context of the broader entitlement issue. We need to

look at it in the context of Medicare and Social Security, the issues

that you have raised. We need to look at it in the context of what

percentage——

The CHAIRMAN. Does that mean more cuts in Medicare and Medicaid?

Secretary PAULSON. I think——

The CHAIRMAN. If you have an AMT patch, basically what you

are implying is even deeper cuts to the budget that provides for

Medicare and Medicaid.

Secretary PAULSON. What we tried to do, and what I was sure

trying to do, was to say, let us come together, let us come to the

table and let us talk about the elephant in the living room, which

is the point you made at the end of your remarks, which is a big

structural deficit. When we looked at the deficit, the $160 billion

today, 1.2 percent of GDP that we had at the end of 2007, is not

the issue. The big issue, and the longer-term issue, is the entitlements. What we have said is, during transparent——

The CHAIRMAN. Mr. Secretary, is it not health care? It is not entitlements, it is health care. It is not entitlements, it is health care.

Let me repeat. You know the facts. If you were to look at a chart

and the long-term trends of the Social Security and Medicare trust

funds and the big drivers as to what actually increases the debt,

what are they? The big driver is not Social Security. Let me finish,

Mr. Secretary.

It is not Social Security, it is interest on the debt and it is Medicare. Those are the big drivers. Now, look at Medicare more closely.

CBO has a very strong analysis on this. CBO says, the reason the

Medicare trust fund is increasing is not so much because of more

baby boomers. That is true that is a factor, but it is not really the

factor.

The real factor is health care costs for the entire economy are

going up, both the public sector and the private sector. It is health

care costs that are going up. So it is wrong to just slash Medicare.

9

That is just going after the symptom of the problem, not the causes

of the problem.

The right thing to do is go after the causes. The right thing

would be for the administration, for this Congress, and for the private sector to figure out how we are going to get health care costs

for the entire economy down, and then we will be able to have a

good handle on the only real problem in entitlements, and that is

Medicare. It is a health care problem, a health care cost problem.

It is not a baby boom problem, it is a health care cost problem.

That is the way to get at the solution here.

Secretary PAULSON. Mr. Chairman, I will agree with part of what

you said. As I look at the entitlements, it is Medicare and Social

Security. Medicare is the biggest——

The CHAIRMAN. By far.

Secretary PAULSON. And it is the most complicated.

The CHAIRMAN. Correct.

Secretary PAULSON. Social Security is analytically easier, and

that is why we started there. But the problem is 2-fold. It is demographic, and with Medicare, as you pointed out—and with health

care, which is the number-one problem we have, and we have two

problems—we have demographics and we have the problem that

the costs are growing much faster than the entitlement.

The CHAIRMAN. I urge you to read the CBO study. You will find

it is much less demographic and it is much more health care costs.

Secretary PAULSON. I have to say, in terms of being in agreement, we do agree that the health care costs are growing much

faster than the economy.

The CHAIRMAN. All right. Thank you. I am way over my time.

Secretary PAULSON. And that is a big issue.

The CHAIRMAN. All right. Thank you.

Senator Bingaman?

Senator BINGAMAN. Thank you very much for being here, Mr.

Secretary. Let me ask, first, the budget deficit projection is $407

billion, as I understand it. That is based on an assumption that the

economy is going to grow, in 2008, at a rate of 2.7 percent. At least,

that is the way I am understanding what you have presented here.

As I understand it, the economy grew at 0.6 percent in the fourth

quarter of last year, 2007, and CBO now estimates that in 2008 it

will be 1.7 percent, not 2.7.

So I would ask if you think, obviously the slower the growth in

the Gross National Product and GDP, the less revenue the government can expect, and the larger the deficit. Have you done a calculation as to what the size of the deficit would be under this budget if growth is at the level CBO projects?

Secretary PAULSON. Yes, Senator Bingaman. Let me say that the

2.7 percent estimate that was in the budget was the one that was

put out in November and the economy has slowed since that time.

That is a couple months old.

If you look at the estimate on economic growth over the 5-year

budget window, they are very close, whether any of the estimates

are on top of each other. If you were to take the 1.7-percent CBO

estimate for this year, the difference is $15 or $20 billion. Again,

I was getting back to the point I made to the chairman. When we

10

are talking about the long-term issues, there are structural issues.

But in any event, your question is $15 to $20 billion.

Senator BINGAMAN. Now, let me also understand, on funding for

the war in Iraq, are the budget numbers that you have presented

to us and that $407 billion deficit, does that assume a certain level

of funding for the war in Iraq or does it not in this coming year?

Secretary PAULSON. You will be able to obviously talk with others in more detail about this, but what we have in terms of 2009,

you have $70 billion, which is a placeholder. That will need to be

updated when General Petraeus comes back and reports, and so on.

In terms of what we are going to spend this year, Congress, I believe, is yet to appropriate $108 billion which is going to be needed

right now.

Senator BINGAMAN. So we need the $108 billion, plus we need

the $70 billion, plus we need whatever General Petraeus says in

his report in March. The amount that General Petraeus asked for

is not included in the budget.

Secretary PAULSON. Because it is unknowable now. To me, as I

said to the chairman, I think it is pretty transparent. That is a

placeholder and that will change based upon what the requirement

is.

Senator BINGAMAN. One of the issues that we have spent a lot

of time on here in this committee is trying to maintain the various

renewable and alternative energy tax provisions that we have put

into law in the 2005 energy bill, such as the section 45 production

tax credit for wind, energy, and the investment tax credit for solar

as well.

There is nothing in your budget to indicate a desire to extend

those beyond their expiration date the end of 2008. Do I take it

that the administration opposes extending those provisions?

Secretary PAULSON. Senator, let me begin by saying that I am

personally a great admirer of what you are doing in the energy

area. I very much appreciate your leadership. When you look at the

extenders, there is a large number of extenders; some are in the

budget, others are not. You should not take as a given the fact that

if something is not in the budget, that we will be opposing it.

But looking at it more generally, energy is a very high priority

for the President. Alternative energy is. We are pleased with the

bill that the President signed last year. More needs to be done.

There are other ways of getting energy through the tax code. I

know that is the focus of this committee.

The Treasury Department is not an expert in energy, that is the

DOE. So, there are sometimes issues in terms of whether Treasury

should be administering our energy policy. But again, these are

things we can talk about. We certainly share your objectives as it

relates to energy security for this country.

Senator BINGAMAN. My time is up, Mr. Chairman. Thank you.

The CHAIRMAN. Thank you very much, Senator.

Senator Crapo?

Senator CRAPO. Thank you very much, Mr. Chairman.

Mr. Secretary, I appreciate the careful attention that you are giving to our capital markets and the attention that the administration has paid in trying to address some of the underlying infraVerDate 11-MAY-2000 14:55 Feb 22, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 54764.000 SFIN1 PsN: SFIN1
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structure issues that we deal with in this Nation as we put this

budget forward.

I want to go back to the AMT as well. I also noted that the administration did not essentially deal with the repeal of the AMT in

the out-years after the first year of this budget, but I understand

that the administration is still very supportive, is it not, of a fix

for the AMT, including a repeal of the AMT, or at least a permanent fix along the lines that Congress has been working on on a

yearly basis in the past. Is that correct?

