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81–439—PDF 2012

S. HRG. 112–779 

CONFRONTING THE LOOMING FISCAL CRISIS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 19, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

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

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

WITNESSES 

Domenici, Hon. Pete, senior fellow and co-chair, Debt Reduction Task Force, 

Bipartisan Policy Center, Washington, DC ........................................................ 5 

Rivlin, Hon. Alice, co-chair, Debt Reduction Task Force, Bipartisan Policy 

Center, and senior fellow in the Economic Studies Program, Brookings 

Institution, Washington, DC ............................................................................... 8 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 37 

Domenici, Hon. Pete: 

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

Prepared statement, joint with Hon. Alice Rivlin .......................................... 39 

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 56 

Rivlin, Hon. Alice: 

Testimony .......................................................................................................... 8 

Prepared statement, joint with Hon. Pete Domenici ..................................... 39 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 59 

U.S. Chamber of Commerce .................................................................................... 66 

(III) 

(1) 

CONFRONTING THE LOOMING FISCAL CRISIS 

TUESDAY, JUNE 19, 2012 

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

The hearing was convened, pursuant to notice, at 10:15 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Conrad, Wyden, Nelson, Menendez, Cardin, 

Hatch, Grassley, Snowe, Crapo, Cornyn, Coburn, and Thune. 

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

Alan Cohen, Senior Budget Analyst; Lily Batchelder, Chief Tax 

Counsel; Matt Kazan, Health Policy Advisor; Tom Klouda, Professional Staff Member, Social Security; Andrea Chapman, Detailee; 

and Claire Green, Detailee. Republican Staff: Chris Campbell, Staff 

Director; and Jeff Wrase, Chief Economist. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

President Truman once said, ‘‘America was built on courage, on 

imagination, and an unbeatable determination to do the job at 

hand.’’ We are here today to discuss the fiscal crisis we face at the 

end of this year. Overcoming this crisis is the job at hand. 

We are pleased to have Senator Pete Domenici and Dr. Alice 

Rivlin with us. They are co-chairs of the Debt Reduction Task 

Force at the Bipartisan Policy Center. 

In November 2010, Senator Domenici and Dr. Rivlin released a 

comprehensive debt reduction plan. That plan has helped inform 

the debate for more than a year and a half. It has been updated 

and, as we approach the looming fiscal crisis, it takes on new importance. 

At the end of this year, our fiscal landscape is scheduled to 

change dramatically: the 2001, 2003, and 2009 tax cuts, the patch 

on the Alternative Minimum Tax, and other key tax provisions, 

will all expire. That would cause steep tax increases on middleclass families. 

The across-the-board sequester of many Federal programs will 

kick in. Medicare’s physician payment system will force a deep cut 

that threatens seniors’ access to doctors. Sitting back and letting 

all this happen would mean a disaster for our country. In fact, the 

nonpartisan Congressional Budget Office projects it could throw us 

back into recession. It doubtlessly also would deal a blow to U.S. 

standing in the world community. 

2 

During the first half of 2013, GDP would shrink by 1.3 percent, 

according to CBO. Over the entire year, GDP would grow only half 

a percent. Canceling the sequester and failing to raise more revenue and maintain the status quo would also be disastrous. 

It would tell the American people and the world that we are not 

serious about our deficit reduction. If we do not find additional revenue and we cannot agree on spending cuts, debt held by the public 

could reach more than 100 percent of GDP by fiscal 2022. 

We need a comprehensive debt reduction plan that does not 

shock the system with deep, immediate cuts. Instead, we need a 

practical, responsible plan that gives confidence to the markets and 

the country. 

What would such a plan look like? The plan should substantially 

lower deficits and debt over the next 10 years and beyond. The 

plan needs to be fair, and everyone must contribute. The plan 

needs to be balanced. This will require cuts in spending. We need 

more revenue to pay for America’s needs. We do not just face a 

spending problem or only a revenue problem; it is both. 

The plan must stabilize and decrease debt held by the public as 

a percent of GDP. The plan should ramp up slowly to allow the recovery to continue. The plan must not count any Social Security 

changes towards deficit and debt reduction. Social Security has not 

added one dime to the deficit or debt. 

Finally, the plan needs to meet the political challenges we face. 

The Rivlin-Domenici plan we will examine today meets many of 

these criteria. It is balanced and fair and requires both revenue increases and spending cuts. The plan generates sizeable debt reduction to stabilize the debt held by the public as a percent of GDP 

by 2014. It would shrink the debt-to-GDP ratio thereafter. 

However, the plan contains some proposals that concern me. The 

plan, for example, includes changes in Social Security which, in my 

judgement, should be dealt with separately and not as a part of 

deficit reduction. 

The plan changes Medicare to a premium support program, and 

it turns Medicaid into a block grant. These proposals only shift 

costs onto seniors, States, and the disabled. Any changes made to 

Medicare and Medicaid should focus on saving money by making 

the health care system more efficient and more focused on quality 

of care. 

Many of the Rivlin-Domenici tax changes are politically challenging as well. Some limit future opportunities. For example, the 

plan repeals all tax incentives that go to colleges without proposing 

anything in their place. 

With the fiscal crisis we are facing at the end of the year, Congress needs to come together and agree on a combination of revenues and spending cuts. It is the only way forward. So let us work 

together to show we are serious about our deficit problem, and look 

to the Domenici-Rivlin plan for inspiration. Let us remember President Truman’s words, and do the job at hand. 

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

The CHAIRMAN. Senator Hatch? 

3 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I am particularly pleased to welcome Pete Domenici—our Senator from New 

Mexico, who was, in my opinion, one of the all-time great Senators 

here—and Dr. Rivlin, for whom we have tremendous respect. Both 

of you have done your best to try to assist in these problems that 

we have. We appreciate your coming here to discuss options for addressing our Nation’s fiscal challenges. 

Given the enormous and growing uncertainties associated with 

the country’s fiscal position, it is far past time that Congress and 

the President act to right our fiscal ship. Market uncertainty is already growing as a result of the historic tax increases set to take 

effect at the end of this year. 

Because Federal law requires certain employers to give advanced 

notice to workers facing layoffs, the automatic budget cuts, or sequestration, set to begin at the start of next year, mean that we 

can expect major layoff notices from defense contractors and others 

starting this fall, should that be the case. 

At a time when job growth is anemic, unemployment remains 

above 8 percent, and the American workers are struggling, it is unconscionable to gamble with the economy by choosing to ignore the 

fast-approaching fiscal cliff. This is not the time to privilege 

election-year talking points and political brinkmanship over economic growth and the American families and businesses that depend on it. 

Make no mistake, the private sector is by no means doing just 

fine. Since the President took office, the unemployment rate for 

government workers has averaged 4.2 percent. By contrast, when 

you include the private sector, the unemployment rate has averaged 9.2 percent during the President’s term. Overall, unemployment has been above 8 percent for 40 consecutive months, while 

the unemployment rate for government workers over the same period has averaged just over 4 percent. 

Only someone who is entirely out of touch with the plight of 

Americans could read these numbers and conclude that the private 

sector is doing just fine. American families and workers in the private sector are hurting and have been for far too long. They cannot 

afford any more hits. 

So Congress and the President should be working now to avert 

the fiscal cliff that threatens all Americans at every income level 

with massive tax hikes. It is long past due to begin reforms of a 

tax code that is a burden on families and businesses and a drag 

on our economy. 

Over the past few years, we have seen many plans to do just 

that, including one our witnesses will address today. What has 

been noticeably absent, however, is engagement by the administration and leadership by the President. 

We hear from the Treasury officials that the administration has 

‘‘principles’’ for corporate tax reform, for individual taxes, and for 

Social Security and other entitlements, but I suspect, because it is 

an election year, they refuse to talk about the specifics. 

In spite of his claim that his proposals are available for all to 

see, no one I know has seen the President’s plan for reforming 

4 

Medicare or Social Security or the tax code. All we hear are vague 

principles with the only definitive characteristic being more redistribution. 

But a sentiment, no matter how strongly felt, is not a plan. The 

lack of leadership from the President at such a critical moment for 

our economy is remarkable, in my opinion. He has ignored numerous fiscal plans that have been crafted by bipartisan groups like 

the one we will hear about today, which was originally crafted in 

November of 2010. 

One of today’s witnesses, Dr. Rivlin, expressed frustration about 

the President’s passive stance toward our slow-rolling fiscal crisis 

as far back as June of last year, writing that ‘‘leadership can’t be 

delegated to commissions or task forces. Mr. President, please get 

out front.’’ 

Now, I would like to echo that frustration and urge the President 

to get out front. Steer us away from this fiscal cliff. Work with us 

to tackle our unsustainable deficits and debt and entitlements, and 

assist us in reforming our broken, antiquated tax system, or code. 

Mr. Chairman, I commend you for your continued leadership on 

these matters. I commend you for taking the step this month of 

outlining your framework and principles for tax reform, and I look 

forward to working with you on tax reform. I hope to work with 

you in addressing the fiscal cliff that is creating enormous uncertainty for families and businesses and contributing to further slowing and weakening of the economy. 

I invite the President and the administration, including officials 

at the Treasury, to join us. While I understand that this is an election year, we cannot let that stand in the way of doing what is 

right for the American people. 

Once again, Mr. Chairman, I want to thank you for holding today’s hearing, and I want to thank these two tremendous witnesses 

for appearing. I certainly look forward to their testimony and appreciate all the efforts that they have made, under very trying circumstances, to come up with the approaches that they have come 

up with. 

We just welcome both of you, and we are really happy to have 

you here. 

The CHAIRMAN. Thank you, Senator Hatch. 

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

The CHAIRMAN. I would like to welcome formally and introduce 

our witnesses. Let me begin by saying I have the deepest regard 

and respect for both of you. You, Senator Domenici, former chairman of the Budget Committee, I know how hard you worked on 

budgets to get our fiscal house in order. I do not know of anybody 

who worked harder than you. 

Then, Dr. Rivlin, I remember your assisting us many years ago, 

when I was over in the House of Representatives, with budget 

issues. You too have been as dedicated in public service and getting 

our fiscal house in order, and I thank you so very, very much. All 

the rest of the positions that you have held are very impressive, including former Director of the White House Office of Management 

and Budget and many other positions, including the one you have 

5 

been serving on today, as co-chairman of the Debt Reduction Task 

Force. 

Thank you both very much. You do not need introductions, either 

one of you, but I just want to tell you how much I appreciate you. 

I think I can speak for every member of the Senate about just how 

hard you have worked and just how deep our admiration is. 

Senator Domenici, why don’t you proceed? You know the order. 

Just go ahead. 

STATEMENT OF HON. PETE DOMENICI, SENIOR FELLOW AND 

CO-CHAIR, DEBT REDUCTION TASK FORCE, BIPARTISAN 

POLICY CENTER, WASHINGTON, DC 

Senator DOMENICI. Thank you very much, Mr. Chairman, Senator Hatch. Thank you for your kind words. Let me say to all of 

you, it is a pleasure to be here. 

It has fallen to me since I left the Senate, for almost half of the 

time that I have been gone, that I have devoted time and energy 

to trying to come up with ways and means to help this great Nation get out of the terrible dilemma that we have in terms of our 

debt. It has been a real pleasure to work at the Bipartisan Policy 

Center with Dr. Alice Rivlin. 

The two of us have done this budgeting differently because we 

have done it bipartisanly from the very beginning. As we worked 

our way through, we had to get both Democrats and Republicans 

to support the proposition, so it is different than others. But if indeed you intend to have a bipartisan solution, then obviously you 

have to do some of the things we are talking about, some give-andtake. 

