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	<title> - DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2004</title>
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	[House Hearing, 108 Congress]
	[From the U.S. Government Publishing Office]




	DEPARTMENT OF THE TREASURY
	BUDGET PRIORITIES FOR FISCAL YEAR 2004
	=======================================================================

	HEARING

	before the

	COMMITTEE ON THE BUDGET
	HOUSE OF REPRESENTATIVES

	ONE HUNDRED EIGHTH CONGRESS

	FIRST SESSION

	__________

	HEARING HELD IN WASHINGTON, DC, FEBRUARY 5, 2003

	__________

	Serial No. 108-2

	__________

	Printed for the use of the Committee on the Budget


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








	U. S. GOVERNMENT PRINTING OFFICE
	84-884 WASHINGTON : 2003
	____________________________________________________________________________
	For Sale by the Superintendent of Documents, U.S. Government Printing Office
	Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
	Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001






	COMMITTEE ON THE BUDGET

	JIM NUSSLE, Iowa, Chairman
	GIL GUTKNECHT, Minnesota JOHN M. SPRATT, Jr., South
	MAC THORNBERRY, Texas Carolina,
	JIM RYUN, Kansas Ranking Minority Member
	PAT TOOMEY, Pennsylvania JAMES P. MORAN, Virginia
	DOC HASTINGS, Washington DARLENE HOOLEY, Oregon
	ROB PORTMAN, Ohio TAMMY BALDWIN, Wisconsin
	EDWARD SCHROCK, Virginia DENNIS MOORE, Kansas
	HENRY E. BROWN, Jr., South Carolina JOHN LEWIS, Georgia
	ANDER CRENSHAW, Florida RICHARD E. NEAL, Massachusetts
	ADAM PUTNAM, Florida ROSA DeLAURO, Connecticut
	ROGER WICKER, Mississippi CHET EDWARDS, Texas
	KENNY HULSHOF, Missouri ROBERT C. SCOTT, Virginia
	THOMAS G. TANCREDO, Colorado HAROLD FORD, Tennessee
	DAVID VITTER, Louisiana LOIS CAPPS, California
	JO BONNER, Alabama MIKE THOMPSON, California
	TRENT FRANKS, Arizona BRIAN BAIRD, Washington
	SCOTT GARRETT, New Jersey JIM COOPER, Tennessee
	GRESHAM BARRETT, South Carolina KENDRICK B. MEEK, Florida
	THADDEUS McCOTTER, Michigan RAHM EMMANUEL, Illinois
	MARIO DIAZ-BALART, Florida ARTUR DAVIS, Alabama
	JEB HENSARLING, Texas DENISE MAJETTE, Georgia
	[Vacant]
	[Vacant]

	Professional Staff

	Rich Meade, Chief of Staff
	Thomas S. Kahn, Minority Staff Director and Chief Counsel





	C O N T E N T S

	Page
	Hearing held in Washington, DC, February 5, 2003................. 1
	Statement of:
	Hon. John W. Snow, Secretary, Department of the Treasury..... 7
	Prepared statement and additional submissions of:
	Hon. Jim Nussle, a Representative in Congress from the State
	of Iowa.................................................... 3
	Mr. Snow:
	Prepared statement....................................... 9
	Response to Mr. Scott's question regarding OMB figures... 31
	Response to Mr. Thompson's question regarding municipal
	bonds.................................................. 42
	Response to Mr. Ford's question regarding Medicaid
	funding................................................ 57
	Response to Mr. Davis' question regarding excise taxes on
	charitable foundations................................. 59
	Response to Mr. Davis' question regarding the President's
	goal for charitable tax breaks......................... 59
	Response to Mr. Ford's question regarding the tax cut
	proposal............................................... 63
	A submission for the record by Hon. Roger F. Wicker, a
	Representative in Congress from the State of Mississippi... 39


	DEPARTMENT OF THE TREASURY BUDGET PRIORITIES FOR FISCAL YEAR 2004

	----------


	WEDNESDAY, FEBRUARY 5, 2003

	House of Representatives,
	Committee on the Budget,
	Washington, DC.
	The committee met, pursuant to call, at 10:10 a.m. in room
	210, Cannon House Office Building, Hon. Jim Nussle (chairman of
	the committee) presiding.
	Members present: Representatives Nussle, Gutknecht, Toomey,
	Hastings, Schrock, Brown, Putnam, Wicker, Bonner, Franks,
	Garrett of New Jersey, Barrett of South Carolina, McCotter,
	Diaz-Balart, Hensarling, Spratt, Moran, Moore, Neal, Edwards,
	Scott, Ford, Capps, Thompson, Baird, Cooper, Meek, Davis,
	Emanuel, and Majette.
	Chairman Nussle. Members and guests will take their seats.
	I know there is a lot of interest in this hearing, and there is
	obviously, today, a lot of other interesting things happening
	around the country and the world, and I know Members, staff and
	our witness will be needed in other areas of the Capitol, so I
	want to make sure that we begin on time.
	This is the full committee hearing on the President's
	growth and jobs plan, the tax relief package in the President's
	fiscal year 2004 budget. Today's witness is the Honorable John
	W. Snow, Secretary, Department of the Treasury. And as I said
	to the Secretary prior to him taking the witness table, he has
	spent more time on Capitol Hill this week than he has spent in
	his new office. And that is part of the risks of the job, and
	part of the job description, of course, is to consult with
	Congress, and we appreciate you doing so in this manner. Today
	we have a number of issues that we would like to discuss with
	you, Mr. Secretary. I would like to welcome you.
	The Secretary, upon his confirmation, became the 73rd
	United States Secretary of the Treasury. I look forward to
	working with you, and have every faith that the President has
	picked the right person to help strengthen and stabilize the
	economy and help us create jobs for all Americans.
	Treasury Secretary Snow comes before us today with
	extensive working knowledge and expertise in economics and job
	creation. Secretary Snow has had a long and impressive career
	in both the private sector and public service to this country.
	He was the chairman and chief executive officer of CSX
	Corporation. He has served as the chairman of the Business
	Roundtable, and was a former co-chairman of the influential
	Conference Board's Blue Ribbon Commission on Public Trust and
	Private Enterprise. He also served as the co-chairman of the
	National Commission on Financial Institution Reform Recovery
	and Enforcement in 1992 that made the recommendations following
	the savings and loan crisis.
	Secretary Snow's previous public service includes serving
	at the Department of Transportation as the Administrator of the
	National Highway Transportation Administration; Under
	Secretary, Assistant Secretary for the Governmental Affairs;
	and Deputy Assistant Secretary for Policy, Plans and
	International Affairs. Secretary Snow has a Ph.D. in economics
	from the University of Virginia, a law degree from George
	Washington University, and has taught economics in the
	University of Maryland, University of Virginia, as well as law
	at the George Washington University. He also served as a
	visiting fellow at the American Enterprise Institute, and
	distinguished fellow at the Yale School of Management.
	Mr. Secretary, yesterday this committee had the opportunity
	to hear from the President's Director of the Office of
	Management and Budget, Mitch Daniels. He came presenting the
	President's overall budget. Today we look forward to your
	testimony with respect to how the President's budget proposes
	to strengthen and stabilize the economy and create jobs.
	At the beginning of the hearing on the President's budget,
	I thought it was important to point out an underlying question
	about the budget. A question that I have, a question that this
	committee will continue to have as we will review it, and a
	question that I am sure that all Americans have, and that is:
	Is it a fiscally responsible blueprint for governing America
	during some very challenging times?
	Today as we examine the Treasury Department's budget
	proposals as well as the President's proposal to strengthen the
	economy, I believe the question should be, do these proposals
	grow and strengthen the economy both now and in the long run?
	There is no question that our economic recovery needs to
	gain more traction in order to create jobs and opportunities.
	The looming question is really how to do it, how to help it. I,
	for one, think we need to look longer than just this first
	year, but many years down the road as we consider the proposals
	that we have to make.
	Last week, the Congressional Budget Office presented its
	new economic outlook numbers to this committee which showed
	that under current conditions, if we do nothing, we will return
	to surpluses somewhere around 2007, according to the
	Congressional Budget Office. However, if we can increase growth
	by only half a percent, we might be back in the black roughly a
	year earlier. And I will show you a chart that I believe
	depicts just that sentiment. Faster growth can improve or does
	improve the fiscal outlook. With just a half a percent, we can
	get back in the black, according to baseline, just in 1 year.
	Imagine if we can get a full percent or even more.
	We also learned from the Congressional Budget report that
	the largest cause for the deficits we faced in the past two
	fiscal years has been due to a weak economy. I will show you a
	chart that we believe depicts that; 68 percent in fiscal year
	2002, and 55 percent in fiscal year 2003 can be attributed to
	the economy. It seems only logical then that we must focus on
	measures that increase long-term growth and strengthen the
	economy.
	It has always seemed to me that the Washington model is
	that we should ask families to tighten their belts year-after-
	year and pay higher and higher taxes to fund additional
	Washington spending, but we never seem to ask Washington to
	tighten its belt so that the American people can keep more of
	their money. So spending restraint will be a hallmark of the
	budget that we present. I think the President, though, hit the
	nail on the head last week during the State of the Union
	Address when he said, quote, ``Jobs are created when the
	economy grows. The economy grows when Americans have more money
	to spend and invest, and the best and fairest way to make sure
	Americans have that money is not to tax it away in the first
	place.'' It seems pretty basic, it seems pretty logical, and it
	seems like a good foundation for a policy that we can build on.
	So, the highest priority in crafting the budget will be
	promoting the overall strength and stability of our country;
	strength and stability in our defense, strength and stability
	in our homeland security, and that is strength and stability in
	our economy. The lesson of the last 2 years is that there is no
	substitute--no substitute for the strength and stability of
	America and our economy. And that is the subject of today's
	hearing, our economy, how to strengthen and stabilize it for
	the long term.
	And with that, I turn to my friend and colleague Mr. Spratt
	for any opening comments he would like to make.
	[The prepared statement of Mr. Nussle follows:]

	Prepared Statement of Hon. Jim Nussle, a Representative in Congress
	From the State of Iowa

	Good morning.
	When President Bush submitted his fiscal year 2004 budget
	yesterday, the underlying question for me was: is it a fiscally
	responsible blueprint for governing?
	From what I have read at this point, and based on the ambitious
	agenda he laid out in last week's State of the Union speech, the answer
	seems to be yes.
	The President's critics will scoff at that. They will point to the
	substantial near-term deficits in the budget deficits that the
	President and his aides have not glossed over. Those deficits are
	troubling especially coming just 2 years after we anticipated budget
	surpluses as far as the eye can see.
	But we all know what happened. Our economy, which had slowed
	dramatically in 2000, slid into recession just as President Bush took
	office. Later that year, terrorism struck here on our own soil, further
	challenging our national and economic confidence. Our necessary
	response rebuilding and shoring up here at home, and taking on
	terrorism where it breeds, overseas has required a commitment of will
	and resources.
	All these factors are still active today. At the same time, we
	continue to face increasingly urgent demands in areas such as education
	and health care. Budget deficits are among the results.
	But fiscal responsibility is not just about making numbers add up a
	certain way. It is fundamentally about governing; and governing
	requires striking a balance among competing demands, weighing desires
	against needs, and facing obligations not only to today's generation,
	but also to tomorrow's.
	Today's principal obligations are clear. We must prevail in the war
	against terrorism, committing all the resources necessary for that
	task.
	We must provide for and enhance the security of our homeland. This
	is not a one-time job; it is a permanent and ongoing task especially
	when we are trying to protect ourselves against evil minds who spend
	all their time calculating ways to terrorize and kill.
	Both of these, along with the other needs cited above will require
	government spending and will result in continued deficits for a time.
	But what matters is that we don't lose control of spending. We must not
	commit to strategies that win popular support today, only to balloon in
	costs that will be imposed on our own children.
	Last, but most important, we must help restore the strength and
	stability of our economy. According to last week's projections by the
	Congressional Budget Office, without action, this economy will continue
	to limp along with unemployment rates at about 6 percent for the next
	several years. This is not acceptable to the President; it is not
	acceptable to me; above all, it is not acceptable to all those families
	struggling to make ends meet. It takes a growing economy to provides
	jobs and opportunities which restores Americans' hope that they can
	make their lives better through their own efforts.
	When it comes to stabilizing and strengthening the economy, most of
	the ``stimulus'' plans I have heard of focus only on the short-term,
	which does not provide either the stability or the long term
	strengthening that is needed. Such proposals are the economic
	equivalent of a crash diet versus a healthy lifestyle.
	The President's plan, in contrast, recognizes that families and
	businesses need to be able to plan for the future. Whether it is a
	family planning for it child's education or a business looking at a
	capital expenditure, we need short-term and long-term solutions. People
	who are out of work don't just need a job for the rest of year; they
	need jobs that will be created to last for years to come.
	At the same time we do need to be very careful about controlling
	spending.
	Our current situation is very much like the situation many families
	throughout the country are facing. When faced with tough times, they
	still buy the family groceries and cover the cost of emergencies but
	don't remodel their kitchen.
	As we begin to construct this year's budget we must adhere to this
	same principle.
	While I support the goal of ending deficits, the highest priority
	in crafting the budget will be promoting the overall strength and
	stability of our country.
	There is no question that we face trying times but we have done so
	in the past and have always come out stronger as a nation and as a
	people.
	We must restore the stability and strength of this economy and this
	nation.
	Our budgets need to look beyond the next election and toward the
	next generation.

	Mr. Spratt. Mr. Snow, welcome to our committee. You bring
	impressive credentials and experience to the Treasury, and we
	look forward to working with you over the years to come. Among
	those welcoming your coming indirectly was an organization that
	you used to belong to named the Concord Coalition. I believe
	you were a prominent and ardent member of that organization. On
	Sunday, the Concord Coalition published a full-page ad in the
	New York Times--I didn't know they had that kind of money. It's
	a manifesto, really, about the Bush budget. And here is what
	they said, the organization of which you were once a very
	ardent and enthusiastic member:
	``Guns and butter and tax cuts, can we have it all? To
	enact permanent new tax cuts in the face of new spending
	pressures, the prospect of war in Iraq, inevitable postwar
	costs, massive but indispensable homeland security, a major
	prescription drug add-on for Medicare is to proclaim that
	America can painlessly have it all. Unfortunately, we can't.
	Sooner or later someone has to pay the bill for guns and butter
	and tax cuts. Many worry about class warfare. Almost no one
	seems to be worried about another form of warfare, generational
	warfare. That is what we risk if we continue to live beyond our
	means and to pass the IOUs on to our children and
	grandchildren.''
	They go on to say: ``When is a tax cut not really a real
	tax cut? Many advocates of permanent tax cuts apparently
	believe that debt is a painless alternative to taxes. In fact,
	deficits merely shift the tax burden into the future. But
	haven't we shifted more than enough onto our children and
	grandchildren? According to Social Security and Medicare
	trustees, these two programs are on track to consume between a
	quarter and a third of worker payroll. This is an unthinkable
	burden. Adding more would be unconscionable. At a time when the
	young men and women of the Armed Forces are being asked to risk
	their lives, make the ultimate sacrifice, are the rest of us
	going to sacrifice by shifting even more of our tax burden onto
	future generations?''
	A pretty strong statement, and it is on our minds very
	much.
	One of the things that we are proud of, Mr. Secretary, is
	that during the 1990s we moved the budget deficit from $290
	billion in the red in 1992--fiscal year 1992, the last year of
	the Bush administration--to a surplus of $236 billion in the
	year 2000. That was a phenomenal accomplishment, and a lot of
	things converged to make it all happen. Now we are seeing the
	slow unraveling of the discipline that made it happen. This is
	one of our favorite charts because it shows what happened in
	the Clinton years. He inherited a $290 billion deficit, the
	biggest in peacetime history, and moved it over 8 years--the
	bottom line of the budget getting better every one of those 8
	years--moved it out of deficit into surplus to the tune of $236
	billion.
	Among other things, that made it possible when the Bush
	administration came to office for us to be having an earnest
	debate here about actually repaying some of the national debt
	as a prelude to saving and making solvent Social Security and
	Medicare for the long run. This would be our way to pave the
	way for the baby boomers' retirement, which begins to occur in
	2008, 77 million baby boomers marching to their retirement
	right now, the first to retire in 2008.
	Let me show you a simple linear graph that depicts--this is
	chart No. 7--the path that we were on when we began the Bush
	administration. The curve marked February 2001 shows you the
	curve that we anticipated following in order to diminish, pay
	back, buy back the Federal debt held by the public. And we had
	a realistic prospect of paying all that debt off by 2011. I
	don't think we would have ever reached that point, but
	nevertheless we had a path plotted to do that. Both sides were
	working in concert on that.
	The upper curve is where we are now, February 2003, just 2
	years, and the difference is $5 trillion. That is a stunning
	estimate of the situation we find ourselves in. We have seen a
	fiscal reversal of $7.8 trillion. We have gone from a surplus
	projected in 2001 of $5.6 trillion today, if we implement the
	policies you propose today, of a cumulative deficit of $2.2
	trillion. That is a $7.8 trillion swing, and I think you would
	agree it is a swing in the wrong direction. We are going the
	wrong way.
	The problem we have looking at this budget--could I have
	chart No. 12--is as we look across the top line and exclude the
	Social Security Trust Fund, because, after all, it is a trust
	fund, we have by law said it should be taken off budget. We
	have had motions in this committee to adopt amendments and make
	permanent law a provision that would have made it illegal to
	ever combine the two accounts. In any event, we think it is
	proper to focus on the budget deficit and the general accounts
	of the budget, the basic budget of the United States, and look
	at the top line.
	The chairman was just talking about seeing some daylight at
	the end of this forecast period. I don't see any. The deficit
	this year and the general accounts to the budget, excluding
	Social Security, is going to be $468 billion. That is before
	any cost is attributed to fighting the war in Afghanistan. By
	2008, it declines to $433 billion. Between 2004-08, 5 years, we
	accumulate $2.140 trillion in additional debt. Now, some of it
	we are able to put in the Social Security Trust Fund, but it is
	still debt of the United States, it is an obligation that has
	to be paid, and we just don't believe that that is a path we
	should be taking.
	And let me show you chart No. 6. We have had an economic
	downturn that was not forecast in January of 2001. OMB is now
	saying that of the $5.6 trillion surplus, $3.2 trillion has
	disappeared because of economic adjustments. So that is
	tantamount to saying the surplus was overstated by 60 percent
	to start with--40 percent to start with. But in any event, this
	shows the additional tax cuts that you have got right now. By
	OMB's estimation, if you did nothing further, we would have
	gone from a $5.6 trillion, to a $129 billion deficit,
	cumulative deficit, between now and 2011. From $5.6 trillion
	down to $129 billion.
	The additional $2 trillion that is showing up on the bottom
	line of the budget you are presenting us, the additional $2
	trillion in debt and deficits that we are going to be incurring
	are because of policy choices you are proposing in this budget,
	and the lion's share of those policy choices that leads us to
	bigger deficits is shown right there in the tax cuts that are
	being proposed by this administration. It will cost about $600
	billion to make permanent the 2001 tax cuts. It will cost a
	little more than $600 billion if we adopt the so-called jobs
	and growth package that you presented. We think it is an
	antigrowth package because it adds debt, and debt in turn will
	stifle growth in the economy.
	And finally, we don't think you can find a way around, nor
	we--we are both in the same box--on the alternative minimum
	tax. Between now and the end of this forecast period, we have
	got to deal with the problem and the cost of fixing the AMT so
	that 340 million taxpayers aren't affected by the alternative
	minimum tax, which is substantial. It is at least $600 billion
	itself.
	If you put those three together, that is over $1.8 trillion
	on your tax agenda. You may not have the AMT actually displayed
	in your budget this year, but there is no way around it.
	Congress and the administration will have to deal with it, and
	we want to talk to you about that in the question period. But
	if you put those three together, that is $2 trillion. If you
	add everything up and adjust it for debt service, that is $4.4
	trillion. That is why this budget is sagging. That is why we
	have got the bottom line going into the red, mired in the red
	in deficit for as far as the eye can see.
	Those are our concerns. We would like to get back to the
	path we were on when we were paying down debt and preparing for
	the retirement of the baby boomers, shoring up Social Security
	and Medicare for the long run. And frankly, as we look at your
	budget, we don't see how you get there. It is not just the fact
	that we see a dire picture of deficits as far as we can
	forecast, but that there is no plan spelled out here for the
	resolution of that problem. So we fear that we are seeing a
	cyclical deficit become a structural deficit and becoming every
	more--every year in your budget becoming more intractable.
	Respectfully, that is what we submit our concerns to be,
	and that is why we are glad to have you here today. We want to
	ask you some serious questions about this situation.
	Chairman Nussle. Without objection, all members will be
	allowed to put a statement in the record at this point.
	Mr. Secretary, welcome to the committee. This is your first
	opportunity before the House Budget Committee. We hope it is
	not your last. But we do hope in the intervening period you do
	have the opportunity to go in and set up your office and begin
	to work, and not spend your entire career on Capitol Hill; but
	we are glad that you are with us today and willing to spend
	some time with us. Welcome, and we are pleased to receive your
	testimony at this time.