Secretary PAULSON. Yes. We clearly would like to patch it this

year. I very much endorse what Senator Grassley said. We could

remove a lot of uncertainty and just get to the chase, because I do

not think anyone is going to believe, at the end of the day, we

should be raising taxes to pay for the AMT relief this year.

In the out-years, what we are saying is, Congress needs to come

together, work with the administration—they have to do it at some

time—to address this issue and address it against the backdrop as

to how big a share of our GDP is going to be taken up by taxes.

How big a share of the GDP by taxes, and also addressing some

of the other issues in that context, which are going to be the entitlement reform. So that has been our position, and it has been pretty transparent.

Senator CRAPO. In the context of what portion of the GDP should

be taken up by taxes, it seems to me that we need to make the tax

policy permanent that we have dealt with already through 2001

and 2003 tax cuts. We need to deal with the AMT in terms of, in

my opinion, permanently repealing it and then dealing with the

issue.

But that is also going to require us to have an overall look at

our tax code and really go through the tax code with a fine-toothed

comb and engage in some very significant tax reform policy, is it

not?

Secretary PAULSON. I think it will.

Senator CRAPO. Let me, in just the few minutes we have left,

shift to the entitlement issue. I know that you and the chairman

just had a discussion about whether it is health care or entitlements. As I see it, Medicare is health care. One way or the other,

we are going to have to deal with the issue. I noted in the budget

that the President has suggested that we cut back in the neighborhood of something like $174 billion, which over time will help us

to address something like $34 trillion of our unfunded liability.

Could you explain that part of the budget a little better?

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

would agree with the chairman and with you, that a big part of the

entitlements issue is health care, and that is reflected in Medicare.

I would also agree that the problem is compounded by the fact

that, added to the demographic issue, health care costs are going

up so quickly.

So what this administration has done is put out a plan where the

$178 billion is a net cut over 5 years, but what it really is doing

is changing the trajectory of growth. Those payments are going to

be going up. What it is going to do is, it would change the trajectory of growth from 7.2 percent to 5 percent. What that does is, if

12

you look out 75 years, it will take a third of that deficit, which is

your $34-trillion number.

So again, we cannot make a dent in this unless we start dealing

with the root problem. This is a way to get the discussion going.

The focus is means-testing and ways of making it more efficient.

Senator CRAPO. I was just going to ask that. The specifics of how

you suggest that we achieve these savings is primarily in meanstesting and efficiencies?

Secretary PAULSON. Efficiencies. Yes.

Senator CRAPO. All right. Thank you very much.

The CHAIRMAN. Thank you, Senator.

Senator Salazar?

Senator SALAZAR. Thank you. Thank you very much, Chairman

Baucus and Ranking Member Grassley.

Secretary Paulson, thank you for your service.

The stimulus package obviously is a major concern of this committee, and obviously of the Senate as we move forward in considering that stimulus package, hopefully this week. I would like you

to respond simply yes or no to the following questions, since you

were one of the key negotiators, I understand, of the House and the

President’s package.

First, with respect to undocumented workers, would it be an improvement upon the House package if the final stimulus package

prohibited undocumented workers from receiving tax rebates?

Secretary PAULSON. The intent was always to obey the law. We

agree, we should work to get a clarification.

Senator SALAZAR. So the answer to that is yes, that would be an

improvement?

Secretary PAULSON. The answer is what I gave you.

Senator SALAZAR. All right. So it is yes.

The second question. Would it be an improvement to the stimulus package in terms of putting money into consumers’ pockets for

investing into the economy if we were to cover the 20 million seniors who are now left out of the House package?

Secretary PAULSON. I am not going to give you a yes or a no to

that. I will give you an answer, if you would like it. Would you like

it?

Senator SALAZAR. I would like it short.

Secretary PAULSON. I will be short and to the point. Our starting

point was to deal with those who pay taxes, like you all did in

2001. In the House, this was expanded to deal with working families with a big refundable portion to it. Clearly we recognize the

difficulties that low-income seniors and veterans are facing, and I

am sure we will be able to work something out and get something

quickly done that is broad-based.

Senator SALAZAR. I appreciate that, Secretary Paulson. It seems

to me that with respect to both the 20 million seniors and the

250,000 disabled veterans that, if we are talking about getting

money into the pockets of American consumers who will help us

stimulate the economy, that that would be a good place to go. I am

hopeful, as you included in your statement there, that we in the

Senate can work with all of you to try to get that aspect across the

finish line here.

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Secretary PAULSON. Yes. Senator, I am not trying to be rude with

‘‘yes’’ or ‘‘no.’’ It is just, I do not think this is the right forum to

negotiate this.

Senator SALAZAR. All right. I understand that.

Let me ask you this as well. There is some debate on the stimulus package and the high unemployment rates and whether we

extend unemployment benefits. There are at least some pockets of

the country—Michigan, notably, and my colleague from Michigan is

here, as well as places like Nevada and others—where you are having unemployment rates reach as high as 8 percent. Would it be

appropriate for us in this stimulus package to take a look at extending unemployment benefits at least to those parts of the country that are receiving that kind of unemployment sticker shock?

Secretary PAULSON. Senator, you have focused on an issue that

has received a lot of discussion, and I think implicit in your question is my apprehension that, with unemployment of 4.9 percent,

to extend benefits would be unprecedented and it would send a

message to the world which I think is the wrong message here. I

have looked over the years, and the one time where I have seen

unemployment insurance extended—I guess I would put it this

way. It has never been extended when unemployment was below

5.7 percent.

Senator SALAZAR. I understand the facts there. I also understand

the reality of the regional differences that we are seeing around the

country.

Let me shift off the current stimulus package to anther question,

because I know I have a limitation on time here. It would seem to

me as just one Senator—I am not speaking for Senator Baucus or

the leadership or anybody else—that the stimulus package has to

be but phase one of how we try to get our economy out of the ditch

and back on solid track, and that we ought to move quickly from

passing the stimulus package over to dealing with at least three

central economic issues, in my view. One of them is the housing

crisis. I think you outlined a number of different provisions that we

could respond to affirmatively to deal with the housing crisis.

Second, to move forward with the passage of a farm bill that will

help us with our food security, which we have spent a lot of time

on here in the last few years.

Third, moving forward with a more robust energy package, which

is the tax portion of the energy bill, which was not included in the

bill that the President signed in December.

Do you think that a second phase like that, quickly on the heels

of passing the stimulus package, might make sense, whether it is

those aspects of it or other parts of a package that you might put

together?

Secretary PAULSON. Yes. Senator, first of all, your objectives in

all three of those areas, I agree with. Now, in terms of the details,

there will be plenty of room for discussion. But first of all, with regard to housing, we have a number of initiatives. There are additional actions we need from Congress, and I could go through those

if you wanted me to take the time, number one.

Number two, there have been some big——

Senator SALAZAR. Would it make sense—just on that one, because I am already out of time—to do that quickly as soon as we

14

get the stimulus package, to move over and to deal with those

issues?