I would not have done it exactly the way we did, and I am sure 

Dr. Rivlin would not have, but, when you put it together, it is a 

bit more than you have indicated, Mr. Chairman. You have indicated, and I appreciate it, that we gave you inspiration. Frankly, 

I think we gave you a plan that is really doable. 

Some of the things in the plan are different than you have stated, and we are going to try to clarify them. Perhaps we had 

misspoken, perhaps we had given you some wrong documents, but 

we believe the solutions to Medicare are here in this proposal, both 

fiscal and as a matter of policy. 

I want to also open by saying to you—and I do not want to do 

this in denigration of any other committee—we no longer have to 

wait for a super committee. I want each one of you to know I am 

trying to look you right in the eyes and tell you that, in the U.S. 

Senate, you happen to be the super committee. We do not need to 

appoint one. 

What am I talking about? What I am talking about is, you have 

all of the jurisdiction basically that is needed to solve our fiscal 

problem. Some of you would rather, perhaps, that it not be the 

case. But Medicare is within your jurisdiction. You cannot fix the 

budget without fixing—that is, in some way reforming—Medicare 

so you push the costs in the future down. 

If you look at the major programs of our country, you will find 

that the only one that is up, up, and away is the cost of health 

care. All the others are controllable. We could fix them rather easily. But unless you fix Medicare, you cannot fix this deficit. 

6 

It is a blue line on our chart, and our chart is here somewhere. 

I never go anywhere without it. I am known as the blue line chart 

man, Pete Domenici. I bring that blue line with me everywhere so 

you will understand what it is. 

You see where we have the major programs of the government. 

They are running almost side to side. Then you look and see the 

blue line, the line for health care spending, is up through the roof. 

We have to bend the blue line in the passage of a Medicare bill. 

Unless we do, we do not solve the problem. 

[The chart appears in the appendix on p. 42.] 

Senator DOMENICI. Now, let me repeat. Mr. Chairman, I heard 

you speak before on this issue, and I think you know it, but I want 

every member of the committee to know that you are the super 

committee. It falls on you to solve the Medicare problem, to solve 

the tax problem with a reform measure that will either be neutral 

in revenue or will gain revenue. We gain revenue in ours. 

But let me proceed to tell you that we have done very little to 

solve the deficit problem during the last 18 months: a lot of talk, 

no action. The only thing we have done is a little bit of work on 

the appropriations part of this budget, but not very much. The 

Budget Control Act brought to us the sequester that has an automatic $1 trillion in defense and domestic cuts. They are now scheduled to go into effect January 2. 

I have to take time to tell you that that sequester is already law 

that has been adopted. It is indefensible for any of you who think 

we ought to do good work around here and that we ought to not 

go wild in getting rid of our defense of our country, to not take seriously that something has to be done to see to it that the sequester 

does not take effect. 

Now, you do not have total jurisdiction over that, so you are not 

the super committee on that, but on all the matters that have to 

do with long-term solutions for the budget, they belong on your two 

shoulders for the Democrats and Republicans on this committee. 

Whether you like it or not, you can solve the problem or you can 

let it go by. 

Now, we already know that the sequester is going to be a very 

big drag on the economy. That is shown to us by CBO. If you can 

join with others who want to make sense out of that part of the 

activities, it seems to me you would do us all a service if you could 

commit yourself to fix that sequester so we could get on with some 

other activities and not be worried about diminishing our defenses 

until we do not recognize that they exist. 

The sequester must be addressed. It is just one part of the looming fiscal cliff that we face. The Bush tax cuts, you know all of 

them, you have recited them. Believe it or not, none of those was 

part of solving the debt problem. They come along, and they happen to be due and payable, or due and you have to do something 

about them. They come into existence during the same time that 

we are trying to fix the debt. It makes it rather complicated for 

some, but that is just the way it is. 

Under ordinary times, perhaps Alice, a Democrat, would not be 

calling for substantial changes to the entitlement programs, and I, 

a Republican, would be against higher revenues. But this is not a 

normal time, and we cannot allow ideological purity, in my opinion, 

7 

to stand in the way of what is right for our country. Otherwise, we 

might as well admit defeat and sit back and watch it go by while 

the accumulation of debt overwhelms our way of life. 

I, for one, will do everything I can to prevent that. We do not 

know what that means, but we do know that America will not be 

the same if our fiscal policy is permitted to go to zero and to become frigid and to become inoperative. Health care reform and tax 

reform that raises additional revenue are essential pieces to any serious plan. 

The first one is easy to show. Many of you have seen my chart— 

I told you about it—with the blue line. It is imperative that you 

understand that it must be fixed or you cannot fix the budget. Anybody who tells you they have a budget fix and they have not reformed Medicare so it costs less money over the next 20 years and 

the line is bent, anybody who says, I have a solution, but does not 

have a solution to Medicare, you should tell them to start over, go 

elsewhere, sell your pot of ideas someplace else, because it will not 

work without Medicare reform. 

We must continue to innovate and experiment with sensible costcontainment measures, but the challenge is not going to disappear 

overnight. You know the population is aging. The Baby Boom generation is just beginning to retire. This means that Medicare will 

face a flood of new beneficiaries. 

In fact, roughly 10,000 people are enrolling in Medicare every 

business day. These are unstoppable trends, and you have to account for them and change the program to take care of them. Because of these trends, even if action is taken now to tackle health 

care costs, and it should be, the U.S. government is destined to increase its health care spending in the near and medium term. 

In the meantime, without other changes, the government would 

continue running large deficits and racking up additional debt. 

Given the magnitude of the fiscal problem, this is an irresponsible 

course. So, in addition to seeking long-term solutions to the structural health care problem, the United States must employ other 

methods to reduce our deficit. 

Federal receipts are currently at a modern-day low because of 

the recession. They are coming in at 16 percent of GDP. But even 

if the Bush tax cuts are extended, revenues are projected to recover 

to 18 percent of GDP by 2017, which is roughly their average historically. 

I understand my time has expired, but I—— 

The CHAIRMAN. Go ahead, Pete. Take a few more minutes. Go 

ahead. 

Senator DOMENICI. Well, I looked around, and I looked at your 

schedule, and you do not have any other witnesses besides the two 

of us, so I asked Alice by just poking her here like this, and she 

said, ‘‘Proceed, finish,’’ so I will. I am almost there. 

I want to say to all of you that what we have produced by way 

of a budget, a plan, should really be taken seriously by all of you. 

I think, Senator Coburn, we have been to see you, within the past 

12 months, about the Medicare proposal. 

It is now refined and suggested, and, if it is adopted, or something close to it, you will have fixed, in our opinion, a major problem with Medicare. Hard to do, but if you look at it, it has to be 

8 

done. We have to convince the seniors that their programs may not 

be around, if we do not fix them, to cover them in the out-years. 

In terms of taxes, it cries out for reform, even if we did not have 

a fiscal crisis. It cries out for reform. It is a mess. We were lucky 

in our committee. We had tax experts who were on our committee. 

It was bipartisan and had a lot of professionals. They have put together a major reform of our tax system that will make it clean, 

sharp, and productive. It will be a growth budget. 

The rates will come down, all the things you have been talking 

about, and we will structure it where it will, over the years, increase revenue somewhat to match up with the entitlement restraint, and you have a good budget. That is what we have done, 

and it is a very good plan. Alice is an expert at it and she has 

worked hard, and I want to now, with your permission, ask her to 

take her time and tell you about the major proposals that we have 

in our budget. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

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

The CHAIRMAN. Dr. Rivlin, welcome to the committee. 

STATEMENT OF HON. ALICE RIVLIN, CO-CHAIR, DEBT REDUCTION TASK FORCE, BIPARTISAN POLICY CENTER, AND SENIOR FELLOW IN THE ECONOMIC STUDIES PROGRAM, 

BROOKINGS INSTITUTION, WASHINGTON, DC 

Dr. RIVLIN. Thank you, Mr. Chairman. 

Senator Domenici has explained our two major messages, which 

are, first, the fiscal cliff is a real one—it is more a wall than a cliff. 

If you allow all of these things to happen on the tax side and the 

spending side that would happen automatically, you will endanger 

the recovery. 

But the other looming crisis is the debt crisis, and the responsibility of this committee, we believe, is to help find a way to avoid 

the fiscal cliff, but substitute a grand bargain that will put our 

budget back on a sustainable track so that the debt is not rising 

faster than our economy can grow. 

The two key elements of such a plan, as Senator Domenici has 

said, are Medicare reform that reduces the rate of growth of that 

program in the future in a sensible way that preserves the program, and tax reform that gives us a fairer, simpler tax code that 

raises more revenue in the future. 

So let me talk briefly about those two proposals; first, on Medicare. Medicare is a hugely successful program. We need to preserve 

the Medicare guarantee of affordable health care for older and disabled people, and we need to do that, not in a way that will shift 

costs to the private sector or to vulnerable beneficiaries, but by 

making Medicare a leader in improving the efficiency and the effectiveness of health care delivery for everybody while reducing the 

rate of growth of health spending. 

Our plan would preserve traditional Medicare permanently as 

the default option for all seniors. It would strengthen the efforts 

which are embodied in the Affordable Care Act to identify improvements in cost-effectiveness of traditional Medicare through innovaVerDate Nov 24 2008 21:05 Jul 19, 2013 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\81439.000 TIMD
9 

tions in delivery and reimbursement incentives. But it would also 

offer seniors a choice, on a well-regulated exchange, between traditional Medicare and an array of private, comprehensive plans that 

offer at least the same benefits and which are required to accept 

everybody, no cherry-picking, but guaranteed issue and community 

rating. 

Those plans and traditional Medicare, in our view, should compete on a well-regulated exchange which would provide information 

on the prices and the outcomes of the plan. The government contribution, we believe, should be set at the second-lowest price established on those regulated regional exchanges. 

Now, an individual senior could stay in traditional Medicare, 

could choose the lowest-priced plan. If they chose the lowest one, 

lower than the second lowest, they get some money back. If they 

chose a plan with more benefits, they would have to pay more. 

We believe that competition on an exchange among those plans 

would achieve considerable savings over time; we estimate, conservatively, $300 billion over the next 10 years. But you cannot be 

sure of that, so as a fail-safe we would impose a cap on per capita 

cumulative Federal expenditures that would be at the rate of per 

capita GDP plus 1 percent, so you would know it would not increase faster than that. 

If, which we would not expect, the Federal expenditure reached 

that cap, then we would impose a means-tested premium but protect low-income seniors. Congress could, of course, decide to do it 

some other way. 

On the tax plan, we would propose, respectfully, to this committee that you adopt a new procedure. Instead of approaching tax 

reform by reviewing the current complexities of the tax code—all 

the exclusions, deductions, and credits—one by one and deciding 

how to change them, we would recommend that the committee take 

the radical approach of starting over. 

Assume that all income from whatever source is taxable, which 

would enable you to raise more revenue at much lower rates, and 

then go about deciding which modifications are absolutely essential 

even though they would raise the rates. 

We would urge you not to revert to excluding the employer-paid 

health and other benefits from income, but to limit and phase out 

this exclusion that encourages both employers and employees to 

choose fringe benefits over wages as compensation. 

If you decide to encourage home ownership, then do it in a way 

that will help the middle class most rather than giving benefits to 

the high end. To this end, we would recommend a 15-percent credit 

for mortgage interest, paid up to a limit, rather than the current 

deduction. 