	STATEMENT OF JOHN W. SNOW, SECRETARY OF THE TREASURY

	Secretary Snow. Mr. Chairman, thank you very much for that
	gracious welcome to the committee, and, Ranking Member Spratt,
	distinguished members of the committee, it is an honor to be
	here before you on my second day on the job. You are going to
	have a lot more in-depth knowledge of a lot of these issues
	than I will, but I am going to struggle through and do my best,
	and in the weeks and months ahead I look forward to getting
	much, much better acquainted.
	I think the chairman and the ranking member framed the
	issues we need to deal with extremely well, and I look forward
	to engaging on those very pared set of issues in the months
	ahead.
	Let me begin by addressing some of those issues and by
	offering my views on what I take to be the essential background
	for the budget. First, the economy, the condition the economy
	is in and how we got there; and then turn to the President's
	economic growth plan, which I think promises creation of real
	jobs, acceleration of the recovery that we are on but which is
	a little wobbly; and for the longer term going to the
	Congressman Spratt's set of issues and the chairman's set of
	issues, higher growth rates, the higher growth rates that will
	enable us to meet those unfunded promises, those huge promises
	to the future that we made to future generations, and to have
	the flexibility that real output and wealth and a bigger
	economy gives us to deal with whatever issues the country may
	face.
	As every American knows by now, whether from having lost a
	job, from knowing someone who has lost a job, or from worrying
	simply about losing their own job, our economy took a turn for
	the worse beginning in the summer of 2000. I come out of the
	transportation business, and I will remember forever looking at
	the carload numbers and the containerload numbers and the
	bargeload numbers and the truckload numbers that came across my
	desk as a private citizen running a large transportation
	company in the summer of July of 2000. It was a striking
	downturn that began. It wasn't seen in the rest of the economy
	for some months to come, but the industrial sector began a long
	downturn that still isn't in a state of recovery, a 2 year--
	probably the longest downturn of the industrial sector that we
	have experienced in two or three decades.
	By the time President Bush took office, that undercurrent
	was running strongly against the economy, and we were clearly
	in a period of declining growth heading into a recession. The
	unprovoked and unprecedented terrorist attacks of September 11,
	compounded those economic difficulties, compounded a recession
	that was already by that time well under way. At the same time,
	the discovery of the abuses that were apparent in some
	corporate businesses and on the part of some corporate business
	leaders slowed the recovery further and undermined confidence
	in our equity markets and in our capital markets.
	In response to this confluence of adverse events, the
	President led decisively, and acting with the Congress in a
	bipartisan fashion took the steps necessary to protect a shaken
	Nation and a fragile economy. In 2001, when relief was most
	needed, he signed a sweeping tax relief package, the most
	sweeping in a generation, and as evidence of the damage to the
	economy became clearer and clearer in 2002, March, acted again
	to further bolster the economy.
	From my point of view, this was precisely the right
	medicine administered at precisely the right time. These
	actions--and I commend the Congress for your action--these
	actions were essential to avoid a much deeper and much harsher
	downturn. And the actions made the recession the shortest and,
	I think, the shallowest in modern times--the mildest since
	World War II. I am absolutely convinced that without these
	measures--and certainly they added to those deficit numbers
	that were on the charts that you showed me--but without these
	measures, we surely would have had a much deeper and much more
	difficult recession to contend with.
	In the face of extreme adversity, our economy, like our
	Nation, remains resilient. Despite the economic slowdown, the
	attack on our homeland, the war in Afghanistan, weakened
	investor confidence, and the current uncertainty surrounding
	the economy as a result of the Iraqi situation, the economy is
	recovering, but the problem is it is not recovering on a fast
	enough pace or a sure enough pace. And as the President has
	said, we can and we must do better. Relative success isn't
	sufficient. Relative success isn't enough. Too many Americans
	are out of work today, and too many Americans are insecure
	about their tomorrows. As long as there are Americans who want
	a job and can't find one, the economy isn't growing fast
	enough.
	That is why the President's jobs and growth package is so
	important. Under that proposal, 92 million taxpayers and their
	families would receive tax relief this year. A typical family
	of four with earnings of $39,000 would receive total tax relief
	of over $1,000, I think it is $1,100-some, compared to the
	taxes they paid in 2002. And importantly, they would get that
	tax relief not just in 2003, they would get that tax relief
	year in and year out thereafter, each and every year
	thereafter. And his plan will create hundreds of thousands of
	additional jobs by the end of this year and well over a million
	by the fourth quarter of 2004.
	The package will not only help America return to its
	economic potential--and this is an important point that I am
	sure the committee will want to join with me--it will increase
	that potential. It will put us on a higher growth path. It will
	eliminate inefficiencies in the economy, distortions in equity
	markets, and, by doing so, will increase the output of the
	economy. It will create a more abundant future with more good
	jobs and greater capacity to address these problems. I think
	that is what everyone in this room, and everyone across America
	is seeking.
	Before I turn to the budget, let me offer a word on
	deficits. Congressman Spratt is correct. I have been a hawk on
	deficits in the past. I was a hawk on deficits--and you will
	want to question me on this--at a time when we were in an
	entirely different world. I was a proponent of the balanced
	budget amendment with President Bush during his--first
	President Bush--during his administration. I was active in the
	Business Roundtable in bringing about the balanced budget
	agreement between the Congress and the administration in the
	mid-1990s, and I am proud of that.
	Let me be clear: Deficits matter. Deficits are important.
	They are never welcome, but there are times, times like these,
	when they are unavoidable, particularly when we are compelled
	to address critical national needs as we are today. Are these
	deficits welcome? Absolutely not. Are they understandable? Yes,
	indeed.
	The surpluses that were talked about that we enjoyed were
	the product of a strong economy, not a weak economy. We will
	not return to economic strength by taxing the economy further
	when it is struggling any more than we would increase our
	Nation's security by failing to fund its defense when we are
	threatened. The prescription for returning to balanced budgets
	is pretty straightforward. I think the chairman talked about it
	in his opening comments. Hold the line on spending and grow the
	economy. Pick the economic growth up half a point, a quarter of
	a point, three-quarters of a point, and we get entirely
	different numbers. Hold spending a half a point or a quarter of
	a point compounded with higher growth, we get entirely
	different numbers. This is the direction the President has
	chosen of course, to create real jobs, more real jobs that
	last, and, of course, to put the Nation on a higher growth path
	for the future.
	Mr. Chairman, I look forward to responding to the questions
	of the committee and working with the committee in hopefully
	the months and weeks--the weeks and months ahead. Thank you
	very much.
	Chairman Nussle. Thank you, Mr. Secretary. And again,
	welcome to the committee, and good luck with and
	congratulations on your new position.
	[The prepared statement of Secretary Snow follows:]

	Prepared Statement of Hon. John W. Snow, Secretary, Department of the
	Treasury

	Chairman Nussle, Ranking Member Spratt, and distinguished members
	of the Budget Committee, I welcome the opportunity to appear before you
	today to discuss the President's budget for fiscal year 2004.
	Let me begin by offering my views on the essential background for
	this budget: the United States economy and President Bush's economic
	growth plan, which promises to create jobs, accelerate America's
	economic recovery, and increase our growth for years to come.
	As every American knows by now--whether from having lost a job,
	knowing someone who has, or worrying about losing theirs--our economy
	took a turn for the worse beginning in the summer of 2000. By the time
	President Bush took office an undercurrent was running against the
	economy. The unprovoked and unprecedented terrorist attacks of
	September 11, 2001 compounded a recession that was well underway, while
	the discovery of serious abuses of trust by some corporate business
	leaders slowed our recovery from it.
	In response to this confluence of adverse events, President Bush
	led decisively. Acting with Congress in a bipartisan fashion, he took
	the steps necessary to protect a shaken nation and a fragile economy.
	In 2001 when relief was needed, he signed the most sweeping tax relief
	in a generation. As evidence of the damage became clearer, he acted
	again in March 2002 to further bolster the economy. This was precisely
	the right medicine at precisely the right time. These actions made the
	recession shorter and shallower than it would have been. In fact, by
	most measures it was the mildest since World War II.
	In the face of extreme adversity, our economy, like our nation,
	remains resilient. Despite a sequence of economic slowdown, attack on
	our homeland, war in Afghanistan, and weakened investor confidence, the
	economy is recovering. But as the President has stated, we can and must
	do better. Relative success is not sufficient. Too many Americans are
	out of work today, and too many Americans are insecure about their
	tomorrows.
	We must build on the proven strengths of our economy. We must
	continue to move toward policies that will create more good jobs and
	raise living standards for all. As long as there are Americans who want
	a job and cannot find one, the economy is not growing fast enough.
	That's why President Bush's jobs and growth package is so important.
	Under the President's proposal, 92 million taxpayers and their families
	would receive a tax cut in 2003. A typical family of four with two
	earners making a combined $39,000 will receive a total of $1,100 in tax
	relief, compared to the taxes they paid in 2002, under the President's
	plan--and not just this year, but in each and every year after. And his
	plan will create hundreds of thousand of additional jobs by the end of
	this year and well over a million more by the end of next year.
	The package will not only help America return to its economic
	potential, it will increase it, creating a more abundant future with
	more good jobs and raising real wages. I believe that is what everyone
	in this room and across America seeks.
	Before I turn to the budget, a word about deficits. Deficits
	matter. They are never welcome. But there are times, such as these,
	when they are unavoidable, particularly when we are compelled to
	address critical national needs. It is important to remember, even
	without the President's economic growth and jobs package, homeland
	security, and the war on terrorism, we would have deficits now. Are
	these deficits welcome? No. Are they understandable? Yes.
	The surpluses we enjoyed were the product of a strong economy, not
	a weak one. We will not return to economic strength by taxing our
	economy when it is struggling, any more than we would increase our
	nation's security by failing to fund its defense when it is threatened.
	The prescription for returning to balanced budgets is straightforward:
	hold the line on spending and grow the economy. This is the direction
	the President has chosen: a course to create real jobs that last. We
	are not going to let terrorism and its effects bring either our Nation
	or our economy to its knees.
	Finally, we should remember that current deficits are small
	relative to our unique circumstances and to our economy as a whole.
	Even at their depth, they remain considerably below the typical levels
	following a recession over the last 30 years and they begin a
	pronounced improvement after next year.
	We face new threats and challenges. Job creation and economic
	growth are keys not only to our near-term but our long-term success as
	well. If we are to meet the threats of today and the challenges of
	tomorrow, we must have a strong economy. In fact, we must seek a higher
	level of prosperity for America than we have known--one which puts us
	on an even higher growth path, one which unlocks the fullest potential
	and talents of the American people. That means encouraging hard work,
	rewarding hard work, and creating the opportunities for work for all
	Americans. These are the values that brought America to where we are
	today and they are the ones that we must allow to lead us into the
	future. We must also remember that our success and our example in this
	endeavor promises not only a brighter, better future for our people and
	our children, but for the rest of the world as well.
	The Jobs and Growth Package, our new initiatives to promote
	savings, our proposal to promote health care coverage, to encourage
	charitable giving, and to promote responsible energy production, and
	improved compliance measures from the Internal Revenue Service are all
	important budget initiatives. Each of these is described in more detail
	in our request.
	The Treasury Department's portion of the 2004 budget is nearly a
	third reduced from 2003, owing mainly to the separation of homeland
	security functions from the Treasury Department this year. Adjusting
	for that change, Treasury's request is an increase of about 3.5 percent
	over last year's request.
	Treasury's budget request will allow us to build on our recent
	accomplishments and highlights our commitments to:
	1. Fight the war against terrorist financing;
	2. Ensure that the tax system is fair for all Americans through a
	comprehensive compliance effort that includes high income taxpayers;
	3. Increase Treasury's efficiency and effectiveness by streamlining
	operations; and
	4. Maintain the integrity of our nation's financial systems and
	currency.
	I look forward to discussing that plan and the rest of the
	President's budget with you today.