Secretary PAULSON. Yes. There are parts that could be done as

quickly, or even quicker, than the stimulus package if they are on

a separate track. I mean, they are all important. But FHA modernization. We have a House bill, we have a Senate bill. They could

get together and have something on the President’s desk next

week.

Senator SALAZAR. Thank you, Secretary Paulson.

The CHAIRMAN. Thank you, Senator.

Senator Grassley?

Senator GRASSLEY. Thank you, Mr. Chairman.

Mr. Secretary, since this hearing is about the revenue side of the

budget, I will start off by looking into the trend line of revenues.

CBO reports said, over the past 40 years, taxes as a percent of

GDP averaged 18.3 percent. In the year 2000, Federal taxes took

20.9 percent of GDP. That is a record post-World War II level. Individual income taxes were at even more dramatic levels. CBO reported individual income taxes were 10.3 percent of GDP.

CBO has also indicated that revenues hit a trough at about 16.3

percent in 2004, but in 2005 revenues increased to 17.5 percent, in

2006 to 18.5 percent, and in 2007 jumped to 18.8 percent. That is

higher than the historical average, all with the AMT patch and the

2001 and 2003 tax cuts in place. We have a chart here, so you

know what the trend line is. I am sure you are aware of that.

Maybe most of the public is as well.

CBO’s most recent projections show that total taxes will continue

to be above the historical average through 2010 when the 2001 and

2003 tax cuts expire. Then revenues are expected to jump up to

somewhere around 19, 20 percent, and I have even seen some

above 20 percent of GDP, back up to that historical high.

Now we hear a lot of criticism from those who oppose the bipartisan plan of 2001. One of the main criticisms is that we cut income

taxes too much. That is, the allegation is that the bipartisan tax

relief plan gutted the Federal revenue base.

Three questions. Do you agree with these critics? Two, is the only

path to fiscal discipline to maintain record levels of Federal taxation as a percentage of the economy? Three, 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. First of all, Senator, I agree with your

points. So to be very clear, I think a major question which we have

to deal with as a Nation is, what percentage of our GDP do we

want to be taken up with taxes? How big should taxes be as a percentage of our overall economy? So I think that is a helpful analysis and is something that we need to look at quite closely. I also

believe the last thing we need right now is a tax increase, so I

agree with you.

Senator GRASSLEY. All right. I want to make clear that I think

that the 40-year average proves two things. One, it is a level of taxation that has not hurt the economy, because we have had good

growth in the economy for 40 years. Number two, it is a level of

taxation that it seems like the people of this country have accepted

as something that they can live with.

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Mr. Secretary, once again we find ourselves facing the individual

Alternative Minimum Tax, AMT. Thanks to a provision that was

developed here in the Finance Committee in 2001, we have temporarily not made the problem worse. That provision ran out last

year. A renewal of that patch is very important, so we have a

major problem we will have to deal with right now. Thankfully, the

President’s budget does contain room for this year’s patch.

To the critics, I would say that that is 1 year more that we have

currently budgeted. Unfortunately, I do not see any provision for

a long-term solution in the President’s budget. According to the

Joint Committee on Taxation, this tax, which was intended to hit

only a thin slice of high-income taxpayers with tax preferences, will

ensnare 25 million families this year if we do not act.

According to the CBO, the AMT will bloom Federal revenues to

record levels of GDP with or without an extension of the bipartisan

tax relief next decade. Now many on the other side insist that we

cannot reform AMT unless we offset the ‘‘lost revenue.’’ I always

put ‘‘lost revenue’’ in quotes because we were not intending to take

it in in the first place.

So for 2008, for example, their basic position is that the harm to

those 25 million families 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 counts the vast amount of revenue from this unintended tax.

Two questions. Mr. Secretary, is it fair to condition AMT reform

on substitution of revenue when we never intended the AMT to

generate the projected revenue in the baseline? And two, why

should AMT reform be secondary to maintaining an unintended

stream of revenue?

Secretary PAULSON. Senator, let me start with your point about

this year, because I do not want to skip over this year. You said

at the beginning, and I said at the beginning of last year, we knew

that AMT was going to be patched and we knew taxes were not

going to be raised to pay for it. But we went through this kabuki

dance and we delayed and delayed, and then it was patched at the

end, but the uncertainty hurt the American taxpayer.

So I do hope that this year, given what is going on in the economy, people can just come together and say, let us just deal with

AMT this year. If we do it this year, that will eliminate plenty of

uncertainty, it will make the job easier on the IRS, and it will just

be a good thing.

Now, looking to the future, I agree with you that, were the AMT

not to be patched, it would be a very difficult thing to explain to

all those who got hit with the increase, this unexpected increase,

that that was not a tax increase. So, it is something we need to

deal with. Our position has been, we need to deal with it in the

context of the broader question, the major question of entitlements,

Medicare, Social Security, and the broader question which you so

skillfully raised about how big taxes should be as a percentage of

our economy.

The CHAIRMAN. Thank you, Senator.

Senator Roberts, you are next.

Senator ROBERTS. Thank you, Mr. Chairman.

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Mr. Secretary, thank you for coming. I know you have a very difficult job, and I know you are doing your very best, and I appreciate that.

Having said that, let me just say right off the bat that in regards

to the budget, the Medicare cuts, or the provision in regards to

Medicare, the proposals are not realistic. I am not going to get into

my CMS rant, which is becoming sort of redundant and, I guess,

infamous on this committee, but we already have doctors who will

not accept Medicare patients because of the reimbursement problem. We have the same thing with home health care providers who

are in a bidding competition now that is somewhere between a

briar patch and a swamp. We have ambulance drivers who are not

being reimbursed at the right rate.

We have druggists who are really the only source of knowledge

and preparation to seniors on their Medicare Part D; despite the

fact that other people try to provide the best information possible,

they get reimbursed probably 70 percent on a generic drug. We already have a situation where we have a bifurcated health care system. We have the clinics that are owned by the doctors who do not

accept Medicare patients, but who also practice in the community

hospitals that obviously have the Medicare, and it is just not working. So, I would urge you to take another look at those proposed

Medicare cuts. It is just not going to happen. I do not mean that

as a pejorative, that is just the way it is.

It is important, and I think Senator Grassley pointed out the

problem of the taxes that are owed but not paid. Obviously, the

President’s budget proposes 16 changes to help reduce the amount

of taxes that are owed but not paid. One initiative will improve

revenue reporting of small businesses and the self-employed, estimated to be the largest component of the tax gap.

Well, I will tell you what. I do not get a lot of letters—I do not

get any letters anymore because of the anthrax situation, but emails. [Laughter.] Well, I do, but they are 2 weeks old and they are

cut up. So, phone calls, e-mails, faxes and town hall meetings saying they want this or that. They say, what on earth are you doing

to me, saddling me with regulations and paperwork and enforcement with my margin, and I cannot find somebody to fill out all

the paperwork.

I want to know on these 16 changes, are we going to streamline

this or are we going to be like Wyatt Earp, who was told by the

deputy that there was cheating down there at the Long Branch and

it was at the roulette wheel, and Harry was cheating again, so he

just went down there with a shotgun and fired through the front

door and everybody got hit? We need a rifle, not a shotgun.

What worries me is, we have the law of unintended effects trying

to get more people to pay, which I want if they are not paying it.