Our plan is detailed in our longer testimony. It would have only 

two rates: 15 and 28 percent. It would have a corporate rate of 28 

percent. It would tax capital gains and dividends as ordinary income. It would have a refundable child credit and a refundable 

earnings credit, and it would have a refundable tax credit for charitable contributions and mortgage interest, up to a limit. 

Despite these low top rates, this plan would be more progressive 

and raise considerably more revenue than the current tax code; we 

would estimate about $2.6 trillion over the next 10 years. Those 

10 

are our two principal proposals, and we would be delighted to answer questions on these or other parts of the plan. Thank you. 

The CHAIRMAN. Thank you both very much. 

[The prepared statement of Dr. Rivlin appears in the appendix.] 

The CHAIRMAN. How does your plan differ from another major 

one that is out there? What is the major difference? 

Dr. RIVLIN. Well, since I was on Simpson-Bowles, along with at 

least three members of this committee that I can see at the moment, let me answer that one. The basic structure is the same. You 

cannot stabilize the debt any other way except by reforming entitlements and raising more revenue from a reformed tax system. 

The tax approach is very similar because Simpson-Bowles did exactly what I suggested: they started over and said, let us tax everything and then add back in certain provisions. So the tax proposals 

are similar. 

Our health care proposal for Medicare, however, is different. 

Simpson-Bowles did not have a serious discussion—although Representative Ryan and I tried—of premium support, and so Senator 

Domenici and I are quite proud of this compromise premium support plan. It is not like the original Ryan plan at all. It preserves 

traditional Medicare, but it does give an option of going to an exchange. 

Other aspects of Simpson-Bowles are similar, I think, to what we 

are proposing. Both Simpson-Bowles and Domenici-Rivlin placed 

limits on discretionary spending over the next decade. You have already done that in the Budget Control Act, so that part is done. 

The CHAIRMAN. Clearly your plan and Simpson-Bowles both suggest discretionary spending and entitlement cuts, as well as revenue increases. Could both of you explain the need for not only 

spending cuts, but also the need for revenue increases? 

I obviously ask the question because there is so much resistance 

in the Congress to additional revenue. How important is the need 

for additional revenue, and how strongly do you support additional 

revenue? What do you tell those who say ‘‘no additional revenue’’? 

Senator DOMENICI. Let us both comment on it. 

The CHAIRMAN. All right. 

Senator DOMENICI. I want to say to you first, as a former Republican Senator, remember that we put our plan together starting 

with bipartisan membership. So we were not a group of Republicans gathered to fix the budget and a group of Democrats gathered to fix it; we were a mixture, and we had to get an ‘‘aye’’ vote 

for the plan so that we could present it to the public. 

So for starters, the partisan issue is one where Democrats say, 

if you are going to have significant tax increases attributable to tax 

reform, you have to—let me put it the other way. 

Republicans say, we will take that only if you reform health care 

so that we are not looking at a forever-increasing tax to pay for an 

ever-increasing health care. Together, you go with a tax proposal 

and a proposal that reforms Medicare. When you combine the two, 

you get bipartisan support. 

Now, there is another reason you need it, and that is, when you 

are finished with this product and you have done all you can, you 

are short money to get to the place where you have a fiscal policy 

11 

that can survive. For it to survive, you have to end up putting revenue into the mix. 

The CHAIRMAN. How much revenue did you recommend? 

Dr. RIVLIN. How much did we recommend? 

The CHAIRMAN. Yes. 

Dr. RIVLIN. We, as I think I said of the plan that we would propose, we think, would raise about $2.6 trillion more over the next 

10 years. 

The CHAIRMAN. And why is that so important? What do you tell 

members of Congress who say ‘‘no revenue’’? 

Dr. RIVLIN. I think the basic reason is, we have a lot more seniors. We will have, in the relatively near future, twice as many seniors who are claimants for Medicare, Medicaid, and Social Security. 

The historic level of spending has been around 20 to 21 percent of 

GDP, 20 percent at the last time we balanced the budget. 

But that was before we had all these seniors. So, if we are going 

to accommodate twice as many people, even if we do a good job of 

bending the health care cost curve, we are not going to bend it to 

zero. If we do a good job on that, we are still going to have this 

tsunami of retirees, and we cannot accommodate those within the 

same level of revenue without cutting out everything else that the 

government needs to do. 

From a practical point of view, when you are in a bipartisan commission—and I have been in two of them now—you start with, 

what can we do on the entitlements, and then you go to discretionary spending, and then you realize you have not gotten there 

yet. 

I think that was a hard moment for Senator Coburn and Senator 

Crapo especially in the Simpson-Bowles debate, but they are 

among my heroes because they stepped up to the plate and said, 

yes, we are going to need more revenues as well as to cut spending. 

The CHAIRMAN. My time has expired. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Dr. Rivlin, the original 2010 version, as I see it, of the DomeniciRivlin plan called for a value-added tax, which I think you called 

a deficit reduction sales tax. Now, that national sales tax was intended to apply to around, as I recall, 75 percent of consumer expenditures and would apply to home sales, purchases of food, and 

purchases of clothing. 

Now, according to your plan, the tax would have generated over 

$3 trillion between 2012 and 2020, and over $17 trillion between 

2012 and 2040, if I have it right. Subsequently, as I understand it, 

you have chosen to drop the VAT—value-added tax—from your 

plan, citing likely lack of general support for a national sales tax 

in conjunction with an income tax. 

In place of the VAT you have decided—again, as I understand 

it—to increase the corporate tax rate from your initial proposed 27 

percent to 28 percent, and to increase the upper tax rate on your 

income tax schedule also from the initially proposed 27 percent to 

28 percent. 

Yet, I am not sure that your fiscal arithmetic adds up. I am not 

sure that those tax hikes would generate enough revenue to replace 

12 

what your initial plan’s national sales tax generated, or was proposed to generate. 

Now, would an increase in upper rates from 27 percent to 28 percent generate the trillions of revenue that your initial plan relied 

on from a national sales tax, or have you also decided to make 

other changes to your plan in order to get more revenue? 

Dr. RIVLIN. You are absolutely right, Senator Hatch. We did not 

make up all the revenue. The original plan had the debt reduction 

sales tax. We did not detect vast enthusiasm in this body or the 

other for a broad-based consumption tax, although we still think it 

is a good idea. So we revamped the plan and made the changes 

that you suggest, but our current plan does not raise as much revenue as the original one did. 

Senator HATCH. Now, this question is for either or both of our 

panelists. Your joint testimony identifies severe economic risks 

stemming from the fiscal cliff, including a strong likelihood that 

the economy would slip again into recession next year. 

You also highlight that effects from the fiscal cliff and other aspects of existing fiscal uncertainty begin to hit this year, and you 

identify CBO’s projection that these fiscal uncertainties will lower 

GDP growth by at least another half of 1 percent in the remainder 

of this year. 

Now, as a consequence, you conclude—correctly, in my view—by 

saying that ‘‘we urge Congress to act quickly’’ and go on to say that 

‘‘waiting until an always-difficult lame duck session may establish 

inaction as the default position, which could lead the Nation directly over the fiscal cliff.’’ 

Now, recently an economist at the Center on Budget and Policy 

Priorities wrote an article in which he argued that the economy 

would not be thrown immediately into recession early next year because of the fiscal cliff, and that there would be relatively modest 

negative effects over the first couple of months of next year. The 

idea was that it would be relatively painless to defer resolution of 

the fiscal cliff into the early months of next year, and fear of the 

cliff should not prod anyone into making ill-conceived budget deals 

during the remainder of this year. 

Rather, the author argues that pressures would mount early next 

year to strike a deal under the gun of an impending debt limit 

breach, and the short-term pain from a couple of months with no 

resolution would hurt, but it would not be a full-blown, year-long 

recession. 

Now, Dr. Rivlin and Senator Domenici, I believe that it would be 

difficult to be more wrong than the recommendation I just described. Growing fiscal uncertainty from the fiscal cliff, sequestration, and the long list of other undone business during the year— 

as officials from the Federal Reserve and CBO warn—will negatively influence hiring, investment, business decisions, and the 

economy well before we hit the fiscal cliff at the end of the year. 

I believe we need to act well before the end of this year, preferably 

before autumn when we are likely to see layoffs in defense and 

other industries begin. 

I wonder if either or both of you would comment on whether you 

agree or disagree with that option proposed by the Center on Budget and Policy Priorities of gambling with the economy and waiting 

13 

until next year to deal with the fiscal cliff and other fiscal matters. 

Do you agree or disagree that waiting until early next year to confront our fiscal uncertainties, including the fiscal cliff, really would 

not hurt that much? 

Dr. RIVLIN. That is a pretty loaded question, Senator. 

Senator HATCH. Well, it is, deliberately. 

Dr. RIVLIN. I think we made clear in our testimony that we think 

the Congress should act as quickly as possible. If, in the face of the 

election, you could possibly get yourselves together to act immediately, or had acted last year, we would be very enthusiastic about 

that. 

It is true that the cliff does not hit all at once, but we should 

not create an image of an America that cannot even avoid this 

quite cataclysmic set of self-imposed problems—after all, nobody 

wanted the sequester to happen, and it imposes deep cuts in a 

mindless way on both defense and domestic programs, and no one 

wants the AMT to go into effect for more people, and I think no 

one wants all the tax cuts to expire at once. 

So letting that all happen would be an admission that our government is not working, and that would, I think, have serious repercussions in the markets, as some have pointed out. 

Senator HATCH. Thank you. 

Senator DOMENICI. Mr. Chairman, I just want to comment briefly. Thank you for your great answer, Alice. I believe you have to 

consider in your question the fact that we are talking about lame 

duck. I think it is very important, for some of you who have gone 

through lame duck, to make sure that you know it is not the best 

choice of an arena to which you would assign the solution of major 

problems, nor is it an arena that you would assign two problems 

to and say, that is all we are going to do, because that never happens. So, I just add that. 

Mr. Chairman, I want to make an observation, if you would permit me. 

The CHAIRMAN. Sure. 

Senator DOMENICI. We talked together, all three of us—Dr. 

Rivlin, you, and I—about revenues and reform of entitlements. We 

have to start—which I did not do—with, what are we trying to accomplish? It used to be we would talk about a balanced budget, and 

that was the operative approach. 

We are now talking about something different. We are talking 

about the ratio of debt-to-GDP, debt being the accumulation of deficits. We are looking to get to a point where we can live with a debt 

and would have a stable economy, and we are looking for somewhere around 60 percent. 

You note that some of those countries that are going down already are passing 100 percent. We are positive that our great country cannot survive 100 and 150 percent before something happens. 

We only did that once for the second World War, for a few years 

to win the war, but then we immediately dropped down to a much 

more stable ratio. 

We have to get back there. To get back there, you have to do 

something to the two tillers that push it, and that is, what kind 

of revenues are you going to have, and what do you do with entitlements? 

14 

So what we had to do in a bipartisan way was say, how much 

can you get out of reform and restraint and cuts, put it over here, 

and then, what is left by way of debt? Where are you going to get 

it from? We said, we have to reform the tax code. Alice has explained how. I think it is the best reform around, and you all ought 

to look at it. It is simple. How you vote on it would be simple too. 

It would be much easier. 

So what we are saying is, when you have those two pillars and 

you are going to reform the taxes and say, how much do we have 

left that we have to solve for for our 60 percent, 65 percent ratio, 

you cannot do it without some revenue. That is how it comes about. 

I did not do a very good job explaining it to you, and I thought I 

ought to try again. I probably did no better, but I feel better about 

it. [Laughter.] 