	Chairman Nussle. I guess I want to start with what you said
	we ought to question you on, and that is you are a deficit
	hawk. And like so many people around here, the words of the
	last 10 years have been put to music about balancing the
	budget, keeping it balanced, you know, never going back to
	those days when we were running deficits, some would say, as
	far as the eye can see.
	How did we get here? How did we get to this point? You say
	deficits matter. We all think deficits matter, I would say, and
	I believe that is now joined in a bipartisan way. So if
	deficits matter, A, how did we get here, and B, what are we
	going to do about it?
	Secretary Snow. One of the charts that was put up suggested
	where the biggest part of the problem lay: The economic
	slowdown, which has cost us over $3 trillion from those
	forecasted surpluses of just a few years ago. We didn't
	squander that surplus. We never had it. It was a forecast. It
	wasn't real dollars in hand.
	And I think the thing to keep in mind here is just how
	humble people who make forecasts should be; that the economic
	slowdown was not foreseen. The slowdown in the growth of
	Government revenues, which was greater than the slowdown in the
	economy, wasn't foreseen any more than at the end of the
	1990s--1996, 1997, 1998, the vast increase in governmental
	revenues was foreseen. That vast surge in governmental revenues
	was the product of what? It seems to me it was clear. It was
	the product of a very buoyant and unsustainable stock market
	that created a lot of capital gains taxes for the Federal
	Government that had not been in the budget before and which are
	not there today. It created an awful lot of revenue for the
	Federal Government growing out of the exercise of options at a
	time when options were buoyed up by this very effervescent
	stock market, by incentive compensation that was a primary part
	of corporate world that ballooned during this period and
	created lots of additional and unforeseen revenues at the
	Federal Government.
	That is over now. It disappeared. And the economic slowdown
	and the consequence of the stock market decline, I think, are
	the single most important factors in explaining the difference
	between where we were several years ago and where we are today,
	to say nothing of the cost of the war on terrorism and the
	economic uncertainty that goes with the Iraqi situation.
	Chairman Nussle. Well, let me hone in then on revenues,
	since that is the reason why the bottom line has changed so
	dramatically is the revenues have not come in. We can talk
	about the fact that there was additional emergency spending,
	there was certainly new homeland security spending, there was
	spending certainly over and above what was anticipated that
	certainly contributed to it. But the economic downturn had
	quite a bit to do with the lack of revenues coming into the
	Treasury. As you said, it was not predicted, it was not
	forecasted. I am dying to ask, why? I mean, we missed--and when
	I say we, I mean CBO, OMB, and Treasury, missed these forecasts
	by $50 billion at a chunk. Why? How can this be within 6
	months--and this is your second day, so I guess the passion
	behind the question is that hopefully this has got to be one of
	the first issues that is tackled.
	And let me put out a suggestion as to what might be going
	on. Our tax system that we have right now, we cannot predict
	the revenue that it will generate. The current tax system has
	gotten so complicated, so convoluted, so based on things that
	are outside of anybody's control that no human being now is
	able to predict what it will generate, because for the first
	time, as I understand it, since 1929, regardless of where the
	economy was going and heading, this is the first 2-year period
	that revenues actually dropped in actual dollars from the
	previous year. And to me that is a signal of the Tax Code and
	our inability to manage revenues more than probably any other
	issue that is out there. And I'd ask your comment or
	observations on that.
	Secretary Snow. I think you are putting your finger on a
	very important issue here. Predicting the economy is one thing,
	and predicting the revenues that go to the Federal Government
	as a consequence of changes in the economy is another. The
	latter seems to have greater margins of error in it than the
	margins of error associated with predicting the economy. So the
	revenue stream is even more uncertain than the economy itself,
	which has always got a measure of uncertainty about it. So
	clearly, there is a disconnect. It is a disconnect I don't
	think we understand. And the best people in the world of
	understanding these things are beside me here and over at the
	Treasury Department and up here in the Congress. We all missed
	it. We all missed it big. As I said, I think, earlier, it ought
	to make us humble, and it ought to make us go back and think
	harder about these interconnections between the economy, the
	Tax Code, and the Government's revenue streams.
	Chairman Nussle. All right. But then if that is the case,
	if we can't forecast tomorrow and can't forecast next year, let
	us just not do anything. Let us just freeze where we are. Let
	us freeze spending; let us not change the Tax Code. According
	to CBO, we grow out of it. According to OMB, we will grow out
	of it in 2 or 3 years. Let us not do anything.
	Why is the President suggesting at this moment in time that
	we do something? And I am asking you this, to some extent,
	tongue in cheek. I mean, we are supposed to freeze at this
	moment in time and do nothing as a government? We are not
	supposed to change the tax policy of this country? That is what
	I hear so many people saying: Don't do anything. Well, in 2 or
	3 years we will be out of it. I mean, is that true, that all of
	a sudden we are going to grow out of it in 2 or 3 years by
	doing nothing over those next 2 or 3 years?
	Secretary Snow. No. I think the President's program is
	animated by the answer to your question, which is, no, we can't
	leave it the way it is. We need to take the steps to assure
	that the recovery, which will generate additional revenues--
	that the recovery stays in place and accelerates; that those
	additional jobs are created; that the economy grows in the
	short term. But more importantly, because this package is--the
	President's growth program--has got a long-term component as
	well as a short-term component that I hope we will be able to
	get into later, it assists the economy now. It creates some
	500,000 additional jobs by year end, the fourth quarter of this
	year, a million and 3 or 4 by the fourth quarter of next year.
	That is a lot of jobs.
	Now, that helps a lot of people who are out looking for
	work. I want to see as many ``Help Wanted'' signs going up all
	over America as possible. But what we need to do is get this
	economy on a higher growth path long term. The way to do that,
	I think, is to take actions like those the President proposes
	on the dividend, because clearly, the double taxation of
	dividends weakens the economy. It distorts the economy. If you
	tax equity capital more, you get less of it. If you tax
	anything, you get less of it. And so we have less equity
	capital. As a consequence, we have more debt in the system than
	we otherwise would have. And I am--we will get into this later,
	but the important thing about the package is that it serves
	both short-term and critically important long-term goals of
	speeding up the economy in the short term, assuring more jobs,
	and putting us on that more abundant growth path in the future,
	which allows us to address these questions that are on your
	mind.
	Chairman Nussle. I have had a chance to talk to a few Iowa
	business folks, big employers within my district and State, and
	who were similarly situated to yourself not too long ago, and I
	asked them what we need to do to create jobs. And I will tell
	you, what they tell me is that there is money out there--a lot
	of people sitting on money right now. A lot of people are
	sitting, waiting. They are waiting because of lack of
	confidence, on one hand. They tell me they are waiting because
	of the uncertainty over the war that is looming. And they tell
	me they are just uncertain about the future.
	And so, I guess, my last question would be, having sat in
	that situation not too long ago around the boardroom table
	making decisions about product lines and job creation and
	actually creating a job, unlike the Government which hasn't
	created a job except a government job in its entire existence,
	tell us what is the trigger. What is the trigger? With low
	interest rates right now and the cost of capital as low as it
	has ever been, what is the trigger to get someone like yourself
	who sits around that table, whether it is a big boardroom table
	or it is a small business kitchen table at home, that triggers
	them to create that next one or two jobs? What is the trigger?
	What is the way that we can get this thing going?
	Secretary Snow. I think the main trigger is confidence, and
	confidence comes from people seeing their disposable income
	rise, and seeing it rise not just in a one-time event, but the
	prospect for a permanent increase in what they can take home,
	what they can spend, what they really have, their after-tax
	income in their pocket going up.
	That is what this first and foremost does. It puts lots of
	additional money in the hands of 92 million Americans. That
	will stimulate the economy because it will give people
	confidence in their future. And it is the multiple-year aspect
	of this. Making these future tax cuts permanent will telescope
	to the future and cause people to say, wow, I am going to have
	another $1,000 a year, I am going to have another $2,000 a year
	to spend. It makes them feel more confident about their future.
	Business will respond as consumers--as they see the
	prospects for their business improving, as they see their
	returns improving. An important feature of this legislation is
	that small businesses, which are the biggest job generator in
	America, will find themselves with more net income and more
	cash flow. They will have more cash flow and net income because
	of the expensing provision, which is an attractive and
	important feature of the bill, but also because of the
	reduction in the marginal tax rates. And of course, so many
	small businesses use the flow-through method of paying taxes,
	they will find their marginal tax rates being reduced. As their
	marginal tax rates are reduced, what does that mean? It means
	their business is more profitable. As their business becomes
	more profitable, has more free cash flow, they are more
	inclined to go out and expand to take on additional customers,
	to make some capital investments, and to put up those help
	wanted signs that I said earlier I would like to see more of
	going up all over America.
	Chairman Nussle. Thank you, Mr. Secretary.
	Mr. Spratt.
	Mr. Spratt. Thank you, Mr. Chairman.
	Mr. Secretary, I was here during the 1980s and here during
	the 1990s, and you were a close observer of the process then, I
	think you would agree. The way we got to where we were in 2000,
	with a surplus of $236 billion and the bottom line of the
	budget that it improved every year that the Clinton
	administration was in office is that we had a plan and we had a
	process. The process grew out of the Budget Enforcement Act of
	1990, which we adopted as part of the budget summit agreement
	made with Mr. Bush, laying the foundation for what happened in
	the 1990s.
	Those rules are now all gone. The PAYGO rule is gone,
	discretionary spending ceilings are gone, sequestration is
	gone. All of the disciplines are gone. And the last vestige of
	any kind of budget plan expired last year. We have no plan; we
	have no process. So how do we get rid of these enormous
	deficits and back to a balanced budget without a plan and
	without a process?
	Now, I know that you are proposing the renewal of some of
	these budget process provisions such as the PAYGO rule. There
	is an old adage around here that it is pay as you go, and that
	you pay, and I will get a free ride. That is a typical attitude
	on both sides of the aisle among all Members of Congress.
	As I understand it, you want to renew that rule, but you
	don't want it applied your proposals; it won't apply to your
	tax cuts, and it won't apply to your entitlement increases; is
	that correct?
	Secretary Snow. Congressman, the PAYGO rules and the other
	sequestration rules and those things that came about in the
	1990s were good policies. I supported those at that time. We
	got to those good numbers you are looking at because of those
	rules in part where spending was under much tighter control in
	that period of the mid-1990s on than it had been heretofore.
	And I forget precisely what it was, but over about a 5- or 6-
	year period there, spending rose at less than the rate of
	inflation, I think.
	Mr. Spratt. But we had a plan, and we had to limit it
	someplace at least. We didn't always adhere to it, we fudged on
	it, but nevertheless it constrained spending significantly and
	achieved results. Alan Greenspan sat there and said, I will
	admit, I was a cynic. I was a skeptic. I didn't think it would
	work. But I have to say--he said--I think that this contributed
	successfully to the successes of the 1990s.
	Secretary Snow. I take some pride in having been associated
	with groups that were in the forefront of urging Congress to
	adopt those rules. I don't think it was the Concord Coalition
	that I was a member of, though.
	Mr. Spratt. I beg your pardon?
	Secretary Snow. But, you know, I know Pete Peterson and the
	Concord Coalition and Warren Rudman, and I think they had done
	a lot of good work as well. But those PAYGO rules and
	sequestration rules and so on were clearly part of the game
	plan that restrained spending that helped us get to that
	promised land of balanced budgets, but aided greatly, I think
	you would agree with me, by that surge of governmental revenues
	that came about because of the buoyant stock market and the
	high productivity and rising real wage rates. We had an awful
	lot of good things going on.
	Mr. Spratt. It was a convergence of all of those things.
	But if we hadn't had the budget disciplines in place, we
	wouldn't have taken maximum advantage. You wouldn't have seen
	the effect on the bottom line. But my question to you is the
	here and now, right now. If you want to see the renewal of
	those, shouldn't they apply to your tax cut proposal this year,
	your increase in Medicare benefits?
	Secretary Snow. No, I wouldn't. If you are asking me
	whether we should have offsets----
	Mr. Spratt. That is what the PAYGO rule means. If you don't
	have offsets----
	Secretary Snow. If you are asking me whether there ought to
	be offsets to the tax reductions, I would candidly say no,
	because if you do that, then you don't get the benefits of the
	tax reductions. And we need those tax reductions to put so many
	people back to work. I mean, it is 2 million people over the
	course of the next 3 years that get back to work because of
	this. And I think that is awfully important, too, to have--as
	we deal with international security, we deal with economic
	security at home.
	Mr. Spratt. Why propose it then, the renewal of the PAYGO
	rule, if it is not going to be applicable?
	Secretary Snow. The PAYGO rule should apply to spending.
	Mr. Spratt. Well, it does. That is what we are talking
	about.
	Secretary Snow. Well, I don't view a tax reduction as
	spending.
	Mr. Spratt. Well, it always applied to tax reduction and
	spending from the very beginning. So you are just talking about
	a PAYGO rule that has limited application. And would you apply
	it to your proposal, to, let us say, Medicare prescription
	drugs?
	Secretary Snow. No, I don't think we would.
	Mr. Spratt. That is spending, isn't it?
	Secretary Snow. It is a spending, but it is part of a
	larger program to reform a system that is badly in need of
	reform.
	Mr. Spratt. Well, I would agree with you about the need for
	prescription drug coverage, but you just proposed a rule, but
	then dispensed with all the applications of the rule.
	Secretary Snow. I am suggesting that we would defeat the
	very purpose of the tax reductions if we tried to offset the
	effect of the tax reductions.
	Mr. Spratt. I understand the point, but if you are going to
	make that point and make it in the manner you made it, then we
	shouldn't even be proposing in your budget that we have a PAYGO
	rule or--a renewal of the PAYGO rule.
	Secretary Snow. Well, I am talking about the PAYGO rules
	applying primarily to spending. I think we have to deal with
	the discretionary spending is where it applies.
	Mr. Spratt. The chairman touched on a very sensitive
	subject for anybody who operates in the realm of the budget,
	and that is the lateness and the reliability of early Treasury
	forecasts of revenues and the composition of revenues. And this
	is not a new topic; it has been around for a long time. We keep
	prodding and pushing the Treasury to come up with better
	estimating techniques so we can know far sooner than 18 months
	or 2 years what is the composition of income taxes, corporate
	taxes, whatever, in a particular fiscal year or calendar year.
	Do you have any plan for doing that--I know you have only been
	on the job for 2 days--improving those techniques?
	Secretary Snow. If I had a better way do it right now, I
	would tell you, but I don't.
	Mr. Spratt. Well, let me suggest to you the reason everyone
	bought into that fantastic forecast, $5.6 trillion in
	surpluses, was that it facilitated your tax cut proposal. We
	were warning that this was a blue sky estimate. You said you
	saw estimates of the economy slumping in August of 2000.
	Secretary Snow. Industrial sector.
	Mr. Spratt. Industrial sector. Transportation sector. The
	MBER says the recession started in March of 2001. The tax cuts
	weren't passed until June of 2001. So what happened is those
	who were pushing the tax cuts ignored the storm clouds that
	were gathering over the economy that people like John Snow at
	CSX were seeing; others were seeing them. They ignored those
	storm clouds and didn't want to acknowledge that that $5.6
	trillion was probably an overestimate. Treasury and OMB now say
	it is an overestimate to the tune of $3.2 trillion due to
	economic adjustments alone. They didn't want to acknowledge
	that likelihood.
	And here is what their budget looked like: If you designed
	a surplus, which excluded the Medicare surplus and the Social
	Security surplus; and those were the terms we were talking
	about on both sides of the aisle then, that we should stay out
	of both of those trust accounts. We were forswearing ever again
	borrowing and spending those surpluses. This is what the
	surplus would have looked like, and this is how it was applied
	in the budget that was adopted in the first year of the Bush
	administration.
	And you see that top green sliver of a line, that layer at
	the very top? After the blue spending proposals and the green
	tax cuts, that was all that was left in the near term between
	2002 and 2005, 2006 as a margin for error. And having made a
	very extravagant project--well, what turns out to be a blue sky
	projection of the economy and the surplus, they then came up
	with a budget that left no margin for error even though, as I
	said, storm clouds were gathering and people were questioning
	whether or not this surplus could indeed be obtained. That is
	what happened. And the reason you bought into it was because it
	made possible these tax cuts.
	Now, at this point in time, if I could get the bridge
	chart--there we go. This is a little complicated for the
	screen, but this comes straight out of OMB numbers. This shows
	where the April 2001 surplus projection lay, $5.637 trillion.
	These are economic adjustments that OMB now says should be made
	to that. Those include technical as well as just economic
	growth adjustments. They don't break them down, unfortunately.
	That means the adjusted surplus that can really be expected to
	obtain in that period of time, 2002-11, the cumulative surplus
	is $2.463 trillion, and all of that virtually is Social
	Security. There is no on-budget surplus after that.
	Then here are the enacted policies: tax cuts, the stimulus
	tax cuts, and then other enacted legislation, a large part of
	which goes to homeland defense and national security. The total
	of those enacted policies comes to $2.592 trillion. That means
	of the available surplus, adjusted available surplus, is
	already spent to the tune of $129 billion. That is the next
	item there. That shows you how much already has been spent. So,
	anything you do now goes dollar for dollar to the bottom line,
	adds dollar for dollar to the deficit, and, as the Concord
	Coalition said, that is a way of charging it up to our
	children. That is what it amounts to, shifting forward the
	burden of it. And the total amount of deficits that you are
	incurring is $2.122 trillion, and all of that--almost all of
	that results from policy decision making right now. You are
	saying it is OK to proceed from now because this is what OMB
	tells us. This is going to be the price tag of adopting this
	budget unless something falls out of the sky and gives us a
	higher rate than 3 percent, which is what they are assuming
	already, a pretty robust rate of growth for a 10-year period of
	time. Doesn't that give you concern?
	Secretary Snow. The--sure.
	Mr. Spratt. As a self-described deficit hawk, you are about
	to pursue policies that will increase the deficit by $2.122
	trillion.
	Secretary Snow. Let us go back and talk about how we got
	there.
	Mr. Spratt. OK.
	Secretary Snow. The 2001 tax reduction was good policy. Who
	doesn't think that?
	Mr. Spratt. But that is over now. I am talking about----
	Secretary Snow. But it builds into these numbers.
	Mr. Spratt. I have got that in enacted policy. I am telling
	you, you are standing at the point with a cumulative deficit
	between 2002 and 2011 is $129 billion, and you are proposing to
	add $1.993 trillion to it, OMB numbers.
	Secretary Snow. OMB numbers that they will acknowledge,
	Congressman, understate the revenues for the future and build
	in all of the costs of the President's growth package. So they
	are worst-case sorts of numbers. I think the economy can grow
	faster, and it certainly will have more revenues in it than the
	numbers that OMB presented to you as they acknowledged, I
	think, that it was a pessimistic case on governmental revenues.
	So the picture is better than that.
	Now, am I happy to have deficits of any amount? No. But as
	I said, deficits sometimes, regrettable as they are, are an
	essential part of carrying on the essential business of the
	country, the critical business of the country, homeland
	security now, and domestic security. And I think it is
	important to bear in mind the size of these deficits. These
	deficits are relatively small compared to the size of the
	economy and historic deficits coming out of recession, as is
	the debt level of the country. They are manageable, and they
	will be receding after a couple years. I think the OMB
	administrator had them going down, as was shown in one of these
	charts. They are deficits that we can work our way out of if we
	can grow this economy faster. And I would make the bet on
	growing the economy faster to work our way out while
	maintaining tight spending controls.
	Mr. Spratt. But you will admit you have got fairly robust
	growth built into this budget already. It is better than 3-
	percent real growth for the next 10 years, averaging out over
	10 years better than 3-percent robust growth, real growth.
	Secretary Snow. I will have to check that to confirm that
	you are right. If you are, I will certainly acknowledge it. I
	had thought that OMB had explicitly not taken into account the
	growth effects, or had discounted some of the growth effects of
	the President's package, but had scored the entire cost of that
	package.
	Mr. Spratt. Let me just ask you a final question. I don't
	want to monopolize this, but this is a very important part of
	the decisions that lie ahead of us. This is our back of the
	envelope tab of what is on the agenda, the Bush
	administration's tax cut agenda.
	The first couple of items are done deals. They are enacted
	law. The tax cut of June 2001, the cost of it a $1.349 trillion
	without including any additional debt service. The stimulus
	package in March of 2002, $42 billion. And now you've got on
	the table a growth package, a small portion of which has been
	passed, a so-called growth package. It will be implemented over
	a period of time. The cost between now and 2013 is $615
	trillion. That is an OMB number. You are also proposing making
	permanent the 2001 tax cuts, which cost about $692 billion.
	As I said, I think you have to include the alternative
	minimum tax. The Treasury was the first to blow the whistle on
	the alternative minimum tax. They put out a report a couple of
	years ago and said, given current trends the number of tax
	filers who will be confronting the AMT will grow from 2 million
	to 39 million over the next 10 to 12 years. I have forgotten
	the time frame. The numbers are roughly correct. You know and I
	know politically we will have to deal with it, and equitably we
	should deal with it, because when we pay off the alternative
	minimum tax it was a way of saying to upper bracket taxpayers
	you are not going to be able to wipe out all your income tax
	liability with reductions and credits and preferences and so
	forth. You got to pay at least the minimum tax. We never meant
	for that to apply to middle income taxpayers, but it soon will.
	But the number who have to confront the AMT every year grows
	from 2 million to 10 million. Politically, the pressure for
	doing something about it has to be dealt with. You said that
	for several years, your Treasury Department has, both
	administrations. The AMT has to be confronted, the committee
	deals with it. Don't you agree it has to be included? If you
	talk about this time frame, we are talking 2004-13, and you
	don't include the AMT, you are fooling yourselves and you are
	fooling the American people.
	Secretary Snow. I think it will be addressed but it should
	be addressed by the Congress and the administration as part of
	an overall tax reform package rather than as a one-off item.
	Mr. Spratt. What you are saying though it has to be offset,
	is that what you are saying? That would mean revenue increases
	somewhere.
	Secretary Snow. It is an issue that needs to be addressed.
	I am granting you that. How and when is something I really
	don't have an opinion on at this time.
	Mr. Spratt. Between now and 2013, the taxpayers affected by
	it will grow from 2 million to 24 million. Don't you think
	before 2013 within the time frame we are talking about, well,
	within it, you have to deal with this issue; therefore it has
	to be included in the tally of the tax cuts likely?
	Secretary Snow. But I think it should be addressed in the
	larger context of real, broad tax reform.
	Mr. Spratt. Let me ask you one final question. It is time
	to clean the closet out. We need to scrub the code down as we
	did in 1986. It is long past due. And one of the anomalies in
	the code we could deal with in a tax reform package would be
	the taxation of dividends. Why not put it in a revenue neutral
	tax reform package? And indeed why not make it for the
	corporate Tax Code the big chip just as the ITC and accelerated
	depreciation was. It was a trade-off to get lower rates. Why
	not play this chip and say to corporate America we will give
	you this if you will agree to get rid of these loopholes and
	the exclusions that lower the effective rate of corporate taxes
	from 35 percent to 15 percent? Aren't you passing up a real
	opportunity there to induce real change and a good cleaning out
	of the corporate Tax Code?
	Secretary Snow. There are a variety of ways to do things.
	However you look at this proposal, it is just good economics.
	Mr. Spratt. But it is not good bargaining. Put it on the
	table and corporate Americans say this is what we will give you
	if you will agree to get rid of these loopholes and these
	things that let you expatriate and locate in Bermuda and avoid
	taxes. This is the incentive to you. We are going to handle the
	double taxation dividends problem in return for your concession
	on these issues.
	Secretary Snow. There are a number of advantages from the
	exclusion on the dividends, one of which is it reduces the
	incentive to do the very thing that you find objectionable and
	I find objectionable, inversions and tax shelters, abuse of tax
	shelters and things, because if you are not paying income tax
	on it there is nothing to shelter.
	Mr. Spratt. You have to have something to show.
	Secretary Snow. There is a byplay here between the dividend
	exclusion and encouraging good taxpayer behavior.
	Mr. Spratt. I agree, and put them in the same package and
	you got something you can pass. Thank you, sir.
	Secretary Snow. Let me close though. I think you and I
	maybe didn't agree on everything there, but I think we can
	agree on the need for better estimates and I will go to work on
	that.
	Mr. Spratt. I would hope we found broader common ground
	than that.
	Chairman Nussle. Just to complete the record, I was
	curious, is the proposal offered by the Democrats compliant
	with PAYGO and offset and revenue neutral?
	Mr. Spratt. If you are not going to play by the rule, we
	are not going to play by the rule.
	Chairman Nussle. Just wanted to make sure the record was
	complete.
	Mr. Gutknecht.
	Mr. Gutknecht. Thank you, Mr. Chairman. Mr. Snow, we
	welcome you to the committee and to Washington again. The first
	question I have for you, are you a volunteer or a conscript? I
	suspect you are somewhere in between. You don't have to answer
	that question. You know it bothers me sometimes when they take
	words that I used back in 1995 and throw back at me today.
	Things have changed. And clearly the economy is different today
	than it was in 1995 and the circumstance we find ourselves in
	is different than it was in 1995.
	I do want to agree with you on everything that has been
	said. As we look at projecting what the economy is going to do,
	what revenues we are going to produce, we can agree now that
	this is a very humbling business. But I do want to come back to
	some things because I didn't hear the kind of answers that I
	think ultimately the American people want to hear. The chairman
	asked a pretty interesting question. Why don't we just freeze
	everything? I mean most Americans would be happy if the Federal
	Government would just freeze an awful lot of the spending and
	allow the economy to catch up.
	Let me give you an example. And we sort of have this debate
	sometimes between CBO and OMB and what Alan Greenspan says and
	other people say about where the economy is and where it is
	going, but according to our official bean counters at the
	Congressional Budget Office this year the Federal Government
	will increase revenues to the tune of 3.7 percent. Now
	yesterday Mr. Daniels was here and I await a little better
	explanation because in many respects I was proud of the fact
	that he stole a line from me that the Federal budget shouldn't
	grow any faster than the average family budget. But the average
	family budget is not growing at 4.5 percent, at least by my
	estimate. And I want to come back to this point. If revenues
	are going to increase by 3.7 percent this year and the Bureau
	of Labor Statistics tells us that the CPI is going to increase
	at 1.8 percent, that is about half, I guess on behalf of an
	awful lot of Americans, why isn't 3.7 percent enough for the
	Federal Government?
	Secretary Snow. Well, Congressman, I am fairly new in this
	job and didn't have too much to do with preparing the budget
	for the United States, but I think the short answer--and it is
	a question better addressed to Mitch Daniels than to me, but I
	think the short answer is that there are pressing national
	priorities. There is the priority of homeland security, which
	takes a very significant part of that increase in the budget
	expenditures for next year. There are also initiatives in a
	number of other areas, the prescription drug proposal that I
	think enjoys widespread support, is part of a broad Medicare
	reform program that makes sense.
	There is a cost to not doing things as well as a cost to
	doing things. If we don't do a growth package like this, what
	do we tell the 2 million people who don't have jobs who
	otherwise would have had jobs because of the growth package?
	How do we explain that we failed to take the action that makes
	the economy stronger? The action you all took in and the
	Congress took in 2001 was an essential action. It cost. It
	certainly had--scoring it, it produced more deficit than it
	produced revenues, but it was good policy. And I think if we
	keep focused on doing good policy, and then asking ourselves
	what is the opportunity cost, what do we give up because we
	don't do it and then look at what shouldn't we do. Should we
	not maintain the homeland security? Should we not wage the war
	on terrorism? Should we not try to put 2 million people back to
	work? Should we not take the growth up a percentage point over
	where it is otherwise? I think the foregone alternatives of not
	doing these thing are actually greater than the costs of
	incurring the budgetary impact of doing them.
	Mr. Gutknecht. I agree with you generally that allowing
	people to keep more what they earn during times when the
	economy is soft is really a good thing to do. My concern is on
	the spending side. You said there is broad based support for
	this program. You will find here in Washington there is broad
	based support for virtually every spending program. It is the
	responsibility of this committee to try and restrain that
	spending so we can actually have a balanced budget and
	ultimately create room for additional tax relief.
	The problem I have with the budget that the White House
	sent up is they say ``yes'' to almost every one of these
	priorities and you come back to the basic number. To a lot of
	Americans allowing the Federal Government to have a growth in
	their revenue of 3.7 percent ought to be enough to fund the
	legitimate needs of the American people. And at some point I
	think we all have to come to grips with the tough decisions we
	have to make, and we need some help from folks like you to get
	that done.
	Thank you.
	Chairman Nussle. Mr. Moran?
	Mr. Moran. Thank you, Mr. Chairman. You know, this is
	exactly what President Bush the first called ``voodoo
	economics.'' It is Reagan redux. Some of us remember in 1980
	when David Stockman spun us the same kind of pitch. Deep tax
	cuts for the wealthiest taxpayers, dramatic increases in
	defense spending, which the Democrats didn't oppose, and then
	of course what the Democrats label as Draconian cuts in social
	programs, which they felt was part of the long-term agenda.
	When President Bush the first came into office and there was
	some resonance of his description of it as ``voodoo economics''
	because it didn't pan out, and it quadrupled the Federal debt
	in just 8 years. In 1990 he put together a bipartisan budget
	summit, raised taxes marginally on the top rates and balanced
	the budget. President Clinton followed up with a balanced
	budget and raised taxes on the highest taxpayers, who,
	incidentally, including yourself, over the last 8 years have
	taken back more after tax income than at any time in American
	history, so it obviously didn't hurt, but it balanced the
	budget. And so it left us with a $5.6 trillion surplus at the
	beginning of 2001. And that was the justification that we were
	given for the deep tax cuts of 2001. And we were even told and
	I remember, in fact the chairman suggested it, that the growth
	could well be more than this, that--the suggestion was we
	really didn't need to worry about surpluses and what the loss
	of revenue would do because the economy was going to keep
	growing. And so we left very little margin for error. And now
	you are telling us, as we have been told five times now, that
	this budget is going to grow the economy. In February of 2001,
	we were told that this budget will grow the economy. We were
	told again in the mid-session review in July of 2001. Again in
	February of 2002. Again in July of 2002. The same spin. And yet
	we have had the worst job growth in 58 years. We have had the
	worst economic growth in 50 years. It is the worst first 2
	years of any presidency from an economic perspective. And yet
	you are telling us, well, we really shouldn't worry much about
	the fact that we have got deficits as far as the eye can see
	because economic growth is going to be better than what you
	suggest.
	And yet we look at the analysis that OMB has given us, your
	economic growth figures are more favorable than CBO's or the
	Blue Chip forecast. Your unemployment rate is less than CBO or
	the Blue Chip forecast. The interest rates that you say you
	would pay are lower than CBO or the Blue Chip forecast, and yet
	you think you can tell us these numbers, give us this
	Pollyannish projection and, you know, everything is going to be
	OK.
	The worst aspect of this whole economic plan is that you
	are cutting taxes in every way possible on unearned income at
	the expense of earned income. In other words, the people who
	are paying for the $4.4 trillion of tax cuts, including
	interest costs over the next 10 years, the people who are
	paying for that are the ones who are payroll taxes into Social
	Security, FICA taxes, because you are taking $2.2 trillion out
	of that Social Security money and using that to offset the cost
	of the tax cuts. So you take it from those who can most afford
	it and take it--and eliminate tax on those who can most afford
	paying them and then sticking those who can least afford it.
	That is our biggest problem with it.
	And you know, in fact, Mr. Nussle used the expression our
	problem is a lack of confidence that people are not investing,
	they are waiting because of the uncertainty. You said it
	triggers their confidence. I agree with you, the stock market
	has lost $5 trillion since your President took office and it is
	primarily a lack of confidence. So if you have any response, I
	would be interested in hearing it, Mr. Snow.
	Secretary Snow. Congressman, I hardly know where to begin,
	but let me take on a few of your points. You are right, the
	economy--the Nation has been subject to a deep and far reaching
	set of shocks that help explain the situation we are in today,
	not the least of which is the extraordinary meltdown of the
	Nasdaq and the equity markets generally. I think it is actually
	$7 trillion that has evaporated with gigantic wealth effects.
	Mr. Moran. I didn't want to exaggerate.
	Secretary Snow. That is probably over the whole period.
	Then the recession, then 9/11, then the corporate scandals,
	crisis of confidence in corporate leadership, on and on. We
	have had a set of shocks, a series of shocks to the economy
	that are of far reaching proportions, and yet the economy
	remains resilient. It is really a credit to the strength of
	this economy and to past policies that the economy could
	respond as well as it did. I will come see you some time and
	talk about the numbers.
	The Blue Chip estimates actually are for more robust growth
	rates than the growth rates that the administration has and for
	lower unemployment. Well, I won't read it to you, but I have it
	here. For instance, in 2003 the administration unemployment
	rate is--well, I won't read all these to you because it will
	take up too much time. On the issue of fairness, because we
	always come back to this issue of fairness, I think it is
	important to come back to the fact that the burden of the
	Government, the burden of the revenues is higher on the top
	taxpayers after this proposal than it is before that proposal;
	that is, if you enact, if the Congress enacts this proposal,
	the highest income taxpayers will be paying a larger share of
	the total obligations of the Federal Government than they do
	before, and the lowest income taxpayers will be paying a lower
	share of the total obligations of the Federal Government.
	Mr. Moran. Is that after estate taxes?
	Chairman Nussle. The gentleman's time has expired. Mr.
	Toomey.
	Mr. Toomey. Thank you very much, Mr. Chairman, and, Mr.
	Snow, welcome to the committee. I can't quite see you there but
	I know you are there. I want to comment briefly and follow up
	on a comment one of my colleagues just made that we are looking
	at Reagan redux, and all I can say is I just vigorously hope he
	is right. It is amazing to me. When Ronald Reagan came to
	office and dramatically slashed taxes, especially marginal
	income, including taxes on the highest wage earners in our
	country and because he dramatically increased the incentives to
	work and save and invest, he ushered in a 17 year long economic
	boom that has created more wealth, prosperity and opportunity
	than this country or any country on the face of the Earth has
	ever seen. How anybody can look at that and say that was a bad
	thing is fascinating to me. It is baffling to me. It was a
	wonderful thing, and it was driven primarily by dramatic
	reductions in taxes.
	There is another aspect of this debate which is almost a
	little overwhelming to me, and that is that the same folks who
	are so concerned about the size of the deficits are the very
	same folks who want to spend even more money. We have had huge
	increases in spending in recent years. And my good friends on
	the other side--and I don't doubt their sincerity about their
	concerns with the deficits, but the fact is they are only going
	to get worse if we keep the spending going.
	The President proposed a budget which is a refreshing
	change from the previous administration in that he is trying to
	hold the line on spending. I hope we can do more. I am going to
	work to try to reduce spending below the level the President
	has proposed. But I understand in Congress that is going to be
	really tough to do. So if we end up right where the President
	is, we need to take that as the given, that level of spending,
	high in my judgment but maybe that is where we end up, the
	question then I think becomes which is better for the economy,
	to finance that as the President has proposed, almost entirely
	with taxes, but with a little bit, about 2.7 percent of our
	economy with debt, or should we instead raise taxes and finance
	the rest of it also by taking money away from the wage earners
	of America and doing it all with taxes instead of this
	combination? I think that is the question before us.
	We will wrestle with the spending level. We will probably
	end up somewhere around where the President is. And I would
	just ask you to comment on which is better for the prosperity
	of America, for the economy of our country, for job prospects
	to just raise taxes and finance it all with taxes or to have
	this modest component of debt?
	Secretary Snow. You framed the essential issue here,
	Congressman, better than I did. It is that notion of
	opportunity cost. What do we give up if we don't give the
	taxpayers more of their own money? And on the other hand, what
	does it cost us in real terms if we try to finance it through
	tax increases. I think framed that way there is only one answer
	you can come to; it is clearly better to go down the path the
	President is taking us. Sure, we have a little higher debt,
	still debt that is in the really modest range by comparison
	with the past, 2.5 percent, 2.7, coming down well below that in
	the years ahead.
	The other side of this is who would propose a tax increase
	to accomplish that objective. I don't think you would, and I
	don't think you would get the objective. You would have lower
	employment and lower growth and ultimately less Federal
	Government revenues.
	Mr. Toomey. I agree. As to the question of the total amount
	of public debt--and I would love to see us have a balanced
	budget this year. I think you have been quite right in framing
	this as plausible alternatives right now, but could you just
	comment on--we are running about low 30s as a percentage--our
	debt as a percentage of GDP in America. Of course that is not
	including the unfunded commitments of the major entitlement
	programs, which obviously require profound reform, but where do
	we rank amongst major industrialized nations? What statistics
	could you share with us to put that in context?
	Secretary Snow. Maybe we could put up a chart that would be
	helpful on the overall question of the Federal debt held by the
	public. I don't have offhand, maybe somebody here does, our
	debt versus other countries. I think our debt is significantly
	lower than the debt as a percent of GDP by most OECD countries.
	But what this chart shows, of course, is that the debt that is
	projected out for the years ahead is lower than the debt we
	have experienced in most of the period since the 1980s. It is a
	manageable level of debt. Would it be better if we could have
	it lower? Absolutely yes. But could we accomplish the national
	objectives without this level of debt? I don't think we could
	either.
	Mr. Toomey. Thank you, and a last quick question. I think
	the President's proposal for a new round of tax relief is
	vitally important for both the short-term and even more
	importantly for the long-term sustainable growth. It seems to
	me capital formation is a critical component in maximizing--
	long-term maximizing sustainable growth. Do you believe that is
	correct and the double taxation on dividend--eliminating that
	double taxation on dividend absolutely has to have a strong
	positive effect on capital formation?
	Secretary Snow. I think there are a few who would dispute
	that. Even those who wouldn't favor the proposal would
	acknowledge that the double taxation of dividends hurts our
	national capital formation. As I said earlier, anything you tax
	more of, you get less of. And we are taxing capital formation,
	equity capital formation and encouraging overuse of debt as a
	consequence. The marketplace left to itself would use more
	debt--less debt and more equity. Because of the Tax Code we
	have higher debt to equity ratios than we otherwise would have.
	And that is not a good thing for the economy. What sense does
	it make to penalize equity capital formation? What sense does
	it make to discourage corporations paying out dividends to
	their shareholders. I have sat in on any number of meetings
	where senior management and the board thinks about how to
	reward shareholders. They say what can we do here. Well, you
	can buy somebody because you can use debt to buy somebody. You
	can buy in your shares. You can use debt to buy in your shares.
	That is tax deductible. You can make some internal investments
	or you can pay out dividends. What is the conclusion most
	companies come to? That is a tax inefficient way to reward our
	shareholders, so we do less of it. By leveling the playing
	field on dividends, we are going to do something that is
	important for corporate governance. One of the charges today,
	one of the concerns today in the capital markets is how
	accurate are these numbers. Are the numbers being managed? You
	can't manage cash. Once we are paying out more cash dividends,
	the best possible way to show shareholders what your real
	earning power is and I think by eliminating the double
	taxation, we are going to see many companies, like Microsoft
	announced recently, will begin paying dividends.
	Mr. Toomey. Thank you.
	Chairman Nussle. Mr. Neal.
	Mr. Neal. Thank you very much, Mr. Chairman. Mr. Secretary,
	for the last two sessions of Congress, I have filed legislation
	on corporate inversions. I think in the last session there were
	187 signatures on a discharge petition, and it deals primarily
	with the issue of those companies who move to Bermuda for the
	purpose of avoiding U.S. Corporate taxes. Do you think that in
	a time of potential war and deficits that it is patriotic for
	these companies to move to Bermuda for the purpose only and
	solely for avoiding American corporate taxes?
	Secretary Snow. Well, if you are asking me whether I am a
	fan of inversions, the answer is no.
	Mr. Neal. Do you think we should do something about it?
	Secretary Snow. I understand the department has a number of
	studies underway on that subject. I think it is a subject that
	needs to be looked at. The Tax Code certainly shouldn't be
	inducing abusive tax avoidance behavior. And I don't know
	enough about the subject, as you do.
	Mr. Neal. Let me help you. Mr. Secretary, I have been on
	the Ways and Means Committee for more than a decade and I have
	heard the chairman of the Ways and Means Committee--and since
	some of us here suffer from amnesia, let me use a reminder--I
	have heard prominent members of the Ways and Means Committee
	say that upon their watch they were going to pull the Tax Code
	up by its roots. And then I heard we were going to dismantle
	the tax system. And I heard the former majority leader talk all
	the time about moving toward a new tax system. And I heard
	candidates for President say we are going to a long funeral
	procession for the Tax Code.
	Do you really believe in the next couple of years you are
	going to change the Tax Code here, Mr. Secretary?
	Secretary Snow. I hope we improve it some.
	Mr. Neal. Do you think we are going to move to a flat tax
	or a consumption tax in the next couple of years?
	Secretary Snow. I don't know. You and the Members of the
	Congress would probably have a better sense of that than I. But
	I think the proposal, the President's tax proposal certainly
	produces a better tax system, a simpler tax system. If you tax
	something only once, it is a lot simpler than if you tax it
	twice.
	Mr. Neal. Well, for these guys in Bermuda, there is no tax
	at all.
	Secretary Snow. But they move there because they are trying
	to avoid taxes, and if you don't tax the dividends, you remove
	the reason for them to go abroad. If people don't have to pay
	taxes, then they don't seek shelters.
	Mr. Neal. What do you think the IRS would do to individual
	taxpayers if they moved to Bermuda for the purpose of avoiding
	taxes?
	Secretary Snow. I don't know.
	Mr. Neal. We could save $4 billion, Mr. Secretary, by just
	asking these folks to pay their share. Business people
	applauded me at a Chamber of Commerce luncheon last week with
	1,200 people in the audience when I said when these folks don't
	pay, you pay more. Not a bad applause line for business people.
	They understand it. The American people understand fairness in
	the tax system. You answered earlier saying we should always
	come back to fairness. Not a bad position to start from, never
	mind to come back to.
	Finally Mr. Secretary, what kind of job do you think
	Secretary Rubin did during his years in the Clinton
	administration?
	Secretary Snow. I am an admirer.
	Mr. Neal. Do you think he was more right than wrong in the
	suggestions he made?
	Secretary Snow. Tell me which particular suggestion you
	have in mind.
	Mr. Neal. Suggesting that we pay down deficits.
	Secretary Snow. I wish Bob Rubin had become more a champion
	of tax reductions. I talked to him about that and I never could
	persuade him of the benefits of some lower marginal tax rates.
	Mr. Neal. The problem I hear is the former majority leader
	said when we passed those three budgets, which I voted for with
	Bush Sr. and Clinton twice, I remember the former majority
	leader saying that we were headed to fiscal Armageddon. And
	then I heard the former chairman of the Budget Committee say
	that we were headed toward the greatest depression in the
	history of the country. Now I hear Rubinomics is dead after we
	proceeded on a course of success that is unparalleled in
	American history. Would you agree with that in terms of
	economic prosperity during those 6 years?
	Secretary Snow. I take my hat off to everybody who had a
	hand in bringing about the balanced budget in that period. My
	preference, though, would have been to see it done with a
	little different mix of tax increases and spending reductions;
	in other words, less on the tax increase side and more on the
	spending restraint side.
	Mr. Neal. I think my time is up, Mr. Chairman.
	Chairman Nussle. Mr. Hastings.
	Mr. Hastings. Again, if I could ask my friend from Alabama
	to lean back and my friend from Arizona. Mr. Secretary, I want
	to congratulate you for being here and having been on the Hill.
	The chairman alluded to that when you have only been on the job
	for a couple of days. You have been inundated with a lot of
	things. I know that you haven't had an opportunity to really
	look at very closely and I congratulate you coming up here and
	really taking the heat.
	Couple of comments on the data that you have been thrown
	at, and you did respond to Mr. Spratt that there is probably
	agreement between the two of you on the one issue that you try
	and do. Projecting ahead is a very inexact science and you are
	being inundated to comment on things that will happen 11 years
	from now. And we know we will probably be way off--pick a
	factor. I am sure that will happen. But let me pick up on a
	very basic issue as to where the policies that are being
	suggested by this administration and past policies by prior
	administrations. If the idea of having--in fact for many years,
	the idea of trying to get the economy going is to have some
	sort of Government stimulus, infrastructure and so forth. If
	that were the case and the fact that the Government is
	spending, we should never be in a recession if that were a very
	accurate model, it seems to me. What you are doing is--and the
	President is doing is--let us trust the people more by giving
	them more of their money.
	So my very basic question to you is, does the economy tend
	to perform better when there is more government intervention or
	less government intervention? And based on whatever your answer
	is--and I hope it is B--tell me why that is the case and why we
	should be looking at that long term.
	Secretary Snow. Well, I think there is clearly a role for
	government in a lot of spheres. But there is also no doubt
	about the fact that the reduction in the role of government
	over the last 30 years or so--less transportation regulation is
	one example and deregulation in many, many spheres--has been a
	big boost to the economy. And I am a big believer in
	minimizing--maximizing the role of the private sector. I think
	the strength of this country of ours and the strength of this
	economy is that we really give a large role to the private
	sector. We let the private sector work. We let markets work and
	we contrast the performance in the United States with the
	performance, say, in Europe. And the defining difference is the
	fact that we believe in markets. We let labor markets work. We
	let capital markets work. And we have embraced market
	principles here, whether in the international trade arena with
	trade liberalization or in domestic markets, in banking and
	finance with Gramm-Leach-Bliley, on and on and on. We have made
	this economy much more responsive, much more competitive and
	much more efficient. As we do that, we grow more. We create
	more good jobs--not just more jobs, but more good jobs, more
	jobs with rising real wage rates.
	So I am a very strong believer in the competitive
	marketplace and letting the competitive marketplace operate.
	Clearly there has to be rules, but letting the competitive
	marketplace be the driver of economic performance and making
	that bet on peoples' initiative and spending their own money
	and making their own decisions and responding to the forces of
	the competitive marketplace, which disciplines all of us, I
	think is the surest and safest course for rising outputs and
	higher standards of living. I agree with you 100 percent.
	Mr. Hastings. Mr. Secretary, thank you very much for that
	response. I was fascinated when Milton Friedman essentially
	wrote a book or a thesis on how a pencil is made. I mean the
	dynamics in the marketplace is absolutely incredible. And where
	we are trying to go is to make that obviously more of a long-
	term phenomenon than a short-term phenomenon. So I give you a
	great deal of credit for taking that initiative. But more than
	that, once again, I think you do a wonderful service coming up
	here with only 2 days on the job and taking what you are
	taking.
	Secretary Snow. Mr. Chairman, if I could expand on the
	Congressman's point for just a minute. In the 1970s, I had the
	privilege of serving in the Ford administration in a role where
	my responsibility was to develop the transportation policy
	initiatives heading the policy shop over at DOT under Secretary
	Bill Coleman, and we worked with the best economists in the
	world, best at quantifying market impacts and so on, and we
	developed these proposals. We didn't get them through. They
	were enacted when President Carter and his administration
	picked them up and moved them forward and ran with them and got
	a congressional blessing on them.
	None of us, none of us who were doing the forecasts on the
	economic gains from eliminating truck and rail regulation had
	any idea how much the wealth effects would be, how gigantic and
	huge the savings for the economy as a whole would be. None of
	us forecasted the fact that in the railroad transportation
	business, transportation rates today in real terms are 40-
	percent lower than they were back then. In the trucking
	industry it is also 40-percent lower in real terms, and with
	better service and with greater profitability. What happened
	there, we unleashed the marketplace, and when we unleash the
	marketplace all sort of wonderful and unforeseen things happen.
	I think that is going to happen with the President's
	dividend proposal. That is why I so strongly support it.
	Chairman Nussle. Mr. Edwards.
	Mr. Edwards. Thank you, Mr. Chairman. I would like to
	address two reasonable questions raised by a Republican
	colleague in this committee. One is, does the economy perform
	better or worse with more or less government intervention? And
	I would suggest Enron is an example where the company would
	have fared a heck of a lot better and millions more might be
	employed today if we had more government intervention rather
	than less. I don't believe the sound bite that the least
	government is always the best government. And I say that as
	someone who is a great defender of our private market system.
	Second question raised by our colleague from Pennsylvania,
	and I think this gets to the root of the difference here about
	this year's debate between Republicans and Democrats. He said
	how can anyone disagree with the Reagan fiscal policies of the
	1980s. I am one person who does disagree with those policies
	because they led to the tripling of our national debt in less
	than a decade, and perhaps that is not a concern to some
	members of this committee. It should be a great concern because
	it will be a huge burden to our children and grandchildren, and
	there is nothing economically sound, there is nothing fair
	about paying for today's tax cuts by charging the cost of those
	to our children and grandchildren.
	Now, Mr. Secretary, what I am hearing this administration
	saying is several things regarding the budget. First, when the
	economy is good and we have surpluses, let us cut taxes and
	give that money back, thus ignoring the fact, the reality we
	already have a $6 trillion national debt. Well, then when the
	economy turns around and is bad, let us have tax cuts to
	stimulate the economy. Tax cuts under any situation may be good
	politics, but I think it is irresponsible policy. And if I were
	an American businessman listening to this debate today, I think
	what would concern me more than the fact that we are having to
	face the largest deficit in the history of America is that
	former Republican budget hawks are now rationalizing and
	explaining away the significance of having the largest deficit
	in the history of America.
	And the next thing I hear this administration saying is
	this budget deficit is moderate and manageable. It may be
	moderate compared to the next worst case in the history of the
	United States, 1992, but I don't consider a $300 billion
	deficit this year and, even more importantly, deficits as far
	as the eye can see to be moderate or manageable. The impact
	upon our children will be devastating when they have to pay the
	debt tax, the interest on the national debt. The impact on
	businesses when this economy starts back up again and we have
	higher interest rates because of huge deficits will inhibit
	growth, not help growth.
	Third thing, this administration says this budget is a
	growth budget. I would challenge this administration to show me
	in the history of the world any nation that took the philosophy
	that long-term deficit spending is a growth stimulator. There
	is no evidence of that throughout the history of the country.
	And I believe this is a growth inhibiting budget because it
	endorses massive national deficits for years to come.
	Next, I am hearing we are not responsible for the largest
	deficit in the history of the United States. Obviously, you are
	not responsible for the war against terrorism or the attacks on
	this country. We all understand that. But you are responsible
	for proposing $2.8 trillion in tax cuts while we face these
	problems and know we have to pay for these problems. The fact
	is we would not have the largest deficit in the history of the
	United States today had it not been for the $1.3 trillion tax
	cut that some of us did predict 2 years ago would lead to
	deficit spending.
	Finally, I hear you talk about cutting spending. Yet the
	six largest programs of the Federal Government that represents
	74 percent of spending are Social Security, defense, Medicare/
	Medicaid and health, interest on the debt, education and
	training. This administration and this budget is proposing
	increases in three of the six largest programs. The fourth we
	have no choice. We must pay the interest on the debt. That
	leaves Social Security and Medicaid.
	Mr. Secretary are you proposing cuts in those two programs?
	Secretary Snow. Congressman, thank you for those good
	questions. First of all, on the issue of the manageability of
	the debt load, clearly as Mitch Daniels said to you, we are in
	a deficit position and we will be for some years to come. But
	the green line there shows that those deficits are relatively
	moderate compared with past periods as a percent of GDP and
	that they are shrinking as a percent of GDP and are well within
	what is manageable. I think the important thing about a
	deficit--and you raise a good question. We have to keep that
	question in mind always. But the important thing about a
	deficit is does it influence the way financial markets react
	and respond, because if it influences the way financial markets
	react and respond then we will get higher interest rates. And
	financial markets react and respond if they think the deficit
	is large and growing relative to GDP or the debt is large and
	growing relative to GDP and if they think it is going to be
	sustained. I think financial markets are accepting these
	deficits that are projected. I think they are bigger than they
	are going to be, frankly, for the reasons I went through
	earlier. But the important thing is to make sure that they
	shrink over time and stay modest, shrink both in absolute and
	in relative terms.
	And of course we are now living in a period where financial
	markets reacts instantaneously to the information they have
	available to them. They have this information. They have seen
	this coming. And interest rates I think are the lowest in 40
	years. So while I very much share your concern about deficits,
	I will come back to the point that the level that we are at
	today is manageable and is not an undue burden.
	Chairman Nussle. Gentleman's time has expired. Mr. Brown.
	Mr. Brown. Thank you, Mr. Chairman. Thank you for coming.
	You have only been on the job a couple of days but you are not
	short of advice, and we appreciate you coming today and letting
	us kind of pick you a little bit. But we debated the tax cuts
	and we recognized that the economy was in a downturn and the
	highest tax level was over 39 percent we felt it was too much
	and lowered those rates down to 35 percent. We felt like the
	death tax was unfair and we eliminated that and now propose
	eliminating the double taxation on dividends and the unfair
	tax, the marriage penalty. All of those were issues we felt
	were relative issues that needed to be adjusted. And yet we
	find in the economy, we look at the long range plan of over 5-
	percent unemployment over the next several years. Those issues
	must be addressed. The economy has got to be put back on the
	right track. We appreciate your efforts to help us mend that.
	Are there any viable alternatives you see--suggestions from
	the other side--other than to cut the tax at the lowest level?
	And you know with this tax rate, you have already expanded
	that. Balancing the budget using the Social Security proceeds,
	there has been a lot of debate about how to do that and whether
	they are going to have a locked box exactly--how we intend to
	do it. But under the code itself, the only investments we can
	have in the Social Security proceeds are in Federal
	instruments. So how do we separate that? I don't think we can
	take the Social Security proceeds and just put it in a locked
	box and not gain any kind of a return.
	Would you explain on how that might work?
	Secretary Snow. I am trying to understand how a locked box
	would work and what the concept of a locked box really is.
	Social Security is a pay-as-you-go system, and it is a system
	with intergenerational obligations. It is currently running a
	surplus. We know that that surplus will run out at some point
	in the future. Every dollar--every penny of that surplus is
	credited to the trust fund and is backed by the full faith and
	credit of the United States. So there is no taking away, there
	is no--I hear this term from time-to-time, raiding the trust
	fund. That is a misuse of the language. There is no raiding of
	the trust fund. To create a locked box without a return, as
	long as it is cash you put into it, seems to me that would be
	sort of a far-fetched notion. That wouldn't make any sense. The
	only reason why it would make any sense out of the notion of a
	locked, box and you can help me understand this better, is that
	you take the money and pay down the debt. But the reason that
	deficits are going up is that we have these urgent national
	needs like putting people back to work, as you alluded to, and
	getting the economy growing. So going that way wouldn't seem to
	make much sense. And I am puzzled by just what the locked box
	concept means in this context where the only way I can make any
	economic sense out of the idea of a locked box is that you use
	it to pay down the debt. And if you do that, then we aren't
	accomplishing these important objectives.
	I hope that is responsive.
	Chairman Nussle. Mr. Scott.
	Mr. Scott. Thank you. Mr. Snow, welcome. It is a pleasure
	to see you here and I hope you bring some Virginia fiscal
	responsibility to this administration. Now I know this budget
	isn't your fault, but it is the President's budget that you are
	having to defend. One of the things you mentioned was growing
	our way out of it. And I just wanted to get the record
	straight. Is it not true that the OMB figures for real growth,
	inflation, unemployment and interest rates for the future are
	more favorable than CBO and the Blue Chip consensus? And if you
	don't know----
	Secretary Snow. I don't know, but I will check the record
	for you. I had thought that there were a number of private
	forecasters that had more robust growth and lower unemployment.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Scott's Question Regarding OMB Figures