But, I do not want a system that is going to add more regulatory

overkill and burdensome regulations, paperwork, et cetera, et

cetera, on small business. How are we going to do this with the 16

changes? Are we going to streamline it or are we going to use a

shotgun?

Secretary PAULSON. Well, Senator, you have raised the dilemma.

That is the question. When you look at the tax gap, by far the biggest portion of it, by far, are individual taxpayers with nonVerDate 11-MAY-2000 14:55 Feb 22, 2010 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 54764.000 SFIN1 PsN: SFIN1
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reported income. So, now the question is, how do we make a dent

in this without providing a painful burden, without creating one on

all the honest taxpayers who are doing their job?

Senator ROBERTS. Exactly.

Secretary PAULSON. There is not an easy way. There is no gain

without some pain here. I hate to tell you, there is just not a free

lunch. So what we have tried to do is come up with legislative solutions that will be more like a rifle shot, but will make a difference.

Basis reporting. We had 16 proposals last year, and I think a couple of them were enacted. But the ones that will make a difference

are things like the credit card companies reporting to merchants

and sending a record to the IRS, things like basis reporting on

stock transactions.

They are serious, but the only way to get at this is to have some

more reporting. So we have tried to carefully choose those that will

cause as little difficulty as possible while making a difference, so

that is what we have tried to do. You see the list that we have in

the budget. We have vetted them carefully and we support them.

There will be resistance to all of them from some quarters. We

have left out things like withholding, on interest, dividends, pensions, all those kinds of things. When they were tried before, there

was a revolt. But they would also make a difference in closing the

tax gap.

Senator ROBERTS. Well, you know, there are some members who

have introduced legislation in regards to the tax code to just get

rid of the IRS. That will show you the frustration that we have.

I appreciate it is a tough problem, and I thank you for comments.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. First, a couple of comments on other

discussions that colleagues have engaged in, and then a question.

First, to support the chairman on health care. You have talked

about the big question being the proportion of GDP that we will

pay in taxes. I think the bigger question is the proportion of our

GDP that we will spend on health care, since right now we are

spending twice as much of our GDP on health care as any other

country. So, I think that is the big question and the big challenge

of our time.

Second, as Senator Salazar was talking to you about unemployment compensation, I think it is important to note that both Goldman Sachs and the Bureau of Labor Statistics have indicated that

by next year the national unemployment rate is estimated to be at

6.5 percent. We have heard from a number of economists, as well

as the Congressional Budget Office, but we certainly heard from

Dr. Feldstein, the former chair of the Council of Economic Advisors

under President Reagan, that one of the two ways that is most

likely to stimulate the economy is extending unemployment compensation. A dollar of extension equals $1.64 in stimulus.

Finally, I would just say this whole notion that somehow extending unemployment compensation, which is 40 percent of a worker’s

average wage, is going to stop somebody from trying to get a job

is just a myth, which goes to my question in terms of the economy.

18

Right now, we have 7.7 million Americans, middle-class working

men and women, vying for 4 million available jobs, so the real

stimulus is to have a good-paying job. When we look at the

underpinnings of this economy, we are not just in another downturn. There is talk about, we just need to weather a housing correction. I totally disagree with that view, with all due respect. We are

in a global economy with large factors that are affecting the fundamentals in terms of the middle class in this country and businesses in this country.

So I would ask you, when we look at the President’s budget, not the deficit, but the debt, in 2001 the Nation’s debt was $5.8 trillion.

In the budget now that is being proposed, this budget of the President’s calls for more than $12 trillion in debt in 2013. Twelve trillion dollars, which does not include the cost of the war, which is

inching up to $1 trillion by itself. We have seen a doubling of the

debt owned by foreign entities during the Bush presidency, so half

of the foreign debt is owned by China and Japan, which goes to my

question.

We have a huge trade deficit now with China: out of 11 months of last year, $237 billion. They are breaking the trade laws. They

are manipulating their currency, sending us toys with lead in

them, and toothpaste with poison in it, and counterfeit auto parts,

et cetera, et cetera.

How do you view us tackling, specifically, I would ask, the currency issue in terms of the fact that in this global economy, given

this situation and the challenges that Americans are going

through, a 40-percent discount on R&D coming into this country

versus what we are doing? What is the Treasury going to do about

this?

Secretary PAULSON. Senator, two things. First of all, one additional thing on unemployment. Unemployment is 4.9 percent. We

think the economy is going to continue to grow. I have looked at

the past when we have extended it: in March of 2007, it was 5.7

percent; in November of 1991, it was 7 percent; in September of

1982, it was 10.1 percent; in January of 1975, it was 8.1 percent;

in January of 1972, it was 5.8 percent.

If the economy continues to worsen to the point that it stops

growing and this problem becomes more severe—and again I am

predicting it is going to keep growing—if it does, that is something

that should be discussed and taken up.

Senator STABENOW. So you are just agreeing at this point with

Goldman Sachs and the Bureau of Labor Statistics?

Secretary PAULSON. I am saying that every projection out there

has uncertainty. I have never seen any economist that can project

with certainty. I have watched this very closely. When we saw this

turning down, we did something that was quite unprecedented. I

had to argue with plenty of economists who say, why are you moving with a stimulus bill when the economy is still growing? I think

we have been all over this, and we are moving quickly. But again,

to make a projection a year from now, if those economists are right,

then you should debate this and discuss it then.

Senator STABENOW. Mr. Secretary, quickly, I know I am out of

time here, but the issue is whether or not it is growing for Americans, middle-class Americans, and what is happening in terms of

19

our jobs, which is a very different thing than what you are talking

about. So how do you deal with China?

Secretary PAULSON. I am going to give you three sentences there,

and then China currency. You are absolutely right. There are

structural changes going on, here and in the world, that are related

to the forces of globalization, technology, and automation. I really

do think the highest priority to be thinking about—and it is going

to be the challenge that we and other developed countries are going

to face over the next 10 years—is how to get the skills to the people

who need the skills to compete in this economy and globally. I

think there are structural issues, I do agree with you.

Now, on currency.

The CHAIRMAN. Briefly, Mr. Secretary, because we are way over

the time here. Very briefly, please.

Secretary PAULSON. All right. I will be very brief on the currency.

As you know, we have advocated for a long time that China appreciate the renminbi. The pace of appreciation doubled over the last

year to 6.7 percent. In the last 3 months, it has appreciated 4 percent. I would still like it to move quicker, and we are working to

persuade them.

The one thing I would say, though, that would be very dangerous, in my judgment, would be a currency bill, particularly with

what is going on in the world right now, where one sovereign nation dictated to another and said, we are going to legislate your

macroeconomic policies, we are going to legislate your currency. It

just would seem disconnected from what is going on in the world,

because right now the fact that the Chinese economy is growing

and doing well is a good thing for all of us, and it benefits not only

them, it benefits the rest of the world. We are benefitting, to a

large extent, by growth outside of this country. Our exports are

growing, and have been for some time, faster than imports, and

that is creating jobs in the U.S.

The CHAIRMAN. Thank you, Mr. Secretary.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. I thank you for your steadfast leadership, and most especially with the stimulus package. We certainly

appreciate it, and I know the people in this country appreciate it

as they are greatly concerned about their own economic futures.

