(Strikes gavel.) The committee will come to order.
The book of Deuteronomy commands you must have completely honest
weights and completely honest measures if you are to endure long in
the land of the Lord your God is giving you.
This is a very good budget because it is an honest budget. The
budget is honest about the cost of the wars in Iraq and Afghanistan in
all of the 10 years that it covers. The budget is honest about the
cost of fixing the Alternative Minimum Tax in all 10 years.
The budget is honest about the need for health care reform. As
President Obama told the Congress last week, health care reform cannot
wait, it must not wait, and it will not wait another year.
This budget makes good on that promise.
The budget is honest about the growth rates for discretionary
spending in all 10 years. The budget is honest about providing
estimates for 10 years, not just five. The budget is honest about
providing a place-holder for additional funds that might be needed
this year for financial stabilization. And the budget is honest about
the need for revenues to fund the government.
Now, just because this is an honest budget does not mean that
this is an easy budget. The budget presents some difficult realities
and it presents some hard choices, but the budget is fiscally
For the first several years of this budget, the economy will be
in a recession. During recession, revenues fall. During recession,
spending on unemployment insurance, Medicaid and other means-tested
benefits automatically increases. And to spur the economy, we enacted
a powerful fiscal stimulus program. All these things cause the
deficit to increase.
But most economists agree that during a recession running
deficits is the right thing to do. The decreased revenues and
increased spending help to lessen the harm of the recession. And
almost all of the effect of these measures on the deficit -- excuse
me. And almost all of the effect of these measures on the deficit
goes away once the recession is over.
The honest measure of whether a budget is fiscally responsible is
not the size of the deficit during the recession. The honest measure
is the size of the deficit once the recession is over. And the honest
measure of whether the deficit is high is the size of the deficit
relative to the size of the economy.
On that basis, once the recession is over, the deficits projected
in this budget are fiscally responsible. By fiscal year 2013, the
deficit is projected to be 3 percent of the economy, and remains at
this level throughout the remaining years of the budget.
Why is this a responsible level? Because debt held by the public
will remain stable as a share of the economy. Debt held by the public
is projected to be about 66 percent in 2013, and it'll be about the
same in 2019. And keeping the debt held by the public stable is
And this budget is responsible because it addresses the most
important challenge to our fiscal future, the growth in health care
Our number one objective this year is to enact comprehensive health
care reform. We need health care reform that provides coverage to all
Americans, improves the quality of health care delivered and contains
the growth of health care spending.
This budget provides a down payment for health reform. The
budget includes explicit policy proposals whose proceeds will go into
(this fund ?). In the coming months, this committee will explore
We'll also need to look at other ways to make the health care
system more efficient. This includes examining the enormous role that
taxes play in promoting health care.
Currently, the law does not include the value of employer-
subsidized insurance in employee's taxable income. And there are
numerous deductions from income for people who save for health costs,
contribute to our employer-provided health care plans, and incur out-
of-pocket medical expenses. These exception are projected to reduce
income tax receipts by more than $200 billion in 2009. And that
amount is projected to grow every year thereafter. Thus, one of the
first places to begin tax reform is with health care reform.
I'm also glad to see that the budget would help lower- and
middle-income American families. The budget makes permanent many of
the tax cuts enacted 2001 and 2003. These include lower tax rates,
marriage penalty relief and the expansions to the child tax credit,
adoption credit and child care credits.
The budget also makes permanent the zero percent and 15 percent
capital gains rates for low- and middle-income taxpayers. And to help
family businesses and farms, the budget will provide certainty under
the estate tax, setting the exemptions and tax rate at 2005 levels.
The budget also makes permanent several provisions enacted as
part of the economic recovery bill. The "Making Work Pay" credit will
allow working Americans to take more of their hard-earned money home.
The American Opportunity Tax Credit would help students pay for
college. And families with children will get assistance from the
expansion of the Earned Income Tax Credit and refundable child tax
And the budget promotes savings for families by expanding the
saver's credit and make it refundable and by providing for automatic
401(k) and IRA enrollment. The budget provides tax cuts for
businesses as well.
The president's budget also proposes several provisions that
would raise revenues, and the committee will explore them this year.
I'm pleased to see that the president's budget includes a
proposal to codify the economic substance doctrine. That is something
that Senator Grassley and I have been trying to do for years. It is
an important tool in cutting back abusive tax transactions.
Mr. Secretary, I know that you are focused on offshore tax
evasion, because of the international revenue proposals in the budget.
Any background that you could give us today on these proposals would
be welcome, and I look forward to working with you on legislation to
recover the tens of billions of tax revenues hidden overseas.
I'm pleased to see that this budget includes funds for additional
efforts by the IRS for reducing the tax gap. Every year, more than
$345 billion of federal tax revenue that is owed goes uncollected.
Each additional dollar spent wisely on enforcement returns $5 to the
Treasury. The budget includes $7.2 billion for a multi-year
enforcement effort by the IRS.
Along the same lines, I am pleased to see proposals the budget
provides for reducing fraud in health care, Social Security disability
payments and unemployment insurance payments.
And, Mr. Secretary, we will also have questions for you today
beyond the budget. Stabilizing our financial system is one of the
greatest public policy challenges facing the government. I hope today
you can give us an update on capital injections to the banks, aid to
the auto industry, AIG, Citigroup and the mortgage foreclosure relief
program. And we'd like to also hear about any plans you may have to
ask for additional $750 billion for financial stabilization included
in the budget on a contingent basis.
And so I commend the president and you, Mr. Secretary, on the
honesty of the budget. I commend you for taking on tough challenges
of the work ahead of us and look forward to rolling up our sleeves and
getting that work done.
Senator Grassley is not here, so I think I'm -- I know he'll be
joining us shortly. So Mr. Geithner, why don't you proceed with your
statement. As you know, your full statement will be automatically
included in the record.
Chairman Baucus, members of the committee, it's
an honor to appear before you today to talk about the president's
budget and the administration's economic agenda. I want to just
summarize the main points of my testimony, and I look forward to
answering your questions.
We start this administration and this Congress with a deepening
recession, an intensifying housing crisis and a financial system under
stress. Since the recession began, 3.6 million Americans have lost
their jobs, millions more have lost or at risk of losing their homes
or are struggling to obtain loans for cars, for higher education.
Many businesses are finding it harder to get credit.
This crisis has helped cause a dramatic deterioration in our
fiscal position. We start with a $1.3 trillion deficit, the largest
as a share of GDP the nation has faced since the Second World War. As
a nation today, we face extraordinary challenges, and these challenges
require extraordinary actions.
In passing the American Recovery and Reinvestment Act, the
administration and the Congress have put in place a very powerful mix
of programs to get Americans back to work and to stimulate private
The combined effect of these investments and tax measures will be
to save or create between 3 and 4 million jobs and to increase real
GDP by 3.2 percentage points by the end of 2010, relative to what
would have occurred in the absence of that program.
Now, alongside the recovery act, the administration is moving to
repair our financial system, so that it can provide the credit
necessary, for businesses across the country to expand and for
families to finance the purchase of a home or a car or to meet their
The deepening recession is putting greater pressure on banks.
And in response, many banks are pulling back on credit. So right now
critical parts of our financial system are working against recovery.
This is a very dangerous dynamic. And to arrest it, we need to
make sure that our banks have the resources necessary, to provide
credit to the economy. And we need to act directly to get the credit
markets working again.
The president has also launched a broad plan to help address the
housing crisis. This plan will help homeowners meet their mortgage
obligations and enable them to refinance, to take advantage of lower
Just this morning, we took the important step of releasing the
details of our loan-modification plan and Treasury guidelines for
servicers. And this will help struggling borrowers begin to see lower
payments, more affordable payments, right away.
These actions in all three areas are essential to lay the
foundation for recovery. And the president's budget builds on this
foundation, to set us on the path to higher long-term growth rates.
The first step, Mr. Chairman, as you said, in addressing our
nation's fiscal problems, is to be honest about them. This budget
breaks from the past by honestly and transparently presenting the
fiscal challenges our country faces.
We include the cost of fixing the AMT each year, reimbursements
for Medicare physicians, the likely cost of future foreign wars and
natural disasters and the potential need, in an abundance of caution,
for additional financial crisis funding.
We offer a 10-year rather than a 5-year budget presentation.
This budget proposes to address the most critical challenges our
economy faces, in health care, in energy and in education, within a
framework that puts us on a path to fiscal responsibility and to
As you know, the soaring cost of health care is crippling
families, businesses and our long-term budget prospects. There is no
path to addressing our long-term entitlement challenges that does not
require major health care reform.
Our budget begins this process by reducing costs and inefficiencies,
increasing quality and prevention and moving towards more affordable
coverage for all Americans.
Just to cite one example, the hospital quality improvement
program in the budget proposes to pay for performance and reimburse
hospitals for the quality of services they provide, rather than merely
the quantity of the services they provide. Health care reform is a
moral imperative, it's an economic imperative and it's a fiscal
Our budget also puts forth a significant commitment to reduce our
dependence on foreign oil, a dependence that threatens our economy,
our environment and our national security interests. Investments in
energy efficiency and renewable energy will help create new American
jobs and industries and lead the way to a new green economy.
If we are truly committed to making our nation both more
prosperous and more just, we must recognize that it defies both our
basic values and economic common sense to deny any child in our
country the quality education they need to compete in the 21st-century
global economy. Our budget calls for more resources for early
childhood education, new incentives for teacher performance and a
significant increase in the Pell Grant, together with President
Obama's American Opportunity Tax Credit which provides up to $10,000
of tax relief for a single student going to four years of college.
On the tax side, the budget rewards work and encourages savings
and investment that will spur growth. The budget proposes to make
permanent the Make Work Pay credit, tax credit, for 95 percent of
working Americans, and to expand the earned income tax credit. It
also includes a zero capital gains tax provision for small businesses
and a permanent extension of the R&D tax credit.
The budget proposes to address the tax gap by tackling tax
shelters and other efforts to abuse our tax laws. And over the next
few months, the president will propose a series of detailed
legislative proposals and enforcement measures to help reduce tax
I want to emphasize that we propose no new revenue increases in
our budget -- none until we are safely into recovery in 2011. At that
point, when the consensus of private forecasters projects
significantly positive growth rates for the overall economy, the
budget restores tax rates to the pre-2001 level for families making
more than a quarter of a million dollars a year.
Even with the critical long-term investments in our economy
proposed in the budget, the president's budget keeps overall non-
defense discretionary spending well below its long-term average as a
share of the economy. And overall outlays return to historical norms
once you account for the interest costs associated with our inherited
deficits and the impact of the Baby Boom retirement and rising health
care costs on entitlement programs.
The president and I share a commitment to working with the
Finance Committee and with the Congress to put our nation back on the
path of fiscal sustainability once recovery has been firmly
The president's budget does this by making tough choices to cut the
deficit in half in (the ?) four years, and to reduce deficits to the
level that is necessary so that overall debt is not rising -- no
longer growing as a share of the economy.
If we do not do this, then we face the risk that government
borrowing will, over time, crowd out private borrowing, resulting in
higher interest costs and weaker growth.
When I last served in the Treasury Department, in the 1990s,
fiscal responsibility helped create a virtuous circle of greater
confidence, strong private investment, strong productivity growth and
higher overall gains in income more broadly shared across the American
Now, addressing these problems -- these challenges that confront
our country -- will not be easy. But we are a strong and resilient
country. We have overcome challenges -- extraordinary challenges in
the past. And we -- do so in the future if we work together, the
administration and the Congress, in putting forth effective proposals
to address these challenges.
Thank you. I will be happy to answer any questions.
Thank you, Mr. Secretary.
And I'd like to turn to Senator Grassley for any opening
statement he might have.
I would apologize to the
secretary, because I was speaking on the floor of the Senate.
There seems to be a common refrain on the Democratic side that
those on the Republican side cannot, somehow, and should not,
criticize the future record deficits and debt that the president's
budget will produce. The premise of that position is that the last
administration produced similar deficits. Moreover, the common
refrain goes that the current administration, and implicitly the
Democratic leadership in Congress, had no hand in creating the current
Now, it is very true that President Obama inherited a big
deficit, and not a deficit that we can be proud of.
We on this side don't dispute that. But to say that we bequeath
solely by those on our side I think is misleading, and I have a chart
that will demonstrate that here.
This chart shows the relative level of deficits over the past
eight years. The chart shows the effect of the economy that the last
administration inherited, the flat investment pattern of 2000, the
tech bubble bursting 2001, the corporate scandals of 2001 and the
economic shock of terrorist attacks on 9/11. These all occurred at
the start of the last administration. They contributed to the sharp
downturn in the fiscal situation that you see demonstrated there those
When the bipartisan tax relief kicked in, the deficits came down.
You'll see in the period of 2004 to 2007 -- in 2007 we entered a
period of divided government, Democratic control of the Congress.
Unless I'm missing something, all of the fiscal policy in the period
2007 and 2008 was a product of a Democratic Congress and a Republican
A Democratic Congress made policy bequests and resulting
deficit and debt to President Obama. And a Republican administration
joined in that bequest.
So President Obama inherited the deficit and debt, and, of
course, it's very, very large as you can see there with the last
column. But that bequest was bipartisan.
Mr. Secretary, as head of the New York branch of the Federal
Reserve, you were a very key player in creating the Troubled Asset
Relief Program. And a good chunk of the big deficit and debt is
attributable to that policy.
I point this out to set the record straight so that we can
constructively -- with emphasis upon constructive -- tackle the large
fiscal problems we face together.
Now, I turn to today's hearing. A little over four years ago, at
this same annual hearing, I criticized the last administration in one
important respect: for the lack of transparency in its budget. The
criticism arose from the administration's -- the Bush administration's
failure to include an extension of the Alternative Minimum Tax patch
in this budget. It was towards the end of that hearing, and Senator
Wyden brought this up, waiting his turn -- final round of questions.
That exchange with Senator John Snow led to a bipartisan effort to
repeal the AMT.
In 2007, when control of the Congress shifted to my friends on
the other side, I likewise criticized them for not including an offset
AMT patch in their budget. In addition, I pressed them to include
extensions of popular tax relief provisions this committee developed
in 2001 and 2003. Both the last administration and the leadership on
the other side adjusted their budgets to account for AMT relief and to
deal with the broad-based expiring tax provisions. In neither case
was all of the tax relief fully accounted for. In neither case was
the revenue side of the budget fully transparent.
President Obama's budget breaks new ground in terms of
transparency. That is, of course, a very good thing. The budget
reflects extension of the AMT patch, although it needs to be fixed to
fully hold middle-income families harmless. President Obama's budget,
like the Republican administration and congressional budgets, includes
extension of the bipartisan tax relief packages of 2001 and 2003.
Unlike these budgets, however, this budget repeals the tax relief for
major categories of taxpayers.
On principle, President Obama's budget agrees with a basic point
many of us on this side have been making for several years; that is,
failure to extend current tax law relief is a tax increase. Getting
that discussion on this level, which focuses on the merits of existing
tax policy, is an improvement in the debate. For far too long -- two
years, to be exact -- we operated in an environment where the fiscal
effects of extending current law tax policy and spending policy were
subject to entirely different levels of scrutiny. Expiring
entitlement provisions, spending was not accounted for. Increases in
appropriation spending over the baseline were not accounted for. But
every dollar of current law tax relief was treated as the sole cause
of deficits. Common sense would tell you that for budget purposes, a
dollar increase in spending should be treated the same way as a dollar
of tax relief.