	Of course, there are some slight differences among the different
	forecasts. The administration's budget forecast is finalized in late
	November to early December, in order to have time to develop budget
	numbers that correspond to the economic figures. CBO and Blue Chip
	figures were assembled a month or two later and therefore are based on
	somewhat more information. Even so, there is really remarkable
	similarity in the results.
	Over the 6 years of the forecast period, the administration
	estimated real GDP growth to average 3.3 percent, only a shade higher
	than the 3.2 percent contained in the CBO and Blue Chip forecasts.
	The 5.3 percent average unemployment rate forecast by the
	administration for the 6 years matches the Blue Chip. CBO estimates 5.5
	percent.
	The administration's view of inflation does show slower growth--an
	average of 1.6 percent over the 6-year forecast horizon for the GDP
	price index, compared to 2.0 percent in the other two forecasts. CPI
	growth is estimated at 2.2 percent by the administration and 2.4
	percent by the CBO and Blue Chip.
	Slower inflation means that the administration projects slower
	growth of nominal GDP than in the other two forecasts--a rate of 4.9
	percent compared to 5.2 percent (the sum of real GDP growth and growth
	of the GDP price index). This would work against the administration's
	budget forecasts since lower nominal GDP would result in lower tax
	receipts.
	Even after accounting for slower growth of indexed programs, which
	are based on the CPI, the budget impact narrows but the Blue Chip and
	CBO figures would still be slightly more favorable for budget
	estimates.
	Overall, while we can point to modest differences among the
	forecasts, it seems that all are very much within a narrow range.