Let me just explore the jobless issue again. I know my colleagues

Senator Stabenow and Senator Salazar have raised it. I am concerned about the unemployment rate and the underpinnings, because we do not see an economy that is creating jobs.

So one of the reasons we have had this conversation—I know

that I thought it was so important that the stimulus package,

thanks to the leadership of Chairman Baucus and Senator Grassley, included extending the unemployment benefits—is we have to

recognize that the long-term unemployment rate is double what it

was in 2002 when we included extending unemployment benefits in

that particular stimulus package, and that the rate of unemployment is up more than 18 percent compared to where it was a year

earlier.

So I think that we have a lot to be concerned about. One-pointthree-million Americans have been unemployed for an extended peVerDate 11-MAY-2000 14:55 Feb 22, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 54764.000 SFIN1 PsN: SFIN1
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riod of time, and we do not see the job creation in this economy.

Business Week cited recently that, once workers lose their jobs,

they have a harder time finding new ones. I know some people say,

well, if we include extended unemployment benefits, it is going to

be a disincentive to finding a job.

I say, well, I think you had better visit some parts of Maine. I

mean, we just had a big headline last week saying sawmills are

closing, and people saying they are going to have to move further

south to other States to find a job with a living wage of some type.

I mean, it is dramatic. We have lost a lot of the manufacturing

jobs in Maine, and I think it is a microcosm of America. So, when

I compare the job creation of this economy compared to where we

were between 1991—and that was the beginning of that recession—to 2001, we created 24 million jobs in that period, and between 2001 and 2007 we created 7 million. Even if you extend it

out to 10 years, it would not nearly reach the rate of 24 million.

So I am concerned about the job creation future of our economy.

I would like to have you address that, and particularly in conjunction with the tax cuts, extending the tax cuts. Frankly, I think we

need tax reform. You will be extending the tax cuts of the wealthy.

The top 20 percent of the households have seen a major increase

in their income, 49 percent of the wealthiest households in America, compared to the lower-income which has seen 17-percent

growth.

So we have some disparities and we have to address that, and

also the Alternative Minimum Tax, which I will get to in a moment. But could you address the unemployment issue and how you

see this economy creating jobs, and why we would not need to extend unemployment benefits?

Secretary PAULSON. Yes, Senator. First of all, I appreciate the

comments. I also appreciate that you and Senator Stabenow have

issues in Maine and in Michigan that are significant. As I said to

Senator Stabenow, I am concerned about extending unemployment

benefits right now because of the message that it sends, because

unemployment in this country of 4.9 percent is much lower than

it has ever been at any time than when we have extended it in the

past. So what you are talking about is another, but related, issue.

It is a significant issue and it a structural issue.

Because what we are seeing when you look at the economy, and

even when I have looked at income distribution, I have noticed that

we have a dynamic economy and we have great mobility, so that

half the people in the bottom 20 percent are going to move out of

it every 10 years, half in the upper 20 percent are going to be new

every 10 years.

But the structural issue, which is to some extent by globalization

but to a large extent by automation and technology, is how do we

get skills to the people who are going to need them to compete?

How do we keep creating new jobs? The economy has created over

the last year, over the last number of years, a lot of jobs. We have

had 52 months straight.

The last numbers that came out—and who knows whether they

will be restated or not—indicated that this streak was broken for

1 month. But we created a lot of jobs. I do not think that is the

issue you are talking about. I think you are talking about some of

21

the structural issues and how to get skills to people to help them

find jobs in today’s world.

Senator SNOWE. Well, if the goal of the stimulus package is to

put the fiscal tools in place, then that is one way to avert it. You

still have the long-term unemployment. The fact is, a lot of people

go unreported, as we well know, in unemployment the longer they

are unemployed. So I do not know if that is the true reflection, but

to have this in place and to address the long-term unemployed, I

think it is significant.

Secretary PAULSON. Well, the goal of stimulus, as I saw it, was

to do something that was temporary and get money quickly and

boost the economy, and then some of the longer-term issues were

going to be on a separate track.

I think on unemployment, what I have said is, if this situation

worsens to the extent that some of you are projecting, then that is

something that should be discussed at a later time.

Senator SNOWE. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Snowe.

Senator Hatch?

Senator HATCH. Thank you, Mr. Chairman.

Welcome. We are happy to have you here. I appreciate the work

you are doing. It is a tough job, and I am grateful to you.

Once again, the centerpiece of the President’s budget is a provision to extend permanently the tax cuts of 2001 and 2003. Now,

the estimated revenue effect of this provision, according to the

Treasury, is nearly $2.2 trillion over 10 years, as I understand it.

Correct?

Secretary PAULSON. Right.

Senator HATCH. Some say that removing the sunsets for these

tax cuts would cost the Treasury this much money. But looking at

it another way, is it not accurate to say that not extending them

means American taxes would go up by $2.2 trillion?

Secretary PAULSON. Correct.

Senator HATCH. How would such a tax increase rank in terms of

size compared to other tax increases in our history? My understanding is it would be the largest. Is that correct?

Secretary PAULSON. I have not done the analysis, but it sounds

right to me.

Senator HATCH. What do you project would be the effect on the

economy on job creation, investment, and on our ability to compete

globally as a result of such a massive tax increase?

Secretary PAULSON. Senator, I do not think it would be a positive

one. It is not something that we clearly would recommend. I think

it would create a serious problem.

Senator HATCH. It could be a disaster. Is that a fair comment?

Secretary PAULSON. Well, as Treasury Secretary I will use my

words advisedly. I am not going to talk about ‘‘disaster,’’ but I

would certainly say it would be unadvisable.

Senator HATCH. A matter of great concern, then.

Secretary PAULSON. I think one of the most important things we

can do for our long-term competitiveness and our fundamental economic strength is to make that tax relief permanent.

Senator HATCH. Many of my colleagues on the other side of the

aisle agree that some of the tax cuts should be extended, but most

22

would not extend the top rates, only the lower rates, and the child

credit, marriage penalty, and so forth.

Time and again, we hear them say that the higher-income earners do not need or deserve the lower rates. From an economic

standpoint, however, is this not really a question of job creation

and growth and not about fairness to the so-called rich, especially

when we think about the number of businesses that pay their taxes

at the individual rates?

Secretary PAULSON. Yes. I think you are very wise to focus on

individual businesses and small businesses. That was something

that I had not been as aware of until I came down here as Treasury Secretary and started analyzing the situation. Seventy percent

of those flow-through small businesses are in those top two brackets. I will tell you, one thing I just learned over the years in working with small businesses, if they save a dollar, it goes right back

into the business and creates jobs and growth.

Senator HATCH. That is my understanding.

I note that the President’s budget once again calls for a permanent extension of the research credit. As you know, Chairman Baucus and I have introduced a bill to not only extend the research

credit permanently, but also to reform it. We believe that the time

has come to make structural changes to the credit to make it more

effective. Therefore, I was especially pleased to see that the budget

indicates that the administration will work closely with Congress

to develop reforms to the credit, so I am grateful to you for that.

Secretary PAULSON. Thank you for your good work on that area.