So I want to thank my president, President Obama, for bringing
more transparency to the revenue baseline. It will enable those of us
on Capitol Hill to more accurately discuss the tax policy changes as
Turning to those changes, there's good news. I'm pleased that
the president recognizes the importance of some economic growth
incentives. Last year many on our side applauded Senator Obama's
proposal for zero capital gains rate for small business and start-up
For reasons I don't understand, the Democratic leadership resisted the
proposal, even though Senator Kerry and Snowe introduced it in a
Why in a $787-billion bill, we couldn't err on the side of an
aggressive capital formation incentive is beyond me. President Obama
planted the flag for this incentive once again. He'll continue to get
my support and support on our side for his doing that.
I mentioned the good news on the AMT patch. I'm pleased that
much of 2001 and 2003 tax relief is made permanent in the budget. The
first bit of bad news is that those bipartisan packages are not
extended in full.
These are bad signals to send to workers, small-business owners
and investors. I have to wonder if these signals might have something
to do with the further downturn in the economy.
The second bit of bad news is that there is a new, hidden
marginal rate increase embedded in the budget. It is a proposal to
place a ceiling of 28 percent on deductions for mortgage interest,
charity and state and local taxes.
Let's review the bidding on the top two rates. The budget
returns to the Clinton era of 36 and 39.6 percent tax brackets; in
addition, the hidden marginal tax rates. This is where we need more
transparency, by not putting back in the pets and peeves but being
more honest and having a 42 or 43 percent top marginal tax rate, if
that's where you really want to go.
These marginal rate hikes are particularly punitive to small
business. I would ask the secretary to pay attention because
yesterday, I heard what he said on television, that only 10 percent of
the small-business people would be hit.
I want him to know that over half of the owners of small business
employ between 20 and 500 employees, are owned and operated by
taxpayers that are targeted for these heavy marginal tax rates. And I
don't understand why you would charge small-business operators more
than you would charge corporations.
But that's the effect of this over -- that's -- in other words, I
want to emphasize for the secretary, over half are between 20 and 500
employees. Small business employs over half the private-sector
workers in America. Two-thirds of small-business workers are employed
by firms between 20 and 500.
Those larger small businesses are also businesses most likely to
expand or contract, depending on business conditions. And I'd like to
have you check the latest Small Business Administration data.
It will tell you that small business created all the new jobs, in
this country, in 2004.
For 2007, the latest year for which data is available, small business
created 74 percent of the new jobs. A materially higher tax rate
will, whether the other side wants to admit it or not, affect the
ability of those businesses to expand and create jobs, because it
reduces after-tax cash flow. It reduces the after-tax rate of return
from business activity. Expansion means more workers. Contraction,
obviously, means fewer workers.
So I challenge anybody to tell me how raising the 33 percent
bracket for small business to as high as 40 percent will positively
affect that small business. I challenge anyone to tell me how raising
the 35 percent bracket for small businesses to as high as 42 percent
will positively affect that business.
Mr. Secretary, I believe the president and all of us want to grow
private-sector jobs. So it's hard to see how this dramatic tax
increase which zeroes in on those dynamic job creators, small
businesses, will grow the private-sector job base. In fact, private-
sector job loss seems more likely.
Mr. Chairman, last year we had a very informative hearing on the
financial effects of cap-and-trade tax. Then-Congressional Budget
Office director Mr. Orszag testified that cap-and-trade tax are that:
taxes. The budget reflects that view in how the cap-and-trade
proposal is treated.
We need to take a very close look at this proposal, particularly
the tax burden it would place on American consumers, workers and
business. Furthermore, we need to know the actual amount of revenue
the administration expects to raise under these proposals. The
president's budget hints at 400 -- $646 million, but it might raise a
lot more than that.
Finally, there is a heavy business tax in this budget. We need
to have a dialogue about those proposals. I'm proud of all the
Finance Committee loophole-closing proposals that Chairman Baucus and
I have developed since 2001 -- some $200 billion in all coming in that
wouldn't otherwise be there -- but we need to be careful to separate
loophole-closers from generic tax increases on business.
One proposal in this budget dealing with treatment of overseas
business income could put American companies at a competitive
disadvantage. Tax increases that ultimately result in American
companies shedding American jobs is not the right way to go.
We have a very -- an even bigger fiscal crisis coming. The Baby
Boom generation will be retiring in big numbers in the next decade,
and that's an entitlement problem. It is not derived from the current
or future state of federal revenue base. Under this budget, the
revenue base is set at above the historic average as a percentage of
the economy. Unless the predilections of particular members is to
solve the entitlement problem solely with record levels of federal
taxation, we need to deal with runaway entitlement spending. I don't
see the 800-pound fiscal gorilla dealt with in this budget.
Thank you, Mr. Chairman.
Thank you, Senator.
Mr. Secretary, I want to begin by just complimenting the
president for focusing so much on health care reform.
said, and Director Peter Orszag at OMB has said, basically the path to
economic recovery is through health care reform.
And that's clear, because health care costs are rising at such a
rapid, rapid rate in America today, affecting, as you said, not only
individuals, who pay enormously high health care costs in America,
through higher premiums or higher co-pays or out-of-pockets -- also
effect on business -- it is such a huge cost of doing business in
America, compared with the cost of doing business -- health care costs
of doing business in other countries -- and third, the fiscal -- the
hit that state budgets and certainly the federal budget has been
And I commend you for your -- including a down payment on health
My concern, frankly, though, is the viability of that down
payment and then how we -- how the budget and how the administration
will help Congress get health care reform enacted, but certainly cost
containment and budget questions are front and center.
The 634 billion (dollars) in the budget is basically split, and
half of that's proposed cuts and -- on the providers' side, Medicare
and Medicaid. Nearly half is basically the 28 percent limitation on
I'm a little -- I'm curious, to say the least, about that,
because those proposed savings are generally outside of health care
reform. And I would hope that the administration would look to try to
find savings within health care reform, because the reason for health
care reform is to help improve quality but also to cut costs,
including fiscal costs. And I'm just curious, if you might comment on
I'm a little -- especially concerned about the 28 percent
limitation, which has nothing to do with health care. There are other
tax provisions that have a lot to do with health care, but that one
does not. And I just don't -- I'm wondering about the viability of
that provision. And so if you could just talk a little bit about the
provisions of the president's budget related to how we get health
reform passed, and if you'd also focus a little more on how we find
savings within the context of health care reform, because certainly
reforming our delivery system is one way to get savings and so forth,
if you could.
Thank you, Mr. Chairman.
I just want to begin by emphasizing again how important health-
care reform is to the American economy, to American business -- not
just in manufacturing but small business across the country. As many
of you recognized, and you've said in this area, one of the most
important things we can do is to reduce the rate of growth in those
health-care costs. That will bring huge benefits to businesses across
the country. It's a very important thing to do.
What the president has proposed in the budget is he laid out a
set of broad principles to guide comprehensive health-care reform.
You've seen those principles. We want to work with the Congress on a
package of proposals that meet those principles, and we want to do so
in a way that is fiscally responsible, that we can afford to do within
our means. How we do that: We start the process tomorrow with a very
important meeting that brings together leadership in the Congress with
health-care experts to try to begin a process of comprehensive reform.
Now, (you ?) like to say that the down payment on the budget
proposes to allocate revenues from other sources to help finance this
important initiative. We recognize there are other ways to do this.
Many of you in this committee have put forward other proposals. We
are absolutely committed to working with you on how to produce a
package of reforms that meets the president's broad principles in a
way that is fiscally responsible for the country. We recognize
there's more -- path to that than what we laid out in the budget, but
we wanted to put on the table, to improve the credibility of our
commitment to do this, concrete proposals that would achieve that.
But this is -- you're not -- (inaudible) -- 28
Let me just say on that -- this is important to
do. That provision will affect 1.2 percent of taxpayers in America,
who account for a modest fraction of charitable contributions. And
our view is that will have modest effects on actual giving.
And, you know, the most important thing you can do for overall
charitable giving is to get the economy strong. That has the biggest
effect on giving as a whole. And so we think this is a -- is a modest
effect. And again, what we wanted to do is to lay out very concrete
proposals to try to make sure that people understand that we need to
do this in a way that's broadly fiscally responsible.
And the administration's willing to have
discussions with Congress on the employee exclusion -- health-care
Of course, we are willing to listen to all ideas
that meet these broad principles.
That's more health-related. It's also very
aggressive. And I might say, it's a 200 -- if you add it all
together, the health -- even if you include the payroll-tax component
-- it's about $300 billion a year.
One of the principles in the president's budget
is, again, to try to preserve our employee-based health-care system.
As you know from his comments during the campaign, that's a very
important part of his system. We'd like to preserve that.
But again, we recognize there are other ways to do this. And we
want to work with you on how best to put together an effective package
of reforms that's fiscally responsible that meets the president's
I appreciate it. My time's up. I just -- it's --
I just urge the administration to dig down deeper to try to find
viable savings and with -- and concentrate on savings within health-
Thank you. Senator Grassley.
Would you skip over me --
And then take the next Republican -- or just
after somebody else has --
Senator Bingaman, you -- this is -- (inaudible).
Thank you very much, Mr. Secretary,
for your testimony.
Let me ask about the issue about stabilizing the financial
system. I think you made the point repeatedly that the way to do that
is to get credit flowing again. To do that, we need to deal with the
troubled assets that are currently on the books of the financial
institutions in this country.
And the proposal, as I understand, that you have made as to how
to do that is to have this partnership with the private sector, and
that would involve Treasury making loans for this -- non-recourse
loans to private investors to buy troubled assets. At least, that's
my understanding of it. I think that's been criticized. Paul Krugman
said it was an attempt to socialize the losses while privatizing the
Could you describe for me how this will work? How does this plan
actually get these troubled assets off of the books of these financial
institutions so that they can get on with the business of providing
credit to the economy?
Thank you, Senator.
Let me just start by underscoring again how important it is to
recovery that we get the financial system providing credit again.
The Recovery and Reinvestment Act will not be as powerful as it needs
to be if the small businesses that would otherwise benefit, from those
programs, can't borrow to finance the investments they need, to
support the broader objectives.
Now, to achieve this objective, we need to do several things.
First, we need to make sure that banks have the capital and resources
they need to lend. Now, in a recession, demand for credit falls,
necessarily falls. And in a recession that follows a big boom in
credit, credit will fall more than it would otherwise fall.
What we have to do is to make sure it does not fall below that
economically viable level because if that happens, you're going to see
the recession deepen and intensify.
The first really important thing we need to do is to make sure
that banks have the resources they need, to be able to provide credit
to the economy. It's hard for them to do that in the market now,
because of this broader uncertainty hanging over the financial system,
about the depth and duration of the recovery, of the recession, the
losses that will come, where those losses will fall, across the
And breaking that dynamic is very important. For that to happen,
the government has to be willing, on a temporary basis, with tough
conditions, to make capital available as a bridge to private capital.
The second most important thing we need to do: The basic
machinery necessary for credit to work, in our country, is broken in
some respects. The pipes are clogged. So the securitization markets
are not functioning.
So a critical second part of our program is to act directly, to
get credit flowing again, to get those markets starting to open up.
And the entire small-business lending market, the auto finance market,
the student loan market, the consumer credit markets depend on that
So yesterday we announced jointly, with the Fed, a very powerful
program of direct financing, by the government, to help get those
assets, get those markets starting to open again.
Now, in addition to that, we are going to lay out, within the
next couple weeks, details of a new program that would marry
government financing, in this case, from the mix of the Fed and the
FDIC, alongside some capital from the government and some private
capital, to help provide financing, to help unfreeze those markets for
Those markets are now not working probably because of this
uncertainty, about the recession and the losses associated with that.
But they're not really working, because there's just no financing
The absence of financing is partly a reflection of the shortage
of capital in the system. And there's just great uncertainty about
recession. So it's good policy. It's good economics and it's smart
for the taxpayer, for the government to be willing to, on appropriate
terms, provide financing to meet that need.
By using private capital along with public capital, you can
reduce the risk that the government ends up dramatically overpaying,
for those assets, taking risks that we cannot understand and manage,
doing so at greater cost to the taxpayer.
Our program has these critical elements: again, a program of
capital as a bridge to private capital; very substantial direct
support to get credit markets opening up again; and a carefully
designed program of government financing alongside private capital to
help unfreeze these markets for legacy assets. Those are each
necessary important things to do.
Our obligation is to do those in a way that has the least cost to
the taxpayer, greatest protections for the taxpayer and greatest
overall benefit to get credit flowing again. And that's -- that basic
principal trade-off is going to guide what we do.
I still have six seconds, so let me ask another
(Chuckling.) I apologize. I apologize, Senator.
The assets that you're purchasing -- am I right,
though, that we're going to be providing these low-interest non-
recourse loans to private investors and essentially take on all of the
risk of -- on the downside while they get the benefit on the upside?
Yeah. And you understand these questions are
hard to answer until you see the details of the proposal. But again,
the objective is just the opposite. The objective is to make sure
that there is private capital in there to absorb that loss, to help
protect the taxpayer from those losses and again help us have a
program that doesn't leave us with a risk that we're overpaying for
risk we don't understand and can't manage effectively.
The government financing -- we'll provide it on sensible terms --
again, terms so that as markets stabilize, conditions normalize,
demand for that financing will normally fade away. So the art in this
is to do it in a way for the -- financing the government provides is
priced so that it's uneconomic, as conditions stabilize, for private
investors to continue to borrow from the government. They'll want to
replace that financing, because it'll be more economic from the
But you'll see. You know, we've laid out the details of our
Capital Assistance Program, we laid out the details of this direct
lending program to get securitization markets starting to open up
again, and you'll see in the next couple weeks us lay out the details
of we structure this fund to achieve the objectives I laid out.
Thank you very much.
Yeah. Mr. Secretary, when we met
in my office and when you appeared before this committee as -- in your
nominee status, I started our discussion by referring to an op-ed
piece, August the 14th, 2008, Wall Street Journal, by Doctors Furman
and Goolsbee. They indicated that an Obama administration would seek
to keep the revenue base at or close to the historic average of GDP.
At that point, CBO reported that over past 40 years it's been around
At the hearing that I just referred to, you indicated that in
general you agreed with Doctors Furman and Goolsbee's target.
Now the budget before us stays very close to that average in the
last -- in the first five years but trends about one-half point above
the average in the last five years, though it peaks at 19.5 (percent)
the last year.
So my question: Do you disagree with those, including some of
the Democrat congressional leadership, who argue that the only path to
fiscal discipline is to maintain record levels of federal taxation as
a percentage of economy? That's number one. And lastly, do you
recognize that there is a downside to future economic growth if we
return to record levels of federal taxation?
Senator, let me say it this way. It is
absolutely critical that, as we move to get recovery back on track,
that we commit to the American people that we're willing to get a path
-- the fiscal deficit on a path to sustainability within a reasonable
Now, again, we propose to do that beginning when we believe we're
confident recovery will be in place, the economy will be growing again
at reasonable rates. But when that happens, it's very important we
bring those deficits down. And we laid out in the budget a concrete
mix of spending and tax measures that will achieve that objective.