	Mr. Scott. My reading of the President's budget shows it is
	more favorable in each of those categories. One of the things
	we mentioned as a recovery--unfortunately this budget doesn't
	have much help for the recovery. The things that will help the
	recovery are the short-term expenditures, especially the cheap
	ones like accelerated depreciation which, long term, don't
	adversely affect the budget very much but have a stimulative
	effect now or temporary increase in unemployment benefits that
	don't lock in payments but give you the benefit right now. The
	backloaded tax cuts will have nothing to do with stimulating
	the economy now.
	Can I get chart No. 5? You have seen this chart several
	times. It reflects the tough choices that were made in 1993.
	They were unpopular, but they were responsible. And as a direct
	result of the votes that Democrats cast in 1993 that put us on
	that trajectory, the Republicans campaigned against us and took
	50 seats. Now that green line right there is not an accident.
	It is in stark contrast to the projections in chart No. 3,
	which show that we are just spending Medicare, Medicaid--excuse
	me, Medicare, Social Security and then some as far as you can
	see. You are from Virginia, Mr. Snow, and you have seen the
	kind of work that Mark Warner has done and the responsible
	decisions he has made, and that is in stark contrast to what we
	heard yesterday when Mr. Daniels came and suggested that there
	is virtually no problem and he intends to make none of the
	tough choices.
	Could we have No. 14? Now, you indicated that this thing
	the deficit is manageable. I would like to ask you how we can
	manage--this stops at 2008. That is when the baby boomers start
	retiring in Social Security. With the substantial new taxes
	that have to be paid--not to pay down the debt but just to
	carry the debt. There is nothing in there for the war on Iraq.
	How are we going to be able to manage the Social Security and
	Medicare challenges of the baby boomers?
	Secretary Snow. Congressman, thank you. Again, you are
	raising the right questions and the important questions. The
	way we manage those obligations to the future is to have a well
	performing economy and to have a bigger economy and to get the
	growth rates in the economy that will give us the flexibility
	to respond to those needs. I am troubled, as you are, by the
	long-term financial status and sustainability of Social
	Security and Medicare. The issues are a little bit different,
	but demographics drive both and of course rising health care
	costs particularly drives----
	Mr. Scott. Do you acknowledge that as the thing gets worse,
	in terms of this budget it gets worse at a time when we need to
	be in a fiscal position to meet the biggest fiscal challenge
	America has ever seen, baby boomers retiring?
	Secretary Snow. We need to be benefited by the strongest
	possible economy as well.
	Mr. Scott. So do I understand you to say that we are going
	to hope we grow out of it without any contingency plan?
	Secretary Snow. No. I wouldn't hope; I would pass this
	legislation so we do.
	Mr. Scott. Well, we see which direction we are going in, as
	far as I can see.
	Let me ask you another question. Do you believe the AMT
	needs to be fixed if we go from 2 million to 39 million
	Americans paying the AMT?
	Secretary Snow. As I commented earlier in response to that
	question, it is an issue that clearly has to be addressed. I am
	not close enough to the facts yet to know how best to address
	it or what the time frame is.
	Mr. Scott. There are only a number of ways to fix it; that
	is, you can increase taxes, spending cuts, or increase debt.
	Secretary Snow. Or you can make it part of a broad-based
	tax reform proposal.
	Mr. Scott. Which would increase taxes or reduce spending or
	increase debt.
	Secretary Snow. Or grow the economy significantly faster
	than it would otherwise grow. I mean, I still think this code
	is a burden on the economy. I don't want to shrink from coming
	forward on this, on that proposition, and I think lower
	marginal tax rates make good economic sense.
	Mr. Scott. Thank you, Mr. Chairman. And I would just like
	to point out that this budget has very favorable growth already
	in it, and in spite of that we are seeing, the numbers go south
	at a rate that we haven't ever seen in the history of the
	United States.
	Secretary Snow. Congressman, the very able chief economist
	for the Department of the Treasury, Butch Clarida, the
	Assistant Secretary for Economic Policy, tells me that I was
	basically right in saying that the Blue Chip is more favorable
	than the Treasury's own estimates. And I will share that with
	you later.
	Chairman Nussle. Mr. Putnam.
	Mr. Putnam. Thank you, Mr. Chairman.
	Welcome, Mr. Secretary. We are delighted to have you here.
	In business, you never want to get in a fight with the
	railroad, but it must be quite a rude awakening on your second
	day on the job to be in this new position, because it is a
	little bit different than running a railroad, I am sure.
	Two years ago, as a freshman member of the committee, we
	opened up with the Treasury Secretary and had some really
	fascinating academic discussions about what to do with the
	surplus, all kinds of pontification over eliminating entire
	classes of debt instruments, and how the Government would
	actually deal with the cash that would be coming in. And
	certainly things have changed since then.
	As Mitch Daniels pointed out yesterday, even if we had
	never been attacked and incurred no costs of war or recovery
	from September 11, and no tax relief had become law, we still
	would be in deficit today as a consequence of the recession and
	the popped revenue bubble, as he put it.
	So I want to talk just a little bit about the dependence of
	the Federal Government on that revenue pyramid and where that
	revenue comes from. You have a high percentage of Americans who
	pay little or nothing in terms of Federal income taxes. For
	many of them, April 15 is a day when they become eligible to
	receive money rather than money is due. And for a fairly small
	percentage of Americans, the Federal Government depends a great
	deal on the revenues that they contribute to pay the bills.
	There are consequences to the structure, to that
	architecture of revenue. In the President's State of the Union
	speech, he mentioned that, as an example, that a family of four
	making $40,000, if his plan were passed, would go from paying
	somewhere around just under $1,200 a year to $45 a year.
	So my first question would be, what is the social
	consequence of having a large percentage of your population
	that pays nothing for the national defense, for an interstate
	highway system, for the level of health care, for the benefits
	of national parks, what is the social consequence of having a
	huge percentage of your population believe that those things
	don't cost anything or that they cost $45 a year?
	Secretary Snow. Again, a good question, probably one that
	is more philosophical than my practical nature allows me to
	give a good answer to. But I think there is something
	inherently troubling about the idea that people aren't
	connected to the larger purposes of the country through the tax
	system and don't take an interest, therefore, in a number of
	the issues that as citizens we would want to encourage people
	to take an interest in. For instance, the efficiency of their
	government, the tax policy itself, the fairness of the code.
	If you are not in the system, I think you are absolutely
	right, you take much less interest in the things that the
	system impacts and affects, and I think that is regrettable. If
	you asked me to design a code that was perfect, and I could do
	it and had all of you to vote for it, I would have a code that
	had fewer deductions, and more people part of it, and lower
	marginal tax rates.
	Now you will tell me how to get there, and I can't tell you
	that. But in principle, I agree with you 100 percent.
	Mr. Putnam. Well, the flip side of that, of course, is that
	a small percentage of Americans are responsible for a high
	percentage of the revenue that comes into the Government. That
	is the source of great debate, and rightfully so. It is a fair
	thing to argue about in this committee and in the Congress at
	large. The President has taken the position that for tax relief
	to be meaningful, those who pay taxes ought to receive it. But
	the larger issue is that a percentage of that volatility in
	Government revenue is based on the dependence on the revenue
	generated from a strong stock market which is inherently
	volatile.
	So if you would, please, comment--and I don't have the
	specific percentage of revenue that comes in as a result of
	capital gains and the dividends and things like that--but if
	you could share with us your thoughts on that and a better
	approach to make the revenue sources less volatile.
	Secretary Snow. You know, I don't have those numbers
	offhand, but I do remember a discussion with Mitch Daniels,
	saying that he was absolutely astonished by the importance of
	that top income tax category to fund the total Federal debt.
	And I forget the number, but the top 1 percent is something
	like 27 or 28 percent, and the top 5 percent is something like
	47 or 50 percent. I mean, it is a small--a relatively small
	number of the taxpayers are paying a large portion of the total
	Federal Government revenue bill. I think everybody who follows
	the Federal budget was astonished to see those revenues grow as
	they did with the ebullient stock market we had in 1997 on, and
	was equally astonished by the collapse in capital gains and
	high-end options and performance shares and those things that
	created so much revenue.
	Which brings us back to the point we began with, with the
	chairman, about volatility of the Federal revenue depended on
	things like the stock market and bonuses.
	But in talking about an ideal tax system, I don't think I
	am going to get a chance to identify or produce an ideal tax
	system. I think we have got to work with the tax system we have
	got for now, and make the marginal improvements we can. And the
	elements that the President has proposed I think are clearly
	not just minor adjustments, but very fundamental improvements
	in the code itself.
	Mr. Putnam. Well, I hope you do have that opportunity.
	Thank you for being here.
	Chairman Nussle. Mrs. Capps.
	Mrs. Capps. Thank you, Mr. Chairman.
	And welcome, Mr. Secretary. I want to start with some
	comments that were made by my colleague, Mr. Baird, yesterday--
	they were provocative--when he was speaking with Mr. Daniels.
	He brought to our attention the size of the real budget deficit
	is actually $480 billion in fiscal year 2004, if we exclude the
	Social Security surplus from our calculations. And that is the
	real deficit that we should be talking about. Social Security
	surplus as we describe it, that so-called lockbox, ought to be
	off limits. There are claims on that money that we all agree
	are going to need to be met in the near future.
	Second, Mr. Baird noted that we could not eliminate this
	$480 billion deficit even if we eliminate every nondefense
	discretionary spending item in the budget. Not cut, but
	actually eliminate.
	Let us set aside that we have been discussing the need for
	short-term deficits in the current situation which are
	unavoidable because of the downturns in the revenues to the
	Government from both the sluggish economy and the President's
	tax cuts, which I actually voted for, combined with the needs
	in the war on terrorism both here and abroad. They have put a
	terrific strain on our budget. And these deficits, which Mr.
	Daniels has described as nothing to hyperventilate about, are
	probably that, if we consider just the short term.
	But I believe we should all be very worried about running
	these kinds of deficits year-after-year. And I would like you
	to address this. But I want you to do so, if you would, keeping
	in mind that the growth projections from the President already
	assume that the economy is going to grow 3.4 percent for the
	next four quarters, and then more than 3 percent annually for
	the next year. How can we reduce the deficits, already assuming
	this kind of growth?
	Secretary Snow. Well, let me start by addressing the
	initial question; and that is, how best to look at the deficit.
	Is it the unified deficit, or is it the off-balance budget, the
	debt owed the public budget?
	I think it is better in terms of gauging the economic
	impacts of the economy to look at it on a unified basis,
	because it is the unified basis that creates the true picture
	of what is happening in financial markets, how much money needs
	to be actually borrowed, or how much of a surplus you actually
	have. So the financial markets will look at it in a unified
	basis, taking into account the funds from the entitlement
	programs as well.
	But I agree with your basic point. We can't be content to
	have deficits as far as the eye can see, and particularly
	deficits that rise in future years. So I always come back to
	the point that deficits are unwelcome. They are not a happy
	thing. In this case, they happen to be a necessary thing for
	some period of time. But there is, I think, OMB Director
	Daniels probably yesterday emphasized his commitment to keeping
	us on a course of fiscal responsibility. The President
	certainly is committed to a course of fiscal responsibility.
	The deficits are on a unified basis, as I said, and showed in
	one of those charts we put up, relatively modest in terms of
	the past experiences and the debt is--this is the deficit
	itself--relatively modest, relative to, and manageable. When I
	talk about manageable, I mean in this level.
	Mrs. Capps. But could I follow up by saying, then, because
	I want to ask you another topic real briefly--I am assuming
	then from your answer that unless we include the Social
	Security Trust Fund and unless we grow the economy by more than
	3 percent, that we are not going to be able to do this.
	But I actually would like to ask you a question that I
	asked Mr. Daniels yesterday; because now, as Treasury
	Secretary, you are also going to be or are a Medicare trustee.
	And I am concerned about the question that most of our
	constituents are asking about, which is how to reform Medicare
	in a way that will allow include coverage for their high-cost
	medications.
	The President's proposal, putting at the core
	Medicare+Choice or a privatized insurance model, which I
	haven't seen the insurance companies really jumping up and down
	about, but would also be paid for with $400 billion over the
	next 10 years. And I am wondering how you think we can manage
	doing this since these companies in my rural district have been
	raising their premiums and lowering their benefits, and then
	leaving because they have made the case that they can't afford
	to be there. They are going to be coming to ask us for more
	money if they are in fact going to be the centerpiece of this
	Medicare program.
	Secretary Snow. Medicare needs to be reformed.
	Mrs. Capps. Yes.
	Secretary Snow. But it needs to be reformed with a
	prescription drug component. And it seems to me every Medicare
	enrollee should have outpatient prescription drugs. There would
	probably be broad-based agreement on that. The President's
	program would use the marketplace, competitive providers under
	a structured system, so that there would be broad coverage, and
	avoid this adverse selection sort of set of issues that runs
	through insurance.
	And Tommy Thompson could give you a lot more detail on
	this, but I understand there is a low-income assistance
	component to the President's package where they would receive
	additional assistance to acquire prescription drugs.
	But the larger issue, though, is how to make the system
	more efficient, how to create the right incentives inside the
	system. My predecessor, Paul O'Neill, spoke eloquently and at
	length about his efforts in Pittsburgh to go in and apply
	metrics to health care, to identify--to bring business
	practices in the Pittsburgh community to the health care
	providers, and the astonishing reduction in costs in health
	care delivery systems that came about over the course of a
	fairly brief period as these management practices, re-
	engineering metrics, and so on were applied.
	I think we can get a much more efficient health care system
	in America. And, if we don't, we are going to have health care
	rising from what is it today, 14 percent, in a few years to be
	17 percent, and if we don't do it, thereafter 20 percent, an
	unsustainable growth in this component of the economy.
	So I guess I am agreeing with you. This is a subject that
	needs a lot of work.
	Mrs. Capps. Thank you.
	Chairman Nussle. Mr. Wicker.
	Mr. Wicker. Thank you, Mr. Chairman.
	Mr. Secretary, thank you so much for your testimony today.
	And I think all members of the committee will agree that the
	President made the right choice, and we think the Treasury is
	in good hands. And thank you for the give-and-take that we have
	had today. Certainly there are differences in philosophy
	between the two sides of this room. I think it is certainly
	fair to say we like tax cuts a little more over on this side
	than maybe my friends on the other side of the aisle. And it is
	fine for us to have that debate.
	I do think it is important, however, for us to make sure
	that the facts that are stated in this room and on the floor of
	the House of Representatives are correct, and so I am concerned
	at some of the disparaging remarks that I hear about the Reagan
	administration, and also some of the perhaps revisionist
	history that I hear regarding the early days of President
	Clinton's administration with regard to budgetary policies and
	recommendations. And I will agree with my friend from
	Pennsylvania, Mr. Toomey. I will take 17 years of sustained
	economic growth any time, the greatest standard of living that
	any country in the world has ever seen. I applaud the Reagan
	administration for ushering that in. And I was here as a staff
	member, Mr. Secretary, when Democrats came across the aisle in
	a Democrat-controlled House of Representatives and helped
	Republicans enact those Reagan tax cuts of 1981.
	But the thing that concerns me is when I hear that those
	tax cuts led to record deficits and the run-up in the national
	debt. So I asked someone to go get me the historical tables,
	and I had a staff member bring that over for me. And I see on
	page 29 of the historical tables provided by this committee,
	that in 1982, revenues increased to the Federal Government.
	Now, I will tell the truth, they decreased in 1983. But then
	after that, in spite of these draconian tax cuts, they went up
	in 1984, in 1985, 1986, 1987, 1988, and 1989 to the point, Mr.
	Secretary, where revenues to the Federal Government increased
	during the Reagan administration by some 60 percent in the face
	of these tax cuts.
	I would suggest to you, and I will ask you to comment in a
	moment after I make my second point, that maybe there was
	another reason for the deficits rather than lack of revenue.
	And then some of my friends from the other side of the
	aisle, Mr. Secretary, mentioned the Clinton surpluses. Of
	course, we on this side of the aisle like to think that the
	Republican majority that was elected in 1994 had a little
	something to do with the surpluses, but I think the truth
	probably is that the economy had a lot more to do with it than
	anything that we did. But the statement was made that President
	Clinton in the early 1990s had a plan and a process for getting
	us to a balanced budget, so I sent out for a copy of President
	Clinton's February 1995 budget proposal. And I see that during
	my second month in office here as a member of the new
	Republican majority, President Clinton came before Congress and
	proposed annual deficits of $192 billion, $196 billion, $213
	billion, $196 billion, $197 billion; and in 2000, $194 billion
	in deficits were proposed by President Clinton in 1995 before
	this very committee.
	[The information referred to follows:]
	<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

	Now, we felt that we could take a different approach and a
	different process when we brought in the majority, and so we
	asked for a tax cut. And it took us a couple years to get it,
	but in 1997, with the help of some Democrats, we enacted a tax
	cut. And, you know, a couple of years after that we had
	achieved a balanced budget in spite of the fact that we had let
	the American people have a little more of their money back in
	the form of tax reductions.
	So I would ask you this two-pronged question, Mr.
	Secretary: In light of the fact that revenues increased some 60
	percent during the Reagan administration and we still ran up
	this huge debt, don't you think it was possibly excess
	Government spending and particularly entitlement spending that
	caused that deficit? And don't you think that perhaps the
	economic growth caused us to be able to do a little better than
	President Clinton proposed to this very Congress during the
	first months of my time here on the Hill?
	Secretary Snow. Congressman, I--what do they say in the
	courtroom--I associate myself with your comments. I think the
	obvious answer to your question is that expenditures rose at a
	rate that exceeded that 60-percent increase in revenues, and
	that was a mighty large increase in the revenues.
	Now, there was a peace dividend that came out of that
	eventually that affected the budgets of the 1990s in a very
	important way, and I don't think we should forget that the
	investment in the defense under President Reagan and Bush
	produced a much different world and a much better world, and
	ended the Soviet Union as we knew it and gave us this large
	peace dividend.
	But the numbers are clear on that. If expenditures had been
	under tighter control, we would have had huge surpluses. And
	the numbers you cite from the Clinton budgets of the early
	1990s was a reason that a number of us got concerned about the
	need for the balanced budget approach that certainly became
	very much part of the Contract With America, as I recall.
	Mr. Wicker. Well, I know that my time has largely expired,
	but I would just encourage the Secretary----
	Chairman Nussle. It has.
	Mr. Thompson.
	Mr. Thompson. Thank you, Mr. Chairman.
	Mr. Secretary, thank you very much for being here. Could I
	get chart No. 14, please? And while that is coming up, I just
	want to say I was glad to hear you, in your response to Mrs.
	Capps, say that it was unacceptable to have debts as far as the
	eye can see. Because when you were making your presentation,
	you were asked are deficits--is debt understandable, and you
	said yes. My note was, but is it understandable to run them for
	as far into the future as these deficits are running? And as a
	deficit hawk, I believe that is totally unacceptable. So I am
	glad that you clarified that.
	Secretary Snow. What I really said is that as long as they
	are a declining share, they don't trouble me. I mean, I hope
	they recede just as soon as possible, and I share that with
	you. But, you know, in running, in serving on boards of major
	companies and so on, debt isn't inherently a bad thing. We take
	on debt at CSX because we use the debt to then get high returns
	on investments. So debt isn't inherently bad as long as the
	debt is used to accomplish something worthwhile.
	Mr. Thompson. Well, at this point I believe it is really
	out of control, and we are paying for that and we are going to
	pay for that into the future years.
	On the first page of your statement, you talked about the
	typical family of four with two wage earners making $39,000 who
	would enjoy an $1,100 tax break. And on chart No. 14, the debt
	tax chart, it shows the tax that these average family of four
	folks are having to pay. Is there any way that we can calculate
	into that the offset? Because it seems to me if you juxtapose
	your example with this chart, there is actually more money
	being paid, at least by some taxpayers, than they are actually
	getting back. And you can either answer that now or get that
	information back to me.
	Secretary Snow. I would like to think about that. The
	notion of a debt tax is one I am still trying to get my mind
	around.
	Mr. Thompson. Well, that is what we are paying as a result
	of the interest we pay on our national debt. I think it is $1
	billion a day that our taxpayers are paying that go to this
	interest.
	Secretary Snow. But fortunately, it is--I think it is only
	8 percent now of the total expense to the Government because--
	--
	Mr. Thompson. What goes down goes up as well.
	Secretary Snow [continuing]. Interest rates are at historic
	lows.
	Mr. Thompson. The other issue that I wanted to touch on was
	the idea of the dividend tax repeal. And you explained I think
	at length why you thought that was good. But I have to go back
	to California this weekend, as everyone here has to go back to
	their home State. And California is going to experience about a
	$1.5 billion hit if in fact the dividend tax is repealed. If
	you add to that what the State treasurer predicts the cost to
	the State will be in regard to multiple bond funding over the
	next 10 years, it is about $18 billion and change. And this is
	going to be not only a direct hit to the State of California,
	but this is going to make it more difficult to fund some of the
	exact programs that you were talking about that will help bring
	us out of these bad economical times. It is going to hurt in
	both State and local government funding, everything from
	schools to firehouses to low-income housing.
	And that is a rough one to square, I don't care which State
	you come from. But when you come from one as big as California,
	it is real tough. And when you come from a State that if you
	look at our GNP, our ranking amongst the industrial States, we
	are the fifth largest State. So if the United States is going
	to recover from this economic downturn, California is going to
	be a big part of that, and this really puts them back.
	And the other thing I want to say about dividend tax is, I
	understand that there is about 36 percent of the seniors that
	receive income from dividends, 64 percent don't. So it also
	becomes a hard one to square when you are talking to that 64
	percent who don't get a dividend income, and try to explain to
	them why we should risk their economic security, especially in
	regard to Social Security and Medicare, to provide a tax cut to
	those 36 percent that do derive their income that way.
	And it just seems to me that we are--and it is usually us
	on this side of the aisle that we are accused by our friends on
	the other side of the aisle for setting up these debates
	regarding class warfare. But I think these are two examples of
	class warfare, one in regard to the underfunding or the
	disparity that is going to be created for funding for low-
	income housing, schools, and things of that nature, and the
	other in regard to people who derive their money from dividends
	vis-a-vis those who derive their money from an hourly job or a
	salaried job.
	Secretary Snow. Let me respond briefly, and then maybe at
	some point come back and talk to you at some length on this.
	Again, Dr. Clarida has done some studies on this question.
	I don't know that he has done California explicitly, but he may
	well have, or his people may well have. But the conclusion of
	the analysis of the net effects of the dividend proposal and
	the rest of the tax plan on the State budgets was that it had a
	positive influence on State budgets, not a negative influence.
	And you ask, well, how can that----
	Mr. Thompson. Well, if you would, though. You are assuming
	that the States would pick that up somewhere else, and it
	becomes an administrative nightmare that is unaffordable if
	they try and create bureaucracies to track that income.
	Secretary Snow. Well, I am told that there is a relatively
	simple adjustment that Treasury can do for the States to put
	that line on the State forms that can be accommodated if the
	States choose to decouple, I think is the phrase.
	But on your question of the municipal bonds and other such
	instruments that States and municipalities use, I don't think
	the dividend proposal will have any major detrimental effect,
	because, as I think about those instruments, they are in
	different markets. I mean, people go into those municipal bonds
	because they want tax-free results, because they want
	stability, they want fixed incomes. There is a profile of the
	investor in those that is different than the profile of the
	investor in equities. And think of it this way. If you are
	looking for a cautious and safe haven, 1 day's loss of market
	equity values will wipe out all the gains of the dividend
	exclusions.
	So I mean, I hear you, and there is maybe some byplay
	there, but I don't think it would be dramatic. And then in
	terms of seniors, I think it is something like half of all the
	seniors who file tax returns get dividends of some kind. And I
	think that is an important fact to keep in mind as well.
	Mr. Thompson. Thank you. And I would like to see your
	information on the municipal bonds, because it is contrary to
	every economic analysis that I have had.
	Secretary Snow. I will follow up with you on that.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Thompson's Question Regarding Municipal
	Bonds