Senator HATCH. Well, thank you.

Will Treasury take a look at the Hatch-Baucus research bill, or

Baucus-Hatch research credit bill, and give us your thoughts on the

changes that we propose, and also help us think of a way to get

us out of the current mind-set that it is all right to keep extending

the research credit a year or two at a time and never get around

to making it permanent? We would like a strong statement on that.

Secretary PAULSON. Yes. We will work with you on your bill. I

could not agree more strongly that permanence gives business a

sense of certainty and makes it easy for them to plan. The reverse

is also true.

Senator HATCH. Sure.

Now, many are criticizing the President’s budget for showing a deficit in fiscal year 2008 in excess of $400 billion. I think it is important to dissect this number before passing judgment. One thing

that I think they have missed is the revenues are projected to actually decrease this year by over $47 billion after years of significant

increases.

Now, at the same time, spending is projected to keep growing at

a rapid clip. If the growth of revenues in 2008 had kept up with

the revenue growth of the previous year, the projected deficit, as

I understand it, would be under $200 billion. Is that correct?

Secretary PAULSON. It would definitely be meaningfully less. You

are right.

Senator HATCH. I think my time is up.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Sununu?

23

Senator SUNUNU. Thank you, Mr. Chairman.

Mr. Secretary, as I travel around New Hampshire and talk to

people about taxes, it is almost inevitable that the first thing they

mention is that the tax code is very complicated. Businesses, individuals, people who itemize see it getting more complex every day.

The people who do not itemize wonder what the people who do

itemize do to minimize their tax burden. There is a higher cost of

compliance, lower compliance rates because of the complexity, and

I assume a lot less accuracy because of complexity.

Congress has a role to play, obviously. I wish we would do more

in reforming and simplifying the tax code. But leadership from the

administration is of great value, so I would like to know what, if

anything, in your budget submission gets at the root of complexity,

and reform may not be the right word, but do you have proposals

that simplify the tax code and make it a little bit more straightforward and easier for taxpayers to deal with?

Secretary PAULSON. Senator, only around the margins. We are

always working. We have done work with regulation to simplify.

There is great complexity. Just to step back and say one of the

major issues we as a country face is overwhelming complexity in

many areas, whether it is disclosure when someone is taking on a

mortgage, whether it is complexity in regulation, and clearly huge

complexity in the tax code.

This is something that—hopefully you will be in the Senate for

many years and you will be able to help lead an effort to get something done there. I do not think it is going to happen while I am

in Treasury. So what we do is, we work in smaller areas to simplify

the regulations, make it somewhat more understandable, make it

easier for taxpayers to get their Earned Income Tax Credit, or

what have you.

But in terms of dealing with the complexity, as a matter of fact,

much of what I am fighting off are things to make it more complex,

just even in the energy area. This is an area where we really need

to focus. Energy security is very important for this country, alternative energy. But if Senators or Representatives are on a tax committee, they would look to achieve their goals through the tax system. So there are a lot of forces to make it more complex as opposed to making it simpler.

Senator SUNUNU. Well, I appreciate the answer. I believe your

sympathies are in the right place, but I think this is a missed opportunity. There is no question that the administration has more

opportunity and more potential in this area because you are able,

through working with your counterparts, to speak with a unified

voice, whereas obviously it is a little tough to make simple,

straightforward tax policy with 535 legislators. Congress has a role

to play, but I would hope that you would be in a position, even if

it is simply over the coming year, to provide a little bit more leadership.

Let me move on, obviously, because we work under time constraints here, to ask you a little bit about credit and attempts to

deal with credit constraints in the marketplace. We are going to

pass an economic growth package. I think that is of some value. I

think it will have an impact in the latter half of this year, and I

think you would agree. But there are fundamental problems in the

24

economy having to do with capital markets, availability of credit,

and liquidity that are at least as significant and as important as

anything we might do on the tax or demand side.

What in your budget, or what can Congress do to complement

what is in the budget, that might have an impact in these areas,

availability of credit and the credit constraints we have seen in the

economy right now?

Secretary PAULSON. Well, I would say you are right in terms of

your point, that capital markets turmoil impacting our financial institutions is, and can increasingly, spill over to our real economy

unless we do something about it. The biggest focus I have had has

been encouraging financial institutions to recognize loss and raise

capital, and to raise capital when they can get it because that is

much better than shrinking their balance sheet and then restraining their lending.

Senator SUNUNU. Are there tax or regulatory obstacles to that

that we need to address?

Secretary PAULSON. No, there are not tax or regulatory obstacles.

As a matter of fact, as we look at it, the other thing I am thinking

about a lot is, what is the right regulatory response to do everything we can to ensure we do not go through this problem again?

There, sometimes I want to make sure that, in looking to fix the

longer-term problem, we do not do things that are going to compound the problem we are dealing with today, because some of the

things that regulators can do in the short term can make it worse.

So we are working on this, but the ideas we have are already up

there, ideas to deal with the mortgage market, and you already

have them before you in Congress.

Senator SUNUNU. Thank you very much, Mr. Secretary.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, both, very much.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. We appreciate you coming to the committee. I would like to cover a couple of things that you have mentioned a little bit. Senator Salazar mentioned the stimulus package

that we worked on under the traditional leadership of Chairman

Baucus and Senator Grassley in a very bipartisan way to come up

with something that we felt did make sure we corrected or picked

up the issues that the House and the administration may have left

out.

One of those that was of particular importance to me was obviously the seniors, but also the disabled veterans. Senator Snowe

and I authored a provision that was included in the Senate version

to ensure our Nation’s disabled veterans would qualify for that

stimulus package.

I know you answered the Senator from Colorado that we need to

quickly work something out, but this is not the place to do it. My

concern is, we have been hearing from all people, all sides that this

is something we need to do quickly. This is the committee to do it.

If this is not the place to do it—I guess where my confusion comes

from is, if the administration does not believe that disabled veterans and seniors should be a part of the stimulus package, that

is one thing, but working something out has to happen. We have

25

done a great job here in a bipartisan way to come up with something to move, and apparently it is not supported by the administration, I guess.

Secretary PAULSON. Well, let me say I commend Chairman Baucus, Senator Grassley, all of you in working so quickly to get something done that meets the principles. I think we will have a very

quick—I am optimistic. I think that your leaders have set a goal

of getting something on the President’s desk as soon as possible,

but prior to the President’s Day recess. All I said is I do not think

that a public hearing is the forum to negotiate this, and I think you

would understand that and respect that. I think you were here

when I answered the Senator’s question. If you want me to give

you just——

Senator LINCOLN. Well, I was just curious, because it seems as

if the administration’s efforts are not to pass the package that we

have before us.

Secretary PAULSON. Because what you have heard me say, just

to go on record, when I looked at things generally and looked at

what you have done, I am very pleased with the spirit and the

speed in which you are working. I will say, when I look at the business side, I prefer the House approach because I think there the

focus is very much on getting the greatest bang for the buck and

getting the most stimulus quickly to the economy.

Senator LINCOLN. Well, do you think it is beneficial to drag our

feet while you all kind of try to come up with something different

than what we have done?

Secretary PAULSON. No, I do not want to. I want you to pass it,

and I want to see it.