I thought you would care about that. 

The CHAIRMAN. Both are accurate. All right. 

Senator Conrad? 

Senator CONRAD. Thank you, Mr. Chairman. Thanks for holding 

this hearing. Thanks to our witnesses, Senator Domenici, with 

whom I served for many years on the Budget Committee and whom 

I have deep respect for, and Alice Rivlin, who is a legend. We appreciate the extraordinary work you have done. 

I think, frankly, you have it about right. I served on SimpsonBowles. In many ways I think your work product is actually somewhat superior to ours. I say that because, while there are a lot of 

similarities, you did take on fundamental reform of Medicare. 

My own conclusion is, we are going to have to do it. How we do 

it, that is critically important. We do not need to throw the baby 

out with the bath water, we do not need to shred Medicare in order 

to save it, but we do need to change some of the elements of how 

it functions in light of health care inflation and this gigantic 

growth in the Baby Boom generation. These are undeniable facts. 

The growth of the Baby Boom generation is not a projection. 

These people have been born. They are alive today. They are going 

to be eligible for Social Security and Medicare, and the trustees 

have told us we are headed for the cliff. 

So I mean, any prudent person, I think, would say, we are going 

to have to make some changes. Part of it is going to have to be 

done on the revenue side as well because, as you point out in your 

chart, in addition to the chart Senator Domenici referenced that 

shows Medicare as being the driver on the cost side, you also show, 

on the revenue side, that trying to do this with the ordinary level 

of revenue that we have had, 18 percent of GDP, is not going to 

be enough in this context and that the times we have balanced the 

budget, we have not been at 18 percent of GDP in revenue, we 

have been at 20 percent of GDP. Your chart shows that very 

clearly. 

I think one other thing that is so important and has not been 

said here today is, Director Rivlin, you have indicated that your 

plan calls for a $2.6-trillion revenue increase. But that is compared 

to current policy—current policy. If we would compare your plan to 

current law, it is actually a tax cut. It is a tax cut, my calculation 

is, of about $1.6 trillion. 

15 

So when we use these words—and words matter a lot—and we 

say there is going to be more revenue, compared to what? Compared to current policy, it is more revenue. Compared to current 

law, it is less revenue. Is that not the case? 

Senator DOMENICI. Yes, it is. Yes, it is the case. 

Dr. RIVLIN. Yes, absolutely. 

Senator CONRAD. And you are talking about a revenue level, in 

2022, of 20.6 percent of GDP. Is that correct? 

Dr. RIVLIN. I think so. 

Senator CONRAD. And that is exactly what the revenue level of 

the country was in the year 2000. 

Senator DOMENICI. That is right. 

Senator CONRAD. That is exactly what it was, and we balanced 

the budget, and we quit taking Social Security money to finance 

the general operations of government. So I think you have it about 

right with respect to the revenue side of the equation. I think you 

are headed in the right direction on entitlement reform. 

I have a little bit of time here left. I would like to go to a question. One of the great vulnerabilities, obviously, of the Medicare reform that you are proposing is this question of cherry-picking. How 

do we prevent cherry-picking by those who offer insurance coverage? 

Dr. RIVLIN. You enforce the rule that they cannot do it. You have 

a regulated exchange with rules. If they are going to offer their 

wares on the exchange, they have to take all comers and at the 

same price, and they have to offer what Medicare offers. There are 

certainly ways of throwing off the exchange anybody who does not 

abide by those rules. In the early days of Medicare Advantage 

there was a lot of cherry-picking, but even in Medicare Advantage 

the CMS has managed to get rid of that. 

Senator CONRAD. Can I just say in conclusion, Mr. Chairman, to 

me one of the biggest challenges we confront in Medicare reform 

is dealing with this risk of cherry-picking. You are quite right, you 

do it through regulation. But I think we all know there are 

geniuses in this country at getting around rules. That is going to 

be, I think, one of the biggest tests. 

I thank the Chair. 

The CHAIRMAN. I appreciate that, Senator. I do not have time, 

but that is an excellent question. If the benefits are the same under 

insurance policies offered under the exchanges, and the benefits 

are the same as traditional Medicare, I just do not see how a private insurance company is going to make any money and get the 

same benefits, if they are required to give the same benefits, when 

administrative costs are going to be a lot higher than a private policy. But that is just a question in my mind that we can get to later. 

I do not want to take other Senators’ time. 

Next is Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. Thank you for this 

hearing. 

Let me join the bouquet-tossing contest. We all so appreciate the 

tremendous commitment you both have made to public service. I 

think what I am going to do is, because time is short, I am going 

to ask you a question on the health care front and then you, Senator Domenici, one about tax reform. 

16 

Dr. Rivlin, it seems to me that there are now conservative people 

who oppose the Affordable Care Act, which includes health insurance exchanges so that Americans can compare policies, tight regulation to prevent the kind of cherry-picking that Senator Conrad 

was talking about, and generous subsidies for low-income people. 

But some of those conservative folks who oppose that in the Affordable Care Act want to bring just that approach to Medicare reform. 

Then we have some liberal folks who do just the reverse. They 

support the President’s approach in the Affordable Care Act for 

those under 65, but oppose it for those over 65. 

So you listen to all this, and it just is a philosophical headscratcher. I mean, you wonder what it is going to take to bring people together. You have made a very constructive contribution, not 

just in the past but today, because I believe what I hear you saying 

is you permanently want to protect traditional Medicare, with its 

purchasing power, and in effect see that as a public option, while 

at the same time allowing for the private choices. Is that a fair description of what it is you are trying to do? 

Dr. RIVLIN. It is, Senator Wyden. I think it is an anomaly. I have 

teased Congressman Ryan about this: why are you in favor of exchanges for Medicare but want to repeal the Affordable Care Act? 

I think the anomaly is equally true on the liberal side. Liberals 

wanted a public option in the Affordable Care Act. We already have 

it in Medicare. 

Senator WYDEN. I think you have stated it very well. 

Senator DOMENICI. Senator Wyden? 

Senator WYDEN. Yes, please. Senator Domenici? 

Senator DOMENICI. Might I just say, you cannot imagine being on 

my side of the aisle now, where I cannot do what you do. I can just 

talk, I cannot vote. When we announce what our plan is on Medicare, those who oppose it immediately say, this is a plan to do 

away with Medicare. 

So we wrote it in. In fact, we called the bill, at my suggestion, 

the Protect Medicare Act so that you would find, in the very language up at the top, it says Medicare is preserved, et cetera. Yet, 

they will stand right there and say, this does away with Medicare. 

You say, well, how does it? Here it says we keep it as a program. 

So, I am glad you raised the point so we get a chance to say that 

is something we did, and it will work. They say it will not work. 

It will work. They say there will not be any people on Medicare, 

they will be elsewhere. But that is just the rhetoric. We have no 

evidence of that. 

Senator WYDEN. Let me ask you both a question about tax reform. This is something I have felt strongly about for years. Senator Coats and I have a bipartisan tax reform proposal. We build 

on a number of the elements that you all offer and the SimpsonBowles report does. But I want to ask you a question about simplicity because I think this is a part of the tax reform issue that 

gets missed. 

Now, our numbers indicate that one taxpayer in five reports 

pass-through business income. These are essentially business owners or principals. So that is 27 million tax returns that claim passthrough income. In effect, 94 percent of those tax returns, about 25 

17 

million, are businesses with pass-through income of less than 

$250,000. 

If we simplify the tax code and get rid of some of these onecategory-after-another approaches with scores and scores of forms, 

is this not going to be a real shot in the arm to the cause of small 

business growth, given those numbers that I just outlined? Either 

one of you. Both of you took Medicare so well, I will let you both 

take tax reform also. 

Dr. RIVLIN. Yes, I think so. Having the same top personal rate 

as a corporate rate is desirable because it gets rid of incentives to 

do your business one way or another, corporate or not, for tax reasons. That would help. 

Senator WYDEN. Senator Domenici can respond quickly. 

Senator DOMENICI. I think without a doubt there is an awful lot 

of restraint in this economy because people have to spend all their 

time doing things that are unproductive—like filling out tax forms. 

We take those out if you add positives. I think it would be a big 

plus for the small business people. 

Senator WYDEN. Thank you both. I look forward to working with 

you. 

Senator Cornyn? 

Senator CORNYN. Well, let me join those who express our appreciation to both of you for your leadership on this important issue. 

My sense is that the needle is moving in Congress, and members 

on both sides of the aisle understand what you have so eloquently 

expressed in terms of the dire nature of our current circumstances 

and what the pragmatic solutions are, going forward. 

That, perhaps, leads to more frustration, but not because—if we 

have bipartisan consensus as to the nature of the problem and sort 

of the 80/20 rule, agree to 80 percent of what the solution should 

look like, maybe we could discard the 20 percent we disagree on, 

and we can make great progress. 

But I just would like to get both of you to talk about the status 

quo, the sequester, the $1.2 trillion in cuts that will take place unless Congress and the President act. I am told by major defense 

contractors that they are going to be obligated, by collective bargaining agreements or other law, to begin sending notices to their 

employees in October that there will be layoffs. 

There have been some projections that as many as a million people in private sector jobs would lose their jobs in national security 

industries if in fact this sequestration takes effect as currently 

written, with half a trillion dollars out of defense spending. 

So Senator Hatch was asking you about the combination. I like 

your analogy: it is not so much a cliff but a wall we are getting 

ready to run into, and quite predictable. 

But the combination of the sequestration and its impact on private sector employment, beginning in October—not in the lame 

duck, not in January—combined with the prospect of the singlelargest tax increase in American history unless Congress acts, I am 

sure people are scratching their heads, as I am, wondering, why is 

the President not sitting down with top congressional leaders and 

saying, how do we avoid this, as opposed to, I am sad to say, the 

President does not seem very engaged in this. 

18 

But I do not want to engage in politics, but I do want to ask you 

about the current path we are on unless something changes. 

Senator DOMENICI. Well, I appreciate the question, and I want 

to tell you that we will get to you, for you and your staff’s perusal 

and use, the report that was done, a white paper report, over at 

the Bipartisan Policy Center. I was co-chair of the group, along 

with the former head of the House Intel Committee—Dan Glickman—and former National Security Advisor Jim Jones, who is now 

over at our center. 

We took about 3 weeks or 4 weeks, with an excellent staff, and 

we analyzed that bill. The analysis of that bill shows that something broke when that was put together. It is not a typical bill. It 

is very difficult to understand. When you get right down to number 

crunching, it is not a 10-percent cut, it is a 15-percent cut. 

When you get down to the bottom, who is doing what, you find 

that every program, every agency, every act, they are all cut, and 

there is no flexibility. When you have something that big with that 

much impact, it cries out for flexibility to save money, to do things 

right, to prevent harming people when they do not have to be. So 

whoever did that, we thank them for a rotten, terrible bill. 

The problem is, I do not know how Congress gets rid of it. I do 

know the Secretary of Defense has spoken eloquently about it. He 

got to use his budget hat a little bit from back in the days when 

he started there, and he says he cannot live with it. I think he will 

be working hard, but some of you have to take the lead in trying 

to find a legislative way to get rid of it or modify it. 

I hate to just kick the can on that one because it is everything 

you said: it is causing people not to invest, it is causing layoffs, it 

is causing uncertainty of a high magnitude. When that happens, it 

costs money, and it costs growth, and it costs jobs, and it costs 

businesses their business. 

Senator CORNYN. Senator Domenici, thank you very much. No 

one around here is claiming credit for the Budget Control Act and 

the sequester, as it was written. 