	Two concerns have been expressed about the possible effects on the
	market for tax-exempt bonds of the President's proposal for eliminating
	the double tax on corporate earnings. Both relate to the demand on the
	part of investors to hold and acquire those obligations. The first
	relates to demand on the part of individuals, the second to demand by
	corporations. The concerns are that reduction in demand will translate
	into higher interest rates having to be paid by State and local
	governments.
	The Federal Reserve System's Flow-of-Funds data for the end of 2002
	show that individuals, either directly or indirectly through mutual
	funds and bank trust departments, held about 77 percent of the $1.8
	trillion of outstanding tax-exempt bonds. Over the last two decades the
	portion held by individuals has risen while the volume outstanding has
	increased substantially. Individuals have increased their holdings
	because yields have been relatively high in comparison to the after-tax
	yields on taxable Federal and corporate bonds and defaults rare. They
	have done so even in years when the stock market was booming. Ending
	the double tax on corporate earnings will make ownership of corporate
	stock more attractive and corporate issuance of debt less attractive.
	In response we expect individuals to increase their holdings of
	equities and reduce their holdings of corporate debt. Because the
	dividend yield on equities will continue to be well below tax-exempt
	bond yields we expect individuals to continue to be attracted to the
	yield and safety provided by holding tax-exempt bonds. Any diminution
	in individual demand is likely to be so minor that it would be
	extremely difficult to detect given the normal fluctuation in interest
	rates generally.
	Three types of corporations hold significant amounts of tax-exempt
	bonds. At the end of 2002, property and casualty companies held about
	10 percent of the total, commercial banks held about 7 percent and
	other corporations about 6 percent. Corporations find investment in
	tax-exempt bonds attractive in part because the spread between tax-
	exempt yields and yields on comparable taxable bonds has in recent
	years been significantly less than the maximum corporate tax rate. Some
	corporations, such as banks holding qualified small issuer bonds or
	corporations having less than 2 percent of their assets invested in
	tax-exempt bonds, additionally benefit from using interest payments
	associated with carrying tax-exempt bonds to shelter other income from
	tax. Moreover, banks are attracted to tax-exempt bonds to meet their
	obligations under the Community Reinvestment Act. Under current law
	relatively small spreads between taxable and tax-exempt rates and, in
	applicable cases, the ability to deduct cost-of-carry against other
	income raises the after-tax capital gains to shareholders from
	corporate investments in tax-exempt bonds well above returns on
	comparable taxable investments. Under the President's proposal after-
	tax gains to shareholders will still be higher for corporate
	investments in tax-exempts, given reasonable assumptions about the
	spread between taxable and tax-exempt yields, corporate dividend payout
	rates and effective capital gains tax rates. As a result, Treasury
	analysts conclude that no significant reduction in corporate demand for
	tax-exempt bonds is likely to occur with the enactment of the
	President's proposal.

	[The following was prepared by staff in Treasury's Office
	of Economic Policy:]

	The Bush Proposal and Municipal Bond Yields (January 27, 2003)

	Some analysts suggest the proposal to eliminate the double taxation
	of corporate profits will increase municipal bond yields as investors
	shift their portfolios toward dividend-yielding stocks. However,
	research papers from several financial institutions suggest a number
	factors will prevent a significant effect on the municipal market.
	<bullet> Municipal investors have a low risk tolerance and want to
	preserve capital. According to Lehman Brothers, municipals have had an
	annual default rate of 0.004 percent and since 1970 there has never
	been a default on a general obligation water, sewer, or public
	university bond rated by Moody's. Eliminating the double taxation of
	corporate profits will not significantly reduce the difference in risk
	between stocks and municipals.
	<bullet> The gain in the after-tax dividend yield on stocks due to
	the Bush proposal could be wiped out in 1 day due to a change in the
	price of stocks. The standard deviation of monthly returns is 1.1
	percent for municipals versus 5.4 percent for equities, according to
	Lehman Brothers.
	<bullet> Even if tax free, the dividend yield on most stocks is
	unimpressive versus long-term municipals. At present, the yield on the
	S&P 500 is about 1.75 percent versus almost 5 percent on municipals.
	<bullet> Municipals are already relatively cheap. Long-term
	municipals are offering yields very close to long-term Treasury bonds.
	Given the very low default rate on municipals, it is hard to envision
	municipals yielding more than Treasury bonds, given that the municipal
	yield is tax free at the Federal level.
	<bullet> Municipals offer investors a pre-determined dependable
	schedule of payments and a final maturity date. These cash flows allow
	investors (such as financial institutions) to match the timing and
	amount of cash flows on assets with the negative cash flows on
	liabilities. Stocks offer no guarantees as to dividend payments or the
	return of principal.
	<bullet> Investors purchase municipals for diversification
	purposes.
	<bullet> Investors are much more likely to shift out of corporate
	bonds than municipals. Compared to municipals, corporate bonds are much
	closer substitutes with equities and have similar underlying credit
	risk. Municipals are about ten times less likely to default than
	similarly rated corporates, according to UBS Paine Webber.
	<bullet> If investors want to shift out of municipals preferred
	securities are a slightly better substitute than common stock. However,
	according to Merrill Lynch, 72 percent of preferred securities pay
	interest, not dividends. Another 13 percent of preferred is issued by
	REITs and foreign issuers. So only 15 percent of preferred securities
	would get the benefit of the Bush proposal. That 15 percent consists of
	about $24 billion in shares outstanding versus a $1.8 trillion
	municipal market.