Senator LINCOLN. So you would support the package that came

out of committee?

Secretary PAULSON. I did not support the package the way it is

right now. I support the spirit. So what you have heard me say is,

I think the business side will be more effective. You have heard me

say——

Senator LINCOLN. That takes a lot of time. I think one of the

things we have heard from most of the financial world like yourself

is, it needs to be timely.

Secretary PAULSON. I agree.

Senator LINCOLN. And we have done a good job at keeping the

lid on it, but putting things in that we felt might be important.

Secretary PAULSON. Senator Lincoln, I am not trying to argue

with you here. I appreciate what you are doing. You asked me for

an answer. I prefer what the House——

Senator LINCOLN. You think we need to wait then.

Secretary PAULSON. I prefer the House’s. No, I want to move

quickly. I would like to see it up there and on the floor and voted

on, and worked through. But I said to you, I think unemployment

insurance, I think some of the specific programs you put in on the

tax side——

Senator LINCOLN. You do not like everything that is in our package, that is obvious. That is life. You do not get everything you

want.

Secretary PAULSON. Absolutely.

Senator LINCOLN. Right.

26

Secretary PAULSON. That is what I said.

Senator LINCOLN. All right. I have my next question. I do not

want to waste all my time.

Secretary PAULSON. I said I would like you to move. I am not trying to hold it up, I am trying to speed it up. I would like to see

it on the floor to be voted on.

Senator LINCOLN. Good. Well, hopefully we will get our package

down there because we worked hard in the committee to get there.

Secretary PAULSON. And I do hope, as you work to do what you

believe are improvements——

Senator LINCOLN. Well, I think disabled veterans and seniors are

very important improvements.

Secretary PAULSON. Also, there are parts of the—but anyway,

you have heard what I have to say.

Senator LINCOLN. Right.

Just one other, to shift my visit here for a moment. The administration’s position on what you all deem to be, I guess, tax increases,

because it seems as if most of what comes out of the administration

is that any revenue-raiser is a tax increase. But at least from the

President’s State of the Union address, that is what I gleaned. He

certainly said that he would veto any bill that raises taxes this

year.

My hope is, you would expand on that statement just a little bit.

I want to be clear. I ask, because the President’s budget that you

sent us includes 25 proposals that bring tax revenues into the Federal coffers, 25 proposals that I am not going to pre-judge. I am not

going to try to rename them as a tax increase or anything else

until I certainly look at them and view them for their policy and

how it makes sense.

But I would ask the same of the Treasury, and certainly of the

administration and the White House. Just because any proposal

may bring revenues in to the Federal Government, that does not

necessarily make it bad policy or deem it a tax increase right off

the bat. We would like to have your opinion on that.

Then before I finish, you mentioned to Senator Snowe how important it was to get skills for workers in terms of boosting the

economy and really helping us to be competitive. We would just ask

you, the President’s proposal eliminates 48 education programs, for

a cumulative shortfall of $85.6 billion since the enactment of No

Child Left Behind. We are so far behind in funding the basics that

Americans need to get those skills. I would just be curious why it

is that we want to eliminate these education programs and once

again fall short on the funding for education.

The CHAIRMAN. Briefly, Mr. Secretary.

Secretary PAULSON. I will be brief on the last part. The Senator

is going to have to talk with Margaret Spellings about our education program and what is in the budget, the details on that. I

was speaking specifically about skills to workers. Also, in terms of

revenue raisers, I would simply say I am going to let the President’s statement stand where it is and agree that I do not think

that we need—this year in particular—to be raising taxes. I think

you can assume that everything in the budget we support, and I

am just happy to talk with you about any specific proposal you

have, or as it comes up, that is a revenue-raiser.

27

Senator LINCOLN. But you do support the revenue-raisers, the 25

proposals that are in the budget?

Secretary PAULSON. Well, I support what is in the budget.

The CHAIRMAN. Thank you, Senator.

Senator LINCOLN. Right. Thank you.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. I want to ask about a budget issue

which is colored by the stimulus debate. Now, the economy lost

17,000 jobs in January. Your Department of Transportation has indicated that, for a billion dollars spent on infrastructure, you would

create 47,500 jobs, many times the jobs that were lost in January.

Now, Senator Thune and I led a bipartisan effort to try to get

some money for road resurfacing, something that can be done very

quickly, into the stimulus budget. You opposed it. People like Mike

Bloomberg say it will create a lot of wealth and be a shot in the

arm in a hurry. So be it. We have had that discussion, and we are

going to still try to prevail. We will see what happens.

But what I would like to ask you is about the budget. You are

also cutting highway and transportation funds in the budget, something like 10 percent. You are the person who is the point man on

job creation. I am trying to find areas in the budget, now that you

are fighting us on the stimulus, that are going to do as much to

have an economic multiplier, both in the short term and in the long

term, as infrastructure and transportation funding.

I cannot find anything in your budget proposal that does it, and

it is especially troubling to see a big cut when people say it would

have made a difference in the stimulus and it would certainly

make an effort in the budget. So, square those numbers for me and

tell me where you are going to see the economic multiplier, the jobcreating potential in other areas that your own administration says

you would find in infrastructure.

Secretary PAULSON. Well, Senator, let me begin by saying you

are right in saying that with the stimulus plan we wanted to stick

to things that were broad-based and would make a difference this

year, not putting money into spending programs.

Senator WYDEN. The Congressional Budget Office, Mr. Secretary,

respectfully, said that the transportation money could get out

quickly, and in fact it will get out weeks and weeks faster than the

rebate checks arrive. We have had that debate. Tell me about the

budget.

Secretary PAULSON. I disagree in terms of looking at the details.

Senator WYDEN. Fine.

Secretary PAULSON. But anyway, go on. But the longer term, to

get to your question, there is no doubt that we have infrastructure

needs in this country. There are tough decisions that were made

in the budget process to do the things that I think we all know are

necessary in terms of having discipline and getting to a balanced

budget number. In terms of the details, in terms of what in——

Senator WYDEN. Now, where in the budget, Mr. Secretary, can

you find the economic multiplier that your own Department of

Transportation says you get with infrastructure spending?

Secretary PAULSON. Where in the budget do you get——

Senator WYDEN. Yes.

28

Secretary PAULSON. I can find some very, very little things that

I can talk about in terms of the kinds of multipliers we are going

to get with our enforcement budget and IRS in terms of the kinds

of multipliers we get with keeping tax rates low, which I think are

fundamentally very important. There are a number of spending

programs where there is a multiplier. What you are saying is, you

would like more of transportation spending, infrastructure spending.

Senator WYDEN. I would like to wring more value out of the

stimulus dollar and the budget dollar. You know I am for keeping

tax rates low. Where are we going to get it, other than in areas like

I am pointing to?

Secretary PAULSON. Well, that is a debate that Congress will

need to have, and you will be able to have with Mary Peters and

other members. At the end of the day, you all may decide there is

more that is needed there. I would say there has been a very disciplined look taken at this budget.