Now, as economies recover, revenues rise relative to GDP. And
you're absolutely right that you need to look very carefully at the
impact of the overall tax burden on the American economy and the
effect that has on incentives for investment and savings in growth.
And that basic approach underpins the proposals we've made in this
So I agree with you that it's very important we get the budget
down to a sustainable level over time. If we don't do that, we're
going to be living with lower levels of private investment, higher
interest rates. That'll be bad for growth. That's the critical
imperative. How we do that is important too. And we've laid out a
mix of policies on the spending side and on the resource side that we
think will get our economy in a position where we're stronger for the
Okay. New question. As modified by the stimulus
bill, Section 1202 of the code, 75 percent of the gain realized on the
sale or exchange of certain small-business stock held for more than
five years is excludable from gross income, the remaining gain taxed
at 28 percent. So effectively, it's a 7 percent (rate ?).
However, then-Senator Obama in his election campaign called for
such small-business corporations' stock to be completely exempt from
capital-gains taxation. And I favor that as well. The -- that
amendment was not adopted in the stimulus bill as I was offering it.
Now, to the president's credit and as a follow-through to his campaign
pledge, in the proposed budget the president again calls for complete
capital-gains tax exemption on the sale of that small-business stock.
However, I'd like to suggest a couple things that the president's
proposal could contain to achieve the maximum benefit from his
proposal. I don't know the specifics, so maybe he already has these
First, the proposal should make Section 1202 gain not subject to
AMT. Second, the proposal should increase from 50 million (dollars)
to 75 million the amount of aggregate gross assets the corporation
could have and still qualify for a qualified small-business
corporation. This is appropriate, given that the $50 million limit
was set in 1993.
So my questions. Two. Would the administration support
completely exempting the sale of Section 1202 stock from the
alternative minimum tax? Would the administration support increasing
aggregate gross asset limits from 50 (million dollars) to 75 million
(dollars) to keep up with the inflation from when it was originally
Senator, I just want to begin by saying that
thank you for emphasizing the importance of that measure. I believe
this is a good budget for small businesses. It's very important to
point out that 97 percent of small-business income occurs to people
below the 250,000 (dollars) a year threshold. Important to point that
It's very important to state, as you said, that the budget
proposes a zero capital gains rate tax on investments in small
Now, the specific provisions you made, happy to consider. We
would like to hear a little more from you about how those could be
designed. And again, we're happy to think about them carefully and
get back to you.
I'm done, Mr. Chairman. Let me just suggest to
him that this is one area where if you want bipartisanship, you're
going to get it.
Thank you, Mr. Chairman.
Thank you, Senator.
Thank you, Mr. Chairman.
I listened to your entire testimony before the Ways and Means
Committee yesterday. Unfortunately, you misspoke. This committee,
the Finance Committee, did not approve of the way your taxes were
handled. You stated to the Ways and Means Committee that there was --
we approved it.
No, Senator --
Well, you can play both tapes, and you will find
out that you misstated.
Senator, what I said is that you had -- that I
had disclosed fully to the committee and the committee had put that
into the public domain. That's the only thing I said yesterday.
No, it was -- the word "approved" came in.
Not by me, but --
Yes, by you.
Well, I mean, we can get the tapes of both
committees, and you will find that we didn't approve, we questioned
you on it. And some were very unhappy with it and some just passed it
on. So that's -- that's over.
You say the budget does not raise taxes on American families
making less than $250,000. But the budget also has a cap-and-trade
system that will auction off emission permits to tip the scales in
favor of less efficient and more costly energy sources. That will
result in higher costs for energy and manufactured goods for all
Americans. How does that not break the president's promise not to
raise taxes on Americans making less than $250,000?
Senator, the president believes, as do a large
majority of the American people, that it's very important that we
reduce our dependence on foreign oil and we move now to put in place a
foundation to encourage greater efficiency in the use of energy and
greater use of clean energy technologies.
Now, that -- you cannot do that without changing the incentives
Americans face for how they use energy. The cap-and-trade proposal --
Well, we could argue about how we're going to get
True. But I think the important point I want to
make is that to do that requires that you change the incentives for
how Americans use energy.
Now, in the president's proposal, which of course --
We've been doing that in 2005 and 2007. Both the
two energy bills that we passed did exactly what you are proposing.
Well, we're going to have to do dramatically more
in that area, I think, to achieve this broad objective.
I agree, because all the things are not included.
Right. And what the president proposed is that
we work with Congress, on a comprehensive cap-and-trade proposal.
And as you know, the resources that proposal will raise are going
to be devoted to making the Make Work Pay tax credit, tax cut
permanent -- this will affect 95 percent of working Americans -- to
devote additional resources to helping facilitate this transition to
cleaner energy technology.
And if it raises additional resources, we will devote those to
helping directly affect those individuals who might face higher energy
costs, if they do not change their behavior, of how they use energy.
But we believe --
But then the ability to trade or to auction off
emission permits is a way that the less efficient are more rewarded
than the more efficient, because they can go and still not comply and
buy the emission permits that are available.
Senator, the cap-and-trade system has been
applied successfully in our country, in parts of the country, to
reduce acid rain. It has been used in other countries with
Well, but there's a cost involved there, because I
live in Kentucky. So I pay the cost.
Well, Senator, again what this proposal is
designed to do is to change the incentives American face, for how they
use energy, so that --
I have one more question.
So that again we make more progress, in energy
independence and improving energy efficiency and facilitating a
transition where we're relying much more heavily on clean
Okay, thank you.
I have one more question and it involves LIFO. This will
disadvantage American companies such as retail companies and
particularly companies in my state of Kentucky, the bourbon industry.
LIFO minimizes artificial inflation gains and accurately reflects
replacement costs. One example of how it is used in Kentucky bourbon
industry, whose aging process under federal law requires that bourbon
be held in inventory several years before it can be sold.
Repealing LIFO would harm U.S. companies and favor their foreign
competitors. At a time of economic distress, when we are trying to
encourage more U.S. manufacturing, the repeal of LIFO moves in
precisely the wrong direction.
Why would we want to repeal LIFO now, after it has been in place
for more than seven decades?
Senator, I've heard a lot of concerns about this
specific provision. There are a significant number of tax
professionals who believe this is good tax policy, good economic
But I've heard, from many people, a lot of concerns about what
impact this might have. And we're going to have to look carefully at
those concerns and the extent we can mitigate those concerns. But I
understand them. And I'm happy to spend more time understanding
specifically the concerns you're worried about, in terms of how they
affect a particular industry.
Thank you, Senator.
Thank you, Mr. Chairman.
Mr. Secretary, I strongly support the views Chairman Baucus has
expressed today -- you, starting tomorrow at the health care summit,
put these federal health care tax rules on the table. It is clear to
me that Democrats and Republicans alike agree that these rules are a
$250 billion monument to regressivity and inefficiency.
And if you do what Chairman Baucus has suggested today, it seems
to me you get a two-fer. One, you get savings immediately on the
health care side, while still protecting the middle class and honoring
the president's promise that people can keep the coverage they have.
And second, you're going to get savings in the future, because you
change people's behavior. So in the future, President Obama and other
presidents won't have to come back and say, "We need money from non-
health-care accounts to fund health care."
Now, you've said you're going to study this. That's
constructive. But what I'd like to know is, do you personally share
the view that these federal health care rules, as constituted today,
are regressive and promote inefficiency?
Senator, what I personally believe is it is
critically important for our country that we come together on a
comprehensive health care reform package that meets the broad
principles the president laid out, and does so in a fiscally
Now, you and your colleagues have shown great leadership in
identifying a very carefully designed way of meeting that objective,
within the framework of the health care system. And as I said to you
before, and I'll say it again now, we will look very closely at those
ideas and at those proposals.
But it's not about looking at my ideas, Mr.
Economists, senators -- I mean, it is almost a
universally-held opinion now, in terms of the scholarship in this
area, that these rules are regressive and promote inefficiency. I
just want to know if you disagree with those kinds of arguments.
Well, I think --
Whether it's Milton Friedman --
-- whether it's Bob Greenstein, I mean, literally,
across the political spectrum, people agree with this. Do you?
Senator, I agree, there is broad support --
-- among economists for what you laid out -- for
what you laid out. I agree with that. I think the -- you know, what
we want to do is fix this. There's a lot of things we're going to
have to change. There's lots of room for improvement, lots of ways to
solve this. We want to work with you on how to do it.
Very good. Let me ask you a question about taxes.
In the last decade, there have been thousands and thousands of changes
in the tax law. It comes to three for every working day now. And
it's very harmful to businesses, who need certainty and predictability
to grow, to face this relentless blizzard of tax law changes.
Are you at all concerned about how the effect of the many more
tax changes you propose now will impact businesses that want to grow
in 2009, knowing that they're going to face more proposed changes in
2010 when tax reform comes along?
Senator, I do agree with you that there are a
wide range of aspects of our tax code that add to uncertainty. And
that uncertainty makes it hard for businesses to make decisions,
launch (their initiatives ?). I completely agree with you about that.
And as we work together towards ways to improve our overall tax
system, tax code, addressing that question will be a critically
The most important thing we face today is to get recovery on
track, figure out a way to make these long-term improvements in health
care, education and energy infrastructure in ways that are fiscally
responsible. The budget proposes a very comprehensive set of changes
designed to achieve that.
It's not going to satisfy everybody. It will come with other
concerns. But we think, as a whole, this package of changes will
improve our fundamentals as a country and leave the economy in a
strong position going forward.
Now, the budget doesn't solve all problems. There are a whole
range of other features of our tax code that are not addressed in this
budget that we would like to build consensus on addressing. And I
hope we have the chance to begin that process with this committee and
your colleagues in the Congress.
I hope you will also say with your tax changes,
though, that you're really setting the table for tax reform in 2010.
Because you look at all the changes people have gone through just in
2008 and 2009, if you're sitting somewhere in Montana or Oregon and
you're trying to grow your business, you've already had thousands that
you've had to assimilate in the last few years. Then you're facing
more proposed in 2009 with tax reform coming at you in 2010. The
first thing you do is you say, I'm going to be a little cautious about
investing knowing that perhaps what I'm doing today may be affected by
changes that are coming up literally in a matter of months.
True. But I think the overall impact of these
changes are, again, are good for business. They're good for
investment. And we're being very clear that we're not going to raise
taxes until recovery is firmly established. And we're very clear
about what taxes will change as we emerge from recovery. So you're
right that certainty is very important. I'm sure we can do better.
And I hope that we're beginning to lay the foundation for broader
Thank you, Mr. Chairman.
Thank you, Senator, very much.
Thank you, Mr. Chairman.
And I, too, want to emphasize how pleased I am that there's
health care reform emphasis in the budget and also some recognition
that there are some health care reform costs involved in it. And I
also want to say how much impressed I am with the leadership of
Senator Baucus on health care reform.
The Senate has been involved in
it for some time, but that's not where I'm going to ask my questions.
I have another favorite area which is workforce training. We have
been trying for four years to get some more flexibility built into
workforce training so that we could train people to some of the
higher-skilled jobs that we're now exporting to other countries.
And it ties in with the goal of creating or saving 3.5 million
jobs, a marvelous goal. Now, I understand creating jobs. What I
wondered was how you rate the saving jobs? What's a saved job?
Well, that's a loss avoided or a rise in
unemployment avoided by getting growth back on track. Again, without
a very substantial program of investments and tax incentives, we would
face a prospect of a much deeper recession and much higher levels of
unemployment. So the president's commitment is framed that way
because our first obligation, again, is to reduce the risk of further
job losses and lay a foundation for a recovery in employment.
But aren't all jobs kind of tenuous at the moment, so
all 130 million or however many there are are being saved by what
Well, I'm not sure I fully understand what we're
debating. I think that it is -- you're right, the economy is going
through a --
I'm just asking for more emphasis on the created jobs
rather than the saved jobs so that we are expanding the skill levels
of the people that we're doing and hope that the administration will
take a look at that Workforce Investment Act to get that flexibility
in there because those are the people that are without jobs. The ones
that still have jobs that are tenuous, we need to do everything we can
to save those.
We want to save them, and we want to create more
jobs. And we want to make the average American worker more productive
in the future, not just through things like worker training but also
by improving basic quality of education outcomes. I absolutely share
that objective and would be happy to work with you on that specific
Thank you. I'm just trying to keep the transparency
I need to talk to you about a very small part of the
budget but on that affects a number of states, including the
chairman's state. About three years ago, we had a tax that we about
to expire. And we put together a rather tenuous group of people to
extend that tax and solve some other problems, one of which was the
problem of orphan minor's health insurance. Orphan minor doesn't mean
they don't have parents, it means that their company no longer
But we were able to save that. We were able to move up the
amount of time that it took to do reclamation in some of the states
that had very little money coming in. And we encouraged the other
states that had been responsibly taking care of their problem to look
at some other things, like more efficient energy and cleaner energy.
And I think the states have been doing that. But there's a provision
in this budget that now jerks the money away from those states that
had been responsibly doing it and ends their alternate or clean energy
or additional energy projects.
And I'm hoping you'll take a look at the history and see how
tenuous that was and see how widespread it is and see if can't -- it's
such a small part of the budget, I'm sure we can work out something.
But all I'm asking is that you look at the history and see what we can
I will take a look at it and come back to you
with a response.
Thank you. And in my remaining few seconds here, I'm
going to express some concern for small-business men. And I think
that quite a few of the people that have already been in this $250,000
tax level are ones that have S corporations, limited liability
corporations, single proprietorships, other businesses where the money
from their business flows right to their bottom line on taxes, even
though they have to plow a lot of that back into their business to
keep their business going. And it will be a huge blow to them and
their businesses and their ability to stay in business if the housing
and the charitable giving and the increased taxes hit them. Is there
any way that we can exclude the small businesses on this? Is there
any way we can give them some kind of relief? I'm just asking.
Senator, as I said before, our estimates are that
the proposals in the president's budget to allow the marginal tax
rates at the very high end above $250,000 to return to their 2001
levels, that specific proposal. We believe it will affect a very
small percentage of small-business owners. The estimates that I was
given yesterday by independent analysis were roughly 3 percent of
I think it's important that we look at the overall impact, again,
of these proposals in the budget on the basic environment in which
businesses operate. And I think the combination of the fact that most
small businesses will see no increase in taxes, some will see a
reduction in taxes, combined with what we're going to try to do with
health care costs, combined with the other broad incentives for
investment we're creating in this budget is a strong and powerful
package of incentives because we believe, as you do, that small
businesses are a critical source of not just innovation and vitality
in our economy but of job growth. So it's a critically important
objective. And we're open to work with you and your colleagues on
other ways, including the ones that Senator Grassley suggested. And
we'll look at all proposals because we share the importance of this
Thank you. My time is expired.
Thank you very much, Senator.
Senator Nelson, you're next.
Mr. Secretary, good morning to you. On
the question about folks not paying what they owe in their taxes,
particularly some of the banks that have used the offshore tax
schemes, and that's estimated somewhere in the range of 40 (billion
dollars) to $70 billion a year that they are not paying. And that's a
heap over the ten-year budgeting period that we have, 400 (billion
dollars) to $700 billion. And a recent GAO study showed that of the
100 largest U.S. publicly traded corporations, that 83 have
subsidiaries in offshore tax havens. For example, Citigroup which, by
the way, is one of the major recipients of bailout funds, has 427
subsidiaries in tax havens, and there are 90 of those subsidiaries in
the Cayman Islands alone.