	Chairman Nussle. Mr. Bonner.
	Mr. Bonner. Mr. Chairman, thank you very much. I am sorry
	that my colleague from Alexandria, VA left because I would have
	liked to have said this in his presence. But since he did, I am
	going to put it on the record regardless.
	Yesterday with Mr. Daniels and again today with the
	Secretary, it is troubling to hear comments made about ``your''
	President. You know, I didn't vote for President Clinton. My
	colleague from Illinois served with President Clinton. But he
	was my President. And President Bush is my President. And I
	think it is important, we are in this time of war where the war
	may expand, and in this time of national tragedy following the
	Columbia tragedy, that this is not ``your'' President and
	``your'' President's budget. This is ``our'' President. And we
	can have a friendly debate about how the budget progresses, but
	I personally would like and hope that as future guests come
	before this committee, that we can refrain from making these
	characterizations that are derogatory toward the President of
	the United States.
	Mr. Spratt. Would the gentleman yield so that I can
	respond?
	Mr. Bonner. Yes, sir.
	Mr. Spratt. I think the gentleman makes a point. And I want
	to say that for a long time we have made it clear that
	President Bush is our President. And in particular, with
	respect to the war, we have said if a war comes, then we will
	be unstinting about the cost of it, because we want to see our
	forces prevail. I had an op-ed piece in the Washington Post
	yesterday which came down on this budget and the President, but
	it ended in the last paragraph by asking him for a bipartisan
	summit. And so I think that indicates a real spirit between us
	and them. He is our President. We want to see him succeed
	economically, geopolitically, and in every other way.
	Mr. Bonner. Mr. Secretary, you have only had a day on the
	job, and some of us on this end of the table have had about
	2\1/2\ weeks so we have got a jump start on you.
	I would like to make sure that I understand from your
	perspective--none of us have a crystal ball and none of us can
	predict with certainty what is going to happen in the
	outyears--but what would the effect be if we did nothing?
	Secretary Snow. Well, if we did nothing in terms of
	boosting the economy, I think we would have a much less certain
	recovery. There is the Iraq war hanging over us, there is the
	threat of higher oil prices. There is this lack of confidence I
	think that permeates the world we live in today, and is seen
	most dramatically in the performance of equity markets and in
	investment in the industrial sector, which is waiting to see
	some reason why they should begin investing. For all those
	reasons, I think to fail to act would be a mistake. And the
	cost of failing to act is those additional jobs, those 2
	million additional jobs that would be created, that percent
	plus of additional GDP that we would have, the better lives,
	the better lives that people would have in a more prosperous
	economy. That is a high price to be paid for not embracing the
	better economic policies that take us to more prosperous
	country.
	Mr. Bonner. Prior to your coming to this job, you certainly
	had a distinguished career in the private sector. One of my
	concerns is if we don't do something to make permanent the tax
	cuts of 2001, that we can't give working families or corporate
	America any certainty about what the future holds. What would
	the effect be of doing nothing to make permanent the tax cuts
	of 2001? Putting yourself back in your former job, how can you
	plan past 2010 if there are some set provisions on many of
	these important tax reductions?
	Secretary Snow. Well, one thing it would do would be to be
	approximately a 50-percent tax increase on the lowest taxpaying
	Americans. I think that is unacceptable.
	Mr. Bonner. Fifty-percent tax increase on the lowest----
	Secretary Snow. Taxpaying Americans.
	Mr. Bonner [continuing]. Taxpaying Americans.
	Finally, I would like to just associate myself with the
	point that the gentleman from Mississippi was making. The Wall
	Street Journal yesterday had an interesting and excellent op-ed
	piece that I would commend to all of the members of this
	committee. And if you have not had a chance, Mr. Secretary, to
	read it, I would suggest that you do as well: Growth in
	discretionary spending over the last 5 years, 45 percent; in
	the last year alone, 9 percent. And we can blame tax cuts, we
	can blame a number of different factors. And I wasn't a Member
	of Congress during the previous 5 years, but does not that
	increase shock the conscience?
	Secretary Snow. I saw Mitch Daniels' numbers that I think
	he maybe displayed here yesterday that lay out that scenario.
	We have abundantly funded a lot of discretionary programs over
	the last 5 or 6 years. I think that is absolutely true. And I
	don't think we can afford to continue to do that.
	Mr. Bonner. Finally as I thank you again for coming, let me
	share with you a number. I spoke to a group of Federal
	employees on Friday in my district. And of course, they have
	different interests than some of the interests we might have.
	But I found it interesting in doing some research, during the
	first year of our Federal Government, your department, the
	Department of Treasury, had 39 employees in 1789. I would hope
	that we could, as we move forward, find ways to move back
	toward a smaller government that is less obtrusive to the
	American people. Thank you again for your time.
	Secretary Snow. You are suggesting that Alexander Hamilton
	had higher productivity than I do.
	Mr. Emanuel. Don't take it personally.
	Chairman Nussle. Mr. Baird.
	Mr. Baird. Thank you, Mr. Chairman.
	I wonder if I could have minority staff put slide No. 16
	up, and the majority staff post the slide reflecting deficits
	percent of GDP.
	Mr. Secretary, in--could you post that slide reflecting
	deficits and percent of GDP?
	Secretary Snow. Our slide?
	Mr. Baird. Your poster. You have referred to it throughout
	the day.
	You have made the point repeatedly, Mr. Secretary, that we
	must consider deficits as a percentage of GDP; yet in 1995,
	when you were talking about the benefits of a reduction in
	deficit, at that point the percentage of GDP--or the deficit as
	a percentage of GDP is approximately where it is now, according
	to the chart that I have seen.
	Now, if in 1995 you projected that a 2-percent--or that a
	reduction in deficits could lead to as much as a 2-percent--and
	that is slide No. 16--could lead to as much as a 2-percent
	reduction in interest rates, if I am a family with a $200,000
	home and my interest rates are reduced by 2 percent, I save
	about $4,000.
	You have talked today about the benefits of a $1,000 tax
	return for a family of four. It seems to me if my interest
	rates, if I could cut interest rates, I would be better off.
	So deficits are real and they do have consequences. And
	while it may be important to interpret deficits in the light of
	percent of GDP, your comments in 1995 suggesting deficits
	needed to be reduced are almost precisely where the deficit was
	today.
	Could you comment on that, please?
	Secretary Snow. Sure, I would be delighted to.
	In 1995, the budget of the United States was projected to
	be in a sizeable deficit in the years going forward. That was
	the $200 billion-plus projections that were in the budget of
	the United States.
	Mr. Baird. Is that not where we are today, sir?
	Secretary Snow. Yes, but with an economy that is 40
	percent, 50-percent bigger.
	Mr. Baird. But the fact that we are talking relative as a
	percent of GDP standardizes that out, Does it not?
	Secretary Snow. Well, you are looking here at a set of
	numbers toward the end of the 1990s that reflected the totally
	unexpected growth of Government revenues from the buoyant stock
	market. In 1995, when I got as concerned as I did--and it
	actually preceded that, Congressman. It preceded it in the
	early 1990s--in the late 1980s, late 1980s, early 1990s. When I
	got concerned about this, I was looking at projections of the
	United States Government for annualized deficits that were up
	in the 4 and 5 percent range, not the 2 percent range. So I was
	talking about projections that we were all talking about at
	that time, and that were alarming not just to me but to many on
	both sides of the aisle.
	Mr. Baird. So you were referring at the time to
	projections?
	Secretary Snow. Sure.
	Mr. Baird. And yet you didn't say that in the comment. I am
	not trying to hold you. But the fact was, you were saying if we
	could lower it by 2 percent from where it is now. Your
	statement in 1995, sir, didn't say if we could lower it from
	the projected rate; it referred to where we were at in 1995.
	And I would assert that we are about there now. And so deficits
	do have a cost.
	Let me ask you a second question, if I may. The gentleman
	here suggested you should lower the size of your agency. I have
	met with some of your agents recently, and they tell me that
	your agency is a toothless tiger; that when they go on
	enforcement efforts, people laugh at them and assert that if
	you try to make me pay my taxes, I will file complaints against
	you.
	Now, we all respect the fundamental rights of the American
	people to be treated fairly by the Department of Treasury, the
	IRS, et cetera. But what do you think we might be able to do in
	terms of generating additional revenue if those people who are
	laughing at your inspectors right now had some respect for them
	and there were some teeth in that?
	Secretary Snow. Well, I think there is a significant
	augmentation of the Treasury budget to strengthen the
	enforcement hand of the Treasury. I think it is $100 million,
	focused on the higher-end income people, and other enforcement
	augmentations as well.
	Mr. Baird. I would applaud that. I have some concerns,
	however, that apparently, at least as I read the budget
	proposal, part of that will be privatized. And I have some
	concerns about the American people having what may well be
	hired guns trying to collect their taxes. I can tell you that
	in the realm of Medicare fraud enforcement, this has been an
	unabashed disaster, and you have got hired guns out treating
	people very shabbily. And we can say all we want, people love
	to criticize Federal employees, but I have seen no great
	evidence that a hired gun is going to treat a private citizen
	with greater respect than a Federal employee who at least is
	answerable to an elected Representative who they elected. So I
	just want to voice my concern. Thank you for your comments.
	Chairman Nussle. Mr. Franks. Mr. Garrett.
	Mr. Garrett. Thank you. And I appreciate your being here
	with us and suffering through all this endless questioning.
	Secretary Snow. Well, it is a good education for a new
	Secretary.
	Mr. Garrett. And it is a good education for a new Member as
	well. And my only regret is I was not here when Mr. Putnam was
	here 2 years as a freshman, when the debate was how do we pay
	off some of these instruments.
	I am inclined to take the view that you held more back in
	1995 than perhaps you hold today as far as the importance of
	attacking the deficit problem. I agree with my chairman, I
	guess his rhetorical question that he made at the outset. He
	said, well, if we do nothing, we know where we are going to
	need to go; so, should we do nothing?
	And the answer, I agree with him is, no, we have to take
	this action. And I agree with the line of reasoning that you
	and the President have with regard to the tax cut, and I am
	completely behind the notion that the way to do this is to grow
	the economy and to grow revenue, and that will be the long-term
	solution to the problem.
	But getting to the issue of the deficit today, you made the
	comment that we have to be concerned about deficit spending.
	But one of the phrases you used was ``except when there are
	critical needs to be addressed,'' and I think everyone on both
	sides of the aisle will agree that we are in a period of time
	when there are certainly critical needs to be addressed. But as
	you said that, I was thinking that when is there a time in this
	Nation when we would not be sitting at these tables and say
	that there are not critical needs to be addressed? We had 40
	years of the cold war, and I am sure the people that testified
	then would say there was a rationale for deficit spending, and
	there was a Great Society and there was certainly a need for
	moving in deficit spending in those times. I would hazard a
	guess that any one of us could come up with a program and say
	that this program that we sponsor for our district or the
	Nation is a critical need, and we could get over that hurdle of
	saying, well, this is the one that we have to address.
	The critical need that we are dealing with right now is the
	terrorism aspect, and I think our President is right when he
	came out right after 9/11 and said, this is not something that
	is going away in a month or 6 months from now; this is a long-
	term problem.
	So how do we--can you just for a moment address that issue
	of saying when we don't have that?
	Secretary Snow. What--the juxtaposition of critical needs
	in my opening comment was homeland security, the war or
	terrorism, and creating good jobs for Americans who are
	struggling. Those were the critical needs I referenced.
	Mr. Garrett. And I agree with them. But I just think that
	going forward we are always going to have those critical needs.
	And how do we put them aside to say we want to move toward what
	Mr. Baird and others were saying, and along the line more in
	keeping with a balanced budget? I think, I hope, in the future
	that this committee is going to be grappling with the bigger
	rules that we are going to be discussing, that you were
	mentioning at the outset with regard to the framework and the
	rules, that Mr. Spratt and others were talking about as far as
	the framework that we deal with in budgets in the future. And
	you have mentioned the PAYGO rule and how that worked.
	And I guess my questions go along the line of this. I think
	I agree with, although I have to think about this a little bit
	more, your comment with regard to the PAYGO rule not applying
	to tax cuts. And I think that is right, but I have to give that
	more consideration. But you also made the comment that it
	should not apply to mandatory expenditures. And I will let you
	respond to this. My thought there is that if we are clever
	enough, any one of our absolutely critical needs we have in our
	districts, I think we are probably clever enough that if that
	was the rule that we had to live with, we could try to turn it
	into a mandatory expenditure so we could get beyond the rule.
	And I think your second comment along that line was if
	there are certain sorts of programs such as the Medicare
	program--if there are certain sorts of programs such as the
	Medicare reform, which we all agree on that we can save
	spending, then perhaps they should be able to get around rules
	such as that PAYGO rule. I would hazard the guess also that
	just about any spending initiatives that we have here on either
	side of the aisle, that we will always say that if we just
	spend more money on education or transportation or
	infrastructure, that we will posit the truth that it is going
	to actually save spending in the long term.
	So if we move all those things off the page, what is left
	even in discretionary spending that is still within the rules?
	Secretary Snow. Well, if you are suggesting that the game
	can get rigged, in which everything is off the table, I would
	agree with you. All games can get rigged in ways that are
	destructive of the fundamental game. But on the larger set of
	questions you are raising here, how to frame this whole set of
	issues, I would have to defer I think to Mitch Daniels and
	people who know a lot more about this subject than I do.
	Mr. Garrett. OK. Thank you very much.
	Chairman Nussle. Mr. Cooper.
	Mr. Cooper. Thank you, Mr. Chairman.
	Mr. Secretary, I have two questions, one macro, one micro.
	You are new on the job; you have to sell a budget that you
	didn't prepare. But I would urge you to read page 315 or 318 of
	this very thick book called Analytical Perspectives, because I
	am deeply worried that you have been saddled with an
	unconstitutional recommendation. And I know that you took the
	oath of office seriously to support and defend the
	Constitution. But when I read the bottom of that page, quote,
	``Under the President's proposal, if an appropriations bill is
	not signed by October 1 of the new fiscal year, funding would
	automatically be provided at the lower of the President's
	budget or the prior year's level,'' that could give 40 U.S.
	Senators the ability to terminate or radically reduce and
	cripple almost any spending program in the country.
	The Constitution gives Congress the power to appropriate
	the dollars for spending. So I would urge you to look at this
	proposal very closely, one that you did not formulate. And
	overall, I would like to urge the American people to get on-
	line and read some of these documents, because for all of your
	smooth skill and calm demeanor, there is a lot in here such as
	this proposal that is indeed radical, perhaps unconstitutional,
	and perhaps irresponsible. And it is important that all
	Americans tune in to these important although arcane issues.
	So, could I have your pledge to take a serious look at this
	proposal?
	Secretary Snow. You can. I accept both the compliment and
	the challenge that you have given me.
	Mr. Cooper. Thank you. At the micro level, you have a very
	able staff. I am not like my colleague from Alabama who wants
	to deplete your staff. One of your ablest people is Pam Olson.
	She is now looking at an issue that has to do with municipal
	power company prepayment for electricity. A bond issue is
	currently being held up right now because she will allow
	prepayment for gas but not for electricity. We would like a
	fuel-neutral policy so that municipal power companies can help
	their people with electricity and gas, and be able to prepay
	for both. So I would just like to urge you and her to take a
	look at that micro issue, because it could help a lot of
	consumers all over America having a municipal power company.
	Thank you.
	Secretary Snow. I will agree to do that.
	Mr. Cooper. Thank you.
	Chairman Nussle. Mr. Hensarling.
	Mr. Hensarling. Thank you, Mr. Chairman.
	Mr. Secretary, let me echo the sentiments of one of my
	other colleagues, that it is indeed, as a freshman Congressman,
	great to meet somebody who has less seniority than me.
	This is my second hearing of the Budget Committee and
	obviously your first, but we have both had the benefit of
	seeing a dizzying array of charts put on the screen here for
	us. I would like to know if the assumptions underlying--if you
	have the same understanding that I do. No. 1, I believe that I
	am being asked to believe that with some amount of clarity and
	exactitude, that we can figure out 10 years in the future
	exactly what the economy is going to be doing. And, at the same
	time, I believe these charts that have a large amount of red
	ink on them are based on the so-called static scoring of the
	President's economic plan, and that I am being asked to believe
	that changes in tax rates have no impact on job creation or the
	economy.
	You saw the same charts that I did, Mr. Secretary. Is that
	your understanding as well?
	Secretary Snow. Yes, broadly. I would not put enormous
	confidence in 10-year estimates of budget numbers. This may be
	the best that can be done, but I would look at them with a
	great deal of caution, as you are suggesting.
	I do agree with you that I think they do not reflect, and I
	think Mr. Daniels was clear in saying this, that they do not
	reflect the full growth component that would be expected from
	the tax package, but they do reflect the full cost component.
	So I would certainly agree with all three of your points,
	actually.
	Mr. Hensarling. Mr. Secretary, even though the budget does
	not include the dynamic impact of the economic program,
	obviously you have seen a number of opinions expressed. What do
	you perceive is the consensus opinion of the economic impact of
	the President's economic program?
	Secretary Snow. Talking to colleagues in the business
	community, and the Business Roundtable put out an estimate. I
	have seen some others. I would say the official numbers of OMB
	probably are on the low side of the growth that will actually
	be achieved. And I think that is true of a variety of the
	private sector estimators.
	Mr. Hensarling. Mr. Secretary, of all the charts that I
	have seen posted today, I notice that there are two that are
	fairly noticeable by their absence. Today, I have not seen one
	chart that plots the growth of Government over the last 10
	years or projecting 10 years forward, even though we did hear
	earlier today that as recently as last year we had a 9-percent
	increase in discretionary spending.
	I am under the impression that over the last 10 years
	Government spending has grown at approximately 6 percent.
	Obviously, the economy has not kept pace with that. There has
	been some criticism from my colleagues on the other side of
	aisle that your economic projections are too rosy; that 3
	percent or 3.3 percent economic growth in the future is too
	rosy.
	So say, for example, hypothetically, if economic growth
	over the next 10 years was, say, 2\1/2\ percent, and say the
	Government continued to grow at the rate of 6 percent, given
	that today the tax burden on the average American family is 40
	percent--local, State, and Federal taxes--if these trends
	continue, do you have an opinion of what would happen to the
	tax burden on the American family?
	Secretary Snow. Well, I can't do all the math in my head,
	but I think the direction is pretty obvious. It would be a
	heavier burden. A heavier burden.
	Mr. Hensarling. Thank you.
	Chairman Nussle. Mr. Emanuel.
	Mr. Emanuel. Thank you, Mr. Chairman.
	This is our second hearing for some of our freshmen, and
	the second time that we have gone through lunch. And I wanted
	you to know I started this six-two and 250 pounds, and that is
	all I have got left. And that you kind of look around, and you
	begin to feel like you are in an Agatha Christy novel: And then
	there were none.
	Thank you very much, Mr. Secretary. Also I would like to
	repeat and echo my colleague: It is good to find somebody with
	less seniority than yourself.
	You know, I am going to take a faint attempt at
	bipartisanship and quote Ronald Reagan. ``Facts are stubborn
	things.'' The fact is, although a lot of people want to review
	the 1980s versus the 1990s and what led to economic growth, the
	fact is that in the 1990s we had a record period of job growth.
	Fact: We had a record reduction in the welfare roles.
	Fact is that we have also in the 1990s extended the trust
	fund for Medicare by 20 years. Fact, we had a drop in those who
	worked full-time and didn't have health insurance, down to 38
	million. And fact is we also had a drop in violent crime in
	this country and we did all that without tripling the Nation's
	debt. So although people can take rightful pride comparing the
	1980s and the 1990s as a period of economic growth and what
	happened, just a simple fact, and I would like to quote Ronald
	Reagan on that, ``facts are stubborn things and those are just
	facts.'' And that may be hard for some people to swallow, and I
	appreciate that, but that is what happened.
	And with that, I think it is worth noting since some people
	like to compare 17 years of Ronald Reagan's economic growth, we
	do think something happened in the 1990s that was certainly
	magical. There is no doubt that it started with the
	entrepreneurs and the middle class families around the country,
	and also with the decisions, whether people like it or not,
	because I don't want to just do nothing about welfare reform.
	We did something about welfare reform. And doing something in
	Washington does have an impact.
	The arguments to the 2001 tax bill was that the President
	inherited the recession and he needed a $1.3 trillion tax cut
	to get the economy moving. Since that time the economy has lost
	2\1/2\ million jobs. Four more million Americans are without
	health insurance that had health insurance before. And I think
	you will appreciate this, is that also nearly $1 trillion of
	corporate assets have been foreclosed on in chapter 11. And one
	of the facts I am most impressed with between the 1990s was the
	fact that we decreased the amount of people living in poverty
	but in fact in the last 2 years two more million people have
	been added to the poverty rolls in this country, just facts.
	And I do think the decisions we make here rather than just
	static and not doing anything have an impact on the economy and
	on what happens, and I do agree that we all want to see job
	growth and economic growth. We want to see deficits lower. But
	one of the things we want to see is every American participate
	in that and that hasn't happened to date. The unemployment, the
	uninsured are not equally shared across every income group. And
	I agree with what you said, deficits can be manageable if they
	are seen as cyclical. But once the markets sees the perception
	go from cyclical to permanent, interest rates rise and that has
	an effect on mortgages, college loans, paying for health care
	bills and it becomes a tax on the families. And we are very
	close--and you may be right and I think you are right, right
	now they are seeing them cyclical. But that moment that
	perception changes in the market that they are permanent and
	fixed and structured, nothing we are talking about the tax cuts
	here will pale in comparison to the rising costs of managing to
	pay for a home, paying for college or paying for health care.
	With that, I do want to talk a second about savings. Fewer
	than 5 percent of the American people participate in the IRAs
	as they exist, the Roth IRAs. And why do you think that
	increasing that limit is going to increase the participation
	that only 5 percent of the top bracket participate today? To my
	view since $3,000 a year is out of reach for a lot of Americans
	to put away, making it $7,000 is only going to be putting more
	money away for those who want to participate and try to save.
	You are just going to go to the same people who today
	participate in the IRA and we are not going to extend it.
	Now I think if you look at all that money that is going to
	go toward that savings, some people see critical investments in
	agriculture. Folks like me see critical investments in
	education. Right now we can't even pay for the President's
	initiative of Leave No Child Behind. This budget, the amount of
	deficits we leave, the amount of debt we add and the ability
	not to invest it, Pell Grants or in education, do have
	consequences because American lives aren't static. Washington
	may want to be static, but their lives are not.
	Secretary Snow. I agree with much of what you had to say.
	Mr. Emanuel. There is an act of bipartisanship right there.
	Secretary Snow. One of the important proposals coming out
	of the Treasury deals with the issue you are raising, the low
	savings rates among the lower income, below the median people.
	The failure to use the IRAs and the Roths and 401s and so on--
	and I would urge you to take a look at this proposal. Pam Olson
	was mentioned earlier as somebody that the committee works with
	closely, which really she is the rowing oar on these LSAs and
	RSAs which would create a new savings vehicle. The current tax
	favored vehicles are just too complex on the one hand and too
	restrictive on the other. They limit the purpose so that that
	mother who wants to educate her child, she puts her money into
	the fund and the child gets sick, she can't use it to help deal
	with the medical problems of that child, so they don't use it.
	And I commend Pam and the Treasury Department for coming up
	with these proposals to make--create new savings vehicles to
	encourage more savings among middle income and lower income
	people. Wealthy people have lots of ways to save. It is the
	lower income people that need to have savings facilitated. So I
	urge you to take a look at these proposals.
	Chairman Nussle. Mr. McCotter.
	Mr. McCotter. Thank you, Mr. Chairman, and I would like to
	thank the good member from Illinois for his bipartisan praise
	of the 1990s-led GOP House of Representatives. You mentioned
	something about the debt tax and that is something I heard a
	lot about. It is a new term, although I am fully expectant that
	I will be hearing that term over and over again at least for
	the next year and 11 months. I think I might have an idea of
	what it is and I just want to see if I can be correct, and then
	I have a quick question. It seems to me that the debt tax is
	caused by politicians' need to immediately spend money in the
	hopes that it will lead to long-term structural improvements in
	the economy when in the end it is basically a mortgage and a
	hope that Government spending will help improve the economy and
	the quality of peoples' lives. This naturally will limit the
	amount of discretionary spending that will be available later.
	So in my mind it becomes basically a debt penalty.
	It gets confusing because we heard the overall accumulation
	of Government debt in relation to individual budgets, and there
	was never a proration for how the immediate spending influenced
	those future budgets. And I think that that was kind of apples
	to orangutans or something. I think under that kind of logic
	there are really five things that can be done. You can
	individually--you can raise taxes. You can individually cut
	prorated reductions in the programs that were benefited by the
	immediate spending at the expense of future spending. You can
	have larger cuts in all other programs whether affected or not.
	You can obviously go across the board spending freeze because
	we heard that will lead to a balanced budget or you can hope
	through some type of budgetary policies you can grow the
	economy and restrain spending and arrive back into a surplus
	situation.
	I didn't study economics. I was a liberal arts guy so I may
	be wrong about some of that. But my question is in investing
	the 1990s--I was a state legislator. I was a county
	commissioner prior to that--at the end of the 1990s, we saw, I
	think it was historically the largest increase in Government
	revenues and we also saw one of the largest increases in
	Government spending and that was followed by a recession. We
	have heard a lot about deficits having consequences on markets,
	a debt--the cost of having a debt at the national level. I was
	wondering if anyone had looked into the prospect of a national
	surplus also constituting negative consequences to our economy
	when the Government takes too much from entrepreneurs and the
	people who make this country great, the working men and women
	and then spends it inefficiently.
	Secretary Snow. Congressman, you may not have studied
	economics formally but you have obviously learned it some other
	way, because you are framing the issues the way the economist
	would frame them. I saw a speech that Larry Summers gave
	recently in which he said no one can be well educated today if
	they don't have a fundamental understanding of economics. And
	economics is basically the study of trade-offs and choices and
	the costs of alternative choices and framing the choices
	intelligently. You just did, and I agree with the way you
	framed them. It is important to always ask what is the cost of
	not doing what we are proposing as well as what is the cost of
	doing it. And where the cost of not doing, what you give up is
	greater than the cost of doing it, you should give it up.
	So I think the President's program is the course that takes
	us and puts us on the best course in terms of those trade-offs
	that you have enumerated.
	Mr. McCotter. I just want to thank you very much. In the
	final analysis, though, I do believe a historical precedent is
	important, and I do believe that had we perhaps at the State
	and local level, because I can't address the national level,
	saved some of the money that the taxpayers put here into
	reserve accounts, into rainy day funds, perhaps we might not
	have offset the entire cost of this proposed budget but would
	have laid a foundation for a rainy day fund much like families
	have to do. And my concern is that we do not attempt to bolt
	the Federal budget on the backs of family budgets no matter
	what direction we take.
	Secretary Snow. I agree with your large point there.
	Chairman Nussle. Ms. Majette.
	Ms. Majette. Thank you, Mr. Chairman, and I would like to
	have displayed slide No. 3. Can you display slide No. 3? And
	good afternoon, Mr. Secretary. I appreciate your patience and
	your fortitude. In my previous life I was a trial court judge
	and I certainly wouldn't have had a witness on the witness
	stand as long as you have been without a break.
	Secretary Snow. Cruel and unusual.
	Ms. Majette. But I certainly appreciate your being here
	this morning and this afternoon, and we have talked a lot about
	the cost of doing or not doing things and trade-offs. And
	before I ask my question I would just like to preface it with
	some reading that I did this morning, and this is from a book
	written by Richard Kriegbaum on leadership and particularly on
	the aspect of creating a budget. And he says that, ``The core
	values of an organization are the promises its members make to
	each other. The budget is the most comprehensive and detailed
	description of what the organization has promised to do in
	expressing those values. What makes budgeting so difficult for
	a future oriented leader is that the budget is mostly about
	history, about keeping promises that have already been made. If
	the promises were made wisely, they will have created a good
	set of present opportunities, attract great people, secured a
	strong position in the market with a positive image and allowed
	for increasing net revenues. The need for growth is a product
	of the fundamental paradox in each budget. Driven mostly by the
	promises of history, the budget must also make promises to
	secure a future. The budget, mundane and arcane, is the
	ultimate leadership forum.''
	Now my question is given the fact that we have the baby
	boomers, the baby boom generation will begin to collect Social
	Security benefits starting in 2008 and also having the Medicare
	coverage and that those are promises that we have made, made by
	past and current Presidents and by past and current Congresses,
	how are we going to be able to honor those past and current
	promises in light of the deficit we already have and the
	proposed budget that will increase those deficits as we move
	forward to 2008?
	Secretary Snow. I begin by saying that our commitments to
	Social Security and Medicare are sacrosanct. It is unthinkable
	that those commitments won't be made. At the same time, it is
	important to recognize that, as you are suggesting, that the
	demographics of the country are putting us on an unsustainable
	basis in terms of the current course. So some fundamental
	reforms need to be thought about in both areas.
	The President has made clear his commitment to Social
	Security, but also is engendering a national dialogue on how to
	put it on a sustainable basis. The commission he appointed came
	up with three options. All included investment retirement
	accounts--I guess two of the three--all three had investment
	retirement accounts as part of the approach. The Social
	Security system needs savings. It needs an infusion of real
	savings. And we need to find a way to make that happen. It can
	only happen, though, I think, and we can only put Social
	Security on a sustainable basis if, one, we grow the economy,
	because that gives us the wherewithal to deal with the
	problems, and, secondly, if there is a bipartisan consensus to
	move forward on that issue.
	On Medicare, health care, the commitment is the same. The
	problem is a little different. It is driven by demographics,
	but also by this extraordinary increase in health care costs,
	which we have to rein in. We have to bring greater discipline
	and efficiency to the health care delivery system. We talk
	about that a lot. We talk about that a lot. But it is an issue
	that has to get joined.
	So I applaud you very deeply for putting that issue before
	the committee and before the Congress because it is one that we
	simply have to address.
	Ms. Majette. Thank you.
	Chairman Nussle. Mr. Ford.
	Mr. Ford. Thank you. We are here, as you know, Mr.
	Secretary, talking about this budget stuff after or during the
	time in which Secretary Powell has made quite a compelling
	statement about the world taking steps against Iraq and even an
	invasion of Iraq. I know that you have a tough gig, made
	tougher by the fact that you didn't really have a job in
	writing this budget, but you have to defend it and perhaps you
	do fully agree with it. But some of the things you said in the
	past which I think we tried to point out here are in conflict
	with the direction that this budget will take us. I want to ask
	specifically just a couple of questions.
	I am reading this morning in the CQR, one of the local
	newspapers here on the Hill, where your friend and colleague
	Glenn Hubbard makes the point that because of dynamic scoring
	that the costs of this tax cut, the $695 billion tax cut, would
	actually be less some $280-billion less, $278 billion to be
	exact, and that it would actually cost only $417 billion over
	11 years. I was curious, one, if you are familiar with his
	talking about this and, two, if you agree with this dynamic
	scoring.
	Sounds a little like fuzzy math to me. I know a lot of
	people here have talked about what counties have to do and what
	families have to do. I would love to be able to go into a
	grocery store and fill up my grocery cart and say it looks like
	it is 250 but by the time I get to the counter maybe it will
	only be 185. I am curious to know if you agree with Glenn
	Hubbard's estimation about this.
	Secretary Snow. Actually I have not discussed that with the
	CEA chairman.
	Mr. Ford. If you could get back to me on that and maybe the
	chairman. I know he is a fan of dynamic scoring as well.
	Perhaps he can get back to those of us on the committee if he
	too agrees with Glenn Hubbard's estimations here.
	Chairman Nussle. Will the gentleman yield?
	Mr. Ford. As long as you don't take my time.
	Chairman Nussle. I will be glad to not take it from your
	time. I am just curious. So your point is that you see
	absolutely no impact at all from our fiscal policies on the
	overall economy and that it should not be taken into
	consideration?
	Mr. Ford. No, sir. I am just asking the question. Evidently
	you are giving me a partial yes. I would love----
	Chairman Nussle. It is not a partial guess or a yes. I just
	wondered if you saw no impact at all from fiscal policy on the
	economy.
	Mr. Ford. Mr. Snow has run a railroad that runs through my
	city of Memphis, and has done very well in business. You, Mr.
	Nussle, have been head of the committee. I am just curious. I
	asked the question for this reason. I was not on the committee
	2 years ago, but I understand having voted against the budget
	that came out of this committee, there were a lot of estimates
	about how well the economy would perform after the tax cuts
	that Congress passed 2 years ago. Well, in fact, that has not
	happened. We heard a variety of reasons why. It is ridiculous
	some of the things that everybody said, particularly--I have a
	lot of friends on that side of aisle. But to suggest that
	Clinton had something to do with this or that Reagan had
	something to do with this or that one person deserves more
	credit than the other is ridiculous. Let us face the facts we
	face right now. If that is the case and if it does not happen,
	what is our fallback here, because we estimated over the next 2
	years all these things would happen with this tax cut and it is
	not happening.
	And I will be happy to yield to the chairman if he wants.
	The second question I would have for Mr. Snow with regard to
	the stimulus package, and I would love to get a copy of your
	memo you sent to Mr. Thompson on municipal bonds and other tax
	free instruments, including the low income housing tax credit
	that Ms. Johnson raised yesterday, I think, before the Ways and
	Means Committee. But I am curious about States. My State, like
	many others, is faced with these crushing burdens. Is there not
	an argument--and I am not an economist. I went to a school
	where they teach it up at Penn and Wharton, but I didn't take
	any of those classes. I was a liberal arts major like the
	former commissioner and State representative over there was. I
	am curious--it would seem to me though, what little I know,
	that the best thing we probably could do would be to help
	Governors avoid either raising taxes or cutting vital services.
	And if we don't provide some direct aid to the States, is it
	your belief that that may offset what we may do here at the
	Federal level whether it is dividend taxes or payroll tax
	rebates or whatever we eventually settle on?
	Secretary Snow. The best thing we can do for the States is
	to create a strong national economy that grows and as that
	strong national economy grows and the States have more jobs,
	more revenues will flow to the States. And the analysis I have
	done--I introduced Dr. Clarida earlier who has done these
	analyses. The States actually pick up in the aggregate more
	revenues as a consequence of this growth package than they
	would have otherwise.
	Mr. Ford. So it is your belief that providing direct aid to
	the States for health and education and other needs, and this
	is not to suggest that we don't have other priorities but I am
	just curious, modifying the Medicaid formula so that my State--
	and Tennessee is faced with a $400 million shortfall this year
	and an expected larger one next year. That is small compared to
	some of the other States represented here. But you don't
	believe that providing some direct aid in addition to the
	stimulus jobs and growth package that the President talked
	before Congress a week or two ago, you don't believe direct aid
	could also help alleviate some of this burden and actually help
	create jobs and grow their economies at the State level as
	well?
	Secretary Snow. I forget the numbers. You would know them
	because you were here yesterday when Mitch Daniels testified,
	but as I recall there was a--here is the chart--these are OMB
	numbers. You can see there has been a fairly sizeable increase
	in grants, Federal grants to State and local governments, and
	that is continuing in this budget.
	Mr. Ford. How much of that is Medicaid? I must have missed
	that part of Mr. Daniels' testimony. It is my understanding a
	little over three-quarters of that was Medicaid funding if I am
	not mistaken.
	Secretary Snow. The numbers escape me right now, but I will
	get back to you on that for sure. I know Medicaid is now, I
	think, the largest source of the grants to the States and I
	think the second largest item in most State budgets.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Ford's Question Regarding Medicaid Funding

	Total Federal grant-in-aid money to state and local governments was
	$351.6 billion in fiscal year 2002. It will rise 9 percent to an
	estimated $384.2 billion in 2003 and an additional 4 percent to $398.8
	billion in 2004 under our budget proposal.
	A huge 20 percent rise in Medicaid grants is slated for this year,
	boosting them from $147.6 billion in fiscal year 2002 to $176.8-billion
	under current law for fiscal year 2003. These grants are expected to
	rise 3 percent further to $182.5 billion in 2004 (amount takes account
	of proposed legislation).
	The rise in Medicaid costs in fiscal year 2003 is expected to
	account for 89.6 percent of the increase in total grant-in-aid in that
	year, but the rise in fiscal year 2004 would make up only about 39
	percent of the increase in grant monies.
	Medicaid expenditures accounted for 42.0 percent of total Federal
	grant-in-aid to states in fiscal year 2002; the share is expected to
	rise to 46.0 percent in fiscal year 2003 and account for 45.8 percent
	of grants in fiscal year 2004.