My time is just about up. I need to pass it off to Senator Grassley. But would you just let me ask this question that I think calls 

for a succinct answer: would you agree with me that if the sequester, as currently written, remains the law of the land and takes effect in January, together with the expiring tax provisions on December 31, if they are allowed to take effect without Congress and 

the President acting, that it is more likely than not that the United 

States’ economy will be thrown into a recession? 

Senator DOMENICI. Well, I am not an economist, but I think that 

is the case. We are going to go negative. We are going to go negative, and we are going to lose jobs. 

Senator CORNYN. Dr. Rivlin? 

Dr. RIVLIN. Well, I am an economist, and I would agree with you. 

But I also agree with the Senator that the answer is not just to 

postpone it. Do something better. 

Senator CORNYN. Thank you. 

Senator Grassley? 

Senator WYDEN. Next is Senator Grassley, then Senator Nelson. 

19 

Senator GRASSLEY. Yes. Thanks to both of you for being here and 

for your expertise in this area, and more importantly your energy 

for it. 

I have two questions dealing with Medicare. One of them partly 

covers Medicaid as well. This 10-year budget window that we have 

to operate under is a problem because it is extremely difficult to 

find health care savings that CBO will agree save money in that 

window without using one of two tools. Congress either has to reduce provider payments or ask beneficiaries to pay more. 

While I agree that we need to make structural reforms to our 

health care entitlements to reign in their long-term costs, I think 

we need to temper our short-term expectations. 

Do you think that there are ways that we can achieve shortterm, scorable savings in health care through structural reforms? 

Dr. RIVLIN. I think you point to a very real problem. In the short 

term, it is very difficult to do that. We do not make big claims for 

our plan saving a lot in the first 10 years. It is the second 10 years 

and the third 10 years that you ought to be worrying about. 

Now, there are some things that can be done in the near term, 

and we have proposed a few of them in Medicare: bundling payments and modernizing the structure of benefits a bit. But the 

long-run structural reform will take time, but that is fine. The 

threat is out there in the long run. 

It is not that we are so afraid that Medicare spending is going 

to rise very rapidly in the near term. That is partly because these 

new seniors that we are talking about, the ones who are just retiring, are younger than the average Medicare recipient. So, the pressure is not going to be as great in the near term. 

Senator GRASSLEY. All right. If you wanted to add something, 

otherwise I will go on to my second question. 

Senator DOMENICI. Well, I would just say that, sometimes when 

we are working on trying to solve this fiscal problem, the recognition that a long-term fix is what is needed puts many people in the 

position that they do not know how you do that and do it now. 

Well, if you write a law that brings the cost curve down like this, 

if the law reads that way, you have changed the expectation, and 

that counts and that helps you with your fiscal soundness that you 

are trying to work out. So the long-term is what we are looking for, 

yet it is hard to get scorable credit over the 10-year window, as you 

said. But we have to work with those people who do the scoring 

and get it done. 

Senator GRASSLEY. My second question deals with long-term support services. This is a significant driver of cost of our entitlements, 

particularly for those who are dually eligible for both Medicare and 

Medicaid. Are there any structural reforms to those programs that 

you would recommend Congress consider to better organize spending for long-term support services that will be more efficient, as 

you suggest Medicare acute care reforms will in the end be more 

efficient? So in other words, you have a model that you argue will 

save money through more efficient spending for Medicare acute 

care services. How about the dual-eligibles, Medicaid, and longterm support services? 

Senator DOMENICI. I do not know. 

20 

Dr. RIVLIN. I think the dual-eligibles are the most difficult population that we have to deal with. They are elderly, and they are 

poor. We would recommend continuing to try to move the dualeligible population into managed care in the framework of Medicare. 

You also raised the question about long-term care. That is a really tough one, and it is a big expenditure for Medicaid, as you know. 

One suggestion we considered—we did not actually recommend this 

because we were not sure—was a division of responsibility between 

the Federal Government and the States with respect to Medicaid, 

one taking the acute care and the other taking the long-term care. 

It could go either way, but we thought a clearer division of responsibility there and getting rid of the gaming that the Federal match 

often incents would be something worth considering. 

Senator DOMENICI. I want to say we debated it a long time, but 

we could not come to a conclusion, so we just told you the options 

there; we did not conclude with one of them. 

Senator WYDEN. Senator Nelson? 

Senator NELSON. Thank you, Mr. Chairman. 

Do you think the political atmosphere will have changed sufficiently after the presidential election that, were the super committee to be sitting again, that it would not be deadlocked in a partisan 6:6 vote? 

Dr. RIVLIN. He is the politician. 

Senator DOMENICI. Well, look, from my standpoint it seems to me 

so obvious that you have to act for your country. I mean, you have 

to put your mind-set almost like it is a war. I mean, you could lose 

it, and with it you would lose your status, your way of life. The 

very existence of the country could go flopping around for 20 or 30 

years. Our money could have problems. 

So I think there has to be more evidence to more members that 

that really is right around the corner. It cannot be delayed forever; 

it is there. I believe this committee will still have the power to get 

most of it done. I do not think we are going to need a super committee; this will be the super committee. 

But I think the votes will be there to report something out either 

from this committee, or a super committee will be formed. I hope 

we do not form one. I hope we encourage this committee to do its 

job. You have most of the jurisdiction, and the rules are set. You 

have staff, and everything is kind of permanent. That is much better than inventing a committee, in my opinion. 

Senator NELSON. Well, I agree with you. The way I understand 

it, the sequester was never supposed to go into effect. It was such 

a meat cleaver coming down, that it was going to get the 12 people 

on the super committee to come to agreement. And here we are. 

Where in your plan does the 15-percent tax rate jump to the 28 

percent? 

Dr. RIVLIN. We will find it. Go ahead. 

Senator NELSON. All right. 

Dr. RIVLIN. I am not sure exactly what the income cut-off is. 

Senator NELSON. Well, while you are finding that, I assume a 

driving factor in your plan was—and it is excellent, and of course 

I say the same thing everybody else has said: thank you all for 

21 

your long, long public service. You are great, both of you. You continue that public service. 

You have it? 

Dr. RIVLIN. It is $51,000. That is presumably for a joint return? 

Senator DOMENICI. Individual. 

Senator NELSON. Individual, $51,000. That would—— 

Dr. RIVLIN. It is $102,000 for a couple. 

Senator NELSON. And that is what we think of today as adjusted 

gross income—— 

Dr. RIVLIN. Right. 

Senator NELSON [continuing]. Although you are not going to have 

all those deductions, save for the charitable and the mortgage interest. All right. 

Well, what is your general feeling about your work product, 

which is a considerable, simplified tax code? What does that do to 

stoke up the economic engine of the country? 

Senator DOMENICI. Well, again, I am lucky I work with an economist who has been through everything Washington has to challenge an economist with: CBO, OMB, et cetera. But I will answer 

first—— 

Dr. RIVLIN. Go ahead. 

Senator DOMENICI [continuing]. And she will say whatever, she 

will fill it in. It seems to me that sooner or later something has to 

be done. The economy is suffering from an awful lot of people not 

knowing what is going to happen. Some big things have to get 

solved because big things are tied in with small things. When you 

add it all up, there is just no vibrancy, not as much vibrancy as 

we need. 

We need something that will give us that. It seems to me a reformed tax code like the one we suggest, captured by the leadership 

and pronounced by them over and over to the American people as 

a solution to a difficult problem—here came a terrible problem, 

some good is going to come out of it, and here is the good. It might 

be the driver solution. 

Senator NELSON. Well, I agree with you. 

I want to get in one more question before my time runs out. I 

certainly agree with you there. Yours is a very simplified tax code, 

considerably. 

If the Supreme Court strikes down the individual mandate, the 

penalty, can you fix part of it with legislative statute solutions, 

such as a limited enrollment period, such as late enrollment fees, 

such as public campaigns to get into the health insurance exchanges? 

Dr. RIVLIN. Yes. I do not think the mandate was a necessary part 

of the Affordable Care Act. You could have done it different ways, 

by penalizing not having insurance without actually mandating it. 

But to go back to your previous question, the other important 

thing is, we have lower marginal rates in our plan. I think that is 

conducive to higher economic growth. 

Senator NELSON. Thank you, Mr. Chairman. 

Senator DOMENICI. Might I say, Senator Nelson, I forgot, and I 

want to second the motion that the best way to get growth in an 

economy is to have lower marginal rates. That is the best way, and 

22 

we have done about as good as anyone with ours in terms of that 

fact. 

Senator NELSON. Fifteen and twenty-eight. That is simple, and 

that is lower. 

Senator WYDEN. Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. I want to also echo 

what has already been said and thank both of you for your great 

body of work and service. Mr. Chairman, it is always nice to have 

you back here. I wish we could get your biennial budget proposal 

through Congress. I think it would do a lot to improve the way 

things work around here. I wanted to ask a couple of questions. You assume $2.6 trillion 

in revenue from the new revenue system and tax code that would 

be created under your proposal. According to the CBO, I think, for 

a 1-percent increase in economic growth, they assume about $310 

billion in additional tax revenue. 

That, I assume, would be under the current, existing tax code. 

But I am wondering, of that number, how much of that revenue— 

or is there any of that, I should say maybe as a better way to ask 

it, that is assumed increased economic growth? Do you see, with a 

simpler, flatter tax code that is more competitive, that it would 

generate growth, and did you factor in what might happen as a result of that? 

Dr. RIVLIN. We do believe that, but we did not factor it in. 

Senator THUNE. All right. So yours is all static in terms of the 

scoring with regard to the tax component. 

Dr. RIVLIN. Well, we use, roughly, CBO methods. 

Senator THUNE. All right. 

Senator DOMENICI. I do want to say that we had a lot of discussion about what level of taxation is right, and nobody knows the 

answer as to what is the best for America. I guess we would start 

by saying, from the vantage point of this Senator, the lower the 

tax, the better in terms of the economy and its capability to 

produce and grow. But is 20 percent too much? Is 20 percent too 

low, just right? Nobody knows that. If you have the right mix elsewhere, it would seem to me you can thrive. That is what we hope 

we have gotten in this tax code. 

Senator THUNE. Yes. Well, I think that, based on historically the 

way you have pegged that, as a percentage of GDP, it is about in 

the right place. The times when we have balanced the budget since 

1969, which have been a handful of times, spending as a percentage of GDP has been significantly below where it is today too, I 

want to say somewhere on the order of 18.7 percent of GDP. So, 

obviously we have to get the spending issue addressed. That comes 

back to your other issue of entitlement reform. 

The only thing I question a little bit is the wisdom of having the 

gains rate the same as the ordinary income rate, or treating capital 

gains as ordinary income. It seems like whenever we have had a 

lower capital gains rate, we have seen a significant increase in revenue just from the economic activity and turnover that occurs with 

that. I like the simplicity of having the two rates, obviously. 

Dr. RIVLIN. I do not think the actual record bears that out, Senator. We have looked carefully at the revenues from the capital 

gains tax and compared them to the rate, and that actually does 

23 

not show that we have had less revenue from higher rates, except 

very temporarily when you announce in advance that you are going 

to raise the rate. 

Senator THUNE. Right. 

Dr. RIVLIN. Of course, a lot of people sell that higher rates 

produce less revenue. But for the long haul, the evidence actually 

does not say that. 

Senator THUNE. All right. 