What can we -- and I don't say you, I'm saying we -- I filed a
bill with others, including Senator Levin, to address this issue. But
what should the U.S. government do to close these loopholes before we
continue to ask taxpayers to bail them out when they're not paying
their fair share of taxes?
Senator, I share your concern. And I think
you're right to point out it's not fair to people who pay their taxes
for people to continue to have the ability to evade U.S. taxes by
taking advantage of offshore tax havens and a range of other
provisions in current law which makes it possible to evade U.S. taxes.
That's why in the budget there is a clear commitment by the president
to come to the Congress with a comprehensive set of proposals for
reducing international tax avoidance. As part of that, we're going to
have to bring a much more ambitious effort to deal with offshore tax
That's not going to be enough, though. There's a range of other
things that are in the tax code now, which create incentives to shift
investment jobs overseas, create other opportunities to evade U.S.
taxes. And we're going to come and give you the best set of proposals
we think we can come up with to try and meet this broad objective.
But I think you're right, it's not fair. And particularly given the
scale of the fiscal challenges we inherit and the important long-term
investments we're going to need to make, the only way to get ourselves
back to a fiscally responsible path is do a better job of dealing with
Now, you know, in the budget there's a very substantial request
for improved enforcement resources. The IRS and the commissioner is
going to be in a position to come and explain in more detail how he
plans to use those. But we're going to look at the full range of
ideas, including the ones you referred to in your bill. And of
course, this committee has shown great creativity and leadership in
this area in the past. We'd like to build on those suggestions.
That is wonderful news and a refreshing attitude.
And Mr. Chairman, this, of course, will be a matter in front of your
committee. And I value your leadership on us addressing these tax
Very important question. I'm very glad frankly
this is being addressed more forcefully by this administration because
it's a big problem.
And very forcefully, and I am very appreciative.
Right. There are lot of ideas. And a lot of them
sound good on the surface, but the main point is to be effective in
closing down those loopholes.
I think the hard thing is, of course, everybody
is for closing the tax gap. But when you look at the specifics,
sometimes that enthusiasm fades. So we need to make sure that we're
putting together as comprehensive and carefully designed set of
proposals as we can. We have no alternative but to do a better job in
Now is the best time to do it. Thank you.
May I, in my remaining time, Mr. Chairman, just ask
one more question?
What we have, as I see on the issue of housing,
we're having voluntary loan modifications made by banks, but they're
putting them back into a loan modification that may be another
adjustable-rate mortgage that when the time comes it's not going to
solve the problem. And we've got this kind of revolving situation
that is delaying the inevitable. The housing plan that you've put
forth has incentives for voluntary modifications to those fixed
mortgages. What can we do to put the protections in there to help the
homeowners from not being forced to or encouraged to sign up for
another mortgage that they cannot afford?
You're absolutely right that many of the
modifications that have been done to date don't fundamentally improve
the overall debt burden of the borrower and still leaves them in an
unsustainable position. And what this program does is try to address
that. So the program provides a powerful set of incentives to produce
more affordable mortgages for people that meet these carefully
eligibility tests because we don't want to be devoting taxpayer
resources to support homeowners that don't need the assistance, nor do
we want them to be directed to homeowners who really knowingly
borrowed dramatically beyond their means. But what this proposal does
is provide, as I said, a powerful set of incentives, incentives of
both types, meaning what I might say persuasive force and some
economic inducements, to provide substantial improvements in
affordability for people who meet this important test where with those
changes you're going to be put in an economically viable position,
able to stay in your home in that case.
Now, that's not the only thing this plan does. Can I just, Mr.
Chairman, quickly say --
-- I'm sorry -- that -- and this is very
important. A critical (component ?) of the rest of the program the
president announced is to try to bring mortgage rates down for all
Americans. The role Fannie and Freddie play in our housing market is
a critical part of that. We announced a significant set of measures
to achieve that objective. And for the first time, we laid out a new
program that would help Americans that have somewhat higher-than-
typical loan-to-value ratios take advantage of the reduction in
mortgage rates already by refinancing where they previously did not
have the opportunity to refinance. Those things together, we think,
will help address this acute crisis that's causing so much damage.
Senator Snowe, you're next.
Thank you, Mr. Chairman.
Mr. Secretary, the president said that in order to have a full
recovery then we have to really resolve the credit crisis. And you've
acknowledged in your statement very emphatically that the credit
crisis has not been resolved, that the dynamic continues to be that
the banks simply aren't lending. That's difficult for my
constituents, and I think it's true of most Americans as to why the
banks are not lending.
I don't know if we know what they're lending, if they're lending,
which banks who have been participating in the TARP program are
refusing to disclose the data on whether or not they're lending.
And so I would like to ask you exactly what do you know, what can
you tell us and, more importantly, what can you tell Americans in
terms of when do we expect that this credit crunch is going to be
resolved, at least to ease, because at this point there is no
discernible evidence on Main Street, certainly in my state, and I
think that's true across the country. And that is deeply disturbing,
frankly, because months have gone on; we've obviously given over, you
know, $250 billion to banks specifically for this purpose, not to
mention the multi-trillions, in all venues, to rejuvenate the economy.
So what can you tell us in this regard about what is your
timeline and measurement for the credit crisis to ease, and whether or
not the banks are disclosing exactly what they are doing with this
Senator, this is critically important, and
everything we're trying to do to get the economies back on track
depends on trying to make sure that our banks are lending and credit
markets start to open up again.
The -- as part of the program we've initiated, we are going to
put in the public domain much more detailed reporting, bank by bank,
by TARP recipient, what's actually happening to their lending and
overall balance sheets. So you will be able to see, the American
public will be able to see, for those institutions that get assistance
in this context, what's actually happening to lending.
As a condition for new assistance, we're going to make sure that
they have to give us a report in advance that explains how they're
going to use that assistance to increase lending above the levels that
would otherwise have prevailed, and you'll be able to see that on an
Now, across the country, in our very diverse mix of banking
institutions, you have some institutions that were not part of the
problem and are strong and are going to expand lending and are
growing, but you have other parts of the system where they're going to
need more capital in order to help support recovery. And our program
is designed to provide that.
Now, you're absolutely right that this is still a deepening
recession and a deepening credit crunch, but I just want to point out
that many costs -- many measures of borrowing costs have come down.
Mortgage interest rates have come down. Borrowing costs are lower for
banks than they would otherwise have been. And you're starting to see
some aspects of the corporate lending market start to open up again.
But we're at the beginning of that process, and it's going to
take more efforts by us to do that. And I think the best measure that
you're going to see of improvement is, again, when those borrowing
costs start to come back down to more normal levels. That will be the
critical test of success. And that's going to take more time, but
it's going to require more carefully designed, appropriately
conditioned capital from your government, as well as a much more
powerful set of direct credit support to the markets that are critical
for consumers and small businesses. And that's what we're doing.
Well, are you planning to release the list of all
450 banks that have received assistance under the TARP program and
what they have done with that money?
Well, we produced a report --
Going retroactively --
-- as well as prospectively, all the banks?
Well, we are putting all the terms of past
assistance on the website for people to see it. So you'll be able to
see the recipients and the precise terms.
We released just last week a new report that looks at the largest
banks in the country, which account for most of the lending. So you
can see on a -- I think it's a monthly basis -- exactly what's
happening to lending by them, detailed by institution.
And going forward, as a condition for any new assistance, you're
going to see much more detailed reporting requirements so -- again, so
that you and your colleagues and the American people will be able to
see, bank by bank, what's actually happening.
Now, again, what -- it's very important to point out that in a
recession, particularly after a huge credit boom like this, demand for
credit by even the strongest companies will slow. And you're seeing
that happen. What we need to do is to make sure the credit crunch
doesn't deepen the recession. And that requires more action by the
government, because in a crisis like this the private sector's not
willing to take risks that would otherwise be economic.
Well, and it's going to undermine the value of the
stimulus plan --
-- once it's under way. And there have been -- you
said yesterday that this will -- this crisis will be much worse if we
don't move quickly. And I think we've moved very quickly on all
fronts here, since this, you know, whole scenario unfolded last fall
-- and some say exposures up to $9 trillion. So I do think that it's
absolutely vital that this gets under way.
And you've projected a growth for 2010 -- or at least the Office
of Management and Budget -- of 3.2 percent. So obviously that's
predicated on certain assumptions of what's going to occur this year.
And so that's why it's important to let the American people and all of
us know exactly when you think that's going to unfold, because that's
twice the growth rate that the Congressional Budget Office is
projecting for 2010. That's a quantum leap from a -- you know, from a
6.2 percent contraction in this last quarter and minus 1.3 percent
projected for this year.
You're absolutely right. The economic recovery
depends on financial recovery.
Just one thing about the forecast --
The administration's forecast is within the range
of estimates that CBO's produced that try to measure the effect of
stimulus on the forecast. And it's also within the range of private
forecast estimates for 2010. And most private sector economists
expect you start to see the economy start to recover in the second
half of this year. But it will depend in part on how quickly we move,
not just to get stimulus in place but, as I said, to get more support
into the financial system -- (inaudible) -- again.
Thank you, Mr. Chairman.
My colleagues have asked so many questions, Secretary Geithner,
that -- I feel like I have many myself and I could go either way,
either talking about the bailout or talking about the tax code. So
hopefully I can get through a couple of these.
First of all, AIG has been bailed out four times since September
to the tune of $160 billion -- September 16th at 85 billion (dollars),
October 8th at 37 billion (dollars), November 10th at 150 billion
(dollars), I believe, and then recently, March 2nd, 30 billion
(dollars) is the proposal. Why hasn't Treasury come forward and said
who are the affected counterparties, the people that are most affected
by the collapse, so that we know why we are doing this?
Senator, thank you for asking this.
AIG got itself in the position, because there was no effective
oversight, where it took on enormous leverage in a large hedge fund
attached to a set of very well designed, well performing insurance
This company operates in countries around the world. It's
enormously important (sic) entity in this context. And its failure,
in the judgment of your government, would have caused catastrophic
damage to the savings of Americans, to interest rates, to pension
values. And you would have seen -- and this is -- I share this
judgment -- you would have seen much greater damage than even we saw
with the failure of Lehman.
That's a --
Now, the world --
That's a -- if you could just clarify more on
that -- because you're saying basically it would have been bad for
America. What I want to know is who would it have been bad for that
would have caused the problems for common Americans and their savings?
The biggest effects would have been on -- not on
the direct counterparties to the affiliate of AIG that sold a bunch of
credit protection. The biggest effects and the most troubling effects
-- like what you saw in Lehman, but I think they would have been
bigger in this case -- would have been on broader confidence in the
financial system, in asset values, in interest rates and in
willingness of people to take risk in exposure to financial
That's -- would have been the cause -- much more damage. That's
harder to quantify, harder to understand. But in the AIG case, it's
very important, because millions of Americans here and around the
world depend on AIG for insurance policies and a range of different
types of savings products. So the judgment your government made in
that context was -- and I think it was the right judgment -- that the
effect on confidence would have been very dramatic, I think more
dramatic than even in the case of the failure of a major investment
Well, Secretary Geithner, with all due respect, I
think that is the question of the day: confidence in the plan. And
the plan is slowly dripping out, and people don't understand where
it's going. They don't understand the AIG bailouts and where and who
it was benefiting. They don't know what specific industries and
companies that we were helping to preserve those opportunities for
Americans. And they don't understand the plan overall.
Senator, just again on AIG, because it's very
important on AIG -- the world has gotten dramatically worse since
September of 2008. You're seeing that across the financial system,
across life insurance companies generally. The world is more fragile
today even than it was then. And therefore the consequences of
allowing a disorderly failure of AIG would be at least as damaging
today -- it was then.
And it is our judgment that the best way to protect the American
economy, from that risk, is to stabilize this institution and let it
be in a position where it can pursue a restructuring, over time, that
leaves us and the taxpayer better overall.
That's why we're doing this. It's because of those broader
benefits. And we believe this is the least-cost way to protect the
economy from that. I wish it were not so. It would be much better,
for us and for you, if we had another alternative to this path that
would contain the damage to the economy as a whole. But that
alternative does not exist.
I'm not sure that we're getting to the point that
I wanted to get to. So I think what I'll do is I'll skip to something
else. And then maybe you and I can have a longer conversation about
that. But I do think that people really do want to understand the
specifics behind that particular bailout and more details, more
details about the plan.
This particular proposal on the budget and taxes; I have a
question in the sense that, you know, there's a lot of junk in the
code. My colleagues have been bringing that up; some people who don't
pay their taxes. But obviously there are a lot of loopholes. Some
other people have been bringing that up.
Why not look at a broader approach to the tax policy than coming
in with this proposed change to the marginal rates? Are you convinced
that we would have to have this high a change to the marginal rates
if, in fact, we would have taken a more systemic approach to this
What I'm saying, you know, coming from software, when you have
errors or bugs in the code, it's a problem. It affects everything in
the system. And that's where we are today.
We have a lot of errors and a lot of bugs in this code. And how
do we know that this plan that you're proposing wouldn't be less
impactful, if we had actually taken a larger approach to closing some
of those and cleaning up some of the problems, in the tax code,
something I know the chairman has talked about doing, a major overhaul
of the system?
Well, we do propose a lot of changes in the tax
code, particularly things that allow people to take advantage of ways
of avoiding U.S. taxes. So we are proposing a lot of changes to
those. But you're right.
As I said earlier, we're not proposing, in this budget,
comprehensive tax reform. But we would like to begin the process of
working, with you and your colleagues, on other changes we can put in
place, not just to simplify the tax code, not just to provide more
certainty to business, not just to make it more fair, not just to make
sure it provides better incentives, for growth, but so that we're
making it a more efficient overall system.
But we couldn't do that kind of comprehensive reform in this
budget. But we'd like to begin that process with you. And we're not
claiming to, of course, in this budget, of -- try to take on those
myriad of other problems that -- but we'd like to begin that process
Thank you, Senator.
Thank you, Mr. Chairman.
Thank you very much, Mr. Chairman.
And Mr. Secretary, welcome. I would also reiterate what our
chairman has indicated about health care, and appreciate the focus and
how critically important this is to the economy and to jobs in the
United States, and certainly to manufacturers as well.
I do want to take a moment -- a lot of important questions have
been asked today, a lot of issues on our minds. But I am going to
zero in on something not surprising to you, which relates to the auto
industry and auto financing and people being able to get loans and so
And do want to just, as an aside, indicate, with all of the
dollars that Senator Cantwell was talking about being asked of AIG,
the relatively small amount of money that General Motors and Chrysler
are asking for by April of 6-1/2 billion (dollars) looks like a
rounding error compared to AIG and a number of other things, and will
keep 3 million people working in this country. So, editorial comment.
But I do want to talk, though, about the credit crisis that has
brought us to where we are, because it is a global credit crisis that
has made it impossible to raise capital for the auto industry, or
manufacturers in general, to invest in the technology we want them to
invest in, to get to the electric vehicles or to even do daily
operations. We saw yesterday in the papers that Japan is going to
move forward with money for Toyota because of the global credit
crisis. So all of the companies in the world are facing this same
challenge, regardless of how people feel about individual companies.