Senator WYDEN. We will have it, Mr. Secretary, with Mary Peters. But I see you, and it is because of my respect for you, as the

point person in the job creation effort. When the headlines said Friday, we lost 17,000 jobs in January, your own Department of

Transportation says you can create 47,500 jobs with just a billion

dollars of transportation funding, I say to myself, that looks like a

no-brainer for the economy. Then we look at your budget numbers,

which cut transportation.

So I know that my time is out. I hope you will take another look

at it, and particularly look at Mike Bloomberg, a New Yorker who

knows something about creating wealth. Look at his comments

when he said, both short-term and long-term, this is where you get

the real benefit.

Secretary PAULSON. I have huge regard for him. I will look at

what he said. I will look at the Department of Transportation study

you cite.

Senator WYDEN. Very good. I will look forward to working with

you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

A vote has begun in the Senate, so we have to finish pretty

quickly here.

Mr. Secretary, you said increased information reporting and

keeping taxpayer burden down is important to improve tax compliance. But for the information to be effective, the IRS clearly has

to have the appropriate technology to do the job and reduce the

burden on taxpayers. Apropos to the question asked by Senator

Sununu, filers must have the ability to e-file and electronically pay,

and so forth, and be up to date, basically.

Secretary PAULSON. Right.

The CHAIRMAN. Yet, your proposal, your budget asked for a cut

of almost 17 percent in the information technology budget. How do

you expect your proposals to work if you want to cut your technology budget by 17 percent? We are talking about the IRS budget

here. I might just say, too, the BSM—that is the basic technology

budget, Business Systems Modernization—basically it is going

down. One year it went up a little bit, but that is an anomaly beVerDate 11-MAY-2000 14:55 Feb 22, 2010 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 54764.000 SFIN1 PsN: SFIN1
29

cause labor costs were reported someplace else over the years. But

how are we going to close the tax gap and bring the IRS up to date

with a 17-percent cut?

Secretary PAULSON. Well, Mr. Chairman, first of all, thank you

for the question and thank you for all the help you have given in

terms of working with the IRS, working with our budget, and

working with management.

I would say that, first of all, the technology in the IRS is not

where we would like it to be, in the Treasury it is not where we

would like it to be, and in the Federal Government it is not where

we like it to be. When I came to my job, I found that we needed

to make a number of changes at Treasury. We have the right people in the right jobs.

I would say, when we looked at what we needed, it does not all

come down to dollars. There is a question as to how fast you can

spend the dollars. It is not always just throwing money at a problem that will make it get better. I think we have what we need

here. But what I would look forward to doing, is talking with you

about that in more detail, and talking with your staff. If, at the end

of the day, you believe that that would be helpful, we will gladly

accept it, I would say.

Then on the tax gap, on the enforcement side, we did not get the

money we needed for the compliance and enforcement side last

year, and we would like to get it this year. But again, we have had

a working relationship where we can talk about these things and

we will get into it in some detail with you, and you will either be

convinced that we have what we need or you can give us more

money and we will that take.

The CHAIRMAN. Well, it is my very strong opinion that the IRS’s

computer systems are virtually in the Dark Ages. We have a big

tax gap, as you well know. We are having a huge and growing technology gap between the private sector—many in the private sector

have very efficient and up-to-date technology and IT processes,

whereas the IRS does not. A lot of the systems at the IRS cannot

talk to each other. If someone files their employment returns, we

do not know whether they filed income tax returns, and vice versa.

I mean, it is more than an embarrassment, yet you want it cut.

Secretary PAULSON. Well, I would say to you, we are in agreement in that there is——

The CHAIRMAN. Do you want people to pay taxes or not?

Secretary PAULSON. We are in agreement that there is room for

improvement.

The CHAIRMAN. You are darned right, there is room for improvement.

Secretary PAULSON. We will be very supportive with a new Commissioner who is very, very technology savvy. We will be able to

work together and——

The CHAIRMAN. Well, I hear you. You are saddling him with a

big——

Secretary PAULSON. Hold on. I would say to you, though——

The CHAIRMAN. He seems like a good man, but he needs resources.

30

Secretary PAULSON. I would say to you, let us work together and

let us make sure. But I would say to you, with all due respect, I

wish it were just a matter of throwing more money at it.

The CHAIRMAN. You hire really good people who know what the

information technology systems should be, then start putting them

in place.

Secretary PAULSON. That is right.

The CHAIRMAN. And this budget says no. It says you are going

to cut.

Secretary PAULSON. Well, now, I would just simply say, and I

think you do know what we have done to begin with at Treasury

and what we are doing in terms of putting people in place, we are

putting good people in place. And if the biggest disagreement we

have is over how much money we are going to throw at technology——

The CHAIRMAN. Senator Salazar, you are next.

Senator SALAZAR. Thank you very much, Chairman Baucus. I

know we have a vote under way, so I will be brief here.

The CHAIRMAN. We have 71⁄2 minutes left.

Senator SALAZAR. When I look at the world, at least from my

point of view as one Senator, I think the whole issue of national

defense and foreign relations is huge, what we do with health care

is huge, and what we do with energy is huge as well. Those are

my few big issues. I know the President addressed our addiction

to foreign oil again this year, as he has in prior years. Yet, there

is a contradiction in terms of that priority and what he has done

here with the proposed budget.

Just on the renewable energy programs and energy efficiency,

there is a 27-percent cut that is proposed by the President in those

programs. I think that is the wrong direction to go, and I think we

need to beef those up, including with the package that this Finance

Committee passed on a bipartisan basis that fell one vote short in

the Senate last time around.

I guess I would ask you, just from a policy point of view, as you

look at the macro issues of the Treasury and our country, whether

or not investments in terms of new technology and renewable energy and efficiency are the places where we ought to put a very

high priority for the country, and whether you think this budget

that has been presented here by the President does that.

Secretary PAULSON. First of all, I believe that the area that you

have cited is one that is of the highest priority. When you look at

the long-term risks, they are right up there with the structural deficit, with entitlements. It is the energy issues and energy security.

Senator SALAZAR. Do you think we walk the talk, though?

Secretary PAULSON. What?

Senator SALAZAR. We can agree on that concept, we can agree on

that goal. Do you think this budget walks the talk in getting us

there?

Secretary PAULSON. Yes. I think, first of all, what was done last

year was a meaningful step. I think we need to do more. I do not

think when we look at energy we should look at it just through the

lens of the tax system and the tax code, because I do think that

flies in the face of Senator Sununu’s issues about complexity, and

I think the IRS has—and Treasury is not really the agency that is

31

the expert on energy. So I think we need to look at it more broadly,

but I look forward to talking with you. I am not wanting to argue

with your basic point, and I look forward to talking with you on

it.

Senator SALAZAR. I appreciate that, Secretary Paulson.

Let me just say, in our conversations tomorrow in the Energy

Committee with Secretary Bodman, as we move forward with trying to get the farm bill together, I think this issue is of the highest

priority to the country, and I would hope that you could help us

with the President and his people to get a robust, clean energy

package together, because we are not there yet.

Thank you very much.

Secretary PAULSON. Thank you.

The CHAIRMAN. Thank you, Senator.

Thank you, Mr. Secretary. We very much appreciate your taking

the time to come and testify before us.

The hearing is adjourned.

[Whereupon, at 11:48 a.m., the hearing was concluded.]

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