Let me ask quickly as well here about the Medicare reform component of this. I think the chairman asked how yours differed from 

Simpson-Bowles in terms of how it treats Medicare. I am interested 

in knowing, because I have seen this reported on. You sort of pioneered the whole idea of premium support. The House adopted, in 

the Ryan budget, a premium support plan, but I think, Dr. Rivlin, 

you have indicated in some of the things that I have seen, that that 

is not consistent with what you all had proposed. 

So I guess I am curious as to, how is the House budget proposal 

with regard to premium support in Medicare different from what 

you all put forward? 

Dr. RIVLIN. Well, it depends which House budget you are talking 

about. The original Ryan budget of 2 years ago had a very severe 

version of premium support which did not preserve traditional 

Medicare and had a very punitive cap on the allowable increases 

in support, which was only at the cost-of-living rate of increase. 

That would have ended traditional Medicare as we know it. 

However, in the meantime, Chairman Ryan has moved to the 

middle, under the influence of Senator Wyden among others, but 

especially embodied in the Ryan-Wyden/Wyden-Ryan version of 

premium support, which does have some differences from ours but 

is basically the same idea, that you preserve traditional Medicare 

as the default option and you allow seniors to choose on a wellregulated exchange among private plans. 

So it does not end Medicare. It gives a choice, and we think a 

competitive situation which can lead to savings. 

Senator THUNE. So we call that the Wyden effect? 

Dr. RIVLIN. I call it the Wyden effect. [Laughter.] 

Senator THUNE. All right. I see my time has expired, Mr. Chairman. Thank you all very much for your testimony. 

The CHAIRMAN. Thank you, Senator. 

Senator Menendez? Oh, he is not here. Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. I, too, echo the comments of all of our colleagues. Thank you very much for your long 

years of public service, including on these recommendations that 

you have brought forward. 

First, I want to encourage you to at least keep on your personal 

agendas the national consumption tax. I understand the popularity 

issues, but I tell you, I am concerned, even if we are able to pass 

tax reform, about how long that will last before it gets complicated 

again because of the desires of the political system to make adjustments in that base. A national consumption tax, I think, can be 

done in a fairer way than our current income taxes. It is borderadjusted, and it has a lot of advantages. 

24 

So I understand the reasons for your change, but I just really 

want to go on record to encourage you to continue that debate. I 

think we will get to it one of these days. 

On the recommendations for Medicare and health care costs, let 

me just give you my concern and get your response to it. It is not 

the exchanges. As a Democrat, I understand putting exchanges in 

Medicare. It is the concern that, to bring down cost with the premium support, you are assuming that there will be savings from 

the institutional players or consumers that will bring about delivery system reforms that will make our system more cost-effective. 

I am concerned about that. We have tried that once with 

Medicare+Choice, and it did not work. In my own State of Maryland, we had the insurance companies ultimately abandon it in our 

State. We then paid the private insurance industry a premium in 

order to get private insurance. Under your exchanges, you do have 

a fall-back of fee-for-service, but you do not really have a public insurance option that may be competitive. I welcome your thoughts 

on a public insurance option on managed care. 

I think the alternative is to look at direct delivery system reforms with accountability, with some form of enforcement. You 

have enforcement on your overall numbers based upon caps, and 

how they are enforced we are not exactly sure. 

I understand we have to get scorable savings, but I would feel 

more comfortable if we did it on direct involvement of delivery system reforms, particularly working with physician groups and hospitals in some form dealing with the more difficult and costly patients rather than trying to put the whole system in jeopardy 

where we may just be shifting costs from the Federal Government 

or from the State governments to the private sector or individuals, 

which may not, at the end of the day, really help our economy. 

Dr. RIVLIN. First, on the consumption tax, I appreciate that. I 

think on somebody’s agenda also ought to be still a carbon tax. I 

just wanted to get that in. 

Senator CARDIN. Good. 

Dr. RIVLIN. But on—— 

Senator DOMENICI. Before you go on, let me say I agreed with 

the choice that we not continue on with the consumption tax. I see 

it as nothing but an obstacle—and we have plenty already—to getting things done. The carbon tax seems like, for some people, a 

good tax. To me, it does not, so I want to make sure I am on the 

record. 

The CHAIRMAN. I am sorry. You like the carbon tax or not? 

Senator DOMENICI. No, I do not. 

The CHAIRMAN. All right. 

Dr. RIVLIN. We differ on that. 

Senator DOMENICI. We did not get it through our Task Force, either. 

Dr. RIVLIN. Yes. We did not put it in our plan. 

The CHAIRMAN. All right. 

Dr. RIVLIN. But let me come back to Senator Cardin’s concern. 

First, we would encourage and keep all of the reforms that are embodied in the Affordable Care Act to try to do exactly what you are 

talking about with existing Medicare, Accountable Care Organizations, and innovations in payment systems. I think probably feeVerDate Nov 24 2008 21:05 Jul 19, 2013 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 R:\DOCS\81439.000 TIMD
25 

for-service Medicare, whether you go with premium support or not, 

is likely to evolve in the direction that you suggest, and we would 

encourage that. 

We think it ought to be encouraged in the private sector as well. 

Although Medicare Advantage, as you point out, was badly structured at the beginning, and the history in Maryland was bad—— 

Senator CARDIN. No plans remained at the end of the day. 

Dr. RIVLIN [continuing]. It has been improved and is actually 

working much better in a lot of places, including, I understand, Oregon. But you could think of what we want to do as a considerable 

improvement in Medicare Advantage by creating exchanges and 

having real competition, which has only slowly evolved in Medicare 

Advantage. 

Senator DOMENICI. I would like to comment and make sure that 

we do not overstate our case. The entirety of reform in the Medicare health delivery system, we did not do that. We did not have 

enough time, nor enough staff. We just proposed a reform for the 

overall structure of the system. Alice and I have a work in progress 

examining other healthcare reforms with ample staff who are trying to get at the whole package of problems and see how we can 

come up with solutions. 

Dr. RIVLIN. Meaning the whole system, not just Medicare. 

Senator DOMENICI. Yes, the whole system. So that is a few 

months away from reality. We were not able to do that in our original efforts. 

Senator CARDIN. Thank you. 

The CHAIRMAN. Thank you. 

Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. I want to welcome 

both of you here today. Senator Domenici, having served with you 

on the Budget Committee when you were chairman, I certainly 

found that one of my best experiences here in the U.S. Senate. I 

want to thank you both, Dr. Rivlin as well, for your legendary and 

exemplary contributions and commitment to this effort in underscoring the urgency associated with these issues that these times 

demand. 

Hopefully we are going to address them in some way. That is one 

of my first questions, because I think, when it comes to tax reform, 

as you are recommending as part of entitlement reform, how do we 

go about this without the presidential leadership that is so essential to this debate? 

We had a witness testify before this committee last night from 

the Treasury Department, indicating that there were no plans in 

the works for comprehensive tax reform. So how does this effort get 

under way without strong support from the President at some 

point? 

I well recall when President Reagan delivered his State of the 

Union address back in 1984. He mentioned that one of his top priorities was tax reform. There was some laughter in the House 

chamber by members. He said, ‘‘What, did I say something funny?’’ 

So I think he was truly committed to it. 

That is what it is going to require in this instance, irrespective 

of the demands of the time. We are at a tipping point. I am not 

so sure that we are going to see the kind of drive that is necessary 

26 

to get this accomplished in the time frame in which we should accomplish it. 

So, one, how essential is presidential leadership in this undertaking? Two, what is the time frame that you foresee, in the lame 

duck session or beyond, and what will the impact be on the economy if we fail to do this sooner rather than later? 

Senator DOMENICI. Well, I will lead off and then let Alice comment. I guess I would say to you, Senator, before I get on the substance, that I am sorry to see you leave. I read about your departure soon. 

Senator SNOWE. Thank you. 

Senator DOMENICI. I left for different reasons than you. I think 

you know why I left. 

Senator SNOWE. Yes. 

Senator DOMENICI. It turns out I did not have the exact illness 

that the doctors thought I had, so I am still able to function somewhat adequately, and I am feeling all right. I am hoping for you 

the very best in whatever you choose to do. 

Senator SNOWE. Thank you. 

Senator DOMENICI. I wanted to say that we cannot, in my opinion, accomplish what must be done for this great country in terms 

of fiscal responsibility without the direct and total commitment of 

a President. That has to be there. 

I do not see how we can take on tax reform and things like Medicare reform without a President telling the American people why 

it is necessary. You can tell them, other people can tell them, but 

when it comes right down to it, when we have to change basic 

things to save the country, you have to have the President helping. 

I believe that that has to happen. I guess the rest is, I hope it 

happens, and the sooner the better, in my mind. I assume lame 

duck is not adequate time. Even the next session might not be adequate for the big package. But sooner rather than later ought to 

be the adage around here that we are following. ‘‘Without the 

President we do not get it done’’ ought to be the hue and cry from 

the Congress and the people of this country. 

Senator SNOWE. Thank you. 

Dr. Rivlin? 

Dr. RIVLIN. I agree with that. I think, with respect to the lame 

duck, which is sooner than we think, it is probably impossible to 

do the whole job in the lame duck. It is just too hard to reform the 

tax code and the entitlements and do everything in such a short 

time with a lame duck session. But I believe you could lay the 

groundwork, the framework that would require the next Congress 

to fill in the details and get it done by a date certain, and you really need to do that. I, too, will be sorry to see you leave the Senate. 

Senator SNOWE. Thank you. Thank you. 

Well, CBO indicated that between the impact of the sequester 

and the failure to extend the current tax rates, there could be an 

effect on economic growth, anywhere from 1.5, 1.7, to 3.5 percent 

on economic growth. So given that, what would you be proposing 

for the Congress to do with respect to those tax rates if we cannot 

achieve any kind of tax reform in the lame duck session? 

Dr. RIVLIN. Well, I think you have to postpone the tax increases, 

but with a requirement to fold it into tax reform and entitlement 

27 

reform that has some teeth in it in the next session. That would 

not be easy to design, but if there is the sense of urgency, which 

we feel there ought to be, then everybody has to be committed to 

doing that. 

Senator DOMENICI. I agree with that in substance and with reference to the genuine need to do something. I wholeheartedly 

agree. 

Senator SNOWE. Can I just ask one other question? When do you 

expect the level of taxes as a percent of GDP to hit 20 percent, 

under your proposal? 

Dr. RIVLIN. Not soon, because it is way down. 

Senator SNOWE. Right. 

Dr. RIVLIN. And that depends on how fast the economy recovers. 

Senator SNOWE. Yes. And your target for spending as a percentage of GDP? 

Dr. RIVLIN. It is ultimately a couple of percentage points above 

our revenues. The answer I am told, to when, under our revenue 

projections, you would get to the 20 percent would be around 2019, 

but that, as I said, depends on how fast we recover. 

We are not, as Senator Domenici said earlier, aiming for a balanced budget, not because we would not like it but because we 

think the first thing you have to do is stabilize the debt, make sure 

that it is not growing faster than the GDP, and that would imply 

a deficit of around 2 percent. That is about what we achieve under 

our plan. 

Senator SNOWE. Thank you. 

Yes? 

Senator DOMENICI. I want to remind the committee again, and 

I will say it to you, Senator Snowe, remember, our package was put 

together by Democrats and Republicans, so we do not come here 

starting with one side or the other. We have already gone through 

the compromises, and how much is enough to cut, how much is too 

much. 

People on each side going their own way can find fault with this 

because it is not theirs, but we cannot do theirs unless Democrats 

have the power, or the Republicans, to take over everything. The 

problem is there, and it must be solved by Senators, not by parties, 

it seems to me, so everybody has to understand that. 