But our dealers and suppliers don't have the credit that they
need to finance inventory, as you know, or to cover capital costs.
Financing companies lack funds to support dealers, to make consumer
loans. And with the consumer demand going down for buying the second-
largest purchase that a family buys, which is their automobile, and
the economic crisis we have today, it's really a perfect storm.
So I appreciate what you announced yesterday with the TALF
program, the term asset-backed securities loan program, because it is
very important to get credit flowing again. However, we have a
problem. And I don't know if this is something that you yet have been
focused on, but the reality is that the program, as put forward,
requires a triple-A rating from two rating agencies. And given the
uncertainty and the ongoing discussions right now with the industry
and with the government, some of the rating agencies have declared
they can't affirm or assign a triple-A rating for securitizations of
dealer floor-plan financing lines, which obviously is a very serious
issue at this point.
In other words, they can't use it. Even though you've announced
it, they're not able to use it. And so I'm wondering, how will TALF
help issuers of dealer floor-plan securitizations that can't meet this
requirement at this time?
Senator, thank you for raising that.
TALF will help, but it's not going to solve all these problems.
I think that, you know, what we need to do and what we're working on
is trying to make sure that these companies lay out a restructuring
plan that puts them on a path to viability without government
assistance over the longer term.
That's a necessary condition for addressing this crisis in the
We're also looking, though, directly at whether we can -- as part
of that, whether we can do other things to help to get directly at
these financing problems that are affecting both suppliers and dealer
inventory financing. So we're looking very carefully at a range of
different ways to address that. And you're right to say that we need
to look at that alongside trying to -- trying to help facilitate the
kind of substantial restructuring the industry needs as a whole.
I mean, we know that the challenge for them is
they have to keep changing their numbers downward, in terms of auto
sales. That's what's driving their ability to put forward various
And you've seen the options. And so the question
of whether or not this financing, this new financing for auto loans,
can actually go to financing arms is absolutely critical. And when we
look at the fact that the TALF program is using three rating agencies
-- SEC relies on 10 different rating agencies. And so I'm wondering
why the Fed is choosing three, versus 10. And wouldn't that give us
the ability to more quickly help in this area, if we were to use a
different approach on the rating agencies?
Well, I'll pursue that specific question with my
colleagues at the Fed, and have someone get back to you on -- on
whether that's something that we can address. But I think the
important -- the really important -- that we're going to have to more
-- look more comprehensively as we try to see whether we can
responsibly help facilitate the kind of path to long-term viability
that's going to be critical for the industry as a whole. But
addressing the financing things I think are -- you're right, are
Thank you, Mr. Chairman.
Well, thank you.
I'm next, according to the chairman. Mr. Secretary, welcome to
the committee. I don't know how you can do all your work and keep
testifying on Capitol Hill like you have. It just seems to me it
would be better to keep you working. But now that you're here, we
might as well ask at least some tough questions.
You stated the president is determined to cut the $1.3 trillion
deficit by at least half in four years. The Congressional Budget
Office estimates that if we did nothing at all, the deficit would
decrease by 90 percent. Now, how can President Obama claim that he
will decrease the deficit by half, when the deficit will automatically
decrease at a much higher percentage?
Senator, I have not looked at the details of that
study, but I don't think it's the right way to think through this --
I think you need to look at the details.
Yeah, I will look at the details of it.
If that's true, why are we going through this? I
It -- framed that way, it can't be right.
If we -- if we don't get growth back on track, we
will face higher long-term deficits.
It's -- the fiscally responsible thing to do now, if you worry about
long-term sustainability, is to do what we can to get recovery
established and the economy growing again.
All right. I'll accept that. I'd like you to look
at it and like you to answer that for me and get me your criticisms of
that particular approach.
Now, you indicate in your testimony that you recognize that many
small businesses are operated as sole proprietorships or through
partnerships or other flow-through entities. Therefore, you obviously
realize that the individual tax rates have a profound affect on those
businesses. Your testimony says that 97 percent of small businesses
would not be affected by the president's plans to increase the tax
rates on single individuals making over $200,000 or families making
over 400 -- or 250,000 (dollars).
Now, it may be true that a high percentage of small businesses
may be unaffected by these changes, but isn't this because there are
so many millions of small businesses that are very small and have just
one or maybe a handful of employees? Now, if you were to analyze the
income earned by small businesses, wouldn't the answer be quite
The data I've seen, which is from the Treasury, from your
organization, indicate that between 7 percent and 9 percent of small
businesses pay tax at the top two marginal rates, but that these
taxpayers account for between 57 percent and 72 percent of flow-
through business income and between 75 percent and 82 percent of
taxes. And of course, these larger small businesses are the ones with
most of the jobs, too.
Now, can you and the administration honestly tell me that you
believe the proposals that would raise the tax rates of individuals
will have no negative effects on job retention or creation of these
small businesses that pay taxes as individuals?
Senator, I'd like to get back to you on those
specific comparisons and give you a comprehensive analysis of --
Well, see, I think it's one thing to say that, you
know, 97 percent are really not going to be affected when the 5 to 7
to 9 percent --
Right. But I want to just --
-- do most everything that happens -- (inaudible).
I want to do this carefully, but I do believe --
and I think it's important to point out -- I think this budget is good
for small businesses. It has some very important beneficial effects
And the best thing we can do for the economy as a whole is to get
growth back on track. And a critical part of that is to try and
address our -- these crippling health care costs. So it's important
to look at the entire package, not just the tax provisions. But --
No, I agree with that. But I also agree that you're
oversimplifying the small business aspect and I'd like you to clarify
Right. And I'll come back to you on that. I --
I think you need to clarify that.
Now, one last question, because my time's running out. But in
your testimony, you state that the Obama administration inherited the
worst fiscal situation in modern American history. From 2003 to a
month ago, you were president of the Federal Reserve Bank of New York.
Now, I'm happy to have you here, so -- but this is a tough question.
You were president of the Federal Reserve Bank of New York, which
implements monetary policy, supervises and regulates financial
institutions and helps maintain the nation's payment systems. Now,
starting in September 2008, bank after bank, most of them
headquartered in New York, began to fail.
Lehman Brothers, Bear Stearns, AIG -- the list goes on and on.
Now, I bring this up because the administration keeps beating
that drum, that it, quote, "inherited failed economic policies from
the past eight years," unquote. Now, the economy for the past eight
years, while not strong, was at least moderate and only began to fail
in the past couple of months.
So I can only assume that the administration was referring to the
recent collapse of the financial markets. And as head of the Federal
Reserve of New York, were you not an integral part of that failed
economic policy, and isn't it a little bit unfair to blame this all on
the prior administration? Except -- you raised the issue that there
could have been more oversight, but you were the overseer.
Senator, thank you for raising this. Just a
couple things. I've said before this --
These are important things to me.
They -- absolutely. I have said before before
this committee and happy to say it again now that there were
systematic failures in supervision and oversight across our financial
Then it's not fair to blame the prior administration
And a lot of things contributed to this crisis,
and a lot of things not just on the financial but on the fiscal side
contributed to this.
But I just want to point out just because you mentioned this
specifically, the Federal Reserve was not given responsibility for
overseeing investment banks, insurance companies, hedge funds, nonbank
financial systems that were a critical part of making this crisis so
intense. Now, but you're absolutely right --
You seem to be blaming us up here.
No, no. No, no --
Wait, wait, I think you're right. (Laughs.)
I think we could have done a better job.
Well, I think we all could have done a better job
and we're going to have to do a better job. And we're going to come
with comprehensive reform of the oversight structure of our financial
system because we have this deep obligation which I feel very strongly
about to make sure that a crisis like this doesn't happen again. But
it's going to have to require comprehensive changes in how we oversee,
much more conservative oversight of the core part of our system, and
it's going to require better supervision of banks as well.
Okay. Senator Carper's next, they tell me.
Thank you very much.
Thank you, Senator Hatch.
Secretary Geithner, welcome. You're a busy man. And I know you
have a wife and children. You ever get to see them?
Yeah, I do. Thank you very much. They're very
important to me. I see them as much as I can, less than I would like.
You'll know you've been away too long when you come
home and your children say to you, "Dad, you look older than your
pictures." I recall my children saying that to me a time or two
earlier in their lives.
Well, thank you for your service. I worry about the
administration, especially with Treasury, your ability to get your
team around you. And can you just give us an update on how we're
progressing there? Your deputy secretary and, you know,
undersecretaries, assistant -- how are we doing there? Because you
need -- obviously, you need help.
We're making some progress. And we'll -- we hope
to come before the committee soon with a full slate of very strong
people. And we're doing this carefully, as you would expect, and, you
know, trying to make sure that we have the best talent in the country,
All right. Good.
I appreciated the opportunity to be with you last week at the
White House in the -- at the budget summit. And we talked a bit then
about an issue that you have mentioned today already. And I think
Senator Nelson raised it, too. And the issue is the tax cap.
I think it galls most people who pay their taxes, pay their fair share
to know that there's some -- in fact, quite a few -- who don't pay
much and, in some cases, at all.
We know, as I mentioned last Monday, if monies are withheld for
taxpayers for income, there's almost a hundred percent compliance in
terms of actually paying our taxes. If there's reporting for the --
for our income that's over 90 percent or more and in cases where
there's businesses or individuals who work with a cash economy, the
actual amount of money that's paid for their taxes may actually be
less than 50 percent.
You've -- we've talked about -- you asked me to cite last Monday
a couple of specific examples of things that we could do. And I was
pleased to read in your budget that you propose to go after folks who
own rental incomes to make sure that they're doing their fair share.
Just take a minute or two and talk to us just very directly about
what this committee can do on a consistent basis to enable folks in
the IRS to go out and collect the monies that are owed at home and
abroad from the folks who owe it and who are dodging their
Well, as you proposed and as you know, I think
you -- there's no solution to this that doesn't rely on better
reporting and better enforcement capacity at the IRS more carefully
deployed. So a centerpiece of what we do in this area will have to
have new proposals in this area. I'm glad you pointed out the one
provision in the budget we put in as a specific example of that stuff,
but that's just the beginning.
And alongside these, as we said earlier, we're going to have to
look at how to deal with the offshore center problem and a range of
other provisions of the tax code which make it quite easy to avoid
U.S. taxes. So we're going to try to bring a comprehensive approach
in that area.
But I think you're right that you have to start with reporting
and you're going to have to start with better, more carefully deployed
enforcement resources. And we're starting that process.
Good. I chair a subcommittee on the Homeland
Security and Governmental Affairs Committee on financial management.
We've held hearings, roundtables to actually delve into this issue.
Now that I'm a member of this committee, I very much want to focus on
it. And as a matter of equity and simply as a -- as we're looking for
offsets, when we want to reduce taxes in some other area, we want to
provide for spending in some other area, we are desperately -- we
desperately need offsets and look forward to working very closely with
you as a partner in this going forward.
I -- hold on just one moment, please. Can we talk a little bit
about carried interest? And talk to us about what the administration
has in mind there. And I certainly appreciate -- we can talk about
tax fairness, but I understand and appreciate the issue of tax
fairness that comes into play, and also with respect to -- especially
with carried interest. And given the need for greater long-term
fiscal responsibility, I also understand the need to generate
additional revenues, which we've talked about here. But I feel that
it's important for us to be smart about it and try to get it right.
I'm sure you believe that as well. And we don't want to
unintentionally undermine business investment.
I think there -- the proposed budget that y'all have given us on
this point is preliminary, but is it possible for you to flesh out
some of the details of the carried interest proposal? Can you lay out
the administration's thinking about how this proposal will -- might
work in practice? And do you think there's a case to be made for
using more target efforts to differentiate between, say, the tax
treatment for carried interest and earned from, say, private equity
funds versus hedge funds?
Senator, we'll put out the details in the budget,
but I just want to state the simple objective, as you did, which is to
treat as ordinary income partnership income. And we think, to be
fair, you need to do that across all partnerships.
It's, I think, very hard to make the case that you can
differentiate fairly among different types, and that's why the budget
provision's framed the way it is.
But obviously getting this right is important, and as on any
issue, we'd be happy to listen to any specific suggestions about how
to do this well.
But I think to do it -- to make it fair, you need to treat
partnership income as ordinary income, and you need to do so in a way
you're treating partnerships alike.
All right. Last question. I met a week or so ago
with David Marvin, a very smart guy from our state, who used to run
the DuPont pension plan. He now he runs a firm called Marvin &
Palmer, and they used to oversee investments, I think about $10
billion. Now they're down to about 5 (billion dollars) because of the
economy and the markets.
He suggested to us that we do a couple things. One, he suggested
to us that we -- that the SEC goes back and reinstates the uptick rule
and -- as a way to get after those that are literally in some cases
acting as predators to drive down stocks.
And I think he or someone else also suggested to us that in
looking at the capital gains tax, that we'd actually try to
incentivize people to hold stocks for a long period of time, and as he
said, in some cases, just take away their capital gains tax altogether
if they hold it for 10 years or more. But for those that are churning
the market, selling stocks on a daily basis and sometimes almost on a
minute-to-minute basis, to raising it, raising appreciably their
capital gains stock (sic). Any thoughts?
I'd like to think about the latter and get back
to you. And on the former, on the uptick rule, that's really an issue
that Mary Schapiro, the SEC commissioner, and her colleagues are
looking -- have been looking at. And I'll consult with her when I get
back and ask her if she could lay out to you and your colleagues her
thinking as she comes to this job and this issue fresh about how to do
this, what benefits it might bring.
Thank you so much, and thank you for your service.
Thank you, Senator.
Senator Roberts, you're next.
Well, thank you, Mr. Chairman.
And thank you, Mr. Secretary. You have given an extremely
articulate, determined and ambitious presentation. It's been very
impressive. But you know, this reminds me or this hearing sort of
reminds me of the "Cool Hand Luke," you know, movie. What we have
here is a failure to communicate. And maybe it's me. Maybe it's you.
I don't think it's you. You have this down pat. Pardon that terrible
But at any rate, I have three issues I want to ask you about.
And I call them anthill issues, reminded of the time that I urged a
colleague of mine not to stand where he was standing. And giving a
speech, he said, I'm fine where I am. I said, no, you're not; you're
standing on an anthill with red ants, and it's not a good thing.
And we've got three anthill issues that folks out in the country,
despite your very articulate views and very determined views, that
they're raising. One, everybody knows that charitable organizations
across the country are being asked to do more with less, as donors
tighten their belts, even without the tax changes, while more people
are turning to charities for assistance.
Now, I have an analysis that found that if the proposed tax
changes in the budget were in effect, in 2006, that the itemized
contributions would have been reduced by almost $4 billion. That's
3.87 to be totally accurate. In the Senate, we would round that off
at 4 billion. But at any rate, that's not modest.
You know, that's a real problem. And the total value of
charitable contributions that high-income households reported on their
tax returns, in 2006, was 81.26 billion. That's just not modest. And
I know it's not going to bring a halt to charitable contributions.
I would agree with you on that. But it will reduce the
contributions to charities, at a time -- the timing of this is so
worrisome -- when Americans are relying more on charitable assistance.