	Mr. Ford. If you could have drafted this budget, Mr.
	Secretary, and you were trying to craft a stimulus package in
	light of the challenges we face and with the vast experience
	you have had in the private sector, public sector, is this the
	budget you would have drafted and presented to this Congress
	and suggested to this Nation to help create a rebound and a
	growth period, including job creation?
	I know I am going over my time. I think I know what you may
	say, but I am just curious if this is the budget you would have
	presented to this Congress had you been on from the very
	beginning with this administration.
	Secretary Snow. I am very pleased to be in a position to
	advocate the policies reflected in this budget. I shy away from
	using the term ``stimulus'' because I think it mischaracterizes
	what this package is all about.
	Mr. Ford. I would agree.
	Secretary Snow. It really is a growth package.
	Chairman Nussle. Mr. Secretary, let me just--excuse me--let
	me yield to Mr. Davis and then I will take some time at the
	end. Mr. Davis.
	Mr. Davis. Thank you, Mr. Chairman. Mr. Snow, I apologize
	to you that I missed a lot of your testimony. I have some
	pressing constituency issues in my office, but I did see a lot
	of you on television this morning. Let me ask a question that
	is totally different from what you have been asked about during
	most of the day. I want to go to the larger point of incentives
	that this budget creates and I want to talk about incentives in
	one particular area. I want to preface that by saying that two
	things are apparent to me as I look at the political context
	around this budget.
	First of all, it is evident that whether we agree or
	disagree with the whole range of cutbacks that are made in this
	budget that there are a range of objective cuts or reductions
	in the rate of growth for a number of social programs that I
	consider important, from education, health care, Head Start,
	you name it. Because of that, it strikes me that there is going
	to be a much greater reliance on the private sector, a much
	greater reliance on the private sector to step up to the plate
	when it comes to charitable giving. The President has spoken
	very eloquently of compassionate conservatism. He has spoken
	very eloquently of the private sector and the private community
	in this country assuming some of the burden that the Government
	may be advocating.
	Given that set of premises, I want to ask you about this
	budget's failure to provide more incentives for charitable
	giving. Pull out just a few facts that I have seen in the
	budget. The President is proposing a $500 charitable deduction
	for nonitemizers. Now based on numbers that I have seen, the
	average charitable gift for most taxpayers is $348. The range
	between $348 and $500 is significant at that level, so as a
	practical matter most people who were giving charitably will
	not receive a tax incentive.
	Give you some more numbers. Two years ago when the
	President sent his first tax cut plan up to Congress, he
	proposed a $90 billion--what would have amounted to a $90
	billion charitable tax break over a 10-year period, about $9
	billion a year. That plan was not successful. In this go-
	around, the President comes back with a $20 billion plan for
	reductions in charitable giving over 10 years. That seems to be
	a significant retreat on the part of the President.
	Two other aspects I will point out to you. A lot of
	charitable foundations--in fact, my understanding is that all
	private charitable foundations, while they are not taxed in the
	normal fashion, pay an excise tax that totals up to $1.4
	billion a year. This budget provides no relief from that excise
	tax.
	Finally, as I understand it right now, if people withdraw
	money from an IRA and attempt to give it to charities, that is
	still taxed. Now that is a classic case of double taxation. The
	budget the President proposes does nothing about that.
	So my question to you is this: Given the extraordinary
	shift from public sector to private sector the President seems
	to contemplate, how can you justify to us and, more
	importantly, to our constituents why the President doesn't do
	more in this budget to encourage charitable giving?
	Secretary Snow. I am not as conversant with this subject as
	you obviously are, but I will give you two broad answers. One,
	the best way to stimulate charitable giving is to have a
	stronger economy so people have more money in their pockets,
	more disposable income. This proposal does that. I am confident
	of that. The IRA proposal that we talked about earlier,
	Congressman, when you weren't here, the Treasury proposals
	there, does permit transfers to charities. It creates a more
	flexible use of these savings accounts and I think will
	encourage savings generally and, by creating more flexible
	uses, will be helpful to charity generally. And I understand
	that in the budget there is some several $100 million in effect
	directed to charitable causes.
	Mr. Davis. Let me ask two follow-up questions, Mr.
	Secretary. Would you support the legislation that has been
	introduced in the Senate, as I understand it and that some of
	us will cosponsor in the House, that would lift the excise tax
	on the charitable foundations?
	Secretary Snow. I have to study that. I am not up enough--I
	wouldn't want to give an off the top of my head answer.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Davis' Question Regarding Excise Taxes on
	Charitable Foundations

	The administration's fiscal year 2003 and fiscal year 2004 budgets
	include a proposal to simplify the excise tax on private foundation
	investment income. The administration has not proposed repeal of the
	excise tax. Under current law, the excise tax rate is 2 percent, but
	the tax rate may be reduced to 1 percent if the foundation's charitable
	distributions exceed its average level of charitable distributions over
	the five preceding years. The administration proposal is intended to
	provide simplification and some amount of tax relief for foundations by
	replacing the current two-tier rate structure with a single 1-percent
	tax rate. The current formula, in addition to imposing recordkeeping
	burdens, can discourage foundations from increasing charitable
	distributions in a particular year, because it would be more difficult
	for the foundation to qualify for the reduced rate in subsequent years.

	Mr. Davis. One more question. Can you give me some
	explanation of why the President has by his own terms retreated
	from his $90 billion goal of 2 years ago as far as charitable
	tax breaks to a considerably less ambitious goal of $20
	million?
	Secretary Snow. This is an area that I am beyond my ken. I
	wasn't here when the President made whatever the original
	proposals are and I am not really familiar with what the
	proposals are in this budget, but I will be happy to look into
	that.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Davis' Question Regarding the President's
	Goal on Charitable Tax Breaks

	The administration's fiscal year 2004 budget proposals reflect
	legislative developments. The charity bills considered in the House and
	the Senate in the 107th Congress were both much more modest bills than
	earlier proposals. In addition, there were bi-partisan meetings between
	Congressional leaders and the White House last year that produced a
	consensus package. The current budget proposals reflect those
	considerations and would provide significant new support and incentive
	for taxpayers to increase their charitable contributions.

	Mr. Davis. Thank you, Mr. Secretary. Thank you, Mr.
	Chairman.
	Chairman Nussle. Let me just take a little bit of time here
	because Mr. Ford brought this up and I have enormous respect
	for my good friend from Tennessee. Just to make it clear, I am
	not a fan of either static nor dynamic scoring. I am a big fan,
	though, of accurate scoring, and we haven't had that under any
	model that I have seen as of now and that frustrates me and I
	know it frustrates the gentleman from Tennessee. So just to
	correct the record.
	Mr. Ford. I didn't mean to cast any aspersions. I know I
	heard a lot of people talking about dynamic this and dynamic
	that yesterday and I thought I heard you saying you support
	dynamic scoring.
	Chairman Nussle. And that gets me to the second part. I am
	not sure what to call it, but--well, let me just ask the
	Secretary. Does the President in the budget that has been
	presented before Congress score his growth package in a dynamic
	scoring model or methodology?
	Secretary Snow. The budget builds in some of the growth
	that would come as a result of the tax incentives in the plan,
	but it is not fully built in; that is, it doesn't play through
	all the consequences of enhanced incentives for savings,
	investment and consumption, nor does it, to my knowledge, fully
	take into account the removal of the inefficiencies that are
	associated with the current Tax Code, in the area, for
	instance, of the dividends. So the way I look at it, it
	certainly scores all the costs of it, but probably doesn't
	reflect all the benefits.
	Chairman Nussle. And I guess it is puzzling because I asked
	the same question of Mr. Daniels yesterday and he said no, it
	is not dynamically scored. In fact, the way I understood it was
	that if, in fact, OMB's growth figures are less than CBO's and
	Blue Chip and both Blue Chip and CBO assume nothing basically
	is changing, I don't know how anyone could assume that that
	scores dynamically, or assumes any growth or assistance from
	the growth package that the President has put forward. And I
	guess that is what I am getting at. I am wondering why you
	don't in the budget assume growth larger than status quo from
	this growth package.
	Secretary Snow. I think it is--the decision to err on the
	side of conservatism basically lies at the base of that
	decision and build in conservative numbers rather than
	otherwise. That is the only explanation that I can see for it.
	Chairman Nussle. Let me ask you one other thing because the
	gentleman from Tennessee said this. He said obviously there was
	no changes or there was no growth, there was no economic
	benefit from the package--the growth package from 2001, the tax
	cuts from 2001. And unless I am missing something, that not
	only was not your testimony but I am not aware of any economist
	that suggests that this was a recession that is typical based
	on the dynamics that were out there at the time, that there is
	nobody with any kind of economic credentials that is suggesting
	that there was no impact in a positive way from the 2001 tax
	cuts that were passed. Now somebody may think it didn't go far
	enough or it could have had more economic impact, but to
	suggest that there was no dynamic impact, just, I am surprised
	at because I am not familiar with any school of thought that
	suggests that there was absolutely no impact from the 2001 tax
	cuts. What is your belief on that?
	Secretary Snow. Well, my belief is that the 2001 package
	was essential to avoid a deep recession and was the right
	medicine at the right time. And if it hadn't been done, if
	Congress hadn't stepped up to the plate with the 2001 tax
	package where I was sitting in the private sector, I was
	looking at the prospect of a very deep and serious recession.
	We ended up with--I think it is the shallowest and shortest
	recession since the Second World War. So I think it was the
	right medicine at the right time and the consequences were
	obvious. The Congress, by taking the steps you did, put us on a
	much faster recovery than would have been the case otherwise.
	That means lots of additional jobs and lots less misery for a
	lot of people.
	Mr. Ford. Mr. Chairman, I didn't actually suggest that
	there has been no impact, if I can indulge for one moment. I
	was only making the point--two points. One, there is an
	estimated $278-billion less that--$278-billion less of an
	impact on the bottom line, and there was a lot of impact on
	what the package that was passed in 2001 would accomplish. Now
	if I am hearing correctly, instead of losing by five
	touchdowns, we lost by three. Might have covered the spread,
	but we still lost. And the only point I was trying to make, I
	still want an answer from you, Mr. Chairman, and maybe you have
	answered it already, but from the Secretary, is there a belief
	in the White House about what Mr. Hubbard said, that the cost
	of this tax cut, that the economic surge could offset 40
	percent of the plan's cost? I think that is a pretty
	significant offset.
	Chairman Nussle. Did he say ``could''? What is the quote?
	Mr. Ford. ``White House official says economic surge could
	offset----''
	Chairman Nussle. Could?
	Mr. Ford. Clearly----
	Chairman Nussle. Not definite, not ``I am betting my house
	on it,'' but ``could?'' Why isn't that fair to say that could
	be the case? Using your analogy, using the analogy of the
	gentleman walking through the grocery store buying food and
	that it has no impact at the end of the counter, doesn't
	recognize, but it does have an impact because at the end of the
	day hopefully he has had dinner and hopefully his stomach is
	full. So there was an impact.
	Mr. Ford. Walking through the grocery store and hoping that
	things go on sale before you arrive at the counter is my point.
	I am only telling you what the man said. Now if you agree--I am
	asking the Secretary. If you agree with Mr. Hubbard in his
	characterization that it could be offset by 40 percent, there
	is no need to be defensive with me. You and I represent people
	we have to go home and explain this to.
	Chairman Nussle. Let me reclaim my time and answer your
	question. Yes, it could.
	Mr. Ford. Fair enough.
	Chairman Nussle. And let me continue to reclaim my time and
	suggest to you that I don't believe that dynamic scoring which,
	A, nobody can yet define and, B, there aren't any models that
	anyone that I am aware of is yet ready to roll out and suggest
	this is the be all and end all economic model. But to suggest
	what we currently suggest, that fiscal Government policy has no
	impact--no impact on today, tomorrow, the next year, 10 years
	from now--is living in an unbelievable vacuum that I don't
	think is realistic either. But to be able to predict it, no, I
	think you are correct and that is why we share, whether it is
	bipartisan or whatever, is that we need better, more accurate
	scorekeeping and more accurate estimates as we look at today,
	tomorrow and the future.
	Mr. Ford. Do you think Mr. Hubbard, who holds a fairly
	significant position at the White House, him making this
	comment that it could cost $278-billion less, but could that
	influence some of you and our colleagues here in the Congress?
	Could it have us believe that this thing won't cost as much and
	somehow or another----
	Chairman Nussle. Why is it unfair for us to consider--let
	me just ask it back. Why is it unfair for us to consider
	whether this could affect us in a positive way when I have been
	hearing all day for the last 2 days how it could not from your
	side; that it may not; that it may be the worst medicine? If
	you could look at the positive, you can look at it from the
	negative.
	Mr. Ford. I am holding fast to the notion that could not.
	But I wanted to get Secretary Snow on record as saying that he
	believed that he could.
	Chairman Nussle. Reclaiming my time, that is why we have
	budgets. That is why we have plans. That is why we have
	parties. That is why we have votes. And that is why we need to
	have this discussion and we need to put our plans on the table.
	We hope to see a plan from your side. We have seen the plan
	from the President. We hope to see a plan from your side and
	then we will be able to make a decision.
	Mr. Spratt.
	Mr. Spratt. Three quick points. If I could, Mr. Secretary,
	give you a handwritten request for some additional information.
	I just had no other method other than to hand write it out. We
	would like some backup data about the assumptions about the
	revenues that will be gained or realized from your new savings
	proposals and then the revenue losses that will ensue as these
	tax shelters build up and accumulate. I think your 5-year
	summary is that it will generate $14 billion in revenues over
	10 years. We would like the assumptions you are making about
	who will transfer out of traditional vehicles into new
	vehicles.
	Second point, I could offer as a witness, but ask the
	former chief economist of OMB who is sitting right behind me,
	Joe Minarik, who has been in this budget process for 20-odd
	years, and he will tell you that OMB does consider the
	behavioral effects of various economic policies in putting
	their documents together. They don't get into alchemy. They
	don't get into magic elixirs and things like that. They take
	very basic views, which is what we want them to do. There is a
	passage from David Stockman about how the first cut on the 1981
	tax cuts was treated, where the bottom line came out and he
	gave it to Mary Wheatenbaum and said what can we do about this,
	we can never sell that, and Mary Wheatenbaum says I can take
	care of it right here. That is where the assumptions will come
	from. Very gut judgments. We don't want that, OMB, Treasury or
	CBO or anywhere else. We want very, very basic assumptions that
	have been demonstrable in the past from other fiscal policies.
	And finally, Mr. Chairman, as we spoke, the Treasury issued
	a bulletin indicating that the Government is about to run out
	of borrowing authority by February 20, according to the
	Treasury's forecast. They will hit the ceiling and will have to
	engage in some stopgap practices in order to keep going. I
	doubt that we will get anything about that around here by
	February 20, but I am concerned that this is a sign of things
	to come. It may not be the last time we will have to raise the
	debt ceiling.
	Mr. Ford. I would still be curious. I know Mr. Nussle has
	answered, but I would be curious to know at some point after
	you have had an opportunity to review Mr. Hubbard's estimation
	about what could happen, I would be curious to know your
	thoughts, if you share his belief that an economic surge could
	offset 40 percent of the $695 billion tax cut proposals. I know
	you said you hadn't had a chance to look at it. I would
	appreciate if you would be able to respond to that.
	[The information referred to follows:]

	Mr. Snow's Response to Mr. Ford's Question Regarding the Tax Cut
	Proposal

	I believe the extra economic growth produced by the
	administration's Economic Growth Package will offset a significant
	portion of the official budget estimate of its cost. A study released
	by the Business Roundtable shows the tax cut will offset one-third of
	the official cost estimate, with most of the offset generated by the
	dividend proposal. A simulation run by the Council of Economic Advisers
	suggests revenue from extra economic growth could offset about half of
	the official cost of the proposal during the 2003-07 period.
	The tax cut will reduce the cost of capital for corporate equity
	investments, leading to an increase in the stock of corporate capital.
	By reducing tax distortions, it will also enhance the efficiency with
	which capital is allocated. Other potential gains from the tax cut
	include those from lower debt ratios, more appropriate corporate payout
	ratios, higher labor supply, and greater investment by small
	businesses.

	COMPARISON OF ECONOMIC ASSUMPTIONS
	[Calendar years]
	----------------------------------------------------------------------------------------------------------------
	Projections Average
	-----------------------------------------------------------------------
	2003 2004 2005 2006 2007 2008 2003-08
	----------------------------------------------------------------------------------------------------------------
	Real GDP (billions of 1996 dollars):
	CBO January......................... 9,673 10,018 10,358 10,697 11,037 11,380 ..........
	Blue Chip Consensus January \2\..... 9,704 10,050 10,383 10,709 11,041 11,384 ..........
	2004 Budget......................... 9,710 10,061 10,414 10,760 11,102 11,446 ..........
	Real GDP (chain-weighted):\1\
	CBO January......................... 2.5 3.6 3.4 3.3 3.2 3.1 3.2
	Blue Chip Consensus January \2\..... 2.8 3.6 3.3 3.1 3.1 3.1 3.2
	2004 Budget......................... 2.9 3.6 3.5 3.3 3.2 3.1 3.3
	Chain-weighted GDP Price Index:\1\
	CBO January......................... 1.6 1.7 2.0 2.1 2.1 2.2 2.0
	Blue Chip Consensus January \2\..... 1.6 1.9 2.1 2.1 2.1 2.1 2.0
	2004 Budget......................... 1.3 1.5 1.5 1.7 1.7 1.8 1.6
	Consumer Price Index (all urban):\1\
	CBO January......................... 2.1 2.2 2.5 2.5 2.5 2.5 2.4
	Blue Chip Consensus January \2\..... 2.2 2.2 2.5 2.6 2.5 2.5 2.4
	2004 Budget......................... 2.2 2.1 2.1 2.2 2.2 2.3 2.2
	Unemployment rate:\3\
	CBO January......................... 5.9 5.8 5.4 5.3 5.3 5.2 5.5
	Blue Chip Consensus January \2\..... 5.9 5.5 5.1 5.1 5.1 5.1 5.3
	2004 Budget......................... 5.7 5.5 5.2 5.1 5.1 5.1 5.3
	Interest rates:\3\
	91-day Treasury bills:
	CBO January......................... 1.4 3.5 4.8 4.9 4.9 4.9 4.1
	Blue Chip Consensus January \2\..... 1.6 2.9 4.2 4.4 4.6 4.4 3.7
	2004 Budget......................... 1.6 3.3 4.0 4.2 4.2 4.3 3.6
	10-year Treasury notes:
	CBO January......................... 4.4 5.2 5.6 5.8 5.8 5.8 5.4
	Blue Chip Consensus January \2\..... 4.4 5.2 5.6 5.8 5.7 5.7 5.4
	2004 Budget......................... 4.2 5.0 5.3 5.4 5.5 5.6 5.2
	----------------------------------------------------------------------------------------------------------------
	Sources: Congressional Budget Office; Aspen Publishers, Inc., Blue Chip Economic Indicators.

	\1\ Year over year percent change.

	\2\ January 2003 Blue Chip Consensus forecast for 2003 and 2004; Blue Chip October 2002 long run for 2005-08.

	\3\ Annual averages, percent.

	Chairman Nussle. Mr. Davis.
	Mr. Davis. I don't want to weigh into this debate, but I
	want to take advantage of your expertise to clarify something
	for myself here. When we talk about or when I have read a lot
	about these notions of dynamic scoring, for some reason it
	seems that the debate seeks to estimate the economic impact of
	fiscal policy, of tax cuts, things of that nature. Can you shed
	some light for me, Mr. Secretary, about why these theories of
	dynamic scoring don't estimate the impact of, say, more
	spending on things such as education and health care, because
	it is my uninformed theory since I am not an economist, it is
	my theory that those things have some effect on the health of
	our economy as well, but it seems that people who engage the
	dynamic scoring issue don't focus on the potential economic
	impact from those things?
	Secretary Snow. I think, and I don't pretend to be an
	authority on this subject, I agree with the chairman that what
	we ought to do is do accurate scoring. But accurate scoring
	ought to take into account the way people respond, and people
	do respond to tax incentives.
	Just a little story, I was in Beaufort, SC just last
	weekend and the historian was showing my wife and me and some
	friends around Beaufort. Beaufort is a unique city because it
	was occupied all during the war and the people left early in
	the Civil War and the antebellum homes are maintained. It was
	never destroyed. And on this tour, the historian pointed out
	the various houses and noted that a number of these houses
	didn't have any doors and that was curious. We asked him why.
	He said it was the first tax shelter. He said Beaufort in those
	days taxed houses by the number of doors, so people put in
	windows.
	Mr. Chairman, just an illustration of the point, Tax Code
	is noted by people and they adjust their behaviors in
	accordance with it.
	Mr. Davis. I do want to make one point before I yield the
	floor, Mr. Secretary. I have no doubt that that is true at some
	level, but the point I will leave you with is this. As we look
	at the priorities facing our country that it seems to me if we
	make the adequate investments in health care, if we make the
	adequate investments in education, that too will have an impact
	on people's behavior, because it will do one very fundamental
	thing. It will move people who have been at the margins of our
	economy into a more secure position, the middle class. It will
	ratchet up people's economic power, and I will leave you with
	the observation that that is something we should take into
	account.
	Chairman Nussle. Mr. McCotter.
	Mr. McCotter. Quickly, I agree with that, but I think that
	the best way for people to come off the margins is to make more
	money and keep it and make the decisions on how to invest that
	money in their own lives through their family budgets. And the
	good news for the good Representative from Memphis, I was at
	the grocery store last night, and I am living a bachelor's life
	with my wife 500 miles away and I decided that ice cream was
	two for five bucks. I have a sweet tooth, what can I say? I go
	up to the counter and it dawns on me it is two for $5 if you
	have a bonus card for the grocery store. I immediately altered
	my behavior given the economic conditions to save myself about
	$2.50, and I am now a member of that grocery store's bonus
	club. So I think that economic decisions even down to the
	micro, micro----
	Mr. Ford. You maybe ought to get Mr. Hubbard and Mr. Snow
	one of those bonus cards, too.
	Mr. McCotter [continuing]. And everyone's decisions are
	affected economically by the conditions in which they find
	themselves. The trouble we are having is not really an argument
	or a debate between you and Chairman Nussle. I think in many
	ways the reason we get economic forecasts that we find to be
	suspect or debatable is the same reason that every economic
	forecaster is not a very, very wealthy person. No one is right
	100 percent of the time, and we have to make our best, most
	educated guess, whether it is dynamic, static or whatever, but
	primarily the needs of our constituents.
	Chairman Nussle. Mr. Secretary, we always save the best
	discussion for last and I think that you have seen a little bit
	of our interests here today on the Budget Committee, and we
	very much appreciate you spending the time that you have with
	us when you certainly could be getting settled at your office.
	So we wish you Godspeed in your new position. I would commend
	to you that estimations--certainly I think you have heard here
	today--are an important priority and you work for the
	President, not necessarily the Congress, but if we could put it
	on your ``to do'' list, that would greatly assist us and,
	secondly, just to give you encouragement as a fellow tax
	reformer, be bold, don't shy away. Even though you may not see
	the light at the end of the tunnel just yet, there are many of
	us who are looking to you and others for leadership in this
	regard, so be bold with regard to tax reform. I think it is
	important at this juncture in our Nation's history.
	I appreciate your time, and we look forward to the time we
	will spend together in the future.
	Secretary Snow. Thank you very much. I look forward to
	being invited back.
	Chairman Nussle. With that, the hearing is adjourned.
	[Whereupon, at 1:50 p.m., the committee was adjourned.]

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