Senator SNOWE. Well, congratulations. I commend you. It is a 

great example to set for the Congress to pursue and, again, reinforces the notion of the fiscal calamity that awaits us if we fail to 

address these over-arching issues sooner rather than later. 

So, thank you. 

The CHAIRMAN. Thank you, Senator. 

You both say that the tax cuts should be extended into next year. 

I think if I heard you, Dr. Rivlin said we should then work to enact 

some kind of tax reform process which presumably generates revenue, but some kind of reform which has teeth in it. 

There are some who say if we extend the tax cuts to next year, 

2013, that we are just kicking the can down the road, that Congress will not do what it needs to do to raise revenue, and that is, 

raise taxes, as you suggest you have to do in your plan. If the tax 

cuts are extended into next year, then the argument is, you are 

28 

just kicking the can down the road. We are not going to do our 

work. 

On the other side of that coin, people say, let them all expire, let 

the rates all go back up, and then we will start to cut taxes next 

year. Then the pressure is on the Congress to actually do something by cutting taxes in a way that is consistent with tax reform. 

What do you say to those who have a little problem with your 

recommendation? Your recommendation is to let all the tax cuts be 

extended another year. That is easy to do politically. What do you 

say to those who charge that that is just kicking the can down the 

road? 

Senator DOMENICI. Well, Mr. Chairman, I am not sure—on the 

record they can check—but I do not think I have said verbally that 

I favor the extension. 

The CHAIRMAN. Oh, I misunderstood. 

Senator DOMENICI. It is all right. I mean, I do not think there 

is any alternative, so I think we have to do that. But I want you 

to know that our Bipartisan Policy Center has not left this issue, 

the one you raise, unattended. We are currently working on a process which would assure that we could have the vote on the tax cuts 

that you say must occur, but require it to be part of a process 

change that would force action on tax and entitlement reform in 

the next Congress. 

In other words, it would be a mechanism for assuring that it 

would happen, and the kick-the-can effect would not be real because there would be a process adopted that would stop the kickthe-can, because the next thing would force the necessary reform. 

The CHAIRMAN. Well, what would some of the real teeth be? 

Senator DOMENICI. Well, we are not through with it yet. It is just 

our best effort to try to solve that, or come up with something that 

would help you solve that problem. It is not ready yet. 

The CHAIRMAN. So when do you think you might have these 

teeth? 

Senator DOMENICI. I do not know. I remember getting a briefing 

from the staff. It is hard as can be. It has our smartest people on 

it, and it is tough, but they have convinced me that it is worth a 

try. It would relate in some way to the process that you and I have 

learned and call reconciliation, that is for sure, and there is one 

other comment. Yes, the continuing resolution would be the vehicle 

through which you would attach that, and we would have it ready 

by then. 

The CHAIRMAN. All right. Well, frankly, if you could have it ready 

before then—— [Laughter.] 

We are all in this together. We are all on the same team. We are 

just trying to figure out how to address the cliff. 

Senator DOMENICI. Thank you. 

The CHAIRMAN. We can help each other, frankly. 

Dr. RIVLIN. But the basic point is, we are not in favor of just extending the tax cuts. You have to imbed it, as I said to Senator 

Snowe, in some kind of process that forces you to come to grips 

with the real problem. 

The CHAIRMAN. Yes. And I am just trying to determine what that 

process is that is credible, credible to the markets, credible to the 

country, and so forth. 

29 

I would like to return a little bit to Medicare and ask whether 

you have cranked the new CBO estimates into your projections, 

your Medicare projections, if nothing is done. It is my understanding that CBO has just come out with a new report saying basically, over the next 10 years, Medicare will grow at the same rate 

as the economy, and long-term it will grow about 1.6 percent above 

GDP. Historically, Medicare grew at about 2.5 percent above GDP. 

The point being, health care costs, on their own, are starting to 

rise a little less quickly than they were earlier. I hear a lot of this 

anecdotally, too, talking to hospitals moving toward integrated systems. They are becoming much more efficient. Many American 

companies are trying to cut their health care costs and are doing 

a pretty good job, in some respects, of cutting their costs. 

It is true there will be more seniors who will be retiring at age 

65, although I vaguely remember a CBO report roughly a year or 

two ago that said, if you look at the composition of the rate of 

growth of Medicare costs, about one-third—I will be very charitable—or 20 percent to 30 percent is really because of additional 

seniors. 

Senator DOMENICI. Is what? 

The CHAIRMAN. Because of the additional number of seniors, the 

Baby Boom retiring. But the rest of it, the bulk of it, is health care 

costs going up for everybody. 

Senator DOMENICI. Right. 

The CHAIRMAN. Not just for seniors, but for everybody. It is true, 

if these CBO numbers are accurate, even if the current trend continues—trends never do, but if it does continue—that that would 

seem to me to indicate that there is not quite the urgency to address entitlements with quite the same aggressive attack mode as 

you have indicated in your report. Times have changed a little bit. 

I honestly believe part of that change in the rate of growth of 

health care costs is due to the health care law we passed. The 

United States’ providers and consumers realize we are in a new 

era, and the new era is getting more control of our costs and delivery system reform. So both the U.S. Government—under CMS, 

say—and the private sector are working, and with the Innovation 

Center too, working together in joint public projects to find more 

efficiencies through greater innovation in cutting health care costs. 

So I just wonder again. My first question is, have you cranked in 

those new projections by CBO in your estimates? 

Dr. RIVLIN. Yes, and they are encouraging, I agree with you. It 

is one of the reasons why one should have faith, I think, that the 

health care delivery system is improvable. We are seeing some improvements now. But we still believe that it would be a sensible 

thing to do, to offer seniors a choice on an exchange where the private sector would also be competing by virtue of some of these 

same changes to offer better product at lower cost. 

The CHAIRMAN. I am not challenging you, but I am just trying 

to get some information here. 

Dr. RIVLIN. All right. 

The CHAIRMAN. If the benefits are the same, if an insurance policy offered in an exchange provides the same benefits as are currently provided under Medicare, where are the savings? 

30 

Dr. RIVLIN. Well, actually the evidence shows that in some cases 

the competition produces still lower costs than Medicare. In some 

parts of the country it does not, but having the competitive situation there would tend to move the whole system toward more efficient and more cost-effective care. 

The CHAIRMAN. Yes. I know that is the theory, but I am just curious because Medicare’s administrative costs are so low. Commercial health insurance administrative costs are quite a bit higher. 

Dr. RIVLIN. They are, but—— 

The CHAIRMAN. The benefits are going to be the same. I am just 

curious where the savings are going to be. 

Dr. RIVLIN. Much of the waste, I think, in Medicare comes from 

the fact that it is primarily now a fee-for-service system with little 

opportunity to have incentives for coordination of care and all of 

the things that we think are conducive to better care at lower cost. 

The CHAIRMAN. That is true, somewhat. But there is such a 

trend now, and there is such momentum to move away from feefor-service and more toward other forms of reimbursement, whether it is—as you know much better than I, Dr. Rivlin—bundled payments, ACOs, medical homes, and all the different ways to get off 

this fee-for-service reimbursement-in-volume kick. 

We had right where you are sitting, or virtually where you are 

sitting, in this room last week health insurance companies and 

medical groups describing all the efforts they are taking, moving 

toward compensation based on outcomes, and it is teamwork and 

getting costs much lower than they were before. That would apply 

to the private sector as well as to Medicare. So, we are moving directly toward what you are just suggesting, that is, away from feefor-service. Very clearly, that is what is happening here. 

Dr. RIVLIN. Yes, I think that is right. 

The CHAIRMAN. But that is going to help reduce the costs, frankly. At least, that is the theory. Already, the rate of reduction is 

going up. 

Dr. RIVLIN. I think it is more than a theory; I think it is happening. 

The CHAIRMAN. Yes. I think it is, too. 

Dr. RIVLIN. We would like to accelerate it happening. 

The CHAIRMAN. And so would we. 

Senator DOMENICI. I am not sure it is happening. We have to 

wait a little bit longer. 

The CHAIRMAN. All right. 

Senator DOMENICI. You speak of anecdotal—I will not burden 

you. I would not. But I am clearly a senior, right? 

The CHAIRMAN. No, you are not a senior. 

Dr. RIVLIN. Me too. 

Senator DOMENICI. I just celebrated my 80th, you know. People 

think 60, but they forget that I was here 36 years of my life. 

But anyway, I was going to tell you just what the doctors choose 

to do to make me stay well leads me to believe that there is an infinite amount of money that they can spend on the human body to 

try to make sure things work. I have had more spent on me; I do 

not want to add it up and give it to you because it would be a case 

study for you. 

31 

But what I would like to say with reference to our answers, we 

are glad that you have talked with us and you see our—on Medicare and health care, we studied it from the standpoint of fiscal responsibility. That was our job. We now have another group of people who are working day and night on the entire system, and that 

is not us, that is others. 

Dr. RIVLIN. We are part of it. 

Senator DOMENICI. Yes. We are part of them, as members of a 

group. All I am getting at is, we may not know all the answers that 

you seek of us because we did not have a lot of time to study in 

detail the more intricate health care issues. 

The CHAIRMAN. Well, I appreciate that. I think we are all concerned about personal responsibility too, because very often doctors 

prescribe medication and prescribe something to patients, and the 

patients do not do what they are supposed to be doing or take the 

medications they are supposed to be taking. You kind of led briefly 

into the question of personal responsibility, and that is something 

else that we have to address. 

Senator DOMENICI. Well, that is clearly a part of it, no question. 

The CHAIRMAN. I will finish here with one point. In reading this 

morning’s paper, I was just struck with a chart that is showing, 

even adjusted for inflation, how, since 2001, median hourly wages 

are basically constant, or have fallen slightly. 

But the bigger drop was in employer-provided health insurance, 

and there was also a bigger drop in employer-provided retirement 

benefits. If that is happening, I think that is private sector. I am 

sure it is private sector. If that is happening, that there are fewer 

and fewer benefits, and employees have less health insurance today 

than 10 years ago, I am just a little concerned about what changes 

it might make in Medicare and addressing the entitlements question in a way that does not decrease benefits to seniors. 

Now we, in the health care bill, as you know, reduced the reimbursement rate that goes to providers, whether it is pharmaceuticals, hospitals, et cetera, et cetera, as a way to get at the health 

care problem. But that did not reduce any beneficiaries’ benefits, 

it just cut the amounts that providers were otherwise getting. They 

went along with it. They did not love it, but they went along with 

it. Why? Because they would get lower margins and get greater volume under the mandate. 

I raise this because I saw this chart today. Given the semirecession that we are coming out of, and because fewer people have 

health insurance today than before, I wonder how wise it is, when 

we attack entitlements, to do something that reduces seniors’ benefits. 

Dr. RIVLIN. Mr. Chairman, I think you have pointed to one of the 

reasons why we needed the Affordable Care Act. It was a response 

to the fact that, over time, employers have been dropping health 

insurance and we have more and more people at relatively low 

wages—wages have not been increasing very much—who do not 

have health insurance. The health reform was a response to that. 

Fortunately, seniors are covered by Medicare, and everybody has 

that who is over the age of 65. We do not read anything that we 

are proposing as undermining Medicare. We hope that it will make 

32 

it more efficient. But it is not any attempt to reduce the benefits 

to seniors. 

The CHAIRMAN. Thank you very much. 

Senator DOMENICI. I think you raise a good point. We have to be 

careful about the issue you raised. It is a serious one. We certainly 

are not—to my knowledge as we worked on this, there was no effort to try to reduce benefits. I think that we were addressing ways 

to save on costs that should not be in the system, and we worked 

hard on that and gave you the best we could. 