And I don't understand why the administration would try to create any
disincentive that would reduce any donations, to charity, at this
So there's one anthill that I want to, you know, go over with
you. By the way, there is a March 2009 study, by Indiana University,
just brought to my attention that indicates 47 percent of higher-
income donors would give less, if the deductions for charitable giving
Next anthill question. And I'll try to make this -- and I'm
sorry, I'm just going to make these observations, and if we have time,
you can respond. And I apologize for that.
The proposal in the budget that reduces the ability for taxpayers
to claim itemized deductions for mortgage interest. My goodness.
What does limiting this tax incentive mean for individuals who have
purchased a home within their means and who intend to live in it, or
have lived in their home for a number of years, or for individuals who
are looking to purchase a home right now? Shouldn't we give them some
certainty in the tax code with regard to the mortgage interest
deduction? What does it mean for the value of their home? Isn't
there a concern that limiting the deduction would further depress home
Now, I don't -- I just don't understand that. And I would say
that the budget does propose to reinstate the 36 to 39.6 percent
income tax rates for individuals in regard to what has been referred
to by Senator Hatch, and that's the third anthill. And basically,
this is the situation where in Kansas we have over 60,000 small
businesses which make up 97 percent of the state's employers. They
are the leading job creators in the state. And this budget will raise
Now, you say it's modest. I think that's the word that you use.
But the National Federation of Independent Business, which Senator
Hatch brought out, shows that 50 percent of the small-business owners
that employed between 20 and 249 workers would fall into this two top
brackets. Over half the nation's private sector workers are employed
by small businesses with 20 to 500 employees.
So at a time when we want to create and preserve jobs ins the
country, we should not be raising taxes on employers who are creating
jobs; i.e., small business.
And I'll tell you what's going to happen. And this is the worry
that I get back from my constituents, from the small-business folks.
They worry that in order to pay this additional tax burden, they may
have to lay off workers, reduce wages or benefits, not hire new
employees, pass these costs on to their customers. None of these are
So I've demonstrated three issues that I would call anthill
issues. I know you have a very articulate responses to this. I know
that's part of the president's budget plan. I would urge you to get
off the anthills and find it somewhere else.
Anthills may --
And Mr. Secretary, I'll just give you a chance to
address those three anthills briefly.
Okay. On the first two, what we're proposing is,
as part of a fiscally responsible package to help bring about
comprehensive tax reform, that in the context of comprehensive tax
reform, that we identify ways that will help finance this very
That's something we have to work with the Congress on. We know
there's going to be different views on how best to achieve that
objective. We've heard a lot of concerns about this specific
provision, understand the concerns around them. We'll have to work
But what we're not proposing to do is now, in the midst of a
recession, put in place these changes. We put those out as proposals
to help make credible our commitment to comprehensive tax reform. But
it's something we're going to have to work with you on and find a way
to do that that we're all going to be comfortable with.
Same thing on -- just to -- I want to be -- just to make the same
point on the small-business side, just to emphasize -- very important
that until we emerge from this recession, that we're keeping the
overall burden of taxes on businesses across the country at current
levels. And the budget does that.
But it's also a critical imperative that, as we emerge from this,
that we get back on a path to fiscal responsibility. And that's going
to be difficult to do, and we're going to have to do it in a way
there's -- there's shared sacrifice. And the president's proposal is
designed to make sure that those burdens come only on those at the
very high end of the income spectrum, including in the business
sector. But --
Senator Cornyn, you're next. (Pause.)
Senator Cornyn's next.
Well, thank you --
It's Senator --
We skipped Cornyn first, but then --
I know for sure, Mr. Chairman, that Senator Ensign
was here ahead of me, if we're observing the early-birding rule, but
He's got -- (off mike) -- speak.
-- defer to the chairman.
So you -- I'll -- Senator Ensign looks -- feels
like -- looks like he feels like he should be recognized --
Well, I'll defer to him.
-- so I'll recognize Senator Ensign.
No, that'd be -- (off mike).
No, no, no.
If he was here first --
I (brought ?) questions.
I just thought up questions, so.
No, he (asked ?) his questions --
Well, I was here for a while. I -- (off mike) --
It's John's turn.
It's between the two of you. Whatever you want to
You work it out.
Thank you, Mr. Chairman. I had to -- I had to
leave for about 15 minutes. I had another meeting. But I was here at
Good. Fine. Fine. Fine.
Senator Cornyn --
Couple of observations. First of all, we have --
all of this spending goes together, whether it's called TARP, whether
it's called stimulus, omnibus, the budget, you know, coming up to the
You in the administration -- and I applaud you for holding a
fiscal-responsibility summit last week. Think that's exactly what we
need to be talking about. Our colleague Evan Bayh wrote an opinion-
editorial this morning in the Wall Street Journal. I think he laid it
out exactly right. We have to start thinking about this spending.
We have an omnibus bill that's in front of us today.
This omnibus bill is not a one-time spending. It's 8 percent over
last year. And it adds to the baseline. So it isn't just the 20-
something billion over last year. But when you compound that over 10
years, it's hundreds of billions of dollars.
You mentioned in your opening statement that this administration
was making tough choices. What I don't understand is why you wouldn't
have stood up and said to the Congress, okay, yeah, this may be last
year's work, but times have changed. The economy has changed. We
need to start making tough choices.
Every family in America is making those kind of choices right
now. They are saying, what can we afford; what can we not afford?
Every business in America is saying, where is -- where are we wasting
money; where do we need to get tighter?
We are not requiring that of anybody in the government at the
federal level. And my question for you is, why didn't you all show
leadership at this time, where we would have joined you in
bipartisanship and said, you know what; let's be fiscally responsible
Senator, I'm nodding, because you're making a
fair point. But I want to point out that in the 2010 budget, the
president does identify some very substantial, immediate cuts in
programs we don't think the American people should support anymore
that we don't think are effective.
On the discretionary side?
Yeah. And --
What are they? What are they? What are they? And
what are the amounts?
Well, one example is to eliminate the subsidies
to middle men in the student loan market. One example is around
overpayment for managed care providers in Medicare. There are other
examples in there, smaller ones and larger ones.
SEN. ENSIGN Well, that's not discretionary. But that's okay.
Yeah, that's a fair point. But you know, again
in the budget, I just want to emphasize this.
In the budget, the president proposes to bring non-Defense
discretionary expenditures down to a lower share of GDP than we've
seen over a long period of time. And during --
That's if GDP grows.
Well, that's true. But you need to measure all
these things against the size of the economy. And the projections in
the president's budget, over the 5-to-10-year period --
I said, if the projections are correct.
True, but the long-term projections in there are
an economy that's growing at a sustainable rate. You know, there's no
difference between CBO, OMB and the private forecasters, on what that
long-term rate is.
Another thing that's very important, again the --
Except that CBO and OMB are always wrong.
Well, forecasts are never what they are. But
over time, the economy does tend to return to its potential growth
rates. But that's the forecast that underpins this.
But I just want to associate myself with your basic conviction
that we are going to have to get ourselves back on a path to
sustainability, and we have to demonstrate to people we're willing to
do stuff that is hard and difficult. And a test of that today is how
much opposition you've seen to the specific (votes ?) from the table.
And I just emphasize that because it's not going to be easy to do.
It's going to --
I only have a minute left. I want to get one more
question and comment in. I just wish you would have taken this
opportunity -- I think you had an opportunity here and you wasted that
There was an earlier question on -- that Senator Enzi had on jobs
created versus saved. I just wanted to follow up with that. You
created a situation where you cannot be wrong. If the economy loses 2
million jobs over the next few years, you can say, yeah, but it would
have lost 5-1/2 million jobs. If we create a million jobs, you can
say, well, it would have lost 2-1/2 million jobs. When you use the
term "create or save," you've given yourself complete leverage where
you cannot be wrong, because you can take any scenario and make
yourself look correct on created or saved. And that's why we are
looking for a metric on this "created" side, because it's easy to say
-- I think -- if all these jobs, you know -- well, we only lost 2
million jobs. Well, okay, I can say now we would have lost 5-1/2
million jobs, and no one will be able to prove you wrong.
Mr. Chairman, just very quickly? The president
lays out in the budget an expected path for the economy over time that
builds in an expectation for what impact we think the recovery act
will have. And the economy may perform better than that or worse than
that, but you'll be able to use that as a way to measure what the full
force of American economic policy does over this period of time.
Now, things --
But we'll be able to hold you to those numbers. If
you don't meet those projections --
No, I'm just saying --
-- in GDP, then your stimulus package will have
-- that you can measure the success of the
policies we did together design and implement -- because we have to do
it together -- on what happens to growth and unemployment relative to
what people thought would have happened in the absence of these
Now, what are we trying to do? We're trying to again reduce the
risk that the economy shrinks by more than it needs to, that
unemployment rises by more than it needs to, that more businesses fail
than need to do.
We're trying to arrest the recession and prevent a deeper
recession that would cause much more damage to the fortunes of
Americans. And that's the obligation we all share. And that's what
these proposals are designed to do.
Thank you, Mr. Chairman.
Secretary Geithner, let me ask you about two topics in the short
time we have together. I'm concerned in the proposed budget about the
nation's oil and gas industry. And more specifically I'm concerned
about what the policies laid out, in the budget, would do to increase
our dependence on imported energy, at a time when I think the country
is of the mood that we need to find more here at home and use less, as
we pursue alternative energy sources.
But can you explain to me how the president's proposal for a new
excise tax, on offshore oil and gas production in the Gulf of Mexico,
will actually encourage more domestic production, as opposed to the
Senator, as you know, and I think it's clear in
the proposal, we don't believe it makes sense to significantly
subsidize the production and use of sources of energy that are
dramatically going to add to our climate change imperative.
We don't think that's good economic policy. And we think
changing those incentives is good for the country. And you should
view these provisions through that basic prism.
Now, people won't necessarily agree with that objective. But I
think that's an important objective. Now, again just to do
proportionality, these -- the impact of these subsidies are very
small, relative to revenues produced by U.S. oil and gas producers.
And I think you make a reasonable case that this impact can be
But as I said, the overall objective is not to be providing
ongoing subsidies to forms of energy production that are going to add
to this critical long-term imperative of climate change.
Do you understand that raising taxes on small and
independent energy companies, producers here, who develop 90 percent
of U.S. oil and gas, natural gas, will actually hurt job creation, in
that sector of the economy, as opposed to help it, which I thought is
what we were about?
Senator, what I know for sure is that we start
with a deeply unsustainable fiscal position and a deep and deepening
recession. And we have to move forcefully to fix that set of
problems. And that's going to require very tough choices, about how
to get us back on a fiscally sustainable path. And it's going to
require some shared sacrifice and burden, across the American economy.
We're not going to be able, given where we started from, to get
us back to a sustainable fiscal position, without doing things that
are going to be hard. And I think this is a reasonable policy, given
the overall objective of again making sure we're not providing
artificial incentives, to produce and use energy that's going to make
our broader climate-change imperatives worse.
I understand your answer. My view is that higher
taxes on small and independent producers here in America will make us
more dependent on imported oil and gas while we transition to cleaner
energy alternatives, which we all -- a goal we all share. And it will
also hurt job retention and job creation in the energy sector, which
provides an awful lot of jobs in this country.
Let me just ask you in the short time remaining: I applaud the
president's stated goal to reduce the budget deficit by the end -- by
50 percent by the end of his first term. But I'm mystified why the
administration would not tackle what is a bigger problem, and that is
the unfunded liabilities of the federal government because of
entitlement spending, some $67 trillion. The way I read the proposed
budget, this budget would actually make entitlement spending worse
rather than better because it adds additional mandatory spending of
$357 billion. Can you explain the rationale to me?
Senator, the president shares your commitment to
long-term entitlement reform, because that's essential to put us on a
path to fiscal sustainability.
The most important thing we can do in the near term to get us on
that path is to reduce the rate of growth in health-care expenditures.
That is the principal source of increases in these long-term
entitlement costs. It's not the only source, but it's the principal
source. And there is no path to addressing those things without
starting with and going through health-care reform that reduces cost
But as you know from what he said in public and what we began
last week, there are other things we're going to have to do, working
with the Congress. And we're trying to begin a process of building
consensus on how to -- on how to get to the point where we're taking
on those other challenges that aren't going to be addressed simply by
reforming health care. Health care you have to start with, though.
Outside of reforming health care, a goal which we
all share, is the -- administration have any other proposals to deal
with this -- these unfunded liabilities, $67 trillion?
Well, Senator, as you saw in the agenda for the
fiscal summit, there are a comprehensive set of other areas for policy
where we need to begin a process of figuring how to solve those. But
we have to start somewhere.
And lastly, specifically, you have no proposal to
deal with the impending insolvency of Social Security in this budget.
Senator, the budget does propose a specific set
of reforms to Social Security. But you're right to say this is very
important for us to do. And we'd like to begin the process of working
with the Congress -- try how to -- figure out how to put Social
Security on a path to long-term viability. It's a very important
thing to do. And as I said, health care is necessary, but it's not
sufficient, for addressing these long-term entitlement problems. And
you're right to underscore the --
Senator -- Senator Menendez. You're next.
Thanks. Thank you, Mr. Chairman.
Mr. Secretary, thank you for your service.
On page two of your testimony, you talked about how both our
economic and financial problems are being compounded by problems in
the housing market: the 2-1/2 million foreclosures, the $2.8 trillion
lost in real-estate wealth.
And for the average American, this is the single biggest asset that
they have and that they draw upon for a variety of reasons --
educating their kids, dealing with a medical emergency, retirement
You know, I've listened to a wide range of individuals in the
housing universe, from all different dimensions, and they come down
upon two -- it seems to me -- pretty much two universal things. One
is continue to drive the rate down even further -- and it's pretty low
right now -- and secondly extend the homeownership credit beyond new
homeownership to all. What do you think of those proposals? And if
you don't like those, how do we see stopping the collapse of the floor
here on the housing market? Because that seems to me that's pretty
critical for us to move forward in this economy.
I think you're absolutely right that although
mortgage rates are lower, the spreads between mortgage rates and
Treasury's are still at -- in some areas at abnormally high levels.
And we'd like to continue to find ways to bring those spreads down.
That would be very beneficial to the broader objective we share.
On the tax side -- (audio break) -- I need to think about it -- I
need to think that a little more carefully. I do want to point out
that we're moving very quickly to make sure that the tax credit that
was in the stimulus package is made operational. And we announced
last week the details -- (inaudible) -- that people can take advantage
of that tax credit against their 2008 income, which would make it have
more power more quickly. But happy to think through and take a look
at additional things we might be able to do on the tax side. It'll be
hard to do, I think, but willing to look at that.
I do think the program the president announced will help, and not
just on the interest rate side but on the refinancing side. And it
will help by helping people who can stay in their homes take advantage
of more affordable payments.
Those undoubtedly are worthy.
Yeah. They are --
And I support them and have voted for them as
well. The question is, how do we stop the free-fall of the
marketplace and values in homes which, if it continues -- now, keeping
people in their homes is great. Making sure that -- refinancing is
great. But there -- I think we need to do something more and we look
forward to working with you on that.
I do think it's very important people understand
the most important thing you can do for the housing market is to make
sure people don't lose their jobs. And the most important way to do
that is try to make sure this economy gets back on track. And that's
what the recovery act is designed to do.
Senator Carper asked you about carried interest.
I just want to ask one quick question. My understanding is the
proposal of the president's budget is that not only hedge fund
managers and others but all who, in essence, use the provisions of
carried interest are going to be treated equally in the same way --
That's our proposal.