The CHAIRMAN. Thank you. 

Are you ready, Senator Menendez? Do you want to take over? 

Senator MENENDEZ. Mr. Chairman, I would never want to take 

over from you. [Laughter.] 

The CHAIRMAN. Senator Menendez. 

Senator MENENDEZ. But I am happy to be recognized next. 

The CHAIRMAN. The great Senator from New Jersey. 

Senator MENENDEZ. Thank you. 

Let me thank both of you for your great work. I appreciate, Dr. 

Rivlin, your service. Senator Domenici, it is great to see you again 

back here with us. 

Senator DOMENICI. Thank you. 

Senator MENENDEZ. I may not agree with every decision that you 

made; I do not think anybody ever will in any of these plans. But 

I think you have made some enormous service to getting a lot of 

the critical issues that are important to address out there, and I 

think that is a great service to both the Congress and to the American people. 

I want to pursue one or two things to get your thinking on them. 

One is, I understand under your plan, while lowering the top income tax rate, you would effectively end the tax break for investment income. That is, tax rates would be lower but the government 

would basically no longer pick favorites between a worker’s salary 

and an investor’s profit. 

In addition to your report, several other deficit reduction plans 

and President Reagan’s 1986 Tax Reform Act all included this 

trade-off, which would go a long way to ensuring that those who 

make the most pay a similar amount of tax as middle-class families 

do. 

Can you explain how you came to this trade-off, and do you believe that equalizing the tax treatment of ordinary and investment 

income is key to a bipartisan success in finding a deal of the type 

of magnitude that you both outlined? 

Dr. RIVLIN. It was key to our finding an agreement. I think it 

is a sensible way to construct a new tax code. 

Senator DOMENICI. Before you came here, I said that we are fortunate, and we want to make sure you know that what you get, 

the work product you get, is bipartisan. We took votes on the issue 

that you have raised, and that is the way that the overwhelming 

majority wanted this package to be. So, they put a good deal of bipartisan thinking into the package. 

Actually, for a couple of members of the group, tax reform was 

the most important part of this bill, without which they would not 

have supported the recommendations. So I assume that, taken sepVerDate Nov 24 2008 21:05 Jul 19, 2013 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 R:\DOCS\81439.000 TIMD
33 

arately, a number of those—one or two that I can think of—probably would have been against what you are talking about. 

But to get the whole package, including tax reform and lower 

rates, Republicans joined Democrats in our meetings, so we come 

to you with that established. I do not know what theory was in 

their minds about it, but they were for different treatment for investment, as you have explained it and as Alice has indicated our 

cause to be. 

Senator MENENDEZ. Your testimony underscores a critical need 

for Washington to remember that our first project must be, as you 

put it, to accelerate economic growth and job creation. I understand 

that you are still supporting a payroll tax cut as the primary job 

creation measure in your proposal. 

Can you explain how your proposal compares to the President’s 

payroll tax cut from his jobs plan, and do you believe, given the 

current uncertainty, particularly in the European crisis, that it 

would be important to move forward with a similar proposal for 

2013? 

Dr. RIVLIN. When we put this plan together, which was actually 

at the end of 2010, the President had not yet proposed, or the 

President and the Congress together had not yet proposed, a payroll tax cut, a payroll tax holiday. 

We believed that it was really important to focus on job creation 

in the near term, so we put in our proposal a full year tax holiday, 

for both sides, employer and employee, as an indicator of that importance. That is a lot of stimulus. Some of that was picked up in 

the agreement made subsequently, but not all of it. 

We have not re-thought what you would do with the payroll tax 

rate right now, but the basic message is, we believe that it is important to keep the recovery going, that the fiscal cliff would stop 

that recovery, and therefore you need to avoid the fiscal cliff and 

do the long-term reform at the same time. 

Senator DOMENICI. I think it is little-known, but the truth of the 

matter is that a good stimulus approach would have been a payroll 

tax—we call it a payroll tax holiday. We put it in our plan for a 

full year, as indicated, and still it had not caught on with anyone. 

Although a small piece of it was enacted for the past couple 

years, we went through a year when the entire holiday still had not 

caught on, and it was still in ours. We recommended it. It seemed 

to this Senator that, for all the stimulus people were talking about, 

the payroll tax was far more simple and probably far more effective. But I do not think we ought to do it at this point. It is very 

expensive, and we ought to get on with the next stage of our plan— 

the deficit reduction—which is what we are talking to you about. 

Senator MENENDEZ. One final comment, if I may, Mr. Chairman. 

I appreciate the way in which you approach the challenges, the fiscal challenges, because I get concerned when I see some of our colleagues in the other body and their suggestion of how we meet 

those fiscal challenges. You cannot put this all on the back of the 

middle class in this country, which in my mind is the core of what 

upholds our ability in terms of the Federal Government and its resources. 

There is a disproportionate effect upon the middle class in the 

context of some of the provisions, like the House budget. In your 

34 

proposal, while the middle class shares in the responsibilities, it is 

not disproportionate. I am wondering if you were thinking about 

that in the context of how you fashioned this, or is that just how 

it came out? Was there a focus there in that respect? 

Dr. RIVLIN. Yes, we certainly focused on it, and, particularly in 

the tax proposal, we wanted it to be at least as progressive as the 

current tax code, and we made that happen. 

Senator DOMENICI. I think that the last point that Dr. Rivlin 

made you can find in the report: that our plan is more progressive 

than the tax code we are replacing. We worked very hard to make 

sure that we confirmed with the experts that that is what we were 

doing. 

For some, it was a real shock when the experts said, yes, our 

plan is progressive and it is better than we are now. That is because it really is made progressive when you close loopholes and 

lower the rates, and we also had something in there that took care 

of the working poor. It started way back under President Ronald 

Reagan. That model is embedded in this, although taxes will be 

computed in a different, more simple way than before. 

But that is in there, and that helped us get more progressivity. 

I think we are substituting the word ‘‘progressive’’ for the broadscope effect on the American working people. I think progressiveness is what we found to satisfy that yearning on our part that 

would be fair. 

Senator MENENDEZ. Thank you both. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Dr. Rivlin, let me follow up on an important point I think the 

chairman was getting into there with respect to the trajectory of 

the health care costs. I think the chairman is right: these numbers 

that are coming out have been encouraging over the last year or 

so. I think we have a pretty good sense of what it is about. We are 

moving towards more coordinated care and away from fee-forservice. 

I think the chairman’s roundtable that we had just a week or so 

ago was also very constructive in this regard. It was essentially 

talking about bringing private innovation to other parts of government, to Medicare in particular. 

What I think you are talking about is, let us say ‘‘no’’ to coupon 

care. Let us say ‘‘no’’ to this idea of just a voucher, where you are 

going to give people some flat sum of money and it is never, for 

the senior, going to keep up with their actual health care costs. 

What you would like to do in order to build on some of these 

positive developments that we have seen recently is, in effect, keep 

the purchasing power of traditional Medicare, try to say that, when 

the private sector choices are good and they have been certified by 

government, you put them into an exchange for the first time, and 

in effect then traditional Medicare and the private sector would 

hold each other accountable and improve each other and in effect 

allow us to take the next steps in encouraging the trends that the 

chairman has correctly pointed out. Is that a fair recitation? 

Dr. RIVLIN. Yes, I agree with that. It has sometimes worried people who have looked at our plan. They said, would the oldest and 

35 

sickest recipients not remain in traditional Medicare and the 

younger, healthier ones go into the private sector? We do not think 

so. 

We think there is some evidence now that private plans are getting themselves together to figure out, how do you deliver care to 

people who have, say, multiple conditions that many older people 

have, like diabetes and heart problems, and figure out, how do you 

deliver care effectively to them in a coordinated way and compete 

for that business? 

Now, they would not, as you say, get just a sum of money, a 

voucher. They would get a risk-adjusted payment, which would 

compensate them for taking older and sicker people, but we believe 

that the competition there could result in benefits to people who 

have really quite difficult situations. 

Senator WYDEN. Well, thank you both. 

Mr. Chairman, I think the point you made with respect to those 

promising trends coming out of, particularly the Accountable Care 

Organizations and the demonstration projects, is spot-on. I think 

the debate that we are going to obviously have is, what else can 

come after that? But I certainly share your view on that point. I 

thank our witnesses, and thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

If I might ask—— 

Senator DOMENICI. Mr. Chairman, could I comment on his question? 

The CHAIRMAN. Sure. 

Senator DOMENICI. Let me say to you, Senator, we appreciate the 

analysis and the way you explained this system we are studying, 

because much of the rhetoric to it is hard for us to handle because 

people just say, this is going to lead to the sickest getting the worst 

treatment and those who are well getting the best treatment. 

We just have to say, that is not what is going to happen. Now 

we have refined it where we can do what you described here, and 

it is obvious we can make it right, make it fair, and make it do 

its job. As you explained it, that helps everybody, and we thank 

you for your interest in it. 

The CHAIRMAN. I have to leave here, so I would appreciate a 

short answer. As I understand it, you project about a $2-trillion 

savings over 20 years for your optional premium support recommendation. I am just curious how you arrived at $2 trillion and 

what the basis for the $2 trillion is. Where does that estimate come 

from, and so forth? Is it an estimate, or is it a cold calculation, a 

cold data set and you just grind it out? I am just curious where it 

comes from. 

Dr. RIVLIN. It is a projection. As you point out implicitly, we do 

not get much savings—we get some savings—in the first 10 years, 

but more in the second. The reason for that is that the CBO baseline to which we are comparing this goes up much more rapidly in 

the second 10 years. 

The CHAIRMAN. Yes. I am just curious. I do not have many opportunities to ask you questions. How did you arrive at that number? 

Dr. RIVLIN. By projecting the—— 

The CHAIRMAN. What did you use to make that projection? 

36 

Senator DOMENICI. We have to get people to help us, if you do 

not mind. 

The CHAIRMAN. All right. Right. 

Dr. RIVLIN. Well, a lot of the analysis that we did depended on 

looking at what is already happening in Medicare Advantage, that 

in many places—in fact, in more populous places where more people live—Medicare Advantage plans are already cheaper than the 

fee-for-service plan. So, it depended partly on projecting that kind 

of benefit. 

The CHAIRMAN. Well, that is helpful. I appreciate that. 

Dr. RIVLIN. The analysis of the savings is the same for the first 

10 years as the second 10 years. It is the baseline that is different. 

I thought that was what you were referring to. 

The CHAIRMAN. Right. No, you answered my question in the first 

part of your answer, namely by looking at Medicare Advantage 

competition. 

Dr. RIVLIN. Right. 

The CHAIRMAN. There are results under Medicare Advantage. 

Dr. RIVLIN. Yes, and other competitive systems. 

The CHAIRMAN. Right. I have to run. I am way late. Go ahead. 

Yes, Pete? 

Senator DOMENICI. But there is also a cap in there. 

The CHAIRMAN. Sure. All right. 

Dr. RIVLIN. Yes. 

The CHAIRMAN. Good. Thank you very, very, very much. We look 

forward to your updated analysis with the trigger and the vehicle 

in tax reform. Thanks a lot. I appreciate it very much. This is an 

issue we obviously care deeply about. I think if we will increase our 

analysis and focus, we will get the result that we all want. Thank 

you very much. 

Senator DOMENICI. Very good. 

The CHAIRMAN. The hearing is adjourned. 

[Whereupon, at 12:22 p.m., the hearing was concluded.] 

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