-- if, in fact, that gets passed. Okay.
And then finally, you -- and the chairman has worked mightily on
this -- but in your testimony, on page six, you talk about the
president advancing a series of legislative and enforcement measures
to reduce U.S. tax evasion and avoidance. You talk about and propose
rules to both reform U.S. corporations' ability to defer foreign
earnings and deter high-income individuals from using tax havens to
And last December, Chairman Baucus released a discussion draft of
proposed legislation to put reasonable limits on the use of excessive
offshore-related party reinsurance by foreign property and casualty
insurers that gives them a competitive tax advantage over those who
stay here domestically and don't do that.
The chairman's proposal seems to me to be consistent with the
administration's strong stance against offshore avoidance.
Is this something that the administration supports?
It's something we're going to take a careful look
at. It looks like a very positive step to us, but I'll look more
carefully at it in the context of the proposals we're going to bring
forward on the broader international tax avoidance plan.
Well, I look forward to working with the chairman
and with you, because it just seems to me that at the end of the day,
we -- you know, we want the average taxpayer to pay their fair share.
It seems to me that those who game the system not
to pay their fair share and that create a domestic disproportionate
set of circumstances for those who do make their investments here in
the United States and follow the law within the context of here in the
United States are at a competitive disadvantage. We need to end that.
Thank you, Mr. Chairman.
I agree. It's necessary for fairness, and it's
necessary for fiscal responsibility.
Thank you, Senator.
Thank you, Mr. Chairman,
and thank you, Secretary Geithner. I'm certainly pleased you could be
here today to discuss the administration's budget outline. I think it
is very important to reiterate the point that the budget really is a
vision or a blueprint of how we plan to move the nation forward. I
think it expresses values and goals and hopefully, you know, lays out
a path forward towards a better tomorrow. And quite frankly, as --
all of us, as Americans, that's what we are striving for, is a better
I have so many questions and comments and so little time -- like
to applaud the administration -- you know, your statement here --
wanting to tackle health care reform, a new energy economy, making
additional investments in education, all of which we know are
investments that pay dividends down the road.
But there is no doubt that we are in the here and now, right --
(chuckles) -- in what we dealing with. And those of us that talk to
our constituents on a daily basis hear from them the concerns that
they express about -- you know, going back to this past fall, just as
Senator Snowe mentioned, the government's made huge investments, huge
investments in taxpayers' dollars. We -- you know, our government
came to us, the administration came to us, "The sky is falling; we've
got to act now, we've got to act now." And we're still hearing a lot
of that. And yet we're not seeing the results of what we were asked
to do when the sky was falling this fall.
So I would just associate myself with my colleague from Maine,
There has got to be greater explanation. It can't
just be posting who got money. We need to know where that money is
going and where those resources are happening, because I'm having
daily calls from my constituency who can't access those dollars and
who are desperate to create jobs and to keep their good businesses.
And most of these people are people who have acted in a fiscally
conservative way, who have investments and own their businesses
outright and, you know, want to continue with operating loans that
will keep them making payroll.
So I say the sooner, the later, that you can get more of that
information out there -- it is enormously helpful on the other end of
the line, which is the confidence end. And we've got to create
confidence that what we are doing here has tremendous efforts and will
bring about tremendous efforts.
But we've got steep costs out there. They're leaving us massive
and massive deficits, federal deficits and debt levels. And I'm
concerned about that long-term debt, and I'm concerned about how the
outline for your budget gets us to deficit reduction in the midpoint,
but in the out years we continue to see that debt rise.
And I think that's a concern.
Back to what Senator Cornyn brought up, talking about health care
costs, I believe that through health care reform it will help deal
with some of the costs, long-term costs, that exists out there. Did
you account for that in the revenue modeling?
Well, in the revenue provisions of the budget, we
-- we included these new proposals for helping to fund part of the
costs of long-term health -- health reform. Am I answering you
question? I'm not sure I'm answering your question.
So where we propose revenues to help finance
health care reform, we did put those in the budget.
Okay. The other question I would ask would be
similar to what Senator Snowe -- and that is, why were your
projections so much more optimistic, with the GDP projections that you
Some of those projections you're comparing OMB's,
CEA's, against --
-- were done before stimulus. So that accounts
for some of the difference.
So you're counting the stimulus in your
Yes, as every economist ultimately will. But the
CBO's new estimates that are done post-Recovery Act have a low- and a
high- end estimate of forecast. And the administration's forecast is
within that estimate.
Why did you include continued war spending at '08
levels, adjusted for inflation? I mean, surely you know the
administration has a plan of what they're going to be doing and idea
of what they're going to spend on the war and -- you know, based on
what we heard in the campaign. I mean, I'm just curious to know why
you did that. I mean, that's a lot of spending.
Senator, what matters is what we spend. And as
you know, the president has made proposals to alter strategy in Iraq
and Afghanistan, and the -- (short audio break) -- budget accounts for
an initial estimate as to what that's going to do to spending going
forward. And that's the critically important thing.
In the budget, we had to start somewhere, and they started with
the spending level that we inherited from this administration with
their strategy for those wars.
Just seems a little phantom to me, in terms of
gimmicks and what -- how you might do.
Last two things I'd just like to bring up, Mr. Secretary, Senator
Roberts and I have both been very concerned about the impact this
economic crisis is having on individual retirement savings. It's
enormous. Just talking to my constituents, it's phenomenal, the pain
they feel, the fear it has -- we had a woman testify in the Aging
Committee just last week, in tears about what has happened to her
savings, to her husband's, and what they are up against. So I think
that's a critical issue and, you know, just hoping that we'll see some
steps here to address some of those concerns.
And in the past several years -- past eight years -- the budget
that we get up here always puts a disproportionate burden on rural
America, and I'm saddened to say that I'm not so sure that this budget
is any different. Rural America is a different place, it's a
different animal. And most of what we do here has a
disproportionately negative effect on rural America. These people are
hurting just as bad, if not more, because they are usually the first
to see the downturn of an economy, and they're the last to see the
I'm not so sure some of them haven't come out of that last
downturn. So certainly would appreciate you all taking a look at some
of the disproportionate burdens you're placing on rural America in
your budget. Thank you.
Thank you, Senator.
Thank you, Mr. Chairman.
And thank you, Mr. Secretary.
These are not easy times. And I think we all appreciate your efforts.
I'd like to talk a little bit about small business, not about the
tax rate but the -- we talked about this a little on the phone. I am
finding, in the last month, something that's really scary to me. And
that is, profitable small businesses are having their lines of credit
pulled by banks.
One little story: I interviewed someone for a job. His father
owns a heating oil company -- about 50 people, I think, 8 trucks -- in
Southwestern Connecticut, profitable business.
He gets a $4-million line of credit from the bank, at the
beginning of the month, to pay for the oil. And he pays it back. He
never missed a payment. The business is about as profitable as it's
always been. The bank has pulled the loan, pulled the line of credit.
And he can't find another one. That business is about to go under.
We have a hardware company in Northern New York; exactly the same
thing. They say, well, the value of the inventory is lower. They're
pulling the line of credit. This is a business that started in 1830.
It employs 300 people.
We have problems again. Hickey Freeman -- 800 jobs in Rochester
-- they're not as profitable as they were. People aren't buying those
suits. Nonetheless it's a good, ongoing business.
My great worry here is if banks are pulling -- it's not just --
when we heard, banks aren't lending, we assumed, nothing new was going
to get started. But if they are starting to pull lines of credit from
profitable small-and-medium-sized businesses, the unemployment numbers
are going to skyrocket. And everything we have done, in the stimulus
and in this budget, will be undone.
Can you give us some idea of what the administration is planning
to do about this? It's a deadly problem, I would say.
You're exactly right. And it's happening. It
really is happening across the country.
And I think more in the last few months than
before. Is that --
Well, you know, the recession is deepening.
And these things feed on themselves. That's why
they're so dangerous. (Inaudible.) And you're absolutely right, and
all your colleagues are eloquent in saying it.
Which is, you know, financial crises and recessions are brutal
and tragic and unfair, because the damage is indiscriminate. And
people that were perfectly responsible get damaged by the actions of
those who were irresponsible.
The necessary thing to do, apart from making sure
the recovery act stuff takes effect quickly, is to make sure that
banks have a enough capital they can lend and that we're providing
very substantial support, to get these credit markets to open up,
which is what we're doing.
Now, community banks need to get access to capital more quickly
under the existing programs. The stimulus package includes a very
important expansion of the small business lending program and the
Will the TALF work in this regard?
The TALF -- this direct lending program I
referred to is -- will be, we believe, will be very helpful in trying
to help get that small business lending going again. And there are
other things we would like to try to do, working with you and your
colleagues. And there are many ideas in this committee and up here,
on the Hill, that we'd like to reflect on.
But the necessary thing is to make sure that banks have the
resources and the ability to lend.
And many do. Some will need a little temporary assistance to
(replenish ?) their private capital.
And it is very important that we move to make sure those
resources are available.
Mr. Secretary, the -- A, banks are pulling back --
-- even with some of these banks --
-- I didn't want to give any names. There are
some who've received the capital infusions; some are not.
But worse, these businesspeople, small- and
medium-sized, search for other sources of lending, and no one is
making them a loan.
Right. Well, there -- you know, again, banks --
there are banks across the country that were careful and prudent and
are able to expand now because they have substantial buffers of
And many banks are being more defensive because they're so
worried about the impact of recession. And this is why it's so
important that we make sure that there is capital available where it
needs to be and that we go (ground/work around ?) banks through
programs like the TALF to try to get markets flowing again.
And we will do that on a scale sufficient --
When will the TALF program be set up for small
businesses so that a bank or some -- you know, they'll feel their loan
is guaranteed and they can make this line -- continue this line of
credit or issue a new -- you know, to -- new line of credit to a new
TALF program, we announced the details, scheduled
the funding yesterday.
And you're going to see, within the next few
weeks, it up and running. And you'll start to see funding available
for new loans. And that will help. But -- really important thing I
want you to understand is that we're going to keep at this. It's
going to require more things. But you're absolutely right to
underscore the importance of this to help get recovery back on track.
You know, this will raise the unemployment rate
and send the economy down. And when it's profitable businesses that
are going under because they can't get credit, it's scary. And --
Right, it is scary. And it underscores again why
credit is so important to recovery. And in our system, banks play a
critical role in that, not just the credit markets. And you got to
move on both together.
Thank you, Mr. Chairman.
Thank you, Senator.
Mr. Geithner, got a question about federal aviation taxes.
There's -- undoubtedly you know we in the Congress attempted to pass a
reauthorization of the aviation trust fund. This committee had
jurisdiction over the revenue part of it, the Commerce Committee their
part. Went to the floor, and it was not passed because of offsets for
highway funds, totally unrelated to airport issues.
Now, this administration's budget, as I understand it, proposes
replacing the ticket-tax revenue with some sort of user-fee scheme.
And I'd like to tell you that I -- that's not a good idea. I strongly
encourage you to go back and just use the process that's worked
before. The current -- it is true the current proposal -- current
funding expires in March this year, so we have to pass some kind of a
It is true the current proposal -- current funding expires in March of
this year, so we have to pass some kind of short-term extension.
But you know, the administration prides itself on honesty in
budgeting. I think that what it's basically trying to do is to
convert the classification, the category of revenue from taxes to
fees, and therefore avoid putting it in the budget. But still it's
going to be a cost imposed on people.
And I just strongly urge you to work with this committee and the
Commerce Committee. We put together a bill last year to address the
reauthorization of the airport trust fund.
Well, Senator, we'll take a careful look at it.
I don't think that was the motivation, but we'll take a careful look
at how to do this.
Well, if that wasn't the motivation, what was?
Well, maybe I should come back to you with a more
thoughtful case and so we have a chance to understand your concerns
and why you think there's a better approach for doing it. But we'll
work with you --
I'm just telling you, I don't think it's a good
idea, what you're trying to do here.
I hear you.
I was struck with a comment that somebody, I think
with some authority, made that puts a little bit different take on the
financial credit problems. And it was this, that if you look at -- if
I have my data, if I remember correctly, you know, household debt as a
percent of gross domestic product was roughly 30 percent, 40 percent
for a long time. It started to creep up a little bit in maybe the
Then in 2000, particularly the last couple, three years, it shot
way up -- (brief audio break) -- of GDP. And the last time that
household debt was that high was 1929. And this person's thought was,
sure, part of the problem is banks aren't lending, but part of the
problem is they're lending too much.
They were lending too much.
And that's for credit cards or home equity loans or
for homes in the first place. (Inaudible) -- household debt. I don't
think mortgage is included in household debt. But if you could just
address that observation.
Well, I think, as I tried to say earlier, you're
absolutely right that this is a crisis born of a period of sustained
overborrowing by households, by some parts of the rest of the economy,
by governments. And that's true around the world. And what that
means is there's a necessary adjustment process we have to go through,
and that will reduce in lower levels of borrowing for a sustained
period of time.
What we need to be worried about, though, is the risk that it, as
the economists say, overshoots, and you see a greater reduction in
lending than is necessary for that process of adjustment to take
place. And that's something we need to arrest and prevent. But
you're right to point out that part of what we're going through is a
necessary process of adjustment after a long period where people were
borrowing beyond their means. And that makes this -- will make this
recession deeper and more traumatic than it otherwise would have been.
Some things just don't change. I think Benjamin
Franklin said, "He who goes a-borrowing goes a-sorrowing." We just
borrowed, all of us, way too much, and now we're paying for it.
Another question that Senator Cantwell somewhat touched on, and I
think a couple of other senators have too. I think one reason that
confidence is not restored -- there are tons of reasons, but one is
because people just don't understand TARP and TALF and all these
different toxic assets and purchase and repurchase and so on and so
forth. They just don't understand it.
When you try to explain it, when Chairman Bernanke tries to
explain it, members of Congress try and explain it, it's Greek. It's
no language. It doesn't -- it's not understandable. And I wonder if
you could -- is there some way you can kind of, in English, to the
average American -- I think most members of this Congress don't
I think you're -- I completely agree. I think
the instruments are complicated, but the objective is relatively
simple, and the objective is to try to make sure that banks are strong
enough that they can lend and provide credit and we get the pipes that
are critical to the credit markets unfrozen and unclogged.
Well, I just urge you to try to think this through
more in words and terms that the average American starts to
understand. You know, I don't want to overstate this point, but I
have been listening to NPR. I think it's "American Experience,"
American something, about a week or two ago, and trying to explain all
this in simple terms, starting with a balance sheet. This guy had $10
and he had loaned to somebody who had a piggy -- (inaudible) -- doll
house and so on. It just got more and more and more. I thought it
was very well done.
Yeah, I thought they did a very nice job. I
agree with you.
Yeah. And if somehow you can just talk about this
in more basic sort of simple terms and put it in terms that the
average American household relates to, that might help quite a bit,
for whatever it's worth.
I have a couple of questions. But before I do
that, I'd like to call your attention to something that you probably
wouldn't know about and to check on it. And I sent you a letter a few
days ago seeking some information, and I've got a follow-up letter
that you're going to receive today, and it deals with private debt
collection contracts and programs that we have, and I need some
information on that. I appreciate that.
There are a number of things that I'd like to talk to you about
-- itemized deductions, PEASE limitations, the related concept of PEP,
28 percent limitations, basically what I would consider a hidden tax
rate, and to find out -- well, let me see if I can shorten this up.
Basically we're interested in the fact that, as I stated in my opening
statement, I consider this a 2 or 3 or maybe in some instances a 4
percent increase in the tax rate above 39.6 or above 36. And the
purpose of it, I think, is hidden marginal tax rate so it doesn't look
So my preference would be to completely eliminate PEPs and PEASE
without any offsetting tax rate increase. The next best option for me
would be to have PEP and PEASE eliminated with an offsetting tax rate
increase. And the worst option would be to have it back in full force
So given the president's stated laudable commitment to
transparent budgeting, I would think that the administration would not
desire a return to what we call PEPs and PEASE.
So my question: Is the administration committed to having PEP
and PEASE returned in 2011, or would it instead be willing to have PEP
and PEASE completely eliminated in exchange for a higher tax rate?
Senator, I'd like to spend a little time on this
issue, but not enough. I'd like to take a careful look at that. And
I think you're right; we need to give you a clear assessment of the
combined impact of these changes. And I'll come back to you with a
more thoughtful view on how we could address your concerns.
Well, if there's an intellectual basis for it, I
sure don't see it. And I think it's just simply because somebody did
not want to cost 40 percent when we had the 1990 tax bill, I think it
I want to ask you about another consequence of the president's
proposals to fully reinstate, again, back to the PEASE limitation and
to limit itemized deductions to 28 percent for single filers and
families up to $250,000 -- or above $250,000.
The most recent IRS data available, tax year 2006, shows three
and two-tenths million filers with adjusted gross income of $200,000
or more claimed the deduction for state and local income taxes on our
itemized returns. The amount of these three and two-tenths million
deductions was $121 billion, or nearly $38,000 per return; in my
state, 22,000 people affected by it; in New York State, 313,000
affected by it.
If the proposals in the president's budget to limit itemized
deductions to 28 percent for higher-income filers are adopted, does
this not amount to a tax hike on state and local income taxes for more
than these 22,000 and this 300,000 in New York, as I use as examples?
That's question number one.
But put another way, if the federal tax benefit of the state and
local income tax deductions cut back, isn't the net effect to the
taxpayers higher state and local taxes? And wouldn't that be contrary
to what we're trying to accomplish by giving the states so much aid so
they don't have to raise taxes?
Senator, I understand this concern. But I'd just
come back to the context. Again, what we did is, as part of a
proposal to lay the foundation for comprehensive tax reform, we
identified a series of ways we could help pay for this and do it in a
fiscally responsible way. But that's a process we're going to have to
have with you and your colleagues. There's going to be different
views on how we can meet those broad objectives. And, of course,
we're going to be open to working through this in a way that meets
these broad objectives.
But the context is, again, as part of an effort to build
consensus on comprehensive tax reform, we wanted to identify ways to
do this that we could in a way to make it fiscally responsible. But I
understand those concerns, and we'll work with you on how best to
Thank you, Mr. Chairman.
Senator Enzi, you're next.
Thank you, Mr. Chairman. And I would
like my full statement to be a part of the record.
I got a person in Montana who had a proposal that was passed on
to some small businessmen in Wyoming who talked to me about it, and it
was a way to take care of small businessmen and this retracting market
for loans and things. And what he was suggesting was that for each
employee that a small business employs, that they receive a $20,000
unsecured loan directly from the federal government at low interest.
Now, I asked some questions about that because that could amount
to a whole lot. But fitting in with your save or create, they
suggested that we ought to talk about rehire or create, and rehiring
being that saved jobs numbers. And they weren't particularly tied to
$20,000; it was just a good idea that they had. But it would
stimulate loans in direct relation to something that was achieved.
And so I just hope you'll put that down as a possibility. I'm
not asking a question, just to mention it, because I thought there was
some validity there, and a lot of flexibility, but maybe some kind of
a solution for small business.
And they weren't particularly tied to 20,000, it was just a good
idea that they had. But it would stimulate loans in direct relation
to something that was achieved, and so I just hope you'll put that
down as a possibility. I'm not asking a question, just to mention it,
because I thought there was some validity there, and a lot of
flexibility, but maybe some kind of a solution for small business.
Returning to the budget, Mr. Secretary, the president's budget
request asked for 750 billion (dollars) for financial stabilization,
but plans to lose apparently 250 billion (dollars). I'd like to know
how you arrived at that number, and is the 33 percent loss Treasury's
investment strategy for this money?
Senator, thank you for raising that. Absolutely
not. The estimate in the budget reflects the OMB/CBO judgment on how
to score the potential risk, the subsidy costs associated with
investments in the financial sector. That's the ratio they used for
-- I believe they used, for the TARP legislation that was passed by
the Congress last year, and that's the basic framework for it.
But that's of course not our investment strategy. It's just a
estimate of the potential subsidy cost in a program of that magnitude.
I want to underscore just the point, though, that this is not a
request to the Congress. It's not an estimate of the potential future
costs. It's just a recognition of reality that it's possible we're
going to need to do this with more resources, and so we wanted to put
in the budget, in an abundance of caution, like we do for other types
of expenditures, wars and national disasters, a placeholder.
Well, why wouldn't you put the whole 750 billion
(dollars) in there, though, instead of just the amount of loss that's
Well, only because that what matters in the
budgetary context is that, again, under the established procedures by
CBO, is what matters is the estimated subsidy costs associated with
those types of investments. So we're doing what I think is
conventional, good budget accounting.
So if it's just a placeholder that is a reserve until
it's needed, who's going to make the determination about when the
money is needed, and if and when it's needed, why can't you just come
back to the committee and the Congress and ask for it at that point?
That's what we'll do. But we thought that it was
-- we're laying out a, you know, as realistic a budget as we could.
And consistent with the range of other changes we made to how we think
about natural disasters and wars, we thought to be consistent in that
context it was better acknowledge the reality that is possible we need
to come back to the Congress for more resources. But this is not a
request. If we reach that judgment we'll come to you with a request.
We'll explain to you why we think it's necessary, how much it will
cost, and give you the opportunity to reflect on whether that is in
the interests of the country.
I'm glad to hear that, because the last time the
Department of the Treasury asked for a blank check it was provided to
them, and the results, I think, were disastrous as far as what we
thought it was going to go to. And with all the questions we've had
on AID, I think that's true, not just speculation. So I'm really
pleased at your assurance that you'll be coming back and have
something very specific for us, in the way of a plan with that.
Thank you, Mr. Chairman.
Mr. Chairman, I misspoke in answering Senator
Grassley's last question, in using the word comprehensive tax reform,
rather than health care reform twice. What I wanted to say was just
these proposals to change deductibility, we put on the table in the
context of a proposal to begin a discussion on comprehensive health
care reform, and it was in that spirit that we identified ways to do
that, in a way that was fiscally responsible. I just misspoke about
comprehensive tax reform, although we're interested in tax reform,
I appreciate that Freudian slip. (Laughter.) I'm
sure you were thinking about tax reform. Okay. Senator Cantwell.
Thank you, Mr. Chairman.
I'd like to go back to the deductibility question. I was
curious, Secretary Geithner, if the -- how is the threshold of 250,000
(dollars) -- how was that arrived at?
You mean in the president's broad tax proposals?
Well, he laid out a set of proposals in the
campaign, very clear the American people that he thought as we move
forward and make investments that are critical to our long term
future, that we're going to need to bring more fairness and balance to
the tax code. And that would require letting those tax cuts on
Americans earning more than $250,000 to expire, restore those marginal
tax rates to the level they were in 2001. So what he's doing in the
budget, is --
So it was just taken from the campaign. I mean,
It was a commitment he made to the American
people in the campaign.
And what do you think, given the limitation on
deductions, the tax rate might actually be on those families?
Well, on deductibility, change the tax treatment
of a set of deductions. And what they do is restore the level of
deductibility for charitable contributions and other things to the
level that prevailed at the end of the of the Reagan administration,
which is still a level roughly double what the typical American gets
in that context. Again, we think that's fair and reasonable, but we
made these proposals only in the context of trying to begin a broad
conversation on how to bring about comprehensive health care reform.
Well, I think -- I mean, these policies that we
have, whether it's deductibility for mortgages, or my colleague
brought up, you know, local taxes, like sales taxes or charitable
contributions, these are all things in the code. And it seems to me
if we want to debate whether we give those deductions in the code
would be a better way to decide what to do as opposed to putting an
arbitrary cap at 28 -- basically at 28 percent, on all itemized
Well, again, we're restoring the level of
deductibility to a point that's been achieved in the past because
we're trying to identify ways to achieve health care reform in a way
that's fiscally responsible. So it's in that context that we're
proposing this. Now, of course we're going to have a debate on this,
and we should have a debate on it. And as many of your colleagues
have said, many people would like to do this without going beyond the
health care system itself. But we'll have to work through this with
Well, we certainly want to work with you, and I
think the committee will, you can see from the questions that people
had on this. And not all states are alike. And not all states -- you
know, this will have a different impact, and I would ask you to look
at that, what you think for those families, particularly in states
where deductibility of sales tax is -- itemization of sales tax -- is
a big issue, what the rate actually might end up being on these
families. Because I think it might be higher than you're
Well -- fair question, and we'll provide a full
range of analysis of that impact as we go through this process.
Thank you, and thank the chair.
Thank you, Senator. I want a couple of questions,
here, and Senator Grassley has one. When people talk about the debt,
what's the difference between publicly held debt and total debt? And
isn't the concept debt held by the public, public held debt,
irrelevant debt number in terms of markets and so forth?
Yes, the economically relevant measure is the net
debt held by the public, of the general government.
So when people talk about total debt, what's the
relevance of that to the markets, or to the economy?
It shouldn't be relevant. Really, the right
economically relevant measure is the net debt outstanding held by the
public. That's the level that affects whether you're crowding out
prior investment, and whether interest rates are going to be higher or
whether -- (inaudible) -- will be lower. But by that measure alone,
because of where we're starting from, that's on a rising path, and we
have to stabilize it.
It's my understanding, the budget deficits, as a
percent of GDP, are roughly costs around 3.2 percent, something like
that. Three percent, roughly.
Right. The level of deficit that stabilizes the
debt to GDP ratio is roughly in the range of 3 (percent). Ideally it
would be a little below 3 (percent), but roughly in that range. And
that's driven by the rate at which you think the economy may be able
to go sustainably over time, and what level of interest rates prevail
But what's -- maybe you answered it already --
what's an acceptable sustainable rate, that is, a deficits as
percentage of GDP, generally? Was there a goal that you're striving
Well, 3 percent, is that. You mean the level of
debt outstanding to GDP, or the level of debt --
No, no --
-- 3 percent is the level that is consistent with
this definition of sustainability, which again is the level which
stabilizes the debt to GDP ratio, the level of debt relative to the
overall income produced by the economy in a given year.
All right. Now let's look at debt, for a moment,
which right now, I think it's around, roughly, 38 (percent), 40
percent, roughly, as a percent of GDP. Then I think it increases up
to close to 60 percent, and 67 (percent) in a year or two. Then it's
-- that's flat, that level relative --
That's right. That's right.
Which raises the question, what is a proper level
of debt to GDP, and when do you start getting nervous?
That is a -- I would say most economists would
say -- that is a manageable burden for a country with our basic
structure and growth potential. It's important to say even that
measure slightly overstates what the level will actually be, because
that measure includes a bunch of borrowing to fund investments in the
financial sector, which will have a return to them over time.
What would some example be?
Well, when the government makes investments in
capital, it provides lending against collateral, they will slightly
overstate that ultimate burden on the economy as a whole. But in any
case, in our judgment, this fiscal package, if adopted by the
Congress, would put us in a sustainable fiscal position over that time
frame, with a level of debt to GDP which is stable at acceptable
Okay. Thank you. Senator Grassley.
I don't disagree with anything you just said
there, but the way I like to tell my constituents is that, on the
annual deficit, we have a 40 year average of about 3.2 percent, and
we've grown that way, and have improved our economy very much, and
improved the standard of living. And on the -- I don't know -- I hope
we don't have above the -- it seems to me like a 40 year average of
the national debt is about 40percent of gross national product.
That's right. And because of the cost of the
crisis, and the --
Yeah. Then it goes up to 60 (percent).
But again, I guess I'd say for 40 years, you
know, that that level of debt has not been harmful to the economy
because it's been manageable.
I want to talk about just one thing, and this is kind of probably
going to be semantics to you, but to some of us that take seriously a
president saying he shouldn't increase or won't increase taxes for
people under $250,000, I want to explain how I think that that's not
-- that he's not abiding by that.
Now, on his cap-and-trade tax increase, it raises revenue of $646
billion over an eight-year period. This $646 billion tax increase
will be paid by all Americans in the form of higher energy prices,
including electricity and fuel, as well as higher taxes on all goods
and services, because of shipment and other reasons.
For example, a single taxpayer making between $95,000 and
$200,000 will receive no benefit under the Making Work Pay credit.
Married couples filing jointly that make between $190,000 and $250,000
do not receive any benefit whatsoever from the extension of the Making
Work Pay credit but are hit by a tax increase on energy they use, as
well as other goods and services, as a result of the cap-and-trade tax
Furthermore, many Americans, including many low-income Americans,
don't get the Making Work Pay credit. For example, those Americans
that are unemployed or in school do not receive the Making Work Pay
credit, but they still will get hit with a tax increase from the cap-
In addition, this would impose a very large tax increase on those
in the transportation industry; truckers, for example, or rural
Americans that have to drive significant distances to their workplace.
Therefore, the president's cap-and-trade tax increase is
inconsistent with his promise to not raise taxes a dime on those
making under $250,000 if you're married and $200,000 if you're single.
Isn't that correct?
Senator, cap and trade would increase the cost of
energy for those types of energy that's particularly carbon-intensive.
It does increase the cost of energy. And that's necessary if you're
going to change how people use energy and make a serious effort to
reduce energy dependence on foreign oil and to address climate change.
What the president proposes to do is to use those resources and
direct them to not just facilitate the transition to a cleaner energy
economy but to offset those costs on the people most affected by them.
And that's, I think, a reasonable strategy. It's good policy. And
for people whose behavior in the use of energy doesn't change, their
cost of energy will go up.
But again, the president is proposing to devote those resources
to making the Make Work Pay tax cut permanent, to facilitating the
transition to more energy-efficient, cleaner-energy technology. And
if there's additional resources beyond what we've made on the budget,
then they'll be devoted also to help compensate for those higher
costs. But again, you can't achieve these objectives without changing
the incentives for how people use energy.
You know, this might be hard to argue against
changing people's habits, but you are admitting in your answer to me,
so a question, that for those people that are not going to get
advantages of the Make Work Pay credit, that they are going to pay
higher energy costs, which is a government-imposed requirement. That
is the effect of a tax. And also, by the way, this budget does not
allocate that money yet. Now, it might --
Senator, the way I would say it is that, again,
the resources raised by this will be devoted to offsetting those
increased costs. And if there's additional resources raised by this
beyond what we identified in the budget, then those will be devoted to
those people most affected by this. But again, the impact depends a
little bit on what happens to behavior and how people use energy.
Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
Thank you, Secretary. This has been most
productive, and we wish you well. Thank you.
Thank you, Mr. Chairman.